- John McDonnell could be Britain’s next Chancellor of the Exchequer.
- The Labour MP is a self-professed Marxist who believes in “generally fermenting the overthrow of capitalism.”
- McDonnell recently endorsed a 200-page white paper of economic ideas, including new targets for the Bank of England and a new financial structure for investing in tech and funding infrastructure.
- The vision is surprisingly moderate. It’s more evidence that Labour is moving closer to the business community as the Tories move away from it.
- McDonnell and Graham Turner, an economist who helped write the paper, talked to Business Insider’s Adam Payne.
LONDON – Critics of Shadow Chancellor John McDonnell know three things about him:
- He once said proudly, “I’m a Marxist” at a political meeting.
- His entry in Who’s Who said that his interests included “generally fermenting the overthrow of capitalism.”
- And at one of his first appearances in the House of Commons as the Labour Party’s new shadow chancellor in 2016, he threw a copy of Chairman Mao’s Little Red Book across the despatch box to criticise the Conservative government’s friendliness to China – a move that cemented rather than dissipated his reputation as one of Labour’s most left-wing members of parliament.
The Little Red Book incident was two years ago.
Today, the Labour Party is one to two percentage points behind the Conservatives in the opinion polls, having been 20 points behind the Tories little over a year ago. Labour did reasonably well at the last local elections. And Prime Minister Theresa May’s government operates only with a wafer-thin technical majority.
The main reason May has been able to keep the Tories together, despite internal rebellions from both its Remain and Leave wings and an “on-hold” plot to stage a coup against her, is at least partly that the Conservatives are united in the fear that they could lose the next election, putting McDonnell in charge of the Treasury, and thus all government spending.
Not the Communist Manifesto
McDonnell sat down with Business Insider’s Adam Payne to discuss his big-picture economic plan for Britain, contained within a white paper published by GFC Economics, a think tank. The plan is… surprisingly moderate.
- A Labour government will give the Bank of England a new target of generating 3% annual increases in productivity, in addition to its existing inflation and unemployment mandates.
- Increase the government’s role in the UK tech sector by turning RBS (which the government has partly owned since the 2008 crisis) into a more aggressive venture capital investor in small and medium-sized enterprises.
- Make the BOE work with the Strategic Investment Board to fund new companies, and with the National Transformation Fund for infrastructure projects.
The Communist Manifesto it is not.
Almost nobody is against boosting productivity (the main debate is about how to measure it properly). Very few people are against strengthening investment in tech and infrastructure (although the Conservatives will likely ask where McDonnell expects to get all that extra money from).
Is Labour trying to replace the Tories as the party of business?
And, strangest of all, the proposals force business to take the prospect of a socialist government more seriously. The 200-page document – dare we call it McDonnell’s Little White Paper? – comes at a time when businesses in Britain are increasingly aghast at the Conservative government’s handling of the Brexit trade deal:
- Last week Airbus threatened to leave the country.
- And on Monday, BMW said it could close its UK plants in the event of increased customs checks.
- CBI chief Carolyn Fairbairn has told BI she is worried that May will not keep close ties to Europe.
- The CBI also told BI that British businesses could soon go bankrupt as a result of the UK trade department’s handling of Brexit.
- Japan has warned that Britain outside the Single Market will attract few of its new investments.
- Fidelity has stopped making political contributions to the Conservative party.
- Unilever has moved its HQ to the Netherlands.
- The mood among May’s kitchen cabinet of business advisors – 13 execs from major British companies – has “decayed considerably” as her government has failed to argue for the close trade ties that most UK companies want to maintain.
- And Foreign Secretary Boris Johnson reportedly said “fuck business” last week, when asked to address the fear within the business community over Brexit.
The white paper has been reasonably well-received in The City. So we put it to McDonnell and GFC’s Graham Turner, a Labour economics advisor, that it looked like Labour was in the process of replacing the Conservatives as the party of business, especially given that Labour’s Brexit policies are closer to those preferred by the business community than the Conservatives’.
“What we’re demonstrating is we’ve got ambition, which business recognises is necessary in government”
“If you look at what Graham has put in the report, and the stark statistics about the way the economy has been run down under this government and its failure to look at long-term challenges, what’s startling is that it isn’t just a government of failure, but a government completely lacking ambition,” McDonnell said.
“What we’re demonstrating is we’ve got ambition, which business recognises is necessary in government. The government is proving itself to be irrelevant to the needs of our economy. People recognise that Labour’s plans can be developed with them in partnership. We can rebuild the economy but go much further and much more futuristic.”
The other obvious question about McDonnell’s plan centres on the 3% productivity target. Although UK productivity is infamously low, most economists believe that is because it’s badly measured. Surely the Bank of England could simply adjust the measurements it uses and instantly produce 3% growth?
“If you end up with an inflation estimate which is much lower than we have at the moment, that simply means you’ve hit 3% productivity because you’ve measured inflation differently,” Turner agreed. “We wrote a book on this very issue in 2016 so we are very alive and alert to it. We wouldn’t want that to be a reason why we hit our 3% productivity target. But if that were to happen, fine, we’d take that into account and then increase the productivity target, possibly.”
McDonnell: “There is a lot of emphasis on the relationship with big data companies”
Then there is the issue of whether the government really ought to get into the business of venture capital investing. Whitehall has a bad record of investing (it lost £2.1 billion on its stake in RBS, the private bank that was partly nationalised in a rescue stemming from the 2008 crisis, for instance). How would a Labour government make sure it gets the same returns as private VCs?
“Because we’ll involve the private sector,” Turner said.
“We’ll involve expertise – scientists, engineers, entrepreneurs. This not a state-domination. This is the state talking to the private sector and saying ‘what do you need in order to invest in technology?’ because there isn’t that dialogue so often. We’ve put the framework in place. We want people in the private sector to talk to us. There’s been this laissez-faire approach that I really don’t understand. Other countries don’t do this. They work in partnership.”
McDonnell chips in, “There is a lot of emphasis on the relationship with big data companies as well. You’re using data which is available to enable wise decisions to be made and ones that you have more confidence in.”
Nonetheless, using state-backed banks to increase their lending to small and medium-sized business is arguably at least one of the reasons why Italy is the mess it’s in now. Community-oriented banks made feel-good loans that had no hope of being paid back, leaving Italian banks riddled with billions in “NPLs” (non-performing loans). The country is now saddled with debts it will struggle to pay. Isn’t McDonnell trying to do the same thing with RBS?
“Absolutely not. Absolutely not,” Turner insists. “They [RBS] said to us they want to do more but their hands are tied behind their back” by the government.
“Why’s it alright for Goldman Sachs to put money into tech companies which have done incredibly well, but not alright when RBS wants to?”
And besides, “Why’s it alright for Goldman Sachs to put money into tech companies which have done incredibly well, but not alright when RBS wants to put £200 million aside for businesses? The stock market didn’t react very well to that [the sale of the government’s stake] because all the stock market wants to think about is when RBS is going to be sold off,” Turner says.
“What I’ve said to John and others in the Labour Party, is look at what’s going on in the stock market. There has been a sea change in the last years. When you look at technology companies who have reinvested their dividends and investors have been patient with them, that’s when they get the best returns. People are now waking up to the fact that if you want to make money in the stock market in the long run, you should support a technology company which reinvests. We would welcome that. At the moment our technology sector is a fraction of what they have in other countries.”
That phrase – “patient capital” – is one you’re more likely to hear from the lips of a Google Ventures executive. It means investors who are happy to let their money sit as equity in up-and-coming companies, for years if need be, before cashing in.
And that is the surprise in McDonnell’s Little White Paper. It’s not that its suggestions are radical. Quite the opposite: Some of them aren’t even that left-wing. Hitching the government to the private sector to guide investment is the kind of Blairite, “New Labour,” middle-way-ism that you usually associate with the Labour Party of yesteryear.
And yet there it is. McDonnell the pragmatist. The Marxist who wants to put the monetarists of the BOE in charge of Britain’s “patient capital.” There isn’t even a name for that.
Productivity socialism, perhaps?
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