There are three huge defects in the Chancellor’s autumn statement
1 Technical
The Chancellor fundamentally believes that the government budget can and should be balanced, or even run in surplus. This basic accounting assumption drives his whole thinking. But facts prove him, and the traditional thinking of the whole financial establishment, wrong on this. He has been unable to eliminate the deficit. He will not be able to eliminate it. In modern high technology, high productivity economies, deficit is inevitable, and manageable.
There’s a huge problem in thinking here. The Chancellor approaches economic policy like an accountant, rather than as an economist. Books should balance. He talks about what we can afford, purely in financial terms. But it’s not money which gives value to the real economy, but rather it’s real economic activity which gives money its value. Economic activity creates financial value, and not the other way round. What we can afford has to be measured in real resources of people, skills, natural resources, technology and capital assets. A thought experiment demonstrates this. If it were possible to plug a machine into the earth to produce the whole GDP without labour and therefore without wages, then the money vouchers the government would have to allocate would all be a total financial deficit each year. Money does not have to be backed either by gold, or by the sale of government bonds, but only by output GDP. Deficits are here to stay. Facts support this hypothesis.
2 Practical
In seeking to eliminate deficit and balance the budget, the Chancellor feels forced to either increase taxation, or reduce spending. He has largely chosen the latter, and proposes a £12bn reduction in welfare spending, even though this is now to be taken not by tax credit reduction now, but by universal credit reduction later. This will nevertheless feed straight through to an equally large reduction in demand in the economy. This is the last thing the economy needs, since deficient demand continues to be the problem, as output growth exceeds wage growth in economies with increasingly automated production.
3 Moral
The burden of these welfare cuts will fall unequally on lower income earners and families. The distribution of the national income will yet again be skewed in favour of the rich and against the poor.
There is an alternative – a basic income
The only ultimately viable economic solution is a basic Citizen Income payable to all, funded by overt money financing, ie outside the public sector borrowing requirement. I argue these points more fully in a paper published by the Centre for Welfare Reform ref ‘The Economic Necessity of Basic Income’
* Geoff Crocker is a professional economist writing on technology at http://www.philosophyoftechnology.com and on basic income at www.ubi.org. His recent book ‘Basic Income and Sovereign Money – the alternative to economic crisis and austerity policy’ was recommended by Martin Wolf in the FT 2020 summer reading list.
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21 Comments
I totally agree with your first point. If I have savings then, thinking in double entry bookkeeping terms, who has the other side of that – the corresponding debt?
In the first instance it’s my pension fund or my bank but they are only intermediaries so I must look further. If I follow the daisy chain it takes me ultimately to a mix principally comprising (a) companies that have borrowings to support their business, (b) individuals with mortgages and/or student debt and/or consumer debt and, (c) biggest of all, government debt.
So, if Osborne wants to reduce government debt he is saying by inescapable logic that he wants to either (1) reduce the nation’s overall savings, or (2) push the majority into taking ever increasing loans of one sort or another. (This works because shrinking public debt is offset by growing private debt).
For Osborne, option (1) simply isn’t viable. It would mean a nation with fewer public assets (e.g. infrastructure), which are the tangible expression of the public debt and endless recession. Equally for Osborne option (2) is only politically acceptable to his backers if they personally don’t have to take on more debt – if they can in fact continue to increase their assets. That’s doable only if the full burden of shouldering ever-increasing levels of debt falls on others.
That in turn is a question of differential resource allocation and hence a political choice but one that depends on being able to hoodwink the majority and their political leadership. Fortunately for Osborne that’s been pretty easy in recent years.
In short, this is a programme for plutocracy for the few and debt serfdom for the majority. Hence, anything that helps increase the private debt burden of ordinary folk is good in Osborne’s world. Welcome to the wonderful world of student loans (now getting on for double the GDP per capita for the current student cohort). Welcome also to Help to Buy.
Of course, it’s not sustainable; at some point the camel is asked to carry one too many straws.
“This is the last thing the economy needs, since deficient demand continues to be the problem”
How can anyone possibly argue that the UK is suffering from “deficient demand”? Retail sales are growing at 4% per annum in volume terms, unemployment is 5.3% and still falling and we have a huge balance of payments deficit because of all the goods we keep importing. Excluding oil, our imports have risen by 3% in the past year. The UK may be suffering from lack of external demand for its exports, but internal demand is certainly not the problem.
“He talks about what we can afford, purely in financial terms.”
The UK has to borrow to finance the deficit “purely in financial terms”. Our interest bill on the debt is payable “purely in financial terms”. You can argue about his priorities in bringing down the deficit, which for the Tories involve lower spending and cuts to things that the Lib Dems believe are worth investing in, but arguing that the deficit and debt levels don’t matter is pure magic money tree economics.
What we can say, and should be saying, is that you can reduce the burden of debt/GDP by investing in things (infrastructure, research etc.) that drive faster growth of GDP, so focusing on increasing the denominator rather than cutting the numerator. That is how the UK brought its debt level down in the post war period, rather than by running a surplus.
As for the Citizen Income, payable to “all”, who is this “all” of whom you speak? And at what level should it be set? And under what criteria should it be payable and, more importantly when should it be withheld? As for overt money financing – does that mean basically printing money? – of an ongoing and potentially unlimited expense, this seems highly irresponsible, particularly in a situation where we do not have a problem with deficient demand and the money is not going to be invested in the productive potential of the economy.
The problem the UK faces is not lack of demand, it is lack of productivity and output to satisfy that demand. Our businesses do not invest enough in capital and skills to fulfil that demand and the outcome is the massive balance of payments deficit and consequent continued sale of assets to foreign buyers to finance our spending.
Gordon, the economy is not a system of double entry bookkeeping. Money is virtual and doesn’t have to add up. Money issue does not have to incur debt – it simply has to match output GDP (plus asset values which are accumulated historic GDP outputs)
RC you’re stuck in the orthodox paradigm which I am unsuccessfully trying to get you to reconsider. If you read my background paper you’ll see that between 2001 and 2007, UK GDP grew by 19.5%, but disposeable consumer income by only 11.5%, hence deficient demand made up by unsustainable consumer credit. So you’d be correct in saying that ultimately demand was sufficient because of bank lending but my point is that without such credit, demand is deficient. It’s a Keynesian problem. Your questions about Citizen Income are valid, and well answered in Malcolm Torry’s excellent book ‘Money for All’ which I’ve reviewed earlier on LDV. You rail against ‘printing money’ which you regard as ‘highly irresponsible’ but we do of course regularly print money (I have some in my pocket right now). The question is only how much money we should print (or create virtually in bank accounts). The answer to this, as my paper makes clear is that we should print sufficient money to enable macroeconomic effective demand to meet output GDP. This is then non-inflationary and non-deflationary.
“In modern high technology, high productivity economies, deficit is inevitable, and manageable.”
Why ?
Simon – the thought experiment in my post seeks to show why. Beyond that the paper I refer to gives a further defence to the hypothesis. The fact of the matter is that we haven’t got rid of deficit yet so that, so far, the facts support my hypothesis.
Simon – it’s because automated production yields more output with less wages to buy it.
So this output can only be bought with money issued by government (limited to the value of that output to avoid inflation).
The government then has no compensating way of raising the money it has had to distribute. Hence inevitable deficit and no problem with writing it off, ie not counting it as deficit, but as OMF ‘overt money financing’ or ‘helicopter money’ as some have called it.
Just a few thoughts, probably random ones –
– we just about drove the party into disaster in order to put the nation first and tackle the deficit, it seems contrary to resile from that position now,
– notwithstanding, the deficit persists and our monstrous national debt is barely scratched,
– the government perhaps could look at re-arranging its borrowing in order to get costs of servicing the debt down (eg while interest rates for it are cheap, and through issuing bonds?),
-underwriting other nations’ investment in our infrastructure is at least as bad an idea as pfi.
Robert Chote was on Friday’s abbreviated Daily Politics explaining where the extra money came from. Lower debt interest is part of it and understandable, Despite the continuing increase in the size of the debt, the UK government has been able to borrow at lower interest rates.
The bit about VAT in government looks a bit technical. The government does not pay VAT or gets it all back, so what is happening here?
Geoff – thanks. i have read your answer several times and am afraid i have no idea what it means.
Geoff – I am slightly bemused by your reply to my earlier comment because I was agreeing with the underlying point of your opening paragraph and restating it in an alternative form that will, I hope, be more accessible to many people. I say ‘underlying point’ because your phrasing suggests a confusion between accounting balances and budget balances. The English words may be similar but they are wholly different things.
Every bank, every company and every government has kept balanced books (bookkeeping incompetence excepted) for centuries. That’s how accounting records work. But that doesn’t mean they’ve all kept balanced budgets; clearly they haven’t and don’t. So, if an individual, company or government doesn’t balance its budget then its accounts record that somewhere is a growing debt. Who holds that debt and what it corresponds to in the real world of the company or government is crucial. If a debt is for productive investment – no problem; if it’s for consumption then there’s a big problem down the track because it has created no income to pay off the debt.
So, it’s perfectly possible to model the economy using double entry to track where the assets are and where the debt is at each point in time. The advantage of doing so is that it enforces a sense-check on the workings because the accounting records no longer balance if you leave something out . Prof Steve Keen, now at Kingston, has a model of the economy that does just this.
Hence when Osborne deficit-spends the public debt increases – but the government books still balance.
Thanks Gordon and I understand your point.
I am arguing however that the government uniquely has the ability to issue money without creating debt.
It should do so, necessarily as the paper I refer to argues at greater length.
Simon – in relation to your question a government deficit is perfectly acceptable if it corresponds to something valuable in the real world. In accounting terms (see above) it is the double entry counterpart of worthwhile assets – tangible ones like infrastructure or intangible ones like education and training.
I therefore sympathise with the instinct of many to bear down on the deficit because too much of it is being incurred on spending with NO useful assets created. Far too much is on welfare related to the failure of the economy to create adequate affordable housing and well-paid jobs or educate and train people to do them etc.
The problem is that bearing down on the deficit addresses precisely NONE of the underlying problems that create those failures. Conversely, the siren danger and attraction to some of deficit spending is that it can paper over those failures for a limited time – that is until the accumulated debt becomes unsupportable.
So, if we assume that government spending is productive (bear with me here!) then there is no problem with deficits. Moreover, in creating those deficits it also injects money (i.e. debt-money – see above) into the economy and those who want to save towards retirement can do so by buying government bonds (this is mostly done by pension funds in reality). If Osborne managed to shrink the deficit to zero this source of savings would no longer be available and, with foreigners increasingly owning UK firms, corporate bonds, the next best alternative, are also increasingly scarce.
Fortunately, in practice, a growing economy means ever-expanding need for infrastructure etc. and hence a proportionately growing public debt and corresponding savings vehicle for people.
Of course the fly in the ointment is that too much government spending is NOT productive although ultra low interest rates helpfully lower the bar. However, obsessing about the deficit will NEVER cure that. We need instead to think about how government works – why it has to spend so much on housing, why so many employers prefer to hire foreigners, how it appraises the likes of HS2 and so on.
That’s something no-one is doing in a remotely organised way. And that is a BIG problem.
Geoff,
A good article and one with which I largely agree with. I might just make a small quibble though:
“The Chancellor approaches economic policy like an accountant, rather than as an economist. Books should balance.”
There’s no incompatibility between accountancy and economics. Books always should balance but that does not mean that the government’s spending always has to be equal to its revenue. It can be more or less depending on external circumstances. There are other factors in the books too.
In a closed economy , or an economy where exports and imports are balanced, the government has to adjust its spending so that everything that is legitimately for sale in the economy clears. In other words everything that everyone earns, either as wages, salary, profits, capital gains etc has to be spent . If less is spent we could have recession so the govt needs to run a deficit. If more is spent we could have inflation so the govt then needs to run a surplus to prevent inflation.
Of course govt can’t know every penny that is saved but it can know that if it spends too much we have inflation and if too little we have recession.
Having a net importing economy is just the same as having a big saver within the economy. So the govt clearly cannot run a budget surplus at the present time unless everyone decided to borrow large sums of money which would not be advisable right now.
Gordon and Geoff,
I think Gordon is right here. If he owns savings, say National Savings certificiates, then the Govt has to assume the debt. If we consider the issuing of a new currency from scratch then it easy enough to see that the Govt’s debt is equal (to the penny) of everyone else’s financial assets.
Money is a liability or a debt to the issuer and a asset to the holder. So the principle of double entry bookkeeping applies as much to government as anyone else.
There is a tradition of not counting the monetary base as part of the National Debt but that’s simply because the economics profession hasn’t kept itself up to date. When currencies were on a gold standard they could be considered debt free. But we’d have to go back to the early 30’s for that to be true. It’s not just in the UK.
Apparently in USA coinage doesn’t count as part of the National debt. It’s probably a hangover from the time that their metal content represented their worth. So a work-around for the debt ceiling problems the President runs into from time to time, when Congress refuses to raise the ceiling is the creation of Trillion dollar coins!
Why not if coins aren’t counted as debt?
Thanks Peter. I agree with what you say about trade balances etc.
But this is a different question to the one I address. I maintain that governments can issue money without it being reckoned as deficit adding to debt. My thought experiment seeks to establish this.
My main point regarding money is that it should be backed up not by a gold standard, nor by the sale of government bonds, but only and always by output GDP.
Geoff,
I like thought experiments but I wasn’t so convinced by yours. It’s essentially the same as imagining that we had a small community which was supplied with all it needs from an external source. A bit like a base on Antarctica or the Moon perhaps. There would be some input from local activities but we could assume they were small. So the inhabitants of the base could elect the government and the government could issue tokens which it could decree to be money. So then the theory is that the residents would use the tokens to sell their allocation of rations they didn’t want and buy fro m others the rations they did want. But what defines the value of the tokens? There’s nothing there. There’s no reason to want them in their own right. They would be ignored and trade would only be by barter.
One way to make them desirable is for government to guarantee that each token was exchangeable for a chocolate bar. The chocolate bar standard! Another way would be for the government to insist that each resident paid a token daily in tax. Then instead of handing out the tokens it would offer to pay wages for tasks which required to be done on the base – payable in tokens. The tokens then do acquire a real value -they are needed to pay the taxes and so avoid the punishment the govt of the base might impose for non-compliance. So then others who may prefer not to work to acquire their tokens could sell a chocolate bar for a token to pay their taxes. The tokens then are desirable in their own right providing the govt doesn’t cease to exist. If it does like when the old DDR collapsed they become worthless.
Peter, no in my thought experiment, the vouchers would be valuable because they would be the sole means of allocation of the rations, or of access to the real goods and services of the totally automated economy. Sure they might get traded and there could be a range of secondary effects, but I am only seeking to make one point, ie that governments will necessarily have to issue such vouchers, or free money, as the component of automated production within GDP increases. We need a Citizen Income and its funding doesn’t need to be counted as a deficit accumulating to government debt.
Geoff,
Is there any academic backing for this idea of “debt-free money”? It makes much more sense (at least to me) to consider that all money is an asset to the holder and a liability to the issuer. So once we understand that, we appreciate that Government, as the currency issuer, has to be in debt for us all to have assets denominated in $ or £ or whatever. In other words all this talk about “paying off the debt” is then just so much nonsense because that means we reduce all our own pound and dollar denominated assets to zero!
If we add up all the world’ s National Debts they total some $60 trillion. So who do we owe it to? Mars? No that’s our own assets. We owe it to ourselves. Furthermore if we don’t count £ coins etc as debt, and for historical reasons of the monetary base at one time being backed by gold, we don’t do that, we have the absurd situation of the government being able to buy back all the bonds it has ever issued, and which is counted as debt, simply by creating enough cash. That makes no sense at all. The situation in the USA is no better. There someone at some time ‘forgot’ about the coinage when calculating the National Debt. So in theory all they have to do to eliminate the ND is create 18 trillion dollar coins! (Google that term if you are doubtful). That’s just crazy economics!
If people understood that the National debt was just a record of all the money that was ever issued, either as cash or bonds, and didn’t have to be paid back like we pay back a car loan, there would be much less angst about the state of the economy. Unscrupulous politicians are scaremongering for their own nefarious purposes.
Peter, agreed.
I seriously propose that much of this accumulated debt will be and will have to be written off, meaning it becomes defined post-hoc as debt free money. The idea that future generations will repay it is nonsense, as it the idea that taxpayers are currently funding bailouts of banks or countries like Greece. This is all virtual money. Only output GDP is the constraint and at the same time the driver.
As for something more academic I can only suggest my paper ‘Keynes, Piketty, and Basic Income’ at http://www.degruyter.com/view/j/bis.2015.10.issue-1/bis-2015-0015/bis-2015-0015.xml?format=INT
Geoff,
It seems we are basically in agreement except that we’re using the word ‘debt’ in slightly different ways. The problem is that the public associates the word ‘debt’ with something that has to be repaid and are scared of the concept. Whereas to me it’s just a negative number which someone has to accept responsibility for , and that has to be government, so that the rest of us can have positive numbers in our bank accounts.
If the LDP are looking for a different and distinctive angle, they could be trying to explain the concept of sectoral balances, as first pioneered by Prof Wynne Godley, to the electorate. Not everyone will get it but enough will, to be able to show up the likes of Cameron and Osborne for what they are . That is a couple of individuals who either don’t understand the economy or who are deliberately preying on the electorate’s fear of the word debt. The idea is that everything does have to sum to zero. If one sector is in credit or surplus another sector has to be debt or deficit etc. But that approach does require that that all assets and liabilites should be included in the summation.
OK 🙂