Monthly Archives: November 2015

Corbynomics, Debt Monetization, Economy, Fiscal Policy, Jeremy Corbyn, Monetary Policy, Poverty, Quantitative Easing

Corbynomics meets Piketty, Stiglitz; From Milibandism to “People’s Quantitative Easing”, the new Labour’s flavour (Part 3 of 3)

The Washington consensus, in response to the fiscal problems of Latin America, espoused fiscal austerity and privatisation. The huge deficits of the governments and the protectionist measures leading to inefficient government companies had exacerbated the problem. Inflation was high because of loose monetary policy. In such a situation it was difficult to attain growth as fiscal discipline was completely lacking. But Stiglitz argues that the fiscal austerity, though a good means in itself, may lead to undesirable consequences if the means itself becomes a problem which can happen if the policies are implemented too fast and in seclusion without the necessary safeguards leading to a devastating situation as witnessed by the Latin countries and others. He further argues that one of the serious drawbacks of fiscal austerity is the increase in the interest rates which can in many cases rise to significantly high levels and which in turn can create insurmountable difficulties for new enterprise creation and job numbers. A country falling into recession because of fiscal austerity will see incomes and wages falling and unemployment rising.

IMF induced recessions, by abolishing subsidies for food and fuel, have led not only to food riots but also high levels of urban violence and high unemployment. The British economist John Maynard Keynes, put forward a simple explanation, and a correspondingly simple set of prescriptions: lack of sufficient aggregate demand explained economic downturns; government policies could help stimulate aggregate demand. In cases where monetary policy is ineffective, governments could rely on fiscal policies, either by increasing expenditures or cutting taxes. While it is true that governments whose budgets get out of control with loose monetary policies lead to rampant inflation yet it is equally true that many countries which witnessed a high growth post the devastating World War II were only due to excessive state intervention in economy by way of tremendous government expenditure. Appropriate government interventions in the market can unquestionably lead to economic growth and even much needed equitable growth. Corbyn’s proposed “People’s Quantitative Easing” has strong economic logic.

Debt monetization is a two-step process whereby the government issues debt to finance its spending, and the central bank purchases the debt by printing money. Governments typically have debt, and can either repay this debt with current income, or by issuing new bonds. A government can either issue new bonds to the public directly or to the central bank. If it sells bonds to the central bank, the central bank will create the needed money to purchase the bonds by increasing the monetary base. Another way of looking at it is when a government spends in excess of its tax revenue it must borrow from the public. The public purchases this debt because it pays an attractive interest rate. If the government has a significant amount of debt outstanding, it may choose to purchase its own debt with newly printed currency. The government has thereby replaced its interest-bearing debt with money, and has thus monetised part of its debt. Now the question being raised is whether “People’s Quantitative Easing” is just another term for helicopter money? Helicopter money was first used by Friedman. It involves the central bank creating money, and distributing it directly to the people by some means (certainly not by helicopter!). It is a sure fire way for the central bank to boost demand. It is a money financed fiscal stimulus. Generally the term now means a tax cut of some form. But what makes helicopter money different from a conventional tax cut is that helicopter money is paid for by the central bank by printing money, rather than the government issuing debt. With doubts being raised over the independence of the central bank, Corbyn will certainly not be amused at his flagship economic policy being compared with ‘Helicopter Money’!

Corbynomics, Economy, European Union, Ireland, Jeremy Corbyn, Labour Party, NATO, Poverty, Quantitative Easing, UK Politics

Corbynomics meets Piketty, Stiglitz; From Milibandism to “People’s Quantitative Easing”, the new Labour’s flavour (Part 2 of 3)

The anti-austerity leader is a strong opponent of military interventions. He has clearly indicated that bombing Syria may not defeat ISIL but would rather involve heavy casualties and has even warned Cameron that any attempt to launch air strikes will be blocked by him. Corbyn is a strong proponent of political and diplomatic solutions, instead of armed conflict. His staunch opposition to renewal of the Trident Nuclear Programme and his ambivalence on continuing membership of NATO has recently raised many eyebrows. But he continues to be defiant and it can only be expected that he may take a more nuanced position in near future. He considers NATO as a cold war vestige which should have been disbanded alongwith the ‘Warsaw Pact’ in 1990. Corbyn views EU and NATO as tools of US policy in Europe. As the US remains overwhelmingly the military superpower, it seized opportunities in 1990 and in 2001 to increase its military spending and develop a global reach of bases unmatched since the Second World War. Also the expansion of NATO into Poland and the Czech Republic has increased tensions with Russia and the West’s intentions in Ukraine are unclear. Corbyn argues that the obsession with cold war politics that exercises the NATO and EU leaderships is fuelling the crisis and underlines the case for a whole new approach to foreign policy. He warns that the long-term effect of the aggressive US foreign policy, backed by the EU and the British government, can lead to further conflagrations and an ever-growing and more fearless Russia-China bloc will increasingly rival NATO and the EU, leading to a more turbulent future.

On the issue of continuing membership of the EU he has made it clear that worker rights cannot be overlooked as part of David Cameron’s renegotiation strategy. Now he has stated that Labour would make the case for continued British membership of the EU whatever may be outcome of the renegotiation. Labour will now make the case that the membership would help Britain to create jobs, secure growth, encourage investment and effectively tackle the refugee crisis.  He has further warned that if the employment protections are diminished then instead of leaving the EU, Labour on coming to power in 2020 will reverse and restore those protections. Protection of the NHS from EU competition law, reform of the state aid rule, reform of the EU budget and increased flexibility on transitional controls will be in the Labour’s agenda.

National Health Service should continue to be completely publicly run and publicly accountable. There cannot be any trace of privatization. A National Education Service, like the NHS, will be the Labour’s flagship education policy. A free University education, funded through a higher rate of national insurance on the highest earners is now being envisaged. He even wants to offer an apology to the students who had to pay fees because of the previous Labour governments decisions. Hard-hitting on the bailout plans, he has lamented that instead of the bailout money reaching the desired public, it has gone to various banks all across Europe leading to continuing destruction of the economy of many troubled countries. A strong proponent of renationalising the railways, he argues that it will allow the public to get the benefit of the investment in infrastructure that is currently underway. Also rent controls will be reintroduced so that an average citizen need not face extreme difficulties because of the mindless surging property prices.

He is a supporter of a United Ireland, even controversially inviting Sinn Féin Party President to London in 1984. Being sympathetic to IRA campaign, his party’s early stand of support for United Ireland was changed by Blair to one of neutrality. The tussle between Irish Nationalists and Unionists is surely going to escalate.

Corbynomics, Economy, Jeremy Corbyn, Labour Party, Poverty, Quantitative Easing, UK Politics

Corbynomics meets Piketty, Stiglitz: From Milibandism to “People’s Quantitative Easing”, the new Labour’s flavour (Part 1 of 3)

The loss of the Labour Party in the 2015 General Elections led to the end of Milibandism and the rise of Jeremy Corbyn, the backbencher MP for Islington North. The new leader of Labour Party is now exhorting fellow Englishmen to support “sunshine of socialism” to break through against the “narrow, nasty” politics of the Conservatives. Extremely conscious of rising inequality, child poverty and widening health inequalities, he plans to set up a National Investment bank to invest in infrastructure, such as housing, transport, rural broadband and green energy; and bankroll that investment with “people’s QE”, money created for a social purpose rather than for banks. Corbyn argues that, if it was acceptable to use QE to support the banking system and encourage lending, it should also be acceptable to use it to fund investment. He envisions a modern, more productive and fairer economy. Agreeing with anti austerity economists, like Stiglitz, he is of the opinion that reducing government investment, for the sake of prudence, is dangerous because it prevents growth, innovation and productivity increases. This in turn lowers the tax receipts resulting in higher debt. In fact noted economist Keynes first proposed “monetising public debt” to pay for public works in order to stimulate recovery from depression. The Treasury would sell new bonds direct to the Bank of England, which would issue credits on which the agencies in charge of public works would draw to pay for the labour, equipment and materials they required.

Corbyn camp has vociferously attacked the privatisation spree as “a confidence trick”. They dismiss it stating that the British people have been clearly robbed while those snatching up the public assets have been printing money. Privatisation of water, energy and rail and even the PFI schemes have been one long confidence trick. A Corbyn led Labour Government would reserve the right to renationalise Royal Bank of Scotland and other public assets, with either no compensation or with any undervaluation deducted from any compensation for renationalisation if they are now sold at a knockdown price. Chancellor, George Osborne, plans to sell off £31bn of public assets in 2015-16. This is now opposed by Corbyn arguing that Conservatives’s “free market dogma” will be challenged and a future Labour Government under his leadership would re-empower the state.

Thomas Piketty, “the modern Marx” and author of the international best seller ‘Capital in the Twenty-First Century’, has researched that capital becomes destructive when it chronically exceeds income. A steeply progressive tax, raising top rate of income tax, a land value tax, inheritance tax are few measures that could absorb the superfluous wealth and redirect it to more productive purposes. Under Corbyn’s plans, Labour 2020 will make large reductions in the £93 billion of corporate tax relief and subsidies. He plans to tackle tax avoidance and evasion by stronger anti-avoidance rules brought into UK tax law, aim of country-by-country reporting for multinational corporations, reform of small business taxation to tackle avoidance and evasion, enforcement of proper regulations to ensure that companies pay what they owe and reversal of the cuts to staff in HMRC and at Companies House, taking on more staff at both, to ensure that HMRC can collect the taxes. He laments that UK has shifted from taxing income and wealth to taxing consumption; and from taxing corporations to taxing individuals.

Corbyn will face his first electoral challenge in Scotland in May 2016 Holyrood elections. It will be a tough contest against the incumbent Scottish National party. He has recently signed an agreement with Scottish Labour leader Kezia Dugdale pledging a more autonomous structure. Corbyn, derided by many, will be before the public with his ‘too good to be true’ plans.