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RIP-Real Incomes Policy
Thematic note

An adaptable macroeconomic performance framework

Hector McNeill1

This note is part of a series as a sequel to the article, From nominal growth to stable real incomes. To place this note in context readers are encouraged to read this article before reading this note.

The levels of predictability and estimated risks associated with the pandemic's continuing impacts of the world economy are associated with the additional evolution in hazards associated with climate change and a problem with real economic growth the two leading economies in the world, in transition and so-called developed economies.

The emerging state of affairs is becoming one of a survival of the fittest mentality which contains implicit dangers of increased economic marginalization of an increasing number of the UK constituency and lower income groups worldwide.

At least, Covid-19 placed the 2008 financial crisis and the illogical response in the form of quantitative easing (QE) into a better contextual focus by exposing the precarious nature of most people's economic status.

Real Incomes Policy

RIP has two macroeconomic policy instruments:
The PPR is a measure of progress of each economic unit in lowering the ratio between changes in output prices against variations in input costs.

The PPL is a rebate on a basic levy according to the PPR values achieved.

Economic units can manage their affairs to minimize the levy even to zero. In this way the macroeconomic policy is coordinated by the participatory development of companies and their work forces and not by largely arbitrary interest and debt targets.

RIP bases policy impact and success on the knowledge and calculations made by the economic actors thereby solving the calculation and knowledge problem in an operational structure that more closely approximates participatory constitutional economics.

The main gap in macroeconomic policies has been a failure to provide a general framework to incentivise productivity. There has been a gradual erosion from a generalized emphasis on system and labour productivity and real incomes generation which was achieved in the period 1945 to 1965. However, Robin Matthews, in a detailed analysis of why there was very low unemployment in this period found that it had little to do with government policy, which was deflationary over this period (Robin C. Matthews, "Why has Britain had full employment since the war?", The Economic journal, Setember, 1968.). The gains in real wages and reduction in income disparity arose from business initiative as opposed to macroeconomic policy.

What has evolved since 1975, has been a system of slowly growing levels of subsidy to companies representing a government revenue foregone, now exceeding in excess of £500 billion each year (2021) in tax breaks and subsidies (based on Treasury data). This represents an massive government revenue foregone equivalent to about 60% of current government revenue of around £850 billion each year (2020). This makes the current protestations by government of whether some aspects of social and other policies need to meet "affordability" tests quite provocative when without such give-aways, the government revenue could be 60% greater without raising taxes on wage-earners.

The need for an adaptable macroeconomic performance framework

Although in theory, such subsidies and tax breaks are often justified as a way to bolster investment and productivity, the consensus, amongst more informed practitioners, is that most are simply regarded as income used to bolster either profits or take home pay of executives. The same, it should be said, for the £10 billion spent on research & development which, in many cases, goes to salaries of personnel working on long term and somewhat speculative payback projects.

Without appropriate metrics there can be no policy cost-benefit estimates

One of the oft-repeated claims is that the reason the Treasury has not accounted for the balance on something like over 1,100 odd tax break classes is because the data and the metrics to do this are "not there". This does not have to be the case. Anyone receiving a tax-break knows the before and after scenarios with respect to their corporate price performance ratios and real incomes performance. However, since the Real Incomes Approach is not part of "mainstream thinking", a large number of tax breaks remain unaccountable. There has been no bean counting.

Substituting cosmetics by structured general corporate support

There is a yawning gap across-the-board where there are no incentives that guarantee value for money in terms of government policies in terms of the generation of tangible sustainable benefits in the form of productivity and real incomes rises across the whole economy. There are, of course, the oft-referenced current so-called "super deductions" which are simply the same sort of subsidy providing essentially a one-off grant, largely as a vote winner, with little accountable impact of productivity or real macroeconomic performance.

What Britain has lacked is a macroeconomic policy that proactively incentivises productivity across the full range of company sizes and sectors including self-employed, as opposed to targeted give-aways with no account of their performance. Many in government confuse this sort of statement with an attempt of politicians to choose winners; it is quite the opposite. Macroeconomic policy objectives and instruments, since 1975, have resulted in a politicians, or the Bank of England, setting arbitrary values for policy instruments such as interest rates, asset purchases and money volumes and taxation. All of which have had an increasingly negative impact on supply side investment and productivity as a result of a significant diversion of funds away from supply side production into assets. As a result of this policy-induced inflation in asset prices, this measure is confused for economic growth and rising "prosperity" while an increasing proportion of the constituency see their real incomes falling and debt presenting the only means of sustaining personal living standards. This decline in living standards is associated with a falling real income cause by a rising cost of living arising from input cost-push inflation. This is caused by policy-induced asset inflation such as domestic house prices and rents, rising prices of commercial, office, retail and industrial unit prices and rents and rises in a range of commodities used as futures contract assets or literally physical hoarding managed by companies in close association with, or owned by, banks . Share prices no longer have a strict relationship to productivity (price-earnings ratios) or company prospects but have risen as a direct function of QE funds flowing into financing share buy backs by companies to boost executive incomes. Throughout this period (1975/2021) increasing amount of funding has flowed into offshore investments generating income for employees and offshore profit reinvestment leading to declining national production and workforce deskilling. In parallel with these trends, the balance of payments has become progressively worse on the goods side because we produce a falling proportion of industrial goods.

It is clear that in a thoroughly confusing way politicians are attempting to choose winners, in this case a minority of constituents who happen to be asset owners and dealers. In the meantime, their responsibility to the majority of the constituency, in the shape of wage-earners, making up 95% if the constituency, have been abandoned in terms of intended benefits.

Real incomes policy for real sustainable economic growth

No matter what the macroeconomic policy has been since 1975, there have always been policy-induced winners, losers and some who remain in a policy-neutral impact state. In constitutional terms this centralized approach has been unsatisfactory and incredibly inefficient and ineffective. Money volumes, debt, interest rates or taxation have absolutely no intrinsic contribution to productivity and real economic growth because the state of every economic unit, including those deploying the same technologies, is different. Real Incomes Policy (RIP) provides an adaptable macroeconomic performance framework where each economic unit can adjust their activities to benefit from the policy within a short term horizon because productivity increases, reflected in unit output price against input prices (price performance ratio), result in more competitive prices, market penetration and higher margins. To secure this, there is need to produce demonstrable increases in physical productivity to achieve the necessary price performance levels; as opposed to clever accounting. Since unit output prices, unit input costs and wages provide a simple metric to measure real incomes there is no longer any excuse concerning the "complexity" of the market or "interference" in the free market since all the decisions rest with market participants. The required adjustments lie in the hands of corporate management and work forces. Where this advance is secured through wage constraint the resulting increases in productivity should result in the ability to raise real wages based on productivity agreements. The Real Incomes Policy indicators of price performance ratio and wages provide a clear metric of the success of any productivity agreements free of fuzzy claims or techniques to obscure the contribution of labour to rises in real corporate and macroeconomic growth. The most important factor under RIP, unlike any other macroeconomic policy, is that no matter what the state or size of an economic unit the degree of benefit derived from the policy depends entirely on the economic unit and not on centralized arbitrary policy instruments. RIP eliminates the problem of the "calculation and knowledge problem" and permits the policy to operate entirely on the basis of "individual motivation and decision analysis" existing within each company.

RIP is counter-inflationary for the output prices of industrial and manufactured goods and can improve performance to reduce the balance of payment deficit. Again, something conventional policies have been unable to achieve for over 45 years.

In constitutional terms, this is a practical way to advance the efficiency and effectiveness of the supply side economy to contribute more directly to real incomes growth on the basis of more from less to help secure the means to address income disparity and climate change.