The problems are not really the economics at all, but much more the politics
A month ago nobody had heard of ‘Corbynomics’. Today Google records 174,000 search results. It is becoming difficult to escape the term in any form of media. If Jeremy Corbyn wins the Labour leadership election, its contents and claims will shape political debate in the UK for some time.
Corbynomics is not yet a fully-fledged and coherent programme or philosophy. It is a collection of ideas about how money and the economy works and the appropriate role of government that sets out to challenge conventional thinking as the beginning of an evolving process.
In the UK fiscal policy has been immobilised by a highly political ‘deficit reduction narrative’, conventional monetary stimulus is exhausted, and deficit reduction and low inflation targets have ceased to act as a reliable guide for policy. The government needs alternative policy levers.
Furthermore, low productivity is holding down wages and inadequate infrastructure in housing, transport, energy, R&D, training and digital communications is holding back productivity. Yet the fiscal deficit has been elevated as the primary economic problem the UK faces, suffocating proper debate about a strategy for the UK economy and the role of government policy.
Corbynomics has a flagship policy of People’s Quantitative Easing (PQE), which has attracted the bulk of political commentary, pointing to supposed bad economics and the dangers of inflation. PQE is a proposal that the Bank of England (BoE) purchases bonds from a national investment bank, with the resulting capital then invested in large-scale housing, energy, transport and digital projects. It is noted that market actors have failed to fund such projects because the prospect of short-term returns has created a reluctance to take on long-term risk.
The architect of PQE, Richard Murphy, draws on insights from a branch of economics called modern monetary theory (MMT) which argues that sovereign governments don’t need to borrow their own currency in order to spend. Central banks credit private banks through fountain pen money, as the BoE acknowledges, in conventional quantitative easing asset purchases. The BoE could do precisely this for a new public investment bank, providing cheap capital for infrastructure upgrading, without increasing government borrowing and with investment scaled up or down in accordance with the needs of the economy. The idea in a nutshell is that this provides an additional macroeconomic lever and a cheap way of tackling the UK infrastructure deficit without increasing the overall fiscal deficit.
An alternative form of PQE based on helicopter money has also been suggested by economist Simon Wren-Lewis and former chair of the Financial Services Authority Adair Turner. Here the central bank creates money and distributes it directly to households. Both variations of PQE, as Wren-Lewis acknowledges, are a form of money-financed fiscal stimulus. The Wren-Lewis version is a temporary monetary stimulus, when interest rates have been immobilised.
Both he, and for that matter the LSE Growth Commission, also acknowledge there is a compelling macroeconomic case for creating a UK public investment bank to support infrastructure and encourage private-sector investment. The Wren-Lewis view, as well as that of others, is that this can be financed by conventional government borrowing when interest rates are low. In other words, Wren-Lewis and the Corbyn PQE approach share a diagnosis of the UK economy and the general remedies required, but differ on the details of precise instruments and their execution. They are nevertheless a lot closer to one another on the orientation of policy than they are to the current UK political consensus.
The conventional economic backing for alternative forms of QE recognises that inflationary risks depend on the broader macroeconomic outlook, including productivity, output and employment levels, with PQE useful at times of very low or zero inflation and high unemployment.
The substantive basis of the current complaints against Corbyn PQE from the mainstream economics fraternity has two elements. First, it is suggested that using PQE as a means of financing infrastructure is conceding too much to deficit fetishism by not borrowing. Second, PQE has uncertain institutional implications for central bank independence and will subject the BoE to excessive political direction.
On the first point, is it possible that economists are as committed to unpicking the deficit narrative as their opponents are to defending it that they are missing alternative ways of opening this up for the public at large? To an extent PQE is already doing this and changing the public conversation about the nature of UK economic challenges.
On the second point, the true extent of BoE independence in recent times is very questionable. What’s more, if inflation targeting has been redundant as a true guide for monetary policy for over seven years, then maybe the terms of central bank independence and the nature of the most appropriate institutional design should be the subject of public debate again? Unfortunately, even that part of the economist fraternity which is sympathetic to the kind of debates Corbyn wants to provoke tends to regard central bank independence as a sacred cow. The BoE establishment is also unlikely to be passive if it perceives a challenge. In short, the substance of complaint about PQE in particular and Corbynomics in general is primarily political, institutional and sociological in nature.
And it is here that the real difficulty lies. Corbyn’s political label as an extreme far left candidate is preventing a mutually beneficial dialogue with broadly compatible intellectual voices. Wren-Lewis and his associates should recognise that, if they want their undoubtedly many good ideas to receive political take-up, Corbyn is probably their best bet. For their part, the Corbyn team could go beyond PQE and MMT, broaden their policy base and further grow their political appeal through such an engagement. They are certainly open to ideas and accept further debate and refinement is required.
However, for reasons of professional esteem and incentives, at least one side of that engagement is likely to be unwilling. For those wishing to shake the current political consensus on the deficit, that is a great shame.