I was at a meeting last night where John McDonnell said that the Labour Party fiscal rule is common sense. After all, it says a government should only borrow to fund investment. That has to be right, doesn't it?
Well, no. That's fine if you are a currency user. But the government is a currency issuer. And different rules apply.
That fact that household analogy for running the economy might be common sense does not mean it is right. In fact, it can be the exact opposite of that.
And so too with Labour's fiscal rule.
There is a long way to go to get this message through it would seem.
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I keep hoping for a party with its heart in the right place and a head which thinks.
The SNP then Ian, I suggest.
Labour? I very much doubt it. They can’t even advocate what should be the first requirement of a progressive government in the UK, a switch to PR.
And as for opposing the right wing con-trick called Brexit?
Yes, right now it’s a right wing con job, but that doesn’t mean it isn’t the right thing to be aiming for. Right now though we have nothing like the necessary preparation. I very much doubt we’ll be leaving in March, and I doubt we’ll be fully out till perhaps the mid 2020s. That’s if there’s still an EU by then. There’s too much which needs to be decided between the UK and individual countries regarding transition. It’ll take years to do right and the EU itself might change out of all recognition by then, no Euro or accompanying zone would be a good thing IMO. The Brexiteers have got the public hooked on a fantasy they simply can’t have.
My excuse is I am (quite often) used to interpreting, then reading what you intended to type, rather than the letters which you actually typed, Richard. I know, that is a low blow (and feeble excuse) coming from a fumble-fingered keyboardist. But hey, Mr Sawyer managed to conjure a sensible point out of it!
Forgiven!
Despite my Scottish sounding name, I live in Somerset with an MP who got over 50% in the last election and who recently compared Taunton to Aleppo.
He has neither.
“That’s fine if you are a currency user. But the government is a currency issuer”.
“Isn’t”, to avoid the contradiction?
??
Quite right “??”. I do not understand my comment either (!); I think I misread the original.
🙂
Alternatively: yes you’re right John, it is common sense. The trouble is common sense is demonstrably WRONG when it comes to macroeconomics (E.g. paradox of thrift).
Is it too much to ask for a shadow chancellor (or indeed a chancellor?) who understands the economy via something more than merely common sense? If not we may as well pick someone from the population at random to do the job.
Actually maybe “common sense” is a good angle from which to tackle macroeconomic understanding among the public?
You can come at it from both directions on the axis “common sense”:
1) Firstly you can note a handful of common sense beliefs that are actually wrong vis a vis macroeconomics.
2) Secondly you can come at the idea of what money is via a common sense route. E.g. “if you and two hundred others were permanently stranded on a remote but resourcefully abundant island, how would you go about organising yourselves” – most will not cite “lack of currency” as a reason for everyone sitting doing nothing and waiting to die.
I like the second one…
Actually I’d say “imagine you and the 200 people you know and like best…” In order to get across the importance of trust.
I think on a small scale anyone can work through the logic of how trust and compromise are required for a group to organise itself to produce and share the essentials and luxuries of life.
Anyone can see how IOUs between known and trusted individuals can work to keep track of voluntary mutual obligations while rules agreed by the whole group might mandate the minimum compulsory obligations all members of the group owe to each other and the group as a whole at all times and in special circumstances (emergencies for example).
I think when people get their heads around that simple, small scale thought experiment they’ll probably find it very much easier to grasp what money actually is, the service banks provide (ascertaining trustworthiness and enforcing obligations) and the role of government and taxation.
I think most people will also more easily be able to imagine what cheats and power hungry maniacs look like in this simplified thought experiment than in our complex reality. They’ll then be able to extrapolate up in order to identify such individuals and organisations in reality.
That’s very important. As a social species I believe we’re very well adapted by evolution to spot and sanction cheats but only in smaller groups (hundreds not thousands of individuals). In large and complex societies the cheats get away with vadtly more shit than they would in the times before the agricultural revolution – i.e. the bulk of our evolutionary experience.
Anyway I think macroeconomics and the money system does all actually make a lot of intuitive sense but only, in my opinion, once you grasp the basics AND just ignore the smoke and mirrors of mainstream macroeconomics.
Is the UK a `resourcefully abundant island`? We have a lot of people: however people are a drain (always) as well as a potential resource (hopefully).
I`m not being negative: just something to consider.
As a lifelong manufacturer/tinkerer etc I revel in the challenge of making a decent lifestyle from limited resources. I fear though that this mindset is not rife in our ruling classes.
Our ruling classes do not make the wealth of this country …..
Brian,
My last post suggests a thought experiment to help laymen think about what money is and how it works. It’s not a comment on the Britain or Brexit.
But yes, Britain has a bundle of resources. The people of Britain of course bring our greatest resource. We just need better education, better training and better leadership. John McDonnell is unfortunately an example of the same piss poor leadership we’ve sadly become accustomed to.
If only Piggy and Ralph had known about MMT….
I was looking at your joust with SWL (via PP) on Twitter the other day and noticed the following : SWL “And what is wrong with raising taxes rather than borrowing to pay for that nurse?” and again: “alongside Labour’s expansionary programme of additional investment and tax funded spending”.
Probably just typos.
I hope you took McDonnell to task for uttering such cap-doffing nonsense.
I did not have the chance
Rod,
John McDonnell has been taken to task on this repeatedly.
He’s not listening.
Personally I believe he either lacks the critical thinking skills necessary to tell macroeconomic truth from bullshit or he believes it’s necessary to play this political game. If I had to bet on one or the other I’d go for the former.
Just to be the token contrarian:
McDonnell is also hinting that he wants to tax more (the rich and corporations we assume) to fund “current spending”.
I know that we don’t view money and tax from that perspective but this “rule” will be part of his pretext for Labour’s tax changes. I also know that we don’t need a pretext for tax reform when injustice and inequality are so rife. But their tax policy, for campaigning purposes, will be addressed toward what they want to do with current spending (NHS, education etc.) and not on abstract principle.
I am not commenting on whether that is a good or bad thing. I just think that it is part of their implicit logic.
He was talking about banking as if deposits fund lending last night…
I curled up in my seat
Oh-my-God.
Perhaps we should send him this:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
He does seem to put a lot of faith in the author so it might be a start.
Do you think he might like another portfolio perhaps? Something big enough but far from economics, Foreign Minister, maybe? Boris has set a low bar there so he can’t go to too far wrong (?).
I can only hope he really knows…
Common sense?
Imagine I am a farmer and I have my own flour mill. I decide to bake a cake. So the first thing I should do is pop to the shop to get some flour?
The problem with ‘common sense’ is that it is nearly always a social construct. It really is not objective.
If you accept the current orthodoxy (religious, economic, political…whatever) ‘common sense’ is confined to that narrative agenda.
John McDonnell is spouting neoliberal ‘common sense’ to an electorate that swallows orthodoxy hook, line and sinker. As to some extent we must…. we do have to live in the social construct we have.
If I believed this was just a pragmatic stance within the orthodox mindset of the populus to become electable with the prospect that the orthodoxy would then be overturned I’d maybe ‘buy’ it.
But I remember being conned by New Labour ……..
The idea that the earth is flat was, for most our history, universally accepted common sense.
Need I say more?
@Marco Fante
I take your point about the flat earthers, but the ancient Babylonians knew the Earth wasn’t flat and made a pretty good estimate of its diameter. (Or so I’m told…I have never actually met an ancient Babylonian)
Knowledge gets lost and has to be re-learned or rediscovered sometimes.
This is precisely the policy that Miliballs adopted about 100 years ago when they concluded that ‘the public wouldn’t understand’ the point you’re making and excused themselves from the responsibility of explaining it. It famously ended with the (in the circumstances wholly understandable) question from a member of the studio audience in the ‘Leaders Debate’ – ‘How are you going to pay for it?’
This leaves McDonut with ‘Well, we’d cut our cloth differently’. Those who fail to learn the lessons of history are doomed to repeat it and all that.
NB He could say ‘Well, have you got the cash to pay for a house? No? Well, how are you going to pay for it? You can borrow the money, (so can we…and we own the bank!)…and interest rates have never been so low – as close to 0% as you can get really…and in any event when you’ve finished paying back what you borrow you’re also going to be left with an asset. So are your children…’ Today programme to take note please.
The proper response to the ‘How are you going to pay for it?’ question is “The same way as the government pays for anything now, through government spending.” and be ready when asked to explain further with verifiable quotes from the BofE on the subject. While the BofE on the whole in their published statements are helpful and illuminating (just Google money creation in the modern economy) Carney, by contrast, is earning his money as Osborne’s political appointee by going full-on TINA (as well as absurdly holding back the Venezuelan gold); useful articles on the former here https://positivemoney.org/2019/01/what-we-learned-from-mark-carney/
and here
https://positivemoney.org/2019/01/meeting-bank-of-england-governor/
Carney’s now a national embarrassment and needs to go.
An economist friend pointed me towards the youtube recording of the National Investment Bank meetng you attended. I eventually got through it on an ancient laptop with miserable and unreliable sound.
The two questions that came to my mind were
– Surely the Government could equally easily print the money a National Investment Bank needed?
– Does the Government not get a double bonus on the money it provides? Not only the interest on the loans, but the extra tax revenue?
In searching for the video, I came across this Channel 4 “factcheck” on Labour spending plans.
https://www.channel4.com/news/factcheck/factcheck-john-mcdonnell-doesnt-seem-to-understand
Have i got this wrong?
When I buy shares in a company, I am very happy with a dividend yield of 4-5%.
When the Government invests in the economy, a dividend yield of 35% is disastrous?
🙂
Let’s be clear, of course it could fund this
And it will if need be
The point is if others want to save in this way, let’s let them do so
And could the margin for the state
The Channel 4 “debunk” of McDonnell raised a very simple question. If the state only gets back 35p for every £1 it spends, where is the other 65p? Why will it not come back as tax over a longer time frame?
It will
Dear Richard,
i am still yet to find clear evidence that government spends through money creation first, rather than taxes funding that spending.
I’ve watched the lectures on youtube from all the prominent MMT’ers out there, especially the ones with Stephanie Kelton who has recently done a round of lectures for popular audiences explaining what it’s all about. I’ve stumbled across your blog posts from time to time too.
If i try and take a methodological, evidence based approach to answer the question “Where does government get its money from to spend for public services” – starting with google searches and going from there, all I get back are gov.uk articles or similar, all pointing to taxes funding spending, and any deficit between tax revenue and spending is funding through borrowing.
https://www.gov.uk/government/publications/how-public-spending-was-calculated-in-your-tax-summary/how-public-spending-was-calculated-in-your-tax-summary
This is how the relationship between tax revenue and government spending is presented, right at the source – from HM Treasury.
So then i scratch my head and think – well ok, lets say that is not true. I wind up with the following questions:
– where do the taxes go when we pay them? What are the accounting treatments at play here, exactly?
– the article that is often cited – the 2014 BoE article talking about money creation in the modern economy, and about how most money is created by banks – does not make any reference to government spending, or how government spending works.
There is a reason why MMT’s like you are simply not convincing the mainstream on any of this. When I try and actually dig into it, to understand in a step by step fashion, what the truth is, i really struggle to find evidence supporting MMT. You can keep repeating things like “governments have run deficits for over a century and therefore the money had to be created first before it was paid back”, except that that does not actually invalidate the statement that taxes fund government spending.
That was at time t=0, but what about now, in 2019? If we have the government itself clearly stating on its website how it spends tax revenue, why should we believe otherwise?
Ok, so most money is created through private banks. Again, i don’t see how that contradicts the standard thought around taxes funding government spending. Is the government creating new money every time it pays for a public service? Let’s take the NHS, for example – the bits of it that are public anyway. Lets say it costs hospital X £50 million a year to run – and to keep it simple, all of that money is essentially salaries of all the staff at the hospital.
I would like you to explain all the T account entries which go from the above start point, back to the source i.e. showing that government created the money to pay for these staff, and that it did not come from tax revenue first.
This has been a bit of a rambling post of mine, but the gist of it is:
– i’m trying to put together a mini documentary unravelling all this. I would love the whole MMT thing to be true, and i want to conclusively show it to be true, in laymans terms, but i need to understand the mechanics, with citations from official sources and a complete picture from the payment of a public service, backwards, to show how it all works.
Would you be willing to be interviewed on this subject by an independent researcher such as myself, to help me and maybe tens of thousands of people who might find my video next year, get to the bottom of all this?
best wishes
Murali
Proof is exceptionally hard when the cycle is running
But four things
a) The BoE once denied what they now admit and most still do not get it
b) Richard Werner has proved banks can create money so the BoE can at will for the government, which is what MMT says
c) All money is a promise – end the p[romise and it must disappear – but new promises are made all the time
d) How has tax ever been paid in government created money if the government did not spend the money into existence first of all?
This might help
https://www.huffingtonpost.co.uk/lee-carnihan/tax-and-spend_b_17452090.html