John Mills: Austerity isn’t working, but that doesn’t mean Corbyn is the answer

But those who criticise the far-left need to do more than just decry the policies they propose

 

Support for Jeremy Corbyn in the Labour leadership election is yet another manifestation, among many in Europe, of the widely perceived failure of austerity to improve living standards for most people.

Who can deny that austerity impoverishes the public sector? That it heaps hardship on those least able to bear it? That it stunts current growth in living standards while failing to produce a sound foundation for future economic growth? And that it tends to favour the rich – and especially lenders rather than borrowers – at the expense of everyone else?

There is little doubt that it is the frustration generated by both the inequity and ineffectiveness of austerity policies that is driving the desire for left-wing policies to be brought back onto the agenda again.

The question is, can they provide any kind of realistic solution?

Clearly, there is a very high electoral hurdle to be overcome. The Labour Party is unlikely ever to get elected on a manifesto containing radically left-wing policies. And even if these policies were put into practice, the evidence accumulated over past decades strongly suggests that they would not achieve the results their supporters hope they would.

So how have we got ourselves into this predicament and what can we do about it?

The root problem is the ineffectiveness of the economic policies across the western world during the past few decades. These have allowed too many economies in the West to become increasingly unbalanced. Their levels of investment in the future have fallen to dangerously low levels, with much of the expenditure they do undertake being spent on projects which do not increase productivity.

They have de-industrialised, thus both foregoing the increases in output per head which manufacturing is so good at producing, and ensuring that they cannot pay their way in the world. They have consequently suffered from balance of payments problems which have sucked demand out of their economies, with the shortfall being financed by running up huge debts.

What expansion in output there has been has largely been led by consumption, based on ultra-low interest rates and assets inflation, neither of which are sustainable.

It is the consequences of these imbalances which have generated the rationale for austerity policies. The key issue is whether the policies advocated by Jeremy Corbyn and his supporters – at least from what we have heard so far – are likely to do anything significant to create better conditions.

First we must recognise that the only way to overcome austerity is to get the economy growing more quickly. Redistribution of existing output, beyond what is being done already, is extremely difficult to achieve on any major scale.

The issue then is whether the policies the left supports have any real chance of making the economy expand more rapidly.

Unfortunately, they almost certainly won’t – at least as articulated at the moment – for all the following reasons.

To increase investment both in industry and in the infrastructure – which has to be the way ahead at least as a percentage of the national income – consumption has to be reduced. This might be possible if the initial impetus to the economy came from manufacturing and exporting, where sufficiently big gains in output are possible over quite a short period, making it feasible both to increase living standards and investment levels at the same time.

But this could only happen if manufacturing became much more profitable. This might well be possible but it would involve a major devaluation to make productive industry more profitable, which is not currently part of the left strategy.

Without a more internationally competitive economy – as Greece and indeed many other Eurozone economies locked into high unemployment and low growth have discovered – the other policies which the left proposes are unfortunately almost certain not to work.

Increasing expenditure on infrastructure, while pushing up government debt which really has to be brought under control, will by itself do very little to increase economic growth. The return on most social investment unfortunately barely covers the interest costs involved in financing it.

Setting up an investment bank will not help manufacturing much, if at all, if the fundamental problem is lack of profitable investment opportunities. Renationalising the railways and energy companies may stamp out some abuses and stop subsidies being syphoned off as profits, but history suggests that relying on the government rather than the private sector for investment funds will not get these industries to make a stronger contribution to our economic performance.

Those who criticise solutions offered by the far-left need to do more than just decry the policies they propose. They also need to think long and hard about where we are going when many people – including plenty who are not Jeremy Corbyn supporters – justifiably fear that the future is one of stagnant living standards and endless cuts.

You may not believe in the remedial strategy which the far-left puts forward, but it is hard to deny that its supporters have a very serious point which badly needs an answer when they say – especially thinking of those who are already disadvantaged – that there are too few signs that austerity policies really provide any long-term solutions to the problems they are supposed to solve.

John Mills is an economist and chairman of consumer goods brand JML. He served as a Labour councillor almost continuously between 1971 and 2006.

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