Author: Gavin Barker
Changes to the welfare state have always been closely matched by changes in thinking about economics. Today that thinking is beginning to change, as more economists start to rethink the role of money in the economy. The Centre for Welfare Reform has already published several articles suggesting that new economic thinking supports the case for basic income. Here Gavin Barker, who stresses he is not an economist, brings together some of the arguments made by economic experts to support Modern Monetary Theory and suggests that it might help us properly fund public services.
The BBC news recently highlighted a major report by the Institute for Fiscal Studies and Health Foundation which said the NHS would need an extra 4% a year - or £2,000 per UK household - for the next 15 years, if it is to avoid "a decade of misery" in which the old, sick and vulnerable are let down.
This is a massive additional increase in taxation at a time when the UK faces the longest fall in living standards since records began 60 years ago; and when one in eight workers already lives in poverty, according to the Joseph Rowntree Foundation.
But there is another narrative gaining prominence among policy thinkers and economists that directly challenges austerity and the assumption that government pays for public services through taxation.
In a provocatively entitled article by the Independent The Magic Money Tree Does Exist, Bill Mitchell, Professor in Economics at the University of Newcastle, Australia, argues that it is time to reject the economy as a household with the nation’s credit card maxed out. Money is not a finite commodity but an abstract concept of ones and zeros which is electronically created out of nothing.
Put baldly, governments with a sovereign currency do not have to fund public services through taxation nor borrow from international money markets. They can print the money they need, either electronically or in paper notes and coins. And they can do so without limit. The only constraint is the capacity of the economy to absorb the money created; but where factories lie empty, machinery unused, or labour languish in unemployment queues, it makes sense to galvanise these productive assets for economic or social good through sovereign money creation.
His arguments are backed by fellow proponents of so-called Modern Monetary Theory which is now gaining traction in Washington and Wall Street. Its lead thinker is Stephanie Kelton, an economics professor, but it also has an unlikely champion in the form of Warren Mosler, a tax exile and hedge fund manager who made his millions betting on the fact that governments never, ever run out of money, so long as they have a sovereign currency as the pound or dollar.
It is worth quoting in detail the nub of Stephanie Kelton’s argument set out in an article by Zach Carter of Huffington Post:
"Modern monetary theorists believe that confusion around money has distracted economists from the real things that affect the economic health of society ― natural resources, technology, available labour. Money is a tool governments use to manage these variables and solve social problems. It is not a scarce resource that governments have to track down in order to pay for projects.
Citing Kelton, Carter goes on to write:
“The basic idea is that the government can’t run out of money,” Kelton said. “It creates money just by spending.”
When people talk about government profligacy bankrupting their grandchildren or triggering a cataclysmic debt crisis, Kelton argues, they’re conflating the experience of a typical family, which has to get money from somewhere outside the household to meet expenses, with that of a sovereign government, which creates money as part of its basic operation.
This leads to an inversion of our common sense understanding drummed into us by policy experts and the media: it is not “tax and spend” as they would have it, but “spend and tax”. Spending stimulates jobs and growth, which can later be taxed. The role of taxation is to control for inflationary effects by destroying the money it created and clawing it back in the form of taxes. It is also to spread wealth and to correct imbalances in economic development through tax incentives.
Similar points are made by the British economist and tax expert Richard Murphy. In his recent article Modern Monetary Theory in a Nutshell he repeats the assertion that “governments can make money out of thin air, at will. This is now an acknowledged fact. The Bank of England agrees now. QE proves it.” and he pointedly adds “if this was not the case then government created money required to make payment of tax could not exist.”
None of this will come as news to the present government who have been quietly printing digital money since 2009 to the tune of £450 billion – a sum well over three times the annual cost of the NHS. But instead of ploughing the money into the real economy to bolster manufacturing and small businesses, or to fund essential public services, the Bank of England used the new money to buy back UK government debt (effectively cancelling the debt) along with complex financial products from private investors like pension funds and insurance companies.
The downside to this experiment of money creation was a large increase in wealth inequality. Buying complex financial assets invariably benefits those whose extensive savings are tied up in shares, bonds or property portfolios. The richest fifth of households gained a £314,143 increase in net worth (from £987,209 per household to £1,301,352) while the poorest fifth of households gained £1,659 increase – from minus £3,896 in 2006-08 to minus £2,237 in 2012-14.
Now think how this money could have been used differently, not just to increase funding for health services but to fund local government, whose budget has been cut to ribbons.
Richard Murphy proposes a Green Infrastructure Quantitative Easing to stimulate the economy, boost employment and tackle climate change by funding essential infrastructure improvement; in particular to make every building in the UK energy efficient and where feasible, fitted with solar panels.
Josh Ryan-Collins, economist at the New Economics Foundation suggests fully nationalising RBS bank and recapitalize it fully using QE so that it can create (low interest) loans to key sectors and small businesses. Instead the government has just announced a multi-billion pound sale of its stake at a significant loss to the tax payer.
An open letter signed by 35 leading economists in 2016 to the Chancellor and Theresa May made pointed reference to the Prime Ministers acknowledgement that lower interest rates and QE had increased inequality by inflating asset prices. Its proposals were as follows:
“A fiscal stimulus financed by central bank money creation could be used to fund essential investment in infrastructure projects – boosting the incomes of businesses and households, potentially assisting the UK’s green economic transition, and increasing the public sector’s productive assets in the process. Alternatively, the money could be used to fund either a tax cut or direct cash transfers to households, resulting in an immediate increase of household disposable incomes.”
What all these proposals suggest is that lack of government money is not the problem. Despite this government's insistent reference to lack of money as the basis of damaging austerity policies, our government can create any amount of money it needs without raising a single penny in tax.
We know this Conservative government has nothing new to say beyond a dogmatic repetition of free market axioms. What Modern Monetary Theory offers is a new approach and new ways of thinking about the role of money in the economy. They surely deserve to be heard well beyond the politicians and private banks who will not warm to ideas that threaten their interests.
The publisher is the Centre for Welfare Reform.
How to Fund the NHS and Public Services © Gavin Barker 2018.
All Rights Reserved. No part of this paper may be reproduced in any form without permission from the publisher except for the quotation of brief passages in reviews.