Good for the working class?
Michael Roberts examines the inadequacies of Corbynomics
During the campaign for the Labour leadership last September, 40 economists (mainly Keynesians and heterodox left economists) signed a letter1 to The Guardian newspaper stating that ‘Corbynomics’ was not extreme: “The accusation is widely made that Jeremy Corbyn and his supporters have moved to the extreme left on economic policy. But this is not supported by the candidate’s statements or policies. His opposition to austerity is actually mainstream economics, even backed by the conservative IMF.”2
But Corbyn’s economic policy not only stimulated support from left and heterodox economists: it also provoked opposition from rightwing, mainstream economists. Professors Tony Yates of Birmingham University and Paul Levine of Surrey University rustled up a letter from 55 economists “from across the political spectrum”, who agreed that Corbyn’s economic plans are “likely to be highly damaging” and represent thinking that is far from mainstream economics. “It is hard to think where mainstream economics and Corbynism sit together at all,” said Yates. Most of these signatories were on the pro-austerity wing of the ‘mainstream’ - like Patrick Minford of Cardiff Business School, or hedge fund advisor George Magnus, the former chief economist of UBS, and Kitty Ussher, a former treasury minister.
Their criticisms were as limited in their explanation as the supporters of the letter backing Corbynomics were. Apparently, Corbyn’s popular plan to renationalise the railways would be a “waste of public money” and “make things worse”. And the idea that the Bank of England could print money to fund public infrastructure at all times, whether the economy was in recession or not, was “highly damaging” and “unnecessary”, since public investment could be financed conventionally, the letter said.
David Smith, the rightwing economics pundit for the Murdoch-owned Times newspaper, praised the 55 mainstream economists for exposing Corbyn’s “incoherent” economic policies. Renationalising the energy sector would be “a hugely expensive folly”, Smith said: “The privatised utilities have not been perfect, but they have been infinitely better than what went before.”Smith quietly forgets the disastrous franchising and fragmenting of the rail network under successive governments, creating high prices (the highest in Europe), big profits, low investment and still large taxpayer subsidies to private monopolies. The privatised utilities (gas, electricity, water, telecoms) have also delivered high prices and huge profits; but low investment and massive manager bonuses.3
Martin Wolf, leading Keynesian guru at the Financial Times, reckons:
Mr Corbyn’s economic ideas are also muddled … Some proposals - notably higher public investment at a time of low interest rates - make sense. Some, such as letting the Bank of England inject the money it creates directly into the economy, make sense in quite restricted circumstances. Some - such as nostalgia for nationalisation and the idea that £120 billion a year in lost tax revenues can be readily found - make no sense at all.4
Presumably, the signatories of the ‘mainstream’ letter consider their approach to be ‘rational’ and based on ‘good economics’. But, as Steve Keen, the head of Kingston University economics and a prominent heterodox economist, points out, these neoclassical, orthodox economists work from an economic model of equilibrium, free markets and marginalism that has no basis in reality, in the same way that the Ptolemaic system of the universe seemed perfectly constructed: “the model appeared to fit the data ... but it was completely wrong about the structure of the universe”.5
Change for the better?
But I digress. In my view, the problem with Corbynomics is that opposing austerity is not enough. The question is whether Corbyn’s main economic policies, as he has been advised to adopt, would work to transform the British economy, if he ever gets the chance to implement them, and deliver an irreversible change for the better in the lives and conditions of the majority of British people.
And there I have my doubts. The main planks of Corbynomics are: ending the tax gap; providing cheap money for investment through what is called a “people’s QE”; an investment bank for funding infrastructure projects; renationalising the railway network; returning the postal service to majority public ownership; and keeping the majority stake in the main British bank, RBS (now going fast, as the Tories sell off the shares).
With these economic measures, Corbyn would scrap tuition fees (maybe?) and restore maintenance grants for students, to be funded by higher taxes on richer earners and a higher corporation tax rate. He would also create a “national education service”, offering free universal childcare - which the IPPR think-tank estimates6 would cost about £6.7 billion - paid for again by some of the money obtained by raising corporation tax. And Corbyn proposes building 240,000 new homes a year and changing the ‘right to buy’, so it applies to the private sector, but not council houses or housing association properties. The new homes could be built through higher borrowing or funded by imposing higher taxes on unused land with planning permission and unoccupied properties. Corbyn also plans to end ‘the market’ in the health service, outsourcing of public services and costly funding through private finance initiatives.
All this is good news for the interests of the majority and Labour. But let us consider the efficacy of these policy measures in achieving these aims. First, the tax gap. The failure of the UK inland revenue services to collect tax from those companies that should pay it, plus the huge evasion and avoidance of tax by companies using corporate accountants, often previously employed as tax inspectors, is a major scandal. Richard Murphy, who has been a tireless campaigner for ‘tax justice’ and is now Corbyn’s main economic advisor, has calculated that up to £120 billion a year in tax revenues has gone missing because of tax avoidance, evasion and non-collection.7 If a Labour government had that sort of annual extra revenue in its hands, it could transform public finances and services.
But could it be collected, while corporations remain in private hands? Even Richard Murphy reckons it would be difficult to extract and thinks £20 billion would be the most likely pick-up.8 Keynesian economist Jonathan Portes, director of the National Institute of Economic and Social Research, said: “Any government expecting to fund a significant proportion of its extra spending plans on the basis of closing the tax gap would find itself with a large hole.”9
That does not mean a Labour government should not try, with new tax laws and anti-evasion measures. But the problem remains that, as long as corporations are private entities beholden to their shareholders, both domestic and foreign, and are not publicly owned, they will seek to maximise their profits. Avoiding and evading tax is a big part of doing that. Indeed, evidence shows that, if it were not for governments continually lowering corporate taxes (not raising them, as Corbyn plans) and turning a blind eye to abuses, then corporate profitability would be seriously impaired and would thus reduce even the level of investment that is currently taking place.
The same concern applies to the idea of closing down the £93 billion a year of corporate tax reliefs and subsidies that Kevin Farnsworth at the University of York has identified10 - way more than the social welfare bill that the Conservative government aims to cut. Farnsworth has shown that corporations get £44 billion in tax breaks for buying equipment, etc and £16 billion of working tax credits. This corporate welfare shows that British capitalism has to be subsidised to boost its profitability and encourage it to invest productively. But if these reliefs were to be cut would that not just reduce profitability and lower investment further? Would there be sufficient public investment to replace lower private sector investment?
Then there is the idea of a ‘People’s quantitative easing’ (QE) programme. Instead of the Bank of England buying government and corporate bonds and printing money to do so (the current QE), the Corbyn proposal is that the BoE would buy bonds and other assets directly from local councils, regional agencies, etc, so that they can invest the money in projects for more housing, schools and services. According to Richard Murphy,
People’s QE is fundamentally different. [It] does have the Bank of England print new money, which is identical to the process that is used by ordinary banks when they lend to business, but it gives that money to people like housing authorities, to local councils, to a green investment bank to build houses, to schools, to build hospitals.11
This has been attacked by the right wing of the Labour Party and by mainstream economists as likely to fuel inflation. This is nonsense in an economy which has only just got back to the level of 2007 and where investment to GDP is near a 50-year low.
There is plenty of room to boost productive investment and GDP. Indeed, inflation is currently zero. The only ‘inflation’ around is in stock and bond prices, fuelled by the BoE’s QE funding of the banks:
Any system of people’s QE would be turned off if we got to a situation of high wages and full employment, but we are so far from that at the moment that we have to tackle the low-wage economy and the lack of productivity in the UK by creating new investment, which is the foundation for new prosperity.12
The other argument against ‘People’s QE’ has come from mainstream economists, including Keynesians, who argue that it would mean ending the ‘independence’ of the Bank of England. Apparently, this independence from government control, introduced by then Labour PM Gordon Brown, is such a good thing that it needs to be preserved at all costs.
This again is nonsense. First, the ‘independent’ BoE does not have a good record in helping the economy and/or avoiding financial crashes. The BoE failed to spot the global financial crash and the ensuing great recession. It panicked when it came along and did nothing to sort out the banks. Its independence was a fake: it really means the BoE is at the beck and call of the major banks and financial institutions in the City of London rather than accountable to the government, parliament and the electorate. We now know that the BoE failed to impose recapitalisation and restructuring of the foreign-owned HSBC and Barclays Bank during the financial crash.13 As a result, the British taxpayer will never see back all the money invested in the banking system. The BoE decides its interest rate policy and its financial supervision in the interests of the City of London, not the wider economy. It only has an inflation target (which it seldom meets) and no growth or employment target that would be in the interests of the people.
What is worrying about People’s QE is none of this. It is whether it can do the trick. Can it help deliver more growth, employment and incomes any more than the traditional mainstream funding whereby governments issue bonds for investment? That depends on whether the Corbyn-proposed National Investment Bank (NIB) can change things. People’s QE would be used to buy NIB bonds to fund investment. A state investment bank is certainly not extreme, as Keynesian biographer Robert Skidelsky has pointed out:
[It] is neither extreme nor new. There is a European Investment Bank, a Nordic Investment Bank and many others - all capitalised by states or groups of states for the purpose of financing mandated projects by borrowing in the capital markets.14
And, as Corbyn himself put it, “If I was putting forward these ideas in Germany, I’d be called depressingly moderate, depressingly old-fashioned, as they have a national investment bank already and they invest in public services.”15
I would add that the NIB looks very much like Brazil’s BNDES, which has been mightily successful in driving investment projects at lower borrowing costs during the great recession, so that Brazil got some investment. Indeed, during the great recession, those countries that suffered least were precisely those countries bolstered by state-owned investment banks that supported infrastructure projects to keep jobs and create investment. Brazil’s INDES investment bank was very successful in doing that, despite the cries of foul by the privately owned and foreign banks operating there. It is no accident, for example, that Brazil had a very mild recession, because the government there plunged huge resources through its state-owned development bank for infrastructure spending.
But the experience of the Brazilian investment bank also shows the problems. The BNDES has taken most of the investment business away from Brazil’s private banks, both domestic and foreign. So they have concentrated on mortgage loans and speculation in commodities and financial assets, spawning a property and credit bubble. Their huge asset power has not been used for developing the economy, because there is no profit in it for them. This is the risk in the UK too. The NIB will do projects for productive investment, while the ‘big five’ multinational banks will sit on the sidelines. They are already failing to lend to small businesses and for investment (only 3% of all assets are in manufacturing sectors).16 So I am afraid that Skidelsky’s claim that “a state-led investment programme offers a way to rebalance the British economy away from private speculative activity to long-term investment in sustainable growth” will not happen if the only instrument is the NIB.
Surely, just using the NIB and perhaps the state-owned RBS alone cannot turn the credit institutions into vehicles for funding faster investment and employment? There is crying need to take over the big five UK banks and use their financial resources in a national plan for investment and growth. This is actually Trade Union Congress official policy (although that is ignored by the union leaders). The case for public ownership is overwhelming.17 Moreover, how can Corbyn’s plan to end the grotesque salaries and bonuses paid to top executives and bankers be implemented without proper public control and ownership of the banks?
Then, as Marxist economist Chris Dillon recently put it, “who will do the actual investing? There’s a case for the state to invest in infrastructure. But we also need corporate investment, to raise private-sector productivity.”18Actually, I do not think we need corporate investment, if that means relying on private companies for profit to deliver the investment that the NIB offers to fund. Take a major project just announced for London. The London ‘super sewer’ is set to begin next year. Bazalgette Tunnel Limited, a special purpose company has been formed to lead the project. Balfour Beatty, the UK construction company, has been awarded a £416 million contract to build part of it. This is a private company with shareholders and private investors. Surely this is a project for a publicly owned and controlled entity, not for profit?
It brings us back to the need for any effective (if extreme) economic policy to include as one of its main planks public ownership under democratic control of strategic industries, or what used to be called in old Labour parlance, the ‘commanding heights’ of the economy. Corbynomics includes the vital measure of renationalising the railways after the disgraceful and incompetent breaking up of the state rail system into private monopolies with franchises, and now asking the highest rail prices in Europe and yet still subsidised by the taxpayer. It has taken the British railways back to the 1830s.
The most pathetic argument against renationalisation has come from Kate Hoey, the maverick ex-Labour MP. You see it can’t be done because it is against EU directives! “It would be hyperbole to say that all efforts to renationalise the railways would be blocked by the EU, but it would be equally naive to dismiss the problem.”19 But EU directives are not law, but guidelines, and can be interpreted or applied as member-states wish.
Corbyn is apparently also considering restoring the state majority stake in the Royal Mail postal service, after its recent privatisation at a ludicrously low price by the current government. This is good, but that still leaves swathes of key British economic operations in the hands of profit-seeking companies. What about the rest of transport: deregulated buses in the big cities; and all the British companies that used to be part of the public sector? What about British Petroleum, British Airways; British Telecom; British Gas; British Aerospace; the electricity and water boards; Transco; Rolls Royce, British Steel, let alone British Coal? And there are the major strategic sectors: the major pharma and auto companies, now mostly in foreign hands, where any profits end up overseas. Public ownership of the key national and regional airports would ensure a proper service that did not cause environmental pain from noise and pollution. “I think the third runway is a problem for noise pollution and so on across west London ... I also think there is an under-usage of the other airports around London,” said Corbyn in the FT.20
Of course, such a programme would be extreme not just for the capitalist media, mainstream economists and the Labour leadership, but also in the minds of many of the signatories to the leftwing letter. But without these measures, in my view, there will not be a “rebalancing of the British economy away from private speculative activity to long-term investment in sustainable growth”(Skidelsky).
The key is investment. As Marxist economist Michael Burke has pointed out, the capitalist sector has failed to deliver decent incomes and sustained growth, because it had failed to invest.21 It seems that the private sector cannot deliver decent incomes and employment for all. Burke points out:
... per capita GDP is still below where it was before the crisis began in 2008. This remains the weakest recovery on record and the year-on-year growth rate has slowed from 3% to 2.6%. This follows a period from the end of 2012 onwards, when no new austerity measures were imposed. Renewed austerity on the same scale as in 2010 to 2012 means there is likely to be a similar slowdown.22
He goes on:
The level of investment in the British economy was £295 billion in 2014, exactly the same as the pre-crisis level of 2007. But the economy is actually 4.2% larger (keeping pace with population growth, but no more than that). Therefore investment is declining as a proportion of GDP. Consumption, not investment is leading very weak growth and this is not sustainable.
The profit rate has only barely returned to its pre-crisis level and is well below profitability prior to this century. The same is true for business investment. Both of these are a recipe for continued slow growth.
In my view, this is a Marxist view of the state of the British economy, which requires Marxist prescriptions. The new Labour shadow chancellor, John McDonnell, sees it the same way. On the day of his big keynote economics speech at Labour’s annual conference last month, he said:
If you look at our capitalist system, one of the definitive analysts of how it works - not whether it is condemned, or whether it is right or wrong, just the mechanics of how it works, when it was formed and how it would be developed - actually was Marx.
He went on:
If you look at most of the institutions that are teaching economics today, Marx has come back into fashion because people have gone back to his analysis of just the basics of how the system works. People might disagree with his conclusions about what to do with the system, but actually to understand how the system works he comes up with some interesting analyses that have been built into traditional and fairly classical economics.23
Analysis and policy
However, note that John McDonnell makes a distinction between Marx’s ‘interesting analysis’ of the capitalist system - ie, what is wrong with it - and “his conclusions about what to do”. Thus Marxist policies for dealing with capitalism do not necessarily flow from his analysis, it seems.
What policies do? Well, apparently, it is Keynesian prescriptions. Thus McDonnell has announced a panel of economic advisors, including international luminaries like Joseph Stiglitz and Thomas Piketty, to help on policy.24 This committee is drawn from the Keynesian mainstream and its heterodox wings, but not Marxists.
I am sure that it looks like a very good political ploy to involve leading economists in Labour’s economic plans. No doubt it is hoped that it will disarm criticism from the financial media and big business when a Nobel prize-winner and the ‘rock-star’ economist of the moment are on the committee. But this reminds me more of the approach of Greece’s Syriza, which started out with a Marxist analysis of Greek capitalism, but which, according to Yanis Varoufakis25 and Costas Lapavitsas26, then needed to be put aside when it comes to policy, because Keynesian economics is more relevant ‘in practice’.
You see, the problem of capitalism, according to these advisors, is a ‘lack of demand’, not a lack of profitability.27 So, in a slump, Keynesian prescriptions call for more government spending or a reversal of ‘austerity’ (in the current parlance), so that spending boosts employment and incomes and restores household consumption (and investment?) as the means to recovery. That means running budget deficits through more government borrowing (issuance of more bonds).
Keynesians generally dismiss those (austerians and neoliberals) who worry that, as a result, spiralling government debt will lead to a new crisis, as governments find they cannot service their debt except at unaffordable interest rates (as in Greece and the peripheral euro zone economies, Puerto Rico, etc). You see, for Keynesians, one man’s debt is another’s asset. So the only problem is if it is foreigners who own the debt.28 If foreign holders of credit demand repayment, they can cripple the currency. This is the view of Paul Krugman in the US and Simon Wren-Lewis, the British Keynesian guru, now part of McDonnell’s advisory team (who, by the way, also thinks the Bank of England should stay ‘independent’).
But debt does matter.29 One of the features of the global financial crash was the massive rise in private-sector debt (household and corporate) before the credit crunch in 2007. That debt rose, as capitalist economies tried to keep profitability of capital and economic growth up through a low-interest-rate, credit-fuelled bubble in unproductive sectors of finance and property. The private credit bit (not the profitability bit) is the Minskyite view of the crisis, as expounded in particular by Steve Keen and Anastasia Nesvetailova (again one of the McDonnell’s new advisors). The credit boom of the 2000s was a response to declining profitability of capital in the productive sectors of the US, UK and other major economies from the end of the 1990s. It staved off a major slump, only to create an even larger one in 2008-09.
That was private-sector debt. But the same issue applies to public-sector debt. If the owners of this debt (banks, hedge funds, pension funds, insurance companies) decide that they want to get their money back or demand lots more in interest to renew loans or buy government bonds, they can shackle the ability of a government to pay for welfare benefits and public services, let alone investment in roads, hospitals and schools.
Debt does matter in a capitalist economy: capitalists owe to other capitalists; households owe to finance capitalists; and governments owe to finance capitalists. The holders of this debt expect a return and prompt repayments. Under a predominantly state-owned and planned economy, state companies, households and governments would owe to other state companies. So the decisions on the cost of borrowing and repayment terms could be decided as part of a national plan and not by the ‘market’ and on the profitability of (finance) capital.
‘Balance the books’
Ironically, having selected Keynesians and Minskyites for his ‘team’, John McDonnell has made it clear from the start that he is not a ‘deficit denier’. By this, he means that he does accept that running government budget deficits cannot be ignored, as the Keynesians reckon. As McDonnell put it, “We accept we are going to have to live within our means and we always will do - full stop.” And until September 13 he had advocated signing up to the Conservative government’s fiscal charter that will make it a law that government’s must ‘balance the books’ over the ‘business cycle’. He had said:
We will support the charter. We will support the charter on the basis we are going to want to balance the books, we do want to live within our means and we will tackle the deficit.
This was clearly a political ploy by McDonnell to avoid the charge being made by the Conservatives that Labour, when in government, allowed deficits to get out of control and thus caused the crisis and the great recession; and that Labour has no regard for ‘balancing the books’. This charge, of course, is nonsense and a downright lie. Actually, when in government, Labour generally ran lower budget deficits than the Conservatives and under ‘prudent’ finance minister and PM Gordon Brown, government spending was kept well under control, as Ann Pettifor, another of McDonnell’s new Keynesian advisors, has pointed out.30
The UK’s budget deficit spiralled only when the global financial crash came and British banks had to be bailed out with taxpayer’s money (borrowing). This prompted Gordon Brown to tell the British parliament that he had “saved the world” (a slip of hubris, meaning he had saved the banks). The current government deficit (still higher than other G7 economies, except Japan, under the Conservatives), the external deficit running at over 6% of GDP and a government debt still rising towards 100% of GDP were the product of the capitalist crisis (the financial meltdown and the ensuing great recession).
McDonnell says that this deficit and the government debt can be reduced not by cutting welfare and public services, as the Conservatives have done and are doing. It is a political choice. Instead it can be done by raising taxes on the rich (reversing cuts in corporation tax and inheritance tax), reducing ‘corporate welfare’ (around £90 billion a year), dealing aggressively with tax evasion and avoidance by the likes of Vodafone, Amazon, Google and Starbucks (worth up to £120 billion a year). And Labour under McDonnell would also stimulate economic growth by borrowing to invest in infrastructure projects. McDonnell also estimates that £80-100 billion could be saved (over 30 years, mind) by scrapping the Trident nuclear submarine programme due for renewal next year.
Laudable as these aims are, much of these tax-gathering measures may not deliver enough extra revenue to close the deficit. It has been pointed out that it will be very difficult to raise the necessary extra £30 billion a year in taxes without hitting middle-income earners - unless UK economic growth takes off from its current 2%-2.5% a year expansion rate.31
The circle could easily be squared if private-sector incomes (wages and profits) rose substantially faster to deliver much higher tax revenues. But that is not going to happen under a predominantly capitalist economy, where profitability is key to investment, employment and income growth. British capitalism has already failed to invest, preferring to pocket its profits and/or speculate in financial assets or invest abroad. And that is with the lowest corporate tax rate among the major economies, as Conservative finance minister George Osborne likes to boast. Higher taxes on the capitalist sector - namely the big companies that invest and employ the bulk of the British economy and people - will only mean a further failure to invest.
The ‘new’ Labour leadership replacing the ‘old’ (‘New Labour’, neoliberal) leadership is pledged to expand public investment in infrastructure, ‘green’ sectors and in housing and transport. This will undoubtedly help to sustain economic activity, apart from helping the majority instead of the 1%. But Corbyn’s and McDonnell’s National Investment Bank will not be enough to deliver sufficiently faster growth as long as the UK economy is still dominated in its strategic sectors by capitalist profit-making companies in the City of London (privatised banking, insurance and pension funds); by large pharma and aerospace companies; telecoms (BT), house-building companies and transport (rail, bus and airlines), etc.
Along with a National Investment Bank (and fully state-owned banking), what is needed is a national plan for investment, employment and services based on a predominantly state-owned economy, democratically controlled and operated. But that is the Marxist prescription from the ‘interesting’ Marxist analysis of the capitalist economy. Instead, the new Labour leadership likes the Marxist ‘analysis’, but looks to Keynesian ‘solutions’.
Capitalism has regular and recurring crises - that is one unique conclusion from the Marxist economic analysis, something not accepted or recognised by mainstream, Keynesian or Minskyite economic theory. British capitalism, along with global capital, is likely to enter another slump before the next general election in 2020. Indeed, McDonnell has also noted that many of the features that led to the last great recession - credit boom, housing bubble, bank speculation, etc - have re-emerged.
Keynesians did not see the last slump (the great recession) coming and did not have the policies to deal with it, at least in the interests of the majority. So relying on Keynesian policies to handle or avoid the next slump, even as a political ploy, may be a hostage to fortune for the new Labour leadership.
Michael Roberts blogs at https://thenextrecession.files.wordpress.com.
4. M Wolf, ‘Two cheers for Jeremy Corbyn’s challenges to economic convention’ Financial Times October 1 2015.
16. M Roberts and M Brooks: https://thenextrecession.files.wordpress.com/2012/11/s-time-to-take-over-the-bankslr.pdf.