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Corbynomics and balanced budgets

Corbyn at PMQsIt has been a stormingly successful two weeks for Jeremy Corbyn, and for the Labour Party. We have seen membership growth, not only more members, but a membership more representative of the broader population, younger and more gender balanced. We have a majority of women in the shadow cabinet for the first time ever, we have seen Jeremy being able to assemble a front bench team reflecting the talents and views across the whole party.

There are certainly challenges ahead. The changes to the leadership election process from the Collins Review saw the number of trade unionists voting in the leadership election decline dramatically to roughly only 3% of the numbers affiliated, and the mandate for the scale of the continued trade union involvement in the party will need reinforcing through further constructive engagement. The good will exists on both sides to achieve this, and the trade unions play a vital mediating role for their party through their connection with millions of working people.

The Collins Review changes also abolished the separate section of the electoral college for the parliamentary party, and much is made of the low levels of support for Corbyn amongst MPs. This point can be exaggerated, Ed Miliband also suffered from lack of support from the PLP, and Corbyn’s position is stronger not weaker than Ed’s, not only due to his overwhelming mandate from the party’s selectorate, but also because Corbyn has the support of John McDonnell as shadow chancellor.

The improvement of Jeremy’s own self assurance and authority has also been extraordinary, compared to his first hesitant performance at the hustings at GMB Congress in Dublin in June. There has never been any doubt about his talent, but Jeremy had been relatively marginalized within the PLP for many years, and just the few months of participating in the leadership contest and now leading the party, has seen him grow into the role.

The appointment of McDonnell as shadow chancellor was vitally important. While there were arguments in favour of a more mainstream figure as a step towards consolidating a coalition of support within the PLP, Jeremy Corbyn won the leadership on the basis of opposing austerity. Only a shadow chancellor who wholeheartedly agreed with that position would be consistent with Corbyn’s mandate.

John McDonnell has also suffered from years of relative marginalization within the PLP, but already he has shown a human and humane manner in dealing with the press, and an assured touch that will only grow and grow. It is worth reminding ourselves of the judgement of Nobel Prize winning economist, Paul Krugman, writing in the New York Times, that Corbyn’s victory was not a lurch to the left, but due to the surrender of the Labour centre to Conservative snake oil over the deficit:

Consider the contrast with the United States, where deficit scolds dominated Beltway discourse in 2010-2011 but never managed to dictate the terms of political debate, and where mainstream Democrats no longer sound like Republicans-lite. … … the Corbyn upset isn’t about a sudden left turn on the part of Labour supporters. It’s mainly about the strange, sad moral and intellectual collapse of Labour moderates.

It was an assured move for Corbyn and McDonnell to appoint an advisory team of economists, including Joseph Stiglitz, Thomas Piketty, Danny Blanchflower, and Ann Pettifor. It will also be essential to ensure that economic policy is privately discussed with the trade unions..

McDonnell’s announcement that Labour will seek to run an overall budget surplus in normal times is good politics, and is founded on a solid economic basis that the objective of economic policy will be to secure growth through investment.

To deal with the economic argument first, there has been some debate between the Socialist Economic Bulletin, and economists associated with Ann Petifor’s PRIME. To quote Michael Burke:

There is a debate among anti-austerity economists and supporters of the Jeremy Corbyn leadership of the Labour Party on balanced budgets and related matters. The debate was prompted by Shadow Chancellor John McDonnell’s commitment to eliminating the budget deficit and was sparked into life by this SEB piece, The need to clarify the left on budget deficits- confusions of so-called ‘Keyenesianism’. It was met with this reply from PRIME economics,‘Living within our means’: deficits and the business cycle.

The importance of this debate is to understand that

If a radical, anti-austerity government simply borrows or creates money to fund consumption, it will provide no boost to long-term growth. This is merely a stimulus to spending or consumption. This may be needed when consumption has fallen dramatically but cannot be a feature of a medium-term economic policy. If on the other hand, the same government borrows to invest in the productive capacity of the economy then the economy is capable of sustainable expansion. This in turn can lead to economic growth and the growth in consumption. Therefore such a government or economic policy framework, which we can call Corbynomics, should aim at increasing the level of borrowing for investment and aim at eliminating borrowing for consumption in favour of borrowing for investment.

Unfortunately, a commonplace fallacy has arisen to conflate government investment and government spending on consumption as a single category as a contribution to GDP. As John Ross observes:

Both economic economic theory and practical results show that in a capitalist economy, not necessarily an economy such as China’s, there is greater resistance to government spending on investment than on consumption – as state investment involves an incursion into the means of production, which in a capitalist economy by definition must be predominantly privately owned. This theoretical point is confirmed by the fact that state expenditure on consumption has historically risen as a proportion of GDP in most capitalist economies since the economic period following World War II while state expenditure on investment has in general fallen in the same period.

The result is that if government runs a deficit through borrowing to fund consumption, then this can result in non-invested private savings being transferred into consumption, therefore decreasing not increasing the overall investment rate in the economy, and therefore effectively decreasing not increasing economic growth.

In contrast, government action to underpin growth rates gives confidence to private investors, producing a win win cycle.

The political debate since the 1970s has conflated all public spending, whether it is for investment or consumption. This has confused the question as while a long or medium term policy of spending more on consumption than is raised as government income is unsustainable, government investment in the productive economy can be designed to achieve the maximum sustainable rate of overall investment, and therefore sustain economic growth, and thus bolster government income.

Some caution also needs to be considered over the alleged lack of competitiveness of state owned enterprises, and other forms of direct state investment in the productive economy, as historically state investment has been strategic to effectively provide a subsidy to other – privately owned – parts of the economy.

Politically, committing to eliminating the government deficit is a necessary accommodation to prevailing public opinion, with the advantages that this allows Labour to exploit the Conservative government’s own failure to achieve a balanced budget through austerity and the resulting economic contraction, and allows the debate to be recalibrated over the key question of whether we continue with the Tory approach of an economy based upon shopping and speculation, or whether we commit to a policy of building the real productive economy through investment, and improving the skills and training base of the workforce.


  1. David Ellis says:

    Trying to make capitalism work is trying to make misery work. Slavery work. Exploitation work. In any case stimulus and austerity in a glutted market have the same effect: they greatly exaggerate the problem of over production i.e. the problem that the capitalist is making more commodities than can be sold at a profit. Austerity and stimulus are in that sense identical though they appear opposed.

    What is actually required in the teeth of the 2008 collapse of capitalism and this massive liquidation of centuries of accumulated wealth is consolidation to save the real economy from the super rich asset strippers. That means a massive redistribution of wealth from rich to poor and the socialisation of the means of production under workers control and protection. That is the exact opposite of what is happening now which is a world historic redistribution of wealth from poor to rich and massive capital destruction. Globalisation is unravelling. This is not the time for timid left reformists talking bollocks about budgets and business cycles.

  2. David Ellis says:

    By 2020 the extremely mild `anti-austerity’ proposals of Corbyn and McDonnell should be more than acceptable to bourgeois public opinion. In fact by then Osborne may well have adopted them for at least a couple of years but he will be so hated that Labour will have a very good chance of getting elected. Certainly it would have had no chance if it had elected any of the other three New Labour clones as leader. But Corby and Co can still blow it and so far are on track to do so by standing with the Tories on the EU Refereundum, which makes their anti-austerity and anti-neo liberal claims look hollow, by giving a free vote on Cameron’s proposals to bomb ISIS in Syria and by backing Trident. If they do these things not only will they not win in 2020 but Labour’s pasokification process will recommence and even accelerate such that they may not even have a party capable of winning more than a handful of seats let alone winning a majority. But let’s not foster any illusions. If Corbyn does win his government will make zero impact on the irreversible decay of capitalism which by 2020 will have progress even further and will inevitably fail. Changing which government is in power is not enough. Only changing which class rules will do.

  3. David Pavett says:

    An interesting article with some helpful links. There is a strong tendancy of adherents of one or another approach to economics to present their ideas as if they are simple to the point of being blindingly obvious. And yet, as this article helps us to see, they come up with analyses and solutions that are mutually incompatible.

    It is with this last point inmind that I think that the last paragraph of the article is something of a cop out. Andy suggests that the goal of zero deficit budgets is “a necessary accommodation to prevailing public opinion”. But that is not at all the issue of dispute among left-leaning economists. Some are arguing, if I have understood correctly, that budget deficits are a good thing in themselves since they are the way new money gets into the general economy. Others take McDonnell’s view that budget deficits are in themselves undesirable and should be eliminated as soon as this can be done without shrinking the economy. At root this is an argument about economic reality and not about public perceptions. It is an argument that needs to be resolved.

  4. Andy Newman says:

    Thanks for the kind words David Pavett.

    If I have not made myself clear enough on the point of the deficit then I will try to clarift and elaborate.

    There are two parts to this, one of which is political, which is to acknowledge that there is a necessary accomodation to public opinion over the question. Given that the charge of “deficit denial” is at the heart of the Conservatives rebutal of Labour’s economic policy.

    You are however correct that there is a substantive economic debate to be had.

    I am not a specialist in this field, but it seems to me that the argument of running a deficit to finance government consumption – (whether or not it this results in “new money geting into the general economy”) is feeding the fallacy that consumption rather than investment leads to economic growth. (the question of money being a secondary one, as a medium of exchange).

    McDonnell was clear in his speech to conference that Labour would be prepared to borrow for strategic capital investment.

  5. Sandra Crawford says:

    The route of the problem is that of sectorial balances. Please look at this link to explain these – it is crucial to the rest of my post.

    The problem is, that in order for people and businesses to have spending power, they must either have 1)earned the money from government, or been given it as a grant or benefit, or 2)borrowed it from a bank, or 3) earned it from foreign exports.

    Now Keynes said that governments should spend heavily during recessions (these days that means bank lending has stopped or gone into crisis). Then governments should close the deficit during booms to prevent inflation. All well and good.
    But, according to a world class Modern Monetary Theorist, Keynes did not envisage the enormous trade deficit that we have these days, which means that we spend more abroad than we earn.

    With a large trade deficit, governments must run a fiscal deficit all the time to prevent unsustainable bank debt/and/or poverty. This is because foreign trade is a large part of income expenditure.

    Norway has the opposite problem – it gets so much money from exports of oil, and has a small population, so it must run a fiscal surplus ie tax more than it spends, otherwise it would get inflation.

    The surplus/deficit is always a product of the trade deficit surplus and is an automatic stabiliser. It is nothing to be ashamed of it just is.

    To promise to cut the deficit when we have an enormous trade deficit is to fall into the Tory trap which is a scam. The only result of cutting the deficit in the UK at the present time is another recession or banking debt crisis.

    Read Bill Mitchell also the MMT economist mentioned above.

    1. David Ellis says:

      Capitalism’s problem is overproduction. Stimulus and austerity therefore end in the same destination: an ever more chronic exaserbation of that problem.

  6. David Ellis says:

    Austerity is not the idelogical choice as the deluded and degenerate left seems to think. Capitalism is the ideological choice. Austerity merely flows as a natural consequence of that choice. Even the left are proposing austerity only suggesting that more of the burden of it should fall on the rich but really austerity is austerity is austerity. Even printing money is austerity because it devalues the currency. Capitalism depends on growth to survive and on credit to fuel that growth. When growth is no longer possible, and it is no longer possible, the accumulated debts become a serious issue that threaten to derail the system completely. They have to be paid but paying off debt merely adds to the impossibility of growth because they are being paid out of already accumulated capital and not profits. Major disruption is required to the political economic relations if capitalist production is to have any chance of entering a new phase of growth. So major in fact that only global war and wholescale destruction can bring them about. Unfortunately for capitalism there are no new political economic arrangements even after say a third world war of epic proportions that could be established that would once again allow capitalism to flourish. Globalisation behind the greatest power the world has ever seen is as good as it gets for capitalism and now the process not of violent renewal is underway but of ultra-violent disintegration. This process of permanent ultra-violent disintegration invokes the opposite possibility of transcending capitalist globalisation via world proletarian revolution so that humanity can embark on the next stage of its journey. If that road is not taken then a New Dark Ages from which there can be no escape is assured.

    1. Sandra Crawford says:

      “Printing Money.”

      This is such a misunderstood piece of conditioning and propaganda.

      Money is printed all of the time!!!

      When government spends, it types figures into a computer indirectly at the central bank, and provides banks reserves and deposits for all its various services and subsidised industries and benefits.

      When banks lend, they create money on the spot daily, by creating a deposit when you take out a loan. See here from the BoE how banks create all of the money they lend daily –

      The other way in which we get national income is from foreign sales, wherein foreign countries create government money or borrow from banks to pay us.

      How do you think capitalism can work without daily money creation? Can a car run without oil?

      Businesses go bust when banks refuse to lend and government subsidy stops. Above all, without government money on which we all depend, we would either starve or go into unsustainable permanent debt with the banks.

      Thatcher said there is no such thing as government money, only tax payers money. How wrong, how dull, how foolish.

      It is the other way around, you must earn government money in order to be able to pay tax!!! Money does not grow on rich people, it is issued by the sovereign currency issuer or created as a debt by banks.

      1. David Ellis says:

        Money is printed all the time which is not a problem when the economy is growing. Print it to pay debt however and as the Weimar found to their cost and you are in trouble. But why spend so much effort on trying to find a way out for capitalism? It is a form of slavery.

      2. john P Reid says:

        yes printing money is misunderstood,but when Corbyn supporters at the Guiardian,like Zoe Williams say the magic money tree exists, do you think daily iorror or Independent reader ,that we need to vote for us,wil think that,sort of view in justifying devaluing the pond would be a vote winner?

  7. David Ellis says:

    See what a difference it makes when Corbyn sticks to his principles instead of making deals with toxic New Labourites so he can have their sorry arses in the Shadow Cabinet. Instead of being full of pathetic stories about national anthems and anti-semitism and discussions about what Corbyn has done in the past or is doing now the press is in fits of worry about what he will do i.e worrying about his actual policies. Everybody is talking about Trident and his declaration that he would not press the button and his supporters and enemies are discussing that and it is re-energising his supporters after a worrying Labour Conference. The next thing for Corbyn to do is to categorically announce that he will be campaigning for an OUT vote in Cameron’s EU Referendum.

    1. David Ellis says:

      p.s. he should also make it clear that UN resolution or no UN resolution he will not be supporting any bombing campaign against ISIS in Syria whatever resolution was passed at Labour Party conference.

    2. john P Reid says:

      anti semitcism, by Corbyn supporters is a pathetic story?

      1. David Ellis says:

        It is indeed. In fact one of my biggest problems with Corbyn is that he is a Zionist. He supports the bogus two-state peace lie thereby recognising Israel’s right to exist which is Zionism. Imagine if he said he recognised the right of ISIS’s Caliphate to exist he would rightly be called an Islamist. He also thinks that a bombed out ghetto and an ever shrinking bantustan can be described as a nation. Of course they cannot and actually illustrate that even if the peace process was real it would constitute a reactionary alliance of Hamas, Fatah and Zionism against the Palestinian National Democratic Revolution. The neo-Stalinists support the two state peace lie not the Palestinians. The left proper needs to support a unified, secular, democratic Palestine (Israel, Gaza, West Bank) against the reactionary forces of Zionism, Hamas and Fatah in which Muslims, Christians, Jews and those of no faith can live in harmony and to which the refugees can return to new jobs and homes.

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