Regular readers will know I have been a long-time critic of the fiscal rules that…
The EU is in terminal decline
Some Wednesday snippets. First, I juxtapose the political machinations that the EU President is engaged in to consolidate and expand her power within the European Commission with the reality that Member State governments are becoming dysfunction because social instability and political extremism are rife. Then I reflect on my experience as Chancellor of Britain – a great success I should say, although I was told I had broken all the rules. It tells one how stupid the rules are. Then, finally, some music to enjoy.
EU decline
Regular readers will know that I am a trenchant critic of the European Union, which has legalised neoliberalism.
By that I mean that they entrenched neoliberal ideology into the treaty structure of the EU, which is quite a different matter from a particular political party gaining office on a neoliberal agenda.
In that situation, voters can easily eject such a party at the next election when it realises how dysfunctional it is.
In the case of the EU, voters do not have that option.
Trying to change the EU treaties is a nigh impossible task and would need a unified approach from all the Member States.
And with Germany standing in the way, such a unity is unlikely (in the extreme).
The results of that approach have been fairly clear – especially since a subset of 20 nations decided to adopt the common currency – the euro.
The people were guaranteed convergence and, instead, have been forced to endure divergence.
Greece has been decimated as a prosperous nation state.
Other nations are in deep trouble.
Now, even the mainstream press are starting to realise what a mess the EU has become such that there is no incentive to act with common purpose anymore.
The UK Guardian article (October 17, 2024) – EU’s weak or distracted governments make unity of purpose hard to achieve – was a break in the normal mainstream pro-Europe commentary.
The article notes that key Member States such as France, Spain, and Germany are now witnessing political instability and the resulting government machinery has been weakened.
The narrative emerging is that the “current European leaders are not up to the job”.
Meanwhile, European Commission President Ursula Von der Leyen is currently engaged in a process to consolidate her power by controlling information and doing secret deals with power brokers.
Her ‘divide and rule’ tactics with the Member States and their Commissioners at the EU is another story again.
Her machinations among the power brokers stand in contrast to her inaction on things that matter – like actual improvements in well-being via innovative policy.
Which is why Macron, Scholz, Sánchez and other leaders are in trouble.
The hoy-polloi are sick of it.
When Mario Draghi decided to deny his past and release his report (September 9, 2024) – EU competitiveness: Looking ahead – he outlined a scary vision for the Continent, which would require around €800 billion per annum to address.
No-one can agree as to who will fund this type of agenda and Germany is clear – it will not permit any sort of increases in borrowing that involve shared liability at the Commission level.
So there is a combination of Member States in political chaos with the Right wing parties surging in elections which is crippling the discretion of those state to do anything and a centre that is more powerful than ever yet largely incapable of meeting the challenges.
The UK Guardian article believes that:
It could be a messy, politically tempestuous period for the EU. But the force of external pressures will not go away … The “force of external events and pressures” will create its own momentum, whether through climate impacts such as floods, fires and storms, public expectations for high-quality jobs, or the threat of a revanchist Russia.
The whole arrangement is a joke.
Ridiculous and dangerous Financial Times Chancellor Game
The Financial Times recently posted its – Chancellor Game – which demonstrates that some IT programmers can add up okay and also how insidious the media can be in promoting the economic fictions that keep us all in the dark.
When I played the game, the participant inherits the Tory malaise that followed 14 years of austerity and inaction on a number of fronts.
Unemployment remains at elevated levels and inflation is now low.
In addition, the UK is facing many challenges arising from that period of government (and the inherited mess the Tories got from Blair’s Labour period).
Climate change.
NHS atrophy.
Housing crisis.
Increased poverty.
Crumbling infrastructure.
Public services in bad state.
etc.
So what should a good Chancellor do in those circumstances?
Increase public spending obviously and carefully change the tax structure to make it more progressive and reduce the spending capacity of the top-end-of-town.
Which I did.
The overall assessment from the game’s analysis was:
You’ve caused chaos in your first Budget by breaking fiscal rules we only just committed to. New chancellors generally try to avoid picking fights with financial markets!
Frustrated with your result?
Definitely not frustrated.
And the assessment from the first year of being Chancellor continued:
You’ve failed to stick to your own fiscal rules: the pound has taken a dive and bond yields are up. A worrying start for a new chancellor.
The overall assessment also told me that:
The government is considering a change to its debt target to create more scope for borrowing to invest. Using this alternative gauge, you would manage to meet your fiscal rules.
Which just tells you how the setting of arbitrary rules can lead to totally different real outcomes.
But when we look at what I achieved, even within their biased framework, we see:
1. “Relative to inherited plans, you’ve raised day-to-day spending by £19bn a year by 2029-30” – as planned.
2. “Although you have raised spending, this will not be enough to deliver the improved services voters will be expecting” – so I was too cautious. I would now bring in a supplementary fiscal statement and amp up spending further.
3. “Relative to inherited plans, you’ve raised investment by £43bn a year, taking public investment to 3% of GDP by 2029-30” and “This takes public investment above the recent average as a share of GDP. If this is sustained, we should start to see big improvements to the quality of public buildings and transport infrastructure”.
That’s what I like to see – a “big improvement in the quality” of public infrastructure, which would have created more employment in well-paid, highly skilled areas.
4. “Taxes are set to rise by £24bn a year relative to inherited plans, taking the amount of tax imposed on individuals and businesses to 37.8% of GDP by 2029-30”, which meant that I “immediately established a reputation as a tax-hiking chancellor. Your government is taking the amount of tax collected to record highs as a share of GDP.”
But note, the tax revenue is coming from large corporations who have been dodging tax for years and very wealthy individuals who live high on the hog while the rest of the nation endures austerity.
So I was happy with the shift to more progressivity in the fiscal system.
There was nothing in the game that reported the labour market effects.
In the notes, we read that:
The game assumes that growth rates and interest costs are unaffected by policy decisions, but changes in borrowing do affect debt interest levels.
Which are absurd assumptions.
How can the growth rate be unaffected if I pump an additional £19bn per year into the spending stream?
The basic rule of macroeconomics is that Spending -> Output -> Income -> Employment demand.
In the real world, GDP growth would have increased and unemployment would have fallen, given my fiscal choices.
Further, I would have instructed the Bank of England to control the bond market.
And, I would have changed the legislation to abandon the administrative requirement that I issue gilts (government bonds) to match the fiscal deficit.
The game is in fact very destructive from a public education perspective.
By just judging the outcomes in terms of a couple of narrow fiscal parameters and judging the decisions taken by relating the outcomes to the narrow ‘fiscal rules’ that are adopted, it biases the reader against fiscal discretion.
And by suppressing any welfare outcomes in terms of climate amelioration, labour market outcomes, poverty, housing availability and quality, etc. it breaks the nexus between fiscal policy choices and societal well-being, which is the raison d’être of fiscal policy after all = to improve well-being.
This is music …
This is what I have been listening to while working this morning.
This song – Flamingo – is taken from the 1959 Blue Note album – The Sermon.
This was a monster recording and featured:
1. Jimmy Smith – Hammond B3 organ.
2. Lee Morgan – Trumpet.
3. Art Blakey – Drums.
4. Kenny Burrell – guitar.
It was recorded on February 25th, 1958 at the Manhattan Towers in New York City.
At the time – Lee Morgan – was just 19 years old and only lasted to 33 years of age.
He was shot by his de facto wife in a jazz club where he was performing.
That is enough for today!
(c) Copyright 2024 William Mitchell. All Rights Reserved.
“And, I would have changed the legislation to abandon the administrative requirement that I issue gilts (government bonds) to match the fiscal deficit.”
There is no such legislation in the UK. It’s entirely a political choice – the ‘full funding rule’ – detailed every year in the Debt Management Report (although, amusingly, they appear to have botched §2.14 in this year’s report).
All you would need to do is publish a new Charter of Budget Responsibility, and lay it before Parliament. The Charter can be used under the legislation to set the terms of reference of the Office of Budget Responsibility, and thereby stop it coming out with the puerile nonsense it currently emits.
Perhaps we should draw up an MMT informed Charter.
Ursula von der Leyen said once that the Russians were desoldering chips out of washing machines to make bombs, drones or whatever…
We have three options: or she has dumb counsellors, or she is trying to make us dumb or …
If Trump wins the ticket in two week’s time and withdraws from NATO as promised, it will herald the demise of the EU project once and for all.
But at what cost?
Well what would you expect of a country where the House of Commons has become the House of Children believing in myths, the main one being that there’s a “fixed pot of money” but nobody bothering to ask three simple questions about this “pot”:-
How much money is in the “pot”?
Where is the “pot” located?
How did the money get into the “pot” in the first place?
Not asking these questions means monetarily illiterate politicians like Keir Starmer and Rachel Reeves gaslight voters by moaning on about a “blackhole” in the amount of money in the pot meaning there’s much less than they thought.
This “fixed pot of money” myth is no better than children believing in Father Christmas (Santa) or for that matter only a few hundred years ago most people believing the Earth is flat!
I have some questions, these concern either one country in the EU or the EU as a whole:
How big is the share of the taxes collected from the military in the total tax revenue?
How big is the share of the deficit that remains in the possession of the military in the whole deficit (no matter, either primary or total deficit)?
Would it be easier to answer if it were a question about the Australian military?
The EU is beholden to lobby groups the same as every so called democratic country.
The EU calls them ‘European interest representation’.
Expect any change? Not in a million years.
Natural resource consumption for Project A (say, infrastructure improvement) must be offset by reduced natural resource consumption for Project B (say, manufactured goods) if total natural resource consumption is to remain the same or decline … No?
The Chancellor Game seems correct in the sense that natural resource consumption cannot grow, but can only be shifted from one project to another …
To JOHN B.
I think that the answer to your question is ‘yes’, if the culture of consumption is going to remain the same. But this culture of consumption that we live in and as we see is unsustainable, it cannot remain the same.
To alter the culture and the civilization attached to it, it takes a lot of resources.
When the Greens were rising in Europe, about three-four years ago, some of them had a particular view that a solution would be that this culture of ours will go away by extinction. Some greens were building remote country houses where their families would survive, living off the gifts of wild nature and moderate agriculture, as city populations will die out as they believe it will.
I think that the contemporary political class is preparing for a similar group or class escape by various means like investing in a new start in colonies on Mars or creating heavily armed Utopian citadels that can sustain a limited population for the elite. They read too much speculative literature, as it seems to me, losing increasingly touch with reality and also creative ability.
The key, I think, is in definition of ‘goods’ as the core concept of economy. The trouble is that the goods get frequently defined as objects of exchange, buying and selling. With this limited view we will never get out of the paradigm that considers economy as what the business class does and makes.
I agree with the definition of goods as in the English Wikipedia that includes: “A good is an “economic good” if it is useful to people but scarce in relation to its demand so that human effort is required to obtain it. In contrast, free goods, such as air, are naturally in abundant supply and need no conscious effort to obtain them.” What is “useful to people” is dictated by culture, that brings me back to the beginning of my argument.
I consider my view optimistic considering that human species have demonstrated high adaptability so far in history.
I think we will arrive at nothing much better by gradually shifting weights in the contemporary economic balance (or disbalance). What we have to do is to break through the current deadlock, or the downward spiral. That will require huge resources to do it properly. Fine tuning will not help much, rebuilding the whole system will make the difference.
Just one more notion. What I said may indicate towards the narrative about wasteocene. I disagree with it, I think we’re living in the same anthropocene and the waste is just a human problem, not the defining problem of our era. To work out what the defining problem of our era really is, we have to rely on empirical sciences. It’s a moving target that changes from era to era.
“Where is the “pot” located?” The pot is located In the National Loans Fund (NLF). Except there is no building that houses the NLF and it has no dedicated staff of its own. As Spock said to Kirk on Starship Enterprise, “It’s a Bank Jim but not as we know it”. It exists in the Treasury but has no physical presence; but, like Santa Clause it annually delivers gifts of brand new Pounds Sterling to patch the hole in the Consolidated Fund. I agree with Neil W, we need a MMT informed Charter.
In UK naming terms, Gilts are mostly fixed term government saving certificates that pay interest and are tradable; unlike Building Society savings or NS&I Income Bonds. The latter could replace Gilts entirely. Trading Gilts has no socio-economic benefit and only benefit the traders, they do not fund government spending. The BoE on behalf of the Treasury, has unlimited power to buy or sell and control the current yield and the price of Gilts any time it wants. So why is the government so frightened by the Gilt market? … Discuss.