Emma Dawnay is board member of Monetäre Modernisierung, the NGO which brought a national referendum on Sovereign Money in Switzerland in 2018.
The amount of goods and services that workers can afford to buy from their wages has been an ever-decreasing proportion of the total goods and services produced over the last 40 years. This, argues Geoff Crocker in his book Sovereign Money and Basic Income, is a problem. The vast majority of workers have to get hold of unearned income to supplement their present consumption, in the form of benefits and pensions, but also increasingly by taking out loans.
Whether it be due to increasing automation reducing the need for workers, or the owners of firms having more power and thus being able to withhold higher proportions of a firm’s profits, Crocker argues the current system is not sustainable. It will fail or at least drastically reduce future potential consumption for most people.
He proposes a simple solution: the state should create the money needed to bridge this gap – debt free – and simply give it to all citizens (this ‘debt-free’ money is also known as sovereign money, which includes not only coins and banknotes, but also electronic money). It solves the problem that the economic system has (people not being able to buy the output of the economy) simply by handing people a basic income, and at the same time it solves the main argument against a basic income: that it would be too expensive. It also answers the question of “how much?” – an ongoing concern for both proponents of a basic income and for proponents of a sovereign money system.
Crocker’s book is a short read (94 pages) and written at a level easily accessible to a non-academic audience, whilst his points are backed up by extensive referencing making his writing worthy of an academic journal.
He gives a good summary of the dominant economic theories since the 1930’s, from Keynesian fiscal demand management, to monetarism with interest rates being used to control inflation, which includes interesting perspectives of key economists and thought leaders. Different reasons for the 2007/2008 financial crisis are compared and critiqued concluding that the cause had more to do with too little demand supplemented by a huge growth in consumer debt, than the predominant explanation of ‘bad’ banks that were too lightly regulated. If the diagnosis of a problem is incorrect policy responses are unlikely to work. Crocker argues the policy responses in this case did not help: increased banking regulation has resulted in stifling growth; quantitative easing has increased inequality; and austerity has caused great hardship – all without making the financial system more stable.
His diagnosis of the problem, like several other economists, is that a build-up of debt led to the financial crisis of 2007/8. However, he digs deeper than others with many graphs showing how consumer spending, income (of different forms), GDP and household debt have been changing in the UK. In particular, he shows that total consumer spending overtook wages paid in 1997, and consumers have run up household debts to enable their consumption. Further – and similar to the ideas of Modern Monetary Theory (MMT) as put forward by Stephanie Kelton – he finds that a government deficit is normal, has no adverse affect on GDP, and that austerity was a mis-guided policy that caused much hardship.
He argues that much government debt is perpetual as it will never be repaid – so it is similar in nature to Sovereign Money as put forward by Joseph Huber. Indeed, government issuance of a perpetual bond with zero interest arguably has the same properties as government issuance of Sovereign Money (coins and banknotes are already Sovereign Money, but the term is usually used for the issuance of electronic Sovereign Money). However, the government issuing bonds has the downside that people – especially politicians - worry about the size of the “deficit” and “national debt”, which would not occur if debt-free Sovereign Money was issued.
Crocker’s solution to the problem that people, in aggregate, are not able to afford the goods and services produced is that the government should issue sovereign money to bolster demand by giving people a basic income (without the need for people to run up personal debts). Further to this, he proposes governments could also solve the ‘problem’ of the ever-increasing national debt by issuing Sovereign Money for some public spending such as the NHS. He compares his solutions to the MMT proposal that government can simply run up more debt and the pure Sovereign Money proposal (as we brought to national referendum in Switzerland) that only the central bank should be allowed to create money (not the banks, as is the case at the moment). He also shows that this would be hard to pay for a basic income without sovereign money, and that if a basic income was paid for out of, for example, higher taxes, it wouldn’t have the effect of generating much more demand as you’d be reducing some people’s disposable income just to increase other people’s.
Crocker covers the standard arguments put forward by both the proponents of a Universal Basic Income and the proponents of Sovereign Money. He also gives very useful summaries of the works of the economists and thought leaders: Adair Turner, Martin Wolf, Robert Skidelsky, Niccolo Fraccaroli, and Mark Blyth.
Readers with a “Green” perspective might find some of his arguments underwhelming as increasing GDP is generally seen as a good thing, with his main idea being to keep “the economy” going by enabling people to consume the output of the economy (whilst not forcing them into debt), rather than aiming to reduce consumption. He does redress this somewhat in his section on a basic income, explaining this will enable people not to have to work producing evermore things – so the effect is likely to reduce consumption.
Proponents of a universal basic income as well as proponents of a sovereign money system will not be completely satisfied. Supporters of sovereign money will argue that, under Crocker’s proposal, banks can still create money which will still lead to asset bubbles (especially house price bubbles), so it would not have all the benefits of a full Sovereign Money system. Proponents of a universal basic income will argue that restricting the income to a level such as there is no gap between aggregate consumption and aggregate wages may not provide everyone with a high enough income to live with dignity, though one assumes this could be supplemented with money from taxation.
A further argument against Crocker’s proposal is that, if the government just issues ever more debt-free money (i.e., Sovereign money) without increasing taxation on firms or shareholders, this money will simply flow from the general population to firms then on to their owners (shareholders) in the form of dividends. This will have the effect of increasing inequality.
Despite these criticisms, I thoroughly recommend this book and the proposals Crocker outlines within it. It is a good read with an excellent introduction to our recent economic history. At this time in the COVID-19 pandemic we need new solutions to our economic problems more urgently than ever. The diagnoses presented in this book are fundamental to understanding the economic problems that we are in. In my view, if Crocker’s proposals were to be implemented, they would certainly be a great first step to solving our economic problems in a fair and just way.
Basic Income and Sovereign Money: The Alternative to Economic Crisis and Austerity Policy (Geoff Crocker, 2020) is available via Palgrave Macmillan.
All articles posted on this blog give the views of the author(s), and not the position of the IPR, nor of the University of Bath.