To fix the UK economy requires that aggregate demand be increased. Nearly all politicians understand that. Except, the favoured way, and some might say the only way, for those on the right of the political spectrum is to create a credit bubble to encourage more private spending through more private borrowing. That’s not an option for the foreseeable future as the private sector is now saturated in debt. So saturated , in fact, that we’ll have another crash in the next couple of years unless the next government acts quickly to prevent it. That will require them to spend in a sensible fashion but nevertheless spend big time. Realistically, it is going to be a difficult sell electorally. The problem, for those politicians wishing to advocate this line, will be questions such as “where’s the money going to come from?” and comments such as we “can’t afford” to do that.
Of course, the money comes from where all money comes from in the first instance, and as Keynes said, if something can be done it can be afforded. The only danger of too much spending is too much inflation. The danger of too little spending is the recession we have now, both in the UK and, even worse, in the Eurozone.
The problem is that the electorate, and most politicians, don’t understand economics. That’s not surprising. The mainstream media don’t explain it at all correctly. To most people, the government is like a company or a household. To spend money it has first to acquire money. That’s true for a user but not at all the case with an issuer of currency.
It’s rather like living in society where everyone thinks the world is flat. If we insist the world is really round then they might not like that and vote for someone else. We, in turn, wouldn’t like that so the best approach may be to pretend we think the world is flat too, and work our way around the problem as best we can!
One way is to redefine what we mean by ‘government deficit’. As Neil Wilson has recently noticed, Ed Balls has been astute enough to use the term ‘current deficit’.
I think we all missed the inclusion of the extra word for slightly too long, so full marks to Neil for spotting that. Maybe, we gave Ed slightly more criticism than he may have deserved over his advocacy of ‘balancing the books’.
So what could be the plan? The idea is simply that we shouldn’t count capital spending, just current spending. On a personal level, current spending is our going down to the pub and drinking a few pints. We’ve nothing to show for it the morning after. Capital , or investment spending, would be on building a house or investing in a viable business. The value of that would, if we drew one up, appear on our personal balance sheet, so even if we went into the red financially we would still be in the black overall once the value of the physical assets was counted.
So how’s it going to work for government? Current spending is, amongst other things, paying out unemployment benefits. Capital spending includes electrifying all railways and building houses. The government is in a very advantageous position when it comes to doing anything in the economy. Unlike you or I, it doesn’t have to borrow money at high interest rates. It can either just create the money or borrow it via the sale of gilts at very low interest payments. Also unlike a private developer which has to pay taxes to government during the course of the development, government actually receives taxes. Therefore if a private developer can build at a profit, then government can do the same thing and make an even bigger ‘profit’.
So say it decides to build a £100 million residential development. It classes that as investment spending or capital spending so it doesn’t appear on the books as a ‘current deficit’. It hands out contracts to builders in the private sector and most of that money gets spent on wages. Either directly, on the wages and salaries of building workers, architects etc, or in the process of the labour that goes into making bricks, concrete, timber, tiles etc. So straightway some £30 million or so comes back as taxes and NI payments. The bricks, concrete etc attract VAT when they are purchased. So that’s probably another £10 million or so going back into government coffers. That revenue is classed as current revenue so it reduces the ‘current deficit’.
Then that remaining £60 million gets spent and respent in the economy. At every stage taxes are levied. 20% VAT, corporation tax, capital gains tax, fuel taxes, alcohol and tobacco taxes, yet more income tax and NI, plus lots more taxes too that we can all think of. The end result is that nearly all that £100 million goes back to government. At the same time building workers who were unemployed have now found jobs so don’t need to be paid dole money any longer.
Then government can take delivery of those £100 million worth of flats or houses , say about 400 of them at £250k each. It then sells them to a housing association or co-operative and gets all its money back. But it’s already got it back anyway! Alternatively it can rent out the residences directly, or via a lease arrangement with the co-operative, and collect the lease or rents, which at present day prices, especially in London, will pay off any interest multiple times. That way it still owns the properties and their value appears as an asset on the government’s balance sheet.
In other words it makes a tidy profit on the deal. And no it’s not necessarily inflationary, when there are unused resources available. Government will have created something extra for sale in the economy. Inflation has to be about more money chasing the same amount of goods not more money chasing extra goods.
It can repeat the same idea in lots of other ways too. For example, it can extend and modernise the Underground in London. It can start to construct Underground railways in other major cities like Manchester, Birmingham and Liverpool. The spending is classed as ‘investment’ or ‘capital.’ The revenue from the spending is classed as ‘current’. The price tag is not important, providing that the resources are available and unused, and providing we create useful jobs paying living wages, we can always afford to pay for them. By creating jobs we are not just investing in infrastructure, but we are also investing in people, enhancing their participation in society and providing them with the means to support themselves and their dependents. We can always afford that.
Is this what Ed Balls has in mind? His Bloomberg speech shows he knows enough about economics to suggest that he does.