I had discussions with other economists yesterday, in which issues like fiscal headroom were on the table for debate. I wrote about this issue very recently.
Unsurprisingly, given my choice of company, those I was talking to had little time for this idea as put forward by the likes of Jeremy Hunt, HM Treasury, the Office for Budget Responsibility, the Financial Times and others. The reason for that is quite straightforward. All of them treat money as the singular constraint on action within our economy. That is their fundamental error.
There is not and never can be, a shortage of money available to a government of the sort that we have in the UK which has created its own currency, has its own central bank, and has succeeded in both making that currency the dominant medium of exchange in the economy for which is responsible and acceptable for international trade. Such a government can, if it ever wishes to spend more, simply create the money to do so because that is quite literally what it does every single time that it spends. Debate about money as a constraint is, in that context, entirely meaningless.
That is not, however, to suggest that there are no constraints on the government when it comes to spending. There very clearly are. The actual constraints are represented by the availability of resources on which money might gainfully be spent before inflation is created.
I, and I am sure others, can hear the almost certain response from the likes of Andrew Bailey at the Bank of England. He would say on hearing this suggestion that the bank is respecting that constraint because it is taking labour market considerations into account when setting its policy. Bailey would, however, as usual, be talking nonsense if he made such a claim. There are three reasons for saying so.
The first is that he is assuming that the current usage of labour is a given fact, determined by the markets, over which neither he nor the government has influence. As a consequence, he would suggest that we are currently at full employment. Office for National Statistics data does, he might say, confirm that fact
Second, Bailey would be wrong to do this. Not only are we not at full employment because there are plenty of people who would like work who do not currently have it, but in making his claim he is ignoring the vast misallocation of labour resources within the economy that we have. There are doctors, nurses, teachers, social workers, and many others who would love to pursue their chosen professions, but because of the denial of resources by the government cannot face the quite literal life-threatening stress upon them from seeking to do so. Those with these skills are working on other tasks within the economy or are simply not working at all, not because the market indicates that it is desirable, but precisely because government policy has denied them the opportunity to deliver what society needs in ways that are humanly possible. No amount of pretence that the market can overcome such a policy failure can disguise this very obvious issue.
Third, and as even Andrew Bailey is wont to point out, the UK is constrained by having a sick workforce. Some are simply unable to work because of the failure of the NHS to care for them. Others cannot work because they have to care for others whom the NHS cannot treat. More still work suboptimally because they need treatments that are delayed and the stress of that situation, let alone any physical impact, will impact their work performance. Once more, massive government failure is the issue here, and nothing the market can do will address that.
My suggestions are, then, threefold. One is that the appearance of full employment that the Office for National Statistics like to create with their data (which even they admit is sub-optimal) is false. We are massively short of that situation because of underemployment and the serious sub-optimal use of skills within the UK labour market.
Most obviously, and secondly, this problem is the real constraint on what we can achieve in the UK.
As a consequence, and thirdly, the real constraint that we face has everything to do with the way in which a false fiscal narrative of austerity that is supported by a false narrative about the shortage of money is preventing this country from meeting needs whilst grossly, misallocating resources within our society, meaning that we all suffer as a result.
Viewed in this way, I think that there is massive fiscal headroom within the UK economy. What I mean by that is that with the right government fiscal policies that recognise that spending additional government money into the economy in a manner designed to tackle this misallocation of resources we could release significant increases in growth, well-being, the personal satisfaction of vast numbers of people when at work, and increase pay for a great many people, all of whom would then be working to best effect.
It would be really good to hear fiscal headroom being discussed in that way. As ever, I will have to live in hope.
For further discussion of these issues see this note on the political economy of money and this explanation of how money moves in the economy.
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Another good blog. I would suggest that in terms of sub-optimal employment we also have people working in sectors which are larger than they should be. A good example is the hospitality sector – is serving coffee the best use of the labour force?
“Andrew Bailey has blamed “serious problems” with Britain’s jobs data for the Bank of England’s forecasting errors as he admitted he did not know the true scale of the country’s worklessness crisis…” https://www.telegraph.co.uk/business/2024/02/14/inflation-cpi-holds-steady-in-boost-sunak-uk-economy/
Behind a paywall in the Telegraph. At least he is admitting to forecasting errors!
Afraid I don’t subscribe to the Telegraph… but you are right to point this failing of labour data out. A few random thoughts….
Self employment disguises unemployment (or at least under-employment).
Low participation rates suggest labour is mis-priced. As a trader, I think low volumes (in financial markets) can suggest the price is “wrong”… maybe it is simply that if wages were higher participation would increase?
Would wage increases lead to inflation? Maybe, maybe not – I don’t really care. It is about “doing stuff”. More people economically active means more of the things we need doing get done.
Higher wages would lead to more investment (as firms looked at alternatives to cheap labour.
With such a shortage of NHS staff why don’t “free market neoliberals” draw the obvious conclusion that wages should rise?
In short, there are lots of things that higher wages might well solve; and higher wages might not deliver the “nightmares” that the BoE fears.
Whilst it’s correct to challenge the silly mantra most economists support that there’s a shortage of money in the UK economy (belied of course by over five decades of house price bubble blowing) the other big factor is sorting out priorities we spend our money on. Certainly from the time human beings developed settled communities and accelerated by the industrial revolution we’ve failed to think about the effect on the planet of creating ever more private and public goods and services. Now the chickens have come home to roost and we need to start prioritising!
“Now the chickens have come home to roost and we need to start prioritising!”
https://static1.squarespace.com/static/53568703e4b0feb619b78a93/t/5367981ce4b0124f24031674/1399298076240/the-entanglements-of-humans-and-things-a-long-term-view.pdf
Should have mentioned this yesterday when you were questioning the use of fiscal rules and debt/gdp ratios….. but it does (sort of) link into the “Fiscal Headroom” debate.
PFI. Few would doubt that building the schools and hospitals were a good idea… but why did Labour choose PFI schemes to do it? Well, it was HMT/Gordon Brown’s desire to meet the Maastricht Criteria on debt/gdp; PFI debt was carefully constructed to be outside the definitions for Maastrict). Now, Brown was not keen on joining the Single Currency so I have never quite understood why he fell for this…. but he did.
Rarely has an arbitrary fiscal rule been so destructive to public good.
Agreed
I think that, whilst not a member of the Eurozone, the UK was, nevertheless a signatory to the Maastricht Treaty.
My understanding is that under the Maastricht Treaty the UK was obliged to try to meet Maastricht debt and deficit to GDP ratios (60% and 3% respectively). If you’re more knowledgeable please do correct me.
I also understood that Maastricht explicitly prevented monetisation of government borrowing, i.e its ability to create money without offsetting this through the sale of government bonds. Hence the subterfuge of the BoE only buying bonds on the open market rather than directly from the government.
Even if the UK government had an exemption (can anyone help me out here), and whatever the other benefits of Maastricht were, clearly these aspects of neoliberal ideology have had a malign influence.
We were a signatory
It’s a while ago.
Certainly we signed – as did all members… but we had various opt outs. Entry to the Single currency required debt and deficit targets to be met but I don’t think it applied to the UK – unless we changed our mind on entry. However, there was an assumption that every country would aspire to what was thought to be “good”.
I think that we did agree to not permitting monetisation of debt…. but thank goodness this was overlooked with QE
Lurking on my bookshelf is a copy of the Treaty (sad, I know) – I will have to look it up!
Thanks Clive.
Pretty sure the UK did agree not to permit monetisation of debt, and that this still applies in the Eurozone. That’s potentially a big problem for the Eurozone (amongst quite a number) as it would potentially prevent their economy creating the money it requires.
We did agree
I have the references, but not at this time in the morning….
I’ve long thought that PFI and failure to regulate the City were New Labour’s biggest failings rather than Iraq. That’s not to belittle Iraq in anyway but the other two were disastrous for the U.K. itself.
It’s as if our government still lives with this ancient fear of the sky falling on its head.
I mean, what they impose on themselves and of course on us, is totally irrational and has no basis in fact whatsoever.