Modern Monetary Theory

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Tax and modern monetary theory

Published by Anonymous (not verified) on Mon, 13/09/2021 - 7:32pm in

I noted yesterday the criticisms that can entirely appropriately be made of those who suggest modern monetary theory (MMT) is dangerous, and even wrong because they literally make up what they suggest it says, with their claims being unrelated to what MMT actually proposes. This undermines the prospect of proper debate, which is, no doubt, their aim.

That said, I am also critical of those who support MMT who make claims for it that are simply untrue. This is especially true with regard to taxation, where far too many who claim to be supporters of MMT almost seek to dismiss tax as being an irrelevance because the government can always create money to pay for public services.

It is, of course, true that all public services are paid for by money creation in the first instance.

And it is also entirely true that MMT suggests that tax never directly funds government spending in the case of those governments where there is a central bank under the control of the government making the spending, there is a domestic currency created by that central bank, and there is little or no government debt denominated in foreign currency. This describes the UK.

But this does not mean tax has no role in an MMT aware economy. That role is just as important, and maybe more so, than in an economy where the awareness of MMT is limited.

When MMT awareness is limited it is believed (incorrectly) that the ordering of the government financing function is:


In an MMT aware economy the reality that this function is as follows is recognised:

Take deposits, or
Maintain overdraft with central bank

Note that there is no borrowing as such in an MMT aware economy. The government is a deposit taker in the sense that it provides savings facilities, but does not do so to fund its activities, because the spending has already occurred. If it does not take deposits (by providing gilt savings facilities, for example) but does run a deficit it can simply run an overdraft with its central bank instead, which QE can be used to disguise, albeit rather ineffectively.

But note tax appears in both equations, and it must. It does, however, perform a very different function in MMT. It cancels money creation to control inflation and critically becomes a tool for delivery of social, fiscal and economic policy. To dismiss tax as of no consequence in MMT is to say that those three things do not matter, and they quite emphatically do. That is why those who downplay tax in MMT are wrong.

This is an issue about which I continue to be concerned. Many who support MMT ignore this point, far too often. That undermines their case.

For that reason, and because HMRC are expected to issue their new tax gap data this week, I thought it worth sharing in full a paper I wrote a couple of years ago on tax and MMT for the Real World Economic Review. It’s mildly academic in tone, but should be reasonably accessible and makes the case for Modern Taxation Theory, which is in my view the necessary corollary of MMT. I hope it’s worth the time reading it.

Tax and modern monetary theory


Modern monetary theory (MMT) has played an important role in advancing understanding of the economic function of taxation, including by showing how it acts to “cancel” government spending as part of a spend-tax cycle. To date however, MMT has not fully explored the implication of these insights for how tax can also achieve social, economic and fiscal goals, as well as macroeconomic ones. This omission is addressed in this paper by suggesting that cash paid in tax is a residual figure arising from a plethora of decisions on tax bases, reliefs and allowances, as well as tax gaps that result from non-compliant taxpayer behaviour. The impact of this range of decisions and practices can be interpreted as a form of social policy with distributional and economic consequences. Such decisions and practices require systematic estimation and appraisal, as well as conscious management of their consequences, if effective control of the economy is to be maintained. It is suggested that this process can be supported by a modern theory of taxation (MTT) that, building on the understanding derived from MMT that tax is not a tool for government revenue maximisation, and can deliver new perspectives on the use of tax as a critical instrument in economic and social policy management.

Key words tax, modern monetary theory, tax gaps, tax spillover, social policy, fiscal policy


The Australian modern monetary theorist Steven Hail has suggested that “proponents of modern monetary theory... claim [that a] government need not balance its budget and are instead calling for the government to balance the economy, which they argue is a different thing entirely” (Hail, 2017). Paul Krugman has offered a not dissimilar view, from a critics perspective, suggesting that what MMT argues is that if a state has a fiat currency and only borrows in its own currency then they do not face debt constraints but do instead suffer an inflation constraint that they have to manage through the control of aggregate demand. As he put is “the budget deficit should be big enough to produce full employment, but not so big as to produce inflationary overheating” (Krugman, 2019). In summary, MMT might be suggested to describe a process for the management of aggregate demand within an economy with its own fiat currency.

One of the consequent curiosities of MMT is its indifference towards describing at least some of the aspects of the role of tax within such an economy. It is stressed that this omission is partial: as several MMT authors (Mitchell et al., 2019; Wray, 2012) make clear, the relationship between modern monetary theory and tax is intimate in a number of areas. For example, it is argued that tax drives the value of money (Wray, 2012, p. 47). This is because it is the promise that a government makes to only accept the currency it creates in settlement of the tax liabilities that it issues that in turn creates demand for its currency. Currency itself consequently has a fiscal nature and underpinning. And as Murphy (2015) argues, if the proportion of anyone’s income demanded in tax within the economy is significant then there is no incentive to use anything but the locally created fiat currency for the settlement of transactions arising within that economy: the risk of exchange gain or loss arising at the time of settlement of tax liabilities in that circumstance discourages anything else. The relationship between tax and the currency does as a result afford a government considerable control over its economy in that situation. In addition, the idea implicit throughout MMT that a government need not tax before spending, but actually must first create the money required before tax payment can take place has become a central insight integral to the relevance of MMT (Bell 1998). But despite this it is suggested that the role of tax within some aspects of MMT remains underdeveloped.

The primary reason for this would appear to be that most discussion of tax within the context of MMT is primarily, and perhaps unsurprisingly given MMT’s focus on aggregate demand management, macroeconomic. For example, it has been argued that within MMT the primary role of tax is to offset demand (Fullwiler et al., 2019). This suggestion builds on the idea that a government that demands more in tax than it injects into the economy through spending necessarily creates unemployment as a consequence (Mitchell and Mosler, 2001). Tax in this view has a very clear macroeconomic role. The overall argument in relation to this has a longer history. Chartalism maintained that tax had a critical role in “withdrawing” money from circulation within the economy, and therefore assisted with the control of inflation (Lerner, 1947). Some suggest that this insight should continue to inform MMT (Murphy, 2015). For others using tax to control inflation after it has broken out is an inappropriate use of its insights: it is instead suggested that MMT requires planning to prevent inflation occurring in the first place (Fullwiler et al., 2019).

However viewed, this debate is macroeconomically focused. It is suggested that this is unfortunate in that it restricts the contribution that MMT might make to understanding the role of tax within an economy once the insights it has to offer are accepted because it ignores the crucial question of how the design of taxation systems can also serve microeconomic (or regulatory) and social policy objectives, as well as macroeconomic ones. There is a perception that proponents of MMT have not embraced this issue (Roth, 2019). For example, MMT’s relative indifference to taxing those with wealth (Kelton, 2019), is in part a function of MMT’s suggestion that redistribution can be achieved without taxation, by using government created credit. Such positions can obscure public understanding of the potential role of taxation within MMT.

It is this potential role that the rest of this paper seeks to explore. In the process a number of issues are addressed. Firstly, it is shown that cash tax collected, which might be considered a balancing figure in MMT’s explanation of the funding of government spending, is a residual figure settled only after a whole range of decisions by government and taxpayers are taken into account. It is suggested that this requires that MMT consider how to manage the tax system as a whole if it is to fulfill its objectives, effectively requiring the creation of a modern taxation theory (MTT). Secondly, the liberating effect of understanding tax as cancellation of money creation is considered. It is suggested that this provides the understanding on which MTT can be based. Thirdly, the consequence of this understanding for managing the role of tax within the economy is explored. The principle that taxes should not cause harm, implicit in recent work on tax spillovers is then explored as a characteristic of MTT before conclusions are drawn.

The limitations to MMT’s macroeconomic perception of tax

As Mitchell et al. (2019, p. 333) suggest, within MMT the macroeconomic identity describing the monetary funding of government expenditure (G) can be summarised as follows, presuming T is the sum total of taxes raised in cash during a period, B is government borrowing and M is government created money, with ∆ representing the change in a total during a period:

G = ∆B+ ∆M + T

The concern in the context of this paper is with the interpretation of T, i.e. cash raised in taxes, within this equation and within wider society. The reality is that T in this formulation is a residual figure i.e. the tax paid in cash is only settled after a whole range of other issues have been addressed and their value has been assessed. So, as is noted below, T is influenced by decisions on the tax bases that should actually be subjected to taxation, decisions on rates and allowances to be provided, and taxpayer decisions on the degree to which they will be compliant with the demands made of them. It is not, then, the case, that a decision can be taken in isolation on the sum of tax to be collected: these other factors have to be taken into account in forecasting the sum likely to be recovered from the economy. If, as Fullwiler et al. (2019) argue, MMT is a tool to be used for policy formulation, and total cash tax paid plays a particular role in this process by assisting determination of the planned inflation rate, then this understanding is particularly significant: it requires a reconsideration of the significance of tax within MMT, and as a related issue of importance in its own right.

In this context an appreciation of the tax gap is important. Both the IMF (2013) and the European Commission (TAXUD, 2018) argue that net tax collection arises after the deduction of two broadly stated tax gaps that reduce total potential gross tax yields i.e.

T = Tt - Tf - Tc

where Tt is the total potential tax due on the tax base, Tf is the net tax foregone as a result of policy decisions and Tc is the tax compliance gap. Both terms require expansion. In the normative typology of the tax base that the IMF (2013) suggests be used for estimation of tax policy gaps:

Tt=(Tb xTr)

where Tb is the tax base for a particular tax and Tr the standard tax rate for that tax base, and:

Tf =Tp +Ts

where Tp represents the value of tax bases not taxed as a consequence of a policy decision (e.g. wealth) and Ts represents the value of allowances, reliefs and varying tax rates granted within bases that are taxed to encourage varying taxpayer behaviours by way of tax spends, whilst:

Tc =Te +Ta +Tu

where Te is the part of the tax compliance gap resulting from illegal tax evasion; Ta is the part resulting from the avoidance of those tax obligations that a legislature thinks fall on taxpayers and Tu is the part of the tax compliance gap resulting from non-payment of tax debts, or unpaid taxes.

Substituting this understanding in the equation for G we get:

G=∆B+∆M+((TbxTr) - Tp-Ts - Te -Ta-Tu)

This version of the identity previously noted suggests that the task of using tax to manage inflation, whether before or after it emerges into an economy in the fashion that MMT suggests possible is more complex than the basic identity implies. This is because what this identity makes clear is that the variable T – the tax settled in cash during a period - is the residual of a whole range of other decisions within the economy. The new identity that is noted implies that there are at least five tax gaps that have impact on this total:

1. The tax policy gap, which refers to the cost of potential tax bases not taxed by choice e.g. wealth, which is untaxed in many economies;
2. The tax spend gap, which refers to the costs (both positive and negative) of granting higher and lower rates of tax that vary from the norm or standard rate as well as the cost of all allowances and reliefs granted to taxpayers, for whatever reason;
3. The cost of tax evasion;
4. The cost of tax avoidance;
5. The cost of tax bad debt i.e. declared sums owing but not actually paid.

Policy is required on each of these issues to manage cash tax collected. Crucially however, MMT thinking has potential implications for the context in which this management should take place. In effect what this implies is required is a new theory of taxation that does not focus on cash tax collected as such, but does instead focus upon the role of tax in cancelling the credit created by government spending within the economy whilst simultaneously delivering the social and economic policies of a government that drive decision making on the tax policy and tax spend gaps.

Tax as cancellation

Within the context of this suggestion that a modern taxation theory might be required, one of MMT’s primary and most useful insights is its explanation that there is not a “tax and spend cycle” but a “spend and tax cycle”. This logically follows from the MMT position that all government spending is initially funded by a credit creation process managed by a government and its central bank. The importance of the logic is that this means that the primary role of tax is to cancel that credit (which takes the form of new money), created by government as a result of its spending. In this role tax plays the same role in cancelling credit, as bank loan repayment does with regard to commercial bank created credit (McLeay et al., 2014). This logic, when placed within the context of the accounting identity for government expenditure discussed in the precious section, necessarily transforms thinking about tax. When tax is not required to fund government spending, which is the necessary and inevitable consequence of this logic, it can and should be designed to perform other pressing public policy roles within the economy. Other such roles can be identified (for example, these from Murphy, 2015):

1) Ratify the value of the currency by demanding payment of tax in the currency a government has created, thereby establishing the value of that currency for use in other transactions in the jurisdiction for which it is responsible;
2) Reclaim the money a government has spent into the economy as a result of the credit creation it undertakes in fulfilment of its democratic mandate;
3) Redistribute income and wealth;
4) Reprice goods and services;
5) Reorganise the economy i.e. to facilitate fiscal policy.

To date MMT has focused almost entirely on the first and second these, yet the others are as potentially important. Others, such as Avi-Yonah (2011) have made the same point. The variation on the accounting identity noted previously also makes clear that tax has political, political economy and social policy implications. It is suggested that MTT should explicitly accept these objectives for taxation. As a result, a modern taxation theory would implicitly reject the orthodox economic view of taxation as a funding mechanism in which the microeconomic objective of revenue maximisation is paramount (as elaborated , for example, in IFS, 2011). Instead a more holistic view of tax that draws on the one developed by John Kay (1986) can usefully be adopted on the basis of, and combined with, MMT insights. In this conception, government is an economic agent in its own right and is a major supplier of public services that reallocate resources within society whilst using tax as a mechanism to facilitate this process.

A broader view of tax management within the context of MMT

This argument suggests that an alternative view of taxation derived from fundamental MMT insights can be developed. To reconcile with the MMT view of tax being a tool to assist a government to fulfill its mandate to manage aggregate demand within the economy a MTT must suggest that a government must manage its tax gaps, of the types previously noted. This is where common ground must be created or the macro and microeconomic objectives of any government cannot be reconciled.

Unfortunately, few tax authorities do at present prepare tax gaps (Murphy, 2019; OECD, 2017, p. 182). One that does so annually is the UK’s HM Revenue & Customs (HMRC 2019b). It defines the tax gap as “the difference between the amount of tax that should, in theory, be collected by HMRC, against what is actually collected” (HMRC, 2016, p. 3). The US’s Internal Revenue Service (“IRS”) offers a variation on this when suggesting that the tax gap is “the difference between the tax that taxpayers should pay and what they actually pay on a timely basis” (IRS, 2016). Their emphasis on “timely payment” adds a nuance absent from the HMRC definition. Both, however, focus on the tax compliance gap (Tc in the notation used previously) and ignore tax forgone (Tf).

In the context of both MMT, with its focus on aggregate demand, and MTT, with a focus on the social and economic objectives of taxation, to ignore tax foregone is a mistake: tax foregone is that tax that a government chooses not to collect for policy reasons. It as such equates to the tax policy gap, but by describing the sum as tax foregone it is made clear that this is a decision not to tax. The International Monetary Fund’s (IMF) addresses this issue of tax foregone, first by suggesting that the appraisal of the tax compliance gap (Tc) has to be undertaken within “the current policy framework” (IMF, 2013, p. 11) and secondly by explicitly recognising that there is a tax foregone, or policy, tax gap arising as a result of the choices made by legislators that necessarily reduces available tax revenues. They refer to this sum, which is referred to as tax foregone in the notation used previously, as a “policy gap”, which they suggest refers to tax laws granting exemptions, tax liability deferrals or preferential tax rates (IMF, 2013, p. 11). These decisions have substantial impact on the chances of achieving the goals that it is suggested should be implicit in a MTT, but at the same time so do they with regard to MMT’s aim of managing aggregate demand.

The European Commission Taxation and Customs Union (TAXUD), which publishes an annual study of the European Union’s VAT gap (TAXUD, 2018), also embraces this idea of a “tax policy gap”, noting that:

“[T]he Policy Gap captures the effects of applying multiple rates and exemptions on the theoretical revenue that could be levied in a given VAT system. In other words, the Policy Gap is an indicator of the additional VAT revenue that a Member State could theoretically, i.e. in case of perfect tax compliance, generate if it applied a uniform VAT rate on all goods and services” (TAXUD, 2016, p. 51).

It should be noted that these two international agencies apart, the significance of this gap is ignored and it would appear that few governments put much effort into appraising the scale of the cost of the tax policy gap. Again, it could be argued that the UK is an exception, but the data it has to offer to appraise this gap is incomplete (HMRC, 2019a). That authority’s focus is on the tax compliance gap (e.g. HMRC, 2019b).

When considering tax compliance gaps it is apparent that there are a range of methods that might be used to prepare such estimates. It has been argued that all are unreliable (Gemmell and Hasseldine, 2013). The IMF (2013) has effectively endorsed two approaches as being of merit. One is described as a “top-down” approach. This uses macroeconomic data to estimate the potential tax base within an economy.

Taking value added tax (VAT) as an example, on this basis the likely VAT due on each part of consumption within national income is estimated as if no allowances or reliefs are supplied to taxpayers (Tt). Allowance is then made for the items exempted from charge as a result of policy decisions (Tp). In addition the cost of those allowances and reliefs granted either for reasons of administrative ease or to influence taxpayer behaviour is also estimated (Ts). These last two estimates constitute the VAT policy gap (Tf). The estimated tax due net of the VAT policy gap is then compared with the actual yield to suggest a compliance tax gap in a “top down” approach. The compliance gap represents tax lost as a result of taxpayer behaviour. As the IMF have noted, an analysis of this sort is dependent upon the existence of statistics of sufficient quality on the size of the tax base derived from sources other than taxpayer records (IMF, 2017, p. 33).

In contrast to this top down approach, a “bottom-up” approach uses an audit sample of submitted tax returns to estimate errors found within them and then extrapolates this error rate across the whole population of submitted returns (HMRC, 2019c, p. 4). The method does however leave this approach very vulnerable to estimates of tax not declared at all on tax returns not submitted by persons whose identity may not even be known. The methodology is also not good at capturing tax not paid by relatively small groups in society, such as the very wealthy. As Zucman et al., (2017) have noted, if such groups are predisposed to evasion then resulting tax gap estimates may be very vulnerable to error.

If MMT is to succeed in the objective of collecting specified sums in tax to ensure the cancellation function of tax has macroeconomic integrity, then it is apparent that those tax gaps need to be estimated. Moreover, they will need to be better estimated than at present, or the MMT objective of eliminating inflation through ex ante planning will be flawed and questionable. Put another way, if tax is to adequately fulfil its “cancellation function,” it will need to draw on tax gap estimates to come to a more precise appreciation of the extent to which “cancellation” is in fact taking place through current tax policy, and how future policy might be adjusted to better fulfil this function.
There is another dimension to this management of taxation from an MMT perspective. The job guarantee in pursuit of full employment (Mitchell et al., 2019, p. 301ff), is partially a normative position. This minimally normative approach to economic policy implicit in the job guarantee could also be extended to other areas of taxation management to fulfil, most particularly the third, fourth and fifth objectives for taxation (Murphy, 2015).

MMT’s description of a spend and tax cycle also opens up the possibility of tax policy being directed towards other social and economic objectives, while also allowing better performance of its macroeconomic cancellation function. Such an approach permits reframing of the way in which orthodox economics might view the expression of the total tax due on the tax base (Tt), noted above. In an orthodox view the single standard rate of tax with minimal allowances that is implicit in that formulation would be the optimum ordering of the tax system (see, for example, commentary by Sijbren Cnossen, IFS, 2011, p. 370). However, in a tax system that is not revenue maximising, and is instead seeking to promote social and economic policy, it follows that there would be good reason why tax rates would vary from the standard rate, even if it remained appropriate to indicate that such a rate existed. Progressive taxation will require this variation even if it challenges the orthodox view of efficient taxation. Likewise, some allowances and reliefs could be created to quite specifically induce changes in behaviour, which would again not fit a model of efficient taxation commonly described in orthodox economic literature (for example, Mankiw et al., 2009; Jorgensen and Yun, 2013).

MTT will, therefore, building on the logic of MMT produce outcomes in tax policy quite different to those implicit in orthodox economic literature on this issue. Such variations in rates, reliefs and allowances will however, create the potential for tax spillovers, which appraise the impact one part of a tax system might have on the effectiveness or otherwise of other parts of the tax system of the same country in which they arise, or the impact that the system being considered might have on other country’s capacity to pursue fiscal autonomy. An awareness of tax spillovers is, then, essential in any system considering how MMT might achieve its taxation goals, which also means that reviewing them is a necessary part of MTT.

Managing the risk within an MMT tax regime – the role of tax spillover analysis

Tax spillovers were first widely discussed as a result of a seminal paper by the IMF (2014) that established that the corporation tax system of one country could have “spillover” effects on the corporate tax yield of another country. This idea has been expanded upon by Baker and Murphy (2019). They suggest the use of a minimally normative assumption when undertaking tax spillover appraisal, which assumption is that spillover appraisal should consider whether or not any one aspect of a tax system causes harm to the same tax in the same tax jurisdiction, another tax in the same jurisdiction or any aspect of tax in another jurisdiction. In this context causing harm means that the stated object of the tax in question has been undermined. So, and to use a commonplace example, if the corporate income tax of a jurisdiction was to be charged at a lower rate than the personal income tax and it was readily possible to reassign income streams otherwise attributable to personal tax payers to corporations it is apparent that the corporate income tax harms the personal income tax in the jurisdiction in question. Such practices can hamper tax’s overall ability to perform a withdrawal function, as well as exacerbating wealth and income inequality.

In the appraisal system that Baker and Murphy propose four taxes (personal income tax, corporate income tax, social security and capital gains tax as a proxy for wealth taxes) are appraised for their spillover consequences both on each other and against four aspects of tax administration, including the prevailing tax politics of the jurisdiction (which considers whether a climate conducive to tax compliance by taxpayers is promoted, or not); the efficiency of the tax administration; the efficiency of the company and trust administration and the impact of international agreements on each of these other aspects of the tax system. The result is a multidimensional tax spillover analysis that considers both domestic and international tax spillover risk. The aim is to identify where that risk exists. This would appear to be of great significance for MMT: unless a government can predict with confidence that it can collect a targeted sum in tax then it follows that its ability to forecast the likely level of aggregate demand it can deliver within the economy without inflation arising will be severely curtailed. Tax spillovers undermine that prospect of forecasting accurately: tax spillover analysis suggests how that process can be improved. MTT extends the idea to make sure that the social objectives within the tax system achieve the social and economic goals noted previously without undermining each other.

MMT and tax – conclusions

MMT has had a substantial impact on much economic debate in recent years. Amongst its contributions has been the suggestion that there is not a “tax and spend cycle”, but a “spend and tax cycle”. This is liberating and allows for a re-conceptualisation of the role of tax within the economy. Rather than balancing a government’s fiscal equation, with indifference as to how the cash sum that achieves this goal is raised, tax can be an instrument of social, economic and fiscal (regulatory) policy. The idea that tax is a sum to be forecast when planning desired levels of inflation, as MMT considers necessary, is only possible if tax collected is seen as a residual of many other decisions implicit within that process. Various social and economic drivers of net tax owing require explicit consideration, as too do the various component elements of the tax gap. That consideration will extend to the requirement that all these sums be actively managed.
If the thinking implicit within modern monetary theory is to ever underpin the economic strategy of a government, assessing the identified five tiers of tax gap, will be critical to its success in imposing control on the economy for which it has responsibility. Tax spillover analysis in both domestic and international arenas is also key to this process of designing tax systems that do not undermine themselves, while achieving social goals and simultaneously assisting control of aggregate demand. Any government embracing MMT will, then, need to adopt this methodology. Tax is key to the success or otherwise of modern monetary theory in practice. To date its importance has been underplayed and under appreciated. If modern monetary theory is to succeed therefore, it has to be paralleled by a more expansive form of modern taxation theory, as explained, aided by tools such as tax gap appraisal and tax spillover assessments.


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The National Insurance increase shows that levelling up has been consigned to the Conservative bonfire of easy promises

Boris Johnson playing Connect 4 with an elderly lady and a nurse whilst visit Westport Care Home in East London 7/9/21Picture by Andrew Parsons / No 10 Downing Street. Creative Commons 2.0 license

A country ruled by criminals needs two revolutions, one small and one big: The small revolution is to overthrow the criminal government, the big revolution is to radically undo the damage these criminals have inflicted on the country!

Mehmet Murat Ildan, Contemporary Turkish playwright, novelist, and thinker


This week, Boris Johnson announced that his government would not ‘duck the tough decisions needed to get NHS patients the treatment they need’, or ‘to fix our broken social care system’. After all the fanfare and promises, from an already morally bankrupt government, the reality is somewhat different. The proposed solution to increase National Insurance will not only do nothing to resolve the growing crisis in social care, or create a fairer system for social care provision, it will also create further burdens on an economy already creaking at the seams.

When Johnson refers to a ‘broken’ health and social care system, he is ignoring the elephant in the room. Who broke it? The actions of successive Conservative governments are to blame, through a decade of cuts that have deliberately starved the public sector of adequate funding, along with decades of allowing a private profit-seeking sector to benefit from public money, at the expense of those needing health or social care services. It did so as a result of its fixation with fiscal discipline and market-driven economic dogma.

The Covid-19 pandemic has exposed the folly of austerity, the toxic and harmful obsession with private sector involvement in the delivery of public services, and the consequences of the lack of strategic planning for such events, which have resulted in the NHS and social care struggling to function effectively during this crisis and led to unnecessary suffering and deaths.

Adding to the already existing shortage of nurses (over 40,000) and other health workers, insufficient ICU facilities, ventilators, beds and PPE, were the warning indicators that something was seriously wrong, as hospitals burst at the seams with very sick patients needing treatment. As a result, we are now facing a growing backlog of patients awaiting diagnosis or treatment (or who have even died waiting), with experts warning of the future consequences on staff already suffering from burnout, stress, and exhaustion. It is humanly unsustainable.

Social care services have not been immune from the same economic illiteracy. The warning signs preceded the pandemic. Social care is in meltdown now, and the proposal to increase National Insurance will not only fail to enable the fairer payment system for social care promised by the government, but it will also do little to alleviate the immediate problems caused by government policies.

Government officials have been clear that most of the money raised by the new tax will be spent on the NHS in the first three years, on the assumption that demand for state-funded care will increase from 2026, as people reach the spending cap. These proposals make no attempt to deal with an already failing underfunded system, and social care providers and charities have already indicated that the extra resources would not be sufficient to improve standards.

The problems faced by social care have been longstanding, exacerbated over decades by a mishmash of reforms by governments unwilling to grasp the nettle, as a likely result of the uncomfortable, but false, question of affordability and how it would be paid for. As a result, under an unfair means-tested social care system, which has for decades been served by private profit-seeking companies and charities relying on state funding to function, social care services have increasingly been impacted by years of funding cuts affecting local council budgets, putting increasing pressures on care standards, wages and employment terms and conditions, as private providers struggle to make their businesses profitable.

This is just pushing the problem yet again down the line, when social care can already no longer meet the needs of those requiring support. Recently published figures showed that nearly 300,000 people are on local authority waiting lists for adult social care, a situation which has arisen as a result of funding pressures and delayed assessments. Figures also reveal a chronic shortage of care workers which has meant that those requiring a home care package have had no option but to accept a ‘temporary’ placement in residential facilities.

The government’s decision to increase National Insurance, a regressive tax that will affect the poorest, not the richest, will lead to many of those already poorly paid workers losing substantial income, as figures now show. Coupled with the looming cuts to the universal credit uplift of £20 a week and rising energy and food prices, it will add more unnecessary pain and suffering to people’s lives. A study published this week by the Health Foundation has shown that the UC cut will hit areas with the worst health hardest and is likely to widen inequality in health and wellbeing, running counter to the government’s promised levelling-up commitment.

Analysis by Policy in Practice noted that by April 2022, the combination of the new Health and Social Care Levy and the removal of the uplift to Universal Credit would mean that carers would be £1035 per year worse off, despite the planned (but scarcely generous) increase to the National Living Wage. Its Director Deven Ghelani said: ‘The unfairness of paying for social care through a rise in national insurance, whilst cutting support for the lowest earners at the same time, means those that kept us going through the pandemic are the ones hardest hit.’

It isn’t any wonder that the media reported this week that many were already choosing to leave social care and find work elsewhere. When Amazon becomes a better alternative to working in social care and playing a vital role in society, then we should question our societal values. When we are told that affordability is key to public service provision, the cruel consequence must be that, down the line, people must suffer higher taxes to balance the budget. How can that even be a consideration for a government which is a currency issuer and has the power of the public purse?

Astonishingly, even the free-market Adam Smith Institute called these plans ‘morally bankrupt’, saying that the government was asking ‘poorer workers to bail out millionaire property owners.’ They also criticised the plan as a ‘kick in the teeth for all the young working people of this country who have already been hard done by the pandemic.’

Whilst the solution is simple, ditching the for-profit motive and replacing it with an adequately funded, publicly paid for, managed, and delivered social care system, getting politicians to agree is quite another matter. Obsessing over how it will be paid for, we have two extremes of economic nonsense being touted in the news and on social media. Both sides of the political spectrum are dedicated to raising taxes to pay for health and social care. The Tories, as these plans show, through punishing already poor people, and Labour by taxing the rich to raise revenue.

Quite rightly, one should tax the rich for reasons of equity and to strip away the power and influence their wealth brings them, but this week some left-wing progressive MPs have flogged the ‘taxing the rich’ to pay for social care narrative to death on social media. James Meadway, a former advisor to John McDonnell, also got in on the act saying that Labour should, ‘seize the opportunity to make the alternative funding case’. A wealth tax and other changes to tax arrangements would fit the bill, he suggested. At the same time, as his party came under pressure to set out a ‘costed plan’, the leader of the Labour Party, Keir Starmer, suggested that Labour would consider taxing wealth even more heavily to raise funds.

How depressingly predictable that the question of how you are going to pay for it is the standard response to funding public services, but the same question is never asked for bailing out banks or going to war.

Yes, of course, we want to see a more equitable society, but playing to Mrs Thatcher’s ‘There is no such thing as public money. There is only taxpayers’ money,’ assertion is a highly damaging tactic. When those supposedly on the progressive left associate themselves with an acolyte of the arch neoliberals Hayek and Friedman, it is scarcely an advert for confidence in them. Although the fact that such views are still underpinning policies and spending is not surprising, given the entrenchment of such narratives in political discourse. Playing to the understanding of one’s audience works every time.

What we need now, desperately, is an opposition which is prepared to put citizens before the profits of private companies and for politicians to reject the gibberish that the belief that taxes fund spending represents. It is hardly progressive to reinforce in the public mind the false household budget narratives of government spending; that tax rises will be necessary to fix what actually has been a deliberately broken health and social care system, or that they could be needed to keep the public accounts straight, as per Sunak’s coming ‘hard choices’ in the October Spending Review.

The insistence that there is no alternative to tax rises to pay for social care is both macroeconomically unsound and cruel to those who are already struggling to keep their heads above water. The consequences of higher taxes in these still uncertain times will be very hard on some of the poorest and most vulnerable in our society, and will do nothing to support the economy, businesses or the working population and their families, as the UC uplift is terminated, and energy and other costs rise. There still remains the looming potential crisis of rising unemployment as furlough ends, and even if there are sectors crying out for workers, there will likely be a mismatch in terms of skills requirements to fill new posts, and that will take time to correct.

In this respect, the government has put all its eggs into the free-market basket, expecting it to come up trumps, and it has failed, unsurprisingly. This government and decades of previous ones have trusted in the market to deliver. The invisible hand of the market, whatever that mythical beast is, has done no such thing. The private sector is a profit-seeking juggernaut which puts its own interests over public purpose. And therein lies the heart of the problem. Government has put fiscal discipline above people’s lives and allowed the private sector to run amok, in an unforgivable free-for-all bonanza of deregulation and profit-seeking.

The question is never, ‘is there enough money’ or ‘how will we pay for it?’ The question is do we have the real resources to deliver a better health and social care service, and if not, what are the solutions? That is the role of the government to plan and deliver through its spending and taxation policies. The government should be us, but now democracy is made a mockery, as government and corporations become one and the same thing, serving not the interests of the people or indeed the planet, but their own rapacious greed.

The price of a hands-off approach has been and will continue to be a heavy one. Government, as an elected body, should have a responsibility to serve its citizens to ensure fair and equitable wealth distribution, to create the vital public and social infrastructure upon which the economy depends, to plan for the future whether in a post Brexit era, for future pandemics, or indeed for a just green transition to deal with the climate emergency. Words and actions, however, like oil and water, don’t mix in Conservative terms. It has done none of those things, and now we have seen how easy it was for Conservative MPs in the Red Wall, who were originally objecting to the NI tax rise, to dutifully line up behind their macroeconomically challenged leaders to vote for more pain and suffering. Levelling up has been consigned to the Conservative bonfire of easy promises, and the people yet again duped into acceptance that there will be no alternative to tax rises, either to fund social care or balance the public accounts.

The failure of government hinges on a lie used to justify austerity. The lie of monetary scarcity. Over decades, despite the rhetoric and promises, the issue of social care has been swept under the carpet, and now the system is barely functioning. It will not be fixed by increasing taxes of any sort. It can only be fixed by a government with the political will to do so. Shamefully, successive governments have made a political choice not to fund it adequately. They invited the private sector in, as if social care or the NHS should be beholden to the god of business efficiency and profit, not public service for human well-being. The real cost has been lives, disaffected, poorly paid staff who are on the edge financially and physically.

We should be shouting it out loud. We have a government that chose this path. A government that chose to let social care collapse for the lie of fiscal discipline. What a terrible price we and our loved ones are paying. It didn’t and doesn’t have to be like this.

There are two potential outcomes: Either that we carry on with ‘business as usual’, as the work and pensions minister Baroness Stedman-Scott put it earlier this week to the House of Lords, referring to the removal of the UC uplift, or something else.

We could imagine a world where monetary reality informs government policies and spending decisions. Where government puts its citizens first. A world in which we could have a functioning public and social infrastructure, funded, managed and delivered publicly. An economy, underpinned by full employment and a Job Guarantee, that works for everyone, not just for an excessively wealthy elite that uses its power and influence to dominate public policy. A society where real resources and wealth are distributed more fairly, and a just transition to a green agenda to address the climate crisis looming close behind. Just imagine! The way may be rocky and uncertain, but if we don’t try, we will never know.




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The post The National Insurance increase shows that levelling up has been consigned to the Conservative bonfire of easy promises appeared first on The Gower Initiative for Modern Money Studies.

If the critics of modern monetary theory want to be taken seriously they have to get their facts right

Published by Anonymous (not verified) on Sun, 12/09/2021 - 7:46pm in

I was sent a link to an article by Michael U. Krause, Thomas A. Lubik and Karl Rhodes for the US Richmond Federal Reserve Bank which is one of the twelve regional federal reserve banks that make up the US Federal Reserve. In it the authors said:

Promoters of modern monetary theory (MMT) — including a growing number of pundits and policymakers — are toying with the idea that "deficits don't matter." They are tempted to believe that a government can merge fiscal and monetary policy and simply print currency to pay for its expenditures indefinitely without economic costs or constraints. This core tenet of MMT, which has permeated the public debate, worries economists of all stripes — not just "mainstream" economists, but also traditional Keynesians and heterodox economists.1

They added:

A key aspect of MMT is that it seems to present a cost-free solution to many economic and social problems. While a critique of current monetary and fiscal policy approaches may certainly be warranted, proponents of MMT go one step further. As we argue in this brief, implementing MMT would reverse the role of policy institutions and would fundamentally change the nature of U.S. currency both domestically and internationally. Arguably, implementing MMT policy prescriptions would therefore require a fundamental overhaul of the relationship between the individual and the state, and MMT's outcomes are potentially catastrophic. Nonetheless, some aspects of MMT are perfectly consistent with the dominant monetary paradigm in economics and are, in fact, the subject of much ongoing macroeconomic research and debate. But MMT differs greatly in its policy prescriptions.

After that the said:

The idea that a government, as the monopoly issuer of currency, can always print money to cover budget deficits and fund government spending may appear reasonable. But it flies in the face of mainstream economics and historical experience. We argue that its recent prominence is a product of the economic context of the past 25 years, where both interest rates and inflation were low. But in the end, MMT provides only an untested set of statements about the consequences of monetary policy.

The old maxim that when in a hole a person should stop digging clearly passed these authors by. There claims are, to be polite, wrong, but are typical of many made by opponents of MMT.

First of all, MMT need have no policy prescription attached to it. What it describes is the way that money operates in a fiat money economy. That is it.

What it most definitely adds is that there is a limit to the extent to which money may be created. That limit is reached at full employment. The idea that MMT says there may be money creation without limit is so grossly wrong it is absurd: what it emphatically says is the exact opposite. It recognises the real physical limits of the economy. The authors do not even hint of their awareness of that. It makes one wonder how much they have actually read about MMT. They only reference one MMT article by an MMT author, which is by Stephanie Kelton, but rather more by opponents.

What they have emphatically also not realised, or deliberately ignore, is that MMT has a very strong focus on inflation control.

They also, therefore, ign0re the role of tax in MMT, even though they read an edition of the Real World Economic Review where I had an article that discussed the role of tax within MMT.

And despite all their claims as to the threat to the US way of life that they say MMT represents they do not spell this out, or explain that all it enables is a New Deal in a fiat currency era.

The fact is that these authors have written about a straw man MMT that is wholly unrelated to what MMT says. This is normal, but it still is too readily believed by people like the Labour Party, who’d rather deal with false versions of MMT than real ones.

At some time when these combined neoliberal opponents of MMT realise that their prescriptions don’t work they will have to turn to what might. Then MMT will have its day.

And how do I know they are neoliberal? The authors say this:

When inflation is low and inflation expectations are well-anchored by central bank credibility, then the central bank may have more elbow room for expansionary monetary policy. Arguably, none of this analysis is controversial or inconsistent with mainstream macroeconomic thinking or MMT. What distinguishes the latter from the former is an apparent disregard, at least in the public debate, for obvious constraints on government spending.

In other words, they are wedded to the idea that democracy should not be in control of economic policy and that a coterie of central bankers, obsessed with oppressive mechanisms of control for consumer but not asset price inflation should run the economy. That’s neoliberal to the core, and they’ll make up whatever is necessary to defend it.

How will you resource it?

Published by Anonymous (not verified) on Sat, 11/09/2021 - 4:45pm in

I have not previously shared this. I think it's time I did:

The US can’t run out of dollars, unless some deeply misguided politicians decide that it should

Published by Anonymous (not verified) on Thu, 09/09/2021 - 6:31pm in

The FT includes this comment this morning:

Janet Yellen has warned the US Treasury risks running out of cash next month unless Congress increases its borrowing limit, as Joe Biden’s administration grows increasingly worried about a possible debt default.

In a letter to congressional leaders on Wednesday, the Treasury secretary said she could not offer “a specific estimate” of when it would run out of cash, but the “most likely outcome” was that its coffers would be “exhausted” during October.

The comment is, of course, misleading. There is no chance of the US running out of cash, or defaulting, unless that is what the Republicans choose that it should. The US can in reality create as much money as it wants, subject (if it is prudent) to inflation constraints and, of course, politics.

The  Republicans could try to crash the dollar. But let’s be quite clear, that is not necessary. And the impression given that the US is running out of money is false. It can’t do that unless some deeply misguided politicians choose otherwise.

The Most Fatal Ailment

Published by Anonymous (not verified) on Thu, 09/09/2021 - 12:42pm in

Part II of The Souls of the People series:

The souls of the people
The most fatal ailment
Ill fares the land

So long as you are happy
What we yearn to be
The sane and beautiful

The sum of what we have been
A little world made cunningly
Like a sinking star

The cries of the harvesters
The earth with its starkness
Written in blood

To do and die
In this fateful hour
So that we may fear less
The rags of time


Kurt Andersen wrote a superb piece in The Atlantic on inequality (2020), especially its trajectory in the US, although much applies to the rise of neoliberalism everywhere. I highly recommend the entire article for the insight it gives into what the heck happened in the last 50 years. As I can write no better, I quote Andersen:

From my parents’ teenage years in the 1930s and ’40s through my teenage years in the 1970s, American economic life became a lot more fair and democratic and secure than it had been when my grandparents were teenagers. But then all of a sudden, around 1980, that progress slowed, stopped, and in many ways reversed…

In 40 years, the share of wealth owned by our richest 1 percent has doubled, the collective net worth of the bottom half has dropped to almost zero, the median weekly pay for a full-time worker has increased by just 0.1 percent a year, only the incomes of the top 10 percent have grown in sync with the economy, and so on. Americans’ boats stopped rising together; most of our boats stopped rising at all. Economic inequality has reverted to the levels of a century ago and earlier, and so has economic insecurity, while economic immobility is almost certainly worse than it’s ever been.

And this is no accident of history. As Andersen observes:

What’s happened since the 1970s and ’80s didn’t just happen. It looks more like arson than a purely accidental fire, more like poisoning than a completely natural illness, more like a cheating of the many by the few—and although I’ve always been predisposed to disbelieve conspiracy theories, this amounts to a long-standing and well-executed conspiracy, not especially secret, by the leaders of the capitalist class, at the expense of everyone else.

But it is not a conspiracy precisely, as Andersen notes. Although the most powerful part—the subtle, unceasing manipulation of law to favor the rich happens out of sight and thus out of mind of the average citizen. On the other hand, much of the tax part is brazen, as well as calls to stop the people from organizing—not unions (although that too), but from using their own government to organize the country’s strengths, its collective skill, productive capacity and resources, and apply these to public goods. This is discussed in a later post.

If the best way to rob a bank is to own one (Black 2005) the best way to rob a society is to be in control of its laws. Like a bank owner, this is both public and behind the scenes, and like a bank, viewed as boring and thus ignored. It doesn’t need to be a conspiracy.

These issues are yet again the problem of our age. Their seeming trajectory towards resolution post WWII, with widespread prosperity and a rising middle class, has been undone. What undid them points to the underlying problem: immediate causes include the spectacular increase in financialization and unearned rents (Fischer 2021), the lack of and lack of enforcement of progressive taxes, both in turn largely due to a shift in the public’s understanding of these issues. What caused this shift in public understanding is the age old problem—power and the lack thereof.

“We Worry Less”

In 1985 economist John Munkirs painstakingly demonstrated the interconnections of a corporate fraternity that essentially ruled the US economy, calling the shots on what does and does not happen in many spheres (The Transformation of American Capitalism: From Competitive Market Structures to Centralized Private Sector Planning, 1985). This wasn’t conspiracy but fact, with details of the firms, interconnections, places and people as researched by a staid academic, not a wild-eyed conspiracist.*

And it was ignored precisely because of that. And because of the rise of the “economics” that would serve this new order. As a fellow institutional economist writes, “Unfortunately, as the corporations became more powerful and sophisticated in the post-war era, both the hoe and the hand upon it began to lose their vitality, as we institutionalists were ushered out of government and by and large made into second class citizens in economics departments.” (Sheehan in Neale et al. 1986).

And that was 1985. How far have we gone from there? Leaps and bounds it turns out. I note how bad the ailments related to inequality (in part stemming from corporate dominance of law) are now in the last post—many are worse than 1985, and inequality undoubtedly so. The gains of the post-war decades were lost as the wealthy managed to diminish them through law and finance. Just one example, by financial means: getting rid of “old-fashioned” pensions while enriching themselves in the process. With academic cheerleading not just from Chicago School types but New Keynesians as well, the “triangulation” strategies of the ’90s New Democrats, New Labour in the UK…you know it’s bad when an icon of 60’s counterculture and rock-n-roll is publishing the best economics reporting on a real issue such as this (Greed and Debt: The True Story of Mitt Romney and Bain Capital 2012, and Looting the Pension Funds: All Across America, Wall Street is Grabbing Money Meant for Public Workers 2013). The dominance and easy acceptance of this ethos by the 2000s was made clear in the inadvertently leaked and now infamous “Plutonomy” report by Citigroup. It opens:

The World is dividing into two blocs – the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies – economies powered by the wealthy…In plutonomies the rich absorb a disproportionate chunk of the economy and have a massive impact on reported aggregate numbers like savings rates, current account deficits, consumption levels, etc. This imbalance in inequality expresses itself in the standard scary “ global imbalances.” We worry less.

Citigroup, 2005

A year later Citigroup came out with a follow up, “Revisiting Plutonomy: The Rich Getting Richer.” Its summary:

Citigroup, 2006

A similar leak with much wider implications occurred in 2016 with the Panama Papers. If there was a hint at revolution at the end of the last post, I wonder why? You know it’s bad when The Economist asks “Can inequality only be fixed by war, revolution or plague?” (2018) and CNN notes “This billionaire warns that America’s massive wealth gap could lead to conflict” (2020).

The Non-Wealthy and Policy

There is a huge literature asking why the non-wealthy vote for candidates that support policies that harm them financially (against minimum wage laws, reduction in welfare programs, regressive taxes) or that do not support policies that would benefit them (public transport, healthcare, jobs programs, minimum wage laws, progressive taxes, environmental laws).

Two major factors commonly cited for the United States are:

  • Race (especially salient in the US; Alesina et al. 2001, see Zeitz 2017 for a thorough overview). Overall, racial divides across countries are highly predictive of less redistributive policies.
  • The Vietnam War. In the US in the late 1960s, unions and traditional Democrats became split from the anti-war and countercultural left, with significant numbers voting Republican. This split allowed for the rise of Republicans for decades, and eventually also the triangulation response of the Democrats, bringing the entire US political spectrum far to the right on core economic issues. (Frank 2004, Andersen 2020)

Other factors (note, of course, that these could all simultaneously occur with varying degrees of effect; the degree of the dilemma is enough to suggest there are multiple factors working simultaneously):

  • A federal system (especially in the US), making redistributive policies at the national level more difficult.
  • The Senate in the US (giving rural areas more power; rural communities may have traditional values that are against redistribution or “big government;” see Sargent 2021).
  • First-past-the-post electoral systems. The natural outcome of which is two parties; this may make a progressive faction less likely to influence outcomes, although other factors would need to explain why this seems to happen more to the left than right; e.g., corporate influence, other structural or sociocultural factors. This directly relates for another reason to lower middle-class apathy and voting on “values” rather than economic issues. There is a vague sense that there is no real difference on economic issues regarding regulation, corporations, free trade, investment in infrastructure, taxation, and industrial policy between the two major parties. There is little sense in voting for a third party in a first-past-the-post system, and the two main parties genuinely haven’t offered the working class true choices on economic policies. Given Democratic corporate connections, New Keynesian and neoclassical economic dominance, New Labour in the UK etc., this vague sense was well-founded.
  • The association, especially with 90s New Democrat and New Labour New Keynesian (not Postkeynesian!), pro-market, pro-privatization beliefs and the “triangulation” strategy of capitulation by the left. Relatedly, a disdain by the working class for a “liberal elite” real or imagined (see Frank 2016).
  • The emphasis on “values” and social issues by the right, sometimes with a bait-and-switch: a conservative candidate runs on values and emotive issues, then if wins actually focuses policy on economic issues in favor of the wealthy and corporations. When it is noticed that change on social issues isn’t happening, the politician blames a “liberal elite” for blocking them, thus setting the stage for another electoral victory on value issues in the next election. (see Why Working-Class People Vote Conservative 2012 by Haidt for an argument that voting on “values” makes sense to the working class; I disagree but it calls attention to key issues).
  • The influence of think-tanks. Directly on the public and media, and indirectly via academia on media and policy.

On a number of comment sections from articles on these issues there are comments “from the people” that should not be ignored—they are direct evidence of what people are thinking, and from my long personal experience working, living in and listening to working class America, they ring true (as representative of what the working class opine).

  • Service industry and blue collar jobs are both physically and mentally demanding and do not provide financial security, all in ways that are qualitatively different than professional and white collar jobs, no matter how hard the latter work. This combines with a strong traditional work ethic that makes “freebies” distasteful. “I work by butt off everyday and they can too.” This is greatly amplified when imagined and/or real increases in (regressive) taxes are claimed to be needed for social programs and public goods (because both Republicans and Democrats believe public projects can only happen with increased taxes). Even a small rise in taxes (or insurance rates, or rent, or inflation) significantly impacts the quality of life of the working poor, again in a way that is qualitatively different than for the financially secure. The middle class and above are secure and comfortable enough that they can afford the idea of paying a little more for redistributive programs (taxes don’t work like that at the national level. However, it only matters how people think taxes work, and they do indeed work like that at the municipal and state level, especially when they are regressive). This simple dynamic is vastly underestimated. The poor in America are deeply suspicious of government programs and redistribution and often the worse-off they are and the harder, less pleasant, and more precarious their job, the more they say that “if I can work so hard and make it with no welfare, then so can they” and then vote for candidates who are against social programs.
  • Successful underfunding and lack of exposure: these are somewhat similar and also reflect the success of conservative and/or libertarian long-term strategy. The right has managed to purposefully underfund public goods. In part, this directly achieves their end goal. More importantly, it greatly furthers the goal, as the right then uses poorly functioning underfunded systems as “examples” that “government does not work,” enabling an overall public sentiment that aids in their objective of reducing public goods and increasing profit-providing privatization (besides the US, this is occurring, for example, with rail transport and healthcare in the UK, and broadband in Australia [Mitchell 2017, 2019]).
    Relatedly, because of the lack of development or scaling back of public goods and services in the past, many Americans have not been exposed to quality public goods. To a degree that would scarcely be believed by a European who has not lived in the United States many Americans believe it is normal for healthcare to be incredibly expensive (with difficult paperwork involved, and tied to one’s employer), that public schools are necessarily low quality, have had little to no exposure to quality public transport (neither local nor long distance), and lack experience or perspective on other public goods such as civic architecture and an efficient bureaucracy (underfunded and unsurprisingly notoriously slow Departments of Motor Vehicles and the like; the experience with underfunded government at all levels fosters a belief that government doesn’t work, which is precisely what the right wants). Many now have low opinions of unions even in the North and coastal West; as a Southerner, I can tell you firsthand that a vast majority of Southerners literally have no idea what unions do and what they have accomplished in the past. This ties in with the dominance of neoclassical economics and the discredited belief that there is some “fair” and knowable distribution of wages and profit, when the truth is that wages and profit are always a political outcome. On two huge issues—healthcare and public infrastructure—and smaller ones as well, two generations or more of Americans literally do not know what quality public goods look like in practice. They won’t vote for what they don’t know.

The above ties in again to the deeply rooted success of think tanks, perhaps amplified by the internet. Again, through long personal experience, the amount of times one hears in conversations among the working class soundbites whose wording can only be from think tanks or think-tank-informed politicians—that minimum wage causes unemployment, that progressive taxes are unfair, that the wealthy create jobs, that welfare causes laziness, that government programs are always corrupt, that regulations stifle small businesses—is very high.

Note that explaining that the belief we must tax in order to organize public goods is a fallacy is a logical approach, as it is both true and should assuage the above fears (of the middle class on the ability to provide public goods). However, the message that social programs will lead to taxes and/or make people lazy is profoundly ingrained in the working poor and middle class in America, and may well make that approach unsuccessful despite it being true. Furthermore, taxes do raise funds for public goods at the state and municipal level. And those are especially regressive. Until those issues are fixed, the strategy to ignore taxation in order to facilitate public goods creation by separating it from the “tax the rich” slogan, will fail at those levels, and since many lump all taxes and public projects together, possibly at the national level as well.

The above attitudes and beliefs combine with the belief, whether cynically used by the right or legitimately held, that upward mobility is high, and high due to some kind of “free market” combined with a weak welfare system (maintaining “incentives”), and thus that 1) moving up is attainable and 2) progressive changes would somehow reduce upward mobility. As example, consider a primary benefit for the working poor in the US, the Earned Income Tax Credit (EITC). The power of a combined aspiration of upward mobility and disdain for “welfare” is common among the poor, e.g., “Because the EITC raises the incomes of so many, some low-income beneficiaries of the federal anti-poverty program regard themselves as middle class Americans—a struggling middle class who look down on “welfare cheats” but are confident nevertheless that upward mobility is theirs to claim.” (Why Working Poor Think They Are ‘Middle Class,’ 2015).

Note the irony that conservatives (and not infrequently, self-styled libertarians) vote in ways that increase government funding dramatically for corporations and the wealthy: subsidies, monopoly laws, corporate and patent law in ways that are interventionist and in favor of the wealthy (Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer 2016) not to mention interest on treasuries mainly held by the wealthy, laws favorable to individual asset holders and corporations (investments, real estate, anti-inheritance tax, liability laws, the 2008 bailouts and Federal Reserve/Treasury policies in general [TARP etc, “rescuing” rather than nationalizing failed companies and directly aiding individuals], or student loan bankruptcy laws).

Although the social and technological changes surrounding decades-long social change are of course vastly complex, the one thing that seems to always be just beneath the surface and that, both in their timing and mechanisms, seem causal, are economically conservative and libertarian think tanks.

The Influence of Think Tanks

These started early and highly ideological. By 1946 there was already a conservative reaction to the New Deal, The Foundation for Economic Education (FEE), whose aim “was to roll back policies of the New Deal. FEE opposed the Marshall Plan, Social Security and minimum wages, among other American social and economic policies” with corporate and industrial backing by “J. Howard Pew [President of Sunoco], Inland Steel, Quaker Oats, and Sears.” (“Foundation for Economic Education,” Wikipedia; see citations by Phillips-Fein 2009; Hamowy 2008; Schneider 2009 and Lichtman 2008).

FEE helped inspire and/or pay for the foundation of other conservative and libertarian groups, such as the Mount Pelerin Society and the Institute of Economic Affairs in the UK. There followed a long line of other think tanks, often umbrella groups which in turn funded or organized conferences, journals, youth outreach, and endless sub-groups funded or organized by an underlying foundation of think tanks, media owners, billionaires, and corporations (e.g., Koch brothers, Murdoch). Incidentally, the point that 1960s counterculture was part of what helped weaken Democrats/strengthen conservative and libertarian policies is supported by the history of the early (1953) and ultimately highly influential John M. Olin Foundation, with its effective fostering of the “law and economics” movement that would greatly increase conservative and libertarian views in law schools in the US. Although founded early, it was not very active until its founder was galvanized by the Willard Straight Hall takeover at Cornell University in 1969. It would go on to be a pillar of pro “free market” policies that law, above all else, could implement.

In total, the amount of influence via professorships, academic departments, organizations or institutes (George Mason, Mercatus Center, CATO, Mises Institute, the underestimated and extremely influential State Policy Network, the Fraser Institute), publishing and other media, programs for youth, providing an academic imprimatur to ideologically motivated economics, advising and consulting…all of these combined has cumulatively in size and over time had a massive influence, especially in the United States. Behind many politicians, talk radio and cable news hosts (and local news through the Sinclair Group) one can directly discern these earlier think tank writings and ideas, and at least indirectly, funding. Personal experience with how deeply their basic framing of issues shapes the acceptable range of discussion on economic issues suggests the impact runs deep (and shapes elections, e.g., Yglesias 2019).

Of course there are progressive and centrist think tanks (some are cited here), some of which predate the rise of conservative think tanks. Yet it seems their influence on the media and everyday people is far less. This is partly a question of funding imbalances (the wealthy and corporations can more easily fund think tanks with a wider academic and media reach than the working class can). Wealthy donors on “the left” seem to largely support what are in reality centrist think tanks; in the age of New Keynesianism this is hardly helpful. Overall the right supports what seems to many observers to be a more calculated, strategic, patient, and dogged approach, that has indeed had long term and fundamental impacts on framing and votes.

Overall, there is a sense that in the United States especially, and in many other countries as well, policies that aid the wealthy at the expense of equality—if not the poor directly—are dominating. And as the ancient Greeks already knew, “An imbalance between rich and poor is the oldest and most fatal ailment of all republics” (Plutarch). The next post looks into the distribution of this imbalance at the the national and international scale.


Notes & Selected References

* Munkirs’ aim is not related to conspiracy, but rather to highlight the unique, and essentially non-capitalist, system that had developed in the US. It is different than the centralized public planning of the USSR, the decentralized public planning of Western Europe, and from a Galbraithian decentralized private planning system; the US had by 1985 become a centralized private sector planning economy.


Note: I am interested in poverty and inequality everywhere. However, there is a default in this series towards the US, in part simply because I am from the United States, but also because the US, being an outlier among wealthy nations on poverty, inequality, and welfare, seems to offer useful lessons on what can go wrong even in a wealthy country with vast resources. Many countries are wealthy or becoming wealthy, and it would be a bad thing for them to fall into the traps that the US has. And the US is the third largest country in the world by population; it would be good to help the millions of poor or struggling Americans. Although inequality and poverty in developing countries is discussed some, the problem of poverty in developing countries is an entire field of study beyond the scope of this series. I hope this small series can shed some light or be useful in thinking about these problems more broadly, even with its focus on the US.

Update: Tom Hickey at mikenormaneconomics noted the relevance of the infamous 1971 Powell Memo. It powerfully demonstrates the concerted, intentional effort and outlines the succesful tactics of think tanks I discuss above. I overlooked mentioning it in the main body but its importance is difficult to overstate.

But one should not postpone more direct political action, while awaiting the gradual change in public opinion to be effected through education and information. Business must learn the lesson, long ago learned by labor and other self-interest groups. This is the lesson that political power is necessary; that such power must be assiduously cultivated; and that when necessary, it must be used aggressively and with determination — without embarrassment and without the reluctance which has been so characteristic of American business.
As unwelcome as it may be to the Chamber, it should consider assuming a broader and more vigorous role in the political arena.

Powell Memo 1971


Alesina, Alberto, Edward Glaeser and Bruce Sacerdote. 2001. Why Doesn’t The US Have A European-Style Welfare State? Harvard Institute of Economic Research, Discussion Paper Number 1933, Nov.

Andersen, Kurt. 2020. College-Educated Professionals Are Capitalism’s Useful Idiots. The Atlantic, Aug. 7.

Appelbaum, Binyamin. 2019. The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. Little, Brown and Company (Hachette).

Baker, Dean. 2016. Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Center for Economic and Policy Research.

Black, William. 2005. The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry. University of Texas Press.

Fischer, Amanda. 2021. The rising financialization of the U.S. economy harms workers and their families, threatening a strong recovery. Washington Center for Equitable Growth.

Frank, Thomas. 2004. What’s the Matter with Kansas? Metropolitan/Picador.

Frank, Thomas. 2016. Listen, Liberal: Or, What Ever Happened to the Party of the People? Metropolitan/Picador.

Haidt, Jonathan. 2012. Why working-class people vote conservative. The Guardian, June 5.

Linden, Michael. 2012. The Rich and Powerful Really Are Rich and Powerful. Center for American Progress.

Madrick, Jeff. 2020. Why the Working Class Votes Against Its Economic Interests. New York Times, July 31. (Review of Reich 2020 and Teachout 2020).

McElwee, Sean, Brian Schaffner, and Jesse Rhodes. 2016. Whose Voice, Whose Choice? The Distorting Influence of the Political Donor Class in Our Big-Money Elections. Demos.

Munkirs, John. 1985. The Transformation of American Capitalism: From Competitive Market Structures to Centralized Private Sector Planning. M. E. Sharpe.

Neale, Walter C., Michael F. Sheehan, and Ronnie J. Phillips. 1986. “Three Reviews,” of The Transformation of American Capitalism: From Competitive Market Structures to Centralized Private Sector Planning by John R. Munkirs. Journal of Economic Issues, Vol. 20, No. 1, pp. 203-215.

Reich, Robert B.2020. The System: Who Rigged It, How We Fix It. Alfred A. Knopf.

Sargent, Greg. 2021. The GOP scam is getting worse — for Republican voters. A new study shows how. The Washington Post. March 8.

Segelken, H. Roger. 2015. Why working poor think they are ‘middle class.’ Cornell Chronicle; on Sarah Halpern Meekin, Kathryn Edin, Laura Tach, and Jennifer Sykes It’s Not Like I’m Poor: How Working Families Make Ends Meet in a Post-Welfare World. 2015. University of California Press.

Teachout, Zephyr. 2020. Break ‘Em Up: Recovering Our Freedom From Big Ag, Big Tech, and Big Money. All Points Books/St. Martin’s.

Yglesias, Matthew. 2019. Fox News’s propaganda isn’t just unethical — research shows it’s enormously influential. Without the “Fox effect,” neither Bush nor Trump could have won. Vox, March 4.

Zeitz, Joshua. 2017. Does the White Working Class Really Vote Against Its Own Interests? Politico Magazine.


A Chinese socialist consensus

Published by Anonymous (not verified) on Sun, 05/09/2021 - 8:42pm in

By Carlos García Hernández (originally published in Spanish in El Común )

Deng Xiaoping and Jimmy Carter during Sino-American signing ceremony - 31/1/1979.Deng Xiaoping and Jimmy Carter during Sino-American signing ceremony – 31/1/1979. Photo: National Archives Catalog

“(a) the monopolistic political power of the Chinese Communist Party (CCP) must not be challenged; (b) within the confines of, and to strengthen, condition (a), economic development should be interpreted as the essence of socialism, and thus of the utmost importance; and (c) regarding the central decision-making process, personalistic regime should be replaced by party rule, i.e., a consensus based collective decision-making process.”

Third Plenum of the 11th Central Committee of the CCP, December 1978

The above quote reflects the consensus that has prevailed in China since 1978. This consensus marked the coming to power of Deng Xiaoping and the start of the economic reforms that have lasted until the present day, which marks the 100th anniversary of the birth of the CCP. The quote was collected by Xu Chenggang, professor of economics at the Cheung Kong Graduate School of Business in Beijing, in his seminal research work “The Fundamental Institutions of China’s Reforms and Development”. Building on this work and on previous articles on what I have called fiat socialism and modern money consensus, I will analyse the Chinese consensus in order to propose the socialist reforms that I believe would help to improve the living conditions of the Chinese people. To do so, I will interpret the information provided by Professor Xu on two levels, one ideological and the other economic.

Xu calls the Chinese economic model a “regionally decentralized authoritarian system”. According to this model, the central government and the CCP leadership control and decide on the political representation of the various Chinese provinces. Once these officials have been chosen, they are responsible for managing most of the economy, since almost 70% of public spending is carried out at the regional level and more than 55% at the sub-provincial level. Then, what is established is a competition between the different provinces. They are placed in a ranking of economic growth and have to compete with each other to climb up the ranking. The provinces are further divided into municipalities (or prefectures), the prefectures into counties and the counties into towns. Competition is established in all subdivisions, so that the most successful subnational governments are rewarded by the central power with more resources. Access to more resources is therefore conditional on success in economic management. This is the basis on which the Chinese economy is established and what distinguishes it from any other economic model ever seen.

The economic results of this model are spectacular. Before 1978, Chinese annual growth was 4.4%; between 1978 and 2011 it was 9.5%. The share of total factor productivity in growth was 11% before 1978; between 1978 and 2011 it was 40%. As a result, between 1978 and 2011, GDP increased 8-fold, a level of growth unparalleled in human history. As Professor Xu explains, one of the consequences has been that “The Chinese population in absolute poverty (defined as $1/day income) has dropped from 50 per cent to 7 per cent in twenty years, while the number of individuals in absolute poverty was reduced by almost 400 million. This number is nearly three-quarters of the poverty reduction in the whole developing world (World Bank 2003)”.

What political interpretations can be drawn from this? In my opinion, one above all: China has definitively broken the link that Karl Marx established between the so-called problem of the realisation of profits and Law of the Tendency of the Rate of Profit to Fall.

Let us recall that, in the second volume of Capital, Marx is confronted with an inescapable question: How is it possible that the capitalists constantly take more money out of circulation than they put into it? Of course, the origin of this subtraction must be surplus value, but “the question […] is not where the surplus value comes from but whence the money comes into which it is turned”. The answer to this question is a turning point in Marx’s work. His reasoning is as follows: the origin of the money into which surplus value is converted must be compatible with the Law of the Tendency of the Rate of Profit to Fall, the fundamental thesis that Marx wants to demonstrate in order to achieve his ultimate aim, which is none other than to expose the inevitable collapse of capitalism, understood as a productive system based on the private ownership of the means of production.

However, this is clearly ad hoc reasoning. That is, instead of analysing the question empirically, Marx designs the answer to the question of the money into which surplus value is converted to fit his predetermined conclusions. Marx thus answers the question by means of the transactions that take place in the private sector and he ignores the existence of the public sector, and for this he resorts to the maxim of Parmenides of Elea, ex nihilo nihil fit, “nothing comes from nothing. The capitalist class as a whole cannot draw out of circulation what was not previously thrown into it”. This is one of the moments when the existence of the gold standard becomes a fundamental pillar of Marx’s work, without which his thoughts cannot be understood. If money cannot be created ex nihilo, then it must be a pre-existing natural phenomenon. Gold and its extraction are the pieces Marx finds to solve the puzzle. Capitalists withdraw more money than they put into the economy because more money is created from new extractions of gold and silver. Thus, “[capitalist production] develops simultaneously with the development of the conditions necessary for it, and one of these conditions is a sufficient supply of precious metals”. Sufficient here does not mean that all money is backed by precious metals, but that the quantity of precious metals must be sufficient to permit the circulation of commodities, which also depends on credit. According to Marx, this credit granted to allow private sector transactions, added to the reserves of precious metals, is enough to enable and explain all the processes occurring in capitalism, which he takes up in his schemes of expanded reproduction and simple reproduction, and he does not hesitate to resort to magical thinking to conclude that “circulation sweats money from every pore”.

By not resorting to the public sector as a source of profit realisation, Marx also manages to save his Law of the Tendency of the Rate of Profit to Fall, since the production of gold and silver, with its particularities, is also explained as the production of the rest of commodities. Thus, the contradictions within the private sector, in which the capitalists are forced to constantly lower wages and increase working hours in order to be able to compete with each other, can only tend to increase to a point where the capitalists’ share of profit, due to the ever-decreasing consumption capacity of the workers, is so reduced that the whole capitalist system collapses.

Now we get into a time machine and travel about a century into the future. When we get out of the machine, capitalism is still there. It is the 1st of January 1979. Deng Xiaoping lands in Washington D.C. to meet with President Jimmy Carter. What happened at that meeting astonished the world. The top leader of the Chinese Communist Party outlined to Jimmy Carter the three points of the Chinese consensus with which this article begins. Unlike the Soviet leaders, Deng did not frame the relationship with the US as a confrontation between two opposing and competing economic systems destined to destroy each other. There were no references to inexorable historical laws. There were no mutual threats. What Deng offered Carter were trade agreements. Deng explained to the Americans that his goal was not the destruction of capitalism in the US, but economic cooperation based on non-interference. If the Americans recognised and respected the sovereignty of the Chinese people, China would not interfere in their internal affairs. On the contrary, it would offer US companies a mutually beneficial access point to the Asian market. Carter not only seized the commercial opportunity offered by Deng, he also officially recognised the People’s Republic of China that emerged from the 1949 revolution.

In my view, the intelligence displayed by Deng Xiaoping at the time was astonishing. I am convinced that it is only thanks to this that the CCP is still in power today. What did this veteran communist militant know that Marx did not? The answer can be found in the date of the meeting, 1st of January 1979, more than 7 years after President Richard Nixon ended the gold standard on the 15th of August 1971. That is more than 7 years of proving that money has always been created ex nihilo. Deng knew this perfectly well, as he was not only the heir to Mao’s revolution, he was also the son of the country that created paper money in the 7th century. To approach China’s relations with the US from a vantage point from which to advocate the imminent collapse of capitalism would have made no sense.

Deng knew that such a collapse was not going to happen. This allowed him to go beyond the Trinity Formula enunciated by Marx in chapter 48 of the third volume of Capital, according to which there are only three sources of income: capital-profit, land rent and labour-wages. Deng knew that there were not three sources but four, since to Marx’s list public expenditure must be added as a source of profit realisation. That is why China’s central bank, called the People’s Bank of China, has played a key role in the country’s development since 1978 by financing sub-national government spending and ensuring that competition between different provinces is on a level playing field.

As Professor Xu explains, this regionally decentralised structure “converts local officials into entrepreneurs”. Decentralisation allows successes or failures to be experienced first at the local level, without destabilising the country as a whole, and allows citizens to feel closer to institutions, which weakens political opposition. This is possible because China’s regions, being so big, are largely self-sufficient, allowing a wide range of goods to be produced. The number of goods under central government control has never reached 1000 and there are only 30 ministries in China. As a result, the central government is much smaller than in other socialist countries and it only controls essential economic sectors (land ownership, banking, energy, telecommunications, railways, etc.). If a reform succeeds in one province, it is possible that other provinces will adopt the same reform. If the reform fails, it is rejected. In any case, the stability of the country as a whole is not put at risk. This is how the transition from a centrally planned economy to a mixed market economy, in which there are all kinds of enterprises (public, private, cooperative, jointly owned, etc.), came about.

Being a mainstream economist, there is a moment in his paper when Professor Xu doubts and wonders how it is possible that China has been so successful. Mainstream economics is dominated by the Washington consensus and Say’s law, according to which non-intervention is essential for flourishing markets to emerge in which, by magic, supply creates its own demand. China is an example of the opposite. There, state and CCP intervention is enormous in all areas, however, economic growth is much higher than in the West. This shows that the Chinese model, despite its obvious shortcomings, is much less corrupt and much more efficient than that of Wall Street, the European Union and all other bodies governed by the Washington consensus, the absurd Say’s law and supply-side economic models.

However, it is also necessary to address the major deficiencies of the Chinese model, since these flaws arise largely from the introduction of neoliberal economic paradigms into its institutions. The most important example of this can be found in the person of Prime Minister Li Keqiang (to whom, fortunately, Xi Jinping does not seem to pay much attention). The economic policies promoted by Li, who holds a PhD in economics from Peking University, are markedly neoliberal in character and deeply influenced by the Washington consensus. As always in these cases, the neoliberal bias translates into an irrational aversion towards public deficits. On the 28th of May 2021, Li said during a press conference:

“The central government is taking the lead in living a tighter life this time. We will reduce the central government’s direct spending by more than half, so that funds can flow to grassroots enterprises and people’s lives. All levels of government must live a tighter life. It is absolutely not allowed to engage in formality, and do those things that spend a lot of money.”

The neoliberal bias of these statements is evident. According to Li, public spending confiscates savings that diminish investment. Like all neoliberals, he understands economic phenomena backwards. Government spending encourages investment because it increases the balance of bank reserves. This encourages demand and therefore investment. To reduce public spending and to think that companies and people’s lives will benefit from this is to miss the point. The reduction in public spending advocated by Li will only increase private indebtedness and unemployment.

This graph shows the evolution of China’s public deficit and its projected evolution until 2026.

 Source IMF


Source: IMF

COVID caused the deficit to increase to 11.39% in 2020. Thanks to this deficit, China was able to contain the pandemic. From a socialist perspective, this data should make it easier to interpret the public deficit for what it really is: a tool to tackle social problems, which in China’s case are many and growing in severity. Therefore, instead of making the reduction of the public deficit an end in itself, Li should forget about the level of the deficit and focus only on social problems. To this end, my proposal for fiat socialism is based on what I have called the Lerner index, which is calculated as the distance between a particular economic situation and one in which unemployment and the absolute value of inflation are equal to zero. In the case of China, the evolution of the Lerner index between 2000 and 2016 was as follows:

The evolution of the Lerner index in China between 2000 and 2016

Chart: year / unemployment rate / inflation rate / Lerner index

The method to bring the Chinese economy to the Lerner point should be the job guarantees based on employment buffer stocks, as these schemes turn permanent full employment, guaranteed by law, into an automatic price stabiliser. The process of reaching the Lerner point in China should not be very complex, since in 1994 the Chinese government took back tax collection as one of its functions and since then has been able to control inflation very efficiently. Therefore, the establishment of full employment and the corresponding price level should occur as soon as possible.

This should be the first step towards the achievement of what I have called the five goals of socialism, which let us remember are:

  1. guaranteed and permanent full employment.
  2. full and prudent use of natural resources.
  3. a guarantee of food, shelter, clothing, health services and education to every citizen.
  4. social security in the form of pensions and subsidies.
  5. a guarantee of decent labour standards.

China has sufficient resources and capabilities to guarantee these five points for its entire population. I am therefore of the opinion that these five points should be incorporated into the three points of the Chinese consensus established by the great Deng Xiaoping. The effort to achieve these five points should not be too great for the Chinese government and the benefits to it would be glorious. I think that is the spirit of these statements by Deng in 1994: “to build socialism it is necessary to develop the productive forces […]. Not until […] we have reached the level of the moderately developed countries, shall we be able to say that we have really built socialism and to declare convincingly that it is superior to capitalism. We are advancing towards that goal.”

Unfortunately, millions of people are not assured of these five points. In China, there are still conditions of misery and exploitation, as in the most savage of capitalist societies, that have made the country one of the most unequal in the world in terms of the distribution of wealth. If the CCP decided to end this exploitation by implementing the five goals of socialism, it would gain enormous support among the lower classes, the same classes that created it 100 years ago, and would strengthen its rule of the country.

Euro delendus est











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Sunak’s class warfare – in the Mirror

Published by Anonymous (not verified) on Sat, 04/09/2021 - 5:04pm in

My argument that national insurance should not be used to fund inreased spending on social care made it to The Mirrior this morning:

You can read it here.

Positive Money and the Bank of England are completely wrong to support the idea of a central bank digital currency for the UK

Published by Anonymous (not verified) on Fri, 03/09/2021 - 8:36pm in

Positive Money has made an appeal asking that people support the idea of a Bank of England central bank digital currency (CBDC) in the UK. In particular, they have asked that people make submissions to the Bank of England on this issue. A number of people have asked me for comment, and I have decided it appropriate to do so. The Bank of England survey is here.

I regret that as has been so often the case Positive Money get most of their logic on this issue hopelessly wrong. Quite staggeringly they are using this proposal to demand the end to the right of private banks to create money, and as I note below the Bank of England will not want to take on that role, so what Positive Money are proposing is that we crash the economy by denying it access to any new money. As ever, Positive Money remains committed to some perverted sort of gold standard that would drive the UK into deep recession. All that reveals they simply have no idea how money works.  I regret having to say it, but you would think by now that they would have learned what money is and what the needs for it within an economy might be, but apparently not.

So, let me state the obvious to start this response. That is to say that we already have a digital currency in the UK. Your bank account is already part of a wholly digital currency system. So, there is no obvious need for a CBDC unless it does something better than your existing bank account or existing money can do.

Then let me as clear as it is possible to be: no one, anywhere, has yet found any evidence that a so called digital currency of any form can do that.

The truth is that for an individual to switch their banking to a CBDC account with the Bank of England may well make them very much worse off. There are a number of reasons, and broadly I'll move from the specific to the more general in  the argument that follows.

First, I rather strongly suspect the Bank of England will not consider granting personal overdrafts as part of a CDBC service. In that case anyone who needs one had better look elsewhere. A CDBC is not for them.

Second, given that many transactions are digitally recorded on credit cards and not debit cards and I cannot see the Bank of England issuing credit cards I cannot see their CBDCs as a way of digitising most transactions. For those requiring credit card facilities you will still need to look elsewhere. So a CDBC may well not be for you.

Third, anyone with chaotic financial affairs - which is the reason why many on low incomes remain unbanked through no fault of their own - is not going to find their chaotic scenario aided by a sympathetic Bank of England manager. So the claim that CBDCs might improve access to banking is just wrong.

Fourth, banks lend. That is their business. But, I cannot see the Bank of England doing that to individuals any more than they might offer overdrafts. So they would not be providing what might be called a banking service. You’d still need banks for that. So CDBCs are not alternative banking, at all.

Instead, and fifth, what the Bank of England might do is simply offer what will in effect be savings accounts, whether they be current accounts for day-to-day transactions where the accounts stay in credit as far as the customer is concerned, or term deposit savings accounts. So CBDCs will provide a small part of the banking service people need. Which makes them pretty irrelevant then.

Sixth, this creates a real conceptual problem because rather bizarrely when anyone saves with the Bank of England they currently increase what is called the national debt. Central bank reserve accounts held by the UK’s clearing banks at the Bank of England are supposedly part of the national debt even though they are simply bank deposit accounts. So too are National Savings accounts part of the national debt. So, running CBDCs would apparently require that this paranoia be overcome. No one is suggesting how that might be done. Nor is anyone discussing what the Bank of England might do with the funds deposited with it. That is the most massive going flaw in their whole paper - and in Positive Money's response to it.

Seventh, despite lip service to the issue neither Positive Money or the Bank of England (based on some of their comments on their website in this proposal) seem to be aware that savings are not what creates the UK money supply. The UK’s money supply is created by lending. Savings are then created by that lending. But the savings are never lent on: they represent money stored inactively in the economy. Seeking to focus banking reform in the inactivity that saving represents would appear to be the most unhelpful way of addressing the issue.

I could go on, but by now I hope you will appreciate that I have major reservations about what is being proposed.

That said, I have many reasons for thinking banking reform is necessary, and that some aspects of CBDCs might have a role in that.

I have argued for a long time, and right through the 2008/09 banking crisis, that the bank payments platform should be taken out of the control of creating banks and be brought under state control. This is because the creaking architecture of private banking cannot be permitted to hold the country to ransom during banking crises, requiring that banks be bailed out to maintain the infrastructure for bank payments.

What is instead required is a banking system where the accounts and payments structure is all under state control but banks provide a credit creation service based on that infrastructure in which private capital takes the risk of default without their being macroeconomic risk to the state, or risk to bank depositors because the accounts of a failed bank can be readily transferred to another operator if a bank fails. Call this the Railtrack model of banning if you like, with the infrastructure being state owned and with licensed banks working on it.

This is the risk the Bank of England should be concentrating on, but which it is not.

Positive Money, with its residual enthusiasm for gold standards and non-fiat currencies and banking, seems to not even see the issue.

A CBDC could be the inter-bank currency in my model - replacing central bank reserve accounts - but that is about it.

This whole issue of digital currencies is a problem seeking a reason for existing. The sooner digital currencies are simply seen as the Ponzi schemes that they are the better. And that is what the Bank of England should be saying if it is a responsible banking regulator that understands the issues it is addressing, which this consultation implies it does not.

But, in summary, please do not support Positive Money on this issue: they are, as is usual, completely wrong when it comes to money.

The Souls of the People

Published by Anonymous (not verified) on Thu, 02/09/2021 - 5:07am in

Photo by Dorothea Lange, Edison, California, 1940: “Young migratory mother, originally from Texas. On the day before the photograph was made she and her husband traveled 35 miles each way to pick peas. They worked 5 hours each and together earned $2.25. They have two young children...Live in auto camp.” Bureau of Agricultural Economics series on agricultural "Community Stability and Instability." National Archives.

[Introduction to The Souls of the People, a forthcoming sixteen-part series on economics and inequality]


Even in wealthy countries, notably the United States,1 the poor suffer much more than the wealthy from private debt,2 incarceration,3 the inability to pay for healthcare,4 access to- and outcomes of education,5 have little recourse to workplace bullying6 and sexual harassment,7 worse consequences from substance abuse,8 9 suffer more domestic abuse,10 depression and mental illness,11 suicide,12 homelessness,13 exposure to crime,14 exposure to pollution,15 insecurity, stress and pain,16 and related problems. Many of these problems are getting still worse for the poor, as well as for the middle class as some sink into poverty.17 18 19

Besides these life-changing issues the “little” things also build to weigh down the poor, again notably in the United States. The working poor, if hired,20 are nickel-and-dimed,21 suffer ever more small miseries22 that “like small debts, hit us in so many places, and meet us at so many turns and corners, that what they want in weight, they make up in number” (Kipling; see for example Hard Work, Hard Lives23).

Fines and fees that are of little consequence to the wealthy are onerous to the poor, and essentially criminalize poverty. In 2019 “53 million Americans between the ages of 18 to 64—accounting for 44% of all workers—qualify as ‘low-wage.’ Their median hourly wages are $10.22, and median annual earnings are about $18,000.” (2019)24 Fines and fees can and do send these working poor into a downward spiral.25 26 27

The “spiral of inequality” that Paul Krugman could write about in 199628 has only gotten worse.29 The working poor are losing faith in the system.30 The middle class is indeed shrinking and upward mobility out of poverty decreasing.31 32 And all the while the wealthy hide their assets,33 use law to enrich themselves further,34 protected by the courts or better served by them,35 36 even by the supreme court.37 38

This sixteen-part series, The Souls of the People, will explore these issues and the ideas and economics behind them. The values, origins, economics and philosophy behind the call to “cut government in half in twenty-five years, to get it down to the size where we can drown it in the bathtub” (Norquist). The creation of think tanks specifically to provide a pseudo-intellectual foundation for inequality, and that along with media convince the middle class to vote against their own interests. The rise, reasons for, and effect of beliefs that markets without law allow for full employment and that wage laws cause unemployment. That competition alone can bring about good working conditions. The rejection of progressive taxes, and of the right to avail ourselves of the power and resources of the country through organizing public goods. And most importantly, how all of these are maintained by laws that impoverish the powerless and enrich the powerful, and thus are self-perpetuating. Yet if the laws don’t change, inequality will worsen. If inequality worsens, the laws won’t change. It is hard to know where to start.

And all the while “in the souls of the people the grapes of wrath are filling.”

The souls of the people
The most fatal ailment
Ill fares the land

So long as you are happy
What we yearn to be
The sane and beautiful

The sum of what we have been
A little world made cunningly
Like a sinking star

The cries of the harvesters
The earth with its starkness
Written in blood

To do and die
In this fateful hour
So that we may fear less
The rags of time


Notes & References

Steinbeck’s 1939 The Grapes of Wrath took its title from Julia Ward Howe’s “Battle Hymn of the Republic,” published in 1862:

Mine eyes have seen the glory of the coming of the Lord
He is trampling out the vintage where the grapes of wrath are stored
He hath loosed the fateful lightning of his terrible swift sword
His truth is marching on

which in turn is an allusion to The Book of Revelation 14:19-20:

So the angel swung his sickle to the earth and gathered the clusters from the vine of the earth, and threw them into the great wine press of the wrath of God.


[1] America’s Poor Are Worse Off Than Elsewhere. 2021.

[2] The Private Debt Crisis. 2016. Richard Vague, Democracy, Fall, 42.

[3] Connections Among Poverty, Incarceration, And Inequality. 2020. Institute for Research on Poverty, University of Wisonsin-Madison.

[4] Americans Near Poverty Line Face Significant Gap in Health Care Coverage, May Forego Essential Health Care. 2021. Skylar Kenney. Pharmacy Times, April 9.

[5] The impact of poverty on educational outcomes for children. 2007. Ferguson, H., Bovaird, S., & Mueller, M. Paediatrics & child health, 12(8), 701–706.

[6] Low-Wage Workers and Bullying in the Workplace: How Current Workplace Harassment Law Makes the Most Vulnerable Invisible. 2017. E. Christine Reyes Loya, Hastings International and Comparative Law Review, vol. 40 no. 2.

[7] Low-Wage Workers Aren’t Getting Justice for Sexual Harassment. 2017. Alana Semuels, The Atlantic, Dec. 27.

[8] Understanding the Relationship Between Poverty and Addiction. 2018. St. Joseph Institute for Addiction, June 18th.

[9] Addiction And Low-Income Americans. 2021. Addiction Center.

[10] Moving Families Out of Poverty: Domestic Violence and Poverty. 2001. Deborah Satyanathan and Anna Pollack, Michigan Family Impact Seminars Briefing Report No. 2001-2.

[11] Poverty, depression, and anxiety: Causal evidence and mechanisms. 2020. Matthew Ridley et al, Science Vol 370, Issue 6522.

[12] Poverty may have a greater effect on suicide rates than do unemployment or foreclosures. 2016. UCLA Newsroom, Nov. 16.

[13] HUD: Growth Of Homelessness During 2020 Was ‘Devastating,’ Even Before The Pandemic. 2021. Pam Fessler, NPR.

[14] Urban Poverty and Neighborhood Effects on Crime: Incorporating Spatial and Network Perspectives. 2014. Corina Graif, Andrew S. Gladfelter, Stephen A. Matthews, Sociology Compass Vol. 8, Issue 9 pp. 1140-1155.

[15] How and why are the poorest people most likely to have exposure to toxins? 2021. Medical News Today.

[16] The high costs of being poor in America: Stress, pain, and worry. 2015. Carol Graham, Brookings, February 19.

[17] The Pandemic Stalls Growth in the Global Middle Class, Pushes Poverty Up Sharply. 2021. Rakesh Kochhar, Pew Research Center.

[18] 8 Million Have Slipped Into Poverty Since May as Federal Aid Has Dried Up. 2020. Jason DeParle, New York Times, Oct. 15.

[19] Poverty In America: Economic Realities Of Struggling Families. 2019. Hearing Before The Committee On The Budget, House Of Representatives, June 19.

[20] Concentrated Poverty and the Disconnect Between Jobs and Workers. 2019. David Neumark, EconoFact- The Fletcher School, Tufts University, Jan. 22.

[21] Nickel and Dimed: On (Not) Getting By in America. 2001. Barbara Ehrenreich. Metropolitan/Henry Holt.

[22] Hired: Six Months Undercover in Low-Wage Britain. 2018. James Bloodworth, Atlantic Books.

[23] Hard Work, Hard Lives: Survey Exposes Harsh Reality Faced by Low-Wage Workers in the US. 2013. Oxfam America.

[24] Low-wage work is more pervasive than you think, and there aren’t enough “good jobs” to go around. 2019. Martha Ross and Nicole Bateman, Brookings, Nov. 21.

[25] The Steep Costs of Criminal Justice Fees and Fines. 2019. Noah Atchison and Michael Crowley, Brennan Center for Justice, Nov. 21.

[26] Fees and Fines: The Criminalization of Poverty. 2019. Kiren Jahangeer, American Bar Association.

[27] Fines and fees are a pound of flesh for poor people. 2021. Alexes Harris, Seattle Times, Feb. 25.

[28] The Spiral of Inequality. 1996. Paul Krugman, Mother Jones, Nov/Dec.

[29] Trends in income and wealth inequality. 2020. Juliana Menasce Horowitz, Ruth Igielnik and Rakesh Kochhar, Pew Research Center.

[30] Survey Shows People No Longer Believe Working Hard Will Lead To A Better Life. 2021. InsiderMag summary of the Edelman Trust Barometer 2020.

[31] The costs of inequality: Increasingly, it’s the rich and the rest. 2016. Christina Pazzanese, The Harvard Gazette, Feb, 8.

[32] Squeezing the middle class: Income trajectories from 1967 to 2016. 2020. Stephen Rose, Brookings, Aug, 10.

[33] How the Rich Hide Their Assets. Accessed August, 2021. Ad and discussion for Estate Street Partners, LLC.

[34] How Wealthy People Use the Government to Enrich Themselves. 2017. Jesse Singal, New York Magazine, Dec. 28.

[35] The rich get richer and the poor get prison : ideology, class, and criminal justice. 2010 (9th ed.). Jeffrey H Reiman and Paul Leighton, Allyn & Bacon.

[36] The Importance of Litigant Wealth. 2010. Albert Yoon,, 59 DePaul Law Review 59:2.

[37] How the Supreme Court Favors the Rich and Powerful. 2020. Adam Cohen. Time, March 3; adapted from Cohen’s Supreme Inequality (2020), Penguin Press.

[38] A Court for the One Percent: How the Supreme Court Contributes to Economic Inequality. 2014. Michele Gilman, Utah Law Review, vol. 2014 no. 3.