Tag Archives: economic incompetence

The Magic Money Tree And Other Fairy Stories

To hear the Tories, you’d be forgiven for thinking that they know what they’re talking about on all matters relating to the national finances. According to the media and the Tories themselves, they can be “trusted on the economy” (sic). After all, according to the political and economic pundits, they’re not the ones who “crashed the economy” or propose “tax and spend” policies are they?  In fact, to hear them talk you’d think they never taxed anyone nor spent any money. But it’s all just a fairy story,  just like the ‘magic money tree’ that only the Labour Party has access to.

The phrase ‘magic money tree’ seems to have made an appearance in the last 10 to 15 years, and it’s used by Tories and ‘researchers’ from right-wing think-tanks to denigrate the economic ideas and policies of opposition parties – especially the Labour Party.  Its use by these groups is meant to suggest economic recklessness on the part of opposition parties and, ultimately, to  perpetuate the myth that only the Tories are economically credible. This is, of course, laughable. Why? Because it tells us the Tories aren’t as economically credible as they or the media would have us believe and the reason for this is because the phrase ‘magic money tree’ obscures the fact that governments have the power to create money from nothing.

Last night on Question Time, Nick Clegg, the former Deputy PM in the Tory-Lib Dem coalition, claimed that you can’t “create money out of thin air”. His government did just that for five years! It’s called ‘quantitative easing’ or QE, and it’s where the central bank creates money electronically and uses it to buy assets. This tells us that money isn’t tied to anything and quite literally doesn’t exist in a physical sense.

Here’s a Bank of England video that explains QE in detail.

If you prefer, here’s Paul Mason explaining QE in the back of a cab.

Two things: first, anyone who says money “doesn’t appear out of thin air” doesn’t know what they’re talking about and second, it reveals that Thatcher’s household finance fallacy, which has dominated the reductivist thinking of political pundits and vox pop interviewees for over 30 years, is just that: a fallacy. Domestic finances and national finances are worlds, no, galaxies apart, and any attempt to reduce national finances to a simplistic narrative of ‘maxing out the credit card’ makes the person uttering those words look like a bit of a fool. But this is what the likes of Dominic Raab and Kwasi Kwarteng do all the time.

Households, that is to say, you or I, cannot go to what is called ‘the lender of last resort’ or The Bank of England or whichever central bank is local to your country and borrow money, nor can any of us issue bonds or create money out of thin air as central banks and governments do. When governments have a cash flow problem, they can apply to the lender of last resort for a loan to tide them over. If  you’re a family of four and you have a poor credit rating and you’re struggling to make ends meet on an ever-diminishing income, the option of obtaining a bank loan isn’t open to you and you may be forced to approach a loan shark instead.

The reason these clichés and soundbites were created in the first place was to hoodwink us and therefore convince us of the necessity to make swingeing cuts to public services, because we simply can’t afford things like public libraries and care for the elderly. Right? Wrong.  Money always magically appears whenever there’s a war or when the government needs to wet the beaks of rentier capitalists.

In the last seven years, we’ve witnessed an explosion of foodbanks across the country, thanks mostly to the state of the economy.  Last week, Dominic Raab told viewers on Victoria Live that people who go to foodbanks have a “cash flow problem”.

Raab is an economic illiterate, who belongs to an economic cult that accepts trickle down as ‘God’s Will’, perhaps a punishment for making the ‘wrong’ life choices.

During Wednesday’s seven-way leaders’ debate, Amber Rudd, standing in for the Incredible Vanishing Woman, told Jeremy Corbyn that his party’s policies weren’t credible and there was “no magic money tree”. In response to this breathtaking ignorance, Joyce McMillan of The Scotsman writes:

The phrase in question is “there is no magic money tree”; and it is used with an almost clockwork regularity by those who oppose proposals like those contained in the current Labour manifesto. Free school lunches? No magic money tree. Free university tuition? No magic money tree. A properly funded NHS, or more generous disability benefits? No magic money tree. And so it goes on, in a litany of meanness and misery firmly based on the assumption that there is a finite amount of money in government coffers, and that to spend it in one place is automatically to take it from another.

Further down the article, she reminds us that:

…between 2009 and 2012, the Bank of England issued an eye-watering £375 billion of extra cash in what is politely known as “quantitative easing”. Even at the time, experts could be heard arguing that this newly-printed money would have a more helpful impact on the British economy if it was simply dropped from an aeroplane on to Britain’s poorer communities, helping the hard-pressed people there to exercise their pent-up demand for new shoes or washing machines or holiday breaks.

That’s a lot of money. Go on…

Yet instead, it seems it was mainly used to prop up the banking system, and help it rebuild its balances. While real wages fell into their longest decline in more than a century, £375 billion of new government money, over four years, was used not to change the system, or rebalance the British economy, or reinvest in our grassroots public services, but to keep things exactly as they were.

So rather than the people benefiting from the creation of new money, it’s used instead to prop up banks, who aren’t lending it to people anyway.  Small businesses are suffering because of this.

So if QE is used because there’s no money in the economy, then where has all that money gone? The Tories would have you believe that it’s gone on fripperies like social security and public sector pay. But that’s nonsense. Ha Joon Chang writing in The Guardian explains:

Despite these significant shifts, myths about the economy refuse to go away and hamper a more productive debate. They concern how the government manages public finances – “tax and spend”, if you will.

The first is that there is an inherent virtue in balancing the books. Conservatives still cling to the idea of eliminating the budget deficit, even if it is with a 10-year delay (2025, as opposed to George Osborne’s original goal of 2015). The budget-balancing myth is so powerful that Labour feels it has to cost its new spending pledges down to the last penny, lest it be accused of fiscal irresponsibility.

However, as Keynes and his followers told us, whether a balanced budget is a good or a bad thing depends on the circumstances. In an overheating economy, deficit spending would be a serious folly. However, in today’s UK economy, whose underlying stagnation has been masked only by the release of excess liquidity on an oceanic scale, some deficit spending may be good – necessary, even.

The second myth is that the UK welfare state is especially large. Conservativesbelieve that it is bloated out of all proportion and needs to be drastically cut. Even the Labour party partly buys into this idea. Its extra spending pledge on this front is presented as an attempt to reverse the worst of the Tory cuts, rather than as an attempt to expand provision to rebuild the foundation for a decent society.

The reality is the UK welfare state is not large at all. As of 2016, the British welfare state (measured by public social spending) was, at 21.5% of GDP, barely three-quarters of welfare spending in comparably rich countries in Europe – France’s is 31.5% and Denmark’s is 28.7%, for example. The UK welfare state is barely larger than the OECD average (21%), which includes a dozen or so countries such as Mexico, Chile, Turkey and Estonia, which are much poorer and/or have less need for public welfare provision. They have younger populations and stronger extended family networks.

he third myth is that welfare spending is consumption – that it is a drain on the nation’s productive resources and thus has to be minimised. This myth is what Conservative supporters subscribe to when they say that, despite their negative impact, we have to accept cuts in such things as disability benefit, unemployment benefit, child care and free school meals, because we “can’t afford them”. This myth even tints, although doesn’t define, Labour’s view on the welfare state. For example, Labour argues for an expansion of welfare spending, but promises to finance it with current revenue, thereby implicitly admitting that the money that goes into it is consumption that does not add to future output.

It would be reasonable to argue that consent has been manufactured by the Tories, their think-tanks and their allies in the media, for the purpose of fulfilling their long-held ambitions to dismantle the welfare state and sell off public services to their corporate friends. Phrases like “the magic money tree” and “we have to live within our means” have been produced to accomplish this.

Governments spend and borrow money all the time. The notion that national finances should be treated like household budgets is demonstrably fallacious. Yet, for over 30 years much of the public has been conditioned into thinking that all government spending and borrowing is fundamentally irresponsible but this thinking is dangerous. People are dying because of it. Next Thursday, you have the opportunity to put a stop to this destructiveness. Please use your vote wisely. Don’t vote Tory.

 

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How Much Will It Cost? (Revisited)

The questions of “how much will it cost?” or “How will you pay for it?” are always posed by the media’s journalists to the planned spending proposals of Labour and all the other parties, bar the Tories. That the Tories have dominated the economic discourse since the 1980s cannot be denied.  Indeed, political journalists have accepted the economic orthodoxy uncritically in the decades that have followed and there are, in my mind, two reasons why they do this. First, they’re not economists and second, they’re lazy. Even the economics editors of the major news organizations tend to be drawn from the Thatcherite School of Household Management Economics, and will base their analyses and their questions on its flawed logic.

Now, I’m not an economist but my instincts regarding national finances are correct: household analogies are nonsense and journalists who repeat them are foolish. The reductivist economic dogma of the Tories and UKIP has dragged this country into recessions (there were three during the Thatcher years) and have forced people into ever greater poverty, while the rich have seen a manifold increase in their incomes.

In an article by Richard Murphy of Tax Research (two days after my piece), he puts to bed the myths that have passed for economic competence and credibility for over 30 years.  He opens by saying:

The most dangerous question in political debate in the UK is the one always rolled out by every journalist, on air or in other media, which is to ask a politician ‘How are you going to pay for it?’ where ‘it’ is whatever the politicians has just proposed to do.

He then provides three reasons why this question is a dangerous one and provides handy replies to the clueless hacks who insist on asking the question.

You can read the rest here.

All governments borrow and spend money. That’s how national finances work. In seven years, the Tories have racked up more debt than the previous Labour government did in 13 years. Moreover, Labour has a better record of paying off debt. In 1976, the Wilson government was forced to take out a loan from the International Monetary Fund to pay for the Sterling Crisis, which was caused by the Heath government’s economic mismanagement. It was paid off by 1979. Thatcher’s Tories continued to use the IMF loan as a stick to beat the Labour Party even though the loan had been repaid. Yet Kinnock refused to counter these lies. Finally, the Corbyn-led party has awakened to the need to counter the Tories’ myths and lies about the national economy and borrowing/spending. And about time too.

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How Much Will It Cost?

“How much will it cost?” is the question many broadcast hacks journalists ask of Labour politicians whenever the subject of spending is raised, yet the same question is rarely, if ever, put to Conservative politicians and there’s a reason for that.  It’s because the mainstream or corporate media has accepted Thatcherite economic orthodoxy and refuses to question it.  Moreover, the question itself is not only loaded, but predicated almost entirely on the Thatcherite logic that national finances are exactly the same as household finances. They are not. And anyone who thinks they are needs to listen to Yanis Varoufakis take down that myth when a member of the BBC Question Time audience repeated it without a moment’s thought.

Thomas G Clark of Another Angry Voice also debunks the myth here.

Television and radio hacks, and their commentator allies have accepted the Thatcherite logic of the market and the domestic finance analogy as fait accompli. For supposedly well-educated people, broadcast journalists have shown that they are neither capable nor willing to ask fundamentally straightforward questions about the Tories’ economic claims, and instead have focussed their attention on Labour’s mythologized economic incompetence.  But the questions they ask are not intelligent questions and behind them is a discourse of mocking and sneering of anything that diverges even slightly from the orthodoxy.

We see this whenever a Tory politician talks about tax cuts, they are never asked “how much will these tax cuts cost”? Instead, their proposals are taken at face value and their tenuous claims to economic competence are accepted as axiomatic. Yet, tax cuts do cost money and the burden will always fall on the shoulders of those who are least equipped to deal with it.  Tories will always claim that they have taken those who earn the least out of taxation altogether.   No questions are asked if the richest will pay more or how libraries, schools and the National Health Service are to be funded when ever-decreasing amounts of tax are being collected by the state.  Of course, Tory politicians know they will never be subjected to the kind of scrutiny reserved for Labour or even Green politicians (Andrew Neil is a possible exception). The deference with which most media journalists treat these puffed up charlatans is more sickening than eating ten Cadbury’s Cream Eggs in a single sitting and it’s getting worse.

This morning, Diane Abbott appeared on Nick Ferrari’s programme on LBC. When Ferrari questioned her about how much will more police officers cost, Abbott got into a muddle. Yet, when Theresa May was asked why nurses were forced to go to foodbanks on The Andrew Marr Show last Sunday, and could only summon up “there are complex reasons” by way of reply, few media commentators batted an eyelid.  Instead, all the outrage was focussed on Abbott’s apparent gaffe. Pathetic.

The level of political debate in the public sphere is shockingly juvenile and is driven by the discourses produced in the mainstream media. It’s no wonder many voters are left ill-informed about their political choices when journalists are only capable of asking stupid questions with the intention of getting a sensational headline.

If our media had any guts, it would have reported on the real story of the day.  Namely, Theresa May going full Erdoğan on pesky local reporters in Cornwall. But they didn’t.

 

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The ‘Deficit’? Which deficit are they talking about?

Let’s get something straight: there is no such thing as “The Deficit” there are deficits, and the politicians of the three main parties are all guilty of presenting an image of a single monolithic deficit that must be “brought down” at all costs. This is to support their cock-eyed view that cuts, particularly to social security benefits are necessary, while tax cuts for the rich will somehow stimulate the sluggish (some would say moribund) economy because the “wealth” will miraculously “trickle down” to those below. Not even the very right-wing George H W Bush believed that and derisively referred to trickle down (or supply side) economics as “voodoo economics”.

Our imperial masters will confuse, sometimes deliberately, “The Deficit” with “The Debt”. Again, there is a debt and it’s called The National Debt, which is accumulated through government spending on wars, for example.  The current national debt has been around since the end of the First World War. Politicians, many of whom are not economists, will often claim that “The Debt” also needs to “paid off” and will again cite government spending on social security as the main culprit of increased borrowing. This is economically illiterate bunkum. Yet, we are now in a situation where, once again, the level of the nationals debt is set to be increased by a new war in the Middle East. Yet, the government can’t find money for the NHS? Please, pull the other one.

When politicians talk about The Deficit, most of the public haven’t a clue what it means and this suits our imperial masters well, for they can use this magic phrase to rebut any criticism of austerity, privatizations and cuts to public services. I have lost count of the numbers of vox pop interviews where some member of the public has quite literally repeated verbatim the spiel of some government minister or other. “The country is broke and we need to pay our debts” some ignoramus will opine, while another will claim “There’s no money, we need to cut something”. The United Kingdom is the seventh richest country in the world and there’s no money? Come off it.

There are five kinds of deficits. Let’s deal with each one in turn.

First, there is the structural or budget deficit. This is when the government is spending more money than it receives. Usually, governments receive money through taxation. If a government is cutting taxes for billionaires and faceless corporations, then it isn’t making any money. It’s simple logic. The other way a government can raise money is to print the stuff but quantitative easing, as it’s referred to, has only benefited the same people who got us into this mess: the bankers. The government could remedy this by taxing the rich more. Whenever this idea is proposed, our imperial masters respond by telling us this will hurt the “wealth creators”. These people only create wealth for themselves. They don’t even work for it. They get other people to do the work.

Work is over-rated. Hard work more so.

The cyclical deficit refers to, as its name suggests, the economic cycle and is caused by downturns in output. Low levels of business activity and high levels of unemployment are the manifestations of this kind of deficit. Some economists disagree over the terms ‘cyclical’ and ‘structural’ and claim that there’s no difference between the two.

A balance of trade deficit occurs when imports outstrip exports. If you’re not making and selling enough stuff to other countries but are buying in loads of stuff from overseas, then this is what happens. Every outgoing Tory government since 1964 has racked up a massive balance of trade deficit for the incoming Labour administration to deal with.

Finally, there’s the balance of payments deficit. This is related to the balance of trade. A balance of payments deficit is created when the imports of goods, services and investment income exceeds the exports of the same things. In 1974, this led to the Sterling Crisis of 1976.

So what is the national debt? Well, this is when governments borrow money from the central bank (In the case of England, this is The Bank of England), which is a private concern and not owned, in spite of its name, by the state. Governments borrow by issuing bonds, securities and bills.  In the United States the level of debt to GDP is 73.60%. In the UK, it’s 88.7%. Does this make a difference to you or I? Well, not really, since the government can borrow money at preferential rates of interest. The Tory-led government claims that it’s “reducing borrowing” but it hasn’t. It’s actually borrowed more money  than the previous government. Furthermore, all governments borrow money. It’s a fact of life.  The Tories’ continual claim that they’re borrowing less (sic) is a lie. In fact, most people don’t even know how much the national debt is, yet Westminster politicians will usually pretend to know when they’re busy conflating the national debt with ‘The Deficit’.

I realize that I have simplified these terms without going into heavy economic theory, but this is how deficits need to be explained to the public.

Do I expect our imperial masters to come clean on government finances any time soon? I doubt it. These people can’t even lie in bed straight.

Here are more blogs about the government’s deficit lies.

Finally! Exposed! The Deficit Myth! So, David Cameron When Are You Going To Apologise?

The Great Debt Lie and the Myth of the Structural Deficit

Another Cameron myth: the coalition hasn’t reduced the deficit by “a quarter”

 

 

 

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