That’s all very well but as a nation we just can’t afford it

Health and social care and education are now just unaffordable. There are too many old and sick people and too many people want to go to university. We can’t afford it. We have to do something different, they say.

However, affordability at the level of a nation is widely misunderstood. The common metaphor for a nation’s finance is drawn from household budgets and an appeal to prudence. Dickens expressed this through the character of Wilkins Micawber in David Copperfield,

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

This we are told is the basis of sound fiscal management of a national economy – the books should be balanced. We are reminded of this on a daily basis in the news and media. Recently when the UK Prime Minister, Theresa May, announced additional funding of £20 billion for the National Health Service, the first questions from the press were “where is the money coming from?” and “will there be additional taxes to cover the cost?” The Micawber principle is deeply embedded in public discourse. Indeed to suggest otherwise is considered to be incompetent or economically reckless, or both.

What the mainstream media rarely talk about is the differences between a national economy and a household. The difference is very important in understanding the nature of public spending. What makes a household different to a nation is that most nations are the issuers of the currency used in that nation. Households do not in general issue their own currency. This is an essential fact in understanding a nation’s finance. The demand for that currency is a consequence of taxes having to be paid in the national currency.

The next bit takes a little bit of thinking about. It is worth allowing your imagination space to contemplate what I am about to say to assure yourself of its validity.

The sum of all surpluses in a national economy must equal the sum of all deficits. 

Let us unpack this with a thought experiment. Imagine there are just two of us on a fabled desert island. We decide that we are going to issue a currency and agree that is the only legal tender on the island. If one of us, for some reason or another is acquiring more currency than they are spending, then that person is running a surplus. It follows then that the other person must be in deficit – they are losing more currency than gaining. Of course, no one would issue a currency for two people, but this does illustrate how in a simple case, with a single legal tender, deficits and surpluses must sum to zero. If we now start adding people into the economy the same accounting fact must hold; all deficits and surpluses must sum to zero since there is only one source of currency.

The zero-sum of deficit and surpluses is profoundly different from the Micawber principle of income and expenditure. The implication of this is that if the government tries to generate a surplus by reducing the difference between spending and taxation, members of society will have to start to carry a deficit (and accumulate debt) in order to meet the needs of the nation. At the same time, public services are run down as result of lack of funding. Yet a government, as the currency issuer, has the capacity to create money to spend on things like health and education. In fact, a government with a sovereign currency (i.e. one that is not pegged to another currency) does not need to borrow money to spend, it has the power to create currency to spend on the things we need, like health and social care, education, housing, welfare, infrastructure, defence and an industrial strategy (secure and meaningful jobs).

It is incorrect then to argue that public services are unaffordable, the choice is to fund them through public funding or through private debt. I know which I prefer. Political activists are quite right in saying that austerity is a political choice and not an economic necessity.

I am going to end here, but no doubt, there are many questions from this which I will address in subsequent posts. Questions like:

  • How does this relate to the £2 trillion national debt in the UK?
  • Doesn’t currency creation lead to massive inflation?
  • Why does the mainstream media insist on the Micawber principle?

Acknowledgements

I have not referenced these ideas and none of theme are mine, so I would like to acknowledge some sources, past and present: Bill Mitchell, L Randall Wray, Stephanie Kelton, Warren Mosler, Ellis Willingham, John Maynard Keynes, Karl Marx, Win Godley, Alfred Mitchell Innes and all the Modern Money Theory proponents on social media #learnMMT

The Higher Education pensions dispute: a perfect storm of neo-liberalism, marketisation and austerity

The current dispute between the University and College Union (UCU) and the representative body of the employers, Universities UK (UUK), is over imposed cuts to pension benefits. According to the UCU, the annual retirement income of academics will be reduced by 10 to 40 percent. This is on top of real-terms pay cuts of 19.5 percent since 2009/101http://www.ucu.org.uk/circ/pdf/UCUBANHE14.pdf, while surpluses in UK Universities have gone up from £1.85 billion in 2014/15 to £2.34 billion in 2015/162Ibid. The accounting model changed in 2016/17 but the sector continued to secure considerable surpluses..

The dispute is more than about pensions though: on the surface, it appears to be a debate about the justification for changes to pension benefits, but beneath is a fundamental argument about political economy and the further push toward a privatised and marketized higher-education sector. Within the sector, within universities, decisions are being made without sufficient democratic scrutiny from members of staff and the wider community. Moreover, many academics may be unaware of the economic underpinnings of what appears to be conflict over pension affordability and university staffs’ pay and conditions. I set out here the underlying political and economic issues that are driving policy in government and that have led to the decision to cut pension benefits. I hope you will see that the pension cuts are the symptom of a deeper malady. I wish to show that the inherent threats to higher education are way beyond being about the comfort of academics in their retirement. And that anyone who believes strongly in the value of scholarship, research and learning should show solidarity with the striking members of the UCU.

I begin with some background to the dispute over pensions and the role of my institution, the University of Cambridge, which along with Oxford has taken a particular stance. I follow this with a quick summary of the economic context. Finally, I bring these elements together and demonstrate that we are in the conditions of a perfect storm for higher education. The underlying debates about the projection and level of risk in the pension fund are connected to government economic choices.

Finally, I argue that universities have a moral duty and should not simply accept the political and economic orthodoxy, rather than acquiescing to the parochial rationality of neo-liberalism and marketization.

Background to the dispute

The Universities Superannuation Scheme (USS) was valued at £41.6 billion in 2014 and £60 billion in 2017. The most pessimistic valuation leaves the pension fund with a shortfall of £5.1 billion in 2017. On the other hand, a best estimate valuation suggests a surplus of £8.1 billion. The question of whether there is, in fact, a shortfall depends very much on the model used to calculate future liabilities, growth and risk. An important factor in this is what is deemed to be an acceptable level of risk. Universities have been particularly keen to reduce the level of risk and a strategy of “de-risking” has been adopted. Equities, are higher risk investments than government bonds or gilts but offer higher returns. However — and I shall explain why in the next section — gilts offer a much lower rate of return than equities. Between 2011 and 2017 the percentage of the USS fund that has been in equities has reduced from 55 percent to 37 percent. While the amount invested in gilts has gone up from 13 percent in 2011 to 31 percent in 2017. Reducing the level of risk leads to a reduction in the rate of returns and is a factor in the pessimistic valuation of the USS fund.

It is the issue of risk that is central to the current dispute. According to Michael Otsuka, who analysed the results of the employers’ consultation over USS3https://medium.com/@mikeotsuka/oxfords-and-cambridge-s-role-in-the-demise-of-uss-a3034b62c033, only a minority (32 percent) of employers were looking for changes to the way in which contributions are set and assets and liabilities calculated. In other words, most employers were happy with the scheme as it stood. However, 73 percent of Oxbridge institutions (which presumably includes constituent colleges as well as universities) were opposed to the current arrangements.

The USS is based on last-man-standing mutuality which means that should all the universities go bust the liabilities would be passed to the last remaining universities. This means that Oxford and Cambridge, as the richest institutions, would bear the liabilities in the unlikely event that the other universities went to the wall. This also assumes that government would not intervene should the whole of the higher education sector go in to complete meltdown.

Otsuka points out that in their submissions to the September consultation on USS both Oxford and Cambridge expressed concern about the level of risk in the last-man-standing scheme. Cambridge objected that:

The University (and the other financially stronger institutions) continues to lend its balance sheet to the sector, which contains the cost of pension provision for all employers. In a competitive market for research and student places the University would be concerned if this appeared to be having an adverse effect on the University’s competitiveness (by allowing competitor universities access to investment financing or reducing their PPF costs in a way that would not be possible on a stand-alone basis).

Within this, Cambridge acknowledges that higher education is and will remain a competitive ‘market’, there is no sense in which Cambridge characterises itself as a public institution there to provide a universally available service in collaboration with the rest of the sector.

This also became evident to me when the government were trying to hurry through the Higher Education and Research Bill at the time the General Election was announced in April 2017. I approached the Conservative Member of Parliament, in whose constituency my Faculty sits, with objections to the Bill. Heidi Allen MP explained to me in her response, that the University of Cambridge had already been in touch with her to explain that they were happy with the Bill as it stood. I am aware how Cambridge, and most likely Oxford too, are seemingly sanguine about the marketisation of higher education and are preparing themselves to exist in this environment.

USS have reacted to a minority (42 percent), of whom, according to Otsuka, Oxford and Cambridge are the most prominent and hawkish members. The majority, however, were happy with the current levels of risk. The UCU describe how on the 23 January 2018, Chair of the USS Board, Sir Andrew Cubie, used a casting vote at a meeting of UUK-UCU Joint Negotiating Committee to remove Defined Benefits from all members of USS. The USS now transfers to a Defined Contribution scheme, where all contributions are placed in an individual investment portfolio. The risk is entirely transferred to contributing members of the USS. It also means a reduction in pensions of between 10 and 40 percent, particularly affecting younger entrants to the scheme.

The national economy does not work like a big family home

It is a common belief that a national economy works much the same as a household; that income must at least equal outgoings and preferably income must exceed expenditure – for that rainy day. Yet, there is a major difference between household economics and a national economy. In a household economy, expenditure is independent of income, one or both can change without really affecting the other. In a national economy, government income or taxation is dependent on its spending. The reason for this is that government spending is the only means by which currency can be introduced into that economy. Government spending creates currency, taxation effectively destroys it.

Within a national economy, all deficits and all surpluses must sum to zero. To understand this, imagine if there were just two people in a national economy. If one person has a surplus, i.e. they have more income the outgoings, the other person must be running a deficit, they must have more outgoings than income. The sum of deficits and surpluses is zero because there is a fixed supply of currency. Now imagine adding more people until there are 60 or 70 million, the sum of deficits and surpluses must still be zero for a fixed supply of currency.

By convention, nations divide economies into three sectors: the public sector (government spending and taxation) the private sector  (households and businesses) and ‘overseas’ (imports and exports). The sum of public-, private- and overseas-sector surpluses or deficits must sum to zero. The UK has an overseas deficit, we are a net importer, so currency is leaving the UK4It is not really leaving the UK, more accurately it means there is domestic accumulation of Sterling as a consequence of overseas trade.. We have a public-sector deficit, government spends more than it receives and the private sector is in surplus, households and businesses have more income than expenditure. It is important to realise that this is an aggregate surplus across the whole private sector, it is just the wealthy individuals and businesses that run a surplus, while poorer households are running a deficit and accumulating debt.

The austerity measures of the last eight years were intended to reduce public-sector deficits. Reducing public-sector deficits while maintaining an overseas trade deficit reduces private-sector surpluses and puts more of the poorer households and businesses into debt. The wealthy are then able to lend their accumulated wealth to the poor profitably.

Austerity uses a household analogy to justify reducing public-sector deficits, where in reality it increases the debts of the less well-off and the wealthy can the profit by lending. Indeed, it is preferable for the wealthy to profit through lending rather than investing in productive business and enterprise. If the poorer are in debt, they will be reluctant to spend, so aggregate demand is reduced making business investment riskier and less attractive.

Austerity is an exercise in trickle-up economics and the poorer are paying rents (that can be rents on property or money) to the rich. This leads to an accumulation of currency and creates a demand for government bonds or gilts as a low-risk means of saving. This is also referred to as the national debt, which is not really debt, but savings. The high demand for gilts (and so-called high national debt) reduces the returns on them. In an investment-led economy, money invested in gilts would more likely be invested in businesses, because government spending and investment increase aggregate demand and the risk of business investment is reduced.

Neo-liberalism: choice and competition

Neo-liberalism is closely aligned to austerity, it is based on the belief that the free market is the most efficient means of exchanging goods and services and that competition results in lower prices, efficiency and improved productivity. A further characteristic of neo-liberalism is the transfer of public services, utilities, nationalised industry and public transport to the private sector. The first moves toward neo-liberalism in the UK were in the 1970s. In 1976, Denis Healey, the Labour Chancellor of the Exchequer, accepted a loan from the IMF, attached to it were conditions that forced austerity, i.e. reducing public-sector deficits. When Margaret Thatcher came to power in 1979 public assets were sold off to individuals and investors, including public housing, utilities and public transport for example. At the same time, there was increased financial liberalisation which facilitated more lending. Outsourcing and private finance expanded through John Major’s premiership and was further extended by Tony Blair during the New Labour government. While it might seem that privatisation reduces the size of the state, the state is still required to fund public services such as health, education, prisons and transport infrastructure Privatisation presents an opportunity for businesses to profit from the provision of public services. Importantly, losses and risk are largely underwritten by the state. The provision of public services by the private sector is an attractive investment: in a period of austerity, with low aggregate demand in the private sector, investing in public service provision with socialised risk, is very attractive.

A further lucrative low-risk investment is the financing of capital projects in the public sector, so-called Private Finance Initiatives (PFI), Public Private Partnerships (PPP) or Private Placements where an institution issues a bond to raise finance.

Privatisation, marketisation, neo-liberalism and austerity are beams of the same sun. They don’t happen without political will and citizen consent; the neo-liberal project has to be lobbied for and promoted. The project has many outriders, think tanks such as the Adam Smith Institute, the Institute of Economic Affairs, and Policy Exchange, all funded by business and wealthy free marketeeers (sometimes transparently but quite often opaquely), to assemble evidence, create arguments, lobby and advocate, through the media, the benefits to the public of choice, competition and private-sector efficiency and innovation. Of course, this is driven more by a fundamental need for capital accumulation, than it is out of a concern for the provision of quality public services. Though the neo-liberal project attracts its enthusiasts and disciples who espouse the benefits of autonomy, individualism, efficiency and innovation.

Neo-liberalism and austerity have been central to growing economic inequality , in addition, the privatisation of public services has contributed to a growing democratic deficit, a powerlessness over the conditions of the community, where service provision is provided by an unaccountable public service . There is a growing inequality in the access to public services, where the principle of universal provision is replaced by an increasing amount of part or wholly private-paying services.

A perfect neo-liberal storm in higher education

The pension issue in the UK’s higher education sector is a perfect storm in the progress of privatisation and marketisation. There are two aspects. Firstly, poor returns from government bonds (gilts) mean that a low-risk investment of the USS pension fund in bonds give returns lower than the consumer price index. Other types of investment, such as equities, are higher risk because of the low aggregate demand in the economy. This is a consequence of austerity and the attempts by successive governments to manage the economy by balancing the books i.e. by reducing the public-sector deficit. Austerity leads to deflationary conditions with low aggregate demand in the economy and high demand for low-return low-risk government bonds. This makes the USS fund vulnerable to pessimistic valuations and to anxious evaluations of risk.

Secondly, the government continues to pursue an outsourced, privatised and marketized model for public services. This is driven by a capitalist lobby that seeks to maintain and expand a rentier economy. The introduction of student loans, tuition fees and subsequent increases are all part of the commodification and privatisation of higher education. The Higher Education and Research Bill that was hurried through before the general election in 2017 further embeds the consumerization of higher education, with the creation of the Office for Students and providing opportunities to establish challenger institution to increase competition in the sector.

The government claims that the reforms introduced since 2010 have resulted in more disadvantaged young people entering higher education, but the evidence suggests that there is an uneven distribution, with disadvantaged students more likely to take up places in less prestigious institutions5https://www.tes.com/news/school-news/breaking-news/new-figures-reveal-dearth-poor-students-russell-group-universities. Further competition and marketisation in higher education will lead to greater inequality, as institutions are forced to compete for the most university-oriented students, generally those from backgrounds with high social, economic or cultural capital.

Higher Education institutions have increasingly adapted to the neo-liberal reforms . This has seen the emergence of ‘New Public Management’ of ‘new managerialism’ as a hierarchical system of control and performativity. The cultural shift is away from democratic governance and collegiate professionalism to executive decision making principally drawing on management accounting and metrics. The disciplining and performative and managerial cultures lead to conformity and undermine academic freedoms except for, say, a few at the pinnacle of elite institutions.

Conclusion

I hope I have demonstrated the connection between the pension dispute, the introduction of student loans, the privatisation and marketisation of higher education and our current national economic policy. For me, as I take part in UCU’s action over the pensions, it is not just about being comfortable in my dotage. I love my job, I love the environment in which I work and I love working with students. There are so many achievements that my institution and the UK higher education sector, as a whole, can be proud of and with which it has led the world. So my motivation is to prevent public education from sleepwalking into becoming a further fragmented and inequitable system. A system that treats students as consumers and undermines scholarly inquisitiveness and the pursuit of ideas, ideas whose inspiration might arise from unusual and unconventional lines of inquiry. The performativity of neo-liberalism fosters a conformity, a narrowness and too often the safe and mundane.

I say we are sleepwalking, because it feels like this here in Cambridge, decision making has become concentrated with a few, no doubt highly-skilled and rational managers. That same rationality appears to have usurped the University’s democratic governance. Of course, it makes sense to reduce the University’s liabilities and exposure to risk to attract private finance, it makes sense to make the University competitive internationally and of course, there is logic in reducing staff pay and conditions to maximise surpluses. But these are rational judgements based on an acceptance that austerity and neo-liberalism are a) necessary and b) the only choice of political economy. It is not the only choice and, as I have argued, austerity is a political choice and not an economic necessity and in accepting it as though it is, we, as a University, make a moral choice. Or worse, we dispense with moral deliberation and accept that growing inequality and a deepening social crisis in society is simply a cost, a risk that can be put into and evaluated in our management analysis. If a university fails to accept its moral mission and fails to engage in genuine democratic moral deliberation over what society should look like, then it has failed as an institution. It may have secured private investment and have good metrics, but, nonetheless, it has failed.

The reason I take action as a member of the UCU is to encourage the higher education sector — and especially the elite institutions — to take responsibility and offer moral leadership. And not to acquiesce to those who look to perpetuate a rentier economy. Universities must offer a robust independent voice based on independent scholarship and promote the same moral purpose and critical thinking in their students.

Finally, I ask: colleagues, students, parents and communities please stand in solidarity with the striking members of the UCU.

References

Radice, H. (2013). How we got here: UK Higher Education under neoliberalism. ACME: An International Journal for Critical Geographies, 12(2), 407–418. https://acme-journal.org/index.php/acme/article/view/969/823
Stiglitz, J. (2012). The price of inequality. Penguin Books.
Piketty, T. (2014). Capital in the twenty-first century (A. Goldhammer, Trans.). The Belknap Press of Harvard University Press.
Harvey, D. (2011). A brief history of neoliberalism (Reprinted). Oxford Univ. Press.

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”