Sunday, September 06, 2015
An incoherent lurch to the left
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

Next Saturday, if the polls and most of the pundits are right, Jeremy Corbyn will be elected leader of the Labour party. There has to be an “if” there because we have had recent experience of the polls and the pundits not being right. It could yet be that this will be another outcome that is different from the one we have been led to expect.

If that is the case, then this will be my last opportunity to write about “Corbynomics” before it retreats back into obscurity. Even if he is elected leader (though with about as much chance of becoming prime minister as I have), somebody would have to get on with the job of turning vague ideas into workable policy.

But for now, let me work with what we have got and start by praising a round-robin letter from 55 economists published in the Financial Times on Thursday. Such letters have had a bad name since 364 mainly academic economists, including former government chief economic advisers and a future Bank of England governor (Lord King), had one published in 1981 warning that the Thatcher government’s policies would deepen the recession. The letter, of course, coincided with the start of the long 1980s’ upturn.

Lately, such letters have been an outlet, and not a very effective one, for academic economists opposing austerity.

This one, however, was spot on. Corbyn’s economic policies, if ever implemented, would be “highly damaging”, had not been “seriously thought through” and included elements that were “almost unbelievable” it said. The 55 economists, from across the political and economic spectrum, and including some opponents of austerity, were stung into action by suggestions from Corbyn supporters that his ideas represented the economic mainstream.

Those ideas include energy and rail nationalisation, “a national investment bank”, not just to invest in infrastructure but in “the hi tech and innovative industries of the future”. “People’s QE” – quantitative easing forced on the Bank rather the decided on by it – to buy the bonds issued by this new bank.

National Insurance (NI) contributions for anybody earning more than £50,000 – thus including many public employees, including senior teachers and doctors – would go up by 7 percentage points and corporation tax by 2.5 points to pay for the abolition of university tuition fees. £93bn of “corporate welfare” and £120bn of uncollected taxes would apparently provide a pot of gold to pay for replacing public spending restraint with the return of state largesse.

A lot of this is easy to dismiss. The idea that governments, desperate for revenue, have turned a blind eye to £120bn of uncollected taxes annually is laughable.

Renationalising the energy sector would be a hugely expensive folly, costed at £185bn by Jefferies, the City firm. Money spent on that would be wastefully diverted from more productive use. Taking control without full renationalisation would fall foul of the rules. Renationalisation without compensation would be the kind of thing Third World dictators do and destroy Britain’s reputation as a place to do business. Renationalising the railways by the backdoor – not renewing existing franchises but keeping them in the public sector – would take very many years.

Much more than this, renationalisation would harm consumers. Many of Corbyn’s supporters are too young to remember how bad most of the nationalised industries were, and how much better service has been since privatization. The privatized utilities have not been perfect but they have been infinitely better than what went before. This is not the Attlee era, when bombed out sectors needed to be nationalised to ensure their survival.

As for “people’s QE”, forcing the Bank to buy the bonds issued by a new national investment bank, which I touched on a couple of weeks ago, not only would this put an end to the most successful economic policy innovation of the past two decades – central bank independence – but it is entirely unnecessary.

If a future government wants to increase infrastructure spending it can do so. If it did so through a new investment bank, that would also increase spending and debt. But if the new bank was soundly-based, and its bonds guaranteed by the government, financial institutions would queue up to buy them. If, in a subsequent downturn, the monetary policy committee did more QE, it could buy some of these bonds if it chose to do so.

Forcing the Bank to be the exclusive buyer of such bonds in all circumstances, suggests that they would be too dodgy for investors and leave the Bank saddled in way that would risk insolvency (requiring the government to step in and prop it up). Leaving the QE tap permanently turned on would mean higher inflation and interest rates. This is a policy whose time should never come.

There is more. In a mixed economy such as Britain’s what should governments do? Certainly they should provide incentives to encourage business to invest, spend on research and development and export. It should at least ensure that these incentives do not put British business at a disadvantage relative to those in competitor countries. Capital allowances are particularly important for Britain’s manufacturers.

For Corbyn, however, these are part of the £93bn “huge tax reliefs and subsidies” which would be much better used in “direct public investment”. Some of this “corporate welfare” offers no scope for saving at all, such as ensuring all government work is done internally. Most of it would result in a net cost to the Exchequer from the corporate exodus that followed. Business employs the people and generates the revenues to pay for the public largesse the Labour leadership candidate craves.

Scrapping tax reliefs is one way of putting up taxes. Increasing corporation tax and putting up individual taxes, not only with higher NI but by making the tax system “more progressive” would be another. All those French people who came over to Britain to escape the high taxation of Francois Hollande would soon be on the way back again.

Those who ignore the lessons of history are condemned to repeat them. The sad thing about all this is that we have been there before and it failed. Killing off the private sector with high taxation and renationalisation, blind faith in the wisdom of the public sector to make the right decisions on everything else, political control of the central bank and a cavalier attitude to the public finances brought us to our knees before, most notably in the 1970s. We will not go there again, but the fact that so many people appear to think it would be a good idea to do so is rather depressing.