The Acute Deficit Phobia – Malady Spreads



Acute Deficit Phobia: The Malady Spreads

Since the election in May 2010 that brought the Tory-led coalition to government not one major political figure in England has publicly disagreed with the austerity doctrine, that the first priority of fiscal policy must be reducing the budget deficit.  I have called this astounding cross-party degeneration into economic illiteracy the “acute deficit disorder”, a pathological fear of public expenditure exceeding public revenue, a phobia in its purest form.
There seemed no party leader or would-be leader with any immunity to this neoliberal malady until this summer.  Jeremy Corbyn asserted unambiguous opposition to the theory and practice of fiscal austerity, and by doing so emerged from the depths of the backbenches to take a commanding lead in the contest for the Leadership of the Labour Party.The sudden and unexpected emergence of Corbyn at what appears to be the choice of a large majority of Labour Party members has one overwhelming explanation — his rejection of the ideology of austerity.  It is astonishing that Corbyn may be on the brink of winning the leadership.  Even more astonishing is high-profile supporters coming forward to assure us on Corbyn’s commitment to deficit reduction,  albeit in a manner quite different from the Tories (see analytical article by Jeremy Smith).The clear purpose of these unexpected interventions is to reassure people that Jeremy Corbyn favours “sound fiscal policy” and, therefore, can be trusted to manage the country’s economy.  The fundamental problem with this attempt at reassurance is that the great burst of enthusiastic support for Corbyn results from his explicit rejection of deficit reduction as a necessary priority.   A few weeks ago in a speech on economic policy he reinforced his anti-austerity message, when he stated “austerity is a political choice not an economic necessity”.   It is such statement that bring people flocking to his rallies.In the same speech also referred specifically to the budget balance, “Labour will close the deficit through building a strong, growing economy that works for all, not by increasing poverty.”For the victims of the phobia the words convey an “austerity lite” meaning, a promise that a Labour government would take direct steps to reduce the deficit; that the time scale would be longer and the deficit reduced by a combination of tax rate increases and cuts that do not harm the poor (e.g. Trident).This “progressive prudence” position is more than mistaken. It is fundamentally wrong because it perpetuates the neoliberal myth that fiscal deficits are a bad thing, that they are an imbalance that must be corrected through policy action.  The retro-reaction, “Jeremy really is for getting the deficit down, but in progressive manner”, is totally wrong and requires going back to basics.

A fiscal deficit is not prima facie a problem.

A fiscal deficit is not an imbalance that needs eliminating (or even reducing).

A fiscal deficit is a compensating response to imbalances elsewhere in the aggregate economy.

To further dispel confusion and misrepresentation before going into the analytics, I can state the central point — the public budget need not balance in the short run, long run, or over the economic cycle.  Indeed, a government can practice “sound fiscal policy” without ever balancing the public budget and without the budget ever showing a surplus.  Yes, I am a “deficit denier”;  being one is sound economics (see the excellent “confessions of a deficit denier” by Malcolm Sawyer).

Market economies expand when total (“aggregate”) demand exceeds the aggregate production of goods and services, and contract when demand falls short of supply (leaving part of production unsold, unintended inventories).  These dynamics of the aggregate economy become clearer when we divide it into three parts, the public sector, the private sector and the export and import or trade sector.

For an economy to expand the sum of the spending across the part must exceed the sum of the “non-spending”.  The familiar terms for non-spending are 1) household and business saving (private sector), 3) taxation (public sector) and 4) imports (trade sector).

During 2000-2007 the growth of demand was sufficient to drive expansion of the UK economy at a rate between two and three percent per annum.  During these years imports exceeded exports, meaning that the trade sector made a negative contribution to expansion of the economy of about -3% of GDP annually.

Had the private sector “balanced its budget” and the public sector done the same, the economy would have contracted, not grown.  The economy expanded because both the private and public sectors had net expenditure that more than offset the negative demand generated by trade.  That is, the private sector and the public sector engaged in deficit spending during 2000-2007 (by about 1.5% of GDP each).

Then, the global financial meltdown hit.  As a result, business investment collapsed.  Net private spending went negative (household plus business saving exceeded investment).  Businesses were very much “living within their means”, and as result, the economy contracted.  It would have contracted even more had the government sector not increased its spending, which stimulated a nascent recovery in late 2009 and early 2010 (Gordon Brown’s fiscal stimulus), which George Osborne aborted with his fiscal cuts.  Attempting to “balance the budget” and “have the government live within its means” was unsound fiscal policy.

This brief excursion into the theory and practice of “sound fiscal policy” produces important lessons.  A government practices sound finance by using the public budget to compensate for expenditure shortfalls and overruns by the private and trade sectors.  If the economy is stagnant or contracting, sound policy requires that the government increase net expenditure — a larger budget deficit.

This generalization, public demand should compensate for private shortfalls, holds even if the economy is at or very close to full capacity.  Indeed, the reason that the UK economy was close to full capacity in the years just before the great financial collapse was because it had a small deficit.  The deficit was not a problem, it was the solution to insufficient private demand.

The message for the foreseeable future is clear.  Until private investment and exports are sufficient to keep the economy near full capacity, a fiscal deficit is the appropriate policy.  Following the “balance the budget/run a surplus in goods times” can mean that the good times never arrive, because demand from the private and trade sectors can be too low to take us there.

The reverse is also the case.  When private demand is robust and booming sound fiscal policy requires a surplus in public budget.  Thus, we have the “sound fiscal policy” generalization:


Policy makers should aim for a fiscal balance that compensates for the sum of net private and trade demand when the economy is at their desired level of capacity and employment.  This explanation of fiscal policy is not “Keynesian”, though Keynes would probably have agreed with it.  The more accurate way to understand the difference between neoliberal budget balancing and sound fiscal policy is an analogy with the differences between alchemy and chemistry, or astrology and astronomy.

Each of the three sectors (private, public and foreign trade) of the UK economy run deficits at some times and surpluses at others.  The conviction that the public sector should have a special status such that a deficit is a problem that needs solving is based on ideology not analysis.  It is not an ideology that a Labour Party leader should adopt in any form or variation.

It is self-defeating to pay lip service to the ideology because the Tories have convinced a large portion of the public to believe it.  This belief is a relatively recent phenomenon, dating from 2010 at the earliest.  Attempting to dispel it is more likely to bring to success than further indulging it.


Economics ‘like astrology’ – John Weeks explains the myths underpinning all modern economics

Published on Apr 7, 2014

Watch the full episode here:

John Weeks, Professor Emeritus at the School of Oriental and African Studies, talks to Going Underground host Afshin Rattansi about the myths underlying modern economic theory. In his new book, he states that it is like astrology because it’s ‘based on a concept of the world that only exists in the imagination’ — it assumes there is full employment which has no basis in reality. This means that supply and demand does not work and public sector debts are not inflationary.

The Deficit Narrative – Understanding and Reframing : Richard J Murphy


The deficit narrative: understanding is the key to successfully reframing it

I have argued for longer than I probably care to remember that the last thing we need in our economy right now is a balanced budget. When and if we have full employment, higher productivity and a confident business sector that is investing heavily and exporting at considerably higher levels than at present I will change my mind: right now we are so far from that situation that a government surplus makes no sense, in theory or in practice.

To complicate consideration of the issue I have also argued that, as a matter of fact, having a balanced budget is something no government can expect or promise to deliver. There is good reason for this. As I have argued in more depth here (and many other places):

The reason is that there are, in macroeconomic terms four sectors in the economy and they must balance. The first is consumer spending. If consumers borrow more to increase spending then someone must lend it to them, or borrow less, as a matter of fact. That person who must borrow less might be business, who might invest less as they borrow less to compensate for more consumer borrowing, or it might be net overseas trade, or it can be the government. But the point is that the net lending and borrowing of these four sectors, consumers, business, overseas and government, will always balance, as a matter of fact.

So, frustrating as this might be to a politician who wants to appear to be in control of the destiny of their government and the state, the fact is that they have remarkably little control over how much they will borrow. If consumers insist on saving, as does business, and trade is running a deficit, (which in effect means foreigners are saving in Britain) then as a matter of fact the government will run a deficit whether it likes it or not. And there is nothing, bar stimulating business investment, exports, or consumer borrowing that they can do to change this.

Let me put this in context. These are the sectoral balances and forecasts for them as per the March 2015 budget data:

All of these balances add to zero. And, as is clear some factors make it very hard indeed to achieve a balanced budget, let alone a budget surplus. The only time it happened in this period, from 2000 to 2002, it was only really possible because of the enormous corporate borrowing during the era. That Labour kept the deficit under reasonable control from then on was, as is widely known, because consumers borrowed during this period to compensate for the fact that after the dot-com crisis business simply stopped net borrowing – which is why they have ended up with what Gillian Tett of the FT has called ‘zombie piles of cash’.

And throughout this period note the enormous impact of the ‘rest of the world’. Because of trade and investment flows flows the ‘rest of the world’ has persistently saved in the UK throughout this period. The result has been that even if business and consumers decided to just lend and borrow from each other and always themselves equalled their flows out to zero (which is very unlikely to happen, but is technically plausible) the UK government would have, for this one reason of the overseas flows, have had absolutely no choice but, as creator of the UK currency, to have run a deficit throughout this period to meet the demand for lending that overseas savers had in the UK and which in that circumstance could only be met by government borrowing. And I stress, there is nothing the government can do about this because, unlike business and households (and the rest of the world when it is stated vis-a-vis the UK) only the government is the creator of currency that can make this equation work. It supplies this currency by running deficits. As a previous post argued, this means it must either create gilts to satisfy the demand for savings products that the actions of others in the economy demands that the government must meet or let reserves at the Bank of England accumulate, but one or other must happen.

In that case the real issue to be discussed when it comes to deficits, as John McDonnell MP, a close colleague of Jeremy Corbyn did in the Guardian recently, is ask just what aspect of the deficit is really being discussed. There are a number of obvious splits within the data to be made to make such discussion meaingful. The first is between current and capital deficits. It baffles me why this distinction is not normally offered when discussing deficits. For the record, this is the data I am using from the June 2015 PSA1 Summary of public finances from the ONS:

Screen Shot 2015-08-16 at 17.41.21

The current deficit is anything not for investment, of course. Net investment is government investment in this case, not that for the economy as a whole. Figures are in millions barring the last column which is in billions. This is that data plotted:

Screen Shot 2015-08-16 at 17.39.32

But suppose that borrowing to pay for net investment (i.e. cost net of sale proceeds) is charged to a capital account. £444 billion over this period then falls out of current account borrowing. From 1997/98 to 2011/12, when QE ended, the borrowing for capital spending was £350 billion. £375 billion of QE did, of course, pay for all that. In fact, you could argue it looked suspiciously like PQE did actually take place, retrospectively, for the entire cost of state spending for that period. If PFI had been added in it would have been less, but the point is QE cancelled all that investment spend: it has now gone from the state balance sheet as debt and is now paid for with much cheaper reserves. So, we have already, in effect done PQE and still met the demand for savings.

What about the rest of the deficit? Go back to the sectoral balances and look at this data, based on the OBR for March 2015 using historic data for the overseas element of the sectoral balances combined with ONS GDP data to indicate a cash value:

Screen Shot 2015-08-16 at 20.44.49

Since 2000 more than £640 billion of deficits have occurred in the UK simply because people from the rest of the world insist on saving in the UK, in sterling and the government had no choice but create the currency they need to let them do so. That effectively meant it had to run deficits for almost all that period for this reason alone. I stress: they had no real choice.

Now compare this data with the data on borrowing and if you exclude borrowing for investment, which it can be argued should be on a separate loan account, and you deduct from the remaining deficit that which had to be created to fuel foreign demand for sterling savings you end up with this data with the reported deficit shown just for comparson:

Screen Shot 2015-08-16 at 21.15.46

Which looks like this when plotted:

Screen Shot 2015-08-16 at 21.15.57

This implies the UK only ran a deficit to meet current domestic need from 2009/10 to 2012/13. Overall it ran a surplus for this purpose over the period.

Is this a fair way of viewing the deficit? I suggest it is. I also suggest, immediately that this is not the only alternative way of looking at deficit data: I can and maybe will juggle this data in numerous other ways as yet to see what might be useful. But my points are threefold.

The first is that, as I repeat, some parts of the deficit are out of the governments control. This is most especially true of the net amount of foreign saving in the UK in a time of floating exchange rates. This demand for sterling has to be met and the government has to meet it: only it can create the currency to do so, usually in the form of gilts. Not recognising this would be absurd. To also try to eliminate this would be to look a gift horse in the mouth: do we really want to stop people from outside the UK effectively subsidising us, which is exactly what they are doing, at incredibly low interest rates over very long debt repayment periods, with a fair chance that a good part of the debt will be written off by the impact of inflation in the meantime and without foreign currency risk as they are saving in our currency? I suggest not.

Second, it is also absurd to lump together the borrowing for government investment with that to meet current domestic need not funded, in effect, by overseas lenders. This borrowing for investment to be accounted for quite separately. This is borrowing to fund improvements in our national infrastructure. We need this. We should be proud that we make such an investment and want to continue to do so. We should be really worried if it declines – as in real terms it is at present. That puts our well being at risk. We need a way to separately and clearly identify this spend to make sure it is properly recognised and managed. No one is going to be surprised that I think this is  a role for PQE.

And, thirdly, what’s left? Well, as the last graph shows, all too often it is a government surplus, much (but not all of it) happening because of increasing household debt. I am not too sure that is something we should be celebrating, and so there is an issue to consider here and how it is business surpluses that need to be addressed here.

I stress: this is a quick analysis. What I am suggesting though is that the deficit narrative is far too constrained and and that if discussion of the deficit and whether or not part of government activity is to be run in surplus is to take place then we need to be aware of what the surplus is made up of, what elements might be controllable, what parts might be fundamentally useful and essentially suited to a controlled borrowing programme, and how the remaining balances need to be managed to ensure overall wellbeing of people in the country is maximised. And in the process I am saying that the deficit narrative we have suffered to date has utterly missed the point in economic terms and been deeply misleading in terms of its consequences for political economy.

If we’re going to have a debt and deficit narrative let us, for heaven’s sake, make it one that is useful and based on what really happens. That’s the least the left should be doing now because if and when we do so the policy implications would be deeply significant.

by Richard Murphy (under a Creative Commons Attribution-NonCommercial 3.0 Unported License.)

From Think Left:

Austerity is a Political Choice not Economic Necessity


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.



How to discuss Modern Monetary Theory: Bill Mitchell.

Deficits are our savings: Bill Mitchell

Budget Surpluses are not savings: Bill Mitchell

The National Debt is money the government owes us Paul Segal

Market participants need public debt: Bill Mitchell

Jeremy Seabrook: The specter of laissez faire haunts Britain.

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

Who says we can’t afford the NHS or Social Security?


By Prue Plumridge

Yesterday in Parliament, we witnessed a shameful spectacle when only 48 Labour MPs voted against the Welfare Bill.  The extreme centre, as Tariq Ali referred to it in his book ‘The Extreme Centre: A Warning’, once again failed to vote for the well-being of the citizens of this country.   Not content with abstaining over Workfare in the last government, a majority of Labour MPs did so again.  Neoliberalism rules in the Labour party in all but those very principled individuals who chose to put their heads up against the flow and say no.

We are told time and time again, that we can no longer afford our NHS or our social security system.  We are told that we must reign in expenditure, reduce the deficit, balance the books and even achieve surplus.  Our politicians like to remind us regularly that we cannot not leave the debt to future generations.  Deficit has become the bogeyman of our times and austerity its friend.

We accept this because we have an incomplete understanding of how our economy and money systems work.  Our politicians (through ignorance and design) use the analogy of the household budget to explain why we can no longer afford public sector services and our social security system.  Notice I make a distinction between the terms social security and the oft used word ‘welfare’ which has become so tainted in recent times.  The connotation of welfare to mean skivers and scroungers has been cleverly used by politicians and the media alike to divide people who either don’t know or have forgotten its origins. Along with the mantra – there is no money – it is used to justify the dismantlement of the safety net for when we are at our most vulnerable and worse still the selling off of every aspect of our publicly provided services to the private sector.

It seems to me that if we are to challenge the view being pedalled by our politicians and many mainstream economists that we can’t afford our public services, and create a decent society for all we need to go back to basics and gain an understanding of how our economy really works. Not the household budget model which serves as a useful means to deceive people who, quite understandably, identify with Micawber the Dickens character in David Copperfield, who said:

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

We are always told by politicians that tax funds our expenditure – meaning that our expenditure on things like infrastructure, the NHS, and Social Security is limited by that income.  We need to start dispelling these pernicious myths which are rooted in our ‘gold standard’ past which demanded that you had enough gold to back your national currency.  This arrangement was abandoned as far back as 1971 and yet we are still running our economy and money system as if it were still in place.

Last year, Dr Stephanie Kelton gave a presentation to students in Kansas City in which she challenged these ideas.  She used the Monopoly game analogy to explain where money comes from and how the system really works and pointed out that balancing budgets will only suppress growth because it removes money from the public sector’s balance sheet which in turn acts as a drain on the real economy.  By which she means the labour, equipment and other resources that produce the goods and services we all rely on.  Spending (as she says quite clearly) equals income to someone. She also explains that we are not going to leave a huge debt to future generations, as is being claimed by those politicians who either don’t understand or wilfully misunderstand the reality. The real issue is not affordability but how we ensure future economic prosperity through improving productivity.

This is what she had to say:

 ‘When you play the game monopoly, you open up the rules, set up the cards and ask who is going to be the banker. So how does the game start? Why doesn’t the banker collect taxes to get the game going? Because no-one has any money yet.  So what does the bank do first?  It has to issue the money before it can collect anything back or the game can’t even begin.  So the spending, the issuing of currency has to come first.  And then you read the instructions and it says the bank collects taxes, fines, loans and interest and the bank never goes broke. If the bank runs out of money the bank may issue as much as needed by writing on any ordinary paper.  It’s exactly what it means to be the monopolist. That’s why they call it Monopoly.  Money has to be spent before it can be collected back.

So you start playing the game and you move you pieces around the board and you land on Community Chest or Chance, you draw your card and oh oh pipes burst, pay $50 – there goes a leakage. You keep on playing, you land on another one and oh oh tax is due pay $100. This game will end very quickly if there isn’t a replacement for the money that is leaking out – so every time you pass GO you collect $200. Why does the monopoly game tell the banker to put in $200 each time you go around? To keep the game going. To let the game continue.  You can save in Monopoly in the form of real estate investment. Every time you buy a hotel or a house you pay the banker some money and it’s out of the game – it’s leaked out.  Every time you pay taxes it’s money that has leaked out of the system. The banker has to spend out more than it collects otherwise the game will quickly come to an end. Which is to say that if the banker is not deficit spending the game will end much sooner.”

Dr Kelton goes on to point out that even Alan Greenspan, former Chairman of the Federal Reserve knows perfectly well that a government cannot go bankrupt.  He made this quite clear when he said under oath as chairman of the Federal Reserve ‘a government cannot become insolvent with respect to obligations in its own currency.  A fiat money system like the ones we have today can produce claims without limit”.  When faced with a question posed by Congressman Paul Ryan on social security (although as Dr Kelton says it could refer to defence spending, education spending, infrastructure spending or student debt), as to whether personal retirement accounts would help to achieve State solvency  (whilst also disingenuously suggesting that social security was going broke and that it would be a good time to move towards personal savings account or in more plain language privatisation), Alan Greenspan replied that there was nothing unsustainable about social security because there is nothing to prevent the federal government from creating as much money as it wants and paying it to someone.  However, the real question, he said was, will the real assets be there in the future that those incomes can be employed to purchase? There are, we all know, demographic changes taking place – a shrinking work force and a growing population of retiring baby boomers which it is claimed is the reason why we need reform and privatisation.  It is, however, a red herring and the real issue is that with fewer working people producing the goods or services how will we ensure that there are enough for future generations to purchase.  If there are not, then competition for a smaller pool of output would then lead to inflation.

Therefore the questions we should be asking are not whether there is enough money but whether we are we making the necessary investments in education and technology or indeed will there be enough resources to ensure that we can continue to be productive particularly in respect to the finite nature of our planet’s resources and how should we manage it? To repeat, the debate can never be about affordability. These are perhaps the real questions for us as a society.  What sort of world do we want to live in? One where greed and inequality increases and poor people are dehumanised and impoverished?  Or one which is fair and just and treats citizens with respect and dignity whilst also recognising some of the really serious issues we face about the future viability of our planet home?

It is clear from recent announcements in the House of Lords and by government ministers that we are being prepared for the eventual complete privatisation of the NHS and our social security system, both to be replaced by insurance schemes.  Not because they have to but because of erroneous ideology which suits the politicians and their corporate friends.

The trouble is, as Mark Twain puts it ‘It is easier to fool people than to convince them that they have been fooled” and it is time to wake up to the deceit which is being practised upon us by those who should be leaders and not exploiters. We have an obligation to ensure that people understand what is happening and why it is happening.  We need to educate ourselves and pass it on.  Otherwise the lie will be perpetuated remorselessly until there are no options left.


Tariq Ali: The Extreme Centre: A Warning

Dr Stephanie Kelton Angry Birds