It seems that there is almost universal political agreement now that the UK's public servants deserve a serious pay rise after seven years of real pay cuts. But, having achieved that goal another, quite extraordinary, discussion has arisen, which is on how we, a a country, are going to pay for this apparent profligacy. It is as if the logic is that if nurses want an additional one per cent then one in hundred of them mist be sacked or as MP after commentator has said "we'll be passing the burden to our children to pay the debt".
This is utter nonsense. I want to give three practical factors that are being ignored by those commenting and then move on to the reason why what they're saying is economically illogical.
The first issue being ignored is the fact that tax is paid on these pay rises. Everyone knows this, of course, but it is as if even the IFS resorts to the household / small business analogy of economic analysis by ignoring this fact. Of course when a business pays over the tax due on a pay rise that's a cost. But that is not the case for government: it is paying itself. And since on average we pay 39% in tax overall that means that at most only 61% of these pay rises need to be paid for because the rest is paid by the recipients in extra tax. Bizarrely, no one seem to be saying this. I have no idea why.
The second practical issue is that once the first recipient of this pay rise has paid their tax they will then spend the vast majority of what they have left over. And those recipients then pay tax. And this extra tax then goes back to the government. And so, on and on. This is a geometric progression: the fact is that the increase in government spending that these pay rises represent eventually comes back to the government in extra tax paid. It does not happen overnight of course, but it happens. In other words, over time the increases pay for themselves.
The third practical factor that is being ignored is that paying more to people who have earned it has a wider impact on the economy. It boosts confidence. It increases spending. And both stimulate markets that are, let's be honest, pretty much in the doldrums right now. So this encourages an increase in investment. And that increases employment. And so more tax is paid. And then the economy grows. And so more tax is paid. In other words, the additional revenue resulting from the initial spend may not just be that which can be seen to directly flow from it. If the spend takes place in a market operating at less than full capacity (and that's a fair description of the UK) then there is what is called a multiplier effect because the increase in economic activity resulting from the sum spent is greater than that spend. The result is obvious: over time the spend may actually more than pay for itself in additional yield as far as the government is concerned. But again, no one is saying that, and I have no idea why.
In this case for three wholly practical and economically sound reasons this spending may pay for itself and there is no reason to increase taxes to pay for it, and there is also no reason at all to discuss it creating a debt burden. But then let me get to the real reason why this is the case. The fact is, as often discussed on this blog, tax does not in any case pay for government spending. It never has, and it never will.
All government spending is paid for out of newly created money. This is not made by physically printing it of course, although it is worth recalling that the government's ability to print and mint money does prove its right to do so. Instead this new money is created electronically. It happens like this. When the government spends it does in effect borrow the cash from the Bank of England. This is a straightforward thing to do. What it means is that the Bank of England extends it the credit. And what that means is that the Bank of England simply marks in its ledger (using a computer keyboard) that the government now owes it more money. It does not go and see if it has the cash in question: it does not need to. All it does is say it owes it more, and that is it. No one else's money involved because the credit in question is new. But given that all money is just a promise to pay (read a bank note to prove that) and promises to pay are just a way of recording credit then that is all that is required.
And there is nothing unusual about this. If you extend an overdraft exactly the same thing happens. The bank you borrow from does not first of all check it has someone else's money to lend to you; it does instead simply create the money you borrow by marking up your account. That is how banking works. Banking is not a process of taking in some people's money and lending it out again. That may be what the historic economic textbooks say, but even the bank of England has said those books are wrong. It is just a system where credit is extended in a special way, because this credit can itself be spent.
Of course, money creation can't go on forever though, and it doesn't. In the case of your bank borrowing the money that the bank created for you is cancelled and disappears forever when you repay the loan. It's as simple as that. Your promise to pay made the money. Your repayment destroyed it again.
In the case of the government the money that the Bank of England creates for it so that it can spend is is cancelled in a different way: tax paid does that. So, tax does not pay for government spending in that case. What it does is cancel the money created to pay for that spending.
This is important for two reasons. First, it means extra tax is not need to pay for the public sector pay rise because it cannot pay for it: it's always going to be paid for by the government borrowing more. But second, because the new money that pays for the pay rise is now available to be taxed - precisely because the pay rise did itself make it available for that purpose - it is always going to be true that so long as there isn't full employment (when new money creates inflation) that the pay rise will pay for itself using one or all of the mechanisms noted above. The pay rise does itself create the new money needed to pay for the tax payment to cancel the money that was created to make the additional payment to public servants in the first place. And yes that's a circular argument because that is the way the world is. The trouble is that there are those who think public sector pay is poured into a black pit from which it never emerges again, and that is the fallacy. Mine is the correct representation, I suggest/
But it does have to be asked where borrowing come into all this? This needs to be mentioned because otherwise it will be asked by others. First, note that government borrowing is normal and has to happen. It is the only way it creates our money. If money is a promise to pay (and it is, because it cannot be anything else) then unless the government spends ahead of taxing and so owes the economy there is no money in circulation. Cancelling the national debt would, then, cancel all government created money - the pound in your pocket. That is a pretty uncomfortable prospect. So we need government debt. And a growing economy - whether growing through real economic activity increasing or because of the inflation we need - needs more money. But there is slightly more to it than that. Growing debt is a function of that growing economy. What it simply says is that the government is injecting more money into the economy and has simply not yet reclaimed it. That's all the national debt it.
This then is a measure of good government: the government acting responsibly to create the growth we want.
And it is simply a measure of the mount of money the government has injected into the economy for others to use - which we all need if the economy is to keep revolving.
And on the way, by packaging this as a special form of savings account - called gilts - the government uses it to provide a form of safe savings mechanism to people who need, including banks themselves and pensions funds, neither of which can operate without national debt and both of whom do, if anything need more of it.
So will we have to repay the debt? The answer is no, of course we will not. Firstly that is because we have never repaid the national debt. Second, that is because we not only know we do not need to do so, but know that it would be calamitous to do so: there would be no more money. Third, it's because the idea of repaying the national debt is absurd: we can only do so by over-taxing and so shrinking the economy for the sole reason of denying the money markets a product that is critical to their operation. Fourth, we know that if we did want to repay the debt we could do so tomorrow and costlessly: £435 billion of QE has proved that. In that case we keep it for good reason. In all these cases then saying we are passing on a burden to the next generation is absurd, unless, of course, you think passing on money to them is crazy, because that is what the national debt is.
So can we afford to give public sector staff a pay rise? Of course we can.
All we cannot afford is the hardship not doing so will cause and which wholly flawed economics is imposing on us.
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Excellent as usual Richard. I haven’t heard your interview on LBC, which would be worth spreading round – do you have a link?
Just a query on “it is always going to be true that so long as there isn’t full employment (when new money creates inflation) that the pay rise will pay for itself”.
What’s the definition of “full employment”? I’m thinking of the obvious case where everyone is employed, but there is lots of poorly rewarded employment.
Full employment is when no one else wants a job
And when pay rates reflect current productivity
Between 1945 and 1970, average unemployment was around 2-3%. This was considered “frictional unemployment”, those between jobs or just entered/re-entered the market, and so was as close to full employment as you could imagine.
That means, with unemployment at 4.4%, we are not at full employment.
And don’t forget underemployment as well – full employment also means people are able to work all the hours that they wish to!
The latter is key
Remember vast numbers – maybe millions – are in involuntary self employment now
Thanks for great article – subject of which we’ve recently begun to develop for NHS campaigners. We’ll share and promote.
Thanks on behalf of the 999 Call for the NHS Team
Our new section: http://999callfornhs.org.uk/no-more-austerity-2017/4593930998
Steve
Thanks!
Public sector real income has fallen, doctors by ca. 22%, largely between 2010 and 2015. This is why Mr, sorry Professor Osborne had such a diabolical smile – he thought he’d got away with it.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/623810/Wage_Growth_in_PRB_Occupations_-_final_report__3_.pdf
Thankyou – even I understood that, especially the proof that governments don’t ‘tax & spend’, they spend & then tax.
‘If money is a promise to pay (and it is, because it cannot be anything else) then unless the government spends ahead of taxing and so owes the economy there is no money in circulation.’
So if I get that, why don’t politicians (left & right)? It might be because until recently much of this was shrouded in jargon – on purpose. But thanks to contibutions by youself & others it is becoming more & more accessible to the electorate.
It’s because some really don’t want to get it. Austerity was never really about balancing the books. Its purpose was & still is to starve the public sector of funds, weaken it, break it up, pass it on to party cronies & finally to privatise the state itself.
So for the Conservative government, ending Austerity would mean ending that process. But not ending Austerity might mean ending the Conservative goverment. We’ll soon see what their way out of the dilemma is now that there isn’t a Blairite party to implement Austerity Lite. My bet is expect a rebranding.
Tories will change anything to keep power
Mike over the last 7-8 years I have been reading the Guardian on line and I’m on a facebook forum. These ideas have been appearing more and more often. There is a growing debate outside the mainstream media.
There is hope.
Richard, Thank you. That is clear, concise and easy to understand. What I don’t understand is, why the message is not being heard or argued for? Surely it’s a hands down vote winner as well as being the sensible way to govern and manage the economy?
I got it on LBC this morning
Even Nick Ferrari listened
Is your argument limited to a 1% public sector pay increase? Or are you saying that the government can always spend whatever it wants without any negative consequences, by simply creating the money from thin air? Free healthcare, free social care, nuclear submarines, new schools and hospitals, benefits for all, etc, etc?
Are there any limits?
The government can spend until its spending creates full employment
That is the real limit
Beyond that you get inflation
The constraints are purely physical – our capacity to work
But, taking the example of submarines, are we not constrained by factors such as needing to purchase parts or resources from overseas in other currencies? Is balance of payments important?
Also, we are surely constrained by other resources from an inflationary point of view, are we not? E.g. we start a huge project building X then the cost of the supplies of the resources for that might go up if demand surges and supply is scarce.
I’m just trying to get my head fully around where the limits are with govt spending and why it’s gone wrong in some other countries
Of course balance of trade matters: I never said otherwise
And I do not suggest large projects be used for economic stimulation. The Green New Deal deliberately says smal is beautiful for that purpose so you do not end up with the embarrassment of a project ending in a dead end or over stimulating because you cannot stop
The limit of stimulation is full empployment
Interesting questions.
1. Balance of trade has a long term impact on exchange rates. In the short term the overseas deficit just means that people overseas are happy to save pounds for a rainy day or to send their children to a UK university one day or to buy UK property one day. If one day they decide to exchange their pounds for another currency rather than buy stuff that the UK produces then there needs to be a buyer for the pounds at a particular rate. If there are too few buyers at that rate then the pounds falls which makes holders of pounds and pound earners relatively poorer. For this reason it is sometimes said that we are relying on the kindness of foreigners but really there is no reason to make a distinction between someone saving pounds on the basis of where they might live.
2. The resources question is more about time scales than any thing else. If there is a scarcity of nurses we can train more nurses but it takes time. If there is a scarcity of an ingredient in washing powder Proctor and Gamble just open a new mine in China but again it takes time. Scarcity is a myth created by right wing economists to make people accept their lot. The only scarcity is human desire and ingenuity (and perhaps fine wine and paintings but again there are alternatives).
Agreed
Maybe there’s also a shortage of economic literacy though?
This is the text of a letter I have just sent to my MP , Bim Afolami ( Conservative – Hitchin and Harpenden ) . I have suggested to my children and friends that they write the same letter to their MPs. It slightly extends a comment I put on here last week . If every MP were to receive such a letter and read it none of them could say they didn’t know how money is created and the realities of tax collection and the deficit. It might also pave the way for Labour to bring forward a new economic policy which could be explained in the simplest, clearest language which would give it credibility with the electorate and break the longstanding view of Labour as being financially incompetent. If it keeps playing the Tories tune of ‘ affordability ‘ it will never get over this hurdle in my opinion.
Anyway here it is :
Dear Mr. Afolami,
As our new MP I wanted to write regarding the current convolutions the government is putting itself through with regard to austerity and the deficit. . It is clear to me that no one in this government has the faintest idea how money is created. I don’t know whether , or not you are in this category, but if you are this is how I explain it when I give my talks called Money in the 21st Century :
Government by granting licences to banks has outsourced the creation of 97% of all the money in circulation to those banks by allowing them to create money out of thin air when they make loans, the greater percentage of which are residential mortgages. The other 3% is coins and notes which the Government allows the Bank of England to create. Out of that 97% taxes are paid and some people, those well-off enough to do so, save by buying government bonds . Those savings are the so-called ‘ deficit ‘ . Government does not have to wait until it has collected taxes, or sold bonds to pay for its expenditure because it, and only it, makes legitimate our currency. Government decides who should pay taxes and how much they should pay and thus all money in circulation is redistributed by Government. QED there is only one lot of money in circulation and it isa matter of Government policy to decide how it is redistributed throughout society. For the last thirty years it has been Government policy ( whichever party was in power ) to redistribute in favour of the rich which has meant less tax has been collected than might have been had the policy been different and therefore more bonds have been sold to rich people ( on the whole ) which is the deficit. There is no issue in increasing the deficit , or increasing taxes it is simply a matter of policy whichever way the Government wants to go. As a country with a sovereign currency there is never, repeat never a shortage of money. There is ample evidence for that fact in the numerous rounds of QE that have been employed in a failed attempt to get the economy to grow again after the Crash of 2008. All the money for QE was created by the Bank of England out of thin air.
It is astonishing to me that so many otherwise educated people in Government and the Civil Service are so ignorant of the facts of money creation and to spout all this nonsense about ‘ living within our means ‘ and ‘ a government is like a household ‘ when self evidently it isn’t makes me very cross.
I do hope you will be able to use my letter to enlighten some of your colleagues.
Yours sincerely
It’ll be interesting to see what sort of reply I receive.
I admit I do not agree with the 97% figure or the outsourcing bit: that is banks operating under licence in my opinion. But I like the idea
Richard – John Hope’s post triggered off a thought (it happens now and then!).
Because I know you’re always looking for something new to do, maybe you could draft a generic letter covering the basics, that we could all send to our respective MPs. A simple tactic which could have a snowball effect. I like the idea of an old-fashioned, hard copy letter (proof of delivery ‘signed for’) as opposed to an email, 38 degree petition or other social media communication. What do you think?
OK…..in a quiet moment tomorrow…..
The trouble with your letter is that you are channelling Positive Money’s 97% meme, and utterly ignoring vertical money, which is the process by which the gov spends newly-created currency into the economy via public spending, exactly as Richard clearly describes in his blogpost above.
The money created out of thin air by the commercial banks is horizontal money, and, as such, not actually money at all, but credit; credit which has to be paid back, at interest, and eventually, as Richard again describes above, destroyed as that credit is eventually repaid by the borrower.
Although your tactic of communicating your theory is worthy in principle, I regret to say that you will only have served to confuse, if not completely mislead him as to the reality of money creation in the UK.
It would have been far better and more accurate to have printed out Richard’s blogpost above, and posted that to your MP instead.
I will be working on a replacement letter
“I will be working on a replacement letter”
Good stuff!
I would happily send one to my MP, but if you know who she was, I expect you’d agree that, very sadly, we would both be wasting our time : (
I will be too
But it has to be done
I did some work on it last night
I am not channeling anybody’s meme . I’ve barely looked at Positive Money because they have set out their stall and I am not willing to buy into anybody’s stall . I am well aware of ‘ vertical money ‘ ( we have to stop using this jargon if we are ever to communicate this stuff about money to our neighbour ) , but this doesn’t contradict anything I said, or Richard said, because any money introduced into circulation by government out of thin air – which is what you are talking about – will be covered either by taxes, or bonds. There is nothing else is there ?
John Hope:
Your claim that the government only creates 3% of the money in an economy is plain wrong.
The whole idea that MMT advances is that all government spending is new money, not money the government borrows from banks.
In the case of the US I believe the figure for government created money is around 20% of the money in circulation.
In other Western economies it could be as high as 30%.
You obviously don’t understand the basics of MMT!
Then you’d better tell the Bank of England because that’s their figure . And what I said was that’s the amount of coins and notes . I am well aware of what MMT says.
I’m glad you’ve spoken about this.
Talking about tax rises to increase public sector pay is pure sophistry and I’m sick to death of hearing about it.
Has any Tory spoken about the tax rises needed to fund the £1 billion for the DUP?
Answer: No. Why? Because they don’t need to – they will either print it or just put a load a number with a load of zeros on Northern Ireland’s digital ledger.
Alastair Darling was interviewed by Nick Robinson on the Today programme and continued the rubbish saying whilst a pay rise was needed we needed growth to fund it whilst failing completely to make the case you have put that the pay rise will pay for itself. Also notable was Nick R asking him when / could he get the Labour Party back as under Corbyn it was just spend spend spend. Darling did not contradict or support Labour’s manifesto in any way.
I totally despair. Quite why it appears that the burden of the financial crisis should be on the shoulders of only the public sector, and that is a meme repeated by all the rightwing press is beyond me.
I
I too heard this Today programme and was horrified. Nick Robinson should have been there to interview, but he introduced Labour as ‘Spend, spend, spend’ as if this were a fact. His bias is appalling.
BBC interviewers often use the technique of making a very unfair remark as if it were fact and then carrying stright on to a question which makes it more difficult for the interviewee to go back and contest the untruth. But Alistair Darling should have picked him up on this.
Alistair Darling is part of the problem here
Sorry…………I meant to say ‘or just put a number with a load of zeros on Northern Irelands digital ledger’.
Probably a dunb question, but why do those suppoting the family budget approach to debt always bang on about the billions we have to pay each year on debt interest. Is that interest payable on Gilts?
That is the interest on gilts
First, they overstate the cost – ignoring that £10 billion or more goes to the government
Then they ignore much of the rest funds private pensions. Do they have a problem with that?
The obsession is small minded ignorance: small minded because they have not bothered to find out the facts
Hi Richard, brilliant article, the accessibility of these ideas for ‘normal’ people like myself is key to undermining the false and misleading narratives that much mainstream commentary uncritically regurgitates. On a separate note, I read recently that the ‘growth and stability’ pact as devised by the ECB is simply ‘perpetual austerity’ – could you shed some light on this?
Best wishes.
The ECB keeps buying bonds
It should do Green Infrastructure Quantitative Easing http://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/
I liked what i heard on LBC and something i have been trying to get my head around for a considerable time. Very easy to understand, put in a very concise way and in complete contrast to what we are constantly being told. Thank you
2 questions
Is this an accepted economical fact? i did read a recent report from the bank of England that does seem to back up your statements/theories.
BIG question why are the Tories pursuing the exact opposite? if it is what i have long suspected ie Chomsky’ theory of privatisation..As a government is it even legal to deliberately affect peoples lives in an adverse way to further your own personal gain!
The BoE agrees on money but not tax
I can’t see how you can do one and not the other
And your suspicions are justified
Why do the Tories promote austerity? I’m a believer in Hadron’s Razor (never ascribe to malice what can be equally attributable to stupidity) but in the case of the Conservative Party’s obsession with austerity, I have a horrible suspicion that it is both malevolent and deliberate. But to what end? What is the ultimate goal?
To recreate a form of feudalism where most are enslaved to capital they cannot question because of the burden of debt they are under
Absolutely right Richard.
“economic” not economical sorry posted in haste lol
finally an expert saying what i have long been thinking….the implications for the Conservatives are huge and pretty much proves what most have known for years! self serving spivs!
Richard, pertinent to this blog and many recent others, I have been told that any attempts at “deficit financing” the public sector will be undermined by “the bond vigilantes”, whomsoever they may be. How or why it would be possible or in “their” interests to interfere with government bond sales I can’t fathom, and googling did nothing to enlighten me. The last references to them on your blog date back to 2010/2011 when you declared their existence to be a myth. But people really believe in them, and that they “reined in” Labour governments in the 1970’s. I’m surprised they haven’t been brought up yet on the Today programme or whatever. Could you (or Mr Shigemitsu, or any of the excellent “explainers” who comment here) help me persuade my friends that they might have been players once but are now paper tigers used to frighten us?
There are no bond vigilantes
Maybe there never have been
But the reality is they have always been a myth
Paul Krugman is great on this. Search his name and fairies
Well, this is a revelation to me.
I too believed that bond vigilantes existed – although I do not believe in fairies (except tooth fairies when my children were (are?) growing up).
This episode reminds me why I keep coming back here and why you must keep writing this blog!
Thank you.
Bond vigilantes sound ever so scary as they are held out as terrible punishment for naughty boys and girls, but are in fact nothing that the UK can’t see off with a simple puff of QE!!
Basically the BoE can buy up any amount of Gilts it may be asked to by the Gov, so if Bond dealers won’t buy them, there is always “a man who can”: the Governor of the Bank of England.
So those dangerous masked vigilantes are really nothing more than toothless phantoms. Ignore them, and the very mention of them as any kind of threat that needs to be appeased.
It just stories to frighten the children, if they look like they’re about to misbehave!
I agree
The confidence fairy that empowered the bond vigilantes has been shown the door by QE
Should I assume that you disagree/would disagree with Bill Mitchell’s advocation that the issuing of debt is not necessary and that pension providers who currently invest in bonds can be catered for by other means (e.g. a national savings fund) then?
Most of the pro-MMT authors I’ve come across seem to think new debt isn’t required (by having the government run an overdraft with the central bank directly instead if I have understood them correctly, although I appreciate EU rules are hazy at best if not outright prohibitive on doing this while we’re a member state), and you are the first one who disagrees, so I’m interested in where the divergence occurs.
http://bilbo.economicoutlook.net/blog/?p=31715
I think debt has a role and so long as the net cost to government is close to zero see a) no reason to get rid of it and b) recognise EU law does not let us get rid of it c) wonder how those who suggest getting rid of it think the repo market will work d) don’t see why pensions and others needing security must be disrupted
I do not let theory get in the way of what works when it is useful and bonds have a use if we understand what they really are and are not beholden to them, which is wholly unnecessary
Re useful nature of debt and bond market:
Is there not something to be said for simplifying the system?
IMHO we should have the simplest system that achieves everything we need. Adding layers of unnecessary complications is a gift to charlatans trying to con the public.
Warren Mosler makes the point that even the idea that the banks are private organisations is a myth and confuses matters. In his opinion, formed while working in a bank, the banks are extensions of the state. They exist and have the powers they do only because the state has granted them those powers and continues to maintain them on a daily basis.
Essentially all this guff about the power of the banks and the bond markets,the horror of the national debt and the wearying cavalcade of inexplicable and contradictory economics terminology is just smoke to prevent us seeing the truth.
That truth is this: The power of the state has been seized by a cabal of private interests. They wield that power as their own and then have the outrageous audacity to claim the state is powerless to contend with modern global capitalism.
It’d be hilarious if it weren’t for all the needless suffering their con trick has caused.
Since the signing of the Lisbon treaty when Brown gave away “sovereignty” the Tories have had but one mission to get us out and get back control. Cameron at the time said “we will not let this rest” and they havent! He was supposed to be the chief remainer (I think not) Accountability to the European court of justice is what its all about imo…one word Panama papers..remember who’s father was named something we would never have known if it wasnt for that data leak
Austerity was inflicted upon us to enable the right conditions of despair. Brexit was sold to us by the msm (prominent owners are also named) Even UkIP was financed by another named in the Panama papers. Do you think it was an accident that the referendum was held in the middle of the largest migrant crisis europe had ever experienced… when the conditions were just right we had a referendum. Only afterwards did we find out.. We could actually send undesirables back, refuse inactive migrants benefits, claim back the costs of medical care from their home countries and we did actually have control of our borders but we chose not to instigate any of the existing rules or even tell people the rules existed in fact a lot of effort by the media was put in to convince us of the opposite and I wondered why??
I also note that despite the Tory rhetoric they removed the tax evasion clamp down from their recent manifesto, it still remains in Corbyns manifesto and impart probably explains the unbelievable hostility he received until Purdah rules kicked in.
Any way just a theory but after recent high level tax evasion prosecutions could the whole Brexit saga be linked to accountability to the ECJ? All imo
I wish to ram home this point ‘ The process by which money is created is so simple the mind is repelled ‘. ( John Kenneth Galbraith – look him up ) You can see the truth of this in the comments that have appeared under this topic today . Why do we cling to this idea of money as a ‘ thing ‘ ? It’s a rhetorical question. We do so because it makes us feel better , more secure ; in a time when most other bonds that once held societies together have weakened massively, money has asserted an importance out of all proportion with its utility and become the measure of all things. We appear to be moving towards a collective nervous breakdown as a result. Trouble is that ‘clinging’ strengthens those to whom it is useful for us to believe that it is the measure of all things because that is what they believe because they have so much more of it than most people . And that gives them a credibility which those without the money are prepared to give them because they feel inferior ; notwithstanding financial crashes and scandals galore over the last thirty years. We have somehow to get beyond all this if we are to survive .
Please tell Positive Money
when you have time ( yes, I know ! we ask a lot) perhaps you could lay out where Positive money doesn’t get it quite right. I read their response to Ann Pettifor and her understanding. I think you would back her over PM but I’m not sure why.
I pretty much agree with Ann here
The basic problem is PM think money is something tangible
It isn’t. It is only a promise to pay. And so it can only be created in use
And it can be destroyed
PM seem to have no understanding of this
They seem to think it real. Even akin to gold backed money. And certainly limited. Carson would agree with them: rationing would be so easy and downturns inevitable. But they are just wrong
Thank you. I see what you mean.
Good stuff Richard.
I have four children and four grandchildren. In good time, can we please have something from the master’s voice that will open their eyes to the Blue rinse that is the only rhetoric they presently hear.
If the powers that be have their own reasons for keeping us small, then we should empower ourselves, and lead from the grass roots upward.
Yes….
Double Bubble!
Now I have an idea where PM are going wrong – and having triangulated your response with Douthewaite and King I more than happy to put this to PM advocates who have got a foothold in my local Progressive Alliance.
The ‘promise to pay’ makes sense to me and I predicate it the following way (a sort of chicken or the egg question):
The need to trade and swap goods and services in human society pre-dates money. We had to barter and exchange goods in order to survive etc.
The key point here is that money did not beget trade: it was the other way around (although money has clearly accelerated trade).
Money was invented to help that method of exchange to become more flexible – to cope with variety in trade. But it is always ‘the trade’ – the exchange of goods and services that comes first. By definition then, money is always the ‘promise to pay’ – the follow on.
It is human behaviour to agree and confirms prices, commodities etc., before we actually exchange the cash is it not?
That is how am trying to make sense of it – rightly or wrongly (feedback welcome).
I’m hoping this hasn’t been said in a previous comment, as I haven’t read them yet, but I feel the need to add it anyway.
Yesterday, I heard that Mrs May felt that public sector pay was still too high relative to the private sector. The BBC, in their “report”, concurred with this, pointing out that, while the gap was narrowing, public sector pay was still (on average) around 10% higher than in the private sector.
A couple of things occurred to me.
1) How much of the private sector pay increases (apparently 3.3%/annum average) has gone to the higher paid in the private sector? I’d imagine that like me, many have heard stories of people not getting a pay rise for years, where I work we’ve had 2 pay rises in the 5 years I have worked there, and I’d imagine that’s pretty lucky compared to others!
2) adding to the above, isn’t it likely that many low paid private sector workers haven’t had pay rises in years BECAUSE of the pay freeze in the public sector? This is one way the Government could encourage more parity in pay, by increasing public sector pay they indirectly encourage better pay and conditions in the private sector, who don’t want their workers leaving their s**ty paid jobs to go and work in the public sector… and yet this has been effectively shut down for 7+ years and counting!
That does of course ignore the divide and rule tactics of “them (public sector) and us (private sector)” waged by the media and encouraged by demagogues like May and the rest of her cabinet. I’ll never get over the rage I feel when told about my “so-called” golden pension I was earning when working in the public sector… though when I showed my private sector employed friend how much was taken from my salary to pay for it (about 4 times as much as she contributed to a quite generous private pension scheme, might I add!), she was quite surprised!
I admit I do not know the answers
But good points
I heard a very good response to that point. The public sector pay is now pretty much exactly the same on average at private sector pay IF you take into account that, due to Government privatisation of certain jobs in the public sector now, people working in the public sector are more likely to be professionals with higher qualifications that would find them better paid jobs in the private sector. Making the level/complexity of work that is salaried more comparable in this comparisons brings the figures back to being very similar. We know that the cleaning and catering services etcetc have been privatised and that therefore in the public sector few or no people are on the minimum wage.
Also people talk about the so-called “gold plated” rights and pensions but I think that we pay a huge amount now for those pensions (I pay 14.3% of salary) and our rights have been eroded year on year with the failure of progress/increments in pay when our skills and experience would normally have allowed these to be awarded. Our workloads have increased because people are leaving in their droves and our job security is threatened by privatisation and service “redevelopment”.
This is all about the Government trying cause discord and an “us” versus “them” mentality. Obviously this is about EVERYONE in the UK. Everyone deserves a decent wage and working conditions and a good safety net if not able to work. If ALL people were paid better (not just the superrich who just squirrel it away into tax havens) they pay more tax and buy more services which pay more tax. It stimulates growth and feelings of self worth and dignity and therefore increases happiness and productivity in general. It is so obvious that the only reason the Tories encourage and spread the lies has to be to ensure that they and their superrich friends get richer.
Richard this is such a brilliant and simple explanation thank you so much. I look forward to sending your proforma letter to my MP and acquaintances who have argued for years that I am crazy and “we have to lives within our means as a Nation”!
That letter is being worked on
I can dual task at the Tax Justice Network conference…
This is the essence of the Tory ‘ divide and rule ‘ strategy which Thatcher exemplified i.e. that everyone working in the private sector was hardworking and efficient whilst everyone working in the public sector was a lazy, feather-bedded good-for-nothing , and that attitude continues with the paler May version .
D’accord.
I understand the overall point, but we should also recognise that at least a third of the cost of any pay increase won’t be paid to employees nor taxed as it will be go on ERNIC and pension costs.
Employer’s NIC goes to HMRC
And the NHS pension fund is unfunded so that goes to gov’r funding too
[…] And we now know car purchases are falling. So too are real wages. And the government is apparently refusing to do anything about that, although it could. As a result personal debt is rising. And we have Brexit uncertainty on top of that. There is also […]
The labour party has often been blamed for irresponsible spending and indeed trying to “spend its way out of depressions”. Do I recall that your historical charts show that Labour governments actually borrowed less and repaid more debt than Conservative ones. If true, were they not errors? I doubt that employment was at 100% during those administrations?
I am not sure what you mean by errors
The charts were factual
And the point is that government spending reduces borrowing – which is exactly what I am saying this post
What I meant was – Were both less borrowing and paying back national debt errors and so did they damage the economy? If so it might be true to say that Labour is less able in managing the economy!
In 1998 to 2000 the economy was overheating
Reclaiming money from the economy was exactly right at the time
Thanks for writing this and your other articles, Richard.
Following the big bail-out of the bank, the graphs showed a huge leap in the ‘deficit’. We were given to understand this as the amount the government had borrowed in order to pay for the bail out. This was then used almost universally by the media and the Tories and LibDems to ‘prove’ that Labour had ‘crashed the economy’ and now it was ‘all hands to the pumps’ to correct the ‘deficit’. I can hardly recollect a single voice outside of Paul Krugman to challenge a) what this deficit really was and b) whether it was ok to live with it, and indeed to carry on investing in useful projects in order to increase wealth and value.
However, according to your analysis, even this is skewed. Is that right? Are you saying, in effect, that there was no need to represent this as a ‘deficit’ anyway? It could have been represented as an ‘adjustment’ or some such? Or was money of some sort ‘borrowed’ from non-government funds in order to bail out the banks? If so, why? Why couldn’t the govt have just ‘borrowed’ from the Bank of England and let it disappear over time? Were the bond-holders (whoever they are) really knocking on Osborne’s door warning the Coalition that unless they cut wages/services/benefits they would up the cost of govt borrowing?
(apologies for asking so many questions)
Best wishes
‘bail out of the bank’ should be ‘bail out of the banks’ (referring to 2008-2010)
Michael
So many questions. May I answer in a blog, maybe tomorrow, as I in a conference today?
Richard
Of course! Thanks very much.
I have set it up – which is a statement of intent to myself
Richard – perhaps you can do it in the form of a poem and Michael can sneak it onto Word of Mouth :0
Joking aside – political change is coming and you can see it in our musicians, artists and in popular culture. Can you think of a single musician or artist that is pro Tory now? Music, art and satire are some of the most powerful weapons available!
I wish I was a poet
When I was a teenager my mentor – a man called Jack Ray – very wisely told me that it was not politicians who changed the world, but poets, and if I really wanted to change the world but could not write good poetry then I should at least try to master prose. Jack died in 2012 aged 95. I took his words to heart. I read a lot of poetry but would not dare publish anything I wrote.
And you’re right: the arts let us see the world as it really is. No wonder most practitioners are left of centre.
Excellent article Richard. Can you help me and explain how/why David Smith in his Sunday Times article didn’t make some of these points in which he compared what is happening today with the 1970s and the need for Britain to call on the IMF to bail us out, why things went so badly wrong under Callaghan that we couldn’t bury our dead, had rubbish piling up on the streets and interest rates in the teens? Smith put that down to Denis Healy trying to spend us out of trouble, nationalising British Leyland (and if anyone had an Austin or Morris in the 70s they know what a mistake that was!) and raising the top rate of tax to 83% (98% for unearned income). I know you aren’t making the comparison but a lot of us who remember the 70s will. Can you explain why it’ll be different this time. Thanks.
In the 70s the world was only just moving towards modern banking: the US had only just come off the gold standard. So the understanding of debt I offer here was then unknown and it was thought that cash in the bank was key – and that governments could not create it because underlying assets to support it were required. Hence we went to the IMF for support as we thought they may be missing. Now we know that is simply not necessary.
Tax is theoretically similar to the casino’s rake at the poker table. Any half competent poker player realises that the rake (usually 5% of each pot) very rapidly takes all the chips off the table.
You can see it happening right in front of you. Up to £10 per pot goes off the table. At 30 hands an hour a player is getting their stack wiped out by the rake every 60 mins.
Without players putting more chips into play the game would be over in a day or so. Thus the supply of new money into the game is a big concern for regular players and of course the casino itself.
On the other hand most recreational player’s have no understanding of the impact of the rake just as most of the public have no understanding of the way tax works.
But the rake is a rent
And tax is not
Absolutely rake is a rent. State spending and taxation are not. They are the two main control valves for the economy.
I mean only that the phenomenon of taxing each transaction leading to all the money being taken away is present and more clearly observable in situations other than taxation.
If people understood that they’d be more receptive of the notion that the state has to spend money into existence in the first place.
Thanks
There is something unbelievable about the suggestion that NO MPs or government officials know about the Modern Monetary Theory (MMT). It is obvious that treasury officials and those in the Bank of England must have both heard of it and discussed it. It IS believable that “ordinary” MPs may have been as ignorant as I about it — hoi polloi will not have heard of it. The chancellor obviously must have heard of it, mustn’t he? The PM? Possibly not — too busy being “focussed”.
So what is going on? Deliberate obfuscation? Why? Or they really do not believe in the theory. Perhaps they cannot believe that it works outside the country — in a global setting? If the theory really is factually correct then these officials should all be thrown out of their jobs for deceit and incompetence. There has to be a reason for this situation. Should we subscribe to a conspiracy theory?
There is a very good chance that they do not know in the Treasury
Maybe they only read to reenforce their own prejudices
Warren Mosler points out repeatedly that everyone at any level of seniority in banking and all the staffers at the Fed understand the realities of the US monetary and financial systems. I find it hard to believe treasury staff, BOE staff and our bankers are not similarly aware of the reality of MMT here in the UK.
I hate to call it a conspiracy against the public but that’s increasingly what it looks like to me.
I think the reason for the obfuscation is they realise that if the public were fully aware they would demand the state act immediately to bring about full employment, infrastructure spending, greening of the economy etc. They know it blows the TINA narrative out of the water and would necessarily lead to erosion of the power of various vested interests.
It is very similar to climate change denial in that sense. The Koch brothers et al are fully aware we could all live in a better world if we addressed climate change properly but they’d lose power and wealth relative to others in the process. That’s all they care about – their relative position in the hierarchy not the overall health or wealth of the system as a whole.
I suspect the higher than normal rates of sociopathy in the upper echelons of politics, media, business and economics has something to do with it…
I would like to think Warren is right
I am not sure….
As Henry Ford said ” It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning ” . How right he was. We seem to be hard wired to believe that money is a ‘ thing ‘ and therefore something of substance and that can be used against us by those ‘ in the know ‘ .
I Made these interactive Quizzes based upon the Positive Money Quiz By David Faraday https://www.quiz-maker.com/QYMG3AR and the money creation Survey of MP´s https://www.quiz-maker.com/Q4FBT85
I Made these interactive Quizzes based upon the Positive Money Quiz By David Faraday https://www.quiz-maker.com/QYMG3AR and the money creation Survey of MP´s https://www.quiz-maker.com/Q4FBT85 Positive Money and MMT have a fairly public Argument regarding the use of the Magic Money Tree, The Basic political quarrel is between, A Job Guarantee and Universal Basic Income. Both are possible and even desirable but people always fall out over ideology.Richards Brand of Fact Based pragmatism always gladdens my Heart I must Say.
I think the argument is deeper than you suggest
MMT understands money, although I am still not persuaded by the JG
PM do not understand money (see comment earlier today)
I’ve been sending complaints into the R4 Today programme about precisely these issues. Earlier this week they had Stephen Dorrell and Norman Lamont, two of the architects of the current neo-liberal economic worldview, arguing that austerity has to continue and we can’t afford public sector pay rises. I’ve only studies economics to A level, and that was 30 years ago, yet even I could see the alternative argument. But the BBC failed to invite an interviewee with an alternative economic worldview and the interviewer asked questions entirely framed by a neo-liberal economic worldview. This happens time and again on the BBC and in my view represents clear right wing bias on economic issues. You’re an awful lot better qualified and more eloquent than I am. Have you considered taking the BBC to task over this?
They know my number
I know from experience arguing is not considered desirable
Of course our government know and the question people then ask is WHY??
Its not a conspiracy theory.. Chomskys theory on privatization are real. The problem is proving that the government is acting against the interests of its own people! good luck with that one.
Its just my opinion and a growing number of other peoples:
Austerity is an unnecessary evil to 1) facilitate Brexit and 2) to get their hands on our schools, hospitals, prisons, police force etc, in fact whatevers left of our country that the state still owns and then just simply rent it back to us. Rentiers is the new conservative black lol
For how much longer can the government be allowed to get away with this outrageous economic bxllshxt? Why is there not more vociferous outrage from the economic fraternity – and those laypeople who understand? https://www.independent.co.uk/news/uk/politics/theresa-may-budget-deficit-public-sector-pay-cap-priority-conservative-cabinet-pmqs-jeremy-corbyn-a7824886.html
Even Cameron has the nerve to jump back in the ring and spout this rubbish.
Sending the proposed letter to MPs is a small step in the right direction but I don’t understand why there isn’t a much more visible (and audible) reaction from academia.
Maybe the obstacle to the truth is quite simply the media. Scary stuff that further reinforces the household budget myth in the public’s mind.
Hi Richard,
Can I ask you what is meant when people say “…but the national debt is costing tens of billions of pounds per year to service (interest payments? If so to whom?) so we have to reduce it as quickly as possible so that this money can then be spent on public services instead”
thanks
Darren
A blog….