Having been taken slightly by surprise to find that Labour appeared to be promoting an idea I have long been associated with, having first suggested something akin to it in 2003, in the form of its so-called Recovery Bonds, I have watched reaction with interest.
As far as I can see many on the right have simply decided to ignore this proposal. That is, I suspect, a policy based on the idea that denial of the publicity of oxygen to Starmer makes sense to them. It also suggests to me that this idea will be recycled as Tory strategy long before Starmer gets the chance to use it.
Reaction on the left has generally been hostile. Duncan Weldon said he could not see why the government wanted to borrow at more than prevailing gilt rates. That wholly misses the point. When existing subsidies to savers cost maybe £60bn a year, paying £1bn in additional interest charges is almost irrelevant if a social gain follows. Nonetheless, it seemed many echoed his view. Market fundamentalism runs riot on the left, or so it would appear.
Others suggested that NS&I should just increase its rates again, but that once again shows a lack of understanding as to what the proposal is about. The marketing of a bond (and I suggest they be hypothecated with greater granularity than it seems Labour might be proposing) is critical to its appeal. There is a deliberate social intention within the plan to link the saver with the project that the saving might deliver.
No one, it seems, got the inter-generational dimension to the idea: the proposal uses savings of the older generation actually to create assets and, most importantly, work for those who are younger.
I was asked by someone who knows MMT well who came up with this dumb idea, and I admitted I might be knew if its progenitors, and saw no conflict. I think that created a sense of horror. The MMT line is that the government does not need to borrow because it can always fund itself. But need and desirability are not the same. I have long argued pure MMT gets this wrong. The government may not need to borrow, but people need to deposit with it. That's for security, or because they are overseas holders of sterling wanting a safe place to borrow funds, or because they are in finance and need the collateral value government bonds provide. The MMT argument about not needing to borrow has a singularity of perspective that does not help explain why bonds actually exist. I am quite willing to disagree with MMT when it gets things wrong.
And as far as I can see only Larry Elliott really got the purpose of the proposal, when saying in The Guardian:
The thinking behind them is that only a fraction of the excess savings built up during the pandemic will be spent so the rest could be doing something more useful than sitting in bank accounts.
In other words, he saw what the critics did not, which is the instability that substantial deficits create by pumping excess savings into the economy which QE denies a safe harbour to by restricting the supply of government bonds at a rate the smaller saver desires.
Aviva noted yesterday that there might be £1.6 trillion held in cash savings in the U.K. right now, with maybe £225bn of that earning no interest at all. People want security. This plan is intended to provide it whilst delivering social advantage.
The person who might gave got the idea best was James Meadway, who was once in John McDonnell's team. He appreciated that this might provide the means to direct loan funds to local authorities at lower cost than they are charged at present with a new economic role being created for them as a result. This is exactly what Colin Hines and I were suggesting in 2003. The aim was always to empower local decision making and accountability.
The Recovery Bond is not a well formed idea from Labour as yet. The suggestion that it will pay market rates of interest is wrong: it needs to pay a premium. And it needs to be linked to ISAs, at least. It also needs more options. NHS bonds would work. So too would Welsh and Scottish bonds appeal, I am sure. But the proposal is much more significant than the critics have understood it to be.
It lets Labour answer the question ‘how will you pay for it?' It now can say.
It lets Labour say it is tackling the risk of instability in the savings market, which I think is high.
And it really does provide a pool of capital. Of course MMT says that the government could also do this. And I agree, but that does not address the political difficulty of it doing so. And it does not address the difficulty of the savings glut that MMT could create, and which as far as I know is an issue it has not addressed, but where the market has no solution and so one is required. This plan recognises those realities and deficiencies and addresses them.
Let me be clear that I see this as a work in progress. But it is also a decided step in the right direction.
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Still some intense “spin doctory” needed. Only one national newspaper, The Independent, had this on its front page today and that was less than a glowing endorsement.
It’s a shocking indictment of our banks that they are unable to recycle savings into viable projects that are of real value to society. We have seen banks and lenders become increasingly remote from the communities they used to serve (closing local branches, and dispensing with local business managers, plus the wholesale conversion of mutual building societies into PLCs). Today banks just want to minimise their costs, and maximise short term returns to shareholders. As a result excess savings simply end in driving up asset prices for housing and stock markets, but without any benefit to the real economy.
As a result, the idea of a community bond that invests in building the green business and infrastructure we need makes perfect sense. The only question is who will administer it? Does Central or local government have the skills to manage these investments efficiently. And if not, how can they use private banks which are not set up to do anything other than increase shareholder returns and maximise their own management bonuses?
The real question is do we need community banks, if community bonds are to work for anything other than the big national projects?
Banking makes loans
That does not require deposits
That is why a different arrangement is required to achieve that goal
Richard.
So, in the language of MMT, arethe Recovery Bonds removing money from the economy to create “the space” for more government spending?
That a bond is “tied” to a specific project, let’s say an NHS Bond, means that the government then has to spend the equivalent value of the bond on the NHS?
It’s a clever way of getting round the “how are we going to pay for it” trope, but I guess it isn’t explaining that bonds or tax are not used to directly fund government spending.
Maybe that debate is for another day. What is needed now, is the spending.
This providing capital for projects
The government could use the funds
So could mutual entities too, in my opinion
Or local authorities
You could apply the analysis you offer, and it would be fair
But only
But this must require the spend match the sum saved
Richard – I just have a query about your point that “…. this must require the spend match the sum saved”.
I don’t think this is the case. The issuing of these bonds does not involve the government removing money from investors bank accounts and putting it into some government spending account and you have made this point yourself before. The bonds encourage folk to save rather than spend their money, thereby removing money from circulation and reducing demand for goods/services they would otherwise spend it on. This then creates space in the economy for the government to reallocate resources to specific priority purposes without stoking inflation. Having removed a quantity of money from circulation by converting it into savings the government can then spend freely (with new money) on the priority purposes that have been identified. If it is understood in this way it is entirely consistent with the fundamental tenets of MMT but demonstrates how the purpose(s) of money are important. In my opinion, managing the economy can be achieved in a more fine tuned way through the issue of hypothecated bonds than through the process of taxation, which is much blunter instrument and better suited to deterring specific purposes of money than incentivising them.
You miss my point
The reason the money must be spent on the items it is promoted to fund is political and contractual
But there is a second point. As a matter of fact this money has been saved, already. But the capacity created by the saving has not been used.
The reallocation of private sector capital is my aim, under public direction. I am not working on a private / public divide in proposing this. The saving already exists. MMT explains its creation. Government deficits create private wealth. Everyone in MMT says so. But QE is effectively preventing that saving being used for public purpose. The consequence is deeply destructive, not least because private wealth is not, as Warren Mosler would have it, the simple accumulation of unused tax credits, but is an effective instrument for the accumulation of continuing economic power.
You have said MMT does not include a theory of society. It does not. Mosler exposes that. What I am doing is addressing that deficiency. I’m seeking to divert the use of that power from financial speculation to social purpose. This proposal is not about creating new saving or withdrawing capacity: the saving was created by the deficit. I am addressing the social aspect of the resulting inequality for which MMT has no answer.
I just hope that they don’t ruin it with some silly concession to the private sector.
Once again the prevailing “conservative” portion of British society, including those with selfish vested interests, pooh-pooh the idea that it’s possible for ordinary people to “choose” a new way of doing things not least because they can’t “choose” how to make “their” monetary system work for them! A large part of the nation in “conceptual” chains!
Is it necessary to issue a hypothecated bond such as a “recovery bond” in an ISA type of (tax free) structure? Would it not be simpler to just issue the bond with a higher rate of interest and keep the unearned interest income subject to tax? For example if I buy a £10000 bond at 1% tax free my annual return is £100. If my rate of income tax is 20%
then I would get the same return, after tax, on a bond offered at 1.25% rather than 1%. The tax at 20% on my return of £125 leaves me with a net return of £100 – exactly the same as the return on a tax free interest rate of 1%. Is this not a more equitable way to proceed whilst also providing greater incentive for those in lower tax brackets to invest in these bonds? It would also mean that there is no need for an arbitrary limit of £20000 (the tax free ISA cap) on what folk can invest in theses bonds.
People love ISAs
It us just game playing, but it’s where money is
So why not do it?
That’s true but it favours higher rate tax payers and so this problem is addressed by the £20K cap which then limits the amount that can be raised. It is then a question of what impact the tax on interest earnings has on demand for the bonds from the better off. I guess this is unexplored territory as I suspect there is no data on the elasticity of demand for tax free against taxable bonds of this sort.
If the interest rate was set at a level that neutralises the tax impact on net returns for higher rate tax payers (40%) the interest rate would be about 1.6% – for a standard rate tax payer their net return would be higher than the return on a tax free ISA type structure,
So for £10000 a higher rate tax payer would earn £160 less 40% tax = £96 whereas a standard tax payer would earn £160 less 20% – £128.
Wouldn’t this (a) get more invested in total (b) incentivise lower paid people to invest?
I’ll muse on it Jim
Jim – doesn’t the Personal Savings Allowance neutralise a lot of this? Assuming you’re a higher rate taxpayer currently getting 0.5% interest then you’d have to have over £100k non ISA savings before you’d even start paying tax. This would be the minority surely?
It’s a good question
Why we need ISAs and that allowance is a question hard to answer, especially when we also have such generous CGT allowances
There’s a strong case for simplifying the tax system if you ask me Paul. Too many exemptions, allowances and inevitable loopholes. Much simpler to subject unearned income to income tax … it results in a higher net rate of return to folk in lower tax brackets and whilst I take Richard’s point about the bond being a means to direct current savings into purposeful investment higher net returns to folk in lower tax brackets is likely to increase savings further….of course this would mean a reduction in private spending somewhere else and the impact of that would have to be considered within the wider context of macro economic management. If an economy is near full capacity but misallocating resources then savings bonds would have an important role to play in reallocation.
Jim
I agree re simplifying the tax system – that is clearly needed, but with the aim of increasing social justice within it
You are still missing the point on bonds: the saving is happening because of the government deficit. The economy is not at full capacity but savings are being misallocated. The aim is to correct that misallocation independent of creating additional economic capacity: that already exists.
My point is MMT does not address those issue. I am aware I will take flak on it for a while.
It appears that some folk have lost sight of the objective – a better life for us and our children. This requires investment in a broad range of things where “markets” have failed to deliver and the key is to find a practical policy that can be implemented that will change this.
MMT purists are right – government could just spend…. but on what political planet do they live?
Opposition on the left hates the idea that savers (ie. the wealthy) should get any return on their savings….. but fail to understand that a Recovery Bond would probably reduce inequalities by preventing asset price rises and delivering a future infrastructure that will help everyone.
Opposition on the right just dislike any government involvement…. but they have been driving the bus for quite a while and have failed to deliver investment. My conservative friends are very concerned about the future and understand the need for investment…. and would quite fancy some return on their savings so the Right may well find their natural constituency in favour of the idea.
In short, the plan is not ideal…… but the objectors offer objections but no alternatives that have a chance of adoption by either political party.
I have been pondering on this all week. The Covid crisis has propelled MMT into warp speed from being in suspended animation. Within the space of one year so much money has been created by our govt that we stand staring at it in disbelief(well those paying attention anyway). Even in the most ardent of MMT advocates could never have dreamt of witnessing such a massive change of events, events brought about by sheer need rather than any real planning.
So what do we do now we actually exist in this new MMT paradigm?
Must admit I am stumped too…..no one foresaw money creation on this scale and timeline. We have created a problem and it could be very big one if we do not attempt to address it. Too much money sloshing around in the bowels of the “SS UK” could well topple the ship and sink it.
Green bonds could well be an answer. Public sympathy with the idea is key. This would have to be sold right. It’s not just about making a profit from investment,(though a little cannot harm the cause). During wartime it is common for govts to issue war bonds to help the war effort. Many are worried about climate change and this is the prefect opportunity for them to feel like they can really act on that concern and do something positive for the planet with their savings.
Though I would also say raising NS&I rates would not be a bad idea as well for those not disposed to the idea of Green bonds, but maybe at a lower rate.
Labour are in the wilderness and look like remaining there for a long time,they offer no opposition to the Gov, to me Starmer works for the Tories,as for future policys they are just killing time,its pie in the sky, and i,m no tory.
Keir Starmer always a timid follower and never a leader in my book!
He goes on about the need for “fiscal responsibility” but he never ever actually tells the voters what this is!
Is it the government operates on a credit card and must automatically balance its books regardless of the economic state of the nation, climate change, GFC’s and pandemics included?
Or is it government can create money from nowhere and consequently the criteria must be the government acting to avoid deflation and abnormal inflation whilst dealing with climate change?
Starmer needs support not getting persistently stabbed in the back by the hard left. Could you imagine Rebecca Long-Bailey I. Charge. At least Starmer has restored some credibility.
@ Janet
How can you pretend he has any credibility when he goes on about the need for “fiscal crecibility” but provides absolutely no detail about how he’s going to achieve this? I like dogs but I don’t expect them to have the power of reasoning to run the country. You’re just telling us we ought to care more for Starmer as though he’s some poor ill-treated puppy! I’m fed up to the back teeth of Starmer providing no detail. He’s being paid good money to do his act of hiding away in the closet!
Janet
At least Starmer now knows how Corbyn must have felt, being stabbed in the back by the “hard right”.
🙂
“Restored credibility”.
Hmmmm.
Are you sure on that????
Just listened to last night’s Novara Media show and James Meadway’s view – as outlined above he recognises that local government have very tight controls on their ability to borrow and this could advantage them significantly.
It would be great to see you on their show Richard, having a discussion/debate with Meadway on MMT, tax and government finance.
Yes the likes of Meadway and Grace Blakeley may not be fully subscribed to MMT but from what I can see this is because they don’t see it as challenging the current power structures in the economy. On this I think there is a lot of common ground.
I am, according to many in MMT, not fully subscribed to MMT
I call that a strength and not a weakness
That was the point I was making..
You can add the MMT community to the long list of people and groups you’ve fallen out with. And always, everyone else is wrong and you are right. About everything. If everyone doesn’t agree with you, they are ‘neoliberal fascists’ and you throw your toys out of the pram and stomp off.
As someone once said. What all your failed relationships have in common is you.
See my reply today
If you start regarding money as a form of information processing or conveying (using a unit of account to measure ratios of value, how many pounds sterling is this thing or service worth for your purposes relative to similar ones) it’s very difficult to avoid “semantics.” Information and semantics (the branch of linguistics and logic concerned with meaning) run together.
For example, the human immune system gathers information about any outside microbe than might move onto the human body or inside it and asks what does this mean for the human body, friend or foe.
It therefore also becomes possible for human beings to collectively ask what is the meaning lying behind human beings developing and using this money technology. One very simple and obvious answer is to provide general well-being. Once this answer is thrown into the ring it’s very difficult to continue arguing money is some kind of neutral technology, the Neo-Classical view.
Whilst we know that money can be used for individual comparative purposes (the limited Neo-Classical assessment of value role) we also recognise that money needs to be used for group purposes with this recognition coming most sharply into focus at times of crisis or uncertainty. For example, there’s a need to assemble resources to deal with and protect against threat from other human groups. Indeed from a mutual point of view there’s also the recognition the better the general well-being of your society the better its ability to deal with such threats and this would account for the sudden surge in Britain of public service provision of such things as subsidised housing and healthcare for all in the aftermath of the Second World War.
Paul J.
I second that!
I too, would like to see you, Richard, interviewed on Novara Media. With or without James Meadway. They skip around MMT. Be good to see them have the discussion and bring it to their audience, even if they don’t agree with you.
I know you’ve asked in the past. I’d be happy to contact them (not that they would listen to me) to suggestt they get you on. If enough of us, who read this blog, contact them, then maybe they would take notice?
Vinnie – agreed, Bastani interviewing Richard would make a great ‘Downstream’ episode.
From the point of view of the social utility afforded by these proposals I am all in favour of it. But I would insist on it being managed by Government – not ‘outsourced’ to the private sector. Hence my scepticism.
I’m intrigued by Clive’s comment: “MMT purists are right — government could just spend…. but on what political planet do they live?”.
Is this all that is holding MMT up? I must question this. Where and how did Government find the billions poured into the private banking sector in 2008? How did they fund Iraq and Afghanistan? And what about the money they’ve spent on Covid (inadequate as it is)?
I agree that there is much more detail to be filled in. MMT policy and practice cannot be employed in splendid isolation. Other areas of the economy – tax, trade – you name it – will need to looked at.
But is that what we are going to say: That no one would believe us? Is that it? If so, what has all this effort been for then?
Yes – I know that Sunak will portray it as a debt – yes – agreed.
But it’s so obvious where MMTeers need to aim their attack. Yes – I can see the point that in spending fiat money, it is a good idea to have savings – a store of money behind it if only to help curb inflation because the money in the system ‘IS’ the system so to speak. However, I’m only a working stiff – I’m no expert and I do my best to keep up. So I have my limitations compared to you ‘full timers’.
But it seems to me that those who worry about those who control the value of our currency are right. There is no way out of this bind that we are in then? MMT will still be portrayed as debt, and as dictated by unelected markets, everything really, from the value of the pound to even making the U.S. maintain its aggressive economic policies as it seeks to maintain the value of the dollar with a trillion + dollar ”deficit’ will based on a lie. A big fucking lie.
It seems to me however that the 1866 Act existed when Atlee’s Government initiated the NHS, social security etc. It was there for 2008 and worse reasons to use it (private stupidity driven by greed). I can’t remember any one at all moaning about how much the banks were soaking up. No questions asked. And none asked when it was portrayed as debt either and austerity came in.
So it seems to me that Milan Kundera was right. We are struggling to remember aren’t we?
I suppose with a craven Opposition Party, some form of new coalition needs to start up of people who are prepared to tell the truth that is actually in plain sight for all. And help us to remember.
In the spirit of Clive’s post in trying to remember what all this is about – if we allow ourselves to be ‘recharged’ by this shitty Government for the ‘help’ they have given then my friends we are ALL toast. In fact we deserve what we get. Because it will mean that only the rich deserve to get bailed at no cost to themselves and the rest of us it seems can go to hell. Some future.
All because too many of us could not be bothered to ‘go and look’ as well as it seems to me so called progressives cannot agree on MMT itself. Even though we’ve used MMT-like investment before – at the end of World War II.
PSR
There is a tension, as ever, in what we are doing.
They’re is the struggle to find a truth – and MMT seems to be a part of that. I say a part deliberately because I am increasingly aware of the gaps (savings, tack and social relationships of power being among the gaps – meaning that they are pretty massive).
However, until MMT fills the gaps – and I am seeking to do that, and will keep doing so, I suspect ot is only a partial answer. That means there are those who only see the gaps who cannot see what it also might answer. That’s a political reality.
The political economic reality is that the left are most inclined to see the gaps in the theory – because it has no theory of change as far as they are concerned. The right are most inclined to understand the theory in itself and see that in its own right as a threat. So, it ends up attacked on all sides.
I think Clive’s view (and I would echo this) is that MMT is working in no small part – it does describe what is actually happening in the monetary economy right now. Not much else. That’s all to its credit. But the political economy arguments are not won. Nor is the theory complete. And in that circumstance those who believe it is of use have to adapt their narratives to the ways of the wold for now whilst sticking to the arguments. That is the pragmatism of politics.
The tension is not always easy, that I admit.
I appreciate your tolerance of my limitations.
My next comment is not a riposte in any way. Nor casting judgement on anyone’s efforts. Just some more thoughts.
But I’m struck by how often politics makes a complete hash of managing these tensions. The last attempt at this resulted in ‘tax payer’s money’. And ‘we can’t afford the elderly’ etc. Not top drawer stuff.
The picture you paint is a daunting one: That we will never be free of having to fend off idiots and the greedy. That there is no final battle for the truth or a truth. Always accommodation. But like all extremists – they’ll always want more. It’s never enough. They’re like the dwarves in Tolkien’s story – struck with ‘Dragon Sickness’.
And if Labour cannot understand like Atlee surely did that MMT (not that he would have called it that of course) was at work then and it DID result in change – well – they’re toast as much we are. Good riddance I say.
And as much as I appreciate your erudition on getting MMT right – was Neo-liberalism right? Was it perfect? Not at all. But we still got it.
The choice we have is to stick with a shitty system called Neo-liberalism which time has revealed is pure tripe for most of us and the planet or try MMT but we’re not quite sure how it stacks up yet? It is beyond us to try it it seems and learn as we go along? I don’t know. That’s where the courageous bit comes in for me. Having a go (but an informed go of course).
And as for politics itself?!!! Pragmatism you say? I’m sure you’re right Richard – but pragmatism about WHAT exactly? The difference between truth and lies? Pragmatism riddled with hypocrisy? I can understand why people go for populism – I really can.
And people wonder why the likes of Putin and China are laughing at us?
In ‘Putin’s People’ Katherine Belton quotes a Russian interviewee (p. 488):
‘We believed in Western values………………… But it turned out everything depended on money, and all those values were pure hypocrisy’.
Philosophically, the West has tied itself in knots over liberty – especially the liberty of money (or the monied). And we’ve literally defeated ourselves in the process. Politically, morally, socially.
And so ends the Enlightenment, progressive politics and the like. Undone by tolerance – of all things. Incredible. Incredible.
When I breath my last in this life, I cannot rule out that it will be with a hint of relief.
I think you mistake my suggestion of pragmatism: I suggest that the steps in n9n-revolutionary change are always pragmatic to a degree….that is all. And the outcome is better than revolution
I can’t help thinking things haven’t moved on much in the English speaking world since the 17th century in England and Wales. In the United States you have King Donald The First wanting to rule by personal decree just like Charles I in England (the only difference as far as the divine right of kings is concerned with King Donald is that he has no God other than his own dreadful fascistic unhinged self!).
Millions of Americans have been taken in by King Donald and willing to trash their democracy along with many current Republican Party politicians wanting to be King Donald’s courtiers mainly for the wealth they think it will bring them. Of course King Donald will throw the Republican Part leadership to one side if they start to defend democracy too much which he knows will cramp his exercise of power!
Isn’t this willingness to be taken in by “strong arm” characters still so typical of many of the English and Welsh voters and how they bathe in the glow of this type of leader’s “exceptionalism”? Doesn’t it really mask a desire to remain children and taken care of by a grown-up? Life’s easier that way!
Pragmatism or not, negotiating with or arriving at an accommodation with power bases that are based on wealth (Tories +donors) establishment (Labour) or violence (revolution) seems to do no good. The principle parties just can’t help themselves. It’s all too subjective for them. They aren’t looking at anything else but their own interests. Yes – revolutionaries too.
The only answer is, is that there are more of us than them. We must stick together if we can. And even feign agreement on (say) MMT. That’s the only pragmatic political answer as far as I can see in these times.
If MMT was a project group, there’s no way I’d have disagreements (no matter how valid) paraded out in the open. It would all happen behind the scenes. Let them assault us. Having them do that would be the first explicit recognition that MMT actually existed. The attacks themselves would validate it.
These are desperate times.
And without electoral reform Revolution us the only alternative
I don’t espouse revolution
And Labour will block electoral reform even though it is obviously in their interests
So, what to do?
Richard – I have no idea mate.
I do know however that the Neo-libs are good are sticking together because facts don’t bother them, nor detail. It’s all emotional.
We seem condemned to be out fought because true progressives are out spent – never out-thought ( I was looking at the Twitter feed the other day you copied us into about new revelations about unaccounted spending on third party pro-Tory messaging).
The only way forward is for Parliament to grow some minerals and start asking some questions. Maybe more pressure should be applied there? Hopefully Mr Oborne will submit his book to parliament and let us know how he gets on.
There is no doubt about it though: some one or something is still pumping gas into the Tory airship, enabling it to stay afloat miss-step after miss-step. We can only hope that they are using something inflammable.
Seven Starmer on Hancock today?
Despair….
Starmer orders “radio silence” on Brexit just like he has one on “fiscal responsibility”!
https://www.theguardian.com/politics/2021/feb/20/labour-mps-dismayed-at-orders-to-maintain-radio-silence-on-brexit
“Radio Silence” Starmer sounds a fitting political epitaph to me for a Red Tory!