Thursday, 23 July 2015

Corbyn's "economic illiteracy"

Recently Chuka Umunna made an appearance on Channel 4 news in which he revealed that he would refuse to serve in a Corbyn led shadow cabinet as a result of Corbyn's "economic illiteracy" when it comes to the deficit. Now before I go into why I don't think that Corbyn's plans are illiterate in any sense, I should first stress that I do agree with one of Umunna's much repeated statements, which is that there is "nothing progressive about paying out huge sums to the city in the form of debt interest repayments". Sadly however I suspect that this is as far as my accordance with his view on the matter extends.

Umunna of late has been keen to stress his distaste towards Osbourne's "austerity fetish" as he terms it, but on the other hand has also been in favour of Osbourne's rhetoric around "balancing the books" and "living within our means", even expressing sympathy towards Osbourne's entirely political policy of forcing the state to run a surplus in "ordinary times" - whatever this means. From this I take it that Umunnas's ideal deficit reduction plan lies somewhere in between Labour's plan before the recent election and Osbourne's projected one parliament surplus plan. Umunna certainly has a right to favour a certain pace of deficit reduction, however I think it's somewhat absurd to represent a slower reduction plan, even a dramatically slower plan as "economically illiterate", doing so without providing any proper analysis beyond platitudes is merely indulging in tabloid economics.

Umunna is keen to emphasise the desirability of surplus, however one of the main arguments behind the idea of a slower deficit reduction (which I will come onto) is that for a growing economy even a relatively large deficit can see debt as a percentage of GDP fall. All the talk of "living within our means" ignores the fact that with growth at 3% and debt at 80% of GDP, an annual deficit of under 2.4% would see the debt ratio fall. Conversely, a slightly larger deficit wouldn't see debt rising to a dangerous level. This is also why I disagree with Umunna about how it was irresponsible for Labour pre-2008 not to run a surplus, the consensus at the time was that the economy was in good health and that therefore a small deficit was sustainable. This turned out to be hideously wrong due to the financial crisis, however on the issue of regulation, which is ultimately what's required in order to prevent a similar recession in the future, all of the leadership candidates bar "economically illiterate" Corbyn are disappointingly quiet.

As previously alluded to, in my view there is much to be said for pursuing a slower pace of deficit reduction. Britain is not in the same boat as Greece, the current debt/GDP ratio of 80% is most likely too high to be sustainable, but there's also no indication that it poses any immediate danger to the economy, nor to the government's ability to borrow at reasonable interest rates. There has even been an IMF paper released suggesting that developed economies which possess independent central banks, such as the UK - aren't in any need to pursue further savings in any form. I disagree with this conclusion as I believe that a slow reduction in debt is desirable in the pursuit of long term sustainability, however I included this paper purely because it is far beyond what Corbyn's proposing, yet I rarely see the establishment calling the IMF "economically illiterate" for floating such ideas.

New Keynesians would in the short term go even further into the realms of "economic illiteracy" by arguing that because interest rates can't be lowered further than their current level, something that is desirable in order to offset some of the economic damage caused by cuts, the government's prime aim at this point in time should be to expand government spending - irrespective of the deficit in an effort to boost the economy. Thus, when the economy has reached a higher degree of stability savings can then be made, although at a much slower pace than what Osbourne follows. Crucially at this point interest rates could then be reduced to counteract the damaging economic effects of cuts, helping to avoid a lot of the hardship currently being inflicted upon ordinary people.

Nevertheless, this Leadership should really be seen as a debate about economic policy come 2020, sadly it looks as though Osbourne's economic masochism will make the debate in this last paragraph merely academic. The economy, despite suffering a lot of damage will probably limp upwards towards mediocre rates of growth, albeit at the expense of a lot of unfulfilled capacity that will never be reclaimed. Interest rates will also have risen, making large, short term debt sustained investment too expensive. The main debate about the deficit will be the pace at which it is gradually reduced, and how the debt/GDP ratio will be prioritised relative to other areas of economic policy. Certain IMF economists mightn't value debt reduction, however Corbyn and other economists have, sensibly in my view appreciated that debt should be gradually reduced, although at a slower rate and therefore with less hardship than what's being suggested by the Tories, and for that matter also what Labour proposed prior to the 2015 election.

Bearing this in mind, although Iain Dale may have accused Corbyn of wanting a permanent deficit in the LBC debate, this shouldn't be seen as anything more than lazy, evidence free journalism. So now that we've cleared up why not talking about "pragmatism" doesn't necessarily make you economically illiterate we can properly talk about the fact that there's also a government income side to this equation. The current overall budget deficit including government investment is roughly £90 billion, Corbyn has rightly pointed out that estimates of the UK's lost income through tax avoidance/evasion range between £30-£120 billion per year. Even an eternal optimist wouldn't expect for all of this to be recovered, however currently there isn't really a concerted effort within government to crack down on this lost income, a proper effort to do so could do a lot to shift the burden of any deficit reductions from the most vulnerable to those who really should be paying these large sums of money anyway. Although - as a side note the effects of Osbourne's strategy have by no means been limited to the poor, there's good reason to believe that the amount wiped off of GDP is equivalent to between £1500 and £4000 per person per year, this information might be useful to those saying that it's impossible to convince the middle classes from "the left". Corbyn is also right to talk about the prospect of tax rises, it's clear that taxes in the minds of many across all parties have gained the status of electoral kryptonite. However with inequality rising and many of the most vulnerable suffering I think that there couldn't be a better time to make a proper coherent case for a more progressive tax regime that is fully capable of funding necessary public services whilst building a more cohesive society, particularly if made clear that in reality this would only affect a minority of earners and businesses, notably large businesses with high degrees of market power.

Finally, as we're talking about economic incompetence, we shouldn't really be talking about the issue of deficits without mentioning the UK's worryingly high current account deficit. Even Peter Mandelson, hardly a standardbearer of the left's economic arguments views this as a problem that needs to be addressed through a proper industrial strategy, one which requires a degree of indicative planning. Yet despite the attention that this issue blatantly deserves, Corbyn once again seems to be the only leadership candidate prepared to address it. So much for economic incompetence.

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