I despair of John McDonnell and Labour's economic policy. As they Guardian reports today:
John McDonnell has sought to reposition Labour as the party of fiscal discipline and competence, using a speech ahead of next week's autumn statement to contrast the government's “failed” austerity approach with his own party's focus on investment.
Public spending did not mean a haphazard approach to the public finances, the shadow chancellor said in a wide-ranging speech.
“There are no easy options,” McDonnell said of a planned Labour approach. “There is no proverbial magic money tree.”
There was more of the same yesterday: the fiscal conservative message is one that Labour is clearly trying to send out. The only trouble with it is that it is fundamentally wrong.
First, of course it is right to condemn austerity but the reality is that government deficits are not, to large degree, matters within their control. I have explained this time and again within the context of the sectoral balances. What these show is that if the consumers, business and the overseas sector are determined, between them, to save (as has been the case for the UK for many years) then as a matter of fact the government will, as the borrower of last resort run a deficit. And the UK government has no choice but be borrower of last resort: it is the creator of our currency and so this is its job.
Second, deficits need not mean borrowing. As a matter of fact £60 billion of this year's deficit (which is budgeted to be all of it, but which will in practice just be most of it) will be subject to Quantitaive Easing during this year. In other words the government will repurchase most if the debt it creates this year meaning it will, in effect be cancelled.
Which proves the third flaw in John McDonnell's logic. There is, as a matter of fact, a magic money tree. Except there is nothing magic about it. Nor is it a tree. It is instead a simple matter of fact that all money is created costlessly by a process of lending and again, as a matter of fact, the government is able to do this itself via the Bank of England, which it owns and de facto controls. I am not saying that doing so is not without consequences: we know they exist but. But to deny economic fact must either be the result of ignorance or political choice.
And fourth, we can run fiscal deficits without risk (as we are now), without inflation and without piling debt on future generations who first of all can QE it and second will simply roll it over anyway, as all previous generations have done because this debt is the essential core of the money supply that keeps the economy revolving.
John McDonnell should not be ignorant on these issues. The two previous links were to blogs written when he and Jeremy Corbyn were well aware that the press were calling me the author of Corbynomics. The articles in question may, therefore, have helped Corbyn be elected. And they quite clearly say that what McDonnell is arguing now is wrong. I also am quite sure that James Meadway, his senior economic adviser,who was until not long ago at the New Economics Foundation, knows that McDonnell's argument is not just a bit wrong, but fundamentally flawed in almost every way.
So, there is no excuse for ignorance.
In that case there is only political choice. And what is clear is John McDonnell has decided to play the role of a fiscal conservative who buys the argument that the economy is equivalent to a household even though it is obviously contrary to what the economy needs and contrary to the interests of the people of this country.
Bizarrely it's also impossible to achieve and deliver his logic of new investment from borrowing considered outside the fiscal cycle if he imposes the constraint he has committed himself to: he will simply create hospitals he cannot afford to staff at the rate he is going.
All of which suggests that he is offering economic policy as socially destructive and economically poor as his opponents and is doing so by political choice. Candidly, on this basis you vote as well vote Tory as for Corbyn's Labour. You'd get the same economic policy either way. And that's a disaster for the UK.
When, I wonder, will we ever see a credible opposition again?
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Is QE effectively textbook monetary seigniorage in this form would you say? Or perhaps seigniorage in reverse?
Seigniorage I think
Agreed, but government spending ALWAYS works by Seigniorage. Essentially there is an unlimited intraday overdraft that ‘has’ to be balanced because of a rule at the end. Not a lot of people fully get this. You can see this clearly from the Supplementary memorandum submitted by HM Treasury. There is no ‘printing money’ government ALWAYS spends whenether it spends by crediting bank accounts throughout the day. I recommend reading the whole thing but here are points 17-20:
http://www.publications.parliament.uk/pa/cm200102/cmselect/cmpubacc/349/349ap02.htm
“17. Government bank accounts at the Bank of England are linked together in a system known as the Exchequer Pyramid, to ensure that any cash balances that remain at the end of each day are channelled into the main central government accounts to reduce the government’s cash borrowing needs to a minimum. If the Consolidated Fund has a surplus at the end of the daily operation this is automatically transferred to the NLF to reduce its borrowing needs. If, on the other hand, the Consolidated Fund is in deficit, for example through outflows on the day being greater than taxation receipts, this is automatically financed by a transfer from the NLF. The NLF will then borrow overnight any remaining cash deposits held in any government accounts at the Bank of England (including the accounts held by government departments at the OPG). The overall effect of this will be a net Exchequer Pyramid surplus or deficit in the NLF.
18. The net surplus or deficit in the NLF is automatically balanced to zero each day by a transfer to or from the Debt Management Account operated by the Debt Management Office (DMO). The DMO’s cash management objective is each day to balance this remaining position on the NLF. It does this by issuing Treasury Bills and by borrowing or lending in the sterling money market during the day. To achieve this objective the DMO needs reliable forecasts of each day’s significant cash flows into and out of central government, and up to date monitoring information on actual cash flows as they occur. For cash management purposes the flows that matter are those which cross the boundary between the Exchequer Pyramid accounts at the Bank of England and accounts elsewhere (ie cross the outer black line of the chart annexed to this memorandum).
19. When government is a net lender on a particular day because, for instance, tax receipts exceed spending, the DMO lends the cash back out into the market. The effect is to balance up cash holdings across the banking sector because, if government has received more cash on the day than it has spent, the commercial banking sector will have an equal and opposite deficit.
20. The DMO has put arrangements in place with the Bank of England and the main settlement banks to ensure that its position is balanced at the end of each day, even when there have been very late changes in the forecast of government cash flows on the day. The DMO also maintains a small (£200 million) balance at the Bank which acts as a buffer, eg in the event of a change in the net government position following the final reconciliation of the government accounts in the Exchequer Pyramid after the end of each day.”
Further reading where the government had an across-day overdraft (until Gordon Brown):
http://jpkoning.blogspot.co.uk/2013/06/from-intimate-to-distant-relationship.html
Similar to many other agents governments operate with a cash buffer. It is just if they are the issuer of the currency they
Currency issuing governments never fund by tax, “printing money” or “borrowing” they always spend by creating money. It is the other way round. The spending creates a chain of transactions that causes taxation to flow, and creates savings at the Bank of England that match the initial spending. Currently about in the ratio of about 90% tax for 10% savings. Penny for penny, each time, every time, for any positive tax rate.
The books always balance. Anybody suggesting otherwise is lying.
So effectively government “printed”, borrowed and via QE “printed” again
So the government funded by crediting bank accounts (“printing money”) that is how it always works.
Yes
Nothing to add
I despair. It’s truly depressing. Unfortunately I can’t see any way out of this impasse. As you say there’s no excuse for ignorance. What’s wrong with him that he can’t (or won’t) take on board advice? Is it a crisis of confidence … that he can’t win the argument? Or simply that he just doesn’t get it?
What is even more bizarre is that McDonnell thinks that this Labour can successfully play the fiscal conservative card. That a Labour party led by Corbyn and McDonnell can climb out of the hole that Labour have been hammered into through 6 years of constant hammering as economically dangerous and wasteful. The idea that Corbyn and McDonnell are going to take on and beat the Tories and the Tory press at a game of who can do the best Swabian housewife impression is laughable.
Not only is this bad economics it is bad politics.
It seems to pretty clear that McDonnell is saying what he is saying out of political expediency. If he stated a position that reflects the true nature of the economy, the vast majority of the electorate will not understand him and he will be mocked by the Tories. So he’s taking the path of least resistance.
The sad truth is that belief in the economy as a whole being nothing more than a household writ large seems to be the modern equivalent of the view held by the ancients that the world was flat — it’s a straightforward enough intuition that comes easily to those who do not give a lot of thought to the matter. What is needed is a programme of popular education, and as a first step to this a true analysis should be systematised in virtually text book form — (and I am sure that many like me appreciate the work that you have done towards this in the Joy of Tax. We then need politicians and spokespeople to fully understand the argument and have the confidence to make it to the public.
I suspect that the difficulty of the first requirement would be outweighed by that of the second. However, it would seem hard to make any progress without a far higher degree of public understanding.
There will be no understanding without the truth beng told
It’s a shame Chris…one from the selection of shames available on this ‘back of a fag packet’ menu (see Jolyon Maugham’s blogs on their failure to offer a second referendum)…that McDonnell and Corbyn don’t learn the lessons of history.
Your phrase ‘…the electorate will not understand…’ Is exactly that which Mlilballs came up with before, long before, the last election when they should have been lambasting Osborne at the despatch box for all that nonsense about ‘paying down the debt’ and ‘Labour’s overspending’. The public won’t understand (because the Red Tops are feeding them a different narrative?…the household budget one) – best move on rather than keep it in the spotlight. So four years later we arrived at the televised debate where Miliband was caught like a rabbit in the headlights of an audience question about overspending/this is all your fault isn’t it?’ asked from the ‘household budget’ viewpoint.
The lesson was ‘the public might not/don’t understand so we’d better start explaining and educating now…and we can start by asking difficult questions like ‘it wasn’t our mess was it?’, and ‘You’re not paying down the debt are you?’ in the House…and then hammering away at it for four years.
But instead here we are again. Having previously embraced Richard’s arguments, suggestions and philosophy and convinced despairing voters like me that AT LAST there was some hope, they have retired into what used to be smoke filled rooms, dumped Richard, and dragged poor old Prudence back onto the dance floor. Bereft of vision, fearful of the voter and their own Blairite wing, and after all the in-fighting, they have opted for Tory lite AGAIN!
I am now resigning my membership of the Party I had only recently rejoined…in despair, and disgust. Whither now?!
I wish I knew
I think you are making a mistake (resigning) – but your choice. Labour needs an education prog at branch level. It then needs somebody with the mind of a QC to forensically take apart the “household budget” argument (preferably in the Commons & with support of the PLP). The problem is that I do not see anybody like that in the Labour party/PLP at the moment.
The situation is hopeless, Richard, I’m sad to say. I cannot even begin to work out what a Meadway is up to if McDonell and Long-Bailey are reiterating myths rather than trying to break the spell of this myths.
The only positive interpretation I’ve tried to come up with before is that they are using a sort of reverse psychology because of the strength of the myths and the near cultural impossibility of dispelling them; in other words they KNOW these things are myths but need to buy into them in order to get power and change course. Sanders was advised by Stephanie Kelton but never used MMT terminology as they knew it would not work as a vote winner, so conventional language was used. But perhaps I’m imputing too much.
The other interpretation is that it is ignorance – in that case the situation is beyond dire and the Left is lost beyond hope and we are then bystanders as grotesque nationalism combined with corporate fascism and shyster politicians hold sway.
My faith in the first interpretation is dwindling, though I’m clinging for dear life to it!
Although I’m actually of the view that telling people where money comes from is a real political vote winner (there is a magic money tree – what’s not to like!) I wonder if there is evidence of what terminology Sanders used so that it could be cloned?
He used MMT – the magical money tree
Richard-did Sanders actually use that expression on the campaign trail? In interviews he might have done but on the podium-really?
No one says magic money tree unless they are being rude
McDonnell was mad to say it
But you can talk QE and MMT
May P-people , generally, think you are mad if you tell them there is a ‘magic money tree’ -I’ve tried it – even if you explain QE to them they look incredulous. As Chris Smith mentioned above, we need a mass myth dispelling program but with a right wing-corporate press the whole thing will be dismissed as a ‘nut job.’
It’s a real problem.
I think you are right about Sanders, and Kelton is now back in Academia I believe (whether in disgust, I don’t know).
As a gesture, I have emailed Corbyn and McDonnell, but I don’t of course expect an answer.
Old McDonnell had a farm … and on that farm he had an economist… with a quack, quack here and a quack, quack there…
Love it Bob!
Jolyon speaks of Labour being ‘cowed’ in his blog and I think that he is right (as is Richard’s exposition of McDonnell’s lack of understanding above).
It’s hard isn’t it? Very hard.
Your criticisms do not belong in the real world of politics Richard. It is clearly not possible for a politician to claim that there is a magic money tree, and that is a practical fact that is independent of whether there is such a tree or not.
McDonnell demanded that the Chancellor “â—¾End austerity, not merely postpone it — guaranteeing serious investment underpinned by a credible fiscal framework
â—¾Provide genuine support for those in low and middle income work
â—¾Secure funding for out public services”
I would have thought we could get behind that.
The best answer to justify any individual spending pledge is surely the tax gap, £120 billion of which a significant amount could be recovered.
For a whole radical programme and understanding of Keynesian economics and/or the real nature of how money is created is necessary, but this simply cannot be reduced to a sound bite.
The. He should not have mentioned a magic money tree
Or fiscal balance
He’s all at sea
There is nothing to get behind
If the media was democratised the truth would have a better chance.
I would have thought the most fertile ground for spreading public understanding of economics is the Labour grassroots. If a few hundred thousand ordinary people can get ‘it’ they will talk to their friends and colleagues and begin to spread the understanding far better than any number of academic textbooks or lectures in London. In my opinion, a branded or themed series of simple diagrams, short (sub 10 minutes) youtube clips and soundbites from people that really understand this, presented in a funny or interesting way, is what is needed to start to break the hold of these ideas. The left has massive celebrity, comedian, media support, people who are good at presenting ideas in engaging and articulate ways and who can engage far more than some unknown academic. They now have money too after the leadership campaigns. They should use it. Jonathan Pie is trying this to some extent. We need something that can be spread by social media and the simplest ideas ‘got’ in under 30 seconds. Political memes or cartoons to embed the ideas without preaching. “Economics for the common man” or “How money works” or something similar, I’m no PR expert. Maybe it shouldn’t even be Labour themed, maybe that brand is too tainted. The costs shouldn’t be high anyway. I would say we need to explain that money is not the same as wealth. That money only has value when backed by a society. That society is a huge multiplier on individual productivity. That even the least productive or poorly educated members contribute to society. Does the boss of Cash Converters get rich off of wealthy educated middle-class people? That tax is what makes the system work and it is a good thing. That your productivity is being taken by people who do nothing for it and their only security is your own ignorance.
Well, that’s just my incoherent rambling thoughts but what do I know.
It’s a fascinating idea
Anyone got a lot of money?
I have some & would fund up to £10k if somebody could pull the thing together AND it looked like at least a branch level it would be used.
Mike
I leave it to others to suggest how your generous offer may be used
Richard
I have a lot of sympathy for the cartoon book idea, primarily because I’ve seen videos produced by an American, Yoram Bauram, who explains economics in a funny, engaging and direct way and takes on the neolibs directly. I’ve also purchased his book, The Cartoon Introduction to Economics, as a primer for my son.
He’s also heavily into climate change and has recently released a cartoon book on that subject. Your facination might be tickled by taking a look at his website http://standupeconomist.com/.
He is good
This is happening to some extent. I volunteer chunks of my free time to deliver talks, seminars and workshops for Equality North West (the Equality Trust presence in the north west). We have done this sort of explanatory work for the last 5 years throughout this region to political, non-political, issue, campaigning and social groupings.
We haven’t been able to strip it down to under 10 minutes and we haven’t dumbed it down to 30 seconds. We cover the evidence from ‘The Spirit Level’ work, macroeconomic sources like the treasury, IMF and ECB, and all sorts of national and specifically regional data to paint the picture of failing trickle-down economic dogma being prolonged by corporately-captured political systems which result in social failure on a grand scale.
What I’ve found is, taking the one I did last week for example to the branch of a union in a suburb of Manchester, that many engaged people now get it. They get it all. They have read, understood and digested and get it all. The question and answer session after a 45 minute presentation lasted an hour and a half and we had to be kicked out of the meeting rooms. The questions were all about the current state of affairs (Brexit, Trump, the general election, tax dodging, the tax gap etc etc). It was attended by forty-odd members on a Wednesday evening.
They just need to know what to do next. We’re working on that.
Sounds good Allan
And something really worthwhile
That’s exactly what I’d hoped the Labour Party would do – they have certainly said as much, though not in such detail. So it’s enormously disappointing that John McDonnell has now decided to try and present himself (and the party) as more prudent (shades of Gordon Brown) than the Tories instead of challenging the whole idea of the household budget version of the economy. I don’t for a moment think this is due to ignorance, but is rather his attempt to appear responsible. Some of the problems with this have been outlined by others, but there’s also an issue of trust; one of the qualities attributed to Corbyn is his honesty, so now to have his shadow chancellor presenting a glossed-up version of the economic truth feels like a betrayal and, what might be as bad, those who think Labour is the profligate party won’t believe him anyway. Better by far to tell it as it is – establish a new territory to fight on instead of running up the hill to the Tories again.
Richard, I’m also desperately disappointed with McDonnell, but I’m afraid the sad news is that there is no magic money tree.
And a good thing too, because if there were, it would be a right old faff; planting the seed, nurturing the seedling, watering and feeding the damn thing, protecting it from parasites and disease, and then finally harvesting the fruit in a good year, if you were lucky, and the weather was clement.
Fortunately, as we know, it’s a lot easier than all that..!
If there was such a tree those with wealth would gave cut it down
There isn’t
So they have to lie instead
I have to report a second car crash on the Daily Politics. Today Chi Onwurah caused Andrew Neil to politely stop asking questions about Labour policy, it was simply laughable.
Oddly though she would on paper appear to be well educated.
So either she has agreed to tow the nonsensical Labour position or she believes what she is saying. Either way it is utterly unpalatable and unelectable.