Flawed political economics are behind the calls for fiscal conservatism

Flawed political economics are behind the calls for fiscal conservatism

By Michael Lloyd 

Article previously published here by Class Online, and reproduced by kind permission,

Notwithstanding the social democratic motivation of the writers of the recent essay Moving Labour ‘into the black’, there is a fundamental political economic flaw in their representation of the situation Labour are expected to inherit in 2015.

Their arguments were put forward in their initial leaflet and are starkly illustrated here:

“And third, confronting the reality of limited resources reveals priorities as the true currency of politics. In the coming years, the central distinctions will be about what the political parties choose to spend scarce funds on as much as the total they plan to spend.”

There is a confusion implicit in this description. Clearly in any economy there are going to be limited real resources. The capacity of a national economy in any time period is limited by the productivity of the physical capital and labour available. But in ‘In the Black Labour’ this real constraint is confused with a suggested financial constraint.

It is important to separate the real constraint and the financial constraint. This is particularly the case when we are considering the UK, a monetary sovereign country. The UK issues its own currency and denominates its government bonds in that currency, sterling, and has a flexible exchange rate. This sovereignty means that the UK can never become “bankrupt”, as wrongly suggested by George Osborne. It also means that other myths such as “the national credit card has been maxed out” and “we are mortgaging our grand-children’s future” are also false.

The intelligent implication of the current and medium-term position of the UK is that fiscal stimulation, via, for instance, a VAT cut and increased public expenditure, current as well as capital, are required, until we reach the real constraint of the full employment of resources.

The so-called financial constraint, whether invoked by George Osborne or by Black Labour, is a self-imposed political constraint.

Clearly there may be a constraint emerging in terms of the preferences of the private sector to hold government bonds, at a given price. This will mean a reduction in the price of these bonds and hence an increase in bond rates. However, government bonds increase the wealth of the private sector via a new savings instrument with guaranteed interest income for the pension funds and others who operate in the bond market.

For the current Coalition government an underlying objective is to reduce the size of the state, motivated by a neo-liberal agenda which sees the market as the sole efficient mechanism for providing goods and services. One need not ascribe a similar motive to the authors of Moving Labour ‘into the black‘, but some of the references to the implied failings of an over-large state certainly give a measure of comfort to this view.

Suggestions from their initial paper that the ‘fiscal’ position of the UK in 2015

“may mean very constrained funding for healthcare, pensions and welfare for the foreseeable future. It’s tough, but the alternative is ducking the genuine decisions nearly every government of an advanced economy currently faces.”

is misleading for a number of reasons:

  • The issue of pensions is a political decision about income redistribution involving transfers from one set of taxpayers to another, given the total size of the economy and the tax revenue available for re-distribution.
  • The issue of the health service is a political decision on whether the state provision of heath care (and social care) which is free at the point of delivery is preferable to commercial provision.
  • Welfare funding is a mixture of areas of provision which is best remedied by having economic policies which deliver full employment and therefore reduce welfare expenditure.

‘Fiscal conservatism’ was not the policy chosen by the Labour government in 1945 when there was a massive post-War level of public debt and the damaged economy needed to grow in both a sustainable and equitable manner. Fiscal conservatism, as advocated by Black Labour, is not the policy which the Labour party needs to advocate for the British economy or to present to the people in 2015.

21 thoughts on “Flawed political economics are behind the calls for fiscal conservatism

  1. Good post – all completely true. When a government that issues its own currency with a floating exchange rate says “We cant do (whatever) because we haven’t enough pieces of coloured paper” (or more accurately and absurdly, “enough digits in our computer”) you know they’re either clueless or deliberately lying….


    • Check out MMT (Modern Monetary Theory) and The Green New Deal. The mythology is that the UK could be bankrupted whereas it is perfectly obvious that the UK government can never be broke and can spend as much money as it needs. The UK is the issuer of its own sovereign currency and has no need to borrow or pay interest. The decisions about how much and what is funded are political, and there is no danger of inflation whilst we have 2.5m unemployed and 6m under-employed. People create wealth not the financial sector. There are lots of posts on Think Left.. I’ll put some links up later.

      Basically, we need to commit to full employment for those who want a job. Mitigation of climate change is the most urgent problem, that the global community faces.. and there are plenty of jobs to be done in reducing energy consumption and increasing renewable energy. Eventually, we should be reducing the working week.


      • I think that the general view is that Fort Knox and the Bank of England vaults contain very little gold any more. There have been a lot of interesting financial devices.. That’s why Germany is rather keen to actually see its gold which has been kept ‘safe’ in New York.


      • You have a vivid imagination. The UK has large amounts of gold bullion in the vaults of the Bank Of England, and the US has many tons of the stuff in fort knox. If I had the time, I could find out how much.


      • Please, do take the time. Many in America have been wanting to see the results of such an audit for some years.


      • Hi Bill. My best source of information is Wikipedia and these are the figures.
        USA gold reserves are 8133 tonnes ( at 48.2 million dollars per tonne = 392 trillion dollars).
        The UK a paltry 310 tonnes = 15 trillion dollars worth).
        I hope that proves my initial point?


      • Thanks. World pollution is not just about climate change. The problems are enormous, but must be solved. Whether they can or not , will depend on the amount of transparency and common effort employed.


      • It has always been the Tory policy to raise the ‘Angst’ of the working masses to increase GDP. Nothing has changed , but they are trying harder, and succeeding, in the first part at least.


  2. Gerfome says “Come to think of it, we have enormous reserves of gold bullion. Why should the poor suffer while we have these reserves?”.

    Gold (in this discussion) is only another form of ‘money’, and the important point is that ‘money’ can be created at will by the government for its national purposes, only limited by any inflation effects as it is spent.

    Let’s say for the sake of argument that there are suddenly discovered heaps of gold bars in the Bank of England that we could use to help the poor. Presumably the government would have to sell some bars for cash, so that could they could then pay companies for housing, food, etc for those poor. This cash is just pieces of coloured paper (maybe pieces of coloured plastic next year…) or more likely just digital numbers in bank accounts. Where did this cash come from to pay for the gold? It was either created by government out of thin air in the past, or created by private banks as loans out of thin air in the past. (You may argue that government gets it’s ‘money’ from taxes or selling government bonds, but ask yourself, where does the money to pay taxes or buy bonds come from?)

    The creation of government money is currently severely limited by neo-liberal austerity dogma (except for the billions created to prop up the banks balance sheets of course), and the banks aren’t creating much money because they only lend if they think there is nearly zero risk of default (e.g. if backed by the government Help to Buy scheme..).
    Somehow this lack of bits of paper requires the poor to suffer while the 1% get even richer through tax breaks and casino money investing.

    At the end of the day, the poor are helped or hindered only by politics, not by the quantity of pieces of coloured paper in existence.There are enough real resources (so far). Actual wealth results from human labour acting upon natural resources – everything else including Austerity Economics and Wonganomics is a smokescreen designed to concentrate that wealth into the pockets of the 1%.


  3. I think I made an error with the gold bullion calculation. Americas bullion reserves is 392 billion dollars, not trillion dollars. Likewise the UK bullion reserves is worth 15 billion dollars.


    • Brian’s explanation is great because he is taking your suggestion seriously. Bill and I are being a bit frivolous in answering (apologies). The fact is that there is a great deal of speculation (literally) about where Germany’s gold actually is .. causing the German parliament to demand that it is physically returned from NY for audit. However, it is also pretty widely believed that Fort Knox and the Bank of England vaults have also been emptied of the physical gold. Wikipedia is just telling you how much gold the banks say that they have… (and not telling you… in the case of China!)


      • It sounds like a lot of gold, but it isn’t that much, compared to the national debts of the USA (16 trillion dollars) and the UK , just over one trillion pounds! There is still room to spend some of it though, to tide everybody over , so to speak!


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