Corbynomics: where next?

With Owen Jones’ recent blogpost as a starting point, I’ve had a go at thinking through what kind of economic strategy is needed to make anti-austerity policy in the UK function. It’s ended up rather long so, for the truly pressed, here is a very quick summary — the last section of the main texts lists some suggestions for policies:

1. Keynesianism is not enough. The weaknesses of the UK economy require measures that will address its serious structural flaws. There are no quick fixes.

2. Austerity is not the product of ideology alone, but hard-wired into the kind of economy we now live in.

3. Structural reforms are the only means by which a socially just anti-austerity economic policy can be delivered. Corbyn’s campaign offers the opportunity to create a base of popular support for a comprehensive anti-austerity programme.

Owen Jones has written a thoughtful (and widely-circulated) piece on how to take the Corbyn campaign forward. It covers a lot of ground, makes some decent suggestions, and some that are more open to dispute. But I wanted to focus particularly on economic policy, which Owen touches on a couple of times. Debates over how “Corbynomics” should be implemented will rumble on and, even if Jeremy is not actually elected, the space to seriously consider plausible alternatives to austerity has now been created. This is a major step forward.

For any alternative, as Owen says, “credibility is key”. This cannot be stressed enough. But “credibility” is a complex thing, particularly in the peculiar situation we have now ended up in, post-2008. On one side, the balance of opinion within the economics profession is skewed heavily against austerity. The textbook models and now five (or more) years of experience all point towards the undesirability of enforcing stringent spending cuts in weakened economies, particularly where interest rates are very low. Attempts to create convincing alternate cases for austerity have floundered — most notoriously with the spreadsheet error made by Reinhart and Rogoff in a paper George Osborne himself was previously wont to cite.

And yet, as Paul Krugman and Simon Wren-Lewis — eminently credible economists — have both pointed out, you would not think this from the content of the mainstream discussion here. We are bombarded, instead, with what Wren-Lewis has usefully christened “media macro”: a set of beliefs that have little to do with most economists’ understanding of how the world works, or historical experience, but that instead centre on the overwhelming necessity to repay government debt as rapidly as possible, to the point where suggestions otherwise (suggestions wholly in line with orthodox economic thinking) are treated as fantastical offences against “simple mathematics”, as a Conservative member of the Treasury Select Committee toe-curlingly attempted to inform Krugman. Even the 50 or so economists attacking “Corbynomics” in the Financial Times conceded the core point on the necessity of government borrowing.

There is an obvious response to this disjoint, and it is the one Owen suggests. It is to get hold of some suitably eminent economists, point them in the general direction of the media, and get them to repeat the message: austerity damages economies. The textbook argument is a Keynesian one: that what one person spends another person must earn, so when the government cuts its spending, there is (of necessity) less earning. The principle and the evidence is clear, to the point that mainstream opponents of austerity (like Krugman) can suggest only that those arguing in favour of swingeing spending cuts are motivated by ideology, disguised as economic management.

More than just bad ideas

There’s a powerful element of truth in this. It’s clear that we are confronted with a Cabinet of committed free-marketeers. But there are two, related, problems with thinking we are dealing only with bad ideas. The first concerns mass politics. The Keynesian case against austerity is a technical and managerial. But the politics of Corbynism are gloriously populist, in the good sense — an uprising of the excluded against the elite, of a piece with movements, post-crisis, across Europe. It is precisely on the rejection of managerial politics and an insistence on the need for a popular voice in decisionmaking that these movements are founded.

The second is the deeper issue, but one which the rejection of managerialism indicates. Austerity in Britain, as supported by the government, the media, and the Labour rightwing, is the product not merely of bad ideas. It is, rather, hard-wired into the kind of economy we now live in. Once it is conceded — and all mainstream sides concede this — that financial services, whatever public opprobrium they attract, must remain the leading element of our economy, the economic strategy becomes clear. Maintaining a critical hub (arguably the critical hub) of the global financial system requires a domestic state prepared to stand behind it. 2008 showed just how fragile and over-extended this global system was: but for the UK to maintain its own position, that overextension of our financial system is necessary. (It is interesting, in light of recent events, to note that the UK has the largest single financial exposure to China of any Western economy.) Mark Carney recently argued that the UK could balloon its financial system to perhaps 9 times GDP, to maintain its world-class position. This is immense, close to the relative size enjoyed by the Icelandic financial system immediately before its devastating crash. The whole state, therefore, has to be prepared to maintain the system.

This translates into a distinctive domestic weakness. A by-product of an internationalised financial system is its immense flexibility and capacity to supply credit. On the basis of rising asset prices — particularly property, and particularly in London — this financial sector can flood the economy with credit, as is now happening. This will not, as a rule, flow to productive sectors, but concentrate, instead, on the provision of a short-term boost to domestic consumption, compensating for a shrinking wage share of national income. Investment, domestically, is squeezed. Fixed investment in the UK is now at its lowest share of GDP since the 1960s. Consumption takes place on the back of rising property prices and rising borrowing. To a significant extent, the austerity programme is possible without driving us back into stagnation because the financial system will allow household borrowing to take place, compensating for weak demand, as a recent economists’ open letter argued.

But the financial flexibility provided by the bloated financial system means, in addition, we have collectively been able to maintain a current account deficit for nearly all of the last three decades, on the basis that the rest of the world will supply the funding needed to pay for it. That deficit is now around 6% of GDP, a record level. I can think of no other major economy that has maintained a deficit of this size for any significant period of time without a crisis, and, of course, the longer it is maintained, the more assets must be sold to the rest of the world and the greater international borrowing must rise. The UK’s net external liabilities (our borrowing from abroad, minus the assets UK residents own) are now rising faster than any major developed economy.

This is unsustainable. We are heading, on this basis for a crash. And it is the risk of crash, and the necessity of maintaining a lean state able to deal with its consequences, that enforces austerity. As the Conservative chair of public administration committee put it, our “national borrowing capacity” to deal with a further crash from a “vulnerable and exposed” financial system has been significantly reduced, post-crash. Austerity means clearing a space to deal with the next one.

To underline the point: Keynesianism, as a policy, is not enough. We are not just dealing with bad ideas, but a bad structure. Any programme seeking to end austerity in the UK has to push beyond the point of demand management or some macroeconomic tinkering, and seek to transform the finance-led economy we all now inhabit. It will not be enough just pull the levers in a different way. The machine needs to be rebuilt. “Credibility” will involve a programme, detailed as far as is necessary, for making that transformation happen.

Structural reform is a bread-and-butter issue

That is where I think Owen errs in divorcing the question of ownership and control from what he calls “bread and butter” issues. He picks up on the example of railway renationalisation: sure, he says, nice to do it, but not central to addressing people’s economic concerns.

I think this is a mistake — potentially a major one. The questions of institutional organisation, and ownership and control over resources are, in an economy like ours, absolutely central to the “bread and butter” issues of living standards. In the case of the railways, it is hard to see how rampant ticketing costs — with rail travel an essential item for millions, whose price has a direct impact on their own standard of living — can be restrained under the jerry-built privatised system. A team from CRESC at the University of Manchester have written a superb dissection of how rail privatisation has failed passengers and wider society which leaves little doubt that the only real solution here will involve some form of public ownership.

Or take a few other recent examples:

· Hinkley Point B will not be completed by 2023, EDF have admitted this morning. Leaving aside the merits or otherwise of nuclear power, over the next year two coal-powered plants are due for decommissioning. We are drifting, slowly but surely, into an energy crisis, as demand squeezes hard up against capacity — the direct product of a firm commitment to a privatised energy market, with the short-termism, absence of effective planning, and failure to invest that this implies.

· Broadband provision in the UK is amongst the poorest in Europe, both in terms of speed and spread of access. There are two direct costs from this: first, the cost of the productivity impact; second, the social cost of digital exclusion that inadequate provision now creates. And we have privatisation to thank directly: this interview with BT’s former Chief Technology Officer makes absolutely clear how the short-term, profit-first prerogatives of privatisation “killed superfast broadband before it even existed”. Aditya Chakrabortty is suitably scathing about the whole experience here.

Broadly, we are dealing with a chronic problem of weak investment. The private sector is incapable of addressing this alone, and no amount of wheedling or tax breaks will change that. It is hard-wired into short-termism. The consequences of this short-termism may soon start producing serious impacts. We need, instead, to take on directly the questions of control of resources and ownership of assets.

Democracy and ownership

Ownership and control are, as Joseph Rayner Stephens said of the People’s Charter, back in 1838, “knife and fork questions… bread and cheese questions”. At the birth of the labour movement, the link between democracy and the control of society’s resources was clear. Likewise for Attlee’s reforming government of 1945; the model of nationalisation adopted was flawed, but it at least posed the question of control and management. And of course the nationalised industries were by no means the dinosaurs of Tory caricature: “total factor productivity … in the nationalised industries of gas, electricity and water increased by 3.1 per cent between 1950 and 1985, a figure that was higher than both their US privately owned counterparts (2.6 per cent) and UK manufacturing as a whole (1.8 per cent) over the same period”.

New Labour’s greatest intellectual error, on the economy, was to forget the good sense of the labour movement, and presume — showing its fealty to neoclassical economics — that the whirring machine of capitalism would produce the goods which a benevolent government could then seek to redistribute in more acceptable manner. Ownership and control did not, in this view matter. For example, the exorbitant profits (and directors’ paycheques) of the newly-privatised utilities had become a national scandal by the mid-1990s. New Labour’s solution was not to renationalise or in any serious way challenge the fundamental premises of corporate rule in the gas and electricity markets. Rather, they levied a one-off “windfall tax”, and redistributed it to the young unemployed via the New Deal scheme.

These efforts whilst New Labour was in office did, just about, manage to restrain the gallop of inequality that Thatcherism had set loose. This was skewed: broadly speaking, New Labour ended up taking from the somewhat better off, and giving to the worse off: inequality at the very top of society was left to skyrocket, unchallenged. But they failed, singularly, to address the economy’s structural flaws: its growing dependency on household debt, its yawning balance of payments, its ballooning financial institutions. A failure to tackle these — indeed, on the last, the active encouragement of said ballooning — helped drive the economy full-tilt into the brick wall of the global financial crisis of the late 2000s. As a result of this crisis, austerity measures are now busily tearing through those mildly redistributive measures Labour introduced: Education Maintenance Allowance — gone; Sure Start centres — chopped; tax credits — going. The fruits of New Labour’s compromise with high finance lasted no longer than a decade; it was able to defend, partially, some of the historic gains of the labour movement, most notably the NHS, but even those are now, under austerity, open to attack.

Owen, by separating the deeper, structural issues from the bread-and-butter, opens the way to recreate New Labour’s historic compromise — but this time, rather than at the start of the greatest credit bubble in history, attempting to do so in the aftermath of its bursting. It is worth noting how lucky New Labour was: it blagged its way through the 2000s on the back of the bubble, an extraordinary, decade-long expansion that enabled both some improvements in living standards alongside some expansion of government spending, and some mild redistribution. The compromise between high finance and (centrist) social democracy that defined New Labour could hold together.

There are no credible reasons for thinking that this good fortune will be repeated. The bursting of the bubble itself, and the profound weaknesses it has revealed in the British economy — evident in the weakness of wage growth, the stagnation of productivity, the rise in household debt, and the current account — are unlikely to cure themselves. It is stretching credulity to think that these faults will not have made their presence felt before 2020, either from a domestic crisis or through the UK’s exposure to risk elsewhere. A future government of the left can expect to work in conditions that are strongly adverse to the kind of compromise New Labour made. There will be no return to no return to boom and bust.

This, to repeat a point, is the dirty truth of austerity in the UK. We are locked into the steady disintegration of the labour movement’s historic achievements because that is what this economy, as presently structured, can deliver. The mainstream of politics then becomes little more than a contest over who will manage the process of destruction most efficiently; unsurprisingly, it is the Conservatives who are the most plausible candidates to carry it out, as the 2015 result confirmed. If these are the terms of the debate, 2020 will be merely more of the same.

If we want to preserve those achievements, we will now have to push the economy in a different direction. Thirty years of neoliberalism have gifted all of us an economy profoundly ill-suited to the challenges ahead: globalised in a world retreating from globalisation; unable to provide decent work for the young; incapable of preserving the social settlement offered to previous generations. Whatever dynamism it exhibits comes through its dependence on an extraordinarily elastic financial system, with (for example) unsecured lending now rising at the fastest rates since 2007. Of course, elastic eventually snaps. Problem debts are piling up.

To be clear: I’m not suggesting a break with neoliberalism because this is desirable. I’m suggesting it because it is now necessary. To preserve the good that has been won, through the labour movement, now requires a decisive break with the both the extension of neoliberalism represented by the Conservatives or its pale imitator on the Labour right. The opportunity represented by the anti-austerity movement and “Corbynmania” is to do precisely that. It is a reflection, as has been pointed out, of the wider crisis of social democracy in Europe. The social alliance that makes it up is the base on which a popular anti-austerity economic programme can be built: an alliance of those old enough to want to defend the good we have, and those young enough to need something better.

A possible strategy

The outline provided by Jeremy Corbyn’s team, The Economy in 2020, provides an ideal base to begin thinking about how to do this. The challenge is to marry up the enthusiasm for an alternative with a robust, transformational programme to deliver it. The points below are just a few hints as to how an outline programme might begin to turn into policy, married to a wider political strategy. Any future programme would require close work, making use of reputable experts (perhaps gathered through a future Council of Economic Advisors, as Owen proposes) but also, importantly, attempting to create a popular argument for the kind of economy we wanted to live in.

Everything must be costed. Whatever a Corbyn-led Labour Party proposes will be exposed to the most merciless and unrelenting scrutiny. Whatever it proposes, then, should be costed to within an inch of its life point: using conservative (small c) assumptions, bolting every tax proposal and every spending commitment into place. The credibility needs to form an iron carapace around the core programme; there is no space for weak spots, particularly on more radical proposals. Given the commitment made by John McDonnell here, the pace of government deficit reduction would be reduced to the kind of minimum level compatible with securing a sustainable, fair recovery. This would be entirely in line with what a recent IMF report would be “optimal” policy for the UK: that a mad rush to close the government deficit, as we are now going to attempt, will do more harm than good for most.

There is no such thing as a free lunch. And there’s no sense in claiming, or even looking like claiming, that there is. It fools no-one. The great advantage of a serious costing is that it allows you to say, with some precision, who will win and who will lose. It has to be clear that this programme will work to the advantage of the great majority, and the disadvantage of a tiny minority. This is the essence of populism. It can be turned into policy. Corbyn’s campaign is fortunate to have well-known tax specialists on its side. Establishing a commission to investigate radically reforming the tax system in a sustainable and socially just manner could be a useful initial exercise, challenging some of the orthodoxies in 2011’s Mirrlees Review in a credible and systematic fashion.

Don’t let the right claim the future. We do not need to counterpose social justice to the desire to create a genuinely innovative and dynamic economy. What we have, at present, is an economy drifting, aimlessly, into a low-productivity, low-investment default setting. The consequences of that, when combined with its “flexible” labour markets, are rising inequality in the labour market and the production of bullshit jobs on a grand scale. Breaking with this will require both a macroeconomic framework that could, realistically, sustain a broadly-based and socially just recovery, and, at the same time, a willingness to think and act radically against the entrenched special interests, old-school attitudes and institutional failings that cripple the economy.

Marianna Mazzucato has provided a brilliant précis of the kind of economic thinking that will address those micro level problems. Innovation needs state action. Poor private management of our shared resources must be challenged. And investment, on a far larger scale, needs to be delivered in infrastructure to make it all work, right across the country. That is not currently happening, as the recent cancellation of Transpennine Express electrification demonstrated. A National Investment Bank, separate from the Treasury, and perhaps a National Infrastructure Commission — again free of Treasury micro-management — could begin to make longer-term decisions on major investments, under transparent and democratic control. As John Weeks argues, a National Investment Bank could ensure that Treasury-mandated but economically disastrous cuts in public capital expenditure were, in future, avoided.

At a local level, a return to decentralised and collective forms of ownership of assets can form part of the strategy — Corbyn’s energy strategy already details how this can be applied, along similar lines to the German model, in switching to low-carbon energy. Equally, the creation of new forms of asset ownership and business models can be supported. His business manifesto has pointers to a future policy mix here. And there is plenty of scope to believe that a traditional coalition between small businesses and large corporations –specifically in addressing issues around the financial system — can be broken up, as the emergence of the SME Alliance indicates.

The current account deficit is the real constraint. The UK’s current account deficit is a gaping wound. That it has not been prodded by the international markets, as yet, is fortunate, but hardly to be relied on for the future. It is the hidden constraint on delivering a socially just economy. It implies greater and greater volumes of international borrowing, whilst selling off more and more assets. John Mills and Bryan Gould, in their recent Call to Action, estimate that “net sales of UK shares, bonds and property” to the rest of the world came to £615bn over 2000–10, equivalent to half annual GDP at the time. But our mainstream politics currently treats a phony constraint, the fiscal deficit, as if it were binding, and ignores this real bind.

It will not be easy to close the current account deficit. A fairly sharp devaluation since 2008 (reversed of late) did not stop the deficit widening further. Enterprising politicians occasionally suggest that boosting exports alone might close the gap. This is a false hope. Exports are, in practice, dominated by a tiny handful of firms: for the UK, the top 5% of manufacturing exporters account for 69% of all manufacturing exports, with similar concentrations for other major European economies. A strategy which sees the solution to the UK’s external imbalances as based on the promotion of exports is resting on an extremely slender base. Confronted with a contraction of global trade, and the implication of increasingly intense competition globally, a push for export-led growth by itself is unlikely to deliver the goods. It is desirable; it is not enough.

Far from attempting to compete in either a race to the top we cannot win, or a race to the bottom we are guaranteed to lose, domestic production and the substitution of imports are more plausible, backed up a significant investment plan. A shift to domestic energy sources through renewables would chisel away at the current account deficit. Likewise, the relocalisation of supply chains in food production has additional environmental benefits. All of this points to the need for an effective, functioning industrial strategy. It is disguised by the neoliberal rhetoric of “competition”, but the UK has successfully delivered what amounts to sector-specific policy in aerospace and pharmaceuticals for a number of years. A refocused (and perhaps renamed) Department for Business, Innovation and Skills could provide one part of this, alongside arms-length bodies such as the National Investment Bank, and a concerted effort to drive up the UK’s very low rates of R&D expenditure. It is difficult for developed economies to break with its earlier pattern of development: “path-dependency” becomes harder to overcome. But with political will it can be done, as demonstrated in Finland’s transformation from primary-goods producer to high-tech exporter. Placing science and innovation policy at the centre of decision-making on the economy, as the Finnish government did through the Science and Technology Policy Council, chaired by the Prime Minister, would be a useful step.

Money matters. The graph below shows, for the last decade, the headline rate of inflation, and the Bank of England’s 2% inflation target.

The 2% target has become a myth. Since 2008, central banks in the developed world have been, to all intents and purposes, groping in the dark. (Does anyone remember Mark Carney’s “forward guidance”?) Quantitative easing has happened on a massive scale. Competitive devaluations are a major policy tool. A third wave of global deflation is predicted. The world simply does not match up to the sets of principles laid out at the time the Bank of England was declared “independent” by Gordon Brown, back in 1997. Instead of clear rules, today we have something like a game of chicken between financial markets, dependent on ultra-cheap money to keep their bubbles rolling, and central banks, keen to assert a return to normality. Global jitters on the back of the Chinese stock market were themselves worsened by the fear of an interest rate rise in the US. (The receding threat of that rate change has brought a return to asset price growth.) A new framework is needed.

The spat over “People’s Quantitative Easing” has forced open that debate on monetary policy. We could extend the general principle PQE involves: despite New Labour’s complaints, there should be no presumption in favour of central bank independence, as currently conceived. The evidence of its success, globally, is unimpressive: low inflation rates coincident with the spread of independent central banks are far more plausibly the result of the extraordinary slide in goods prices that globalisation occasioned. Meanwhile, independent central banks like the Bank of England presided over a monstrous asset bubble during the 2000s. Joseph Stiglitz has argued that countries with less independent central banks performed far better in the crisis of 2008. And greater clarity over the desired exchange rate will be necessary.

Transform finance. All of this requires the transformation of how finance operates in the UK. It must, of course, be shrunk in size, at least as far as assets under management go: as an industry, it creates few jobs, with total employment in 2007, after fifteen years of boom, being almost identical to total employment in 1992. A shrinking of the scale of finance, with smaller regional and local banks better-informed about their local economies might well produce an increase in total employment — even if a few bonus-happy senior figures will need to find alternative and less “socially useless” employment. As Bank of International Settlements research has demonstrated, bloated financial systems are a barrier to growth and productivity gains. They distort incentives and cannot allocate capital effectively to socially-desirable projects (however much private profit they make). Moreover, major financial institutions act as immense concentrations of power and influence, warping democracy. The New Economics Foundation has presented the case for a break up of major banks, and for a diversity of different banking forms, operating at different scales throughout the country with clear public-interest mandates. New technologies like peer-to-peer lending can form part of this mix.

Take on the Treasury. Close to the heart of the UK’s economic problem sits its most powerful department of state, the Treasury. Austerity, over the last five years, has even reinforced that power. But placing economic policymaking, taxation, spending, and oversight of finance in a single department has not served any of them well, whatever (somewhat hubristic) claims are made by its senior mandarins. As Stian Westlake and Giles Wilkes have recently argued, this concentration of power has produced chronic short-termism, a desire for “wheezes” over planning, and an overcentralisation within Whitehall that has damaged outcomes. To this we can add the proximity of its relationship to high finance, in the Treasury-Bank of England-City nexus. Westlake and Wilkes call for a significant reduction in its power, through the creation of alternative centres of economic policymaking. BIS or its successor department would be a logical place to locate some of this, backed up (as Westlake and Wilkes suggest) with a shift in policy co-ordination to a Cabinet-level National Economic Council. A Labour-led government committed to transforming the UK economy would have to treat this as a priority.

One final point. This is a Plan A. Plan B, should a further crisis occur in the next few years, would shift its emphases, even if the outline remains similar. We should all be prepared, just as Osborne and Cameron were in 2008, to offer an emergency programme, backed up by a clear, simple argument, and stick to it — just as Osborne and Cameron have stuck to theirs. The most likely outcome in the event of a crisis and recession (assuming sanity prevails) would be an immediate end to the austerity programme, the Treasury allowing the economy’s “automatic stabilisers” to function and ballooning the deficit as a result. The Tories did this in the recession of the early 1990s; they will likely do the same again today. Arguments over austerity would shift. Changed circumstances should provoke a changed response.