Jeremy Corbyn’s stunning victory in the Labour leadership election has sparked much gnashing of teeth. Worryingly, it promises a testy political battle in the party at a time when the country needs an effective and viable opposition.
His brand of so-called Corbynomics has attracted a fair amount of derision in some quarters and benign tutting in others. Nevertheless, there are some important elements in what he says that we believe are well grounded and which could now offer a clear, distinctive and viable economic programme with which to confront the government.
Corbyn wants a public investment strategy to rebuild the UK’s economic capacity and ensure we can perform well as a competitive economy, with high wage and high-skilled jobs. This would ultimately be paid for by the long-term improvement in economic performance which investment makes possible, along with the improved tax receipts it generates.
The government would need to decide what balance to strike in using these receipts, between reducing future taxes, paying off national debt and making further investment in future economic capacity. Chancellor George Osborne has committed to prioritising the first and second of these; Corbyn would give more attention to the third.
Most economists would endorse this commitment to investment. Many, however, expect it to be forthcoming from the private sector, just as soon as the public sector shrinks enough to leave space for private sector initiative. This is also the chancellor’s position.
Corbyn instead follows economists from John Maynard Keynes to Mariana Mazzucato, in arguing for a strong investment role for government as a condition for private investment to flourish.
Corbyn has called for a version of “quantitative easing” by the Bank of England, as a means of financing this investment strategy. One attraction for Corbyn is that QE seems to be “costless”; it is just a matter of the bank printing money. This avoids making the deficit in public finances worse and undermining international confidence in the UK economy.
However, his investment strategy should in any case commend itself to the international financial markets, providing it is clearly separated from current account spending. Corbyn’s proposal for a National Development Bank would be one way of doing this, without resorting to QE and without involving the Bank of England.
His argument that QE is “costless” is misleading. The bank prints money (or rather creates it electronically) and uses this to buy government bonds (debt) on the financial markets. The aim is to drive down the general rate of interest, with the aim of stimulating private investment and economic growth. However, the government bonds that the Bank has bought mean that the Treasury still ends up owing it money (unless the Bank writes off the debt, something which would not be welcomed by the financial markets).
QE has already “cost” £375 billion. Whatever the total outlay, it may have to be repaid in due course from taxation receipts, money which could otherwise be spent on hospitals and public services.
Corbyn may have misunderstood QE as “costless”, but the rest of the UK political class has been no less reticent about acknowledging the real cost of QE for the UK public.
The costs of QE represent only part of the cost of the financial crash of 2008. There was in addition the cost of bailing out banks such as Northern Rock, RBS and HBOS. The government has taken only modest steps to prevent a repeat of that disaster. It is unsurprising therefore that Corbyn has been able to tap into widespread public anger, with his plans to tackle corporate tax avoidance and banker bonuses. Corbyn cannot expect the UK to mount a successful attack on this front by itself. He would therefore be likely to support EU efforts to tackle these problems, rather than opposing them, as the chancellor has done.
There may also be merit in Corbyn’s wish to re-nationalise the railways. Standard economics allows for a case to be made for some economic activities to be undertaken by the state, where the social benefits of collective provision cannot be effectively realised by other means. This may be one such case, and one that can be successfully sold to voters.
Re-nationalisation would presumably however require compensation for investors – and this in turn would likely require higher taxes. That’s a tricky proposition for any government, but there is at least room for debate over where the tax burden should fall.
‘You didn’t build that’
Corbyn makes much of the benefits to the corporate sector of public activities, from the provision of roads to the education of tomorrow’s workers. His estimates of the overall value of this contribution have been attacked, but he is surely right that the business world and the public sector are intimately interrelated. This is very different from Osborne’s view that the public sector is a drag on private sector vitality and must accordingly be shrunk.
Rather than decrying the ill-thought out nature of some of Corbyn’s proposals – others have done that already – we have tried to rescue the baby from the bath water and consider what a more workable statement of Corbynomics might involve, and how this might indeed appeal to a wider swathe of the electorate.
We have also sought to show some of the main areas of disagreement with current Conservative policy. This may enable a more balanced debate about the alternative ways forward for British economic policy.