A ‘Modest Proposal’ for economic growth Part 2: A shot in the arm

A ‘Modest Proposal’ for economic growth Part 2: A shot in the arm

by Hugh Andrew
article from Friday 12, May, 2017

I EXPLAINED yesterday – in the first of my two part article – how Britain, Europe and the world are crippled by a legacy of massive debt overhang built on speculative investment and asset price appreciation. I went on to explain how we in Britain could tackle that by developing economic growth through the creation of a One Nation Fund that would provide infrastructure spending without creating new unsecured debt. In this second part I wish to turn to possible criticisms of the idea.

There are only three ways out of debt overhang:

1.      Default

2.      Inflation

3.      Growth

While the first two might have to be used in some measure they both carry huge risks of running out of control and of unintended consequence (though of course it may be possible to ‘retire’ the national debt that the government now itself owns thanks to Quantitative Easing). The third is the route that was used post war to gradually reduce towering debt commitments. It is the route that we need to take now. It does not preclude other actions but it is the only viable solution and we have to find a way towards it. Let me deal with the core objections that might be raised

1.   Advanced economies naturally grow more slowly and therefore high levels of investment are wasted.

This has become a standard trope. There is of course truth that as economies grow, so consumption increases, the demand for asset increases and productive investment shrinks as a percentage of GDP. However there are three core fallacies in this assumption in the current day:

-     While part of the UK may be ‘mature’ in terms of investment, much of the country is both relatively impoverished and underinvested. The average conceals vast differentials and the removal of London would radically change the picture.

-     The essential and increasingly urgent transition to a green economy needs investment on a huge scale.

-     Substantial and spread-out infrastructure developments give a much wider platform for sustainable developments across the UK than merely focussing on a few hotspots.

2.   The state is a poor allocator of investment:

-      I have not yet stated the mechanism of investment. It could be done perhaps through splitting up the failed banking behemoths we have into regional investment structures such as Germany. It could be driven by community demand. It could be added to private investment. It could be allocated to a specialist bank with specific lending remits (such as the Green Investment Bank). However one certainty is that deep infrastructure investment reduces the cost of further investment by increasing connectivity, reducing transport costs, improving energy efficiency and supply etc. It thus radically improves the platform for private investment.

-     The state may not be the best investor but, as stated above, an unregulated private sector with its penchant for speculative boom and artificial scarcity hardly stands as an exemplar.

3.   Nowhere do we see how the state will capture the benefits of the One Nation Fund i.e. it is an investment without a linked return.

-      The state will make what I might call ‘general’ capture through improved tax revenues and economic base but this investment begs a further and controversial taxation tool to capture the passive gain made by those who hold assets and benefit from investment. That of course is Land Value Taxation. This would clearly capture the benefits of the policy and indeed could act as an anchor for the reinvention of local government by giving them a clear benefit for productive growth. LVT of course is an anti-speculative tax so it has further benefits. 

The state or investor then does make clear and quantifiable return while of course obtaining social good as well.

4.    This huge injection of capital is inflationary

-      Only in the sense that all economic growth has potential inflationary consequences and of course such injections can be regulated

-      It is a great deal less inflationary than printing fiat money.

5.   This is retrospective taxation:

-      It is not. Any beneficiary of a tax break can enjoy the benefit of that during their lifetime. The charge falls upon their death. The sole change to current practise is the (admittedly radical) one of time limiting the enjoyment of reliefs. 

What a Modest Proposal does is unlock the reserves of liquidity in a still very wealthy country for a greater good. It is noticeable that simple Quantitative Easing (some £375 billion to date) has protected asset prices, kept existing liquidity flowing but seems to have resulted in little growth transmission to the real economy. The very nature of this proposal is to use already extant resource to provide exactly that transformative shot in the arm that Britain needs. It is time to move on from a policy of drift to a policy of action.

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