Does deficit spending increase national debt?

A national economy, with a sovereign currency, is big money system. Unlike a household the independent inputs and outputs are not income and expenditure. The input to a national economy is currency that is introduced into the system through public spending. The output is the money that leaves to go abroad, as a trade deficit, currency that is saved by the private sector (households and business) and money that is removed from the system through taxation.

The diagram below illustrates this system for the UK in 2016. The government spent £745 billion1All data is approximate and values are indicative. Data was drawn from www.ukspending.co.uk into the economy on things like health, education, welfare and pensions and defence etc. It removed £680 billion in tax (income tax, corporation tax, VAT etc).

We are net importer, so our trade deficit was approximately £87 billion. In other words this currency left the domestic economy.

To balance this, private sector savings had to reduce to by $22 billion to meet the shortfall. For many individuals this means increased private debt. In other words £22 billion was introduced into the economy from the private sector. The private sector was using reserves or borrowing to deal with a private sector deficit created by government economic policy.

This model is the idea of former University of Cambridge economics professor and government adviser, Wynne Godley. Godley proposed that all surpluses had to match all deficits in the economy. This an accounting fact and not an economic theory.

A government with a sovereign currency does not borrow to spend . It simply credits the accounts of health trusts, local governments and welfare recipients.

Then, it is important to understand how the national debt arises.

Government bonds or gilts are used to reduce excess reserves accumulated in private sector saving accounts in commercial banks. This is necessary to maintain interest rates. If savings are too large then interest rates, as a result of supply and demand, will have to reduce. In order to stop them going negative the government has to reduce the amount of saving by exchanging currency reserves for bonds.

The private sector and its investors, in times of economic certainty prefer to limit risk. Government bonds are one of the least risky investments even though returns might be low. When the government cuts spending, like the Conservative-led government in the UK since 2010, demand reduces and private debt increases. Investing in business or development becomes risky, there is uncertainty that there will be sufficient demand to make the business sustainable. Currency that has gone overseas in trade or that has been accumulated in the domestic private sector ends up in banks and it is necessary for the government to exchange these for bonds, i.e. to increase the national debt.

This explains why, even when we cut spending, the national debt does not reduce and can even increase (see chart below). In fact, taking Wynne Godley’s approach demonstrates that the normal operating condition of a healthy economy is with a public sector deficit.

The period from 2010 shows a decrease in the deficit yet the national debt increased. It also happened 2004 to 2007 and 1993 to 1996. National debt is as much dependent on economic confidence as it is on public sector deficit.

Reference

Mitchell, W. F. (2016). Modern Monetary Theory and Practice: An Introductory text. CreateSpace Independent Publishing Platform.

This changes everything

I was feeling numb at five minutes to ten last Thursday. I had been campaigning intensely for the Labour party – both professionally and in a personal capacity – for months. It came up on Twitter, the mainstream media were saying that exit polls predicted a hung parliament. And while the Conservative party were predicted to be the largest party, the result for me marked a major change in British politics. It was going to be an exciting night.

So it turned out. As the results came in through the night it was clear that Labour had increased its share of the vote from April polls of about 25 per cent to 40 per cent in the General Election. This was unprecedented.

What is so significant, is the election result demonstrates strong support for a radically different economic and social policy. Radically different from the consensus that had existed between the major parties since the 1970s.

Keynes is back baby. The manufactured consent around a liberal/ neoliberal political economy which focuses on controlling public-sector spending and facilitating wealth creation has been shaken to its core. Particularly because it was the cause of the 2008 Global Financial Crisis and it prompted the austerity approach adopted by the Coalition government and Tory governments from 2010 to 2017. Neoliberalism and austerity has undermined public services and exacerbated inequality.

When I say Keynes is back, I mean that we stop the purblind view of the importance of wealth creators, but begin to look again at the role of government spending in creating demand. Wealth creators cannot attract wealth unless ordinary people have sufficient money to purchase things in the economy.

Government can increase that wealth through redistribution (e.g. progressive taxation), increased investment in the economy (e.g. through infrastructure, health and education) and more robust regulation of the financial sector (addressing exploitation of private debt). Since the UK government has a sovereign currency it can use its capacity to spend, tax and regulate to rebalance the economy.

Keynes is back, but it’s been upgraded by contemporary economists. I have written about it in the following posts:

http://stevenwatson.co.uk/2017/01/mmt-school-spending/

http://stevenwatson.co.uk/2017/02/spendandtax/

The consequence for teachers, educators and academics is that we have to start thinking differently. We have to think about what education might look like in a post-neoliberal world. Some of my thoughts are in the following post:

http://stevenwatson.co.uk/2017/05/laboureducationge2017/

Since the Labour Party’s positive manifesto has been welcomed by the country, we must now go further and think about how we transform our education system. Transform from a marketised, privatised and commodified system into a democratic system that serves communities and the nation in an inclusive way. Paying attention to social justice, peace, environment, community cohesion and individual and collective intellectual development. A system that must effectively serve people more and serve less those that run and control it.

Exciting times, I look forward to the debate.

 

Modern Monetary Theory (MMT) does not change things in an instant

The idea that MMT can just change politics and economics the moment people engage with its ideas is wrong.  While I very much believe in the efficacy of MMT, I do not accept some of the views about how it should be taken up by politicians.  Particularly, the suggestion that leftist and progressive politicians should lead with the ideas of MMT.  That they should be bold in talking about the real limits of government spending, when that government has the sovereign powers to create a currency.  From the perspective of MMT, currency is introduced into the economy through government spending,  it withdraws currency through taxation.  This is contrary to the orthodoxy of seeing taxation as a revenue and government spending as an expenditure.  MMT aficionados become hot under the collar when they hear politicians, media presenters and lay persons relating tax to spending:  that all government spending must be matched up to tax revenue.

A short while back I found myself responding to a blog post from the heterodox economist Bill Mitchell. British Labour has to break out of the neo-liberal ‘cost’ framing trap. Bill was incredulous with the British left, that John McDonnell (Shadow Chancellor) and Jeremy Corbyn (Leader of the Opposition) had abandoned progressive economics. There is another out to day. British labour lost in a neo-liberal haze. Mitchell’s argument is that UK Labour are being lured into the neoliberal thinking because they are explaining their economic policy based on tax and spend.  A crime against MMT.

Now I have greatest respect for Bill Mitchell, I have learnt a great deal from his books, his blog and various videos on YouTube.  It is his writing that has helped me understand post-Keynesian economics and MMT.  It has empowered me politically.  While the economics is crystal clear, I feel Bill has a blind spot politically.

I’ve also had arguments on social media with MMT supporters about this.  And it is perhaps my own research in education that makes me realise why the introduction of a new theory or a new idea—no matter how brilliant, how insightful or how effectively and accurately it reflects the real world—does not change people’s thinking and behaviour easily.

The reason for this is to do with human reasoning.  There is a duality in our reasoning facility.  At one level, we are rational and logical.  We have the capacity to consciously reason based on the evidence, assumptions and premises in front of us.  At another level we are highly intuitive, we make judgements based on the situation we see in front of us.  With this kind of reasoning we draw much less on our capacity to consciously reason.  We rely on our experience and judgement.  We rely on our memory and previous experience.

For the most part, humans are much more reliant on intuitive reasoning than they are conscious reasoning.  The reason is simple, conscious reasoning requires much more effort, the mental processes required draw on the body’s resources.  Unlike a powerful computer, human beings are not able to sustain conscious logical and deliberative reasoning for sustained periods.  We therefore must rely on our intuitions.

But if we were simply to rely on our intuitions, our social lives would be chaotic.  It would be an interaction of individuals making fairly random intuitive judgements and responses to the situations they met.  Fortunately, we have culture to overcome this.  This provides us with a shared pattern of behaviour to make our actions more predictable and more understandable for each other.  Call it what you will, these are life’s protocols, mores, manners, and even language.  It is like much of our behaviour is pre-programmed but constantly adapting. Vary it too much and your behaviour appears abnormal or even unacceptable.

My research has been largely about the professional learning and development of mathematics teachers in secondary schools.  I have observed many lessons and they mostly follow similar patterns, like a cultural script.  The teacher begins by explaining or demonstrating a mathematical method or idea.  The students will follow this with practice on exercises or working through textbook questions.  Even the dialogue follows fairly predictable patterns.  Notably, the initiation-responds-feedback routine of teacher-student dialogue predominates.  The teacher asks a closed question to the class, a student responds and the teacher replies yes or no.  It is predictable classroom rhetoric.

The classroom is an intense and demanding place.  The teacher has little opportunity to consciously reason through their actions and decisions in carrying out their teaching.  They are relying on patterns and routines, heuristics and cultural scripts in order to make complex social interactions more predictable.  By the same token, students also become familiar with the cultural script and the ground rules.

And this is how I understand the frustrations of MMT economists.  Why is it that we have a theory that is so good, it explains the economy so effectively and so comprehensively but everyone is not using it?  And I felt the same way when I started researching the professional learning of mathematics teachers.  Why is it that we know so much about learning, through a combination of anthropology, sociology, psychology and neuroscience?  Why isn’t the teaching and learning that I observed in the mathematics classroom reflecting this knowledge?

My explanation, which draws on the work of philosopher and cognitive psychologist, Philip Johnson-Laird, is in the duality of human reasoning and the limitations of our capacity to consciously reason.  Furthermore, it is our reliance on culturally defined patterns of behaviour and thinking.

That is not to say, humanity is incapable of change, that it is incapable of adopting new ideas, new thinking and acting in different ways.  However, the assumption that new ideas will simply change behaviour, no matter how good that idea is, simply misunderstands the nature of human thought and behaviour.

In terms of economics, the orthodoxy that government spending is dependent on taxation is not simply a construct of neoliberalism—of liberal economics—from the last few decades.  No, once we start to dig and search for the origins of this thinking we go back centuries.  Mark Blyth, in his recent book, Austerity: The History of a Dangerous Idea, sees the source of cultural thinking about economics in the work of John Locke in the 17th century.  It can be tracked through the work of Adam Smith and David Hume, for example.  It is embedded within cultural thinking about political economy, it is a fundamental cultural artefact: that in order for government to spend it must raise tax.

Of course, this is reinforced by the media and by mainstream economics.  It is easy for people to accept since it is analogous to every individual’s experience of their own personal finances.

So, we do not simply change people’s thinking with a radical idea.  We need so much more.  Education is at the heart of this, people need time to think about and muse on how the economy works.  People need teachers to guide and challenge their thinking and help bring heterodox economic ideas into everyday use.  It is complex, demanding and it needs time and investment.

I acknowledge therefore, that no political leader, however progressive will be in a position in the current cultural orthodoxy to change thinking.  No matter how eloquent, how compelling and how richly they explain MMT, without addressing cultural dispositions towards economic ideas, thinking will not change.

However, what political leaders can do is move the argument on.  They can present progressive economic ideas in terms that mean things to people.  At the same time, as Jeremy Corbyn and John McDonnell have done, they can get more people talking about how the economy works and in many cases people are reaching for further understanding.  This presents an opportunity for heterodox economics, such as MMT.  People are looking for something different.

It is important to think about economics in political economic terms.  Orthodox economics lends itself to the worst forms of exploitative capitalism, like for example, neoliberalism.  There are indeed vested interests in retaining the status quo.  You don’t have to listen to the BBC for very long or read any of the UK’s leading newspapers to realise how embedded politically and culturally, orthodox economics is in our society.  Vested interests prefer it that way and will do everything to retain it.

It is necessary therefore, that any project to revolutionise the economic thinking of the masses is seen as a political project.  That doesn’t mean that progressive forces seize power and impose new economic thinking.  No, it is a more consensual project.  One that must concurrently develop economic thinking and political purpose.  This is about the development of economic literacy in tandem with political empowerment.  These two elements are inseparable.  You can’t have political empowerment without economic literacy.  MMT aficionados recognise this and find it frustrating, understandably.  However, they must also recognise that economic literacy only comes through political empowerment and action.

I was listening to a podcast from Novara Media on Saturday as I pottered round the house. The Long Depression: Michael Roberts on Capitalism and Crisis.  The presenter James Butler questions the guest, Michael Roberts, about post-Keynesian economics.  As a Marxist economist, Roberts puts forward a view not dissimilar to the one that I present here.  It was interesting, as I was made to think about tensions between Marxist economics and post-Keynesian MMT.  The former, as described by Roberts, is rooted in a political struggle of between capitalist and proletariat.  On the other hand, MMT does not have the political dimension.  It is an economic model with political consequences.  As this discussion unfolded, between Butler and Roberts, I found myself in sympathy with both positions.  I have a good understanding of MMT but also recognise that economics is necessarily a political project. In other ways Marxist and post-Keynesian economics are not incompatible.

And this is why I ask that progressive economists back the UK Labour Party, Jeremy Corbyn and John McDonnell.  Their proposal for the economy, while not exactly in the language of MMT is not inconsistent with it either.  I refute the claim that it is neoliberal. If we are generous, we can see that they are attempting a combined political and economic project.  Increasing public spending, progressive taxation and potentially greater regulation of the financial sector.  However, they are using the language of the economy that people are familiar with.  As a political project, their aim, in my opinion, is to make government more democratic and transparent.  It through this that economic literacy can be expanded.

At a personal level, this is the first time in my fifty-two years that there has been anything close to the faintest sniff of something radical or different.  We must support it.

The Labour Party’s radical vision for education: the opportunity of a lifetime

Judging by the polls, as UK Prime Minister Theresa May announced a snap General Election on the 18 April, you would be forgiven for thinking that the result is a foregone conclusion. And, for that matter, with a resounding Tory victory. But this election is anything but a foregone conclusion. It is set to be closer than commentators predict. People must now make a serious choice, a serious decision — rather than simply express a preference.

And already, after a week of campaigning, the polls have narrowed. Even though the Tories continue to retain a commanding lead over Labour Party, it is evident that the Labour Party have gathered some momentum. Compared with the Tories, the Labour Party have campaigned very effectively in this first week.

The following is the standing ovation Jeremy Corbyn received from the headteachers at the National Association of Headteachers (NAHT) conference in Telford 30 April 2017. While I expected him to be given a polite reception, I was surprised by this. There is clearly something in the air.

 

And so, there is everything to play for.

An end to austerity, neoliberalism and privatisation in education

There probably never has been a more important election for education. The choice between the two main political parties has never be starker. The Tories will continue with academisation, free schools, privatisation, marketisation, a return to selective schools and a school choice agenda. While the Labour Party plans to restore Local Education Authorities and create a National Education Service. The Labour Party plans to bring education back into the public sector.

This general election could mark the end of an education policy consensus that has existed since the 1970s. Since then, education policy has been moving toward marketisation and privatisation. Schools have increasingly come to compete with one another; with an emphasis on centralised accountability (which is frequently punitive); high-stakes assessment and progress measurement; surveillance and performativity; managerialism and hierarchical management structures; intensification of teachers work; and the undermining of teachers’ pay and conditions.

Some argue that these reforms have improved the educational outcomes of many children. They also argue that closer the scrutiny of schools ensures that students make progress and achieve in final examinations. And that this, they claim, has improved the quality of teaching and learning.

These are exaggerated claims, educational reforms have led to more heat than light. There has been lots of noise and increasing demands placed on schools and teachers, yet with very little real insight into the implications of policy. Furthermore, claims made by successive governments are too often based on a selective reading of data. They ignore the complexity of education and identify simple—and frequently overly reductive—measurements to try and determine the impact of policy.

While I don’t personally have a particular passion for international comparisons, the following data visualisation for reading performance in the OECD PISA tests shows negligible change in students’ reading performance in England. There is a similar picture for mathematics and science.

That is not to say that the general level of teachers’ knowledge and skill has not improved over the last 40 years. Education research, theory and practice has developed in that time, comprehensive schools have matured and developed. But this is in spite of policy rather than because of it. I would go as far as to say that marketisation has hindered the progress that teachers, themselves, have tried to make through this time.

A new economics for a post-Keynesian age

It is important to recognise that the Labour Party’s education policy, like its other public sector policies, is based on a different kind of economic approach. All governments in the UK since the latter half of the 1970s have adopted a similar economic approach. An approach that prioritises and privileges the freemarket. The privatisation and marketisation of education is a consequence of this economic thinking. The electorate are encouraged to accept freemarket policy in education because it will supposedly give them more choice. Furthermore, choice and competition will motivate schools and teachers to deliver higher standards. However, there is little evidence to support this conclusion.

Privatisation and marketisation in state education is justified with claims of increased efficiency, higher standards and the advantages of parental choice. These disguise the economic thinking and political choices that drives policy in this direction. The real reason is a response to the problems faced by capitalism more generally. Capitalism is a system of political economy which involves using resources, money and labour to return profits. For 200 years it has been the dominant political economy in the UK.

In the 1960s, capitalism was undergoing one of its periodic crises. Capitalists were finding it increasingly difficult to sustain profit levels. Over the next decade governments used economic policy to make it possible for capitalists to preserve their profits. A key part of which involves reducing the role of the state and the control of state spending. Subsequently, all governments have been preoccupied with reducing public sector deficits. In other words, reducing the amount of public spending and reducing the size of the state. Additionally, and increasingly, governments have privatised and outsourced public services. The argument has been, of course, for efficiency and choice. When in fact the aim has been to preserve profits in the private sector.

A smaller state provides opportunities for private-sector providers to move into providing public-sector services. We have observed this trajectory in the UK, in health, education and even with prisons. While some private providers claim to be not-for-profit organisations, for all intents and purposes, they are capitalist organisations. And necessarily they must accumulate capital. This may not be through generating surpluses or profits, as we might imagine. But it is also achieved through the expansion of their organisation.

In 1988, with the introduction of the Education Reform Act, the process of the privatisation of education was enacted in legislation. City Technology Colleges under Conservative governments in the late 1980s and 1990s were the initiates of privatisation. The New Labour government refined this idea and introduced their Academies programme. The process was further accelerated under the Coalition government where Multi-Academy Trusts were established as private limited companies and billions of pounds of a publicly owned assets were transferred to the private sector. The history of this has been one of cross-party consensus in the privatisation of education by stealth.

This is what is referred to as neoliberalism. It goes under many names: liberal economics, deficit reduction, living within our means and austerity. All these mean the same thing, the preservation of the profitability of capitalism. While I do not intend to go into it in detail here, the reduction in public sector spending leads to increasing levels of private sector debt. In addition, the power of individuals to organise at work and protect pay and conditions is undermined by limiting the powers of Trades Unions. Neoliberalism leads to growing inequalities in society, the rich get richer the poor get poorer and in turn this leads to social unrest . It gives an opportunity for the far right to promote simple divisive answers, attractive to those that have not benefited from neoliberalism.

The following illustrates the trend in wealth inequality in the UK. Notice the upward trend after long period of decreasing inequality in the first part of the twentieth century.

Wealth inequality in the UK

 

The following shows the growth in wealth inequality (The Gini coefficient ranges from 0 for perfect equality to 1 where one person has the majority of income). Note how this rises in the mid 1970s to the 1990s where it has remained constant subsequently.

The following shows UK inequality compared with other nations based on the Gini coefficient.

This video illustrates the extent of inequality in the UK.

Teachers and schools must cope with the challenges of high-stakes inspection and accountability. Furthermore, they must respond to the social problems created by neoliberalism. The managerial and hierarchical system combined with accountability results in a bureaucratic system. The bureaucracy places further demand on teachers since it undermines their capacity and power to use their judgement in their job. While efficiently run schools are often characterised by systems, rules and procedures, these often become a dominating rather than supporting structure. This limits teacher agency within this environment.

We are in a period of economic change. The Global Financial Crisis of 2008, was the clearest of indicators of the failure of neoliberal economics. Mounting private debt and an unregulated financial sector in the USA led to a truly global financial collapse. Governments, in leading nations worldwide, have subsequently failed to heed the warnings and reform their economies. Instead they have continued with neoliberalism and austerity.

It really doesn’t have to be this way. Governments, like the UK government, can increase public spending with economic justification and keep education within the public sector. The preoccupation with deficit reduction is disingenuous. It is a matter of simple accounting, that as part of the normal operating condition of an economy, where the government has its own sovereign currency, the country will run a public-sector deficit. This ensures that the private sector, that is, people, households and businesses, can hold a surplus. In other words, they can save for a rainy day. The government with its power to create currency does not have to save in the same way, because it has the power to spend when needed.

John Maynard Keynes recognised that when the economy has excess capacity, it is a necessary for the government to inflate the economy through public spending. Currently we have excess demand for health, social care, education and training. By increasing spending, we can fulfil more of this demand, and improve the quality of our education system. This is a necessary and valuable investment in our education system.

Increasing public spending, making taxation progressive (fairer), regulating the financial sector and controlling the movement of capital will reduce the level of wealth and income inequality in the UK.

While the Labour Party has not published its General Election manifesto yet, this has been the essence of the economic policy put forward by Jeremy Corbyn and John McDonnell since they assumed the leadership of the Labour Party in September 2015. It is for this reason, they have been vilified by mainstream media and establishment. This proposal for wealth redistribution is an attack on the 1 per cent, the same people who have controlling interest in the media and in establishment institutions. It is little wonder that Corbyn has been subject to ferocious attacks in the media.

Labour’s education manifesto: the National Education Service

There have been several policy announcements. The most important, and the most overarching policy proposal is the National Education Service. This is analogous to the National Health Service, a cradle-to-grave national service which provides education for all and free at the point of use. This provision is from early years right through to higher education. This provides a complete and complementary collaborative service for the provision of education.
It will not be a fragmented system of providers competing for resources or competing to educate pupils and students who require least investment. The National Education Service restores collaboration. It would put knowledge, skills and experience at the heart of its mission. This is because, under a different economic model, organisations would not be preoccupied with narrowly defined outcomes as they are in the current neoliberal system.

There would be less emphasis on bureaucracy, hierarchy and managerialism. The focus of organisational leadership would be on collectives, comprising stakeholders, practitioners and experts. All with diverse views and experience, but with a commitment to developing education through participation and democratic approaches. Leadership becomes important in a different way. No longer will it be presidential or in the style of a chief executive officer. It will be a role in which the leader must convene and ensure effective participation, deliberation and decision making.

The current neoliberal system tends toward bureaucratic processes, which undermine the power of practitioners to use their judgement. The reality teachers’ day-to-day practice involves moral judgement much more than it does logical or scientific reasoning. Practitioners, teachers and education workers need to be empowered to use their judgement. They also need opportunities to develop and test their judgement, they need sophisticated understanding of their professional learning and development. They also need to contribute to the overall philosophy, rationale and principle of the National Education Service.

To support a National Education Service requires first-class research and development. Currently there are calls to make educational research a science. It isn’t a science. But it can draw on scientific principles. But central to the development of educational policy and practice is the relationship between theory and practice. This means that human judgement must intervene in logically derived conclusions. That is not to say that scientific research is not an important part of educational research. Although, it is a mistake to believe that by simply undertaking a randomised-control trial education research becomes scientific. Merely following scientific procedures does not mean that we have been scientific. The process of educational research has much in common with science in that we scrutinise our knowledge of the world, elaborate on existing theory and attempt to make predictions. The key difference with educational research is that it is in the field of complex human relationships, cultures and practice. It is necessary to recognise that a refutation or a new theory does not by itself change behaviour. Advanced educational research acknowledges the humanity of thinking and behaviour.

One of Jeremy Corbyn’s aspirations is to transfer more power to the people. The participatory nature of the National Education Service allows for greater democratic participation of practitioners and stakeholders. It would also see the restoration of the Local Education Authority. This would also restore education to the ownership of local communities, with local democratic accountability.

Jeremy Corbyn speech to the NAHT can be found at the following:

http://press.labour.org.uk/post/160149172594/jeremy-corbyn-speech-to-the-national-association

Further details about education policy have been announced. The Labour Party will reverse the £3 billion worth of cuts that the Tory government have planned for schools. They will also abolish tuition fees for undergraduates. They have announced £160 million worth of funding for arts education. There will be universal free school meals for primary children and the introduction of VAT on independent school fees. They will reintroduce Educational Maintenance Allowance for young people still in education. I also expect to hear further support for Further Education, adult learning and part time courses such as those with the Open University. Similarly, I expect proposals for the funding of higher degrees and research degrees at masters and PhD level. I would also expect to see the recent Higher Education and Research Bill, which legislates further marketisation and privatisation of higher education, to be repealed by a Labour government.

Jeremy Corbyn speech to the NAHT can be found at the following:

http://press.labour.org.uk/post/160149172594/jeremy-corbyn-speech-to-the-national-association

While the Labour Party’s proposals are still taking shape, an understanding of the underlying economic vision that is driving policy proposals, means it is possible to give a sense of what a future education system could be like. It would be an inclusive system for the many and not the few. It would promote social mobility, and help young people in becoming educated and informed participants in democracy.

Though there will be cynics who will say this is not possible, who will say that it cannot be done and who do not trust the inherent good nature of humanity. It is this cynicism and apathy that is the barrier to an ambitious future of something fairer and better.

For the first time in my life, we are closer than ever to something truly transformative. And it is through working together, and a belief in something better, that this vision can be realised. It is not dependent on a single leader to deliver it, like in the past, but it is dependent on a political leader to facilitate and empower the many to turn a collective vision into reality. As Corbyn recently described his own leadership style:

For many years, I couldn’t see much beyond how so many political leaders manipulated us while giving in again and again to vested interests. I didn’t want to be like that. And it wasn’t clear to me there could be another way. But I’ve learned there is. Whereas insecure leaders want to feel stronger by asking you to give them more power. I recognise strong leadership as equipping you with more power…Because there’s no doubt that these are anxious times. Individually, more of us face uncertainty at work. Nationally, we wonder how we will make the transition out of the EU in a way that protects jobs and living standards. And globally, we wonder how safe we are as extreme right wing movements and violent conflicts spread. I hope you can see now that there is more than one way to respond. We could seek a fragile calm. And hope someone in power knows what they’re doing and will guide us through. That means looking to whoever’s in charge and welcoming their reassurance. We don’t look further, we don’t ask questions. It’s the response the few have bet on the many settling for. I’m in this job because I believe there is a better way to respond. It’s about rejecting fake reassurances or simple slogans from government. It’s about sharing ideas and deciding upon real and lasting answers. We are not going to have free thinking shut down by a hostile media or an elite that scoffs at anyone who dares to step out line. No, each of us has a contribution to make. We have ideas for a better tomorrow and we are going to respond together. Jeremy Corbyn, Leader of the UK Labour Party, April 2017

Let us not miss this opportunity.

Responding to Teach First’s Social Mobility Report

In many ways I was pleased to see the publication of the Teach First report on social mobility. The publication of this analysis is important in drawing attention to the problems of inequality and social mobility in education.

But it also annoyed me greatly. Because I see that the levels of inequality and lack of social mobility are a result of successive governments’ economic choices. We have, since the 1970s, in the UK and the USA particularly, adopted a system of liberal economics, neoliberalism. The aim has been to reduce the size of the state with controls on public spending and the transfer of public-sector services and nationalised industry to the private sector.

The result of the adoption of neoliberalism has led to an increase in inequality as a result of controls on public spending, regressive taxation and the deregulation of the financial sector  . The barriers to social mobility are attributable to economic inequality . The adoption of neoliberalism creates a system whereby value flows from the less well off to the wealthiest.

As part of reducing the role of the state, public-sector provision has been transferred to private ownership, in the case of Academy schools, or new private-sector not-for-profit provision has been created, as in the case of Teach First. Teach First, like other forms of outsourced public provision, is a product of neoliberal thinking. Teach First’s proposition is that through the deployment of high-achieving individuals in schools, the effects of disadvantage can be mitigated.

I believe this to be wrong, since it is only through economic policy that inequality and poor social mobility can be addressed. That is not to say we don’t need good schools for all and in them skilled professionals, but it is important that we address society’s problems with appropriate policy making as a priority.

Neoliberalism can’t solve the problems created by neoliberalism. It is a paradox. It is with this in mind I was reminded of a great literary paradox and, as you will see, the striking similarities this has with outsourcing the solutions to neoliberal inequality.

Joseph Heller’s Catch-22 (1962) is a dark satirical comedy set in an American airbase in Italy at the end of the Second World War. The story follows the main character Captain John Yossarian and his associates, as they participate in a seemingly endless number of bombing missions over Germany. The ‘Catch-22’, the novel’s leitmotiv, and a term subsequently absorbed into the English language, is a paradox. It is first expressed in the novel thus:

There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane, he had to fly them. If he flew them, he was crazy and didn’t have to; but if he didn’t want to, he was sane and had to.

World War II, although often seen as a geopolitical war, was the consequence of the economic conditions in the preceding period. Liberal economics had prevailed, with substantial deregulation of the financial sector. Speculation and credit ran rife. The bubble burst in 1929, this plunged the US into a deep recession and took much of Europe with it. The instability created by a crisis of capitalism led to the Second World War.

These conditions are not unlike those that led up to the Global Financial Crisis in 2008 and also the inequality we have in the UK now.

Milo Minderbinder, a comrade of Yossarian, is an entrepreneur, a war profiteer. Heller presents him as a symbol of the American capitalist Dream. Initially, Minderbinder’s syndicate, M & M Enterprises appears small and benign. It involves selling and buying eggs in a complex series of profitable transactions. While flying a mission, Yossarian asks Milo why he buys eggs from Malta for seven cents and sells them to the mess hall for five cents. Milo explains that he does it to make a profit. Perplexed, Yossarian asks if he then loses two cents on each egg. Milo explains:

But I make a profit of three and a quarter cents an egg by selling them for four and a quarter cents an egg to the people in Malta I buy them from them for seven cents an egg. Of course, I don’t make the profit. The syndicate makes the profit. And everybody has a share (Milo Minderbinder, p. 265).

Yossarian thinks he is beginning to understand, he asks if the people Milo sells to are making a profit of two and three quarter cents when they sell them back to him for seven cents. He asks: “Why don’t you sell the eggs directly to you and eliminate the people you sell them to?” Milo responds: “Because I am the people I buy them from.” Milo further explains that he initially buys the eggs in Sicily for a cent each. He makes profit of six cents on each egg overall, except when he sells to the mess hall where he makes four cents. The convoluted process is simply to expand the reach of his business activity.

Arguably this is not dissimilar to the complex contractual arrangements we have with outsourced service providers and academy chains. None of which, like Milo, make a personal profit. There is a contract in which Milo’s syndicate benefits from the activity of the enterprise. Similarly, with outsourced business, through its not-for-profit activity, society supposedly benefits.

“Really?” You ask.

“Yes, really.” I say. “Well, make your own mind up.”

However, Milo like all capitalists expands his business. M & M Enterprises are contracted by the Germans to carry out bombing raids for them. The enemy outsources their combat to the enemy. The Americans then end up fighting on both sides in the battle at Orvieto, and bombing their own squadron at Pianosa. At one point Minderbinder orders his fleet of aircraft to attack his own base, killing many American officers and enlisted men.

I did not realise, when I first read Catch-22 as a teenager, how Heller captured the deep irony of capitalism and liberal economics. That the suffering and damage it creates also provides opportunity for profit and capital accumulation.

The mechanisms by which we employ outsourced providers, like Teach First, to address inequality is a business scheme that capitalises on economic failure. If we address the economic issues, we would not need an enterprise to provide the service, the resources could be absorbed into the public sector to contribute to quality education for all.

I  do not wish to denigrate the many good people who work for and have trained with Teach First. No doubt, their motives are good. They want to do the best for the students they teach. My criticisms here, are at the level of political economy and policy, where I challenge the assumption that within neoliberalism it is possible to create educational programmes that promote social mobility and mitigate for inequality that is, itself, a consequence of neoliberalism.

Neoliberalism can’t solve neoliberalism. It’s a catch-22, we have to change the economic system.

References

Stiglitz, J. (2012). The price of inequality. Penguin Books.
Wilkinson, R. G., & Pickett, K. (2010). The spirit level: why equality is better for everyone. Penguin Books.

Labour’s Universal Free School Meals policy: an economic not an educational policy

Labour’s Universal Free School Meals Policy, for primary schools, funded by adding VAT on private school fees was generally well received. Those that opposed it, generally, did not see it as an economic policy and it perhaps reveals a limited understanding of how a nation’s economy work. So in this blog, I want to outline how our economy works. It is brief, so it may be a little crude in places. On the whole, though, I feel I offer a succinct explanation of the model.

No, don’t go anywhere! It’s worth reading. Really it is.

The recipe for happiness, according to Dickens’ Mr Micawber, is through fiscal prudence:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery (Dickens, David Copperfield, 1850).

It’s simple isn’t it? And if you follow these rules then you will be happy.

It follows then that the same rules apply to a national economy. Income £721 billion (from national and local taxation for 2017), annual expenditure £720 billion result happiness, annual expenditure £784 billion (all government spending for 2017), result misery.

Oh dear! No wonder there is so much misery about. We are in deficit to the tune of £63 billion. Surely, it follows then, that we have to make savings and cut back or increase taxation.

While this is the narrative that is perpetuated in the media and by government, it is not the way the national economy works.

A national economy is not like a household with incomes and expenditure. A household has money going in and going out again. A national economy does not have money going in and out of it, in the same way. The national economy includes all the money that is in its own currency. Some may get saved up, some my go abroad. But the only place that money is going to be spent is in the national economy, even if that activity is overseas.

The national currency is introduced into the economy through government spending. There is no other way of creating currency. The way in which currency is introduced by the treasury is by spending on health, education, defence and welfare, for example. The government either credits the accounts of public-sector organisations or gives contracts to private companies to provide goods and services.

A government’s currency is an IOU. The reason these IOUs have value is that the government expects us to pay taxes in the national currency. The government will not accept anything other than its national currency. We accept it as salaries and shops accept it because, essentially, we have to pay our taxes in the national currency.

Before a government can raise any tax it has to spend. It has to introduce IOUs into the economy. This year, in the UK, it will be £784 billion.

If we apply the Micawber principle and cut spending to try and get it down to £721 billion, you would expect tax revenue to reduce. The reason it doesn’t is because people and organisations increase their borrowing. Much growth in the economy in the last few years has been a result of consumer spending funded by private debt. Individuals and businesses (the private sector) have to borrow from commercial banks to help fund a reduction in public spending. Or they have to use up their savings. The government’s cuts in spending mean that public sector deficit is transferred to private sector debt.

Cutting public spending leads to a reduction in spending on things like health, education and welfare. We have to make decisions about what to spend limited resources on. We have to prioritise spending. This is austerity.

Austerity increases the amount of private debt, with households and businesses borrowing from commercial banks and lenders who profit from the process. Currency entering the system as a result of government spending becomes unevenly distributed. With the lenders and those with capital accumulating further, while the rest become poorer and indebted. It trickles up rather than down.

The accumulation of currency at the wealthier end of the private sector ends up in the banks. The treasury and Bank of England have to create bonds in order to buy back this currency to maintain interest rates. This is what the national debt is, it is not what we think it is. It is private sector-accumulation of currency.

A regressive taxation, one where the more wealthy pay a smaller proportion of their income and wealth in tax, than the less wealthy, adds to inequality. It also increases accumulation at the top end and adds to the national debt.

We need a progressive taxation, one that increases the proportion of tax paid by those at the top end and gives more income to those on lower incomes. I am not going to go through the benefits of universal welfare here. Abi Wilkinson offers an excellent explanation here in The Guardian. Kevan Bartle’s blog about Universal Free School Meals argues the benefits of this policy excellently, too. The important point is that this policy should be seen as an economic policy and not an educational policy.

The austerity programme (it has actually been with us since the mid 1970s, to a lesser or greater degree) is system that allows finance unrestrained access to our economy. Politically, by drawing on Mr Micawber, a consensus has been established amongst the electorate. Consequently, we find our public services starved of funding. But the Mr Micawber doesn’t work on a national scale and if applied, like it has been done,  it leads to growing inequality.

The government can increase public spending. Additional spending, more currency entering our economy, increased pay, better working conditions for teachers, more investment in research and development. And the currency that enters the economy does not just remain in schools, it is spent in the private sector. More wages, more spending in the economy, more tax revenues. It will not increase the deficit, but it will mean more money going to the less well off (including most public-sector workers e.g. teachers).

That national debt will come down if we have a more progressive taxation system, discouraging the accumulation of currency, and so the treasury does not have to issue bonds to maintain  interest rates.

We, like the US and many countries in Europe, need an end to austerity, an end to deficit reduction. We need to increase public spending and we need progressive taxation. Labour’s simple policy is the latter. It is a very good policy proposal. More of this please.

Further reading and information

You can read previous blog posts:

Taxation and government spending: which comes first?

There is plenty of money to spend on schools: a Modern Money Theory Perspective

More information about Modern Monetary Theory on this page:

Modern Money Theory

The following books are useful background and all readable:

Pettifor, A. (2017). The production of money: how to break the power of bankers. Verso.
Mitchell, W. F. (2016). Modern Monetary Theory and Practice: An Introductory text. CreateSpace Independent Publishing Platform.
Wray, L. R. (2015). Modern money theory: a primer on macroeconomics for sovereign monetary systems (2nd edition). Palgrave Macmillan.
Stiglitz, J. (2012). The price of inequality. Penguin Books.

 

The Production of Money: Ann Pettifor’s new book and its implication for school spending

As Ann Pettifor’s book was published, it was both amusing and perhaps a reflection of current times that one of the most complete and effective reviews of the Production of Money: How to Break the Power of the Bankers was in Vogue. The following are some thoughts on the economic system and some observations on Ann Pettifor’s book, which is well worth a read. It is succinct and readable, but still requires some thought and concentration.

My interest in economics has grown considerably over the last couple of years. This was prompted by a more robust anti-austerity line taken by the Labour Party on the election of Jeremy Corbyn in 2015. Like many people, I understood a nation’s economics as much like my own income and expenditure, that it was an exercise in balancing the books. So my initial question was how can a political party be serious about anti-austerity, if the books have to be balanced?Continue reading “The Production of Money: Ann Pettifor’s new book and its implication for school spending”

Taxation and government spending: which comes first?

The common assumption is that the UK’s taxation is the source of revenue that pays for public services, health, welfare benefits, education and defence. It is often assumed, and commonly framed as, taxpayers money. I was having quite a discussion on Twitter about this. I was putting forward the idea that taxation is not a source of income. The following justification comes from Larry Randall Wray and is a view held by heterodox [1] economists who subscribe to Modern Monetary Theory or Modern Money Theory (MMT) (see Mitchell, 2016; Wray, 2015).

Wray explains the principles in the following video. If you want a brief overview read on.

[youtube https://www.youtube.com/watch?v=-KRi9nF8BiA&w=854&h=480]

Imagine year zero for a country’s economy, the notional point at which the economy begins. The first thing that the country has to do is invent a currency. In the UK we have the pound. The government creates a currency with which transactions and trade can take place. The government is the only institution that has the legal power to create that currency. Anyone else who tries to faces criminal prosecution.

At year zero, the UK has to introduce that currency into the economy, it can give it to its citizens and it can pay them to provide the things we need for our society. The government pays people to provide administration, build hospitals, schools, sports facilities and weapons. It can pay people who don’t have a job. It can pay people to be doctors, teachers and it can provide training for those individuals. It can pay for research and development.

It is only after the government has introduced currency into the economy that it can tax people and businesses. This flow of spending followed by taxation continues year-on-year. And in fact most of the time the UK runs at a deficit, there is lag between spending and taxation. Because spending precedes taxation. You can see this in the graph below.

gov-spending-and-revenue
Government General Expenditure (GGE) and Government General Revenue (GGR) (IFS source)

So what is taxation for, if it does not provide government its revenue?  Wray and other MMTers argue that it creates a demand for the currency, it makes it flow round the national economy. If we did not have taxes then the currency, the pound for example, would not be in demand in the economy. We need it because we have to pay taxes in that currency. Richard Murphy (2015) considers tax a kind of democratic subscription, it gives citizens a commitment and right to participate in democracy. Taxation is also used to redistribute wealth and to regulate inflation by increasing or reducing demand in the economy.

It is important to recognise that running an economy in deficit does not necessarily increase the national debt, because the national debt is not really a debt in the sense that we understand personal or household debt (Wray, 2015). The national debt are bonds created by the government to drain accumulated reserves in the banks. This represents the accumulation of currency in the private sector and technically speaking it is used to maintain the overnight interest rate. This, I understand is common knowledge for anyone in banking or finance.

So when a government talks about maxing out the government credit card, or leaving a debt for our grandchildren this is highly misleading. A government cannot run out of its currency. Therefore, there is really no excuse for not funding health and education and other public services properly.

Related blog posts:

There is plenty of money to spend on schools: a Modern Money Theory perspective

Education, policy and pedagogy: It’s the political economy stupid!

Note:

[1] Heterdox economics contrasts with orthodox or mainstream classical economics.

[2] 0n 22/2/2017 I noticed that this blog had been replaced with an earlier incomplete draft, I have now restored it

[3] Thank you to Sandra Crawford who introduced me to this excellent illustration of the ideas in this post.

[youtube https://www.youtube.com/watch?v=IhRzC_fERbs&w=854&h=480]

References

Mitchell, W. F. (2016). Modern Monetary Theory and Practice: An Introductory text. CreateSpace Independent Publishing Platform.
Murphy, R. (2015). The joy of tax: how a fair tax system can create a better society. London: Bantam Press.
Wray, L. R. (2015). Modern money theory: a primer on macroeconomics for sovereign monetary systems (2nd edition). Houndmills, Basingstoke, Hampshire ; New York, NY: Palgrave Macmillan.

Education, policy and pedagogy: It’s the political economy stupid!

At the heart of all the main issues in education at the moment is economics. In fact economics in education has become of increasing importance and is a growing field in itself. Analysis of data to evaluate education policy has been valuable in understanding how schools perform and the achievement and a progress of different types of students, for example.

This approach is in the tradition of classical economics. Underpinning classical economics is the idea that people make rational decisions within markets. This leads to econometric models that can be used to predict the behaviour of markets and the behaviour of the economy as a whole. In education, for example, it leads to predictions about earnings following participation in school-based programmes or interventions, the study of various subjects or attendance at Higher Education.

Classical economics sets its boundaries at the edges of the economic system. It does not concern itself with the political dimensions of economics, apart from say, informing policy makers on resource allocation. This rests on its fundamental principle of rational behaviour.

If we step outside classical economics, we can still see the distributions of wealth and power that classical economists observe, but we can also begin to see the forces that create these systems. It is not simply rationality with, as Adam Smith observed, an invisible hand ensuring that all would be fair in a freemarket society. Karl Marx’s critical analysis of capitalism in the three volumes of Das Kapital showed that the freemarket does not lead to a fair or equipatable distribution of wealth. It necessarily leads to the accumulation of capital. As a consequence there is an exploited working class. And hence economy is necessarily political.

One can be forgiven for thinking that in state education political economy can be ignored. The reason we think like that is that since the end of the Second World War and until recently, we have had no reason to think differently. But now we must. I shall explain by dividing the period between 1945 and the present into three economic phases.

The first phase is from 1945 until 1970. The post-war period saw considerable government spending on health and education and sat alongside a  freemarket economy. Education was grant-funded through local authorities. This investment was seen as a benefit to society as a whole. However, from the late sixties until the 1970s, things changed. The economic context changed and public education economics had to change in response. This leads to our second economic period between 1970 and 2008.

In the 1970s, there was a change from a mixed economy with public sector spending alongside a freemarket economy to neoliberalism, where there was much greater emphasis on the freemarket. During the early seventies there was a crisis in capitalism, in the UK this was characterised by inflation, decreasing company profits and increasing wage demands by the work force. In the end the unions lost, their pay was controlled and businesses were able to maintain their profits to some degree. The worst outcome was that the economic crisis was erroneously blamed on the unions, inefficient nationalised companies and a supposedly bloated public sector. When Margaret Thatcher was elected in 1979, she famously took on the unions, began privatising nationalised companies and reducing the size of the public sector. Underpinning this was the belief privatisation and marketisation was the best way to run our public services. The invisible hand would do its job. Neoliberalism was the political economy that continued until 2008. It was adopted by New Labour in 1997 and was supplemented by an increase in public spending. Although much capital spending in schools was from private capital. For large businesses, neoliberalism created opportunities to profit from public-sector services and subsidised by the state.

The preoccupation through this period of neoliberalism has been on the deficit in public sector finances. That is the difference between tax revenues and government spending. The preoccupation with eliminating deficit spending and an attempt to return a surplus in public finances has the effect of reducing private sector surpluses (I explain this in more depth here). In other words private sector borrowing has to increase, households become more indebted, house prices inflate. This creates demand in the economy (consumers are debt spending) and the banks profit. In 2008 this whole sorry pile of private debt was found to be overvalued and the big banks had to be bailed out by the state. Once again capitalism is in crisis. But the financial crisis of 2008 was a symptom of underlying problems brought about by neoliberalism itself.

The neoliberal period of unregulated freemarket capitalism has resulted in increased wealth inequality, while the richest 10 per cent or so, have got richer the rest have got poorer or are carrying considerable debt. Inequality in society is indicative of a divided and unhealthy society. Wealth and income inequality leads to democratic inequality, where the wealthy are in a position to influence government much more than the less well off. It also leads to health and education inequalities. Furthermore, it leads to a less productive society since there is less investment in workers and their development.

We find ourselves in period of post-capitalism or post-neoliberalism, the collapse of centrist politics is indicative of this also. No longer is the status quo working for a large proportion of society, this is evident in the election of an unequivocally anti-austerity leader of the opposition, and more dramatically the referendum result that will ultimately lead us out of the EU. This was the precipitation of an anti-establishment and anti-status quo vote.

In terms of the character of education, the three economic periods (public sector, neoliberalism and post-capitalism) have shaped schools and pedagogy in particular ways. During the public-sector period (1945 – 1970) practices and organisations were emergent, but drew heavily on the approaches used in traditional establishments, like for example, the grammar school. In an attempt to address diverse social needs and with new ideas developing in the fledgling field of education research, there were attempts to address individual needs using student-centred practices. However, the mainstay of educational practice drew on traditional teacher-centred practices, because it is much easier to prepare for and to manage classrooms.

The neoliberal period (1970 – 2008) can be characterised by increasing accountability, increasing managerialism and perfomativity. The emphasis on accountability means that teachers are expected to ensure students achieve targets and expectations in terms of progress and examination results. There is increased surveillance and attempts to identify effective practice in terms of progress and attainment. In the 2000s this extended to a prescription of classroom practice and pedagogy. While practice remains largely traditional, there are elements of progressive student-centred teaching, but on the whole the latter, apart from among enthusiasts, was superficial. The importance of the social aspects of learning, such as discussion and dialogue, the importance of affect and motivation and the recognition of constructivist learning were recognised and mandated in official views of pedagogy. However, given the demands placed on teachers and the intensity, as a result of being held increasingly accountable for students’ results, these elements were only really implemented in a performative way, to please observers and inspectors rather than placing them at the heart of education.

The post-capitalism period (2008 – present) continues a neoliberal theme, but it does not hide the crisis beneath. Since 2010 the Coalition government and the  Conservative government from 2015, have extended the privatision projects brought in by previous governments. Academies are effectively outsourced education service providers to the state. There is increased emphasis on quantifiable outcomes to monitor the quality of the service provided by schools. In an attempt to make the educational commodity more clearly defined the student-centred aspects of pedagogy have been abandoned and even vilified. The emphasis has been increasingly on narrowly defined definitions of knowledge and the reduction of learning to a process of memorisation of increasingly complex facts. The crisis beneath this, within the post-capitalist school, is the overall reduction in teachers’ pay and conditions, longer working hours, excessive workloads and deprofessionalisation. The recruitment and retention of teachers is increasingly challenging. There are also deep concerns about the impact of intense school experiences on children’s mental health and wellbeing.

Economically, we move into a post-capitalist post-neoliberal world in which economic, technological, social and political forces are undermining existing approaches. Yet the government continues to press ahead with a privatised and marketised approach to education. What we need to do is develop schools and educational practices to respond to community needs in a more holistic way and to draw on contemporary understanding of learning in terms of culture, socialisation and cognitive development. We cannot return to public sector nationalisation of state education, but we must reduce the managerialism and hierarchical structures of schools and academy chains and improve the working conditions and professionalism of teachers. They can be mutualised as community co-operatives, to devolve decision making and to collaborate with communities. This is an antidote to the corporate managerialism of the neoliberal period. While schools cannot mitigate for wealth inequality, they can connect with local communities and help develop confidence and build social and cultural capital. Austerity (deficit reduction) is a political choice and not consistent with the post-capitalist period we find ourselves in (I elaborate on this in a previous post here).

The driving force in state education is political economy and by considering economic and political forces, not only can we better understand policy, practice and pedagogy, we can better design schools and learning to respond to the political economy in which we live.

There is plenty of money to spend on schools: a Modern Money Theory perspective

It is common and widely accepted that the UK’s finances are in a dire situation. The national debt has grown from £700 billion in 2010 and is set to reach almost £2 trillion in 2020. While the deficit (the difference between government spending and taxation) has been reduced from roughly £100 bn (2010) to £40 bn (2016), there is a commitment to turning the deficit into a surplus. As a consequence many people are willing to accept that we must tighten our belts, make savings and do what we can to avoid the out-of-control debt spiralling further. We do, after all, want to avoid passing on this debt to our children and grandchildren. So it goes.

According to the Institute of Fiscal studies, school spending is being cut by 8 per cent in real terms. Perhaps more. Over the last few weeks I have heard colleagues in the university as well as teachers, headteachers and parents acknowledge that this is necessary given the economic situation and prospects I have outlined above. We have to cut back on spending, we have to reduce the debt, we have to make sacrifices. We have to find low cost and efficient ways of educating children more cheaply. No frills, no expansive (or expensive) learning; the learning of facts in classrooms with austere compliance. For teachers, no professional development, longer hours and real-terms pay cuts.

After all, it all makes complete sense. It may be a bitter pill to swallow, but if we, as individuals, households or as businesses overspend we would end up with an unmanageable debt and we would go bust. It makes sense that the same applies to government spending. If the UK government overspends, day-to-day, we will, as a nation, go bankrupt.

Now here’s the thing, government spending is not an aggregated version of household spending. In our personal lives our spending is independent of our income. We are, for all intents and purposes, free to spend what we like; whether we spend less or more than our income. Clearly, if we spend more we will go into debt and if we spend less (which is almost an impossibility in the Watson household) we save, but fundamentally income and expenditure are independent of one another. Which is where there is big difference with government finances or what we might call macroeconomics. This is probably the most important thing to understand in getting a better grip of how a nation’s economy works.

The difference between you and the UK treasury is that you do not issue your own currency, the UK does. For every transaction with that currency, whether you are paying for schools or buying an ice cream (see Richard Hammond), there is a buyer and a seller. Because at any one point in time there is fixed amount of currency, for everything spent there must be something sold. Across the whole economy income must equal expenditure. There is at the heart of macroeconomics a conservation of the total amount of currency, because it is only the government that has the legal power to create or destroy currency.

Think of it like this, the government creates currency, the pound. If you work in the public sector you are paid in pounds, with which you buy things from the private sector. People working in the private sector get paid in the currency and also buy things. Currency is circulating around the economy (of course, households and businesses can save money buy spending less than they earn but I will come to this later). The mechanism by which the circulation of currency is controlled is through taxation, we have to return a proportion of our earnings through paying tax in that currency. But importantly the government has to create currency and spend it before there is anything to tax. Tax should not, therefore, be seen as a revenue source, but as a means of regulating the amount of currency in circulation. The source of a government’s capacity to spend is through the creation of its own currency. It is therefore recognised that governments, like the UK and US for example, cannot go bust because of their power to create currency and that they buy things in that currency.

These are the fundamental ideas in Modern Monetary (or Money) Theory (MMT) which draws on the ideas of both Keynes and Marx to consider macroeconomics in an alternative way. The starting point is the idea that within a nation with a sovereign currency all incomes must equal expenditure. A macroeconomic view of this income and expenditure balance is usually considered by breaking it up into different sectors. The private sector, the public sector and in trade with the rest of the world. With this we get the following simple equation:

Private sector surplus or deficit + Public sector surplus or deficit + Exports/Imports = 0

The private sector includes both businesses and households, it is desirable that this is in surplus, since the private sector should have reserves to cope with changes. The public sector surplus or deficit is the difference between tax revenues and government spending. It is the figure that governments and media like to bandy around and create such alarm with. But you can see that if imports are high i.e. currency is leaving the UK, and the private sector is running in surplus then we must have a deficit. And in fact, deficit is a normal way of operating the economy and should not be used as an indication of over spending.

What about the national debt? This not really a debt as such, it is equivalent to the accumulation of surpluses in the private sector. The government issues bonds to buy back the reserves created by the banks as a result of the deposit of private sector surpluses. In the UK this is mostly from large businesses and wealthy individuals since quite a lot of ordinary working folk are in debt.

So if deficit and debt do not constrain government spending can we just create money and be done? It is true to some degree, but according to MMT the constraint on spending is inflation. In other words if the government increases spending too quickly demand outstrips supply and prices go up. A government has to increase spending cautiously. At present, however, inflation is not a problem, it is very low and we can afford to increase public spending without worrying too much about inflation.

But an increase in spending would stimulate the economy, increasing economic activity and therefore growing the economy. One issue is to make sure that spending does not result in the accumulation of wealth by large companies and wealthy individuals. This is what has happened as a result of quantitative easing after the financial crisis and it is why the national ‘debt’ has grown.  As this is equivalent to the accumulations in the private sector. QE swelled the coffers of the rich. In order to make sure spending is more fairly distributed we need to consider things like universal basic income, progressive taxation and debt jubilees (paying off household debt).

I have taken you on a whistle-stop tour of MMT, there is much more to read and understand – which is what I continue to do. A good visual account can be found here. I have been reading Modern Monetary Theory and Practice: An Introductory Text by William Mitchell, L. Randall Wray and Martin Watts, which I recommend. The are blogs by Bill Mitchell, New Economics Perspectives. This lecture by L Randall-Wray is an excellent introduction too.

I conclude by outlining or restating — emphasising even — the implications for spending on schools. Debt and deficit are not the barrier to adequate spending on our schools. As the sixth wealthiest nation in the world we can afford to properly fund our schools. There really is no excuse. What is not clear is whether the government are economically illiterate/incompetent or have some other agenda i.e. the privatisation of schools. If you read The Price of Inequality by Joseph Stiglitz or Post-Capitalism:  A Guide to Our Futures by Paul Mason, they suggest the latter is almost certainly true. Capitalism is in a state of crisis, ensuring sustained profits is difficult and therefore companies are wanting to move into areas where governments can support revenue and profits, like transport, health and education. So-called neoliberalism. Expounding the belief that a nation’s economics is analogous to a household or business serves this: reduce the deficit and debt through outsourcing, markets and efficiencies. It seems most likely that government is being influenced by the self-serving who are defending the capacity of the wealthy and large business to accumulate capital.

It is important that we in education ask questions about the economic models that we are presented with. That we do no acquiesce in a state of ‘oh dearism’ and resignation. That we don’t find ourselves trying to mitigate for government cuts by overworking and burning out. It is important that we educate ourselves, challenge the government and act in solidarity to oppose.

I am happy to engage in discussion about the ideas I have presented here.