Having just pondered upon what the purpose of this blog might be in 2018, a near perfect suggestion came along, pretty much fully formed. This exchange took place on the blog over the last few hours of yesterday:
The suggestion that comes from that is, of course, that the blog does at least in part exist to provide responses to the ill-informed comments too commonly heard in public debate on tax, economics and the role of government of the type Anth has made.
Let me offer some facts. This is what the UK government will spend its money on in 2017/18:
Now Anth, tell us what's wasted and of no use to anyone in there, and how much you expect to save as a result?
And do remember that you don't pay for any of that spending anyway. That spend comes to £802bn, but revenue looks like this:
That comes to £744bn. So even if you find savings in the first chart there is no way that they will necessarily reduce your tax bill because (as I have long argued) tax does not actually fund government spending. That's paid for by (metaphorically) printing more of these:
The promise to pay printed on there is fulfilled by accepting such money in settlement of your tax bill, which only exists precisely because the government spent in the first place and has to tax some, all, and on occasion even more than that spending back only because if it did not there would be inflation. Its decision on how much to tax to control inflation then leaves a surplus, balanced budget or deficit, but it does not mean tax pays for the spend: that's paid for by the Bank of England extending the government credit against its promise to pay, in exactly the same way as all other money for spending is created.
So, given these facts Anth, what spending would you cut, and why, and what would the effect on tax be?
I'm curious to know. So are others. Please tell.
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If this “tax does not actually fund government spending” could be found in the discourse of any politician then we might stand a chance.
Richard, I’m trying to understand your argument about tax not being required to fund spending, and why this matters. What are some books I could read on the subject?
You could start with my Joy of Tax….
I’ve read your book and don’t mean to be rude, but I was looking for a more rigorous/academic treatment of the point?
Modern monetary theory then: search at will
I thought you didn’t agree with the MMT guys?
I don’t on the Job Guarantee
I do on a lot else
Once you’ve read about Modern Monetary Theory, or even if you don’t, here’s a video of Stephanie Kelton -The Angry Birds Approach to Understanding Deficits in the Modern Economy –
https://www.youtube.com/watch?v=Q1SMjeuyF-Y
It’s very good, and explains deficits and a few other related topics.
George S Gordon says:
January 2 2018 at 3:27 pm
Once you’ve read about Modern Monetary Theory, or even if you don’t, here’s a video of Stephanie Kelton -The Angry Birds Approach to Understanding Deficits in the Modern Economy —
https://www.youtube.com/watch?v=Q1SMjeuyF-Y
Thanks for this George.
Gerald –
You don’t need to read anything, just apply simple logic. “Tax and Spend” can’t be right – it assumes that the money had to exist before it was taxed. All money comes from the government (through various agencies, but as a simplification the statement holds true). If all money comes from the government then they had to “release” it (i.e. “spend” it) before it any tax payable using that money could be charged. It’s simple… if the money wasn’t spent into the economy by government, nobody would have any with which to pay their taxes.
So, “Spend and Tax” must be the right way around.
In a nutshell, that’s why tax doesn’t pay for anything. Hope that helps!
For an ‘easy’ introduction you might try Warren Mosler’s “The difference between money and litter is the Taxman.”
https://www.youtube.com/watch?v=aArYrUFzjxw
Yes….
The link I just posted is the wrong link. Try this.
https://www.nakedcapitalism.com/2017/05/taxes-parable-turning-litter-money.html
@Gerald
Take a look at “Functional Finance and the Federal Debt”
http://www.modernmoneynetwork.org/sites/default/files/biblio/lerner%20functional%20finance_0.pdf
This is a good read on MMT:
Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, Second Edition
Richard, a good blog! I’d refer Anth to the Beardsley Ruml document you posted here a few years ago. We know that tax is chiefly about:
1) ‘Driving’ the currency and its acceptability.
2) Creating behavioural changes.
3) Redistributional (changing patterns of consumption)
4) Removing excess money if inflation is a risk ( read the Abe Lincoln speech quoted in Richard’s book ‘The Joy of Tax)
5) Taxing ‘bads’ not ‘goods.’ ( taxation for social, health and environmental purposes).
(Richard, you might want to add to this list, or disagree with it!)
So Anth’s concern should be: ‘Is the Tax in the right place’ not ‘I feel a bit better paying it’
We’re not on a gold standard; we’re not pegged to another currency (like EUrozone countries) so there cannot be a shortage of it, nor can the Government default and nor does Government spending promote inflation ( unless the productivity of the country collapses).
Simon, there will be a comment in the morning
Simon,
“nor does Government spending promote inflation ( unless the productivity of the country collapses).”
That comment relies on highly theoretical, outmoded and extremely naive assumptions about “productivity”, competition, demand and excess capacity.
I will wait until Richard comments ‘in the morning’ before saying anything further.
I am 9nly talking tax in the morning
“I am only talking tax in the morning”
Extra coffee before log-in. Forewarned is forearmed. 🙂
you’re right Marco-rather naive of me to express such a generalised view -what I was thinking was that it would not promote inflation in the present UK context (underemployment and high private debt).
Thanks Richard,
It’ll be hard to keep this brief but I’ll try.
Simon’s observation about inflation assumes a simple but common notion of demand-pull inflation where the economy is normally running close to capacity and a rise in nominal income then outstrips the economy’s capacity to produce..
That notion is outmoded because the industrialised world now exists in a state of permanent excess capacity. The manufacturers of East Asia and Germany alone could easily outproduce world demand. That’s manufacturing. As for services etc. the existence of permanent unemployment and underemployment is effective proof of excess capacity (an excess capacity of labour – skilled and unskilled).
One simple answer to this may suggest that greater income equality would increase consumer demand and take up the excess – it would, but not entirely. We could still outproduce potential wants and needs. So the point about “productivity” is moot.
More to the point, Simon Cohen’s observation inherently assumes a healthy state of competition – where a rise in demand is met with increased production not price rises. That is a patent nonsense. The industrialised world is for the most part now a corporate oligopoly world and the UK’s retail oligopolies provide just one prime example.
If a rise in demand where to occur now through significantly increased pensions and public sector wages (for example) then a large proportion of that would be captured through price rises on the part of non-competitive, rent-seeking oligopolists and monopolists. The have the market power to do that and they would.
In the current world, low inflation is primarily a consequence of low demand via poverty and inequality. That’s how low inflation is maintained. I’ll spare you the paragraph on oligoplolist’s demand curves but suffice to say that if we are to alleviate inequality then we must first address the question of competition and corporate market power. Flippant references to ‘the country’s productivity’ will not suffice.
Go read Polanyi: I think you’ll find some agreement
Polanyi?
Sure. His relevance increases over time.
Simon,
Thanks for replying. I was juggling tasks and posted my long comment before noticing your response. I hope that didn’t appear to be rude.
Hi Marco -no not rude at all.
What concerns me about what you say is that your unqualified statement about global excess capacity is based on ‘excess capacity’ as defined by global rentier, financialised economies – you state it as if it were an underlying reality, independent of ideology. That sounds rather 19th Century.
There is no real limit to the jobs that can be done -at present, with an ageing population we need many more public services and as Naomi Klein has pointed out, if we were to address climate change, we could create full employment possibilities.
The nation state need not be supine in the face of oligopoly and rentier activity as it is now and I’m not clear why you think that is the case. Full employment is always possible, even with large populations.
You were assuming I was making a ceteris paribus statement whereas it was more like a ‘mutatis mutandis’ one!
Low inflation and low demand now are, in my view largely based on rent seeking, as Michael Hudson put it Finance, Insurance (particularly in America) and real Estate (the FIRE sector), you merely mention ‘low demand via poverty and inequality and seem to be reversing cause and effect.
Do you have a reference for the ‘oligopolist demand curves’ you mention? Sounds interesting!
Simon,
I know that the world needs a lot of fixing up but the idea that we can always find positive tasks to keep us busy does not detract from the reality of excess capacity.
Yes, I was referring to the industrial capacity required to meet consumer demand and potential consumer demand . That reference stems from economic terminology that you may well find to be inherently “ideological” in some way, and it in some ways it probably is.
My point about inflation being mostly a function of market power (rather than capacity) remains nonetheless. Permanent excess capacity need not be a bad thing entirely. Appropriately managed it could open a world of greater leisure and universal well-being. Growth in a finite world must end at some point. John Stuart Mill had already envisioned this 1848.
http://www.econlib.org/library/Mill/mlP61.html
I’ll assume that your reference to cause and effect is based on a misunderstanding. Greater poverty causes lower demand causes lower CPI figures (normally). My reference to oligopolists’ demand curves simply acknowledges that even they must charge lower prices when demand is very low. When incomes rise they steal a large part of the advantage.
I mentioned the curves flippantly, you don’t really need them and not everyone will find them to be “interesting”. But to meet your request (and minimise the potential pain) I’ll offer this brief introduction: http://www.economicsdiscussion.net/oligopoly/oligopoly-models-sweezys-kinked-demand-curve-model-and-collusion-model/3781
More seriously, The authors Josef Steindl, Paul Baran and Paul Sweezy (Baran & Sweezy) are generally good on monopoly capital, oligopoly and stagnation.
Thanks Marco – I’ve not read Sweezey or Baran although the names are familiar.
I’d rearrange some of the education spend to have a mandatory module on money creation in the modern economy.
Arguably that would save lives.
Scott Egner says:
January 2 2018 at 10:41 am
“I’d rearrange some of the education spend to have a mandatory module on money creation in the modern economy.
Arguably that would save lives.”
Much as I agree that financial education is seriously lacking in our basic curriculum I shudder to think what would be taught given the current orthodox economic consensus. Also, I don’t think you would easily arrive at a consensus on what would be left out in order to create time for it.
In general the less control the government has of the education curriculum the better, I would suggest.
Nuclear weapons. I would hate our country to be occupied by a foreign power but using nuclear weapons – weapons of mass destruction – could cause the end of humanity. If we can’t use them, what are they for?
The Conservatives could abolish them and the following fuss would soon die down. Labour would find it much more difficult.
I believe the argument is that our opinions are more highly regarded internationally, as a nation, if we’re part of the ‘nuclear club’ than if we were unarmed peaceniks.
Deterrent. Let’s imagine Hitler had nukes during the second world war and we didn’t. What do you think would have been the outcome?
Benzo, he would have done what the Americans did and found a distant target to use for live testing.
Instead of trying to reimagine history, why not state the enemy which nuclear weapons are deterrent against now – and how that deterrence works.
“…Instead of trying to reimagine history, why not state the enemy which nuclear weapons are deterrent against now — and how that deterrence works.”
Erm…because there isn’t one….. and it doesn’t ?
I have thought that perhaps the best thing we could do with Trident, rather than scrap it, is offer it to the North Koreans in order that the US can have some justification for continuing to believe in their obsession that Mutually Assured Destruction is a viable defence policy.
I’m searching for a combination of keystrokes that produces an emoticon suitable to follow that observation and find myself defeated.
Richard i find your blog very thought provoking and i agree with much of what you say and the purpose of it (pursuit of fairness and equal opportunities)..i do find myself contesting some of your macroeconomic ideas..
Inflation for example can come from many sources..the UKs recent experience has seen inflation generated by a fall in sterling (post brexit result) and us importing goods at higher prices and this passed on to the consumer. The more we rely on QE the greater the danger that the currency markets will hammer sterling and we will have the same inflationary consequences only much worse. QE so far has been used to suppress market interest rates which are insensitive to base rate changes i.e longer dated gilt and corporate bond yields. When these gilts & bonds mature the probability is the BofE will reissue to itself (as they will want to continue to keep interest rates suppressed) – here we have effectively started “peoples QE” which you advocate..to me this will be the catalyst for a major inflationary problem as the currency markets get spooked by the uncertainty and scale of issuance.
Taxing more to combat inflation isn’t fixing the problem – the problem will be the FX markets perception of sterling through the use of QE.
See later reply
“…..The more we rely on QE the greater the danger that the currency markets will hammer sterling ….”
Last time I looked at FX charts I was seeing a general decline of the Dollar against basket and no signs of a consistent fall in Sterling against the Dollar. Maybe I’m reading the charts wrong.
The OECD examined governmental spending in a report in November 2016. They found that subsidies and pensions provided by the government reduce potential GDP by a large factor, 7:1 in the case of subsidies, 2:1 in the case of pensions. Ergo cutting these things will make us better off.
But take something less controversial such as a decision to get £300 into the pockets of pensioners to spend on anything of their choosing. You can do this in 2 ways – stick £6/week on the rates of pensions , PCGC, and the applicable amount of benefit claims. Or not give them anything for 51 weeks of the year and hire a hundred staff to administer a new system which pays them the full amount just before winter with a reminder to put the heating on, as if they are children who are incapable of budgeting and unaware of seasonal temperature variations. These staff could be better deployed checking tax returns to make sure that people are paying the correct amount that government has decreed to inhibit inflation ( because tax doesn’t pay for things ).
Subsidies for what?
And pensions for who?
And what does ‘better off’ mean?
As for winter fuel benefit – simple – don’t means test it
And many other benefits come to that
Absolutely.
Means testing is just another form of rent on the benefit – its costly and pushes up the cost of benefit provision which is what the orthodox politicians get worried about anyway in order to cut costs in the first place.
The only people who benefit from means testing are those who get the contracts to do the means testing.
It is bizarre to think that politicians have spent a lot of time reducing peoples’ entitlements using means testing as a filter in order to cut benefit bills only to see the cost of administration go up!! Bizarre but true that a whole industry is being set up to deny people State help. Bizarre and unjustifiable in my view. Bizarre and deeply immoral.
“As for winter fuel benefit — simple — don’t means test it
And many other benefits come to that”
I suspect governments like means testing because it reduces take-up.
Gordon Brown made a meal of pretending that this was virtuous targeting of resources on those most in need. I think this was disingenuous and he rapidly demolished the principle of entitlement which the Labour movement spent most of the 20th century trying to establish.
Indeed – and just tax the benefits away where they are not needed.
Richard
Beautifully written if I may say.
And for Anth – I hope that you can see things differently or at least start to begin to. This is not received wisdom you are dealing with here. Open your heart and your mind to Richard’s input.
Pretty much every household, rich or poor, wastes or gets poor value for money on something and the same is true of business.
Government isn’t the exception it is the norm, but it can manage to do things on a far grander scale than everybody else.
However as all government spending must create jobs, profits and income for somebody you have to ask, is it really waste?
Christmas is the best evidence of you first comment
If the government is paying £46 bn on debt repayment. Who is it being paid to?
And is it sensible? and or necessary when in theory it could borrow from itself?
It’s sensible if you think private pensions are sensible: pension funds and insurance companies own quite a lot of this
Some of course is also paid outside the UK
But then, other governments pay people here too….
The reality is that at present we do not know how to run banking and pensions without government debt
Nor money, come to that….
And remember this is someone else’s income
And it is quite often taxed
And it is spent again….
So the multiplier is at work
There aren’t black holes in government spending: just better and worse multipliers and recipients
‘The reality is that at present we do not know how to run banking and pensions without government debt
Nor money, come to that…’
The second half of that I agree with, Richard but not the first part. Money is an IOU so money is debt but that is not the same as saying that the Government NEEDS to issue bonds to spend, or we NEED to have private pension schemes reliant on bonds ( other Government savings vehicles can be used).
The bond market itself inflicts certain opportunity costs onto society by creating an unnecessary rentier activity. MMT ( in the words of Bill Mitchell) makes clear the alternative:
‘The alternative is to offer a support rate on the excess reserves. This decouples the relationship between the bond sales and the central bank interest rate maintenance operations.’
This ‘floor’ policy eliminates inter-bank competition.
He goes on to say:
‘the central bank does not have to conduct any open market operations (reserve adds or drains) to sustain its target rate of interest. It can simply make it costless for banks to hold the extra reserves by matching the support rate to the target rate. Then the excess reserves are indistinguishable from holding an interest-bearing government bond.’
I’m in sympathy with Neil Wilson re: the bonds dealers:
‘The argument is whether the holders of bonds are the correct entities that should receive a government income. The majority of current bond holders are not the correct entities to receive a government income. They should get out there in the private sector and do something useful, or have their money rot in a bank account.’
T
There are alternatives to what might also be thought of as a ‘barbarous relic.’
Another alternative is a zero interest rate policy or floor which the B of E describes here:
‘Under this system OMOs are not required. Instead, the
standing facilities play the central role in supplying and
absorbing reserves at the policy rate. With the supply of
reserves seamlessly adjusting to demand, the zero-corridor
system should provide the most robust interest rate control in
the face of changes to the demand for reserves or disruption to
the interbank money market.’
regarding the opportunity cost of issuing debt Bill Mitchell has written:
The real costs of any resource-using activity are measured by the opportunity costs of not using these resources in alternative activities.
The operation of public debt markets absorb a diversity of real resources deployable elsewhere.
While this is difficult to assess in the context of an economy without public debt markets, some points can be made to structure our thinking.
The opportunity costs in terms of the labour employed directly and indirectly in the public debt ‘industry’ are both real and large.
The ‘cottage industry firms’ that characterise the public debt industry use resources for public debt issuance, trading, financial engineering, sales, management, systems technology, accounting, legal, and other related support functions.
These activities engage some of the brightest graduates from our educational system and the high salaries on offer lure them away from other areas such as scientific and social research, medicine, and engineering.
It could be argued that the national benefit would be better served if this labour was involved in these alternative activities.
Government support of what are essentially distributional (wealth shuffling) activities allows the public debt market to offer attractive salaries and distorts the allocation system.
While this labour may move within the finance sector if public debt issuance terminated, the Government could generate attractive opportunities by restoring its commitment to adequate funding levels for research in our educational institutions.
On balance, public debt markets appear to serve minor functions at best and the interest rate support can be achieved simply via the central bank maintainng current support rate policy without negative financial consequences.
The public debt markets add less value to national prosperity than their opportunity costs. A proper cost-benefit analysis would conclude that the market should be terminated.’
Simon
That was almost as clear as one of Bill’s! But Bill is right on this
Thanks
Richard
‘That was almost as clear as one of Bill’s! ‘
Sorry, Richard – I often find myself posting things that are at the outermost edges of my understanding and cognitive skills, so I’m not as clear as I should be.
I’m still in the process of trying to assimilate these ideas – so some of my postings are ways of testing out where my own understanding (or lack of it) is at – I’ve always found this site very friendly and encouraging in that respect.
Simon
We all do that!!
You’re welcome
Richard
A dozen quickies:
1. PFI cost burden.
2. New nuclear plants and added nuclear storage/reprocessing capacity – we can’t reprocess plastics so where will long lived high-level wastes be [safely] stored for millennia?
3. Bail out of privatised railway companies e.g. recent East coast line (Grayling’s handy work).
4. Unnecessary prison and probation privatisations [reforms] (Grayling’s handy work).
5. Building more prison capacity and detention centres (Grayling’s handy work).
6. New homes subsidy, there are better ways to help our youngsters have affordable accommodation.
7. HS2. We need to electrify the UK’s railway infrastructure, railway lines and rolling stock, first.
8. Brexit shambles e.g. DUP confidence & supply agreement.
9. Higher earners pensions tax allowance.
10. NHS agency (nurses and doctors) payments and privatisation of services.
11. Maintenance of an extended royal family and their **expectations of living standards**
12. Chasing and disenfranchising disabled, mentally ill and others by the DWP et al from reasonable **expectations of living standards**.
I could get some students on that lot….
I seemed to recall that you carried on claiming for ages that you still had lots of accounting clients before finally admiring you had none.
Is it going to be the same with students?
I mean, what courses do you actually teach? How many hours a year are you actually lecturing? How many students do you actually have? Are there any exams baded on this that count for anything. It won’t be a state secret. I do fear for your students being taught ideas that no other sane person agrees with.
My City profile is here https://www.city.ac.uk/people/academics/richard-murphy
I teach a course for second year undergraduates on the Economics of the Real World.
The course looks at how issues within political economy are addressed in the world beyond academia.
There is a focus on combining theory and data with current contextual issues to present relevant arguments that will enhance students ability to tackle issues within and beyond the academic environment.
I have forty direct teaching hours a year.
80% of my employment is research based.
My teaching hours in proprtion to contracted teaching time are, I think, the highest in my department.
The course is assessed on a presentation by the student and an extended essay. It is not examined as a result. The course carries equal weighting with others the students will take in their second year and counts towards their degree as a result.
Now in its third year, the course appears popular with students.
My colleagues appear to think my opinions not just sane but worth sharing, as it seems do many others. You are, of course, at liberty to disagree with them all.
A faint whiff of Worstall perhaps (?).
@Ho hoe – The pertinent question to RM should have been; “Are you referring to undergraduate or postgraduate student assignments or future research (students)?”. There are entirely different learning outcomes and skill levels to assess, between Yr 2 and PG levels. Combining information RM has given on this blog about his academic position at City and my own. I assess (on this limited information) he is committing 75 to 200% of the expected hours to his direct teaching duties, particularly in preparation of online teaching material and resources students and the university Teaching Excellence Framework (TEF) demands.
I’d say it’s about 150%
I sweat for those students
Including a lot of follow up when they are in the third year
I’d be glad if someone taught sense to economists!
My elder lad did A Level Economics & it was horrible. A simple trip through free market ideas with nary a step for markets failing.
It was a rotten, lousy, course which I’m glad he gave up at AS. He’s now doing History, much more rigorous.
I love to know how economists can keep teaching, post 2008, the exact same course they taught pre 2008, even though its been proved to be wrong. I mean proved in the only forum they care about, the market!
They deny that they are
Which is even worse
I would add corporate welfare to that list.
I also would not trust a lot of the data the government provides.
I have worked with and alongside the NHS and local government, there is wastage.
Also Iraq, Afghanistan, Syria, Trident etc… we are not a super power anymore.
Also, the war on drugs.
Jim
We could save billions on the “war on drugs” but we won’t. It would really upset the way the journalists who write on the Daily Mail & Express think of the way that the readers of the Daily Mail & Express think about drugs. We couldn’t have that. could we?
The banks make lots of money laundering drug money, witness HSBC and the drug cartels. Witness the documentary on the subject, HSBC Gangsters of Finance https://www.arte.tv/en/videos/069080-000-A/hsbc-gangsters-of-finance/ While the banks run the government, as they clearly have for some time, it seems likely the ‘war on drugs’ will continue.
What constitutes ‘waste’ in government expenditure is what politics is all about isn’t it.
Anyone who disagrees with keeping a nuclear deterrent will point at Trident and say that is definitely ‘waste’. But the political argument for keeping it is that it is a cost-effective way of maintaining a nuclear deterrent without necessarily making an objective case for having it at all. I’m not even clear whether it is possible to make an ‘objective’ case. It comes down to risk assessment in an uncertain world. aka Guesswork.
Another project which will continue to be contentious is HS2. Ditto the new Hinkley Point power station. And a brace of Aircraft carriers.
The argument is not so much whether or not we can afford them as whether they are worth affording in terms of the benefits they will yield. Are we just ensuring an expensive future electricity supply and very expensive rail tickets to Birmingham. ?
I suspect (and I’m sure I’m not alone) that the arguments in favour of policies like these and a myriad others are swayed by players with lobbying power and vested interests.
Overall these sort of projects are not going to make the difference to the size of the pie charts, unless they are making significant difference to the workings of the wider economy in at least the medium term.
The biggest waste is not so much financial as in the human resources which are wasted in not being usefully employed.
Your last is easily the most important point
Richard, if you will, please, this:” that’s paid for by the Bank of England extending the government credit against its promise to pay, in exactly the same way as all other money for spending is created.” I understand before we entered the EU this was catered for by the Ways and Means section of the BofE, but by which section has it been done since?
Pass…..
Will have to check
I’ve made this point on this blog and elsewhere many times ; it’s extremely difficult, if not impossible to dislodge from our minds the idea that money is not a ‘ thing ‘ . Take Bitcoin for example which has almost no resemblance to money as we know it. The inventors could have called it ‘ Bitdigit ‘ , but who would believe that had any connection to money and thus value ? It is perhaps the most deeply ingrained belief in our sophisticated society that money has substance notwithstanding the trend towards the elimination of cash. So for a government to go against that belief system and say ‘ Hey folks it’s all made up ‘ would be tantamount to saying it’s all a fraud. So that’s the first major hurdle. The second is the constant repetition of the lie that money is scarce ‘ it doesn’t grow on trees ‘ which is the government is like a household trope and it can only spend as much as it earns . It is incumbent on those of us who know that neither is true to explain why.
Let’s keep trying
” the government is like a household trope”
Intruiguing that this does not exist outside of Britain. No, let me rephrase that – intriguing that it does exist in Britain.
Hint- with proximity as a convenience one might consider attacking the source of such ideas as well the idea itself. Come to think of it where did that stupid notion come from to begin with?
Good question
I doubt Thatcher invented it, although she promulgated it
Marco Fante says:
January 2 2018 at 9:48 pm
” the government is like a household trope”
“Intriguing that this does not exist outside of Britain. No, let me rephrase that — intriguing that it does exist in Britain.”
I’m not sure you are right about that, Marco. I think it is hardwired into US culture aswell, that you can’t spend what you ain’t got which without actually mentioning household budget is implicitly playing on that idea. See the intro to Stephanie Kelton’s wild Birds lecture ( https://www.youtube.com/watch?v=d57M6ATPZIE Scroll in to 4.30 ish. montage of US politicians playing the debt guilt card big time)
Mark Blyth makes the point that the German ‘schuld’ means both ‘debt’ and ‘guilt’ and underpins the German attitude to deficits based on similar false premise of domestic or personal debt. Compared to Italians who derive debt from ‘credo’.
Confusion in language is delightfully exemplified in our own rather perverse use of the terms debit card and credit card.
Margaret Thatcher very effectively muddied the waters by appealing to ‘common sense’. I expect she belived it to be true when she likened the national economy to her housekeeping budget. It is unlikely she ever had to face the problem of not having enough to meet her household bills and thought the country should be run on the same basis.
https://www.youtube.com/watch?v=Yt4vzzGMyzc Scroll in to 1.20 Can you believe MT would understand this attitude from her own experience? Unlikely because she will have learned finance from her father, shaped in the same times as ‘Wee Bobby’ but viewed from a very different perspective.
Hi Andy,
I too have been intrigued by the ambiguity of the German word schuld. Academics that write about German Ordo-liberalism usually mention it. The American guys will need to explain their coroporate finances.
As for the household trope, its quite specific and specifically British.
Hmmm lots of discussion here that has been had before. But if it helps………………………fine.
For me though the arguments have been made and I accept them. Government in this country is not spending enough money – either through debt or printing it. An over reliance on interest-bearing debt in the private sector is like playing with matches on a hydrogen inflated airship. It’s stupid and we know all to well what will happen. So as an alternative, what have we got to lose?
Yes – there might be inflation. Yes there might be unforeseen consequences. Yes – we need to look more deeply into how the financial linkages in the system might cause problems and have a Plan A, B, C , D – as many pans as we bloody need.
But be in No doubt that it is the time for a courageous state to spend money. It’s Nike time: Just Do it.
And then we monitor and rebalance from there.
Damn it – I forgot BREXIT! Sod it – do it anyway!
Without advocating anything much and mainly for the sake of conversation I will note what may be an imperfection in the MMT narrative here.
Having gone away, come back and had a second look at this post I couldn’t help being struck by the UK’s reliance on VAT, a regressive tax base which, at £143bn, is almost as big as income tax, the main progressive base (£175bn). To be fair we could include the National Insurance as progressive and still say that a regressive tax being almost half as much as the progressive taxes is something of a concern in principle.
And then it occurred to me that inflation control may not be an adequate primary explanation, for the existence of tax. Especially so given that the wealthy have a lower propensity to consume. Poorer income groups, by contrast, spend all or most of their money (out of need). They have a greater proportionate impact on consumer demand and consumer price inflation.
Going on that principle an increase in VAT would be the best way to reduce demand pull inflation – heaven forbid! The system is regressive enough already, too much so. Then it occurred to me that
the welfare state system of tax and transfer (taxing the rich and transferring to others) actually increases demand-pull inflation. And that is just as well given that inflation has been well below the BoE target for 9 out of the last 10 years.
Government spending supports demand and it has rescued us from the potential disaster of deflation. That too is a form of inflation control so have I merely expanded on an established point? Not really. Taking what I have said here into account we cannot simply say that: “tax does not actually fund government spending” or more particularly that the government taxes us “because if it did not there would be inflation”. Not simply.
The government spend has a redistributive function that supports demand. It also has an effective if unstated policy purpose in restricting the incomes of those that will do nothing more than hoard or sink their excessive fortunes into rent-seeking and non-productive, de-stabilising speculation. In economic terms alleviating excessive wealth could be almost as important as eliminating poverty.
In conclusion I know that taxes are not NEEDED to fund government spending and that overt monetary financing is fundamental in a sovereign, fiat currency issuing nation with seigniorage etc.
I do however note that the taxes that are best for controlling CPI inflation (regressive taxes) are not those that are best for redistribution and supporting demand (progressive taxes). If we consider asset-price inflation then progressive income tax helps but specific taxes on capital are even better.
I would also note that overt monetary financing may usefully support demand in a stagnant, low inflation economy. It may present a better option than government borrowing (as Simon has noted)
– but increasing taxes on capital and the rich may be even better still (as a priority at least).
I know that a ‘tax for policy purposes’ narrative already exists in parallel to the ‘tax to control inflation’ story but I think that the former may be bigger and the two may be inextricable.
All in all it may better to say that “the government spent in the first place and has to tax some, all, and on occasion even more than that spending back” to restrain inflation and re-balance the mix of spending and investment in the economy.
Something like that perhaps?
Does this morning’s blog post help?
“The Reasons to Tax” post?
Yes, very helpful. It could not be more pertinent.
Thank You
“….To be fair we could include the National Insurance as progressive…..”
Is NI actually progressive ? My understanding is that there is an income ceiling on contributions , does the Class 4 contributions arrangement make up for that and maintain a progressive application?
No it isn’t: it’s not at all progressive at higher ranges
Yeah, true.
Which kind of makes the balance seem even more regressive.
[…] was some discussion here yesterday on the relationship between tax and government spending. As I pointed I out, this is by […]
BenZo
You haven’t understood this, so I will try to make it clear,in the words of Run DMC “its not a mystery its history & here’s how it goes”, the point of Mutually Assured Destruction was that it prevented war. Either the US or the USSR could, if it wanted, detonate sufficient nuclear missiles to pulverise its opposite. Either the US or the USSR could, in its death throes, detonate sufficient nuclear missiles to pulverise the power that hit it.
Nuclear War was the ultimate “zero sum” game because neither the USA nor the USSR would gain anything from it apart from vast death tolls & a terrifying, miserable, life for the few that remained. So, rational people don’t do that.
You posited an alternative universe where Hitler had a nuclear bomb. Had he had one, he would certainly have used it because he wouldn’t have cared what damage was inflicted on Germany. Hence, as I said before, it would have been a matter of complete indifference to Hitler whether we had a nuclear bomb or not.
[…] was some discussion here yesterday on the relationship between tax and government spending. As I pointed I out, this is by […]