An open letter to Rachel Reeves
An open letter to Rachel Reeves
Britain's new Finance Minister had an opportunity to change the relationship between the government and the economy in today's budget, instead she stuck to the rules.
Dear Ms Reeves,
Congratulations on becoming the first woman to be appointed Chancellor of the Exchequer, and on your first budget speech, to which I listened with interest.
I had hoped you might take the opportunity to inspire the House of Commons - and the country - with a mould-breaking speech calling for a wholesale review of the role of government in economic management.
You might also have encouraged some reflection on the connection between the economic changes of the last four decades and the state of Britain, and indeed the world, today. But, as was always more likely, you took a more conventional, dare I say, conservative approach.
This is a shame, because if you were serious in your interview with The Observer on Sunday when you claimed that,
‘My budget will match the greatest economic moments in Labour history’
then forgive me, but what you said in the House of Commons today really didn’t cut it.
The massive majority Labour won on 8th July essentially gave you a free pass to do whatever you wanted - short of provoking the financial markets à la Liz Truss, but we’ll come back to that.
And while I don’t doubt your commitment to creating a fairer economy with more opportunities and improved economic security, especially for those for whom the economy currently isn’t working, I’m afraid tinkering around the edges of a system that has been broken for years will not deliver social change on the scale we both desire.
You’re younger than me, but I live in Lewisham, the part of London where you grew up. Like you, I benefited from a comprehensive education at a time when schools were properly funded and the comprehensive system still celebrated.
But then our paths diverged somewhat: you studied Politics, Philosophy and Economics at Oxford, before taking a Masters in Economics at the LSE, prestigious universities both. I would imagine each of those courses came with a pretty hefty reading list, though perhaps not unlike the one I have worked my way through over the last three decades.
A Brief Economic History of Britain since 1945
I very much appreciated your reference to history in Sunday’s interview, where you compared the position of the new Labour government to those elected in 1945, 1964 and 1997.
‘In 1945, we rebuilt after the war; in 1964, we rebuilt with the ‘white heat of technology’; and in 1997, we rebuilt our public services. We need to do all of that now.’
Undoubtedly true, but perhaps a little analysis would be helpful?
In 1945, the Attlee government inherited a unique situation. Britain’s economic capital had been destroyed by the demands of war and, like the rest of the world, the country had to be rebuilt, almost from scratch.
While the market stability enforced by the Bretton Woods agreement ensured no repeat of the interwar economic chaos, it also placed limits on the ability of Britain to invest for the future. It wasn’t Labour’s fault necessarily, but it would be well into the 1950s before the UK showed any real economic dynamism. We couldn’t even feed ourselves properly until 1954, when rationing finally came to an end.
What Clement Attlee recognized, like the architects of Bretton Woods, and millions of ordinary people appalled by the human cost of the war and the crimes of the Holocaust, was the need for a more moral approach to economic management.
Among the results were the Welfare State, the National Health Service and an acceptance by all political parties of the positive role that government can play in the economy. This country owes Attlee, Nye Bevan and their colleagues a huge debt of gratitude. It’s true, their success was limited by the economic constraints enforced by Bretton Woods, but it would be wrong to assume that economic stability and economic dynamism can never coexist.
In 1964, Harold Wilson was absolutely right to anticipate the coming technological revolution. But Britain failed to capitalize on that second industrial revolution as it had the first, losing out to the emerging economic powerhouses of Japan and Germany.
By 1973, as a consequence of widespread industrial action, Edward Heath’s Conservative government was forced to bring in the three day week. As a nine year old it was great to have time off school, and rather exciting to (not) do our homework by candlelight. But the crippling strikes, along with the oil crisis that same year, denied the British economy the ability to build on the achievements of the preceding two decades.
Once Heath was ejected from office, we endured five years of largely impotent Labour governments before Britain and the world embarked on a great economic experiment led by Margaret Thatcher and Ronald Reagan.
That experiment certainly restored some of the economic dynamism missing since 1945, and with the abandonment of controls on capital flows, along with floating exchange rates, enabled rapid growth in the new economies of the far east. But it also signalled more unequal societies in countries like Britain; an overly financialised economy focused on protecting the wealth of the better off, rather than creating new wealth for the benefit of the least well off; and an over reliance on credit for consumption that would eventually help bring the global economy to its knees.
But we did enjoy a huge improvement in public services (a key contributor to poverty reduction and a more equal society) under the New Labour government led by Tony Blair and Gordon Brown from 1997. But the means by which they achieved these laudable goals - exploiting a period of credit-fuelled economic expansion to increase tax revenues to invest in improving public services - was to prove unsustainable in the long term.
The problem wasn’t that the extra tax revenues were spent on social programmes, nor that they took advantage of improved public finances to borrow more to fund additional public sector initiatives. The Conservative Party was knowingly dishonest to suggest it was out-of-control public debt that caused the 2008 financial crisis. As every self-respecting economist acknowledges, it was private debt and the complex web into which it had been woven, that brought the banking system to the verge of collapse.
I offer this potted economic history of the last 80 years for just one purpose: to show that governments like yours, Chancellor, governments that are committed to creating a less unequal, more inclusive society, generally have their hands tied by constraints imposed by prevailing economic orthodoxy, whether it be well-intentioned (Bretton Woods), ill thought through (Reaganomics) or naively optimistic (Blair and Brown).
But these constraints are no more inevitable than the fiscal rules made up by your Tory predecessors, in the spirit of which you are now setting limits on your own more socially ambitious economic reforms.
I’m afraid that without a wholesale redesign of the economic framework on the scale of Bretton Woods or Reaganomics, there is no way Labour can possibly achieve its stated social objectives.
But encouragingly, history suggests that the economic framework can be redesigned. In fact, it seems to happen more or less every forty years. So surely now it’s your turn, Chancellor.
So what might this new economic framework look like?
There are three distinct but interconnected systems that underpin the economic framework. And the rules under which these systems operate largely determine economic outcomes, both in terms of the amount of wealth generated and the way it is distributed.
These are are:
the Tax system,
the Monetary system, and
the Financial system.
The Tax System
This is the mechanism through which a portion of the wealth generated through economic activity is transferred to the state to fund its activities, leaving the rest to individuals and companies to spend or invest as they wish.
The key thing here is balance. The economist Marianna Mazzucato has written of the need for an economy in which the private sector takes responsibility for those activities to which it is best suited, while the state looks after those things that don’t lend themselves so well to market supervision.
This will only be achieved when we get past the absurd notion that private sector = good and public sector = bad. Both have an important role to play in a modern, successful economy. But if the responsibilities of the state are not properly funded it won’t be able to effectively support the private sector in its mission to create wealth.
It has long been argued that governments everywhere tax the wrong things. The majority of tax revenues come from income (ie labour), profit (ie entrepreneurship) and purchases (ie consumption). Each of these are essential to the process of wealth creation. And all of these taxes target earned income, income that accrues to individuals and corporations as a direct result of their efforts to create wealth.
It would be far more sensible to tax unearned income and wealth. In the 19th century, J.S. Mill argued that the ‘unearned increment’ of land be taxed. Henry George took this further, arguing that if land was taxed to the fullest extent, then it might become unnecessary to tax the fruits of productive endeavour - wages, profits and consumption - at all. Such a Land Value Tax was a key plank of your predecessor David Lloyd George’s 1911 people’s budget. As I’m sure you know, those measures were overturned in the House of Lords by the Edwardian equivalent of today’s financial elite: landowners.
When the value of land, and other assets like shares, precious metals, fine art, and even wine and whisky rise, no new wealth is created. Instead, existing wealth inflates the value of these assets for the sole benefit of their owners, at the same time depriving the productive economy of funds for investment.
A tax on unearned increases in asset values could play an essential role in a creating a balanced economy, and would enable you leave more money in the hands of wage earners for consumption, and corporations for reinvestment. I am pleased to see you acknowledged this in today’s budget by increasing rates of capital gains tax. But this is really just the tip of the iceberg.
The Monetary System
It always surprises me how few people understand where money comes from, who creates it, and who benefits as a result of how it is created.
The fact is that nearly all of the money in circulation is created by commercial banks when they grant loans to their customers and make a deposit of the loaned funds into the customer’s bank account. Nearly all money is created as debt, repayable with interest, by profit-making commercial banks whose customers include the government.
Why do commercial banks get to enjoy this privilege when the central bank is equally able to create money but is, in many countries, prevented by legislation from doing so to fund government expenditure? Obviously there needs to be a mechanism to prevent central banks from pumping too much money into the economy, but why should legitimate and much needed public expenditure be constrained by the cost of borrowing from commercial banks?
The late James Robertson, possibly the world’s leading authority on the monetary system and alternatives to current arrangements until his death, suggested that all money could be created by the central bank and spent into circulation by the government. This may be too radical a change for many, but I would urge that changes to the way money is created are crucial if we are to create a balanced and fair economy.
The Financial System
The financial system exists to supervise the allocation of funds for investment. Financial markets help to price these funds and assist investors in deciding where best to place their surplus wealth.
Historically they acted as an intermediary between individuals and corporations with excess funds, and others whose endeavours required investment. All new wealth is created in the real economy: where it creates the goods, services and experiences that people need and want.
In today’s economy, while the financial markets still channel some surplus funds into the real economy, they are far more engaged in complex processes designed to create more money for people who already have a great deal of the stuff.
If commercial banks can create money virtually at will, and fund managers can use this money to ‘play’ the markets and generate considerable returns for their clients without going anywhere near the real economy, is it any wonder that more and more money ends up in the hands of fewer people; money that has no connection to the amount of new wealth created in the real economy?
It gets worse: when people spend this nefariously earned money in the real economy, it reduces supply and raises prices, so those whose income is derived solely from work are priced out of the products and services which they may have had a role in creating.
For this reason alone, Chancellor, I’m sure you can see why fundamental reform of the financial system is imperative for a more balanced and inclusive economy. If you add in the tendency of the financial markets to create ever more complex means to extract wealth from the real economy - we all remember 2008 - then there really is no argument against reform.
But that’s completely unrealistic. We’ll never be able make it happen!
I’m not suggesting it’ll be easy. Change never is. But I challenge you, and anyone else who believes that we can create a more inclusive, just and sustainable world simply by tinkering with existing economic arrangements, to explain how.
We know that current economic arrangements favour the interests of the already wealthy, and mitigate against those at the bottom of society being able to pull themselves out of poverty. Since legislators allowed financial markets an effective veto over economic policy, financial market interests have ensured that wealth flows in one direction only: upwards, to the already well off.
We also know that trickle down, the idea that at least some of the wealth created anywhere in the economy will eventually make it’s way down to those most in need, only occurs in very particular circumstances: when investment creates well paid, long lasting jobs. Otherwise, it is only ever a function of the redistribution of wealth by governments through taxation.
There is also evidence that taxing wages and profits acts as a disincentive to entrepreneurship. So why not, instead of sticking with a system that distributes wealth in a way that requires it to be redistributed by the government, instead create a level playing field, so more people can play a productive role in the process of wealth creation and be properly rewarded for their efforts.
You should have a chat with your cabinet colleague Ed Miliband. When he led the Labour Party he was ridiculed in the media for using the term pre-distribution. But I understand this to mean creating an economy where more people can earn a decent living as a result of the own efforts, rather than requiring support from the state; a laudable ambition.
There is no fixed pot of wealth to be divided up more or less equally. By limiting the opportunities for gainful economic engagement to steadily fewer people, and by allowing the creation of financial mechanisms for extracting wealth from the real economy, the current system suppresses the capacity for creating new wealth. The exceptional wealth of the super rich is only possible in an economy that denies a fair chance to millions of people.
The changes outlined above are not meant to create an equal society. That would be impossible, and also unbearably dull. The objective is to bring about a rebalancing of the economy so that the poorest in society are able, through their own endeavours, to feed, house and clothe themselves and their families now, and in the future.
It can’t happen in isolation
Even if you wanted to go it alone, Britain can’t lead the world on this. It can only be achieved as part of a concerted effort on the part of all the major western economies. We all remember the Truss/Kwarteng budget and the way the financial markets reacted. On that occasion the markets were right: government strategy was driven by ideology and the figures didn’t add up. For once financial market interests were aligned with those of everyone else.
But if those interests suspect you are going to change things in ways that threaten their privileged position permanently, they won’t hesitate to make life very difficult for you.
It’s true that the financial markets don’t only manage the wealth of the super rich; they also look after the funds of anyone with a private pension, and many of those people are not especially well off.
But it is this power over the whole economy that they leverage in their unspoken threats against radical changes in economic policy. They hold the country to ransom in order to safeguard the interests of the better off, which is not only unethical but also anti-democratic. As a consequence we end up with record numbers of billionaires alongside record numbers of homeless.
If Britain alone tried to take on these interests, the economy would suffer as money flowed out of the country to places with more favourable conditions. Only if nations cooperate to change the rules across borders can the effects of financial market behaviour be tamed. This is as much a diplomatic challenge as an economic one.
And it would do no harm to forge relationships with those among the wealthy elite who acknowledge that things have gone too far. Your fellow Labour MP Liam Byrne has been working with former city trader Gary Stevenson: both recognise that wealth inequality has reached an unsustainable level because the economy has become unbalanced in the service of the most wealthy.
Or you might talk to to Patriotic Millionaires: rich people who want to be taxed more for the wider benefit of society. There is a clear argument for a wealth tax now, but if the economy were to become more of a level playing field, this may only need to be an interim measure. There will still be people who are much better off than the rest of us, but their wealth will no longer be so excessive as to impact the wealth generating capacity of the economy, and lead to the grossly unequal distribution of wealth we see today.
Nor can it be achieved overnight
None of this can be achieved overnight, nor be the result of a single budget. It’s going to take a generation at least. Lack of space prevents me from going into the imperative to mitigate the impact of climate change, but movement away from a finance-based, short-term returns-driven economy is crucial in this regard too.
And there is no doubt that the rise in support for authoritarian populist leaders is driven, to some extent at least, by a sense of economic injustice on the part of large numbers of people. People like Trump, Farage, Orban and Le Pen get very little support when the majority feel as if they are being treated fairly. Right now, many people feel their life chances are worse than those enjoyed by their parents and grandparents.
Finally, Chancellor, if you’re still reading, I must acknowledge that given the constraints of the current economic framework, the measures announced in your budget today are probably as good as anyone committed to a fairer and more equal society could have hoped for. But achieving the social outcomes we both desire in a way that ensures they can be locked in for decades to come, will be impossible without the kind of structural changes outlined above.
I noted with a smile that the formal title of the Red Book, the 164 page document issued by the Treasury containing the details of your announcements today, is: Fixing the Foundations to Deliver Change, and I can see how you have tried to match that aspiration. But as you will have gathered from the above, the foundations are not just broken, they were specifically designed to prevent you from delivering the kind of social changes you wish to bring about. Only when those foundations are underpinned with something more conducive, and the current ones are removed, will that change be possible.
A rebalanced economy that naturally limits extreme wealth at the top, and reduces poverty at the bottom, would also help mitigate the two other great threats of our time: climate change and the rise in support for authoritarian politicians. Three birds with one stone, Chancellor!
You still have time to help the world change direction; and with your colleagues in the new government you still have time to help set our remarkable civilization back on the path of progress: the kind of progress in which a dynamic and inclusive economy automatically lifts all boats, bringing security for those who currently have none, while encouraging genuine entrepreneurship on the part of those who want achieve more. This is the story you need to tell, and you need to start telling tomorrow morning.
Yours in hope and solidarity,
Mark Braund
ps: I know you’re very busy, but if you do have any time, or if you think your advisers might benefit from a little ‘reorientation’ in respect of their understanding of the way the economy works, and whom it currently benefits, then I can recommend the following books:
Ha-Joon Chang - 23 Things they Don’t Tell You About Capitalism
Francis Coppola - The Case for People’s Quantitive Easing
Henry George - Progress and Poverty
Fred Harrison - The Power in the Land
Eric Lonergan - Money (the art of living)
Steve Keen - The New Economics: A Manifesto
Marianna Mazzucato - The Value of Everything
Ann Pettifor - The Production of Money
James Robertson and John Bunzl - Monetary Reform: Making it Happen