In this post, originally published on Medium, Michael Berks discusses NHS funding.
I’m sure you’ve all seen the story of 100-year old Captain Tom Moore, who, by walking 100 laps of his garden has raised over £23 million for NHS charities. It is, on the face of it, a happy, feel-good story — something we all need in these difficult times. And I’m certainly not going to knock Captain Tom— bloomin’ legend that he is, or complain at anyone donating to his cause. However, if your social media feeds are anything like mine, you’ve probably seen lots of counter posts, pointing out the inescapably true fact that we have a government with a remit to properly fund the NHS — the importance of which has never been clearer — and portraying the NHS as charity, reliant on the goodwill of donations to perform its everyday duties, far from a good thing, is actually a very damaging viewpoint to take.
The majority of these counter posts also point out something else seemingly obvious –the way the government funds the NHS is by collecting taxes from all of us and using these to pay for services. And if some of the rich celebrities cheering on all this giving would instead pay a fair share of taxes we really could fund the NHS properly without relying on charity! Amirigghht?!!
At this point, of course, my MMT alarm bells start ringing. In fact, I’d argue that framing the funding of the NHS in this way is only marginally better than seeing it as a charity case. In this post, I’ll try and explain why. It’ll be quite (ok very) long, but I’ve kept it as economic jargon-free as possible, so I really hope you take the time to read through and hopefully come away with a clearer idea of how government provision of services actually work.
The big problem with the taxes pay for NHS (or other government services) frame is it promotes the idea that money grows on rich people — and as a result, that rich people are thus some special species we must protect. We must nurture them, the wealth-generators, to harvest them for their taxes, without which, we can’t have the things we need to make society work. In other words, while we might want to collect more taxes from the rich, if we upset them too much, they’ll all leave the country — so now we’re even worse off than before. Or at the very least, they’ll just use creative accounting to squirrel away more of their earnings into tax havens so we won’t see any extra income anyway. More generally, just reducing their earnings in any way actively harms us — they earn less, we get less in taxes, our services suffer. We’re fed this narrative time and again, and ultimately it leads to absurd stories like this… a pay-cut to Premiership footballers will harm the NHS!
Let’s be clear what this is claiming. There will be a frontline member of NHS staff somewhere — say Charlie the nurse — who as a result of footballers having to take a pay-cut while not playing football, will have to lose his job.
Take a step back. Forget what you think you understand about economics or how money works for a second, and just try and think this through.
In fact, stop and say these words out loud:
“Because some very rich men don’t get to go out and play ball with each other, we’ll have to stop Charlie doing his job as a nurse.”
Sounds ridiculous right? That’s because it IS ridiculous.
Why should anyone not doing their job, prevent Charlie from doing his? Obviously if said person’s job produced food for Charlie, or his transport, or something else he needs to live and breathe and get to work on time each day, that might be a problem. In other words, all they key-workers we’ve suddenly realised exist — we need them to keep working. But footballers..? Not so much.
As long as Charlie is willing and able to be a nurse, our government has an infinite supply of pounds it can pay him. It doesn’t need your taxes or charity to pay him. Indeed creating money out of nothing is how all government spending works.
Oh God! I mentioned government spending and infinite in the same sentence. You’ve just put your economics hat back on, haven’t you? Inflation. Hyperinflation. ZIMBABWE!! Don’t I know what happens when governments ‘print’ money without limits?!
OK, calm down. Let’s work this through properly…
First up, I’ll concede there is some conceptual difference between the notion of Charlie receiving pounds created out of nothing from the government, and paying him with pounds directly linked to a tax or your charity donations. The former are new financial assets entering the economy, whereas the latter are the same pounds recycled from somewhere else in the economy. So on the face of it, paying Charlie with ‘new’ government money is increasing the money supply.
And with your economics hat on again, you’ve heard that increasing the money supply equals inflation. As the supply of money goes up, its value must come down — the pound in your pocket is worth less, and thus all the goods you need to buy will cost you more. Simple supply and demand. QED.
Again, slow down. Take a step back. In fact ‘money supply increase equals inflation’ is one of those ‘common sense’ bits of orthodox economics that has no basis in reality, and is completely disproved by all the actual data we see in economies across the world (if you really want a description of what happened in eg Zimbabwe, ask me in the comments).
To see why, stop thinking in abstract economic terms, and think instead about some real supply and demand you actually experience in everyday life. Take petrol prices. The average pump price of a litre of petrol in the UK at the end of January was just over 127p. Today it’s 109p [ed. this was mid-April]. That’s a 15% drop in 2 months. The money supply in the UK hasn’t shifted by anything like that in this time — and more specifically, government spending is rising significantly to meet the demands of the current crisis, so surely prices should be going up?
Of course you know why petrol prices have dropped. No-one is driving their cars, so no-one is buying petrol, both here and abroad. More generally, the demand for oil across the world has plummeted, and in turn, so has its price (indeed there’s been a way larger percentage drop in the price of crude oil — the reason pump prices have ‘only’ dropped by 15% is because of all the other fixed costs in the retail price of petrol). When demand for oil increases, prices will go back up. The point is, it isn’t the total supply of money out there driving changes in the price of oil, but money that is actually being used to try and buy oil. The same principle, give or take, is what defines prices for most goods and services. In particular, money being saved — by you me, or anyone else in the economy — is not being used to buy anything. It just sits there in our accounts, as numbers on a spreadsheet somewhere. It is not inflationary.
So now let’s go back to Charlie and our Facebook posts. “If only the government would make rich people pay their share, and collect some of all that loot in tax havens, we could actually afford a fully funded NHS”. Polls show this sentiment is pretty popular across the political spectrum. Obviously if you read the Daily Mail you hate Lewis Hamilton, whereas if you read the Guardian you hate Richard Branson — but one way or another, everyone, apart from the super-rich, hates a tax dodger.
And you might disagree on how feasible it is to actually collect those taxes (and therefore not believe it when party X includes that income in their spending plans), but assuming the government does find a way, everyone thinks it’d be great if we could use that tax as income to better fund public services.
But hold on. Those pounds we’ve just clawed back from the Cayman Islands were previously sitting in the accounts of Richy McRich doing nothing. If we now use them to pay Charlie to keep being a nurse they are every bit as ‘new’ pounds to the real economy as the government creating pounds out of thin air.
Take the following three scenarios:
(1) Richy McRich in an uncharacteristic display of generosity pledges a portion of his off-shore account to pay Charlie’s wages forever as a charitable donation to the public.
(2) The UK government in an uncharacteristic display of a government doing what it promised to do, closes a tax loophole and is able to collect from Richy McRich’s off-shore account enough to pay Charlie forever.
(3) The UK government uses its power as the sovereign monopoly supplier of pounds to pay Charlie forever.
The functional impact on the real economy — that is, what money is used to buy goods and services across the country, is identical in each scenario. But (3) had your head screaming about hyperinflation a minute ago, whereas (1) or (2) seem like the perfect win for society.
So if that’s true, does that mean we don’t need taxes at all?
Well no, of course not.
Firstly, what makes Charlie, or anyone else, want to work for the government at all?
This is where taxes come in. By making all of us pay a tax, that can only be settled using pounds (of which the government is monopoly supplier) — and moreover, having the authority to put us in jail if we don’t pay — we all have the incentive to either earn pounds by directly working for the government, or by providing good and services for people that do. The government pays Charlie to be a nurse, receiving pounds some of which he uses to pay his tax. You sold Charlie his car, or walk his dog, or clean his windows — receiving pounds from Charlie, some of which you use to pay your taxes. You use your pounds to go to the supermarket… And so on. That’s how a modern monetary economy works.
You might not realise this fundamental role of taxes –after all, it’s obvious why you need pounds when everyone ELSE values them too. But have you ever thought, why does everyone else value them too?
Put another way, the government doesn’t need our money, it needs us to need their money. That is why in MMT we say taxes drive the value of money. It is the ability of the UK government to tax us in pounds, that gives what is otherwise just a piece of paper with the Queen’s face on it (or some numbers on a spreadsheet) value.
So #1 — taxes drive the value of money.
Next, remember the first rule of MMT is: THOU SHALL NOT TALK ABOUT MMT.
Wait, that’s not true either, we bang on about it all the time!
The first rule of MMT is: “Societies are always constrained by the real resource limits of their economy”.
What does that actually mean? In this case, Charlie is our real resource.
To keep Charlie employed as a nurse, we need him to be not employed doing something else. In that sense, the government is in competition with all of us in the private sector for all the goods and services we can produce between us. If everyone has a job, and there are no more people with sufficient skills to be trained as a nurse (or a doctor or a teacher etc) the government can’t magic one out of thin air, just because it has an unlimited supply of pounds. It could double the wages of all nurses, and then offer new posts — which might cause some people to think, ‘hey, I’m going to quit my job and retrain as a nurse’. But this scenario absolutely is inflationary. The government is using its infinite supply of money to bid up the cost of wages across the economy.
So as well as driving the value of money, another important role taxes play, is to take away some of our spending power. That leaves less money in our pockets to bid away the services of Charlie or anyone else. In other words, taxes stop us (the private sector) from using real resources we might otherwise want, making them available for the government to buy and use instead.
If that seems to contradict what we said above about tax havens, the point is Richy McRich didn’t want to use his pounds to buy any more goods and services — he just wants to hoard them. That’s why he stashed them in an off-shore account in the Cayman Islands. So trying to tax them doesn’t actually free up any real goods or services this government might need.
It’s at this point people with left-wing/progressive views (and largely the people making and liking the fund-the-NHS-with-taxes Facebook posts) get a bit uncomfortable with MMT. After all, taxing the rich is a pretty core tenet of our beliefs. And now we’re saying you don’t need to? Well, fear not my lefty friends. Think about the three scenarios above. The first two actually give power to Richy McRich — it’s the money grows on rich people framing I talked about at the start. Which means if we make our public services dependent on the ability of us to get his money, we also have to accept when he lobbies the government to get his way (to reduce corporation taxes or ease environmental restrictions on his airline or make his offshore fund legal in the first place etc, etc). This is exactly how politics work now. That’s why framing the NHS as dependent on tax income is almost as harmful as framing it as being dependent on charity donations.
Whereas in scenario (3) we just ignore Richy. We don’t need him to keep Charlie as a nurse or all our other public services running. This means if you want to shut down his Cayman Islands account or whack him with a proper inheritance tax bill, or whatever, you can do so without being told ‘no, you can’t upset the wealth-generators or we’ll hurt the NHS’. Ironically, by understanding MMT and the role of taxes, you have far more freedom to insist on a more redistributive tax system (if you wish of course — others on the right may disagree, remember ultimately MMT is agnostic left vs right, by all means, fight it out, just get your economics right first).
So how about the NHS now? What are its real resource limits? The COVID crisis is showing us we’re hitting a lot of them. We can’t suddenly magic more nurse, doctors, ventilators, ICU beds or PPE in to existence. And even if people, in general, are available, they still need to be trained and moved to the required location. An unemployed ex-factory worker in Hartlepool can’t suddenly be redeployed as a nurse in London.
Some of those shortages (eg a lack of PPE orders) appear to be down to current government incompetence, but a lack of nurses and doctors (and ambulance drivers, lab technicians etc) is a long-standing problem due to the continuous underfunding of the last decade. As a proportion of the population, we had more frontline staff in nearly all our public services 10 years ago. The reason we don’t now, isn’t because we ran out of people, but because we were convinced we’d run out of money. But as you hopefully now understand, the idea we didn’t have any money is, and always was, nonsense! In other words, the real resources were always there, and thus the government always had the ability to keep buying them.
Where are all those people who could have been employed in the NHS working now? Well, Charlie’s mate Emily was training to be an ambulance driver but is now a self-employed courier delivering next-day Amazon prime parcels. Steve wanted to be a teaching assistant but works for Uber instead, and Vanessa was going to be physiotherapist for stroke victims but freelances as a PT in her local gym. Where do you think the record employment in the private sector and the gig economy has come from?
If you detect a note of sneering there, I promise you there’s none. I’m not knocking any of those jobs or the people that work in them. They clearly have value to the economy — both to Amazon, who benefit from a nice low wage driver for their sellers, but also to us, who get our gadgets delivered seemingly before we’ve even ordered them. And who doesn’t love an Uber eats?
The question for us all, then, is what we want from our economy. Or more importantly, what do we want from ourselves. Our taxes haven’t gone down to make those resources available to us as private individuals, and they won’t need to go up, if we wanted to instead shift them back to working in the public sector for society as a whole. Ultimately, it’s a political decision, far more than it is an economic one. And it’s not for me to persuade you what your what political views should be. But now you hopefully understand the economics a little better, then next time you’re clapping for all our NHS staff, have a think about what you value most.