Andy Haldane, formerly at the Bank of England and now at the Royal Society of Arts, has said something I can definitely agree with in the FT today:
The fiscal rules he condemns are those of the type both the Tories and Labour are dedicated to. They only concern themselves with the ratio of what is incorrectly called debt to GDP.
What they fail to take into account is the use made of debt. As a result the value of assets created is ignored by any such rule. Only liabilities are taken into account, and even then I would argue that those liabilities are miscategorised. They are not borrowing. They are sums due to depositors, as in a banking arrangement, which fact should be obvious when things like National Savings and Investments are included in the figure.
So what sort of fiscal rule should there be? I realised recently that I probably wrote the rule that we really need more than a decade ago, without appreciating at the time that I had done so.
This rule is based on an economic requirement, and not a financial one. It therefore puts reality above accounting fiction. What it is intended to do is five things:
1) Focus investment activity.
2) Encourage long term thinking.
3) Ensure pension needs are met.
4) Reflect intergenerational justice.
5) Embody the social contract that must underpin a good society.
What is this idea? It is what I have called ‘the fundamental pension contract'. This says that the older generation should invest their efforts during their working years in creating capital assets and infrastructure in the state and private sectors. The younger generation should then utilise these assets in their their work and, in return, support the income needs of the older generation during their retirement whilst at the same time creating new assets for those to come after them on whom they will rely in their own retirement. Honouring this compact is crucial for the success of any society, in my opinion.
Think about it,and unless we do this society will fail. That is precisely why the realisation that we are far from doing so now is so worrying, most especially when it comes to climate change.
I suggest that this is a rule worth having because it is all embracing, relating to both state and private sectors, and all encompassing in that the interests of all people are addressed. It also takes into account both sides of the balance sheet whilst recognising that income is the goal. Existing rules come nowhere near this.
Thoughts are welcome.
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“both sides of the balance sheet”
Indeed, missing from almost every country is a balance sheet – what assets (and liabilities) does a country have.
I think we were talking about this earlier this year in the context of Scotland 🙂
The Commission economist with whom I collaborate, talks about the need to measure both flows and balances. Aother economist (Spanish) looked on agast as the Spanish state disposed of performing assets (i.e. buildings etc) which generated income for the state. But such discussions would raise questions on the whole rationale of asset sales (elec networks, water, rail etc etc).
I hope so….
We have been here before. Where is the balance sheet?
While not quite the same thing, it seems related to the role of the state in mediating longitudinal redistribution of risk and opportunity over the course of each person’s life – lots of investment in health and education when young, sharing the fruits of adulthood (while supporting those who for whatever reason need it – because that is what a humane society does, rather than exposing people on a hillside), and providing further support where required in retirement – not just pensions but particularly health and social care.
Minouche Shafik wrote about this recently. Eg https://www.imf.org/external/pubs/ft/fandd/2021/04/what-we-owe-each-other-book-minouche-shafik.htm
We are in an emergency situation, whether it is climate, ecological degradation, gross inequality with rising wealth at the very top and desperate poverty below. The investment needed to tackle any or all these needs are enormous. Therefore fiscal rules are out of the window and concentration of investment whether public or private must be directed at priorities to repair and restore the damage that out of control capitalism has created. Any rules must be focossed on our very survival.
Mine is
It would seem the ideal ground to try to get Labour’s Rachel Reeves to respond with her ‘I was in the BoE ‘ mantra. If ex BoE Haldane is citing a full fledged asset-inclusive type of fiscal rule, then get her to say is that what she understands by a fiscal rule – one that would allow investment.
She probably woudnt dare answer, but it would put her on th defensive instead of her usual ‘where is the money coming from’ retort.
Underlying all of this is the immature reasoning that only the private sector market creates anything of value and the state gets in the way. After the Great Financial Crash of 2007/2008, and similar if less disastrous events previously, it should be very obvious to such immature individuals who think this way that out of greed the private financial sector in particular will regularly destroy value! In consequence it should be obvious the state has a role to play not merely to monitor and regulate the financial sector but to bail it out as lender of last resort and to mitigate the regular collapses of demand the sector regularly causes through reckless lending. Where do you find in any of the UK political parties any integrated and thorough understanding of this conclusion? You simply don’t they blindly stumble on with the view the private sector market on its own automatically and quickly self-balances and financial sector induced crashes are a rarity.
In the late 30’s the ‘Fiscal’ rules were dumped to inveat in urgent requirements, ie a war.
Bet the Ukraine money will be ‘Borrowed’ by invention and that country will need to pay it back to ‘Balance’ the books.
Like your fiscal rules, why do we charge our children for education when they are our future?
The Nat C’s are on the march.
Haldane’s observation reminds us of the Lewis Carroll world of economic management in which we live in Britain. An unelected Central Bank managing the economy with blunt instruments, inappropriate for the tasks in hand, but capable of systatically wrecking people’s lives and stalling the economy when applied; and a set of fiscal rules set by Government that the Central Bank knows don’t work, and can’t work.
Great system. It could only be the result of neoliberal thinking.
We had a set of fiscal rules that emerged from the sacrifice and carnage of two world wars if I remember correctly – something about the state using its war powers to
give its citizens a decent life.
Evidently, capital/wealth does not think that the ancestors of those whom we commemorate every year are worth the effort anymore. It’s ok apparently to just do some pomp and circumstance and lay some wreaths to remember them, instead of keeping to their word to look after the fallen’s children, grand children etc., for evermore!
Well, sombre ceremony and a few roses are not good enough for me.
What any state needs is flexibility to deal with issues that present. ‘Fiscal rules’ are just rigid and biased concoctions to denote that politicians are in control and give them some sort of credibility. They also signify conformity with potential funding streams.
We don’t need ‘fiscal rules’ really that see money as artificially as limited. Because it is not.
Look at any states response to 2008 and the current CBRA – all designed of course to prop up the private money use (I can’t call it ‘investment’ any more – ridiculous) . We need fiscal rules based the principles of living a decent life.
Your suggestions work for me Richard.
Thanks
It would appear Free Market Fundamentalists can engage in unlimited debt creation even to the point of destruction of an economy yet the state also involved in making an economy function has to operate in a debt straight-jacket except when it has to perform a Lender of Last Resort to bail out these Market Fundamentalist ideologues. This confused and backward attitude of mind dominates the UK including all the political parties and the vast majority of voters. Clearly if one component part of the economy isn’t engaged in speculation for profit this should be regarded as a necessary stabilising force. This I think was the message Keynes was trying to get over but failed because he regarded the state’s role as intermittent rather than continuous. Hyman Minsky’s work I believe has corrected this defect in Keynes’s understanding.
The big mistake then (if I’ve read you right and understood) is paying for pensions and benefits out of current taxes instead of having a real national insurance system.
With an insurance system the growing funds can be invested – each persons stake in a collective wealth fund. I’m sure insurance companies have an active Treasury function and don’t just sit on the money. In a public scheme the profit extraction could be avoided.
When set up life expectancy was short – the inter generational transfer small. Pay as you go is breaking under the strain of an ageing population.
It would take a while for the funds to build up so some political will and initial funds would be needed – but the case could be made. It’s vision that’s needed.
You have not read me correctly