Intergenerational fairness is a long term issue, not a short term one

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The idea that providing a decent income to pensioners is an example of intergenerational unfairness depends in large measure on the assumption that people will take a very short term view of the economics. The argument starts from the assumption that working people lose out by having to pay for pensions of those who have retired. Even assuming that the economic basis of that (i.e. that all the wealth created in society belongs only to those in work and those who own the capital) were correct, it’s still far from true. If the triple lock means that pensioner purchasing power rises at a faster rate than the purchasing power of those still in work, the wonders of compound interest mean that those who benefit most from the triple lock will be those who have not yet retired and are unlikely to do so for some time. The corollary is equally simple: if the purchasing power of pensioners is allowed to progressively decline instead, the biggest losers won’t be today’s pensioners, but those who retire in the future. Anyone currently in work who falls for the argument for reducing the proportion of GDP spent on pensions will give them a boost in the here and now is implicitly accepting that their own position as pensioners will be even worse than the position of today’s pensioners.

The questions which the politicians and economists seem unwilling to debate are simple ones: what is the ‘right’ level of the state pension in relation to earnings, how do we get there, and what mechanism should be used to maintain the relationship thereafter? At the ‘right’ level, there should be no need for anything like the triple lock; a straightforward mechanism for maintaining parity will serve the needs of all current and future pensioners. The reason for avoiding the question of the ‘right’ level is also very simple: the answer is likely to be along the lines of ‘rather more than currently being paid’. To the extent that they are willing to debate the issue at all, the debate normally starts with a question about how much pensioners ‘need’ to live on. It’s a question which carries within it a whole series of subsidiary questions and assumptions about the life style pensioners should be ‘allowed’ to lead. And the supplementary question raised is ‘what about those pensioners who get other income on top of their state pension’, but that’s an issue which a progressive taxation regime should deal with.

A properly working economy, serving the needs of the society in which it operates, should be able to provide a decent standard of living for all, without forcing people to reduce their standard of living when they hit retirement age. It is the neoliberal economics of the UK’s main political parties which perpetually seeks to divert attention away from that. To know why, we have only to ask the question which Roman senators were encouraged to ask: “Cui bono?”

The issue over care should be about how it is delivered, not how it is funded

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The UK’s new PM talked a lot last week about care, and there’s no doubt that identifying what care is needed and how it is to be provided are significant issues facing us, particularly as the population ages. Sadly, though, the debate rapidly turned into one about how care is to be paid for, which is a completely different issue – and in some ways, irrelevant. The need for care is based on the aggregation of the needs of millions of individuals – whilst the level of provision might vary according to how much money is available or what budget is set, the need doesn’t change in response to the funding.

If we start from first principles rather than ideological views about money and the size of the state, the nature of the problem changes. One of the problems with neoliberal economic thinking is that it values only two things: labour and capital. The economy is seen as belonging only to those who supply either their labour or their capital – with a huge bias in favour of the latter. Everything and everyone else is then seen as a ‘burden’ on the productive economic activity of those groups, often with the implicit assumption that the living standards / purchasing power of those non-productive groups should be limited to the basics. But if we instead see the economy as a social construct, with the objective of serving all members of the society in which it operates, the picture changes completely. A successful economy needs to be able to provide a decent standard of living (leaving aside, for the purposes of the current argument, who decides what that is, and on what basis) for all its members – young, old, sick, and disabled. And, however defined, that ‘decent standard’ includes things like education, health – and care.

If ‘the economy’ is to serve all of us rather than only those supplying labour or capital, the question ceases to be about how much we tax to pay for x, y, or z, and instead becomes one of how we ensure that the level of economic activity is high enough to provide that decent standard of living – and what mechanism we use to share the benefits of that economic activity. Economic growth is important, of course, but once we accept the obvious truth that growth cannot be infinite in a world where resources are finite, we cannot use that growth – however much the politicians try to do so – as an excuse to avoid discussing the issue of distribution. But avoiding that issue, ultimately, is why the supporters of the current neoliberal capitalism reduce everything to a question of ‘how will you pay for it?’. Better – from their perspective – to turn people against each other over a question of taxation than to get to grips with the question of how wealth and income are distributed. All the debate around how care is to be funded - like the debate about the welfare bill, or the pensions triple lock – is about diverting attention away from the key question, which is about the distribution of wealth and income within society. And whose interests are served by that?

Burnham is making the problems worse by his adherence to self-imposed rules

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One of Andy Burnham’s ‘qualifications’ for the job of PM was that he was used to running a major public sector operation in the form of the mayoralty of Greater Manchester. It’s certainly a big job, and he will certainly have learned a lot from doing it, even if the degree to which he was successful is always going to be arguable, depending on one’s political perspective. There is a difference of scale, of course; but even more important is the difference in the constraints acting upon the incumbent. Manchester (like the Senedd here in Wales) has its powers and budgets circumscribed elsewhere. Westminster sets both, and the mayor (or First Minister) has no choice but to follow the statutory requirements laid down for him or her.

When it comes to running the UK from Downing Street, however, the situation is completely different. The Westminster parliament insists that it has absolute power – delegated to it by God and the Monarch – to do whatever it wants. Financially, the only real constraint is the capacity of the economy – the available resources, in short. Any other constraint is self-imposed: the so-called ‘fiscal rules’ are the invention of the government of the day which can change them at any time it wants to (and history shows that governments tinker with the rules regularly). There was no such thing before Gordon Brown invented them in 1997, and they were invented largely to ensure that the incoming Labour government followed broadly the same policies as the outgoing Tory government, in the belief that that was what ‘the markets’ wanted.

To date, Burnham has given no indication that he understands the difference – that he has moved from a situation where he has to obey rules laid down by others to one where he can make the rules. And all the neoliberal foundations and lobbyists – to say nothing of the financial ‘experts’ in the mainstream media – are only too keen to ensure that he doesn’t realise the extent to which he is imposing unnecessary constraints upon himself. There was a report today, for example, claiming that the PM “will have to raise taxes or cut spending” to meet his pledges and that “There's clearly no scope for increasing borrowing”. What they like to call ‘borrowing’, some of us prefer to call ‘accepting deposits from people looking for a safe home for their money’ – and the only limit on that is whether people have money for which they are seeking a safe home. Given the lack of worthwhile investment opportunities (which is a much bigger problem in itself), there’s no sign of any lack of deposits; and the choice posited by the first quote is solely a result of the fiscal rules.

One of the big issues which Burnham has highlighted this week is the question of social care. It’s usually presented as a shortage of money, but even if money was unlimited, there would still be a lack of qualified and willing carers, and lack of capacity is a much more important constraint than lack of money. But that lack of capacity is another self-imposed constraint – this time it’s arbitrary rules over numbers of migrants.

One point of similarity between the governments in Wales and Scotland, the mayoralty in Manchester, and the UK government is that they are all facing major issues. But only one of them is compounding the problems by using its unique position to be able to set its own rules in a way that exacerbates rather than alleviates.

One sector's boost is another sector's loss

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The slimmed-down Commonwealth Games opens in Glasgow today, featuring around half the usual number of sports, because Glasgow stepped in late in the day as host after Victoria, in Australia, pulled out. Slimmed down = less cost – a good thing, surely? Well that depends. Because slimmed down also = fewer athletes, fewer spectators, fewer hotel nights and meals, less of a boost to the local economy.

During the recent world cup, many pubs in England were allowed to open late, and enjoyed something of a bonanza as a result. Hard-pressed hospitality sector gets boost – a good thing, surely? Well, again, that depends. Where did the money spent come from? If it was money which would otherwise have been spent in the same pubs, but over a longer period, then it’s just a change in cash flow. If it’s money that would otherwise have been spent on other things, then a large short term boost for one sector probably equates to a smaller longer term reduction in spending in a host of other sectors. Maybe not even noticeable in the grand scheme of things, but there nevertheless.

The point is, as the wondrous invention called double-entry book-keeping tells us, that what looks like a positive entry to one party will always look like a negative entry to someone else. Unless there is an overall increase in the supply of money, it cannot be otherwise. And, as Richard Murphy pointed out a couple of weeks ago, there are only two ways in which the total money supply can be increased: deficit budgets by the government and commercial bank lending. In accounting terms, both end up looking like ‘borrowing’ to someone, although that’s an oversimplified view when it comes to the government. The questions to be asked are ‘which is better?’ and ‘for whom?’. Neoliberals (and that includes Andy Burnham, for all his rhetoric) will always favour commercial bank lending, which in turn always favours those who already own most of the wealth. It is not the option which is most favourable to the majority of us, but unless and until we break free of the assumption that it is always and inevitably ‘better’, we will never rebalance the economy in favour of the many.

Out with the old, in with the old

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So far, the Burnham rhetoric has been better than the Starmer rhetoric, but that isn’t exactly a high bar. The substance – to the extent that there is anything other than a superficial paint job – will emerge in the coming days and weeks. Later this year, there will be (we are told) a 10-year plan. In the light of the recent rate of turnover in leaders of the UK government, the degree of confidence that Burnham will still be around to see the plan published (it will, inevitably, be later than proposed), let alone to see it through to implementation, cannot be high.

Some of the signs are not good, already. Putting a man who resigned from government because the Treasury wouldn’t divert enough funding away from protecting people against poverty and ill-health into deterring imaginary Russian threats in charge of the Treasury doesn’t exactly fill me with confidence that the ‘change’ being demanded by Burnham will be quite the change that we need. Rhetoric about moving away from the neoliberal approach of the past few decades is utterly undermined by the statement that the arbitrary fiscal rules – only ever invented in order to entrench neoliberalism into the UK government’s economic philosophy – will be adhered to.

Scrapping the mad scheme for digital ID is a welcome step, but the mathematics behind diverting the uncommitted funding from that into a reduction in VAT on electricity costs are a little dodgy to say the least. Those paying the fuel bills – and especially those living in fuel poverty – will welcome any reduction, but when reduced to the level of ordinary household bills, the saving doesn’t look that large. £45 a year off the energy price cap equates to around 86p a week, strangely reminiscent of Gordon Brown's derisory 75p per week pension increase in 1999 - and worth rather less when inflation is accounted for.

We need more than a sharper rhetoric, a more developed sense of humour, and a bit of tinkering at the edges, but there are no signs as yet that Burnham is any more capable of envisioning a different approach than his predecessor. Being better at selling the same basic approach might buy him some time, but it will do little more than that.

May was a near record month for UK saving

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The UK Government accepted a record level of deposits from savers during the month of May, the second highest total on record for the month of May. Savers (mostly pension and life insurance funds as well as some wealthy individuals) clearly recognised that saving with the UK government is one of the safest places for their money, because the UK government’s ability to create extra money as and when required means that they can never lose their capital. That’s one way of presenting the figures, but it’s not the way that most of the media chose to present the same information. Instead, the near-universal response (here’s one example) was to treat it as a disastrous increase in government borrowing.

The disparity serves to underline the simple and unavoidable fact that what looks like a debt to one party will always look like an asset to the other. It also underlines the way in which those who want to deliberately constrain or reduce UK government expenditure will choose to interpret the facts in the way which they believe boosts their perception – to say nothing of boosting their own financial interests. The willingness to deposit such large sums with the government suggests that the savers aren’t really against what they describe as ‘government borrowing’ at all – why would they be, when they’re the main beneficiaries? It’s more that they’re against the government spending money on services instead of cutting taxes. And – surprise, surprise – those who benefit most from interest payments on government ‘borrowing’ would also have the most to gain from tax cuts.

For the rest of us, the problem isn’t government borrowing per se, it’s the way in which paying for that borrowing ends up funnelling money into fewer and fewer hands, concentrating wealth rather than spreading it. Any meaningful attempt to decrease inequality must inevitably mean that we have to look at the way in which wealth and income are distributed within the economy. Understanding that one person’s debt is another person’s asset is one small step towards that.

Making the pie bigger isn't enough

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Politicians at both ends of the M4 place a great deal of emphasis on economic growth as a way of making us better off. It’s true, of course, that a bigger pie makes it possible for people to enjoy bigger slices – and making the pie bigger is a convenient way of avoiding questions about the way the pie is shared. Sometimes, vacuous phrases about rising tides lifting all boats are thrown into the debate, but it’s an analogy which isn’t as helpful as the initial image may appear. In the first place, only seaworthy boats are lifted – unseaworthy ones simply get inundated. Secondly, even for all the boats that are lifted, there is still a huge disparity between a superyacht and a dinghy, and rising tides do nothing to reduce that. Thirdly, at the risk of pushing the analogy too far, if the owner of the superyacht steals the sails and oars from the dinghy, the rising tide isn’t overly helpful to the guy in the dinghy.

The point is that whilst growth creates the potential to benefit all, the reality can be different: ignoring the question of distribution of benefit is akin to a belief in the magic of trickle-down economics. In the US, the proportion of GDP going to employees (through wages etc.) has fallen from a high of 58% in 1970 to around 51% today; over the same period, the proportion diverted into profit has risen to around 12%. There is a similar pattern in many other advanced economies, underlining the way in which the benefits of economic growth have been concentrated in fewer hands, leading to an increase in inequality. On the face of it, the UK is something of an outlier. According to this research, the proportions of GDP going to wages and profits have been remarkably stable in the UK, which might give us superficial hope that rising GDP will indeed benefit society more generally than is happening elsewhere.

As the research also makes clear, however, such high level statistics are hiding a pernicious growth in inequality. It’s not only the share of GDP going to ‘workers’ which matters, it’s also the way in which that is shared out amongst those workers. More detailed analysis shows an increasing remuneration gap between the lowest and highest paid workers, and that in turn leads to an increase in inequality, and means that an apparent increase in wealth is not being felt at all by many. It underlines the importance of governments avoiding a dependence on simplistic measures of ‘success’ such as overall GDP, or even average GDP per head. Growth per se is not enough. Even if growth is always possible and sustainable (which is a whole other, far from unimportant, question), we cannot ignore – as many politicians seem keen to do – the question of the way in which wealth and income are shared within society. Baking a bigger pie is not enough.

Are productivity and efficiency always good things?

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Will Hayward drew attention this week to the rather defeatist comment by a Reform Ltd MS that “we are not very good in Wales at being efficient in running things”. There’s a sense in which we should not be overly surprised at the comment; it is, after all, in line with the general view held by the unionist parties that Wales is too small and too poor, and Welsh people too stupid, to ever govern ourselves, and that we should defer to our betters in London. For a Reform Ltd politician to express similar views is on a par with the breaking news that the Pope is a Catholic; all he’s done is to repeat a weary old trope in rather more blunt language than that to which we are accustomed.

Leaving that aside, though, the thing that piqued my interest is the inherent assumption that ‘efficiency’ is always and necessarily a good thing anyway. It may seem blindingly obvious, and be a generally applicable rule, that it’s better to achieve a given goal with fewer resources; but being blindingly obvious doesn’t make something true. I’ve been around long enough to know that what’s obvious isn’t always true and what’s true isn’t always obvious. Whilst they’re not quite the same thing, there is a clear overlap between efficiency and productivity, and coincidentally the new Welsh Government announced this week that it will be setting a national productivity target aimed at closing the gap between Wales and the rest of the UK. The announcement itself makes it clear that many of the details are yet to be determined, so it’s impossible to predict the likelihood of success at this stage. The encouraging thing, though, is that it looks as if the target is to be set and monitored at a macro level, rather than being a micro-economic target for individual businesses or sectors.

That difference between the micro level and the macro level is an important one, and brings us back to the question of whether improved efficiency is always a good thing. For any individual business, the ability to produce the same output with, say, half the input in terms of labour is a huge financial advantage, and unquestionably a benefit for that business. But for the economy as a whole, producing the same output with half the input could simply leave half the workforce unemployed, an outcome which few would welcome – even the businesses which have achieved the savings, who could find that half their potential customers can no longer afford their products. Whether reducing the number employed in existing enterprises is a good thing or a bad thing thus depends on whether – or to what extent – those freed up resources can be employed on other useful activities. That is a lot harder to plan for and achieve, and increased use of AI in the drive for efficiency / productivity gains may make it more so.

It also opens up other questions, particularly about how the benefits of improved productivity / efficiency are distributed (increased wages, reduced working hours or increased profits, for example). Changing that distribution goes beyond the current powers of the Senedd, unfortunately. It would, though, be good to see, amongst the yet-to-be-announced metrics which will be used to measure success, an attempt to at least monitor who is benefitting, rather than simply assume that an overall average increase in productivity is sufficient in itself. Sometimes, a simplistic bottom line can obfuscate rather than clarify meaningful progress.

Identifying the right problem

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There was a report of an opinion poll in the i paper a few days ago on the issue of paying benefits to young people who are not in employment, education or training. The article itself is behind a paywall, but the data is available in Table 53 in this report. The headline figure was that 56% of those questioned believed that all benefits should be stopped for such people. As one might expect, the numbers vary between supporters of different parties, with those supporting parties of ‘the right’ most likely to support the proposition. Asked in isolation, it’s easy to see why so many might support that (why, the implication is, should anyone not seen to be ‘contributing’ expect to be supported?), but I wonder whether the implications have been thought through by those responding to the survey.

For people in that ‘NEET’ category, benefits are likely to be their only direct source of income; removing it implies that those 56% of respondents are quite happy for the young people to go without food, clothing or shelter. In reality, of course, many (but by no means all) in that category will be living with their parents, who would presumably be expected to continue paying the living costs for their adult offspring. The key economic fact to note, though, is that the withdrawal of benefits from anyone means that someone, somewhere, has their own spending power reduced. Maybe it’s the individuals directly affected, maybe it’s their parents who are obliged to divert money from their own discretionary expenditure. In economic terms, it matters little to the basic conclusion: somebody’s spending power would be reduced, with a consequent reduction in overall demand. In fact, there’s a more general point which this underlines – if a government cuts spending or increases taxation in pursuit of the alleged nirvana of a balanced budget, someone, somewhere must always have their spending power reduced.

The political question is that the ‘who’ and the ‘where’ are ultimately choices being made by politicians. The claims that ‘benefits’ or ‘pensions’ are unaffordable are not the result of some iron-clad law of economics; they are the direct result of political choices as to who should pay for the entirely arbitrary need to pursue a balanced budget. Worse, they are framed in such a way as to encourage us to believe that governments have no choice but to act to reduce such expenditure, and that the impact of doing so will be felt by ‘someone else’. But if we ask a rather different question, it’s easy enough to expose the lie. That question is, in simple terms, ‘are there enough resources in the UK to provide every citizen with a decent standard of living?’ The answer, unquestionably, is ‘yes, of course there are’. That we ‘choose’ not to use those resources to achieve that aim is down to ideology, not economics.

None of that, of course, provides an answer to the problem of so-called NEETs – but then neither does simply cutting their benefits. The only ‘problem’ that that solves is how we continue to ensure that resources are concentrated in fewer and fewer hands. But that concentration of wealth is the much bigger economic problem.

Vigilantes are the problem, not the solution

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It must have been sometime in the 1950s that I used to watch Mr Pastry on the television, and I’m sure that I remember one episode in which he wanted to be a ‘village auntie’; but my memory also told me that Mr Pastry was Clive Dunn rather than Richard Hearne, so maybe it was a different programme. Anyway, the plot line was that our hero had completely failed to understand what a vigilante was. The media and commentators seem to be suffering from a similar lack of understanding every time that they refer to the dreaded ‘bond vigilantes’ who are apparently forcing interest rates up because they’re worried that the Labour government might in any way deviate from the Tory financial straightjacket rectitude to which they’ve been stupid enough to commit themselves.

It’s not true; the participants in the bond markets really don’t give a damn about what government policy is, and are not trying (as true vigilantes would) to exercise extra-judicial powers over perceived miscreants. They care only about extracting maximum benefit for themselves, and see the widespread belief that a change in government policy might make UK bonds a riskier prospect as an opportunity to line their own pockets. It’s a form of self-fulfilling prophecy. Those paying the interest might well want a stable low level, but that isn't necessarily true of those receiving it.

That doesn’t mean that paying higher interest rates on government ‘debt’ isn’t a potential problem for the public finances. The extent of that problem is somewhat exaggerated though: part of the ‘debt’ is held by the government-owned Bank of England, so the government is paying interest to itself in an exercise which is more about book-keeping than debt management, and the higher interest rates only apply to new ‘debt’, not to the money which has been ‘borrowed’ previously. It’s also true that around 30% of the 'debt' is owed to banks, financial institutions and governments outside the UK, but that is offset by the fact that governments outside the UK also owe large amounts (almost £900 billion in the case of the US alone) to UK banks and financial institutions, and to the UK government itself, and interest comes into the UK as well as flowing out.

The bigger problem with the conventional analysis is that it looks at only one side of the equation, to wit the financial impact on government finances. But we need to look at the other side of the equation – after all, if one body is paying interest, someone else is receiving it, and those recipients are the holders of those bonds, and they are mostly based in the UK. They include a small number of wealthy individuals who directly buy bonds and a much larger number of indirect holders, mostly current and future pensioners. And since the benefit received through interest payments is proportional to the amount of bonds held, the benefits will flow disproportionately to the most well-off. In short, government bonds are a mechanism by which wealth is transferred from the many to the few (Richard Murphy has a fuller explanation of that here), and it is the few (or their representatives) who are manipulating the markets to maximise that flow.

Bowing to the perceived pressure from ‘the markets’ is outsourcing financial policy to those to whom wealth is being transferred. Understanding that is a key first step to debating alternatives – but not one that the political representatives of the few, whether Tory, Labour, Reform UK or whatever, are keen on promoting.

Enforced poverty is no answer

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The political parties of the neoliberal right (Reform Ltd, the Tories, and Labour), aided and abetted by the majority of the media, continue to push their agenda of cutting the bill for benefits and pensions. The current most popular rationale which they give is to divert money into armaments, but if it wasn’t that, it would be something else. It’s easier to sell the anti-benefits message if it can be presented as a binary choice, even if that presentation is a complete nonsense.

It may even be a popular policy, given that the debate around benefits has been slowly and insidiously polarised over recent years in such a way that many people have come to believe that anyone receiving benefits is a freeloader on the efforts of the rest of us. They just don't think it will affect them. The turkeys have been sold on the argument that promoting the virtues of stuffing somehow means that they will be spared the Christmas chop.

There is, of course, no doubt that some savings can be made. Complex rules could be simplified to reduce administration costs, benefit fraud could be targeted (although the costs of doing that will eat into any savings, and targeting tax fraud and evasion would be a more productive use of resources). But such savings are on the margins: the only real way of generating large financial savings from the benefits bill is to cut the amounts being paid. Reducing payments is one approach, cutting eligibility is another; but whichever approach is chosen, one inescapable consequence is that the spending power of some real people in the real economy would be reduced. How many, and by how much, are debateable questions; the underlying fact of a reduction in spending power is not.

Even if it were possible to identify accurately and precisely which people are ‘choosing’ not to work as opposed to which are unable to (and the reality is that that is very difficult to do – real people, in real families, in real communities have a complex mix of circumstances which mostly lie in grey areas rather than black and white ones), the bottom line is that the number of them is much lower than popular sentiment might suggest. Savings on the scale being demanded by some require a much less targeted approach under which many more people lose access to funds. They will include older people, sick people, children – are we really going to push them into poverty in an attempt to starve someone in the household into a probably non-existent job?

‘Cutting the benefits bill’ looks to be an easy task if we look only at the number of pounds and pennies being spent by government. It looks very different, though, if we start to look at the people involved. It challenges our perceptions of the sort of society we are or want to be. Yes, of course, we want those who can do so to make a contribution, but is being employed really the only way of doing that – and is enforced poverty for those who don’t really the best answer? For the neoliberals – for whom everything boils down to pounds and pennies – the answers might be in the affirmative; for those who believe that there is more to life and the human experience than money and economics, jettisoning that narrow approach and starting with people is the essential first step.

Lack of money isn't the problem

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It has long been understood that the one thing that governments can always find money for is war. War is undoubtedly costly, as the US is currently finding out. It is not really, though, a financial problem. As Professor Richard Murphy points out today, the real constraint isn’t financial, it’s about the availability of bombs and missiles and the ability of even the US economy to replace them at a fast enough rate. The US will run out of Tomahawk missiles because it can’t manufacture them with sufficient speed, not because it can’t pay for them. Similar considerations apply to Iran, of course – although an economy using lower cost, easier-to-produce weaponry can to some extent compensate for its relatively smaller size.

There is another corollary to this as well. There is talk that reducing the level of sanctions enforcement on Russian oil and gas to mitigate the economic impact of the war in Iran will enable Russia to prolong its own war in Ukraine by increasing the flow of money into Moscow’s Treasury. It’s true in only one important respect: to the extent that Russia needs materials, components etc from outside its own economy, increasing its flow of foreign exchange will assist it, but to the extent that it can meet those needs internally, then, just like the US, it won’t be a lack of money which constrains it.

Russia is vast; it has a huge range of raw materials available to it. It’s also a dictatorship: switching the use of its natural and human resources from peace time activities to war time ones is a lot easier than it is in a supposed democracy. Much of the response from ‘the West’ to the war in Ukraine has been based on the assumption that economic sanctions will reduce the sums available to the Russian government to spend on armaments and eventually force it to stop its aggression. But if those sanctions only impact Putin’s ability to make purchases outside the Russian economy, and Russia can meet most of its own needs within that economy, then the assumption is invalid. Russia can never run out of money, and can continue its war as long as it has the resources to do so available within its economy.

That’s not to argue that sanctions should not be applied, even if we know that they are widely being broken by back door transactions. It does, though, suggest that merely cutting off economic contact with a country with access to such vast resources of materials and labour will not bring that country to its knees any time soon. It’s more tokenistic than effective. It’s not a new lesson – Iran, for example, has been subject to severe sanctions for decades, and is still able to produce drones not only for its own use but also for export. The mistaken belief that money (or lack thereof) is a constraint on action by sovereign governments running their own currency has a lot to answer for.

Raising money for war

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As the warmongering rhetoric of the UK’s traditional parties (Tory, Lib Dems and Labour), along with newcomer Reform Ltd, ramps up, suggestions have been floated that the UK should start issuing war bonds, a method of borrowing from the public which was used to fund both World Wars. One of those floating the idea is Lib Dem leader, Ed Davey, and the call is also being supported by an alliance of defence industry bosses. The keenness of the armaments industry for the government to raise more money to divert into their pockets is understandable – arms manufacturers are the only consistent winners from warfare. Surprise, surprise – arms manufacturers support a plan to transfer other people’s money to themselves!

Even if we assume, for the purposes of argument, that spending more on armaments is a good thing, there is a big question over whether the government actually needs to borrow money to achieve that aim. The constraint isn’t about money – the government can always create money to fund whatever it wishes – it is about real resources in the economy. Are the raw materials, labour, energy etc to produce more armaments actually available, or do they need to be redirected from other economic uses? The way in which they are financed is a separate question entirely. On the scale on which our politicians apparently wish to manufacture armaments, it is likely that diversion of resources from other activities will be required – and which economic activities are selected to suffer the effects of that diversion is a far more important question, even if not one that any of them are in any great rush to answer.

Those advocating war bonds as a means of raising finance seem to think of it as an opportunity for ordinary people to come together and loan their pennies to the government in a great patriotic outpouring, as happened in the two world wars. Except it didn’t happen; it’s a false memory of events seen through biased lenses. And that little dampener eliminates the need to even consider whether the UK’s population would suddenly be overcome by the jingoistic fervour which the proposal presupposes.

In both world wars, the bonds were overwhelmingly sold not to ordinary individuals in the street but to a small number of wealthy individuals and to companies and institutions, unsurprisingly concentrated in London and south east England. The scheme launched in the first world war was actually a spectacular failure, with the Bank of England being forced to buy many of the bonds itself (an early example of what would probably be called quantitative easing today), hide the assets in its accounts, and then lie about having done so. As the government increased the interest rate in an increasingly vain attempt to attract more money, many of the new bonds were purchased by holders of the existing bonds converting them into the new higher interest bonds instead. As might be expected by any rational observer, the motivation of capitalists was more about making money than saving the country.

That highlights one of the issues with governments issuing bonds – they benefit mostly the wealthiest in society. By treating tax and ‘borrowing’ as alternatives, the rich end up keeping their capital and earning interest on it rather than paying tax. It’s also a double whammy – when the government spends the money into the economy, it overwhelmingly flows upwards into the hands of the wealthiest, through profits and dividends. To the extent that even a small number of ordinary people respond to the call, they end up reducing their own spending power as the flow of capital increases social inequality. It's not quite the wizard wheeze as which its advocates seem to see it. Unless you're an arms manufacturer.

Cutting wages is no solution

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As a simple fact of mathematics, any organisation which can cut the salaries it pays to its employees will ‘save’ money. Whether it’s a sensible thing to do, whether it’s the right thing to do, whether the employees will calmly accept the reduction without resorting to industrial action – none of those things affect the simple mathematical truth that reducing salaries means the employer spends less to achieve the same result. For those of us lucky enough to be part of an occupational pension scheme (which is most people by now, even if some of the schemes aren’t particularly good), the employers’ contribution to those schemes is part of the overall remuneration package: it’s a form of deferred salary. Cutting the amount employers pay for pensions is, therefore, a wage cut by another name – it’s just that the impact won’t be felt immediately.

One of Reform Ltd’s latest wheezes to ‘save’ money involves doing just that – cutting back on the benefits paid out in pension schemes, and thus reducing the amount of the deferred salary due to employees. It’s a not very well disguised salary cut. Whether it’s quite the pain-free saving as which it appears in the short term is another question, however. Reducing the incomes of future pensioners will reduce their retirement standard of living. By how much depends on the circumstances of the individuals, but we can be certain that at least some will end up applying for extra benefits as a result, and it will also reduce the amount of income tax collected from pensioners – it’s not a ‘no-cost’ proposal. Looking at the wider economic impact, people with less money spend less as a result, and that in turn reduces demand in the economy.

The fact that none of this is immediately obvious to many is down to the fact that the real impact won’t happen for years – or even decades – when those with a reduced pension reach retirement age. Maybe those proposing it believe that it will be so effective in deterring people from retiring at all that the impact will be insignificant. In a world which increasingly treats only ‘working people’ as having any validity whilst all others are to be regarded as a ‘burden’, that’s a perfectly possible interpretation. It’s a view of the world which isn’t restricted to Reform Ltd – it will probably be mainstream Labour-Tory policy in a year or two. It highlights a feature of politics – and indeed, the capitalist economic system – which is the increasingly short term views which prevail. A society which works for all people throughout their lives has to take a long term view, considering the first 18 years of life, as well as the last 20-30, when people are likely to be ‘unproductive’ in economic terms, but are still part of the society in which they live. Squeezing out costs in the short term might be good micro-economics, but it’s lousy macro-economics, quite apart from being a lousy way of treating individual members of society. It’s a distinction which those who benefit directly from the short term gains are unable – or, more likely, unwilling – to understand.

We need to retake control of the economy

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Figures announced this week show a rise in the level of unemployment, with young people being particularly hard hit. The government has responded in the way that all governments do, by talking about ‘helping more people into work’ (often a euphemism for cutting benefit payments) and inventing more, sometimes dubious, apprenticeships as a back door way of subsidising employers. The opposition has responded in the way that all oppositions do, by blaming government policies, especially those relating to wages, tax and regulation. The assumption underlying both of those positions – even if it drives them to propose different solutions – is that rising unemployment is a cyclical problem, which will be resolved if only we can get that magical growth they keep talking about.

It’s possible that they’re right; but it’s also possible that they’re wrong. What if, rather than growth and innovation solving the issue, that same growth and innovation, powered perhaps by AI, compounds it? There is a certain complacency surrounding that question. In a sense, it’s entirely natural – history shows us that the initial response to innovation and increased productivity is a loss of some jobs, which is usually followed by the appearance of new jobs, sometimes of a type and nature which nobody had foreseen. Maybe the same will be true of AI, and it’s overly pessimistic to believe that the job losses will be more permanent and generalised than we’ve seen in the past. It’s clear that the workers likely to be displaced by AI will include those in more technical and high-paid jobs than previous rounds of innovation, but the fact that the nature of any resultant replacement jobs is not currently clear doesn’t mean that there won’t be any. But the statement that ‘there always have been’ in the past can’t be taken as a certainty for the future either.

One junior minister in the UK government has already suggested that part of the response to the growth of AI might be the introduction of some sort of Universal Basic Income (UBI), although even he seems to be talking abut it as a temporary response, allowing people to retrain for the jobs of the future, whatever they may be. And there’s no doubt that any sort of UBI would be enormously expensive: even an income set at the less than adequate level of Universal Credit would be likely to carry a price tag of some £200 billion per annum. But what is the alternative that those objecting to the cost would propose in a situation where most work is done by automatons or AI? Are those people who have been displaced to be treated as disposable, and left without food or shelter as a result, whilst those lucky enough to still have work continue to live as normal (and those who own the machines and the software continue to accumulate wealth well beyond their capacity to spend it)?

It’s a scenario which raises questions about what an economy is for. Forget ‘invisible hands’ and market spirits – an economy is a social construct, and it’s up to the society in which it operates to determine how it works, who benefits from economic activity, and by how much. If an economy cannot supply at least the basic needs of all the people in that society, than it’s not performing its social function. From that perspective, tax is not some burden placed unfairly on those who own the capital or provide the labour, it is merely the mechanism by which the outputs of economic activity are used for the benefit of all. It is, in its very essence, a mechanism for redistribution. For the last four or five decades, we’ve increasingly lost sight of that and allowed the economy to be captured by a few, and corrupted to serve only their interests. If the resulting gross inequality hasn’t been enough to force a rethink, perhaps the impact of AI will be.

War is a choice, not an inevitability

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One of the policies which seems to be increasingly common ground between the Tories and Reform Ltd is opposition to the target of becoming carbon neutral, or reaching net zero in terms of carbon emissions. It’s a policy platform which seems to be implicitly underpinned by two very curious beliefs.

The first is that expenditure on achieving neutrality is in some way consuming wealth whilst continued exploitation of fossil fuels is generating wealth. It is, of course, complete and utter piffle. If we measure wealth in terms of GDP (or GVA), what money is spent on is irrelevant. It is the act of spending it which adds to GDP; money spent in insulating properties adds as much to GDP as the same amount of money spent on drilling for oil – and that’s true whether the spending is in the public sector or the private sector. There might be an argument that multiplier effects mean that spending on X rather than Y ultimately generates more GDP per £ spent. I actually don’t know the answer in this specific case, but it’s interesting to note that it’s not an argument they are trying to make. I rather suspect that they are conflating two different kinds of wealth – national wealth as represented by GDP and private wealth as reflected in the bank balances of individuals and companies. I’m sure, though, that this conflation has nothing to do with the fact that both parties rely heavily on donations from established players in established sectors, such as oil and gas. Not.

The second curious belief is that if nothing gets spent on achieving net zero, the whole amount of any projected expenditure becomes a net saving, and makes money available for other things. Their favourite other things are tax cuts for the wealthy and/or channelling expenditure into donor companies, such as those in the armaments industry. Badenoch’s statement today is a classic of the genre. I suppose that, if they really believe that climate change is not happening at all, then it would be a reasonable belief, although that would be flying in the face of overwhelming scientific opinion. I’m not sure that they really do believe that, though; reading some of what they say, it seems more likely that they believe that we can and will somehow adapt to climate change. The costs of that, they simply ignore – a problem for another day.

Badenoch would clearly prefer war to addressing climate change, which I suppose puts her on the same page as Farage and Starmer. There is, though, more to the cost of war than diverting the finite resources of planet Earth into weapons of destruction. There is the obvious cost of loss of human lives (although they would probably all prefer to see that as a loss of a productive labour force). There’s also the lost opportunities which such diversion of resources would entail – the opportunity to provide a decent standard of living for all, for instance. Badenoch is making it clear that she thinks that austerity (obviously not for her section of society) is a price worth paying in order to prepare for all out war with Russia. And then there’s probably the biggest cost of all: in the event of surviving such a war, the cost of reconstruction would be enormous.

There is one point about which she is right. Governments face choices. Whether the constraint on what governments can do is the availability of money (as she, Starmer and Farage all insist that they believe) or the availability of physical resources (as economic reality dictates), governments still have to choose between options for using that money or those resources. Badenoch is making her choice clear – war. And she’s being aided and abetted by politicians and military types urging the same choice on an almost daily basis. There is an alternative, though: we really don’t have to allow them to make that choice.

Do capitalists understand capitalism?

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The criterion for determining whether or not a capitalist enterprise is viable or not is, in essence, very simple. To be viable, an enterprise needs to be able to sell its wares for a price which enables it to cover all the costs of production (labour, materials, etc), to pay all applicable taxes, to comply with all relevant laws and regulations, and to make a reasonable level of profit. In a rational world, the definition would be extended to add an environmental sustainability requirement, but that’s for another day. The corollary is that any enterprise which fails to meet that criterion is not viable in the market in which it is operating.

It probably shouldn’t surprise me, although it does, that so many capitalists seem not to understand the criterion at all. Some claim that taxation is a problem; others that minimum wage legislation stops them making a profit; yet others say that regulation and what they like to call ‘red tape’ prevent them making a profit. But, provided that all the rules and costs apply equally to all, a company which can’t afford to pay a living wage to its employees, or which needs exemptions from taxation, or which can only work if it doesn’t have to abide by environmental or health and safety legislation is a company which is, bluntly, not viable in the market in which it operates. If a company really can’t increase its prices when its costs increase, then one of two things must be true: either there is more supply than demand in the market at a price which makes the business viable, or else its competitors are operating more efficiently. Either way, according to strict capitalist rules, it is not viable as a business and should close.

Now, I’m not really advocating that hundreds of businesses across Wales should close down – but then, I’m not a huge fan of untrammelled capitalist markets either. I’m merely pointing out that capitalism, left to its own devices, requires that non-viable businesses fail. It’s a feature, not a bug, of the system. In the real world, there are all sorts of reasons why government authorities might want to keep some enterprises operating, using subsidies and exemptions in the process. It’s a valid role for government to perform. What we should not do, though, is pretend that the companies being thus supported are successful capitalist enterprises, let alone allow their owners to extract profits and dividends on the back of a subsidised existence. Yet, in industry after industry, that is precisely what we do. Interestingly, some of those who benefit from such government intervention are also the people bleating about the cost of benefits, pensions etc. It seems as though state largesse is only a bad thing when it goes to other people.

Buying shares isn't the same as investing

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For most people, the reduction announced in the budget yesterday to the limit on cash ISA’s, from £20,000 to £12,000 per annum, is an academic question. There can’t be many on an average salary who have even £12,000 available to save, let alone £20,000. The tax-free status of interest on such accounts is effectively a subsidy to those who do have that sort of money to put aside. As ever, the taxation system in the UK works to promote the flow of money from those who have less to those who have more. Who ever said that Conservative politicians – of whatever stripe – don’t believe in redistribution? They do – just in the wrong direction.

The argument for that subsidy was always that ‘saving’ was a ‘good thing’ for people to do, and should be encouraged. Reeves has effectively being saying for some time that ‘saving’ isn’t such a good idea after all – what we really need is investment. She’s right in principle, but utterly wrong in the implementation. She is arguing that those who are in a position to put aside the full £20,000 must put the remaining £8,000 into stocks and shares, but defining that as ‘investment’ is just plain wrong. Certainly, if someone buys shares in a start-up, that is an investment: the money goes into the company and is used to pay the initial costs. In return for that, the investor owns a chunk of the company in the form of shares and can expect dividends paid out of profits if the company is a success. But when they sell those shares, even if the person buying them pays two or three times as much for them, not one penny of the payment for those second-hand shares goes into the company for further investment. That doesn’t mean that the new owner doesn’t own a chunk of the company, nor that (s)he won’t receive dividends, merely that the transaction doesn’t represent a new investment in anything. It creates no added value at all.

It might, though, lead to an inflated share price. If Reeves’ approach leads to more ISA monies being used to purchase existing stocks and shares, the price (and therefore the apparent value) of those stocks and shares will increase, in line with the basic rules of supply and demand. That in turn has two effects: firstly, it increases the disparity between the ‘value’ of the shares and the underlying value of the company and its assets, and secondly it makes it more likely that those shareholders will lose some of their apparent wealth if the shares crash. And the greater the disparity, the more likely it is that there will be a crash, or at least a ‘market correction’ at some point, probably as the result of an external shock. Reeves is not only trying to force more people to risk their capital by saving in ways where the price can go down as well as up, she’s also increasing the level of that risk. All because of a dodgy definition of investment.

She’s right, though, in saying that the UK needs more investment. But if we define investment as being the creation of new assets – for instance, new companies, new equipment, new infrastructure – there are better ways of doing it than persuading people to put their money in the hands of market speculators and gamblers. Public sector investment in infrastructure is one of those, but you wouldn’t know that from listening to the Chancellor.

What about the digestives?

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A Labour MP has produced a short video which has gone viral in an attempt to explain the so-called government debt crisis in terms of the ratio between bourbon biscuits (debt) and custard creams (GDP). I’m not sure whether he’s fully thought through the possibility that, for those of us (count me in) who prefer bourbons, this might make the idea of bigger debts more attractive. More worryingly, it made me wonder whether the budget to be announced by the Chancellor later today might itself be based on biscuit mathematics rather than economics, although that might help to explain the odd choices she seems determined to make. One thing that was clear, as the MP piled up his biscuits, was that there was a remarkable lack of crumbs. I suppose that might well be another accurate budget prediction.

What biscuit-based economics skates over, however, is that underlying it is the same set of assumptions as are used by government and opposition alike in their own money-based economics. Treating the amount of money which savers queue up to place on deposit with the government as though it’s a serious debt problem, pretending that the UK has a maxed-out credit card, and ignoring the fact that a goodly chunk of the interest payments being made by the government are actually paid to, er, the government itself so that that element of expenditure immediately also becomes income, are all signs of a commitment to the ridiculous household analogy for government finances. Doing the accounts in biscuits might be mildly entertaining, but it is still economic nonsense.

The number of custard creams and bourbons isn’t actually the limiting factor on what we can do. As Keynes would probably have said, if he’d decided to base his major works on biscuits, if the biscuit factory has the capacity to produce more biscuits, if the materials are available, if there are enough available workers, and if the environmental impact of making biscuits can be met, then we can make as many biscuits as we want. Although, speaking personally, I’d opt for a nice chocolate digestive.

Where do you want to be shot?

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When ‘news’ papers have a space to fill, one common response is to report the results of some survey or other listing the world’s favourite **** (insert item of your choice here). The extent to which the findings are meaningful is an open question. Passing through Heathrow a few weeks ago, I spotted this advert urging people to vote for Heathrow as their favourite airport.

And there was a similar message (for a different airport, obviously) at the destination. Respondents are self-selecting (none of this demographic weighting stuff), and are not required to have actually visited any other airports – or, even, the one for which they are voting. And the appeal of the message is a clear one – vote for ‘your’ airport. More of a loyalty test than a scientific survey. It's a reminder that we should always be questioning the context and methods used in any survey, even professionally conducted opinion polls, before blindly accepting the headline summary.

Which brings me to a report in yesterday’s Sunday Times about a More in Common opinion poll which suggested that 67% would prefer the Chancellor’s budget this week to fill the fiscal black hole by cutting spending rather than increasing taxes on working people. It’s hardly a surprising result – as a general rule, people seem to naively believe that spending cuts somehow affect ‘other people’ whereas tax cuts impact them directly. But, in reality, it’s a bit like an assassin asking whether you’d prefer to be shot in the head or in the heart: it avoids the much more important question about whether you really want to be shot at all. The existence of Rachel Reeves’ black hole isn’t questioned, and nor is the need to fill it by balancing the budget. In effect, the reporting of a simple opinion poll (which I’m sure was conducted professionally in terms of its methodology) manages to confirm and reinforce the Overton window for debate around government finances, confining it to the assumptions made by the UK’s three right-wing parties (Tories, Reform and Labour), all of which are signed up to the ridiculous household analogy for government finances.

For all the leaks, briefings and speculation, we don’t yet know what Reeves will announce this week, but whether she opts for spending cuts, tax rises, or some combination of the two, the effect will be much the same: she will be reducing the purchasing power (and therefore the standard of living) of millions of people in pursuit of an ideological position which imposes upon her an entirely arbitrary set of rules which she herself has designed. And the post-budget debate will revolve around whether the totals she’s arrived at are correct and whether there’s a better combination to achieve the same outcome. But who will be asking whether we really want to be shot at all?