Given yesterday's extensive National Accounts analysis replaced my usual Wednesday blog post, I am using…
Those in glass houses …
I saw a letter published by IPPR – who call themselves “The Progressive Policy Think Tank” – urging the BBC to change the way it conducts economic commentary. The letter – Economists urge BBC to rethink ‘inappropriate’ reporting of UK economy – was sent to the Director-General of the BBC following some “BBC reporting of the spending review” which they say “misrepresented the financial constraints facing the UK government and economy.” The H.M. Treasury – Spending Review 2020 – was published on November 25, 2020. I decided not to comment on it publicly given that my time is poor at the moment with lots of writing deadlines and travel now resuming with pent-up demand for my services (in person). It was what you would expect from the British Treasury. But some of the signatories to this latest letter criticising the BBC coverage of the Spending Review should look in the mirror. They seem to have short memories or perhaps they are learning the error of their ways. We can only hope.
The Spending Review 2020
The Spending Review recognises the need for “extensive and unprecedented action to tackle the virus and mitigate these impacts across all areas of the UK” but then chimes in with the usual “comes at a significant fiscal cost” warnings.
There was some extra funding for the depleted NHS but no additional funds for education at a time when school funds are severely restricted and additional demands are being made on teachers.
A pay freeze for public servants (nurses excepted), allegedly on the equity grounds (relative to private employees), is not a good thing to do when there are significant spending shortages in the economy.
In addition, one of the worst aspects of the austerity since 2010, has been the massive attack on local council funding in Britain.
The Spending Review provided some relief to local councils but nothing like the funds that will be required to deal with the fallout from the pandemic or to restore already depleted or abandoned services.
While, the Government is increasing public infrastructure investment to the highest levels in 4 decades, and, in that sense is honouring its “levelling up” narratives, which will further shore up its votes in the old Labour heartland, I sense much more is needed – particularly at the local council level – housing, etc.
When a nation is dealing with a forecast contraction of 11.3 per cent in 2020 (the largest contraction in 300 years apparently) and is projected to take until the end of 2022 to get back to where it was (in size terms) before the pandemic hit, the government’s priority should be to protect jobs and incomes while ensuring the health challenges are met.
Notwithstanding the forecast of a fiscal deficit of 19 per cent of GDP in 2020, I don’t sense the Government’s response is anywhere near sufficient.
The interesting dynamic from my perspective is that the Tories are now operating well beyond their DNA comfort zone. They realise that austerity narratives will not cut it anymore.
This is a disaster like none we have experienced.
The most offensive part of the Spending Review, from my perspective was the cut back to 0.5 per cent in the Government’s overseas aid spending from 0.7 per cent.
There is no sense that the Government cannot afford to maintain this spending and it should.
Enter the BBC
The BBC coverage of the spending review was pretty appalling.
Its Political Editor, Ms Laura Kuenssberg who studied history at university has been embroiled in controversy since taken the position at the BBC.
She was called out by the BBC Trust for breaching “the broadcaster’s impartiality and accuracy guidelines” when she distorted an interview with Jeremy Corbyn.
On BBC2’s Politics Live program, she said that the public borrowing was “absolutely eye-wateringly enormous”, which is one of those meaningless metaphors that are used to bias our response towards the negative.
They have no meaning in reality, just emotional triggers.
She went on:
If you think about the debate we had really all the way through from the late noughties all the way through to the 2015 election, it was defined by ‘how is the country going to pay back what we had to borrow in the credit crisis?’
This is that, and some, okay?
This is the credit card, the national mortgage, everything absolutely maxed out. Enormous levels of the country basically being in the red.
So any person with any knowledge of these things would find that representation objectionable.
The government doesn’t have a credit card.
It issues the currency.
Households which use the currency have credit cards.
And the British government can never run out of money.
That is the sort of lie that the British Labour Party introduced into the narrative in 1976 and that legacy continues to haunt British politics, especially within the current Labour Party.
On her BBC Blog – Spending Review: Rishi Sunak grapples with a political paradox – you see more of her rather spurious reasoning.
She claimed that:
… what lurks on the country’s balance sheet is the biggest economic baggage for generations.
Financially-constrained corporations and households have balance sheets.
The concept has no real meaning for a currency-issuing government.
She continued to show her macroeconomic illiteracy:
But the enormous debts that have been racked up for good reasons leave us vulnerable to tiny changes in interest rates that the government can’t control.
She was just repeating what the boss of the OBR was mouthing. One illiterate to another.
The British government can always control bond yields – whenever it chooses, including making them zero or negative.
The paradox she refers to is the dissonance within the Conservative government over its ‘sound’ finance and small government DNA and its current spending support for the economy.
That is the interesting thing that I am watching.
Then we get to the Letter
First, the letter from the economists, says, among other things:
To focus on the “credit card” analogy, we would argue that this is never an appropriate metaphor for public finances. Maxing out a credit card would imply that the government is approaching a hard limit on its ability to borrow. This is not the case.
But then it goes on to say that the public debt ratio matters, says the IMF’s judgement is a source of authority, and that public borrowing is fine at the moment because “interest rates currently charged on government bonds are at record lows”.
The latter is used to justify the assessment that:
These are not the signs of an institution approaching its credit limits.
Which means they believe the British government has financial constraints that are currently not binding because it can borrow cheap and lots of investors are keen “to continue to fund its borrowing”.
Which is the same situation, essentially as a household faces.
If the financial system has an “appetite” (their words) to continue funding spending in excess of household income, then the household can run deficits.
So, the BBC would reasonably conclude that these signatories do not have a solid case.
They are railing against the BBC use of the household ‘budget’ analogy being applied to public spending and borrowing, yet, essentially end up stating that the British government is financially constrained in its spending, but that constraint is soft at the moment.
A small nuance only.
This is not, in my view a progressive position to take.
Progressives should be about truth.
The truth is clearly that the British government is never financially constrained irrespective of the interest rate environment or the ‘appetite’ of private investors to buy its debt.
It can always instruct the Bank of England, within the current institutional framework, to, for example, increase the size and use of the Ways and Means Account facility.
No debt needs to be issued to the private sector and it can go ‘hungry’ and have its “appetite” unsatiated.
That reality is why the BBC commentary on the recent spending review is so misleading and wrong.
Second, among the signatories were Simon Wren-Lewis and Jonathan Portes, the masterminds behind the British Labour Fiscal Credibility Rule.
You will recall that I was a major critic of the ‘Rule’ and was vindicated when the Labour Party sneakily changed it in the weeks before the December election because others had picked up on the fact that it was unworkable.
I last wrote about that in this blog (which has links to many previous analyses) – British Labour remains unelectable (November 26, 2020).
As a reminder, the – Fiscal Credibility Rule – was released in October 2017 as a British Labour Party ploy to keep the financial markets from criticising them as they sought victory in the election.
The advisors to the Party have a visceral but irrational fear of the powers of the City of London. The ‘Rule’ was an appeasement statement.
The text contains statements like:
Labour believe that, in the medium to long term, governments should not need to borrow to fund their day-to-day spending. While there are exceptional times when shocks from the private sector mean that government has to step in to help, everybody knows that if you’re putting the rent on the credit card month after month, things needs to change.
Didn’t the IPPR Letter to the Director-General of the BBC lecture him about “the “credit card” analogy” never being “an appropriate metaphor for public finances”?
Yet, Wren-Lewis and Portes defended the British Labour Party’s use of the same metaphor vehemently.
Sure, they may not have written the actual words in the ‘Rule’ document.
But they supported it and claimed credit for the conception of the ridiculous rule.
Households have credit cards.
Governments do not.
Credit cards are about facing financial constraints.
The British government does not face any financial constraints on its spending – if it chooses to exercise its intrinsic capacity as the currency-issuer.
The seems to be a memory lapse by some of the signatories to the letter to the BBC.
Credibility is not enhanced by inconsistency.
People in glass houses …
I expect these signatories will now write to the Labour Party policy review process demanding that it retract the Fiscal Credibility Rule’s inference that the government has a credit card.
I am not holding my breath.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.
This Post Has 12 Comments
It is tricky.
The letter shows that the economists are wrong but BBC is even more wrong.
“everybody knows that if you’re putting the rent on the credit card month after month, things needs to change.”
is so condescending only a middle class economist can write it.
Everyone knows if you can’t afford rent because if you don’t have a job or your job pays too low to cover that then something is wrong with society and not the individual.
Newsflash, its the 21st century, if you can’t provide basic standard of living (ie housing) then your society has failed, period. End of discussion.
Blaming credit card user for it is essentially victim blaming, but did we expect anything more from the so-called “educated” at this point?
“It can always instruct the Bank of England, within the current institutional framework, to, for example, increase the size and use of the Ways and Means Account facility.”
That instruction is permanently in place already.
What’s stopping it happening is the Debt Management Office’s terms of references. Specifically objective 1.1
“DMO must supply sufficient cash each day to enable government to meet its payment obligations. This is fundamental and unconditional.”
And KPI 1.1 “KPI 1.1: Ways and Means end of day transfers for cash management purposes must be avoided by ensuring that there is always a positive DMA balance.”
Otherwise as the objective’s explanation show it all would happen automatically:
“The DMA [Debt Management Account] is used to manage the Exchequer’s net cash position. Balances in central government accounts contained within the Exchequer pyramid are swept on a daily basis into the NLF [National Loans Fund Account] and the DMA is required to offset the resultant NLF balance through its borrowing and lending in the money markets. The DMA is held at the Bank of England and a positive end-of-day balance must be maintained at all times; it cannot be overdrawn. Automatic transfers from the government Ways and Means (II) account at the Bank of England would offset any negative end-of-day balances, though it is an objective to minimise such transfers. Thus, evidence of meeting this objective is provided by reference to the number of occasions the DMA goes overdrawn.”
HM Treasury doesn’t even need to send a letter to a notionally arms length operation at the Bank of England. It just needs to send an internal memo and change the terms of reference for the DMO.
Create the money in the bank accounts of those who need it now. Thats not borrowing. Just the most effective way to save/boost the economy. It’s democratic too. Common sense really.
Just want to say it has been an absolute pleasure guys. All of you guys have taught me so much over the last 12 years. Every one of you. Helped me See the light.
But I’m calling it a day had enough….
The Lunatics have taken over the asylum in my beautiful wee country and nothing will stop them now. I tried my best to stop them but failed. Time to enjoy my retirement away from the loons and enjoy what time I have left on the planet let the lunatics deal with Brussels.
Take care – good luck and I wish all of you all the best in the future. I hope you get what you are all searching for.
Perhaps we MMTers need to see the glass half full instead of half empty. The PTB have been forced to acknowledge that federal governments MUST spend money they haven’t yet “raised” in order to address the pandemic crisis. THAT is a good sign. When that money has been spent (hopefully in at least a minimally sufficient amount) and people begin to get back on their feet (however shakily), THEN will be the time IMHO to convince not only the PTB (perhaps an impossible task until enough of them pass on) but the people in general that there is no need to “raise” the money already spent, the very spending of it having created it. In other words, I think the time has not yet come for the other MMT shoe to drop, fiat money constrained only by available resources, but one shoe, available fiscal agency, seems to be already off or half off. Let’s take what we can get right now, consider it a partial victory, and continue to work even harder toward winning the war of economic thinking.
Let’s face it the UK is an economy in decline for a variety of reasons but one of the main ones is the failure of most of the populace to understand the evolution of its currency into a “safe-asset” one and the scope this provides to help slow, even arrest, economic decline.
“The Monetary Structure of Economic Activity” Christine Desan. Harvard Law School. Published 2020.
I know a young woman who works as an economist at IPPR. I have been recommending this blog to her. I hope she is reading this:o)
Send her a copy of Macroeconomics!
To which country does Derek Henry refer?
(And I wish him, and everyone in it, all the very best().
@eg Derek writes about ‘my beautiful wee country’. Must be bonny wee Scotland. A check of posts the day before confirms.
All the best Derek, though I assume you are not here.
@Fred. ‘Macroeconomics’ costs £50! I don’t have a copy myself, not because I can’t afford it but because it says nothing about land or rent. I was told that this is because the land issue is just microeconomics.