The Lib Dems have since disappeared into irrelevance. The lib Cons are still around — and include in their number our current Prime Minister. But could the man who buried David Cameron’s premiership be the one to resurrect ID cards?

There’s no point rehashing the arguments made in the early 2000s. This is an issue in which the case for and against is prone to exaggeration. The fact is that a liberal democracy can have compulsory ID cards without sliding into dictatorship — or not have them and avoid anarchy. There are plenty of examples of both scenarios.

So, instead of having the old argument, let’s have a new one. I’ve always been instinctively opposed to ID cards, but looking at the underlying dynamics of the issue, 2020 looks very different from 2010. The most obvious — and recent — of game-changing developments is the Covid crisis. The future is pathogenic now. Even if there’s no second wave, we cannot assume a new normal in which pandemic disease risk isn’t a major policy consideration.

Suggested reading

Not so rosy: the legacy of the Coalition government

By Peter Franklin

Lockdown has restricted our freedoms in ways that make the concerns of the ID card debate look trivial. We’re now presented with plausible — indeed, likely — scenarios in which our freedom of movement and association depends on us being able to produce documented facts about ourselves: quarantine certificates; vaccination records; immunity status; test, trace and tracking data.

In terms of international travel some of this is already in force — with passports serving as the primary means of proving ID. How long before ID cards serve a parallel function as ‘internal passports’? It’s a disturbing concept, but as an alternative to general lockdown, it may be the least worst option.

Suggested reading

Should we let the aviation industry die?

By Peter Franklin

Another game-changing development is new technology. Back in 2010 we hadn’t yet woken up to the full implications of social media. We didn’t realise just how much the tech companies knew about us. A lot of people weren’t even using smartphones yet. In 2020, we still don’t know the whole story, but we’ve come to accept a significant degree of electronic surveillance in our everyday lives. Thus the idea of being easily identified doesn’t seem so foreign anymore, not when we’re identified every time we go online to shop, socialise and express our opinions.

Of course, the information flows that would be enabled through ID cards would be controlled by the state — and the state, unlike Facebook or Google, has the power to arrest and imprison you. So, the stakes are higher. But, then again, if the authorities want to track your movements and behaviour, they already can.

The last ten years have seen rapid advances across a variety of surveillance technologies, including facial recognition, gait recognition, and even heartbeat recognition. The CCTV network is ever expanding in scope and sophistication and is supplemented by drones and other mobile forms of image capture. And that’s just one form of big data collected by the various arms of the state.

In short, if you’re leading any sort of normal life, the authorities don’t need you to carry around an ID card in order to identify you.

Suggested reading

Big Bezos is watching you

By Peter Franklin

Indeed, the bigger risk may lie in not being identified. This was demonstrated by the Windrush Scandal — in which people who had immigrated to this country from the Caribbean were required to prove to the authorities that they’d been legally resident in the UK. For the Windrush generation who arrived before legal immigration was documented in the way it is now, this was difficult to do. Shamefully, longstanding UK residents were deported because they were unable to assemble the documentary evidence that wasn’t there — or, at least, wasn’t accessible. The scandal was in fact two scandals: first and foremost the inhumanity of plunging innocent people into a Kafkaesque nightmare; but also that it should be so hard to prove the basic facts of your own life.

A future full of big data will be a hyper-bureaucratic future. In our dealings with both the state and private corporations it is, therefore, vital that we have some consistent hold over the way our identities are recorded and recognised. ID cards could provide that control — a key that grants us access to what we need to know and what we want others to know about us. There’s no guarantee that the introduction of such a system would guarantee our rights, but it would be an opportunity to fight for them.

*

We also need to think about the people who slip through the cracks of the system — living undocumented, unofficial lives unsupported and unprotected by the authorities. Only a small minority of these will be citizens who freely choose an ‘off-grid’ existence — a choice that should be respected. The great majority, though, will be vulnerable adults and children, many of them illegal immigrants, some of them trafficked against their will — and all of them at risk of exploitation. A recent report from the Centre for Social Justice estimates that there may be 100,000 or more victims of modern slavery in Britain alone.

We make things easy for this vile trade by tolerating, even celebrating, a bargain basement labour market — the legal and illegal components of which shade into one another. This is further enabled by a context in which it’s still possible for people to live and work without needing to prove who they are — and without their employers and landlords having to confirm those identities. A robust ID card system that made this simple and straightforward — but also inescapable — would be a severe blow to the modern slavers, people smugglers, slum landlords and other exploiters who depend on the anonymity of those they exploit.

Of course, no such system can be foolproof, nor would it be completely free of inconvenience for law abiding citizens. However, the same can be said of our passports system. Ultimately, it is a question of comparing these potential harms against the consequences of the status quo — in which we’re neither able to fully control our borders nor to prevent the everyday violation of basic human rights.

*

What about the practical arrangements? One of the reasons why there was such resistance to New Labour’s ID cards policy was the lack of confidence in the government’s ability to manage IT projects. Indeed, the decade was marked by a series of fiascos — including one occasion when two CDs containing confidential child benefit data on 25 million people got lost in the post. Yes, really. The ensuing outrage was probably what doomed the ID policy before it was even implemented.

Is there any reason why we should have any more confidence in government today? The faltering progress on the promised test-and-trace app isn’t exactly encouraging. However, there’s no reason why governments can’t deliver ambitious IT projects. Singapore and Taiwan have impressed the world with their use of tech to control the spread of Covid. As it happens, both countries also have compulsory ID card systems. Another interesting model is Estonia, a world leader in providing online government services. Estonians can even vote in national elections online. And that’s despite the country being under constant cyber-attack. 

Suggested reading

Covid is a once-in-a-lifetime opportunity

By Peter Franklin

So if they can do it, why can’t we? Well, the fact is that we can. Any ID card system could be based on systems that have been successfully and reliably computerised. The passports system is the obvious example and an appropriate one if ID cards are re-introduced as means of exempting individuals from future lockdown restrictions. 

If HMG ever persuades the British people to accept ID cards it must be in the service of our overall convenience, not theirs. Every ID card should come as part of a package that also includes a free passport and, for those suitably qualified, a free driving license too. As in Estonia, it should provide strong authentication for access to online government services and participating private sector websites. And even if we don’t immediately follow the Estonian example of internet-based voting, ID cards could be used to provide a robust system of confirming identity for voting by post and at polling stations. 

*

Then there’s the question of electronic cash. Thanks to innovations like contactless payments and online retail we’re using less physical cash than ever. Covid has only accelerated the decline of notes and coins, whose circulation through so many hands makes them a potential vector of disease. But to do without them altogether would require some form of e-cash — that is, not a credit or debit card, but a card that carries a digital currency for making instant, frictionless payments. In other words, something like an Oyster Card, but which could be used anywhere.

Suggested reading

Why is Zuckerberg inventing a currency?

By Peter Franklin

The big tech companies smell an opportunity. Some of them, like Facebook with its Libra project, are already on the case. But do we really want private companies running the digital currencies of the future? Or do we want one of the very oldest functions of government to stay in public hands? Writing in The Guardian, the economist Kenneth Rogoff suggests one possible way forward:

“The most radical approach would be a dominant retail central-bank currency which allows consumers to hold accounts directly at the central bank. This could have some great advantages, such as guaranteeing financial inclusion and snuffing out bank runs.”

It doesn’t have to go quite that far, but if currencies do go fully digital then making sure that everyone has access to the means of exchange becomes absolutely essential. At the very least, government needs to provide some form of guaranteed basic account. But that, of course, raises the question of identification. It probably wouldn’t be a good idea to have our electronic cash on the same piece of plastic as our ID, but the two would have to be linked in some way.

*

William Gibson once said that “the future is already here — it’s just not evenly distributed”. Well, a future in which everyone is subject to constant, electronic, centralised identification is certainly on its way.

The things that were decentralised — the little bits of information we give away through our relationships with friends, family, strangers, suppliers, customers and the agencies of the state — are inexorably coming together. But that process of centralisation is not evenly distributed. It privileges the most powerful organisations and is taking place away from public scrutiny.

ID cards might just be our best chance to drag the centralisation of our data — our very identities — into the light. It’s not a question of whether we’ll be ID’d in every moment of our lives, but how.

For the Government to do “whatever it takes” will require it to spend whatever it takes — both to beat back the pandemic and to revive a devastated economy.

This year it’s projected that the US Treasury department will issue $3 trillion (i.e. three thousand billion dollars) of new bonds (a bond, by the way, is basically an IOU).

In the UK it’ll be hundreds and hundreds of billions of extra borrowing.

In the EU things are horrendously complicated by the single currency, but there’ll be colossal borrowing requirements there too — and across the world.

Interest rates are at record lows right now, but economic recovery implies that that they will at some point come back off the floor. So how will governments cope then? Will public finances be chewed up by the cost of servicing these loans? What if multiple countries default, sending the global financial system into meltdown? One way or another, the recovery could be crushed by the sheer weight of debt.

More from this author

Could free cash fix the economy?

By Peter Franklin

However, there is a way out: monetisation. This means that central banks, like the Bank of England, will be the biggest buyers of the extra debt. They will simply create new money (by electronic means rather than physically printing banknotes) and use it to buy government bonds.

Given that a central bank is owned by the state, the state effectively borrows money from itself and owes it to itself. So no sovereign debt crisis.

*

That’s how western governments get out of the economic frying pan, but in doing so will they plunge into a political fire?

The radical Left — excluded from power across the West — sees an opportunity here. In fact, it believes that it is on the brink of a historic breakthrough. We were told that there is no “magic money tree” to pay for the lavish spending plans of politicians like Jeremy Corbyn and Bernie Sanders. So how will voters react when neoliberal governments admit that these arborial wonders do exist after all?

If the limits on what a government can borrow are much looser than what we’ve been previously led to believe then the political implications are profound. This is how Thomas Fazi puts it in his recent article for UnHerd:

“All the pain, suffering and misery imposed on millions of people as a result of austerity was entirely a political choice. All the cries of “How are you going to pay for that?” were simply a way to maintain the deeply unequal relations of power in our societies. To dramatically restrict our ability to imagine economic and political alternatives. But “all of these excuses that we have been given as to why we cannot treat people humanely have suddenly gone up in smoke”, as Alexandria Ocasio-Cortez said. If money can be created out of thin air to fight a ‘ war’ against a deadly virus, doesn’t it follow that the same can be done to ‘ wage war’ on poverty, unemployment, inequality, ecological collapse – all of which are much deadlier evils than Covid-19.”

It’s a powerful argument. All the more so because unlike many of his fellow radicals Fazi recognises that the EU is an institutional roadblock to the new economics and new politics he believes in. In particular the Eurozone and European Central Bank mean that member states no longer control their own currencies — and thus can’t monetise their debt without the say so of the other member states (and some countries, like Germany and The Netherlands, aren’t keen).

But though he makes a compelling case, I don’t agree with his conclusions.

Suggested reading

Could Covid-19 vanquish neoliberalism?

By Thomas Fazi

Let’s start with austerity. I’m not going to defend the entirety of UK economic policy since 2010. In particular, I think the early decision to stick to the plans of the previous Labour government and slash capital expenditure was one of the great policy mistakes of the 21st century. To cut investment in vital infrastructure doesn’t save anything at all, it just runs up a different kind of debt — while depriving an ailing economy of much-needed stimulus.

But that doesn’t mean we should finance big increases in current expenditure and/or tax cuts through even more borrowing. Think what a no-holds-barred borrow-and-spend economic policy actually means: even if the government in question is impeccably socialist, it becomes utterly dependent on the international money markets.

Those markets have a habit of punishing fiscally unrestrained governments, by charging them higher rates of interest, in effect making further borrowing unaffordable — and even provoking a sovereign debt crisis. Britain in 2010, with its crisis-hit financial sector and depleting North Sea oil reserves, was especially vulnerable.

OK, but what if the UK government had monetised its debt instead — borrowing from the Bank of England not the money markets? If this is what’s going to happen in 2020, why didn’t we do it in 2010? The answer is that if we had, Sterling would have crashed in value sending the price of imports surging upwards and causing an inflation crisis. Interest rates would have surged too, meaning mass mortgage defaults, bankruptcy and unemployment.

Now is different because monetisation, if it happens, will happen in many countries not just one. If they monetise their debt to a roughly equal extent, then their currency values, relative to one another, will stay roughly the same.

That’s why we got away with quantitative easing (QE) when we first started using it, in the wake of the global financial crisis. Though it was a novelty back then, Britain was in the same boat as other countries.

*

Quantitative easing, by the way, can be seen as a dress rehearsal for the kind of debt monetisation that’s on the cards now. So, a quick word about how it works (or is supposed to):

First of all, the central bank magics up some new money and uses it to buy government bonds. However, in the case of QE these are previously issued bonds purchased from the money markets, not new debt purchased directly from the government. That’s because the objective isn’t to finance government spending, but to stimulate the economy.

By taking a load of bonds off the market, thus reducing their supply, the government can get away with selling new bonds that offer a lower return. Not only does this cut the cost of public borrowing, it also encourages the money markets to lend to businesses because the return they get from lending to the state is so slim.

Furthermore, QE is supposed to be a temporary measure. As soon as the economy picks up again, the central bank not only stops with the QE, it reverses (or “unwinds”) the QE it’s already done — i.e. it sells the bonds it bought back to the market and destroys the money it gets for them. In other words, the money it created out of nothing (see above) is returned to nothing and everything goes back to normal.

Suggested reading

Coronavirus will change nothing

By Ben Gummer

Or at least that’s the theory. In practice, QE has not been unwound. All or most of the money that central banks have created since the Global Financial Crisis (£645 billion in the UK alone, and trillions worldwide) is still out there in the economy. And yet it hasn’t caused the inflation that a lot of economists expected.

As for all those bonds that were purchased through QE, the central banks are still sitting on them. The Bank of England, for instance, now owns a third of the UK’s national debt. It’s all deeply weird, but now accepted as the new normal.

So, having got away with permanent QE — and faced with the urgent need to stop the Corona-crisis turning into a global depression, why not do debt monetisation directly and honestly — the central banks openly creating money to finance emergency government spending?

Indeed, why stop at a one-off response to the current crisis? Why not make this a permanent arrangement — and finance the anti-austerity policies favoured by Corbyn et al. It could be argued that Labour’s 2019 manifesto, far from being too radical, was in fact overly cautious. If there’s no effective limit to government spending, why not embrace some truly radical policies — like universal basic income (as advocated by the Pope this Easter) or a full-on Green New Deal to stop climate change in its tracks?

*

The most obvious objection is that even if sovereign governments can create as much money as they like out of thin air, the same method doesn’t work with the things that money buys.

Whether it’s energy, raw materials, machinery, goods, services or people’s time — we still live in a world of scarcity. One can certainly argue that neoliberal economics has left the economy short of demand, but the supply of most of the things we want and need is finite. If you give government the power to create unlimited demand, then supply will be overstretched and hyper-inflation will result.

The advocates of Modern Monetary Theory (MMT) have an answer to that. This new school of economic thought argues that central banks should create all the money that governments need to spend, and that the tax system should be used to remove enough money from circulation to keep prices stable.

Modern Monetary Theorists, therefore, want to turn conventional economic policy on its head. Instead of using fiscal policy (e.g. tax) to raise revenues and monetary policy (e.g. interest rates) to control inflation, it would be the other way round.

The great advantage of this topsy-turvy system is that governments would always have enough money to fund their plans (within the constraints of what the economy can produce). It should also be a lot easier to ensure enough demand in the economy to head off the threat of deflation — which has been more of a danger over the 2010s than inflation.

The big problem with Modern Monetary Theory is that it’s just that — a theory. It proposes a radically different way of managing the economy that’s never been tried before. If we tried it now, we could easily miscalculate and send prices spiralling.

Mind you, that’s what they said about QE — and we still went ahead with that.

*

If the coronavirus does force us through the MMT looking glass — and if it doesn’t blow up the economy (two very big ifs) — is there any objection to Thomas Fazi’s argument?

Yes — and it’s precisely the thing that the radical Left most likes about this brave new world: it would give government unprecedented power.

The modern state already has a monopoly on the use of violence. By and large that’s a good thing , ensuring law and order. Yet tyrants throughout history have turned it against the people. The ability of free societies to constrain that power has been hard fought.

The reason why that struggle was won isn’t just down to the courage of those that fought for it — or to their sources of ideological inspiration. It is also thanks to the fact that governments depend on their people for money. As soon as rulers can’t enslave the ruled anymore — or make us their serfs — they have to persuade us, bargain with us, make concessions to us.

And so, step-by-step, our rights have advanced. Sure, things like education and urbanisation have also helped to solidify the power of the people — but ultimately it comes down to the fact that our leaders need our money, and for that we’ll have our say. No taxation without representation!

Indeed, it’s striking that where governments don’t rely on their people for revenue — perhaps because the economy isn’t developed enough for a modern tax system or there’s a state monopoly on the exploitation of valuable natural resources — there’s little or no democracy. Think Russia or the Middle East or much of Africa.

This is what worries me most about a state that gets its money from the central bank, not the general population. It’s what especially worries me about the idea of the state providing people with universal basic income or some equivalent system. As soon as we depend on them, the power relationship is reversed.

Democracy is what happens when the people pay the government, not the other way round.

It’s a great pleasure to be here at the World Economic Forum annual meeting — better known as Davos. This year the theme is “Stakeholders for a Cohesive and Sustainable World.” Last year it was “Globalisation 4.0: Shaping a Global Architecture in the Age of the Fourth Industrial Revolution.”

Honestly, where do they get this rubbish?

Do they just write buzzwords on bits of paper and pick them out at random? Or is there a special machine, like a National Lottery draw? A random balls generator would certainly seem to be involved. What does this Davos-speak achieve? What does it change?

Suggested reading

Has a Davos backlash begun?

By Nomi Prins

What’s not in this speech

I’ll admit that’s a question that could be asked of a lot of ministerial speeches too. In fact, most of them. Normally, a speech from a Chancellor of the Exchequer at Davos would go something like this:

To start with, some awkward bonhomie, with obligatory unfunny joke. Then I’d big up the British economy — as if blather from a politician is the basis on which people like you make investment decisions.

Next, there’d be a policy section. By law, this has to be introduced with the words: “building on strong foundations.” But it wouldn’t be anything you hadn’t heard before. And, of course, that’s the idea.

The message of every ministerial speech since the British people voted for Brexit is that nothing’s really changed. But it has. Because in 2016 and 2019 people didn’t vote to keep everything the same. They voted for change.

Suggested reading

Can the Tories cling on to the Red Wall?

By David Jeffrey

Things must change

The reason for that is right here at this resort. The global elites. From business, politics, academia and the media. We’re all here to talk about the world’s problems as if they were nothing to do with us. As if the policy disasters of the 21st century weren’t of our doing. As if the electoral backlash that we failed to see coming is all the fault of the voters.

Their failure to listen to us…

…to hear what we have to say about their ignorance…

…to take lectures about their privilege from a tenured intelligentsia…

…to be moved by the advertising of woke corporations…

…to accept their lot as indebted consumers…

…or as outsourced workers….

…or as hollowed-out communities.

We make high-minded speeches about an international rules-based framework, but what too many of our people actually experience is a system rigged against their interests.

*

From their perspective, this place feels like it’s a million miles away. And they’re right. In almost every respect, it’s another world — socially, economically, culturally. But not electorally. Democracy is what keeps this Elysium tethered to planet Earth. We can’t float away.

The voices that we silence in the boardroom, the lecture hall, the TV studio — make themselves heard at the ballot box. That’s a verdict that we can’t ignore. Or overturn. Or bypass.

So, no, I’m not here to plead for corporate favour. To tell you that nothing has changed. Things will change. Things must change. And if I do have a feel-good message, it’s that, in Britain, things can change.

The state of the global economy

If I could change the title of this year’s Davos, I couldn’t do better than something that Sir David Attenborough said last week: “The moment of crisis has come.”

At the start of a new decade we have to look back at the last decade and realise that we can’t go on this way. Not in the environmental sphere. And not in the economic sphere either. It may be ten years since the last recession.

And capitalism is still standing. But I’m not going to stand before you today and pretend that all is well with the global economy. Something is badly wrong and it lies at the heart of our troubles.

Consider the following fact: in August of last year, the global money markets had 17 trillion dollars invested in negative yield bonds.

17 trillion dollars.

In bits of paper guaranteed to make you a loss. Now I used to be a banker. I understand that managed money needs to go somewhere and that, at times, a very low but reliable yield might be the best option compared to a high risk investment.

But ladies and gentlemen, these are not normal times. The conventional economics that we grew up with doesn’t work any more. We’ve now had a decade of ultra-low interest rates. But without runaway inflation.

Suggested reading

Is the British jobs miracle fake news?

By Peter Franklin

In some countries, we’ve also had a decade of job creation. In the UK, employment levels didn’t just recover after the recession — they’ve risen to new heights. Again, without the inflationary pressure that conventional economics would lead us to predict.

However, growth has been slow. Wages flat. And poor productivity a continuing drag on prosperity.

*

In the first decade of the 21st century, economists spoke of a “Great Moderation” — an end to the boom and bust cycles of the 20th century. We all know where that ended up: With the worst crash since the Second World War.

The Left proclaimed the end of capitalism. The Right worried that QE would unleash inflation. Both sides were wrong. The story of the second decade of the 21st century is the Great Zombification. A global economy that staggers on, but doesn’t respond to stimulus.

*

I think we need to question the stimulus itself. Low interest rates encourage lazy, unproductive investment. Companies borrowing to buy back their shares…

…or to buy out the competition…

…or corner a market…

…or inflate an asset bubble…

These things engineer rewards for a lucky few. But they don’t build prosperity.

Suggested reading

Why low interest rates poison the economy

By Peter Franklin

Low interest rates have a deadening effect on the banking sector too. When rates are low, margins are low, and banks err on the side of caution. Genuinely innovative businesses are starved of funds, while essentially bankrupt firms are kept on life support — for fear of recording a loss.

Capital is left tied up in all the wrong places. Killing growth. Killing productivity. Killing opportunity.

*

Who’s to blame? Let’s start with governments. They are the world’s biggest debtors — and people who owe money pay the lowest interest rates they can get away with.

But they’ve been getting away with for more than a decade now. The market keeps lending money to the state at rock-bottom prices. And that’s because it’s got nothing better to do with it. If there were enough productive uses for the world’s cash, interest rates would return to normal. But clearly, there’s a shortage.

Reforming the private sector

The key question is why. I believe it’s about the wrong incentives. We’ve made life too difficult for the inventors and entrepreneurs, and too easy for the hangers-on.

Public sector waste is an obvious problem, but there’s a parasitic load in the private sector too. The tax avoiders, the polluters, the speculators and the rentiers. All the industries that profit from the productive economy without contributing to it.

I’m reminded of what Peter Thiel said about Silicon Valley — which is that most of the venture capital that he invests goes not into product development, but to “landlords, to commercial real estate.”

It’s time to unrig the system. Public sector reform is not enough. We have to change the incentives in the private sector too.

Take the tax system, for instance. Taxing work more heavily than the unearned profits of land ownership cannot be right. And all the more so when those profits disappear abroad. Britain must and will remain a country open to talented people from around the world.

If you wish to live and work here, supplying the skills and knowledge that our economy needs, then you are very welcome. Indeed, we’ve already acted to extend the welcome offered to overseas students. However, if all you want to do is use our green and pleasant land as a piggy bank then you will pay handsomely for the privilege.

The hard truth is that much of what we call “foreign direct investment” in the UK is foreign direct speculation. And the same applies to billions of pounds of domestic investment too. A flow of capital that drives up the cost of buying or renting a home (or workplace) is the sort of investment we can do without.

Therefore we will act unilaterally on this matter, reforming the tax treatment of land and property, to support home ownership and productive enterprise.

The international order

On other issues, however, the effort to rebalance economic incentives must be international. For instance on the issue of tax avoidance, I would say this to our friends in the European Union:

Britain will not become an offshore tax haven. We will work with you to ensure that wealthy individuals and corporations pay their fair share of taxes. And, yes, that does include the tech titans of Silicon Valley. Of course, the EU will need to deal with its own tax havens.

We will also cooperate with our international partners to uphold the polluter pays principle. Earlier this month, Ursula van der Leyen, President of the European Commission, set out some ground rules for a trade agreement with the UK.

“No tariffs, no quotas, no dumping,” was her key phrase. I’m in full agreement with that.

Dumping, as you know, is when one country takes advantage of lower standards to export products at an unfair advantage. For instance, a country that continues to fuel its economy on coal — especially the filthiest kind of brown coal — would be guilty of environmental dumping. As we strive to achieve net zero emissions by 2050s we need a level playing field from Beijing to Berlin and beyond.

Suggested reading

The EU's soul-destroying rhetoric

By Giles Fraser

Open versus closed

Given the global scale of the challenges and opportunities that lie ahead, some form of rules-based international order is necessary. But it’s not inevitable though. If it’s skewed against some of the participants, it will be resisted.

Rule-makers must understand the difference between rules and their impact. Equally applied does not mean equally felt. For instance, within the EU, the UK was subject to the same rules as everyone else on free movement, but it should have been obvious that the practical effect would not be the same.

An English-speaking country with an open labour market and a non-contributory social security system was always going to be affected differently to most other EU states.

It was the refusal to take this into account that more than anything led to Brexit. As we build new frameworks, we should remember the role that flexibility plays in sound construction.

*

This applies as much to relationships within nations as it does between them. A country as a whole may sign up to the same set of rules, but the impact on different communities will not be the same.

Attitudes to global integration have come to define a new “open-versus-closed” spectrum within our politics. In many countries, it has become more important than Left versus Right. It’s why we’ve got a Conservative MP in Leigh and a Labour MP in Canterbury. The trouble is that the terminology of open-versus-closed, as used by one side only, is utterly self-serving.

Suggested reading

The deeper meaning of Open and Closed

By Peter Franklin

Working class communities are in fact more open to the disruption caused by globalisation than the professional elites secure within their regulatory barriers.

The so-called knowledge class may be more open to the idea of internationalism, but in practice their lives are lived within environments which are carefully controlled, if not closed altogether. For instance, here we are in Davos surrounded by a state-of-the-art security fence and a no-fly-zone. Where better to extol the virtues of a borderless world?

Unrigging our own rules

It’s not only the international order that needs reform. British politics is also skewed by rules of our own making. These include the Treasury rules on public investment.

Though meant to be objective these skew funding towards certain parts of the country because they are deemed to be more productive — and thus provide a greater return. It’s a catch-22 that ensures that other parts of the country don’t get the investment in research, skills and infrastructure that would make them more productive. 

This too must change — and it will.

I’ve already ordered a comprehensive re-write. We will also go much further in transferring power from the centre to our cities and towns far beyond our capital. The people of this country did not vote to take back control from Brussels only see it stuck in Whitehall.

And I promise it won’t be.

Conclusion

Ladies and gentlemen, there are two equal and opposite errors made about capitalism. On the Left, it’s that the system is a flimsy construction, about to collapse under the weight of its contradictions. On the Right, it’s that the market is a force of nature, a fundamental property of the universe that only the over-mighty state can interfere with.

Neither is true. Given the chance, people will trade freely with one another. However it is government that gives them that chance. Capitalism relies on a framework of law and justice.

Right now, however, the rules aren’t fair — if indeed they work at all. We must either change them — or have them changed for us.

Thank you for listening.

ENDS

Some things, though, never change. Then, as now, Oliver Letwin was in the news. He’d just given a speech on the theory of Cameron Conservatism. It still makes for a thought-provoking read. The timing, however, was spectacularly unfortunate.

Letwin’s central argument was that “politics — once econo-centric — must now become socio-centric”; or, as he also put it, “instead of being about economics, politics in a post-Marxist age is about the whole way we live our lives; it is about society.”

Yet, as he spoke those words, the first dominoes were falling in the Global Financial Crisis of 2007-08. By September 2007, it engulfed the Northern Rock building society — a shocking event, but a mere curtain-raiser to what was to come. The credit crunch turned into a banking meltdown which turned into the Great Recession which turned into the long, hard slog of austerity (punctuated by the Eurozone crisis and the immiseration of Greece).

Suggested reading

The permanent punishment of the Greek people

By Peter Franklin

Contra Letwin, politics became intensely, almost exclusively, “econo-centric”. It stayed that way for years. Today, though, it’s as if it never happened. If, outside the business pages, the state of the economy is considered at all, it is usually through the lens of a hotter story.

What explains our economics amnesia? Is it because the problems of capitalism were all sorted out five years ago and we can afford to worry about something else? Or were the problems massively over-hyped ten years ago — meaning there was nothing to worry about in the first place?

Or, much more likely, have we been so distracted by the political consequences of the last financial crisis, that we’ve left ourselves unprepared for the next one?

*

If you’ve forgotten what we argued about before Trump and Brexit then, trust me, it was economics. The subject dominated the headlines and the leader columns. Any journalist who knew the difference between a debt and a deficit saw their careers flourish.

Robert Peston, officially BBC business editor (later economics editor), became king of the news. Economists like Thomas Piketty became best-selling authors. Books about finance and financiers were made into Hollywood movies. Central bankers, meanwhile, were treated as if they were film stars.

Of course, the experts did have some uncomfortable questions to answer, like “why didn’t you see this coming?” But mostly they got away with it because the media and the politicians hadn’t seen it coming either. In any case, the hard questions soon moved on to the future of the capitalist system. For instance, did it have one? At very least, it became acceptable — indeed, fashionable — to express doubts about the neoliberal version of capitalism.

The “before” and “after” of this shift in mood was a wonder to behold. On the eve of the crisis, Oliver Letwin could confidently state the following:

“…the capitalist/socialist debate has in general ceased to dominate modern politics. From Beijing to Brussels, the free market has won the battle of economic ideas.”

As it turned out, the debate wasn’t quite done-and-dusted. The country didn’t turn to socialism, but with private banks being taken into public ownership it was clear that the world had changed. The Conservatives took too long to realise this and it cost them dear. Gordon Brown regained a brief moment of relevance (“this is no time for a novice”) and Vince Cable seized the intellectual initiative.

Suggested reading

Where did the Church's land go?

By Giles Fraser

Meanwhile, on the streets, the Occupy movement was physically bringing capitalism to a halt, if only in some city centres. But, crucially, it wasn’t just the Left on the warpath. The conservative heartlands were up in arms too — with elements of the media giving voice to their anger.

An ingenious piece of research helps to quantify this phenomenon and the economics news boom more generally. You can read about it in a post by Tony Curzon Price and colleagues on the Rebuilding Macroeconomics blog:

“We collected the entire online corpus of the Daily Mail money section since 1998 — 240,000 articles. We used Google’s text analytics tools to extract entities like firms, places and subjects from the articles. We used Google’s emotion detection tools to identify the valence and stridency of the emotions in each article.”

What they found was a huge increase in stories about “rip-off” companies:

“Before 2004, there were about 10 rip-off stories a week; this rose slowly to around 15 before the GFC, when it rose rapidly to around 30, peaking in 2010. It then fell back but has settled at a level above 20 rip-off stories per week.”

The peak in coverage coincided with a peak in the emotional negativity of the articles. Furthermore, as a breakdown of the subject matter reveals, it was news about the financial sector driving these trends.

*

And yet what did all that fear and anguish amount to? For all the earnest discussion of radical reform, capitalism today doesn’t look much different from capitalism before the crash. Nationalised banks have returned to private ownership, while those in charge escaped with their riches and all but one of their knighthoods. Move along, nothing to see here.

The news agenda did move along. By the middle of this decade, non-economic events were grabbing our attention: conflict in the Middle East, the refugee crisis, the rise of populism at home and abroad.

In 2015, Robert Peston quit his role as BBC economics editor to become ITN’s political editor. It was a canny move — because, in 2016, the Trump and Brexit earthquakes remade the landscape. It was all about politics now; the economics news boom was well and truly over.

Suggested reading

The global economy has gone mad

By Peter Franklin

We now study the minutiae of Parliamentary procedure, not the minutes of the Bank of England’s monetary policy committee. Where we once put names to faceless bankers, we now make celebrities out of EU bureaucrats.

Books that explain politics have displaced books that explain economics. For instance, the super-productive Mr Peston hit the shelves with How Do We Fix This Mess? The Economic Price of Having it All and the Route to Lasting Prosperity in 2012, then changed tack with the compactly titled WTF? in 2017. Or take the example of another former BBC economics editor, Evan Davis, who offered us his Made in Britain: How the Nation Earns Its Living in 2011, but followed up with Post-Truth: Why We Have Reached Peak Bullshit and What We Can Do About It in 2017. 

Arguably, the book of the financial crisis was The Big Short by Michael Lewis, which was published in 2010. He stuck with finance and economics with subsequent books, but with The Fifth Risk in 2018 he too had switched to politics (specifically a study of the machinery of government under Donald Trump).

Even among anti-capitalist protestors, we’ve seen a shift in focus. The radical egalitarians of Occupy have given way to the radical environmentalism of Extinction Rebellion.

*

Of course I don’t mean to suggest that we’ve stopped talking about the economy altogether. You can read all about it in the business section of any newspaper that still has one. The Economist still covers economics. The money pages of the Daily Mail are still about money, even if the tone isn’t as angry as it used to be.

But however good the specialist coverage, it is the mainstream news agenda that really matters. For all the importance of the internet and the detailed information it can provide on almost any topic, it is worth remembering that somewhere in the offices of every powerful man and woman on the planet there will be a table on which the day’s newspapers are laid out. It is the front page headlines that the decision-makers see every time they walk past, not the inside page analysis.

If the economy gets a look-in at all, it is typically within the context of higher profile issues. In Britain that means Brexit. To see what I mean, have a look at the blog of the BBC’s current economics editor, Faisal Islam. It started in July of this year, and, as of the 25 October, there have been nineteen posts so far. By my count, sixteen are mostly about Brexit; only one doesn’t mention Brexit at all.

Of course, Brexit matters a lot — not least to the economy. But the unrelenting media focus means that we’re not paying attention to important economic developments that have little or nothing to do with the B-word.

For instance, any story about a car factory closing or being scaled back in the UK turns into a slanging match over the impact of Brexit uncertainty. Meanwhile, we miss the much wider story about the technological disruption of automotive manufacturing around the world. What may turn out to be one of most consequential developments of the next decade — Germany’s industrial crisis — doesn’t get the attention it merits.

Suggested reading

What if Germany's economy toppled?

By Peter Franklin

And that’s not the only story we’re missing. In August this year, global investment in negative yield bonds hit $17 trillion — a truly bizarre and worrying phenomenon, and yet one that most members of the news-consuming public will be completely unaware of. That’s bad, because if we don’t hear about it then our politicians won’t care about it. Conventional monetary policy has basically collapsed, but it hardly features on the political agenda.

I wonder how many of our 650 MPs know what a negative yield bond is or could provide a cogent explanation of their attractiveness to the money markets — and what that says about the state of the global economy?

I don’t know the answer, but I suspect it’s roughly as many MPs who knew or cared about what was going wrong the last time it all went to shit.

No, I don’t mean Brexit — after all there’s nothing especially odd about a major economy having its own trade policy and controlling its own borders. What I’m talking about has no precedent: helicopter money.

Suggested reading

Why is Zuckerberg inventing a currency?

By Peter Franklin

What used to be a wild ‘thought experiment’ among economists is now closer to actually happening than ever before. If it does, we, as citizens, need to be prepared — because there are profound implications for the conduct of economic policy and, I’d argue, our entire system of government.

So, here’s what you need to know now before it happens. Let’s start with the most basic question:

What the heck is helicopter money?

Helicopter money is money that a country’s central bank (which in Britain is the Bank of England) creates out of thin air and then gives to the government or directly to citizens in return for… nothing. Though the process of money creation (and distribution) would be done electronically, it’s basically the same thing as printing off bank notes and handing them out.

It’s called helicopter money because the economist Milton Friedman once compared the process to a helicopter dropping banknotes over a crowd of people waiting below. In practice, the distribution would be more orderly. For instance,  a sum of money could be transferred into the bank account of every qualifying recipient; or it could happen indirectly, the money going to the government to fund tax cuts or extra spending. Either way, the purpose is to increase the money supply and stimulate demand in a slowing economy.

Doesn’t this sort of thing cause inflation?

It could, and at various points in history it has — sometimes triggering hyperinflation.

However, central banks, especially in the Eurozone and Japan, are more worried about deflation — a sustained, growth-killing fall in prices. That’s why governments instruct central banks to do what’s necessary to maintain a low, but positive, inflation rate — typically 2%.

Suggested reading

Is too much money a bad thing?

By Peter Franklin

To stop inflation from over-shooting the target, central banks put up interest rates to discourage borrowing and thereby shrink the money supply. This decreases demand for goods and services — and thus lowers prices. However, since the financial crash of the last decade, the big challenge has been to stop inflation from under-shooting the target. There’s been too little demand in the economy, which is why central banks have cut interest rates to encourage borrowing. More money floating around the economy ought to push up prices just enough to hit the inflation target.

But here’s the thing: despite cutting interest rates to record lows, the anticipated inflationary pressures have failed to materialise — in fact, central banks have struggled to produce even the small amount of inflation they need to hit their targets.

With interest rates on the floor, what else can central banks do?

Weirdly, zero isn’t as low as interest rates can go: some countries have experimented with negative interest rates — meaning that it is the lender not the borrower who pays interest on the loan.

You might ask why anyone would lend money on these terms. But for large organisations who manage massive piles of cash, it might be the least worst option if other stores of value are riskier. Think about it as paying someone to look after something valuable for you.

However, there are limits to how far interest rates can go into negative territory. Too far and the economy starts seizing up — as people do what’s necessary to protect their money from evaporating before their very eyes. For instance, they could send it abroad or convert it to illiquid assets like gold. This would defeat the main objective of reducing interest rates, i.e. to increase the money supply.

Therefore, when interest rates really can’t go any lower central banks need a completely different way of expanding the money supply. Which brings us to quantitative easing…

What is quantitative easing?

Quantitative easing, or QE, was first used in the wake of the 2008 financial crisis. Here’s how it works:

The central bank creates money out of nothing. It then uses it to buy up financial assets, mostly government bonds, from financial institutions like banks, pension funds and insurance companies.

This has several effects. Firstly, it provides a big injection of cash into the financial sector. Secondly, all that extra demand means that bond prices go up and the return they need to provide to keep investors interested goes down. Anyone looking for a higher rate of return therefore needs to move their money into other, somewhat riskier ventures. In theory, there ought to be a cascade of lending and investment throughout the economy, thereby stimulating consumption and enterprise.

Suggested reading

The most important policy we don't talk about

By Peter Franklin

When central banks, at the direction of governments, started QE, there were warnings that this would unleash inflation. But, as was the case with slashing interest rates (see above), it didn’t. Even with close to full employment in America, Britain and the privileged parts of the Eurozone, there’s been little sign of the economy overheating — despite all those QE money injections.

In any case, QE can be reversed — or ‘unwound’, to use the jargon. A central bank can sell the assets that they’d previously purchased from the finance sector. The money generated by the asset sales would then be destroyed — remember it was created out of nothing in the first place and the central bank would return it to nothing. This would obviously shrink the money supply back down again and cool any overheating in the economy.

Indeed, this was always the plan: QE was never supposed to be permanent — just a temporary shot in the arm during the trauma of the Great Recession and its aftermath. Once things were back to normal, QE would be unwound and interest rates put back up again.

But there was no return to normal. Ten years after the end of the recession, QE has not been unwound. Interest rates remain on the floor — and deflation, not inflation, remains the main threat. Indeed, with worrying signs of a new economic downturn in Europe, the European Central Bank has recently restarted QE.

If QE doesn’t cause inflation, what’s wrong with doing more of it?

Well, the clue is in the question — QE was meant to cause enough inflation to end the danger of deflation and return the economy to ‘normal’, but in this respect it’s proved to be weak medicine. What’s more, QE has damaging side effects. By pushing up asset values, it widens wealth inequalities between people who own lots of assets (like bonds, shares and property) and those who don’t.

Suggested reading

How much trouble is the economy in?

By Peter Franklin

Hence the argument that the central banks need an alternative to both interest rate cuts and QE, which is where helicopter money comes in.

How does helicopter money differ from QE?

With QE, the central bank creates money and transfers it (via asset purchases) to the financial sector. To have the desired impact, the institutions that make up the financial sector need to lend that money to the rest of the economy, i.e. to individuals, private companies and public sector bodies, who’d use the supply of credit to buy things and make investments.

There’s a number of reasons why this hasn’t worked. Firstly, rather than lend the money out, financial institutions have stockpiled cash and assets. Secondly, individuals, enterprises and governments have been reluctant to borrow and spend — especially those with too much debt already. Thirdly, a lot of the money that has been borrowed has been used to finance the wrong things — like property speculation and keeping failing ‘zombie companies’ alive (thus tying up capital and talent that might be more productively used elsewhere).

Suggested reading

You can keep your free money

By Peter Franklin

Helicopter money, on the other hand, would by-pass the financial sector and go straight to the ‘real economy’. Furthermore, the recipients would get it without having to go deeper into debt, making it more likely that they’d spend it. Thus, in theory, it would not suffer from the impediments that stopped QE from working.

If it worked too well and sent inflation soaring above the target, central banks would have plenty of tools to calm things back down again. Stopping the helicopter money, unwinding QE and putting up interest rates would all be options.

OK, but nobody serious is serious about this, are they?

Adair Turner, former chief of the Financial Services Authority and the CBI, is an advocate of helicopter money. The economist Frances Coppola wrote a book this year making the case. There’s an argument for it in a recent report from Deutsche Bank. It’s now regularly discussed as a possibility by financial journalists and investors (if not always supportively).

So far, we haven’t had any senior politicians or serving central bankers stick their heads over the parapet, but if (or when) there’s another recession and nothing else is working, the pressure on the decision makers will become intense.

Remember that before QE happened it was seen as a purely theoretical idea — and far too unconventional for monetary policy in the real world. But with the financial crisis at the end of the last decade, the tried-and-tested options were exhausted one-by-one, leaving QE as the next untried option. 

Now, it’s helicopter money that is the next untried option.

What are we waiting for, then?

Helicopter money could be a powerful policy instrument, but it reeks of desperation. Unlike the obscure technicalities of QE, we’d all notice if the state started giving us cash-stuffed envelopes. Suspicions of this free lunch could shake rather than bolster consumer confidence — a counterproductive outcome.

Central banks could make their move less obvious to the public by giving the money to governments to spend on our behalf. Except that would be illegal under Article 123 of the Treaty of the Functioning of the European Union. Britain might be free of this restriction after it leaves the EU, but that probably wouldn’t be the best time to turn on the printing presses. Besides, it is the Eurozone that’s at the greatest risk of deflation, so it’s the European Central Bank that should take the initiative.

Suggested reading

What if Germany's economy toppled?

By Peter Franklin

If the ECB found a way around Article 123, helicopter money would still be a political minefield. For instance, if the cash went directly to individuals would all Eurozone citizens get the same amount per head or would it be pegged to average income in each member state?

Once a central bank starts handing out cash to citizens or to governments, the distinction between monetary policy (interest rates, QE, etc.) and fiscal policy (tax, benefits, etc.) becomes blurred. Indeed, the central bank starts to look like a government — which is awkward in a democracy because it isn’t elected. Within the context of the EU and the Eurozone it’s especially awkward, because monetary policy would be seen as a means of integrating fiscal policy by the monetary backdoor.

Any other problems?

According to a post on the Bank of England’s staff blog, issuing helicopter money would make the central bank technically insolvent. That’s because creating money means that those who get it have correspondingly bigger deposits with their banks and the banks, in turn, have correspondingly bigger deposits with the central bank. From the central bank’s point of view these are extra liabilities. In the case of QE, that’s doesn’t matter because in buying up bonds it acquires assets that balance the liabilities. But with helicopter money the central bank acquires new liabilities (an inevitable consequence of money creation) but no new assets — because it doesn’t get anything in return for the money it gives away.

That doesn’t matter if the general bank doesn’t have to pay interest on the deposits it holds. But that implies that interest rates would have to stay at zero forever — meaning the economy would never get back to normal.

Another hazard is that government gets a taste for helicopter money — after all, it’s free! It’s meant to be a one-off emergency measure, and no doubt that’s how it would be sold to a sceptical public. But that’s what they said about QE and yet, rather than being temporary, it’s become a fixture of economic policy. Helicopter money could prove to be equally addictive, if not more so — which would leave the solvency of the entire system dependent on permanently supine interest rates.

What’s wrong with zero interest rates forever?

Ultra-low interest rates are the result of a low growth economy; but, with vicious circularity, they’re also the cause of it. As I’ve argued before, cheap credit destroys enterprise by making banks risk averse and by increasing ‘market concentration’ (i.e. reducing competition) in the real economy.

Ultra-low interest rates are the economic equivalent of empty calories. They feed a bloated, sluggish form of capitalism — to the detriment of risk-taking, innovation, productivity and wage growth.

Suggested reading

Why low interest rates poison the economy

By Peter Franklin

Enterprising, inventive, fast-growing economies have no trouble avoiding deflation because with so many opportunities to invest in a brighter, more prosperous future, there’s a constant demand for money. A hunger to commit today’s resources to building tomorrow’s bigger, better economy is a good thing, but of course it pushes up interest rates.

Loaded up with debt, governments have a perverse incentive to suppress investment in genuinely productive economic activity. If, through the use of helicopter money, we load up the central banks with liabilities we’ll only make the problem worse.

Interest rates used to be big news – capable of grabbing headlines with every move up or down. But now that they’re on the floor, no one wants to know – the news just steps over them, looking for where the action is.

Suggested reading

The global economy has gone mad

By Peter Franklin

Interest rates aren’t dead, of course, only sleeping. Indeed, economic policy has become a dream world, filled with financial phantasmagoria like quantitative easing and inverted yield curves. And there’s fevered talk of even stranger stuff – like Modern Monetary Theory, People’s QE and ‘helicopter money’.

And yet the weirder it gets, the more disconnected it becomes from mainstream politics – and thus democratic accountability. In the past, when interest rates (as in central bank base rates) were significantly higher than zero and liable to substantial cuts and hikes (sometimes by entire percentage points!), voters paid attention because each change had a direct and understandable impact on things that people cared about – like whether they could make that month’s mortgage payment.

These days, however, esoteric policy instruments like QE lack relatability and thus don’t get the attention they deserve.

Ultra-low interest rates have all sorts of nasty side effects that impact upon us all. Previously on UnHerd, I took a look at what they do to the corporate sector (they make big businesses bigger and lazier), but today I want to focus on the banking sector and a great Bloomberg article on the subject by Satyajit Das.

The point of cutting interest rates is to encourage borrowing, consumption and investment and thus pep up the economy. And yet, since 2008, we’ve gone through an entire cycle of crash, recession and recovery without interest rates ever really getting off the floor. In fact, they’re so consistently low that at times of slowing economic growth governments can get away with selling negative yield bonds on which the buyer is guaranteed to make a loss (a seemingly crazy form of investment that I try to explain here).

And yet ultra-low interest rates as set by central banks don’t necessarily translate to a borrowing boom:

“As interest rate margins contract and profits are squeezed, banks raise fees or turn to other revenue measures to boost earnings. This keeps actual borrowing costs relatively high, undercutting the whole point of a negative rate policy.

“As the economy continues to sputter, desperate policymakers slash rates more and more deeply. Government bond yields grow increasingly negative and the yield curve flattens. Banks, which hold substantial amounts of government debt, see their profits decline even further.”

Banking is a low margin, high risk business at the best of times – so when those margins are squeezed even tighter (thanks to very low interest rates), lending policy becomes super-cautious, which, as Das points out, “perversely reduces the amount of credit available”.

Suggested reading

Why low interest rates poison the economy

By Peter Franklin

Part of this pathological caution is refusing to pull the plug on failing businesses:

“Negative rates distort incentives. Facing declining profits, banks grow reluctant to foreclose on distressed borrowers. They extend lifelines to zombie companies, which can service their debt when interest rates are so low even if they have no prospects of repaying the principal.”

This might seem like a mercy, but it really isn’t. For fear of recording a loss, the banks leave capital tied up in moribund, low productivity firms when it could be invested in dynamic enterprises that fuel innovation, productivity, job creation and higher wages.

Another argument for ultra-low interest rates is that they persuade savers to spend more of their savings. But this doesn’t necessarily follow either. Das reminds us that because regulators require banks to hold a minimum level of savers’ deposits, the interest rates on savings accounts have to stay high enough to keep savers saving. In any case, the sullen weirdness of the economy doesn’t exactly encourage savers to splash their cash.

Ultra-low interest rate policy, suffers the same psychological drawback as expansionary fiscal policy (i.e. government spending like a drunken sailor in port). People aren’t fools and know that the central bankers and politicians wouldn’t be resorting to such measures if they weren’t desperate – and that they wouldn’t be desperate if the underlying situation wasn’t dire. Spooked by their leaders’ rictus smiles and sweating brows, consumers and investors go to ground instead of rekindling their animal spirits.

Is there anything that can be done? Well, it’s not all the fault of the banks – because they’re not the only source of investment capital. A lot of businesses (and wealthy private individuals) don’t need to borrow, they’re already sitting on massive cash-piles – but aren’t investing the money, not even in themselves.

This points to the real problem – a chronic lack of investment opportunities. For all the talk of technological revolution, especially robotics and artificial intelligence, it seems to be making remarkably little difference to the economy.

Suggested reading

Sod the singularity

By Peter Franklin

It’s a point well-made in another Bloomberg article by Noah Smith:

“…if robots were taking over, there would be plenty of additional evidence in the economic data. Businesses would be investing more, in order to build and install the robots. College-educated workers (who build and run the robots) would see a growing wage premium. And most importantly, labor productivity would be accelerating, as the amount of human labor shrank and machines assumed more tasks. Yet none of that is happening.”

The ultimate proof is interest rates. If the technological potential for productivity improvements existed in more than a few specialist sectors, then there’d be much more demand for investment capital – and thus much higher interest rates.

In short, persistently low interest rates are nothing to celebrate; there’s no clearer sign of long-term economic stagnation.

But what happens when Right-wing governments end austerity, turn on the spending taps and cut taxes? Given the expectation that Boris Johnson and Sajid Javid will come up with a giveaway Budget, the Left is having to ready a new line of attack. There’s an early taste of it in a recent New Statesman editorial:

“In common with Donald Trump, who has presided over the largest US budget deficit since 2012 (4.7% of GDP), it would be unsurprising if Mr Johnson allows government borrowing to rise by cutting taxes and increasing spending – one could call it reactionary Keynesianism.”

Keynesianism refers to the economic theories of John Maynard Keynes. Rather more loosely, it’s also used to describe any policy of stimulating the economy through higher expenditure and/or lower taxation. It’s a label and approach typically championed by the Left, so what might make Keynesianism reactionary?

Further reading

Why low interest rates poison the economy

By Peter Franklin

As far as I can tell, the first person to write about reactionary Keynesianism was the American Socialist Michael Harrington. In a 1966 Encounter article (and also in a 1972 piece for the New York Times) he credits the concept to JK Galbraith. Basically it means a government giveaway that fails to achieve progressive purposes.

Examples might include blowing a surplus on tax cuts for the rich or a war in the Middle East. Then again, the Left would probably deem any expenditure signed off by Johnson and Javid to be either inadequate or misdirected, so they might as well blow the lot on a 500 ft statue of Margaret Thatcher.

There’s another pre-emptive strike on Conservative economic policy from Larry Elliot in The Guardian. But more than a mere critique of what the Conservatives might be about to do, it’s a devastating analysis of both Conservative and Labour economic policy since the 1990s:

“For decades Britain has consumed more than it has produced, with the result that the UK has the biggest deficit on its current account of any member of the G7…

“The economy was kept going through the boom years of the 1990s and 2000s because cheap imports meant inflationary pressure was weak and interest rates could be kept low, allowing consumers to load up on debt to buy ever more expensive real estate. Rising property prices made people feel richer than they actually were. They borrowed to trade up to bigger homes and they borrowed to fit them out. Personal indebtedness soared.”

This economic model has biased opportunity to the South (especially London) and to the asset rich baby-boom generation – who have run up debts while making precious little provision for their impending old age. Younger generations, already struggling with the rent and mortgage payments, are poorly placed to shoulder the burden.

As Elliot puts it, “Britain has a trade deficit problem, a London versus-the-rest problem, a debt problem, a housing problem and a care problem.”

Further reading

Why aren't the Tories talking about economics?

By Peter Franklin

He’s absolutely right to take the long view. The new economic policies unveiled at each Budget or even at the start of a new government are less important than what doesn’t change, i.e. the prevailing economic orthodoxy. If that is fundamentally flawed, and the government does nothing about it, then everything else is just sticking plaster.

I do differ from Elliot in his analysis of what happened in the crucial decade of the 1990s, though. His chain of cause and effect (cheap imports → weak inflation → low interest rates → borrowing boom → runaway house prices) doesn’t tell the whole story.

Another way of looking at it is this: to pay for the persistent trade imbalance, there had to be a compensating inflow of foreign investment – the current account deficit can only be as big as the capital account surplus. Successive governments encouraged the inflow by promoting the UK as a place to buy up assets, e.g. British property and British companies. This increased demand for sterling, pushing up its value on the currency markets. This in turn meant lower interest rates, cheaper imports and less uncompetitive exports – thus further exacerbating the trade gap. For a while, the vicious circle can be sustained because loose monetary policy allows more borrowing and thus rising asset prices, which attract further foreign capital.

Though it has precedents in the Thatcher era, this is essentially a New Labour economic strategy – exactly what one would expect from a government committed to a major expansion of the welfare state, but without the growth rates or tax rates necessary to pay for it. That left public sector borrowing as the only way to raise the money directly – plus the indirect boost provided by private sector borrowing.

Of course, to keep the money flowing in it has been necessary to turn the British economy and property market into a convenient piggy bank for the world’s loose change – with all the damaging consequences described above.

The austerity (plus quantitative easing) of the Cameron and Osborne years may have seemed like a change of direction, but in fact it was just a reaction to the financial crash they inherited from Gordon Brown (borrowing booms tending to end badly). They left the underlying economic model largely untouched – which is why they moved so quickly to get house prices inflating again.

Osbornomics was followed by Theresa May’s “economy that works for everyone”, but was nothing much of anything really. Now we’ll have to see whether the “end of austerity” under Boris Johnson amounts to anything more.

If all it provides is a Brexit-ready stimulus without underlying structural change then the charge of reactionary Keynesianism will be well deserved – though equally applicable to previous governments.

Further reading

Ten years after the crash, we should still be terrified

By Peter Franklin

Larry Elliot sets out a test of the current government’s willingness to tackle the country’s deepest economic problems:

“Being tough on the causes of Brexit means changing the culture of business so that it boosts investment. It means rethinking the role of the state so that Britain leads rather than follows in the fourth industrial revolution. It means spending more on infrastructure, especially in the north. It means a mass housebuilding programme. Put simply, it means doing stuff not normally associated with politicians who think the free market is always right.”

I agree with almost all of that – except that one’s attitude to the free market isn’t the real issue. Whether right or wrong, the market works within the framework of public policy and what it incentivises. So what counts is whether government seeks to support a genuinely enterprising, inventive UK economy or prefers to keep the plates spinning on what amounts to a country-sized Ponzi scheme.

Innovation or speculation? The choice is ours.

If you didn’t know, you probably wouldn’t guess that the £ is a stylised letter ‘L’. At first glance that doesn’t make much sense, but it’s derived from the Latin libra pondo, which means ‘a pound by weight’. Strictly speaking, the first of those two words refers to the unit of measurement and the second to the act of weighing something (it’s the root of the verb ‘to ponder’). However, it was pondo, not libra, that was adopted by speakers of Germanic languages as the unit, eventually becoming ‘pound’ in English.

Suggested reading

The three myths about free markets

By Jesse Norman

Languages derived from Latin stuck with variations of ‘libra’, hence the French word Livre and the Italian Lira. Even in medieval and early modern England, it was natural for educated people (who knew Latin and French) to use an ‘L’ as a Pound sign. The libra connection also explains why the abbreviation for ‘pound’, as in a unit of weight, is ‘lb’.

*

There’s now a 21st-century twist to this tale. Last week came the news that Facebook is launching an electronic currency – called ‘Libra’.

Like the Pound (£), the Dollar ($), the Euro (€) and the Yen (¥), the Libra will have its own symbol – an obscure character called the triple tilde, which looks like this: ≋

Unless you’re a mathematician studying the geometrical concept of congruence, it’s unlikely that you’ve ever seen a ‘≋’ before. However, if the Facebook project succeeds it might not be long before you see it everywhere. Though it may flop or stay stuck in some niche application, there’s a chance that Libra could become a global currency – and, perhaps, the universal means of exchange.

But why would anyone want to convert their £ or $ into ≋?

Libra is a blockchain-based cryptocurrency, and if ‘crypto’ is your thing there are various options to choose from. A few of these have become pretty significant – most (in)famously, Bitcoin. However, they also have limitations as a mass medium of exchange – including obscurity (not enough people have even heard of them, let alone accept them as payment), complexity (just too difficult to use), insecurity (vulnerability to hacking and other criminal activity) and volatility (wild swings in value compared to conventional currencies).

Suggested reading

Is community crypto the future of money?

By David Z Morris

Can Libra overcome the limitations? Well, for a start, it has Facebook behind it – plus Facebook’s partners in this venture, which include Uber, Vodafone, PayPal and Visa. If anyone can create and promote a digital currency that is widely used, user-friendly and secure, it’s this lot. But what about the volatility problem? What’s to stop privately controlled, electronically-issued scrip from crashing in value?

An extremely useful TechCrunch briefing by Josh Constine explains how Libra would anchor itself:

“The idea is that you’ll cash in some money and keep a balance of Libra that you can spend at accepting merchants and online services…

“Each time someone cashes in a dollar or their respective local currency, that money goes into the Libra Reserve and an equivalent value of Libra is minted and doled out to that person. If someone cashes out from the Libra Association, the Libra they give back are destroyed/burned and they receive the equivalent value in their local currency back. That means there’s always 100% of the value of the Libra in circulation, collateralized with real-world assets in the Libra Reserve.”

Assuming that all works, the next question is: why use it as opposed to all the other online payment systems out there? The big promise with Libra is that transaction fees will be much lower than for, say, credit cards. This would cut costs for vendors – and reduce the friction of online commerce. Constine points out that Facebook already has a relationship with 7 million advertisers and 90 million small businesses. The other participants in the venture can contribute millions more relationships. If transaction costs (in hassle as well as money) really are significantly lower than established systems, then that’s a potentially enormous number of vendors who’d not only accept but encourage payments in Libra.

Suggested reading

How robots could set the developing world free

By Peter Franklin

Then there’s the billions of people in the world who have limited or no access to financial services. The involvement of nonprofit organisations dedicated to financial inclusion (such as Women’s World Banking and Kiva) points to a global and humanitarian level of ambition. An especially interesting market is made up of the world’s 100 million+ migrant workers – who in 2018 sent $689 billion back home (including $529 billion to low and middle income countries). Transaction costs on these remittances are notoriously high and reducing them substantially would make a huge difference to the recipient countries. It would also spread Libra’s reach across the planet.

So, yes, Libra has the potential to become a global currency used by rich and poor alike. A pre-emptive backlash is already underway. The currency has acquired some unfortunate nicknames such as ‘Facebook crypto’ and ‘ZuckCoin’ – attesting to fears that the Silicon Valley behemoth and its CEO, Mark Zuckerberg, are already too powerful. Do we really want to give it – and him – control of the world’s money supply, too?

But, hang on, Libra hasn’t even been launched yet. Even if it realises its wildest ambitions, it seems unlikely that the custodians of the world’s official currencies – in particular, the government of the United States of America – would tolerate a genuine challenge to its monetary power.

Another source of partial reassurance is Libra’s ownership and governance structure. Josh Constine explains that “Facebook won’t fully control” the system:

“…but instead get just a single vote in its governance like other founding members of the Libra Association, including Visa, Uber and Andreessen Horowitz, which have invested at least $10 million each into the project’s operations.”

Suggested reading

The dark side of China's Social Credit System

By Peter Franklin

Furthermore, efforts are being made to address concerns over privacy and control of user data:

“Facebook is launching a subsidiary company also called Calibra that handles its crypto dealings and protects users’ privacy by never mingling your Libra payments with your Facebook data so it can’t be used for ad targeting. Your real identity won’t be tied to your publicly visible transactions.”

Even better, the underlying software is open source. So, conspiracy theories aside, this really doesn’t look like an attempt to establish top-control over the global economy.

*

So, nothing to worry about, then. In fact, something to look forward to – a super-efficient payments system minus the rip-off merchants. But before we see Zuckerberg as a Christ-like figure, over-turning the money-changers’ tables, here are three little things that might just cause concern:

Firstly, Facebook doesn’t need exclusive control over Libra to become enormously more powerful. Consider the World Wide Web, which established a user-friendly and seamless means of exchanging information. The Web is governed on a model that is even more ‘open’ than Libra, yet that didn’t stop the tech giants (including Facebook) from establishing a dominant position.

Libra, if it succeeds, would establish a user-friendly and seamless means of financial exchange. The world apart that is Chinese internet provides a model of what happens when the distinction between the tech and finance industries is erased. For instance, the Chinese mobile payments market is fifty times bigger than in America and WeChat (the closest equivalent to Facebook) has a commanding position as the “app for everything.” Libra could create similar conditions in the west and Facebook would be ideally positioned to take advantage.

Suggested reading

How China ditched the banks

By Peter Franklin

Secondly, the fact that Libra itself is designed to keep information about individual payments secure, anonymous and decentralised is not necessarily good news. One way of getting the notoriously undertaxed tech sector to pay its fair share is to use levies to target it’s revenues at source – e.g. as generated by advertising clicks or online sales. That could prove more effective than trying to apply corporation tax to the industry’s well-massaged and footloose profits. All the time that the tech giants know exactly where each dribble of revenue comes from, the law can be used to verify the taxes that ought to be paid on it.

That however could be rendered impossible by a completely anonymised and opaque transactional system. Expect tech-savvy governments to pay very close attention to how the technology evolves – privacy must not become the enemy of transparency.

Thirdly, what if those controlling Libra decided to behave really, really badly – i.e. like the monetary authority of a sovereign state? The early indications are that the system is intended to operate within very strict limits. As described above, Libra will only be issued in exchange for an equivalent amount in a hard currency like US Dollars. This is to create confidence in Libra as a reliable store of value, without which it is unlikely to achieve widespread acceptance.

But imagine a future in which Libra or some rival system is well on the way to becoming a de facto global currency. The closer it gets to achieving the status of a universal means of exchange, the more it will become its own guarantee of value – valuable not because it is exchangeable for other, more conventional currencies, but because enough people need and want Libra. At that point, its controllers will be tempted (or may even be pressured) to turn on the metaphorical printing presses and issue Libra backed up by nothing except public faith in the system.

Suggested reading

Do you know where money really comes from?

By Peter Franklin

One method might be to set up a Libra bank that creates currency out of thin air, lends it out and then destroys the money when it is repaid (but pockets the interest paid by the borrower). That might seem completely bizarre, but this is how conventional fiat currencies and conventional banks already work – in the modern world, that’s where money comes from.

*

To be clear, there’s zero evidence that this is the Libra masterplan. The objective is to create a cheap, easy and reliable way of buying and selling, giving and receiving, just about anywhere in the world – a bridge between countries and their currencies, not a rival source of monetary power. The irony is that the more Libra succeeds in its stated objectives, the more it will be seen as a potential threat to the established order.

Suggested reading

Should the rich be allowed to destroy their own wealth?

By Peter Franklin

Yes, I know the heart bleeds – but there really is a global shortage of places for the seriously rich to put their Earthly riches. There just aren’t enough alternatives to the bog standard option of the bank account.

Indeed, interest rates wouldn’t be at record lows around the world if there weren’t a global glut of cash.

Writing for Axios, Dion Rabouin notes that US companies have “record cash holdings of close to $3 trillion”. Wealthy individuals aren’t doing too badly either:

“The top 1% of U.S. households are holding a record $303.9 billion of cash, a quantum leap from the under $15 billion they held just before the financial crisis.”

Of course, most of us would love to have this ‘problem’. And, in a way, we do. Though the non-wealthy have little or no share in the global money glut, our lives are affected by what happens to it.

Those charged with managing extreme wealth are channeling the cash into places where it can do more harm than good – for instance, the property market where it inflates house prices and rental values. Then there’s the practice of share buyback – in which cash-rich companies buy up their own stock:

“Companies made a record $1.1 trillion in stock buybacks in 2018 and are on track to surpass that number this year.”

Buybacks increase demand and reduce supply, thus pushing up share prices – already inflated by the effects of quantitative easing. The executives can say they’ve ‘added value’ and are rewarded accordingly – not least in the form of ‘tax efficient’ stock options.

Admittedly, the company wouldn’t have the cash for the buybacks if it wasn’t profitable in the first place – but that’s not difficult when you can borrow money at rock bottom rates (QE again), buy up the competition and exploit a monopoly position. The company’s soaring market capitalisation means that the banks are happy to keep lending it money… and so on and on it goes, generating further surpluses of cash for the fortunate few.

Suggested reading

Why low interest rates poison the economy

By Peter Franklin

Obviously, none of this is good for the long-term health of the economy – and, for most of us, it’s of no short-term benefit either. What, then, can we do about it? Taxation is an obvious weapon, but the thing about enormous piles of cash under professional management in a borderless world is that they don’t sit still waiting to be punitively taxed.

A slightly different approach is to use tax to disincentivise some of the less desirable uses of the money glut. Property-based assets are an obvious target, because it’s not like we’ll end up with less land if we scare away the speculators. Targeting share buybacks is trickier. While we might want to discourage this and other forms of ‘financial engineering’, we also want to encourage equity investment in productive enterprise – and the finance industry is full of people who can disguise the former as the latter.

Ideally, we’d have such an enterprising, innovative economy that there’d be ample opportunities to invest in growth-generating industries. Established companies would be so threatened by new competitors that they’d invest their profits in business development instead of the complacency of share buybacks. It would also be good to have more rich people with the brains, balls and heart to invest their money imaginatively, courageously and philanthropically. That’d mop up the money glut.

Needless to say, these happy scenarios depend on culture change – which, if it happens at all, is a long-term process. So, in the meantime, is there anything that the state can do to attract excess capital into socially-useful investments?

Visionary public funding programmes of the kind that gave the internet its start are great – but, again, it’s a long-term process. Fortunately, there are some quicker wins to be had – areas where strategic state-led investment can unlock avenues for productive private investment.

Consider the decades of under-investment in the economic infrastructure of our cities beyond London. Addressing key weaknesses – like the state of our non-Londoncentric public transport system – does not require futuristic technologies, but tried-and-tested upgrades that more productive local economies already have.

Suggested reading

The irrelevant debate over the top rate of tax

By Peter Franklin

The challenge for government – including local government – is to become a credible enabler of private sector investment opportunities. That means an end to the imprudence of politically-driven mega-projects like HS2 and Hinkley point, and a pivot to smaller, less complicated, productivity improvements.

The fact that so much potential has been left locked-up for so long is an indictment of our over-centralised political system and our lopsided national economy. But that can be changed – indeed, it is being changed as local communities are re-empowered and the foundations of a modern industrial policy are put in place.

A new prime minister has an opportunity to shift this work into a higher gear.

Another pair of terms that can get confused is ‘fiscal’ and ‘monetary’. Fiscal policy is all about how a government raises and spends money; monetary policy is about the management of the currency – and especially how much of it there is in circulation, which is primarily controlled through interest rates and which has a big influence on inflation.

Being about spending and taxation – i.e. what the government giveth and what it taketh away – fiscal policy tends to be more political than monetary policy. The latter typically goes unnoticed, unless something goes badly wrong. In fact, the whole subject is so esoteric that situations that we ought to be concerned about – such as the impact of persistently low interest rates – fail to excite much debate. Indeed, it suits the politicians to depoliticise the whole issue, handing over key decisions to an ‘independent’ central bank as if some of the most fundamental features of the economic system had nothing to do with them or, by extension, us – the voters.

Further reading

Do you know where money really comes from?

By Peter Franklin

However, monetary policy is becoming re-politicised. In fact, it’s become the subject (and sometimes the cause) of some of the most radical developments in politics of our time. The most obvious example is the ongoing consequences of the European single currency, which was supposed to be the ultimate in turning over political decisions to the technocrats, but which has unleashed forces that are slowly tearing the EU apart while at the same time driving efforts towards further integration.

Then there’s the debate stirred up by the use of monetary instruments like quantitative easing (QE) – when central banks create money and use it to buy back government bonds and other assets from the market, thus boosting the money supply and reducing the cost of borrowing. As well as being controversial in itself, QE is drawing attention to things that governments would prefer the public not to notice – such as the fact that private banks are allowed to literally create money out of thin air before lending it to us.

Once people start focusing on the weirdness of monetary policy, they start having weird ideas of their own. For instance, there’s the proposed alternative/supplement to QE known as ‘helicopter money‘ i.e. money that is created by the central bank and then dropped directly into consumers’ bank accounts. Then there’s Modern Monetary Theory, which turns conventional economic policy on its head and is gaining influential converts.

Another radical departure in monetary policy is proposed by Dirk Schoenmaker in an article for VoxEU. He argues that Eurozone monetary policy should be “tilted” in favour of investment in low carbon technology – by lowering the cost of capital for such investments relative to investments in polluting technologies.

Further reading

It's time to overhaul economic policy

By Peter Franklin

But are central banks supposed to get involved in such things? Surely if the state wishes to channel investment towards certain sectors it should do so by non-monetary means, like tax breaks and subsidies. And if a central bank were to pick favourites, how would that even work? Doesn’t a change in base rates apply to the economy without differentiation?

To answer the last question first, Shoenmaker explains that as well as setting interest rates, the institutions of the Eurosystem (i.e. the European Central Bank and the central banks of the Eurozone member states) have other means of influence:

“The Eurosystem manages about €2.6 trillion of assets in its Asset Purchase Programme, which includes corporate and bank bonds in addition to government bonds. In its monetary policy operations, the Eurosystem provides funds to banks in exchange for collateral, which currently amounts to €1.6 trillion. A haircut is applied to the value of collateral, reflecting the credit risk.”

In finance, a ‘haircut’ is the discount that creditors apply to the value of an asset as a item of collateral compared to its value on the market as an investment item. The more extreme the haircut, the greater the reduction in general demand for the asset:

“Applying a higher haircut to high-carbon assets also makes them less attractive, reducing their liquidity. Early estimates indicate that this haircut could result in a higher cost of capital for high-carbon companies relative to low-carbon companies of four basis points.”

A basis point is a hundredth of one per cent, so four basis points amounts to a 0.04% difference in interest rates. That might not seem like very much, but when it’s applied to the vast sums of investment that will be needed just to stop Europe’s energy infrastructure from crumbling, it adds up. Furthermore, it sends yet another signal to the money markets that investing in fossil fuels is risky – and that the climate change commitments that governments enter into come with teeth.

It would also demonstrate that central banks, though not directly responsible for climate policy, realise that anything that destabilises the global climate ultimately destabilises everything – including the financial system for which they are responsible.

Schoenmaker makes a persuasive case, then. And yet I wonder if EU member states might not see any extension of monetary policy as economic integration by the backdoor. While monetary policy has been federalised by the single currency, fiscal policy remains, for the most part, in national hands (though subject to the Stability and Growth Pact). If, however, we start using monetary policy to do things previously the exclusive province of fiscal policy, then within the EU that would represent a further erosion of national sovereignty – and that could be subject to a further populist backlash.

Ironically, it may be non-members of the Eurozone (and indeed the EU) that find it easier to use monetary policy in new ways.

Further reading

Ten precedents for a compromise Brexit

By Peter Franklin

To answer the second question first, MMT matters because it’s starting to trickle down from academia into serious politics. The theory is finding supporters on the ascendant Left-wing of the US Democratic Party. Indeed, some see it as the means by which a progressive administration might fund the Green New Deal (which carries a ten trillion dollar price tag).

Suggested reading

Just how mad is the Green New Deal?

By Peter Franklin

As for the first question, it might be helpful to draw a parallel between economics and physics. The theories of the two disciplines can be expressed in the form of complicated equations. Physics theory has a much firmer foundation in reality than economic theory, but in both cases one can rearrange the maths and re-chop the logic to arrive at bold new interpretations. MMT is to economics what general relativity, quantum mechanics and string theory are to physics – a fundamental reordering of the theoretical framework.

In conventional economic policy, governments raise money through taxation and borrowing (or by turning on the real and metaphorical printing presses). They then spend that money. However, Modern Monetary Theorists say that’s the wrong way of looking at it. Because a sovereign nation ultimately creates its own currency, it need never default on any debt denominated in that currency. It can, therefore, create all the money it needs – the only limit is the risk of inflation (caused by too much money chasing the finite productive capacity of the real world economy). The purpose of taxation in MMT is not to raise revenue, but to control inflation – i.e. by taking away the ability of individuals and organisations to place demands on the economy’s productive capacity.

This is how Matt Breunig sums it up in a piece for the People’s Policy Project:

“What MMT advocates do is assert that actually all government spending is funded by money creation. Taxes and borrowing may look like ways the government gets cash to spend, but in fact all they do is delete money.”

Though MMT supporters tend to be on the Left, so are the theory’s most vociferous opponents – of which Breunig is one:

“…it has become clear to me that the bulk of MMT discourse is not really about what the best policy instruments are for maintaining price stability and debt stability, but rather about using word games to make people believe that the US can have Northern European levels of government spending without Northern European levels of taxation…

“The real point of MMT seems to be to deploy misleading rhetoric with the goal of deceiving people about the necessity of taxes in a social democratic system.”

Of course, there’s always a distinction to be drawn between ideas in their pure form and the grubbier uses that they’re put to. In this respect, conventional Left-wing economics (or Right-wing economics, for that matter) is no less unsullied than MMT. For instance the most prominent calls for higher taxation to fund higher spending have focused on squeezing the super-wealthy. This conveniently distracts from the fact that Scandinavian-style welfare states depend on a heavily-taxed middle class.

Suggested reading

The irrelevant debate over the top rate of tax

By Peter Franklin

So let’s leave the politics aside, and ask whether MMT has any merit as a way of looking at economic policy. I believe that it might just do, since we live in a world where some goods and services are becoming ‘post-scarce‘. As an example of what this means, consider the case of software: once an app has been developed, the cost of producing more copies of it is negligible – it is demand that is constrained, not supply. Technologies like artificial intelligence and robotics have the potential to shift more and more of the economy into a state of effectively inexhaustible productive capacity.

As I’ve noted previously, a decade of extremely loose monetary policy has notably failed to unleash inflation, suggesting an increasingly flexible supply-side response to the demand we throw at it. Indeed, given demographic trends, it’s the demand-side we should be more worried about. In the most aged societies, like Japan, the struggle is to stop deflation, not inflation.

If this is the direction in which we’re headed, the rise of MMT, if nothing else, prompts us to reconsider some basic assumptions.

For instance, in all advanced economies there is a fiscal authority (typically a finance ministry) that controls the level of public debt through fiscal policy like taxation, borrowing and expenditure; then there is a monetary authority (typically a central bank) that controls the price level (i.e. inflation) through monetary policies like interest rates, quantitative easing and money creation in general.

The revolutionary implication of MMT is that this should be the other way round – the central bank providing the government with money it needs (simply by creating it), while the finance ministry manages inflation through its powers over taxation and expenditure.

Unlike the generalised impact of interest rates, tax and investment based interventions can be targeted at particular sources of inflationary pressure. For instance, if land prices are shooting up then an appropriate response might be the imposition of land value taxation to dissuade speculators (plus more funding for the regeneration of derelict sites).

In an economy where some forms of supply are becoming superabundant, but others remain constrained (and thus become opportunities for speculators and monopolists), using a scalpel, not a cosh, to tackle inflation makes evermore sense.

One doesn’t have to agree with where MMT came from, or its use and abuse in contemporary politics, to see its relevance to a changing future.

Suggested reading

Why 'enough' is the most dangerous word in economics

By Peter Franklin

The overall thrust of the piece is a critique of Modern Monetary Theory (MMT) – an ‘alternative’ school of economics currently in favour with American Left-wingers like Alexandria Ocasio-Cortez.

The authors quote Kevin Muir‘s definition of MMT:

“Modern Monetary Theory is a macroeconomic theory that contends that a country that operates with a sovereign currency has a degree of freedom in their fiscal and monetary policy which means government spending is never revenue constrained, but rather only limited by inflation.”

In other words, if you’re in a position to make your own money, you don’t need to worry about budgetary deficits or public debt, you only need to worry about prices. Given that inflation has been low for a generation and continues to stay low despite the return to growth and near full employment, government can afford to fund lavish spending programmes like the proposed ‘Green New Deal’.

Suggested reading

Do you know where money really comes from?

By Peter Franklin

But what if inflation is much higher that we’ve been led to believe?

Writing from an US perspective, Lebowitz and Roberts argue that we’ve been misled:

“…during the Clinton Administration, the Boskin Commission was brought in to recalculate how inflation was measured. Their objective was simple – lower the rate of inflation to reduce the amount of money being paid out in Social Security.

“Since then, inflation measures have been tortured, mangled, and abused to the point where it scarcely equates to the inflation that consumers deal with in reality.”

Here’s an example:

“…home prices were substituted for ‘homeowners equivalent rent,’ which was falling at the time, and lowered inflationary pressures, despite rising house prices.

“Since 1998, homeowners equivalent rent has risen 72% while house prices, as measured by the Shiller U.S. National Home Price Index has almost doubled the rate at 136%. Needless to say, house prices which currently comprise almost 25% of CPI has been grossly under-accounted for.”

‘Homeowners equivalent rent’ is a specific case of ‘imputed rent’ – which is what you’d have to pay for the use of your house or car if you didn’t own it (or, to put it another way, what you could earn by renting it to someone else). It’s a theoretically ‘pure’ and consistent way of assessing the value of assets, the sort of measurement that appeals to economists. In the real world, however, most people who buy a home don’t care about its imputed rent, but what they actually have to pay for it – which, surely is the only kind of price that matters.

Suggested reading

The truth about GDP figures

By Peter Franklin

This is not the only way in which the official inflation rate depends on theory rather than straightforward observation:

“There is also a measure called ‘hedonics’ which is used to account for the change of value of a particular good over time… an example [is the] additional power of modern computers [which] means consumers are getting more for their money than in prior years, hence paying less according to inflation calculations.

“Some hedonics make sense, like computers, but many do not. Can you apply the same logic to High-Def TVs? Unlike the computer, TV’s serve no economic benefit. Should inflation measures be reduced because you now have a 50-inch flat screen versus a 32-inch one? We say no.”

This is quite the rabbit hole. Take the example of cars: at any particular price point, these are more reliable and fuel efficient than they used to be. On the other hand, congestion means that driving is a much less rewarding experience than in the age of the open road. Or food: on the one hand it’s great that we can have fresh tomatoes all the year round, but on the other hand they don’t taste of anything.

How on Earth does one adjust for the positive and negative ‘hedonics’ of all of that? Depending on the value judgement one makes we could be much richer or much poorer than we’re officially purported to be.

The problem of subjectivity also applies to ‘the basket of goods’ use for the inflation calculation. Adjustments to the content are required from time to time (to take a trivial example, the price of lard is not as relevant today as it was a hundred years ago). But while genuine shifts in consumer preference should be reflected, other consumer trends could be distorting the picture. A shift in spending to some classes of increasingly affordable goods and services (e.g. electronic gadgets) may reflect an attempt to compensate for the fact that other, more important, items such as decent and conveniently located living space, are getting more expensive.

And whose experience of inflation are we talking about anyway? If, say, luxuries are getting cheaper while everyday necessities like rent, utility bills and childcare are getting more expensive, then averaging it all out conceals the fact that most people whose outgoings are dominated by the essentials are experiencing a higher rate of inflation than those with money to burn. (There’s a parallel here to GDP figures – if most of the proceeds of overall growth are going to the rich, then the rest of us are experiencing a stagnant economy not a growing one.)

So, inflation is a slippery concept. And what’s more, governments have every reason to use this lubrication to massage the figures down. The lower the official inflation rate, the lower the expenditure on index-linked payments like state pensions – and the higher the rate of ‘real’ economic growth.

Mainstream economists have every reason to go along with the official line, because it appears to validate the mainstream monetary policies of the neoliberal era. Left-wing economic theorists also have a reason not to rock the boat, because their borrow-and-spend policy ambitions depend on inflation not being a problem. Then there’s a huge commercial vested interest – comprised of all of all of those businesses whose speculations depend on an inexhaustible supply of cheap credit.

Of course, those who claim that the real inflation rate is much higher than everyone else admits can be written off as a fringe – in the same category as ‘goldbugs’, crypto currency enthusiasts and other heretics.

Suggested reading

The irrelevant debate over the top rate of tax

By Peter Franklin

But try this thought experiment: If there were an economy in which inflation definitely had been under-reported over a long period, what would it look like?

One might expect increasing levels of dissatisfaction among ordinary working people who don’t feel as rich as they’re told they are. Other likely symptoms might include: a long-term build-up of consumer and public sector debt in order to finance ‘normal’ levels of spending; the inflation of speculative asset bubbles; puzzling shortfalls in genuine productivity; a destabilising accumulation of bad risks in the financial system; and the collapse of public trust in conventional politics.

Remind you of anything?

The thought was this: the amount of money denominated in any particular currency isn’t fixed – in almost all cases it increases over time. It must do, otherwise economies wouldn’t be able to grow (at least not in units of the aforementioned currency). The question, therefore, is where does the extra money come from?

Suggested reading

Has a Davos backlash begun?

By Nomi Prins

Luckily, the place I was working at the time contained a number of people whose job was to know about the economy and economic policy. Some of them would go on to related careers in government, journalism and finance. Surely they could tell me where money comes from.

But here’s the thing, none of them could. It’s not that they were stupid. They knew the facts and could crunch the numbers required to get their degrees and do their jobs, but clearly that knowledge didn’t include an answer to my question.

Of course, even I knew where physical money, i.e. cash, comes from. The notes are printed and the coins minted by the state. However, in a modern economy, cash is the loose change of the money supply – most of which only exists electronically in the form of bank deposits and the like.

So where does that sort of money come from? None of the people I asked knew. It’s strange because while we talk endlessly about how money is earned, spent, taxed and redistributed, how it comes into being barely gets a mention.

It is, however, the topic of an eye-opening article by Pierre Ortlieb for the Economic Questions website.

Ortlieb tells us the truth, which is that most money is created by banks in the process of making loans. I mean that quite literally – the money that a bank lends to a borrower is simply brought into being at the stroke of a pen (or the click of a keyboard). Yes, really – they are allowed to do this. It’s all perfectly legal. In fact, it’s fundamentally what banks are for.

When the loan is repaid, there’s another click of the keyboard and the money is destroyed, returning to the notional space from whence it came. (However, the interest paid on the loan is not destroyed and is instead trousered by the bank – a little thank you for their trouble.)

There are complications of course, but basically that’s where money comes from.

Suggested reading

How banking is still making Britain poorer

By Catherine Colebrook and Carys Roberts

Ortlieb is not revealing some deep dark secret here – prominent financial institutions have made it quite clear how it all works:

“For instance, in 2014, the Bank of England published a short, plainly-written paper that described in detail how commercial banks create money essentially out of nothing, by issuing loans to their customers. The Bank author’s noted that ‘the reality of how money is created today differs from the description found in some economics textbooks,’ and sought to correct what they perceived as a popular misinterpretation of the credit creation process…”

A lot of people, however, still believe in the ‘textbook explanation’ i.e. that banks expand the money supply by lending out their savers’ deposits. As the Bank of England explains, the mere act of saving money doesn’t create anymore of it – because if it wasn’t being saved it would be spent. In fact, spending the stuff may well be more of a stimulus to the economy than sticking it in a savings account.

The idea that commercial banks are creating money out of thin air is counterintuitive, indeed downright disturbing. We assume that only the state can ‘print money’ and we hope that the printing press stays in the hands of sober and sensible central bankers. But no, it turns out that commercial bankers have money creating powers too!

That said, the central bank sets interest rates, putting a limit on what people can sensibly borrow and therefore what the commercial banks can sensibly lend. This constrains their money creating powers.

With interest rates currently so low, central banks have been resorting to the alternative mechanism of quantitative easing to jumpstart the economy. Ortlieb argues that the weirdness of QE has prompted the authorities to be much more open about how money works:

“As quantitative easing has stoked public fears of price instability, monetary authorities including the Bank of England have sought to clarify who really produces money. In this sense, taking steps to inform the public on the real source of money – bank loans – is a worthwhile step, as it provides constraints on what a central bank can be reasonably expected to do, and reduces informational asymmetries between technical experts and lay citizens.”

Perhaps the best way to assuage concerns that QE is ‘funny money’ is to be clear that it’s all funny money. QE or no QE, the modern economy runs on a medium of exchange that is created out of nothing and is only worth something because everyone believes that it is.

Suggested reading

Easy money: How have the central bankers got away with it?

By Peter Franklin

This is the nature of a fiat currency, and in these troubled times Ortlieb urges those in charge not to hide the truth:

“Central banks would be better off engaging in a clear, concise, and careful communications program to inform the public of how credit actually works, even if they might not really want to know how the sausage gets made.”

I’m sure that’s right, but all the same, it’s probably best that people aren’t thinking too hard about what’s in the sausage when they’re eating it.

I’m in favour of restriction. The biggest problem with the British economy – and with Western capitalism in general – is not too little freedom, but too much. Too much, that is, for those who make it their business to increase their share of existing wealth without creating any. This is what economists call rent-seeking (which includes, but isn’t limited to, what tenants pay to their landlords).

Rent-seekers are able to extract value from others because of the monopoly rights that the state gives them over a particular resource – be it land, intellectual property, permission to pollute, political power or something else. Rent-seeking is therefore a result of government policy. Unsurprisingly, governments find themselves relentlessly lobbied by those with a vested interest in maintaining the unjust, opportunity-sapping status quo.

Further reading

What the Tories need in their next leader

By Graeme Archer

Taking on those vested interests requires courage and determination. But that’s why a government – especially one that believes in the opportunity to create rather than extract wealth – should be judged on the quality of its enemies.

Here are ten enemies that the Cameron and May governments should have made, but didn’t:

1. Land owners

Conservatives believe in the right to private property. And so they should. But that right shouldn’t include the uplift in value created when land becomes ripe for development.

The price of farmland can shoot up from less than £10,000 to more than £1,000,000 an acre just because of a planning decision. The act of merely owning the land has contributed precisely nothing to this added value – and yet landowners are able to claim the lion’s share of it.

This injustice, which Winston Churchill condemned back in 1909, lies at the heart of the housing crisis – a crisis which is destroying the Conservative ideal of a property-owning democracy and therefore popular support for conservatism among younger people.

If the Government did something about legal barriers that prevent it from acquiring land at agricultural-use value to build new housing, then a whole range of opportunities could open up. Instead, it continues to side with a few lucky farmers rather than millions of aspiring home owners.

2. The big developers

Of course, if we built more houses, the law of supply and demand would mean lower prices and reduced profits for those lucky landowners, right?

Wrong – and so is the idea that the planning system is mostly to blame for the dearth of new homes. In fact, there’s a huge backlog of unused planning permissions – leading to accusations that the big developers are “land banking”; ie, manipulating the development of the land they hold to control prices.

Of course, that can’t be possibly be true, because the Government has commissioned an investigation – the Letwin Review – which has been taken as evidence that developers don’t land bank. However, the Independent Review of Build Out Rates, Draft Analysis, June 2018, also says this:

“The fundamental driver of build out rates once detailed planning permission is granted for large sites appears to be the ‘absorption rate’ – the rate at which newly constructed homes can be sold into (or are believed by the house builder to be able to be sold successfully into) the local market without materially disturbing the market price.”

Deliberately restricting supply in order to stop prices from falling? How is that not manipulating the market?

It’s plainly obvious what’s going on. The Government must stop hiding behind jargon like “absorption rates” and take land supply out of the developers’ control.

3. Nimbys and cowboys

The planning system isn’t entirely free from blame. A particular problem is the designation of green belts around urban areas. Preventing sprawl is a worthy objective, but choking the growth of prosperous cities such as Oxford and Cambridge is not. Model developments like Poundbury in Dorchester, show that we can build beautifully designed extensions to towns and cities that enhance local life instead of harming it.

However, instead of negotiating a grand bargain on sustainable urban development, the Government has failed to confront the green belt fundamentalists, while turning a blind eye to ugly, piecemeal development in unprotected areas – the worst of both worlds.

4. The bankers

In August 2011, riots erupted across urban England. But what happened next was just as remarkable: a shock-and-awe demonstration of the power of CCTV. Rioters were systematically identified by the police (with public help), shamed by the media and harshly punished by the courts. So much for the anonymity of the mob.

Now compare all that to the UK government reaction to the financial crisis. No shock-and-awe for the bankers. There have been a few prosecutions in relation to specific scams such as the Libor-rigging scandal. Oh, and someone had their knighthood cancelled. But that’s about it.

It would seem that recklessly crashing the global economy is an almost crime-free activity.

Further reading

Ten years on from the crash, the most important banking reform has still not been enacted

By Liam Halligan

5. The beneficiaries of QE

Of course, that’s not to say that the financiers weren’t targeted by the state. Indeed, they were singled out… for a massive programme of assistance.

There were the immediate bailouts of failing banks, but also a much longer period of Quantitative Easing or QE. Though presented as a general tonic for ailing economies, QE has the specific effect of inflating the value of financial assets and therefore rebuilding the bankers’ balance sheets (and boosting the investment portfolios of the wealthy).

The mechanics of the policy also generates a cascade of transactions on which fees can be charged – another nice little earner for those lucky enough to benefit.

Even if we accept the argument that governments had no choice but to resort to QE, it remains a profound injustice that the sector responsible for the original crisis has profited so handsomely from the emergency treatment.

But don’t expect any meaningful process of ‘financial truth and reconciliation’. The brain-aching complexity of QE is precisely what allows governments to get away with not having untangled it.

6. The nuclear industry

When the Conservative Government came to power in 2010 one of its first moves was to slash subsidies for renewable power. Quite right too – the leading renewable technologies were considered capable of delivering more for less, and that’s exactly what they’ve achieved. Despite self-serving predictions that the industry would shrivel without generous subsidies, it has thrived – cutting costs and expanding capacity.

No such market discipline for the nuclear sector, however. Hinkley Point C – the first new nuclear power station to begin construction since the 1980s – is to receive a guaranteed and very expensive price for its electricity over 35 years. So assuming it’s up and running by 2025, we’ll still be paying for its overpriced electricity in 2060.

By the way, the nuclear tech we’re getting for this money – the European Pressurised Reactor – is  dogged by a history of engineering problems and cost overruns.

How on earth did we end-up with this radioactive lemon? Well, it was the first – and, so far, only – opportunity to guarantee a future for Britain’s nuclear industry (even if most of the kit is imported from the French).

No industry and no technology should be owed a living – and certainly not one with nuclear’s record of failure.

7. The rail industry

Speaking of enormously expensive things that don’t turn up on time, let’s talk about our trains.

The Train Operating Companies (TOCs) aren’t best-loved by British public. But this year, with the biggest timetable changes for at least a decade, was the chance for a reset. It was really important then that the whole thing went smoothly.

It was a disaster – with services in the North and South East of England descending into chaos.

The regulator’s report into the fiasco found that the TOCs, Network Rail, the Department for Transport and indeed the regulator all made mistakes – but also that it was unclear as to who was responsible for what.

The obvious conclusion is that the structure of the industry is unsustainable. Of course, if no one has ultimate responsibility then no one can be held ultimately accountable (right up to the Secretary of State for Transport) – which suits all concerned. Except the passengers, of course.

Further reading

Can we reform our rancid political debate?

By Douglas Murray

8. Air polluters

At least most trains are electric these days, which means they don’t belch out the airborne pollutants linked to 40,000 premature deaths in the UK every year and billions of pounds’ worth of damage.

The disastrous decision to encourage the use of diesel engines in Europe can be blamed primarily on the German government and the Volkswagen emissions scandal. However, the British government has repeatedly failed to take the action necessary to clean up the air in our worst-affected cities – or say, in sufficient detail, how it plans to fulfil its legal responsibility to do so.

The long-term solution is to switch to electric vehicles, but we also need a short-term solution. The difficulty isn’t that we don’t know what to do (ie, dis-incentivise the use of polluting vehicles in vulnerable urban areas); it’s that it wouldn’t be popular with motorists.

The most powerful vested interests are the ones composed of millions of people. The trouble is that also leaves millions of people breathing polluted air – but that’s OK because a lot of those are children and they can’t vote.

9. The carpetbaggers of London

On to another kind of grubbiness. How is the Government getting on with its repeated promises to do something about the foreign money laundered through London’s property market?

Very slowly, is the answer. Almost 100,000 properties in the UK are owned by offshore companies. To its credit, the Government is forcing these publicly to register their “beneficial owners” – though not until 2021. Better late than never, but one has to wonder how so much information about so many properties is going to be verified.

Of course, this would be a much smaller problem if the ownership of high-end property in the UK weren’t so lightly taxed (and therefore ridiculously attractive). One would assume that most foreign investment in London real estate is legitimate; but one has to ask: who benefits?

Certainly not the ordinary working people and productive enterprises priced out of their own capital. And not those who pay heavy taxes on the fruits of their labour because their government won’t shift the burden on to idle wealth.

London and other British cities should be fully open to genuine entrepreneurs and innovators from around the world. But we don’t need more speculators; we’ve got quite enough of our own.

Further reading

What's killing the Conservatives?

By James Kirkup

10. Government itself

Let’s conclude with the vested interest closest to home – the machinery of government and the wider political system. The Conservatives came to power promising a revolution in the way that we’re governed. The 2010 Conservative manifesto was entitled Invitation to Join the Government of Britain and promised a “Big Society” in place of a “Big State”.

There have been some reforms – most notably a significant devolution of power to cities. But, on the whole, the status quo remains intact. Parliament, Government and the Civil Service all work in much the same way as they did in 2010. Even the most straightforward reforms, like a modest reduction in the number of MPs from 650 to 600, have yet to be delivered. 

Others have been scrapped – such as the introduction of “extended ministerial offices“. These were a tiny move to towards reducing the dependency of Cabinet ministers on the civil service – and on Downing Street. Of course, even that proved too much of a threat to the established order.

And thus a sclerotic system of government struggles on – unable and unwilling to confront its own vested interests, let alone anyone else’s.

I’m in favour of restriction. The biggest problem with the British economy – and with Western capitalism in general – is not too little freedom, but too much. Too much, that is, for those who make it their business to increase their share of existing wealth without creating any. This is what economists call rent-seeking (which includes, but isn’t limited to, what tenants pay to their landlords).

Rent-seekers are able to extract value from others because of the monopoly rights that the state gives them over a particular resource – be it land, intellectual property, permission to pollute, political power or something else. Rent-seeking is therefore a result of government policy. Unsurprisingly, governments find themselves relentlessly lobbied by those with a vested interest in maintaining the unjust, opportunity-sapping status quo.

Further reading

What the Tories need in their next leader

By Graeme Archer

Taking on those vested interests requires courage and determination. But that’s why a government – especially one that believes in the opportunity to create rather than extract wealth – should be judged on the quality of its enemies.

Here are ten enemies that the Cameron and May governments should have made, but didn’t:

1. Land owners

Conservatives believe in the right to private property. And so they should. But that right shouldn’t include the uplift in value created when land becomes ripe for development.

The price of farmland can shoot up from less than £10,000 to more than £1,000,000 an acre just because of a planning decision. The act of merely owning the land has contributed precisely nothing to this added value – and yet landowners are able to claim the lion’s share of it.

This injustice, which Winston Churchill condemned back in 1909, lies at the heart of the housing crisis – a crisis which is destroying the Conservative ideal of a property-owning democracy and therefore popular support for conservatism among younger people.

If the Government did something about legal barriers that prevent it from acquiring land at agricultural-use value to build new housing, then a whole range of opportunities could open up. Instead, it continues to side with a few lucky farmers rather than millions of aspiring home owners.

2. The big developers

Of course, if we built more houses, the law of supply and demand would mean lower prices and reduced profits for those lucky landowners, right?

Wrong – and so is the idea that the planning system is mostly to blame for the dearth of new homes. In fact, there’s a huge backlog of unused planning permissions – leading to accusations that the big developers are “land banking”; ie, manipulating the development of the land they hold to control prices.

Of course, that can’t be possibly be true, because the Government has commissioned an investigation – the Letwin Review – which has been taken as evidence that developers don’t land bank. However, the Independent Review of Build Out Rates, Draft Analysis, June 2018, also says this:

“The fundamental driver of build out rates once detailed planning permission is granted for large sites appears to be the ‘absorption rate’ – the rate at which newly constructed homes can be sold into (or are believed by the house builder to be able to be sold successfully into) the local market without materially disturbing the market price.”

Deliberately restricting supply in order to stop prices from falling? How is that not manipulating the market?

It’s plainly obvious what’s going on. The Government must stop hiding behind jargon like “absorption rates” and take land supply out of the developers’ control.

3. Nimbys and cowboys

The planning system isn’t entirely free from blame. A particular problem is the designation of green belts around urban areas. Preventing sprawl is a worthy objective, but choking the growth of prosperous cities such as Oxford and Cambridge is not. Model developments like Poundbury in Dorchester, show that we can build beautifully designed extensions to towns and cities that enhance local life instead of harming it.

However, instead of negotiating a grand bargain on sustainable urban development, the Government has failed to confront the green belt fundamentalists, while turning a blind eye to ugly, piecemeal development in unprotected areas – the worst of both worlds.

4. The bankers

In August 2011, riots erupted across urban England. But what happened next was just as remarkable: a shock-and-awe demonstration of the power of CCTV. Rioters were systematically identified by the police (with public help), shamed by the media and harshly punished by the courts. So much for the anonymity of the mob.

Now compare all that to the UK government reaction to the financial crisis. No shock-and-awe for the bankers. There have been a few prosecutions in relation to specific scams such as the Libor-rigging scandal. Oh, and someone had their knighthood cancelled. But that’s about it.

It would seem that recklessly crashing the global economy is an almost crime-free activity.

Further reading

Ten years on from the crash, the most important banking reform has still not been enacted

By Liam Halligan

5. The beneficiaries of QE

Of course, that’s not to say that the financiers weren’t targeted by the state. Indeed, they were singled out… for a massive programme of assistance.

There were the immediate bailouts of failing banks, but also a much longer period of Quantitative Easing or QE. Though presented as a general tonic for ailing economies, QE has the specific effect of inflating the value of financial assets and therefore rebuilding the bankers’ balance sheets (and boosting the investment portfolios of the wealthy).

The mechanics of the policy also generates a cascade of transactions on which fees can be charged – another nice little earner for those lucky enough to benefit.

Even if we accept the argument that governments had no choice but to resort to QE, it remains a profound injustice that the sector responsible for the original crisis has profited so handsomely from the emergency treatment.

But don’t expect any meaningful process of ‘financial truth and reconciliation’. The brain-aching complexity of QE is precisely what allows governments to get away with not having untangled it.

6. The nuclear industry

When the Conservative Government came to power in 2010 one of its first moves was to slash subsidies for renewable power. Quite right too – the leading renewable technologies were considered capable of delivering more for less, and that’s exactly what they’ve achieved. Despite self-serving predictions that the industry would shrivel without generous subsidies, it has thrived – cutting costs and expanding capacity.

No such market discipline for the nuclear sector, however. Hinkley Point C – the first new nuclear power station to begin construction since the 1980s – is to receive a guaranteed and very expensive price for its electricity over 35 years. So assuming it’s up and running by 2025, we’ll still be paying for its overpriced electricity in 2060.

By the way, the nuclear tech we’re getting for this money – the European Pressurised Reactor – is  dogged by a history of engineering problems and cost overruns.

How on earth did we end-up with this radioactive lemon? Well, it was the first – and, so far, only – opportunity to guarantee a future for Britain’s nuclear industry (even if most of the kit is imported from the French).

No industry and no technology should be owed a living – and certainly not one with nuclear’s record of failure.

7. The rail industry

Speaking of enormously expensive things that don’t turn up on time, let’s talk about our trains.

The Train Operating Companies (TOCs) aren’t best-loved by British public. But this year, with the biggest timetable changes for at least a decade, was the chance for a reset. It was really important then that the whole thing went smoothly.

It was a disaster – with services in the North and South East of England descending into chaos.

The regulator’s report into the fiasco found that the TOCs, Network Rail, the Department for Transport and indeed the regulator all made mistakes – but also that it was unclear as to who was responsible for what.

The obvious conclusion is that the structure of the industry is unsustainable. Of course, if no one has ultimate responsibility then no one can be held ultimately accountable (right up to the Secretary of State for Transport) – which suits all concerned. Except the passengers, of course.

Further reading

Can we reform our rancid political debate?

By Douglas Murray

8. Air polluters

At least most trains are electric these days, which means they don’t belch out the airborne pollutants linked to 40,000 premature deaths in the UK every year and billions of pounds’ worth of damage.

The disastrous decision to encourage the use of diesel engines in Europe can be blamed primarily on the German government and the Volkswagen emissions scandal. However, the British government has repeatedly failed to take the action necessary to clean up the air in our worst-affected cities – or say, in sufficient detail, how it plans to fulfil its legal responsibility to do so.

The long-term solution is to switch to electric vehicles, but we also need a short-term solution. The difficulty isn’t that we don’t know what to do (ie, dis-incentivise the use of polluting vehicles in vulnerable urban areas); it’s that it wouldn’t be popular with motorists.

The most powerful vested interests are the ones composed of millions of people. The trouble is that also leaves millions of people breathing polluted air – but that’s OK because a lot of those are children and they can’t vote.

9. The carpetbaggers of London

On to another kind of grubbiness. How is the Government getting on with its repeated promises to do something about the foreign money laundered through London’s property market?

Very slowly, is the answer. Almost 100,000 properties in the UK are owned by offshore companies. To its credit, the Government is forcing these publicly to register their “beneficial owners” – though not until 2021. Better late than never, but one has to wonder how so much information about so many properties is going to be verified.

Of course, this would be a much smaller problem if the ownership of high-end property in the UK weren’t so lightly taxed (and therefore ridiculously attractive). One would assume that most foreign investment in London real estate is legitimate; but one has to ask: who benefits?

Certainly not the ordinary working people and productive enterprises priced out of their own capital. And not those who pay heavy taxes on the fruits of their labour because their government won’t shift the burden on to idle wealth.

London and other British cities should be fully open to genuine entrepreneurs and innovators from around the world. But we don’t need more speculators; we’ve got quite enough of our own.

Further reading

What's killing the Conservatives?

By James Kirkup

10. Government itself

Let’s conclude with the vested interest closest to home – the machinery of government and the wider political system. The Conservatives came to power promising a revolution in the way that we’re governed. The 2010 Conservative manifesto was entitled Invitation to Join the Government of Britain and promised a “Big Society” in place of a “Big State”.

There have been some reforms – most notably a significant devolution of power to cities. But, on the whole, the status quo remains intact. Parliament, Government and the Civil Service all work in much the same way as they did in 2010. Even the most straightforward reforms, like a modest reduction in the number of MPs from 650 to 600, have yet to be delivered. 

Others have been scrapped – such as the introduction of “extended ministerial offices“. These were a tiny move to towards reducing the dependency of Cabinet ministers on the civil service – and on Downing Street. Of course, even that proved too much of a threat to the established order.

And thus a sclerotic system of government struggles on – unable and unwilling to confront its own vested interests, let alone anyone else’s.

As the year-end comes into view, our thoughts naturally turn to the future. The challenges facing the UK are considerable, of course – not least because of the government’s fragile House of Commons majority and the questions that raises about Brexit, policymaking in general and Theresa May’s day-to-day political survival.

It is important, though, occasionally to escape the 24-hour news cycle. Columnists and political pundits, in particular, must take time to look beyond the latest political rows and their impact on the parliamentary arithmetic.

At the turn of 2017, as the New Year beckons and we pause for breath, such reflection is particularly important. For questions are now frequently being asked, not only about this or that government policy, but about ‘the system’. Doubts are being raised, more widely and loudly than at any time in my adult life, and often by sensible people, about the future of capitalism itself.

Capitalism works, and is sustainable, when it spreads wealth broadly. That, in turn, means that the market economy secures and is bolstered by widespread popular consent. Yet, with British youngsters struggling to attain living standards enjoyed by their parents, and workers more generally enduring extended real terms pay cuts, capitalism is becoming less popular. For far too many, then, and to recall Von Mises, capitalism is failing to ‘deliver the goods’. Swathes of voters now view the UK economy not so much as capitalist, but corporatist or even cronyist – and with some justification.

Throughout history, the rough edges of capitalism have needed to be smoothed. That will always be true – and it can be done with a humane, properly resourced welfare state. While the UK’s benefit system is patchy, and notoriously tough to reform, it for the most part doing a reasonable job.

But capitalism is also about ensuring a degree of fairness and the spreading of opportunities, not least among the aspirational classes – those working hard, and striving to improve the lot of themselves and their families. This is where the current failure lies.

For almost a decade now since the global financial crisis, access to bank finance – to buy a home or to start and then expand a business – has been severely limited. At the same time, social mobility has gone into reverse. A recent government study found that “a stark social mobility postcode lottery exists in Britain today where the chances of someone from a disadvantaged background succeeding in life is bound to where they live”[1.  “Social mobility in Great Britain: fifth state of the nation report”, Social Mobility Commission, 28 November 2017].

Some inequality is inevitable under a capitalist system, and UK income inequality has been much exaggerated. But the inequality of wealth – including property and financial assets – has undoubtedly spiraled upwards over recent years (the subject of last week’s Charlie Pickles column). In June 2017, the Resolution Foundation estimated[2.   ‘Britain’s increasingly unevenly shared property wealth is driving up inequality after a decade-long fall’, Resolution Foundation, June 2017] that the wealthiest 10% of UK adults now own around half of Britain’s wealth, with the richest 1% controlling no less than 14%. Even this shocking number is surely an underestimate, given the difficulties in identifying the assets of the super-rich.

An unfortunate 15%, by contrast, have no or negative wealth. And while wealth inequality fell during the decade from 1995 to 2005, it has since risen steady, not least since the 2008 global financial crisis, and the subsequent fall in home ownership.

The total value of wealth across Britain – not just housing, but also private pensions, shares, land and other physical objects – has fully recovered since the 2008 collapse and continued to grow. From £9,900bn before the crisis, UK wealth rose to £11,100bn in 2014, the Resolution Foundation estimates. Rising inequality, though, means that the wealth of the typical ‘median’ adult, lying exactly in the middle of the wealth distribution, has fallen – from £99,000 just before the financial crisis to £84,000. This fall has been driven, in large part, by reductions in property wealth, linked in turn to the narrow distribution of home ownership.

Living and consuming

This was the year when the UK’s housing crisis finally rose to the top of the political agenda – which is where it should be. Britain’s broken housing market is the principal cause of discontent among those who feel ‘the system’ is against them – not least ‘priced-out’ youngsters who, despite holding down good jobs, are unable to buy.

It is generally accepted that the UK needs around 250,000 new homes each year to meet population growth and household formation. The UK’s chronic shortage of homes has been years in the making, as some of us have highlighted, with successive governments failing to ensure enough homes were built.

During the Thatcher era, as council houses were sold under ‘right to buy’ but not replaced, an average of just 190,900 new homes were constructed each year. This fell to 160,800 while John Major was Prime Minister, before dropping again to 156,000 under Tony Blair. Gordon Brown’s short premiership saw annual house-building fall further to 143,400, in the after­math of the 2008 credit crunch, which wiped out many small and medium-sized builders. There was another sharp drop under the coalition government of 2010–15, as new homes per annum fell to just 123,560 on average, the lowest peacetime level since the 1926 General Strike. Over the last 40 years, then, the UK has built around 2-3 million too few homes.

This fundamental lack of supply, coupled with the Bank of England’s ultra-loose monetary policies since 2009, has seen house prices spiral. That has led to the emergence of ‘generation rent’. A decade ago, almost 60% of 25 to 34 year-olds owned their own home. Now it’s well below 40%.

In response to this housing shortage, rather than taking measures to curb prices by ensuring more homes are built, the Conservatives have instead stoked-up the demand side of the market via their ‘Help to Buy’ initiative. The initial error was made in 2013 by then Chancellor George Osborne. His successor Philip Hammond compounded that mistake this year, by further extending the HTB scheme.

Since taking office in 2010, the Tories have also allowed the UK’s oligopolistic house-building industry to amass vast ‘land banks’, delaying the conversion of planning permissions in actual homes, boosting prices and profits by imposing a deliberate house-building go-slow. The campaign group Shelter estimates that no less than one in three homes granted planning permission between 2012 and 2016 has not been built – amounting to 320,000 units. In London, the share of such ‘phantom homes’ is one in two[3.  ‘Phantom Homes – Planning Permissions, Completions and Profits’, Shelter Research Briefing, July 2017]. Over the same period, the profits of the UK’s five largest house-builders soared by 388%, reaching £3.3bn in 2016. These facts are clear evidence that the UK’s housing market isn’t working.

Average house prices across the UK are now eight times the average wage – a historically high multiple, impossible to finance with a regular mortgage. Even youngsters holding down professional jobs are increasingly ‘priced-out’. That’s why half of first-time buyers depend on ‘the bank of mum and dad’, rising to two thirds in London and the South East – an option available only to some. The UK’s housing market, then, once a source of social mobility and security for those willing to work and save, now generates widespread discontent and anger.

Theresa May’s government has talked tough about ‘fixing the housing market’. But successive announcements throughout 2017 have fallen far short of the radical measures required to address the problem – including genuine sanctions against ‘land-banking’ developers. HTB, in fact, has significantly boosted the profits of large developers – a group of companies that has historically contributed generously to the Conservative Party’s coffers.

While the bulk of the solution to the UK’s housing shortage lies with the private sector, Britain is always going to need a significant and regularly replenished stock of subsidised social housing – another area where successive governments have failed. In response to the Grenfell Towers tragedy, Theresa May announced funding for just 5,000 social units a year for five years – set against a 2m-strong council house waiting list. This was a risible response, as I wrote at the time.

The UK’s broken housing market has been instrumental in convincing a growing number of voters that capitalism is unfair – from low-income workers to high-achieving professionals. Discontent among young and middle-aged adults, linked to their inability to buy a home, largely explains Jeremy Corbyn’s strong showing in the June 2017 election.

The discontent with ‘the system’ goes beyond housing, though, with more and more consumers feeling that businesses in general are ripping them off. Faith in a largely ‘free market’ settlement is increasingly in doubt, according to important research from The Social Market Foundation, published in October 2017. Perceived corporate excesses, such as high profits and prices, are fuelling a growing belief that capitalism is rigged, with the benefits accruing to a small elite at the expense of the ordinary UK households[4.  ‘Concentration not competition: the state of UK consumer markets,’ Social Market Foundation, October 2017.].

Eight out of ten UK consumer markets – including telecoms, banking and gas and electricity – were ‘concentrated’ in 2016, according to SMF research, dominated by a small number of large companies. Concentration in the telecoms market has increased over the past decade with respect to broadband and mobile telephony. Banking is also more concentrated than before 2008, with the market for current accounts still controlled by just a few players. The household utility market is similarly in the grip of a handful of energy companies. All this results in a range of negative outcomes for UK consumers – including a lack of choice, poorer customer service, lower levels of trust, ‘super-normal’ profits, under-investment and high prices.

It is vital that ‘barriers to entry’ are lowered so these vital consumer markets become more competitive. Too often, onerous regulatory and licencing requirements, encouraged by incumbent firms, deter new entrants. Competition policy also has a tendency to be far too influenced by supplier interests, rather than consumer concerns. When industries are challenged, regulatory changes are typically made only to ‘industry standards’ and ‘voluntary codes’ – non-binding stipulations, that are routinely circumvented.

Some consumer markets work relatively well. The SMF report highlighted that the rise of discount supermarkets in the UK such as Aldi and Lidl has driven a decline in the concentration of the UK groceries market in recent years. That has generated better outcomes for consumers, even if some suppliers continue to feel badly treated by the large supermarket chains.

When it comes to housing, though, and large corporations such as telecoms companies and banks, consumers increasingly feel they’re getting a raw deal. If markets fail to work well, and capitalism doesn’t ‘deliver’, confidence in our ‘system’ could become endemic – resulting in draconian state interventions, driven by a loss of faith among voters. That would be the wrong outcome for Britain. At their best, free and functioning markets are a driving force of job creation, innovation and prosperity. They expand consumer choice and keep prices low as companies compete to win and keep customers. New ‘challengers’ who enter markets are able to pressure incumbent businesses, pushing them to offer better prices and invest to improve their services.

Yet big companies in the UK and across much of the Western world have become far too powerful. Our political, business and media elites are much too intertwined. Such cosy relationships enfeeble competition policy, further strengthening the might of a small number of corporations. It strikes me that, at some stage, Britain may need the kind of bold anti-trust measures that America reached for in the late nineteenth and early twentieth century – policies championed by Ida Tarbell, the journalist whose name is the title of this column and the subject of the short film I presented for UnHerd.

Systemic dangers

Historically, faith in capitalism has been dented in the aftermath of serious financial crises. This is what happened at the turn of the last century, when successive market collapses and the related ‘Long Depression’ across the US and Europe, roughly from the mid-1870s to the late 1890s, helped to usher in collectivism and ultimately anti-capitalist revolution in some nations – most famously Russia. The Wall Street crash of 1929, and subsequent ‘Great Depression’, also resulted in far more state involvement and public ownership in countries that remained broadly capitalist – a trend that lasted at least until the 1980s.

While the worst of the 2008 financial crisis is over, the global banking system remains precarious and financial markets extremely bloated. After years of quantitative easing, stock prices look extremely over-valued. The US Dow Jones Industrial Average closed at an all-time high over 70 times during 2017 – more than any other year in history. Government bond prices are also in bubble territory, with yields compressed due to years of QE-driven bond buying by central banks including the Federal Reserve and the Bank of England.

The reality is that systemic dangers continue to loom large in both global equity and bond markets – not least in the UK. It is far too complacent to conclude that ‘too big to fail’ has been ended – with the general public rightly sensing that the problem that caused the 2008 crisis is yet to be solved.

“The one big public narrative in this country is… the need to end too big to fail – because that process is not complete,” said Bank of England Governor Mark Carney in September. “Everywhere I go I am asked when I’m going to end too big to fail and the fundamental unfairness,” the Governor remarked.

The Bank of England has made much of the ‘stress tests’ it has conducted on the UK’s big banks – modeling exercises that estimate the ability of these institutions, given their financial reserves, to survive market squalls. It is important to “shed light” and “show that the core of the (UK financial) system is able to withstand very big shocks” says Carney, who in November announced that Britain’s largest seven lenders had all passed.

These stress tests, though, rely on the ‘book value’ of banks’ assets, rather than their more realistic market value. That overstates lenders’ resilience. The Bank of England itself also suffers from an inherent conflict of interest, given that its remit is to maintain the stability of the financial system. That makes it more likely to declare the banking sector ‘safe’, than to point publicly to problems.

Rather than relying on a financial regulator to provide reassurance, it would make far more sense to force big UK banks to become less complex – implementing a full, institutional separation between risky investment banking and commercial banking, for instance, as this column has often argued.

Britain’s banking sector, moreover, remains extremely opaque, with investors unable to gain complete access to balance sheets, so they can assess what is actually going on. That’s why some of our largest banks still have ‘price-to-book’ ratios of less than 1.0 – implying that the market objectively values the business to be worth less than the declared net value of its financial assets. That reveals lingering suspicions that such institutions are not being transparent, harbouring loss-making investments that continue to smoulder, in some disguised form, somewhere on or off their books. This hardly points to a banking sector that is healthy and durable – suggesting that capitalism could yet be dealt another serious blow, in the form of another banking crisis.

It is also worth noting, should another collapse occur, that the UK and other Western governments are now far more indebted than they were in 2007 ­­– meaning they are less able to support moribund banks and other collapsing financial institutions. With interest rates already at rock bottom, the Bank of England also has little or no scope to lower borrowing costs – which are already negative in real (inflation-adjusted) terms.

While pointing out these harsh truths, though, it would be wrong to be too gloomy. The UK economy – despite the near-constant drumbeat of negativity from much of the business press – is bearing up quite well. Growth remains relatively buoyant and, even though sterling has regained much of the ground it lost since the June 2016 Brexit referendum, manufacturers are benefitting from a boom in orders. Britain has also just been judged by Forbes magazine, despite doubts over our EU negotiations, to be have better business prospects in 2018 than any other country in the world – based on ‘technological readiness’, ‘property rights’, ‘inward investment’ and ‘low unemployment’.

While big businesses and many international observers like how the UK economy operates, though, British voters are more sanguine. Many reasonable, liberal-minded people supported Jeremy Corbyn in June 2017 and – and look determined to do so again.

“The government I lead will put fairness and opportunity at the heart of everything we do,” said Theresa May after this year’s election, in a speech that was widely praised. We’ve seen little, though, in the way of concrete policies that will help the ‘just about managing’ families the Prime Minister so rightly identified as being key to her party’s election success.

For my money, the key to keeping Corbyn out of office, and stopping UK capitalism from taking a seriously wrong turn, is the housing market – and, in particularly, creating the right environment to spark a sharp rise in the construction of new homes. Ministers must bring the large, foot-dragging developers to heel, imposing punitive taxes on land-holdings with planning permission that remain undeveloped.

The government should also create powerful Housing Development Corporations – public sector bodies that acquire land and grant themselves planning permission, before selling on plots to private developers, prioritising access to the small and medium-sized firms that will build quickly. The HDCs would use the ‘planning gain’ from the sharp rise in land values once permissions have been granted to fund new schools, hospitals, roads and so on. If housing development means local public infrastructure and services are significantly enhanced, there would be far fewer local objections to new housing.

Every UK recovery from recession over the last century has been associat­ed with a sharp rise in the construction of residential properties – with the exception of the post-2008 re­covery. It is no coincidence, given the slow pace of UK house building over the last decade, that we’re experiencing the longest and slowest economic recovery in British history.

Channels of Progress

‘Capitalism delivers the goods’, wrote Von Mises, some 70 years ago. Yet increasing numbers of UK voters now think otherwise, which is why a hard-left Labour leader inching close to power.

We should take our cue not from Von Mises, but another Austrian economist, Joseph Schumpeter – who was far less complacent about the survival of capitalism. Writing around the same time as Von Mises, Schumpeter provided a sparkling defence of capitalism, pointing famously to the ‘waves of creative destruction’ that occur as entrepreneurs invent and then innovate, cause old ideas, equipment and methods to become obsolete, bringing progress and improved living standards for all.

Such a system can only work, though, when there’s a safety net to help the needy – a condition which the UK largely fulfills, even though there will always be ways in which our welfare state and public services can be improved.

What’s really hindering UK capitalism, though, and causing this crisis of confidence, is the lack of genuine competition. Too many markets, across too many UK sectors, are failing to operate properly – from house building to banking to the supply of telephony, broadband, gas and electricity. These failures, the result of over-concentration and incumbent advantages, are now so considerable, and having such a negative impact on consumers, that there is a rising clamour to upend capitalism as a whole.

It was the US economist Mancur Olson who put his finger on the problem we now face, in his 1982 masterpiece ‘The Rise and Decline of Nations’. Building on Schumpter’s work, Olson argued that mature industrial economies, as they develop, become hobbled by ‘vested interests, unwilling and uninterested in change’. That’s the greatest long-term danger to capitalism, in my view, what Olson referred to as ‘the silting up of the channels of economic progress’, by established industry players, who are able to lobby governments, and defend and extend their market dominance by preventing meaningful regulation and reform.

Western capitalism in the twenty-first century, in the UK and elsewhere, is functioning rather less well than it should. Yet, too-big-to-fail banks that extort government bailouts are anathema to free markets. Monopoly corporations that restrict competition and exploit consumers are anathema to free markets.

An oligopolistic house-building sector, deliberately restricting the supply of new homes to keep prices and profits high, is anathema to free markets. Plummeting social mobility is anathema to free markets – undermining the social contract upon which capitalism is built. These trends are increasingly apparent in modern Britain. That’s why the UK’s broad cultural and political acceptance of free markets is now being questioned, bolstering Corbyn’s support.

Capitalism need not lead to ever-rising inequality, providing the right checks and balances are in place. But governments of all shades must constantly face down behaviour that causes systemic instability, and/or involves excessive corporate greed. That’s something which UK politicians from all parties, for some time now, have largely failed to do.

Being pro-market does not always mean being pro big business. In fact, it often means precisely the opposite – as this Tarbell column has previously argued. Unless the Conservative party shows it understands that, and soon, the world’s fifth-largest economy could soon be under the control of a rabble of neo-Marxists.

In the current era of ultra low interest rates and quantitative easing, there is some loosening of the old strictures. However, really radical ideas – such as helicopter money – have yet to break into the political mainstream. Governments don’t want to make their boundary-pushing too blatant – lest they they undermine public confidence in the currency.

There might, however, be another way for cash-strapped governments to replenish their treasuries. There’d be no monetary malarkey involved, and no need for extra borrowing or taxation. All that governments would need to do is make the most of a resource that is ultimately under their control: land.

We usually associate the wealth of a city with its buildings, but the most valuable and enduring resource is what those buildings are built on. Just how valuable, is the subject of an article by Richard Florida for CityLab:

“The total value of America’s urban land is astounding, adding up to more than $25 trillion as of 2010—that’s roughly more than double the nation’s total economic output or GDP in 2006, according to a recent study by economists at the University of Illinois and the University of Michigan…

“That breaks out to an average of $511,000 per acre, or $100,000 for the typical residential lot of roughly a fifth-acre (or $2,000 for a typical parking spot). Over the course of the study period, the total value of urban land peaked at more than $28 trillion—2.2 times more than the U.S. GDP in 2006, before the economic crash—but then fell to $18 trillion, or 1.3 times GDP, in 2009.”

The geographical distribution of this land wealth is highly uneven:

“New York… has the highest average price per acre, at more than $5 million. Next in line are three metros—San Francisco, Honolulu, and Jersey City across from Manhattan—where land is valued at $3.3 million per acre. Los Angeles is fifth, at $2.7 million per acre, with Orange County and San Jose following closely at $2.6 million and $2.3 million per acre, respectively. Average land values exceed $1 million per acre in a dozen additional metros, including Miami, Seattle, Oakland, Washington, D.C., and San Diego.”

Other big cities don’t do nearly so well. Boston comes in at $600,000 an acre and Houston less than half of that.  Bottom of the the pile are “Rust Belt metros such as Buffalo ($162,000) and Pittsburgh ($156,000)”.

Unsurprisingly, the most valuable land is in the city centres – a cool $123 million per acre in New York and in the $20-30 million range for Chicago, Washington and San Francisco.

Richard Florida sees a story of inequality in these figures:

“Economic inequality is bad, but spatial inequality is even worse. An acre of central land in New York City is worth approximately 72 times more than an acre of central Atlanta or Pittsburgh, and almost 1,400 times more than the same in many small Rust Belt and Sunbelt metros.”

On the other hand, there is a huge money-making opportunity to be had here – and not just for the Donald Trumps of this world. In countries lucky enough to have a ‘superstar city’ like New York or London, governments need to get entrepreneurial. Unless it’s being used for an important environmental or cultural purpose, publicly owned land in these areas should be systematically exploited for the public good.

For instance, in London there are low density housing estates scattered across the city’s inner suburbs. This is some of the most valuable land in the world and yet its potential is being wasted. Redeveloped at a density appropriate to its location it could generate enough income to greatly improve the lives of the people already living there, with plenty left over for the public purse. Furthermore, the extra population would generate ongoing revenue through local and national taxes, not to mention the wider boost to economic growth.

And let’s not forget the brownfield and greenfield sites within commuting distance of high productivity cities. This land could be worth hundreds of thousands or even millions of dollars per acre. Obviously, planning permission is the all important issue – but that too is in the gift of government.

The state is in a position to buy land and massively multiply its value overnight simply by issuing a piece of paper. The demand for land isn’t inexhaustible of course. And there would come a point at which the state-as-developer freed up enough land to lower property prices.

But this would be a good thing, indeed a miraculous thing – a license to print money while suppressing inflation.

Writing for Bloomberg, Noah Smith has a fascinating – and carefully worded – article about rising levels of government debt around the world. The headline, though, overstates his case: 

‘Debt Keeps Rising and Nothing Bad Happens’

Rising debt – especially when enabled by quantitative easing (QE) – is doing a great deal of harm; for instance, by inflating asset prices to the undeserved advantage of the asset-rich[1.  Read Douglas Carswell’s recent essay on this subject for UnHerd.]. 

However, that is not Smith’s point. His argument centres on stubborn refusal of 21st century government borrowing to hit the hard limits that marked our earlier economic history. With a few exceptions, such as Greece, western governments now seem able to keep borrowing at ultra-low interest rates without the money markets calling time. 

This begs a rather important question:

“Is there any limit to how high these debt levels can go? If central banks keep interest rates at or near zero forever, governments will never run out of cash, since debt service costs will be minimal. Of course, interest rates could rise if bond buyers stop buying government bonds, causing a solvency crisis and forcing a government default.”

Unless market demand for government bonds is infinite, it must have must have a limit. This is influenced by market confidence – which would be severely strained by any country whose debt levels went significantly above its peers (the exception here being Japan, whose government borrows heavily from its own people). 

Governments, however, have a trick for ensuring that their bonds don’t exhaust demand – which is to get their central banks to buy some of them back from the market. This is what Quantitative Easing is used for – though supposedly only in the special circumstances of a deep economic shock (such as the 2008 financial crisis).

Smith envisages a future in which QE is the norm not the exception:

“If the central bank prints money to buy newly issued government debt at a zero interest rate, the government can borrow infinite amounts while paying nothing.”

Wouldn’t this cause inflation? You’d think so, but, as previously noted, a decade of already super-lax monetary policy has yet to produce any. This has emboldened the monetary heretics:

“If inflation never materializes, central banks can keep printing money and using it to finance government deficits forever. This idea is the centerpiece of a theory called modern monetary theory, once relegated to the intellectual fringes but now gaining currency outside academia.”

It might not be long before this theory gets tested:

“At some point, if debt increases enough, the Federal Reserve will have to start financing the government with printed money. That would be a fascinating macroeconomic experiment, though maybe not one we should eagerly anticipate.”

‘Modern monetary theory’ happens to share the same initials as ‘magic money tree’ – but if we do start plucking fruit from its branches some uses may be less risky than others. The general principle is that we should use any such money to invest in economic productivity and/or to tackle asset inflation.

For instance, the state could buy-up land to create a ‘national land bank’. This would be deployed to get housing built where it’s most needed and to disrupt property speculation (and therefore runaway house prices).

Inflation is a function of supply and demand. Printing money would certainly push up demand, but if systematically used to tackle bottlenecks in supply we might just get away with it.

“…job losses will be followed by declines in income tax, social security contributions and other payroll taxes. Exchequers will see healthy tax flows replaced by increased obligations to pay social benefits. So far, so simple: why not tax a robot as if it was a person?”

The obvious retort is that robots aren’t people, they’re equipment:

“Neither robots (no matter how humanoid they might look) nor the AI which drives sophisticated machinery, highly evolved service-delivery mechanisms or financial transactions are anything other than tools by which businesses operate. They exist to boost business productivity and profitability. Taxing them as if they’re real people simply doesn’t make sense.”

Indeed, it makes no more sense to tax a robot then it does to tax a forklift truck, a combine harvester or a Corby trouser press. Each of those three items is a labour saving device, enabling what was previously the work of several people to be done by one person. A robot is no different.

But what if the new wave of automation is so powerful that instead of boosting our productivity, or freeing us up to do other work, we’re swept out of the labour market altogether?

I doubt whether this will happen anytime soon, but let’s assume it does. What would then happen to the tax base? Nothing good, says John Bull:

“In most G20 nations, the rate of tax which businesses pay on their profits (corporation tax in the UK) is less than the rate of income tax, social security contributions and payroll taxes paid by and in respect of the human workforce. So, increases in corporate profits promised by the rise of robotics will not result in a compensating increase in corporation tax receipts.”

He goes on to set out three options for a government response:

1. “Increase the rate of corporation tax to compensate for the decline in labour taxes…”
2. “Reduce the tax incentives available for research and development. While that might contribute to the solution, it could be disastrous for advanced economies.”
3. “Or, broaden the tax base in other ways, for example through the implementation of a land value tax, through higher business rates for companies using robotics or AI, or through similar measures specific to business type or location.”

As it happens, there’s something rather fundamental that both Mr Corbyn and Mr Bull have overlooked: In the event of a comprehensive robot takeover of the labour market, tax rises will not be necessary. Indeed, we’d be able to abolish taxes on productive economic activity.

Instead, government could simply create money to fill its own coffers and to distribute to the population, making up for lost wages. In normal circumstances that would unleash inflation, perhaps hyperinflation. But there’d be nothing normal about an economy in which most work was done by robots and artificially intelligent systems. In such a scenario the supply-side would be able to ramp-up production to cope with any surge in consumption.

Indeed, the big challenge would be on the demand-side. The end of the payroll wouldn’t just demolish the tax base, it would pauperise consumers. Government would have to step in to create demand in the economy.

To an extent, it is already doing so–for instance, by holding down interest rates and through quantitative easing. Some economists want central banks to go further, using so-called helicopter money to put spending power directly in consumers’ pockets.

If such measures are on the agenda in today’s high-employment economies, imagine what would happen if super-productive machines were doing our jobs.

As I’ve argued before, we are moving into an era of new economic realities, in which old assumptions no longer apply. But just as we stand on the threshold of a fundamentally different future, our politicians are refighting the ideological battles of the 1970s.

Lucky old robots: they don’t feel despair.

Before the financial crash, excessively low interest rates, quantitive easing and the like would be punished with inflation. In the earlier part of this decade, the op-ed pages were full of rightwing economic pundits saying this would happen sure as clockwork (if we didn’t mend our ways in time). Yet, like their leftwing brethren (who warned that austerity would cause mass unemployment), they were proved wrong.

The post hoc rationalisation was that the financial crisis was much worse than previously realised – and that the shock of such a deep recession must have suppressed demand. This excuse is wearing thin. We’re now ten years on from the start of the crisis – and several years into the recovery (the precise number depending on location). So where’s that inflation then?

It’s a mystery that Nouriel Roubini tries to fathom in a piece for Project Syndicate:

“Since the summer of 2016, the global economy has been in a period of moderate expansion, with the growth rate accelerating gradually. What has not picked up, at least in the advanced economies, is inflation. The question is why.”

If we can’t blame lack of demand, then we ought to look on the supply-side of the economy:

“One possible explanation for the mysterious combination of stronger growth and low inflation is that, in addition to stronger aggregate demand, developed economies have been experiencing positive supply shocks.”

A ‘positive supply shock’ is basically a glut – an expected surge in production sufficient to soak up demand at the same (or lower) prices.

Roubini lists a number of examples, all of which are happening to the global economy right now:

“Such shocks may come in many forms. Globalization keeps cheap goods and services flowing from China and other emerging markets. Weaker unions and workers’ reduced bargaining power have flattened out the Phillips curve, with low structural unemployment producing little wage inflation. Oil and commodity prices are low or declining. And technological innovations, starting with a new Internet revolution, are reducing the costs of goods and services.

The conventional wisdom is that it won’t last. But, in this context, the conventional wisdom is circular – it assumes whatever it takes to stop conventional economic theory from blowing up. Roubini (who defied convention when he was one of the very few economists to predict the financial crisis) argues that we should be open to the possibility that the positive supply shocks are permanent (or at least persistent).

He is not alone:

“…the Bank for International Settlements…argues that it is time to lower the inflation target from 2% to 0% – the rate that can now be expected, given permanent supply shocks. Trying to achieve 2% inflation in a context of such shocks, the BIS warns, would lead to excessively easy monetary policies, which would put upward pressure on prices of risk assets, and, ultimately, inflate dangerous bubbles.”

Perhaps we should go even further and consider a truly radical possibility – which is that the long prophesied age of abundance is beginning to manifest itself.

The most fundamental assumption in conventional economic theory is scarcity. Indeed, the whole of economics is basically devoted to answering one question: how should we allocate scarce resources?

The concept of post-scarcity economics has been explored by science fiction writers, but policy makers need to catch-up. Though obviously not happening universally, there are more and more examples of once scarce resources that are now super-abundant in particular places and at particular times. Examples include information and entertainment (thanks to the internet); food (people in the developed world have access to far more calories than they can sensibly consume); energy (at times of peak production from renewables, the wholesale price of electricity in some markets has dropped to zero); and even money itself (i.e. when money is loaned at close to zero interest).

With further technological progress (especially in robotics and artificial intelligence) we can expect the once distant prospect of post-scarcity to breakthrough into more and more of our present reality.

I’d like to reiterate that this process, though underway, is clearly incomplete and extremely uneven. As a result it is helping to drive all kinds of distortions – like inequality, asset bubbles and, in some countries, the threat of deflation.

Above all, it is overturning old assumptions, which now provide a dangerously misleading guide for policy makers.

To save capitalism – or at least the practice of liberty in the economic sphere – we must remake our theoretical frameworks.

However, his analysis does beg a rather big question: if easy money is so damaging then how have those responsible — first and foremost, the central bankers — got away with it for so long?

Actually, this is two questions:

• how have they got away with it politically; and
• how have they got away with it economically.

Firstly, the politics. Douglas Carswell is against independent central banks on principle. Monetary policy decisions should be a matter for democratically elected politicians, not appointed technocrats that can’t be voted out. Fair enough. However, in respect to easy money let’s not kid ourselves that this is something our politicians would have done any differently. Indeed, they’ve actively done their bit to pump cheap debt into the economy – for instance, by loosening the regulatory framework (until the resulting financial crisis). And I’m afraid that we, the people, haven’t exactly been out on the streets demanding a return to monetary and fiscal discipline. We like cheap debt, we like low taxes, we like high spending.

Of course, you can’t have low taxes and high spending without lots of borrowing. The deeper that a  nation goes into debt, the greater the pressure to keep interest low enough to keep the cost of servicing and refinancing that debt within affordable bounds. With enough pressure, monetary policy (i.e. the setting of interest rates) becomes subservient to fiscal policy (i.e. financing budget deficits). This state of affairs is known as fiscal dominance and it is generally reckoned to be a bad thing. Writing for City Journal, the economist Bill Watkins explains why:

“For years, fiscal dominance existed on the fringes of economics, important mostly to economists thinking about fiscally irresponsible countries such as Argentina and Brazil. Italy, too, has a long record of monetary accommodation of deficit spending. There’s a reason none of these countries has achieved its economic potential—fiscal dominance has led to bad outcomes, including ever-increasing inflation, reduced trade, declining consumption, and, eventually, political instability.”

Keeping a lid on inflation (and everything that stems from it) is, in normal circumstances, the top priority of monetary policy and thus the setting of interest rates. Fiscal dominance typically distorts the order of priorities, dragging interest rates below the level needed to contain the inflationary beast. Because voters like low prices even more than low taxes and high spending, they tend to punish governments that let inflation rip.

In previous decades, ultra-low interest rates would have resulted in ultra-high inflation; but in recent years, they haven’t. Which brings us to our second question. The main reason why the central bankers have gotten away with things economically is that they’ve been operating in a disinflationary environment. Indeed, in some countries – such as Japan – the primary threat is outright deflation (i.e. negative inflation).

If inflation isn’t a threat (or at least a much smaller one than it used to be) then some might ask whether fiscal dominance matters any more. Needless to say, it does matter, because, as Douglas Carswell explains in his article, rock bottom interest rate policy (and its scuzzy mate, quantitative easing) can wreak havoc in many other ways.

Perhaps the most fundamental question is why the money markets put up with such low interest rates. After all, the rates set by central bankers act as a floor on market rates, not a ceiling. Commercial lenders have every incentive to loan money at the highest rate that borrowers are willing to pay. Like all prices in a free market this is subject to supply and demand. Therefore if interest rates are so low it is because there is too much money on offer to borrowers who have too little use for it (other than overheating the housing market).

If western economies were bursting with exciting opportunities in productivity-boosting enterprises, then the competition for investment capital would be more intense and interest rates would be higher. The fact that rates have been so low for so long is a sign not just of bad policy, but also of a failing economic system.