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The Economics of Starmerism

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What do we know about Labour’s economic approach under Keir Starmer? In his Fabian Society pamphlet ‘The Road Ahead’, and in his Labour Conference speech we are beginning to get some clues to the Economics of Starmerism. So can he rise above the prevailing ‘mediamacro’ economic fallacies so dear to the mainstream media and the right wing of the Labour Party? I explain the importance of the ‘Baumol Effect’ and make some suggestions for getting real with the Starmer aspirations.

Labour party leader - Sir Keir Starmer Rwendland, CC BY-SA 4.0 , via Wikimedia Commons
Labour party leader Sir Keir Starmer – Rwendland, CC BY-SA 4.0, via Wikimedia Commons

Dr Starmer’s Diagnosis

Keir tells us that the Conservative Party have three charges to answer: firstly they have used the global financial crisis (GFC) of the late 2010s as a smokescreen for ‘rolling back the state’; secondly they have embraced a nationalism that tends toward isolation; and thirdly they have imported social, cultural and national divisions to the United Kingdom. The consequence of these obsessions is incoherent economic management that has led to increased poverty, deterioration in law and order and the collapse of public services, the social fabric and even the nation’s health. This has led, points out Starmer, to an appalling legacy of wasted potential. In particular, he charges, ‘faith was put in the power of a free-market model that valued the contribution of capital but not labour’. The consequences are low levels of productivity and social mobility, which in turn stunt liberty, democracy and citizenship, and particularly co-operation and solidarity.

Keir Therapy

Labour will give people ‘real flexibility and choice at work’ with a New Deal for Working People which increases the minimum wage and grants immediate rights to sick pay, parental leave and flexible working for all workers, stronger trade union rights and guaranteed work or training for young people. This, assures Starmer, will ‘benefit business’ by creating ‘happier, more productive employees’. The Economics of Starmerism will put ‘Wellbeing’ at the heart of government decision-making, with special emphasis on physical and mental health. Improvement will be achieved by filling staffing shortfalls, ‘providing the NHS with the support it needs’ and ‘harnessing the power and potential of technology’.

Labour would take advantage of Brexit to force a focus on local procurement. There will be a 3% target for investment in science, research and development and a £28bn annual government investment in green transition. The greater part of the burden of taxation should not fall on working people, he tells us. Perhaps most radical of all is Starmer’s conference speech proposal to reform company law ‘to change the priority duty of directors to make the long-term success of the company the main priority’. He believes that this would be ‘with the blessing of British business’.

The Prognosis

Contra many of his left-wing critics, Starmer’s proposals are potentially far-reaching. On the face of them they would represent an acceptance that British capitalism, and successive UK governments’ lack of engagement with its failures, needs to be radically shaken up. They show a realisation that the UK economy is not delivering resources for the population or to the services that provide for a baseline quality of life in a developed country.

The Conservatives’ current line is that demand set against current deficient supply arising from labour shortages will spontaneously produce a ‘high wage, high skills, high productivity’ economy as UK business is forced to invest in labour-saving capital. If so, Brexit looks like a very damaging hammer to crack a nut. Given the evidence that immigration is associated with higher productivity and healthier public finances, it seems more likely that Brexit-related labour shortages are going to lead to higher prices, business failures, bigger deficits and/or higher taxes.

If Starmer is serious about getting resources into the pockets of the median citizen and to public services then he will need to carry through on his plans for business reform, embrace taxation on the asset-rich and release himself from the obsession with the current level of public debt rather than its long-run sustainability. Starmer may be naïve to believe, as suggested by the quote above, that ‘business’ will be pleased by the practical measures required to achieve his goals. Starmer tells us that business provides ‘jobs, prosperity and wealth’, but what does this really mean? A viable business has come to be understood as one that when its accounts are calculated ‘turns a profit’. But these cash flows alone tell us a limited amount about the contribution to economic or social welfare of the business.

Smoothing the Lumpy Economy

It is true that if a business gains a net surplus of foreign currency this boosts the ability of UK citizens to purchase foreign goods – but on a purely domestic basis monetary flows created by business activities simply redistribute already existing ‘prosperity and wealth’. In the perfectly competitive and transparent economy envisaged by some economic theorists, creation of wealth anew follows automatically from profitability. Observation of actual economies reveals that none of the conditions required to bring about this happy state exist. The smooth economy of perfect knowledge and competition that the economists imagine then becomes lumpy – money accumulates in some parts of the economy and becomes scarce in others. Having more money than immediately required for either personal or business expenses gives economic power – the ability to outbid or outwait others with less. The economy becomes more lumpy yet. Worse still, economic power can be used to leverage political power, power over information, and abuse of the legal system.

The upshot is that ‘business’ can create jobs, prosperity and wealth, but can also destroy them, waste them, and worse. Society and its governments need to monitor the tangible outputs of business for their contribution to overall welfare, and to constrain the inequality (‘lumpiness’) of the economy within tolerable limits to preserve fairness and democracy. Keir Starmer’s aspirations appear to recognise this, but he may underestimate the boldness and difficulty of making those aspirations reality. We already live with an extremely lumpy economy – one that has already spilled over into a lumpy political system. The party of the wealthy (and thus of the self-enhancing status quo) has an inbuilt electoral advantage, the elitist right (dedicated to opposing inequality reduction measures above all else) controls the bulk of the media landscape, and legal redress is generally unavailable except to the wealthy.

The reversal of New Labour’s achievements, such as Gordon Brown’s tax credit scheme and the temporary regeneration of the NHS, demonstrates that it is not enough to tinker around the edges of government finance. Starmer’s pledge to ‘shift priority’ in the NHS suggests similar tinkering with public services. Prevention and mental health provision are absolutely vital, as the pandemic has demonstrated, but is emergency care less important? Perhaps this language was ill-chosen, but it suggests the politics of ‘hard choices’, that turn out to be hard only for the poor. The idea that technology will allow us to get a better health service on the cheap – if that is what is being suggested – is a naïve fantasy. The pledges to make every school ‘a great state school’, build affordable homes and forge a ‘Green New Deal’, incorporating £28bn of investment every year, are laudable, but only a real shift in resources can make these plans real.

The Second Opinion: Rejecting Mediamacro and Embracing Baumol

In ‘The Road Ahead’ Starmer tells us that the next Labour government must ‘repair the public finances’; in his speech he says ‘the public finances we will inherit will need serious repair work’. If Starmer believes that these are his real constraints, then he has fallen into the mediamacro trap designed to stymie any genuine change to the status quo. For lasting economic and social change in the UK we need an approach that transcends financial accounting and considers how we use our real national resources to create a fairer, happier and more sustainable country. There are hints that Keir Starmer understands this – when he talks about driving power ‘into the hands of people and communities’ or acknowledges that business is forced, often against its will, into short-termism, or that ‘the greater part of the [tax] burden should not fall on working people’ – but how is he going to put it into practice? Unless he works this out his good intent will fall, as so often for Labour before, by the wayside.

For a start, the current headline government debt is misleading. As part of the Bank of England’s Quantitative Easing programme, around one-third of government debt is currently in the Bank’s hands, so owed by the state to the state. Even that portion of debt in the hands of domestic (60% of the rest) and foreign investors pays out very low rates of interest – so low that after inflation is taken into account recent debt issues have been earning money for the government. When a huge rebuilding effort is required, the level of government debt should absolutely not be a priority. Until interest rate or inflationary pressures become apparent, there are far more pressing needs. The one sure way to bring these pressures about is an economy tanked by an insecure and unhappy workforce and dismal infrastructure investment.

For similar reasons, increasing taxation simply to increase revenue should not be a major focus. As Starmer suggests, the shifting of the burden is more relevant. Taxing work and employment through income taxes, and taxing business activity through profit taxes and VAT are favoured mainly because these taxes are easy to collect. Usefully ‘smart government’ would find better ways to tax the downsides of capitalism: excessive wealth and land accumulation, and social and environmental impacts.

The share of government expenditure or of taxation in GDP also needs to be ditched as a useful yardstick. Economists who have studied the matter now largely agree with the proposition of the eminent US economist William Baumol, that if we want the constantly improving health and education provision that we expect and advancing technology allows, we must inevitably contribute a constantly increasing share of our resources toward these. Counterintuitively, this need not mean that our private consumption enjoyment is reduced. Everyone who has studied economics in any depth will pride themselves on understanding the counterintuitive concept of ‘comparative advantage’ in international trade. This idea relies on the importance of relative rather than absolute differences in productivity. The so-called ‘Baumol effect’ arises as manufacturing production becomes relatively more efficient, and so proportionately more resources need to flow into public services. Services, particularly health, care and education services, are much more difficult to make more efficient in their outputs per worker – indeed personal individual contact time is an important measure of the quality of the service. These sectors must compete for resources with the increasing-return manufacturing sector without being able to offset higher costs with greater labour productivity. Since this happens only because overall productivity is increasing, at the same time as a bigger share of resources is required for labour-intensive services, there are more resources available – so that there is no need for an absolute fall in the quantity of consumption goods we can have.

There is a strong overlap between services that are intensive in skilled labour – such as health, care, education, the law and research – and services that are difficult to market and provide privately. Thus public sector financial costs tend to rise considerably faster than those for the private sector. And yet this greater share does not mean an absolute fall in private consumption – it is in fact compatible with increasing private consumption, depending on how the final allocation between sectors is set. Nor is it evidence of an inherent ‘inefficiency of the public sector’ that Starmer takes a dig at, or evidence that adequate health provision is ‘unaffordable’. Since most workers have not seen any such increase in their consumption over the last 20 years, we can say pretty conclusively that the inadequacy of the public sector is a direct consequence of productivity benefits going instead to those at the top of the income and wealth distribution.

Deep Treatment

Getting power ‘into the hands of people and communities’ is meaningless unless this includes economic power. Wealth and land taxation are part of this. But if Brexit has an upside, it is that there are now no restrictions on how we choose to regulate business structure in the future. Changing corporate governance law to reduce short-termism is good, but better would be to re-orient business at its root. Labour policies need to force workers’ fair compensation and conditions, community and social concerns, to be at the heart of business decision-making, rather than tagged on as matter of compliance with central government edicts. This will help to increase the quantity of real jobs, real wealth and real prosperity, public and private.

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