Published by Palgrave Pivot, 2020
The amount of goods and services that workers can afford to buy from their wages has been an ever decreasing proportion of the total goods and services produced over the last 40 years. This, argues Geoff Crocker, is a problem. At the same time the proportion of unearned income from investments - which tends to flow to rich people - has been increasing. The result is that the vast majority of workers have to get hold of unearned income to supplement their present consumption, in the form of benefits and pensions but also, increasingly, by taking out loans.
Whether it be due to increasing automation reducing the need for workers, or the owners of firms having more power and thus being able to withhold higher and higher proportions of a firm’s profits, Crocker argues the current system is not sustainable. It will fail, or at least drastically reduce future potential consumption for most people.
He proposes a simple solution: the state should create the money needed to bridge this gap – debt free – and simply give it to all citizens (this ‘debt-free’ money being known as sovereign money). This would solve the problem that the economic system has (workers not being able to buy the output of the economy) simply by handing people a basic income, and at the same time it solves the main argument against a basic income: that it would be too expensive. It also answers the question of “how much?” – an ongoing concern for both proponents of a basic income and for proponents of a sovereign money system: the level of basic income should be set at the difference between the output of the economy and the sum of wages, distributed equally.
Crocker’s book is a short read (94 pages) and written at a level easily accessible to a non-academic audience, whilst his points are backed up by extensive referencing making his writing worthy of an academic journal. He gives a good summary of the dominant economic theories since the 1930’s from Keynesian fiscal demand management to monetarism (in which interest rates are used to control inflation), which includes interesting perspectives on key economists and thought leaders. Different reasons for the 2007/2008 financial crisis are compared and critiqued concluding that the cause had more to do with too little demand supplemented by a huge growth in consumer debt, rather than the predominant explanation of ‘bad’ banks being too lightly regulated. Crocker’s analysis can be compared to that in the chapter 2 of the Green House book The Post Growth Project, where Brian Heatley carries out a more in-depth study of the economy than Crocker, also finding that wages make a falling share of income and that people have supplemented their consumption by taking out loans. Heatley’s conclusions are more wide-ranging, where inequality must be reduced for a Green economy to flourish. It is also worth noting that Crocker does not analyse the housing market, which according to Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd and Laurie Macfarlane, plays a significant role in our economy: the gap between wages and consumption may be partly explained by people (at least those who own property in London and the South East) spending the increase in value of their property as house prices have risen.
If the diagnosis of a problem is incorrect policy responses are unlikely to work. Crocker argues the policy responses in the case of the financial crash did not help: increased banking regulation has resulted in stifled growth; quantitative easing has increased inequality, and austerity has caused great hardship – all without making the financial system more stable.
His diagnosis of the problem, like several other economists, is that a build-up of debt led to the financial crisis of 2007/8. However, he digs deeper than others with many graphs showing how consumer spending, income (of different forms), GDP and household debt have been changing in the UK. In particular, he shows that total consumer spending overtook wages paid in 1997, and consumers have run up household debts to enable their consumption. Further – and similar to the ideas of Modern Monetary Theory (MMT) as put forward by Stephanie Kelton – he finds that a government deficit is normal, has no adverse affect on GDP, and that austerity was a mis-guided policy that caused much hardship. He argues that much government debt is perpetual as it will never be repaid – so it is similar in nature to Sovereign Money as put forward by Joseph Huber. Indeed, government issuance of a perpetual bond with zero interest arguably has the same properties as government issuance of Sovereign Money (coins and banknotes are already Sovereign Money, but the term is usually used for the issuance of electronic Sovereign Money). However, the government issuing bonds has the downside that people, especially politicians, worry about the size of the “deficit” and “national debt”, which would not occur if debt-free Sovereign Money was issued.
Crocker’s solution to the problem that people, in aggregate, do not earn enough wages to afford the goods and services produced is that the government should ensure that they can afford these without the need to run up personal debts by handing out a basic income in the form of sovereign money. Further to this, he proposes governments could also solve the ‘problem’ of the ever increasing national debt by issuing Sovereign Money for some public spending such as the NHS. He compares his solutions to the MMT proposal that government can simply run up more debt as well as the pure Sovereign Money proposal (as brought to national referendum in Switzerland) that only the central bank should be allowed to create money (not the banks, as is the case at the moment). He also shows that it would be hard to pay for a basic income without sovereign money, and that if a basic income was paid for out of, for example, higher taxes – it would not have the effect of creating demand as to increase some people's disposable income you would have to reduce that of others.
Crocker covers the standard arguments put forward by both the proponents of a Universal Basic Income and the proponents of Sovereign Money. He also gives very useful summaries of the works of the economists and thought leaders Adair Turner, Martin Wolf, Robert Skidelsky, Niccolo Fraccaroli, and Mark Blyth.
Readers with a “Green” perspective might find some of his arguments underwhelming as he sees increasing GDP as a good thing, with his main idea being to keep “the economy” going by enabling people to consume the output of the economy (whilst not forcing them into debt), rather than aiming to reduce consumption. He does redress this somewhat in his section on a basic income, explaining that this will enable people not to have to work to produce ever more things – so the effect is likely to reduce consumption.
Proponents of a universal basic income as well as proponents of a sovereign money system will not be completely satisfied. Supporters of sovereign money will argue that, under Crocker’s proposal, banks can still create money which will still lead to asset bubbles (especially house price bubbles), so it would not have all the benefits of a full Sovereign Money system. Proponents of a universal basic income will argue that restricting the income to a level such as there is no gap between aggregate consumption and aggregate wages+basic income may not provide everyone with a high enough income to live with dignity, though one assumes that this could be supplemented with money from taxation.
A further argument against Crocker’s proposal is that, if the government just issues ever more debt-free money (i.e. Sovereign money) without increasing taxation on firms or shareholders, this money will simply flow from the general population to firms then on to their owners (shareholders) in the form of dividends. This will have the effect of increasing inequality.
Despite these criticisms, I thoroughly recommend this book and the proposals Crocker outlines within it. It is a good read with an excellent introduction to our recent economic history. At this time in the COVID-19 pandemic we need new solutions to our economic problems more urgently than ever. The diagnoses presented in this book are fundamental to understanding the economic problems that we are in. In my view, if Crocker’s proposals were to be implemented, they would certainly be a great first step to solving our economic problems in a fair and just way. However, by themselves they will do little to encourage more sustainable lifestyles, although the persistence of economic problems, with many people financially “squeezed” and having to take out ever more loans makes it more difficult to address climate issues in the significant way that is needed.