Time to abandon fictions of how our economy functions

Error message

Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/menu.inc).
Published by Anonymous (not verified) on Sun, 06/12/2020 - 9:35am in

UK pounds sterling notes and coinsPhoto by John Cameron on Unsplash

“The point is, not every deficit serves the broader public good. Deficits can be used for good or evil. They can enrich a small segment of the population, lifting the yachts of the rich and powerful to new heights, while leaving millions behind. They can fund unjust wars that destabilize the world and cost millions their lives. Or they can be used to sustain life and build a more just economy that works for the many and not just the few. What they can’t do is eat up our collective savings.”
― 
Stephanie Kelton, The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy

 

 

In last week’s MMT Lens, GIMMS lamented the appalling propagandised narrative being touted endlessly by the media and ill-informed journalists following the Chancellor’s spending review that the state finances could be compared to a credit card. The implied suggestion was that the ‘UK was going to sink like the Titanic under the burden of unsustainable borrowing and debt’ unless the government took steps to reduce its spending.

This week a group of mainstream economists wrote to Tim Davie, the Director General of the BBC, to object that some of its reporting misrepresented ‘the financial constraints facing the UK government and reproduces a number of misconceptions surrounding macroeconomics and the public finances and pointing out that the ‘credit card’ analogy … is never an appropriate metaphor for public finances’.

The signatories of the letter pointed to the responsibility of the BBC as an influencer and educator to ensure that they represented economic reality by avoiding household budget analogies. They suggested that the government should not focus on reducing the deficit but instead ‘embark upon a major investment package boosting jobs and growth’ which would be ‘in line with standard macroeconomic literature which stresses the beneficial effects of countercyclical government spending during crises’.

So far … so good, and just what the economic doctor might have ordered if he or she understood how sovereign governments which issue their own currency spend. For too long, the public has been bombarded with such analogies promoted by mainstream economists, politicians, and institutions alike. Analogies which have formed an incorrect version of how the UK government really spends. Given the seriousness of the current economic emergency we are facing and the challenge of climate change, it was, and is, time to challenge the economic orthodoxy.

But whoa … just as we start to get hopeful about a sea change in economic thinking, the signatories of the letter went on to spoil their clarification by reverting to norm. The household budget norm. The one that ultimately would constrain government spending – that of having to deal with an out of control debt burden at some unspecified time in the future.

They claimed that increased deficit spending could be justified on account of interest rates on government bonds being at record lows which would mean that government would therefore spend less on debt interest over the next five years, despite the rise in national debt over the course of the next five years. They then went on to suggest that it was likely that interest rates would remain low for the foreseeable future and that these were not signs of an institution approaching its credit limits, rather they were a signal to government’s creditors to continue to fund its borrowing.

Whilst criticising the BBC for the sin of allowing its journalists to refer to household budget accounting, it then goes on to reinforce that very same narrative. The one that involves government collecting money from us in the form of taxes and borrowing any additional money it needs to carry out its spending agenda. The narrative so beloved of Mrs Thatcher encapsulated in her much-quoted dictum ‘There is no such thing as public money … There is only taxpayer money. If the state wishes to spend more it can only do so by borrowing your savings or by taxing you more’ has informed the public and political debate about government spending for decades. The money has to come from somewhere and the question raised when politicians, particularly progressive ones, talk about spending is how will it be paid for? The spectre of debt hangs around our necks like a bad-smelling penny.

As Stephanie Kelton, author of The Deficit Myth says, we have learned to accept the conventional description that ‘Taxing and borrowing precede spending’. But even though it is flawed reasoning, it dominates the way we think as we compare the state finances to our own household budgets. It sounds reasonable and rational. But as Kelton points out ‘We’ve got the whole thing backward’.

Going against all of our carefully groomed preconceptions, the monetary reality is that the UK government neither needs to fund its spending by collecting tax, or match its deficit through issuing bonds (in other words so-called borrowing) or indeed buy them back via QE which is often confused erroneously with ‘printing money’. We have been living a lie propagated by a neoliberal establishment, both on the right and left, which has an interest either in keeping that narrative alive and well for its own ideological purposes or to appease the City.

Getting the formula right is vital. TAB(S) = tax and borrow to spend, is replaced by (S)TAB = Spend to tax and borrow. In basic terms, this means that the sovereign currency issuer has to spend into the economy before it can impose a tax or indeed indulge in the pretence that it has to borrow – a left over function of gold standard days. The borrowing model exists as a sleight of hand, a smoke and mirrors which bears no relationship to monetary reality and suits politicians to scare the pants off people!

So, some might say what difference does knowing any of this boring stuff make to my life? Well, in fact, a whole lot of difference. You don’t have to be an economist or understand economic formulae to see the effects of government spending policies on the nation, whether it is the 10 years of cuts to public sector services and welfare or indeed this round of fiscal injection which has sustained the economy during these last few months as Covid-19 has wreaked havoc on people’s lives. We are living the consequences of the decision to impose austerity, cuts public services and change the way the benefit system works. We are living the consequences of a market dominated economy which puts the needs of corporations above the needs of working people.

This week the BBC published a distressing video report of conditions in Burnley which have worsened over the last few months. It was also a stark reminder that poverty and inequality is not a new phenomenon, it didn’t just happen as a result of Covid-19. It existed well before the pandemic arrived. The level of human degradation was shocking to see.

The BBC analysis showed that the death rate from all causes between April and June this year in the most deprived areas was nearly double that of deaths in the least deprived parts of England. Whilst Boris Johnson talks of ‘levelling up’ he is, in fact, acknowledging the damaging consequences of his government’s policies over the last decade which have led to increased poverty, inequality and ill health across the country whilst at the same time shifted wealth into fewer hands.

Over years right-wing politicians and the media, in an orgy of blame and finger-pointing, have created a narrative that people’s personal shortcomings lie at the heart of their poverty, not government inaction.

Whilst the government has relinquished its responsibility for the overall economic and social health of its citizens through its spending and other policies, it makes it all the more depressing when the government then goes on to laud in cynical soundbites its additional funding (under pressure) for local authorities, for families to stay warm and fed and extra money for food aid charities. Forced to mend its own failures, caused not just by Covid-19 but by its ideological agenda, greed and to feather its own nest through the revolving corporate door.

This is a systemic problem which has its roots in insufficient government spending on public and social infrastructure and employment legislation which has served the corporate body and poured vast amounts of public money into private profit and not just in these last few months.

When queues lengthen for food banks, when children are ripping bags open for food because they are so hungry, when parents are feeding their kids before themselves and when someone says ‘a couple of days food means everything to us’, this is a systemic failure of a corporatised government serving other interests as if trickle-down of wealth was a real thing!  Covid-19 is not to blame. Government and its policies are.

It was reported this week by the Trussell Trust that it 47% of households surveyed at food banks during the summer owed money to the Department of Work and Pensions due to loans and overpayment of benefits. Three out of four households on Universal Credit using food banks were repaying an advance payment to the government, a loan primarily taken out to cover the five-week wait for the first payment.

Emmie Reeve, the Trust’s chief executive urged the government to stop taking money from people’s pockets during the winter months saying:

“Our welfare system should increase people’s security, not suffering. But right now the government is taking money from the benefit payments of many people using food banks,

 

“Taking money off payments to repay these debts makes it much harder for people to afford the essentials and can impact on people’s mental health – this isn’t OK.

 

“With the pandemic continuing to hit people’s incomes, the government must pause taking money from benefit payments over the winter months until a more responsible and just system that offers security and support is in place. This would help people on the lowest incomes to keep every penny of their benefits to help afford the absolute essentials, instead of needing to turn to a food bank for help.”

 

GIMMS would argue that it is not only cruel and inhumane to cause suffering, but that it is totally avoidable where the government is the issuer of the currency. The government is using the household budget model to claim, falsely, that it must be responsible and recoup taxpayer money where benefits have been overpaid. But with a S(TAB) model of the public finances (spending has to happen before a government can tax or borrow) this can be shown to be nothing but an accounting procedure to make the government look as if it is a good guardian of the public accounts. It bears no relationship to monetary reality and is both harmful to the economy and ultimately harmful to human and planetary health.

When Emmie Reeve asks the government to stop taking money away from the poorest and most vulnerable amongst us ‘until a more responsible and just system that offers security and support is in place …  to ‘help people on the lowest incomes to keep every penny of their benefits to help afford the absolute essentials, instead of needing to turn to a food bank for help, that is indeed vital. However, it is not just the welfare system which needs to change. It is the whole vision of how our economy functions. How an understanding of monetary reality could, and should, determine the policies pursued by governments in the interests of national economic and social well-being.

As discussed in last week’s blog, over recent decades the share of productivity has ceded into ever fewer hands leaving people poorer and living less equal lives than the richest who have benefited from ‘trickle-down’ policies at the expense of the poorest.

We have a situation where our public and social infrastructure is in a state of decay and the language used to describe what is happening is about relegating blame to weakest and poorest in our society and our public institutions like the NHS. Only this week Dame Sally Davies suggested in an article in the Guardian that the COVID-19 response was compounded by groupthink and a ‘lack of resilience’ in the NHS’. It was as if the problem lay with the NHS and not successive governments from Thatcher to Blair and Cameron who are really to blame for pressures being faced by the NHS as a result of Covid-19. There was not one mention of government involvement through austerity, cuts to public spending and damaging reforms designed to fragment the service and make it ripe pickings for the private sector.

Neoliberal groupthink and ideological arrogance would be a better description. The state has become nothing more than a cash cow for the private sector at the expense of government-directed public purpose, which includes full employment.

The direction we are going in, which has been covered in many previous MMT Lens blogs, seems ever clearer as the State steps back from its primary purpose which involves a democratically elected government as agents of the people, inspired by the concept of public service to deliver the public good.

In an article published in the Guardian in May this year, Andy Haldane, the Chief Economist at the Bank of England, suggested that civil society had been neglected politically and financially and quoting from Raghuram Rajan’s book ‘The Third Pillar’ wrote ‘We have let the local community pillar break down and wither’.

Referring to the ONS (Office for National Statistics) which said that we should measure social value and its contribution to society he argued that we don’t see volunteering as work because it’s unpaid. “What could be more ‘doing things for others’ than volunteering?” he suggested.

Referring to the fourth industrial revolution and the prospect of jobs being taken by robots, he asked how in such a scenario do we reward people. Although expressing some ambivalence about a UBI and with questions about its feasibility and financing his view was that a renewed civic sector could exist alongside a ‘more socially purposed corporate sector’ and a state and public sector that provides insurance and infrastructure support.

Yes, indeed we have allowed the local community pillar to break down and wither, but not for the reasons he suggests. Ultimately, the charitable and voluntary sector (as was pointed out in last week’s MMT Lens) is a deliberate failure of government. A failure to spend sufficiently on delivering public purpose aims.

Indeed, Haldane’s project to encourage volunteering in the NHS has been about mitigating for a badly funded and resourced public institution using an appeal to public goodwill to do so. His suggestion that volunteers could provide the NHS with skills which would otherwise cost ‘hundreds of pounds per hour’ is symptomatic of an ideology whose toxic roots are now bearing poison fruit in these difficult times. The idea being encouraged that charity and volunteering can play some part in state-funded delivery of services which puts cost above people under the guise of encouraging community cooperation. The false belief that there is a limited pot of money to be shared out is being used to justify this mega shift in how society operates and who controls it.

The suggestion that volunteering can replace good publicly paid for and provided services which provide employment and wages which in turn keep an economy functioning, or indeed that a UBI (Universal Basic Income) could mitigate for the prospect of industrial and technological change as part of a fourth industrial revolution sounds appealing. However, it is nothing but a neoliberal trojan horse which keeps working people in their place and the corporate sector dictating the economic rules for its own benefit.

Furthermore, the idea that socially purposed corporate sector is the way forward ignores the fact that the corporate rationale is to make profits for their shareholders, usually through exploiting working people and other resources. If it indulges in social or greenwashing, it does so to persuade its customers that its motives are wholesome, yet another corporate sleight of hand.

Haldane seems to suggest that government’s role should be reduced to one of being an insurer and servicer of corporate needs rather than those of citizens and that utilising a volunteer workforce to keep costs and spending down should play a part in that. It ignores the fact that it is the very power of the state, along with its spending and legislative powers, that allows these market structures to exist in the first place.

Unemployment, underemployment, precarious employment, hunger, homelessness, decaying public and social infrastructure all are crimes being committed by this government against its people. Whilst corporations benefit from the sovereign currency powers of government, working people and their families pay a high price in growing poverty and inequality, which in the coming months as companies fail and unemployment rises can only get worse.

In conclusion, it is worth repeating the final few words of last week’s blog:

“Only the government can step in as the power behind the public purse, and such an acknowledgement offers huge opportunities to create an economy that works for everyone and not just the few. If a job needs doing, then it should be the state that provides the wherewithal, either through a job guarantee to smooth out the cyclical ups and downs of the economy, or through an expanded public sector. The only constraint any government will face is one of real resources and that is the real political challenge. How those resources are shared to create a society that works for all.”

 

Join our mailing list

If you would like GIMMS to let you know about news and events, please click to sign up here

Support us

The Gower Initiative for Money Studies is run by volunteers and relies on donations to continue its work. If you would like to donate, please see our donations page here

Share

Tweet

Whatsapp

Messenger

Share

Email

reddit

Pinterest

tumblr

Viber icon
Viber

The post Time to abandon fictions of how our economy functions appeared first on The Gower Initiative for Modern Money Studies.