Corbynomics and balanced budgets

It has been a stormingly successful two weeks for Jeremy Corbyn, and for the Labour Party. We have seen membership growth, not only more members, but a membership more representative of the broader population, younger and more gender balanced. We have a majority of women in the shadow cabinet for the first time ever, we have seen Jeremy being able to assemble a front bench team reflecting the talents and views across the whole party.

There are certainly challenges ahead. The changes to the leadership election process from the Collins Review saw the number of trade unionists voting in the leadership election decline dramatically to roughly only 3% of the numbers affiliated, and the mandate for the scale of the continued trade union involvement in the party will need reinforcing through further constructive engagement. The good will exists on both sides to achieve this, and the trade unions play a vital mediating role for their party through their connection with millions of working people.

The Collins Review changes also abolished the separate section of the electoral college for the parliamentary party, and much is made of the low levels of support for Corbyn amongst MPs. This point can be exaggerated, Ed Miliband also suffered from lack of support from the PLP, and Corbyn’s position is stronger not weaker than Ed’s, not only due to his overwhelming mandate from the party’s selectorate, but also because Corbyn has the support of John McDonnell as shadow chancellor.

The improvement of Jeremy’s own self assurance and authority has also been extraordinary, compared to his first hesitant performance at the hustings at GMB Congress in Dublin in June. There has never been any doubt about his talent, but Jeremy had been relatively marginalized within the PLP for many years, and just the few months of participating in the leadership contest and now leading the party, has seen him grow into the role.

The appointment of McDonnell as shadow chancellor was vitally important. While there were arguments in favour of a more mainstream figure as a step towards consolidating a coalition of support within the PLP, Jeremy Corbyn won the leadership on the basis of opposing austerity. Only a shadow chancellor who wholeheartedly agreed with that position would be consistent with Corbyn’s mandate.

John McDonnell has also suffered from years of relative marginalization within the PLP, but already he has shown a human and humane manner in dealing with the press, and an assured touch that will only grow and grow. It is worth reminding ourselves of the judgement of Nobel Prize winning economist, Paul Krugman, writing in the New York Times, that Corbyn’s victory was not a lurch to the left, but due to the surrender of the Labour centre to Conservative snake oil over the deficit:

Consider the contrast with the United States, where deficit scolds dominated Beltway discourse in 2010-2011 but never managed to dictate the terms of political debate, and where mainstream Democrats no longer sound like Republicans-lite. … … the Corbyn upset isn’t about a sudden left turn on the part of Labour supporters. It’s mainly about the strange, sad moral and intellectual collapse of Labour moderates.

It was an assured move for Corbyn and McDonnell to appoint an advisory team of economists, including Joseph Stiglitz, Thomas Piketty, Danny Blanchflower, and Ann Pettifor. It will also be essential to ensure that economic policy is privately discussed with the trade unions..

McDonnell’s announcement that Labour will seek to run an overall budget surplus in normal times is good politics, and is founded on a solid economic basis that the objective of economic policy will be to secure growth through investment.

To deal with the economic argument first, there has been some debate between the Socialist Economic Bulletin, and economists associated with Ann Petifor’s PRIME. To quote Michael Burke:

There is a debate among anti-austerity economists and supporters of the Jeremy Corbyn leadership of the Labour Party on balanced budgets and related matters. The debate was prompted by Shadow Chancellor John McDonnell’s commitment to eliminating the budget deficit and was sparked into life by this SEB piece, The need to clarify the left on budget deficits- confusions of so-called ‘Keyenesianism’. It was met with this reply from PRIME economics,‘Living within our means’: deficits and the business cycle.

The importance of this debate is to understand that

If a radical, anti-austerity government simply borrows or creates money to fund consumption, it will provide no boost to long-term growth. This is merely a stimulus to spending or consumption. This may be needed when consumption has fallen dramatically but cannot be a feature of a medium-term economic policy. If on the other hand, the same government borrows to invest in the productive capacity of the economy then the economy is capable of sustainable expansion. This in turn can lead to economic growth and the growth in consumption. Therefore such a government or economic policy framework, which we can call Corbynomics, should aim at increasing the level of borrowing for investment and aim at eliminating borrowing for consumption in favour of borrowing for investment.

Unfortunately, a commonplace fallacy has arisen to conflate government investment and government spending on consumption as a single category as a contribution to GDP. As John Ross observes:

Both economic economic theory and practical results show that in a capitalist economy, not necessarily an economy such as China’s, there is greater resistance to government spending on investment than on consumption – as state investment involves an incursion into the means of production, which in a capitalist economy by definition must be predominantly privately owned. This theoretical point is confirmed by the fact that state expenditure on consumption has historically risen as a proportion of GDP in most capitalist economies since the economic period following World War II while state expenditure on investment has in general fallen in the same period.

The result is that if government runs a deficit through borrowing to fund consumption, then this can result in non-invested private savings being transferred into consumption, therefore decreasing not increasing the overall investment rate in the economy, and therefore effectively decreasing not increasing economic growth rate.

In contrast, government action to underpin growth rates gives confidence to private investors, producing a win win cycle.

The political debate since the 1970s has conflated all public spending, whether it is for investment or consumption. This has confused the question as while a long or medium term policy of spending more on consumption than is raised as government income is unsustainable, government investment in the productive economy can be designed to achieve the maximum sustainable rate of overall investment, and therefore sustain economic growth, and boost government income.

Some caution also needs to be considered over the alleged lack of competitiveness of state owned enterprises, and other forms of direct state investment in the productive economy, as historically state investment has been strategic to effectively provide a subsidy to other – privately owned – parts of the economy.

Politically, committing to eliminating the government deficit is a necessary accommodation to prevailing public opinion, with the advantages that this allows Labour to exploit the Conservative government’s own failure to achieve a balanced budget through austerity and the resulting economic contraction, and allows the debate to be recalibrated over the key question of whether we continue with the Tory approach of an economy based upon shopping and speculation, or whether we commit to a policy of building the real productive economy through investment, and improving the skills and training base of the workforce.

14 comments on “Corbynomics and balanced budgets

  1. Andy Newman: For those of you wondering why I have been quiet in recent weeks, my son has been in hospital.

    All the best, mate. Hope he’s on the road to recovery.

  2. DSCHBACH on said:
  3. No to EU on said:

    Hope you son gets better soon.

    But sorry Corbyn total capitulation to the hard right over Europe is a disgrace.

    No wonder people are calling him Tory-lite

  4. Best wishes for your son.

    Whatever the economic reasons for the McDonnell position, the political ones are very interesting. By saying that they will try to eliminate the deficit and halt austerity measures, this viewpoint decouples ‘deficit talk’ from ‘austerity talk’. Osborne (and the whole media crowd) have sold the idea that the only way in which deficit could be reduced is by cutting the wages of the low-paid, cutting the benefits of the poor and slashing public services. There was no alternative. McDonnell says there is an alternative, a non-austerity alternative. This means that the argument has to be a class one and not one in which the left has to stick up for deficit. I didn’t mind sticking up for deficit but the basis for it was that it’s what capitalists do anyway. And then we were introducing the class argument behind that. It was very hard, if not impossible. And the media have relished the idea that because ‘we’ overspend, the poor must be hit the hardest. McDonnell is the first major public figure to get a voice to talk about an alternative. He has that place where he has to be interviewed because a) Corbyn’s vote and b) because Corbyn was brave enough to give him the job. So far so good.

  5. jock mctrousers on said:

    Australian MMT economist Bill Mitchell has a lot to say on this (unfortunately as usual it’s about 3 times as long as my attention span, not counting the supplementary reading):

    British Labour Party is mad to sign up to the ‘Charter of Budget Responsibility’
    http://bilbo.economicoutlook.net/blog/?p=31963

    Snippet: ” …his statement discloses a deep insecurity in the Corbyn camp that leaves them adopting fiscal rules that are the hallmark of the neo-liberals. It retains focus on the fiscal balance, however, decomposed into current and capital, whereas the focus should be on creating full employment and prosperity. The adoption of the Tory fiscal rule – the so-called – Charter of Budget Responsibility – still provides some flexibility for government to avoid harsh austerity. However, it can easily become a source of unnecessary rigidity, which prevents the government from fulfilling its responsibilities to advance welfare. Overall, the insecurity it betrays is the worrying part of this statement. This blog is in two parts – today is more conceptual (and longer). Tomorrow – will be more empirical (and much shorter). We will conclude that the British Labour Party is mad to sign up to the ‘Charter of Budget Responsibility’, which is a chimera – it is not a responsible framework at all.”

    From the comments: ” The group of talking heads he’s assembled are all straight out of the Krugman fan club. It’s got mainstream down the middle of it like the proverbial stick of rock.

    Those are the ‘betters’ that want to rule over the ‘commons’ via the central bank, and he’s giving them all they want to form a New House of Lords within the Court of the Bank of England.

    This isn’t even nudge theory, or foot in the door theory. There is no attempt to establish an alternative narrative based upon real things and real services – which is what is required if the left is ever to move forward.

    This is simply deciding to play away at neo-liberal united – with its famous sloping pitch. Talk about tying your shoelaces together.”

  6. jock mctrousers,

    I think, as I said, that this misses out the political dynamic we’re in. Economists of all sorts are brilliant at pretending economics is not political. Corbyn is leading a centrist/right wing group of people. Whatever his political beliefs, he can’t expect to proceed in any way whatsoever by assuming he can impose whatever he wants on the Labour Party, let alone get it put down as a manifesto and sell it at an election. he’s got to start by keeping a majority in the Labour Party, stifling the very loud right wing voices who want him out. Then he’s got to wrong foot the media for at least a short while. So, he and McDonnell etc have done this decoupling thing. He’s saying, let’s argue about rich and poor and not talk deficit. Sounds to me like right politics in this situation…

  7. I think these thoughts of Caroline Lucas from Saturday’s Guardian chime with those from the economist quoted by Jock at 8. I think she sees John McDonell’s probable political intent, to park the deficit issue and prove Labour’s economic responsibility, to allow Labour the space to shift the debate – as others have alluded to.

  8. Andy Newman on said:

    Michael Rosen: So, he and McDonnell etc have done this decoupling thing. He’s saying, let’s argue about rich and poor and not talk deficit. Sounds to me like right politics in this situation…

    Yes, Michael, you have exactly got it here.

  9. Andy Newman on said:

    jock mctrousers: It retains focus on the fiscal balance, however, decomposed into current and capital, whereas the focus should be on creating full employment and prosperity.

    This misses the point, you need to look at the argument in the round, that by agreeing in principle with the idea of government income covering government spending on consumption, i.e not borrowing in normal circumstances to cover expenditure; then McDonnell is explicitly decoupling this from government borrowing for infrastructure and other productive investment.

    ie, government borrowing for capital expenditure is exempted by the formula McDonnell is advocating.

    jock mctrousers: ” The group of talking heads he’s assembled are all straight out of the Krugman fan club. It’s got mainstream down the middle of it like the proverbial stick of rock.

    Again, missing the point. the group of advisory economists will certainly add gravitas and economic credibility, but they will be an advisory panel, not puppet-masters for the shadow chancellor. There is nothing wrong with “mainstream”, socialists aim to transform the terms of the debate so that we are the new mainstream.

    McDonnell is a tough character, and comes with his own ideas.

    jock mctrousers: There is no attempt to establish an alternative narrative based upon real things and real services – which is what is required if the left is ever to move forward.

    Here you are just wrong. That is precisely what McDonnell seeks to achieve through emphasis on creating the highest sustainable rate of investment, consequent economic growth, and the entailed rise in government income.

  10. Andy Newman on said:

    Michael Rosen: Corbyn is leading a centrist/right wing group of people. Whatever his political beliefs, he can’t expect to proceed in any way whatsoever by assuming he can impose whatever he wants on the Labour Party, let alone get it put down as a manifesto and sell it at an election. he’s got to start by keeping a majority in the Labour Party, stifling the very loud right wing voices who want him out. Then he’s got to wrong foot the media for at least a short while.

    This – by the way – is the most brilliant, short explanation of the immediate tasks of the Corbyn leadership, and explains exactly what the left needs to understand and be behind.