I have published this video this morning. In it I note Rachel Reeves keeps saying that we should manage the economy as if it were a household. That is completely wrong. But if it were true, the decisions she is making would end up destroying the finances of any household, she's making such a mess of things.
The audio version of this video is here:
The transcript is:
No one would run a household the way that Rachel Reeves is trying to run the country.
Rachel Reeves likes to say that she learned economics at her mother's kitchen table, where she watched her, apparently, ticking off the entries in the bank account to make sure that every penny had been accounted for, which is fine, but that is not the job of a Chancellor of the Exchequer.
And nor is it the job of a Chancellor of the Exchequer to run a government like a household because a government can create its own money and a household can't. They are fundamentally different.
But let's just suppose for a moment that the government was run like a household. I read a really interesting blog on this recently by a chap called Chris Dillow, who I've followed on Twitter for years. He's been an economist I think for more than 40 years now and he writes a blog called Stumbling and Mumbling. Many people will not know about it. I've read it for a long time and I'd recommend it even though he's a Marxist, and I'm not, because reading a Marxist is quite good for your education on occasions.
But Chris made a really good point, and that is that some of the decisions that Rachel Reeves and the Labour Party are making would never be made by a sensible household. She isn't even keeping to her basic rule that she should run the economy as if it was a household.
Let me give two examples and both of them were made by Chris, but I've made the points elsewhere in my time as well. The first is the use of the private finance initiative to fund things like the proposed new Thames crossing. This £9 billion project is apparently going to be outsourced to the private sector so that the government doesn't have to borrow the funds in question.
I've already mentioned the insanity of this in another video, which we'll link below. But, as Chris points out, the insanity is actually also true if you look at this from a household perspective. It's rather like, as he points out, a household that looks at a mortgage deal, and sees that it offers a great deal for five years, and an appalling one for the next fifty years, and would take that option anyway, because its planning horizon is only five years, and it really doesn't care about what happens over the rest of the period during which it's got to make the repayments owing.
And that's what this deal is like. The whole reason that Rachel Reeves will take a PFI deal is precisely because, she's Chancellor, and let's be candid, her expected period in office is unlikely to be longer than five years, so she's taking a deal that will make her look good while she is Chancellor, and she's quite indifferent to what happens thereafter.
But households aren't like that. Actually, households do look at the whole pattern of payment that they are expected to make. And most of the time, most households, I'm not saying all, but most of the time, most households, and at least all competent households, will not take a worse deal overall because they get a short upfront benefit. Instead, they'll balance the whole equation. But she isn't doing that. And as a consequence, She's proving to be a very bad household manager.
And this is also true with regard to another Labour policy. That Labour policy is on nationalisation.
The net cost of a government borrowing at present is about 1%. In other words, the government's cost of borrowing is only a little over 1 percent more than the rate of inflation inside the economy, give or take. It moves slightly, but around that, that's the average. And if that's the case at present, all that a company that the government wants to nationalise has to make is more than a 1 per cent real rate of return on their investment at present.
Even the water companies have done that until very recently. The rail companies do, by and large, make a profit. So too do electricity companies, they make much more than that.
So, the government could take these essential national utilities, into state ownership as a consequence, at absolutely no real cost to the Exchequer at all, because the cost of borrowing to buy these companies at fair value would be less than the rate of return that they could provide to the government as a consequence through the payment of dividends arising as a result of their activities.
Buying them would therefore result in the transfer of an asset making a good return on investment, which return would more than cover the cost of the interest that the government would pay on the sums that it would issue in terms of new bonds to buy out the shareholders of those businesses.
Why wouldn't it therefore do that? Who knows? If a household could issue bonds to buy investments that would pay a return greater than the cost of paying interest on the bond in question, it would be mad not to buy the investment. I mean that quite literally. Mad! And the government is in that position with regard to these industries.
It could buy these companies that provide not just a rate of return to the government if they were to be owned by it, but also create a public good that would be a benefit to everyone and which would be better managed under state control. And yet it won't do that. That's madness. It is most certainly not running the government like a rational household would do.
So why is Rachel Rees not following her own mandate that she must run the government as if it is a household? She isn't with regard to using PFI, which is economic madness and a form of borrowing that would make no sense to any household. And she isn't with regard to nationalisation, which would make total sense to any household because they could make a return from it. As could the current UK government.
I simply do not know what she's doing. But what I am sure of is that Chris Dillow is right. Rachel Reeves is not running the UK government like she would run a good household. And that should worry us.
I make it clear, I don't believe in the household analogy. But if she's going to use it, she should at least follow it. And she's not even doing that.
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The problem with nationalisation is the debt those private companies now have. Surely, any payment for them will have to take that into account?
The deals would usually involve a haircut
But if those debts can be oaid and a return paid there would bbe no reason for that
There would still be a net gain
Couldn’t the companies involved sue the govt via ISDS?
I am not sure I follow…
Reeves is looking after where she has come from.
That is all that can be concluded from your very clearly articulated post.
Facts that she should be mindful of are therefore rendered redundant because she got the backing of interested parties before the election and now must make good her promises after it.
Simples.
Blowing my own trumpet, people can read more about the government-household fallacy on my web site:
MMT: The “economy is a household” myth
https://www.mmt.works/the-economy-is-a-household-myth/
Ypi’re welcome to blow your trumpet here
Thanks, interesting site. But it’s not been updated since early 2023?
Posts have not been updated in over a year, but other pages have been updated since, as late as this morning!
Just curious but are you familiar with the Four Quadrants of Spending.
Households generally spend in Quadrant One
Governments spend in Quadrant Four
So yes, completely different, although quadrant four spenders could learn a lot from the efficiencies imposed by spending in quadrant one. If your spending efficiency drops by more than 1% moving from One to Four then the case for nationalisation fails a cost benefit analysis in the examples you give.
Oh dear
You really think the case for natyionalisation is amde solely on the vasis of cost?
And even if it was, do you really think the state so much worse than the orivate sector, which is only surviving in most vases where natioianlisation because of state bailouts, direct or indirect?
The household stuff that Reeves spouts is grooming for Uk serfs. Is all. I doubt if she believes thet stuff she spouts – it is simply a way to keep the rabble in line.
In the case of nationalisation & housholds owning stuff – roof top solar – own your own powerstation.
Direct ownership is always the best option for a household – a cursory glance on e-bay shows the cost of the main bits of kit. Then of course there are the smoke & mirrors crew that will fit solar to your roof, give you some peanuts/benefits & cream off most – for themselves. Most people are clueless ref roof top solar and take the easy option – why bother informing yourself? .
& there in a nutshell we have elec, gas and water privatisation – cream off most of the profit and run rings around the regulator (thanks to informationm asymmetry). Rip-off-UK, large or small – corporates or smaller players, all unregulated all there to milk UK serfs – with approval from the Uk gov.
Thank you and well said, Mike.
With regard to regulators, I would just add putting the likes of senior banksters and accountants to head these agencies.
That’d be banksters with history. When their own historical misdeeds come before them for judgement they naturally find themselves not guilty. We’re British – it’s how we do things!
What I want to know is how Rachel Reeves and her mother managed to work out how they were going to tax you and me; or issue their money (printed in the microwave, or the fridge?), to you and me. I don’t recall the scam; but if I find out – i will demand they return my money.
🙂
If no intelligent household without the ability to create its own spending money would contemplate PFI deals to get things done then we have to see PFI as a corrupt outcome of pretending the government has no money creation powers of its own. Voters were warned that Scammer & Co were Thatcherites Mark III ( Blair and Brown being Mark II) but FPTP meant they had to get rid of Mark I Thatcherites who were even worse than the original. This is the state the country is in but it’s still one of Siesta when it comes to understanding economics and monetary matters. It’s doubtful the country will move to fascism why bother when the people are so asleep?
Thank you and well said, Richard.
It’s great to see your reference to Rutland’s finest.
Really?
Who?
Thank you, Richard.
Chris is from that small, but perfectly formed county. I have long been following.
Ah….
Now I get it
I sent a copy of that Stumbling & Mumbling blog to my MP. He’s a new Labour MP who won against a new Tory candidate (the previous MP stood down). I’m not sure what side of the Party he is on, but have decided to keep battering him with emails. My main point is that if Labour don’t improve public services and infrastructure, they will be succeeded by Reform/Tory in 2029. So, what have they got to lose by ditching the ‘Fiscal Rule’ and acting like a Labour Party (rather than Tory Lite)!
I haven’t had a reply yet, but remain hopeful!
I particularly liked the reasons for not Nationalising:
1. Whether the companies would continue to yield so much under state control.
2. That nationalization just gives a future government something to sell off cheaply to its cronies.
3. Given the piss-poor quality of UK management – the companies will be badly managed whoever owns them and its better that capitalists get the blame than that the government does.
He doesn’t mention the fourth one:
4. The Mail, Telegraph, Express won’t like it and might say nasty things!
Thank you, Robin.
I’ve been thinking about doing that for mine, Vale of Aylesbury.
I noticed no # 5 and # 6, Blairite revolt and expose of the dear leader’s domestic situation, not necessarily in that order.
“The net cost of a government borrowing at present is about 1%. In other words, the government’s cost of borrowing is only a little over 1 percent more than the rate of inflation inside the economy, give or take”.
Who benefits most from high inflation? Government benefits most from the impact on the National Debt. We had inflation of 11%. When inflation falls, there is a reduction of the value of the national debt in the hands of the creditors, to the longer term advantage of Government. It is one of the principal reasons Government funding is constructed in the way it is; this is a can (virtually the only one) that is well worth kicking down the road.
When it’s so simple – even in her own ‘household’ terms, why is there no discussion on BBC etc – “why are you proposing to spend far more of ‘tax payers money’ on the Thames crossing using PFI – when it would cost much less to build it direct”?
Obvious topic for a video:
What’s wrong with being a Marxist.
🙂
Try Murray Bookchin’s critique of Marxism.
It is well informed by his very extensive and committed personal experience as a Marxist.
Later, he identified himself as “the voter” who first secured an election victory for Bernie Sanders, who, reportedly, won his first electoral success in Maine by less than half a dozen votes.
It can be more easily read in sections.
(I’ve always found Murray’s writing style wayward, with much sidetracking and references to Ancient Greece and city state philosophy)
Murray was a Marxist for almost 40 years, and a communist in the Trotskyite faction fpr three decades.
He migrated politically through his life, as he observed the failures of dogma in the political theories through the 20thC.
After a period as an anarchist, his ‘end’ point in the 1970s was Social Ecology, which has now been adopted by Degrowth and some steady state proponents, but also underpinned much European Green Party thinking from “Die Grünen” movement of the 70s and early 80s.
So his critique is not tainted with free market capitalist dogma, though, like Peter Kropotkin, he was influenced by Adam Smith.
That is his “Theory of Moral Sentiments” rather than the “Wealth of Nations”, the former of which urges empathy and the ethical principle of ‘do as you would be done by’.
Murray actually worked as a union organiser in the USA seeking to recruit the ‘vanguard’, so was a Marxist activist.
https://www.marxists.org/archive/bookchin/1969/listen-marxist.htm
re £9bn PFI for Thames crossing.
Do you think this article is accurate and the way Labour is going (rampant neoliberalism) -https://www.theguardian.com/commentisfree/article/2024/jul/02/labour-plans-britain-private-finance-blackrock
It is accurate
I know the author