By Peter Martin Twitter: @petermartin52
An economic and political discussion usually and rather quickly gets around to a discussion on “the deficit”. Of course what everyone means is the Government’s deficit rather than the deficit neo-liberal politicians have created in our spending power in recent years. The other less mentioned deficit is the one the UK runs in its trade and financial dealings with the rest of the world. There are various terms used in connection with this such as current account deficit, balance of payments deficit. Then there is the capital account which includes the sale of gilts. To keep things simple I’ll just use the term external deficit for the net flow of ££ out of the economy. So we can think of this as the Surplus the Rest of the World has in its dealing with the UK in £ terms.
If we consider everything as a surplus we can say:
Government Surplus + Private Domestic Sector Surplus(or PDS savings) + Rest of the World Surplus = 0
This is the well known sectoral balance equation. The Private Domestic Sector would essentially be the real economy and would include all publicly employed workers, local councils and their workers, and even some Govt owned companies – though this might just depend on how the accounts are presented. This is just in £ terms. They don’t include any real assets like gold reserves or land holdings.
Going back to deficits this works out as:
Internal Deficit (Govt Budget Deficit) = PDS Savings + External Deficit (Trade)
It is common in discussions for someone to say something like ‘the trade deficit is not the fiscal Deficit.” Which is of course true, butthe two deficits are very closely related. If, as now, we are running a 5% of GDP trade deficit and the Government is running a 4% deficit there is 1% more spending leaving the economy to pay our net import bill than is replenished by the Govt deficit. That money has to come out of everyone’s savings. So if the external deficit was zero the Government deficit would certainly be reduced substantially and may even be eliminated completely. Another way to look at it would be to say that money paid out for imports can’t be taxed but if it is paid out for local products it can be. Money generated from export sales, or import replacements can be taxed too. Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.
Exporting more, to the value of 2.6% of GDP and importing 2.6% less will close the trade gap completely. This may require a some initial discomfort to achieve but it will be nowhere near as bad as continually putting up with with tax rises and spending cuts, ignoring the external deficit and running the economy into ever deeper recession.This is a saleable message that our politicians (are you reading this John McDonnell? ) could well explain to a sceptical public.
There are those MMT supporters who will not be at all pleased with the thrust of this argument.They will be thinking that we should not be using MMT to explain how our deficits can be reduced but, rather, we should be explaining how they do not matter. They’ll argue that the deficits are just numbers on a spreadsheet, that ££ are just like runs on a scoreboard, that the government is monetarily sovereign and that it can never run out of pounds, it can never involuntarily default and it can never go broke in any debt denominated in ££. They will further argue that exports are a net real cost to the economy and that imports are a net real benefit. Therefore we should be exporting as little as possible and importing as much as possible. Of course, this is all absolutely true and intellectually incontrovertible. Except, I would just question the morality of deliberately taking more from the world than we are prepared to give in return.
It is also true is that we live in a democracy and we have to assess the chances of the voters ‘buying’ this argument in sufficient numbers for Labour to win in 2020. I am not a politician but I would say there is no chance at all. So, if this is a correct assessment, we have to look for the next best alternative. If we don’t offer that, which is an economy at relatively full employment with low internal and external deficits, stable but modest levels of growth, inflation and interest rates, we will end up with something very much worse. An economy with high levels of unemployment and underemployment, high numbers of low paid and low productivity jobs, higher internal and external deficits, and with a government which is forever chasing its own tail with a succession of tax rises, spending cuts and the encouragement of excess private credit created asset bubbles. In fact, just like the one we have now.
People are sick of all that. We just need sensible politicians to explain that there is a much better, if not a perfect, option
“Exporting more, to the value of 2.6% of GDP and importing 2.6% less will close the trade gap completely. This may require a some initial discomfort to achieve but it will be nowhere near as bad as continually putting up with with tax rises and spending cuts, ignoring the external deficit and running the economy into ever deeper recession.This is a saleable message that our politicians (are you reading this John McDonnell? ) could well explain to a sceptical public.”
Sounds quite easy, 2.6%, but is of course very hard to achieve. It could be achieved through some taxes on all imports. This tax is then to be distributed to all exports, for example. The aim should be to have a balanced current account. So a tiny tax of 5% might be sufficient, as that will make imports 5% more expensive, and exports 5% cheaper. The tax should be adjusted from year to year.
That should of course be the thrust of the argument, if any deficit to be targeted, it is the current account deficit of 5.2%. Rather than the budget deficit.
Yes I agree that it’s the current account in Trade that needs to be targetted. However, tariffs on imports aren’t allowed under EU law. They are also strongly discouraged under World Trade Organisation rules and I would generally agree that they should be.
The obvious mechanism would be to reduce the value of the pound but there are other considerations too. We need to stop the inflow of ‘hot money’ into the financial sector. Then there is the effect of the inflow of large amounts of overseas cash which is fuelling the property bubble in London. It doesn’t make any sense to allow the use of that ‘hot money’ to purchase expensive London properties, which are often kept empty, and at the same time price local people in London out of the property market.
It’s also distorting the real economy in the rest of the country, and the difficulty of producing steel economically in Redcar is just one example. The plant is up to date. The workers are willing, co-operative and certainly not overpaid. So we need to ask ourselves if we want to try to make a living out of the financial bubble economy or from an economy providing real goods and services.
Peter, that will absolutely screw over the “export led” economies and send them into recession.
I worry about the effect of this on the rest of world (incl Eurozone.) Not every nation can export out of a recession.
My personal views: stop issuing gilts (over half of which are held overseas) and paying them interest, and land value tax on property.
“So we need to ask ourselves if we want to try to make a living out of the financial bubble economy or from an economy providing real goods and services.”
I agree on financial bubbles. I would re-regulate the banks and use it to “fund” abolishion of NI:
The only thing is disagree with (Neil) here is the debt jubilee, I would introduce LVT and gradually increase.
But I see no reason why we cannot have a more service-led economy.
Why not ban luxury goods?
I’m so glad that you ‘question the morality of deliberately taking more from the world than we are prepared to give in return’. That question has bothered me ever since I first understood the operational reality that exports are a real net loss to the economy and imports, a real net benefit. Not only are we benefitting from the importers’ natural resources, their water and energy but we are also not suffering their environmental degradation, pollution etc. and usually on the backs of the workers who are not protected by much of a welfare state, health or education provision.
Really interesting article – thanks.
I’ve just posted up a question on the same theme on Facebook’s “Intro to MMT” page. I think it’s an important issue to resolve and it could possibly involve some movement away from the MMT “deficits don’t matter” line which I know all progressive politicians have political a problem with.
Ultimately politics is more than just economics and there’s no point just berating Jeremy Corbyn and John McDonnell on being backward on economic questions as tends to happen in some MMT circles .So, I’d say we have to explore possible resolutions to this question.
I am very much at one with you on that analysis. Persuasion means starting where the other side is, not where they ought to be.
” ‘question the morality of deliberately taking more from the world than we are prepared to give in return’.”
It’s not about morality. It is about preventing a global recession. The problem is your causality is wrong. The UK does not deliberately take more from the world – “export led” countries deliberately weaken their currency and give more to the UK than they recieve. And barring supporting coups, there is little we can do. Actions could have unintended consequences that make everyone poorer.
My idea is you could have “fair trade aggrements” similar to “free trade” but requiring worker and environmental rights.
The same could be applied to immigration – only countries with Full Employment (Job Guarantee) and Universal Healthcare have open access. So you would exclude third world nations like the USA (heh.) It’s very difficult for a foreign leader to argue against that – as they will basically be saying they want to dump their unemployed on the UK rather than dealing with it themselves. We say- implement a Job Guarantee and we will gladly give you open access.
The right do this thing all the time. Why can’t the left?
Are you saying that the exporting countries are able to adjust their currencies to give more than they receive but the importing countries aren’t able to adjust their currencies to stop their taking more than they receive? You seem to be with your remark ” there is little we can do” ?
Maybe that’s just me but I can’t follow the logic of that argument!
“Are you saying that the exporting countries are able to adjust their currencies to give more than they receive but the importing countries aren’t able to adjust their currencies to stop their taking more than they receive? You seem to be with your remark ” there is little we can do” ?
Maybe that’s just me but I can’t follow the logic of that argument!”
My point is that if we do that, the exporting countries may well go into recession, and the stuff we have “taken” will just not get produced.
We could try and start a currency war by buying up foreign currency but I can’t see that going well.
The pressure is from the exporter side, with forced saving in Sterling so they feel they can inject more money into their economy their central bank has “earned.” It is up to them to stop the silliness, as shown in Neil W’s article here:
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