These were the notes I used to prepare for the talk I gave this morning to Co-operatives Wales today to mark Robert Owen Day. I do not guarantee that I followed them, precisely, but they are a good indication of what I said.
My purpose today
- To explain what is wrong with the economic paradigm that many on the left are now signed up to
- To explain that there is an alternative to that paradigm
- To explain from where we can find the money to fund our future
The left of centre paradigm
- Existed from 1945 to 1975
- The logic of social democracy
- The welfare state
- Nationalisation
- State control of the economy e.g. exchange rates, money supply, interest rates and much else
- Defeated by
- Rigidity
- The end of empire
- The end of the gold standard
- Oil crises
- Resulting inflation
- An absence of thinking on what came next
The neoliberal paradigm
- “Neo-liberalism offers economic growth through a faith in market solutions.”
- That the market does not work does not matter
- That this was proven in 2008 does not make any difference to faith in the system
- That every bank now runs with a state subsidy is ignored
- The faith remains: the market will solve problems
We know neoliberalism has failed
- The UK is not working anymore
- 13 years of neoliberalism austerity and the drive for small government is destroying us
- Government only seems to exist to transfer state revenues into private income for the benefit of a few
- Our freedoms are collapsing
- And the challenges we face are not being addressed
- Climate
- AI
- Failing public services
- Inequality
- Private debt
We need a new paradigm
- “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.”
- The logic is that of Lord Keynes in 1942: “We can afford whatever it is that we are capable of doing”
We need to understand some fundamental economic truths
- The idea that governments can run out of money is not true. QE has shattered that for good.
- But using QE to increase inequality - which is what has happened - has been a disaster when it could have been used for social purposes.
- The demand that the government must balance its books has also been shattered by QE - because that has shown:
- Governments are not dependent on borrowing - they can fund themselves
- Which means that they can buck the markets on interest rates
- And they can use QE to balance the equation as they wish
We also need to appreciate
- Money is created by lending, not by saving
- Government does not borrow, it provides opportunities for savers
- Company shares do not fund investment now, if they ever did
- Borrowing does
- As a result the financial services sector really does not provide funding for either government or companies
- It's just a casino
Not to put too fine a point on it
- “Not to put too fine a point on it, financial capitalism has become so focused 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 purpose”
And despite this the government is providing massive subsidies to the financial services sector
- My research shows that 80% of all the UK's financial wealth is saved in tax incentivised assets
- Pensions
- ISAs
- Some smaller arrangements
- Pensions
- More than £55 billion subsidy a year
- ISAs
- Over £4 billion a year
- At least half this goes to the wealthiest 10% in the economy - and a significant part to the top 1%
- In fact, the top 10% get more in savings subsidies than the average person in the bottom 40% of income earners gets in benefits.
- We have a financial services sector run by an elite for the befit of an elite with massive tax subsidies thrown in
Things are worse than that though
- 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 we need a renewed social contract
- Government must become the intermediary between savers and investments - a role that financial markets have long forgotten
How does it do this?
- Three ways
- It reduces the state subsidies for the casino
- Or it requires that conditions be attached to the subsidies
- The conditions require that subsidised saving be for public purpose - and the state then provides the means to ensure that happens because markets have not
Reducing the state subsidy for the casino
- If anyone wants tax subsidized pension or ISA in the future I suggest they should onky get it if they invest in accordance with the conditions the government lays down. This does not mean that people cannot save still in ways that do not match the conditions - but they don't get tax relief for doing so.
For pension funds
- Well over £100 billion is invested a year
- To get tax relief in the future I suggest 25% of all new contributions must be invested in new job creating programmes compatible with net zero objectives.
- This suggestion would raise more than £25bn a year for that goal.
- Business and government can issue financial instruments meeting the need - but the rule book will be very tight. Those in use now are way too lax.
ISAs
- £70 billion a year in savings (some admittedly recycled form old accounts) goes into ISAs. Net withdrawals do not happen.
- I suggest all money saved must go into bonds meeting the criteria specified for pension funds - which will be met by bonds issued by local and central government, health service trusts, schools, housing associations, and energy systems (state and private) seeking to become net zero.
- All £70 billion a year might be available for this purpose. There might actually be a surplus of funds available.
The result
- Savers' money will be used to create employment
- And it will pay for the green transition
- We will also get
- New energy systems
- New energy saving investment
- New housing
- Sustainable transport
- Renovated buildings
- New schools, hospitals and other public facilities
- Paid for at almost no real cost as the interest rate will broadly match inflation, or be less right now (as is the current market rate) ( which is what ISA savers get now)
As importantly
- People will see their savings in use
- The intergenerational contract will be restored as the savings of older people provide work for younger people
- We might get to next zero
- Because the changes redirect tax relief and stimulate the economy there is likely to be no net new cost to government: £60 billion is being wasted in subsidies to the City right now
- The argument that ‘there is no money' will disappear
- When asked, every politician will be able to say how they will pay for our future
- And the state will be back at the centre of the economy – where it belongs and is needed if we are to get the society we both need and want
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Robert Owen day has got me thinking about AI.
My suspicion about AI is that a workplace devoid of or with reduced amounts of real people would be less of a political problem to capital – there would be no or less appeals to politicians on behalf of labour to deal with working conditions and pay for example. Less to talk about, less to bother with, less to worry about, more profit.
Once again capitalist nirvana is at the centre of AI – whether we, – or wider society – want it or not.
If you’ve not seen it, checkout Naomi Klein’s piece in the Guardian.
https://www.theguardian.com/commentisfree/2023/may/08/ai-machines-hallucinating-naomi-klein?CMP=Share_iOSApp_Other
I hope it went down well.
One thing that intrigues me – and I don’t recall you detailing here – is the idea that 80% of all the UK’s financial wealth is saved in tax incentivised assets. I can see you are excluding wealth in property or unquoted owner-run businesses, but it still surprises me that “ordinary” people have such a small percentage of any savings in non-ISA building society accounts, or that those of above average wealth don’t have significantly more money than they can funnel into ISAs and pensions.
The other eye-opening comment, that the top 10% get more in savings subsidies than the average person in the bottom 40% of income earners gets in benefits, is more credible but again it would be nice to see the workings. The different percentages and the word “average” make it a little difficult to understand exactly what the comparison is. Do you mean the total subsidies/benefits in those groups, or the average per person (which would also depend on the size of the groups)?
I used ONS data
Page 463 data here – and still true with updated data https://eprints.whiterose.ac.uk/153627/10/modern_monetary_theory_and_the_changing_role_of_tax_in_society.pdf
Thanks. I admit I had no idea that the total value of pension funds was so much more than other forms of saving. But I suppose that is what retirement costs.
While the current tax incentives to save for pensions are clearly unfairly distributed (benefitting higher earners) the amount does show that incentives work in directing saving in a way that was politically thought desirable. Without them it is highly likely that even fewer people would save into pensions and not so much – with a consequence of much more poverty in old age.
But if the saving is in a Ponzi scheme – and it is – the incentive will have horrible repercussions
Surely, if it is a Ponzi scheme there won’t be any savings. Arguably you could describe the State Pension in that way, though I don’t know whether there was ever any pretence that a fund would be created.
But those £4.4T of “private pension wealth” in your calculation must represent actual funds held for future distribution. Certainly the fund which pays my pension (and to which I assume you are a current contributor) holds assets which look consistent with its obligations.
Ponzi schemes appear to have value until they don’t because convention permits value to be ascribed to them
So, for example, vast amounts of pension money is in oil companies, the value largely based on their oil reserves which we all now know cannot be extracted if we are to survive. Sometime there will be a reckoning. It has not happened. You pension may not look so good then.
Value is just perception, nothing more. And it can disappear very fast.
last paragraph
the ‘£60 billion subsidies’ is revenue foregone rather than a payment?
This is a transformational plan and would see a major shift in power from asset owners to the wider population. We would be nearer a real democracy.
‘All we need’ is enough politicians and others to get it done! But if they could, it would be, IMHO, a great a paradigm shift as Keynes’ policies.
Congratulations, Richard.
Revenue foregone is a tax cost
Thanks
Hope it went down well.
Starmer’s Labour is running further and further away from all those ideas. Even though they grounded in the facts and in analysis, in the present media landscape many of the points you are making are almost unsayable.
We just dont have a free media – Andy Verity replied to my twitter plea for a programme which set out to pose some of what you are saying – inviting heavyweight economists to elaborate or challenge (Mazzucato, Raworth, Blanchflower, Murphy, Woolf et al) and get the political parites to respond or even to try to engage.
He said yes – that would be a good programme – but its not clear why he doesnt use his influence to get it produced.
We can hope….
And I am told it went down well
Perhaps Starmtrooper could wake up to ask himself the question if getting Brexit done was such a successful idea why did the Tories receive such a hammering at last week’s local council elections!
Why do we still call it the Labour Party? The Starmtrooper on Steriods Party would be more appropriate!!!
I note the following comment in regard to Priti Patel in a Guardian article today:-
“In comments reminiscent of the disastrous Liz Truss leadership, she also backed a tax-cutting agenda, despite the perilous state of public finances and stubbornly high inflation.”
With comments like this The Guardian really ought to give up, recognise it’s as Neoliberal as they come, and sell itself to Rupert Murdoch! It’s simply “weaponising distrust” in the state in true Thatcherite fashion!
https://www.theguardian.com/politics/2023/may/13/tory-anarchy-breaks-out-as-revolt-looms-on-brexit-laws
Well done Richard!
Concise, Coherent Compelling ,
Thanks
Why not a book, Richard? Would give your ideas a wider audience.
I am being asked to do it
I am still not sure what its structure would be
Looks like a pretty good manifesto.
Pity there is no political party willing to pick it up.
The last line is highly pertinent – putting gov back at the centre where it belongs.
Should that be “And they can use QE to balance the equation IF they wish” ?
Yes