The leadership debate in the British Labour Party seems finally to have swung around to a discussion on economic theory. The Labour Shadow chancellor Chris Leslie has recently weighed into the discussion with a claim that:
Jeremy Corbyn’s anti-austerity agenda will harm the poor
Really? What planet is Chris Leslie living on? Back on Earth the empirical evidence from around the place is that harm to the poor occurs from the application of austerity economics rather than sensible economics.
The Labour right’s economic mumbo jumbo means that they are forcing Labour Party members who may not be of the left themselves to ally themselves with the left. Many may not want to leave NATO, or want to nationalise all the leading industrial companies, or want to live in a society which is over-controlled by government. The do, though, want sensible macro-economic polices and they, albeit in slightly imperfect form, aren’t on offer from anyone except the left.
The Labour Right needs to get a grip.
They could start by looking at the nature of deficit spending by government. This is one way of getting more money into the economy. Generally to reflate it. Taxation is one way of removing money. This has a deflationary effect. But, they aren’t the only ways. There is export inward spending by overseas customers which is reflationary. And, spending on imports by home consumers which removes money from the economy and so is deflationary. Then there is saving which is deflationary and de-saving, or private borrowing, which is reflationary. Too much deflation leads to recession. Too much reflation leads to inflation.
We have to consider all money flows. Germany, being a net exporter, has inward money flows from trade and so a balanced or even a surplus budget is required over the trade cycle. The UK is a net importer so requires a deficit -on average over the trade cycle.
So, if the Labour Right wish to reduce the government’s budget deficit, they need to understand what they are doing and understand the nature of those money flows. They need to understand the need to move trade into balance too -probably with the help of a significant £ devaluation. Otherwise they will just end up incompetently crashing the economy and having 20% plus unemployment.