It would appear that Newton Emerson doesn’t buy the view that quantitative easing might be about investment in real activities that promote growth but his disdain for the economic rationality of Corbynomics and his arguments opposing it are full of contradictions and holes.  So for example while he appears to see it Corbyn’s approach as dangerously radical he notes other, apparently more radical, alternatives such as giving out unfunded tax cuts or rebates, which have come from decidedly mainstream quarters such as George Bush or the head of the Financial Services Authority, who noted that the Bank of England had considered something similar.

The rationale behind Corbyn’s proposal is that the British economy needs sharply rising investment to boost economic growth.  This would produce higher levels of employment with people paying more taxes and taking fewer benefits, in the process reducing the public sector deficit and debt while realising better public services.

Newton Emerson however sees only the prospect of increased inflation because it would mean printing money and giving it to the government who would waste it, leading to rising prices.  He compares this unfavourably with simply handing out money through unfunded tax reductions (characterised as dropping money from a helicopter)or the Bank of England’s own quantitative easing explained in the first post, although he favours each of these for totally different reasons!

So, simply handing out money is good because “it is spent immediately on the high street” while the existing quantitative easing is even better because it “is a more effective and responsive version of the helicopter drop, where the cash is handed out under circumstances that ensure it will be hoarded by the banks.”  So if it’s spent that’s good and if it’s not that’s even better!

I don’t think I’m sticking my neck out very much by saying that most commentators think that the banks not lending the money but hoarding it, as explained in the last post, is a problem with quantitative easing as practised by the Bank of England and not a plus.

Of routeing the money through the banks, he says: “Better still, the moment prices start rising, the made-up pounds can be recalled and lending will instantly shrink by a factor of 20, reversing inflation in its tracks”.  Yes indeed, monetary policy usually takes around 18 months to two years but one that works instantly would be even better, except that if it worked by reducing lending instantly and by a factor of 20 the effect would be a catastrophic depression.

Emerson is right when he says that capital investment projects might take two to five years to get off the ground while the money paid on wages and to suppliers starts to be spent right away but this is an effect of any investment, state or private, so why is this only a problem with state investment?

If there were already an investment boom and a cyclical upturn that might shortly lead to overproduction and a glut of goods that cannot be sold profitably because of saturation of the market there would be a point to Emerson’s objection.  But preventing this would require some sort of economic planning, basically an end to capitalism, and he definitely doesn’t favour this.  In circumstances of a meagre upturn after a long recession it is unlikely there is constrained capacity that would lead to rapid inflation if additional money was pumped into the economy in the way proposed.

Emerson shines his Tory credentials by recalling the economic crisis in Britain in the mid-1970s in which deficit spending by the Labour party Government in 1976 led to the IMF being called in to give Britain a loan.  This shows that this sort of Keynesian policy leads only to inflation.  Four decades on, he says, the Corbyn supporters dismiss this lesson.

But his problem is two-fold.  What exactly is the lesson to be learnt and is the situation today the same as that in the mid-1970s?

The lesson drawn by certain advisors to city traders in the mid-1970s was that too much money was being created which was causing inflation and that Governments should target measurements of money supply to ensure that they do not exceed predetermined levels.  This monetarist policy was taken on board by the new Thatcher Government and dropped when it didn’t work.

But even his quoting of Labour leader Jim Callaghan in the 1970s ignores the admission in it that this policy had previously worked.  Post war recessions were shorter and less severe because of Keynesian policies.  Today’s critics of these policies now proposed by Corbyn ignore this, while Keynesians forget that it cannot solve underlying problems.  So yes these policies did lead to inflation, which increased over the post war period and eventually took off, but this brings us to the second question whether conditions today are the same as those of the 1970s?

The ‘money printing’ carried out by the Bank of England etc., which Emerson supports, is not free of inflationary consequences itself, it’s just that he fails to notice because they appear in rising property, share and other asset prices.  The policy of investment by the state at least promises investment in activities that support real production.

The Corbyn alternative is not madcap economics and is more supportive of working class interests than stuffing money into banks whose Directors were only yesterday appearing in parliamentary hearings explaining how they didn’t really know what they were doing.

Nevertheless the Corbyn policy of infrastructural investment by the state is limited in two senses and isn’t itself socialist.  First it’s investment in infrastructure where private capitalist initiative has failed.  The investment proposed is not therefore the sort that would be in competition with private capitalist production and in so far as it will be private capitalist concerns that pick up the contracts, such state investment will be a big boost for them.  Emphasis on state investment in infrastructure is something Corbyn shares with the many left electoral alternatives that have decried the desertion of old labour from its past.  They are pretty naked now it may be back.

The second way it isn’t socialist is that it is the capitalist state that is increasing its role in the economy not worker owned cooperative production, in which workers can democratically take the initiative and learn to run things themselves.  This could lay the economic and social grounds for a political challenge to the system as a whole where workers to decide they should own and run the whole lot.

There is nothing very democratic about current state ownership and the workers within it still answer to a boss.  The success of state led investment in efficiency terms is very much dependent on the developmental capacities of the state itself but when private capitalist intervention has failed it’s not a very strong argument for the likes of Emerson.

Like the rest of the shrill and desperate attacks from the right the local criticism of Corbyn doesn’t hold much water.  Others in the mainstream have recognised openly the limited radicalism in what is being proposed, which may actually be understood by those venting their disapproval.

Their opposition may therefore be motivated by fear that what is being proposed opens other more radical vistas for those seeking an alternative to austerity.  That this may well be the case is a reason why Corbyn should be supported.