A letter to the Chancellor of the Exchequer from Prue Plumridge
I feel I must write to you in response to your speech at the Conservative Conference in which you referred to the medium-term challenge of dealing with the public finances so as not to burden future generations.
Aside from the fact that your government has been promising to deal with the public finances for the past seven years whilst regularly moving the goal posts for achieving it, failed Tory promises show astonishing ignorance about how the state finances work in practice.
Or, is it, perhaps, that you do know but prefer to keep the public in the dark with fake messages about household budgets, living within our financial means, paying down our debts and saving for a rainy day.
You (and George Osborne before you) have abused the trust of the public with your myths and lies about maxing out the credit card and going broke. Neither of which can happen in a sovereign currency issuing state. I’m sure you know that really. In truth, this has suited the pernicious ideology of the Tory government which claimed that Labour overspent and austerity was unavoidable. Neither was true. But, as a result, seven years of cuts to public spending have led to rising poverty and inequality through the redrawing of welfare provision and the decimation of public services not to mention the on-going attacks on employment rights and the rise of insecure working and the gig economy.
And, all the time, while you tell us that there is no money for those services upon which we all depend from the NHS, to public infrastructure and services and local government we are witnessing the ongoing transfer of wealth into ever fewer hands and public money being poured into corporate pockets.
Admit it, Chancellor, this exercise has never been about necessity. It has always been about ideology which can be best expressed in the words of the former head of John Lewis who said recently ‘the only way to provide good public services is to ensure a vibrant business economy’ …… which is not only neoliberal bunkum trading on the lie of discredited ‘trickle down’ but shows how this false narrative dominates the mainstream and infects public understanding. To quote Richard Murphy from Tax Research on the NHS (and whilst he doesn’t mention it, public services too)
“there is no reason why we should not have health care in thirty years’ time, whatever that care might be…… All we have to do is decide we want it. Then we can pay for it. It will not be a matter of not affording it. It’s just a matter of setting priorities. “
Moving on to your claim that borrowing takes money from the pockets of future tax payers is plain wrong to put it bluntly.
As the economist Professor Bill Mitchell notes “Each generation chooses its own tax rates and that means that the mix of public and private sector involvement in the economy is a political choice”
In this case yours. Government spending in the form of deficits (assuming of course a government that takes seriously its responsibility for the well-being of the nation) can work on behalf of citizens to create a healthy economy and a fairer distribution of wealth. This not only helps today’s citizens but also creates investment in public education, public health and other infrastructure which benefits both current and future generations. Or, of course, it can, as in the case of the Tories and already noted, represent wealth transfer to the already rich and public money leaching into private corporate pockets. And just to be clear as I can hear you whispering but what about the printing presses, inflation and Zimbabwe I am not suggesting that deficits don’t matter – they do but not in the way you tell us they do. The fact is that whilst governments are never revenue constrained spending will always be limited by available productive capacity and resources. And that is what has to be managed. It should never be about balanced budgets rather it should be about creating a balanced economy.
So, Chancellor, in conclusion, I will finish by saying that a time is coming when you will no longer be able to fool the public into believing your household budget version of the state finances which has claimed that we can’t afford public services, the NHS and the welfare safety net. They will then understand that you made a choice to deny them the public infrastructure that ensures a healthy economy and the well-being of their families. They will understand that you played with their lives and their survival.
It is to be hoped that in the near future you will indeed have plenty of time as a shadow minister in her majesty’s government to reflect on where the Tory party went wrong but then again you probably won’t.
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?
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.
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.
* Unfortunately Chris Evans is not the only MP in need of a lesson in economics.
Belief in a flat Earth is found in the oldest writings and early Mesopotamian maps showed the world as a flat disk floating in the ocean. Thankfully things have moved on since that time and we now accept the proof that it is indeed a sphere spinning in space.
It is not difficult to imagine the reaction to those who challenged this view, such as Christopher Columbus, and the scepticism with which such ideas would have initially been received. After all, if you’ve been told that you’ll fall off the edge of the world if you go too far, questioning that notion would have led to shaking of heads. Those disputing the prevailing set of ideas or beliefs on the basis of “what if” would have been ridiculed, insulted or even physically attacked as fear of the new set in.
We have reached such a time in history now. The destructive neoliberal status quo of the last few decades is being shaken to its core and there is an opportunity at last for a conversation about where we go from here and how we can bring about change. It won’t be easy but Jeremy Corbyn has started the ball rolling by offering a radical vision which not only restores the core values of the Labour party and responds to a changing world but also opens up an opportunity for dialogue on such issues as climate change, finite resources and sustainable living. It is a positive start.
Of course, those who have the most to lose will not let their power go easily and we are seeing that already with attacks on Jeremy Corbyn by the Establishment and business leaders and worse still, from his own party. Only this week, an article in the Telegraph was predicting that Jeremy Corbyn’s economic plans will turn us into Zimbabwe and lead us to calamity. We must, however, stand strong against such attacks which stem from fear and forge our future together.
People are starting to see through the decades long political neoliberal consensus which favours the magic of free markets. But there is still a way to go and it won’t be easy. It is vital that we ask questions and, even when, like the flat earthers, we find the potential solutions out of our comfort zone because it questions the long-accepted paradigm, we must not turn away.
Most people (including me) shy away from discussion of economics. Mathematical equations and economic models dance before the eyes and shut down the brain like no other subject. And yet the decisions made by our elected politicians are based on economic ideas which can wreak havoc on our lives and the lives of our families and friends or can, alternatively, be used for a public purpose to benefit those same lives. Indeed, we are seeing the damaging consequences of those decisions today. Dismantling our social security system, selling our publically funded public services to the private sector, deregulation, the watering down of employment and trade union rights and driving down of wages in the name of competition. TTIP, TISA and CETA added into this mix will prove to be the final nail in the coffin of democracy. It is, therefore, time to engage in a conversation and challenge those who have deceived us for so long. We must ask ourselves what if the world isn’t flat at all?
Maggie Thatcher’s line “There is no alternative” is the usual excuse for continuing with the free-market ideology and the claim that continued austerity, balanced budgets and surpluses are vital to a successful economy. We will all remember Liam Byrne’s infamous note, when Labour left power, saying ‘There is no money’. That one stupid remark has allowed the deficit/debt reduction argument to dominate the economic and political landscape of the last five years and been used by David Cameron and George Osborne in a deliberate distortion of reality to justify cuts, the creation of a small state and private sector domination.
It is unfortunate that even some of the Labour elites are using the same loaded language which says that we must continue with such policies. Yvette Cooper, who has a PPE from Baliol College at Oxford, said recently “I don’t think the answer is what Jeremy has proposed, which is basically printing money that we haven’t got to build things”. Her comment is symptomatic of her lack of grasp of wider economic ideas and yet, she, like many, has been a victim of the way it has been taught for decades in educational institutions. One might think that the doctrine of balanced budgets was the only game in town.
Regretfully, these ideas have been cleverly used to also deceive ordinary people that there is no alternative. That we must accept the pain and balance our budgets in true Micawber style. The idea that the state should deal with the deficit and reduce the national debt has become a part of the narrative which is firmly fixed in the collective psyche. The problem has been reinforced by our experience of our own household budget which has to be managed to ensure we don’t go into the red or get into debt.
The first step is to ask questions. Don’t rule anything in or out – the world is a complex place much more so than even this simple presentation.
Most of us will remember from our history lessons, the 1929 crash. The UK government’s response at the time was to balance the budget and re-establish confidence in the pound. Public sector wages and unemployment benefits were cut and by 1931 unemployment had risen to almost three million. The march to London by the men of Jarrow is a symbol of that economic disaster which left thousands of people destitute and hungry.
One of the people who challenged that view was John Maynard Keynes who was fiercely critical of the then Conservative-Liberal coalition government’s austerity budget and wrote:
‘Every person in this country of super-asinine propensities, everyone who hates social progress and loves deflation, feels that his hour has come and triumphantly announces how, by refraining from every sort of economic activity, we can become prosperous again.”
It is ironic, that when the coalition came to power in 2010, they chose to repeat an economic policy that had so singularly failed in the 1920s and 30s, and the Conservatives are promising more of the same over the next five years.
‘Insanity is doing the same thing over and over again but expecting different results’Albert Einstein is once said to have observed. But then one could ask the question is it insanity or a deliberate strategy?
To return to Keynes, his argument was, essentially, that in order to support full employment governments must use their spending power to invest in the economy on the basis that spending equals income to someone which is, after all, what makes the world go round. So when governments reduce public spending the result can only be higher unemployment. Indeed in the last week we have learned that for the financial year so far the deficit was down £7.3bn (23%) but in the three months to June there was a rise of 25000 in unemployment. To make the connections if we stifle spending to reduce the deficit then this can only have a detrimental effect on the economy by reducing the amount of money available to the non-government sector.
So where, may you ask, will the money come from to deficit spend? When Yvette Cooper suggested wrongly as it happens that we can’t print money that we haven’t got to build things she was forgetting that electronic monetary resources were created to rescue the banking system in the form of Quantitative Easing which no-one objected to then, even though, basically, it disappeared into a big banking black hole.
Jeremy Corbyn’s People’s QE is quite another kettle of fish and this time those money resources would be used for public purpose that is for the benefit and well-being of society as a whole and not just a small section of it. To put that clearly in the words of Professor Bill Mitchell:
“People would soon see the benefits in the form of better schools, hospitals, public transport, green energy innovations, more jobs, more diverse cultural events”
The response to these ideas has been one of panic-stricken hysteria, as emotive language such as ‘debt mountain’ is used by politicians and the media to scare the general public, by reinforcing the household budget model of our state finances and economy. Let’s not forget the irony here that George Osborne has managed to achieve a debt mountain all of his own!
Professor Bill Mitchell’s conclusion should reassure the public:
PQE is an excellent strategy for the British government to introduce. It exploits the currency-issuing capacity of the government directly and uses it to increase the potential of the economy to improve well-being.
It is astonishing to realise that contrary to common belief sovereign governments start the ball rolling by issuing money, tax revenues are not necessary for a government to spend and that our national debt is not a debt in the usual sense of the word.
So, I can hear you ask: what then is the purpose of tax? I’ve heard that ‘printing money’ is inflationary? And say that again our national debt is not a debt at all?
We must start with the first principle which is that, since the abandonment of the gold standard, sovereign governments like ours can issue as much money as it needs. Remember the money issued comes first, and not taxes. This is a key point. Without money in our pockets we can’t pay taxes anyway.
Beardsley Rumi former Chairman of the Federal Reserve wrote as long ago as 1946:
… given control of a central banking system and an inconvertible currency, a sovereign national government is finally free of money worries and need no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore should be regarded from the point of view of social and economic consequences.
What this actually means is that tax, far from being a revenue raiser, is a mechanism for what we can call public purpose meaning, for example, redistribution of wealth from the rich to the poor. It also has the function of managing inflation by raising taxes to dampen demand, or reducing them to increase it.
Secondly, money issue by a sovereign state is not, in itself, inflationary. Politicians parading as prophets of doom are warning us that ‘printing money’ will cause inflation. In an effort to scare people, we are reminded of Germany’s hyperinflation after the First World War or Zimbabwe’s in the 1990s. In both cases, the truth of the matter is that these episodes could not be described in any way as normal – they were extreme events and not remotely like the situation in the UK or the US. Of course in Germany’s case, the imposition of huge reparations in gold under the Versailles Treaty, the loss of 25% of its industrial capacity as a result of the war and then the occupation of the Ruhr when Germany defaulted forced them to increase the money supply which did not match its supply capacity. So when exports then slowed and Germany could not continue to pay back its debts it led to the hyperinflation which was to have catastrophic consequences for the German nation both in the short and long term.
And herein lies the clue, if you keep on spending and can’t produce the goods to meet that spending, you’ll get inflation Spending with no regard to whether there are enough resources to match it, is the cause of inflation not the money issue in itself. So deficit spending is not the problem. The issue is whether we have the resources to justify the spending and if we have, how we can use them effectively for the benefit of society as a whole.
We have almost two million people without jobs. People whose talents remain unused. People who want to work despite the inference by government and irresponsible media that the unemployed are lazy and feckless which has become the prevalent myth, now accepted by the public as being true. The solution therefore is to invest in building new schools, hospitals, homes and green infrastructure as well as create real job opportunities so that people can make a positive contribution not only to their own well-being but that of their communities. Remember that spending equals income to someone, and so by using the resources we have, effectively and fairly, we can improve the lives of all. The deficit will only be a problem when all available resources are being used. And we are most certainly not in this position at the moment.
And this brings me, finally, to the notion of the national debt. If, as is noted above, sovereign governments can issue money then it begs the question why do we have to borrow? Well the reality is that we don’t. Sovereign governments don’t need to issue debt. The real game is about corporate welfare as Treasuries and Bonds are sold to big investors who want a nice safe, risk free place to stash their money and get a guaranteed income flow. Much like us when we transfer money from our current bank account to a savings account. Where governments are the primary money issuers there is no reason why the national debt could not be scrapped. We wouldn’t have to worry about ‘paying it back’. And, after all, how could you pay back the money supply?
The important thing for us to understand is that there is an alternative to the inertia of past decades. We don’t have to accept it we have to challenge it.
The world is a complex place and full of uncertainty but we have been bewitched by a dogma that proposes freedom and everlasting growth on the backs of the people and the planet but which, in fact, is tying us in chains to the benefit of the few. As Keynes observed in his book written in 1936:
“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes.”
The Post War Consensus is long gone and the positive outcomes of that consensus, being dismantled as we speak. The ascendency of individualism over cooperation and all that entails is almost complete. As Ha-Joon Chang wrote:
‘Many believers in the individualist view would sacrifice political freedom to defend economic freedom”
It is clear that such unrestrained pursuit of self-interest through the belief in the magic of free markets has proved itself wanting and resulted in huge disparities of wealth, impoverishment, inequality and unequal access to opportunity.
Whilst we need wisdom too, knowledge is power and so the more we are informed, the easier it is to challenge the lies of politicians and their media lackeys. It is not necessary to immerse oneself in economic models and mathematical equations to understand the importance of economic policies and their effects on society but if we are to move forward we must show those who would lie to us that we cannot be fooled any longer.
