No, Sir Edward, we are not going bankrupt!

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“We are going bankrupt as a nation — there will not be the money to pay for the NHS or pensions.” This was the impassioned cry from Sir Edward Leigh (Con, Gainsborough) in Tuesday’s Commons debate on public health restrictions. He referred in particular to the closing of pubs at 10pm and more generally to what he saw as a need to let businesses “get on and do business”.

Fortunately he was wrong. We won’t go bankrupt as a nation. This is because we create our own money. He no doubt thinks that business activity is always needed, through taxation, to pay for public services such as the NHS. This is not the case. The state is at liberty to create whatever money is needed to pay for public services. Taxation is needed to remove money from circulation to prevent inflation, not to pay for public services.

Inflation occurs when the economy is working at full capacity and the money in circulation creates effective demand beyond what the real economy can meet. The pandemic reduces both supply and effective demand. The supply of hospitality services is reduced by measures to prevent the spread of the virus. Effective demand for hospitality services, and for other services and goods, is reduced by the loss of income suffered by many businesses and employees whose work is affected by the COVID restrictions.

Most money circulating in the economy is normally created by private banks when they make loans. Money is destroyed when loans are repaid or written off, such as through bankruptcies, and when taxes are paid. Investment in several areas of the economy – such as hospitality, the arts and aviation – is likely to be depressed at the moment, which means that private money creation will be below normal.  It is not at all clear that the money being put into circulation through business support schemes, additional social security payments and health expenditure needs to be balanced by increased taxation. In any case, increased business activity could create its own need for taxation by stimulating an increase in the money created by private banks.

The social effects of closing down much of the hospitality sector are, of course, very painful. But this is not the point that Sir Edward is making. He is talking about the consequences to the public finances of the COVID-related restraints on business. He seems to share a common misunderstanding of the role of money and taxation in the economy.

Perhaps one of the more damaging misconceptions of our time is that public services are separate from but supported by “the economy”. They are very much part of the economy. They meet needs and they provide employment. They differ from the private businesses in that they draw more state-created money and they destroy less money through the payment of taxes. Public services can be as much a driver of the economy as can beer-consumption, fast-fashion or horse-racing.

A flourishing hospitality sector adds to the quality of our lives. It’s not true that we need it to pay for the NHS.

 

* John Medway was a founder member of the SDP in 1981 and London's first elected SDP councillor. He worked for most of his life in social housing, latterly specialising in finance, and he has an MSc in economics. He is now retired but has an active interest in the economics of sustainability.

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64 Comments

  • Peter Martin 16th Oct '20 - 10:28am

    No we won’t go bankrupt but we could have a future inflation problem. The problem isn’t the debt created by Government spending it’s where the spending goes. If it doesn’t come back as taxes straightaway it is because the recipients aren’t spending it.

    If that changes in the future, and they do start spending bigtime, there could be a need for tax rises to cool down an overheating economy. It is quite possible that the overheating economy will lead to a surge of money into what the neoliberals would call the Govt’s coffers. That, ironically, and perhaps counter intuitively, will be a sign that some tax rises will be in order.

    Not now though.

  • Nonconformistradical 16th Oct '20 - 11:01am

    @Peter Martin
    “The problem isn’t the debt created by Government spending it’s where the spending goes. If it doesn’t come back as taxes straightaway it is because the recipients aren’t spending it. ”

    A non-economist asks…. aren’t the people most likely to spend straight away money provided through government support schemes during the present crisis those most in need of it? The less well-off? The ones struggling to put food on the table?

    It is the better off who can afford to squirrel government handouts away (maybe some in offshore hideaways…?)

  • Very informative post.

  • Peter Martin 16th Oct '20 - 11:21am

    ‘Perhaps one of the more damaging misconceptions of our time is that public services are separate from but supported by “the economy” ‘

    Even from an MMT perspective this isn’t really true. If you consider the plight of, for example, a very poor sub Saharan African country with large areas of desert, no significant natural resources and a poorly educated population, the economy isn’t going to be in good shape. Neither will be the level of public services the Govt will be able to offer. It won’t have the ability to trade what it does have for what it doesn’t have. It won’t have much, if it can’t grow much or dig it out of the ground or whatever.

    The point of MMT is not that the economy doesn’t matter to support Public services. Just the opposite in fact. But the focus of the Governments fiscal policies should be totally on keeping the economy functioning well rather than fretting about “where the money is going to come from”.

    Keeping the economy going has, under normal circumstances, to be the top priority. There should be no more silly and unnecessary austerity polices to “balance the books” etc. These are not normal times though and the trade-offs between public health and keeping the economic wheels turning is naturally causing some difficulty.

  • Peter Martin 16th Oct '20 - 11:45am

    @ Nonconformistradical,

    Yes the less affluent will much more likely be spending what they receive. If they do that they’ll be paying VAT, petrol duty, alcohol and tobacco duties etc. They’ll be spending in supermarkets. That money, what is left of it, will be used to pay the wages and salaries of supermarket workers who’ll also be paying their taxes. It just keeps getting spent and respent until it’s all gone back to Govt.

    Unless it is saved then it doesn’t. So the Govts deficit is simply what doesn’t come back as taxes and has been saved. Those doing the saving won’t just be the ultra rich who are squirrelling their money away into tax havens. They’ll be those who are working from home, those on relatively generous pensions, in fact anyone who is receiving close to their normal income. They’ll have the usual amount of money coming in but they won’t have the usual range of options to spend it.

  • @John Medway – is there a consensus on the macroenomic theory you are asserting or is it disputed? It reads, to this admittedly rank novice student of economics, Modern Monetary Theory or a variant?

    I would be interested in reading more about it. Can you recommend any resources?

  • Are you advocating actually printing money or quantitative easing through a central bank? The two are very different, despite what journos and even some economists tend to think. The former is certainly inflationary and makes no long-term sense, the second less inflationary and can have a role to play. The problem is that the latter is subject to rapidly diminishing marginal returns, as many governments around the world have discovered in the last decade.

    The real threat is not national bankruptcy but a declining credit rating and rising borrowing costs. That rating depends on many factors but excessive borrowing to support a growing, uncontrolled deficit is certainly one. That certainly does have an impact on a government’s ability to fund public services and make long-term investments.

  • Thanks all for your comments so far.

    @Joe Otten I’m not taking a view on the closing of pubs specifically. I’m merely saying that Sir Edward’s reason for keeping them open is wrong.

    @Peter Martin As always, your comments are extremely helpful. Yes, the danger of inflation will be there once confidence returns. One of my overnight reflections on my post is that I have rubbished one supposed constraint on public expenditure while not putting similar emphasis on the real constraints. Money is rather magical in that can be created from nothing but that’s not true of the real economy which is subject to real resource limitations.

    @Nonconformistradical – yes, the direct recipients of government help are likely to spend it as it comes in. In my own case, my pensions keep flowing into my bank account as normal but I am spending less than normal so there’s a bit more in the account than normal. That (and more) could be splurged on an electric car once things return to normal.

    @Peter Martin – your second comment – Yes, my wording about the support for public services from the economy was deficient in that it applied only to money, not to the real economy. Thanks for pointing that out with such a full explanation.

  • John Medway: Thanks for an excellent article.
    Sir Edward Leigh – “referred in particular to the closing of pubs at 10pm and more generally to what he saw as a need to let businesses “get on and do business”.”
    Liberals should be supporting the principal that people should be allowed to do what they want to do in the absence of evidence that in so doing they will harm others. Wetherspoons preliminary results were published this morning: http://www.investegate.co.uk/wetherspoon
    Therein Tim Martin puts his argument against the 10pm pub curfew and summary statistics indicating that the companies pubs are not evidently ‘centres of transmission’.
    It is also interesting that Chairman Martin is now very critical of the government which in some measure he helped into office. Notwithstanding Sir Edward’s spurious argument about taxation we should decide and communicate our response to the 10pm pub curfew on the basis of Liberal principles.

  • Peter Martin 16th Oct '20 - 1:43pm

    @ Paul Fisher,

    Money isn’t dysfunctional. It works remarkably well to create the trade system and modern economy we have in the world.

    True, it would work even better if there was a better understanding of what it is, especially on the part of those who run currency issuing Govts, but a wholesale “reform” of what is actually working quite well is likely to do more harm that good.

    The interest charged by private banks is to give them a margin on what they do and insure against the possibility of bad debt. If you think they are profiteering you can compete against them directly in the peer-to-peer loan market. It’s supposed to work quite well so you could think of giving it a go.

    The “Positive Money” crowd think that all money should be government issue. The easiest way to achieve that is to Nationalise all the banks.

    Will it make much difference to the workings of the economy? That’s a political decision to be made. It might make a bit of difference but not a lot. You’ll still not be able to borrow money interest free! Either from the banks or on the peer to peer network.

  • Is it possible that Income support can provide the living costs needed by people and the can have a UBI income to produce goods, services to sell (or be educated for future job position) say at market stalls on the net and for those goods to be taxed.

  • Nonconformistradical 16th Oct '20 - 2:19pm

    @Peter Martin
    “Money isn’t dysfunctional. It works remarkably well to create the trade system and modern economy we have in the world. ”

    Does it? It seems to me that when the system fluctuates it becomes an issue of ‘heads I win, tails you lose’ – and the real losers are primarily those struggling to put food on the table. I’m disinclined to feel particularly sorry for the well-off who might lose some money in a downturn but who still have roofs over their heads and can put food on the table every day.

    It does bother me that some people involved with debates like this appear to ignore the impact of money on the poorest in society and want to treat the money system in isolation from its impacts on the poorest.

  • Paul Barker 16th Oct '20 - 3:09pm

    Well, its not called Bankruptcy when it happens to Countries but it can still be very nasty, We could end up having to ask The IMF for a deal, on their Terms.
    In general it helps for Countries to have Money in the Bank, ideally in “World” Currencies like The Dollar or EURO but that is now a dream for future generations as far as The UK is concerned.
    For now we need to be spending only on suppressing Covid & Unemployment, not daft projects like No-Deal Brexit.
    The next Government will have a lot of difficult choices to make & printing Money wont help.

  • John Medway 16th Oct '20 - 3:21pm

    @Paul Fisher: So far I have encountered three strands of progressive thinking about money that accept that money can be created by a state that enjoys monetary sovereignty (unlike, for instance, members of the Eurozone). One is Positive Money that you refer to, another is MMT (Modern Monetary Theory), on which @Peter Martin shows every indication of being expert, and a third is what I would call straight Keynesianism, as set out very eloquently by Anne Pettifor in her book “The production of money” (https://www.versobooks.com/books/2706-the-production-of-money). There seems to be a lot of common ground between them as well as some important differences.

    I agree with you on the way profit-making institutions have found ways to circumvent arrangements that governments put in place to try and control the creation of money. I have heard it said that cheques were invented as a way of circumventing the Bank of England’s monopoly (in England, not in Scotland) of the issuing of banknotes. I think this tendency has been exacerbated by the light-touch regulation that has prevailed since the Thatcher years.

    You’re quite right in saying “An MSc is no guarantee!” My MSc predates the explosion of new and revived Keynesian thinking that followed the crash of 2008. Moreover, with so much time spent on microeconomics and on econometrics, the study of macro and money was inevitably rather sketchy, as well as being bogged down in complex algebra. I regard myself as a perpetual student of economics, though when I drafted my posting yesterday, I was playing at being an opinionated economics journalist.

    On your opening comment on the dysfunctionality of money, I tend to agree with @Peter Martin’s response.

  • John Medway 16th Oct '20 - 3:23pm

    @n hunter I think you’ve opened up a huge new topic there and I don’t think I can offer a useful comment on it today.

    @Nonconformistradical I agree with Kate Raworth of “Doughnut Economics” fame https://www.kateraworth.com/ that the fundamental aim of economic policy should be to give everyone the chance of a decent life while remaining with the “planetary boundaries” (climate change, soil and freshwater conservation, maintenance of biodiversity etc.). Misunderstandings on the nature of money can stand in the way of that. Defenders of the privileges of the well of, intentionally or otherwise, promote such misunderstandings to justify policies that hurt the poor (“austerity”) and shield the rich from additional taxation. Hence my concern to try and rectify those misunderstandings.

  • John Medway 16th Oct '20 - 3:34pm

    @Paul Barker: Yes, there’s far more to economic policy than the creation of money for domestic use. Particularly for an open economy like the UK, the international dimension of money management is of vital importance. On some aspects of this the different strands of progressive thinking on money tend to disagree, but I won’t attempt to go into this any further.

  • Nonconformistradical 16th Oct '20 - 4:32pm

    @ John Medway 16th Oct ’20 – 3:23pm
    Doughnut economics – ta – turned out I already had it on my wanted books list – I’ve increased its priority

  • John Medway 16th Oct '20 - 7:30pm

    @Freddie: For some reason your comment didn’t appear on my screen till quite late. Sorry for the delay in my response.
    MMT is one of several strands of thinking which take into account the the way money is created and the ability of states to create money – see my response to Paul Fisher.

    On MMT I have read Stephanie Kelton’s ‘The Deficit Myth’ – https://www.amazon.co.uk/Deficit-Myth-Modern-Monetary-Economy/dp/1529352525and I have been dipping into Randall Wray’s ‘Modern Money Theory’ – https://www.amazon.co.uk/s?k=randall+wray+modern+money+theory&i=stripbooks&ref=nb_sb_noss – and Edward Fullbrook (ed), ‘Modern Monetary Theory and its critics’ – https://www.amazon.co.uk/Modern-Monetary-Theory-its-Critics-ebook/dp/B085632KFL. There is also a recent textbook on macroeconomics written from an MMT perspective by William Mitchell et al, ‘Macroeconomics’ – https://www.amazon.co.uk/s?k=William+Mitchell+randall+Wray+macroeconomics&i=stripbooks&ref=nb_sb_noss – of which I have only read a sample. If you google on ‘Modern Monetary Theory’ you will find lots of articles on it.

    For Positive Money, I would suggest you visit their website – https://positivemoney.org/

    For a straight Keynesian approach I recommend Ann Pettifor’s “The production of money” – https://www.versobooks.com/books/2706-the-production-of-money

    Others may have other suggestions and recommendations.

  • John Medway 16th Oct '20 - 7:44pm

    @Martin: Yes, I’m afraid a 500-word blog-post about the nature of money and its policy implications leaves lots of questions unanswered and many of them are still unanswered in my own mind! I think the main claim of the authors I have read on this subject is that there is more space for a country with monetary sovereignty to tackle problems of economic stress in a humane way than for a country that is not in command of the currency it uses.

  • Innocent Bystander 16th Oct '20 - 8:59pm

    @Freddie
    Don’t worry about understanding the theory. It isn’t economics – ,it’s politics.
    This is yet more of the socialist Perpetual Money Machine. Eternal wealth and prosperity for all and we don’t have to kow-tow to the evil capitalist monster.
    We don’t need to grow, manufacture, well do anything productive at all. We just print money. Give it to the people and they give it back in taxes.
    Kelton is Bernies “Economic Advisor” which says a lot about both of them.
    No wonder the progressive left is losing ground to populists. The people look for real world solutions and they are offered proposals that children ridicule.
    Here’s my tip. Forget and never use again the word “money”.
    Now reframe this thinking using only the word ” value”. You can’t print that.

  • Steve Trevethan 16th Oct '20 - 9:53pm

    “Where Does Money Come from? A Guide To The U K Monetary and Banking System” from The Economics Foundation is well worth reading.

  • Peter Martin 17th Oct '20 - 4:22am

    @ George Miles,

    Inflation is the major factor when determining the longer term exchange rate. At one time the pound was worth $4. Now its much less. That’s because inflation in the UK has been consistently higher than in the USA.

    Inflation isn’t caused simply by Governments printing money. Nearly all Govts do that. We’ll never agree on why we’ve not been too good at keeping inflation under control. Those on the right will blame the Trades Unions. Those on the left will perhaps blame the desire of the capitalists to maintain high profit margins.

    But at the moment we’re doing OK. Inflation is very low.

  • Steve Trevethan 17th Oct '20 - 7:30am

    To what extent might house price rises be a factor in longer term U K inflation?

  • Peter Martin 17th Oct '20 - 9:59am

    @ Innocent Bystander,

    “No wonder the progressive left is losing ground to populists.”

    I’ve said the same thing but for different reasons. If the ruling class doesn’t listen to those like Stephanie Kelton who give a correct explanation of how the economy works, the working classes will turn to the populists. They won’t march to protest that the Government should be running higher deficits, but they will blame ethnic minorities and other immigrants. They’ll find reasons for doing things you won’t like at all!

    If the coalition hadn’t been so wrong headed about the need for economic austerity in the period 2010 to 2015 then the result in 2016 would have likely been much different.

    If the ruling class in Germany had known how to run its economy in the 30s, the course of world history would have been very different. The population indeed did turn to the populists, who were very adapt and astute at understanding what they needed to do. No balanced budgets for them! They mobilised the resources of the German economy very effectively. It’s just a pity that they weren’t put to a more productive purpose.

  • Antony Watts 17th Oct '20 - 10:47am

    It’s simple, not esoteric. Money goes round and round, banks and governments can create it.
    The issue is how and where it goes round and round. We simply need to directthis to more needy people/enterprise and fully support them

  • The problem is this – yes you can create money – in fact that is what happens. Money only exists if people accept that it exists.
    Food, clothes somewhere to live are not so simple. Someone has to collect and usually cultivate the food, The same with the other things we need. We either do it all in our country or exchange what we have to get what we don’t have.
    If we look at behavioural economics we can see efforts being made to find out how people actually make decisions – and we need to remember that the “we” includes each one of us.
    The last time we had as serious a situation as we have now was in the forties. There were appeals to “dig for victory” as we needed to grow our own food. We had the message to export or die and the sale of “export rejects” in the shops.
    The real problem we have at the moment is that we won’t wake up to the fact that we do not face a once in a lifetime problem , this is simply the real world. We do not know when the next virus will appear, we do not know when we have diseases resistant to antibiotics,
    although there is plenty of evidence that we are actually almost at that stage.
    We need to find ways of managing our planet in a way that is founded on the reality of how the world actually is.
    There is little hope of it happening.

  • @Innocent Bystander: “Don’t worry about understanding the theory. It isn’t economics – ,it’s politics.” Though I disagree with most of what you’re saying, you’ve raised an important point. I think there’s a complex interaction between economic theory and politics. A theory has many attributes, including whether it is true or false and in whose interest it is to promote it. Economic theory is also discussed with varying degrees of honesty and among people with varying degrees of knowledge and understanding. It’s a messy business and it’s an interesting challenge to try and sort through the mess.

    @Steve Trevethan: I should have thought of “Where does money come from”. Here’s the link to it – https://neweconomics.org/2012/12/where-does-money-come-from/

    “To what extent might house price rises be a factor in longer term U K inflation?”

    I don’t myself see a direct link between house price inflation and, say, consumer price inflation. However, I see a very strong link between QE (one form of state money creation) and house price inflation. My take is that QE, as implemented in recent years, has fuelled house price inflation. If, instead, it had been used to buy bonds issued by a national investment bank, it could have financed additional investment in renewable energy and other infrastructure. Done to excess, that might have fuelled CPI inflation but that might have been preferable to the house price inflation that actually occurred. Others might have a different view.

  • @Martin: “Incidentally, how true is it that a country cannot go bankrupt? If a country owes money in Yuan (Renminbi) or whatever, which it cannot service (or repay), I would have thought this makes it bankrupt.”

    I’m inclined to agree with you in principle. However, a country such as the UK that can borrow in its own currency would not normally borrow heavily in other currencies though it might incur short-term debts in the course of, for instance, buying oil. The UK could, of course, suffer such economic decline that it is no longer able to borrow internationally in sterling. Brexit might set us on that path! Others might take a different view.

    @James Moore “Are you advocating actually printing money or quantitative easing through a central bank?”
    If you mean “printing money” literally, then I would say that notes and coins are normally only about 3% of the money in circulation, so I’m not really interested in that. However, an alternative to QE is direct “monetary financing”, where, say, the Bank of England grants the Treasury an interest-free, permanent overdraft.

    I’m not necessarily advocating either. The power of a state with monetary sovereignty to create money has a strong impact on it’s ability to borrow even if that power is held in reserve. This is because it will never default on debts denominated in its own currency.

    Neither approach to money creation will be inflationary if there is spare capacity (eg unemployment or under-employment) in the economy. State money creation is one way of helping an economy to achieve its full potential.

    I agree with you about our credit rating. Though we need never run out of pounds, the exchange rate could fall and our ability to export might not respond strongly enough to stop the rate falling further. When we attained monetary sovereignty in 1971 (before which we were pegged to the dollar, which, in turn, was pegged to gold) we gained more freedom of manoeuvre, but within limits.

  • @Antony Watts: “It’s simple, not esoteric. Money goes round and round, banks and governments can create it.”
    I’m glad you find it simple! I still struggle with it.

  • @James Moore: I should have added that the Bank of England is creating and destroying money most of the time through its “open market operations”. The issue is about if and when state money creation needs to operate on a bigger scale.

  • @Freddie: Also, if you would like to read about money creation from the horse’s mouth, so to speak, here is an explanation from the Bank of England. It’s called “Money creation in the modern economy” –
    https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

  • There is no doubt that MMT is a perfectly accurate description of how money is created and destroyed. But, in isolation, it has very little to say about policy although some on the left wrongly jump to the conclusion that they want to reach, namely that it implies there are few or no limits to what government can spend on welfare, the NHS and similar good causes.

    The missing ingredient is what money IS, namely a direct or indirect a claim on future cash flows. So, when a bank advances a mortgage it does so because it gets a cut of the buyer’s future earnings – a direct claim. If the house buyer loses his job and can’t pay, then the bank uses the backup of repossession of the house – a valuable and saleable asset and an indirect claim on the new buyer’s cash flow.

    In general, assets are indirect claims on future cash flows. They have limited value in themselves but, like a repossessed house, can be traded for something that does provide a cash flow. Government money is supported by the health of the whole economy so the link to specific cash flows is very remote which obscures the relationship.

    This has important policy implications. If investments ON AVERAGE succeed and lead to expected flows, then well and good as the new money created to finance them is backed by strong cash flows. But if ON AVERAGE they only yield poor, zero or even negative returns, then the value of money is eroded causing inflation (but the connection is not linear).

    One key issue is that banks (which create most new money) were allowed by deregulation to take the path to easiest profit – putting nearly all of it into property (easy for them) and little into business (difficult + almost all lending to small business was really property lending because secured on the owner’s house). This was financialising (i.e. hoovering up) existing cash flows but not creating new cash flows, so inflation (mainly house prices but spilling over) followed. What is profitable for banks is not necessarily good for the country as became clear when the overextended banks collapsed.

    Government too has a poor record, routinely driving a coach and horses through its own rule book. So, Track & Trace done incompetently by cronies is a negative return on investment (it is useless). Similarly, HS2.

  • Innocent Bystander 17th Oct '20 - 1:48pm

    John,
    Thank you for your courteous reply but if you really want a challenge (and possibly a Nobel Prize) put aside MMT. It’s just a hobby for armchair eccentrics and for socialists in denial of capitalist reality.
    Hey, if Bernie is for it then it must end up in a forgotten backwater (like him).
    Governments can print money but, so what, it is the citizens who create value from the natural resources they have available, from their skills, ingenuity and enterprise.
    It is the value which they create from nothing and with which they trade and compete with other nations’ citizenry that matters.
    It is value, and only value that counts. Using money is easier than barter but that’s all it’s for.
    Imagine the world had only one currency? In effect it does and that is found in the worth of that which they all want to trade. Any nation that tries to cheat by fiddling with their ‘barter tokens’ will be found out and suffer the consequences.

  • John Medway 17th Oct '20 - 2:52pm

    @Gordon: That was a very meaty post, most of which I think I agree with. There’s one sentence I would question: “But if ON AVERAGE they only yield poor, zero or even negative returns, then the value of money is eroded causing inflation (but the connection is not linear).” I would have thought that if assets yield a poor return, the value of those assets would decline and this would be deflationary. A decline in the value of assets would mean a rise in the value of money.

    @Innocent Bystander: I’ve heard other people say that the Left in the USA has latched on to MMT as if it were a magic solution to the problem of providing decent public services to a people that hates to pay taxes (as do most people). However, I haven’t so far tracked down the evidence for this – I just don’t know enough about American politics.

  • @Paul Fisher: “The above debate shows that there are no experts on this matter.” Perhaps you are right but I could name quite a few people who are far more expert than I am on monetary theory and they belong to various strands of thinking, including MMT, Positive Money and modern Keynsianism. Perhaps, as time goes on, if adherents to the various strands listen to each other, the area of common ground may grow.

    You have also raised the important question of how thinking on monetary theory should fit into the Lib Dem policymaking framework. The problem with monetary theory is that it is technical but with enormous policy implications. Bad monetary theory, I believe, led us to go along with George Osborne in 2010 and put the brakes on economic recovery while inflicting untold hardship on the less well-off. Some people in the party, more expert than I am, might take a different view.

    With so much seemingly honest disagreement among experts, it could be difficult for the party to reach a working consensus on the way forward. I think the first step might be for some of us to support each other in building our understanding of the various theories in circulation, starting with the common ground between them. Perhaps we could use the sort of internet forum that isn’t vulnerable to trolling-like behaviour – the primary aim being co-operative learning rather than competitive point-scoring.

    I’ll give further thought to that and perhaps others might too.

  • The country might not be going bankrupt, but people are. Bussiness are closing, jobs are being lost, venues have gone, the arts are in tatters, and students are being robbed of their education. This is the fundamental problem with statist thinking. People’s lives end up being wrecked and limited because the aims of the state are separate from the lives of individuals within it. Some people might want to live in a permanent state of authoritarian health control, but they should be honest about it and stop trying to make it sound inevitable or the only option. It is not. It is a choice. The financial cost to the state is the least of the issues.

  • John Medway 18th Oct '20 - 6:52pm

    @Glenn: I take your point about the cost in human well-being of measures to combat COVID and I agree that the financial cost to the state should be a relatively minor consideration. On the issue of state versus individuals, I see that as an issue of balance between individual liberty and the protection of life and health more generally. That’s beyond the intended scope of my original blog post so I won’t expand further.

  • John Medway 18th Oct '20 - 6:55pm

    @Paul Fisher: “The above debate shows that there are no experts on this matter.” Perhaps you are right but I could name quite a few people who are far more expert than I am on monetary theory and they belong to various strands of thinking, including MMT, Positive Money and modern Keynsianism. Perhaps, as time goes on, if adherents to the various strands listen to each other, the area of common ground may grow.

    You have also raised the important question of how thinking on monetary theory should fit into the Lib Dem policymaking framework. With so much seemingly honest disagreement among people far more expert than me, it could be difficult for the party to reach a working consensus on the way forward. I think the first step might be for some of us to support each other in building our understanding of the various theories in circulation, starting with the common ground between them – a co-operative learning project.

    I’ll give further thought to that and perhaps others might too.

  • Peter Martin 18th Oct '20 - 8:58pm

    @ Paul Fisher,

    You’ve said:

    ‘Positive Money advocates (not a crowd!) do not advocate “government issued money” Do you want me to repeat that?’

    Repeat it if you like, but the Positive Money Wiki entry says:

    “Under such a reform private banks would be deprived from their ability to create money by extending credit into the economy. In turn, the Bank of England would regain the monopoly over money creation”

    The Bank of England is effectively an arm of Government. All central banks are. The Americans like to pretend otherwise but the Fed is no different from any other CB in this respect. So if you want the BoE to have a monopoly over money creation you’re advocating that money creation should be the sole preserve of government.

    Effectively this means nationalising the banks or placing them under such strict Government/BoE control that they may as well be nationalised. As a socialist, I’m not personally against this, but I do have to admit that it’s not going to make a huge difference to the way banking works.

  • Peter Martin 18th Oct '20 - 9:36pm

    @ Tom Harney

    “Money only exists if people accept that it exists.”

    Money is effectively a tax voucher. A tax voucher is only a voucher if the Govt says it is. So if you want to stay out of jail, you need to pay your taxes and that means working to obtain the vouchers needed! Sorry to offend your Lib Dem sensitivities but that’s the way the system works.

    @ John Medway,

    “I’ve heard other people say that the Left in the USA has latched on to MMT as if it were a magic solution to the problem of providing decent public services to a people that hates to pay taxes (as do most people).”

    Not just in the USA. For a start it’s not a magic solution. It’s a just a theory of how the economy functions and why it’s perfectly normal for a Govt like the UKs to be slightly in deficit. The economic policy of the Coalition to try to produce a surplus was just stupid in the extreme.

    It’s rather odd for us MMT advocates to be the situation of having spent the last decade arguing that it was perfectly reasonable to spend a couple of tens of billions extra into the economy without worrying too much about where it was going to come from, to now find that everyone has taken us at our word and is busy advocating that several hundred billions should be injected!

    There’s not much talk about putting a penny on income tax! What’s the big deal? A government in charge of its own currency can never go ……..

    OK that’s true because we’ve said it! But I can’t help feeling that we’ve lurched from one extreme to the other.

  • Peter Martin 19th Oct '20 - 11:15am

    @ William Francis,

    “In any case states don’t finance themselves via printing money…..”

    If this is true, it is only because it is too inconvenient and expensive to have to transport cash in a security van. It’s all done by electronic transfer and tapping into a keyboard these days.

    And if they do finance themselves by levying taxes, where does the money come from before it is available to be collected as said taxes?

  • Innocent Bystander 19th Oct '20 - 11:45am

    One day a clever MMT’er will see the light on the Damascene road and grasp the reality, beyond the word ‘money’.
    I pay my taxes in crude oil, pork bellies and wheat. I used my income which consisted of automotive crankshafts, copper wire and Mars bars. The govt took that tax and gave a nurse silicon chips, natural gas and an aero engine so she could buy container ships and train rails.
    Well, just little bits of those and to make it easier we three used coloured paper between us. But crucially, that paper traces its worth to those things. We don’t trace its value back to a single element (atomic number 79) anymore but it does have a traceable chain back to something of worth or it is worthless. The world has an international currency and it is its consensual, but unspoken, recognition of what has value between them.
    John was wrong, we can go bankrupt (and are well on the way) because it will run out of pistons, light bulbs, crates of bananas, rivets and it not have those to pay its nurses and public sector pensions.

  • @ John Medway, Perhaps a better way to explain that point is a thought experiment of two extreme scenarios.

    For the first imagine that a country has a track record in both public and private sectors of borrowing for productive investment and, on average, making good investments – ones that support the debt as envisaged. Then debt, both public and private, will increase as the economy grows but only in proportion so it will stay within sensible bounds.

    For the second consider a country that routinely makes bad investment decisions in both public and private sectors. The associated debt will grow (net of any that is written off along the way) but the assets it finances yield little or no economic return to the economy as a whole so economic growth flatlines or falls. This country will eventually reach a crisis when the growing debt becomes unsupportable.

    In this second scenario the country must create more and more debt to support a flatlining economy. It is the real economy that creates value so, measured against that, money steadily loses purchasing power – hence inflation. And this will happen first in the sectors where ‘bad’ (i.e. unproductive) debt creation is most intense – property – before it seeps into the rest of the economy.

    I can think of two main ways ‘bad’ debt is created.

    Firstly, when the banks are incentivised to create debt with little public benefit. After the 1980s mortgage lending took off, driving up house prices and increasing banks’ share of the economic pie at the expense of households’ share. (The banks were doubly incentivised because property lending is less skilled than business lending so they also cut staff costs). This is financialisation of the economy at the expense of the productive sectors and was/is a direct result of perverse incentives caused by Thatcherite deregulation.

    Secondly, when graft, incompetence, or whatever lead to poor investment decisions the associated debts won’t be supported by the cosh flows – e.g. HS2. This is essentially a management problem.

    One caveat: GDP is a poor measure. If A sues B and B countersues A and both spend £1 million on lawyers, GDP benefits by £2m but there is no real gain. In general, one has to peer through thick fog to see what is really going on.

  • In my earlier comments I took the perspective of investment – ‘good’ or ‘bad’ and touching on how it is shaped by (de)regulation. That’s because it’s a field I once worked in so that view comes naturally but it’s functionally equivalent to the distinction between ‘earned’ and ‘unearned’ income made by classical economists from Adam Smith onwards who looked at it from the perspective of earnings.

    Basically, they recognised ‘unearned’ income’ (largely agricultural rents in their day) as a drag on the economy – merely a redistribution of income from the poorer to the more powerful/better connected without enlarging the productive capacity of the economy as a whole. They contrasted this with ‘earned’ income that resulted from productive activity and went to the person doing the work.

    In the 20th century ‘neoclassical’ economists stood the older, more accurate interpretation, on its head and it’s obvious why they would want to do that – it’s been immensely profitable for those well connected at the top of the party – bankers and others. For ordinary Tories, the small retailers and the like who used to be the bedrock of the party is not been good and I suspect that in large part explains both why the Tory membership skews older and also why, searching for a culprit for 40 years of failure, they have landed on the EU as the problem. Sorry, but the BIG problem is much closer to home!

    A strong implication is that a primary target of policy should be to devise institutions and systems that incentivise ‘virtuous’ behaviour – for example in this context for banks to lend much more to the productive economy despite the costly upskilling this will require.

  • Peter Martin 19th Oct '20 - 3:55pm

    @ Innocent Bystander,

    “I pay my taxes in crude oil, pork bellies and wheat……”

    I don’t think so. I have heard of the taxman accepting a work of art but I imagine that wouldn’t be welcomed at the DHSS. Those guys want ££. I know they do. I’m just in the process of doing my quarterly VAT return.

    I have a few bucketfuls of apples off my garden trees. It would be good if they’d take those instead of my digital bank transfer! Why do they want those digits anyway? Don’t they have their own computers?

  • Peter Martin 19th Oct '20 - 3:57pm

    HMRC not DHSS !!

  • I’m delighted to see so much and that so sage about MMT — or at any rate the first half of this excellent thread: I’ve only scanned the second half for the three letters of my hobby horse. And of course the matter is urgent.

    But we have recently voted to support the idea of UBI, with a positive policy to put to the electorate. So I am sorry to see no reference to UBI in the discussion above [apologies if I missed it]. Most of our past discussions of UBI seem to me to have revolved around the core conundrum, “Yes, UBI — but how on earth can we pay for it?”. Surely, MMT provides the answer? If not, please say why.

  • John Medway 19th Oct '20 - 7:55pm

    @Gordon (your second post): In general terms I can’t disagree with your second scenario – habitual bad investment will ultimately be pretty disastrous for an economy. But I can’t resist a little nit-picking on “This country will eventually reach a crisis when the growing debt becomes unsupportable.”. While a country enjoys monetary sovereignty and its borrowings are in its own currency, no public debt is unsupportable because it can always be serviced and redeemed by state money creation. However, the money pumped into the economy through public debt redemption (eg private holders of gilts swapping gilts for cash) will tend to cause inflation unless a recession is already underway or additional taxes are successfully raised. Whatever happens, people will be poorer in real terms. Action informed by even the best monetary theory can’t protect an economy from bad investment decisions in the real economy but it can, perhaps change the nature, distribution and, to a small extent, the size of the damage. So yes, I think you were right in your original post, that bad investment decisions will tend to cause inflation. One up to you.

    You’re so right about GDP. It’s a very crude indicator of the strength of an economy, though has its uses, for instance as the denominator in the debt to GDP ratio.

  • John Medway 19th Oct '20 - 8:19pm

    @Roger Lake: No, sorry, I don’t think MMT is the answer to financing UBI. A UBI that obviates much of the need for means-tested social security payments would involve a huge and continuous injection of money into the economy. Without increased taxation on a similar scale, inflation would result. It may be that “budget deficits” could be permanently higher than they are but I would guess nothing like high enough to offset the need for an enormous tax hike. I have yet to see a costed UBI proposal that isn’t either inadequate (by the standards expected by some of its proponents) or unaffordable (without a bigger tax hike than the electorate is likely to support). That’s not to rule out UBI altogether. A modest UBI that makes fairly minor inroads into the need for means-tested benefits, might still be feasible and serve a useful purpose.

  • Peter Martin 19th Oct '20 - 9:35pm

    ‘ “Yes, UBI — but how on earth can we pay for it?”. Surely, MMT provides the answer? If not, please say why.’

    Many on the left don’t seem to get past the MMT maxim that a nation which issues its own currency can never go bust. Therefore that are lots of uses we can put all that lovely created money! There’s a bit more to it all than that. It helps to remember the principle of the sectoral balances. This tells us that the ability of the Government to spend an amount more than it raises in taxation is dependent on two things. Firstly a willingness by our overseas trading partners to sell us more than they buy from us. Secondly a willingness by the domestic sector to spend less than it earns.

    Take away both of those, say we have a combination of balanced trade and a domestic sector which doesn’t save anything then we end with the Government spending only what it receives in taxation.

    It is difficult to know just what our overseas trading partners will make of a UBI. Probably they’d let it go if it was inconsequentially small. But what sort of UBI would that be? If it was large it would also have a negative effect on the earnings of the domestic sector. We need those to be larger than spending.

    So for these and a variety of other reasons the consensus of MMT opinion is that the UBI is NOT the way to go.

    http://bilbo.economicoutlook.net/blog/?p=44133

  • Peter Martin 21st Oct '20 - 9:52am

    One of the common misconceptions about MMT is that it advocates that a currency issuing government should always be in deficit. So what is the correct understanding?

    It is that the Government’s deficit (or surplus) is equal to everyone else’s surplus (or deficit). ‘Everyone else’ can be divided up according to geographical location into the Private Domestic Sector and Foreign Sector. The foreign sector, for an economy like the UK’s, has nearly always been in surplus because they have tended to want to sell us more than they buy. The private sector often will also be in surplus, (spending less than they earn) except when they are borrowing and spending too much when its the other way around! That’s another story.

    A responsible government should try to accommodate the wishes of the other two sectors and at the same time steer a sensible middle path between having too much inflation and too much recession in the economy. It’s own fiscal position is quite unimportant by comparison. This is why policies of economic austerity, unless they are introduced to cool an overheating economy, are so wrong headed. Govt is putting its own fiscal position above the needs of the economy.

    A policy of ‘anti-austerity’, ie an insistence that the Government should always forcibly run a deficit to be able to fund whatever social policy the liberal left might be keen on at the time is equally wrong headed. That’s fine if the other two sectors want to run a surplus but we shouldn’t assume they’ll always want to do that. They might decide to run a deficit. ie Spend their savings. Government should try to accommodate that wish by aiming to run a surplus. The extra spending by the other two sectors will prevent this being deflationary.

  • @Chris Cory: Increased money creation without increased taxation or saving can help bring into use any spare capacity in the real economy (eg idle machines or unemployed workers). It won’t help an economy that is already working at full capacity. Aid from outside can help expand the economic capacity of a country that lacks the foreign exchange to buy the equipment and knowhow it needs.

  • Julian Tisi 22nd Oct '20 - 8:28pm

    @Innocent bystander
    “I pay my taxes in crude oil, pork bellies and wheat. I used my income which consisted of automotive crankshafts, copper wire and Mars bars. The govt took that tax and gave a nurse silicon chips, natural gas and an aero engine so she could buy container ships and train rails. Well, just little bits of those and to make it easier we three used coloured paper between us.”
    Thank you for injecting some light and humour on this debate. You’ve hit the nail on the head of course. Every currency in the world is linked and its value quoted in relation to the others. The wishful thinking that many MMT proponents put forward that money can be created out of thin air sans consequences is something we really need to knock on the head.

  • @Julian Tisi: But money is being created out of thin air all the time.

  • John Medway,

    You wrote, “Taxation is needed to remove money from circulation to prevent inflation, not to pay for public services.” This seems to be a MMT position which I disagree with. Most government expenditure is financed from taxation, it is not possible to fund all our government’s expenditure from creating money. The government is not creating money to fund the majority of its deficit. However, the bank of England did create some money to fund some of it recently.

    I would like to convince most party members that it is possible to fund part of the deficit by creating money but presenting a simplified position on taxation and money creation does not convince many. We need to convince them that if quantitative easing did not increase inflation it is therefore fine for the government to have most of this new money to spend into the economy rather than the Bank of England using it to buy back government loans.

    It is very disappointing that economic courses focus too much on microeconomics and econometrics rather than macroeconomics and Keynesian economics. This might explain why economists don’t understand how Keynesian economics works and MPs can support austerity, which was the wrong policy after 2010.

    You wrote, “Neither approach to money creation will be inflationary if there is spare capacity (eg unemployment or under-employment) in the economy.”

    This is not strictly true, they could create inflation is they are larger than the amount the economy can grow in a year even if there is spare capacity because some of the spare capacity cannot be brought into product quickly enough.

    Perhaps you should ask to give a presentation on the different theories – MMT, Positive Money and Keynesianism to members of the Federal Policy and Conference Committees so they can understand that there is a lot of agreement that government income does not have to be increased to pay for new government expenditure.

  • John Medway 26th Oct '20 - 6:23pm

    @Michael BG
    Sorry for the delay in my response to your comment.
    “Most government expenditure is financed from taxation, it is not possible to fund all our government’s expenditure from creating money.”
    I agree in the sense that most government expenditure is normally offset by taxation. MMT (which I’m not fully signed up to but I’m influenced by) seems to take the view that money is created whenever the government spends. Whether one accepts this or not depends on how one defines money for this purpose. If we define money as what people and businesses can use to make payments, and if we roll up government and the central bank together into “the state”, then it seems to me that the MMT view is valid. However, if we treat the government as an entity separate from the central bank, then one could argue that the Treasury’s deposit with the Bank of England is money already created and that government spending merely moves money rather than creating it. In my posting I was inconsistent, talking about money being destroyed when taxes were paid without mentioning money being created when the government spends.

    “… presenting a simplified position on taxation and money creation does not convince many.” That has been my experience with this posting. A 500 word blog-post is not a good place to discuss monetary theory and I have my doubts about the wisdom of my posting it, though the exercise has been an excellent learning experience. The posting was a knee-jerk reaction to Sir Edward Leigh’s incitement to panic about the deficit.

    “… they could create inflation … even if there is spare capacity because some of the spare capacity cannot be brought into product quickly enough.” Yes – what I said was a bit of an oversimplification – like much of my posting. A bottleneck in one sector of the economy could mess things up.

    “Perhaps you should ask to give a presentation on the different theories … to members of the Federal Policy and Conference Committees … ” In principle an excellent idea but I would rather this was done by someone with a better claim than I have to expertise in the subject!

  • Peter Martin 27th Oct '20 - 5:24am

    @ John Medway @ Michael BG,

    “Most government expenditure is financed from taxation, it is not possible to fund all our government’s expenditure from creating money.”

    It doesn’t really matter. If we had a system of Govt spending which relied on printed pieces of paper then we’re not particularly concerned whether the Govt reuses the old pieces it collects in taxation or whether it puts them in the shredder and prints new ones.

    The money collected in taxation is just digits in a computer so does it really make any sense to think in terms of the old digits and the new ones that are issued? Deficits and surpluses are simply the difference between two numbers.

    Yep there is always a problem linking the price of any particular commodity to the general level of inflation. If Govt changes direction quickly and starts to spend up big time on PPE, or on a test and trace program, or on medical ventilators or whatever, then the price will initially be high due to what could be termed bottlenecks.

    MMT isn’t saying anything particularly different in this respect. If possible changes shouldn’t be too sudden. MMT also recognises that pools of unskilled labour probably don’t have much effect on inflation and the level of wages in an upturn. Employers will be looking for a particular type of worker. They’d rather pay higher wages in the short term than have to retrain unskilled workers. This is one reason for the MMT preference for a JG program which should be just as much about training and reskilling as providing jobs.

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