Jon Cruddas summarises the poverty of Labour's thinking when writing in the Observer today, saying that:
Thursday is a big moment for the renewal of social democracy. The Institute for Public Policy Research's 'The Condition of Britain Report' sets out a plan to tackle our social problems and rebuild society when there is no money to spare. Whoever wins in 2015 there will be more cuts to come.
I added the emphasis.
Cruddas is wrong. So was Andrew Rawnsley wrong in the same paper when he argued:
Labour needs to be candid about the painful cuts it will have to make. Behind the scenes, Labour's Treasury team has begun to identify how it would squeeze spending to balance the books if the party were to win power.
And, for the record, Ed Balls and Chris Leslie will be wrong if they try to impose this policy on labour in power.
There is one fundamental reason why I can make this statement with such confidence and that is that at the macro (national) level there are some accounting equations that hold true in economics. One is that the economy does, in fact, balance as a matter of fact. It has to: double entry requires it. It may well balance at the wrong point with a result that we do not want, but it does balance. And what that means is that if someone is in surplus then someone else is in deficit.
There are not too many variables in this equation either: just the government, consumers (that's you and me), business and trade. So, if the government runs a surplus someone else has to run a deficit. It's pretty obvious really: the books will balance. So, a government surplus of the sort Labour says it wants must be matched by increasing consumer debt, business spending or money flows via trade. There is no other way it can happen, as a matter of fact.
The trouble is that creating surpluses in these other areas is going to be hard. First, we have remarkably little control over trade. As most people are aware, we almost invariably run a deficit and secondly we have (unless we suddenly and ruinously begin using interest rates to alter exchange rates) almost no control over our exchange rate so let's treat that as fixed to the extent that it is beyond control. And let's also be aware that such is the state of the Eurozone we should not be looking for much hope from that source — which is our biggest market. Trade, then, will not be our salvation, whatever we might hope.
In that case we're looking for a government surplus to be matched by either consumer borrowing or by business spending on investment.
Now, again, let's deal with the easy one — business spending. This would be on investment of course; we can't imagine they're going to start a free for all in pay rises for anyone but bosses. But as we know, whilst they're laden high with cash (which right now they lend, in practice, to the government) they appear to have no intention of spending that and worse still appear clueless as to what they might spend it on. There is no hope of them creating a deficit on their budget right now a their reticence to spend appears solidly inbuilt to their psyche, and so they will not create a surplus for the government any time soon.
In that case we're down to consumers to start borrowing heavily to make the government surplus happen. And you now wonder why George is creating a housing bubble? This is his only hope for creating that surplus that he desires.
But he doesn't just need a but of a bubble, he wants us to plummet into debt. As Duncan Weldon, when at the TUC, long argued Osborne's growth plan in 2010 was predicated on consumers going into increasing household debt on the basis of their belief that a budget surplus and tax cuts would be just around the corner. Consumers had more sense: they did not believe him and so we got a recession because they saved instead of spending. Now George is back on the same band wagon — with the same tune — selling the same myth but with the added twist that this time he is literally giving the money away through subsidised mortgage lending to try to make it happen.
But we all know that warnings are being given everywhere about the fact that this bubble will burst, or at the very best, be deflated gently. There is, therefor no sign of salvation on this front either.
In that case none of the pre-conditions for a government budget surplus exist in the economy and as a consequence there is nothing it can do to create one. It can cut all it likes, but all that will do is make matters worse. People will save more as their safety net is removed. Business will invest less as one of its biggest customers - the government - indicates it is buying less and trade will still remain beyond control. So whatever cuts are imposed the budget will not balance.
The questions to ask in that case are why Labour does not know this, why it does not acknowledge it and why it is not honest about both facts with the electorate. If it was it could, of course, propose the alternative economic policy we actually need, which is that the government should invest to create the future the country and our economy needs. But because it won't be honest Labour cannot make this case and is instead stuck in a morass where failure is the only sure thing it is offering.
It's really weird that a political party should set out to fail, but Labour is. Why is the question a lot of people should be asking.
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I am rather afraid that the reasons Labour has adopted the essentially pre-Keynesian economic policies it has in the last decade or so are: (1) few if any of its current leadership – and I include the current economics team – understand British political economy, and none of them understand it well enough to withstand the kind of questioning they would receive from the media if they diverted from the current consensus; (2) all of its current leadership believe that it is impossible to challenge that economic consensus thinking which emerges from the City and is transmitted by the media; (3) I would guess that obsessed as they are by focus groups, they find that focus group members do no understand political economy and are thus unable to see beyond the ‘common sense’ and ‘housekeeping’ metaphors which pass for economic thought among the public at large.
Underlying this is the odd fact that few Labour MPs feel it necessary to understand the British economy; this, it would seem, is something they feel more comfortable leaving to ‘experts’.
I think you are spot in Robin. Labour have become austrian zombies who have lost any sense of social purpose in economics. They have been taken in by the inflation obsession and the financialisation/commodification of everything. Cruddas is a profoundly opportunistic and ignorant man, on the one hand trying to play the ‘working man’ card and on the other kissing the posterior of the neo-liberal ideology. The Labour Party deserves its own destruction. We know that Governments aren’t households and that deficit bad/surplus good thinking as an abdication of all social responsibility.
Just look at the current passport fiasco as example. Perhaps a few people missing their holidays might actually show how cuts hurt, and make those people perhaps consider those it hurts a lot more than missing a few weeks in the sun.
I am not so sure the cuts have caused the backlog of passports.
The sectoral balances approach that you describe so well here seems so simple that it should be taught in schools as part of ‘life skills´. If everyone knew it and understood its implications they would be laughing at Osborne´s stupidity right now, and wondering why on earth Labour were repeating his economic lies.
Consideration of the economic failings of aiming for a government surplus just now would reveal that this target is simply a fig-leaf to cover the Tories real one, namely privatisation of the welfare state. Labour just wants to get back in power, and will say anything that seems popular at the time. Desperate times.
I will confess to being a Scot who is voting YES to try and get away from this parcel of rogues who are swerving constantly more rightwards as time goes on. Neo-liberal consensus? No thanks!
Brian, as an Englishman living in SE England, not far from London, not only do I have every sympathy with your desire to get away from the right wing lunacy that prevades Westminster, I’d like to be able to declare independence from them as well.
In fact, i think that if the Scots do vote for Independence, it won’t be because of any silly ‘I’ll support any team that plays against England’ nationalism, but because a lot of Scots want a fairer, better society than our rotten Westminster Parliament is going to deliver. Here’s the irony of course; while Cameron and his fellow travellers proclaim their love for a united kingdom, it’s their own wretched policies that are making the UK a more and more divided society.
You have it in a nutshell. You don’t hear much about ‘Braveheart’ up here, but there is instead a lot of discussion about social fairness, food banks and children in poverty.
If we did get a ‘fairer, better society’ here then the pressure on the Westminster parties to ditch the Austerity and social division policies from the vast swathes of England and Wales that have been brutalised by the Coalition (and probably a Tory/UKIP government next time…God forbid) would be irresistible. It could change everything.
This is why they try so hard to frighten us.
“One is that the economy does, in fact, balance as a matter of fact.”
Spoken like a true Modern Money Theorist!
To quote Randall Wray: “Private debt is debt. But Government debt is financial wealth for the private sector.”
When will politicians see the light and liberate us from the dread fallacy of composition error?
The economic consensus is very pervasive now, and politicians, like the public, have been steeped in the “economy as household” metaphor because it is one of Mencken’s answers to complex problems: clear, simple and wrong. There are a lot of things like that which strongly influence political prescriptions. Politicians are exposed to the same propaganda as the rest of us and they believe it to the same extent as the rest of us.
What I think makes it difficult for people to see through the consensus is the unquestioned underlying assumption. What the OP is describing is pretty much a closed system (with the exception of trade). Once you realise that, the inevitability of balance is obvious: what most people unconsciously assume is that there is a separate pot of money somewhere else. And that is true for a household: money comes in from wages etc, and that income is not affected by the decisions of the household as to spending and saving. Therein lies the fundamental difference between a household and an economy.
People are not encouraged to ask about that magic source of money. The media and the mainstream economists say “we cannot afford” high public spending and that is accepted. But if we cannot afford a welfare state paid for by public spending we cannot afford it privately either: for it is all the same money. It follows that we are saying that the poor must starve, to put it at its crudest.
Perhaps I am wrong and people do understand that, and are either happy with it, or resigned to it. But I don’t think so. I honestly think they believe that there is this external source of money, without asking themselves where that is supposed to come from. It really is a zero sum game: but that has been flatly denied for decades, by our mainstream economists and our plutocrats.
It is not easy to see what is obvious to you, Mr Murphy, for there is a fog of propaganda which obscures the reality; and for someone like me, with no background in economics or accountancy, it was really hard to get to grips with this. The mainstream media is of no help at all, and economic papers are (deliberately?) obscure. It is very tempting to give up and leave it to the “experts” especially when they are supposedly “explaining” what it all means with the flawed (and partial) “household” model.
People need to understand that this model is predicated on a magic money tree: it is not a metaphor so much as a fairy tale
I admit I am not sure what you are arguing
If you are saying there is no magic money tree then you are wrong: even e Bank of England admit that now
I do not think we disagree. The problem lies with the many faces of money, I think. It is certainly true that we can print more money, and to that extent there is a money tree: it is also true that there is no monopoly on doing so, since it is clear that the banks create money too. But that is not what the household metaphor talks about: it is in a different part of the forest
As I listen to people both in my circle and in the media, it seems clear that they think there are different pools of money. There is private sector money; and there is public sector money; and there is their own money. They are encouraged to believe that the government has no money of its own, as Thatcher said. Government only has money from taxation, so we get the mantra of “taxpayers’ money and all that goes with it. But at the same time they do not talk of “customer’s money” in the same way: they believe that the private sector does have money of its own in quite a different way. And that is what I mean by the magic money tree, which is separate. So they believe that we cannot afford a public sector but we can afford to pay for the same services through the private sector.
I think the difference is that the magic money tree in the sense that you and the BofE are using it is the one and only money tree: and that does exist. But the perception is that there are either two trees: the mint, which is bad cos it leads to inflation if you shake it: and another private tree. The money from the second tree is quite different and it behaves quite differently when it is used. Or, alternatively, that there is only one tree and it belongs to the private sector.
This metaphor is over extended but the main point I am trying to make is that money is indivisible in this context: if we can’t afford public provision we can’t afford private provision. If we could it would mean there were two pools of money
Not sure if that is any clearer: I am short of time, sorry
We are on a wavelength now
Thanks
“it is also true that there is no monopoly on doing so, since it is clear that the banks create money too.”
Banks only create money because they are licensed to do so – in exactly the same way that Sita are licensed to empty your bins.
It is a simple outsourcing arrangement.
If we don’t like what they are doing, then we simply change the terms of the licence to direct them to do what we do want them to do.
It’s the same tree, just with lots of different people allowed to shake different branches.
Perhaps, Fiona, the key point is that money is not wealth. To explain. In Robinson Crusoe there is a second wreck. He goes into the wreck and finds a drawer full of gold coins and throws then down in anger. He would give them all for “six pairs of English shoes and stockings”. Money is a demand for goods or services. It only has value when it can be exchanged.
To this end, as i understand it, and I have no qualifications in economics,we can issue money which puts idle or unused resources to work to create wealth which can pay back the issuance of the new wealth. At the moment there are people looking for jobs and empty factories. There is much to be done but we are told ‘there is no money’. In one version, we have to wait for money; in the other we could issue the money. If I am wrong, I am sure the web master will point it out!
You have worked out the entirely correct logic, now confirmed by the BoE, that it is lending that creates investment and so deposits and not saving and not the other way round
Savings withdraw money ANC cash from the economy
You are quite right, Fiona. private Money is seen as ‘real’ and public money seen as if it is virtually counterfeit , invalid and inflationary. This is ludicrous. However, because banks are essentially in control of the supply and we have a monetary policy that is based on bond sales we are encouraged to think of this as a ‘state of nature’. The UK ,as it has its own currency, does not need to issue bonds before it can buy anything.
If we had a true democracy we would elect Governments on the basis that they can issue there own currency for social purposes. The money can then be removed from the system by variously rated taxation.
Euro countries can’t do this because they are controlled by the ECB and fiscal policy is separated from monetary-we can see the result!
Being realistic, I think this is a very long way from happening
The problem with macro economic analysis, the use of aggregates, and of the accounting approach to economics followed by Mmt is that the actual capital structure – what is invested in – is an irrelevance to the model. It doesn’t matter what the government or companies invest in, everything balances and the solutions appear obvious. The fact that the capital structure of the economy – the thing that makes all the goods and services we consume – must surely be the most important consideration, tells anyone with any sense that ignoring this structure makes any model which does so completely unrealistic. You simply cannot understand the economy or prescribe solutions if you reduce capital to an homogeneous aggregated accounting entry.
Hang on – better than most macro economics that ignores money entirely because it has no theory of it at all
The candid answer is that no one should use one instrument blindly – and I would sincerely hope no one would
But that does not mean as an instrument MMT does not work – after all – as I stressed, it is investment that drives the business change in the process
Readers. It well disposed to economists may consider “better than most macro economics” not to be an especially high bar 😉
That’s not true at all. The Capital Development of the economy is central to the Minsky description of what banks should be in business to do.
MMT is very much about real resources and services. In fact that is the central thesis – money is secondary to the actual stuff in the economy and we should be less concerned about numbers and more about people and stuff.
Once you have freed government from its glass prison, then it can concentrate on public policy. An important part of that is ensuring that the production side is viable and successful.
The absurdity of Mmt is that it gives money magical powers when it is in the hands if the state. It sees the state as being able to make use of monetary free lunches. And that’s because it starts from accounting tautologies and develops micro theories from them. A bit if common sense would easily demonstrate that they have made logical leaps along the way because the conclusions are too incredible.
Understanding MMT is vital
But to then assume there is limitless money is wrong
But I do not think a single sensible MMT economist is saying that
“Trade, then, will not be our salvation, whatever we might hope.”
Never forget that trade is just some other country doing government spending, consumer spending or business investment – and we’re just stealing a bit of that.
Which is a bit silly when we can just create some more of our own. Why give more real resources and service away to other countries than we need to?
This seeming inability for Labour spokespersons to be on the same wavelength is a phenomenon across the Party – Sends out waves of Terror for 2015 onwards
Since 60% of people surveyed regarded ‘Ed’ as unsuitable PM material, and many of the new ‘input’ MPs’ regard getting their hands dirty much the same as we regard child-abusers, it is not looking good for labour.
That is tempered by the conservative party being seen as the party making its friends rich.
Either way, this democracy (sic) is looking (sick).
We now have professional politicians disconnected from all those messy low-lifes who actually do stuff to earn money. Still, we can sit back and watch them stab each other in the back.
We seriously need a revolution!