At the last election, the Labour Party was not trusted with the economy.
And, now, Jeremy Corbyn, John McDonnell and the wider membership are committed to “anti-austerity economics”. We are no longer “austerity-lite”, broadly in keeping with Tory policy.
We know all too well what austerity means:
A low wage economy
An unequal society.
Cuts to Public services, Social security, and Real incomes
But saying that is the easy bit, the Labour Party comfort zone.
We need to create an alternative that is credible, distinctive, practical, easy to understand and to communicate. No pressure then. Right now, I would just like to say a few things that might help:
Set out what John McDonnell has said so far
Spell out the approach of Positive Money, a think tank with a radical appraisal of how the economy works
Set out just two of the many, many Tory economic fallacies,
Discuss some possible action points for this CLP.
Labour Party Economic Policy
One of Jeremy Corbyn’s three policy pillars is: there should be a New Economics, “laying the economic foundations of a prosperous, fairer and sustainable society”.
John McDonnell’s Conference commitments (September 2015):
Pay down the deficit by way of sustainable long term growth achieved by strategic investment now
Progressive taxation: taking more from the better off and tax avoiders/evaders
Creating an “entrepreneurial state: a strategic state that works in partnership with business, entrepreneurs and workers to stimulate growth
With the government role to promote advances in technology, skills, and organisational change to drive up productivity
Using patient long term finance for investment in research resourced by a national investment bank
Review of the operation of the Treasury, the HMRC, and the Bank of England
Maintaining the independence of the Bank of England, but reviewing its mandate currently focused on the rate of inflation
Restoring and extending trade union rights
Promoting public, co-operative, worker controlled and mutual forms of ownership
Consulting an Economic Advisory Committee of world renowned economists: to advise Labour government policy before implementation
John McDonnell has said there will be a Labour Party wide consultation on policy, but has not yet laid out how this will be done.
The progress so far:
The Economic Advisory Committee has met once, but its discussions will always be confidential.
Members of the Committee are holding events on their specialist areas around the country.
Annual Economic Conference proposed involving trade unions and business in the hope of “stimulating an unprecedented and realistic debate”.
BUT: Labour’s Membersnet website carries no information on McDonnell’s announcements, and still carries the economic policies and proposals of the Miliband era in the run-up to the 2015 General Election.
2.Positive Money This is a think tank and pressure group that works nationally and locally. For the last 2 years, I have personally attended a group that meets every 6 – 8 weeks in Walthamstow. Positive Money offers a deep analysis of what is wrong with the economy, and asks the fundamental question:
Where does money come from?
The Bank of England is responsible for just 3% of the total money in circulation, that is, all the coins and bank notes. It is private banks that create 97% of our money, created electronically in the act of making loans which then circulate through the economy. 97% of our money is dependent on the creation of debt.
The Implications of the Private Creation of Money:
Money is channelled away from industry and non-financial businesses - towards mortgages and property.
Loans for the acquisition of property are no problem for banks because any failure to make repayments leads to bank repossession. In normal times, the bank can resell at a profit in a rising market.
Loans to productive industry and business are more of a problem. The initial assessment of the loan is more difficult; and should the loan fail there may not be enough collateral to repay the bank.
As a result, 51% of loans, that is money entering the economy, goes towards buying property, driving up house prices.
Only 8% goes to productive industry.
In addition, 31% goes into the financial markets, the City, and 10% towards credit cards and personal loans.
In my personal view, this is why the economy is, in the technical term, “knackered”.
2. The Economy Is Subject to Recurrent Booms and Busts. There are incentives for bank staff to lend, in the form of promotion, bonuses, and commissions. As a result, banks make more and more loans in the good times, driving up the amount of money in the economy, and so the price of houses, other property, and financial securities. Loans become more and more reckless as bank executives are driven by their incentives to create debts that eventually cannot be repaid.
The case in point is the loans to the sub-prime housing market in the States that could not be repaid by low paid and unemployed workers. The 2007-8 global crash began with the failure of these loans.
But the crash was not confined to the banks that made the loans. The loans had been turned into financial securities traded world-wide, held by international banks and investment houses. When the loans failed in the American sub-prime market, there was a risk that banks world-wide would fail.
Governments took the responsible option. They stepped in to use their resources to secure the banking system. Public debt rose massively to cope. Austerity was the policy tool then chosen to reduce the resulting public debt.
The system of money creation by the banks remains in place unreformed. 97% of money is created by private banks with selfish motives.
So, we are still at risk from destabilising global boom and bust.
To sum up, the ability of banks to create money was the cause of the global crash and all the austerity policies that followed.
So, you have to ask is this really the best way for money to enter the economy?
Positive Money suggests:
The wider community, in the form of the government, should take responsibility for the level of money and debt in the economy, not banks. This would just be an extension to the 1844 Bank Charter Act that stopped banks other than the Bank of England from issuing notes and coins. It would simply be an extension of that principle into the electronic age.
In the short term, give the Bank of England, and it’s Monetary Policy Committee a new mandate, to monitor money supply and debt, not just inflation.
The mandate would be set, just as the inflation target is now, by elected government. The Bank of England and a renamed “Money Creation Committee”, as technical experts, would be as independent as now.
In the longer term, the new role of the Bank of England would be to actually control, not monitor, the amount of money and debt in the economy. The new money would be debt free money, that is, not interest bearing.
The new debt-free money would be available to government to decide how to use it: it could be channelled into more productive sectors, such as house building (as opposed to house purchase), technical innovation, productivity, training, etc, or given to the poorest amongst us or, given equally to all citizens, driving the economy. That choice becomes a political question.
There are strong parallels here with Jeremy Corbyn’s People’s Quantitative Easing… but this has not been mentioned recently by the Labour leadership.
Positive Money also suggests a practical and proportionate experiment: create £10B of QE for direct investment in infrastructure, and see the benefits. There is little risk of resulting inflation in the current economic circumstances.
To return to the main point: - What are the benefits of the Bank of England taking control of the money supply?
(1) Financial stability: it should remove extreme booms and busts. The economy will not be pumped up by banks trying to maximise bonuses.
(2) The shape of the economy will be determined by an elected government, not by out of control, “too big to fail”, banks. The focus can be a productive economy, not rising house prices.
This analysis is not crazy left wing stuff: it is supported by the Chief Economics Correspondent of the Financial Times, Martin Wolff, and the former Chair of the Financial Services Authority, and one-time candidate as the Governor of the Bank of England, Lord Adair Turner.
The Bank of England has acknowledged that private banks create the majority of money electronically, “out of thin air”, in a technical paper in 2014.
And there is cross-party interest: in late 2014 there was a Parliamentary debate into the issue co-sponsored by Steven Baker (Conservative), the late lamented Michael Meacher MP (Labour), Caroline Lucas MP (Green), and Douglas Carswell MP (UKIP).
As to People’s QE, prominent supporters not part of the Labour Party or the Economic Advisory Committee include
Professor Paul Krugman, Nobel prize winner for Economics
Yanis Varoufakis, former Greek Finance Minister
Journalists Simon Jenkins and Robert Peston.
Perhaps now is the time for some radical thinking.
BUT: It will be difficult to conduct a credible debate on the economy when the Labour Party is not trusted with it. So, we have to tackle some of the baseless slanders that have come our way.
The Labour Party needs to re-establish its reputation; and pose the question “why should the Tories be trusted with the economy?” To do that, I think we need to look at:
3 Tory Economic Fallacies There are a lot of them, I have confined myself to two:
(1) “Labour crashed the economy” It is not true that Labour ran an irresponsible government that overspent.
If one looks at the key measure, government deficits, they are historically quite normal. Repayments are absorbed by growing economies and the impact of inflation:
Tory governments 1979-96: average £30B pa Labour governments 1997-2007: average £15B pa
If one looks at the key measure, the public debt/GDP ratio:
1997 Labour inherited debt/GDP ratio of 42% from the Tories; by 2007, Labour had reduced it, not increased it, to 36%
Ratio leapt in 2008 because the government bailed out the banks and the economy shrank in the recession.
Even by the 2010 election, UK debt/GDP stood at 80%, below the ratio of “prudent” Germany (83%), and other leading European countries, such as France.
So, it is not true to say that Labour crashed the economy due to irresponsible spending. Labour’s record is considerably better than the Tories, and compares well internationally.
(2).Tory “Long Term Economic Plan” Where is it? It does not exist. There is no such document.
If you consult the Conservative Party website, you will see the “Long Term Economic Plan” as a headline over the usual Tory policies to cut the deficit by slashing public spending, to cut taxes, and to reduce immigration. It is just the usual Tory prejudice dressed up as policy.
The Conservatives say they have a plan. But what actually happened?
The Tories have presided over the slowest recovery from recession in the UK historical record.
By 2015, GDP had increased marginally since 2008 – but this was due to increases in population, not increases in productivity. In terms of productivity, the UK is 20% below the G7 average. Britain spends less on investment than any other G7 economy, 15% of GDP, down significantly from 2008.
Despite George Osborne’s talk of the “March of the Makers”, UK manufacturing has declined at the fastest pace of any of the G7 nations, to 10% of GDP now, the lowest amongst G7 nations. The figure for Germany is 22%.
The balance of trade deficit reached an historic high of 6% of GDP in 2015, a reflection of the decline of British manufacturing which accounts for a half of our exports.
The role of financial services is over-hyped, which is very helpful to some of the Tories’ biggest donors. It is worth remembering that Jeremy Corbyn refers to the Conservative Party as “the political wing of the hedge fund industry”. Financial services make up 7% of the economy.
Most people taking jobs since 2010 moved into lower pay jobs. The number taking work that pays less than £20,000 increased by 1.5M by the end of 2014. The number taking jobs paying more than £20,000 decreased by 800,000.
The Tories presided over 5 years of falling real wages until rescued by falling oil prices and a supermarket price war that cut inflation in 2015. Even then, the measure used to measure inflation, and so real wages, was the Consumer Price Index, not the Retail Price Index, so excluding housing costs. In London, this is particularly misleading.
So, if this was the outcome of Tory policy, you have to ask,
“Was this the Tory Long Term Economic Plan?”
Indeed, “Are the Tories crashing the economy through their ideology and incompetence?”
4. Suggested Action Points:
Woodford Green and Chingford CLP should join in the Labour Party consultation on economic policy when we can. With regard to Positive Money:
There is an open invitation to attend Positive Money meetings in Walthamstow.
We could invite Positive Money formerly to speak at the CLP.
Please consult the website: there are many worthwhile videos.
We could build local linkages with organisations and groups with similar concerns to our own through joint events and speakers, so building a consensus around an anti-austerity programme. Examples would be the:
Equality Trust that focuses on lessons from “The Spirit Level” by Wilkinson and Pickett, looking at the pernicious effects of inequality, nationally and internationally.
Jubilee Debt Campaign that focuses on the pernicious effects of debt, nationally and internationally
Or we could continue our discussions on Tory Economic Fallacies, such as:
Running the National Economy Like a Household Economy, so ruling out a range of policy tools available to government.
Prioritising benefit scroungers over tax dodgers, despite tax evasion and avoidance accounting for a much greater loss to the Exchequer.
Promoting the “National Living Wage” which is unrelated to the “living wage” defined by the experts in the field, the Living Wage Foundation.
The obsession with reducing public debt whilst ignoring potential investment in the real economy at a time when funding is available at historically low rates of interest.
The primacy of deficit reduction in policy making.
Measuring the wrong things, such as:
GDP, rather than GDP/person or personal well-being
Inflation, rather than debt or money supply. Monitoring inflation did not forewarn us of the global crash or the national recession.
The Consumer Price Index, rather than Retail Price Index, as the measure of inflation and real wages. So we ignore housing costs, the single largest item in most households’ expenditure.
This is an important discussion. New evidence and confidence in making the economic argument strengthens our hand in the “long conversation” we are all part of in the run-up to the next General Election.