We don’t need ISAs to build houses

Posted on

Rather depressingly the Guardian has reported that:

A future Labour government would build 125,000 new homes over the next five years by harnessing £5bn from a new ISA for first-time buyers announced in last month’s budget, Ed Miliband will announce.

Why is that depressing? Not because new houses will be built, I assure you: we need them. No, it's depressing because the logic is that we can't have those houses until someone saves enough to pay for them, and that is absurd.

This subscribes to the totally false economic logic that a bank cannot lend until someone has saved, and, as the Bank if England has now admitted, that is just wrong. There is no need for a single penny of deposit (at least in principle) for a bank to be able to lend. All that is required is that people have to think it is good for honouring its obligations.

And the same is true of governments, only more so. They do not need any money to spend. Quantitative easing proved that. £375 billion was created out of thin air to save the financial services sector from itself between 2009 and 2012. And if money can be created out if thin air to do that the trick can certainly be repeated to build the houses we need. There is no need for an absurd, state subsidised, savings scheme to achieve that result.

I do, of course, call that programme Green QE and explain it here. What is depressing is that the economic truth that the Bank ifEngland finally admitted, that it is lending that comes first and deposits that come second and as a result of the lending, cannot now be admitted by government. The corollary for government is that government spending always comes first, always, and tax comes second. The logic is identical to that on banking, and just as the economic text books were wrong on banking so are they on tax right now.

The reality is we do not raise money in tax to pay for government funded activity. The truth is that governments spend first and then reclaims the tax spent from the economy in sufficient amount to make sure that there is sustainable growth without inflation and that goals in addressing inequality and market failure are simultaneously achieved. Viewed like that there is no logic to balancing the government's books if to do so would result in less economic activity, more inequality, more market failure or a less sustainable future.

But as yet only some economists and central bankers are beginning to get their heads around the reality of money, and many fewer still have got their heads around the reality that tax reclaims money the government has created by spending it into the economy. What this true perspective on tax means is that  tax is not a process of the government claiming money others have made, not least because (quite literally) most of us do not have the power to make money. It is instead a process of the government claiming back that which is already its own because government created that part of our income through its spending into the economy. That  point also makes clear that (as I have long argued) we have no right to our gross incomes, but only to our net earnings after tax, because the tax element of our supposed earnings always belongs to the government, who literally made it by spending it into the economy in the first place. 

When this is understood we won't wait for Micky Mouse savings schemes to build houses. We will build them, simply because the need exists. But until then we will be constrained by our lack of understanding. And that is mighty frustrating.