Why do politicians tell us Debt/Deficit myths which they must know to be untrue?

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The New Economic Perspectives’ video clip on the Government budget, Deficits and Debt presented below (produced for educational purposes), debunks the myths that politicians tell their populations to justify ‘austerity’.  In the case of the clip, it starts with 3 full minutes of American politicians misinforming the electorate.  An identical montage aimed at the UK electorate could undoubtably just feature George Osborne’s utterances from his forthcoming Autumn statement scheduled for this Thursday (5th December 2013).

However, the reality is that all economists know that the deficit and debt mythologies are not true and ‘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’.  Economists, and Central bankers like Mervyn King, Ben Bernanke, Alan Greenspan, all know that:

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’.

In fact, the St Louis Federal Reserve, from the heart of Western capitalism in the US confirms the same for the US dollar (and any other nation that creates its own currency) :

‘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.’

Paul Samuelson, ‘father of modern economics’ and Nobel Prize winner, suggested the reason for perpetuating the mythologies in a 1995 interview:

“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.”

It may be that politicians fear the ‘anarchic’ demands of the electorate were the public to understand that the UK economy is not like a household and can never be bankrupt.  However, these distortions of reality have been carried to a new pitch by George Osborne and the Coalition government:

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

It would be just as well to remember this week, when listening to George Osborne and Danny Alexander, that Keynes 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.’

 

New Economic Perspectives on the Government Budget, Deficits, and Debt

Published on Nov 28, 2013

The video clip features the following speakers, in order of appearance:

L. RANDALL WRAY
Professor, Economics, University of Missouri-Kansas City
Senior Scholar, Levy Economics Institute
Author, Understanding Modern Money, Modern Money Theory
http://www.economonitor.com/lrwray/

STEPHANIE KELTON
Professor, Economics, and Chair of the Department of Economics, University of Missouri-Kansas City
http://stephaniekelton.com/

WARREN MOSLER
President, financial services firm Valance Co. Inc.
Author, Soft Currency Economics, The Seven Deadly Innocent Frauds of Economic Policy
http://moslereconomics.com/

For More Information:

University of Missouiti-Kansas City, Economics Blog:
New Economic Perspectives
http://neweconomicperspectives.org/

The Modern Money Network
http://www.modernmoneynetwork.org/

Other posts from Think left:

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

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

Warren Mosler and Soft Economics

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Warren Mosler‘s Soft Economics

Extracts from:  Warren Mosler’s Soft Economics paper

“In the midst of great abundance our leaders promote privation. We are told that national health care is unaffordable, while hospital beds are empty. We are told that we cannot afford to hire more teachers, while many teachers are unemployed. And we are told that we cannot afford to give away school lunches, while surplus food goes to waste.

When people and physical capital are employed productively, government spending that shifts those resources to alternative use forces a trade-off. For example, if thousands of young men and women were conscripted into the armed forces the country would receive the benefit of a stronger military force. However, if the new soldiers had been home builders, the nation may suffer a shortage of new homes. This trade-off may reduce the general welfare of the nation if Americans place a greater value on new homes than additional military protection. If, however, the new military manpower comes not from home builders but from individuals who were unemployed, there is no trade-off. The real cost of conscripting home builders for military service is high; the real cost of employing the unemployed is negligible.

The essence of the political process is coming to terms with the inherent trade-offs we face in a world of limited resources and unlimited wants. The idea that people can improve their lives by depriving themselves of surplus goods and services contradicts both common sense and any respectable economic theory.”

  • Monetary policy sets the price of money, which only indirectly determines the quantity. It will be shown that the overnight interest rate is the primary tool of monetary policy. The Federal Reserve sets the overnight interest rate, the price of money, by adding and draining reserves. Government spending, taxation, and borrowing can also add and drain reserves from the banking system and, therefore, are part of that process.
  • The money multiplier concept is backwards. Changes in the money supply cause changes in bank reserves and the monetary base, not vice versa.
  • Debt monetization cannot and does not take place.
  • The imperative behind federal borrowing is to drain excess reserves from the banking system, to support the overnight interest rate. It is not to fund untaxed spending. Untaxed government spending (deficit spending) as a matter of course creates an equal amount of excess reserves in the banking system. Government borrowing is a reserve drain, which functions to support the fed funds rate mandated by the Federal Reserve Board of Governors.
  • The federal debt is actually an interest rate maintenance account (IRMA).
  • Fiscal policy determines the amount of new money directly created by the federal government. Briefly, deficit spending is the direct creation of new money. When the federal government spends and then borrows, a deposit in the form of a treasury security is created. The national debt is essentially equal to all of the new money directly created by fiscal policy.
  • Options over spending, taxation, and borrowing, however, are not limited by the process itself but by the desirability of the economic outcomes. The amount and nature of federal spending as well as the structure of the tax code and interest rate maintenance (borrowing) have major economic ramifications. The decision of how much money to borrow and how much to tax can be based on the economic effect of varying the mix, and need not focus solely on the mix itself (such as balancing the budget).

See Warren Mosler’s Soft Economics paper

The Modern Economics (MMT) – Warren Mosler

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Warren Mosler on Modern Monetary Theory   

This video shows Warren Mosler being interviewed by Marshall Auerback on Modern Monetary Theory. MMT is the alternative to what we usually hear in the mainstream media. Warren discusses the government’s role as issuer of the currency, the meaning of deficits and the job guarantee. He is talking about the US, but there are parallels with the UK

More on MMT:

On tax avoidance and the purpose of taxation

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On Tax Avoidance and the Purpose of Taxation

From @alittleecon Previously published here:

A large section of the public get very worked up (rightly) about tax avoidance. Huge companies like Google or Vodafone seem to be getting away with paying very little tax despite turning over billions. At the same time, the Government are pursuing cuts to discretionary public spending. People often make a connection between the two and argue that if rich companies and individuals paid all the tax due, there would be no need for any cuts, so a ‘left’ solution to the economic crisis is to go after the tax avoiders/evaders in a big way, and all will be OK. I think this view is misguided. Here’s why.

Firstly, there is an implicit assumption that we need those taxes that have been avoided/evaded to pay for government spending, and if we don’t go after that money, then austerity is unavoidable as the Government doesn’t have enough money. As the UK has its own currency though, this cannot be true. It can create new currency at will and can never run out. There is a risk of inflation of course, as with any type of spending (public or private), but if you don’t think repatriating and taxing a sizeable chunk of money stashed offshore would be inflationary, how could creating a similar amount to spend into the economy be inflationary? The money sitting offshore is largely inert, sitting as excess savings. Money can only be inflationary if it is circulating.

This leads on to the other point I want to make which is about the reason we tax at all. If you ask most people why we have taxes, they will say “to pay for government spending on public services”, but as someone who finds myself in agreement with Modern Monetary Theory (MMT), I don’t think that is really the purpose of taxation at all.   So what is the real purpose of taxation? There are a number of, none of which are to pay for government spending (although confusingly, for a government to spend, it does need to tax):

1. A ‘Chartalist’ view of money (which MMT incorporates) argues that the imposition of a tax by a sovereign government creates a demand for a currency. So because people are required to pay tax in pounds, a minimum level of demand for pounds is assured and people will be willing to do business in pounds so they can obtain enough to pay their tax liabilities. Because pounds have value to those with a tax liability in pounds, they also have value to those who are not taxed in pounds, so it’s not necessary that all users of pounds are taxed.

2. While the government doesn’t need to collect tax before it spends, if it spends without taxing, this will almost certainly cause inflation. We can think of government spending as ‘printing’ money and taxation as ‘unprinting’ money. The tax ‘makes room’ for the government to spend without causing inflation.

3. To correct for ‘externalities’ and discourage ‘harmful’ behaviour. Externalities are costs or benefits generated by an activity which affects non-users of that activity. Examples could be pollution or second-hand smoking. So we might want to heavily tax polluting activities to the point the activity becomes unprofitable or the tax collected is equal to the cost of the clean-up. We might want to tax smoking heavily because it imposes a cost on the health services or gambling because it can lead to crime and contribute to social breakdown.

4. For redistributive purposes. This reason would be why we might wish to take on tax avoidance. Our economy is working as a giant hoover at the moment, sucking up money from the bottom to the top, increasing inequality and leading to more and more people becoming marginalised and stuck in unemployment or low-paid work. Tax is one way of trying to correct for this damaging process.

To sum up then, I am not saying we shouldn’t go after tax avoidance. We absolutely should (although overhauling and simplifying the whole tax system would be more effective in the long run). It’s just that I don’t think it’s an answer to our sluggish economy. Those who avoid/evade tax undermine the tax system by offending people’s sense of fair play. If some are seen to be ‘getting away with it’, it makes maintaining the legitimacy of tax more difficult, and a strong tax base with efficient collection is vital for a functioning mixed economy.

While we need to do something about tax avoidance (preferably through regulation rather than appealing to amoral companies’ morals), we should not oppose austerity by saying “tax the rich more” or “tackle tax avoidance”. Austerity should be opposed on its own terms i.e. the government is not running out of money; the markets can’t hold us to ransom, and cutting spending in a recession is a really, really stupid thing to do.