Thursday, 12 November 2015

Debating Corbynomics

By Michael Burke
The Labour Assembly Against Austerity conference in London takes place this Saturday, November 14. The author is pleased to be able to share a platform with Ann Pettifor a direct of PRIME and author of ‘Just Money’ as well as Professor Victoria Chick whose major works include ‘The Theory of Monetary Policy’ and ‘Macroeconomics After Keynes’. 

All the panellists (and probably the audience) are opposed to austerity, and the debate is within that context. The opponents of austerity all want an alternative to this policy and to raise living standards. The debate turns on how this can be done. 

As SEB has previously shown there are only two uses of output; either investment or consumption. A sustained increase in living standards requires an increase in output. Increased consumption is a consequence of increased output. The question then becomes, can living standards be increased by increasing the rate of consumption, or is it necessary to increase the rate of investment?

The answer to this question provides the fundamental basis of economic policy, and not simply fiscal policy. If Consumption ‘C’ is the fundamental driver of growth over the medium-term then all available economic levers should be used in order promote it, monetary, fiscal, regulatory and so on. The converse is true if Investment ‘I’ is the fundamental driver of growth.

The recent history of the British economy is instructive in resolving this question. After a bout of austerity followed by a pre-election boost to demand in the last parliament living standards effectively stagnated, measured as per capita GDP. As this measure is an average it disguises the transfer of income from poor to rich and from labour to business that the austerity policy entails. Most people are actually worse off than 5 years ago.

The chart below shows the key developments in the level of GDP and its composition in the period since the recession began in the 1st quarter of 2008 to the 2nd quarter of 2015. 

Fig.1 Change in GDP & Components Since Recession Began
The recovery has been exceptionally weak by historical standards. Even so, real GDP has increased by just under £100bn since the recession began in 2008, an increase of just 5.9% in more than 7 years! Consumption (including both household and government consumption) has risen by more than £80bn over the same period, an increase of 5.6%. By far the weakest component of GDP has been investment, which has risen by less than £5bn, or 1.6%. Given the time period, in statistical terms this is effectively zero growth of investment. (The residual, the difference between GDP and C and I combined of £15bn is accounted for by net exports, inventories and other items).

Osborne has not ‘rebalanced’ the economy, but has tilted further in the direction of consumption and away from investment. This matters because only investment (and education) can increase the means of production. Consumption cannot do that.

If it were true (in some sort of inversion of Say’s Law) that consumption creates its own investment, then we should have expected investment to rise at least in line with consumption over the ‘recovery’ period. But prior to the recession the ratios of GDP to consumption and investment were approximately 7:6:1. In the recovery period the ratios have been changed to 20:18:1. 

The rate of consumption has risen and the rate of investment has fallen. But the mass of the population is not better off. This is because investment is required to sustain growth, which is the basis for rising living standards.

It may be argued that the rise in consumption is insufficiently strong to spur an increase in investment, and that much stronger growth in consumption would produce more investment by reducing spare capacity. But there is no evidence for this assertion. As profit-maximisation is the goal for producers, it is just as likely in the current period that producers would meet capacity-straining increases in consumption with higher prices.

In fact the entire crisis is characterised by what Keynes dubbed ‘liquidity preference’ and Marx called the hoarding of capital. Firms are investing a low and declining proportion of their profits. More revenues from consumption and more profits are not leading to a revival of investment.

It is a false notion that it is possible to increase living standards over the long-run by prioritising the growth of consumption. The sustained growth of production requires the growth in the means of production, which requires investment. It is only in this way that that is possible to sustainably raise living standards.

No comments: