I did not manage to write after John McDonnell's speech yesterday. A book launch, interviews and recording for BBC1 news, Sky, Newsnight (although I don't think they used it) was a little distracting. And a night's sleep has helped add perspective. Several things stand out.
The first is the clear rejection of gesture politics. George Osborne can legislate for surpluses, as Alastair Darling rather unwisely did before him, and it makes it no more likely it will happen. The truth is John McDonnell knows the chance of George Osborne achieving a surplus is incredibly low, and he also knows that if he did do so that John will also get no real chance to be Chancellor as the Tories are likely to win. So planning on the possibility makes no sense at all, and he is not wasting time considering the possibility. The days of confrontational politics where alternatives are put forward are back, and from whatever part of UK politics you come that has to be good news. The consensus we have suffered has been stifling for democracy itself.
Second, there is a rejection of austerity. The alternative is growth, but based firmly on investing in our future. I hear already voices saying that people will need to be convinced this is possible. Of course it is possible: growth is what happens when you build homes people need, the IT infrastructure that is essential, the flood defences that will keep some key parts of the UK populated, and more. And when we have growth more people work, fewer claim benefits, pay increases (the type of inflation we need after decades when the reverse has been the case in real terms as a share of GDP) and so budgets tend to balance. It is a progression like night following day. Indeed, it is the only way to balance the budget in a modern state that accepts its obligations to its electorate.
Third, I heard the tax gap and related issues. It was all Sky wanted to talk about last night as if this was the basis on which the deficit would be closed: I refused to play Adam Boulton's game on that and he got very grumpy as a result. But it is important. It is vital that a level playing field for business be built where the tax cheats do not get an advantage. That will have to happen if the mixed economy is to survive. This agenda is the most pro-business agenda there is now.
Fourth I heard about the rebuilding of the instruments by which the government intervenes in the economy. This is very welcome and massively overdue. Bob Kerslake looking at the Treasury is an inspired move: a non-Treasury civil servant is the right choice to look at how the Treasury can be put in its proper place. It has been too dominant for far too long, populated by a peculiar breed of thinking that is akin to that of the small minded accountant who only knows what cuts they can deliver. The courageous and entrepreneurial state has to be set free. That is the aim.
It's the same with the Bank of England. No one is saying that the Bank of England need lose its independence if it has the right mandate, but giving it a remit based solely on inflation and suggesting its role is linked solely to monetary policy as if there is some total divide between that and fiscal policy is just wrong. The review has to be significant.
As it will be on HMRC where the questions to be asked stretch from top to bottom of the organisation, even if the top is where many of the problems seem to lie. It will need to be open-minded and welcoming of all suggestions and comments but as with the other reviews, the idea that current structures are sound has been firmly rejected.
And last I heard no new taxes on those not able to pay: progressive taxation is back. And we need it.
Faisal Islam of Sky put it to me yesterday that there was no policy in this speech. How wrong can anyone be? This was about rebuilding policy from the foundations up. It was not about silly tinkering or gestures. It was about fundamental change. Maybe some can't recall such thinking. Well, it's back.
If it had included the environment a little more it might have been better still. But it was a welcome step forward. The gaps will need to be filled, including on that vital issue, but for the first time for a long time it looks like change is possible.
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The problem, as I’m sure we all know really, is that it is difficult to explain to the electorate that the deficit is really no problem at all, especially with inflation at 0%. Not that its ever been any sort of problem since the pound floated after Black Wednesday in 1992.
It is also difficult to explain to the electorate that the government cannot control its own deficit. George Osborne is the latest to have discovered this the hard way!
Simply, if savers (mainly the central banks of the big exporters) wish to purchase gilts, which account for nearly all the deficit, there is little the government can do to stop them. If they don’t issue the gilts the pound slumps. If they do issue gilts the govt has to deficit spend the proceeds back into the economy or the economy slumps.
So which would we all prefer?
So we do have to recognise, at least amongst ourselves, that although sentences like:
“And when we have growth more people work, fewer claim benefits, pay increases (the type of inflation we need after decades when the reverse has been the case in real terms as a share of GDP) and so budgets tend to balance”
sound plausible we have to ask ourselves if they are really true.
Of course growth is good. It is necessary to lift people out of poverty and create the well paying jobs that people need. A healthy economy will enable the UK to sell even more gilts and, probably, at a lower interest rate. But is there any real evidence that the government budget deficit has ever fallen over the longer term, even as the GDP has risen over the longer term?
So we do need to be careful about what we promise. In Australia, Julia Gillard’s Labor govt came to grief after making silly promises on the deficit which it was unable to keep. British Labour shouldn’t make that same mistake.
Peter-Bill Mitchell makes it clear that:
“governments should not issue any public debt as the benefits of doing so are small relative to the large opportunity costs. The Modern Monetary Theory (MMT) position is that there is no particular necessity to match public deficits with debt-issuance for a currency-issuing government and deficits should be accompanied by monetary operations which we now call Overt Monetary Financing (OMF).
I think he has also pointed out:
“The ‘cottage industry firms’ that characterise the public debt industry use resources for public debt issuance, trading, financial engineering, sales, management, systems technology, accounting, legal, and other related support functions.
These activities engage some of the brightest graduates from our educational system and the high salaries on offer lure them away from other areas such as scientific and social research, medicine, and engineering.
It could be argued that the national benefit would be better served if this labour was involved in these alternative activities.”
If the interest rate is at the lower bound there seems to be less of a case for issuing debt as an interest rate control.
As Mitchell goes on to say:
“MMT suggests that the policy interest rate should be maintained at zero, which means there is no need to have stocks of public debt in the hands of the non-government sector.”
Doesn’t this need some discussion? Although, I accept this would be a paradigm shift too far for Labour at present-one paradigm at a time please!
Bill ignores the constraints of the EU
Let’s get the infrastructure we need first – and keep cost as low as possible – but not make financing the likely issue
PQE is important – but not as important as the investment
EU law constrains the mechanisms that can be used, but the choice of how to fund a deficit, by issuing cash, or by issuing debt, or a mixture of the two, is still there. As you’ve pointed out, the effect of QE was that the deficits of the years 2009-2012 were approximately all funded by issuing cash.
Is your position that deficits should usually be funded with debt, but that during a recession it is OK to fund at least part of them with cash? If so, I would be interested to know your reasoning.
Simon has quoted part of Bill Mitchell’s argument for funding deficits entirely with cash: that issuing debt enables the finance sector to suck income and talented people out of more productive sectors of the economy.
One positive argument sometimes given for issuing debt is that people have a reasonable need for safe savings which preserve the value of their money. In other words, paying more interest than necessary (by issuing debt rather than cash) is a deliberate subsidy. But it seems to be a very poorly targeted subsidy, when much of the interest is paid to outside the UK, and there is no limit on how much richer people can hold in gilts. This subsidy could be better targeted via National Savings products, for short-term savings; and for retirement savings, by going back to SERPS, instead of private pensions.
The latter point ties in to posts you’ve made about the poor value of private pensions, relative to the huge subsidy which they are given in tax relief. And if gilts are being issued because they are useful for pensions, then there is a further subsidy in the unnecessary extra interest being paid by issuing gilts instead of cash. Meanwhile, the existence of private pensions is another factor swelling the size of the finance sector, and of the income it drains from the rest of the economy.
I would be interested to hear your views, though I realize this may be a big topic …
Simon,
Bill is describing what should be done ideally. He’s saying gilts issues should be abolished and replaced with longer term deposit reserve accounts at central banks. I would argue they should pay some interest, to be decided by government. At present, gilts are sold at auction which means the market decides longer term interest rates unless govt intervenes to lower them with QE.
There’d be no QE nor PQE needed under Bill’s plan – as I understand it. But there’s some way to go before that can happen. We have to make do with the system as it is for now.
The Tories are likely to win, if George Osborne manages to close the deficit and run a surplus?
If Osborne did do that, that would mean either
(a) reducing the current account (trade deficit) which would mean more exports or less imports. Very unlikely at the moment with recession looming everywhere in Europe and Britain with good growth rate sucking in imports.
(b) increasing private sector borrowing even more – that is pump up the housing market and get people to buy even more expensive houses. He might try that again. But very unlikely it will succeed.
(c) Osborne could of course tax the wealthy and the corporates which have excess savings. That is very unlikely to happen.
So the deficit will get smaller, but people will get even more indebted.
At the same time public services are already creaking everywhere because of lack of funds. That is at the beginning of five years Tory rule. That will of course get worse over five years, as more funding is cut back.
All you say is absolutely true
But Chancellors who deliver what they say get re-elected
Osborne has no hope of delivering his promise
I thought John McDonnell’s speech was a powerful one, and I agree Richard, that the viable alternative narrative it framed will have the neo-liberal much more cautious now.
I still feel like pinching myself now and again every time I hear Corbyn or McDonnell speak on the telly.
Labour shadow Ministers arguing for a progressive politics and economics that discriminates in favour of working and poor people.
Crikey. Has somebody dropped an hallucinogen in my coffee?
Evan Davis came across as very positive last night on Newsnight with McDonnell; he seems to have picked up on the excitement at conference. Allegra Stratton did a nasty “mods and rockers” piece, looking for dissent. You had a minute or two of her time I think Richard, and came across as distinctly un-rockerish. I’m sure she was disappointed. John McTernan was included for comment at the end. I don’t think he will last – much too boring and negative. But Zoe Williams (Guardian) was also very positive.
I look forward to Evan Davis putting McDonnell’s policies to Osborne on Newsnight, and hopefully nailing him.
Indeed-is the oil tanker of perceptual change actually beginning its turning circle!
Sorry-I sound like Humphrey Littleton there!
(Simon Q).
John McDonnell spoke well yesterday. At last real Labour Chancellor’s speech for many a decade.
I am concerned however about his promise to cut the deficit by taxing the rich and the rent-seeker. Tax the appropriate people and redistribute by spending on the poor and the public services yes. But with an enormous trade deficit, you cannot tax to cut the fiscal deficit without increasing poverty and private debt. Is there someone (Anne Pettifor maybe) hopefully to point out sectorial balances to John?
I will be doing that
So will Ann, Anastasia and Danny at least
Bill Mitchell has become very concerned by John McDonell’s promise to cut the deficit. He thinks that he has walked straight into the Tory neoliberal framing.
http://bilbo.economicoutlook.net/blog/?p=31968
He says that “Britain will not generate large external surpluses in the foreseeable future, which means the only way that the private debt situation can be brought under control without driving the economy back into recession, is for the government to increase its fiscal deficit.”
Bill is right
I have been saying the same thing for some time
@ Sandra,
Yes Bill is right. He always is on these kind of issues! Or maybe nearly always 🙂
Now is a good time to sell any shares, spare houses etc you may have IMO. It’s going to be tough for the next few years.
The only hope is that the Tories will say one thing and do another. There’s some evidence they did that in the last Parliament. They had to give themselves at least a chance in the election.
‘Sectorial balances’
My ears pricked up when I saw this.
Can someone explain in around 4-5 sentences why this is relevant in the context of this blog as I seem to have forgotten!
Thanks
http://www.taxresearch.org.uk/Blog/2015/07/09/george-osbornes-planned-budget-surplus-requires-some-heroic-and-wholly-implausible-assumptions/
Thank you muchly Richard.
I am intrigued about this constant reference to an ‘enormous balance of trade deficit’. You have a floating pound so why hasn’t the appropriate adjustment occurred?
I am aware that industry is often slow to respond to depreciations etc. but, overall, the point remains. If there are structural issues I can’t see how you could rely on the fiscal deficit alone to compensate for a external imbalances. In the near term, yes. But not indefinitely.
Marco,
I think you have it the wrong way around. It’s always easier for a country to hold its currency down and run a surplus than it is elevate its currency and run a deficit.Whenever the Uk has tried to elevate its currency the speculators have made a killing!
If countries such as Holland, Germany, Switzerland, Denmark, China, Singapore, and others want to cheapen their currencies there’s not a lot anyone can do to stop that. Unless we have currency wars! There needs to be countries like the USA and UK who run deficits to enable these countries to run surpluses. Everything has to sum to zero!
A floating currency isn’t going to cahnge anything.
Peter,
There are several aspects of this that I can’t abide. Generally, nations are either have a float, a peg or they are currency manipulators eg. China (simple case) or Germany (basket case). I don’t see why the UK or anyone else is obliged to run deficits in order to facilitate mercantilists like China and Germany.
The US represents something of an exception because the USD is the world’s de facto reserve currency. Its deficits provide global liquidity and the US enjoys certain (mixed) blessings as a consequence.
You are right about the “currency wars” assertion re. competitive devaluations. That is the problem that Keynes tried to resolve at Bretton Woods and it remains unresolved. It is also the reason that “free trade” is a complete farce. I can’t see it being resolved without some sort of universal standards (level playing field)and some resolution of the reserve currency question. Keynes’ Bancor proposal tried to address these matters. I can’t see that anyone can resolve them unilaterally. At least not entirely.
There are a couple of ways of looking at this. We could say that imports are a net benefit to the economy and exports are a net cost. We could consider that the UK is getting a better deal than Germany for example. We have the surplus in the real things.They have the deficit. We just run whatever level of budget deficit is required to keep our own economy topped up with spending money.
Incidentally, Germany is the real mercantilist. Their trade surplus is 7.5% of GDP. China is a much more modest 2.5% of GDP.
Germany, or the whole of the EZ, doesn’t really cause the UK any problem. It is forced to recycle its surplus through buying gilts. Germany does however cause its trading partners in the EZ lots of problems because there is nor recycling mechanism in place. Anyone would need to have rocks in their heads to sign up for a common currency agreement with a country like Germany!
If the UK decided it wanted to balance its trade it could simply stop issuing gilts or issue fewer gilts and make up the difference in the short term by PQE. That would lower the currency, without their being any accusation of a trade or currency war. A lower currency would lead to a more balanced government budget too. The two deficits are closely tied as Neil Wilson would explain.
In fact I see PQE as more a way of controlling the exchange rate than a way of raising money. That’s just my view, I haven’t seen anyone else argue the same way. I’d be interested in Richard’s thoughts on that point.
Hmm. Yes. Its an interesting discussion. I’m actually (sort of)with you on the idea of imports being a net benefit and exports being a net loss. The devaluation that makes you more competitive also lowers your purchasing power and standard of living. But, then again, that’s the consumer perspective. From an employment perspective, a continuous rise in imports isn’t particularly helpful. A budget deficit can (should, must) balance that out in the present tense but not indefinitely. Some external adjustment has to occur.
Your ‘sectoral balances’ perspective is interesting because it cuts through and identifies a close relationship between the two deficits (or surpluses if the case may be). One failing in the standard economics is that it only identifies an indirect relationship and it views the two separately.
As for your PQE observation, I think that may depend on the size of the ‘external’ sector (X-M). In a small trading economy like Singapore, it accounts for most of the economy. In the US and most large economies its actually a lot smaller than most people think. If your external sector is relatively small, the effect that monetary and fiscal policy has on exchange rates is less important in proportionate terms and less of a consideration overall.
I do think it will be difficult to convince people of growth as an alternative to austerity because of what Wren-Lewis has dubbed ‘media macro’. And because of what a lot of Labour MPs believe. And the stuff John McTernan comes out with on TV.
I think Corbyn et al are absolutely right to try and challenge the austerity narrative but it will be hard. Hopefully they will have a good media team as well as the economists on board, plus start building up grass roots activity too.
It was refreshing to hear McDonnell yesterday – I know there is the worry he is buying into the deficit denial framing – but over all I thought this is what a Labour politician should sound like (and none of the main ones have for years).
I can see merit in his strategy of we may as well vote for Osborne’s nonsense law even though he doesn’t believe it. Hopefully it’s the right move. Difficult to say.
Likewise, I took the time to listen carefully to John McDonnell’s speech and was impressed. And I’m certainly not in the ‘hard/old left camp’. I particularly liked the line-up of advisors that have been put together – some very serious minds there.
As so often, one wishes that media commentators and interviewers would actually listen to what was said, rather than hear what they want to hear…
Look forward to see how this translates into working policy
I was thinking about Frances Coppola’s observation re. Cameron walking away from the EU fiscal compact (it leaves the Tories’ options open) and your point about the deficit refusing to go away and it occurs to me that there is another distinct possibility that Labour will need to prepare for.
They (the Tories) could start pinching your policies while trying to pass that off as something different, something of their own. Seriously. Cameron is a flexible and pragmatic leader (he’ll do whatever it takes).
If this happens. The one thing you wouldn’t want to do is be reactive – shift when they shift in order to maintain difference. No, they don’t get to call the shots (especially when they are backing down). What you would want to do is be prepared, hold your ground and immediately commence a loud major narrative that describes exactly what they are doing and how you have set the agenda.
Its just a thought, but you never know…
I watched the speech and McDonnell’s interview by Jon Snow, as did my wife. I was impressed, and my wife – whose not particularly interested in politics (although she’s an ardent watcher of C4 News each evening so knows what to look out for) – thought it was the most sincere and straight talking interview with a politician she’d heard for years.
On your point about Faisal Islam saying there wasn’t much policy, I assume he means actual formulated detail. If so then this is deliberately disingenuous I think. As you note, this process needs to start with reframing and that was/is exactly what’s happening here – which actually pretty impressive given the short time since Corbyn became leader.
You are right of course that there were some fairly obvious omissions. Environment certainly has to be in, not least because the Tories have trampled so much environmental legislation into the dust – and plan to continue to do so (with the result that even middle England will be in revolt by 2020 I suspect).
That aside, the review of the Treasury is so, so overdue, and of the BoE and HMRC, so self evidently necessary – and so much about tackling institutional bias and power – that they cannot be ignored if we’re to have a public administration that’s actually fit for the 21st century and a democracy worthy of the name.
I thought he was good. The most important thing being the cultural shock he has created by coming from a different place and seeming like a real person (like they used to 40 years plus ago!)-the young in particular are sick of the creosoted, suited up time-servers and Corbyn certainly isn’t that. I’m nervy about expecting too much but its the start of something that I was despairing of ever seeing in my life time.
It’s also good fun watching the media having a hard time ‘appropriating’ Corbyn and fitting him into whatever frame they were trying to fit him-certainly the media effluence isn’t sticking so far.
After the national Anthem nonsense he needs to reframe ‘patriotism’ in a way that shames the Tories-shouldn’t be too difficult in the light of the neo-lib globalisation, capital flight and trade deficits and the creation of crap jobs.
Richard,
I first became aware of your work when you spoke at the TUC Rally in London in October 2010, when(amongst other things) you introduced me to the Tax Gap. I have since periodically dipped into your website but have frequently mentioned the Tax gap on Twitter, and to our (Cons) MP; he studiously ignored my comments on this (there’s a surprise) —even though he did read economics at Uni.
I voted Labour unenthusiastically at the last election, but since Corbyn and McDonnell’s arrival I plan to join the Labour party. Your presence on the BBC1 TV News last night, reinforcing McDonnell’s speech was one of the re-assurances I needed, that their policies really are deliverable.
I have fulminated over the tax gap, but take your point that it isn’t the complete cure-all for our ills. 3 points arise. (1) I believe if you divide the current annual “take” of HMRC by the number of employees, then each employee collects about £7Million tax p.a. So raising the £34Billion that HMRC admits not collecting, only requires another 5000 employees (rounding the figures). Suppose they only get — say £20 Billion because some is lost as the proceeds of crime or because of bankruptcy/insolvency, and assuming you can provide an employee for £200K p.a. (overheads etc. + salary, pension etc.), investing 5000 X £200K p.a. = £1Billion p.a., should produce a 20-fold return — at least. Can anyone challenge the present government (e.g. at PMQs) to try this? More to the point, can Corbyn & McDonnell present it in simple terms as their intention when they are returned? (2) It is way beyond my understanding, but you claim the tax Gap is nearer £120Billion p.a. Can the Government be challenged to accept your claim or clearly state the grounds for disputing it? I don’t doubt your word or your work — but a second independent assessment would make it even clearer — as well as embarrassing the present Government. (I’m a physicist — we are more certain about the Higgs Boson — which few of us understand – because two independent groups both found it at CERN). (3) Amazon, Vodafone and their like, all claim that they are paying all the tax required by law. In that case the law needs changing. I believe no company accepts a profit of less than 15% on Gross turnover. Corporation tax is 20%. So every company or global corporation should pay a minimum of 3% (15% of 20%) on Gross turnover in the UK — UK sales or goods supplied to UK addresses. A simple law, easily understood. This is not a new tax, nor is it “raising taxes”. It’s just making sure that the tax laws are complied with. Thus it cannot be business unfriendly.
You cannot extrapolate gross yield to each employee: marginal yield has to be considered instead but I am confident on my estimates there
Consideration of the speech and its content on its own, in isolation from other context, is certainly a valid endeavour and on this basis there was a sufficient amount of re framing to provide the basis for further progress.
However, this speech cannot only be considered in isolation from the wider context of what, apparently, Corbyn and those and round him are trying to do. Two aspects of this context are the signals being sent out by Corbyn about working with others inside of the Westminster Parliament, such as the Greens (bringing in your concerns about the environment) and the third largest party the SNP; and the aim of straight talking, honest politics.
It was therefore not just unfortunate for these two aims but also inexplicable that the speech contained what at best might be regarded as poorly briefed observations referring to the actions of the SNP. A detailed explanation of not simply why the assertions and statements he made are technically accurate and factually incorrect but also deeply damaging for these two aims can be found here:
wings over scotland.com/normal-service-resumed
In brief, a number of Labour amendments to Scottish Parliament Legislation which essentially played petty party political point scoring in the knowledge that the amendments would be voted down were used to make ridiculous assertions in this speech that undermine efforts to work together with others to oppose Tory policies, like austerity and Trident, and the aim of a kinder more honest type of politics.
The second issue concerns the observation you have made about who it is will be sent into the Treasury.
Having someone who is not a creature of the Treasury represents the right way forward. However, I’m far from convinced that in this case the right candidate has been identified for two reasons.
Firstly, because having someone who is not a creature of the Treasury is a necessary but not sufficient criteria. It will also require someone with a great deal of knowledge, expertise, and experience of not just economics and monetary and fiscal systems but also the structures and processes involved.
Secondly, because whilst it is the elected representatives who set the policy it is the paid officials, like civil servants in Government (with a small g) or full time union officials in trade unions, who decide how that policy will be carried out on a day to day basis. As with the law it is not just about the letter but also the spirit. You have to have confidence that whoever is put in will follow the spirit as well as the letter of the policy brief.
In this instance the role played during the EC Objective One funding, during the time of the first Blair Government, in which the spirit of local community involvement and control ( a key funding criteria) was systematically and brutally undermined in favour of top down created local front organisations filled with local handpicked party political activists (devolving control rather than democracy down to the lowest level, effectively corrupting the process and structure) places a large question mark against this candidate.
Richard, Bill Mitchell is claiming that McDonnell is still clinging to a ‘deficit fetish’ and that the Labour party is setting itself into a trap like Syriza (The non-austerity British Labour Party and reality Part 2 http://bilbo.economicoutlook.net/blog/?p=31968). Any thoughts on that?
Did they fall in?
Bill clearly thinks so
John McDonnell says he has just swiped it aside, saying it’s a stupid political trick and he can’t be bothered with it
But John McD is talking about current and capital budgets and there are, I recognise, issus in that. Neil Wilson makes them better than Bill, although he also forgets that there can be investment yield, which is odd
I am not wholly ahppy witht he political compromises in the policy. I do recognise why they exist. And by ignoring yield Bill and Neil miss what investment is for
God is great. Bill Mitchell is great, but he is not God. I’m growing slightly tired of hearing about him.
Q.Tired of hearing about who? – Bill or God?
A. Well, both really (and I say that without the slightest disrespect to either of them).
@ Marco Fante,
Yes I take your point about Bill. I sometimes disagree with him. He’s not infallible. Maybe we should mention people like Warren Mosler, Stephanie Kelton, Randall Wray a little more.
They’re all on the same page – except that Bill is probably more pro-Marx than most other MMTers.
I like Bill
I just wish he’d sometimes write just 500 words instead of 3,000
They are all very like minded but the difference is that Bill writes a prolific blog!
Bernie Sanders has employed Stephanie Kelton as an advisor, however, seeing obviously the benefits to the left of Modern Monetary Theory.