Corbynomics - Not a fantasy, a real solution

Why Corbyn's economic policies are not optimist or weak, but a true solution to our economic issues.

There's an interesting debate going on just now around the economics of the UK Labour Party, which has recently been titled "Corbynomics". And whilst I myself am not a Labour Party member, the general economic approach by left-wing parties (the SNP, Greens, Labour, Plaid Cymru) is one which I heavily support. I wanted to look at the history behind this economic theory, then explain how it could ultimately work in practice today. Because the sheer lies spread about Corbyn's economic policy have not met enough resistance.

In terms of actual economic theory, Corbynomics is heavily inspired by the classical idea titled 'Keynesian Economics', proposed by English economist John Maynard Keynes. Keynes himself has been described by The Economist as being "Britain's most famous 20th-century economist." and one of the most important people of the 20th century by Time magazine.

His economic theory was, in his time, rather radical. It proposed that in the short term, especially during times of economic recession, that economic output (goods and services) was actually heavily influenced by overall spending in the economy, encouraging government intervention. This was laid down in great analysis in his book 'The General Theory of Employment, Interest and Money' in 1936, during The Great Depression.

Whilst many Liberals and Conservatives may dismiss this as purely theory today, history tells a different tale. We must go back to the incredible election of 1945, when the Labour Party won a landslide victory under the leadership of Clement Attlee.

Labour had achieved 48% of the vote, winning a grand total of 393 seats (a majority of 146) despite most pundits predicting a Conservative victory. Labour's victory came massively in the hands of first time voters, due to many seeing Winston Churchill as a "man of war" rather than a future leader, although he would later be re-elected after Attlee himself.

Attlee's ultimate aim would be to follow the advice of the 1942 Beveridge Report, which aimed to to tackle the “Five Giants” of Want, Disease, Squalor, Ignorance and Idleness. To achieve this, Labour would follow Keynesian economics with incredible results. The National Health Service Act would offer universal health provision whilst the National Insurance Act would introduce a new idea of social security. Workers would contribute a sum of their salary every week to the UK Treasury, allowing them to be entitled to benefits if facing unemployment. This was an excellent contribution to solving social problems within society as this kept families afloat and gave workers minimum living conditions: a safety net to stop others from falling into poverty. The New Towns Act of 1946 was brought forward and brought up blueprints to create around 14 new towns across the country, including the likes of Glenrothes and East Kilbride, and built 200,000 houses each year. Many local areas saw poverty drop dramatically, such as York with poverty levels falling from 36% in 1936 to 2% afterwards in 1950. The Education Act of 1944 (implemented by Labour when they came to power) saw that all local authorities were demanded to provide education for primary, secondary and higher students on a universal level. During this time Labour had brought unemployment down to 2.5% and managed to have a surplus budget, whilst nationalising steel, iron, goal, gas electricity and railway industries.

To many this has been titled "The Golden Age of Capitalism".

But of course, nothing lasts forever. This golden age would eventually end as the public would begin to question the economics of Keynes. GDP had declined by 3.9% in the 70s (taking 14 quarters to actually recover). James Callaghan's Labour government saw unemployment at around 1.5 million people and multiple strikes in the public sector, ultimately leading to the infamous "Winter of Discontent". Inflation was high by this point, with increased prices and a fall in real income for workers. Upon reflection, many historians would argue that it was not the issues of Keynesian economics itself that brought hardship. Many would point to the 1973 oil crisis as a major factor which saw the price of oil fall to almost $3 a barrel. Others would also point to the 1973–74 stock market crash (linked to the oil crisis), as a decline in the stock market saw the London Stock Exchange's FT 30 lose 73% of it's value. But despite this, it was clear the electorate wanted something new.

And thus with the fall of Callaghan's government, we enter the era of Thatcherism.

Under the Thatcher era, the Conservative government re-wrote the rules on the market economy, arguing that lowering tax rates, particularly at the top, would only make people work harder and invest more. This, according to Thatcher, would allow incredible new growth with inequality, but the inequality would be shared. Growth would be so high, that those on the bottom end and in the middle would be better off anyway. These ideas come under the economic theory of "Trickle Down Economics". Thatcher also wanted to reclaim the "freedom" of capitalism, thus leading her to privatise or sell over more than 50 companies.

Despite lowering inflation, it came with a massive cost. Mid way through the 80s, unemployment had shot up by 12% to over 3 million people (the highest since the 1930s) whilst more people earned less than the median income.

Housing prices also increased.

The Conservative's vision of capitalism hurt the poorest, oldest, youngest and most vulnerable in our society. And these same mistakes arebeing repeated today. Thatcherism is still mainstream Conservative ideology.

But whilst the Tories fail to defend their own economic policy, it doesn't stop them trying to bring down "Corbynomics". There's been one particular newspaper piece that's been circulated on social media more recently:

So how accurate is this anti-Corbyn view? It's a complete fantasy.

On a side note, I wholeheartedly support free tuition. Taking the view of Nicholas Barr from his book "The Economics of the Welfare State", he makes the following point:

"It is frequently the overall system which is important...Taxation and expenditure should be considered together."

Having a means-tested system which is focused on individual policies is more costly than revamping the entire system (which is an argument more aimed against neoliberal ideas). But more importantly this idea of thinking is based on a society where everyone has the same basic rights.

Secondly, the article above makes the claim that interest would have to be paid if the government borrowed money.

From the left wing perspective we're taking, that's completely false.

Let's get one thing clear: we do not pay taxes for goods and services. It's a massive misconception which even myself once believed. It's the borrowing from the central bank that allows us to spend on goods and services, and tax is a tool to then collect money which has been spent. Let's put that in order...

1. The government borrows (creates) money from the central bank (Bank of England)

2. The government then instructs where the money is spent (expenditure)

3. When workers spend what they earn in wages, the government then taxes them

The money we borrow comes from the most obvious place: the bank. In this case, the UK government can easily go to the Bank of England and ask for the borrowing it requires. Such a government could then decide to buy goods and services from private sectors and build more schools, hospitals, roads etc.

So the UK government can borrow money from its central bank, otherwise known as quantitative easing. Which has the ultimate benefit of not paying a single penny on interest.

Right now though, because the UK government borrows from private banks, it has to pay back £33 billion in interest on what it has borrowed (in contrast, it costs the UK £34 billion a year in tax avoidance and tax that simply isn't collected). Which isn't surprising since private banks are about making a profit, that's their priority. But the UK government isn't unaware of this, it's a choice. The UK government has borrowed from the central bank on occasions such as WW1, WW2 and the 2008 Banking crisis.

(But there's more to tax than simply a tool to collect money. By collecting tax, we are then able to remove money from circulation and savings. If we do this at a measured level, so it's not simply being kept in savings and or a trade loop, we are then able to control inflation at a reasonable level.)

We can also raise income tax for the highest earners in society, allowing the government to collect more in terms of-

"Cameron! Surely by raising income tax for the wealthiest in society, the rich will simply just leave?"

Well from what the evidence tells us, no.

Based on economic behaviour, what we actually find is that the wealthiest will barely move if they faced hiked up tax. Researchers from Stanford University and the US Treasury Department actually found that from 500,000 households earning over $1 million, only 12,000 of them (2.4%) will actually move to avoid paying less tax. When we look at households earning more than $1.5 million, it only slightly increases to 2.7%. And this isn't just a snapshot of evidence from one financial year, it covers 13 years of reviewed tax returns. And another report also highlights that when the wealthiest do move, it's down to other reasons than simply tax.

There's also another solution to which can generate greater spending in the economy and allow people to have a decent living: a living wage. Many left-wing parties have proposed a £10 living wage to be fully implemented by 2020, again another policy which I support. Unsurprisingly this is opposed by those on the right, making the case it's unaffordable and could damage businesses. Is this accurate?

Let's look at other countries in the EU and the comparison of their wages. Using data from Eurostat, we find that the three countries in the EU with some of the highest levels of unemployment are Greece and Spain. At the same time, we also find that these countries have the slowest growth and lowest minimum wage economies in the EU. If we take the same data and see the top two countries, Belgium and the Netherlands, we find that they have some of the lowest unemployment rates in Europe with a high minimum-wage economies. When the UK had introduced legislation on the minimum wage (despite scare stories of destroying job opportunities from the CBI and the Conservatives), it merely created a rise in inflation by less than 1%.

If we're going to fix the economy then it's time continue the push for progressive politics. But we need not simply create new ideas, but look to theory that's worked in the past and develop it to our current climate. Because progress is not achieved by waiting until the right results arise, but daring to act and make it happen today.

It's not abstract theory either, Corbynomics is better known as the Nordic model. The Scandinavian nations are the richest, most developed in Europe. Portugal, using these exact methods, has halved it's deficit, cut it's unmployment rate by 7.7%, and the economy has grown for 13 successive quarters after 3 years of negative growth whilst in Austerity.

Corbynomics is the economic policy we need to implement as a nation.

#JeremyCorbyn #LabourParty