I read an article in the Financial Times earlier this week (September 23, 2023) -…
The New Labour group are clearly getting desperate in Britain and Blair himself has come out again to vilify Jeremy Corbyn and predict a Labour annihilation at the next general election. Clearly Blair and his cronies haven’t understood that their time in the sun is over. They recreated the Labour Party into a Tory mirror image on key issues and the grass roots of the Party is now reclaiming the lost ground. The UK Guardian article (August 12, 2015) – Syriza’s Greece: the canary in the cage for Corbyn’s Britain? – illustrates how stuck in the neo-liberal mud the British economic debate has become. It tries to claim that Corbyn is a throwback to the past and the policies that old Labour tried in the 1970s failed and would fail again. Clearly, the writer and most of the commentators which resonate the same message haven’t really understood the difference between a currency-issuing government and one bound by a mania for fixed exchange rates and fiscal surpluses. Increasingly, the attempts by Corbyn’s support base to appear to be ‘fiscally responsible’ tells me that he will not succeed in altering the debate if he continues to promote ideas that equate fiscal responsibility with deficit elimination. Fiscal responsibility is equated with achieving full employment with price stability – and in the current climate that would require a fiscal deficit some percent of GDP larger than what it is at present. Corbyn’s camp should be talking about that rather than deficit elimination, which is a ridiculous policy target to aspire to.
In 2002, at a dinner in Hampshire, Margaret Thatcher replied to a question about her greatest achievement. She said:
Tony Blair and New Labour. We forced our opponents to change their minds.
That about sums it up when we read statements from the modern Blairites that electing Jeremy Corbyn would be the best thing for the Tories.
My view, from afar, is that the Tories would be terrified of a modern left leader and a progressive labour policy platform. That is, as long as the change translates into a re-framing of the debate and challenges the basic macroeconomic myths that go through to the keeper too often these days without scrutiny.
That was one of the legacies of Blair. New Labour propagated the neo-liberal economic myths too and gave the Tory narrative credibility when it had (and has) none.
The article suggesting that Syriza’s experience is “the canary in the cage for Corbyn’s Britain” is asinine to say the least but allows us to establish a general principle that also applies to all the trash talk coming from the New Labour camp who just cannot face irrelevance it seems.
It is actually difficult to discern the message from the ‘Canary’ article it is so poorly written. Apparently the writer, a long-standing Guardian editor/journalist thinks the latest Greek fiasco – the bailout deal – is “far from perfect” but irrespective, “we certainly should … be pleased” that the Troika and the Colonial Administration (aka Greek Syriza Government) have agreed on terms.
Apparently this is a sign of “greater willingness to be flexible” on Syriza’s behalf and is being interpreted by the journalist as evidence:
… that a democratic mandate can (just about) coexist with the constraints of a fragile monetary union and the disciplines of a globalised financial economy.
I wonder which planet the journalist was on when typing that up.
Apparently, Syriza – “a radical government” has not only survived but is “even prospering – after savvy compromise”.
The 29-page document that is now public – Greece – Memorandum of Understanding for a three-year ESM programme – drafted August 11, 2015 doesn’t look much like prosperity to me – for the Greek people or the political fortunes of Syriza which is in the process of tearing itself apart because a substantial number of left members cannot tolerate the sell-out that the Prime Minister has dealt them.
As a slight digression, there are things in the 29-page document that do not offend me at all. Reforming the professions to reduce their rent-seeking capacities, forcing high income earners to pay taxes, improving the effectiveness of the public administration so that it actually delivers high quality public services, improving public procurement processes to eliminate corruption, and the like are all sensible reforms that reduce special interest group leverage and help the government provide necessary support to the economy.
But the fiscal targets – a primary surplus (that is, fiscal balance net of interest payments) of “a surplus of 0.5 percent in 2016, 1.75 percent in 2017, and 3.5 percent in 2018” are ridiculous given the state of the economy.
With the economy contracting further over the next 12 months and tax revenue falling substantially as a result, these targets are totally unrealistic.
The ‘Memorandum’ also requires the Greek administration (we can hardly call it a government anymore) to “monitor fiscal risks … and … take offsetting measures as needed to meet the fiscal targets”.
In other words, the fiscal rules (targets) are set in stone and further spending cuts and tax hikes will be required given there is little chance that the economic outcomes over the next three years will deliver revenue to the Administration that would enable them to meet their targets.
There is nothing in the Memorandum about creating works and restoring full employment. Nothing about putting young people back into work.
It would take the most extraordinary imagination to interpret the process and the result (the 29-page document) as being a “savvy compromise” or a sign of flexibility.
It is brute force austerity forced on Greece by the Troika which saw the ECB violate the terms of its existence when it engineered massive financial instability in the Greek bank system and brought the economy to a standstill through liquidity constraints.
Syriza’s leadership were too gutless to force the issue – that is, invoke Plan B which would have thwarted the ECB intransigence and would have demonstrated that an exit from the Recession Cult that is the Eurozone was possible and beneficial.
There was nothing democratic about it. Democracy in Greece is somewhat dead. The Troika now control economic and social policy. The Greek Administration cannot introduce any legislation without drafting input from the Troika technicians and must legislate a raft of measures that will obviously undermine the welfare of the Greek people, against their stated wish to end austerity.
So the judgement of our UK Guardian editor/columnist is somewhat questionable, to say the least.
The journalist’s point though is to comment on British “Labour’s leadership prospects”. He think Corbyn will triumph and that his electoral platform would be “another disaster”.
Apparently, Corbyn’s “challenging” agenda should take a lesson from the “clever autocrats” in China “who struggle to macromanage China’s economy from Beijing” and “are learning the hard way”.
Apparently, Syriza’s reality check – it is hard to discern exactly what the author is on about – but a reasonable interpretation is that Syriza started with a hard-core agenda but has had to face reality – and accept fiscal rectitude is somehow the exemplar of policy responsibility (with 25 per cent unemployment and rising!).
Apparently, Syriza’s path back to reality is something Corbyn might study – which makes Greece the canary in the mine!
And with China apparently behaving like Labour did in the “good old days” when it allegedly lost control of the economy and invoked “just the sort of panacea” that the Chinese are now attempting which “isn’t working very well”.
So it was a long rambling article to tell us that the New Labour elevation of the free market (or copying Thatcher) was the only reality that works for Britain and any attempt at increased state intervention will fail just as it apparently did when Labour was not New Labour.
Apparently Syriza has learned that lesson too – hard left politics is out with the dinosaurs and the global pressures of Capitalism force governments to promote market forces to allocate resources and punish those which try to resist that inevitability.
Hmmm, the only reality check that Syriza was forced to accept was that if it wants to stay in the Eurozone and continue to use a foreign currency then it has little capacity to act independently of the rules that are set down by the technocrats in Brussels/Frankfurt and Washington (IMF).
It didn’t teach us anything about the intrinsic capacities of a currency-issuing government to articulate and implement a progressive domestic policy. Syriza could have resisted the Memorandum nightmare by exiting the Eurozone and restoring its own policy independence.
I won’t repeat what I have written many times about that option. By now it would have been growing strongly (if it had have left in January when elected) and things would have been settling down on the foreign exchange markets. Its banking system would be safe from failure and unemployment would have been tumbling (especially if it had have introduced a Job Guarantee).
Then it could have tackled some of the reasonable features of the Memorandum (noted above) with full political sovereignty and a growing economy. The oligarchs could have been reduced in influence by the sheer dint of force of popular acceptance of the leftist manifesto introduced by a currency-issuing government with complete control over interest rates.
The point is that a currency-issuing government which floats its currency and doesn’t issue any liabilities in foreign currencies has all the power, irrespective of how global the economy has become.
A Corbyn government could target domestic policy aspirations and neutralise any private bond market influence if it wanted to. The Bank of England sets the interest rates and could be instructed by the Treasury to support public spending without any need to issue debt to the private bond markets.
Of course, while a currency-issuing government can ensure all productive resources that are available for sale in that currency are productively utilised, that is a different thing from being able to guarantee a particular material standard of living.
The material standard of living that a society can achieve is ultimately limited by the real resources it can command. A currency-issuing government has no financial constraints but it certainly faces real resource constraints.
Which means that if a nation is heavily dependent on foreign imports then it can suffer falls in its real standard of living (access to real resources) should the external sector decide that the real terms of trade have to change.
For Britain, with a relatively large external deficit, this might happen if foreigners decided they no longer wanted to accumulate net financial assets denominated in sterling.
But that reality doesn’t stop the currency-issuing government from achieving full employment and price stability and equity. It just means that real living standards can fluctuate if the external sector deficit rises or falls.
All of which tells me that unless Jeremy Corbyn gets some new advice that allows him to re-frame the debate somewhat then not a lot will be gained if he was to become leader.
I have written about this recently – Jeremy Corbyn must break out of the neo-liberal framing and Correcting political ignorance and misperceptions.
So I don’t want to rewrite those blogs.
But again on Tuesday (August 11, 2015), the UK Guardian Op Ed by John McDonnell (a Labour MP from around Heathrow) – Jeremy Corbyn would clear the deficit – but not by hitting the poor – tells me that the Corbyn camp are in a sort of netherworld where they have one foot in a progressive world and narrative but the other in a neo-liberal world which will thwart their progressive agenda.
This article is keen to emphasise that “economic competence” is equivalent to understanding that the fiscal deficit has to be brought back into balance.
He even quotes the opinion poll by Jon Cruddas (a conservative Labour MP) that received airplay last week. I provided a critique of that exercise in the blog last week – Correcting political ignorance and misperceptions.
Polls reflect what people are conditioned to believe NOW. It is no surprise that people have misconceived views about fiscal deficits given that both sides of politics in Britain have rammed the neo-liberal message down their throats for the best part of three decades.
As I noted in that blog – framing can alter the way people view something. It would be a relatively easy task to get the Labour media machine into action over the next five years re-framing the whole macroeconomics narrative.
That would be a show of leadership.
Thinking that a poll that reflects the views of the indoctrinated NOW is to be the disciplining factor for the foreseeable future is the abandonment of leadership and reflects a very poor understanding of social psychology.
There is no correspondence between a fiscally responsible position and the state of the fiscal balance. There is nothing automatically responsible about a balanced fiscal position. History would tell us that, in fact, a small continuous deficit is probably the most responsible stance a currency-issuing government can adopt, given the saving preferences of the non-government sector.
So despair comes to mind when I read John McDonnell write:
So let me make it absolutely clear that Labour under Jeremy Corbyn is committed to eliminating the deficit and creating an economy in which we live within our means.
Why would he be committed to that?
Who has done the modelling to show that with a current account deficit of around 5.9 per cent (in 2014) and an already overextended private sector (in terms of debt), that a fiscal deficit of zero will be appropriate?
It clearly would not be. It would drain too much expenditure from the economy and squeeze the private domestic sector into more debt as the economy was slowing.
A fiscal balance now or in the foreseeable future would drive Britain into recession.
I don’t see a major shift in the external situation and the private domestic sector needs to restructure its ‘balance sheet’ to bring the debt liabilities down to sustainable levels.
Even John McDonnell acknowledges that the current dynamic is leading to excessive “credit expansion and City speculation, and a growing debt bubble”.
Hasn’t he put the parts of the jigsaw together? Clearly not. Who among Corbyn’s advisory group actually knows which jig saw pieces to manipulate?
With a current account deficit and the need for the private domestic sector to reduce its debt position (start saving overall), there cannot be a substantial reduction in the fiscal deficit – now or later.
These balances are all interlinked through income shifts. Corbyn’s team simply has to understand that the neo-liberal narrative about running fiscal surpluses is deeply flawed and imparts a recession bias with mass unemployment the casualty.
And it inevitably leads to fiscal deficits anyway as tax revenue collapses as economic activity falls.
So Jeremy Corbyn should stop talking about deficits as if they are a legitimate policy target. He should instead start urging his supporters to write Op Eds that educate people about the role of deficits in sustaining full employment and prosperity.
These Op Eds have some years to alter the narrative. Then the opinion polls will shift and the Conservatives will have a real fight on their hands.
John McDonnell thinks the progressive position is to eschew deficits but to force the rich and high income earners to do the lifting:
Where the Corbyn campaign parts company with the dominant economic thinking of both the Conservative government and the other Labour leadership candidates is that we don’t believe that the vast majority of middle- and low-income earners who didn’t cause the economic crisis should have to pay for it through cuts in tax credits, pay freezes, and cuts in essential services. Instead we believe we can tackle the deficit by halting the tax cuts to the very rich and to corporations, by making sure they pay their taxes, and by investing in the housing and infrastructure a modern country needs to get people back to work in good jobs.
Once again, there might be good reasons to increase the tax burden on high income earners and corporations to reduce their purchasing power.
But that argument should not be conflated with the size of the fiscal deficit argument.
Even if there is good sense in reducing the capacity of the high income earners to spend by forcing higher taxation rates and better compliance onto them, there will still be a need for whatever deficit is appropriate given the external balance, the saving desires of the private domestic sector and the state of the economy overall.
So Corbyn’s Labour might take from the rich to give to the poor, which is something I would endorse. But it still remains that the overall net position of the government will require deficits.
So confusing distributional equity issues with a determination of the appropriate size of the fiscal deficit is fraught and should be avoided by the Corbyn camp.
Thus, John McDonnell should rethink his position summarised by:
We accept that cuts in public spending will help eliminate the deficit, but our cuts won’t be to the middle-and low-income earners and certainly not to the poor. Our cuts will be to the subsidies paid to landlords milking the housing benefit system, to the £93bn in subsidies to corporations, and to employers exploiting workers with low wages and leaving the rest of us to pick up the tab.
Who says that cuts to net public spending are appropriate? Why would Corbyn want to do this? What does he think will be the impact on unemployment?
At present, Britain’s fiscal deficit is too small. I don’t see much changing in the years ahead to alter that conclusion and the need for on-going fiscal support for growth.
Redistribute spending by all means if equity is your goal. But at present cutting net spending is a ridiculous policy target to sign up for.
I am very excited about the Corbyn challenge. There is a chance to clear out the New Labour crust that has welded neo-liberal narratives onto the Party and restricted its capacity to offer a progressive alternative to Britain.
But, increasingly, the attempts by his support base to appear to be ‘fiscally responsible’ tells me that he will not succeed in altering the debate if he continues to promote ideas that equate fiscal responsibility with deficit elimination.
Fiscal responsibility is equated with achieving full employment with price stability – and in the current climate that would require a fiscal deficit some percent of GDP larger than what it is at present.
Corbyn’s camp should be talking about that rather than deficit elimination, which is a ridiculous policy target to aspire to.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.