Thanks to Alderman Michael Poulter MBE for permission to reprint
Why the deficit myth is a useful deception
It is often difficult to understand the economic-speak into which so many expert-explanations seem to lapse. I imagine that I am not alone so I will share a version of the explanations that make sense to me. Unfortunately, I no longer remember everyone that I should credit.. apologies.
The deficit is the putative shortfall in government tax receipts or ‘income’ relative to its ‘spending’. The words ‘income’ and ‘spending’ are deliberately put into inverted commas because George Osborne and his ilk would have us believe that the UK budget is like our own individual household income and spending. (To be fair so do most mainstream economists.)
This generates an extremely useful word confusion because we all know the consequences of households getting into more debt than they can afford. In the absence of a real analogy, ordinary people are easily persuaded that government must cut ‘spending’ which of course is the ultimate ideological goal of the tea-party Tory neofeudalists.
However, government ‘spending’ and ‘income’ are nothing like household spending and income. Furthermore, the word ‘deficit’ itself consciously, and unconsciously, invites the belief that it is a ‘bad thing’ that must be ‘sorted out’. Again for emphasis – the term ‘deficit’ in this context does not mean the same as it would in a household. Bill Mitchell proposes that all ambiguous macroeconomic terms have to be reframed so as to undermine the ideological metaphors of the neoclassical consensus. He proposes that all statements be qualified as in, for example, ‘The government deficit rose and generated higher levels of wealth for households and firms.’
The deception that arises from the deficit myth is that the government ‘spending’ more than it receives in tax is detrimental and holds back economic recovery – hence the argument for the cuts and austerity.
In order to understand why the deficit fears are just hype, it is helpful to look at how money and tax have historically been used to control and direct the behavior of populations. For example, British Colonialism in South Africa.
Essentially, the motivation for invading and colonising a foreign country is about land – new land for settlement, agriculture and to exploit the foreign country’s natural resources. All of these require a substantial labour force.
Obviously, the colonialists could have tried to import all the necessary workers (as the US has done) but the most practical quick solution was to use the indigenous population.
The problem was how to get the indigenous population to plough the fields or go down the mines to dig for gold. Why would people, who had been living and surviving perfectly well for generations, want to give up their way of life to work for the colonialists? Not only was the work demanding and uncongenial but their own self-sufficiency would be threatened.
Basically, there are three possible answers:
Offer high wages… not only would that be beside the point of colonising in the first place but (initially at least) money would only be an inducement if it could be spent on some stuff or service that the indigenous population wanted or needed. No-one can eat bank notes.
Enslave the population and force them to work at gunpoint … but that in itself is quite labour intensive, requiring guards as gang masters, and generally incurs an inconveniently high mortality rate (as in the Belgium Congo).
The third option is much simpler…. create a currency and require the indigenous population to pay tax in that currency.
Warren Mosler has a neat routine which explains how taxing works. He tells the audience that he is turning his business cards into a currency and that he will pay each of them, one business card, to clean the lecture theatre at the end of his talk. The audience laugh until Warren Mosler adds that there will be armed guards at all the exits who will only allow individuals out of the lecture theatre if they pay a tax of one Mosler business card. So now the audience has the choice of being trapped in the lecture theatre all night, or do the cleaning, get their business card ‘pay’ and be allowed to go home.
So by creating a Business card currency and enforcing ‘tax’ collection, Warren Mosler is able to control and direct the behavior of the audience.
The same system held in inducing the indigenous population to work for the colonists. Those who failed to pay their taxes were imprisoned and could then be used as unpaid forced labour. Either which way, the indigenous population were snookered.
Now the main point is that neither the colonists or Warren Mosler had to wait until the tax was collected before they could ‘spend’ their currencies on paying their workers. In fact, it would have been impossible because there wasn’t a currency before they created it out of thin air. (The pound sterling became the standard currency of the Cape of Good Hope colony in 1825 … Before a unified South Africa, many authorities issued coins and banknotes in their own pound, equivalent to sterling.)
The Colonial and Mosler ‘governments’ had to ‘spend’ before the workers could pay their taxes. Futhermore, the tax that was collected was quite irrelevant in determining how much the Colonial/Mosler ‘governments’ could spend. If they needed more labourers, they just created more money. The tax was not government income in the household sense. The tax was simply part of the mechanism to get the work done and make the money flow. In fact, after collecting, the tax receipts/business cards could just be thrown away .. the only cost would be the cost incurred in the actual manufacture of the bank notes/business cards.
Now in the Mosler currency system, the amount of tax received back would equal the amount that his ‘government’ created.. so there would be no ‘deficit’.
However, if someone wanted to ‘save’ a Mosler card memento more than they wanted to go home… there would be a ‘deficit’ of one Mosler business card collected in ‘tax’. Nevertheless, the deficit would not be any problem to the economic system. Warren would still have got the Lecture Theatre cleaned, he could print another set of business cards whenever he needed to, and the Mosler business card collector would have ‘saved’ his card to spend at a later date.
Essentially, the ‘deficit’ is a reflection of the total amount of saving, investment and employment that is occurring in the economy. It is not something which has to be paid back.
Just as with the unilateral decision of the ‘saver’ of the Mosler business card:
‘It is the non-government sector deciding to save more than it invests that generates the government deficit’ (Neil Wilson cif).
Michael Burke provides the numbers to show that it is indeed the current non-government sector ‘saving’ (ie. not investing) which accounts for the ‘entirety of the prolonged crisis’. It is estimated that private sector businesses are holding back £700+billions. Effectively, there is an investment strike by the private sector:
The driving force of the slump remains the fall in investment, led by the fall in business investment. The fall in business investment alone more than accounts for the entirety of the prolonged crisis.
Michael Burke (and others) stress the necessity for the government to act as the ‘investor of last resort’:
Government could act to offset this by investing on its own account, if necessary drawing on the resources of the private sector to do so. Instead, the Coalition cut public sector investment by £6bn after Labour increased it modestly…. It is still the case that increased public sector investment is the only viable means of resolving the crisis that doesn’t lead to further misery for the majority of the population.
Neil Wilson writes:
Why is it so difficult for people to connect the dots… When money is injected into the economy it bounces around generating transactions and taxation. Anything left is saved by somebody and eventually ends up being swapped for Gilts.
Government spending pays for itself. Each time every time.
It is, at least arguable, that Osborne knows that his policies on deficit reduction are a complete but ideologically useful fiction. Generously, the Financial Times’ Martin Wolf wrote in response to the Autumn Statement:
“The government has been led astray by focusing on deficit and debt rather than the health of the economy.”
However, Professor Bill Mitchell does not mince his words and they can act as a conclusion as to why the deficit myth is a useful deception:
… the constraints imposed by neo-liberalism are entirely ideological and came about from a concerted campaign to win the battle of ideas. There is nothing about deficits that should frighten international capital. In fact, capitalists will make higher profits in a fully employed economy than in a stagnant economy.
Important point made in comment’s thread by petermartin2001
The question of inflation also does need to be answered. No economist, including Warren Mosler and Bill Mitchell, would say that the deficit didn’t matter. Although their argument is often deliberately misrepresented in that way. The argument at the moment should be that, as inflation isn’t the major issue at present, therefore the deficit isn’t the major issue either..
Its an argument which, as Bill Mitchell points out, doesn’t bother the more progressive of the capitalist class. They know they don’t make profits from low deficits if low deficits mean reduced business activity and higher unemployment. There’s no profit , or surplus value, to be made from an unemployed worker!
I was trying to keep it simple. I did try working inflation into the Mosler business card model but it all got a bit surreal!
Inflation is only a problem when all the potential capacity of the economy has been reached which with our levels of unemployment/underemployment is not an immediate problem. In the words of Neil Wilson (filched from Cif):
‘five million without work that want it, education opportunities for our youth, limiting the excessive growth of house prices, and euthanising all the rentiers and oligopolists out there.’
I know that the OBR etc question that the UK has suffered a decline in capacity post 2008 but you know how iffy their predictions are.. and can’t see it being a problem when we need ‘a New green Deal’ to be zerocarbonbritain 2030!
The only two things that were actually surprising about Boris Johnson’s Centre of Policy Research speech were:
i) That anyone should think that Boris’ avowal of 19th Century Social Darwinism is surprising because it is patently obvious that his speech also represents the views of Cameron, Osborne, Tory Ministers and much of the wider Conservative Party.
ii) That Boris would have talked openly about his views in public.
However, Andrew Rawnsley was surprised on both counts:
Where on earth do we start? Let’s begin with his view of what drives human nature in general and capitalist economies in particular. The speech was highly illuminating – not about what really makes society tick, but about what goes on inside the whirling head of mayor Johnson. It is his contention that “greed” and “the spirit of envy” are not vices to be regretted, but virtues to be lauded because they are “a valuable spur to economic activity”. This was not a throwaway line, a light aside, just another one of those provocative Johnsonian sallies designed to wind up lefties and stimulate the erogenous zones of the right wing of the Tory party. It was central to his argument. He hailed greed and envy as emotions to be celebrated because that was at the heart of his contention that inequality is not only inevitable, it is desirable and necessary as an engine of economic growth.
Clearly, Andrew Rawnsley has never heard of Herbert Spencer, 19th century philosopher beloved by the wealthy and powerful American Robber Barons, Carnegie, Rockefeller, Vanderbilt and the rest?
(See below – J. K. Galbraith’s video clip from the 1977 ‘The Age of Uncertainty’ series)
It was Herbert Spencer, not Darwin, who coined the phrase ‘Survival of the Fittest’, drawing parallels between his political classical economic theories and natural selection.
Spencer’s theories of laissez-faire, survival-of-the-fittest and minimal human interference in the processes of natural law had an enduring and even increasing appeal in the social science fields of economics and political science. 20th century thinkers such as Friedrich Hayek, Ludwig von Mises, Milton Friedman and Ayn Rand expanded on and popularized Spencer’s ideas, while politicians such as Ronald Reagan and Margaret Thatcher enacted them into law.
‘Laissez-faire, survival-of-the-fittest and minimal human interference’ as advocated by Ayn Rand, is the pedigree of Boris’ incongruous suggestion that the largest cornflakes rise to the top of the shaken packet.
And also his even more controversial assertion:
‘… Johnson mocked the 16% “of our species” with an IQ below 85 as he called for more to be done to help the 2% of the population who have an IQ above 130.’
(Well, perhaps not so controversial given that those percentages are inherent to the IQ test methodology… but let’s not get bogged down in dissecting Boris’s faulty understanding and ignorance. Let’s go with the implicit message.)
American follower John Fiske observed, that Spencer’s ideas were to be found “running like the weft through all the warp” of Victorian thought .. and are clearly still running like a weft through the upper echelons of the Conservative Party. The silence from Cameron et al immediately following Boris’ speech was deafening.
Essentially, the tenets are those of the American Dream:
i) Rich people are rich because they have fought their way to the top and are more intelligent.
ii) Poor people are poor because they have not tried hard enough and are stupid.
iii) Government and the benefits system prevent the cornflake packet being shaken hard enough. Hence, the need to remove the ‘safety net’ of the welfare state and shrink the role of government.
(Frankly, I can’t believe that I’m writing this extremely unpleasant garbage which owes nothing to any informed understanding of genetics, cognitive psychology, sociology or economics.)
As a commentators on Cif wrote in response to Boris’speech:
‘They’re not even trying to pretend anymore, are they?
Perhaps that’s a good thing, because it shows that the end is near. Hubris is the best indicator for that…’
‘Spot on, it’s the new eugenics. The conservative hierarchy genuinely believes that there is no further need for social mobility, that the social hierarchy with its grotesque inequalities is some kind of perfect order. The rest of us simply live to serve the new banking aristocracy.’
Boris may well have overestimated the readiness of the UK for his ‘eugenic’ message. Another putative Tory leader, Sir Keith Josephs, certainly scuppered his chance of being Prime Minister when he attributed the cycle of social deprivation to a combination of the young and poor in a climate of sexual freedom perpetuating a deprived class with little effective hope of self-improvement – adding that “the balance of our human stock is threatened”.
After some days, Cameron and Osborne finally felt the need to distance themselves from the Boris speech but it is noteworthy that their disclaimers were somewhat ambiguous and not entirely inconsistent with Boris’ views …
Asked on his flight to China whether the London mayor spoke for the Conservative party about IQ levels and inequality, the prime minister said: “I let Boris speak for himself. I think it is very important that we make sure we do everything so that we maximise people’s opportunities to make the most of their talents.”
.. which could mean ‘maximise cornflakes’ opportunities’ so that they can greedily and enviously fight their way up the packet unimpeded by big government.
“I wouldn’t have put it like that and I don’t agree with everything he said.”
.. so which bit didn’t you agree with George?
However… How can Cameron and Osborne possibly say that they reject Boris’ philosophical assumptions when we can all see in their policies that they are doing their utmost to create the ruthless laissez–faire society advocated by Hayek, Friedman, Rand, Regan and Thatcher?
It is a bit hazy as to how Boris explains inherited wealth as being the result of individual struggle… Did Cameron, Osborne and the other cabinet millionaires all start at the bottom of the cornflake packet?
The Age of Uncertainty Episode 2 – The Manners and Morals of High Capitalism
The Age of Uncertainty is a 1977 television series about economics, history and politics, co-produced by the BBC, CBC, KCET and OECA, and written and presented by Harvard economist John Kenneth Galbraith.
Galbraith acknowledges the successes of the market system in economics but associated it with instability, inefficiency and social inequity. He advocates government policies and interventions to remedy these perceived faults
The content of the series was determined by Galbraith, with the presentation style directed by his colleagues in the BBC. Galbraith began by writing a series of essays from which the scripts were derived and from these a book by the same name, emerged which in many places goes beyond the material covered in the relevant television episode.
The New Economic Perspectives’ video clip on the Government budget, Deficits and Debt presented below (produced for educational purposes), debunks the myths that politicians tell their populations to justify ‘austerity’. In the case of the clip, it starts with 3 full minutes of American politicians misinforming the electorate. An identical montage aimed at the UK electorate could undoubtably just feature George Osborne’s utterances from his forthcoming Autumn statement scheduled for this Thursday (5th December 2013).
However, the reality is that all economists know that the deficit and debt mythologies are not true and ’have long known that the idea of balancing budgets over the cycle is a bit like a fairy story we tell to frighten the kids’. Economists, and Central bankers like Mervyn King, Ben Bernanke, Alan Greenspan, all know that:
The UK government can never ‘run out’ of money;
The UK government can never be forced to default;
The UK government can never be forced to miss a payment;
The UK government is never subject to the whim of ‘bond vigilantes’.
In fact, the St Louis Federal Reserve, from the heart of Western capitalism in the US confirms the same for the US dollar (and any other nation that creates its own currency) :
‘As sole manufacturers of dollars whose debt is denominated in the dollar, the US government can never become insolvent ie. unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for US government debt at home because the US government has the only means of creating risk-free dollar-denominated assets.’
Paul Samuelson, ‘father of modern economics’ and Nobel Prize winner, suggested the reason for perpetuating the mythologies in a 1995 interview:
“I think there is an element of truth in the view that the superstition that the budget must be balanced at all times [is necessary]. Once it is debunked [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old fashioned religion was to scare people by sometimes what might be regarded as myths into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing the budget if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say ‘uh, oh what you have done’ and James Buchanan argues in those terms. I have to say that I see merit in that view.”
It may be that politicians fear the ‘anarchic’ demands of the electorate were the public to understand that the UK economy is not like a household and can never be bankrupt. However, these distortions of reality have been carried to a new pitch by George Osborne and the Coalition government:
The scale of the Coalition government’s intended austerity measures are on a scale never seen in modern Britain. What is planned here will dwarf anything that was undertaken by Thatcher in the 1980s. There is already massive unemployment in the public sector….Massive unemployment and lower wages mean lower tax receipts, and even bigger budget deficits and debt loads…It is now clear that the austerity policy in the UK is not a matter of economic necessity but of political choice… It is obvious that the cuts of this scale are about much more than just deficit reduction… The cuts are part of an agenda to transfer services from the public sector to the private sector. The pretence of ‘there is no alternative’ is a means for the Conservative project to radically transform the state.
It would be just as well to remember this week, when listening to George Osborne and Danny Alexander, that Keynes said:
’Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all.’
New Economic Perspectives on the Government Budget, Deficits, and Debt
Published on Nov 28, 2013
The video clip features the following speakers, in order of appearance:
L. RANDALL WRAY
Professor, Economics, University of Missouri-Kansas City
Senior Scholar, Levy Economics Institute
Author, Understanding Modern Money, Modern Money Theory
Professor, Economics, and Chair of the Department of Economics, University of Missouri-Kansas City
President, financial services firm Valance Co. Inc.
Author, Soft Currency Economics, The Seven Deadly Innocent Frauds of Economic Policy
For More Information:
University of Missouiti-Kansas City, Economics Blog:
New Economic Perspectives
The Modern Money Network
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