Forgotten (or ignored) wisdom

We seem to have forgotten (or ignore) so much of what we should already know. Here’s former Chairman of the US Federal Reserve Marriner Eccles talking about the false equivalence of household and government debt in 1938 (p5)*:

“Isn’t it about time that we learned this simple truth? Is it so hard to understand that when an individual owes money he generally owes it to another individual, but when a nation owes money it owes it to itself? When an individual pays a debt, he pays it to someone else. When a nation pays a debt, it pays it to its own people. Now, this doesn’t mean that a nation can go on and on piling up debt or that any amount of expenditure and taxation is justified. The point is that we get into wholly misleading con­ceptions if we make the old mistake of confusing the matter of in­dividual solvency with the solvency of the nation as a whole. The individual solvency depends upon continued income and living within that income. The nation’s solvency depends upon the productiveness of all of its people. The individual cannot create money. The gov­ernment can and must as one of its fundamental sovereign functions. Its primary responsibility is to create an adequate supply of that money for the purpose of aiding production. The individual cannot increase his income by taxation. The Government can. In fact, it seems superfluous to pursue further the point that there is no com­parability between the case of an individual and the case of a Gov­ernment.”

And about the way we are mislead about the dangers of government debt (p7):

“I think it is unfortunate to say the least to have public attention misled into becoming alarmed over the wrong things. I very much regret that responsible leaders, however conscientiously, nevertheless mistakenly create public alarm over the solvency of the nation or the soundness of its credit, This is just what they do
when they call attention to one set of facts or figures without show­ing their relationship to other facts and figures. Isn’t it up to us to keep our eyes on the important things? And what seems to me to be vitally important is that the Government shall do all it can both to create an adequate supply of funds and then to facilitate the flow of funds throughout our economy in the most productive way possible— that is, productive of real wealth. That is what, as I see it, the Govern­ment has been attempting to do, often clumsily, awkwardly and in­effectively. I do not suppose anyone has been more critical openly than I have about policies or expenditures that seemed to me to be unproductive or that seemed to me to interfere with production. The point I want to make here is that I do not think it is realistic, or that it helps us to solve the problems before us today, or that it contributes to saving our system or our democracy to work ourselves up into a frenzy over deficits or increases in the debt while at the same time failing to take account of the enormous gains that have been made [In terms of growth of national wealth].”

All the things we hear today about the dangers of debt and deficits have been thoroughly debated and debunked a long time ago, and yet politicians continue to return to these themes when it suits their political purpose. We should be able to see through them by now.

*Thanks to this blog by Bill Mitchell for drawing my attention to Eccles’ speech. Do read the whole thing.

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Warren Mosler on Modern Monetary Theory

Thought I’d share this video of Warren Mosler being interviewed by Marshall Auerback on Modern Monetary Theory. If you don’t know who Warren Mosler is, you should! Warren discusses (among other things) the government’s role as issuer of the currency, the meaning of deficits and the job guarantee. He is great at simplifying economic concepts although what he says goes against everything we usually hear about the economy. Mosler is talking about the US, but in the UK, the system is much the same. Give it a watch.

Benefit Cap Bullshit

Iain Duncan Smith got himself into bother a while back when he claimed DWP research showed that as a result of the benefit cap being announced, 8,000 people who would be affected by it have found work. The UK Statistics Authority disagreed however saying the claim “is unsupported by the official statistics…“. When finally challenged about this on the Today programme this morning, this exchange followed (JH is John Humphrys):

JH: “The problem is that you made claims about how things were changing on the basis of the trials that were being carried out and all the rest of it, and they turned out not to be well-founded. You said we’ve seen already, already you said, this is a statement you made in May, already we’ve seen 8,000 people who would have been affected by the cap move into jobs. But when the National Statistics Authority looked at that, they said ‘not true’.”

IDS: “No, what they said was that you can’t absolutely prove that those two things are connected.”

JH: “Your statement is unsupported by the official statistics published by your own department.”

IDS: “Yes but by the way, you can’t disprove what I said either. The reality is [interruption] no, no, no, let me finish. There’s an answer.”

JH: “You can make any claim on that basis.”

IDS: “I am, I believe that this to be right. I believe that we are already seeing people go back to work, who were not going to go back to work until they were assured of the cap. Look we just published some polling today, John, on this very group.”

JH: “Polling isn’t statistics.”

IDS: “Hold on let me just give you this. We polled and we found that something like 72% of those who report have been very infrequently in work in the past since being notified by the cap have gone back to work. I believe that this will show, as we go forward, that people who were not seeking work are now seeking work because that’s the way to avoid the cap.”

So first IDS says don’t worry about the evidence, because he believes it’s true, but then cites new research which he claims also supports his assertions. Does it though? Here is the report IDS cited this morning. Ipsos Mori undertook telephone interviews with 500 of the 8,000 people who had found work since the announcement of the benefit cap to try to show that people had been motivated by the cap to find work.

The problem is that they did not find that. Remember, IDS originally tried to claim that all 8,000 had moved into work because of the benefit cap. The survey found though that 15% of them hadn’t even heard of the benefit cap, and another 31% only knew a little about it. Only 57% remembered being informed that the cap would affect them, and of these, 71% were already looking for work.

About half of those who remembered getting a letter about the cap took action afterwards. For 31%, this meant looking for work (although half of these were already looking). This means of the 500 surveyed, only around 45 people started looking for work because of the cap that weren’t doing so before. 45!!

Looking at the results then, and if we assume the survey was representative of all 8,000 people, far from being able to say all 8,000 found work as a direct result of the cap, the best that can be said in reality is that about 720 people started looking for work and found it after hearing of the cap that weren’t looking before. Not a particularly impressive behavioral change. On IDS once again, we must call BULLSHIT!

‘There is no credible theory that relates starvation with an increased capacity to gain employment’

In the US a number of states have started to cut unemployment benefit even while unemployment remains high, and here in the UK, George Osborne thinks it is a good idea to lengthen the time newly unemployed people must wait before claiming benefits. At the same time, Jobcentre Plus will start hauling in about 50% of job seekers for weekly interviews. Many people suspect this is designed to find more excuses to sanction claimants and strip them of their benefits. This seems to rest on the theory that if the unemployed cannot rely on the state for subsistence levels of support, they will be more motivated to find work. As an antidote to that viewpoint, here’s an extract from a blog by Professor Bill Mitchell discussing the situation in the US. It equally applies here:

“…there is no credible theory that relates starvation with an increased capacity to gain employment when the economy is some millions of jobs short of the level necessary to provide work for all those who desire it.

Forget the smallest margin of unemployed who do not want to work. They are of a second-order of smallness that doesn’t warrant attention. The overwhelming majority (comprising millions of citizens) want to work but cannot find work because it is not to be found.

Why not? Because there is a lack of spending in the economy. Firms create employment in response to demand for their products. They might be confronted by millions of desperately hungry workers who have just had their benefits cut but they still won’t put them on because there is insufficient demand to justify expanding production.”