Thursday, 3 April 2014

How it all works - Quick Start Guide

Time and again you hear the same refrain: "it has to be paid for and those that want it never give a realistic view on how that is to be done".

Well we do. Constantly. But it is probably time to put it down in one place for easy reference.

So the 'quick start' version goes something like this:

The government invests in their programme. That money is spent by the recipients on goods and services, which are then made by the businesses for which they hire staff and pay wages.

All that activity causes an amount of taxation and an amount of saving to happen, which when you sum it up exactly equals the government investment. Each time, every time.

Therefore government investment is limited only by the dynamic capacity of the economy, both domestic and international, to produce stuff that people need - largely at the low income end of society. Importantly this is stuff that wouldn't otherwise get made or done.

So its all 'paid for' by making stuff we wouldn't otherwise make, using machines and people that would otherwise be under-utilised, and creating profits, savings and increased economies of scale we wouldn't otherwise get.

It's a win-win all round.

Wednesday, 2 April 2014

'Taxation = Government Investment' : Each Time, Every Time

Once again we're seeing articles published across the progressive sphere that bang on endlessly about taxation.

And they always make the same mistake - which is to conflate the total amount of taxation collected with the distribution of that taxation amongst the population. Usually because they see taxation as income, rather than the air-conditioning process it actually is.

The two arguments are completely separate, and confusing the two is, once again, playing away from home at Neo-liberal United.

It's important to realise that when government invests it will always generate the same amount of taxation for any positive tax rate. Pound for Pound. Each and every time.

So why is there a government deficit you are no doubt screaming. Well that's because you've missed the other bit of taxation.

Taxation is about reducing spending. That is its primary purpose, in aggregate, - to stop the system overspending its capacity.

Once you understand that, then you quickly realise that people actually tax themselves. It's often called saving. That reduces the amount of spending an individual does - which is the primary purpose of taxation. So we can call saving - specifically saving in excess of investment - Voluntary Taxation.

And that gives the simple equation:
Voluntary Taxation + Compulsory Taxation = Government Investment
which simplifies to:
Taxation = Government Investment
for those with a correct understanding of what taxation actually is.

Therefore to increase the total amount of Taxation, you just push up Government Investment - once you've assured yourself that there is real space in the economy to take the extra investment. If there isn't enough Voluntary Taxation, then government can up the Compulsory Taxation or encourage more Voluntary Taxation to make space - should it so wish.

The distribution argument is completely separate from this. It is about who gets to do Voluntary Taxation and who gets to do Compulsory Taxation, and whether that distribution is considered fair by the population. The government investment is already done at that point and the total amount cannot be affected by the distribution algorithm. It's just arguing about which end of the water ballon should be the highest.

Yes it's an important debate, but it has nothing to do with whether we have public services or not.

We will get nowhere until we get it across to people that governments are about deploying people and stuff to achieve a vision that all of us have signed up to via the democratic process. And by doing that we have given our government sovereign authority to bring it about.

Monday, 31 March 2014

Full employment is when everybody has a job

Today we have had another day of 'truth by repeated assertion' where everybody trots out their favourite belief about jobs and states it as fact.

On the one hand you have the Tories stating that "spending billions of pounds creating jobs in the public sector doesn't work either". Well if you don't then even fewer people in the private sector would have jobs, because of course the key issue we face is that we no longer have to hire everybody to produce enough output for them  (Which I call the Paradox of Productivity)

On the other hands you have the Bastard Keynesians moaning about productivity and exports again and the crazy idea that businesses just invest if you can only offer them money cheaply enough.

It might be a good idea for these people to get out there and spend some time at the sharp end in real businesses. Then a lot of these crazy notions will get dispelled by a heavy dose of reality.

Productivity fell in the UK largely because British businesses didn't sack people during the recession. Instead they left them fallow - essentially privatising unemployment benefit by continuing to pay wages. What that does is to reduce the output per hour - because all those fallow people still end up being counted as part of the denominator in the productivity calculation .

Of course by paying those wages, effective demand stayed up validating the businesses decision not to get rid of the people, and so the UK recovered faster than other nations. Quite why the UK did this will keep graduates in PhDs for years to come.

The problem, of course, is a belief in marginal theories. The people who dreamt up these statistics cannot seem to comprehend a business that holds onto more staff than it needs. But that's exactly what real businesses do. They always maintain a buffer. They are not going to let Fred go unless they absolutely have to, because Fred is not easily replaced - again something that economic theory seems to struggle with. So they limp on using Fred at 10% of his full capacity hoping that business will pick up in the future.

Now as we move into the recovery phase, what is happening is that lots of low productivity jobs are being created. There is a lot of false self-employment for example, which gets around the minimum wage rules.

Once again the beliefs get in the way of reality. To get more productive we need more mechanisation and automation, but that destroys jobs in the private sector. I know this all too well, because it is part of what I do for a living. But of course that triggers the Paradox of Productivity, because we now have more output capacity, but less effective demand overall.

So we need something to restore effective demand, namely new job creation often by the public sector. Those are likely to be more socially useful than the non-jobs the private sector comes up with to maintain the velocity of money (do we really need more marketing, advertisers, estate agents and derivative traders? Is national life enhanced by more self-employed individuals knocking at doors begging for the industrial sized national 'charities'?).

What Osborne is proposing is a Luddite Manifesto, effectively allowing capital to avoid investing in new machinery, methods and automation. Instead cheap labour is deployed. Travel around Lincolnshire this spring season and you will see eight individuals strapped to the back of planting machines like some sort of Matrix style cybernetic add-on. They sit there all day sticking plants into the ground in a back-breaking manner. And after dark you will see them drinking cheap liquor by the drainage canals - because they are far from their homeland and there is nothing else to do. It's borderline Victorian.

And if you want evidence of the proliferation of PR, marketing, spin, and style over substance jobs in the private sector, then you need look no further than the British Labour Party. It's a pity all the Labour greats from the past were cremated, because by now they'd be spinning so fast in their graves we could hook them up to the National Grid and solve the impending energy crisis.

What Balls is proposing is first to achieve an accounting impossibility and then he might also force some people to work for somebody else somewhere and might pay them, but we don't know how that will operate in practice because there is no detail anywhere.

As usual in British Politics, Hobson's Choice is the only choice on offer.

If we want Britain to move forward we need business and government to invest. Government can invest whenever it can get around to presenting a coherent vision of the future worth investing in, but business will only invest when it is swamped with demand. For there to be demand people with a high propensity to spend need to have money to spend. That generally means they need a job and a decent income.

So to square the circle you need a full blown Job Alternative Guarantee - a job offer open to all, paid at the living wage working for the public good. That makes sure that everybody who wants a job can get one. The wage then creates the demand, which means that businesses now swamped with demand will either hire the staff away, or preferably invest capital and eliminate the need for a job - increasing our productivity.

And away we go - a bubble up economy where you get wealthy by servicing the needs of the many, not the few.

It ain't difficult.

Saturday, 29 March 2014

Scottish Independence - a Modern Money analysis

Flag of ScotlandAn unbelievable amount of rot has been written over the last few days and months about how Scotland would separate from the UK. Most of it severely uninformed and much of it using very faulty neo-liberal and neo-classical economic analysis. Much has a clear political bent. (The myth of the national debt monster is a regular feature. I debunk that here)

I figured it is time to offer a more sober analysis of how you would actually design a Scottish Monetary system using the very latest Modern Money design principles, and how Scotland would move towards true independence.

IMV Scotland is in a fairly unique position. If their politicians were less interested in having their tummies tickled by the Brussels elite and were actually interested in ensuring that the citizens of an independent Scotland all had a good, secure standard of living, then they are in a position to deliver it.

I'll believe that when Alex Salmond sends for Bill Mitchell to advise on how to setup the Scottish Monetary and the Scottish Job Guarantee systems.


First ignore the money


One of the amusing facts about analysing a modern monetary economy is that the money is not the important bit. Too much of recent analysis on Scotland has been conducted entirely in a unit of account (whether GBP, EUR or even, bizarrely, USD), as though there was a one to one match between reality and money. There isn't. Money is just an abstraction. A useful mechanism. It is not and should not be the primary concern. 

Real people using Real resources to make Real stuff and perform Real actions is what an economy is. Money is oil, not petrol. It lubricates the wheels. It lets them turn faster. It allows things to happen. But it does not make things happen. That is decided by Real people. 

Modern Money is from the Post Keynesian tradition and  is the analysis of the Real Transactions in an economy in historic time, within the context of a monetary system.

It would be better described as 'Realism', and the rallying phrase should be 'Get Real'.

So let's 'Get Real' with the Scottish economy.


The Scottish Economy


Scotland has a population of up to about 5.3 million people. That's slightly smaller than Denmark and Finland, about the same as Singapore and bigger than Norway, Ireland or New Zealand. It has a notional GDP of between GBP126 and GBP 148 billion depending upon who you believe. (Notice the unit of account unavoidably creeping in there). 

The main argument is about where Oil and Gas receipts are allocated, and of course the articles in the press are entirely about numbers, whereas what matters is the reality of the situation. Where do the people that work for and on the platforms come from, and where does the product hit land.

As you can see from the map the majority of Terminals from the main UKCS Oil and Gas fields make landfall in Scotland. Since they make landfall in Scotland, the Scottish government can levy them if required and turn them off if the companies refuse to pay. This is regardless of which jurisdiction the Oil company operating the field is registered in, or whether the notional output is credited to the national accounts of the UK or Scotland. The oil and gas make landfall in Scotland (St Fergus, Cruden Bay, Sullom Voe, Flotta), or Teeside in England. For example the Forties pipeline system which lands at Cruden Bay carries 30% of the UK's oil to shore.

Therefore any Oil company will be employing people and using services from people living in Scotland and therefore they will be paying those people in the Scottish currency (You can see the spread of where people in Oil and Gas live here). If the amount of trade the oil companies' supply chain induces in the Scottish economy is insufficient, then the Scottish government can apply a resource levy to the terminals which will generate a further demand for the Scottish currency - even if all the oil and gas is sold in US dollars and accounted for in some other country's national accounts.

Beyond that the Scottish economy is, like the UK, a largely service economy - about 72% of the Value Add in the economy is service oriented. Beyond that there is a large manufacturing segment, and of course the famous Scottish exports of Whisky and Salmon - which are as important as Oil refining to the Scottish economy.

The Scottish GDP figures document is an attempt to apply the national accounts regime to Scotland as a separate country. It requires careful reading, preferably alongside the input-output statistics. What they show is that Scotland has, in GBP terms, a balanced external sector with the rest of the world and an import deficit with the UK. But the elements of that deficit with the UK are largely notional - lots of services from the financial and service centres in the South of England which are relatively easy to substitute,. So any currency pressure could be resolved in real terms via substitution and relocation if they weren't dealt with nominally via the financial system.

Scotland has a reasonably decent infrastructure thanks to its association with the United Kingdom. It has a National Health Service, good public and private schools, some of the finest Universities in the world, good road and rail links, good airports, and a strong military background. It famously already has a separate legal system and system of land ownership.

On top of all this of course there are the people of Scotland who, in keeping with the residents of the rest of the British Isles, tend to punch above their weight in terms of inventiveness and ingenuity.

With all this at their command the Scottish people could easily operate as an independent nation if they so wished, and would be able to deliver an excellent standard of living and low income inequality to all who live there.

As long as they adopt an independent free-floating currency, control the banks, and implement functional finance correctly (with a Job Guarantee).

Friday, 28 March 2014

UK Sectoral Balances and Private Debt Levels - Q4 2013

Once again very little change in government investment as it strains to keep the economy moving forward. There's been a great deal of talk about the state of the external sector - but you have to remember that somebody has to want to save in Sterling for that to occur. The trade will not complete otherwise. The UK is stable and appears to be moving forward. It's time we understood that rock solid stability and a thousand years of continuity is very valuable to people living elsewhere in the world.
The household sector continues to be negative. The gross debt figures below tend to suggest that this is due to running down of saving rather than any increase in the take up of debt. The non-financial sector continues to save vast sums - as does the external sector.

And the private debt levels:
As with last quarter the GDP increase has brought down the ratio. However if you look at the underlying figures, the overall amount of private debt is going down in nominal terms - driven by debt repayment in the corporate sector. So whatever profit was being generated was being destroyed in debt repayment. Although deleveraging is of course to be welcomed, it looks like it is being driven by dissaving amongst households. And that probably won't last.


Source: Office of National Statistics, tables RPZD, RPYN, RQAW, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Private sector debt based on tables J8XI, NLBC, NKZA, NNQC, NNRE, NNXI, NNXM, NNWK, J8XK, NLSY, NLUA, J8XM, NJCS, and NJBQ (Lending, securites and derivatives per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted).

Saturday, 22 March 2014

Complaint to the BBC over terrible video about government spending

Peter Martin kindly drew attention to an appallingly bad piece by Hugh Pym that has been published on the BBC Online website.

Once again it perpetuates the myth about the government drawing on a mysterious pile of financial resources that are out there somewhere in the world (in this case a pile of red sweets). Both Peter and Alex Little have complained to the BBC and got the usual dismissive response.

But it got their attention. So now it's my turn, and here's what I wrote:
The video shown is a factually inaccurate description of the way that government financing works and should be withdrawn or replaced.

The way HM Treasury works is that it spends first and backfills later. What Hugh should have shown in that the government spends 7 into the economy, 6 come back as direct taxation and the other is saved and swapped for government Gilts. The whole thing goes around in a big circle - from government to the wider economy and back again.

If the government wants to spend 8, then it just spends it on its float at the BoE, and that will leave 2 that get saved and swapped for government Gilts - which then restores the float.

Therefore the government no more goes cap in hand to obtain money, than a bank does to a worker when they get their salary paid into their account. Both are technically acts of 'borrowing', but not in the sense of creating any real obligation.

The Bank of England is a subsidiary of HM Treasury (as shown in the Whole of Government Accounts), and is required by law to take direction from HM Treasury (4(1) of Bank of England Act 1946). Any 'independence' the BoE has is limited. Nobody has the authority to bounce a government cheque. Parliament is sovereign.

Our currency system is a dynamic structure capable of supporting all real transactions in the economy and it is vitally important that the BBC gets that across. Otherwise it is supporting political myths that work to the detriment of licence fee payers and the BBC itself.
The BBC, being quintessentially British, makes it very easy to complain. If you can see the video then please complain about it, and ask that it be withdrawn. Use your own words. Be polite. Point out the flaws and ask what you want to be done.

Only by taking action can we change the way things are - a little at a time. In the words of the late Tony Benn: "Democracy is not just voting every 5 years and watching Big Brother in between and wondering why nothing happens. Democracy is what we do and say"

Monday, 10 March 2014

UK Whole of Government Accounts - Some Juicy Quotes

In my last post I came across the Whole of Government Accounts (WGA) for the UK, which provides a consolidated view of government. This is of course represents pretty much exactly the MMT view of the government sector.

Some of the quotes from the accounts are too good to be left hidden away in a PDF.

Paragraph 2.2 (pp7)  sets the scene:
HM Treasury identifies the entities to be included in WGA in accordance with the legislation that
required WGA to be prepared1. It is required to include entities that “exercise functions of a public
nature” or that are “substantially funded from public money”. The Treasury’s decisions are consistent
with the classification of entities to the public sector by the ONS. This is because the ONS takes account
of these factors when making their classification decision as well as the degree of control that
government has over each entity.
This is corroborated by the auditor in paragraph 7.16 (pp50)
To be included in the WGA, a body must do the work of the UK government, be accountable to, or be otherwise
controlled by government.
Therefore, unsurprisingly, the accounts include the central bank (para 7.75 pp76)
the Treasury has taken steps to make the WGA more transparent and complete. The 2010-11 WGA: … consolidated the financial activities of additional bodies, such as the Bank of England
The bilateral relationship between HM Treasury and the Bank of England is similarly explained clearly. Para 3.80 (pp28) shows that the indemnities between them are irrelevant at the consolidated level.
A number of guarantees and indemnities exist between HM Treasury and the Bank of England. These are not disclosed in Whole of Government Accounts, as both bodies are included in the consolidated financial statements.
The same point is made in Para 3.85 (pp 29)
Arrangements between bodies within the WGA boundary, such as guarantees and indemnities between HM Treasury and the Bank of England, are not included, as they eliminate on consolidation in these accounts. 
MMT says that QE is an asset swap and effectively eliminates any Gilts purchased. The accounts agree in para 7.50 (pp 62)
As at 31 March 2011, there were some £1,059 billion of gilts outstanding but the WGA shows a
smaller figure of £746 billion (Figure 10). The WGA is not intended to include as liabilities gilts held as
assets by entities in the WGA, such as the Bank of England Asset Purchase Facility Fund as part of
Quantitative Easing (paragraphs 7.53 to 7.54).
Para 7.54 (pp65) expands on this and delivers the killer conclusion:
Consolidating Quantitative Easing does not significantly reduce the overall liabilities of government
but it does reduce the number reported as government borrowing. Once intra-government transactions
are eliminated, the scheme represents an exchange of gilts (liabilities of the National Loans Fund) for
central bank reserves (liabilities of the Bank of England).
In addition the Consolidated Statement of Financial Position (pp94) contains the term "Financed by Taxpayers' Equity". Which is exactly correct. The net savings of the non-government sector is indeed Taxpayers' Equity.

When you apply the International Financial Reporting Standards to a set of government accounts, the MMT viewpoint arises quite naturally from the numbers.