The bad economics of ‘top Labour figure’ would keep Tories in power

The Guardian reported comments made by current Shadow Chancellor Chris Leslie today in an article headlined “Corbyn’s economic strategy would keep Tories in power, top Labour figure says”. To me it says much more about the Labour right than anything Corbyn has come up with. It’s the mode of thinking Leslie expresses that will really keep the Tories in power. If Corbyn does win, he needs to make a clean break from the sloppy thinking set out in the Guardian’s article.

The current view on the economy in the Labour Party is identical to to that expressed by the Conservatives (but completely at odds with what most sensible economists would advocate). That is to say they think is the government’s deficit gets too high, and the total stock of debt gets too high, ‘the markets’ will start to doubt the government will be able to repay their debts and interest rates will rise, which will mean the government actually can’t repay its debts and may have to default, leading to economic ‘chaos’. To mitigate this risk, the government needs to cut spending/raise taxes to try and reduce its deficit in order to get the public finances back on a sustainable track.

It’s not clear at all to me that the Conservatives actually believe this argument, but that’s the one they have been endlessly repeating and which Labour apparently agree with. The trouble is though, if you accept this argument as true, Labour’s calls for ‘fairer cuts’ looks incredibly weak and makes it easy to attack. I don’t see how Labour can win with this argument, but the media and the Westminster establishment seem to think it’s an absolute must. I got an email from the Liz Kendall team today giving me a long list of nice sounding ideas (with no detail) about her ‘vision’ for the country, but while maintaining this wrong model of how the economy works, she and others in the Labour Party can argue for nothing more than that they will be better managers that the Conservatives. If you buy the argument on deficits and nobody is disputing that version of reality, surely you would just vote Tory?

The current view however, is nonsense. The economy just doesn’t work like that. The government always has as much money as it needs. High deficits don’t lead to higher rates, and there is no chance the UK would ever default on its debts. What we need is someone who gets this and doesn’t let bad economics prevent them for arguing for what needs to be done. Can Corbyn be that person?

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Cameron channels Thatcher to remind us what the Conservatives really stand for

“Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay – that ‘someone else’ is you. There is no such thing as public money; there is only taxpayers’ money.”

Margaret Thatcher, Speech to Conservative Party Conference, 1983

I was six months old when Thatcher gave this speech. It was nonsense then and it is still nonsense now. That hasn’t stopped David Cameron from channeling the spirit of his hero in a speech given on the campaign trail today saying:

We know that there is no such thing as public money – there is only taxpayers’ money. And we know how we’d rather see it spent: Not on bureaucracy or bloat or the latest crackpot Government scheme but on you, your family – your future.

“Quite simply, it’s your money – you earned it. And we believe it’s people – not politicians – who know best how to spend their own money. And that’s what today is all about.”

The wording is remarkably similar to Thatcher’s phrasing in ’83. I doubt it’s a coincidence. The truth though is 180 degrees from Thatcher and Cameron’s assertions. “taxpayer’s money” is an ideological term used to set the bias towards lower spending and lower taxation. That’s a perfectly defensible argument to make, but the likes of Cameron make it so dishonestly. How far does he want to take this “you know how to spend money best” line? Health care? Schooling? That’s the logical conclusion.

We could just as easily turn the phrase around though and say “there is no such thing as taxpayer’s money – there is only public money”. The UK government is the issuer of pounds. They don’t come from anywhere else, so in order for us to have money to pay our taxes, government must spend the money into the economy first, and it must generally spend more than it taxes back in order for the supply of money to increase sustainably.

Now I don’t think Cameron wants to shrink the size of government to nothing (I don’t think he really believes in anything really), but this section of his speech shows a willingness to gently lie to people in order to push policies which seem to benefit all, but are really squarely aimed at benefiting those at the top. Those at the top can afford the best of everything. They don’t need public services. Everyone else though doesn’t have that luxury though, which is why pooling our resources makes sense in so many areas. Cameron also talked about the “immorality” of government spending, but providing useful public services is not immoral, it’s just common sense!

MMTers: Does Adair Turner have a point?

There’s quite an interesting interview with Lord Adair Turner published here. This bit in particular caught my eye:

“I think the crucial thing, the crucial question you need to answer when you accept that we can do fiat money creation is how to discipline and I’m going to address this subject in a lecture in Germany in February, because some of my very senior German friends have said to me, “Adair, you’re absolutely technically right that this is possible”, but, without quite putting it this way, they say, “we mustn’t tell the people!” Because if the people know, and if the backbenches of Parliament as well as the small elite technocrats know that this is possible, people want to do it – not to the extent of 2% of GDP or not just when we’re in a crisis – they’ll want to do it to the extent of 10% of GDP every single year because the Chancellor of the Exchequer will know that he can always create some fiat money so the head of the Department of Health will come through and say, “so why don’t I have some of this?”

“So, we have to find…the way I think about what we did with fiat money creation…it’s like medicine which, taken in small amounts, is good for us but taken in large amounts is toxic and fatal and, essentially, we’ve decided that it’s so dangerous that we’ll put it in the medicine cabinet, lock the door and throw the key away. And for most time, throwing away that key hasn’t harmed us too much because there were other things that were so great in the economy but I think we are now in an environment where throwing away the key has harmed us. If we take it out of the medicine cabinet, we’ve got to have a believable set of political economy processes. And I think that’s the challenge to the Occupy movement and people on the radical left: how would you place it in a discipline. Now here’s one way I might place it in a discipline, say we can do it within the framework of an independent central bank: you could have a thing that says the Treasury can have an element of an unfunded deficit or it can write off some of the existing debt owned by the central bank but only with the approval of the Monetary Policy Committee of the central bank in the pursuit of a 2% inflation mandate. They can agree this amount in order to make sure at least that you hit the 2% inflation target but they have control of it. In some way or another you’ve got to place limits on it because central banks independence and rules on non-monetising, they’re like those commitment devices that people who are trying to give up smoking, or diets. On one level, it’s completely arbitrary to say you’re not allowed another chocolate until 4 o’clock in the afternoon rather than 3:59 but you have to do these rules because otherwise you won’t stick to it”.

A point pushed by Positive Money people is that a committee of clever people should decide how much new money to create rather than leaving it to private banks. The passage above seems to me to be quite a clear exposition of this idea. Others would argue that this is anti-democratic, and the decisions should be taken by elected politicians. So my question would be, does Lord Turner have a point?

alittleecon top 5 posts of 2014

It’s the end of the year, so time to embark on a self-indulgent look back at some of my top posts from 2014. Here’s the top 5 most-read:

1. A random CIF commenter nails it on Tory welfare lies

Note the slightly click-baity title. I basically just copied and pasted a comment from the Guardian’s website here, but it was my most-read post of the year. Go figure.

2. The Basics of Modern Monetary Theory

This was my beginner’s guide to MMT and it seemed to go down well. I am rather more proud of this one than the number 1 post on this list.

3. What does it mean to be fiscally responsible?

This was actually written in September 2013, but continues to get regular hits, due to it being high up the rankings on Google for some search term or another. “Fiscal responsibility” is a phrase that ain’t going away any time soon though.

4. Michael Meacher’s Speech on Benefit Sanctions

Michael Meacher MP made a good speech in the HoC about benefit sanctions. I shared it here.

5. BBC Economics Editor struggles with economics of public debt

This is from just a couple of weeks ago and is about Robert Peston having difficulty with stuff he should probably already be on top of.

Budget deficits are neither good nor bad

This is going to be a re-blog of a re-blog, which is a bit lazy of me, but I’m repeating it again because I think it’s rather pertinent at the moment, what with the talk about long term economic plans to generate budget surpluses and spending cuts and tax hikes supposedly totalling £50bn on the way. It’s so far removed from the usual debate about austerity, I try and repeat it as often as possible. Anyway, this is from an old Bill Mitchell blog (my favourite economist) and he’s writing about whether budget deficits or surpluses are good or bad (Bill’s Australian by the way if you didn’t already know):

The budget balance has no meaning as a standalone aggregate. What does a $A30 billion federal deficit mean? Nothing in itself. What does a deficit of 2 per cent of GDP mean? Only that the deficit is 2 per cent of current price GDP. Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends.

The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances.

There is nothing intrinsically good or bad about any specific budget outcome.

In response to the 1982 attempt by conservative politicians to pass a Balanced Budget Act in the US Congress, the revered macroeconomist Gardner Ackley said:

My own position on deficits has always been, and remains, that deficits, per se, are neither good nor bad. There are times when they are not only appropriate but even highly desirable, and there are times when they are inappropriate and dangerous. During a recession or a period of “stagflation”, deficits are nearly unavoidable, and are likely to be constructive rather than harmful.

This blog – A voice from the past – budget deficits are neither good nor bad – has more discussion about Gardner Ackley.

To add meaning to the discussion we have to relate the budget outcome to the circumstances in the economy rather than be side-tracked by some pre-conceived notion that some balance is desirable and another is not.

It is not the government’s role to run deficits or surpluses. We want governments to make policy choices that will maximise the potential of the people to enjoy their lives and contribute the best they can, given their own circumstances to the well-being of society and the planet.

We might call this goal one of public purpose. An essential element of that goal, given current cultural morays in most nations, will be to ensure that everyone who wants to work has a job and for those that are unable to work, for whatever reason, have adequate income support so they are not alienated and socially-excluded.

That goal is constrained by the availability of real resources that the nation commands – labour, capital, land, etc – but not by the financial capacity of the currency-issuing government.

In most budgetary discussions, it is erroneously assumed that the national government has a financial constraint and has to budget like a household.

The analogy neo-liberals draw between household budgets and government budgets is false. Households use the currency and must finance their spending.

However, government issues the currency and must first spend (i.e. credit private bank accounts) before it can tax (i.e. debit bank accounts). The claim that governments must tax or borrow to ‘finance’ its spending is false under a fiat-currency system.

The Euro nations are an exception to this rule. They surrendered currency sovereignty, and thus have to borrow to cover deficits. This makes them dependent on bond markets (in lieu of European Central Bank support) and exposes them to solvency risk. The current Euro problem lies in the flawed design of its monetary system, which was a neo-liberal ploy to limit the capacity of these governments to borrow and spend.

The restrictions on government spending are the quantity of real goods and services available for sale in its own currency, including all the unemployed labour. Neo-liberal claims that bond markets limit government spending are false.

The fact is that the only constraint that a currency-issuing government, such as the Australian government faces, are how many real goods and services are available for sale in $A. When there is mass unemployment, for example, we can conclude that the government has no real constraint at that point in time and can bring those labour resources into productive use through higher spending.”

We don’t need to increase taxes to pay for better public services

It’s becoming quite fashionable at the moment to advocate raising existing taxes (or introducing new ones) specifically to ‘pay’ for increased investment in public services, particularly the NHS. A lot of people say they would be quite happy to pay a bit more tax if it meant we can invest what is needed to ensure a world class NHS. This comes on the back of years of talk about our ageing population creating new pressures on the NHS leading to a ‘funding crisis’. The thing is though, we can afford to invest in the NHS and we don’t need to increase taxes to pay for it.

Taxes don’t actually pay for government spending at all. In fact, government spending ensures we have the money to pay tax. The spending comes first. Richard Murphy explains this quite nicely in this blogpost, and I’ve tried to explain it myself here. Taxation has a number of purposes, but paying for public spending ain’t one of them (even though 99% of people think it does).

We will always have the money to pay for extra NHS spending, the question is whether we have the resources. An important part of any health service is obviously going to be the medical personnel, so if we need to increase capacity, the question is are there enough qualified people available to hire, or enough people willing to be trained to do the work? The cost of hiring an extra doctor or nurse, is not the salary cost, it’s the cost to the economy of that person not doing what they would be doing if they weren’t a doctor or nurse.

Similarly with medical facilities and equipment. There is always enough money to purchase those things, but the question is, is using them in the NHS more or less important than what they would otherwise be used for? I would argue that usually, the answer would be more.

I think by floating the idea of increasing taxes to pay for things like the NHS, it allows the fiction of taxes paying for spending to continue. If everything we might want to do to further public purpose is couched in terms of how it will be paid for, it gives the other side the advantage. It’s far better to talk in terms of real resources rather than money. As my fellow MMTer Neil Wilson is fond of saying, it’s time to get real!

Objections to the Job Guarantee

On Thursday I went to Sheffield to watch an excellent lecture on the Job Guarantee by economist L Randall Wray. It was a good chance to meet some Twitter friends in person for the first time and also to see in the flesh someone whose work I’ve been following for the last three years and whose ideas I’ve blogging about for the last two. Wray was talking about the key policy proposal of Modern Monetary Theory – the Job Guarantee. The Labour Party are proposing something called a Job Guarantee, but isn’t really worthy of the name, so I was interested in what the other people at the lecture thought of the idea when fully fleshed out. The people there were probably already pretty sympathetic to the idea, and most did seem positive, asking what other economists thought of it and whether businesses would object. I also wanted to see what people who may not have heard of the idea would think of the Job Guarantee when first exposed to it, so I canvassed for some views on Reddit. Here is what I posted:

…I would like to hear your opinions of an alternative policy, which would be a job guarantee scheme. What is a job guarantee? Here are the main features:

  • The government would offer a job to anyone willing and able to work.
  • The government would pay the wages, but it would be up to local communities to design the jobs
  • The jobs would be paid at a living wage
  • On the job training would be provided

What are your first thoughts/objections?

I got a modest number of responses which were along the lines of what I expected. These are a few of the responses:

Non jobs

If a government creates jobs they will be non jobs equivalent to digging holes and filling them back up again. This argument is often used, and is kind of a misunderstanding of Keynes who said:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.”

Source: Book 3, Chapter 10, Section 6 pg.129 “The General Theory..”

So Keynes was arguing that even paying people to perform useless tasks would be better than nothing, but something useful would be much more sensible. Similarly, even if all jobs created under a Job Guarantee were indeed non jobs, that would still be preferable to leaving people unemployed. But with clever job design though and a bit of imagination, we can do much better than that!

Too expensive

This argument is that it would be too expensive to create jobs to hire unemployed people, so it’s better to keep them on the dole and hope things pick up. But how much would it actually cost? At the moment there are around 2.1 million unemployed people. The living wage is around £7.65 an hour (higher in London, but I’ll use the lower figure here. So if we gave all the unemployed full time jobs (35 hours pw) paying the living wage this would cost:

2.1m x 7.65 x 35 (hours pw) x 52 (weeks per year) = £29.24bn. Wow, that’s a lot! But that’s only the gross cost. For the net cost, we need to deduct the cost of paying unemployment benefit (the number claiming unemployment benefit is only around half the total unemployed figure). This is:

1.01m (on JSA) x 72.4 (weekly JSA for someone over 25) x 52 (weeks per year) = £3.8bn

£29.24bn – £3.8bn = £25.44bn

There are some other costs not included about like management, administration and training costs, but there are other savings that may mean the final cost would be even lower because don’t forget, these 2 million now working will be paying income tax and national insurance. Not all will want to work full time, so the average hours worked per week on the Job Guarantee would be less than 35. You wouldn’t need to offer all 2 million a job though because as the newly employed spend their wages, this will create additional jobs in the private sector as sales increase.

Ignoring all that though and using the higher figure, for a net cost of £25bn, we could have a economy in which everyone who wants a job has one. This is about 1% of the UK’s GDP, or less than half our defence budget, or less than 20% of the welfare budget. When you look at that in context, it doesn’t seem that expensive at all. Don’t forget too, this £25bn is much higher than it would be in normal times. As the economy recovers, private businesses would be able to hire from the pool of job ready Job Guarantee workers, and the number of people in Job Guarantee jobs would shrink.

Training and education not subsidised jobs

This is what I would call the neo-liberal line. It says that unemployment mainly occurs because the unemployed do not have the right attitude or the right skills to get the jobs that are there for people who do have the right attitude and the right skills. Those who subscribe to this view argue that the role of government should be to train the unemployed to to find work. This is the strategy we have employed in the UK for at least the last 15 years. The problem is, it’s nonsense. If the jobs don’t exist, no amount of training will help every unemployed person into work. Some of them will always fail. It’s really rather cruel.

Jobs would need to be economically viable

I’m not quite sure what this means, but I think it’s the view that for something to be worth doing, it must make a profit, and that the private sector creates the wealth with which the public sector uses to provide public services. This is just not true though. Government should not be run like a business. The things it decides to fund should not rest on “economic viability”, but on whether the funding will improve the general welfare of the country.

Sounds like communism

Didn’t really get this one, but I suppose it’s a reaction to the government increasing its payroll by up to a couple of million more workers. The Job Guarantee though would only be the offer of a job. No one has to take up the offer. And rather than being communist, it’s actually pro-business in a lot of ways. Businesses often complain that the people they hire lack basic skills or the right work ethic. They view hiring the unemployed as often a risk not worth taking, so they should welcome a job ready pool of workers with recent work experience from which to hire. They just have to make the workers a better offer to the one they get in the Job Guarantee. A little competition in the labour market would be a good thing. The wages paid to Job Guarantee workers would also bolster the sales of private sector businesses.

I guess I can understand a lot of the knee-jerk reaction to the idea that the government should be prepared to give jobs to all the unemployed, but I hope the above has answered why I think these objections are ill-founded. Those who are unemployed and on benefits are already on the government’s payroll, it’s just that we are wasting their talents. Why not pay them a decent wage and get them engaged in useful work? Sounds like a win-win to me.

“What motivates people and leads them to high endeavor is not fear but hope”

I really like this blog from today by Bill Mitchell about what he calls the ‘unemployment industry’ and what we would call welfare to work. Talking about Australia, he says this industry’s productivity is practically zero. This resonates here too because we have a Work Programme whose results are worse than doing nothing. Bill draws up some great quotes from and about Arthur Altmeyer, one of the fathers of social security in the US.

I think it’s worth repeating them in full here because it will demonstrate how far we have come from the initial aims of social security, aims that over here were expressed by Beveridge. At an event in 1968 to mark the 33rd anniversary of the signing of the Social Security Act, the US Secretary of Health, Education and Welfare, Wilbur J. Cohen said this of Altmeyer:

“To those who declared that if men were no longer afraid to lose their jobs America would become a nation of loafers, Arthur Altmeyer replied that there was a motivating force in the lives of men that was even stronger than fear–that force, he said, was hope. A democratic society, he said, must rely on hope and incentive rather than fear and compulsion to influence the conduct and aspirations of its citizens. And I think that is a worthy note for us to remember in the issues that face us today. Social security, he taught us, replaces fear with hope. As he put it, liberty means more than freedom to starve. It means a real opportunity to make the fullest use of one’s capacity. Far from destroying individual initiative and thrift, social security, by providing a degree of protection to families against the major vicissitudes that beset them in this modern and complicated and hazardous world, releases energies because it substitutes hope for fear as the mainspring of human endeavor.

 

In short, Arthur Altmeyer preached and practiced the idea that liberty and security are interrelated and that we cannot have one without the other. With this kind of faith that he demonstrated in man’s perfectability, with this kind of vision of democratic government.”

The bits in bold seem to be the exact opposite of what politicians like Iain Duncan Smith believe today. Far from bringing hope, IDS believes social security has fostered a ‘dependency culture’. Rather than replacing fear with hope, with his new sanctioning regime, he wants to replace hope with fear, believing he can scare people into jobs, or at the very least compel them to stop claiming social security. 

Bill goes on to quote Altmeyer from the same 1968 event as saying:

“Before I get off of the early days I want to say another thing–an important thing many people forget. Important as the Social Security Act was, it was only part of the New Deal. We recognized it as largely an income maintenance program. But we had all kinds of work and education programs going. For example, the National Youth Administration. It financed not only vocational schools, but made grants to the colleges, secondary schools, and primary schools. People have forgotten that that was a part of the picture. We had the work programs–PWA, WPA and CCC.

 

Today I run across people who went to those CCC camps. They are proud of what they did in those days. They go and visit–when they have their vacations– the places where they planted trees, or what not, to show their children, their grandchildren, what they did for their country.”

Now, instead of jobs programmes, we have unpaid work experience and ‘mandatory work activity’. When Duncan Smith talks about dependency he means social security payments are too high, but to Altmeyer, who was dubbed “Mr Social Security” (that would probably sound like an insult now):

“The most important cause of dependency is a lack of jobs at adequate wages. So we must work toward full employment. We must have a permanent, long-range, nationwide public works program.”

As Bill then goes on to write:

“All our modern politicians and policy makers and those who the policy makers have co-opted within the ‘unemployment industry’ they created should reflect on that and work out where they have gone wrong and why.”

Quite.

 

“The beauty of public employment schemes”

More great blogging from Bill Mitchell today over at Billy blog. Bill somehow manages to produce 2,000+ words of daily economic analysis, and I often reblog parts of his posts for those without the time to read the whole thing. Today’s blog discusses some long-term economic projections published by the OECD. He offers an alternative to the implied future of continued austerity suggested by the OECD. Hidden behind the innocuous title “MMT is not conservative”, here is Bill on public employment schemes, which is a good antidote to today’s politicians who think governments “don’t create jobs”:

“The beauty of public employment schemes is that they can be evaluated on totally different criteria than the decision by a private employer to take on an extra worker.

There will be a massive number of jobs in areas of environmental and personal care services over the next 50 years as the climate and land-use damage from capitalism takes its toll and the population ages. There is significant scope to offer well-paid and secure employment to those being rejected by the private sector as robots take over assembly line and other work.

The OECD conception of growth is one driven by profit. My conception of growth is unrelated to that. If the population increases, then economies need to grow to provide income earning opportunities for all. But growth via public service oriented employment leaves a totally different footprint than that driven by private market incentives.

That is what I tell green-followers who demand no growth. There has be growth, the challenge for progressives is to channel it into green-consistent activities. The government sector has to lead the way in that regard and use its currency-issuing monopoly to mobilise productive resources that the private sector chooses to leave behind (lower skilled labour etc).

There is massive scope to redefine what we mean by productive work – artists, musicians etc – can become public servants on secure pay, which would transform the green-quotient of the real GDP growth rate.

Jazz and reggae concerts and art displays and circuses (without animals) are less environmentally damaging than smokestacks! But the dollars spent on them woud deliver the same growth rates as a dollar of coal exported.

Inequality can also be reversed if governments use their fiscal capacities to advantage and ensure that all workers have opportunities to earn decent incomes. Banning most of the financial speculation will also help.

This also ties in with infrastructure. The trend to privatisation and public-private partnerships has undermined the quality and scope of major infrastructure in the advanced world.

Governments should take back control of that development and use major infrastructure projects as vehicles for employment, wages growth, and altering the nature of urban centres. More public transport, better energy systems, better communication systems, etc can be spawned through public sector leadership.

One of the big claims that the privatisation lobby made was that private firms faced ‘unfair’ competition from public enterprises. I always found that ridiculous.

Using our real resources in the best way possible at the lowest cost is the aim of any economy. Waste is typically bad. So if a public firm can access funds cheaply relative to a risky private firm but produce something people want then that is to be applauded. Capitalists are always looking for subsidies as long as they only go to them! Leaving the market free to them is a form of public subsidy.”

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!