Speech on the Spring Budget Statement 2023

My Lords, I join other noble Lords in paying tribute to the remarkable maiden speech of the noble Baroness, Lady Moyo. It was very thoughtful and thought provoking, and I very much appreciated her reference to me—she will have a great future here.

The Budget was crafted in the shadow of disruptive world events over which the Chancellor has little or no control, but it is by its effectiveness in tackling or responding to those events that I think this Budget will be judged. The three killer apps—as one might call them—are global finance, technology and geopolitics. The global banking crisis of course caused the depression of 2008-09. The recent collapse of SVB shows, as the noble Lord, Lord Fox, noted in this House on Tuesday, what a huge proportion of our tech industry depends on finance from a single foreign bank whose solvency in turn depends on fluctuations in interest and bond rates. That is one element of huge fragility in our system.

As for technology, it simply speeds up the operation of every single movement in the economy, whether beneficial or destructive. We know about geopolitics, which threatens all our supply chains and the future of the global economy. So those three elements are really beyond the control of a Budget or a Chancellor and, together, they make the world economy more dangerous, more unstable and more uncertain.

The Minister, in introducing the Statement, stuck closely to the forecasts—but how does she explain the ludicrous divergence in the OBR’s forecasts on inflation and growth between October/November 2022 and March 2023, or the divergence in forecasts between the Treasury and the Bank of England? The noble Lord, Lord Willetts, pointed out that these different models factor in different things, but which of the factorings lead to an outcome that we can have faith in? You factor this, you factor that. What is going on is that all the models used are inadequate. They have become inadequate in the face of large structural breaks which have been occurring in the economy as a result of Covid-19 and the war in Ukraine. They are models which are still optimising around some long-forgotten equilibrium.

I am not sure that we have a better model, but it limits the confidence that we can have in these forecasts. They are trotted out almost as truths. The Chancellor said, “We will grow by” X, Y or Z per cent in the next three years, but what he meant was that the OBR model says that those will be the growth rates—and that is not a satisfactory basis for building confidence.

The speed-up of model obsolescence represents a huge break from the past. We were brought up to believe that short-term forecasts were relatively reliable—after all, how much could change in six months?—and that the longer ones were less reliable. Now, however, both are unreliable. It has infected both the short-term and long-term forecasts. The Treasury is not steering the economy—that phrase was the title of one of Sam Brittan’s great books. The economy is being tossed around by the world economy from one place to another, and that is not going away any time soon. These destructive events have wreaked havoc with the macroeconomic rules so laboriously constructed in the 1990s and 2000s, in particular that of the separation of fiscal and monetary policy, which was the architectural triumph of the Blair-Brown years.

What is it like today? What is the state of that separation today? The fact is that it has been fatally undermined. The Bank of England has been stoking up inflation when it was set up to do the exact opposite. It has been given a green mandate that conflicts with its inflation mandate, and no one knows exactly what the relationship is between fiscal and monetary policy. It has become hopelessly fuzzy, as we found out on the Economic Affairs Committee when we interviewed the Governor of the Bank of England. The whole relationship is shrouded in fictions that no one is meant to penetrate. That is not the basis for giving confidence in macroeconomic policy. In fact, the confidence has been withheld.

“Our plan is working”, said the Chancellor. What plan? To reduce inflation? To get growth? To reduce the inactivity rate? To achieve energy security? He must realise that any improvements that have been recorded since he became Chancellor, or in the last two or three months, are not due to anything the Treasury has done but result from what has been going on in the world economy. There have been beneficial developments, particularly what has happened to energy prices.

A remarkable thing about Budget making today is what it says about markets, media and policy networks. If you analyse it, you will find that there is actually very little difference between the Truss-Kwarteng and the Sunak-Hunt Budgets; the first just came at slightly the wrong time, that is all. Now, things have got a bit better. These are Budgets that depend on five-year forecasts; you cannot say that the difference of a month or two in the presentation of a Budget should have caused such panic in the market—unless, of course, no one had any real confidence in the long-term forecasts on which the Budgets were made.

At one time, there were things called “Budget leaks”. You were not meant to reveal what was in the Budget. In fact, the Chancellor of the Exchequer in 1947 resigned because of a Budget leak. Now, Budget leaks are routine; they are sort of trailers in which the Treasury lays out what it is going to do. What about the opportunities for speculation, for example, that that might give rise to? No one thinks about that any more. You have to make the newspaper headlines.

The Chancellor might have taken advantage in his Budget to display the beginnings of a coherent framework. There is one such framework—it is a very old model; no one knows about it any longer—called the balanced budget multiplier. That approach underpins the Biden Administration’s $738 billion Inflation Reduction Act, which was passed into law last year; I do not think that the Chancellor referred to it in his speech. It is based on an intelligent combination of extra investment and higher social spending to be paid for by higher taxes on the rich and the very rich. Split roughly half and half between tax and spending increases, the combined effect is forecast to secure—again, one has to make the point that it is a forecast—a cumulative reduction in the federal fiscal deficit of about $300 billion over five years. It may not happen—it probably will not—but at least there is a mechanism in it which suggests that it could happen. What we do not have in the present enthusiasm for the policy working is any mechanism or theory which gives you confidence that what the Chancellor is doing will achieve what he wants it to do.

I will make two final points—I am sorry that I have gone on a bit—about where we are in the cycle. It is very difficult to assess what is happening in the labour market; the noble Lord, Lord Bridges, talked about this. On the one hand, we have a very high inactivity rate of about 7 million altogether, which is usually connected with a slack labour market. On the other hand, we have unemployment very low at 3.7% and lots of job vacancies, which would suggest a tight labour market. What is the explanation of that puzzle? The truth, I think, is that headline unemployment figures no longer accurately measure the capacity utilisation of an economy; I think that that has been true for some time, but it has been brought to the forefront recently. A shortage of supply in some areas is combined with a general deficiency of demand in the economy. We would expect the latter to be the case, given that the economy has not grown for three years while the population has grown by 1 million and real wages have fallen substantially. Therefore, we would expect a deficiency of aggregate demand, even though there are pockets of shortage of supply. The Budget might have addressed its attention to that.

I wish that the Chancellor had argued in favour of job creation, rather than incentives to people to apply for jobs that do not exist. Gordon Brown and I, two years ago, argued for a public sector job guarantee scheme, which I still think would act as a kind of buffer stock of employment which would oscillate with the oscillations of the cycle. I am sorry that it was not adopted; it would have been—and still would be—a good method of job creation today that would also tie in with the devolution strategy.

My last point is about securing the long-term growth of the economy. Of course, I welcome the incentives that the Chancellor has provided for investment—the creation of 12 new investment zones modelled on becoming potential Canary Wharfs—but I wish he had given a bit more attention to two British institutions for investment, which I do not think that he mentioned: the UK Infrastructure Bank and the British Business Bank, both of which could be developed. As the noble Lord, Lord Eatwell, said, we know that investment has been a problem in the British economy for a long time. We also know that the share of public investment in total investment has dropped dramatically, and it has not been compensated by any increase in private investment. Here is a good opportunity to insert the state into the long-term recovery of the economy and to provide for the energy and security autonomy, which is the aim of the Government and us all.

In short, there are quite a few interesting initiatives, but I do not think that they have been properly joined-up, and we still await a commanding framework for action in a world that is spinning out of control.

Letter: The economic conditions that make wars more likely

FEBRUARY 17 2023

One year has passed since the start of Russia’s invasion of Ukraine, and nothing seems to indicate that the flames of war are dying. Why does the war still continue? Why are military tensions rising in the world?

We reject the thesis of a “clash of civilisations”. Rather, we need to recognise that the contradictions in the deregulated global economic system have made geopolitical tensions more acute (Opinion, February 14).

One of the worst faults of the present system is the imbalance in economic relations inherited from the era of free-market globalisation. We refer to international net positions, where the US, the UK and various other western countries have large external debts, while China, other eastern countries, and to some extent Russia are in an external credit position.

A consequence of this imbalance is a tendency to export eastern capital to the west, no longer only in the form of loans but also of acquisitions leading to a centralisation of capital in eastern hands.

To counter this trend, the US and its major allies have for several years abandoned their previous enthusiasm for deregulated globalism and have adopted a policy of “friend shoring”: an increasingly pronounced protectionist closure against goods and capital from China, Russia and much of the non-aligned east. The EU too has been joining this American-led protectionist turn.

If history is any guide, these uncoordinated forms of protectionism exacerbate international tensions and create favourable conditions for new military clashes. The conflict in Ukraine and rising tensions in the Far and Middle East can be fully understood only in the light of these major economic contradictions.

A new international economic policy initiative is therefore required to head off the threat of further wars.

A plan is needed to regulate current account imbalances, which draws on John Maynard Keynes’s project for an international clearing union.

A development of this mechanism today should start from a double renunciation: the US and its allies should abandon the unilateral protectionism of “friend shoring,” while China and other creditors should abandon their espousal of unfettered free trade.

The task of our time is urgent: we need to assess whether it is possible to create the economic conditions for world pacification before military tensions reach a point of no return.

Globalization’s Latest Last Stand

With the world increasingly turning away from economic integration and cooperation, the second wave of globalization is threatening to give way to fragmentation and conflict, as the first wave did in 1914. Averting catastrophe requires developing strong political foundations capable of sustaining a stable international order.

LONDON – Is the world economy globalizing or deglobalizing? The answer would have seemed obvious in 1990. Communism had just collapsed in Central and Eastern Europe. In China, Deng Xiaoping was unleashing capitalist enterprise. And political scientist Francis Fukuyama famously proclaimed the “end of history,” by which he meant the triumph of liberal democracy and free markets.

Years earlier, the British economist Lionel Robbins, a firm believer in free markets, warned that the shaky political foundations of the postwar international order could not support a globalized economy. But in the euphoria and triumphalism of the early 1990s, such warnings fell on deaf ears. This was, after all, a “unipolar moment,” and American hegemony was the closest thing to a world government. With the Soviet Union vanquished, the thinking went, the last political barrier to international economic integration had been removed. 

Dazzled by abstractions, economists and political scientists should have paid more attention to history. Globalization, they would have learned, tends to come in waves, which then recede. The first wave of globalization, which took place between 1880 and 1914, was enabled by a huge reduction in transport and communication costs. By 1913, commodity markets were more integrated than ever, the gold standard maintained fixed exchange rates, and capital – protected by empires – flowed freely and with little risk. 

Alas, this golden age of liberalism and economic integration gave way to two world wars, separated by the Great Depression. Trade shrank to 1800 levels, capital flows dried up, governments imposed tariffs and capital controls to protect industry and employment, and the largest economies separated into regional blocs. Germany, Japan, and Italy went to war to establish blocs of their own. 

The second wave of globalization, which began in the 1980s and accelerated following the end of the Cold War and the rise of digital communications, is now rapidly retreating. The global trade-to-GDP ratio fell from a peak of 61% just before the 2008 financial crisis to 52% in 2020, and capital movements have been increasingly restricted in recent years. As the United States and China lead the formation of separate geopolitical blocs, and the world economy gradually shifts from interconnectedness to fragmentation, deglobalization seems well underway. 

To understand why globalization has broken down for a second time, it is worth revisiting John Maynard Keynes’s memorable description of London on the eve of World War I. “The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise,” he wrote in 1919, “were little more than the amusements of [the investor’s and consumer’s] daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.”

In our own time, geopolitics is once again threatening to break the international order. Commerce, as Montesquieu observed, has a pacifying effect. But free trade requires strong political foundations capable of soothing geopolitical tensions; otherwise, as Robbins warned, globalization becomes a zero-sum game. In retrospect, the failure to make the United Nations Security Council truly representative of the world’s population might have been the original sin that led to the current backlash against economic openness. 

But geopolitics is not the only reason for the breakdown of globalization’s second wave. Neoliberal economics, which came to dominate policymaking in the 1980s, has fueled global instability in three major ways. 

First, neoliberals fail to account for uncertainty. The efficient-market hypothesis – the belief that financial markets price risks correctly on average – provided an intellectual basis for deregulation and blinded policymakers to the dangers of setting finance free. In the run-up to the 2008 crisis, experts and multilateral institutions, including the International Monetary Fund, were still claiming that the banking system was safe and that markets were self-regulating. While that sounds ridiculous in retrospect, similar views still lead banks to underprice economic risks today. 

Second, neoliberal economists have been oblivious to global imbalances. The pursuit of market-led economic integration accelerated the transfer of manufacturing production from developed economies to developing economies. Counterintuitively, though, it also led to a flow of capital from poor to rich countries. Simply put, Chinese workers supported the West’s living standards while Chinese production decimated Western manufacturing jobs. This imbalance has fueled protectionism, as governments respond to public pressure by restricting trade with low-cost producers, and contributed to the splintering of the world economy into rival economic blocs. 

Lastly, neoliberal economics is indifferent to rising inequality. Following four decades of hyper-globalization, tax cuts, and fiscal tightening, the richest 10% of the world’s population own 76% of the total wealth, while the poorest half own barely 2%. And as more and more wealth ends up in the hands of tech speculators and fraudsters, the so-called “effective altruism” movement has invoked Laffer curve-style logic to argue that allowing the rich to become even richer would encourage them to donate to charity. 

Will globalization’s second wave collapse into a world war, as the first one did? It is certainly possible, especially given the lack of intellectual heft among the current crop of world leaders. To prevent another descent into global chaos, we need bold ideas that build on the economic and political legacies of Bretton Woods and the 1945 UN Charter. The alternative could be a more or less direct path to Armageddon.

The Return of Thoughtcrime

The UK’s draconian Public Order Bill, which seeks to restrict certain forms of protest used by climate activists, will expand the state’s ability to detain people deemed disruptive and limit the courts’ ability to restrain it. This will align the British legal system with those of authoritarian countries like Russia.

LONDON – In December 1939, police raided the home of George Orwell, seizing his copy of D.H. Lawrence’s Lady Chatterley’s Lover. In a letter to his publisher after the raid, Orwell wondered whether “ordinary people in countries like England grasp the difference between democracy and despotism well enough to want to defend their liberties.”

Nearly a century later, the United Kingdom’s draconian Public Order Bill, passed by the UK House of Commons last year and now being considered in the House of Lords, vindicates Orwell’s doubt. The bill seeks to restrict the right to protest by extending the scope of criminality, reversing the presumption of innocence in criminal trials, and weakening the “reasonableness” test for coercive action. In other words, it widens the government’s scope for discretionary action while limiting the courts’ ability to restrain it.

When the police seized Orwell’s copy of Lady Chatterley’s Lover, the novel was banned under the Obscene Publications Act of 1857, which prohibited the publication of any material that might “deprave and corrupt” readers. In 1959, the nineteenth-century law was replaced by a more liberal measure that enabled publishers to defend against obscenity charges by showing that the material had artistic merit and that publishing it was in the public interest. Penguin Books succeeded with this defense when it was prosecuted for publishing Lady Chatterley’s Lover in 1960; by the 1980s, the book was taught in public schools.

But while Western democracies have stopped trying to protect adults from “depravity,” they are constantly creating new crimes to protect their “security.” The Public Order Bill creates three new criminal offenses: attaching oneself to objects or buildings (“locking on” or “going equipped to lock on”), obstructing major transport works, and interfering with critical national infrastructure projects. All three provisions target forms of peaceful protest, such as climate activists blocking roads or gluing themselves to famous works of art, that the government considers disruptive. Disrupting critical infrastructure could certainly be construed as a genuine threat to national security. But this bill, which follows a raft of other recently enacted or proposed laws intended to deal with “the full range of modern-day state threats,” should be seen as part of a broader government crackdown on peaceful protest.

By transferring the burden of proof from the police to alleged offenders, the Public Order Bill effectively gives police officers the authority to arrest a person for, say, “attaching themselves to another person.” Rather than requiring the police to show reasonable cause for the arrest, the person charged must “prove that they had a reasonable excuse” for locking arms with a friend.

The presumption of innocence is not just a legal principle; it is a key political principle of democracy. All law-enforcement agencies consider citizens potential lawbreakers, which is why placing the burden of proof on the police is an essential safeguard for civil liberties. The Public Order Bill’s presumption of guilt would reduce the extent to which the police are answerable to the courts, aligning the UK legal system with those of authoritarian countries like Russia and China, where acquittals are rare.

The bill also weakens the “reasonableness” requirement for detention and banning orders, allowing officers to stop and search any person or vehicle without any grounds for suspicion if they “reasonably believe” that a protest-related crime may be committed. Resistance to any such search or seizure would be a criminal offense. And magistrates could ban a person or organization from participating in a protest in a specified area for up to five years if their presence was deemed likely to cause “serious disruption.” And since being “present” at the crime scene includes electronic communications, the ban could involve digital monitoring.

The question of what should be considered reasonable grounds for coercive action was raised in the landmark 1942 case of Liversidge v. Anderson. Robert Liversidge claimed that he had been unlawfully detained on the order of then-Home Secretary John Anderson, who refused to disclose the grounds for the arrest. Anderson argued that he had “reasonable cause to believe” that Liversidge was a national-security threat, and that he had acted in accordance with wartime defense regulations that suspended habeas corpus. The House of Lords ultimately deferred to Anderson’s view, with the exception of Lord Atkin, who in his dissent accused his peers of being “more executive-minded than the executive.”

Even in wartime, Atkin claimed, individuals should not be arbitrarily detained or deprived of their property. If the state is not required to provide reasons that could stand up in court, the courts cannot restrain the government. The UK’s current wave of national security and counter-terrorism bills directly challenges this view, making Atkin’s dissent even more pertinent today than it was during the war.

Law enforcement’s growing use of big data and artificial intelligence makes the UK government’s efforts to curtail the right to protest even more worrisome. While preventive policing is not new, the appearance of scientific impartiality could give it unlimited scope. Instead of relying on informers, police departments can now use predictive analytics to determine the likelihood of future crimes. To be sure, some might argue that, because authorities have so much more data at their disposal, predictive policing is more feasible today than it was in the 1980s, when the British sociologist Jean Floud advocated “protective sentences” for offenders deemed a grave threat to public safety. American University law professor Andrew Guthrie Ferguson, for example, has argued that “big data will illuminate the darkness of suspicion.”

But when considering such measures, we should keep in mind that the state can sometimes be far more dangerous than terrorists, and certainly more than glued-down protesters. We must be as vigilant against the lawmaker as we are against the lawbreaker. After all, we do not need an algorithm – or Orwell – to tell us that handing the government extraordinary powers could go horribly wrong.

Spying on Citizens

Sir, Your leading article (“Digital Danger”, Jan 2) warns of the use of Chinese-made surveillance systems to track people in the UK. But neither your editorial nor the surveillance watchdog, Fraser Sampson, seems to have any qualms about British-made equipment being used for the same purpose. In 1786 Jeremy Bentham designed the Panopticon, in which a central prison watchtower could shine a light on all the encircling prison cells without the inmates being able to tell that they were being watched. This, he thought, would motivate them to behave legally. Bentham thought his contrivance was equally applicable to hospitals, schools and factories. In Orwell’s dystopian novel Nineteen Eighty-Four, one-way TV systems are installed in every flat. Big Brother would always be watching you.

The danger of where a surveillance system is made seems of minor importance compared with our acceptance of the right of democratic governments to spy on their citizens whenever and wherever they please in the name of national security.

Speech on “Ukraine: Tactical Nuclear Weapons”

My Lords, I am grateful, as we all are, to the noble and right reverend Lord, Lord Harries, for initiating this debate and for drawing attention to the real danger of nuclear escalation.

I am in profound disagreement with the Government’s policy on Ukraine—I have said it before in this House and I shall say it again. This disagreement can be stated in one sentence: the Government’s policy is a war policy; I support a peace policy. I shall try to justify that.

The then Foreign Secretary, Liz Truss, stated on 27 April:

“We will keep going further and faster to push Russia out of the whole of Ukraine.”

This policy has been repeatedly restated by government spokesmen. It is supported by the Opposition and echoed by the media.

In calling for peace, I may be an isolated voice in Britain, but not in the world. Everyone outside the NATO world is calling for negotiations and some within it—I draw attention to President Macron in particular. Let me try to be logical. The Government’s policy makes sense on one assumption: that Ukraine, with NATO military support and economic sanctions on Russia, will soon complete the reconquest of Ukraine, including Crimea. In this case, there will be nothing to negotiate; the deed will have been done—it will have been accomplished.

I am not privy to secret military intelligence, but such evidence as I have, plus a dose of common sense, suggests that neither Russia nor Ukraine can achieve their war aims at the present level of hostilities, so the pursuit of victory is bound to bring escalation on both sides. Russia will intensify its air war, and NATO will provide Ukraine with more weapons to shoot down Russian aircraft. At what point such escalation leads to the accidental or deliberate deployment of tactical nuclear weapons is anyone’s guess, but the danger must be there, as the noble and right reverend Lord, Lord Harries, pointed out. That is why the war should be ended as soon as possible, and that can be done only by negotiations based on a ceasefire.

I utterly reject the premise underlying the Government’s policy that it is up to Ukraine to decide if and when it wants to end the war. President Zelensky’s policy is to get his “land back entirely”. Of course, it is up to Ukraine to decide what to do, but we cannot give Ukraine carte blanche to determine its war policy when we are in fact providing it with the weaponry to continue the war at considerable sacrifice to our own people. The decisions for peace and war, and on what terms to end the war, must be taken by Ukraine and NATO jointly.

I have reached one conclusion which is more compatible with government thinking: that no meaningful negotiations are possible as long as President Putin remains in office and, more importantly, in power. It is not only that his personal prestige is too heavily implicated in an impossible object but that his attempt to achieve it is leading his country to disaster. His invasion of Ukraine has galvanised Ukrainian nationalism, expanded NATO, shifted the balance of power in Europe to its most anti-Russian eastern states, exposed hitherto hidden Russian military and technical weaknesses, subjected Russia to the most sweeping economic sanctions ever imposed, and provoked the emigration of many of the most talented Russian scientists, technicians, thinkers and artists. In sum, he has erected a new monument to imperfect and incompetent statesmanship.

Any settlement of the war which can inspire confidence in the future will require Mr Putin’s departure from the scene. I do not know how this is to come about; it is beyond our control. However, we can offer an incentive: our Government can say that they would be willing to join our partners in serious negotiations to end the war with a new Russian Government. This negotiation would include the future status of Crimea and the dropping of sanctions. It would encourage forces within the Russian state to implement a change of government. This is a tough but constructive policy that I would understand and support; I do not understand the present policy in intellectual terms. It might not succeed, but it is infinitely better than the dangerous bellicosity we seem to be trapped in.

Speech on the Autumn Statement 29 November 2022

My Lords, the Chancellor’s Autumn Statement is designed to reassure the markets of the sustainability of the public finances. That is, the Chancellor accepts as binding the views of the City of London, whether they are right or wrong. It is what the markets think that matters, not how matters really are—a nice intrusion of post-modernist thinking in what is supposed to be the hard science of economic policy-making.

It is pretty obvious why the Government should pay such attention to the financial markets. For decades, the financial sector has propped up the UK’s hollowed-out economy. Financial flows into the City of London allowed the country to neglect production and trade and artificially maintain a higher standard of living than its productive capacity warranted. Now we are paying the price.

Instead of starting to repair this long-term damage, the Autumn Statement is designed to repair the so-called “black hole” in the budget, in the belief that doing so will, by some magical process, produce an automatic surge in output and growth. In other words, it concentrates on shrinking the numerator, the budget, while ignoring the effects of that shrinkage on the denominator, which is GDP growth. Even in terms of maintaining investor confidence, that is misguided, as the noble Lord, Lord Eatwell, pointed out. How does the Chancellor imagine foreign creditors reacting if his spending cuts produce, or deepen, a recession?

Politics should be based on some theory, at any rate, but there is no explicit theory to be found in either the Autumn Statement or the OBR forecast. The Chancellor sets fiscal targets to reassure the markets. The OBR is there to reassure the markets that the Government’s targets are consistent with its own forecasts. The Treasury and the watchdog cling to each other for mutual protection behind a barrage of statistics that claim far more than they are entitled to.

If there is an implicit model behind both Treasury targets and OBR forecasts, it is the one known as financial crowding-out. There is assumed to be a fixed supply of capital, so the Government’s increased demand for funds puts upward pressure on interest rates. The rise in interest rates will “crowd out” any stimulus afforded by additional borrowing. That is why the less the Government borrow, the more growth you will get. That is simply a restatement of the “Treasury view” of the 1920s, explained by the then Chancellor of the Exchequer, Winston Churchill, who said that

“when the Government borrows in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process it raises the rent of money to all who have need of it.”—[Official Report, Commons, 15/4/29; col. 53.]

Presumably, Jeremy Hunt would subscribe to that hoary doctrine, though doubtless in less orotund language. It is as though the Keynesian revolution had never happened; we are just back to pre-Keynesian orthodoxy. It is all embellished in various ways and tweaked here and there, but the substance is exactly the same. However, as the economist Rob Calvert Jump wrote in a recent article:

“There is now a consensus amongst economists that austerity does significant damage to an economy’s potential, undermining growth, as the experience of the last decade in Britain has shown us. Further austerity will do far more damage than a ‘fiscal hole’ that disappears with tweaks to models or accounting rules. The ‘fiscal hole’ is a dangerous fiction compared to the hard facts of austerity’s impact.”

The last point is particularly worth emphasising. How many people realise that the notorious “fiscal black hole” is the product of shifting definitions of net public sector debt?

Theory alone cannot provide us with all the answers; in fact, all the macro models are in more or less of a mess. I will give three examples. The first is the rise in the inactivity rate. There has been a fall of 227,000 in employment since a year ago. So we have a tight labour market with unemployment at 3.6%, a strong demand for labour and a falling labour participation rate. How can that be explained?

Secondly, there is the notorious productivity puzzle. No one has much of a handle on this. What we know is that the forecasts suggest there will be a dramatic fall in living standards, by about 7.1% over the next two years. How will creating a depression stimulate enterprise, innovation or investment, which are the drivers of productivity?

Finally, inflation is expected to peak at 11% in the first quarter and then fall. Again, the discussion really makes no advance on the old discussion about the causes of inflation, whether due to excess demand or cost push—there are, of course, cost-push factors. I think everyone understands that the UK’s support of Ukraine has pushed up energy prices. That is why the Government are now explicitly asking the public to save energy to beat Putin, using crude, World War II-style “Dig for Victory” messaging. What is much less understood is that the UK has a special problem: gas is particularly expensive here, due to our chronic lack of gas storage and our inefficient and exploitative energy distributors.

To conclude, I am strongly in favour of balancing the budget, but not by any mixture of cutting spending and raising taxes. The approach I would favour in present circumstances revives the almost forgotten Keynesian idea of a balanced budget multiplier. A contemporary version of this would suggest a windfall tax or excess profits tax on energy producers, the proceeds of which would be spent by the Government on maintaining investment and consumer demand in the face of the economic downturn.

Too Poor for War


Decades of deindustrialization have hollowed out the UK economy and made it woefully ill-prepared for wartime disruptions. As the financial speculators who funded its current-account deficits turn against the pound, policymakers should consider Keynesian taxes and increasing public investment.

LONDON – A wartime economy is inherently a shortage economy: because the government needs to direct resources toward manufacturing guns, less butter is produced. Because butter must be rationed to make more guns, a war economy may lead to an inflationary surge that requires policymakers to cut civilian consumption to reduce excess demand.

In his 1940 pamphlet “How to Pay for the War,” John Maynard Keynes famously called for fiscal rebalancing, rather than budgetary expansion, to accommodate the growing needs of the United Kingdom’s World War II mobilization effort. To reduce consumption without driving up inflation, Keynes contended, the government had to raise taxes on incomes, profits, and wages. “The importance of a war budget is social,” he asserted. Its purpose is not only to “prevent the social evils of inflation,” but to do so “in a way which satisfies the popular sense of social justice whilst maintaining adequate incentives to work and economy.”

Joseph E. Stiglitz recently applied this approach to the Ukraine crisis. To ensure the fair distribution of sacrifice, he argues, governments must impose a windfall-profit tax on domestic energy suppliers (“war profiteers”). Stiglitz proposes a “non-linear” energy-pricing system whereby households and companies could buy 90% of the previous year’s supply at last year’s price. In addition, he advocates import-substituting policies such as increasing domestic food production and greater use of renewables.

Stiglitz’s proposals may work for the United States, which is far less vulnerable to external disruption than European countries. With a quarter of the global GDP, 14% of world trade, and 60% of the world’s currency reserves, the US can afford belligerence. But the European Union cannot, and the UK even less so.

While the UK has been almost as aggressive as the US in its response to Russia’s actions, Britain is far less prepared to manage a war economy than it was in 1940: it makes fewer things, grows less food, and is more dependent on imports. The UK is more vulnerable to external shocks than any major Western power, owing to decades of deindustrialization that have shrunk its manufacturing sector from 23% of gross value added in 1980 to roughly 10% today. While the UK produced 78% of the food it consumed in 1984, this figure had fallen to 64% by 2019. The British economy’s growing reliance on imported energy has made it even less self-sufficient.

For decades, the financial sector propped up the UK’s hollowed-out economy. Financial flows into the City of London allowed the country to neglect trade and artificially maintain higher living standards than its export capacity warranted. Britain’s current-account deficit is now 7% of GDP, compared to a current-account surplus of 1.3% of GDP in 1980. Until recently, the British formula had been to finance its external deficit by attracting speculative capital into London via the financial industry, which had been deregulated by the “big bang” of 1986.

This was brilliant but unstable financial engineering: foreigners sent the UK goods that it otherwise could not afford, Britain sent them sterling in return, and foreigners used the pound to buy British-domiciled assets. But this was a short-term fix for the long-term decline of manufacturing, enabling the UK to live beyond its means without improving its productivity.

In his 1930 Treatise on Money, Keynes distinguishes between “financial circulation” and “industrial circulation.” The former is mainly speculative in purpose. But an economy that depends on speculative inflows experiences financial booms and busts without any improvement to its underlying growth potential. The UK’s strategy echoed this observation: it did little to develop exportable goods that could improve the current-account balance, and its success depended on foreigners not dumping the pound.

But the speculator’s logic, as George Soros explains, is to make a quick buck and get out before the crash. Relying on speculators is like a narcotics addiction: a temporary high becomes a necessary crutch. The energy crisis brought on by the Russia-Ukraine war was the equivalent of cold-turkey withdrawal, blowing an even larger hole in the UK’s trade balance. The current-account deficit is expected to increase to 10% of GDP by the end of 2023, providing short-term investors with a strong incentive to sell their sterling-denominated bonds.

The pound’s ongoing decline will make UK imports more expensive. And since import prices will likely rise faster than export values, the decline in the sterling’s exchange rate will probably widen the current-account deficit, not least because the country’s diminished manufacturing sector depends heavily on imported inputs. As the pound depreciates, the price of these imports will increase, resulting in even greater erosion of living standards.

This leaves policymakers with few good options. The Bank of England has already raised interest rates to maintain inflows of foreign capital, but high interest rates will likely crash housing and other asset markets that have become addicted to rock-bottom rates over the past 15 years. Taking steps to balance the budget may temporarily calm markets, but such measures would not address the British economy’s underlying weakness. Moreover, there is no evidence that fiscal consolidation leads to economic growth.

One possible remedy would be to revive government investment. UK public investment fell from an average of 47.3% of total investments between 1948 and 1976 to 18.4% between 1977 and 2007, leaving overall investment dependent on volatile short-term expectations.

The only way the UK could “pay for the war” is to implement an industrial strategy that aims to increase self-sufficiency in energy, raw materials, and food production. But such a policy will take years to bear fruit.

All European countries, not just Britain, face an energy crisis as a result of the disruption of oil and gas supplies from Russia, and policymakers are eager to increase energy inflows. But any deal with Russia as it wages its war on Ukraine with apparent disregard for human life would carry enormous moral and political costs.

One possible way forward may be to reach an agreement to ease economic sanctions in exchange for a resumption of gas flows. Given its special economic vulnerability, and following Brexit, Britain is well placed to explore this idea on behalf of – but independently from – the EU.

A limited agreement could ease Europe’s energy crisis while allowing continued military support for Ukraine. But it should be conditional on Russia reducing the intensity of its horrific “special military operation.” Negotiation of a limited energy-sanctions deal could, perhaps, open the door to a wider negotiation aimed at ending the war before it engulfs Europe.

As for the UK, in the short term it will remain dependent on City-generated financial inflows to prevent a catastrophic near-term collapse of the pound, forcing the new British Chancellor, Jeremy Hunt, to scramble to “restore confidence” in the British economy. In lieu of Keynesian taxes or public investment, that will most likely mean drinking more of the austerity poison that caused Britain’s current malady.

Reinstating fiscal policy for normal times: Public investment and Public Jobs Programmes



This paper upholds the classical Keynesian position that a laissez-faire market economy lacks a spontaneous tendency to full employment. Focusing on the UK case, it argues that monetary policy could not prevent the economic collapse of 2008-9 or achieve full recovery from the Great Recession that followed. The paper then outlines the case for fiscal policy to regain a permanent status of primacy in modern macroeconomic management, beyond the pandemic emergency. It distinguishes between public investment and automatic stabilisers, reducing discretionary actions to a minimum. It presents the case for re-empowering the State’s public investment function and for reforming the system of automatic counter-cyclical stabilisers by means of public jobs programmes.

1. Introduction

Even before the advent of the pandemic crisis, economic policy had begun to inch back to the use of fiscal instruments after decades of belief in the efficacy of monetary policy to maintain the lowest possible –i.e. non-accelerating inflation –rate of unemployment (NAIRU). Already in an October 2019 speech, former ECB Chairman Mario Draghi was talking about “fiscal policy playing a more supportive role alongside monetary policy.”This reappraisal followed the failure of quantitative easing (QE) to providethe promised recovery in prices and output after the Great Recession. Conventional economic theory could not explain why trillions of QE assets remained stuck in bank deposits offering negative real rates of return. Even the very same Central Banks that have implemented unconventional monetary policy programmes have recently admitted that “important knowledge gaps remain” over the “technical understanding of QE” (Bank of England, 2021b).Disappointment over monetary policy has coincided with a much more positive reading of the global fiscal boost in 2008-9, and a much more negative interpretation of Europe’s subsequent espousal of fiscal ‘consolidation’. A notable turning point was the rehabilitation of fiscal multipliers in 2013 by the IMF Chief Economist (Blanchard and Leigh, 2013), whose findings have been recently confirmed and extended (Fatas & Summer, 2018; Brancaccio and De Cristofaro, 2020). This reflected both disappointment with the results of monetary policy and the reduced costs of fiscal policy opened up by interest rates stuck at the zero lower bound. In short, the economic crisis of 2008 exposed long-standing muddles in conventional macroeconomic theory, with vicious interrelated consequences (Gabellini and Gasperin, 2019). However, no generally agreed vision exists for future conduct of macroeconomic policy. While monetary policy is generally viewed as insufficient to safeguard macroeconomic stability, the demand for fiscal ‘help’ is still far from being a principled discussion, more in the nature of a temporary emergency response to an unexpected shock, as championed by IMF Chief Economist Gita Gopinath (2020) or by the Governor of the Bank of England Andrew Bailey (2021), who merely sees fiscal policy as “helping to spread the cost of this [Covid-19] shock over time”. During the COVID-19 lockdowns, governments have run up deficits and debts unprecedented in peacetime, without abandoning the consensual theory of what constitutes fiscal prudence in the long term.Our proposition is that fiscal policy should be reinstated as part of a coherent and permanent framework for macroeconomic policy. In fact, the economic recovery that will follow the gradual resolution of the pandemic emergency will leave economies with higher debt-to-GDP ratios.A return to fiscal consolidation, without any consideration to the actual level of activity, must be avoided.1 This paper sketches the principles of a new fiscal policy approach, which would allow the maintenance of employment and output as near as possible to their optimal levels, while minimising the scope for discretionary spending driven by special interests. The focus is on the UK case.Section 2 of the paper outlines the main features of pre-crash orthodoxy. Section 3 shows how monetary policy failed in practice to stabilise the economy, both before and after the crash. Section 4 explains the causes of this failure. Section 5 outlines the case for reinstating fiscal policy. Section 6 discusses the importance of public investments in protecting against cyclical shocks and improving the long-run performance of the economy. Section 7 proposes a strengthening of the system of automatic fiscal stabilisers, embracing the introduction of a public sector job programme. Section 8 summarises the elements of theproposed fiscal approach.

2. Pre-crash macroeconomic orthodoxy

Pre-crash macroeconomic orthodox policy was essentially underpinned by the following beliefs:

(1) The belief in optimally self-regulating markets, with the supposed existence of a ‘natural’ rate of unemployment to which the economy automatically converges.This is associated with the rational expectations revolution of the 1970s, championed by Robert Lucas and Thomas Sargent. In their models (Lucas, 1972) there is no uncertainty, only risk,and wages and prices are flexible. The ‘New Keynesians’ pointed out that the existence of sticky nominal prices and wages prevented the economy from being optimally self-adjusting (Mankiw and Romer, 1991), but mainstream policy saw this fact as an invitation to de-regulate product and labour markets. It was, therefore, the economics of Lucas and his school which provided a theoretical underpinning for the Thatcher and Reagan liberalisations and labour market reforms of the 1980s. On top of this, Eugene Fama’s (1970) ‘efficient market hypothesis’ rationalised financial de-regulation and justified the expansion of banking, as giving a promise of uninterrupted liquidity.

(2) The control of inflation is a necessary and normally sufficient condition for macroeconomic stability. This is attributed to Milton Friedman’s (1968) elegant demonstration that competitive market economies2would be stable at their ‘natural rate of unemployment’ provided the rate of inflation was kept low and constant.

(3) Monetary policy is superior to fiscal policy for stabilisation purposes. This also followed from Milton Friedman’s argument3that fiscal policy operates only with ‘long and variable lags’, so that government interventions are likely to have their impact in the wrong phase of the business cycle.

(4) Stabilisation policy should be carried out by independent central banks,4insulated from political interference and applying mechanical rules. In contrast, the vote-seeking propensity of politicians would infallibly lead them to overheat the economy by running budget deficits at full employment.

(5) The State is less efficient in allocating capital than the private sector. Although Adam Smith ([1776] 1976) recognised the State’s responsibility to provide public goods such as transport and education, this was downplayed by his successors. David Ricardo (1817) notably remarked that only ‘productive industry’ could generate useful capital. This kind of reasoning underpinned the marginalisation of the State’s investment function from the 1970s. It also fed the idea that State budgets should be balanced at the lowest feasible level of taxes and revenues to prevent them from ‘stealing’ productive resources from private industry.

In summary, orthodox theory held that fiscal policy should have little or no influence either on the economy’s level of output or upon the allocation of capital.The year 1976 represented the symbolic point of hegemonic transition from Keynesian fiscal to Friedmanite monetary policy, particularly in the UK.That year James Callaghan, Labour’s prime minister, told his party conference5 (quoted in Skidelsky, 2018, pp. 169-170):“We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment…That is the history of the last twenty years.”

Economists will recognise this as the death sentence ofPhillips Curve Keynesianism (Phillips, 1958). Prime Minister Callaghan’s account, which echoed Friedman’s narrative of the 1960s, ignored the fact that the average inflation rate in the UK was lowerin the 1960s than it had been in the 1950s, while in the United States it was about the same (table 1). The record shows that full employment and low inflation –coinciding with a low ‘Discomfort Index’, the sum of the rates for inflation and unemployment popularised later by the McCracken Report (OECD, 1977) -were perfectly compatible with intelligent Keynesian fiscal policies. In contrast, the golden age of macroeconomic monetarist management (i.e. the 1990s) recorded higher Discomfort Indexes, due to the inability to reduce unemployment down to the levels of the 1950s and 1960s. Moreover, the relative importance of those two macroeconomic objectives shifted away from the full-employment commitment of the Keynesian era to the univocal obsession with inflationtargets, embedded in the policy approach of major central banks during the 1990s.6What these figures also show is that the so-called ‘fiscal theory of inflation’ -the theory that the government would always use inflation to meet its budget constraint -is at the very least vastly exaggerated. Although inflation was starting to rise at the end of the 1960s it really only took off in the 1970s, under the influence of a coordinated world boom (which caused a dramatic rise in commodity prices), the first oil price shock and the breakdown of the international monetary system (Skidelsky, 2018, pp. 164-167).

Friedman’s explanation of the higher rates of inflation over the 1970s is thus seriously incomplete. As confirmed by Benati (2008, p. 123): “the Great Inflation was due, to a dominant extent, to large demand non-policy shocks, and to a lower extent ―especially in 1973 and 1979 ―to supply shocks.”

Nevertheless, the stagflation period continued to be considered as the empirical demonstration that demand-management fiscal policy was ultimately ineffective –if not deleterious –as a tool of macroeconomic stabilisation.The withdrawal of the State from stabilisation policy was matched by the shrinkage of its role in allocating capital to guide the investment decisions of private business. Since the mid-1970s, public investment as a share of total investment has steadily fallen indeveloped countries. The UK’s record is illustrative (figure 1): from an average of 47.3% in the years 1948-1976, the public investment share fell to 18.4% in the years 1977-2007. This has left total investment unduly dependent on volatile short-term expectations.

3. The weakness of monetary policy during the Great Moderation and its failure after the 2008 crisis

The case for reinstating fiscal policy as the main instrument for macroeconomic stabilisation rests on the limitations of monetary policy. Monetary policy has had a prolonged trial, from the 1980s to the present day. The evidence is consistent with two conclusions.First, central bankers’ achievement of their target rates of inflation during the Great Moderation, which lasted from the mid-1990s to 2008, was more the result of external factors than of good policy, as Roger Bootle argued in The Death of Inflation(1997). Likewise, Mervyn King (1998, p. 2) talked about a “benign environment” for monetary policy during the Great Moderation. Second, since the economic downturn of 2008-9, central banks have been trying in vain to restore the pre-crash trend rate of economic growth. In other words, monetary policy has had much less direct influence on the real economy than orthodox monetary theorists believe, and inflation outcomes are more the result of real-economy developments than their cause.In the immediate post-crash years (2008-2010), monetary and fiscal policy acted together to halt the downturn resulting from the 2008 financial crisis. “Deficits saved the world” declared Paul Krugman (2009). In the UK, government deficit relative to GDP increased above the 9% level in the years 2009-2010, keeping the economy afloat. Subsequent monetary expansion on its own failed to offset the effects of the fiscal consolidation started by the Chancellor of the Exchequer George Osborne in his budget of June 2010 (figure 2).

With conventional interest rate policy disabled, as official rates hit the zero lower bound, central banks resorted to ‘unconventional monetary measures’ in the form of quantitative easing, or buying government securities. In the UK, three rounds of quantitative easing (QE) in 2009-10, 2011-12, and 2016 injected into the British economy about £435 billion of ‘high-powered’ money corresponding to 21.8% of GDP in 2016. These measures did not achieve the recovery of prices one would associate with a strong upward movement of the business cycle (figure 3). Most importantly, the main failure of unconventional monetary policy was its inefficacy in revamping economic growth (figure 4). In the post-crisis years (2010-2019), real GDP growth was more than 1 percentage point lower than during the Great Moderation period (1997-2006).

QE was supposed to work through two main transmission channels. First, buying government debt held by banks would cause them to lower interest rates, making it cheaper for households and businesses to borrow money. Secondly, buying both public and commercial debts from non-financial companies, would stimulate investment “by boosting a wide range of

financial asset prices” (Bank of England, 2021a). However, this did not happen as quickly as foreseen, given that total business investment (in real terms) in 2014 was still below its pre-crisis level, with large variations among sectors: already in 2011 investment in real estate was close to its 2007 value, while it took until 2015 for the manufacturing sector to recover its pre-crisis value, confirming the relatively small impact of expansionary monetary policy outside housing (Krugman, 2014).7Slashing the official Bank Rate and implementing an unconventional programme of large-scale purchases of government bonds did lower short-term and long-term interest rates (figure 5), without spurring bank lending and business investment. The only clear impact was on government’s borrowing costs: interest rates on 10-year Gilts fell from 4.02% to 0.83% at the end of 2019, creating a fiscal bonus for extra primary spending.

The underlying expectation of monetary authorities, based on the theory of the money multiplier, was that an increase of base money M0 would lead to a multiplied expansion of broad money M4.8 In fact, as figure 6 shows, the relationship between these two variables in the period 2009-2015 was inverse.

This meant that QE failed to unblock the two expected transition channels from money to output and prices: the demand for bank loans did not respond to the lower structure of interest rates enabled by QE and asset owners (i.e. households and businesses) did not increase their spending (see Author, 2018, pp. 258-273). It was not the scarcity of liquidity that stopped businesses from investing, but rather a lack of demand, reinforced by the concurrent implementation of contractionary fiscal policy.

4. Theoretical shortcomings of monetary policy

The mediocre results achieved by monetary policy point to a key theoretical weakness: the scant attention paid to the causes and existence of what Keynes ([1936] 2018) called the “speculative-motive” or demand for money. In expecting QE to generate increased business

investment, the Bank of England ignored the possibility that the cash proceeds of the Bank’s bond sales would be ‘hoarded’, rather than spent. The United Kingdom Economic Accounts compiled by the ONS show that total currency and depositsof non-financial corporations in the UK increased from £ 428 billion in 2009 to £ 750 billion ten years later.The emergence of ‘idle balances’ was a well-established explanation of business downturns before Keynes. It was stated clearly by Hawtrey in 1925 (p. 42):

“When trade is slack, traders accumulate cash balances because the prospects for profit for any enterprise are slight, and the rate of interest from any investment is low. When trade is active, an idle balance is a more serious loss, and tradershasten to use all their resources in the business.”

Keynes took hold of the idea of ‘liquidity preference’ in the General Theoryand ran with it. First, he thought of it arising not just in moments of anxiety but as a normal condition of capitalist economies, given the inherent uncertainty about the future. It is his basic explanation of long-run underemployment equilibrium. Second, he thought of the rate of interest as the ‘price’ of dishoarding, not the reward for saving. Savings could not therefore be treated as ‘loanable funds’, whose rate of return had only to come down for investment to pick up. Third, absent official intervention, the liquidity premium attaching to money would prevent the establishment of a long-run rate of interest consistent with continuous full employment. Fourth, Keynes distinguished clearly between the cost of capital and the demand for capital. Central Bank policy can influence the financing of credit, but not the decision to invest which ultimately depends on the expected returns from the investment. QE adds to the liquid reserves of banks and corporations, it does not automatically reduce ‘risky’ lending rates or increase the marginal efficiency of capital.The Bank of England also ignored the distributional effects of its bondbuying policy. Its assumption was that, by raising asset prices, QE would automatically deliver the ‘wealth effect’ of increased consumption. Nevertheless, given the different class propensities to consume, this ‘effect’ turned out to be too small to stabilise consumption, with much of it being hoarded by wealthier individuals. Summing up this line of argument, the quantity of money is not an independent variable that affects lending and spending activities. The causality is rather the opposite: money circulation through the lending process depends on the level of economic activity (McLeay et al., 2014). How much QE-generated purchasing power is spent producing output depends on business expectations, and these ultimately depend on the state of effective demand, that is, having ‘consumers at the door’.

5. The need for fiscal policy and the conditions of its reinstatement

The Keynesian case for macroeconomic policy rests on the claim that a market economy lacks any efficacious internal mechanism for reaching and maintaining full employment. Moreover, because of radical uncertainty, investment is subject to sudden collapses. Such downturns, far from triggering V-shaped recoveries via flexible wages and prices, lead to a more general decline in aggregate demand. Monetary policy on its own is relatively powerless to prevent the collapse of business expectations or to counter the ensuing fall in aggregate demand.

This leads to the case for reinstating fiscal policy as a ‘necessary’ and ‘permanent’ tool of macroeconomic management.9The prime objective of fiscal policy should be to influence the level of aggregate demand in order to eradicate involuntary unemployment, accommodating the highest growth potential of the economy. A distinction needs to be made between capital and current spending.10Although both play a part in influencing demand, their functions are partly different. The role of capital spending is to help equip the economy with the infrastructures and the capital goods it needs for achieving better productive capabilities and a superior growth rate of the economy. The role of current spending is to provide the necessary resources for the government to carry out its ordinary functions, such as the provision of goods and services to the population, especially when it comes to offsetting short-term collapses, as in the recent case of the COVID-19 crisis.Following from these distinctions, fiscal policy should be reinstated in its double aspect of steadying total investment and offsetting cyclical disturbances through more automatic mechanisms.

6. The role of public investment

The return of macroeconomic policy management in normal times requires a permanent public investment function for the State. In the final chapter of his General Theory, Keynes ([1936] 2018, p. 336) stated the logic behind it as follows: “It seems unlikelythat the influence of banking policy on the rate of interest will be sufficient by itself to determine an optimum rate of investment. I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing anapproximation to full employment;though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative.” The State should therefore determine the volume, and influence the direction,of investment by its own capital spending, and not just seek to influence the price(i.e. the interest rate) of investment through monetary policy.This was fully recognised in the Keynesian era, when the large share of public investment over total investment contributed to reducing the inherent volatility of private investment (figure 1). The logic of this argument is that public investment level should be partly independent of the business cycle and based on “long views and on the basis of the general social advantage”11(Keynes, [1936] 2018, p. 143). When the economy slows down, public investment programmes should be maintained, independently from short-term public financing needs. A guaranteed flow of public projects would provide the expectational foundation of a growing economy, by reducing the scope for violent fluctuations in overall investment (Kalecki, 1971).12This is now increasingly supported by recent empirical evidence, which seems to confirm that ‘Schumpeterian’ public investments have sizeable multiplier and accelerator effects (Deleidi and Mazzucato, 2019). For a sample of eleven Eurozone countries (1970-2016), Deleidi et al. (2020, p. 354) have found that “fiscal multipliers tend to be larger than one and an increase in public investment engenders a permanent and persistent effect on the level of output”. Similar results are obtained with respect to public investment and military spending by Gechert & Rannenberg (2018), based on a collection of 98 existing studies. Estimates of this long-term ‘supermultiplier’ effects (Deleidi et al., 2019) for the US economy (1947-2017) report multiplier values on GDP to be 2.12 for direct public investment (including R&D), up to 7.76 for non-military R&D public investment. Public investment is performed by central and local governments or by government-controlled entities. In the first case, investment spending is often contracted out to the private sector, which assumes the responsibility for implementing the single investment projects. This normally increases the cost effectiveness of investment projects, while affecting the planning capacity of the State when it comes to promptly executing its investment programmes (Kattel and Mazzucato, 2018).Alternatively, public investment projects could be ‘internalised’,by making use of dedicated public agencies, which represent a more direct tool of policy intervention and state planning. In the UK, a significant share of public investments is performed by public corporations, whose investments are accounted separately from other business investments.13However, the share of public investments performed by public corporations in recent decades have been significantly lower than in the post-war years. The average share of investments made by public corporations from the early 1950s until the late 1970s was 44.5%, while it only represented 18.4% in the 1980-2016 period.14This is mostly explained by the privatisation of previous State corporations, operated throughout the 1980s, which compromised the capacity of the BritishState to directly orient public investments in a more targeted way. A more effective role for the State in planning its investment programmes does not necessary imply the re-nationalisation of large chunks of the economy. Nevertheless, the macroeconomic efficacy of public investment can be reinforced with a further internalisation of investment projects within existing public entities and with a greater involvement in the coordination of investments performed by private businesses, as notably advocated decades ago by the Nobel Laureate James Meade (1970).

7. The role of public jobs programmes

The normalisation of fiscal policy as a tool to reach and maintain full employment is complemented by the role that automatic fiscal stabilisers play in taming thebusiness cycle. These can be further strengthened by means of public sector job programmes, which would directly offset cyclical variations in employment.According to Paul Samuelson (1948, pp. 332-334): “the modern fiscal system has great inherent automatic stabilizing properties.” When the economy turns down, government tax receipts fall and spending on unemployment benefits and other transfers rise, creating an automatic deficit which offsets the fall in private spending (or in terms of the national income identity offsets the rise in private sector saving). When the economy recovers the budget automatically re-balances. Following on from Minsky’s early theorisation of the government as “an employer of last resort” (1986; 2013), and in line with the existing policy research from the Levy Institute in the US15(Wray et al., 2018), this paper advocates a Public Job Programme (PJP). This is tailored for the UK economy, but can readily be applied in other countries. It would not only restrict discretion overfiscal policy, but it would also constitute a much more powerful –and modern –counter-cyclical stabiliser than the system described by Samuelson.

7.1 Earlier versions of public job programmes

Far from being a revolutionary innovation, the PJP idea is “plain common sense” as Keynes and Henderson (1929, p. 10) put it when backing Lloyd George’s programme of loan-financed public works to reduce the then high level of British unemployment.The Lloyd George plan did not see the light in the UK, but it would soon find its most famous realisation in the New Deal programmes under US President Franklin D. Roosevelt. Reflecting on the Works Progressive Administration (WPA), a programme that was employing 3.3 million workers in 1938, Donald S. Howard wrotein 1943 (p. 126):“An enumeration of all the projects undertaken and completed by the WPA during its lifetime would include almost every type of work imaginable […] from the construction of highways to the extermination of rats; from the building of stadiums to the stuffing of birds; from the improvement of airplane landing fields to the making of Braille books; from the building of over a million of the now famous privies to the playing of the world’s greatest symphonies.”Similarly, the Civilian Conservation Corps (CCC) was designed to provide young unemployed men (around 1 million) with work on projects that included (Merill, 1981, p. 197):“The prevention of forest fires […] plant pest and disease control, the construction, maintenance and repair of paths, trails and fire-lanes in the national parks and national forests and such other work […] as the President may determine to be desirable.”Its rationale was later succinctly stated by the US National Commission on Technology, Automation and Economic Progress in 1966 (p. 110):“With the best of fiscal and monetary policies, there will always be those handicapped in the competition for jobs by lack of education, skill, experience, or because of discrimination. The needs of our society provide ample opportunities to fulfilthe promise of the Employment Act of 1946: ‘a job for all those able, willing, and seeking to work’. We recommend a program of public service employment, providing, in effect, that the Government be an employer of last resort, providing work for the ‘hard-core unemployed’ in useful communal enterprises.”The Humphrey-Hawkins Act of 1978 authorised the US Federal government to create a ‘reservoir of public employment’ to balance fluctuations in private spending. The reservoir would automatically deplete or fill up as the economy waxed or waned, creating an ‘automatic stabiliser’. However, the Humphrey-Hawkins Act was never implemented. It represented the last gasp of New Dealism. In later decades, sporadic attempts to implement a job guarantee policy have struggled against the orthodoxy that unemployment resulted from labour market inflexibility and that reforming the labour market was key to lowering the ‘natural’ rate of unemployment. Very limited examples of public job programmes can be found in Europe. In 1997, European Prime Ministers pledged a job or training guarantee to all newly unemployed workers within one year of losing their job (Layard, 2011, p. 174). Only Denmark, The Netherlands and Hungary (Matolcsy and Palotai, 2018) have sought to implement that pledge, albeit in very limited forms. Outside Europe, India has experimented the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in 2005 (Gosh, 2015), while Argentina introduced its Plan Jefeemployment policy in 2002 to address the consequence of the unfolding financial crisis (Kostzer, 2008).

7.2 An outline of a modern Public Job Programme

How would a modern public work programme be conceived? In our sketch for a Public Job Programme (PJP), the government would guarantee a job to any job-seeker of working age who cannot find work in the private sector, at a fixed hourly rate which would not be lower than the national minimum wage rate. Some other elements need to be considered:1. PJP should not target aggregate output, but labour demand. This eliminates the problem of having to calculate output gaps. It is less analytically and practically complicated to target employment than output. Definition of full employment can be made quite precise and uncomplicated: it exists where all who are ready, willing, and able to work are gainfully employed at a given base wage. This corresponds to the absence of ‘involuntary’ or ‘unwanted’ unemployment.162. The PJP pool acts as a labour buffer-stock, which expands and contracts automatically with the business cycle, reducing discretionary variations in spending. It is analogous in that sense to the unemployment insurance fund, which also automatically depletes and replenishes, but is a more powerful automatic stabiliser than the latter (see below for an analytical explanation). 3. A PJP would maintain employability better –an important factor in economic recovery and growth prospects. As Pavlina Tcherneva (2018, p. 17) puts it: “it continues to stabilize economic growth and prices, using apool of employed individualsfor the purpose rather thana reserve army of the unemployed.” It is worth emphasising that maintaining ‘employability better’ is a comparative term: the comparison is not between a PJP job and a ‘good’ job, but between a PJP job and no job.4. PJP workers would be paid at a fixed rate. This can be set at any level the government wants above unemployment benefit. A fixed wage sets a floor for private firms’ wages. If the PJP wage was set at the national minimum wage, no minimum wage legislation, with all its attendant compliance costs, would be needed, since private employers would always have to pay at least the PJP wage if they were to attract workers, and in periods of strong private sector demand they would have to bid for scarce labour at above the PJP wage. The aim of paying PJP employees a fixed minimum wage is both to set a floor to the aggregate fall in income in a downturn and to prevent employers from undercutting the legislated minimum wage in ‘normal’ times.17 For many, PJP wages may be lower than those they had previously earned, but the comparison should not be between PJP and market employment, but between PJP and no employment at all.5. PJP job champions attach great importance to Keynes’s stress in 1937 ([1978], p. 385) on the “need today of a rightly distributed demand than of a greater aggregate demand”. A satisfactory average level of employment can be consistent with some parts of the economy overheating and others under-heating, as Minsky (1965) noted. The implication of this is that orders for work should be placed in areas experiencing, or most vulnerable to, high unemployment. A PJP programme can be used to influence the structure of employment as well as its level -it can thus be made consistent with advocacy for a ‘Green New Deal’.6. Consistently with the above, a PJP could be administered locally, by a variety of agencies: local governments, NGOs, and social enterprises. Their goal would be to create ‘on the spot’ employment and training opportunities where they are most needed, matching unfulfilled community needs with unemployed or underemployed people. To ensure that projects can be ‘shovel-ready’ -rolled out on demand -inventories of communal needs should be prepared and kept by ‘job banks’ and job centres. They could fall under three main heads:18 a) care for the environment; b) care for the community; c) care for people. This does not imply that ‘caring’ will only be done when unemployment is heavy. A PJP placement should not replace, it should complement, existing public sector care provision. For instance, a PJP placement could use nursing facilities and schools to create needed-on-the-job training and credentialing opportunities to facilitate transition to private sector jobs as private sector employment opportunities pick up.

7. The fiscal resource for a PJP would come initially from current taxation, just like normal unemployment benefits. In case of a recession, the extra-spending required to pay for the newly unemployed workers could come either from taxes raised progressively fromhigher incomes –exploiting the expansionary effect of the balanced-budget multiplier (Haavelmo, 1945) –or from borrowing, or by a combination of both.A first objection against PJP is based on the idea that it would lead to inflation spiralling out of control. On the contrary, the ‘automaticity’of the programme makes it less prone to be inflationary than discretionary management of the business cycle. It provides two further built-in barriers to inflation: (a) sensitivity to the regional distribution oflabour demand and (b) maintenance of employability in the downturn, which would relieve the ‘bottleneck’ of skilled labour in the upturn. To prevent the private sector rather than the public sector becoming the source of inflationary pressure, the government could be mandated to raise anti-inflation taxes automatically to prevent inflation rising above a stated rate. If counter-cyclical policy can be made sufficiently automatic, there is much less need for governments to ‘outsource’ anti-inflationary policy to central banks.A second common objection is that PJP employment is bound to be ‘pretend’ work, in the spirit of paying people to dig holes and fill them up again. This is one reason why some ofthose sympathetic to a job guarantee favour subsidising private sector employers to retain labour in a downturn. Theoretically, this would have the same effect. However, it would be extremely difficult to prevent private sector employers claiming the subsidy under false pretences (as it has happened to some extent with the Furlough schemes of 2020). The chief defect of financial incentives for people to seek work is that they may incentivise the unemployed to look for jobs but provide no assurance whatsoever that they will find them. PJP would eliminate this obvious structural flaw. 7.3 The automatic countercyclical macroeconomic impact of a PJP programmeThis section aims to provide some analytical support to the intuition that the implementation of a PJP would represent a more effective form of countercyclical fiscal policy than the traditional system of unemployment benefits (UB). In particular, the comparison is performed with respect to the mitigating element of ‘automatic stabilisation’ that the two alternatives represent, when a recession occurs. Duringthe negative phase of the business cycle, government deficit increases as a result of two factors: a fall in revenues due to the diminished level of economic activity and an increase in public expenditure in the forms of payments to the newly unemployed workers. In the PJP case, the unemployed worker, instead of receiving a monetary compensation for the loss of his/her private job, is offered a public job, and remunerated at the minimum national wage. In simple Keynesian model of a closed economy, national income equals the sum of aggregate consumption, investment and government expenditure:


The consumption equation takes this form:


Where 𝐶0 is autonomous consumption and 𝑐𝑌 is the part of consumption which is explained by the level of national income. 𝑐 represents the marginal propensity to consume, and it assumes any value between 1 (all national income is consumed) and 0 (all national income is saved).Investments are supposed to be dependent on exogenous factors (i.e. expected profitability or ‘animal spirits’):


Government spending is autonomous:


Inserting the functional forms of 𝐶,𝐼 and 𝐺 in the expenditure identity, and rearranging, gives the typical Keynesian dynamic income equation:


Every variable within parenthesis represents an autonomous component of aggregate demand. Therefore, with a variation in one of these (e.g. fiscal expansion +∆𝐺0), the expression 1/(1−𝑐) captures the value of its multiplier effect on 𝑌. What could happen in the case of a downturn, driven for instance by a sudden fall in investment 𝐼0? While the income component of consumption 𝑐𝑌reacts immediately and proportionally to a recession (i.e. a fall in aggregate national income 𝑌), the autonomous consumption component 𝐶0 relates to other psychological conditions. It seems reasonable to assume that, during a recession, 𝐶0 falls because people will expect to earn less in the future and they would reduce extra expenditures in favour of more precautionary savings. However, under the PJP scenario, not only would the wage compensation be immediately higher, but it would remain permanent as long as the worker is employed under the PJP. Moreover, the employability of the worker under a PJP scheme would be higher than the medium to long-term unemployed worker under UB, thus increasing the prospect of a better-paid private sector job in the future. This would positively influence the aggregate autonomous component of consumption during a recession: under a PJP scenario it would nonetheless fall, but by a lower amount than in the UB case:


Secondly, the aggregate marginal propensity to consume 𝑐(i.e. the sum of all individual marginal propensities to consume, ∑𝑐𝑖𝑁𝑖=1) would differ under the two different scenarios. The expansion of spending on PJP during a recession could also imply a redistribution of income from higher to lower earners (or not at all earners, as the unemployed worker would be), if the first were to be taxed more in order to finance extra public jobs.19 Two forces would then be at play.

First, the redistribution of income itself would have a positive impact on the aggregate propensity to consume. At the same time, the relatively higher stability of earnings and job prospects in a PJP scenario would reduce the incentive to save a higher rate of nationalincome, therefore increasing the marginal propensity to consume. It is reasonable to conclude that these parallel dynamics would have a more positive impact on the aggregate marginal propensity to consume in the PJP case than they would have under a simple UB system of less-than-compensating income transfers:


The crucial result arising from the distinction between the two systems is that, when considering an identical expansion in public expenditure following a recession, recovery under the PJP would be stronger. Finally, both the UB and PJP approaches should be conceived on a per capita basis. They would apply to the same number of newly unemployed. Given that PJP would amount to a full and permanent minimum wage, while the UB would represent a lower and progressively reducing disbursement, the overall increasein public expenditures relative to this automatic stabilisation mechanism would be higher in the case of the PJP. Per capita expenditure under a PJP scenario would always be higher, because providing a permanent UB at the minimum wage level (or close to) would be unfeasible, as it would generate perverse incentives for low-skilled job seekers. In order to address the same number of unemployed people, the PJP will initially imply a higher deficit but one which will rapidly fall in response to the higher boost to demand, which will increase the tax revenues (via the enlargement of the tax base) and reduce expenditures on unemployment.

8. Concluding remarks

This paper has attempted to discuss the following propositions: first, a laissez-fairemarket economy is cyclically unstable and liable to settle down to a long-term underemployment equilibrium. Second, macroeconomic policy management is required to reach and maintain continuous full employment. Third, fiscal policy is a much more effective tool to achieve this than monetary policy by itself. Fourth, an effective approach to fiscal policy would separate and reinforce the practical use of capital and current expenditure, while limiting the discretionary element in old-style Keynesian demand management. Anew fiscal policy approach can be outlined, based on a combination of long-run public investment and short-run public job programmes (table 2).

Public investment –investments in general, as noted by Sylos Labini(1964) -directly impacts on the demand for capital goods (macroeconomic impact), while increasing the productive and innovative capacity of the economy (microeconomic impact). Similarly, public job programmes impact on the demand for consumer goods via workers’ wages (macroeconomic impact), while increasing their employability (microeconomic impact).The investment component of demand is affected directly by public investments acting as a catalyser of private investment, and indirectly by public job programmes because they better preserve the income expectations of workers. Higher nationalincomes coming from PJP wages positively impact on consumption.The two pillars jointly support a full employment level of economic activity, the public investment programme by protecting total investment against the fluctuations of private investment, and the PJP by strengthening the automatic stabilisers.Leaving to one side the important issue of coordination of fiscal and monetary policy, the financing source of public investment should be based on borrowing, while PJP can be financed by a combination of both borrowing and taxation, with a progressive taxation system that, by redistributing income, maximises the multiplier effect via a higher aggregate marginal propensity to consume. The priorities for public investment, classified as capital expenditure, would be centrally planned, in order to reduce coordination problems, but their implementation should take into account the role of local business and public authorities. By contrast, public job programmes can be planned and implemented locally, with precise attention to the needs of local communities.

The employment target of public investment lies in the creation of jobs via the multiplier effect of public investments on private business, while public job programmes address the reduction of unemployment through the direct creation of work.In conclusion, the two pillars of the proposed fiscal policy constitute the sketch for a modern Keynesian demand management policy based on the primacy of fiscal policy. Moreover, far from resuscitating fiscal policy as a mere emergency measure for extraordinary times –e.g. financial crises, natural disasters, pandemic events, etc. –they promote its continuing validity as the most effective and reliable instrument for reaching and maintaining a full-employment level of economic activity. This will becomeparticularly important when the COVID-19 crisis is over, leaving the scars of higher unemployment levels, business insolvencies and losses in industrial production. The trauma of the ongoing crisis will not be overcome if fiscal policy is set to turn ‘orthodox’ –that is, cease to exist as a macroeconomic tool. It is important for governments to understand that fiscal policy is for ‘normal’ times.


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1 For instance, the Italian Treasury in October 2020 was already outlining its long-term budgetary programme with the aim to set a reduction trajectory for the debt-to-GDP ratio to the pre-pandemic levels by 2031. Its ‘Budget Note’ does not include a single mention of any employment target (Ministero dell’Economia e delle Finanze, 2020).

2 This belief in the inherent stability of product markets anchored in stable inflationary expectations underpinned the succinct policy pronouncement of Nigel Lawson, then Chancellor of the Exchequer (quoted in Skidelsky, 2018, p. 192): “It is the conquest of inflation, and not the pursuit of growth and employment which […] should be the objective of macro-economic policy. And it is the creation of conditions conducive to growth and employment, and not the suppression of [inflation] which […] should be the objective of macroeconomic policy.” Such conditions typically included de-regulating labour and product markets, nationally and globally.

3 Friedman (1960) believed that a monetary policy that targeted interest rates was equally unreliable. That is why he favoured a money growth rule: the monetary authority should increase the money supply by a fixed percentage each year. Post-Friedman’s monetary policy approach rejected Friedman’s rule, but substituted a different rule –the Taylor (1993) rule –whereby central banks raise or lower their lending rates by a certain percentage in response to deviations from their inflation targets.

4 In his book Unelected Power(2019), Paul Tucker endorses the case for delegation of macroeconomic policy to central bank technicians, given the lack of ‘credible commitment’ by politicians to govern in the public interest. He does though raise the issue of the legitimacy of the decisions of banking technocrats.

5 The famous passage was written by his then Friedmanite son-in-law Peter Jay.

6 Notably, Article 2 of the European Central Bank’s Statute claims “the primary objective of the ESCB shall be to maintain price stability”.

7 ONS Data.

8 Broad money aggregate M4 is a measure of money supply in the UK. According to the classification made by the Bank of England, M4 comprises: holdings of sterling notes and coin by the private sector (other than monetary and financial institutions); sterling deposits (including certificates of deposit); commercial paper, bonds, floating rate notes and other instruments of up to and including five years’ original maturity issued by UK monetary and financial institutions; claims on UK monetary and financial institutions from repos; estimated holdings of sterling bank bills; 35% of the sterling inter-MFI difference.

9 It is important to emphasise this necessity, as recent academic literature has implied that were monetary policy not ‘constrained’ by the zero lower bound, it would be superior to fiscal policy. See Blanchard et al. (2020), Furman & Summers (2020).

10 The theoretical distinction between capital investment and current expenditure is well recognised in public finance theory (Sargent, 1981, pp. 23-24): “A pure current account expenditure is for a service or perfectly perishable goods that gives rise to no government-owned asset that will produce things of value in the future. A pure capital account expenditure is a purchase of a durable asset that gives the government command of a prospective future stream of returns, collected for example through user charges, whose present value is greater than or equal to the present cost of acquiring the asset. A pure capital account budget would count as revenues the interest and other user charges collected on government-owned assets, while expenditure would be purchases of capital assets. On these definitions, government debt issued on capital account is self-liquidating […]. Government debt issued to finance a pure capital account deficit is thus not a claim on the general tax revenues that the government collects through sales and income taxation. The principles of classical economic theory condone government deficits on capital account.”

11 For instance, public investment should be financed at the central government level and directed to the long-term objective of securing an adequate supply of public goods. The concept of public goods can be considered in a rather extensive way, ranging from the very restrictive textbook definition of a good “which can be enjoyed by everyone and from which no one can be excluded” (Samuelson & Nordhaus, 2009, p. 36) such as basic infrastructures to the more comprehensive aim “to do those things which at present are not done at all” (Keynes, 1926, p. 46), like investment in projects developing new technologies.

12 In our presentation, we deliberately abstract from additional reasons for public investment deriving from the existence of public goods or the possibility of enhancing the productive capacity of the economy. For instance, Mazzucato (2013) has shown that public investment in R&D has had an instrumental role in the development of new technologies in consumer electronics, renewable energies and pharmaceutical products.

13 A notable difference with respect to other countries, in which investments performed by State-owned enterprises are not distinguished from ‘private business investments’ even if these entities are classified as ‘public corporations’ (See United Nations’ System of National Accounts, 2008).

14 Author’s elaboration on ONS data

15 The idea of job programmes became also quite popular in Europe in the immediate post-war period, as a very direct way to eradicate the conditions of poverty that wereafflicting several European economies. In Italy, for instance, the consensus around this proposal stretched across thinkers with very different ideological orientations: from the proposal of the social-liberal Ernesto Rossi (1977), to the 1949 ‘Piano del Lavoro’ of the communist trade union CGIL (Annali Fondazione Di Vittorio, 2014), to the Catholic social teaching of Giorgio La Pira (1951), who would later put into practice a scheme of public works during his years as Mayor of Florence (1951-1957).

16 In our definition, involuntary unemployment includes forced underemployment: those in work for less hours than they would wish.

17 A PJP wage set at above the minimum wage, as recommended by American advocates (see Minsky, 2013 and Tcherneva, 2020), would also have a beneficial distributional effect, by substituting an upward for a downward pressure on wages. It would thus bring a single instrument to bear on the interrelated problems of unemployment and poverty. A public sector job guarantee might be built round the aim of reducing poverty. However, this is not its main macroeconomic objective.

18 Key areas of activity in the Hungarian programme are: use of organic and renewable energy; repair of public road networks inside rural settlements; elimination of illegal waste dumps; increase of local food sufficiency.

19 The redistribution of income happens if higher income earners are taxed more to finance more PJP workers, but the overall distribution of income become less unequal as more people retain a higher income flow compared to the UB case. In fact, the distributional comparison has to be made between the two different scenarios: in the UB case, incomes end up being less equally distributed than in the PJP case.