What should an economist make of the economic policy of Jeremy Corbyn, the new leader of the Labour Party in the United Kingdom?
Among other things, Corbyn and his team have proposed not just a minimum wage but a "maximum wage" as well. That means, presumably, that firms will not be allowed to pay any employees over a certain amount. Unless that amount is set at some extremely high level – so high that it would not be considered a 'socialist' measure at all – the result is obvious. Talented people will leave in order to get higher pay elsewhere, and talented people who might have come to the UK from other places (like high-tax France, for example) won't. Likewise, companies whose business relies on world-class human resources will not be able to attract them in the UK, so will move abroad, or will not bother to come. So unless Corbyn can get the entire world to adopt the same "maximum wage", the policy won't work. And even if he could, there would then be a lot of talented people downing tools.
Another strand of Corbyn thinking is to nationalise (or is it re-nationalise) the energy companies. He might even re-open the coal mines, whose workers caused Margaret Thatcher so much annoyance. Unless the aim is to re-create a labour movement based around mining communities, the latter policy seems odd, for several reasons. First, the UK's coal resources are pretty poor. Thatcher may have had political reasons to close the mines, but the straightforward economic reasons were the low quality of the mineral resource in the UK, and the inefficiency of the UK coal-mining operations. At one point it was cheaper to land coal from Australia in the UK than to mine it ourselves. Were it feasible to mine coal efficiently in the UK, more people would be volunteering to do it. Also, deep-pit coal mining is not, and never will be, a particularly healthy occupation. In a country that is doing its best to stop people smoking cigarettes, it seems remarkable to wish to send more people into coal mines. Unless you figure the entire job can be done by robots, which on the basis of other countries' experience, seems unlikely.
As for nationalising energy companies, why bother? Will that really contribute more to the UK economy? How much more efficiently could the state run the energy sector, even on the most optimistic assumptions? Is the presumed benefit worth the upheaval?
And another point: would compensation be paid to the (millions of) shareholders of the energy companies? If so, that would be a big drain on the government budget: these are big companies so the bill would run to – who can be sure, but probably £200bn or more. What other government budgets are going to be cut to pay that bill? And if no compensation is paid, what signal does that send to potential investors in UK enterprises? Simple: the message that their money could be taken off them without notice. Better, many might think, to put their cash elsewhere. And better, many entrepreneurs might think, not to bother building up a business in Britain.
Corbyn has taken a robust anti-austerity stance. We should borrow to invest in our future prosperity, he insists. The proposition would be more widely accepted, were the UK government's borrowing not already at a record high (apart from war debts) and getting higher each year. Arguably we have not had austerity, we have just kept on borrowing, and spending, perhaps a bit slower than we might have done.
The plan is for 'People's Quantitative Easing'. The argument is, not entirely fallaciously, that the previous rounds of quantitative easing have gone into creating asset bubbles, which is fine for the people who own assets such as shares, but not for the ordinary workers whose firms are finding it hard to meet their wage bills. So how can we get new spending to do the business? Corbyn's answer is to spend it directly on things that matter, things that will improve our lives, things that will makes us prosper in the future – things like roads, housing, transport, green energy and digital projects. In other words, the Bank of England will be creating money that the government will spend on projects that the government decides fit – not to finance the projects that industry and business believe would deliver the best return. The policy certainly envisages a much larger role for the public sector in the economic life of the nation. But is public decision-making any better than private decision-making? Is Whitehall good at prioritising and managing investment projects? Probably not.
The anti-austerity call also comes at a time when the Bank of England is thinking much more about how to tighten things than to loosen them. The UK's growth is already well ahead of Europe's in general, and there are fears that this growth simply reflects the fact that interest rates have been held at 'emergency' levels for more than five years. An important job for a central bank is to dash away the punch bowl before the party gets too raucous and ends in people doing stupid things. Now might be a good time to stop pouring the punch.
How to fund all of the new expenditure envisaged by Corbyn and his team? There is talk about cutting tax reliefs and subsidies to the corporate sector, which the team estimates at £93bn. True, there are far too many little schemes to aid business, all of them squibs injected into the budget speeches of past Chancellors in order to get a cheer of approval from MPs. We would be better to scrap them and have generally lower taxes. But equally, cutting schemes such as grants for research and development might actually, in the immediate term, do more harm than good, forcing firms to cut back their research and investment activities. More thought is needed on that one. And even if the £93bn figure is accurate and not a wishfully high guess, how far does that take us towards paying for the ambitious economic programme that is envisaged?
Another ambition is to 'end' tax evasion and avoidance. A pressure group that the Corbyn team rely on puts the loss to the Exchequer of avoidance and evasion at £120bn. There is no justification for this figure. Surveys generally agree that the UK has one of the world's smallest shadow economies. Certainly, there is a fair bit of back-pocket trading, and when VAT is 20% it is not surprising that many people would prefer to pay in cash than have their transaction go through the books and suddenly grow one-fifth larger in cost. If it were possible to prevent cash transactions (and France has recently lowered the size of transactions where you are actually forbidden from paying in cash), it is entirely possible that a lot of fledgling businesses would be killed off by the tax, and perhaps by the extra regulation of doing everything by the book. But for small transactions, how can the back-pocket method ever be totally policed? The idea that there are £120bn of savings waiting there to be picked off is – well, optimistic.
Likewise with avoidance. True, the Treasury can take action against schemes whereby people are paid in rare metals or some other ruse to avoid national insurance and the like. But the point about avoidance schemes is that they are legal. They work within the existing rules. The more complex the rules are, the more possibility is there of moving money, quite legitimately, from one column to another in order to benefit from the different treatment of it and lower your tax bill. There is really only one solution to this – to have taxes that are low enough that they are not worth avoiding. But that does not seem to be on the Corbyn agenda.
So much for what is in the Corbyn economic programme. Just as revealing is what is not in it. There has been precious little mention of encouraging new start ups, helping growing companies with easier rules and regulations, and promoting entrepreneurship. There has even been ever little talked about improving the conditions for new kinds of company to grow, such as social enterprises, cooperatives or mutuals. The solution to our ills is seen as greater spending led by the state, not a revival of growth, enterprise, trade and entrepreneurship led by ordinary individuals and groups. Given the competition which the UK faces from other, dynamic, economies, this seems a worrying oversight.