In September, John McDonnell said that Labour will develop the ultimate alternative for the country, as the team consists of the leading economists. It was told about the promising team of the new Economic Advisory Council of the party.
However, almost everyone from the council weren’t sure they were heading towards that ultimate alternative. No matter how beautifully Mr McDonnell spoke about it, many specialists quit the project altogether. For example, Danny Blanchflower, who was once working for the monetary policy committee of the Bank of England, said that nobody would rule the Bank. He said that no person who uses their common sense would do it in case Jeremy Corbyn took the post of prime minister.
While the Labour’s fight for the leadership continues, it’s not difficult to spot that the economy is slowly going down the stairs. The average wage level lowered by 10% in 8 years till 2015, while asset prices are near the zero interest rates now. This gives the left-wing party a lot to add to their current disputed. Such disparities, across regions and generations, go a long way to explaining the discontent that prompted voters to opt for Brexit and the prominence of immigration in political debate.
Most economists believe that Brexit will have a long-term negative effect on growth and that immigration is not the reason for the squeeze on real wages. Labour should be proposing ways to cope with the damage. Its answers are variously non-existent, irrelevant, fanciful or destructive.
Mr Corbyn’s economic pronouncements come down to two themes: austerity (bad) and investment (good). Well, there’s a strong case that bearing down on the budget deficit is not what government should be doing now.
The Bank of England has downgraded its GDP projections since the Brexit vote, and weaker growth will mean lower tax receipts. Monetary policy is already very loose and appears to have diminishing effectiveness when interest rates approach zero. To support demand, the government could ease fiscal policy. The cost of capital is low: the government could borrow more at today’s interest rates to spend on infrastructure.
Inflation is likely to rise, given the boost to import prices caused by the post-referendum depreciation in sterling. That will intensify the pressure on real wages. The hope is that it will be offset by the long-term stimulus to demand that looser fiscal policy can bring.
But here’s the conundrum. A looser fiscal stance makes sense because Britain’s monetary framework has credibility. Investors in sterling-denominated assets don’t doubt the Bank of England’s commitment to containing inflation. But that would change if Mr Corbyn were in office. Labour envisages public investment through, in Mr Corbyn’s words, “a national investment bank and a network of regional investment banks to redistribute wealth and power”.
What’s wrong with that? Well, if the Bank is required to buy bonds from these investment banks, it no longer has operational independence to meet the inflation target. Instead, it would be compelled to underwrite deficit financing for whatever scheme Mr McDonnell stipulates. We have no idea what Mr Corbyn and Mr McDonnell see as appropriate targets for public debt and the budget deficit.
No responsible public servant would agree to be Bank governor under this regime. A left-wing government committed to social programmes needs credibility in monetary policy. Mr Corbyn appears to have given no thought to this. Were he to become prime minister, a collapse in real wages would doubtless follow at some point. Labour under his leadership is a threat to workers’ living standards.