“That’s all very nice, but how are we going to pay for it?” Probably the most annoying question in politics.
A hospital porter discusses with a bond trader the idea that we can’t afford nice things like modern functioning hospitals or food for hungry children.
“I do this for a living,” he said. Or what do you know, you’re just a hospital porter? I often come across patients I don’t agree with and let it go, but this was different, “I’m a bond trader.”
When I picked him up from CT he was telling a healthcare assistant, on a similar £10-ish an hour as me, that he “would gladly pay more tax” as if he wanted a round of applause every Thursday evening. This liberal virtue signalling is designed to make you think, ‘cor blimey guvnor, you got a bleeding heart of gold’ but exposes a fundamentally Thatcherite view of economics: well-funded public services are unaffordable, because according to her dictum; there is no such thing as public money. “If the state wishes to spend more it can only do so by borrowing your savings or by taxing you more.” Whether you’re a bloody good bloke like our bond trader and don’t mind paying tax so children don’t go hungry etc, or you resent paying for the treatment of a cancer you don’t have yet, the thinking is basically the same. You suffer under the misapprehension that the pound is a finite resource, there’s no magic money tree.
Money, however, is magic. It’s a splendid trick, a sorcerous device and shared delusion. In countries such as the UK, which issue their own fiat currency, which works because people believe it does, there is no limit to what the government can spend because it can spend money that doesn’t exist and the state can borrow from itself.
Even Alan Greenspan, chair of the Federal Reserve from 1987-2006, the golden age of neo-liberalism, during a senate committee hearing had to admit “the United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
“I don’t want to pay more tax. Why should I?”
“Why, dear boy,” he patiently explained, “to pay for vital public services, like schools, or this here hospital.”
“We don’t need to pay for it with tax.”
“You mean like quantitative easing?”
“Or just run a fiscal deficit.”
“We’d have to pay back every penny. Economics, you know.”
“Why? Just don’t.”
“Don’t be ridiculous. This is what I do for a living. I’m a bond trader.” A gammon is a gammon, Air Max or not.
A lot of people think economics is a science, it’s not. It’s more like quack medicine and divination, homeopathy and astrology, than any empirical system. They think there is a correct way to do it, free from politics or emotion and, because they’re no expert, they don’t know what it is. This makes ordinary people feel like they have to defer to ‘experts’ who don’t necessarily know what the fuck they’re talking about, if they did, it wouldn’t keep going wrong. Aaron Bastani puts it well, “their language of mathematical economics resembles the high Latin of Europe’s priests as they explained the nature of things to illiterate peasants who could never hope to understand.” I didn’t care how many more zeros this geezer had on the end of his salary than me, I wasn’t going to doff my cap and curtsey for him.
Obviously, we need to pay tax. It has three vital functions but, in a sovereign currency such as ours, where the state is both borrower and lender, none of them are funding spending. It redistributes and limits wealth. It can curb inflation by reducing demand and it creates demand for the currency. Stephanie Kelton retells the way Warren Mosler, the ex-stockbroker turned modern monetary theorist and author of Soft Currency Economics, explained it to her in her book ‘The Deficit Myth’.
Warren told her he got his kids to do chores round the house paying them in business cards but almost immediately they weren’t interested. The car went unwashed, dishes piled up, the lawn went un-mowed until finally he introduced a new household law. At the end of every month, each child had to give him two business cards, no excuses. Just like that there was demand and his business cards went from worthless scraps to legal household tender and the jobs got done.
“Haven’t you heard of inflation?”
“Yes, but that’s not what causes inflation.”
Aside from the fact we need to question whether sacrificing things like a decent health system, low unemployment, wage growth etc, for the sake of keeping inflation down is worth it since it is only an advantage to asset holders and creditors at the expense of everyone else – fiscal and monetary stimulus and budget deficits don’t cause inflation in and of themselves.
It’s easy to assume a greater quantity of money makes each unit worth less, but that doesn’t actually follow. The kind of inflation that government over spending risks is demand pull inflation, whereby aggregate demand outstrips aggregate supply, so prices rise in response. Imagine you want to open an edgy, yet ironically twee boutique candle making shop in Hackney Wick, but there are already fifteen there. The only way to get staff, candle wax and plates with swear words on them is to take them from elsewhere, to outbid your competitors causing prices to rise. Thankfully government can control demand by reducing spending or increasing tax. There are limits to government spending, but none are financial.
Richard Murphy explains in a recent post on his blog Taxresearch.org.uk, that the current slight increase in inflation is down to demand recovering much quicker than supply as lockdowns lift, because of shortages in things like semiconductors. The result is the same.
“Have you heard of MMT? Modern Monetary Theory?”
“I don’t care what some theory says.”
“It’s not really just some theory.”
“We’ll agree to disagree.”
I suddenly realised I was arguing with a man in a wheelchair, with a chest drain, who was either unwilling or unable to understand what I was saying, and I didn’t care. He was getting wound up and I didn’t want him to blow a pulmonary gasket, so I dropped it. My job, however small a part I play, was to heal and ease the suffering of this man, however much of a prat, and I wasn’t doing it. I kept quiet till we got back to the ward.
I couldn’t help thinking of the writer, LSE and Cambridge University lecturer and economist Ha Joon Chang noting that the most successful economies are not run by economists, because economists, at least since Pinochet’s Chicago Boys, have mostly been worse than useless. With the vastly increased speed and efficacy of financial instruments they devised, and removal of financial regulations they oversaw, the returns on finance capital became many times higher than investments in the productive economy, creating a disincentive to invest, thus undermining the economy they rely on. (See 2007 financial crash, where bad mortgage debt was sold as securities which were packaged up and sold on again and then used as collateral to take out loans to buy more esoteric financial derivatives and credit default swaps etc, until the global economy was like a teetering Jenga tower). The best they can hope for, he says, is to be ineffectual.
I wonder if bond traders are the same.
In other news, an old patient asked to buy crack cocaine off me, and a porter got fired, allegedly for stealing a packet of biscuits.
************************************************************************
Ideas contributing to this piece came from the following sources
The Deficit Myth: Modern Monetary Theory and The Birth of The People’s Economy – Stephanie Kelton
Fully Automated Luxury Communism – Aaron Bastani
23 Things They Don’t Tell You About Capitalism – Ha-Joon Chang
Economics The User’s Guide – Ha-Joon Chang
Soft Currency Economics – Warren B. Mosler
Taxresearch.org.uk – Richard Murphy
This article was originally published at The Wise Woman’s Helper and has been republished with the permission of the author.
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