Towards a socialist MMT
Last year, non-financial firms capital spending was equivalent to just 65.7% of their retained profits – the lowest share ever. To put this another way, firms’ desire to build up cash and/or reduce debt is at a record high – despite negative real interest rates….. [Moreover], capital spending as a share of retained profits was trending downwards before the recession. This suggests the reluctance to invest is a longish-term problem, reflecting the dearth of investment opportunities, and not just a cyclical one.
And it’s not just Marxist Chris saying this. The Ernst and Young Item Club says much the same:
The corporate sector is accumulating cash at an astonishing and accelerating pace and acting as a major drag on the rest of the economy, keeping it close to stall speed. It is hard to see any strong revival in the economy until companies start to release this cash by spending more on acquisitions, investment or dividends.
Even the Bank of England seems to agree:
Private domestic demand growth could be boosted if more of the historically large corporate financial surpluses were spent on capital investment or transferred to households in the form of higher wages or dividends (May 2011 inflation report, quoted by Frances Coppola).
So what to do about it? After all, we’re talking about very large sums here. The EY Item club estimate that there’ is £754bn held in cash by the corporate sector may be up the wall (it seems likely that they’ve included overseas cash holdings in this figure, which is a bit thick), but Frances’ estimate of £251bn (from BoE’s figure for M$ sterling liabilities for non-financial firms) is still a pretty hefty sum. Even releasing 10% of that into the real economy would make for a pretty decent economic push.
To date, the main leftist argument has simply been for a retention of corporation tax, on the basis that:
The corporation tax cut will…. simply add to the cash pile of large companies, giving them more than £400 million (page 50) this year to tuck away, and much bigger sums in years to come. This increases the wealth gap in the UK by giving away a wholly unnecessary tax cut to big business.
That might simply stop the problem of non-investment getting worse, but it doesn’t resolve it.
Perhaps the best way is introduce a ‘non-investment tax’, whereby corporations are taxed at a certain rate on retained profits if they fail to release a certain percentage of those profits – whether through capital reinvestment, dividends, acquisitions, pay rises or new jobs.
This mirrors Modern Monetary Theory (MMT), which sets out how governments can simply use the advantages of fiat currency to stimulate aggregate demand when the economy needs it. Indeed, to the extent that taxing non-investment in this way might simply lead to corporations keeping their retained profits in gilts, it might in any case create a ‘secondary MMT’, as lower demand for gilts leads to governments buying their own gilts (the same as printing money).
But the advantages over normal MMT are clear. First, it gives corporations the opportunity to invest in the way they wish, with government coming in to do it for them (through taxation) if they choose not to abide by their ‘ social responsibilities’.
Second, and related to this, it moves away from the disturbing logic of some MMT advocates, that anyone unemployed at the time of the MMT release would be forced to work on the government payroll at the minimum wage created under it.
Of course, any such move towards a non-investment tax would have fierce opponents, wielding two main arguments.
First, there would be the argument that corporates would simply leave Britain and head for countries where such a draconian tax regime does not exist.
This is the same argument used against all higher tax countries, of course, and is based largely on myth. Moreover, the move towards a Financial Transaction Tax does show that international agreement can win out over fears of freeloading, if one or two countries are brave enough to lead the way.
Second, there will be the argument that such a tax system, which would depend on increased transparency from firms and good auditing, would be very difficult to administer, given the need to use some kind of MMT-style sliding scale for the non-investment tax rates in ‘good’ and bad times’ (when a reduction of the non-investment tax to 0% might be appropriate).
Certainly, the introduction of such a tax wouldn’t be for a faint-hearted government. There may well be a need for a Made In Dagenham Barbara Castle figure to stand up to the corporate sector and effectively announce ‘It’s a risk we’re going to take’.
Even so, an incoming socialist government might want to give some serious consideration to how we might, through a progressive but malleable tax regime, create a more stable economy more resilient to capitalist boom and bust as a result of some enforced ‘corporate social responsibility’.
It might be an approach that will find support from across the channel if May 6th goes well. Come to think of it – I might just translate this into French and get tweeting @fhollande.