debt reduction

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Breaking free from false economic narratives

Published by Anonymous (not verified) on Mon, 30/11/2020 - 8:11am in

Silhouette of a woman breaking a chain to free her hands as the sun risesImage by Elias Sch. from Pixabay

Dear Dominic

One all night sesh we had playing Monopoly in college and the banker ran out of money. We just wrote out more notes and it worked fine. Should I tell Rish?

Financibus ad infinitium

Boris

 

Posted on Facebook by the author Michael Rosen

 

Anyone watching the media coverage before and after the Chancellor’s Spending Review could be forgiven for thinking that the UK was going to sink like the Titanic under the burden of unsustainable borrowing and debt unless the government took the necessary step to control its spending. The party of fiscal sustainability which has been reworked over these last few months to keep the economy afloat is now rowing back and an army of fiscal hawks and deficit doves are now back to playing the household budget game of the public finances.

After 10 years of punishing austerity and cuts to public sector spending, which have already done huge damage, Rishi Sunak told the BBC he would have to make tough choices on public pay.

Torsten Bell from the Resolution Foundation claimed that the COVID-19 crisis is causing immense damage to the public finances and tax rises will be needed to cover the extra spending.

Laura Kuenssberg, the political editor of the BBC, talked about the ‘eye-wateringly enormous levels of public borrowing’ as a result of the ‘massive gap between what the government takes in tax and what it has been spending’. Recalling David Cameron’s false claim in 2010 that the economy was nearly bankrupt, she suggested that the government’s credit card was ‘absolutely maxed out’ and ‘there was no money left’.

Daniela Gabor, an economist from the University of West England, whilst on the one hand accepting that the household budget narrative of the public finances was flawed, she like many others reinforced it by saying that ‘interest rates on public debt were at historical lows’ and that government, rather than making cuts ‘should be using the opportunity to borrow more in order to finance the country’s recovery’.

Tom Kibasi, a former director of the Institute for Public Policy Research (IPPR) thought that whilst we need structurally higher government spending that would, in turn, mean permanently higher taxes.

A former Treasury Minister described it as a ‘multigenerational debt which will have implications for the rest of our lives in terms of what the British state can afford’.

And the Shadow Chancellor Annaliese Dodds topped the titanic effort to mislead the public by saying ‘Britain must rebuild its economy after the Covid-19 pandemic with one eye on rising deficit and debt levels.’

STOP!

From politicians on both sides of the political spectrum, institutions and think tanks such as the IFS and the Resolution Foundation, and economists stuck in orthodoxy from fiscal hawks to deficit doves, all are choosing to be ignorant of how governments spend and all promote the same economic illiteracy. It seems that the Establishment is on a mission – to ensure that the public doesn’t get the wrong idea about the spending capacity of the UK government to address the fallout from the Covid-19 pandemic and to ensure that the lie of austerity is not uncovered and that cuts to public spending imposed from 2010 were driven, not by fiscal necessity, but by economic ideology.

The political and media tale of the vast amounts being ‘borrowed’ is a cynical reinforcement of a false narrative that is setting up people for the expectation that there is always a price to pay in cuts, pay freezes or ultimately higher taxation.  Like many Chancellors before him, Rishi Sunak is hiding behind the smoke and mirrors of public accounting which does not reflect the monetary reality of how a government which issues its own currency actually spends.

The most telling aspect of this narrative, which should instruct our views, is that the government has had no trouble finding the money to pour into the private sector and will continue to do so, as announced in Sunak’s infrastructure plan outlined in his Comprehensive Spending Review. This projects more than £100bn worth of capital spending next year on building projects for schools, hospitals, housing, transport and green projects. Whilst public money flowing into private profit in itself is not an issue unless we are talking about public services which should always be publicly funded and delivered, it will quite simply mean more contracts flowing to the private sector without parliamentary oversight and public accountability.

At the same time, Rishi Sunak plans to cap public sector pay, reduce the planned increases to the national living wage (from 49p to 19p per hour), cut the amount of money available for low-wage tenants through housing benefit and he has left Universal Credit claimants in a state of uncertainty as to a continuation of the current UC uplift in April.

After 10 years already of public sector pay freezes, imposing more will further reduce standards of living for public sector workers who have already suffered enough. As life becomes tougher and incomes even more stretched, less money will flow into our local and national economies – not exactly helpful at a time when the government should be ensuring sufficient spending to keep the economic wheels rolling.

As so many are already on low wages or in precarious employment, this will quite simply drive people into even more poverty. And worse, is it right to further deprive people of an income which allows them to support themselves and their families without a daily struggle to make ends meet?

Would it not be better, through adequate welfare and employment policies, to ensure that people did not fall into poverty in the first place, and not just in times of economic crisis? This is the moment for serious consideration of a Job Guarantee to get us through these dark days and beyond. Useful public work paid for centrally and organised locally at a living wage to keep money flowing through the economy.

After the last few months, we have seen the very real value of public sector work, and indeed those key workers, often on low wages, who have kept the economy functioning. They are the linchpins of a healthy economy and society. Government ministers clapped for them and now they want to throw them under a bus. The government, which is the price setter for labour and thus determines both the wages of those in the public and private sector through wage and employment policies, is playing a cynical but not unsurprising game of divide and rule to keep working people subordinate to the needs of corporations. Businesses which profit from policies designed to keep wages down and profits up, as the share of productivity continues to be shifted into ever fewer hands, causing more misery along the way. The expected huge rise in unemployment will indeed play right into their hands although, of course, that will eventually come full circle as people on low wages spend less into the economy.

These last few years, months and weeks, we have seen things that no civilised country should see, and not just in the UK. The huge growth in the use of food banks (covered in previous blogs) which predates the pandemic reflects government policies – people from all sections of society are now being driven to queue for food. Their stories should shame our politicians.

Dame Louise Casey, a former homelessness Czar and advisor to 5 previous Prime Ministers, was clear ‘This is the UK in 2020 we should be able to do a better job of looking after the destitute and the hungry … and no it is not ok to leave that to charity… Unless something is done, a food emergency will follow the economic emergency’.

Earlier this year, the Work and Pensions Secretary Therese Coffey described food banks as the ‘perfect way’ to help the poor, as if somehow the government had had no hand in their poverty. Which of course is the neoliberal way – blaming poor people for their situation. However, it cannot be emphasised enough that it is the government which has had a hand in their poverty. Not just this government, but successive governments who have idolised the god of the market and bow to its dictates.

The decline of our public and social infrastructure, from the NHS, social care and mental health provision, not to mention other vital public services and the social security safety net, is not an unforeseeable tragedy borne of events outside government control which necessitates hard financial choices. It has been a deliberate act of neglect, which looks to continue.

The former Liberal Democrat MP and care minister, Norman Lamb, whose voting record showed he generally voted for reductions in welfare benefits, bewailed this week the neglect of social care and mental health services. In the same breath, he suggested that the state of the public finances should be a cause of concern, implying that there was a lack of money to address the worsening state of our essential services. There is no lack of money. What we lack is a political will to act. The political will to serve the nation’s interests and those of some of the poorest and most vulnerable in our society.

In this respect, and over decades, we have been witnessing the decline of State responsibility as philanthropy (with its shades of Victorian ‘do-gooding’ and social control), charity and volunteering have slowly been taking its place as a mechanism to deliver public goods. It is serving to substitute public spending, which is increasingly being withdrawn by the state on the premise of unaffordability whilst at the same time maintaining those public services that the private sector can run for profit and receive public money to do so.

As evidence of this drift, this week Andy Haldane, the Chief Economist and founder of Pro-Bono Economics, said that civil society had been one of the unsung heroes of the pandemic crisis and that the social sector had been ‘operating as our institutional immune system’ supporting those most in need. It was heartening, he said, that civil society and charities have plainly risen to these challenges, helped by a surge in volunteering activity’. He then went on to note that the charity sector was in a fragile state financially with a funding gap for this year of around £10bn and this hit to income was expected to persist for the majority of charities.

‘An institutional immune system’? This gets to the nub of the issue. The idea that charities and volunteering can or should be a substitute for proper government-funded intervention and not just in times of crisis. The Big Society is now playing out big time. And whilst we should not criticise the goodwill of those people who give their time and energy to good causes, one might argue that the need for charity and volunteering is, in fact, a failure of the state. And as it is becoming very clear, such a model has one big flaw.

Charities, like all organisations, depend on volunteers being available and donations and other forms of raising money to run their activities. In times of crisis like today, they too suffer as businesses suffer, as economic conditions decline, and people have less money in their pockets to spend. These days, they have become little more than businesses, making money and having the same hierarchical business structures of top management with top salaries and volunteer or low paid workers at the bottom. This is not a good or sustainable model for the delivery of public purpose, serving economic and social well-being.

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.

The bottom line is that in reality there is no shortage of money; just a shortage of political will which is borne of a toxic ideology that reviles the state delivery of public services, combined with the newly coined word ‘chumocracy’ which serves the interests of the friends of the government and the corporations who can ensure their place through the revolving door.

On Tuesday’, Bill Mitchell hosted a guest blog by Professor Scott Baum, and it deserves to be quoted in this week’s MMT Lens. Whilst referring to Australia, it provides a valuable insight into where we are right now in the UK and what the challenges we face are in turning the ship around, or rather stopping it from sinking like the Titanic with all passengers aboard.

 

“The fairy-tale of government working for everyone is continuing to result in significant social and economic pain for many individuals, their families and their communities.

 

Why is it that the government says one thing, but then in practice does another?

 

What has led us down this path of accumulated social wreckage?

 

We know that it is not because sovereign currency-issuing governments are fiscally limited in their ability to work for the good of everyone.

 

The government, if they wished, could intervene in a heartbeat to improve the precarious lives currently being lived by so many Australians.

 

We have seen this during the COVID emergency where governments have been quick to step in and provide a wide range of support to a wider range of the population than has been the case in the past.

 

Politicians have been allowed to leave their ideologies (think neo-liberalism) at the door.

 

But what their ideology doesn’t allow them to do is to stray for long. Before too long they have to go back and pick up where they left off.

 

The apparatus of justification that is so entrenched within the neo-liberal ideology means that even when ‘business as usual’ approaches have to be abandoned due to a crisis, it is not long before we turn back to the usual ideas that have led us to where we are today.

 

Throughout the COVID slowdown statements by politicians have been steeped in this kind of ‘return to normal’ thinking.

 

Early on Australian Prime Minister Scott Morrison said

 

The measures are all temporary, targeted and proportionate to the challenge we face. Our actions will ensure we respond to the immediate challenges we face and help Australia bounce back stronger on the other side, without undermining the structural integrity of the Budget.

 

Reading between the lines, yes, we had to do something we were not comfortable doing because the ‘system’ wasn’t working.

 

But we can’t wait to get back to our comfort zone.

 

In short, as a society, we are where we are because of the failures of the neoliberal system, the inability of politicians to see beyond their ideological views and the ability of those who benefit most to continue to legitimate the system.”

 

Failure to leave our household budget comfort zone can only lead to more poverty, inequality, and environmental decay. As the pandemic has inadvertently set us on a different course, those of us who want to see a fairer redistribution of wealth and resources and a planet which can support future generations sustainably, need to ensure that the road taken is not a Great Reset towards a reinforcement of global corporate power and influence greenwashing its way towards greater control and higher profits.

That’s some challenge, but it’s not insurmountable.

 

 

Event Recording

The video of GIMMS’ event “Phil Armstrong in Conversation with Neil Wilson” is now available:

 

Also available as a podcast via the MMT Podcast. #75 Neil Wilson & Phil Armstrong: In Conversation

 

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The post Breaking free from false economic narratives appeared first on The Gower Initiative for Modern Money Studies.

Just getting by is not enough

Woman shopping in a supermarketPhoto by Kevin Laminto on Unsplash

“The rich run a global system that allows them to accumulate capital and pay the lowest possible price for labour. The freedom that results applies only to them. The many simply have to work harder, in conditions that grow ever more insecure, to enrich the few. Democratic politics, which purports to enrich the many, is actually in the pocket of those bankers, media barons and other moguls who run and own everything.”

Charles Moore

In the light of the possible wage freeze for 5 million public workers, the economist Grace Blakely explained on Double Down News this week why billionaires should pay, ‘not working people who sacrificed their lives to keep our economy going.’ Whilst the sentiment is right that working people should not pay for the crisis, her suggestion that the billionaires should step into the breach and pay what they owe instead is just more neoliberally inspired claptrap. The implication that the very rich are stealing from the public purse and that we should bring back John McDonnell’s magic money tree from the Cayman Islands is a shameful and false narrative being peddled by a supposed left-wing economist who clearly is still caught in the headlights of false household budget accounting. By such shifting of blame elsewhere, Blakeley fails to acknowledge the real power of the public purse to spend, should the government choose to, on public purpose and also the power of the state to legislate to ensure that the rich pay what they owe. In this fairy tale narrative of taxes fund spending, she ignores the fact that, amongst other things such as redistributing wealth through progressive taxes, taxation is the mechanism to reduce the influence of the wealthy in the corridors of political power. That should surely be the left-wing argument for ensuring the billionaires pay their dues.

Blakely’s appeal came in response to the proposal by the Centre for Policy Studies for a three-year public sector pay freeze, which it claimed could save the government cumulatively £23m. It also suggested in its newly published report that the pain had not been shared equally and that private sector workers had suffered more than those in the public sector. The CPS put forward that NHS workers could be exempt from the freeze to account for their hard work and sacrifices during the pandemic giving an albeit reduced saving.

Robert Colville, the Director of the CPS, suggested that the public finances had been decimated and that it would be difficult to justify generous pay rises in the public sector when private sector wages were falling, given that there was a need to control public spending and reduce the structural deficit which the pandemic was likely to have opened up.

Once again not only do we see the powers that be aiming to drive further wedges of envy between the public and private sector, but also a reinforcement of household budget accounting in terms of how the government spends.

Over the last six months and more, the public sector has stepped up to the plate in response to Covid-19. The Prime Minister and his Chancellor have stood in Downing Street to clap for the NHS and social care workers and the nation responded. The public sector – the NHS, education, social care, and services provided by local government – has, along with other key workers in the private sector, ensured that services were kept going. That care for the elderly continued to be provided in difficult circumstances, that the food and other vital supply delivery networks continued to function, that supermarkets and other shops were stocked and able to provision the nation.

The pandemic has demonstrated, as no other event perhaps could, how interdependent society is and that key workers in the public and private sectors, many of whom are low paid, underpin the foundations of society so that it can function effectively. The world of Mrs Thatcher’s ‘there is no society’ has been well and truly discredited.

And yet after all the clapping and talk of levelling up, the government might be on the brink not only of creating more societal division in a cynical sleight of hand to distract attention away from government actions, but also of freezing the pay of public sector workers who have already suffered the consequences of a decade of Tory austerity. It is time to question who the government is serving. The markets and exploitative corporations or its citizens?

We have been brainwashed into believing that the government is at the mercy of the market and must serve it. The public has accepted the lie that government spending is constrained and dependent on private businesses generating the wealth which in turn generates the taxes that we are told fund government spending.

And yet the reverse is true. It is the government which sets the economic bar. It is the government which spends to tax, which sets the price for labour and legislates for protective employment law. It has been a political choice to cede responsibility for ensuring that people both in the public and private sector are paid wages commensurate with a good standard of living, that would put paid to continuing poverty and inequality.

At the other end of the scale, the power of the public purse has been shown to work perfectly when it is a question of pouring vast sums into private profit, in many cases with little accountability. The term ‘chumocracy’ has also been applied to how many of these contracts have been awarded.

Only this week, we have seen yet another demonstration of how the use of the public purse is a matter of political choice as the government agreed a four-year £16.5bn increase in defence spending. Boris Johnson called it ‘a once-in-a-generation modernisation of the armed forces … [required] to extend British influence and protect the public’ and restore Britain as “the foremost naval power in Europe”. We seem to be going back in time!

Labour unsurprisingly has supported these plans, but did ask how they would be paid for. Patrick Butler from the Guardian questioned how such a vast amount of money was justified when the ‘public finances have been stretched by the pandemic’.

The vision of stretched finances appeals to household budget explanations of how governments spend and is designed to reinforce the narrative of scarcity of money. Over the last few months, it surely must start to dawn on the public that there is no scarcity of money. The public finances have not been stretched, indeed they have been positively overflowing. The government simply made a political decision to spend money on defence, just as it did to support furlough or after public pressure to feed hungry children in schools.

In terms of how the government spends, it does not have to choose one expenditure over another. It does not have to match its spending to tax revenue or worry whether it can borrow money. It is just a decision based on political priorities. Feeding hungry children wasn’t a priority until it became politically expedient for it to be.

It is disheartening that time and time again mainstream journalists persist in toeing the establishment line that money is scarce and there will be a future price to pay. In an article in the Financial Times this week, it was suggested that that the Exchequer was running on empty and that the Tories in the wealthy south will soon be asked to support tax increases to help left-behind regions.

Let’s reiterate yet again that the state of the public finances is not dire, the Exchequer is not running on empty and, since tax does not fund government spending, increases will not help left-behind regions. In fact, taxing more in a period of economic decline or as a country was coming out of one would be positively harmful.

When it is suggested that drivers could be charged for using roads to help Rishi Sunak cover a tax shortfall of £40bn caused by the rising popularity of electric cars, one is tempted to point out that there is no hole in the finances to plug. Whilst we might want to use taxation to encourage people to use public transport, the only holes to plug are the potholes caused by cuts to spending on our road network.

It cannot now be any clearer that the UK government, which has the power of the public purse to authorise spending through its central bank, is not hindered by scarce monetary resources. That it just spends. The clear political priority is to spend on defence to ‘extend British influence’ rather than invest in a public and social infrastructure that serves the interests of the nation or addresses the rising poverty and inequality which has arisen as a result of government policies over the past 10 years.

The question of affordability has been used by successive governments to justify their spending policies. And yet, whilst successive governments have always found money for defence or prosecuting wars, whether it can be found to pay public sector workers decent wages is quite another matter.

In the same vein this week, the Treasury was reported to have been reluctant to commit more money to delivering the Prime Minister’s 10-point plan for moving to a low-carbon economy. Aside from the usual puff and rhetoric from politicians on a practical level, there are still questions as to whether words will be translated into real, firm actions. In an open letter to the government, it was reported this week that the UK would not be able to deliver on its zero-carbon commitments unless it intervened in the energy from waste sector and that recycling rates have reached a standstill. Ministers have also been accused of using the pandemic to justify further delay on promised action on food waste reporting until 2021. While the planet’s biodiversity continues to decline as the planet warms and valuable resources go up in smoke with few constraints, the government continues to prevaricate.

In saying that hard choices exist in relation to public sector pay or suggesting that we haven’t enough money to address climate issues, the Treasury ignores the elephant in the room. That the real human and planetary cost of not spending on these vital things will be immeasurable.

Over eight years ago George Osborne criticised green policies as a ‘burden’ and a ‘ridiculous cost’ to British businesses. Since then the environmental landscape has changed irrevocably as the climate tsunami bears down upon us with ever greater urgency. Governments have become masters at making promises or giving speeches with hat tips to change, but which result in very little. To suggest that there is a monetary constraint reveals much about the ideology which governs the government’s policies and the constituency it serves, but in the end, the burden of not acting will not be monetary, it will affect every aspect of our lives – economic and societal.

This is an opportunity not to be wasted. We have allowed an economic system to exploit working people. Businesses have justified low wages and poor employment conditions as prerequisites to competitiveness. Government having abandoned full employment policies in the 1970s has rolled over instead of assuming its considerable powers.

A recent report published by the Social Equality Commission quoted a female supermarket worker who said ‘when you dig really deep, I think it is about happiness and stability, and feeling valued … because money is secondary to all that. As long as you can get by, you shouldn’t worry about it.’

Happiness and stability are, without doubt, important but how such happiness and stability can occur when people are struggling to make ends meet is debatable. Just getting by is not enough and nor is it fair. Good wages and secure employment allow people to have a good standard of living, to be able to plan for the unexpected or indeed to save for the future. People are being brainwashed into accepting their lot on the lie of there being no alternative when there is such imaginable wealth in the hands of few people whose power and influence dictate its distribution.

From a macroeconomic perspective, the bottom line is that people with good wages and employment security spend their money in their local communities and the wider economy which in turn support local and national businesses. It seems the Chancellor, by suggesting he has to plug the hole in the finances either by higher taxes or public sector pay freezes, is displaying a deliberate ignorance, dictated by ideology, of the macroeconomic importance of people having money in their pockets. Let’s remember that one person’s spending is another’s income. It is fundamental!

To conclude this week’s lens, it is only right that we bring our readers’ attention to an editorial in the Guardian which highlighted that:

Coronavirus has thrown into sharp relief the inequalities in Britain. The bottom fifth of the working population have seen incomes cut sharply and their savings reduced to nothing. For the poor, there’s little or no cash to furnish even the barest of Christmases, while those at the top have seen cash pile up in bank accounts.

And then went on to criticise Sunak by saying that:

‘he continues to peddle the myth that the extra government borrowing during the pandemic means that he has to make “hard choices” to “balance the books”. The chancellor is softening the ground for austerity policies. Mr Sunak is making an ideological choice by using the wrong model of the economy. If he does not relent then he will be responsible for unnecessary unemployment and poverty.

It then urged Sunak to rethink his future policies by recognising that:

‘the government can take responsibility for maintaining the total level of spending in the economy at level that keeps the country as close to full employment as possible where a working week is at a reasonable length and paid at a reasonable wage.’

This is a moment of great change. A moment of great opportunity to create a fairer society for all. The economist Herman Minsky wrote: “a necessary ingredient of any war against poverty is a program of job creation; and it has never been shown that a thorough program of job creation, taking people as they are, will not, by itself, eliminate a large part of the poverty that exists”.

Unemployment and its associated economic and social ills could be mitigated by the introduction of a government-backed Job Guarantee, not only to deal with the economic fall out from the pandemic which will continue for some time to come but also act as a just transition mechanism as we address climate change. As a macroeconomic tool, it offers a cyclical approach to unemployment that would create a more stable economic environment to deal with the ups and downs of the economy with the added advantage that working people are not left to perish when times get tough.

Instead of talking about monetary scarcity and unaffordability, an argument which dominated the narrative for decades, the debate must now move to how we can create a more sustainable and equitable future in the context of the distribution of finite real resources and who gets them.

Society, through its elected government, has to decide its priorities. Real and sustainable human and planetary well-being delivered by powerful states with the power of the public purse governing in the interests of their citizens? Or a rehash of the current economic model which has at its heart a greenwashed control by global corporations.

 

Event Recording

GIMMS’ event “Phil Armstrong in Conversation with Neil Wilson” is now available as a podcast via the MMT Podcast. Our thanks to Christian Reilly for publishing it.

 

The MMT Podcast #75 Neil Wilson & Phil Armstrong: In Conversation

 

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The post Just getting by is not enough appeared first on The Gower Initiative for Modern Money Studies.

The deceitful image of money scarcity has no place in our society.

Hands of two women. A younger woman holding the hands of an elderly woman.Image by Sabine Van Erp from Pixabay

Society is indeed a contract. It is a partnership … not only between those who are living, but those who are dead and those who are to be born.

Edmund Burke
Reflections on the French Revolution – 1870

 

In the news this week the government did yet another turnabout following Marcus Rashford’s campaign and public pressure by announcing a £170m winter grant scheme to support low-income families. During the same week, the Trussell Trust reported that there had been a 47% rise in the number of parcels distributed via its networks in the 6 months to September 2020 compared to the previous year; that more than 1.2 million parcels were distributed, of which 470,000 were to children. And this was, it suggested, just the tip of the iceberg as these figures did not include the number of people helped by the numerous local organisations, independent food banks and local authorities who have stepped in to support their communities.

Whilst the Trust attributed some of these increases to the pandemic, which has had a devastating, effect the Trust was clear as to the underlying reasons why people need support. The key issues were related it said to a fundamental lack of income which has left people struggling to afford the essentials. As Emmie Revie, the Chief Executive of the Trust commented to the Guardian:

 

‘We have to find better ways of supporting one another as a society than leaving people to rely on food charity. It’s not just about ending food banks, it’s about finding an alternative to the need for mass distribution of charity food in the fifth wealthiest country in the world.’

 

The threads of poverty lie in adherence to a failed market-focused economic ideology and the government policies and spending decisions that result from it. Child hunger is just one of many interlinked consequences and research published this week by the Living Wage Foundation showed that during 2019/20 nearly three-quarters of independent care workers in England were paid less than the real living wage. They are, it said, among the 5.2 million workers in low paid, insecure jobs – 1.3 million of whom are key workers. The analysis noted that care workers earn an average of £8.50 per hour and 24% are on zero-hours contracts. It, like the Trussell Trust, highlighted the existing inequalities in our society which has hit the lowest earners the hardest and that was before the pandemic struck. Whilst the nation clapped with Boris Johnson Tabitha, a care worker, said:

 

‘I feel like a Roman Gladiator going into the ring on a night shift. Everyone is clapping for you, but you’re pitting yourself against a deadly disease without the proper pay and protection.’

 

As the government has increasingly ceded its responsibilities for its citizens through cuts to spending on public infrastructure both local and national, which in turn has led to an ideological and financial response at local level as private profit-seeking companies were invited to tender for contracts to deliver social care services, the consequences have been devastating. For those being cared for as much as those doing the vital work of caring for others.

As the government lauded its financial acumen in managing its accounts, its decisions have led to a vicious cycle of deprivation and poverty and public infrastructure decay. The connections are irrefutable. Surely it must dawn on the nation soon, as government and other institutions begin to wind up and reinforce the household budget narrative in support of action to get the public finances ‘back in order’ after all this spending, that its health and economic well-being is being reduced to one of balanced budgets and unaffordability.

At the same time as Rishi Sunak suggested that he may increase capital gains tax to pay for billions borrowed and the COVID-19 debt which is supposedly racking up, the Resolution Foundation published its report entitled Unhealthy Finances: How to support the economy today and repair the public finances tomorrow. In its report, it focused specifically on the dual challenge it believes the government is facing ‘to ensure that there is sufficient fiscal support through the crisis and recovery, and setting fiscal policy on a sustainable path.’

Even though it said that the government should commit not to start such consolidation until the economy had recovered, it still claimed that the government must do what is required to ensure that the public finances are sustainable and adopt a balanced current budget rule.

In the report, it suggested continuing to use low interest rates as a tool for supporting the economy and noted the fiscal damage being caused by lower tax receipts and higher spending. It proposed, amongst other things, reforming the tax system to raise revenue and imposing a health and social care levy to provide any additional revenue required.

Here we have all the usual implied but false language narratives about government spending – taxing to spend, borrowing and unsustainable public debt, repairing the public finances, financial sustainability, balanced budgets.

We’ve been here many times before and clearly the establishment is determined not to lose control of that narrative. The fightback is in full swing. The deficit and debt worrywarts are working overtime to keep the public in line. Heaven forbid that people should learn the truth about how the government really spends!

However, as that knowledge is going more mainstream, questions are being asked as it is becoming ever clearer that human and planetary well-being lies with government choice, i.e. who gets the money. It is therefore intolerable to think, in the light of this growing understanding of the spending capacity of government, that government and think tanks are suggesting that taxes be increased to pay for this imaginary round of borrowing and the subsequent imaginary national debt which has arisen from it.

Whilst one could certainly make a case for reforming the whole tax system to ensure a fairer distribution of wealth, the justification by the Resolution Foundation or the Chancellor for increasing taxes does not stack up for the following two reasons:

  • That such action would quite simply take money out of the economy at a time when it would still be recovering from the economic effects of the current crisis compounded by previous cuts to public spending which have had a cumulative effect on the economy. Private debt levels prior to the pandemic were already high but have soared by 66% since May to £10.3bn. The number of people in serious debt has doubled since March rising to 1.2m with a further 3 million at risk of falling into arrears. Raising taxes with this scenario in mind would seem self-defeating and destructive.
  • That taxes don’t fund government spending and cannot be used to reduce public debt

Quite simply the ‘taxes fund spending’ story is just a lot of accounting smoke and mirrors to suit an agenda which aims to keep people downtrodden and accepting their fate. The trope of financial unaffordability is deep within our own household budget psyches and shifting such narratives can be hard work. Much depends on loosening our attachment to them through knowledge and more importantly the desire for something better.

Taxes will not pay off the national debt any more than they will boost financially a failing social care system. Our public services including social care and the NHS are in crisis as a result of government choices, not a lack of tax money the government can collect. Privatisation and the profit motive, along with public spending cuts have both played a role in destroying what could and should have been funded publicly.

The deceitful image of money scarcity, with government reliant on taxes and borrowing to spend, has no place in our society as children go unnecessarily hungry and our young people face a gloomy future.

In this week’s Guardian, Patrick Collinson wrote that the COVID-19 crisis could have a lasting impact on young people’s pensions: indeed, the lives of young people have been turned upside down with future employment prospects damaged and life opportunities curtailed. However, future private pensions are the least of the worries of young people as they start out in life. It is the government’s role now to ensure, through its policies, that young people can thrive and build themselves a future and decent state pension provision should be a significant part of that.

We need to expose the con of private pensions which are reliant on fickle markets and a stable economy. Margaret Thatcher’s economic vision which was inspired by Friedrich Hayek and Milton Friedman reflected her belief in the superiority of the market. The idea implicit in this dogma was that the welfare state deprived people of the opportunity to make their own provision for old age. Thus, we witnessed the opening up of the market for private pensions in an attempt to weaken the state’s own pension provision. The current crisis is exposing their weakness which even before the pandemic was becoming clear and invites us to question the state’s ideological reliance on the private pension sector.

The solutions are to provide decent state pensions to give retired people financial security and ensure a decent standard of living and to reduce the pension age. The current round of retirement age increases is based on the lie that state pensions will become increasingly unaffordable as the birth rate falls and tax take reduces which will, it is claimed, cause an unacceptable burden on future taxpayers. We need to break the false connection between the payment of tax and receiving a pension.

The question of how it can be paid for doesn’t arise if we understand how the government spends. It would be paid for in the same way the government always pays for things; by creating the money out of nowhere. A simple transfer with a few computer keystrokes authorised by the Treasury and carried out by the Central Bank. We need to knock on the head the idea that a portion of our tax is being collected somewhere in a savings pot to be divvied out at retirement or indeed that taxes serve to pay for public services.

Assuming that government has invested through sufficient spending on public and social infrastructure including education, training, new technologies and by embracing full employment policies, then an earlier retirement and a good state pension is possible. Such investment will not put a financial burden on the lives of future generations, it will enhance them and those of retirees. We just have to decide as a nation how we want the real, but finite, resources we have at our disposal to create a better life to be shared out.

Earlier this week, there was an interesting exchange of views on a Facebook labour group when someone posted the following:

 

‘You do realise the Bank of England are printing new notes by the million. All we will get from Johnson is a bankrupt country.’

 

It is disappointing to observe in that post and the thread that followed that some individuals on the left seem to get pleasure from continually shooting themselves in the foot. By excoriating what they see as a reckless Tory government because in their view it is spending too much and driving us towards bankruptcy or hyperinflation, adds a certain touch of irony to the criticism since it was the Conservatives who used similar arguments against Labour’s spending plans in the last election. It all boils down to where is the money going to come from and who is going to pay?!

This type of scaremongering is damaging to a left-wing agenda and is borne of lack of knowledge. It is regrettable that, even when presented with the facts about how the government spends, many still choose to persist in reinforcing the myths and ignore the fact that it is impossible for the UK government to go bankrupt or run out of money and that government does not need our taxes to pay for public services not even the taxes of the rich. Ultimately, that is to deny monetary reality and what that knowledge could mean for any future progressive government’s spending plans if such a government were to exist although that is currently quite another story!

If we are going to debate, let’s do it from a position of knowledge rather than making exaggerated and untrue statements about how we are all going to hell in a hand cart because the Tories have spent too much. Let’s remember that in 2010 the same arguments were being levelled at Labour following the Global Financial Crash; another era of suffering and hardship for many. And that it was the Tories who said in 2010 that there was no alternative to cuts to public spending to get the public finances back in order and yet have suddenly without a problem found the monetary wherewithal to save the economy from the worst effects of the crisis. For the left to use this argument against the Conservatives is counter-productive to future progressive agendas.

The household budget ping pong played by successive governments at election time, which examines critically the fiscal record of a government or asks how its spending plans will be paid for, has done great damage to society and the economy. Such arguments overlook the real measures of economic health relating to how government serves its citizens in real social improvements from the provision of health and social care, education, policing, a social safety net and public transport networks to local service provision of libraries, municipal parks and refuse collection. All these things which previously were determined as the public good have been attacked by a governing elite serving its own interests and those of its financial donors.

As Peter Fleming, professor of business and society at City, University of London wrote:  Austerity [redefined] these things as fiscal liabilities or deficits rather than shared investments in common decency’.

Let’s argue for a better, fairer and kinder society based on real knowledge of monetary reality and not baseless statements which only serve to promote continuing political inertia on the left in terms of understanding how money works and how that knowledge fundamentally changes how we can respond to today’s and tomorrow’s challenges.

 

Newly published

This week, we published a fact sheet on Negative Interest Rates

Negative Interest Rates

and a new paper by Phil Armstrong and Warren Mosler

Weimar Republic Hyperinflation through a Modern Monetary Theory Lens

 

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The post The deceitful image of money scarcity has no place in our society. appeared first on The Gower Initiative for Modern Money Studies.

Time to worry less (or better not at all) about the national debt and challenge the government’s economic record instead.

£1 coin and £10 Bank of England banknoteImage by bluebudgie from pixabay

The old world is dying, and the new world struggles to be born; now is the time of monsters.

Antonio Gramsci

In the week that the Chancellor Rishi Sunak announced his latest Job Support Scheme, everywhere you look the TV journalists and other media pundits are bewailing the rising cost in terms of “borrowing” and government debt. TV presenters can’t help themselves. ‘We’ll be paying for it for years to come’, is the on-going mantra being drummed into the public consciousness, just in case we forget. It was even suggested on this week’s BBC’s Money Box programme that it would take 3000 years to repay the national debt! An astounding calculation made on the basis of current borrowing levels and the annual tax take. However, given that a sovereign currency-issuing government like the UK’s doesn’t even have to borrow to spend, it’s just another example of household budget accounting.

Whilst those of us with a better understanding of how money works shout at the TV with incredulity that the same falsities are being repeated endlessly, many of those same journalists and presenters fail to make the very real connections between government spending, the state of the economy and the lives of its citizens.

Whilst the implication of unaffordability and a future tax burden prevails as a reason to curtail spending eventually, the real price has been and remains a human one; economic instability and uncertainty for people and the prospect of more damage to the environment. We can’t afford to improve people’s lives or even save the planet! Apparently.

Whilst we read endless articles reporting on the declining state of our public services and local government, the injustice of a social security system which is failing too many people the elephant in the room largely goes unacknowledged; the role that government plays in the welfare of its citizens through its spending decisions. While we see huge sums of money being poured into private profit, our public and social infrastructure is in a state of decay. Their choice is clear.

At the same time, the left-wing social media pages continue to shoot themselves in the foot by posting articles and memes with language designed to increase the public’s fear of too much spending and its consequences on future generations; ‘UK national debt soars to record levels as Covid pushes up borrowing’ is one such posted this week.

Whilst such pages are clearly and quite rightly aimed at holding the government to account for their abysmal management of the economy and its consequences for some of the poorest people in our communities, they do so within the context of a household budget narrative. Such a narrative will, without doubt, constrain a future progressive government, not liberate it!

Instead of focusing on deficits as if they were a measure of good or bad stewardship of the public finances, we might better and more correctly point out the government’s economic record. How did it respond to the on-going crisis and the economic fallout? Had it, through its spending policies, ensured a well-functioning public infrastructure able to rise to the current challenges? Did it spend sufficiently to secure the financial stability of its citizens during this uncertain time? Or not?

In an unstable and uncertain environment, the job of the Chancellor is to mitigate those losses with sound policies and sufficient spending to keep the economic boat afloat as long as is necessary, whilst also ploughing additional investment into the public and social infrastructure to support the economy. Instead, government spending policies over the last 10 years have left the country’s infrastructure in a perilous state and unable to respond effectively. The price in human lives, poverty and rising wealth inequality is to be added to the devastating effects of the pandemic.

And yet, still in mainstream reporting, it’s as if people’s lives matter less than digits on a computer. And all this despite the growing understanding of the sovereign powers of a currency-issuing government. Whilst politicians, think tanks and journalists still have their heads firmly stuck in the sand like ostriches, people are led to believe that there will be no alternative to a future reckoning if the country is not to be bankrupted or future generations of taxpayers burdened with huge debt.

The role of the media and indeed the political opposition, if we did but know it, is to challenge government. Not to uphold and reinforce its power. Their role is to make the government accountable for its political and spending decisions and to bring to public notice when it abuses its sovereign powers in favour of other estates. Its job is to ask questions. Instead, whilst they approve of government intervention at this serious time they still prefer to talk about the state of the public accounts, rising public debt and the consequences for future generations. Thus, they continue to reinforce the myths about how sovereign governments really spend. The neoliberal economic orthodoxy rules.

The Chancellor’s plans sit very much within the neoliberal economic orthodoxy, despite the vast sums of essential government spending to prop up the economy and secure people’s financial security. He has already let it be known that he is considering a freeze of benefits and public sector pay and abandoning the pension ‘triple lock’. It will no doubt be presented as a necessity to get public spending under control and pay back the vast sums of money it has supposedly ‘borrowed’.

However, the truth is that it will be more to do with the government’s long term aim which had its origins in the actions of successive governments since Thatcher to transfer public provision to the private sector whilst ensuring the state’s role as a cash cow to the corporate sector.

Whilst Sunak’s increased spending was and remains vital, there has been valid criticism of his plans both early on and now with the proposed job support scheme which was referred to more correctly as an ‘unemployment creation scheme’ by the tax campaigner Richard Murphy. Sunak has failed on all levels and the promised V-shaped recovery is looking less and less likely.

Apart from being a short-term solution to a problem which is likely to persist for some time, it will require employers to share the cost of paying wages with damaging consequences. This will, without doubt, provide a significant motivation to make staff redundant, not preserve jobs. It fails to support those working in the hospitality industry whose businesses have been put on hold due to Covid-19 restrictions and furthermore the 3 million self-employed often working in creative industries have also once again lost out and will not benefit from these new measures. Far from being the party of the entrepreneur (unless of course, you happen to be rich one like Dyson and likely to contribute to your party funds), Sunak has shown complete disregard for the army of self-employed and small business entrepreneurs who make valuable contributions to the economy.

As the furlough scheme draws to a close, many thousands of people have already lost their employment and found themselves on Universal Credit. And yet many, despite the increased benefits now being paid, find themselves with insufficient income to manage their finances. Many hundreds of thousands will be added to that number over the next few months as the prospect of further restrictions resulting from the coming second wave of Coronavirus and the government’s inadequate plans.

The Resolution Foundation has suggested that it will be a significant mistake to end the £20 a week boost to tax credits and Universal Credit now being proposed by the Chancellor, the cut to come into effect next April. This the Resolution Foundation suggests rightly would clearly affect income and spending.

It has said that the rise in unemployment, combined with planned benefit cuts, means a ‘grim outlook for living-standards’. It has also noted that ‘The £20 a week boost can be seen as a reflection of the fact that out-of-work support was not adequate when we entered the crisis and – without the boost – certainly won’t be adequate in future. […] Ending the boost would mean withdrawing perhaps £8 billion from disposable incomes in 2021-22, precisely from those groups and places that need it most to support spending and the economic recovery in 2021-22.’ Removing that boost will have a huge negative impact on disposable incomes.

And here we come to the crux of the matter and one which the Chancellor cannot ignore. And that is, quite simply, that one person’s spending is another’s income. Rises in unemployment and proposals for public sector wage caps will drive the economy even further down the slippery slope.

On the one hand, Sunak says, ‘we must learn to live without fear’ and then counters that by saying ‘I cannot save every business. I cannot save every job’.

Whilst he implies he has no power to do otherwise and that people will have to bear the burden, he fails to mention that the government is in control. That it alone has the means, as a sovereign currency issuer, to mitigate the worst effects on the economy of the pandemic and indeed has the ability to use it to address the next great survival challenge bearing down on us like a tsunami – that of climate change (which seems strangely to have been put on the back burner).

The government, by dint of being the sovereign currency issuer, can spend what it needs to, within the limitations of real resources. It could rebuild a publicly-provided and paid-for infrastructure, both locally and nationally, thus providing more socially useful jobs paid at a living wage and could implement a permanent Job Guarantee to act as the economic stabilising mechanism to see us through this difficult time and most importantly to ensure a just transition towards an environmentally sustainable economy.

With such serious issues at stake, we must challenge the notion that the government cannot afford to deal with mass unemployment, poverty or climate change. We must challenge the notion that the government has to impose higher taxes or debt on the nation which limit what can be achieved to improve people’s lives.

Quite simply, the idea that there aren’t sufficient numeric digits available to make a better world is a fraud of the highest order. The future depends on our understanding it and challenging those that tout those lies either wilfully or unknowingly.

 

Further Reading:

National Debt https://gimms.org.uk/faq/what-is-the-national-debt/

Government Borrowing https://gimms.org.uk/faq/doesnt-the-government-have-to-borrow-when-it-spends-more-than-it-taxes/

The Job Guarantee https://gimms.org.uk/job-guarantee/

 

 

Upcoming Event

Phil Armstrong in Conversation with Warren Mosler – Online

October 17 @ 17:00 pm – 18:30 pm

GIMMS is delighted to present its second ‘in conversation’ event.

GIMMS’ Associate Member Phil Armstrong whose new book will be published in November (details below) will be talking to Warren Mosler. Warren, who is one of the founding proponents of MMT, has dedicated the last 25 years to bringing that knowledge to a wider audience across the world and authored ‘The Seven Deadly Innocent Frauds of Economic Policy, published in 2010. He also sits on GIMMS advisory board.

Register via Eventbrite

 

Event recording

Phil Armstrong in Conversation with Bill Mitchell – Online

An audio recording of the event is now available via the MMT Podcast here

 

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The post Time to worry less (or better not at all) about the national debt and challenge the government’s economic record instead. appeared first on The Gower Initiative for Modern Money Studies.

What’s the choice?

Do we accept there is no alternative to our rotten economic system or demand something different? Let’s re-examine our values and use our imaginations to redefine how we work and live.

Sign that says "imagine" fixed to a stone wallImage by Belinda Fewings on Unsplash

“We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense. Under a laissez-faire system, the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment).
This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness. Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence”.

(Michał Kalecki, 1943)

In 2010 Professor Michael Marmot published his independent review (commissioned in 2008 by the then Labour government) ‘Fair Society, Healthy Lives’ in which it was concluded that reducing health inequalities was a ‘matter of fairness and social justice’ and that ‘tackling social inequalities and tackling climate change must go together’. It recommended that reducing them would require action on six policy objectives:

  1. Give every child the best start in life
  2. Enable all children, young people and adults to maximise their capabilities and have control over their lives
  3. Create fair employment and good work for all
  4. Ensure healthy standard of living for all
  5. Create and develop healthy and sustainable places and communities
  6. Strengthen the role and impact of ill-health prevention.

The general election which the Conservatives won was premised on the illusion that Labour had spent too much and that it was necessary to restore the public finances to health. This, we were told, would necessitate a programme of austerity to cut public spending and balance the books. The government spent the next decade doing just that but at huge social cost as, a decade later, the evidence shows.

In February, just before Covid-19 began to take its toll both in lives and on the economy, The Institute of Health Equity published an update to mark 10 years from the 2010 report in which it highlighted the following:

  • People can expect to spend more of their lives in poor health
  • Improvements to life expectancy have stalled and declined for the poorest 10% of women
  • The health gap has grown between wealthy and deprived areas
  • Place matters – living in a deprived area of the North East is worse for your health than living in a similarly deprived area in London, to the extent that life expectancy is nearly five years less.

The comparison between the objectives in the original report and the current situation is stark. As Professor Marmot who is a director of the UCL Institute of Health noted:

‘This damage to the nation’s health need not, have happened … Austerity has taken a significant toll on equity and health, and it is likely to continue to do so. If you ask me if that is the reason for the worsening health picture, I’d say it is highly likely that is responsible for life expectancy flat-lining, people’s health deteriorating and the widening of health inequalities. Poverty has a grip on our nation’s health – it limits the options families have available to live a healthy life. Government health policies that focus on individual behaviours are not effective. Something has gone badly wrong.’

Addressing the Covid-19 pandemic and its on-going consequences has been made much more difficult as a result of the pursuit of unnecessary austerity driven by political aims and not financial necessity. Not only has our public and social infrastructure been devastated, but government policies have wrecked people’s lives – either through punishing social security reforms or wage policies designed to favour the interests of employers over employees. All being enabled by the lie that there was no money

Instead of prioritising the existing health inequalities that the original report revealed, the newly elected government chose, through its spending and employment policies, to purposefully ignore them. It pursued quite a different agenda which has proved to be more about reducing state intervention (with the incorrect narrative of unaffordability) whilst at the same time endlessly promoting the idea of personal responsibility and self-reliance.

Responsibility for the social determinants of health which should lie within the purview of government through its policies to ensure a healthy nation and economy, has thus been shifted downwards to citizens. The social and economic conditions in which people live determine both individual and national health and we have lost sight of the fact that the health of the nation is one of its most important assets. Poverty, poor wages and working conditions, the scourge of unemployment, a social security system unfit for purpose, poor housing, poor food, and a deficient education system are disturbing indicators that something is very wrong and demonstrate very clearly the toxic nature of market-driven policies deriving from neoliberal ideology.

At the same time, as a report published in February for the ONS (Office for National Statistics) ‘Social Capital 2020’ revealed, we are becoming an increasingly fragmented and divided society as trust in government has fallen and our sense of isolation and lack of community belonging has increased having a significantly deleterious effect on social cohesion.

So, when Boris Johnson and his cohorts began talking about levelling up, people began to feel hopeful that the government was beginning to take responsibility as a potential architect for restoring social cohesion through its spending and policy decisions to improve the lives of its citizens and create a society which understands collective obligation.

And yet to date, there has been little sign of government intervention on that score. In fact, the words ‘levelling up’ have yet to go beyond mere words. And indeed, as the debate about how the government’s vast fiscal injection will be paid for only this week, a Conservative MP suggested that the pandemic will make levelling up even harder, once again implying that scarcity of money will, in the end, put the brakes on further government action. It plays to our false understanding of how governments spend and allows the narrative of more taxes or perhaps another round of austerity to be justified.

The plain truth is that as we are increasingly learning government has become the agent of big business rather than the driver of social cohesion and well-being whilst at the same time acting as a cash cow for businesses, all without public accountability. Contracts being dished out left right and centre!

As has been noted in previous blogs the price we are paying is a heavy one. As voluntary organisations step in to bridge the gap whether it is university law students providing legal advice to plug the gap in access to justice, volunteers in the health service to support an overstretched NHS, or indeed those involved in food banks to keep hunger from the door of its many recipients we are being primed by an appeal to our goodwill to accept the idea that there is no alternative since public funds are we are told unavailable.

We are moving towards such goodwill actions becoming indispensable and the societal norm. Only last year the co-founder of Probonoeconomics Andy Haldane suggested that volunteering could help society and provide the NHS with skills which would otherwise cost ‘hundreds of pounds per hour’. At the same time, we have private residential care providers suggesting that robots could take the place of human contact in reducing loneliness amongst residents. When cutting costs and profit becomes the sole driver for human activity it is time to challenge such notions before it is too late.

Volunteering cannot become the default to plug those deliberately created gaps in health and social provision to serve a toxic market-driven ideology. Indeed, it could not fill those gaps adequately in the long term.

The implication that the government is financially embarrassed must be challenged. At every turn, we are treated to household budget narratives to defend government spending policy. And yet whilst the government can find billions for a test and trace service for Covid-19 (outsourced to private companies – Deloitte, Serco and G4S) it cannot find the money for publicly funded and delivered public service provision both at national and local level, a state-backed job guarantee or a basic living wage income to ensure that those who cannot work for any reason can live decently and without fear.

One of the key objectives of the 2010 report from the Institute of Health Equity mentioned at the beginning of this blog was to create fair employment and good work for all.

Good, well-paid employment either in the private or public sector is one of the vital ingredients for overall economic stability and a healthy society. The role of government therefore should be to ensure full employment as a policy objective to create stability both in normal and abnormal economic times such as these.

And yet whilst government continues to grapple with the economic fallout from Covid-19, which is not over by any means, its Chancellor seems to be sticking to his guns on closing the furlough scheme regardless of its implications and is supported by the Bank of England’s chief economist Andy Haldane who has warned against its extension on the basis that such a move would prevent a ‘necessary process of adjustment’ taking place.

On that basis, it would seem that rising unemployment will be in their eyes an acceptable price to pay for this shakeout whilst ignoring its damaging consequences on the economy and the knock-on effects on people’s financial stability and their health. Can we also suppose that it will likely be used to drive a further extension of a low wage, insecure employment economy?

The former Prime Minister, Gordon Brown at the same time has attacked the Bank of England for failing to place sufficient emphasis on job creation. As the architect of the supposed central bank independence he claimed would give it the freedom to control monetary policy. But this was, in reality, a convenient sham – a mechanism to sidestep government’s responsibility as an elected body to deliver economic stability. As Professor Bill Mitchell wrote in 2017 ‘The point is that central banks can never be independent of treasury departments and claims to the contrary were just part of the depoliticization of policy that accompanied neoliberalism’. The central bank is the servant, not the master.

Economic stability is in the hands of government through the policy choices it makes and its spending decisions. It alone has the power, through its currency sovereignty, to ensure full employment. Given the dire predictions for the economy in this obvious time of great change related to the pandemic and also the need to address climate change, we need a government committed to price stability through the implementation of a centrally funded and locally organised job guarantee to guide us through these difficult times. Whilst magic bullets don’t exist, it will be important to avoid a 1930s scenario of mass unemployment and ensure a just transition whilst the great climate change shakeout progresses. We need radical solutions, not next week, next month or next year we need them now.

And yet while Rishi Sunak talks about tax increases to pay for the coronavirus bailouts and the Treasury Committee suggests laying out a road map for the autumn budget for repairing the ‘hole in the public finances’ with a proposal for a temporary abandonment of the triple lock on pensions, the public are once again being primed for bad news. Whilst tax reform should be on the agenda, raising taxes at this juncture would be a foolish path to take which would do nothing to support the economy. And instead of repairing the ‘hole in the public finances’ a monetarily savvy government would be looking to repair the very real holes in the public and social infrastructure it alone has been responsible for over the last 10 years.

With the government we currently have in place, we might be whistling in the wind as it clearly has other objectives and other estates to serve. However, that does not mean that we, as an increasingly informed public through the power of civil movements, cannot force the sort of reset that would benefit ordinary people by redefining the role of government as a servant of the people rather than the rich and powerful global interests which currently influence policy and economic direction.

 

 

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Let’s not let the debt doomsters rule the roost!

Doing so will come at a huge human and planetary cost.

Silhouette of a businessman outside in a thunderstorm holding an umbrella and brielfase with lightning flashing behind himImage by Gerd Altmann from Pixabay

In this week’s news the train crash economics of neoliberalism continues to thunder on. The government, still ensconced in its ivory tower, continues to avoid taking any responsibility for its actions or policies passing the buck at every turn. And public money we didn’t apparently have for public services these last ten years continues to be poured into the bank accounts of its business friends with no accountability.

As the government’s furlough scheme draws to a close, M&S announced earlier this week that it is to cut 7000 jobs in the next three months and Pizza Express is to close 73 outlets making 1100 people redundant. This will add to the growing number of already unemployed which without continuing government action will set to increase over the next few months.

The actual shape of the labour market has been masked by the Chancellor’s job retention scheme which has kept people off the unemployment register. With vacancies having halved during the second quarter along with the doubling of the claimant count (figures from the ONS July 2020), which already stands at 2.7 million, the future is looking bleak for many in the aftermath of Covid-19. Add to this the reliance of the economy on the service sector, (retail, hospitality and leisure) which employs many workers in precarious, low paid, casualised employment and which has been hardest hit since lockdown.

Unless the government chooses to step in as the employer of last resort with a Job Guarantee or provide local authorities with the funds to hire workers lost to the austerity cuts in the regular public sector, then unemployment is destined to rise.

Covid-19 has laid bare the need for additional teaching staff, healthcare workers and prison staff. In every public service, a case can be made to increase staff numbers, hired into well-paid unionised jobs. With an expanded public sector operating alongside a government-backed Job Guarantee offering employment opportunities for those who need retraining to transition back into regular employment, we could avoid the worst consequences of a damaging recession and provide a stable framework for the future economy.

The government could also, if it chose to, invest significantly more in higher education to ensure that the country has sufficient engineers, nurses and teachers to secure the nation’s own productive capacity rather than stealing those workers from nations facing their own crisis.

The IFS reporting also this week noted that English councils are facing the prospect of having to cut even more services should the government fail to meet the additional costs of their spending on the Covid-19 pandemic. This will add to the pain that has already been experienced as a result of stretched local government budgets following cuts to their funding which has left them increasingly cash poor and having to make difficult decisions on public service provision to balance their budgets. With some already having faced the prospect of bankruptcy, even Tory-run councils, the future of local governments is also looking rocky. It reinforces, as already mentioned, the need for both increased funding and an expansion of local authority services.

In the same week as Matt Hancock, the Secretary for Health and Social Care, announced the abolition of Public Health England (in an exercise in passing the blame to take the heat of the government’s appalling handling of the Covid-19 crisis), Deloitte was awarded a government contract – adding to the already huge number of private companies which have benefited from public money both before and during the pandemic crisis. The myth of private sector efficiency lives on despite the growing evidence that public services would be better provided publicly – whether it’s the NHS, social care, the probation service, local government, or the test and trace programme contracted currently to the discredited private company SERCO.

Since the pandemic began, an estimated 20,000 households have been made legally homeless and 230,000 people face the prospect of eviction unless the government extends its temporary ban which it has renewed until September. Food banks continue to bear the brunt of years of austerity and the Covid-19 fallout with hunger being normalised rather than questioned as to why it is happening. Whilst the richer amongst us can take advantage of a temporary ‘eat out to help out scheme’ thus reinforcing the vast inequalities that exist in this country, it will do nothing to address both the systemic problems caused by the policies of successive governments, 10 years of politically induced austerity and the consequences of Covid-19 on the economy.

While we all clapped for the NHS (including Boris Johnson), nurses have lost out on salary increases and UK families who lost loved ones caring for patients will lose eligibility for welfare benefits if they take the compensation package of a measly £60,000. All at the same time as Dido Harding is appointed head of the new Public Health body to replace Public Health England despite her widely criticised leadership of the SERCO run test and trace programme and Sajid Javid, the former chancellor, takes an extra job as an advisor to JP Morgan on an undisclosed salary. These appointments add to the already long list of revolving door politicians on both the left and right who have joined the ranks of advisors to private industry including healthcare. Jobs for the boys and girls.

While the government sits in its ever-higher ivory towers praising its ‘world-beating actions’ and feathering the nests of corporations, the realities are stark for many. The economic ideology which has driven government policies on both sides of the political spectrum for over five decades is encapsulated in the ongoing redistribution of wealth upwards, privatisation and the dismantlement of our public and social infrastructure. The much-lauded shrinking of state involvement in the public sphere in pursuit of efficiency is a mirage. Instead, we have its marketisation acting as it does as a cash cow for corporations and which has also to their benefit created a distorted, unregulated capitalism with the sole objective of keeping the profits rolling and the power in the hand of a small elite. All at the expense of the health of the economy and its citizens.

And yet despite the fact that the pandemic has increasingly revealed the gaping holes in this pernicious ideology, right on cue politicians, institutions and journalists have begun yet again to reinforce in the public consciousness that there will be a price to pay for this vast (but necessary) fiscal response to the pandemic which should have proved beyond all doubt that the austerity narrative of money scarcity was a con job!

The alarming headlines in the media this week are designed to instil fear as they report that government debt hits £2tn for the first time ever. The Telegraph reported that ‘Britain is about to be sucked into a catastrophic doom loop with no escape hatch’ as government,  the author posits, will have no option but to increase taxes in an economy that is unable to generate enough money to pay for the government’s huge expenditures.

Then comes along the apparently left-wing London Economic, which one might have hoped would have a different emphasis than the size of the national debt, focusing on the amount of the UK’s ‘debt pile’ and the vast ‘borrowing’ figures. Instead of challenging Rishi Sunak who it quotes as saying ‘This crisis has put the public finances under significant strain …. today’s figures are a stark reminder that we must return our public finances to a sustainable footing over time, which will require taking difficult decisions’ it appears to accept the narrative that there will be a future price to pay. Instead of examining what that spending represented in terms of a vital fiscal injection to save the economy – however skewed it was towards the interests of business or examining who were the real beneficiaries of that spending it focuses on the debt pile instead! If it had been a left-wing government response to the pandemic or addressing inequality and climate change how would they have pitched their argument?

Instead of pointing out the harmful consequences of the previous 10 years of austerity on the economy and people’s lives it goes along with the prospect of more cuts to spending in the future without questioning the premise for that possibility.

Even Annaliese Dodds, the Labour Shadow Chancellor, couldn’t get it right earlier this month. Spoiling her statement that continuing financial support for jobs and businesses would be vital until confidence and growth returned, she reinforced the household budget message by talking about putting off measures to rein in the UKs ballooning state debt. She added that whilst interest rates remained low the government’s ‘number one goal’ should be to keep the economy functioning rather than risking growth with ‘fiscal tightening measures’ to reduce the ‘debt mountain.’ Heart in the right place but with the wrong narrative.

Whether it’s reference to debt piles or mountains, borrowing and taxation to fund government spending household budget economics rules whichever side of the political spectrum you are on whether you are a deficit hawk or a deficit dove.

Even on the other side of the pond, as the race for the presidency hots up, only this week a Joe Biden aide Ted Kaufman, echoing Liam Byrne’s note left in the Treasury in 2010, suggested that if the Democrats were to win the ‘pantry is going to be bare’ as a result of the growing deficit and therefore spending options would be limited due to the rising national debt. Not exactly an invitation to put an X on the Democrat voting slip!

It has to be said that Rep. Ocasio-Cortez in raising the alarm by saying ‘We need massive investment in our country, or it will fall apart. To adopt … ‘deficit hawking now, when millions of lives are at stake is utterly irresponsible’ is, without doubt, speaking for us all if we did but know it.

Huge damage has already been done by the previous 50 years of a malignant economic ideology which has been compounded by a household budget economics understanding of the state finances and 10 years of the politics of austerity. To be talking again in terms of reining in expenditure whether in the medium to long term can only make things worse for the lives of citizens. As Stephanie Kelton said in January whilst in Adelaide ‘Government deficits are normal and even necessary to the health of most economies’.

The spectre of borrowingcontinues to haunt the public understanding of how the government funds its deficit as does the prospect of higher taxes to pay back what has been borrowed.

Only this week the BBC published a ‘borrowing’ explainer in the context of Covid-19 saying that such measures will prove expensive because when the government’s income reduces because there are more unemployed it leads to a tax shortfall which it then went on to explain meant that the government would have to borrow on the financial markets by selling bonds to fund the deficit.

But the reality is something quite different. What if we could knock this borrowing and debt spectre right off its perch?

In the minds of a currency user, the BBC’s description sounds like a logical proposition. When you spend beyond your income you may have to finance it by getting into debt by borrowing from a bank or building society or worse loan sharks charging huge interest. However, the state finances do not operate in this way. Whilst from an accounting position it certainly looks as if the government has to borrow, this is just smoke and mirrors designed to keep the household budget mirage going and the focus on fiscal discipline rather than delivering the public purpose within the context of finite real resources.

In short, that is because as the anacronym S(TAB) framework explains – spending precedes taxing and borrowing. Monetary sovereign countries like the UK as currency issuers can always meet their liabilities, provided they are denominated in that currency. As the Stirling Wolf noted in his excellent ‘borrowing’ explainer on how an independent Scotland would actually pay for its spending ‘the government is ultimately the boss’.

If the left-wing finds both the right leaders and the will to deliver a truly progressive agenda, then it will have to accept that shifting the narrative away from household budget language will have to play a role. It cannot as Biden’s Aide suggested fall back on images of the treasury being empty, if and when it comes to power which will, in turn, limit its political agenda. That would be more than foolish, it would be indefensible at a time when the challenges the world faces in terms of rectifying the huge wealth disparities that exist, dealing with the prospect of massive global unemployment as a result of the pandemic and finding solutions to the climate tsunami which is bearing down upon us. It would quite simply reinforce yet again the images of a scarcity of money and the need for fiscal discipline rather than meeting the needs of the economy, citizens and the planet.

It behoves a truly progressive left to challenge the economic shibboleths surrounding money and debt and unpick these destructive narratives. We need a government to take responsibility by recognising the power of the public purse. Otherwise, at some point in time, the ‘how will we pay for it?’ story will rule the day yet again at huge human and planetary cost. And we will rue that day.

 

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What could a Post-Covid Economy look like? GIMMS Associate Philip Armstrong explained at our online event this month

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The post Let’s not let the debt doomsters rule the roost! appeared first on The Gower Initiative for Modern Money Studies.

We pay for it by spending the money

We would like to share an article by GIMMS associate Alan Hutchinson.  This article was posted on his excellent website Matches in the Dark here.

Alan Hutchinson portraitI use this as supporting notes for a talk I give on Modern Monetary Theory (it’s missing the jokes and the audience participation!). By Internet standards it is quite long, but it provides a good overview and should take no more than 30 minutes to read. If you want a quicker read I have something much shorter. This is a living document and will be updated to reflect changes to the talk and changes to economic data.

Let’s start by dispelling a myth: Modern Monetary Theory is not something that a government can choose to adopt. MMT is not something that can be turned on or off. In and of itself, MMT is neither of the Left or of the Right and it is not a policy, although there are policy prescriptions which flow from it. Modern Monetary Theory is simply a description of how the monetary system works — right here, right now.

In providing that description, MMT lifts the veil on a carefully crafted fiction about spending and taxation, one that provides the ideological backing for the form of late capitalism we commonly call ‘neoliberalism’. Unfortunately, that fiction is accepted as a universal truth by almost everyone, irrespective of their political affiliations.

Now, we all have some idea of how money works and lots of opinions about how it should work. I’m going to ask you to temporarily suspend those ideas and opinions while you read this, because MMT turns many of them upside down. Of course, it’s not just MMT that challenges the average person’s economic world-view and many are surprised by facts which are uncontested by mainstream economists. For example, I often start my talks with a question for the audience:

For every £100 the government spends into the economy, how much is returned as tax?

A typical lay audience will answer around £50. As I write this, the government gets back at £98 for every £100 it spends. Much of this article is about why it’s £98 and whether or not this is a Good Thing.

MMT may only just be seeping into the public consciousness, but the Financial Times has been writing about it for several years now and one of their journalists, Izabella Kaminska, has a good way of describing the effect MMT has on our understanding.1 She compares it to viewing an autostereogram — those pictures in the ‘Magic Eye’ books of the 1990s. Autostereograms appear to be nothing more than a random collection of coloured dots, but when you stare at them in just the right way a hidden three-dimensional image appears.2

Even with only a basic understanding of MMT, you will find that everything looks different — you start to see what’s hidden inside all the random noise that accompanies talk about money and the economy.

So, how does MMT help our understanding of economics? How does it help us build a better society? To keep this short, I am going to cover the two most important aspects:

  • First, MMT neuters the standard capitalist retort: How are you going to pay for it? In the new paradigm the question is rendered meaningless because we pay for it by spending the money — it’s as simple as that.
  • Second, MMT shows that unemployment is a choice made entirely and exclusively by the government of the day. The government chooses the unemployment rate.

Once these two points are understood by a (truly) progressive UK government it can set about implementing a radical economic plan, one which is built around first-class public services and a Job Guarantee programme. The Job Guarantee is at the heart of MMT because it does two things: it provides a meaningful job and a true Living Income to anyone who wants one, and it helps to control inflation.

In a nutshell then, MMT sweeps away all the nonsense about there not being enough money and all the nonsense about having to tolerate unemployment in order to keep inflation down.

Modern Monetary Theory is a descriptive endeavour which leads to some quite startling and world-changing prescriptive conclusions. Let’s start with the descriptive component. It details how the monetary system of a nation like the UK has worked since 1971, which was when the 1944 Bretton Woods system of international payments collapsed and the last vestiges of the gold standard were abandoned. To properly understand MMT you need to know a little bit about gold.

Prior to 1971, the UK government’s policy options were constrained by the gold standard. Sterling wasn’t directly convertible into gold, but the value of the pound was fixed against the US dollar and that was convertible. Having to defend the pound in a fixed exchange rate system forced the UK government to adopt policies which were not in the public’s best interest.

In simple terms, the number of pounds in circulation was restricted by the amount of gold and dollar stocks held by the government. The money supply had to be more or less static — if the government spent £100 into the economy, it had to remove £100 through tax or otherwise drain it by issuing bonds. The government appeared to be revenue constrained — an illusion was created that it could only ever get its money from taxes, with any shortfall covered by an action which came to be known as ‘borrowing’.

After 1971, the pound was no longer pegged to the dollar and we entered the current era of free-floating currencies — where the value of the pound is decided on the international markets. Sterling became a fiat currency, one that is not backed by a commodity or tied to a foreign currency. The word ‘fiat’ is Latin for ‘let it be done’ and indicates that the currency is simply legislated into existence. The government says this is the currency and so it becomes the currency.

The policy limitations that resulted from the gold standard and fixed exchange rates no longer applied. With a fiat currency the idea of a ‘run on the pound’ is a meaningless concept and the government no longer has to contend with currency speculators or ‘bond vigilantes’. Nor does it have to worry about ‘propping up the pound’ or, to a large extent, the fact that we import more than we export.

Most importantly, there is absolutely no way the UK government can be forced to default on debt repayments. Default can only be forced on a country which is not sovereign in its currency. That includes all countries which use the euro because they are not monetarily sovereign. In this respect, Germany is no better off than Greece — both can be forced to default. Anyone, be it an economist, a politician or a newspaper columnist, who claims that the UK is at risk of default is talking nonsense.

All the worries about default or a ‘run on the pound’ belong to the 1960s and it’s staggering how they are still indelibly imprinted on the collective mind.3 Not having to deal with all these issues means that the government can use all the economic tools at its disposal to achieve domestic objectives — which should always include full employment.

Moreover, the claim that the government is revenue constrained — that taxes pay for spending — no longer makes any sense. From the government’s perspective, the age of money scarcity ended in 1971 and it’s been like that ever since.

Unfortunately, the illusion of revenue constraint is still with us today and that’s because gold-standard thinking suits the agenda of the rich and powerful. The economic elite — the section of society which we now call the 1% — set and control the dominant narrative in economics, so almost everyone still believes that government can only spend what it taxes or borrows.

I probably have to careful here that I don’t come across as a conspiracy theorist. I am not suggesting that there is a secret cabal busy organising a disinformation campaign to persuade us that tax funds spending. The economic elite believe this nonsense just like everyone else. But because it’s the stuff which justifies the elite’s position in society, it’s the stuff which gets column inches and airtime.

The elite and their political supporters achieve this by framing the debate in terms of simple metaphors related to our everyday lives. In particular, the idea that the government is constrained like a household is propagated by messages like:

“we need to balance the books and that will mean tightening our belts”;

“we must pay our way in the world”;

“Labour maxed out on the credit card.”

Don’t for one minute think that the household budget stories are confined to the political Right. When asked by Martin Wolff of the Financial Times ‘[Do you] share the view that ordinary people do not understand economics?’, John McDonnell answered:

Most ordinary working people know how to budget better than any politician, largely because they are living off low wages and they have to, therefore, make sure they can get to the end of the week. The best budget person I ever met that understood real economics was my mum. My dad would come in, hand her the wages and, because it was that sort of generation, she would look after the household and we would get by.4

Progressives across the political spectrum accept these assertions without challenge and unwittingly reinforce them with talk of increasing taxes on the rich and corporations. It’s a position which supports the status quo and stifles any meaningful debate.

Now, before I go any further, I must stress that although Modern Monetary Theory assists us in understanding the monetary system in any country, the policy prescriptions we come to later only apply to countries which are sovereign in their currency. There are three criteria which define a country with a sovereign currency:

  • it issues its own currency — so no using a foreign currency;
  • its currency floats free on the international markets — so no peg to another currency;
  • and it does not have debts in a foreign currency — so no borrowing from other countries or from the IMF.

MMT prescriptive policies apply to the UK, the United States, Japan and many other countries. The policies would be problematic if applied in Eurozone countries, be it Germany or Greece, because they all use a currency which is, to all intents and purposes, a foreign currency.

Don’t pay any attention to anyone who says:

What about Argentina? They have their own currency and they went bankrupt, didn’t they? What about Zimbabwe? They had their own currency and that didn’t stop all that inflation. And what about the current crisis in Venezuela?

Argentina does have its own currency, as did Zimbabwe when it went into meltdown. But both countries also had masses of foreign debt and at the time of the Argentinian crisis, the peso was pegged to the dollar. As for Venezuela, there is nothing MMT can do to ameliorate the combined effects of governmental incompetence, an economic elite determined to regain control and hostile interference from a powerful foreign entity.

The textbook way to further explain MMT usually involves an analysis of the flow of money between different sectors of the economy. The trouble with this route into MMT, the sectoral balances approach, is that it involves a little bit of double-entry bookkeeping — it’s not difficult, but some people may be put off by some of the terminology.

Here’s another way to get you started which requires no prior knowledge — all you need is an opinion about other peoples’ opinions.

Suppose a poll is carried out tomorrow, with a large and representative sample of the electorate. There are just three questions, the first two of which are very simple. See if you can guess how most people will answer them.

Here’s the first question:

Do you believe that the government deficit should be cleared within the next twenty years?

Given the current hysteria about deficits, I don’t think the answer is in doubt — most people are going to answer ‘yes’.

The thing I find worrying about this question is that a lot of people will answer ‘yes’ when they don’t really know what the deficit is. Moreover, I’m surprised by some of the people who struggle to provide a definition. I know quite a few academics who, with no hint of shame, admit that they don’t know what the deficit is — yet they still hold an opinion about it. For readers who are little bit unsure, the standard definition of the deficit is the difference, over a given period, between what the government spends and what it gets back in tax.

The second question is:

Do you believe that everyone should have the opportunity to save a small amount from their income?

Saving is usually seen as a good thing, so they are probably going to say ‘yes’.

These two answers demonstrate two things: that most people don’t understand how our system of money works; and that they have the ability to hold two contradictory beliefs at the same time.

It is impossible for a country like the UK to eliminate the deficit and still allow the domestic private sector to increase its stock of savings. Believing that the deficit can be cleared while we are still increasing our savings is just Orwellian doublethink.

We can start to understand the connection between the deficit and savings when we answer the third question. It’s a bit more complicated:

Suppose the government pays two people £100 each for some work. One is a window cleaner who is paid the minimum wage. The other is a PR consultant whose salary is £150,000. Now, a proportion of each £100 is going to go back to the government in the form of tax. Does the government get more back in tax from the £100 it paid to the window cleaner or the £100 it paid to the PR consultant?

How are people going to answer this one? It’s certainly a lot less clear-cut than the first two questions, probably because it appears to introduce a political element. It certainly seems more ideological, but it’s really no different from the first two questions. It’s just that most people see the earlier answers as obvious and ‘common sense’.

I find that people answer the third question depending on where they are on the left-right/poor-rich/north-south spectrum. Those at one end of society will say that highly paid consultants, being ‘part of the 1%’, will pay less tax because they can afford fancy accountants. At the other end of society is the argument that window cleaners, being members of the ‘devious lower orders’, will avoid paying tax altogether by insisting on being paid cash-in-hand.

So, what is the real answer? Well, it’s that in the long run there is no difference. The government gets exactly the same amount back in tax from the £100 paid to the window cleaner as it does from the £100 paid to the consultant. Over a sufficiently long period, the government will get back in tax pretty much all that it spends, no matter where it spends it and no matter what the tax rate is.

However, over the short term, there are significant differences as to how the spending affects the economy. Simply put, it’s better to spend the money on window cleaning.

Most people think the idea that government gets back all its spending irrespective of the tax rate is just crazy talk. They think it’s the ramblings of a loon because they have been conditioned to think of government spending and taxation in a way that supports a fundamentally neoliberal agenda. Specifically:

  • they think that tax is a burden placed on the private sector to enable the government to get its spending money;
  • they think that money is taxed only once, reinforcing the burden concept and leading them to focus entirely on the tax that they alone pay;
  • they have no regard for what happens when they spend their income or where it came from in the first place;
  • they don’t realise that all government sector spending initiates a spending chain in the non-government sector;
  • they don’t realise that at each link in that chain some tax is likely to be paid — income tax, national insurance, corporation tax, VAT, stamp duty, import tariffs;
  • and they can’t see that this means that government will always get back almost all that it spends.

To see how this works, let’s look at one of the payments from the question above and analyse the spending chain it creates. I am assuming a simple tax system where all transactions are taxed at 20%.

  • The government pays £100 to a window cleaner;
  • She pays 20% tax on the £100, so £20 goes straight back to government;
  • She spends the remaining £80 at Aldi for a week’s worth of food and essentials for herself and her daughter;
  • Aldi pays 20% tax on the sale and £16 goes back to the government;
  • Aldi uses the remaining £64 to pay someone to run its tills for a day;
  • He pays 20% income tax and government gets £13 back;
  • He is left with £51, which he uses to buy a train ticket to go and see his mum;
  • Virgin Trains pays 20% tax on the ticket price and another £10 goes back to government;
  • Virgin uses the remaining £41 to pay for a window cleaner to clean the windows at one of its stations.

And so it goes on, money moving along a spending chain (which sometimes doubles back on itself).

It is just a simple geometric progression where government spending causes taxation — not the other way around. This is a key point in MMT: the spending comes first and tax is a secondary operation. It’s the spending that makes the tax happen. Government spending bounces around the economy — generating income for households and firms — and a little bit goes back to government at each link in the chain.

If you have difficulty with the concept of spending preceding taxation, just ask yourself this question:

Where does the money to pay taxes come from in the first place?

Money in a modern economy is not something that pre-exists within the economy. It always comes from a higher source. Even in economies where money was based on precious metals, it was usually issued and controlled by a higher source. Consider the Robin Hood legend and money taxes (taxes paid in crops or labour are different). The king decreed that money taxes were to be paid in silver coins and used a Nottingham-based proxy to collect them. Where did those coins come from in the first place? What would happen if the king didn’t tax them back?

Our little model has shown that £100 spent by the government has spread out into the economy, creating £336 in personal and corporate income, and £59 has gone back in tax.

But we’ve only followed the spending chain for a few links. Any mathematician will tell you that, in this idealised model of the economy and with a flat transaction tax set at 20%, the process will continue until the government gets back all £100 and income amounting to £500 has been generated. What’s more, the government will still get £100 back if the tax rate is reduced to 10% or increased to 30% — there will just have to be more links in the chain. In the long run, and in this idealised model, changing the tax rate has no effect on the total tax take.

You may ask why we don’t reduce income tax to a flat 5% then. That’s because tax has purposes other than serving as a drain of government spending, the most important being that it allows the government to direct the use of resources — people and stuff — for the benefit of all. Tax takes away some of our purchasing power and in doing so leaves resources unused. The state can then buy those resources and deploy them to further the public purpose.

The real purposes of tax were explained in the 1940s by the US economist and central banker Beardsley Ruml. He saw tax as has having multiple uses, none of which had anything to do with funding spending:

  • to stabilise the currency;
  • to discourage bad practices and encourage good ones;
  • to provide clarity about spending by appearing to allocate tax to specific things;
  • and to ‘express public policy in the distribution of wealth and of income’.

Ruml summed up all this rather succinctly in the title of his article:

Taxes for revenue are obsolete.5

His work led to the MMT concept that taxes drive currency. This is a core concept which answers the question:

Why would anyone accept money that is not backed by gold?

They accept it because it’s the only thing with which they can pay their taxes — and a cosy little cell is always available for anyone who doesn’t pay up. Tax is not designed to give people a nice warm feeling inside when they pay it. Tax is not ‘the price you pay for living in a civilised society’. Tax is coercive. Tax is an expression of raw state power.

For some people, this is where the cognitive dissonance kicks in and they start to feel uncomfortable with MMT. They feel a bit queasy as the truth materialises out of the background noise and they realise that everything they believed about money and the economy isn’t true any more.

But let’s get back to our spending chain. Why does the government only get back £98? Surely if we follow the maths the government will get back all £100. What happened to the other two quid? Well, the bit that the government doesn’t get back is the bit that isn’t spent — twenty-pound notes hidden under a mattress, money in an ISA or retained corporate profits. Anything that isn’t spent is, by definition, our savings and money that is saved breaks the spending chain. Saved money can’t cause any further tax to happen.

Therefore, in any given period the difference between the amount the government sector spends and the amount it gets back in tax is equal pound-for-pound, penny-for-penny to the increase in the savings of the non-government sector.

Hang on a minute! Isn’t the difference between what the government spends and what it receives in tax the definition of the deficit? Of course it is. The thing we call the ‘deficit’ (which is universally perceived as a Bad Thing) is nothing other than an accounting representation of the aggregate increase in savings (which are universally perceived as a Good Thing). The deficit is savings.

It’s not accidental that the public suffers from deficit doublethink and it’s the result of 40 years’ worth of clever PR. Imagine you were a neoliberal strategist, hell-bent on reducing the size and reach of the state. Which term would you use to describe the difference between government spending and tax receipts? Deficit or savings? Terrifying black hole or national nest egg?

MMT goes on to show that net financial assets — which is just a fancy name that economists use for ‘savings’ — cannot come from anywhere other than from government spending. That’s because the real money in the system always comes from government. We’ll look at this in more detail later.

So far, so straightforward. However, there may be a bit of a problem: some of the terminology may be confusing you. I’ve said that the government ‘gets back’ through tax almost all that it spends and this may cause you to think that the money it ‘gets back’ is somehow available to be spent again. It isn’t, and this is where MMT provides a critical insight into the true nature of government spending. All UK government spending is new money which is eventually destroyed by taxation. The government doesn’t really ‘get back’ the money it taxes out of the economy — the money just ceases to exist.

I have also used the term ‘non-government sector’ rather than ‘private sector’. This is deliberate and is essential for an understanding of savings. The thing that MMT calls the non-government sector is made up of the domestic private sector — firms and households here in the UK — together with the foreign sector. When foreigners are paid for the things we import they accrue financial assets denominated in Sterling. When we export things we get some of these financial assets back, but we export less than we import and there is an imbalance in favour of the rest of the world.

It is important that the inclusion of the foreign sector in the non-government sector is understood. A common and invalid criticism of MMT is that it only considers a closed domestic system, without regard for the rest of the world. Any confusion usually arises from a deliberate misinterpretation of the term ‘non-government sector’.

This is where the concept of sectoral balances comes in, the bit that relies on double-entry bookkeeping. The sectoral balances approach says that however we split the economy into chunks — sectors — all those chunks must balance each other. The whole must sum to zero. This is because, just like a company balance sheet, for every asset in the Sterling economy there is always a corresponding liability and for every borrower there is always a lender.

Suppose we split the economy into government and non-government sectors, then if one sector is in surplus the other must be in deficit. The accounting tells us that it cannot be any other way. If the non-government sector is in surplus because of its desire to save, then the government sector must be in deficit. You can’t get away from this fact and no economist or chancellor will dispute it.

Let’s look now at a three sector model, one made up of the government sector, the domestic private sector and the foreign sector. A few years back, before the Coalition took over, the government sector deficit was 10%, i.e. taxes destroyed about £90 for every £100 of government spending and £10 ended up as savings either here or abroad. The savings were split roughly fifty-fifty between us (the domestic private sector) and the rest of the world (the foreign sector). For each £100 the government spent about £5 ended up as financial assets held by UK households and firms, and £5 ended up as financial assets held by foreigners.

But then along came Cameron and Clegg who told us that the deficit was a Bad Thing and had to be eliminated. Hence austerity. But if you eliminate the deficit you also have eliminate someone’s savings and that is precisely what has happened. We are still importing the same amount of stuff as before and the foreign sector is still accruing savings amounting to £5 for every £100 of government spending. That £5 is being paid by £2 government deficit and £3 worth of dissaving by the domestic private sector. We are no longer saving overall. We are running down savings, selling assets or going into debt just to keep the country going. And we haven’t seen this level of dissaving pretty much since records began. It is not sustainable and is precisely the sort of thing that leads to recession.

So, not only does the ‘deficit’ have to cover our desire to save, it also has to cover our desire to import and that is always balanced by the Chinese and German desire to hold Sterling savings.

Now, the operative word that I have just used is ‘desire’ and it blows a big hole in the ideology of austerity. For the last 40 years, governments of all persuasions have told us that the deficit is a Bad Thing and then pretty much ignored it. Since 2010, however, the deficit has become a political weapon and the government has persuaded almost all of us that it must be eliminated.6 The government claims to have the power to rid us of the deficit and they tell us that the form in which that power must be exercised is austerity. It certainly sounds plausible: if the government spends less then surely the deficit will be reduced, won’t it?

But we now know that the deficit is actually a measure of our desire to save, our desire to import and the Chinese desire to save in pounds. So, deficits are neither good nor bad. They just show that money is flowing from the government sector to the non-government sector. The government creates the money out of nothing and some of it becomes our savings.

A government surplus shows the opposite — that the state is removing money from the non-government sector and destroying it. If we are going to continue to pay our taxes then, in aggregate, we are going to have to economise. The population as a whole will either have to reduce its spending or run down its existing savings. Imagine what that does to the spending chains and the livelihoods which depend on them.

If the administration doesn’t understand this, or chooses to conceal its understanding for ideological reasons, it is quite likely that the country will be worse off in terms of employment, health, happiness and all the other things that make up our collective well-being.

You can certainly try to debunk the concept of sectoral balances, but be warned: you will first have to disprove the science we call ‘arithmetic’. You will have to show that 2 − 2 ≠ 0. Good luck.

Right, just to make sure you are keeping up, here’s a quick recap of the two main points so far:

  • First, the ‘deficit’ is just another name for the flow of money into savings, both domestic and foreign, that takes place in the Sterling economy over a given period. Oh, and the thing we call the ‘National Debt’ is just an accumulation of previous deficits. The ‘debt’ is just the total stock of money held in savings at any given moment. The deficit and the debt are not things that we — or our grandchildren — ever need to worry about.
  • Second, spending precedes taxation. At the risk of sounding like Doctor Who, we need to reverse the polarity to understand the economy. Government spends new money into the economy and it is gradually destroyed by tax. The spending effectively pays for itself, so the question ‘How are you going to pay for it?’ is meaningless. We pay for it by spending the money.

Now, this bit about the government getting back £90 for every £100 it spends sounds too good to be true, doesn’t it? This seemingly magical rule doesn’t apply to you or me, to the corner shop or to the trans-national corporation. When we spend we get goods and services in return. When government spends it gets goods and services and it ‘gets back’ the money in tax. It’s one of two reasons why the government budget should never be compared to a household budget.

The other reason is that the UK government is the monopoly manufacturer of Sterling. Government is the currency issuer. A household, like everything else in the non-government sector, is a currency user.

I am going to make a quick detour at this point and talk briefly about banking. Some people are concerned about the apparent power that banks have to create money. It’s true that the banks create out of thin air an awful lot of stuff that people like to call ‘money’ and the economy would collapse without it. However, what’s always missing from these worrying analyses of bank lending is that all bank credit sums to zero. Every asset created by the banks always has a corresponding liability and any ‘money’ created when a loan is made is destroyed when the loan is paid off.

In fact, banks don’t create money; banks extend credit. And this means that savings can never come from bank loans. If you believe that net financial assets can come from bank credit then you believe that borrowing £100 from a bank at 6% and putting it in a building society account that pays 2% can be classed as ‘saving’.7

The difference between the money created by government and credit issued by banks becomes apparent if we think of government spending as an ‘interest-free loan’ into the economy. It’s a loan that’s gradually ‘paid off’ by the taxes that are raised at each link in the resulting spending chains. Except that it’s never quite paid off because we choose to save some of it. Try that with a bank loan and see how far you get. You have to pay off a bank loan in full and you have to pay interest. Wouldn’t you rather see poverty reduction enabled by government ‘loans’ than by payday loans?

Which brings us back to government being the only entity which can issue Sterling. To get savings in the system we have to have a special type of money — economists call it high-powered money — which is injected into the system from outside the system. All bank-created money is inside the system, but every penny of government spending is high-powered money.

The upshot of all this is that the UK government never needs to ‘borrow’ and — here’s the important bit — the government can always create as much currency as it needs. That means the government can buy whatever it wants that is for sale and priced in pounds.

At this point in the discussion the mainstream economists, locked into a world-view based on gold standard thinking, will jump in, screaming:

See! These MMT crazies think the government can just keep on printing money until the cows come home. We’ll be ruined by inflation! We’ll end up like Weimar Germany or Zimbabwe! We’ll be issuing trillion pound notes!

Well, no we won’t. All spending, whether by the government or the private sector, carries a risk of inflation, but money alone does not create inflation. The risk depends also on the availability in the economy of real resources — people and stuff. Sure, the UK government can always win a bidding contest with the private sector for any resources that can be bought with pounds, and this may force up the price if the resources are limited and there is significant private sector demand for them. So, yes, the government does need to be mindful of its unique power.

But what if the government were to buy up all the things which nobody else wants? After all, it’s difficult to force up the price of something if there is no demand for it.

Unfortunately, there isn’t enough unwanted stuff in the real economy on which the government can usefully spend its money. There are, however, lots of people who are classed as ‘unwanted’ — millions of them, in fact. By definition, the unemployed and the underemployed are unwanted in that they don’t attract a bid price from the private sector.

This is where the Job Guarantee comes into play. It is a core part of MMT — it’s the prescriptive bit — and it’s important because it helps maintains price stability. It helps control inflation through a constraint on government spending. But it’s not a revenue constraint; it’s a real resource constraint.

The dominant economic models tell us that there is an inverse relationship between inflation and unemployment. Mainstream economists, including all those Nobel laureates, say that attempting to bring unemployment down will always put inflation up. They say that, if we want to keep inflation at bay, it’s necessary to have millions of people unemployed or underemployed or in all those insecure, low paid jobs.

This is the Phillips curve and its cruel companion the Non-Accelerating Inflation Rate of Unemployment (NAIRU), theories which lead to the claim that there is a natural rate of unemployment at which the economy is somehow ‘optimised’. They are nothing more than ways to explain away failed models and ineffective policies.

The Job Guarantee shows us that there is another option to using a buffer stock of unemployed people to control inflation: we can use a buffer stock of employed people. It’s not a new idea and was first suggested in 1965 by Hyman Minsky:

Work should be available to all who want work at the national minimum wage. This would be a wage support law, analogous to the price supports for agricultural products. It would replace the minimum wage law; for, if work is available to all at the minimum wage, no labour will be available to private employers at a wage lower than this minimum… To qualify for employment at these terms, all that would be necessary would be to register at the local public employment office.8

The primary aim of the Job Guarantee is to provide useful and meaningful employment in the public sector at a fixed minimum wage to anyone who wants a job and can’t find one in the private sector — or, for that matter, doesn’t want to work in the private sector. Although the wage is fixed, it will be a socially inclusive wage set at the level society thinks is a fair and reasonable minimum for someone working full time. It should be a Living Income, not a Basic Income. I suggest that it should be at least £19,500 — that’s £10 per hour for a 37½ hour week — along with comprehensive rights and benefits, including paid holidays, paid maternity or paternity leave, union membership and ongoing training. There should also be the freedom to choose the number of hours worked each week, so people can allocate their time to other things too.

The Job Guarantee is not Workfare. Nor is it a job creation scheme which the government turns on and off depending on how an unaccountable committee interprets the ‘health’ of the economy. The level at which the programme runs depends entirely on demand from the people. If you want a Job Guarantee job, then it’s your right to have one and it’s up to the administrators to find one that suits you.

Crucially, that right extends to anyone who is currently in work and this puts very strong pressure on the private sector. If firms want to employ people then they are going to have to offer better pay and conditions than the Job Guarantee. In effect, the government, through the Job Guarantee, is using market forces to coerce the private sector into treating its workers fairly and responsibly.

But at the same time as providing work, the Job Guarantee also acts as a balance to the ups and downs of the business cycle. The Job Guarantee is a public sector auto-stabiliser, a counter-cyclical mechanism that evens out boom and bust in the private sector and anchors inflation.

Here’s how it works. When the private sector suffers a downturn there will be redundancies and anyone who loses their job can choose to take up a job offer from the Job Guarantee. This causes a significant and immediate increase in government spending into the economy, ensuring that the spending chains and all the other incomes dependent on them are maintained. The Job Guarantee keeps the economy going and stops a slide into recession. Just as important is the maintenance of our collective well-being by providing everyone with something useful to do.

Conversely, when business is booming, the Job Guarantee programme contracts as people are attracted away from it and into private sector jobs. As the programme scales down, government spending is automatically reduced, the economy doesn’t overheat and the risk of inflation subsides.

It’s a simple, elegant mechanism and because it’s automatic there’s no need for a bunch of technocrats to decide how much government spends into the economy. Moreover, it shows that recessions are discretionary. Just like unemployment, going into recession is a choice made entirely and exclusively by the government of the day. Remember, if the private sector is somehow unable or unwilling to provide full employment, then there is still one sector left which is always able and should be willing.

Under extreme conditions, the automatic stabilisation effect of the Job Guarantee may be insufficient and the government may need to raise taxes or reduce spending in order to prevent inflation. The first step should always be to raise taxes on the rich and if this causes redundancies then the Job Guarantee is always there to pick up the people who lose their jobs. The Job Guarantee curbs inflation by moving workers from an inflating sector to a fixed wage sector.

There is much, much more to say about the Job Guarantee, but I need to bring this piece to a close. However, I urge you to keep thinking about it. Try to make a mental list of all the jobs that we don’t do now, but which we could do under the Job Guarantee — all those nice-to-have jobs which would generally make the UK a better place.

Then there are all those unpaid jobs that we already do, work we take for granted which should be recognised. The Job Guarantee will change the definition of ‘work’, so the jobs don’t have to be profit-making or ‘productive’ in a private sector sense — anything that furthers the public purpose will do.

Look closely at the apparent randomness around you and, just like an autostereogram, those jobs will snap into focus. You will realise that there is always plenty to do and that should make you suspicious of the claim that, in the future, there won’t be enough work to go around. We can never, ever run out of useful jobs to do.

So, what’s next? Well, two things for starters. First, we have to explain the difference between ‘sound’ finance and functional finance. Sound finance is the myth that government budgets are the same as household budgets or, if you are a mainstream economist, that there exists a Government Budget Constraint. Functional finance acknowledges the power of sovereign currency and stresses that it is the job of government to use that power for the good of the people, particularly by ensuring full employment. It’s an idea posited in 1943 by Abba Lerner, the Russian-born British economist. Unfortunately, at the Bretton Woods conference in the following year the US ‘encouraged’ us to return to the gold standard.

Second, we need to start altering the discourse and the first candidates for change should be the phrases ‘taxpayers’ money’ and ‘government borrowing’. Taxpayers are not and never have been the source of currency. Similarly, government doesn’t borrow when it issues bonds; instead, it provides a safe place for us to store our savings.

We should also be careful about talking about the government ‘investing’ in the economy. All the talk of government ‘investing’ in the economy is a prime example of working within a neoliberal framing — trying to package up spending in a way that is supposed to look responsible, making it look as if government is some sort of business. We should be honest and tell everyone that the government just needs to start buying up all those unused resources — the ones without jobs. When anyone says ‘How are you going to pay for it?’ we tell them. The debate needs to switch from money to resources if a progressive agenda is to prevail.

Then, armed with the knowledge that a fiat currency provides the government with the ability to provide jobs for all, we need to question capitalist power relations — all that conventional wisdom about relying on the rich for their tax money, pampering the corporations because they alone create jobs, regarding the financial sector as an engine of growth, and believing that national governments are constrained by globalisation.

All that nonsense is just that: nonsense.

 

1.

It’s interesting how the Financial Times was covering MMT six years ago, but The Guardian is only just starting to catch up. See Why MMT is like an autostereogram, Izabella Kaminska, 22 February 2012, FT Alphaville.

2.

See Magic Eye, Wikipedia

3.

It’s worth noting that from 1990 to 1992 we returned to a pegged currency system when the UK became part of the European Exchange Rate Mechanism. The ERM was a precursor to the euro and required that the UK maintain the value of the pound within a narrow band. It didn’t go at all well, created a recession, and ended in an ignominious and very costly exit from the ERM on ‘Black Wednesday’. Still, a few speculators made billions out of it, so it wasn’t all bad.

4.

See Economics 101, 27 July 2018, BBC Radio 4.

5.

Taxes for revenue are obsolete, Beardsley Ruml, January 1946, American Affairs.

6.

Even the Labour Party is in on the act: ‘Our manifesto is fully costed, with all current spending paid for out of taxation or redirected revenue streams. Our public services must rest on the foundation of sound finances. Labour will, therefore, set the target of eliminating the government’s deficit on day-to-day spending within five years.’ Balancing the Books, Labour Party Manifesto, 2017, The Labour Party.

7.

Strictly speaking, it is possible to get net saving between different entities within the non-government sector using bank credit, but it’s not possible either at the individual level or at the aggregate level.

8.

Poverty in America, Hyman P. Minsky (Margaret S Gordon, editor), 1965, Chandler Publishing. Reprinted in Ending Poverty: Jobs, Not Welfare, Hyman P. Minsky, 2013, Levy Economics Institute of Bard College.

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The post We pay for it by spending the money appeared first on The Gower Initiative for Modern Money Studies.

We ignore the fate of our young people at our peril.

If we value a better future for all, the secret will lie in asking them what sort of world they want to live in and using their talents to create it.

Student typing on a laptop computer with notes at her sidePhoto by Startup Stock Photos

“The secret message communicated to most young people today by the society around them is that they are not needed, that the society will run itself quite nicely until they – at some distant point in the future – will take over the reins. Yet the fact is that the society is not running itself nicely… because the rest of us need all the energy, brains, imagination and talent that young people can bring to bear down on our difficulties. For society to attempt to solve its desperate problems without the full participation of even very young people is imbecile.”
― 
Alvin Toffler

This week emotions have been running high. Many of the students whose lives have been seriously disrupted by the Covid-19 pandemic were further battered when their A level exam results were not what they had been expecting. At such a stressful time it is profoundly distressing that results have been reduced to an impersonal algorithm which has favoured those in private education and left many in the state education sector reeling and without the university places they had been hoping for. Hopes and dreams shattered in an instant.

According to Boris Johnson, the system was ‘robust’ and ‘dependable’. Yet many students who were already disadvantaged by social, economic and geographic divides as well as 10 years of disastrous government policies which cut spending on education, health and social housing impoverishing their families and reducing their life chances, had to deal with the fall out of months of remote learning and, for too many, little or no access to adequate technology as well. Where did the promised laptops and broadband access get to?

Boris Johnson’s ‘levelling up’ promise has failed, at the first hurdle, to deliver for young people whose lives are still ahead of them and who face a future of uncertainty and further hardship, depriving them of life opportunities. They have been let down and not just by Gavin Williamson’s ineptitude. It will further split the generations, reinforce peer inequalities and create more angst and division across the board. Free appeals won’t cut it. Students should not be in this situation in the first place!

At the end of May, the LSE published a report entitled Covid-19 and Social Mobility which looked specifically at the how both the economic and educational shocks caused by the pandemic could wreak long term damage to young people’s prospects in life. It noted its concerns that the pandemic would ‘push young people into a dark age of declining social mobility because of rising economic and educational inequalities.’ However, it also pointed out that even before the crisis younger generations had already been facing declining mobility with falling wages, fewer opportunities and stagnant or declining living standards.

It is therefore not a new phenomenon and quite rightly we should be concerned about the likelihood of such rising inequality becoming even further entrenched as opportunities for young people are reduced by the combined consequences of 10 years of harmful government policies and the fallout from the pandemic.

This week the headlines have focused on the fact that the UK had plunged into recession for the first time in 11 years, with the economy shrinking by an unprecedented 20.4% between April and June. However, even before this, figures from the ONS showed that the economy was already displaying signs of decline with economic growth in the final quarter of 2019 at 0.0%.

Damaging economic fallout from this pandemic was predictable, but we cannot ignore that it has been the politically derived and cumulative effects of austerity which has made things much worse. The public and social infrastructure has been damaged beyond all recognition.

George Osborne said in 2012 of his austerity policies ‘You will hear those arguing that we should abandon our plan and spend and borrow our way out of debt… You hear that argument again today… A credible plan to deal with our debts is an anchor of stability and a pre-requisite of recovery.’

Whilst the deficit hawks cheered him on, the results of spending cuts have been predictable. Dealing with our debts has not provided an ‘anchor of stability,’ rather it has proved to be a ball and chain around society’s ankles. And it certainly hasn’t been the ‘pre-requisite of recovery’ promised.

As mentioned earlier, society was already paying a heavy price for the government’s reckless obsession with cutting spending and now the very real cost is being revealed in human terms, even more so during the pandemic.

  • Both national and local public services in a state of decay
  • Rising numbers of people on zero-hours or part-time or fixed-term contracts,
  • Low wages, insecure work, rising private debt, poverty and inequality
  • A social security system unfit for purpose and based on blame and punishment, not real support.
  • Improvement in life expectancy has slowed since 2010
  • Health inequalities have increased
  • A record rise in the use of food banks and increased homelessness.
  • The highest excess mortality in Europe during the pandemic
  • Social inequalities revealed in the higher rates of death in deprived areas and amongst ethnic communities

All have combined to leave a society fractured with an unprecedented crisis of confidence, both before and after the pandemic struck.

And yet whilst Rishi Sunak took the only course of action open to him to stem the tide of unemployment and economic decline – a programme of fiscal spending – we had him yet again intimating this week that there will be difficult choices ahead. It echoed George Osborne responding to the publication of public sector borrowing figures by the ONS (Office for National Statistics) which was £51.1bn higher than the same month last year who warned that there would be ‘hard choices’ ahead for Boris Johnson and his colleagues on tax and spending.

Household budget rhetoric lives on in the corridors of power, in public institutions and disappointingly in the minds of the public as GIMMS has noted many times before. If we are to address the fallout, which will be considerable if left to the deficit hawks, we need to break the cycle in the latter.

It was regrettable again this week that the household budget narrative was reinforced in an article in the Guardian which referred to the report mentioned earlier in this blog in which the authors Stephen Machin and Lee Elliot suggested quite rightly that it was time to redress the balance as the pandemic threatened to further exacerbate the longstanding divisions in society. But its preferred mechanism for doing so was imposing a one-off progressive wealth tax on the top 1% richest people in Britain ‘to help repair government finances battered by recession and… repay all the extra government debt incurred by the pandemic’. They suggested that ‘failure to take action would ensure that the coronavirus crisis ushers in a dark age for social mobility.’

It is shameful that economists from a prestigious Russell Group university are still promoting the ‘tax funds spending’ trope. To be frank, it is the greatest scam ever; the deliberately created and reinforced illusion that tax of any sort pays for government spending. Equally inexcusable is the suggestion that the lives of future generations will depend on such an approach.

The simple truth is that governments with sovereign currency-issuing powers don’t need tax before they can spend, and they certainly can’t ‘repair the finances.’ As Deborah Harrington, an advisor to GIMMS and director of the NGO Public Matters, put it so succinctly in a comment on social media:

‘The debate we have around taxation is to treat it as if we were wholly dependent on extracting tax from the wealth of the rich in order to fund public services and social security benefits. As if it were a charitable concern rather than publicly funded. We behave as if tax was actually the income of government and that its spending is tightly constrained by it and that we have to go and borrow from the private sector when we can’t tax the private sector enough to pay for everything. These formulations entirely ignore the reality that the only creator of net financial assets into the economy (i.e. additional money) is the government itself. The government is more powerful and has deeper pockets than the private sector will ever have. We end up with a story that makes deficits into the enemy of ‘responsibility for the economy’. From this perspective, high taxation is ‘left-wing’ and tightly controlled and reduced public spending is ‘right-wing’. Yet both put deficit reduction and/or running surpluses on a pedestal, both are neoliberal perspectives.’

Yes, we can tax the wealthy in one way or another for the purposes of equity by removing their purchasing power and to reduce the enormous political influence that their excessive wealth affords them. That is the conversation that we should be having, not how we can collect more tax to ‘repair the finances’ or fund public services. Taxation does neither in the normal course of events.

A political world where the wealthy are seen as the wealth creators who should, by dint of being so, pay less tax thus causing wealth to trickle down (or so the narrative goes) has been shown to be political propaganda to justify government’s market-driven policies which have distorted the economy and impoverished many. With such a false household budget narrative, one can only imagine who will be made to pay in the future for this round of vital government spending to protect the economy.

On this basis, Johnson’s promise for increased spending not just to ‘level up’ and deal with the huge inequalities which have arisen (not just on his government’s watch) but also to invest in public infrastructure would appear arguable, indeed downright misleading, when the conversation is turning to how it is to be paid for. They seem to contradict his own Chancellor’s message that hard times are coming and there will be a price to pay.

It is vital that we knock this narrative on the head before many more people get hurt by the acceptance that there is no alternative.

There is one.

This week GIMMS shared a just-published video called ‘The Power of the Pound‘ which explains, in a very easy to understand format, how the UK can afford the things it needs for its citizens, like the NHS, social care, social security, education and pensions. We recommend our readers to check it out and pass it on.

We don’t have to accept the narratives pushed by politicians and institutions which frame government spending in household budget terms and make the claim that spending is constrained by a finite pot of money.

Our nation’s values should not be determined by the question of whether we can or cannot afford to pay for the things that improve society. Our values should be determined by how we share a finite pot of real resources more fairly and equitably to improve people’s lives and create an economy that works for everyone – including our young people who need all the support they can get to be a light for the future.

 

 

 

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The post We ignore the fate of our young people at our peril. appeared first on The Gower Initiative for Modern Money Studies.

“Whatever great meaningful and impactful work we are doing now is only the beginning, let’s keep moving forward for a better tomorrow.” – George Stamatis

Woed Cloud economy unemplyment job debt money taxPhoto by PublicDomainPictures

According to the Office for Budget Responsibility, whose fiscal sustainability report was published last month, the news is bad. In its Executive Summary, it noted that the UK was on track to record the largest decline in annual GDP for 300 years. It has forecast that this winter, unemployment will soar to levels last seen in the 1980s under Margaret Thatcher. It recognised the government’s focus on managing the pandemic and reviving the economy through its fiscal spending programme, but went on to point out that the structural fiscal damage would likely lead to the need to increase tax revenues and/or reduce spending to put the public finances on a sustainable path.

Instead of examining the real human consequences of government policies over the last decade, or the huge fiscal response to the pandemic, the health of the economy more has often than not been reduced to the fiscal framework of household budgets. Over the last few weeks, GIMMS has been pointing out in the MMT Lens that the Debt Sirens are now working overtime to revive in the public consciousness the idea that there will be a heavy price to pay for the huge sums spent by this government.

In this week’s news, Rishi Sunak suggested that Britain cannot sustain the current level of ‘borrowing’ and Andrew Bailey, the Governor of the Bank of England, backed up the Chancellor when he said that there was no question of a wholesale extension of the Job Retention Scheme. The clear implication is that it’s not affordable! One wonders on this premise whether Rishi Sunak, like Labour’s Liam Byrne, might be obliged to leave a note in the Treasury when he finally leaves saying ‘There is no money left’. The Tories spent it all!

You might be forgiven too for thinking when TV journalists like Krishnan Guru Murthy then reinforce the false household budget narrative with statements like ‘The Government is running out of Money’ or when The Times publishes a provocative headline, as they did this week, designed to send pensioners into a spin ‘State pension fund ‘raided’ to pay for pandemic unemployment payments’ that they are pointing out the obvious. It is not possible to continue ‘spending like a drunken sailor’ without consequences. Surely the public might say? Notwithstanding that government spending is the only thing keeping the economy from tanking further.

Even the National Institute of Economic and Social Research, whilst opposing at the end of last month the Chancellor’s planned closure of the furlough scheme saying it was too early to do so without the probability of a surge in unemployment, then goes on to focus on the problem of higher public sector borrowing in its words ‘financed by higher private sector saving’. The money has to come from somewhere. Doesn’t’ it? Whether that’s borrowing or higher taxes.

And so, the public continues none the wiser and starts to prepare itself for hard times ahead. Such uncertainty will, in turn, lead to yet more economic distress as people fear the worst and retrench yet more. Those who can, will continue to save and indeed the figures show that during the pandemic savings have risen. At the other end of the scale, the choices for many are cutting their budgets or getting into debt. Either way, it is the worst economic recipe of all. Savings don’t always mean people are going to spend in an uncertain climate and for those lower down the wage scale, the choices don’t even exist. It becomes a vicious cycle of decline.

It’s time to break this cycle of lies.

To put it clearly, a sovereign currency-issuing government doesn’t have to borrow from the private sector in order to spend, nor raid the State Pension Fund to pay for the pandemic unemployment payments. And it most certainly can’t run out of money! After the big spend, a narrative is being constructed to justify more cuts to publicly provided services, just as happened in 2010 when the Tories came to office. While we clapped for our public services and key workers recognising their vital contribution to keeping the economy functioning during the pandemic, the Establishment has been planning its next coup which will focus on how to pour yet more public money, that apparently ‘we don’t have’ to invest in the public purpose, into private profit instead. As mentioned last week – the creation of UK plc.

While Rishi Sunak promotes, with great fanfare, his ‘Eat out to help out’ scheme (when many people are simply struggling to eat and for whom such a discount might represent a whole week’s food) and Boris Johnson unveils his £10m half-hearted plan to cut obesity (with those contradictions ringing loud and clear) the numerous elephants in the room remain seemingly invisible to policymakers:

  • The last 10 years of austerity which has left the economy in bad shape and the public and social infrastructure in a state of decay and unable to respond effectively. A social safety net which has been decimated and left many people hungry and homeless.
  • The precarious nature of employment with long hours, insecure working practices, and poor pay.
  • And now the prospect of mass unemployment adding to the already structural faults in the employment landscape.

The growth in self-employment with around 5 million people or 15% of the workforce, a growing number of which are women, has replaced well-paid and secure work. Presented as offering choice and flexibility it has, in fact, left many people in dire economic straits trying to make a decent living even before the pandemic and the rules on receipt of benefits over the last few months have further disadvantaged these people and left them without.

Currently, many people are now chasing too few jobs with employers receiving hundreds of applications for just one position. It seems that the message to people of working age is that you are on your own. You can either sink or swim! Then, in the event that your job is no longer viable in the longer term, the message from Rishi Sunak this week is to get on your bike and get retrained and, without a doubt, then if you still fail to find a job then you can be sure that the blame will be shifted onto you.  As Bill Mitchell said in a blog in 2009 during the Great Financial Crash ‘Training does not equal jobsthis will be yet again a government shifting responsibility elsewhere and abdicating its own for the economy and the welfare of its citizens.

The government’s continuing fixation on ‘debt’ and the unsustainability of ‘borrowing’, which is the driver for its October deadline for bring the furlough scheme to a close, combined with private sector redundancies or cutting workers’ pay (both of which are already happening) is a recipe for economic disaster and lies in flawed thinking. Indeed, if pursued, will do an immense amount of harm to an already ailing economy. In simple economic terms, the government’s deficit is the private sector’s surplus. In personal terms that we can identify with, that’s the money circulating in the economy. Who in their right minds would want to remove it at this critical time by abandoning the furlough scheme or even consider higher taxes? But still, the household budget drums beat! And still the shifting of public assets into ever fewer hands carries on.

We are, it seems, being presented with a choice. A stark choice. Follow the household budget narratives which ultimately will demand tough decisions on spending (notwithstanding that there will always plenty for the next war, or to fill the boots of big corporations) and accept there will be no alternative to more public infrastructure decay and worse more deaths of innocent people. Or we break free from the nonsense which asks, ‘but where will the money come from?’ The bottom line is that our public fixation with high levels of debt and the rising deficit is harming people, indeed killing people, and pulling the rug from under the feet of those same people threatened with the loss of their job, cuts to their wages or government-imposed public sector wage restraint. Indeed, thousands of NHS nurses and healthcare staff marched in towns and cities this weekend to protest about being excluded from the public sector pay rise announced by the government in recent weeks. Just how Rishi Sunak thinks he can stimulate an ailing economy by cutting the lifelines of working people is a mystery.

We need now to restore the diminished power of working people and resist the potential for driving down conditions and pay which most likely will be the result of mass unemployment as the power shifts remorselessly towards ever fewer people. We haven’t got one, but we need a government not only prepared to legislate to protect working people from the economic ravages of the pandemic, but also one that is committed to the principle of full employment through the implementation of a Job Guarantee. Instead of worrying about the size of the deficit, we should be looking at its size in relation to what it represents in real terms to the well-being of citizens and whether or not it corresponds to full employment.

So, why a job guarantee, why is it important and what would it entail? In simple terms, the job guarantee acts as a superior macroeconomic stabiliser providing a sustainable solution to the perennial problems of inflation and unemployment. Its aim is to create full employment and price stability through the government hiring unemployed workers as an employer of last resort.

Professor Bill Mitchell usefully clarified in his blog this week what it would entail:

  1. A guaranteed job for anyone who wants to work and cannot currently find a job.
  2. They would receive a socially inclusive minimum wage.
  3. They would receive holiday and sick pay entitlements, superannuation contributions from the employer, and other special leave entitlements that are common in the permanent workforce.
  4. They would be entitled to undergo training (on-the-job or in outside environments, including going back to school, college or university).
  5. They would receive social wage benefits – what some might call guaranteed levels of services – such as health care insurance, free child-care, transport allowances, access to legal aid supplements, etc.
  6. Family Income Supplements: The Job Guarantee is not based on family units. The Job Guarantee wage (available to anyone over working age) would be supplemented with benefits reflecting family structure. In contrast to workfare, there would no pressure on single parents to seek employment.
  7. They could choose whatever hours they desired to work – effectively eliminating time-based underemployment.
  8. IMPORTANTLY, a worker would be given a grace period on accessing the Job Guarantee. Their wage would start immediately but they could have 3-4 weeks before having to start work where they could sort out their affairs, ‘take a breather’, engage in job search if they wanted, etc. During this period, they would be paid the standard wage rate.
  9. The job would be permanent if they chose.
  10. The job design can be flexible to help workers with special difficulties enjoy a productive working life (for example, the provision of clinical support within the workplace to help people burdened with episodic illnesses).

To this, we would add a superior benefit system which would protect those who cannot work for any reason including illness and disability or carrying out caring roles along with Universal Basic Services.

The question must be answered. And we must answer as a collective. What sort of society do we want to live in? A dystopian Mad Max one where economic slavery and gross inequality dictates the terms by which we live our lives. Or something better?

 

 

Event

The Post-Covid Economy

We were privileged to be able to host GIMMS Associate Philip Armstrong speaking about how the economy works and what a Post-Covid Economy could look like.

Christian Reilly kindly recorded the event for us and shared it on The MMT Podcast here.

Slides available at https://gimms.org.uk/wp-content/uploads/2020/08/Phil-Armstrong-MMT-and-Post-Covid-Economics.pdf

 

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The post “Whatever great meaningful and impactful work we are doing now is only the beginning, let’s keep moving forward for a better tomorrow.” – George Stamatis appeared first on The Gower Initiative for Modern Money Studies.

What sort of future do you want for yourself and your children? If it’s not more of the same, then it’s time for some radical thinking. 

Two children walking away on a path with their arms around each otherPhoto from Pxfuel

Three common neoliberal threads run through this week’s news: How will the enormous sums of money borrowed by the government to hold up the Covid-19 ailing economy be paid for? How can we fix the crisis in social care which has been starkly revealed over the last few months? And the continual covert shifting of responsibility from government to the public in the endless blame game which has created the narrative that poverty and inequality is a personal failure that bears no relationship to government policy.

Over several weeks now, and already noted by the GIMMS MMT Lens in previous blogs, the narrative of getting the public accounts back into balance has been a constant theme in the media; preparing us for the worst, preparing us for the inevitable. Revenue raising, public sector pay restraint and finding savings, returning to normal levels of ‘borrowing’, not to mention talk of plans to balance the books.

After 10 years of austerity and the very visible consequences which are wracking society, combined with the economic effects of Covid-19, the public should be shaking in its boots at such talk. Yet there is often a veiled acceptance that there will be no alternative. Only this week, Douglas Fraser in an article which appeared on the BBC website entitled ‘Is it time to rethink the tax system?’ repeated the common tropes that more tax revenue would be needed to fund government borrowing and the enhanced public services the nation is demanding. Quoting the Public Accounts Committee on the subject of tax breaks, it was suggested that they cost the public purse hundreds and billions of pounds in lost income as if somehow the government was a public limited company, a local government authority or indeed you or I.

Forgive us if we keep labouring the point, but wherever you look you just can’t get away from the false Household Budget version of the public money system – it pervades the public consciousness like a bad penny. Both on the left and right it informs every comment by journalists, politicians, government institutions and think tanks. From the wealth taxes to pay for public services suggested by the Shadow Chancellor Anneliese Dodds, to the price the nation will have to pay for all that additional spending. Never mind that its aim was to keep people from going hungry and being unable to pay their bills when the economy was going into a nosedive because of lockdown.

One might, of course, take issue with the way this fiscal programme was carried out, benefiting as it did businesses and corporations rather than working people directly, with the fact that many were let down by a welfare system which had already been proved not fit for purpose with many falling through the cracks, not to mention the vast sums of money poured into public contracts with the private sector. But such a fiscal injection was vital and will continue to be vital for many months to come, even as the furlough scheme is closed and we face the prospect of a huge rise in unemployment on levels not seen for many decades. These were political choices unrelated to monetary realities and we would do well to recognise and emphasise that fact when talking about how money works.

Even whilst the conversation is about how it will be paid back and in an age where national sovereignty has been deliberately ceded to global corporations, it demonstrates with stark clarity the real powers of a government which has sovereign currency-issuing powers to act quickly and with public purpose (should it choose to do so) without reference to the state of the public accounts (as was already patently clear from the bank bailouts in 2008 but which somehow we seem to have forgotten!)

In the review of a recently published book ‘Post Democracy – after the Crises’ authored by the academic Colin Crouch it notes that:

Globalisation having curtailed the ability of national governments to shape economic policy, the neoliberal ideology that drove it “has turned this weakening of the nation-state into a virtue”. For Crouch, neoliberals view governments as “almost by definition incompetent” and sought to strengthen the power of multinationals as more dynamic, efficient stewards of economic well-being. But neoliberalism was never about simply weakening the state –instead, it requires continual state intervention to create and shepherd market mechanisms, as well as obligatory bailouts and subsidies (as we see in the current crisis). The anti-statist rhetoric of neoliberal populism bears little resemblance to the actual practice of neoliberals in government.

Whilst denying modern monetary reality (even though that is what it has been doing in effect) the UK government has not had any financial problem dealing with the current crisis – funding its agenda or lining the pockets of the corporate beneficiaries who no doubt will continue to profit from the public purse. Contrast that with the false narrative being pursued about affordability and how it will be paid for ultimately and surely the contradictions are staring the public in the painfully in the face, particularly now.

Instead of examining this from the point of view of how public purpose can be served through government action, the myths and legends of how governments spend are being shamefully repeated to reinforce the desired message that it will have to be paid for. This strengthens the intrinsic public belief that our public and social infrastructure will have to bear the brunt in the end.

Many will approve of the government’s stated intention to create thousands of UK public sector jobs – from nurses to teachers and police officers – after years of unnecessary cuts which have damaged our public and social infrastructure. But seen alongside the narratives of rising ‘government debt’ and questions about how it can be paid for, they will understandably mistrust the government’s expressed intention, whether that’s rebuilding an already decimated public sector or levelling up society. Especially those who understand that cutting departmental budgets to find so-called savings which can then supposedly be spent elsewhere is a fantasy and a deception.

For many decades, the question of funding social care has been a reoccurring theme in political circles and this week it was brought yet again into public focus as it was revealed that the government was considering plans for over 40s to pay more tax or national insurance or self-insure to contribute towards the cost of care in later life either at home or to cover the cost of a stay in a care home. It would, in the words of the Conservative MP Damien Green, resolve the funding question, whilst the Liberal Democrat former MP Paul Burstow suggested that it would put ‘social care on a firm footing for the future … to ensure sufficient funds are raised’. The chief executive of NHS England, Simon Stevens, said in an interview in early July that he hoped that ‘by the time we are sitting down this time next year, on the 73rd birthday of the NHS we have actually as a country been able to decisively answer the question [of] how we are going to fund and provide high-quality care for my parents’ generation’.

That sticky, sticky question of how we will pay for it yet again raises its ugly head and yet again fails to acknowledge monetary realities. Aside from the facts that the flat-rate tax being suggested would be regressive and inequitable punishing those on already low incomes and that it would take income that would have been spent into the economy out of the economy at a time when it is already struggling (and will be likely to do so for some time yet, maybe even years), it does not represent the reality that such a tax does not equate to a pot of money put aside by government to pay for anything – let alone social care.

As Alan Greenspan said in response to a question by US Congressman Paul Ryan about personal retirement accounts helping to achieve solvency for the system.

Well, I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase.”

The UK is no different. Importantly as Greenspan points out and which equally applies, although in a different context here, it could create the money to fund social care tomorrow, if it chose. The real constraints would be assuring that government had made provision to ensure that the real assets are available – in this case sufficient care workers with good pay and conditions and an adequate care home infrastructure to deliver high-quality care.

That requires both planning and political will and, for the best outcome, restoration of social care to the public sphere rather than being run by corporations who are intent on cutting costs for profit. The endless round of austerity has cut funding to local authorities charged with social care provision, combined with its provision through the private sector has been damaging. This and the colossal failure of care revealed due to Covid-19 show that it is time for a radical rethink about social care provision.

We need to stop thinking about how it can be paid for because with modern monetary realities in mind that is a given. Instead, we must start thinking about how we can create a decent social care system which offers dignity to those who need its services and fair pay and conditions for those providing them.

Finally, in this week’s news, there has been another frequent constant theme – blaming the populace for government failings. Whether it’s Matt Hancock blaming the public for the rise in coronavirus infections (notwithstanding the complete dog’s dinner that has been the constant theme of this government’s handling of the pandemic with its tardy and inconsistent communication and messaging), telling us we can save the NHS by cycling and losing weight (implying that you’ll be to blame if the NHS sinks beneath the waves) or the shocking comments by Jacob Rees Mogg’s sister Annunziata who tweeted that people on low incomes should buy fresh produce instead of junk food to save money and learn to budget and cook to improve their health. Rees-Mogg, speaking from her ivory tower of wealth and privilege, clearly has no idea about the lives and struggles of ordinary working people. Instead let’s blame, blame, blame.

The neoliberal notion of personal responsibility has become paramount in government messaging down the decades. One which has disputed the role of the state in creating a positive vision of society which puts collective action at the heart of government policies.

We all have a role to play as part of any collective action to improve the nation’s well-being, but such messaging is less to do with collective action and more to do with shifting the blame downwards so that government is no longer in the firing line and can thus abdicate its responsibility and deny democratic accountability.

It is time to acknowledge the government’s responsibility for the socio-economic conditions people find themselves in. Not just the consequences of austerity – the cuts to public sector spending on our NHS, social care, education, policing and local government – but also those policies which have decried full employment as a policy objective and left people in low paying, precarious employment with less protection against the ravages of capitalism. It is time to recognise the socio-determinants of the nation’s health and how governments have used the blame game to shift attention away from their real objectives. Serving not citizens, but global corporations and shovelling public money into private profit. Westminster Plc!

If the government can create money on a whim to fund its friends, then equally it can create money for the public purpose and to pursue full employment. Don’t let anyone tell you that it can’t. Learn the real story about money and what the very real constraints to spending are and how the government’s role is to balance the economy, not the budget. Our lives will depend upon it.

 

Upcoming Event

The Post-Covid Economy – Sat, 8 August 2020 18:00 – 19:30 BST

What could a Post-Covid Economy look like? Join GIMMS and our speaker Philip Armstrong to find out. Register via Eventbrite

 

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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

 

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The post What sort of future do you want for yourself and your children? If it’s not more of the same, then it’s time for some radical thinking.  appeared first on The Gower Initiative for Modern Money Studies.