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Perception racket

14 August 2015 By George Hay

British politicians are queuing up to warn of the dangers of Jeremy Corbyn. The North London Member of Parliament has a reasonable chance of becoming the leader of the opposition Labour Party on Sept. 12. While that would still leave him far from running the country, there are two things worth noting about the old-school leftist firebrand: the loudest scaremongers are from his own party, and certain of his ideas are worthy of debate.

If Corbyn does win the vote of party members, which began on Aug. 14, the incumbent Conservative Party will rejoice. Its surprise majority in May’s general election suggested the British electorate is politically further right than had been assumed. If Labour elects the supposedly hard-left Corbyn it faces “annihilation”, Labour’s former centrist leader Tony Blair argued on Aug. 13.

Blair could be right. The problem for previous Labour leader Ed Miliband, argues Oxford economist Simon Wren-Lewis, was not that he was left-wing but that he was perceived to be, with all the accompanying connotations of clunking redistribution and innovation-strangling intervention that turn British voters off. Corbyn actually is left-wing. Yet he is striking a chord because after a global financial crisis and austerity, the post-Thatcherite consensus – privatisation good, nationalisation bad – is ripe for reappraisal.

Take Corbyn’s support for public ownership of infrastructure assets. Following wholesale privatisations in the 1980s and 1990s, nine of England and Wales’ 10 water and sewerage companies are publicly listed or owned by private equity. Based on the standard justification for privatising public assets – that it brings efficiency gains and lower bills – you’d expect Welsh Water, owned by a not-for-profit entity called Glas Cymru, to lag far behind.

It doesn’t. Over the past three years, Welsh Water has been fourth or higher in regulator Ofwat’s customer satisfaction survey of 19 water groups. It scores better than privately-owned entities like Thames Water, which is also more highly indebted due to the need to hit the return targets of foreign owners like Australia’s Macquarie, and the China Investment Corporation.

Glas Cymru has a normal board of financial experts, overseen by a 70-strong panel of local customers who act as engaged shareholders. Instead of bigger dividends, gains from efficiency savings reduce their bills. It sounds a better model for the ownership of publicly essential natural monopolies than allowing foreign-owned entities to make regulatory returns higher than Glas’ 2 percent cost of finance, on the ideological basis that the private sector is always more efficient.

Another Corbyn idea is to use Bank of England quantitative easing to support housing, energy and infrastructure projects. One objection is the risk of stoking inflation, although the bank is currently battling deflationary forces. A second objection is that central banks should not be seen to compromise their independence by favouring particular sectors, or their credibility by merrily printing money to finance things that should be done by taxpayers.

These protests would have more force if central banks hadn’t spent the last seven years pulling off all manner of off-piste moves. The European Central Bank surreptitiously advanced hundreds of billions of euros to Greek and Irish banks to stop them collapsing, while the Bank of England’s own “Funding for Lending Scheme” explicitly incentivised banks to lend to small businesses. Economists like former UK regulator Adair Turner have publicly advocated simply giving money to citizens to stoke demand.

No doubt global creditors helping finance the UK’s budget deficit would look askance on a left-wing government manning the printing presses. But their objection would be more about the reasons, and the destination of the funds, than the principle.

The obvious danger is that Corbyn – like Greek Prime Minister Alexis Tsipras – could make the UK public sector more sclerotic, and shower public money on spurious causes. But this is not just a left-wing failing. Conservative Chancellor George Osborne’s “Help to Buy” scheme has used 12 billion pounds of public guarantees to help Britons enter an already inflated housing market. A left-of-centre government would be more likely to spend this on new supply.

The idea of a Corbyn-led Britain remains highly unlikely. Hence the gory details of how his proposed nationalisations might work – perhaps via utilities regulators cratering share prices with onerous caps on allowed returns – are unlikely to be tested in practice. But if nothing else, Corbyn’s ideas may force some of the less efficient aspects of the market consensus to be held up for lively debate.


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