We know that one of the key reasons why Labour lost the last two elections is because we were seen as economically incompetent.
The Tories and the media have managed to convince many voters that the banking crash was a Labour profligate spending crash. Or at least, that Labour was cowed by the power of the banks.
They also convinced us that a Keynesian rescue should be given to the bankers and creditors. The central bank printed money which went straight into the balance sheets of the banks and thence into asset prices and share prices. The intention was that banks would start lending to companies who would then invest and build the economy. Yet over six years later, GDP per capita in the UK is lower than it was before the crisis.
Private borrowing, on the other hand – which led us into this mess – is set to rise again. Indeed, while many of the over fifties may be paying down their mortgages, the younger generation are taking on more debt. This is the fruit of the quantitative easing that, we are told, is the only “credible economics”.
Meanwhile those who played no part in the crisis are still being forced to pick up the tab. So what is the alternative? And how ‘credible’ – and that is the magic word, because everybody agrees Labour needs to be trusted on the economy – is it?
Jeremy Corbyn’s leadership bid has brought to public attention a question economists have pondered for decades: is it ever a good idea to print money? Much like Corbyn, I think it can be, if we were to give it directly to investment projects. For example, to local authorities so they can build housing.
Existing quantitative easing has inflated asset prices, but this type of QE would be different: if money is created and something tangible – like housing – is produced, then we have an increase in product to correspond to the increase in money. It is when there is an increase in money with no corresponding increase in product that we get too much cash chasing too few goods: demand pull inflation. Plus, increasing the supply of housing will mean the cost of purchase and rents will fall, helping to reduce the housing benefit bill, which at present goes straight to landlords.
QE for direct investment, or even QE that’s given directly to households, is a credible policy for economic growth. It’s not even particularly radical – Australia did the latter in 2009, giving citizens a $950 back-to-school bonus aimed at helping families with school-age children, and $900 to Australians earning less than $100,000 a year. These stimulus payments played a large part in Australia coming out of the global financial crisis relatively unscathed, having avoided recession.
One of the arguments against this sort of QE is that government adopting it as a policy, and therefore directly instructing the central bank, might be a threat to its independence. But are central banks really independent of government, and is independence always the best scenario?
Already it is governments that dictate central banks’ remit. This is twofold: first government decides what inflation target should be set; second government determines whether the bank has any other remit, such as the US Federal Reserve’s function to encourage full employment. There is no inherent reason why central banks should not be instructed to do anything else by the government, too. It’s merely a political decision that reflects the neo-liberal consensus. It’s also worth noting that banking independence did not prevent the 2008 crisis, nor did central banks foresee the crisis.
Perhaps it’s time to shift the focus, then, from the sanctity of an abstract banking independence, to the economic and social consequences of different forms of economic intervention. We are at a fork in the road, and Labour needs some brave heterodox thinking in order to win back trust on the economy.
Can Corbyn provide that, with his “quantitative easing for the people”? He is at least asking the right question and proposing that the idea be fully investigated. However, in my opinion, he is far from economically radical, because he accepts that the deficit must be reduced.
What would be radical to argue, as the Australian economist Steve Keen does, is that running a government surplus is bad, because it sucks money out of the economy and reduces private saving. What would be radical is to argue, as Labour donor and economist John Mills does, is that the government deficit is the mirror image of the trade deficit, and that it cannot be reduced without shrinking the economy, unless we have a 30% fall in the value of sterling.
One thing is for sure: until we get a government economic policy that places the blame for the crisis where it belongs – on the banks and private debt-led growth – we are going nowhere useful. The public knows in its gut that the bankers were to blame for the crisis. Labour failed to tackle the financial sector and instead put us in debt to it. The party should own up to what it got wrong and set out a radical economic vision, instead of pleading guilty to non-existent crimes.