The question of ‘How are you going to pay for it?' is now perennially used by journalists to challenge any proposal made by any politician on any issue, whatever its inherent merits might be.
The question reflects poorly on those asking it. It assumes that nothing a government does might be of worth in itself, and so people might value it sufficiently to want to pay for it. That means the question is inherently biased.
The question also assumes that money spent adds no value to the economy, as if it is lured into a black pit, never to be seen again when in fact money spent my a government does three things. First, it becomes someones' income. Second, it provides the means for those getting that income to pay tax at an average overall rate exceeding 33%, meaning that at least one third of all government spending comes back pretty much directly in additional tax paid. Third, it provides the funding for additional consumption in the economy, and that means yet more tax is paid. So, far from disappearing into a black hole, much government spending actually funds itself by providing the means for additional tax to be paid.
The question next assumes that when the government spends it's at cost to other activity elsewhere in the economy. But this is only true when the economy is at productive full employment. We're a long way from that right now. So what the government spends boosts the size of the economy, rather than rearranges a fixed amount of existing work, as the question presumes.
But there's something even more important to note about this question. What it also assumes is something particularly perverse. It assumes that government spending will happen without any additional work being required to deliver the chosen policy. It's as if the spend takes place independent of human effort. And that's just daft. Because the fact is that no government policy happens without human effort being expended.
Appreciating this does however suggest the correct answer to the question ‘How are you going to pay for it?' That correct answer is ‘We're going to work for it.' After all, how else is anything paid for?
When the government has a plan to spend money it intends to put people to work. And to answer the question ‘How is it going to be paid for?' the correct answer is ‘From out of the value created, which is why we're doing it.'
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the most important current debate , possibly even more than Brexit. It applies whether we stay or leave.
Ermmm may say ‘Brilliant’! Spend and tax indeed.
Thank you . I’ll try this on the mis-led where I work.
How you maintain your will to educate the political and public sphere – I do not know. Having just read your entirely reasonable evisceration of the latest OBR ‘projection’ on the economy and an ageing population, I would despair. Perhaps your suggested answer could be abbreviated still further to… “We will pay for it by doing it.” – perhaps even followed by the counter question, “Why – exactly – should we not do it?”
Funny, is it not, how that question is **never* asked when defence spending/royalty/wars/parliament-revamps are broached. It must just come from some bottomless pot not available for any other requirements.
Ian – It’s no coincidence that your categories of spending are those that are likely to produce the least of the value that Richard includes in his (practically perfect) answer.
That someone might use it to reply to the likes of Humphreys or Robinson on the Today Programme might be enough for me to start listening to it again.
Although, on reflection, that’s unlikely – my mornings are imeasurably better without it, but if someone could comment here if and when someone does use it then I’ll happily check it out on the iPlayer.
I admit that the Today programme rarely intrudes on my mornings now
And I rarely miss it
“……I admit that the Today programme rarely intrudes on my mornings now….”
Presumably somebody keeps listening……. perhaps that explains all the miserable faces we see around us. What a depressing way to start a day. I wonder if it gets sponsorship from Big Pharma to keep the anti-depressant market buoyant.
I can do without it. And it usually makes me cross when I do hear it.
In the case of defense – I have a quite nice paper (see below) which compares spending on health vs speading on “defense” – specifically it considers the “multiplier effect”. Spending on health has a multiplier effect in the range 2x to 4x – i.e. it drives further economic activity. By contrast the paper found that spending on weapons (let’s call a spade a spade eh!) has a negative multiplier -9 – i.e. it reduces economic activity. So very much – take your pick – gov spending that increase a nations economic activity (e.g. health, education….) or one which reduces it – weapons spending. Might be interesting to see if there is a correlation between the rise in the military/industrial complex in the USA and the decline in “social” spending and economic activity in the period 1960 to the present.
Does investment in the health sector promote or inhibit economic growth?
Aaron Reeves1*, Sanjay Basu2,3, Martin McKee3, Christopher Meissner4 and David Stuckler1,3
Do you have a url for the paper?
Without seeing the paper I would assume that the military reliance on imported hardware would create a net withdrawal overall and thus result in a negative multiplier. The health spend with a greater emphasis on services (local labour and wages spent) would have a strong positive multiplier.
If that is not the case I am not sure why the military spend would be multiplier negative.
It is screamingly obvious that defence spending is a waste of money. Or, at the very least, an overhead cost to society – like locks and bolts and prisons and all the rest of the security paraphernalia.
Weapons only come into their own in the economic sphere if they are used aggressively to conquer and pillage. Pillage is always zero sum, that’s rather the point of it.
Much the same applies to the rapacious finance ‘industry’. Too much zero sum and not enough investment. Nobody makes money out of gambling, it just gets redistributed.
Just in case no-one else responded to Richard’s request regarding the paper “Does investment in the health sector promote or inhibit economic growth?”:
https://globalizationandhealth.biomedcentral.com/track/pdf/10.1186/1744-8603-9-43
Thanks
On the mark as usual Richard. Have you noticed an anomaly, that question is never asked when the the proposed expenditure involves going to or engaging in any acts of war. The omission sort of gives the game away. My answer to the question “how are you going to pay for it” is “rich people are going to pay for it” How do you define rich people? If the government has never knocked on your door and said “may I borrow something” you are not rich. Personally I wouldn’t levy tax on any income below say £100k., and then only to control inflation and redistribute income. But I would also monitor the running of the economy in real time. This was done in Chile’s by the great management cybernetician Stafford Beer for President Allende. The experiment was cut short when the CIA overthrew that democratically elected government and installed Pinochet and his reign of terror. The event heralded the rise of Thatchers & Regan’s assault on the working class and the ascent of neo-liberalism.
You wouldn’t provide many state services then
The Right would love you
Good bye health, education and the social safety net
Quite a lot of law and order too
What economy would there be left to monitor?
No Richard, taxation does not fund Government expenditure. The economy works best when the circular flow of money is kept in motion. Capitalism is a system where this circular flow is interrupted and siphoned off by the 1%. More importantly the economy is not primarily a money system, it is a thermo-dynamic system. It works as a money system only as a proxy. Every single aspect of life from the concepts we hold as individuals and as a society and work involves the transfer of information and energy. Because it is a thermo- dynamic system it is also a mathematical one. That means the problems are mathematical and solutions are mathematical. The fact that we have no solutions to the present economic crisis is that we are looking in the wrong place.
John.Adams says:
” That means the problems are mathematical and solutions are mathematical. The fact that we have no solutions to the present economic crisis is that we are looking in the wrong place.”
There is some deep truth in this I suspect. Economics was perhaps led up the garden path by Adam Smith et al because they were all bamboozled into fretting about money and wealth.
As a species we all too often attack the symptoms rather than identify the problem. You can spend for ever mopping the kitchen floor, but it would be more effective to turn the tap off so the sink doesn’t overflow.
Having said that, there is much we could do in the economic sphere to provide effective symptomatic relief. And we all know what some of those things are.
I meant to ask John, where should we be looking?
More on Chile in ‘Democracy in Chains’ by Nancy MacLean.
” it was [James] Buchanan who guided Pinochet’s team in how to arrange things so that even when the country finally returned to representative institutions, its capitalist class would be all but permanently entrenched in power.” It’s an horrific story.
It really is the most important question in politics and economics. It stands like Everest in the way of all progress and yet to those of us who read your blog and those contributions made by Stephanie Kelton, Steve Keen and Bill Mitchell it’s a total NON- QUESTION. I wish I knew the answer and I wish Jeremy Corbyn and John McDonnell knew the question. It really could be a long haul and I’m not sure that the politicians with the nous to answer it are out of short trousers yet.
It’s a non-question
But one those three, I and others have to tackle precisely because it is asked
I will offer more on this soon….
This is what Republicans in the US say when they cut taxes, when asked how they will be funded – don’t worry, the additional growth will generate extra taxes.
To some extent this was how the Tories have also managed, despite supposedly pursuing a lower deficit and falling debt, have also managed to lower income taxes (mostly by raising the tax free allowance) and corporate income taxes and offset this with spending cuts and by saying the cuts will generate extra growth.
Ask yourself this, if you were a TV presenter earning six figures, living in a valuable house, which side of the issue would you personally benefit from, were it true? The tax cut side or the extra spending + extra taxes side.
The true answer may be “both”, but it’s possible you may perceive spend and tax as more of a threat to your personal finances than spending and tax cuts.
The Overton window is very much alive, but even more so when it’s mostly a window in the houses of the wealthy who own, fund, support or work in the main U.K. media outlets
It’s up to left wing politicians to be good enough to deal with this, in my opinion
If they’re not, why are they in the job?
“It’s up to left wing politicians to be good enough to deal with this, in my opinion
If they’re not, why are they in the job?”
I refer the honourable gentleman to the previous contribution …..
“…Ask yourself this, if you were a [Politician] earning six figures, living in a valuable house, which side of the issue would you personally benefit from, were it true? The tax cut side or the extra spending + extra taxes side.” 🙂
For many, politics has ceased to be a vocation and become no more than a job. An inherently insecure job, given the need to seek periodic re-election. It therefore becomes very important to invest more time in ensuring future career prospects than concentrating on the real job in hand.
A ‘professional’ job involves the least input for the highest return.
We need…desperately need ‘amateur’ politicians. People who do what they do because the ‘love’ doing it and do it for the right reasons.
Or people with vocations
Tension in decision making between autonomy and hierarchical.
It would seem that there is little clarity in regard to the theme mantra of “Taking Back Control” as witnessed in the rise of populist or nationalist groups around the world, Brexit in the UK, “Making America Great Again” in the United States and the anti-immigration parties in Europe as seen in the German and Italian general elections. If we step back and try to understand what’s going it seems to me it’s all about the endless human predicament of trying to resolve the tension between individuals wanting maximum autonomy to make decisions about their lives and the necessity for direction from hierarchical decision making by the few theoretically benefitting the many.
The problem of course lies in the “theoretically” in that much of the theory, ideology or belief systems that support hierarchical decision making mask the fact that far from being “good” for the many it’s “bad” only serving the interests of the few or specific nations. So, for example, few understand how their country’s monetary systems work and that both their governments and private sector clearing banks have the capacity to create money from nothing. This is because the few are constantly telling the many their governments have no money of their own.
Few understand that free market capitalism is flawed in the sense of failing to adequately address the need to equitably balance supply by demand so, for example, the few who control capital are able to outsource production out of a country but then demand the right to import back into that country. Few understand that global trading is unfair in that businesses and nations seek alliances to capture price point in global markets through the use of tax havens, currency rigging, direct government subsidies and various other forms of manipulation.
Few understand that in terms of human social grouping the natural networking size is round about 150 people and that rules have to be devised and hierarchical directing arrangements made in human societies to grow larger communities, nations and global networking organisations for trading, maintaining peace, collaborative research and tackling issues common to all people on the planet such as pollution and the global warming threat. Pertinent to those rules, of course, is the natural human networking size so that an insistence on free movement of people will create tension particularly with differences of language and cultural values:-
https://courses.washington.edu/ccab/Hill%20and%20Dunbar%202003%20-%20Group%20size.pdf
In summary human beings simply have to recognise they need to get better at recognizing that paradoxically there can be dysfunctional belief systems or ideologies arising out of our need to use hierarchical decision making arrangements. It’s no longer good enough to automatically assume there’ll be no negative side-effect from such arrangements given our drive to have more elaborate societies to better meet our well-being needs.
Oh sorry prof… I Always thought your Proffered answer to have been;
“because we ‘ll print the money…”
But if you knew anything (and you clearly don’t) you’d know a) money is not, as such, printed but is instead b) a promise to pay and c) that requires a counterparty, which in this case is d) the party who will do the work and so e) add the value in exchange for payment and in the process f) pay tax whilst g) increasing their spending capacity which h) increases the income of others so that i) they pay more tax, j) which process is then until the multiplier effect is delivered in full, k) quite possibly yielding 100% or more return to the government on the spending made.
But you don’t pay attention, do you?
The answer to “How are you going to pay for it?” should always be:
“With money.”
This is almost certain to prompt the further question:
“And where is the money going to come from?”
The person being quizzed now has an open goal to score into, using the reasoning you employed above, Richard.
I agree. If I remember correctly there was a working paper from the IMF where they conceded that they had their models wrong in terms of government spending multipliers. The IMF’s model used a fiscal multiplier of 0.5 (a pro-austerity multiplier), when the authors discovered that the average for OECD countries was above 1and for some countries even higher (anti-austerity). And I am pretty sure there are also multiplier differences depending on the type of spending. There is, just found one published 2013 – https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3849102/
Whilst it is frustrating that McDonnell can’t wrap his head around the fact that taxes don’t fund spending (surely Gordon Brown has told him?), at least part of their investment policy is to target national industries for spending which will keep the multiplier in house so to speak.
Austerity as an economic policy is nonsense- although I can see how it works politically. Obviously not in the interests of your average citizen.
The IMF admitted they were wrong
It’s a pity politicians have not noticed
“The multiplier”.. the golden goose. It has been extensively written about, discredited then back in vogue for those who believe in PQE. I don’t pretend to know the answer after all with the extra money in my pocket – will I buy the next model of the iPhone ( where the multiplier will certainly yield far less than 100%) or invest in a private equity start up ( where there is the chance there is a multiplier effect of 100% or more) but it is much like the 2.30 at Newmarket. Is this the premise for sound economic modelling?
Your decision is irrelevant
Populations are reasonably predictable even if you are not
“The IMF admitted they were wrong”
The IMF is the militant wing of the US treasury aka the GOP, in the same way the CIA is the militant wing of the US equivalent of the Foreign Office.
When Nixon announced the decoupling of the Dollar from the price of gold, the IMF should have been disbanded and completely reformed to meet the needs of a different world. It is 47 years obsolete and has done the most incredible damage in that period.
The IMF is not to be trusted in ANY of its pronouncements.
If it was dissolved it would have to be replaced
“If it was dissolved …[the IMF] would have to be replaced”
Agreed.
“….disbanded and completely reformed….”
As an international (pan national) organisation not as an adjunct to US foreign policy. This is no longer the post-WW2 era.
Superb column and sentiment Richard! A wonderful simple opening statement.
And the response to ‘snailmailman’ is very edifying.
Would it be fair to say that your opening statement requires an increase in the money supply and that the issuance would be QE rather than private bank in orgin?
Thanks
Re your last point, the additional funding is simply government spending. It need not be QE. PQE is more likely, but it could (if only the EU and the UK accepted economic reality) be a deficit on central bank loan account for the government
Perhaps Snailmailman could confirm where the money came from to pay for quantitative easing. Why wasn’t the Treasury forced to increase taxes by hundreds of billions of pounds so it could afford to buy in the bonds?
“Snailmailman”
Is a tosser and a troll I wouldn’t bother with him much if I were you.
That’s not subtle but I recognise the sentiments
This really is the crucial question for Labour politicians to answer. I long for a Labour politician to take on the question head on the next time it is asked on TV and destroy it with logic. But will it ever happen?
I live in hope
I liked the look of Corbyns’ speech today but my hopefulness was then somewhat diminished when he mentioned that a 5% wage rise for the public sector could be funded by higher corporate taxes.
Maybe he has a point but even when HM opposition wants to treat the economy and tax system as a closed loop system you have to wonder about what they think they know about these matters.
Sad……………….
Agreed
Incompetent, actually
“I live in hope”……..
Hope , in Derbyshire…?
And I thought you lived in Ely.
“How are you going to pay for it”?
Perhaps that question should be answered with a question something like : Do you understand (macro) economics? Have you heard of the multiplier when applied to government spending?
The other variant of this question that has achieved an undeserved exalted status for journalists is the overly specific/detailed question, e.g. exactly how much would a 1000 extra police officers cost? Anything to avoid engaging with the underlying principles.
Can you explain what metrics are used to determine when ‘productive full employment’ is reached? Where those metrics position the UK now i.e. we are at (say) 75%?
Presumably the current measures of employment & unemployment are not the right ones otherwise given the current figures we would be (at least) close.
You know we are not at full employment
The majority of the self-employed are not making the minimum wage
Even allowing for evasion they are not making a living wage
Full employment is productive full employment at a living wage at least
We are a long way short
And of course the assessment will be a matter of judgement
But not your vindictive judgement
Hmm – I don’t see how you can say I’m vindictive – just asking a question which I imagine you’d be asked by much better qualified people than me.
Do you have any data to support your claims that (e.g. the majority of the self employed are not making the minimum wage) and other issue?
What factors are involved in the ‘matter of judgement’? Who decides?
What exactly is ‘ productive full employment’?
ONS and HMRC data proves my point re income
I have defined productive full employment
I think you are wasting my time
J A Rank says:
“— just asking a question which I imagine you’d be asked by much better qualified people than me.”
Hard to imagine there is such a person. 🙂
All he has to do is Google UK unemployment and underemployment so yes he is a time-waster.
I can tell you what full employment isn’t – and it isn’t NAIRU (https://en.wikipedia.org/wiki/NAIRU) which is how full employment is currently calculated by mainstream economists, as I understand it. An equation that justifies unemployment as a control for inflation. Not so much a dismal science as an inhuman one.
OK – thanks
Can you tell me what ‘full productive employment’ is, not what full employment isn’t? What measures etc?
I just did
J A Rank probably can’t concentrate because he’s too busy banging that gurt big gong. 🙂
For those of you familiar with TheGreatRonRafferty commenter on Guardian articles here’s an interesting comment from him on a recent Independent article:-
“I lived and worked in the fens, from where 80% of the UK veg (cabbages, cauliflowers, calibrice, brussels, leeks and onions) originates. I knew loads of the farmers, the gangmasters and the workers. As soon as Jan 1 2004 arrived, the veg workers, who had done the work in the fields for generations, in ZHC, were sacked, and EEs brought across to do the work instead. Many were “loaned” the money for the journey (a loan that they could never repay), had their passports taken off them (“as security”), were put in 2-up, 2-down houses that in 2004 cost £30K and a year later cost £100K because the gangmasters were buying them all up as houses of multi-occupancy at 20+ per house, and fed an abysmal diet, all of which was the subject of excessive stoppages from their pay. Many of the workers wore clothes entirely unsuitable for the weather and ground conditions (not those nice new orange ones you’ll have seen when the BBC sends a camera), …… so I hope you enjoy your slave-picked veg. You might of course, be forgiven for hating the British gangmaster. But in an ironic twist, most of those were replaced by even worse EE gangmasters, who not only advertised the jobs solely in EE countries, but required workers to speak a specific EE language.”
https://www.independent.co.uk/voices/jeremy-corbyn-brexit-benefits-labour-ukip-a8461411.html
Add that to research on the Brexit vote that argues the strongest correlation with Leave votes was in manufacturing areas in competition with Chinese imports:-
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2870313
Add that to the fact that an Austerity programme has been in operation in the UK since 1947 in the sense that both Conservative and Labour governments have not fully used the government’s capacity to create money and therefore jobs (getting worse as the decades wore on) and it seems reasonable to argue a main cause for the Brexit Leave vote was economic. The prime cause of course is under-educated and/or corrupt politicians in both the EU and the UK!
I would certainly agree with you Schofield regarding your last paragraph.
Nicholas Timmins in his wonderful biography of the welfare state (The Five Giants) says that the NHS was under attack as soon as it was formed and cut backs kicked in almost straight away.
This issue goes right to the core of why Government exists for at all? What do the MPs think they are there to do?
I must admit I just don’t understand your last two paragraphs.
Are you saying that the benefits are worth the work put in, and therefore the tax returns wiłl probably exceed the expenditure?
I hope to address this issue tomorrow
Richard, sorry for this diversion: but we live in strange times.
The government has just published a White Paper that purports to explain how the EU Withdrawal Act will be legally implemented. I have not yet read it, but the following comments are drawn from media reports. The proposals will be enacted after Parliament approves the final EU agreement, if there is one. If there is no deal the proposed Bill will fall.
The new legislation will revise some parts of the EU Withdrawal Act, only just passed and not yet in force; to ensure the UK statute book is operative throughout the transition period. Thus the new legislation will not terminate the authority of EU law in the UK on 29 March next year, although the EU Withdrawal Bill made clear in para.1 that its first priority is: “The European Communities Act 1972 is repealed on exit day”. Only the ECA will not now be repealed on exit day.
The jurisdiction of the European Court of Justice will continue until December 2020.
This is an extraordinary proposal; launched, in classic, cowardly, gutless manner – on a Friday, as holidays intervene. The EU Withdrawal Act has already fallen apart. The legislation is in tatters. As an exercise in government this is has reduced legislative politics to complete farce. The Government and Conservative Party are a complete disgrace.
Bizarre indeed
Re the multiplier issue..
“Populations are reasonably predictable even if you are not”
So I presume you have modelled PQE and the multiplier effect. Are your results public?
The widespread conclusion on investment multipliers in times of low general investment and under employment – which is when I advocate the use of PQE – is that they exceed 2 and can exceed 3
I.e. they can pay for themselves
See work by the IMF, for example
“modelled”
LOL.
Favourite word of those that are trying to sound authoritative and don’t have the faintest idea of what they are talking about.
[…] Cross-posted from Tax Research UK […]
http://www.taxresearch.org.uk/Blog/2018/07/23/1945-manifestos-and-a-new-beveridge/#comment-810771
Schofield’s comment from the other day, citing Thatcher, Cameron and May denying that there is any such thing as Public Money is relevant here too. We’ve discussed it before, these metaphors are so ingrained, so seemingly intuitive that they have reached the status of (pseudo) economic paradigms or self-evident truths.
Richard, you might be interested in this Treasury letter:
http://www.progressivepulse.org/economics/hm-treasury-says-mmt-is-correct
May I reproduce here in the morning?
Good work….
A bit boring of me but just for the record should note that the tax, growth and multiplier response doesn’t apply to any government spend on imports.
But it does to exports
“How are you going to pay for it?”
“You really want the answer?”
“Of course.”
“We’ll pay for it in exactly the same way we pay for that new naval ship, that Parliamentary salary, that new bridge.”
“You haven’t answered the question.”
“Oh yes I have.”
” But really really how do you pay for it?”
“We write a cheque and send it.”
[…] with some political and economic experience sent me a note after they had read my blog on answering the question ‘How are you going to pay for it?’ They liked what I had said but […]