John McDonnell sheds his Corbynista cloak

by Nick Small

For the 4.5 percenters, who, like me, backed Liz Kendall, John McDonnell’s first major speech as shadow chancellor at Labour Party conference was, in many ways, a pleasant surprise.

The acknowledgment of a golden rule of British politics, that the voting public demand reassurance from the centre-left about our economic credibility in a way that they don’t from the Tories, is welcome.   It’s also welcome that McDonnell has explicitly reinforced the message that economic prosperity and social justice are two sides of the same coin; as our aims and values put it that means ‘a dynamic economy serving the public interest’.  In other words, you can’t redistribute wealth unless you first create it.

Recognising that the country has to live within its means, that Labour should tackle the deficit fairly and that a Labour government inheriting a current account deficit in 2020 should pay it down without jeopardising sustainable economic growth is, again, good to hear.  It’s not austerity-lite and it’s not deficit denial.  This will chime well with the voters who’ll decide the next election.  They may well be more economically radical than many from my wing of the party thought, but they’re certainly more fiscally cautious than many Corbynistas gave them credit for.

But it’s on monetary policy that McDonnell was perhaps most interesting, especially around Bank of England independence.  In 1997 the second major economic announcement the Labour government made was that an independent Bank of England would set interest rates to meet an inflation target determined by ministers.  The first announcement was one no-one gives Gordon Brown much credit for – a return to high and stable levels of employment as the key goal of macroeconomic policy.  But the two are linked.  Bank of England independence led to a depoliticisation of interest rates, which reduced short-termism and locked-in economic growth.  It’s also the reason why the UK hasn’t had interest rates hitting 15% like in the last Tory recessions.

Abandoning Bank of England independence, which McDonnell has suggested in the past, wouldn’t in the long run bring about dynamic and sustainable growth or improve things for those suffering at the hands of Tory austerity.  The public still don’t trust the politicians on the supply of money.  It was that distrust that led to setting up the West German Bundesbank in 1957 and the same distrust that led Brown to set up the Monetary Policy Committee 18 years ago.  So guaranteeing Bank independence, as McDonnell did in his conference speech, is a positive.  So too is widening that debate to ensure that the Bank’s Monetary Policy Committee looks at the impact of interest rate policy on growth, employment and earnings as well as inflation. Where this leaves people’s QE, though, is anyone’s guess.

National governments’ ability to impact directly on aggregate outputs are significantly restrained in a globalised 21st century economy.  What we need are monetary and fiscal policies that crowd-in public and business confidence.  We need to change the things we can change.  Government intervention is best targeted to those areas where government can best have a positive influence – like skills and welfare to work – and to eliminate market failure through taxation, removing corporate welfare and competition policy.  We need to accept the things we can’t change – whether we like it or not, in the long run supply always equals demand.  But most importantly, we need the wisdom to know the difference.     

Nick Small is a Liverpool councillor and assistant Mayor

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4 Responses to “John McDonnell sheds his Corbynista cloak”

  1. “Recognising that the country has to live within its means..”

    Yes, of course. But, because we are wasting the resources we have available to us by having much too high a level of unemployment, underemployment, and low productivity jobs we are living well below our means.

    “that Labour should tackle the deficit ..”

    Why? Is inflation too high for you?

    “….inheriting a current account deficit in 2020 should pay it down…”

    You can’t pay down a deficit. You can only pay down a debt, by running a surplus, but you can’t pay down a deficit.

    “without jeopardising sustainable economic growth”

    There’s the rub! You can’t !

    “It’s not austerity-lite…”

    That would be putting it too kindly!

    “…and it’s not deficit denial.”

    That’s true! But WTF is deficit denial? Is anyone denying the receipts from taxation are less than the level of spending?

  2. ” in the long run supply always equals demand.”

    I missed this gem of wisdom (NOT)!

    As Keynes famously said we’re all dead in the “long run”.

    If we have 95 bones and 100 dogs, and assuming there’s a demand of one bone from each dog, we can see that supply is not going to equal demand. Five dogs will go hungry.

    The reason we have unemployment is because the supply of jobs doesn’t equal the demand for jobs. Neo-liberals would argue that is because the wage level being demanded is too high. However, Keynes showed 70 years ago this to be an erroneous view. Reducing wages also reduces the purchasing power of those wages which in turn causes reduced demand in the economy, which then leads to more unemployment.

    Supply doesn’t equal demand unless governments fine tune their economies to make the two equalise. Too much demand for the available supply will create inflation. Higher prices are the rationing mechanism. Too little demand will create falling prices but also higher than acceptable levels of unemployment.

  3. stephen says:

    sorry to have a go. Liz Kendall? you voted for her? you are 4.5% human

  4. Nick, seems to me that it has been made pretty clear that ‘people’s QE’ would have a place during the recessionary phase of an economic cycle, much like Darling and Osborne have used QE for the banks in recent years. It makes one wonder if you are being deliberately obtuse for political reasons. Right now with low interest rates it would be an ideal time to borrow more to invest in infrastructure projects. Maybe up there in Liverpool you could build more council housing if you were allowed to borrow.

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