On Policies, Perceptions and Potentials

In theory, theory and practice are the same. In practice, they are not. (Anon.)

“Lack of social mobility” and “austerity” confront us. Perhaps much of what we might, and might not do, depends upon information, perceptions and attitudes?

In 2019 our public spending is about 38% of GDP, with the USA at about 36%, Germany at 42%, France 56% and Italy 36%.

In 2010 our national debt to GDP ratio was 53%. In 2018 it was 87%. Equivalent 2017 figures are: France – 98.5%; Germany – 64.1%; Japan – 222.3%; USA – 103.8%.

Since 2010, more than £30 billion has been cut from welfare payments, housing subsidies and social services. About 66% of “poor” children are in families with at least one parent working. Between 2012 and 2019, the number of children fed from food banks has more than tripled. Since 2010 homelessness has increased by 169%. The slowdown ln UK life expectancy is one of the highest in the G20 countries.

The above data, our own experience of people begging and living on our streets, and reliable reports that needed, skilled workers (such as nurses) use foodbanks, indicate that “austerity” has done great social harm.

Ten years on, the “deficit” is far from being removed, £billions of welfare budget cuts are planned and “austerity” has resulted in the slowest UK economic recovery in a century.

Perhaps we now need to campaign for its cessation and, if possible, its rectification? (The Institute for Fiscal Studies estimates that “rectification” needs expenditure of at least £12.4 bn above current budgetary projections.)

Might changes of policy be made more effective if connected to changes in perceptions?

The theory of “austerity” and the need for it have been labelled and considered as economic but, in practice, its effects have been and are, significantly social. It has had most effect on what is/was labelled the “Welfare State”.

Perhaps this label is part of the reason for the introduction and acceptance of “austerity”. The “Welfare State” support of the economically weak makes it seem like an optional, charitable extra to the functioning of the state. It is consequently seen as an avoidable set of costs.

This is a misleading perception. This support is, in practice, largely, a direct, if insufficiently perceived, enablement of the economically weak. Seen as tool to make them stronger and so more economically effective and positive, it is a form of national investment. A nation’s people, especially its children, are its greatest resource and should be treated so.

“Enabling State” is a more accurate and positive concept and purpose than “Welfare State”. A principal state purpose is the protection of its people. Such involves the more “visible” protection from external threats, e.g. terrorism, and less perceived internal threats, such as starvation and homelessness.

Principal powers of the state include the creation of money and putting it into its society, and getting some back in taxation. The state needs to put in more money than it takes back for without this difference there is no money for households and businesses. Money is put into society indirectly and directly: taxation seems to take it back directly if inefficiently. “Quantitative Easing” put tons of money into the banks with the purpose of indirect, “trickle down” benefits to our economy and society.

Perhaps policies which simultaneously extract (austerity) and inject (QE) money into an economy might be questioned and deeper discussions of economic policy held?

These might include Modern Monetary Theory and “QE for the People”. The theory of the latter is that instead of creating money to buy financial assets, central banks could invest it directly in public investment projects such as road maintenance and hospitals. Both forms of QE are theoretically equally vulnerable to inflation and MMT is interesting on inflation!

Perhaps we might start thinking and working for an “Enabling State”?

The person who proves me wrong is my friend. (Socrates)

* Steve Trevathan is chairperson of Lyme Regis and Marshwood Vale Liberal Democrats.

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  • Peter McLaughlin 8th May '19 - 12:43pm

    We liberals are proud that our policies are evidence-based and thought through – this is one of the things that divides the Liberal Democrats from the other major parties, almost as important as the difference in our values. Embracing crank, pseudo-scientific theories like MMT would undermine the party’s commitment to the evidence: putting our idea of what a policy should look like before our scientific knowledge is reckless and is potentially harmful for those we hope to help.

    We ought to be most concerned for the poorest in our society, without a doubt, and austerity has been incredibly harmful and must be fought. But the answer is not reckless, theoretically-unfounded monetary policy that would involve revoking central bank independence and threatens our economy.

  • Sue Sutherland 8th May '19 - 2:25pm

    It would be good if the Party could agree that austerity and trickling down haven’t worked and the concept of an enabling state has appeal. However, for me, the word State itself has lost its’ usefulness. It conjures up a harsh regime squeezing the poor to benefit the rich and it belongs in the 20 th century when attempts to make the state supreme or to shrink it through privatisation were the main political arguments.
    In a democracy the state is really just the means of operating the will of the ruling political party so the ogre is really like the Wizard of Oz. It seems to me that attempts to privatise this function are falling apart with the failure of companies in the areas of building, social care and education.
    I would prefer it if we Lib Dems introduced the concept of the national community with the responsibility to support the weak as we state in our preamble. A community suffers if it doesn’t ensure the maximum capability of all its’ members and it must also protect itself from harm. This can form the basis of decision making on what services the community itself provides. For example, bus and train services may be provided by the community if it is vital that transport enables the workforce to travel reliably while the army and police which protect the community should be working under its direct control.
    At the moment many people see the operation of the state as malevolent so it seems like a good time to rethink what it actually means and replace it with something rooted in Lib Dem political philosophy.

  • @ Peter McLaughlin, “We liberals are proud that our policies are evidence-based and thought through – this is one of the things that divides the Liberal Democrats from the other major parties”.

    Sadly, Peter, that was not the case with the Duncan-Smith Universal Credit system. It could have done with some evidence based scrutiny by Lib Dem parliamentarians. It went through propelled by a load of glaring assertions by IDS – and barely a peep from what appeared to be the docile and unchallenging LD benches.

  • William Fowler 8th May '19 - 3:24pm

    There is little coherence amongst LibDems about economic policy, as likely to have advocates of printing more money as there are of economic competence… and there is little agreement amongst those who post here (read the site every day for over a year).

    A rallying point might be to move the burden of tax from the individual to business. If you want positive and massive press coverage (for once!), for instance, suggest replacing council tax with a turnover tax on companies doing business in the UK. If you want to level the playing field between online and high street then expand that turnover tax so that it replaces employer NI and business rates. These would seem both liberal and radical…

    Getting rid of council tax will help the low paid (the welfare segment already has it mostly paid for them), although getting the govn out of people’s lives does not seem that popular on this site. The UK has one of the most absurd energy pricing models in the world where low energy users are penalised by standing charges, so these should be abolished, and as payback for a decade of rip-offs the first £20 a month of gas/electric and water should be free with higher rates thereafter so that energy companies don’t go bust… again helping the low paid whilst encouraging low energy use (it would also encourage people to get solar panels).

    As to income tax and NI, fuse them together but at much lower rates for the low paid, with a neutral effect on those earning 20-35k… state pensions would be based on (lenghtly) residence and benefits/social housing access/tax credits etc would only be available after a minimum of five years (non-continuous) residence, discouraging low skilled immigrants from bothering with the UK (another popular idea, especially if we stay in the EU).

  • @ Steve Tretheven Thanks for your very generous remarks, Steve. You also say, “Perhaps the short-comings of the “Coalition” might encourage more information to, and involvement of, the general membership.”

    Yes, of course, up to a point there needs to be an input and Conference approval – but – there are lessons from the past which ought to be noted. Policy should stop being a series of verbose essays presented to Conference.

    When I joined the Liberal Party back in 1961 there was a ferment of debate – informed by Jo Grimond’s use of experts and the best University brains to design policy…… we also had Harry Cowie as the Research Officer in Headquarters who serviced all the working parties. Harry wrote the 1964 ‘Why Liberal’ manifesto. “Why Liberal ? Paperback – 1964” still obtainable on Abe Books and Amazon from £2.73.

    Harry himself was a top class brain…. Glasgow University…. Balliol, Oxford ….and been senior researcher at P.E.P. – (Political and Economic Planning. The book should be compulsory reading.

    Whoever takes over from Vince Cable should follow Grimond’s precedent. We have enough connections with the Rowntree Trust to commission them to make policy recommendations based on the UN Alston Report as often referred to by Katharine.

    If the party fails to challenge the status quo it will – and reverts to being pale blue Tory – it will deserve to go into the dustbin of history (yet again !!).

  • Sue Sutherland 8th May '19 - 10:30pm

    Thank you Steve for your kind comment, especially as, in my comment on a previous post I had remarked “stuff compassion”!

  • Peter Martin 9th May '19 - 8:16am

    @ Peter McLaughlin,

    “Embracing crank, pseudo-scientific theories like MMT would undermine the party’s commitment to the evidence”

    This sort of thing has been said about many new theories, which can cause a little bit of discomfort at times, and no doubt will continue to be said. “How can the cat possibly be both alive and dead?” about Quantum Mechanics for example. But, if we didn’t have QM we wouldn’t understand how semiconductors work and we wouldn’t be communicating via the internet now.

    IMO most of MMT is not that modern or new. Most of it is already there in Keynes, Kalecki and others. Is it correct? Yes, I would say it is. Much of it is just a statement of the obvious. However, if you’ve spotted any flaws, please let us all know. We can have a rational discussion and correct any mistakes. That is how science should work.

    @ Steve,

    “Ten years on, the “deficit” is far from being removed, £billions of welfare budget cuts are planned and “austerity” has resulted in the slowest UK economic recovery in a century.”

    Why would anyone expect it would be? In the UK we are continually losing money to pay our net import bill. To enable an recovery that money has to be replenished from somewhere. Either we can all borrow more as individuals to maintain our spending or the Government has to deficit spend it back into the economy. Both have happened. But our increased borrowing as individuals has probably now just about stopped. That probably means tough times ahead.

    This is not rocket science. Or even Peter MacLaughlin’s “pseudo-science”. It’s just basic arithmetic that any intelligent five year old should be able to follow.

  • Peter Martin 9th May '19 - 8:34am

    @ Steve,

    Is the above article yours or a quote from somewhere else?

    I like the concept of “enabling state”. There’s too much focus on the idea of the ‘welfare state’ which is essentially driven by kind hearted people who are doing their best to repair the damage done when the state abrogates it proper role of making the system work for everyone.

    This is not to say we shouldn’t provide generous welfare for people who really need it, but it gets a bad name when it’s obviously going to people who should be making a positive contribution to society. Neither am I saying that it’s their fault that they aren’t!

  • Steve Trevethan 9th May '19 - 11:18am

    Dear David,
    Thank you for your excellent suggestion of the pro-active use of non political experts.
    Perhaps HQ might commission analytical reports and related “roadmaps” which could be communicated to members so that we are better informed and can make consequent comments.
    In a era of easy communications this appears to be a sustainable system to institute. (Perhaps the 38 Degrees model might help?)

  • As the party of Keynes we should have known that austerity was the wrong policy. One of the issues with the negotiations with Labour was that they didn’t recognise the need to cut public spending in the short term. Our 2010 manifesto talked of an economic stimulus and not cutting the deficit until the economy was strong enough. Economic growth would have reduced the deficit.

    The party needs to recognise that the economic policies of Coalition government were wrong and at the time it was reported brought the UK economy back into recession. The cuts to benefits were wrong and were not needed.

    Of course it was wrong to cut government spending while having quantitative easing to bail out the banks, who didn’t use the money to invest but to used it to sort out their balance sheets.

    Five years of Coalition cuts followed by a year of even deeper Conservative cuts led to Referendum result. If we had rejected the Conservative economic policies and just kept government spending and income rates stable the deficit would have been reduced and perhaps if there had been a referendum Remain would have won.

  • Peter Martin 9th May '19 - 2:35pm

    @ Steve,

    Very well done. The concept of the ‘Enabling State’ is an excellent one that should fit in with general Lib Dem principles and have widespread political appeal. There’s a big question about whether it fits in with EU principles but we won’t go there for the moment.

    I’d like to use the term myself and, I’ll give you full credit. Maybe you could develop the theme? An article on the “Welfare State or Enabling State?”. Maybe.

    I might just have a bit of a quibble about “MMT and QE for the People”. MMT is meant a a general theory of how a fully fiat currency system (ie no links to gold or any other currency) should work. It’s not just about QE which is simply an asset swap of one type of Govt IOU for another type of Govt IOU. But some people get annoyed when I discuss this so I’ll not say any more. 🙂

  • Steve,

    in the last paragraphs of your article you call for deeper discussions of economic policy and write “These might include Modern Monetary Theory and “QE for the People”. The theory of the latter is that instead of creating money to buy financial assets, central banks could invest it directly in public investment projects such as road maintenance and hospitals. Both forms of QE are theoretically equally vulnerable to inflation and MMT is interesting on inflation!

    Jonathan Portes, a leading UK economist, has recently written about these concepts for prospect magazine https://www.prospectmagazine.co.uk/economics-and-finance/nonsense-economics-the-rise-of-modern-monetary-theory
    “There are certainly some who think that MMT is indeed a “magic money tree” and that, for example: “as a sovereign nation, the UK can always afford high quality universal NHS healthcare.”
    “The problem is obvious. Bangladesh is a sovereign nation just as much as the UK is (meaning, in this context, that it has its own currency managed by a central bank that is under the ultimate control of the government). But, no matter how large a deficit it ran, Bangladesh couldn’t afford universal NHS-quality healthcare for its people. It simply isn’t rich enough—it doesn’t have the doctors, nurses, or hospitals it would need. And this is the crucial point—if it tried to buy them and printed money to do so the result would mostly be inflation, with more money chasing a restricted supply of doctors and
    so on.

    And the same applies to the UK. Yes, the UK can afford a high quality NHS. And education, and welfare system, and so on. But the idea it can do so without raising taxes is for the birds. Sure, the UK could run very large budget deficits, even with unemployment low. But the result would still be the same as that predicted by conventional economists. Inflation would rise. You can create money out of nothing, but you can’t create doctors, schools, or consumer goods.

    And no matter what the Bank of England did, long-term interest rates would rise, as the private sector—not just “markets” or Goldman Sachs, but ordinary businesses and households—observed that we were not just spending more than we were taxing, but that we were consuming, or trying to consume, more than we were producing, and that inflation was the inevitable consequence. We wouldn’t become Turkey overnight—but
    the logic is the same.”
    “…one thing is absolutely certain. The claim that that MMT means that a future government can dodge hard choices about how to pay for decent public services is just plain nonsense.”

  • Peter Martin 9th May '19 - 9:42pm

    @ Steve @ Joe

    There’s a well known quote, often misattributed to Gandhi, which goes along the lines of:

    First they ignore you. Then they ridicule you. Later they attack you. Finally they agree with you but insist you aren’t saying anything they didn’t already know!

    So it looks like, on this basis, that Jonathan Portes, our “leading UK economist” is somewhere between stage two and three. The comment about Bangladesh is just about as mendacious as it is possible to be. MMT isn’t for example saying that a drought stricken region in central Africa without any significant natural resources and whose levels of literacy and health is low can suddenly transform itself into a mini USA simply by running a budget deficit.

    What it is saying is that unnecessarily trying to balance a Government budget can seriously damage that country’s health. Think Italy – where there has been no growth for the last two decades. Because what matters are natural and human resources – not budget deficits unless there is an inflation problem. If you waste these by not ensuring a healthy economy, and not minimising unemployment and unemployment then you won’t grow. Period – as the Americans like to say.

    Sure you can argue that a LVT could be sensibly introduced into the tax structure. But it will be just another tax. It’s not a magic solution. There’s no way it can ever be just a single tax. Marxist and Georgists share a similar problem in thinking that 19th century economists can offer 21st century solutions.

  • Peter Martin,

    Jonathan Portes and others make the point that mainstream or orthodox economists do not advocate “unnecessarily trying to balance a Government budget” and actually advocate the opposite where the circumstances justify significant deficit financing or stimulus.
    This is a key reason why he comes to the conclusion that MMT “is a mixture of the tautological, the obvious and the tendentious.”
    Simon-Wren Lewis has reached a similiar conclusion https://mainlymacro.blogspot.com/2018/03/the-dangers-of-pluralism-in-economics.html saying “unfortunately some in MMT appear to want to make it a kind of cult, where only MMT sees the truth and everything in the mainstream is neoliberal and wrong. They attract followers because of their politics, but then they turn their followers into converts with closed minds.”
    Another leading Keynesian economist, Paul Krugman. describes discussion with promoters of MMT in similiar terms sayig “arguing with the MMTers generally feels like playing Calvinball, with the rules constantly changing: every time you think you’ve pinned them down on some proposition, they insist that you haven’t grasped their meaning” https://www.nytimes.com/2019/02/25/opinion/running-on-mmt-wonkish.html In the aricle he discussess Abba Lerner’s doctrine of “functional finance,” and refutes the claim that the required size of the budget deficit can be determined by the need to achieve full employment; as long as monetary policy is available, there is a range of possible deficits consistent with that goal. The question then becomes one of tradeoffs: would the things the government could buy with a higher deficit be worth the lost private investment due to a higher interest rate?
    He concludes his article with a a simple question:
    “Are MMTers claiming, as Kelton seems to, that there is only one deficit level consistent with full employment, that there is no ability to substitute monetary for fiscal policy? Are they claiming that expansionary fiscal policy actually reduces interest rates? Yes or no answers, please, with explanations of how you got these answers and why the straightforward framework I laid out above is wrong.”

  • Peter Martin 10th May '19 - 6:19am

    @ Peter Davies,

    Austerity, in an economic sense, doesn’t mean the same as it might do in a wider sense. Even in post war Britain there wasn’t austerity, in that wider sense, for everyone.

    It means, primarily, running an unnecessarily tight fiscal policy which causes the economy to be pushed close to, or actually into, recession. As we see for ourselves when the economy is in this condition, we see the rise of the type of social problems which are much discussed on LDV.

  • Peter Martin 10th May '19 - 6:59am

    @ Joe,

    A common tactic is to misrepresent what MMT is actually saying then attack it on that basis. If you read the big names of MMT: Stephanie Kelton, Bill Mitchell, Warren Mosler, and Randall Wray you’ll see they all acknowledge that it isn’t possible to achieve what we might term full employment, either by fiscal or monetary methods, without creating the conditions for too much inflation at the same time. This is a departure from what people like Keynes, Lerner and Kalecki might have argued for in the post war era.

    We aren’t in wartime situation any longer and it isn’t realistic to try to hold down incomes and prices by government decree. This is where the JG comes in. Rather than have a pool of unemployed and underemployed people we have a pool of workers on a Job Guarantee. I personally have some reservations of the details of how this would work but I do acknowledge the theory and that it is an idea worth discussing.

    So that is the first part of Paul Klugman’s question answered.

    The question of interest rates should be obvious to everyone. A currency issuing Government sets them as it chooses. In the short term, usually, by a decision of a committee in the central bank. In the longer term by encouraging the central bank to be a player in the bond markets which then affects the yields, and therefore the effective interest rates, of those bonds.

    MMT doesn’t deny the effect of changing interest rates and therefore the level of borrowing and spending on the economy. But it does say that it does not work as many people might imagine. You can’t simply move interest rates up and down to regulate the economy. Every downward move, to stimulate it, inevitably increases the levels of private debt. This has a deflationary effect. So the next move is more likely to be downward than upward to compensate. Inevitably, we all arrive at the situation we have now, when interest rates are so low that they cannot be realistically moved downwards to create a further monetary stimulus and therefore a fiscal control of the economy becomes the only option.

  • Peter Martin 10th May '19 - 7:00am

    @ Joe (cont)

    On the point you made of “mainstream or orthodox economists do not advocate unnecessarily trying to balance a Government budget”: I think it’s true that more of them are saying this now than they were several years ago during the time of high deficits after the 2008 GFC. So maybe MMT is actually having some effect. It’s just a pity that they and the Lib Dems weren’t actually saying this at the time of your coalition.

    It’s also a pity that they aren’t saying the same about the eurozone now. Trying to screw down fiscal policy as tightly as the EU are in countries like Italy makes no sense whatsoever. We’ve seen the evidence. (you’re supposed to be big on that!) It hasn’t worked in the past so why expect it to work in the future?

  • Joseph Bourke 10th May '19 - 2:18pm

    Peter Martin,

    nearly all mainstream economists agree that fiscal policy is the more appropriate tool when interest rates hit the lower bound. However, interest rates at the lower bound is a rare and abnormal condition that we have not seen to often. Vince Cable made this argument consistently during the coalition years and continues to argue for substatial increases in debt-financed public investment in the current environment.
    Freed of ministerial responsibilties in 2015, he published a joint article with Chuka Ummana setting out their joint views on the importance of a long-term industrial strategy to the UK economy https://www.independent.co.uk/voices/comment/the-deafening-silence-on-the-governments-industrial-strategy-is-ominous-10485216.html. This is the internal works of economic growth and what ultimately determines the level of real wages and living standards.

  • Sean Hyland 10th May '19 - 3:34pm

    Nice explanation of MMT on Richard Murphy’s taxjustice blog today. He is an advocate of its introduction but seems well aware of the risks and limitations.

  • Peter Martin 10th May '19 - 6:21pm

    @ JoeB,

    “However, interest rates at the lower bound is a rare and abnormal condition that we have not seen to often.”

    I don’t think we’ve ever seen it. But, as no Government has previously tried to regulate the economy, solely using the level of interest rates, this is not too surprising. As explained previously, close to zero interest rates is always where we’ll end up when anyone tries it. It won’t happen straightway. It will take a few years. Maybe even a few decades!

    I’d have to look at the context in which it was written but it is simply not correct to say “MMT says that deficits are positively necessary for growth.” A big part of MMT is a correct understanding of the role of the sectoral balances. So if one sector is in surplus another sector has to be in deficit. Therefore, if a combination of the overseas sector and the domestic sector are in deficit then the Govt inevitably will be in surplus. That’s fine. But this in itself is fairly unusual and it almost certainly only applies to countries running sustained and continuous export surpluses. Not everyone can do that.

    Richard Murphy, from what I’ve read, seems to blow hot and cold over MMT. He’s not really a go-to person on the subject. But, in any case, the last paragraph is written by Jonathan Portez. Not Richard Murphy. It’s rubbish – not to put too fine a point on it. The MMT line is that the Government Debt can be either large or small and is simply a reflection of what everyone else wants to save. Think of the Govt as a bank. If the bank is seen to be safe then people will want to save in it. Therefore Japan can quite safely run a debt to GDP ratio of some 240% providing inflation is not seen to be an issue..

  • Peter Martin 10th May '19 - 6:36pm

    @ Sean Hyland,

    “Nice explanation of MMT on Richard Murphy’s taxjustice blog today. He is an advocate of its introduction but seems well aware of the risks and limitations.”

    OK but MMT isn’t something that can be ‘introduced’. It is a theory of how economies actually works. So if you want to, say, introduce a common currency in the EU and create the conditions for widespread recession and high unemployment which will almost certainly lead to the rise of the far right, a good working knowledge of MMT will certainly help you do that!

  • Steve Trevethan 10th May '19 - 8:27pm

    How is it possible to assess the efficiency etc. of our national economic policy/policies in which taxation plays a significant part, when “tax havens” etc. prevent the presentation of the actual relevant tax base?

  • Steve Trevethan 11th May '19 - 7:33am

    Dear Joseph,
    Many thanks for the helpful links!

  • Peter Martin 11th May '19 - 9:48am

    @ JoeB

    If Government spends money into the economy and gets back some of it back in taxation it must follow that the difference, ie the Govt’s deficit, is what is saved. It may not be formally saved. It could be just a child putting some money into a piggy bank. It could just be the notes in your wallet. Its also possible that a £20 note has been burned by a Bullingdon boy! These may be small amounts but they aren’t going to show up in the savings figures.

    We have to also to consider the behaviour of our overseas trading partners who like to sell us lots of stuff, which we pay for in pounds, but only use a proportion of those pounds to buy things in return. That difference is their savings.

    So, does it matter exactly how the money is saved or who saves it? Is it better for you or I to save some money, or is it better that the Bundesbank does it? It really doesn’t make the slightest difference. The Government can spend what it likes providing it steers a sensible middle course between having too much inflation on the one hand and too much recession and unemployment etc on the other.

    @ Steve,

    I’m not too keen on Richard Murphy. His latest article “Pretty much all that most people need to know about modern monetary theory” is some way off the mark. There’s quite a bit more to it than he makes out. And who is he to say just what most people need to know anyway?

    He’s quite wrong when he says “……there is also no link whatsoever between modern monetary theory and Brexit.” MMT is about macroeconomic theory and anyone who doesn’t understand that Brexit is mainly about a failure of macroeconomic practice, both the UK and in the wider EU, clearly doesn’t deserve to be taken seriously.

    Brexit isn’t just about net migration. However, even that has macroeconomic causes. People don’t choose to move to Manchester from Malaga for better weather!


  • Joseph Bourke 11th May '19 - 11:12am

    Peter Martin,

    “So, does it matter exactly how the money is saved or who saves it?”

    Not only does it matter it is crucial to the functiong of the economy. As capital accumulates in the hands of the wealthiest and more and more income flows overseas to service borrowings the economy is hollowed out, wages stagnate andinequality deepens.
    If firms are not matching savings with investment and instead corporate surpluses are being recycled into inflated property markets.home ownership becomes a prospect only for the wealthy with the great majority ofthe workforce seeing half or moreof their after-tax income going out to pay rent.

  • Peter Martin 11th May '19 - 4:30pm

    @ JosephB,

    “Not only does it matter it is crucial to the functiong of the economy.”

    “It” being who saves the money.

    It only matters if you think it matters and start to fret and make the wrong decisions as a consequence. Consider the example of a person in the UK who renovates a boat and makes a profit of , say, £10k. He buys £10k of Premium Bonds. The Government now has a debt to him. Suppose we now move our renovator over to Denmark. He sails the boat over to the UK sells it and pockets his £10k which he puts in a Danish bank which converts it into krone. Ultimately the Danish central bank, the Nationalbank, end up with the pounds which they don’t want to exchange on the forex markets. That would push up the krone, so they buy UK gilts. So the UK now owe £10k to the National bank. One appears as domestic savings. The other appears as part of the trade deficit or current account deficit.

    Other than that, what difference does it make? None at all until someone decides they want to spend that £10k. It’s £10k that has been earned in the UK but not spent. This allows the Govt to spend the same amount without causing any inflation. We can imagine our boat renovators moving countries and it still doesn’t make any difference until they want to spend some money.

    @ Steve,

    It won’t make any difference because MMT is just a description of how a fiat currency system works. It’s not something that can be adopted.

  • Joseph Bourke 11th May '19 - 6:59pm

    Peter Martin,

    it matters for the reasons expounded above and as detailed by Josh Ryan-Collins in his blog on Why can’t you afford a home?http://mikenormaneconomics.blogspot.com/2018/10/josh-ryan-collins-why-cant-you-afford.html
    ” Bank created credit is a force outside of market forces which distorts the markets. With an oversupply of money and a shortage of houses, the sky’s the limit on house prices. The only thing holding back the cost of housing is the ability of people to work hard enough to service the loan on a property. Extra hours at work, two or three jobs, mini-cabbing in the evening, renting a room or two out, friends getting together to buy a hime, etc, but all this does was raise the price of homes even more.
    The bankers made a fortune, and so did the landlords, while Britain was set to work. The One Percent turned Britain into a powerhouse work-house with everyone going 24/7. This is the protestant conservative work ethic where no one owes you a living. A neoliberal dream.

    In the 1950’s people thought machines and technology were going to bring about the leisure society where many of us would opt for doing some voluntary work for the benefit of society, but the opposite has happened. With the whole world going 24/7, and the planet’s resources fast being used up, a few billionaires are on their way to becoming trillionaires. And one way they did it, was to set us to work by giving us easy bank credit and house price inflation.

    But the people were fooled when they thought they were actually getting richer as their houses raised in value, because the quality of their lives were greatly diminished when life became all work.”

  • Peter Martin 11th May '19 - 7:19pm

    @ JoeB,

    We seem to be talking at cross purposes. I was making the point that it doesn’t make any difference where owners of government bonds reside, but you’ve switched the conversation to housing.

    Mike Norman is a fairly well known MMTer BTW.

  • Joseph Bourke 12th May '19 - 1:00am

    Peter Martin,

    in analysing sectoral balances we look at changes in groups within the economy that mirror the components of GDP – Househols (Consumption and net borrowing/savings), Firms (borrowing and Investment), Goverment spending on output and the foreign sector (trade balance).

    In the link on Mike Norman’s blog the point is made that:
    ” If mortgage lending supports the building of new homes, this new money can be absorbed into the economy. However, in most cases mortgage finance enables people to buy existing property on existing land. As households, supported by banks, compete to purchase, the result is increasing land and house prices. Higher prices lead to more demand for mortgage credit, which further pumps up prices, and so on.
    This feedback cycle runs against standard economic theory where an increase in the supply of goods, all else being equal, should eventually lead to a fall in prices. An ‘equilibrium’ price will be reached at the point when the quantity of goods supplied exactly matches the demand for them. But with bank credit and land, we have two phenomena that are quite unlike standard commodities. Bank credit is highly elastic and essentially infinite; in contrast land, as discussed in the preceding chapter, is inherently inelastic due to its scarcity.”
    ” in the last 20 years, when real house prices have increased by 50%. During the same period, real average incomes have flatlined — but mortgage credit has risen exponentially.”
    As the ONS data shows, Household savings are at a historic low. Household borrowing is estimated at 1.8 trillon of which 1.6 trillion is morgage debt.
    This is where corporate and foreign surpluses predominaely end-up – invested in mortgage lending on infated propery prices that suck-up disposable income deflating demand and stagnating average real incomes.
    When surpuses are reinvested in expanding productive capacity in the economy there is a virtuous circle of saving and investment. When surpluses are invested in rent-seekig activities like land appreiation it has the opposite effect – skimming off much of the value created into the hands of a small wealthy sector of the population with significant accumulated capital at their dispoal.
    This link discusses the issues in more detail http://evonomics.com/josh-ryan-collins-land-economic-theory/

  • Peter Martin 12th May '19 - 7:40am

    @ JoeB,

    It seems that you’ve taken Mike Norman/JRC’s argument a step further by saying that “This is where corporate and foreign surpluses predominately end-up – invested in mortgage lending on inflated property prices that suck-up disposable income deflating demand ” my emphasis.

    Firstly, it doesn’t decrease overall aggregate demand. When the government/BoE engineer down interest rates which they can easily do by a combination of a decision of its monetary committee and being a player in the bond markets, the intention is to create a stimulus in the economy. It may not be the best way to create a stimulus but it works to an extent, at least in the short term. For every purchaser of an overpriced property there is also a seller. That purchaser, and also existing owners, will also likely use the opportunity of using the lower interest rates and higher property prices, as collateral, to borrow to fund business ventures or new purchases of consumer items or whatever.

    Secondly, there is no evidence that foreign holders of capital are going to take a significantly different view than UK holders. As ALL of our current account deficit is attributable to our EU trading deficit, and so we EU holders of our debt, this seems an odd argument for a Lib Dem to make. True, there is a problem with wealthy overseas buyers using UK property for speculative purposes. We’ll always have the ‘overseas wealthy’ and yes we do need to tackle that. There are ways of curtailing their activities using Nationality laws and their right, or otherwise, to own UK property.

    If you believe in managed capitalism, there are limits to what Governments can compel corporations what to do with their money. We can do much better to make sure they don’t evade/avoid their taxes. I’m sure we all agree on that. But we can’t direct, for example, Starbucks to build more coffee shops! There is a limit to the amount of coffee we can all drink! There’s no Starbucks in my home town, for example, and presumably that’s because they don’t think there’s sufficient demand for their product. That has to be their call.

    But it doesn’t really matter in the short term if Starbucks don’t want to spend or reinvest their profits. This gives fiscal space for the Government to do some spending instead without creating inflation.

  • Peter Martin 12th May '19 - 7:41am


    Bank credit isn’t infinite. Banks can’t do anything that you or I, in principle, can’t also do. They’ll lend when the value of the asset of the loan they create is greater than the nominal extent of that loan allowing for the costs of their borrowing in the first place. The idea that banks can create money ‘from thin air’ is somewhat misguided. If they could do that why would they bother to try to persuade their customers to deposit their savings? Sure they just type in numbers when they create a loan but they are also creating their own liabilities which they have to be able to cover. To that extent they aren’t like Governments.

    Excessive bank lending is, in any case, yesterday’s problem. Why would they want to lend into a falling housing market or a falling share market? I’ve not seen the term ‘credit crunch’ used too often yet but it’s probably not too far away. Someone has to do the borrowing to keep the UK economy going. If that isn’t you and I, it has to be Govt.

  • Joseph Bourke 12th May '19 - 12:27pm

    Peter Martin,

    Will Hutton writing in the oberserver today notes: https://www.theguardian.com/commentisfree/2019/may/12/left-is-fizzing-with-ideas-for-smarter-economy-but-can-labour-profit-from-them

    “The great deformation of the past 40 years, what one group of American economists calls “the Great Mortgaging”, is the bewildering way banks, responding to consumer preferences but with ever-decreasing public regulation, have transmuted themselves into monster mortgage machines, across the west but in Britain particularly.

    All the incentives in the financial system are to lend against property, whether to us as individuals or some private equity company with property as collateral. Thus the asset price and private equity boom; thus the bias in favour of breaking up companies to unlock their property assets; thus the starvation of credit flows to Britain’s clusters of potential high-growth companies.
    Josh Ryan-Collins in his book writes:
    “…this huge growth in wealth relative to the rest of the economy originates not from the saving of income derived from people’s contribution to production (activity that would have created jobs and raised incomes), but rather from windfalls resulting from exclusive control of a scarce natural resource: land.

    This may help us explain – at least in part – the great ‘productivity puzzle’– that is, why productivity (and related average incomes) been flat-lining, even as ‘wealth’ has been increasing. The puzzle is explained by the fact that the majority of the growth in wealth has come from capital gains rather than increased profits (or savings) derived from productive investment, Savings are at a fifty year low in the UK even as the wealth to income ratio hits record highs.

    When the value of land under a house goes up, the total productive capacity of the economy is unchanged or diminished because nothing new has been produced: it merely constitutes an increase in the value of the asset. This may increase the wealth of the landowner and they may choose to spend more or drawn down some of that wealth via home equity withdrawal. But they equally many not. Moreover, the rise in the value of that asset has a corresponding cost: someone else in the economy will have to save more for a deposit or see their rents increase and as a result spend less (or, in the case of the firm, invest less).”

  • Innocent Bystander 12th May '19 - 1:22pm

    Thank you and I read Hutton’s piece. It is just another dose of fizzled out textbook Marxism that’s left so much suffering and suppression in it’s wake.
    There is proposed a “Public Bank” (BTW what’s new about that idea?) which will invest in what? The answer’s easy. In those proposals which astute private investors won’t touch. The snake oil salesmen and bunco merchants are rubbing their hands with glee at the thought of running rings around the likes of Hutton and Mc Donnell who will be so desperate to be seen “doing something” they will sign cheques for anything.
    My question to Hutton would be “If you are so good at spotting brilliant new innovation opportunities why don’t you make a few million with your own money and rescue the financial basket case that is the Guardian?”

  • Peter Martin 12th May '19 - 7:03pm

    @ Joseph Bourke,

    “All the incentives in the financial system are to lend against property,…….Thus the asset price and private equity boom……. thus the bias in favour of breaking up companies…….”

    What you’re saying, if I understand you correctly is that these things were inevitable due to the capitalist system, and government was powerless to do much about the creation of a credit fuelled bubble.

    BUT these symptoms are only typical of the deficit countries of the world. The USA, the UK, Australia, NZ etc. They haven’t happened to anywhere near the same extent in the surplus countries like Germany for example. Although there is evidence that as Germany loses control of its monetary policy things, especially with the rise of ECB led QE, have started to change in the last few years since this paper was written.


    The requirement in both the UK and USA is for someone to do the borrowing to finance the external deficit. Governments don’t want to do it so they have encouraged the private sector to do it instead. Germany runs a large external surplus so there is no real need for anyone to do any borrowing. Hence the German Govt doesn’t encourage it in the same way as the British Govt does.

  • Joseph Bourke 12th May '19 - 10:55pm

    Peter Martin.

    there are two related aspects that give rise to the move away from productive investment to rent-seeking activities in recent decades.
    The first is the role of land in the economy. As this LSE book review https://blogs.lse.ac.uk/lsereviewofbooks/2017/09/04/book-review-rethinking-the-economics-of-land-and-housing-by-josh-ryan-collins-toby-lloyd-and-laurie-macfarlane/ notes:
    “The authors show that property is now the single largest source of wealth in the UK, making up half of all total household assets and net wealth. Mortgage debt comprises the majority of bank lending and household liabilities. Maintaining these asset values is now the overriding macroeconomic concern. Although the global financial crisis had exposed the limits of this model, basic trends remain unaltered. The authors suggest that the growth in wealth inequality, charted by Thomas Piketty and others, derives principally from housing rather than other assets and reflects underlying land values. They suggest further that the financialisation of housing is the root cause of the UK’s poor productivity performance – housing crowds out more productive investment. They make a set of well-argued policy proposals at the heart of which is the case for a Land Value Tax and a National Land Bank. Given the scale of wealth tied up in land, this case looks persuasive, notwithstanding the political opposition it would face from the rentiers.”
    The second is the regulation of bank lending. In particular to prevent what Hyman Minsky termed Ponzi Financing in his Financial Instability Hypothesis https://braveneweurope.com/josh-ryan-collins-should-credit-be-guided
    “Mortgage and other asset-market lending typically does not generate income streams sufficient to finance the growth of debt. Instead, the empirical evidence suggests that after a certain point relative to GDP, increases in mortgage debt typically slows growth and increase financial instability as asset prices rise faster than incomes.

    These new empirical findings support a much older body of theory that argues that credit markets, left to their own devices, will not optimise the allocation of resources. Instead, following Joseph Schumpeter’s, Keynes’ and Hyman Minsky’s arguments, they will tend to shift financial resources away from real-sector investment and innovation and towards asset markets and speculation; away from equitable income growth and towards capital gains that polarises wealth and income; and away from a robust, stable growth path and towards fragile boom-busts cycles with frequent crises.”

  • Peter Martin 13th May '19 - 7:58am

    @ JoeB,

    The Georgist idea of single land tax is an historical anachronism. It had an obvious appeal in the 19th century Liberal party, which was the party of industry and commerce, largely because the Tories, the traditional party of the landed aristocracy, owned the land and so the lazy aristocrats were in the fortunate position of collecting the rents from the hard working industrialists. The 21st century economy has moved on a bit from that.

    This is not to say we shouldn’t have an LVT. However, this has to be included in a wider system of wealth taxation, and this has to be seen in the context of taxation for a reduction in inequality rather than a way for the Government to ‘get some money’. It isn’t necessarily going to lead to a more efficient economy.

    As Bill Mitchell explains in this two part article, there is a BIG problem with Georgists in that “there is a presumption that national governments need tax revenue to fund their spending.”


  • Steve Trevethan 13th May '19 - 7:59am

    Is there no actual “Market” but only a theoretical market?
    In practice there are only lots of markets of varying use, clarity and fairness.
    Actual markets are subject to the virtues and vices found in humanity and so, like all human activities need rules and practices plus enforcers.
    Alas, some “Economic Theory” seems to be used more as a mass control mechanism than a fair and clear guide and “Economics Code” for the citizenry to understand, use and have used on them.
    A sound economic theory is to always ask these questions:
    “Who benefits?”
    “Who guards or controls the guards?”
    P.S. Thanks to all who have read and/or contributed to this conversation,

  • Peter Martin 13th May '19 - 8:21am

    @ Joe B,

    Just in support of my argument that UK property (and land prices) have been artificially pumped up in a credit binge to ‘pay for’ our current account deficit, let’s take a look at a country where there isn’t one.

    “Berlin is predicted to see six per cent growth this year, the highest of any European city. Yet homes there are still more affordable than in any other major German city and up to two thirds cheaper than Paris or London.”


    Not that I’m saying everyone can be like Germany with a huge trade surplus, but we can make sure, like they have, that credit is kept under control and we don’t create speculative bubbles in the property market.

  • Peter Martin 13th May '19 - 6:39pm

    @ Joseph,

    You can argue that tax creates the fiscal space for Governments to spend without creating inflation. To that extent we can introduce the concept of real taxes rather than notional monetary taxes.

    There’s really no such thing as Government borrowing if you accept that fiat money is an IOU of Government. It’s just not possible for anyone to borrow their own IOUs. Think about it! What is usually called borrowing is simply swapping one type of IOU, a bond, for another type, ie cash. So if a Government spends money into the economy now, it will almost certainly come back at some time in the future. Not entirely certainly because there is always going to be a small amount simply disappears without trace.

    But it doesn’t make any difference to the Government whether it disappears or not! What do you do when you get your own IOU back? You just tear it up. It’s worthless to you!

    This is all very straightforward. I can’t understand why there’s any argument about it!

  • Joseph Bourke 14th May '19 - 2:36am

    Peter Martin,

    “I can’t understand why there’s any argument about it!” Therein lies the issue. The government acts as the appointed agent of the population. When it spends money on consumption,transfer payments or depreciating assets it is creating a claim against the incomes and wealth of taxpayers that is settled by tax payments. Government debt issuance is a mechansim that provides for deferring settlement of part of that claim to a future date.
    Banks create money in a similar fashion. They create money by issuing loans. They finance those loans when they are drawn down or transferred outide of the bank at a later date via inter-bank lending either in overnight money markets or longer-term borrowing, deposit acceptance and corporate bond and securities issuance.

  • Peter Martin 14th May '19 - 8:29am

    @ JosephB,

    “The government acts as the appointed agent of the population.”

    Of course, and who is saying it isn’t? This is not at all inconsistent with a correct working knowledge of the mechanics of a fiat currency. It is self evident that a Govt spending money into the economy has to take place before there is any money in the economy to be paid as taxes.

    Actually, you are saying exactly the same thing as many MMTers. They put it that the Government spending of today is the Government’s revenue of tomorrow. Or in the next few years! So cutting Govt spending today cuts Govt revenue tomorrow. I don’t usually put it this way. I don’t like the concept of ‘Govt Revenue’ which carries an implication that the Govt needs an ‘income’ to spend. But as we’ve already agreed that spending generates its own revenue I suppose it’s a valid way of looking at the process.

    As ever, we do need to warn against the conclusion that just because the Govt can spend without limit that therefore it should. The constraint is inflation and the availability of real resources.

    Banks don’t have any magical powers to do anything that you and I cannot do. Yes, they can create money. But they also have to accept the liability too and cover it with BoE notes, or digitally in a BoE account, on demand. BoE money is rated the ultimate. But as the Government owns and controls the BoE they don’t have this problem! The BoE is just another arm of Govt effectively.

    At one time Govt did have exactly the same problem. The Govt had to cover its liabilities with gold on demand. But that was a long time ago and things have moved on. Except our thinking hasn’t moved on with it. We’re still stuck in a gold standard mentality.

  • Joseph Bourke 14th May '19 - 2:11pm

    Peter Martin,

    The states provision of public services and redistribution of income (output) is effected by current and future taxation – with some taxpayers being net beneficiaries at various times and some being net payers at various times.
    Banks provision of loans is based on the intermediation of savers and borrowers. Some customers will be net depositors at various times other will be net borrowers. When a loan is created and the funds are transferred from one bank to the other, the originating bank can borrow the money back from the receiving bank to fund the transaction. This is how money circulates in the economy and 97% of money is bank deposits. Clearing is effected via reserve accounts maintained at the BofE. This is the purpose of BofE reserves. It is not the provision of loan funds by the government. Banks buy notes and coins from the state to cover the costs of production. This seiniorage acounts for about 3% of money in circulation.
    Inflation in economic terms refers to an increase in the money supply without a corresponding increase in the output of goods and services that drives up the price of goods and services.
    Chages in the general price level may be drived by factors other than changes in the money supply. Scarcity of resources like oil can increase prices without any preceding increase in the money supply – so called cost-push inflation. Excess demand over and above what can be supplied can also increase prices – so called demand-pull inflation.
    Both the state and banks can increase the money supply without bringing about an increase in the supply of goods and services.
    The housing market contains all three elements of inflatiion – increases in the money supplied by banks effected by low interest rates and quantitative easing, scarcity of housing supply and urban land on which new housing can be developed and increased demand from new household creation and population growth.
    Creating substantial volumes of new money in the economy without increasing output generates asset price and/or consumer price inflation and destabiises the economy. This is why money creation and credit provision i the economy needs to carefully monitored and regulated.

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