The pledge to ‘level up’ the left behind parts of England is key to what happens in English politics over the next 3-5 years and beyond (I say ‘English’ politics because the dominant political issues in the four nations of the UK seem to be diverging). Boris Johnson’s promises to revive the towns and industrial communities of northern and coastal England have raised expectations, and won votes and seats. But even if he calls an election early in 2023 he will need to have demonstrated that commitment in increased expenditure to retain many of the votes won over in 2019.
The difficulty of reconciling this promise with the Conservative ideology of low taxes and a constant squeeze on public expenditure has just been demonstrated by the refusal to accept Sir Kevan Collins’s estimate of the scale of investment need in schools to catch up with years of neglect capped by 18 months of pandemic. £50 per pupil, offset by a reduction in the pupil premium, presents ‘an undervaluation of the importance of education’, Collins declared as he resigned.
The UK has the widest gaps in both regional and personal inequality of any OECD country apart from the USA. Levelling up (let alone ‘Building Back Better’) means sustained investment to reduce those gaps: not only in education but also in transport links, economic regeneration, and local communities and government. Johnson has given the impression that he’s committed to that investment– without, of course, thinking about the detail. Sunak has presented the Treasury view that long-term commitments to increased spending are dangerous; planning for the next Budget includes more cuts than increases. The Conservative Right still believes in cutting public spending and leaving economic strategies to the private sector.
Here is a fundamental contradiction in government strategy. The ‘comfortable leavers’ who voted for Brexit did not vote for higher taxes and sharper transfers to England’s poorer communities. But the left behind who gave Johnson his 80-seat majority in December 2019 look to him to spend generously on rebuilding local communities, bus and rail links, and industries.
But this is not an easy dilemma for Liberal Democrats to resolve, either. Our greatest mistake in entering the coalition in 2010 was to acquiesce in George Osborne’s approach to closing the deficit primarily by cutting spending rather than by investing for growth and raising tax. Opinion polls now show that the majority of voters are in principle in favour of raising taxes – though many may happily assume that others will pay the higher rates rather than themselves. We are currently a party strongest in the prosperous South-East, with membership most strongly from graduate professionals who already hit the 40% rate of income tax. Our activists and councillors are conscious of pockets of poverty in London, and as champions of local action will not instinctively support increased transfers of public spending to other regions.
But we are a national party. We believe in equal opportunities for all citizens, through education and training, through opportunities for work and participation in public life without sliding down to London. Those of us who’ve spent our political careers campaigning in northern cities and towns have seen the cumulative effect of industrial decline, long-term reductions in local government spending and local autonomy, since Margaret Thatcher’s government first began to shift Britain towards a small-state, service-dominated country. England’s entrenched inequalities, and the political resentments that has generated, cannot be reversed without a sustained increase in public spending.
President Biden has come to a similar conclusion in the only ‘western’ democracy that has a wider gap between rich and poor than the UK: he is pushing for a massive investment programme worthy of President Roosevelt. The Dutch have pledged to invest more on rebuilding public education than Sir Kevan Collins asked for here. Germany has managed to sustain a highly successful economy, and a less divided society, with a level of public spending significantly higher than Britain over the past 40 years.
Social Liberals will recognise that the narrower ideology of free market economic liberals does not provide answers to the complex challenges of rapid technological and climate changes, social disorientation, and the erosion of local autonomy and identity that we face. We need ‘New Deal’ Liberalism (you might even call it ‘social democracy’) to meet the challenge.
* William Wallace is Liberal Democrat spokesman on constitutional issues in the Lords.
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50 Comments
Thank you for an interesting and important article!
Might it be appropriate to study, adopt and adapt the Nordic socio-economic model?
https://www.investopedia.com/terms/n/nordic-model.asp
It’s certainly a problem for the Lib Dems in Scotland, William. I was thoroughly depressed to read today in the Glasgow Herald how Willie Rennie has boxed himself in to narrow Unionism yet again and opposed further devolution. The Herald reports :
“THE SNP’s hopes of a cross-party consensus to tackle poverty has been halted after Lib Dem leader Willie Rennie accused the new Social Justice Secretary of playing the constitution card. Mr Rennie has pointed the finger at Shona Robison after he received a letter from her ahead of Tuesday’s Holyrood debate on poverty.
The Lib Dem leader has claimed the SNP has used “the issue of poverty to advance their constitutional arguments” – despite the fact Ms Robison’s letter does not mention independence.
In her letter to party leaders, the Social Justice, Housing and Local Government Secretary highlights she will lodge a motion next week to agree that tackling child poverty “should be a national mission for this government and parliament” and also “agree the need for employment powers to be devolved to allow us to take further action to tackle poverty”.
Scottish Labour also backs more employment powers being devolved to the Scottish Parliament”.
@ Lord William Wallace,
“Our greatest mistake in entering the coalition in 2010 was to acquiesce in George Osborne’s approach to closing the deficit primarily by cutting spending rather than by investing for growth and raising tax”
It probably wasn’t. The biggest mistake that nearly everyone makes is to think that you can reduce the deficit either by reducing Government spending or increasing taxes or a mixture of the two. The snag is that if the Government cuts its spending it also cuts its income. If it raises taxes it slows the economy which also reduces it income. So the end result is generally not what supporters of either course of action would wish for.
You need to look at the workings of the economy from a different perspective. The Government’s deficit has to equal, penny for penny, everyone else’s surplus. In other words Government doesn’t want everyone else to save too much. To that end the reduction in interest rates to nearly zero has been a good move. It encourages everyone else to spend rather than save. If they are spending they are paying taxes. If they are saving they aren’t paying any.
Another snag arises when inflation is ultra low. So everyone else might still want to save even when interest rates are zilch. Especially if there’s not much to spend it on. Like now. Or like in wartime when many things were rationed. Then the Govt’s deficit will rise sharply because there’s insufficient spending going on.
Not that there is anything wrong with people saving. If that’s what they want to do, then they should be allowed to do that. The problem might come later when they start to spend their savings big time and overheat the economy. That will be the time to raise taxes and maybe interest rates. Doing the latter is a dangerous thing to do, though, especially with so much private debt in the economy.
“Might it be appropriate to study, adopt and adapt the Nordic socio-economic model?”
Yes, to studying it. But adoption and adaption? It won’t work for a free trading country like the UK.
The Nordic model is essentially mercantilist. By hook or by crook, a mercantilist country has to restrict domestic consumption at the same time as depressing its own currency to keep its exports cheap. That way it can have more money flowing into the economy, as a payment for exports, than is flowing out as a payment for imports. The surplus can be exported to keep the currency from rising. So there’s much less need for Govt to deficit spend into the economy. The books look good from a neoliberal prespective.
There are two problems. Firstly, not everyone can run an export surplus. Secondly, the countries that do aren’t doing themselves any favours. They are simply accumulating the IOUs of others that they can’t spend. They don’t seem to grasp the idea that net exporting real things comes at a real cost.
Are the Nordic citizens and their children better off than ours?
What is citizen inefficient with keeping internal costs low?
In which ways does an attractive currency harm its country’s citizens and about-to-be citizens?
(Why has HMG encouraged the rise in house prices?)
Is the USA a mercantilist country as, through the dominance of the dollar, it seems to collect IOUs from most of the World. Please see Michael Hudson’s writing, especially « Super Imperialism ».
Is Germany a mercantilist county?
Which economic theory/theories facilitated the rise of South Korea?h
As the (alleged) duty of governments is to protect its citizens and the purpose of business is to make profits, might (alleged) free trade be always a compromise between free trade and protectionism?
Coalition? Why were/are the leaderships of so many parties ignorant of or simulating ignorance of the « Deficiency Myth »? (Stephanie Kelton is good on this)
First class everybody! And special thanks from this crumbly to Steve Strevethan for reminding us about Stephanie Kelton’s “Deficit Myth” — very readable for non-economists too. Last time I contributed a comment (not very long ago) urging that three sets of initials summarised what I considered should be our watchword or slogan: MMT + UBI + . . . dammit! It’s slipped my memory and I’ve accidentally deleted all my flaggings in the LDV list.
But MMT + UBI is a start. To that economic creed I would add that the desirable extra dimension of electoral (as well as congenial) debate ought to be an ever warmer approach to the Greens — that is where young energy looks and works: not only important aims, but pursued with youthful, footslogging, energy!
William, Levelling up is not a challenge to the Conservatives. It is a headline grab.
In Borisland there is no reality, just warm words. Thus
– “Oven Ready Deal” really means “Appallingly Bad Deal.”
– “There will be no border down the Irish Sea.” means “Stuff Northern Ireland”
– “Full control of our fishing waters” means “We have given control away.”
– “The party of Business” means “F**k business” and
– “Till death us do part” means whatever you want it to mean.
The only problem it gives the Liberal Democrats is “When do we start to attack the Conservatives for their lies?”
David Evans: Absolutely! Well said indeed.
@ Steve,
To give you concise answers to some of your questions:
“Is the USA a mercantilist country… ? ”
No. Whatever we might think about the USA, it pursues a relatively liberal trade policy and doesn’t seek to ensure that its exports are always greater than its imports.
“Is Germany a mercantilist county? ”
Yes. Any country which contrives to ensure that it is always selling more goods and services than it buys has to be mercantilist by nature. The EU desperate needs its major economy to be an economic engine and provide the peripheral countries with a market for its products in a similar way to the USA does on a global scale.
The UK used to play that role on a smaller scale but the EU economy, overall, needed a bigger marketplace. It remains to be seen just what will happen after Brexit.
“Are the Nordic citizens and their children better off than ours?”
Possibly they but there other factors involved. The big advantage of mercantilism is that it enables Govts to run budgets which appeal to neoliberals. Money comes into the country as receipts for net exports. So according to the principle of sectoral balances the Govt deficits are much less than they would otherwise be and may even be in surplus. So they can’t tend come out with silly arguments that they “can’t afford” to provide children with a good education or they “can’t afford” to provide nursery places etc.
But as I constantly keep saying, it isn’t arithmetically possible for every country to export more than it imports. So the way forward for global and European economic prosperity has to include those countries which run net trade deficits too. Economic prosperity should not mean producing more and more just for the sake of it. The successful operation of a Green economy will need to have the right economic footing too.
Peter Martin: We have to be careful not to confuse different aspects of economic management. In a recession (like now) it makes sense for governments to invest and spend, rather than focus on immediate balancing of the budget. But over the economic cycle it matters what level of taxation and spending is sustained. The UK has kept the tax take lower than most other OECD members for the past 40 years – assisted by revenue from North Sea oil in the 1980s, but leading to persistent deficits and constant pressures to curb spending ever since. Of course Boris Johnson hasn’t thought this through: I’m arguing that we need to do so, and set out out position as disappointment with Johnson erodes his red wall vote support.
I would remove the label of levelling up and let’s be balanced fairly.
Housing, and that carries awful stories of lack of repairs and decent housing. School meals, not everyone is an academic genius, but every child should have a grasp of reading and writing.
Johnson’s idea of levelling up is not considered appropriate by others.
Having worked in Teacher Staffing for many year’s, I’m sure teaching staff are aware.
Further on David Evans’ comments:
We know exactly what the Conservatives will do and particularly so under Johnson. They will issue yet more and bigger promises. Never mind if the infra structure is dilapidated and towns are on their knees, they will be offered such promises, echoed and amplified in popular media to astound and amaze.
Given our low standing in current polls, this is not really a dilemma for us to resolve. We should accuse the Tories of levelling down and depressing economic activity for everyone; we can specify what needs to be done, making it clear that anything else would be levelling down and also announce that we can free up business by decimating Boris’s burgeoning bureaucracy (achievable with a Single Market deal).
The key to levelling up and reducing our geographic inequality is providing high paid jobs in those areas that need them. This will require a degree of planning that free traders might not like. Incentives for companies to move north would be part of an economic strategy that also includes better education, skills training and focusing the green agenda on those areas.
@ William Wallace,
I think we have all heard arguments that the government should try to balance its books over the course of the economic cycle. All governments have tried but they never quite manage to do it. So why not? Many would say they haven’t tried enough. I would say that, in net importing countries like the UK and USA, Govts can’t do the impossible. They can’t defeat the arithmetic of the sectoral balances which dictates that Govt surpluses can only be temporarily generated by stoking up a the type of unsustainable credit boom we saw in the late 80’s and again around the turn of the millennium.
This is not to say the Govt can spend without limit. And tax at such low levels that no-one ever complains. All that really matters are the inflationary considerations of whatever fiscal policy is being implemented. This is why there is some discussion and there are some concerns that the recent high Government deficits will lead to an overheating economy. To be more precise, it isn’t so much the deficits that are the problem its the extra money that many have accumulated during the lockdown which may well be spent too quickly when there is something to spend it on again.
We are in an emergency situation but the same economic rules do apply. It doesn’t make any sense to say we can safely create and spend 100’s of billions now but we couldn’t find a tenth of that amount prior to the Covid crisis to bail out the NHS. Politicians shouldn’t have been saying that we couldn’t have done that without raising taxes to “pay for it”. It would have been legitimate to have argued that we shouldn’t have done it because of the inflationary implications. But maybe it is too much to ask that politicians should be quite that honest about economic choices.
David Evans 8th Jun ’21 – 10:45am:
The only problem it gives the Liberal Democrats is “When do we start to attack the Conservatives for their lies?”
Since welcoming into the party 10 defecting MPs who obtained public office by misrepresentation having stood for election on a manifesto commitment to implement the EU Referendum decision, the Liberal Democrats are in no position to criticise others for being dishonest.
“The key to levelling up and reducing our geographic inequality is providing high paid jobs in those areas that need them……”
I would say thy should start with reasonably well paying jobs. I notice on another thread there is some concern that Tim Farron will have his constituency taken away from under him. Every time the Boundary Commission reports there is a net loss of regional constituencies to provide for more in the SE of England.
If the Govt was serious about levelling up it would be doing what it took to keep populations in the regions where they were. It’s a lot easier to recruit a teacher in South Cumbria than it is in London. The snag is that the kids are in London because their parents have chosen to live there for economic reasons. Jobs in London pay more than they do in Cumbria.
The point is that Governments would get more for their money if they spent more of it in the regions to a sufficient extent to reverse the continual population shift. It really doesn’t make any sense for us all to cram into one corner of the UK.
Jeff?:: Come on! Johnson and his associates have set a new low in honesty, sincerity and mismanagement by any standards, and deserve to be called out from any quarter. Politics is a dirty business at times, as most people realise, but there must be a limit to what you can get away with!
Jeff – So you believe Boris should resign for misrepresenting his so called “Oven ready deal,” “No border down the Irish Sea.” and “Full control of our fishing waters.” Not forgetting “The extra incentive for our farmers to go for Leave is getting rid of the burden – the form-filling” the Prime Minister, aka Mr Alexander Boris de Pfeffel Johnson, Country File, June 2016
Good for you.
The Nordic economic model is a social democratic model built on high quality public services and requires a comparatively high level of taxation of national income to sustain it.
As developed economies with advanced manufacturing and service sectors, the Nordic counties export their surplus capital accumulation to countries where capital can be employed. That capital in turn allows less competitive economies to invest in developing their economies.
MMT is a description of the monetary system. The suggestion that you can permanently fund a UBI with government deficits funded not by borrowing, but BofE money creation is a rather silly one and not one that any credible MMT economist would likely make.
Money is debt ((bank liabilities in the form of deposits and bank reserves held at the BofE) and almost all the money in the economy is created within the private banking system.
Virtually all governments will borrow to invest i.e, run deficits and in a recession will increase deficits to stimulate private sector demand (gradually reducing as the economy recovers). During periods of debt deflation governments are additionally forced to replace the money destroyed by deleveraging with new money creation (bank reserves) to reverse the contraction in the money supply. In recent years that has been done in quantity (quantitative easing). However, QE to banks simply replaces broad money (bank deposits) with base money (reserves) by swapping bonds held by banks for reserves.
QE in the financial system lowers interest rates and generates asset price inflation but has no direct impact in the real economy (beyond peripheral wealth effects) and hence on CPI inflation.
During the Covid pandemic emergency relief was required. Hence, we have seen large deficits and the growth of government debt. Debt sustainability is a function of the interest rate and economic growth. When the interest rate on public debt is below the economy’s growth rate existing debt will decline as a share of output even if no new taxes are levied. So limited deficits to fund investment can and have been run in perpetuity, but large deficits cannot be sustained over the longer term without interest rates rising above economic growth levels. The alternative (for exporting countries with a strong net investment position) is Japan where interest rates have been held down for decades, but at the cost of low economic growth and productivity in its service sectors.
Marbles return. I hope our future course will be steered by MMR + UBI +PR.
Johnson gets away with his distortions and fantasies of the actualite becausea lot of folk think he is ‘a bit of a card’ and part of the entertainment industry.
Cleggy and his sidekick Sancho Panza Alexander didn’t get away with it between 2010-15 (student fees, VAT bombshell etc.,) because Lib Dems always portrayed themselves as pure and honest and generous and holier than thou. It was a bit like the vicar fiddling the Church collection.
Short of a charismatic new Leader untainted by association I can’t see a cure anywhere near the horizon.
“MMT is a description of the monetary system. The suggestion that you can permanently fund a UBI with government deficits funded not by borrowing, but BofE money creation is a rather silly one and not one that any credible MMT economist would likely make.”
For once I have to agree mainly with Joe. MMT economists don’t support the concept of a UBI. So you can adopt MMT if you like but the economists won’t come on board too with any kind of useful advice on how to fix the problems you’ll create for yourself with the introduction of anything like a substantial UBI . As Joe says creating money is not always a solution.
Having said that, conventional borrowing is a swap. Taking in one lot of Govt IOUs that don’t pay any interest (cash) and replacing them with other issued IOUs that do pay a tiny amount of interest (bonds). Money creation is just issuing money which saves it the bother! Is there much difference? Possibly if interest rates were higher. But now they are ultra low. What does matter is the total extent of spending in the economy, both public and private, relative to the amount of goods and services which are available to be purchased This should neither be too low and cause recession. Nor should it be too high and cause high inflation.
For me the concept of ‘levelling up’ means ‘failing up’, in the sense that fine words that lead to nothing might buy you temporary popularity; but will end in failure because, for those less fortunate to get a leg up, those who have been more fortunate will probably need to hold back. Some pundits are already talking about ‘blue walls’ crumbling in the South East. It will be interesting to see whether the upcoming By elections both in Chesham and Amersham and in Batley and Spen point to any trends.
The only way I can see to spread wealth and opportunity around more equitably is to work towards a Federal U.K. where the three nations and the six or seven English regions are offered maximum devolution. Whatever system you devise, however, it will be extremely difficult to wrench control away from the south east, given its strategic position so close to Europe.
On the subject of ‘Levelling Up”. Just been watching the debate in Westminster on the cut in overseas aid. Where were the Liberal Democrats ?
Not one out of the eleven Lib Dem MP’s in the Chamber to witness or support for one of the few Lib Dem achievements of the Coalition years.
Has rigor mortis set in ?
@ Joe Burke, at 2.52 pm.
Joe, you state above that “MMT is a description of the monetary system. The suggestion that you can permanently fund a UBI with government deficits funded not by borrowing, but BofE money creation is a rather silly one and not one that any credible MMT economist would likely make.”
Would it be fair to call that a perfunctory and evasive paragraph, unlike most of what you write? Of course that is what MMT is, that’s the label on the tin. But to state the obvious falls far short of even commenting on it ( beyond a passing sneer), or even acknowledging that it is one of a number of different descriptions. And the ‘suggestion’ you go on to dismiss is not one that has been made, I think. I am too old and rusty, now, to claim for myself any such credit as credibility, but can you so airily dismiss the credibility of the author of “The Deficit Myth”, the American academic and US government adviser, Stephanie Skelton? Is it not probable that the very recently announced policy of the US President owes much to her and other proponents of MMT? It may be worth bearing in mind that MMT does not stand for anything so dodgy sounding as “NEW” Monetary Theory.
All that I have tried to encapsulate in my chain of initials is the suggestion that a combination of a fair voting system for Parliament — to introduce eventually an honest system of governing
democratically — would do well to examine MMT closely; and that the skew that UBI would impart to the economy would not only truly ‘level up’ the wretched, but also curb the indecent material greed with which the well-off are ever more quickly damaging the Environment and all of us in it. Is that silly?
Roger,
While the state can create money, it cannot ensure that the money has value. Modern monetary theory does not have a theory of value, or an explanation of the origin of value. It is a description of the monetary system based on chartalism.
The state cannot artificially fix the value of its currency, which is fixed by the market. Money itself, is only a representation of value, not value itself. Value itself is found in production. Commodities, i.e. goods and services produced to be sold, possess value. The (fiat) money in a given economy simply reflects the measured value of the tangible and intangible goods in circulation in the market.
If the state puts more money into circulation without a commensurate increase in the value of the goods in circulation, it merely reduces the value represented by the money.
All of this means that the government cannot print money ad infinitum. There is a limit to how much money the government can create.
That limit is inflation, which is a general increase in prices, or in other words, a decrease in the value represented by money.
MMT recognizes the risks of inflation. As Kelton says, “the limits are not in our government’s ability to spend money, or in the deficit, but in inflationary pressures and resources within the real economy.”
So what is MMT’s solution to prevent inflationary pressures? Kelton explains: “At its core, MMT is about replacing an artificial (revenue) constraint with a real (inflation) constraint. […] Instead of starting with the premise that every dollar of new spending should be paired with a dollar of new revenue, MMT urges us to begin by asking, How many dollars should be subtracted away?” In other words, simply offset the addition of new money by taking money away from elsewhere in the economy. How? By… Taxes!
In short, we are back where we started. We need taxes to fund public services.
Any government that lets inflation ramp-up as a consequence of public spending and raises taxes significantly to dampen it will face the accusation of having itself caused the problems in the first place. I understand, Biden is proposing to fund his budget plans with increased taxation of companies, the highest-income tax payers and increased capital gains taxes.
Roger,
on UBI an organisation named the UBI Center has undertaken a deep dive into the LibDem UBI consultation paper https://www.ubicenter.org/lib-dem-policy-paper.
They assess the four UBI reforms described in the paper, which are partly offset by tax and benefit reforms and find that each would reduce poverty by at least a sixth and deep poverty by half, while benefiting 7 in 10 Britons, though they would also add at least £20 billion to the annual deficit.
A deficit of 1% of GDP is perfectly sustainable without creating inflationary pressures or raising taxes, although it may eat into the level of capital investment that may otherwise be deployed in the economy. So, it becomes a political judgement as to where the tax and spending priorities are, not a macro-economic one.
@ Roger,
Stephanie Kelton is often written about with some approval on LDV. She’d be a good speaker for the next Lib Dem conference whether that was virtual or in person.
However, you shouldn’t run away with the idea she’ll tell you how to fund a generous UBI by running ever larger Government deficits. She’ll no doubt say a Government’s deficit is equal to everyone else’s surplus and to that extent they are a good thing. And if everyone else wants to run a surplus ie save then the Government should be wanting to run a deficit. But if they don’t want to do that then their extra spending shouldn’t be used to ‘fund’ extra Govt spending too. Govt needs to do the opposite of what everyone else wants to do.
Here is SK on the UBI being a poor substitute for a Guaranteed Job:
https://twitter.com/stephaniekelton/status/822081407635877888?lang=en
@ John Marriott,
“….. it will be extremely difficult to wrench control away from the south east, given its strategic position so close to Europe.”
The control and the wealth are in the SE because London is the capital city and centre of Govt.
Canberra does very nicely for the same reason. If it hadn’t been founded as the Aussie capital in the early 20th century there’d be nothing there except for a few large sheep farms!
@ Joe
“A deficit of 1% of GDP is perfectly sustainable without creating inflationary pressures or raising taxes”
Not perfectly and not necessarily. If the private sector has been stoked up with too much private credit it is quite possible to have an overheating economy with a Govt surplus and double figure inflation. Nigel Lawson somehow managed to achieve that in the late 80s. Inflation isn’t exclusively caused by excessive Govt spending relative to taxation levels. Private sector spending counts too.
“While the state can create money, it cannot ensure that the money has value. ”
True
“Modern monetary theory does not have a theory of value, or an explanation of the origin of value.”
Not true.
The value of money is derived from the power of the State to levy taxes payable in its currency of issue. So, to get the money to pay our taxes, or any fees levied by Govt, we need to either work for the government, sell something to the Govt or work or sell something to someone else who has acquired money from govt either directly or indirectly.
http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html
Correction and apology. Layla Moran did, in fact, later take part in the Overseas Aid debate remotely rather than in the Chamber. She spoke with real passion and conviction and I withdraw my earlier comment.
Peter Martin,
A theory of value is any economic theory that attempts to explain the exchange value or price of goods and services. Economic value theories are based on scarcity of resources
Paper or digital money is not scarce and has no intrinsic value of itself. It is continually created and destroyed and exists as a representation of value. Fiat money is money whose value is not inherent but called into being by a human system. Money derives its value from its utility as a medium of exchange and store of value. In order for money to function as a store of value and medium of exchange people need to have confidence in its exchange value and stability. That confidence comes from the backing of a stable government with the ability to collect future tax revenues.
William Wallace is arguing that it matters what level of taxation and spending is sustained over the economic cycle. John Rentoul writes in the Independent “When the pandemic is over, his {Boris Johnson] vaccine-boosted popularity will be over too. Today, we saw what sort of issues will crowd in to replace headlines about what restrictions might be lifted when. The prime minister faces intense pressure for more public spending on schools, the NHS and foreign aid”
“Public opinion will demand that nurses, care workers and support staff be paid significantly more, and that NHS capacity be increased up to and beyond the achievement of the Labour government, which got close to clearing waiting lists altogether in 2010.
As ever, though, the public will be less willing to pay the taxes needed to fund it all, having discovered over the past 15 months that what Sunak called the “overwhelming might of the British state” could be mobilised temporarily to pay the wages of much of the country’s workforce by borrowing”.
@ Joe,
” That confidence comes from the backing of a stable government with the ability to collect future tax revenues.”
That’s the MMT line too. Taxes drive money as Randall Wray explains in the link I posted previously.
“William Wallace is arguing that it matters what level of taxation and spending is sustained over the economic cycle.”
This, again, is the MMT line. Fiscal policy is crucial for a good economic outcome. We don’t want an overheating economy which will produce high inflation. Neither do we want a depressed economy with high levels of unemployment.
So we’re finally in agreement? 🙂
@David Raw
“Correction and apology. Layla Moran did, in fact, later take part in the Overseas Aid debate remotely rather than in the Chamber……
I withdraw my earlier comment.”
Noted.
Don’t you think it was a pity that you acted so hastily in the first place in making the original comment? Mightn’t it have been better to wait longer…?
At the moment I wonder why I bother to write on the subject of Housing and the way some Housing Associations operate.
Very recently, there have been several cases of poor housing and mould and damp, water coming through ceilings.
I’ve had a blocked drain on going for two weeks with water coming through the floor. So soul destroying.
Still the situation on buses causes problems for wheelchair users like myself, I was hit across one of my legs by a buggy not secured.
I want somewhere decent to live, I don’t like going 15 minutes down to the Community Hall to use the toilet, I have a key to get in.
Grenfill, should never have happened, cladding is still in place on some buildings.
If anyone in the Bath area has a Wheelchair friendly property to rent, I’m interested. That won’t help the general bad situation we have on some housing, but in any case, I will continue to fill your page with the unfair situations this government has encouraged in many respects, lack of investment in the future for the many who can’t afford to buy.
Possibly so, Mr. Radical, though given the 0.7% was a flagship Lib Dem achievement by a Scottish Lib Dem MP when in Coalition, and given the fact that a former Prime Minister travelled up from Maidenhead to speak, as did two former Tory Cabinet Ministers from the Midlands and Yorkshire – indeed the SNP Leader travelled all the way from the Isle of Lewis to make a speech any Liberal would be proud of, I still think the Lib Dem Leader could have travelled a few miles from Kingston.
Too much marching away from the Gunfire towards the zoos and the chip shops these days.
Might it be worth the L.D.s promoting the need for, and the benefits of, equitable and efficient taxation?
Stephanie Kelton lists four:
* It gives the government power without the use of force.
* It manages inflation
* It manages wealth distribution
* It facilitates behaviour modification
Richard Murphy of the site Tax Research UK adds
* Price adjustment of goods and services to address externalities and socio-economic priorities
*Increasing interest/participation in democracy.
Can a sustainable, equitable and efficient society exist without honest and understood taxation?
Peter Martin,
you must be mellowing in your old age if you have finally come to the understanding that much of what is highlighted in MMT is embedded in LibDem economic policy and has been since Keynes.
This https://www.forbes.com/sites/johntharvey/2019/01/28/is-mmt-scholarly/?sh=5fcb51b13601 is a useful summary of what the economist explains is how things work, not what you should believe.
“economics is about policy and policy is intended to solve a problem. The problem foremost in the mind of MMT economists is unemployment”.
1. The federal government can print its own money.
TRUE! The private sector creates money, too. This isn’t a theory, it’s a legal fact.
2. The federal government doesn’t have to pay back the debt.
FALSE. I don’t know anyone who has ever said that, probably because it is not true. Of course they have to pay the individual Treasury Bills when they mature, and they do. There is no reason, however, that they cannot do what every household and business in America can also do, and that is subsequently take on new debt. Nor must its level of debt ever be reduced to zero any more than Exxon’s or CitiBank’s.
3. The federal government can’t be forced into bankruptcy.
TRUE.
4. We can afford any social program we want.
FALSE. I don’t know a single, solitary MMT scholar who has ever argued this. Money may not be scarce (in either the private or public sectors), but resources absolutely are. If we have the resources, money can be created to use them. If we don’t, then money is irrelevant. The question is never, “Do we have enough money for a border wall, free college, or universal health care?” It’s, “Do we have the resources?”
5. Financing the deficit by printing money can’t cause inflation.
FALSE. If the economy is at full employment and we continue to stimulate demand, then, regardless of how we finance it, of course prices are inflated. Supply cannot keep up with demand. That was precisely our problem in WWII. With unemployment around 2%, we spent in massive deficit and had to introduce rationing and price controls.
6. Deficits don’t matter.
Matter how? Matter in that it will cause us to go bankrupt? In that sense, no, it doesn’t matter. In the sense that it can’t cause inflation? Then it does matter. In the sense that any kind of deficit spending is helpful? Nope. Deficits DO matter about some things and they DON’T matter about others.
Steve Trevethan,
I think William Wallace is a arguing for the benefits of, equitable and efficient taxation. The 2010 Mirrlees review points the way to how this might be achieved.
Simon-Wren Lewis in his blog https://mainlymacro.blogspot.com/ makes some valid points about the Biden investment programme William refers to in his article.
He Writes “”The whole point of the new state contingent policy regime that many macroeconomists now favour is that fiscal policy looks after recessions and interest rates stop inflationary spirals. If fiscal stimulus does not lead to inflationary pressure that requires interest rates to rise above their lower bound it is not a big enough stimulus.”
Nick Johnson in this article https://peofdev.wordpress.com/2021/05/22/economic-recovery-from-covid-and-the-threat-of-inflation/ highlights some of the consequences:
“Another impact of much looser fiscal policy may be increases in interest rates, which could in turn deflate the prices of financial assets, from stocks to housing. This is surely long overdue, though it could be painful for many. Given the accumulated debt of households and firms, it would lead to a rise in bankruptcy as the burden of debt repayments rises. But for the economy as whole, the inflation of financial assets alongside historically weak growth in wages has contributed to the growing inequality of income and wealth. This is one of the more insidious consequences of a reliance on monetary policy to support demand in recent decades. A reversal of this would be healthy in the longer term, as consumption shifts to being supported more by wages than by the unsustainable accumulation of private debt. Perhaps some form of debt jubilee which writes off household debt would be necessary.
More generally, ways could be found of redistributing income to poorer and middle-class households, whether by boosting wages, increasing the progressivity of the tax system or strengthening the welfare state. All this would give those in greater need more ability to pay down debt by supporting the share of household income in GDP, even as many firms are forced into bankruptcy or periods of restructuring.”
@ Joe,
“……much of what is highlighted in MMT is embedded in LibDem economic policy and has been since Keynes.”
Except it was somewhat forgotten during the coalition years. Keynes wouldn’t have prescribed economic austerity as way to recover from a financial crisis and the recession that followed. There was a slight improvement afterwards but even as late as 2019 the Lib Dems still hadn’t rediscovered what they used to understand quite well. The 2019 manifesto was the most neolib of any of the mainstream parties.
When Rishi Sunak was just starting with his very modest support packages at the start of the Pandemic, Layla Moran was asking where the money was going to come from. Hopefully she has figured it out since.
MMT doesn’t say we can afford any social program we want. I do my best to point out to the more wide eyed of supposed MMT enthusiasts that there is a lot more to the theory than simply creating money for their pet projects. Often its a UBI!
I’d recommend anyone to have a go with Bill Mitchell’s quiz to get a better understanding of what it really does mean.
http://bilbo.economicoutlook.net/blog/?cat=12
Peter Martin,
the link you give to Bill Mitchell’s blog is an example of what the problem is with some of these ideas. There are 3 QandA’s. In the first answer, he argues that the reduction in interest rates caused by QE is a stimulus, but the stimulus is offset by lower interest income of savers. He concludes the effect is neutral which ignores the distributional impact on those reliant on fixed incomes, the house price inflation and the wealth inequality impact of zero bound interest rates.
For the 2nd question, he seems to give the wrong answer as noted in most of the comments. In the 3rd answer he changes the parameters to assume a saving component when comparing the multiplier effect of a direct stimulus in the form of tax cuts, but no saving element by the recipients of direct government spending on goods and services into the circular economy.
Richard Murphy draws attention to these issues when he says “that Bill is just so often hopelessly wrong” https://www.taxresearch.org.uk/Blog/2019/01/18/why-bill-mitchell-is-simply-wrong-on-modern-monetary-theory-and-imports-and-exports/.
Murphy makes a valid point about living in the real world. That is what politics is about – the ability to deliver real improvements in living standards across the population as a whole. That is something the Scandanavian countries have achieved with their broad based tax policies and what the 2019 LibDem manifesto set-out to do https://ifs.org.uk/election/2019/article/liberal-democrat-manifesto-an-initial-reaction-from-ifs with its focus on childcare support, welfare, health spending and public investment program above 3% of national income per year.
@ Joe Bourke,
I don’t want to get into a detailed discussion of the answers to Bills quiz on LDV. If you want to make a comment on Bill’s blog, we can see if you get a response and I’ll add my tuppence worth. There have been times, just occasionally when I’ve disagreed with Bill! Usually though I’ve had to concede that he’s right when I have studied the supplied answer to his question and I’ve given the wrong answer!
I know that Richard Murphy, who seems to have his own not-so-parallel version of MMT, often disagrees with Bill. This is fair enough in itself if he explains his criticism rationally . But he makes the same ‘mistakes’ as most critics of MMT in misquoting and misrepresenting the MMT position and then attacking his own misrepresentation. For example:
“It is not true that we are outright losers from exports, and it is unambiguously not true that we are the only winners from imports”
MMT supports the concept of free trade, or as free as it is politically possible to make it, which has to mean that both importing and exporting has to be a good thing, and mutually beneficially for both parties. However the purpose of exporting some things, which one party might be good at making, has to be able to import other things, which they aren’t so good at making.
There’s no point in exporting just for the sake of it. Some mercantilist countries export much more than they import, year in and year out. They are simply accumulating IOUs which they can’t spend. This really doesn’t make any sense at all.
It’s not just MMT economists who make the same point. I can’t see why it’s even controversial.
Peter Martin,
Norway has used its surplus from North Sea Oil exports to invest in its sovereign wealth fund that supplements its pension system. Some 73% of the fund was invested in equities, 2.5% in unlisted property, and 24.5% in fixed income such as government and corporate bonds.
Developed counties with successful exporting sectors tend to build their net asset position with the ROW. In the case of Japan, for example, this capital accumulation offsets an otherwise comparatively high public debt level.
Exports are driven by firms seeking markets for their goods and services overseas and utilise spare domestic production and labour capacity within firms.
The UK has been able to run a relatively large trade deficit for decades because its multi-national and financial services firms bring in investment income from longer-term overseas investments, coupled with central London property and equity sales, However, as net investment income changes to be more going out then coming in, the current account deficit has to be increasingly financed by asset sales or additional borrowings https://www.ft.com/content/a7b3e6fa-7f16-11e5-a1fe-567b37f80b64
When you look at the real world, who’s citizens are better off. Those like South Korea or those in North Korea where purchase of government issued bonds by firms and individuals is compulsory https://nationalinterest.org/blog/korea-watch/south-koreas-economic-policies-prepared-it-coronavirus%E2%80%94north-koreas-did-not-162346
Switzerland is sometimes said to operate a mercantilist style economy, exporting much more than they import, year in and year out. However, Switzerland has become one of the richest economies in the world owing to the prosperous banking industry, a thriving tourism sector, and a huge number of exports from luxury brands. The Swiss don’t export just for the sake of it or accumulate IOUs which they can’t spend. They enjoy one of the highest standards of living in the world with a stable government and well educated population (the literacy rate is 99%).
This may be of interest : Sir Tom Hunter’s foundation has produced a report on the Scottish Economy which has been well received :
Raising Scotland’s Economic Growth Rate
..https://www.thehunterfoundation.co.uk ›
-Sir Tom Hunter calls for collaboration over a national debate on economic … to a report published today by Oxford Economics, commissioned by The Hunter … an impact on Scotland’s growth rate if there was a clear focus on achieving that
Sir Tom Hunter’s economic report backed by 27 Scottish …https://www.insider.co.uk › News › Sir Tom Hunter
9 Apr 2021 — The open letter implores a national debate on Scotland’s economic future to … The Oxford Economics document, Raising Scotland’s Economic Growth … sector and the media, to determine a new economic strategy for Scotland. … The report, commissioned by Sir Tom Hunter’s foundation……………
It is a well balanced paper from Oxford economics setting out the pros and cons of potential policy initiatives Raising Scotland Growth Rate
@ Joe,
However you want to spin it, for every country running a net export surplus there has to be another running a net import surplus. If the key to economic success is seen to be in the accumulation of economic surpluses we’ll inevitably have more trade disputes which will lead to trade wars and it turn lead to real wars. It’s happened before and it could happen again.
MMT offers an alternative to the conventional “exports are good – imports not so good” narrative by asking us to consider the real purpose of trade. It should be a process of exchanging one commodity for another rather than to get one over on our trading partners with the winners being the sellers and the losers being the buyers. The EU still has this attitude which is obvious from the Brexit negotiations.
@ David and Joe,
The problems of Scotland are intrinsically no different to those of Northern England. In Scotland the discontent manifests itself as Scottish Nationalism and a desire for independence. In Northern England it is the desire to leave the EU and for an English Nationalism which the Tories have been happily prepared to oblige and provide. At least they say they are! This is the basis of their ‘levelling up’ slogan. We’ll have to see how that works out.
The problem is that the UK is far too London centric. Money in any currency union naturally gravitates to other money and the job of central government is to push it back out again. This happens to some extent but not as much as is needed to level the economic playing field. If we think the UK is bad, we might console ourselves that the EU /Eurozone is far worse at doing what is needed to ensure that the euros don’t all end up in Germany and the Netherlands!
We do indeed need ‘New Deal Liberalism’ now, well said William! And not least in resisting the temptation of our south-east intellectual base to avoid higher investment in ‘levelling up’ the North. I was pleased that our Executive here in West Cumbria in its meeting tonight resolved to question what is being done by the Government for our constituency of Workington, which is home naturally of Workington families as well as of the now legendary Workington man! Although certain sums have been promised to finance reconstruction in the centre of one of our smaller local towns, our secretary believes that the profits of the work to be done will accrue to London firms.
Besides infrastructure redevelopment we will need of course a share of the funds for catch-up in educational provision now being denied by Messrs Johnson and Sunak, as well as more useful apprenticeships and job provision to help slow the flow of young people to the opportunities of the south-east. There is much to press for, because there is much that needs government funding, and not least in tackling vast regional inequality in England.
Katharine., The paper for Scotland makes similar points about where profits may accrue.
“There are several related reasons why using fiscal policy to permanently and significantly increase the economic growth rate is not normally an option. The first is that financial markets are unlikely to be sufficiently sanguine. The adverse response of the US Treasuries market to President Biden’s recent Covid recovery package illustrates this caution on the part of markets.
Second, while more borrowing in one year may raise growth in that year, simply keeping borrowing at the same increased level the following year is likely to cause growth to fall back to its previous rate. So, more and more borrowing may be needed, which is likely to be unsustainable.
Third, and most important, there is reason for scepticism whether the borrowing will actually cause economic growth to increase significantly. Demand will rise, but will supply rise too, in the shape of higher output of goods and services, and higher employment? The answer depends partly on how much spare capacity there is in the economy to start with, and how quickly capacity can be raised via, for example, increased corporate investment, or more people deciding to look for work. If there is little spare capacity, or if the economy is not very responsive, then the increased demand is likely to lead to some mix of higher imports, companies focusing on domestic sales at the expense of exports, or higher prices.
And in the case of Scotland, it might be that an increase in spending or cut in taxes by the UK government might cause output to rise in other parts of the UK, but not in Scotland, if the latter’s economy is already closer to capacity, or less able to quickly ramp-up capacity, than some parts of the UK. (The same would be true for any other individual UK nation or region).
Our econometric estimates suggest that at the UK level, the economy entered the pandemic with a modest amount of spare capacity of between ½% and ¾% of GDP. That implies that if demand were to be boosted by about that amount, then there would be no problems with inflation, but a larger boost over a sustained period would be inflationary, unless accompanied by ‘supply-side’ measures to raise either capacity or efficiency”
Fiscal policy is part of the answer but only part. Efficient tax policy and industrial strategies (including FDI) are argubably more important.
@ Joe Bourke,
“The first is that financial markets are unlikely to be sufficiently sanguine.”
“The financial markets” eh? This is always the neoliberal excuse for not doing something of a social nature. The line is usually along the lines of “sure, we would like to do more of that except that those ‘markets’ just won’t allow it. They’ll sell off the pound and then it will only be worth 20 cents. What a fine mess we’d be in then!
Except it really doesn’t work like that at all. If anyone had said running an increased deficit of even 10% of the one run up by Rishi Sunak to kick start the Northern economies and help out the NHS prior to the Covid emergency, the answer from the neoliberals would have been you know what!
The point is that increased Government spending in the South East of England will, and has, increased inflation there. It may not mean the price of bread is much different in Workington or Wokingham, that can be transported up and down the country on lorries, but try to buy something in Wokingham which can’t be, like a house and you’ll know what I mean.
Increased expenditure in Workington, on the other hand, won’t create any extra significant inflation. It will get spent and respent in the economy and go back to the Government in extra taxation revenues. The deficit will therefore be unchanged.
There’s really no need to worry about ‘the markets’ providing that the economy in the UK as a whole is working well. This is what will make the UK an attractive option. We need a more prosperous North, and a more prosperous Scotland and Wales. All this is possible without creating extra inflation.
So why not just do it?
The main issue with pursuing the social democratic model is that it only really works in the Nordic countries where union membership well exceeds 50%. This is a product of the Ghent system of social insurance, which means trade unions provide unemployment benefits and the like and has ensured that even private sector white-collar workers join trade unions. This provides the electoral base for social democratic politics.
Somewhere between 1900 and 1930 we have lost any backing from trade unions and have mainly represented those peripheral to 20th-century class politics, people the 1959 manifesto described as the:
“millions of young people and uncommitted voters who simply do not see themselves mirrored in the image of Tory bigwigs or Labour bosses. There are all the consumers, small business owners, professional men and technicians, craftsmen and farmers, fishermen, shopkeepers and pensioners who have no interest in the Capital v Labour struggle and are greatly harmed by it.”
We need a different uniquely Liberal idea of how to run a society; not merely a clone of social democracy.
This is why we should be pushing for the old ideas of Ownership for All, community politics, co-ownership and a Federal Britain.
“The point is that increased Government spending in the South East of England will, and has, increased inflation there. ………………… try to buy something in Wokingham which can’t be, like a house and you’ll know what I mean.”
Quite. I’m not an economist but I think I do understand the definition of inflation – too much money chasing too few goods – which seems what is fundamentally wrong with housing in this country. Although the houses do need to be built in the right places with as low environmental impact as possible (e.g. not in areas at risk – now or in future – of flooding problems, not so as to increase transport costs, time or environmental impact etc.)