That’s why it’s called a ‘struggle!’

Quote

By Theresa Byrne, previously published here
Ok I’ll start in the traditional style, and confess: I pinched the headline from Jeremy Corbyn’s speech to Scottish Labour. But it summed up my feelings and emotions over the last few days. Yes politics is a struggle, yes it is a constant push for progressiveness. And that is why most of us are in it.Change is not easy, whether it is changing a habit or changing a mind set. That is a psychological and emotional given. The Labour party is about change. Change in society, change in economics, change in politics. Many within the party forgot that after 1997, because the changes in society that were introduced were easily done. And were in many ways relatively superficial.

Take an example. The National Minimum Wage was introduced in 1999. It was profound in many ways, as the government said via the Low Pay Commission ‘this is the minimum people can be paid’. Many people on very low wages received a significant increase in their wages, the threatened job losses never materialised in the numbers forecast, the amount of the NMW slowly crept up, and the Tories accepted it as inevitable. But the amount of the NMW was not a significant amount of money, not really enough to live on and still required additional benefits from both government and local councils in order for families and people to survive. The concept was excellent but the execution left much to be desired. The underlying philosophy of poorly paid jobs with poor prospects was not directly challenged by the government, it was accepted. A superficial change to the pay structure was introduced but the two or three tier job market remained. Where was the necessary investment in manufacturing that could have created better jobs? Where was the governmental challenge to repeated outsourcing of work by business which encouraged the minimum level jobs and eventually to zero hours work?

Opportunities to challenge and significantly change the way society operated at an economic level were missed by the Labour Government between 1997 and 2010. We missed the chance to have the arguments and discussions about the links between taxation and public services, preferring to allow PFIs to pay for new hospitals and schools, and to allow the financial services bubble to pay for other investments. We did not regulate the financial markets so the crash that happened in 2008 caused horrendous problems to the economy and to people, as the Government scrambled to save the banking industry. We also then allowed the Tories to set the myth that we overspent, even when they had agreed with our spending plans back in 2007.

If we had made the case for taxation paying for public services, people would have understood that Labour was not overspending. We were providing those services such as the Health Service, social care, education etc in common, as common goods where we share the responsibility and the cost of provision together because we share the goods. We pay for the services, they are not ‘provided’ for us through a vague government spending concept but through taxation paid by everyone and a progressive taxation system where the more income you have the more you pay is the balanced and fair way to tax. But this argument was not made. And by the time we needed to challenge the myth it was too late, our opportunity has passed by. We have to remember that in 1997 the schools, hospitals and local services were in such a dire situation that the people understood that (i) a new government was needed and (ii) that serious investment was demanded. That was our opportunity to make the case for taxation to pay for the services and people were open to us, to our new ideas. We failed to make that case. Again we superficially changed by investing through PFIs but the underlying philosophy of linking taxation to public services as a part of a civilised society to challenge the economic view of taxation as a necessary evil that should be reduced for a small state was not made.

Our struggle now must be to understand, explain and argue for fundamental change in society, in economics and in politics which is what Jeremy Corbyn is about. The policies he has put forward, with John McDonnell, about investment in housing, in education, in the Health Service and local government, in secure jobs are all direct challenges to the neo-liberal free market knows best economics that have been in existence for over 30 years. The struggle is about asking questions about people’s perceptions, talking with them about why we believe that investment in housing is not just good for providing a home but for jobs, for increasing taxation in the economy, allowing people to establish themselves and build a community. Talk with them about the importance of security in work, how it builds community, allows children to feel secure, allows more people to become active and involved in their local community at a volunteer level because they can relax and not worry so much about still having a job tomorrow or next week. Talk with them about a good quality Health Service where having a serious illness is not a cause for money worries but an opportunity to focus on the importance of getting better, or dealing with the psychological consequences of illness. Talk to people are having a good social care system integrated with health, housing, community links so that elderly people, those with disabilities can be part of the community and know that their needs are being dealt with not just adequately but well and with respect.

We are facing a challenge, the challenge to change and more importantly to struggle to get our voices heard. We are being challenged but we must rise to the struggle together. We have a leader who wants us to be with him, to stand alongside him in the fight. If we are to be true to our comradeship, then we stand shoulder to shoulder, in solidarity with Jeremy Corbyn ready for the struggle, for the fight. We are doing it with and for the people, lending our strength and voice to their struggle as all in solidarity. We must not be found wanting, and I am sure we will not be. We will change the world, to a world of peace and justice where no one and no community is left behind step by step by step.

The riddle of the deficit (or deficits for Dummies)

Quote

Riddle: When is a ‘deficit’ not actually a deficit?

Answer: When it’s a Government budget deficit.

 

 Dear [insert name of virtually any Journalist or Politician]

It seems that you’re still having a bit if a struggle to understand what a budget deficit is, and what it does.

Let me try and explain.

Imagine that I’m the ‘Government’ and you are the ‘Private Sector’.  I give you a bar of chocolate.  Now, I (the ‘Government’) am in deficit to the tune of one bar of chocolate… but you (the ‘Private Sector’) are in surplus to the sum of one bar of chocolate.

Are you with me so far?  The government sector and the private sector or non-governmental sector, are opposite sides of the same coin.  A deficit for the government means a gain in the private sector and vice versa.  (The private sector means everything in the domestic economy, which is not government – I’m leaving out exports/imports to keep it simple).

One way or another, Government spending all goes into the private sector … payments for the NHS, Education, the military, unemployment benefits, working tax credits, child benefit, the Police, the judiciary, pensions, motorways, new infrastructure, grant to local governments and much more, are each paid for out of government spending.

OK?   So government doesn’t just spend, it also taxes.

So I’ll be the ‘Government’ again, and I’ll give you (the ‘Private Sector’) a bar of chocolate and then take back half of it, as a tax.   Now both the ‘Government’ and the ‘Private sector’ have half a bar of chocolate each but the government has a budget deficit of half a bar of chocolate whilst the private sector is increased by half a bar of chocolate.

With that extra half a bar of chocolate you have a lot of options.  For example, you could eat it (i.e. consume goods and keep someone in a job replacing them); give it to someone to mend your bike (i.e. create employment); put it in the cupboard for another day (i.e. save) or repay your friend the chocolate you owe him (i.e. pay off debts).

The way to work out if the government has a budget deficit, a balanced budget or a surplus is simply to subtract the total amount collected in tax from the total amount that government spends.   At the moment, the UK has a budget deficit, which means that the amount spent is greater than the amount of tax collected.

However, George Osborne says this is absolutely ‘frightful’ and that under his new policies, the UK will be in surplus by 2020 (!)

So what does a surplus mean for those of us in the private or non-governmental sector?

Well, if I pretend to be the ‘Government’ again, and I give you (the ‘Private Sector’) a bar of chocolate and then take it all back again … the budget will be balanced. Government spent a bar of chocolate and collected a bar back again… but you in the private sector have nothing more than you had before the ‘Government’ started spending!   (How great does a balanced budget sound now?)

To be in surplus, I as the ‘Government’ would give you a bar of chocolate and then demand a bar and a half of chocolate back from you (the ‘private sector’).  Now you have the problem of how you are going to get me that additional half a bar of chocolate?  Maybe you have some saved bars of chocolate which you can use for a year or two but eventually you may have to go into debt or even sell your house to give me, the Government, that extra half bar of chocolate!

As J.D. Alt writes in his excellent US post:

 If [government] runs a “budget surplus” for long, the Private Sector will either have to diminish its economic activity in general (go into recession)—or plunge hopelessly into debt (borrowing bank money it can’t repay, possibly causing a banking crisis)—or both.

 

Instead of creating jobs by spending, paying off debts or saving, a surplus budget eventually leads to redundancies, greater household indebtedness and greater precariousness of the workforce.

Obvious questions are raised by this simple story, like where did I (the ‘Government’) get the money to buy the chocolate in the first place?   Answer: I created it – that’s what Governments do if they’re the sovereign issuer of its own currency!   This is an incontrovertible fact – only the UK government can create Pounds Sterling – anyone else is committing the criminal act of counterfeiting.

If sovereign governments can create as much money as they want, why does the UK government need to collect tax to fund public spending?   Answer: It doesn’t – there are many essential reasons* for the government to collect tax but taxes do not pay for anything.

Think about it, if government kept on spending into the private sector without having a means of also draining the economy, we would have rampant inflation. (Literally, if it was all in bars of chocolate!)  So tax is one of the means of keeping the amount government spends into the private sector equivalent to the number of goods and services available for people to buy… thus preventing price inflation.

That is probably enough for now. I would recommend this and this for more information but please don’t hesitate to contact me if you need further explanation as to how the economy really operates.

Kind regards

Yours sincerely

Syzygysue

* Tax is important for lots of reasons including giving value to the currency but it does not fund government spending.

PS.  We’re constantly told that the deficit means that future generations will have to pay off our debts. This is simply rubbish.  Which would your children really benefit** from?   Half a chocolate bar (deficit budget), no chocolate bar (a balanced budget) or increased household debt and a potential recession (a surplus budget)?  It would be no contest in my family!

(** Obviously, caveats re: inflation apply)

 

DIAGRAMS & DOLLARS: modern money illustrated (Part 1) 

DIAGRAMS & DOLLARS: modern money illustrated (Part 2)

 

Is it really better to lift people out of paying tax?

Quote

Lifted out of Participation

by @julijuxtaposed

First posted on December 13, 2012

I’m no economist so I’m keeping this excursion simple.

Is it really better to lift people out of paying tax?  It sounds like a desirable policy goal on the surface: of course you want to keep as much of your money as possible, but it makes no sense in the general and especially current context. Aside from the wider philosophical arguments about the responsibility and size of an ideal government and, leaving out that conveniently seldom-mentioned elephant – the ability to print a sovereign currency as necessary – isn’t the excuse for limited Government spending usually blamed on the revenue-capacity of the Treasury? That same Treasury that is so starved of income that it’s keen to also ‘lift’ the biggest and the richest out of tax?

So, lack of revenue being the narrative, how does it help the national economy if a growing number of people pay no tax because they can only find part-time, short-term, zero-hour contracts and the like? Part-time work is ideal if you only require part-time wages, but underemployment doesn’t keep the roof over your head and feed your family. It doesn’t cover your bills and it certainly doesn’t make you feel safe. It puts you in almost constant survival mode and this engenders anxiety, hopelessness and resentment because desire and effort are made to seem almost redundant. So, because the underemployed employee can’t earn enough to even cover life’s basics, we know that financial assistance is required from the State.

Suddenly, through a variety of top-up benefits, you are beholden to all the lucky, tax-paying public and, to add insult to the injurious and carelessly laid policy traps, you are generically and fatuously labelled as a ‘scrounger’ who must have some terrible moral deficiency. You are now a gratuitous drain on some fictionalised hard-working majority. Ironic considering how very few people would knock back a chance to genuinely improve their lot if real improvement was on offer.

Maybe, as some will tell you, part-time work, temporary and zero-hour contracts are sneaky economics and avoidable. I suspect this is largely true and quite curable with sufficient and appropriate investment in our common needs, such as infrastructure, public services, housing, science and technology (especially green). In such progressive and abundant circumstances, employees may even see their personal and collective value being more highly respected and rewarded – sufficiently to pay tax.

Maybe, as others will tell you, this epidemic of underemployment is just the consequence of our modern economy to which we must adjust. If this is true then we need to urgently and seriously find ways to make life affordable on minimum hours and minimum wages.

Lifting people out of tax is symptom-based popularism – a convenient way of ignoring the larger reality: we wouldn’t need so much money if it didn’t cost so damned much to live.

There is another issue around this seeming gift of tax exemption which underpins my philosophical view: that renowned concept of ‘no taxation without representation’. Tax contributions are as much a citizen’s way of participating in the running of their country as is their vote. It actually anchors the citizen’s vote by virtue of the State’s need for the contribution as a vehicle of that representation. Thus we derive our right to have a say in a democratic system.

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

Quote

There’s No Money Left?  by alittleecon

http://alittleecon.wordpress.com/2012/09/24/the-british/ First posted 24.09.12

“The British Government has run out of money because all the money was spent in the good years,”

George Osborne, Feb 2012

“…in the years of plenty they put nothing aside. They didn’t fix the roof when the sun was shining”.

David Cameron, March 2008

“There’s no money left”

Letter left by Liam Byrne, May 2010

For the last 4 years you will have seen or heard quotes like this in the media. How we were on the brink of bankruptcy and how “there is no money left”.  Those advocating a “Keynesian” response to the current crisis are rebuffed with the argument that we cannot increase borrowing now because we didn’t run budget surpluses in the years before the crisis – “Gordon Brown spent all the money”. Keynesianism has now been reduced to “surpluses in the good times, deficits in the bad”.

Liam Byrne’s famous note left as Labour left office was particularly heinous and the Coalition never miss an opportunity to use it as a stick with which to beat Labour. It may surprise you to hear this, but Liam Byrne is not an expert on the economy (or anything else), and should be ignored on all matters economic.

The Government say Labour want to increase borrowing by £200bn, and this would be disastrous as, if the ‘markets’ thought we were increasing borrowing, they would start to worry that we would be unable to repay our debt (or “pay our way in the world” as David Cameron is fond of saying), and interest rates would start to rise. This is basically what has happened in some of the states in the Eurozone, and Coalition ministers have not been shy in pointing this out (repeatedly and at length). Currently, Labour have no coherent response to this.

But is there any truth to this narrative? Is there an alternative path?

Perhaps surprisingly considering they have provided the intellectual cover for austerity, economists 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. Here’s Paul Samuelson, “father of modern economics” and Nobel Prize winner, being interviewed in 1995:

“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.”

So the idea that budgets must be balanced is a myth. Samuelson believed this myth was necessary to place a leash of governments who might be tempted to spend, spend, spend, but a myth it is never the less. But why is it a myth? Aren’t governments limited in their spending by what they can raise in taxation plus the amount the private sector is willing to lend them?

Categorically no! A country like the UK which issues its own floating currency, does not depend on anyone else for money. It can issue more currency at will and without limit. Therefore, it can never go run out of money and can always afford to purchase anything for sale in its own currency. This is a very simple (and perhaps obvious) point, but one that is generally ignored in all discussions about government finances. When it is discussed, it is discussed in somewhat hysterical terms: “PRINTING MONEY!! HYPERINFLATION!!” etc. etc. More sensible people realise that government creation of money is no more inflationary than bank creation of money. Creation of new money could be inflationary, but only at the point where output is unable to expand any more in response to new demand.

But if a government doesn’t need to collect taxes or borrow from the markets in order to spend, why does it do these things? In a country like the UK, taxes serve a number of purposes. Firstly, tax ensures there is a demand for the government’s currency. We must all pay taxes in pounds (some more than others), so we accept pounds as payment for goods and services so we can pay our taxes. Secondly, taxes make room for government spending. If the government just spent without taxing, very quickly we would reach maximum output and start to experience accelerating inflation. Taxation helps keep a lid on inflation. Finally, taxation is used to meet social aims. These may be to redistribute wealth or to discourage harmful activities, like polluting or smoking.

Why does the government sell bonds? It does this primarily to maintain its target rate of interest. If the government wanted, it could stop selling bonds altogether. This would mean the overnight interest rate would fall to 0%. Bonds also serve as a risk free asset which institutions like pension funds like to hold as part of their portfolios, so they serve a purpose in that way also.

So armed with this knowledge about government finances, what should government do?

  1. The do nothing approach. Like Paul Samuelson says, we can accept the truth about government finances, but also be concerned about letting governments spend without constraint, and so continue to tie our hands with regards to policy options. Taking this approach means we are in for a prolonged slump and a very slow recovery. We could still borrow more from the markets for investment, but this adds no new money to the system, just brings old money back into use.
  2. Use the knowledge that a government is not constrained by revenue and borrowing to actively pursue policies which would restore full employment and raise living standards. One possible approach would be to adopt an idea devised by the economist Abba Lerner (a contemporary of Keynes), known as functional finance. Lerner set out three rules for fiscal policy under functional finance:
    1. The government should ensure there is sufficient aggregate demand to ensure there is full employment. It should do this by lowering taxes and/or raising spending. If inflation beckons, government should do the opposite.
    2. Government should borrow money when it wishes to raise the interest rate and repay debt when it wishes to lower it.
    3. The government press shall print any money that may be needed to carry out rules 1 and 2.

I prefer option 2 as clearly it offers the shortest path back to prosperity. There are issues around how our political system would cope with functional finance, but this is a political problem, not an economic one. If the general public were fully aware of the realities of our monetary system, and the policy options that presented, we could all have a much more grown up debate about which course we should take.

For a full discussion of the nature of modern money, I recommend this video of a presentation given recently by Michael Hudson and L. Randall Wray. It’s a bit long, but well worth the effort:

http://mikenormaneconomics.blogspot.co.uk/2012/09/randy-wray-and-michael-hudson.html

Further Reading

The following are a few blogs I find useful for helping to understand economics:

http://mikenormaneconomics.blogspot.co.uk/

http://bilbo.economicoutlook.net/

http://neweconomicperspectives.org/

http://www.3spoken.co.uk/

http://www.creditwritedowns.com/