There is some discussion in British Labour Party circles on the question of bringing the railways, and other key industries, back into public ownership. Those opposing the idea usually argue along the lines of “we can’t afford it”. They say the capital, or money, required would be far better used on housing, education and other growth promoting projects.
They either don’t understand the economics or they are deliberately misrepresenting them to suit their own nefarious political purposes.
Apart from the administration costs of making it happen, renationalising the railways, or nationalising any other industry, in Britain, or anywhere else, costs nothing. This must be true when you think about it. Otherwise, how possibly could they have been nationalised in the first place, by the Attlee Labour government, immediately after WW2 when the country was said to be virtually bankrupt?
It works in the same way as QE. Before the repurchase of railway shares, or whatever else such as govt securities from the banks in the case of QE, there are two zeros on either side of the balance sheet.
After the repurchase, the assets of the shares or securities, on one side of the balance sheet exactly equal the liabilities , created by any payments, on the other. So the balance sheet still balances. You can’t do this, and I can’t do this but Government is an issuer of its own currency, and it is really no problem at all.
Conversely, it must be true that if nationalisations cost nothing, then privatisations don’t actually raise any extra usable money either. And they don’t. The recent sale of the Post Office/Royal Mail in the UK didn’t raise a single extra spendable penny!
Ah, the real world in action.
“But! Deficits…” they cry.
Yes I can understand this. But, even though Miliband and Balls went through the motions of arguing against the sale of the Post Office, they never once challenged the general assumption that it would be better for the taxpayer to get some money into the coffers, and leave the running of the Post Office to the private sector.
If people had known there was no money to be gained they wouldn’t have gone along with the idea.
So if this argument is right why didn’t they use it?
A question for Peter Martin: to answer: Does this mean that the government simply creates ex nihilo the money that it pays the shareholders of a business which it decides to nationalise? If this is the case, wouldn’t it cause inflation to do this, and therefore all existing holders of money would pay indirectly, through the reduction in purchasing power that they would all suffer?
It would have a similar effect to Quantitative Easing which hasn’t been much at all. Shares are held largely by institutional investors and as investments by individuals. They’d be unlikely to change their consumer spending patterns. They would switch to other investments.
I’ve just checked and the postwar Labour government chose to compensate the Railway shareholders by issuing 3% “Government Transport Stock” rather than issue new money.
Does it make any difference whether government issues bonds , stock, or cash? I would argue they are all IOUs of government so it really doesn’t . It makes no practical difference whether the owners are compensated by stock bearing annual interest or are given a lump sum in cash; in the latter event it would simply be re-invested either in non-nationalised concerns or in government gilts.
What happens when an industry is privatised? The Royal Mail made a profit and the Government held the shares. It exchanges the shares for cash from private buyers who now acquire the right to those profits. If the process of nationalisation is thought by some to be inflationary, when money is created, is privatisation deflationary if Government don’t do anything with that money? It is just a number of their own IOUs so they may just as well tear them up.
I would argue that it isn’t because that money was unlikely to be spent on consumables anyway. If Government were unhappy that the spending power in the economy was insufficient, there was no need to sell off the Royal Mail to get money to spend. They can spend whatever they like. If they do choose to spend the proceeds of the sale then the prior existence of that money does not mean the spending is any less stimulative on the economy.