Last week, Chancellor George Osborne made the headlines with his Mansion House speech announcing plans to make it illegal for the UK to post a budget deficit during normal times.
Assuming there is no recession, Mr Osborne envisages a scenario in which public spending is funded by tax receipts. Common sense might suggest the plan adds up, but common sense overlooks technology.
The Osborne plan is built on the premise that public spending is either funded by tax receipts or borrowing. There is a third way. It is massively controversial, some say dangerous, but view it in the context of technology, and indeed demographics, and it may make total sense. The Osborne plan seems ignorant of this.
We are on the verge of a new technological revolution – at least that is one of the claims made in the book iDisrupted by John Straw and Michael Baxter. This new revolution is occurring at a time when across much of the world the population is expected to decrease. Technology can solve some of the biggest challenges of the 21st century, and create wealth. There is a very real danger we will mess up, however, and convert extraordinary opportunity to abject disaster.
Examples of how technology can transform the world and create wealth, include the Internet of Things transforming both industry and agriculture. Armed with sensors measuring the health of crops, or assessing where bottlenecks occur in the production process, the Internet of Things has the potential to enable us to generate more food, to mine more raw materials, and manufacture more goods worldwide for less cost.
Robotics creates the possibility of producing more goods and services for less labour input. New technologies offer the potential to reduce greatly the cost of energy, and advances in nanotechnology, stem cell research and genetics offer the potential to transform the way in which we grow our food. They may even enable us to grow our meat, avoiding the inefficacy of feeding animals. Smart cities will promote greater efficiency, and vertical farms will enable us to make greater use of our land.
In addition, we have the emergence of the sharing economy – iDisrupted predicts that within the next decade or two, the sharing economy will converge with self-driving cars. Few of us will own cars, and we will require fewer cars to meet demand.
Demographic projections suggest that the populations of Russia, Germany and Japan are on the verge of declining – or already are. Expectations are for China’s population to decline by the end of the decade after next. Populations age before they decline. The challenge of meeting the needs of a growing retired population from a dwindling working population will perhaps be the single biggest challenge of the next few decades. Technology can solve the challenge by enabling us to produce more from less input.
On the other hand, technology also threatens to have a devastating effect on jobs. Recent history also seems to indicate it can create distortions in the way wealth is distributed. This creates an even bigger gap between the few people who own capital and those skilled enough to master technology, and everybody else.
The combination of new technologies and an ageing population is a potential recipe for decades of deflation, unemployment and massive inequality at a time when technology should be producing abundance for all.
The fix can lie with the government spending more than tax receipts, and funding the deficits via central banks and the creation of money. This could take the form of permanent quantitative easing, in which the profits enjoyed by the central banks are paid as dividends to respective governments. The idea is not new. The Chicago Plan proposed a similar concept in the wake of the 1930s depression. In 2012, a paper from the IMF entitled The Chicago Plan Revisited updated the idea. In these plans, the ability to create money is stripped from banks, which are only allowed to match borrowing with capital. Instead, the central banks control the money supply.
We are entering unique times. The combination of technological advances and ageing across much of the world has no precedent. This time it is as different as it can be. However, if the result of technology is job losses, extreme inequality and poverty, we will have failed. Governments can address the rising gap between potential and reality via the creation of tax credits, funding education and training, and subsidising the ownership of capital among the populace at large, in the form of massive tax incentives at the lower end of the income scale to invest in pensions. It cannot fund such spending by taxation; basic economics will make this impossible. Only the creation of money can fund it.
It appears George Osborne’s proposed law will make it impossible to respond to the great challenges of the 21st century.
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