Economic Policies for an Incoming Labour Government – Part 2
Economic Policies for an Incoming Labour Government
By Bryan Gould and George Tait Edwards
Part 2 of 9: Stimulating Wealth Creation
If we are to find that better way, we must clearly understand the failures
and deficiencies of what has gone before. A major milestone in that quest
for understanding was reached earlier this year when the Bank of England,
in an article published in its first quarterly bulletin for the year1 became
the first significant central bank to acknowledge that the vast proportion of
money in our economy (calculated by the authors at 97% of the total money
supply) is created by the banks. This admission, which has been hotly
contested and denied by bankers and economists for decades, if not
centuries, casts a whole new light on the meaning of money and its
significance for economic policy, and is the key to a new approach – not
only as a response to recession – but as the foundation of a successful
economic policy.
We need not explore here the mechanisms by which the banks create
credit; suffice to say that they are well set out in the Bank of England
paper, and in the end amount to the simple fact that the banks are not
simply intermediaries, bringing savers and lenders together. They do not
lend money deposited with them but instead lend money that they
themselves create by making book entries unsupported by anything other
than their willingness to lend. But while the mechanisms may be simple,
the implications for policy are huge.
The facts that the quantity of money is almost entirely a function of bank
policy and that its continuing but regulated growth is the normal and
required condition for a well-functioning economy suggest strongly that the
conventional treatment of money as a neutral factor in economic policy is
completely mistaken. Current monetarist orthodoxy treats the money
supply as reflecting more or less automatically the needs of the real
economy, and impacting on it only in the sense that, if it is allowed to grow
too fast, it will generate inflation. The reality is, however, that the rate of
growth in the money supply is not just a function of the level of real
economic activity but is, as we shall see and according to the purposes to
which it is put, an important determinant of that level.
It is worth registering at this point that the banks’ remarkable monopoly
power to create (or “print”) money is exercised entirely in the interests of
profits for their own shareholders rather than of the economy as a whole.
It might be thought that this private exploitation of such an important
power would warrant the most careful public scrutiny, yet it attracts
virtually no attention from policymakers, other than in terms of countering
inflation; the Coalition government prefers to focus on reducing
government spending, as the supposedly essential feature of macroeconomic
policy.
They thereby totally overlook the fact that it is extraordinarily important
for the purposes of economic policy-making as a whole to understand the
impact of private money-creation on this scale and, in particular, to analyse
the purposes for which that credit is created.
A Labour government should no longer, in other words, accept that credit
creation by the banks is benign, and automatically serves – because it is
allegedly self-regulating – the public interest; a more effective economic
policy depends crucially on an acknowledgment that credit creation (and
therefore the whole of monetary policy) is hugely important and impacts
directly and substantially on the development of the real economy, and can
be made to serve a variety of wider economic interests rather than simply
those of private profit-seeking bank shareholders. A Labour government
that took this position would surely be encouraged to find that, on this
issue, public opinion had got there first.
Keynes was well aware of the fact, and of the almost unlimited potential,
of credit creation by the banks and recognised it as an important element in
macroeconomic policy. His pre-war contention that “there are no intrinsic
reasons for the scarcity of capital” is supported by compelling evidence, not
least now by the Bank of England’s recognition that money is created by the
banks from nothing. What should now be fully recognised, however, is that
the purposes of credit creation could and should extend well beyond the
funding of house purchase, which is currently its major feature.
Credit creation at the central bank, if properly directed and managed, can
be used to selectively increase the private investment level of the country,
as has previously occurred in all very high-growth economies, and as could
happen in Britain.
1Bank of England Quarterly Bulletin, 2014, Q1 “Money Creation in the Modern Economy” by
Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.
© Bryan Gould and George Tait Edwards 2015
Economic Policies for an Incoming Labour Government – Part 1
Economic Policies for an Incoming Labour Government
By Bryan Gould and George Tait Edwards
Part 1 of 9: The Coalition Government’s Failed Austerity Programme
The outcome of the next general election cannot be confidently predicted but one thing is clear; the odds on both a Labour election victory and a successful term in office would be greatly increased if the Labour leadership had the confidence and courage to develop and deliver a convincing alternative economic policy.
At present, Ed Miliband and Ed Balls seem inhibited from attacking the
failed policies of austerity (to which George Osborne claims there is no
alternative) and are content to focus on policy in other areas as a means of avoiding any real debate on economic policy. Yet there is, as both
experience and reason demand, a growing consensus that austerity has
failed and, as a consequence, an urgent need for Labour to describe clearly what an alternative and better policy should be and how it would operate.
The purpose of these articles is to identify one of the basic and central
issues on which that successful alternative policy should be developed. A full understanding and adoption of the proposals advanced here would allow the Labour leadership, in the run-up to the election, to attack the
Coalition’s economic record with greater conviction and confidence, and
would provide the launching-pad in government for a long-delayed and
hence urgently needed restoration of Britain’s economic fortunes.
Not A Moment Too Soon
The new direction that an incoming Labour government must adopt will
come not a moment too soon. The damage done by the Coalition
government is cumulative and fundamental, and extends beyond purely
economic failure to social dislocation and political disintegration.
In economic terms George Osborne’s record is appalling. The so-called
recovery has been delayed unnecessarily for more than half a decade and means that a return to pre-2008 living standards is still many years away.
Median GDP is still 3% below 2007 levels, and since the population has
increased by3%, that means an average fall in individual incomes of 6%.
The decline of the productive sector and particularly of manufacturing has meant that only 10% of our GDP is now accounted for by manufacturing -the lowest proportion of any major developed economy – and our share of world trade has fallen to just 2.7%.
Coalition polices have resulted in the sharpest fall in living standards in
more than 60 years. According to data from the Institute of Fiscal Studies, average wages have fallen by over £1,600 since 2010, at an average rate of over £530 a year. The pre-Coalition reduction in median income (not the same as average wages, but an acceptable proxy), can be calculated at about £5,400 over thirty years (1980 to 2010) – about £180 a year – so that the Coalition has produced a reduction in worker incomes of almost three times the previous trend.
But these figures relate only to the working population, and take no
account of the reduction in unemployment and disability benefits, the
denial of benefits to mothers seeking work because they have not been
employed during the previous two years, and the exclusion from the data
for both the employed and unemployed of the growing practice of zero hours contracts, all of which mean that the real extent of income cuts is
much larger than official figures indicate.
The burden imposed on working people has not of course been shared by the wealthiest people in our society. According to an Oxfam report1, the richest 5 families in Britain have more wealth than the poorest 20% of the population. That level of inequality is unprecedented since records began in the UK.
In an even more recent report2, Oxfam also reports that the Coalition’s
welfare cuts have pushed 1.75 million of the UK’s poorest households
deeper into poverty, suffering an absolute cut in their income in the past
three years and leaving them struggling to cover food and energy bills.
The national scandal that millions of children in the UK are going to bed hungry is not some accidental by-product of Coalition policy. It is the inevitable and deliberate consequence of policies pursued by a government that is “of the privileged, by the privileged, for the privileged”.
The disadvantaged poor – the disabled, the sick and the unemployed – have suffered, through cuts in their benefits, the greatest burdens in dealing with the recession. SCOPE, the charity supporting disabled people, have shown, for example, that 600,000 people in the UK lost a total of £2.62 billion pounds a year from Monday 8 April 2013 as a result of the Coalition Government abolishing the Disability Living Allowance (DLA) and introducing the new Personal Independence Payment (PIP), with tighter eligibility criteria and a controversial new assessment. The purpose of that change is not to improve service or to make things more fair but simply to save money. The lack of concern for the most disadvantaged in our society was compounded by the amazingly (and deliberately) inaccurate statements about incapacity benefit made by Ian Duncan Smith.
Coalition policies have disproportionately affected women, who are
more often found in lower-paid occupations and in the caring
professions. An analysis of Treasury data by House of Commons Library
researchers in 2012 showed that £11.1bn of the £14.9bn raised from the
five spending reviews since 2010 comes from women even though they earn less than men on average. Planned changes to tax credits, child benefits and public sector pensions were largely to blame. They came shortly after the government announced plans to cut the 50p top rate of tax for all those earning over £150,000.
A Failed Banking System
The failures of the Coalition government have extended into other areas of policy. One of the principal reasons for both the excesses that led to the Global Financial Crisis and the difficulty we have had in recovering from recession has been the absence of a responsible and supportive financial-industrial banking system in the United Kingdom. The Coalition Government acknowledged as much in “The Coalition: our programme for government”3 where they promised that, “We will reform the banking system to avoid a repeat of the financial crisis, to promote a competitive economy, to protect and sustain jobs”.
None of this has been done. There has been no reform of the banking
system with the result that, as Mervyn King has regularly warned, a repeat of the financial crisis is still a major risk.
They further promised that “We will introduce a banking levy and seek a
detailed agreement on implementation.” The banking levy was introduced in 2010 and was intended to raise £2.5 bn, but has raised nothing like that sum. In the 2014 Budget, George Osborne restructured the levy to provide maximum limits for individual banks and five bands, which meant a cut that is disproportionally beneficial to the very largest banks.
They also undertook to “bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in
developing these proposals, we will ensure they are effective in reducing
risk.” Less than six months after the Coalition came into Government, the proposal to deal with bonuses was abandoned. Bonuses are back with a vengeance.
A fourth promise to “bring forward detailed proposals to foster diversity in
financial services, promote mutuals and create a more competitive banking industry” produced no action whatsoever, while a fifth to “develop effective proposals to ensure the flow of credit to viable SMEs … which will include consideration of both a major loan guarantee scheme and the use of net lending targets for the nationalised banks” produced an extra £80 bn of re-discounting of loans by banks, part of which may have proved useful to some banks who wished to reduce the bank levy, but which nevertheless produced a fall in loans to SMEs of about £56bn.
The failure to take effective action on any of these issues has been, as we shall see later, hugely detrimental to any attempt to correct one of the main deficiencies in the management of the British economy. The failures were compounded by the fate of the Parliamentary Commission on Banking Standards which was established in July 2012, following the LIBOR-rigging crisis. The Commission’s report was set aside by politicians who showed themselves anxious to find reasons to shy away from the necessary reforms. It was claimed that such reforms had been rendered unnecessary by reforms already being implemented, that they would damage the competitiveness of the City and cost jobs, and that they would harm the banks’ ability to support the rest of the economy.
The UK’s competitiveness will be threatened in the long-term by this
indifference to the dangers associated with poor banking standards and
culture. If the arguments against complacency and inaction have not been heeded now, when the crisis in banking standards has been laid bare, they are yet more certain to be ignored in the future when memories have faded.
It should be understood, however, that the real problem with British
banking is not about dubious ethics but that it does not, unlike foreign
banks, see the funding of investment in productive capacity as its main
function. The right ethics with the wrong agenda is no recipe for British
economic recovery.
The list of failures demonstrates one central theme; because the Coalition Government does not understand the process of wealth creation at all, their focus is on the side-issue of making economies in the budgeted cost of government. Their obsession with the objective of achieving a balanced budget blinds them to the fact that there is a much better way to govern Britain – a way that increases the wealth and welfare of all, as we will illustrate in the following articles in this series.
1 www.theguardian.com/business/2014/mar/17/oxfam-report-scale-britain-growing-financial-inequality?
CMP=EMCNEWEML6619I2
2 www.theguardian.com/politics/2014/apr/22/welfare-cuts-drive-uk-poorest-poverty-oxfam
3 www.gov.uk/government/uploads/system/uploads/attachment_data/file/78977/ _programme_for_government.pdf
© Bryan Gould and George Tait Edwards 2015
The Light Dawns
A complete understanding of great events will often have to wait until well after the shouting and the tumult die away and a longer perspective permits a more objective assessment of what really happened. Even then, though, greater elucidation proceeds at a glacial pace.
Today, we may well find ourselves again at the beginning of just such a process. Just as it took a decade and a Second World War to achieve a broad consensus as to what had really caused the Great Depression in the 1930s, we can now begin to survey the events that led to the Global Financial Crisis, and the response that has been made by orthodox policy to the recession that followed, and to assess them in the light of the accumulating evidence of actual outcomes since those events.
The evidence is surely mounting that the remedies to recession proposed by orthodox policy have failed. The German insistence on austerity, smaller government and eliminating deficits has led directly to the travails of the euro zone and the real threat of renewed recession, with the result that countries like Greece and Spain are in desperate straits and the continued viability of the euro itself is at risk.
The British, despite all George Osborne’s chest-beating, have endured five years of austerity and the longest and deepest recession in modern times. Living standards have still not returned to pre-2008 levels and such prospects as there are for the future rest on an unsustainable consumer boom and asset inflation in the housing market.
The more moderate approach, the relaxed monetary policy and greater government involvement put in place by President Obama have produced, by contrast, at least a partial recovery in the American economy. The comparison compels conclusions that call into question the whole thrust of policy around the globe over the last three decades.
It is not just that neo-classical economics have failed to produce a solution to the problems created by the Global Financial Crisis. It is rather that the policies that were put in place before the GFC – and that we are now beginning to see were responsible for bringing it about in the first place – are now being pursued all over again, with every likelihood that they will produce the same outcomes.
The simple certainties that were the basis of the monetarist revolution that began in the 1980s – that national economies were just like private businesses, that there was little role for government, that the market could safely be left to produce optimal outcomes, that restraining inflation through controlling the money supply could and should be the only goal of macro-economic policy – are now being looked at in a different light.
The questioning is still piecemeal, still nibbling at the edges rather than constituting a full-scale assault, but there is no doubt that future historians will mark this decade as the point when the counter-revolution began. At the heart of that new thinking will be a re-assessment of what monetary policy is and should be about. Already, we see governments (for example, Shinzo Abe’s government in Japan), central banks (even the Bank of England, with New Zealand’s Reserve Bank deserving an honourable mention), and leading academic economists beginning to understand that a monetary policy instrument that is only ever used rather ineffectually to damp down asset inflation is absolutely missing the point.
That can be seen very clearly when we look again at the seminal paper published in the Bank of England Quarterly Review in March last year. That paper conceded (the first such concession made by any major central bank) that 97% of the money in the UK economy was created out of nothing by the banks; a similar proportion would be found in many western economies, including New Zealand.
The whole basis of monetarist policy was thereby revealed to be a charade. Governments may cut spending and impose austerity, and may raise interest rates in a vain attempt to control the money supply (while doing unnecessary damage in passing to investment in the real economy), but the banks go on printing money as though there is no tomorrow. The greater part of that new money is created – not for productive investment – but for house purchase, and all of it for private profit rather than the public good.
This huge increase in the volume of money, most of it directed into the housing market and unbacked by any corresponding increase in real production, has inevitably created a huge asset inflation, a dangerous bias in the economy in favour of speculation and against productive investment, a major driver of inequality between those who own property and those who do not, and an economic policy that is totally ineffective in the hands of governments that do not have the slightest understanding of what they are doing.
As for the banks, their profits soar, the bonuses they pay themselves multiply in size, and their ability to create wealth out of nothing means that the asset bubbles that eventually burst to bring about the Global Financial Crisis are again being inflated as we watch.
How did all this come about? The answer is simple. In the 1980s, financial services were deregulated, governments withdrew from macro-economic policy, banks moved in to displace building societies as the main suppliers of mortgage finance, restrictions on capital movements were removed. The result? The banks discovered that lending on house purchase was hugely profitable and almost risk-free, and that there was in practice no limit to how much money they could create; the only constraint was the presence or otherwise of willing borrowers. While governments strained every sinew to “control the money supply” and their own spending, the banks’ ability to create new money through the stroke of a book entry continued unabated.
A recent study by the National Bureau of Economic Research in the US of bank lending in twenty countries and over long periods shows an undeniable link between the increase in the money supply (though even these expert authors seem not to quite understand how that increase happens) on the one hand and asset inflation in the housing market and an increased risk of financial crises on the other.
The outcomes of this huge shift in economic power, away from governments and in favour of banks, are felt everywhere in our daily lives – in housing costs, in jobs, inflation, government spending, growth rates, balance of payments. Yet the change is hardly remarked, let alone understood. That is about to change – and not before time.
Bryan Gould
17 January 2015
Breaking the Shackles of Neo-Liberal Orthodoxy
Labour leaders have often been eloquent in articulating a vision of the kind of society they want; it is explaining how that vision is to be realised that seems to be the problem.
We have seen a further demonstration of this sad truth at this year’s Labour conference. Ed Miliband had good things to say about Labour’s goals, but Ed Balls made it clear that those goals would have to be achieved within the constraints of the current neo-classical orthodoxy.
The subordination of lofty aspirations to the harsh and supposedly inexorable dictates of “free-market” economics has a long and sad history in Labour politics. Harold Wilson, for example, destroyed the chances of his 1960s government with his long and ultimately fruitless battle against devaluing the pound.
Jim Callaghan signalled his acceptance that Keynesian economics had run their course when he told the 1976 Labour conference that “you can’t spend your way out of recession”.
The New Labour governments at the turn of the century, of course, had no need to undergo a Damascene conversion. They readily embraced the “free-market” orthodoxy and set about trying to produce a better society on the basis that the filthier the rich, the bigger the crumbs from their table would be.
Ed Balls has placed himself firmly in that tradition by asserting that a new Labour government would allow no let-up in austerity and no resiling from the restraint of public spending. Any progress, it seems, would have to come from re-shuffling the pack, not from cutting a new one.
The commitment to continued austerity is inevitably and correctly seen as validating, of course, the main plank in the Tory platform, and therefore immediately gives rise to the question – why should the voters trust Labour to carry it out when the Tories are available to do it with considerably more conviction?
If the voters did accept Labour’s commitment to maintain austerity, how – they might ask – could Labour promise with any credibility, in an unchanged macro-economic context, to produce different and better economic outcomes? And if Labour were to win power on that basis, why would they want to enter government in a straitjacket of their opponents’ making?
The acceptance by Labour leaders that reducing the government deficit must be the top priority seems explicable only on the basis of either a complete loss of political nerve or a total failure to understand how more successful economies operate.
Austerity policies, as the record shows, are an extremely ineffective way of bringing the deficit down. By reducing the size of the economy, they will inevitably diminish tax revenues, which means that the deficit is therefore bigger than it would otherwise be, both absolutely and as a proportion of a slower-growing GDP.
Further, with low investment in the domestic economy, so that the borrowing and lending of the household and corporate sectors roughly balance each other out, and with no action to address our lack of competitiveness, the consequent foreign payments deficit (and the borrowing from abroad that it necessitates) has to be roughly matched – as an accounting inevitability – by a government deficit.
Cutting public spending, in other words, is beside the point and largely self-defeating as a means of reducing the deficit – even if that is treated as the primary goal of policy. If we really want to get the deficit down, there is no option but to get the economy moving again, not on the basis of an unsustainable asset inflation and brief consumption boom, but of improved levels of investment, competitiveness, and trading performance.
How is that to be done? A complete alternative strategy cannot set out in a couple of hundred words here, but it is certainly not to be helped by reducing government spending. In any case, why do we single out government spending as so dangerous to stability and prudent management, when we look at what happens elsewhere in the economy?
In the real economy (and not that of fevered right-wing imaginations), 97% of our money comes into existence as credit created out of nothing by the banks. That credit is created by the stroke of a computer entry; it rests on nothing other than the banks’ willingness to lend – especially, of course, on house purchase, hence the asset inflation in the housing market.
No one seems to turn a hair at the fact that the money supply is almost totally accounted for by credit created by private companies whose sole purpose is making profits for their shareholders. On the other hand, a government that created credit for public purposes and the good of the economy as a whole (or, as the pejorative term would have It, “printed money”) would be lambasted.
Government-created money is acceptable, it seems, only when – you’ve guessed it – irresponsible lending means that the banks have to be bailed out. Then, the Bank of England will issue up to £350 billion of “quantitative easing” (equally the product of the “printing press” and, incidentally, having no appreciable inflationary consequences).
If vast amounts of money can be created for private purposes, why is it so outrageous that a government serving the public interest might create money for investment, say, in new productive capacity? That, after all, is exactly what the newly dominant economies of the Pacific Rim – China, Korea, Taiwan, and others – have done and are doing, and exactly what Shinzo Abe in Japan has returned to, after two decades of stagnation while his country applied policies recommended to them by western economists – those same economists who apparently still have Ed Balls in thrall.
Isn’t it time the Labour leadership shook off the shackles of a failed orthodoxy and learnt to think for themselves? They might then identify the means that would enable those desirable ends to be met.
Bryan Gould
25 September 2014
A New Version of Exclusivity and Self-Interest
In a 50-year involvement in politics and 20 years in the House of Commons, I found that friendship is perfectly possible with people of very different political views from my own; indeed, some of the more stimulating and amusing companions came from the ranks of those whose political views I abominated.
I have often puzzled over the fact, therefore, that people who are so agreeable in personal terms can hold views that are so unattractive. People who are kind to animals, generous to their friends, and supportive of family members who need help, can often exhibit a breathtaking – and at times cruel – lack of generosity, compassion and understanding when it comes to those who are a little more distant from them in social or cultural or ethnic terms.
My explanation of this apparent paradox is that people who hold right-wing views (excluding those who are just plain nasty) often suffer from a simple failure of imagination. Their impulses are fine and generous when they relate to people who are recognisable and close to them. But they are unable to project those commendable responses on to a wider scale because they simply cannot understand that society is made up of people who are just as dear to others as their own friends and family are to them.
The rich and privileged are even more prone to this limitation than most of us. Like most people, they are more than capable of seeing only what they want to see and ignoring what they wish not to see. The advantage they have is that their wealth allows them to indulge these idiosyncrasies to a much greater degree than the rest of us.
The starting, or default, position for many people, in other words, is that looking after themselves and their immediate families is the first priority. It requires real effort to persuade them that they can afford what might be seen as the luxury of thinking of others. People are often reluctant to lift their eyes from the immediate and close at hand, and to understand that taking the wider view can lead to a better life and a stronger society for everyone.
Even when that effort is made and greater understanding of others arrived at, the prospect of hard times is often enough to send them hastening back to base. When crisis threatens, the hatches are battened down and the wagons are circled to face the enemy. Any thought of social concern is abandoned; self-preservation is the first consideration.
That is, I think, the explanation of the otherwise inexplicable fact that, in the midst of recession, when it would seem even more important than usual that people should recognise common cause and support each other, the response is in the opposite direction, and many become more fearful of other similarly disadvantaged people, more focused on self-protection and self-preservation and less generous towards the claims of others.
Roger Scruton, (The Guardian, 10 September) seems to agree with me. His explanation and defence of what it means to be a Conservative – with its emphasis on the supposed imperatives of identity and attachment – is little more than a re-statement, in slightly more elegant language, of the traditional Tory preoccupation with the differences between “us and them”.
The “way of life” enjoyed by “who we are” – those with whom, Scruton says, we identify and to whom we feel an attachment – begs all the obvious and age-old questions. Whose “way of life” are “we” talking about? Do we mean just those of us who are more than ready to join with us in defending the status quo and the privilege we enjoy at the expense of others? Do we exclude from the definitions of “us” those who, because they are different or are perhaps – according to our criteria, less worthy – do not share “our way of life” as we choose to define it?
Scruton obligingly helps us with the answer. “Attachment,” he asserts, “is a form of discrimination and therefore a way of giving preference to those who already belong.”
There is little of philosophy here. What we have is after all just another expression of self-interest and exclusion. Are his “attachment” and “identity” not just different ways of applying and emphasising difference from others? And no prizes for guessing who, in Scruton’s brave old world, will have the power to decide the criteria that will identity those who are or are not “one of us”.
Even if we accept Scruton’s identification of the threats to our “way of life”, is it really the case that looking inwards is the best form of defence? Which is likely to be the stronger and, in the long run, more successful – a society that is fearful of change and difference, that instinctively excludes rather than includes, that divides and weakens, or one that embraces and values all its members, that builds its cohesion and therefore its strength?
And should we really weep many tears for the poor hard-pressed Conservative, who finds it so difficult, Scruton says, to persuade people to think only of themselves? Perhaps he should try, for once, to see how easy it is to ask them to lift their eyes to a wider horizon.
Bryan Gould
11 September 2014