We need to balance the Budget over the Business cycle as Keynes suggested, right?

(This article first appeared in Liberal Democrat Voice)

Firstly, we do need to ask if Keynes did suggest that. There are arguments either way on this point.  Keynes’ view unfolded and developed starting in the bleak 1920’s in Britain. There was no “roaring twenties” for the UK economy as the government deflated the economy to try to fit the Pound back on to its pre war Gold  Standard. Keynes then did argue that governments should run deficits if private spending declined and reduce those deficits when future growth was strong enough. This has been interpreted by many that his intent was that the budget was to be more or less balanced over the business cycle. If anyone is keen to research into his thinking they might like to start with his 1924 publication “A Tract on Monetary Reform”.

A better approach might be to try to understand why Keynes should made a break from tradition and start to advocate that budgets should at times be unbalanced. If we consider an economy which is neither a net exporter nor a net importer and in which everyone spends what they earn within the economy, Government spending and taxation must balance. This is true regardless of the level of taxation imposed (providing it is finite) and so regardless of the level of inflation within the economy. It has to, according to the principle of sectoral balances originally developed in the 60’s and 70’s by the late Prof Wynne Godley at Cambridge University.

If the participants of the economy don’t spend all they earn, ie when private spending declines,  we can have a tendency to recession. Keynesian economists would point out that prices and wages tend to be “sticky” and so don’t respond quickly to changing circumstances as more classically minded economists suggest they should. Therefore, Keynes was quite right to suggest that the Government should spend  more, or tax less,  to prevent recession from occurring. The government needs to borrow money from the savers and spend it on their behalf. Later, when the savers withdraw their money from the bank, or empty their piggy banks, and spend it, the Government needs to run a surplus in its budget to prevent the economy from overheating and inflation occurring. So the budget does indeed end up balanced over the cycle. It ends up being an approximately symmetrical pattern when expressed graphically.

This relatively simple model may have been adequate for the UK economy in the 1920s. However in recent times the extent of saving and desaving hasn’t been symmetrical over the business cycle. When times are good people may borrow and spend more but equally they may put more aside for their retirement. So if the spending/saving/borrowing pattern of the population isn’t symmetric over the business cycle, neither can we  expect the government to run a balanced budget over the business cycle. Instead of imports and exports balancing,  our economy has something like an annual  5% of GDP deficit in its current account. Our trading partners seem happy to supply more real things to us than we supply to them. They take our IOUs in the form of treasury bonds or gilts to make up the difference. In effect they are like a big net saver within the economy. As Keynes pointed out,  if people are saving more, and that includes our trading partners, the Government has to be spending more or taxing less.

The ‘balanced budget over the cycle’ is really just a special case which does not apply to our own 21st century economy. If we try to force the Government budget into balance, at the same time ignoring the trading position and the willingness or otherwise of the economy’s participants to net save then we are courting economic disaster. The budget will not balance, no matter how hard we try, and we will end up like a dog chasing its own tail as the economy spirals ever deeper into recession.

The Job Guarantee. Problems from a Left Perspective.

There’s no doubt that a JG program along the lines we might imagine it to be, and along the lines advocated by the leading names of MMT: Warren Mosler, Bill Mitchell and  others would be highly desirable.

We could have an economy run to ensure almost full employment except for a  JG rate of about 2%. Then maybe there would be another 2% who were in receipt of unemployment pay due to their being temporarily between jobs. We could allow a reasonable period of time for that to occur -say about 3 months. The JG could have a part to play in young people’s apprenticeship schemes too. There could be some relaxation in the principle of “public purpose” if job training was combined with education. The JG could pay a living wage meaning that the wage was more than just enough to stay alive but it was enough to enjoy life too.

The problem, for me, and I suspect others on the left, is that we fear it won’t turn out quite like that. There’s no guarantee, or even likelihood,  that the JG will end poverty. It would depend on the wage the JG pays relative to the cost of living in the locality. If you’re living in London and depending on the rental property market you’d need an income much higher than anything I’ve seen proposed for the JG to be above any reasonable definition of the poverty line.

Incidentally, this posting was prompted by a discussion between Neil Wilson and others (including myself) on his very good blog:

http://www.3spoken.co.uk/2015/11/job-guarantee-jobs-for-people.html

“Very good” doesn’t mean we always agree, BTW,  as this exchange shows.

PM: “We don’t want to get into the situation, for example, where we’re threatening young mothers with loss of benefits for not taking up the JG or getting into disputes with the mentally ill as to their capability for work.”

NW: “I’m afraid that isn’t your choice. That is the choice of the society you live in and how they perceive those individuals”.

Which is a fair enough comment of course, but if it looks, from a left perspective that there are too many devils-in-the-JG-detail for comfort why would the left want to aggressively pursue the concept of a JG? Why not just leave it ” to the society (we) live in ” to come around to the idea ? That’s not likely to happen for a very long time, though. Either the JG is pushed by the left or it just won’t happen at all. Another problem, again at least for me, is the language used to promote the idea of a JG and it being a “buffer stock”. We are real people. Yes we want to work and make a contribution but we don’t want to be a “buffer stock” in the same way as we can have a buffer stock of bales of wool or kilos of butter.

While MMT and concepts like the JG are useful they only go so far. MMT doesn’t say anything about how wealth and incomes should be shared out. If we don’t address that question, and keep on addressing it then we’ll end up with just as much poverty in the future even though society as a whole could well be richer.

There could well be very much higher rates of JG work as the not-so-innocent fraudsters in Government deliberately shift essential work into the JG sector. The JG would be a very powerful weapon and used in the hands of the fraudsters to reduce wages. We could, for example, have a JG now in parts of the EU which paid say €7 ph or whatever was just slightly higher than social benefits. So in Greece we’d have 25% on a JG instead of 25% unemployed.

There’s no way any of us with a leftist perspective would support that. If anyone is contributing to society by working, the old principle of Labour’s Clause 4 applies: “To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible etc..”

Having a JG, even on a so-called living wage, doesn’t change that one bit!

The UK Autumn Budget Statement – More Neoliberal Nonsense!

The Autumn statement would not be so bad if it was economically coherent, with the spending and taxing plans agreeable, or otherwise, according to one’s political opinion. However, it does not make any sense. Not only does it not “add up”, it is inconsistent with all the principles of arithmetic.

The right wing Tory MP John Redwood makes the point :

“In total the new estimates show us paying an extra £105 billion in tax over the five years”

George Osborne says:

” we will reach a surplus of £10.1 billion in 2019/20″

Note: it’s not just “about £10 billion” its  “£10.1 billion”. We’ve all got to admire just how precise George and his Treasury economists can be about these five year forecasts! As if !

There’s no chance of this happening with the UK running a ~ £90 billion deficit in its external deficit due to trade and other international payments.  It would mean that the UK economy would have to find ~ £100 billion every year to pay the import bill and also provide the government with its £10 billion surplus.

This, presumably, is close enough to John Redwood’s ” extra £105 billion in tax”?

George Osborne says that  “Britain will be out of the red and into the black” which is completely untrue. These figures mean the British economy will be in the red to the extent of ~£100 billion to pay for the Govt being ~£10 billion in the black,  and Britain’s overseas trading partners being ~£90 billion in the black.

It can’t possibly happen that way,  unless somehow the trade deficit can be turned into a trade surplus, and that aspect is totally ignored in George Osborne’s grand plan. The UK economy could not sustain a net loss of £100 billion even for one year – never mind on an annual basis. George Osborne will only send the economy into a downward spiral trying to achieve the impossible. An economy in a depressed state will also deliver depressed levels of taxation revenue.

In a couple of years time, the excuse for the plan failing , as it inevitably will , is likely to be that even though the Government has kept spending under control, taxation revenues will have not come in as expected. This will be attributed to: Problems in the eurozone, problems with world trade, problems with loss of revenue from North Sea oil, a new war in the Middle East maybe?

In other words, the same kind of ‘excuses’ as were put forward after the last similar plan failed, in the years following the Tory win in 2010, except the Govt could blame the Lib Dems then! If the Government cared to look for a reason, rather than an excuse, they would explain that their deficit has to be the sum of what everyone else saves. They don’t have direct control of that.

There’s a saying , usually incorrectly attributed to Einstein, about doing the same thing over and over but expecting different results, being a sign of madness.  Are the Tories mad, though, or just plain bad?

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MMT and Economic Growth

Most economists , including the MMT variety, are wedded to the notion that economic growth in itself is a good thing. Of course, it has indeed been that over the last centuries. Few of us would be happy living under the same conditions as our 19th century forebears for example.Looking at inscriptions on the headstones of an old cemetery, or the reading of a few chapters of a Dickens novel provides enough evidence of the harsh living conditions that most endured then. Infant mortality was high. Many women died in their prime due to complications of childbirth. Improvements have largely been made possible by economic growth. In our modern economies we notice that unemployment falls when economies grow. Workers can negotiate higher wages as businesses can sell their products and services into marketplace. Everyone is happy. Governments get re-elected!

Economic growth is largely a product of human ingenuity. Give a group of workers the task of doing something, like making a car for example, when they have no experience of even seeing a car before and they’ll struggle to do it. The cars they produce won’t be very good. They will consume a lot of labour power and be relatively expensive, so that only the very wealthy can afford them. That was the case in the early years of the car industry. But as the workers gain more experience and apply their intelligence to the problems at hand, the cars are continually improved. The labour time to make each one falls as production techniques improve too. Fast forward to where we are now, and we have very good cars made very efficiently by far fewer workers at a fraction of the cost of a century ago. It is the same story in just about every industry we can think of.

Those in the Green movement question that we can have economic growth forever citing the fact that economic growth implies an exponential consumption of the finite resources which are available to us. It’s a good question and it’s one we are going to have to answer sooner or later. We might want to make a start on doing that now in the context of our present economic problems. In the UK and Europe we have seen no real economic growth since the 2008 GFC. The situation varies from country to country but typically GDP per person is just about what is was a decade ago. Even so, this is still approximately twice what it was a generation ago. So is everyone twice as happy now as they were then? Or are they exactly as happy as they were a decade ago?

Of course they aren’t. There’s much more unemployment and underemployment now. There are more homeless people than there were, there aremore people relying on food banks. The state of the NHS and the education system is worse than it was. In 1980, students still had grants, but now they don’t, even though supposedly we are a much wealthier society, notwithstanding the difficulties brought about by the 2008 crash. This is not what I remember being told by Sir Keith Joseph ( a Tory politician very close toMargaret Thatcher) in the early 70’s when we clashed at a student meeting where he was speaking. He criticised me, in particular, and the left in general, for being overly concerned with the redistribution of existing wealth and not enough about the creation of new wealth. His message was that social and economic problems, of which we were both aware existed, were best solved by having a more productive economy and allowing the wealth creators free rein to create wealth unhindered by State interference. It would have been inconceivable to the rest of the meeting, and maybe even to Keith Joseph and myself, that some 40 years later we’d have had the levels of growth we’ve had but still the same economic problems would remain unresolved.

We don’t need degrees in economic theory to know that if the proverbial ‘economic cake’ is much bigger but there are still those surviving on meagre rations, that the imbalance must be due to how that cake is cut. The question of who gets what does matter when discussing Economics. Economic growth has to be more than about mopping up surplus labour in a capitalist economy. If we do achieve some growth, that’s fine, we all can feel a bit better off. If we don’t, we should all feel that we are neither better nor worse off, instead of, as now, feeling that we have to run just to stand still. Do we need a different type of economy for that to happen? The critics of MMT might argue that it’s little more than a patch for the problems of a capitalist economy. I wouldn’t accept that but we do have to explain how MMT can work for everyone if we are to establish meaningful links with the political left. A Job Guarantee on a minimum wage won’t be enough for many.

If we do want that, we have in the words of Labour’s old Clause 4 to provide an economic theory which can help to “secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof”.

 

The Job Guarantee, MMT and the Redistribution of Wealth

One important component of MMT is known as the Job Guarantee (JG) or sometimes the Employer of Last Resort (ELR) . The idea is an unemployed worker would be offered a job by the Government instead of unemployment welfare benefit. The job would be for public purpose and pay a basic wage. This would effectively define a minimum wage for other workers too.  There’d be no point working for less than the JG wage somewhere else for example. The government would possibly pay out slightly more than it would in welfare benefits to support these jobs, but it would not be paying out money for nothing. It would be receiving something in return, for the benefit of society as a whole,  and would prevent useful resources, the labour power of millions of workers, from going to waste.

Instead of there being a pool of unemployed there would be a pool of JG workers. Instead of an unemployment rate there would be a JG rate. Whereas government now uses unemployment as a means of inflation control,  a future government would use the JG and the JG pay rate as a means of inflation control. Bill Mitchell likens the JG scheme to one previously used by the Australian government to stabilise the price of wool. It used to buy up wool, which might otherwise have been unsold,  at sales auctions to guarantee a floor price. Then, later as the price of wool might have risen, stocks were sold from the buffer supply to reduce wool prices.

One potential problem is with the rights of JG workers. If they feel they are being asked to work for a lower level of pay than they might consider to be socially acceptable, and also under conditions which might be less than acceptable, do they have a right to join a union and demand higher pay and better conditions? The scheme cannot work too well if that is the case because the minimum wage will then potentially be a source of inflation.

So, the question arises: can we really compare human workers with bales of wool?  Should workers be ‘sold’ from a buffer stock to lower the wages of other workers?  This does not sound, to my admittedly socialist ears,  like an appealing idea!  Trade unions have to have an input into the level of the minimum wage whether or not it is defined by the wage of a JG. Governments may be fair and just in defining a reasonable living wage or they may not be!

It is potentially only a problem if  unemployment is brought down to something like 4% and efforts to reduce it below this figure create inflationary tendencies in the economy. Some of those 4% will be people between jobs but some will be, for as variety of reasons, hard-to-place workers. They shouldn’t just be abandoned but neither should we be too hasty to introduce compulsory work. The meaning of ‘compulsory’ being that there would be no social benefits otherwise.

MMT doesn’t, IMO,  make this point at all clear in its theorising. Bill Mitchell has expressed his view as:

“The existing unemployment benefits scheme could be maintained alongside the JG program, depending on the government’s preference and conception of mutual responsibility.
My personal preference is to abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations.
The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a JG job…..
I would also allow a person a short-period – perhaps two weeks – in between losing their job and starting a JG job – to sort out their affairs. This period would be covered by full JG pay.”

We can all have our ‘personal preferences’ . Mine would certainly NOT be to “abandon the unemployment benefits scheme ” until such time as we have a genuine socialist society and not just a so-called socialist government in charge of an essentially capitalist society or economy. No economic theory, including MMT, has much if anything to say about the desirability of wealth redistribution. The argument to concentrate on economic growth rather than redistribution, is I would argue, a neoliberal argument in itself. GDP per capita now in the UK is twice what it was in 1979 when Mrs Thatcher first won a general election. It is a similar ratio in most advanced countries too, so Mrs Thatcher cannot have been at all responsible for the UK growth!

Her accusation then,  and from her supporters too,  was  the left was being reactionary in its demands for redistribution and that all economic problems would be solved by having a more productive economy. This might be described as the ‘rising tide raises all boats’ theory. Experience should have taught us that the rising tide may well have raised luxury yachts but not necessarily “all boats”. We have more unemployment now than we had in 1979, more underemployment, more homeless, more people relying on food banks, and the NHS is in very poor shape. Clearly all problems have not been solved and will not be solved, regardless of the level of past and future economic growth, until the question of wealth redistribution is back on the political agenda.

By all means let us establish a  Job Guarantee but let us make it very clear we mean a Voluntary Job Guarantee. We should make sure the benefits of that extra production, that extra economic growth,  are used to equalise wealth distribution rather than those benefits ending up in the possession of the already ultra wealthy as has happened with previous economic growth.  Let’s see how that works out before even thinking about any compulsion.