Jeremy Corbyn must break out of the neo-liberal framing

Two articles in the UK Guardian this week summarise what is going on with the British Labour Party at present. The first (August 3, 2015) – Jeremy Corbyn’s supporters aren’t mad – they’re fleeing a bankrupt New Labour – refutes the notions propagated by the previously dominant ‘New Labour’ factions that the Left of the Party are in some way mad, deluded, or otherwise sick. Instead, it argues the Left are part of a new “grassroots political movement” reacting to the bereft nature of New Labour which is without a “clear vision, or a set of policies, or even a coherent distinct set of values”. The second article (August 3, 2015) – Corbyn’s economic strategy would keep Tories in power, top Labour figure says – provides proof of concept. It is written by the Shadow Labour Chancellor Chris Leslie and reflects an abysmal understanding of macroeconomics that only a deluded free-marketeer would dare suggest had anything to do with reality. The article demonstrates that the top echelons of the British Labour Party parliamentary wing are caught in the destructive neo-liberal Groupthink economics that not only caused the GFC but has also led to austerity being the norm for policy makers these days. And there is no doubt that it is a failed doctrine and not worthy of a progressive opposition. The new “grassroots political movement” is reacting sensibly to the intellectual carnage at the top end of their Party and lets hope it is triumphant and purges these ideas from Labour forever. But, first, it must break out of the neo-liberal framing that is pervasive in its first major statement.

On July 22, 2015, Labour leadership contender Jeremy Corbyn presented his so-called – The Economy in 2020 – manifesto, which represents his economic policy position (his team called it a “vision”, which is a word that always invokes suspicion in me!). Visions often evaporate into meaningless blather that hides a lack of substance and understanding.

The ‘2020 plan’ notes that “austerity is about political choices, not economic necessities”, which is clearly correct.

But the ‘Plan’ also has some worrying aspects – the most obvious being that the concept of “money” being “available” is intrinsically linked to alleged extra taxable capacity among the “richest 4% of households” or the “very rich” or “corporations”, which clearly is a retrograde (and misleading) framing for a progressive policy platform to adopt.

The ‘Plan’ also falls into neo-liberal framing when it says:

… We all want the deficit closed on the current budget …

Why would we “all want” that? There is no rational economic reason, for a currency-issuing government, to think that a balanced fiscal position is responsible, desirable or even possible.

The fiscal balance should never be a policy target – whether it be an immediate aim or some stretched goal into the future.

The relevant goals should be about the outcomes that make societies prosperous and inclusive – goods schools and hospitals, good public transport, full employment, strong income support safety nets for those who cannot work, socially responsible minimum wages etc.

There is no sense that the narrative should be about balancing the fiscal deficit.

There is also an inherent contradiction in the position.

Austerity is about the spending position of the economic system as a whole. The economy is either subject to a spending gap – where total spending is insufficient to absorb the available productive capacity – and or it is not.

So when we worry about austerity it is because policy choices are deliberately forcing the economy to operate at below potential and mass unemployment is one of the consequences of that policy failure.

Accordingly, when there is a spending gap, the fiscal deficit is too small, given the spending decisions of the non-government sector.

There needs to be more net public spending.

So, discussions about taxing the rich or the corporations to get “money” to match government spending in these cases is rather missing the point.

There is no shortage of ‘money’ per se for a currency-issuing government. One should never tie the spending capacity of such a government to whether some cohort can ‘afford’ to pay more tax.

The ‘Plan’ thinks that the deficit will be closed:

… through growing a balanced and sustainable economy that works for all … And by asking those with income and wealth to spare to contribute more.

A balanced and sustainable economy (whatever that is) might actually require a permanent, on-going fiscal deficit to be sustained by government while the non-government sector spends less than its overall income and manages sustainable levels of private debt.

Certainly, that has been the norm in the Post World War II period. It is highly unlikely that a government will be able to sustain full employment and run a balanced fiscal position.

Further, it is neo-liberal framing to hold out that the role of taxation is to generate funds which allow the currency-issuing government to spend.

Taxation functions to create real resource space in the economy so that the government can run its socio-economic program by bringing the idle real resources back into productive use.

A government should increase taxes for a particular non-government group only if it wants that group to have less purchasing power.

Concepts of ‘making the rich pay their fair share’ is missing the point entirely. Will increasing the current tax burden on higher income groups and thus deprive them of that purchasing power help the British government achieve full employment and reduce poverty?

I cannot see any direct link. The government can achieve full employment and reduce poverty without any ‘assistance’ from the rich at all. It has that capacity. The progressive ‘tax the rich’ narrative always sounds to me as the policy goals are in some way dependent on the rich pulling their weight.

The reality is quite different of course. The government does not need the rich to implement a progressive social policy program.

It might need to increase taxes at some point to ensure there is sufficient real resource space to accommodate the spending without causing inflation. But Britain has significant idle resources at present and so there should be no talk about having to free up private real resources to ensure government has sufficient spending scope.

As part of a greater vision changing the composition of the taxation revenue might be deemed useful to break up inheritance dynasties etc. But those considerations have nothing to do with the capacity of the government to spend.

For now, British Labour should not hold out to the rich that they are somehow essential to ‘funding’ the progressive spending plan. They are not!

The ‘Plan’ thus skates on the neo-liberal frame and I would be advising the Left Candidate to break out of that framing stranglehold – to reject the neo-liberal Groupthink entirely – its language, its preoccupations and the sort of questions its continually thinks are important to answer.

Forget the deficit. Forget the fiscal balance. Focus on what matters – employment, equity, environmental sustainability. And as we would soon see – the fiscal balance will just be whatever it is – a relatively uninteresting and irrelevant statistical artifact.

In that sense, the ‘Plan’ wants to elevate to “centre-stage”:

… a publicly-led expansion and reconstruction of the economy.

Which is more the framing that is required.

But then we lapse again. After stating that “Britain needs sharply rising levels of investment in the economy”, the next related statement is:

Faster growth and higher wages must be key to bringing down the deficit.

No, faster growth and higher wages are the keys to improving prosperity, to reducing poverty and to providing inclusive opportunities for all.

The “bringing down the deficit” obsession is just taking us back inside the Groupthink.

The ‘Plan’ advocates the creation of a “National Investment Bank” which will:

… invest in the new infrastructure we need and in the hi-tech and innovative industries of the future.

All of which is sound. It is clear that private credit markets to not fund large scale investments that are in the national interest.

I would rather this body be called a ‘National Infrastructure Authority’ rather than suggest it will operate as a ‘bank’ which will be funded by stripping “out some of the huge tax reliefs and and subsidies on offer to the corporate sector”. Once again, this is suggesting the top-end-of-town is somehow necessary to provide funds for essential public infrastructure.

That erroneous reasoning is akin to the logic that Ayn Rand laid out in Atlas Shrugged – that the rest of us required the resources of the movers and shakers for our prosperity. It is so far removed from the truth.

A currency-issuing government doesn’t need to “strip out some of the huge tax reliefs” etc from the rich or the corporate sector to provide the spending necessary to empower a ‘National Infrastructure Authority’ to determine the best infrastructure to invest in etc.

That is why I would disabuse the nation of the idea that the rich are going to provide the funds that will then be used to help the poor. It is nonsensical logic and plays right into the hands of the rich. It vindicates their (false) rhetoric.

The rest of the ‘Plan’ gets bogged down in tax envy sort of politics.

Apparently, the “biggest issue facing British politics right now … is how to get some of the wealthiest individuals and biggest corporations to pay anything like their fair share.”

Fair share of what? Why is that the biggest issue? It is only an issue if we buy into the neo-liberal frame that the funds that are not being collected from the rich constrain the ability of the government to spend on its socio-economic program.

Which is, of course, a completely false frame and should be buried by the progressive left.

So, I was quite underwhelmed when I read the ‘Plan’. I was hoping for statements about the revitalisation of the public school system in Britain; new investments in green technology; and a full employment scheme motivated by a strong public sector job creation program – perhaps a Job Guarantee.

I was not expecting several pages of claims that the rich need to give the government more money so it can spend more and that the deficit should be eliminated.

But, apparently, the ‘Plan’ is being seen by others in the Labour Party – the tediously erroneous ‘austerity-lite’ New Labour brigade as a “starry-eyed, hard left” economic strategy.

Which just goes to show how far right the neo-liberal framing has the debate.

The UK Guardian article reported on an interview that the current Shadow Chancellor, one Chris Leslie, gave after Jeremy Corbyn had outlined his anti-austerity manifesto, such as it was.

I am hoping Jeremy Corbyn wins the nomination because Leslie has declared “he would decline to serve under” his leadership. Britain will be better off it the likes of Leslie do not achieve high office.

He claimed in the BBC Radio 4 interview that the leadership struggle has become “a fork in the road for the Labour party”.

Given the statements of the other three candidates, all of which have “pro business” leanings, it is truly a fork in the road for the progressive side of politics. Only Corbyn has a chance to redefine the political debate and then he has to escape the neo-liberal frame he is operating in – perhaps unwittingly, but clearly nonetheless.

But Leslie thinks that Corbyn’s “hard left … policies”:

… risk hurting some of the most poor, the most vulnerable, those on the lowest incomes.

What, by pursuing full employment, pay equity, better public infrastructure … etc?

He told the BBC that Corbyn’s idea that the Bank of England could use overt monetary financing to fund public spending was dangerous:

Take this suggestion that there should be a people’s quantitative easing, in other words the Bank of England should be able to just turn on the printing presses and magically deal with all the public service and public investment needs that we have. At one level that sounds fantastically easy – if there is a shortage of money print some more. The difficulty is that if that then provokes higher inflation, if that then means that interest rates go up who will pay the price for that? It is the poorest and those on the lowest incomes who already find the cost of living very difficult.

Which is why Britain will be a better place if Leslie disappears from the public landscape.

Please read my blog – OMF – paranoia for many but a solution for all – for more discussion on this point.

I also spend a Chapter in my new book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015) – on Overt Monetary Financing.

Overt Monetary Financing (OMF) would require the central bank to use its currency issuing capacity to underwrite the fiscal deficits of the national government in order to create growth and employment in their domestic economies without encountering the restrictions that private bond markets place on their spending.

OMF, erroneously called the ‘printing money’ option, is universally considered to be taboo among neo-liberals because they wrongly claim it will lead to inflation, and perhaps hyperinflation.

However, in reality, it can be a very effective way for governments to responsibly manage economic growth without having to issue public debt.

How can a relatively simple monetary operation between a central bank and its corresponding treasury department (both part of what we call the ‘consolidated’ government sector) possibly be considered a taboo?

OMF simply means that in some form or another, the treasury arm of government tells the central bank it wants to spend a particular amount and the latter then ensures those funds are available for use in the government’s bank account.

Various accounting arrangements might accompany that action. For example, the treasury might sell some government bonds to the central bank to match the value of the funds that are placed in the treasury’s bank account. None of these accounting arrangements should cloud the fact that central banks can create money out of thin air.

Why go through all the hoopla of creating elaborate corporate welfare structures – like issuing government bonds to private sector traders – when the central bank can just create funds out of thin air?

What are the limits? Answer: the available real resources.

You will wonder why central bankers would keep pumping out liquidity for the government to spend once the economy was beyond full employment and was no longer able to increase output?

Would central bankers be so irrational that they need to be placed in a straitjacket to stop their destructive tendencies? These questions might seem ludicrous or crass but they are merely responding at the logic level that maintains the taboo.

Leslie’s claims about “printing money” and the inevitable inflation just put him into the hysterical group of commentators.

All transactions between the government sector (treasury and central bank) and the non-government sector involve the creation and destruction of net financial assets (‘money’) denominated in the currency of issue.

Typically, when the government buys something from the non-government sector it just credits a bank account somewhere. That is, numbers denoting the size of the transaction appear electronically in the banking system.

These numbers signify a new financial asset has been created to the favour of the recipient of the spending. The reverse is true when taxes are paid. There are no printing presses involved!

OMF would be an incredibly efficient way to operationalise government spending. An instruction would be sent to the central bank from the treasury to transfer some funds out of its account at the central bank into an account in the private sector, which is held by the recipient of the spending.

A similar operation might occur when a government cheque is posted to a private citizen who then deposits the cheque with their bank. That bank seeks the funds from the central bank, which writes down the government’s account, and the private bank writes up the private citizen’s account.

All these transactions are done electronically through computer systems. So government spending can really be simplified down to typing in numbers to various accounts in the banking system.

Why why do economists claim that OMF would lead to out of control inflation? Whenever governments increase their deficits, mainstream economists and their pawns in the financial media make claims about the likely inflation that they say will result.

Leslie appears to be a member of this squawking squad!

They should have reflected on recent history.

The large fiscal and monetary stimulus packages introduced by many governments to offset the GFC have not resulted in the predicted inflation. It isn’t the first time that the doomsayers have been proven wrong.

When QE, for example, was first introduced in Japan in the 1990s, mainstream economists rushed to predict that the massive expansion in central bank reserves would be inflationary.

Students in every mainstream macroeconomics class, and that means almost all students, would have predicted, based on the nonsense they were learning, that the high deficits and high public debt ratios in Japan at the time, should have driven interest rates sky high, that bond markets should have stopped buying government bonds, that the government should have run out of money, and all the time that these disasters were unfolding, that inflation should have been be galloping towards hyperinflation.

Nothing like that happened. Neo-liberal economists wrote off their mistakes by claiming that Japan is ‘so strange’ that it is a ‘special case’ and therefore not generally applicable.

Their ad hoc defence was convenient because the Japanese experience with sustained high fiscal deficits, the world’s largest public debt to GDP ratio, close to zero interest rates, and deflation, was totally at odds with their economic theories. It was a mind-boggling failure to explain reality.

The reason they keep making these false predictions is that they rely on two textbook notions – one which is just plain wrong while the other has limited applicability during a recession.

The first notion is the rather technical sounding concept of the ‘money multiplier’, which links so-called central bank money or the ‘monetary base’ to the total stock of money in the economy (called the money supply).

The second notion then links the growth in that stock of money to the inflation rate. The combined causality then allows the mainstream economists to assert that if the central bank expands the money supply it will cause inflation, which is their prima facie case against OMF.

As is often the case, many financial commentators who wax lyrical about the dangers of OMF do not even fully understand the theoretical route that is alleged to link central bank monetary expansion with inflation.

Please read my blog – Money multiplier and other myths – for more discussion on why the money multiplier is a flawed concept and inapplicable to the real world.

The second flawed aspect of the antagonism against OMF relates to the mainstream theory of inflation captured by the so-called Quantity Theory of Money (QTM).

The QTM links the expansion of the money supply with accelerating inflation. It is the most intuitive part of the neo-liberal story and the one that resonates with the public.

While the QTM was formulated in the 16th century, the idea still forms the core of what became known as Monetarism in the 1970s and is the principle reason for the taboo against OMF.

The QTM posits that an expansion of the money supply causes inflation because it adds nominal spending growth to a fully employed economy.

The only way the economy could adjust to more spending when it was already at full capacity was to ration that spending off with higher prices. Financial commentators simplify this and say that inflation arises when there is ‘too much money chasing too few goods’.

The main problem with the theory (there are several) is that capitalist economies are rarely operating at full employment. The Classical theory essentially denied the possibility of unemployment.

The fact that economies typically operate with spare productive capacity and often with persistently high rates of unemployment, means that it is hard to maintain the view that there is no scope for firms to expand the supply of real goods and services when there is an increase in total spending growth. If a firm has poor sales and lots of spare productive capacity, why would it hike prices when sales improved?

Thus, if there was an increase in availability of credit and borrowers used the deposits that were created by the loans to purchase goods and services, it is likely that firms with excess capacity will respond by increasing the supply of goods and services to maintain or increase market share rather than push up prices.

In other words, an evaluation of the inflationary consequences of OMF should be made with reference to the state of the economy.

If there is idle capacity then it is most unlikely that OMF will be inflationary. At some point, when unemployment is low and firms are operating at close to or at full capacity, then any further spending, whether funded by OMF or some other scheme, will likely introduce an inflationary risk into the policy deliberations.

OMF does not increase the inflation risk at all.

All components of total spending, private consumption expenditure, private investment, exports and government consumption and investment spending carry inflation risk if they become excessive. Inflation is caused by total spending growing faster than the capacity of the economy to produce real goods and services in response.

In that situation, firms have no flexibility to increase production, and thus ‘ration’ off the spending growth by putting up prices. Significantly, the reserve position of the banks is not functionally related to that process.

The central bank can ‘sterilise’ the liquidity impacts of the deficit spending by selling bonds to the private sector. But that doesn’t reduce the inflation risk of the initial spending. It just means the private sector has more bonds and less deposits. The government spending has already occurred. Of course, no responsible government would desire to expand the economy beyond its real limit given the political problems it would face should inflation rise sharply.

OMF thus doesn’t add any new elements to this risk.

Leslie clearly doesn’t understand any of this and should disqualify himself from commenting on such matters.

He also made the rather crazy claim that the British public would boycott any new public services provided by Corbyn’s Economic Plan because they would not have been legitimised by public consent:

If you don’t get that collective consent amongst taxpayers then those taxpayers will go for private health insurance or private education. You actually undermine the case for the public realm which is what we should all be about in the Labour party.

Which is about as desperate as it gets. I can just see it – British children walking out of public schools on mass and heading to their local private school. British people with legs hanging off after accidents demanding the ambulances boycott the local public health authority and take them to some private hospital.

As desperate as it gets. Since when does a policy that rejects the essence of the neo-liberal mythology that New Labour was built upon become illegitimate in the eyes of the public?

Conclusion

There is a lot at stake for British Labour in this current leadership struggle. I would generalise that and say that what is happening in Britain and the US (with Bernie Sanders) now represents a real chance on the left to re-define the progressive narrative and firmly take it out of the neo-liberal framing that has trapped the debate for the last few decades and compromised successive governments.

There is no future for Britain in New Labour. It is an old, failed approach. The losses in England and Scotland should tell the Labour Party that its appeal is gone.

The future is for a progressive force to articulate a plan that places full employment, equity, inclusion and environmental sustainability at the forefront and disabuses the public of the fiscal myths that it has been indoctrinated with by the right-wing think tanks, media and politicians (including New Labourites).

The only danger is that the left remains trapped in these neo-liberal frames itself. It has to address that issue as a matter of haste.

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That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.