John McDonnell needs to think outside the box and shift power from lenders to borrowers
When a movement sweeps into town trumpeting what they call the “new economics”, I usually run through a mental list of questions. Forget the rhetoric: what are the actual policies? Are there figures? Do they add up? Does this stand a chance of being implemented? Last but not least, are they being advised by Joe Stiglitz?
Professor Stiglitz is a brilliant economist who won the Nobel prize for his work on asymmetric information in 2001. But in the following years he has also moonlighted as the patron saint of lost economic causes.
In 2007 he endorsed Hugo Chávez’s economic reforms in Venezuela, which now faces the worst case of hyperinflation since Zimbabwe. In 2010 he advised the Greek government, months before it plunged into its continuing crisis. In 2014 he advised the Scottish independence campaign, insisting that the country would thrive outside the rest of the UK whatever happened to oil prices. Hmm.
Professor Stiglitz is now hoping to put this unfortunate run behind him by helping Labour’s Jeremy Corbyn and John McDonnell create their own “new economics”. On the one hand, this is excellent news: Britain desperately needs major reform to help push its economy forward — the more ideas the better. On the other hand: Joe Stiglitz.
Yet for all the bluster, the shadow chancellor’s policies look thin and uninspired. There is his fiscal rule, mostly recycled from the one cooked up by Ed Balls. His plan for a national investment bank looks eerily similar to pledges featured in almost every Labour and Lib Dem manifesto of recent decades; in fact, a version of it was already set up by the coalition.
Far from replacing George Osborne’s Office for Budget Responsibility — itself one of the few genuine innovations in UK fiscal policymaking over recent decades — Labour will simply fiddle with its oversight. Mr McDonnell wants to build hundreds of thousands of new homes, but then so does everyone else, and his plans for rent controls don’t just look like Ed Miliband’s — they are Ed Miliband’s.
In his state of the economy speech last weekend, Mr McDonnell boomed: “I want us to surpass even the Attlee government for radical reform.” At this rate, he would be unlikely to surpass Gordon Brown’s government.
Labour is absorbed with the narrative of left versus right and austerity versus splurging
In his defence, this is primarily because Britain today is very different from the Britain of Clement Attlee. The imperative is not creating a welfare state, but reforming it to survive another 70 years. Back then the tax system was small and uncomplicated; today it is bigger and more complex than ever. In other words, the only way to be truly radical today involves dismantling structures and fighting vested interests that have been entrenched for decades.
This is no easy task. Mr Osborne came into office with a host of bold ideas that looked far more radical than Labour’s current offering: he wanted to merge national insurance and income tax and to eliminate the favourable tax treatment of debt. The best ideas were jettisoned once he was told by the Treasury just how much resistance he would face.
Before you despair, there are plenty of reforms that could make a real difference to the UK economy. Mr McDonnell’s problem is that they don’t conform to the narrative of left v right and austerity v splurging that he is absorbed with. They are mostly technical and deeply unsexy. They matter because they go to the very sinews of the economy.
For instance, consider what happens under UK law when your home is repossessed. Not only can the bank take your home but, if that does not recoup your full debt, they can also pursue you for your other possessions until they have the full amount. This is known as a full-recourse mortgage. While such loan agreements are par for the course here in the UK, over in the US most mortgages are non-recourse, meaning if you face negative equity you can leave the house, put the keys through the letterbox, put it in the hands of the mortgage company and hear no more of the matter.
Such distinctions are the DNA that determine a country’s genome. It so happens that Britain’s insolvency system tends to favour the lender, whereas many other countries tend to favour the borrower. And so the UK economy has a tendency to get mired in debt more easily, and for longer, than elsewhere.
Thus in the recent financial crisis the proportion of loans written off by banks was about 7 per cent in the US, more than 5 per cent in Ireland but less than 0.6 per cent in the UK. Despite having had equally bumpy rides, Ireland and the US are now significantly stronger compared with their pre-crisis peak than the UK.
If there is such a thing as a new economics, it must involve a deep dive into the legal code that determines the relations of borrowers and savers — and propose shifting power away from the lenders. It must examine the incentives entrenched by laws, regulations and conventions that have made the City so influential.
There is still plenty of time for Mr McDonnell to tackle such issues rather than churning up the same infertile economic turf all over again. For all his poor choice of champions in recent years, Professor Stiglitz remains a potent intellectual force, as are others among Labour’s advisers. Now more than ever, though, Britain needs a new economics. Enough talk; let’s see some plans.