A critique of the University of Cambridge’s external financing approach from the perspective of modern money theory

Remarks for the discussion at the Senate House, University of Cambridge on 6 November on the use of funds from £600 million bond issue

Deputy Vice Chancellor.

The Council has already approved of raising external finance by issuing bonds of up to £600 million. And I understand that this discussion is about the use of the funds raised. But I thought it important to explain that there are potential societal affects as a result of this kind of debt financing, since no Regent or any other person has done so previously, and that a stated aim of the University is to benefit society and not to act in a way that is detrimental to it.

I will try and explain as briefly as I can.

My starting point is a simple incontrovertible truth about a national economy, that is, the sum of individual deficits must equal the sum of individual surpluses. To illustrate this, if there was just me and the Deputy Vice Chancellor on a desert island where we agreed on an issued currency, if I was in deficit, that is earning less than I spent, necessarily the Deputy Vice Chancellor would be in surplus, earning more than he or she spent.

Within the closed monetary system of a national economy no one other than the state can create or destroy currency. Therefore, the sum of deficits must equal the sum of surpluses.

Let us now aggregate. If we consider three aggregations, as is the practice in national accounting, public, private and overseas: ‘public’ represents government spending and revenues, ‘private’ represents household and business spending and income, and ‘overseas’ represents imports and exports. Using the same reasoning about individual deficits and surpluses, the sum of public, private and overseas deficits and surpluses must be zero.

The UK economy generally has an overseas deficit, we import more than we export. Therefore, the rest of the world is in surplus with the UK economy. In managing an economy, a government should ensure that the private sector is running a surplus so that people, households and businesses can accumulate savings to cope with changes in the economy. The normal operating condition of public finances is in deficit. This ‘sectoral balance’, as it is called, reveals that a national economy is nothing like the economy of a household or business.

But UK governments over the last forty years have become preoccupied with treating the national economy as a household and a key economic mission has been in balancing the books or reducing the deficit or recently in its more extreme form, ‘austerity’.

What is the effect of this? Overseas deficits have remained broadly constant, so reductions in public sector deficits have resulted in the reduction in private sector surpluses. This reduction in private sector surpluses does not affect the sector evenly. The poorest households become increasingly indebted and the credit is provided by the wealthiest in the private sector. Austerity exacerbates a private debt-based or rentier economy, where existing wealth is expanded through debt interest and rent. As the state withdraws from using fiscal policy, in other words, as it stops investing, private debt and credit become the dominant economic form.

So, as government attempts to reduce public deficits, by cutting spending on things like higher education the poorest in society are under increasing financial pressure. Meanwhile universities are forced to raise finance in other ways and this simply adds to the problem.

There is a further consequence of public deficit reduction that was recognised by both Marx and Keynes. When conditions lead to a private debt-based economy or rentier economy, the investor is less likely to invest in the productive economy. That is in enterprises that deliver the things that we need as a society. In a debt economy demand is fickle, it is reliant on household debt and inflated assets. The risk of making profits from lending is much less than investing in the productive economy. Investing in manufacturing, for example, becomes much less attractive, it is much more attractive to live off interest and rents. This has an impact on jobs and on the creation of long-term meaningful work. This contributes to undermining liberal democracy (see for example the EU referendum result, or the US presidential elections in 2016).

So, there is a great deal of demand for debt, it is bought and sold and traded like a commodity. Financialization is the business of using low-risk low-return debts such as that generated by the University’s bond scheme and using it to construct portfolios that feature a balance of high-risk speculative investments and safer investments such as government bonds. Financialization involves securing marginal profits from speculating on debt, interest and risk using sophisticated financial products. This kind of financialization led to global and political crises in the 1920s and a major financial crisis in 2008 (among others). By entering the debt economy, the University contributes to the problem.

It may seem expedient to the Council to proceed with this proposal since the University must sustain its work. I accept that the decision has been made. However, I just wanted to explain that this is not a politically or economically neutral endeavour. From our privileged position we have a duty to offer moral and intellectual leadership and must at least be aware of what we are complicit to in issuing over £0.5 billion of bonds. I welcome the Vice Chancellor’s commitment to more robustly challenging government’s higher education policy, but we must match this with our actions.

Dr Steven Watson

Faculty of Education and Wolfson College

For further reading on modern money theory:

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

Nersisyan, Y., & Wray, L. R. (2016). Modern Money Theory and the facts of experience. Cambridge Journal of Economics, 40(5), 1297–1316. https://doi.org/10.1093/cje/bew015

Wray, L. R. (2012). Introduction to an alternative history of money. Working paper, Levy Economics Institute of Bard College.

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.

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

A quick response to Lord Willetts on intergenerational equality (Resolution Foundation Report).

This is a quick response on Willetts’ talk in the Imagine 2027 series at Anglia Ruskin University last night.

It is remarkable that the liberal wing of the Conservative is being forced to respond to the Labour Party’s progressive economic turn.

Willetts’ considers that intergenerational equality is driven by birth rates, a largely Malthusian idea. It assumes that birth rate causes economic conditions, whereas the relationship is probably reciprocal i.e. birth rate is as much influenced by economic conditions as vice versa.

Willetts is insistent on fiscal conservatism, that means taxation must be greater than or equal to public spending.  Based on the accounting fact that all surpluses and deficits within an economy must sum to zero, if fiscal conservatism is pursued with an overseas trade deficit, debts in the private sector continue to accumulate. At the same time, investors become reluctant to invest in the ‘productive’ economy. Fiscal conservatism leads to inflated asset prices (like property) a rent-seeking economy and growing wealth inequality.

These are the economic conditions that we have been in since the mid-1970s and has been the source of much of what we describe as intergenerational inequality.

The solution is fiscal policy (spending in the public sector, regional investment and industrial strategy). This will encourage investment in the productive economy, create worthwhile and sustainable jobs, improve our trade deficit, lower inflated house prices and counter rent-seeking speculative investments. This should be accompanied by progressive taxation, but I don’t believe that taxation should be punitive but should support fair distribution of wealth (no, I am not that nasty socialist that wants to go after the rich that Willetts portrays). Moreover, it will reduce the demand for government bonds (national debt) because investment in the economy would be less risky, bonds become less appealing.

Willetts and the Resolution Foundation’s plan proposes increased taxation to pay for public services (fiscal conservatism is not negotiable, ergo neither are inflated asset prices nor is the rentier/ private debt economy). In some cases, the taxation is hypothecated. On the whole, the proposal for paying for public services and redressing intergenerational inequality is through taxation (in some cases hypothecated and overall regressive).

Sadly it won’t work.

Willetts is a charming and an engaging speaker and speaks with authority, but he is trying to sell snake oil and it is not to be trusted. He is trying to make a plausible case for the continuation of debt/ rentier capitalism mitigated by regressive taxation. A fool’s errand.

 

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.

It’s not taxpayers’ money!

 

It’s not taxpayers’ money.

The only taxpayers’ money is that which is in your arse pocket;

Or in your piggy bank;

Or in your savings and current accounts.

 

It’s not taxpayers’ money,

The taxpayers didn’t create it,

The government did,

By spending it.

 

And it’s not taxpayers’ money!

The government creates money for us to save and spend;

If they don’t spend it, we don’t spend it,

Then, we don’t save or buy.

 

The government is there to serve us,

Or it should do in a functioning democracy.

The government can spend what it needs to serve the people.

Don’t tell us anymore there is not enough money!

 

The rich have got richer,

There has been enough for them,

But the poor have got poorer

Our common services have been run down.

 

We can afford everyone to have decent work, healthcare and education,

This fact is hidden in the vaults of the Bank of England,

So that those with wealth and power can exploit us,

And an impotent government presents us with lies.

 

The way this stops is when we all say it stops,

The powerful never give anything away,

Until we all demand it of them.

“Spend what is needed!”

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.

 

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.

 

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.

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.

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.