I think this from Simon Wren-Lewis, written yesterday, is very good:
[The suggestion is] that Sunak, like Osborne, only pretends to misunderstand the nature of government debt. I used to say this deficit deceit was really a pretext to reduce the size of the state, but I think we need to be more precise in the current climate. Many Conservative MPs today seem quite happy about the state paying too much money out to corporations who have previously or will subsequently give Conservative politicians seats on the board, and/or have given the party financial support. What they fear is government money going to the wrong people, people who are not their friends, donors or the very rich, and who are unlikely to vote for them.
Corruption, in other words, under the guise of deficit concern.
There is not really a lot to add to that.
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Agreed – and William Hague speaking today about not being able to carry on financing e.g. hungry children due to the deficit.
We need to keep up the message of full employment being the appropriate lever/metric to use.
Until we can change the language around all of this we cannot get to the root of the problem.
As long as people (with their hearts in the right place) talk about how a government can hypocritically “find” the money for dubious PPE firms but not a paltry sum for sustaining their populace, we are somewhat doomed.
Using “find” in this context is incorrect, reductive, and pernicious. But the (often good) people using it cannot see that.
Unfortunately the parlance of public expenditure is biased and set against truth-tellers.
So, your suggestion is?
It’s fanciful, but if we had proportional representation, there’s space for a party which talks honestly to the public about money creation what it sees as its role in the economy and society.
No smoke and mirrors. No bullshit.
No more talk of “finding” money or – Raab’s favourite – “hard choices” (when deliberately causing unnecessary hardship for disabled people).
It ain’t gonna happen any time soon, but that won’t stop me desiring it.
🙂
Re Steve’s reference to PR and maybe more transparency, it might be sooner than you think. The campaign group Make Votes Matter have brought together a cross party Alliance in support of PR and have agreed a Good System Agreement for its implementation. Key is getting Labour to support PR and the Labour for a New Democracy campaign is working hard for PR to become a Labour Manifesto commitment. There is a groundswell of opinion in favour of a fairer system where votes match seats.
“One of the myths perpetuated by mediamacro is that management of the public finances is all about controlling our debt by keeping deficits down. As with so much of mediamacro, this is something no academic macroeconomist would say. Econ 101 (first year undergraduate economics) tells you that the deficit should rise and fall with the economic cycle. In particular in major recessions deficits rise rather a lot, and that is exactly what they should do.
Econ101 also tells you that in a recession caused by collapsing demand, it makes sense to increase the size of an already large deficit through fiscal stimulus. It becomes absolutely necessary to do so when interest rates can no longer stimulate the economy because they are stuck at their lower bound. Fiscal stimulus is the way you get out of recession much quicker, and according to some models the only way to get out of recession.
Much the same applies to a national crisis. No one worries about rising debt in a war, and no one should worry about rising debt in a pandemic. Government debt and monetary financing are all about being able to spend big in emergencies without having to worry about running out of money.” (The beginning of Wren-Lewis’ Blog)
One of the myths perpetuated by neoliberalism is that economists have always known this, and neoliberalism factors it in. So presumably the deficit myth never happened; nor did Osborne, nor did austerity. somebody made austerity up out of nothing. Austerity never happened. There, I have fixed it.
🙂
Bit of both really
encourage the importance of the small state
lavish as much financial benefit to potential & current benefactors
a case of ” have your cake & eat it ”
but
don’t give even the crumbs to the loser kids
https://www.theguardian.com/commentisfree/2020/oct/21/government-covid-contracts-britain-nhs-corporate-executives-test-and-trace
A very good read from George Monbiot, where the money is going, mro
The first sentence Simon Wren-Lewis opens with is the following:-
“One of the myths perpetuated by mediamacro is that management of the public finances is all about controlling our debt by keeping deficits down.”
Genuine democracy and therefore greater control over corruption is only going to be possible when there’s the radical recognition there are only two types of money – government created and “private bank” money and this requires doing away with the government’s central bank!
Why?
Because as long this exists corrupt politicians will apply the “debt” argument to government spending!
We should be mindful in understanding this radical proposal that in the UK a central bank only came into existence in England in 1694 just over three hundred years. We need to understand why and why we no longer need it.
I am not wholly sure I get this argument as yet
Independent central bank I get
Why abolish a government department which without independence the Bank is?
Three reasons:-
In the public mind “banks” are synonymous with “debt” and “debt” is still viewed as a less than ideal situation to be in by households especially and for good reason, home foreclosure, for example. So there is an element of fear involved in the idea of “debt.”
For centuries the UK simply had a Chancellery of Exchequer which today we know as the Treasury Department. There was no separate central bank.
The reasons for having a separate central bank now no longer apply. (Read the bottom of page 11 and the top of page 12 in the following link which starts with “First, the change occurred at the center.” and ends with “The Stuart monarchs picked up the cost of the coin and undermined old traditions like tallies out of desperation, not grand design. They often experimented without anticipating the end results. They began issuing public bonds, for example, without any clear intent to realign the relationship of the monarch with its subjects.”
https://books.google.com/books?id=kMwCoQEACAAJ&pg=PA1&source=gbs_toc_r&cad=4#v=onepage&q&f=false
MMT, of course, has always argued a government’s treasury department and central bank should be viewed as one entity. What MMT fails to do is delve into the historic reasons why a central bank was established in England in the first place. Many countries including the USA modelled their monetary systems on the English one at a later date with little understanding of the historical events leading to this particular evolution of a government central bank.
I am completely opposed to so-called independent central banks
You take it a step further
I have no great problem with that, but it would need to have an operational entity wrapped around it, for certain, whatever it was called
Here’s a long history why government (not a central bank) is able to define what a country’s “Unit of Account” should be:-
https://modernmoneynetwork.org/sites/default/files/biblio/desan_coinreconsidered.pdf
In a nutshell why it can be this “definer” is because as an entity it’s both the largest creditor and debtor in the country!
(Government sector balance) = (Private sector balance) — External sector balance
The external sector balance is inconsequential because if all the foreign held treasury bonds were cashed in for pounds, we would merely create the pounds and swap them for the bonds with zero effect on the worth of the UK.
Therefore, to all intents and purposes, (Government sector balance) = (Private sector balance)-(Ex Sect Bal; which we can ignore)
If this is so then any reduction in the deficit will – because the External balance is mostly treasury bonds – withdraw money from the private sector leading to a recession.
It baffles me why this fact cannot be moved into the pubic domain. It’s not rocket science.
Well put
Sorry but I think Wren Lewis is out of date there. That maybe have been a fair analysis last year but things have radically changed, we are in a different world. The Tories are spending like no one ever spent before(whether in the right areas is a moot point) But as per this article today in the Guardian, people will see this and wonder what a Labour government would do different. Not much of late to be honest apart from becoming more concerned about the deficit.
Pretty damning writing here.
“What’s more, the expanded role for the state presents a major challenge for the Labour party to differentiate itself from the government. The traditional social democratic method — higher state spending within the same framework — simply won’t cut it when spending is already ballooning. Promising to spend more becomes rather meaningless, even if Labour is able to win day-to-day tactical advantages.
This leaves Labour with two choices. It can either outflank the Tories with an agenda of deep economic reform to overhaul the fundamental basis of the economy, not just the size and scope of the state. Or it can try and position itself, in opposition to the explosion in expenditure, as the new fiscal hawks.
Last week Labour chose the latter, claiming that the government’s missteps would cost £110bn or “£4,000 for every household”, in an increasingly familiar attempt to secure tactical advantage. But attempting to seize the mantle of fiscal responsibility by channelling George Osborne circa 2009 is unlikely to succeed as a political strategy.”
https://www.theguardian.com/commentisfree/2020/oct/27/boris-johnson-no-socialist-spending-make-labour-job-harder
Spend is not the issue
Motivation is
I disagree with you as a result and think Simon is 100% in the moment
Seems that the small things often bring down a government than the big things. Will Boris and Co be remembered for their refusal to pay for some school dinners and all that massive spending forgotten?
Still a lot to play for of course.
@ Vinnie
I don’t think Dodds played the Deficit Hawk I think she was pointing out the loss to household income as a consequence of the Tory government failing to control the pandemic:-
“Escalating demands on the government to take national action as Greater Manchester falls under the strictest localised restrictions, Dodds claimed that failing to bring the R number below 1 could cost as much as 6% of GDP, equating to £110bn in lost economic output or £4,000 a household.”
https://www.theguardian.com/world/2020/oct/20/failure-to-act-on-covid-circuit-breaker-will-cost-billions-labour
Labour’s pronouncements are now following a pattern I think of steering clear of letting anyone know how they believe the country’s monetary system works.
Do they know?
October 28 2020 at 1:18 pm
@ Vinnie
I don’t think Dodds played the Deficit Hawk I think she was pointing out the loss to household income as a consequence of the Tory government failing to control the pandemic:-
“Escalating demands on the government to take national action as Greater Manchester falls under the strictest localised restrictions, Dodds claimed that failing to bring the R number below 1 could cost as much as 6% of GDP, equating to £110bn in lost economic output or £4,000 a household.”
https://www.theguardian.com/world/2020/oct/20/failure-to-act-on-covid-circuit-breaker-will-cost-billions-labour
Labour’s pronouncements are now following a pattern I think of steering clear of letting anyone know how they believe the country’s monetary system works.
Helen,
I take your point, but Dodds is only saying what we all understand there, even Tories, so she is not adding anything of help. Other than she sees a 2 week lock down as the answer. I’m not so convinced.
My Guardian link features this Robert Peston’s article ;
https://www.itv.com/news/2020-10-22/can-boris-johnson-nationalise-the-economy-only-for-a-year
The Tories are portrayed by him as having to implement the opposite to austerity in a bid to get us out of “penury”, which has a certain delicious irony. Labour could certainly be doing more on explaining austerity never is helpful. But I didn’t see that so much in 2010 to now nor are we seeing much now, they seem more concerned about being the fiscally sensible party.
They could be putting a lot more pressure on the Tory govt if they listened to Richard Murphy for example.I do like the suggestion by another commenter from the SNP (who do understand money creation)here that we should all join the Labour party and change it from within, it being a ready made platform of sufficient scale, maybe we should.
The Tories are being dragged along by events ,this is not their natural territory, but they are getting some credit for it ,which has to be slightly worrying. Yes they are still looking after their chums ,as they always do, but right now there is some awareness in the public that they are now changing stance and throwing eye watering amounts of money at this, and people are scared and confused about how this will have to be paid back .Labour isn’t explaining that at all.
Btw I’m Vince, there is also a poster on here called Vinnie….just so as not to confuse us .
Love your posts.
I don’t see the logic of Lewis’ comment.
Surely if the Tories did spend that money on people who did not usually vote for them, they WOULD vote for the Tories because they would feel and see the uplift in support? This is why the ‘red wall’ Tories are agitating for a better spend. They will buy off a bunch of desperate people – just like the Neo-lib critique of liberal democracy says it does.
This explains to me why the Tories at first say no to something, then appear to relent and give something (or be seen to be giving something) to show that they can be reasonable (or appear to be). They’re playing games to stay in power – and their rich donors know they have to do this as at the moment with their backs against the wall.
What matters for me is what happens next because the Tories (or the cleverer ones) are now playing the long game. I’m sure a new wave of austerity will come after Covid as well as a a raft of new privatisations on the basis that we ‘We’ve spent all that money to help you through Covid and now we need to pay it off and can’t afford stuff.
Never let a good disaster go to waste – that is the Tories motto.
And the real elephant in the room is the loss of public memory – the public forgetting what happened, the mistakes, the money spent corruptively and the Tories will go into over drive in the next election – just how they won BREXIT and the last election which even now has still not been dealt with effectively. I still think they hold all the cards basically.
You’re too darned logical to be a Tory
Take that as a compliment….
Have a read, then think UK instead of USA:
“All the odds are on the man who is, intrinsically, the most devious and mediocre – the man who can most adeptly disperse the notion that his mind is a virtual vacuum. The Presidency tends, year by year, to go to such men. As democracy is perfected, the office of president represents, more and more closely, the inner soul of the people. On some great and glorious day the plain folks of the land will reach their heart’s desire at last and the White House will be adorned by a downright moron.”
https://www.rutherford.org/publications_resources/john_whiteheads_commentary/something_wicked_this_way_comes_anarchy_is_being_loosed_upon_the_nation
I’m pleased that Simon Wren-Lewis has introduced the word ‘deceit’. As I have said before, Stephanie Kelton’s ‘The Deficit Myth’ might have been more accurately ‘The Deficit Deceit’ because it is inconceivable that Osborne and the treasury were/are not fully aware of the truth about deficits. The determination to push through the HS2 Tory vanity project on the basis of boosting the economy makes that clear. If government money is spent genuinely boosting the economy and not swelling the pockets of Tory donors then it’s quite possible for the ‘national debt – GDP’ ratio, which seems to be the preferred measure of national ‘debt’, to remain stable. However the national debt fear factor is the most successful Tory weapon against Labour, as we saw in the last election, so the Tories, ironically unchallenged by a frightened Labour, will rubbish the truth with a vengeance.
One thing that strikes me in regard to “debt” and “deficits” is that the ordinary citizen never really thinks when a bank makes a loan this is an act of “unbalancing” the bank’s books simply to create a flow of money into the economy. Foremost in their minds, particularly if it’s that citizen taking out the loan, is this debt is really an unnecessary evil that needs to be paid off, redeemed as soon as possible.
This outlook is the same if it’s the government using a central bank. It’s the necessity for “institutional mechanisms” to create and manage money flows in the first instance in a capitalist market based society that appears “intuitively” to escape the mental reasoning capacity of ordinary citizens.
This “intuitive” outlook I think is highly understandable since as a species we’ve spent more time living in hunter-gatherer subsistence societies where money didn’t intervene in our obligations to each other to achieve that subsistence. We were acting just as all life does with a bias towards cooperation not competition.
Karl Polanyi hits it on the nail in the penultimate page of Part Two, Chapter Three of his book “The Great Transformation” when writing about the advent of the capitalist market economy:-
“The transformation implies a change in the motive of action on the part of the members of society: for the motive of subsistence that of gain must be substituted. All transactions are turned into money transactions, and these in turn require that a medium of exchange be introduced into every articulation of industrial life.”
Remembering we’re still in the coronavirus pandemic I think my sentence should read “We were acting just as most life does with a bias towards cooperation not competition.”
But the argument still stands it looks as though human cooperation will be seeing front-line NHS staff get the first of two anti-Covid vaccine shots sometime before the end of the year.
I seriously hope so….
I can never understand why “proper” economists give so much attention to Public debt and so little to Private debt. I have been trying to list the reasons I think this is insane:
1) UK Private debt is almost 3x larger than UK Public debt. And far less scrutinised.
2) Banks have enormous freedom to create out of thin air the money they use to make a loan. (They cancel this money when the loan is repaid). An asset of the borrower is normally used as security.
3) Although the Bank loan is normally Bank-created money, the interest on the loan must be paid in Government-created money.
4) Part of the interest on Bank loans that are successfully repaid compensates the Bank for loans that go bad. The Bank-created money that is lost is replaced free-of-charge with Government-created money.
5) Private debt drives inequality. The interest on Private debt can be considered equivalent to the tax that the Government receives from its spending in the economy. The poorer you are, the higher your interest rate, i.e. rate of Bank-tax (http://www.progressivepulse.org/economics/a-perfectly-regressive-tax-a-guest-post-by-michael-green).
6) Private lending drives up asset prices, by increasing competition for an asset.
7) I would like to call Bank-inflated assets Schrodinger assets. Their value is highly dependent on nobody wanting to realise them. Schrodinger’s unfortunate cat may or may not be alive when you open the box. Similarly, when you try to cash in a Schrodinger asset, the money may or may not be there. The loans that banks make are in Bank-created “real” money, but the assets against which the loans are secured are valued in Schrodinger money. The more the apparent value rises, the less likely it is to be realised. Richard uses different terminology, but I think we mean the same thing.
8) There might be an interesting consequence of Richard’s wealth tax, since it would be levied on Schrodinger assets. Would it help to counteract the destabilising effect of bank-induced asset inflation? Why borrow money so that you can pay more tax?
9) The combination of COVID and Private debt myopia is likely to be catastrophic. If the Government will not accept the full costs of COVID as Public debt, they will not go away. They will simply become unsupportable Private debt. Inequality will be driven to unimaginable levels. There is no way that COVID Private debt can ever be repaid, so that, after some more years of austerity, it must ultimately lead to another Bank crash.
10) All a bit like COVID. The Government dare not take the draconian measures necessary to bring infection down to a level where test and trace can cope. Ultimately it will have to take those measures, but only after thousands of needless deaths. The Government will not dare to take on the level of Public debt necessary to cover the cost of COVID. Ultimately, Private debt cannot contain those costs. The Government will have to step in and use Public debt, but only after years of needless misery.
Thanks