Martin Wolf has written in the Financial Times today about the difficult choices facing John Healey as he prepares for his October Budget. Wolf argues that the Chancellor needs to be bold. I agree, but unfortunately, what Wolf proposes is precisely the opposite of what is required.
Wolf says that "the long-term goal must be to reduce the debt ratio to far lower levels over time”. From there, all the usual familiar arguments follow.
The fiscal position must be tightened. Taxes will have to rise, but only on those with average or lower incomes, of course. Spending must be cut. Above all, the Chancellor must convince what Wolf calls “the lenders on whom the country depends” that Britain is being managed by grown-ups.
I fundamentally disagree with this argument. The UK government does not depend upon financial markets to provide it with sterling. The government creates sterling when it spends. Taxation withdraws money from circulation, not least to control inflation, while bond issuance gives sterling holders an alternative savings mechanism.
Government debt is, as a result, also private wealth. Gilts are savings products held by pension funds, insurance companies, banks, overseas investors and others who want secure sterling-denominated assets. There is no reason why reducing their supply should be an objective of economic policy in itself.
Nor does the government have to accept current gilt yields as an unavoidable fact of economic life, although Wolf does, seemingly ignoring the policy decisions that have made them higher than those of other G7 countries. Those decisions could be changed. The Bank of England could stop quantitative tightening. The government could reconsider the full-funding rule. It could change the maturity profile of government debt, and it could expand the role of National Savings & Investments to provide capital for investment. All of these are political choices. Wolf ignores them all.
Instead, he presents financial markets as imposing an external discipline to which democratic government must submit, and that is the fundamental problem with his argument. If the government responds to weak growth, inadequate investment, failing public services and external economic shocks by raising taxes on those with what might be called ordinary incomes and by cutting spending to satisfy financial markets, the likely consequence will be weaker demand, less investment, continuing economic stagnation and increasing dissatisfaction. The government might satisfy the bond market whilst making the country poorer. That is not responsible economic management. It is, in fact, the exact opposite.
There is, however, a much bigger issue here. Martin Wolf has often expressed his profound concern about the future of what he thinks to be western democracy. I share that concern, but there is a fundamental contradiction between that concern and the economic policies he advocates.
What Wolf is effectively demanding is a democracy constrained by financial markets. In his apparent opinion, governments may be elected, people may vote, and political parties may make promises, but when what people want conflicts with what financial markets supposedly require, the markets must win. Such a system might retain the appearance of democracy, but it denies much of its substance, and that is what we have now got.
People want decent healthcare, functioning schools, affordable homes, secure jobs, reasonable incomes, decent infrastructure and protection from climate change. They also want some hope that their children might enjoy better lives than they do. Instead, they are repeatedly told that these things cannot be provided because government must satisfy fiscal rules, reduce debt and reassure financial markets.
People are making it increasingly clear that this is not what they want. Across western democracies, dissatisfaction with established political parties and institutions is growing. That should surprise no one when those institutions appear incapable of responding to people's needs.
The danger should be obvious. When democratic governments repeatedly tell people that voting cannot deliver what they need because markets will not permit it, people will eventually, and inevitably, conclude that democracy does not work. At that point, they will look for politicians who promise to overturn the system altogether, and there is no guarantee that those politicians will have any commitment to democracy.
That is precisely the threat to western democracy that Martin Wolf says he fears. Yet the economic programme he proposes reinforces the conditions creating that threat. Making markets sovereign and democracy subordinate will not save democracy. It will instead destroy people's remaining faith in it.
In that case, however unintentionally, Martin Wolf risks becoming an architect of the very demise of democracy that he fears. He is, in effect, one of the biggest threats to democracy that he desires, by offering what he thinks is sober opinion that actually undermines all he claims to support, while dressing that opinion up with all the status that an FT columnist enjoys.
If democracy is to survive, people have to believe that it can deliver outcomes that meet their needs rather than those demanded by financial markets. That is the choice John Healey really faces, and it is much more important than satisfying the bond market.
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That’s very good thank you:-)
Thank you
I was annoyed when I read that….
Thank you and well said, Richard.
Wolf is a regular on CNN, spouting the same nonsense. That’s why he’s on / in the MSM and Richard isn’t.
He is not a fan of mine; I know. We have met.
Jacqueline was present: she reckoned that if daggers could have been thrown at me, they would have been.
Thank you, Richard.
I can more than imagine.
I should have added that this also explains why the likes of Wolf are invited on government enquiries, in Wolf’s case, the Vickers commission on bank reform, and Richard isn’t.
I suspect, mon Colonel, they would regard you as a class traitor.
I’m sure Mr Wolf has strong convictions. Ii’ve read one of his books and he does seem concerned about the future of democracy. Nevertheless, he does fall into the category of the ‘contented’ as far as his own finances are concerned. He will never have to worry about the things many people do.
I find it a bit rich when he talks about the country as if the poor are no longer with us. He needs to get about more. I hope he gets to read your criticism of his article and has a long look in the mirror, considers his good fortune and whether his prescription is for himself or his fellow citizens living outside the City.
He is not a fan of mine, I know. We have met.
Richard,
If you are going to meet him again my youngest son has a chainmail cope (Think balaclava) and a Danish Army helmet and some very impressive – if 3D printed Warhammer Weapons
No body armour – as yet! I am afraid.
Thomas has a total suit of armour, plus broadsword….
Mind you, he is about 5″ taller than me…
I must remember to be very very nice to him if we ever meet………………
🙂
A good post. Unfortunately, the media will take his points as if they were the truth about government funding. We can expect the BBC to parrot his points and people will think thats what the government needs to do. He is correct that Mr Healey will have to make difficult choices – difficult because he is clueless about government finances as he is not competent enough to be Chancellor!
Much to agree with
Wolf is Neo-liberalism personified. He rails at poor behaviour like the Bernie Madoff’s of this world but still thinks that finance can put its own house in order when the whole system is predicated on leverage (political as well as financial) and secrecy. Like many extreme liberals he is walking self-contradiction that cannot never be solved. Richard is right to call out his destructive involvement.
Thank you
“Instead, he represents financial markets” – there sorted.
Now makes total sense as a cursory glance at the back pages of the FT show. Anything that threatens the supremacy of markets is to be resisted.
Hence Wolfie’s position. (………..think street facing window, high stool, red light obvs metaphorically speaking).
Has Mr. Wolf ever defined what he means by democracy?
Might it help him, and the gullibles who accept his pronouncements, if they were to read the writings of Mr. Robert Dahl on the pluralist theory of democracy which show that politico-socio-economic outcomes are the results of competition between unequal interest groups aka. Polyarchy?
”Just because perfection in our democratic system is impossible, there is no reason not to improve its equity and visiblity by recognising its dominant groups, not least finance, and managing their excessive power better.” (From Graham Smith)
He eulogises on it
But he has forgotten the demos part.
In his book Wolf does a fair job of arguing that the market capitalism we have had for some decades has undermined liberal democracy. However he then seems incapable of proposing any significant change and just argues for more of the same.
A small group of us met with him last year, encouraged by his book, but that was just the conclusion we came to. He is captured by that belief system and is incapable of envisaging any alternative
He has deeply internalised neoliberalism.
Most of the far right groups out there at present would also tell you they have a commitment to democracy yet they despise it.
We now live in a world of smoke and mirrors to a degree I never thought possible and must be careful about taking anything at face value.
If I read an article that espouses commitment to democracy but then proposes actions that will likely destroy it, I see either a very foolish individual or a very cunning one.
I will reserve judgement until I see more of that person’s actions rather than their words.
All the journos and politicos lining up this weekend to say “the Triple Lock must go”. Jim O’Neill, the Resolution Foundation, the British Chambers of Commerce, those idiots at the New Statesman…
They’re selling it as “helping young people” which will be news to poor kids who get some spends off their grandparents or whose single parent might get some help with the shopping.
It really is disgusting because we all know the “savings” will actually be spent on weapons.
There will be a video on this issue this week, probably Wednesday
Excellent. But we know they’ll get their way eventually when the business lobby, the media and the so called “Left” are lining up behind it
Yes some young people aren’t doing well right now but this narrative about NEETs needs interrogating because the numbers haven’t really changed that much over time
https://ifs.org.uk/publications/why-has-neet-rate-risen-understanding-trends-and-drivers-using-administrative-data
Are you sure?
Am I sure about the NEETs?
Well the data shows that for all but one year in the 2000s the number of NEETs today is lower than back then.
In my view what’s really going on with the current situation is they are spinning the fact that the economy stalled two years ago, in many parts of the country it is worryingly close to complete collapse and unemployment is up generally. So they’re trying to say there’s a problem with the (already miserly and punitive) benefits system which far too many Brits are completely ignorant of or the attitude of young people.
Yes some young people are suffering with anxiety while claiming Universal Credit. But I guarantee they won’t be getting the higher rate (the health element) just for anxiety. And anxiety and depression are widespread in this country and have been for years. It’s a key feature of neoliberalism in an atomised society.
If you mean am I sure they’ll break the Triple Lock, yes, in the end they’ll get their way.
All noted and thank you.
The fact of the matter is that the vast majority of both the young and old are very poorly served in our society. They are unfortunate in that, along with all the other vulnerable groups; the disabled, immigrants, the homeless, low earners, the unemployed etc, etc they bear the brunt of inhumane (and we know totally unnecessary) policy making that strictly adheres to ‘what the City wants’.
I do hope the Triple Lock is maintained. I admit I have benefitted from it in the past few years, but I have also sent the ‘surplus’ to my grand daughters to help them through their further education courses, so they are not too heavily burdened by debt when they start to work.
This is what makes my blood boil about the likes of Aaron Bastani continually chipping away at it: there will be so many single parents, sick people, disabled people, out of work people etc who will be getting a bit of help from their parents and grandparents.
In this period of history expertise is diminished, science and academia are derided and politicians are not trusted. People know things are not working and seek out an answer. The fascists have provided easy (if completely false) answers that some people have embraced. Their failures will ultimately be recognised, hopefully before they can do too much damage.
Yet somehow, neoliberal economics retains the status of gravity, biology and mathematics as axiomatic truths. While some people can even be convinced that earth is flat, EVERYONE knows that government debt is a big problem and you must never run a budget deficit! Challenging the neoliberal economics consensus is the start of rebuilding our society, and somehow it remains the hardest nut to crack.
You are absolutely correct. Martin’s Wolfe is a high priest of neoliberal economics and stands in the way of practical solutions. Taking down these economic “certainties” is the battle at hand. How on earth did these false ideas become so embedded in our society?
By the neoliberals spending a lot of money – as the fascists are now.
I have been reading your posts for some years now and find your views compelling, having studied economics many decades ago and worked in banking since the 1970’s. It seems to me that the teaching of economics in schools and universities needs to change in order before we see a change in mainstream thinking away from neolibralism. How do we acheive that?
I agree. Economics education is a significant part of the problem because students are too often taught one particular way of understanding the economy as if it were economic truth, rather than one school of thought amongst several.
Changing that will not be easy. Universities have departments, careers, journals and funding structures built around existing approaches. Those structures reproduce themselves.
I think change therefore has to come partly from outside conventional economics. We need better economic education in schools, genuine pluralism in universities, and much more public discussion of how money, tax, banking, accounting and government actually work.
That is one reason why I write this blog and make videos. I am trying to make economic ideas accessible to people who were never taught them, or who were taught models that bear remarkably little relationship to the economy they actually experience.
Ultimately, ideas change when enough people realise that the existing explanation does not work and demand something better.
We have to create that demand. Relearning Economics and others are, it has to be said, trying to do that with some success, but they do not use modern monetary theory.
A worthy aim and I wish I wasn’t too old to help. However, my grandson and grand nephew are listening.
Thank you
Having also worked around and occasionally for the banking and finance sector since the 70’s, it has also changed. You could make an argument back then that banks in particular did attempt to serve the wider economy and businesses of all sizes. Branch networks and regional offices that covered the country and were staffed by people that knew something about their customers and local areas. Now we have much reduced networks staffed by administrators.
That change can be linked to neoliberalism and Thatcher’s deregulation, as banks too adopted the policies of Friedman, maximising their own profits – personal and shareholder – regardless of the consequences for the wider economy and their customers. We need a finance sector that serves the wider economy and that should be part of the terms and conditions of their banking licences.
Agreed, having been around as long as you.
It becomes more and more difficult to resist the notion that we are living in a ‘controlled democracy’. As Chomsky said to Andrew Marr – I’m sure you genuinely believe what you are saying but if you didn’t believe – you wouldn’t be here. Would Martin Wolf be where he is in the FT if he didn’t believe the markets were in charge?<p>
Its the only economic story that is allowed on main stream media, BBC etc.there are many other heterodox economic voices – not only Richard – who would challenge it – I wonder why they rarely if ever appear?<p>
Any ‘public service broadcaster’ would exhibit some curiosity about whether or why the markets rule – pity wee don’t have such a broadcaster.<p>
Deep state?
A good question
Excellent post.
Martin Wolf is a curious character. He isn’t as bad as others in the mainstream media. But he oddly reverts to orthodoxy on this issue.
We have been having this debate for centuries. And learned nothing. Historically the finance sector always has insisted on its right to lend to government at exorbitant interest rates,as if there was no other way.
But we know better now thanks to blogs like this.It’s really time we stopped obliging the markets.
The BBC have this tag line “Everything we do is funded by you”. They just keep spouting it, as if we might have some control as a result. It’s so annoying.
If I’m paying, I Demand accurate financial reporting and comment.
🙂
On another aspect of this discussion, we should be looking at ways to reduce the influence of what I would call the financial gambling cabal without spooking the markets. Might a softly softly approach work better than a sledge hammer? For example gradually reducing the interest rate on certain categories of bond? I do not know what the mechanism would be but I have always liked a softly softly catchee monkey approach! Or am I talking nonsense?
Not nonsesne: the goal is good.
I am working on it, but this one is a big job.
Neoliberals say they are worried about democracy, but I wonder about that. If neoliberal policies inevitably lead to austerity for those who are not wealthy, to a mistrust of government by the many, and the inevitable rise of the right-wing/fascists, why should we believe that neoliberals care about democracy. They care about wealth, their wealth, regardless the outcome. Meanwhile, here in Canada, our neoliberal Prime Minister Carney (formally our and your head of central banks) is bringing in oligarchs from around the world to propose they buy our public services (ports, airports, wharves, perhaps water, etc.) in return for investing in pipelines that will be out-dated by the time they are completed. He’s brought in legislation to thwart environmental regulations, indigenous constitutional rights, and our right to protest and to expect privacy. He’s yesterday’s man, rushing us into the 1980’s when a Conservative Prime Minister, Brian Mulroney, privatized our national airline, national railway, national laboratory, and national petroleum company. How can people like Wolf and Carney not know?
Thanks Richard. Your posts and videos have deepened my understanding of MMT.
Unfortunately few university economics departments teach anything that is heterodox. They are energy and resource-blind and blind to human needs. And few people with heterodox degrees get hired outside of academic institutes, cooperatives or NGOs. Economics has become abstract math theories. They loose the lived experience within the equations. They expect humans to fit their models rather than fitting their models to humans. Except for energy, there are no independent variables. Everything is interdependent.
Workers, small & medium businesses, small farms are the backbone of economies. The production and use of real goods and real services. But they doesn’t create billionaires. Financial products, derivatives and speculation have turned economies into casinos and it’s so easy for predators to take control when systems are complex and complicated. Politicians don’t understand how it works or how to get off the merry-go-round and get back to basics.
We need to cap wealth to prevent wealthy people and businesses from engaging in predatory behavior. Wealth taxes alone won’t cut it. We need to tun off the wealth accumulation pump of financial products, stock options.
I think MMT fits so well with other heterodox economic theories.
MMT complements limitarianism, limits on total net wealth of individuals/households (ex. $5 million to $10 million) and businesses (assets, valuation, profits, market share). I’ve been reading Ingrid Robeyns, former director of the Fair Limits Project at the U. of Utrecht.
MMT complements ecological economics, doughnut economics (Kate Raworth), feminist/care economics, slow money, circular economics, workers’ cooperatives, housing co-ops, credit unions, public banks, post-growth, degrowth until steady state economics.
Bringing economics back to basic needs, for the well-being of humans and communities, for wildlife and ecosystems. None of this is abstract.
Grammar correction
But that doesn’t create billionaires.
I would be interested to hear your thoughts on the relationship between debt, in its various forms, and the future. More specifically, if observing environmental limits requires less production/consumption, what happens to creditors & debtors? I understand oil & other materials inputs to production are becoming increasingly difficult (and expensive) to access – physical limits on production. How might a U.K. government respond with respect to public debt, how would pension funds react ?
I’m not sure whether this question is 100% coherent … hopefully it contains sufficient sense to be of use.
I think this is a very important question, and worth addtressing.
Debt is, in effect, a claim on future income. But future income ultimately depends upon future production, and that production depends upon people, skills, energy and natural resources.
If environmental limits require us to reduce some forms of production and consumption, then not every existing financial claim on the future can necessarily be honoured in the real terms that its owner currently expects. That applies to private debt, corporate valuations, pensions and other accumulated financial claims.
This does not mean the UK government need default on its debt. It issues sterling and can always meet sterling-denominated obligations. The constraint is not its ability to create pounds, but what those pounds will actually be capable of buying.
Pension funds face the same underlying problem. Their assets are ultimately claims upon future economic activity. They cannot guarantee future pensioners a particular real standard of living independently of what the future economy can sustainably produce.
That is why the environmental crisis is also an accounting and financial crisis. We have created enormous financial claims upon a future whose real productive possibilities are constrained by planetary limits.
The answer cannot simply be austerity. It has to be changing what we produce, investing massively in sustainability and recognising that some existing expectations of financial return may have to fall.
Ultimately, nature cannot be made to balance the financial books.