George Osborne’s false choice between spending on social security and spending on infrastructure

From the Telegraph:

“Britain’s welfare budget should be used to fund new transport links in the north which will bring a “real economic return” rather than “trapping people in poverty”, the Chancellor has said.”

The article goes on to quote Osborne as saying:

“I think the real choice in our country is actually spending money on this big economic infrastructure, trans-pennine rail links, Crossrail 2 in London and the like, and spending money on, for example, welfare payments which are not generating a real economic return and at the same time are trapping people in poverty.”

This creates the very strong impression that Osborne really wants to ramp up infrastructure spending, but is being prevented from doing so by people “trapped in poverty”. I’m not entirely sure what the ‘real choice’ means in policy terms, but it’s a completely false choice.

The social security bill is not preventing the Chancellor from increasing spending on roads and rail, if that’s what he wants to do. If there are enough skilled workers, spare land and building materials available, then we can afford to do it. If there aren’t, then cutting the social security budget further is not going to make much of a difference.

Osborne seems to misunderstand what social security is for. It functions  to prevent individuals from falling into penury, but it also has a macroeconomic function, in that it dampens economic shocks by stopping people’s incomes falling below a certain point meaning as people lose their jobs, they can still afford to buy things – sales which other people’s jobs rely on.

The flipside of this is that when an economy is recovering from a recession, the social security bill naturally contracts, as people find jobs and go back to work. Increasing spend on infrastructure will help aid this contraction further by creating additional jobs.

So far from needing to cut social security spending to be able to afford extra spending on infrastructure, the extra spending itself would actually contribute towards Osborne’s stated aim of reducing the social security bill.

Of course what actually traps people in poverty is low pay, which again could be partially addressed by creating decent paid construction and engineering jobs through – you’ve guessed it – additional infrastructure . Of course, this type of spending is not a solution to all problems. To really start to tackle low pay, the government should get serious about job creation and remember that governments actually can and do create jobs. A full job guarantee would be a more complete answer.


Modern Monetary Theory vs Mainstream Macroeconomics

In my last blog, I introduced the basics of Modern Monetary Theory (MMT). While looking through my drafts folder tonight, I found this table I’d copied from this blog post by Bill Mitchell. It gives some commonly heard macroeconomic propositions, and gives an alternative MMT view on each proposition. It’s quite a succinct summary of how a lot of the things to do with the economy that are often stated as fact, are certainly arguable at best, and at worst, are total nonsense.

Mainstream macroeconomics Modern Monetary Theory
Budget deficits are bad Budget deficits are neither good nor bad and are required where the spending intentions of the non-government sector are insufficient to ensure full utilisation of available productive resources.
Budget surpluses are good Budget surpluses are neither good nor bad and may be harmful in some circumstances if they involve a drag on growth in situations where there are idle resources.
Budget surpluses contribute to national saving There is no sense to the concept that a currency-issuing government saves in its own currency. Saving is an act of foregoing current spending to enhance future spending possibilities and applies to a financially-constrained non-government entity. The government never needs prior funds in order to spend and thus never needs to “save”.
Budget should be balanced over the business cycle Budget should be allowed to adjust to the level of net spending required to achieve and sustain full employment given the spending decisions of the non-government sector, irrespective of the state of the business cycle.
Budget deficits drive up interest rates because they compete for scarce private saving Private saving is not finite and is related to income. Spending always brings forth its own saving because saving rises and falls with income movements, which are directly related to movements in spending.
Bond markets determine funding costs of government Central bank sets interest rate and can control any segment of the yield curve it chooses. The costs of government spending are the real resources that are utilised in any particular public program.
Budget deficits mean higher taxes in the future Budget deficits never need to be paid back. Every generation can freely choose the level of taxation it pays.
The government will run out of fiscal space (money) Fiscal space is more accurately defined as the available real goods and services available for sale in the currency of issue. The currency-issuing government can always purchase whatever is for sale in its own currency. Such a government can never run out of its own currency.
Budget deficits equals big government Budget deficits may reflect large or small government. Even small governments will need to run continuous deficits if there is a desire of the non-government sector to save overall and the policy aim is to maintain full employment levels of national income.
Government spending is inflationary All spending (private or public) carries an inflation risk. Government spending is not inflationary while real resources are idle (ie. There is unemployment). All spending is inflationary if it drives nominal aggregate demand faster than the real capacity of the economy to absorb it.
Issuing bonds to the private sector reduces the inflation risk of deficits There is no difference in the inflation risk attached to a particular level of net public spending when the government matches its deficit $-for-$ with bond issuance relative to a situation where it issues no debt. The inflation risk is embodied in the spending rather than the monetary arrangements that are associated with it (bond-issuance or not).
Intergenerational burdens are linked to inherited budget deficits in the form of debt that have to be paid back. Intergenerational burdens are linked to the availability of real resources. For example, a generation that exhausts a non-renewable resource imposes a burden on the next generation. A future generation cannot transfer real resources back in time.
Unemployment is used to control interest rate Employment is used to control interest rate
Sovereign issuer of currency is at risk of default Sovereign issuer of currency is never at risk of default. The issuer of a currency can always meet any liabilities it incurs in that currency.
Taxpayer money Public currency. The taxpayer does not fund anything. Taxes are a device to free up real resources so our agent, the government can instigate a socio-economy program for our collective benefit.
Humans make rational decisions based on self-interest Humans are complex and rarely predictable, reason and emotion are inseparable.

The Basics of Modern Monetary Theory

I haven’t done a post specifically about Modern Monetary Theory (MMT) for a while now, although that is the perspective from which I approach a lot of the issues I blog about. With that in mind, I thought I’d go back to basics and write a beginner’s guide to MMT as I see it. Any errors that follow will be mine alone. Please let me know if you spot one!

What is MMT? Modern Monetary Theory (MMT) is a branch of the heterodox Post Keynesian school of economics. At a basic level it is comprised of the following ideas:

  1. Taxes drive money;
  2. Taxes and borrowing don’t pay for government spending;
  3. Countries like the UK cannot go bust;
  4. Functional finance;
  5. Sectoral balances;
  6. Endogenous money;
  7. Governments should pursue full employment;
  8. Focus on real resources, not money.

So what do all these things means? In turn then:

1. Taxes drive money In theory, anyone can start their own currency. You or I could just print up some notes in our garage.  The trick though is getting it accepted. MMT posits that in order for governments to get its citizens to accept and use their currency, it is sufficient for them to impose a tax in that currency. Provided they are able to enforce the payment of the tax, people will be willing to work for payment in that currency in order to pay the tax. So the necessity to pay the tax in the government’s currency drives demand for that currency and ensures it has a value.

Further reading:

MMP Blog #8: Taxes Drive Money

Tax-driven Money: Additional Evidence from the History of Thought, Economic History, and Economic Policy

2. Taxes and borrowing don’t pay for government spending While governments do need to tax, MMT says that they do not do it to pay for their spending. Indeed, MMTers argue that government spending must come first. How can anyone pay a tax denominated in the government’s currency unless the government first spends it into the economy? So what are taxes for? We have already seen one function of tax in point 1. Taxes drive the nations currency. They also act to ‘make room’ for the governments spending, preventing that spending from generating inflation. Progressive taxes are also used for re distributive purposes to help a government meet it social aims, and taxes can also be effective to incentivise or disincentivise certain behaviours (e.g. smoking, drinking, polluting). But what about government borrowing? At the moment, if the amount of tax collected is less than the amount a government spends, it ‘borrows’ the rest by issuing government bonds. The amount it borrows is repaid with interest. MMT though, argues that similar to taxation, this borrowing is not undertaken to finance its spending, but to maintain its target interest rate. Under current arrangements, if a government didn’t match its spending to taxes plus borrowing, this would create excess reserves in the banking system, and this would drive overnight interest rates down to zero. Government borrowing also acts as a risk-free source of savings to the private sector, including pension funds.

Further reading:

Taxes for revenue are obsolete

Government bonds and interest rate maintenance

3. Countries like the UK cannot go bust In the run up to the 2010 UK General Election, it was said loudly and often that the UK was on the brink of bankruptcy, about the go the same way as Greece. We had run out of money. MMT says this is nonsense. Governments like the UK who issue their own currency cannot go bust, in the sense that they cannot run out of money. In this sense the UK differs from the Eurozone countries, who, since joining the Euro, no longer issue their own currencies. They are now currency users. This point is often missed when discussing government debts. The usual story is that when ‘the markets’ see government debts rising, they start to worry about how the debt will be repaid and so demand higher rates of interest before they will lend more. This happened in some of the Eurozone counties before the European Central Bank stepped in to stabilise the markets for these countries debt. Countries like the UK though have central banks that can always intervene if interest rates start to rise, so the risk of an interest rate spike here is low to non-existent. Interest rates on government debt are a policy choice for the currency-issuing government. To maintain the maximum flexibility over an economy, MMT recommends countries maintain their own free floating currency, and to only borrow in that currency.

Further reading:

There is no solvency issue for a sovereign government

Why do politician tell us Debt/Deficit myths which they must know to be untrue?

4. Functional Finance Functional finance is an approach to fiscal policy adopted by MMTers but first espoused by economist Abba Lerner. Functional finance has three rules:

  1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
  2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
  3. If either of the first two rules conflicts with principles of ‘sound finance’ or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.

Further reading:

Functional Finance

Functional finance and modern monetary theory

5. Sectoral balances Sectoral balances is an approach to viewing the financial makeup of the macro economy, popularised by economist Wynne Godley. It helps not to view things like the government deficit in isolation, but rather to see it in the context of what’s happening elsewhere in the economy. In the three sector version of Godley’s sectoral balances: Government balance = Private sector balance – Foreign sector balance If we apply this to the UK, we see a government deficit of 6%, a private sector balance (private sector sayings  – private sector investment) of 2% and a foreign balance (exports – imports) of -4%. MMTers argue that the natural state for the private sector is surplus, so for countries with trade deficits, a government deficit will also be the norm. If the government tries to reduce or eliminate its deficit, it will only succeed if the private sector is willing to reduce or eliminate its surplus.

Further reading:

What Happens When the Government Tightens its Belt?

UK Sectoral Balances and Private Debt Levels

6. Endogenous Money Endogenous money is the idea that rather than the central bank determining the amount of money in the economy – exogenously, the amount of money is instead determined by the supply and demand of loans. In shorthand, MMTers (and Post Keynesians in general) would say, “Loans create deposits”. That is to say that banks create money by extending loans to customers, while at the same time creating a corresponding deposit. This runs contrary to what is generally taught to students of economics – that savings are loaned out with banks acting purely as intermediaries, or at best leveraging an initial injection of government money by a predetermined ratio.

Further reading:

The Endogenous Money Approach

Money creation in the modern economy

7. Governments should pursue full employment In the post war period up until the early 70s, Western governments were committed to the principle of full employment, and largely achieved this, with the unemployment rate averaging around 3% in the UK throughout that period. The Conservatives famous “Labour Isn’t Working” campaign poster of 1979 was powerful because unemployment had reached previously unthinkable levels of 1 million. Today, the Government start high-fiving each other when unemployment falls below 2.5 million. MMTers argue that achieving full employment again is very much a realistic and achievable goal, but it means abandoning modern notions that “governments don’t create jobs”, and accepting that capitalism left to its own devices will never employ all those willing and able to work. A key tenet of MMT is that governments should act as the ’employer of last resort’, offering work to all those who are willing and able to work, but unable to find a job.

Further reading:

The Job Guarantee: A Government Plan for Full Employment

The job guarantee is a vehicle for progressive change

8. Focus on real resources, not money While politicians tell us there is no money left, millions are without sufficient work and resources lie idle. MMT argues that we should focus on these real things – people and resources – rather than money which is just a tool for putting those people and resources to work. Governments can and should spend money into the economy when the private sector cannot or will not to maximise the potential output of the economy.

Further reading:

Modern Monetary Theory: The Last Progressive Left Standing

Scottish Independence – A Modern Money Analyisis

Those are some of the basics of MMT then, not that I can capture it all in 1,500 words. For more reading, try some of the links on my blogroll.

If the private sector’s not doing it, doesn’t mean it’s not worth doing!

Regular readers will know I favour a policy known as the job guarantee. This is where the government pays the wages of anyone willing and able to work, but unable to find it. This appeals to me because I believe the following things are true:

  • In our society, working (either for yourself or an employer) is seen as the norm; part of being a good member of society;
  • Doing a job of work that people think is worthwhile brings a lot of benefits in terms of mental and physical health;
  • People consciously or unconsciously understand this and most people want to work;
  • People shouldn’t have to work for wages below a level which allows them a reasonable standard of living;
  • Without active government involvement, there will never be enough jobs for all or enough jobs paying a socially acceptable wage.

So I am fully signed up to the idea that a job guarantee would be a very fine thing. Convincing others of the merits of this idea is much more difficult than I thought though! A lot of people accept there aren’t enough jobs, that wages are too low and that work is becoming more and more casualised. Despite this, they would rather leave people unemployed than have the government actually create jobs. I’m not quite sure why this is, but I it’s partly a lack of imagination (what would they do/non-jobs/digging holes and filling them in etc), and partly the usual “nice idea, but how will you pay for it” response.

It also seems to be received wisdom that the profit motive ensures that everything worth doing is already being done by the private sector, and if the private sector is not doing it, it must not be worth doing. It’s this argument I want to address now by suggesting a few areas either not being delivered or are under-delivered by the private sector, but are nevertheless quite worthwhile!

  1. Adult social care – We are often told there is a crisis in adult social care. At present, private sector companies are contracted to provide a lot of the home visits to the elderly an infirm. Contracts are often awarded to the lowest bidder, which means these services are delivered on the cheap. Staff are often on zero-hours contracts, poorly paid and only permitted to spend 15 minutes or at most half an hour on each visit. They are often not even paid for travelling between visits! So why not train up some of those willing and able to work, and pay them to provide a much more comprehensive service to people in need? This would help take the pressure off our hospitals if people are being well cared for in their homes, and allow resources in the NHS to be better targeted.
  2. Sports/Fitness coaches – As well as an adult social care crisis, there is also an obesity crisis. We could train people to deliver sports coaching to kids on a much wider scale. There are a lot of sports that require very little equipment, but with a coach who can inspire and importantly, a service that is free or heavily subsidised for the user, we could start to reverse the obesity trend. This again reduces expense in the long term on the NHS and kids who are fit and active do better in school.
  3. Childcare – Childcare is very expensive and means that a lot of people who want to work find most of their wages are going on childcare. Training people to provide childcare would lead to lower costs, meaning work becomes a more viable option for many. In addition to this, for those who prefer to look after their own kids, could also be paid to do so. A lot of people struggle to see looking after your own kids as being a job, but it could be argued that it’s a pretty important job. The production of the future generation will always pay for the future consumption of the current generation, so if kids are brought up happy and healthy by a parent in their early years, they will likely become more valuable members of society when they grow up. Is it really that different paying someone to look after someone else’s kids, to paying someone to look after their own?

Those are just three suggestions, but I know others will have much more imaginative ideas! There are so many socially beneficial jobs that would enhance our environment that just aren’t being delivered by the private sector (at least not at a price affordable to all). We could change this, but we need to lose the private sector good/public sector bad mentality. It’s holding us back!

What a Good Economy Should Look Like

I came across this video earlier today and thought it was worth sharing. It’s an audio extract from a longer talk given in Italy by Warren Mosler, who is one of the founders of Modern Monetary Theory (in the same way some bands are big in Japan, Mosler is big in Italy!). Mosler describes in one minute what a good economy should look like, and in light of George Osborne’s announcement today of his ‘commitment’ to full employment, it seemed apt. Does his description sound remotely like what we have today? I think not! The full video and transcript are here.

Right-wing framing of the macro-economy

I’ve done a few of posts on conservative framing recently and I was subsequently reminded of a draft paper by Bill Mitchell and Louisa Connors called “Framing Modern Monetary Theory“. It discusses how the economy is generally discussed by mainstream commentators, before considering how an alternative narrative might be constructed using similar tactics as those in the mainstream. They argue that:

“The dominance of mainstream macroeconomics narrative in the public domain is achieved through a series of linked myths that are reinforced with strong metaphors.”

Below is a table from the paper by way of some examples. Many of these metaphors pop up on an almost daily basis. If, like me you frequent the comment sections of newspaper websites, you’ll see them all the time. They have all been absorbed by people and repeated back ad nauseum:



All of the metaphors in the table are either wrong or willfully misleading, but they been very successfully implanted into most people’s minds through constant reinforcement. The challenge is how to construct alternative metaphors to start to change the nature of the debate. UK Labour’s strategy (assuming they actually disagree with the Government) has been a poor one. As the authors say in the paper:

“…progressives should avoid debating within the frames that conservatives use. For example, attacking the British government’s pursuit of fiscal policy as being ‘too fast’ implies that the desirable alternative is more gradual (managed) reduction in the government deficit. The frame is that the budget deficit is bad and has to be reduced. The more productive progressive frame would be to explicate the functional role of government deficits…”

Labour’s compulsory job guarantee vs the real thing

Labour re-announced their proposals for a ‘compulsory job guarantee’ today, along with their plans for funding it. I’ll ignore the funding proposals because they are just playing the nonsense  ‘how will you pay for it’ game, but there were some extra details on how the programme will work in practice. It had previously been said that it would only be a one year programme, but now Labour say 5 years. Not all the details are in, but there are enough now to do a compare and contrast with Labour’s plans and what the real thing would look like. By real thing I of course mean the job guarantee as envisaged by MMTers. Apologies for the formatting of this table, but I’m crap at html!

Labour’s Compulsory Job Guarantee MMT Job Guarantee
Eligibility 18-24 year olds claiming JSA for over 1 year; Aged 25+ on JSA for over 2 years Anyone willing and able to work
Compulsory? Yes, possibility of having benefits sanctioned if refuse job No
Choice of which type of work? Unclear. Some element of choice likely Yes. People would be offered work suitable to their skills and interests
Jobs where? Private and non-profit sectors Non-profit only
Pay Current minimum wage Living wage
Hours 25 hours per week Flexible depending on circumstances. Full time and part time options
Duration 6 months Indefinite – until the individual finds a regular job
Training included Yes, but £500 cost cap Yes
What type of work? Unclear. If like Future Jobs Fund, could be a wide range Very broad range

To summarise then, I like the fact that Labour are acknowledging a need to create jobs, but dislike pretty much everything else about their plans. The pay’s too low, the hours too short, the private sector are involved (to what extent is still unclear), 6 months isn’t long enough, there are unnecessarily threatening undertones (sanctions!, compulsory!) and so on. It’s a start though I suppose.

Some policy ideas for Party Conference season

It’s Party Conference season again, kicking off with the Lib Dems this weekend. While the main parties will doubtless be floating radical new policies like voluntary codes for zero hour contracts, voluntary codes for private sector landlords or how best to ‘nudge’ people to behave in ways not in their long term interest (mainly borrowing more money), I thought I’d float just 3 alternative policies I’d like to see introduced.

1. No surprise to regular readers, number 1 is a job guarantee. While David Cameron and George Osborne are high-fiving about unemployment falling by 24,000, long-term unemployment and youth unemployment both remain high. Even if we now have a strong recovery, hundreds of thousands are going to be left behind, as employers are unwilling to hire people without recent job experience. To fix this, the government should create jobs to act as a transition from unemployment to regular paid employment. These jobs should be available to anyone struggling to find a job, but who is willing and able to work. This would also render the whole zero hours debate moot.

2. Housing affordability and availability is a real issue for millions. Nasty policies like the bedroom tax don’t help, and the Government’s enhanced right to buy is exacerbating the problem. We need 250,000 new dwellings per year to meet demand. At the moment we are building less than half that number. To address this, central government should award grants to local authorities of £200 per resident, for the building of social housing. These homes should be required to be built to passivhaus standard. Building regs should also be amended to prevent some of the worst residential building we see today.

3. A debt jubilee. Current policy seems to be to ‘recover’ the economy based on pumping up private debt levels once again. This is clearly unsustainable. Debt levels are already too high, and much of it probably can’t be paid back. We should accept this and hit the reset button. Each household could be given a one off payment of £10,000, which must be used to pay off debt, be it mortgage debt or unsecured debt. Those who do not have any debt get to keep the £10k to spend on whatever.

Pie in the sky? In the current climate yes, obviously these things won’t be implemented, but in terms of the ideas being practical, affordable and beneficial for the majority? Yes, I think these policies are all those things. Got any of your own? Leave your ideas in the comments.


Warren Mosler on Modern Monetary Theory

Thought I’d share this video of Warren Mosler being interviewed by Marshall Auerback on Modern Monetary Theory. If you don’t know who Warren Mosler is, you should! Warren discusses (among other things) the government’s role as issuer of the currency, the meaning of deficits and the job guarantee. He is great at simplifying economic concepts although what he says goes against everything we usually hear about the economy. Mosler is talking about the US, but in the UK, the system is much the same. Give it a watch.

“The parable of 100 dogs and 92 bones” – Why the Work Programme can’t work

Today’s Billy Blog is another must read, on the state of austerity-age Britain. In it he includes his ‘parable of 100 dogs and 92 bones’. I’ve used this before on this blog, but this is a better version of it, so it’s worth recounting, as it’s a perfect allusion to Governments’ obsession with ‘back-to-work’ schemes and why they can never succeed on their own. The Coalition’s failing Work Programme is a perfect example of this.

“Case study: the parable of 100 dogs and 92 bones

Imagine a small community comprising 100 dogs. Each morning they set off into the field to dig for bones. If there enough bones for all buried in the field then all the dogs would succeed in their search no matter how fast or dexterous they were.

Now imagine that one day the 100 dogs set off for the field as usual but this time they find there are only 92 bones buried.

Some dogs who were always very sharp dig up two bones as usual and others dig up the usual one bone. But, as a matter of accounting, at least 8 dogs will return home bone-less.

Now imagine that the government decides that this is unsustainable and decides that it is the skills and motivation of the bone-less dogs that is the problem. They are not skilled enough. They are idlers, bludgers and “bone-shy”.

So a range of dog psychologists and dog-trainers are called into to work on the attitudes and skills of the bone-less dogs. The dogs undergo assessment and are assigned case managers. They are told that unless they train they will miss out on their nightly bowl of food that the government provides to them while bone-less. They feel despondent.

Anyway, after running and digging skills are imparted to the bone-less dogs things start to change. Each day as the 100 dogs go in search of 92 bones, we start to observe different dogs coming back bone-less. The bone-less queue seems to become shuffled by the training programs.

However, on any particular day, there are still 100 dogs running into the field and only 92 bones are buried there!”

Bill concludes with:

“In the UK there are about 92 bones for every 100 dogs and in Spain 72 bones for every 100 dogs!

The point is that fallacies of composition* are rife in mainstream macroeconomics reasoning and have led to very poor policy decisions in the past.

There are simply not enough jobs.”

* Fallacies of composition are very common in discussions of economics. It basically means – what’s true for an individual isn’t always true for a whole group of individuals. An example of this would be the argument that cutting the minimum wage will increase the number of jobs available. While for a single firm, if wages could be cut, that might enable the firm to hire more people, if they are cut across all firms, then workers will be able to buy less stuff, so less will be produced, meaning less workers are needed. David Cameron saying everyone should pay off their credit card bills is another example. Good for the individual, bad if everyone does it at the same time.