Follow the Money

"Follow the Money", Paul Johnson

In his inimitable racy, self-confident, didactic style, Paul Johnson, the go-to economics commentator for the BBC, sets out a comprehensive portrait of UK social needs and expenditure. He documents inadequacies and inequalities in social provision; in health, where NHS outcomes are worse than comparable countries (p127,149); in social care (p154), where funding social services care, home residents, rely on cross-subsidy from self-funding residents (p169); in education (p180), where equally gifted people from poorer backgrounds receive lower lifetime earnings (p225), with further education suffering stringent cuts (p218); in welfare subject to deep cuts (p85,95). In-work poverty (p92) means that work and wages are no longer delivering adequate income. Johnson reckons high housing costs and increased renting are the reason for this (p76), along with fierce benefit reductions, but he offers no housing strategy solutions.

Local authority services were cut from 2009-2019 by 40% to 60% (p246). The only group to have benefited during the period he covers are pensioners. But even here there is total inconsistency in forcing saving for retirement whilst then allowing pensioners to blow the whole lot when reaching pension age. Opting into pension schemes provides no meaningful retirement income to those on low earnings, but costs businesses hugely in administration, whilst generating profit for pension companies. The reforms introduced by Steve Webb and Adair Turner need critical review.

We are suffering from dire growth and low productivity. The government deficit is the rule, being the case in 99 of the last 122 years (p264), so that debt has ‘ratcheted up’ (p3), but can’t keep growing (p10, 261ff). Johnson discusses tax reform, including unworkable wealth taxes, capital gains and inheritance tax (p56). He advocates taxing multinational corporations where they make sales rather than profit in the country of their incorporation (p48), a proposal which is flawed by complexity, multiple routes to evasion, and losses as well as gains, for example, the loss of Rolls-Royce profit tax in the UK to sales tax in the countries it sells its aero-engines.

There are, Johnson says, no easy answers to the extensive funding dilemmas he identifies, as he proves by the weakness of his proposed solutions of stability, education, infrastructure expenditure, tax reform, EU trade, and relaxed planning rules (p275), all necessary but not sufficient.

Like many of the fellow commentators he cites with regular approval, Johnson takes a purely financial accounting view of the economy. His title is to ‘follow the money’. What’s missing is any consideration of the real production economy which generates output. Questions of technology, productivity, investment, R&D, new products and services, and new patterns of employment and income are entirely omitted, but these are the generators of growth and prosperity.

To ‘follow the money’, Johnson would first need to consider creation of money by central banks. He recognises that central banks now hold substantial proportions of government debt (p9) but fails to follow the implication of this, ie that since the central bank is itself owned by the government, then this is equivalent to zero net debt, otherwise known as direct monetary funding of government expenditure. This is supposedly prohibited in most jurisdictions, to prevent government profligacy. It is however widespread, and negates the argument that high levels of debt require austerity.

The low point of Johnson’s discourse is his superficial 2-page trashing of proposals for a basic income (p90-91). He resorts to insults, calling the proposal ‘zombie…stupid….fantasy’ and its proponents ‘charlatans’, normally a clear indication of the weakness of the argument. He quotes his hero John Kay who writes ‘either the level of basic income is unacceptably low, or the cost of providing it is unacceptably high’, dismissing ‘the appeal of the underlying philosophy’. But Johnson cites none of the literature proposing basic income, fails to take its arguments seriously, and therefore offers no credible critique. Contrary to what Johnson and Kay write, the economy is perfectly able to deliver a universal basic income. It already does. One imagines that Johnson and Kay would accept the need for society to ensure that everyone had access to a basic level of consumption. That requires a corresponding universal basic income. 

The question is not whether a universal basic income is needed, but how it is supplied. If waged employment can deliver it, then fine, but Johnson himself admits the existence of in-work poverty, which is a sure indication that wages are inadequate to ensure basic income. So welfare benefits are needed, the question then is whether these should be conditional or universal. Again, Johnson himself lists the failures of targeted conditional welfare benefits of harsh conditions, intrusion, humiliation, low take-up rates, and above all, unemployment and poverty traps due to their steep withdrawal tapers, which once reached 96% (p80), but have been moderated to 70% under Universal Credit (p88). He also correctly points out that making tapers more shallow extends their reach up the income scale to the point that people paying higher tax rates then also receive welfare.

Authors Malcolm Torry and Stewart Lansley have demonstrated that a revenue-neutral basic income scheme is perfectly feasible. Recent macroeconomic modelling work by Cambridge Econometrics has demonstrated that a £100bn basic income scheme funded by debt-free sovereign money yields a stable equilibrium without inflation or devaluation as demand takes up spare capacity and then stimulates the investment, production and growth Johnson calls for. Moreover, when automation leads to a further reduction in aggregate wage, basic income fills the gap, again in stable equilibrium. In an imaginary fully automated economy, all GDP would be basic income. It, therefore, follows that to the degree to which production is automated, a component of basic income is structurally required. None of this is covered in Johnson’s woefully inadequate account.

The book is available here.

Geoff Crocker
Editor ‘The Case for Universal Basic Income'
www.ubi.org

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