At the Welsh Labour conference last week, Jeremy Corbyn said that the government should not be afraid of debt or borrowing, citing Attlee’s progressive reconstruction of the nation in the face of huge government debt.
This is a good observation and a common sense one. However, economic structures and our understanding of them have evolved drastically since Attlee.
A government led by Jeremy Corbyn would not need to borrow or raise tax to pay for its spending.
Heresy! I hear the establishment scream.But those who understand Modern Monetary Theory (MMT) would not even flinch.
MMT is the new progressive economic theory making dents on neoliberalism all over the world. Economists with a good understanding of macroeconomics, along with their thousands of foot soldiers, are sensing the opportunity and spreading the word.
To explain the bold assertion of spending from thin air, it is important to understand the relationship between government spending, taxes and borrowing.
I previously talked about these in the piece “Labours’ economic alternative to neoliberalism”, but another example might help to illustrate it further.
How do modern currencies work?
In the example above, it doesn’t make a difference whether the gold stars are physical gold stars, gold stars drawn on a chalk board, or for 21st century sake, electronic gold stars.
Cynthia is what we refer to as ‘monetarily sovereign’. That means she is the sole issuer of the currency her economic system relies on. She can never run out of gold stars, just as monetarily sovereign governments can never run out of money.
Deficits and surpluses
Both Cynthia and her children are left with a zero gold star balance at the end of the week (neither of them have lost or gained gold stars).
But let’s say Cynthia gives her children’s 80 gold stars, and taxes them 100. At the end of the week she will have a ‘surplus’ of 20 gold stars and her children will have a ‘deficit’ of 20. The children will thus be indebted to their mother by 20 gold stars.
If we take the opposite scenario and Cynthia gives her children 100 gold stars and taxes them 80. At the end of the week she will have a deficit of 20 gold stars and her children a surplus of 20. The children may then decide to save these surplus gold stars for a rainy day.
Government spending = non-government sector income
Government deficit = non-government sector surplus
Government surplus = non-government sector deficit
Now, lets say Cynthia wants to teach her children a lesson in forward planning.
She offers to keep the 20 surplus gold stars aside for them. To entice them to do so, she promises to return 25 gold stars to them at the end of the month. Cynthia has just issued a bond.
To some, it may look like Cynthia’s children lent their mother gold stars, or that they are ‘financing’ her spending, but as we see it is just a safe, interest paying, place for the children to lodge the gold stars they wanted to save. This is analogous to government ‘debt’, or ‘Bonds’, for a currency sovereign government like the UK.
Bonds are a service our government provides us with. The UK Government does not need our bond money to finance spending, just as Cynthia does not need her children’s gold stars to finance hers.
Whether Cynthia issues the bonds or not depends entirely on demand from her children, not on Cynthia’s desire to spend more!
A complex system
We could add complexity to this example by adding exchange with children in other homes (trade), a gold star borrowing service (banks), etc. But none of these change the basic relationships between government spending and the non-government sector.
Also, it is not difficult to imagine that the children may also want to exchange gold stars between them (microeconomics), but this does not negate the fact they must obtain their gold stars from their mother first.
The economic reality of the UK
In the UK, it is us citizens who rely on the spending of our monetarily sovereign government, in the same way Cynthia’s children rely on their mother. If our government pursues a surplus, it pushes us into a deficit, or debt. When the government spends, that helps us to increase our wealth.
Conservative government policies are entirely removed from the macroeconomic reality of our nation. Those who have seen first hand the damage that austerity policies have done on the well being of their loved ones and others, understand this well, even when they do not have the economic knowledge to articulate their concerns.
For those who do, it is evident that the Conservative government has gone on a rampage of gratuitous cruelty inflicted upon its own citizens.
By cutting spending, they are effectively depleting the private sector of its wealth at great human cost. All just so that the government can save money it doesn’t need.
Meanwhile, the Labour Party must stop saying it will use ‘borrowing’ and taxes to pay for their policies, because both the issuing of bonds and taxes are a result of government spending, not the prerequisite. Labour must abandon arbitrary fiscal rules and state, boldly and unapologetically, that it will pay for its spending the way that monetarily sovereign governments have always paid for their spending, by spending!
Labour must state that it will not impose outdated constraints related to debt or taxes. That spending will be based entirely on the need to provide employment and not on fake notions of affordability.
Our nation’s spending is not limited by money or finance but by the availability of real resources, such as unemployment and raw materials, real goods and services. And therefore, inflation shall be controlled by ensuring that the government spends to maintain the nation running at full capacity (full employment) and no further.
Above all Labour cannot continue to justify its policies with neoliberal narrative, because that narrative was designed precisely to justify the rolling back of the state.
Corbyn and McDonnell will never be able to beat the neoliberal masters at their own game. Instead, they should change the game completely, fight lies with truth, and challenge the neoliberal narrative head on.
All over the world, neoliberal economists are already on a back foot. If we force them to defend ideology with reason, to make sense out of nonsense, they will lose.