First President Trump – next Prime Minister Corbyn?

The chances of Jeremy Corbyn leading his Labour party to victory in the next general election look remote. William Hill puts the odds of a Labour majority at the next general election at 6/1. Polls have Labour lagging behind the Tories by as many as ten points which, when new constituency boundaries are taken into account, implies that the Conservatives will secure a 70-seat majority come 2020, reported The Independent earlier this year. More recent polls tell a similar story equally if not more gloomy from Labour's point of view. In short, a Corbyn victory is about as likely as well, about as likely as Britain voting to leave the EU, or Donald Trump winning the American presidency.

But regardless of whether Corbyn can repeat the trick, Labour is the official opposition and its economic plans deserve scrutiny, as Daniel Mahoney points out on the CapX website. Mahoney and Tim Knox recently published a report for the Centre for Policy Studies (CPS), a right-wing think tank, which did just that. So should we be worried by the prospects of a Corbyn victory? The authors think so the challenges of Brexit will pale in comparison, they think. Their report analysed Labour's current policy proposals in five areas: infrastructure, employment legislation, welfare, tuition fees and shale gas. And the cost of Labour's proposed measures in those areas alone is "simply enormous". It comes out at a cost to taxpayers of around £17,500 per family over just one parliamentary term (see table). Such a bill would cause "real chaos for families up and down the country", says Mahoney.

Would it? That shocking-sounding figure includes some debatable assumptions and guesswork that a higher minimum wage and worker protections will necessarily lead to French levels of unemployment, for example, and that a ban on fracking will lead to huge losses in terms of higher energy prices, foregone tax receipts and lost jobs. The biggest part of the bill calculated by the CPS is Labour's central spending commitment so far: to a £500bn infrastructure programme, as revealed in Shadow Chancellor John McDonnell's party conference speech earlier this year. McDonnell proposes to fund this with £350bn of borrowings and £150bn of private-sector investment. These plans amount to £14,000 per household over the parliamentary term, says the CPS, again if some guesswork is built in in this case, that bond yields will revert from their current lows to historical averages. The remainder of Labour's tax bombshell, as weaponised by the CPS, comes from welfare promises, such as scrapping the bedroom tax and the cap on welfare payments and scrapping tuition fees in higher education.

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The Labour party did not respond to requests for comment, but it's possible to work out what its thinking is by looking at John McDonnell's speeches and comments over the past year or so. What's interesting is that his perspective is not quite the one you might have been led to believe from overheated McCarthyite commentary in the press. It may, for example, surprise you to know that new new Labour is not as much like old Labour as you might have been led to believe.

McDonnell is not, for example, a huge fan of state ownership of the economy. In a speech to the London School of Economics, given last year, he ruled out "top-down nationalisation" as a panacea for all ills, citing in justification the insights of Hayek, who had "profound" things to say on the question, in McDonnell's judgement. Nor can the state simply tax and spend, he said: "Demanding a higher and higher rate of public spending from an economy with the UK's structural weaknesses is unsustainable."

Repealing "pay to stay" limits on social housing£1.25bn

Labour's next tax bombshell?

Total cost of policy proposals, according to CPS*

Capital cost of infrastructure borrowing£350bnCost of servicing £350bn of gilts for infrastructure£31.50bnIntroducing spare-room subsidy£2.55bnRepealing welfare cap (direct)£0.50bnRepealing welfare cap (indirect)£0.25bnRepealing "pay to stay" limits on social housing£1.25bnCost of unemployment increasing£31.85bnCost of abolishing tuition fees£50.50bnCost of fracking ban (in foregone income tax and NI)£2.60bnTOTAL COST£471bnTotal cost per household**£17,444* Over five-year parliamentary term ** 27 million households in the UK

True, having conceded this ground, he is more vague about just what the alternative plan is. In place of concrete proposals, he gives us hand-waving at least one member of his Economic Advisory Council of left-leaning economists flounced off over McDonnell's lack of any such detailed policy proposals. In place of a plan, at least as yet, McDonnell instead called in his speech for a "sophisticated argument" about ownership, for a revival of self-management and workers' control, for decentralisation of powers from the state, and for "social entrepreneurship". He wants a "conversation" about the roles of the Bank of England and Treasury, and how these might be "democratised". He wants fairer taxes so that huge multinationals make a fairer contribution to society.

Until recently, that would have sounded like pretty standard leftist fare and hence easy to dismiss. Now, however, policymaking elites, shocked by Brexit and Trump, are desperately scrambling around for ideas on how the "left behind" might be given a helping hand to catch up and for alternatives to what has, at least apparently, been rejected in recent votes the now decades old project of globalising capital flows and opening borders to flows of economic migrants. Indeed, when Theresa May took office as prime minister in the wake of the Brexit vote, her promises seemed like the result of a raid on McDonnell's old speeches as she promised state-directed industrial strategies, more workers on the boards of firms and higher minimum wages "in the interests of families struggling to make ends meet".

The talk now in policymaking circles, as a recent MoneyWeek briefing explored, is of a shift from using monetary policy to boost a flagging economy to using fiscal policy for the same ends particularly by raising state infrastructure spending. Such promises will lead to "the usual cries" from critics about debt, as Simon Wren-Lewis, an economist who has advised McDonnell, correctly predicted in a blog. But McDonnell's plans in any case are restrained (at least in theory) by his fiscal rule: that taxes must cover current spending over the parliament, while leaving the government free to borrow to invest.

It is right to do that, says Wren-Lewis, and such borrowing will be constrained by a commitment to reduce debt relative to trend GDP over the course of a parliament. This doesn't sound obviously very scary for business. Indeed, in March of this year McDonnell was able to boast to The Guardian that "wealth creators" backed his plans to balance the books while borrowing to invest in infrastructure on the basis of a cautious welcome of his ideas from the bosses' union, the CBI. "We're now mainstream with common-sense policies," said McDonnell.

In this light, an old-fashioned socialist seems rather more in tune with the mainstream of economic thinking than the Thatcherite think tank. Indeed, the CPS's calculation of the cost of the infrastructure promises assumes that bond yields will trend back to historic norms. But if the Bank of England keeps buying bonds to keep yields pinned at a fixed level as the Federal Reserve did in the late 1940s and the Bank of Japan is now doing this won't happen. Indeed, perhaps this is just the "conversation" McDonnell wants to have with central bankers.

Reasons to be nervous remain, however. A recent study of China's vast infrastructure programme, for example, reported recently in MoneyWeek, estimates that more than half of its building projects are actually destroying economic value. In other words, the spending on buildings and airports and bridges and whatnot, rather than enabling and boosting economic activity, is simply wasted on bridges to nowhere. "The same would be true of a similarly massive programme in the UK," says Mahoney.

Other commentators are even more jittery. Allister Heath, writing in The Daily Telegraph, says Labour has been taken over by a "neo-Marxist, angry mob" and that the choice at the next election is "the Tories or Armageddon". Maybe, but does Labour really stand a chance? The "mob" in charge of Labour are pushing a very different kind of populism from the kind that is going down so well across the Atlantic, all over Europe, and in Britain. Nor do they have a skilled demagogue prepared to indulge in the kind of rhetoric against immigrants and liberal values that voters seem to want to hear and are prepared to back.

But regardless of the prospects for the current "mob" in charge of Labour, change in some form looks to be on the cards. Celebrity guru Russell Brand is convinced anyway. The vote for Trump, he says, whether you approve of him or not, shows that the days of "neoliberalism" are numbered.