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.
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“… 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. ” Um. This is our government, so what they make is ours, no? We made them, remember? So I don’t believe your argument stands on that basis… I can agree though that tax is necessary to restrain inflation but it can only be done fairly in an environment where all pay taxes in equal and proportionate measure. The one we have, where some through artifice need pay no taxes at all so in order to avoid deflation of the value of their tax haven-stored currency the remainder have to pay an amount of tax which is entirely disproportionate, is hugely unfair.
I don’t buy the government as agent of the people argument
Anymore than BP is agent for its shareholders
It is a separate and distinct entity. Sure democracy gives us an element of control but it is not ours, per se. That is wjhy exercising control is so important or it can cease to be benign
Literally every left wing economic fallacy trotted out in one blog.
You are directly misinterpreting what the BoE has said. Not least that Banks still do need deposits to lend (for regulatory, capital and credit reasons), and make good any lending with other borrowing.
Then you go on and say governments can print money out of thin air. Which is nonsense as well. Looks like you don’t understand QE and are really talking about monetarism – just printing new notes. You’ve basically just said that you can create assets out of thin air, and nobody will notice any problem. So why aren’t we all walking on golden pavements?
Next you say that government spends first, then reclaims money through tax. Suggesting that government is the engine behind all growth. Which of course is chartalist nonsense – now rebranded as MMT. There is plenty of economic activity which would happen without the government and needs no government intervention, or even a defined currency.
Then you extend your theory. Because the government is behind all growth, everything actually belongs to the government first. Our pay is really what they allow us to have – a gift. No right to our gross incomes? What utter totalitarian rubbish. It’s actually quite worrying anyone can even suggest that – given it’s implications on our freedom and liberty.
So congratulations. You’ve misunderstood every economic concept or theory you’ve looked at here. And then put it all into one blog.
Except everything I said is right and as the BoE had to point out – it was al the conventional economists who were wrong
And yes, money is indeed made out of thin air – just go read what they say and stop believing in a flat earth. It is deeply unbecoming
As for libertarian nonsense – I sense paranoia
No, the BoE have pointed out that banks cannot create base money (M0) and can only create M4 money – more commonly known as credit.
It’s pretty clear everything you say isn’t right. If by using QE as you say, we could have near unlimited spending without having to raise any debt or tax, why haven’t we? Why hasn’t anybody, ever?
The reason of course, is that QE doesn’t work the way you say it does. What you are suggesting is monetarism. You don’t seem to understand what the BoE has said about QE either. I quote:
“QE does not, as is sometimes suggested, involve printing more banknotes. And QE is not about giving money to banks. Rather, the policy was designed to help businesses raise finance without needing to borrow from banks. And also to lower interest rates for all households and businesses.”
Your interpretation is that everything you say is correct. It’s becoming more and more apparent that this is only in your head. ANy time anyone points out the flaws in your arguments you simply say you are right by decree then block them from posting.
Libertarian nonsense? Better than totalitarian and left-wing propaganda. We can have everything we want for free – as long as we let the government control every aspect of our lives!
M0 is 3% of money
M4 embraces about 97%
And it is made by banks out of thin air
Why not by government too?
Of course QE was not money printing. And nor was it giving money. It was money created, as all is, by way of loan (from the BoE to a BoE subsidiary to buy gov’t debt – a circualr gtransaction, in the end)
And yes I do understand all that
It is seemingly you who does not
Come back when you have learned something
Silas
Does your poor opinion of what is essentially fiat money also extend to private banks who create it by issuing credit cards and organising loans that create asset bubbles?
Or is the creation of fiat money by a sovereign government to actually solve a social problem not allowed by your obviously neo-lib dogmatism?
Tell you what – don’t bother to answer because your double standards are obvious.
Richard,
Thank you, as always, for bringing up the tough topics which need to be discussed. I have long felt that all pay items, for all people, should go through a governmental vetting system. For example:
I hire you to conduct carpentry work at my home. Upon completion of the job, you are paid. However, you are paid properly. I use an electronic system to provide information to the government as to the particulars and the amount. The government then deducts the proper amount from my account and provides the NET to your account. The net, of course, being the proper amount of tax to be deducted. This entire transaction would be completed within one contained ‘system’, all operated by the government.
Through this national system of debits and payments, users would receive a statement of accounts on a monthly basis and a statement of society on a quarterly basis. Key, the government would receive the proper tax, first and foremost. This sort of system would allow a closer coordination of society, the economy, the people and government.
Brilliant.
Furthermore, for the transaction to be fully valid, the carpenter would need to be properly registered and licensed, etc. The scope for “benign guidance” from the centre is tremendous.
The danger is that a future neo-lib government could dismantle such a project.
The secret is to hardwire these things. The proposed Office for Tax Justice, for example, should be independent of government control with separate powers.
It is government that drives growth and provides for us. This cannot be at the whim of short-termist politicians. Yes we should have elections in order to prevent dictatorship, but there should be a permanent progressive framework in place.
I’m sorry, but we also need to be tougher on unacceptable opinions (climate change denial, neo-liberalism, etc). Richard’s astonishing tolerance of dissent is a great credit to the left, and his pin-sharp put-downs are inspirational (I always think of burst-balloons when one of the neo-libs tries to take him on: “but you seem to have forgotten x” … pfffffffffffffft). However, this is time that would be better spent re-building government.
Oddly, Portugal is moving in this direction
There an official receipt can be demanded for any transaction – and the trader has to supply it via a government registration which means tax is very hard to avoid
It has been a deficit closing measure, which may be the wrong motive, but it is working
It is a measure to look at here, seriously. A job for the Office for Tax Responsibility
A nationwide transparent system of payment? It sounds to me as if, probably without knowing it, you’re advocating the blockchain.
Thank you Deirdre & Bill,
Whether we call it ‘blockchain’ or a ‘national sysytem of debits and payments (NSDAP)’, this is what we are all fighting for and for which Richard and his blog are the cornerstone. Coordination is vital.
Oh dear Silas,
Someone’s worried about the advance of the progressives in a few weeks time.
I don’t think Richard could have been more explicit, for example: “But as yet only some economists and central bankers are beginning to get their heads around the reality of money”.
There’s a reason Richard used “reality” and not “possibility” for example. Yes, it’s a new insight, and great thinkers like Richard will always face opposition from conservatives. On a topical note, remember that they refused Jesus too.
In a few weeks we have a choice between the 1930’s, and possible salvation. We can only hope that we get the latter, and that the best economic minds are brought in. (So I suppose we better enjoy this blog while we still can).
I find this very surprising. In January 2013 I attended the 3rd conference of “Positive Money”- I support them, although I am still not sure about the exact percentage of the money supply should be created by government via the central bank, but I am on their spectrum. I do not see (like Adair Turner), how we can get out of the positve feedback of private debt creation without government created debt free money, as well as progressive taxation).
The reason I bring this up here is that I find it incredulous that Miliband should believe that savings are needed. The reason is that the leaders of positive money stated at this conference that they had interviewed Ed Balls and George Osbourn on the topic of money creation. They concluded that (from their point of view), that Ed Balls was much more dangerous than George Osbourn because he understood the system perfectly and thought it was a good system, uncritically.
I would say that house buying is the area that banks should be kept away from especially, as they rent seek on dangerous economic bubbles and need bailing out when the economy as whole fails to pay due to falling incomes and productivity. If they are allowed to create credit it should only be for productive purposes and should be taxed heavily.
House building and buying should be an area for government created credit, as government can then control the asset inflation and debt, and could nationalise a house if people fell on hard times.
Worth keeping an eye on Iceland, perhaps, as they contemplate doing away with money creation by the private banking system altogether http://www.telegraph.co.uk/finance/economics/11507810/Iceland-looks-at-ending-boom-and-bust-with-radical-money-plan.html… oh, and about the blockchain; while I’m here again anyway, it’s unlikely any government could dismantle any worldwide system built around the internet without taking down the internet itself. Unlikely then. More about the blockchain here http://www.forbes.com/sites/steveforbes/2015/04/02/how-bitcoin-will-end-world-poverty/
Bill,
Complete agreement on Iceland. I have visited Iceland in the past and know the people there can handle such an issue. On blockchain/nsdap, we are building trust in government, day by day, conversation by conversation, no doubt the proper safeguards would be in place to ensure that any shut off by government would be done with the complete support of the people.
Maybe Ed is just trying to reassure the voter that he does not plan to use debt to promote the building of more houses so it looks as though he is using ‘sound’ economic principles that are in line with the voters understanding or expectations of matters? Labour keep having the ‘tax and spend’ label applied to everything they say.
As explored elsewhere in this blog, many voters have been brought up to treat macro economics like micro economics (a household economy IS like a country’s economy for example).
This is truely excellent news.
We can all now give up work.
I knew the Greens were right, the government can afford to pay us all £70k pa for just being cool citizens.
Why do right wing commentators have to be so stupid?
That is a serious question
I’m right wing for pointing out the ability to create deposits of value has some conditions that can’t be ignored?
I’d better change my voting intentions.
Money is fairly irrelevant and confuses many.
The issue is resource. Do we have spare resources that can be used to build houses? Or are we going to borrow them from someone who will expect them to be returned?
Only a deeply unconventional macro economist can argue money is fairly irrelevant
They gave said as such for a king time and mist if their models ignore it
No wonder they had no answer forr the Queen
And as is clear, you remain deeply confused by it
Or anyone else
They resort to derision in the absence of argument. You’ll remember I do a lot of digging around in history looking for clues? Well, I can confirm the right wing have used derision, name-calling, belittling in place of argument where it seems fair to assume they have none for centuries. The dreadful thing is, it works great! People by and large are so stupid they’re routinely taken in by these tactics and always have been. It makes me despair sometimes, makes me think seriously about just looking after me and mine.
Thanks
Richard, the government is not allowed to directly fund itself by printing money, it is against EU law. It also doesn’t have the mechanism to do this either. When you say the government spends first and taxes later this is factually incorrect, giving the impression it can spend money it doesn’t have. It can’t. It does actually have to either tax first or borrow first. It literally cannot spend without doing this bar a relatively small funding mechanism at the BoE. I think you have extrapolated your understanding of banks to the government. But it really doesn’t work that way. I repeat, the government has only two sources of funding – taxation or borrowing. It cannot spend first under the current system.
A) it can and does lend to itself. QE does that
B) of course it borrows first. I never said it didn’t. I said it need not tax first. The reality is historically it printed first. I accept it now borrows. But it uses it’s power as government to do that and knows it need not tax to spend. In that respect ur us wholly unlike anyone else. You ignore that fact
In order not to tax to spend it would have to borrow its entire expenditure every month. Something like 10 times the current rate of borrowing? Yes, it can buy these bonds up using QE, but under the current rules it would still have to sell the bonds on the market first (this is what the Eu laws say). So whether it could really do this is I think questionable. Certainly there would be a tremendous confidence question mark. Also, such an increase in the money supply would surely be hugely inflationary.
I remain deeply baffled as to why you, like so many right wingers, are utterly unable to comprehend a) what I write b) the real world
This representation of both is farcical
You ignore the fact that there is tax – the reclamation process – going on. Why?
I can only put it down to one if two things. Stupidity or incompetence.
Richard, you have kind of answered our own question; and even the Daily Mail seems to acknowledge right wingers tend to be stupid:
http://www.dailymail.co.uk/sciencetech/article-2095549/Right-wingers-intelligent-left-wingers-says-controversial-study–conservative-politics-lead-people-racist.html