I have been asked by a number of people, from MPs onwards, to prepare answers to the types of questions being commonly asked about the economy in the Covid era. I can't see why these things shouldn't be shared. What follows was written as a Twitter thread - hence the brevity - but it provides some suggestions.
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Should we raise taxes to pay for Covid 19?
Right now, definitely not. We're facing an economic downturn in 2021. Almost nothing can prevent it. And increasing taxes will take more tax out of the economy, and make the down turn worse. So definitely don't raise taxes now.
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Does that mean we don't need any tax changes now?
No, it doesn't, but overall taxes mustn't increase. Tax the wealthy more then, and reduce tax for the poorest. That increases overall spending power in the economy because those least well off spend all their income. But that's it.
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So what taxes could increase?
Capital gains tax could be increased to income tax rates. Corporation tax for large companies could be 25%. Tax reliefs on pensions for higher rate taxpayers could be reduced. We could tax investment income more. Increase council tax at the top end.
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What taxes could go down for the low paid?
National insurance would be a good place to start. Cancel council tax for those on benefits. Reduce council tax for low rate rate bands. Free BBC licence fee for those on benefits. Think laterally, in other words.
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Do we need to repay the national debt?
No, of course not. Firstly, we've only repaid tiny amounts since WW2 and nothing since 2001. So why start repaying now? And why do it anyway? The owners of the national debt want to own it. So why force them to sell it when they want it?
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Any other reasons not to repay national debt?
Yes. £200bn is National Savings. £400bn has foreign owners. £800bn is owned by the Treasury and can't be repaid. The rest is owned by pension funds, banks and the finance sector. Why force them to sell? It makes no sense.
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So any other reason to leave debt as it is?
Many. Like, it's never been cheaper, which is what really matters. And to repay the debt requires either more tax or cuts in government spending and both reduce demand in the economy - and we will need all the demand we can get in 2021.
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Should we in fact be spending more?
Of course. The NHS is underfunded. So is care. Education and justice are at their limits. They need money, now. But most of all we need the government to lead investment in a sustainable economy for the UK. Why not spend when there is so much need?
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What does investing in a sustainable economy look like?
Most important, it is about making the UK's 30 million buildings energy efficient. Triple glazing. Insulation. New boilers. Heat pumps. And solar power. All done street-by-street by a mass of newly trained people to do the job.
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What else do we need to invest in?
New carbon neutral housing. Research into new transport solutions. More efficient wind, solar and tidal power. Better, safer agriculture. New energy grids. Real high speed broadband. Better business systems to deliver all this.
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But we're already in debt. How do we pay for this?
First, people are queueing up to save with the government. Why don't we let them? Second, let's change the tax incentives on pensions and ISAs to drive money to green investment. And if that is not enough then there is QE.
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What changes to tax incentives?
Require pension funds invest 25% of all new contributions in programmes creating green jobs in exchange for tax relief. Ensure ISAs can only be saved in government backed green bonds - to be used to deliver the transformation this country needs.
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Why QE? Haven't we had enough of that already?
QE is simply the Bank of England creating new money for the government to spend. So long as there is unemployment this can be done with no risk of inflation. So we can have all the money needed to invest in the transition we need.
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But haven't we already maxed out the credit card?
This claim is absurd. It assumes the government's like a household. It isn't. Unlike households governments can create money, without limit. So they can always pay their bills. There is no credit card. And there is no limit.
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So we can create money forever?
No. There is a limit. It's full employment. That's the constraint. Money is not. So at full employment spending has to stop. But that's why the aim should be to create a wide variety of jobs in every constituency. Think small to deliver big.
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There will be more of these. But these will do for starters. And of course each is just a framework for an answer. But there's never a reason, however short the time available, to not argue for the economy we need.
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Very handy….. and the brevity is a plus!
Is there a place for the multiplier in there somewhere? E.g. “Q: Is it OK to divert money from foreign aid and wages of public sector employees benefits to COVID outsource companies and defence? A: Public spending on some areas is economically more productive than others, because a multiplier greater than one gives more back than you spend, eg health and care spending are much better for the economy than say defence, where the multiplier is below one. Spending in the right areas is also better for wellbeing, which is what the government should really have as its focus.”
Good point
Very good, very worthy; …… But! What does neoliberalism have? Answers? No, but like the devil and music, it has all the best maxims; maxims – eternal economic ‘truths’ they insist on selling – that resonate with the electorate’s deepest domestic values: “household budget”; “taxpayers’ money”; “paying the debt back”; “tax and spend”.
The biggest problem with MMT is it is counter-intuitive. It seems arcane, mysterious, and to the British electorate – MMT seems at best, glib: “too clever by half”. We can’t sink neoliberalism with maxims because the ideas behind MMT require a little sustained thought and are initally unsettling to understanding; but what we can do is ask the difficult questions neoliberalism cannot and dare not candidly answer, without giving the game away.
We can only succeed the same way neoliberals use their enduring popular maxims; find two or three qusetions, maximum; and keep asking them repetitively so often, eventually the electorate notice that they are never actualy either properly addressed or answered, but always evaded; and that neoliberals must be hiding something from them, or do not know what they are doing; that neoliberals are, in fact either culpable or gullible.
So we need at most three or four short, trenchant unambiguously phrased questions (I would say on debt first, then tax) that demand answers; circulate to every ‘mover and shaker’ known, and especially media and politicians; and repeat, again and again (exactly the same phrased questions) until either they are answered or neoliberalism evasion is obvious.
It seems to me that we should approach this in recognition that if austerity is neoliberalism’s dirty little secret, money creation and debt is the dirty big secret of neoliberalism.
Has anyone told you that you are unreasonable
Mind you there are several more threads in progress – and that is one of them
Sad that I can’t even watch television without writing such things…
Richard,
“Has anyone told you that you are unreasonable”.
Perhaps I am, but I must protest, not on this. For the second time, I am not singling you out here, I understand the limits of your capacity; but your Blog is also a generally civilised forum for discussion of economic matters, and I make these remarks in the spirit of a query to the whole readership. My apologies if that did not appear to be the case, but I was separating the forum from you, which I trust you may acknowledge is difficult to do. I am delighted if you comment, but I do not expect it because I appreciate the demands on your time, merely to respond to comments on the Blog alone.
I also acknowledge that I am commenting far more than I would usually do over the last few weeks; but that is because the current crises of Covid, economy and Brexit are bringing the flaws in neoliberalism to the forefront, and out in the open; at last the debate in economics is being prized away from the grip of ideological dogmatists. I come here to acquire knowledge, to find sources, to pursue them, and to reflect.
John
I was also jesting: I much appreciate your contributions. I am also being asked to do what you ask by MPs (plural)
The Twitter versions of this stuff are really cutting through – people are noticing. So more will be written that way.
Go well
Richard
Jings, it seems I cannot even detect a joke any more – no wonder they call economics the ‘dismal science’ (I always thought that meant ‘the hopeless science’; oh, well); either I must be unendurably humourless, or your joke delivery lacks a certain ‘je ne sais quoi’ …..
Eh, please do not respond to this comment…..
🙂
Flipping heck, even I knew Richard was joshing John!
I didn’t realise that you were such a sensitive old soul!
FWIW I – as a bit of hot head on this forum I appreciate the contrast provided by your more cool and measured contributions too.
Guys!
Let’s cool it…
Says the most hot headed here
Can you explain why at full employment spending has to stop?
Because when there is full employment at a living wage the economy is at full capacity and then spending more can’t result in more production so inflation must follow
I know this is nit-picky – would it be more correct to say full employment (utilisation?) of persons and resources?
I feel it gives room to consider shifting where or how people are employed, if required. Hopefully sidesteps reductionist arguments about “well, everybody’s already employed”
You are probably right….
Thanks
Can I just check? Does this mean that the government still spends but that it is matched by taxation? So, any increase in spend is matched by an increase in taxation and vice versa?
Craig
Sorry – to what are you rewferring? I cannot see when I moderate comments
Haven’t we had inflation without full employment in the past?
Yes, due to an external shock called oil
But that cannot be controlled using any economic policy
It just has to be worked through
“repay the debt requires either more tax or cuts in government spending”
Could not the debt be repaid with quantitative easing? E.g. the foreign owners’ or government bonds part?
No, in a word
Thy are also debt
With regard to the licence fee, this would have to be funded by the state. The current arrangement for seniors was a particularly mean bit of trickery.
Where I live, the far north of Scotland everyone uses oil for heating and water and a mixture of lpg and electric for cooking. People would like to switch to electric for water and heating but the cost of electricity is twice the cost of oil (in terms of running costs). There is a huge, and ever growing, wind farm near by, the blades and other parts arrive by boat. It seems to me that switching to greener forms of energy is vital but so is ensuring that the resulting energy is affordable and that as much of the investment made into it is spent wisely and where possible in the UK.
Hear, hear
Is the answer when faced with the usual retort “by creating more money you are pushing the value of sterling lower” that this mainly affects overseas investors or could it have an impact on imports for UK businesses and how is this offset?
Where is the evidence for this?
If you want to do more stuff, as a society, you need to record more value being created
How is this done?
More money.
If money is printed beyond value added, then currency deflation may become a problem. However, to argue for a static amount of money, or to avoid increasing the money supply is idiotic, when most people hope for a greater value society.
As a very crude analogy, it would be similar to saying “we can’t have any more wind turbines, because we’ve run out of Watts”. (I think, happy to be corrected)
The argument then shifts to discussing which services etc are valuable. Which is generally much harder to hide an austerity/make the rich richer agenda behind.
Thanks Johan, I understand now
[…] Cross-posted from Tax Research UK […]
Under “So what taxes could increase?” and at risk of sounding like a scratched record – A windfall tax on those relatively few businesses (think online retailers, delivery companies etc.) that have had an absolute field day (in terms of either profit or market penetration) as a result of Covid. Maybe, sooner or later someone will use the word “profiteer” in the debate on this.
I could buy that
Apologies for not being clear on what I was referring to. It was this question and answer:-
So we can create money forever?
No. There is a limit. It’s full employment. That’s the constraint. Money is not. So at full employment spending has to stop. But that’s why the aim should be to create a wide variety of jobs in every constituency. Think small to deliver big.
I’ll repeat my question so that it can all be kept together:-
Can I just check? Does this mean that the government still spends but that it is matched by taxation? So, any increase in spend is matched by an increase in taxation and vice versa?
Craig
Yes!
That must then happen
Better not spend though (but there are exceptions, always)
Love this, very helpful.
Most politicians and voters aren’t aware that commercial or private sector banks create money from thin air:-
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
Most politicians and voters aren’t aware that the original Bank of England was a commercial or private sector bank that created money from thin air in the shape of bills and bank notes which it gave to the government for spending in return for hypothecated tax return money to give to the bank’s private sector capital and reserves subscribers by way of interest. Of course, the BoE is now nationalised but what difference does this make in regard to its legal powers to create money from thin air these weren’t cancelled!
Agreed
It is wonderful the way you explain it. What I would like to know is: Since all major, and not so major economies in the world are busy borrowing, who or what is providing all that money? Or is it just a bunch of numbers on certain accounts to which you can add or subtract at will?
Right now we are,min effect, borrowing from no one, except the Bank of England
QE creates new money. That is it. See the thread on this last Sunday
Do we not need a more nuanced goal than just ‘full employment’? That implies a somewhat rigid economy. The shape of the economy needs to change with growth in some areas and contraction in others. Climate change, health and social care and technology would be just three areas driving (desirable) shifts in employment.
That means we should want to see many more people in training and education, potentially between jobs, but being properly supported in that transition. That is also route to decent, more productive and better paid jobs.
I agree – more nuance would be good
The nuance Robin (if I may) is this: there is no such thing as the economy being cleaved into two, with ‘private’ on one side and ‘public’ on the other and never the twain shall meet like the Tories say (remember that infamous spreadsheet by Kenneth Rogoff which suggested a certain ratio of public sector economic activity versus private and all the bollocks about the poor little privateers being squeezed out by the public sector)?
How do I know this?
Well, it’s simple: through procurement of course.
As a public sector body I am spending our budgets through procurement on private contractors all of the time. We as a public body (a Council) do not carry the workforces on our books to get everything done – we use the private sector and it benefits them and the local economy. I’m actually bringing in the private sector in – not pushing it out! This is the truth of the matter.
This whole public versus private thing via libertarian ‘choice theory’ has really messed up things – it distorts reality.
To paraphrase Krugman ‘My budgets are also the private sector’s budgets’ – money melds us together for God’ s sake – but not when the rich and financial sector have it all to themselves!
Good one
PSR (not to be confused with PSBR…)
Im not sure I was suggesting that there is a cleavage – in fact probably the opposite. One ought to add in the so called third sector of not-for-profits, charities, social enterprises and CSOs who are a significant element in their own right and oft forgotten. One way of viewing a ‘mixed economy’ is of an ecosystem in which they are all in practice interdependent. Rather than the view of the neoliberal right of the state as the proverbial baby to be drowned, always getting in the way. Or of the further Left of the private sector as always an evil to be kept to a minimum. As I recall, Mr Rogoff’s spreadsheet had a simple error in it. More empirically, the Scandinavian countries rather disprove his claims.
Whether its the role of the state as a massive purchaser of goods and services, a regulator ensuring a level playing field and setting (high) standards or provider of services that are intrinsic monopolies. Or as Mariana Mazzucato points out, a major investor in primary research – a good debate between her and Ha Joon Chang yesterday – see:
https://www.youtube.com/watch?v=EFtFTuA6Vfo&feature=youtu.be
I can rant for Britain on the subject of crap procurement in the shape of outsourcing/PFI having been involved first hand (both private and public sectors) and coincidentally having just come off a long call on just that subject with an ex colleague whom I have persuaded to ‘see the light’. Nothing to dispute there
The point I was originally making was rather different, being about decent jobs (a weak phrase I know), the investment in skills and more needed to enable them, and the better productivity that results. Investment that has been lacking across all sectors. Productivity has become a bit of a dirty word in some quarters, where it has come to mean paying people as little as possible to work for as long as possible to minimise costs and hence maximise profits. A pretty standard view across much of the City and amongst the more narrow minded school of accountants Im afraid to say. Not Richard of course!
However, if we are envisaging a world in which people are able to work shorter hours to deliver better results with less impact on the environment and still be paid properly, that is also about productivity and applies to all sectors. Yes of course that means valuing ‘output’ differently (care being a prime example) and probably rethinking GDP. People like Diane Coyle at Cambridge’s Bennett Institute working in this area are worth keeping an eye on. https://www.bennettinstitute.cam.ac.uk/about-us/team/diane-coyle/
Its a big factor in having an economy that can afford to have the quality of public services all of us here want. MMT and money creation does not mean we can all sit on the sofa and watch Bake-Off whilst having great health and social care! Evidence of that is seen at its starkest in poor, subsistence economies. No amount of aid alone will build those services.
Hence my comment on being wary of just creating any old jobs to provide full employment. Risks falling somewhere between the Victorian workhouse, and soviet era forced employment. We still have to think about decent productive jobs, that people want and are equipped to do, and building the kinds of organisations that will host those jobs, be they public, private or third sector. The state has to take a lead role in that whether those jobs are in private or public sectors – interdependent as you say.
Keep the comments coming! Ain’t no silver bullets in this world
Going back to John S Warren’s point yesterday about ” unambiguously phrased questions ” that need to be asked
how about
Q Is there a magic money tree ?
A Yes but it’s not magic —the Govt. creates money into the economy to keep the wheels of the economy from falling off
I am working on this
I like that
I’m still trying to get my head round this aspect, so don’t bite my head off… Is full employment the QE limit (due to the inflationary effect of competing for labour)? What about using further QE to spend in developing countries where there’s work to be done, e.g. on climate change mitigation, and people available to do it? Is it that the money would tend to find its way back in orders for goods and services: creating demands that we wouldn’t have the capacity to respond to without inflationary effects?
It’s clearly in the interest of all countries with sovereign currencies to accelerate the rate at which those that don’t are able to decarbonise. Could QE be used for this extension of the principle of ‘we can afford that which can be done?
Might you come back having the post I have offered this morning?
I support John S Warren’s plea for some endlessly repeatable questions. The power of a pointed question should never be underestimated, particularly when the answer is obvious and unambiguous. One from the past to appreciate is that attributed to John Ball, prior to what the history books call the Peasants’ Revolt (of 1381): “When Adam delved and Eve span, who was then the gentleman?”
We need the modern day equivalents.
I am gpoinmg to try to work on this
[…] Providing the answers that are needed […]
Really great post Richard.
If this argument is going to be won it cannot be done in technical terms, it has to be done in a clear concise way that doesn’t make people (MPs, and the public) feel stupid, or duped.
It has to be worked into a story which people can buy into about our nation’s future.
The biggest challenge though is ensuring the above gets a fair hearing in the media and specifically on our public (state) broadcaster.
When you have the political editor going out to bat (consciously or unconsciously) for the economic status quo, that’s a real problem.
Robert Peston has posted that the current borrowing is potentially very expensive, and that is why some reduction is necessary. Is he correct?
Peston’s post here: https://www.itv.com/news/2020-11-25/spending-review-how-the-uks-covid-19-debts-may-turn-out-very-expensive
Comoplete nosnese
Real costs are falling
They are wholly within the control of the government
There is no sign of any risk of an increase
And actually – the means of preventing such an in crease is also in government control
He is just wrong
Peston is echoing (or perhaps anticipating) a point that the IFS made the other day – that QE leaves the Bank of England (and by extension) the government exposed to increases in the base rate. With the current rate at 0.1%, there is nowhere for it to go but up in the medium term. This appears to be becoming a prevailing counter-argument to the proposition that gilt rates are very low so why worry about government debt for the foreseeable future, so it might be worth spending some time to scotch.
I will….
The point us the OBR says the risk is very low …..
If rates rose as they predict the cost will still be at record low rates
Maybe the risk is low – although it would not be the first time the OBR has been overly optimistic! – but 0.2% is double 0.1%, and 1% is ten times, and £800 billion is a large multiplicand. The stronger argument, it seems to me, is that the rate (and indeed whether it is paid at all) is within the control of the Bank of England anyway.
I should have a video out on this in the morning
There is no risk,because the cost of remaining debt is tumbling