Somebody Think of the Children

‘I think we have a moral duty to the next generation, to our children and our grandchildren, to wipe the slate clean for them. We set out a plan, it lasts for about six or seven years, to wipe the slate clean. To rid people of that sort of dead weight of debt that has been built up over time… We owe it to the youngsters of today to lift that dead weight of debt off their shoulders.’

Nick Clegg, May 2012

Of all the justifications for austerity, the one which says we owe it to our grandchildren to deal with the debt is probably the most emotive. The national debt currently stands at £1 trillion and despite what Nick Clegg says (in the quote above he confuses the debt and the deficit), it’s set to rise year on year. Right wing commentators (such as Fraser Nelson) love to remind us this is £20,000 per person which will need to be paid off through higher taxation in the future. Now it’s true £1 trillion is certainly a lot of money, but is it true that our grandkids will suffer if we don’t deal with this now?

I would argue that the exact opposite is true. What we leave to our grandkids should be measured in real things. Will there be enough housing? Will our roads and railways be adequate? Are our schools good enough? Have we invested enough in the decarbonisation of our economy? In looking to cut now, I believe the Government are on the way to ensuring the answer to all these questions is no. That will be the real legacy we leave to our grandkids. By failing to invest for the future today we will bequeath a less prosperous economy, and a huge debt pile because at the moment austerity is failing to reduce the deficit.

But is this huge debt pile a problem? If it’s been built up investing for the future, it will be less of a problem than if it’s been built up by paying people not to work, but in both cases though, it’s a distributional issue rather than a funding issue. Every £ of government debt is an asset to someone else. The question is who holds these assets? If it is mainly those at the very top, that may be a bad thing. If it’s going mainly to support the retirement income of pensioners, maybe that’s not as bad. We could rectify this distributional issue through the tax system.

So who holds the national debt at the moment?

This data come from the Treasury and is up to date as of Sept 2012. You can see that following QE, the Bank of England now holds over a quarter of government debt. Any interest the government pays to the Bank of England must be returned to the Treasury as profit. So this portion of the debt is no burden on anyone. More QE is likely, so this proportion could rise.

About a quarter is held by the insurance sector. This includes pensions. Most pension funds hold government bonds as part of their porfolios as a way of generating low risk returns, and debt interest payments go towards pensioners income.

The other sector with large holdings of UK debt is the foreign sector. This includes foreign governments and corporations. Just over 30% of UK debt is owed to foreigners. A lot of people may be surprised it’s not higher and are worried about what might happen if foreigners stop buying our debt. The UK is seen as a safe haven at the moment due to the turmoil in the Eurozone, but if there did come a time when the rest of the world stopped buying our debt, this would not mean the government would cease to be able to fund its spending.

It’s possible to view government debt issuance not as a source of funding, but instead as a way of controlling interest rates. The government could actually turn that 25% of debt held by the Bank of England onto 100% and stop issuing debt externally altogether. Some Modern Monetary Theorists such as Bill Mitchell view government debt as “corporate welfare” and think the practice should be stopped altogether.

In summary then, it’s right to think about the longer term and worry about what life will be like for future generations, but in promoting austerity as a way of reducing the debt burden for our grandchildren, what we are actually doing is ensuring they will be less wealthy than if we invested now in infrastructure, education and decarbonisation. I don’t think they will thank us for that, so we need to invest for the future  now to ensure they will be better off than we are today. In Mr Clegg’s words, “we owe it to our youngsters”.

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“Of Course the Government Can Create Jobs!”

This is the title of John T Harvey’s latest post over at his Forbes blog. This is an issue over in the States at the moment, but over here in Britain we have also had it drummed into us that economic recovery can only be private sector led, and the Government’s only role in reducing unemployment should be to prepare the unemployed for work (of course, even this function has been sub-contracted to the private sector through the Work Programme). Not only can the government create jobs, that is exactly what it should do, and I gave details of a potential policy here that would do just that.

This is another one of those ideas that should be common sense, but sadly isn’t. Here a couple of extracts from John’s post, but please read the whole thing. :

“A recurring theme in the Presidential Debates has been the role of the government in the economy. There are obviously many complex issues involved and a number of tradeoffs and caveats exist with any policy. That said, however, the assertion that the government cannot create jobs is ridiculous. It is a function of a biased definition of “job” designed to decide the question even before it has been asked.”

And regarding the idea that all public sector jobs exist because of tax appropriated from the private sector:

“Not only do your taxes go to pay the salary of the fireman, but, when he spends it, his salary contributes to your wages. So who is supporting whom–is the government dependent on taxation of private sector salaries, or are private sector salaries dependent on sales to government institutions and employees? Obviously, they are largely interdependent and rely on the continuation of the flow between them. Largely, however, but not completely, for if one of the two can act with autonomy, it is the government. At the federal level, we can spend in deficit indefinitely and without fear of default (see It is Impossible for the US to Default), meaning that the government can spend even without tax revenue, and its spending can create private sector sales–and jobs.”

Governments Are Not Households

At the moment, Columbia Law School are holding a series of seminars on the theme of “Modern Money and Public Purpose”. You can go to their website here or follow them on Twitter (@thepublicmoney). Through the magic of the internet, all the seminars will be able to be viewed online.

The latest in the series was entitled “Governments are not Households” and featured two prominent Modern Monetary Theorists, Warren Mosler (who has 40 years experience in the finance sector) and Stephanie Kelton (an academic economist at the University of Missouri, Kansas City). Both do a great job of explaining complex (and often counter-intuitive) concepts in easily understandable terms. In this video, they discuss the nature of modern money, government debt and deficits. There are two presentations followed by a very good Q & A session.

Further Reading:

The 7 Deadly Innocent Frauds by Warren Mosler

How to be a Deficit Owl

The current economic debate in this country is split between those we can call deficit ‘hawks’ versus those we can call deficit ‘doves’.

The hawks are the austerians who argue government deficits are too high, so we must cut expenditure fast. Government should get out of the way and let the private sector do what it does best. George Osborne and chums are definitely in this category.

The doves argue that the private sector is very weak at the moment, unemployment is high and so we must temporarily increase spending to stimulate the economy. They would agree with the hawks however, that generally, large deficits are bad and so we need a medium term strategy to get the deficit down. Paul Krugman is probably the most famous deficit dove, but over here, economists like Jonathan Portes fall into this category, and also maybe Ed Balls (although he often sounds like a hawk).

The problem for the doves is that their argument is easy to tear down with scaremongering about burdening our grandchildren and Greek-style bankruptcy. Because the doves agree these are medium to long term risks, the hawks win the day because they just use the analogy of government being like a household and having to spend within its means. Most people can relate to this, so while people don’t like austerity, many think there is no other way.

There is another type of deficit bird though – the deficit ‘owl’. The owls reject the idea that we need a medium term strategy for getting the deficit down, arguing that there is never a risk of government insolvency and that government is nothing like a household. In this discussion over at Huffington Post Live, Modern Monetary Theorist Stephanie Kelton (who I think coined the term ‘deficit owl’ and uses @deficitowl as her Twitter handle) discusses her frustration with progressives who argue from the deficit dove viewpoint, and why they will always lose the argument with conservatives. She uses the analogy of fiscal policy being like a thermostat. When the economy is too cold, the thermostat should be turned up; when it is too hot, turn it down.

Anyway, I think the Huff Post vid is a really great demonstration of the difference between the deficit dove viewpoint and the deficit owl view. Both are on the same side of the argument at the moment, but to me the owl position is much more convincing and also has the benefit of being true, while the dove position is a bit of a fudge. We need  more owls.

Bullshit Mountain, UK

The title of this post is an allusion to Jon Stewart’s recent debate with Bill O’Reilly (watch it here – it’s very entertaining). Stewart’s argument was that many Republicans dwell on “Bullshit Mountain”. Their view of the world is completely skewed and this prevents the nation’s problems from being solved, as complex issues are turned into simple (but false) choices. Many Tories also seem to live on Bullshit Mountain, and today was George Osborne’s turn to appeal to this demographic. This post will provide some commentary on Osborne’s speech and point out some of its logical flaws. I won’t deconstruct the whole speech, just pick out a few gems.

“The deficit is down by a quarter. There are one million more private sector jobs. The economy is healing.”

Three sentences, three misleading statements. When Osborne says the deficit is down by a quarter, he means the deficit in 2011/12 was a quarter less than in 2009/10. This is true, but what he doesn’t say is that the deficit for the first 5 months of 2012/13 is up on the first 5 months of 2011/12. So it is more accurate to say that the deficit is going up.

As for the million extra private sector jobs, that may be true, but Osborne doesn’t mention the half a million less public sector jobs, or that a significant number of these jobs have been part time or temporary. Or that there are still less jobs in the economy than before the beginning of 2008. Or that the employment rate is still significantly below its pre-crisis level.

Osborne says the economy is healing, but we are in recession. To many people that doesn’t feel like healing.

“Our country would have been all-but ungovernable if we had not been straight with the public before asking them to cast their vote.”

If they had really been straight with the public, our country would have been ungovernable – by the Conservative Party, because they would not have won enough seats in the election.

“We’re not going to get through this as a country if we set one group against another, if we divide, denounce and demonise.”

Let’s not forget he had spent the whole morning doing just that when talking about further cuts to welfare!

“Each one of my Budgets has increased taxes overall on the very richest.

And we’ve achieved that while getting rid of a cripplingly uncompetitive 50p rate that raised no money and cost jobs.”

If the first statement is true, it kind of undermines the second. If the 50p rate is so uncompetitive, so wealth destroying, why aren’t the other supposed tax hikes on the rich equally as damaging?

“But just as we should never balance the budget on the backs of the poor; So it’s an economic delusion to think you can balance it only on the wallets of the rich.”

This plays to two of the key beliefs of the residents of Bullshit Mountain. The first is that Government is like a giant household and should try to balance its budget at all times. This is nonsense. You only have to look at the Government’s budget outcome over the last 40 years to see this. A deficit is the natural state for the UK economy. This is a neutral fact. It is neither good nor bad.

The second belief is that if you hike taxes on the poor, they will work harder, but if you hike them on the rich, they will work less!

“Where is the fairness, we ask, for the shift-worker, leaving home in the dark hours of the early morning, who looks up at the closed blinds of their next door neighbour sleeping off a life on benefits?”

Ignoring the fact that they might be sleeping off the night shift they’ve just arrived home from, this plays up to another Bullshit Mountain belief – that there are millions of people living the Life of Riley off the backs of the hardworking ‘strivers’ out there. If only there would get off their arses and find a job, we wouldn’t be in this mess. The poor are to blame! This viewpoint demonstrates an inability to reason correctly. Are we really to believe that sometime in 2008, millions of people independently from each other suddenly decided to quit their jobs and sign on the dole. Of course not! The problem is a macroeconomic one of not enough jobs. Repeatedly beating the unemployed with a stick will not help them find jobs if no jobs are available.

“Some of the biggest issues in British politics, so big people thought them too controversial to fix, we have been prepared to tackle. A state that had become too expensive to pay for. Public sector pensions we couldn’t afford. People earning low incomes but still paying income tax. Business fleeing Britain because our taxes were too high. “

These are all pure Bullshit Mountain. A state that had become too expensive to pay for? What does he mean? We can afford any size state the people in our democracy decide we want. Public sector pensions are always affordable. Their size is a political decision. It has nothing to do with affordability. People earning low incomes are still paying income tax. Which businesses are fleeing because of excessive taxation? Certainly not ones whose loss we should mourn.

“They think that extra borrowing could pay for spending, or indeed tax cuts, in an attempt to put money in the pockets of consumers. But the extra borrowing would come at the cost of higher interest rates and everyone would know there would be higher taxes to pay for it, coming down the track. The higher interest rates would pick the very pockets of the working people you are trying to help and the fear of extra taxes would undermine their confidence.”

TINA is back! This is the only argument Osborne has left now. Even though the deficit is going up, because he is not doing it on purpose, the markets have confidence in him, but if he were to increase the deficit on purpose, they would turn against him. Not very convincing is it? Our low interest rates have nothing to do with austerity. They are low because we have our own currency so the markets know there is no default risk on UK bonds. Even if the markets did start to lose faith, they can’t hold us hostage. All the BoE need do is announce a target interest rate and commit to buying and bonds that go unsold at this rate. End of the problem of the markets.

“Now, as well as those critics saying we’re cutting too fast, there are those who say we’re cutting too slow.”

The only people saying that are those living at the very top of Bullshit Mountain. No serious person would say that.

“Our published plans already require us to find £16 billion of further savings. As I have said, the broadest shoulders will continue to bear the greatest burden.”

Apparently £10 billion is to be cut from the welfare budget. Not sure welfare recipient’s shoulders are all that broad.

“Nor am I going to introduce a new tax on people’s homes. It would be sold as a Mansion Tax. But once the tax inspector had his foot in the door you’d soon find most homes in the country labelled a “mansion”. Homes people have worked hard to afford and already paid taxes on. It’s not a Mansion Tax it’s a Homes Tax and this Party of home ownership will have no truck with it.”

What does Osborne think council tax is? All he need do is introduce a couple of extra council tax bands to ensure someone living in a £10m house doesn’t pay the same as someone in a £500k house.

“We have never argued that you stop what economists call the automatic stabilisers operating – the lower tax receipts and extra government payments that follow if, for example, the global economy turns down.”

What does he think welfare payments are? The are automatic stabilisers designed to prevent the economy from sinking into the abyss when it is hit by a shock like the financial crisis. He is already weakening them and is proposing to weaken them further. This will unsure the next crisis will be much worse.

Osborne finished his speech with some supply side bullshit. This is music to the ears of the residents of Bullshit Mountain. Business taxes are too high, regulations to tough, we want people to aspire blah blah blah. Osborne even thanked Adrian Beecroft for his piss-poor report! Our problems are absolutely not due to business taxes or regulation. These are ideological demands from people whose interests differ dramatically from the vast majority of the population.

So to end then, here are a few facts for the residents of Bullshit Mountain:

1. Government is nothing like a household. A balanced budget should never be a policy goal;

2. The reason the deficit is so high, is not because Government is recklessly spending too much, it’s because the private sector is not spending. So we can either tax the excess savings of those who are hoarding money, or we the Government can spend more. Those are the only two choices if we want a swift recovery.

3. The vast majority of benefit claimants are not out of work because they are lazy, or ‘scroungers’. They are out of work because there are not enough jobs. Repeat after me “We demand aggregate demand!”

4. Our business regulations and taxes are already some of the lowest in the developed world. Don’t believe me? Check out the stats for yourself on the OECD website. Cutting them further will not strengthen our economy. Quite the opposite. It will only speed up the transfer of resources from the bottom to the top, and hasten the arrival of the next crisis.

We should never pander to Bullshit Mountain, as Labour currently seem to be trying to do (Liam Byrne anyone?). If we could all agree on these four things, we can start to talk about actual solutions to the problems we face. I’ve outlined some approaches we could take here:

There’s No Money Left?

The Work Programme. Is this the best we can do?

“Why Government Should Not Be Run Like A Business”

John T Harvey has a new post up at his Forbes blog tackling the familiar trope that government is inefficient and should be run along the line of a business. One version of this argument heard over here goes that we need more MPs with business experience so they understand how a country should be run. Grant Shapps has deployed this argument recently when defending himself against accusations about his former business activities.

Anyway, I really like John’s blog. He writes for a US audience, but his POV is equally relevant over here. Read the whole thing, but here’s an extract:

…the general question still stands: does it make sense to run government like a business? The short answer is no. Bear in mind, first, that “efficiency” in the private sector means profit. Hence, to ask that the government be run like a business is tantamount to asking that the government turn a profit.

…the key issue is this: not everything that is profitable is of social value and not everything of social value is profitable. The proper role of government is the latter. Those arguing for a business model for government must necessarily be ready to shut down all government functions that do not earn a profit, regardless of their contribution to our well being. And, if the public sector is being run properly, that should mean every single one. If it’s profitable, they shouldn’t have been doing it in the first place. There is no need for the government to start a chain of hamburger stands, hardware stores, or coffee shops. Rather, they run child protective services, the National Park Service, and the Air Force. Profit is the realm of business, while unprofitable but socially useful tasks is the responsibility of government.

Labour’s Deficit Problem

You’ve probably 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. In 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.