Another Tory policy? Basic Income (without Government Debt)

Shock! Horror! The Tories have stolen Labour's public spending policies. Chancellor Rishi Sunak has started to undo the austerity that his own party imposed for a decade which, as Headley Stone  wrote (FT letter 15 Feb) 'has brought the UK's public services to its knees' . 

Commenting on the budget in the FT on 11 March,  Martin Wolf wrote: 'It makes sense for the government to borrow to spend, especially on investment. I have been arguing this for a decade. The decision to cut investment right after the financial crisis was a classic bit of Treasury idiocy. Now ...with employment high ...no longer the ideal time....But it is still a risk worth running provided the money is well spent which one has to doubt, given the hurry.' 

What is it about our party politics that had George Osborne, a Tory chancellor imposing harsh measures for a long time to the detriment of the common good and now has a successor from the very same party determined to undo it?  Left-leaning polices have now become the centre ground but have been cleverly captured by the politicians of the old right. At long last, new enabling fiscal policy that for so long has been proscribed, will be relaxed, but if Mr Wolf is right not with the best timing.  Incidentally the investment will benefit bankers and large funds as the money will be borrowed from them. It need not be that way, as sovereign governments can create money debt free.      

The huge impact of Covid-19 on the economy and on households will surely need 'helicopter money' for every citizen and the news is that President Trump is planning to 'send out cheques to every American within two weeks' to achieve a boost. There are people calling for such a measure in the UK. A UK petition is running with an ambitious plan to set a basic income at £1000 per month, sign here: Basic Income .   This: QE for the People  explains how it would work without raising new government debt.  

What may well be started as an emergency measure to plug depleting household budgets by a free handout, needs to become a standard fact of life for every citizen. Everyone needs sheltering from the whirlwind caused by Covid-19 and the usual rollercoaster of flip-flopping politicians who play with our livelihoods through shortsighted policies.     


Posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom £3   

Richard Werner and Kang-Soek Lee. Groundbreaking findings for new economic policy

Central bankers are openly struggling to understand why their low interest rate regime of the past decade has not brought vigorous renewed growth to their economies. This new paper 
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan   should give food for what rational thought might exist in the high monetary echelons of power.   After all, if there is a startling mismatch between the practical outcomes of your policies derived from your theories then maybe, just maybe, you are relying on baseless assumptions?

Werner and Lee have taken great pains to examine the received classical economics wisdom that 'lower [interest] rates stimulate growth and vice versa' . 

They say there is a paucity of empirical evidence to back up this belief in the level of interest rates determining economic growth.  After examining half a century of data across four major economies involving 'varieties of capitalism' they conclude that the theory that low interest rates cause economic growth is rejected in 6 out of 8 cases and rejected in 8 out of 8 cases when  2 years of leads and lags were considered. However the alternative hypothesis that economic growth determines interest rates, is supported in 8 out of 8 cases.  '..long-term and short-term interest rates follow the trend of nominal GDP, in the same direction, in all countries examined'.

This has huge implications for public policy. The authors suggest that the policy makers drop the theory of price of money (interest rates) and that it be replaced by the quantity of money theory. Thus:

• the quantity of credit (the source of the money supply) should be the key driver 
• the raising of short term rates, to encourage banks to lend due to future higher rate expectations    
• the large scale central bank purchases of bonds should stop - they should be sold  instead (which would raise interest rates)
• the bank sector be structured to deliver credit creation for productive purposes
• the backing of fiscal policy with monetary policy by ceasing the issue of government bonds but instead, borrowing from banks
• that 'green quantitative credit guidance ' becomes a policy to ensure that sustainable projects are encouraged through central bank 'window guidance'  or through a decentralised local banking system

The paper concludes by reaching ahead to the idea of examining the possibility that the existence of interest itself imposes pressure on economies to grow unnecessarily thus depleting natural resources.     

The question is: How such a radical and necessary change Werner and Lee propose could begin to be managed? To take one obvious point: millions have low interest mortgages and the raising of interest rates would threaten the financial stability of many households. Additionally with increasing costs of mortgages reducing available funding, dropping house prices would leave many lenders uncovered by the equity in the property. Safeguards would be needed. There would probably have to be a mandatory fixing of interest rates for existing mortgages for some years. But as central bankers have created this particular property boom with the low interest rate policy they should get along with government and work together to solve it, given the new insights of this paper.

The paper shakes one part of the house of cards that is our economy. As The Free Lunch - Fairness with Freedom points out, our society is built on unfairness. Our treatment of land, houses, banking and monopoly powers have embedded poverty for many and wealth for a few.  Werner and Lee have painstakingly delivered truth as it is and not as it is taught in countless economics schools and universities. Who from the world economics establishment will grasp the implications? Which wise politicians could unite us all - losers and winners - to take a fairer course in the future and redirect us all  towards the common good?
posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

8 June 2017 Election Surprises?

Party manifestos, according to Free Lunch principles, should tackle the monopolistic tendencies arising in society.  The moral basis for this is from common threads found in biblical, enlightenment and liberal values and concern human rights, equality and freedom. As the political parties ply for our votes in June how do they measure up to the implied 'fairness with freedom' ? 

The core aim of The Free Lunch - Fairness with Freedom is the common good. The book suggests ways to move towards a society where each citizen is a beneficiary of the resources of nature and those arising from community-inspired schemes. The book is anti-monopoly and what is termed rent-seeking: meaning the hunt for gain sought by monopolists. Extreme disparities of wealth and poverty are the outcome in a society where control of monopolies is lax. Enlightened politics will reduce rent-seeking outcomes. 

• How are the current political parties matching up with the aims of reformers who desire the sharing of monopoly resources via a universal income for all?  
• What do they prescribe to redress the unfairness of the land monopoly: For example what about the land value gains of home owners compared with none for renters?
• What about the resource of further education now being charged for through student fees when it used to be provided free as a common provision from the public purse?
• What about the huge credit-creating monopoly of banking which neglects small business loans as too small and unprofitable to bother with? 
• What about the ability of government to create its own money to fund public expenses for public services, safely and without inflation?
• What about extending the voting franchise to younger people?

It is natural to want monopoly rights. It makes for an easy life. Owners of homes share in the land monopoly through the valuable nest-egg that builds up over the decades associated with the underlying land value of their home.  Fred Harrison points out that:

'... owners of high-value homes are able to recoup what they pay in taxes through rising property prices. ...enjoy tax-free use of schools and hospitals... Low income earners and families that rent their homes...carry the cost of the infrastructure investments and public services that enhance the value of the homes of the rich.' 

How fair is that? What do our political gurus recommend about this particular inequality which creates a constant welfare burden?  

Universal Basic Income (Citizen's Income / Citizen's Royalty)

• The only party wanting to introduce this is the Green Party.  They would create a pilot to test the idea. 

The land monopoly: home owning or renting

• Labour and the Liberal Democrats both mention land value tax as a tax reform measure. This would retrieve the gains accruing to the land values in property prices for the public purse and allow lower taxes on income and goods or as a substitute for council tax.  
• The Greens and Labour would introduce rent controls. This would be a protection for renters as a useful half-way measure until a full land value taxation scheme was implemented payable by landlords.
• The Tory manifesto policy for care in later life was to be paid from a home sale without limit above a £100k house value. The enforced U-turn, in days, shows the political danger of taking land value gains. Whilst not having the universality of land value tax for all land, the idea that property gains should fund the care is a reasonable quid pro quo, but to have to individually account for each care package and each property is probably a bureaucratic path best not travelled, besides introducing a variable charge/cost (aka 'taxation') for every case.      
• Bedroom tax aboliton (now a liablity of council house renters)  is proposed by the Greens, Labour, the Lib-Dems and UKIP.

Student tuition fees  

• The Greens, Labour and UKIP plan to abolish student tuition fees and would introduce maintenance grants (UKIP for poor students). 
• The Lib-Dems, the original champions of the abolition of tuition fees who reneged to their great downfall after being in coalition, propose bursaries for nurses and grants for poor students.
• The Tory proposal is: forgive loan repayments for teachers; provide access to grants for technology students & 'financial support that offers value for money'. This one looks 'interesting' with the news that student debt interest rates will rise from 4.6% to 6.1% this year. Andrew Greenwood (FT letter 19 April) wonders why the Swedish model is not followed with the cost of student loans as per the cost of government borrowing at 0.34%?     

Voting age to 16 

• The Green Party, Labour, the Lib-Dems and UKIP all want this. 

Local Banks 

• Labour will get the Post Office to establish a Post Bank with full banking services in every community. They also propose regional development banks. 
• The Lib-Dems will 'Require the major banks to fund the creation of a local banking sector dedicated to meeting the needs of local SMEs'. 
• The Tories propose British Business Bank branches in several major cities for SME lending needs.

Monetary reform  No parties make any suggestion about using government money creation powers to fund some public expenses. Instead the arguments are about balancing the books for borrowing, taxing and spending. Labour suggests borrowing for extra infrastructure investment because interest rates are so low - it is bound to pay off. But no one makes the case for creating the money as an extension of the QE creation process to pay for such expense without debt or interest to repay to banks. 

Lord Turner is an exponent of this e.g. deficit financing (Book: Between Debt and The Devil) as is Prof Richard Werner e.g. broadband investment.  There is no reason why just as quantitative easing is used to create money to buy back government debt or to buy commercial bonds, that it could not be used to nationalise the water companies (a Labour Party idea but bought through bonds) or to fund general government spending. The Monetary Policy Committee of the Bank of England would need to take note of any money supply implications and outcomes and act as necessary to prevent adverse economic effects - as they do now with QE. Student education could be a modern case for debt free, interest free government money creation. No more student tuition fees.  This would be a monetary reform which only hurt the big banks.  Where are the far sighted politicians to start controlling this monopoly power? 

With the early solid Tory lead appearing to slip the contest may be more open than we ever thought. World wide electors surprise us. Will June 2017 UK be yet another one? 

Posted by Charles Bazlinton author The Free Lunch - Fairness with Freedom. Director of Local First CIC 'Promoting Local Banks' 

Fiscal Charter: Wisdom, Irrelevant Nonsense or a Cunning Plan?

John McDonnell gets a blasting from the FT ('Labour left floundering over economic policy') for Labour's chaotic policy turnabout but gives helpful hints of what might have been if  JM had been better informed.

George Osborne made an attempt this week to bind every future government to its Fiscal Charter (balanced budgets).  As the FT points out the Brits do not do such things.  'Declaratory laws' have no place and besides Mr Osborne himself rubbished a Labour attempt at the very same thing in Labour's 2010 Fiscal Responsibility Bill: 'vacuous and irrelevant' he said then. What's different with yours now, George?  The FT says that John McDonnell's description of the Fiscal Charter as a 'stunt' is accurate, being just another trap for Labour to encounter. All this works for the Osborne austerity view whilst the public are generally oblivious to the truth that the government's accounts are not the same as household's accounts as Lord Turner said recently :
'...the very essence of the insight of macroeconomics is that governments and states are not the sum of households. In the personal household economy, books have to be balanced, but the state economy is different.'

It is not that George Osborne himself does not understand an alternative to austerity such as the Quantatitive Easing for the People that Jeremy Corbyn now wants. Back is 2013 he quite understood that austerity is not the only way:
 ' It is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. This would allow governments to increase spending or reduce taxation without raising corresponding finance from the private sector.'  
So we have a party following a Chancellor with an 'austerity' policy that seem merely set up to wrong-foot the opposition regardless of the damage it might cause to our economy or the possibilities it might exclude.

Mr Osborne is probably knowingly stretching his apparent belief in the austerity imperative as long as it discomforts Labour. Sooner or later he will decide, as the FT suggests, that a political judgement must be made rather than an economic necessity followed and his outlook will change - even with a cunning plan? Perhaps he will then begin to monetise the deficit as Lord Turner suggested in 2013. This might then 'achieve' his Fiscal Charter rules because creating government money that does not need to be paid back would be excluded from the deficit calculations!

Meanwhile we are being led on a false trail of needless hardship where the benefits of deficit financing are being ignored. Perhaps some Tories will be bold enough to develop insight? Or will Labour actually get their act together? The debate must be opened out and not delayed just for the benefit of the Conservative political purpose of annihilating Labour.   

QE: easy for the rich. Kaletsky's QE: easier for the poor. Corbynomics? Bank of England independence.

Last week's blog had Natalie Bennett at Making Money Work, asking: Could monetary policy do anything about inequality? Steve Keen said that dealing with private debt would address inequality and it was his suggestion that one-off payments to everyone could tackle this, on the condition that debts be repaid first. Lord Turner didn't think there is a 'magic...costless way' of addressing inequality - the way to do this is progressive taxation.

Philip Aldrick (The Times 19 Sept) QE spared Britain a recession...  is particularly clear that monetary policy increased inequality by creating asset price bubbles such as in gilts, bonds and house prices. Inflation is rocketing in these assets, leading, for example, to fading hopes for first-time homeowners.  Low interest rate funding and high demand from UK and non-UK owners buying to let inflates this bubble. [ Private Eye has a searchable map of such overseas owned properties using Land Registry data. Check your area! Whole streets in London are foreign owned].

Clearly monetary policy as carried out since QE in 2009 has increased inequality in housing. But Anatole Kaletsky in Prospect Magazine: How Corbynomics could work  has a neat solution. Instead of QE's £375bn spent to prop up financial markets ('making the rich richer') he proposes that this could have been spent by being given via a weekly £20 payment, to every 'man, woman and child in the UK' until UK growth returned to pre-crisis levels. He proposed this back in 2012. The Free Lunch Blog mentions it here.

So monetary policy could reduce inequality - since equal payments to all inevitably raises living standards proportionally more for the less well off. As long as conditions are strictly adhered to as to the eventual termination of the payment no harm would be done.

That would be a temporary remedy for a sluggish economy. (NB: temporary QE has lasted 6 years so far). But politicians would be wary of the dangers of launching such a citizen-based policy because it would be difficult to stop politically when the monetary need was over. What would be needed to take over would be a similar payment to all but funded by reform of the welfare/tax balanced budget. Such a Citizen's Dividend / Basic Income would need to be established by the end of the monetary booster to avoid the pressure on politicians to extend the  monetary policy dangerously beyond its period of monetary need. Basic Income UK and Citizen's Income Trust have the details of an unconditional non-withdrawable payment to all, as of right.and it is broadly affordable within current budgets. That is the policy that would establish a new citizen's right, like voting, education and a health service.

Another use of monetary policy to promote sustainable growth is suggested by Prof Richard Werner: that credit creating institutions could provide monetary incentives for education purposes '$100,000 for each child born...such a policy would not be inflationary: among all inputs into the production function, human resources are by far the most important.' (New Paradigm in Macroeconomics p340).
To ensure good education for all must be among the most effective ways of poverty reduction and thereby inequality.

Inequality reduction by monetary means would not be magic - merely an effective policy against poverty and as a means of growing the economy.

But QE is magic - for wealthy people. From early 2009 when QE started the UK FTSE 100 share index to date has gained over 60% & UK house prices have risen 67%.

Strange how central bankers and governments fail to take easy steps to help the poor but so easily open doors for the rich to garner greater riches. The Monetary Policy Committee at the Bank of England has met dozens of times since QE started and resolved every time to keep interest rates at 0.5%. Their learned deliberations have now blown up another asset price bubble. Is the BoE really so partisan that it cannot think beyond top layer wealth creation as the sole answer to the crisis? Is it really there for the good of all - as might expected in a democracy? Presumably our government in meekly acquiescing to a measure that has achieved so little for so long, wholly agrees with it.

Bank of England independence is strongly defended. The question to be put is: How dependent on central bank policies ought the government to be?        

Making Money Work: Lord Turner, Steve Keen, Chris Giles & Richard Spencer on Corbynonmics and money creation.

Lord Adair Turner has learnt a bit on the practicalities of speechmaking since we last reported (see ECOBATE 2014, 11 Nov 2014). In Winchester his PowerPoint slides were lost en route and but he did a brilliant job improvising. At the Positive Money event Making Money Work at Central Hall, Westminster on Monday 7th Sept he safely had 2 paper copies of his slides for each of the 200 or so attendees. His talk developed his ECOBATE 2014 theme and gave much detail as to how he thinks government economic and monetary policy technically could, and politically should, develop. 

He said that he did not agree with the extreme radical Positive Money view for the abolition of fractional reserve banking and its replacement with 100% reserve banking. But the 2008 crisis and slow recovery since cannot be understood without a clear understanding of the nature of debt, money and credit. Pre-crisis and for many decades we were far too relaxed about the private credit creation by banks. Post-crisis we are too terrified of the potential of what he termed 'overt money finance' (OMF) of government deficits -another name for this is 'helicopter money'. 

Lord T said there is no reason whatsoever against helicopter money, it was all a question of how much you do. A small amount will stimulate a little with no excessive inflation. He thought it would however be excessive to fund 10% of the fiscal deficit this way as it would bring hyperinflation and destroy the economy. 

In discussion  - Chair: Fran Boait (Positive Money) ; Prof Steve Keen (Univ of Kingston) & Chris Giles (Financial Times) - the matter of the doubtful effectiveness of Quantitative Easing (QE) so far was discussed in contrast to OMF. Chris Giles thought that whilst he would never rule any new idea out (e.g. Jeremy Corbyn's 'Peoples QE') he was sceptical that it is seen as a sort of magic solution which has no cost. He was cautious of using OMF as a monetary tool.  If it was used simply to put new money in everyone's bank account, good, but to use it to spend on infrastructure was fraught with problems - you might have to halt the construction of the HS2 railway unfinished, due to monetary rules.  Money is not the only driver of the economy, in addition there is housing and planning policy and new macroeconomic tools as to how banks should lend; however in the future QE might be seen to have been OMF.  Here Lord T agreed that QE, as started in 2009, might become post-facto OMF. He illustrated this with his view that with the Bank of Japan owning 60% of GDP in Japanese Government Bonds he thought it highly improbable that these would be repaid or sold off by the BoJ. He thinks it will become helicopter money and be shown to be a permanent monetisation of government debt. ''That is going to happen and I would place a bet on it'.

He thinks that we should consider a 2009 UK scenario where a 4% of GDP fiscal deficit was planned and £350bn 'reversible' QE issued. He put it that it might have been announced that 5% would be planned with the extra 1% being OMF money creation and non-reversible. He said that this would send an important signal and be much clearer than the current scenario of whether QE really is reversible.   

Currently the Bank of England is apparently doing two things: 1.Managing interest rates and QE for inflation targeting. 2. Managing bank lending through loan requirements and bank capital requirements, for economic safety and stability all without managing demand.  What he sees as actually happening is that the BoE is starting to manage the allocation capital as seen in the Funding for Lending Scheme to be directed to SME loans.  Five years ago such government allocation of capital was unthinkable! 

The cause of the crisis had been the mis-allocation of capital through private credit creation by banks.  Too much credit chased existing assets rather than to finance productive investment, which Richard Werner calls 'credit for GDP transactions'.   This caused a debt overhang with the danger of deflation.  Beyond the supply of consumer goods to most households,  housing becomes another way to compete between members of society to gain a more attractive home or stay at a hotel. As locations offer varying benefits this competition encourages more debt. Banks encourage this, being biased towards property lending due to the collateral available. Steve Keen pointed out the reverse case of lending to entrepreneurs where, maybe,  four out of five loans might fail with loss of principal. This shows the difficulties that banks can have in lending to productive ventures. 

Lord Turner questioned how widely we might be able to spread a new understanding of the monetary issues being discussed.  In confessional mode, in his new book 'Between Debt and the Devil' he has a chapter 'The crisis I did not see coming'. He had to embark on an intellectual journey to understand themes ignored in his earlier economics education - a frank admission in mid-career from a very high-flying player. He said the very essence of the insight of macroeconomics is that governments and states are not the sum of households. In the personal household economy, books have to be balanced, but the state economy is different. Steve Keen said whilst he was impressed by the new openness at the Bank of England but in contrast the political class think the government should be running a surplus. 'They vie with each other: 'My surplus is bigger than your surplus' ' which is the equivalent of banks believing they should be receiving more loan repayments than they put out in loans. Governments ought to be running a deficit with money creation financing a large part of that.  Clearly from the view of the panel, economics education should be transformed so that these things are understood in universities, but beyond that how easily can the ordinary voter understand it? As to conventional economics theory, the efficient market theory is clearly wrong as no financial trader would get up in the morning if it was, since they would not be able to make any money! But the public needs to know that economics will never give as clear answers in its field as for instance an engineer can give in designing a bridge.

In Q&A I said I was involved in helping to establish a local community bank - Hampshire Community Bank which would lend locally and give its profits to local good causes. Was this a good foil to the problems being discussed that had arisen through centralised, international banks?  By their strong applause the audience clearly appreciated the idea.
Steve Keen thought it was an excellent idea as local knowledge would inform bank decisions on loans. Centralised banking is essentially 'collateral banking' which is dangerous, but as Richard Werner emphasises local banks are the strength of German banking. 

Chris Giles said local banks are obviously good, but that a weakness might be that local firms gain loans merely by being local and not through normal due diligence and good banking practice. (Note: If I had been able to respond a comment could have been that this danger is just as likely with non-local banks! Just look at what happened leading up to the 2008 crisis. Where was careful banking practice by national /international banks then?)  

Richard Spencer, an economist whom Jeremy Corbyn uses to inform his People's QE, said that 5 weeks ago he hadn't heard of Corbynomics but since then he has been credited with writing it!  Jeremy Corbyn asks what does the economy need?  He thinks we need investment in public infrastructure and this needs money and if needed a deficit, and this if fine because people want to buy bonds. However he thinks the banking system is too powerful and People's QE would mean that the bond route would not always be wholly used and banks not needed for some fraction of the money. Corbyn has said that if the economy is booming People's QE would not be needed as the bond route might be wholly enough.  He (RS) largely agrees with Lord Turner's views apart from central bank independence. He said that for politicians to be told by the central bank the amount of OMF needed is not democracy, it would be rather like being told by bankers how much tax is needed. Politician should listen to able technocrats, such as at the Bank of England. But let's not have bankers in charge, let's have democracy in charge. Strong applause.

From the panel: When politicians had control of interest-rate-setting, public opinion (or party opinion) was often targeted very obviously and the high inflation of the 1970's might be seen as a warning that sole political control was dangerous.  'Commitment devices' (e.g. Committee on Climate Change/ Bank of England) agreed by politicians in order to keep a steady course over time ahead even when it hurts, are useful.  However the ECB has been given far too much control as it defines its own terms for price stability, for instance.      

Natalie Bennett the Green MP asked what the money system would look like if consideration for the environment and for addressing inequality (where everyone has enough) were both addressed. Chris Giles thought a monetary system could not create a better society. Lord Turner thinks that money systems are not an appropriate answer to carbon issues - there are enough devices around already.  Progressive taxation is the device to address inequality, not OMF. Steve Keen thinks that money creation is needed to redirect spending to carbon reduction, no-one will do this for a profit.    

Barb Jacobson for the Basic Income Trust asked about the idea of using money creation for cash payments to everyone?  

The panel agreed with the idea: There should be no problem with ensuring a single payment to each person through NI numbers and tax numbers / It should be directed to paying off personal debt first for those who have it / Alastair Darling tried to do it in 2009 but was told it would take 9 months, so he reduced VAT instead / Australia did the same thing in 2 weeks.

Note: 

Chancellor George Osborne understands the subject of the Making Money Work event, as reported in  this blog   Nov 13 2013:
 ' It is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. This would allow governments to increase spending or reduce taxation without raising corresponding finance from the private sector.'   See Treasury document quoted para 3.34:  Here 

See the Positive Money official post for the event Making Money Work: HERE

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom