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OPINION

The Corbyn threat

The Corbyn threat
September 15, 2015
The Corbyn threat

You might think the answer is: not at all, because there'll never be one. I'm not happy with this reply. For one thing, many of those who now tell us that Corbyn is "unelectable" foresaw neither Labour's general election defeat nor his election to the Labour leadership, so their views must be discounted. And for another, investors must worry not just about central scenarios but also risks. We should therefore think about low-probability, high-impact possibilities.

For investors, perhaps the most obviously worrying aspect of Corbynomics is the prospect of higher taxes not just upon wealthy individuals - Mr McDonnell has shown interest in the possibility of a wealth tax - but upon companies, too. Mr Corbyn believes that "the government is missing out on nearly £120bn in tax revenues, per year" because of tax evasion and avoidance, much of it by companies. Granted, even his supporters suspect that only £20bn of that £120bn is feasibly collectable - although tax barrister Jolyon Maugham questions even this - but even this is equivalent to 5 per cent of UK company profits, which is a sizeable sum.

There is, though, some comfort for investors here. Higher corporate taxes don't necessarily mean a one-for-one fall in profits. If companies respond to them by cutting investment or jobs, it would be workers who suffer instead. "The burden of corporate taxes falls mainly on workers," says Stephen Gordon of Quebec's Universite Laval (although others, such as Kimberly Clausing at Reed College in Portland have questioned this).

A further concern for investors is Mr Corbyn's promises to nationalise utilities and rail companies: Mr McDonnell has described privatisations as "a history of the British people being robbed". This would deprive us of some of the highest dividend payers and lowest-volatility stocks on the market even if decent compensation is paid.

A third problem is less concrete, but perhaps also worrying. A Corbyn government would be one that for the first time in many years is antipathetic to the interests of big business and supportive of tough regulation: Mr McDonnell wants "legislation to replace short-term shareholder value with long-term sustainable economic and social responsibilities as the prime objective of companies". Not all these regulations would be disastrous - for example, Mr McDonnell's call for a separation of retail and investment banking echoes that of mainstream economists such as Luigi Zingales and Paul Volcker - but such an anti-capitalist atmosphere might reduce investors' appetite for risk and hence cut share prices. (You might think it would also be bad for sterling, but for investors this could be a good thing as it would raise the value of our overseas investments.)

If all this seems worrying, there are a few comforts. One might be macroeconomic policy. Mr Corbyn wants more public investment and job creation. This should, via conventional multiplier effects, mean higher aggregate demand and profits.

>For investors, perhaps the most obviously worrying aspect of Corbynomics is the prospect of higher taxes not just upon wealthy individuals, but upon companies, too

However, Mr Corbyn proposes to finance this investment by printing money which alarms some economists. Tony Yates at the University of Birmingham has warned: "Any attempt to hijack the printing presses for general deficit financing, when loose money is not necessary to achieve the Bank of England's mandate, will wreck monetary policy for a long time to come." Given that high inflation is bad for equities, this is a nasty prospect.

Much, though, depends upon whether loose money will be necessary to achieve the Bank's mandate or not. If Mr Corbyn inherits a weak economy and low inflation, then printing money might be necessary to get inflation up to its 2 per cent target. That would be perfectly good and conventional policy. If, however, he prints money when inflation is around or above target, that could, as Professor Yates warns, raise inflation and inflationary expectations to the detriment of equities.

There is, though, another comfort for those worrying about a Corbyn premiership. History shows that an anti-business (or anti-market) climate isn't necessarily bad for shares. For most of the last few decades, French politics and culture has been less friendly towards business than American politics. But for a lot of this time, French equities outperformed US ones.

There's a reason for this. One of the biggest threats to the value of existing shares comes from market forces, from the fact that new companies and technologies destroy old ones in a process that Joseph Schumpeter called "creative destruction". A government that taxes successful entrepreneurs and regulates companies heavily might slow down this process and so protect existing companies from creative destruction. Even if you think Corbynomics would be bad for the economy, it needn't be bad for existing shares.

In this context, Mr Corbyn's proposed National Investment Bank (NIB), which he intends to invest not just in infrastructure but in "the hi-tech and innovative industries of the future" becomes important. This idea is (or should be) founded on the work of Sussex University's Mariana Mazzucato, who has shown that many great innovations arise from state rather than private sector investment. It poses some big questions, however. One is: will the Bank actually succeed? The problem here isn't simply that governments are bad at spotting future winners, but that success is highly unpredictable, even by the experts. Another is: if the NIB does generate new technologies, will these be complements to existing companies or substitutes? Will incumbent companies be able to exploit them, to the benefit of share prices? Or will the new technologies instead be used by new companies that displace existing ones, in which case creative destruction will hurt shares? I confess to being less certain on these matters than the ideologues of either side.

There is, though, something we must remember here. It's that stock markets are to a large extent globalised. If the world economy nosedives, UK equities will fall even under the most benign domestic economy policy, and if it thrives, shares could do well even under bad government. Political pundits, both amateur and professional, are prone to overrate the importance of politics for good or ill.