There is no such thing as Corbynomics, but there could be a chance to turn the tables on deficit fetishism.
Among those that are quite critical of the Government’s economic policies, many have regarded Jeremy Corbyn’s election as leader of the Labour Party with dismay. This dismay stems from at least two worries. The first is a belief that an overtly anti-austerity agenda will be a turn-off for most of the voting public. The second, more general concern is that both the two main parties are now dominated by an ideologically driven agenda. Both views could be correct, but it is also quite possible to be more optimistic.
Take the issue of austerity first. The worry is that a majority of the public have been irretrievably won over to the view that the economy as a whole is no more complicated than a household budget. We have maxed out our national credit card, and we must put things in order as soon as possible. As any undergraduate studying economics will tell you, that view is quite wrong. The pessimism comes from a belief that appeals to intuitive common sense will always win out over appeals to academic understanding.
There is a difficulty with such a pessimistic view. Over the 30 years before the financial crisis, government debt as a share of GDP in the OECD area almost doubled, and there was no good economic justification for this trend. Economists called it the problem of “deficit bias”. This trend seems at odds with the idea that the public will always vote for the party that promises austerity.
So what changed following the crisis? There are two obvious points. First, many people were having to cut back on their own borrowing, so arguments for austerity based on household analogies resonated. In different times, when many households are trying to obtain larger mortgages for example, attitudes to borrowing might be a little less one-sided. Second, from 2010 to 2012 the news was dominated by the eurozone debt crisis, and at that time it was not clear that this was a uniquely eurozone problem.
A good case can therefore be made that the public is not inherently obsessed by the deficit. In particular, George Osborne’s plan for surpluses on the overall budget gives Labour an opportunity to turn the tables. If the Labour opposition commit themselves to something like achieving balance on current expenditure, this makes public investment the dividing line between the two parties. Labour can argue that while they intend to invest more in houses, schools, hospitals and flood defences, the Conservatives want to knuckle under in case there is another financial crisis.
In short, Labour intends to invest in the future, while the Conservatives will not because they are obsessed with the deficit. For what it is worth, Labour can pick any non-partisan economist at random, and the chances are they will agree that a period of low interest rates and cheap labour is the time to increase public infrastructure investment. If anti-austerity rhetoric can be linked to investing in the future, it could become a vote winner.
What about the fear that Labour is going back to a pro-nationalisation, pro-union past that clearly failed in electoral terms? A great deal here depends on how politically smart the new Labour leadership and Labour MPs are. The leadership know that the majority of MPs, and probably a majority of the public, are well to the right of themselves. They cannot hope to win in 2020 leading a divided party. While a radical agenda might work for a Labour Party membership that is highly political, well-informed, and fed up with Labour appeasement, winning over a much less political electorate who read a hostile press is something else.
The smart strategy is to take the long view, and focus on policies that move the party’s platform to the left in ways that the majority of the parliamentary party are comfortable with. This means focusing on a pro-investment, anti-inequality agenda, which could include a substantial increase in public-sector house building, and leaving issues like renationalisation for later. The recent announcement that Labour will renationalise the railways one franchise at a time is an example of this pragmatic approach.
Another promising sign concerns Corbyn’s proposal for People’s QE. The original proposal was that a National Investment Bank (NIB) be set up, financed by a new burst of money creation by the Bank of England. Many economists have supported the idea of a NIB. Conventional QE, which involves the Bank creating money to buy mainly government debt, could certainly be improved by using the money more directly to stimulate demand. The problem is combining the two ideas in a proposal for 2020, when it seems unlikely that the Bank will be doing any more QE at that time. Forcing the Bank to create money to finance a NIB would threaten the independence of the Bank of England.
John McDonnell, shadow Chancellor, had in the past indicated that he would be quite happy to end independence. This goes against the views of most economists, but in addition would be a gift to the Government, who would then have some basis for claims that a Labour government would mean higher inflation. So the smart move would be to keep an independent Bank of England, and propose to set up a NIB using conventional finance, perhaps with a government guarantee. When it wanted to do more QE, the Bank could invest in the NIB. Last week, in an interview for The Guardian, McDonnell explicitly stated he intended to keep the Bank independent.
So there are some signs that the Labour leadership are taking a pragmatic, consensus-building approach. What is less clear is how many in the parliamentary party are prepared to reciprocate.
Professor of Economic Policy, Blavatnik School of Government, Oxford University
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