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  Proposition Number: 001 - Macroeconomic Policy

22nd August, 2020. Advisory



Concerns to be handled by Macroeconomic Policy added later or requiring better explanation
Replies are given below concerns/questions in this column.


Sub 1. Which macroeconomic approaches address the Health issues listed?
  • Making the service more efficient
  • Raising wages of health workers including nurses and auxiliary staff
  • Maintaining the service in the public domain
Answers: Austrian economics does not appear to have a specific policy on public health efficiency whereas RIO policy does. RIO performance incentive policies are applied to private and public sectors alike geared to raising productivity and higher real wages by applying the policy instruments PPR and PPL (there are other options within the real incomes approach). This single answer addresses the next two bullets and question 3 below.


Sub 2. In relation to current interest rate system that impacts exchange rates, how is this to be handled?

Answer: The alteration of interest rates as a policy instrument under ADM causes fluctuations in exchange rates under normal circumstances but under QE this has been abandoned. Exchange rates should depend upon the levels of consumption by foreign consumers of UK products and services. The relative attractiveness of these products and services should depend upon the quality of those products and services relative to their price. Therefore exchange rates can remain stable if the productivity of British manufacturing and service provisions rise while unit price remain steady or decline. RIO policy emphasizes rises in productivity and market penetration based on price elasticity of consumption. By managing PPRs under RIO policies British produce can remain competitive. This is not related to interest rates which become freely negotiated between savers, saver agents and investors.


Sub 3. How are public services to be accounted for?

Answer: This has been addressed in answer to point 1.


Macroeconomics theory and policy is not working out well in practice with increasing income and wealth disparity and devaluation of the currency where asset holders gain and wage earners are losing....monetarism appears to be the problem and needs to be modified or replaced.

     Initiated 19th August, 2020



[This topic is initiating at a more advanced stage because it has been realized that many concerns in economics-related topics affect the majority and the mechanism is excessive financial or monetary injections whose impact is to split the gains between a very small number of asset holders and the majority of wage earners. This policy failure mechanism is explained in the Real Money Theory which substituted the defunct Quantity Theory of Money in July 2020.]

[ However we are making contacts (20200819) with the leading exponents of non-monetarist policy approaches to identify an appropriate alternative to act as a basis to develop a proposition for a new approach to macroeconomic policy]

[we will be post relevant references in the Resources section as we identify them]

Preamble:

This preamble visits the concerns recorded in all other Proposition topics on this site to review the possibility of a single Macroeconomic Policy accommodating and addressing these concerns.

Taking into account the concerns expressed under the following topics on this site: Constitution, Economics, Education, Finance, Health, Income disparity, Industry & services, Interest rates and Money Supply it is apparent that most can be addressed through a general rise in real economic growth and better income distribution.

Education & Health concerns

The references to the needs for technical education are specific but we have been informed that this would require a major influx of investment requiring more funding. On the Health provisions there are three issues. Making the service more efficient, raising wages of health workers including nurses and auxiliary staff and maintaining the service in the public domain.

[There is the additional concern that the NHS should not be "on the table" in trade talks. We have received specific concerns on trade agreements but we had to request clarifications on several aspects before this can become a proposition topic].

Policy options

As far as is evident from the review of existing theories and propositions for a systems of macroeconomic management to address all concerns it is evident that the following "schools of thought" have track records that do not address but rather have created the conditions giving rise to the concerns expressed:
  • Keynesianism
  • Monetarism
  • Supply Side Economics
A proposition exists in the form of Modern Monetary Theory (MMT) which aligns itself with Keynesianism but carries strong underlying perspective of the Hedge Fund mindset which sees government issuance of money as a welfare system for banks and the financial services sector. Throughout history the electorate has never gained access to a participatory policy formulation and decision process of public choice. Therefore, the risk associated with MMT is that those who issue the money decide the assignments. So far the track record shows a considerable amount of new "exogenous money" flows into the assets held by a very small percentage of the constituency and prejudices the prospects for rises in real incomes of wage earners as the majority by suppressing "endogenous money".

Government revenue seeking (Fiscal policy)

Another, generally overlooked prejudicial aspect of law, regulations and professional frameworks is the damage inflicted by government revenue-seeking through levies and taxation. Corporate taxation and accountancy norms place wages, the vast majority of income for the majority, in an isolated cost classification in tension with profits. As a result because of lack of appropriate incentives, normal corporate decision making will seek to maximize profits and shareholder value resulting in a relative pressure to contain or suppress wage rises, even when productivity rises. This perverse structural legal and regulatory framework represents a major prejudice to the advance of the interests of the majority of constituents in gaining higher real incomes.

Unions

This process is exacerbated by the decline in employee membership of unions and the efforts of some political parties to reduce the influence of unions by denying them any presence in the processes of decision analysis on macroeconomic policies including any sector or "industrial" policies. The maximum participation permitted today is "consultations" which have no particular weight in decision analysis and parliamentary decisions can effectively convert "consultations" into black boxes where the political party in power in government biases conclusions towards pre-determined party preferences.

Concerns recorded under Constitution

On the Constitutional concerns, RIO-Real Incomes Objective policies and in particular PPP is geared towards providing company management and work forces sufficient flexibility and directional incentive to maintain a high degree of individual adaptation to the specific conditions of each company and workforce. This is something that the ADM policies have completely failed to achieve through the application of top down market interventions which distort opportunities to create winners and losers.

The concerns recorded under Economics

The specific concerns expressed under general Economics are accommodated by RIO policy.

Education and Health concerns have been referred to above.

Concerns recorded under Finance

The Finance topic concerns relate to lack of availability of finance for SMEs and productive investment in general resulting from quantitative easing (QE) as an excessive influx of "exogenous money" into the "endogenous money" pool as explained by: The movement away from "exogenous money" based policies is part of the Austrian and RIO approach. In addition the RIO approach is specifically targeted at increasing returns on investment through incentive to promote price and physical productivity.

Concerns recorded under Income disparity

Income disparity concerns are addressed by the RIO discarding of corporate taxation and corporate taxation/accountancy rules that assign wage earners to a cost category. The bonus incentives under PPP result in a better distribution of real incomes.

The concerns addressed under Industry & Services relate to the inappropriate corporate taxation accountancy structure and this is descried in the previous entry.

Concerns recorded under Money Supply

Money Supply concerns are handled largely by doing away with "exogenous money" based policies as supported by Austrian and RIO theory and policies.

Bank of England - the elephant in the room

Monetary policy decisions come from the Bank of England and the track record of the last 20 years has been a disaster for the majority while greatly enhancing the wealth and income of a very small minority. In constitutional and economic terms it is necessary to question the independence of this institution of this function in not coming under the scrutiny of representatives of the people as opposed to representatives of political parties. Very little evidence exists as to the degree to which the BoE upholds the interests of the majority in its decisions. The evidence so far it that the BoE looks after those who earn a living in the financial services and asset ownership. The massive influx of exogenous money is not only exercised under the BoE but also under the USA Federal Reserve and the European Central Bank creating the same sort of problems observed in the UK and reported in the concern statements on this site. The question arises, what is the purpose of maintaining these institutions as a component of policy? In constitutional economic terms financial service companies do not have a vote while only those who own or are employed in them have a vote. This groups of constituents constitute less than 1% of the electorate and therefore the BoE's biased representation towards the interests of this faction needs to be curtailed.

Next steps in this process

There remain some gaps as a result of some issues not having been raised in the concerns and therefore not being present to test propositions. Therefore we would like to ask for anyone having an interest in any of the concerns covered to ask questions based on statements made in this section or raise what are considered to be gaps even if not originally placed in the concerns records.

  • So far analysis of Keynesianism, monetarism, supply side economics and modern monetary theory are essentially variants on a theme and based on the aggregate demand model. Although supply side economics claimed to be distinct in the late 1970s, it turned out to be a fiscal variant of low marginal taxation operating along the same aggregate demand model (ADM) lines. This is why it is placed into this group

  • The remaining approaches to economics include constitutional economics, the real incomes approach, also known as RIO-Real Income Objective and the so-called Austrian approach

  • Constitutional economics is more an approach to constituent participatory decision making on policy and has advanced the theory of public choice. However, its does not present a coherent macroeconomic policy framework.

  • The Austrian approach appears to have a lot in common with the real incomes approach, in that its analysis is based on the logic of decisions and motivations of economic actors such as individuals and companies. On the other hand the ADM approaches are more of a statistical econometric approach which attempts to create a logic for policy decisions on very broad sweeping movements in the economy. Both the real incomes approach and the Austrian approach reject this approach because it ignores the incredible complexity of the economy a heterogeneity made up of a population of individuals and companies all of which face very different specific conditions and prospects. This is why conventional policies generate winners and losers and eventually lose traction.

  • The Austrian and real incomes approach have the same concern about maintaining the purchasing power of the currency, something the ADM approach fails to achieve.

  • The real incomes approach has a tendency to favour "natural interest rates" as opposed to central market interventions that cause differential impacts and in many cases prejudice. This is to generate a far greater range of investment possibilities based on the transactions between savers and those wishing to use funds for investment. RIO policy permits interest rates to be set between lenders and borrowers with no state intervention. The Austrian approach appears to favour a similar approach but is less explicit than RIO policy.

  • In terms of income disparity the real incomes approach bases the assessment of economic performance on the balance of real incomes between shareholders, managers, company owners and employees (wage earners) and consumers. Companies have incentive to improve income distribution as a direct function of the incentive provided under PPP or RIO policy

  • The real incomes approach appears to be more relevant to today's issues in the UK because it concentrates on the development of policies to generate increase productivity as a basis for enhancing currency purchasing power. It does this through a RIO-Real Incomes Objective policy, formerly referred to as Price Performance Policy or PPP whereby companies gain short term bonuses based on actual gains in productivity that result in moderate price increases. In the 1980s the supply side economic approach failed as a result of an inability to maintain any incentives to sustain investment - RIO policy maintains the incentive and secures policy traction.

  • In terms of income disparity the real incomes approach bases the assessment of economic performance on the balance of real incomes between shareholders, managers, company owners and employees (wage earners) and consumers. Companies have incentive to improve income distribution as a direct function of the incentive provided under PPP or RIO policy

  • For RIO policy to work the real incomes proponents explain that there is a need to be changes in government revenue-seeking activities such as corporate taxation and accountancy regulations that isolate and prejudice wage earners (wage suppression) and therefore the majority of the population (constituency)

  • The paradoxical or unexpected aspect of RIO policy is that there is no need for corporate taxation and profits become what Schumpeter referred to as their basic function of guaranteeing the future operation of a company through investment and thereby guaranteeing future employment. The RIO policy does however apply a so-called Price Performance Levy (PPL) where the operational Price Performance Ratio (PPR) is used to weight the PPL. This is geared so as to enable companies to manage their pricing and investment policy so as to avoid paying the PPL i.e. reduce its value to zero (0) and in doing so greatly enhance their real incomes. Corporate performance is based on the returns on investment measured in terms of distributed real incomes plus the PPL bonus. Taxation essentially passes to PAYE and circulation taxes.

  • The RIO policy approach has a far greater positive control of inflation through the PPR/PPL-based Rio policy. Indeed, RIO theory has shown in 1976 that inflation has nothing to do with money volume and QTM (incidentally something also stated by Keynes) but is entirely dependent on price-setting by individual companies and those transacting.

  • The RIO theory development has established an important distinction between "exogenous money" which arises from banks entering credit entries into an account ledge i.e. money out of thin air and "endogenous money" generated by savings and transactional payments, including wages, by the production and services sectors. [Secretariat: We are adding relevant references to RIO policies and Austrian approach to Macroeconomic Policy Resources section]
Please send all contributions to: secretariat@policyforum.org.uk