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Could Corbynomics fix our economy?

Labour Leadership Candidates and now they are 4_edited-1The debate surrounding Labour’s leadership contest is being marred by name-calling and red-baiting. Perhaps this is inevitable but it is regrettable. Britain remains in an economic crisis, which has now entered its eighth year. A more productive course would be to discuss how to end it.

A marker of that crisis is that per capita GDP is still below where it was before the crisis began in 2008, as shown in Fig. 1 below. 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.

The Tory strategy is more of the same, which one commentator called a Captain Bligh policy, “the floggings will continue until morale improves”. This policy is supported by virtually all the mainstream press. Unfortunately, it is also supported by three of the four candidates for Labour’s leadership. They abstained on the Tory Welfare Bill, the centrepiece of the government’s latest Budget. Only Jeremy Corbyn stands on a clear anti-austerity platform, which he outlined in his economic policy manifesto.
Longest-ever crisis

No-one alive today has ever experienced a longer economic crisis in Britain. The nearest comparison for the length of the current British economic crisis was at the end of the nineteenth century and the Long Depression. As per capita GDP has not recovered it is extremely difficult for median average living standards to rise. On the contrary, the austerity policy serves to work in the opposite direction by transferring incomes and wealth from poor and middle-income layers to the rich and from labour to big business. So, the latest Budget included a further cut in the Corporation Tax rate to 18% while cutting £12 billion in social protection to the most vulnerable in society.

The Tory policy is straightforward. These transfers of income known as austerity will continue until the business sector is making sufficient profits for it to resume investment. The crisis will be paid for by increasing the rate of exploitation. The austerity mark II of the latest Budget is not because there is still a public sector deficit, as this will fall as it does everywhere even if there is moderate nominal GDP growth. Renewed austerity is necessary because business is not yet willing to fund an investment-led recovery.

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 larger 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.

Yet the profit level has also recovered and accounted for 37% of GDP in 2014, compared to 36.1% in 2007. So the Tory policy is not working. Profits have increased by 6.8% in real terms since 2007, but investment is unchanged. Fig.2 below shows the official estimate of the profit rate in the non-financial sector versus the proportion of GDP devoted to business investment. These are strikingly indifferent results for 5 years of austerity policies. 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.

The profits recovery has been greater than the investment rebound. As a result, the extremely high level of uninvested profits has actually grown. The level of uninvested profits in the British economy was £355 billion in 2014, compared to £261 billion in 2007. This is the main brake on a robust and sustainable recovery. Andy Haldane, chief economist of the Bank of England says that firms are ‘eating themselves’ by refusing to invest and instead paying out ever-greater proportions of profits in shareholder dividends. This has been a recurring theme in SEB, and we might add the enormous increase in managerial pay and bonuses which are also a factor. The remainder is deposited in the banks, where it fuels ongoing speculation in financial assets, stocks, housing and commodities.

Unfortunately, it is this Tory strategy that three of the four contenders for the Labour leadership have endorsed. They have no principle difference with the centrepiece of Tory strategy, cuts to social protection ‘welfare’, privatisations and cuts to corporation tax. The recovery from crisis will be funded by workers and the poor.

This is an extremist economic policy. In the first phase of the leadership campaign it began with an attack on public spending of the Blair and Brown years, placing the candidates not only to the right of New Labour but to the Tories of the time, who effectively endorsed New Labour spending.

Economically, it also places those candidates to the right of Thatcher, who both spent and taxed more than New Labour as a proportion of GDP. It is perhaps worth recalling that main rates of taxation were significantly less regressive even when Thatcher left office in 1990 than they are under the current government (and that many of them were made more regressive by New Labour).

This wholesale adoption of the key planks of an economic policy of a government to the right of Thatcher has been compounded by the refusal to oppose the Tory policy of cutting £12 billion from the ‘welfare’ bill. This is widely understood as a direct attack on the living standards of the poorest and most vulnerable and will directly increase child poverty. The Institute of Fiscal Studies, which is not a hot-bed or radicalism but simply uses the Treasury’s own model of the distributional impacts of Budgetary measures, was explicit in arguing that the Budget would increase child poverty.

Yet these measures were not opposed by the Labour frontbench or by three of the four candidates for leadership. Even the Blairites used to boast that they had reduced child poverty. It is more than a rhetorical question, but also a vital political one to ask if the Labour Party supports increasing child poverty, what is it for.

Corbynomics

Jeremy Corbyn is the only candidate who is not proposing extremist economics. His policy aims to promote growth through increased public investment, funded by progressive reform of the current taxation system, and attacking the abuses of the £93 billion in annual payments for ‘corporate welfare’ in subsidies, bribes and incentives to the private sector.

At the same time he opposes any attempt to make workers and the poor pay for the crisis and rightly argues that the deficit would close naturally with stronger growth. This poses a different way out of the crisis than the one supported by the Tories and the Labour frontbench. His campaign and platform corresponds to a mood inside the Labour Party and wider society. The Tories only won 24% of the electorate’s vote in May because only a minority supports their policy. Labour got fewer votes because it had no alternative.

It used to be the case in the period of economic expansion before the crisis, that to some extent ‘a rising tide lifted all boats’. Even if the labour share of national income declined continuously from the 1980s under all governments, at least living standards for the majority in work were rising. That is no longer the case. The entire austerity policy means that there will be no rise in living standards for the majority until big business sees fit to invest once more. That is, only after having made workers and the poor pay for the crisis and a renewed fall in living standards.

It is this policy which the Labour Party frontbench has signed up to. It is a shock to many in Labour that the verbal commitment to match Tory spending is a real one, even when that means supporting an increase in child poverty. Many are quite rightly revolted by it.

By contrast, Jeremy Corbyn’s economic plan is a moderate, logical and fair one. Big business has the resources to fund the investment the economy needs and as they refuse to invest on a sufficient scale, government will use some of their resources in the interests of society as a whole. Workers and the poor should not pay for a crisis they did not cause. Jeremy Corbyn’s plan for state-led investment offers a way out of the crisis.

17 Comments

  1. Mervyn Hyde says:

    It doesn’t matter how much GDP rises or falls my life remains the same, but in reality someone’s life does get better, when we look at the top 1% for example.

    With the impact of China and India common sense should tell anybody that things can only get worse unless we do something positive ourselves.

    That means a whole new perspective, competition and markets have become irrelevant, we need to produce according to need not about what we can export, our trade deficits runs to billions every single month and
    can only get worse, unless we change to creating our own goods, the private sector won’t because they don’t see the profits and we are still losing production to the far east.

    We have the money to create the future we choose, the Bank of England doesn’t have to borrow a penny from anywhere, the deficit is a lie used to asset strip our country, it could all be different.

    We either take control of our economy are become the serfs to the banking system and capitalism.

    We only have a future if we recognise that it is up to us to create it.

    1. Rodney Willett says:

      Am I right in thinking that whenever the state follows your ideas, that state ends up seriously less well-off than before?

      1. J.P. Craig-Weston says:

        The UK is moving ever more rapidly towards the standard American,(these days America is operating essentially as a colonial or even just as rentier economy,) model of economic colonialism AKA; Free Trade.

        As America perceives things, the only purpose of other economies is to generate dollars to buy American goods and service; in practice these are generally weapons and other armaments, (Trident for example,) too often used to enforce repression in support of undemocratic right wing authoritarian government by small wealthy land owning cliques.

        This is same pattern that has been been put into place throughout Latin America, the Caribbean and throughout the third world; which the UK will shortly joining.

        All our adds value industry and services are now foreign owned, (by companies paying little or no tax,) as increasingly are all our assets, (all the companies involved in Fraking are foreign, for example,) and money and funding are being stripped out of even basic social welfare provision for the least well of in order subsidize, (corporate welfare or simply, “tribute,” to use an archaic but still somewhat apt term for what’s happening,) over-mighty and all too often American based or administered corporations and consortia; to the tune of £94 billion by one recent estimate.

        There’s almost no real difference between where Greece is to day and where we in the UK will be tomorrow.

        This is the end game of 50 to 100 years of, (particularly post war,) economic and foreign policy, even Lend Lease, (remember that,) had free trade arrangements similar but far less severe than TIPP or TAFTA, (Clause 8, I think,) written into it.

        But what does that mean in practice ?

        Well traveling through Manchester every day and seeing the poverty and the hundreds of utterly destitute people begging on the streets, it already looks a lot like the slums of any third world country and we’ve still got five more years of this crap to go.

      2. Mervyn Hyde says:

        Rodney:

        That is such a simplistic statement it barely requires an answer.

        If Britain were surrounded by hostile nations that refuse to trade with it, and threaten it’s very existence, don’t you think we would look something like the Banana republics or the old commecon bloc.

        Better still unless you are walking around with your eyes closed we have already achieved that without those conditions they suffered.

  2. David Ellis says:

    I think we need to recognise that business as usual is not possible. Austerity isn’t about bad people doing bad things for the sake of it it is about the collapse from exhaustion and bankruptcy of a sclerotic and monopolised economic system. Capitalism will not be making any comebacks just because Jeremy thinks all it needs is some nice people in charge. This is rapidly becoming a life and death situation for workiing people not just in Britain but across the globe. As imperialist capitalism rewinds the film of globalisation the choice is a straight one between socialism or barbarism. A New Dark Ages awaits us all if we fail. The violence that it took capitalism to progress to its final globalised form will be as nothing compared to the violence of its unopposed decay. To that end the Corbyn Campaign needs to adopt some serious socialist policies that will put the working class in power and put capital in iits place. He needs to propose radical solutions such as full-employment by sharing the productive work after all the entire crisis can be reduced to the fact that the benefits of ever greater productivity accrue to a handful of super rich through higher profits and unemployment for the masses instead of to the masses through an ever decreasing working week. The right of capital to maintain a reserve army of unemployed which is so fundamental to it is one we must end. It is why 85 individuals have more personal wealth than 3.5 billion and it is why capitalism has reached the end of its road.

  3. swatantra says:

    The plain fact is that we’re never going to find out for at least 10 years, or being optimistic 5 years.

  4. Bazza says:

    Excellent piece by Michael.
    Perhaps other policy tools to explore are a Windfall Tax on big business (to politically get more of the workers share of legally nicked surplus labour back) plus more taxes on the rich and land and a significant EC Financial Transaction Tax plus a Common Corporate Tax.
    We also need a global living wage and more democratic public ownership (by country) and state led public investment. But whatever we do we also need our brothers and sisters in every country to be doing the same things – we need to offer 21stC economics to take on
    19th C Neo-Liberal economic doctors who only know how to bleed.
    The right wing Neandertholls call us extreme but our extremism is like with democratic public ownership, letting staff elect boards and communities have a say – more democracy, democratic schools with whole communities electing governers and democratically elected and accountable LAs having democratic control. Yes the extremism of the Left is more democracy and a say in every area of life. The future I believe is grassroots, bottom up, participatory and democratic- what socialism was always meant to be.
    Yours in solidarity!

  5. Bazza says:

    Just a thought but perhaps a democratic socialist PM would visit Calais and gather all the asylum seekers in a meeting and talk to them. And say their desperate actions (or how it is being reported) is worrying UK citizens and ask how we could work out a fair solution together- again this dangerous Left ideas of participatory and invovlement and what is Cameron offering more security and dogs.
    Perhaps we should treat human beings with respect.

    1. swatantra says:

      It wouldn’t work and you damn well know it.
      They’d laugh in the face of any person who tried to talk to them with ‘respect’. The situation has gone beyond ‘respect’, and I’m frankly getting a bit tired of ‘respect’ and desperate’ and ‘vulnerable’ being used in this context. What is needed is for the French with the help of the British and others to build proper ‘Holding Camps’, and intern these young men, and process them and return them to their countries of which they are citizens. These days you are born a citizen of the Nation you are born into and you cannot self declare your self a citizen of the world, giving you the automatic right to force yourself into another country …. without that country’s express permission or license to …. whatever your circumstances.

      1. Billericaydickie says:

        Here, here. And what a wonderful blog that is.

      2. Robert says:

        But let in the young women so they can be abused in Birmingham….

      3. J.P. Craig-Weston says:

        Perhaps if, “we,” stopped bombing, “their,” homes and “their,” families and “their,” societies back to the stone age on any or no pretext, then, “they,” might be much less desperate to get away from violence and bloodshed and far more keen to rebuild the kind stable centralized states that, “we,” have so cynically destroyed largly at the behest of America.

        This is very much a problem of, “our,” own creation.

    2. Billericaydickie says:

      Eeehr, yeah, OK Bazza. What is it you’re on about?

    3. John P Reid says:

      I noticed the respect those people at Calais , showed threatening to smash the skulls of the lorry drivers who wouldn’t sneak them through, with crow Bars

      1. Billericaydickie says:

        Slightly off topic John P but still to do with economics, even the voodoo ones of Corbyn.

        We are reaching a crisis, and I don’t mean at Calais, about the attitudes of the great and the good in this country to the kind of immigration that an open doors policy, and that is basically what the Corbynistas are advocating.

        It is coming down to this. Do we have an open doors policy because that is what the critics of the present system are advocating. Corbyn isn’t, at least openly, advocating this but his supporters in East London are.

        1. Robert says:

          Thatcher and Blair were the ones with the open doors Corbyn has not been given the keys yet.

        2. Mervyn Hyde says:

          You need to understand where the real threat is coming from and whilst the immigration situation is a problem, perhaps you should trying engaging your brain on these issues because, people generally think this problem has gone away, but it hasn’t and that is the real problem that you choose to ignore.

          https://www.youtube.com/watch?v=_JzatQhy5Mw

          Perhaps you could watch this video and gives us your valued opinion of it’s content.

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