The UK faces serious challenges: the cost-of-living crisis, which has been with us since the Global Financial Crisis (GFC) is showing no signs of abating; poverty is on the rise; the NHS and other key public services are struggling to provide the services we need; our economy is stagnant; our infrastructure is crumbling; and our environment is under threat.
And, worse, it appears that there is nothing much we can do about it. Our media almost universally carry the message that the government has very little room for manoeuvre given ‘the state of government finances’ and that our only hope is to rely on the magic of market forces, which will surely be unleashed if only we can reduce regulation and the burden of taxation.
Fortunately, we are not helpless – though we have learned to believe that we are – and the stakes are now so high that it is imperative that we realise our power:
- My working title (quickly rejected as too cheesy for publication) for the book 99% was The Frog, the Elephant and the Jellyfish – the elephant was a symbol of the learned helplessness which has led us not to tackle the problems we face;
- Continuing to rely on magical solutions is a path doomed to failure;
- It is time for us to return to reality and take action.
The elephant as a symbol of learned helplessness
What is it that prevents an elephant from running away from the circus? It is tethered. A metal chain is tied around the elephant’s foot and secured to a wooden peg hammered into the ground. Although removing the peg would be very difficult for a human, an adult elephant weighs around 5 tonnes and can lift a weight of around 300 kilograms. With some effort, the elephant could free itself, but it does not do so.
Why not? It is because training began when the elephant was a baby. Its trainers secured its leg with a chain, and the chain was fixed to a metal stake securely fixed into the ground. Naturally, the baby elephant tried to get away, but it could not do so; and the harder it tried, the tighter the chain would bite into its skin. Soon the baby elephant learned: trying to escape was both futile and painful. It stopped trying.
Now that the elephant is an adult, this knowledge is deeply ingrained – trying to escape is futile and painful – and it no longer tries. The mighty elephant is secured by simple wooden peg which it could remove at any time.
The second part of the book 99% is devoted to explaining how we have been trained to ‘know’ that there is no practical alternative to the situation we find ourselves in. Any proposed solutions are simply unaffordable.
We have internalised a large number of myths, and this acceptance paralyses us. You have probably heard all of the following statements so many times before that they feel true to you – perhaps even unquestionably true. And yet each of the statements below is demonstrably false:
- government finances are just like household finances – and since households cannot run a deficit without going bankrupt, nor can governments;
- taxing the rich will simply hurt the poor – low tax rates will create a trickle-down effect which will enrich the whole population whereas high tax rates inevitably stifle economic growth;
- the State is slow, cumbersome and inefficient and therefore unsuited to providing the products and services the population requires such as social housing – all state activities should be privatised (just look at the performance of our privatised industries to see if you believe that still);
- regulating businesses is the route to economic failure – businesses which are unregulated will naturally innovate to create the maximum benefit for society;
- money cannot just be created out of nothing.
With the training we have received, we accept that, even though we do not like the situation we find ourselves in, we simply have to live with it.
And, like the elephant, we do not free ourselves.
Time to stop believing in magic
Christmas is a wonderful time for children (at least in a well-to-do family). If you are under four years of age, then it seems truly magical: you may genuinely believe that Father Christmas, aided by his helper elves, brings presents during the night to you, to your parents, and to every child in the world. If you are a little older, then the game is slightly different: you know that Father Christmas does not exist, but you are not sure that your parents know you know; and you fear that once they know you know, you may no longer get your presents. So you pretend to believe. It is not quite so magical, but you still get presents.
The magic of market forces is an equally charming idea: a dynamic and constantly innovating system of businesses competing with each other to meet the needs of society is the best way to create and distribute the goods and services that people value. No one knows better than the individual what that individual values, so no one other than the individual should have a say. People should spend their own money as they choose, buying what they most desire at any time. Market fundamentalists believe that the best thing any government can do is to get out of the way and let the magic of market forces solve all our problems. Regulation of business should be ruthlessly repealed, taxes should be driven down to the level where governments are forced to leave almost everything to the markets: public services should disappear to be replaced by private; benefits should be replaced by charity, etc.
In the real world, of course, we have seen that market forces do not solve poverty – how could they? Without money, poor people have no way to communicate to the markets what they need. Market forces do not provide universal healthcare – poor people and those with expensive conditions are not profitable customers. Market forces do not provide high-quality education to the poor. Market forces do not solve climate change – indeed many of these dynamic and constantly innovating businesses use their wealth and power to prevent action being taken on climate issues. Market forces do not exist in sectors with monopolies – look at what our water companies deliver for the population.
So those of us who are adult know full well that the magic of market forces is not a real-world solution to the problems of society. But of course some have done well out of the current system – they are still getting presents – and others are afraid to rock the boat, so they pretend still to believe. This unfortunately includes many policy-makers and media commentators.
So we continue to hear the message that lowering taxes on business (see box for why this does not work) and slashing regulation are the key to unleashing growth. And policy-makers continue to heed that message.
| What Makes Businesses Grow?Businesses invest in growth when they have reason to believe they will get a good return on their investment. If they have significant spare capacity, they do not need to invest to meet demand and of course they do not do so. So the conditions for growth are essentially:1) demand will soon outstrip ability to meet it; and2) profitability will be high enough to ensure a return above the cost of capital.Note that these criteria do not include corporation tax rates – something that many politicians seem to think is a key determinant of growth. Why not? Well, most large businesses use discounted cash-flow techniques to assess whether they will get a return on investment. Since the government has made full expensing permanent, changing corporation tax rates will have exactly zero effect on equity funded businesses growth decisions: a 1% increase in rates will increase the value of the tax allowances and thereby reduce the effective investment by 1% and also reduce the value of the return on investment by 1%, with a zero net effect on rate of return. The same is true for a reduction in tax rates.A change in tax rates does not change the rate of return on a new investment – if it was a sound investment before the change, it is sound after; and if it was unsound before, it remains unsound after. What a change in tax rates does achieve is to alter the return businesses receive on investments they have already made. A tax cut makes shareholders richer but does not incentivise growth. |
The last Conservative government, having taken Britain out of the EU supposedly so that the ‘freedoms’ we would enjoy could turbocharge British business, undertook several exercises aimed at igniting a bonfire of EU red-tape. Interestingly, the response from the Confederation of British Industry was to explain that the vast majority of British businesses preferred continued close alignment with EU regulations.
And of course British business has not flourished since Brexit. Our economy has underperformed almost all our peers.
While there are a few areas in which careful deregulation would be positive, there is no evidence that overall it can spur growth (though like tax cuts, it is popular with some business owners as it can increase their profits). For the rest of society, however, under-regulation may be a bigger threat – the water companies are just one example.
We have a choice: continue to believe in the magic of markets and hope that, in some mysterious way, this time the magic will solve our problems; or accept reality and develop policies to tackle the problems we face.
As they say in the City, “hope is not a strategy.” It is time to stop believing in magic.
Dealing with reality
The single most important area where we need to change our thinking to accept reality is in relation to government finances. We have all been told a thousand times that the ‘state of government finances’ is an ever-present obstacle to government delivering what the population needs.
That, of course, was the reason given to justify austerity (at a time when government debt:GDP was around 70%). Cameron told us that “I wish there was another way. I wish there was an easier way. But I tell you: there is no other responsible way.” And the hugely damaging policy of austerity was born.
This is what austerity has done to the earnings of the British people.
In Cameron’s imaginary world, there was no other way. In our world, when Sunak was forced to accept the need for a lockdown during COVID (when government debt:GDP was around 95%), miraculously, there was suddenly a way to find an additional £70 billion to spend on the furlough scheme. In total since the GFC, the government, via the Bank of England, has created £895 billion in new money, when it wanted to do so.
Since the furlough scheme, finding new money has again reverted to being ‘irresponsible’ and the ‘state of government finances’ has again become a major issue. The House of Lords’ Economics Affairs Committee even launched an Inquiry into the supposed risks Britain runs because of government debt – an Inquiry that was deeply flawed from start to finish.
The reality is that lack of money is never an issue for the UK government (but lack of real resources can be: printing more money to address a supply shortfall is likely to lead only to inflation).
Instead of worrying about (arbitrary, as each Chancellor sets his or her own) fiscal rules and the ‘state of government finances’, a responsible government, serious about renewal would ask itself three questions:
- How much growth should we stimulate? Given the poor growth over the last 14 years, the answer must surely be quite a lot;
- What public services does a civilised society need? Both our own pre-financial crisis history and comparison with other developed countries shows that we need to strengthen ours considerably;
- How much risk-free savings does the private sector require? The fact that bond rates have been so low over the past 14 years suggests a very considerable appetite.
The answers to these questions shape a truly responsible Budget, as the diagram below illustrates.
In contrast to what we are normally told:
- A government deficit equals stimulus to the economy (spending more money into it than we take out in tax), something which has been inadequate for the last 14 years – a deficit is not something to be eliminated;
- Public services are a critical part of being civilised, not a profligate indulgence;
- The private sector needs risk-free ways to save (eg for pensions etc), and this is provided by government borrowing.
- And there is really no risk of our government debt becoming unsustainable.
So a determined and responsible government can find ways to deliver – ways which do not rely on sitting back and hoping that the magic of market forces will solve our problems for us.
We need:
- First and foremost to accept reality –particularly in relation to money and how it is created;
- To stimulate recovery without spurring inflation, we should plug the staggering amount of leakage from our public finances, where what should be public money finds itself either not going into public services, being misspent, or simply not being collected in the first place;
- To enable this to happen, we should rewire our economic institutions; and
- We should invest in national renewal.
We are not helpless. Our government is not helpless. We cannot afford to act helpless in the face of the challenges confronting us today.
If you think it is time for us to unlearn our helplessness and start to repair the damage, please share this article widely using the buttons below. And take a look at the 99% Organisation and join us.
