deficit spending

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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.

Modern Monetary Theory (MMT) White Paper – UK

Published by Anonymous (not verified) on Sun, 25/10/2020 - 6:37am in

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Published online 24th October 2020

 

Full Document

 

Introduction

The purpose of this white paper is to outline the fundamentals of MMT and its application to the United Kingdom

What is MMT?

MMT began largely as a description of Central Bank monetary operations, which are best thought of as debits and credits to accounts as kept by banks, businesses, and individuals.

Warren Mosler independently originated what has been popularised as MMT in 1992.  And while subsequent research has revealed writings of authors who had similar thoughts on some of MMT’s monetary understandings and insights, including Abba Lerner, George Knapp, Mitchell Innes, Adam Smith, Wynne Godley, and former NY Fed chief Beardsley Ruml, MMT is unique in its analysis of monetary economies, and therefore best considered as its own school of thought.

 

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The post Modern Monetary Theory (MMT) White Paper – UK appeared first on The Gower Initiative for Modern Money Studies.

What is the real burden that the government’s “hard choices” will pass on to future generations?

Instead of more political rhetoric and more of the same orthodox solutions dressed up as change, we need radical progressive action to pave the way for a kinder, more equable and sustainable future.

 

Planet Earth in handsImage by Anja from Pixabay

After this crisis, if anybody dares mention a ‘need’ for austerity or tax cuts for ‘wealth creators’ aka useless parasites, or calls for pointless fiscal retrenchment, then ridicule their rank stupidity, economic illiteracy, immorality and their inability to learn simple lessons.’

Phil Armstrong, GIMMS Associate.

 

The debt warriors are continuing their rear-guard action. In the hope that all is not lost in the battle for minds as people get wiser; the battle to keep people believing that the vital extra spending, which has in effect kept the economy afloat, is going to have to be paid for. Sustaining the illusion is vital for their purpose and the people need reminders and nudges to keep them in the dark and demonstrate that the government is fiscally responsible. Where have we heard this before? And look how that ended up. Ten years of punishing austerity and the killing off of our public services in the name of balanced books.

This week, the Conservative MP Harriet Baldwin said on BBC Politics Live.

‘It’s the right time to talk about [balancing the books] because we have to maintain the confidence of the bond market.’ We have a plan to bring the public finances under control’

This little gem suggesting that government is beholden to the bond markets (when it is not) followed Rishi Sunak who said in his conference speech earlier in the week that he had ‘a sacred duty’ to ‘leave the public finances strong’ hinting that there might be tax rises ahead. He continued by saying that ‘If… we argue there is no limit on what we can spend, that we can simply borrow our way out of any hole, what is the point in us?’

Hard choices would have to be made as he pledged to ‘balance the books’. He posited that the public would accept that taxes would have to rise given the size of public spending during the crisis and suggested that the government might have to break some of its manifesto pledges. Wait for it…it’s coming.

The implication is that those billions of pounds borrowed to keep the economy afloat and functioning will have to be paid for and that the burden, if not addressed, will pass to future generations in the form of higher taxes. Keeping the illusion going was further emphasised at the weekend when the government rejected extra support for workers in lockdown areas because ‘the national debt is rising’ and it would cost too much.

So deeply is the ‘tax pays for spending’ narrative embedded in the public consciousness that research published this week by Ipsos Mori suggested that of those responding almost half favoured raising taxes to fund public services in the context of Covid-19 with the most favoured option being a wealth tax for people earning over £500,000.

Still resolutely stuck in the ‘taxes fund spending’ mode, people implicitly understand that somewhere along the line they have lost out, not just personally but in terms of a public infrastructure which Covid has demonstrated is no longer fit for purpose due to cuts. And, quite rightly they want redress, as long as perhaps it’s not them that have to pay. Whilst there is a big difference in approving a concept and actually accepting it as the reality for one’s own pocket, the government is relying on that false narrative for it to get away yet again with murder.

In the light of monetary realities, knowledge of which is increasingly coming into the spotlight and challenging the status quo orthodoxy, in searching for answers the better questions to ask the public might have been:

Do you want the government to spend more on improving our public services in the interests of the nation?  

Do you want to restore those public services to publicly paid, managed and delivered provision?

For the truth is, that these decisions are political ones, not linked to taxes or borrowing or the state of the public finances.

At the other end of the political spectrum, this week on Double Down News Grace Blakely exposed, quite rightly, the increasing horrendous gap in wealth distribution and its damaging effects on society. However, she then went on to suggest that the billionaires should pay the costs.

At a time when the Swiss Bank UBS reported this week that billionaires increased their wealth by more than a quarter at the peak of the crisis when at the same time millions of people were losing their jobs or struggling to get by on furlough schemes and Universal Credit it might seem a just call to ask the extremely wealthy not only to pay what they owe but pay more. After all, over decades, working people have seen their living standards fall, as their share of productivity has ended up in the hands of ever fewer people so it is infuriating to see that the gap between the haves and have nots which was already huge, growing even more rapidly as billionaire’s wealth hits new highs. An increase in the pay of politicians announced late this week (the Tories having already rejected a pay increase for nurses) shows little solidarity with people’s struggles and it must surely start crossing people’s minds that something is seriously awry not just in terms of wealth distribution but also in the way they understand how power works and who pulls the strings.

But it is equally disheartening to note that we have left-wing economists and commentators reinforcing the mantra of ‘tax pays for government spending’ in the daily smoke of mirrors that suggests that state spending is like a household budget and that the solution is to get the filthy rich to pay more.

While our public infrastructure continues to crumble before our eyes and people suffer it’s time for the left to stop talking about getting the rich to pay for it, however much that appeals to a sense of fairness. Only by recognising how government really spends and using that knowledge to propose an alternative vision for the future can we win that battle. If it does not, then any plans that future progressive governments propose will always be constrained by this false narrative.

In the words of Deborah Harrington, who sits on GIMMS advisory board:

‘Billionaires can’t ‘pay for’ the coronavirus crisis. Only governments can. The left should stop promoting the neoliberal theory that we are all dependent on and beholden to the rich for our public services. They are cheering their support for Thatcher, May and all the others who claim the government has ‘no money, only taxpayers’ money’. Tax the rich because they are too rich. Tax the rich because inequality is damaging to a healthy society. Tax the rich because they use their disproportionately accumulated wealth to buy government policy that makes them even richer. Have the courage to say that the extremely wealthy are a drain, not a gain, for society. Stop trying to push the idea that if you could only persuade them to pay their taxes willingly everything would be just fine. Even better, have pre-distribution mechanisms that stop them accumulating so much in the first place.’

The question some might ask is have politicians on any side learned anything? Forty years of economic orthodoxy have left many economies around the world in poor shape and unable to address the crisis. And yet whilst Rishi Sunak considers disingenuously and publicly how he is going to ‘pay for‘ his fiscal injection (to keep the right narrative alive in the public mind) it most certainly will not stop money pouring into the bank balances of private corporations.

And given the Chancellor’s Conference speech it will on the other hand most likely mean that the public sector will once again be squeezed. It is a guise for delivering what they have always intended – to destroy the public sector as publicly funded, managed and delivered infrastructure that serves the public good with no profit motive, through the toxic ideology that business is more efficient. The lie of a so-called small state is smashed by the realities that it increasingly exists to serve global corporate interests.

Whilst government ministers laud their actions and monetary largesse, anyone following media reporting or previous GIMMS blogs will know that the real beneficiaries of public money have been large corporations who have failed to deliver the promised efficiency and worse without public accountability. The prospect of Westminster Plc draws ever nearer.

And the promised levelling up? It will likely be just one more casualty of a wretched economic system, and just more of the typical political rhetoric which politicians are so good at – on both sides.

In the wake of the Chancellor’s speech, the Guardian in its unexpected and timely editorial this week noted ‘it makes no sense to compare personal experience with the economics of a nation’. Quoting the late Labour MP Roy Jenkins who observed correctly that a family budget was not the same as a national budget and said that Margaret Thatcher had traded in ‘lousy economics’, it noted how much of the political economy had been conceded to the right and that the present Labour shadow chancellor still in orthodox mode could not match his ‘unapologetic Keynesianism’.

Sunak’s speech seems indicative of what to expect in the future. Yet more penny-pinching when it comes to our public infrastructure. It suits a carefully crafted narrative to suggest that such spending would bankrupt the economy or burden future taxpayers. A narrative the public continues to buy for now, at least as a reflection of how it believes that government spends.

While our imaginations are still stuck in Mikawber mode, the real threats to the future are being cynically put on the back burner when those threats are the ones that we need to be addressing urgently. It seems that, in political terms, ultimately the quest to balance the books is being made to appear a far more important objective than addressing climate change and politically created and unnecessary inequality. Our planet is to be sacrificed on the pyre of balanced budgets and big business gets to create a greenwashed world in its image – that of profit and greed.

As we watch the fires in South America continue to burn as a result of deforestation to make way for cattle pasture and soy plantations, and the tropical wetlands continue to burn in the Pantanal, a combination of a man-made arson and drought caused by the climate crisis, we need urgently to shift the narrative to one of sustainability and human and planetary health.

This year of environmental disasters – fires, drought, floods and Covid-19 – is a reflection of our failure to act and should be the wakeup call we need. Our leaders, for all their fine words, are complicit in this destruction. Some wilfully and openly ignore the threats, others indulge in ‘environmentally friendly’, rhetoric whilst doing very little, and at the same time global corporations some of the biggest polluters sell us their greenwashing propaganda.

Along with climate change, poverty and inequality continue to rise. It was reported this week by the charity Save the Children that living standards for the UK’s poorest had plunged during the pandemic. It noted that over a third of families on Universal Credit and Child Tax Credits have had to rely on help from charities for food or children’s clothes over the past two months and two-thirds had incurred debt to get by. Half of those surveyed said that they were in rent arrears or behind on household bills. Earlier research carried out by Save the Children and the Joseph Rowntree Foundation in June revealed that 70% of people had cut back on food and other essentials when the pandemic began and the charity warned that the winter will be more difficult for many families as heating and other household costs rise and the prospect of further job losses increase the pressure on overstretched household budgets. With the threat of a cut in Universal Credit next April, the future is looking even more uncertain for some of the poorest people in our communities.

And we cannot ignore the global situation. Save the Children also noted last month in a jointly authored report with UNICEF that the number of children living in multidimensional poverty (access education, healthcare, housing, nutrition, sanitation and water) across the world had soared to around 1.2 billion due to Covid. To put it starkly, an additional 150 million since the pandemic began in early 2020. It also noted that around 45% of children were severely deprived of one of the critical needs mentioned above before the pandemic and that the picture is likely to worsen in the months to come.

While the arguments rage about the size of government, its colossal spending and future tax burdens, the cost of such arguments on human lives and the planet seem of secondary concern as the government continues to pursue its market-driven dogma which is neither free nor fair.

The promised V-shape recovery has not materialised and left prospects bleak for the Covid generation whose employment prospects are quickly vanishing into the mist and threatening their future health, security and livelihoods.

Instead of real jobs with good pay and conditions, Rishi Sunak is offering people ‘job coaches’ to beef up their CVs or training to improve their future job prospects. Never mind that without government intervention in the form of adequate spending and other targeted measures to improve the economic outlook, those jobs will never materialise. Relying on business to find solutions will lead us to a dead end.

Or as earlier this week the Conservative MP Robert Jenrick called for ‘grassroots volunteering and ‘togetherness’. Where was the government when it was telling us austerity was necessary to get the public finances straight as it dismantled our infrastructure and other vital public services? A government that also promoted individualism, greed and selfishness, has overseen huge wealth inequalities and divided our communities. The word ‘togetherness’ doesn’t seem to fit the bill.

Instead of real solutions, the government is offering the usual toxic rhetoric painted as positive proposals for a so-called new normal which aims to consolidate the toxicity, not address it.

At a time when jobs are being lost, GIMMS repeats its question. Why not rebuild our public sector offering good wages and secure employment? Why not introduce a Job Guarantee that provides a living wage, training and good employment conditions to bridge the gap when times get tough and provide a transitional staging post into private sector employment when the economy improves?

Rethinking the sort of society, we would like to live in will be of paramount importance in the coming months. The old model is not fit for purpose and we and the planet deserve something better.

 

 

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

Bill Mitchell spoke to Bill Mitchell for GIMMS on 27th September 2020.

 

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

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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 is the real burden that the government’s “hard choices” will pass on to future generations? 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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Is the public purse empty?

The government wants you to believe that the public purse is empty and needs replenishing to set the finances straight. It’s not and it doesn’t. Time to challenge the lie or accept the inevitable economic consequences

 

Word cloud with the words tax, Challenge the lie, taxpayer, deficit, debt, government, prosperity, austerity, ideology, pandemic, Covid-19, coronavirus, treasury, money, spend, wealth,burden and recoveryOver the last few months, GIMMS has focused on the on-going impact of both politically derived austerity and the Covid-19 pandemic on the nation, along with the prospects for the economy in the future. Every week, we have aimed to build a picture of a nation where Covid-19 has revealed the stark nature of the consequences of economic ideology, government policies and spending decisions which have shaped our society over decades which has not only deprived many of economic stability in terms of employment and standards of living, but also skewed the distribution of wealth and resources towards an ever-smaller group of people. At the same time, we have continued to challenge the all-pervasive narrative that government spending is just like our own household budgets.

The two are intimately connected as political ideas and the usual explanation for why the government has to pull in its horns and reduce its spending. And yet in recent months as Rishi Sunak did what was necessary to keep the economy ticking over, bills paid and food on the table, people must surely be asking some difficult questions about why, if there was no money for public services in the 10 years leading up to the pandemic, that suddenly there is no shortage of it. How to explain this to the public? It seems contradictory to what we have been led to believe.

It has been encouraging to see that finally people are beginning to ask questions and that modern monetary realities are being discussed in the public domain. However, it would seem that as soon as a flicker of light at the end of the fiscal tunnel appears, the fiscal hawks get back onto their ideological saddles to keep the lie going that there will, in the end, be a price to pay.

Indeed, this week Philip Booth from the right-wing think tank the Institute of Economic Affairs claimed in an astonishing article in The Telegraph that young people should be just as concerned about rising public debt as climate change. He asked how can a young person be concerned about climate change and then complain about austerity but not be worried about increasing government debt that future generations will have to service?

Aside from the prospect of environmental decay and its human consequences – which surely must be a more pressing problem in terms of humanity’s future – in making an incorrect connection between an ageing population and a reduction in tax revenue, his words are aimed at creating more fear and preparing people in an endless repetition to accept there will be no alternative to tax increases to pay for it. While Mr Booth gets all hot and bothered at the thought of a £2 trillion debt noose which is more than 100% of GDP, he clearly missed the economic history lesson that after the second world war the debt to GDP ratio stood at 248% and yet we managed to build a successful economy alongside the public and social infrastructure that has provided a stable and secure framework for the nation’s overall health, until more recently that is.

Combining this fact with the monetary realities that sovereign currency-issuing governments like the UK’s have to spend first in order to collect any tax at all (which is exactly what the government has been doing even if it hides its action in the smoke and mirrors of ‘borrowing’) it is difficult to understand how in a sluggish or depressed economy such as will be likely maybe for years yet that the IEA would suggest increasing taxation. In an environment where demand is already suppressed as a result of Covid-19, that would be the most irresponsible action depriving working people of more of their income and forcing difficult decisions about their spending priorities – rent, bills, food or indeed discretionary items.

At the same time and in the same article, Paul Johnson from another right-wing think tank the IFS (Institute of Fiscal Studies) warned that the UK will have to compete for scarce finance as other countries run up ever-increasing deficits to fund their own Covid-19 recovery packages. The suggestion that money is scarce is just another distortion of monetary reality and fails to focus on the real challenge that all governments face – that of balancing the economy by matching their spending to available resources. There is no shortage of money, but it suits politicians and institutions to persuade us that there is.

The implication that rising debt poses a long-term threat to prosperity by imposing a debt burden on future taxpayers, or indeed that there is a scarcity of money, is just another irresponsible fear-inducing narrative aimed at restoring the household budget status quo which has suited and served the political, financial and corporate classes for too long. It suggests fear on their part that they are losing their grip and consequently a good time for a continuing challenge!

However, whilst the right-wing are preparing the ground to reinforce their political power, not just monetarily but through continuing with their long-held aim to destroy the last vestiges of democracy and our welfare state, the left-wing and other constituencies continue to shoot themselves in the foot, thus helping the right-wing to maintain the household budget illusions to serve their own interests.

The campaigning body 38 degrees sent a petition email to its supporters this week in which it said:

‘Rumours are swirling that [Rishi Sunak] is considering raising corporation tax to help pay for vital public services. It means companies will have to pay a little bit more tax, to help fund our schools and NHS and get out of this crisis.’

As already noted, this would be exactly the wrong time to increase taxes, but implying that such an action is needed to fund public services is just another example of how the household budget model reigns – not just in the minds of those in the political arena (even though one might question that they know perfectly well how the public money system operates) but also more broadly in the public consciousness, campaign groups included.

Let’s be clear at the risk of repetition: spending precedes taxation, therefore a sovereign, currency-issuing government neither needs to tax to spend or to borrow to cover its deficit. Once the monetary framework is understood, then it becomes clear that all spending decisions are political ones deriving from a political agenda. Who wins or loses out and how we want as a nation to see real resources distributed are the real question we should be asking; not mithering about the state of the public finances – that’s just part of the smoke and mirrors being perpetrated by government to serve their own agenda.

In this week’s Times, it was suggested that Treasury officials were planning to plug the ‘hole’ in the nation’s finances by raising corporation tax. At the same time, the left argues to increase it to pay for public services! As Professor L Randall Wray notes, ‘they compound their confusion – not only do they insist on being wrong about the purpose of taxes, but they also embrace one of the worst ones’. The stakes are high now in terms of the future of the economy so either argument is entirely based on the wrong premise that raising taxes will perform a specific function. However, the left wing’s focus on making the rich pay is as erroneous an argument as raising tax to get the finances back into balance is.

However, returning to the subject of corporation tax for a moment, whilst the government does not need tax to spend, it does need to implement tax reform within the context of creating a fairer distribution of wealth and resources – that being one of the real purposes of taxation.

The Covid-19 pandemic has revealed the already existing inequalities which have deepened over the last few months. Moreover, the economy over decades has been skewed towards benefiting those who are already some of the wealthiest at the expense of working people in terms of standards of living, well-paid employment and good terms and conditions.

George Osborne cut the corporation tax rate to one of the lowest in the world in the belief that wealth trickles down. Lower taxes mean businesses will invest more, employ more staff, increase wages or pass benefits onto customers in lower prices, or so the trickle-down mantra goes. What it does, in reality, is increase profits and any benefits that are accrued are passed directly onto shareholders, thus reinforcing the already existing inequalities.

However, it is important to note that tax reform will be but one of the ways of rebalancing these inequalities and should be combined with:

  • direct government action in the form of increased spending on the public and social infrastructure which supports a healthy economy and
  • a Job Guarantee to bring about a rebalancing of the power structures towards working people whose standards of living have been eroded by decades of wilfully created unemployment to suit the corporations.

In conclusion and with the question hanging in the air as to how this huge injection of public money will be paid for being raised daily, we point to Ari Rabin-Havt’s article in the Jacobin in which he notes that the ‘The government’s pantry isn’t bare – the people’s pantry is bare’ As he concludes:

We cannot simply be satisfied with making policy arguments against austerity and the serial exaggerations of fiscal warriors. We need to wipe from our lexicon their ignorant metaphors that equate government financing with household financing. When they are wielded as part of our policy debate it should be met with pure derision.”

 

 

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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.

To rephrase Mahatma Gandhi ‘The future will depend on what we do today.’

Statue of seven children using a lever to move the world“Together for Peace and Justice” by Xavier de Fraissinette, Parc de la Tête-d’Or, Lyon. Image by Ben Kerckx from Pixabay

Just a brief look at the news headlines in the last few weeks should be enough to set the alarm bells ringing. We are watching as the nation suffers a train crash of epic proportions.

The Institute for Employment Studies reported in May that the number of people claiming benefits principally because of being unemployed had risen by 860,000 in the month to 9th April to just over 2 million, and that not since February 1947, the year of the big snow, had unemployment figures risen so steeply. It went on to say that that that figure was now likely to be in the region of 3 million, the highest since the 1980s, and that it will take years, not months, to repair the damage.

According to figures released by the Office for National Statistics (ONS), 600,000 jobs have already disappeared and many face redundancy over the next few months as economic uncertainty continues and employers begin to make plans to reduce their workforce as the furlough scheme is phased out later this summer. The ONS also noted that that there had been a record fall in job vacancies between March and May and hinted at worse to come. Jonathan Athow, from the ONS, commented that ‘the slowdown in the economy is now visibly hitting the labour market’

The consequences of Covid-19 on the economy, and let’s not forget the impact of 10 years of cuts to public spending and welfare entitlements, are affecting every aspect of our lives.  Thousands of children have been plunged into poverty and UK food banks are facing record demand with more than 100,000 carers forced to use a food bank in the UK lockdown. Two-thirds of families on universal credit have been pushed into debt, having had to borrow money including using payday loans or credit cards to keep their heads above the water. Put bluntly, that means people struggling to put food on the table, money in the electric meter or pay their rent, not to mention the impact on the mental health of parents trying to provide the basics or educate their children at home for three months without adequate access to the internet or computers.

The Joseph Rowntree Foundation, in partnership with Save The Children, are shining a light on the experiences of families and children in poverty; calling on the government to ensure that families are supported, not just during this lockdown period but also beyond it, to prevent increasing numbers of children being pulled into poverty. It points out that too many children are going without, due to income losses and the pressure that the lockdown has put on already overstretched budgets.

Whilst one must commend those who have performed extraordinary acts of public service during this pandemic, those who have raised money for the NHS and charities and this week like Mark Rashford who through a steadfast public campaign shamed the government into continuing its vouchers for free school meals during the summer holidays, we now urgently need a frank national conversation about where we go from here.  Not just about the sort of society we want to live in now or in the future, but whether we even want to protect our children’s children from the devastating effects of climate change; the threat of which is hanging like a tsunami over our heads while we queue outside Primark or Nike Town!

We are a nation that has been divided by a toxic ideology which has, until recently, ripped to shreds any sense of collective responsibility. We cannot stick our heads in the sand and return to the normal many are hankering for. Too much is at stake.

The pandemic has revealed the shocking state of the Social Care system which is in a state of collapse, an NHS battered by 10 years of cuts to its spending with reductions in staffing, beds and facilities, a social security system which has removed the support pillars and left people in dire poverty and children hungry, living sometimes in temporary accommodation with no sense of security.

The greatest achievements of the post-war world are being dismantled or outsourced to profit and are being replaced by the so-called big society which ironically is also collapsing due to cuts government cuts. As previously reported by GIMMS, Covid-19 has left one in ten charities facing bankruptcy this year and many struggling to provide services in an economic environment which has its roots in austerity.

Instead of state involvement in the provision of the fundamental structures that form the basis of a healthy economy and society which benefits everyone (even if those structures are not perfect), we are being prepared through constant propaganda and messaging to accept a reset. One in which the state continues to pour public money into private profit but at the same time claims there is no money for publicly paid for and managed services and an adequately funded social security system.

Our society is being impoverished, not just financially but in terms of its public and social infrastructure, culturally and the safety net which protects people when through no fault of their own the economy tanks. All on the basis of claimed unaffordability. The monetary largesse of these last few months is already in question and we face a return to more cuts to public spending.

Just this week it was reported that Leeds Council is considering closing its museums and libraries as it can no longer afford to pay for them. This is not just a localised problem; across the country libraries and museums have already closed or rely on volunteers to staff them. The pandemic is revealing the brutal cost of previous cuts to government spending that have left local and regional councils, particularly in the north and south-west, impoverished and with insufficient infrastructure to even deal with the consequences of Covid-19.

Aside from the valuable input to GDP (which ministers seem to conveniently forget), our cultural life is under threat as our museums and libraries face more closures as local councils try to balance their books. Our national and local theatres, art galleries, orchestras and all those things we value in terms of human enrichment and education face if not oblivion, then severe retrenchment.

While public money finds its way easily into private profit at the blink of an eye to provide public services in the name of the lie of market efficiency, our society is being prepared to accept a reset in which charities, public donation and volunteering, not to mention the philanthropy of the Victorian poor law boards, decide who gets what.

Is that the sort of society we really want to live in?

To recognise the alternatives, we have to understand how an alternative vision can be paid for, as that is the perennial question always asked by the public and politicians alike. If we fail to do so the future looks pretty bleak for us all now and for future generations who will be paying not the financial cost but the very real human cost.

We need to start with a basic understanding of how the UK government as the currency issuer spends. It is regrettable that across the piece left and right-wing economists, along with politicians and institutions are still stuck in the household budget narrative of how governments spend. For the right, the constraints lie in a scarcity of money (which they use to justify their political agenda) and on the left the answer is getting the rich to pay through their taxes or borrowing at low rates of interest to fund our public services, pay for public infrastructure or fund a green new deal.

Only this week the ONS focused its report on the public finances on the through-the-roof borrowing figures and, shock horror, it is apparently £173.2bn higher than it was a year ago at £1.95 trillion and the UK’s debt-to-GDP ratio has pushed above 100%. Such focus is designed to put fear into the hearts of people who don’t understand the working of the economy and the public finances and it is likely to enable the government to justify further austerity at some point in the future.

Indeed, the Chancellor Rishi Sunak it has been reported is preparing to scrap the triple-lock on the state pension on the basis that the already high cost of the Covid-19 pandemic could make it unaffordable. Officials have claimed that a temporary suspension would be unavoidable if the government is not to be faced with paying a massive bill next year.  The Pensions Policy Institute has already warned, quite rightly, that such a move would have serious implications for already existing and future pensioner poverty and the amount spent on other means-tested benefits such as housing benefit, caring credits and disability premiums. It would also impact on low earners who would have to put in an extra £540 a year to avoid poverty in retirement. How would punishing people even further help the economy or indeed serve its already beleaguered citizens?

Torsten Bell from the IFS in an article in the Guardian claimed that a survey of economists had proved that they were not keen on cuts or more austerity to reduce the deficit, but favoured tax rises instead. He further claimed that economists were turning into a bunch of radical lefties these days. However, whilst their support for austerity has dwindled perhaps, they still see the public accounts as a household budget whereby taxing and borrowing (at low rates of interest) form the basis for government spending. That cannot be considered radical in any shape or form and unless they can get to grips with how a modern monetary system actually works and reject the notion that spending now will create financial burdens on future generations, then sadly we will see more of the same orthodoxy rearing its ugly head.

To put it bluntly, in an economy that is facing wipe-out and serious future economic consequences, the idea that paying more taxes to pay for government spending which will do yet more harm to the economy as it takes money out of the economy is nonsensical, especially when you know that government doesn’t need those taxes before it can spend.

We need to ditch this narrative if we are to make a better, fairer world which also puts the environment as a top priority. Indeed, at the beginning of this week, the leaders of some of Britain’s top charities wrote to the Prime Minister to demand as a priority a green recovery and urged him to use economic rescue packages to build low-carbon infrastructure and stimulate the creation of long-term green jobs.

However, if we allow that sticky question of monetary affordability to dominate the debate, any future actions will always at some point in time constrain a government’s spending decisions.

We don’t have to be economists either to understand monetary realities or challenge the current false narratives which pervade the discourse.

There are just a few things we need to know or consider:

  • The UK government is the currency issuer.
  • It neither needs to tax in order to spend, or to borrow to cover its deficit
  • Such a government whilst not being financially constrained does face real resource constraints when deciding its spending policies. These include the human beings that do the jobs and the physical resources needed to provide goods and services.
  • If the nation decides ultimately that it wants the government to take a greater role in public provision of services to serve the best interests of citizens, it will have to accept that the government will have to procure those resources and thus may have to deprive the private sector of some of those resources in order to do so.
  • A Job Guarantee is fundamental to this understanding of monetary realities. It not only provides an essential automatic stabiliser in the economy ensuring that people are not left abandoned on the unemployment scrap heap during its cyclical ups and downs and values their contribution to making a more stable society but also plays a vital role in controlling inflationary pressures.

In the coming years, with the growing threat to climate change, it will also provide an essential mechanism to implement a just transition as jobs are lost in polluting industries and we move towards a sustainable economy.

In such an environment we will have to entirely rethink and redefine what work is and what our societal values should be. We need to ensure that we can offer our young people a future with good, non-exploitative employment which pays good wages and offers decent terms and conditions within the context of creating that sustainable economy.

Let’s not leave the future in the hands of the neoliberal orthodoxy which has done so much damage, created so much poverty, inequality and societal division. We do have choices. We don’t have to accept more of the same.

 

 

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The post To rephrase Mahatma Gandhi ‘The future will depend on what we do today.’ appeared first on The Gower Initiative for Modern Money Studies.

To talk about the future is only useful if it leads to action now

Environmental protester at a demonstration holding a sign with a clean Earth and a dirty Earth and the slogan "You Decide"Image by Dominic Wunderlich from Pixabay

‘To talk about the future is only useful if it leads to action now.’

E F Schumacher: Small is beautiful: Economics as if people mattered.

The Bank of England in its Monetary Policy Report for May 2020 noted in its summary that the ‘unprecedented situation means that the outlook for the UK and global economies is unusually uncertain.  It will depend critically on the evolution of the pandemic, and how governments, households and businesses respond to it’.

Already, the consequences are being felt around the world and there remains great uncertainty about the future.

In April the price of oil plummeted into negative regions as world economies slowed due to COVID-19.

At the end of April, it was reported that two million Bangladeshi jobs could be at risk as western high street clothing shops closed their doors for lockdowns. Bangladesh is a major garment exporter and reliant on European and American orders with some 83% of its export revenue linked to the garment industry.

Factories across the textile sector in countries like Bangladesh and India are still struggling to stay afloat. There have been closures or reduced working hours which have had a devastating effect on jobs and income for those employed in a sector which already relied on poor wages and bad working conditions to compete.  The dependence of globalised trade on outsourcing and just in time logistics to be competitive is exposing structural weaknesses and emphasising its exploitative nature on both domestic and foreign populations. Pull one piece from the jigsaw and the whole edifice comes crashing down.

Since lockdown, many high street businesses have been forced to close their doors as well as those with a global reach.  Airlines have scaled down their domestic and global operations, grounding planes and staff with the prospect of thousands of job losses. Rolls Royce has also confirmed that it would be making significant redundancies in its civil aerospace business both here and abroad.

In response and across the piece fiscal interventions have become the ‘mot du jour’ not the least in the UK.

Whilst one can argue the detail about how it was done and point out the flaws of the schemes which has left many working people without support, Sunak’s fiscal intervention was the right thing to do. However, whilst the Chancellor acted quickly to protect working people, he did so in line with Conservative neoliberal ideology by channelling money into big business and not just through signing contracts with already discredited companies like Serco to provide government services with no accountability built in.

Last month the Treasury and the Bank of England, following a campaign by Positive Money announced that the names of those companies which have been bailed out through the Covid Corporate Financing Facility would be made public. The scheme allows ‘investment-grade’ companies to sell short term debt to the Bank of England thus allowing access for Britain’s biggest corporations to billions of pounds of cheap funding. Fran Boait from Positive Money said ‘“The Covid Corporate Financing Facility was serving as a secret bailout vehicle, allowing Britain’s biggest corporations to access public money without the public having to know.”

It has been revealed that among the companies which have benefited are Stagecoach, G4S, Rolls Royce, Easy Jet and Intercontinental Hotels. So far 152 companies have taken over £16bn with an expected total bailout of £67.7bn.

However, as the SourcenewsScot reported this week, one in five of firms receiving bailout money are airlines, oil and gas or car manufacturers and ‘the only strings which are tied to this cheap money is a request by the BoE to be restrained in paying dividends. It doesn’t matter if they are climate polluters or tax haven users or have exposed their workers to harm during the pandemic, the BoE will bail them out if they are making a ‘material contribution’ to the UK economy just so long as they are also corporate giants.’ So much for the government’s expressed commitment to a green economic recovery at a time when such commitment is vital.

Positive Money has also warned that it may not be long before they are back for more given that this crisis is unlikely to be over anytime soon.

It is yet again more evidence that the UK government with the power of the public purse can bail out whomsoever it chooses, just as it did the banks in 2008, with not a taxpayer in sight.

For many small high street businesses and medium-sized enterprises which are struggling and desperate to get back to some sort of normality, the future remains an unknown. The economic and employment uncertainty is likely to continue. This, along with the cumulative effects of reduced incomes on salaried workers and reliance on minimal state support for many self-employed (for those who are eligible for it at all) may cause people to be cautious about future spending.

Figures show that during lockdown consumers have been spending around £17.9bn less per month into the economy as spending habits shifted to accommodate the new normal. According to figures published by the Bank of England, in April households also repaid record amounts of debt accumulated on credit cards and personal loans amounting to £7.4bn. Whilst at the other end of the scale, figures from the Bank exposed a sharp increase in business debts as a result of the drop in sales.

At the same time, the New Policy Institute calculated that the richest 20% of UK households will have likely saved £23bn by mid-June, which is more than six times as much as the savings made possible by the poorest 20% of households. Even if the pandemic were to stop dead in its tracks or restrictions were to be eased or lifted, with so much uncertainty confidence may not return for some time yet.

Many businesses, with increased debt and little hope of regaining the sales ground they have lost, may yet go under, thus increasing unemployment. In the light of failing confidence, people may have no alternative but to continue to retrench and/or continue to save.  And those who have suffered cuts to their income, been laid off or furloughed or face the prospect of redundancy and who have never been in a position to save, will further be impoverished thus deepening the wide gulf that exists between the rich and poor and those of ethnic origin in what is an already divided country.

Shockingly it was revealed by the Health Service Journal (HSJ) this week that the government had removed a key section from Public Health England’s review of the relative risk of COVID-19 to specific groups which suggested that discrimination and poorer life chances were playing a part in the increased risk of contracting the disease amongst those with BAME backgrounds.

The HSJ noted Matt Hancock’s response articulated at a daily coronavirus briefing this week when he said that ‘he understood why many were ‘understandably angry about injustices’ and that he felt a ‘deep responsibility because this pandemic has exposed huge disparities in the health of our nation’ [saying also] that ‘much more work’ was needed to be done to understand ‘what’s driving these disparities’ before adding: ‘We are absolutely determined to get to the bottom of this and find ways of closing the gap.’

In the light of his response one has to ask oneself the question where has the government been? The last 10 years of government-imposed austerity, cuts to spending on public sector services, its ideological attachment to low wages and precarious employment to serve the business agenda had already taken their toll before COVID-19 even arrived into our midst. It is incomprehensible that politicians and their appointees don’t know where the inequality and poverty have come from! Wilful ignorance comes to mind.

So where might we be going now?

Rishi Sunak, the Chancellor, announced last week that the Coronavirus Job Retention Scheme (aka the furlough scheme) which has helped protect 8.4 million jobs is to be extended until October and those who were eligible for Self-Employment Support will be able to claim a second and final grant in August. However, his plan to taper pay-outs from August onwards from the current 80% will mean that employers will have to cover the difference.

The ending of the furlough scheme at such a crucial moment will, without doubt, have exactly the opposite effect to the one desired.  It is likely to lead to a steep increase in unemployment as businesses are forced to downsize their operations or go bust; making people redundant just at the time when the world is entering a recession, or worse. The UK does not exist in a bubble – it is also affected by world economic conditions, which are equally distressed.

The impact is likely to be devastating. An analysis published by The Institute for Public Policy Research (IPPR) this week suggests that by the end of 2020, 1.1million more people face poverty as a result of the coronavirus pandemic and that 200,000 more children will be among those expected to be below the pre-virus poverty line as job losses hit family incomes. It says that without urgent action to protect families from financial hardship it would bring the total number of children living in poverty in the UK to 4.5 million – an increase of almost 5%.

Its figures are drawn from Bank of England estimates that unemployment is likely to reach just under 10%, or around 3.3 million people, by the final quarter of the year. Claire McNeil, Associate Director of the IPPR, said ‘The government must apply the same level of ambition it had for supporting businesses and workers … to prevent a new generation of children and their families falling into poverty through no fault of their own.’

What we need now is the combined and continued power of the state and the public purse, to both stave off further damage and begin the vital move towards globally sustainable economies and the pursuit of a more equitable and sustainable sharing of global resources.

The economic policies of the preceding decades have been framed around three false narratives: That global corporations and financial institutions are the wealth makers and must be privileged, that the State is powerless to act in the public interest and that the public accounts are like our own household budgets with spending limited to income (in this case taxation) which requires a firm hand and iron fiscal discipline to keep them in balance.

We are now by dint of this tragedy discovering that the magic money tree, like the magic porridge pot, is showing no signs of running out of funds as Rishi Sunak is also apparently contemplating yet another package of measures to help the economy. The release of information about the details of this package have now been put back until the autumn as Sunak seemingly waits to see what happens. Perhaps he’s expecting an economic miracle!  It has to be said that this is a moment for bold thinking, not delay or prevarication.

In fact, what we now need is a revolution in thinking, not the stale economic orthodoxy which has already done so much damage down the decades.  It is disappointing when three former Chancellors of the Exchequer still frame their arguments in household budget terms when talking about the challenges ahead. It is also disappointing to read the OBR’s analysis of the furlough scheme which speaks in terms of costs to the public finances and debt, when the focus should be on the real benefits of government spending to the nation and its economic health at a crucial time and in terms of investment in the future.

In the case of Osborne, the architect of austerity, it was frustrating to note his continuing adherence to ‘handbag’ economics when he commented in an article in the Telegraph that ‘sadly we are poorer than we thought we were, and either we’re going to have to raise more in revenue or spend less than we were planning’.

It is clear that whilst the cash is being splashed for the moment, the magic money tree is likely to have a limited life or perhaps more accurately will only bear fruit to serve the interests of the global corporations and other wealthy elites. If this remains unchallenged it will not bode well for the future of the UK, not to mention the planet.

If some of us thought that COVID-19 might act as a wake-up call for the future, that scenario is still unclear. Not only in terms of the government’s priorities about who is to benefit from government spending but also looking at the general situation. Pollution levels are once again rising in China and it is expected that Europe will follow suit. The pictures of long queues outside Ikea paint a depressing picture as do the piles of rubbish left in beauty spots by people who travelled hundreds of miles in their cars to get there. It seems that while people were obliged to stay at home, they would bake, connect with one another through Zoom or contemplate a different way of doing things, they are still just as eager to pick up where they left off once the restrictions are lifted.

And yet while we are all dying to get back to normal there is still an existential threat to civilisation which we must address swiftly if we care at all for the fate of future generations whilst we still have some time left.

COVID-19 offers an opportunity to rethink everything and most importantly to challenge the received wisdom that ultimately there will be a financial price to pay for government spending too much! The price we will really pay for continuing with the narrative of financial unaffordability will be the health of our ecosystem and all those who depend upon its resources to enable and enrich their lives in every sense.

We can all play a part in bringing about positive change. However, it is only government with the power of the public purse and an understanding of the resource constraints that all governments face, that can demonstrate the real resolve through its legislative powers at national and local level to deliver public purpose goals. A green recovery is only possible with a government committed to real change in its spending priorities and through pursuing full employment policies. This could be through a combination of an expansion of the public sector combined with a Job Guarantee to allow the transition towards the green economy we need by providing the necessary economic stability.

Let’s not let this opportunity slip through our fingers.  It is only the people that can demand the change we need. It is only people with the correct knowledge that can pour scorn on politicians who continue to adhere to false narratives about how governments spend. The future is at stake now more than ever before.

If you want to know more the GIMMS website is a good place to start the journey to that challenge

https://gimms.org.uk/mmtbasics/

 

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The post To talk about the future is only useful if it leads to action now appeared first on The Gower Initiative for Modern Money Studies.