With Jeremy Corbyn’s victory in the Labour leadership elections, there likely will be a renewed focus on Corbyn’s economic policies. Indeed, there has already been some interesting analysis of Corbyn’s proposal for “people’s QE” and the ramifications that would have for the (instrument) independence of the Bank of England (see Simon Wren-Lewis’ mainlymacro blog).
However, one area of Corbyn’s stated economic policy that has received less attention is his desire to (re-)nationalise the energy, rail, and banking industries. It is conceivable that there might be a re-hashing of the age-old debate regarding the relative advantages and disadvantages of privatisation vs nationalisation, with the same age-old conclusions.
Much more interesting, on the other hand, is the mechanism (and the implications of said mechanism) by which Corbyn proposes to carry out his re-nationalisation policies. Specifically, Corbyn has stated that he “reserves the right to” nationalise a firm “”with either no compensation or with any undervaluation deducted from any compensation for renationalisation.” (as reported by The Independent)
In other words, Corbyn has stated a potential desire to expropriate a privately-owned firm (or multiple firms) while providing a less-than-market return on the assets that a Corbyn government would acquire.This is likely to have a dramatic impact on private incentives to 1) acquire any of the assets that the current Conservative government would privatise over the next five years; 2) invest in the energy and rail industries that Corbyn has said he already wants to re-nationalise; and 3) invest in other industries in the UK.
First, Corbyn thus far seems to have restricted the target of this policy to firms that are privatised by the current Conservative government over the next five years. Therefore, the heaviest impact is likely to fall on those assets that the current Conservative government was planning to sell off over the next five years. In particular, Corbyn’s expropriation policy is likely to reduce the amount of money any selling-off of assets by the current government is able to raise.
To see this, note that should a Corbyn Labour government win the 2020 election, any asset sold off by the current government between now and then would be taken back by the Corbyn Labour government. This means that any private entity thinking of purchasing any asset the current government sells off would need to factor in the possibility that they lose control of (and, hence, also lose any profits resulting from) that asset in 2020. As such, a private entity would reduce the amount it was willing to pay for the asset being sold-off – the obvious result of this is that it reduces the amount of money the current government would be able to raise from selling-off any assets (with the associated implications concerning any reduction of the national debt).
It is possible that this makes selling-of the asset not to be worthwhile such that the current government decides to retain control of it after all (perhaps this is Corbyn’s plan all along?). If so, then it would mean that assets that might be put to more efficient use in the private sector instead continue to be run by the public sector (with the resulting potential impact on GDP).
Second, although Corbyn does seem to have restricted his expropriation policy to government assets that are sold off between now and 2020, there remains the possiblity that he extends that policy to his entire re-nationalisation aims. In other words, Corbyn could conceivably expropriate the assets of energy and rail companies. This introduces substantial uncertainty regarding the rate-of-return energy and rail companies can expect to obtain on any investments they might make between now and then. As increased uncertainty regarding the rate of return of an investment results in fewer investments being made (see here and here), the impact of Corbyn’s policy (even if Corbyn is not elected in 2020) is to reduce the current levels of investment made by firms in these industries. This comes at a time when both the energy and rail industries are in need of substantial investment in new infrastructure – anything that reduces the incentives of these firms to make these necessary investments cannot be a good thing.
Third (and this is somewhat speculative on my part), to the extent that Corbyn might wish to expand his nationalistion policy to other industries, the same impact would be felt in those industries. However, the impact in these as-yet-unnamed industries may well be negligible, particularly in comparison to all the other areas of uncertainty that affect firms’ investment decisions (at least until any further nationalisation policies are stated).
It remains to be seen if Corbyn gets a chance to implement his policies, but, regardless those stated policies are already having an effect. Corbyn needs to clarify exactly what his plans regarding nationalisation are very soon lest those effects grow substantially.