Labour MP in urgent need of lesson in economics

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A response to Chris Evans MP by Prue Plumridge

Just before the vote on the Fiscal Charter Chris Evans MP (who abstained) said:

Labour should be proud that when we were last in government we ran a budget surplus for four years and achieved some of the lowest deficits both in UK history and in comparison to other economically developed nations.
There is nothing progressive about budget deficits. Every pound we spend on debt interest is one less we can spend on the NHS, on vital public services, on helping the poor and vulnerable.
Fiscal discipline allowed us to commit record funds to education and healthcare without damaging the public finances. This was the foundation of the trust people used to place in the Labour Party. We were seen as safe custodians of economy, delivering on the issues people care about.”

It seems from this, that Chris Evans is in urgent need of an economics lesson for dummies.*  His statement shows dire ignorance of how the State finances and money system works.

He claims that there is nothing progressive about budget deficits and lauds the fact that Labour ran a budget surplus for four years whilst achieving some of the lowest deficits in UK history.

So is this something we can be proud of and does it fit with any sort of reality?

I would suggest that politicians should actually take some time out to learn about how our economy really works before they make such assertions.

Firstly a short lesson in deficits and surpluses.  Government deficits sound bad, don’t they, when we are told that they are like of our own household accounts?  Going into the red is something we avoid if possible – the consequences of doing so as a private individual or company could be ruinous.  However we have been conned by the language used to describe our economy which equates it to a household budget and suggests that going into debt risks bankruptcy.  Nothing could be further from the truth.  A sovereign country issuing its own currency cannot go bankrupt unless we live in the Eurozone, a country like Greece, which does not control its own currency issue.

Equally, if a government aims to reduce the deficit it will take money out of the economy in the same way as going into ‘surplus’ does.  It’s back to front to our understanding in terms of our own personal income/expenditure/savings.

Firstly, taxation is not income or revenue as we are told since a government which issues its own currency is not constrained by its tax take assuming it has idle resources available.  A ‘budget deficit’ represents the money spent into the economy and is the way a government can add aggregate demand and influence output and employment levels. Whilst there is unused productive capacity the actual ‘budget deficit’ is of no relevance. The only legitimate goal that any government should pursue is the real goals of employment and output.  In fact budget deficits are simply the mirror image of non-government savings.  Government spending represents all those things we take for granted which make our country a better place to live and work.

As Professor Bill Mitchell puts it ‘The government deficit rose and generated higher levels of wealth for households and firms.’
The word ‘surplus’ is equally misleading as it implies savings.  A ‘budget surplus’ does not represent national savings at all.  Households save to increase their capacity to spend in the future. But a government cannot save in its own currency. It does not apply to the issuer of the currency who can spend at any time it chooses.

It seems that like many politicians, Chris Evans simply has no idea of how the macro economy actually works.  They, like many of us, have been taken in by decades of neoliberal economic thought which declares categorically that deficits are bad and balanced budgets and surpluses are good.  In truth they are neither good nor bad and are dependent on economic circumstances – the state of the economy, the trade account and the level of private debt.

The budget surplus of which Chris Evans is so proud was made possible by sky rocketing household debt.

As Steven Hail puts it:

‘the ignorance of this politician on the fact that government surpluses mean non-government deficits, and that countries without trade surpluses cannot run budget surpluses for long without a private debt explosion and growing financial fragility is beyond worrying.  It is pure ignorance’.

Boom and bust had been abolished so said Gordon Brown as he put his faith in financial deregulation to facilitate an economic miracle which, in reality, actually encouraged household debt and asset bubbles.  It gave all the appearance of a growing economy when in fact it was built on sand.  Financial speculation replaced the solid foundations of a real economy which should be concerned with investing in the well-being of a country’s citizens and the protection of our natural environment.

So let’s get it right Mr Evans and all those who abstained from the Fiscal Charter vote it’s nothing to be proud of at all.

John McDonnell’s decision, if a little late, was the right one to make and let’s hope that the real story of how our economy actually works will start to see the light of day sooner rather than later.

UKHouseholdDebt9311
* Unfortunately Chris Evans is not the only MP in need of a lesson in economics.

Labour’s deficit problem.

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By alittleecon

First posted on October 2, 2012 by 

You may have seen lots of posts with titles like the one above, talking about Labour’s deficit dilemma.  How can they restore the trust of the British people?  How can they set a credible plan to grow the economy without borrowing more?  Ed Balls’ speech at this year’s Labour Party Conference was all about treading that line between policies for growth, matched by spending constraint.  The question for Labour is always “How are you going to pay for it?”

In this post I want to take a different tack and look at Labour’s ‘deficit problem’ from the other side.  How can it get past the argument that deficit reduction is priority number 1?

To me Labour’s problem is not how it explains how it will get the deficit down, rather the issue is that the whole argument about debt and deficits is economically illiterate.  It misleads the public and completely hobbles any attempt by the left to take the initiative in the economic debate.

So what is the deficit argument?  Why is it so important to get the deficit down that as a consequence we have to suffer persistent high unemployment, increasing poverty and stagnant living standards?

Here’s everyone’s favourite punchbag Nick Clegg parading his ignorance at the Lib Dem conference last week:

So to those who ask, incredulously, what we – the Liberal Democrats – are doing cutting public spending, I simply say this: Who suffers most when governments go bust? When they can no longer pay salaries, benefits and pensions? Not the bankers and the hedge fund managers, that’s for sure. No, it would be the poor, the old, the infirm; those with the least to fall back on.

So but for austerity, Britain could go bust.  Really?  Where does this idea come?

The argument goes that when we run a deficit, we must borrow from ‘the markets’.  If the deficit gets too high the markets will start to worry we might not be able to pay back what we borrowed and so will start asking a higher rate of interest.  If we keep borrowing, eventually the markets will say “no more”.  Nick Clegg believes at this point, we could literally run out of money – we would be bankrupt.

In answer to this I’ll quote Chris Dillow (read his excellent blog here) who put it better than I could:

…this is plain wrong. In countries with their own central banks, governments cannot go bust because the central bank can simply print money to buy government debt: this is what QE is. Of course, this might or might not be a bad idea. But Clegg didn’t argue this. He just made a prat of himself.

So we need to get past this nonsense (and it really is nonsense) that if we don’t ‘deal with our deficits’, financial armageddon awaits.  But what about the Eurozone?  Aren’t they on the brink of bankruptcy?  Couldn’t that happen here too?

The countries of the Eurozone took the decision to give up their own currencies and replace it with a common currency, the Euro. I n doing so they gave up the ability to issue their own money, to set interest rates and to manipulate their exchange rates.  This means that Government spending really is constrained by how much they can raise in taxes or borrow from the markets.  They can run out of money because they gave up their ability to create currency.  This has lead to the markets periodically raising interest rates on Eurozone country’s debt to the point where in Greece, they actually were unable to borrow any more money on the markets and they had to accept their first (of many) bailout.  This was the backdrop to the 2010 election here when we had Nick Clegg and George Osborne running around saying we were days away from becoming the next Greece.  This was a fiction though.

As long as the UK keeps the pound, it cannot run out of money.  Nick Clegg’s idea that we can (or even already have), while idiotic, somehow still frames the economic debate in this country.  Every suggestion of a new spending plan has to be ‘paid for’ by a corresponding tax rise or pay cut elsewhere for it to be seen as ‘credible’. NO IT DOES NOT!

Until we get away from this spurious framing, we will never have a country we can be proud of.  If Labour really want to work in the interests of working people (and to me, the jury’s still out on that one), the whole framing of the economic issues needs to be moved away from deficit reduction, and onto what we want our society to look like.  To me, this is Labour’s deficit problem.

We on the left should set out a vision for what we want society to look like (for me it would be the right to a job, adequate housing, free education including university and healthcare amongst other things), and communicate the policy changes required to get us there.  The deficit should not even enter into the debate until such a time as we reach maximum potential output.  It should be allowed to float, rising in the bad times, falling in the good. Only then can we bring about real change.  The response when asked about the deficit should follow Keynes’ mantra:

It is the burden of unemployment and the decline in the national income which are upsetting the Budget. Look after the unemployment, and the Budget will look after itself.