Kinnock in Wonderland

Neil Kinnock, the bookmakers’ favourite to become the next Leader of the Labour Party, has a very simple explanation for the current economic depression in Britain. In a speech read to the Cardiff Fabian Society on 1 July he attributed it to a “deliberate Government policy”, to a decision by the previous Tory government to pursue “policies of slump”:

“The Tories are caught in a trap of their own making. They set a target for reducing public spending and tax. Then they cut public spending. The economy shrinks. That reduces tax revenue and the Government has to increase borrowing. So they cut public spending some more and push up taxes. The economy slides, more people lose their jobs, and the crumble becomes a collapse, as the economy gets smaller and weaker.
The trap is their obsession about public spending. Our plans are based on using public spending for what it is good at — for investing in our industry, our people and our public services, for providing useful work for people and stable markets for the equipment they use. That is all commonsense.
We know how to achieve economic growth — how to put the country back to work. The Tories don’t.”

So, for Kinnock, the present slump has been caused by the Tories’ policy of cutting government spending rather than being part of the depression phase of the economic cycle through which the world capitalist economy is currently passing. In fact, on this matter the Conservative Party can legitimately plead not guilty. The present slump is not their fault; it has not resulted from the policies they have chosen to pursue. The present slump in Britain is part of a world wide capitalist depression and the Tory governments in office since 1979 have merely passively adapted their policy to the world economic situation as any government, including Labour, would have had to do (and did do when they were in office during an earlier stage of the world depression).

If Kinnock’s explanation was the right one then, logically, the slump could be ended by a change of policy, either by a new government or even by the present Tory government. And this of course is the conclusion Kinnock wants to reach. As he put it in his election address to the voters in his constituency of Islwyn in South Wales:

“We will expand the economy, by providing a measured increase in spending. Spending money creates jobs. If we increase pensions and child benefits, it means more spending power for the elderly and for parents, more bought in local shops, more orders for goods and more jobs in factories. More spending means that the economy will begin to expand; and growth will provide new wealth for higher wages and better living standards, the right climate for industry to invest and more resources for the public services.”

At first sight this may seem plausible — “commonsense”, as Kinnock puts it. Since one of the features of a slump is a shrinking of the market, a lack of demand for goods, why not simply give people more money to spend? But it is not as simple as that. Slumps are provoked by the rate of profit having fallen too low to make it attractive enough for capitalists to continue investing as much in production as they had previously. The resulting cut back in production is at the same time a cutback in incomes derived from production (profits, wages, taxes). The shrinking of the market in a slump is thus a consequence of the slump, not its cause. Similarly, the “way out” can only come from a revival of profitability, not from an increase in purchasing power artificially pumped into the economy. And a revival of profitability is a slow process which will indeed come sooner or later, but which governments can do little to hasten beyond continuing to give priority to profits and profit-making.

In these circumstances what would be the effect of an increase in government spending such as advocated by Kinnock? That would depend on how it was financed. There are three ways in which a government obtains the money it spends: taxation (and in the end all taxes fall on property and property incomes, since taxes on wages and on articles consumed by wage-earners are ultimately passed on to the employer); borrowing (overwhelmingly also from property-owners since only they have the sums of money the government is likely to be interested in); and the printing press.

If the government’s increase in spending is financed by increased taxation this would inevitably come out of profits. Suppose the government used this extra money to “increase pensions and child benefits” — as Kinnock suggested in his election(eering) address. This would certainly mean “more spending power for the elderly and parents” but it would also mean less spending power for shareholders and capitalists. The extra spending by pensioners and parents would be offset by the decrease in spending by capitalists, either on their own consumption or in reinvesting in production. There would therefore be no overall increase in spending of the sort Kinnock wants to rely on to get the economy expanding again. The government would have simply robbed Peter to pay Paul, the overall level of demand in the economy remaining the same.

But suppose that the government used the extra money raised by taxation “for investing in our industry”, as Kinnock suggested to the Cardiff Fabians. Once again the overall level of demand would remain the same, with the government simply investing, spending on productive activity, what private capitalist industry had previously been doing. It is indeed possible that the capitalists had been hoarding or lending to the financial market rather than themselves re-investing their profits in production, but this would have been due to the absence of profitable sales outlets. The fact that their profits were taxed away and re-invested by the government would not alter this situation for the government would find it just as difficult as the private capitalists would have done to sell the extra goods it had invested in. To the extent that it did succeed in selling them this could only be at the expense of sales by private capitalist industry. So once again the economy would not expand. The most that would happen would be a change in the pattern of what was produced.

The situation would be just the same if the government decided to finance this increased investment by borrowing, inevitably from private capitalists. For these latter would only be prepared to lend their capital rather than investing it themselves in production because they would have judged that no profits, or insufficient profits compared to the rate of interest on loan capital, were to be made from producing goods. As to the final theoretical option, even Kinnock has not suggested borrowing money at interest from private capitalists to increase pensions and child benefits!

In the end, then, if government spending is to have any chance of having the effect that Kinnock wants it to have, if it is to be a real injection of extra purchasing power into the economy rather than a mere redistribution of already existing purchasing power, it will have to be financed by using the printing press. This is what Kinnock is in effect advocating. But the result would not be to expand the economy, which will only begin to expand of its own accord when profit prospects improve; it would rather be to expand the rate at which prices are rising. For printing money in excess of what the economy needs at any particular time for its various transactions can only result in the depreciation of the currency, reflecting itself as a rise in the general price level.

Internally this does not matter too much since people can get used to the changing value of the paper tokens they use in their economic transactions, but it can have serious effects on the competitive position in the world market of the country which practises it. A higher rate of inflation than the world average, or than those of a country’s main commercial rivals, will mean that the prices of its exports will rise faster than those of its rivals and so become uncompetitive. This will reflect itself in falling sales and so in falling profits and then in falling output and rising unemployment.

In his speech to the Cardiff Fabians Kinnock cited the last Labour period of office from 1974-79 as an example of what a government “committed to planned growth” could do. Certainly the world depression had only just begun then and had still not reached its lowest point at the time the Callaghan government was voted out of office in 1979. It is however strange that Kinnock should refer back to this period since Callaghan is on record as having, on the basis of an actual experience of running capitalism, expressed the exact opposite view to that which Kinnock and the Labour Party, now in opposition, advance:

“We used to think that you could just spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you, in all candour, that that option no longer exists and that in so far as it ever did exist, it only worked on each occasion since the war by injecting bigger doses of inflation into the economy, followed by higher levels of unemployment” (The Times, 29 September 1976).

No wonder the Labour Party has lost all credibility. Out of office “More spending means the economy will begin to expand”; in office they suddenly discover that “that option no longer exists”. As a matter of fact it never did exist. The idea that a government can spend its way out of a depression is based on a complete misunderstanding of how capitalism works. But then the Labour Party never did understand capitalism. Kinnock doesn’t either, which must make him a typical Leader for the Labour Party.

ALB