Monday, August 17, 2015

A Look at Corbynomics

There's lots of discussion of what Jeremy Corbyn's economic plans are, so I thought I'd put some of the major elements under the microscope. I should add the disclaimer that because as it's clear to people who follow me on twitter, Corbyn is my favoured candidate. I will try though to keep my views as analytical as possible (although I do abandon impartiality in the last section).

Deficit Reduction

If my reading of his policy on deficit reduction is actually pretty conventional, the view I've cobbled together is that while he believes we need to reduce the deficit and ultimately stabilise debt/GDP but he believes we should be far slower and more careful in reducing the deficit, not setting an arbitrary time frame. This seems to appreciate something that few politicians realise and that is that we have far less control over the economy that we actually do, a suitable metaphor might be attempting to reach a destination by sail, sailing close to the wind looks like a more direct route but might ultimately end up counter-productive as you may end up being blown off course.

The reason that this is a sensible approach is that borrowing is currently very cheap and we appear to be at the zero lower bound in terms of interest rates, textbook macroeconomics tells us that fiscal policy is very effective in this kind of situation which is a pretty good case against austerity and for borrowing to invest (something that Jeremy also proposes).

Tax Raising

I'm not so keen on this section. Richard Murphy is quite confident of the figures he's put forward here although my hunch is that they are optimistic, I'm not sure if the figures are as large as is said and even if they are I'm not sure how easy it would be to get out hands on this money. That said, there are still some good proposals, country by country reporting in particular would be very useful.

He also talks about the £93 billion in corporate reliefs and subsidies, this is also something I'm not so sure about. I'm sure there are some of these that could be cut, but an awful lot of them seem to be things we should be encouraging (investment and R&D allowances for example) and there are some that could cause serious problems for the way some businesses operate.

All in all I think the tax raising possibilities mentioned in the document are very optimistic.

The Helicopter

The proposal that's got most people talking is his QE for the People idea, which appears to be getting the Bank of England to print new money which is then spent on infrastructure. The policy looks a little like what's called "helicopter money", an idea originally proposed by Milton Friedman and has been discussed more recently by people like AdairTurner, Mark Blyth, Eric Lonergan and Simon Wren-Lewis and Willem Buiter. The main difference is that they have all treated it as a monetary policy instrument, an additional weapon to be put to use to get inflation back on target when the interest rate isn't cutting it.

As a monetary policy instrument the simplest way would be for a universal simple lump sum payment to all adult citizens, this could both provide a rapid boost to demand and the nature of the universal nature of the transfer would mean the Bank of England remains independent. The problem with using helicopter money on infrastructure is that it's really quite difficult to time infrastructure projects in such a way that they can raise aggregate demand. It can take years of preparatory work before you start building a new road for example, this essentially means that it would be little use as a way of rapidly raising raising the quantity of money and aggregate demand in order to combat inflation. The political nature of this new spending and money creation would in effect create a second, politically controlled monetary authority which would undermine the role of the Bank of England as the UK's monetary authority (Tony Yates is good on this).

My overall opinion on the helicopter money idea is that it's a good idea when done in the right way, but that infrastructure QE is not a good idea and that any National Investment Bank would be better financed through conventional government borrowing. That said, one of the main criticisms I've heard is that it would be inflationary doesn't really stand up. A large enough amount this kind of QE could be inflationary, but if inflation was to start to tick up you could simply turn money taps off. An alternative and perhaps better way of looking at QE for the people is to view it as a way of selling expansionary fiscal policy to a debt averse public, this to me seems to be what People's QE is really all about.

A Final Note

You might have noticed that I am quite harsh on Corbyn in what I say, so the obvious question arises: Why am I voting for him? Firstly, while I think Corbyn's policies are flawed, I do not think they are policies that can be dismissed out of hand, they are ideas that deserve to be taken seriously. Corbyn's political opponents have not attempted to developed a serious critique of his ideas, given that trust on the economy is important for winning an election you would hope they would be able to do this.

The second point is that again while I don't like everything Corbyn is offering, his policies seem on balance the best on offer. As I've said, there's much to like about his fiscal stance and there are variations on Peoples QE that could work effectively. He's probably promising more than he can deliver, but it is at least a vision of a better future.

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