national debt

#RethinkMoney – The Greatest Lie Ever Told (Probably)…#TaxAndSpend

GIMMS is delighted to have permission from blogger Duncan Poundcake to reblog his article which was originally posted here

 

So what have we learned from the General Election of 2019?

Mainly the familiar cry of:

”How will you pay for it?”

”Labour ‘broke the bank”…

”Labour left a note saying  – We have spent all the money”…

Nothing very new in that. We have heard it on a loop for nearly 10 years from many Politicians. Policy Makers, Think Tanks, Economists, The Press and RW influencers, that:

  • For Her Majesty’s Government (HMG) to spend is a very bad thing to do.
  • HMG is at the largesse of the Tax Payer and is unable to spend for public purpose. HMG must either – a: Tax and/or b: Borrow before it spends.

Why?

  • There is an undefined and finite amount of Sterling that can ever be available in the economy.
  • Once this Sterling threshold has been reached, HMG must borrow back this Sterling from the private sector, to fund its spending.

Even Labour, with its £400bn spending bill, tells us; Tax, Borrow and Spend is the order of the day.

Unfortunately, yet again, Labour miss an opportunity and tell us the polar opposite of the reality…

1. The UK has ALWAYS been a Sovereign Fiat Currency Issuer

HMG has ALWAYS been able to create £s at will but there have been numerous times where, by circumstance, or design, it has been limited as to how many Fiat £s it can create.

Since 1971, the UK has been a Sovereign Fiat Currency Issuer, without restriction – In laymans language, HMG:

  • Has the legal monopoly on the creation (Issue) of its OWN currency.
  • Can create (Issue) Sterling at will, from thin air, with zero impedance.
  • Everyone else is a Currency User.

So why does everyone tell you otherwise?

Time to travel in the Monetary TARDIS…

2. A little bit of History repeating – The Gold Standard (Again):

Image by PublicDomainPictures from Pixabay

 

Over much of the 20th Century, the UK, US and other developed nations have been on and off variations of the ‘Gold Standard’.
In stark comparison to the economics of the last 40 years, when the Americans and British created ‘The Gold Exchange Standard in 1944’, their focus was:

  • To avoid trade deals which impoverished lesser trade partners.
  • An attempt to control flows of speculative financial capital.

The latter, in particular, had wrecked the global economy prior to the Great Depression, the outcome of which was seared into their collective memories:

  • A global depression,
  • Mass unemployment.
  • The rise of Fascism in Europe and Communism as a response.
  • Global War.
  • Millions Dead.

Post-War planners aimed to prevent the repetition of previous competitive currency devaluations but engineered not to force debtor nations to reduce their industrial bases to attract financial speculators and keep interest rates high.

British economic sage, John Maynard Keynes…

John Maynard Keynes portrait© National Portrait Gallery, London
Image cropped from John Maynard Keynes, 1st Baron Keynes of Tilton; Lydia Lopokova by Walter Benington, for Elliott & Fry bromide print, 1920s Given by Bassano & Vandyk Studios, 1974 Photographs Collection NPG x90117

again fearful of repeating the mistakes that led to Great Depression and carnage that followed, was the primary mover behind Britain’s proposal that Trade Surplus nations should be forced to use their trade surplus for good, or lose it for good:

  • Either import from debtor nations
  • Build factories in debtor nations
  • Donate to debtor nations.

The U.S. opposed Keynes’ plan and proposed creating the International Monetary Fund (IMF) with enough financial clout to counteract destabilising flows of speculative finance. However, in contrast to the modern IMF, the fund would counteract these speculative flows automatically, no political strings or agendas. An honest broker.

History demonstrates that on almost every point where the USA objected, Keynes was to be proved right.

3. Bretton Woods… 

The U.S. Secretary of the Treasury, Henry Morgenthau, Jr., addresses the delegates to the Bretton Woods Monetary Conference, July 8, 1944The U.S. Secretary of the Treasury, Henry Morgenthau, Jr., addresses the delegates to the Bretton Woods Monetary Conference, July 8, 1944 (Credit: U.S. Office of War Information in the National Archives).

 

In 1944, at Bretton Woods, the Allies met to plan a Post-War world and as a result of the collective conventional wisdom of the time, the Allied nations preferred to do this by regulating a system of fixed exchange rates, indirectly disciplined, by binding the USD to Gold at a fixed price per ounce.
This  system relied on a regulated market economy with:

  • Strict controls on the values of currencies.
  • Flows of speculative international finance would be stopped by channelling them through Central Banks. #Capital Controls
  • The intention being to direct international flows of investment.
  • The focus on using capital to building useful things that created jobs or benefited the public purpose, rather than financial speculation on the markets.

Interestingly, it was US planners who coined the phrase ‘Economic Security’, surmising that a liberal international economic system would enhance post-war peace and keep Communism at bay. This came from a belief, that causes of both World Wars, was ‘Economic Discrimination’ and trade wars. The main culprits being trade and exchange controls of Nazi Germany and the ‘Imperial Preference System’, where members, or former, of the British Empire were given special trade status, resulting in a German, French, and American protectionist policies.

*US Planners were shrewd enough to recognise that to keep Capitalism popular, taxpayers and workers, needed to see a benefit from it and to feel their lives being improved, rather than risk the alternative, Communism. To ensure this, regulated Capitalism was the solution and the irony is, we have the Cold War to thank for this Golden Age.*

In stark contrast to today, Bretton Woods participants agreed that a liberal international economic system ALSO required governmental intervention.

Following the economic turmoil of the 1930s, the management of economies had become the main activity of governments, taking on increasing responsibility for the economic well-being of its citizens. This had proved to be largely successful and popular. Employment, stability, and growth were the order of the day. In turn, the role of government in the national economy would continue. The Welfare State, which grew out of the Great Depression, had created a popular appetite for governmental intervention in the economy, and it was Keynes who made it clear that Government intervention was required to counter market failures.

Enter the era of State Capitalism…

Members of the Gold Standard agreed to closely regulate the production of their currencies to maintain fixed exchange rates, with a bit of wiggle room either side. The express aim being to make international trade easier. This was the foundation of the U.S. vision of a post-war world, Free Trade:

  • Lowering tariffs
  • Maintaining a balance of trade via fixed exchange rates that assists Capitalism.
  • Reduce trade and capital flows.
  • Revive the Gold Standard (Again) using USD as the world’s reserve currency.
  • Prevent Governments messing around with their currency supply, as they had between the wars.
  • Governments would be required to monitor the production of their currency and would refrain from manipulating its price.

4. Tax & Spend & Borrowing…

It is important at this point, to remind ourselves, HMG was still a Fiat Currency issuer but, up until 1971, had voluntarily limited its ability to created its own currency.

So following Bretton Woods, from 1944 until 1971, Gold was ‘Convertible On Demand’ into Sterling. This required HMG to have lots of Gold stashed away at the Bank of England (BoE) just in case anyone wanted to convert their pot of Gold into Sterling. Indeed, once upon a time, you could walk into the Bank of England with Gold and they were obliged to accept it and pay you cash.

Like all liabilities, it was worked out on risk. HMG surmised that only a small percentage of the public would ever demand their gold to be converted into Sterling, at any given time, so it only had to have a limited amount of Gold in reserve, just-in-case. Fractional Gold Reserve Central Banking, if you will.

However, because of the rules of the Gold Standard, HMG Currency Issuing (Spending) would be constrained by the amount of gold in the BoE vault.

The other issue HMG was acutely aware of, was spending Sterling for Public Purpose was in reality, spending the Gold it had in the BoE. The Gold never left the BoE but with a promise of convertibility into £s:

  • Limited how many £s could be spent at any one time
  • How many £s cash could be spent at any one time was…dictated by how much Gold it had in reserve.

So if HMG wanted spend more, it had to:

  • Find more Gold to allow it to create more Fiat £s to
  • Or, recoup Fiat £s from the private sector i.e: TAXPAYERS – BEFORE it could spend more. Welcome to…‘Tax and to Spend’.

Now to protect all that Gold in the BoE from a profligate Government, just creating Fiat £s to spend, they had a few tricks up their sleeve…

How could a Sovereign Currency Issuing Government, such as HMG with a self-imposed brake (The Gold Standard) on how many £s it can create and issue, spend more £s than it was allowed to create?

The Solution?

BORROWING BACK Fiat £s from the taxpayers’ savings – to spend again – rather than creating and issuing additional new Fiat £s, which might exceed the back-up supply of Gold. The plan being:

  • Why not get taxpayers to exchange their £s savings, for Sovereign Gilts, Treasury Bonds OR similar, that pay interest.
  • Taxpayers still get to benefit from the HMGs spending MORE £s each year than it intends to collect back in tax. Thus allowing taxpayers to continue to build their wealth of £s.

ERNIE

*One ingenious demonstration of this, was the infamous ‘ERNIE’, invented by a Bletchley Park codebreaker in 1956 and Premium Bonds, offering taxpayers another way to save outside of banks or building societies. Which of course, was not its main purpose. Premium Bonds were just another way to recoup £ from taxpayers, without actually Taxing. Recycled Money.*

 

And this is exactly how HMG ran Government spending up until the point Richard Nixon suspended US involvement in the Gold Standard in 1971 – due to the spiraling cost of the Vietnam War. US Government spending was outstripping its Gold Supply – and became a Sovereign Fiat Currency Issuer, without restriction.

*As Keynes had predicted in 1944, eventually the USA found itself in the inherent paradox of the Gold Standard:

1. It was required to be the Worlds Reserve Currency and as per the Bretton Woods agreement, keep USD flowing outwards to keep global trade moving.

2. However, this put a restraint on its ability to spend inwards, domestically.

A large percentage of its Gold Reserves had to be set aside to cover outward flows of USDs, restricting  USDs available to be created for domestic Public Purpose – which at the time of Nixon was Johnson’s: ‘The Great Society’ project.

Between 1944 – 1971, the US saw its stash of total world Gold Reserves shrink from 65% to 22%. The market speculated that the US has so many USD out in circulation, it was unable to convert USD to Gold, due to these dwindling Gold Reserves. The dollar depreciated. Inflation went up, employment followed suite and due to the spending spiraling requirements of the Vietnam War, Nixon saw the solution as suspending convertibility to Gold and to go 100% Fiat. No restrictions to USD creation.*   

The Gold Standard was effectively dead. The US now no longer converted USD into Gold and other nations bailed out in 1973. The Gold Standard was officially buried in 1976. The UK followed suit. However, the system for creating and issuing HMG money, DID NOT CHANGE and as I write, in 2019 nearly 50 years later, the Government still operates its finances as if it were on the Gold Standard:

  • So the HMG continues to sell Gilts, Treasury Bonds, Premium Bonds
  • So it can ‘borrow back’ £s from taxpayers
  • To spend MORE than it collected in taxation.

The one upside of this was/is a form of Corporate Welfare exchanging £s for Government IOUs, with the interest received, adding to private savings and wealth.

So we have ended up where the reality of Money Creation since 1971, is that HMG is not revenue constrained when it comes to spending for Public Purpose but continues to use a Monetary system that claims to be still on the Gold Standard.

To reiterate, for clarity, Her Majesty’s Government:

1. Is No Longer on the Gold Standard.

2. Is Not required to convert £s into any commodity to spend.

3. Is Not required to use taxpayers £s to spend.

4. Does not need to borrow or recoup Taxpayers £s savings to spend.

Yet, NO Government since 1971, has changed the from Gold Standard System to reflect the powers of a Fiat Currency Issuer. So HMG continues to tell us that it needs to:

  • Sell Gilts, Treasury Bonds. Premium Bonds, The Lottery etc.
  • Use the proceeds – Taxpayers’ Private Savings & Wealth to allow it to spend more than it collects in Taxes.

Now the rub with this is the interest, or payouts HMG needs to make to holders of these, all of which is added to the National Debt. So to pay for this, the Government needs to issue even MORE Gilts & Treasury Bonds etc. to cover the interest payments. Ad Infinitum…

HOWEVER…

A quick reality check via Quantitative Easing (QE) has shown us, if you are lucky enough to have owned £454bn of Gilts and Corporate Bonds, HMG bought from you, then you have become very rich indeed…unlike HMG which is falling ever deeper into debt.

Which is a complete MYTH and has created 50 years of confusion and a convenient smokescreen for those who see Government as a problem.

Even the BoE concurs: “Read my lips. No new taxes”…Does the Bank of England print money? – YouTube

5. Enter, Stage Right…AUSTERITY:

Now if you believe all this unwittingly, or otherwise, there is a logic in thinking that an ever-increasing National Debt is unsustainable and the ONLY solution is to REDUCE, substantially Government spending and to pay down the debt.

However, knowing that Gold Standard limitations no longer apply, the HMG has created a solution, to a problem that does not exist and ironically, created a further problem to the original one, which never existed in the first place. Think IMF Crisis, 1976.

The National Debt and the convoluted machinations of issuing ‘debt’ and accounting for it, as a brake to stop HMG from issuing more Fiat £s than it could guarantee with Gold, is a relic of history. Some would consider this insistence on clinging onto an economic fossil, to be stupidity, or perhaps a sign of something far more deliberate…

It is of course a legal requirement and not unreasonable, to expect HMG to keep a track of its spending. The much-vaunted DEFICIT:

1. The gap between £s out and £s in.

2. A balance sheet of the Fiat £s HMG has decided to spend into the economy but not redeemed in taxation.

When the HMG spends, this allows taxpayers to keep £s. When the Government reduces spending, this forces taxpayers to use their savings to spend and REDUCES private wealth. The less the Government pays for, the more you have to use your savings and income.

Repeat after me…AUSTERITY REDUCES PRIVATE WEALTH…

Questions to be answered…

1. If HMG fell out of the Gold Standard in 1971…

2. Which resulted in the £ no longer being required to be convertible to Gold…

3. Why do we still account for fiat government spending for public purpose as if we were on the Gold Standard?

4. Is it just welfare for taxpayers to exchange their fiat £s into Government Savings Instruments, that pay interest?

As QE has shown us, HMG Debt Instruments are not distributed equally across all taxpayers but are bought by a wealthy private and corporate elite.

Perhaps the most mind-blowing for taxpayers to get their head around is the ability for HMG to PAY OFF – at ANY TIME – the National Debt by purchasing all Debt Instruments in exchange for Fiat £s. Hello Japan…

So far from being ‘Fiscally Prudent’ by reducing the Deficit and running Government Finances like a household, only spending what is received in Taxation – the real-world outcome is to impoverish taxpayers and their well-being.

6. The solution?

A fundamental shift and an education of all taxpayers and the political establishment, to understand that:

As long as labour and sustainable resources are available, Government Spending is not only a good and positive but absolutely essential for the economy and the democratisation of wealth.

The ONLY limitations HMG has to spending for Public Purpose are:

1. The physical resources available.

2. The labour available.

3. Its own aspirations.

4. The taxpayers’ willingness to learn, deconstruct and the 1% and their cheerleaders across politics, the media and society who have used the confusion around Government Money Creation spending and taxing for the purpose of wealth extraction and power.

History demonstrates that the Tax and Spend myth, has resulted in dire and far-reaching consequences.

Roberts

In 1976, when HMG went to the IMF claiming to have ‘run out of money’ and in return for $2bn, Healey was required to introduce Austerity measures – which were a precursor to the economics of Margaret Thatcher – latterly Neo-Liberalism.

There was an alternative proposed some 3 years before, yet thanks to Wilson, Healy & Callaghan’s refusal to listen to Tony Benn, history unfolded the way it did and Healy capitulated to Hayek and his Neo-Liberals, who have spent the following 42 years capturing the state, media and democracy in the UK – and beyond – for their own benefit.

Oh and by the way, Britain never did go ‘Bust’, no matter what Mr Roberts writes…

 

 

 

 

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The post #RethinkMoney – The Greatest Lie Ever Told (Probably)…#TaxAndSpend appeared first on The Gower Initiative for Modern Money Studies.

Which way from here? That depends on where we want to go. Our choices now will determine our future.

Sign on a fence with and arrow logo and the word votePhoto via PxHere

We are in the last few days of the election campaign. An election which, without doubt, will be a defining one for the future of this country and possibly even the planet. It will determine whether we carry on with the economic and political status quo or whether we choose a different path towards a socially just and fairer economic system which also addresses as a matter of priority the challenges posed to the future survival of our species.  Growing political unrest caused by the last forty years of market-driven dogma has created huge wealth inequalities and is driving dangerous right-wing populism worldwide.

This might be just a national election, but the world is watching. Where we put our X in the voting booth this time around will be crucial. It matters as never before.

The ancient Greek philosopher Aristotle wrote:

“For the duty of the truly democratic politician is just to see that people are not destitute; for destitution is the cause of deterioration of democracy’

Of course, he lived in a time very different to our own, but he believed that the best form of democracy was one with a more equal income distribution and that greater economic equality would increase the stability of the state and thus that of citizens.

The State has a crucial role to play in serving the public purpose or in other words creating the fundamental frameworks for a healthy society and economy which benefits everyone.  However, for the last forty and more years, economic power has become increasingly concentrated in the hands of a few people. This has been facilitated by successive governments whose policies have been informed by an ideologically based dogma of privatisation, deregulation and an emphasis on ‘sound finance’ which, over the last nine years, has been at the heart of Conservative austerity.

It has also been enabled by politicians who have acted less in the service of the nation and more in the interests of corporations and excessively wealthy people who have influenced government policies in their favour through a network of lobbying and special advisors. Democracy has been undermined by those with the power and wealth to influence politicians and a media which continues to play a huge role in that subversion.

The ideological premise of trickle-down has been that the rich are the wealth creators, that tax cuts encourage investment in the economy and jobs which benefit working people and then, in their turn, brings in taxes to pay for our public services. We have been deceived with the lie trotted out over the years and even during this election campaign by Conservative ministers and even some on the progressive left that our public services are dependent on bringing in tax revenue. When in fact it is quite the reverse.

A healthy economy and all that means, from citizens having access to good education, quality healthcare and a protective welfare system, (not to mention other vital public services or businesses which rely on access to an educated and healthy workforce and the physical infrastructure for their businesses to flourish) depends on a government which has made a political decision to invest sufficiently in that public and social infrastructure to benefit both today’s and tomorrow’s citizens. It does not depend on a government checking on whether there is enough in the public purse to do so.

For well over a year now, GIMMS has charted the consequences of austerity in its MMT blogs. Yet, now we are now witnessing on a daily basis, like never before, its damaging effects on the very foundations of economic and social life.

Economic data published last month showed that the services sector slowed in the last quarter and the manufacturing and construction sectors contracted in November. The economy just avoided recession, with the weakest growth in a decade.  Whilst clearly the uncertainty over Brexit will have played a part, cuts in government spending over the last 9 years will have also played a significant role as businesses lose investment confidence and households tighten their belts due to rising household debt.

A study published by the Office for National Statistics on 5th December 2019 found that whilst Britain’s total wealth grew by 13% between 2016 and 2018, the wealth of the richest 10% increased four times faster than those of the poorest 10%. It also found that the poorest 10% of households had debts three times larger than their assets, compared with the richest 10% who have accumulated a stash of wealth which was 35 times larger than their total debts. The Wealth and Assets Survey carried out by the ONS also showed that in 2018 the top 10% finished up with 45% of national wealth while the poorest 10% held just 2%.

The shocking data underlines the growing wealth divide. A divide between those at the top who barely noticed the 2008 Global Financial Crash (or indeed profited from it) and those on low incomes whose real earnings have barely risen since the crash and who have seen their economic share of productivity decrease over decades. The very people who have paid the real price for austerity have, in fact, suffered a double whammy.  They not only are facing an enormous and increasing burden of household debt (putting huge stress on their finances exacerbated for those on low incomes and in precarious employment), but they are also reaping the consequences of brutal cuts to the public service sector.

Huge inequalities that have arisen as a result of the pursuit of this pernicious market-focused ideology along with a deceitful balanced public accounts narrative have not only driven a steam roller through our public services and vital welfare systems but have also impoverished millions leaving them floundering in insecure and low paid employment.

In the week that the Liberal Democrat leader Jo Swinson apologised for backing the Coalition’s austerity policies during the Coalition years and whose economic spokesman claimed in a speech very recently that they are the only party of ‘sound finance’ (which sounds very much like more of the same), the news has been ever more damning about its consequences for the lives of working people, families, children and the elderly and our public infrastructure.

Shelter’s ‘Generational Homeless’ report found that a child becomes homeless every eight minutes; that’s 183 children losing their homes every day. It found that at least 135,000 children will be living in temporary accommodation on Christmas day.

‘Life in a B&B is horrible. There’s no room to do anything. I’ve been told off … for running in the small corridor. You can’t do much, you can’t play much. I don’t get to play that much. Sometimes me and my little brother Harry fight for the one chair because we both want to sit at the table. I find it really hard to do my homework’ says Will whose family was made homeless and now lives in a single room in a bed and breakfast in Ilford.

A leading charity Action for Children warned this week that some of the youngest children are facing a childhood crisis as almost one million under 10s from low-income families face a bleak Christmas lacking basics such as a heated home, warm winter coat or fresh food.

Research from the charity shows that after a decade of austerity and ongoing problems with universal credit, parents below the breadline are able to spend just £2 a day per child on food and struggle to afford nutritious food which is vital for their health and development.

The Dispatches programme ‘Growing up Poor; Britain’s breadline kids’ which aired on Channel 4 earlier this week exemplified the shocking poverty that exists in one of the wealthiest countries in the world. Children sleeping in their coats in the middle of winter because they can’t afford heating; parents counting the pennies to see if there is enough money to feed the meter; a family living in Cambridge surviving on £5 a day in a wealthy city that houses eight of the 2000 food banks that have been set up across the UK in the last decade to alleviate hunger; and a teenager Danielle who is studying for her GCEs and self-harming housed with her family in a bedsit, with no savings and relying on a local soup kitchen and food bank to survive.

This is happening in 21st century Britain and yet it feels like we are being transported in Dr Who’s Tardis back to the streets of Dickensian times.  Our children are being denied a future by a government which has put balancing the public accounts above the health of the nation, its children who represent the future and the environment upon which they will depend for their survival.

At a hustings last week, the Conservative MP John Whittingdale was applauded by the audience when he claimed that Labour had left the economy in a perilous state and close to bankruptcy. Perpetuating the lie that austerity had been necessary to get the public finances in order, he said that careful economic management by the Conservatives meant that they could now spend on the NHS, policing and education. No acknowledgement was made about the damage that austerity had caused to our public services; those on low incomes and in insecure working; the huge rise in homelessness or the 73% increase in supplies being distributed in the 2000 food banks across the UK; the increasing numbers of hospital admissions for scurvy, vitamin D deficiency and other maladies associated with economy inequality and child food poverty; and no mention of the systemic problems with welfare reforms and the introduction of Universal Credit, along with a punitive assessment system which have led to many deaths.

We must continue to challenge the false assumptions about how modern monetary systems operate and demonstrate to the public that contrary to common belief government spending is not constrained by monetary resources.

Tackling existing and future inequality and saving the planet will not be constrained by the state of the public accounts or the national debt or whether government can raise sufficient tax or borrow on the markets but rather how it will manage the finite resources it has at its disposal to create the public frameworks and infrastructure to sustain a healthy economy and environment.

It is both a moral question about how a civilised nation should behave towards its neighbours near or far and how we organise our societies to create the optimum environment for all to live with dignity and without fear.

It is regrettable that creating fear and hate has been the modus operandi of governments, extreme political movements and the press. Without a fundamental shift in our attitudes we cannot hope to make the radical changes we need to create a fairer society and more importantly to survive.  A challenge to the political and economic status quo is vital if we care about our children’s future and that of many others around the world.

To reiterate the final paragraph in last week’s MMT Lens:

What are we so afraid of? A better future for our children? A more sustainable and fairer economy for all? Indeed, a planet for us to live and breathe on? What is not to like?

 

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The Rise of the Right

Published by Anonymous (not verified) on Thu, 21/11/2019 - 8:30am in

GIMMS is pleased to be able to present for our MMT Long Read two chapters of the book “The Rise of the Right – English nationalism and the transformation of working-class politics” by Professors of Criminology Simon Winlow, Steve Hall and James Treadwell.

“Throughout Europe right-wing populism has grown to the extent that we can now legitimately begin to think about the very real possibility of a fascist future. The new right-wing nationalism will not be a carbon copy of 20th-century European fascism, but fascism it will be, nonetheless. For years this seemed unthinkable…We must recognise that the adoption of hippy counter-culturalism was a colossal error, and then begin to repair some of the damage it has caused. The first step is to reconnect with the working class with a renewed order of grounded universal ethics and truthful symbolism comprehensible to all cultural groups…the left can be rehabilitated. Reconnecting with the working class and persuading them to believe in its project is a very difficult task, but it can be done.”

The Rise of the Right – English nationalism and the transformation of working-class politics

The Rise of the Right cover

Originally published by Policy Press in 2017.  Permission granted by the publisher to use this content.

https://policy.bristoluniversitypress.co.uk/the-rise-of-the-right

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It’s not balanced budgets that will save us. It’s the power of the public purse and our human values.

Person at a demonstration holding a placard with slogan "What lessens one of us lessens all of us"Photo by Micheile Henderson on Unsplash

Charles Dickens began his novel ‘Hard Times’ thus:

“NOW, what I want is, Facts. […]. Facts alone are wanted in life. Plant nothing else and root out everything else. You can only form the minds of reasoning animals upon Facts: nothing else will ever be of any service to them. [….] Stick to Facts, sir!”

Whilst one might dispute Dicken’s character Gradgrind with his miserable vision of human existence, facts can be very useful. They can trace the human misery caused by 9 years of austerity and the last forty years of a pernicious market-oriented ideology which has led to vast disparities in wealth distribution and caused huge damage to society by encouraging the pursuit of self-interest.  And yet it has to be said as the election campaign gears up, that in terms of monetary reality, of facts there seem to be very few to be had.

As political and economic commentators, not to mention politicians on all sides, emphasise daily their claims that the government finances are like a household budget, the public has largely remained stuck in the quagmire which is presented as monetary reality and distrustful of a political system which has failed them.

Looking at newspaper front pages this week you could be forgiven for thinking that we are headed for bankruptcy if Labour were to win the election or that their spending plans would cost UK households £43,000 each. A ‘reckless spendathon’ is in the offing according to a government spokesperson in a recent BBC television interview.

Aside from such narratives being a fallacy, they are designed to put the frighteners on people who are already suffering financial hardship caused by years of austerity and ideologically driven government policies. Those with a political agenda shore up those false beliefs that borrowing too much will lead to government insolvency. They cynically and callously terrify people that they will be asked to pay for those spending programmes when they will not. This is an establishment that is running scared that their reign of power is coming to an end. The means justify the ends!

It cannot be denied that if we are to escape the worst effects of a coming global downturn, an incoming government of whatever variety will need to implement adequate spending programmes and increasingly fiscal policy is becoming the ‘mot du jour’. However, the message is reinforced daily by all sides of the political spectrum that there are still financial limits to that spending.

Last week Ed Davey, deputy leader of the LibDems said of Labour and the Tories spending plans that they are ‘writing promises on cheques that will bounce’. The very same party that joined in with Tory austerity during the Coalition and voted for public spending cuts and welfare reforms.

In the same week, the Greens promised welcome public investment of £1trillion over 10 years to fight climate change, the money for which it said would come from ‘borrowing’ and ‘tax’ changes.

Then the Chancellor of the Exchequer in a ‘give with one hand take back with another’ message promised to increase borrowing to fund billions of pounds to pay for new infrastructure but then announced three new fiscal rules to ‘control borrowing, to control debt and to control debt interest’.

Stuck in household budget la-la land he said without a hint of jest:

‘like anyone who budgets whether it’s a household, or small business or large business, I know that we must keep track of what we are spending and what we bring in…. We can’t run an overdraft forever on day to day spending, so I can confirm that our first rule will be to have a balanced current budget. What we spend cannot exceed what we bring in.

Never mind that you can build as many hospitals as you like as part of an infrastructure spending programme but if you make up foolish rules about day to day spending those hospitals will remain empty of nurses and doctors and other health professionals to staff them.  And let’s not forget the bailing out of the banks or successive wars funded without a taxpayer in sight.

The same tired old tropes abound about taking advantage of ‘historically low borrowing rates’ and ‘living within our means’ remain the context for Conservative spending plans and figure in one way or another in the language narrative of other parties too.

In a similar vein this week, the shadow chancellor reinforced that same story when he tweeted:

‘The Tories can’t invest in the public services we need because unlike Labour they won’t raise taxes on the super-rich and take on the international tax dodgers’.

The implication being here that he will bring back the magic money tree from the Cayman Islands to pay for our public and social infrastructure.

Even the Leader of the Opposition has suggested that if they don’t tax the very rich, then Labour won’t be able to pay for public services.

As Professor Bill Mitchell commented in a blog in response:

‘The British government does not need to tax the rich to pay for first-class public services. It can do that at any time it can muster the real resources to accomplish that aspiration. It issues its own currency.

It might want to tax the rich because they have too much power but that is quite separate from justifying such an action because the government needs their ‘money’.

Although without doubt the proposals on the progressive left to tackle social inequality, rebuild public infrastructure and address climate change are laudable and indeed vital, it is to be regretted that the arguments for public spending programmes are being reduced to household budget frameworks of monetary affordability, where the money will come from and economic credibility. We have become fixated by the single idea that the country’s economic ‘health’ hangs on whether or not we run a deficit.

GIMMS will say it again. In reality, the only analysis that really counts when deciding which way to vote in any election is not a judgement based on a government’s financial record or whether it balanced the public accounts but what its economic record was.

We as citizens should be examining where the money was spent and who benefited. Did that spending ensure that its citizens were in secure employment and fairly paid, had decent housing and sufficient food in their bellies? Did it create a healthy and more equitable economy in which wealth was more fairly distributed? Did it ensure that the vital public and social infrastructure such as the NHS, social care, education and local government were adequately funded to serve the public purpose and not fill the coffers of private profit? Or was that public money sucked up by the private sector in a big free for all in which the state serves the interests of the corporations rather than the interests of its citizens?

And what about government policies on health, education, welfare spending and the environment? Did they create stable lives by improving the material, financial, physical and mental health of citizens? Did they ensure adequate investment to ensure that the nation can be as productive as possible through good education and training both for present and future generations? And finally, the environment – what actions did they take to address the climate crisis?

In other words, we should be examining what the real economic outcomes were.

After nine years of telling the public that there was no alternative to austerity and cuts to public spending because the coffers were bare, it’s amazing what the prospect of an election can do to turn the spending taps on. And yet the smoke and mirrors, lies and deception about how government spends just carries on relentlessly.

But now it’s all OK (for the moment) the Conservatives have found the magic money tree, cutting the deficit has apparently given them some savings and the fiscal ‘headroom’ to spend. For those that know, this narrative is a fairy tale of epic proportions. For those that don’t, it should be enough to arouse a cynical response by a public which has been at the sharp end of those tax and spend myths which have formed the basis for its policies.

Indeed, only this week the following headlines should serve as the wakeup call for the public about Conservative economic credibility.

‘UK suffers biggest fall in jobs in four years’

‘UK avoids recession but annual growth slowest in almost a decade.’

‘Wage growth slows’

We can blame it in part on the uncertainty caused by Brexit, but the reality is that behind the faceless employment figures published by the Office of National Statistics are the lives of real people who have been affected by the government’s policies and spending decisions over the last 9 years.

To put it in basic economic terms, when a government spends it creates income for the private sector which is then spent into the economy. When it imposes spending cuts it is removing money from people’s pockets leaving them with only three options: Use their savings if they have any, take out credit or go without.

All spending, whether from government or the private sector, equals income for someone. What happens when you take that away? That’s people who lost their jobs in the public sector as local government, the NHS and schools were forced to pare down their budgets as a consequence of public spending cuts. That’s people constrained by public sector pay caps and pay cuts. That’s people who ended up working two or three jobs on low pay to keep a roof over their head and food on the table. That’s people working in precarious employment in the zero-hours or gig economy with no guaranteed decent income or sick or holiday pay. That’s people affected by the reforms to welfare and the introduction of Universal Credit, from those who are unemployed left with insufficient financial resources to make ends meet and those in work but not earning enough to keep their heads above the water to those left struggling to cope because of chronic sickness or terminal illness.

In seeking the nirvana of balanced budgets by cutting spending the Conservative government has not created a healthy economy it has done the very opposite. The statistics are the proof.  Without adequate spending, the economy suffers, and people pay the price.

And yet as political parties present their spending plans and worry about how they will demonstrate their economic credibility the elephant in the room is crashing about trying to make itself noticed. On one note it is pathetic to see the Conservative party take issue with the opposition’s spending plans calling them reckless and unaffordable whilst promoting its own as being fiscally responsible. On another, in their rush to spend, neither party seems to have considered the real resource factor and how that will be managed.

The IFS for all its neoliberal sins ‘gets’ the elephant in the room and recognises that whoever wins on December 12th their spending plans will be dependent on whether they have the right resources at their disposal to deliver.

After 9 years of insufficient spending into the economy to prepare for the future, will there be sufficient people with the right skills to meet the government’s needs? Whether that’s engineers and construction workers to design and build the proposed infrastructure or homegrown nurses and doctors already trained up to service the planned spending on the NHS? Or in these days of climate crisis we might also be talking about the resources needed to deliver the Green New Deal and ensure a just transition not just for those in the rich west but those in the global south whose countries have already been plundered of raw materials and impoverished so that we can maintain our standard of living.

For progressive parties like Labour and the Green Party who wish to deliver a left-wing agenda what they have to do is decide their key priorities, consider the availability of resources and how they could be freed up to deliver a future government’s objectives efficiently and effectively. A case in point this week is Labour’s plan for free broadband which has much to recommend it in terms of bringing communities together in an inclusive and connected society. Journalists and others predictably have asked the question where will the money come from? They have missed the point entirely and should be asking instead how many workers would we need to deliver it?

Ultimately, all sovereign currency-issuing governments don’t need to match their plans to tax revenue or determine whether the markets can lend them the money. The role of government in this respect is not to balance the budget but to balance the economy.

The public needs to understand that it isn’t the government’s ability to tax the rich but its power to run a deficit which determines the health of an economy. As the sovereign currency issuer, the UK government has the power of the public purse to fund the public works necessary to tackle social and wealth inequalities, deal with the current global economic uncertainty, and fund the Green New Deal, should it choose to do so.

However, at home, our public and social infrastructure is in a shocking state of decay caused by 9 years of cuts to public spending and lack of planning. Reversing that decline is not something that just promising to spend can solve in the short term.  There are important issues to consider for the long term which may not fit the short-termism of the political five-year framework and many politicians who have become used to serving other interests.  That is the scale of the challenges we face.

When all is said and done even though the Labour party persists with the household budget myths John McDonnell has it right in terms of what is required not just to reverse the social injustices heaped upon global populations because of pernicious ‘free’ market ideology or the threat to the human species at our own hand. As he said not only must the scale of investment match the scale of the crises we face both in ecological and social terms, but also if we don’t make these investments our future generations will never forgive us.

Let’s leave the final words to Professor Bill Mitchell who wrote a while back:

“My ideological disposition tells me that the pursuit of human values is the only sustainable way of organising and running a world. The neoliberal era has severely undermined that pursuit.

That’s what we must change and urgently if we want half a chance to save ourselves and our children’s children from disaster.

 

Note: GIMMS has a very good resource section on our website which takes you through how money works. From FAQS to resources sheets and external websites, videos and academic papers for those who want to take it further. For an introduction to how money really works follow the link here.

 

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The post It’s not balanced budgets that will save us. It’s the power of the public purse and our human values. appeared first on The Gower Initiative for Modern Money Studies.

The austerity prescription was not an experiment; it did not fail for the rich. Time for a rethink. Time for an economic revolution.

Published by Anonymous (not verified) on Sun, 03/11/2019 - 8:51am in

Poling station sign on a fencePhoto by Martin Bamford

“Ultimately austerity has failed because it is unsupported by sound logic or data. It is an economic ideology. It stems from the belief that small government and free markets are always better than state intervention. It is a socially constructed myth – a convenient belief among politicians taken advantage of by those who have a vested interest in shrinking the role of the state, in privatizing social welfare systems for personal gain. It does great harm – punishing the most vulnerable, rather than those who caused this recession.”

David Stuckler, The Body Economic: Why Austerity Kills

 

So here we are. After literally years of national uncertainty over Brexit, parliamentary wrangling and growing public discontent, a general election has been announced just before Christmas. Whilst at this early stage it is unclear what the outcome might be (we have a road to run yet) who we vote for should be determined not by listening to the promises that will be made in political manifestos but by examining closely the economic record of the current government over the last 9 years.

Who has gained and lost out through government’s and taxation and spending policies? Who has suffered at the sharp end of austerity politics and why? Every day the consequences are ever more visible. On our streets, in our hospitals and GP surgeries, in our schools and local communities, amongst our family and friends. Hunger and the normalisation of food banks, growing homelessness, cuts to child and adult social services, the collapse of social care, lonely deaths of vulnerable people behind closed doors, longer waits to see a doctor or hospital referrals, the humiliation and financial distress caused by welfare reforms. This is what austerity has achieved. GIMMS has covered these things week in and week out for the past year in some form and again we make no apology for doing so again. What happens next will be in our hands as will the future of our children and future generations.

Austerity has been built on a lie, and in fact, has allowed the incumbent government to pursue the neoliberal ideology of decades with impunity. It has shamelessly promoted the cult of the individual over collective action, demonised those who don’t fit the mould of hard-working people, left them at the mercy of the unemployment queue or working in the low paid, insecure gig economy, burdened them with high levels of private debt, increased poverty and inequality not to mention sold off public assets and privatised vital public services.

We were endlessly told that the previous Labour government had spent all the money and bankruptcy beckoned. We were told there was no alternative to cutting public spending to get our finances back in order. We were told that our public services were inefficient and no longer affordable. And we believed it all. Not because we were stupid but because it seemed a logical premise that the government’s finances were like our own. We were bound by Dickens’ character in David Copperfield, Micawber, whose dictum was that happiness arose from not spending beyond one’s means. However, those misunderstandings are now starting to shift and although many politicians and orthodox economists are trying to ignore the elephant in the room, modern monetary realities are moving into the mainstream arena to be discussed, criticised and picked over. We should feel more confident at this positive step forward.

In the meantime, though, we still have a big job in front of us to inform and challenge the status quo and economic orthodoxy of the last 40 and more years.

While we prepare for the coming election (and Christmas) the effects of government austerity roll on, affecting people’s lives remorselessly.

Published in July and updated just a few weeks ago, the Insolvency Service reported that levels of personal insolvency were approaching the highest in a decade. In the three months up to September, they rose from 25,169 in the same period last year to 30,879. The data also showed a dramatic increase in company insolvencies which had increased for the third consecutive quarter. Duncan Swift, president of insolvency and restructuring trade body R3 said ‘figures provide a worrying insight into the state of personal finances’ and are ‘further evidence that the economic and political turbulence of the last 12 months has taken its toll on businesses’. He also observed that ‘although real wages have hit a recent high, they are still lower than they were before the financial crisis. Unemployment may be low but it’s not necessarily secure for everyone’.

In a blog in 2017, Professor Bill Mitchell wrote:

‘One of the defining features of the neo-liberal era has been the build-up of private debt, particularly household debt. [……….]. Pursuing budget surpluses is necessarily equivalent to the pursuit of non-government sector deficits. They are the two sides of the same coin’.

In other words, when a government is in surplus i.e. it has taxed more than it has spent the non-government sector pays the price.

We should be wary however about blaming everything on Brexit, as many pundits do, and instead should be looking at other causes for the rise in private, household debt and growing financial instability.

Over the last nine years, the government has pursued an austerity policy of cuts to public spending on the false premise that it needed to cut its deficits and borrowing to get the public finances back into shape. It also provided a handy smokescreen for the Conservative government to reduce the level of state involvement in public service delivery by contracting out and privatising services, although it did not stop public money going into private profit.

Public services were cut, people lost their jobs and local government grants were slashed.  Poverty and inequality grew as employment became more precarious in a low wage economy along with the rise of zero and part-time hours, and the gig economy. The claim at the time was that if the public deficit was not reduced then the economy would suffer through a scarcity of money. The politicians advised by economic experts promised that lower deficits or fiscal surpluses would guarantee financial stability.

However, the reality was the reverse. Austerity policies, quite simply, removed money from the economy and reduced people’s spending power, leaving them with no other option but to increase their debt by taking out credit or spend their savings. As John Maynard Keynes so rightly noted ‘the boom, not the slump is the right time for austerity’.

When a government stops spending sufficiently to ensure full employment, someone else has to take up the slack i.e. the consumer has to spend instead to prop up the economy. However, unlike currency-issuing governments whose spending constraints are not financial, private households are limited in their capacity to spend by their income or their ability to borrow. Pursuing lower deficits or surpluses was, and still is perverse, not to mention damaging, given the economic context at the time. The nation is now paying a heavy price for austerity as the country faces the prospect of a future recession caused also by a global slowdown and the uncertainty of Brexit.

By way of example, we can show how the prevailing economic orthodoxy had serious consequences for the economy. In the early 2000s, Labour ran budget surpluses achieving the lowest deficits in UK history. Politicians of the time, in justification and using the classic household budget metaphor, said that there was nothing progressive about budget deficits and that every pound we spent on debt interest was one less we could spend on the NHS, on vital public services, on helping the poor and vulnerable. The UK was at the time on the crest of a wave of consumption built on household debt which subsequently and, as we know, ended in the Global Financial Crash caused by crooked financial institutions who’d got out of control, and governments who had not only encouraged a deregulated financial environment but also pushed debt into the private sector whilst claiming themselves to be financially prudent.  We don’t seem to have learned any valuable lessons from that experience.

In a co-authored paper with Luke Reedman, Professor Bill Mitchell wrote in 2002.

‘… a major shift in monetary and fiscal policy is required and must begin with an acceptance that public deficits are typically required to maintain stable growth rates in spending and sustainable levels of private sector debt. The government can clearly run surpluses for a time by exploiting the willingness of the private sector to increase its debt levels. But this strategy becomes highly deflationary once private agents seek to restore their balance sheets. The resulting output corrections force the public sector into deficit with accompanying private wealth losses and rising unemployment. In this context, the argument that budget surpluses are needed to ‘fire-proof’ the economy is nonsensical.’

To give these technical facts a human dimension we need to bring them down to real-life realities.

Aditya Chakrabortty commented in an article this week, that more than four million are children living in poverty in the UK and that the number of food banks has increased from 57 in 2010 to 428 last year, handing nearly 580,000 parcels to children. Such figures, in one of the richest societies in human history, should mortify us as a nation. Reviewing the recently published book ‘It’s a no money day’ Chakrabortty describes it as ‘a watershed moment when Britain’s food banks go from newspaper headlines to a subject that teachers cover in classrooms; the moment at which mass destitution is no longer a badge of political failure but is instead accepted as part of British life.’ The normalisation of food banks and the charitable collection of food in supermarkets should be THE moment when the alarm bells start to ring.

When the likes of Michael Gove sneer at people using food banks for not being able to ‘manage their finances,’ in so doing they not only perpetuate the lie that people are to blame for their own misfortune, but they also provoke hate and create societal division.  By propagating the lie of money scarcity and shifting of responsibility from government to individuals, politicians are failing in their duty as elected officials to serve citizens. The role of government needs to shift back from one which serves corporate interests to one which serves the public purpose.

We are a nation rich in real resources and have a currency-issuing government with the capacity to mobilise those resources for the public good. Nurturing our children should be always central to our nation’s investment, with their young minds nourished with hope and inspiration and not the needless misery of foodbanks and poverty. By extension, this applies to the population as a whole, many of whom have suffered needlessly from government austerity and ideologically driven policies.

Given the climate crisis and the challenges we face in righting the social injustices of the past few decades (caused by an ideology which has put the individual over the interests of the collective and profit over the health of the planet and its citizens increasing poverty and inequality and threatening the existence of our species), it is time to engage in a conversation about what we think should be our priorities in the future.  About what sort of country we want to be, what public and social infrastructure we need to create economic and social well-being and what sort of future we want for our children’s children. These are not left or right questions, they are, quite simply, questions about our human values.

In the words of the current Prime Minister, ‘Britain deserves better’. It certainly does. Better than the last 40 years of economic and ideological orthodoxy which successive neoliberal governments have pursued relentlessly. It’s time for a change.

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The post The austerity prescription was not an experiment; it did not fail for the rich. Time for a rethink. Time for an economic revolution. appeared first on The Gower Initiative for Modern Money Studies.

Surplus to requirements, ScoMo?

Published by Anonymous (not verified) on Sun, 20/10/2019 - 6:09pm in

Applause, stamping, hoots and catcalls resound up and down our wide brown land as another big week in Oz-politics lives down to expectations, as John Crace says of Boris Johnson, now the incredible sulk, after his inevitable Brexit flip-flop just flops with a not-so-super Saturday vote to delay, a thinly-disguised ploy to sink the whole…

The post Surplus to requirements, ScoMo? appeared first on The AIM Network.

We need to relearn the art of adequate spending for public purpose

Published by Anonymous (not verified) on Sat, 12/10/2019 - 9:30pm in

The GIMMS team have been away and had a very busy two weeks travelling between Brighton, London, Manchester, Leeds and Newport for a variety of events.  All in all, it has been very successful and well worth the effort. We’ve had the pleasure of meeting lots of enthusiastic and lovely people across the country and we hope that over time the interest can be carried forward into real action in local settings.

The recording of the Brighton Fringe Event at which Professor Bill Mitchell spoke is now available here and we are working on editing the training session in London and the recording of GIMMS event at the Green Party Conference.

So, from this week normal service is resumed for our MMT Lens with a round-up of the key events over the last two weeks.

 

Cardboard placard at a protest with the slogan "Fight today for a better tomorrow"Photo by Markus Spiske on Unsplash

Boris Johnson is spending. Well, not his own money, of course, but he has authorised a multibillion-pound government spending programme not to mention substantial tax cuts for the wealthiest. After nine years of unnecessary and harmful austerity politics a focus on fiscal rather than monetary policy, which is in a predictable dead end, is to be welcomed although strangely it seems to reflect many of Labour’s spending promises. They say that imitation is the sincerest form of flattery, don’t they?

As part of the spending review by Chancellor Sajid Javid some weeks back, Boris Johnson in his speech at Conference promised investment in the NHS and social care, education, transport and roads, local government, police and the environment. And again, strangely, all those things that it has been busily cutting over the last 9 years because it was claimed we couldn’t afford them are now back on the spending menu. It is tempting to ask the question but where will the money come from since it’s the one that the Conservatives have most often asked Labour when they have announced their policy and spending programmes.  It has also been tempting for some like Paul Johnson from the IFS to wonder whether Boris’s proposals for tax cuts were feasible given his public spending promises.  That is, of course, if like Paul Johnson you accept the too often trotted out household budget version of the state finances which says that government relies on tax and borrowing in order to spend which GIMMS readers surely must know by now they don’t in a country where the government is the sovereign currency issuer.

These spending promises and tax cuts drive a coach and horses through the notion that government spending is constrained by taxpayer revenue. It also tells us very clearly that some politicians know exactly how the money system works and let’s be honest it’s not been the first time that the Tories have opened the public purse to serve a specific political agenda! Those computer keys at the Bank of England will be red-hot if the promises are kept.

After having been told in no uncertain terms that there was no money and that we all had to pull in our horns to get the public accounts back into health suddenly there’s money but an equal question in people’s minds about how it will be paid for. And that cannot be surprising given that the household budget narrative reigns in the public consciousness.

As usual and in response to the government’s plans, some of which were announced prior to the Conservative conference, there have been alarm bells ringing in the usual quarters both political and institutional about the impact on the deficit and debt and borrowing levels.

The government’s spending plans sit contrary to the 2% of GDP limit which was set for the 2020-2021 fiscal year and suggests a rowing back from the traditional Tory mark of fiscal prudence. It remains to be seen how much of this is an electioneering ploy and whether it will translate into reality. However, interestingly, as government announced its spending plans there was trouble brewing in its own party as voices of dissent were being raised at a party fringe meeting where MPs, representatives from the Taxpayers’ Alliance and the Institute of Economic Affairs indicated that although they recognised that people had suffered through austerity they believed that the government had not gone far enough in cutting public spending. John O’Connell, Chief Executive of the TPA went as far as to reject the word austerity saying we should refer instead to ‘living within your means’.

It is shameful to note that there are people who, whilst acknowledging that austerity has caused suffering, want more of it. The household budget framework of taxing to spend and the resentment felt by some that ‘their tax’ is funding freebie public services for all lies at the heart of it and reflects the neoliberal ideology that the state should take a step back and abandon people as authors of their own fate. The idea that ‘living within one’s [financial] means’ is a better measure of economic success than pursuing public purpose to benefit people materially and in terms of well-being is an indication of how far we still have to go to challenge this narrative. Not only do we need to counter the notion of ‘taxing to spend’ with the correct description ‘spending to tax’ we need to correct the idea that living within one’s means relates to money. The only ‘living within our means’ we need to be doing relates to our resources whether that’s people or the materials used in the production of goods and services that we benefit from. The only balance we need to make is the one between spending and resources.

Predictably, news of the government’s spending and taxing plans brought out the debt sirens on the left who have been posting FB memes that the national debt has soared under the Tories to almost £1.8 trillion since 2010. It is disappointing to note in the face of the real consequences of austerity that the language narrative about how government spends is still dogged by household budget explanations, ‘rising deficits’, ‘increased borrowing’ and ‘mounting national debt’.

The Conservatives response has been that the government’s prudent management of the public accounts has given them the fiscal space to spend. In fact, the Prime Minister trotted out the usual nonsense that the Conservative Party had ‘tackled the debt and the deficit’ left by the last Labour government and suggested disingenuously that it has only been able to increase investment in schools and hospitals because it had ‘cleared up the wreckage they left’.

All these descriptions used by both the right and the left wing lie within a flawed mainstream paradigm. On the one hand, the Conservatives have used it to defend the need for austerity to deliver their own ideological agenda and claim fiscal superiority over their political rivals. On the other, Labour persists in the language of tax and spend and finding the magic money tree in the Cayman Islands to fund their laudable progressive programmes. Even John McDonnell could not resist saying that the proposed tax cuts would ‘rip out £10-£20bn a year from our already decimated public services’.  When clearly, they can’t and won’t!

It is regrettable that the public finds itself still caught in the headlights of a long deceased monetary narrative the consequences of which live with us now and will continue to do.

Instead of taking the debt sirens at face value in their criticism of the rising national debt under the Conservatives we should instead be evaluating their economic record. Who gained from their spending and taxing policies and who lost out?   Measuring success by the state of the public accounts from the size of the deficit/debt or whether the government has balanced the budget or achieved a surplus is quite simply incorrect and tells us nothing about the context of the state of the public accounts.

This can best be evaluated with a brief look at both the government’s spending plans, its policy agenda and the on-going consequences of cuts to public spending.

The government whilst it is planning to spend £25bn on improvements to the road network it has not been similarly generous to the bus network which amounts to only £220m. Combined with its already announced spending on the environment of around £432m which is a fraction of the amount needed to address the challenge of climate change demonstrates the Conservative’s complete disregard for the environmental challenges facing us. Apart from the fact that since 2010 government has cut spending on subsidies to bus companies which have forced the closure of 3000 bus routes (not to mention all the other consequences of cuts to public sector spending including the NHS, social care, education policing and local government) this would have been a good time for substantial investment in sustainable public transport instead of giving precedence to roads and cars.

Of course, as indicated earlier, it cannot be denied that a domestic spending programme is a good move at a time when the figures show that the world seems to be sinking towards recession. However, it should not be surprising, given who has authorised the spending, that it is still framed within a neoliberal framework of privatised public services and public money going into private profit whether that’s the NHS and social care or privatised transport networks. It does not suggest a reversal of neoliberally inspired agenda which the Conservatives have been pursuing under cover of austerity.

It also ignores the on-going consequences of public sector cuts, reforms to welfare and the introduction of Universal Credit on the well-being of citizens and indeed the economy.  The scandal of the huge rises in homelessness is bad enough (the Charity Crisis estimates some 24,000 people last year) but just last week figures published by the Office for National Statistics revealed that 726 homeless people died on our streets in 2018. The figures showed a 22% rise over 2017 which was the biggest increase since data was first collected in 2013

The Chief Executive of Crisis, Jon Sparkes, responding to the figures and at the same time putting a human face on the statistics said:

“It is heart-breaking that hundreds of people were forced to spend the last days of their lives without the dignity of a secure home. This is now the second year running where we have known the true scale of the human cost of homelessness, yet still the lessons from these tragic deaths go unlearnt.”

Add to this the record numbers of people, as reported by the Trussell Trust earlier this year, who are using foodbanks along with increasing food insecurity and the spectre of malnutrition, far from turning the page on austerity, the consequences of it remain with us and will do for some time to come unless we get a change in government.

Just a quick look at other news from the last couple of weeks emphasises that just the promise of spending is not going to fix the damage quickly. Behind just these few headlines lie the reality of the harm that has been caused by austerity and government policy choices.

“England sees ‘worst summer on record’ for A&E waits”,

“Alcohol tax cuts cause nearly 2000 extra deaths”,

“Severe obesity among children aged 10 to 11 at record high…. Figures highest among children from the most deprived communities”

 “Unprecedented’ rise in infant mortality linked to poverty”,

“Nursing vacancies hit record high leaving patient care at risk”

For the lie of balanced budgets our economy has slowed, people have got poorer and inequalities have risen, and our public and social infrastructure is cracking up. And all the while the rich have got richer and appropriated an immoral share of the country’s wealth – all with the helping hand of government.

But it doesn’t have to be like this. There is an alternative world and it is up to us to bring it about not just for our sakes but for our children who will bear the burden of our inaction if we turn away.

It starts by understanding these simple concepts:

“A sovereign government is never revenue constrained because it is the monopoly issuer of the currency. In other words, its public debt level is irrelevant in terms of its capacity to spend in the future, unless it deliberately constrains itself with voluntary fiscal rules.

Such a government is never financially constrained in its future choices by its past fiscal position. 

Fiscal Space is [not] about financial resources. It can only be about real resource availability in a modern monetary economy where the government issues its own currency.”

Bill Mitchell 2017

It is both encouraging and exciting that the orthodox narratives are being challenged now in the mainstream media as modern monetary realities get an airing even if sometimes critically. The debate is moving on. We just have to ensure it reaches a successful conclusion.

 

As we said in our introduction, the video of Professor Bill Mitchell’s talk on the Green New Deal has been published on our YouTube Channel.

 

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The post We need to relearn the art of adequate spending for public purpose appeared first on The Gower Initiative for Modern Money Studies.

Book Review: Why Not Default? The Political Economy of Sovereign Debt by Jerome Roos

Published by Anonymous (not verified) on Wed, 09/10/2019 - 10:03pm in

In Why Not Default? The Political Economy of Sovereign Debt, Jerome Roos explores why sovereign defaults have been an undesirable last option by systemically unpacking the structural characteristics of the contemporary debt market. This is a fresh and painstakingly researched approach that raises vital questions for economists, political scientists and policymakers to address in the era of relatively low cost, yet mounting, sovereign debt, writes Aleksandr V. Gevorkyan.

Why Not Default? The Political Economy of Sovereign Debt. Jerome Roos. Princeton University Press. 2019.

In Why Not Default? The Political Economy of Sovereign Debt—a book based on his doctoral dissertation—Jerome Roos systematically unpacks the structural characteristics of the contemporary debt market. Leveraging analysis of historical evidence, the author proposes a theory of creditor structural power and high spillover costs of default, thereby answering the question in the book’s title. The book connects the global financial system with countries’ prospects for access to the international capital markets and economic development.

Why don’t nations, or in the adopted jargon, sovereign borrowers, simply default on their debt if that could minimise financial burdens? It would appear to be logical to renege on prior commitments when faced with macroeconomic deficiencies or a currency crisis and interruption of foreign exchange flows. Yet, as Roos argues, sovereign defaults have become less common. In fact, even going back in time, despite their higher frequency of occurrence compared to today, sovereign defaults were the undesirable last option.

There is much to discover and learn in this dense volume. The opening chapters are dedicated to what the author describes as ‘The Theory of Sovereign Debt’. This is then followed by a critical review of the history of sovereign defaults, starting with early Italian city states, continuing through the nineteenth-century restructurings and 1930s defaults. Before its concluding chapter, the bulk of the book is found in the most granular exploration of three cases across three lengthy parts focusing on Mexico (1982-89), Argentina (1999-2005) and Greece (2010-15).

The historical perspective on the evolution of debtor compliance is undoubtedly one of the distinctive strengths of this study. The problem of sovereign debt is neither new nor confined to computer-modelled technical fundamentals. And little here has been by accident and much is derived from the debt dealings and dispute resolutions of the accumulated past. This historical narrative is interplayed with political economy. Applied consistently throughout, this merger adds to the book’s credibility as the dispersed historical episodes are stitched together in a framework of three enforcement mechanisms of debtor compliance.

Image Credit: ‘Let Greece Breathe’ event, London, 15 Feb 2015 (Sheila CC BY NC 2.0)

So, why not default? The author argues that an institutional framework in the international capital markets of enforcement mechanisms securing creditors’ structural power over the borrower and the high spillover costs of default faced by the latter hold the key to the answer.

The first enforcement mechanism is the market discipline defined as ‘a product of private creditors’ capacity to inflict highly damaging spillover costs on a debtor’s economy by withholding further credit and investment in the event of noncompliance’ (17). Creditors’ ability to act uniformly against an autonomous borrower is paramount in this mechanism. Roos documents the progression of the global capital markets from a decentralised to a more concentrated scheme. The bond markets of the 1920s-1930s were highly decentralised and filled with small retail investors with limited ability to coordinate their actions as creditors. The state (on the creditor side) in those and earlier debt restructurings played an important role, with at least diplomatic guarantees. With time, as global financial markets transformed, following banking systems’ consolidation, there was a shift towards a concentrated organisation of capital markets imposing now a coordinated discipline upon the borrower. This, Roos argues, is the critical element of the structural power that contemporary creditors have over borrowing governments.

The second enforcement mechanism relates to the conditionality of lending, familiar to development economists and common in the cases of official creditors or multilateral organisations crisis lending. Moving from the cases of Mexico and Argentina to the recent Greek debt crisis, the book illustrates the rapid evolution of this mechanism. Along the way, the role of multilateral institutions, such as the International Monetary Fund (IMF), as a lender of last resort is strengthened. The official creditor states (and individual private investors), in turn, relied on IMF’s programme as a prerequisite assurance to re-engage with the borrower. The mechanism appears to gain effectiveness as the debtor faces minimal domestic financial self-sufficiency and no viable alternatives to borrow externally.

Finally, the third mechanism pertains to the ‘bridging role’ of local business and political elites in each debtor country advocating fiscal discipline and debt repayment. Roos sees this as a complementing factor to the first two mechanisms and a by-product of the post-Bretton Woods ‘internationalization of debtor discipline’ (79). There is a structural, country-specific element to the financial power and fiscal decision-making that domestic elites claim on the debtor state. Much of this power is interdependent with the ability of domestic commercial groups to attract foreign credit motivating their preference for fiscal austerity in an attempt to avoid spillover costs to the private sector’s debtor profile.

Collectively, the argument goes, all three reinforce private creditors’ structural power. The spillover costs of sovereign default increase as a borrower risks being cut off from international capital, exacerbating domestic political fallout and economic malaise. As such, there are external and internal pressures upon the debtor, forcing debt repayment and compelling a new government to accept their predecessors’ obligations. Still, a default today is possible, the book concludes, but only ‘when all three enforcement mechanisms have broken down’ (70).

There is considerable relevance of the issues raised in Why Not Default? to today’s global capital markets and a demanding reader would have benefited from such clear assertion. The years since the 2008 global financial crisis have seen a rapid rise in foreign currency-denominated debt across emerging markets and developing countries, in particular. While some of this increase is dictated by individual country’s fundamentals, there is also evidence of emerging markets jumping on the opportunity to borrow in the global capital markets and of old-fashioned ‘reach for the yield’ by the global investor in the higher liquidity and low interest rates environment largely shaped by advanced economies’ monetary easing policies.

As emerging markets are racking up debt, including, now increasingly, in local currency with significant foreign investor ownership, the stakes are rising for macroeconomically weaker individual economies in the event of a significant disruption of capital flows. As in the past, the triggers might be a combination of external or internal factors. Of greater concern, however, are the transformative indirect tendencies in the capital markets affecting smaller economies. This is precisely the landscape where Roos’s combined theoretical framework of structural power and enforcement mechanisms, tested in real time, may inform policy actions aimed at preventing high spillover costs of multiple sudden defaults.

On a minor side, some might find Why Not Default? to be quite detailed and with limited empirical analysis. Yet, the latter may not be necessary here as the book advances its author’s conceptual vision. That may leave one a bit impatient to read Roos’s concrete proposals for reforming, if needed, the debt markets. But such analysis would likely require a dedicated volume with a magnifying glass focus on country-specific institutional, historical, political and socio-economic factors: apt for a follow-up work. On a personal note, it would also have been interesting to read more about sovereign debt challenges across the post-socialist transition economies of Eastern Europe and the Soviet Union as countries in this group may or may not be operating within the book’s proposed debtor compliance framework.

More broadly though, by asking ‘Why Not Default?’, Jerome Roos raises some unconventional, yet imperative, questions for economists, political scientists and policymakers to deal with in the new era of relatively low cost, yet mounting, sovereign debt. The book is fresh and novel in its approach to the problem of the creditors’ role and stuns the reader with painstakingly impressive treatment of historical evidence of debt restructuring, making the analysis relevant to discussions today.

Overall, Why Not Default? is a valuable resource in its intellectual synthesis of history and political economy, offering a motivation for an informed sustainable development strategy in the present and the future.

Aleksandr V. Gevorkyan, Ph.D. is Associate Professor and Henry George Chair in Economics at the Peter J. Tobin College of Business, St. John’s University. He is the author of Transition Economies: Transformation, Development, and Society in Eastern Europe and the Former Soviet Union (Routledge, 2018). This book was recently reviewed for LSE Review of Books by Dr. David Lane.

Note: This review gives the views of the author, and not the position of the LSE Review of Books blog, or of the London School of Economics.