Want to reduce your deficit, Mr Osborne? Stop your boys burning those £50 notes* !

* Or at least ask them to tell you about it!

The Oxford University based Bullingdon club has attracted controversy of late, in large part  due to certain unsavoury practices  indulged in by its young, privileged, elitist but poorly behaved members. Their current initiation ceremony is reported to include the burning of a  £50 note in front of a beggar or homeless person.

.B

Former members of the club are now a well ensconced part of the UK political establishment. These include the current Prime Minister Mr David Cameron (In photo, second from the left standing) , the Chancellor of the Exchequer Mr George Osborne, and the Mayor of London Mr Boris Johnson (far right sitting)

A key source of worry for our worthy politicians is the UK’s government budget deficit which now runs at approximately 4% of GDP. This is the gap between what the government spends into the economy and what it receives back in taxation.  The budget deficit is often referenced in support of their argument that we are all “living beyond our means”,  that our “credit card is maxed out”, and that cutbacks in spending  and increases in taxes are unfortunately necessary to “cut our coat according to our cloth” etc etc.

So in this context, we might ask just what macroeconomic impact the burning of our currency might have? It is course illegal to deface or destroy currency. Why should that be?

It does have an effect. If these wealthy young men had chosen to give £50 to a homeless person that money would no doubt have been quickly spent. It would have been a stimulus to the economy.  The destruction of £50 has the opposite effect. It is exactly the same as if we had handed that £50 note over to the government in taxation, where the government routinely puts old notes through the shredder.  If Mr Osborne knows of specific instances where currency has been deliberately destroyed he is quite entitled to count that as voluntary taxation. His deficit would be reduced commensurately.

As he can’t know just what happens to our currency he has to assume it still exists and that it is just being saved somewhere. The net effect is still the same. To keep the economy functioning,  at full capacity,  any money which has been taken out of circulation either by its destruction or because it is being stored in a safe or bank account has to be respent back into the economy by government on our behalf. It’s neither here nor there  whether the budget is in deficit or in surplus.

We don’t need to know how much is being burnt and how much is just being stored. If any government overdoes the spending, relative to the levels of taxation, we’ll have too much inflation, but if it underdoes it , like now, we’ll have deflation and high levels of unemployment and underemployment.

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5 responses to “Want to reduce your deficit, Mr Osborne? Stop your boys burning those £50 notes* !

  1. Thanks for this informative post. I have read some of the work of Wynne Godley and occasionally read Bill Mitchell’s blog, both of which inspire me. I am not completely convinced by MMT; my readings of Marxist economics have been useful too. I find myself swaying between post-Keynesianism and Marxism in their understanding of capitalism. My doubts about achieving and maintaining full employment come from the necessity for periodic restructuring of the economy which is necessary for productivity growth. A recession, painful though that is for many, can accelerate this process as weaker firms go bust, and stronger firms restore their profitability, ready to expand once demand picks up. Marx thought that recessions were part of capitalism’s strength and ability to renew itself. However I do still believe in the potential efficacy of government policy, including fiscal and monetary, and industrial policy. I find the sectoral balances approach of MMT and SFC modelling very helpful in aiding my thinking about the evolution of the economy, and the sustainability of growth as imbalances within and between nations accumulate over time.

    • An interesting point about the usefulness of recessions. So, even if we could control the economy sufficiently well to have no recessions and no artificial booms we might think of deliberately creating them? Just occasionally? Maybe!

      On the question of Marx, Keynes and MMT I’d say there isn’t really any great conflict. Marx was writing about capitalism as he observed it in the 19th century, with all major currencies tied to gold. Keynes in the early to mid 20th century when that link had started to be weakened due to the requirements of putting economies on a war footing. MMT is the economics of the modern age. ie fully fiat fully floating currencies with no tangible link to any commodity like gold or silver. They’re just IOUs of govt.

      So was Marx right and will capitalism eventually fail? Probably he would have been proved right by now if capitalism hadn’t changed. Keynes helped bring about that change of course. MMT will bring about further changes if it hasn’t already! So we’ll have to wait and see on that!

      • Yes I hold no illusions about Marx’s prediction of the overthrow of capitalism. He seemed to suggest a number of ways this could happen: a falling rate of profit, a rising politically conscious working class, ever-increasing company size, so he hadn’t got it fully worked out. I am no socialist, but at the same time I am open to an evolving society, which may not always be a capitalist one. The evidence suggests that Marx was right about crises/recessions being endemic to capitalism and even the best policies not being able to prevent them completely. Even the golden age of the 1950s and 60s eventually broke down into crisis, and some would say that its success had little to do with fiscal policy. However, right now there must be room for improvement in policies to manage the financial sector, macro management, and industrial policy, which I see as more of a long term promoter of growth. And in contrast to Keynes thoughts on ideas being more powerful than vested interests, I think both are important and there is some dynamic two-way relationship between them, or between the evolution of material conditions and consciousness. Thanks for your reply.

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