First posted on October 2, 2012 by alittleecon
You may have seen lots of posts with titles like the one above, talking about Labour’s deficit dilemma. How can they restore the trust of the British people? How can they set a credible plan to grow the economy without borrowing more? Ed Balls’ speech at this year’s Labour Party Conference was all about treading that line between policies for growth, matched by spending constraint. The question for Labour is always “How are you going to pay for it?”
In this post I want to take a different tack and look at Labour’s ‘deficit problem’ from the other side. How can it get past the argument that deficit reduction is priority number 1?
To me Labour’s problem is not how it explains how it will get the deficit down, rather the issue is that the whole argument about debt and deficits is economically illiterate. It misleads the public and completely hobbles any attempt by the left to take the initiative in the economic debate.
So what is the deficit argument? Why is it so important to get the deficit down that as a consequence we have to suffer persistent high unemployment, increasing poverty and stagnant living standards?
Here’s everyone’s favourite punchbag Nick Clegg parading his ignorance at the Lib Dem conference last week:
So to those who ask, incredulously, what we – the Liberal Democrats – are doing cutting public spending, I simply say this: Who suffers most when governments go bust? When they can no longer pay salaries, benefits and pensions? Not the bankers and the hedge fund managers, that’s for sure. No, it would be the poor, the old, the infirm; those with the least to fall back on.
So but for austerity, Britain could go bust. Really? Where does this idea come?
The argument goes that when we run a deficit, we must borrow from ‘the markets’. If the deficit gets too high the markets will start to worry we might not be able to pay back what we borrowed and so will start asking a higher rate of interest. If we keep borrowing, eventually the markets will say “no more”. Nick Clegg believes at this point, we could literally run out of money – we would be bankrupt.
In answer to this I’ll quote Chris Dillow (read his excellent blog here) who put it better than I could:
…this is plain wrong. In countries with their own central banks, governments cannot go bust because the central bank can simply print money to buy government debt: this is what QE is. Of course, this might or might not be a bad idea. But Clegg didn’t argue this. He just made a prat of himself.
So we need to get past this nonsense (and it really is nonsense) that if we don’t ‘deal with our deficits’, financial armageddon awaits. But what about the Eurozone? Aren’t they on the brink of bankruptcy? Couldn’t that happen here too?
The countries of the Eurozone took the decision to give up their own currencies and replace it with a common currency, the Euro. I n doing so they gave up the ability to issue their own money, to set interest rates and to manipulate their exchange rates. This means that Government spending really is constrained by how much they can raise in taxes or borrow from the markets. They can run out of money because they gave up their ability to create currency. This has lead to the markets periodically raising interest rates on Eurozone country’s debt to the point where in Greece, they actually were unable to borrow any more money on the markets and they had to accept their first (of many) bailout. This was the backdrop to the 2010 election here when we had Nick Clegg and George Osborne running around saying we were days away from becoming the next Greece. This was a fiction though.
As long as the UK keeps the pound, it cannot run out of money. Nick Clegg’s idea that we can (or even already have), while idiotic, somehow still frames the economic debate in this country. Every suggestion of a new spending plan has to be ‘paid for’ by a corresponding tax rise or pay cut elsewhere for it to be seen as ‘credible’. NO IT DOES NOT!
Until we get away from this spurious framing, we will never have a country we can be proud of. If Labour really want to work in the interests of working people (and to me, the jury’s still out on that one), the whole framing of the economic issues needs to be moved away from deficit reduction, and onto what we want our society to look like. To me, this is Labour’s deficit problem.
We on the left should set out a vision for what we want society to look like (for me it would be the right to a job, adequate housing, free education including university and healthcare amongst other things), and communicate the policy changes required to get us there. The deficit should not even enter into the debate until such a time as we reach maximum potential output. It should be allowed to float, rising in the bad times, falling in the good. Only then can we bring about real change. The response when asked about the deficit should follow Keynes’ mantra:
It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.
Labour’s deficit problem appears to be one of intellect.
Good post – the electorate are left saturated with information. They know what is needed but
bombarded by politicians’ jargon, they switch off.. Getting this message through is Labour’s big task; it was ever thus.
Kay: I am not sure what you mean? Whose intellect is lacking, and by whose assessment ? I can’t see the electorate lacking in intellect. However the problem is a deficit in funds. The lies and propaganda of the neoliberalist agenda orchestrated by the corporations are well funded and supported by corrupt media,compared with poltical parties on the Left.
It is not easy for anyone of modest means to uncover truths. Insulting the intellect of the electorate is hardly going to win them over. Presenting facts might help. How do you suggest we can achieve that?
The intellect of the Labour party is lacking. I see nothing in anything he’s said to suggest Balls actually understands what money actually is or where it comes from, and wasn’t it Byrne that left the famous note saying ‘there’s no money left’? All nonsense like this does is perpetuate the time the wrong arguments are the only ones being aired, though I doubt either of them grasp that..
@Kay I agree that some don’t know; some like Osborne are manipulative but others, and I suspect Balls is one, have concluded that its too difficult to argue against the mainstream media etc and are attempting to triangulate. Balls has a line in his Huffington post interview about there being no point in offering answers to questions people aren’t asking. Obviously, I think that he is making a big mistake. I believe that it is possible to explain and expose the madness of neoliberal monetarism, but we are told that LP support is ‘soft’ and that is the sort of thing that politicians take seriously. IMO the thing that would turn things around would be a LP taking on the banks and coming out with a radical Green New deal like FDR… but I can also imagine the headlines they’d have to be willing to confront.
I think FDR made a bad move with his GND. He crushed the growing movement in the States for local currencies, many of which were blooming inspired by the experience of the Austrian town Worgl. More about Worgl here (if the link comes out as a link!) http://alt-money.tribe.net/thread/70e5eb29-853d-44ca-9faa-b789d1757037 Quoting from ‘People Money;The Promise of Regional Currencies’ “… In 1933, American economist Irving Fisher was so inspired by the Worgl story that he published a book called Stamp Scrip. It inspired hundreds of business and communities across the USA to start their own currencies. Fisher then advised the new President Roosevelt that local currencies could quickly end the depression. However, the President decided instead for the centralised New Deal solution to unemployment. The local systems were all closed down.” More detail can be read in Bernard Leitar’s book ‘Future of Money’.
It seems to me Roosevelt’s primary interest was in maintaining the status quo, the power of central government, rather than helping the average citizen towards a better quality of life. Something was blooming in America and he crushed it. It’s beginning to bloom again here now, with various local pounds springing up. They’re a step in the right direction and should be encouraged. We need to gain economic secession from central government. If we don’t, a handful of malcious spiteful children like Osborne can continue to perfectly legally ruin the lives of millions.
Thanks for the information 🙂 I will look into it… I would hardly find it remarkable that any politician would act to maintain the power of central government.
Unremarkable but lamentable. They’re supposed to work in our best interests, not crush any evidence of just how well we can get along without them. For me this is more evidence central government is the enemy. It’s got to go..
… and while I remember, ‘Grip of Death’ (Michael Rowbotham) is available 2nd-hand on Amazon for £6.80. There’s a wealth of economic knowledge in that book and it’s modestly priced too!
I have said before what an economic ostrich I can be; I often find myself ‘ignoring’ discussions around finance, as it is for me, as I suspect it is with many others, a case of, in reality there’s just not enough money coming in, to cover what needs to go out!
Having said that, economics is also a topic that Politicians seem to want to make us believe is incomprehensible; this post and several similar ones have made me realise that this just is not true.
I am now firmly of the opinion we must get the facts out, the more I know and economics, the less I am afraid of it, and the more interested I become, I’m also realising National Economics is not rocket science it is fairly simple – we need to invest in jobs, the more people in work receiving a realistic salary the more money the Country takes back in both open and hidden taxes and the less it has to spend on State Welfare! These are the facts as I read it and I believe, this is the message we need to keep putting over.
The more people who like me, become to realise the basics the more likely they are to demand the appropriate Policies and Actions from Government.
Keep the posts coming please
Great response and the deliberate obfuscation is exactly right. We are very let down by the media as they always ask “Where’s the money coming from?’ without ever really asking the underlying questions about what money is. I surveyed BBC journalists a year ago and almost overwhelmingly the presenters on BBC news have a background in languages… so their economic savvy is not high. Furthermore, more than 75% were educated at private school 😦
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