Funding public services: A Bevanite approach

Every economist knows there's a big problem with this election campaign. Both main parties are ruling out increases in income tax and national insurance but such pledges are, as Helen Miller says, a "mistake" given that tax rises will be necessary to prevent further deterioration in the public services.

There is, however, a perspective that's missing here - one provided 70 years ago by one of our greatest politicians.

In his 1952 book In Place of Fear (pdf), Nye Bevan anticipated our current problem. There is, he wrote, a "deep antagonism between public and private spending" because people don't want higher taxes but do want more public spending:

Unless a radical solution is found, the political parties will tend to revolve around the ridiculous issue of sixpence on or off the income tax. This is pure Liberal polemics. In these circumstances the social services become a political football, kicked about from one election to another.

So, what is this radical solution?

It's not for the government to borrow more. Of course, everyone in the 1950s knew that governments could in principle borrow heavily; they had done so during the war and Abba Lerner's theory (pdf) of functional finance was well-known. But Bevan excluded this option because "the perils of inflation [are] ever threatening in conditions of full employment." 

Nor, he thought, did the answer lie in immigration: "in our crowded island no one should pretend that a shortage of labour in a particular industry is solved by bringing workers in from abroad."

Instead, Bevan's answer was nationalization.

The conflict between private and public spending, he thought, arose from the fact that "the property-owning classes believe that the function of disposing of the economic surplus should lie with them." But, he added: "once a larger proportion of industry is publicly owned, a larger part of public spending could be financed out of the surplus which now accrues to private owners."

Nationalization for him was a way of funding public services. And even a little nationalization would go a long way. In 1938 the profits of the mining, utilities and transport and communications sectors alone were equivalent to one-fifth of all public spending, and half of government spending on goods and services.*

Today, of course, things are a little different. But the general point still holds. The earnings of FTSE All-share companies are almost £180bn, well over one-sixth of public sector current spending and about as much as government spending on health and social care. Which is not nothing. Even a fraction of it dwarfs the £6bn that would be raised by the unthinkable atrocity of raising the basic income tax rate by a penny.

Hence the case for a sovereign wealth fund, as advocated (for different reasons) by economist such as Eric Lonergan, Roger Farmer and Miles Kimball. The government should, they say, issue bonds to buy productive assets, just as Bevan advocated.

You might object that this is no longer such a great idea now that the cost of debt finance is higher now than it was in the 2010s. Not quite. The dividend yield on the All-share index is 3.5 per cent, two percentage points higher than the real cost of government borrowing. Which means that borrowing to buy equities should be profitable over the long-run, and these profits could be used to help finance public services.

Of course, this doesn't solve the problem of how to fund public services today simply because it would take years to gradually build up the wealth fund. But that merely shows that starting a sovereign wealth fund is like planting a tree: the best time to do it is years ago. One function of good government should be to prepare for the future, which argues for starting to build a fund now.

There are, of course, objections to this. One is that it is not especially socialist. Under this sort of scheme companies would still be run for profit rather than for social purposes; it could not be otherwise given that the SWF would be a minority shareholder with little influence on management. All the drawbacks of capitalistic workplace practices - hierarchy, domination and inequality - would therefore remain**. There are big differences between a sovereign wealth fund and Meidner-type plans advocated (pdf) by Markus Furendal and Martin O'Neill in which ownership of companies is gradually transferred to their employees.

Indeed, it is perhaps capitalists who might welcome an SWF more than many, as the gradual build-up of such a fund would crate a guaranteed demand for equities whilst it would over time give governments more incentive to ensure that policies don't depress share prices.

Another objection comes from MMT. This says that the constraint upon expanding public services is not the inability of the government to raise finance but a lack of real resources: capital, labour, management skill and so on. Insofar as profits now are saved rather than spent, shifting them to funding public services would raise aggregate demand which would - at times of near-full employment - be inflationary. To offset that would require either higher taxes or higher interest rates. An SWF cannot avoid the basic fact that when an economy is near full capacity more public spending requires less private spending. It does not, therefore, solve the problem***. (Things are of course different when there are idle resources.)

The pros and cons of the idea, however, are not my point. The point is that the idea isn't even on the agenda, despite it having been advocated by top economists and by one of the most revered politicians of the 20th century. Which shows us that the purpose of politics is not to find technocratic solutions but to maintain private control of economic surplus.

And doing this requires not that some questions - such as the one Bevan raised of who should control the economic surplus - must remain off the agenda: one of the ways is which capital exercises power is its influence over what gets debated and what doesn't.

Silence on such questions requires a form of institutionalized stupidity. Here's Bevan on the logic of nationalization:

The fact that an industry is nationalized should provide additional income to the state for, among other reasons, compensation is paid at a low rate of interest on gilt-edged securities while the profit rate extracted in private concerns is usually much higher*.

Contrast this to Rachel Reeves, claim that "spending billions of pounds on nationalising things...just doesn’t stack up against our fiscal rules.” A self-taught miner 70 years ago knew that balance sheets have two sides, whereas an Oxford-educated former Bank of England economist today pretends not to know it. Which is a sign of how politics has been captured by institutionalized stupidity.

I wouldn't say that such stupidity is necessary to defend the status quo. But it's remarkable how many politicians give the impression that it is.

* Source: Feinstein Statistical Tables of National Income, Expenditure and Output of the UK, 1855-1965.

** Except insofar as it is profitable to ameliorate them. (which might be a big "except" but that's another story.)

*** I think this is a crucial objection. But it's not one available to those who reject MMT, as most of the Labour leadership implicitly do. 

Comments

[TickyW]

A debt for equity swap is not unknown in business takeovers (or mergers). The predator company offers to issue debt to the prey's shareholders in exchange for the prey's shareholders surrendering their shares to the predator company. Voila, the prey is swallowed by the predator.

If business can do this, why not the government? I recall, hopefully correctly, this approach was used to nationalise the Bank of England

[Danny Axford]

"the perils of inflation [are] ever threatening in conditions of full employment."

There's a few threads that could be tugged on in that rather sweeping statement.

[Alex]

I do agree that this idea should be on the agenda. But there is a big problem with it, and with nationalization for other reasons, not addressed here. That is, that in the absence of some clever solution, these assets are merely future giveaways to Tory cronies (or given their current electoral nadir, perhaps the cronies of some right-wing successor party).

Some serious consideration needs to be given towards a poison pill mechanism for such assets. Under our current constitutional arrangements, where a parliament cannot bind its successors, the only solution I can think of would be to create some international organization for holding the assets, by treaty, so that the UK government can't unilaterally flog them off again. But perhaps there are others.

[MJW]

Nationalising things doesn't have a fantastic track record, once nationalised they become monopolies under political control and subject to political clientelism. Some bang on about Tories underinvesting in nationalised industries and flogging off the family silver and other such bollocks, but they don't acknowledge that once captured by client groups investment benefits the client groups not the consumer/public. Even today there is resistance to modernisation in those industries where there is a high level of government involvement e.g. railways are effectively monopolies operated under contract by the DfT, subsidy demands for loss making blast furnace steel production etc...

It's a truism that everyone wants more public spending on the things they like, and ideally for someone else to pay for it, but this has never been tenable. At some point the state has to prioritise the things it should be involved in and the level of involvement it actually needs. We get far less benefit from public investment than we should because of all the interests who want a finger in the pie. I read somewhere recently that the feasibility study for a new (as yet unbuilt) Thames crossing cost more and took longer to complete than it took one of the Nordic countries to design, build and open an actual river crossing of a similar requirement. HS2 is hideously overblown due to all the interests dragging on it.

[CA]

https://x.com/CJFDillow/status/1797882561739501786

Chris Dillow @CJFDillow

"Politics, like business, can select for psychopathic traits":

https://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2024/02/psychopath-politicians.html

BBC News (UK) @BBCNews·Jun 3

Starmer says he is prepared to use nuclear weapons

https://bbc.in/3X7XBrg

2:46 AM · Jun 4, 2024

[Kester Pembroke]

the mainstream theory government finances spending by tax, borrow or print is wrong. In the UK all government spending works by creating money and there are unlimited intraday overdrafts at the central bank borrowing happens at the end of the day. Money can’t leak abroad it is a swap/exchange, not a conversion. If there is no saving or pay back bank loans in the spending chain you will get all government spend back as tax. Similarly, if people spend from savings or take out bank loans and spend no saving or pay back bank loans get all that money back as tax too. Government spend at Tesco get some back as VAT (taxes as ‘cashback’), Tesco pays its employees another chunk taken by government in income tax and so forth.

https://publications.parliament.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm

Point 20 says:

“ensure that its position is balanced at the end of each day”

Also at diagram in bottom surplus/shortfall in consolidated fund.

[Kester Pembroke]

As to MMT:

https://new-wayland.com/blog/labour-wants-more-batley-grammar-schools/

https://new-wayland.com/blog/structural-deficits-are-deflationary/

[Dave JJ]

Your claims cited on Novara media that we've got full employment are utter nonsense.

We've got at least 2.5 million people unemployed, 1.5 million of which claim UC which doesn't even cover basic costs. Although of course we've no idea whether those figures are the full story because we've no idea how many people are actually in the country - it's likely to be 10 million people more than they are admitting to

If we had actual full employment wages would be going up and up and up and people would feel able to organise in their workplaces far more easily. Well that isn't happening and we have several million people officially classed as destitute.

You make these claims because you're an immigration obsessive who has no business calling himself a "Marxist". Mass immigration is a big business agenda and it has dangerously over-populated this country (we are a net importer of food), created a massive housing crisis and meant that less is being shared out among more.

[Blissex]

«Your claims cited on Novara media that we've got full employment are utter nonsense. We've got at least 2.5 million people unemployed, 1.5 million of which claim UC which doesn't even cover basic costs.»

The contrarian case is easy to make:

* In 2009 there were 2.5 million unemployed and 62 million people in total, now there are 2.5 million and 71 million residents. That in 2009 there was a huge labour shortage of 9 million people. Since the number of unemployed today is the same as then, that means there is still a huge labour shortage, probably another 9 millions.

* More generally according to Economics there is a labour shortage whenever wages are above workforce reproduction level. Until the marginal surplus labourers "exit permanently" the labour market there is a labour shortage.

* Global market wages are $1-2 per hour, those in the UK are $10-20 per hour, this allows UK workers to price gauge and exploit UK employers, and the only reason for this is that there is too little immigration. It is also easy to argue that the reason is racism: the UK is 85% white, the global market is 85% people of colour, it could be called a situation similar to "apartheid" south Africa where white supremacist lived in 85% white nice neighbourhoods and had wages 10 times those of the 85% percent of the non-white workers mostly living in slums.

«If we had actual full employment wages would be going up [...] created a massive housing crisis»

Considering that (85% white) UK workers are still being paid 10 times more than (85% people of colour) global market workers, that UK real wages have fallen since 2009 on average by 8% is not that significant.

The marvelous housing boom by which real house prices have improved by 80% (and rents almost as much) in the same period means that labour costs are falling as property incomes are rapidly rising, bringing much more affluent lifestyles to many millions of UK native families. Thanks to that everybody wins and nobodies lose (note that I did not write "nobody loses").

«You make these claims because you're an immigration obsessive who has no business calling himself a "Marxist"»

Our blogger is an *internationalist* Marxist, he cares about workers everywhere, not just UK workers, and I think that he reckons that immigration is the best way to lift out of poverty the (85% people of colour) great mass of global workers. As we can easily check the countries with the highest emigration, for example Mexico, Pakistan, Nigeria, have become much less poor than those with lower emigration, for example Japan, Brazil, China, Ireland. Also consider the benefits for the people of the countries for high immigration mentioned above: lower labour costs and higher property incomes.

«Mass immigration is a big business agenda»

It is actually widely discussed as a DEI anti-racist agenda: only white supremacists want to exclude people of colour out of their 85% white "the garden" and keep them struggling in 85% non-white "the jungle".

:-)

More seriously "labour shortage" is a flexible term and the real discussion is about income distribution.

[Blissex]

«More seriously "labour shortage" is a flexible term and the real discussion is about income distribution.»

Whenever there is a claim about an economic or political situation I always ask myself "for whom?" because the answer is quite rarely "for (nerly) everyone".

A good concept to apply accordingly is that of "our own". Most people implicitly think of "our own" as the group that matters to them.

For example when some people in the UK claim that something, like healthcare free at the point of use, or decent welfare, or affordable housing, etc. is a "human right", their notion of "human" extends as far as those they consider "our own", which almost never includes people outside the borders, and often a lot less people than those inside.

[Blissex]

«If we had actual full employment wages would be going up [...] created a massive housing crisis»

«Most people implicitly think of "our own" as the group that matters to them.»

For example the commenter above does not seem to consider as "our own" the foreign workers who want to immigrate, the domestic employers who hire them, and the domestic property owners who hugely benefit from higher housing demand, all of whom benefit from immigration.

[Ben Philliskirk]

TBH, the idea that the UK has 'full employment' as well as the idea that the UK labour market is 'swamped by immigrants' are influenced by the 'lump of labour' fallacy. The UK shows that it is quite possible to have areas of labour shortage while at the same time sections of the labour market see an almost inexhaustible supply of cheap labour. In certain parts of the economy workers are scarce partly due to government policy, to unwillingness to train staff, and to 'credentialism'. Alternatively, there are massive swathes of the service economy that employ the 21st Century 'industrial reserve army', now comprising millions of students, working mothers and retired people returning to work. Most of these people are either happy to work part-time and/or less securely, or are forced to.

The problem is pretending that all workers are in the same position and subject to the same economic forces.

[Jan Wiklund]

"A self-taught miner 70 years ago knew that balance sheets have two sides, whereas an Oxford-educated former Bank of England economist today pretends not to know it. Which is a sign of how politics has been captured by institutionalized stupidity."

There are two things to point out in this statement.

First, it is not only in economics idiocy reigns. We have foreign policy, for example, where it is considered enough to grandstand and to bully, for example to get the Chinese to obey. While we simply forget that it was our own capitalists who put the power into the Chinese hands with "outsourcing" of their productive resources.

Second, are there such things as self-taught miners today? In Bevan's time there were tens of thousands of them, becase there was a labour movement with an interest to take over society and for that reason self-taught. When people lost faith in taking over, and for that reason lost faith in self-teaching, stupidity had plenty of space to seep into.

It is not easy to correct any of these two.

[Blissex]

«the idea that the UK labour market»

Careful there, the conventional wisdom is that the very idea of an "UK labour market" (85% whites) is racist, as there is only a global labour market (85% people of colour).

[Blissex]

«foreign policy, for example, where it is considered enough to grandstand and to bully»

That is not foreign policy, it is just domestic electioneering. The UK has not had a foreign policy since at least Suez. Boris Johnson who is very politically astute knew when he was Foreign Secretary that his role was 95% ceremonial, but because there was some linger prestige attached to it because it once mattered (in the eras of redcoats and gunboats) it could be used for posturing for domestic electioneering.

https://www.theguardian.com/uk-news/2016/jul/06/with-you-whatever-tony-blair-letters-george-w-bush-chilcot
Blair to Bush, Letter (2002-07-28)
«I will be with you, whatever.»

David Cannadine, Roland Quinault "Winston Churchill in the Twenty First Century" (2004)
https://books.google.co.uk/books?id=ZSIdHeug6g4C&pg=PA24
«The irony was, of course, that one of the war aims of the Roosevelt administration was the liquidation of the British Empire, and the expansion of American power and influence at the expense of Britain.
By the end of 1943 it was clear to Churchill that he could no longer rely on American co-operation. As he explained to Violet Bonham Carter: "When I was at Teheran I realized for the first time what a very small country this is. On the one hand the big Russian bear with its paws outstretched -- on the other the great American Elephant -- and between them the poor little British Donkey [...]".»

Andrew Marr "History of modern Britain" (2008)
«Yet when one country, the United States, is both leader of a large alliance of other countries, and has strong national interests which may conflict with those of her allies, there is bound to be friction. [...] In practice this meant sharing intelligence with the Pentagon and CIA, the intertwining of nuclear strategy, large US bases on British soil, the leasing of British bases to America, and a posture towards American presidents that is nearer that of salaried adviser than independent ally.»

William Rees-Mogg "The Times" (2006-08-07)
«When Jack Straw was replaced by Margaret Beckett as Foreign Secretary, it seemed an almost inexplicable event. Mr Straw had been very competent — experienced, serious, moderate and always well briefed. Margaret Beckett is embarrassingly inexperienced.
I made inquiries in Washington and was told that Donald Rumsfeld, the Defence Secretary, had taken exception to Mr Straw’s statement that it would be “nuts” to bomb Iran.”

Side note: he had more precisely said that it would have been “nuts” to *nuclear bomb* Iran, he was not objecting to the usual conventional bombing.

«The United States, it was said, had put pressure on Tony Blair to change his Foreign Secretary. Mr Straw had been fired at the request of the Bush Administration, particularly at the Pentagon. … The alternative explanation was more recently given by Irwin Stelzer in The Spectator; he has remarkably good Washington contacts and is probably right. His account is that Mr Straw was indeed dismissed because of American anxieties, but that Dr Rice herself had become worried, on her visit to Blackburn, by Mr Straw’s dependence on Muslim votes. About 20 per cent of the voters in Blackburn are Islamic; Mr Straw was dismissed only four weeks after Dr Rice’s visit to his constituency.
It may be that both explanations are correct. The first complaint may have been made by Mr Rumsfeld because of Iran; Dr Rice may have withdrawn her support after seeing the Islamic pressures in Blackburn.
At any rate, Irwin Stelzer’s account confirms that Mr Straw was fired because of American pressure.»

[billb]

«Yet when one country, the United States, is both leader of a large alliance of other countries, and has strong national interests which may conflict with those of her allies, there is bound to be friction. [...] In practice this meant sharing intelligence with the Pentagon and CIA, the intertwining of nuclear strategy, large US bases on British soil, the leasing of British bases to America, and a posture towards American presidents that is nearer that of salaried adviser than independent ally.»

Come friendly Daggers
And fall on Cheltenham

[Blissex]

«the domestic employers who hire them, and the domestic property owners who hugely benefit from higher housing demand»

Just to be pedantic here, it is not *foreign* immigration as such that has such beneficial effects increasing the prosperity of "Middle England" incumbents, work-free and usually tax-free, it is any significant increase in population:

E Wrigley, "Energy and the english industrial revolution", page 142
“However, when population growth exceeded 0.5 per cent annually, real wages plummeted”

And this is the enormous effect of even small amounts of population increases on property prices:

https://www.businessinsider.com/affordable-housing-crisis-us-west-coast-cause-explained-2023-9
“Tucked in the far southwest corner of Colorado is the historic city of Durango. Built in the 19th century at a railroad junction, it's nestled in a bend of the Animas River as it flows through the magnificent San Juan Mountains. Stunning scenery and copious amenities helped attract 460 new residents to the town of 19,000 during the pandemic. That may not sound like a lot, but it was enough to juice median home prices by 50% in just three years, with them soaring from $500,000 in 2019 to over $750,000 by 2022.”