Jeremy Corbyn’s Economic Plan is Not Crazy
by Benjamin Studebaker
Over the past week, I’ve been hearing the rumors. They’re saying that Jeremy Corbyn is crazy–that he’s released an economic plan so radical, so incendiary, so madcap that no reasonable person could possibly support him for Labour leader. I thought to myself “Oh no Jeremy, what could you possibly have done to get these folks so riled up?” So I read the plan. It’s not crazy–indeed, there is significant support in the literature and in recent experience for what Corbyn is proposing.
Corbyn believes that the economy has not fully recovered and that economic demand is depressed:
To date, we have seen only the most feeble of upturns:
• We have had the longest period of falling real wages since the 19th century
• A disastrous investment and productivity record
• A swelling balance of payments deficit
• The creation of army of low-paid, low skill, insecure, zero hours, bogus self-employment jobs. People are still worse off today than they were in 2008. The average household is still awaiting recovery.
He believes demand will still be depressed in 2020 and that there will be room for growth. He wants to unlock this untapped economic potential, improving the government’s fiscal position by increasing revenues and reducing demand for benefits by raising incomes.
There’s a good argument that Britain is underperforming in the ways Corbyn highlights. British real wages have been falling consistently since the economic crisis:
Productivity has not kept up with the historical trend line:
This is not an ailment that afflicts all countries equally–Britain has lost ground against all the other G7 countries since 2007 (UK = 100):
It is also true that in the last five years, the UK’s current account deficit has grown much larger:
Britain’s underemployment figures have been improving lately, but it still trails many European countries (many of which are stuck on the euro, which should seriously handicap them and give Britain an advantage):
So Corbyn’s criticisms of the UK economy under the Conservatives check out. To solve these problems, Corbyn wants the state to make some big investments in technology and infrastructure (energy, housing, transport, and digital). Ideally, these investments would create high skill, high wage jobs and improve Britain’s productivity and industrial competitiveness, allowing Britain to improve its current account and generate sustainable economic growth.
There is a good case for this–one of the advantages the state has over private investors is its ability to absorb large short-term losses in the interest of achieving far larger long-term gains. Investments that would bankrupt any private sector company are practical for the state because it has a lot more money to work with and a lot more access to credit. For these reasons, the state has long played a pivotal role in supporting major national projects, like the construction of the railroads or the grid. Many private sector innovations have their roots in technologies originally developed for military purposes by the state.
The question everyone wants answered is how Corbyn believes the UK can to pay for this. He proposes two strategies:
- The Bank of England Strategy: replace quantitative easing with an equivalent program that invests new money directly into technology and infrastructure, bypassing the banks.
- The Soak the Rich Strategy: eliminate tax loopholes and tax subsidies for the wealthy and corporations and use the money raised to create a National Investment Bank, similar to the sovereign wealth funds that countries like Norway have.
Corbyn’s opponents allege that the first strategy will create inflation and that the second strategy will undermine Britain’s financial sector and hurt growth. Let’s take a closer look at each of these debates.
The Bank of England Strategy
The key thing that must be understood is that the Bank of England has already printed very large amounts of money and injected it into the economy. This was part of its quantitative easing (QE) strategy, which was also employed by the US Federal Reserve, the Bank of Japan, and, most recently, the European Central Bank. QE was first employed in the immediate aftermath of the global economic crisis. The goal of QE was to recapitalize the banks by taking governments bonds from the banks and exchanging them for newly printed currency. It was hoped that this would stabilize the financial sector and boost the wider economy by increasing the amount of money available for lending to the private sector.
At the time, the right was livid, warning that QE would lead to hyperinflation. In 2010, a number of business titans and economists wrote an open letter published in the Wall Street Journal warning the Federal Reserve of deadly consequences:
We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.
What happened? The warnings proved unfounded–inflation did not skyrocket in the US:
The UK hasn’t experienced high inflation either:
Indeed, in both countries, inflation is now dangerously close to zero. Deflation is very damaging to the economy–falling prices encourage people to wait to buy things, and this can rapidly bring the economy to a halt.
Why didn’t QE trigger significant inflation? QE sounds very inflationary–the state is literally printing money and handing it to banks–but if the economy is depressed, QE can maintain the level of economic activity necessary to prevent a recession without triggering a boom. QE was also criticized by the left because it gave the new money to bankers rather than consumers or the government. Because economic demand is depressed, banks and firms have little reason to spend the money they receive from the banks on expanding supply or on new projects. Instead, they invest the money in each other, inflating the stock market without creating enough job and productivity growth. Even as productivity and wages continue to lag, the FTSE 100 has performed very well over the past 5 years:
From where Corbyn is sitting, it appears that we’re printing money but failing to put it to use. So Corbyn wants to bypass the banks and directly fund his technology and infrastructure projects. Corbyn could do this with no significant adverse effects up until the point at which the economy really is running at capacity and inflation rises. In effect, his spending would be governed by the inflation rate rather than by the government budget. This is a radical, creative, and innovative government policy, and it would likely work. Britain’s current inflation rate is very close to 0%, so Corbyn could print and spend quite a bit of money through the Bank of England without seeing above-target inflation. Indeed, a little bit more inflation would be a good thing–most central banks try to run 2% inflation, and some economists recommend a high inflation target of at least 4%. So Corbyn would have lots of flexibility here.
The Soak the Rich Strategy
Alternatively, Corbyn also believes that he could find the money by closing tax loopholes and increasing enforcement of extant tax laws. Corbyn believes he could find £120 billion:
The £120bn figure is made up from:
• about £20bn in tax debt, uncollected by HMRC which continues to suffer budget and staffing cuts (only partially reversed in the last Budget)
• another £20bn in tax avoidance
• and a further £80bn in tax evasion.
The right argues that even if this money theoretically might be collectible on paper, the act of trying to collect it will cause it to vanish. This is because the right believes that there is no substantive difference between reducing tax debt, avoidance, and evasion and tax increases–both of these policies take more money from taxpayers, albeit by different legal means. The right believes that tax increases will cause brain drain, as innovators and investors flee the UK’s high rates. They also believe that increases will discourage private sector investment. Since enforcement and rate increases both collect more tax, the right believes both policies will have the same results.
There is truth to this–Corbyn would certainly be taking significant amounts of money out of the hands of investors. Corbyn can defend the point by appealing to what I said before about how the FTSE is growing while productivity and wages stagnate. Corbyn can argue that the financial sector is not growing the real economy and that the money these investors have is idling. Corbyn can claim that by taking this money from them and having the state invest it in technology and infrastructure, Corbyn could generate more growth than the money presently generates idling in the stock market.
This is a direct challenge to the Conservative view that financialization is good for Britain and that more investment is always positive. Corbyn is implicitly alleging that the financial sector is not adequately distributing investment and that the state must step in to put the money to good use. This is very counter-intuitive to many people who have been taught to believe that the government is never more economically efficient than the private sector. This is why so many people are dismissing Corbyn’s plan as bonkers–they think it is impossible that Corbyn could increase growth by transferring money from rich private investors to the state because they think that rich private investors are the only true engine of growth. For this reason, they argue that any effort by Corbyn to collect the tax would result in a decrease in economic activity that would eliminate any revenue gains.
Who do you think is right? Thankfully, we don’t have to guess. Economists have already conducted significant research to determine the optimal tax rate for the rich, i.e. the rate that would raise the most real government revenue, taking into account the effects of taxation on work and investment. The research shows that the Conservatives dramatically underestimate the amount of tax that can be collected at gain–Diamond and Saez suggest that the top rate of tax could be 70% before the losses surpass the gains. They reviewed the literature on the Elasticity of Taxable Income and found a median value of 0.25 for the rich. This means that for every £1 increase in taxes, the rich will report £0.25 less income. That’s significant, but it’s much smaller than most people on the right believe, and it suggests that Corbyn really could find this money with the appropriate legislative toolkit. Add to this that there’s significant evidence that the specific things Corbyn wants to spend money on are really needed, and there’s a pretty good case for this policy.
There’s significant support in the literature for the claims Corbyn is making. The QE experience shows that Corbyn could definitely print and spend a significant amount of money on technology and infrastructure without pushing inflation above target. The research on optimal tax rates suggests that Corbyn will likely be able to find the tax revenue he’s looking for if the legislation he enacts is sufficiently robust. I am extremely confident that the Bank of England strategy would work and reasonably confident that the soak the rich strategy would as well. Corbyn should be taken seriously–those who oppose him must be made to engage with the optimal tax rate literature and they must be made to engage with what we’ve learned from the QE experience. The flippant dismissal we’re seeing of Corbyn and his ideas should not be allowed to pass unchecked.
More than 40 leading economists have signed a letter of support for Corbyn’s economic policies. They say:
The accusation is widely made that Jeremy Corbyn and his supporters have moved to the extreme left on economic policy. But this is not supported by the candidate’s statements or policies.
His opposition to austerity is actually mainstream economics, even backed by the conservative IMF. He aims to boost growth and prosperity. He voted against the shameful £12bn in cuts in the welfare bill.
Despite the barrage of media coverage to the contrary, it is the current government’s policy and its objectives which are extreme. The attempt to produce a balanced public sector budget primarily through cuts to spending failed in the previous parliament. Increasing child poverty and cutting support for the most vulnerable is unjustifiable. Cutting government investment in the name of prudence is wrong because it prevents growth, innovation and productivity increases, which are all much needed by our economy, and so over time increases the debt due to lower tax receipts.
We the undersigned are not all supporters of Jeremy Corbyn. But we hope to clarify just where the “extremism” lies in the current economic debate.
Bruce V Rauner professor of economics, Dartmouth and Stirling, ex-member of the MPC
Emeritus professor, London South Bank University
Emeritus professor, Leeds
Professor, Kingston University London
Emeritus professor, UCL
NEF personal capacity
Dr Suzanne J Konzelmann
Lecturer, New York
Marco Veronese Passarella
Lecturer, University of Leeds
Dr Judith Heyer
Emeritus Fellow, Somerville College, Oxford
Dr Jerome De-Henau
Senior lecturer, Open University
Professor, University of Bergamo
Formerly Universität Wissemburg-Halle
Dr Pritam Singh
Professor, Oxford Brookes
Senior research fellow at Istat, Rome
Dr John Roberts
Retired former economist
Professor, University of Manitoba
Associate professor, University of Oxford
Guglielmo Forges Davanzati
Associate professor, University of Salento
Senior lecturer, Glasgow
Emeritus professor, Open University
Socialist Economic Bulletin
Adjunct lecturer, University of Adelaide
Associate professor, Laurentian
Editor, Red Pepper
Senior researcher, ISAE, Rome
NEF personal capacity
Lecturer, City University
Dr Mary Roberton
A really good read, I must say!
One of Britain’s best political analysts agrees with you! http://www.theguardian.com/commentisfree/2015/aug/03/jeremy-corbyn-new-labour-centre-left?CMP=share_btn_fb
Very sad to see how the rest of the Labour Party is unable to provide alternative compelling ideas and so resorts to demonization. In so doing, it attacks its own history.
I’ve been waiting for this post.
I have to wonder whether the cries that Corbyn is unelectable will become a self fulfilling prophecy if he actually wins: it hardly inspires confidence in the party if it seems that half of them think that he’s a complete lunatic.
One of the most damaging long-term consequences of Labour’s strategic move to the center is that eventually you get Labour Party members who don’t see centrism as a strategy but instead as the objective.
Benjamin, I wanna give you a big fat cyberhug.
agree with what you say here.
it’s also important to consider that even the possibility of an explicitly anti-austerity candidate being in the running for PM would probably cause a run on the currency and in turn an increase in the cost of servicing national debt in the short term.
such is the vulnerability of the british economy to these kinds of fluctuations. Jeremy could bring investment in business and productivity to give our economy more resilience. unfortunately, budget surplus fetishism has an extremely tight grip over public opinion, however misplaced this understanding is.
This all brings it back to the question which so many labour voters are strggling with: vote with your heart? or vote for what seems realistic within the political and economic status quo.
If Corbyn can get close enough to make the markets worry, then he’s not unrealistic. If he can’t, he’s no risk to the markets. Given that the benefits of a Kendall/Cooper/Burnham Labour Party are not very large (inequality increased under Blair & Brown), I think it would be rational to take a chance with Corbyn even if you think his chances of winning are small, as long as you think they’re significantly above zero.
[…] https://benjaminstudebaker.com/2015/08/05/jeremy-corbyns-economic-plan-is-not-crazy/ Good article […]
Weren’t these the sort of economic arguments being made by people like Eric Hobsbawm back in the early 80s and which were actually supported at the time even by Tony Blair?
Blair came into parliament following the ’83 election and he stuck with the party line during that period. Hard to say whether this was genuine or if he already harbored more centrist views and chose to support the Labour leadership despite that. Certainly the platform during the early 80’s was considerably further left than it has been at any time since then.
A very good article. My only comment would be that I don’t think anyone in the right wing parties (ie the tory party and a significant portion of the labour party) can be made to engage with literature and evidence. The majority of these people aren’t stupid, and they know the policies will work. But it is in their (and more crucially their donors) best interests to dismiss it, and that is why we are seeing right wing politicians (many from the labour party) taking turns in trying to dismiss his sensible policies as “dangerous”.
Unfortunately as the right wing press regurgitate this nonsense as gospel, a lot of the public will believe it! However there is a real corbyn movement building, especially with the young and it is very exciting. However if he does win the leadership debate, and then goes on to win the next general election, I think corbyn would still find it very difficult to implement the change he hopes for, with the majority of his MPs currently opposed to his ideas as they are still married to blairite/thatcher economics. How do you go about purging a load of self serving, corrupt MPs from a once great party?
Even the rich would be best served by a government that made targeted, effective investments in technology and infrastructure. Successful state investments in economic growth will result in larger revenues and profits for the wealthy and their businesses.
If Corbyn were able to win not merely the Labour leadership but a general election, I think this would give him a great deal of legitimacy and political capital. He would certainly have things much easier in the UK parliament (given that he must, by law, command a majority) than new US presidents do. They must frequently overcome very heavy congressional opposition and gridlock. In sum, I think if he can win a general election, he can run the government, and if can’t run the government, he can’t win a general election.
This is true in conventional economics, but in the post recession years from 2009 to 2015 in the uk the richest 1000 families more than doubled their wealth, while austerity measures were introduced.
One easy to spot flaw in your argument is the finance sector. Currently over half of tory donations come from the finance sector in the city of london, through a mixture of bankers and hedge fund managers. If corbyn got into power, there is no doubt he would clamp down on this industry, and prevent them from making the obscene profits they do now. Therefore there is no way the tories will ever contemplate policies like this as they would lose over half of their donations, not to mention rewarding board positions in their future careers! It genuinely has almost nothing to do with whether the policy will work or not.
It would (and hopefully will) be very interesting to see. It appears most of the senior labour politicians have far more in common with the tories than corbyn, and although corbyn would technically have a majority, I just can’t see people like Liz Kendall, Alan Johnson and Chris Leslie even voting through a Corbyn queens speech! I think another split is possible, like what happened to Michael Foot with the social democrats. Hopefully I’m wrong!
In the short-term, the rich do make more money. But in the long-term, reductions in the rate of economic growth will cause rich people to experience a lower standard of living over the course of their lives than they might otherwise. If, say, it were possible to grow the economy at 3% a year (with the technological and productivity progress that would go along with that) and instead the economy grows at 1%, in a decade or two everyone will be worse off than they would have been.
I tend to agree with Simon that even if Corbyn went on to form a Government (a remote prospect unfortunately, IMO) then he would struggle to fully implement his policies. I expect you are correct Benjamin that the rich would ultimately benefit from a Corbyn Government. However, the capital-owning super rich and the boards of FTSE100 companies don’t look beyond the ends of their noses when it comes to state intervention and progressive taxation. Of course, state intervention is considered an excellent idea when it protects their interests, but the default assumption is that it is a great evil. Therefore, the full weight of their wrath would be brought to bear.
Having said that, since any alternative Goverment (Tory, New Labour or a coalition including one or the other) will definitely continue to implement kamikaze neo-liberal policies, then I would argue it is the duty of anyone who cares about the UK’s long term prospects to support Corbyn. And if he did get elected – a remote possibility, but significantly less than zero – then the least that would happen is that the Great British Public would see with their own eyes that left wing policies are not entirely catastrophic and that the Powers That Be have been lying to them all these years. A Corbyn Government might not last long, but his lasting legacy would be to make neo-liberal Governments unelectable for a couple of generations at least.
Fantastic article Benjamin. The tax debt in particular is something that I am really interested in, you mentioned that Norway employed the same strategy, do you have any info on how this has been achieved/ how they got it to work?
Norway’s sovereign wealth fund is a little simpler, because Norway puts its North Sea oil revenue directly into the fund. Norway uses the fund to invest in stocks and its holdings are immense (£100,000 for every man, woman, and child in Norway). In the UK, rather than put North Sea oil revenue into a sovereign wealth fund, the oil money was used to push down taxes by the Thatcher government. This forces Corbyn to try more inventive strategies for finding the money. I should also note that Corbyn wants to make long-term investments in infrastructure while Norway’s fund is generally run with the purpose of making immediate profits for the government.
Benjamin – We are, alas, discussing this as if decisions by either Tories or Labourites were made as the result of a rational process, either altruistic or self-interested. In my half century of following current events, both as journalist and as mere observer, may I suggest that you take the time to give a careful read — indeed, a listen! — to Bertrand Russell’s Nobel Prize Acceptance Speech of 1950, “What desires are politically important?” http://www.kpfahistory.info/dandl/bertrand_russell.html You won’t agree with everything he says, but I guarantee that you will find it lastingly stimulating and evocative. It’s stayed with me since I first heard it on an LP in 1956.
As for Clause Four, it has an unfortunate media-saturated history (quite unrelated to its actual content) which threatens to sink Corbyn without a trace. But the result will be that whoever wins the Labour election will thenceforth be remembered as The Man/Woman who Killed Corbyn, with all that that implies on either side. It could be both a step away from reform and a step towards rioting in the streets.
If only Russell’s cautiously optimistic prescription were as convincing as his penetrating diagnosis! But that’s a weakness he shares with virtually all the great physicians of the body, mind and spirit.
Benjamin, further support from the Guardian’s economics editor. http://www.theguardian.com/business/2015/aug/09/jeremy-corbyn-labour-overspending-did-not-cause-financial-crisis
Oh dear, where to start. Quantitative Easing is not printing money it is a method of temporally taking debt out of the market. This increases the value of debt and makes others more willing to lend, debt is now worth more. One of the keywords is temporally and thus it will have to be put back into the market in the future. It is almost Keynesian in the attempt of flattering the debt cycle; it is not a magic bullet. If you want to borrow money to invest and stimulate, then knock yourself out, just don’t try and dress it up as something else.
What should have happened in the during the last economic boom was the government should have saved money giving us the ability to make those infrastructural investments when the economy down turned, instead they borrowed and wasted money on too many pet schemes.
As for proof that borrowing and spend policies do not work let’s not forget the UK going to the IMF for a loan, or the winter of discontent, all caused by policies just like Jeremy’s. Greece would not be in the problems it is in today if it hadn’t borrowed so much. In 1989 Argentina had to borrow more to service it $5 billion debt interest charges and this lead to 5000% inflation. If Jeremy Cordon gained power many will just leave the UK.
Peter Diamond and Emmanuel Saez paper in on US higher tax bands; I am sure you aware that a US citizen is taxed on their global income, but in the UK, enshrined in EU law, we are only taxed on our local income. I will leave the response from the Adam Smith Institute that shows lowering the top rate increase revenue. http://www.adamsmith.org/blog/tax-spending/calculating-the-optimal-progessive-income-tax
Traditional QE removes bonds from the market and exchanges them for new money created by the central bank. PQE would use the money to pay for infrastructure instead of bonds. PQE and the national investment bank have never been tried in the UK. The 1970’s differed from this period in many crucial respects–in the 70’s, oil shocks produced high inflation, but today the UK is almost in deflation. In 2002, Argentina defaulted on its debt and has since recovered nicely. The UK’s debt position is much better than Argentina’s was.
To ensure that UK citizens cannot simply flee from tougher tax laws, Corbyn will need to change some laws and renegotiate or cancel some treaties. This is why, as I said, the effectiveness of this policy depends on how robust his reforms are.
A very good analysis.
I have re posted your Blog on my pages on Facebook, Twitter and on my “New Agenda” blog.
That’s significant, but it’s much smaller than most people on the right believe…
pssst. none of them believes that. they just pretend to believe it.
conservatives do not actually believe anything they claim to believe.
they worship satan…e.g.:
the UK is now the poorest germanic language speaking country in europe.
it has the largest trade deficit in the developed world.
it has the most rigid class structure in the developed world.
it has the greatest inequality in the developed world.
it sucks at football.
Interesting read .
I would of preferred no QE or printing but investments in technology and infrastructure would of been much preferred than the bank and stock market bubbles .
what i cannot agree with is the 70% tax , yes it might be able to be pushed to such an extreme but surely it is morally wrong to push people so close to their breaking point where they would have to start taking drastic decisions affecting their lives ?
It’s worth rereading Gibbons’ “Decline and Fall of the Roman Empire” if you’re old enough to have the time. Some of the most perceptive analysis of the very concept of empire itself was written in the last days when it was too late to do anything about it. Global wierding and global economic collapse come to mind.
Ill check that book out , been looking for similar so thanks .
Reblogged this on Britain Isn't Eating.
Reblogged this on The Night Owl and commented:
I’ve just come across this post and, even to an economics numpty like me, what Corbyn proposed in 2015, is a lot more likely to succeed than the austerity being pushed by the tories.
All I can hope for now, is that ordinary people take note of what’s said via social media, rather than in the tory-run newspapers, so we can get Labour in, to start fixing the many things the tories have broken!
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