August 03, 2015
It's widely agreed that Jeremy Corbyn's popularity is due in large part to the mediocrity of the alternatives. As if to demonstrate this, Chris Leslie - Shadow Chancellor - claims that Corbynomics would be inflationary.
This isn't wholly unreasonable. A money-financed fiscal expansion - which is all "people's QE" is - would increase employment and aggregate demand. Conventional economics says this would reduce the "output gap" which would tend to add to inflation.
The claim might be reasonable. But we cannot make it with much confidence, for three reasons.
First, measures of the output gap are subject to considerable uncertainty (pdf) - so much so that Paul Ormerod and Chris Giles (who I guess are hardly Corbynites) think the concept is nonsense.
Secondly, the UK is an open economy and as the standard textbook says:
In an open economy, there is a range of unemployment rates consistent with the absence of inflationary pressure (Carlin and Soskice, Macroeconomics, p343)
It's possible, as Richard says, that disinflationary pressures in the euro are would hold down UK inflation.
Thirdly, Corbynomics isn't just about QE. It also comprises a deflationary policy - higher taxes on companies and the rich. These would tend to depress demand and employment and hence inflation. Whether there is net inflation depends upon the balance of the two. It's uncertain.
But so what if inflation does rise? As Tony Yates has said - and he's no loony lefty either - there might well be a case for a higher inflation target. I'm not sure he's right - but I'm pretty sure that 4% inflation wouldn't see the world cave in.
Maybe Leslie's right, then. Or maybe not. My Hayekian scepticism about the possibility of centralized knowledge of the complex process that is the macroeconomy prevents me being confident either way.
And yet I am depressed by his intervention,
The fact is that there are 5.4 million people who are unemployed or under-employed: 1.8m officially unemployed; 2.3m who are "inactive"but want to work; and 1.3m part-time workers who want full-time work. If inflation can rise when there's so much unemployment then we suffer from a massive supply-side problem. If this is the case, then Labour should offer some solution to this.
Which is just what Leslie is not doing. Instead, all he is doing is peddling fear. But given the choice between hope - however forlorn - and fear, Labour members can be forgiven for choosing hope.