Osborne’s ‘clever’ games should come back to bite him in the end

In a sane world, the news today that George Osborne’s wishes to enshrine in law a new ‘fiscal framework’ to ensure future governments only borrow in ‘exceptional circumstances’ would be greeted by laughter followed by the Chancellor’s immediate resignation for economic illiteracy.

Unfortunately, we do not live in a sane world. We live in a world where the idea that a governments finances are comparable to a households finances is a zombie that just won’t die. Many people – including many who should know better – will nod sagely at this news and think it’s a great idea.

This latest wheeze from Osborne is clearly designed to expose Labour’s perceived weakness on the economy (as if they could get any weaker). Faced with this, what should Labour do?

Their immediate reaction appears to brand it a ‘political stunt’, which is exactly what they’ve said every other time Osborne has tried one of these tricks. Labour haven’t said whether they will support this measure or not, but I think they should congratulate the Chancellor on his excellent idea and support it wholeheartedly. Then, when the mythical surplus proves illusory, they can batter Osborne with his own words. And if they ever do get back into power, they can just pretend they are sticking to the rule while doing the opposite. That’s pretty much what the Coalition did for 5 years, but hey, that’s just politics right?

There are a lot of reasons why Osborne’s surplus is not attainable for more than a year or two as Ann Pettifor sets out pretty clearly here:

“…

no matter how determined he may be, the Chancellor cannot eliminate the deficit – the balance between government income and expenditure.

While you and I can cut our overdrafts by cutting our spending, or by increasing our income – the all-mighty Chancellor cannot do the same. The public sector deficit is not dependent on his actions, or the government’s policies. It is dependent on economic activity in the economy as a whole. If the economic ‘cake’ (that is employment) shrinks, the government deficit will rise. As the ‘cake’ expands, the government deficit will fall.”

And for a longer explanation of the damaging effects of austerity, I can recommend todays Billy Blog.

2015 Budget Bullshit

I might be a bit jaded at the moment, but I don’t have anything interesting or insightful to say about today’s Budget, so instead I’d though I’d just make some snarky comments instead.

I hate the language of politicians. They dumb down, make false equivalencies, and use slogans that just don’t make any sense. George Osborne (or whoever writes his speeches) is no exception. Here are some bullshit phrases he used today that particularly annoyed me.

1. “Today, I report on a Britain that is growing, creating jobs and paying its way.”

Line one. Bad start. “Paying its way” doesn’t really mean anything in the context of a nation state does it?

2. “Britain is walking tall again.”

I’ve already seen this line parroted by assorted Tories several times. Please stop.

3. “Today we make that critical choice: we choose the future.”

Obviously been watching Trainspotting again. I suppose he thinks Labour would say “We chose not to choose the future; we chose something else.” He goes a mental for the next few lines doing the full PF Project track.

4. “Real Household Disposable Income per capita.”

Osborne wants to say that living standards are higher than they were 5 years ago. You would bloody well hope so, but the only way he can say this is to define living standards using the tortuous formulation above.

5. “We will also use this opportunity to lock in the historically low interest rates for the long term.

I can tell the House that we will increase the number of long-dated gilts that we sell.”

Maybe someone smarter than me can tell me why this is a good idea. If you can borrow short term at real rates close to zero, why would you borrow at higher rates over a longer period?

6. “Lower inflation means lower interest charges on government gilts.”

This sounds like bullshit. Perhaps someone could confirm?

7. “We’d be spending money we didn’t really have.”

The UK government never “doesn’t have money”. What is he talking about?

8. “The hard work and sacrifice of the British people has paid off.”

Well done British people!

9. “The sun is starting to shine – and we are fixing the roof.”

My old favourite, an analogy that has no relevance here.

10. “So the OBR report today that debt as a share of GDP falls from 80.4% in 2014-15; to 80.2% in the year 2015-16.”

I’d like to see the sums on this one. I reckon there’s some serious creative accounting going on (not that it matters in the slightest).

That’s only half the speech covered. I could go one, but I’ve kind of lost the will. There was a load of stuff about “rewarding savers”, which is generally a terrible idea for capitalist economies which rely on spending not saving, particularly when the government plans to continue to tighten it’s belt. We can’t all do so at the same time! Any way, a lot to hate in Osborne’s speech. 50 more days or so and it will all be over.

How well do people understand the term ‘government deficit’?

Here’s an interesting poll finding from Yougov this week. They asked people the question “How well would you say you understand what people mean when they talk about the government’s deficit?” In answer, 69% said they had a very clear or fairly clear understanding. Not bad then. It’s talked about every day by politicians, so it’s good people understand what it means.

Not so fast though. Yougov followed up by asking “Which of the following do you think best describes the government’s deficit?” The majority (51%) thought “The total amount of money the government has borrowed” rather than the more correct description (“The amount of extra money that the government borrows each year”), which was only picked by 31%. 2% even answered “The total amount of money that everyone in the country has
collectively borrowed on overdrafts and credit cards.” Oh dear.

This is probably good news for the Tories. They can run around saying they have halved the deficit and most people will associated that with lower government debt (which people in turn tend to equate with their own household debt, where more=bad). It’s also bad news for people like me who want to try to explain to people that government deficits might not be an altogether bad thing, and that our government debt is not an issue that should supersede all others. It will also make me more skeptical about any future headlines generated from polling data!

You can find the full tables by clicking on the link above, but here are the headline figures. Interestingly, Labour voters were less likely to say they had a clear understanding of what a government deficit was, but they were no more likely to pick the wrong answer than supporters of other parties.

What Cameron’s idea of “living within our means” actually means

Bill Mitchell’s blog post from today on David Cameron’s recent speech on the economy was a good one. Bill writes:

The Government then proposes the following nonsensical fiscal cut back over the next five years. Obviously, some genius in the Treasury (or OBR) has been told that they have to get a surplus by 2018-19 and then drew the spending cut line to meet that objective.

If that net public spending contraction was to happen given the state of the external sector and the already heavily indebted private domestic sector, then pigs would be flying or the economy would be pushed back into deep recession.

The problem is that if they really try to cut spending by that much and that quickly then the recession will come before the pigs take-off.

The House of Commons yesterday overwhelmingly voted to commit to achieve budget outcomes in this ballpark. Bill thinks pigs will fly before this is achieved! He goes on to take a look back at some OBR reports from 2011 (including this one) to have a look at what was being forecast for private debt at the same time as politicians were talking solemnly about the need to reduce debt as our responsibility to future generations. Bill says:

The following Table is taken from the OBRs Table 1 showed the forecasts for household assets and liabilities as a percentage of disposable income. The OBR says that “net worth is forecast to decline as a percentage of income as the household debt ratio is expected to rise and the household assets ratio is expected to fall”.

In other words, all the fuss about private and public debt levels and “dealing with our debts” in 2010 and 2011 was a smokescreen.

Its own growth strategy was always contingent on the private sector taking on a rising debt burden over the forecast period and becoming relatively poorer?

What the British government’s strategy amounted to was a deliberate plan to reduce public debt at the expense of more private debt.

Prudent fiscal management requires that exactly the opposite is the case when the economy is floundering – given current conventions about matching fiscal deficits with public debt issuance.

So which part of Britain is actually “living within its means”?

It’s a good question! In the event, household debt hasn’t (yet) gone up by as much as forecast because the government’s deficit hasn’t come down by anything like as much as was thought, but rising private debt is an absolute guarantee should politicians like George Osborne get their way. Here is the path the OBR are currently forecasting:

In other words, above the levels of the 2008 crisis. Bill ends on a rather depressing (but probably accurate) note:

It is clear what ground the British election will be fought on in the coming months. Economic myths, data denials and lots of well-crafted myths about money, debt and deficits.

The real problem is that the British Opposition will go along with it and claim it will conduct austerity better and more fairly and all the rest of the nonsense.

OBR doesn’t appear to understand the implications of its own forecasts

Head of the OBR, Robert Chote was questioned on the Autumn Statement by the Treasury Select Committee yesterday. The full transcript is here, but I don’t recommend it unless you are having trouble sleeping. I blogged last week about the OBR’s forecasts and what they imply about household debt, but this didn’t come up much at all yesterday. The only point at which it did was when Conservative MP Steve Baker asked:

“Can I just tie some of this into what we heard yesterday from some of the economists from the City who came in? I had an exchange with them about this notion that savings are being run down and that consumer credit is coming forward, and we agreed that this is demand being brought forward. So if demand is being brought forward today, through the rundown of savings and the taking up of consumer credit, wouldn’t we expect a reduction of demand in the future and wouldn’t this lead us into a further boom/bust cycle, even within the context of how you think about demand?”

So Baker is saying consumers are spending money today, not because of rising incomes but because they are spending their savings or borrowing for consumption. He asks how long this can continue. Here is Robert Chote’s reply:

“Certainly if you look at the relatively robust pace of growth over recent quarters, that has been reflected particularly in terms of the contribution from the consumer of people running down savings rather than having stronger income growth. We have assumed that it is not plausible, and I think if you look at the last year the real consumption growth has been running further ahead of real wage growth than in almost any other year over the last 15 or 20 or so. Therefore, in our forecast, the main reason we expect the quarterly pace of growth to slow into next year is that you see consumer spending moving more into line with income growth and being less driven by the sort of decline in saving you are talking about.”

So Chote is  saying the potential for the trend of consumer spending being supported by running down savings and consumer debt continuing is not plausible, but that they expect wages to pick up which will ensure spending growth continues (albeit at a slower rate). The thing is though, as I outlined in the two posts linked to above, in order for the deficit to be eliminated over the next 4 or five years, that’s exactly what the OBR are forecasting needs to happen. Household debt needs to rise and consumers need to spend more than income on an unprecedented scale. So either Chote doesn’t understand the implications of his own forecasts, or it’s his way of saying they are just ‘not plausible’. It’s a shame none of the MPs present pushed him more on this.

Tory Minister Sajid Javid plucks some numbers out of his arse

From the Telegraph:

Labour’s “basic instinct” is to spend money and their economic policies will leave Britain £500 billion worse off, a Cabinet minister will say today.

Sajid Javid, the Culture Secretary, will say that labour MPs believe that spending money is a “mark of success” and they are “simply not comfortable” with austerity measures.

He said that according to a Treasury analysis, under Labour the Britain’s debt will be the equivalent of two thirds of national income in 2035. Under the Conservative approach, it will be a third of GDP.

There’s a lot wrong with this idea. Apart the fact that Labour haven’t produced any spending plans yet, and when they do they’re unlikely to be much different from the Tories, where does he get £500m from? And what does ‘worse off’ mean in this context.

His time scale is over the next 20 years. ‘Worse off’ to me would be that either national income in 2035 would be £500bn lower than it would otherwise be, or that the cumulative shortfalls in national income over the next 20 years under a Labour Government would add up to £500bn. It’s already a nonsense because for a start, the electoral cycle is only 5 years, and if Labour were to win in 2015 and stay in power for 20 years (highly unlikely) wouldn’t that be an indication they were doing something right?

Javed is not even talking about national income though with his £500bn figure. He’s talking about government debt. He’s saying that a Tory government would get the Debt/GDP ratio down to 33% by 2035, while Labour would only get it down to 66%, which it money terms would be £500bn. There’s a couple of crap assumptions here. The main one is that more government debt is worse than less government debt. This is false. Indeed the opposite may be true.

All government debt is someone else’s savings. Hence more government debt means more savings and vice versa. So whether a low Debt/GDP ratio is better than a higher ones depends entirely on how that outcome has been achieved. You could have a fast growing, dynamic economy with a high level of government debt, and equally you could have a slow growing economy with a very low debt/GDP ratio, and vice versa. For example, consider these two scenarios:

1. National income is £1 trillion. Government debt is £333bn.

2. National income is £1.5 trillion. Government debt is £1 trillion.

Which is ‘worse off’. Sajid Javid would say we are worse off in scenario 2 because government debt is higher. Any reasonable person though would conclude that we are clearly much better off in scenario 2. Indeed £500bn better off!

For claiming that a 66% Debt/GDP ratio vs a 33% debt/GDP ratio means we are £500bn worse off, Sajid Javid deserves to be laughed at. He’s apparently going to say all this in a speech today, and people will no doubt nod along sagely at his intelligent analysis. The world’s gone mad!

Government debt is not a burden on future generations

The Guardian have an article today about an index that purports to measure intergenerational fairness:

“Young people face a steeper climb to achieve the lifestyle of today’s baby boomer generation, according to an index measuring intergenerational fairness which recorded a rise from last year.

 

The declining affordability of housing for the under-30s accounted for the increase alongside a rise in government debt, which future generations must pay.”

 

In response, economist Bill Mitchell has written a great blog questioning some of the indicators used to build the index, in particular the government debt measure, which Mitchell argues in no way places a burden on future generations. The blog is excellent but a little long, so I thought I’d just quote some choice sections here:

“…the inclusion of public debt and unfunded pension liabilities for government workers in the index are based on a misunderstanding of what actually will burden the future generation.

 

The fact is that the current government has as much ‘money’ now as it had yesterday and the same amount it will have tomorrow. That is, it has whatever it wants to spend. It always has that. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there had have been deficits in the past.

 

The implication of the IF Index components is that fiscal surpluses provide more spending capacity in the future or lower tax rates. That is plain false.

 

Every generation chooses its own tax rates. That is, the mix of public and private sector involvement in the economy is a political choice. If the future generations want more private and less public they will choose lower tax rates etc.

 

Currency-issuing governments do not draw down on the savings provided by the previous government’s surpluses. It is a nonsensical notion thinking that a sovereign government would ‘save’ in its own currency.”

 

He goes on:

“The idea that borrowing ‘takes money from the pockets of future taxpayers’ is nonsensical. The funds to pay for the bonds originate in the government net spending in the first place.

 

Clearly, deficits now are in part helping the current generation with income transfers and the like. But they also facilitate public education, public health and other infrastructure which provide massive benefits into the future for the current generation and their children.

 

Once you understand that then the idea that there is a future burden will make you laugh.”

 

And on the idea that we’ll all have to be taxed more in the future to pay back today’s debts:

“There has never been an empirical relationship shown between tax level changes and debt level changes lagged however many years you like. The notion is ridiculous.

 

I have never been asked to pay back the public debt that was accumulated as non-government wealth by my parent’s generation. But I sure benefited from the public infrastructure that the continuous fiscal deficits allowed the government to provide.

 

If you want to provide for the future generation then the things that will matter are education, employment and public infrastructure. All three are investments in the future. On all three, the previous government failed dramatically.

 

The best thing this government can do to prevent entrenched disadvantaged among our youth is to ensure they have work now or are in education and training programs.”

 

So the next time you hear someone argue government debt is placing a burden on our children’s future, you’ll know they’re talking nonsense!

 

 

Another reason Labour don’t deserve your vote

From The Guardian:

“In a speech intended to address Tory claims that Labour cannot be trusted with the economy, the Labour leader will stress that balancing the books will be a key element of the party’s plans for the five years after 2015.”

The article goes on to quote extracts of Miliband’s speech which contains this passage:

“You and I know we won’t have the money. For all of the cuts, for all of the pain under this government, Britain still has a deficit to deal with and a debt to pay down. That’s why our programme starts with a binding commitment to balancing the books in the next government.”

You might ‘know’ that Ed, but I and an increasing number of people know that is bullshit. There is always as much money as is needed. That’s not to say Labour should go mad, but the money will never run out. It’s stuff – people, physical resources and our ability to innovate and create new technologies – which sets the bounds of the possible, never money.

Britain has a deficit, but the things it has to ‘deal with’ are its unemployment problem, its low wage problem, its housing problem. Miliband’s focus on things that are irrelevant, but which undermine attempts to deal with things are relevant, doesn’t inspire a lot of confidence in what a Labour Government under his leadership could achieve.

The Tories deserve to lose next year and the Lib Dems deserve to be wiped out, it’s just that Labour don’t deserve to win. Expect low turnout records to be broken again next May!

The Basics of Modern Monetary Theory

I haven’t done a post specifically about Modern Monetary Theory (MMT) for a while now, although that is the perspective from which I approach a lot of the issues I blog about. With that in mind, I thought I’d go back to basics and write a beginner’s guide to MMT as I see it. Any errors that follow will be mine alone. Please let me know if you spot one!

What is MMT? Modern Monetary Theory (MMT) is a branch of the heterodox Post Keynesian school of economics. At a basic level it is comprised of the following ideas:

1. Taxes drive money;
2. Taxes and borrowing don’t pay for government spending;
3. Countries like the UK cannot go bust;
4. Functional finance;
5. Sectoral balances;
6. Endogenous money;
7. Governments should pursue full employment;
8. Focus on real resources, not money.

So what do all these things means? In turn then:

1. Taxes drive money In theory, anyone can start their own currency. You or I could just print up some notes in our garage.  The trick though is getting it accepted. MMT posits that in order for governments to get its citizens to accept and use their currency, it is sufficient for them to impose a tax in that currency. Provided they are able to enforce the payment of the tax, people will be willing to work for payment in that currency in order to pay the tax. So the necessity to pay the tax in the government’s currency drives demand for that currency and ensures it has a value.

Further reading:

MMP Blog #8: Taxes Drive Money

Tax-driven Money: Additional Evidence from the History of Thought, Economic History, and Economic Policy

2. Taxes and borrowing don’t pay for government spending While governments do need to tax, MMT says that they do not do it to pay for their spending. Indeed, MMTers argue that government spending must come first. How can anyone pay a tax denominated in the government’s currency unless the government first spends it into the economy? So what are taxes for? We have already seen one function of tax in point 1. Taxes drive the nations currency. They also act to ‘make room’ for the governments spending, preventing that spending from generating inflation. Progressive taxes are also used for re distributive purposes to help a government meet it social aims, and taxes can also be effective to incentivise or disincentivise certain behaviours (e.g. smoking, drinking, polluting). But what about government borrowing? At the moment, if the amount of tax collected is less than the amount a government spends, it ‘borrows’ the rest by issuing government bonds. The amount it borrows is repaid with interest. MMT though, argues that similar to taxation, this borrowing is not undertaken to finance its spending, but to maintain its target interest rate. Under current arrangements, if a government didn’t match its spending to taxes plus borrowing, this would create excess reserves in the banking system, and this would drive overnight interest rates down to zero. Government borrowing also acts as a risk-free source of savings to the private sector, including pension funds.

Further reading:

Taxes for revenue are obsolete

Government bonds and interest rate maintenance

3. Countries like the UK cannot go bust In the run up to the 2010 UK General Election, it was said loudly and often that the UK was on the brink of bankruptcy, about the go the same way as Greece. We had run out of money. MMT says this is nonsense. Governments like the UK who issue their own currency cannot go bust, in the sense that they cannot run out of money. In this sense the UK differs from the Eurozone countries, who, since joining the Euro, no longer issue their own currencies. They are now currency users. This point is often missed when discussing government debts. The usual story is that when ‘the markets’ see government debts rising, they start to worry about how the debt will be repaid and so demand higher rates of interest before they will lend more. This happened in some of the Eurozone counties before the European Central Bank stepped in to stabilise the markets for these countries debt. Countries like the UK though have central banks that can always intervene if interest rates start to rise, so the risk of an interest rate spike here is low to non-existent. Interest rates on government debt are a policy choice for the currency-issuing government. To maintain the maximum flexibility over an economy, MMT recommends countries maintain their own free floating currency, and to only borrow in that currency.

Further reading:

There is no solvency issue for a sovereign government

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

4. Functional Finance Functional finance is an approach to fiscal policy adopted by MMTers but first espoused by economist Abba Lerner. Functional finance has three rules:

1. The government shall maintain a reasonable level of demand at all times. If there is too little spending and, thus, excessive unemployment, the government shall reduce taxes or increase its own spending. If there is too much spending, the government shall prevent inflation by reducing its own expenditures or by increasing taxes.
2. By borrowing money when it wishes to raise the rate of interest and by lending money or repaying debt when it wishes to lower the rate of interest, the government shall maintain that rate of interest that induces the optimum amount of investment.
3. If either of the first two rules conflicts with principles of ‘sound finance’ or of balancing the budget, or of limiting the national debt, so much the worse for these principles. The government press shall print any money that may be needed to carry out rules 1 and 2.

Further reading:

Functional Finance

Functional finance and modern monetary theory

5. Sectoral balances Sectoral balances is an approach to viewing the financial makeup of the macro economy, popularised by economist Wynne Godley. It helps not to view things like the government deficit in isolation, but rather to see it in the context of what’s happening elsewhere in the economy. In the three sector version of Godley’s sectoral balances: Government balance = Private sector balance – Foreign sector balance If we apply this to the UK, we see a government deficit of 6%, a private sector balance (private sector sayings  – private sector investment) of 2% and a foreign balance (exports – imports) of -4%. MMTers argue that the natural state for the private sector is surplus, so for countries with trade deficits, a government deficit will also be the norm. If the government tries to reduce or eliminate its deficit, it will only succeed if the private sector is willing to reduce or eliminate its surplus.

Further reading:

What Happens When the Government Tightens its Belt?

UK Sectoral Balances and Private Debt Levels

6. Endogenous Money Endogenous money is the idea that rather than the central bank determining the amount of money in the economy – exogenously, the amount of money is instead determined by the supply and demand of loans. In shorthand, MMTers (and Post Keynesians in general) would say, “Loans create deposits”. That is to say that banks create money by extending loans to customers, while at the same time creating a corresponding deposit. This runs contrary to what is generally taught to students of economics – that savings are loaned out with banks acting purely as intermediaries, or at best leveraging an initial injection of government money by a predetermined ratio.

Further reading:

The Endogenous Money Approach

Money creation in the modern economy

7. Governments should pursue full employment In the post war period up until the early 70s, Western governments were committed to the principle of full employment, and largely achieved this, with the unemployment rate averaging around 3% in the UK throughout that period. The Conservatives famous “Labour Isn’t Working” campaign poster of 1979 was powerful because unemployment had reached previously unthinkable levels of 1 million. Today, the Government start high-fiving each other when unemployment falls below 2.5 million. MMTers argue that achieving full employment again is very much a realistic and achievable goal, but it means abandoning modern notions that “governments don’t create jobs”, and accepting that capitalism left to its own devices will never employ all those willing and able to work. A key tenet of MMT is that governments should act as the ’employer of last resort’, offering work to all those who are willing and able to work, but unable to find a job.

Further reading:

The Job Guarantee: A Government Plan for Full Employment

The job guarantee is a vehicle for progressive change

8. Focus on real resources, not money While politicians tell us there is no money left, millions are without sufficient work and resources lie idle. MMT argues that we should focus on these real things – people and resources – rather than money which is just a tool for putting those people and resources to work. Governments can and should spend money into the economy when the private sector cannot or will not to maximise the potential output of the economy.

Further reading:

Modern Monetary Theory: The Last Progressive Left Standing

Scottish Independence – A Modern Money Analyisis

Those are some of the basics of MMT then, not that I can capture it all in 1,500 words. For more reading, try some of the links on my blogroll.

High government debt doesn’t lead to high interest rates

At some point I seem to have got myself on the email distribution list for Tory Party spam, so I regularly get updates from the likes of Michael Green (Grant Shapps) and Mr Egg (Sajid Javed) about how wonderfully the current government are doing. A phrase they often include is “tackling the deficit to keep interest rates low”. This repeats the widely held belief that once government debt gets too high, the interest rate ‘the markets” demand to lend more money to the government will start to rise, at which point debt interest payments will get out of control and BAD THINGS WILL HAPPEN. Thank god for the coalition eh?

Today I came across these helpful charts presented by Paul Krugman in a recent conference paper which help us examine this assertion more closely (I found them in this post, which makes the same points I make here).

In this chart, each dot is a country. The debt-GDP ratio is on the bottom access, and the interest they pay on 10-year debt is on the left-hand axis. Broadly speaking, there seems to be a clear positive relationship between higher debt and higher interest rates. The dot on the far right is Japan, which doesn’t fit the pattern, but they must be a special case right? Maybe Green/Shapps and Mr Egg are right then?

Hang on though. This chart is the same, but Krugman has distinguished between Euro and Noneuro countries. The relationship between high debt and high interest rates for the Noneuro countries (like the UK) has disappeared. So what can we conclude:

1. High government debt does not lead to high interest rates if you have your own currency. Tories and Lib Dems are talking rubbish when they say “tackling the deficit to keep interest rates low”.

2. If we don’t need to fear high government debt, austerity is an even more horrendous policy

2. Don’t join the Euro. Ever. That means you too Scotland.