How Labour should respond to Corbyn

Jeremy Corbyn’s rise to prominence is revealing. It shows a Labour party bereft of intellectual leadership. Politics is crying out for inspiring policies – ambitious, radical policies, which positively address economic challenges. It seems that the best Labour can come up with is “back to the 1980s”. To this extent, Yvette Cooper is spot on:

“the truth is that Jeremy [Corbyn] is offering old solutions to old problems, not new answers to the problems of today. We have to look the 21st century in the eye, face up to the future. That’s where we will find the new radicalism, the answers in the modern fight for social justice, equality and solidarity. Not the old answers of the past.

… And I want to show today that there is an alternative that is both radical and credible, true to our values, but serious enough to win.”

The problem is, she has no “radical and credible” ideas. Corbyn is radical and wrong, Cooper wants to be radical and has … “sure start” and “clean coal”. Both are good ideas, but neither are radical nor inspiring.

What’s most damning is the fact that radical, innovative and credible policies are available – Labour’s leadership needs to get out more. Here are four examples:

1. The economic challenges facing Britain and most of the developed world are reasonably well understood. Foremost is that globalisation, deregulation and technology have combined to produce great innovations, but have also shifted power firmly towards capital and against labour. Turning back the clock through taxes or regulation is wishful thinking. New policies need to be smart.

One way to align the interests of labour and capital is to broaden the ownership of capital. Mark Blyth and I have outlined a way to do this. The UK should create a sovereign wealth fund, financed by issuing gilts, which would then invest in global businesses, through international equity markets. After ten to 15 years, the debt could be repaid and the remaining shares – perhaps up to 30% of GDP – would be distributed to the 80% of UK households with the least wealth. These shares would be held in savings accounts (such as ISAs) and could be drawn down for specific needs. Our proposal is self-financing as we outline in the Harvard Business Review.[1] There is no tax involved, no regulation involved, and no cost to the government. The population in fact benefits as long as global capital continues to thrive. This is a serious, capital-friendly, way to address the challenges of wealth inequality.

2. Give the Bank of England the means to be effective. The Bank of England has no effective tools when interest rates are already this low. The simple truth is that policy is currently based on hope. The government – and it appears the opposition – have no idea what to do if there is a recession. Oxford University’s Simon Wren-Lewis, and Ivy-league professor, Mark Blyth, have outlined how to do a smart version of “people’s QE” (Corbyn’s QE is a complete distraction). The Bank of England should be given the power to make equal payments direct to households, in the event of a recession, or the threat of recession. Former US Federal Reserve Governor, Ben Bernanke – no less – first floated the idea, in discussing Japan. We have refined it. Under no circumstances should the Bank of England’s framework be tampered with. It should remain independent, and mandated with delivering 2% inflation. But the Bank needs a new tool, one which is fair, works quickly, is not intermediated the banking system and asset prices, and one which does not require balance sheet distortions in the household sector.

Not only would this reform reduce the likelihood of recessions prospectively, it is also more likely to produce financial stability. Yvette Cooper needs to talk to Simon Wren-Lewis. And while she’s at it – and to refute any doubt about her fiscal credibility – she can ask Jonathan Portes to join them and strengthen the UK’s fiscal rules and the powers of the Office for Budget Responsibility. After all, Portes and Wren-Lewis have already shown us how to do it.

3. The Entrepreneurial State. Having stopped off at Oxford, go to Sussex University. Mariana Mazzucato has written an extremely modern, forward-looking, ideology-defying book, The Entrepreneurial State. Many will quibble over details, but the message for policy-making is clear: the state can play a hugely supportive role in fostering innovation, as it has in the past. But it needs to be ambitious and aggressively supportive of the private sector. Given the largest private equity and venture capital industry outside of the United States, Britain should be fostering a technology boom. Give Mariana Mazzucato a ministry which is tasked with investing 20% of GDP over 10 years on a hugely ambitious R&D programme across all areas of technological innovation. It needs to work with universities, scientists and co-finance with venture capital and private equity. More than anything it needs to be ambitious. Britain should have its own “Arpa”.

4. Finally, let’s really back a radical overhaul of education and infrastructure. The school system is tired of continual reorganisation, but there are simple policies which have huge effects which we can borrow from development economics. In education, the most obvious is to increase the length of the school week. The public sector should offer seven days week primary and secondary tuition, starting in deprived areas, with parents free to choose an opt-out. Clearly this requires more teachers and investment in IT. If you want to do more, ask Esther Duflo and Abhijit Banerjee how. They’ve already done the work.

On infrastructure, John Van Reenan and his colleagues at the LSE have similarly told us what to do. The case is even more compelling now that the government can borrow for the long-term at close to zero in real terms.

If Yvette Cooper really wants to be radical and electable, she could also drive a coach-and-horses through the economic nonsense of left-wing/right-wing policies. If income growth is “too low”, she could continue cutting income tax for households on low incomes, and revitalise income tax credits.

In summary, the response to Corbyn, or for that matter the Scottish Nationalist party and UKIP, is not retrogressive compromise. Nor is it dull, middle-of-the-road, ‘competence’. There are big challenges. There are also innovative and powerful new ideas. Our political leaders need to get up to speed.

[1] The UK’s sovereign wealth fund could be financed by issuing gilts equivalent to 30% of GDP, and fully investing the proceeds in an index of global equities (leaving the government’s net debt is unchanged). Prudent estimates of the current global equity risk premium suggest that equities will deliver twice the return of bonds over 10-15 years, implying that the government could distribute up to 30% of GDP in global equity to the 80% of the UK’s least wealthy families every 15 or so years, contingent on market returns. This is not snake oil, it follows from the private sector’s aversion to the price volatility of equities – rational or othewise. The government, as issuer of gilts in fact faces the opposite set of financial risks, which allows it to make medium term investments on behalf of those without financial resources.

About The Author

Eric Lonergan is a macro hedge fund manager, economist, and writer. His most recent book is Supercharge Me, co-authored with Corinne Sawers. He is also author of the international bestseller, Angrynomics, co-written with Mark Blyth, and published by Agenda. It was listed on the Financial Times must reads for Summer 2020. Prior to Angrynomics, he has written Money (2nd ed) published by Routledge. He has written for Foreign AffairsThe Financial Times, and The Economist. He also advises governments and policymakers. He first advocated expanding the tools of central banks to including cash transfers to households in the Financial Times in 2002. In December 2008, he advocated the policy as the most efficient way out of recession post-financial crisis, contributing to a growing debate over the need for ‘helicopter money’.

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