Corbyn and the Same Old Populist MistakeBy Daniel Lacalle (14 September 2015)
“He is a Sinn Fein-loving, monarchy-baiting, Israel-bashing believer in unilateral nuclear disarmament. This is a man who, for more than 30 years, has made a political career out of being explicitly and avowedly on the Spartist Left. He is a frondist, an inhabitant of the semi-Trot margin, an unrepentant lover of oppositionalism” Boris Johnson
Never in my life have I seen more euphoria after the nomination of a Labour candidate … among conservatives.
The UK has created over the past four years more jobs than the rest of the European Union put together, and spending less than half -relative to GDP- on active employment subsidies.
The country leads the growth of the most industrialized nations, the G7 , with 4.5%, and unemployment today is almost below the natural rate, at 5.6%. In effect, considering that the UK is a net recipient of tens of thousands of immigrants, we can consider it full employment .
As a country of SMEs, where meritocracy and success are highly regarded, it comes as an anachronism for Labour to elect Corbyn, who for 30 years has lived off the public sector and just complained.
The two great weaknesses of the British economy are the high trade and fiscal deficits .
Faced with such a scenario… what could not be more illogical than for the Labour Party to elect someone whose main economic policy is to widen those deficits? To consider deficit spending, tax increases and white elephant public infrastructure as “solutions”, when they have failed miserably in France or Spain in the 2004-2010 period is simply unexplainable.
It is no surprise, therefore, that eight Labour cabinet members have resigned after the election of a Labour leader who proposes some of the most outdated and failed policies in modern economic history. Mr Corbyn said that the State spent too little under previous labour governments despite the fact that the country´s financial situation deteriorated dramatically with large imbalances that are still felt today. With a current 44.4% of GDP public spending, saying the government spends “too little” is an insult to taxpayers and efficient public bodies alike. But on top, he wants to penalize the private sector creating the largest government privilege ever designed. The People´s QE (quantitative easing).
In Europe we are already accustomed to the follies of magic solutions from populist parties. Syriza, Podemos, and others always come up with “magic” and allegedly “simple” ideas to solve large and complex economic issues, and always fail when reality kicks in. But there are few that match the monumental nonsense of the “People´s QE”. The Government´s QE rather.
What is it and why is the People´s QE a bad idea?
The UK policy of increasing money supply aggressively in the past has always been based on two premises to make it work and avoid hyperinflation and currency destruction: the independence of the central bank as a central pillar of monetary policy, and the constant sterilization of asset purchases (ie, what it buys is also sold to maintain as close as possible to supply and demand market principles). The balance sheet of the Bank of England has remained stable since 2012, coinciding with the highest economic growth period, and is below 25% of GDP.
However, we should not forget that the largest expansion of the balance sheet of the Bank of England coincided with a Labour government.
Corbyn´s People´s QE means that the central bank loses its independence altogether and becomes a government agency that prints currency when the government wants, but the increase of money supply does not become part of the transmission mechanism that reaches all parts of the real economy. All the new money is for the government, with the Bank of England forced to buy all the debt issued by a “Public Investment Bank”.
The first problem is evident. The Bank of England would create money to be used for white elephants, a disastrous policy as seen in Spain and other EU countries that only leaves overcapacity and a massive debt hole. By providing the public investment bank with unlimited funding, the risk of irresponsible spending is guaranteed. In a country where citizens are well aware of wasteful public infrastructure, this is not a small risk.
The second problem is that rising public debt, even if hidden at the investment bank, would still cripple the economy even with perennial QE. As Moody´s points in Brazil, public debt has to include that of state owned enterprises. Printing money does not reduce the risk of rising debt, as we are seeing in Japan or the US. And the new bank´s potential losses are covered with more taxes .
The idea of building unneeded bridges and airports all over the place to create jobs would be mildly amusing if it hadn’t failed time and time again, and forgets the cost of running those infrastructure projects once built, apart form the debt incurred. All paid by the taxpayer, who guarantees the capital of the Public Investment Bank. Anyone that travels around Spain and sees the thousands of white elephants should be scared of the consequences.
The third problem is that inflation created by these projects is paid by the usual suspects. The citizens, who do not benefit from this spending as the laws of diminishing returns and debt saturation show. Additionally, trade deficits widen to unsustainable levels as imports outweigh exports. Think of China, who today needs four times more debt to create one unit of GDP than eight years ago. Tax increases, higher cost of living and, above all, destroying a large part of the British private sector because the state monopolizes the major sectors of the economy and increases taxes for the rest.Read the full article on the Spanish News Website, the article is already translated into English.
Tax increases, higher cost of living and, above all, destroying a large part of the British private sector