Smart People talk about Government Buying
The political framing around numbers stops us talking about what actual drives an economy — buying things.
Whenever you explain to somebody that, effectively, the government has an unlimited zero percent overdraft at the central bank, and that government spending happens by simply authorising the spending you generally get a retort similar to this:
So we should just give everybody a million pounds
But you smile gently and respond in a way that generally floors whoever you are speaking to.
We could, but what has each individual got to sell to the government that is worth a million pounds?
This response forces people to think past the numbers. Suddenly, we are discussing what government is really about — procument and supply of public goods and services.
In any large organisation there is a buying department. They are staffed with procurement professionals who are there to ensure that the organisation gets maximum value for money while maintaining continuity of supply.
Procurement and supply management involves buying the goods and services that enable an organisation to operate.
It is time to stop talking about government spending. That frames the political debate solely in numbers and is specifically designed to stop anybody talking about the most important part of the process.
What is there available for the government to buy?
Once you think about things from that angle it becomes crystal clear where the spending limit is and what the policy restrictions actually are.
The fiscal limit is reached when the government runs out of things it wants to buy at the price it is prepared to pay.
That is where the magic happens. Government can manage the value relationships in its economy because it can set the price of so many items it purchases for the public good.
Government purchases inject money into the economy. Buying things puts money in people’s pockets that they then use themselves to buy things. That gives government a powerful tool for managing the level of transactions in the economy. For anything that is a ‘nice to have’ public service, the government can set a price for the service on a ‘take it or leave it’ basis. If there are better deals in the private sector and transaction levels are high, nobody will take up the offer. But when there is a downturn and transaction levels fall, then there will be a queue of people wanting to work for government.
Standby Investment Contracts
Here we put government contracts for a piece of work on the shelf at a set price.
To do this you need projects that can be broken up into phases, and which are largely time insensitive. For example, to replace a section of the central reservations of a motorway with concrete barriers, or re-tarmac a section of the road.
During construction booms these contracts will stay on the shelf, and during slumps firms will start to take them up. This helps to stabilise the construction industry over its notoriously fickle cycle, while at the same time managing inflation and injecting public funds to maintain effective demand in the wider economy. A win-win all round.
It’s not limited to construction of course. You can imagine something as simple as a contract to trim back a set of trees sitting on the shelf waiting for a downturn.
Phased stabilisation projects have issues with them. Obviously once you start a project then the resources used will be engaged until the project is finished, yet the economy can go from bust to boom within that time period. So getting the right chunk size for projects — neither too big, nor too small — is paramount.
And over time ‘nice to have’ contracts become critical. The trees grow until they become dangerous, and the safety barriers deteriorate until they have to be replaced now. At that point the contract moves from the ‘standby’ pile to the ‘needs to be done’ pile.
So you will still need something else that is more responsive to changes in circumstances.
Job Guarantee — decent jobs for all
The Job Guarantee is by far the most powerful example of auto-stabilisation. The state offers to buy any spare labour hours at the living wage and deploy those hours for the public good.
If everybody is working for the private sector then there is no expenditure and no injection of public funds. During a downturn more people come onto the programme, the government starts paying wages, and effective demand is maintained in the economy.
People have stability and security knowing they can always find something to do with their day, while maintaining a living income. Yet because it is a spend side auto-stabiliser there is no disruption to the wage structure of the economy so tax rates can remain low.
How planning is more effective than tax
Many public services and investments are required regardless of the state of the private sector business cycle. Yet even with required public services the government can use its sovereign power to manage contracts. For example, if there is a hospital that needs building in an area, the government can set a price and, if necessary, suspend authorisation to build anything else until it gets its price for the hospital.
Note how this works. The government is threatening a localised downturn in a particular industry to force acceptance of its terms. It does this via its sovereign power to grant building rights. This is a far more clinical method of freeing up resources than carpet bombing the economy with tax rises in the hope that will free up enough builders to create a hospital.
How bank regulation is more effective than tax
Because construction is generally heavily funded with debt, construction planning management works really well to control spending in the economy. If you stop construction projects, then all that happens is that bank’s credit lines are not drawn and private debt falls.
In other words rather than money being spent elsewhere on other things (as it would be if you banned the sale of sugary drinks), the money simply isn’t created in the first place. The people that lose out are bankers who now get less income because the banks have issued fewer loans.
This can be extended to a general principle. The more you constrain bank lending, the fewer the number of private projects, the less bankers get paid, and the more stuff there is free for government to procure.
In essence, restricting bank lending is the same as raising taxes. That is, after all, the aim of interest rate hikes — reduce bank lending. And interest rate rises are there to avoid having to raise taxes to slow things down.
But you can be more surgical than this. You can restrict what types of project banks can fund. The private projects that then happen are the ones a society want to happen. Undesirable projects are stopped: borrowing money to buy shares back, speculation in commodities or, worst of all, borrowing money to short sell the national currency.
Regulating the asset types of banks ensures money is lent where it needs to be lent, avoids the possibility of ‘Minksy Moments’, and frees up resources from the finance industry that can be procured by government or non-finance businesses.
People and Resources
When we talk about what there is available to buy, it avoids the other classic trap of political debate — believing that by throwing money at something it will fix the problem.
People make things happen
The classic political football in the UK is the NHS, where there appears to be a genuine belief amongst some politicians that the mere process of extracting money from rich people will cause doctors, nurses and hospitals to pop into existence by magic.
If there are no doctors to buy, then it doesn’t matter how much you extract with taxation. The NHS will not have any more capacity to treat patients.
Once you get beyond numbers and start talking about what there is available to buy, you can see the constraints clearly. The restriction is qualified doctors available to buy at the current time. Stealing them from another country with poorer health outcomes than ours is immoral, so instead we need to look at where the doctors are deployed across the nation and what they are currently doing. (And yes we need to look and see if there are any more people available in the country that could be trained as doctors. But that is required investment for the future. It won’t solve today’s issue).
When you do look around, you’ll find where a good supply of doctors you need is — in the private healthcare system. Because contrary to popular belief private healthcare does not reduce the load on the NHS. It take scarce doctors away from the NHS so they can treat people with money ahead of those with the most pressing clinical need. It is queue jumping for the wealthy.
So the most pressing question in healthcare is not whether we need to tax the rich to save the NHS. Clearly we don’t. What we need to ask is whether private healthcare should continue to exist in the UK at all or whether we should ask the rich to get in the queue alongside the poor. You’ll struggle to find a politician making that case.
There are other sources. There are many doctors that have retired or left the NHS completely. We should ask them why that is, and what it would take to persuade them to rejoin. Then we need to redesign the job using job enrichment techniques to make it more attractive. Nobody who loves being a doctor should be dissuaded from the profession by poor job design or system issues.
Know your limits
This principle extends to the other public services. The limits to the education system are teachers. The limits to infrastructure and social housing are construction workers and available land area. Houses won’t build themselves, and as long as we use antiquated brick-on-brick techniques we can’t build them any faster.
The limits to a train system is the capacity of the track. Which then begs the question why we have first class carriages? Why isn’t the train system first class as standard? Shouldn’t that be what we are aiming for. If the trains had sufficient seating capacity why would you need seat reservations? Why shouldn’t you be able to get four seats together on a train whenever you want? Why don’t we have more carriages as standard? Have we been so brain-washed that we accept artificial capacity restrictions based upon false monetary concerns, rather than the actual physical constraints of the track infrastructure?
You may remember a furore over a train. Ask yourself why you may have accepted that the train was adequate for the purpose just because some corporate money man said so.
There is a rule of thumb in systems design. If you want actual free choice in any system that involves hiring (hotel room, hire car, theatre seats, etc), then you are ‘jam packed’ when you still have 20% free capacity. After that choice is automatically limited in some way. Somebody has to lose out and not get what they want.
Now consider how sensible a ‘choice of school’ sounds in that context. Is there really a free choice, or is it actually a clever policy that dynamically shrinks the catchment area of popular schools forcing up the remaining house prices to levels only the upper middle class can afford?
And government can avoid buying any more school capacity in the popular areas because, well, if you can’t afford the house prices you always have the choice to go elsewhere. Don’t you?
When we remove the focus on numbers (“we can’t afford more capacity”) then the underlying mechanism is revealed, along with the type of social engineering it represents.
Buying creates Value
Government is such a big buyer within its currency area that it can heavily influence the value relationships — how much real stuff has to be handed over for each unit of currency. Without government purchases the system will quickly run short of the right sort of money and drop into recession. That gives government a big stick to extract value in return for its money.
So government should be both generous and sparing with its money. It should ensure there is enough money in circulation at all times, but it should only hand it over for the maximum amount of real goods and services it can negotiate.
Understanding this, think what happens if you give everybody money for ‘nothing’. The value relationships in the economy shift and the value of the currency shifts towards ‘nothing’.
To maintain price stability government needs to be an effective buyer, a master of procurement and a tough negotiator for value, which through sheer size within its currency area forces everybody else to act the same if they want to stay solvent.
For example if the NHS is short of staff, why would it then purchase staff through agencies? That approach creates the very shortage the NHS is trying to resolve. Instead it should ban the use of agencies and cut out the middlemen. Those that are currently agency staff then have the choice of taking the jobs on offer, leaving the profession, or leaving the country. The result is a value redistribution away from agents and towards existing front line NHS staff.
Smart People Procure
What we buy and the value we get from our purchases is what makes the world go around. For government, as the single largest purchaser in the economy, this is doubly so.
What is stuff currently used for?
What are people currently doing?
Is there something more useful they could be doing instead?
By talking about procurement of public goods and services we reframe the debate about what really matters.
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