I try very hard to be positive about the Labour Party's economic policies, and I promise you, it is hard. Take this morning as an example. As the Guardian and many other newspapers have reported:
The Bank of England could be given a mandate to boost productivity growth under a Labour government as part of opposition plans to overhaul the country's “economic architecture”.
Revealing the findings from a review of the UK financial system, the shadow chancellor, John McDonnell, will on Wednesday make the case for a fundamental transformation that could include a revamp of the Bank's remit in order to help drive economic growth.
I stress that I cannot find the original document to which this report refers: as yet it does not appear to be on the Labour Party's website, but since all the reports are broadly similar the Labour Party must have issued a press release focusing on these issues, although that release is also not in its web site as I am writing.
I have to say I am completely bemused as to what Labour are trying to achieve.
First of all, why is Labour maintaining an independent central bank? This feature, which is an absolute mark of right-wing neoliberal thinking, and which is a legacy of the Gordon Brown / Ed Balls era from which I would have thought John McDonnell was keen to disassociate himself, has three incredibly unfortunate consequences in that it removes economic policy from democratic control, puts bankers in charge, and makes monetary policy the focus of attention when fiscal policy has to be the future direction of all economic policy. The time for economic policy to come back solely under the control of elected politicians within the Treasury has arrived: it is deeply disappointing to see that Labour has not embraced this idea.
Second, I have long argued that for the Bank of England to have a single economic objective of maintaining the inflation rate at 2% is absurd, particularly when inflation is, in itself, no longer any real risk to the UK economy. This will even be true if we have a significant spike as a result of a Hard Brexit, because that will be externally imposed and there will be nothing that the Bank of England could do to control it. In that case, the adoption of another one, or more, goals was appropriate, but to make that new goal labour productivity was not. In fact, of all the goals that I can imagine, productivity has to be about the worst that Labour could have picked. That needs explanation.
Productivity is measured by recording the amount of output from a process given a fixed input of the variable that is the focus of attention. So, for example, if labour productivity is being measured then the focus is upon the amount of output for each unit of labour input into the process (e.g., a working hour). So what Labour is saying by adopting a labour productivity measure as a Bank of England target is that it wants the amount of productivity in the economy to rise for each unit of labour input. This has some quite serious consequences.
First, it very obviously encourages the substitution of capital for labour. In other words, the target necessarily encourages increasing unemployment, particularly among those with low skills, where we have a major social problem already.
Second, since the measure is eventually made in financial terms, there is also an obvious incentive to deliver low wage increases, which is (I would have thought) the last thing that Labour wants to encourage.
Third, this goal does not take into consideration the distribution of the benefit of the increased productivity. We have seen decades of overall rising productivity in our economies, but with the vast majority of that gain going to capital. The result has been increasing inequality, rising corporate profits, and increasing relative poverty and there is nothing whatsoever in this new target that reverses that situation.
For all three reasons, the recommendation made is remarkably pro-capital and remarkably anti-labour, in the sense of being very largely counter to the best interests of those who work for a living. I can see very little to applaud about that.
The alternative measure that should have been adopted has been discussed here, often. The appropriate target was rising median wages.
Median wages must be the target because the mean is heavily skewed by very high paid to a few people in the workforce.
And median pay must also be targeted because it makes clear that the goal is an increasing reward to the person who works for a living, and who earns around the normal level of pay, who I would expect to be at the epicentre of Labour's concern.
And median pay needs to be considered because this then requires investment in new productive capacity, but of a type which does not leave large numbers in the country behind, as a pure productivity target might well do.
I would love to say I could see any logic to what Labour has done. Maybe someone can enlighten me as to what it is. But right now Labour appears to be polishing its credentials as a deeply conventional, and fundamentally neoliberal party when it comes to economic policy.
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Do you know Graham Turner? I remember him back in ‘Credit Crunch’ days and noted he was speaking at State of the Economy conference recently.
I have met him.
I’ve found his phone number. Now to consider what to do;o)
Turner is peddling quite similar bullshit (on steroids) as the EU and ECB neoliberals.
Totally effing clueless.
Shame on McDonnell. I read this ‘report’ last night, and am livid about it. I don’t think aggregate demand is even mentioned once – a complete twat imho. 🙁
A dear friend sent the Jeremy Leggett video to Corbyn, Mc Donnell and several more Labour figures with an appropriate commentary on how positive and productive renewable energy would be. I hope they pay proper attention to the opportunities presented.( apologies if names spelled incorrectly)
The Labour leadership has no moral courage. This isn’t anything to do with economics . It’s politics i.e. electability . Corbyn and McDonnell both believe in the Tory mantra ‘ Labour cannot be trusted to run the economy ‘ or some version thereof. So yes ANY policy they espouse will be designed to ensure the neoliberal consensus isn’t damaged in any way because to do so would, they believe damage their credibility . So if anyone is looking for Labour to make a fundamental change in economic doctrine look elsewhere because it isn’t going to happen.
That’s totally untrue. If you think that Jeremy Corbyn has no moral courage I would ask you who you think has. John McDonnell too does not lack moral courage. He has always relied on economic advisors – the wrong ones at the moment unfortunately. I would also ask you where this negativity gets us? Are you content to let the tories continue their destruction of public services? Why don’t you think of how we could turn John around in a positive way rather than just insulting him and the rest of us who support the leadership?
Carol , I do not underestimate the scale of the task that faces not just the Labour Party, but anyone who has seen through the neoliberal fantasy, and wants to do something to oppose it. There has to be a reframing of the conversation in society at large , but in order to have that conversation the whole economics / finance mechanism needs to be challenged at a fundamental level. I am making a short film with my son ( a professional filmmaker ) which aims to explain in the simplest, but most accurate way we can, how our money and tax system works and why we have financial crises . It is no easy task because it requires a shift in consciousness to hear someone say for example our government ‘ spends and taxes ‘ when we have all been brought up to believe the opposite. Just take the present conversation about the additional funding for the NHS. Now if anyone has given it a second thought the proposition that this additional funding is coming wholly, or in part ( it makes no difference ) from a’ Brexit dividend ‘ is so ludicrous that it can be dismissed out of hand. But that isn’t how the conversation goes . These sort of statements are taken on board by our political and media class and think tanks without any sort of real challenge because to do so would be to say the emperor is naked. Paul Johnson of the IFS, for example, says the extra money won’t all come from the Brexit dividend when the whole thing is total nonsense . But Corbyn and MacDonnell don’t come out and say this either and so when they do say something that sounds even remotely ‘ socialist ‘ it is dismissed by the right wing press as ‘ extreme left ‘ . If they did but know it they have a clear advantage over any progressive politicians in Europe whose country is trapped inside the Eurozone. There is a delicious anecdote recounted by Yanis Varoufakis from his very first meeting with Wolfgang Schauble . Schauble’s first words to him were ‘ Elections cannot be allowed to change economic policy ‘ . Did someone whisper something similar to Corbyn and McDonnell I wonder .
Any details from John Hope about this film he is making with his son. I am very interested in how it would be presented because I am afraid that at the moment, the Devil (who is non-MMT) has all the best tunes and they are being sung daily by many politicians and broadcasters.
We need some more catchy, effective and informative ways of spreading the word. People will switch off if you tell them you are going to play the “galop infernal” from Act 2 Scene 2 of Offenbach’s Orpheus in the Underworld but they’ll listen when you tell them it’s the can-can.
Carol Wilcox says:
“John McDonnell too does not lack moral courage. He has always relied on economic advisors —…..”
More wisdom is required to profit from ‘good’ advice than to give it. If he can’t tell ‘gold dust from lizard shit’ he should stop digging.
That’s what got us working class people into this fascist mess.
Sigh – I increasingly wonder why I remain a member of the Labour Party 🙁
What could the BoE actually do to further the goal of greater productivity? Would they recommend tax breaks or government subsidies for companies that invest in further automation? Recommend government spending on infrastructure and education/skills? Or would they be expected to start intervening in the economy directly themselves? Would that be without democratic oversight?
I don’t understand what the Party Leadership are trying to achieve here nor how they intend to achieve it. I get tired of having to explain Labour party economic policy on the doorstep and in the street – this just makes it more incoherent and moves it even further away from what I believe the party should be intending to do.
You hit an issue I chose not to focus on in what I wrote, which is what the BoE could do about this, unless they are given control of fiscal policy, which is an idea too scary to think about.
Increased productivity needs investment.
“Low gilt yields show there is room for higher UK public spending” is the headline of an FT story this morning….. seems like higher government investment financed by QE with cash drained by extra long term borrowing to meet demand from pension funds (MMT-ish) is now City orthodoxy!
This comes as no surprise to me.
I know for a fact that not so long ago (2017) McDonnell attended meetings with various investment banks as a relative who works in the sector organised the meeting with him at their bank/employer.
What do you think was said at that meetings (and others)? What salient points did JMcD come away with? I like to know – wouldn’t you?
How can you make a decent offer in this political climate to the electorate if you are not willing to rock the boat? As John says above, no evidence of moral courage at all.
It’s a myth that the problem is the size of the economy or productivity, It’s the distribution of the pie that’s wrong. Since resource exhaustion and global warming are upon us, any economic strategy based on growth is foolhardy as well as the lie it always has been.
It’s the application of labour which creates growth. Services are also part of production, which do not have to involve consumption of resources. A consumption tax could address this. We must learn to recycle.
I was shocked as well when I heard about this proposal in an interview on the Today programme’s Business section at 6:15 this morning with Graham Turner, founder of the GFC Economics website, and author of the report ‘Financing Investment’ produced for the Labour Party. The final report doesn’t seem to have been published yet, but there was an interim version put out last December (http://labour.org.uk/wp-content/uploads/2017/12/Financing-Investment-Interim-Report.pdf).
This version didn’t mention the 3% productivity target, and didn’t seem to suggest that everything was going to be left to the BOE’s monetary interventions. On p.47 of the interim report it proposes a ‘Strategic Investment Board’, which “will facilitate coordination between the Treasury, the Bank of England and the Department for Business, Energy and Industrial Strategy (BEIS). This will re-establish the link between the real economy and the banking sector.” But it doesn’t talk much about the role of fiscal policy, referring mostly to ‘monetary and financial policy.’ In his accompanying article in the Guardian today, McDonnell disappointingly writes that the BOE “should retain operational independence”, but adds “it is time to reassess its guiding principles.”
It all sounds at best half-baked, and at worst {?) misguided.
Your last summarises my feelings
I hesitate to say this in the presence of experts, but this seems to me to be worse than the recommendations of the recent and much derided Growth Commission report. Andrew Wilson’s failure to grasp the benefits of a sovereign Scottish Currency echoed John McDonnell’s failure to grasp Professor Murphy’s Corbynomics. I guess the Growth Commission stance is a bit worse because it was ceding control to someone else’s central bank.
The “excuse” in both cases would perhaps be the expected reaction of the mainstream media (and mainstream economists?).
However, giving direct control of employment and productivity to the central bank, with the consequences explained here, is surely a mistake that’s an order worse. I appreciate that sticking with mainstream monetary theory also has negative employment consequences, but this latest economic proposal is surely explained by a serious lack of brain power. Can anyone explain why they think it will make sense to the public or the mainstream media?
never mind how it is written up in The Guardian, this clearly isn’t aimed at the public, so if not, then at whom? “Opinion formers” in the media? Or people further behind the scenes? Back to a bit of “triangulation”? Perhaps McDonnell has been “captured” by the monetarist establishment who see that things might need to look a little different from now on but don’t want the basics to change? Just like the SNP and the Growth Commission.
To win an election Labour need a media and establishment that considers them controllable, or at least just about tolerable. And people who are asset-rich like things the way they are with rising house and share prices. Even the not so asset-rich like the easy credit i.e shiny new cars on cheap finance. And those with no assets and no credit? Who gives a **** about them? Never mind that it’s all unsustainable. Proposals based on MMT and PQE would be the kiss of death at this point in time. The Economist magazine recently wrote an almost “tolerant” article about current Labour economic ideas. Lets see this accommodation develop!
My personal hope would be that once in power Labour will realise that they have to move to MMT and PQE based policies – otherwise they will fail.
I get no hint that Labour is playing double bluff
“I get no hint that Labour is playing double bluff”. Sadly, neither do I. But I think that A Pessimist’s last comment may well turn out to be true. They will completely fail otherwise. I’m due a meeting soon with an MP whom I hope to convince who may be the way in. Surely someone from John’s team is reading this f**king blog.
I would hope so…..
This is a link to the final report:
http://www.gfceconomics.com/wp-content/uploads/2018/06/Financing-investment-final-report-combined.pdf
Thanks
Page 35 of the final report, under the heading “Deficit targets” has –
“The Bank of England will be expected to demonstrate how its policies have contributed to the
productivity target (of 3% per annum).
The Government could decide to allocate spending and taxation in a way that still meets its deficit (or surplus) target, but damages the potential growth path of the economy. This may also increase the risks of higher inflation. The Bank of England would be expected to articulate its position to the broader public. This will act as a strong deterrent to the Government introducing fiscal policy measures that damage the productive potential of the economy.
To reiterate, the Bank of England will not be able to dictate spending allocations between departments or on specific tax rates. These will be matters for the Government, working with the Treasury. The Bank of England will, nevertheless, be expected to engage in a rigorous debate with the Treasury in regard to budgets that do not ‘credibly’ contribute to the productivity target, or breach Labour’s own Fiscal Credibility Rule.
Specifically, the Labour Party commits to:
– Closing the deficit on day-to-day spending over five years;
– Ensuring government debt is falling (as a share of GDP) at the end of five years; and
– Borrowing only to invest.
This framework will provide an extra incentive for the Government to reduce the tax gap.”
Perhaps Professor Murphy will agree with the last line (and they do suggest the tax gap “is very likely to be an underestimate”).
So, if the Bank of England has a disagreement with the Government, it should make the disagreement known to the broader public in order to deter the Government from damaging fiscal policy measures, even if they meet the government’s fiscal target. In practice, I assume that means the BoE will warn the Government in private that it will go public unless the Government desists?
Hence, at least indirectly, the BoE is being given fiscal control – am I reading this right?
It’s quite amusing re tax gaps
To support the noted claim that the tax gap may be as high as I suggest they quite a paper that quotes me, but not me directly
And I happen to agree that this framework does definitely require additional focus on the tax gap
But the framework is still the wrong one
And I agree -the framework does appear to be going control of fiscal policy to the BoE, which is bizarre.
George S Gordon,
Re. this:
“Page 35 of the final report, under the heading “Deficit targets” has —
“The Bank of England will be expected to demonstrate how its policies have contributed to the
productivity target (of 3% per annum).”
WTF? 3% of what? Is that Labour Productity Growth, MFP growth, what?
Where is this “report” Does anyone have a link to it?
The link is in these comments
Final report – http://www.gfceconomics.com/wp-content/uploads/2018/06/Financing-investment-final-report-combined.pdf
Richard, what springs to mind of the Labour/Conservative parties is “two cheeks of the same arse”
Listening to Corbyn and May arguing during PMQs was a deeply distressing experience as they thrashed our how the ‘emperors’ new suit was going to be paid for!
Richard,
To begin with I agree that, going by press reports, the idea appears to be totally bogus, especially so given that “productivity” measurement (capital productivity in particular) is hopelessly unreliable and completely outside the remit of the BoE which deals in monetary matters and outcomes that are quite numerically specific .
Reading between the lines of the Guardian article I get the impression that McDonnell might be signalling – in this case hinting at using high-tech / new industry investment as a pretext for overt monetary financing (yep, Corbynomics).
At any rate , I think that a couple of things in your post need to be addressed as I know that if don’t address them some rather unfriendly critics probably will. The first is this:
“So, for example, if labour productivity is being measured then the focus is upon the amount of output for each unit of labour input into the process (e.g., a working hour). So what Labour is saying by adopting a labour productivity measure as a Bank of England target is that it wants the amount of productivity in the economy to rise for each unit of labour input. This has some quite serious consequences.”
Well, it might do if labour productivity is being measured. That’s a big “if” and you’ve gone from explaining that particular “if” to stating: “So what Labour is saying…”
We cant’ necessarily assume that McDonnell’s sole focus is labour productivity without firm grounds for doing so. Nor does the article that I saw propose any form of monetary style targeting or BoE independence in this area. It says:
“Under options being considered by the party before the next election, Threadneedle Street would cooperate with the government on meeting a productivity target, move some of its operations to Birmingham, and steer high street banks towards lending in productive sectors, such as manufacturing and IT.”
Lord knows how that co-operation would be arranged or what sort of “target” they would have in mind. One imagines that the government would retain control of its own ideas in that regard (?) It all sounds very notional at this point. Which brings me to this bit in your post:
“Productivity is measured by recording the amount of output from a process given a fixed input of the variable that is the focus of attention.”
Yes, that’s true but not entirely so as econocrats and economists that specialise in this area tend to give their highest priority to Multi-Factor Productivity (MFP) which can be defined as “the growth in outputs minus the growth in inputs”. That refers to all inputs including capital and labour.
They know that there is no overall benefit if the cost of capital substitution (capital deepening) outweighs any increase in labour productivity.
The Guardian writer ignorantly and blithely gives his readers a definition of labour productivity and tells them that is what “productivity” means – so typical, so dumb. Given the opportunity I could almost slap him. I would also note that his paragraph on that particular point has no direct connection with the alleged Labour party proposal.
So, if Labour’s focus is on Multi-Factor Productivity as it should (and normally would ) be then some of your criticisms would not apply and it may appear that you have been a tad bit presumptuous.
However, that said, I must agree that productivity growth on its own is a pointless pursuit and the main reason for that is, as you say, that:
“this goal does not take into consideration the distribution of the benefit of the increased productivity. We have seen decades of overall rising productivity in our economies, but with the vast majority of that gain going to capital.”
Given the mass unemployment implied by the coming wave of AI tech it may be fair to note that productivity growth per se is totally passe and its all about the distribution.
Given that existing monetary targets are to be maintained according to the parts of the report I have no had time to read I think you are being optimistic
I take your point on the existing monetary targets – totally.
As for the rest of it I fear that you and others may have rushed to judgement on something that is as yet unclear. Particularly so on the point of labour productivity. As for McDonnell’s aims, from the little we can gather it appears that he would like the BoE to support government investment and productive industry or so it would seem.
That’s not the BoE’s job
That is fiscal policy
Which was my point
Marco Fante says:
“…….and steer high street banks towards lending in productive sectors, such as manufacturing and IT.”
Been there did that. (We’ve even got the T shirt and it’s full of holes) It was called a bank bailout, it was supposed to promote bank lending into the productive real economy. We’re still waiting.
If there’s low demand (because policies have shut down the economy) it would be a brave entrepreneur who would be investing in industrial production of ….of what ? What can you sell to people who have no spare cash ?
Capitalism is driven by sales.
No Andy,
I didn’t say that. It must have been another commenter.
My apologies, Marco for the misdirected attribution.
I lifted it from one of the above, and I had thought it was yours. Mea culpa.
I read this stuff – not Richards comment but the article by McDonnell & it sends me to sleep – there is no connection with the real world. Let’s try this: 75% of Uk buildings need in-depth energy renovation. The work force to do this (think 150,000) does not exist – but could – with the right training. The BoE could fund it & even earn a return since in most cases the internal rate of return on an in-depth energy renovation of a building is well north of 5% (I have the numbers – French ones but France ain’t so different). I leave the exact financial modalities to others.
My question to McDonnell is: why is he farting around with “productivity” when the problem is poorly paid, part time mostly unskilled jobs & the national problem of energy incontinent buildings is staring him (& Corbyn) in the face.
I utterly fail to understand where these numpties are coming from. The UK needs practical policies that Joe Ordinaries can understand – not wierdo stuff that has resonance (if at all) only in the BoE and other places.
Want to win an election? promise a warm comfortable home for all, funded by the Bank of England owned by the UK people & providing the resources to them to help them.
Insulation could create long-term jobs in every constituency
Nothing else could do that
Or maybe this?
https://www.opendemocracy.net/neweconomics/kind-capitalism-possible-left-build/
Maybe
That’s an optimistic view
The report is available from GFC Economics but, strangely, not yet from the Labour Party.
http://www.gfceconomics.com/wp-content/uploads/2018/06/Financing-investment-final-report-combined.pdf
The title page carries the following health warning:
‘This is an independent report produced by GFC Economics Ltd (“GFC”) & Clearpoint Advisors Limited (“Clearpoint”) for the Shadow Chancellor of the Exchequer. It should not be taken to represent the views of the Labour Party or the Shadow Chancellor. In publishing research, GFC & Clearpoint are not soliciting any action based upon it. GFC & Clearpoint’s publications contain material based upon publicly available information, obtained from sources that we consider reliable. However, GFC & Clearpoint do not represent that it is accurate and it should not be relied upon as such. Opinions expressed are current opinions as of the date appearing on GFC & Clearpoint’s publications only. GFC & Clearpoint are not liable for any loss or damage resulting from the use of its products.’
It is 202 pages (but double-spaced).
One can hope it dies a death but the relationship between Turner and McDonnell is old and appears deep.
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Late coming to this but a couple of points: the gap between the expert knowledge shown by contributors to this site and what many people believe is large and only growing so communication between these two is increasingly hard to imagine so many people will continue, through no fault of their own, not to understand and showing contempt for them will not help; many people believe that under-investment and profit-taking has caused low productivity and will welcome McDonnell’s initiative as they welcomed Corbyn’s regional investment plans, not grasping, admittedly, the nature of the B of E; lastly, Corbyn and McDonnell both remember the warning the B of E gave Wilson when he was elected and atecwsry of the power of capital, knowing that there is no equal and opposite power to challenge it.
I hope and think this is true. The first objective of Corbyn and McDonnell is to get elected. They can then do what they want. Remember these two have been in the game (without the power) for decades. They are rightfully fearful of enemies within and without the Party. Let’s just get them elected first.
Carol Wilcox says:
” The first objective of Corbyn and McDonnell is to get elected. ,,,,,They can then do what they want. They are rightfully fearful of enemies within…..”
Been there. Done that …….with Blair and Brown. Where did that get us ? More of the same with some minor tweaks.
If Corbyn and McDonnell want to be elected they had better be offering something voters want.
And can they deliver against their enemies within ?? I don’t know. I have my doubts.
I’m a very long way from being an economist, so maybe my comments will be trite and easily dismissed. On the other hand, I’m exactly the kind of person that needs convincing here.
The overwhelming impression I have is of the massive elephant in the room; climate change. Have I missed the decoupling of growth from climate change? Given the accelerating pace of change, I would have thought it would figure as a central element in any economic policy worth its salt. The only mention I can find in this thread is the mention of retrofitting the UK’s building stock with insulation. Can anyone explain?
Please search Green New Deal on this site
What has been written so far in this blog is very enlightening and I thank all contributors especially Richard, however, how do we get John McDonnell back on the right lines? I spend most of my spare time posting MMT articles on social media and particularly Labour oriented pages on FB, and I detect a widening understanding of the issues amongst members as well as the wider public, but MPs seem disinterested in MMT or for that matter economics generally – any suggestions as to how we get through to them?
I wish I knew
I am trying…
Organise an MMT symposium. Make the centrepiece a discussion between MMT’rs and any tame neoliberals who are brave enough to take up the challenge. Advertise it widely with a bit of hype.
I simply do not have the time to do this
But I’d happily play a cocunut in the shy
Yes Richard, I know you are.
BTW have you thought of going on Real Progressives? I’m sure Steve Grumbine would welcome it.
I’ve tried setting up a meeting for Warren Mosler to talk to Andrew Neil on one of his shows, but to no success – probably doing it wrong. You’ve been on Andrew Neil’s show, how did you get that set up?
I was asked
I never try to get media exposure
Let’s hope that it’s someone trying to bounce Corbyn rather than yet another capitulation.
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