Must Reads for Opponents of Austerity

Economics can seem a bit impenetrable to the lay person. Partly, it seems to me, this is deliberate on the part of economists to complicate the field – baffle with bullshit you might say. Accessible texts are difficult to come across; ones worth reading even more so. Economics and economic policy are too important to leave to the economists and politicians though, particularly since the dominant paradigm in economics has failed us so badly.

Whilst Eurozone countries are faced with a choice of austerity or default/Euro exit, there is no sound economic rationale for austerity in the major nations outside the Eurozone. High debt and deficits do not create an inherent risk of default, nor do they need mean higher taxes in the future, or place a burden on our grandchildren. These basic truths are emphasised by a branch of economics known as Modern Monetary Theory (MMT). There are a lot of passionate opponents of austerity on the left of the political spectrum, but I feel they don’t yet have the weapons necessary to argue effectively the case for an alternative. I think an understanding of MMT can provide a sound basis for making that case.

Here I just want to draw attention to two great primers on MMT. Both written by Warren Mosler, they are easily understood by the average reader although the ideas presented will seem counter intuitive at first. The first is called “Soft Currency Economics”. It can be read on Mosler’s website here. Here is an extract:

“The purpose of this work is to clearly demonstrate, through pure force of logic, that much of the public debate on many of today’s economic issues is invalid, often going so far as to confuse costs with benefits. This is not an effort to change the financial system. It is an effort to provide insight into the fiat monetary system, a very effective system that is currently in place. The validity of the current thinking about the federal budget deficit and the federal debt will be challenged in a way that supersedes both the hawks and the doves. Once we realize that the deficit can present no financial risk, it will be evident that spending programs should be evaluated on their real economic benefits, and weighed against their real economic costs. Similarly, a meaningful analysis of tax changes evaluates their impact on the economy, not the impact on the deficit.”

The second primer is called “The Seven Deadly Innocent Frauds of Economic Policy”. This can also be read for free via Mosler’s website here. Here are the ideas Mosler calls “innocent frauds”:

“1. The government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

2. With government deficits, we are leaving our debt burden to our children.

3. Government budget deficits take away savings

4. Social Security is broken.

5. The trade deficit is an unsustainable imbalance that takes away jobs and output.

6. We need savings to provide the funds for investment.

7. It’s a bad thing that higher deficits today mean higher taxes tomorrow.”

Mosler is an American, and writes for a US audience, but the arguments he presents are equally applicable to the UK (or Canada, Australia, Japan etc). Please read and let me know what you think.

Links

Soft Currency Economics

7 Deadly Innocent Frauds

Mosler’s Mandatory Readings

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.