The contest for the next leader of the Labour Party is in danger of becoming
interesting. Jeremy Corbyn is increasingly stealing the show – perhaps because he is the only one saying anything of substance. The other candidates seem to have been rendered incoherent or inchoate by the carefully manufactured “Big Lie” that the Great Recession was caused by a Labour government that spent too much.
It has now got ridiculous: with Andy Burnham, while arguing for “balanced and sustainable public finances”, considering it necessary to reassure us that “Labour spending on education and the health service didn’t cause the global banking crisis”. As if any of the electorate believe that buying books for British school children and drugs for the NHS caused the sub-prime crisis in the US housing market? And, while senior Labour politicians are busily apologising for spending too much in the past, the Oxford economist, Simon Wren-Lewis, has shown that the argument that the last Labour government seriously mismanaged the nation’s finances is a myth.
The problem when you say something is that you are easily accused of being wrong or, even worse, you are accused of being wrong and saying something that is old. So Corbyn is being accused of regurgitating the failed policies of the past. According to the Financial Times: “his views – higher taxes, mass nationalisation, more welfare, more borrowing – are seen as toxic by New Labour veterans, who prophesy a repeat of Michael Foot’s disastrous leadership in the early 1980s that led to a landslide 1983 election victory for Margaret Thatcher”. Let us ignore the artistic license used by the FT (including ignoring the impact that Falklands war had on the 1983 election) and focus on the economic policies that Corbyn is advocating today.
Four-pronged strategy
There are four key elements that can be identified in Corbyn’s economic strategy which he outlined in a speech last week, all of which are grounded on solid economic foundations and which have little in common with Labour’s policies of the early 1980s.
First, is his (expected) rejection of austerity as a coherent macroeconomic strategy. Many have identified the damaging economic and social impacts of austerity. The case for austerity largely rests on the notion that a looser fiscal policy would result in higher interest rates or that would have an adverse impact on business confidence. The reality is different: looser fiscal policy would have little impact on interest rates which are already at their lower bound and which have had to be propped up by quantitative easing (aka printing money) as they could not be cut further. As for the “confidence fairy”, there is no convincing evidence that austerity improves business or consumer expectations.
Of course, the popular mantra is that the level of public sector deficits and debts are “not sustainable”: but there are no optimum numbers for these variables; what is important is whether the debt is fundable and what it is used for. In a world of low interest rates, government deficits are easily fundable and remain low by historic standards.
Second, Corbyn argues for increased public investment in infrastructure and the establishment of a National Investment Bank. As argued by the LSE Growth Commission, investments in infrastructure, such as transport, energy and telecommunications, are essential to raise growth and productivity .
Many of these investments must come from the public sector. The private sector cannot be expected to make investments where the primary beneficiary is the economy as a whole and not an individual firm or collection of firms. Furthermore, many of these investments are large-scale and long-term, requiring government planning, delivery and financing.
Third is the case for protecting welfare, raising the marginal rate of tax on high-earners and clamping down on tax evasion and avoidance. The philosophy of the current government is that the poor need a cut in welfare to make them work; whereas the rich need a cut in taxes to make them work. This asymmetry is based on politics and not on economics. The current policies on welfare will further accelerate inequality and lead to rising child poverty.
Fourth, is the case for regional rebalancing to encourage growth throughout the economy. There have been long-term spatial imbalances in the UK economy which have accelerated since the early 1980s: whereas growth in London has accelerated, growth in much of the rest of the national economy has been slow or stagnant. This is socially undesirable but also economically inefficient. A strong regional policy will improve national economic growth. Sound bites about a “Northern Powerhouse” are not sufficient – what is required are policies of substance – and Corbyn needs to be more explicit in how he would tackle these entrenched imbalances.
The leadership campaign has increasingly been characterised by invective and vitriol. According to Tony Blair, if your heart’s with Jeremy Corbyn you need to “get a transplant”. Instead, it would be better to use your head to examine his policies: many of which would have a significant impact on long-term prosperity.
Michael Kitson is University Lecturer in Global Macroeconomics at University of Cambridge.
