By Karl Sorri for Global Risk Insights
When the race for UK Labour Party leadership began some 3 months ago, the ‘rogue backbencher’ Jeremy Corbyn was given only a 100-1 chance of winning. But Mr. Corbyn ended up winning the contest with nearly 60% of the vote, giving him a stronger mandate than even Tony Blair received in 1994.
During his acceptance speech, Mr. Corbyn declared: “We need an economic strategy that improves people’s lives,” adding that “you can’t do that…with grotesque inequality.” Many have applauded him as a breath of fresh air to the current pursuit of austerity, whilst critics find his economic policies illogical or even dangerous. But what is “Corbynomics,” and does it stand a chance?
It’s the people, stupid
In essence, Mr. Corbyn is staunchly pro-growth and anti-austerity, and is particularly opposed to the current cuts imposed by the Welfare Reform Bill. Moreover, he is committed to decreasing tuition fees, boosting public housing, and (somewhat more controversially) renationalizing energy services and railways. Ultimately, his policies are fairly left-wing.
But even though he calls for less cuts and more spending, he isn’t a deficit denier – he simply denies that austerity, mostly hitting lower income families, is the way forward. Instead he believes a combination of a more just tax system and economic growth stimulus is the cure for Britain’s woes.
More specifically, he want to reduce tax breaks for the wealthy and cut back on various subsidies for corporations (sometimes referred to as “corporate welfare”), which he claims amount to roughly £93bn per year. He also aims to crack down on tax evasion, which he estimates to cost the government up to £120bn a year in revenues. But perhaps most interestingly, he champions the strategy known as Peoples Quantitative Easing, or PQE.
PQE is similar to the quantitative easing already pursued by the UK, which is to say that the Bank of England electronically increases the money supply to promote economic activity. The crucial difference is that under PQE the new money will directly fund public infrastructure investments (e.g. green energy, housing, digital infrastructure), rather than purchase government bonds from financial institutions.
In its defense, PQE argues that traditional QE is flawed because the implied ‘trickle-down effect’ doesn’t work in practice. Instead PQE’s investments, through the activities of a proposed National Investment Bank, would achieve a multiplier effect to generate concrete and sustainable growth.
The UK economy, which is currently growing at nearly 3%, may look strong compared to some other European economies, but it has its problems. Britain suffers from stubbornly high levels of household debt (87% compared to national income), regional inequality, as well as a worrisome reliance on consumer spending (about two-thirds of GDP). PQE could help to remedy these issues, especially when the Bank of England eventually raises interest rates.
Moreover, the fear that PQE leads to unwieldy inflation – denied by many – shouldn’t be a major concern for a country that is currently facing near-zero inflation. Importantly, PQE can be reduced when (or if) inflation starts becoming more substantial.
Without a doubt, Mr. Corbyn’s economic vision is ambitious, though not as radically left-wing as some Conservatives wish to portray. Indeed, his policies are widely justified as mainstream alternatives to austerity. But to make his vision come true, there are major hurdles to overcome.
Labour’s love lost?
While there are many people who believe in Mr. Corbyn, there are plenty who do not. This includes people from his own party, most notably former Prime Ministers Tony Blair and Gordon Brown. Somewhat unsurprisingly, his election to Party leader last weekend was met with some notable resignations.
Fortunately Mr. Corbyn has taken steps to gain stronger party approval. For one, his acceptance speech was decorated by calls for a strong, united Labour party, and many of his appointments to his shadow cabinet – including Andy Burnham and Angela Eagle – have been seen as accommodating to the more ‘Blairite’ Labour MPs.
However, the notable exception to this is his controversial appointment of Mr. McDonell to Shadow Chancellor, whose radical statements are often featured in tabloid headlines. Many think this decision could be Mr. Corbyn’s downfall.
But his critics shouldn’t overshadow his robust public support. With 76.3% voter turnout in the leadership election and a resounding victory of 59,5% of the vote (in the first round, across every section) Mr. Corbyn has a rock-solid mandate.
If the British public can accept his policies and appointments, and if his popularity can translate into success in next year’s elections in Scotland, Wales, and London, perhaps his bravado will be forgiven.
One thing that may help him is if the Conservative party loses support. For starters, the Conservative-led parliament recently passed a controversial law that lowers the tax credit threshold, which has been met with sharp criticism. The main qualm is the immediate impact this will have on low-income families, who are set to lose up to £1000 a year.
Moreover, the upcoming EU referendum, initiated by Prime Minister Cameron, is already straining the Conservative Party. If Mr. Cameron fails to gain significant concessions from his EU colleagues, or if the referendum goes sour in some other way, he risks losing voters to UKIP or possibly even a vote of no-confidence.
Make or break
In all, it is important to remember that Mr. Corbyn’s policies were largely defined in the course of his Labour leadership campaign, so we can expect his actual policy proposals to be somewhat less left-leaning now that he has been elected. This will inevitably placate both edgy Labour MPs as well as undecided voters alike.
As such, it seems premature for critics to label him ‘unelectable,’ or to claim he will push Labour to the fringe of UK politics. We should instead keep in mind his weighty popular support, including the huge increase in Labour membership over recent days.
Indeed, if Mr. Corbyn plays his cards right, we can expect Labour to perform fairly well in next year’s elections, and in turn, this will inspire a united Labour party in the 2017 parliamentary elections. Considering the impressive momentum so far, Mr. Corbyn and his branch of Corbynomics stand a fighting chance, and it would be a blunder to underestimate him again.