Britain craves Corbyn’s manufacturing aspirations

The era of globalisation dawned in the 1980s. Swathes of British industrial heartlands, industries that had defined these commuities since the 19th century Industrial Revolution, left for the low cost environment of China. Britain established itself as a global leader in financial services, allowing the City of London to drive economic progress. Yet nostalgia for the earlier days remain. A remnant of the Northern Powerhouse, the emotional desire for the return of manufacturing amongst derelict and unemployed communities has the power to swing an election; a desire shared by the Leader of the Opposition.

This week Jeremy Corbyn joined the quorum of the disenchanted  – those who have lost from the globalisation idyl that was sold to us 30 years ago. Launching his ‘Build it in Britain’ initiative in Birmingham, the Labour leader declared that “change is needed, we must aim for something better”. A pledge to reverse the tide of manufacturing outflows to East Asia, returning Britain to its position as the ‘workshop of the world’ that it held in the mid-19th century. At just 11% of GDP, British manufacturing has diminished from importance; previously the centrepiece of the North, a rejuvenation would have vast consequences for the region.

Support for a manufacturing return has solid logical foundations: job creation, reduced geographical inequality, green production and economic diversification will all be welcome benefits. Yet Corbyn’s method for achieving this is flawed. Whilst lambasting Donald Trump later in the speech for his protectionist desires, Corbyn’s plan draws him ever closer to both the White House, and the new closed border world order that is rapidly – and dangerously – emerging.

During the speech, Corbyn mocked May’s fondness of exclaiming her desire to “take back control of our laws, our money and our borders”.  Yet Corbyn himself is proposing changing the law to prevent public money flowing out of our borders. With government contracts to private firms worth £200bn annually – 7.6% of GDP – Corbyn plans to redirect them towards British manufacturers in an effort to rejuvenate the sector. He lambasts the £1bn worth of NHS contracts shipped abroad from 2014-17, and even hinted at the absurdity of transferring production of British passport production from Gateshead to France.

This is economic nationalism. Awarding contracts purely based on nationality and not economic efficiency is a form of protectionism that would damage this fundamental principle of economics. It is an insurance lifeline for firms; with the government as a backstop to liquidation, the incentive for investment is drastically diminished.

What the government should instead be addressing is the fundamental roots of the manufacturing decline; productivity. The economic indicator with the power to make or break industries in the era of global trade. The reason why Britain has the smallest manufacturing sector as a proportion of GDP in the G7, which hasn’t run a trade surplus in goods since 1981. Corbyn noted in his Birmingham address that despite being governed by the same rules, in Germany “you’ll struggle to find a train that wasn’t built there”. Yet whilst portrayed as the economic nationalism of Merkel’s government, this omits the fact that annual German R&D expenditure is 1.2% GDP higher than Britain’s, reflected in a UK productivity that is 25.6% lower than Germany’s. This is purely an example of economic efficiency at work. Britain’s dire record on investment and productivity must bear the brunt of the blame, and as such should be the priority for government investment.

The Competition and Markets Authority have warned of the danger of public selective choice of manufacturers – swimming against the tide of globalisation will divert investment away from efficient firms, and thus away from the interests of consumers. Government should instead be a guide; through a system of incentives it should once more make the UK an attractive destination for industrial capital, rather than using an iron fist to blockade money at our borders.

Corbyn does acknowledge the need for this, yet does not assign it the priority it deserves. Whilst Britain cannot claim a cost advantage over the developing world, it’s speciality in logistics, technology and management must be further developed and displayed in the limelight. Coercing manufacturing back to British shores is now within the realm of possibility; 1 in 6 who relocated to China have now returned. Shenzhen’s average wage has tripled from £2500 in 2007 to £8000 today. As labour costs rise and ever-greater importance is assigned to speed of bringing new trends to market, relocating to British land would localise the supply chain and enable production closer to its consumers. Indeed, the businesses that returned cited logistical expertise, speed of production as opposed to cost and technological advancement as their core reasons for relocation. Manufacturing globalisation is on the cusp of a reverse that Britain must capitalise on.

 

Manufacturing therefore need not be forced home through selective, economically damaging public contracts. The government instead must create the right incentives for it to flow back naturally. Corbyn’s suggestion of investment in the “industries of the future” is a welcome proposal, particularly in forms of green energy where Britain can utilise its scientific expertise to truly dominate the market. Yet his criticism of the government in misguided; it is a decade of underinvestment in technology, research and logistical capacity – the ingredients of incentives – that have left the former Northern industrial stalwarts as desolate towns of stagnation.

The public sector is not the culprit. It is merely responding to incentives. The private sector must incentivise these contracts to stay onshore; for which government investment can help to create an environment of SMEs and technological progress to finally end a decade
of stagnant productivity. Whilst Corbyn’s plan is flawed, his idea for an industrial rejuvenation is powerful; and if productivity trends are reversed, this idea may soon turn into reality.

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No new money for lifting public wage cap

Theresa May has announced that the public sector pay cap will be lifted but the Treasury will release no new funds to finance the pay increases. This may cause further cuts in other spending priorities.

Public sector workers could face rises of 3.5% but most will qualify for only 2%, a real terms pay cut due to inflation.

Anti-Union legislation has prevented the Union PCS from striking over pay despite 85% of workers voting to do so the Union and others want an increase of 5% to counter the huge drop in real term public sector pay over the last 8 years.

David Cameron introduced the pay freeze in 2010, followed by a 1% rise two years later. Wages in the public sector have severely lagged behind inflation but it is the same story in the private sector since the beginning of austerity.

A Labour party spokesperson called the latest offer:

“a slap in the face to public sector workers who have seen their wages cut for years by the Tories’ cruel pay cap to pay for huge tax cuts to the super-rich”

“An average offer of just 2% per year and, according to reports, only for some public sector workers, will still be a further real-terms pay cut.

“Even worse, there doesn’t seem to be any new funding for departments for this, meaning pay rises will have to come at the cost of other services, pitting hard-working public servants against those they are working with.”

Analysis from Iwan Doherty- Editor in Chief

The headlines should no new money for public sector. This means any wage rises will just cause cuts elsewhere.

it’s an example of how disconnected the Conservative Party are with the average worker and why so-called ‘centrist’ solutions don’t work.

Selling a pay cut as a pay rise doesn’t make it one, public sector workers should not be seeing their hard work be worth less and less each year, 2% which most workers will get is a pay cut. The government banning strike action over the issue shows how desperate it has become. Austerity on the public sector must end, if pensions rise with inflation why don’t public sector paychecks?

Releasing no new funds is not only cruel but stupid, it means that other spending must be cut. That’s both spending that provides vital services to citizens and spending in our economy. We need to be putting more money in the hands of people who spend it but the government’s obsession with deficit reduction has meant its closed its eyes to economic growth and the needs of its citizens. The move may mean some workers aren’t so bad off but may cause jobs losses and cuts to spending on resources. You can’t pay people more and want nominal spending lower, they need to pick a side.

The government must commit to spending more money, that is the start of creating economic justice after too long in austerity mode. Patch work solutions and trying to appease voters will not help, if anything this policy will only make the life of our public sector harder.

BREAKING: Tory international trade minister resigns over Heathrow

Greg Hands MP has today announced his resignation.

He said on Twitter: “As the government will be whipping the vote on Monday, this means I am resigning from the government.

“It has been an honour to serve the prime minister (and her predecessor) for the last seven years and I wish the PM & the government every continuing success.”

This will likely put further pressure on the Prime Minister, as the Heathrow vote approaches.

More to follow…

Government makes £2bn loss on sale of RBS shares

Overnight the government has sold 925m shares in the majority public owned RBS for £2.5bn. The sale represents a £2.1bn loss at the rate of 271p, compared to 500p a decade ago, which has not been traded above since 2010.

The National Audit Office (NAO) states that the true break-even price is 625p. This itself has never hit this since 2008, and could lead to an overall total loss of over £30bn.

The government still owns 7.5 billion shares, and this latest sale covers 7% of the ownership of the bank. The first batch of shares to be sold after Alistair Darling and Gordon Brown had to intervene in 2008 was in 2015 for 330p raising £1.9bn. After this latest round, taxpayers’ stake in the bank has lowered from 70.1% to 62.4%.

Ostensibly, this loss needs to be measured over what the catastrophic scenario would have been without the bailout out in the first place which cannot be denied when the banking world of a decade ago is judged. RBS was arguably the biggest bank in the world at the time and the Labour government originally was forced to step in to save a crisis, not to attempt to make a profit. Over the past decade the bank has been restructured, and now operates more as a domestic bank, for example RBS now operates in nine countries as opposed to thirty-eight. However, such vast scale restructuring has led to the bank shrinking in size by more than half, leading to between 50,000-60,000 job losses.

Despite these damaging figures, both the government and RBS appear satisfied with the mornings conclusions. Jon Glen, Treasury Economic Secretary argued that it is “unrealistic” to think Britain should hold on to RBS shares until taxpayers can recoup their investment, and Chancellor Phillip Hammond sees the sale as helping to put the “financial crisis behind us”. Hammond also argued that the government should not be in the business of owning banks, and that the proceeds of this sale will go towards reducing the national debt and help to “build an economy that is fit for the future.”

But this it is virtually impossible for the public to feel self-assured in these comments. Especially after the worries amongst financiers earlier in the year that there was potentially another crash on the way, looking at America particularly, which do not seem to let up following President Trump’s latest protectionist trade policies.

Amongst the Chief Executive of RBS Ross McEwan’s pleasure at the largest stakeholder selling more of its share, he is under the impression that RBS is now a simpler, safer bank that is focussed on delivering for its customers and its shareholders. Indeed so, in February the bank reported an annual profit of £752m, this was its first for a decade and a sharp turnaround from the £6.95bn loss the previous year.

Yet on the Today programme this morning, Ian Gordon, a Banking Analyst at Investec, not only reiterated the gloomy news for the public that there is no chance of ever breaking even on its investment, but RBS have further plans to downsize to hit a cost-income ratio target of 50%. This will add to the £40bn already spent by RBS on conduct and restructuring cost, which has not only consumed the £45 billion bailout fee, but together with bad debts has destroyed the value of the business, and could lead to more job losses. Gordon concluded that because of this, RBS is still an inefficient bank and the most optimistic and aggressive target, should all the markets act favourably, would be 2023 for selling off all remaining shares.

Frustratingly, Jane Sydenham, an Investment Director at Rathbone, sees the present as a good time for the government to sell these shares because the economy is “reasonably strong” due to low interest rates which are slowly rising. This may be good for the banks, but similarly was thought over ten years ago, and, looking at the uncertainty in America and the rise of populism across Europe, it remains difficult for faith to be placed in the current economic system going forward.

Despite positive sounds coming from the world of finance, not only is it clear that the public will not be refunded directly, judging from the mixed reception it is still clear that everything is very unclear. At the turn of the year there was talk of another crash. And comments from Sydenham about the economy growing and interest rates being low mean nothing to people whose wages cannot compete with inflation.

Analysis from Iwan Doherty- Editor in Chief

Privatised profits and nationalised losses. When the Labour Party rail against policies for ‘the few’ this is what they mean. RBS has been making losses at the expense of the taxpayer for the last decade, but as soon as it posts a profit it is boxed up to be sold. The policy is corrupt and will only enrich a few people and will hit our pockets.

The chancellor says we cannot hold onto our shares. Nonsense. George Osbourne promised that the Treasury would make a profit on bailing out the banks. We are set to make a £25bn loss. This from the party of fiscal responsibility.

The loss is a spectacular failure by the Tories and another reminder of how the rich and powerful use their influence to tip the tables in society. It is another reminder of the Global Financial Crisis when the economic establishment made us pay up for their mistakes.

Modern Monetary Theory holds huge possibilities for the country

There are many visions about how we create a better nation, but almost universally they all aim for the same conclusion. What we also want to achieve is better schools, hospitals, research and development, infrastructure, public transport, policing and more. We want a better quality of life. Yet with every debate about the public sector there is one dividing factor between the two parties.

The cost.

We must be fiscally healthy in order to give the best quality of life for everyone. But what if I told you we could afford it? Because there is a new school of thinking around economics that’s gradually making its way into mainstream debate, titled Modern Monetary Theory.

MMT quite talks about how the “fiat” money system works. The theory examines models in countries like the UK, US, Japan, Russia, China, Australia, Canada and Switzerland, because they all have their own currencies from their own central banks. They can create their own currency in the forms of notes, coins and simply using keystrokes on their laptops with transfers between banks. Key here is understanding that it is impossible for these countries to go bankrupt in regards to their own currency. This is quite different from other countries in the Eurozone, such as Greece, where they are unable to create their own currency. Eurozone nations share the same currency, the Euro, which is controlled by the European Central Bank. They do not have their own individual currency producing central banks.

Countries with their own central bank have one special advantage; they don’t have to first collect money before they can spend. This allows the government to purchase goods and services from the private sector, without needing to raise/tax money first. This also goes for spending on the NHS, education, police services, infrastructure or whatever they so desire. It is after this spending occurs that the government can collect taxes from the private sector.

So many of you will be probably be asking yourselves “If the government with its own central bank can spend money without collecting taxes, then what’s the point in collecting taxes at all?”

Before we go further on why tax gives currency its value we must go further back in time, when taxes were backed by gold. Under the “gold standard” a country’s currency was physically backed up by its access to gold. For example, if at a time gold was worth £30 an ounce, then the holder of £30 could, in theory, exchange their money from the banking system for an ounce of gold. This meant that the country’s currency could not exceed the value of the access to gold stores. But this changed when in 1971 the US president, the then president Nixon, took the USA out of the gold standard and was followed by the rest of the world

But when the system changed the textbooks didn’t follow. If we were on the gold standard and promised to convert dollars into gold at a fixed price, then we do have to be careful about how many dollars we spend into existence. There is only so much gold, so once we start running low on reserves then we compromise the whole monetary system if we spend too much. We may not be able to convert currency into gold. Yet despite this system being replaced we act as if we’re constrained by the same limitations of the gold standard.

The gold standard was replaced by a “fiat” currency. Fiat is Latin for “It Shall Be,” so money is essentially created upon decree. With a fiat currency system there is no physical commodity backing it. So with no gold or silver to give the currency its value we must now understand how tax does.

Instead of seeing tax as a source of revenue for the government we must understand it as a tool. Tax allows there to be continued demand for the currency, giving it value. When the government converts the currency fully over to everyone in the country then this allows people to accept it as their wages, to which then they can spend it on purchasing everyday items you normally buy.

Then we must also think about the taxes that government also impose on private businesses and households. The tax must be paid, and the Central Bank would facilitate these payments between the country’s smaller banks. This means that if you wanted to get a mortgage your local bank would happily do it. This makes you an agent/currency user, and others around you will be using the same currency for deposits, loans or even contracts.

1) Taxes are made compulsory by the government; we pay them by law.

2) The government makes it compulsory that taxes can only be paid with the sovereign currency that the Central Bank creates.

3) Therefore citizens must find a way to acquire this money to pay for taxes

4) Therefore this gives value to the sovereign currency

Countries can make currencies overnight, and they can be accepted as long as there is demand for them. But it isn’t just demand that taxes help with, it also allows the government to control inflation and maintain price stability. How does this work?

Let’s create a scenario that there is a shortage of cars. People have the income to purchase cars, but there simply isn’t enough to go around for everyone (so demand is greater than supply).

But let’s say I’m selling my car, I’ve advertised it across my local community and want to sell it for £700. We must remember that we’re in a time when there’s a lot more buyers than sellers. So if there is six potential buyers that wish to purchase my car, and have around about £2,000 with them, they will start a bidding war. The value of the car goes beyond its original value closer to how much they have to spend, meaning that they have inflated the price. This is a key example of price inflation.

Now imagine if someone came along to the bidding war for my car and obtained a shovel, threatening to hit the bidders with his shovel unless they give him some of their money. He would take the money, but also feel slightly bad for taking so much, and would then leave each person with £1,000. A final bidder might then put down the last bid of £900 and I could accept this price. This is far closer to the original value of the car.

Okay, sounds a bit silly right? But in this scenario the man with the shovel has managed to prevent the car from being grossly inflated and managed to keep it closer to the original price. This is what, in effect, the central government does when it imposes taxes. The man with the shovel represents the government. Central governments take money out of the economy/circulation to keep leveled price stability and stop excess inflation. This works if there is more demand than supply.

I understand that libertarians will be losing their minds and screaming “TAX IS FORCE” with my given analogy. I’m honestly quite happy with that.

We can also turn the tables in a second example. What if there is more cars than there are those willing to purchase them (so supply is greater than demand)? Those selling the cars may be pushed to reduce the price of the cars so those with lower incomes can afford to buy them. But when the central government faces a scenario when supply is greater than demand (possibly because people are deciding to save their money at that time rather than spend it) then they can help increase spending power in the economy. This can be achieved by lowering taxes so that people have more disposable income to spend. So taxes are a tool for balancing the economy.

If you want another cheesy example, look at the private economy as if it was a bird bath. You want to maintain a good level on water in the bird bath in your garden, so that both big birds and small birds can splash in it. What happens if it rains overnight and the bird bath becomes full? Clearly we would need to remove a fair amount of water from the bath. What happens if it doesn’t rain for a long period of time, leaving the bath to have little water or dry up? We would then need to add water into the bath.

If you want to add money  to the private economy, we can:

1) Increase Government Spending

2) Increase Private Investment

3) Increase our exports (depending on the value of the product)

“Ah,” cry those on the right “so what you’re saying is that there is truth to the neoliberal argument for cutting taxes, as a tax cut for the rich means that it will trickle down to the bottom!”

No

When studying economics we use a term called the “marginal propensity to consume” (MPC) which helps us understand how much every extra pounds we receive will be spent into the economy.

The wealthiest have already consumed what they’ve always wanted. By increasing their disposable income they won’t actually add anymore new spending into the economy. We won’t see new spending help create jobs for those who seek work. What this tax cut really allows is for the wealthiest to buy shares, stocks and real estate. These investments with their new disposable income benefits the top 10%. Instead we discover is that such investments actually driving up prices and lock out millions of consumers. Whilst real estate markets could go up in wealth what we won’t see is a large increase in growth and employment. A good economist understands that the only tax cut that creates an economic stimulus is a tax cut on the poorest citizens.

Within the theory of MMT we also empathise the importance of deficit spending in order to create growth. So let’s take it back a step and look at deficits as a whole.

Before we talk about deficits we need to have a greater understanding of about two important sectors of the economy; the public sector and the private sector. Remember, in a country where the government can issue its own currency it is not financially restrained, so for the government sector can receive spending before taxes are collected. This is in contrast to the private sector, which is made up of two parts. There is the private domestic sector where we as individuals and firms consume domestic goods and services that are produced, bought and sold into the economy. Then there is the private foreign sector, which exports and imports goods and services to and from other countries. However, unlike the government sector, the private sector is financially restrained, since it must have money before it can spend. This can be achieved through getting money from the government or exports to other countries.

The deficit is the difference between how much a government spends into the economy in a given year and how much it gets back from taxation. For example, if a government spends, say, £100 million into the economy but only collects £80 million from taxation then our government deficit is £20 million. Neoliberals will screech to no end at how horrible such a scenario is and will label this as uncontrolled spending and want to “balance the books”. But not only do neoliberals wish to avoid deficit spending, many Keynesian economists only support deficit spending at the worst of times. It does sound fiscally irresponsible, so is that the case?

Let’s look at the bigger picture when the government has a deficit. This graph is used by Professor Stephanie Kelton:

The red highlighted line shows the US government’s budget balance (in terms of a percentage of GDP), compared to the black highlighted line showing the private sector’s balance. The bigger the US government deficit became the greater the surplus was for ourselves. Yet when a government budget manages to reach a surplus, the private sector eventually dives into a deficit. This is the other side of the story neo-liberals don’t want to talk about. A government deficit of £20 million means that there is a public surplus of £20 million for the rest of society. So really a government deficit adds pound assets to other parts of the economy. This is completely normal and necessary in order to run a healthy economy. The chart shows this almost like a mirror image between both the government and private sector

If the government seeks a surplus then the private sector would have to run a deficit, unless it ran a trade surplus. To have a government surplus the state has to introduce austerity measures (or directly increase taxes, but the Tories would rather be burned alive before they would try that). For the private sector to afford this they would need to cut into their savings, sell their assets or take our loans on credit (and they would have to pay interest). With less money in the private sector to be spent on goods and services this then strangles growth with increased private debt. Yet politicians on both sides of the spectrum seem to miss this out entirely. We must remember that if a country can produce its own currency then government can never go bankrupt and eventually pay its debts.

If a government has a trade surplus combined with a government deficit, then we can better create growth which takes us one step closer to full employment and price stability.

But this is where we must understand the very limits of MMT, as it’s not a magic money solution. If, for example, the UK wanted to kickstart a massive infrastructure project then it would need the labour, machinery and materials to do so. Money cannot train nurses, doctors, engineers, police officers or teachers. MMT can help pay to utilize resources, but it is not the solution to magically making them appear. Thus, MMT tells us we can only go as far as the real economy will let it, as anything beyond the means of what a nation can actually create is inflationary. It is also worth noting that MMT shows that countries with their own sovereign currency can still go bankrupt if they have too much foreign denominated debt, thus leading to them to devalue their currency and lose the ability to pay for foreign bonds. This is one of the main problems with Venezuela.

However, this is why it is more beneficial to run a government deficit and private sector surplus, since this then creates a greater healthy equitable balance.

The news that the UK government has managed to achieve a lower government deficit brings little joy. Do you seriously picture a family who are forced to choose between heating their home or feeding themselves jumping with joy with such news? Can you imagine public sector workers who haven’t seen a decent pay rise in years leaping over the moon? Will the homeless see their spirits lift and applaud their grand masters in the halls of Westminster? No, they will continue to feel the hardship of Conservative fiscal policy, because austerity is not ending anytime soon. Paul Johnson, Director of the The Institute of Fiscal Studies (IFS), argues that there is still massive spending cuts and social security cuts still to come. He points to the disastrous prison system in England, incredible pressure on local government budgets and a struggling NHS as a consequence of austerity.

But perhaps you don’t have much faith in the IFS? Fair enough, then we can look at the report by the Equality and Human Rights Commission titled “The cumulative impact of tax and welfare reforms”. They’ve analysed the impact of austerity in the UK amongst various groups, finding that if you’re a woman, disabled, have kids, from an ethnic minority or all of the above then you’re disproportionality worse off. And not by a little bit.

As rich men in suits raise their champagne glasses with the cheer of “balanced books” the rest of us pay the price.

So you can see why right wingers despise the MMT argument. It suddenly turns the deficit figure on its head and creates a new debate away from their agenda. How big should the UK’s deficit be?

You see? Suddenly when Conservatives cry that a Labour government would borrow more it doesn’t seem so ugly, and that’s because it really isn’t. This thinking around the theory is backed by numerous academics and economists such as Professor Stephanie Kelton, Professor Richard Murphy, Professor Pavlina R. Tcherneva, Professor Bill Mitchell, Professor Warren Mosler, Professor Abba P. Lerner, Professor Steve Keen, Ellis Winningham, Professor L. Randall Wray, Professor Scott Fullwiler, Rodger Malcolm Mitchell…the list goes on.

And it won’t create hyperinflation. We’ve already mentioned above how we can control inflation by using tax as a tool, but others are simply not convinced. Many on the right argue that simply by printing money we are causing inflation, which leads to hyperinflation. But modern economics shows that we don’t physically print money for everything, we usually just credit accounts online (and in doing so create reserves).

But printing money is normal. It happens, quite literally, every day. The printing of money alone does not cause inflation, it is when a government attempts to spend beyond the resources and productive capacity it has. Any suggestion that money in isolation is inflationary is incorrect. In the examples of Venezuela, Zimbabwe and Weimar Germany a large factor for inflation was due to supply-side economics (cutting taxes and decreasing regulation).

Other reasons that currencies generally tank can be because there is a catastrophic failing in a nation’s output, they could choose to peg their currency or take on large foreign debts. If you still don’t take my word for it then take the word of the Cato Institute. They looked at every single case of hyperinflation in recorded history and found that none could be attributed to policies seeking full employment.

Nor will the taxes create inflation. It is true that taxes on business activities will get passed on to consumers, assuming they can get away with it. But, technically, this isn’t inflation. Inflation is defined as a continuous increase in the general price level of goods. When we see a tax hike imposed on businesses it is a one-off price increase, so it is not a continuous rise. While taxes can serve several other purposes besides just fighting inflation, the goal with an inflation-fighting tax is to reduce private sector spending.

We must remember that there is more than one tax and not all will be as equally effective at such a task.  While taxes function to prevent inflation, that does not mean that we should use adjustments in the tax code in order to fight inflation. We could use a job guarantee scheme for such a task, but again that can be a discussion for another day.

Labour could promote truly progressive policies if it embraced Modern Monetary Theory, it could go about it’s radical transformation of the country whilst staying fiscally responsible.

Austerity – Asymmetrical, abhorrent and avoidable

“Unless we deal with this debt crisis, we risk becoming once again the sick man of Europe”. This was David Cameron in 2009, addressing the Conservatives in Cheltenham on how best to deal with the wake of the 2008 global financial crash. More specifically, this was the beginning of the age of austerity in the Conservative party mindset – the treatment of our nation as a failing business that demanded sweeping cuts across the public sector. Cut to the beginning of 2018, and it was announced that Austerity had finally reached its targets of debt reduction – a full 2 years later than the brutalist model of spending reduction was supposed to. But how successful has Austerity really been for the United Kingdom and its future?

With the aim of reducing the national debt to a level that investment could begin again without compounding trillions in national debt, Austerity has been ‘successful’ –  it has finally succeeded in its core promise to reduce the budget deficit significantly.  Indeed, according to UKPublicSpending.co.uk’s estimations, the current budget deficit between 2010 and 2017 has fallen from £99.74 billion to only £14.04 billion. Though this is a considerable reduction in national debt, there are two key issues that prove the truly devastating impact of Austerity on the United Kingdom – the impact on the economic prosperity of the people, and the precedent set by both former and future conservative action surrounding the national economy.

To take national debt reduction as evidence that austerity has worked for Britain is almost laughably reductionist. Rather, austerity has led to significant economic hardship, regional economic disparity and a fall in opportunity for many. This is not to argue that societal hardship in times of economic uncertainty is surprising; rather, the extent of such hardship was widespread, brutal and largely unnecessary.  Take women in the national economy, for example. Due to austerity and the severe public spending cuts, female workers in the public sector have been most harshly impacted by this policy of financial subtraction. Due to cuts in tax credits, sweeping redundancies across largely female dominated sectors, and the growth of the casual job market as the only route back into employment, it is estimated that women have been 15% worse off as a result of austerity – equivalent to just over £70 billion lost in potential wealth. Similarly, massive cuts to the welfare system have severely impacted the lowest earners in our society – with a 2016 WBG assessment estimating that the lowest 10% of households will be 21% worse off as a result of austerity.  Austerity has had a similar regional effect, with massive cuts to budgets outside of the regional south leading to a disparity in unemployment. According to the Office for National Statistics, unemployment in the North East reached 5.8% in 2017; compared with 3.3% in the South East. It is no complex conclusion, therefore, that the effects of austerity have been not only significant, but wide ranging and unequal.

But it is the failure of the neoliberal consensus that makes austerity not only brutal, but unnecessary. It must be conceded that the wake of the 2008 financial crash demanded a somewhat revolutionary economic response. In a world with families being kicked out onto the streets, Multinational banks closing and national economies such as Greece almost collapsing under the weight of their debt, to maintain the economic status quo would have achieved little else but gradual and unavoidable economic collapse.  But to claim, as the Conservatives did, that Austerity was the only solution is not a problem of debt but of failed foresight. The problem itself relates to the consensus of privatisation and state reduction that has prevailed since the 1980’s. The need for economic revolution after the brutal conditions of the 1970’s, coupled with a political desire to appeal to the electorate, led to a shift in economic models; away from taxation, and towards venture capital and debt. This allowed of economic growth based on lending, debt and speculation, whilst pacifying voters by protecting their ‘hard earned money’ from the evils of taxation. At the same time, the growth in faith that the private sector facilitated economic revolution led to mass privatisation, the shrinking of the state and the sale of numerous sources of government revenue, external to taxation. How, then, does a state fund itself whilst maintaining this ethos of low taxation and sale of its own revenue streams? Any attempt to increase spending through taxation, after the prosperity of the 1980’s, would have been little else but the proverbial bullet-in-your-own-foot; thus, the money must be borrowed or gained from the sale of government assets.

This is where the problem of failed foresight emerges. Austerity was not inevitable, had the neoliberal consensus recognised that privatisation, low taxation and increasing focus on debt was the recipe for economic crisis on an unprecedented scale. Austerity is the product of ignorance to the inherent fluctuations of capitalism; an ignorance that removed any state capability for self-investment, any capability to reinvigorate the economy and consumer confidence, and any ability to enact any alternative to brutal cuts that affected millions. Not only did the population face severe cuts, it also faced negative real wage growth. The UK achieved the 2nd worst economic performance in Europe between 2007 and 2015, only Greece managed worse. The nation sank to the bottom of the OCED wage growth index in 2018.

Perhaps more troubling than this, the rhetoric surrounding austerity removed the decision from the political sphere. The Conservative government made it appear as an unavoidable evil that we, the people of Britain, would just have to grit our teeth and bear the severity of. It is important, now more than ever, to challenge the ideas around austerity as a ‘success’ and those who seek to remove debate and democracy from political decisions. If light is not continually shed on how brutal, unequal and unsuccessful austerity has been for the current and future state of Britain, then we leave ourselves prone to this kind of unnecessary rhetoric again; perhaps even as a cover for more inherently unequal policy.

Can the special relationship overcome Trump’s protectionist dialogue?

For ultra-Conservative politicians like Nigel Farage, Anglo-American relations have never been better. With Trump in the White House and Britain leaving the EU, it was time to celebrate. When Farage stepped into the lobby of Washington’s plush Hay-Adams hotel earlier this month, to deliver a keynote speech at the Conservative Political Action Conference, one would be forgiven for glossing over the fact that Farage wields no power in the corridors of Westminster.

Nevertheless, the current pastiche of Fox-branded Conservativism is central to the Trump presidency, and it is the Trump presidency that will forge a new era in Anglo-American relations post-Brexit – one that Brexiteers believe will ultimately result in an iconic US-UK trade deal surpassing anything that could have been offered by Brussels.

It seemed Mr Trump agreed, hosting Theresa May just days after his inauguration. The Prime Minister was the first international leader to visit the White House in the Trump administration, and very obvious attempts were made by both sides to reaffirm the “Special Relationship”. Mr Trump held Mrs May’s hand on the walk down the colonnade and assured the world’s media that the US will always have Britain’s interests at heart, likening their relationship to that of Ronald Reagan and Margaret Thatcher in the 1980s.

It was great PR from both sides, but as with many subsequent press conferences from Trump and May, it lacked any evidence of substantial policy to provide certainty as to how this relationship would work in practice. Naturally, the two nations will always continue to collaborate and defence and security matters and will be natural allies in global conflict. For example, Trump affirmed his commitment to NATO, and the two nations reached an agreement in December 2016 to deploy US-built F-35 fighter jets on the Royal Navy’s new fleet of aircraft carriers.

However, the success of Theresa May’s government lives and dies by the completion and success of Brexit. 52% of the population, we are told, voted to take back control of Britain’s borders and statute books, and give Downing Street the power to agree its own trade deals. Therefore, a crucial marker for the success of any post-Brexit government will be its ability to strike better trade agreements for Britain than if it were a member state of the EU. Naturally, all eyes will be on trade negotiations with the US – its largest single-nation trading partner, when Britain leaves the EU in 2019.

Similarly, Donald Trump’s presidency lives and dies by his perceived ability to ‘Make America Great Again’, with his ‘America First’ rhetoric appealing to voters in states like Pennsylvania and Ohio where the decline of traditional industries has caused jobs and incomes to stagnate. It should come as no surprise to anyone Trump’s ‘America First’ policy has significant implications on the administration’s approach to global trade. After all, his campaign speeches often criticised the Obama administration’s handling of the North American Free Trade Agreement (NAFTA).

What started as vague threats on Twitter has recently turned into real action, with Trump announcing tariffs of 25% tariff on steel and 10% on aluminium imports on March 9th, a move which apparently triggered the resignation of Gary Cohn, Trump’s chief economic adviser. This followed announcements in January over tariffs on solar panels and washing machines – all decisions made in Trump’s mind to protect American businesses and give a competitive advantage to US-based manufacturers, by increasing the prices of foreign goods.

Although the White House has offered exceptions to the tariffs for America’s, the move has been heavily criticised by China and South Korea, who supply the US with aluminium, steel and white goods. They both believe that the policy violates World Trade Organisation rules, though Washington argue that the tariffs are in the interests of national security under Article XXI of the WTO treaty. At the time of writing, European Council president Donald Tusk is urging the US to resume trade talks on the Transatlantic Trade and Investment Partnership, in response to Trump’s threat of increased taxes on EU cars.

So where does this leave Britain? Clearly, protectionist trade policies and threatening America’s most important existing agreements in TTIP and NAFTA make for a less-than-ideal environment for Liam Fox and his team, tasked with eventually securing the US-UK trade deal promised at the start of Trump’s presidency. Fox’s first task is to ensure the UK will be exempt from the punitive tariffs on steel and aluminium while it is still a member of the EU, a tariff that has many British companies such as Jaguar Land Rover very worried.

As for the wider promise of securing a US-UK trade deal after Brexit, it’s clear that Trump’s ‘America First’ approach to global trade will most likely make for an uncompromising approach to future talks with London. The UK’s aviation industry has already expressed concern over compromises to existing agreements, which could limit flights between the two nations. Boris Johnson was right to claim that the UK was “first in line” for trade talks with the US, but Trump’s current stance suggests his loyalty to his domestic supporters will outweigh any concessions the UK can expect on trade talks in the name of the ‘Special Relationship’.

Banks for the many – Reasons why co-operative banks should have our support

First established in Germany in the mid-19th century to help poor farmers, cooperative financial institutions have grown to include about 250 million members, most of them in the developed economies. There are two main types of cooperative financial institutions: credit unions and cooperative banks. Both are owned democratically by their members, as opposed to investor-owned banks owned by shareholders.

Credit unions are distinct from cooperative banks mainly in two ways: they only accept members as customers and limit their membership to those sharing a “common bond”, such as profession. For example, the Navy Federal Credit Union membership consists of current and former US Navy personnel. Credit unions are more common in North America, while cooperative banks are more common in Europe.

Other major cooperative financial institutions include building societies such as Nationwide, that specialise in home mortgages. Co-operative banks offer a real alternative to the private run banking sector we have today, and as well as being democratically run they offer a number of economic advantages over private banks.

Firstly, co-operative banks are more resilient to banking crises. Even before the 2008 Global financial crisis, the cooperative banks in Europe were more cost effective than other banks, with better loan quality as a consequence of low risk lending policies. The credit unions in North America were expanding as well, with the reserves growing from 80 to 100 billion between 2005 and 2007. However, the financial crisis of 2008 truly revealed the advantages of cooperative banking. The failure rate of US credit unions between 2008 – 2010 was around 0.3%, compared to 1.5% of commercial banks. In Europe, the co-operative banking sector went into the crisis better prepared than its competitors with profits being added to the reserves instead of going to the shareholders, creating a stronger capital base to buffer difficulties. With stronger focus on retail banking instead of more speculative endeavours, their share of write-downs and losses (7%) was nearly three times smaller than their market share (20%). Without the massive government welfare check to save the big banks, the cooperative banking sector would’ve grown substantially in market share. For example in Netherlands, the cooperative Rabobank was the only major bank that didn’t need a bailout.

In all European countries, co-operative banks are over-represented in lending to small and medium sized businesses. For example in Germany the cooperative banks share of all loans in Germany is 17%, but the share of loans to SMEs stands at 28%. Research shows that SMEs perform better in countries with large cooperative banking sector and suggests that they loan to SMEs with lower costs. During the crisis the cooperative banks were more likely to continue or increase lending to SMEs than their competitors. In the US, startups are six times less likely to be dissatisfied with credit unions than they are with big banks. Loans to small companies are more likely to be used for growth whereas many loans to large companies are used to buyback stock.

Cooperative banks are better taxpayers: for every one billion in assets, German co-operative banks pay 2.5 million in taxes, compared to big private banks that pay only 0.5 million. A bank run by the people are more than willing to see their profits go back into society. They also engage more in other socially beneficial activities. For example, the Nationwide Building Society gives out community grants to projects submitted and selected by the members on one-member-one-vote basis.

Without shareholders pressuring for maximising immediate returns, cooperative banks have a more long-term focus. Numerous studies have shown that they are more likely to establish long-term relationship with their clients, especially with Small and medium enterprises. This, along with profits going to reserves instead of shareholders, manifests itself in less volatile return on equity. A stronger focus on relationship banking also leads to stronger local ties and networks. This can lead to co-operative banks having more sustainable growth.

Overall we can see that added to the appeal of banks run democratically for its members is not only appealing, but extremely beneficial to our economy. Co-operative banks, banks for the many, should have our support.

WeCo is a social media cooperative. Here’s a WeCo poll on what snippet of information in this article you find the most interesting

Northern England should run scared from the Tories’ hard Brexit plan

With 10.2% of its GDP dependent on EU trade, the highest per capita EU funding in Britain and 35.5% of its manufacturing sector at risk were the UK to leave the EU, the statistics imply that Northern England would have been an ardent proponent of the Remain campaign. Yet the map above suggests otherwise; out of 125 counting areas in the North East only 11 voted Remain, with the Leave vote as high as 69.9% in Hartlepool.

This outcome was not just a vote against the EU; it was a vote for change. It was an outcry against austerity, against globalisation and against the decades of economic stagnation compared to their Southern counterparts in the capital who have flourished in the neo-liberal era. However the Northern Brexit fever was based on a lack of information, with the tabloid media overstating the responsibility of migrants in explaining the gulf between Northern and Southern prosperity whilst failing to explain the economic disaster that could ensue if the UK left the single market. And now, the North may pay a particularly heavy price.

The impact on the Northern regions is dependent on the content of the final Brexit deal, yet one fact is astonishingly clear – much opposed to the views of many of its voters, a closer relationship with the EU will be best for the North. Leaked government analysis suggested that the North East could lose 3% of its GDP under a Norway-style deal but up to 16% were Brexit to entail trading under WTO rules. Whilst the Brexiteers will rightfully rally around the fact that the claims of an imminent recession failed to materialise and so these figures should also be ignored, it is not the numbers that are important; on analysis of the Northern economy it is evident that it is far more dependent on the EU than the South – and thus regardless of the actual figures, a hard Brexit will be far more detrimental to the North than an inclusive trade deal.

The North East is the only UK region with a trade surplus with the EU, and unlike London’s global trading base, most Northern exports are shipped across the Channel. 160,000 jobs are directly linked to EU trade, largely in the manufacturing sector as with the Nissan car plant in Sunderland. An exit from the Customs Union would increase tariffs on Northern exports – raising the price for EU consumers, reducing the profits of manufacturers and encouraging relocation to the Continent to maximise sales. And despite the emphatic bellowing of Brexiteers that Brexit will free us from the shackles of the Common External Tariff to open our trade to the world, the CET is the only mechanism protecting North Eastern trade with the EU from low cost competitors in Asia, hungry to enter the lucrative European market – and so by the laws of trade, British manufacturing would be unlikely to compete outside of the continent anyway. Tariffs also raise import prices, which together with the inflationary effect of the depreciation of the pound, will squeeze stagnant real incomes in the long term. Declines in the purchasing power of workers’ wages and unemployment benefits will increase poverty rates and decrease tax revenues, necessitating further government cuts to public services that make the vision of a Northern Powerhouse an ever more distant reality.

Yet it is not just trade that creates an inexorable link between the North and its continental counterparts – the North is also a net receiver of EU capital. The £350mn a week to spend on the NHS, as championed by the UKIP parades that struck the heart of the Northern citizens who have overseen tumultuous cuts to public services under the Osborne era, pales in comparison to the inflows from the EU. Gone will be the £8.5bn, 7 year programme by the Regional Development Fund to reduce regional inequality in addition to £260mn yearly funding for North Eastern charities – and whilst the government has pledged to continue such funding, its long term commitment is uncertain. Structural funds are provided to Cumbria, Merseyside and South Yorkshire, with incomes between 75%-90% of the EU average, allocated to employment agencies and startup support to reduce the Northern structural unemployment that has failed to be addressed by the domestic government since deindustrialisation in the Thatcher era. These funds have created 70,000 jobs in Northern England since 2007 from University of Sheffield Research – sufficient proof that the EU is providing the North what the budget-constrained government cannot. This funding has been a lifeline to prevent London from sliding further ahead of Northern stagnation; against the lobbying power of the capital’s financial powerhouses, continuation of Northern funding will likely be the first to be axed if Brexit induces further pressure on the fiscal budget.

The past 30 years have seen spectacular prosperity gains in the Southern regions that have adapted to the globalised, neoliberal world economic order whilst the Northern manufacturing heartlands have slid further into stagnation. And whilst the Brexit vote was symbolic as a cry for inclusivity, Brexit will not be dictated by North-Eastern factories. Its dependence on EU trade and funding compared to more prosperous parts of Britain will not be subsidised by a budget-constrained government; the 58% of the North-East who voted Leave on the false assumption that border controls was the solution to their stagnation failed to account for the controls on goods, funding, and ultimately, their livelihoods. The economic woes of Northern public services since 2008 and its structural unemployment since de-industrialisation and plain to see, yet Brexit will not change this. The Brexit vote appears a grave mistake for the dream of a Northern Powerhouse; only a Soft Brexit can stop this vision from slipping ever further away from reality.

National Investment Bank: Economic Genius or Political Ploy?

The Treasury is teetering on the edge as shortages in the housing market increase and a proposed rise in council tax looms as local authorities struggle to stay afloat.

The era of new-age austerity heralded by former Chancellor George Osborne following the financial crisis failed to restore the fiscal budget to prime health, and the economic impact of Brexit on tax revenues is set to further delay growth and halt the Conservatives goal of a balanced budget. Thus, the headache of how to improve public services without shaking the “magic money tree.”

Jeremy Corbyn believes he has found the answer – a National Investment Bank which will invest £500bn over the next decade enabling the British public service to expand as it hovers on the edge of collapse.

National Investment Banks have been tried and tested across the world. British universities and utilities have received billions from the EU’s own Investment Bank based in Luxembourg. As an ‘off balance sheet’ public institution, borrowing by the Bank does not contribute to the public debt and so avoids the tricky political dilemma of explaining excessive spending, as Labour have so often been accused, whilst still being able to implement the liberal ideal of growing the involvement of the state in economic and social spheres. Corbyn’s pricey agenda, as laid out in the 2016 manifesto includes: a £250m Children’s Health Fund, Crossrail 2 and universal superfast broadband by 2022. All these projects will need access to cheap finance without significantly increasing the deficit, and so the National Investment Bank seems the perfect method to achieve this.

However, a bank is still a bank. Unlike the Treasury, a social institution that can invest for the public good whilst raising tax revenue from elsewhere, the National Investment Bank must make a return on capital. As such, the tentacles of Corbyn’s economic plans are limited to projects with a future revenue stream that can pay back the loan with interest – and so whilst social corporations and banks will be able recipients – a new NHS hospital will not be within the remit of this off-balance-sheet institution. However the ability to lend to Small and medium-sized enterprises (SMEs), particularly in the underdeveloped Northern regions, will lower risk of high interest loans from riskier corporations . This will allow small businesses, the engine of competition and innovation that can drive Britain forward into the new digital economy, to prosper and contribute to both technological advancement and economic growth.

Labour’s proposes 12 Regional Investment Banks, that ensure local problems are solved without concentrating all employment and expertise in the City. Whilst the administrative and capital-raising tasks will be left to the National Bank, the Regional arms will be vital for effective implementation – since they are able to conduct in-depth research of local investment issues. Moreover on a national scale, the Banks can target the type of institutions that will shape Labour’s economic vision in the long run. Corbyn’s proposal for funding platform cooperatives democratically-governed technological firms that are run by the workers and users who need them most – unlike the nature of Silicon Valley giants – is a prime example of how the Bank can be the pivot in the transition towards a social capitalistic model and away from the current system that places the profit-maximising corporation at the heart of economic priority.

Yet the question is also one of timing. Despite the flamboyant brilliance of showering cash over budding entrepreneurs and innovative corporations, supply may exceed demand. The uncertainty surrounding the Brexit negotiations creates difficulty for rational firms to form expectations of future profits, and so they will have a preference for delaying investment until future demand is more predictable. There may therefore not be sufficient demand for the money that will be washing around the economy; the Financial Crisis showed that even excessive monetary stimulus by the Bank of England could not break the stranglehold that uncertainty had on investment; thus far from credit drying up, the demand for it may be invisible.

A National Investment Bank will likely be a positive institution with marginal impact. As Brexit uncertainty heightens and the global era of cheap money slowly fades away, excessive Bank borrowing will not only crowd out private investment, but there may also be a shortage of demand. The benefits of regional Banks for targeting local issues and the ability to use the Bank as the pivot in the transition away from corporate capitalism are ambitious visions, yet the impact of a public institutions that provides credit at only slightly lower interest rates than private banks is unlikely to reshape the economic landscape into the social capitalistic digital economy that Labour envisages.

Whilst the current circumstances prevail, Labour’s plan seems set to be just another cog in the economic wheel, providing only a small stimulus to SME growth. Yet as time progresses, the need for government to repel the forces of globalised private corporations and monopolists may demand a National Investment Bank, although whether Mr Corbyn will still be around to see it is another question in itself.