Some people have asked me about what John McDonnell has said on the deficit today.
Before going any further, please read this: what follows is my speculation and nothing else.
But I suspect John McDonnell has been influenced by this article by Simon Wren-Lewis. It certainly feels like it, which makes the article well worth a read.
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I agree Richard. From inside the Labour Party, in its current state, the article makes a lot of sense, and if McDonnell has been listening, I can quite understand why.
What is worrying is that the article advocates a less than frank and open statement on the economic facts, in exchange for electablity. A very dangerous line to tread in my view.
As I’ve already commented elsewhere, and as confirmed by Michael Portillo on that TV show where he shared a platform with Diane Abbot, this is EXACTLY what the Tories did over the NHS “no more top-down reorganisations of the NHS”, before launching the most savage, andcpointless, and destructive top-down organisation of the NHS in its entire history, throwing ” good money after bad” effectively in a highly wasteful exercise.
When pressed, Portillo agreed that the Tories lied, because they knew they’d lose the election if the told the truth.
A truly shameful, destructive lie. And we’re asked to trust the Government?
Alas, though, my example proves your point, Helen – this is indeed, a dangerous line to tread.
“Arguing against deficit fetishism (or in more populist terms ‘obsessive austerity’) while pursuing fiscal responsibility through a balanced current budget can become a winning strategy for the centre-left in Europe over the next few years.”
It sounds like rather badly spinned gobbledygook to me.
Straight out of the New Labour handbook.
if only we had a media that would take time to explain ideas, rather than set up confrontations.
I’m afraid I read mcDonnell’s repetition of the “living within our means” meme which reduced me to mouth-gaping despair again and the desire to rip up my newly (and naively?) acquired Labour membership card.
The illiteracy continues. In reality we are “living within our MEMES”.
It doesn’t sound as if he is listening to Wren-lewis but just re-iterating a new form of defecit-fetishism-if he means a return to Keyne’s “spending creates income” then he should make it explicit.
Oh well, as the joke goes: ” break time’s over, back on your heads”!
Just to amend what I said: I suspect, Richard, when you said “John McDonnell has been influenced by this article by Simon Wren-Lewis” you meant this comment by him (Wren-Lewis):
“Too many in the Labour party think that because many people now believe this idea, the best thing to do is pretend it is true and apologise for past minor misdemeanours (knowing full well it will be interpreted by everyone else as validating the Conservative line). ”
Sound like this is exactly what he’s listened to.
My feelings on the Guardian exclusive on John McDonald went from despair to hope and then despair again. Despair from the acceptance of the ‘living within our means’ and ‘ we are not deficit deniers’ tropes. Then guarded hope from the realisation that he was drawing a distinction between Current Account and infrastructure investment borrowing. Lastly, back to despair as I struggled to understand what this might mean for the range of Investment types that might be open to a future Labour government.
For example, I heard this week that there was a shortage of electricians. Could government spending on electrician training be counted as investment? Or will this type of spending on the unemployed/underemployed add to our Current Account deficit? If so, Labour will have thrown away a key spending tool for controlling inflation (supply of qualified labour eg electricians).
The capital budget has very fixed meanings and those meanings are determined by the European Accounting framework the ONS operates to (European System of National and Regional Account 2010).
Training and education is, and always has been, a revenue expenditure. R&D expenditure however is now capitalised under 2010 where there is specific intellectual property output (patents, etc). I suspect that will be the bin where a lot of this nonsense will be hidden.
So all this will result in endless fiddling of figures – which will eventually all unravel anyway due to the constant increase in depreciation and interest impacting the current budget. I’ve explained the feedback and scale issues here: http://www.3spoken.co.uk/2015/09/corbynomics-and-current-budget-balance.html
It’s all very silly. There are many years available to explain the reality of the situation to people and get them used to the structure.
But Labour just can’t seem to break this “we need to be like the Tories” habit.
Neil, thanks, I’ve scanned your article and the comments on it.
I agree that pqe would eventually be used to fund day-to-day `expenditure` [probably under the guise of the NHS] rather than `investment`, and that the only question is when would this happen.
What I don’t understand is how even this scenario could be worse than conventional qe. In particular, how could it lead to unacceptable levels of inflation when there is so much other downward pressure on prices through globalised commodity trading and uncontrolled movement of cheap labour?
dave
There is only a risk of inflation if the BoE fails to do their job properly. And that can only be if the people running it believe it isn’t their job – in which case they should be replaced.
QE and PQE are functionally the same thing.
Government spends. The private sector ends up holding extra bank reserves and commercial bank deposits as savings rather than Gilts.
In QE the Gilt is issued and then effectively de-issued by the Bank of England giving people their reserves back. In PQE you just cut out the middle step (technically you replace it with the NIB issuing bonds and the BoE di-issuing them and giving people their reserves back).
Neil, this is politics, not accountancy. Yes, we need to work out how all this works in terms of the accounts and avoid holes like that dug by Gordon Brown on PFI. The election will not be won on budget technicalities but we will need to make this transparent and avoid charges of ‘fiddling’. That might indeed involve ring-fencing some of the current budget explicitly for skills development and excluding it from the balance target. For me, that’s OK, as long as it’s clear and open. It’s early days, let’s see.
This is not about ‘being like the Tories’. It’s about recognising that we can’t campaign to ‘live beyond our means’. Once we acknowledge that we can move the debate on. On the means available to government, we can ask why we let the rich get away without paying their taxes, or why we tolerate mass under-employment that prevents people making a contribution. On expenditure, we can ask why are we wasting up to £100bn on Trident, or why we give billions to landlords through housing benefits instead of building homes and controlling rents. And so on.
We can win those debates and I want to win.
I concur with Lyn’s view that the pqe/qe argument will be resolved as a question of politics not accountancy [still less economics].
In order to make pqe politically attractive, it will be necessary to ring fence sums raised so that it cannot fund the NHS or education. rather, homes and transport where people want to live and work, and in creating national high-speed broadband service.
Another solution will need to be found for pfi.
The Current Account (Deficit or Surplus – as if!) refers to the UKs balance of trade, and not current revenue expenditure.
It’s best not to confuse the two.
Thanks for the correction. I guess the Guardian’s use of the term must refer to current revenue expenditure, but would be happy to be challenged in this.
Richard, I have seen/heard/read a few interviews with you over the last few weeks on TV/radio/newspapers and one thing that has puzzled me is why you appear to tone down your responses as compared to your blog in regards to these matters. When Andrew Neil asked you if you would increase the deficit you said you would and left it at that, and it was clear from the way he asked the question that this would be ‘a bad thing’.
I don’t understand why you have not explained in any of your interviews (that I have followed — I may have missed some) why the government effectively cannot control the deficit (due to the non-government sector net saving), why even if it could it would be irrelevant because the deficit/debt doesn’t restrict the government’s ability to fund itself either now in the future (according to MMT), and why if anything the wellbeing of the country would be better served by having a larger deficit at the moment (MMT again).
If I said to you in your blog comments that the problem with your policies is that they would increase the deficit you would tell me to get real and go read MMT, but if I said the same thing to you as part of a TV/newspaper interview I get the impression that you would hold back. My feeling is that if you were putting out into the mainstream media these ideas then it would force Corbyn and McDonnell to be more open about how they respond to these ideas, and it could prod them to tell the truth about the deficit (rather than lying, which is basically what they are doing now, as I believe they are both aware of MMT). At the moment they can pretend MMT doesn’t exist, instead of having to explicitly accept or reject it.
My personal preference would be to see you on TV explaining MMT ideas in a mainstream interview, but I wonder if you do not want to bring these ideas out in the mainstream because you have decided that you believe it should be up to Corbyn to determine what strategy he wants to follow (whether you agree with it or not) and you would be imposing yourself on that decision if you started MMTing in the mainstream media.
I would draw your attention to this http://www.taxresearch.org.uk/Blog/2015/09/25/business-as-usual/
As I said to Andrew Neil – I am not Jeremy Corbyn’s man – I am my own man
If I did not do well enough I apologise – point taken for net time, if there is one
I think to be fair to you Richard, i’d imagine it’s quite difficult having someone barking ‘gotcha’ style questions at you, constantly interrupting and generally not waiting around for an answer before moving on to his next tabloid talking point.
His style is deliberately confrontational, designed to chip away at the metal exterior of a machine politician. The format is not designed to get at the truth of an idea – you did very well under the circumstances.
Thank you
‘Sigh’! They never learn, do they? Have Labour learned nothing from the post-war consensus?
Is this some sort of contagion that has entered the economic sphere? Why do they not learn that deficits do not matter and that no national debt has been paid back since it’s inception?
The only positive I take out of this is the notion of using investment to get the deficit down, though it is unclear how he is going to do this if he intends to accept the economic restraints of the conservatives?
I will wait and see how this actually plays out, but at the moment, I have to admit I’m hugely disappointed. An own goal!
I can only assume that McDonnell either
a) Has come to realise that there’s no way on God’s Earth that the average person on the street will understand macroeconomics while they will always accept concepts such as ‘we can’t live beyond our means’, ‘we can spend more than we earn – it’s common sense’ and ‘we can’t live well now and expect our grandchildren to pick up the bill’.
or
b) he really doesn’t understand the way the macroeconomy works.
I’m going to defend John McDonnell on this, on both economics and politics.
On economics, drop below the headline on the fiscal charter and look at the content. First, Labour will tackle inequality alongside the deficit. Tax justice will play a large role in that and scrapping Trident would help. Second, Labour will fund investment on top of balancing the current account. Go into the detail and this is a radical programme.
On politics, yes I want Labour to win the next election. No apology for that: the alternative is another five years of economic vandalism, probably with Osborne as PM. On policy, content counts not words. I will accept ‘living within our means’ and ‘central bank independence’ if we can move the debate onto practical solutions to real problems. That we can win.
Mostly agree with your point about practical solutions. However, has John McDonnell given away a key economic lever? Do accounting regulations prevent investment in people (Eg. Electricians as in my earlier comment)? I assume that when the government spends/invests in people (Eg. training), that the cost is added to the deficit, but the benefit can’t be quantified since people can’t be added to balance sheets as assets? This contrasts with houses, rail lines etc. where the ‘investment’ value can be easily quantified.
I’m unsure about whether this distinction is relevant. If it is, John McDonnell may have already thrown away a key economic tool by agreeing to a Current Account balance/surplus. Is anyone able to advise on this potential implication?
McDonnel need to listen to Frank N Newman: https://www.youtube.com/watch?v=ICkdaquB2vY
Let’s hope that “living within our means” includes the ability to borrow billions and run a long-term deficit!
Good point; if I spend more than I earn, have a nice comfortabe house with a massive mortgage and a wonderful lifestyle based on lots of juicy credit card debt…. but happen to own a national bank, and have a printing press in the basement with a licence to print money, then I am, in fact, living perfectly within my means! Which is nice.
No you won’t be
You’ll be exploiting the trust placed in you
From the ‘Guardian’ article, John McDonnell will indicate in his speech “that his support for the charter is qualified because he believes that only the current account should be balanced to give the government space to borrow to fund infrastructure projects”.
By accepting your opponents framing of the issues you’ve lost already. ”We need to get the deficit down,but…….” was almost precisely Ed’s position.
Their position is an attempt to make a nuanced rebuttal to the question ‘when did you stop beating your wife’. You’re still left explaining that you’re not a wife beater and nor have you ever been a wife beater.
Some of the signs from a few weeks ago were not promising and i can’t say i’m surprised by this. It’s not that i don’t think McDonell and Corbyn don’t understand the issues – i think they do – it’s more that they’ve come to the conclusion that they don’t have the intellectual chops to *explain and persuade*. Easier to default to the narrative and tweak it……
I can only sigh wistfully when you see the paucity of talent on the Labour benches and then contrast that with somebody like Yanis Varoufakis on QT last Thursday
Alternative theory:
Jeff is right, Corbyn and McDonnell know what they are doing. They also know they that have plenty of time to articulate a new vision. Right now they are playing to the party (easing divisions) and starving the media of controversy. The best advice may be to be patient in the present time.
Wren-Lewis has a managerial frame of mind. He is right in advising the moderates to ditch austerity. There is no harm in any of this for the time being.
0
Progressives will find it very hard to shift the narrative within 2 weeks of this sea change in British politics.
I can empathise with a cautious start while a proper MMT policy base is crafted.
Let’s give them the benefit of the doubt…for now.
There is no harm in any of this for the time being.
There’s always harm if we heard to be saying things we don’t mean. The Government’s deficit in everyone else’s surplus is what we really do mean.
It’s a pity all of that (and a bit more) is going overseas to pay our import bill right now.
The recession will only get worse if the Tories do what they say. Let’s be in a position to say “I told you so” at the next election.
as i understand it measures like PQE, closing tax loopholes, increasing Corporation Tax (whilst remaining competitive), etc will have the effect of reducing the deficit EVEN THOUGH that’s not what said measures were enacted to do. and so to argue that deficit reduction isn’t necessary is, as far as i can see, completely pointless and worse still plays into the hands of those wishing to paint Labour as profligate.
why fight a battle on ground your enemy has very purposefully chosen when your broader strategy has no use for it? i think both McDonnell and Corbyn are choosing their battles very wisely so far.
That sir, is an excellent observation and one does not need to be a Machiavellian cynic or master of lateral thinking to see the obvious virtue in it. I have tried to argue the exact same case in previous threads. Your version is more concise.
Politically, the deficit issue is non-problem. It is a gift that plays right into the hands of the fair tax, anti-austerity, pro-growth, pro-revenue and PQE agendas without being the focus thereof. As such it can be embraced, addressed, ignored and sidelined simultaneously.
One does not need to confront the enemy in this case but to thank them for their thoughtless generosity.
@Graeme – i’d argue that by choosing to highlight the desire to reduce the deficit you *are* actually fighting on your enemy’s battleground. They’re tacitly acknowledging that the deficit is a problem that has to be ‘solved’.
Perhaps Richard Fort’s point that we’re only 2 weeks in and their economic policy is still being worked on is something to consider. Maybe they’re giving themselves space to work on the details and strategy – but, on the other hand, difficult questions like these have a tendency to get kicked into the long grass never to be seen again through expediency. There’s always a crisis at hand which throttles discussion – the moment is never opportune.
I hope McDonnell is really taking the Michael hear and using that ghastly phrase in the same way the Tories pat people on the head with “hard working families”-this reduces politics to piss take which is sad-but necessary?
I’ll sign my self Simon Q (for Quaker!) to distinguish myself from the other Simon who is now posting.
(Blog doesn’t seem to have a “name already in use function”?).
Simon
That will help
I am not aware of a duplicate name plug in…
Richard
By the way, they are not “highlighting” their desire to reduce the deficit. Quite the opposite. They are sidelining it. By refusing to confront the issue they allow for the opportunity to shift the battle on to other areas – the headline issues that they really are highlighting.
Marco, agreed. This will let us fight on ground we choose, not Osborne.
as yourself, Lyn Eynon and Boochiwawa (part a)) have all recognised, there is no way the public will believe anyone who says that adding to the country’s debt isn’t necessarily a bad thing. unless you honestly believe that a majority of the electorate are going spend what little free time they have reading up on MMT, you’d be a fool for even attempting it. and so not only is it a battle Labour need not engage in, it is one they would almost certainly lose, doing their credibility huge damage in the process.
John McDonnell ought to be saying things like:
1) We are not deficit deniers. We’re deficit understanders.
2) We promise to balance the economy. We want an economy which works for all.
3) The Tories are full employment deniers.
4) The Tories are economically illiterate!
John McDonnell needs to find the courage to make these bold claims and challenge the so-called accepted wisdom. Not everyone will get it straightaway, but they will respect JC ond JD for taking the fight to the Tories in a positive way. We need to line up all the available experts in support of what we’re saying. In addition to Richard we’ll have plenty of support if we just ask!
As Graeme Woodhead (above)so aptly put it:
“why fight a battle on ground your enemy has very purposefully chosen when your broader strategy has no use for it?”
When strategists talk about “picking their battles”. This kind of selectivity is precisely what they are referring to.
There seems to have been a lot of consternation in the blogosphere concerning John McDonnell’s apparent approval of budget mania. However the Guardian article clearly contains the following statements :
‘But he indicates that his support for the charter is qualified because he believes that only the current account should be balanced to give the government space to borrow to fund infrastructure projects.
He says of Osborne’s plans to deliver an overall surplus: “There is an economic illiteracy about this. If you have a surplus in that sense you are actually taking capacity out of the economy.”’
So not only does John McDonnell clearly know about the macro-economy sectoral balances but is only talking about getting the current account (i.e. import-export) into surplus (which in passing is not an easy task….).
So his position appears to be much more subtle than first appears from the headlines.
This recent blog article from ‘Notes From a Broken Society’ explains the point in more detail:
https://notesbrokensociety.wordpress.com/2015/09/26/john-mcdonnell-and-the-deficit/
Good point, well made.
Well the new economic advisory team has been annouced and I’m not inspired
There are good people on there
I do think that’s a pretty useful team
Pretty useful maybe but paradigm changing ? No.
Here’s more about the team- http://www.thesundaytimes.co.uk/sto/news/uk_news/article1612376.ece?CMP=OTH-gnws-standard-2015_09_26 (I’m afraid it’s behind a paywall). For some reason it hasn’t been reported elsewhere (if I was cynical I would say it’s because it shows that McDonnell has support of leading economists).
Here’s extract listing the six advisors:-
“THE shadow chancellor, John McDonnell, has recruited six economists to help write Labour’s economic policies in an effort to counteract the public view that it cannot be trusted with the nation’s finances.
In an interview with The Sunday Times, McDonnell revealed that the academics – who oppose George Osborne’s austerity plans – will meet four times a year to guide him and give lectures in Westminster to MPs sceptical about the direction in which he wants to take Labour policy.
The panel includes Joseph Stiglitz, a Nobel prizewinner; Thomas Piketty, author of a surprise bestseller on inequality; and Mariana Mazzucato, who argues that big government is more innovative than big business.
Simon Wren-Lewis and Ann Pettifor, who argue that investment is more important than the deficit, will join the panel and David Blanchflower, a former Bank of England economist and critic of Osborne, is also expected to lend advice.”
Stiglitz, Piketty, Mazzucato, Wren-Lewis, Pettifor and Blanchflower- seems quite impressive to me!
Plus my City colleague Prof Anastasia Nesvetailova, please
At least one or two of those will be chased by reporters and fans seeking autographs. Good economics, great politics.
On a more serious note, the symbolism here is unmistakable. This sends a signal that should assist in straightening some of those that have been fluffing-on about “economic credibility”. It also signifies something deeper that relates to legitimacy, momentum and ascendancy. Its another indicator of who is (and is not) on the right side of history. Soon enough you will see changes in the attitudes of doubters in the progressive commentariat. New found ‘friends’ will appear.
I think that it has potential to play out out well in the macro media narrative, i.e. Contrasting economic expertise of the panel with Osborne’s history degree.