• Economic Policies for an Incoming Labour Government – Part 6

    Economic Policies for an Incoming Labour Government

    By Bryan Gould and George Tait Edwards

     

    Part 6: The No-Cost Keynesian Stimulation of Demand in the Economy

     

    An incoming Labour government could and should stimulate the economy by

    restoring all the benefits (worth about £20 bn a year) which the Coalition

    Government has reduced or denied to the low-paid, the sick, the disabled,

    the poor and the underprivileged. The case for doing so is based not only on

    social justice and on restoring the integrity of our society but on making

    good the deficiency of demand that has handicapped our economy as a

    consequence of austerity.

    This would be achieved by creating £20 bn of consumer credit at the Bank

    of England to fund the policy during that first year. The costs of that credit

    creation for Government expenditure would be nil and the benefits would

    be immense. If we assume the average UK tax take of about 42%,

    government income would rise by about £8.4 bn; but because much of the

    extra purchasing power might be spent on food and other non-taxed

    necessities, the tax take might be about half of that – say 21%. On the

    other hand, the extra spending would have a multiplier effect of about 2, so

    that the total effect on the UK economy would be a stimulus of about

    £40bn. Even allowing for a lower than average tax take, the Government

    would still gain revenue of £8.4 billion, the economy would receive a

    stimulus of £40 billion (a likely addition to economic growth of about 2.6%)

    and many of the dire effects of the Coalition’s austerity programme would

    be negated. The financial condition of Britain’s poorest would be

    ameliorated; the poor would be more able to afford to eat, heat their

    homes, pay their bills, and live better lives without worrying where the

    next penny was coming from.

    That policy could be continued in the following years but, as the additional

    government taxes came in from economic recovery, the credit required to

    be created would reduce accordingly eventually becoming nil within the

    lifetime of the parliament as economic growth increased due to investment

    credit economics.

     

    The Credit Restoration of the Royal Bank of Scotland

     

    The bad debts of the Bank of Scotland should be immediately purchased in

    their entirety by the Bank of England, using targeted quantitative easing.

    Again, it would cost the Government nothing. The Government would have

    bought assets worth (say) 50% of their book value for nil expenditure. The

    total bad debts of the RBS are estimated at £38 billion, so the Government

    would gain assets of about £19 billion in return for no appreciable cost

    whatsoever. Furthermore, the RBS would cease rejecting loan applications

    from SMEs, where they are urgently needed but where about three out of

    four are currently being turned away. There is no good reason why the RBS

    should continue to do this, when normal business could be resumed

    immediately.

    Through this means, which could be applied to stabilise other British banks

    as necessary, one of the main and continuing consequences of the Global

    Financial Crisis – the overhang of bad debts that inhibit the banks from

    lending – can be negated. Interestingly, one of Richard Werner’s major

    findings from his inquiry into the reasons for the Japanese stagnation over

    recent decades was the inhibiting effect of bad debts on the willingness of

    the Japanese banking system to maintain an adequate level of credit

    creation and therefore of liquidity. In this instance, we have the chance to

    learn from Japanese mistakes. We should be clear that the objection based

    on moral hazard pales into insignificance by comparison with the huge

    economic advantages from pursuing this course.

    Many of those who call themselves economists and many politicians who

    imagine themselves to be competent will be stunned by these proposals, if

    the past is any guide. As Keynes commented, “the difficulty lies not so

    much in developing new ideas as in escaping from the old ones, which

    ramify, for most of us brought up as we have been, into every corner of our

    minds.” And as John Kenneth Galbraith, who was a member of the FDR

    administration when the investment credit creation policy was adopted by

    the US Government, has said, “the creation of money is so simple that the

    mind is repelled.”

    We should remind ourselves that there is nothing new about the creation of

    credit by the Bank of England. No less than £375 bn of credit was created

    to stabilise the liquidity and preserve the operation of British Clearing

    Banks and £80 bn of such credit was created to support Vince Cable’s

    proposal to extend business loans to industry.

    The novel aspect (in British terms at least) of our proposals is that the

    proposed credit is to be focused on useful social and economic objectives –

    on the establishment of more prosperity among the poor and

    disadvantaged, upon the minimal cost fixing of the RBS and other banks and

    upon the creation of the kind of bank support for industry and commerce

    that has existed for centuries in Germany, for about a century in Japan and

    for about a third of a century in China.

     

    The Mechanisms

     

    The primary objective of the incoming Labour Government’s reforms should

    be the establishment of a United Kingdom of abundant capital resources

    and the placement of Britain’s future industries on a sound economic

    footing. Inseparable from that first objective is the reformation of the

    British banking system to ensure its future stability and effectiveness.

    Another objective would be the fulfilment of the Government’s duty of care

    to the people – the relief of the groups disadvantaged by the actions of the

    recent Coalition Government and the restoration of full employment as a

    government objective. Finally, measures should be taken to ensure the

    permanence and continuity of these reforms through major changes in the

    machinery of Government. We set out now our proposals for achieving

    these objectives.

     

    The Re-nationalisation of the Bank of England

     

    The Bank of England should be brought once again under Government

    control. It is unwise for any government to allow any natural monopoly to

    be fully independent, and the control of credit creation is such a central

    aspect of government policy that direct control is required.

    The operating objectives of the Bank of England, as a central departmental

    agency of government policy, will be redefined as the promotion of

    economic growth and the control of inflation within the guidelines of a

    national industrial and social development plan.

    Gordon Brown’s proclamation of the “independence” of the central bank

    was widely applauded at the time and remains a cardinal – and

    unchallenged – element in policy today. Yet handing monetary policy over

    to the tender care of a central bank is simply a reinforcement of the

    current and increasingly discredited orthodoxy that inflation is the only

    concern and proper focus of monetary policy and that its treatment is

    simply a technical matter that is properly the preserve of unaccountable

    bankers, and is not to be trusted to politicians. Quite apart from the

    undemocratic nature of this approach, we have paid a heavy economic

    price for allowing the bankers’ interest to prevail over the interests of the

    economy as a whole.

    It is easy to see why the bankers – and the economists who work for them –

    should support this. It is less easy to see why the politicians should so

    readily have accepted it. Yet the answer is fairly clear. It has suited the

    politicians well to be able to argue that the travails of the economy arise as

    a consequence of inexorable economic forces which must kept in check and

    marshalled by expert technicians. Our governments have thereby been able

    to disclaim any responsibility for policies for which they should be

    ultimately responsible.

    As a matter of interest, this very issue was succinctly discussed by members

    of the Japanese Committee on Financial System Research (Kinyu Seido

    Chosa Kai) as it considered whether to revise the 1942 Japan Law that

    established the Bank of Japan’s primary objective as the promotion of

    economic growth. On that Committee, Dr Shimomura represented the

    Ministry of Finance, while his opposite number was Mr Shigeo Matsumota,

    representing the Bank of Japan.

    Dr Shimomura is reported as having “stressed the inevitable subordination

    of the central bank to the government from two standpoints – that the

    policy of the central bank should be managed and operated in

    full coordination with the general economic policy of the Government and

    that the Government on its part is called upon to hold itself responsible to

    the nation for the outcome of its financial policy.”

    Mr Matsumoto on the other hand “emphasised the necessity of maintaining

    the independence or neutrality of the central bank from the Government on

    the ground that the central bank is first of all assigned with the task of

    contributing to the stabilisation of the currency value….”1‑

    What is clear is that an economic policy that breaks the shackles of current

    orthodoxy would necessarily have to be removed from the exclusive and

    self-interested control of bankers. It would need to be driven by politicians

    who saw the need to ensure that the wider interest is carried into policy

    and is an essential element in setting its direction and gaining for it the

    necessary support.

     

    © Bryan Gould and George Tait Edwards 2015

     

    1. From “The Political Economy of Japanese Monetary Policy” by Thomas E Cargill, Michael M Hutchinson and Takatoshi Ito, The MIT Press, Cambridge Massachusetts and London, England, p24.