I made my position clear on fiscal surpluses some time ago. I have not changed my mind. I won't be any time soon. We don't need them. But let's run through the arguments anyway.
We need deficits because people want to buy gilts
The simple fact is that as the economy grows, and as the volume of savings within it grows, and as the demand for secure homes for such savings increases, particularly with an ageing population, there is an increased demand for government debt. All of these situations exist at present. The only way in which this demand for government debt can be met is by running deficits or by borrowing to invest through a National Investment Bank. To deny people the gilts that they want at this point in time would be to undermine the stability of the UK savings and investment market. If that is what George Osborne is planning to do then he should be explicit about it and say why he thinks that is a good thing.
We need deficits to promote new economic activity
There are, right now, a number of unfortunate economic circumstances in existence at the same time.
The first is a savings glut i.e. people are being cautious and want to save money. This is especially true of the wealthy who do, of course, have most to save.
Second, the world's largest companies are, by and large, not investing nearly enough to create required levels of growth to keep the world's rising population in anything like the style to which it has become accustomed. This is almost certainly because there are very few obvious technological innovations that they either want to promote, or which they think will provide them with the returns that tweaking existing products can deliver. To put it another way, the world's global companies (and there aren't that many of them) appear to be pretty bereft of ideas on how to use money creatively at present.
Third, at the same time it is very obvious that there is a massive shortfall in public investment. We do not have the social housing, transport infrastructure, broadband, flood defences, sustainable energy capacity, insulated buildings and so on that we need. There is a massive mismatch between the private capacity to save within the economy and the private sector inclination to invest and the need for public investment.
There are two, fundamental, ways to solve this mismatch of resource allocation: we can either tax saved wealth to fund public investment or we can borrow that saved wealth and provide it with the secure home that it is looking for at incredibly low interest rates and use the resulting funding for the purposes of providing the public investment we need. In the process we create the growth, employment, wage increases, modest levels of inflation, training and apprenticeships, long-term assets to pass to the next generation, technical innovation, private sector spin-offs and so much more that provides long-term prosperity for our country.
We need deficits to create money
Saving takes money out of circulation in our economy: it effectively destroys it. That is because money is only created be lending and since saving is the opposite of lending ( loan repayment having the same net effect as saving in economic terms) than a worldwide glut of savings leaves a shortage of something that we all need, which is money. UK money supply has fallen since the end of the quantitative easing programme in 2012. If this shortfall is to be made good then the only party capable of delivering the money we need to keep the economy going when the private sector insists, overall, on saving is the government and the only way in which it can create this new money is by running a deficit. This is the role of quantitative easing when the economy gets really tight: I would of course prefer People's Quantitative Easing to any other form because this does, of course, direct the funds to productive investment for all the positive reasons noted in the previous section.
If the government runs a surplus someone else has to run a deficit
It is a simple fact of life that if it one person borrows another one lends. There is no way around this fact. This is just double entry bookkeeping. There is nothing clever about saying this and yet there is an extraordinary reluctance to accept this truth. So, for example, Germany apparently thinks that every country can run a trade surplus at the same time, when by definition this is an impossibility because every surplus must be matched by a deficit, and likewise the current UK government appears to think it can run a surplus without somebody else being in deficit. In fairness the Office for Budget Responsibility is aware of this and, in clear indication of their supplicant role to the Treasury's wishes, have forecast (as I noted in July) that UK consumers will take on take on record levels of debt and UK business will undertake record levels of borrowing to fund investment at a scale that they have not delivered for decades and that UK overseas trade balances will improve to a degree that no one could consider plausible in the current world market, all of which assumptions are necessary to deliver to George Osborne the budget surplus that he craves.
As I said before on this issue, I could be wrong: people may decide to stop saving and suddenly go into a borrowing frenzy, and likewise business might suddenly discover that it has investment needs that have been unrealised for decades, whilst foreign net inflows of funds into the UK may indeed change, but candidly I think that the prospect that all of those things might happen simultaneously is extraordinarily unlikely. To put it another way, the chance that deficits in the private and overseas sector of the scale required to ensure that the government can run a surplus is remote, in the extreme. So a surplus is just not going to happen.
The government's deficit is to some degree beyond its control, especially if it is pursuing a policy of austerity
What the previous section really makes clear is that the government's deficit is, to a very large degree, beyond its direct control. In fact, if it wishes to run a surplus then the only way in which it can do so is by delivering a situation where there is such a state of economic security and stability that people are willing to borrow because they feel secure as to their future income and are confident in the social safety net that will exist to help them if that income fails, whilst business is willing to invest because the solid foundations of infrastructure that supports that investment have been put in place by government. Austerity, and the lack of investment that goes with it, are in that case the absolute antithesis of what is required to create the basis for a sustainable budget surplus. Only a confident government using its power to promote growth can create that confidence and the austerity narrative of negativity creates the opposite sentiment.
What does all this mean for the government's so called Fiscal Charter?
What this might mean for the so called Fiscal Charter is that the plan it puts forward for a sustained surplus is complete nonsense without explaining how and why this will be maintained, which the government is not doing. In fact, it is worse than that: making such a surplus the goal when austerity policies are being pursued makes the achievement of any significant reduction in debt most unlikely - as the current year's borrowing record evidences. And this is why this Fiscal Charter should be opposed: it is an exercise in fiscal illiteracy. That's about the kindest thing I can say about it
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Isn’t there a contradiction in selling gilts in that Gilts are savings accounts with the treasury and we know that Governments with a sovereign currency don’t need this ‘income’ in order to spend-why can’t the money be diverted elsewhere as yields are so low in any case bonds issued by local authorities/PQE projects ? Sorry to seem naive but I tend to regard gilts as ‘corporate welfare’as Bill Mitchell puts it, don’t we need something more visibly useful for this money?
I see gilts as a valuable safe haven
I think Bill and MMT in general have this wrong
Gilts have underpinned safe asset need for a very long time
What would do it instead?
How about allowing the investors seeking a safe haven the equivalent of a savings account at the central bank, with interest rates fixed at whatever the CB deems required to either attract or detract such savings (+ive when safe havens are needed, -ive when growth returns and needs investment cash)?
The problem I have with gilt issuing is not the issuing itself, but the way bond sales are used to reinforce a negative ideology (i.e. implying that the government of the day is forced to the bond market to “beg” for loans from these so-called benefactors, i.e. the market, to fund the deficit, when it’s not even remotely true! (even David Andolfatto, who works at the St Louis Fed and is staunchly neoclassical from what I can tell, recognises that there is huge demand for safe Government debt, so it’s the Market begging the CB for bonds in a flight to quality)
I agree with the mentality issue
Am working on ideas to reframe that
It is deeply mebedded in a lot of thinking
I expect you’ve done it previously, but highlighting the MMTers impractical dismissal of the state’s role in providing safe assets is very important.
http://www.3spoken.co.uk/2015/09/gilt-issues-considered-harmful.html?m=1
National Saving > Gilts
Sirry, but now let’s live in the real world of what is possible nd candidly getting rid of gilts altogether is not going to happen
PQE is a radical way of achieving part of the goal
But let’s work within the constraints of what is possible, please
Agreed Richard-we need to work within what’s possible -but that’s different from advocating for gilts which create a huge parasitic industry of unproductive activity that goes back centuries. The bond dealer IS the rentier par excellence-so , yes, if we’re stuck with this we need QE like loopholes but can’t we be a little more candid about WHY we need these accounting tricks? The euthenasia of the bond dealer is timely
I happen to think bonds have played a useful social purpose on the whole
What it would do is offer ‘safe haven’ investment products at National Savings – targeted at the individuals that need them.
The question all Gilt lovers need to answer is why huge quantities of government benefit payments in the form of interest should be paid to foreigners (who don’t spend it – increasing the foreign balance differential) and financial sector holders
There is no need for tradeable universally held assets of the government that receive government income. The state should be able to determine precisely who is receiving government funds at any point in time. You can’t trade your disability benefits for a capital sum in the market to a foreigner. So why is Gilt interest treated differently?
The safe assets in the private sector are deposits at the banks under the deposit insurance system. That is sufficient for small firms.
Larger firms should take the risk in the commercial banks or distribute their cash pile.
Neil
Sorry, but such a change is in the realm of fantasy
I don’t engage with neoliberalism for that sort of readon
Nor MMT when it suggests things like this
I deal I and reach the economucs of he real world
Richard
Richard,
You did ask “What would it(MMT) do instead” and Neil gave you a reasonable answer, so it’s then a bit much to say you won’t engage!
But, by advocating spending via PQE instead of via gilt sales you have engaged. Once we accept the principle that govt doesn’t need to sell gilts to ‘raise money’ its just a question of tidying up the details. They do need tidying up IMO!
Do we have fixed interest accounts for savers or just sell fewer gilts? If fewer gilts, how many fewer? How do we decide? What is govt trying to achieve by reducing its interest bill when it is the currency issuer? How much spending should be financed via PQE?
Those details are not the same as saying we not need gilts
@ Neil Wilson “Larger firms should take the risk in the commercial banks or distribute their cash pile.”
Well no not necessarily. For example, firms may want to hoard money (yet not lose the value of that hoard) in order to purchase capital equipment or take-over another business without increasing their debt obligation/s. This would suggest that an inflation proof “term limited” government savings facility might help encourage a more stable investment climate. Such a mechanism, however, has to be used alongside the mechanism of achieving and maintaining a more equitable control of the use of capital.
Correct me if I’m wrong you have written that you are in favour of a “quantity limited” but presumably “non-term limited” inflation-proofed government savings facility for individual citizens (non-corporate) and I assume that you’d be supporting this because governments cannot easily and consistently regulate inflation not least because of conflicting objectives.
If you are doing this in part because of the pyschological security it offers then it’s not a big stretch to extend this to the concept of “business investment confidence” or as Keynes once described them “animal spirits” since all “animals,” corporate or non-corporate, seek security don’t they?
As for the issuing of gilts to provide this security reassurance I’m MMT, it provides too much “free lunch” with the reassurance and I think and hope that both you and Richard Murphy can find some common ground on this.
Most gilts are not held by business or use Repo
They are used for investment
There is an issue there – which is maintaining a low cost and the conditions attached
But realistically I do not think we can get rid of gilts
Replace the word “Gilts” with “Tax Avoidance.”
So why is one right and the other wrong? Why is not issuing Gilts so much less realistic?
It would be much less harmful than say raising regressive sales taxes on the Isle of Man 😉
I am sorry: I am not getting your meaning
I’m sure this used to be called fiscal policy once upon a time. Governments allow deficits to expand, increasing aggregate demand to stimulate the economy until the private sector takes up the slack.
Have you been in contact with the Labour Party in re their decision to back the charter?
I have not advised on this issue in any formal way
I have discussed it with friends
Some, I suspect, are in the Labour Party
Thank goodness McConnell has seen the light over this.
The Blairite automata are welcome (as the Mirror reports http://www.mirror.co.uk/news/uk-news/labour-mps-storm-out-party-662222) to storm out of the meeting and ape Ben Bradshaw in declaring it a “***** shambles”, but what you post above shows that it is the Blairites who are locked into old thinking, who are “automata” whose cogs and wheels are operated by the thinking of long – dead economists, as J.K. Galbraith noted.
And “Gidiot” Osborne can crow and gloat as much as he likes, but McConnell secures two vital advantages by this move. First, he isolates Osborne, so that when Osborne’s predictions come crashing down around his ears, McConnell can simply stand there silently, and point to Osborne, without needing to say a word, safe in the certainty that his policy is not caught and tarred by the same brush.
Secondly, he has outflanked the gathering SNP initiative to brand the Labour Party as not being serious about anti-austerity, and so laid the ground for some sort of Labour recovery in Scotland & an ESSENTIAL requirement, if the Tories succeed – as they will – in gerrymandering the boundaries and reducing the number of MP’s to 600.
All in all, not just a smart move, but a necessary move.
Hang on I think I’ve got it back to front-McDonell is NOT now backing the charter? In that case reverse what I said above (can’t keep up with the pace.
McDonnell is not now backing the charter
mcDoneell states one of his reasons for not supporting the charter (which he implies is bullshit anyway[my word]) is that Redcar brought home to him the scale of suffering out there and that welfare cuts are creating great suffering-kind of obvious, isn’t it can’t see why Labour are keeping their powder relatively dry on this as there is enough ammo to utterly excoriate the Tories-glad he has changed direction but it all still sounds luke warm and not telling people we need a deficit-and screaming out: The Gov’t is not a ******* household!
Sorry, the Mirror website lunk came out wrong.
Should be http://www.mirror.co.uk/news/uk-news/labour-mps-storm-out-party-6622225#ICID=sharebar_facebook
Good article in Grauniad dealing with the way Corbyn’s radical proposals have been hobbled by his own partly making a renaissance in Scotland for Labour less likely, it focuses on the Fiscal Charter and the difficulty that Corbyn has getting his party to oppose it leaving the SNP (which, in some senses is not a radical left Party) to represent the ‘Left’ – this is a terrible situation for Corbyn and McDonell-can’t see it resolving. See: http://www.theguardian.com/commentisfree/2015/oct/13/jeremy-corbyn-snp-radical-scotland-labour#comment-61313856
I will never understand what on earth possessed John McDonnell to agree to the Fiscal Charter in the first place.
His belated u-turn, absolutely correct though it is, unfortunately now just comes across as bumbling incompetence.
Ham-fistedness must be contagious; see what you started, Cameron?
“His belated u-turn, absolutely correct though it is, unfortunately now just comes across as bumbling incompetence.”
I never heard this. I am very pleased to hear it, but as you say, what possessed him in the first place to agree to the restrictions of the fiscal charter, only he really knows.
Perhaps economic literacy will now prevail in the Labour party.
Richard- your name is popping up all over the place in relation to what sounds like a theatrical farce going on in the Labour party:
1) McDonnell makes Fiscal Charter U turn
2) Paul Mann criticises McDonell (correctly!) for signing up
3) Paul Mann then criticises PQE and yourself for using s Friedmanesque policy which he says will hurt pensions.
It’s becoming a Gordian Knot!
Paul Mann?
John Mann?
I have just been on the World at One on this…
And very good, you were too!
Thank you
John Mann-sorry!
It is also worth repeating that, as Paul Mason observes, the reason the private sector is not and will not provide the necessary investment in new technology growth (which it and the State had provided to kick start previous upswings in the cycle) is because it no longer has the incentive due to the depression in wage rates arising from a combination of over restrictive trade union legislation, extremely effective anti labour/working people propaganda, infiltration and subsequent neutering of any effective opposition, and the spread and growth of unprecedented levels of mental slavery within the general population via the vilification of alternative ideas. Berney’s pupil Goebbles would be envious.
It is now far easier to make mega profit from rentier activity. As a result all policy is designed to consolidate, through corporate lobbying, existing rental ownership rights, such as plant and other DNA, digital content, land, real estate property, and anything/everything else, including the 99%, from which value can be extracted until it/they/we is/are nothing but an empty shell to be discarded as no longer necessary to the requirements of the 1%. Much like feudal Lords had over everything in pre – capitalist times.
Osbourne, and his admirers in all three establishment parties, are not, and never were, serious about the budgetary surplus. He, and his class war acolytes (who are all comfortable with wealth and inequality regardless of which gang/party they nominally belong to) are knowingly spinning a line believing they have the tools to get away with it given the number of people who regularly demonstrate a willingness to defend to the death and die in a ditch clutching their forelocks the bullshit they are peddling,
Good article. Insightful as usual. My only contribution would be to add in to the list of “unfortunate economic circumstances” the failure of real wages to keep pace with productivity increases, the Thomas Palley and Thomas Piketty argument. This would help dispose of the Ralph Musgrave argument made as a comment on your previous article on fiscal surpluses that suggests blowing house price bubbles is a sensible way of stimulating an economy. It might in theory if new and youthful entrants are able to afford to get on board the house purchase train but every indication in both the US and UK is that wages are failing to keep pace to enable this leading to a derailment of this principal means of investment for most people outside of their pension investment.
Borrowing continues to go up. The government talks about needing to save money, yet gives away £3 billion in ta\cuts to those that don’t need them. It is cutting more than £20 billion from the NHS, yet insists on buying the £100 billion ornament which is Trident.
We boast a country of 100 billionaires, yet insist we need to cut back on a deficit as if this country was close to bankruptcy, which it patently isn’t.
The tories claim this country is undergoing a strong recovery, yet still insists on billions of pounds worth of cuts to the public sector. Talk about wanting your cake and eating it!
I notice that the fiscal charter, or austerity, is all in one direction. It would probably more beneficial to raise taxes for the rich to pay down the deficit, but that ain’t going to happen. Public services, which mostly working class people rely on, are being cut to the bone. What was that about being all in this together? The most laughable soundbite ever uttered?
The fiscal charter is a con to enable transfer of assets from the public purse to the private purse.
Nothing more.
On just the politics front the u-turn doesn’t look good for the Labour leadership. McDonnell is now in the right place and never should have said he’d sign up to the fiscal charter. But the hostile press are making a huge meal of it.
Somebody needs to bring economic sanity to the political debate – and given ‘mediamacro’, a PLP closer to osbormonics than anything sensible, and a hostile media that person needs to appear to be absolutely on top of their brief.
Sadly McDonnell doesn’t look like he is given reports that he wasn’t fully au fait with the charter (true or not, I don’t know) but that’s the message out there.
This mistake (and it was unnecessary) has stirred up the fractious PLP on other issues. I find it all quite depressing. I don’t know how long Corbyn and McDonnell can last and any replacements will just be Tory-lite on economics (and other things) since that’s what most other MPs are to varying degrees.
There doesn’t seem to be an opportunity for a mainstream advancement of what is just sensible economic policy at the end of the day in place of the erroneous narrative we are currently enduring.
I would agree that the confusion has been unfortunate
As I sometimes say to my children, “sh*t happens, let’s move on”
“We need deficits because people want to buy gilts”
Absolutely right and well said, Richard! I hope everyone who’s even the slightest bit worried about our deficit and so-called “national debt” reads this very important piece of what will be ‘news’ to them.
The question to be resolved, and I must admit I’m not totally clear on the answer, is if we should sell gilts. Is the fact that people want to buy them a good enough reason to sell them? Why can’t be just allow people to put their money on deposit. Offer the a fixed interest rate, say 2%, and tell them “that’s it. Take it or leave it”.
Some would say 2% was way too high. We should pay 0%. So what will happen then? If we stop people saving, deliberately creating enough inflation to make 0% very unattractive, we’ll theoretically have no deficits at all.
Is that what people really want? Is George Osborne aware that what he needs to do to achieve his surplus is create more inflation and stop selling gilts?
We will be paying zero soon
Yes but is still positive in real terms! We need 0% on gilts/govt deposits and ~3% inflation!
That’s where I think your PQE will be needed.
I think you’re teasing us.
Sectoral balances mean government surpluses can only be run outside “normal times” (WTF) and leakage means (government spending + new “private sector loans”) can never match completely.
Money will always be lost down the back of the sofa, and traders will exchange real fiat paper for real goods.
I’m not saying running a surplus isn’t possible.
Just deeply stupid *if* you want to avoid secular stagnation.
And note the *if*
John McDonnell needs to quote Keynes to his honourable friends, i.e. “When the facts change I change my mind. What do you do, sir (or in this case, sirrah)?
Interesting article and I agree with the point on borrowing to invest which ultimately can be done whilst running a surplus (Ed Balls said it but nobody listened) or even when running a deficit – I guess the strategy is that the surplus will pay the interest on long term investments. Ultimately though are we not chasing our tail with ever increasing debt interest slowly crowding out government spending (operational spend) assuming that the rate of growth or revenue from taxes grows slower than the impact from our investments. Governments are not always great at picking winners. Some countries run wealth funds and seem to then have very nice budget to do things that benefit the population subsidising things like transport for example, which lets face it the Uk is crying out for. I don’t agree with your key point that running a surplus is wrong since it really depends on what is happening in the economy whether you need to inflate or not and at what level – also the concept of a wealth fund should be introduced which may certainly help given that if we can’t get revenue in taxes then we can get more income in other ways.
Too much in there for detailed comment
Surpluses only make sense when economies are overheating. Otherwise you just undershoot capacity. Why do that?
Re crowding out: this is just fiction unless there is overheating. We are a million miles from that
Re wealth funds: I’d sggest people employed by gov’t are at least as good as people generally at picking winners. And backing losers. They are people still
But realistically I do not think we can get rid of gilts
What would be the pros and cons of offering fixed interest term deposits rather than having govt bonds sold at action?
PQE is essentially a method short circuiting the bond system of letting the ‘market’ set interest rates on govt borrowing. The government decrees that longer interest rates should be reduced when it instructs the central bank to buy bonds. So do we only need PQE because we have the bond system?
What would be the effect of Govt setting interest rates at lower that the ‘market’ would like?
The BoE is no a deposit taker
Nor should it be
It deliberately lends long
That is what gilts are for