Monday, 30 November 2015

Corbyn’s election: Rational economics starts here

The following piece was originally a presentation to the recent conference of the Labour Assembly Against Austerity. Prof. Chick is one of the foremost Keynesian economists in Britain. 

The argument below may surprise many who regard themselves as ‘Keynesians’ and yet who argue for persistent budget deficits and routinely borrowing to support consumption.

On the contrary, a key point of agreement between Marxists, genuine Keynesians and others, and one that is reflected in the editorial line of SEB, is that investment is decisive for economic growth and that the current crisis is caused by the weakness of investment.


By Victoria Chick

Since the election of Jeremy Corbyn as leader it has become acceptable in the Labour party to challenge the austerity doctrine (Corbyn The Economy in 2020). What a welcome change! Rational economics starts here.

I shall take it as read that everyone in this room holds the following truths to be self-evident:

(1) That austerity is counterproductive if its purpose is to reduce the public debt and 

(2) That its real purpose is to provide a smoke-screen behind which to shrink the state and reward the rich

There is another truth that is less obvious:

That government cannot determine the size of its deficit by its own actions. 

Austerity is not only unpleasant politics; it is bad economics. We need to explain and communicate this fact to the electorate -to demonstrate that we are not the ones who are economically illiterate!

The economics of austerity is based on an inappropriate generalisation from the individual’s budget to the government’s budget. Mr Micawber can control his deficit, but only because he is a small cog in a great machine. Government is a big component of the machine, and other parts react to what it does. Those reactions influence national income, the level of unemployment (and hence benefits) and tax revenue. A cut in expenditure will reduce income by more than the original change in government expenditure (the multiplier, working negatively).

Second, there is the ‘three balances’ identity: (G-T) + (I-S) = M-X
[where G is total Government spending, T is Government revenues, I is investment, S is savings, M is imports and X is exports].

The private sector is just about in balance; the fiscal deficit is almost the mirror image of the international current account deficit. The fiscal deficit cannot be eliminated (should you want to) without eliminating also the international deficit, which almost no-one is talking about (John Mills is an exception).

Alternatives to austerity 

If you really want to eliminate the deficit, the positive response of the economy to government action, the multiplier in the positive direction, needs to be enlisted. In a recent blog, the TUC’s senior economist, Geoff Tily, recalled that Keynes, who was the first to exploit the potential of the multiplier, did not use the phrase ‘deficit spending’ which is so closely associated with his name but rather ‘loan expenditure’. Now since deficits have to be financed by borrowing you might not see any distinction, but the point is that wise, productive loan expenditure pays for itself over time and increases the productivity of the economy. Output and employment rise, the tax take rises, benefit costs fall and we have increased our productive and social capital. Loan expenditure reduces the deficit as the economy recovers. The point is rhetorical, but it is good rhetoric that we need.

Keynes on the budget

Let us look more closely at Keynes’s view of budgetary policy, for it is usually much mis-represented and current discussion of the budget in normal times is still somewhat confused. He distinguished between the ‘ordinary budget’ or current account, and the capital budget or spending ‘below the line’ – a distinction we make today.. The latter was to be used to compensate for failings in private-sector investment. 

‘...periods of deficiency (sic) expenditure should be made the occasion of capital development until our economy is much more saturated with capital goods than it is at present.’ (J M Keynes, Collected Writings vol XXVII p 320)

This would by itself make the economy more stable:

‘...if the bulk of investment is under public or semi-public control and we go in for a stable long-term programme, serious fluctuations are enormously less likely to occur.’ Ibid. p 326

By contrast the aim should be for the current budget normally to run a surplus,  

‘which should be transferred to the capital Budget, thus gradually replacing dead-weight debt with productive or semi-productive debt...’ ibid. p 277

‘I should not aim at attempting to compensate cyclical fluctuations by means of the ordinary Budget. I should leave this to the capital Budget.’ Ibid p 278

The two budgets serve different purposes:

‘[T]he capital budgeting is a method of maintaining equilibrium; the deficit budgeting is a means to attempt to cure disequilibrium if and when it occurs.’ Ibid, pp 352-3

And capital expenditure ‘has nothing whatever to do with deficit financing’ ibid. p 352 

In other words, deficit financing is for emergencies only – emergencies like the depth of a depression. That lesson was learned and applied after the financial crisis. There is no need to follow the financial crisis with a self-inflicted fiscal crisis. The economy is currently far from peachy but it is not in dire straits. Let us not plunge it into further recession by austerity. Worse, this and the previous government have gone about things in precisely the wrong way, cutting investment rather than current expenditure. Let us instead keep calm and debate where the capital budget should be directed. Intelligent capital spending is more likely to reduce the deficit than austerity.

What kind of capital spending?

As anyone who has read Michael Meacher’s last book knows, there is no shortage of useful things to do. Everyone will have his or her priorities here; but there are some very obvious candidates: green infrastructure, housing. In general, real investment, including investment in those things whose return is hard to measure (education, health, even some infrastructure), and even in things that yield little or no financial return. On this latter point, there is a tremendous PR job to be done, for the mindset is as wrong-headed today as it was in Keynes’s time. He wrote:

‘The nineteenth century carried to extravagant lengths the criterion of what one can call for short "the financial results," as a test of the advisability of any course of action sponsored by private or by collective action. The whole conduct of life was made into a sort of parody of an accountant's nightmare. … I spend my time … in trying to persuade my countrymen that the nation as a whole will assuredly be richer if unemployed men and machines are used to build much needed houses than if they are supported in idleness. … 

The same rule of self-destructive financial calculation governs every walk of life. We destroy the beauty of the countryside because the unappropriated splendours of nature have no economic value. We are capable of shutting off the sun and the stars because they do not pay a dividend.’ ‘National self-sufficiency’, The Yale Review, Vol. 22, no. 4 (June 1933), pp. 755-769_

We must face down that dreadful sneer, that government is no good at ‘picking winners’. Is the private sector so good at ‘picking winners’? The banks, for example? Private investment now has virtually dried up, in favour of at best unproductive and at worst pernicious financial speculation. The incentives for private share-holder-owned companies in any case favour far too short a time horizon. As Mariana Mazzucato argues, government’s role is to create and foster markets, not just to rectify their malfunction. That means a courageous state must not flinch; it must be prepared to ‘pick’ what in its best judgement will be winners but knowing that some will be losers – to use the power of its budget to change the direction of our economy to deal with the pressing problems that we face. The private sector will not do that. It wants to return to business as usual. Business as usual is not an option.

Wednesday, 25 November 2015

Alternative Autumn Statements: Continued Tory Failure Versus Corbynomics

By Michael Burke
Having spectacularly failed in his stated goal of eliminating the deficit in the last parliament, George Osborne is repeating his experiment in this one. Both the June 2010 and 2015 Budgets proposed ‘fiscal tightening’ of £37 billion. In the first of these Budgets the main method was cuts in public spending. In the second it is the sole method.

In the latest Autumn Statement this now falls to £36 billion and takes place more slowly after the U-turn on implementing cuts to working tax credits. These are now effectively scheduled to take place more slowly under the guise of ‘reform’ to the Universal Credit system.

The effect of renewed austerity is reasonably predictable. The economy has not grown significantly in the last 5 years. As nominal GDP is approximately 16% higher, so the impact of almost exactly the same nominal cuts will be very similar as from 2010 onwards. Likewise, the starting-point for growth is about the same. In the 3rd quarter of 2010, ahead of that Comprehensive Spending Review the GDP growth rate was 2% and on an upward trajectory from the depth of the recession. In the recent preliminary estimate the growth rate in the 3rd quarter of this year was 2.3% and slowing from 3% following the election boost to the economy, as shown in Fig.1.
Fig.1 GDP Growth Since the Recession
The effect of the first round of austerity was to slow the economy to a crawl. Living standards fell and the deficit actually began to rise. GDP growth was 1% in both the 2nd and 4th quarters of 2012 and only lifted above that by the boost from the London Olympics. The economy is set to slow again in 2016 under the impact of austerity and based on past experience may slow towards 1% growth in 2017.

Policy Options
At the time of the March 2015 Budget there were blood-curdling forecasts of the decline of public spending to lower levels than the 1930s. This was entirely a political manoeuvre, a trap designed to get Labour to support unfeasible spending plans and so have nothing positive to offer in the election campaign, which Ed Balls duly jumped into.

In fact, it is the content of government current spending which matters far more than its proportion of GDP. Government spending on education, on health, on childcare and other public goods improves the living standards of the population. An increase in social security payments because of rising joblessness or in-work poverty is necessary but can only partially alleviate falling living standards. There is a world of a difference between current spending that falls because well-paid jobs are being created on a large scale, or falls because the NHS is being cut.

The medium-term history of the British economy is stable or rising Government current spending as a proportion of GDP, as shown in Fig.2. It is the composition of this spending which has adversely altered. To take just one well-known example, the public sector has almost given up on house-building but incurs £25 billion annually in housing benefit payments, which are paid to landlords – enough to build over 160,000 affordable homes. This reflects both slower growth and rising inequality.

Fig.2 Government Current Spending (lhs) & Net Investment (rhs) as a Proportion of GDP

The focus for cuts over the longer run has actually been to public sector net investment. This has been renewed by Osborne. The Blair/Brown government slashed public sector net investment to an all-time low (to meet other, extremely damaging Tory spending plans in 1997 to 2000). But Brown increased public sector net investment to 3.2% of GDP in response to the slump in 2008 and 2009 and this was responsible for the recovery. Osborne has effectively halved this rate of investment.

SEB has previously shown that the private sector followed suit in both cases; increasing or decreasing its own investment rate in response to the rise or fall in public sector investment, with a time lag of 6 months. This is a practical demonstration of what is meant by the phrase state-led investment.

These very different trends in the components of government spending reveal the truth behind the Tory rhetoric of ‘deficit-reduction’, ‘living within our means’ and ‘shrinking the state’. Successive governments, of which this is just the most brutal, have not reduced total current spending as a proportion of GDP and have been content to borrow to fund that spending. They have simply changed its content. Landlords and others, after all, are part of the class of capitalists in whose interests economic policy is formulated.

State spending has not shrunk, but state investment has been savaged. The trend is towards minimal or even zero net public investment. This is because investment creates the means of production. If the public sector invests it owns those means of production. They are not owned by business. To the extent that the state owns the means of production it can direct the level of investment in the economy and its overall trajectory. Private business cannot directly make profits from the means of production it does not own, which explains the contrary drive towards privatisation.

Corbyn & McDonnell are right

The response of the Labour leadership is therefore correct. Prior to Comprehensive Spending Review Shadow Chancellor John McDonnell said his approach could be summed up as “investment, investment, investment”. Firm opposition from the Labour leadership to cuts in working tax credits produced Osborne’s U-turn.

Investment (Gross Fixed Capital Formation) has been in a long-term downtrend in the British economy. It was also specifically responsible for both the recession and for the weakness of the recovery. The long-term investment downtrend is shown in Fig. 3 below, which shows both total investment and Government investment as a proportion of GDP.

Fig.3 Total Investment and Government Investment as proportion of GDP
The startling fact revealed by this chart is that it is the slump in Government investment which is primarily responsible for the decline in aggregate investment. Over the entire period the peak to trough decline in total investment has been 26% of GDP to 15% in the recession. The decline in the Government component of that is 7.5% to 0.5%. It is the cut to Government investment which is driving the long-term decline in British investment, responsible for 7% of a total decline of 11%.

As the chart also shows, the decline in investment in the current cycle began in 2006, long before either the financial crisis or the recession itself- and was led by a private sector decline. The rate of investment is decisive for the trajectory of the economy as a whole.

The policy focus must not be on investment in general, with exhortations or bribes to the private sector to invest. This has been tried by Osborne and failed. It must be direct investment by the public sector itself, in housing, transport, infrastructure, renewable energy and education. The private sector will follow.

This is why the proposed Public Investment Bank is so important, supported by measures such as PQE and changes to the tax system to penalise unearnt income such as shareholder dividends while promoting investment. The Public Investment Bank can mop up the idle cash of the large corporations, and direct it for productive investment. Crucially, it also allows the public sector to reap the benefits of that investment, so that it acquires a larger and enduring weight in the economy able to sustainably increase investment over the long-term.

Thursday, 12 November 2015

Debating Corbynomics

By Michael Burke
The Labour Assembly Against Austerity conference in London takes place this Saturday, November 14. The author is pleased to be able to share a platform with Ann Pettifor a direct of PRIME and author of ‘Just Money’ as well as Professor Victoria Chick whose major works include ‘The Theory of Monetary Policy’ and ‘Macroeconomics After Keynes’. 

All the panellists (and probably the audience) are opposed to austerity, and the debate is within that context. The opponents of austerity all want an alternative to this policy and to raise living standards. The debate turns on how this can be done. 

As SEB has previously shown there are only two uses of output; either investment or consumption. A sustained increase in living standards requires an increase in output. Increased consumption is a consequence of increased output. The question then becomes, can living standards be increased by increasing the rate of consumption, or is it necessary to increase the rate of investment?

The answer to this question provides the fundamental basis of economic policy, and not simply fiscal policy. If Consumption ‘C’ is the fundamental driver of growth over the medium-term then all available economic levers should be used in order promote it, monetary, fiscal, regulatory and so on. The converse is true if Investment ‘I’ is the fundamental driver of growth.

The recent history of the British economy is instructive in resolving this question. After a bout of austerity followed by a pre-election boost to demand in the last parliament living standards effectively stagnated, measured as per capita GDP. As this measure is an average it disguises the transfer of income from poor to rich and from labour to business that the austerity policy entails. Most people are actually worse off than 5 years ago.

The chart below shows the key developments in the level of GDP and its composition in the period since the recession began in the 1st quarter of 2008 to the 2nd quarter of 2015. 

Fig.1 Change in GDP & Components Since Recession Began
The recovery has been exceptionally weak by historical standards. Even so, real GDP has increased by just under £100bn since the recession began in 2008, an increase of just 5.9% in more than 7 years! Consumption (including both household and government consumption) has risen by more than £80bn over the same period, an increase of 5.6%. By far the weakest component of GDP has been investment, which has risen by less than £5bn, or 1.6%. Given the time period, in statistical terms this is effectively zero growth of investment. (The residual, the difference between GDP and C and I combined of £15bn is accounted for by net exports, inventories and other items).

Osborne has not ‘rebalanced’ the economy, but has tilted further in the direction of consumption and away from investment. This matters because only investment (and education) can increase the means of production. Consumption cannot do that.

If it were true (in some sort of inversion of Say’s Law) that consumption creates its own investment, then we should have expected investment to rise at least in line with consumption over the ‘recovery’ period. But prior to the recession the ratios of GDP to consumption and investment were approximately 7:6:1. In the recovery period the ratios have been changed to 20:18:1. 

The rate of consumption has risen and the rate of investment has fallen. But the mass of the population is not better off. This is because investment is required to sustain growth, which is the basis for rising living standards.

It may be argued that the rise in consumption is insufficiently strong to spur an increase in investment, and that much stronger growth in consumption would produce more investment by reducing spare capacity. But there is no evidence for this assertion. As profit-maximisation is the goal for producers, it is just as likely in the current period that producers would meet capacity-straining increases in consumption with higher prices.

In fact the entire crisis is characterised by what Keynes dubbed ‘liquidity preference’ and Marx called the hoarding of capital. Firms are investing a low and declining proportion of their profits. More revenues from consumption and more profits are not leading to a revival of investment.

It is a false notion that it is possible to increase living standards over the long-run by prioritising the growth of consumption. The sustained growth of production requires the growth in the means of production, which requires investment. It is only in this way that that is possible to sustainably raise living standards.

Friday, 6 November 2015

Labour Assembly Against Austerity- key discussions for the left

By Michael Burke

The Labour Assembly Against Austerity meeting on November 14 is an excellent opportunity to discuss the key economic issues, promote the anti-austerity policies of the Labour leadership and debate the way forward. 

The Labour Party and the left in Britain generally has never before been in a situation where its leadership has been under such sustained and ferocious attack from its opponents. This is because Labour’s new leadership is also something entirely new. It espouses policies which run counter to the austerity offensive, which is the main project of big business and its political representatives. So bringing together all those who want to defend this leadership against right-wing attack, discussing the alternatives to austerity and debating the way forward is vital.

The keynote speaker is the Shadow Chancellor John McDonnell. Along with Jeremy Corbyn and their allies, he has pushed the Tories back on cuts to working tax credits, so much so that it would now be a surprise if at least some concessions were not made. But it should be clear that any gains made through amendments to Osborne’s plans and the Tories’ political difficulties arise because there has been such firm and clear opposition from Labour.

Even if there are certain tactical retreats, it is also clear that the Tories will be relentless in their pursuit of austerity policies. There is no significant section of big business opinion which does not support austerity. Therefore it will be increasingly important for the entire anti-austerity movement and the Labour Party to clarify its economic alternatives and to popularise them among the widest possible layers in society. The debates should be about how to defeat the Tories and their austerity policy, and what the sustainable alternatives should be. As such, the debates will need to be comradely ones aiming to maximise light while minimising heat.

In Britain and in many Western economies in the period since World War II there has been a bastardisation and then the almost complete marginalisation of advanced economic thought. The most important economists are reduced to fortune cookie phrases in the case of Adam Smith’s ‘invisible hand’, completely distorted with reference to Keynes’ ‘digging holes and filling them’ or ignored completely in the case of Marx. Building a movement that is capable of challenging and then defeating the Tory arguments will require a culture of debate and familiarity with these authors and more besides.

SEB has shown that growth is required to raise living standards and that growth itself is primarily determined by the rate of investment. It is because the rate of investment is so low in the British economy that there has been no growth in living standards since the crisis began. The economy has expanded by just £100bn from the 1st quarter of 2008 to the 2nd quarter of 2015, less than 6% in over 7 years. But of this growth £80bn has been the growth of consumption while just £4bn has been a rise in investment. We remain in an investment crisis.

The Labour Assembly Against Austerity meeting will offer the opportunity to hear from leading figures in the Labour Party, the trade unions, campaign organisations and the anti-austerity movement. A series of workshops will allow more detailed debate. Both of these are necessary if the movement as a whole is to continue its momentum and build a clear understanding of the alternative to austerity.

Labour Assembly Against Austerity
10am – 5pm Saturday 14th November

Institute of Education, London WC1H 0AL

Speakers include:
Shadow Chancellor John McDonnell MP
Diane Abbott MP
Lucy Anderson MEP
Michael Burke, Socialist Economic Bulletin
Victoria Chick, Emeritus Professor of Economics, University College London
Andrew Fisher, Left Economics Advisory Panel (LEAP)
Professor Özlem Onaran, Professor of Workforce and Economic Development Policy, University of Greenwich
Ann Pettifor, Director, Policy Research in Macroeconomics (PRIME).
Mark Serwotka, General Secretary, PCS
Steve Turner, Assistant General Secretary Unite
Dave Ward, General Secretary, CWU

Sessions will cover:
Labour's alternative to austerity
Free public services & decent wages
Tackling the housing crisis
Who should pay for the crisis?

Tickets £10/£7 at:

Wednesday, 4 November 2015

Labour Assembly Against Austerity Conference - Saturday 14 November

10am - 5pm Saturday 14 November
Institute of Education, 20 Bedford Way London WC1H 0AL
Tickets here:

• John McDonnell MP, Shadow Chancellor

• Diane Abbott MP
• Lucy Anderson MEP
• Shelly Asquith, Vice-President (Welfare,) National Union of Students
• Michael Burke, Socialist Economic Bulletin & Economists Against Austerity
• Victoria Chick, Emeritus professor of economics at University College London
• Katy Clark, Co-Chair, Labour Assembly Against Austerity
• Sabby Dhalu, Stand up to Racism
• Betsy Dillner, Director, Generation Rent
• Fiona Edwards, Student Assembly Against Austerity
• Siobhan Endean, Unite the Union
• Councillor Maryam Eslamdoust, Camden
• Andrew Fisher, Left Economics Advisory Panel (LEAP)
• Don Flynn, Migrants Rights Network
• Carol Hayton, Labour Party National Policy Forum
• Councillor Emine Ibrahim, Haringey
• Francesca Martinez comedian, writer and campaigner
• Andrew Murray, Stop the War Coalition & Unite the Union
• Councillor James Murray, Islington & Labour Party National Policy Forum
• Professor Özlem Onaran, Professor of Workforce and Economic Development Policy, University of Greenwich
• Ann Pettifor, Director, Policy Research in Macroeconomics (PRIME)
• Tim Roache, GMB Yorkshire & North Derbyshire
• Christine Shawcroft, Labour Party NEC
• Mark Serwotka, PCS General Secretary
• Steve Turner, Assistant General Secretary Unite & Co-Chair People's Assembly Against Austerity
• Dave Ward, CWU General Secretary
• Councillor Claudia Webbe, Islington
• Peter Willsman, Labour Party NEC & CLPD Secretary

Sessions on:
Labour's alternative to austerity
Corbynomics: raising growth and improving living standards
Free public services, decent wages and unions for all
Tackling the housing crisis – building council houses & controlling rents
Who should pay for the crisis? - tax justice not benefit cuts
Ending austerity, building the movement and winning for Labour
Oppose racist scapegoating – refugees and migrants are not to blame
Invest in people and the planet not war

£10 full price / £7 concessions


The Labour Assembly Against Austerity is a forum to discuss alternatives to austerity and the policies Labour needs to stimulate growth, jobs and rising living standards.