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.

Was Panorama’s Presenter right about Corbynomics?

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Panorama’s presenter, John Ware’s negative opinions were hardly hidden in ‘Jeremy Corbyn: Labour’s Earthquake’.  For example, he started by sneering that a Corbyn Town Hall meeting had all the fervour of a revivalist meeting (sub-text = crowd hysteria).  But then, he did a piece to camera, that really betrayed (at best) his ignorance or a deliberate attempt to mislead the public over the anti-austerity policies presented by the Corbyn team.

He said that if Jeremy Corbyn were to become Prime Minister, he would “order the Bank of England to print billions of pounds for a raft of new projects – roads, railways, houses…” and how would Corbyn pay for all this?  By collecting the £120 billion estimated to be uncollected tax receipts.

(at 18.28 mins http://www.bbc.co.uk/iplayer/episode/b06bg6ty/panorama-jeremy-corbyn-labours-earthquake )

Whilst it is perfectly true that Jeremy Corbyn wants to address the tax haven scams (which would include increasing the tax receipts), he has never suggested that this was the substance of his plans to resuscitate the economy.  Apart from a novel solution such as ‘QE for people instead of the banks’ Jeremy Corbyn’s fiscal stimulus is totally consistent with the sort of keynesian economic policies that were mainstream prior to New Labour’s capitulation to the economics of Margaret Thatcher.

I will leave it in the capable hands of the Renegade Economist, Ross Ashcroft to explain how politicians bailed out the wrong industry after the Great Banking Crisis in 2007/8 and what should be done now i.e. adopt policies that run counter to austerity and conventional mainstream economics.  In fact, precisely the sort of policies that Jeremy Corbyn is proposing.

Another economic crash is coming. How did this happen? Renegade Economist | Comment is Free

George Osborne failed to mention private debt in either of his budgets which is strange because his economic policies are dependent on increased household debt to sustain demand.

As a further treat, I include a one minute interview with Steve Keen in which he explains what’s wrong with mainstream economics.

What’s wrong with Economics? Professor Steve Keen explains – 16 Nov 2011

Uploaded on Nov 16, 2011

Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney. His main academic research interest is in developing mathematical models of Hyman Minsky’s Financial Instability Hypothesis. Prof. Keen’s best-selling book, Debunking Economics, delivers a powerful critique of modern neoclassical macroeconomics. He maintains a website dedicated to ‘analysing the global debt bubble’ at http://www.debtdeflation.com.

So was the Panorama programme a fair representation of Jeremy Corbyn’s economic policies?  The  conclusion has to be no…. The case for anti-austerity policies, as presented by Ross Ashcroft and Steve Keen, is overwhelming and long over-due, given the likelihood of another economic crisis.