The first lesson from Corbynomics: we need to raise the quality of economic debate
What should we make of Corbynomics? The new Labour Party leader’s economic policy breaks two decades of broad cross-party consensus. The political and media reaction tells us something about the paucity of genuine economic debate in this country – it is narrow, shrill, unreasoned and therefore inadequate to meet the significant challenges of the 21st century. This is why the RSA is developing a proposal for a Citizens’ Economic Council, to broaden and deepen the quality of economic debate and ultimately of policymaking.
The Labour leadership contest was certainly more interesting than anyone might have predicted. The participants and press have not pulled any rhetorical punches. Initial ridicule of Corbyn’s candidacy turned to predictions of electoral oblivion and economic collapse. The accusation that he will drag Britain back to the 1970s was validated, it seems, by his victory speech wisecrack that the four leadership contenders would form an ABBA tribute band. The weight of the establishment attack on Corbyn even prompted a cheeky tweet from the Russian ambassador implying that it amounted to a totalitarian crushing of dissent. Well, I guess he should know.
But let’s leave the political slapstick to one side and focus on the economics.
First, is there even such a thing is ‘Corbynomics’? The key document - ‘The Economy in 2020’ - is slim and contains very little detail, but setting out his broad world view Corbyn states that “wealth creation is a collective process between workers, public investment and services, and, yes, often innovative and creative individuals”
Nothing particularly sinister about this, and an emphasis on innovation and creativity is pleasing to see. As Marianna Mazucatto has shown, the role of public investment is crucial to private wealth creation. This statement does underplay the role of private enterprise, but this seems to be a deliberate contrast with a (somewhat straw man) Conservative account of wealth creation as “solely due to the dynamic risk-taking of private equity funds, entrepreneurs or billionaires bringing their investment to UK shores”.
To conclude from this that Corbyn is hostile to private enterprise is too much of a stretch – he seems to be trying to rebalance our understanding of wealth creation to include all the necessary participants.
How about the actual policies themselves? I will take a brief look at four that have proved controversial.
First, on the central question of the deficit, Corbyn’s position is that after 2020 the government should borrow only to finance investment. This is a perfectly viable position to take, particularly given the UK’s poor productivity record which many suggest could be improved through investment in public infrastructure, innovation and skills. With interest rates at historic lows, and the overall level of public debt within tolerable limits, the UK government could comfortably borrow more in the bond market if it had a sound investment plan for the proceeds.
In other words, there is a perfectly sensible and legitimate debate to be had between the Corbyn position and the present Government’s. What has confounded this debate is the seemingly common-sense idea that the Government must behave in the same way as an individual household by balancing the books or preferably running a surplus. But the public sector is not analogous to a single household. In fact the whole reason that macroeconomics exists as an academic discipline is because in a complex social system you cannot predict the behaviour of the whole by adding up the parts. Entirely new dynamics come into play. Furthermore, a surplus in one sector of the economy must be matched by a deficit somewhere else. You cannot have a surplus in all sectors at once. This is not a question of ideology, but accounting. But the revelation that if you support a government surplus you are effectively supporting an increase in private household debt would probably come as news to most people. Would it change the tone of debate if this was widely understood?
Second, Corbynomics calls for a more progressive tax system and increased wages to reverse the long trend of workers getting a smaller and smaller proportion of national income. No specific tax rates are mentioned, although there is no suggestion of marginal rates above 50%. This is within the bounds of both recent UK history and current global practice. I would argue that the choice between higher versus lower tax and public services is primarily a political question to which economics alone cannot provide an answer. Although economics can certainly illuminate the impact of marginal tax rates on the behaviour of firms and households, it is simply not capable of telling us in advance what the perfect overall balance of tax would be for the UK economy.
Third, Corbyn has called for nationalisation, starting with the rail industry. It must surely only be in the UK that national ownership of natural monopolies and key utilities is considered unimaginable? Perhaps it is because we are ruled by a generation of policymakers and journalists scarred by bumpy rides in rusting British Leyland cars. Perhaps we simply cannot believe we have anything to learn from the success of other nation’s economies. Either way, national ownership of railways works just fine in France and Germany. It worked rather well here in the UK for 5 years on the East Coast Mainline, which achieved higher customer satisfaction for lower taxpayer subsidies than under private ownership.
The most sensible form of ownership and control for different industries is best taken on a case-by-case basis, not by the blanket application of an ideological preference for private or public ownership. It seems hard to have a reasoned debate about that even with opinion polls showing 58% in favour of nationalisation of rail and other utilities.
But perhaps that is partly because privatisation vs nationalisation feels like rehashing a stale debate. Where is the new thinking? Look no further than Corbyn’s policy on energy. This is full of ideas about more effective competition and stimulating new clean technologies. It extols the virtues of radical decentralisation of ownership and control: community energy co-operatives, municipal power companies. This is no 1970’s throwback. It is a radical new agenda.
Finally, we turn to People’s Quantitative Easing. This policy been the richest source of commentators talking sheer nonsense. It is regrettable the amazing social technology that we call ‘money’ is so poorly understood by politicians, public and even economists, many of whom have simply not studied this field in any depth. Leaving this aside for another day, unpacking People’s QE reveals three distinct proposals jumbled together; for increased investment in public housing and other infrastructure, for a public investment bank as an institutional vehicle to achieve this, and for public money creation as the method of financing it. None of these ideas are crazy. They have all been successfully implemented in industrial economies in the past, and in some cases in the present day. This is not to say that such policies have no risks – in particular, political control over investment decisions and public money creation pose huge governance challenges – but these are debates worth having.
Business groups, amid a mixed set of reactions, have cautiously welcomed Corbyn’s plans for infrastructure investment. As Adair Turner has argued, modifying QE to spend £35 billion of central bank money on investment in bricks and mortar instead of using £375 billion of central bank money to buy government bonds is perfectly justifiable in theory even if there are considerable practical and political economy challenges to overcome.
What is not helpful is to hear immediate cries of “Hyperinflation!”, “Robert Mugabe” and “Weimar Republic” trying to drown out any consideration of the actual evidence or theory behind the idea of QE for investment. These are not meant as contributions to a meaningful debate. They are meant as ways to close down and prevent meaningful debate of new and unfamiliar policy proposals. Perhaps the Russian ambassador has a point after all.
The cause of 21th Century Enlightenment is not well served by the kind of hysterical reaction to unorthodox ideas that has been a depressing feature of the Labour leadership campaign.
Luckily there has been more sensible consideration of Corbyn’s economic policies, for example by Martin Sandbu in the Financial Times and Anthony Hilton in the Evening Standard, but can we push this higher quality discourse out of the specialist financial press and into the broader public domain?
One idea we are pursuing is the Citizens Economic Council, suggested by Matthew Taylor in his Annual Lecture. This would be a two year project to open up economic debate to a broader public, demystifying economic ideas and enabling many more organisations and individuals to feel able to have informed economic views and ideas.
Our aim would be to foster new and powerful kinds of ongoing civil society conversations about economic matters, involving and bringing together a range of economic and social actors.
The roll call of ideas initially dismissed as heretical that went on to change the world for the better is a long one, some germinated at the RSA. If we are to progress, we need to welcome challenges to orthodox thinking and subject them to reasoned, well-informed and inclusive debate.