A political economist I much admire, and with whom I have co-authored, is Andrew Bake at Queen's University, Belfast. He has a new post on the Sheffield Political Economy Research Institute (Speri) blog with the above title.
As he argues in his opening paragraphs:
Political economists are pessimistic about the prospects for far-reaching and profound change following the financial crash of 2008. A common refrain is that little in the way of substantive change to the financial and economic order has been achieved and that the window of opportunity has now slammed firmly shut.
Economic ‘crises', the political science literature tells us, should be conceived of as critical turning points, the reference here being to the original Ancient Greek medical meaning of the term ‘crisis'. Questions have consequently been raised about whether the crash of 2008 and the ensuing recession was in fact a crisis at all. Certainly, evidence of a shift to a new economic paradigm or mode of thinking has been hard to find.
I fear there's a lot in that but he doesn't totally despair. Having considered a theory of change he asks:
Is it possible to identify any potential post-crash sea change moments?
Three examples suggest themselves: first, the macro-prudential ideational shift in financial regulation during 2009, which has resulted in the current effort to build macro-prudential regulatory regimes; second, the return to exploring co-ordinated adjustment to macroeconomic policy to tackle and reduce global imbalances through the Mutual Assessment Process (MAP), following a decade or more of a non-aggression pact based on the notion that governments simply put their own houses in order via inflation targeting and deficit-GDP ratios; and, third, the recent endorsement of the tools of country-by-country reporting and automatic information exchange as a basis for reducing corporate tax avoidance.
Now I admit I was surprised by the inclusion of the last, important as I think it is. Andrew says though:
These ideational changes share common features. One is that all of these ideas ran contrary to prevailing sentiment and were unpopular ideas cursorily rejected by powerful interests and leading policy makers during the boom of the 2000s. In each case, the financial crash and its fall-out have resulted in renewed interest in these approaches, followed by their acceptance by leading governments.
Another is that the pressure for each of these changes came primarily from technical experts.
As he put it
In the tax case, the arguments in favour of a new approach were mainly developed by the Tax Justice Network, comprised of a former Jersey tax official turned whistle-blower, a professor of accountancy, a professor of law and a chartered accountant turned campaigner, leading to the conversion of key OECD officials and eventually resulting in support from G8 and G20 governments.
In each case, it is striking that it has been experts pushing change in relatively technical policy areas that have had success in producing shifts in thinking and priorities.
But it's not all good news:
However, these developments also serve to illuminate one of the most striking features of post-crash political economy: namely, the complete absence of a co-ordinating discourse about the crash that ties all these (and other) disparate pieces together. Politicians across the advanced world — from whom any new grand co-ordinating narrative must surely come — have shown themselves to be either incapable of, or largely uninterested in, developing new ideas and discourse about the lessons of the crash in ways which draw on and connect to the lessons learned by technocrats.
This raises several further important questions. Why is democratic politics, and the political leadership of major political parties, seemingly failing in this endeavour, and how can this be overcome? What kind of common framework of thought, explanation and narrative could plausibly link up these seemingly disparate pieces of a new jigsaw? These are difficult questions, but they highlight the need for research institutes, such as SPERI, to contribute potential answers by being bold enough to move beyond narrow academic questions of causation and explanation and enter the world of prescription.
It also highlights the need for technical experts to continue to communicate why we think change so important, and that there is a narrative behind it; in this case one that makes the case for greater equality as the foundation for stable and healthy markets and as the basis for the vital government services that underpin almost everything of value in society.
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One or two snags. Our politics is no longer democratic or remotely so. Our “leadership” neither leads nor knows how to. There is no common framework nor is there likely to be. It is not a jigsaw where the pieces should fit together, it is a random collection of items rather like my waste paper basket after a few weeks. As for moving to “prescription”, this is what happened in the 20’s and 30’s in certain parts of Europe. That ended badly as well.
Richard,
In response to your ‘But it’s not all good news:’ onwards, and with regard to macro-economics, how does stuff like the following get on to the agenda (this is the Abstract to a paper I have written, but I am sure others have similarly-radical insights to offer)?
Perhaps the least-coherent aspect of Keynes’s ‘habitual modes of thought and expression’ in macro-economics is the all-pervasive and ill-considered use of the expression ‘money’. This paper starts from first macro-economic principles, and uses process re-engineering techniques in an attempt to define a more coherent paradigm for the concepts currently ‘enclosed’ by that expression.
This paper argues that there are two radically-distinct concepts currently ‘enclosed’ by the single expression ‘money’, and that, if we wish to facilitate integrity of thought and expression, we must reserve two radically-distinct expressions for those two radically-distinct concepts, and we must consider those two radically-distinct concepts in isolation before considering policy options (potentially to try to link them). More specifically, in this paper:
1. The expression ‘Wealth’ is reserved solely to encompass the concept of Assets and Liabilities (‘money’ and non-‘money’ without distinction); as expressed in balance sheets.
2. The expression ‘Currencies’ is reserved solely to encompass the concept of Units of Measure of Value (such as the US Dollar, the GB Pound, the Euro, the Yen, etc.). Units of measure are merely figures of speech. They cannot in themselves possess the characteristic of value, and their sole role in a balance sheet is in the enumeration of the values of Assets and Liabilities (‘money’ and non-‘money’ without distinction).
With regard to ‘Wealth’ (as defined in this paper), this paper argues that the sole worthwhile macro-economic distinction (i.e. as opposed to legal, administrative or slang distinction) between different types of Wealth is not the distinction between ‘money’ Wealth and non-‘money’ Wealth, but the distinction between Owned-Wealth (‘money’ or non-‘money’ without distinction) and Owed-Wealth (‘money’ or non-‘money’ without distinction). More specifically, in this paper:
1. The expression Owned-Wealth (‘money’ and non-‘money’ without distinction) is reserved solely for anything which appears in precisely one balance sheet. Each such item is therefore a ‘net-equals-gross’ increment to ‘the wealth of nations’.
2. The expression Owed-Wealth (‘money’ and non-‘money’ without distinction) is reserved solely for anything which appears in precisely two balance sheets: once as an asset; and once as an equal and opposite liability. Each such item is therefore a ‘zero-sum’ increment to ‘the wealth of nations’. Indeed, the global network of Owed-Wealth is simply a zero-sum book-keeping exercise which ‘keeps the score’ on where we are in our non-barter trading and employment activity. Buyers/employers effectively ‘borrow’ from sellers/employees at the point of trade/employment (and record that Owed-Wealth in payables/receivables accounts). Buyers/sellers and employers/employees then use the cash/banking processes merely to ‘intermediate’ that Owed-Wealth. Those who have sold more than they have bought accumulate net-positive Owed-Wealth, and those who have bought more than they have sold accumulate net-negative Owed-Wealth. The aggregate (of course) is zero.
Indeed, this paper argues that macro-economists, central bankers and politicians should ignore all concepts, expressions and aggregates associated with the expression ‘money’. The distinction between ‘money’ Wealth and non-‘money’ Wealth is (or ought to be) a purely-administrative factor; of interest only to students of the history of routine commercial and financial administration, and completely-irrelevant to macro-economics.
With regard to ‘Currencies’ (as defined in this paper), this paper argues that macro-economic factors whose value is determined by fiat ought to be inflation-linked passively ‘by default’. This inflation-linking ought to include Currency-conversion rates (conventionally called Currency-‘exchange’ rates), Owed-Wealth (or base interest rates), and scheduled payments. This passive inflation-linking would establish the global zero-sum network of Owed-Wealth as a global, macro-economically-neutral, level-value frame of reference for ‘real’ macro-economic activity (i.e. production, consumption, trade and employment). The macro-economic issues currently associated with inflation and Currency-‘exchange’ rate instability should be seen as self-inflicted wounds caused by wilful variations from that ‘default’ inflation-linking. Thus, this paper argues that macro-economists, central bankers and politicians should promote that ‘default’ inflation-linking through global and state institutions from the IMF downwards, should abandon ‘monetary’ policy altogether, and should confine macro-economic policy exclusively to fiscal policy. The concept of Currencies is (or ought to be) a purely-administrative factor; of interest only to students of the history of routine commercial and financial administration, and completely-irrelevant to macro-economics.
With regard to ‘market forces’, this paper argues that the theoretical self-optimising influence of ‘market forces’ is based not on the interplay between ‘supply’ and ‘demand’ in the context of some form of ‘market’, but on the interplay between production and consumption of Owned-Wealth within the context of a supply-chain. That interplay between production and consumption results not in stable-equilibrium investment and prices, but in business cycles around stable-equilibrium investment and prices. For Owed-Wealth, there is no such thing as production, consumption or a supply-chain. Thus, the market prices of Equity and Securitised Owed-Wealth (as well as ‘speculative’ Owned-Wealth, such as land and raw materials) are dominated by speculative investment/disinvestment. Self-fulfilling expectations lead to ‘bubbles’, which are exacerbated by excessive leverage, derivatives and other financial engineering. In the interest of economic stability, the central banking system (including the global and state banks and regulators from the IMF downwards) should moderate conservatively the level of such financial engineering on behalf of creditors (rather than allowing politicians, bankers, corporate executives, and financial professionals free reign in their own self-serving interests). In doing so, they should follow the precautionary principle in regulating financial innovation (i.e. financial innovation should be ‘prohibited unless specifically approved’, as opposed to ‘permitted unless specifically prohibited’).
Finally, this paper argues that the central banking system already in effect acts as implicit guarantor for every Non-Equity Owed-Wealth liability of every financial institution and state (‘money’ and non-‘money’ without distinction), and that that role should be made explicit. The central banking system (including the global and state banks and regulators from the IMF downwards) should act as borrower/lender of first/default recourse for banks and states. This would eliminate (the need for) inter-bank Owed-Wealth, and would eliminate bank liquidity as a macro-economic factor. In order to moderate the risk implicit in such a facility, the central banking system should itself commission all valuation and auditing standards and processes conservatively on behalf of creditors (rather than allowing politicians, bankers, corporate executives, and financial professionals free reign in their own self-serving interests). Again, in doing so, they should follow the precautionary principle in regulating financial innovation. Indeed, the vast majority of financial innovation (including the securitisation of Owed-Wealth such as with GB Gilts, US Treasuries, and other state, commercial and mortgage-backed securities) should be outlawed in favour of simple inflation-linked current-accounting.
Richard,
In response to your ‘But it’s not all good news:’ onwards, and with regard to tax justice and the polarisation of wealth and income, and regardless of your magnificent efforts, how does stuff like the following get on to the agenda (this is the Abstract to a paper I have written, but I am sure others have similarly-radical insights to offer)?
We are all familiar with the seemingly inexorable increase in economic inequality. Keynes’s ‘wealth of nations’ increases, but the increases are ‘enclosed’ by an increasingly-wealthy elite. The wealthy elite have a lower marginal propensity to consume than those less fortunate. They have run out of ways in which to consume their wealth, and simply get richer. The ‘trickle-down’ effect simply fails to materialise. The less fortunate are excluded and marginalised.
Taxation is (or ought to be) the primary mechanism for equitable (re-)distribution of ‘the wealth and income of nations’. Democracy is (or ought to be) the primary mechanism for promoting measures to (re-)form taxation in order to deliver that equitable (re-)distribution. Unfortunately, the secrecy, obfuscation and (spurious) complexity built in to the current accounting and taxation processes pre-empts democratic ‘engagement’. The rich and powerful (and their agents in the accounting and taxation professions) have ‘enclosed’ the debates by default and by FUD (Fear, Uncertainty and Doubt).
This paper uses process re-engineering techniques in an attempt to define from first principles the nature and consequences of taxation, and to define a paradigm and blueprint for the end-game of the campaign for reform of the accounting and taxation processes. It argues that, irrespective of the administrative alignment of current tax processes, all taxes are already levied in economic terms out of a comprehensive definition of Gross Enterprise Profit; the profit gap between the consume value of the utility created/added/enclosed by enterprises (for which read gross prices), and the disutility of the labour input to enterprises (for which read net wages). However, taxes are levied out of that Gross Enterprise Profit in one of two different ways:
1. In the UK at the turn of the millennium, Payroll-Uplift Taxes (on Gross Enterprise Profit) included Income Tax on employee earned income, employee National Insurance Contributions, employer National Insurance Contributions, and Value-Added Tax on the value added through payroll costs. Payroll-Uplift Taxes are levied in proportion to payroll costs, irrespective of the profitability of those payroll costs. Indeed, for an enterprise to break even, that enterprise must be able to charge almost £2 as the gross price for the value added by each £1 of net wages. Thus, Payroll-Uplift Taxes pre empt propositions which cannot create/add/enclose almost £2 of utility for every £1 of net wages, and impose a (relatively) penal rate of tax, and risk of tax-induced loss, on high-employment enterprise.
2. In the UK at the turn of the millennium, Non-Payroll Taxes (on Gross Enterprise Profit Net of Payroll-Uplift Taxes) included Corporation Tax, and Value-Added Tax on the value added through Gross Enterprise Profit Net of Payroll-Uplift Taxes. For the purposes of this paper, the concept of Non-Payroll Taxes also extends to include Capital Gains Tax, Capital Transfer Tax, Inheritance Tax, Income Tax on un-earned income, and Income Tax on super-normal earned income. Non-Payroll Taxes do not distort economic activity. Profitable enterprise remains profitable.
Unfortunately, without global cooperation, productive nations have to compete with tax havens for the divertable tax base (i.e. Gross Enterprise Profit net of Payroll-Uplift Tax), in a downward beggar-thy-neighbour spiral to the point where Gross Enterprise Profit net of Payroll-Uplift Tax becomes virtually untaxable. In order to maintain tax revenue to fund social (re )distribution and communal spending, socially enlightened nations find themselves in a further downward spiral as they have to increase the punitive burden of Payroll-Uplift Taxes on the utility added by a working population shrinking as a proportion of the total population. Thus, contrary to all natural justice and economic efficiency, the effective rate of Payroll-Uplift Tax is almost invariably far higher than the effective rate of Non-Payroll Tax.
However, regardless of global cooperation, each tax regime could implement a revenue-neutral and distributionally-neutral ‘inversion’ of all taxes into the enterprises which create/add/enclose the gross profit from which those taxes are levied. Then, with global cooperation amongst the powerful nations on an increasing minimum effective rate of Non-Payroll Tax, and on measures to exclude tax avoidance and tax havens, each tax regime could implement a revenue-neutral ‘rotation’ of the tax base within each enterprise from Payroll-Uplift Tax to Non-Payroll Tax; to bear more directly and more fairly on the gross profit from which both such taxes are levied.
Thus, this paper goes on to argue that the campaign for reform must develop and maintain a strategic focus on the need to build a global critical-mass agreement to the following:
1. A rising global minimum effective rate of Non-Payroll Tax. By default, implementation in each tax regime should be combined with decreases in the effective rate of Payroll-Uplift Taxes; to be zero-sum in revenue and distributional terms. Eventually, the rising global minimum effective rate of Non-Payroll Tax should rise above the falling rate of Payroll-Uplift Taxes in all tax regimes. Indeed, in many tax regimes (particularly third world regimes), Payroll-Uplift Taxes could be set to zero.
2. Practical measures to allow complying regimes to exclude diversion of tax bases through non-complying regimes:
a. All cashflows (no questions asked) from a bank in a complying regime to a non-complying regime should be taxed as ‘profit’ by the sending bank (at the rising global minimum rate of Non-Payroll Tax).
b. All cashflows (no questions asked) from a non-complying regime to a bank in a complying regime should be taxed as ‘profit’ by the receiving bank (at the rising global minimum rate of Non-Payroll Tax).
Thus, cashflows diverted through non-complying regimes would in fact be double-taxed (at the rising global minimum rate of Non-Payroll Tax) in complying regimes, without challenging the ‘sovereignty’ of the non-complying regimes. If there was no potential to reduce taxes by diverting cashflows through non-complying regimes (and indeed, if there was a certain and substantial increase in taxes in such diversion), the incentive for such diversion would be stopped ‘at source’.