Geoff Crocker’s book looks at important challenges facing the British economy and policy.  It is critical of much analysis that underlies current policies and proposes a different approach.   Not all the criticism is well-founded, in my judgement, but there is enough cogent argument to make this an interesting and important read.

The book is in three sections, entitled On Income, Money and Technology.  These disparate topics are united because the author wants to propose a policy programme that draws on each one.

In the first section he observes that wages have long been a diminishing share of total income, particularly for the poorest households.    The rising importance of benefits is a response to the relative stagnation of wages in the lowest deciles of the income distribution. Labour’s share as a whole declined from 72 per cent of GDP in 1955 to some 60 per cent in the 21st century but the poorest experienced a disproportionate squeeze.  The numbers classified as in deep poverty or destitution has more than doubled in recent years. Consumption has been maintained only by a sharp increase in household debt which grew from 43 per cent of GDP in the late 1980s to 68 per cent even before the great recession of 2008, much of it incurred by the poorest households.

Crocker notes that, for a given level of GDP, any increase in automation will reduce wage income and require an increase in social welfare income.  We must accept, he argues, that high-wage work cannot be the source of adequate income for the whole population.  The decline of the wage share also reduces consumption demand (debt cannot increase for ever) threatening deficient aggregate demand.

Such a position usually faces the retort that all previous predictions of mass technological under-employment have failed to appear and redundant workers have eventually found gainful employment as the economy expands. Yet, the hollowing out of the UK labour market, the virtual disappearance of the single-income household and the deplorable statistics on poverty are long-standing phenomena.

International developments have reinforced these tendencies with the rise of lower-wage economies able to attract investment and deploy the latest technologies. Searching for the magic remedy of “growth” is all very well but GDP growth strong enough to overwhelm the mighty distributional tendencies to which this book points is beyond the capacity of government policy to deliver.  Crocker’s proposals therefore deserve serious attention.

The second section of the book, called Money tackles how the state finances the policies that the first section suggests are necessary.   

Crocker criticizes the full-funding rule by which HMG undertakes to finance any budget deficit by bond issuance.  He also takes issue with the Bank of England treating the reserve balances that commercial banks hold with it as a form of debt and so paying interest on them.  He infers from this that the government has surrendered seignorage, a state prerogative, to commercial banks imposing an unnecessary debt burden on the public finances.  “Direct money financing” of state expenditure would improve the situation.

In my view this is a mixture of good arguments and bad.  The implications of the good argument are over-extended leading to an unjustified policy prescription.

Crocker points out that commercial bank balances at the BoE are not a debt.  They are the ultimate form of money so cannot be settled or repaid as a true debt could.  The banks own that money and can use it at will to meet obligations.  The Bank of England is merely the custodian keeping the books; it hasn’t borrowed anything and is not a debtor.  Its balance sheet is a fiction that should not be allowed to cost the tax-payer billions of pounds unnecessarily.  The Central Bank has to pay interest on the marginal tranche of the reserve balances in order to control the interest rates banks charge the public but it need not pay out on infra-marginal balances – an argument also made by Paul de Grauwe in the context of the European Central Bank.  Crocker is surely right that we can manage monetary policy without paying a vast subsidy to commercial banks.  Ceasing to do so would improve public finances, filling a good chunk of the Chancellor’s black hole.  It is astounding that fear of financial institutions seems to be preventing this reform.

What about “direct money financing”?  Crocker quotes Adair Turner who argued for direct money finance of government expenditure instead of QE after the 2008 crash.  Turner’s argument was cogent and, in my view, correct but Crocker neglects the context – prolonged recession.  Normally, when the economy is operating at near capacity the homely old rule works quite well: pay for current expenditure with taxation and investment expenditures with debt.  Issuing debt means tax- payers in future years will make a delayed contribution to financing infrastructure.  Why should current tax-payers foot the whole bill in taxes or inflation for kit that lasts decades?

The final section of the book is a literature review of the effects of technology, concluding that it and automation are largely responsible for reducing labour share, with the heaviest impact on low-decile incomes.  The distributional effect is more salient than the aggregate effect.  Experts in this literature and its evidence may have qualifications but the inference seems fair enough. The development of machine learning raises the threat that the depressing effects will be extended to higher income deciles.

The policy recommendations with which the book concludes flow from the analysis: a reduction in the conditionality of most welfare benefits, a reversal of increases in pension age and a low universal basic income - a hybrid system, supported by studies at the University of Bath.

The author wants to “tier” commercial bank balances and so restrict Bank of England interest payments.  He also wants the government to judiciously issue money to retire debt, but it is not obvious what the benefit of that would be.

There are further policies for stimulating and managing technology.

There is also an appendix in which a lot of current economic theory is criticized.  Macroeconomic theory has retreated in recent decades into the exploration of the logic of purely imaginary worlds, regarding the actual world as an uninteresting special case.  This provides some juicy targets for Crocker’s critique.  He ranges very widely, however, in quite a short space so can seldom work through issues in a way that might command a consensus. The shade of Lord Keynes is treated with due reverence.