Jeremy Corbyn and his shadow chancellor John McDonnell are desperate to be seen as economically credible. As part of this, on Sunday Labour announced the creation of a new economics committee made up of the economic darlings of the left: Thomas Piketty, Danny Blanchflower, Ann Pettifor, Joseph Stiglitz, Mariana Mazzucato and Simon Wren-Lewis.
Make no mistake: while each new advisor has made a serious contribution to their own fields of economics, and will oppose some of the la-la-land economic musings Labour have recently offered, together they still represent a paradigm-shifting agenda.
Piketty wants a global net wealth tax and top rates of income tax of 80 per cent. Blanchflower has never seen a monetary policy expansion he did not like. Mazzucato believes the state is the key source of innovation. Wren-Lewis and Stiglitz want significantly higher public investment levels.
The first outing for this new type of agenda – McDonnell’s conference speech – was less radical than Corbynomics 1.0, certainly. But it was still very controversial. McDonnell wants to balance day-to-day government spending with taxation, only borrowing for new investment. He will not aim for George Osborne’s overall surplus to repay debt.
While ordinarily this sort of pledge may have been endorsed by all economists, that was before the Great Recession and the historically high peacetime debt levels. Given accumulated debt, the likelihood of future recessions and demographic headwinds, getting debt down to sustainable levels sooner seems more sensible.
How will he achieve his deficit reduction? He seems to believe that state investment will raise the sustainable growth rate of the economy dramatically and that clamping down on tax avoidance can conjure up £120bn of revenue. There is little to no evidence for either claim.
One reason we are in this mess is that Gordon Brown overestimated the sustainable growth rate prior to the crisis – meaning our structural deficit was higher than he believed. To get £120bn of revenue from tax avoidance would, in reality, mean ending many government tax breaks – which, in essence, would lead to huge tax austerity of the private sector to maintain public spending.
McDonnell has thankfully toned down his People’s QE proposals, whereby the central bank would directly finance government investment through money printing. It now seems that he would only consider abandoning central bank independence in extreme circumstances.
This, as Lord Turner explained yesterday, could still dangerously change expectations. While there is certainly a debate to be had about changing the Bank’s target – a discussion McDonnell wants to happen – unfortunately, he labours under the misapprehension that monetary policy can be used effectively to target “employment”. This viewpoint was utterly debunked and discredited by the experience of the 1970s.
If the macroeconomics is worrying, the microeconomics is worse. On housing, McDonnell ignores the key barrier to new housing supply – planning regulations. Instead, he thinks that the state building new council homes where he thinks we should live will solve the housing crisis. He also wants rent controls – a policy idea almost all economists agree does not work.
On tax, he wants corporation tax rises – even though economists tend to think this is the most damaging tax rise in terms of its impact on growth, and a higher top rate of income tax – even though this is likely to lower revenues.
Finally, he wants renationalisation of rail, which will supposedly be costless because the franchises will just be taken up by the state as the existing ones expire. Yet even announcing this possibility is likely to have a chilling impact on investment right now, while doing nothing to improve outcomes for passengers.
Despite the veneer of the credentials of his new advisers then, a radical and worrying agenda remains.