Keynesian thoughts on Corbyn's Platform

The speech delivered on 13^th August by Yvette Cooper, one of four contenders for the  Labour leadership, was quite extraordinary, and indirectly helps to enlighten the actual novelties of Jeremy Corbyn’s platform. (http://www.yvetteforlabour.co.uk/manchester_speech_text [2]). After telling us that ‘We have to look the 21st century in the eye’, it proceeds to misrepresent Corbyn’s arguments on economic policy (I write this as some-one who will be voting for him, but not otherwise involved).

After falsely claiming that Corbyn would be ‘bringing back clause IV’ (presumably the pre-1996 one), the speech continues by  that it would involve ‘spending billions of pounds we haven’t got switching control of some power stations from a group of white middle aged men in an energy company to a group of white middle aged men in Whitehall’. Is it really only white middle aged men work for energy companies? Quite how white middle aged men in Whitehall would operate a power station is not explained. Nationalisation involves the issue of government bonds with which to purchase the company concerned.

The bonds would add to the national debt, but the interest on those bonds is covered by the profits of the nationalised energy company. The 1945/51 Labour government managed to undertake extensive nationalisation against a background of a national debt to GDP three times the present one. It is then suggested that some ‘return to British Leyland’ is on the agenda which is an interesting notion! Copper does suggest working ‘with business to double our investment in science and the future, so we can create 2 million more good quality high tech manufacturing jobs’. This would be fine, but she should recognize that such a plan runs into the same neo-liberal criticisms which she makes on Corbyn’s ideas – where does the money come from?

It was though her remarks on macroeconomic policies which particularly caught my eye. Copper states that ‘printing money year after year to pay for things you can’t afford doesn’t work – and no good Keynesian would ever call for it’. Presumably the ‘you’ here is the government – and the whole point of the Keynesian argument is that when there are underutilised resources, spending by government is required to employ those resources to produce goods and services of value.  Spending in order to take place has to be backed by money.

I would regard myself as a (post) Keynesian economist, though whether ‘a good one’ I leave for others to decide. Her statement on Keynesian approach is a travesty. ‘Printing money’ (more accurately the creation of central bank money) occurs every year (indeed every day), and has been occurring for hundreds of years. Money is created and added to in two ways. First, in order for the government to spend, money has to be created. The central bank facilitates government spending which involves the creation of (central bank) money. The money thereby created circulates, and eventually much of it is destroyed – taxes are paid, new government bonds are issued. But some of that the money created remains in existence.

Hence, and second, each year in general more money is created than is destroyed, and there is more money is existence at the end of the year than at the beginning. In normal times, that is when additional quantitative easing is not being applied, the rate of increase in central bank money (held by banks as reserves and as notes and coins) is likely to be similar to the growth of nominal GDP. The seignorage which the increase in central bank money  provides is a relatively small part of the over-all funding for government expenditure, most of which comes from tax revenues and the issue of bonds. ‘Printing money’ so called happens year after year.

Unless the central bank creates the money, government expenditure cannot occur. The question to be posed is not whether there should be the ‘printing of money’—because there will always be that—but how much, and more what will be the balance of the funding of government expenditure between tax revenue, bond sales and additional central bank money. The creation (‘printing’) of money has to parallel the political choices over the level of expenditure. The

The argument is then made that ‘Quantitative easing to pay for infrastructure now that the economy is growing is really bad economics.’ The insertion of ‘now’ may suggest that it would have been a good idea if the ‘quantitative easing’ which pumped £375 billions into the banks reserves had been used for infrastructure investment. But that time is passed, and the question now should be what are the most appropriate ways of funding infrastructure investment.

There are clearly alternative ways of financing and funding infrastructure (including, but not to be recommended, private finance initiative so favoured by new Labour playing accounting tricks to invest in infrastructure in a more expensive way) of which the use of ‘quantitative easing’ is one.  What should be discussed is what infrastructure, whether housing, hospitals, schools, environmental projects etc. (but not Trident) should be built, and on what scale.

The timing of infrastructure construction is also an issue to bring the unemployed into work and to take advantage of low interest rates. Would there be sufficient resources (workers, materials etc.) available to enable the houses, hospitals etc. to be built? Instead of hysterical claims, what is required is a debate over the priorities for socially beneficial public investment and what are the most effective ways of financing and funding that investment.