“The purpose of government is to ensure that everyone has what they need to live a good life. That means giving every child the very best start in life, caring for people when they need it throughout their lives and ensuring needs are met through a combination of universal public services, a secure living income and the basic human right to a home. A society that meets those basic needs of its citizens provides a foundation on which to build opportunities for individuals and our whole society to flourish.”
Social Justice and Fairness Commission
Wherever you look, the media is flashing its inflation warnings. ‘UK recovery overshadowed by inflation’ says the Guardian. ‘Serious inflation is coming and the time to start addressing it is now’, intones The Telegraph. Shock, horror says the Times, ‘Sirens over inflation are going off’ and ‘if it doesn’t get on with [unwinding QE] the Bank will end up like a fire brigade with no engines, no hoses and no water.’
We are all going to hell in a handcart, is the impression that readers might gain from these pronouncements. And yet, even as the headlines aim to create fear in the same way as they do when journalists sound the alarm about the rise in public debt, they often fail to tell the real story and lead people along with flawed narratives, which in some cases lay the blame on too much government spending, rather than examining the wider context of inflationary pressures. In this case, the evidence shows that it can be attributed to the ongoing reopening up of the economy (which may not be sustainable), price pressures on raw materials like oil, and rising commodity and freight prices. However, with the CPI standing at 1.6% last quarter and still under the Bank of England’s 2% target, inflation should hardly be a cause for concern. As Professor Mitchell noted in the conclusion of his blog on May 17th.
“Clearly, some areas of our economies will experience price pressures in the coming period given the disruptions in supply and various administrative pricing decisions by governments (reversing pandemic assistance in areas like rents, energy, childcare etc).
But these pressures in some segments of the economy are unlikely to instigate a major shift to high generalised inflation rates because the capacity of workers to defend their real wages is diminished now.
Fiscal policy has a long way to go yet in reducing unemployment and underemployment from their elevated levels before that capacity becomes functional again.”
Indeed, this week, Jan Vlieghe who is a member of the Monetary Policy Committee of the Bank of England, was clear in a speech to the University of Bath that the UK was ‘not yet out of the woods’, and that whilst there was a temptation to call the increased economic activity a boom, it was, he said, ‘more accurate to call it a prospective return towards normal’. He reminded his audience that the global situation will continue to affect the economy, not to mention the prospect of the risk of higher unemployment as the furlough scheme ends. He said that since the prospects for the labour market would remain uncertain, even when the economy reopens totally (if it does) there still could be the prospect of a rise in unemployment which would be of ‘macroeconomic significance’. He rejected the suggestion that increases to the money supply, commodity prices or wages were likely to increase the inflation rate permanently above the government’s 2% target.
However, even as Vlieghe refers to normal, we should remind ourselves in this context that prior to the pandemic life for many was not ‘normal’. The impact of government policies and spending decisions, originating with George Osborne’s austerity programme which began in 2010, has devastated many people’s lives, whilst at the same time the rich have gone on getting ever richer. Indeed, the Sunday Times reported that during the pandemic, the UK created a record number of billionaires, bringing the total to 171, 24 more than a year ago.
Austerity stripped out our public and social infrastructure, leaving it struggling to function even before the pandemic arrived. It has added to the woes of a society already disintegrating under the weight of huge wealth inequalities that have built up over decades. The pursuit of neoliberal dogma which has lowered living standards and led to the degraded infrastructure has been cruelly exposed over the last year.
As a Guardian editorial noted this week:
“The reopening of our economy will reveal much weakness and high unemployment. This is a time for stimulus and repairing a broken social contract. Get people into work, especially the young, who have lost many opportunities in the past 15 months, and ensure key workers are better paid and protected. First things first.”
In short, neither Zimbabwe nor the Weimar Republic are on their way, and inflation is the last thing we should be worried about. We should instead be looking at the context at a time when there is substantial unemployment and underemployment, a phenomenon that actually precedes the pandemic and reflects the government’s misplaced obsession with cuts to public spending. It also reflects their use of unemployment as a mechanism to control inflationary pressures, by determining full employment to be anything but! Governments have, for decades, condemned too many people to a life of poverty and insecurity, whilst at the same time favouring businesses through legislation which allows wages to be kept low and employment insecure.
It is regrettable to note that according to an IPSOS Mori poll carried out for Kings College London earlier this year, many people still view poverty as a personal choice and believe that success is determined by hard work and determination. Meritocracy still rules as a guiding force in British life. The poll also revealed that even despite the exceptional circumstances of the pandemic, Britons were likely to think that job loss was the result of personal failure, rather than chance. It apparently does not seem to matter that prestigious institutions, thinktanks and charities recount week in week out the deleterious effects of poverty on people’s lives, and indeed on the economic health of the country, alerting the nation to the involuntary nature of unemployment and poverty. A divided society works for no one but the elites who push meritocracy.
Over the decades the concept of neoliberal meritocracy has held sway, the role of government appears to have become a secondary consideration. However, it has had no alternative over the past year but to prop up the economy with vast spending; clearly showing the capacity of currency-issuing governments to step up to avoid economic collapse. Such a capacity must then put into question the 10 years of austerity led policies and their consequences, which were presented as vital to the health of the public finances. The pandemic has shown without doubt that austerity was unnecessary; an imprudent policy that harmed the economy and people’s lives.
Even as the consequences of poverty and inequality become ever more apparent, our supposed freedom to be whatever we want to be has continued to be promoted as paramount, and led to a society divided by the notion of shirkers and hard-working people; lazy public sector workers against industrious private sector ones. This has enabled the government’s intent to divest itself of any responsibility for the well-being of citizens through its cuts to public spending, whilst at the same time pouring vast sums of public money into the ongoing scandal of government contracts; awarded without transparency or accountability to private companies or those with connections. No expense spared. The role of government has been subsumed into serving capital interests and endless growth, regardless of the impact on the environment and the lives of citizens.
Indeed, a case in point is the publication this week of the CBI report ‘Seize the Moment’, which focuses on addressing the long-term challenges facing the UK – ‘geographic inequalities, decarbonisation and innovation.’ No one would deny that we do indeed need to ‘seize the moment’, but how we seize it is the question we should be posing. Whilst the CBI sees partnerships, including with government, as an important part of this process and says that its members have an important role to play, it notes at the same time:
“Governments don’t create jobs. Governments don’t prepare people in the workplace for the skills of the future. Governments don’t suddenly invent new decarbonisation technologies. That’s what businesses do.”
The CBI seems to have misunderstood the primary role of government in creating an environment that is conducive to a successful economy. Governments can and should, through their policy and spending decisions, create the economic conditions for job creation, enable an educated workforce and ensure investment in research and development through universities. Investment that gives eventual life to new technologies and products that can be exploited by business.
We should not forget either the vital public infrastructure provided by government which keeps their businesses functioning, whether its education, health, or transport infrastructure. Government can also play a role in using regulation to ensure that business plays by the rules and does not overstep the mark in its search for profit. And, when trouble strikes it is only the government, not businesses, that can step in to support the economy.
Government puts in place the mechanisms to protect the economy in the event of external threats, such as disease or the cyclical downturns which afflict all economies from time to time. It does this through its spending capacity as the currency issuer, and we have seen those powers over the past year, as indeed we did in 2007 during the Global Financial Crash. When the chips are down, the government has no alternative but to act. It does not check the state of the public accounts, it just spends, even though the narrative of borrowing and taxation to fund it still sits at the forefront of both political and public understanding.
Wealth creation begins with the government, whose role is to lay the foundations for a successful economy. Not by serving profit-related interests through lobbying and the revolving door, but to serve the interests of the nation as a whole which includes those of working people. The function of businesses on the other hand is to make profits, and working people have often been the losers, given that in the current set up businesses are the beneficiaries of government policy, which may not always serve workers and their families.
The proof of failure to serve those interests is clear in the consequences of the policy and spending priorities of the current government. As reported by GIMMS last week, a damning report from End Poverty has shown that the number of children living in poverty, without sufficient nutrition, in unheated homes or facing the prospect of eviction, has shot up over the past few years in the North East. For all the promises made by Conservative politicians, levelling up still has to be translated into real action and reach those who need it.
The solution requires government action that starts with addressing poor wages and insecure work practices. As past figures have endlessly shown, many in poverty are in working families, existing on low wages and precarious employment. Marcus Rashford has done sterling work in raising money and awareness of the issues, but we should not need the charity industry or philanthropists to mitigate and pick up the pieces caused by a government that has abdicated its responsibility for those who elected them. Whether that’s rich individuals, food banks or housing charities. They are not a substitution. We need the government to do its job through spending and policy decisions that enable levelling up, through wage and employment legislation and by creating the public infrastructure which keeps the economy functioning and brings stability.
Instead, we have a government that has found how to loosen the purse strings for corporations, but is biding its time to tighten them yet again when it comes to public purpose. The revelations by Cummings told us what we already knew about the governing class, exposing an entire flawed economic system that is largely upheld by a media that has failed to hold it to account. This has had devastating consequences, not just this last year but for decades. As Aditya Chakrabortty noted in an article this week ‘it lies in a grotesque failure of the state.’ Not a mistake or an omission or a misjudgement. But the pursuit of self-interest and greed. The public purse has found its target while ordinary people have paid the price in unnecessary suffering and death, hunger, homelessness, and a degraded public infrastructure.
And consequently, daily, we are treated to media and political narratives which aim to prepare us either for further cuts to public sector spending and further hardship, or raising taxes to pay off public debt. Or at the other end of the political spectrum politicians who advocate collecting taxes from the wealthy to spend on public infrastructure. By creating connections between tax revenue and public spending, we hit a brick wall that stops us dead.
According to the first narrative, there will have to be an eventual reckoning given the ballooning public debt. This week the Treasury is alarmed as a result of its post-pandemic forecasts that claim that the value of future student loan write-offs and interest subsidies will eventually ‘hit the public finances’. Yes, the smoke and mirrors of public accounting will claim that they will, but the reality is the opposite for a sovereign currency-issuing country like the UK.
Our education system as a whole has paid a heavy price, not just in terms of cuts to funding across the board but also through its commercialisation. Universities have become fully-fledged businesses to make money and service the needs of capitalism, rather than the good functioning of society culturally, socially, and economically.
The plans to cut 50% of arts course funding because they are not ‘strategic priorities’ beggar belief. Aside from the cultural enrichment that the arts bring to people’s lives, they also make a huge economic contribution which runs into billions. In effect, the decision destroys the Treasury narrative that taxes are needed to fund government spending. Why would you in that case cut off your revenue streams? It seems that the Chancellor and his Education Secretary have lost their economic marbles. From an economic point of view, it is foolhardy and short-sighted. The future poses many challenges, and we will need to prepare for them.
In the second narrative, the Chancellor Rishi Sunak found himself under pressure from President Biden to back a global corporation tax, and the Shadow Chancellor Rachel Reeves, whilst supporting it as a mechanism to create a fairer playing field for UK businesses then spoiled it all by saying that it would bring in extra income to pay for public services.
Some on the left are like rabbits in the glare of an oncoming car – committed on one hand to creating a fairer society and addressing the climate emergency, but on the other, happy to be flattened through their adherence to a flawed economic model that suggests that affording everything a nation needs requires raising taxes at the top.
Yes, let us raise taxes on the excessively wealthy to remove some of their purchasing ability and the influence on the corridors of power that their wealth brings them, but let us stop saying it pays for government spending. Such narratives will in the end constrain public programmes, not to mention the capacity to address the climate emergency. The lack of money has nothing to do with revenue collection or the ability to borrow. The lack is a matter of political choice, and politicians pursuing an economic ideology that suits the interests of wealthy elites and their own personal gain. If that is not shocking, it should be.
This week, an article by the New Economics Foundation added to the confusion about how governments spend. On the one hand, it suggested that ‘Whenever new public finance statistics come out, what follows is: public debt fearmongering, false household analogies, and a flurry of commentary devoid of any semblance of literate macroeconomic analysis’. At first sight, a cause for a small celebration and thinking that on the ‘left’ there is a coming light at the end of the tunnel. But then it spoils it all by reinforcing the false household analogy, saying:
‘The fact that public borrowing has not been this high since the second world war is serious and should not be taken lightly. But equally, the fact that financing that debt has never been more affordable is also hugely reassuring. Yet despite having countless headlines on the former throughout the pandemic, there has been precious little attention given to the fact that the government’s debt servicing costs are at historic lows. […]
Next, they dig themselves ever deeper by suggesting that:
‘…for macro-economists, what actually counts is the cost (affordability) of servicing debt – whether the government can securely pay off debt interest payments. There are numerous “tribal” battles across the schools of macro-economic thought. Yet, there is virtual agreement across the board that public finances are sustainable indefinitely when debt servicing costs are equal to or below the growth rate of the economy. The implication, drum roll please, is that increases in public debt may not require tax rises or public spending cuts in the future. If interest rates are lower than the increase in national income, the relative debt burden will shrink with it.
Blow me down with a feather! The NEF is right back down the rabbit hole of borrowing, debt servicing costs and all that nonsense and thus reinforcing the household budget analogy. It started so well!
If we thought that after a year and more of economic pain and suffering, which has been built on the backs of decades of neoliberally inspired public policy and spending decisions (which has infected all sides of the political spectrum), that the time has come to choose another path, then for the moment at least we might be disappointed.
But without doubt, the stakes are high. We must aim to create a fairer and sustainable planet, not based on the misplaced concept of green growth which implies maintaining our current consumption or growing it further, but on the understanding that there are real limits that relate not to money but finite resources. The CBI’s ‘Seizing the Moment’ report focusing on creating an extra £700bn of economic growth by 2030 is symptomatic of the problem we face. We have to consider that we cannot continue with life or business as usual. MMT as a lens on monetary reality offers us a perfect opportunity to view the world, not from a perspective of artificially created scarcity, but as Jason Hickel, author of ‘Less is more’ calls it ‘public abundance’.
Last year, GIMMS published an article by Carlos García Hernández. In his article, Carlos quoted Stuart Chase, an American economist who wrote in ‘The Road we are Travelling’ (1942) that all economic policy must meet five fundamental objectives:
- guaranteed and permanent full employment
- full and prudent use of natural resources
- a guarantee of food, shelter, clothing, health services and education to every citizen
- social security in the form of pensions and subsidies
- a guarantee of decent labour standards.
That should be our starting point for what comes next.
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