Corbyn Danger? Danger for Whom?

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Backing Corbyn

The “Corbyn Danger”: Danger for Whom?

@johnweeks41

Fear & Loathing on the Campaign Trail 

Hunter Thompson chose the title above for his book relating his eccentric take on the 1972 US presidential election.  In a somewhat different way, it is singularly appropriate to the current campaign for the Labour leadership.  With the outstanding exception of Ed Miliband, the notables of the Blair-Brown era can contain neither their fear nor their loathing of the front-runner, Jeremy Corbyn.  From this collection of “yesterday’s men” the attacks on the MP from North Islington come thick and fast, slings and arrow of the outrageous (á la Hamlet, Act II, scene 1).  Ex-PM Blair advises supporters of Corbyn to consider heart transplants.  Ex-cabinet member (now Lord) Mandelson quakes before the threat of a “lurch to the left” by the Labour Party.  And to these I can add former leader Neil Kinnock, ex-spinner Alastair Campbell and in veiled language ex-PM Gordon Brown.

Equally thick and fast come the attacks on Corbyn’s economic policies, notably in the Financial Times where the insurgent is described as a doing “potential harm to…British public life” for his advocacy of “radical” policies.  An inspection of his policies seems relevant with this and other allegations including from members of the Labour Party that Corbyn inhabits some extreme/hard left territory,

To do this I went to the source, the website for Mr Corbyn’s leadership campaign a virtual visitor can download a statement of his economic policies, The Economy in 2020.

Anti-Austerity

I begin with a Corbyn policy certain to send the neoliberals into anxiety, public ownership (aka nationalization/re-nationalization).  A pledge to take the railroad into the public sector features prominently on the campaign website.  After 35 years spent selling off public assets, this commitment to public ownership comes as a shock.

But, is it radical or hard-left?  A look to the continent suggests otherwise, where the public sector owns the railroads in France, Germany, Italy and Spain.  None of these countries have or had radical governments.  In the United States, very much neoliberal territory, the passenger rail company Amtrak is publicly owned.  Further, in 2013 the citizens of Hamburg voted to bring all public utilities into public ownership.

While public ownership is less common today that in the past, it is sufficiently frequent across the globe not to be unusual or rare.  The same point applies to the Ten Priorities listed in The Economy in 2020, which fall into three categories, opposition to fiscal austerity, taxation and re-structuring of the UK economy.

We find no ambiguity in the candidate’s position on fiscal cuts.  “Austerity is a political choice not an economic necessity”, and Corbyn opposes it, promising “always to protect public services and support the most vulnerable”.  Closely related to opposition to austerity is “a publicly-led expansion and reconstruction of the economy with a big rise in investment levels”.

The commitment to “publicly-led” growth is likely to be more controversial that opposition to austerity, because anti-austerity does not necessity imply more expenditure while an increase in public investment would.  The implicit argument in defence of an increase in public investment is that it would generate faster growth and the taxation induced by the greater output would quickly eliminate the increase in the fiscal deficit required to fund the investment.

Also implicit is the “crowding in” process, that properly targeted public investment would foster private investment to restructure the economy.  Public investment priorities would be implemented through “a multibillion pound programme of infrastructure upgrades” including broadband networks.

Controversy has focused on the mechanism to fund the infrastructure update, “a National Investment Bank”, which some confuse with Corbyn’s references to a “People’s Quantitative Easing”.  The investment bank could fund its project either by sale of bonds to private buyers (“capital markets”), or by selling bonds to the Bank of England (“monetization of the deficit”).  The major difference between the two is that the former leaves the money supply unchanged, while the latter increases it by the amount of the investment.

The possibility of funding through selling bonds to the Bank of England prompted an attack on Corbyn from Labour shadow chancellor Chris Leslie, who alleged that this would be inflationary, and therefore “risks hurting some of the most poor, the most vulnerable, those on the lowest incomes”.

The “hurts those you wish to help” argument suffers from two serious problems.  First, the UK economy now suffers from pressures toward deflation not inflation, so that expansion of the monetary base is the appropriate policy.  Second, much empirical evidence indicates that contrary to Mr Leslie’s allegation very low inflation hurts the poor and benefits the rich.  One of the reasons should be obvious, inflationary pressures are associated with rising employment and wages.  In addition mild inflation devalues household debt and the poor are heavily indebted.

However, the mechanism to fund public investment and whether it would prove inflationary provides no support for the “hard left” accusation by Leslie.  We find national investment banks advocated by solidly mainstream economists (for example, Robert Skidelsky).  Funding of investment by borrowing from central banks is even more common – indeed, in the 1980s Ronald Reagan used this funding technique to cover current expenditure without generating notable inflationary pressures.

Taxation

The revenue generating policies in The Economy in 2020 focus on increasing the progressivity of the overall tax structure.  This has three components: 1) a shift from indirect to direct taxes for households, 2) stronger measures to eliminate personal and corporate tax avoidance, and 3) “large reductions” in corporate tax relief and subsidies.

Economists, even if they prefer indirect taxes (taxes on expenditures) agree that these are regressive;  their share of gross income falls as income rises.  A reduction in VAT and an increase in personal income taxes that leaves total tax take unchanged would reduce income inequality.  A reform of the tax structure that would reduce inequality hardly qualifies as “hard left”.  In a recent FT article the decidedly right of centre Chris Giles cited the negative impact of inequality on economic growth (drawing on a study by the OECD, which confirmed an earlier study by the IMF).

The tax policies proposed by Jeremy Corbyn are not hard left, but they are controversial because they would reverse the inequality-enhancing trend of our public finances over the last thirty years.

The Corbyn Danger

The economic policies proposed by Jeremy Corbyn are certainly a break with the current consensus in the Conservative, Labour and Liberal Democratic Parties (though not so different the anti-austerity Greens, SNP and Plaid Cymru).  This makes them radical only if one has an extremely narrow view of the limits of legitimate debate.

The surprising aspect of Corbyn’s economic policies is not that they are radical and hard left, but that they would be perceived as such, especially by prominent people in the Labour Party which has many MPs committed to social democratic values.

Since the other three candidates for the leadership profess to different degrees concern with inequality, I would have expected criticism to focus on the inadequacy of Corbyn’s policies rather than their radical nature.  For example, his programme could place more emphasis on enforcing a “living wage”, more on legislation to strengthen collective bargaining, plus policies to limit the grotesque inflation of corporate salaries.

It appears that the source of Jeremy Corbyn’s radicalism and the outrage his candidacy provokes in the Labour elite lies not in his policies.  While leader of the Labour Party Ed Miliband introduced fundamental reform in the process by which future party leaders would be chosen.  From a previous system of voting that gave the Parliamentary Party proportionally much greater election strength, the new system is one-member-one-vote, a change that two backbench MP called “disastrous” for which Miliband should apologize.

Therein, we find the profound radicalism of Jeremy Corbyn’s threat to  become Labour Party leader.  Should he win, it will be by a process that does not require the approval of the Labour Party elite.  Corbyn is not the danger that fills them with fear and loathing; it is the spectre of democracy.

Economist John Weeks is a Professor Emeritus of the School of Oriental and African Studies, University of London.

A Falling Pound will Lower the Living Standards Of Workers and the Poor

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First posted on Thursday, 28 February 2013

Socialist Economic Bulletin

A falling pound will lower the living standards of workers and the poor

By Michael Burke 

The British pound has begun to fall once more on the international currency markets.  It may be further helped on its way by the loss of the AAA credit rating.  This will have important domestic economic consequences.The currency is also being talked down by a number of officials, effectively including both the current governor of the Bank of England and his appointed successor.  Their hope is that a weaker pound will boost Britain’s woeful export performance, and perhaps lead to a revival of business investment in the export-oriented sectors of the economy.

A policy of failure

One key problem in pursuing this policy is that it has already happened in the recent past and failed. Between 2008 and 2009 the pound fell by approximately 30% against the US Dollar. Against a basket of currencies (represented by the Sterling Trade-Weighted Index) it fell by over 25%.

Chart 1

13 02 28 Chart 1

This was effectively a significant devaluation of the pound. Yet even in nominal Sterling terms, exports barely grew. Britain’s share of world export markets actually fell, from 3.5% in 2008 to 3.2% in 2012, continuing a long-term trend.

Chart 2
13 02 28 Chart 2

The effect of the devaluation was to push up the Sterling value of imports. This, combined with Coalition measures such as the increase in VAT and higher charges for transport and domestic fuel bills, pushed inflation higher.

Britain was the only major industrialised economy that experienced ‘stagflation’ during the crisis – that is a simultaneous economic decline or stagnation along with accelerating inflation.  Using a common measure such as US Dollars for international comparison, the UK became an incredible shrinking economy, the biggest absolute decline of any major economy.  Real wages and incomes also shrank dramatically, as the effect of wage freezes and welfare cuts were magnified by sharply rising prices.

This ought to be a lesson for all those who argue that a simple exit from the Euro and large devaluation is the remedy for the crisis-hit countries of the EU.  Britain is outside the EU and experienced a large devaluation.  The sole consequence was higher inflation and lower real incomes.

One of the reasons why membership of the Euro remains so popular even in the crisis-hit countries is that repeated devaluations punctuated the preceding decades of those economies – and failed to raise relative living standards.

Currencies and competitiveness 



Currency exchange rates are simply relative prices so that devaluation can reduce the relative price of the same or similar good.  But the effects of global competition mean that an improvement in relative price competitiveness will not last if investment levels fail to match competitors.

This relative underinvestment is the key structural failing of the British economy.  According to recent data from the Office for National Statistics productivity is 16% below the rest of the G7 and has fallen relatively by 10% during the crisis.

This has resulted in a structural deficit on the external accounts.  The deficit on the current account, which is equivalent to the British economy’s borrowing from the rest of the world, has widened to 3.7% of GDP in the first three quarters of 2012, compared to zero in the depth of the recession.

Borrowing is either conducted for consumption or for investment.  But as SEB has repeatedly argued, British investment has slumped.  It is now just 14% of GDP.  This is the cause of the slump in relative productivity, even compared to the rest of the G7, all of which have lower investment now than before the crisis in 2008.

As investment has already fallen therefore the current account deficit can only be corrected by a relative decline in consumption.  This runs entirely contrary to the argument for increased consumption to resolve the crisis.  But we have already seen that real wages have fallen during the crisis.  This has reduced the consumption of most workers and the poor.

Who will pay for investment? 



Fortunately, there is an alternative method of reducing aggregate consumption in order to boost investment.  Alongside workers’ wages and investment Marx argued that consumption was divided into necessary consumption and the consumption of luxuries.  In this category may be included all items not essential to sustaining well-being, but also all items which have no production capacity.  The most important of these is expenditure on armaments.

At £777bn the accumulated stock of profits held in cash at British banks is already a multiple of the funds required to restore all the output lost in the recession.  At the same time dividend payouts to shareholders are at a record high approaching £79bn in 2012.  Managerial and other bonuses (including in the City) are climbing once more.  Economically, the renewal of Trident is a huge waste of resources, up to £100bn, as are increased military interventions, with lethal consequences.

From these multiple sources, there is more than sufficient capital to increase investment and reduce consumption without in any way hurting the real incomes of workers and the poor.  On the contrary, improving their living standards is both essential to and the ultimate purpose of socialist economic policy.
The obstacles to this solution are political and social.  The purpose of capitalism is to preserve and expand capital, hence its name.  Any policy which infringes on, let alone overturns the absolute prerogatives of capital will be resisted fiercely.

Instead what is currently on offer is a continuation of the long relative decline of the British economy.  To alter fundamentally that path of decline would require a redirection of wasteful spending and idling capital towards investment.  Instead, what is planned is a further erosion of the real incomes and consumption of workers and the poor. From that, there may eventually be some modest increase in investment. The decline of Sterling, and the inflationary effect it will produce is part of that project.

Other Michael Burke posts on Think Left:

BRIBING THE PRIVATE SECTOR TO INVEST ISN’T WORKING

GDP DATA SHOWS BRITAIN IS THE WEAKEST OF ALL THE LARGE ECONOMIES

PRODUCTIVITY CRISIS IN THE BRITISH ECONOMY

20 YEARS OF LOST OUTPUT

The Autumn Statement and long-term Austerity

Investment Slump Greater Than Whole Loss of British GDP

BRITAIN’S EXPORT PERFORMANCE IS WOEFUL

The new recession is directly made in Downing Street

WHY MORE ‘AUSTERITY’ IS ON THE WAY

THE UK’S BUDGET DEFICIT IS RISING NOT FALLING

The new recession is directly made in Downing Street

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By Michael Burke

First posted on Socialist Economic Bulletin 1st October 2012

The final release for UK GDP in the 2nd quarter of 2012 showed a small upward revision to recorded growth. But this still showed a contraction of 0.4% of GDP for a third consecutive decline. Real GDP is now 1% below the level recorded in the 3rd quarter of 2011.

Previously SEB has shown that the driving force behind the recession has been the decline in investment (Gross Fixed Capital Formation, GFCF). That remains the case. In aggregate real GDP has declined by £60bn since the peak level of activity in 2008. Investment has contracted by £50bn.

Only the decline in household consumption comes close to making such a negative impact on GDP, falling by £42bn. In contrast the other main categories of GDP have risen. Government current spending has risen by £13bn while net exports have risen by £14bn. The latter is overwhelmingly due to the slump in import demand as exports have risen by less than £3bn over the period. GDP and its main components are shown in Chart 1 below.

Chart 1

12 09 30 Chart 1

The private sector was the source of this decline in investment, as the Labour Budget of 2009/2010 temporarily increased public investment. The incoming Coalition immediately brought that to a halt. What is now striking is that the decline in investment is now led by the contraction in public investment. In fact the whole of the ‘double-dip recession’ of three consecutive quarters of falling GDP is accounted for by the sharp fall in public investment.

This is shown in chart 2 below. This is the same format as the previous chart but it covers the time period from when the Coalition came into office. In addition it separates the two sources of investment, public and private. The data for these are taken from Schedule F of the latest  quarterly national accounts.

Chart 2

12 09 30 Chart 2

Over the period of the Tory led-coalition’s time in office the economy has contracted by £5.6bn. But the main driving force is no longer the investment strike of the private sector. It is the sharp contraction in public investment which has fallen by £11.2bn, almost twice the fall in GDP. Private investment has actually increased by £4bn over the same period.

It is noteworthy that household spending has also fallen by an amount greater than the fall in GDP, down by £8.6bn and reflects the effects of ‘austerity’, the cuts in welfare and other payments, the public sector wage freeze and the decline in real wages because of high inflation. Off-setting these to some extent have been the rise in government current spending and the increase in net exports.

In a very direct sense the latest contraction in the British economy is a function of government policy.

It is a recession made in Downing Street.

http://socialisteconomicbulletin.blogspot.co.uk/2012/10/the-new-recession-is-directly-made-in.html