Rory Stewart versus Zack Polanski

Both of these guys need to up their game

With apologies, especially to younger readers.

There’s been a fair amount of (admittedly niche) media coverage of Rory Stewart’s argument with Zack Polanski, when the Green Party leader¹ was interviewed by Stewart and Alastair Campbell on a recent episode of their Leading podcast.

It wasn’t so much an argument as a dressing down, in fact: when Polanski made a very poor job of responding to Stewart’s forensic examination of his economic plans and the thinking behind them, the former Tory minister didn’t hold back.

Although Stewart himself struggles to escape the straitjacket of economic orthodoxy, he was quite right to expect Polanski to have coherent answers about his plans to sell an alternative economic vision to the electorate, especially as the bar is set so much higher for an insurgent trying to overturn the status quo.

This was a shame because, up to that point, Polanski, despite the remarkable speed at which he talks, had outlined his vision for a more tolerant, compassionate and inclusive Britain rather persuasively.

Economists Worth Listening To

Asked by Stewart to name some of the economists he was listening to, he mentioned Grace Blakeley, James Meadway, Gary Stevenson and Richard Murphy. All four have built excellent critiques of the current economic system, and have a sizeable following among people already persuaded of the need for radical change, but it’s fair to say their message hasn’t broken through into the mainstream.

Stewart was quick to point out that none of them are currently working as academic economists, which is true. But a first in PPE from Oxford (Grace), and a first in economics from the LSE plus a PhD from London (James), give the first two the requisite credentials, I think. Gary Stephenson, who was interviewed in a previous episode of Leading, made millions as a city trader before becoming an articulate critic of the way the financial markets distort the real economy, and studied for an MPhil in economics at Oxford. Richard Murphy is not an economist: he is an accountant by training, and a tax expert, but he has written widely on the monetary system.

Had he been better briefed, Polanski might also have mentioned Steve Keen or Michael Hudson, both renowned economists working from within academia to try to reform their profession and persuade politicians that there is an alternative to the current set up.

He might also have thrown into the ring the names of three economists no longer with us: Hyman Minsky, Herman Daly and Mason Gaffney, each of whom spent their careers trying to persuade the world that the underlying assumptions of mainstream economics renders it all but useless as a guide for politicians struggling to meet the expectations of voters. The hijacking of the discipline of economics in the interests of minority wealth and privilege has been well documented, not least by Gaffney.

If Stewart, or anyone else, would like to delve deeper into the work of the many excellent economists trying to change things, I would also suggest checking out the work of Ann Pettifor, Frances Coppola and Mariana Mazzucato, three brilliant thinkers who happen to be here on Substack. And if you want to immerse yourself in the work of academic economists of the kind Stewart would surely approve, then check out the World Economics Association, which publishes dozens of peer-reviewed papers every year, all of which expose the intellectual paucity of the prevailing neo-liberal economic paradigm.

While Polanski didn’t have the answers he should have had, Stewart remains frustratingly unable to see beyond the narrow confines of conventional economic thinking. Most of the problems he and Campbell discuss on their podcast each week have no solution without a fundamental rethink of the economic system. Polanski understands this, even if he isn’t across the detail.

The Deficit, the Debt and the Bond Markets

During their discussion, Stewart raised the issue of the size of the UK government’s debt and the cost of interest repayments. These payments - somewhere between 8 and 9 per cent of total government spending - massively constrain the ability of the government to deliver on its promises to reduce poverty and improve public services.

In order to plug the gap between tax revenues (which fluctuate dependent on the state of the economy) and expenditure (commitments which are usually difficult to avoid) governments have always borrowed money from the bond markets.²

Most of this debt is held by large financial institutions: banks, insurance companies and pension funds, among others. But they don’t just buy this debt when the government issues new bonds. Once issued, these bonds are traded on a secondary market (just like the stock market) that exists so that bondholders can offload them before they mature. This secondary market largely determines the price the government has to pay for borrowing because it effectively sets the interest rate demanded by investors each time the government needs to borrow more.

Many people, along with some economists, assume this to be the natural order of things: if governments can’t raise the money they need via taxation, they have to borrow from the markets. And as the markets set the price at which they are prepared to lend, the government has no choice but to accept it.

But is this really a natural order, or is it an order that results from political decisions that have been made, over years, that are not necessarily in the wider public interest?

Rather than simply accept the lenders’ terms, the government could issue bonds with a condition that they are not traded on a secondary market. They could say that only the original purchaser is entitled to redeem them when they mature. Investors might respond that they wouldn’t be prepared to lend money under such arduous terms, but financial institutions need safe investments for a sizeable proportion of the funds they administer.

Which brings us to two important questions: First: whose money is the government borrowing here? Answer: anyone who has savings or has put money into a private pension. Second: whose money is it using to pay the interest accrued? Answer: taxpayers’ money.

When the government pays interest on the money it has borrowed, it does so from tax revenues. And, as the burden of taxation falls most heavily on low to middle-income earners, because this group comprises the majority of the working population, these repayments constitute a transfer of wealth from those with little in the way of savings, to those who have plenty. It is a transfer of wealth from poor to rich, and it is a direct consequence of the way the government is currently obliged to borrow money.

Institutional investors like buying government bonds because they are deemed a safe bet: they come with a government guarantee that they will be repaid. And they will be: as long as governments retain the ability to raise revenue through taxation, today’s borrowing can be repaid from tomorrow’s tax revenue. But the reason government bonds are so safe is that governments cannot default on loans made in their own currency, because they are able, through the central bank, to create new money.

Where does money come from

After the financial crisis of 2008, when it was decided the commercial banks needed help to beef up their reserves, and that the economy was further threatened by a lack of liquidity, this is exactly what happened: the Bank of England created new money which it used to buy back government bonds (ie to redeem them early) and so inject cash into the financial markets. This process was known as quantitative easing.

If the central bank can create money like this, why can’t it do the same to plug the deficit, to repay maturing bonds as they become due, or to cover interest payments? It could, although it would have to be careful not to stoke inflation. If there is too much money sloshing around the economy, chasing too few goods and services, then inflation will inevitably follow.

The late economic philosopher James Robertson, who devoted much of his life to the study of monetary economics, concluded that the best way for all money to be created would be for the government to spend it into existence. Robertson’s idea is a radical one, but it behoves us to think seriously about how money is currently created (mostly by commercial banks when they make loans), and who benefits from these arrangements.

My point here is not necessarily to spark a debate about money creation, but rather to point out that mainstream debate about the economy, about government spending, about taxation, about the deficit, and about borrowing takes place under a set of assumptions about economics which are not part of any natural order: they derive from the way successive governments have given away economic power and thus allowed the financial markets to dictate policy.

Telling a Relatable Story

All that said, the intricacies of economic theory and policy are never likely to win anyone an election. Polanski is right: we have have to find effective ways to challenge minority wealth and power, and while that will require us to redesign the economy, the moral argument for doing so might be an easier place to start.

Polanski, or someone like him, needs to tell a relatable story about how democracy has been usurped by minority interests, and how ordinary people will not see any improvement in their lives until something is done to bring the economy back under democratic control. Not only because this is the right thing to do, but because it will enable more people to make an effective contribution to the process through which new wealth is created, and to earn a decent living for themselves.

There is an alternative to current arrangements. It is perfectly possible to engineer a more inclusive economy, and with it a kinder society, and my sense is that most people would support that objective. Let’s hope Zack is up to the task, and if he isn’t, that someone else comes along who can credibly explain to Rory Stewart how they would go about it.

1. For my overseas readers, since Polanski became leader of the Greens they have improved their position in the opinion polls considerably. He is a good media performer, a passionate advocate for a fairer society, and seems able to relate to ordinary voters.

2. Bonds are simply a promise by the government to pay a certain amount on a particular date, and therefore carry an implied interest rate.