# Economics

## Dynamics of Output and Demand in a Growing Economy

An earlier post discussed some of the dynamics of output and demand implicit in the income-expenditure model. Attention was confined to a simplified economy that was stationary other than when adjusting to one-off exogenous changes in demand. The present post considers a continually growing economy in which autonomous demand changes over time. The discussion is kept simple by treating all demand other than private consumption as exogenous. The model can be extended to include additional endogenous demand components – such as investment or job-guarantee spending – but this is left for another time.

**Behavioral Assumption**

As was emphasized in the earlier post, a key behavioral assumption of the income-expenditure model is that, in setting production levels, firms attempt to eliminate unplanned investment, defined as the unanticipated change in inventories. Equivalently, unplanned investment can be defined as excess supply. In response to excess demand or supply, firms are assumed to vary the level of production in an effort to cater to the level of demand. The model presupposes that there is sufficient slack for output to be adjusted to demand in the assumed way.

In the context of a continually growing economy, the elimination of excess demand or supply requires firms not only to react to what has happened in the immediate past (as reflected in any unexpected change in inventories) but also to anticipate how fast demand is likely to grow in the immediate future. This suggests the following decision rule:

This says that firms will adjust actual output (Y) by an amount (ΔY) that is intended to cover the expected change in demand (ΔYde) as well as eliminate part or all (a proportion λ) of unplanned investment (Iu).

If growth is taken to be continuous, with time divisible into tiny increments, the process can be represented in terms of elementary calculus. The above decision rule becomes:

The dots indicate time derivatives. Y dot (= dY/dt) is the instantaneous change in output. Yde dot is the expected change in demand. It equals the expected growth rate of demand (gde) multiplied by the level of total demand: Yde dot = gde Yd. The level of unplanned investment (Iu) – or excess supply – is the difference between actual output and total demand: Iu = Y – Yd. Substituting these alternative expressions for Yde dot and Iu into the decision rule and rearranging gives:

**Expectations**

At times it is necessary to specify how expectations are formed. For present purposes, the simplest form of adaptive expectations will do. According to this assumption, firms expect demand in the present to grow at the same rate as it was growing in the recent past:

Here, gde is the expected growth rate of demand at time t and gdt–θ is the actual growth rate of demand at an earlier time t – θ, where θ is a phase of time.

Adaptive expectations result in systematic errors. When the actual growth of demand is accelerating, so that demand is growing faster now than in the recent past (gd > gdt–θ), firms that form expectations in the assumed way will underestimate demand. Conversely, when the growth of demand is decelerating, firms will overestimate demand. Expectations will only turn out to be correct when the growth rate of demand stabilizes for long enough that gd = gdt–θ = gde.

This simple form of adaptive expectations implies that, whenever there are errors, expectations are adapted according to the rule:

The difference between gde and gd is the error in expectations. It is assumed that firms respond by adjusting expectations in the opposite direction to the error. For example, if firms overestimate the growth rate of demand prevailing at time t, the error will be positive. Expectations will be adjusted downwards. This is a special case of a more general rule of adjusting expectations by the amount -β(gde – gd), where the positive reaction parameter β is set to one.

A different assumption could be made, such as basing expectations on a weighted average of past outcomes, allowing for slower adjustment of expectations in the event of errors, or opting for rational expectations, which would allow for quicker correction of random, unbiased errors, but none of these choices would alter the basic results of the model. One way or another, expectations have to be modeled to give determinate results, but the precise choice does not matter much in the present context as long as the assumed rule is at least somewhat sensible. Accordingly, a simple option is preferred.

**Growth of Actual Output**

Expression (2), which describes the way firms respond to excess demand or supply, implies a growth equation for actual output. This is obtained by dividing both sides of the expression by actual output (Y) and noting that Y dot / Y is the instantaneous growth rate of actual output (g).

If there is excess demand, the fraction Yd / Y exceeds one and actual output grows faster than expected demand (g > gde). Under excess supply, the reverse is true. Equilibrium requires that demand equal supply (Yd / Y = 1). In that case, the growth rate of actual output will coincide with the growth rate of expected demand (g = gde).

As has already been noted, expectations can only become correct if the growth of total demand (gd) first stabilizes. Otherwise, if gd keeps changing, expectations will also keep changing (with a time delay of θ) and result in variations in the growth rate of actual output.

For equilibrium to persist, firms’ demand expectations would need to become – and then remain – correct (gde = gd). If this occurred, actual output would grow at the same rate as total demand (g = gd) until firms made an error in predicting the trajectory of demand. Starting, hypothetically, from a point of equilibrium, any error would cause actual output to deviate from total demand (Yd / Y would differ from one) and result in diverging growth rates for actual output and total demand.

**Other Key Assumptions**

As has been discussed, the growth equation for actual output given by (5) is predicated on the behavioral assumption that firms, through their production decisions, attempt to eliminate unplanned investment and keep pace with demand. Two other key assumptions of the income-expenditure model are that: (i) there is a positive level of autonomous demand (A > 0); and (ii) there is a positive, and stable, marginal propensity to leak (α > 0) to taxes, saving and imports.

On the basis of these three assumptions, there is a tendency, within the model, for both actual output and demand to converge, at any point in time, toward a particular (but, in a growth context, evolving) level of output (Y*) at which supply would equal demand.

The characterization of this equilibrium level of output will depend on what is assumed about demand. As always, total demand can be considered as the sum of two parts: induced demand and autonomous demand. Here, all demand other than net induced consumption is assumed to be autonomous. This makes induced demand (1 – α)Y. Autonomous demand is A. Therefore:

**Equilibrium Output**

With the determinants of actual output and total demand specified, the level of output (Y*) to which supply and demand converge can be established. With actual output equal to total demand, Y and Yd can be replaced with Y* in (6):

Solving for Y* gives:

Output level Y* is a particular multiple (equal to 1 / α) of autonomous demand. It is a notional level of output (changing over time) that the economy does not necessarily reach. Its relevance hinges on it being an ‘attractor’ for both actual output and total demand. In the income-expenditure model, Y* does in fact play the role of an attractor under most circumstances. A way to verify this point is presented later.

**Growth of Equilibrium Output**

The growth rate of Y* can be obtained from (6′). The first step is to differentiate with respect to time:

All terms involving Y* dot can be collected to the left-hand side:

Dividing through by αY* will convert the left-hand side to a growth rate (Y* dot / Y*). Multiplying A dot by A / A will also enable this derivative to be converted to a growth rate:

Rewriting the expression in terms of growth rates and noting that A / α = Y* gives:

Under present assumptions, the growth rate of Y* simply follows the behavior of autonomous demand (g* = gA), which is taken as exogenously given.

**Growth of Total Demand**

The growth behavior of total demand is implicit in (6). Following the same procedure as in the previous section, the expression can be differentiated with respect to time:

Dividing through by Yd and multiplying Y dot and A dot by Y / Y and A / A, respectively, gives:

Expressed in terms of growth rates:

Here, gd, g and gA are the growth rates of total demand, actual output and autonomous demand, respectively. The growth rate of total demand is basically a weighted average of the growth rates of actual output (g) and autonomous demand (gA). The first term on the right-hand side describes endogenous demand growth. The second term describes autonomous demand growth.

Substituting for g, using (5), and rearranging yields the following expression for the growth rate of total demand:

Terms 1 and 2 can be considered briefly in turn. If there is excess demand, Y / Yd is less than one and term 1 will be greater than (1 – α) gde. As Y / Yd increases toward one, the term approaches (1 – α) gde. If Y / Yd actually equals one, the term will equal (1 – α) gde. Now, it has already been mentioned, in relation to (5), that when Y / Yd equals one, the growth rate of actual output equals both the expected growth rate of demand (g = gde) and, by (8), the growth rate of autonomous demand (g = gA = g*). So the tendency of term 1 is to approach (1 – α) g*.

Turning to term 2, in equilibrium A / Yd equals α. This is clear because, from (7), the equilibrium level of income is Y = Yd = Y* = A / α, implying A / Y = A / Yd = α. When there is excess demand, both Y and Yd are less than Y*, implying Yd < A / α or, upon rearrangement, A / Yd > α. So term 2 exceeds αgA when there is excess demand but tends toward αgA as A / Y shrinks toward α. In equilibrium, term 2 equals αgA. And since gA is the equilibrium growth rate, term 2 tends toward αg*.

Considering the right-hand side of (10) as a whole, the growth rate of demand (gd) tends to approach (1 – α)g* + αg* = g*.

**Dynamic Stability**

The discussion so far has highlighted certain characteristics of ‘equilibrium’ – or what is often referred to as ‘steady state’ – growth. In a nutshell, a steady state would require actual output continually to equal total demand (Y = Yd = Y* = A / α). Under these circumstances, autonomous demand would be a stable fraction (α) of actual output and total demand (A / Y = A / Yd = α). In terms of growth rates, all key variables would be growing at the same rate (g = gde = gd = gA = g*).

Of course, it is one thing to identify features of steady-state growth. It is another to establish whether the system has a tendency to move toward such a state. Basically, the question is this: if the exogenously given growth rate of autonomous demand is held constant for long enough, will the assumed behavior of firms and households tend to push the economy toward a situation in which actual output and total demand converge on output level Y* with all key variables growing at the same rate as autonomous demand?

It should be stressed that this is an exercise more in logic than empirical reality. There is no suggestion that autonomous demand would in fact grow at a constant rate for any significant length of time or that a real-world economy could ever attain a steady state. The purpose of the exercise is to establish the results and tendencies that follow, logically, from the stated assumptions of the model.

To consider the issue of dynamic stability, let:

Variables y and z, both ratios, are measures of excess demand. Variable y is greater than, equal to, or less than one depending on whether demand is greater than, equal to, or less than output. When Y = Yd = Y*, y = 1.

Variable z, the share of autonomous demand in income, is an alternative indicator of excess demand. It has already been observed that when demand and supply are both at the level Y*, z = α. If, starting from a steady state, autonomous demand subsequently grows at a different rate than output, there will be excess demand or supply, with z diverging from α. Under excess demand, z > α; under excess supply, z < α.

It follows from the definitions of y and z that the share of autonomous demand in total demand (A / Yd) is z / y. As with z, this share is greater than, equal to, or less than α depending on whether there is excess demand, equilibrium, or excess supply.

Most of our focus can be on variable y (= Yd / Y). Dynamic stability requires y to tend toward one and, if it gets there, to remain at one unless there is an exogenous change in either the growth rate of autonomous demand (gA) or the marginal propensity to leak (α). Clearly, whether y will behave in the required way will depend on the growth behavior of total demand (Yd) and actual output (Y). This can be made explicit by differentiating y with respect to time (applying the quotient rule):

The fractions in brackets on the far right are growth rates and Yd / Y is variable y. Modifying the expression accordingly gives:

This is a differential equation. It relates the instantaneous change in y (y dot = dy/dt) to the growth rates of demand and output (gd and g) as well as to y itself.

For a steady state to persist, it is not enough that y = 1 at a given moment. It is also necessary for y to remain unchanged (y dot = 0). As (12) spells out, this can only occur if demand and output happen to grow at the same rate (gd = g = g*).

Equation (12) is missing details that are needed to assess stability. One way to fill in these details is to express the equations for gd and g in terms of y and substitute the resulting expressions into (12). An alternative way, which turns out to be a bit simpler, is to substitute an equation for g into an equivalent expression for y dot, making use of the definition of z. The first step is to differentiate z ( = A / Y) with respect to time to obtain:

It can then be observed that

Since both 1 and α are constants, it follows that y and z both change at the same rate:

This means that the expression for z dot in (13) can be substituted into the right-hand side of (12) to obtain:

To eliminate z, it can be noted from rearrangement of (14) that z = y + α – 1. Upon substituting for z, (12) becomes:

Since (12) and (12′) are equivalent expressions, either can be used to check stability.

It is still necessary to substitute an expression for g in (12′). Writing (5) in terms of y gives the required expression:

Substituting this into (12′) gives:

Formulated in terms of (12”), the question of dynamic stability comes down to how y dot responds to a small change in y. Starting from a situation in which y = 1 and y dot = 0, it is necessary that changes in y away from 1 set in motion forces that tend to cause y to move back toward 1. In considering this question, expectations will be taken as given. At time t they are already formed, based on what happened at time t – θ. And if a steady state has persisted at least for length of time θ, the expected growth rate of demand will equal the other growth rates under consideration. The other elements in (12”) are either parameters (α, λ) or an exogenous variable (gA) and so can also be taken as given. Accordingly, we take the derivative of y dot with respect to y. Dynamic stability requires that the derivative be negative when evaluated at the critical point y = 1, y dot = 0.

In undertaking this exercise, it is important to mention that equation (12”) is nonlinear in y because of a y-squared term (if the expression is expanded out). This means that taking the derivative with respect to y serves only as a test of ‘local stability’ as opposed to ‘global stability’. Basically, the derivative represents the best linear approximation to the behavior of y near the point y = 1.

Taking the relevant derivative (applying the product rule) gives:

Evaluating the derivative where y = 1 and gde = gA = g* reduces the expression to:

The derivative is negative provided:

Therefore, the modeled behavior is locally stable provided the growth rate of autonomous demand (gA = g*) exceeds -λ, where λ is the positive reaction parameter that indicates the intensity of firms’ response to unanticipated changes in inventories. For positive growth regimes, the model always exhibits local stability.

**Description of the Model’s Growth Behavior**

Provided the condition for dynamic stability holds (g* > -λ), and y stays quite close to 1, the behavioral assumptions ensure a tendency for actual output and total demand to converge on Y*. Conceptually, the growth process depicted in the model can be described as follows. Starting from a steady state, an exogenous increase in the growth rate of autonomous demand (gA) creates a situation in which actual output and, to a lesser extent, total demand temporarily grow less rapidly than Y*. This results in excess demand (y > 1), a delayed upward revision of expectations (since gd > gdt–θ), and an acceleration of output growth (g) that brings with it further endogenous acceleration of demand growth (gd). So long as g remains below gA, it also remains below gd. At this stage, y is still rising further above one.

At a certain point, g catches up to gd. This occurs at the same time as g catches up to gA. It then overtakes both gd and gA. The deviation of g above gA is greater than gd‘s deviation. This is partly because endogenous demand growth accounts for only a fraction of total demand growth (which is a weighted average of endogenous and exogenous growth) and partly because leakage to taxes, saving and imports occurs throughout the process.

In the convergence of y toward 1, there can be some oscillation (fluctuation) around the critical point. This is due to the lag in firms’ response to excess demand and supply, including in the adjustment of expectations. If the growth rate of autonomous demand (gA) is held constant throughout the adjustment process, the oscillation is damped (declining in amplitude). This is illustrated in the first diagram below. In the second diagram, random variations in gA cause more sporadic behavior. In both diagrams, the growth rate of autonomous demand is exogenously increased from 0.01 to 0.03 at time t = 5, though with random variation around these levels in the second diagram.

The next two diagrams illustrate the convergence of growth rates. Once again, the growth rate of autonomous demand is exogenously increased from 0.01 to 0.03 at time t = 5. In the first diagram, the process is entirely deterministic. In the second diagram, the growth rate of autonomous demand is subjected to random disturbance.

The way in which g interacts with gd and gA can be verified working from the expression for gd in (9). Subtracting g from both sides of the expression gives:

This can be rewritten

In the first fraction on the right-hand side, the difference between total demand Yd and induced demand (1 – α)Y is simply autonomous demand A. Modifying the expression accordingly gives:

If g is less than gA, the right-hand side is positive. Since the left-hand side must then also be positive, g will clearly be less than gd. Conversely, when g is greater than gA, it must also be greater than gd. This confirms that g deviates further from gA in both directions than gd deviates. The expression also shows that the growth rates of actual output and total demand coincide when equal to the growth rate of autonomous demand (g = gd = gA).

## ‘De gustibus non est disputandum … exceptum if non-selfishum’

The status quo of Economics ten or fifteen years ago was that paying $8 to see a revenge fantasy of a fictitious protagonist taking fictitious revenge on a fictitious bad guy who has fictitiously wronged him falls tightly under economists de-gustibus-non-est-disputandum sensibility, whereas a subject spending $8 to take real revenge on a real-life bad […]

## ‘Auch unter Trump wird sich für uns wenig zum Besseren verändern’

Tooze: Viele Menschen, die Trump gewählt haben, sind der Überzeugung: Die Regierungen der vergangenen Jahrzehnte haben sich nicht um mich gekümmert. Damit haben sie sogar Recht. Jetzt ist da aber plötzlich jemand, der nimmt uns ernst. ZEIT ONLINE: Aber stimmt das wirklich? Nimmt Trump diese Menschen ernst? Tooze: Natürlich ist Trump in Wahrheit kein Interessensvertreter […]

## Top 20 heterodox economics books

Karl Marx, Das Kapital (1867) Thorstein Veblen, The Theory of the Leisure Class (1899) Joseph Schumpeter, The Theory of Economic Development (1911) Nikolai Kondratiev, The Major Economic Cycles (1925) Gunnar Myrdal, The Political Element in the Development of Economic Theory (1930) John Maynard Keynes, The General Theory (1936) Karl Polanyi, The Great Transformation (1944) Paul […]

## Tax and social security changes since 2010 are a tale of increasing inequality and discrimination

*The Equality and Human Rights Commission published its final report on the impact of tax and social security changes in the UK over the last few** years yesterday. The report was written by Jonathan Portes and my friend and occasional co-author, Howard Reed, in whom I have considerable confidence on this issue. I thought about summarising the report's press release, but it does the job perfectly well as published and so I cross post it here, because it deserves to be noticed in full so shocking are the findings:*

Four months after releasing our interim report, we have today released our final cumulative impact assessment, exposing how much individuals and households are expected to gain or lose, and how many adults and children will fall below an adequate standard of living, as a result of recent changes to taxes and social security.

The report, which looks at the impact reforms from 2010 to 2018 will have on various groups across society in 2021 to 2022, suggests children will be hit the hardest as:

- an extra 1.5 million will be in poverty
- the child poverty rate for those in lone parent households will increase from 37% to over 62%
- households with three or more children will see particularly large losses of around £5,600

The report also finds:

- households with at least one disabled adult and a disabled child will lose over £6,500 a year, over 13% of their annual income
- Bangladeshi households will lose around £4,400 a year, in comparison to ‘White’ households, or households with adults of differing ethnicity, which will only lose between £500 and £600 on average
- lone parents will lose an average of £5,250 a year, almost one-fifth of their annual income
- women will lose about £400 per year on average, while men will only lose £30

The negative impacts are largely driven by changes to the benefit system, in particular the freeze in working-age benefit rates, changes to disability benefits, and reductions in Universal Credit rates.

David Isaac, the Chair of the Equality and Human Rights Commission, which is responsible for making recommendations to Government on the compatibility of policy and legislation with equality and human rights standards, said:

"It’s disappointing to discover that the reforms we have examined negatively affect the most disadvantaged in our society. It’s even more shocking that children – the future generation – will be the hardest hit and that so many will be condemned to start life in poverty. We cannot let this continue if we want a fairer Britain.

"We are keen to work together with government to achieve its vision of a Britain that works for everyone. To achieve this outcome it is essential that a full cumulative impact analysis is undertaken of all current and future tax and social security policies. We have proved it’s possible and urge the Government to follow our lead and work with us to deliver it.”

As well as calling on the Government to commit to undertaking cumulative impact assessments of all tax and social security policies, particularly in order to comply with the Public Sector Equality Duty, the Commission is also reiterating its call for government to:

- reconsider existing policies that are contributing to negative financial impacts for those who are most disadvantaged
- review the level of welfare benefits to ensure that they provide an adequate standard of living

The announcement comes one week after the Commission submitted a report to the UN’s Committee on Economic, Social and Cultural Rights (ICESCR) highlighting that the UK’s social security system does not provide sufficient assistance to tackle inadequate living standards.

Download the reports

## This is not a time to just reform the Big 4: it is a time to sweep the whole failed structure of UK auditing aside and to start again

According to the FT this morning:

A UK financial regulator has called for an inquiry into whether the big four accounting firms should be broken up, in a move aimed at ending their dominant position auditing the accounts of Britain’s biggest listed companies.

Stephen Haddrill, chief executive of the Financial Reporting Council that regulates accountants, said Britain’s Competition and Markets Authority should investigate the case for “audit only” firms in an effort to bolster competition and stamp out conflicts of interest in the sector.

They added:

Mr Haddrill’s intervention follows a string of corporate accounting scandals, ranging from Carillion in Britain to Steinhoff in South Africa and Petrobras in Brazil. “There is a loss of confidence in audit and I think that the industry needs to address that urgently,” he said. “In some circles, there is a crisis of confidence.”

The suggestion is one I have little difficulty supporting. It has been apparent for decades that the structure of the Big 4 has created conflicts of interest that have prevented the essential public interest role of acting as auditors from being undertaken either properly more effectively for the benefit of society.

But, the question has to be asked as to why the Financial Reporting Council might be suggesting this now. Might it be because yesterday there was a call from the Local Authority Pension Fund Forum (who I advise, but not on this issue) for the abolition of the FRC. As has been reported:

An influential UK pensions body has called for the country’s accounting watchdog to be wound up and replaced with a proper statutory body.

The Local Authority Pension Fund Forum (LAPFF) – which represents 72 of the UK’s local government pension schemes – made the demand in its submissionto a consultation on the Financial Reporting Council’s (FRC) proposed revisions to the UK Corporate Governance Code.

In its submission, LAPFF said it viewed the positions of the FRC’s chair, Sir Win Bischoff, and chief executive Stephen Haddrill untenable and “considers that the FRC should be put into special measures, to be run by commissioners until a new body is set up under primary legislation”.

Let me be clear: I might support the FRC call for reform of the Big 4, but I have even stronger sympathy with this call from LAPFF, which represents more than 60 local authority pension funds with more than £200 billion under management.

If there is a problem with auditing now it must have taken time to develop. And if so it happened on the watch of the FRC, which is an organisation riddled with membership from the Big 4 creating massive conflicts of interest that are at the heart of the crisis of confidence to which the FRC refer.

This is not a time to just reform the Big 4: it is a time to sweep the whole failed structure of UK auditing aside and to start again.

## Radio 3 Programme on Internet Threat to Democracy

Next Tuesday at 10.00 pm Radio 3 is broadcasting a programme about the threat to democracy in the age of the internet. It’s part of the *Free Thinking Festival*, and is entitled ‘People Power’. The blurb for it in the *Radio Times* reads

*Democracy was the most successful political idea of the last century but can it survive the digital age? Anne McElvoy chairs a discussion with Rod Liddle, associate editor of the *Spectator, *David Runciman, author of *How Democracy Exists, *Caroline MacFarland, the head of a think tank promoting the interest of “millennials”, and geographer Danny Dorling. Recorded in front of an audience at Sage Gateshead as part of Radio 3’s Free Thinking Festival.* (p. 130).

McElvoy recently presented the excellent short history of British Socialism on Radio 4. Now, I might be prejudging the programme, but it looks like very establishment thinkers once again trying to tell us that the Net, bonkers conspiracy theories and electoral interference from the Russians are a threat to western democracy as a way of protecting entrenched media, political and business interests.

The Net isn’t a threat to democracy. What is destroying it, and has caused Harvard University to downgrade America from a democracy to an oligarchy, in the corporate sponsorship of politicians. Because politicos are having their electoral funds paid by donors in business, they ignore what their constituents want and instead represent the interests of big business. Which means that in Congress they support the Koch and the oil industry, and the arms companies against 97 per cent of Americans, who want greater legislation over guns to prevent any further school shootings.

As for the press, they’re aiding the collapse of democracy because they’ve become part of massive media and industrial conglomerates, and represent the interests of their corporate bosses. They are most definitely not representing ‘truth to power’, but are instead another layer of power and ideological control. They promote the policies their bosses in big business want, even when it is actively and obviously impoverishing ordinary people. Like the way the right-wing press is constantly pushing neoliberalism, even though this as a doctrine is so dead it’s been described as ‘Zombie Economics’.

In this case, the internet really isn’t a threat to democracy, but the opposite. People can check the lies their governments and media are telling them, and disseminate real information to correct it, as well as go further and identify the people and organisations distorting and corrupting our politics from behind the scenes.

**And this is obviously scaring the political and media elite. Otherwise they wouldn’t be transmitting programme like this.**

## The IFS really is the home of dismal economics

The IFS published its analysis of the Spring Statement yesterday. The headline was that if the government was to meet need in the economy within the next few years then it was going to have to raise £41 billion pa in additional tax to pay for the that demand and balance the budget.

This is so typical of the IFS, which seems to specialise in persistently misunderstanding tax, the economy and the relationship between government spending, money and well being. Given the IFS is the, supposedly, most revered think tank on the issue this is some claim to make, so let me unpack that just a little.

First, let’s be clear that since 1694 the UK government has run almost persistent deficits and made no real attempt to ever clear its debts. The result is that in 324 years the government has not tried to run a balanced budget, and we have made decided economic progress despite (or rather precisely because of) that fact. So why is the IFS endorsing a goal, in the shape of a balanced budget, that makes no economic sense at all and which has been proven to be unnecessary by experience?

This is, secondly, most especially true when it is appreciated that since 1971, when money ceased to have any relationship with the gold standard, the so called national debt is, in fact, the largest component in the money supply. What the IFS is then doing is suggesting that although they believe the economy will grow that they want this to happen without the government playing a role in it so doing by injecting the essential liquidity that will fuel the increased activity that will be undertaken. How, I wonder, do they think that helps?

Third, what this shows is that, as ever, the IFS think that we live in a world of tax and spend, where the ability of the economy to supply care for the elderly is entirely dependent upon the capacity of large firms of accountants, staffed by highly paid individuals, to seek tax abuse at a significant profit on which they pay tax for as long as they think it worthwhile living in the UK.

And I kid you not: the IFS actually made a statement that we are dependent upon rich, highly mobile, individuals paying tax in the UK for the supply of government services in this country, and this despite the fact that they often say that imposing taxes on the high paid will never fund the services we require. It is as if they are wholly unaware of the completely paradoxical nature of these parallel claims.

The reality is that we are dependent on the overall level of income in the economy and, as importantly, whether income is spent or not. The actions of the wealthiest and highest earners (groups who usually overlap because the wealthy reach that state by not spending, which is easier when you don’t need all your income to live on) in not spending suggests they are not that valuable to the economy. That they contribute is savings: and we already have a glut of them. That's one good reason why national debt is rising: they are buying the government binds in question.

The rich and wealthy are also not that valuable because their low overall rates of tax compared to both income and wealth suggests that our dependency upon them is tenuous, and that their replacement by lower paid, but likely to be as ambitious and in truth equally competent people of sound judgement, might in the event that there was an exodus from the country of the current incumbents of the highest paid posts actually be for the overall best of the country by creating a considerably improved income distribution.

And there are two other key issues the IFS ignore. The first is that national debt is £435 billion less than they say because of quantitative easing. John Redwood understands that. The IFS persist in not telling the truth about this. QE cancels government debt.

Last, the IFS continue to suggest that government spending is akin to pouring money into a hole. They ignore the fact that it is wealth creating in its own right. They ignore the fact that this spending is other people's income, on which they might pay tax. It seems that they, like the Office for Budget Responsibility, massively underestimate the economic multipliers on government spending, which is why both have got their forecasts so wrong in the past. And the result is that the IFS becomes part of the government propaganda machine for austerity.

It really is time that they stopped being given the respect that they get for largely following the Treasury script, which on this occasion would be exactly what the IFS is saying rather than what Philip Hammond did. This would not matter except for the fact that the Treasury has truly been the home of dismal economics for decades now. And so too then is the IFS.

## Ricardian equivalence — nothing but total horseshit!

Ricardian equivalence basically means that financing government expenditures through taxes or debts is equivalent since debt financing must be repaid with interest, and agents — equipped with ‘rational expectations’ — would only increase savings in order to be able to pay the higher taxes in the future, thus leaving total expenditures unchanged. Why? In the […]

## ITV Programme Next Thursday on Martin Luther King

Next Thursday, 22nd March 2018, ITV are broadcasting at 9.00 pm a programme about Martin Luther King, presented by that British newsreading institution, Sir Trevor McDonald. The blurb for this in the *Radio Ti*mes runs

*On the 50th anniversary of the civil rights leader’s death, Trevor McDonald travels to the Deep South of America to get closer to the man who meant so much to him and so many others. As well as finding out about the horrors of lynching in 20th-century America, he asks Naomi Campbell, General Colin Powell and the Reverend Al Sharpton what Martin Luther King all means to them. Disturbingly, he also meets a former member of the Ku Klux Klan who admits that he would once have targeted him because of the colour of his skin.* (p. 103).

There’s also a section three pages further back, on page 100, which adds a bit more. This says

*It’s 55 years since Martin Luther King’s ‘I have a dream speech’ in Washington transfixed the world and became a rallying call for the American civil rights movement. Fifty years after King’s assassination, Trevor McDonald looks at a remarkable life that was cut short. he talks to friends of King’s, including singer Harry Belafonte.*

It’s the small, if familiar, details that still move. Like hearing how the mighty gospel singer Mahalia Jackson, seeing King struggling with notes for his speech, prompted him loudly with “Tell them about the dream, Martin”. What followed was off the cuff and remains spine-tingling to this day.

MLK was also politically far more radical than he is often portrayed. A month or so ago there were a series of articles and videos by Counterpunch and the various American left-wing news programmes pointing out that the rather anodyne image of King as preaching simple racial reconciliation was carefully crafted to exclude his criticism of capitalism and American imperialism. King did believe in racial reconciliation between White and Black, but he also believed that capitalism and big business was keeping Whites and Blacks divided in order to weaken the working class, and allow ordinary folks of whatever colour to be exploited.

He was also an opponent of the Vietnam War, which he saw as more corporate imperialism to exploit and oppress the coloured people of that country, just as Blacks in America were being exploited.

This stance led him into conflict with the Democrat Party and the president, Lyndon Johnson. After MLK made a speech denouncing capitalism and the war at the Riverside Church, Johnson removed King’s bodyguards. It was an ominous measure that everyone knew would ultimately mean King’s death.

And King also didn’t mince his words when it came to describing the atrocities of the Vietnam War and American imperialism. You may remember the fuss the Republicans kicked up about the Reverend Jeremiah Cone, the pastor at Barack Obama’s church. Cone was also strongly anti-American because of what he viewed as the country’s intrinsic racial injustice, shouting out ‘God dam’ America!’ The Republicans claimed that he was anti-White, and that his hatred of Whites must also be shared by the Obama, then just campaigning for the presidency, because Obama had worshipped in the same church without objection for something like 20 years. I honestly don’t know if Cone was anti-White or not. It’s possible he was. But his comments on American imperialism were very much in line with what MLK, who certainly wasn’t racist, also said.

**This is an issue I shall have to go back to, as it’s still very, very relevant today, when the racist right is once again trying to goose step back into power, and western imperialism is exploiting and plundering the countries of the world, all under the pretext of freeing them from terror.**