Beyond tax rises

Most people agree that we need to raise public spending to repair our damaged public services. Simon Wren-Lewis estimates that it needs to rise by around 4.5% of GDP eventually.

Such an increase, as Simon says, requires higher taxes. This isn't because the government needs the money. It's because it needs real resources - more doctors, nurses, carers, military equipment or prison officers and so on - and there isn't so much spare capacity in the economy that these can come from dole queues or by companies increasing their production with their existing workforces. We therefore need tax rises to divert labour from the private to the public sector. As MMTers say, the purpose of taxes is to reduce inflation - and right now big increases in public spending would be inflationary without higher taxes.

Of course, everybody knows these would be unpopular. What's not sufficiently appreciated, however, is that they cause more problems than just this.

The first is that, in cutting consumer spending, higher taxes would depress sectors where competition is strong such as retailing, pubs and restaurants. This matters because competition is a major cause of efficiency gains - which is perhaps why productivity growth in retailing has in recent years outstripped that in the economy generally. The decline in such sectors would thus tend to reduce our already lamentable aggregate productivity growth, especially when accompanied by a shift in resources towards the public sector where productivity has tended to stagnate for years.

It's not just the impact on productivity growth that should concern us, though. So too should the cultural implications. Success in retailing and hospitality require that companies be heedful of customers' wants - that they cultivate the Smithian virtue of sympathy, of putting oneself in others' shoes; this is why some are accused of being "woke". "Doux commerce" - the tendency for trade to soften manners - can work in domestic as well as international trade. In shrinking consumer sectors, this is weakened. Which is all the more regrettable because rentierism will not be. The tendency for economic success to accrue to those who merely own assets rather than to those who provide decent goods and services will thus be strengthened. That's regress - a move away from commercial society back towards feudalism.

A second problem is that declining consumer spending could foster doom loops. As fewer people go to pubs, the atmosphere worsens ("this place is dead") thereby discouraging others from going. And as shops close, high streets become more depressing and so fewer visit them, diminishing the footfall for the remaining businesses.

This is dangerous not just economically but politically. Thiemo Fetzer and colleagues have found "a significant positive association between high-street vacancy rates and UKIP support." And Diane Bolet has shown how pub closures also boost support (pdf) for the far right. This shouldn't be surprising. As Ben Friedman showed, and Markus Brueckner and Hans Peter Gruener confirmed, economic stagnation breeds intolerance and reaction. The most visible signs of that stagnation will therefore boost the far right.

The third drawback is simply that shopping, days away and nights out make us happy. That might be a price worth paying so we don't have to wait so long for a hip replacement. But is it one worth paying for military contractors' profit margins or Border Force agents?

This question might not trouble our joyless rulers but it should trouble the rest of us. In a supposedly advanced society, there must be more to the economy than drudge work and struggling to pay the rent and gas bill.

Higher taxes therefore are nasty.

This - rather than anything Reeves actually says - is a justification for Labour not having big, quick rises in public spending or large tax rises.

But there are other possible responses to this dilemma.

These do not include taxing the rich. Doing so might satisfy some conceptions of justice. But it does not solve our economic problem of how to release real resources for the public sector. If the rich respond to higher taxes by cutting their saving or by reducing the size of planned inheritances, no such resources are released. In such an event, increased public spending would be inflationary and the Bank of England would raise interest rates in response - and these too would curb consumer spending with the same adverse effects as tax rises.

There's a simple solution to this - to raise the inflation target. I'm surprised this isn't more widely discussed.

Another possibility is to raise public sector productivity. Doing so requires more than waffle about reform and privatization, however. It requires, as Dan Honig shows, giving frontline workers more autonomy and power.

But of course, it's not just higher productivity in the public sector we need. We need higher productivity growth all round simply because this would give us more of everything: private consumption, public services, leisure, whatever. Labour's talk of planning reform is a good start here. But it's just that - a start. Serious measures to raise productivity would require (among other things): stronger competition policy; shifting taxes from incomes to land; rejoining the single market; more support for universities (which are high-productivity export earners); and a liberal immigration policy. All these measures will be opposed by vested interests and the media. And this is only to mention mainstream thinking, let alone policies such as economic democracy or greater equality.

There's something else. The reallocation of labour towards public services need not be achieved by macro policy alone. There are tens of thousands of jobs which would not exist in a more efficient economy. There's excessive guard labour - including some security guards, supervisory staff and patent lawyers - which protect captalist property rights. There's the bloated financial sector sustained by tax (pdf) breaks and ignorance of fund managers' performance. There are the bullshit jobs described by David Graeber. There are too many government bureaucrats, tax lawyers and accountants who are maintained by an excessively complicated tax and benefit system. And there are too many workers in industries with negative externalities - those producing environmental, risk or intellectual pollution*.

In this context, Keynes is now irrelevant. "It is in determining the volume, not the direction, of actual employment that the existing system has broken down" he wrote. That might have been true in the 1930s but it is not now. Redirecting labour requires not macroeconomic policy but specific measures targetting these egregious jobs.

And here's the problem. The government is showing insufficient interest in how to achieve this reallocation of labour through microeconomic and tax policy, and (except for planning policy) little interest in attacking the vested interests opposed to policies that might raise productivity. That leaves higher taxes as its only option, even though these are dangerous.

The fact is, however, that if Labour is to succeed in improving public services and defeating the far right, it needs to get out of the straitjacket of centrist macroeconomic policies. An attack on the more predatory and reactionary elements of capitalism is not leftist idealism but a brute necessity.

* These aren't especially leftist points. They're the product of policy failures and of what Milton Friedman called spending "somebody else's money on somebody else." Free marketeers - assuming there are any left - should be concerned with these.

Comments

[Chris]

H’mm not convinced. Best start with the quality of the public sector employees upon whom the reliance of ‘improvement’ will be placed. Having seen the role of The Childcatcher in Chitty Chitty Bang Bang, I am certain there is something similar assessing adults and identifying those that will never contribute anything meaningful to society, and finding them jobs in HR, NHS admin or Local Government. Example (1) Vennels and the Post Office. 99.9% of me says she should be behind bars; the 0.01% merely identifies her as utterly useless and simply unfit for the role.

[rsm]

"It's because it needs real resources - more doctors, nurses, carers, military equipment or prison officers and so on - and there isn't so much spare capacity in the economy that these can come from dole queues or by companies increasing their production with their existing workforces."

What if you legalize drugs so we can self-medicate, and stop planning your society on forever increasing the violence of war and punishment?

[Chris]

I was too quick to print. Nice to see the realism cropping up in my assessment.

Diana Johnson, a Crime Policing and Fire minister had belongings stolen when she was addressing an audience of senior police officers about ‘an epidemic of anti-social behaviour, theft and shoplifting.’ (BTW, shoplifting is theft.)

The chief executive of a sexual assault support service has stood down after a review found it failed to protect women-only spaces. Mridul Wadhwa – a trans woman – resigned after a Rape Crisis Scotland report found she failed to behave professionally while head of Edinburgh Rape Crisis Centre (ERCC). The investigation, carried out by an independent consultant, also found Ms Wadhwa “did not understand the limits of her authority” and the needs of survivors were not prioritised.

People in positions well outside their presumed expertise.

(Rolls around floor in gales of laughter until he realises what damage these type of people can do.)

[nickj]

why do I care about productivty when the benefits don't trickle down to me? I can have redistribution instead.

[Ben Oldfield]

If the NHS is short of nurses and doctors then the market says that you have to increase their pay, that is what the MARKET says. If more nurses and doctors are required then you have to train them, this is another thing the government is in denial about.

[Jan Wiklund]

Now, doctors and nurses have resigned from the NHS during years because their pay has been to low and because their workload has been to high. So there must be doctors and nurses somewhere out there to take from, provided you can goad them back to service.

The question is: what are they doing now? Something outside of their profession? Left for France as their Spanish colleagues do?