Opinion: Putting the political back in economy

“The Liberal Democrats are working for a stronger economy in a fairer society enabling every person to get on in life.” What key policies will reinforce this simple message? How do we ensure that economic liberalism supports and advances social democracy?

My answer to these questions lies with the words of J K Galbraith – “economics does not usefully exist apart from politics. The separation of economics from politics and political motivation is a sterile thing. It is also a cover for the reality of economic power and motivation. And it is a prime source of misjudgement and error in economic policy.”

The focus of Liberal Democrat economic policy is to enable every person to get on in life.

New Job creation in the private sector that lags growth in the working age population and reduction of numbers in the public sector will not address the waste and socially damaging issue of 2.5 million idle workers. Laudable as it is. The current apprenticeship scheme has yet to make a significant dent in long-term youth unemployment.

Keeping interest rates at close to zero is a boon for borrowers, but highly damaging to savers and retirees reliant on fixed incomes. Monetary activism is the form of quantitative easing is great for stock market investors and high value property but devastating for pension funds and the purchasers of annuities.

Welfare reform based around non-existent job opportunities is divisive and counter-productive. We need to be able to go much further than the tentative steps taken with the work programme in providing a clear and unequivocal route out of reliance on benefits. This will provide the platform for making entitlement to housing benefits and/or social housing tenancies contingent on employment.

Fairer taxes in the form of increased personal allowances won’t mean much to those most affected by welfare cuts, spending reductions, increased VAT and council tax benefit reductions i.e. the bottom income decile.

There are three key policies that in my opinion can reinforce our message of “Stronger economy, fairer society.”

Firstly, a job guarantee scheme, both to put a floor under aggregate demand and to provide a clear and unequivocal route out of benefit dependency.

Secondly, replacement of the personal allowance, JSA, ESA etc with a citizens income. Coupled with a requirement for entitlement to housing benefits and/or social housing tenancies to be contingent on employment (including the job guarantee programme) this will serve to both focus tax benefits where they are most needed and eliminate much of the problems associated with high marginal rates of benefit withdrawal.

Thirdly, an approach to management of the public finances as advocated by Samuel Brittan (The harmful myth of the balanced budget £) to a balanced current account budget over the business cycle, utilising a monetary stability fund under the control of the Bank of England.

In Trying to fix broken economics, a reunion with politics to form again the larger discipline of political economy should be what Liberal Democrats stand for.

* Joe Bourke is an accountant and university lecturer, Chair of ALTER, and Chair of Hounslow Liberal Democrats.

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16 Comments

  • Geoffrey Payne 16th Apr '13 - 12:24pm

    Sounds very good to me. Can’t be done under this Coalition, one political step would have to be to end that.

  • The Jobs Guarantee scheme is ideal for third world and undeveloped, low skill countries, when starting a system of social security. Because no investment has been made either by the people or the government in skill development or training, these schemes cause little wastage of human resources, and because so many of the jobs are very low skill work, they can be done by anyone.

    However in a highly developed country such as the European countries, there is a recognition that forced work schemes are an inefficient use of the diverse and highly developed skills of the population. The schemes would take away the low skilled jobs from people, while specialised skills would be wasted for the individual, and more difficult to find for the employer. We can see the impact in the results of the “work program”, which has been found to have a negative impact and to be “worse than doing nothing”. That is why in developed countries, people tend to develop their skills and target their jobsearch to match, so that the population stays advanced and retains a variety of developed/specialised/experienced people in various different sectors.

    There is also a general recognition that a job should provide a wage suitable to sustain the life of the worker, so that someone working full time can meet their housing costs and reach a decent standard of living. If someone continues to need state assistance, then they are not “out of benefits”. Otherwise work is not a route out of benefits, it is a state subsidised poverty-labour subsistence scheme.

  • CP,

    I would not advocate forced work schemes and agree the “work program”, has been found to have a negative impact and to be “worse than doing nothing”.

    The DWP report A comparative review of workfare programmes in the United States, Canada and Australia concluded:

    – There is little evidence that workfare increases the likelihood of finding work. It can even reduce employment chances by limiting the time available for job search and by failing to provide the skills and experience valued by
    employers.
    – Subsidised (‘transitional’) job schemes that pay a wage can be more effective in raising employment levels than ‘work for benefit’ programmes.
    – Workfare is least effective in getting people into jobs in weak labour markets where unemployment is high.
    – Levels of non-participation in mandatory activities are high in some workfare programme

    A minimum wage job guarantee is a ‘route out of benefits’ that serves Beveridge’s aim of keeping men and women fit for a return to work and provides a floor to aggregate demand. It can be both the starting point to acquiring or maintaining the skills for career progression and a realistic safety net for the involuntarily unemployed.

    Pavlina R. Tcherneva, Ph.D. is Assistant Professor of Economics at Bard College, Research Scholar at The Levy Economics Institute, and Senior Research Associate at the Center for Full Employment and Price Stability. Her research expertise is in: fiscal and monetary policy, direct job creation, and the economics of gender. She sets out the technical arguments in the attached blog Alternative Fiscal Policies: Why the Job Guarantee is Superior . She makes the simple but nonetheless timeless argument that people want jobs, not handouts, while demonstrating how the Job Guarantee fosters participatory democracy.

    The Royal Borough of Greenwich have grabbed the bull by the horns with full-time or pat-time jobs on or above the London Living Wage in the Borough’s teams covering parks and open spaces, street cleansing, recycling, enforcement, and in town-centre management. Royal Borough’s new employment scheme helps families affected by cuts . I understand the aim is to move many of the new recruits onto the private sector over the course of the next six months.

  • Matthew Huntbach 16th Apr '13 - 10:58pm

    CP

    The Jobs Guarantee scheme is ideal for third world and undeveloped, low skill countries, when starting a system of social security. Because no investment has been made either by the people or the government in skill development or training, these schemes cause little wastage of human resources, and because so many of the jobs are very low skill work, they can be done by anyone

    Are there no tasks in this country that need doing and could be done with relatively little training? Consider, for example, all these stories we hear of people in geriatric wards starving to death because there is no-one to feed them. How much training and skill does it take to feed someone in a geriatric ward? We have parks and gardens untended and scruffy, how much training would it take to be able to clean them up, do a bit of planting?

    There is also a general recognition that a job should provide a wage suitable to sustain the life of the worker, so that someone working full time can meet their housing costs and reach a decent standard of living. If someone continues to need state assistance, then they are not “out of benefits”.

    With housing costs so crazily high in many parts of the country, by this argument MOST jobs aren’t worth doing. We used to have a scheme of enough state-owned houses let out at cost price which ensured someone working full time could meet their housing costs, we got rid of it. Perhaps we should do something to bring house prices down.

    That is why in developed countries, people tend to develop their skills and target their jobsearch to match, so that the population stays advanced and retains a variety of developed/specialised/experienced people in various different sectors.

    Sorry, but I hear so many tales of people who HAVE skills, who are putting in several job applications every week, but are getting nowhere. One of the big problems is fear. The rich and comfortable seem to think this makes people work harder, but it doesn’t. If you are constantly afraid of losing your job, and then not being able to find another, and so then losing your house, what do you do? Well, you certainly don’t try anything new or innovative. You certainly don’t give up your job and train for another. You keep your head down and do what your boss tells you, even if it makes no sense – and if it means you stay and they go, you stab your fellow workers in the back if you have to. You cancel any plans you had for home renovations and improvements – so that’s work lost for tradesmen; similar for much else, you just stop spending money on anything but necessities, so contributing to fear and unemployment elsewhere.

    We need to end this fear by guarantees of job and home security.

  • Dane Clouston,

    The Nobel prize-winning economist James Meade, adviser to the SDP/Liberal Democrats, was a lifrlong advocate of the social dividend or what we would now call Citizens Income. His 1964 book ‘Efficiency, Equality and the Ownership of Property’, championed the idea of what he called a “property-owning democracy”. Despite the term’s subsequent associations with Margaret Thatcher’s sell-off of council housing, Meade’s version of a property-owning democracy was conceived as a stage in the development of social democracy beyond the welfare state.

    Meade’s property-owning democracy would go beyond the constraints of redistributive policies by looking fundamentally to change individuals’ economic power within markets. It would do this by significant redistribution of control over both human and non-human capital. Meade’s approach to predistribution thus involved a society where social justice was promoted not only by raising wages through substantial investment in education and training, but also by giving every citizen a capital stake, along the lines of a supercharged version of the baby bond that George Osborne threw onto the scrapheap.

    Meade’s idea was later taken up and further developed by the political philosopher John Rawls, in work published during the final period of his career. Rawls argued that predistribution in a property-owning democracy wasn’t a second-best strategy for creating social justice, but was in fact far superior to traditional forms of welfare-state redistribution.

    Predistribution of human capital, through education and training, fosters self-respect and economic agency, while predistribution of capital stakes gives people the kind of independence that comes with being less in thrall to the vagaries of the labour market. Those with a more secure economic position are free to refuse demeaning or badly paid jobs, and this in turn bids-up wages and reduces inequality.

    Meade and Rawls, the two outstanding theorists of predistribution, conjure a vision not just of tinkering at the edges of current market outcomes, but of fundamentally changing the distribution of economic power in society. While both look to reduce the month-to-month taxation and redistribution of incomes, they nevertheless agree that real predistribution involves the aggressive taxation of wealth, through taxes on capital holdings and transfers, and especially on inheritance. Real, radical forms of predistribution do not so much allow governments to tax less in absolute terms; rather, they require a fundamental shift in the focus of taxation from income to wealth.

    It’s a project that promotes a strategy to deliver abundantly on values of social justice, economic freedom, and equality of opportunity. But it’s a project that involves going head-to-head with entrenched interests, breaking up existing concentrations of wealth and economic power. The politics of predistribution, if taken seriously, is revolutionary in scope and not for the fainthearted.

  • Ken Palmerton 17th Apr '13 - 12:05pm

    After something like Fifty years of Liberal and lib Dem party membership, at last someone is talking about A Liberal model of Political economy. It is music to my ears to hear talk of J.K.Galbraith, for instance.

    Now is there a forum for us to discuss what we would have this gang of economic illiterates at the head of our party should consider? Non of our radical thinking SHOULD worry them, there is plenty from within main stream British Liberalism to set our people back on their feet. Fiddling with the mere details of taxation and the benifit system is not enough. as Gladstone would have said, we need root and branch reform. And it is EASY.

    Ken.

  • Dane Clouston,

    with respecto your point “A Citizen’s Income is either enough to live on, or it is not. Problems either way!” I would refere you to the FAQ’s on the Citizens Income Trust around this point. CITIZEN’S INCOME TRUST

    How much would the Citizen’s Income be?

    A FULL Citizen’s Income (FCI) is defined as ‘enough to live on’. If everyone were to receive a FCI, it would cost so much to pay for it that it is unlikely to gain political or public support. However, some people, such as elderly people, could be granted a FCI.

    A PARTIAL Citizen’s Income (PCI) is one that is not sufficient to live on by itself, and it would need to be topped up by earnings. However, those without any other income, or whose other income is insufficient to live on, would need their incomes to be supplemented from public resources via residual contributory and means-tested benefits. The Citizen’s Income Trust has costed schemes based on a Citizen’s Income equal to the current amount of Pension Credit for those aged 65 or over, and on the current levels of Income Support or Job Seekers Allowance for adults. For some households, this Partial Citizen’s Income would need to be supplemented by other provision, especially for housing costs, but far fewer people would need such supplements than need current means-tested benefits. With a Citizen’s Income the marginal deduction rate (the amount of any extra £1 of earnings lost through taxation and benefits withdrawal) would be a lot less than under the current system, it would be far easier for households to increase their net income and therefore to earn their way out of poverty.

    As regards your second question – would you be interested to meet and discuss how to make the Campaign for Universal Inheritance more effective and influential in seeking to persuade political parties, including the Liberal Democrats, to replace Dynastic Capitalism by Democratic Capitalism with greater equality of opportunity not only in health and education but also in the inheritance of wealth? The answer is Yes and my contact email addess is [email protected].

    As a starting point, I would suggest a draft written submission to the Libdems Taxation Group addressing the proposals in Section 3 – Wealth Taxation of the attached Tax Consultation Paper

  • Ken,

    it is good to get feedback from a fellow traveller on the road to A Liberal model of Political economy.

    I would suggest the appropriate forum to to meet likeminded folks and discuss the reintroduction of the radical thinking from within main stream British Liberalism is the Social Liberal Form.

    The SLF conference to be held in Manchester on July 13th is themed : Ownership and Democracy -where does Power lie?

    Steve Webb MP, Minister for Pensions, will deliver the second William Beveridge Memorial Lecture. Other speakers will include Rt Hon Vince Cable (tbc), Deborah Hargreaves (High Pay Unit), David Howarth, Mariana Mazzucato and other well known faces from within and outside the party.

    The Provisonal programme will include:

    Plenary Sessions:
    William Beveridge Memorial Lecture: Steve Webb
    Economics debate
    Power and inequality

    Workshop and panel sessions on:
    Land and ownership
    Capital (redistribution from large to small businesses)
    Labour and industrial democracy
    Information and media ownership
    Localism
    Housing ownership

  • The idea of a universal inheritance is interesting.

    I propose it should be: 1. A healthy childhood 2. A good education, and 3. Full employment opportunities.

  • Paul In Twickenham 18th Apr '13 - 12:56am

    There has recently been adverse publicity for what I have always called the “cargo cult economics” on which much of the austerity agenda is built.

    The highly publicized and systematic dissection of the selective data and dubious computational procedure used by Rogoff & Reinhert has thrown much of the “academic” justification for austerity into chaos.

    It has been at the heart of the Paul Ryan agenda in the USA and the “plan A” still allegedly being followed here in the UK, and now it has been demolished by the startling discovery that the authors didn’t know how to write an excel macro and appear to have selectively chosen data points that would lead to the conclusion they wished to draw.

    If you aren’t aware of this clinical dissection of R&R then I recommend this link: http://www.guardian.co.uk/commentisfree/2013/apr/16/unemployment-reinhart-rogoff-arithmetic-cause

    The significance is that these simple changes to the calculation is that in economies with greater than 90% debt-to-GDP , R&R had calculated that GDP growth was -0.1% per annum. In fact using all of their own data the actual GDP growth in those economies is +2.2% per annum.

    I have previously on this website made the somewhat flippant claim that all of the right-wing economic rhetoric is simply an attempt to provide an academic cover-story for what is fundamentally special pleading that me and my rich friends should pay less tax while everyone else can go to Hades. Perhaps R&R is (to use an over-worked political cliche) the “smoking gun”.

  • Paul,

    your comment and link reinforces what J K Galbraith articulated may years ago “economics does not usefully exist apart from politics. The separation of economics from politics and political motivation is a sterile thing. It is also a cover for the reality of economic power and motivation. And it is a prime source of misjudgement and error in economic policy.”

    The Rogoff and Reinhart research not only fails to indentify the political consequences or bias of policies the authors implicitly advocate, but that error of ommission is compunded by both computational error and assumptions that equate correalation with causation.

    Samuel Brtttan is advocating an end to simplistic austerity budgets and the financing of public spending in three ways:

    1. A balanced budget for current spending under normal conditions of full employment i.e. (around a 5% structural unemployment rate as compared with the currenr rate of circa 8%).

    2. The excess of spending on capital investments over and above depreciation and sales of assets should be funded by borrowing. If capital spending is less than depreciation and sales , then the proceeds of assets sales should be used to pay down national debt.

    3. The third element is a stabilisation fund to manage cyclical fluctuations in demand and the money-supply. The government has the power via the Bank of England to increase or reduce the amount of money in the economy that is made available to purchase goods and services. During recessions the government can call on this stabilisation fund to meet the funding requirements of automatic stabilisers (i.e. temporary reduction in tax receipts and increased welfare support payments) and/or other fiscal stimulus As the economy begins to overheat and wage inflationary pressures rise, the government would withdraw money from the economy to dampen demand by using the net gains from increased tax receipts and lower welfare spending and/or fiscal tightening measures to repay the stabilisation fund.

    This fund is intra-goverment debt that carries no interest cost and is limited in scope to the extent that increases in the supply of money supply introduced into the economy cannot exceed spare output capacity as evidenced by changes in inflation or nomimal GDP expectations in the forecast horizon.

    Briitan goes on to suggest “The threefold division could perhaps be policed by a body such as the Office for Budget Responsibility..”

  • Professor Hillel Steiner, a political theorist at Manchester University, pioneered the philosophy behind Left Libetarianism.

    Four broad policy tendencies characterise left libertarianism. First, extensive privatisation and deregulation in the economy and social rules; second, an increasing proportion of state revenue derived from land tax and inheritance tax; third, a shift from conditional welfare benefits towards unconditional basic income or basic capital state entitlement; and fourth, free trade, free immigration and (potentially) international pooling of land tax revenues.

    In this interview The Big Idea: Hillel Steiner on Left-libertarianism

    “Left-libertarians hold that people who own natural resources have to pay taxes on them, which should then be distributed equally to everyone. The tax, or what I get out of that tax revenue, is my compensation for not owning land or natural resources to which I should be as entitled to as their current legal owners are.

    Insofar as the idea of the Big Society has a connotation of lots of volunteer groups doing certain things in the neighbourhood and in their towns, as a Libertarian I like that. I really think that people on the left who are critical of this approach are being ungenerous. The idea that the state should do everything for us is really one about which we have to grow up

    Cameron’s right in that he’s hit on this idea of reducing the state. As a Libertarian and even as a Left Libertarian, I support this move. But I would like to see accompanying it a wealth distributing policy that is obviously lacking and will never occur under a Tory government. The kind of redistribution policy, and this might bear on the tuition fee question earlier, that Left Libertarians on the whole favour goes under a number of forms.

    One form is unconditional basic income. Rather than receiving an income from the welfare state based on one’s particular condition – single mum, disabled, etc – citizens get a guaranteed unconditional income. There’s a big worldwide movement in favour of unconditional basic income and most Left-libertarians support it.

    An even more radical idea is not this unconditional basic income, but what’s called an unconditional ‘basic stake’. Instead of everybody receiving a monthly cheque from the state out of tax revenue, when they reach the age of 18 or 21, people get a huge capital stake, which they can choose to invest as they see fit. They can invest it in higher education, opening a small business or something along those lines. But everybody gets the same stake.

    The basic ideas of this theory of Left-libertarianism have been around for centuries. An American philosopher and I published a two-volume anthology on Left-libertarianism. The first volume dwells on the concept’s history. Key ideas can be traced to Grotius, Locke, the Levellers and others.

    All I’ve done is pick up on those ideas, try and excavate philosophical roots for them and see how they connect up with our general thinking about morality, politics, economics and rights, in particular. I make the concept of rights central to the whole theory. I guess I have pioneered the casting of this view of justice into modern analytical philosophy terms.”

  • Dane Clouston 19th Apr '13 - 10:13am

    Very interesting about Left Libertarians, thank you!

    Having formed the Campaign for Universal Inheritance in 1997, I discovered in 2000, from the Fabian Society’s “A Capital Idea” proposal, that Thomas Paine had proposed in “Agrarian Justice” in 1797 that all 18 year olds should receive a capital grant at 18, financed by taxation on inheritance.

    So Tom Paine deserves a mention too! Before I learnt about his proposal, the idea came to me at Oxford while reading PPE as a mature student in the early 1970’s when I was told that Proudhon had said that all property is theft, something I disagreed with. But I came to the conclusion that vastly unequal inheritance of property is a kind of theft from one’s peers in each new generation. I stood in Newbury in 1974, for the second and third time, as Liberal Parliamentary Candidate, on a platform of “greater equality of opportunity in health, education and the inheritance of wealth”, and very nearly got elected!

    As a Liberal, I differ from Left Libertarians firstly in that I would certainly not have all inheriting an equal amount, but merely an equal basic minimum amount of roughly 10% of average wealth, financed out of taxation on larger total cumulative lifetime amounts of lifetime capital gifts and inheritance received, and clawed back in tax in due course from the more fortunate. Of course, once the proposal has been introduced, there is scope for increasing the basic minimum amount and rates of tax.

    As a Liberal, I differ from Left Libertarians secondly in having my doubts, as already expressed, about a citizen’s income – either it is enough to live on or it is not, with problems either way – but must read again and think about your comments on that.

    As a Liberal, I also differ from all too many Liberal Democrats in not wishing to be part of a country called Europe, because, amongst other reasons, while I can see UK Universal Inheritance being introduced before too long in the UK, I cannot see that happening in a country called Europe unless and until the UK’s example is followed by other individual countries.

    EU-wide “Bambini Bonds” were an even worse idea than Baby Bonds, which themselves were ludicrously means tested according to whether parents just happened to be or not to be on benefits at the time of the baby’s birth. And the Child Trust Fund leads to very unequal amounts of tax relief leading to very unequal amounts for young adults, whereas the point of UK Universal Inheritance is that it would be the same basic minimum for all 25 year olds , regardless of parental and other contributions.

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