David Cameron has said all the signs of another global crash exist. I think he is right: they do. But from then on he and I differ.
Writing in the Guardian it is as if he did not attend the G20. There is a nod to tax reform. But he appears to be completely unaware of the commitment to raise infrastructure spending at the core of the G20 plan to turn round ailing economies. His focus is instead on highlighting problems in Europe and on signing TTIP - the trade treaty that will require the privatisation of the NHS whatever he says now. To put it bluntly, this is a man who can see a crisis coming and who must know that his austerity programme can only make it worse (anyone but a fool can see taking money out of a failing economy, as he plans to do, is bound to make it worse) but who is resolutely refusing to recognise the issues that will cause this next wave of economic collapse.
So, let me explain as simply as possible for the likes of David Cameron why we are going to have another crisis. It's not hard to do. And it can be summarised in one phrase. The wrong people have the money. If you want an explanation for that it is that government policy over the last few years has done all it can to make sure that the wrong people to make a change in the world have got more of the money.
What do I mean? I mean that the people who spend least of their incomes have had the biggest pay rises and are the only ones to enjoy effective tax decreases over the last few years. These people are the highest income earners in the UK. At the same time cutting benefits for the poorest and increasing VAT (which together with deliberately enforced wage cuts have reduced the net disposable income of most people) and cutting taxes for the wealthiest this has been the inevitable outcome. And we know this outcome has not happened by chance: this is deliberate.
Wealth inequality has risen too. Again, that's deliberate, and capital gains tax cuts and reductions in inheritance tax are all intended to foster this goal. But there is a problem with fostering wealth inequality. The rich are rich because they do not spend anything like all they have. If they did spend it they would not be rich. But what that means is that when there's a shortage of spending in the economy to let the wealthiest get wealthier simply means that the imbalances within it get worse. And it's imbalances that cause crises.
Corporation tax cuts and reforms to our corporation tax system that means that multinational corporations based in the UK can, since 2010, find it much easier to make effective use of tax havens to cut their UK tax bills have also made the problem worse. I reckon these cuts are costing at least £10 billion a year. What these cuts do is transfer money that would have belonged to the state to companies in the hope that they will be encouraged to invest it as a result. But they aren't doing any such thing. The amount of the UK corporate cash pile is open to dispute (partly because company accounts are so unreliable) but what no one doubts is that it is growing. Companies are taking the tax cuts and banking them. They aren't even giving them back to their owners. They're just hoarding it. Like the wealthy (perhaps, unsurprisingly) large companies are simply sitting on their cash.
The tax gap is another indication of this. You don't have to believe it is as big as I think it is to realise that what the tax gap really means is that, yet again , the wrong people have the money. What really belongs to the government is in the hands of crooks and cheats, with massive economic consequences.
That is true of all these observed facts. All mean that for differing reasons the wrong people have the money. Either, in the case of the tax gap, the money is in the wrong hands in a way that undermines economic confidence, especially amongst honest small businesses, or in the case of the other gaps (income, wealth and the gap between large and small companies) increasing amounts of cash are being given with official sanction to those who won't spend it. And what that means is there is a shortage of demand in the economy - and most people are seeing their incomes fall. It's not rocket science to work this out: it's glaringly obvious, and yet the likes of David Cameron and George Osborne deny it, and suggest all mist carry on as now - absolutely guaranteeing as a consequence that things can only get worse.
What can be done? I've always pointed out that there are only four drivers of the economy: consumer spending, investment, net foreign flows and government spending.
Investment is not happening; business will not do it: that's why it has cash.
Net foreign flows are broadly neutral: the trade deficit is dire but hot money still comes to the UK, although we cannot rely on that.
Consumer spending is poor and may get worse: most people do not have the money.
And that leaves the government to put matters right. It has to generate new economic activity.
How? Three ways. First, print money and use it productively rather than simply give it to banks to prop up asset values. That's green quantitative easing. The Bank of England has conceded this is possible. This would invest the length and breadth of the UK to create new sustainable infrastructure (which is exactly what the G20 says is needed to deliver jobs).
Part of the funding for Green QE would come from the income it would generate. The IMF says investing in infrastructure pays right now simply in terms of new tax yields created.
Part would have to come from additional taxes. Big business would have to pay some. I note that in the FT there is discussion today of applying retrospective taxes on large companies, albeit in Japan. Maybe the time has come for that here too if business will not invest its cash.
And we do, undoubtedly, need to rebalance tax onto those who can pay it via increased taxes, especially on wealth, including a national insurance charge on investment income and better wealth taxation, including land value taxes. Banks mist also contribute through financial transaction taxes.
And we must close the tax gap.
Put this together and there is a coherent economic policy in play that deals with the fundamental fact that our economy is not performing as it should because money is being directed, by the nature of modern capitalism, into ever fewer hands (the drive for artificially defined productivity guarantees that) which fact is being exacerbated by current government policy and this fact has to be reversed if most people in this country, and others, are to achieve anything like their potential in the economy, in society and in their lives.
That's my goal. It cannot be that of the current government or they would not be doing what they are.
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So, if say £1,000,000 is to be distributed as (a) pay rise(s), does the chancellor rake in more tax if its given to one individual, or, spread amongst 10,000 individuals?
A simple % will be sufficient answer.
Initially it makes almost no difference – the effective tax rates are broadly similar
But because those on lower incomes spend a higher proprtion of income the multiplier effects them having the income is much higher
You say regarding Cameron “anyone but a fool can see taking money out of a failing economy, as he plans to do, is bound to make it worse”. Well, that’s true but it assumes his aim is to make the economy stronger. I very much doubt that and always have, IIRC I said on my arrival here Cameron/Osborne etc. are creatures entirely of privilege and their principal aim would be to reinforce and underline that privilege. This is exactly what we’re seeing. They aren’t doing it by making the economy stronger or fairer, they’re doing it by making it weaker and even less fair. Cameron knows full-well he’s weakening the economy. We should expect no less.
Further we should probably bear in mind there won’t be any financial crisis at all for Cameron and his super-rich chums. They’re coldly and deliberately making life harsher and in some cases unendurable for the rest of us, but they’re all ok and will continue to be.
They seem intent on making money scarcer for the majority. That’s fine. If we look away from the TINA narrative they’re so keen we adopt as gospel we’re reminded by books like ‘People Money’ by the late Margrit Kennedy among others that there are indeed alternatives like local/regional currencies and of course Worgl provides us with an excellent example of what stamp scrip can do for a local and probably a national economy. Uninspired by the empty-headed nonsense being spun by Balls, we need to leave government to its own devices and providing for ourselves, I feel, and the ideas in this book need to be more widely understood and put into practice. With that in mind I’m looking for a walkthrough for the kind of stamp scrip setup they implemented at Worgl. Does anyone know of one? The books on it all seem to be in German which I don’t speak 🙁
I agree – by making the economy weaker, the Tories can open up what is left of the public sector (NHS etc,) and then enable the pension funds and other international asset strippers to come in and strip out the value for their investors. How soon will it be that a fully qualified doctor is on £20K a year? Or less!
This seems to be the unstoppable internal logic of it all but sooner or later, having gone around and sucked up other people’s money, who or what will be left?
Bill there are translations of gesell’s work available and I think a website in german and English
I’ll have a hunt round, thanks.
Gesell ‘got’ both the money and the land issues.
Clinton’s former Labour Advisor Robert Reich makes the same point in his film ‘Inequality for All’ – I only tell you this so that you are aware that others feel the same and that you are not the only fish swimming upstream so to speak.
The film is well made and I’d highly recommend it.
If you are still recovering and perhaps need some down time, instead of those boxed sets also consider these:
‘Inside Job’ – about the role CDO’s played in the crash but also digs deeper into the economics and regulation ‘professions’ (not to mention ratings agencies) and their roles in bringing down the world economy in 2008.
You might also consider Michael Moore’s ‘Capitalism: A Love Story (a humourous take with deadly intent) and also the rather excellent ‘The Flaw’ which ends with just the conclusion you have stated here – that the real financial crisis is the reduction in wealth for those who actually drive the economy.
And then there’s the ENRON film – The Smartest Guys in the Room – which for me sums up the mindset of those wrong people who have the money best of all.
Finally, have a look at the work of Adam Curtis, particulalrly ‘The Mayfair Set’ where he exposes the asset stripping that paved the way for the economic system we work with today. He also did a film about Barings Bank after the Leeson affair.
One of the factors that gives me hope with the above is that besides Adam Curtis, all the films I’ve suggested have been made in America – the font of neo-liberalism no less – and this suggests that the ideas of people like Ayn Rand, von Hayek etc., have lost their lustre.
Thanks!
Inside Job is brilliant and explains in simple terms just how the banks ripped us all off.
Latest IFS pamphlet on lower than expected savings being realised from welfare “reform”.
http://www.ifs.org.uk/publications/7447
“Over the course of this parliament, the government have made changes to benefits and tax credits that, at the time they were announced, were expected to reduce spending in 2014—15 by £19 billion relative to a world of no policy change. In fact, real spending (after adjusting for CPI inflation) will be only £2.5 billion lower in 2014—15 than it was in 2010—11”
All that pain (inflicted with glee let’s not forget) for no gain.
Richard,the problem with your analysis is that you are thinking in terms of money and not in terms of real resources and the consumption of real resources. Let me give an example. What is best for society?
Bill Gates spends all of his money on buying lots of food, eating it himself and letting the rest spoil.
Bill Gates spends all of his money building a super yacht that only he will use.
Bill Gates spends all his money on jugglers and clowns to entertain him.
Bill Gates lives frugally but reinvests his money in Microsoft.
Bill Gates parks all his money in the bank forever.
Bill Gates burns all his money.
It seems you would think that the last three are bad for society, but they are in fact the best because they mean Bill Gates effectively works for society for free.
I am using money as a metaphor
Money is, as a matter of fact, a metaphor
The allocation of resources equitably and environmentally would require a true democracy which we are light years away from. It would also require a sort of collective planning to replace the skewed and rigged nature of markets-again this would require an immense amount of goodwill and a profound conversion to anti-hierarchical modes of thinking to avoid the collosal disasters of Soviet Russia and its State Capitalism.
I’m afraid that neo-liberalism will probably continue as it it has mesmerised (via media control) the populace into accepting it as a meta-reality. It might not burn itself out until it brings massive moral and environmental tragedy in its wake.
2 & 3 are the best because his money gets redistributed.
Bill, how come you didn’t pick #1 too? Isn’t it the same as 2 and 3? But I’m intrigued how you can think society is better off if Bill Gates employed hundreds of people as his personal entertainers than if he didn’t. The movement of money to them is a red herring. Society would be better off if Gates did things for free and no one had to provide services to him in return.
I did think about it – I thought about all of them – in that specific case I’m not keen on the waste of resources. Food comes from animals and plants – they die to make it – and it’s simply disrespectful to waste their sacrifice. I say thank you to the spirit of Mr. Buffalo before I eat him, myself. I mean it, too.
I’m not sure that your propositions are as neutral as you seem to be suggesting. They are also a bit ‘abstract’?
There is no doubt there is a lot of social utility emanating from Gate’s products and services, but they have all cost someone cash to acquire them – I don’t see anyone buying a microsoft computer or software by taking along some tomatoes from the back allotment or some newly laid eggs from the hens they keep. Let’s keep this grounded in reality. Money seems to have been conceived as a proxy way by which to barter without having to use/lose your resources? Taken to extremes this concept is called a credit card.
In my opinion, what is best for society in terms of things from Gates is this:
1. Paying his staff a good living wage.
2. Paying his suppliers a good price for their goods.
3. Paying all of his taxes where ever his business does business.
4. Not arbitraging the tax regimes of different countries.
5. Making sure his products can be shared with other products (copyright laws,
patents etc)and avoiding market monopoly.
6. Not colluding with states who wish to eavesdrop on innocent citizens going
about their business.
7. Ensuring his products are recyclable and do not poison the planet.
8. Buying raw materials from people who behave ethically and do not pollute
the planet or exploit labour.
9. Not getting bored and becoming a politician.
10. Apologising for Windows XP.
I’m sure I could go on but with the exception of (10) above, I’d expect the same from Apple too.
‘It is only when wealth begins to concentrate in the hands of a relative few at the expense of billions of others who are denied even a small share of finite wealth that trouble starts and physical, human suffering begins. It does not have to be this way. Massive greed and consequent massive human misery and suffering do not have to be accepted as a givens, unavoidable, intractable, irresolvable. Just changing the way business is done, if only by a few companies, can change the flow of wealth, ease and eliminate poverty, and leave us all with something better to worry about. Basic human needs such as food and shelter are fundamental human rights; there are more than enough resources available to go around–if we can just figure out how to share. It cannot be “Me first, mine first”; rather, “Me, too” is more the order of the day.’
That statement made 18 years ago would lead to a sequence of events which are continuing 3 years after the authors death. In December, you’ll be hearing about a Lithuanian proposal to deliver a ‘Marshall Plan’ to Ukraine requiring 30 billion euros from EU funds.
https://www.linkedin.com/pulse/article/20141116095228-3207079-european-people-s-party-a-marshall-plan-for-ukraine
The foolishness and short-sightedness of cameron and his cronies (including, by default, the Labour Party!) is that they are repeating the mistakes of history (perhaps, as Nietzsche said, we are doomed to an ‘eternal recurrence of the same’) as the wealth divide increases the likelihood of social unrest increases. We now face the prospect of a high-tech version of Dickensian Britain.
With all gov benefits moving solely to electronic application/payment, you should not underestimate the degree of control that gives to the state.
All we need now is electronic voting and we can tie gov payments to peoples voting choice: Vote for me or your bank account [doesn´t] get it.
The problem with quantitative easing is that it devalues the buying power of the currency to which it is applied – just look at Germany/Japan after WW2.
With government borrowing we have run up the fiscal deficit – correct me if i’m wrong but the way I explain this is when there is more money changing hands in the (fiscal) system than actually exists in the system to begin with. Look what happened when banks in America started to lend money that didn’t exist for mortgages. It’s the very reason John Major didn’t want us to sign up fully to the EU (unless the EU safeguarded a fiscal deficit of no more than 3%)
Not only do we need to claw back the fiscal deficit, we need to pay off the interest – this is purely money being passed upwards from the poor to the rich. And we need to regenerate the buying power of the currency. How to do that? The more we rely on the convenience of borrowing, the more interest is generated and the larger the gap becomes.
Credit/debt and convenience are our worst enemies.
QE is not borrowing
It cancels borrowing
But QE needs to be spent into the economy – and not given to banks
See what I have written on green quantitative easing
I wasn’t saying that it was borrowing, i know it’s just the generation of more numbers on computer screens (or cash). The way i wrote about QE and then borrowing, was sloppy on my behalf!
What I meant was that we have 3 different problems: borrowed money which is repayable with interest, the fiscal deficit and the reduction of buying power of sterling through QE.
I agree with your idea of green QE though – we need money in our back pockets or how else can we oil the wheels of the fiscal system? If the richest hold onto all the cash, how are we supposed to buy their wares? Business has no need of moral values and there is no cap on how much profit is enough – thats the crux of it.
We all do sloppy on occasions 🙂
Do you have any thoughts on the idea of QE being used to distribute money as a Citizens’Income? I’m reading Money for Everyone by Malcolm Torry about Citizens’Income and this is a scenario he suggests at the start of the book… Obviously, by increasing people’s spending power, including those on low income, will be likely to to increase consumer spending, one of the drivers you mention. How would this compare with green QE as a driver for the economy, do you think?
I do not think QE can pay for a Citizen’s income
But I support the idea http://classonline.org.uk/docs/2013_Policy_Paper_-_Richard_Murphy__Howard_Reed_(Social_State_-_Idleness.pdf