The Guardian reported last night that:
The governance of England, Scotland, Wales and Northern Ireland should be reinvented within a new voluntary union in a bid to save the UK from disintegration, an independent all-party group of experts will argue this week.
The Constitution Reform Group, convened by former Conservative cabinet minister Lord Salisbury, is to make the the case for radical constitutional change in the UK by claiming the need has been boosted by the vote to leave the European Union.
They added:
Their proposals say the existing union should be replaced with fully devolved government in each part of the UK, with each given full sovereignty over its own affairs. The Westminster parliament, the group says, should then be reduced to 146 MPs.
And:
The group proposes that the shared UK functions would include the monarchy as head of state, foreign affairs, defence, national security, immigration, international treaties, human rights, the supreme court, a single currency, a central bank function, financial services regulation, income and corporation tax powers, and the civil service.
Other functions of the existing UK would be controlled by the nations and regions, creating what would in effect be a sovereignty-max solution to the national question in the UK, similar in effect to the “devo-max” proposal that has often been canvassed in Scotland.
There is, of course, no chance that the Bill that the backers of this proposal say will be published this week will ever become law, but the fact that some serious, if largely retired, politicians think this idea worth putting forward without having any understanding of the consequences is deeply worrying.
Let me be clear, I am not opposed to devolution. Many aspects of it appeal to me, a lot. But any suggestion of devo-max that ignores the macro-economic impacts of what is being proposed is irresponsible, at best, and this proposal seems to do that.
As I explained in The Joy of Tax, just as we now know that we misunderstood money for about 320 years (until the Bank of England admitted its error in April 2014 when they accepted that loans create deposits and not the other way round) so too have we also misunderstood tax. Tax does not, never has, and never will pay for government spending. Tax reclaims the money that the government has spent into the economy to prevent inflation. In the process of making that reclaim social, fiscal and other policies are advanced by the choices made on who repays the benefit of the spend incurred, and whether the repayment is required of the same person who enjoyed the benefit of it.
The evidence for this claim is twofold. One is a simple thought exercise. Given that the government requires payment to be made to it in sterling, which is the official currency that only the government can ultimately supply (even if via regulated private banks) then how could tax ever be paid if the government had not spent the money required to make settlement of it first? The spend has to come before the tax, in other words.
Second, that tax is not the pre-condition of spending should be obvious: we have been running deficits almost continuously since 1694. In other words, we have never relied solely on tax to fund spending precisely because we do not need to do so.
In that case though the suggestion of devo-max whilst control of many taxes and the central bank (which inevitably, therefore means monetary policy) remain centrally controlled makes no sense at all.
Surely we have learned this by now? If the Euro has taught anything it has shown that a currency union without political union is exceptionally difficult to manage, most especially if the central bank is also controlled by the interests of an economically dominant participant.
This is exactly what would be replicated in the UK by this proposal. An English controlled central bank would set rates and run economic policy for the benefit of England, dominated still by the interests of the City. This could be a complete disaster for Scotland, Wales and Northern Ireland, even if (as I note) VAT is not to be covered by the central policy decision making. That, however, just adds to the mess: VAT rate boundaries can require customs borders to enforce them, and certainly involve substantial admin. There is little gain to be had there.
This then is a proposal that concentrates power for an elite in London, who would be subject to much less scrutiny. The central bank would become over-powerful as a result. The devolved states would be diminished as a consequence, especially so in the case of the smaller ones. And the real ability to decide on policy would be diminished.
The fact is that unless devolution is matched by a co-ordinated policy for controlling the currency and macro policy on lending and overall tax levels, in which the devolved states clearly have a say in a way that can counter the centralised power of the dominant member state, then candidly all it offers a route to disillusionment.
And the reality that devo-max might require separate currencies, or related currencies working within agreed bands in the style once tried by the ECU, might even have to be considered. Then, and only then, might the economic adjustments needed to make devo-max work be possible. What we have instead is another political proposal that has not thought about the consequences of its implementation that would become apparent within days if it were to ever happen.
When will politicians learn?
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An excellent post, Richard, again.
“When will politicians learn?”
My guess is that the majority of politicians are up to speed on the concepts, even if maybe a bit hazy on the details of the economic theory. But they are exactly that: ‘politicians’ so what they say is shaped very largely by what they think will be understood by, and influence, the public. And all this ‘living within our means’ goes down very well with the overwhelming majority of the public, including a bunch of my friends who really ought to know better.
The disconnect is down to a need for a better public understanding of the whole money/tax loop. While books like The Joy of Tax make a contribution to that, they will not reach enough people to swing public opinion, and I doubt that the tabloids are going to start running easy-to-digest explainers any time soon.
I made a similar point on CiF-but not as eloquently.
Ireland operated a de facto currency union with the Punt pegged to Sterling for decades. Of course, it was always possible for the link to be broken and when it was eventually the Punt floated above Sterling.
Trying to preserve a fractured union has some similarities to efforts to fob the Irish off with home rule (but keep them, forcibly, in the empire– even after independence Irish ports were occupied until 1939).
Today Ireland is better off on almost every metric than Scotland or N.I. (incomes, equality, graduates as a share of the population, life expectancy etc). The “punching above its weight” that Ireland does is not military but in improving the lives and life chances of its citizens.
England and the lands it controls has been run by and for the very rich for a long time; hence Bullingdon club members on opposite sides of the EU referendum. The same people are responsible for the British tax system and for an economy that works for the few (openly acknowledged in Theresa May’s campaign slogan).
Surely it’s time for self government for all the nations of the UK?
If that does not involve currency union, maybe yes
I’d also like to add that if politicians – and it has to come from politicians – want to change the discourse, then the language – and the choice of metaphors has to change.
At the moment we seem to be stuck with two alternative and unhelpful metaphors:
– ‘we have to live within our means’ (code for ‘we can only spend if we raise the money through taxation’)
– ‘the money-tree’ (code for ‘if we just create money we’ll get inflation’).
The reality is that in any feedback loop (which is what we’ve got) it’s futile to try to find a coherent story that says ‘X causes Y’ because it depends where in the loop you start. In effect (tax -> spend) and (spend -> tax) are both true and depend only where you choose to jump into the loop.
The solution is to lose the language of causation and adopt the language of identities. So, while (X = aY + bZ) seems to imply that Y and Z ’cause’ X, (eX + fY + gZ = 0) is an identity which does not imply causation. Obviously sectoral balances spring to mind as a relevant example.
However, while the sectoral balance identity can be nicely expressed in equations or graphs, it’s a harder problem to express such an identity in simple, down to earth language (preferably with a pithy catchphrase) that can be used on conference platforms or out on the stump. Even if the motivation were there to do so.
I so agree
I’ll add it to the list of conundrums to solve…
The compromise might have to be that The Federal Parliament has control of the central bank now known as the BoE but that any additional local spending would have to be in local currencies which would be acceptable for local tax payment (much as the Bristol or Exeter pounds are now) but not Federal Taxes. This would give less financial freedom than a completely independant currency, (which itself I think would be a difficult and lengthy process to establish) but more economic devolution than without anything at all.
I am afraid that does not work: the Bristol pound is a pound and so adds none of the required flexibility
I’d quarrel with the “none” and prefer ‘some’!
And surely as the Bristol Pound, for example, has now gone electronic and is acceptable for local tax payments it has in effect created some local money out of thin air?
If devolved governments created their own local bank then they would currently have even more flexibilty — though obviously subject to the Federal Banking Regulations of the time.
But the Bristol pound only works because it is £1 for 1 Bristol pound convertible
I am not saying that does not make it useful
But that is not a new currency. It is just locally circulating pounds
I confess that I haven’t read it in full, but I found this interesting document, titled ‘The East Anglia Devolution Agreement’. I assume this links in some ways to the Guardian article you quoted above and is also what Theresa May was alluding to in her acceptance speech yesterday. Your thoughts?
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/508115/The_East_Anglia_Devolution_Agreement_FINAL_with_signatures_and_logos.pdf
These seem like stitch ups to me
Guaranteed regional control for one party
This is a very important post and topic but I still don’t quite follow what it is this Devo-max is proposing exasctly. Some things need to be clarified. That said, there are a couple of additional points worth raising
1. The question of fiscal powers are not clear. If the proposal is considering monetary union with separate trade balances and separate sovereign debt – then its authors should beg for a merciful punishment.
On this the lessons of the Eurozone are all too apparent.
For those who may be unaware these two articles might be instructive:
http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000221516.pdf
http://www.ceps.eu/book/governance-fragile-eurozone
2. Richard,
I must respectfully differ with you wholeheartedly with regard to the idea “that devo-max might require separate currencies, or related currencies working within agreed bands in the style once tried by the ECU”
That is the proven recipe for Eurozone-lite. It was the method adopted by the EMS and the evidence reveals that the Common Market nations all had a relatively neutral balance of trade prior to the attempts at linking their currencies. The Eurozone disequilibrium (aka. German mega-surplus) began to accumulate exponentially as the EMS established itself and then skyrocketed once the euro was accepted.
The “agreed bands” failed because they prevented the currencies from adjusting freely and the surplus nations (Germany in particular)prevented internal adjustment by heavily suppressing wages and inflation. They did exactly what Mundell’s original & highly regarded OCA Theory told them not to do.
The risk here is that the BoE would effectively become the new Bundesbank and set policy to restrict southern inflation with no regard for regional unemployment.
3. Come to think of it, that’s what the BoE does now! Devo-max or no Devo-max the UK has never been an optimal currency area. It is of course possible for victory to be snatched from the jaws of disaster if the devolution agreement improves the status quo by creating a pretext that would secure representation on the BoE board for all UK countries – and throw in an economic roundtable for good measure?? Something like that.
Of course the MMTers would say that monetary sovereignty should be the first order of priority and they’d probably be right – provided that none of the sovereign nations are ever reduced to the ‘original sin’ of borrowing in a foreign currency.
As an academic you and others here might appreciate these references (some of the evidence that I was referring to above)
Common Market trade balances:
http://trove.nla.gov.au/work/21609674?selectedversion=NBD350374 (a book, sorry)
EMS trade imbalances:
http://scholar.google.com.au/scholar_url?url=http://www.academia.edu/download/34769099/EMU.pdf&hl=en&sa=X&scisig=AAGBfm3ToceoL6u69-NQ0nTVmLI2BiTfzw&nossl=1&oi=scholarr&ved=0ahUKEwje6_nJyO3NAhVDFpQKHcawAJoQgAMIHSgBMAA
(Table 1, 4th page in)
Eurozone trade imbalances:
http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000221516.pdf
I am not sure what you’re disagreeing with
I am saying that if full variance by separate currencies is not possible then something close to it is needed
I am arguing against any move towards a Euro replication in other words
That would be the disaster I am warning against
The compromise is that – to make things possible as things head towards full currency separation
I knocked that out too fast and made a partial copy & paste error in quoting you (quoted too much).
Specifically, I was disagreeing with this bit:
“related currencies working within agreed bands in the style once tried by the ECU”
The EMS / ECU arrangements were not close to full variance, they were, in their effects, almost as bad as the full monetary union.
Historically, we could probably say that the only arrangement that was binding but close to full variance was Bretton Woods. Even there Mundell found that overly tight monetary policy in surplus countries imparted a recessive tendency’.
I didn’t realise that you intended the ‘agreed bands’ to be a transitional measure on the way to full currency separation (sorry). That would be OK on the condition that it wasn’t dragged out for too long I suppose.
I did not make it clear enough, I think
Transitions are as long as they need to be
Usually that is not long