Thatcher’s economics has generated ‘poverty in the midst of plenty’

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By Prue Plumridge

Lord Wolfson, chief of the Next retail chain said recently that the national living wage could drive up inflation as the retailer would have to raise prices to offset the cost of the new minimum wage of £7.20.

The word ‘living wage’ (which £7.20 is not) clearly strikes fear into the hearts of rich businessmen.   The business mantra is that paying people a decent wage can only lead to the bogeyman of inflation or job losses and is the usual stick with which the workforce is beaten to keep it fearful and compliant.

Let’s first put a context onto this claim by Lord Wolfson.  According to Professor Bill Mitchell, Wolfson claimed that a living wage of £6.70 was ‘enough to live on’ and a ‘decent amount for a lot of his staff”.  He also said that it was not necessary for Next to raise wages because ‘the clothing chain had 30 applicants for every job advertised’.  Professor Mitchell went on to note the salary and benefit arrangements for Wolfson who had a base pay of £743,000 in 2014/15 along with a range of other benefits and bonuses which brought his salary to a total of £4,666,000.

A report published by Citizens UK recently noted that:

‘An estimated 5.24 million people in the UK are employed on less than the living wage. Many low-waged workers are in receipt of benefits and tax credits, policy tools used to top up their incomes [and are] criticised in popular media and policy circles.

The calculation of the public subsidy is a new way to think about low pay.  In effect it is low paying employers who are subsidised by state payments to their employees without which they would be unable to meet their basic needs and continue to work for low wages.’ 

In other words this is nothing more than corporate welfare on a grand scale which costs the tax payer a gigantic £11bn a year.  To put this into context benefit fraud is £1bn. Companies, in effect, have no incentive at all to pay decent wages when they know for certain that the State will (for now) pick up the tab through benefit payments.

To understand claims that increasing the minimum wage will lead to an inflationary loop or job losses we first have to understand from where this idea originated.  The post war period between 1948 and 1973 was known as the Golden Age.  Production had increased, there was full employment and living standards had risen.  In the words of Harold Macmillan in 1957 ‘most of our people have never had it so good.’  During this period before the attack on fiscal deficits occurred across the advanced world inequality was lower than it ever had been, workers were more upwardly mobile and GDP was averaging much higher growth.  The country was riding high on the post-war economic boom which had also seen the foundation of the National Health Service, a social security system and education for all and all despite the so called ‘National Debt’.

This was, in fact, the classic era of Keynesian economics which served as the standard economic model in the latter half of the 1930s and the post second-world war years.   Keynes’ theory was that problems such as unemployment were nothing to do with moral shortcomings but were more to do with imbalances in demand and the point at which a country was in its economic cycle – expanding or contracting.  As such he believed that at times of economic downturn when an economy could no longer sustain full employment government should step in to ensure that resources were fully utilised.  To this effect government spending, he believed, should be used to increase overall demand which, in turn, would increase economic activity and reduce unemployment.  It challenged the reigning laissez-faire model which had its roots in the Classical economic theories of 18th century thinkers like Adam Smith and David Ricardo who believed that markets worked better without government interference.

The 1973-74 recession changed all that.  The certainties of the golden age were to be challenged as unemployment rose and prices spiralled.  The trigger for this was the OPEC oil price crises in 1973 and 1979.   Inflation combined with recession was a new phenomenon and, as it turned out, proved to be the crucible for what is known today as neoliberalism.  The ideas of such economists and thinkers as Friedrich Hayek and Milton Friedman came into their own and quickly began to take root.  By the end of the 1970s, it dominated economic thinking amongst the educated elite in universities and the political and business world.

The study of economics was elevated to that of a science in the belief that through the use of modelling and formulae the future could be predicted accurately and the full employment agenda of the post war years, government intervention and market regulation was abandoned in favour of the magic of market forces.  Such interventions, it was believed, would cause inflation or result in increased unemployment through destabilising the market process which, naturally, sought to find its equilibrium.

Karl Polanyi, who explained the deficiencies of a self-regulating market and the potential dire social consequences of unfettered market capitalism in his book ‘The Great Transformation’ predicted:

‘To allow the market mechanism to be sole director of the fate of human beings and their natural environment…. would result in the demolition of society.’

From the 70’s onwards we start to see a shift in economic thinking which can be summed up in a speech by Prime Minster James Callaghan who told the Labour Party conference in 1976:

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending.  I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.” 

Margaret Thatcher came to power in 1979 and she fully embraced the expansion of neoliberal ideas through government policies.  Her aim was to break with the post war political consensus and pursue policies which deregulated financial markets, rolled back the state through privatisation of publically owned assets and weakened welfare support, undermined union and employment protection and abandoned full employment goals.  The results were that the bargaining power of workers was seriously undermined.  By the mid-80s unemployment had trebled and there was widening income inequality.  Margaret Thatcher who said ‘It is our job to glory in inequality’ laid the foundations for the growing perception that the individual controlled his or her own fate.  On that basis, poverty was a result of one’s own shortcomings and not a failed social system.

Tony Blair’s Third Way attempted to humanise the market by reconciling traditional left of centre values with laissez-faire capitalism.  However, it still accepted the neoliberal doctrines linked to income distribution and the idea that there was a natural rate of employment which was determined by supply and demand.

As Professor Bill Mitchell commented recently:

“They preached equity yet watched income and wealth inequality rise under their stewardship.”

As part of this new Third Way approach, a minimum wage was introduced in 1999 by the Blair government.  However, whilst it was seen as one of the best achievements of New Labour and didn’t lead to the predicted job losses and increased costs the truth was that it was set at too low a level to have any real impact on people’s lives.   What is more, although unemployment fell during its first two terms in power overall, it did increase and the lowest unemployment rate it achieved was still more than 1% higher than in the early 1970s.  This combined with the fact that the low public investment as a share of GDP, which began under Thatcher, largely continued under New Labour and the effects of weakened bargaining power and wage stagnation further increased pressures on the working population.  Furthermore, Blair’s human face of neoliberalism was betrayed by a step change in attitudes to welfare when the Blair government moved to cut single-parent benefits in 1997 and tried to introduce cuts to disability benefits in 1999.  This culminated in 2008 with James Purnell’s Welfare Reform Paper under which everyone would have to do something in return for their welfare payments.  Tony Blair also boasted that the UK had ‘the most flexible labour market in Europe’ but we shall see shortly at whose expense.

When the Conservatives returned to power in 2010, the framework was virtually in place for a full scale assault on the public sector and workers’ rights.  Workfare forced claimants to work for nothing but their benefits under the guise of work experience and training and Tony Blair’s flexible labour market literally found themselves on an even faster race to the bottom.  Temporary contracts, zero hours and low paid work have all facilitated the normalisation of a flexible labour market which is a trademark of neoliberal economics.  In addition, as part of their goal to reduce public spending, the Conservatives also introduced high fees for employment tribunals which has led to a noticeable reduction in claims, clearly at the expense of working people’s rights.

In May 2015, the Tories were re-elected and in only a few months we have seen yet more attacks on Trade unions and working people’s rights and benefits.

Caroline Lucas summed up the last four decades in an article in the Independent:

‘The economic project that has dominated politics since the 1970s has had at its heart the strangulation of the Trade Unions. Why? Because it is the unions which stand as a last line of defence against repeated Government attempts to privatise, deregulate and cut back on the public services upon which we all rely.

The results of that economic project – skyrocketing inequality, the loss of thousands of public sector jobs and increasingly precarious work for many – are plain to see. For more than 30 years, successive Governments have sold off our national assets and deregulated our economy – but to continue the project the Conservatives know they need to remove a key barrier to change: the remaining power of the millions of members of Britain’s trade unions.’

One of the premises of neoliberal thought is that wealth trickles down as a result of markets having the freedom to act without government interference.  We have not found this promised market equilibrium.  What we have seen instead is wealth pouring into the hands of fewer and fewer people.  Unemployment, underemployment and low wages have become a scourge in our society as they disempower people and dispossess them of dignity and the means to ensure their well-being.  Market competition and globalisation have spurred a race to the bottom by allowing companies to suppress real wage growth and accept unemployment as part of the price we have to pay for reaching the promised-land.

So this bring us back to the start of the story.  We have nearly 2 million unemployed people but the real picture is of many more millions who are underemployed, on low incomes and temporary and zero hours contracts having no job security at all and facing the prospect of reduced income support from the State.  Ninety percent of the McDonald’s chain work on zero hours contracts – that’s 82,800 people, Sports Direct employ 20,000 and J D Weatherspoon 24,000 on such contracts.  The employers’ justification for such working arrangements is that it makes Britain more competitive in a harsh economic climate.  Compare that assertion to an increasingly unequal income distribution in which those at the top benefit at the expense of those at the bottom.  Remember Lord Wolfson’s salary last year.

With high unemployment, companies have no trouble finding people to work at the prevailing wage rates.  And yet, whilst profits and bonuses increase, the price for market competition and globalisation is being paid by those least able to ride the waves of economic uncertainty.

Michal Kalecki in his work ‘Political Aspects of Full Employment’ posits a number of reasons why industrial leaders are opposed to full employment.  Although it was written in 1943, his propositions seem as true today as when he wrote it.  Business leaders were, he said, averse to government interference in employment matters, feared losing control of government policy, loathed the idea of public investment and disliked the idea of publically funded welfare.

In 1943 the Times editorial explained why full employment was not a good idea. It said:

Unemployment is not a mere accidental blemish in a private enterprise economy. On the contrary it is a part of the essential mechanism of the system, and has a definite function to fulfil.  The first function of unemployment which has always existed in open or disguised form is to maintain the authority of master over man.  The master has normally been in a position to say if you do not want the job there are plenty of others who do.  When the man can say if you do not want to employ me there are plenty of others who will the situation is radically altered.’

As Kalecki describes it very succinctly:
“For here a moral principle of the highest importance is at stake.  The fundamentals of capitalist ethics require that ‘you shall earn your bread in sweat’ — unless you happen to have private means.”

The Golden Age, for a short period of time, challenged the status quo and the power of big business to dictate terms but since that time the ascendance of neoliberal thought has restored the balance in favour employers and has been supported by ever more government legislation to undermine working people’s rights.  As Lord Wolfson’s assertion indicates, they now have considerable control over the labour market and wages and people have become mere pawns in a global game to be exploited in the name of profit.  The cost to the economy and society of unemployment and underemployment is huge in terms of the outcomes on health and well-being and as a consequence on society as a whole.

So how can this imbalance be best addressed? Jeremy Corbyn stood on a platform of anti-austerity and has promised a radical programme. This will require first that he and his Chancellor wholly reject the neoliberal framework of deficit reduction and balanced budgets. These two positions are irreconcilable. Secondly we need to address urgently the issue of unemployment. In the words of Hyman Minsky in his book ‘Ending Poverty: Jobs, not welfare.

they involve a commitment to the maintenance of … full employment and the adjustment of institutions, so that the gains from full employment are not offset by undue inflation and the perpetuation of obsolete practices.’

So what would this mean in practice?

Philip Pilkington in an article published in the Guardian in 2013 summed it up very neatly with reference to the work of Hyman Minsky:

“Minsky’s theories of financial instability suggested that capitalist economies were prone to serious downturns in which huge amounts of the labour force would find themselves unemployed. What’s more, this would lead to large shortfalls in demand for goods and services which would further exacerbate such downturns. The result was a vicious circle that would become worse and worse as the financial system evolved into an increasingly fragile entity and households and businesses became increasingly mired in debt. The only way out of this was to build robust institutions that insulated working people from the excesses of the system. While progressive taxation and unemployment benefits went some way toward both protecting workers and propping up demand during downturns, it did not, according to Minsky and his followers, go nearly far enough. They believed that governments should offer a job to anyone willing and able to work and then pay for these jobs by engaging in increased deficit spending – as they currently do with unemployment benefits during downturns.

We have a capitalist system which, in fact, has generated ‘poverty in the midst of plenty’.   Poverty, rather than as suggested being the result of the shortcomings of the individual is, in reality, the consequence of unemployment, underemployment and low pay. The primary objectives of government, therefore, should be to ensure that working people are paid a wage which is sufficient and gives them dignity, and the provision of a job guarantee for all those who want to work.  This should be supported by an adequate welfare system to help those who are physically or mentally unable to work through illness or other misfortune.

Those who, like Mark Carney, decried Jeremy Corbyn’s economic plans for PQE by saying it would imperil the recovery, drive up inflation and hurt the poor and the elderly are in denial and should question the very basis upon which they construct their economic assumptions.   Firstly today’s global economy is suffering from deflationary pressures rather than inflationary and even a Governor of the Bank of England should know that some inflation is beneficial.  And secondly, the economic paradigm which advocates austerity, deficit reduction and balanced budgets is bogus and has been for over 40 years.  It has been used to justify the creation of a small state on the false basis that the private sector is more efficient.

We should understand as L Randall Wray said in his introduction to Hyman Minsky’s book that:

‘…. the primary barrier to attaining and sustaining tight full employment is political will’.

The Universal Declaration of Human Rights states: “Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment. 
The neoliberal paradigm is foundering but those supporting it will not give up without a struggle since so much is at stake. There is an alternative and with Jeremy Corbyn we now have a mandate to take the ‘road less travelled’ to secure the necessary changes which will rebalance the economy in favour of a fairer distribution of available resources and income.

Our next step must challenge the status quo by understanding how we can best implement that alternative and build the mass movement we need to make change happen.

References:

http://www.mirror.co.uk/news/business/next-boss-warns-living-wage-6421023

http://ineteconomics.org/ideas-papers/interviews-talks/demystifying-modern-monetary-theory

www.guardian.co.uk/commentisfree/2013/jun/07/labour-jobs-guarantee#sthash.ikqwo08O.dpuf

Ending Poverty: Jobs not welfare: Hyman Minsky

Political Aspects of Full Employment: Michal Kalecki

http://www.theweek.co.uk/business/54485/zero-hours-contracts-mcdonalds-flexible-or-exploitative

Rejecting the TINA Mantra and the second ‘gilded age’ http://bilbo.economicoutlook.net/blog/?p=31888

Jeremy Corbyn’s new politics must not include not lying about fiscal deficits http://bilbo.economicoutlook.net/blog/?p=31888

A short history of neoliberalism

http://www.globalexchange.org/resources/econ101/neoliberalismhist

From Keynsianism to Neoliberalism: Shifting paradigms in Economics

http://fpif.org/from_keynesianism_to_neoliberalism_shifting_paradigms_in_economics/

http://www.marxist.com/neoliberalism-dead-or-sleeping.htm

Politics in the Pub Your Rights 2 Work

https://www.youtube.com/watch?v=pS7AOaYY6Lo

Published on Sep 4, 2015

Dr Victor Quirk of CofFEE (Centre of Full Employment and Equity) outlines the history of employment policy in Australia, tracing it from the 1940’s policy of full employment and questions why it’s no longer Government policy.

Telegraph Tosh on Economics

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Steven Hail’s point by point response to the Daily Telegraph Article by Jeremy Warner  which suggested the Jeremy Corbyn’s economic plans will turn us into Zimbabwe.

Economics in crisis – it needs a ‘Reformation’

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With great insight, Chris Waller draws the parallels between the state of the Church in the 16th century and the state of contemporary economics (1):

Economics needs its Reformation, not only a new theoretical basis, if one can be found, but more importantly, the financial economy needs to be taken out of the hands of a small and overly powerful clique – a clique which, like the Church of Luther’s day, has been shown to be not only corrupt but criminally incompetent in the very matters in which it claimed to have special insight and expertise. Economics in the twenty-first century is in the grip of the very same mind-set that impeded any possibility of intellectual progress in the 16th century and now stands in need of its Nicholas Copernicus, its Giordano Bruno, its Galileo and its Johannes Kepler.

There are voices out there raised against the current economic orthodoxy but, if history is any guide, those who wield power will do their utmost to stifle anything which they regard as heresy and they will not relinquish that power without a struggle: things will get worse before they get better and the Greek people may well be the actors in what is only the first act of a very modern tragedy. (1)

 

Furthemore… asks Chris Waller … Even if economics were solidly founded in theory, we are still left with the bigger question: what is the purpose of the application of this theory?’

A point also made by Neil Wilson when he writes ‘Let’s stop chopping people’s feet off to fit the New Procrustean bed.  Let’s make the bed big enough for all of us.’ (2) He also draws a parallel between mainstream economics and a religion:

Under a New-Keynesian economic system there must be suffering so that the purity of the model is maintained. And since this religion fits with the views of those with the money and power, it is funded and propagated. (2)

 

‘And when the real world throws up endless evidence that the model is utterly wrong, the mainstream economists scream that, no, the world must be forced back into the model. (2)

 

In the same vein,  Professor Richard Wolff  told Bill Moyers (in the excellent video interview below) that he had to go to a Business school to learn how real world economics works because it wasn’t what was being taught in the elegant equilibrium models of the Economics Department at Harvard or other prestigious Universities.  Professor Steve Keen goes further by saying that there is ‘a paradoxical but transcendental truth’ – Neoclassical economists don’t understand neoclassical economics.

 

The problems outlined are pretty damning.  We are told that ‘there is no alternative’ (Mrs Thatcher’s TINA) .. and yet it is an economic system which doesn’t predict real world events like the financial crisis in 2008; that the real world throws up endless evidence that the model is utterly wrong; that economics in the twenty-first century is in the grip of the very same mind-set that impeded any possibility of intellectual progress in the 16th century; and that since this theory fits with the views of those with the money and power, it is funded and propagated.  Moreover, a system which doesn’t serve society, is justifying ‘austerity’ policies and leaves ‘Greece effectively stretched on the rack, we have unemployed living in pipes, and the Spanish youth left to wander the streets scratching a living and their heads’.

How is this dire state of affairs possible?

Professor Bill Mitchell writes (3):

Some of the body of mainstream theory was applicable to the convertible, fixed exchange rate currency systems that were defined under the Bretton Woods system. Under that system, the government was revenue constrained as a result of the link between currency on issue and the stock of gold held by the central bank. As a consequence, the government had to raise taxes and/or borrow from the non-government sector in order to spend…. By the 1960s, a series of what were called “competitive devaluations”…  were made and set up a series of leapfrogging actions among trading rivals. The system collapsed soon afterwards when it became obvious that the US government could not longer support it.

So, at present, the overwhelming perception that the wider society has of economic affairs, options available to government, causalities between economic variables etc is based on a myth. There is mass deception which is propogated by my profession for various reasons.’ (3)

The system is ‘a complex web of inter-related myths’.

But is there only one strand of economic thought or are there different schools?

This useful but far from complete tree was published in (I think) the Washington post:

w-mmt2

For the mainstream, the disputes are solely between the Neo-Classical economists and the Neo-Keynesians.   But there are also the ignored Post-Keynesians.  Professor Bill Mitchell is a notable omission from the Post-Keynesian list above but that may be because he is Australian.  Professor Steve Kean is also missing from the line under Minsky (but that may be because he is also Australian).

In explaining some of the origins of these approaches, Professor Bill Mitchell writes (3):

‘I have noted in the past that the body of theory we call neo-classical (characterised by marginal analysis) emerged in the fourth quarter of the C19th as a counter to the growing popularity of Marxist thinking and the threat it was posing for the wealthy capitalist class. Industrialists provided funding to economists of the day to develop a theory that would show capitalism to be “fair”. This was the basis of marginal productivity theory, which claims that all rewards taken from the system are in strict proportion to the contribution the recipient makes to the production process.

So wages and profits are alike – each goes to the recipient (worker and capitalist) as a reward for their respective contributions.

Mainstream macroeconomics was built on this microeconomic theory which “proved” that free markets were optimal and self-regulating and that most of society’s ills were the result of government distortions of the market.

The theory has survived despite being internally inconsistent… and lacking predictive capacity.

There are vested interests therefore in preserving a body of theory that promotes, for example, damaging deregulation which has allowed national income to be redistributed to profits and undermines the security of worker entitlements (including their jobs). It is thus not a battle with ignorance but a hegemonic struggle.

However, the elites exploit the ignorance of the majority to maintain these myths.’

Neo –Keynesianism arose out of a synthesis of Neo-classical economics and Keynesianism.  A leading architect is Professor Gregor Mankiw, Professor of Economics at Harvard University, former chairman of the Council of Economic Advisers under President George W. Bush and in 2006, an economic adviser to Mitt Romney and continued during Romney’s 2012 presidential bid.  I think it is pretty safe to say that Mankiw is not a Democrat.  He is also author of the mainstream undergraduate textbook Principles of Economics.

In November 2011, some of the students in his Economics 10 class caused a storm by walking out of his lecture. Their criticism of his course speaks volumes as to the current lack of plurality in economic approaches taught in Universities:

“..we found a course that espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today … Economics 10 makes it difficult for subsequent economics courses to teach effectively as it offers only one heavily skewed perspective rather than a solid grounding on which other courses can expand. … Harvard graduates play major roles in the financial institutions and in shaping public policy around the world. If Harvard fails to equip its students with a broad and critical understanding of economics, their actions are likely to harm the global financial system. The last five years of economic turmoil have been proof enough of this.”

As Chris Waller writes, in economics just as in the 16th century church, ‘those who wield power will do their utmost to stifle anything which they regard as heresy’.

However, it is clear that not knowing which economic school, politicians and economic analyses are ‘coming from’ contributes to TINA and the confusing ‘smoke and mirrors’ reported in the MSM.  People are ‘turned off’ by the impenetrable jargon and arcane language…

Professor Stephanie Kelton, another advocate of MMT, has created a shorthand  (as explained by Alittleecon).  There are deficit hawks, deficit doves and deficit owls (4):

The hawks are the austerians who argue government deficits are too high, so we must cut expenditure fast. Government should get out of the way and let the private sector do what it does best. George Osborne and chums are definitely in this category.

The doves argue that the private sector is very weak at the moment, unemployment is high and so we must temporarily increase spending to stimulate the economy. They would agree with the hawks however, that generally, large deficits are bad and so we need a medium term strategy to get the deficit down. Paul Krugman is probably the most famous deficit dove, but over here, economists like Jonathan Portes fall into this category, and also maybe Ed Balls (although he often sounds like a hawk).

The problem for the doves is that their argument is easy to tear down with scaremongering about burdening our grandchildren and Greek-style bankruptcy. Because the doves agree these are medium to long term risks, the hawks win the day because they just use the analogy of government being like a household and having to spend within its means. Most people can relate to this, so while people don’t like austerity, many think there is no other way. (4)

But what about the Modern Monetary Theorists and Post-Keynesians?

They are the deficit owls.  They reject the idea that the government is like a household!  Hence, they argue that we do not need a medium term strategy for getting the deficit down because there is never a risk of the UK government being ‘broke’ and unable to pay its bills. (4)

Richard Wolff (and many others) emphasise that mainstream economics is not working, and does not reflect the real economy.  Furthermore, as Chris Waller (and many others) say ‘the financial economy needs to be taken out of the hands of a small and overly powerful clique’.  These are pretty huge indictments.

In addition, the heretics or the alternative, heterodox economists are ignored or pilloried by the mainstream (although, no burnings at the stake to date) but as Neil Wilson, another deficit owl, says:

We can have jobs for all and sufficient income for all. There is no need for poverty. And very likely without having to ‘tax the rich’ either. So we all win.

Let’s harness the output we’re leaving on the table. Let’s stop chopping people’s feet off to fit the New Procrustean bed.

Let’s make the bed big enough for all of us. (2)

If the ‘alternative economics’ was good enough for Roosevelt, Keynes and Lincoln, it makes sense to start listening to the heretics.  Can’t quite picture Ed Miliband as Henry VIII though…

(1)  http://www.economania.co.uk/new-reformation-chris-waller.htm

(2)  http://www.3spoken.co.uk/2013/02/new-keynesian-more-like-new-procrustean.html

(3)  http://bilbo.economicoutlook.net/blog/?p=19265

(4)  https://think-left.org/2012/10/15/how-to-be-a-deficit-owl/

Full Show: Taming Capitalism Run Wild

February 22, 2013

Economist Richard Wolff and Restaurant Worker Advocate Saru Jayaraman talk about battling rampant capitalism, and fighting for economic justice.

Even as President Obama’s talking points champion the middle class and condemn how our economy caters to the very rich, modern American capitalism is a story of continued inequality and hardship. Even a modest increase in the minimum wage — as suggested by the president — faces opposition from those who seem to show allegiance first and foremost to America’s wealthy and powerful.

Yet some aren’t just wringing their hands about our economic crisis; they’re fighting back. Economist Richard Wolff joins Bill to shine light on the disaster left behind in capitalism’s wake, and to discuss the fight for economic justice, including a fair minimum wage. A Professor of Economics Emeritus at the University of Massachusetts, and currently Visiting Professor in the Graduate Program in International Affairs of the New School, Wolff has written many books on the effects of rampant capitalism, including Capitalism Hits the Fan: The Global Economic Meltdown and What to Do About It.

George Osborne says we’re running out of money ..

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First a quiz:

Q1.  The UK economy is just like a household and the government has to finance spending out of its income or through borrowing.  True or False?

Q2.  The role of taxes is to provide finance for government spending?  True or False?

Q3.  The UK government needs to borrow money from the private sector to finance the budget deficit. True or False?

Q4.  If the Tory/LDs were running a budget surplus instead of a budget deficit, pressure would be taken off interest rates because the private sector would have more funds available for investment projects. True or False?

Q5.  If the budget deficit persists it will burden further generations with inflation and higher taxes. True or False?

Q6.  We need to run budget surpluses now, to help build up the funds necessary to cope with an ageing population in the future. True or False?

The answer is that they are all are false …not true… misleading… erroneous… fictitious… incorrect… deceitful… dishonest… sham… bogus… unreal… and yet we are fed these lines, day after to day, to justify George Osborne ‘shrinking the state’.  And worse still, Ed Balls and the LP are going along with an austerity-lite economic strategy.

Don’t believe me?

Listen to what the St Louis Federal Reserve, from the heart of Western capitalism in the US says:

‘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.’

The same is true of Sterling.  Economics Professor Randy Wray explains :

L. Randall Wray — MODERN MONEY: the way a sovereign currency “works”

Published on Sep 23, 2012  ModMonPubPurpose

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’.

So why are we told that there is no money left; that it is imperative to reduce the deficit and debt; and that we have to keep the ‘bond markets’ happy?

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.

http://www.globalresearch.ca/uk-economy-falls-into-double-dip-recession/5313842

If George Osborne was serious about reducing the deficit and balancing the budget, he wouldn’t be cutting jobs, benefits and reducing corporation tax.

‘So even if you are obsessed with reducing deficits, the best way is to engender growth. The dumbest thing a government can do if it wants a lower deficit is to impose fiscal austerity. There are a lot of dumb governments out there. The problem is they are aided and abetted by criminal types who know full well it is dumb to cut net public spending but pressure governments to do so as long as the space for spending on them expands.’

http://bilbo.economicoutlook.net/blog/?p=22186#more-22186

The 2011 Budget Control Act, initiated by the Republican controlled House, is one of the most foolish pieces of legislation ever passed into law by Congress, as it forces the government to attempt to “balance” its budget and reduce the budget deficit.  National government budget deficits, which are the net contribution of government spending to economic growth, are actually integral to economic growth, contrary to the anti-scientific conventional budget lore upon which deficit hysteria has been built.  Without government budget deficits, the economies of nations with trade deficits CANNOT accumulate net financial wealth  due a matter of simple arithmetic; those few nations (China, Germany, not the US) with large trade surpluses MIGHT be able to accumulate net financial wealth without a budget deficit but always with the cooperation of other nations financing those surpluses through trade and, in most cases, government budget deficits on the side of the net-importing nation.

A fiat currency-issuing national government, unlike a local government, business or a household, does not depend upon tax or other income and therefore is not and should not pretend to be bound by conventional balance sheet accounting, which was perhaps a more applicable, though not particularly successful, means of national government accounting during the gold standard era. The reasons for transitioning away from the gold-standard, the rigidities which it imposed on aggregate demand and the money supply, have been suppressed from public discourse in an era in which deficit hysterics like those at “Fix the Debt” hold honored seats at the policymaking and policy advocacy tables.  These deficit hysterics, funded by Wall Street tycoons freelancing as economic pundits, would like Washington insiders and the media to believe that the gold-standard never went away, specifically for the purpose of cutting social programs that stand in the way of Wall Street’s expansion into new markets.

I have recently proposed that we rename the so-called budget deficits specifically of currency-issuing governments, the government’s “net contribution to monetary/economic growth” so that the confusion no longer persists that these so-called deficits are by their nature “bad” and to be avoided.  The fiat currency issuer can never run out of its own money, can never be in “deficit” in it; “net contribution” is a better formal description of the excess of spending over taxes for specifically a fiat currency-issuing government.  The government spending over taxes collected becomes the incremental increase in the money supply for the real economy as it grows in real terms, underneath the pro-cyclical expansion and contraction of money available from bank credit (i.e. expands in a boom and collapses in a bust).  Too much price inflation is a possibility with too much government spending over-and-above taxes collected but demand-led inflation in our current situation would be a “high quality problem” indicating that we have reached full capacity in our economy, which is not nearly the case.  Right now we have a very large output gap as well as high demand for government-led expenditures on things like infrastructure, public services and education, making increased government expenditures very unlikely to cause inflation.

http://neweconomicperspectives.org/2012/12/fueled-by-deficit-hysteria-obama-and-the-republicans-are-choosing-the-path-of-economicide.html

The deficit is the government’s ‘net contribution to monetary/economic growth’ .. so who in their right mind, would want to reduce it?  We should be increasing it until the UK has jobs for all who are willing and able to take them.  As Keynes said:

Look after unemployment and the Budget will look after itself”

Keyes also 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.’

(My emphasis in bold)

Related posts:

The big lie – Governments cannot run out of money!

How to be a Deficit Owl

Cameron and Osborne dwell on Bullshit Mountain, UK

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

Why does the Structural Deficit remind me of LIBOR?

Osborne and Cameron’s Big Deficit Myth

What is George Osborne playing at?

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/

Why does the Structural Deficit remind me of LIBOR?

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(I know this might sound rather boring but the facts are actually a bit incredible…)

The London Interbank Offered Rate (LIBOR) is a benchmark interest rate used broadly all over the world and affects trillions of dollars of loans worldwide – mortgage loans, small-business loans, personal loans. ‘The Libor is not based on an objective measure of the interest for bank-to-bank loans. It is the average of a daily poll of the Association’s member banks, who give an estimate of the interest rate they think they would pay if they sought to borrow from another bank. It is supposed to be the way the financial system assesses the overall health of the financial system.It has now been discovered that a substantial number of banks were manipulating their estimates of the interest rate to their own advantage.

Rep. Denis Kucinich, U.S. Representative from Ohio’s 10th District on the LIBOR-participating banks:  “We don’t know just how deep this scandal goes. But the fact is that if a fundamental component of our financial system has been or is being manipulated, we have the right to know about it.”

In May 2010, the coalition decided to place the structural budget deficit at the heart of its fiscal policy, and George Osborne’s argument for his ‘austerity’ programme depends largely on his assertion that it is necessary to completely eliminate it.  Initially, clearing the deficit was projected to occur within the course of one parliament but the time-span has been extended repeatedly, and estimates currently seem to be somewhere between 2017 and 2020.

So given its central importance for the coalition’s policies, we need to know what is a structural deficit?  How is it calculated?  And is it a valid measure justifying the coalition’s draconian austerity programme?

structural deficit

A budget deficit that results from a fundamental imbalance in government receipts and expenditures, as opposed to one based on one-off or short-term factors. [1]

A government budget deficit occurs when a government spends more than it receives in tax revenue.  It is called a structural deficit when the ‘spending-exceeding-income’ state persists for a period of time.  This causes concern to mainstream economists because they argue that if the deficit is actually over and above the ability of the country to repay, then a government can only clear it by cutting spending, defaulting, or by deflating the debt through engineering a high inflation rate.

Clearly these last two options alarm lenders, and since in a neoliberal world, governments can only borrow from the markets, governments worry that if there is a crisis of confidence, the bond markets will impose very high interest rates or yields ….  which in turn, will increase the structural deficit still further!  This is what is supposed to have happened in Greece and Spain.

At its simplest, the Structural deficit is calculated by finding the difference between government spending and the amount it receives in the form of tax … but nothing about economics is ever that straightforward.  The important thing to take on board is that if tax revenue falls, as it did in the 2007 recession, there will be an increase in the budget deficit without there having, to have been any increase, or change, in government spending.  Nevertheless, since job losses occur in a recession, government spending will inevitably rise because of paying out in unemployment benefits.

Budget Balance = Revenue – Spending.

Budget Balance = (Tax Revenue + Other Revenue) – (Welfare Payments + Other Spending)

We know that Tax Revenue and Welfare Payments move inversely with respect to each other, with the latter rising when GDP growth falls and the former rises with GDP growth. These components of the Budget Balance are the so-called automatic stabilizers (2)

 

Furthermore, the ability to pay off the deficit is assessed by a country’s deficit relative to its GDP. Therefore, without any change in absolute size, the deficit becomes a proportionately bigger percentage of GDP when the economy is contracting (as in a recession) and proportionately smaller when the economy is growing.  Hence:

‘Before the financial markets went into meltdown in the summer of 2007, it was assumed the structural deficit was about 2-3% of GDP; Osborne’s plans are based on estimates from the Office for Budget Responsibility that the structural deficit is actually more like 5-6% of national output.’ (3)

In other words, the structural deficit grew as a percentage of GDP because the economy contracted in the summer of 2007, but in addition, it also actually increased because of falling tax receipts and increased welfare spending.

‘…. the drastic nature of the government’s deficit-reduction plan is explained by the belief that the economy suffered severe permanent loss to its productive potential as a result of skills being lost, capital being scrapped and the closing down of entire bits of the financial system. According to this view of the world, the fact that inflation has been well above its target for the past 18 months suggests that there is little or no spare capacity in the economy despite the severity of the recession.’ (3)

The words, ‘productive potential’ and ‘inflation’, are the nub of complications in calculating the revenue part of the structural deficit.

The ‘productive potential’ is an estimate of what the tax revenues would be if there were ‘full employment’.  In fact, the structural deficit used to be called the Full Employment or High Employment Budget. Professor Bill Mitchell says “The change in nomenclature is very telling because it occurred over the period that neo-liberal governments began to abandon their commitments to maintaining full employment and instead decided to use unemployment as a policy tool to discipline inflation.”(2)

The puzzle is, that in a neoliberal world, ‘full employment’ is not what you think … For most of us, full employment’ is ‘an economy that delivers as many jobs as there are people wanting them and hours of work consistent with the desired hours of the workers.’  But in the neoliberal world of OECD, the IMF et al, ‘conceptions of full capacity are ideologically-loaded by the NAIRU concept and are frankly … a total joke. (2)

 From the 1970s, the concept of the Non-Accelerating Inflation Rate of Unemployment (the NAIRU) became a central plank in the front-line attack on the use of discretionary fiscal policy by governments. ‘It was argued, erroneously … that full employment occurred when the unemployment rate was at the level where inflation was stable.’(2) Estimates of NAIRU are just that… ‘estimates’… and the standard errors of these estimates can vary between 3 and 13 percent in some studies.  Clearly, such a large range for error means that an estimate of the structural deficit based on the NAIRU, or some derivation of it, is highly questionable.

Nevertheless, these estimates are used to compute the tax and spending that would occur at the so-called ‘full employment’ point. But, according to Bill Mitchell, because it ignores 5% (usually) of the working-age population ‘it severely underestimates the tax revenue and overestimates the spending and thus concludes the structural balance is more in deficit (less in surplus) than it actually is.(2)

The significance of the statement, the fact that inflation has been well above its target for the past 18 months suggests that there is little or no spare capacity in the economy despite the severity of the recession’ (3), is that… given full employment is defined as that point where inflation is stable,… there is an assumption that the current tax revenue is more or less at full capacity.  (Madness or what?)

In June 2012, the official unemployment rate was 8.2% of the economically active population. This means that there were 2.61 million unemployed people, but there was also another 9.23 million economically inactive people aged from 16 to 64.  (4)

It seems that government ‘believes’ that this is the new ‘full employment’ because the economy is supposed to have ‘suffered severe permanent loss to its productive potential as a result of skills being lost, capital being scrapped and the closing down of entire bits of the financial system.(3)

This is turning common sense on its head.  In an economy that is designed for the whole population, and not just the wealth of the 0.014%, there are a multitude of jobs that need doing, a ‘green revolution is required… and if there is still not enough employment, cut back the number of hours that each person works and reduce the pension age.  This would pump demand back into the system, balance the economy and potentially mitigate the looming energy disaster.

I can almost hear the cries of  ‘we can’t afford it, there’s no money left’.  But quite apart from the obvious course of increasing taxes on the wealthy and corporations and the shutting down of tax havens, £31 billion is currently sitting unused in HMT’s Debt Management Office; £1 billion from TV licenses paid 6m in advance and so on… not to mention the fact that Quantitative Easing has poured 375bn into the banks and that may well be increased to 500bn in the future (5).  And to complete the heresy…. there is no reason why governments cannot afford to run a bigger debt and structural deficit, than we currently enjoy, in order to create real full employment.

But to get back to the structural deficit – tax revenue is not only derived from individual employment, there are also taxes paid by companies and corporations.  So what has George Osborne done?  He has cut corporation tax from 28% in 2010 to 23% in 2012, with the aim of eventually reducing it to 20% or less.  He has made it easier to put wealth into tax havens and removed the requirement on UK companies to pay tax to British authorities on overseas earnings.  Furthermore, he has cut the top tax rate for individuals from 50% to 45%, on the basis of the improbable Laffer curve.

The Office for National Statistics said the data for July 2012 heightens concerns that the government will miss its deficit reduction target.

The ONS said the total deficit since April had reached £47.2bn – up £11.6bn on 2011 – excluding financial interventions and a one-off boost after assets from the Royal Mail’s pension fund were transferred to the Treasury… At this rate, borrowing for 2012/13 overall will massively overshoot the Office for Budget Responsibility‘s forecast of £120bn, excluding Royal Mail effects, by over £35bn…”we think that the government will struggle to cut borrowing at all next year.”  Government spending, meanwhile, grew 5.1% on the previous year, mostly on welfare payments….  (6)

.

Richard Murphy suggests that George Osborne should take the blame for July’s dramatic fall in tax receipts:

‘… this loss can simply in part be due to a deliberate government give away at a time when it could not be afforded… some companies may now be anticipating the impact of new controlled foreign company rules in their payments on account. The Treasury said in Budget 2011 that these would cost £210 million in lost revenue this yearand I have always thought this a massive underestimate. This encouragement for companies to abuse tax havens to hide their profits may already be costing us dear. (7)

Putting it simply, George Osborne says one thing and has done the opposite in many instances.  He has reduced the amount of money coming into government by the loss of tax caused by cutting jobs, tax cuts for the wealthy and corporations, including through tax haven legislation. He has increased the spending on welfare payments by 5.1% because of the increased unemployment resulting from his austerity programme.  And this is notwithstanding either the extra expenditure on the reorganization of the NHS, education, the courts and so on, or the cuts in expenditure on benefits which came into force in April.

Budget Balance = (Tax Revenue + Other Revenue) – (Welfare Payments + Other Spending)

And now, on the basis that the deficit is rising not falling, there is talk of more cuts being introduced in the November Spending Review … more cuts on top of those already scheduled.  For example an additional 10bn from the Welfare budget.

Chris Dillow wrote in November 2011 after the last Spending review:

. Forecasts of the structural deficit rest upon two huge uncertainties – and it’s not clear that they offset each other: an uncertain estimate of the output gap (and sensitivities of spending and revenues thereto); and  the usual uncertainties surrounding any fiscal forecast. I’m with Simon Ward on this: “it is troubling that the fiscal framework pivots on a concept subject to huge empirical uncertainty.”

I suspect that the notion of a structural deficit is playing an ideological role… (8)

 

Chris Giles of blogs.ft.com (9) agrees that the use of the ‘structural budget’ as a fiscal target leaves a lot of room for games. And as an example, Simon Ward reported that:

The Chancellor and the Office for Budget Responsibility (OBR) have, in effect, traded assumptions. The OBR has cut its guess about potential output, implying that a larger proportion of the current deficit is structural. The Chancellor has retaliated by assuming that he will be able to cut public spending by 0.9% a year in real terms in 2015-16 and 2016-17, thereby putting the structural budget position back on track. (10)

To be frank, all of George Osborne’s approaches are consistent with, and have striking parallels, with the last 30 years of disastrous Republican ‘neoliberal’ or plutonomic economic strategy  ‘Has George Osborne been taking Trans-Atlantic lessons from Jude Wanniski and the Republicans?’

So to sum up as to why the Structural Deficit reminds me of Libor:

The Libor is a fundamental component of our financial system, and the structural deficit is a fundamental component of the coalition government’s programme.

‘‘The Libor is not based on an objective measure of the interest’ and the structural deficit is not based on an objective measure of potential tax revenue… both are more or less ‘guess-timates’.  Yet Libor is ‘supposed to be the way the financial system assesses the overall health of the financial system’ and the structural deficit is used by the coalition government to assess the health of the UK economy.  Both the Libor and the structural deficit ‘guess-timates’ have a direct impact on the lives of millions of ordinary people.

It has been admitted that the Libor was manipulated in the interests of the banks, and the structural deficit is clearly open to being used to justify the unjustifiable… for example, in terms of dismantling/privatizing the welfare state, and cutting benefits to those who are disabled, unable to work, unemployed, low waged or suffering from high rents.

As Denis Kucinich says ‘If a fundamental component of our financial system has been or is being manipulated, we have the right to know about it.’  The same holds for government economic strategy.  Bill Mitchell calls Structural deficits – the great con job! 

 

Addendum:

The structural deficit is ‘the problem’ in the neoliberal ideological construct of the world.   But in the ‘real’ world, the problem is the lack of demand, a global ‘out of control’ banking system, and the level of private sector debt.  According to Michael Meacher:

‘…. the first forecasts of the newly formed OBR in 2010, the government was expecting the level of private household debt, already £1.57 trillion, to rise to a staggering £2.13 trillion by 2014-5.   It should be emphasised that this was not something they feared would happen or were simply allowing to happen, but rather it was a deliberate aim of monetary policy that it should happen.   The plan was that the deficit provided the perfect excuse to squeeze the public sector, shrink the Welfare State, but ever-increasing private household debt would provide the extra demand to maintain at least some modestly decent growth.   The opposite has happened.

In the private corporate sector deleveraging (i.e. paying off debt) has gathered pace because the corporates are sitting on mountains of cash (at least £70bn) but not investing because demand is being squeezed.   Equally in the private domestic sector households are being forced to pay down their debts and cut their consumption as rapidly as they can as the only way to get by.   The effect is massive private debt deflation, which is the real cause of the slump. (11)

 

Related posts:

‘Has George Osborne been taking Trans-Atlantic lessons from Jude Wanniski and the Republicans?’

Thom Hartmann describes Osborne’s vision for the UK

Simon says: QE is the biggest confidence trick of all time.

A Modern Jubilee: How to End the Recession 

What is George Osborne playing at?

(1) http://lexicon.ft.com/Term?term=structural-deficit

(2)  Structural deficits – the great con job!   http://bilbo.economicoutlook.net/blog/?p=2326

(3)  http://www.guardian.co.uk/business/2011/jul/17/economics-osborne-uk-structural-deficit

(4)  http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/june-2012/index.html

(5)  https://think-left.org/2012/07/27/simon-says-qe-is-the-biggest-confidence-trick-of-all-time/

(6)  http://www.guardian.co.uk/business/2012/aug/21/uk-public-finances-deficit-borrowing

(7)  http://www.taxresearch.org.uk/Blog/2012/08/21/why-have-corporation-tax-receipts-fallen-by-20-start-by-blaming-george-osborne-as-its-all-his-fault/

(8)  http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2011/11/structural-deficit-doubts.html

(9)  http://blogs.ft.com/money-supply/2010/05/17/the-obrs-flaws-and-benefits/#ixzz24Jk6COTe

(10)  http://moneymovesmarkets.com/journal/2011/11/29/uk-autumn-statement-much-ado-about-nothing.html

(11)  http://www.michaelmeacher.info/weblog/?s=household+debt

Simon says: QE is the biggest confidence trick of all time.

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Simon (Jenkins) says ‘QE is the biggest confidence trick of all time’:

‘It is a cheat, a scam, a fiddle, a bankers’ ramp, a revenge of big money against an ungrateful world. It is called quantitative easing, and nobody has a clue what it means. According to the Bank of England, the past four years have seen £325bn pumped into the British economy to kickstart growth, with another £50bn now on the way. This enormous sum does not exist and never has. It is not “printed” money or funny money. It is no money. The one silver bullet on which the coalition relies to pull Britain out of recession is a fiction.’ (1)

Has Simon got the wrong end of the stick?

Frankly, it depends … listening to politicians in the media, it is clear that (shamefully) most of them understand very little about economics.  They regular confuse government debt and the structural deficit. (2)  For the most part, they and our journalists are steeped in the strait-jacket of monetarism and the mythologies of neoclassical economics.  TINA still prevails in mainstream thinking….  But in 2008, there was a horrified realisation that the economy was not working as predicted and that the financial system was bringing about its own Armageddon. Since that point, the public have only been offered the impenetrability of economist-speak to explain QE, which may be spoken in good faith or to deliberately obfuscate the listener.

However, MMT-er Professor Bill Mitchell explains:

‘Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment.

It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualisation suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.’ (3)

In other words, the mainstream assumption is that the bank is simply a ‘middle-man’ between those who put money in, and those who want to borrow… but that is neither what is happening, nor actually resembles the way in which banks work.


http://www.youtube.com/watch?v=l7L3ZtCSKKs&feature=related
New Economics Foundation – ‘Where does money come from?’

Simon (Jenkins) says:

‘Osborne and Cable still utter strangled cries for banks to do “more lending to small and medium-sized businesses”. They formulate endless schemes to “kickstart the economy”. They know that none of these works, but we still have such flops as Project Merlin, the regional growth fund and the business growth fund. The British economy is in a classic Keynesian liquidity trap. It is starved of demand, but nothing is done to boost it.’ (1)

Simon Jenkins is absolutely correct to identify the lack of demand… and that is why big business is not investing (4), and they are not going to start investing unless they see the return of demand.

‘… the weirdest assumption of all is that business will invest massively more? Why will they do that? Their customers – whether here, or the government, or abroad – are all going to be consuming less but it’s assumed business will invest substantially more. That is utterly implausible. They just aren’t that irrational. They want a return before they invest – and since this forecast clearly says none will be forthcoming then that isn’t going to happen.’ (5)

The Bears also agree with Simon (Jenkins) that Quantitative Easing does not do what the Federal Reserve and the Bank of England say it will do! …  But is it possible that there is another intention?  Could thecheat, scam, and fiddle’ be a completely different ‘cheat, scam, and fiddle’ from that identified by Simon Jenkins?

Could QE be removing government debt with just a magic click on the mouse? 

Payguy2 says:

‘… QE obviously isn’t working in the way it is intended.  The credits given to banks are not finding their way into the real economy.  QE is simply not stimulating growth in the money supply in the way it is intended to….. 

Is there a silver lining though? (6)

The Bank of England can obviously create money from thin air without creating a parallel debt anywhere else and this money could be used to clear Government debt. 


QE works thus – the Bank of England creates £75 billion electronically as it is a central bank and can credit its reserves with as much money as it likes. The Bank lends this £75 billion to a Special Purpose Vehicle – a wholly Government owned PLC called the Asset Purchase Facility.  The APF then buys £75 billion of outstanding Government gilts from banks, pension funds and other institutional investors. The banks all make huge profits from the sales and get cash credited on their central bank reserves. The APF takes on the government gilts. So far so good as no money created or destroyed.

What is intriguing is that this offers a chance to destroy government debt with no inflationary risk or build up of debts anywhere.

How? The AFP is sitting on £75 billion of government debt.  It is wholly owned by the government.  If it just retires the debts by communicating that they no longer exists. Job done. There is no further inflation or loss of investor confidence.

Already we have a situation where over a third of the outstanding National debt is sitting in the Government owned Bank and another section of the Government, the Debt Management Office – an arm of HMT – is paying interest to the Bank which is again just sitting there unused. It would be more honest to monetize this debt and just retire it.

It is very, very  likely that the debts will have to be monetised anyway.  With the Bank sitting on £325 billion (and some estimating this will rise to half government total debt or £500 billion) it just simply will not be possible to sell this at any time before the gilts mature and expire naturally. How on earth could the government fund its normal gilt issues when the Bank was dumping out £200 or potentially £500 billion worth of gilts from the APF.

This certainly won’t happen whilst the government still runs a deficit and needs to borrow and it certainly can’t happen when and if we have recovered. At this point, the banks will be creating enough lending to allow the money supply to widen at its normal rate. Dumping an additional £200 -500 billion of liquidity out on the market at this point will cause rampant inflation.

Until then we are left with a ridiculous situation where the Tories are moaning about huge and “unaffordable” government credit card bills. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired.  (7)

Richard Murphy of Tax Research blog puts the case even more simply:

‘.. the Bank of England, which is owned by the government, has paid HM Treasury, which is part of the machinery of government, £325 billion to buy debt issued by the government …. as I have explained before, this means that in any proper accounting system that produced a single set of accounts for the government .. debt that was repurchased would have been considered to be cancelled. That’s because you can’t meaningfully owe yourself money, and yet that is precisely what is happening here. The Treasury owes the Bank of England money but as it, in effect, owns the Bank of England, it therefore owes itself the money and as such the debt has simply been cancelled….

I am saying that the arrangements used in QE hide this economic reality and that [when] all the mumbo jumbo is cleared away what is happening in QE is that money is being printed to clear the government’s deficit and that debt is not really being issued at all …

But that also means that … we haven’t got national debt of just over a trillion now, it’s just under £700 billion. Now that’s a lot, but it’s only 45% of GDP and that was so commonplace during, for example, the Thatcher years that no one noticed it. (8)

Jim Leavis argues much the same point and poses the following question in an article intended for Investment professionals:

‘If the government simply cancelled the £300 billion of QE gilts held by the Bank of England, who would be unhappy?

No default [would have] taken place (no CDS trigger, no D from the ratings agencies who are only interested in failure to pay private investors), the UK’s public finances become sustainable, the economy gets a boost from the knowledge that the QE cash injected will stay there for the foreseeable future, and a mechanism exists to remove cash from the economy should inflation return.’ (9)

So why would the government want to hide such positive news?  What would be the consequences of the Treasury and the Bank of England acknowledging that QE is a means to eliminate the huge hike in government debt which resulted from the socialization of banking losses? (10) 

Clearly, there would be political consequences:

‘…. If the population broadly understands that a sovereign government can never run out of money and can always make these electronic transactions then the questions they might ask their politicians will change and force the latter to be more accountable for their political choices….’  *UE is needed rather than QE  (11) 

… it means the whole debt paranoia is wrong. Debt is not rising at the level claimed by the government. Secondly, the focus can then move onto paying for services. That kicks in the tax gap debate. Third, it means Labour can honestly say it is not constrained by having to repay debt to future generations – because well over half of all debt issued since 2008 has already been repaid. (8)

 

In other words, this would be of enormous political significance, because such knowledge would undermine the ‘Austerity’ argument of George Osborne, the EU troika and the IMF .. and would demonstrate that the dismantling of the NHS, and public services, was an entirely ideological decision.. namely the ideology of the Washington Consensus. 

The misnamed ‘deficit-deniers’ would be thoroughly vindicated! 

Simon Jenkins was right to say QE isa cheat, a scam, a fiddle, a bankers’ ramp, a revenge of big money against an ungrateful world’….. but for the wrong reason.  The QE ‘confidence trick’ is that it hides the ‘inconvenient’ truth that sovereign governments can never run out of money.  The cuts are not, and were not, ever necessary.

Post-script:  In the light of the above, George Osborne’s speech is misleading to say the least.  

George Osborne: no U-turn on deficit reduction plan

Speaking at an investment conference in London, the chancellor admitted that the 0.7% plunge in growth in the three months to June was “disappointing” but insisted that the Treasury would stick to the course set two years ago.

“You will hear those arguing that we should abandon our plan and spend and borrow our way out of debt,” Osborne said in response to widespread calls for the coalition to do more to lift Britain out of double-dip recession.

“You hear that argument again today. These are the siren voices luring Britain onto the rock. We won’t go there.”

http://www.guardian.co.uk/business/2012/jul/26/george-osborne-no-u-turn-deficit-reduction?CMP=twt_gu

(1) http://www.guardian.co.uk/commentisfree/2012/jul/12/qe-bankers-swindle-liquidity-crisis?INTCMP=SRCH

(2) http://www.guardian.co.uk/politics/reality-check-with-polly-curtis/2012/may/09/nickclegg-davidcameron 

(3) http://bilbo.economicoutlook.net/blog/?p=661

(4) http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/03/capitalists-on-strike.html 

(5) http://www.taxresearch.org.uk/Blog/2012/03/21/the-key-economic-assumptions-osborne-is-making-are-wrong-which-means-he-cant-balance-his-books/

(6) Mervyn King has turned our leaders into zombie puppets 12 july 2012

(7) http://www.guardian.co.uk/business/2012/may/17/barack-obama-eu-growth-crisis

(8) http://www.taxresearch.org.uk/Blog/2012/07/13/the-untold-truth-about-quantitative-easing-is-it-simply-cancels-debt-and-that-means-national-debt-is-now-just-45-1-of-gdp/

(9) http://www.bondvigilantes.com/2012/04/11/if-the-government-simply-cancelled-the-300-bn-of-qe-gilts-held-by-the-boe-who-would-be-unhappy/

(10) https://think-left.org/2011/12/21/gordon-brown-did-not-spend-all-the-money-the-banks-did/

(11)  http://bilbo.economicoutlook.net/blog/?p=19828

*UE = Unemployment Easing