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.
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.