The Cost of Living Squeeze and Tax Reform

UK inflation is today reported to be running at an annual rate of 4.2%. The labour market appears reasonably healthy at this point with the UK unemployment rate at 4.3%, vacancies broadly in line with unemployment numbers and labour shortages driving wages growth.

Inflation, however, hits those on low and fixed incomes hardest. The high levels are being driven by higher household gas and electricity prices UK inflation. While the Bank of England expects inflation to reach 5% next year before coming back down in the second half of 2022, the Labour shadow Chancellor said households would be left more than £1,000 worse off next year due to higher levels of inflation.

Inflation itself comes from both the demand and supply side. Demand-pull or monetary inflation is driven by money creation and is thought to be associated with too much money chasing too few goods or as a consequence of exchange rate depreciation that increases the cost of imports. Cost-Push inflation is driven by market forces that push up wages and/or raw material costs faster than productivity increases or supply is constricted by bottlenecks that, like lower exchange rates, increase the cost of essential imports like food and energy.

To address falling living standards in an inflationary environment requires a strategy for productivity driven economic growth

Four leading economists have co-authored a paper that provides  a means of stimulating real economic activity  in the aftermath of the coronavirus lockdowns without stoking inflation.Post-Corona Stimulus  “The post-Corona economic environment puts a premium on finding fiscal means to stimulate the economy while continuing to finance current levels of expenditures and debt. We develop and carefully calibrate a model of the US economy to show that an increase in the tax rate on the value of land, balanced by decreases in the tax rates on the incomes of capital and labor, can meet this need.”

The tax reform requires a shift towards Land Value Taxation over a period of years while simultaneously reducing the tax burden on labour and capital by an equivalent amount i.e. a tax neutral reform. In an economy with separate groups of workers, capitalists and landlords the simulations predict increases in welfare by 6.4% on average across all three groups , and increases in output by almost 15% relative to trend.

The economists conclude: We can do no better than repeating the conclusion of the Mirrlees Review, the most comprehensive and rigorous review of UK taxation undetaken for many decades: “This is such a powerful idea, and one that has been so comprehensively ignored by governments, that the case for a thorough official effort to design a workable system seems to be overwhelming”. This was ten years ago. It is surely more overwhelming now.

* Joe is a member of Hounslow Liberal Democrats and Chair of ALTER.

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  • Steve Trevethan 17th Nov '21 - 4:37pm

    Thank you for an interesting article!
    Might it help if we were to reduce corruption, enable the tax gatherers to be more efficient, undermine tax havens and tax short term stock market transactions?

  • William Francis 17th Nov '21 - 5:08pm

    LVT is a policy the country desperately needs and the party needs to promote.

  • Relying on renewable energy and 100% back up from gas all over Europe was always going to guarantee soaring energy prices. I have said that here many times. Let us hope that there is a mild winter otherwise supplies could fail. We already operate close to power outages due to insufficient electricity and intermittency of supply.

  • Peter Martin 17th Nov '21 - 11:35pm

    @ Joe,

    Apart from getting in your usual plea for a LVT, I’m not sure what you’re getting at in this contribution. Incidentally the key link to the LVT doesn’t work and I think this is the paper you mean.

    Inflation is more of a worry with a lot to lose than it is for those with next to nothing to lose. It’s also more of a worry to those who can’t keep their income in line with inflation. If we look back to the high inflation periods of the 70s, the better off sections of society, who didn’t have such strong unions, probably suffered more than most. That’s why they were so keen to vote for Mrs T who promised to restore the balance in their favour.

    “… a strategy for productivity driven economic growth”

    How many times have we heard a call for this? Those robots which are going to take all our jobs won’t be forming any unions, wont be going on strike for higher pay, so won’t be causing any inflation (either demand pull or cost push) and sound to be highly productive into the bargain. Are they the cavalry coming over the hill about to rescue us all? I doubt it but we’ll see.

    The point about making more goods and services is that we can all be better off. If we make less stuff we’ll be worse off and if we make the same amount we’ll be the same, providing the distribution is unchanged. I don’t quite follow your remark that we always have to make more, just to avoid being worse off.

    The important thing right now, which you don’t mention, is what is happening at the BoE. Lib Dems are right to point out that much of Parliament is unelected and so this is a bad thing. The officials of the BoE are unelected too. Unlike the good Lords in the upper house they do have real power to mess up the economy big time. So why aren’t Lib Dems saying this is an even worse thing?

    If they raise interest rates we are at grave risk of a crash and we’ll likely all suffer even if we aren’t borrowers.

  • Joe Bourke,

    Why have you not mentioned the 2018 Liberal Democrat paper entitled “Replacing business rates: taxing land, not investment – Introducing the Commercial Landowner Levy” ( In it we set out how we would replace the business rates with a commercial landowner levy for England and Wales. In this paper we state just for England this tax change would cost the government £1.375 billion a year.

  • Peter,

    Where does the UK source its gas from?
    “Gas from fields in the North Sea and Irish Sea provide around 40 per cent of the country’s gas supplies.
    European imports make up a similar proportion. A direct pipeline across the North Sea from Norway to the UK is by far the single biggest source of imports from the continent. The Netherlands and Belgium also supply significant amounts of the UK’s gas.
    The remaining roughly 20 per cent comes in the form of Liquefied Natural Gas (LNG) shipped in from around the world. Qatar and the US are the largest suppliers of this.
    Britain also has gas storage facilities that act as a source of system flexibility when there are short-term changes in supply and demand. However these amount to a fraction of the storage capacity of the UK’s European neighbours.
    Russian gas imports into the UK amount to around 5 per cent of the country’s total usage.

  • Peter Martin,

    monetary inflation refers to the expansion of the supply of broad money and credit circulating in the economy relative to the available supply of goods, services and financial assets in the economy. Its effect is seen most clearly in rising prices of financial assets, property and consumer goods and services.
    Expansion of money supply over and above the rate of growth of the economy that leads to a general increase in prices generates inflation that can be self-correcting, either by increased supply becoming available to satisfy demand or recessions that bring demand back in line with available supply capacity and stabilise prices. That may well be the outcome for Europe and the USA as supply bottlenecks ease and interest rates begin to rise.
    The UK has an additional ongoing supply shock other than the Pandemic i.e. Brexit. Brexit has reduced labour supply and increased barriers to trade with the continent.
    These are the conditions for stagflation – a combination of persistent inflation and low economic growth.
    “There is no definitive cure for stagflation. The consensus among economists is that productivity has to be increased to the point where it would lead to higher growth without additional inflation. This would then allow for the tightening of monetary policy to rein in the inflation component of stagflation (that is easier said than done, so the key to preventing stagflation is to be extremely proactive in avoiding it).”
    Tax reform that shifts the burden of taxation towards economic rents (principally Land rents) while simultaneously reducing the deadweight of taxes on wages and returns on investment in productive capacity are a means of stimulating growth in productivity without increasing the money supply via private debt or increasing government deficits that exacerbate inflationary pressures.
    It’s not rocket science although following the mathematical equations in Michael Hudsons and colleagues paper might make it seem so.

  • Michael BG,

    the Labour party has followed the LibDem lead on business rates announcing they will scrap the current system replacing them with a new system fit for the 21st century

  • @Joe Bourke – “Britain also has gas storage facilities that act as a source of system flexibility when there are short-term changes in supply and demand.”

    I remember this being discussed a few weeks back on R4 when the rising gas prices was the issue of the day. The current in-service gas storage facilities amount to 1~2 days of consumption, whereas across Europe it’s closer to 6 weeks.

    Peter is right the UK bet the country on cheap gas imports purchased on short-term contracts. Yes, it enabled us to rapidly shut down coal power stations, but in typical UK fashion, governments spent the monies elsewhere rather than actually invest in critical UK infrastructure… But it’s going to be ‘okay’ as the Chinese have been developing thorium reactors (based on research which US/UK gave to China as we were more interested in uranium with its military potential)…

  • The Rough field, (a depleted former gas field) was used to store up to 3.3 billion cubic feet of gas. Sadly, the government allowed Centrica to shut down this facility in 2017.

  • Roland,

    Ed Davey recently commissioned analysis of investment in renewable energy finding the growth of renewable power in the UK has collapsed to its lowest rate in a decade.
    “Under the Conservatives, the UK renewables industry has been neglected to the point where coal power stations are being fired up.”
    I expect you are right with respect to Thorium reactors becoming an important element of energy supply going forward. Bill Gates and Warren Buffet are backing Natrium technology

  • @Joe -Renewable energy is not an answer to anything. Wind turbines would not exist without massive subsidies and solar panels are useless in our climate. The latter is also an eco disaster waiting to happen when discarded panels start leaking their horrendous toxic chemicals.

    Germany led the way with renewables and now has the highest energy cost in Europe. Her grid is close to collapse and so is her energy market. The renewables need 100% back up for windless weather and when the wind is strong, supply exceeds demand. Energy cannot be destroyed so it needs to be used. Germany has to pay to get rid of it, creating negative prices. This is creating market chaos. It is also close to destroying the grid and power cuts are more common.

    High energy costs and powercuts mean German industry is now becoming less competitive, causing the great German economy to decline. This is Germany is commissioning new coal fired power stations.

  • The word “why” is missing as the third word in the last sentence of my comment, above.

    Energy availability and low cost are essential elements of a successful economy. These were provided by coal but at an environmental cost because of the air pollution. Greenhouse gas warming is now a spent effect due to absorption band saturation but this will be resisted by climate scientists for as long as possible to keep the gravy train running. I am not at all concerned by CO2 emissions but I am concerned by air quality issues. Perhaps cleaning up coal use should be higher on the agenda, it is a plentiful energy resource world wide.

    It is unfortunate that important matters are judged by labels these days, rather than by rational thinking. Coal has become a product of the Devil and gas is closely related. In fact the combustion of gas produces CO2 and water so it is entirely clean. If we stop worrying about the greenhouse effect then gas is ideal. But I am concerned about over use leading to the exhaustion of this great resource before we find a reliable substitute.

    We all know about the problem of creating a lack of energy availability, whether real or political. That is where we are right now.

  • Peter Martin 18th Nov '21 - 8:20pm


    I’m not sure why you’re lecturing us on the perils of stagflation. We’re just coming, at least hopefully we are, out of a severe economic shock which had a definite and real cause. It wasn’t self inflicted like the 2008 GFC. The government spent when spending was needed. It’s hardly surprising that inflation is over the 2% target. There’s really no need to panic about an extra 2 or 3 %. Stagflation it ain’t !

    How the British economy turns out post-EU will depend on how far it abandons austerity, restores the public sector, and deals with the ravages of past austerity. If the Tories return to form, then it is a bleak future. The Labour Party has to expunge its Blairite past before it will be a progressive contributor.

  • Peter Martin 18th Nov '21 - 8:48pm

    @ Peter,

    This thread is supposed to be about cost of living and taxes. So I’m not quite sure why you’re saying.

    “Greenhouse gas warming is now a spent effect due to absorption band saturation”

    It is, however, important to counter this nonsense. You don’t know what you are talking about.

    IR energy (heat) is radiated into space from high altitudes. It’s absorbed and reradiated many times on its journey from the surface of the earth to space. If we were to measure the temperature of the Earth, using an IR thermometer, from a point on the moon we would measure approximately -18C. This won’t change with various GH gas levels. The GH gases do the radiation after first absorbing the IR.

    But, although the measured temperature won’t change the height of the radiation layer will. If there is an increased concentration of GH gases in the atmosphere the height at which there are just enough molecules to do the radiating will increase. Air gets thinner with increasing height and so too does the concentration of GH gas molecules.

    So, the altitude corresponding to -18C will also rise if there are more GH gas molecules than previously. What used to be the -19 degree level has now warmed by 1C. And so will all the levels below it! If we increase the GH gas concentrations we get even more warming. The so-called saturation effect is a spurious argument.

  • Peter,

    I think Germany and the EU consider natural gas a transition source of energy to 100% renewables within a decade and a reserve source of energy thereafter rather than relying on Russian gas on a long-term basis.
    Climate change itself has exacerbated energy problems with droughts in Brazil depleting hydro-electric power supplies, exceptionally hot summers in Europe consuming energy reserves for air conditioning etc. European Investment is being redirected from oil and gas to renewables and this will set the course for energy supply going into the next decade. I do think, however, that France is not likely to follow Germany’s lead in phasing our nuclear and nuclear energy will remain an important energy source to back-up renewables going forward,

  • Peter Martin,

    I would say it is a bleak future if we cannot learn from experience or understand that counter-cyclical policy means governments spending freely to counteract falling incomes during recessions and withdrawing that stimulus as private sector incomes recover to prevent overheating.
    Monetary or fiscal stimulus is a short-term measure not a permanent feature of policy as Keynes made clear with his oft quoted remark “In the long run we are all dead”.
    Stagflation is induced by policy mistakes e.g. continuing monetary or fiscal stimulus when contractionary policies like monetary tightening are required, coupled with supply constraints such as we have today in the aftermath of Brexit.
    The Labour party of Callaghan and Healey came to understand that as did Blair and Brown.
    How the British economy turns out post-EU will depend on the capacity of its firms and population to overcome the obstacles that have been put in its way in trading with its nearest neighbours; recruiting needed staff from Europe and beyond; dealing with the disruption of high levels of inflation and coping with the impact of higher levels of taxation and prices on consumer spending.

  • Peter Martin 19th Nov '21 - 2:23am

    @ Joe,

    If Keynes was making anything ‘clear’ it was in the opposite sense to the one you’re implying. You sound to be in agreement with more classically minded of economists that the economy will naturally tend towards equilibrium ‘in the long run’, albeit that you do concede that it might just need a little nudge from time to time.

    Keynes was of the opinion that the ‘long run’ was simply an accumulation of many ‘short runs’ and therefore it makes sense to always do what it takes to keep the economy on track by intervening when necessary .

    The phrase “kick start” is often used about such interventions. The implication here is that we have a motor cycle. The ‘engine’ of the economy will then keep going, on its own, for at least a longish period after which it might then stall again and then there will need to be another intervention.

    But what if this isn’t the correct analogy? What’s changed since Keynes’ day? I would suggest it is in the desire of the overseas sector to always sell to us more than they buy from us. We aren’t the workshop of the world any longer. I’m not quite sure why they want to continually swap real goods and services for our IOUs but it seems they do. IF we want to go along with their wishes we have also to accept that we need to generate these IOUs.

    ‘We’ in this sense has to be government.

  • Joe Bourke,

    The link you provided does not give any details of what Labour will replace the business rates with. It was just a press release.

    I agree with Peter Martin. We both at the start of the government giving Covid support pointed out that once people were back at work there could be an increase in inflation (which has happened). You normally agree with the OBR. In their economic statement to go with the budget at the end of October they were forecasting UK economic growth to be 6% next year, 2.1% in 2023 and 1.3% in 2024, with unemployment reaching a peak at 4.9% this year falling to 4.2% in 2024. In the past you have not considered 1.3% a particular low level of growth. The OBR are not forecasting stagflation and for 2025 and 2026 they forecast inflation back at 2% with economic growth of 1.6% and 1.7%.

    In comments to a previous thread ( I pointed out that economists think that when inflation is seen to be transitory the best course of action for the government and central bank is to do nothing. In the same thread I think you pointed out that economists think this inflation is transitory. However, the Bank of England has announced that quantitative easing is ending by the end of the year and in April the government is increasing taxes (NI contributions).

    Controlling the increase (stimulus) of the monetary supply is the way central banks try to control not only inflation but control economic growth too. The quantity theory of money and the Fisher formula express how this works. However, we know that this increases asset inflation, with the rich getting richer and the poor poorer. This is why governments should return to relying more on fiscal measures, especially as they can be targeted at particular regions or particular supply problems.

  • @Joe Bourke –
    re: “Ed Davey recently commissioned analysis of investment…”
    Well given the growth is year-on-year it would naturally decline, even if the same amount was being spend each year.

    Looking at the graph, the conditions necessary to produce the period of ‘high’ expenditure was put in place prior to 2010.

    FYI, the fuel in Natrium reactors is enriched Uranium – the major product (by weight and volume) of the Iranian nuclear programme; which also nicely demonstrates just how short the gap is between civilian usage of Uranium and military usage…. It adds another dimension to the US development of Stuxnet.

  • Peter Martin 19th Nov '21 - 10:29am

    We should be wary of the term ‘money supply’. We have various definitions such as M0, M1, M2 , M3, MB, MZM etc. Which one do we choose?

    If we own a government bond, such as a gilt or a premium bond, then according to the standard wisdom, we don’t count that as money. I don’t know about anyone else, but I’m just as happy to own premium bonds as the same amount in cash. It’s all the same. Nothing more than different types of govt IOUs. Increasing the so-called money supply is no more than swapping IOUs that aren’t counted as money to other IOUs that are. It doesn’t mean anything.

    So why have asset prices increased? It is caused by interest rates being very low at the same time there is an expectation that assets are in a rising market. We are always being told how banks can create money when they lend. They’ll lend to enable borrowers to purchase those rising assets if they have sufficient collateral to make the risk worthwhile.

    Lowering interest rates works reasonably well to stimulate a sluggish economy but raising them to try to cure inflation isn’t simply the reverse process. It creates a worry among lenders that existing loans will turn sour to such an extent that they may well call them in and stop issuing new ones almost entirely. By doing this they help create the conditions that caused the concern in the first place. Worry turns to panic as the market and the economy crashes.

  • Peter Martin,

    What’s changed since Keynes day is that government spending as a % of national income has increased from circa 25% in the mid 1930s to 40%+ in the post-war era. The economy will readjust over time (as Keynes believed) but it could take longer than desirable during severe recessions/depressions. Today, automatic stabilisers do the job of smoothing short-run fluctuations in the business cycle with more active intervention only required for shocks like the financial crisis or pandemic rather than cyclical fluctuations. Keynesian economic requires withdrawal of stimulus as economic recovery is underway (the boom is the time for austerity at the treasury). Electoral considerations make it expedient to apply stimulus but inconvenient to apply the brakes when required.
    Excessive monetary stimulus is the cause of both instability in the financial markets (as Minsky’s work pointed out) and of increasing inequality as Michael Hudson and his fellow economists have described in their research. It has also been a contributory factor to stagflation from the mid 1960s to the early 1980s when drastic increases in interest rates around the world were required to finally bring inflation back under control and has been a feature of Japan’s stagnant economic growth over the past three decades.
    Interest rates need to be allowed to rise as and when determined by the Monetary Policy Committee without government interference and inequality needs to be addressed with Tax reform as Hudson (and Mirrlees before him) has proposed.

  • Michael BG,

    no one knows if stagflation will set-in but Brexit makes the UK’s position rather more precarious than most. The Times writes “Because of the unprecedented economic shock of Covid-19, almost every country in the world now faces the threat of stagflation. And all the signs are that the UK economy could be heading for a repeat of 1970s stagflation.

    Inflation can be made a lot worse if central banks slash interest rates and print lots of new money— as they have during the coronavirus pandemic. The UK’s Bank of England has done this through its quantitative easing (QE) programme.

    All this extra cash sloshing around in the economy forces up prices for food and fuel. This is because there are more pounds chasing the same amount of goods.

    The House of Lords recently warned that the Bank of England was “addicted” to printing money. Peers said the Bank must show how it was going to end its £895bn QE programme given the threat of higher inflation and damage to the economy.

    Brexit and Covid have also made some things worse in terms of the depleted pool of migrant workers.

    This has contributed to shortages of agricultural workers and lorry drivers to produce goods and get them to the shops.

    This pressure on global supply chains, at a time when demand is high, is making the upwards spiral of higher average prices even worse.

    In 2016, asset management firm Schroders said the UK leaving the EU means “uncertainty will remain high for some time. The UK is likely to experience a stagflationary period of lower growth but higher inflation.”

  • Roland,

    I do think that nuclear energy has to be a key element in energy production going forward. I just don’t see renewables being adequate or even necessarily the cleanest source of energy production.

  • Peter Martin 19th Nov '21 - 2:22pm

    @ Joe,

    “All this extra cash sloshing around in the economy…”

    One of those phrases beloved of neoliberals to deliberately create a false impression!

    Much of the ‘extra cash’ is sitting in accounts doing nothing. If it is doing nothing it isn’t “sloshing around” ! And so it doesn’t have any effect on the economy. So by all means tax it away if wish to reduce inequality but it’s not going to have any effect on inflation in the short term. It might just remove the possibility that it might start to do something, maybe ‘quasi sloshing?’, in future but then gilts are always redeemable and sellable before the redemption date. The situational hasn’t changed when gilts are changed into cash (ie QE). The cash doesn’t “slosh” any more than did the gilts it replaced.

    You seem to be suggesting that 40% is too high, but previously you were extolling the virtues of the Scandinavians who have 50% + levels of public expenditure. Not all of the extra goes on public services. A fair chunk of that is to pay the price of their net exports. So make your mind up, please!

    “Addicted to printing money”

    This is another emotive term to conjure up images of what can go wrong but rarely does. Except perhaps in the aftermath of a war. It’s been a long time since we used gold coins. Even the ones we do have have iron or steel in them. They stick to my magnetic catch on my mobile phone! Money mainly isn’t even “printed” these days. It’s created in a computer by a few keystrokes. It’s more about creating numbers on a spreadsheet than “printing”. You might want to try to come up with a more accurate emotive term which does better describe what actually happens.

  • @joe – Agree, the only question is in what forms and when will the UK government wake up and get its act together.

    I like the ideas behind the Natrium and Oklo nuclear reactors namely build small and on a production line. However, the big issue is the fuel – Uranium suits the military industrial sector, whereas Thorium really only has civilian power production application. On to which we add the political dimension: US/UK experience is in uranium, whereas China is conducting much R&D in thorium…

  • Peter Martin,

    the terms used are direct quotes from the linked Times article on stagflation describing how stagflation has come about historically, House of Lords reports and how excessive monetary stimulus is typically a major factor is bringing about those conditions.
    Nouriel Roubini makes similar arguments in the Guardian suggesting conditions are ripe for repeat of 1970s stagflation and 2008 debt crisis
    “The stagflation of the 1970s will soon meet the debt crises of the post-2008 period. The question is not if but when.”
    I do indeed think counties like Sweden have been able to manage their economies in a better fashion than the UK and are able to sustain a high level of public service provision because they are prepared to finance that provision with taxation. Virtually, all Sweden’s tax financed spending goes into public services and not into export subsidies. The Swedish export strategy is funded with a tiny fraction of public spending supporting export campaigns

  • Peter Martin 19th Nov '21 - 3:52pm

    “The Swedish export strategy is funded with a tiny fraction of public spending supporting export campaigns”

    No. Not that cost. Most of the cost is hidden. If, for example, Denmark, is selling us more stuff like Bacon and other Pork products, than it is buying from us it will generate a surplus of pounds on the Forex markets. Its exporters don’t want pounds they want krone to pay their bills. Where do they come from?

    Another way to look at it is that a big net exporter has to use the tax system to suppress domestic demand, prevent inflation and provide the funds to actually pay for what is being exported.

    To put it in sectoral balance terms:

    (S-I) +(M-X) + (T-G) =0

    or T = (I-S) + (X-M) + G

    So government spending (G) is only equal to taxation revenue (T) if the other terms sum to zero. Incidentally, you are always deliberately oblivious to this.

    If X- M = Export Surplus or ES, the extra tax which needs to be collected, compared to the same Export Deficit, and to support the same G has to be equal to 2 * ES

  • John Marriott 19th Nov '21 - 4:11pm

    I think we can safely say that the Earth’s temperature is rising. Mind you, it’s done it before and then it’s cooled down. Remember the Ice Age? The question is whether our activities, especially in the past hundred years or so, have anything to do with it or whether,as before, it would have happened anyway. “So what?” some may ask. Perhaps it might be quite nice, as John Redwood MP opined a few years ago, to have warmer summers.

    OK, I get it. Of course it’s not a good idea for the ice cap to be melting so fast and sea levels to be rising. After all, under this scenario, there won’t be much left of my beloved Lincolnshire above water by the end of this century. Let’s not forget those forest fires in Australia and California, or those floods in Central Europe and hurricanes in the Deep South of the USA and the Caribbean.

    If you buy into the climate change theory that it’s emissions of CO2 that are causing all the problems then reducing them would appear to be a no brainer. Let’s start with the burning of fossil fuels, with the spotlight first on coal. Yes, let’s leave it in the ground unless carbon capture can be proved economically viable. Gas has its drawbacks as well. In fact the only gas I would try to exploit would be hydrogen. It could fire our domestic heating systems and power our vehicles either through internal combustion or an electric motor via a fuel cell. As long as it’ ‘green’ hydrogen, it could have a great future. Also, how do we intend to power our long distance aircraft, if we really do intend to keep them in the air?

    The other ‘green’ alternatives, such as wind and solar power, are already playing their part, although what happens when the wind doesn’t blow and the sun doesn’t shine? However, until large scale nuclear fusion is doable, standard nuclear power leaves a toxic residue that stays with us for hundreds if not thousands of years. The one technology that nobody seems to want to promote is tidal and wave power. Why not? Because, according to ‘Jeff’ it’s too expensive. Well, it doesn’t always have to be.

    I’ve just ordered a plug in hybrid car. Yes, I’m hedging my bets, I know, but, even at my relatively advanced age, I’m on my way to going green!

  • Peter 17th Nov ’21 – 6:17pm:
    Relying on renewable energy and 100% back up from gas all over Europe was always going to guarantee soaring energy prices.

    Indeed. The obsession with renewables, which in the UK means intermittent and unreliable wind, has increased our dependency on gas which is the main dispatchable power source available. This has been exacerbated by reduced exploration and development of new oil and gas fields, as predicted…

    ‘How Climate Activists Caused the Global Energy Crisis’ [October 2021]:

    The result of successful climate activism is, paradoxically, rising coal use and carbon emissions. That’s because because electricity produced from natural gas produces about half of the emissions of coal.

    Some of us warned that climate activist efforts against natural gas would backfire. Eight years ago I defended fracking for making natural gas cheaper than coal. Reducing natural gas exploration would make gas more expensive, I argued, and delay the transition away from coal.

    Some worry that cheap oil increases its use, but petroleum use is highly inelastic, since our cars and trucks rely on it. Little oil is burned for electricity production, and natural gas is required to balance at the intermittency of solar and wind.

    The proof is in the data. Fossil fuels’s share of global energy production remain unchanged at 84 percent since 1980. To the extent emissions in Europe and the US declined, it was largely due to the transition from coal to natural gas.

    Let us hope that there is a mild winter otherwise supplies could fail.

    That may depend on which way the wind is blowing…

    ‘Arctic Sea Ice Extent Currently Second-Highest In 15 Years, And Growing…’ [19th. November 2021]:

    This week, Arctic sea ice is approaching 10,000,000 km2 — the second highest ice extent of any of the last 15 years. Furthermore, the years 2008 and 2005 are on course to be eclipsed in the coming days/weeks, as are many from the early-2000s and mid/late-1990s — this means that 2021 will soon claim the title of ‘the highest Arctic sea ice extent of the past two decades’ (since 2001).

  • Peter Martin,

    a glance around the globe will tell you that many of the big exporters in the Gulf states, Asian tigers etc have some of the lowest tax regimes in the world – virtually non-existent in the UAE. In many cases, they don’t want local currency, they want Us Dollars to import the goods they want for their economy.
    It is not governments that typically import and export but firms even when those firms may be government controlled.
    The argument that imports are a benefit and exports are a cost doesn’t hold up in a world where countries focus on comparative advantages like Oil reserves or technical expertise.
    Imports are a direct benefit to consumers whether they be food, energy, products or services like overseas holidays.
    For Companies and their workers exports are a distinct advantage, otherwise no company would export. Also, the import of competitor goods might hurt domestic businesses, as they lose sales to foreign competitors and shed staff.
    For the Country exports increase GDP which is defined as C + G + I+ (X – M).
    A negative balance of payments (imports exceeding exports) is a cost to the country. A country can finance negative balance of payments through IOU (government bonds) if it finds willing buyers. Alternatively it can finance by selling domestic assets (domestic companies, real estate, mining rights). Ultimately, however, a country will run out of domestic assets – or there is a political backlash against foreigners owning valuable domestic assets. So it is best to keep current account deficits moderate in the long term.

    The MMT view of Balance of Payment issues seems to be US-centric, where the reserve currency status of US$ means that International demand for dollars is high and does not need to be backed by real US assets.

  • Peter Martin 19th Nov '21 - 9:39pm

    @ Joe,

    “..many of the big exporters in the Gulf states, Asian tigers etc have some of the lowest tax regimes in the world – virtually non-existent in the UAE.”

    Only superficially. The kind of taxes we are familiar with such as VAT, income tax etc aren’t the main forms of government revenue in places like Saudi Arabia, Kuwai, and the UAE. Governments largely own the revenue generating oil infrastructure and control the export of oil and gas. They collaborate through OPEC to get good prices. This is where the real taxation, in the sense of a transfer of spending power to the government occurs. Singapore runs largely under government control and ownership of a large section of the Singaporean economy. So although income tax rates are low there are other ways the government can remove spending power from everyone else.

    The sectoral balances still apply to these states but digging out the true figures in an economy which is highly controlled by governments may not be that straightforward.

    “For Companies and their workers exports are a distinct advantage, otherwise no company would export”

    Of course. There’s no wrong with exporting if we bear in mind that its purpose is to be able to import. There’s no point in exporting just for the sake of it.

    ….exports increase GDP

    Yes they do. The P, though, stands for production and not consumption. If I grow apples and give them to my neighbour in exchange for his IOUs I might be increasing my GDP but he ends up eating the apples!

    ” MMT view of Balance of Payment issues seems to be US-centric”

    I’ve heard this said often enough but there’s nothing remarkable about US trade figures in terms of their GDP, or their budget deficit or levels of savings etc. They aren’t too much different from our own. The sectoral balances apply to the Americans just as they do to everyone else.

  • @John Marriott Thank you for your comments. They deserves a comprehensive response, which I gave, but unfortunately it was removed. I think I was too honest in places.

  • John Marriott 20th Nov '21 - 10:48am

    I shouldn’t get upset, mate. It happens to me all the time. Another trick is to say it’s too long. Then, of course, there’s the dreaded “flood protection alert” ie too many comments in too short a time. I always wonder how Messrs Bourke and Martin appear to get away with it. At least I WAS an active party member for well over thirty years, unlike the latter, who still has a soft spot for the good old Labour Party.

    I believe the topic of this thread was supposed to be about taxation. Your early intervention some three days ago has clearly failed to stir the pot sufficiently. Like the drum beat in Ravel’s ‘Bolero’, the ping pong between our taxation gurus just goes on and on, regardless of the flurries from the rest of the orchestra occasionally breaking through!

    PS I’m still not quite sure how you managed to work in gas supplies; but well done!

  • Joe Bourke,

    In your post of 19th Nov 1.37pm you ignore my point that the Bank of England has said it will end quantitative easing at the end of this year, and that I pointed out that both Peter Martin and I pointed out last spring that the Covid support could increase inflation. You also failed to state why you reject the OBR forecasts for inflation, growth and unemployment.

    It is not enough for an economist just to predict problems ahead, but they should provide solutions and Nouriel Roubini hasn’t done this. He is saying, “this slow-motion train wreck looks unavoidable”.

    However, all of this assumes there are going to be supply problems in the future and that our current supply problems are not short-term because of the shock the world economy took because of Covid. What is the case for huge world-wide supply problems in the future, rather than just some disruptions?

    It is no good just saying Brexit is going to cause stagflation in the UK. I have at least set out some areas where the government can target its spending to reduce the effects of employment problems caused by the UK no longer having access to a large external pool of people to employ. It also seems that the government is aware of the problem, but it just isn’t doing enough to provide solutions.

  • Peter Martin,

    When considering equations I always think the best place to start is with:

    C + G + I + X = C + T + S + M

    This has a nice balance and when the economy is in a state of equilibrium it is true and the equation balances. If it is out of balance then elements of the equation with change to bring the equation into balance. In this equation exports like investment and government spending are injections and taxation, savings and imports are leakages.

    G + I + X = T + S + M

    And get to T
    G + I – S + X – M = T

    We agree at this stage, but you leap after this.

    X – M = T – G – I + S

    Even if you say that I = S you still haven’t got 2 multiplied by anything.

    X – M = T – G

    If X is larger than M then Taxation has to be larger than Government Expenditure when I = S and the economy is at equilibrium (the part you wish to ignore).

    However you could have
    X – M = S – I when T = G

    Here Savings are greater than Investment and it is this which allows that country to be an exporter nation.

  • Peter Martin 20th Nov '21 - 11:08am

    To be fair to the BoE, and especially the members of their monetary committee, they do look to be reluctant to push up interest rates. Otherwise they would have done this already.

    Probably they do understand that the risks to outweigh the benefits right now. On the other hand they are under pressure to do something. So hopefully there will only be a small and token increase next month which won’t do too much harm.

    Having said this the principle that important decisions about our economic well being should be made by accountable and elected officials is still being broken.

    @ John,

    One tip to avoid being held up with comments is to space them out. Just do a couple at a time then wait a few hours before doing any more.

  • Peter Martin 20th Nov '21 - 11:39am

    @ Michael

    As you correctly say: X-M = T-G when (S=I)
    So, to put some numbers into this, if exports are greater than imports by £100 bn the govt needs to also run a £100 bn surplus.

    On the other hand if imports are greater than exports by the same amount the government will be running a deficit of £100 bn.

    So for the same level of govt spending the difference between the two scenarios is £200 bn of tax collection. That’s where the factor of two arises.

    I’m not necessarily advocating that we should run a large trade deficit. There are arguments for and against. But we do need to recognise the link between trade deficits and budget deficits. They aren’t exactly equal because S isn’t usually equal to Ì but there is still that connection.

    Joe seems, if I understand him correctly, to be arguing, that the budget deficit causes the trade deficit. Whereas I would put it the other way around. You’d need to fix your exchange rate to a lower than market rate to first fix your trade deficit and then a lowering of the budget deficit could follow without plunging the economy into recession.

  • Peter Martin,

    Once the equation is out of balance it will try to rebalance itself.

    Therefore if C + G + I + X does not equal C + T + S + M and T + S + M is larger than G + I + X a number of things can change (and I expect all do change).

    I think if people have decided to buy more imports the first thing which will happen is home Consumer spending decreases. This leads to there being less money in the economy and to stop a recession the government needs to increase its spending or reduce taxation to make up for the decreased home consumer spending. The government does not have to increase spending or cut taxation and if it doesn’t then the economy is likely to go into recession. I don’t see an increase in import spending causing the government to spend more, but it does cause there being less money in the economy and this would cause the reduction in other factors such as the taxation revenue.

  • Michael BG,

    covid support has not increased inflation. If both Peter Martin and you were saying is does last spring then you were wrong then and you are wrong now. Government support merely partially replaces lost income. UK GDP (output of goods and services ) declined by 9.9% in 2020 and will recover much of that lost output this year and next as unemployment falls back to around 4%. What causes inflation is excess credit creation in the banking sector prompted by overly loose monetary policy which predates the Covid pandemic. Inflation relates to a general increase in prices (all prices) not simply a rise in some prices like oil and natural gas.
    Stagflation arises when monetary inflation is accompanied by supply shocks. In the 1970s these came in the form of oil price shocks and crumbling Industrial relations preceded by a long period of falling labour productivity relative to International competitors. Today these supply shocks come in the form of energy price shocks and excessive debt at corporate and state level that brings about the law of diminishing returns when debt is overused as a factor of production. In the UK these shocks are exacerbated by the impact of Brexit on supply chains across Europe and distribution.
    Stagflation needs to be addressed from two sides. Tightening of monetary policy to reign in excess credit creation in the banking sector and tax reform of the kind described in the article featured on the thread i.e. the post-corona stimulus advocated by Michael Hudson etal.

  • Peter Martin,

    I don’t know where you get the idea that I would argue that the budget deficit causes the trade deficit. I think national accounts sectoral balances are arithmetic outcomes and not causation as the economist that developed the method of analysing them between households, firms, the foreign sector and government, Wynne Godley, makes clear in his papers.
    Trade deficits are mainly a matter of international competitiveness and terms of trade – a function of relative prices, labour costs and comparative advantage.
    As the UK has moved from being the workshop of the world to a services based economy its terms of trade have changed. The UK retains strong export markets in aerospace, luxury cars, Tourism, financial services and latterly North sea oil, but imports the bulk of its energy, half of its food and most consumer goods. The UK has one of the highest foreign trade intensities in the world with imports and exports equating to over half of GDP.
    There is no automatic reason for a twin trade and budget deficit. Foreign exporters (particularly after the Asian financial crisis) like to hold a large buffer of US treasuries, so there is a strong correlation between US trade and budget deficits, but not so much in other countries. If foreign investors shun government bonds and look to other investments such as real estate or share portfolios there is limited impact of trade deficits on government borrowing and deficits as demand leakages from imports are replaced with spending on construction of property assets or business investment spending.
    China will run large trade surpluses at the same time as running large budget deficits. Germany typically runs annual budget deficits of around 2% while running large trade surpluses.

  • Peter Martin 20th Nov '21 - 1:47pm

    @ Joe

    Excess credit creation can lead to higher inflation because it leads to more spending. People generally wish to borrow money because they want to spend it. It always comes back to what is being spent in relation to what is available to be bought.

    I don’t believe anyone was saying the increased budget deficit of last year was going to have an immediate effect on inflation. A deficit on the part of the govt is an indication that everyone else was saving more. More saving doesn’t mean more inflation. It means less.

    Its when those savings start to be spent that we start to see inflation pick up, especially if the levels of production haven’t totally recovered after the pandemic and we are still suffering from bottlenecks in supply chains.

    We see rises in inflation in Europe and the USA. It’s due to previous govt spending to support economies during the pandemic. The BoE are forecasting that it will fall, at least in the UK, in a matter of months and this time they are probably right.

  • Peter Martin 20th Nov '21 - 2:09pm

    @ Joe

    German and Chinese people are highly thrifty. You only need to listen to Henning Wehn’ s comedy routine to grasp that German and British attitudes to borrowing are quite different.

    So if the German people are net saving the German govt has to accommodate their wishes by doing the borrowing or running a deficit. So the trade surplus is pushing one way, i.e. the need to run a surplus, and the savings requirements of the population is pulling in the other.

  • Peter Martin,

    the increased budget deficit of last spring is not going to have an effect on inflation and neither will the budget deficit of this year or next year. Counter-cyclical fiscal policy is (as the name suggests) countering deflationary contractions in spending. If accumulated household savings were all spent at once that may cause a temporary spike in prices in some sectors like consumer goods, overseas holidays, restaurant price etc but not in staples like energy, fuel and food. However, expectations are that accumulated savings will not be all spent at once and are more likely to decline slowly over time.
    Inflation is a lagging indicator but (properly defined) it is not simply a temporary spikes in prices for a few months. It is a persistent and relentless rise in prices as was seen from the mid 1960s to early 1980s across the developed world. The root of its cause is monetary policy i.e. artificially lowering interest rates such that excess money is created in the banking sector. It can be exacerbated by shocks like the Opec oil crisis, but these one off shocks are not the root cause of decades long inflation.
    I have no idea if we will see continuing inflation or perhaps deflation here in the UK next year (probably much like the BofE). Japan seems to be deflating again while the rest of the world is seeing price increases all round This suggests that psychological influencess like inflationary or deflationary expectations may indeed play an important role in outcomes.
    What I do know is that Brexit is likely to present the UK with some unique challenges compared to the rest of the world and we can only focus on areas where we can make a difference such as Tax reform while mandating the BofE to address price and financial market stability.

  • John Marriott 19th Nov ’21 – 4:11pm:
    The one technology that nobody seems to want to promote is tidal and wave power. Why not? Because, according to ‘Jeff’ it’s too expensive.

    I merely report the findings of numerous feasibility studies that have been conducted over the last century. The Severn estuary is generally regarded as one of the best locations in the world to build a tidal power scheme: it has the world’s second-largest tidal range at over 14 metres, contains a large area of water, and is relatively shallow for building a dam. The most cost-effective proposal was the Cardiff-Weston Barrage which would generate “up to 5%” of the UK’s electricity demand at a projected cost, in 2010, of £34 billion. Even that would produce very expensive electricity. Also, it’s not a scalable solution. As we use more electricity for transport and space heating then the percentage of demand it could supply would decrease. Once built, there are no other locations that are nearly as good. For the high cost and environmental damage it would cause it doesn’t make economic sense.

    ‘Severn tidal power: feasibility study conclusions’ [January 2013]:

    This series contains documents relating to the 2-year feasibility study into tidal power on the Severn estuary.

    In October 2010, the government concluded it did not see a strategic case for public investment in a tidal energy scheme in the Severn estuary, but the outcome of the feasibility study does not preclude a privately financed scheme.

    ‘Severn tidal power feasibility study: conclusions and summary report’ [October 2010]:

    In the light of these findings the Government does not see a strategic case to bring forward a Severn tidal power scheme in the immediate term. The costs and risks for the taxpayer and energy consumer would be excessive compared to other low-carbon energy options. Furthermore, regulatory barriers create uncertainties that would add to the cost and risk of construction. The Government believes that other options, such as the expansion of wind energy, carbon capture and storage and nuclear power without public subsidy, represent a better deal for taxpayers and consumers at this time.

  • John Marriott 19th Nov ’21 – 4:11pm:
    The one technology that nobody seems to want to promote is tidal and wave power.

    Wave power may have some potential – the energy density of moving water is 600 times that of air. Although variable and intermittent it is more predictable than wind. Many designs of wave energy converter have been developed over the years, but so far none have proven to be economically viable. The UK is a world leader in research and government funding is available for new ideas.

    What would be useful for the UK is more pumped storage capacity to help offset daily fluctuations in renewable power. There are a few potential sites in Scotland, one currently under construction, and one in England on the north coast of Exmoor…

    ‘The seawater pumped hydro potential of the world’ [April 2018]:

    The second-best site in the UK is probably this one on Exmoor, the only place where deeply-incised higher ground reaches the coast. It’s much smaller that Strath Dearn (~200 GWh, dam 600m long by 185m high) yet it would still increase the UK ‘s installed pumped hydro capacity by a factor of about seven. But could it ever be built? The combes of Exmoor are noted beauty spots, and certainly the owners of the Hunters Inn would not be amused. Neither would the residents of the villages around the periphery of the reservoir, who would watch it fill and drain probably once a day in the winter.

    This would be near to the site of the world’s first pumped storage system…

    ‘Remains of leat serving former hydro-electric generating station, on the south bank of the East Lyn River, 210m east of Oxen Tor’:

    The water-powered electricity generating station at Lynmouth was the work of a local engineer, Charles Geen. The station began to operate in the early months of 1890 and it relied on the fast flowing East Lyn River to drive the turbines, the water arriving at the station via a leat and pipeline system. However, by 1895 demand was outstripping supply at certain times and a pumped storage system was installed to ease this pressure. This pumped storage system, which relied on water being pumped to a reservoir for later use as and when required, is considered to have been the earliest in the world.

  • John Marriott 20th Nov '21 - 4:25pm

    At last, an answer from ‘Jeff’ and a confession. “I merely report the findings”. So, no personal opinion then and presumably the ‘findings’ that support your views? Remember the drunkard and the street light?

    MY personal view is never say never. The potential of tidal and wave power is immense if we can get the technology right. Look how the overall cost of green energy has come down. You might believe everything this government says. Given its track record I certainly don’t!

  • The economist had a good piece on energy markets last month
    !The world may yet escape a severe energy recession: the glitches may be resolved and Russia and opec may grudgingly boost oil and gas production. At a minimum, however, the cost will be higher inflation and slower growth. And more such squeezes may be on the way”.
    “Governments need to respond by redesigning energy markets. Bigger safety buffers ought to absorb shortages and deal with the intermittency of renewable power. Energy suppliers should hold more reserves, just as banks carry capital. Governments can invite firms to bid for backup-energy-supply contracts. Most reserves will be in gas but eventually battery and hydrogen technologies could take over. More nuclear plants, the capture and storage of carbon dioxide, or both, are vital to supply a baseload of clean, reliable power.”
    “A more diverse supply can weaken the grip of autocratic petrostates such as Russia. Today that means building up the lng business. In time it will require more global trade in electricity so that distant windy or sunny countries with renewable power to spare can export it. Today only 4% of electricity in rich countries is traded across borders, compared with 24% of global gas and 46% of oil. Building subsea grids is part of the answer and converting clean energy into hydrogen and transporting it on ships could help, too.”
    “All this will require capital spending on energy to more than double to $4trn-5trn a year. Yet from investors’ perspective, policy is baffling. Many countries have net-zero pledges but no plan of how to get there and have yet to square with the public that bills and taxes need to rise. A movable feast of subsidies for renewables, and regulatory and legal hurdles make investing in fossil-fuel projects too risky. The ideal answer is a global carbon price that relentlessly lowers emissions, helps firms judge which projects would make money, and raises tax revenues to support the energy transition’s losers. Yet pricing schemes cover only a fifth of all emissions. The message from the shock is that leaders at cop26 must move beyond pledges and tackle the fine print of how the transition will work. All the more so if they meet under light bulbs powered by coal.”
    My view is that we cannot avoid investment in Nuclear Power and carbon pricing as we transition to Net Zero. Technology advances hold out the prospect of recycling nuclear waste and this may turn out less harmful than dumping millions of old solar panels in Africa or killing off the world’s bat population or other bird species with offshore windmills.

  • Peter Martin 20th Nov '21 - 9:16pm

    @ Joe,

    “the increased budget deficit of last spring is not going to have an effect on inflation and neither will the budget deficit of this year or next year.”

    This seems to be new departure. The criticism has been that the government has been “printing too much money” even though you know very well that there isn’t any printing involved. But you like the phrase because it conjures up images of governments debasing the currency and creating unnecessary inflation. But now you’re saying the government spending we saw to support the economy won’t have any inflationary effect.

    My take is that it might for the next six months or so but if you are saying this doesn’t actually count as inflation it looks like we might be in agreement. Except you are saying we need to raise interest rates. To cure an inflation problem we don’t actually have?

    It looks like the BoE are doing a better job than might have been expected in holding the line against an interest rate rise. So, credit where credit is due on that. It looks like they take the view that the danger in the longer term is recession and I would very much agree with them on that.

  • John Marriott 19th Nov ’21 – 4:11pm:
    Of course it’s not a good idea for the ice cap to be melting so fast and sea levels to be rising.

    Melting? The Antarctic has just had its coldest half-year since records began (in 1957).

    ‘Antarctic interior posts coldest April-to-September on record’ [October 2021]:

    According to the National Snow and Ice Data Centre (NSIDC), the average temperature at the U.S. Amundsen-Scott South Pole Station between April and September was minus 60.9ºC.

    This was the station’s lowest temperature on record for this six-month period, with records dating back more than 60 years.

    It was also the station’s second coldest winter (June, July and August) on record, with an average seasonal temperature of minus 62.9ºC. This is 3.4ºC below the long-term average (1881-2010) for winter.

  • John Marriott 19th Nov ’21 – 4:11pm:
    …until large scale nuclear fusion is doable, standard nuclear power leaves a toxic residue that stays with us for hundreds if not thousands of years.

    If we were a ‘nuclear free’ country like New Zealand that might be a reasonable consideration, but we already have a substantial stockpile of nuclear ‘waste’ from power stations, military, medical, and industrial sources. It doesn’t take up much space and the storage costs are a largely fixed overhead. Adding incrementally to it isn’t going to add significantly to those costs or the stockpile legacy. Uranium-fission reactors, like Hinckley Point C currently under construction, only extract a small percentage of the potential energy from their fuel. It is possible to reprocess and recycle their spent fuel for use in a different type of reactor which can reduce the volume and half-life of the remaining waste. An example of such a design is Moltex’s Stable Salt Reactor – Wasteburner (SSR-W)…

    ‘Reduces Waste’:

    Moltex’s Stable Salt Reactor – Wasteburner (SSR-W) uses the nuclear waste from past and present operations as fuel, significantly reducing waste stockpiles.

    Moltex is a UK company based in Warrington, but has had to go to Canada to find a customer for its initial power station development. It remains to be seen if this reactor design can be successfully built.

  • Peter Martin,

    During a downturn the government can and should make up a fall in demand relative to supply. That mostly happens automatically as tax receipts and welfare spending (automatic stabilisers) ebbs and flows with the peaks and troughs of the business cycle. Supporting demand relative to existing supply and maintaining existing supply is not a source of inflation. Trying to generate economic growth beyond the capacity of the economy to expand is a source of inflation.
    The government can usually create inflation (Japan excepted) by expanding the money supply (quantity of money x velocity) relative to the capacity of the economy to produce goods and services. It can do that through two channels – monetary and fiscal policy. Monetary policy to expand bank lending into the economy drives inflation principally in financial assets and the housing market. Maintaining fiscal policy at elevated levels over and above the supply capacity of the economy (i.e. when the output gap has largely closed) will typically generate CPI inflation that may or may not be temporarily offset by deflationary forces like cheap goods from China. RPIX is already at a 30 year high
    Quantitative easing by itself does not impact significantly on consumer prices. It does impact asset prices by lowering interest rates and hence inflating the price of stocks, bonds and property. Tax or Debt financed government spending is not inflationary even after the economy is growing again. A combination of QE and debt financed government spending (Debt monetisation) would be inflationary once the economy is in recovery and the deleveraging period has come to an end.
    Debt financing is subject to the law of diminishing returns. The greater the level of a factor of production introduced the lower the multiplier. When debt levels are elevated introducing further debt stimulus produces short-term returns for one or two quarters, then a flattening of growth followed by a decline after a year or so as a consequence of negative multipliers and declining productivity. That also probably contributes (along with high inflation) to debasement of the currency relative to other International currencies.
    Regardless of current supply issues, Interest rates need to rise to contain credit expansion and cool the bubbles in the housing and financial markets. Stabilised government deficits going forward should be contained in line with expected nominal growth at around 3.5% to 4%. Deficit spending should be directed at the transition to green energy and productivity enhancing investments with positive multipliers. Tax reforms should be focused on a switch towards wealth taxation in the form of land value taxes from taxes on earned incomes. We might then have a prospect of addressing inequality and improving living standards for all.

  • The Rolls Royce small nuclear reactor looks like an interesting development
    Fellow at the Royal Society and Royal Academy of Engineering Dame Sue Ion said:

    “This is extremely welcome news and demonstrates the potential of advanced nuclear power, which could be expanded safely to improve the overall efficiency of our energy system, with cheaper stable low carbon power to help meet the UK’s net zero goal.

    This welcome recognition of the innovative approach taken by the Rolls Royce-led team gives the UK a real chance to regain its place at the top table in nuclear energy internationally and create a new manufacturing base for cutting-edge power .generation, helping boost our economy and our export potential.”

  • Peter Martin 21st Nov '21 - 10:48am


    “Interest rates need to rise to contain credit expansion and cool the bubbles in the housing and financial markets.”

  • Peter Martin 21st Nov '21 - 11:06am

    @ Joe

    “Interest rates need to rise to contain credit expansion and cool the bubbles in the housing and financial markets.”

    Not a good idea! In 2007 the Monetary Committee of the BoE raised rates from 4.6% to 5.8% and the economy crashed. By 2009, they had to lower them 0.5%. So what was the point of raising them in the first place?

    It’s a pity that the MC at the BoE weren’t better acquainted with some economic history, in particular the reasons for the 1929 Wall Street Crash.

    “From 1928, the Federal Reserve began raising interest rates – partly concerned about booming share prices. Increasing interest rates to 6% played a factor in reducing economic growth and reducing demand for shares”

    If you’re saying monetary policy has been too loose in the last decade, you are right. But, once it has been allowed to be too loose for an extended period of time, tightening it up can be catastrophic. Now that interest rates have been lowered as far as they have we are stuck with them. That is unless we want to deliberately crash the economy.

    There are signs that at least some in the BoE do understand this.

  • Peter Martin,

    Interest rates influence economic activity by changing the incentives for saving and investment and the decisions of households and businesses by changing the amount of cash they have available to spend on goods and services. Low interest rates reduce the amount of income that households and businesses get from deposits, and some may choose to restrict their spending. For borrowers, an increase in interest rates can increase the amount paid in interest by borrowers.

    Survey evidence suggests that low interest rates do not encourage investment by larger listed companies. Rather than borrowing for investment, listed firms use borrowing capacity for share buybacks. This financial engineering is a much safer means if increasing shareholder wealth than riskier investments in productive assets,
    Evidence from Japan suggests that very low interest rates cause savers to cut back on spending to preserve dwindling capital and do little to increase lending demand.

    Bubbles always end regardless of what central banks do. The roaring twenties in the USA were a stock market bubble inflated by excessive debt leverage, just as we see in the US today. RCA was the technology stock of the twenties. In the five years prior to the Great Crash of 1929, RCA stock soared from about $11 to its September 1929 high of $114. It never paid a cash dividend just like today’s high flying electric vehicle stocks. Today instead of RCA we see Tesla with a PE ratio of 355 times earnings. Japan’s stock market and property bubble crashed in 1989 with market PE ratios of 65 and has never recovered to that level since. Eventually, share prices revert to fundamentals i.e, their price is related to their real earnings.
    Ultimately, governments and central banks do not control financial markets. They react to them. When central banks try to control markets they create asset bubbles. It’s always too late to act once a bubble or inflationary spiral has taken hold, but act you must to avoid a worsening situation down the road. Government cannot prevent the fallout from a bubble bursting, just mitigate the impact on the real economy, inflation and employment with targeted support to the most vulnerable.

  • Peter Martin 21st Nov '21 - 3:30pm

    “Tax or Debt financed government spending is not inflationary even after the economy is growing again.”

    You’re wrong. Both can be. It depends on the resources available in the economy. ‘Tax government financed spending’ is less likely to cause inflation. But, it is still possible. If, for example, Governments increase the standard rate of income tax we all have less to spend and this will actually prevent us spending on something else. It is deflationary. On the other hand if you tax the assets of the wealthy you are removing money which is unlikely to be spent anyway so will not have the same ‘cooling’ effect. This is not to say that we shouldn’t do that but we do it for different reasons.

    You neglect to address this issue in your call to change the tax system.

    Debt financed spending again isn’t stopping anyone spending money they wouldn’t spend anyway. At least this is true if interest rates are ultra low or even comparable with the inflation rate. It might be different if there were real gains to be made by saving for a few years.

    “Quantitative easing by itself does not impact significantly on consumer prices.”

    True. QE is just an instrument of monetary policy to reduce longer term interest rates. Short term rates are determined by a decision of the Monetary Committee in the BoE. So why are you in favour of giving the responsibility for meeting the inflation target to the BoE in the first place? The only way they can even have a small effect in inflation is to encourage the creation of dangerous asset bubbles in the property market. As we have all seen for ourselves!

    Inflation control, including the meeting of inflation targets, has to be the responsibility of government using a mixture of monetary and fiscal measures, with the emphasis very much on the latter.

    If there was one thing I did think we agreed on it was that governments could create inflation if they spent too much. So I am surprised to hear you claim that Government deficits don’t do this. If they don’t why even try to reduce them?

  • Peter Martin,

    resources available in the economy don’t change much in the short-term. They grow with population growth and advances in technology.
    Tax on incomes has a deadweight loss effect Typically, taxing a good lowers supply and raises prices. Income taxes cause people to work less or exert less effort. But land is different. Its supply is fixed and cannot go away. As a result, as long as landlords are competing with each other for tenants- Landlords must simply pay up and carry on as before. Land Value Taxes are thought to have zero deadweight losses.
    The reasons for an Independent central bank are well rehearsed. Economic variables have both short-run and long-run effects. A cut in interest rates or taxes before an election can give a short-term boost to economic activity for a few months only to generate higher inflation and unemployment a little later as the initial sugar rush of stimulus wears off.
    Governments clearly can create inflation if they run deficits in excess of the nominal growth rate of the economy when the economy has recovered to its normal operating capacity. That may be a while yet for the UK. Debt financing constrains this from happening when central banks allow interest rates to find a natural level i.e. in the absence of debt monetisation or artificially suppressing interest rate increases that contain inflation.
    The price level in a economy near full employment is expressed by Irving Fisher’s equation of exchange i.e. the quantity of legal tender and credit money x velocity = Nominal GDP (You cannot measure velocity directly only money supply and nominal GDP).
    As Keynes wrote “The quantity theory of money is a truism.” Fisher’s equation of exchange is a simple truism because it states that the total quantity of money paid for goods and services must equal their value . But it cannot be accepted today that a certain percentage change in the quantity of money leads to the same percentage change in the price level.”
    That underscores the point that economic variables of all kinds are non-linear, other things do not remain equal or unchanged and velocity of money is not always stable.
    Inflation is a lagging indicator, If you wait until inflation takes hold it is already too late and you may well be forced to induce a recession with a combination of steep hikes in interest and taxes to halt an inflationary spiral.
    People frequently don’t do what governments may want them to do, whether it is borrowing and spending or saving and investment. That is why economics is a social science.

  • Peter Martin 21st Nov '21 - 11:10pm

    @ Joe,

    resources available in the economy don’t change much in the short-term. They grow with population growth and advances in technology.

    Advances in technology don’t just happen. Nearly always they are a spin off from the research and development conducted and paid for by government for military purposes. There was a huge leap forward during the wartime years. In the 30’s we had biplanes made of canvas and wood. Afterwards had rockets, radar and jet engines. The internet is the most recent example of how technological advances are dependent on government involvement.

    …when central banks allow interest rates to find a natural level …..

    You seem to want it both ways. The central bank being given the job of regulating the economy which it can only try to do by varying interest rates, and at the same time you want interest rates to find what you call a natural level. How can they be ‘natural’ when the central bank sets them?

    “People frequently don’t do what governments may want them to do, whether it is borrowing and spending or saving and investment.”

    That’s true. That’s why the Government generally has to do the opposite. If we are borrowing and spending too much the Govt needs to borrow and spend less and/or tax more. And vice versa!

  • Peter Martin,

    the Swedish economist Knut Wicksell did a lot of work on the idea of a natural rate of interest rate. Wicksell defined the natural rate as that interest rate which is compatible with a stable price level, and stable asset prices. Those are the basic functions of the central bank in maintaining economic and financial markets stability.

  • Peter Martin 22nd Nov '21 - 4:12am

    @ Joe,

    No they aren’t. According to Govt policy the target isn’t a stable price level but an inflation target, and not an upper limit, of 2%. This is linked to the concept of the NAIRU or Non accelerating inflation rate of unemployment which isn’t so rigidly defined but nevertheless is an acceptance that full employment isn’t achievable. Too low a rate would push inflation over target whereas having too much unemployment would mean the target not being met.

    Central banks in the EU have tended more towards the idea that stable asset prices and more stable prices generally will naturally produce a healthier economy but we’ve seen higher unemployment levels there as a consequence. It was the same story in the UK and the USA prior to WW2. ie Stable prices but high levels of unemployment. There was an additional twist to the story in Europe in that stable prices didn’t result in a stable society!

  • Peter Martin,

    Price stability exists when average prices are constant over time (as they were for most of the period of the gold standard outside of major wars) or when they are rising at a very low and predictable rate. Price inflation occurs when average prices are rising above this low and predictable rate, and price deflation occurs when average prices are falling. In both cases, the effects are potentially extremely harmful to a country’s economic performance and to the welfare of its citizens. For this reason, price stability is commonly regarded as the single most important macro-economic objective.

    For the UK, price stability means ensuring that the price level increases gradually, by an average of no more than 2% per year. The official target is 2%, though there is a safety margin of +/- 1%. The Bank of England is forced to intervene if inflation falls outside of these limits.
    It was unstable prices leading to debt deflation after WW1 that was the source of unemployment in Europe and also in the USA after the Wall Street Crash.
    The whole purpose of price and asset value stability is to avoid financial market crashes and the depressions/recessions that follow.

  • Peter Martin 22nd Nov '21 - 3:27pm

    The prices were unstable, ie falling, in the 30s depression because of the lack of demand. Banks had failed and depositors had lost their savings. Prior to that many had overextended themselves by taking out loans to buy shares which were only worth a fraction of the purchase price. In the UK there were wrong headed policies of putting the pound back on the gold standard at its pre WW1 level.

    Even those who had somehow managed to hang on to their money weren’t in any hurry to spend because the price of that car, or radio, or whatever was likely to be cheaper if they waited.

    In other words, falling prices were a symptom of the lack of demand and not the cause of the depression.

    The solution to the problem was relatively simple. The Govt needed to step in a do the spending needed to reflate the economy and get it going again. This happened soon enough but unfortunately it took a war for the dimwits who ran National Treasuries to abandon their we-must-balance-the-books mentality.

  • Peter Martin,

    several currencies went through a catastrophic failure after WW1 including in Russia and Poland. Germany and Hungary saw it twice in the Weimar hyperinflation and after WW2.
    In the UK prices rose by more between 1970 and 1990, than they had done in the previous 200 years.
    Irving Fisher and Keynes drew the same conclusion from their research. It was that instability in the aggregate price level had been the main source of business cycle fluctuations.
    In his Tract on Monetary Reform, Keynes argued that a market economy ‘cannot work properly if the money, … as a stable measuring rod, is undependable. Unemployment, the precarious life of the worker, the disappointment of expectation, the sudden loss of savings, the excessive windfalls to individuals, the speculator, the profiteer-all proceed, in large measure, from the instability of the standard of value’.
    One of Keynes’ concerns was the need to prevent prices falling as they did by 10% in 1930. It was stability that Keynes was after and in 1933 Keynes wrote an open letter to the newly installed American president, President Roosevelt, urging him to hold fast to ‘a long-range policy of stable prices’. The New Deal should aim to get the economy moving, but not in a way that might prove inconsistent with long-term price stability.
    That is what we need today. The current inflation may well prove transitory and recede during 2022 only to be followed by debt deflation which would then require lowering of interest rates at that time.
    The research referenced in this article by Hudson etal provide a basis for stimulating economic growth through tax reform while allowing for interest rates at natural levels to do their work of maintaining price stability.
    The essence of price stability was encapsulated by Alan Greenspan:
    ‘For all practical purposes, price stability means that expected changes in the average price level are small enough and gradual enough that they do not materially enter business and household decisions. ‘

  • @ Joe Bourke, You’ll find, according to ONS, that the rate of inflation in the UK after the Asquith Liberal Government took Britain into the First World War was : 1915 12.24%, 1916 18.18%, 1917 25.38% and 1918 22.09%.

    Many historians have questioned and theorised why the Liberal Party was overtaken in popular support by the Labour Party in the 1920’s. You may have part of the answer above.

  • Peter Martin 22nd Nov '21 - 8:34pm

    @ Joe

    Your choice of 1970 to 1990 looks like cheerypicking for your convenience. As you’ll no doubt be aware there was a lot going in those decades that wasn’t what I would have wanted. Nevertheless 1970 wasn’t a bad time to be 18 years old.

    We still had uni grants and there were plenty of jobs to choose from afterwards. It wasn’t that hard to buy a house. Don’t knock the post WW2 period. It was better than what happened after WW1.

  • David Raw,

    it is a good point about war inflation. I think there was a similar experience at times during the Napoleonic wars that was also followed by a acute economic slump, accompanied by chronic unemployment leading to the Peterloo massacre in 1819. Prices returned to stable pre-war levels by 1822. From 1822 until 1912, consumer prices showed no overall increase.
    For many hundreds of years (apart from the period of the ‘Great Tudor inflation’) the price level was stable-in the sense that, although there were periods of rising or falling prices there was a tendency for the price level to return to its original level. Even in the inflationary sixteenth century prices rose only by a factor of just under four, whereas since 1900 prices have risen over forty-fold.
    It wasn’t only prices that increased in the Great War so too did taxes and these kept increasing after the war until the Geddes Axe in 1922. The immediate trigger for the fiscal squeeze appears to have been a tax revolt by middle-class voters which panicked the government into cutting public spending and income tax rates. The cuts were made all at once rather than being phased, and the biggest falls came in social security spending, defence and education rather than ‘equal misery’ across all policy areas. The most obvious long-term effect of the Geddes Axe was economic (exacerbating the sluggish economic performance and unemployment it was intended to mitigate), but it likely also contributed to the electoral realignment as between the Liberal and Labour parties in the 1920s as you note.
    I think Lloyd George was in the right track with his earlier Land tax proposals, but the exigencies of electoral politics and war brought those plans to a halt and the treasury increased income taxes instead. Many of the radical liberals that could have pushed for the Land tax reforms after the war, like William Wedgewood Benn, joined labour in the 1920s and here we are a century on still trying to get tax policy right.

  • Peter Martin 23rd Nov '21 - 10:16am

    @ Joe @ David,

    I’ve made the same point about wars and inflation except in the context that the major inflations, such as the often quoted hyperinflations in the Weimar Republic and Zimbabwe, have occurred in the aftermath of a war rather than during it. Govts can always clamp down tight to make spending difficult during wartimes even though they might be running large deficits. Keynes’ as an adviser to the Govt during WW2 made a better job of keeping inflation under control than did the Liberal Coalition govt in WW1.

    In a way, the Pandemic has been a ‘mini-war’. We’ve seen Govts run large deficits which haven’t resulted in inflation at the time but those deficits are equal, to the penny, of everyone else’s surpluses and they are now starting to be spent. Add in that the economy hasn’t fully recovered, there are issues on the supply side, and it’s no surprise that we have a ‘mini-inflation’ after our ‘mini-war’.

    But nothing has really changed in the economy although there have of course been human causalities. We haven’t got to pay any reparations and we haven’t got bomb damage to repair. So we can concentrate on getting the NHS and social care right without thinking the economy will collapse about us.

    It’s all very well fiscal conservatives lecturing us all on how marvellous it was in the 19th century when the price of bread was more stable. The other side of the story is that so were wages. Most people in 1912 were more interested in how much their wages actually bought at the time than how much they would have bought in 1822.

    We are all of a generation when we would, at the start of our working lives, have been able to buy a round of drinks in the pub and still had change from a pound etc etc. Now it costs much more but we earn much more too. So are we better off now or were we better off then?

  • Sorry about my delaying in responding to your comments, since Saturday I haven’t been well enough to post comments here.

    Joe Bourke,

    Peter Martin and I did not say in spring last year that the job retention schemes WOULD cause inflation but COULD cause inflation. I am surprised you didn’t read what I wrote correctly. The government increased people’s spending power while at the same time stopping them from spending. This has meant that some people have increased their savings while not wanting to do so. According to OBR figures in 2020 household consumption was down 10.1%, recovering only by 4.7% from this reduced level in 2021 and forecast to recover a further 9.8% in 2022. It is the increase forecast in many areas of spending which leads to the forecast of 6% economic growth in 2022. If this increase in spending is not matched by increased production and supply of good this is what causes demand-pull inflation. It is a basic tenet of Keynesian economics. I am surprised you don’t understand this aspect of how the economy works.

    I don’t accept that in the longer term there will be world-wide supply shocks, because of increased energy prices. The countries which export such energy know that if they reduce supply and/or increase prices this can cause a world recession and a world recession is not in their interest. Nouriel Roubini writes, if central banks try using monetary policy to control inflation “they will risk triggering a massive debt crisis and severe recession”.

    According to a House of Commons Briefing paper (,
    “In 2020, the UK’s exports of goods and services totalled £601 billion and imports totalled £597 billion. The EU accounted for 42% of UK exports of goods and services and 50% of imports in 2020.
    The UK generally imports more than it exports meaning that it runs a trade deficit. A deficit of £129 billion on trade in goods was offset by a surplus of £133 billion on trade in services in 2020. The overall trade surplus was £4.3 billion in 2020.”

    From the Budget book I have calculated that the UK’s GDP was £2100.19 billion for 2020/21 based on government expenditure of £1115.2 billion being 53.1% of GDP (page 38). This makes exports about 28.6% of the economy.

  • Peter Martin,

    Hyperinflations were very rare events before WW1, but have become a regular occurence since. Greece experienced hyperinflation in WW2 during the German occupation and Hungary saw the worst case of hyperinflation ever recorded in the first half of 1946 under Soviet occupation
    Keynes argued in his work How to Pay for the War (published in 1940) that the war effort should be largely financed by higher taxation— and especially by compulsory saving (essentially workers lending money to the government), rather than deficit spending, in order to avoid inflation. Much of these forced savings were held for decades until they were inflated away.
    Unlike the USA, the UK War debt required the maintenance of rationing after the war into the mid1950s; running budget surpluses for a time to reduce demand under the Attlee government after the devaluation of 1947; wartime levels of taxation through to the 1970s; and low interest rates coupled with high inflation that together with robust growth chipped away much of the debt. That was made possible by maintaining capital controls until 1979.
    Oliver Blanchard made the point that when the average interest rate on public debt remains below growth rates than debt remains sustainable. That leaves two questions. How do you keep interest rates from climbing above average growth and what are the most effective means of stimulating growth in an environmentally constrained environment.
    Central banks have a high degree of control on overnight rates of interest when inflation is subdued, but not so much on longer-term rates without capital controls in place. Stronger economic growth in the future should perhaps see interest rates recover from the historic lows seen since the financial crisis.
    The average standard of living in the 1970s would be considered poverty levels today. We were happy enough then because we were all pretty much in the same boat. Being young and carefree helps too. We are mostly materially better off today, but perhaps not that much happier than when the Beatles released their 1964 hit “Can’t Buy Me Love”

  • Peter Martin 23rd Nov '21 - 2:09pm

    @ Michael BG,

    Sorry to hear you’ve been unwell. I hope you are feeling better now!

    Nouriel Roubini’s reputation jumped enormously when he correctly predicted the 2008 crash. I’m not convinced , though, that he his stated reasons for thinking a crash was likely was a true reflection of his thought processes. It can be difficult, and have career implications, for a mainstream economist to stray too far into what some regard as heterodox (heretical?) territory. So, if there was a heterodox strain in his line of thought it would have been better for him to dress up his argument in more orthodox garb.

    In any case I sensed, around 2006, that something was very wrong when I heard of buyers purchasing houses without even viewing them. It was far too easy to get personal credit. I hadn’t started looking into economic theory at the time and I’d never heard of MMT, but I understood enough to know that bust follows boom in spite of Gordon Brown’s claims to the contrary. The crash wasn’t that hard to predict.

  • Michael BG,

    I am sorry to hear that you have not been feeling well and hope you will continue to get better.
    I have referenced demand-pull inflation in the article. If excess savings are suddenly spent that draws forward demand from the future and it subsides again as savings are depleted turning to deflation. That is not the persisent inflation that comes with continuing increases in money supply in the banking system relative to supply capacity.
    The Chinese Central bank is concerned by high producer-price inflation – energy and commodities
    “China’s central bank advisor Liu Shijin said Chinese economy could enter a period of ‘quasi-stagflation’ with relatively slow growth and excessively high producer-price inflation”
    Central Banks are already using monetary policy to control inflation in Russia, South Korea, Brazil etc. The UK is ending its QE program and the USA is phasing out its asset purchases – so called taper. It does of course have to be done cautiously and incrementally as the economy emerges from lockdown to avoid triggering a collapse in financial markets.
    Trade intensity can be expressed as the sum of exports and imports over GDP.​ A higher trade intensity suggests an economy is more susceptible to external shocks in the world economy

  • Peter Martin 23rd Nov '21 - 2:52pm

    @ Joe,

    “Keynes argued in his work How to Pay for the War (published in 1940) that the war effort should be largely financed by higher taxation— and especially by compulsory saving (essentially workers lending money to the government), rather than deficit spending, in order to avoid inflation”

    It’s not correct to say “rather than deficit spending”. If workers were lending to government the government must have been borrowing it. It all amounts to the same thing. Deficits were high during WW2 both in the USA and UK. That’s why both counties ended up with large National Debts at the end of it.

    Neoliberals are prone to making this kind of ‘mistake’. They consider that the Govt is a household, though they will usually deny it when pressed, and argue that if the Government is short of money it needs to ask for a loan in the same way as you and I would. We really do live in households. Neoliberals don’t consider that the Government is also a bank and many savers want to park their money with them because the Govt’s ‘bank’ with its issue of gilts and other securities is the safest place to do that.

    So saving is the process of parking your money with the Government and can be thought of as the same thing as temporary and voluntary taxation. If the Government insist on workers saving, the process must, by definition, be somewhat less than voluntary! But strictly speaking it should still be counted as a loan and so contribute to deficits and debts, if, unlike taxation, there is at least some intention to repay one day.

  • Peter Martin,

    higher tax payments were collected during the war to reduce deficit spending, but part of the tax collected was recorded as repayable at some convenient time in the future This parliamentary debate from 1972 discusses the issue
    “It is fair to say that the fact that all the post-war credits created between 1941 and 1946 have still not yet been repaid more than 25 years later has been a source of increasing irritation and disappointment. I am glad that the end is now in sight.
    It is interesting to recollect how the post-war credit scheme started. Its origins lay in the proposal made by the late Lord Keynes in his now celebrated paper “How to Pay for the War”, that part of people’s earnings should take the form of deferred pay. In this way, he argued, people would postpone that part of their consumption attributable to their increased war effort and so help to pay for the war, while the purchasing power could be released when the war ended and mitigate what he then feared would he a substantial post-war slump. Accordingly, in the Finance Act, 1941, when certain of the personal allowances were cut, it was provided that the additional tax levied on each individual in consequence would be recorded as being credited to him for repayment and on such dates as may be fixed by the Treasury being a date so soon as may he after the termination of hostilities in the present war”. “So soon as may be” has been rather a long time coming.”

  • Thank you Peter Martin and Joe Bourke I am feeling better today and hope the improvement continues.

    Joe Bourke,

    Prices are not stable over time and I note you have in your later comments recognised that in the past wage rates were often reduced. Something that doesn’t happen today, it is only real wages which fall not wages in monetary terms.

    You wrote, “Prices returned to stable pre-war levels by 1822. From 1822 until 1912, consumer prices showed no overall increase”.
    According to the ONS UK inflation between 1822 and 1912 was 11.24% ( In 1822 is was -13.59% (and this negative inflation continued for a number of years.

    According to Wikipedia ( “The (Geddes Axe) Reports advocated economies totalling £87 million; the Cabinet decided on savings amounting to £52 million” from a total expenditure of £603 million.

    I suggested that the government should have tried to get the money being saved during Covid lockdowns into a form which would restrict how quickly that money could be spent. (It seems that something similar happened during WW2.)

    If inflation is caused by people spending their savings, the length of time of this inflation will depend on how long the savings last and if production can be increased to meet the demand. If the increased spending could be predicted along with how much inflation this will cause then the government could reduce its spending to try to reduce just enough demand to reduce the inflation and not economic growth.

    You seem to reject both economic levers that exist. You dislike central banks trying to increase the money supply because it causes asset inflation and you don’t believe fiscal measures work long-term and in small amounts. I am not even sure you think fiscal measures work when targeted. You seem to be left with the hopelessness of believing as economists in the past wrongly believed than the economy is self-correcting.

  • Michael BG,

    The pound had an average inflation rate of 0.12% per year between 1822 and 1912. That is about as stable as you can get over a 90 year period.
    Central banks in pursuing price stability need to focus on growth of money supply in the private banking sector which is by far the greatest source of money creation in the economy. They do that with interest rates, open market operations and regulatory requirements for banks lending standards, capital and liquidity buffers.
    Virtually all economists recognise that economies (left to their own devices) typically tend towards self-correction in the long-term, but that can be a long cycle. The purpose of Keynesian fiscal stimulus is to restart that self-correction in the shorter-term by introducing demand into the economy that will encourage firms to invest and hire workers and to withdraw that stimulus as private sector growth takes hold.
    As the economy recovers we should start to see incremental increases in interest rates to more normal levels as this BofE policymaker points out: “future rises in Bank Rate are largely indicative of the recovery.”
    In a healthy stabilised economy you would see stable prices; positive real interest rates after inflation that at least preserve the purchasing power of small savers; low unemployment and economic growth comparable to that of over developed economies.
    That, in my view, is best achieved by policies that underpin demand like a guaranteed minimum income and job guarantees for long-tern unemployed; financing of current spending at full employment levels (circa 4%) with taxation including Land Value Tax; and financing planned deficit spending of 3% to 4% for capital investment with longer term borrowing. Cyclical fluctuations that increases or decrease annual deficit spending as a consequence of automatic stabilisers should be financed with borrowing at shorter-term maturities.

  • Joe Bourke,

    Virtually all economists recognise that economies (left to their own devices) typically tend towards self-correction in the long-term”.

    Perhaps self-correction is the wrong term. Economies will work towards an equilibrium, but this does not mean that it will be where an economy is at full capacity.

    The purpose of a Keynesian fiscal stimulus is to stimulate the economy to move it closer to full capacity and build confidence so that firms will invest and hire workers. The economy should move closer to full capacity and the closer it gets to full capacity the less need there should be for more economic stimulus. The withdrawal of stimulus should only happen when the economy is likely to overheat not just because of some theory. What is important is ensuring domestic demand is high enough to stimulate British business but not too high that it creates inflation.

    Why would anyone what a stabilised economy? What we want is an economy at near full capacity which grows at its maximum each year.

    I agree that we need to invest more money into job guarantees and training guarantees. Do you think that investing £11.7 billion next year into this would be a good start? I believe everyone should have an income at the poverty level for their household type and believe this is better than trying to set a minimum income level for each person. I am glad to read that you accept that the government has to run a budget deficit, but you are wrong that it should always be in the region of 3 or 4%. The extra amount that the deficit can be increased by each year has to be determined by how much spare capacity there is in the economy and not by arbitrary numbers. When the economy is near to full capacity the government deficit should be less than the economic growth rate. We are not in a position where the ‘automatic stabilisers’ actually do stabilise cyclical fluctuations. I am not convinced this will ever be possible, because it would mean that government spending would increase automatically to make up the short-full from domestic spending during a downturn. (It didn’t even manage to do it during the Covid crisis.)

  • Michael BG,

    government spending on pensions and the NHS increases above inflation every year regardless of recessions. In a recession tax receipts fall and the number of welfare claimants increases. These are the automatic stabilisers.
    The covid crisis is not a cyclical recession and has required emergency support to households while still seeing a fall in GDP of 9.9% for 2020. The economic recovery has come about as a consequence of the rollout of vaccination and ending of lockdown with much of the emergency support coming to an end this year.
    Budgets are set based on an economic forecast for the following fiscal year. That includes an estimate of borrowing for capital spending. The actual outturn will determine what the actual deficit is for the year and what the actual borrowing will be.
    The key purpose of budgets is to plan ahead for the spending required for the provision of public services and the borrowing required to maintain those services.
    The recent spending review presented a forecast for the five years from 2022-23 to 2026-27 as follows:
    Current budget deficit (surplus) as % of GDP 0.6 -0.5 -0.9 -1.0 -1.1 (in real terms based on 4% inflation)
    Public sector net investment 2.7 2.9 2.7 2.7 2.7
    The forecast estimates unemployment at 4.2%. That is for all practical purposes an economy operating near capacity at full employment level after which diminishing returns or crowding out begins to set in from additional spending.
    Until such time as structural tax reforms were in place, I would look at running a balanced current budget and increasing public sector net investment by 1% of GDP i.e. additional spending of 2% of GDP overall or £40 billion with £20 billion allocated across the NHS, Schools, Local authority finance, Universal credit and job guarantees for current spending and £20 billion on priority Green investment and public housing for capital spending.

  • Joe Bourke,

    I know what you mean by ‘automatic stabilisers’. My point is that the increase in government spending caused by increased unemployment is not great enough to cover the loss of spending power of unemployed people not receiving their previous wages.

    The reason the fall in GDP has not been as large as it might have been is that the government took steps to ensure incomes did not collapse. 11.7 million people received some support from the furlough scheme. However the maximum the government paid was 80% of earnings. If everyone had had a 20% cut then GDP would have fallen by 20%.

    There are 1.448 million people unemployed in the UK according to the ONS – 4.3%. 4.2% is therefore about 1.414 million people. While having this number of unemployed people is acceptable to you, it isn’t acceptable to me. About 1.111 million is acceptable to me; about 3.3%. I would also like to reduce the number of people receiving Employment and Support Allowance down from 2.3 million and this will require government spending and having the economic conditions where employers are happy to employ people with health issues that affect how they can work.

    You are saying you want to increase government spending by 2% of GDP, 1% or £20 billion for current spending and the same for investment spending. This would cause a current spending deficit for 2022-23 and 2023-24 as well as the current year. The £20 billion for current spending is on top of what the government has announced. This is over £20 billion short of the £46.67 billion I suggested for next year (

    Increasing Universal Credit and the legacy benefits by £20 a week would cost in the region of £12 billion. We have estimated a UBI of £71 a week would cost £30 billion on top of the tax changes we suggested. In our 2019 manifesto we had nearly £14 billion for early years and child care and £5 billion for reversing some of the benefit cuts since 2010. I have suggested spending £11.7 billion to provide 1 million job guarantee and training guarantee places. It would cost a further £5 billion a year (for three years) to fund the education catch-up needed after Coronavirus. Are you including £1.6 billion a year for local government to fund the £4.8 billion “back hole”?

    So how would you split your £20 billion in the first year?

  • Michael BG,

    to maintain a balanced current spending budget, deficit spending would increase by 0.5% (£10bn) in 2022-23, a further 0.4% (£8bn) in 2023-24 and a further 0.1% (£2bn) by 2024-25 i.e. 1% (or £20 billion) in total by 2025. Most of that spending would be allocated to NHS backlogs and education catch-up (as long as higher interest rates was not absorbing it). Any additional current spending over that level would need to be tax financed with a shift towards land value taxes from income taxes.
    With a balanced current spending budget, the overall budget deficit equates to net investment spending of around 3.7% (i.e. projected nominal growth going forward).

  • Peter Martin 25th Nov '21 - 1:07pm

    @ Joe @ Michael BG,

    “The purpose of Keynesian fiscal stimulus is to restart that self-correction in the shorter-term by introducing demand into the economy that will encourage firms to invest and hire workers and to withdraw that stimulus as private sector growth takes hold.”

    ie the kick start theory. So all we need to know is how to ride a motor bike!

    It’s simply a matter of faith on your part that “In a healthy stabilised economy you would see stable prices; positive real interest rates after inflation that at least preserve the purchasing power of small savers; low unemployment and economic growth…”

    As youngsters we’d often test out how far, and fast, we could ride down the street with our hands off the handlebars. Sometimes we’d do OK and other times we’d end up in a heap! Our bikes were stable up to a point but if anything happened like hitting a stone….

    It is safer to keep your hands on the handle bars at all times. Even more so when riding a motor bike! In other words, why assume the economy is even partially stable when there is no need to?

    “Virtually all economists recognise that economies (left to their own devices) typically tend towards self-correction in the long-term”

    Is this the same long term when we’re all dead? I’m not sure that they do. Economies don’t exist in isolation. They are a feature of the civic society that creates them. The societies themselves will react in unpredictable ways if the perception is their economies aren’t performing as they should. Riots, in this country, co-incide with economic recessions. The troubles in Northern Ireland were caused by a failed economy there in the 60s. Then, in the 30s, there was the rise of fascism in Europe, as a response to the high rates of unemployment and recession, which led to WW2.

    So, the ‘long run’ in Europe wasn’t quite when we all ended up dead. Just 60 million or so of us!

  • Peter Martin,

    Each economic period is also the long run of some short-run expediency of long ago. WW1 came about as Germany rose to challenge the hegemony of the British Empire. The Treaty of Versailles set the path for the Weimar Hyperinflation of 1923, Germany’s debt crisis of 1931 and the rise of Hitler
    “Germany’s financial collapse in the summer of 1931 was one of the biggest economic catastrophes of modern history. It led to a global panic, brought down the international monetary system, and turned a worldwide recession into a prolonged depression.

    The reason for the financial collapse was Germany’s large pile of foreign debt denominated in gold currency which condemned the government to cut spending, raise taxes, and lower wages in the middle of a worldwide recession. As the political resistance to this austerity policy grew, the German government began to question its debt obligations, prompting foreign investors to panic and sell their German assets. The resulting currency crisis led to the failure of the already weakened banking system and a partial sovereign default.

    Hitler managed to profit from the crisis, because he had been the most vocal critic of the reparation regime.”

    The decisions taken in the aftermath of the pandemic will have long lasting consequences just as those taken at the Treaty of Versailles did. This ECB board member explains why
    “Only by protecting public investment over the entire business cycle, while successfully implementing structural reforms, can we boost productivity and growth potential and, ultimately, rebuild tax bases and service debt in the long run.
    If we apply the lessons of the pandemic to our economic policy, we can emerge from this crisis with a stronger economy and greater social and political cohesion. Upgrading the rules by which the EMU is governed is unequivocally in the interest of all EU member countries, and the importance of NGEU cannot be overstated. Its success would recast the EU economic toolbox and shore up the European project for generations to come.”

  • @ Joseph Bourke “WW1 came about as Germany rose to challenge the hegemony of the British Empire”. Really ?

    Now if you’d said the paranoid insecurities of the Hohenzollern monarchy, the Prussian elite who ran Germany who didn’t give a fig about treaty obligations, the insecure hegemony of the Austrian Empire, the system of European alliances, or even the peculiarities of the Belgian railway system I might just have given you a D instead of an E, Joseph.

  • David Raw,

    historians can point to many factors and events in the years leading up to WW1, but the fact that Germany posed a challenge to the British Empire at the time would not, I think, be disputed by any reputable student of history.
    The Imperial War Museum is generally a reliable source on these matters
    “Between 1900 and 1914, Germany became identified by Britain as the chief foreign threat to its Empire. This was, to a large extent, the outcome of the policies pursued by Germany’s leader, Kaiser Wilhelm II – most notably his eagerness to build a battle fleet to rival Britain’s.”
    A J P Taylor’s War by Timetable is an interesting account of unintended consequence. In his earlier work – The Struggle for Mastery in Europe 1848–1918 – Taylor examined the Great Powers’ ability to wage war by taking into consideration their population, defence spending per capita, coal and steel production and manufacturing production. He maintained that determining the strength of a state requires an assessment of its economic resources.
    At the beginning of the 20th Century both Germany and the USA were beginning to pose a serious challenge to Great Britain’s dominance in industrial production and manufactures
    “While Britain produced about twice as much steel as Germany during the early 1870s, Germany’s steel production exceeded Britain’s in 1893, and by 1914 Germany was producing more than twice as much steel as Britain. Moreover, only one-third of German exports in 1873 were finished goods; the portion rose to 63 percent by 1913. Germany came to dominate all the major Continental markets except France”.
    Forget the O Level history, David. Look to economic history for the real answers as Paul Kennedy does in the The Rise and Fall of the Great Powers, or Jeremy Paxman’s Empire in which he writes “Germany envisaged WW1 as a way of destroying the British Empire”.

  • Peter Martin 25th Nov '21 - 9:38pm

    @ Joe @ David Raw,

    “Germany rose to challenge the hegemony of the British Empire”

    Enrich Maria Remarque in ‘All Quiet on the Western Front’ wrote:

    “A mountain in Germany cannot offend a mountain in France. Or a river, or a wood, or a field of wheat.”

    So, presumably, it couldn’t challenge the British Empire either. It was the ruling classes of Britain and Germany who wanted ever bigger Empires. That wasn’t going to be possible. One side wasn’t going to get their way.

  • Peter Martin,

    yes, that is a profound quote from Enrich Maria Remarque.

  • Joe Bourke,

    I am disappointed in how conservative your aims are. My recent article ( suggested that what the party was suggesting in our reply to the budget in October was about £46.67 billion more expenditure than the government and instead of agreeing to something close to this you have suggested only £10 billion extra for next year, less than a quarter.

    Do you think more money should be allocated to the NHS above what the government has announced for backlogs? And if so, how much would you allocate each year for the next three years.

    In my article I pointed out that in our budget briefing we stated we would “Provide at least the full recommended £15 billion to fund the catch-up needed in Education over three years”. This is £5 billion a year. I also pointed out that our budget briefing included, “The Local Government Authority projects councils will be facing an £8 billion black hole in their budgets by 2024. The Tory Government has responded with… £4.8 billion.” This is a shortfall of £3.2 billion. If we made this up over three years this is a further £1.07 billion each year.

    It seems you are not serious about providing job guarantees and training guarantees as you have not stated how much you would allocate to these schemes.

    I pointed out in my comment of 18th Nov 11.36am that our proposal to introduce our version of a Land Value Tax (Commercial Landowner Levy) will not raise any extra revenue, but will cost the government £1.375 billion a year. I believe that some members of ALTER worked on this policy including you.

    I am surprised by your strange view of how WW1 came about. Did you not study the causes of WW1? You seem to be arguing that Britain caused WW1 because of the economic rise of Germany. Or maybe Germany caused it by declared war on Russia because they wanted a war with the UK.

  • Peter Martin,

    I posted (24th Nov 11.52pm) an alternative to Joe Bourke’s purpose.

    “The purpose of a Keynesian fiscal stimulus is to stimulate the economy to move it closer to full capacity and build confidence so that firms will invest and hire workers. The economy should move closer to full capacity and the closer it gets to full capacity the less need there should be for more economic stimulus. The withdrawal of stimulus should only happen when the economy is likely to overheat not just because of some theory. What is important is ensuring domestic demand is high enough to stimulate British business but not too high that it creates inflation.”

  • Peter Martin 26th Nov '21 - 5:01am

    @ Michael BG,

    Yes this, the kickstart theory, is the conventional view of why a Govt fiscal deficit is required. It is about encouraging firms to invest rather than save their money as piles of cash or govt bonds. They’ll only do that if it is more profitable to take the risk with investments rather than pick up whatever tiny amount of interest they can. Even though interest rates have been lowered to almost zero, to discourage saving and encourage borrowing, Govts haven’t succeeded.

    Except that firms have often taken advantage of lower rates to borrow money to buy back their shares to make it appear they are doing better than they are. This probably won’t end well!

    If we consider the sectoral balances it follows that the purpose of govt fiscal deficits is simply to keep things as they are rather than provide any stimulus. Govt spending simply replaces money lost to the economy by the savings requirements of both our overseas trading partners and the private domestic sector.

  • Peter Martin 26th Nov '21 - 5:39am

    @ Joe,

    In the link from your previous comment you wrote ” This ECB board member [Fabio Panetta] explains why”.

    Except it’s all too vague to be an explanation. He’s making the usual calls for “implementing structural reforms”, boosting productivity and growth potential, rebuilding tax bases etc but without saying how. He’s conceded that “During the financial crisis, the eurozone adopted a wrong policy mix, causing an economic gap to emerge with other major economies” but doesn’t say how it was wrong or what they should have done instead.

    There was too little attention paid in the UK to how the EU was getting it wrong and what the effects on us were here. Yet, it was those effects which led to us leaving.

    So until the PTB in the EU do that there’s not too much hope they will get it right next time. Especially if, as they almost certainly will, the ultra fiscally conservative FDP ( or should that be ‘business friendly’ ?) have a significant influence in the new German coalition.

    PS I should have got Erich Maria Remarque’s name right! It’s not Enrich.

  • Michael BG,

    maintaining control of public finances is neither conservative or reckless. It is what responsible governments do to maintain public service provision and the purchasing power of the nation’s currency. Deficit financing should be limited to the amount of expected nominal GDP growth to control inflation and further spending in an expanding economy should be financed by taxation not borrowing. As the article for this thread notes, inflation comes from both the demand side and the supply side. Demand-pull inflation exacerbates house price inflation and accommodation costs in general. Cost-push inflation in areas like food and energy, in particular, reduce output and can lead to the kind of stagflation experienced in the 1970s.
    The IFS writes “With, in the words of the OBR inflation quite possibly hitting its “highest rate in the UK for three decades” millions will be worse off in the short term. Next April benefits will rise by just over 3%, but inflation could easily be at 5%. That will be a real, if temporary, hit of hundreds of pounds a year for many benefit recipients.”
    Labour shortages appear to be keeping unemployment at low levels for now. The ONS reports record lows in youth unemployment
    With respect to Job guarantees, I think this should be focussed on the long-term unemployed
    As regards WW1 there are many good histories available. The British decision to enter the conflict was prompted in large part by the threat to the maritime dominance of the Royal Navy and trade routes that would arise with a French defeat and German control of Channel Ports in Belgium and France.

  • Peter Martin,

    Kickstart theory is not only applied to monetary policy but also to fiscal policy. It shouldn’t be applied to either. With monetary policy low interests are supposed to encourage business investment and so if they are turned-off by increasing interest rates, then businesses will be discouraged from investing.

    With a fiscal stimulus it increases demand and this extra demand works through the economy (the multiplier), but if the government stops spending this money this removes demand from the economy and deflates the economy.

    Extra government spending is to replace the spending not carried out by the people mainly because they don’t have it any more because they are unemployed but of course it includes the money no longer spent on investment and saved instead.

    It is forecasts, expectations and confidence which influence people’s and businesses’ decisions. If businesses expect demand to increase they will employ more people to produce more and then these people who are no longer unemployed have the money to spend more – a virtuous circle.

  • Joe Bourke,

    When I advocated an extra £40 billion of government spending not financed from taxation for next year, as I did in my article I was not being reckless and I thought I was not being conservative. I may have been more conservative than the party.

    The IFS say the poorest in society i.e. those on benefits are likely to have a real income cut of 2%. This means demand in the economy will be reduced by this real term cut. Also the IFS say this is likely to affect millions of people. Therefore the government needs to spend enough extra next year to at least make up for this decline in real aggregate demand. Even the £46.67 billion I calculate for how much more we are saying we want to spend on top of the government’s spending next year ( looks conservative. 2% of GDP of £2483.14 billion for 2022-23 is £49.66 billion. Your £10 billion looks deflationary.

    My suggested £11.7 billion for one million places on job guarantee and training guarantee schemes does not pay them the minimum wage, it pays them £50 a week on top of their benefits and their travel expenses. I assume this is less than paying them the minimum wage. If not enough unemployed people want to be on these schemes I would open them up to people receiving Employment and Training Allowance. I thought you were bothered about the skills shortage and structural unemployment.

    Looking ahead to 2023-24 I would be looking to increase government spending by 1.4% of GDP and a smaller percentage the following year. These would be on top of the government current plans and not my or the party’s suggested larger government expenditure for next year. My aim would be to get economic growth for 2023-24 from the 1.18% forecast to above 2.6%.

    British foreign policy was often heavily influenced by the balance of power in Europe. However, if wars were really fought because of economic decline we should have fought the USA again as it was them who replaced us, not Germany and the USA should be getting ready to attack China. An example of this I suppose was Japan, who wanted an empire for economic reasons.

  • Michael BG,

    the projected deficit for 2022-23 is 2.4% of GDP and then drops to around 1.7% going forward. Increasing spending by 2% of GDP increases ongoing budget deficits to 3.7% of GDP per year while operating at near capacity. 3.7% is inline with expected nominal growth in the economy.
    UK growth is highly dependent on global growth and inflation is also driven to a significant extent by global prices, the sterling exchange rate and the monetary policy of the US Federal reserve.
    Former Federal Reserve economist Stephen Roach sees only one way to contain US inflation: immediate rate hikes “The longer they defer a more meaningful monetary tightening, the great the risks of stagflation.”
    Michael Hudson, who is one of the authors of the paper referenced in the article for this thread is the author of Super Imperialism “Most economists actually look at economies as if they’re done on barter. And money doesn’t really appear because economists say, “Well, we owe the debt to ourselves, so it doesn’t really matter.” But the “we” who owe the debt or the 99 percent, and the “ourselves” or the one percent that things are owed to in America and internationally (are not the same). Right now, you’re seeing crises erupt throughout the world. Argentina, again, is about to default or repudiate the debt that it owes to the International Monetary Fund…
    “This is why the United States cannot industrialize as long as the house prices absorb this high a rate of income, and as long as the banking sector is supporting this, and as long as the political parties say we will not tax real estate so that all of the rising land value will be able to be pledged to banks to pay interest instead of to pay taxes. Essentially, it’s the (lack of) taxing of real estate in the United States that has subsidized the increase in housing prices, because housing prices are worth whatever a bank will lend to buy a house. If you have to go to a bank, and if they lend more and more and this money isn’t taxed away, the price is going to go up. So you have the government policy, the bank policy, all trying to promote this high diversion of income into paying land rent. Again, this is the exact opposite of what Adam Smith and John Stuart Mill and classical economics and the whole 19th century had advocated. This has priced American labor and industry out of world markets.”

  • Peter Martin 27th Nov '21 - 9:52am

    @ Joe,

    ….and then drops to around 1.7% going forward. Increasing spending by 2% of GDP increases ongoing budget deficits to 3.7% of GDP per year…..”

    And this is because 2 + 1.7 = 3.7 ?

    It might work this way for your local council, whose revenue stream and spending are largely independent, but not for central government which issues the currency as it spends and then collects some of it back in taxation.

    Let’s say the government decided to spend more on increasing the size of the army. It would need new recruits so it would have to pay their wages. Approximately 30% or so of their pay goes straight back to the government. Right away we can see that they aren’t going to cost as much as some might think. I’m not suggesting that soldiers don’t spend money on such things as cars and clothing etc, but, for illustrative purposes we might anticipate that, soldiers being soldiers, they will end up spending a fair chunk of their pay in the pub and alcohol revenue will increase. The money spent will also cover the salaries of extra bar staff who also have to pay tax and spend what is left on petrol for their cars, which is heavily taxed, and so the money in the economy dwindles, transaction after transaction, until it all ends up back with the government. That is unless someone makes a decision to save some of it. This is the government’s deficit in the end.

    You’ll probably point out that you’ve specified an economy operating at “near capacity”. So, hypothetically, in your model, we have lots of recruits joining up who are giving up jobs which pay a similar amount to what they earn in the army. This isn’t at all realistic. Except for the officer class, they are generally recruited from socially deprived areas and so are more likely to be unemployed or working in poorly paid and insecure jobs. This is, of course, why they might want to join up in the first place.

  • Peter Martin 27th Nov '21 - 9:53am


    Government spending generates its own revenue. But it doesn’t mean we can spend without limit. The limit has to be set by the available resources in the economy. Even if , say, we were at the limit, as your model might imply, and we did try to create a larger army we’d end up with increased inflation. This will lead savers to conclude that they would perhaps be better off converting their ££ into something more tangible like tins of beans or bars of gold, or house improvements or whatever. This would produce more spending and even more inflation but the government deficit still would not increase in the simple minded way you are suggesting. Govt spending leads to private spending which, in turn, creates taxation revenue to offset the deficit. But, to repeat, at the price of higher inflation if we are indeed close to capacity.

    So unless you can get your model right I don’t think we need to be too concerned about your warnings of stagflation.

  • Peter Martin,

    the actual deficit is never that forecast. The purpose of the budget is not a priori to determine the precise deficit that may need financing but to assess the tax and spending requirements for delivery of public services and the capacity for public investment with the deficit as a residual, determined by automatic stabilisers and constrained by interest rate/inflation expectations.
    OBR forecasts model the economy on the assumption of stabilising at or near capacity. The more the government spends in this situation the more taxes it needs to collect or borrowing it needs to undertake. Economic growth is forecast to reach near capacity, so cannot grow further in the short-term. The only way to grow the economy is to increase its operating capacity over the longer-term. That requires productivity enhancing investment in infrastructure, research and skills and technological development.
    MMT academics advocate economic models that evaluate the inflationary impact of spending proposals in advance and the reintroduction of price controls on corporations as a means of controlling inflation. See That has been tried before and failed. Inflation is here now and will be for some time. The rate of increase in prices may slow next year, but prices tend not to go back down. Wage increases below inflation cut living standards and hurt those on lower incomes most. Ultimately, high inflation is simply a hidden and regressive tax that desperate governments resort to when they have lost control of public finances.
    Stephen Roach is a former Federal Reserve economist who also served as Morgan Stanley Asia’s chairman during the 2003 SARS outbreak. In his comments linked above he says:
    “The level of aggregate demand is much, much stronger than the Fed had thought when assessing inflation prospects in recent policy meetings,” he said. “So that supply-demand imbalance is going to be persistent. Enduring.”
    He believes there’s nothing lawmakers can do to materially ease its effects. So, the onus is on the central bank.
    “I learned the painful lessons focusing on transitory special factors when I worked at the Fed in the early ’70s, and that was a recipe for disaster,” he said. “The Fed today has really no institutional memory. No policymakers in the control room have any firsthand experience with the types of shocks that we’re seeing right now.”
    That sounds a lot like the UK situation and those MMT academics advocating price controls that were tried and failed in the 1970s as well.

  • Peter Martin 27th Nov '21 - 12:13pm

    @ Joe

    Tax rises might be necessary to prevent inflation and cool an overheating economy. But they don’t do anything much for the deficit. Govt’s don’t borrow in this situation. Everyone else, including the overseas sector, might decide to save which isn’t quite the same thing. But it looks to the causal observer as if it is.

    Of course we can be like the Greek govt which was forced by the EU to adopt such severe measures of austerity that every had no spare money to save. Is this the plan?

    The economy is ultra fragile at the moment. We’ve seen a severe reaction to the announcement of a new and potentially dangerous Covid strain.

    The last thing we need is to finish it off by hiking interest rates. It’s highly irresponsible for anyone to advocate this.

  • Peter Martin,

    the problem with using taxes to cool inflation has been explained by Warren Mosler. He has has written and spoken many times about the dead loss costs of transaction taxes and the way they inhibit transactions (Mosler, Warren. 2013. Soft Currency Economics II. CreateSpace Independent Publishing Platform):

    “A sales tax will inhibit transactions, as will an income tax. … Furthermore, transaction taxes offer large rewards for successful evasion, and therefore require powerful enforcement agencies and severe penalties. They also result in massive legal efforts to transact without being subject to the taxes as defined by the law. Add to this the cost of all of the record keeping necessary for compliance. All of these are real economic costs of transaction taxes.”

    As an alternative he puts forward a real estate tax.

    “A real estate tax is an interesting alternative. It is much easier to enforce, provides a more stable demand for government spending, and does not discourage transactions. It can be made progressive, if the democracy desires.”

    The Greek government was in the position of having the Germans and EU available to assist in bailing out their banks and cutting their debt obligations by 50%. If Greece had to deal with the crisis on its own the outcome would likely have been widespread banking failures and a hyperinflation. Greece today is able to borrow at very low rates of interest to deal with the Pandemic crisis. Contrast that with neighbouring Turkey’s double digit inflation and interest rates.
    Stagflation is difficult to deal with as we know from the experience of the 1970s. But the longer you let it go on the worse the eventual problem becomes.
    Japan’s current account surpluses enable it run sizeable budget deficits without concern for inflation. There is virtually unlimited demand for US dollars that tends to insulate the US from the negative effects of persistent trade deficits. The UK has neither of these features.
    The BofE monetary policy committee has to make the judgement as to interest rate levels and that will require a cautious and gradual approach. Chief Economist, Huw Pil says “provided the jobs market continues to be strong, he thinks interest rates will need to gradually increase in the coming months, to make sure inflation comes back down from current high levels.

    However he points out that the economic picture is still uncertain, so the Bank of England can’t give precise guarantees on what will happen to interest rates, especially further into the future than the coming months. That will depend on how the economy performs. And with high uncertainty, the Bank of England should take a cautious approach to policy, assessing each decision on a step-by-step basis.”

  • Peter Martin 27th Nov '21 - 3:26pm

    @ Joe,

    Warren Mosler may well have his own personal preferences on the levels of taxation and the types of taxation which are most effective but this doesn’t change anything. MMT doesn’t say that we have to have a VAT of 20% or income tax rates of 45% or whatever. It does say that there needs to be an effective system of taxation to give a value to the currency. If the currency’s value is falling, ie we are experiencing inflation, then we need to have more taxation or someone, ie government has to reduce its spending.

    Whatever system of taxation we choose has to be sustainable. The political left tends to have a contradictory view about the rich. On one hand there is a desire to have a more egalitarian society, but on the other there is an implicit need to keep the rich so they can be taxed to ‘provide the money’ for government spending. There’s obviously something wrong somewhere! What do we do when the rich are not so rich any longer?

    Once we see that we don’t need their money in that sense the correct taxation policies are clear enough. We tax the rich more to reduce inequality in society but the real resources to fund the NHS etc still have to be found from somewhere else.

    The division of cost-push and demand-pull inflation isn’t quite a clear cut as you make out. In any case we first have to decide what we mean by inflation. It’s not just that we have price increases. If, for example, we had a major Krakatoa type volcanic eruption we would have several years of bad harvests. Food prices would increase, worldwide, and for everyone. It wouldn’t mean we had a worldwide inflation problem.

    Inflation is the steady and predictable rise in prices and wages from one month to the next. The Covid pandemic is having a similar effect which could last for a year or so but rising prices are to be expected and so we don’t necessarily have an inflation problem. It pays to wait and see for a few months until we see just how bad the new variants thmight be, and if the old ones are finally in retreat.

  • Peter Martin 27th Nov '21 - 3:31pm


    The stern, but kindly, Germans bailing out the spendthrift Greeks might be the EU narrative. Yanis Varoufakis would say it was the German banks which recklessly lent out too much money during the boom times and it was they who needed the bailing out when their loans went sour. So the German government simply transferred the debts of their banks to the Greek Government.

    MMT economists, including Warren Mosler, have always said that the eurozone was a monetary and financial disaster in the making. Covid would have finished it off except that all the usual silly rules were suspended for the duration. The big problem will come afterwards when someone has to pick up the bill! We’ll see how the new German coalition will react to that one.

  • Joe Bourke,

    According to the Budget book (page 37) the current budget deficit for 2022-23 is 0.6% with general government net borrowing being forecast to be 3.3% and this is then forecast to fall to 1.8% of GDP for the following two years. Economic growth is forecast to be 2.1% in 2023, 1.3% in 2024 and 1.6% in 2025 (page 25). With unemployment being above 4.2% and about 2 million people receiving employment and support allowance there is lots of spare capacity during the whole of this period.

    If the government spent £23.4 billion to provide two million job guarantee and training guarantee places why do you think it would be impossible to increase economic growth by 1.42%. One million people extra in work would increase the percentage in work by 2.3%. Do you really think that these extra 2.3% of workers could not increase GDP by 1.42%?

    Indeed as I pointed out aggregate demand is going to fall by nearly 2% based on the IFS forecasts, and so economic growth is likely to be tiny, hence the need to increase aggregate demand using fiscal measures. Economists are divided about inflation and if it is likely to be short-term because of disruptions caused by Covid-19. You suggested we should listen to Nouriel Roubini who states, “Under these conditions, central banks will be damned if they do (increase interest rates) and damned if they don’t … As matters stand, this slow-motion train wreck looks unavoidable.” The best way to deal with stagflation according to most economists is to do nothing in the hope that the causes of the inflation are short-term.

    It you want house prices to decrease, then the government should build more and then market forces should stabilise prices. Taxing people who have extended themselves with the largest mortgage they can afford is not a good policy, it will reduce aggregate demand and may produce a recession.

    While the OBR often talks of limited capacity I don’t recall them saying that the UK economy has reached full capacity since 2010. If this is not true, please provide a link to an OBR report that does?

    Peter Martin,

    I like to think that about 40% of any increase in government spending comes back to government in increased revenue. Then as the multiplier works government revenue increases by a further 40% of this further increase in the size of the economy. 100% is unlikely to come back and I haven’t managed to produce a model to achieve this.

  • Peter Martin,

    Michael Hudson, one of the promoters of Land Value Tax in the paper referenced in this article, considers himself an advocate of MMT

    “…the United States cannot industrialize as long as the house prices absorb this high a rate of income, and as long as the banking sector is supporting this, and as long as the political parties say we will not tax real estate so that all of the rising land value will be able to be pledged to banks to pay interest instead of to pay taxes. Essentially, it’s the (lack of) taxing of real estate in the United States that has subsidized the increase in housing prices, because housing prices are worth whatever a bank will lend to buy a house. If you have to go to a bank, and if they lend more and more and this money isn’t taxed away, the price is going to go up. So you have the government policy, the bank policy, all trying to promote this high diversion of income into paying land rent. Again, this is the exact opposite of what Adam Smith and John Stuart Mill and classical economics and the whole 19th century had advocated. This has priced American labor and industry out of world markets”.

    “If you have to pay 43 percent of your income for rent, then even if the government were to give you all of your goods and services for nothing, all of your food, all of your clothing, all of your transportation for nothing, you’d still have to pay so much money for rent and for health care that you couldn’t compete with labor in Asia or the Third World or even Europe… the only way to cure this is for housing prices to go down. But if the housing prices go down, then the banks will go broke. That’s why Obama said he had to support the banks: because if he’d actually lowered the housing prices to realistic levels, that would enable America to survive, but the banks would go under. Until you’re willing to restructure the banking system, you’re not going to be able to industrialise the American economy.”

  • Michael BG,

    there is a problem of labour shortages in the country not a problem of cyclical unemployment. There is a long-standing issue of structural long-term employment that requires permanent tax financing of apprenticeship and training schemes (that would then act as automatic stabilisers across a cycle) not just a temporary fiscal stimulus.
    I expect most economists will agree with the BofE chief economist that the most appropriate way to manage rising inflation risks is to gradually raise interest rates over time while carefully monitoring the impacts on the real economy.
    The government does need to invest in public housing. which can and should be debt financed. To do so effectively it needs to be able to acquire development land in the right locations at pre-planning consent values i.e. reform of the 1961 Land compensation act.
    The budget books says the OBR expects the economy to return to pre-pandemic levels by the end of 2021 (absent further lockdowns). In 2019, before the pandemic, the Office for Budget Responsibility (OBR) estimated a negative output gap of 0.1 percent

  • Peter Martin 27th Nov '21 - 11:40pm

    @ Joe,

    I was somewhat familiar with Michael Hudson and his book Super Imperialism long before I’d heard of MMT. I was naturally sympathetic to his argument about the FIRE economy (Finance, insurance, and Real Estate) but without being totally convinced. I now see it as a consequence of neoliberalism. ie A reluctance by government to run the deficits and accept the debts that go with running economies like the USA’s and UK’s. So they have pushed the responsibility of shouldering those debts on to the private sector by a process of deregulation and deliberate asset bubble creation which led to the 2008 crash and is probably not finished yet..

    The surplus countries of Germany and the Netherlands haven’t needed to do that so they didn’t follow the same route and they haven’t created the same of FIRE based economies. The snag is that we call all be like Germany and the Netherlands. If they run their large trade surpluses then someone else has to run large trade deficits.

    So whilst LVT may have some merits as a tax it won’t be a solution on its own. We can still have neoliberalism and a LVT too. It won’t stop rentierism.

    It’s a while since I read his book but he came across as a odd mix of Marxist and Georgian. Marx was highly critical of Henry George, so I’m not sure of how he managed that!

  • Peter Martin 28th Nov '21 - 12:03am

    @ Michael BG,

    “I like to think that about 40% of any increase in government spending comes back to government in increased revenue. ”

    It all comes back unless it gets saved. The £ is a monopoly issue of the UK government. An IOU of the issuer. The pound is nothing more than a tax voucher, which is created when government spends them into the economy. The deficit is the difference between what comes back as taxes and what is spent. This must mean that someone somewhere has hung on to those vouchers. They may have stashed some in a safe or a piggy bank. Or they may have been put into the bank and the bank has bought some govt bonds (another type of voucher) with them. They may have done that themselves directly. They could just exists in their purses and wallets.

    The govt’s debt is the sum of all the vouchers, including govt bonds, which haven’t yet been collected in tax.

  • Joe Bourke,

    I stated that my aim was to provide two million places on job guarantee and trainee guarantee schemes over the next two years. I thought this would be clear to you that this is to deal with structural unemployment. As I said the government doesn’t pay unemployed people enough for the so called automatic stabilisers to work.

    You didn’t answer my question, if one million people were trained to take on the jobs we have labour shortages in, do you really think that these extra 2.3% of workers could not increase GDP by 1.42%?

    I stated most economists think that the best thing to do when there is stagflation is to do nothing. You may be correct most economists may believe that the “most appropriate way to manage rising inflation risks is to gradually raise interest rates over time while carefully monitoring the impacts on the real economy”. This of course doesn’t mean they are correct. In fact if past history is anything to go by, if most economists agree on something then there are most likely wrong.

    I agree the 1961 Land Compensation Act should be reformed and it is party policy (passed at conference in September) to do so. You haven’t addressed my point that if you increase taxes on homes this will reduce the spending power of people who own homes.

    The output gap is supposed to be negative (actual production minus potential production divided by potential production). It is difficult to estimate potential production (or output) and the OBR under-estimate it. If a massive re-training programme was initiated then the potential would increase. I don’t understand how potential production can be less than actual production in normal times.

    Peter Martin,

    I know you believe that all money comes back to the government unless it is saved, but it doesn’t, lots of it just keeps on circulating. If no money is circulating then no taxes are paid from it. (The only way I can see your belief being true is if all the people suddenly stopped circulating the money because for example they were all dead.)

    The idea of circulating is a central one to economics. This is why the circular flow of money is central to understanding macroeconomics.

    A government deficit is Savings minus Investment plus Imports minus Exports assuming the economy is in equilibrium.

  • Peter Martin,

    if Michael Hudson looks to the work of Karl Marx and Henry George for his analysis of what ails the capitalist economy, he is probably looking in the right places. The issue of inequality is at the heart of disfunctional modern economies.
    Increasing deficit spending is a powerful tool for aiding recovery from recessions. It loses its effectiveness, however, when overused in economies that are using the bulk of their available resources and begins to generate diminishing returns and ultimately negative returns as debt levels in the economy increase. Monetary policy loses its stimulative effectiveness as interest rates reach the lower bound and begins to produce negative results when accelerating inflation starts to debase the currency and money savings no longer function as a store of value.
    When monetary and fiscal stimulus lose their effectiveness, economies must look to alternative reforms. The tax reform proposals from Hudson and colleagues are just such an alternative.
    The UK is experiencing labour shortages across all sectors of the economy
    These shortages are particularly acute in the Health, social care and education sectors. These staff shortages pre-date the pandemic. There is now a massive backlog in NHS treatment with waiting lists having grown to an estimated 7 million and still growing to a point where a national force of volunteer NHS Reservists is being discussed to address the expected 13 million future backlog. There is an identified need for catch-up funding in schools that will have long-term impacts on the future prospects of young people. The housing and climate change crises also pre-date the pandemic. These are the priority areas that can benefit from catch-up deficit funding over the next few years in line with the growth of the economy.
    Demographics will force a higher proportion of state spending from national income on a ongoing basis as the % of the population in the workforce continues to shrink in size. A higher proportion of state spending means a higher proportion of taxes. That is the reality that we all must face. The issue is how and where those taxes will be levied.

  • Michael BG,

    “if one million people were trained to take on the jobs we have labour shortages in, do you really think that these extra 2.3% of workers could not increase GDP by 1.42%?”

    I think the outcome on growth would be much the same as was seen with over-manning in nationalised industries or the jobs for life tradition in Japan i.e. lower productivity and stagnant growth.
    The increased deficit spending should go to the NHS, local authorities and Education sector to address the staffing shortages in the health sector, social care and schools and to investment in public housing and the transition to net zero.
    The job guarantee program should be tax funded and focused on long-term structural unemployment with a view to equipping people with the work skills required to participate in the economy. The benefits of the job guarantee program is that it allows people to engage in socially useful work while earning a minimum wage and acquire the basic skills needed to live an independent life. It additionally serves as an automatic stabiliser during downturns that adds to the existing fiscal stabilisers in the economy. It should not be expected to generate any significant growth in output when the economy is operating near capacity.
    The output gap can be negative or positive. It is the margin by which economic activity currently exceeds or falls short of its potential or sustainable level. A negative output gap is associated with lower rates of capital and labour utilisation, implying some spare capacity in the economy; a positive output gap is associated with higher rates of resource utilisation and, if sufficiently positive, evidence of ‘overheating’ which would put upward pressure on wage growth and inflation

  • Peter Martin 28th Nov '21 - 10:10pm

    @ Michael BG

    Savings include all the money that is in anyone’s possession. Even if it’s a short time.

    Warren Mosler is making the same point in this tweet:

    I think WM is using the term Public Debt rather than National Debt because, for some reason, some things are arbitrarily excluded from the National Debt like the coinage. But its all debt and should be included.

  • When Warren Mosler refers to the public debt being simply the net money supply, it is true to say that net money supply (i.e. excluding the money supply created in the banking system) is deficit spending that has not yet been retired from tax collections or inflated away over time.
    The broad money supply (in the form of bank deposits) circulating in the economy is represented by cumulative credit instruments created by financial institutions and government deficits. It is expanded by new lending and deficit spending and reduced by loan repayments/settlement and tax collection.
    Gilts are typically rolled over or more recently replaced with short-term debt in the form of bank reserves held by commercial banks (base money). The current UK debt approximates the sum of deficits/surpluses accumulated since around the turn of the century.

  • Peter Martin 29th Nov '21 - 3:56am

    @ Joe Bourke,

    Do you mean the turn of the 21st century? The further you go back the closer the approximation.

    Warren Mosler is including government bonds such as Gilts and US Treasuries in his definition. Although the dollars which were originally issued by Govt have come back, they haven’t come back as collected tax.

    In a totally fiat money system the total public debt doesn’t just approximately equal all the previous deficits it does equal it. A problem arises if Governments don’t keep abreast of the times with their definitions. At one time, what you would term the net money supply wouldn’t be counted as debt because it was backed by gold. Now it isn’t and there is no reason not to include it.

    The Americans don’t include the coinage in their definition of National debt. Why not? It just allows for this sort of confusion:

    Finally, the banks may issue what we call money but it always calibrated against government money. They don’t create any net assets in the private sector.

  • Peter Martin,

    Yes, that should be the 21st Century and the cumulative deficits from 1999-2000 to date. The economist had a good article on debt dynamics in 2011

    “There are two things that matter in government-debt dynamics. The difference between real interest rates and GDP growth (r-g), and the primary budget balance as a % of GDP (ie, before interest payments). In any given period the debt stock grows by the existing debt stock (d) multiplied by r-g, less the primary budget balance (p).

    The simple r-g assumption is one of the most important in debt dynamics: an r-g of greater than zero (when interest rates are greater than GDP growth) means that the debt stock increases over time. An r-g of less than zero causes it to fall.

    The UK (and USA) were able to reduce large WW2 debts via negative real interest rates
    that amounted on average from 3 to 4 percent of GDP a year

    In plain language, post-pandemic we will likely see low interest rates maintained and higher inflation akin to the post-war period for sometime going forward.

  • Peter Martin 29th Nov '21 - 11:10am

    @ Joe,

    The r-g relationship was the main thing I remember from reading Piketty’s book Capital. I can imagine Warren Mosler saying something like: “So what if Govt Debt increases? It means that everyone else is choosing to save more. Aren’t we always preaching the virtues of thrift?”

    That’s fine for you and I of course but thrift comes with its own paradox. It means that if we are being thrifty then governments have to do the opposite. Michael Hudson seems to have moved somewhat in this direction since he first wrote Super Imperialism. He was critical, at one time, of the USA becoming a “debtor nation”. The whole tone of the book was that this resulted from the USA being unfair in forcing everyone else to lend it back the dollars they had accumulated from their net exports to the USA.

    From an MMT POV, and probably a Free Trade POV too, this isn’t at all true. No-one is forcing the big net exporters to not buy US products in return. No one is saying they have to attempt to tilt the table by currency manipulation and the application of tariffs.

    But anyway he now does seem to be closer to MMT but maybe he’s not quite there yet! He’s far enough in the right direction to not be in total agreement with Piketty though. Not that I’m saying that Piketty doesn’t have his good points. He acknowledges that wealth is largely inherited and that we need to tax it. A problem arises when the holders of the wealth are based overseas. Even the Isle of Man is ‘overseas’ for tax purposes! If the Govt wants to get serious then it has to do something about UK controlled tax havens and campaign for other to do the same. Monaco, Lichtenstein, San Marino, Andorra and even Switzerland and the Vatican, can only do what they do with the consent of the EU.

    A LVT can go some way towards a solution but it won’t be a solution on its own. It needs to be part of a wider crack down on tax evasion. I haven’t heard you mention tax havens. It’s all about LVT – according to you.

    You might be interested in this:

  • Joe Bourke,

    I am almost speechless. It is unbelievable that someone who shares the liberal view of humanity can believe that if people are given the training to do the jobs where we have skill shortages it would result not in these people doing the jobs where we need people but would result in employers recruiting more people than they need so their businesses are over-manned.

    Why do you think that these newly trained people would be employed to over-man businesses rather than to do the jobs they are trained to do?

    Only two sentences later you wrote, “The job guarantee program should be … focused on long-term structural unemployment with a view to equipping people with the work skills required to participate in the economy!” (This is what I am suggesting.)

    This statement of yours is inconsistent with your view that providing the training and work skills need will only result in over-manning. If you can, please explain this?

    It seems you don’t consider helping the unemployed any sort of priority. Liberalism to be meaningful has to deal with the issue of millions of people wanting to work who can’t get a job. Liberalism has to be for everyone.

    If more people are needed to train to be nurses, doctors and teachers then the government needs to encourage people to take up these careers by increasing the number of training places and abolishing loans to pay for the courses in exchange for a number of years’ service. Maybe something like five years for a teacher, seven for a nurse and ten for a doctor. To encourage people into social care wage levels need to be substantially increased and better terms and conditions provided. This will need huge amounts of money to fund.

    If we can get about half of the people currently unemployed or receiving employment and support allowance into work then about 1.7 million more people would be in work than now. They would provide taxes and save the government benefit payments. Their extra spending would also grow the economy.

  • Joe Bourke (cont.)

    If a fiscal stimulus works in a recession then it will always work if there is enough spare capacity in the economy. The idea of diminishing returns is interesting because the propensity to consume decreases and the propensity to save increases as people’s incomes increase. However, if the fiscal stimulus is targeted to areas of high unemployment and providing unemployed people the training and skills required this is less likely to happen because unemployed people have a higher propensity to consume than the average person.

    If interest rates are so low to effect the average person’s propensity to save this is a good thing if more demand is needed in the economy. The issue with monetary policy is that it increases the spending power of the richest in society who have the lowest propensity to consume. Instead they buy assets, which leads to asset inflation.

    Peter Martin,

    If you accept that money is either paid to the government or not paid to the government and money in circulation should also be called savings then you can say, all money comes back to the government except that which we are treating as savings. This is not the same as saying all money comes back to the government in taxes.

    All government debt are the savings of other people. (Except of course when it is held by the central bank then it doesn’t really count as money.)

    All government deficits make up the current national debt. There is nothing new in saying this.

  • Peter Martin 30th Nov '21 - 7:55am

    @ Michael BG

    “All government deficits make up the current national debt.”

    Yes, this is true, and no, it isn’t new but it appears not to be true if we don’t include issued money, via the QE smoke and mirrors trick, as debt. At one time the monetary base wasn’t considered to be debt because it was backed by gold. Now it is and so it should be included. The same for the Americans and their coinage.

    All money comes back to government as taxes, eventually is the usual way of putting it. In practice some is lost forever for a variety of reasons. So if it doesn’t come back this way it can be included as savings. Of course Govt knows when someone buys a bond that this is savings money rather than tax money. It doesn’t know about the money that might be squirrelled away in safes and piggy banks or lost down the back of the sofa.

    It doesn’t really matter. It’s all the same. It can be spent by Government subject to the usual proviso of not causing excessive inflation.

    I wouldn’t agree that training extra workers would result in overmanning but they probably will not be as compliant as you’d like them to be. For example, we could train more nurses but not all of them would actually take to their new role. Employers aren’t always looking for particular skills when they are recruiting. They are, though, usually looking for someone who has a decent work record and will turn up regularly! This is the first requirement.

    So, a nurse who is looking for a new job will be in a much better position to find one that someone who has been unemployed for a long period even if the new job doesn’t require any nursing skills. I think we just have to accept this will happen to some extent, but, of course, if staff turnover is too high then this is a sign that something is wrong somewhere.

  • Peter Martin,

    I don’t think it is useful to say that all money goes back to the government when it isn’t true. If you start your economic theory with something that can be seen as untrue you have lost someone who you could educate to understanding how the economy really works. Therefore as it isn’t true it can’t be used to argue this is why the government can spend as much as they want subject to causing inflation.

    I am not convinced that money backed by gold should not be considered as a loan. A person is given a piece of paper in exchange for gold, it looks like a loan to me. When they want the gold back they give the piece of paper back in exchange for it.

    I am not bothered what job someone takes after being on a government guaranteed job and/or training scheme. The aim is to get them into work. Indeed, employers prefer people with a full history of being in work, but if there are labour shortages in the area they want to recruit then they will have to consider those who don’t have the work history they would prefer. This is why having full employment is so important. It is a strong factor in getting employers to employ those who find it hard to get work. Having been on a job guarantee scheme is a way of gaining better recent work history. I would if I felt it necessary consider both a carrot and stick to encourage businesses to employ those people who find it hard to get employment.

  • Job guarantee programs are minimum wage jobs to provide work skills. Nursing and teaching are skilled occupations requiring commensurate pay. Applications for places on nursing courses have risen by almost a third (32%) to reach 60,130 this year A similar surge in applications has been seen for teacher training courses with the number of applications 42 per cent higher than the same time last year
    This is where the training budgets need to go for nursing and teaching bursaries . A qualified nurse or teacher does not require job guarantee programs to find work. Social care workers are largely in the private sector in predominantly smaller family run businesses. Local authorities need to be able to pay sufficient rates to allow social care workers to be paid a higher wage and receive adequate training. That means increasing social care budgets not pouring money into make work projects in the form of job guarantees while starving NHS ans schools training budgets and local authority social care budgets.
    Job guarantee programs require overmanning i.e. employment in jobs that would not otherwise be done were it not for a government supported program. The benefits are to society as a whole in having long-term unemployed retain work skills and kept in touch with the labour market while providing an automatic fiscal stabiliser during downturns.

  • Peter Martin 30th Nov '21 - 10:46pm

    @ Michael BG,

    Money is issued by the government when it spends it into the economy. Some of it gets returned in tax quickly, some much more slowly. Maybe it’s out there for a few years or even decades. A friend of mine has a collection of old bank notes which he’ll probably never spend. I have some pre decimal coins which are worth more than their face value so they’ll never be returned to the government as tax.

    If reports are to be believed, some Oxford students deliberately burn banknotes in front of homeless people. That’s the end of that money. That money won’t go back to the govt in tax either. However it wouldn’t make any difference if it did. The BoE routinely burn or shred lots of banknotes themselves.

    If we have a gold standard the banknotes themselves are liabilities so can be considered a debt by the issuer. The gold itself is the asset which is kept safely in a vault. If the bank holds the gold on a 1:1 ratio, the assets and liabilities match exactly. They net to zero.

  • Peter Martin 30th Nov '21 - 10:59pm

    @ Joe,

    “Job guarantee programs require overmanning i.e. employment in jobs that would not otherwise be done were it not for a government supported program.”

    There are lots of people doing jobs which wouldn’t be done without government support. Like MPs, the entire armed forces, the civil service, everyone working in the NHS…..

    In addition there are many working for companies in the private sector who wouldn’t have a job if government hadn’t given out contracts. Like all the workers who are building HS2 and Crossrail. All the workers in shipyards who are building submarines etc for the navy.

    This is one of your more nonsensical statements!

  • Joe Bourke,

    It was you who wrote, “The UK is experiencing labour shortages across all sectors of the economy … These shortages are particularly acute in the Health, social care and education sectors.” I have been talking about job guarantee and training guarantees to deal with the other labour shortages.

    Now you are suggesting that any shortage might only be until the increased trainees are qualified, which I suppose for students doing a PGCE is a year but for nurses is three years.

    Most social care is provided by private businesses but a majority is financed by local authorities. And it is how much local authorities have to spend which is a huge factor in how much these private businesses can pay as wages and the terms and conditions they can offer. I didn’t suggest that job guarantees should be used to train people for social care jobs. I stated lots more money is needed for social care.

    I think it is disingenuous of you to write comments addressed towards me which implied I wrote things I didn’t write.

    You wrote, “Job guarantee programs require overmanning i.e. employment in jobs that would not otherwise be done were it not for a government supported program”.

    When you wrote, “I think the outcome on growth would be much the same as was seen with over-manning in nationalised industries or the jobs for life tradition in Japan i.e. lower productivity and stagnant growth” is it not an answer to my question, “if one million people were trained to take on the jobs we have labour shortages in, do you really think that these extra 2.3% of workers could not increase GDP by 1.42%?”

    If it isn’t an answer (which I hope it isn’t), when please will you answer the question, “if one million people were trained to take on the jobs we have labour shortages in, do you really think that these extra 2.3% of workers could not increase GDP by 1.42%?”

  • Michael BG,

    “if one million people were trained to take on the jobs we have labour shortages in, do you really think that these extra 2.3% of workers could not increase GDP by 1.42%?”

    The answer is no. Economics is not accounting. These are non- linear relationships (parabolic curves) When any factor of production is overused the law of diminishing returns kicks in. As debt levels grow the amount of extra GDP per pound of debt falls and eventually becomes negative. According to Dr Lacy Hunt, the current inflation will be followed by deflation. Today’s core problem is that excess debt suppresses economic growth, without which demand can’t rise enough to generate inflation or push up interest rates over the medium term. This is a structural problem, which at this point we really can’t fix Adding more debt will not raise GDP, it will decrease it.

    “If you do not have saving out of income, you cannot get sustained growth in investment. Without sustained growth in investment, the standard of living does not rise.”
    Lacy agrees we could see some transitory inflation this year. He doesn’t see it lasting long, and Fed policy doesn’t especially matter. We are beyond that point.

    “If the Fed wants to raise interest rates, they can slow economic activity down. However, when economies become extremely over-indebted and debt levels are rising very dramatically, the velocity of money falls. And that keeps shifting the aggregate demand curve inward. The fact of the matter is there is no mechanism other than for a very limited period of time by which the inflation rate can go higher.”

    “In other words, as long as excess debt is pushing velocity lower, aggregate demand will keep falling. Sustained, broad inflation is impossible under those conditions—though there could well be temporary inflation in certain segments.”

  • Peter Martin 1st Dec '21 - 9:14am

    @ MichaelBG,

    Could 1 million extra workers increase GDP by 1.4%?

    GDP is about £2 trillion. So to meaningfully increase GDP by 1%, each worker would have to generate £20k. So 1.4% would be £28k. So, possibly not.

    But, this isn’t the issue. Currently the system demands that nearly everyone must work, in a reasonably well paid job, to have a decent standard of living. However, the system is rigged to ensure that there aren’t enough of them available. The rest have to get by on social benefits and not so well paid part-time and insecure jobs. The reason for this is to prevent those workers who are reasonably well paid from having too much bargaining power and becoming even more well paid! In other words, to prevent inflation.

    The idea of the JG is to have a buffer stock of employed labour rather than buffer stock of unemployed labour.

  • Peter Martin 1st Dec '21 - 9:43am

    @ Joe,

    “Economics is not accounting.”

    I’m not sure why economists say such things. If economists learned to do handle numbers that too they might actually make a better job of it and with fewer mistakes!

    “Adding more debt will not raise GDP, it will decrease it.”

    Are we talking about private or public debt? The usual mechanism to increase private sector spending is to reduce interest rates to encourage everyone to save less and borrow more. Borrowers are almost always spenders. But it can only be spent once. Once the stimulus wears off then Fisher debt deflation kicks in as spending power is reduced. Is this what Lacy Hunt means? Then we have to have another reduction to create a new stimulus to compensate for the debt deflation caused by the previous rounds of credit creation. This is why interest rates are ultra low.

    Interest rates can’t go any lower at the moment unless they go negative. That would create a weird cashless world. For example, instead of suppliers wanting their customers to pay promptly they want them to delay to avoid having to lose money in their negative rate bank accounts. Hardly anyone thinks negative rates are a good idea except some weirdo economists. Probably the ones who haven’t learned to count!

    But we don’t need lower rates at the moment. Neither do we need higher rates. That is unless we want to create a whole lot of debt defaults and crash the economy!

  • Matt Wardman 1st Dec '21 - 9:56am

    I have not read all 124 posts :-), however:

    1 – I note that our inflation remains low by international standards (eg Eurozone = 4.9%), as does our unemployment level.

    2 – I think the answer to increasing GDP is to invest to make up the producivity deficit we have in too many areas of our economy. Opening up to cheap labour will not achieve that.

    Industry has not yet adjusted I think, and industry bodies imo spend far too much time complaining.

    I think there is also a lot to be done wrt the large amounts available to be invested in apprenticeships, which I think are already of the order of several £bn per year.

    3 – I’m not ready to call “labour shortages” yet, as I am not convinced that we are back in a comparable position. There is still much rebalancing to be done after the end of furlough, much to learn about demand for temporary overseas workers etc.

    4 – Agree on the need for significant tax reform, and I am disappointed that it has not happened. That about £10-15bn has been spaffed away on inflating house prices, and giving free money to richer people in society via the Stamp Duty Holiday, is a disgrace.

    That’s not much less than would have been needed to complete HS2 NE, which would have given us the huge benefits of getting people out of aeroplanes on internal flights, transferring freight to rail etc. Now none of that will happen.

  • Matt Wardman 1st Dec '21 - 9:58am

    PS Does anyone have any numbers on HGV drivers.

    That there is no media reporting suggests that this has improved, as UK media do not report success in general.

  • I agree that job guarantees for long-term unemployed are a useful supplement to the social safety net (as is a guaranteed minimum income), but do not think we will see any lasting increase in output from such programs when we are near an unemployment level of circa 4%. . There may be an initial increase in GDP from spending on job guarantees that inflates the figures for a quarter or two. But that will be followed by a flattening and then finally a decline in output . This is what the empirical evidence shows happens when you have high levels of debt in an economy including corporate and public debt (See page 4 of linked newsletter for scholarly research) That is why the job guarantee program needs to be tax financed initially as are other social security programs and can grow or contract automatically with the state of the economy.
    Debt financing has to be applied to productive investment that generates economic returns or utility greater than debt service costs over the time period of the investment. In the absence of such returns you ultimately get what Minsky called ‘Ponzi’ finance i.e. borrowing simply to cover debt service costs. The same principle applies whether it is household debt, corporate debt or government debt. Debt levels rack-up during deep recessions and need to be whittled down as a % of GDP during periods of economic recovery to avoid the kind of instability that Minsky warned off and the erosion of living standards by way of inflation or debt deflations.

  • Peter Martin 1st Dec '21 - 4:11pm

    @ Joe,

    “The same principle applies whether it is household debt, corporate debt or government debt.”

    Not really.

    Households and corporations cannot choose their own interest rates. Interest rates are outside their control. If they rise sharply, they find that interest rates are more than they budgeted for and, in the worst case, can be forced into default. The UK Government/BoE can and does choose its own rates. If it can have any level of interest rate that it likes as we’ve all seen for ourselves in the last decade or so. So it would only raise rates as a matter of conscious choice

  • Peter Martin,

    The BoE can set short-term rates with monetary policy. Longer-term rates are influenced by fiscal policy and as inflation rises the rate required to secure borrowings increases. The central bank does not create economic conditions, it reacts to them. Short-term rates were reduced in reaction to the financial crisis not before it. Long-term rates were bid down by buyers after the crisis in a flight to safe investments. That is why German bonds are offered at 0.5% negative interest rates while Turkey’s bonds require 20% yields to attract buyers. If you don’t want your citizens to have the ability to invest outside of your own country then you have to impose capital controls, as was the case during and after WW2 until 1979. This kind of yield curve control can also spur companies to increase their already heavy debt loads, while punishing pension funds and other savers.
    The BofE will likely raise rates in the new year if inflation goes any higher and unemployment stays low. The longer-term rates for bonds will be determined by market forces. If ,like Japan over the past three decades, we return to a low growth, low inflation environment in 2022 then long-term interest rates will remain depressed regardless of any attempt at fiscal or monetary stimulus. Conversely, if we are able to bring-up productivity to levels comparable with Northern Europe and the US through strategic investments and tax reform then we will have the prospect of returning to a higher trend rate of growth for a time until we catch-up and level off in accordance with the Solow model of economic growth. If the economy is growing again then bond yields/borrowing costs will start to rise as they did before the pandemic struck.

  • Joe Bourke,

    You have decided not to answer the question in a general sense but now link to an article which says debt levels and deflation are the problem therefore the economy can’t grow. The article you link to is not trying to answer my question and it is odd that you try to use it to justify your answer. Your answer is inconsistent with, “The job guarantee program should be … focused on long-term structural unemployment with a view to equipping people with the work skills required to participate in the economy!”

    It would seem from this that you believe that if an individual goes on a Guarantee Job or Training scheme they can be equipped with the necessary work skills for them to be a productive part of the economy, but if more than a few people are on these schemes then something different happens and they can’t become a productive part of economy even as my question clearly states they are employed doing a role which could not be filled until they applied for it because of the labour shortage. I hope you can understand why I think you are being disingenuous. Please can you explain why if someone who was unemployed is employed in a new role they do not increase total production? (Please don’t talk about it could be a role that doesn’t increase GDP. It would be disingenuous because it doesn’t answer the question within the terms it is being asked.)

    It seems that Lacy Hunt is just saying that sometime in the future the debt bubble will peak and this will cause a downturn (not deflation for some reason). Looking at those dates, it seems to be that all of them (1838, 1873, 1929-30, 2008-09) were times of high private debt and it is this private debt bubble that burst. I can’t see how this relates to job and training guarantees provided by the state. The 2008-09 crisis shows that governments can take on the debts of banks and at the same time use fiscal measures to stimulate the economy. (Doesn’t Gordon Brown claim the credit for getting this agreed [October 2208] by the G7?) This article is inconsistent with your view that inflation is the problem and we will have stagnation.

  • Joe Bourke, (cont.)

    If demand can’t increase because people have too much debt then the government needs to spend into the economy and this extra demand will increase production and GDP. If unemployed people get back into work their spending power will increase, this will increase production and we are in a virtuous circle.

    Indeed, the velocity of money has decreased, but lots of this decrease was caused by lockdowns because of Covid. Savings have also increased because of Covid. And Covid is not even mentioned in this article. Peter Martin, me and the OBR all predict that some of the money saved because of Covid will be spent into the economy.

    Peter Martin,

    I agree that 1.4% of £2 trillion is £28 million. However another way of looking at it is that 32.5 million people produce £2 trillion, therefore one million can produce £61.538 billion of goods and services. This averages out at £61,538 per person.

    The point is that both you and I reject the idea that we should have a “buffer stock of unemployed people”. We therefore advocate policies of full employment and reducing structural unemployment so people are only unemployed when changing jobs – frictional unemployment.

  • Michael BG,

    the answer is no. Job guarantees are unlikely to increase GDP when unemployment is at 4%. It is more likely that the negative multipliers that Dr Hunt describes and references with research reports, will result in reduced overall activity. He writes:
    “Money and debt are created simultaneously. If the debt produces a sustaining income stream to repay principal and interest, then velocity will rise since GDP will eventually increase beyond the initial borrowing. If advancing debt produces increasingly smaller gains in GDP, then V falls. Debt financed private and governmental projects may temporarily boost GDP and velocity over short timespans, but if the projects do not generate new funds to meet longer term debt servicing obligations, then velocity falls as the historical statistics confirm”.
    Dr Hunt points out that he expects inflation to increase in the short-term and output to slow (stagflation) before returning back to low inflation levels in the future and possibly deflation. He notes that “the acceleration in debt relative to GDP has correlated closely with the sustained decline in the velocity of money from its peak value of 2.2 in 1997 to 1.12 today. Further, in 2000 the growth of real per capita GDP began to decline relative to its long-term growth trend, again reflecting the law of diminishing returns on the overuse of debt. The U.S. appears to be walking the same economic path of the Euro Area and Japan due to the growing indebtedness, shrinking real per capita GDP growth and declining money velocity”.
    That does not mean that long-tern unemployment should not be addressed, just that is comes with a fiscal cost as do most social security programs. We don’t pay benefits to increase output. We pay them to assist people in need.
    State Job guarantee programs are not required for areas where there are labour shortages. Private sector employers can and do provide apprenticeships and training where required and government support for private sector apprenticeship and training scheme are in place.
    Job guarantees require the creation of jobs that would not otherwise be done in the private or public sector were it not for the job guarantee program. Clearly where there are labour shortages this indicates that such jobs will be done whether or not there is a job guarantee program. They just need sufficient people to apply for training to fill the posts and this may require paying higher wages not minimum wage job guarantees.

  • Peter Martin 1st Dec '21 - 10:28pm

    @ Joe,

    “The central bank does not create economic conditions, it reacts to them. ……….. Long-term rates were bid down by buyers after the crisis in a flight to safe investments.”

    “The longer-term rates for bonds will be determined by market forces.”

    You know this isn’t true and that the supposedly independent central banks themselves, the BoE, ECB, the US Fed etc were the main buyers who forced down interest rates during recent times of crisis. The BoE didn’t decide, of their own volition, they need to own £700 bn or so of Govt gilts because they needed “safe investments”.

    It’s an even more ludicrous suggestion in a European context. The ECB decided they needed a safe haven for their euros so they swapped hundreds of billions of them in exchange for Italian and Greek bonds. Who else would want to buy them? Who are you trying to kid? Come on, Joe, get real!

    If Govts want longer term interest rates set by market forces they have to instruct their central banks to keep out of the bond market.

  • Peter Martin 1st Dec '21 - 10:48pm

    “Job guarantees require the creation of jobs that would not otherwise be done in the private or public sector were it not for the job guarantee program.”

    So what’s wrong with that? It’s not “overmanning”. We all agree that we need, for example, more trees being planted. So we employ people to plant trees as part of the JG program. We get the trees, that otherwise would not be planted, and those in need of a job get an income. Its a win-win situation. There are lots of other examples of jobs that need doing but otherwise wouldn’t be done without a JG program being in place: Restoration of neglected parks and other public spaces. Helping out older people to cope at home for longer rather than being moved into expensive care. Running youth groups for young people. For more suggestions, see section 8 of:

  • Peter Martin,

    this is from the Govenor of the Bof E“Monetary policy cannot solve supply-side problems – but it will have to act and must do so if we see a risk, particularly to medium-term inflation and to medium-term inflation expectations,”
    “And that’s why we at the Bank of England have signalled, and this is another such signal, that we will have to act,” he said. “But of course that action comes in our monetary policy meetings.”

    Note this is “will have to act” not “may choose to act” if they feel like it. Central banks respond to economic conditions they do not set them.

    The US Federal Reserve is also responding to economic conditions by keepig out of the bond market The Chair said ” “The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases… perhaps a few months sooner.”

    Germany has an inflation rate of 6% and its 4.9% across the Euro area putting pressure on the ECB to act. Is Germany choosing to pay a negative yield of 0.5% on its ten year bonds because it wants 6% inflation? Of course not. It has negative yields because there is too much demand for German bonds.

    Central banks in countries such Poland, Norway, Romania, Russia, Sri Lanka and New Zealand have already raised interest rates in recent months in response to global economic conditions.

    There is nothing wrong with job guarantee programs to do socially useful work. But these programs are done to help people into needed work in the private or public sectors not because we suddenly decide that we need more trees planted or decide to pay people to increase such voluntary activities. It is planned overmanning that we choose to do for the future benefit of those on the program.

  • Peter Martin 2nd Dec '21 - 8:44am

    @ Joe,

    The Governor of the BoE will be chosen because he goes along, at least to some extent, with the so-called New Keynesian, NK, view (NK should actually be Not Keynesian) that the primary regulatory mechanism in the economy is monetary rather than fiscal policy. So if he’s given the job of hitting an inflation target of 2%, when inflation is higher, what else can he do but raise interest rates? Previous governors have had the opposite problem. Inflation, and growth, have been deemed to be too low so they’ve had no other option but to lower them to almost zero.

    It’s been a policy designed, by Govt and not the BoE, to encourage private sector borrowing and discourage private sector savings. If the private sector is saving less then the government sector is borrowing less too. This has worked temporarily, but at the cost of creating far too much private sector debt. The snag is that it doesn’t work the other way around. If interest rates are raised there will be less private borrowing and more private saving meaning that the Govt will be doing more borrowing. The deficit will rise.

    The NK economists will then make the mistake of cutting Govt spending and raising taxes to attempt to reduce it. So we’ll have a situation where both monetary and fiscal policy is too tight and we’ll see the economy crash. Instead of the economy floating on a sea of private debt it will be sinking under the waves of bad debt. There’ll be a panic with even less private sector borrowing and more private sector saving meaning that the Govt’s deficit will soar like it did after the 2008 GFC.

    Then the BoE had room to lower interest rates by 5% to discourage saving. They won’t be able to do this next time. See the graph on the link below.

    I should imagine that Andrew Bailey, and most Central Bank Governors, are well aware of the problem and are looking for any excuse not to raise interest rates at the moment. They’ll be making the most of the emergence of the Omicron variant.

  • Peter Martin 2nd Dec '21 - 1:23pm

    @ Joe,

    “Germany has an inflation rate of 6% and its 4.9% across the Euro area putting pressure on the ECB to act. ”

    Many are attributing our relatively high inflation rate (4.2%) to Brexit. Perhaps they are understating their case? It looks like it has had an even worse effect on Germany! 🙂

    “Is Germany choosing to pay a negative yield of 0.5% on its ten year bonds because it wants 6% inflation?”

    German inflation may be slightly higher than the EU average. 1.1% according to your figures. It’s never going to be much different. If prices tend to be higher there than in the rest of the EU, there will be an increased flow of imports as exporters in the EU move to take advantage of higher prices. That’s a good thing. The only way for countries like Greece and Italy get the euros they need, other than by borrowing them, is to export to the rest of the EU and the surplus counties in particular.

    So to answer your question it is ‘no’. Germany is paying a negative rate to discourage capital flows into the country. The current account and capital account sum to zero. So it can’t have a surplus in its current (trade) account and its capital account. It needs to export capital and so have a deficit in that. The inflation issue is secondary.

    In any case, German monetary policy is largely outside its own control. That’s been handed over to the EU. The ECB has to, or should, take a view on what is best for the EU as a whole rather than just for Germany. German fiscal conservatives have a problem accepting that!

    The big problem for both us and the EU at the moment is the high price of imported gas which is mainly the result of political tensions between the EU and Russia. Raising interest rates isn’t going to do anything to reduce those tensions or produce any extra supplies of gas.

  • Matt Wardman,

    Haven’t governments for over 50 years been saying they have been encouraging businesses to invest to increase productivity? What could the government do which is new and is likely to work?

    Joe Bourke,

    How can you believe that if thousands more people were employed doing jobs which have been impossible to fill this will not increase GDP? Having more people in productive jobs increases GDP. How can you argue otherwise?

    You seem to be unable to answer the question, “if one million people were trained to take on the jobs we have labour shortages in, do you really think that these extra 2.3% of workers could not increase GDP by 1.42%?” As Peter Martin has pointed out you seem often to answer a different question, one which was not asked.

    Now you don’t seem to be able to answer, “Please can you explain why if someone who was unemployed is employed in a new role they do not increase total production? (Please don’t talk about it could be a role that doesn’t increase GDP. It would be disingenuous because it doesn’t answer the question within the terms it is being asked.)”

    You seem to want to answer a question about job guarantees increasing GDP that I didn’t ask. It would be pointless to ask you such a question because you don’t seem to understand that increased spending results in increased production (where the capacity to increase production exists) and hence increased GDP. This is a basic feature of understanding how the economy works if you wish to understand Keynesian economics.

    You now seem to be saying that the government should not try to do anything about structural unemployment. The evidence of labour shortages is the evidence that the private sector does not provide the necessary training to meet their demand for workers. Many UK businesses recruited from abroad rather than train UK people. This is why the government has to be proactive.

    Your understanding of Job Guarantees is not the same as mine. Yours often looks like workfare, mine never does. With voluntary Job and Training Guarantee schemes people would not go on them if they believed that once trained and having acquired the experience they would not be paid a wage they required.

  • Michael BG,

    these are schoolboy arguments. We were at full-employment before the pandemic with employment down to 3.8% and OBR forecasts are based on full-employment levels.
    To get more agricultural workers onto farms or meat processing factory workers to work night shifts requires offering better pay and conditions. The government is not involved.
    Keynesian economic is not about straigt-line suppy and demand graphs it is about the real world. In the real world ceteris paribus does not apply it is rather ca case of mutatus muatandis.
    When you are presented with conflicting evidence you resort to claiming that others cannot understand econcomic – “you don’t seem to understand that increased spending results in increased production (where the capacity to increase production exists) and hence increased GDP.
    You answer the point yourself – at near full-employment (i.e. when there are widespread labour shortages) the capacity to increase production does not exist.

  • Peter Martin 3rd Dec '21 - 10:15am

    @ Joe,

    “……these are schoolboy arguments. We were at full-employment before the pandemic with (un)employment down to 3.8%”

    They aren’t. We don’t have 96.2% of the workforce working the hours they would like. Someone working for two weeks in a year full time but with nothing the rest of the time, is counted as unemployed for 97% of time. Someone working just one hour per week isn’t counted as unemployed at all. If they would like 35 hours they too are unemployed for 97% of the time.

    In addition many potential workers are looking for work but don’t qualify for any benefit so don’t register as unemployed.

    You may claim that the UK definition of unemployment meets some arbitrary international standard but it doesn’t meet any rational scientific standard.

  • Peter Martin 3rd Dec '21 - 10:40am

    @ Matt @ Michael BG,

    “..the answer to increasing GDP is to invest to make up the producivity deficit we have in too many areas of our economy. Opening up to cheap labour will not achieve that.”

    Matt has answered the question that has supposedly “puzzled” many highly paid mainstream economists.

    If you take a look on youtube you’ll see the latest agricultural technology for harvesting crops. Google {roboveg youtube} to see some examples.

    But, these machines aren’t cheap. So if you’re a grower of vegetables you’ll be less likely to want to invest in one if there is a plentiful supply of cheap labour. At least that’s the way any rational person who look at it from a strictly economic perspective.

    It’s not just co-incidence that low productivity has coincided with low wages and a plentiful supply of overseas workers. There’s should be no puzzle at all. It’s not that hard.

    Maybe it’s more a case of pretending to not understand something if your job depends on it?

  • Joe Bourke,

    You just can’t bring yourself to answer my question within the terms it is asked. Within my question is a condition which you have recognised – “where the capacity to increase production exists”. Therefore to claim that you can’t answer the question because we are at full employment denies the conditions of the question.

    Do you really believe that the £20 a week those claiming Universal Credit and Tax Credits received had no effect on GDP? Do you really believe than none of it was spent on things produced in the UK, which wouldn’t have been purchased if the people had not received the extra money?

    It is your denial of this real world condition which allows me to write that you don’t seem to understand that Keynesian economics is based on the idea that increased spending results in increased production (where the capacity to increase production exists) and hence increased GDP. If you understood this you only needed to write that you did understand this aspect of Keynesian economics. Instead you reject the idea of people putting conditions to their questions and talk of mutatis mutandis to justify your not answering my questions within the terms they are asked.

    I have never understood why you have such difficulty in answer people’s questions. Perhaps you will explain why you have such a problem with engaging with people on their terms?

    I don’t understand why you talk of unemployment at 3.8% when it is at 4.3% and predicted only to full to 4.2% in 2024 and beyond, leaving 0.4% of people who were working according to you in 2020 unemployed. That is 172,520 real people who you believe can’t be productive members of society with your mistaken talk that the economy is at full capacity. Also the OBR make assumptions and one of them is that those who are structurally unemployed can’t be productive members of society as well. You are making the same mistaken assumption.

    Peter Martin,

    I assume that most people (and the government) understand that if a business invests in modern machinery they can increase their productivity. However, the question is how do governments encourage businesses to do the investment?

  • Peter Martin,

    “You may claim that the UK definition of unemployment meets some arbitrary international standard but it doesn’t meet any rational scientific standard.”

    The Labour force survey is indeed based on comparable international standards that allow for comparisons across countries and time periods. The simple fact is that the workforce is made-up of a large number of people with different preferences for flexible and part-time working, including students seeking a few hours work to mothers with schoolage children and retirees looking for a few hours to supplement pensions. A rational scientific standard takes into account diversified needs and the basic fact that people are not little pegs to be herded into standardised job program or involuntary national service programs to meet some ideological goal based on anecdotes that fly in the face of real evidence on the ground.
    The job guarantee program is well defined by Pavlina Tcherneva – to provide a voluntary employment opportunity in public service to anyone who needs it. It is a permanent, central government funded, and locally administered program that supplies voluntary employment opportunities on demand for all who are ready and willing to work at a living wage. She estimates the cost of the program in the US to be between 0.8% and 2% of the GDP. The program has a counter-cyclical component when unemployment is rising as a consequence of falling aggregate demand and is hence a useful addition to automatic fiscal stabilisers.
    Labour shortages will be met by reallocation of people from industries that have a surplus of labour to those with a shortage over time i.e. market based reallocation.
    A JG policy can only supplement an established social security system. It is not a panacea for solving poverty and unemployment alone (Tcherneva, 2018).

  • Michael BG,

    there is no evidence of lack of demand in the UK. The current high inflation is a combination of excess demand and constrained supply.
    Universal credit payments should be increased, but it should be financed by tax collections not by borrowing. Greater deficits combined with more QE will only spark further inflationary increases, hurting those reliant on benefit payments the most.
    The issues with employment today are not issues of aggregate demand. Rather, they are issues of technological unemployment or redundant skills i.e. a problem outside the scope of demand management. These problems need to be addressed by not only training guarantees tailored to individual requirements and provided in the private sector, but also with an income guarantee as technology displaces more and more manual labour.

  • Peter Martin 3rd Dec '21 - 2:36pm

    @ Joe,

    A rational scientific standard to calculate levels of unemployment would not include the assumption that everyone who works a couple of hours only wants a couple of hours. Neither would only financial claimants be included. Many unemployed who could claim benefits don’t do so out of concern for the treatment they might receive from those who are supposed to be helping them find a job.

    Of course there would be no problem devising such as system if the political will was there to do it. But the political will is to minimise the extent of the problem. Adopting a more rational approach is at variance with that.

    On the question of increasing GDP we used to be able to do that, regularly and consistently, up until 2008. Now we apparently cannot. The EU has the same problem. But if we could do it then, there is no reason we cannot do it now. The Americans haven’t lost the knack. Except for duration of the recent Covid emergency that is. This is understandable but there was no similar cause for the post 2008 shambles in the UK and EU. No pandemic. No big volcanic eruption. No asteroid strike. It was all self inflicted.

    Google {GDP UK} or {GDP USA} or similarly for France etc to see what I mean.

    @ Michael BG,

    I suppose Govt could allow more generous tax concessions to encourage more capital investment. That would help to some extent. But any new investment has to make financial sense. So a business needs paying customers and the cost of labour displaced needs to be more than the cost of the investment.

    The government needs to create the right economic conditions for that.

  • Peter Martin 3rd Dec '21 - 3:01pm

    @ Joe Bourke,

    You do seem to have a soft spot for Pavlina Tcherneva even though you’re more in agreement with Picketty than her.

    Here she is, rightly having a go at him for espousing the same mainstream line you do too.

    “How would Thomas Piketty propose to save the city of Norfolk, Virginia? He teaches us, ad-nauseum, that what the U.S. collective state has to spend on such things as sea walls, flood gates, elevating infrastructure and roadways, buying-out property owners so they can relocate to higher ground, etc., etc., is limited to the number of tax dollars that can be collected from U.S. citizens—as if the collective state itself were like a club, and if the clubhouse needs repairing, the club members must first pay a special assessment of dues—or, alternatively, the club can borrow dollars from the supply of Capital owned by the wealthiest 1% of its membership, or (as a creative alternative) the rebuilding effort could be structured in such a way that the newly elevated Norfolk would pay rent to the one percent in perpetuity for the privilege of living above sea-level.”

    So what do you make of that? Is she right or is Piketty?

  • Peter Martin,

    this is from Dr. Hunt;s newsletter:
    “Real GDP per capita in the second quarter of 2021 was $58,478. From 1870 until 2000, U.S. real per capita GDP rose by 2.2% per annum. Since then, the growth has been 1.1% per annum (Chart 2). The historic rate of growth fell 50% in this time frame. If the GDP per capita had grown at the pre-2000 pace, it would be nearly 26% higher or $73,474. In the fourth quarter of 2019, the quarter before the pandemic disrupted economic activity, real per capita GDP was about 17% below the trend line of the historic re2000 growth rate. References that real GDP has recovered to the pre-pandemic level badly miss the point. As correctly documented many times, the expansion from 2009 until early 2020 was the worst in U.S. economic history. The period of subpar performance is not eleven years but nearly two decades. During this long span the pernicious effects of massive indebtedness on U.S. economic well-being has increased dramatically.
    As a result of the pandemic, the economy has fallen markedly further below where the U.S. economy would be operating if it had not become as massively over-indebted. The unprecedented debt financed stimulus measures since the spring of 2020 have only produced transitory spurts in economic growth that quickly dissipated. Despite consensus wildly optimistic forecasts, the 6% plus growth of the first half of 2021 did not rectify the situation.
    In the third quarter, economic growth slowed sharply, registering a fraction of the growth rate in the first half. Coincidentally, consumer confidence fell sharply as consumers cut back significantly on their buying plans as expectations for increases in future income slumped. This slowdown occurred just one quarter after $2 trillion of debt financed government transfer payments were made to moderate- and lowerincome households. Although the size of this operation was larger than the “shovel ready
    projects” of 2009 and the 2018 tax cuts that were also debt financed, the effects of the massive additional increase in debt did not last any longer. This is consistent with the many studies which indicate that the government spending multiplier is negative.”

  • Peter Martin,

    I have a soft spot for anyone who is honest about their research. Tchervana makes clear in her work that there is a significant cost to the job guarantee program and it is not a panacea for solving poverty and unemployment alone.
    Piketty has made important contributions to the economics of inequality and he is correct to focus on tax reform as the key to addressing these issues as does Michael Hudson and colleagues in the article to this thread.
    Keynesian theory is based on an assumption of sticky prices and wages. In the time, Keynes was writing and developing the General theory (1920s and 1930s) there was an absence of inflation in the UK or USA and it was not an issue he had to grapple with. That is not the case today.
    Piketty understands that to mobilise real resources in a capitalist economy, the issues of income and wealth distribution need to by systematically addressed, otherwise government stimulus simply magnifies the already yawning gap between a wealthy elite and 99% of the population.

  • Peter Martin 3rd Dec '21 - 4:38pm

    @ Joe,

    Who’s Dr Hunt?

    The Americans have still done better than both the UK and EU.

  • Dr Hunt is a former senior economist at the Dallas Federal Reserve. His newsletter is linked above, This is his profile

  • Peter Martin 3rd Dec '21 - 10:32pm

    @ Joe,

    I’ve just been listening to a You tube talk by Dr Hunt. On the one hand he’s saying that MMT has already been tested and found to have failed. On the other his talk is titled “Why MMT would lead to hyperinflation”. So it’s been tested and found to have failed because it hasn’t led to the hyperinflation that it should have done? I can’t make any sense of this at all.

    He seems to be arguing that deflation is going to be the main problem which is actually taking pretty much the same line as MMT economists. Whatever criticisms he might be making of the current macroeconomic situation in the major economies he fails to mention that their shortcomings haven’t been brought about by MMT economists. The dominant paradigm has been supposed New Keynesianism which isn’t Keynesianism at all but old fashioned monetarism dressed up in a different garb.

    MMT is of course simply a statement of how monetary systems function. It is not a set of policies. The only valid test is how well it describes what has actually happened given the set of policies which have been applied. If he thinks it has failed to do that he should explain why. Dr Hunt is just another right wing economist who seeks to discredit a theory and can only do that by misrepresenting it in the first place.

    I’m not sure why he wants to discredit it when he’s actually saying some of the same things that MMT economists say too. Such as that increasing Govt debt will lead to lower interest rates and not higher ones which is the usual ‘crowding out’ theory.

    So maybe he knows that MMT is fundamentally correct but doesn’t want everyone else to know that too? I heard enough to know that he’s not worth taking seriously.

  • Peter Martin,

    Dr Hunt’s experience and credentials as an Internationally recognized monetary economist speaks for itself. He has a long record over many years of being right on the direction of interest rates and he backs up his opinions with his own and others scholarly research. He does indeed expect the current rate of inflation to subside over time and interest rates on longer term bonds (but not necessarily short-term rates) to fall further as the US economy weakens. No one can say, however, just how long the current inflationary cycle might last.
    “The U.S. economy has clearly experienced an unprecedented set of supply side disruptions, which serve to shift the upward sloping aggregate supply curve inward. In a graph, with aggregate prices on the vertical axis and real GDP on the horizontal axis, this causes the aggregate supply and demand curves to intersect at a higher price level and lower level of real GDP. This drop in real GDP, often referred to as a supply side recession, increases what is known as the deflationary gap, which means that the level of real GDP falls further from the level of potential GDP. This deflationary gap in turn leads to demand destruction setting in motion a process that will eventually reverse the rise in inflation.
    In the 1970s, the economy was beset by a string of such supply curve shifts primarily because of falling oil production. Then the inflation rate did not fall but continued to march higher. However, before Paul Volcker was made Fed chair late in the decade, the Fed actions allowed money supply to accelerate steadily. During the 1970s, unlike currently, the velocity of money was stable (although not constant). As a result, the aggregate demand curve (C + I + G +X = M x V) also shifted steadily outward. This allowed the inflation from the supply side disruptions to become entrenched.
    Currently, however, the decline in money growth and velocity indicate that the inflation induced supply side shocks will eventually be reversed. In this environment, Treasury bond yields could temporarily be pushed higher in response to inflation. These sporadic moves will not be maintained. The trend in longer yields remains downward.”

  • When we are talking about Keynesian economics it is important to remember the era that Keynes was writing in . This is why the analysis is sometimes referred to as depression era economics.
    Keynes refuted Say’s law that says supply creates its own demand and instead he assumed that the short run supply curve was horizontal i.e. that supply was perfectly elastic in the short run and would automatically increase to meet demand. A reasonable assumption at the time based on the depression conditions of the 1930s. We know today, however, that the short run aggregate supply curve has a positive slope i.e neither Says law or Keynes assumption of a perfectly elastic supply curve is what prevails in the real world.
    Keynesian full employment occurs when there is no cyclical unemployment in the economy, only structural and cyclical unemployment. Government spending on goods and services adds to GDP when there is cyclical unemployment i.e. unused resources in the economy. At Keynesian full employment, additional deficit spending tends to generate inflation rather than adding to GDP. Transfer payments do not add to GDP. They are not additional government spending on goods and services, they are a redistribution of income from one section of the population to another . This is what job guarantees are in practice – transfer payments.. There is no significant output of goods and services from these jobs that the income the workers earn or other income earned in the economy can be spent on. The job guarantee program will however, serve as a fiscal buffer along with other automatic stabilisers when the economy enters a recession. It is a permanent program that should be tax funded at the full employment level i.e. when take up is limited. The number of people using the program will increase during a recession and the deficit spending will increase automatically at that time and decrease as the economy recovers. That is counter-cyclical policy as it should be.
    In a supply side recession, when inflation is impeding recovery, you need non-inflationary fiscal policy such as tax reform that does not create dis-incentives for work and investment. This is where the Hudson proposals for LVT to partially replace taxes on earned incomes come in.

  • Joe Bourke,

    Pavlina Tcherneva sets out her vision of what a job guarantee scheme would be like, but I also talk of a job guarantee and a training guarantee. And my idea for a job guarantee is not the same, but equally valid. The role of a job guarantee is two-fold, to provide relevant experience to those who have been recently trained to undertake a new role and to provide jobs which allow people to keep their existing skills up-to-date. The training guarantee is to provide training to unemployed people with the training and skills they need to apply for the jobs available in their area.

    Zero point eight percent of £2 trillion is £16 billion. Do you want the UK government to allocate £16 billion to job guarantees?

    Most economists seem to be saying that current inflation is not caused by excess demand but is caused by supply problems.

    You don’t suggest that the government can do anything to assist people get into work. It seems because you don’t think they can do anything. I think you are wrong.

    Greater deficits only increase inflation if production can’t be increased. With unemployment higher than in 2020 it is clear there is spare capacity in the UK economy. Therefore there is a role for demand management. Also even in 2020 there was spare capacity which can be reduced by increasing demand.

    From what you wrote do you accept that increasing demand can increase production? It seems you could do!

    Do you support ‘training guarantees tailored to individual requirements and provided in the private sector’?

    Peter Martin,

    I hadn’t realised that GDP for the UK has not yet reached the level pre-2008 in US dollars. $3.093 trillion in 2007, $3.066 in 2014, and $2.857 in 2018.

  • Peter Martin 4th Dec '21 - 9:59am

    @ Joe,

    The problem with economics, as I’ve often said, is politics. So you really need to understand Dr Hunt’s politics, and others who adopt the same approach, before anything else. He’s obviously very much to the right. For example, he takes exception to the phrase “people’s economy”. He’s heard MMT advocates use this term, and in his mind, he’s linking this to “govt command and control” and by implication the establishment of a Marxist state.

    Most of us would accept that the economy should exist to serve our needs rather than the other way around. It’s democracy rather than communism.

    Therefore it really doesn’t matter to him whether or not MMT is correct. It has to be discredited. Secretly, I suspect, he does accept that it’s right so he takes some of the conclusions, which he deems to be acceptable, but comes up with some different and convoluted way of justifying them. He’s latched on to the term ‘non-linearity’ for example. It’s nothing more than obfuscation.

    There are plenty of others like him in the financial world. We should perhaps take a look at which kind of economics they choose to use when they’d like to make a few dollars, rather than anything they actually say.

  • Peter Martin 4th Dec '21 - 10:10am

    @ Michael BG,

    The pound was greatly overvalued in the run up to the 2008 GFC. It was the main reason why we didn’t join the euro at the time. It would have been far too hard to stick to the euro rules with that high entry level. So overvalued currencies do have some positives!

    Generally speaking I support the floating of currencies. But there are limits. If there is too great a capital inflow we can lose control of our own economy.

  • Michael BG,

    lifelong learning and training grants are an existing element of LibDem policy Grants
    Inflation is always caused by an imbalance of supply and demand. If higher prices persist that causes aggregate demand to adjust to lower aggregate supply. Higher prices at present have been concentrated in food and energy costs. The last time this happened after the financial crisis it set off the Arab spring in Tunisia Food riots. The current riots in Sudan are linked to high prices for everything from petrol to food.
    The government can and should provide job guarantees by funding local authorities to do so job guarantees Widespread labour shortages, supply constraints, Brexit and ongoing issues around the pandemic, high levels of accumulated savings and rising inflation make it clear that there is excess demand chasing constrained supply in the economy.
    What I wrote is that the short run supply curve is not perfectly elastic, so increasing demand in the short-run may not increase production it will almost certainly increase wages and prices.
    In a supply side recession, when inflation is impeding recovery, you need non-inflationary fiscal policy such as tax reform that does not create dis-incentives for work and investment.

  • Peter Martin,

    Dr Hunt is not a politician or a political advisor. He is an expert in fixed income securities and follower of the Federal Reserve that analyses the macroeconomy as a basis for the provision of investment advice. That advice is based around the buying and selling of short and long-term securities by investors and is influenced by the direction of interest rates. He does support his advice with published research.
    I doubt that he would give much thought to MMT unless asked for an opinion. When asked , his opinion is in line with most other economists. Oliver Blanchard said much the same thing as Hunt “If [the Fed] issued money at zero rate, then we’d have hyperinflation. But we’re basically issuing a new form of debt, which is bank reserves,”
    You need to ask yourself why virtually all leading economists point out the flaws in the MMT framework whether it be Paul Krugman , Larry Summers, Oliver Blanchard, Martin Wolf, Jonathan Portes, Thomas Palley etc Are all of these leading Keynesian economists politically driven and focused on discrediting MMT for nefarious purposes? They are not. They are simply pointing out what should be obvious to anyone. It is scarce resources that are the constraint. The more you increase the money supply relative to the capacity of supply to grow, the higher the price of those scarce resources and the greater instability you create.
    Inflation has been kept low in recent decades by globalisation, demographics, debt overhangs and destructive technology.These disinflationary forces will likely continue if they are not overwhelmed by excess money creation.

  • Joe Bourke,

    When I posted my comment at 1.08 am I couldn’t see your posts made either side of midnight.

    Thank you for posting your view of Keynesian economic. You do understand that in Keynesian economics increased demand leads to increased production. But you have a strange condition – ‘where there is cyclical unemployment’, it should be where the unemployed can be employed productively (no matter why they are unemployed).

    The government needs to eliminate structural unemployment by providing the training and experience needed for these people to be turned into spare resources. How many of the 1.448 million people unemployed do you think are structurally unemployed? How many of the approximate 2 million people receiving Employment and Support Allowance do you believe could become employable?

    If a person is paid more money to do a guaranteed job, their extra income creates extra demand. Whether this extra demand increases GDP or inflation depends on if production can be increased, just like with any extra government spending.

    It is generally accepted that our current inflation is caused by temporary supply problems (this is why the Bank of England has not increased interest rates) and there is lots of spare capacity in the economy as I have pointed out to you.

    I have pointed out that increasing the taxes house owners pay would decrease aggregate demand, but you ignored my point.

    You haven’t said if the government should fund job guarantees at the minimum level suggested by Pavlina Tcherneva £16 billion a year. It makes my suggested £11.7 billion a year seem on the conservative side!

    If there are supply problems holding back production then the government needs to take the appropriate action to resolve the problems and remove the blockages. As a labour shortage is one of them, but we have over a million people unemployed, the government needs to take action to get unemployed people trained to do the roles where there are labour shortages.

    Peter Martin,

    Perhaps I should stick to trying to discover the UK’s GDP in pounds. This graph ( ) looks better than the one in dollars. (Also no recession between 1992 and 2007!)

  • Peter Martin 4th Dec '21 - 5:57pm

    “You need to ask yourself why virtually all leading economists point out the flaws in the MMT framework ”

    They don’t. They can only deliberately misrepresent it and point out the flaws in the distorted version.

    They’ve all been around a lot longer than MMT and have all written a lot of papers which aren’t MMT compliant. So, naturally they see a set of new ideas as a threat to their legacy. Those who are more right wing want to maintain the fiction that Governments are like households to try to keep Government small. They know its not true but it still doesn’t stop them coming out with statements like ‘there is no such thing as govt money etc’.

  • Michael BG,

    Long-term unemployment fell to a a record low of 0.80 percent in the fourth quarter of 2019, immediately prior to the pandemic. It is that 0.8% that will be the target of job guarantee programs i.e. circa 260k long-term unemployed. The number of unfilled vacancies is currently at a record high vacancies. The ONS reports that the largest increase in vacancies was in the retail sector and in motor vehicle repair. Retail requires no special training beyond on the job training. Employers can claim a £3000 grant for taking on an apprentice mechanic as can any employer training grants
    Job training for work outside of the public sector is best provided by private sector employers. Government training schemes are a poor substitute for on the job training and few employers hire from job centres.
    As to the cause of inflation this MPC member gives an update on the inflation outlook and Outlook Nov 2021
    “Price pressures in global manufactured goods reflect, at least in part, strong global demand for goods, including consumer goods, ICT, and plant and machinery investment. These price pressures may well have some persistent effects on UK CPI inflation, partly because of lags in the pass through to consumer prices but also because the underlying strength in demand and prices for manufactured goods may prove persistent. Even once effects from energy prices fade, the closing output gap and possibility of some persistent effects from global cost pressures point to risks that, with the current policy stance, CPI inflation will remain above the 2% target 2-3 years ahead.”
    “my view is that risks are on the side of a more persistent period of excess demand and above-target inflation, reflecting greater domestic cost and capacity pressures. Given this, at the November MPC meeting I voted to tighten monetary policy by curtailing the asset purchase program and raising Bank Rate to 0.25%. If the economy develops as I expect, then some additional tightening, on top of such a move, probably will be needed fairly soon.”
    The government needs to focus on providing good quality public and social security services including ensuring the NHS, schools, social services, local authorities, police and other critical services are adequately funded and able to pay the wages required to meet their staffing needs. In terms of economic management, it is critical for living standards to keep a lid on inflation over the next 2-3 years until pressures fade and maintain price stability through judicious application of monetary and fiscal policy including tax reform. The Hudson paper referenced in the article shows how an increase in the tax rate on the value of land, balanced by decreases in the tax rates on the incomes of capital and labor, can stimulate the economy while continuing to finance current levels of expenditures and debt.

  • Larry Elliott has a good piece today A fortnight ago the UK economy was looking up; then Omicron arrived
    “Being an armchair critic is easy but getting the balance right is hard. A couple of weeks ago it all looked different. Certainly, the number of UK cases remained stubbornly high but the UK was not suffering the surge in cases seen in Austria, Germany or the Netherlands. The arrival of vaccines – the big change in the past 12 months – meant hospitalisations and death rates were much lower than they were when the country was locked down last winter.
    Meanwhile, the economy was chugging along. The end of the furlough had passed off without the feared wave of redundancies and things were looking up for both the manufacturing and services sectors. Industry was reporting the strongest order books since the late 1970s, while the loosening of travel restrictions meant the service sector saw the biggest upturn in overseas business in four years.
    Growing inflationary pressure caused by supply-side bottlenecks posed the biggest barrier to rising output, and the City was convinced the Bank of England’s monetary policy committee would raise interest rates at its December meeting. Then Omicron arrived and everything was made a lot more complicated.
    Mervyn King says Central banks have ‘King Canute’ theory of inflation and they ‘should not be ashamed to acknowledge that they do not know where interest rates will be in the future because it cannot know where the economy will go in the months and years ahead.”

  • Joe Bourke,

    I asked you how many people you think are structurally unemployed. You said 0.8% of the workforce are long-term unemployed. Are you saying that it is these 0.8% of the workforce who are structurally unemployed?

    (By the way 0.8% of our current workforce of 43.13 million is about 345,000.)

    If as you wrote 3.8% is full employment and 0.8% is structural, do you agree this leaves 3% as frictional unemployed?

    Are you saying that there is no role for the government in providing training to the unemployed in roles where there are labour shortages?

    As you say Michael Saunders believes that any demand-pull inflation is at the global level not the UK level. Increasing UK interest rates don’t affect global inflation.

    The government should focus on managing the economy, reducing unemployment, ensuring economic growth is as high as possible, that UK generated inflation is under control and ensuring unemployed people can get back into the labour market as soon as reasonable. I don’t understand why you don’t agree with me.

    From your post of 9.03pm should readers understand that you believe because of Omicron the Bank of England should not increase interest rates, while Omicron is a threat?

  • Peter Martin 6th Dec '21 - 10:28am

    @ Joe,

    “Long-term unemployment fell to a a record low of 0.80 percent in the fourth quarter of 2019”

    You do consistently seek to minimise the extent of the unemployment and underemployment problem. Underemployment is probably the bigger of the two.
    It looks like you are basing your view of the national economy on what you see in London and the SE of England. The employment situation is much better there which is why there is a net migration from the regions and other UK countries into the London area creating a different problem of unaffordable housing and inadequate infrastructure.

    “Mervyn King says Central banks……. ‘should not be ashamed to acknowledge that they do not know where interest rates will be in the future because it cannot know where the economy will go in the months and years ahead.’ ”

    I’d put it that governments should not be ashamed to know what taxes and spending will be in the future because it cannot……

    Big problems with relying on monetary policy or interest rate adjustments:

    1) A stimulus only works temporarily when rates are reduced.

    2) A stimulus is at the expense of creating far too much private sector debt causing asset price inflation.

    3) It is a blunt instrument. All regions are treated the same even though different policies are usually needed for different regions.

    4) A rise in interest rates to cool the economy, and reduce inflation, at a time of high private sector debt increases the number of bad debts. One bad debt can create several more leading to an avalanche effect which crashes the economy and requires massive Govt intervention to rescue it.

  • @Joe Bourke 27th Nov ’21 – 12:57pm
    “the problem with using taxes to cool inflation has been explained by Warren Mosler. He has has written and spoken many times about the dead loss costs of transaction taxes and the way they inhibit transactions (Mosler, Warren. 2013. Soft Currency Economics II. CreateSpace Independent Publishing Platform):
    “A sales tax will inhibit transactions, as will an income tax.

    Yet we have an effective 30% transaction tax on anything purchased through say the Apple iStore which doesn’t seem to have prevented its massive growth. Okay this ‘transaction tax’ is the Apple tax of using their iStore and not a government imposed levy. however, I agree people will look for ways to avoid paying and the incentive seems to be based on either having a relatively high transaction tax (eg. VAT @20%, Apple ‘tax’ 30%) or where the ‘tax’ collected accumulates to a large amount (eg. Amazon and its current negotiation with Visa UK…)

  • Michael BG,

    in my opinion a voluntary job guarantee program based on socially useful work that would not otherwise be done (as advocated by Pavlina Tchnervena) should be targeted at and offered to the circa 260,000 people categorised as long-term unemployed.
    Labour shortages in the private sector should be addressed by private sector employers through wage and benefit offers supported by government training grants. Labour shortages in the public sector should similarly be addressed through funding of adequate wage and benefit offers to attract sufficient numbers to NHS, Teaching and local authority financed social care services. This will of course mean higher prices and higher taxes going forward.
    Michael Saunders puts both side of the argument for rate hikes following the emergence of the omicron scare Taking a cautious approach is a reasonable approach in the circumstances. However, i do not think the UK government is capable of reproducing the kind of financial repression that kept real interest rates negative and inflated away the WW2 debt over several decades.
    The critical issue is inequality and the falling share of real wage income as a % of GDP in recent decades . That needs to be addressed with radical tax reform and a focus on investment in productivity enhancing infrastructure and early years education. The government cannot fine tune economic growth. It can only create the right conditions and incentives to allow growth to develop.

  • Joseph Bourke 6th Dec '21 - 2:29pm

    Peter Martin,

    Between September and October 2021, all regions showed steady growth in the number of payrolled employees, with only London having fewer than at the start of the coronavirus (COVID-19) pandemic
    For the three months ending September 2021, the highest unemployment rate estimate in the UK was in London (5.6%) and the lowest was in the South West (3.3%); all regions saw a decrease in the unemployment rate compared with the previous quarter (April to June 2021), except for Northern Ireland, which increased by 0.2 percentage points.
    Mervyn King, as the former governor of the Bank of England does speak with the authority of considerable experience over many decades.
    “A satisfactory theory of inflation cannot take the form ‘inflation will remain low because we say it will’; it has to explain how changes in money – whether directly via quantitative easing or indirectly via changes in interest rates – affect the economy.”
    The failure to withdraw QE in response to good news, or even the absence of bad news, had led to a ratcheting up of central bank balance sheets, something King said was “unsustainable”.
    “The only forward guidance markets and economic agents need is an unswerving commitment to price stability.”

  • Peter Martin 6th Dec '21 - 3:19pm

    @ Joe,

    Figures collated during the Covid emergency aren’t the most reliable indicators.

    Look, Joe, economic prospects for workers are generally better in Maidenhead than Middlesborough. That’s why we don’t see too many people move to the NE from the SE, but we do see them move the other way despite of the increased cost of living.

    This is the underlying reason why some parts of England voted for Brexit and others didn’t. It is why the Red Wall has been crumbling as voters there have lost faith in the ability of the Labour Party to change things. It is why there has been some talk by the Tories of ‘levelling up’ but we aren’t holding our breath on that one!

    Median earnings are the highest in London and the SE than lowest in the NE. This is a more reliable state of the labour market than levels of unemployment.

  • Peter Martin,

    Last yeas JRF report on poverty found that in recent years London has had “a higher poverty rate than any other UK area”.
    Muhammed Butt, executive member for welfare, empowerment and inclusion with cross-party body London Councils, said: “In contrast to the simplistic myth-making about London, the streets here aren’t paved with gold. London has among the highest poverty rates in the UK, with the most severe pensioner and in-work poverty and two-thirds of the national homelessness total. The government is making positive noises about levelling up the country but needs to boost support for deprived communities everywhere – including the capital.”

  • Peter Martin 6th Dec '21 - 10:32pm

    @ Joe,

    Yes there is poverty in London but that still doesn’t change the fact that London and the SE of England are where the wealth is. There would be less poverty if it was shared out more equitably.

    List of UK’s 100 most prosperous areas contains only two places in the North

    “The Index shows what is well understood—prosperity is concentrated in the South of England, and it is appropriate for the levelling up agenda to target more deprived areas.”

  • Mark Valladares Mark Valladares 6th Dec '21 - 11:07pm

    @ Peter,

    Having briefly looked at the Legatum Institute report that you refer to, whilst I take your general point, their scoring system is a bit quirky. Mid Suffolk, where I live, is in the bottom quintile for natural environment, for example.

    I’d also suggest that “South of England” is a bit lazy, given that the five Suffolk local authority areas all fall outside of the top 125. It’s more like the old Home Counties in truth.

  • Peter Martin 7th Dec '21 - 4:50am

    @ Mark,

    Yes I agree with you about the “South of England”. That was a quote from the article. I always use the term ‘SE of England’. Even that’s not totally accurate in that Hampshire and Cambridgeshire look to be doing just as well as Surrey and Kent. It’s anywhere close enough to London. Certainly the West Country and Cornwall have the problem of low wages combined with the high house prices of the South East.

    Where regional policies have been applied they have been successful. Northern Ireland is doing relatively much better than it used to. But it has to be with the co-operation of central government to level the UK playing field by a process of fiscal equalisation. Providing the cash, in other words. We see this happen in Scotland via a relatively generous Barnett formula. It is the English regions, and particularly the NE, that need more help than they are getting.

    I take Joe’s point that London and the SE of England have their problems too. But, many of these problems are caused by a continuous net inward population flow. Government policy would be better directed towards slowing that or even reversing it.

    It’s while since I heard the term “home counties”. So everyone living elsewhere in the UK is outside the “home”? London might be our capital city but it’s only part of our home.

    @ Joe,

    “The only forward guidance markets and economic agents need is an unswerving commitment to price stability.”

    This sounds more like an article of Mervyn King’s economic faith than anything based on real world evidence. Price stability might be a necessary condition but it is not a sufficient one. In any case we haven’t had price stability in housing and other asset based costs. The history of the eurozone has been more successful, at least until the recent Covid emergency, in achieving price stability but a wider economic success hasn’t followed.

    Again, it goes back to a flawed regional policy. Euros will always gravitate to other euros in the wealthy regions like Germany and the Netherlands. They can’t simply be lent back out to the regions. The loans are never going to be repayable. They have to be spent back into regional economies to keep them going.

  • Mark Valladares Mark Valladares 7th Dec '21 - 11:47am

    @ Peter,

    I dimly remember in the old pre-celebrity Come Dancing days, there were two Home Counties teams, and I always thought of them as counties within commuting distance of London. It has always been a bit of a moveable feast though.

  • Joe Bourke,

    You seem to have a lot of confidence that the economy will ‘right its self’. You also have a misplaced confidence that the private sector will solve its labour shortages. Indeed, it does seems that you see no role for the government in providing training to the unemployed in roles where there are labour shortages. I disagree with your confidence in the private sector and I do see a role for government to act where markets and the private sector fail.

    How much would you allocate to fund your job guarantee for your 260,000 unemployed people (which is 0.6% not 0.8% of the UK workforce of 43.13 million)?

    As we had 3.8% unemployed before Coronavirus and 0.8% is structural do you accept that friction unemployment is only 3%?

    It seems that when the economy is managed using monetary policy a side effect is increased inequality, but when it was managed using fiscal policy inequality was reduced!

    Fiscal policy can be used to increase economic growth if spare capacity exists. The government can target economic assistance to the poorer areas and as I have said involve itself in training unemployed people to ensure everyone who wants to be can be a productive part of the economy.

    Mervyn King said there had been a decade of sluggish economic growth despite the largest monetary stimulus the world had ever seen and it was “surely time to recognise that many if not most economic problems are not amenable to monetary policy solutions”. Therefore it seems he is advocating fiscal measures.

    Maybe you should compare the unemployment rates to the 3.8% of south-east England:
    North East 5.1%
    West Midlands 4.8%
    Yorkshire & The Humber 4.6%
    North West 4.2%
    East Midlands 4.1%
    Scotland 4.1%
    Northern Ireland 4.0%
    Three of them are above the UK average.
    Five regions had a decline in the employment rate:
    North East
    Yorkshire & The Humber
    Northern Ireland
    West Midlands.

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