Byline Times published this yesterday:
They noted:
My article follows.
Left-of-centre thinking has only dominated the economy for one period in history. The post-war consensus was built on the ideas of social democracy. That consensus collapsed in the 1970s.
The rigidity of the post-war international economic architecture that initially underpinned the prosperity of that era could not withstand the pressures of an increasingly global world where imperialism was ceasing to play a role. In addition, the command and control approach to macroeconomic management within governments, learned by so many politicians of the era from the wartime economy, fell into conflict with people seeking greater economic freedom.
The failure of the left to adapt opened the door to neo-liberalism. That led parties of both left and right to the era of non-government, where light-touch regulation was the creed and the 2008 financial crisis the consequence. It is only the absence of an alternative vision that lets this vision stagger on. That vision is that:
“Neo-liberalism offers economic growth through a faith in market solutions.”
It is my suggestion that the left should replace this with a new ethos:
“The left wants to create a sustainable economy by putting all the resources available within society to best use, including those that the market fails to use to best effect.”
In doing so I draw on some serious changes in economic understanding over the last decade or so.
A Revolution in Economic Thinking
Neo-liberal dogma might have survived the 2008 financial crisis, but the practice of government and its financing since then has suggested that much has changed. The idea that governments cannot create money to fund their own activities without dependence on either taxpayers or borrowing has been shattered by quantitative easing.
That governments can increase inequality by use of this new funding mechanism has also become clear, although nothing is being done to tackle it, resulting in growing tensions within society. And throughout this era, the disconnect between people's savings, stock markets, bond markets and the financing of the needs of society has become apparent as corporations fail to respond to the crisis of climate change and ask for government support to do so despite ever-increasing apparent financial wealth within the economy as a whole.
Government claims as to its own inability to act due to the retention of the neoliberal demand that it balances its books are creating a tension that needs resolution. The opportunity to resolve this crisis comes from new economic thinking that has developed over the past decade:
Money is Made by Lending, not Saving
We now know that all bank-made money is created by lending. As a result, we know that no bank lends savers' funds. They are not the intermediaries that they were once supposed to be. The reality is that cash savings in banks are macro-economically inconsequential because they almost never create new employment or jobs in the way they are saved at present;
Government Doesn't Borrow: It Provides Opportunities for Savers
We know that the government creates new money via the Bank of England literally every time it spends. As such tax does not fund government spending, nor does borrowing. Instead, both are funded by government money creation. Tax exists primarily to control inflation as a consequence, by cancelling the money the government creates through its spending (in the same way as loan repayment cancels bank-created money). What has been called government borrowing is nothing of the sort but is instead an incredibly secure savings facility offered by the government largely as a favour to the banking sector who need it to underpin their operations;
Company Shares Do Not Finance Investment
Based on research colleagues and I have been doing at Sheffield University and elsewhere, we know that FTSE companies do not rely on or need new share issues to finance their investment activity. In fact, they are repurchasing shares faster in most cases than they ever issue them. What that means is that saving in shares also rarely if ever creates new investment or jobs now. This is as true of property companies as any other quoted company;
Financial Services Do Not Provide Capital
The conclusion is that as things stand, the whole edifice of the financial services industry has ceased to be an intermediary between savers and investors, which was once its raison d'etre. Instead, it merely provides cheap capital for banks in the case of cash savings or money to be used in endless, but unproductive, speculation in the case of stock exchange-related savings activity, including most of that in property;
Not to put too fine a point on it, financial capitalism has become so focussed on engineering financial returns from smart accounting, takeovers and mergers, and capturing public revenues for private gain that it has forgotten that its role was once to supply capital for useful purposes. Neoliberal capitalism has now developed to the point where capitalism itself has in any meaningful way ceased to exist;
Government Subsidies to the Failing Financial System
Despite this, there is about £8.4 trillion of financial wealth in the UK, according to the Office for National Statistics, and of that sum, more than 80% attracts tax subsidies on an annual basis at a total cost in terms of tax foregone on pensions and ISA reliefs of very nearly £60 billion a year;
Of this sum at least £28 billion goes to the top 10% of wealth owners in the UK: this system shovels government support upwards through the wealth hierarchy of the UK, and all to no overall economic effect, except to increase inequality;
So not only has neo-liberalism failed but so too has the government by not noticing or responding to this. It's subsidising a financial system run by an elite for the benefit of an elite in a way that has ceased to add any value to the rest of society;
Breaking the Pension Contract Across the Generations
Worse, that system has failed the fundamental pension contract: this is the tacit agreement that one generation, the older one, will through its own efforts create capital assets and infrastructure in both the state and private sectors which the following younger generation can use in the course of their work. In exchange for their subsequent use of these assets for their own benefit, the succeeding younger generation will, in effect, meet the income needs of the older generation when they are in retirement. Unless this fundamental compact that underpins all pensions is honoured any pension system will fail. Ours is now tottering on the brink of doing so.
So, what can be done about this?
A Renewed Social Contract: the Uses of Capital
Government has to take on a new role in society. It has, in effect, to become the intermediary between savers and investors to make sure that the nation's capital is once more used for social purposes.
The significance of this cannot be overstated. Whenever there has been a major shift in economic thinking it has always been about how capital is used by society, for what purpose, and to benefit whom.
The change always happens when the structure in place has been corrupted and then abused. So feudalism gave way to monarchical government, which in turn was replaced by early forms of parliamentary government, albeit on a very limited franchise, which did in turn by the end of the 18th century gave rise to the industrial revolution and the growth of the joint-stock company. That era was then replaced by the welfare state in 1945, only to then pass on again in the 1980s to neoliberalism, with its focus on returns to financial capital above all else.
As those changes took place the use of capital always changed. So too did the beneficiaries change. It is never the routine of day-to-day spend and tax that changes society. It is the way capital is allocated, and rewards are distributed that does that.
The proposal made here is to change how capital is used. Using the very obvious power that tax reliefs have to direct the use of savings it is suggested that the tax reliefs attached to ISA and pension savings accounts should be changed to mandate their being saved in new Green New Deal bonds to be issued by National Investment Banks in the case of ISAs and to encourage that same use in the case of pensions.
The types of bond will vary to suit the different markets, but the goals will remain the same. The focus will be on cash savings bonds in the case of ISAs, with simple to understand structures. Bonds more akin to hypothecated gilts might be available for pension use.
In both cases, the National Investment Banks of each of the countries of the UK would be directed to use the funds that they can generate from these Green New Deal bonds to fund the transition that is required to a sustainable economy faster than might be possible by relying on any existing decision making or funding process. As a consequence additional investment will be made in:
- New social housing
- New sustainable energy generation systems
- New energy efficiency systems, including in public and private housing
- Sustainable transport systems
- The renovation of many existing public buildings to make them energy-efficient and sustainable
- R & D into:
- New food production systems
- Reduction in food waste
- Alternative energy systems
- The support mechanisms for society, most especially in health and publicly provided social care, whether at home or in residential provision
- Education and related facilities to support all these programmes
Doing so will also release funds for significant new spending on the regular programmes of government since there will be reduced demand on these for investment purposes.
That is because it is assumed that ISAs will, if the interest rates offered are as good as those available from commercial banks, generate funds of maybe £60 to £70 billion a year for this purpose, which is the amount regularly saved in these accounts a year at present, whilst if just one-quarter of all new pension contributions is diverted for social investment as a result of the changed conditions of pension relief then more than £25 billion of additional funds for this purpose might also be available from that source each year.
Because the proposed changes redirect tax reliefs no new taxes are likely to be required to achieve this goal. It might, however, be appropriate to restrict some of the reliefs for saving available to the very wealthiest.
A New Economic Vision for the Left
The aims of this proposal are quite straightforward. One is to make capital a mechanism capable of delivering change for social advantage again. Another is to turn currently wasted tax reliefs into focussed subsidies that deliver benefits on a host of fronts, meaning that they are used productively once more. Third, the aim is to restore the social purpose of saving. That then leads to the goal of creating a restored pension contract within society as a whole, as a part of which the aim is to rebuild inter-generational solidarity.
But perhaps most of all, the purpose is to recreate the link between the saver and the investment that they fund that has been entirely destroyed in modern financial capitalism when the saver in a pension, ISA of any sort, or any structured fund has no real idea what their money might be used for. That it so happens that the investments with which the saver might associate themselves resulting from this proposal could also be of their choosing, either by offering dedicated (e.g. climate, health or transport funds) or regional funds so that the saver might associate their money with new projects in their own region or devolved country, enhance this goal.
What is the downside? There can be no doubt that this will be felt in the City of London and the financial services industry, which have come to see the financial wealth of the UK as their plaything for gain, with tax reliefs thrown in to comfort the blow for savers if markets do not work out as the financial forecasters suggest they might. I suspect that if funds flow towards savings of the sort I describe in the scale that I suspect likely then the demand for other financial services products will fall. But I would welcome that.
Any change to the allocation of capital in society must have the goal of putting resources wasted by the existing allocation to better and more productive use. Many of those now engaged in generating little or no return for society at all in the financial services sector might very well be much better employed elsewhere in society.
Could the parties of the left in the UK sell this idea as the basis for the revolution that we need to deliver the transformation that the country requires? That would require imagination. But, while the theoretical implications of what is proposed are not easy to communicate, the practical dimensions – including the fact that existing tax reliefs are being very unfairly distributed for no social gain – should be easy to explain, as should be the idea of creating new funds to direct investment for social purposes.
Richard Murphy is an economic justice campaigner and political economist. He is Professor of Accounting Practice at Sheffield University and co-founder of the Green New Deal
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thanks, Richard for an interesting and thoughtful read. I confess an instinctive unease about hypothecated taxes, so although I have been anticipating it may arise, I need to think more about hypothecated pensions.
If I amy go off topic, I fear the busy news schedule is sweeping out of sight too fast, Google’s move post Roe v. Wade to change its ‘location data’, in consequence. The virtue of the move should not lead us to overlook the extraordinary power we have handed Big Tech over our lives.
My concern is that it has taken Roe v. Wade for anyone to notice that the consequence of Big Tech’s Big Idea: ‘permissionless innovation’, exploited without let or hindrance (and with the law still trailing far behind ,in an antiquated age that is long gone), on the seductive altar of consumer convenience (how to disarm the user of their judgement); has delivered us all into the hands of Big Tech; from which there is no escape offered, save through their own choice.
Nobody is listening. Zuboff has been forgotten.
Big Tech’s choice – not yours or mine.
I am not even aware of this
A link?
Here: https://www.nytimes.com/2022/07/01/technology/google-abortion-location-data.html
If I read this correctly Google is acting appropriately although it is hard to think how they fill the missing data
They are, but they are moving in the context of Roe v. Wade; a watershed American moment. Why does it take Roe v. Wade to do it, note in a specific ares related to the Supreme Court decision, rather than a general and universal block applied across the board? Why has the access they are now blocking ever been allowed? This is a failure of politics and law through the casual and ill-informed endorsement of consumers about their real interests, for an immediate, transitory convenience, and the inclination of neoliberal politics to serve commercial interests over public interest; a historic weakness of both that has shadowed us like a plague through the whole history of commercial society.
Powerful arguments here for not taking your phone with you and using cash when you’re there. I imagine this will be one of many instances where the anonymity of cash shines by comparison to the convenience of carding it. Perhaps accepting cash while physically onsite together with anonymous communications will be touted as attractive features some day.
” the anonymity of cash shines by comparison to the convenience of carding it”
Yes. It may, however be argued that the anonymity makes taxation problematic for Government, and bags of cash is also often associated with dubious practices. I would counter that the problems of scamming, data protection, and the facility of instant global transfer, and the sheer vast, complexity of digital financial transactions are far more critical problems, which are already inadequately regulated.
My argument is that cash is free to circulate, and this has special social value; not part of the Big-Tech-Banking network, not instantly turned back into credit by rent seekers; and better distributes and sustains the circulation of cash from the sovereign issuer to those who most need it and whom least interest the rent seekers (save the most cyncially exploitative), and therefore are typically the most cash and transaction poor in a digital age. Everything is about credit, which serves the rent seeker first in a digital age.
John mentions “consumer convenience”. There’s a long-standing adage in the worlds of systems development and implementation that increasing customer convenience generally brings with it the risk of diminishing customer security. Much of the huge increase in fraud stems from the massive swing to online banking (which the banks encourage enthusiastically) and the ease with which fraudsters can access private bank details either through deceiving the gullible or by hacking into computers. Another adage of the systems world that’s worth remembering: there are no hackproof computers – your’s or the bank’s.
I’m no fan of Google, but it’s only fair to point out that it’s perfectly quick and easy to turn off location sharing, location history and other intrusive settings in a Google account, as well as to deactivate the location setting on an Android phone. Anyone who has a Google account will receive reminder emails two or three times a year about checking their privacy settings, and it’s worth doing as it seems to me they’re always sneaking in new features, and of course they’re always “opt out” instead of “opt in”.
‘,,,, they’re always sneaking in new features, and of course they’re always “opt out” instead of “opt in”.’
And there it is; opt out before opt in. These are your rights, playing second fiddle to permissionless innovation. Permission should be required first, not presumed. It should not be incumbent on the rightsholder to require to take action to defend their rights.
This is my fundamental point.
Incentivising pension funds to allocate funds to the purchase of green (or otherwise hypothecated) bonds by the use of tax incentives makes sense – doing this reduces the amount they “invest” in useless and unproductive financial asset speculation. If I understand how bonds work correctly, they take money out of circulation in order to create headroom for the government itself to allocate capital.
However, pension funds could, if they were consolidated into a single large fund, allocate funds for equity partnerships to support the formation, development and growth of productive businesses, thereby directly allocating pension savings as investment in productive activity. I say “directly allocating pension savings” because, unlike the case of purchasing bonds, the fund would not be standing aside to allow the government to execute the investment of capital; the fund would be allocating the investment itself, although the government might wish to ensure that the choices of investment are aligned with a national industrial strategy.
Participation by a pension fund as an equity partner is not a liquid financial asset and presents very different investment risks which is why if pension funds are to be encouraged down this road I think it would be best to consolidate them all into a single national fund. A national fund might also enable more effective alignment of investment with an industrial strategy.
You mention FTSE companies in the context of new capital being raised to fund growth. The truth is theses companies by their size and scale are typically market leaders and can fund growth through retained earnings.
Capital raising for fledgling companies is almost entirely through Private Equity which is a very generic and broad term but some colour is provided by this report
https://www.bain.com/insights/private-equity-market-in-2021-global-private-equity-report-2022/
Also please don’t assume private equity is the domain of only big institutional investors. It is not. The retail investor can access many successful closed end funds will fantastic long term recorded from the lines of 3i, HG capital, Oakley capital and many many more.
Many companies eventually float on the public markets but many remain private even when they become dominant players in their field. So please be rest assured new capital is meeting new growth opportunities is size and frequency.
Sorry Alan, but that’s your fantasy and not the reality
I have done the research and this is the reality
https://productivityinsightsnetwork.co.uk/app/uploads/2021/06/PIN-Report-29-6-21-FINAL.pdf
The fact is that the large corporate is now a machine to turn debt into dividends that are paid out of profits that have not been earned
you look at FTSE 350…it’s the same deal. These companies are typically highly profitable and fund growth via retained earnings..i repeat new capital for fledgling companies via private equity and the scale is enormous. You have done your research on the wrong area.
The McKinsey review of private equity markets in 2022 gives you idea of the scale of funding for small and growing companies in need of capital
https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/mckinseys-private-markets-annual-review
The rewards from,private equity are largely dire – as pension funds are finding
Most goes to paying out founders
And it is a tiny proportion of capital markets
Who is paying you to write this nonsense in the face of the evidence, which does not in any case address the issue I was addressing?
ED COMMENT:
I deleted this comment because it did not address the evidence I supplied and reiterated unsubstantiated claims
This is not a place to make an unsubstantiated claim that neoliberalism works
What’s needed now is an actual left wing party, one prepared to action your ideas. Sadly we don’t appear to have one at the moment.
Can the Left as a concept exist anymore? Is it feasible?
I don’t know anymore. But also, I doubt it.
It’s had a thorough hatchet job done on it here in the UK – particularly in England.
I prefer the term ‘progressive’ these days, whilst I keep hearing the term ‘centre-left’ being bandied about by Labour.
It’s worth thinking about. The Tories – I think that we can agree – stopped being a ‘one nation’ type Tory party a long time ago and the version we see before us now – unlawful, unprincipled, Fascist and downright seditious BTW to the point of traitorous actually – is the terminus of the direction they took under Thatcher and have managed to do this without rebranding themselves (pretending to be something they are not).
I don’t know the answer to the presentational aspect for the Left, progressive or progressive Left but it all starts with new ideas when we are being force-fed the one idea that there aren’t any new ideas.
If you are a musician or a composer, you already know a lot about ‘permissionless innovation’. And if you don’t support BREXIT, the name ‘Cambridge Analytica’ will make your blood boil.
https://www.cnbc.com/2022/07/01/google-will-delete-location-history-for-visits-to-abortion-clinics.html
It is highly likely that people have adapted rather unquestioningly to Big Tech without seeing the downsides as Zuboff explains . But these are still early days and I think that there will be battles to come.
What is going to be salient is the way in which Governments choose to go about doing something about this.
I really like your article above as it fills a huge void.
All I would add is a bit about party funding – the economics of that – from accounting and full disclosure as to how it is used – might be covered in a follow up piece.
Outspending people to win an argument is not democracy of any sort.
The implications of the message needs spelling out in big letters for our politicians.
Laissez -faire capitalism mis-directs resources into speculation driven by government support.
In the case of housing which is by far the biggest investment category : these subsidies are -Housing benefit , planning restrictions, building regulation, restrictions on council housing. This combines to keep prices and rents high while restricting supply and fails to modernise to ensure good insulation and energy efficiency.
In the case of pensions it directs resources to companies who indulge in short term gains at the expense of long term investment . In get rich schemes rather than sound investments. In overseas investments rather than investments with local benefits. It wastes a lot of money in dodgy investments and excessive transaction costs. As a result pension incomes are low and Is heavily subsidised to mask this.
In the case of agriculture heavy subsidies go to landowners who have divested its labour force and substituted heavy use of pesticides and industrialised forms of agriculture which depletes long term sustainability , increases health risks, and dependence on imports.
In the case of health and social care, investment has been cut as “unsustainable” and insufficient staff trained as its “unaffordable”. More of the burden falls to the individual on low incomes.
In the case of industry : the energy sector was privatised leaving the UK with both high costs and high supply risks; The car industry largely off-shored; Public transport both privatised and underinvested. Cheap imports destroyed the steel industry and the chemical industry.
The pharmaceutical industry is largely a success because of the role of government backed support to universities and Research and Development.
The state and government needs to assume more responsibility and take more control of the misallocation of current resources. It has to be accountable but so should the current system be. The current system gets away with waste, extravagance and inequality , at the expense of incomes, pensions, health and living conditions because of secrecy , propaganda , and a self serving elite who prefer it that way.
Don’t be too subtle in the messaging.
Thanks
You get it
Much to agree with – if summarised and made more easily absorbable (especially around money,QE, bonds and savings etc) .
I do think Keynes’ ‘Anything we can do we can afford’ has much appeal – in challenging the neolib narrative and maybe provoking some attention.
At present Labour and the left attract no attention, and are merely another faction within the governing party – 90% of this week’s coverage has been Tories talking, and even when its Labour they are also talking about the Tories.
This can also be seen in terms of sustainability, a term that is usually just applied to environment and the climate.
The current financialised model is unsustainable in that it extracts wealth and creates little or nothing new, as surely unsustainable as burning down the rain forest. The syphoning of wealth upwards, low pay and training and running down of publicu services (to name but a few factors) is socially unsustainable.
Working at WWF a while back, we defined ‘green economy’ as being one that is sustainable in all three dimensions. The focus is usually just on the environmental, climate change and energy dimensions.
Doughnut Economy, Wellbeing and Beyond GDP are all frameworks that take a more holistic approach though none tackle the underlying macroeconomic aspects.
The key that you are right about this lies in the primacy of the nation state. Hayek identified the ultimate evil as the communist state, and the only possibility of defeating it in the power of money. When he put money, or mammon, in charge of the nation state, he sold the pass. Zuboff identified the way in which big tech has reacted, and Amazon, noting the trend of offshore tax avoidance, has been seeking to dominate the nation state ever since. I am surprised that no one has noted that Johnsons prime characteristic and practice of betrayal has most recently been applied against the supporters of Putin, whose money he and his friends had been so enthusiastically welcoming up to that point. They must be feeling as hurt as all the other people who he has betrayed.
This is why your joy of tax is really the prime text, and why this scheme of yours is the way forward,. The trick will be preventing mammon and it’s propagandists from derailing it. Thank you, and more power to your elbow.
Thanks