Labour Assembly Against Austerity Conference - Saturday 14 November

LABOUR ASSEMBLY AGAINST AUSTERITY CONFERENCE
10am - 5pm Saturday 14 November
Institute of Education, 20 Bedford Way London WC1H 0AL
Tickets here: bit.ly/labourassembly14nov

Speakers:
• John McDonnell MP, Shadow Chancellor

Plus
• 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

Tickets: bit.ly/labourassembly14nov
Facebook: https://www.facebook.com/events/956190447774293/
Twitter: https://twitter.com/labourassembly
Website: http://labourassemblyagainstausterity.org.uk/



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.

Tories have no answer for slowdown. Corbynomics does.

By Michael Burke
The British economy is slowing down. In the 3rd quarter of 2015 the economy had expanded by just 2.3% from the same period in 2014. This measure removes the volatility of erratic quarter to quarter movements in GDP.

The most rapid pace of growth in this recovery has been the 3.1% recorded in the 2nd quarter of 2014, which mainly reflected government efforts to stoke consumption (particularly in housing) in the run-up to the election. Since that time the growth rate has progressively slowed. This is shown in Fig.1 below. Despite the severity of the recession, at no point has the growth rate matched the higher levels seen before 2008 to 2009.

Fig.1 UK GDP- Growth is slowing

The slowdown does not mean that a recession is imminent, although this business cycle will come to an end at some point and the global economy is also experiencing some difficulties. The more immediate danger is the effect of government policy and the renewed imposition of austerity policies.

As SEB has previously shown, Austerity Mark II announced in the July 2015 Budget is exactly the same as Austerity Mark I announced in June 2010, a fiscal tightening of £37 billion in both cases. The real effect will be somewhat less this time as the economy has expanded moderately in the interim. Even so, the effect of the first round of austerity was to slow the economic growth rate from a little over 2% year-on-year to 1%. A similar outcome should be expected this time around.

Examining the slowdown

This weakening outlook is the increasing subject of commentary. An article in the Guardian by David Graeber has received a lot of attention. He is a committed opponent of austerity, and all disagreements should always be read in that context. In ‘Britain is heading for another crash: here’s why’ he correctly castigates George Osborne’s economic fallacies, but then supplies a few of his own. As these appear to be widely shared by other progressive economists and opponents of austerity, they are worth debunking.

Graeber argues that any government surplus must entail a private sector deficit. As he correctly states, this is simply an accounting identity and must be true; every borrower requires a saver and vice versa. He goes on to say that the determination to run public sector surpluses is necessarily negative, as it forces the private sector to borrow. He further states that this debt is forced on to those least able to pay it and that this causes recessions, which is often the case.

But in this key passage (using the chart he supplies) he adds, “But if you push all the debt on to those least able to pay, something does eventually have to give. There were three times in recent decades when the government ran a surplus:



Note how each surplus is followed, within a certain number of years, by an equal and opposite recession.”

Note the reason why the surpluses of the private sector do not cause recessions is never explained, nor why we might be entering another recession even though there are still large government deficits.

There are in fact four separate episodes of fiscal surpluses in Britain shown in the chart. Examining them debunks the fallacy that government surpluses cause recessions. The chart used shows the largest surplus of all on the overall fiscal balance in 1948. There was no recession at all until 1974! At the end of the 1960s there was modest surplus, followed by 5 years of continuous growth, and the largest-ever growth rate recorded in a single year, 6.5% real GDP in 1973. The small surplus in 2000 was a result of New Labour sticking to extreme Tory spending plans in the first two years after election in 1997, which was subsequently relaxed. Reasonably strong growth (in British terms) followed and the subsequent crash 8 years later had nothing to do with that surplus. The surplus in the late 1980s was a function of the glut of North Sea oil. This should in fact have been larger, had Government saved this windfall for future investment, as Norway did. Instead, along with Government borrowing it was used to stoke a consumption surge, the ‘Lawson Boom’. The subsequent recession occurred when boom turned to bust. The surplus did not cause the recession – borrowing for consumption while also floating in oil revenues caused an unsustainable boom that inevitably failed.

This argument for permanent fiscal deficits makes no distinction at all between borrowing for investment and borrowing for consumption. The long-run history of the British economy and its decline is in part characterised by the rising rate of Government consumption coupled with a falling rate of Government net investment.

Fig.3 below shows that the strongest rate of growth of GDP in the 1960s was associated with the lowest levels of Government current spending, and vice versa. The higher rates of Government consumption are associated with the slowest levels of growth. The long-term trends are also clear; rising Government spending and declining rates of GDP growth.

Fig.3 UK Public Sector Current Spending Rises As GDP Growth Declines

By contrast, high or rising rates of public sector net investment are associated with high or rising rates of GDP growth (again, in British, not global terms). This is shown in Fig.4 below with public sector net investment as a proportion of GDP alongside the rate of growth of GDP.

Fig.4 UK Public Sector Net Investment, % GDP & GDP Growth

 

Here, although the GDP data is erratic the relationship clearly trends in the opposite direction; as net investment declines so does the GDP growth rate, and vice versa.

In fact there is a significant negative correlation between public sector current spending and GDP growth of -0.41326. By contrast, there is a very small positive correlation between public sector net investment and GDP growth of 0.1281, which rises to 0.21235 if GDP growth is lagged for 3 years (possibly to account for the economic effects of large projects). But in an economy like Britain’s, public sector net investment is usually too small to determine the overall rate of economic growth.

Fig.5 below shows the rate of GDP growth alongside the proportion of total investment (Gross Fixed Capital Formation) in GDP from both the public and private sectors. Even a cursory glance shows the strength of this relationship and the correlation is 0.7721. It is investment which is the primary driver of growth.

Fig. 5 GDP Growth & GFCF as a Proportion of GDP

 

The proportion of GDP devoted to investment (GFCF) is the main determinant of the growth of GDP. But currently the level of public sector net investment is too small to affect the outcome of GDP. At the same time, the level of private sector investment is too weak to support a more robust economic recovery. What can be done?

‘Crowding out’ and Corbynomics

One of the greatest fallacies in modern economics is the notion of ‘crowding out’. This is the assertion that if a level of public sector investment or borrowing is too high then this will prevent the private sector from investing. It particularly came into vogue during the era of privatisations under Reagan and Thatcher and is inscribed in most Western econometric models.

It is a nonsense because it assumes a fixed or steady state economy. But if either the public or the private sector invests in the productive economy, there will be economic growth and so increased funds available for investment.

Over many decades the Western economies have provided ample evidence that the notion of ‘crowding out’ has little basis in fact. Fig. 6 below shows that over the medium-term UK public sector net investment as a proportion of GDP has been cut. In common with most Western economies, the total level of investment as a proportion of GDP has not risen but has actually fallen, although the British case is one of the more extreme examples of both.

Fig.6 GFCF as a proportion of GDP & Public sector net investment as a proportion of GDP

It is clear from the chart that public sector net investment leads investment overall. There is a lagged effect, so that the strongest effect of rising public investment on total investment is registered 5 years later. On this basis the correlation between the two variables rises to 0.6820. Far from public sector investment ‘crowding out’ private sector investment, high and/or rising public sector investment ‘crowds’ it in.

This in turn is a significant part of the answer to the question posed earlier, what is to be done if investment is the main determinant of economic growth, yet public sector net investment is currently too small to effect the outcome of GDP as a whole?

The austerity policy is in part a failed answer to this question. It assumes that if wages and taxes on business are pushed down, businesses will increase the proportion of their profits assigned to investment. This has not occurred.

By contrast, Corbynomics has a very different answer. As high or rising public sector investment crowds in private sector investment, the policy response should be to raise the level of public sector investment in order to raise the total level of investment in the economy. The purpose is to raise the sustainable growth rate of the economy and so improve living standards.

If there are future crises of private sector investment, it may be necessary to raise the level of public sector investment once more. But the answer to the current crisis is to increase public sector net investment to a level where total investment is sufficient to sustain much higher, more sustainable growth.

Currently, the level of investment as a proportion of GDP is 20.6% in the OECD as a whole. In Britain it is 16.9%. An immediate objective should be to raise British levels of investment towards that average, so that competitiveness is not further eroded and living standards do not fall further behind. That is the first step towards addressing the current crisis. Future steps will be discussed in subsequent pieces.
 

Lessons from Ireland for the debate on investment and consumption

The debate on what spurs economic growth and therefore what policy tools to use is not unique to Britain. As the world economy slows, variations on this debate are taking place in many countries.

A piece on the Irish blog ‘UNITE’s Notes on the Front’ deals with this question from the specific perspective of the current Irish economic and political situation and is written by Michael Burke.

The context is that the general election to the Irish Dáil is less than 12 months away. The current government is a coalition led by the right wing Fine Gael and the Labour Party and has been pursuing austerity policies. But now that an election is in the offing the Coalition has shifted towards boosting consumption in order to get re-elected (much like the coalition government in Britain after 2012). This was the content of the recently announced Budget for 2016.

However, a wide array of forces opposes this agenda. Sinn Féin, some other elected representatives, many in the trade unions and social justice campaigners all argue (with differing emphases) that investment should take precedence. Boosting consumption should be a secondary priority and this should mainly be done by boosting the incomes of the poor and lower paid workers at the expense of the rich and the very highly paid.

There are sound theoretical reasons for this order of priorities, which have been demonstrated by SEB. Moreover, the recent history of the US, which is the Western economic model shows that, as consumption rises as a proportion of GDP economic growth slows and so does the growth rate of consumption. An examination of recent Irish economic history exhibits the same pattern. This is, a high or rising proportion of the economy devoted to investment leads to higher growth, including the growth rate of consumption. A low or falling proportion of investment leads to slower growth, including the growth rate of consumption.

The full piece can be read here.

Corbynomics: winning with policy clarity

By Michael Burke

Economic policy is central to the survival and eventual victory of the new Labour leadership, even though it is clearly not the only issue. Contrary to the usual Tory media reports, Jeremy Corbyn and his Shadow Chancellor John McDonnell registered an advance with the debate and vote on Osborne’s risible Fiscal Responsibility Charter. That advance came because the correct position of voting against was adopted. As this question will not go away, further advances will require even greater clarity.

The measure of the advance can be summed up in its political aspect with an analysis of the vote. Just 20 Labour MPs rebelled against Labour’s line by abstaining on the Charter. It may be recalled that of the 35 nominations Jeremy Corbyn received from MPs in the leadership contest, only about half of them actually supported him. During that campaign the vast majority of MPs followed the line of abstaining on the Tories massive cuts in the Welfare Bill. Now the overwhelming bulk of the Parliamentary Labour Party has voted against the key Tory legislation of permanently enshrining austerity and ruling out borrowing for investment. This is despite the fact that as recently as May the party’s economic line was ‘fiscal rectitude’, ‘zero-based spending reviews’ and sticking to outlandish Tory spending cuts in the first two years of the Parliament (something the Tories could not do in their own June 2015 Budget).

Politically, the 20 abstainers have isolated themselves within the party (although they will no doubt find regular berths in the BBC studios and lots of column inches in the Murdoch press). Jeremy Corbyn and John McDonnell have led the PLP to a much better economic position by opposing Tory economic policies. As the Tories are committed to austerity and this will be central to the economic debate over the next five years, that leadership will need to keep moving forward.

Exposing Osborne’s fallacies

Labour lost the last election because its economic policies were not credible. There is a concerted effort to distort this factual finding to suggest that Labour was too anti-austerity. Therefore the debate on economic policy is central both to the future direction of Labour policy and its election prospects.

Osborne’s great fallacies, like most distortions of the truth, have some connection to popular understanding otherwise it would be impossible to explain their political power. A central fallacy is to treat all debt as essentially the same, with equally negative consequences. Instead, as Socialist Economic Bulletin (SEB) has repeatedly shown John McDonnell and Jeremy Corbyn have made the correct distinction between borrowing for consumption and borrowing for investment.

In the homely analogies beloved by this Chancellor and by Margaret Thatcher, ordinary households understand very well the difference between different types of borrowing. Borrowing to buy a home, or borrowing to pay for night classes, or a new work-related computer all provide an asset or additional income and so are an investment. But borrowing to pay the electricity or grocery bills is not sustainable. It may ‘circulate more money in the economy’ but can only be done in extremis and not in the long-term.

Likewise, businesses understand cashflow. Business makes an appraisal of investment opportunity on the basis of cost-benefit analysis. If a reasonable expected rate of return exceeds the cost of borrowing then the investment will be made. But if the business is borrowing to meet day to day expenses it will soon face insolvency and possibly bankruptcy.

Government relies on these economic agents for its income. But in truth it is not unique as all three agents, government, business and households rely on each other for their income both directly and indirectly. In that sense government is no different. Government borrowing for investment delivers an economic return, either direct or indirect, will expand the economy and, just like business a key criteria will be whether the rate of return on the investment exceeds the borrowing cost. Contrary to views Keynes did not hold, but which are misleadingly entitled ‘Keynesianism’, borrowing for day to day consumption will not necessarily expand the economy – this depends on whether extra production increases profit, and in a number of situations expansions of demand may not increase profit and may actually reduce it. Consumption should usually be met by current revenues from taxation. If there is a shortfall between desired government current spending and revenue, wasteful spending can be cut (e.g. Trident) and/or taxes can be increased.

SEB has repeatedly demonstrated that investment is the decisive input for growth and consumption cannot lead growth, and from this it follows that government borrowing should be used for investment over the business cycle (running deficits/borrowing for consumption as well as investment may of course be valuable in economic downturns)

Alliances

The clear opposition to the Fiscal Responsibility Charter from the ‘Corbyn/McDonnell’ team on the Labour front bench was supported by strong economic arguments from a number of quarters, not all of them long-standing allies.

In the Commons debate Caroline Lucas said, “The Chancellor is incredibly irresponsible to imply that borrowing is always bad. If we borrow to invest, we increase jobs, stabilise the economy and increase tax revenues. That is good for the economy, not bad for it…... If we are investing in jobs, that gets taxes going back into the Revenue, which is good for the economy.” And, “The Chancellor is deliberately misleading the public by continuing to claim that all borrowing is irresponsible. It is not. What is irresponsible is failing to borrow to invest, providing we are able to sustainably meet the cost of borrowing.”

Jonathan Reynolds, describing the Charter as intellectually moronic said, “It essentially commits this House to never borrowing to invest, even when the cost-benefit analysis of that investment is such that the country would benefit greatly. That is why it has not one serious economist backing it.”

Helen Goodman said, “One of the most pernicious things about the rule that the Chancellor has chosen is that it treats capital and current spending the same. He is ignoring the fact that investing in housing, science, broadband, transport and the university system is a way of strengthening economic productivity and increasing growth in the British economy. Nobody thinks that it is right to max out the credit card to pay the weekly grocery bill—of course not—but families up and down this country take out mortgages to buy their homes. There is a precise parallel here.”

Regarding what John McDonnell himself said, as much of the press will not report it accurately, here are some of his key points “The worst false economy is the failure to invest. This will be a direct result of Government policy embedded in this charter, with its limits on all public sector borrowing. This Chancellor’s strategy has given us investment as a share of GDP lower than all the other G7 countries, falling even further behind the G7 average in recent years. It is incomprehensible for the Chancellor to rule out the Government playing a role in building our future. For him to constrain himself from doing so in the future, no matter what the business case for a project, has no basis in economic theory or experience.”

And, “We will not tackle the deficit on the backs of middle and low earners, and especially not on the backs of the poorest in our society. We will tackle the deficit, but we will do it fairly and to a timescale that does not jeopardise sustainable growth in our economy. We will balance day-to-day spending and invest for future growth, so that the debt to GDP ratio falls, paying down our debts”.

“That is why we will establish a National Investment Bank to invest in innovation across the entire supply chain, from the infrastructure we need to the applied research and early stage financing of companies. To tackle the growing skills shortages we will prioritise education in schools and universities along with a clear strategy for construction, manufacturing, and engineering skills to build and maintain sustainable economic growth. The proceeds of that growth will reach all sections of our society.”

Outside the Chamber, Chi Onwurah had previously written a strong piece deriding Osbornomics’ refusal to invest, “The Osbornomic farmer wouldn’t borrow to buy a tractor unless crop prices were falling. The Osbornomic househunter would not take out a mortgage unless her salary was being cut. The Osbornomic CEO would only invest in a new product line when revenues were falling.”

Long-standing Corbyn/McDonnell ally Diane Abbott made a series of similar points on Twitter, “Osborne's Fiscal Responsibility Charter effectively outlaws the equivalent of taking out a mortgage…..Osborne's Fiscal Responsibility Charter is a con-trick from a charlatan. Outlawing borrowing for investment means long-term stagnation….Every household and firm knows that borrowing for investment boosts incomes. Only Osborne and the austerity fanatics are unaware of this.”

These analogies are extremely useful for popularising the alternative to austerity, which is investment. The new leadership team has shown it can command an overwhelming majority in PLP with clear opposition to Tory austerity. Developing a broader understanding of the distinction between borrowing for investment and borrowing for consumption, and why Labour should support the former will be key in pushing back the Tories in the period ahead.

Why borrowing for investment is correct – John McDonnell is right & Osborne is wrong

By John Ross

An earlier article ‘Why John McDonnell is correct to borrow for investment – an elementary economics lesson for Osborne’ analysed in the ‘family’ and ‘common sense’ vocabulary Osborne likes to present the distinction between state borrowing for investment and state borrowing for current expenditure – a key economic distinction Osborne’s Fiscal Charter deliberately tries to obscure. It also showed how sections of the media deliberately attempt to aid Osborne in this by talking of budget ‘deficits’ and ‘borrowing’ without distinguishing between borrowing for investment and borrowing for consumption.

The following article, an excerpt from a longer analysis of Western responses to the Great Recession, analyses the issue in more formal economic terms. It shows that John McDonnell is very far from being an ‘extremist radical’ in supporting state borrowing for investment. Among those holding the same logical position are fellow 'extremists' Ben Bernanke. Larry Summer and Martin Wolf!

* * *

An answer that may be immediately rejected in explaining the failure of response to the Great Recession, and the ‘new mediocre’ slow economic growth following it, was that no Western expert understood the situation. To the contrary, eminent Western economic figures well understood that the problem in the US and other Western economies was that the mechanism translating company income into investment was not functioning adequately, and that the solution was for the state to step in and invest these funds - as in Roosevelt’s 1930s response to the Great Depression. Merely a representative few of those arguing for this response will therefore be quoted - to show the accurate, indeed comprehensive, character of their analyses.

Ben Bernanke, almost immediately he could speak openly after ceasing to be Chair of the US Federal Reserve, called for:

‘a well-structured program of public infrastructure development, which would support growth in the near term by creating jobs and in the longer term by making our economy more productive.’¹

Lawrence Summers, former US Treasury Secretary, argued:

‘We may… be in a period of ‘secular stagnation’ in which sluggish growth and output, and employment levels well below potential, might coincide for some time to come with problematically low real interest rates…

‘The… approach… that holds most promise – is a commitment to raising the level of demand at any given level of interest rates… This means ending the disastrous trend towards ever less government spending and employment each year – and taking advantage of the current period of economic slack to renew and build up our infrastructure. If the government had invested more over the past five years, our debt burden relative to our incomes would be lower: allowing slackening in the economy has hurt its potential in the long run.’²

Martin Wolf, chief economics commentator of the Financial Times, and one of the world’s most influential economic journalists, argued:

'In brief, the world economy has been generating more savings than businesses wish to use, even at very low interest rates. This is true not just in the US, but also in most significant high-income economies.

‘The glut of savings, then, has become a constraint on current demand. But since it is connected to weak investment, it also implies slow growth of prospective supply…

‘So what is to be done? One response to an excess of desired savings over investment would be even more negative real rates of interest. That is why some economists have argued for higher inflation. But that would be hard to achieve, even if it were politically acceptable….

‘Yet another possibility… supported by many economists (including myself), is to use today’s glut of savings to finance a surge in public investment.

‘The best response… is measures aimed at raising productive private and public investment. Yes, mistakes will be made. But it will be better to risk mistakes than accept the costs of an impoverished future.’³

Wolf analysed this situation in the UK, which faced the same problem as the US, citing similar views by other influential commentators:

‘With real interest rates close to zero… it is impossible to believe that the government cannot find investments to make itself, or investments it can make with the private sector, or private investments whose tail risks it can insure that do not earn more than the real cost of funds. If that were not true, the UK would be finished. Not only the economy, but the government itself is virtually certain to be better off if it undertook such investments and if it were to do its accounting in a rational way…

‘This does not even deserve the label primitive. It is simply ridiculous.’

Wolf clearly pointed to the consequences:

‘The results… are not at all ridiculous. They are extremely costly to both the economy and society. Yet, instead of taking advantage of the opportunity of a lifetime to repair and upgrade the capital stock, as Mr Portes [of the UK National Institute for Economic and Social Research] notes: “Public sector net investment – spending on building roads, schools and hospitals – has been cut by about half over the past three years, and will be cut even further over the next two.”’

Wolf concluded, endorsing such analysis:

‘He [Portes] recommends a £30bn investment programme (about 2 per cent of GDP). I would go for far more. Note that the impact on the government’s debt stock would be trivial even if it brought no longer-term gains…

‘the government… is refusing to take advantage of the borrowing opportunities of a lifetime…. It is determined to persist with its course, regardless of the unexpectedly adverse changes in the external environment. The result is likely to be a permanent reduction in the output of the UK.’ ⁴

Richard Yamarone, of Bloomberg Economics Brief, caustically noted:

‘Instead of adopting an economic solution such as matching idled and unemployed agents (millions of manufacturing and construction workers) with necessary improvements to the electrical grid, dilapidated highways, high-speed trains, outdated bridges, tunnels, ports, and water pipes, America received the political response of extended unemployment benefits and a whopping food stamp programme – safety nets for those who have fallen, not ‘stimulative’ measures.

‘Unlike during the Great Depression, which left a dazzling infrastructure legacy including a swath of bridges, tunnels, highways, art, dams and power generation, the only remnant from the 2007-09 depression is an underemployed labour force, earning a fraction of previous incomes, diminished skill sets and little or no promise for recent college graduates.’⁵

References

1. Bernanke, B. (2015, April 30). WSJ Editorial Page Watch: The Slow-Growth Fed? Retrieved May 2, 2015, from Brookings: http://www.brookings.edu/blogs/ben-bernanke/posts/2015/04/30-wsj-editorial-slow-growth-fed?cid=00900015020089101US0001-05011

2. Summers, L. (2014, January 5). Washington must not settle for secular stagnation. Financial Times.

3. Wolf, M. (2013a, November 19). Why the future looks sluggish. Financial Times.

4. Wolf, M. (2012, May 17). Cameron is consigning the UK to stagnation. Financial Times.

5. Yamarone, R. (2014, January 8). Summers’ remedy is years out of date. Financial Times.