In May 2023, when the British Office of National Statistics (ONS) released the March-quarter national…
Maybe the British Labour Party could get Nancy Pelosi to do some stupid tweets for them as well. She is an expert at it – see my blog – When neoliberals masquerade as progressives. She thinks it is smart progressive politics to post tweets criticising her political opponents for a policy that “explodes the deficit … dumping … debt on every man, woman & child in America”. A fallacious argument. But moreover, a very stupid strategic argument because it fails to educate the public on what deficits and public debt are and what the capacities of a currency-issuing government and locks the progressive side of politics into no-win dilemmas. When it is their turn to govern they quickly find that they have no room to move on government spending because their own taunts when in opposition are thrown back at them. Same the world over. The progressive side of politics seems to have a lame obsession with meaningless aggregates – like the size of the fiscal deficit or public debt to GDP ratio. Pathetic is not the word.
In Australia, you still see headlines regularly like this one – Our national debt blasts past half a trillion dollars – which apart from the emotional language and framing that is meant to create fear immediately (“blasts past”) it also runs the line that:
Australia’s national debt has exceeded $500 billion, more than double the debt Labor added during the global crisis but in a fraction of the time, forcing the Coalition to defend its claim to be the better economic manager.
Which suggests that the conservatives (Coalition) are worse policy makers because their fiscal deficit has been higher.
The Labor Party in Australia has been demanding the Government “drop its planned corporate tax cuts” because they will lead to a “debt blowout”. Idiots.
The corporate tax cuts are bad policy but not because the deficit will rise as a consequence.
This sort of attack is mindless and doesn’t advance progressive politics. In fact, it holds it back.
We know that there is a matching public debt issuance for the on-going deficits. So under those redundant institutional arrangements (more later), it is obvious that if the government is running a deficit then its debt will rise $-for-$.
To merely rehearse the line that if a government with lower public debt is doing a better job than one with higher public debt, which is basically the argument the journalist seeks to make in this case, is an exercise in ignorance or deliberate deception.
It might be true that the policies that are in place which deliver a higher fiscal deficit are inappropriate than a previous policy regime, but then the opposite might be true.
For example, consider a government that inherits a rising deficit due to the impacts of a recent recession and a stimulus package from the previous government designed to overcome that recession.
If that government then embarks on an austerity campaign – ‘to repair the budget’ – it will likely stall any growth prospects, undermine its tax receipts and push the deficit out even further.
That would be an inappropriate use of fiscal policy.
But if the same government continued to support the stimulus path with some further discretionary expansion and eschewed any temptation to ‘repair the budget’ via austerity, then it would see national debt rise (probably under current institutional arrangements) but should be lauded for running the country’s economic policy in a responsible way.
So with Pelosi going crazy on Twitter and the same neoliberal cancer occupying Australian politicians, one hoped that the British Labour Party might be a little more inspired, given how bad the Tory government is at present.
Remember, the Chancellor said the other day in relation to a discussion during an interview about automation:
Where are all these unemployed people? There are no unemployed people. We have created 3.5m jobs since 2010. This economy has become a jobs factory.
The latest Data from the British Office of National Statistics (ONS) suggest that in November 2017:
There were 1.42 million unemployed people (people not in work but seeking and available to work).
The Chancellor presumbly has a complex rounding-down algorithm he uses to equate 1.42 million with zero.
But while that ‘gaffe’ provided some oohs and aahs and suggested that the Tories remain totally aloof and maintain a ‘born to rule’ stance, it also demonstrates how much scope there is for Labour to exploit if it adopts the write educative frames.
Enter another Tweeter, Mr David Lammy, Labour MP for Tottenham, former Blairite (he supported the illegal invasion of Iraq).
Here is some of his work.
The graph shows the National Debt for Britain as a per cent of GDP. The colours are along party-lines (Red Labour; Blue Tories).
The claim is that somehow Blair/Brown were better economic managers than the current government because it had lower deficits.
Here is a longer view – from 1950 to 2016. There are two series shown. The first comes from the Bank of England’s A millennium of macroeconomic data.
The second comes from the latest ONS dataset – Government deficit and debt return which only goes back to 1992.
What do you make of the pattern shown?
There is no unambiguous story you can tell from looking at that graph. Were things much worse in 1950 than they were in the early 1980s?
You need to know some history to make any sense of it. You need to know why the fiscal deficits (the flows of net government spending), which flowed into the shifts in the debt stocks, were recorded.
You need to know what the swings in economic activity were? That would help you know whether the fiscal shifts were cyclical (automatic stabiliser impact) or due to discretionary changes in government policy.
By David Lammy’s logic, the last year of Margaret Thatcher’s period as Prime Minister, was an example of better fiscal policy than any period under the Blair/Brown Labour government.
Of course, we know that no progressive would make that conclusion.
Further, when the Tories came to office in May 2010, the UK was in the grip of a massive balance sheet recession.
Given that a balance sheet recession requires the government to run elevated fiscal deficits for an extended period to allow the non-government sector time to restructure balance sheets via increased saving (lower spending than usual), a responsible fiscal policy stance would have seen the newly-elected Tory government increase its public debt for several years.
So, under the current institutional arrangements, those blue bars would in fact have been recorded and a sign of the Tories doing exactly what a responsible government should have been doing.
Please read my blog – Balance sheet recessions and democracy – for more discussion on this point.
Of course, we know that George Osborne imposed austerity in his first fiscal statement (June 2010) and continued, in vain, to ‘repair the budget’, which saw the recession deepen and the fiscal deficit rise.
The rise in the deficit was a sign of poorly constructed policy – being driven by the automatic stabilisers – but that is not the point.
The deficit should have been even higher and maintained at those elevated levels for maybe a decade or so to get the UK economy growing and providing quality employment creation.
Further, one could hardly call the conduct of fiscal policy under Blair/Brown responsible. Neoliberal conservatism is a more adequate description.
What the British Labour Party MPs should be saying in the light of yesterday’s British government – Autumn Budget 2017 – is not that the deficit or national debt is too high.
Rather they should be highlighting the deliberate undermining of the NHS, even though the fiscal statement provided more funding. There is a massive funding gap remaining for the NHS and the Tory attempts at starving the service is reducing health outcomes for British citizens.
Unforgiveable and unjustifiable.
The flat productivity forecasts are a sign of failed government policy – and this extends beyond the recent past. Attacking education and training institutions was a favourite trick of the Blair years too.
While I haven’t yet read all the documents provided by the H.M. Treasury to support the Chancellor’s statement it is clear to me that Hammond has broken with the recent Tory past by finally accepting that austerity will kill growth and the obverse – you need to increase spending to increase growth.
The fiscal stance announced by Hammond is mildly expansionary.
But with the Brexit negotiations continuing and the fairly dire GDP forecasts, the sensible thing for the Government to do, once it abandoned the myth that ‘austerity cuts create growth’, would have been to increase the deficit significantly – investing in health, education, training and innovation.
The UK Guardian’s editorial position – The Guardian view on budget 2017: a missed opportunity – is testament to how far off the mark that newspaper has become:
The result is a poorer, more indebted British state less able to act in the name of economic justice: the higher pay pledged to low-paid workers by the government under the national living wage scheme won’t now materialise when ministers had promised.
The national debt or past deficits do not restrict the capacity of the British governemnt to “act in the name of economic justice”.
The Government can always initiate progressive policies, irrespective of the national debt levels. Past deficits do not reduce that capacity.
Although, we might add that if the past deficits had been prorated over initiatives that had previously advanced well-being then there would be less to do now! Exactly the opposite to the conventional neoliberal narrative that the UK Guardian continually pushes these days.
The UK Guardian also disgraces itself with this statement:
That Brexit preparations will cost the taxpayer more than the promised extra cash for the NHS appears to underline just what a wasteful and exhausting exercise leaving the EU will be.
The Government, certainly, should have allocated many more millions than it did to the NHS and announce reversals to the outsourcing and privatisation squeeze that it has been using to undermine the viability of the health service.
But “the taxpayer” will be contributing nothing to the Brexit preparations.
Please read my blog – Taxpayers do not fund anything – for more discussion on this point.
The UK Guardian is correct though when it says:
What the chancellor should have done is to accept that the public sector deficit is the wrong target for policy and end his own party’s obsession with austerity, which has led to politicians endlessly debating debts and deficits with little regard for the human costs of their decisions.
Which makes its earlier claims seem rather confused.
Of course, it is not just the Tories that have been obsessed with deficits and debt. Viz Mr Lammy and the rest of his party!
Which then brings me to a related theme.
I get many E-mails asking me about what would happen if a central bank was to purchase all of the government’s outstanding debt and then write it off with a stroke of a computer delete key.
Which is really just a specific form of a more general question: what would happen if the government stopped the unnecessary practice of issuing debt altogether to match its net spending?
This seems to be a growing sort-of dinner party discussion topic and I get offered all sorts of prognoses from E-mailers ranging from the collapse of the central bank, collapse of the entire monetary system, collapse of the world order, with hyperinflation thrown in along the way.
I am regularly arraigned with the view that I am a moron for even advocating this as the preferred Modern Monetary Theory (MMT) position.
I have considered the general question in these blogs (among others):
Moron or not, the short answer to the question is – sorry to say – not very much would happen.
In the case of the central bank deciding under government direction to wipe out all the outstanding debt, it would take just a few deft computer keystrokes to accomplish the task.
Some big numbers would move from one government account to another on the screen and once the delete button was hit the numbers would then disappear altogether.
The non-government sector income would fall a bit until some other spending source came along.
That is about it.
Want a bit more detail?
Well, first, the central bank would start buying all the outstanding bonds in the secondary market. Owners of those bonds would enjoy an immediate capital gain.
The transaction would just swap bank reserves, which the central bank can create out of thin air for the bits of paper we call bonds.
The non-government sector’s net financial assets would be unchanged – just the composition – more cash less bonds.
The government liability would shift from bonds to reserves.
The government (central bank) would, if it held the bonds, pay itself (the treasury) the interest due. Upon maturity the government (treasury) would pay itself (the central bank) the face value of the bond and the bond would expire.
The government would have a flow of its own income up to maturity and then a capital amount at maturity. The capital amount might be less or more than the central bank paid for the bond when it purchased it, depending on market movements at that time. So it might record a capital loss or capital gain with no consequence other than an accounting entry being recorded.
The central bank could also just write the asset (bond) off immediately upon purchase, which would mean the government was cancelling its own debt and obviating any accounting need to transfer money from itself to itself.
The ‘loss’ that would be accounted for (the asset write-off) would have no wider significance. Central banks cannot go broke.
Please read my blog – The ECB cannot go broke – get over it – for more discussion on this point.
The purchase of the bonds by the central bank (irrespective of whether they kept the assets or wrote them off) would reduce the income flows for the non-government sector over the life of the bond. Why? The shift in wealth composition is more cash (no interest payment) less bonds (lost interest income).
Would the decision lead to inflation? Well, to answer that question you have to work out whether it would push nominal spending in the economy beyond the productive capacity of the economy to absorb it.
Short answer: Why would it? The only likely effects would come from the lost income of the non-government sector which might reduce total spending in the absence of any countering spending increase from elsewhere.
Clearly, the government could stop that negative spending effect.
The decision would have no significant effect on the yield curve once we acknowledge that government bonds disappear. The central bank could still maintain whatever should term policy rate it desired without open market operations by simply paying a commensurate support rate on excess reserves.
While buying the bonds, the yields would be driven down, which would probably impact on other returns. But eventually that impact would dissipate.
If it didn’t choose to do that interest rates would fall to zero (or whatever the support rate was).
There might be some impacts on the capital account of the Balance of Payments given there would be less fixed income assets (bonds) available. But these would be trivial and would be biased towards pushing the exchange rate down a little and pushing international competitiveness up a little.
So the answer is: not much.
It continues to amaze me how lame some progressive politicians are. They think it is clever to skewer the conservatives on matters pertaining to deficits or public debt ratios.
But the reality is that all they do is make it harder, when and if they are elected themselves, to pursue progressive policies.
Both sides of politics then get stuck in a ridiculous and erroneous discussion about whether the deficit is too high and take their eye of the real challenges relating to well-being.
That is enough for today!
(c) Copyright 2017 William Mitchell. All Rights Reserved.