Austerity is a Political Choice not Economic Necessity

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By Prue Plumridge

Last week Matthew Lyn (a columnist for Bloomberg) wrote in an article published in Money Week that, “the policies on offer under Corbynomics would quickly ruin the economy”. This was followed shortly afterwards with another written by no less than a Labour councillor and published on Labour List which assured us that Cutting the deficit, healthy public finances, running a budget surplus, fiscal responsibility, and prudence [..] are not Tory ideological dictums but sound economic strategies that had served Labour well in the past. Embracing these goals and persuading Britain that we can be trusted on economy is a key to winning power.”

However, if were to take the trouble to understand how our economic and money systems actually work we would soon learn that such statements are either born of economic illiteracy or wilful deceit in order to pursue specific political agendas. This can largely be attributed to the decades of ‘conditioning’ which has done its job and led to the belief amongst the general population that there is no alternative to austerity, that we have to live within our means, and pay back our debts in the best Micawber tradition. You would think listening to politicians, many mainstream economists and the media that there is only one economic model in town – the household budget one.

Jeremy Corbyn has set out a clear and achievable plan for the future, and yet, Lyn believes that his proposals are a recipe for disaster. In fact he calls it delusional and complains bitterly that the success of the Greens and the SNP is based on a crazy idea that we can wave away our economic problems by recklessly printing money, getting into more debt and increasing state intervention.  Matthew then exposes his ignorance on economic matters by confusing deficit with debt when he writes “by any historical standards the UK is running a huge budget deficit”. The reality is that whilst George Osborne has reduced the deficit he has also increased the debt significantly* so by any standards, if you accept the household model of state budget accounting and that the debt is debt in traditionally accepted terms, the Chancellor hasn’t been doing that well given that he promised to balance the books by 2015.  To  he is now promising a £23bn surplus by 2020 that he says will not only eliminate the deficit, allow us to pay back some of our debt but also reduce our taxes.

*2015         £1.36 trillion (forecast)

2014          £1.26 trillion

2013          £1.10 trillion

2012          £1.10 trillion

2011          £0.91 trillion

2010          £0.76 trillion

2009          £0.62 trillion

2008          £0.53 trillion

Most people readily understand the word budget in terms of their own income believing, quite rightly, that they go into the red when their spending exceeds their income and that saving is spending less than they earn. It is easy to be fooled into thinking that our economy and money system works in the same fashion.  The on-line UK national debt clock which is ticking at a mind-boggling speed is a good example of how we have been conditioned to believe that we have been profligate and it is time to get control of our expenditure, balance our books and pay down our debt. Our understanding is, in fact, back to front. Deficits in state terms represent our savings i.e money that is issued by a sovereign government and spent into the economy to increase the financial assets available to the private sector i.e. to make the economy go round. On the other hand, achieving a surplus, as economically ignorant politicians are promising with some pride, will simply have the opposite effect by removing those said assets from circulation and putting the private sector into deficit.   One man’s surplus is another man’s deficit as it were. And, furthermore, the idea that a government can ‘save’ money is simply wrong as Professor Bill Mitchell, the respected Australian economist explains:

“People get very confused about the concept of national saving. They assume that saving is spending less than you earn and then apply that to budget surpluses and conclude that the surpluses add to national saving. But this view is erroneous. A sovereign government does not save. What sense does it make to say that the government is saving in the currency that it issues? Households save to increase their capacity to spend in the future. How can this apply to the issuer of the currency who can spend at any time it chooses?”

The subject of the national debt is also one where there is public misunderstanding.  Television is awash with programmes which picture debt collectors carting away the assets of someone who has got into arrears with a loan or following the lives of people whose financial situations are so dire that they are forced into bankruptcy.  Most of us quite erroneously, think this applies to the State too.  Who wouldn’t when prominent politicians say things like ‘We have taken our country back from the brink of bankruptcy’ (George Osborne October 2010). We were told then that if the country didn’t rein in its expenditure the debt collectors would be knocking on the door of the Treasury demanding payment or threatening bankruptcy if it didn’t pay up.  A simplistic picture yes but one which would chime with many people’s personal experience these days.  Worse still, we were compared to Greece and next in line to be affected by a sovereign debt crisis. Both lies and about as far away from the truth as it could get.

Here is how Paul Segal described the reality in an article published in the Guardian in 2010:

“Cameron argues that within five years the national debt will rise to “some £22,000 for every man, woman and child in the country”. This may be true, but what he doesn’t tell us is that it is money the government owes to us – not money that we owe to anyone else. That’s right: 80% of our government debt is owed to the British people. What is called “national debt” is our own savings, looked at from the other side of the balance sheet.”

It seems extraordinary that the economic model advocated by mainstream, neoliberal economists is one that is promoted as if there had never been another and also denies the accounting realities which are the basis for how the economy and money system actually works. It’s as if Wynne Godley, Hyman Minsky, Abba Lerner, Michal Kalecki, and of course Keynes and Marx to mention a few, never existed.

So if the money system doesn’t work as we’ve been led to believe by deceitful or economically illiterate politicians and media hacks, how DOES it actually work? Quite simply:

“A sovereign, currency-issuing government is NOTHING like a currency-using household or firm. The sovereign government cannot become insolvent in its own currency; it can always make all payments as they come due in its own currency because it is the ISSUER of the currency, not simply the USER (as a household or private business is). This issuing capacity means that the government does not face the same kinds of constraints as a private sector user of money, which in turn exposes the fallacy of the household analogy, so beloved in popular economics discourse.

Indeed, if government spends currency into existence, it clearly does not need tax revenue before it can spend. Further, if taxpayers pay their taxes using currency, then government must first spend before taxes can be paid. Again, all of this was obvious two hundred years ago when kings literally stamped coins in order to spend, and then received their own coins in tax payment.

Another shocking truth is that a sovereign government does not need to “borrow” its own currency in order to spend. Indeed, it cannot borrow currency that it has not already spent!”

It is astonishing to learn that whilst most of us think that government has to raise money from the capital markets to finance the deficit and refinance maturing debt this is not how it works at all.  It is simply a convenient smokescreen behind which neoliberal politicians (Conservative and Labour alike) hide in their justification for pursuing austerity and public sector cuts. In fact, as Professor Mitchell points out “the continued issuance of public debt is a form of corporate welfare which makes the task of making profits through trading financial assets in private capital markets that much easier…… the Treasury [issues] securities not because it needs cash, but because market participants need securities.” 

The truth of the matter is that in 1971 when the Bretton Woods system collapsed (which tied currency to a gold standard) and fiat currencies were introduced governments were freed from those revenue constraints.  We have been led to believe that raising cash from the market is to fund government spending when tax revenue is insufficient.  But in a fiat monetary system even tax revenue is unnecessary.  The constraints on government spending are not financial but those linked to productivity and available resources and this is what puts the brakes on government spending not being in debt.

So how can we make sense of the motivation of our politicians to justify austerity and cuts on the back of what is not only plainly untrue but has also proved so destructive during the last five years? Jeremy Seabrook wrote in the Guardian in 2010.

Today’s detestation of “big government” stems from this same source, and the affection of Cameron and his colleagues for the “big society” is a euphemism for the reduction of public funds in assisting the poor: rolling back the state, leaving the market to distribute its rewards in accordance with the natural order of things … the market mechanism is as flawless a creation as the earth, and should remain untouched by the hand of meddlers, whose only effect is to upset its power to enrich us all … Once more, the state shrinkers, the advocates of vanishing government, the cutters of red tape and regulation, the liberators of a humanity constricted by statist straitjackets, believe they have a mandate for freedom. But it is freedom under the law of an imagined jungle; by a savage irony, at a time when the smoke from the stumps of felled trees in the real jungle darken the horizon of a used-up future.”

We are not as neoliberal politicians want us to believe  ‘living beyond our means’ and the austerity drive which manifests itself as the necessity for draconian cuts in the public sector and the privatisation of publically funded services is really about reducing the size of government and restoring the ‘primacy of the market” as Professor Mitchell has remarked.

Deficits and debt are, in truth, the biggest red herrings of all in this debate.  In fact as Lord Macaulay wrote in ‘The History of England’ published in 1849:

‘At every stage in the growth of that (national) debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt kept on growing; and still bankruptcy and ruin were as remote as ever’

The real issue is how we plan for the future.  How productive can we be, will there be sufficient resources at our disposal to meet demand? These questions have to be debated in the context of climate change and the devastation which we are seeing all around us, both human and in nature, whose roots lie in the capitalist desire for untrammelled growth and the search for profit.  Equally we are not the ‘machine men’ of Charlie Chaplin’s speech in The Dictator and as such we need to give those that want it and are able the dignity of employment which meets their financial and physical needs.

It is time to reassess the capitalist pursuit of profit through the downward spiral of a low paid economy and the maintenance of unemployment as a neoliberal necessity. It is time to challenge the neoliberal agenda which successive governments have embraced over decades. Such blind adherence or maybe not so blind has led to increasing inequality, a wealth gap of extraordinary proportions, an unstoppable drive for unsustainable growth and a situation where corporate power is replacing the democratic framework as it subverts democracy through politicians and trade deals.

So what sort of society do we want to live in and how might we achieve it? The entry of Jeremy Corbyn into the leadership race has revitalised that political debate in a very public way.  Do we want to continue with a political framework where there is not much to tell between the parties and a status quo future or do we strike out for a completely new paradigm? That debate must be held in terms of an economic model that will best deliver our aims.  Professor Bill Mitchell has set out some broad principles which could serve as the basis for that discussion.

 

1. The Government is Us!

2. The government is our agent and like all agents we cede resources and discretion to it because we trust that it can create benefits for all of us that each one of us individually cannot achieve. We understand scale.

3.  Governments invest in our immediate well-being by providing essential services without the need for profit.

4.  Governments invest in the next generation’s well-being through building productive infrastructure that delivers services for decades.

5.  We empower governments with unique characteristics so that it can pursue our interests without the constraints we face ourselves.

6.  We understand that a deficit for us means we have to find funds to cover it, whereas a deficit for our agent, the currency-issuing government means it is funding our spending and saving choices.

7.  A government deficit enhances our freedom because it boosts our income and allows us more options.

What next?  The choice is most definitely ours.

 

Sources:

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

How to discuss Modern Monetary Theory: Bill Mitchell.

http://bilbo.economicoutlook.net/blog/?p=25961

Deficits are our savings: Bill Mitchell http://bilbo.economicoutlook.net/blog/?p=10384

Budget Surpluses are not savings: Bill Mitchell http://bilbo.economicoutlook.net/blog/?p=961

The National Debt is money the government owes us Paul Segal

http://www.theguardian.com/commentisfree/2010/jun/17/fiscal-deficit-threat

Market participants need public debt: Bill Mitchell http://bilbo.economicoutlook.net/blog/?p=10404

Jeremy Seabrook: The specter of laissez faire haunts Britain.

http://www.theguardian.com/commentisfree/2010/jun/20/spectre-laissez-faire-haunts-britain

The Debt Delusion: Exposing Ten Tory Myths about Debts, Deficits and Spending Cuts: Mehdi Hasan.

The hidden welfare state

The UK has two welfare states.  There is one that is reported and endlessly discussed, and another, which is rarely mentioned.  Whilst the first is suffering enormous cuts under the Tory/LD coalition, the other just keeps expanding.

Comedian, author and activist Rob Newman explains to the New Internationalist magazine (May 2013):

Governments on the left and the right can always justify welfare cuts by pitting, for example, mobility scooters against needle exchanges, or the soft-play area in children’s playgrounds against an old people’s home.  Who deserves it most, they say, students or cleaners?  Old or young?  But when we’re running not one, but two welfare states, that’s a totally fake scenario.  The real choice is between playgrounds or gas rigs; between Meals on Wheels or The City of London Currency Speculators’ Maintenance Allowance.

There’s a connection – never mentioned – between, let’s say, Britain’s eight new deep-water gas rigs and its 200 new food banks.  The connection is that the $4.5 billion subsidy package being doled out to transnational gas corporations is a very big slice of the welfare pie.  And to keep the gas transnationals on the benefits to which they are addicted, hungry humans have to queue for tinned food that is too close to its sell-by date to be kept on the shelves of supermarkets, many of which are themselves massive recipients of corporate welfare.

Not only does the UK pay out unemployment benefits less generous than Romania, Albania and the US, but the wages of the employed have simply not kept pace with productivity over the last 30y.

Tory Ideology is all about Handouts to the Wealthy paid for by the Poor

Meanwhile, the corporate sector sits on a colossal cash surplus of £800bn but without investing because the real problem continues to be the lack of aggregate demand… and the richest 100 UK citizens, only 0.0003% of the electorate, now have wealth estimated at £257bn.

Nevertheless, George Osborne has been prepared to cut £18bn from benefits plus a further £81bn from public services in the name of unavoidable austerity, whilst at the same time providing huge subsidies, tax cuts and removing regulation for the hidden ‘welfare’ system that benefits the private sector.

No goods or services are directly returned to the government in exchange for these expenditures, although of course,  politicians will argue that they’re stimulating the economy, helping struggling industries, creating jobs or funding important research but actually this is just a corporate welfare system.

The Cato Institute estimated that in the US, $93 billion were devoted to corporate welfare in 2002. This was about 5% of the federal budget… and nearly twice the amount spent on social welfare ie. feeding people, housing the homeless, raising children out of poverty…

There is no reason to think the situation is different in the UK.  However, overall statistics for the UK corporate welfare budget are hard to discover .. and the variety of different subsidies are staggering.  Needless to say, our MSM focuses its attention on fraud and waste in the social welfare budget.

Welfare fraud and waste is never far from the top of the UK’s news agenda – but the real figures often bear almost no resemblance to popular belief. The British public, for example, think around 27% of the welfare budget is lost of fraud, according to TUC research.

The Department for Work and Pensions’ latest data on fraud and error in the benefit system shows a very different reality: fraud exists, but at a far lower level than the public believes – and is outweighed by errors from claimants and officials alike.

The overall figures show fraud and error are largely unchanged from last year. The DWP estimates £3.5bn has been overpaid due to errors and fraud in the system; 2.1 per cent of the overall benefit expenditure.

http://www.guardian.co.uk/news/datablog/2013/may/13/welfare-fraud-error-universal-credit

The corporate welfare budget arises from four main sources:

Paying little or no tax – Tax havens

Tax breaks

Enjoying huge subsidies

Removal of employment and environmental protection regulations

The task of covering all these areas adequately is beyond the scope of this post so I offer these quotes which illustrate some of the ways in which the corporates are benefiting from political sponsorship of their welfare:

The UK’s 100 biggest public companies are running more than 8,000 subsidiaries or joint ventures in onshore and offshore tax havens, according to research published on Monday, raising fresh concerns about the full extent of corporate tax avoidance.

The figures, published by the charity ActionAid, show that only two of the companies listed on the UK’s FTSE 100 have no subsidiaries in tax havens – while companies such as Barclays and Tesco own hundreds. 

http://www.guardian.co.uk/uk/2013/may/12/uk-companies-condemned-tax-havens

Could this be the same Chancellor who in his 2012 budget offered multi-nationals which opened a finance subsidiary in a tax haven a reduction in corporation tax from the then rate of 23% to an eye-wateringly low level of just 5.5%?   It could be, and it was.   Is this the same Chancellor who, whilst ultimately controlling the UK Crown Dependencies and Overseas Territories which constitute up to half the world’s most frequently used tax havens, declined to take any action to close them down?    Yes, it was again.

http://www.michaelmeacher.info/weblog/2013/05/corporate-tax-scams-in-developing-countries-the-next-target/#more-5201

I say tax gap is £95bn

It was revealed recently that only one in four of the UK’s top companies pay their taxes, meanwhile they receive tax credits to the tune of hundreds of millions of pounds funded by people who did pay their taxes.

http://scriptonitedaily.wordpress.com/2013/05/12/corporate-giants-arent-wealth-creators-theyre-parasites/

 … vastly profitable large chains of supermarkets … get an enormous subsidy to help with one of their major overheads, staffing costs. This is because many employees in these large and successful companies are paid only the minimum wage. And because the current minimum wage is not a living wage, nearly everyone on it has to claim tax credits to be able to make ends meet. Those tax credits are funded by the taxpayer…. Let’s stop calling them “wealth creators” and start calling them state subsidised industries.

http://www.searchingfinance.com/news-and-views/teresa-pearce-mp-a-living-wage.html?goback=.gde_1211737_member_236208402

Currently, it is estimated that the government has already provided £43.5bn in various subsidies including the National Infrastructure Plan, the Equity Loan and Help to Buy schemes, the Enterprise Finance Guarantee and the Regional Growth Fund, with nothing to show for it.  Far greater sums are in the pipeline, up to £310bn.  

https://think-left.org/2013/05/11/despite-britains-new-thatcherites-only-the-state-sector-has-recovered/

It is more important to [the Tory/LD coalition] to privatise everything they can in pursuit of their real objective of a fully marketised State rather than to compel these banks, of which the taxpayers own 82% of RBS and 39% of Lloyds, to prioritise lending to industry to kickstart the economy and get growth going at last.   Even more significantly, an enforced sale before the election will at their current share value lose taxpayers £24 billions!   That is truly staggering when Osborne has been prepared to cut £18bn from benefits plus a further £81bn from public services in the name of unavoidable austerity.   Yet at the same time he is now disposing of assets which will gratuitously lose the public coffers £24bn.

http://www.michaelmeacher.info/weblog/2013/05/osbornes-smack-in-the-face-for-all-benefit-spending-cuts-victims/

 

It is arguable that without the state’s support the banking sector would have collapsed entirely.  But even on the most favourable comparison from the low-point of the recession the subsidy has been hugely inefficient.  A £1,020bn hand-out to the banks has yielded an increase in output over that time of approximately £40bn.  It would have been far more efficient if the state had directed its own capital into the production of banking services, via fully nationalised and controlled banks. 

https://think-left.org/2013/05/11/despite-britains-new-thatcherites-only-the-state-sector-has-recovered/

114 year Workers Rights Scrapped by Coalition Government.

For the Benefit of the Conservative Party – “FOR SALE – Local Hospital and Schools “

.. if you spend £100 on healthcare in the NHS you get one hundred quid’s worth of healthcare less about 5% management costs. In the private sector you’ll get a hundred quid’s worth less 3% management costs, 5% profit, 12% to pay bank loans and charges, plus a chunk for bonuses, dividends and return for investors. And, no provision for what happens if they go broke or get fed up.

http://www.hsj.co.uk/comment/opinion/andrew-lansley-competition-is-critical-for-nhs-reform/5041288.article

I will conclude with the 2011 nef briefing,  ‘Feather-bedding financial services’, which asked, in addition to the unprecedented public support for the financial sector over the past three years, how much are the big banks benefitting from hidden subsidies?  They identified at least three significant hidden subsidies:
  • The ‘Too Big to Fail’ subsidy: The government now provides a public guarantee, effectively insurance against banks going bust. This gives banks a huge commercial advantage over other firms in a market system. It means banks are able to borrow money much more cheaply than if they were not ultimately underwritten by the public. Exchanges with leading auditors in front of the House of Lords Select Committee on Economic Affairs in January 2011 confirm this. A conservative analysis reveals that this hidden subsidy could be worth £30 billion annually. It means that bonuses to senior staff for ‘performance’ and dividends to institutional investors are at least in part a straight transfer from the taxpayer.
  • The quantitative easing windfall subsidy: When it was decided that the economy needed more liquidity, the Bank of England pumped money in using the technique called ‘quantitative easing’. To meet various, and sometimes self-imposed, requirements, it did by purchasing government bonds through investment banks. Merely for being passive conduits for this ‘risk free’ arrangement the banks took a cut of every trade. Here nef analysts found that banks enjoyed a significant windfall, but that lack of transparency keeps the likely amount hidden.
  • The ‘make the customer pay’ subsidy: Looked at sympathetically, the banks have been put in a difficult position. At the same time as being required to rebuild their capital, they are also under pressure to lend. In response, the banks have tried to manage this by increasing the gap between what they have to pay to borrow money, and what they charge people to borrow from them. This is the so-called interest rate ‘spread’. But the banks have a choice. They could recapitalise by reducing or eliminating bonus and dividend payments until their capital base is rebuilt. As it is, the taxpayer is subsidising the banks twice over: once through taxpayer funded public support to the banks, and secondly through paying much higher interest to borrow than the banks do. This hidden subsidy to retail banking and one part of the investment banking world amounts to at least another £2.5 billion each year.

http://www.neweconomics.org/press/entry/are-british-banks-getting-billions-in-hidden-subsidies-asks-nef

As James Galbraith wrote:

The Predator State…. The state as monopoly collector of taxes and corrupt distributor of the spoils to the private sector…

There is no common good, no public purpose, no shareholder’s interest; we are the prey and governments as well as corporations are run by and for predators.

Furthermore, none of this is likely to get any better under the rules of the US-EU FTA (Free Trade Agreement) which the Tory/LDs are wanting to get signed by 2014.  Part of the secret negotiations are the transfer of sovereignty from nations to private corporate tribunals who will be empowered to compel governments to change their laws or pay unlimited fines.

Are we already in the post-democratic era?