While the Daily Mail, with Pavlovian regularity, persists in ringing the “Marxist” alarm bell, the Financial Times is a little more measured. “Labour has a fair wind” with business leaders, the paper argued this month, “with many terrified of a hard Brexit”. At the CBI’s annual conference in November, leaders of industry gave Jeremy Corbyn a distinctly warmer welcome than they gave Theresa May.
That should come as no surprise, given the destabilising extremism of the Conservative Brexiters. Their echoing of hard-right American Republican ideology and advocacy of a hard Brexit is based on the belief that the UK’s economic interests, in particular the NHS and public services, would benefit from subjugation to American oligopolistic capital. Hence the calls for the UK to join the North American Free Trade Agreement. Yet, at the same time, polling shows that the British people are disillusioned with the privatisation of key sectors, and favour nationalisation. They seek protection from the impact of deregulated market forces on their lives and livelihoods and on their children’s prospects.
Business leaders have been made aware – by the IMF, the OECD and the Bank for International Settlements – that the Conservatives’ dependence on what David Cameron called his government’s “monetary radicalism and fiscal conservatism” has gone too far. There is now real concern about the long-term impact of quantitative easing which, coupled with austerity, has led to rocketing asset prices, falling wages and rising inequality. Those with access to central bank largesse have been enriched as the prices of assets have risen; while those without assets and dependent on earnings have suffered as incomes have fallen in real terms.
Falling incomes and spare capacity have not been good for business. While the Treasury, the Office for Budget Responsibility, an independent watchdog, and the National Institute of Economic and Social Research, a thinktank, have obsessed over supply-side issues, politicians have been persuaded by economists to sit on their hands, as Britain’s economy falters under huge, unused capacity. Howard Bogod, who runs a business with a turnover of under £20m, wrote recently: “Economic models have failed to explain why wages have not increased as unemployment has fallen so low. These same models are incorrect in their conclusions about productivity growth – indeed these two failures are linked. My conclusion based on observing actual businesses is that if nominal demand were to continue to grow then both productivity and real wages would start to grow more quickly, and economists would again be left scratching their heads.”
There is, nevertheless, anxiety over the scale of Labour’s public investment plans and their impact on the UK’s credit rating. But Labour has a record, in key respects, of being more fiscally conservative than Conservatives. For example, a review by economists at Policy Research in Macroeconomics of current budget deficits or surpluses (that is, excluding public investment) for the whole period before the global financial crisis, from 1956 to 2008, reveals that Conservative governments had an average annual surplus of 0.3% of GDP, while Labour governments had an average annual surplus of 1.1%.
The shadow chancellor John McDonnell’s plans include a commitment to a “fiscal credibility rule” – the state would only borrow to invest in capital projects which will, over time, pay for themselves. In the event of a recession, this rule would only be suspended when technocrats at the Bank of England decide monetary policy can no longer operate with interest rates around 0%. By contrast, George Osborne and Philip Hammond’s fiscal rule gives the chancellor more discretion in the “event of a significant negative shock” quite broadly defined.
Here I must acknowledge a disagreement with Professor Simon Wren-Lewis, of Oxford University, who advised Labour to adopt a fiscal rule that once again prioritises monetary policy, and in some respects is more constraining than Gordon Brown’s “golden rule”. I would prefer a fiscal rule aimed at using government (and central bank) firepower to secure the UK’s economic security and prosperity, first and foremost. The best way to cut the deficit and public debt, as is well understood, is to ensure that prosperity generates the jobs and tax revenues that will, in turn, balance the government’s books.
In 2016, UK investment remained pitiably low – 116th out of 141 countries in terms of capital investment as a percentage of GDP. Labour’s public spending plans will boost investment, with contracts that largely benefit the “timid mouse” (as Professor Mariana Mazzucato characterises it) that is the private sector. In other words, the “roaring lion” that is a government backed by a central bank, will, under Labour, at last take action to stimulate a private sector that has significant spare capacity; one not yet fully recovered from the catastrophic impact of the great financial crisis and that still lacks confidence.
Business leaders know their biggest problem is spare capacity and a shortage of customers coming through the door. That is why they have been willing to listen to the shadow chancellor’s “tea offensive”, and that is why they will ignore the Daily Mail’s Pavlovian howling.