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True consequences of government policy are far worse than a waste of taxpayers’ money

Published by Anonymous (not verified) on Sun, 12/06/2022 - 1:06am in

Rishi Sunak holding a £1 coin while making a speechImage by HM Treasury on Flickr. Creative Commons 2.0 licence

“Real generosity towards the future lies in giving all to the present.”

Albert Camus, Notebooks 1935-1942

 

The Debt Doomsters are back (did they ever go away?). Rishi Sunak is accused this week of wasting billions of taxpayers’ money servicing government debt. In yet another smoke and mirrors exercise to keep the household budget model of Exchequer Accounting alive and well, Professor Jagjit Chadha of NIESR (The National Institute of Economic and Social Research) claimed in a BBC article that Sunak’s actions had left the country with ‘an enormous bill and heavy continuing exposure to interest rate risk’. While neoliberal think tanks like the NIESR continue to focus their attention on the false model of how the government spends, the actual consequences of years of government policies which are colliding with geopolitical events and the continuing effects of the pandemic on global supply, means that the economic crisis will not be solved any time soon, unless the government chooses to actively work to solve it with an understanding of monetary reality and the real constraints to its spending.

As many thousands of households face further pain, adding to the already existing misery, the cumulative consequences of a decade and more of Conservative policies which have put balanced books and a toxic, market-dominated ideology over public well-being, are plain to see. We are a country in crisis, not because the government failed to get the public finances under control, but because the government has chosen that route, through its spending and other policies.

As the academic Prem Sikka tweeted, responding to a BBC article which reported that people in receipt of tax rebate cheques were queuing to cash them at pawnbrokers because they couldn’t wait for the money:

‘Government measures don’t deal with poverty or corporate profiteering. There is no long-term respite. Cost of living crisis is systemic’.

The consequences are stark. Statistics translate into real people and their lived experience arising out of years of government policies. The exponential growth in food banks across the UK is a telling aspect of that failure which GIMMS reports on regularly, as is the hunger which forces people through their doors. When mothers can’t afford to buy baby milk formula as was reported by ITV News on Friday, or have to skip meals to feed their children, it is indicative of a society in deep trouble as the gulf between the haves and have-nots becomes ever wider.

This is not happenstance, and what is worse is that government ministers don’t recognise their own hand in this unacceptable situation. Last week, when asked to comment on Radio 4’s Today programme about the plight of a mother who was skipping breakfasts and whose son was concerned, the government minister Dominic Raab said, ‘I read that story – it just breaks your heart and melts your heart.’

Faux compassion. His own children will never have to face that realisation.

Raab’s voting record tells, in fact, quite another story and shows that he has consistently voted for reductions, like many of his colleagues, in spending on welfare and against raising welfare benefits in line with prices. So, it was not surprising to learn in the same BBC interview that he ruled out an expansion of free school meals, despite calls from teaching unions and charities to widen it out to all families in receipt of Universal Credit. According to figures published by the Food Foundation, around 1.7 million children are eligible for free school meals, but it is estimated that 2.6 million live in households that miss meals or cannot access adequate nutrition because they can’t afford to. The impact on the health of those families cannot be underestimated, nor on the economy itself.

The ONS noted in its reporting last month that wages were failing to keep up with inflationary pressures. As a result, credit card borrowing is rising at its fastest rate in 17 years, according to the Bank of England, despite its ill-advised interest rate increases. Increases that will do nothing to address the external supply issues which lie at the heart of the current inflation and can only add to the nation’s financial woes. Growing numbers of households are facing rising personal debt to pay bills, put food on the table and keep the lights on. People who are quite simply trying to keep their heads above the water are, however, not only victims of these current inflationary pressures, but also victims of decades of policies which have ensured that the share of the rewards of productivity has gone into ever fewer hands. Impoverishing many and enriching the few. We are now reaping the consequences.

Functioning economies don’t just happen. They are created by governments through their spending and legislative decisions. For too long, the public has been hoodwinked by politicians, and the mainstream media which repeats the mantra, into believing that a healthy economy demands balanced public accounts. It is unaware for the most part that the government, as the currency issuer, has the capacity to spend without tax collection, or indeed that taxation or bond issuance (incorrectly referred to as borrowing) can only happen once the government has spent the money into existence, which it does through its central bank on a daily basis in vast quantities, from paying pensions and benefits, to the salaries of public sector workers, and its contracts with the private sector.

The public is also largely unaware that the real challenge for any government is how it balances the economy, based on the real resources it has at its disposal, and what its political and economic priorities are. What the public hears instead is that the measure of good government is whether it has been fiscally responsible. The message is that deficits are bad, regardless of the economic circumstances. And heaven forbid that a government should incur public debt and create burdens for future generations.

In the UK’s case, the priorities, over a decade, have been less about the welfare of citizens and more about keeping a toxic economic ideology alive, and big business (who dictate the rules) on top, through adherence to this false accounting model. And yet, while public infrastructure decays, public money has been poured into corporate welfare, whether in bank or corporate bailouts, or favourable tax regimes that benefit those same business interests.

Whilst NIESR extolled the virtues of sound finance and berated Rishi Sunak, Boris Johnson suggested in a speech in Blackpool after his confidence vote win that the current tax burden was an ‘aberration’, that more state spending was not the answer to every problem, and that instead, we should focus on cutting regulation to unleash growth.

Haven’t we been here before? And look how that ended! The 2008 Global Financial Crash and the terrible loss of life that resulted from the fire at the Grenfell Tower revealed the consequences of allowing the financial sector to be a casino and businesses to do as they please. That is the real cost of deregulation.

Despite Sunak unleashing the power of the public purse, even if one notes that distribution was inequitable, favouring big business over supporting citizens adequately to navigate the current crisis, Margaret Thatcher’s ideas clearly still hold sway in the corridors of Conservative power. Perhaps, one might contend, not because they actually believe it, but because it suits their agenda.

Whether it’s Thatcher’s pronouncement that ‘It is your tax which pays for public spending’, or her insistence that ‘there is no alternative’ to the discredited notion of free markets, Will Hutton’s article in the Guardian last month, which claimed that Sunak is ‘dumping ‘Thatcher’s verities’, is clearly a little premature. As his neighbour in Number 10, playing to his audience in the re-constituted lobbying group Conservative Way Forward, founded by Thatcher and promoting free-market policies, demonstrates. Well, when you’re in a sticky corner you have to get support from somewhere to keep you in Number 10, don’t you?

In the same vein, at the end of last month, it was reported that Johnson had written to civil servants to justify his plans to cut 91,000 jobs, claiming that government must reduce its costs ‘just as many families are doing’. Arguing that since the UK had left the European Union and the threats posed by the pandemic were diminishing, he said that ‘we no longer require the state to have the same colossal presence in people’s lives’ [therefore] ‘we must ensure the cost of government is no greater than absolutely necessary.’

The notion being promoted yet again is that the government spends like the budgets of the families he refers to, and therefore it must show fiscal responsibility and cut its cloth to what is affordable.

The neoliberal narrative of the small state also predominates in this message, along with the story that the function of government is solely to facilitate the needs of big business so they can keep the wheels of the economy turning, through deregulation and keeping state spending to a minimum to reduce the tax burden on the corporate body. According to this mantra, it allows corporations to ‘invest’ their profits in innovative new technologies which, in turn, it is claimed creates employment and facilitates wealth creation, which then trickles down.

The lies they tell.

Never mind that that actually hasn’t occurred as corporate profits and top dog salaries have grown exponentially over decades, while at the same time working people and their families have suffered the consequences of a low-wage economy, based on precarious employment and exploitation. It is not a recent phenomenon and not confined to the UK. Whilst this article is dealing specifically with the UK, we cannot ignore the impact of this toxic economic system on global citizens who have borne the brunt, particularly in the Global South, and who are suffering the fall-out of the current crisis.

As Oxfam reported last month, as food and energy prices rose to their highest level in decades, billionaires operating in those sectors have seen their fortunes rise by $453 billion in the last two years. That combined wealth stands at $12.7 trillion, representing a three-fold increase over the year 2000. According to Oxfam, the fortunes of the richest 20 billionaires are greater than the entire GDP of Sub-Saharan Africa.

Corporations and the excessively wealthy have, over decades, profited from pain, and governments around the world have complied through failure to act. That’s a sick system in operation.

Returning to the UK, never mind either that the public and social infrastructure which includes civil servants, form the backbone of a healthy economy, or that there will be economic consequences at such a critical time to reducing the workforce as people lose jobs and the salaries that would be spent into the economy. People who will in some cases join the already insecure and badly paid employment landscape, the sickening consequence of the government’s hands-off approach and its failure to create a functioning economy that is fair to all, and lines the pockets of its corporate friends instead. For a party that claims to want to grow the economy, it’s going the wrong way about it!

In this light it is both infuriating and disgusting that Johnson, in his Blackpool speech, said that the government intends to ‘look at how we can give our nation of aspiring homeowners better access to low deposit mortgages’ and ‘extend the right to buy’, as if that plan will help people already on the poverty line, struggling to feed their families and pay their energy bills. The man with a plan – not! No change there then.

It is equally shocking, as already mentioned previously, that he raised the ’spectre’ of a 1970’s style ‘wage-price spiral’ if workers, in response to the cost-of-living crisis, demand higher pay. Whilst CEOs continue to rake in vast salaries and bonuses as did the Sainsbury boss who it was reported, saw his pay triple to £3.8m last year, the average Sainsbury employee earns183 times less than their boss. Johnson by recommending pay restraint to working people who have for too long been the victims of government policies which have benefited employers, this surely should be the wakeup call for change? A call for a fairer distribution of the country’s wealth.

The nation has lived through the consequences of over a decade of government austerity policies which have decimated our public and social infrastructure and introduced public sector pay caps, on the lie of unaffordability. This combines with policies that have also promoted a generally low-wage economy and insecure working practices, with the claimed advantage that it supports businesses to be competitive. If Johnson gets his way, he seems to be proposing to follow that same route again.

When it was politically convenient, and Johnson needed the votes of the so-called Red Wall, he promoted his levelling up project promising funding and support. But Boris Johnson’s so-called ‘defining mission’ has so far been little more than a damp squib and has failed to even start dealing with the systemic problems caused by 30 and more years of the adherence to an economic ideology which has bred the pre-existing poverty and inequality that has added to the current economic difficulties.

Now with the growing crisis resulting from the pandemic and the continuing conflict in Ukraine, if the Chancellor chooses to continue to play the household budget game to keep his reputation as a safe pair of fiscal hands, it is probably only a matter of time before any talk about levelling up or investment in the nation’s public infrastructure goes by the wayside, As we know from past experience of Johnson at the Dispatch Box, fancy rhetoric is easy to spout but clearly not so easy to deliver without a clear strategy or foregoing the rhetoric of affordability.

The government can talk as much as it likes about levelling up through local investment, but without addressing the key causes of the failure of local communities to thrive, which include wage rates and employment legislation, both determined by national government, it will continue to fail. Businesses will be reluctant to invest if they have no confidence that that investment will bring a return. When infrastructure is in a state of decay and people’s lives a constant struggle, an economy cannot flourish.

Levelling up can only happen with a government that has the political will to use the power of the public purse and legislative capacity to distribute wealth more fairly and create the public and social infrastructure which underpins a fair and sustainable economy. It can only happen when the social determinants of a nation’s health and environmental sustainability sit at the heart of policy. It cannot be one based on growth for growth’s sake, to keep the profits high, and capitalism on a roll at the expense of people and the health of the planet which provides the means for human existence.

It can’t happen either in a government that still pretends that fiscal discipline comes before human security, health, and welfare, or indeed preservation of the planet. The idea that is promoted by politicians that those things are dependent on a healthy economy and the tax that derives from it is false. Thatcher’s faux model of the public finances is being used to serve the neoliberal agenda and keeps the public in a state of ignorance, fearful and therefore malleable to that agenda. It is time to challenge that economic agenda and the monetary model which drives it.

Let’s not be under any illusion. We are at a crossroads for humanity. We can choose the path of endless wars to fund a bloated arms industry that produces only death and destruction and continue with the harmful economic model which is driving poverty and inequality and making our planet a wasteland.

Or we can fix upon another path which respects the more productive human endeavour to create a fairer and more peaceful existence for all, to ensure that future generations can look back and thank us, not curse us. What we choose today will determine what happens tomorrow. As Albert Einstein noted: “The measure of intelligence is the ability to change.”

 

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Reblog – No, MMT Didn’t Wreck Sri Lanka

Published by Anonymous (not verified) on Sun, 15/05/2022 - 8:37pm in

Debunking Bloomberg with Fadhel Kaboub

Written by Stephanie Kelton

Originally published on Stephanie Kelton’s “The Lens” on 29th April 2022.

Two poor men sitting on a trolley on a street of closed shops. Petta, Colombo, Sri LankaImage by Harshabad on Pixabay

Last week, Bloomberg touted an opinion piece (written by one of its regular columnists) claiming that “Sri Lanka was the first country in the world to try MMT” and that “the experiment has brought the country to ruin.” A few days later, The Washington Post republished the article. So it garnered a fair bit of attention. Unfortunately, the essay offers little insight into what’s really gone wrong in Sri Lanka. But, hey, editors and writers have discovered that MMT drives clicks, so there’s no dearth of efforts to shoehorn MMT into almost anything.

A number of people sent me the link and asked me to respond. I sat down to do just that, but then I remembered that MMT economist Fadhel Kaboub talks about Sri Lanka in some of his presentations and that he’s been studying the country for years.

Fadhel is an Associate Professor of Economics at Denison University and President of the Global Institute for Sustainable Prosperity. He brings deeper knowledge of the Sri Lankan economy and the policy decisions that have paved the way for their current predicament. So I reached out to invite him to respond to Mihir Sharma’s main claims about the so-called MMT experiment in Sri Lanka.

Sharma’s big claim is that “two cherished heterodox theories…became official policy in Sri Lanka and, within two years, they brought the country to the brink of default and ruin.” The government has halted payments of its foreign debt and warned that it may default. Import prices are surging. It’s hard for people to buy food and fuel. There are periodic blackouts and rationing. Inflation is close to 19 per cent and the central bank has recently doubled interest rates. Sharma acknowledges that there are ’structural factors’ at play, and he concedes that the pandemic hammered the nation’s tourism sector while the Russian invasion of Ukraine made everything worse. But he argues that “the deeper problem” is that the ruling elite “turned Sri Lanka’s policymaking over to cranks.” One of the heterodox theories that is supposedly responsible for the crisis is MMT.[1] What follows is a lightly-edited transcript of my Q&A with Professor Kaboub.

KELTON: Sharma claims that “Sri Lanka is the first country in the world to reference MMT officially as a justification for money printing.” He blames former central bank governor, Weligamage Don Lakshman, for listening to monetary cranks who convinced him that “nobody needs to worry about debt sustainability” as long as you “increase the proportion of domestic debt [relative to debt denominated in foreign currency].” Is there anything in MMT that says that as long as you “increase the proportion of domestic debt” you can “print money” without worrying about debt sustainability or inflation?

KABOUB: When I first read the statement of Sri Lanka’s Central Bank governor, Mr Weligamage Don Lakshman, back in 2020, it was very clear to me that he does not understand the basic MMT insights. He was under the impression that what matters in terms of monetary sovereignty is the proportion of foreign currency debt relative to domestic currency debt and that there was no need to rethink the foundation of the economic development model that his country has used since the late 1970s. Governor Lakshman focused on the proportion of debt but never questioned what the external debt was fueling, and never articulated how a higher proportion of domestic debt was going to build economic resilience in Sri Lanka.

MMT economists have been very clear all along that a country’s fiscal spending capacity is constrained by the risk of inflation, which is determined by the level of productive capacity (availability of real resources, productivity, skills, logistics, supply chains, etc.) and the level of abusive market power enjoyed by key players in the economy (cartels, exclusive import license holders, shell companies, cross-border traffickers, speculators, corrupt government procurement systems, etc.). Therefore, increasing a country’s fiscal policy space must be done via strategic investments to boost productive capacity and regulation of abusive market power. Sri Lanka’s economic policy choices (pre-pandemic and Russia-Ukraine war) do not even come close to what MMT economists would have suggested.

As I will explain below, Sri Lanka has three structural economic weaknesses that were systematically reinforced via mainstream economic policies: 1.) lack of food sovereignty, 2.) lack of energy sovereignty, and 3.) low value-added exports. These deficiencies imply that accelerating the country’s economic engines leads to more pressure on its external balance, a weaker exchange rate, higher inflationary pressures (especially food/fuel/medicine and basic necessities), and, as a result, it leads to the classic trap of external debt.

Here is how it all started. Sri Lanka, like many countries in the Global South, began the liberalization of its economy in 1977, and adopted a classic IMF-style economic development model based on exports, foreign direct investment (FDI), tourism, and remittances. This development model remained tamed during the civil war (1983-2009), but it was fully unleashed in 2009, and that is when external debt began to skyrocket, going from $16 billion in 2008 to nearly $56 billion in 2019. The value of the Sri Lankan rupee dropped from 114 to 178 LCU/USD. Thanks to a massive increase in government subsidies and transfers reaching more than 30 per cent of government spending in recent years, Sri Lanka struggled to keep inflation below 5 per cent. Yet, economists celebrated Sri Lanka’s great achievements with an average growth rate exceeding 5 per cent in the decade after the civil war, and a real per capita GDP growth putting the country officially in the upper-middle-income economy category. Sri Lanka was following the mainstream economic development model like a good student. In the decade starting in 2009, exports grew from $9.3 to $19.1 billion, tourism quintupled from 0.5 to 2.5 million visitors annually, FDI inflows quadrupled by 2018 to a record $1.6 billion, and remittances doubled to nearly $7 billion annually. These are the four engines of Sri Lanka’s economic growth, but they are also the engines driving the country deeper into the structural traps of food and energy dependency, and specialization in low value-added exports.

Here is how these engines constitute a trap. An increase in tourism induces more food and energy imports. An increase in remittances means more brain drain. An increase in low value-added exports induces more imports of capital, intermediate goods, fuel etc.; and an increase in low value-added FDI does the same plus the repatriation of profits out of Sri Lanka. On a global scale, these neocolonial economic traps have suctioned $152 trillion from the Global South since 1960.

KELTON: Sharma argues that it was the “printing of money” that caused inflation to hit record highs. He cites the rate of growth of the Sri Lankan money supply and concludes that inflation hit record highs because the central bank expanded the money supply by 42 per cent from December 2019 to August 2021. Why isn’t this a critique of MMT, and how do you think about the current inflationary pressures?

KABOUB: Sharma is wrong on two fronts here. First, he is assuming that the central bank actually controls the money supply, when in fact the money supply is an endogenous variable determined by the private sector (consumers, business, and banks). The central bank simply accommodates the needs of the market in order to keep short-term interest rates at a stable target, otherwise it will cause all kinds of instability across financial markets. Second, Sharma is assuming that inflation is caused by an increase in the money supply, when in reality, Sri Lanka’s inflation, like many developing countries, imports its inflation via food and energy imports. The higher the pressure on the external balance, the weaker the exchange rate, the higher the inflation pressure from imported goods. Sri Lanka struggled with these pressures for a decade, and managed to muddle through by accumulating more external debt, which quickly became unbearable after the pandemic (loss of tourism, remittances, FDI, and export revenues) and the massive increase in global food and energy prices after the Russian invasion of Ukraine.

The solutions to Sri Lanka’s inflation problems are not in the hands of its central bank. Raising interest rates in Sri Lanka will not end the war in Ukraine, or end the pandemic-induced global supply chain disruptions. The most effective anti-inflation tools fall under fiscal policy. It is the parliament, and the various ministries and commissions that can design strategic investments to boost productive capacity, and have the legal authority to update and enforce antitrust laws. In fact, raising interest rates can often fuel inflation (and inequality) because it is the equivalent of an income subsidy to bond holders, and a tax on actual investors who might be discouraged from increasing productive capacity

KELTON: Sharma appears to know that he has offered a faulty representation of MMT. He anticipates some of the counterpoints that I suspect you and I would both raise. He writes, “proponents of MMT will likely say that this was not real MMT, or that Sri Lanka is not a sovereign country as long as it has any foreign debt.” You have been studying Sri Lanka for a few years now. What, if anything, have policymakers done that suggest that they have been running any kind of “MMT experiment” over the last two years?

KABOUB: Well, this is where Sharma nails it! As I explained above, Sri Lanka’s economic policies don’t even come close to anything informed by MMT insights. Sri Lanka’s government ignored its structural weaknesses, didn’t invest in food/energy and strategic domestic productive capacity, didn’t tax/regulate abusive market power, has a corrupt political system dominated by a single family, and when it was backed into a corner after the pandemic, it doubled down on bad economic decision by claiming that agricultural fertilizers are unhealthy (when they really didn’t have the foreign exchange reserves to pay for the imports), so they destroyed agricultural output, especially rice, in the middle of global food crisis. If the Sri Lankan government was serious about investing in healthy food or a healthy economy, it would have put forward an actual food sovereignty strategy centred on native seeds, it would have discouraged intensive monoculture farming, it would have invested in regenerative farming to undo decades of damage to the soil, and it would have supported farmers to increase yields with well-defined medium and long term strategies. Clearly, this “organic farming” experiment was sloppy at best, but it should not overshadow the fact that the roots of the agricultural vulnerability have been decades in the making.

KELTON: Sharma chides the government for shunning the advice of “mainstream economists” and for “refusing to even consult the IMF.” Let’s assume he’s right about the central bank and other policymakers turning away from mainstream economists and institutions like the IMF. What kind of advice has the IMF given to Sri Lanka in the past, and what kind of economic development strategies would you recommend if officials called on you to advise them?

KABOUB: Sri Lanka has been following the IMF instruction manual for decades. It has received 16 loans from the IMF since the 1960s, and it is currently negotiating another one. Since 1996, Sri Lanka has never been away from the IMF’s negotiating table for more than 3 or 4 years at a time. Despite the political rhetoric of the Sri Lankan government over the last couple of years, the current Sri Lankan administration has abided by the IMF’s terms and conditions of the $1.5 billion Extended Fund Facility (that’s the 16th loan disbursed between 2016-2020). So maybe the Sri Lankan government has come to realize that the IMF instruction manual is actually harmful. The problem is that they don’t fully understand why, and they certainly haven’t identified an alternative strategy to escape from this trap.

In terms of policy advice, Sri Lanka needs emergency assistance with immediate shipments of food, fuel, medicine, and basic necessities. Sri Lanka needs debt relief rather than debt restructuring. For example, UNDP has recently recommended negotiating debt-for-nature swaps. There are other debt swap mechanisms such as debt-for-development, debt-for-equity, and debt-buy backs. The Sri Lankan central bank should be negotiating FX swap line agreements with the central banks of its major trading partners in order to stabilize the value of its currency.

Sri Lanka should also access the IMF’s newly created $45 billion Resilience and Sustainability Trust (RTS), which, unlike other IMF facilities, is actually a program that funds strategic investments to build resilience and promote sustainability. Sri Lanka would qualify for up to $1.4 billion of concessional loans with substantial grace periods. However, to qualify for RTS funds, Sri Lanka must first have an existing agreement with the IMF. It needs to enter these negotiations with its own strategic vision in order to escape the IMF’s austerity and external debt trap.

The IMF wants countries to establish an economic policy framework that leads to external debt sustainability, but its track record has been a miserable failure. Sri Lanka needs to convince the IMF and other lenders and strategic partners, that it can only escape this external debt trap if it tackles the problem at its source — e.g. by investing strategically in food sovereignty (with an actual long-term strategy rather than half-baked organic farming wishful thinking), investing in renewable energy capacity (energy efficiency, public transportation, etc.), investing in education and vocational training in order to climb up the value chain in the manufacturing sector, and becoming more selective in its support for export industries and FDI projects. In other words, ending the race to the bottom policies, and building resilience to external shocks.

These strategic investments must be coupled with an actual democratization of the political as well as the economic system. The government needs to crack down on corruption, cartels, abusive price setters, and entities that enjoy exclusive economic power and have every incentive to object to the strategic investments listed above.

The sad part of this story is that Sri Lanka is only one of many countries in the Global South facing the same structural traps, struggling with unbearable external debt, soaring food and energy prices, shortages, and rising social and political tensions.

 

[1] The other has to do with a shift toward organic farming that has apparently fueled a precipitous drop in crop yields, farming incomes, and export revenues.

 

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Splendour of the Queen’s Speech brings no relief for hungry people

Published by Anonymous (not verified) on Sun, 15/05/2022 - 5:47am in

Prince Charles sitting alongside the Imperial State Crown in the House of Lords at the State Opening of ParliamentCopyright House of Lords 2022 / Photography by Annabel Moeller. Creative Commons 2.0 license

The good we secure for ourselves is precarious and uncertain until it is secured for all of us and incorporated into our common life.
Jane Addams, US social reformer and suffragette (1860-1935)

 

How best to describe the state opening of Parliament this week? An anachronism in the 21st Century, bearing no relationship to the reality of people’s lives? Or, as Raphael Behr suggested in a Guardian article, ‘it was a reminder that much of what passes for a British constitution is actually fancy dress’. A King in waiting, dressed up in his military uniform, sporting medals and seated next to his mother’s jewelled crown, delivering a speech not actually written by her at all. You couldn’t make it up.

In terms of the reality of people’s lives, in these difficult and uncertain times, it proved as predicted, to be all show and no substance as the very real hardships being faced by people were scarcely acknowledged. No further solutions were offered to the growing financial insecurity caused by the ongoing fallout from the pandemic, global supply issues and rising inflation, along with the Ukraine war, which are all affecting the global economy with concomitant knock-on effects on individual nations.

The Spring Budget brought forth little relief, and the Queen’s Speech reinforced it. We have to bear the pain now to enjoy jam tomorrow! Michael Gove was adamant in ruling out an emergency budget during a televised interview earlier this week and blamed the current situation on global inflation, as if somehow the government had no tools to alleviate the growing pressures on families across the country.

The cure for this economic mess is, according to Boris Johnson, to ‘revive Britain’s economic growth’, as if that could be achieved by next week. He told parliament on Tuesday that whilst his government would make every effort to help those struggling with rising prices, ‘however great our compassion and ingenuity, we cannot simply spend our way out of this problem, we need to grow out of this problem’.

Aside from the fact that compassion and ingenuity seem to be in very short supply when it comes to the economic strategies and spending policies of Johnson’s government, the focus on repairing the public finances, instead of maintaining sufficient spending (in good times and bad) to keep the wheels of the economy turning, will most likely drive the economy into recession. The signs are already there. Data from the Office for National Statistics shows that the UK economy contracted by 0.1% in March, after flatlining in February, with retail sales down, production falling, and spending on cars decreasing by more than 15%. The British Retail Consortium, backed up that data in its latest reporting, noting that retail sales had dipped in April, and figures from Barclaycard also showed credit card spending on entertainment and eating out, slowing. The cost-of-living crisis is beginning, predictably, to crush confidence and put the brakes on people’s spending. And whilst Boris Johnson pledges that the government will, ‘do things in the short term to ease the squeeze on living standards’, (no sign as yet), they will likely go the same way as all the rest, into the wastepaper basket of empty promises. It must be getting pretty full by now.

It beggars belief that The Telegraph published an article this week suggesting that, according to top economists, people should save less and borrow more to save the economy and prevent a recession. Martin Beck, who is the chief economic advisor at the EY Item club claimed that it was, ‘incumbent on households using their strong financial position to keep spending’, and that ‘the pandemic has left households very well prepared for this period of turmoil because they were able to save more and pay down their debts.’

Where do they find the economists who write this drivel? Aside from the fact that it is only government that can enact the spending policies able to stabilise the economy, the truth of the matter is that not everyone was in the fortunate situation of being able to save and pay down debt during lockdown, and in times of economic uncertainty, whether you have the money or not, spending, or borrowing (unless they are driven to the latter) is the last thing that is on people’s minds. Furthermore, an analysis of Bank of England data by the Debt Justice, revealed that the number of UK households struggling with high levels of debt had increased by a third in 2021, even before the rise in energy prices and the removal of the £20 uplift in universal credit payments. And indeed, as mentioned above we are seeing the signs that people are retrenching in the face of that uncertainty. Lack of confidence begets a reluctance to spend.

Furthermore, the mantra of growth, as promoted by Johnson as the route out of this impasse is based presumably on the promotion of the false logic that a healthy economy drives tax revenue and gives government fiscal space to spend on public and social infrastructure. Just more of the same garbage churned out daily by those who know exactly how government really spends, but use the myths of scarcity to serve a purpose and deliver their ideologically-driven narratives. A political choice at the expense of the health of the economy and those who underpin its success – working people.

A healthy economy doesn’t depend on government tax revenues or borrowing capacity, it depends on a government having the political will and the real resources to deliver it.

A healthy economy also depends on the public and social infrastructure being in place, FIRST, to support the people and the businesses who rely on it. That is the job of government and represents the vital components of a functioning economy, and is certainly not dependent on monetary affordability.

It also fails to acknowledge that in the light of the climate crisis, Johnson’s focus on growth per se, without a clear plan or a strategy to deliver a sustainable and fairer, more just society, will just keep the capitalist juggernaut hurtling towards its destruction. And in this respect, we don’t seem to be making much progress in addressing this emergency. COP 26 is but a distant memory, and growth at any cost seemingly the name of the game.

At the same time as Black Rock warned this week that it would not support shareholder resolutions on climate change this year because they were ‘not consistent with their clients’ long term financial interests,’ a new forecast by scientists led by the World Meteorological Association, found that the probability of one of the next five years temporarily exceeding the 1.5 global heating limit was now 50% up, from 20% in 2021.

As the climate crisis warnings become ever more insistent and visible in our daily lives, banks continue to fund investment in fossil fuels and governments allow them to, without censure. The mission to save humanity from planetary degradation is on the rocks, as governments put fighting wars and growth as a top priority, trumping a future for our children.

It is distressing that the idea that government spends like our own household budgets has tainted any public discussion about the way forward, whether it is dealing with the fall-out from the pandemic, the effects of poverty and inequality on economies particularly, but not confined to the Global South, and the affordability of addressing the climate crisis. The tools are there through an understanding of monetary reality to deliver a healthy economy within the context of available resources, which we emphasise again are the real constraints to government spending.

However, the effects of government austerity policies which have dominated the economic narrative for over a decade, and also led to the idea that cuts to the public sector were necessary to get the public finances back into order, have not only created an increasing burden on the working population and their families, but also have driven the process of stripping out the last vestiges of our publicly paid for and delivered public services, on the lie of its unaffordability. The price we are paying today is unacceptable

It fits very nicely with the neoliberal ideology which has prevailed for decades; that the state’s role should be minimal, that it exists solely as a cash cow for the private sector, that the charity and voluntary sector should step into the government’s shoes for the provision of services that are not profitable, and that the individual should be promoted over the now dying concept of collective action.

At the same time, that same government (and others before it) have dedicated themselves to serving their own interests and those of their wealthy and corporate supporters, as well as pouring public money into private profit, from arms dealers to healthcare. And there it is, the vital clue, that money is not a scarce commodity. Public money for the corporate beggars leaching on the state while the public sector begs for adequate funding.

The consequences of this long-standing toxic ideology are before us. The growth of a low wage economy, in hunger, food banks and homelessness, and the widening gap in wealth distribution, are just a few of its damaging manifestations, all the result of government choices.

The Food Foundation released data this week that shows that in the last three months there has been a rapid jump in the proportion of households cutting back on food, or missing meals altogether. It noted that in April, 7.3 million adults live in households that said they had gone without food or could not physically get it in the past month. That compared, it said, with 4.7 million in January. There had also been a sharp increase in the proportion of households with children experiencing food insecurity in the past month, at 17.2%, up from 12.1% in January 2020. That represents, the Food Foundation noted, a total of 2.6 million children under 18 who live in households that do not have access to a healthy and affordable diet, putting them at high risk of suffering from diet-related diseases. It has called on the Government to take urgent action to prevent further escalation of this crisis, to include increasing benefit levels in line with inflation, expanding access to Free School Meals and the Healthy Start Programme.

The National Institute of Economic and Social Research, following its analysis for Channel 4 last year, reported this week that more than 250,000 households will ‘slide into destitution’ next year, which will bring the total number in extreme poverty to around 1.2 million. The think tank, echoing the Food Foundation, said that without government action, more than 1.5 million will face a rise in food and energy bills, that will outstrip their disposable income and force them to use savings (if they have any) or borrow to get through.

Professor Adrian Pabst, who is NIESR’s deputy director for Public Policy, commenting in November last year said: ‘Britain’s broken economic model shows no signs of turning into a high-wage, high-productivity, high-growth economy anytime soon.’ Regardless of Johnson’s promises.

While government fails to deliver, people will continue to struggle. It is distressing to note that while people’s lives are being ripped apart by a government that has no solutions but book balancing, Tories remain in their ivory towers sitting in judgement on those who cannot feed themselves or their families adequately. Not because they lack cooking or budgeting skills as a Tory MP suggested this week, but because they don’t have enough money. First up, we had the Ashfield MP, Lee Anderson, speaking in the Commons debate on the government’s Queen’s Speech, claiming that there wasn’t a widespread need for food banks, and that hunger was rather down to the fact that too many people ‘cannot cook’ and ‘cannot budget’. Tell that to the Trussell Trust and the myriad food banks serving their local communities. It was an insult to those who are forced to use food banks through no fault of their own, and to suggest that one can cook a wholesome meal for 30p a day by cooking from scratch. Perhaps he should be issued with a challenge to do so. It shows completely how out of touch some MPs are with the lives of their constituents.

Secondly, the Metro reported this week on Dartford Conservatives tucking into a buffet of cakes and sandwiches, after cutting the ribbon for the opening of a new food bank, as if that were something to celebrate. Whilst, in the same church building, desperate families have to queue there for food.

In 2017, Tory MP Jacob Rees-Mogg called the support given to food banks ‘rather uplifting’ and ‘shows what a compassionate country we are’. Of course, it is human to feel compassion for others who have fallen on hard times and want to help, but the existence of food banks, whilst not a new phenomenon, is a stain on a government which has the fiscal tools to ensure that people have the dignity of well-paid, secure work, either in the public sector, or in the form of a publicly run Job Guarantee scheme, to support those caught in the inevitable ups and downs of the economic cycle, and extraordinary events such as the pandemic or war, from which now stems an increasing tide of hunger and poverty, to add to that already perpetrated by prior lack of adequate government action.

Nicholas Hair, a Labour council candidate, commenting on the event said,

‘Food banks are not heart-warming. They are evidence of a failure of government and of a society to seek social justice’.

That gets to the heart of the matter. A government which knows it has the tools, as the currency issuer, to support people through this difficult time, but has chosen not to. A government that fails to spend sufficiently to support an economy and its citizens, transfers the burden to those who can least afford it. The human cost of this failure to act now will be devastating for working people and their families.

The solution, however, is not as the Chairman of Tesco has suggested this week, to impose a windfall tax on energy companies, as if collecting that money would give the Treasury the funds to alleviate the cost-of-living crisis. And, in the same vein, neither will a windfall tax on North Sea oil and gas operators, ‘rake in’ money for the Treasury to soften the pain of rising energy bills as predictable analysis by the Labour party continues to suggest. Just more of the managed illusions politicians rely on to keep the public on side from the valid point of view of fairness. The government, as the currency issuer, could create that funding tomorrow by authorising its central bank to do so. And it neither needs to tax nor borrow to keep the economy functioning. Again, its only constraint is the availability of real but finite resources, and how they are managed to deliver government priorities and avoid inflationary pressures.

However, on the other hand, a big yes to taxing the energy companies whose profits have gone through the roof, along with executive pay, and whose business is polluting and contributing to the climate crisis. Tax them to force change and drive sustainable energy solutions, or tax them out of existence if they fail to comply, but not because it provides funds for the Treasury to spend. It doesn’t.

On one further point, one could not disagree with the Tesco Chairman’s view that Rishi Sunak should not have raised National Insurance. He gets it! He understands that removing even more of people’s income leaves less for essentials. His remarks may have been driven by clear concern for those who are rationing the amount of food they eat, but also, no doubt, by the effects of that on the business as less money circulates through the economy and into company profits.

On that basis, it also makes a nonsense of Boris Johnson’s announcement this week that the government plans to cut 91,000 civil service jobs, claiming that it will free up cash to tackle the cost-of-living crisis. Or as Larry Elliott suggested in an article this week that ‘harder choices will need to be made, and at a time when ageing populations are intensifying pressures for higher spending. What nonsense!

Aside from the fact that government, as the currency issuer, doesn’t have to rob Peter to pay Paul, and paints a picture of scarce monetary resources which have to be divvied out, it demonstrates blinding economic illiteracy. Again, involuntary unemployment is not only harmful to those affected by it, but under current benefit arrangements, people would be left with less money to spend which, ultimately, would also have a knock-on effect on businesses such as Tesco, in an economy already facing serious problems.

If the government can create funds for its wars, or to bail out banks with no problem, then the question we must ask urgently is why can’t it do the same to help people, and why can’t it invest in the vital public and social infrastructure it has destroyed in the last decade?

When a Treasury spokesman claims, as was reported in The Telegraph this week, that since ‘public debt is at its highest levels and rising inflation is pushing up debt interest costs, the government has to manage the public finances sustainably to avoid saddling future generations with further debt’, there is only one response. It is a damaging lie.

And when Steven Millard, an economist at the NIESR think tank commented that, ‘The Chancellor had the chance to help poorer households, to do something about this. But he chose not to. He chose instead to pay for the Covid Assistance, the added fiscal support, by running down the deficit’, he has understood the potentially catastrophic consequences of that political decision, even if he chooses, like many in his profession, to ignore the monetary reality of how government spends.

The crossroad is before us, there is an alternative. But the question is, which direction will we take?

 

 

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Cabinet brainstorms quick fixes for the cost-of-living crisis to avoid the real solution

Published by Anonymous (not verified) on Sun, 01/05/2022 - 3:51am in

“When people live in a fair, caring society, where everyone has equal access to social goods, they don’t have to spend their time worrying about how to cover their basic needs day to day – they can enjoy the art of living. And instead of feeling they are in constant competition with their neighbours, they can build bonds of social solidarity.”

Jason Hickel – Less is More.

Boris Johnson holds a meeting of UK Cabinet minstersPPicture by Simon Dawson – No 10 Downing Street on Flickr. Creative Commons 2.0 license

According to the Telegraph this week, the Treasury has ‘raked in more tax than ever before’, thus putting the UK, it says, on course to have the ‘highest tax burden since the aftermath of the second world war’. The Chancellor, still counting his beans, was not in the slightest bit apologetic, making clear his assertion that he had no other option but to get the public finances back on track after the vast amount of public money that had been spent during the pandemic. Keeping the £12,570 personal allowance for income tax at its current level would, the author of the Telegraph article indicated, generate an extra £20bn for the Treasury over the next five years, thus reinforcing, yet again, the plainly wrong idea that government relies on tax to spend, or balance the public accounts. A government spokesperson called on for comment, said, wiping a tear away, that it had been forced to make ‘tough decisions’, but not to worry, in 2024 we can expect a tax cut bonanza just before the next election.

The Guardian took another tack, not taxes, but borrowing. In an article by Larry Elliott entitled, ‘UK government borrowing halves but is still close to record high’, he quotes figures from the ONS which reported that the gap between the state’s revenues and its spending was down on the previous year, but that despite the improvement over the year, the total deficit for 2021/22 was more than £20bn higher than forecast by the OBR. All as if borrowing figures were a sound measure of the government’s management of the economy. The Chancellor, trying yet again to sell his agenda of fiscal discipline, was quoted by Elliott, reiterating yet again, that ‘Public debt is at the highest levels since the 1960s and rising inflation is pushing up our debt interest costs, which means we must manage public finances sustainably to avoid saddling future generations with further debt’.

They are all at it! Whether it’s former or current Chancellors of the Exchequer, journalists or orthodox economists, they all have one thing in common: their addiction to the false narrative of household budgets. The idea that governments are limited in their spending policies by how much tax they collect or what they can borrow. The false corollary of all that, is that without careful management of the public accounts, either we face the prospect of the UK going bankrupt, as former Chancellor George Osborne suggested to the public, or future generations will pay the price in higher taxes. All nonsense, of course, but it keeps the public in their place, meaning acceptance without question, that the government has limited fiscal capacity, and the message that government has no option but to impose belt-tightening policies, completely ignoring the fact that a government deficit represents a private sector surplus, in layman’s terms, the money in our pockets. Taxing away more doesn’t give the government more to spend, or to pay down public debt as is implied, and it certainly doesn’t help an economy to navigate difficult times.

We are now witnessing in the most distressing way, the terrible consequences of those narratives which are having a direct effect on the economy, or more precisely, the people who do the work to keep it functioning. Not just the effects of the last 2 years on people’s lives but the ongoing consequences of decades of successive government spending policies. Policies which have ranked fiscal discipline over economic health and public well-being, seen wealth distribution skewed to favour ever fewer people and overseen the selling off or privatisation of key public assets with vast amounts of public money syphoned off for private profit, along with the underfunding of vital publicly run and paid for public infrastructure which has left it in a state of ongoing decay. We have paid a heavy price as a nation for the economic ideology which prevails and dictates policy and spending.

From every corner, the warning signals have been ringing loudly. Last month, Martin Lewis, the Money Saving Expert, said that he was running out of tools to help people manage the cost-of-living crisis. He said that ‘it’s not something money management can fix, it’s not something that for those on the lowest incomes telling them to cut their belts will work, we need political intervention.’

Phil Andrew, the CEO of the StepChange Debt Charity, echoing Lewis, said that their advisers had been taking increasing numbers of calls from people who fear they won’t be able to keep up their debt repayments. With eleven million households facing Covid-related debt, and four million using credit to pay for essentials, he was clear:

‘For these households, rises in energy bills and the increasing cost of essentials are not things that make the difference between being able to afford luxuries or not. They are the things that genuinely make the difference between heating and eating.’

The Trussell Trust, which runs more than half of UK food banks, says it is witnessing an accelerating crisis across the UK as more and more people are unable to afford the absolute essentials necessary to eat, stay warm and dry, and clean. Figures released this week show that the Trust’s network provided more than 2.1 million parcels to people facing financial hardship from 1st April 2021 to 31st March 2022, which represents a 14% increase over 2019/20 – before the pandemic. And more than 830,000 parcels were provided for children, which represents a 15% increase from 2019/20, when 720,000 were provided. The Trust, again echoing Martin Lewis, said that there is still time for politicians to turn this situation around, saying that, governments at all levels must use their powers and take urgent action now to strengthen our social security system so it keeps up with the true cost of living and helps prevent hundreds of thousands more families being forced through the doors of food banks.’

These figures are a shocking indictment of a government that does have the fiscal tools to put in place solutions to mitigate the economic shock of Covid (although imperfect, already demonstrated), the effects of the war in Ukraine and last but not least to address a climate crisis which threatens humanity, but which seems to have been put on the back burner even as the planet’s life support systems continue to degrade and the social injustices intensify globally.

Our government has the legislative and fiscal tools, should it choose to use them, not only to mitigate this economic crisis in the short term, but also to challenge the market-driven ideology of decades. An ideology which has led to an increasing divide between the rich and the poor, with an ever-increasing share of wealth going into fewer hands, as wages have stagnated. A pernicious ideology that has created increasing reliance on an unfair social security system which punishes people rather than supporting them, whilst it has made the concept of real full employment a dirty word and allowed the corporate sector to get away with murder by paying low wages and setting working people against each other in the dash for a job and a modicum of security.

We may, as the Trussell Trust says, need a fairer social security system for those who cannot work, or who are caught in economic straits not of their making, but we also need a government with the political will to implement a Job Guarantee, not just to provide the vital cyclical economic automatic stabiliser at such times as these, but also to reverse the unfair advantage capital has had for decades over labour, which has been responsible for wages being driven down in a fight for competitive supremacy with all that entails in human deprivation.

However, apparently, the government is right out of tools, out of ideas, out of everything except perhaps its propaganda machine, which is working just fine. This week’s Cabinet ‘blue sky thinking’ exercise left many scratching their heads as Boris Johnson was reported as asking for proposals for tackling the cost-of-living crisis without actually spending public money. Ministers have been ordered to find new ‘non-fiscal’ solutions. Grant Shapps suggested making the MOT test biennial instead of annual. Is that a joke? If so, it’s in the worst possible taste, ignoring as it does the very real effects of higher energy and food costs on families across the country. Their problems won’t be solved by such crass intervention. And Johnson is said to have revived the Liz Truss proposal to cut childcare costs by lowering England’s legal limit on adult supervision for nursery children, even though such a move could well endanger the safety of these children. As we said – right out of ideas, well at least sensible ones like using fiscal policy to address the current crisis and indeed future ones. Meaning, spending newly created money as only a currency-issuing government can do.

Even Torsten Bell from the Resolution Foundation think tank, which has its roots in orthodox economic thinking, commented that he thought the government had ‘lost the plot’, if it believed that such ideas would improve people’s lives substantially.

It is quite shocking and disingenuous of a Chancellor who can afford a £600 pair of trainers, has an extensive property portfolio and will think nothing of spending £13,000 a year on heating a swimming pool, to tell listeners on Mumsnet this week, that it would be ‘silly’ at this moment in time to give poor families any further help with rising bills, when people are already feeling the pinch from record rises in energy price and steep increases in the cost of food and essentials. Sunak’s Spring Statement and previous budgets have been a kick in the teeth for ordinary people who have paid the price in living standards and rising private debt, caused by inadequate spending, not just by Sunak but also by previous Chancellors wedded to economic orthodoxy, and the lie that government spending is just like our own household budgets. People who have already been subjected to government policies which have driven growing poverty and inequality and decimated the public and social infrastructure over the decades which preceded the current emergency. They need help now, not later, when things are likely to be infinitely worse.

The Chancellor has at his disposal the fiscal tools he needs to address the current cost-of-living crisis and create a fairer and more sustainable society. But while he adheres to his fiscal discipline message that puts the household budget narrative of tax and spend, paying down debt, reducing public deficits or the objective of achieving balanced budgets or surpluses at the top of his agenda, regardless of the economic conditions that prevail, the lives of ordinary people can only get worse, and recession will be just over the hill. We are not all in this together under this regime.

There is an alternative. It’s just that we don’t have a government or other political parties willing to challenge the economic orthodoxy which drives spending and legislative decisions. The system has been corrupted to serve global corporations, whilst politicians have been bought, as a result, by benefiting through the revolving door. At the same time, the media plays out the narrative like a broken record, to keep the illusions going that governments are powerless to intervene when economic instability threatens, hamstrung as they are by scarce monetary resources, when the reverse is actually true.

What hinders government is not scarcity of money, but the recognition that it must align its spending to the available resources and the productive capacity of the nation, and make the political decisions about who gets the pie based on that. That is the real balancing act and the real starting point for a true understanding of what governments can do, with the political will, to create the sort of society which benefits everyone, by serving public purpose instead of corporate greed.

 

 

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The post Cabinet brainstorms quick fixes for the cost-of-living crisis to avoid the real solution appeared first on The Gower Initiative for Modern Money Studies.

Fresh audio product: the IMF and debt, Asian Americans

Published by Anonymous (not verified) on Sat, 30/04/2022 - 3:41am in

Tags 

Radio, Debt, IMF

Just added to my radio archive (click on date for link):

April 28, 2022 David Adler of the Progressive International on an impending debt crisis, with an emphasis on the role of the IMF (Guardian article here). • Sudip Bhattacharya on the Asian American population: its diversity, its unity, its politics

Out-of-touch Chancellor’s Spring Statement fails to help those most in need

“Once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilisation.”
John Maynard Keynes  

This week, amidst continuing global economic uncertainty caused by the ongoing pandemic and the outbreak of war in Ukraine, the Chancellor, Rishi Sunak, delivered his Spring Budget. Unsurprisingly, it did little to help the very poorest of households, as the Resolution Foundation reported in its analysis that followed:

“Taking into account the measures announced by the Chancellor, the typical working-age household faces an income fall of 4 per cent, or £1,100, in 2022-23. But the greatest falls will be felt by the poorest quarter of households who are set to see their incomes fall by 6 per cent. This will see a further 1.3 million people fall into absolute poverty next year, including 500,000 children – the first time Britain has seen such a rise in poverty outside of recessions.

 

Incomes are on course to be lower at the next election (2024-25) than they were at the last (2019-20), with typical non-pensioner income projected to be 2 per cent lower. Such an outcome would make this the worst parliament on record for living standards growth.

 

The Chancellor pre-announced a 1p cut in the basic rate of Income Tax for April 2024, saving an average earner £243 a year. But the gains of this and the lasting impact of a higher National Insurance threshold are wiped out by previously announced tax rises.  In 2024-25, when the income tax cut comes into effect, 27 million out of the 31 million people in work will pay more Income Tax and NI as a result of personal tax changes announced by Rishi Sunak.”

Chancellor Rishi Sunak filling a red car with petrol at a petrol stationImage by HM Treasury on Flickr. Creative Commons 2.0 license.

While the Chancellor continues to count the tax beans and make his calculations, those who have already suffered the consequences of the last 12 years of Conservative policies will now be expected to take further pain in the form of a resurrection of harmful austerity dressed up in the concept of possible ‘jam tomorrow’. Cynically speaking, just before the next election.

In the light of a sustained round of higher government spending and the myth that we have borrowed heavily to sustain an economy hit by a global pandemic (even if much of that went into corporate pockets), some economically uneducated politicians are now appealing to the nation yet again to sacrifice their well-being on the altar of balanced budgets. We should be willing victims, according to this false logic. Despite the huge spending over the past two years, the household budget myths were never far away from the public gaze as the media pounded their messages about how there would be a price to pay, eventually.

At the same time as the Resolution Foundation lays it on the line as to the significance of the Chancellor’s budget, which yet again divides rich and poor, it then goes on to reinforce the myths about how the UK government spends. Tax receipts, it said, had come in much stronger in 2021/22 than expected, which would give the Chancellor ‘headroom against his fiscal rules’. The Independent claimed however that Sunak was keeping some of that tax bonanza back for a rainy day or to cover his planned tax cut in 2024. Whilst the Foundation’s analysis is stark on the consequences of this week’s budget, it is clearly still in the dark ages when it comes to describing how currency-issuing governments spend, as are so many think tanks and organisations on both the left and the right, not to mention a myopic media.

Charles Dicken’s character Micawber has been resurrected (if he ever went away) by a Chancellor who, after an astonishing fiscal response to the pandemic, is now re-donning Thatcher’s mantle, reinforcing the lie that taxes fund spending, or that government needs to borrow to fund itself over and above its revenue.

The suggestion by Torsten Bell at the Resolution Foundation, that these unexpected tax receipts would allow the Chancellor to consolidate the Treasury’s fiscal position and deliver his promises is just more shoring up of a myth that governments spend like our own households. And a bit of a joke because by any standards what the Chancellor, with his great wealth and extensive property portfolio, has done, is punish those who can least afford it and who do have to live within their financial means or face the prospect of debt because they are currency users, not currency issuers. The rising use of food banks and increasing homelessness can only get worse as his budget decisions begin to bite in April and our public services will continue to deteriorate without adequate funding.

Holding forth from his ivory tower, Sunak has not an ounce of understanding about the impact of government spending policies on the lives of working people, not to mention the economy. His decisions are directed by a desire to show himself fiscally prudent, not by public health and economic security.

When Rishi Sunak says, as he did earlier this week, that ‘we can’t help everyone because it’s too expensive’ or proposes an efficiency drive to cut £5.5bn of claimed government waste with a view to those savings being used to fund vital public services, it is quite simply a distortion of the facts to serve a political agenda.

Whether it is the Chancellor reciting the usual mantra about it being ‘vital that every single penny of taxpayers’ hard-earned cash is […] spent well,’ or the Shadow Chancellor and other uninformed left-wing politicians suggesting that they would fund public services via a windfall tax on energy companies, the public is being led by the nose in its ignorance of how government spends. An ignorance perpetuated by the daily narratives in both left- and right-wing quarters and by a compliant media singing from the same hymnbook. The economic orthodoxy rules the roost. And yet increasingly we are seeing the true cost of such narratives. They are not financial, they are the threats to human life, biodiversity, and a functioning planet.

Given the challenges we face from an increasingly forgotten climate crisis (and incidentally scarcely mentioned in the Spring budget), the ongoing exploitation of the global south, which has bled countries dry to sustain the lifestyle of the west and which is coupled with rising poverty and inequality affecting citizens across the world, it is time to challenge these myths which have served a political agenda and a toxic ideology. Keeping the myths alive for the purposes of social control and the profits rolling into private pockets with government serving its corporate masters.

Nothing is too expensive in monetary terms; government doesn’t have a finite pot of money with which to provide public and social infrastructure and neither does it have to doff its cap to the wealthy or large corporations to provide it. Contrary to the usual household budget narrative, when the government spends, it does so based on a political agenda, not the state of the public coffers. It just doesn’t want the public to know that, because it is a lie that can be used to justify its spending policies and who gets the money, or indeed yet another round of austerity when it suits. A harmful ideology that feeds government policies and spending decisions.

The proof of the pudding lies in the fact that when it serves that agenda there is always money to fund a government’s own political priorities such as war or defence spending, or public contracts divvied out to its mates with no accountability. Only this week, Sunak revealed that the UK had given Ukraine £100 million worth of weaponry. And yet at the same time, he tells us that savings in government departments must be found by rooting out waste which can in turn, according to the household budget narrative, be used to fund public services, as if a government that issues its own currency has no money of its own and has to tax or borrow or make ‘savings’ by robbing Peter to pay Paul to fund its agenda.

While the Telegraph talks this week about the parlous state of the public finances and running out of road, suggesting that excessive government spending was crowding out investment in the private sector by discouraging ‘innovation and competition in crucial sectors such as health and education’ (which tells us a lot about the priorities of those on the conservative right), it claimed also that government spending levels were ‘indefensible.’  These statements are predicated on the lie that money is a finite and scarce resource and that the State and its public infrastructure is wasteful of hard-earned taxpayers’ money!

While the Telegraph talks tough by suggesting that spending needs to be cut even further, the Spring Budget is already a kick in the teeth for those who are currently struggling to make ends meet and will mean even more hardship and poverty as energy, food and other costs continue to rise. The Chancellor has made a political choice to create further difficulties for already beleaguered citizens on the promise of ‘jam tomorrow.’ Fiscal discipline over national economic well-being. What a cruel way to view the lives of millions of people, who it seems have become expendable in some people’s eyes where government finances are concerned. Better a balanced budget than a happier, healthier more productive nation.

Let us ask what is the role of government? To balance the budget, keep the wealthy happy and the profits rolling? Or something else? What we should be discussing is not the state of the government finances, whether it has balanced its budget or gilded its reputation as being fiscally prudent, but how it has managed the real but finite resources it can, if it chooses, access through its tax and other policies to create a sustainable and functioning economy which benefits everyone, not just a small section of it.

Thus, a healthy economy depends primarily, not on a private sector paying its taxes to provide vital public infrastructure, for too long the public has been misled on this issue. It depends instead on the spending and legislative decisions taken by a currency-issuing government to create the publicly paid for and preferably managed national and local infrastructure upon which we all depend as individuals and businesses, from health to education, welfare, public transport networks, and employment. Government in service to its electorate, not the corporate body. That should be the starting point for a discussion about where we go from here and involves creating a better public understanding of how government really spends.

In short, the current economic problems and inflationary pressures are not caused by too much government spending as some would have it, but by supply chain disruptions resulting from the pandemic, the war in Ukraine and the growing effects of climate change on the world economy including food production. This is a moment not for fiscal retrenchment but thinking best how to support working people in these difficult days and planning for a sustainable and fairer future for all.

 

 

 

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Houston, We Have a Credit Problem

by Neil Tracey

In 2021, China had around 30 million homes sitting vacant for extended periods. There’s enough unused housing in China to house around 80 million people, roughly the population of Germany. This isn’t “slack” in the market; there is little hope that these homes will someday find an occupant. These homes are bound to remain empty.

Pile of credit cards

Our growth-obsessed economy requires credit to “succeed,” leaving millions in debt in a bloated economy. (CC BY 2.0, Sean MacEntee)

Indeed, most of these homes are simply held as financial assets; people who already own one home buy another and hang on to it, expecting it to appreciate. Even more peculiarly, Chinese property developers continue to build more homes. The absurdity of this market made headlines late last year with the story of Evergrande, a Chinese property developer that had accumulated over $350 billion in debt, then defaulted on large sums. Now, months after Evergrande first threatened to default, it has slipped from the headlines. However, it’s worth revisiting the story of Evergrande to understand just how it came to be. Why was a developer building more homes in a country that already had available housing for another 80 million people?

The answer lies in credit. Credit is driven by, and in turn reinforces, expectations for the future. By driving expectations for the future, credit steals democratic control over the future from citizens and gives it to market forces. We’ll explore this issue by looking at Houston, Texas and how the credit market drove its growth. Then we will address what credit may look like in a steady state economy and how steady-state economics may return control of their futures to citizens.

Extreme Growth and Houston: The “Limitless City”

Visiting Houston, one thing stands out: it’s a BIG city. With a population of over 5 million and a metropolitan area of over 9,000 square miles, Houston is the only American city without formal zoning restrictions. In his book, Ages of American Capitalism, Jonathan Levy explains that Houston is culturally, economically, and geographically defined by its cycle of credit-driven growth.

In Houston, there was an expectation that the city would expand. This expectation was the result of fomenting hysteria over oil, housing expansion, and pop culture. In their 1981 song Houston is Hot Tonight,  Iggy Pop sings, “Bright lights, Houston is hot tonight / Arabian sheiks and money, up in the sky / Now I don’t mind, a bloodbath / When I’ve got oil on my breath.” Combining exotifying imagery, money, and oil, Iggy Pop captures the overwhelming expectation of growth that seized Houston. This expectation of growth led to the expansion of cheap credit that let Houston expand so rapidly that its edges became undefinable. Urban geographers, trying to understand the limits of Houston, had to come up with a whole new set of terminology. Houston was a “multi-node city,” an “edge city,” an “edgeless city,” and a “boundless city.” Indeed, the only thing that seemed certain was that Houston was growing, and wouldn’t stop.

NASA satellite image of Houston, Texas lit up at night

Houston is certainly “hot tonight,” and getting hotter. (CC BY-NC 2.0, NASA’s Marshall Space Flight Center)

Houston’s role as a “limitless city” was due to credit. Credit is money or goods extended by a creditor to a recipient based on the understanding that the recipient will pay it back in the future, plus interest. Therefore, credit is a bet on the future ability of the recipient to pay back the money they borrow, and then some.

For this article, we’ll limit our discussion of credit to credit extended by a private creditor; in practice, that may be an individual, bank, or company seeking to make a profit (as opposed to a government agency advancing a social objective). Given this definition of credit, we can see how it may create a cycle of growth. Creditors decide to whom they should give credit based on who is likeliest to repay in the future. Creditors look to companies and individuals with historically high growth rates as a determining factor. In turn, having access to credit enables recipients to grow. A cyclical relationship between credit and growth ensues, whereby credit leads to growth, which leads to more credit, which leads to more growth, and so on.

This model of credit-driven growth can be seen in Houston, where growth expectations attracted the market for credit, since the promise of growth suggested that future property prices would increase. Thus, the expectation of growth meant that Houston applicants were perceived as “good bets” for repayment. This enabled the credit-fueled expansion of Houston as a business. At the same time, Houston’s expansion fueled the expectation that it would continue to expand. This expectation, then, fueled its expansion. Thus, the self-reinforcing mechanism of credit and growth expectations persisted.

At some point, this cycle of growth confronts the physical constraints of the natural world. After Hurricane Harvey dumped 51 inches of rain on Houston in 2017, the New York Times published: “A Storm Forces Houston, the Limitless City, to Consider Its Limits.” Since the flood, Houston has made little progress in considering those limits. Houston appointed a “flood czar” who wants to increase Houston’s green spaces to help absorb flood waters, but there’s no movement to limit the city’s growth. Only two years after Hurricane Harvey, the Houston City Council recklessly approved the development of a 100-year floodplain into condominiums.

Possibilities for Credit in a Steady State Economy

Due to this self-reinforcing cycle, the credit market is incompatible with a steady state economy. Ideas for how to reform this cycle come from a rather surprising source: John Maynard Keynes. Far from a steady stater, Keynes was famous for pitching the “propensity to consume” as well as government policies designed for growth. However, towards the end of his General Theory of Employment, Interest, and Money, Keynes presents some rather unique thoughts on the role of credit.

One idea for reform comes from the price regulation of credit. The price of credit (that is, the real interest rate) could be regulated to avoid unsustainable growth. The Federal Reserve already uses its power to set interest rates, and has long prioritized low rates to stimulate growth. However, the Fed could use a more nuanced approach to setting particular interest rates for loans in specific markets. There are certain areas of the economy that need credit to launch, such as the renewable energy sector. The Fed, with a little urging from Congress and the president, could set low interest rates for these sectors, essentially subsidizing them via differential interest rate. Outside of these sectors, the Fed would set higher interest rates to lessen the rate of growth in other sectors, and of GDP at large.

As a macroeconomic actor, the Fed wouldn’t be keen on dabbling with sectoral distinctions. If necessary, Congress could pass a bill to establish differential interest rates, if not directly via the Fed, then indirectly via fiscal policy such as credit supplements or taxes. Presumably such a law would have a sunset clause or be revisited and readjusted annually, as with an appropriations bill.

A related option is for credit to be socialized and overseen by a government agency. (While the quasi-governmental Fed exerts control over interest rates, most actual credit is extended through private banks.) Credit would be fully controlled, in other words, by democratic institutions.

Socializing credit would enable the government to marry its fiscal and monetary policies, extending credit to essential industries and limiting credit for increasingly outdated or harmful ones. However, for this proposal to work, the federal government would have to concurrently abolish the private credit system and limit access to foreign credit.

Portrait of Neil Tracey, CASSE's economic policy intern Spring 2022Neil Tracey is a junior at Georgetown University and an economic policy intern at CASSE.

The post Houston, We Have a Credit Problem appeared first on Center for the Advancement of the Steady State Economy.

Are Concerns over Growing Federal Government Debt Misplaced?

Published by Anonymous (not verified) on Thu, 11/11/2021 - 8:02am in

If the global financial crisis (GFC) of the mid-to-late 2000s and the COVID crisis of the past couple of years have taught us anything, it is that Uncle Sam cannot run out of money. During the GFC, the Federal Reserve lent and spent over $29 trillion to bail out the world’s financial system,[1] and then trillions more in various rounds of “unconventional” monetary policy known as quantitative easing.[2] During the COVID crisis, the Treasury has (so far) cut checks totaling approximately $5 trillion, often dubbed stimulus. Since the Fed is the Treasury’s bank, all of these payments ran through it—with the Fed clearing the checks by crediting private bank reserves.[3] As former Chairman Ben Bernanke explained to Congress, the Fed uses computers and keystrokes that are limited only by Congress’s willingness to budget for Treasury spending, and the Fed’s willingness to buy assets or lend against them[4]—perhaps to infinity and beyond. Let’s put both affordability and solvency concerns to rest: the question is never whether Uncle Sam can spend more, but should he spend more.[5]

If the Treasury spends more than received in tax payments over the course of a year, we call that a deficit. Under current operating procedures adopted by the Fed and Treasury, new issues of Treasury debt over the course of the year will be more-or-less equal to the deficit. Every year that the Treasury runs a deficit it adds to the outstanding debt; surpluses reduce the amount outstanding. Since the founding of the nation, the Treasury has ended most years with a deficit, so the outstanding stock has grown during just about 200 years (declining in the remainder).[6] Indeed, it has grown faster than national output, so the debt-to-GDP ratio has grown at about 1.8 percent per year since the birth of the nation.[7]

If something trends for over two centuries with barely a break, one might begin to consider it normal. And yet, strangely enough, the never-achieved balanced budget is considered to be normal, the exceedingly rare surplus is celebrated as a noteworthy achievement, and the all-too-common deficit is scorned as abnormal, unsustainable, and downright immoral.

First the good news. The government’s “deficit” is our “surplus”: since spending must equal income at the aggregate level, if the government spends more than its income (tax revenue), then by identity all of us in the nongovernment sector (households, businesses, and foreigners) must be spending less than our income.[8] Furthermore, all the government debt that is outstanding must be held by the nongovernment sector—again, that is us. The government’s debt is our asset. Since federal debt outstanding is growing both in nominal terms and as a percent of GDP, our wealth is increasing absolutely and relatively to national income. Thanks Uncle Sam!

But the dismal scientists (economists) warn that all this good news comes with a cost. Deficits cause inflation! Debt raises interest rates and crowds out private investment! Economic growth stagnates because government spending is inherently less efficient than private spending! All of this will cause foreigners to run out of the dollar, causing depreciation of the exchange rate!

With two centuries of experience, the evidence for all this is mixed at best. Deficits and growing debt ratios are the historical norm. Inflation comes and goes. President Obama’s big deficits during the GFC didn’t spark inflation—indeed, inflation ran below the Fed’s target year after year, even as the debt ratio climbed steadily from the late 1990s to 2019. The initial COVID response—that would ultimately add trillions more to deficits and debt—did not spark inflation, either. (Yes, we’ve seen inflation increasing sharply this year—but as I noted, the evidence is mixed and many economists, including those at the Fed, believe these price hikes come mostly from supply-side problems.)

Interest rates have fallen and remained spectacularly low over the past two decades.[9] Anyone looking only at those 20 years could rationally conclude that interest rates appear to be inversely correlated to deficits and debt. While I do believe there is a theoretically plausible case to be made in support of that conclusion, the point I am making is that the evidence is mixed. And if you were to plot the growth rate of GDP against the deficit-to-GDP ratio for the postwar period, you would find a seemingly random scatterplot of points.[10] Again, the evidence is mixed at best.

Finally, the dollar has remained strong—maybe too strong for some tastes—over the past 30 years in spite of the US propensity to run budget deficits, and even trade deficits for that matter. Both of these are anomalies from the conventional perspective.

So, while there are strongly held beliefs about the negative impacts of deficits and debt on inflation, interest rates, growth, and exchange rates, they do not hold up to the light of experience. When faced with the data, the usual defense is: Just wait, the day of reckoning will come! Two centuries, and counting.

 

[1] http://www.levyinstitute.org/pubs/ppb_123.pdf

[2]  http://www.levyinstitute.org/pubs/wp_645.pdf

[3] http://www.levyinstitute.org/publications/can-biden-build-back-better-yes-if-he-abandons-fiscal-pay-fors

[4] https://www.forbes.com/sites/afontevecchia/2013/07/17/bernanke-to-congress-we-are-printing-money-just-not-literally/?sh=7271b3a8109b

[5] http://www.levyinstitute.org/pubs/e_pamphlet_2.pdf

[6] Kelton, S. 2020. The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy. New York: Public Affairs..

[7] https://www.tandfonline.com/doi/full/10.1080/05775132.2019.1639412

[8] http://www.levyinstitute.org/pubs/e_pamphlet_2.pdf, p.13.

[9] http://www.levyinstitute.org/pubs/e_pamphlet_2.pdf, p. 17.

[10] http://www.levyinstitute.org/pubs/e_pamphlet_2.pdf, p. 20.

Debt Ceiling, Job Guarantee, Inflation

Published by Anonymous (not verified) on Fri, 05/11/2021 - 5:28am in

Grabbing a moment to catch up:

The Case for Minting a $1tn coin to deal with America’s Debt Ceiling
— Nathan Tankus (@NathanTankus) <em>The Guardian</em> (@guardian) Oct 15, 2021

Good Forms of Collectivity: Low-Carbon Care Work and a Federal Job Guarantee

— Natan Last (@NatanLast) Los Angeles Review of Books @LAReviewofBooks April 26, 2021

Like Haiku, the limits created by Twitter offer opportunities for brevity and coherence. Here’s the first bit of Steven Hail’s admirable Nov 1, 2021 Twitter thread:
“Inflation is not in itself some terrible disease which we have to minimize or eliminate.
It is not like Covid, needing to be stamped out. It is not like involuntary unemployment, underemployment and insecure employment, which are genuinely social evils.” Read more.

Cartoon: Mint the NFTs

Published by Anonymous (not verified) on Sat, 02/10/2021 - 7:50am in

Tags 

Comics, Debt, Deficit

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