Cameron and Osborne dwell on Bullshit Mountain, UK

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Bullshit Mountain, UK

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First posted on October 8, 2012 

The title of this post is an allusion to Jon Stewart’s recent debate with Bill O’Reilly (watch it here – it’s very entertaining). Stewart’s argument was that many Republicans dwell on “Bullshit Mountain”. Their view of the world is completely skewed and this prevents the nation’s problems from being solved, as complex issues are turned into simple (but false) choices. Many Tories also seem to live on Bullshit Mountain, and today was George Osborne’s turn to appeal to this demographic. This post will provide some commentary on Osborne’s speech and point out some of its logical flaws. I won’t deconstruct the whole speech, just pick out a few gems.

“The deficit is down by a quarter. There are one million more private sector jobs. The economy is healing.”

Three sentences, three misleading statements. When Osborne says the deficit is down by a quarter, he means the deficit in 2011/12 was a quarter less than in 2009/10. This is true, but what he doesn’t say is that the deficit for the first 5 months of 2012/13 is up on the first 5 months of 2011/12. So it is more accurate to say that the deficit is going up.

As for the million extra private sector jobs, that may be true, but Osborne doesn’t mention the half a millionless public sector jobs, or that a significant number of these jobs have been part time or temporary. Or that there are still less jobs in the economy than before the beginning of 2008. Or that the employment rate is still significantly below its pre-crisis level.

Osborne says the economy is healing, but we are in recession. To many people that doesn’t feel like healing.

“Our country would have been all-but ungovernable if we had not been straight with the public before asking them to cast their vote.”

If they had really been straight with the public, our country would have been ungovernable – by the Conservative Party, because they would not have won enough seats in the election.

“We’re not going to get through this as a country if we set one group against another, if we divide, denounce and demonise.”

Let’s not forget he had spent the whole morning doing just that when talking about further cuts to welfare!

“Each one of my Budgets has increased taxes overall on the very richest.

And we’ve achieved that while getting rid of a cripplingly uncompetitive 50p rate that raised no money and cost jobs.”

If the first statement is true, it kind of undermines the second. If the 50p rate is so uncompetitive, so wealth destroying, why aren’t the other supposed tax hikes on the rich equally as damaging?

“But just as we should never balance the budget on the backs of the poor; So it’s an economic delusion to think you can balance it only on the wallets of the rich.”

This plays to two of the key beliefs of the residents of Bullshit Mountain. The first is that Government is like a giant household and should try to balance its budget at all times. This is nonsense. You only have to look at the Government’s budget outcome over the last 40 years to see this. A deficit is the natural state for the UK economy. This is a neutral fact. It is neither good nor bad.

The second belief is that if you hike taxes on the poor, they will work harder, but if you hike them on the rich, they will work less!

“Where is the fairness, we ask, for the shift-worker, leaving home in the dark hours of the early morning, who looks up at the closed blinds of their next door neighbour sleeping off a life on benefits?”

Ignoring the fact that they might be sleeping off the night shift they’ve just arrived home from, this plays up to another Bullshit Mountain belief – that there are millions of people living the Life of Riley off the backs of the hardworking ‘strivers’ out there. If only there would get off their arses and find a job, we wouldn’t be in this mess. The poor are to blame! This viewpoint demonstrates an inability to reason correctly. Are we really to believe that sometime in 2008, millions of people independently from each other suddenly decided to quit their jobs and sign on the dole. Of course not! The problem is a macroeconomic one of not enough jobs. Repeatedly beating the unemployed with a stick will not help them find jobs if no jobs are available.

“Some of the biggest issues in British politics, so big people thought them too controversial to fix, we have been prepared to tackle. A state that had become too expensive to pay for. Public sector pensions we couldn’t afford. People earning low incomes but still paying income tax. Business fleeing Britain because our taxes were too high. ”

These are all pure Bullshit Mountain. A state that had become too expensive to pay for? What does he mean? We can afford any size state the people in our democracy decide we want. Public sector pensions are always affordable. Their size is a political decision. It has nothing to do with affordability. People earning low incomes are still paying income tax. Which businesses are fleeing because of excessive taxation? Certainly not ones whose loss we should mourn.

“They think that extra borrowing could pay for spending, or indeed tax cuts, in an attempt to put money in the pockets of consumers. But the extra borrowing would come at the cost of higher interest rates and everyone would know there would be higher taxes to pay for it, coming down the track. The higher interest rates would pick the very pockets of the working people you are trying to help and the fear of extra taxes would undermine their confidence.”

TINA is back! This is the only argument Osborne has left now. Even though the deficit is going up, because he is not doing it on purpose, the markets have confidence in him, but if he were to increase the deficit on purpose, they would turn against him. Not very convincing is it? Our low interest rates have nothing to do with austerity. They are low because we have our own currency so the markets know there is no default risk on UK bonds. Even if the markets did start to lose faith, they can’t hold us hostage. All the BoE need do is announce a target interest rate and commit to buying and bonds that go unsold at this rate. End of the problem of the markets.

“Now, as well as those critics saying we’re cutting too fast, there are those who say we’re cutting too slow.”

The only people saying that are those living at the very top of Bullshit Mountain. No serious person would say that.

“Our published plans already require us to find £16 billion of further savings. As I have said, the broadest shoulders will continue to bear the greatest burden.”

Apparently £10 billion is to be cut from the welfare budget. Not sure welfare recipient’s shoulders are all that broad.

“Nor am I going to introduce a new tax on people’s homes. It would be sold as a Mansion Tax. But once the tax inspector had his foot in the door you’d soon find most homes in the country labelled a “mansion”. Homes people have worked hard to afford and already paid taxes on. It’s not a Mansion Tax it’s a Homes Tax and this Party of home ownership will have no truck with it.”

What does Osborne think council tax is? All he need do is introduce a couple of extra council tax bands to ensure someone living in a £10m house doesn’t pay the same as someone in a £500k house.

“We have never argued that you stop what economists call the automatic stabilisers operating – the lower tax receipts and extra government payments that follow if, for example, the global economy turns down.”

What does he think welfare payments are? The are automatic stabilisers designed to prevent the economy from sinking into the abyss when it is hit by a shock like the financial crisis. He is already weakening them and is proposing to weaken them further. This will unsure the next crisis will be much worse.

Osborne finished his speech with some supply side bullshit. This is music to the ears of the residents of Bullshit Mountain. Business taxes are too high, regulations to tough, we want people to aspire blah blah blah. Osborne even thanked Adrian Beecroft for his piss-poor report! Our problems are absolutely not due to business taxes or regulation. These are ideological demands from people whose interests differ dramatically from the vast majority of the population.

So to end then, here are a few facts for the residents of Bullshit Mountain:

1. Government is nothing like a household. A balanced budget should never be a policy goal;

2. The reason the deficit is so high, is not because Government is recklessly spending too much, it’s because the private sector is not spending. So we can either tax the excess savings of those who are hoarding money, or we the Government can spend more. Those are the only two choices if we want a swift recovery.

3. The vast majority of benefit claimants are not out of work because they are lazy, or ‘scroungers’. They are out of work because there are not enough jobs. Repeat after me “We demand aggregate demand!”

4. Our business regulations and taxes are already some of the lowest in the developed world. Don’t believe me? Check out the stats for yourself on the OECD website. Cutting them further will not strengthen our economy. Quite the opposite. It will only speed up the transfer of resources from the bottom to the top, and hasten the arrival of the next crisis.

We should never pander to Bullshit Mountain, as Labour currently seem to be trying to do (Liam Byrne anyone?). If we could all agree on these four things, we can start to talk about actual solutions to the problems we face. I’ve outlined some approaches we could take here:

There’s No Money Left?

The Work Programme. Is this the best we can do?

The fundamental deceit of ‘There’s No Money Left’

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There’s No Money Left?  by alittleecon

http://alittleecon.wordpress.com/2012/09/24/the-british/ First posted 24.09.12

“The British Government has run out of money because all the money was spent in the good years,”

George Osborne, Feb 2012

“…in the years of plenty they put nothing aside. They didn’t fix the roof when the sun was shining”.

David Cameron, March 2008

“There’s no money left”

Letter left by Liam Byrne, May 2010

For the last 4 years you will have seen or heard quotes like this in the media. How we were on the brink of bankruptcy and how “there is no money left”.  Those advocating a “Keynesian” response to the current crisis are rebuffed with the argument that we cannot increase borrowing now because we didn’t run budget surpluses in the years before the crisis – “Gordon Brown spent all the money”. Keynesianism has now been reduced to “surpluses in the good times, deficits in the bad”.

Liam Byrne’s famous note left as Labour left office was particularly heinous and the Coalition never miss an opportunity to use it as a stick with which to beat Labour. It may surprise you to hear this, but Liam Byrne is not an expert on the economy (or anything else), and should be ignored on all matters economic.

The Government say Labour want to increase borrowing by £200bn, and this would be disastrous as, if the ‘markets’ thought we were increasing borrowing, they would start to worry that we would be unable to repay our debt (or “pay our way in the world” as David Cameron is fond of saying), and interest rates would start to rise. This is basically what has happened in some of the states in the Eurozone, and Coalition ministers have not been shy in pointing this out (repeatedly and at length). Currently, Labour have no coherent response to this.

But is there any truth to this narrative? Is there an alternative path?

Perhaps surprisingly considering they have provided the intellectual cover for austerity, economists 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. Here’s Paul Samuelson, “father of modern economics” and Nobel Prize winner, being interviewed in 1995:

“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.”

So the idea that budgets must be balanced is a myth. Samuelson believed this myth was necessary to place a leash of governments who might be tempted to spend, spend, spend, but a myth it is never the less. But why is it a myth? Aren’t governments limited in their spending by what they can raise in taxation plus the amount the private sector is willing to lend them?

Categorically no! A country like the UK which issues its own floating currency, does not depend on anyone else for money. It can issue more currency at will and without limit. Therefore, it can never go run out of money and can always afford to purchase anything for sale in its own currency. This is a very simple (and perhaps obvious) point, but one that is generally ignored in all discussions about government finances. When it is discussed, it is discussed in somewhat hysterical terms: “PRINTING MONEY!! HYPERINFLATION!!” etc. etc. More sensible people realise that government creation of money is no more inflationary than bank creation of money. Creation of new money could be inflationary, but only at the point where output is unable to expand any more in response to new demand.

But if a government doesn’t need to collect taxes or borrow from the markets in order to spend, why does it do these things? In a country like the UK, taxes serve a number of purposes. Firstly, tax ensures there is a demand for the government’s currency. We must all pay taxes in pounds (some more than others), so we accept pounds as payment for goods and services so we can pay our taxes. Secondly, taxes make room for government spending. If the government just spent without taxing, very quickly we would reach maximum output and start to experience accelerating inflation. Taxation helps keep a lid on inflation. Finally, taxation is used to meet social aims. These may be to redistribute wealth or to discourage harmful activities, like polluting or smoking.

Why does the government sell bonds? It does this primarily to maintain its target rate of interest. If the government wanted, it could stop selling bonds altogether. This would mean the overnight interest rate would fall to 0%. Bonds also serve as a risk free asset which institutions like pension funds like to hold as part of their portfolios, so they serve a purpose in that way also.

So armed with this knowledge about government finances, what should government do?

  1. The do nothing approach. Like Paul Samuelson says, we can accept the truth about government finances, but also be concerned about letting governments spend without constraint, and so continue to tie our hands with regards to policy options. Taking this approach means we are in for a prolonged slump and a very slow recovery. We could still borrow more from the markets for investment, but this adds no new money to the system, just brings old money back into use.
  2. Use the knowledge that a government is not constrained by revenue and borrowing to actively pursue policies which would restore full employment and raise living standards. One possible approach would be to adopt an idea devised by the economist Abba Lerner (a contemporary of Keynes), known as functional finance. Lerner set out three rules for fiscal policy under functional finance:
    1. The government should ensure there is sufficient aggregate demand to ensure there is full employment. It should do this by lowering taxes and/or raising spending. If inflation beckons, government should do the opposite.
    2. Government should borrow money when it wishes to raise the interest rate and repay debt when it wishes to lower it.
    3. The government press shall print any money that may be needed to carry out rules 1 and 2.

I prefer option 2 as clearly it offers the shortest path back to prosperity. There are issues around how our political system would cope with functional finance, but this is a political problem, not an economic one. If the general public were fully aware of the realities of our monetary system, and the policy options that presented, we could all have a much more grown up debate about which course we should take.

For a full discussion of the nature of modern money, I recommend this video of a presentation given recently by Michael Hudson and L. Randall Wray. It’s a bit long, but well worth the effort:

http://mikenormaneconomics.blogspot.co.uk/2012/09/randy-wray-and-michael-hudson.html

Further Reading

The following are a few blogs I find useful for helping to understand economics:

http://mikenormaneconomics.blogspot.co.uk/

http://bilbo.economicoutlook.net/

http://neweconomicperspectives.org/

http://www.3spoken.co.uk/

http://www.creditwritedowns.com/