Can there be any excuse for yet another ‘guide to Keynes’, 90 years after his own Can Lloyd George Do It? One good excuse is the current UK election debate over Labour’s public investment plans. The arguments of the 1930s are still being rehearsed.
Labour’s manifesto confirms the radical idea of
borrowing, over time, an additional 30% of national income in order to invest
in the public sector – 30% on top of the 85% reached under the Conservatives. What
are we to make of this? 30% is the same as 3% annual net investment for 10
years. Depending on the timescale, Labour’s plans represent either a doubling
of the Conservatives’ plans (when limited to 3% annual net investment) or
something much bigger.
Table 1 puts the economy’s numbers into perspective on a human scale by considering the amounts per worker in 2018 (figures from Budget October 2018 and Blue Book 2019):
Public sector net debt
Industrial corporate debt (funding buildings, plant and equipment, etc)
Personal debt (residential mortgages)
Labour’s 2019 plans (spread over time)
Table 1: Major UK Debts 2018, per available worker
Total net public debt in 2018 represented about
£52,700 per worker, up from £17,100 in 2007. This figure compares with
corporate debt of £50,800 in the form of long-term securities, funding plant
and equipment; personal debt (mainly mortgages), up from £50,700 to £56,800.
Bank debts in the form of deposits (what we think of as money) total £231,000.
For 23 years between my undergraduate and graduate
studies in Economics I was a banker. A good banker creates debts that represent
genuine wealth. Bankers can add value to society; even if some styles of
banking are preferable to others. A debt can be a source of profit for both lender
and borrower. The UK Treasury’s debts are of the highest quality.
Labour 2019’s plans to create a national investment
fund and bank represent about £19,200.
If these plans had been implemented in 2010, we would by now have
something to show for a decade of budget deficits totalling £34,000. The figure
of £19,200 is certainly large but hardly disporportionate given the scale of
the ambition for change.
What did the historical Keynes think about public
sector debt? How much can the public sector safely borrow? My new book John Maynard Keynes: The Art of
Choosing the Right Model shows how the reality of
his thinking differs from the mythology: especially from the idea of Keynes,
common in the US, as a money-printing, inflationist socialist.
The main thrust of Keynes’s policy thinking, looking
forward to peace-time (he died in 1946), was to encourage private investment by keeping interest rates as low as possible –
the ‘euthanasia of the rentier’. His cheap money policy was implemented during both
the Keynesian Era (1951–1973) and the Austerity Era (2007–2015).
Curiously, the UK and US governments on average
invested more than they borrowed during
the Keynesian Era and their saving was at its highest. This is in line with Keynesian theory: high investment
will create high saving in a virtuous circle. The Keynesian Era itself was
fortunate in being driven mainly by private rather than public investment, but
it could equally well have been driven by public investment.
We can be sure both Keynes and Labour would support
what we now call the Golden Rule: balance the current budget over the cycle but
borrow long-term to invest on its merits, without any specific limit. The
Conservatives have qualified this Rule only by a limit on public borrowing to
invest of 3% of income, a figure in line with the EU’s Fiscal Compact.
Do we actually need Labour’s 2019 investment plan? From
Keynes’s perspective on full employment, perhaps not at all. Writing in 1942,
he expected peace-time full employment to imply 5% unemployment, reflecting the
frictional and structural factors in a changing economy. He might have been
surprised by the 2% achieved during the Keynesian Era, but not by the Bank of
England’s 4.25% current equilibrium rate. We are not at present facing a
problem of short-run, temporary unemployment.
Our problem is that, despite high levels of private
investment over several decades in various hotspots, the UK still suffers from
structural unemployment, large regions of the country suffering from
under-investment and under-employment. 2.6% of the workforce are part-timers
who would prefer full-time work. There is an opportunity to redeploy workers from
poor quality jobs to address our climate and housing emergencies. Keynes thought
large scale public sector investment in housing and utilities entirely appropriate,
precisely as does Labour today.
Yet where is the money to come from? In one sense, money
is never a problem. Any state with its own currency has unlimited credit, i.e.
access to the means of payment for the initial expenditure. In 2009 the UK could project an unprecedented
£175bn deficit (12.4% of income) while interest rates reached record lows.
Nevertheless, unlimited credit does not mean an unlimited budget. There is no
credit limit on my American Express charge card, but that does not mean I can
afford everything I could buy. It depends on how I am going to fund repayment of the card balance at
the end of the month. ‘Funding’ means the issue of securities that allow the
cost of this expenditure to be recovered from future income.
Keynes was against funding
public deficits by printing money, which means government must also issue
securities. If the only source of revenue to service public debt is taxation,
given the rate of tax on the national income, there is a prudential limit on
the level of public debt as a proportion of income (the public sector debt
ratio, the figure we have been quoting earlier). The absolute size of the debt
in terms of currency is not important.
Another way for the State to capture the cash return
on investment is to run industry itself. Here John McDonnell is more realistic
and hard-headed about finance than the Conservatives. Keynes wrote before most
of Britain’s major industries were nationalised after 1945. Borrowing to invest
£650bn is not necessarily imprudent if the monetary return on investment can be
captured directly and not only through taxation.
Labour’s £650bn is to be divided between a National
Transformation Fund (£400bn), funding infrastructure investment in transport
and utilities together with housing, and a National Investment Bank (£250bn).
Labour proposes to re-nationalise the railways and utilities so that the extra
borrowing for their investment can be serviced directly by the revenue from
providing services. The capital invested in public housing and the National
Investment Bank would undoubtedly earn a higher return than the government’s
cost of borrowing.
There is nothing ‘Venezuelan’ about Labour’s public investment plans. The real question is whether nationalised industries can generate the necessary returns on the investment. That is a matter of management and governance. The private sector does not have a monopoly on good practice, especially in these industries. If the private sector is not investing enough, particularly to address structural unemployment, there is no inherent financial reason why the State should not step in, as Keynes recognised. The objections are practical or political, not financial or economic.
M. G. Hayes is a Quondam Fellow of Robinson College, Cambridge. His new book, John Maynard Keynes, is available now from Polity.