Project Fear is now Project Fact and still we stumble onwards to chaos

Published by Anonymous (not verified) on Wed, 25/07/2018 - 5:41pm in

I would love to think each day in the unfolding Brexit disaster will be the worst. But I know that is not true. After all, we are only in the phoney war as yet: the real thing has yet to happen and will, I fear, be so much worse than things are now. That said, yesterday does take some beating.

May effectively sacked her new Secretary for Exiting the EU and is to take charge of Brexit negotiations. That’s not encouraging.

Raab will, instead of going to Brussels, take back control of the national larder as food shortages are now an anticipated outcome of Brexit. Project Fear has ceased to be, I note, as a consequence: it is now Project Fact.

And Jeremy Corbyn sang the praises of Brexit, saying it would mean we could bias government procurement in favour of UK companies when that is what every other EU country already seems to do whatever the rules might say. It really is time he caught up with reality.

Then, just to add to the confusion, the government published a White Paper that said the legislation for exiting the EU, which they have just fought through Parliament and which says it will come into effect on the day we leave will not do any such thing: 29 March 2019 is now, apparently, 1 January 2021.

It’ all too easy to think, quite often, that Westminster exists in a parallel universe. Yesterday provided evidence in support of that case. But it also provided evidence of something else. Many suggest that politicians are not in charge in the UK: that there is a power behind the government that really runs the country. Some think it the civil service. Others have different conspiracies.  I sincerely hope that those who think such things realise that yesterday provides the evidence that this is not true.

We are in a mess. Politicians created that mess. No one but politicians can get us out of that mess. It will have massive consequences. And there is no 'deep force' to save us from it.

Well, bar one. And that is angry parents. No one has more energy or capacity for potent anger than a parent wanting to feed their child and who is prevented from doing so. If that is the situation we face next year then the dark force in the country will be angry parents who will not tolerate being told they cannot do so because of Brexit.

In 2008 Alastair Darling knew he had no choice but save the banks because there had to be food on tables and there would not have been if he had let any one of them fail. Right or wrong, that's why it happened. It may have been the wrong decision for the long term, but it was right on the day.

A decade on and what we are seeing are all the wrong decisions being taken for the long term which have the potential to crash the economy in the short term, and to create mass civil unrest in the process.

Few think Alastair Darling a towering force in British politics. He got a great deal wrong. But he saw what needed to be done at a moment of crisis. Apparently no one with much power in British politics now comes close to having his insight even though ample notice of the crisis is being given this time.

We need to worry.

And candidly, we need to change government. But there is no mechanism to do so. And no effective opposition to replace the shambles we have.

And that's the real fear.

A Simple Modern Money Tale – Buckwell Island Establishes a Currency

Published by Anonymous (not verified) on Wed, 25/07/2018 - 6:22am in



At one time or another many of us have probably pondered questions such as: Where does a national currency come from? How does a currency system basically work? Why might people agree to accept a national currency in the first place? How can we be confident that a national currency won’t collapse and that people will continue to accept it in economic transactions? Can a government ever go broke and leave citizens footing the bill? Can financial affordability even be an issue for government?

The answers to these questions depend, above all, on whether the government in question is a currency issuer or a mere currency user. The simple tale traced below illustrates some basic aspects of a society in which government issues its own currency. It is important to understand that the illustration does not apply to governments that use a currency issued by some other entity. For example, it does not apply to a state or local government that is required to transact in a currency issued by its national government. Such governments are mere currency users, much like households and private businesses. They do not issue their own currencies. Equally, the illustration does not apply to a national government that has given up its prerogative to issue a currency and has instead agreed to use what is essentially a foreign currency. This is currently the predicament of those European governments who have committed to using the euro. At least for now, such governments have reduced themselves to the status of mere currency users. If, at some point in the future, these European governments decide to go off the euro and reintroduce their own currencies, the following illustration will then become applicable to them, but not until then.

Most national governments, however, do issue their own currencies. This is true of the national governments of countries such as China, the US, Russia, the UK, Japan, Brazil, India and too many others to mention.

To illustrate in very simple terms the position of such governments and the nature of their currencies, consider Buckwell Island. It is an imaginary island. Its people have just voted to form a nation. Elected representatives from each region of the island have gathered to discuss some basic needs of the new nation.

After much discussion and consultation it is agreed that there need to be some common rules governing access to natural resources, ownership or stewardship of property, and the conduct of business activities. It is decided that the newly formed government will need to see to the effective defense of the island and develop key public services in education, child and aged care, health care and civil administration as well as build or oversee the building of roads, a public transport system and a modern communications network. All this will take time and much effort.

The island government realizes that it will need to hire some people to perform roles in the public sector. It also needs a way for private sector activity to be integrated into the economy. To this end, it decides to introduce a national currency called the ‘buck’.

The currency is established in two basic steps:

First, the government officials return to their local electorates and announce that all citizens of at least working age will be required to pay taxes. A tax authority will be established to monitor and enforce payment. Significantly, it is specified that all taxes and other government charges will have to be paid in bucks. No other currency or item will be accepted. In addition, all income and wealth generated on the island will be evaluated in bucks, with taxes imposed accordingly. Court settlements will also be specified in bucks.

Since people require an income, and since income and wealth will be evaluated in bucks and subject to tax, this first step in establishing a national currency creates a need within the community for its members to earn or otherwise obtain bucks.

The effect of this first step is to ensure at least some demand for the currency. Since people need bucks to pay taxes and other government charges, they will accept the currency in payment for goods and services that they are able and willing to supply either to government or to fellow Buckwellians.

With a basic demand for the currency now created, the second step in establishing the currency is for the government to open up various channels through which members of the community can actually get hold of the currency. In partial fulfillment of this objective, nominated government representatives release a list of public sector job positions. It is announced that there will be jobs for teachers, health practitioners, administrators, police officers, defense and peacekeeping forces and other important roles. Suitable applicants are free to apply for these jobs. If successful, they will be paid in bucks.

The officials also announce a list of goods and services that the government would like to purchase from private businesses. This opens up opportunities for prospective businesses to sell output to a large customer (the government). To obtain finance, competing businesses will be able to approach a newly established public bank for loans. These loans will be issued in bucks. In time, private banks may also be permitted to operate. For now it is left as a future question for the voters to decide.

The effect of these measures is to ensure that citizens can get hold of the currency. Some people will accept a job offer from the government to work in the public sector. Business operators, financed at least initially by public loans, will be able to start production and sell their products or services to customers, generating revenues in bucks. The rest of the working-age population will be able to seek employment in the private sector in exchange for bucks.

The government also announces a Job Guarantee program. Anyone who cannot find a job elsewhere can accept a job-guarantee position financed by government and administered by local government or perhaps community organizations. Those who are unable to work due to age or sickness will receive a pension paid by government. For accounting purposes, the pension payments are treated as negative taxes rather than spending, because they do not constitute direct spending on goods and services.

With these policies in place, everyone can get hold of bucks. They will be obtained either as newly issued currency when the government spends, pays pensions or lends, or as circulating currency when households or businesses make payments with bucks yet to be extinguished by taxation.

To facilitate economic activity as well as saving, citizens are granted the right to hold accounts at the public bank. Payments for goods and services can be made through the direct debiting and crediting of bank accounts or the exchange of hard currency.

To summarize, there is a basic two-step logic involved in Buckwell Island’s introduction of a currency. First, by requiring taxes and similar charges to be paid in bucks, the government ensures that people are willing to accept the currency. This step ensures at least some demand for bucks since people need them, at minimum, to pay taxes. Second, the currency is issued. The government issues bucks by hiring workers, providing pensions, extending loans to businesses and purchasing some of their output.

It may be noticed that it would be impossible for anyone to pay taxes before the currency had actually been issued. Until government spent on goods and services, or paid pensions, or the public bank lent, there would be no way for anyone to obtain bucks. An implication is that government spending and public lending are logically prior to the payment of taxes. The government’s spending and lending are not constrained by the amount of taxes paid in the past. To the contrary, the capacity of citizens to pay taxes originates from government spending and lending. A currency-issuing government, such as Buckwell Island’s government, can always afford to purchase whatever is available for sale in its own currency. In other words, if something has a sale price in bucks, the island government can always afford to purchase it, since it is the sole issuer of bucks.

A system of accounting and basic bookkeeping is put in place with the aid of spreadsheets maintained by the public bank. Whenever the government decides to spend or lend bucks, the public bank types in the appropriate new numbers in its spreadsheets. If the government pays 100 bucks for office stationary, the public bank marks up the account of the stationary supplier by that amount. The new deposit will be an asset of the stationary supplier and a liability of government.

The stationary supplier is one entity in what can be called the non-government sector. This sector includes all households and private businesses on the island as well as any foreigners making transactions in bucks.

When the government spends 100 bucks on office supplies, the financial assets of the non-government sector, taken as a whole, increase by the same amount. This increase in non-government financial assets is offset exactly by an increase in government liabilities of the same amount. In this way, bucks (which are government liabilities and non-government assets) are created out of nothing.

Conversely, when the stationary supplier pays perhaps 30 bucks in tax, this amount is subtracted from its bank account. This action destroys 30 bucks. They no longer exist. The stationary supplier’s assets go down by 30 bucks as do government liabilities. As a whole, the financial assets of the non-government sector decrease by this amount, as do outstanding government liabilities.

In short, government spending and lending create bucks, which are a financial asset of non-government and financial liability of government. Taxation eliminates bucks. Loan repayments to the public bank also function as tax payments, and so eliminate bucks. The discharge of any other government charges, such as through the payment of licensing fees or fines, also eliminates bucks.

As a matter of logic, something cannot be destroyed before it exists. Bucks must be created through government spending or lending before they can be eliminated through taxes, the repayment of public loans or the discharge of other financial obligations to government. Or, to put it another way, the government must issue its financial liabilities before they can be extinguished.

Clearly, there is no limit to how many financial liabilities the government can issue in its own currency. For Buckwell Island’s government, there is never a question of financial affordability when it comes to anything that is available for sale in bucks. To issue its liabilities, the government simply makes a decision to spend, pay pensions or lend. With the decision made, the bucks are keystroked into existence when the public bank types them into the accounts of spending recipients, pensioners or borrowers.

However, the absence of a financial limit does not mean that there are no limits to what can be achieved in real terms. It would be pointless for Buckwell Island’s government to keep increasing its spending if there were no actual goods and services that could be produced to meet the extra demand. Acting in this way would merely bid up the prices of various goods and services. And since the prices of these goods and services might also enter into the costs of producing other goods and services, there could potentially be a bout of excessive inflation in which prices, on average, rose rapidly and continued to rise for some time. Inflation causes the currency to lose some of its purchasing power. A unit of the currency – one buck for the islanders – would purchase less than before.

Fortunately, Buckwell Island’s government and citizens understand that the level of total spending – which includes the spending of government, the island’s households and businesses, and foreigners – needs to be kept in sensible proportion to the capacity of the society as a whole to produce real goods and services. This does not necessarily mean that taxes must be as high as government spending. To the extent that households, businesses and foreigners wish to spend less than their incomes, this subtracts from the overall level of demand and makes it possible for government to spend somewhat more than it taxes without causing excess demand.

Although our tale is very simple compared with the complexities of modern economies, it does highlight some basic points that will help address the questions posed at the outset. Introducing more real-world factors, such as a private banking sector, would greatly complicate the details of the story but not change the basic issues presently under consideration. Returning to the questions:

Question 1. Where does a national currency come from?

Answer. In a society with a currency-issuing government, the currency originates from governmental decisions to spend or lend. Whenever Buckwell Island’s government follows through with its decision to spend or lend, bucks are created. As has been discussed, the bucks so created are a financial liability of government – a form of liability that the government can issue without limit – and a financial asset of non-government.

Question 2. How does a currency system basically work?

Answer. The currency originally comes from government. When the Buckwell Islanders sell goods or services (including labor services) to government, they receive bucks in exchange as income. When businesses borrow from the public bank to invest in production or hire workers, these expenditures likewise go to somebody as income. In this way, bucks enter the economy and can be used for various purposes within the economy. Some of the bucks received as income will be used by households and businesses to pay taxes. Some will be saved in accounts at the public bank or in hard currency. Some will be used to buy goods and services from foreigners. And some will be used to buy goods and services from others in the island community, creating additional income in the process. In this way, bucks circulate from one household or business to another until at some point they are eliminated through taxation.

Question 3. Why might people agree to accept a national currency in the first place?

Answer. An important reason is that people must obtain the currency in order to pay taxes or meet other financial obligations imposed by government. This ensures that the Buckwell Islanders will accept bucks in particular, in preference to some other currency. The imposition of taxes and other government charges is not necessarily the only reason people might accept the currency. But this factor is sufficient to ensure at least a base level demand for the currency.

Question 4. How can we be confident that a national currency won’t collapse and that people will continue to accept it in economic transactions?

Answer. A complete collapse of the currency would mean that it was no longer possible to buy goods and services with the currency. It would mean that nobody was willing any longer to accept the currency in payment for anything. A complete breakdown of the currency will not happen so long as the government effectively enforces taxes and other obligations denominated in its currency. It is the successful enforcement of these obligations that guarantees the currency remains acceptable in exchange at least to some extent.

Even so, we have also recognized that the currency can lose some of its purchasing power when the tax burden becomes too light relative to the level of government spending. If taxes were kept very low but the government chose to spend a great deal in comparison, this could cause (in combination with other spending) more demand than the economy could cope with in a timely fashion and result in a bidding up of prices for many goods and services. A unit of the currency – one buck for the islanders – would then buy less than before. The purchasing power of the currency would decline.

What matters, in this respect, is the strength of spending in general, whether by government or non-government. All spending carries some risk of inflation if it causes demand to outstrip the capacity of the economy to supply additional output. The more households, businesses and foreigners wish to save bucks (rather than spend them), the more it is possible for government spending to exceed tax payments without causing undue inflation.

The solution to an outbreak of severe inflation would be for government either to cut its spending, raise taxes or do a combination of both. These actions would constrain the level of public and/or private spending and help to keep inflationary pressures in check. In the absence of a Job Guarantee, the policies would almost certainly create some unemployment. Fortunately, Buckwell Island has a Job Guarantee. This program ensures that full employment can be maintained despite any reduction in total spending on goods and services that might occasionally be necessary to curb inflation.

Question 5. Can a government ever go broke and leave citizens footing the bill?

Answer. A currency-issuing government can never go broke so long as it sticks to operating in its own currency and refrains from borrowing in foreign currencies. (To the extent that a government becomes indebted in a foreign currency, it reduces itself to the status of a currency user and can run into financial difficulties.) A government that sticks to its own currency faces no financial constraint. It can always create more currency if and when this is deemed appropriate.

Question 6. Can financial affordability even be an issue for government?

Answer. A currency-issuing government can always purchase whatever is available for sale in its own currency. By the same token – and at the risk of stating the obvious – the government cannot purchase what is unavailable for sale. Put simply, there can be a shortage of natural resources. There can be a shortage of workers. There can be a shortage of knowledge and technical know-how that prevents certain goods or services from being supplied within a particular time frame. These constraints place limits on what can be done in real terms. But, importantly, anything that can be done within these real limits is affordable for a currency-issuing government.

Related Posts

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Introducing a New Currency

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The state of ‘New Keynesian’ economics

Published by Anonymous (not verified) on Tue, 24/07/2018 - 9:46pm in



The standard NK [New Keynesian] model, like most of its predecessors in the RBC literature, represents an economy inhabited by an infinitely-lived representative household. That assumption, while obviously unrealistic, may be justified by the belief that, like so many other aspects of reality, the finiteness of life and the observed heterogeneity of individuals along many […]

The right answer to ‘How are you going to pay for it?’

Published by Anonymous (not verified) on Tue, 24/07/2018 - 6:32pm in

The question of ‘How are you going to pay for it?’ is now perennially used by journalists to challenge any proposal made by any politician on any issue, whatever its inherent merits might be.

The question reflects poorly on those asking it. It assumes that nothing a government does might be of worth in itself, and so people might value it sufficiently to want to pay for it. That means the question is inherently biased.

The question also assumes that money spent adds no value to the economy, as if it is lured into a black pit, never to be seen again when in fact money spent my a government does three things. First, it becomes someones’ income. Second, it provides the means for those getting that income to pay tax at an average overall rate exceeding 33%, meaning that at least one third of all government spending comes back pretty much directly in additional tax paid. Third, it provides the funding for additional consumption in the economy, and that means yet more tax is paid. So, far from disappearing into a black hole, much government spending actually funds itself by providing the means for additional tax to be paid.

The question next assumes that when the government spends it’s at cost to other activity elsewhere in the economy. But this is only true when the economy is at productive full employment. We’re a long way from that right now. So what the government spends boosts the size of the economy, rather than rearranges a fixed amount of existing work, as the question presumes.

But there’s something even more important to note about this question. What it also assumes is something particularly perverse. It assumes that government spending will happen without any additional work being required to deliver the chosen policy. It’s as if the spend takes place independent of human effort. And that’s just daft. Because the fact is that no government policy happens without human effort being expended.

Appreciating this does however suggest the correct answer to the question ‘How are you going to pay for it?’ That correct answer is ‘We’re going to work for it.’ After all, how else is anything paid for?

When the government has a plan to spend money it intends to put people to work. And to answer the question ‘How is it going to be paid for?’ the correct answer is ‘From out of the value created, which is why we’re doing it.’

Where modern macroeconomics went wrong

Published by Anonymous (not verified) on Tue, 24/07/2018 - 12:09am in



In issue 1-2 (2018) of Oxford Review of Economic Policy, the editors have invited some well-known contemporary mainstream macroeconomists (including e.g. Simon Wren-Lewis, Randall Wright, Olivier Blanchard, Ricardo Reis, Joseph Stiglitz) to give their views on how to rebuild macroeconomic theory for the future. Some of the contributions are interesting to read. Others — like […]

The Office for Budget Responsibility does not do macroeconomics, as its Fiscal Sustainability Report painfully proves

Published by Anonymous (not verified) on Mon, 23/07/2018 - 4:57pm in



I have been asked on Twitter whether I have read the new Office for Budget Responsibility report on the long-term fiscal sustainability of the UK, published last week. The honest answer when I was asked was 'no', but I logged the request and what better is there to do on a lazy Sunday evening than settle down with an OBR tome?

The nub of the forecast is that there are going to be more of us and we're all going (on average) to live longer:

The result is that health spending is going to grow considerably as a proportion of GDP:

But note, not much else is going to change - especially beyond age-related spending. Still, government spending will be up.

Despite this massive change in the age profile, employment rates are not going to decline much:

And we're going to experience fairly steady growth:

And note migration does not massively change that.

But despite all this the proportions of tax revenues raised to GDP are going to be massively consistent:

As a result of which government borrowing is going to rise steadily:

And I have to be honest, that by the time I had got to this I was beginning to give up the will to live.

Let me explain why. In a nutshell it is because this forecast is nonsense. What it assumes is that the government is a business operating in an economy on which the government's decisions have no impact. Let me be clear, I have prepared projections in my time for which such an assumption is appropriate. That assumption will, in fact, be true for the vast majority of businesses in the UK. But it is a wholly inappropriate assumption to be made in a forecast of this nature for the government as a whole. What the government does change the economy: the two are not independent of each other. Sheer scale makes that clear. So too does the fact that the government is the currency issuer. And the only agency that can tax. But the OBR does not seem to have noticed this.

I should explain that there is reason for this. That is that the Office for Budget Responsibility is made up mainly of exiles from the Institute for Fiscal Studies who famously say they 'don't do macroeconomics'. That is painfully apparent here.

Let me take one simple example. Health care spending as a proportion of GDP is to nearly double according to the OBR in their projection. The increase is 6.7% of GDP. But, they say, VAT revenues as a proportion of GDP will also rise. And that is not logical. Because there is no VAT on healthcare. And so the amount of VAT recovered as a proportion of GDP should fall given how material the first assumption is. But apparently, the OBR can't make the link. That's either because they are very poor at financial modelling (it would really not be very hard to program an assumption on this: give me a few minutes and I would do it for them) or, alternatively, they're assuming that whatever the government does has no impact on the economy as a whole.

I strongly suspect both my observations are true. With regard to the latter the confirmation comes from one simple search of the document. I searched for the word 'multiplier'. In other words, I looked to see what assumption the OBR was using to explain the relationship between the additional government spending they are forecasting on healthcare and overall growth. What I was looking to find was an explanation as to whether they thought this would add to, or subtract from the growth potential in the economy, and why. This would, after all, seem to be the absolutely fundamental assumption that underpins any projection of this nature. But the word is not to be found in the document. Not once. Not even in a footnote. So this is not macroeconomics as we know it, at all.

In which case let me summarise this projection with which they have sought to scare the populous at large, to no doubt support the OBR / IFS view of the ongoing need for austerity. What they are saying is that because the government has had the temerity to think it must look after the UK's healthcare needs we will all be going to hell in a handcart due to an unsustainable burden of debt.

First, let's make clear that the OBR shows not the slightest understanding of what debt really is. They just don't get modern monetary theory.

Then let's note that they must know that their assumption on tax is crass: they know that eventually funding without tax increases creates inflation as full employment is approached, but they ignore such issues in their entirety.

Just as they ignore the fact that spending in this way will add to UK growth since we are not at full capacity in our economy at present.

Whilst also ignoring that because those engaged in this activity are well paid, on average, that this spending might increase the overall tax take.

And that providing healthcare to an ageing population might also solve the productivity issue (as the elderly are in fact now known to be quite productive and drag up the productivity of younger employees)

None of these things are noted.

Nor is the fact simply removing the stress of old age from people's lives increase their willingness to spend.

Instead, the OBR hold everything constant and say we can't afford to provide healthcare without massive tax rises.

The result is that this might be politely described as a crass piece of work.

And candidly, if this is the best they can do they need to be replaced.

Bourdieu on neoliberalism

Published by Anonymous (not verified) on Mon, 23/07/2018 - 4:55pm in



Economists may not necessarily share the economic and social interests of the true believers and may have a variety of individual psychic states regarding the economic and social effects of the utopia which they cloak with mathematical reason. Nevertheless, they have enough specific interests in the field of economic science to contribute decisively to the […]

1945, manifestos, and a new Beveridge

Published by Anonymous (not verified) on Mon, 23/07/2018 - 4:47pm in

A regular commentator on this blog, G Hewitt, noted yesterday that the Imperial War Museum notes on their website that:

The Labour Party won the general election decisively, winning 393 seats, while the second-placed Conservatives only secured 197. With an emphasis on social reform, the Labour Party’s manifesto was strongly influenced by the Beveridge Report and included a commitment to full employment, affordable housing, and social security and health care for all.

In contrast, the Conservative campaign focused on Churchill’s popular appeal, lowering taxation, maintaining defence spending and encouraging private business interests. While Churchill acknowledged a need for social reform, he argued that this should be done privately rather than by the government, claiming that Labour would need 'some kind of Gestapo' to implement such reform.

Despite Churchill’s concerns, the Labour Party’s emphasis on social reform clearly appealed to many voters, who gave Labour a landslide victory at the polls and a clear mandate for change.

As G Hewitt then noted:

Well knock me down with a feather, plus ca change, it’s deja vu all over again. The first para is what Labour should be majoring on, and spent the Blair/Brown years largely ignoring while adopting the Conservative policies in the second para. Maybe they should commission a new “Beveridge”, written by someone with MMT background, cull the Blair/Brown Tories within their ranks and address the issues of inequality etc which the 1945 manifesto highlighted and which are still here today and perhaps in 5 to 10 years, when Scotland and NI have gone they may be ready to bring England into a more equal, more socialist place.

If only, I say.

If only.

Mainstream economics and neoliberalism — what is the difference?

Published by Anonymous (not verified) on Sun, 22/07/2018 - 1:11am in



Oxford professor Simon Wren-Lewis had a post up some time ago commenting on traction gaining ‘attacks on mainstream economics’: One frequent accusation … often repeated by heterodox economists, is that mainstream economics and neoliberal ideas are inextricably linked. Of course​ economics is used to support neoliberalism. Yet I find mainstream economics full of ideas and […]

The present state of economics

Published by Anonymous (not verified) on Sat, 21/07/2018 - 1:04am in



More and more often, confidence in the professional qualifications of individuals representing certain occupational groups which formerly were held in high esteem has started to erode. Dismissing scientific evidence and ignoring expert opinion has become a feature of political discourse around alternative truth. In part this is self-inflicted as various statements that are publicized with […]