On Economic Sensibilities and Ideology

Another article for another interview. This time however I'd like to focus a bit more on the economic arguments behind Corbyn's campaign rather than the electoral arguments I discussed earlier this week. One of the problems I often find being on the left is that people are quick to assume that your preferred approach is intrinsically moralistic, and as such that any policies following from it are going to rely on luck rather than judgement to succeed. This attitude seemed to crop up in this interview, with Murnaghan summarising Corbyn's argument as "the 2015 manifesto wasn't left-wing enough". Rarely have I seen proponents of cuts (from any party) generalised as "right wing", their arguments are often given a higher level of respect out of a tacit consensus that they're rationally driven. I don't want to come across like too much of a stereotypically bitter blog writer, however I do think that it's only fair to accept or dismiss arguments on the grounds of evidence, not upon prejudices grounded within the existing political consensus.

When it comes to evidence, Corbyn's view is one shared by many economists, and even if it's futile to try and debate what the majority opinion is, it's fair to say that the sort of argument Corbyn made is more mainstream amongst economists than it is amongst the media. In an attempt to show why Corbyn's suggestion of a restructured economy is sensible I've listed a few examples of the UK's poor economic performance below.

OBR data suggests that since 2010 austerity has lost every person in the country at least £1500 per year, although this could be as high as £4000 per year. This roughly translates as between £3000 and £8000 per year for every adult of working age. This information was undoubtedly dispersed very poorly by Labour during the last parliament, most people saw the Conservatives as good for growth - something backed up by a lot of the news agenda even if it was based upon dodgy economic assumptions.

Nevertheless even if austerity has indeed cost everyone £1500 per year, many such as Murnaghan could still argue that this is a matter of not wanting to saddle the next generation with debt. This is a half-truth, however it should also be considered that governments will indefinitely owe certain levels of debt and that this debt will never have to be fully repaid. Debt/GDP was 250% in 1945 compared to today's level of 80%, however you'd be hard pressed to find anyone in hindsight suggesting that instead of creating the NHS it would have been more prudent to cut budgets in order to save future generations from debt. This is a somewhat flippant comparison as I do feel that debt at 80% of GDP is too high to be sustainable, especially without capital controls. However the best solution should surely be to find a compromise between today's growth and tomorrow's debt rather than through following a process of economic asceticism? Interest rates are at their zero lower bound, meaning that cuts today will have a greater dampening effect on GDP than if the same savings were made at a later time in a stronger economy, this also means that the government is unnecessarily damaging its own tax income - forcing itself to borrow more to cover for lost income. On top of this, debt interest rates are still at incredibly low levels, meaning that a stimulus package could be financed without incurring punitively high levels of debt repayment. However despite this evidence to the contrary, in some ways I'm very much looking forward to the day when the political class prioritises the wellbeing of future generations above all else, as a student it seems a shame that when the Conservative party were encapsulating this notion of national altruism into policy form they accidentally overlooked the fact that most of my generation were being resigned to over £40,000 of debt by the age of 21.

Back to the national picture, even IMF papers are now suggesting that deficits don't need to be reduced in countries which aren't at risk of facing "default premiums" on any borrowing, these premiums are high interest rates which largely result from a state lacking an independent central bank to underwrite its own debt - something which the UK does have in the form of the Bank of England. What's also easily forgotten is that if the economy is growing "balanced books" aren't needed to reduce debt as a share of GDP. If the UK economy were to be growing at 4%, which sadly it isn't partially as a result of contractionary policies, then a deficit of 3.2% or less would maintain debt at 80% of GDP, considering this in our approach would probably be more sensible than the lines taken by either the Conservatves currently or by Labour in its 2015 manifesto, especiallly seeing as our current debt level doesn't pose an immediate risk to the economy (this example was taken from Simon Wren-Lewis' guide to the deficit).

As for employment, the recession and "recovery" since 2010 mightn't have been plagued with high unemployment, but this doesn't mean that the labour market is particularly successful. An extra 2.5% of the workforce are self-employed, largely out of necessity rather than through enhanced entrepreneurship, whilst underemployment has risen from 1.9% to 8% of the workforce (link). In addition GDP per capita still hasn't caught up with 2008 levels unlike in Germany and the USA (see graph below). What GDP we have managed to claw back is largely a result of the inflated housing market and central bank led quantitative easing. Wages, which for many ordinary people are the only way of making money, are still 10% behind their 2008 level. Productivity has also not caught up with its 2008 level, this hasn't been helped by the government almost explicitly promoting the creation of low pay and low regulation jobs (such as 0-hour contracts) over capital investment. This situation can hardly be viewed as an economic success story.

Deflation is also currently occurring within the UK economy, the BBC may be keen to call this "negative inflation" so as not to overplay a phenomenon driven by low oil prices, however even without considering oil, core inflation is still only at 0.8%, a symptom of low demand and low confidence in an economy damaged by heavy cuts.

Looming over this entire situation is the UK's current account deficit. Despite a devaluation of the pound since 2008 the UK has been unable to generate a trade surplus. The economy is being supported by foreign investment in the city of London, however should this investment cease then we could see yet another crisis, after all the current 6% current account deficit is comparable to that of Malaysia immediately prior to the East Asian crisis in 1997. The economy needs an industrial plan, something currently being overlooked by the mainstream parties.

There are plenty of reasons to want a restructured and more stable economy for the benefit of everyone in society, I deliberately avoided inequality in this post because it could easily have taken up the entire article, even if this is a clear area where Corbyn holds an advantage over more reticent politicians. The reasons that I have mentioned however are still often largely overlooked by many politicians and journalists, but this doesn't mean that they're not real concerns. Figures such as Corbyn may not get much of a mainstream platform, but neither did Hyman Minsky, and I can't help but feel that if he was alive in 2008 many people would have been asking him for his opinion on the economic situation. The job of the Labour party should be to confront these structural problems rather than to shy away from them, for this reason I'm very glad that Corbyn will be on the ballot in the coming leadership election.

A Belated Appraisal of Corbyn on Newsnight

Corbyn recently kicked off the public aspect of his campaign to become Labour leader by featuring in a Newsnight interview with Evan Davis. From first impressions the interview went ok, however what struck me when watching it was the extent to which Corbyn's arguments were often instantly dismissed, as if they were somehow tautologically false. Davis himself is a competent economist, having previously worked for the Institute of Fiscal Studies, and whilst I don't want to extend my remit into areas where it doesn't properly belong - I feel that I should at least point out some areas within the interview where Corbyn made good points that shouldn't be quickly written off as either utopian, deluded or damaging towards the majority of the population. Something which the political mainstream often indulges in when socialism is given a public platform.

1 - The Left Can't Win in England

After a somewhat bizarre start to the interview in which Corbyn was asked whether or not he regretted his past support for Northern Irish peace negotiations, the interview swiftly moved on to whether or not the left could ever win an election outright, particularly in England. Davis seemed to take a typically "Rational choice" approach towards the issue, which I don't feel is nuanced enough to adequately describe why many people opted not to vote for Labour.

First of all I don't view it as particularly correct to deem and entire country, in this case England, as intrinsically right wing when compared with Scoltand or Wales. There are economic and historical factors in large parts of Scotland and Wales which might lend themselves more favourably towards Labour, however this doesn't equate with individuals in these areas having an entirely unique set of political values. Different experiences of the system may lead to different voting outcomes however there still remain large consensuses on important issues. For the same reason large parts of Scotland didn't vote for the SNP simply because Scotland is a left wing country, they did so as in their eyes an SNP vote was a way of making a positive change to the established, tired political system, a phenomenon that manifested to a smaller extent elsewhere in the form of UKIP. Of course individual beliefs on issues such as austerity and immigration matter in the outcome of elections, however if this was always the case then Vote for policies wouldn't indicate that Labour and the Greens are more popular than the Conservatives and UKIP when ranked by manifesto content, nor would UKIP voters generally support nationalising the railways and utilities.

In conjunction with the above point about England I think it's also important to dispell the notion that the recent defeat was worse than expected due to middle class people rejecting the left-wing position of Labour's manifesto. The '15 manifesto may have been to the right of Blair's in '97 - yet the media still managed to successfully cultivate a consensus that Miliband's manifesto drove away hordes of Blair era voters who were deterred by punitive tax policies. This opinion doesn't however appear to be supported by the electoral data. Research published by Jon Trickett suggests that what has really been perniciously eating away at Labour's vote share since the start of Blair's first term - is the coring out of its working class support. Relative to past performances, it seems that in 2015 middle class people were relatively happy to see Miliband become prime minister, even in the face of horrified gasps from the partisan press. Unfortunately for Labour though, this was accompanied by traditional Labour supporters in many cases opting to vote for other parties such as UKIP, or indeed choosing to stay at home – something which is becoming increasingly common.

2 - The Public Support Austerity

This argument to an extent is probably true, the British public trust the Conservatives with the economy to a greater extent than they trust Labour, even if in a contradictory fashion they personally on an aggregate level aren't confident about their own economic security. Fuelled by media spin, the public often abide by the thesis that Labour crashed the economy in 2008 through fiscal profligacy, leaving the Conservatives to clean up the mess - kickstarting growth through the use of fiscal contraction, something which Davis his self has repudiated in the past. In reality OBR data suggests that the GDP lost as a result of austerity is equivalent to at least £1500 per year per person. There exists an academic debate surrounding the pros and cons of austerity both in an economic and a humanitarian sense (as a non-economist I'll let Simon Wren-lewis explain why I'm on the "against" side economically here, here, here, here and here). However, despite academic disagreements this debate was largely non-existent in the sphere of mainstream discussion prior to the election. Even without convincing everyone that austerity had lost them £1500 a year, merely invoking a sense that what constituted a sensible economic approach wasn’t a foregone conclusion could have helped convert many voters who opted for the Conservatives despite being worried about the effects of cuts. Neverthelss, through using this artificially created consensus the Conservatives successfully tapped into the self-interest aspect of many voters - by essentially conveying the message that "of course it's bad that 1 million people are using foodbanks, but this is a necessary step if the rest of the population - and eventually the foodbank users themselves are to get on in life". Labour got stuck in the no man's land of supporting the Tories' flawed "nation's credit card" analogy to the extent that it alienated many of the people the party was created to represent, whilst simultaneously fighting a losing battle to beat the Conservatives in the “responsibility” stakes, somewhat unsurprisingly seeing as this economic narrative was fundamentally drawn up by the Sun and the Daily Mail.

Corbyn is right that the Labour party needs to be proactive in setting its economic priorites. There's often a tendency within Labour to try and make do with whatever agenda the partisan press feels like setting, but whilst this may seem easy as a short term solution it often just leads to battles which the party can never win. Despite this however, in my view the reason to oppose Conservative austerity is more fundamental - aside from the deep human suffering government cuts have caused, in isolation they have also been very unpopular. Bearing in mind that there seems to be a general consensus within the party (including the centrist wing) that we lost the economic argument due to a general public misunderstanding of the disputed nature of government economic policy, rather than through anti-austerity arguments being factually incorrent - shouldn't Labour as a party set out to explain that there is a way of avoiding cuts without ruining the economy? Rather than expediently accepting a policy that many Labour MPs quietly disagree with? The public are incredibly dissatisfied with politicians as it is, as exemplified by declining election turnouts, therefore I question the long term viability of a strategy which relies on the party capriciously reassessing its core values irrespective of the actual, objective opinions held by those in charge. After all the trouble with disingenuity is that it's often very easy to read, and the public will readily judge politicians whom they deem guilty of it.

3 - State economic activity is inherently "dangerous"

As part of his political "litmus test" Davis decided to grill Corbyn on his ideal extent of state activity when measured as a percentage of GDP. Davis, despite not explicitly saying so - I gather falls into the anti-state camp, having previously advocated the privatisation of state services for efficiency purposes. Irrespective of his personal views however this strikes me as a somewhat strange and rather presumptuous question, Davis implied that the current level of state spending at 40% of GDP is approaching "dangerous" territory, which he deemed to be anything above 50%. Once again I don't feel like this is a subtle enough evaluation of the current political situation to put into percentile brackets.

Firstly, much of what the state does is important for the rest of the economy, for example state spending in the form of research and development is often needed to compensate for low levels of research conducted in the free market, something which Joseph Stiglitz has categorised as a negative externality of laissez-faire capitalism. Mariana Mazzucato in her book 'The Entrepeneurial State' outlines many examples in which state activity has led to the creation of cutting edge technologies. On top of this many of Capitalism's success stories have been prime examples of mixed economies, for example Post-War Japan, Britain, the USA, the Nordic countries and the countries of the "East Asian miracle”. Growth has slowed down and become more unstable since the dawn of deregulation and privatisation, I don’t feel like this is a strong enough context to write off state activity as dangerous.

Second of all, and the main reason why I see Davis' approach as insufficiently subtle is that it lumps state transfer in with state led physical economic activity. In the post-Piketty world even the IMF is talking about the dangers of high inequality, with the OECD also warning that high inequality has cost the UK nine percentage points of growth. Bearing in mind the fact that high inequality is generally unpopular both publicly and politically I'm not sure why increasing transfers along the lines of what Tony Atkinson has suggested should be viewed as "dangerous", even if I agree that in the long run inequality needs to be addressed by proper regulation rather than just through transfers.

To finish off this evaluation, of course socialists within Labour such as myself want to see Corbyn run a good campaign, this goes without saying. However I think what's important, and hopefully what I've managed to convey in this post - is that even if you're just a mild social democrat, or for that matter someone who simply wants to see the current system managed in a better and more ethical manner, Corbyn is most certainly worth listening to. Davis like many in the media intimated that the only people who could ever support Corbyn are those with goals driven by ideology, rather than those who have goals set through rational analysis of the status quo. In the context of this election election and of the disarray within the wider economy in general, this simply isn't the case.