Governments should spend more and tax less to reduce their deficits.

There’s no mistake in the title! To understand economics as it works at the macroeconomic level means we cannot just assume that what works for us as individuals or households also works for currency issuing governments like the UK, the USA and Australia. At first look,  it’s almost as if we have gone down the rabbit hole and we really are in a parallel universe. It is tempting to quote Lewis Carroll’s Queen in “Through the Looking Glass”:

“Why, sometimes I’ve believed as many as six impossible things before breakfast.”

But Alice was quite right in saying:

 “one can’t believe impossible things.” 

We just need to look at the problem from the right perspective to make sense of it all. Any currency issuing government, such as the USA, the UK, or Australia  need never have a Greek type debt problem providing it understands how its own economy works.

The government deficit can be expressed as:

Govt Deficit = Savings of Everyone Else = Private Domestic Savings + International Savings

or

Govt Deficit = Private Domestic Savings + BOP deficit(trade)

In other words, if everyone else in the world wants to save in US dollars, UK Pounds or  Australian dollars which they must if want to sell these countries more stuff than they buy from them, then the governments, or the Private Domestic Sectors in these countries, have to run a deficit.

If the Governments try to reduce their deficits by cutting spending and raising taxes then all they will do is force their economies into recession or even depression.

If they do really want to reduce their deficits, they would have to discourage everyone else saving. In the UK, that would include overseas trading partners who sell to the UK more than they buy from the UK and save the difference.

The way to do that would be to keep interest rates low and engineer some inflation, just a few % should be enough,  into the system – by increasing government spending and reducing taxation. So, perhaps counter intuitively, the way to reduce the government’s deficit in the longer term is for it to spend more and tax less in the shorter term.

Note: I’m not arguing that governments should make deficit reduction a primary object of economic policy. The government’s fiscal policy should always be aimed at steering a sensible middle course between having too much inflation on the one hand and too much unemployment and too many business failures on the other.

But, inevitably, there will always be those neoliberal types  who focus on the government’s deficit. They always seem bewildered that it doesn’t change in the way what they expect it to, and this article is an attempt to explain why.

 

A High Pound, a Healthy Economy, Low Deficits: Pick Any Two from Three!

We all might like to have: 1) A high pound 2) Close to full employment with a healthy growing economy 3) Low government and trade deficits or even surpluses. But, are all three even possible simultaneously? If we have to choose just two which one should we leave out? For most people, there is no simple answer but if we better understand the way our economy works we will at least know what the options are from all political perspectives. Including the second option, of a healthy economy, should be a “no-brainer” for politicians right across the political spectrum. Businesses need a buoyant economy to make profits just as workers need a buoyant economy to find decent and well paid jobs. But is it? The quest for a balanced government budget seems as distant a goal as ever, but the connection to that other largely forgotten deficit, in trade, is rarely made.

Previous generations understood, what we seem to have forgotten, that if any particular country, as a whole, has a net deficit trading position with the rest of the world then either the government of that country, or the inhabitants of that country, has to fund it by borrowing. In other words, the internal deficits run by governments, and the extent of the private sector debts which can accumulate in the economy, are directly related to the external deficits caused by a trade imbalance. We can see that countries such as Germany, Switzerland, Holland and Denmark which run large trading surpluses do not have any of the public or private sector debt problems* which we see in the UK or USA which run large trading deficits. Unfortunately, though, the solution to world debt problems cannot be for everyone to run a trading surplus!

If we do wish to ensure the third option, of low deficits, is included in our choice we need to understand that both government and trade deficits have to be kept low. Transferring the burden of debt, as seems to be the wish of George Osborne, necessary to sustain the current UK trading imbalance, from government to the private sector is going to do less than nothing to solve the economic problems of the country. If he wants to reduce his government’s deficit, without crashing the economy by imposing an unrealistic debt burden on everyone else, he has to acknowledge that this can only be done by reducing the trade deficit too. He has to start to tackle the problem from both ends by nudging down the value of the pound. Including the low deficit option means we have to then choose between having a high pound and a healthy economy.

We can see for ourselves what happens when a country like Greece is stuck with a currency which is too high to suit its economic capabilities and yet it is forced to attempt to balance its books. The economy crashes! Or, we can choose a high pound, a healthy economy and have a more relaxed attitude to the twin deficits. There are many economists who present a good case for selling as much debt (government gilts) as is possible and recycling the proceeds back into the economy with increased deficit spending. Some debt can also be sold to the central bank in what has come to be known as People’s Quantitative Easing. Providing inflation is kept under reasonable control there should be little or no problem.

We can also have a more relaxed attitude to the build up of private debt (if we know what we are doing!), but we should appreciate the difference. Government debt, unless it is in some foreign currency, doesn’t have to be repaid in the same way. The accumulation of too much private debt, though, can lead to economic busts to follow the initial boom created by the increase in bank lending. Tory chancellors starting with Tony Barber and later Nigel Lawson were fond of shifting the debt ‘burden’ from government to everyone else this way. We had the Barber boom, then the Lawson boom. The recession of the early 90’s should have been termed the Lawson bust. Later the supposedly more socialist Gordon Brown boasted of his economic prowess by delivering a government surplus around the turn of the millennium. Simply created by allowing too much private sector borrowing, unfortunately!

Most of this posting, so far, is entirely apolitical in nature. The same economic constraints apply whatever the political complexion of the society or economy involved. It is natural we might have different ideas and opinions over the ideal size of government. It is fair enough to argue for a more socialist approach to the distribution of available wealth and income or a more conservative approach. What is not fair enough, though, is for the political right or neoliberals (who are unfortunately not confined to the Tory Party) to wreck public services like our NHS, and our economy, for some nefarious purpose, or in some misguided attempt to reduce the government’s deficit, by cutting government spending and raising taxation without taking into account everything else that changes when they do that. All they’ll do is crash the economy – again! Judging by the economic storm that is brewing, the powers-that-be haven’t learned from past mistakes and it looks very likely we are seeing the start of yet another very severe financial crisis.

* A country with a large trading surplus is unlikely to have its Private Domestic Sector in overall net deficit. Although this is theoretically possible if Government insists on running an even larger surplus. But the net position can still hide localised high debt problems within the PDS.

Footnote: Some MMT supporters might argue that the tone of this article is more Keynesian than MMT. I accept that criticism but I originally wrote this with the promise from the editor of LabourList, Peter Edwards, that ‘sensible’ articles on economics would be accepted. He’s not explained why but he’s still managed to reject it! So I do accept that I attempted to temper the tone slightly!

Nevertheless I’m posting this up here as the start in a series of articles which are aimed at those who might be immediately turned off by a more strident MMT view  (such as the Govt can never run out of pounds etc) , but at the same time ensuring that the arguments are technically correct.

 

Is a Happy New Year Possible for 2016?

In April 2014 I wrote:   Stand by for the next UK crash! ETA 2016

I didn’t use my crystal ball which has never proved very reliable, in any case, when it comes to forecasting football scores or racing results. The reasoning was based  on the rate of fall in the financial position of the UK private domestic sector. It was obvious, then, that serious private sector debt problems would start to arise in mid to late 2015 if government policies carried on as they were.

Two recent articles by Owen Jones in the Guardian and Nigel Morris in the Independent  bear this out. Government policies have indeed been carried on as they were.

There is a very real danger of an economic crash as Owen Jones argues although he doesn’t have quite the right explanation. It’s really not much to do with the need for increased industrial productivity. The productivity of  UK and European industry is higher than it has ever been. Yet the economic problems are worse than they have been since the 30’s. Clearly Owen Jones, much as we might admire his political stance,  is barking up the wrong tree.

Simply, if the UK wants to run a 5% of GDP deficit in its Current Account Balance of Payments, someone has to fund that by borrowing. Usually it is government which has assumed that role but increasingly the burden is being shifted onto the Private Domestic sector.

It may work in the short term but soon the private sector will be increasingly unable to raise the necessary loans especially if there is a fear of higher interest rates, and a general credit crunch in the economy. The words ‘credit crunch’ started to become a cliche of all 2008 financial commentary  just prior to the GFC. We are starting to hear them again on a more regular basis.

It’s not looking good!

PS/Edit

The graphical basis of my concern. A modified screen shot from Neil Wilson’s blog “3poken”.

The Job Guarantee. Problems from a Left Perspective.

There’s no doubt that a JG program along the lines we might imagine it to be, and along the lines advocated by the leading names of MMT: Warren Mosler, Bill Mitchell and  others would be highly desirable.

We could have an economy run to ensure almost full employment except for a  JG rate of about 2%. Then maybe there would be another 2% who were in receipt of unemployment pay due to their being temporarily between jobs. We could allow a reasonable period of time for that to occur -say about 3 months. The JG could have a part to play in young people’s apprenticeship schemes too. There could be some relaxation in the principle of “public purpose” if job training was combined with education. The JG could pay a living wage meaning that the wage was more than just enough to stay alive but it was enough to enjoy life too.

The problem, for me, and I suspect others on the left, is that we fear it won’t turn out quite like that. There’s no guarantee, or even likelihood,  that the JG will end poverty. It would depend on the wage the JG pays relative to the cost of living in the locality. If you’re living in London and depending on the rental property market you’d need an income much higher than anything I’ve seen proposed for the JG to be above any reasonable definition of the poverty line.

Incidentally, this posting was prompted by a discussion between Neil Wilson and others (including myself) on his very good blog:

http://www.3spoken.co.uk/2015/11/job-guarantee-jobs-for-people.html

“Very good” doesn’t mean we always agree, BTW,  as this exchange shows.

PM: “We don’t want to get into the situation, for example, where we’re threatening young mothers with loss of benefits for not taking up the JG or getting into disputes with the mentally ill as to their capability for work.”

NW: “I’m afraid that isn’t your choice. That is the choice of the society you live in and how they perceive those individuals”.

Which is a fair enough comment of course, but if it looks, from a left perspective that there are too many devils-in-the-JG-detail for comfort why would the left want to aggressively pursue the concept of a JG? Why not just leave it ” to the society (we) live in ” to come around to the idea ? That’s not likely to happen for a very long time, though. Either the JG is pushed by the left or it just won’t happen at all. Another problem, again at least for me, is the language used to promote the idea of a JG and it being a “buffer stock”. We are real people. Yes we want to work and make a contribution but we don’t want to be a “buffer stock” in the same way as we can have a buffer stock of bales of wool or kilos of butter.

While MMT and concepts like the JG are useful they only go so far. MMT doesn’t say anything about how wealth and incomes should be shared out. If we don’t address that question, and keep on addressing it then we’ll end up with just as much poverty in the future even though society as a whole could well be richer.

There could well be very much higher rates of JG work as the not-so-innocent fraudsters in Government deliberately shift essential work into the JG sector. The JG would be a very powerful weapon and used in the hands of the fraudsters to reduce wages. We could, for example, have a JG now in parts of the EU which paid say €7 ph or whatever was just slightly higher than social benefits. So in Greece we’d have 25% on a JG instead of 25% unemployed.

There’s no way any of us with a leftist perspective would support that. If anyone is contributing to society by working, the old principle of Labour’s Clause 4 applies: “To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible etc..”

Having a JG, even on a so-called living wage, doesn’t change that one bit!

The UK Autumn Budget Statement – More Neoliberal Nonsense!

The Autumn statement would not be so bad if it was economically coherent, with the spending and taxing plans agreeable, or otherwise, according to one’s political opinion. However, it does not make any sense. Not only does it not “add up”, it is inconsistent with all the principles of arithmetic.

The right wing Tory MP John Redwood makes the point :

“In total the new estimates show us paying an extra £105 billion in tax over the five years”

George Osborne says:

” we will reach a surplus of £10.1 billion in 2019/20″

Note: it’s not just “about £10 billion” its  “£10.1 billion”. We’ve all got to admire just how precise George and his Treasury economists can be about these five year forecasts! As if !

There’s no chance of this happening with the UK running a ~ £90 billion deficit in its external deficit due to trade and other international payments.  It would mean that the UK economy would have to find ~ £100 billion every year to pay the import bill and also provide the government with its £10 billion surplus.

This, presumably, is close enough to John Redwood’s ” extra £105 billion in tax”?

George Osborne says that  “Britain will be out of the red and into the black” which is completely untrue. These figures mean the British economy will be in the red to the extent of ~£100 billion to pay for the Govt being ~£10 billion in the black,  and Britain’s overseas trading partners being ~£90 billion in the black.

It can’t possibly happen that way,  unless somehow the trade deficit can be turned into a trade surplus, and that aspect is totally ignored in George Osborne’s grand plan. The UK economy could not sustain a net loss of £100 billion even for one year – never mind on an annual basis. George Osborne will only send the economy into a downward spiral trying to achieve the impossible. An economy in a depressed state will also deliver depressed levels of taxation revenue.

In a couple of years time, the excuse for the plan failing , as it inevitably will , is likely to be that even though the Government has kept spending under control, taxation revenues will have not come in as expected. This will be attributed to: Problems in the eurozone, problems with world trade, problems with loss of revenue from North Sea oil, a new war in the Middle East maybe?

In other words, the same kind of ‘excuses’ as were put forward after the last similar plan failed, in the years following the Tory win in 2010, except the Govt could blame the Lib Dems then! If the Government cared to look for a reason, rather than an excuse, they would explain that their deficit has to be the sum of what everyone else saves. They don’t have direct control of that.

There’s a saying , usually incorrectly attributed to Einstein, about doing the same thing over and over but expecting different results, being a sign of madness.  Are the Tories mad, though, or just plain bad?

A Simple Spreadsheet Model of Government Spending

There is no intention on my part to provide Steve Keen any competition for  his excellent Minsky program but I thought I would have a  try to explain some of the economic ideas of this blog in figures rather than just in the usual words, so I put together this spreadsheet. Which you can download  here. (Just make sure that it doesn’t get renamed when downloading. It needs to be called econ.xls for the macros to work). It is quite easy to use.

As spending has to come before taxation we first have to spend some money into the economy. I’ve chosen $500. Just consider the $ symbol to represent whatever currency you like of course.

The recipients of this money are three users of the currency (A, B and C) who receive the above amounts for services rendered. Just to keep it simple we only have these three users in the economy. The payments are decided in a quasi random way in the program so you won’t see the same figures but they should add up to the total spend by the government. Press the RESET button and you’ll see this.

Next, with the Tax level set at 0%, press the second macro button. You’ll see that user A uses his money to buy from user B. Then user B buys from user C and user C buys from user A.

As the tax level is set at 0% the goverment isn’t receiving any revenue so we now need to change this to 20%. Press the RESET.

Press the second macro and each time we’ll see the effect of a single transaction. ( meaning that all three users are buying and selling from each other). Notice that cash assets are equal to the government’s deficit and as the revenue rises the cash assets fall and the deficit falls too. Eventually the deficit falls to zero. We can raise tax rates to 30% or whatever and though the deficit falls faster it doesn’t go into surplus even with high tax rate. Press the RESET.

We’ll next allow our users to put some cash away in a savings account. We’ll allow them $5. As there are three users , pressing Macro button 3# should show $15. We repeat the exercise and surprise, surprise, no matter how many transactions we have, we end up with a deficit of $15.

Of course if I were George Osborne I’d shriek in horror at this $15 deficit
🙂 and call in the Office of Budget Responsibility. They would no doubt advise that the way to restore the spreadsheet to showing a surplus was to cut spending and raise taxes. So we cut spending to $450 and raise taxes to 25% and give the program another go. “That’s odd” George would be thinking “I’ve done what the OBR has advised but still my deficit is persistent!”

Next George could try Nigel Lawson. He knows a thing or two about producing a surplus. He managed it in the late 80’s by encouraging lots of borrowing. That’s what he’d suggest again. So George would type -$20 (minus $20) in the savings account for each user. Press macro #3 and try again. A few taps later on the second macro and Hey Presto! We have, or rather George now has his surplus. If we are one of those users, we are the ones in deficit!

If this wasn’t so serious and wasn’t ruining the lives of our young people this might be all rather amusing.  How is it possible that such a cretin can be paid over £130,000 pa for f***ing up the economy?
………………….
Edit:
“Stuey” (below) asked an important question which might just bear repeating here with my answer.

Q: When I create a debt for the users, government runs a surplus. But isn’t that because the loan would have come from the government in the spreadsheet? Loans usually come from private banks. Doesn’t that make a difference?

A: It doesn’t make any real difference. We can easily put our three currency users into debt by clicking on the third macro.

Say we give them $100 worth of debt and the cash to match. That could be an overdraft at a private bank. So they’d have the debt but an extra $100 of cash ie spending money to start with. We click away on the second macro and the govt has a $100 surplus. Everything looks good – superficially.

If all the users banked at the same private bank the transactions would be recorded in the IOUs of that bank. Except, the tax bill on the transactions would have to be paid from the private bank’s reserves – in real central bank money.

So, at the end of the process, the users are collectively in debt to the tune of $100. The private bank has an asset of those debts but it has also lost assets of $100 from its reserve account. So the PB ends up all square. The debts in the economy remain, however, until they are repaid – unlike in the spreadsheet when they are extinguished by the reset button.

It is this accumulation of private debt in the economy which is the basis of Steve Keen’s debt deflation concept. The problem of increasing private debt levels can only be temporarily fixed by encouraging the creation of yet more private debt. But that’s a bit like a junkie needing a bigger and bigger fix. He needs at some point to choose a healthier lifestyle.
…………………….
PS I do this kind of database (usually Access) and spreadsheet programming in my day job too, usually in an engineering context. If you have any requirements send me an email:   peter_martin_2001@hotmail.com

 

 

 

 

MMT and Economic Growth

Most economists , including the MMT variety, are wedded to the notion that economic growth in itself is a good thing. Of course, it has indeed been that over the last centuries. Few of us would be happy living under the same conditions as our 19th century forebears for example.Looking at inscriptions on the headstones of an old cemetery, or the reading of a few chapters of a Dickens novel provides enough evidence of the harsh living conditions that most endured then. Infant mortality was high. Many women died in their prime due to complications of childbirth. Improvements have largely been made possible by economic growth. In our modern economies we notice that unemployment falls when economies grow. Workers can negotiate higher wages as businesses can sell their products and services into marketplace. Everyone is happy. Governments get re-elected!

Economic growth is largely a product of human ingenuity. Give a group of workers the task of doing something, like making a car for example, when they have no experience of even seeing a car before and they’ll struggle to do it. The cars they produce won’t be very good. They will consume a lot of labour power and be relatively expensive, so that only the very wealthy can afford them. That was the case in the early years of the car industry. But as the workers gain more experience and apply their intelligence to the problems at hand, the cars are continually improved. The labour time to make each one falls as production techniques improve too. Fast forward to where we are now, and we have very good cars made very efficiently by far fewer workers at a fraction of the cost of a century ago. It is the same story in just about every industry we can think of.

Those in the Green movement question that we can have economic growth forever citing the fact that economic growth implies an exponential consumption of the finite resources which are available to us. It’s a good question and it’s one we are going to have to answer sooner or later. We might want to make a start on doing that now in the context of our present economic problems. In the UK and Europe we have seen no real economic growth since the 2008 GFC. The situation varies from country to country but typically GDP per person is just about what is was a decade ago. Even so, this is still approximately twice what it was a generation ago. So is everyone twice as happy now as they were then? Or are they exactly as happy as they were a decade ago?

Of course they aren’t. There’s much more unemployment and underemployment now. There are more homeless people than there were, there aremore people relying on food banks. The state of the NHS and the education system is worse than it was. In 1980, students still had grants, but now they don’t, even though supposedly we are a much wealthier society, notwithstanding the difficulties brought about by the 2008 crash. This is not what I remember being told by Sir Keith Joseph ( a Tory politician very close toMargaret Thatcher) in the early 70’s when we clashed at a student meeting where he was speaking. He criticised me, in particular, and the left in general, for being overly concerned with the redistribution of existing wealth and not enough about the creation of new wealth. His message was that social and economic problems, of which we were both aware existed, were best solved by having a more productive economy and allowing the wealth creators free rein to create wealth unhindered by State interference. It would have been inconceivable to the rest of the meeting, and maybe even to Keith Joseph and myself, that some 40 years later we’d have had the levels of growth we’ve had but still the same economic problems would remain unresolved.

We don’t need degrees in economic theory to know that if the proverbial ‘economic cake’ is much bigger but there are still those surviving on meagre rations, that the imbalance must be due to how that cake is cut. The question of who gets what does matter when discussing Economics. Economic growth has to be more than about mopping up surplus labour in a capitalist economy. If we do achieve some growth, that’s fine, we all can feel a bit better off. If we don’t, we should all feel that we are neither better nor worse off, instead of, as now, feeling that we have to run just to stand still. Do we need a different type of economy for that to happen? The critics of MMT might argue that it’s little more than a patch for the problems of a capitalist economy. I wouldn’t accept that but we do have to explain how MMT can work for everyone if we are to establish meaningful links with the political left. A Job Guarantee on a minimum wage won’t be enough for many.

If we do want that, we have in the words of Labour’s old Clause 4 to provide an economic theory which can help to “secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof”.

 

The Job Guarantee, MMT and the Redistribution of Wealth

One important component of MMT is known as the Job Guarantee (JG) or sometimes the Employer of Last Resort (ELR) . The idea is an unemployed worker would be offered a job by the Government instead of unemployment welfare benefit. The job would be for public purpose and pay a basic wage. This would effectively define a minimum wage for other workers too.  There’d be no point working for less than the JG wage somewhere else for example. The government would possibly pay out slightly more than it would in welfare benefits to support these jobs, but it would not be paying out money for nothing. It would be receiving something in return, for the benefit of society as a whole,  and would prevent useful resources, the labour power of millions of workers, from going to waste.

Instead of there being a pool of unemployed there would be a pool of JG workers. Instead of an unemployment rate there would be a JG rate. Whereas government now uses unemployment as a means of inflation control,  a future government would use the JG and the JG pay rate as a means of inflation control. Bill Mitchell likens the JG scheme to one previously used by the Australian government to stabilise the price of wool. It used to buy up wool, which might otherwise have been unsold,  at sales auctions to guarantee a floor price. Then, later as the price of wool might have risen, stocks were sold from the buffer supply to reduce wool prices.

One potential problem is with the rights of JG workers. If they feel they are being asked to work for a lower level of pay than they might consider to be socially acceptable, and also under conditions which might be less than acceptable, do they have a right to join a union and demand higher pay and better conditions? The scheme cannot work too well if that is the case because the minimum wage will then potentially be a source of inflation.

So, the question arises: can we really compare human workers with bales of wool?  Should workers be ‘sold’ from a buffer stock to lower the wages of other workers?  This does not sound, to my admittedly socialist ears,  like an appealing idea!  Trade unions have to have an input into the level of the minimum wage whether or not it is defined by the wage of a JG. Governments may be fair and just in defining a reasonable living wage or they may not be!

It is potentially only a problem if  unemployment is brought down to something like 4% and efforts to reduce it below this figure create inflationary tendencies in the economy. Some of those 4% will be people between jobs but some will be, for as variety of reasons, hard-to-place workers. They shouldn’t just be abandoned but neither should we be too hasty to introduce compulsory work. The meaning of ‘compulsory’ being that there would be no social benefits otherwise.

MMT doesn’t, IMO,  make this point at all clear in its theorising. Bill Mitchell has expressed his view as:

“The existing unemployment benefits scheme could be maintained alongside the JG program, depending on the government’s preference and conception of mutual responsibility.
My personal preference is to abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations.
The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a JG job…..
I would also allow a person a short-period – perhaps two weeks – in between losing their job and starting a JG job – to sort out their affairs. This period would be covered by full JG pay.”

We can all have our ‘personal preferences’ . Mine would certainly NOT be to “abandon the unemployment benefits scheme ” until such time as we have a genuine socialist society and not just a so-called socialist government in charge of an essentially capitalist society or economy. No economic theory, including MMT, has much if anything to say about the desirability of wealth redistribution. The argument to concentrate on economic growth rather than redistribution, is I would argue, a neoliberal argument in itself. GDP per capita now in the UK is twice what it was in 1979 when Mrs Thatcher first won a general election. It is a similar ratio in most advanced countries too, so Mrs Thatcher cannot have been at all responsible for the UK growth!

Her accusation then,  and from her supporters too,  was  the left was being reactionary in its demands for redistribution and that all economic problems would be solved by having a more productive economy. This might be described as the ‘rising tide raises all boats’ theory. Experience should have taught us that the rising tide may well have raised luxury yachts but not necessarily “all boats”. We have more unemployment now than we had in 1979, more underemployment, more homeless, more people relying on food banks, and the NHS is in very poor shape. Clearly all problems have not been solved and will not be solved, regardless of the level of past and future economic growth, until the question of wealth redistribution is back on the political agenda.

By all means let us establish a  Job Guarantee but let us make it very clear we mean a Voluntary Job Guarantee. We should make sure the benefits of that extra production, that extra economic growth,  are used to equalise wealth distribution rather than those benefits ending up in the possession of the already ultra wealthy as has happened with previous economic growth.  Let’s see how that works out before even thinking about any compulsion.

Where does the Money come from in a Monopoly game?

It has been some time since I last played Monopoly. The Board Game.  As I remember we have several players and a banker who assumes a similar role to government in our economy. He hands out money at the start of the game. Whenever we pass GO, or draw a lucky card from the community chest we get a bit more. He charges us tax,  super-tax, and might put us in jail from time to time.

We don’t like it when that happens, but where does the money come from in a Monopoly game? The more right wing players might argue it comes from other players when they land on the their Mayfair or Park Lane properties which have houses and hotels on them! They like to think that wealth creates money rather than the reverse. But those of us who take a wider view know it all comes from the banker originally.

The government/banker is always in debt. He has to be. His debts are the players’ monetary assets. Penny for penny. Would the game work at all if he insisted on always balancing his budget?

PS Apologies if this is a statement of the bleeding obvious! But, many of our highly educated (over-educated?)  politicians still seem to be in need of such.

Do we really have austerity economics in the UK?

Many right wing commentators make the point that public spending is higher now than under the last Labour Government in both real and nominal terms. They dispute the charge made against the present government by the left that they are engaging in the ‘austerity economics’.  Even the deficit (they mean the government’s budget deficit)  they will admit, when pushed,  is higher than the last Labour government’s deficit. So why are we being so harsh when they are clearly doing their best? If we want austerity , they argue, just look at what happens in the Eurozone.

Is there any justification for their defence? Possibly. GDP per person is just about the same as it was a decade ago. There were no accusations of austerity economics then and most voters  in the UK felt fairly well off. Or, at least they did in sufficient numbers to re-elect a Labour Government in 2005. So, why is the general feeling that we are worse off now than we were then? If the published figures are correct, and there is no reason to dispute them as far as I know, then the problem must be one of distribution of the available income.

Ironically, the best defence the Tories have against the charge of austerity economics is that there would be no austerity if everyone had a fairer share of what was available. They might not go for that though!  GDP per person is now twice as high as it was when Mrs Thatcher first won a general election. She and her government were of the opinion that the left were reactionary in quibbling about the distribution of the proverbial cake, and that it was better for all if we just concentrated our efforts into making a bigger cake.

Well, we’ve done that. The cake is now twice the size, but there are more homeless now than there were then, with higher levels of unemployment and underemployment. Terms like “Zero Hours Contracts”  and “Food Banks”are in existence now which weren’t then. So why the problem? It has to be caused by how the available wealth and income is divided.  There is no alternative explanation.

That would be the socialist explanation of why we have austerity. An economist would perhaps adopt a different tack as has Professor Bill Mitchell:

“Austerity occurs when the government runs deficits that are too small relative to the spending and saving decisions of the non-government sector. In this context, it is moot where the revenue comes from. The impacts of running insufficient fiscal deficits usually does impact on the poor and disadvantaged, most notably, because it causes mass unemployment and/or underemployment. And I don’t diminish the concern we should have for those distributional consequences. But from a macroeconomics perspective that is not the point. Austerity is about the sufficiency of the deficit contribution to total spending and national income generation.”

So how does this work with the present bout of austerity in the UK?

John Redwood recently made the following claim on his blog:

“The most recent figures show the UK deficit gradually reducing, with tax revenues growing more quickly than the growth in public spending, as planned.”

There are two problems here: Firstly he, I would suggest David Cameron and George Osborne too,  thinks that reduction is a good thing. Secondly,  he thinks the UK’s deficit is the same as the Govt’s budget deficit which it clearly isn’t. A better description of the UK’s deficit is the net loss of ££ to pay for the net import bill and which is currently some 5% of GDP.

So, it must follow that if Government reduces its own deficit to below 5%, as it has recently done, that it is simply pushing the economy into recession. That’s austerity. Everyone will run increasingly short of money. Gross aggregate demand can then only be maintained by increased private sector borrowing which of course just inflates the bubble economy.

London property is rated as the most overvalued in the world with a bubble index of 1.88 and the rest of SE England can’t be far behind.

http://www.theguardian.com/money/2015/oct/29/london-house-prices-most-overvalued-world-ubs

If the Government wants to run a a 5% deficit in trade it has to run something like a 7-8% deficit in its budget to allow those in the economy who wish to save (rather than borrow) some capacity to do so.

Pushing it down to only 4% is a recipe for disaster. The economy is now hanging by a thread. The bubble will burst sooner rather than later and we all know what happens to real economies when bubble economies burst.

Even looking at this kind of economics from a right wing perspective, I can’t see it makes any sense. Firstly it will reduce the electoral chances of the Tory Party. Voters who become economically disadvantaged and become reliant on State support will vote for parties offering better rather than worse support. Secondly, it will hinder their desire for a smaller state. That is only going to be possible when workers have sufficient spending power to afford private sector alternatives to those services the State now provides.