The Motives behind Corbynomics – Tax Research UK

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The Motives behind Corbynomics

As seen by Economist Richard J Murphy, of Tax Research UK,

Previously published here

I had this article in the Islington Tribune (Jeremy Corbyn’s local paper) whilst taking a couple of days off:

RATHER like Jeremy Corbyn the economics that has in the last week or so, been dubbed Corbynomics is not new.

What’s new is that for the first time in years a politician who is willing to speak out for policies that might really change the wellbeing of most people in this country has hit centre-stage.

There are three key ideas at the heart of Corbynomics.

• The first is that austerity is not necessary. 

This sounds really radical when, for example, at the last election all three major parties competed to argue who could cut the deficit the most.

In fact though very large numbers of economists, including Nobel laureates Paul Krugman and Joe Stiglitz, have pointed out how bizarre this is.

There is, they say, no chance of a recovery if we deliberately reduce our government spending by enforcing government cuts.

And as they add, balancing the budget is not necessary, especially when right now government borrowing is so cheap that it would be crazy not to invest in our future.

Corbynomics in that case is what makes sense, revealing austerity as just bad politics.

• The second theme is that reducing inequality increases wellbeing for everyone, including the best off. 

Again, this is not radical.

The International Monetary Fund agrees with this claim, which is based on the logic that if you want to grow an economy fast the people who need money most are those who spend their incomes.

That’s the least well off, because the best off save, by definition. So redistribution pays when you’re recovering from a recession.

• The third theme is that it’s just not true that markets do everything well and the state does everything badly: the reality is that great people can do great work in either sector and the job is to pick the right organisation for the job that needs doing.

So how does this pan out? In four ways.

• The first is in ensuring that the money to pay for essential government services is available.

This would be done by increasing some taxes on those best off, and for large companies.

It would also come from investing heavily in HM Revenue & Customs to crack down on tax dodgers.

• Second, it would come from investing new government money to kick-start the economy by building schools, hospitals, transport systems and in creating sustainable energy systems.

This is called People’s Quantitative Easing because it’s a variation on the £375billion programme used from 2009 to 2012 to keep the financial system afloat, but this time the money is used to benefit ordinary people. Funding investment activity in this way makes it much easier to balance the government’s books in the long term.

• Third, where it is essential that to get best public service that the state co-ordinate an activity Jeremy Corbyn is not afraid to say so.

Rail services are the obvious example.

• And last, Jeremy Corbyn is committed to beating inequality, whether from unemployment, low pay, disability, or discrimination or from lack of access to education, housing and other needs people have.

What he’s quite willing to say is that if this requires a bigger state sector than we have at present, so be it.

He is saying that may be vital to all our wellbeing and we can afford it.

The UK is, after all, the sixth richest country on Earth.

What is more, the well off would really benefit: there would be growth for them too, while the risk of inflation is virtually non-existent until such time as people in the UK are as well paid and productive as the French, who beat us by 20 per cent right now.

It’s different so it seems radical. But I will give the last word to the Financial Times. Last week they said Corbynomics “could actually be a decent idea”.

As one of its authors, I can live with that.

Reproduced under a Creative Commons Attribution-Non Commercial 3.0 Unported License. –

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If Keynes is good for China – what about the UK?

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First posted Wednesday, 9 January 2013 on

Socialist Economic Bulletin

China’s economy speeds up

By John Ross

China’s economy in 2012 was “a tale of two halves”: In the first six months slowdown, even a feeling of developing crisis; in the second half recovery and accelerating growth. The story therefore had a happy ending. But it is worth noting what went wrong in the first half, and how it was corrected in the second, as this contains lessons for the future.

The initial problem in early 2012 was simple. China’s economic policy makers underestimated the problems in the developed economies. China’s official prediction of 10 percent export increase in 2012 could not be achieved without significant growth in developed markets. This did not materialize – the US economy grew slowly while Japan and the EU’s fell into a new decline. Consequently, as is now officially stated, 2012’s export target will not be achieved.

This itself was not an extremely serious error. It is impossible in economics, due to the enormous number of variables involved, to make precisely accurate predictions, only orders of magnitude can be accurately predicted. The undershoot in export growth in 2012 will not be enormous. To compensate for international demand being weaker than predicted China required a domestic economic stimulus. It was here that a much more serious problem initially arose.

Early in 2012 the World Bank produced a report arguing that China’s state should “get out” of the economy – something clearly going against a new state stimulus program. Supporters of such neo-liberal policies in China, for example Lang Xianping, launched a campaign arguing that a stimulus program was futile and that China faced terrible economic depression. Western authors such as Nouriel Roubini advanced less extreme versions of the same analysis.

Such “the state must get out of the economy” neo-liberal policies have produced economic disaster where they have been pursued in countries as diverse as Europe, Latin America and Russia. I warned in this column in March that such policies would damage China’s economy.

By summer 2012 the damaging consequences of state failure to intervene were clear. In May annual fixed asset investment growth fell to 20.1 percent, the lowest level for a decade. In August the yearly increase in industrial production declined to 8.9 percent, from 11.4 percent in January. In the same month industrial company profit fell 6.2 percent year on year. A sense of malaise, even elements of crisis, was evident during the first half of the year under the impact of policies which reflected neo-liberal opposition to state intervention.

Fortunately from mid-year policy changed, creating the happy economic ending to the year. In late May Premier Wen Jiabao announced growth must receive more support. An infrastructure investment program that grew to US$157 billion was launched. Theoretical support to the new stimulus was given by former World Bank Chief Economist and Vice President Lin Yifu – who specifically stressed an investment based stimulus package was preferable to a consumer based one.

These policies meant the state “getting back” into the economy – not in the sense of trying to administer it, but in that of setting the overall investment level. Such policies are familiar in either Chinese economic analysis stemming from Deng Xiaoping or Western ones coming from accurate reading of Keynes. Premier Wen Jiabao also turned the economic tables, explicitly justifying not only the 2012 stimulus but the earlier one in response to the 2008 financial crisis.

The stimulus package launched in mid-2012 was rightly of a much smaller scale than 2008’s. In 2008 the world economy plunged downwards in the greatest economic decline since 1929. A huge stimulus was necessary to guard against downturn on such a scale – particularly under conditions where not only was there severe existing global recession but also further downside risks. The 2008 scale of stimulus, US$586 billion, was to guarantee China’s economy was not dragged into global downturn.

But in 2012 there was stagnation, not sharp decline, in the advanced economies. China’s required stimulus was therefore much smaller – a program on 2008’s scale would have been highly undesirable in overheating the economy in these different circumstances. The announced infrastructure stimulus in 2012 was approximately one third of 2008’s. But the state was “stepping into” the economy on an appropriate scale.

The correctness of these policies was shown rapidly. By November the investment decline had reversed – the annual increase in fixed asset investment rising to 20.7 percent. The same month year on year industrial production accelerated to 10.1 percent. Industrial company profits began to grow – rising to a 20.5 percent yearly increase in October and 22.8 percent in November. Profits growth in October and November was so strong that it turned the 1.8 percent yearly decline in January-September into a 3.0 percent increase in January-November. While GDP growth for the 4th quarter 2012 will not be available until later it would be highly astonishing, given these trends, if it were not higher than the 3rd quarter of 2012’s 7.4 percent.

What are the conclusions, and what are 2013’s perspectives? It showed, as always, the disastrous consequences of neo-liberal opposition to appropriate state intervention in the economy. A moderate problem facing China, lower than anticipated growth in developed economies, and consequently somewhat slower than anticipated export growth, became a significant crisis due to opposition to appropriate state intervention. However once policies were corrected, and appropriate investment stimulus policy measures adopted, all the advantages of China’s economic structure came into play. Within a few months China’s economy was recovering with an impetus that is strong enough that it will clearly continue into 2013.

China’s difference to Western economies is that once the appropriate economic policy response is decided it has structures to deliver it. The Chinese state has sufficient levers that it can set an overall investment level in the way that Deng Xiaoping or Keynes considered necessary. This created rapid economic recovery in the second half of 2012. In contrast the Western economies have no structures to set the overall investment level. The latter remains purely in private hands – something Keynes explicitly warned would create crisis.

In the Western economies, to attempt to reverse the decline in fixed investment which is the core of the Great Recession, governments are reduced to running huge, ultimately unsustainable, budget deficits or flooding the economy with money – symbolized by the various quantitative easing programs in the US and hyperexpansionary monetary policies now followed by the European Central Bank and Japan’s central bank. These have failed both to reverse the investment decline in developed economies while threatening other states in the global economy with inflation and currency fluctuations due to this excessive monetary expansion. China’s policies ensure its own investment does not decline, thereby generating economic growth, while not pumping excessive monetary stimulus into the global economy.

Provided the policies which brought China’s economy success in the second half of 2012 are continued, its economy’s prospects for 2013 are clear. China’s economy in the 2nd half of 2012 was on an upward trajectory shown clearly by upward shifts in profitability. As this was still growing it will clearly continue into the first half of 2013. Projections of accelerated growth for the first half of 2013, compared to 2012, therefore appear well founded.

During the course of 2013 external conditions will have to be reviewed to see if the existing domestic stimulus is sufficient – theoretically the domestic stimulus could be reduced if export conditions significantly improve, or it could be accelerated further if external conditions deteriorate. But 2013’s basic dynamic is that China will grow much more rapidly than other major economies, due to its structural strength and its much superior mechanisms for dealing with economic downturns which 2012 again demonstrated.

*   *   *

This article originally appeared on China.org.cn.

(emphasis added)

John Ross is Visiting Professor at Antai College, Shanghai Jiao Tong University. From 2000 to 2008 he was Director of Economic and Business Policy in the administration of the Mayor of London Ken Livingstone, a post equivalent to the current position of Deputy Mayor. He was previously an adviser to major international mining, finance and equipment manufacturing companies.

Simon says: QE is the biggest confidence trick of all time.

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Simon (Jenkins) says ‘QE is the biggest confidence trick of all time’:

‘It is a cheat, a scam, a fiddle, a bankers’ ramp, a revenge of big money against an ungrateful world. It is called quantitative easing, and nobody has a clue what it means. According to the Bank of England, the past four years have seen £325bn pumped into the British economy to kickstart growth, with another £50bn now on the way. This enormous sum does not exist and never has. It is not “printed” money or funny money. It is no money. The one silver bullet on which the coalition relies to pull Britain out of recession is a fiction.’ (1)

Has Simon got the wrong end of the stick?

Frankly, it depends … listening to politicians in the media, it is clear that (shamefully) most of them understand very little about economics.  They regular confuse government debt and the structural deficit. (2)  For the most part, they and our journalists are steeped in the strait-jacket of monetarism and the mythologies of neoclassical economics.  TINA still prevails in mainstream thinking….  But in 2008, there was a horrified realisation that the economy was not working as predicted and that the financial system was bringing about its own Armageddon. Since that point, the public have only been offered the impenetrability of economist-speak to explain QE, which may be spoken in good faith or to deliberately obfuscate the listener.

However, MMT-er Professor Bill Mitchell explains:

‘Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment.

It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualisation suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.’ (3)

In other words, the mainstream assumption is that the bank is simply a ‘middle-man’ between those who put money in, and those who want to borrow… but that is neither what is happening, nor actually resembles the way in which banks work.


http://www.youtube.com/watch?v=l7L3ZtCSKKs&feature=related
New Economics Foundation – ‘Where does money come from?’

Simon (Jenkins) says:

‘Osborne and Cable still utter strangled cries for banks to do “more lending to small and medium-sized businesses”. They formulate endless schemes to “kickstart the economy”. They know that none of these works, but we still have such flops as Project Merlin, the regional growth fund and the business growth fund. The British economy is in a classic Keynesian liquidity trap. It is starved of demand, but nothing is done to boost it.’ (1)

Simon Jenkins is absolutely correct to identify the lack of demand… and that is why big business is not investing (4), and they are not going to start investing unless they see the return of demand.

‘… the weirdest assumption of all is that business will invest massively more? Why will they do that? Their customers – whether here, or the government, or abroad – are all going to be consuming less but it’s assumed business will invest substantially more. That is utterly implausible. They just aren’t that irrational. They want a return before they invest – and since this forecast clearly says none will be forthcoming then that isn’t going to happen.’ (5)

The Bears also agree with Simon (Jenkins) that Quantitative Easing does not do what the Federal Reserve and the Bank of England say it will do! …  But is it possible that there is another intention?  Could thecheat, scam, and fiddle’ be a completely different ‘cheat, scam, and fiddle’ from that identified by Simon Jenkins?

Could QE be removing government debt with just a magic click on the mouse? 

Payguy2 says:

‘… QE obviously isn’t working in the way it is intended.  The credits given to banks are not finding their way into the real economy.  QE is simply not stimulating growth in the money supply in the way it is intended to….. 

Is there a silver lining though? (6)

The Bank of England can obviously create money from thin air without creating a parallel debt anywhere else and this money could be used to clear Government debt. 


QE works thus – the Bank of England creates £75 billion electronically as it is a central bank and can credit its reserves with as much money as it likes. The Bank lends this £75 billion to a Special Purpose Vehicle – a wholly Government owned PLC called the Asset Purchase Facility.  The APF then buys £75 billion of outstanding Government gilts from banks, pension funds and other institutional investors. The banks all make huge profits from the sales and get cash credited on their central bank reserves. The APF takes on the government gilts. So far so good as no money created or destroyed.

What is intriguing is that this offers a chance to destroy government debt with no inflationary risk or build up of debts anywhere.

How? The AFP is sitting on £75 billion of government debt.  It is wholly owned by the government.  If it just retires the debts by communicating that they no longer exists. Job done. There is no further inflation or loss of investor confidence.

Already we have a situation where over a third of the outstanding National debt is sitting in the Government owned Bank and another section of the Government, the Debt Management Office – an arm of HMT – is paying interest to the Bank which is again just sitting there unused. It would be more honest to monetize this debt and just retire it.

It is very, very  likely that the debts will have to be monetised anyway.  With the Bank sitting on £325 billion (and some estimating this will rise to half government total debt or £500 billion) it just simply will not be possible to sell this at any time before the gilts mature and expire naturally. How on earth could the government fund its normal gilt issues when the Bank was dumping out £200 or potentially £500 billion worth of gilts from the APF.

This certainly won’t happen whilst the government still runs a deficit and needs to borrow and it certainly can’t happen when and if we have recovered. At this point, the banks will be creating enough lending to allow the money supply to widen at its normal rate. Dumping an additional £200 -500 billion of liquidity out on the market at this point will cause rampant inflation.

Until then we are left with a ridiculous situation where the Tories are moaning about huge and “unaffordable” government credit card bills. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired.  (7)

Richard Murphy of Tax Research blog puts the case even more simply:

‘.. the Bank of England, which is owned by the government, has paid HM Treasury, which is part of the machinery of government, £325 billion to buy debt issued by the government …. as I have explained before, this means that in any proper accounting system that produced a single set of accounts for the government .. debt that was repurchased would have been considered to be cancelled. That’s because you can’t meaningfully owe yourself money, and yet that is precisely what is happening here. The Treasury owes the Bank of England money but as it, in effect, owns the Bank of England, it therefore owes itself the money and as such the debt has simply been cancelled….

I am saying that the arrangements used in QE hide this economic reality and that [when] all the mumbo jumbo is cleared away what is happening in QE is that money is being printed to clear the government’s deficit and that debt is not really being issued at all …

But that also means that … we haven’t got national debt of just over a trillion now, it’s just under £700 billion. Now that’s a lot, but it’s only 45% of GDP and that was so commonplace during, for example, the Thatcher years that no one noticed it. (8)

Jim Leavis argues much the same point and poses the following question in an article intended for Investment professionals:

‘If the government simply cancelled the £300 billion of QE gilts held by the Bank of England, who would be unhappy?

No default [would have] taken place (no CDS trigger, no D from the ratings agencies who are only interested in failure to pay private investors), the UK’s public finances become sustainable, the economy gets a boost from the knowledge that the QE cash injected will stay there for the foreseeable future, and a mechanism exists to remove cash from the economy should inflation return.’ (9)

So why would the government want to hide such positive news?  What would be the consequences of the Treasury and the Bank of England acknowledging that QE is a means to eliminate the huge hike in government debt which resulted from the socialization of banking losses? (10) 

Clearly, there would be political consequences:

‘…. If the population broadly understands that a sovereign government can never run out of money and can always make these electronic transactions then the questions they might ask their politicians will change and force the latter to be more accountable for their political choices….’  *UE is needed rather than QE  (11) 

… it means the whole debt paranoia is wrong. Debt is not rising at the level claimed by the government. Secondly, the focus can then move onto paying for services. That kicks in the tax gap debate. Third, it means Labour can honestly say it is not constrained by having to repay debt to future generations – because well over half of all debt issued since 2008 has already been repaid. (8)

 

In other words, this would be of enormous political significance, because such knowledge would undermine the ‘Austerity’ argument of George Osborne, the EU troika and the IMF .. and would demonstrate that the dismantling of the NHS, and public services, was an entirely ideological decision.. namely the ideology of the Washington Consensus. 

The misnamed ‘deficit-deniers’ would be thoroughly vindicated! 

Simon Jenkins was right to say QE isa cheat, a scam, a fiddle, a bankers’ ramp, a revenge of big money against an ungrateful world’….. but for the wrong reason.  The QE ‘confidence trick’ is that it hides the ‘inconvenient’ truth that sovereign governments can never run out of money.  The cuts are not, and were not, ever necessary.

Post-script:  In the light of the above, George Osborne’s speech is misleading to say the least.  

George Osborne: no U-turn on deficit reduction plan

Speaking at an investment conference in London, the chancellor admitted that the 0.7% plunge in growth in the three months to June was “disappointing” but insisted that the Treasury would stick to the course set two years ago.

“You will hear those arguing that we should abandon our plan and spend and borrow our way out of debt,” Osborne said in response to widespread calls for the coalition to do more to lift Britain out of double-dip recession.

“You hear that argument again today. These are the siren voices luring Britain onto the rock. We won’t go there.”

http://www.guardian.co.uk/business/2012/jul/26/george-osborne-no-u-turn-deficit-reduction?CMP=twt_gu

(1) http://www.guardian.co.uk/commentisfree/2012/jul/12/qe-bankers-swindle-liquidity-crisis?INTCMP=SRCH

(2) http://www.guardian.co.uk/politics/reality-check-with-polly-curtis/2012/may/09/nickclegg-davidcameron 

(3) http://bilbo.economicoutlook.net/blog/?p=661

(4) http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/03/capitalists-on-strike.html 

(5) http://www.taxresearch.org.uk/Blog/2012/03/21/the-key-economic-assumptions-osborne-is-making-are-wrong-which-means-he-cant-balance-his-books/

(6) Mervyn King has turned our leaders into zombie puppets 12 july 2012

(7) http://www.guardian.co.uk/business/2012/may/17/barack-obama-eu-growth-crisis

(8) http://www.taxresearch.org.uk/Blog/2012/07/13/the-untold-truth-about-quantitative-easing-is-it-simply-cancels-debt-and-that-means-national-debt-is-now-just-45-1-of-gdp/

(9) http://www.bondvigilantes.com/2012/04/11/if-the-government-simply-cancelled-the-300-bn-of-qe-gilts-held-by-the-boe-who-would-be-unhappy/

(10) https://think-left.org/2011/12/21/gordon-brown-did-not-spend-all-the-money-the-banks-did/

(11)  http://bilbo.economicoutlook.net/blog/?p=19828

*UE = Unemployment Easing