Why the deficit myth is a useful deception

It is often difficult to understand the economic-speak into which so many expert-explanations seem to lapse.  I imagine that I am not alone so I will share a version of the explanations that make sense to me.  Unfortunately, I no longer remember everyone that I should credit.. apologies.

The deficit is the putative shortfall in government tax receipts or ‘income’ relative to its ‘spending’.   The words ‘income’ and ‘spending’ are deliberately put into inverted commas because George Osborne and his ilk would have us believe that the UK budget is like our own individual household income and spending. (To be fair so do most mainstream economists.)

This generates an extremely useful word confusion because we all know the consequences of households getting into more debt than they can afford.   In the absence of a real analogy, ordinary people are easily persuaded that government must cut ‘spending’ which of course is the ultimate ideological goal of the tea-party Tory neofeudalists.

However, government ‘spending’ and ‘income’ are nothing like household spending and income.  Furthermore, the word ‘deficit’ itself consciously, and unconsciously, invites the belief that it is a ‘bad thing’ that must be ‘sorted out’.   Again for emphasis – the term ‘deficit’ in this context does not mean the same as it would in a household.  Bill Mitchell proposes that all ambiguous macroeconomic terms have to be reframed so as to undermine the ideological metaphors of the neoclassical consensus.  He proposes that all statements be qualified as in, for example, ‘The government deficit rose and generated higher levels of wealth for households and firms.’

http://www.youtube.com/watch?v=w2JwUKEUdPY#t=302

The deception that arises from the deficit myth is that the government ‘spending’ more than it receives in tax is detrimental and holds back economic recovery – hence the argument for the cuts and austerity.

In order to understand why the deficit fears are just hype, it is helpful to look at how money and tax have historically been used to control and direct the behavior of populations.  For example, British Colonialism in South Africa.

Essentially, the motivation for invading and colonising a foreign country is about land – new land for settlement, agriculture and to exploit the foreign country’s natural resources.  All of these require a substantial labour force.

Obviously, the colonialists could have tried to import all the necessary workers (as the US has done) but the most practical quick solution was to use the indigenous population.

The problem was how to get the indigenous population to plough the fields or go down the mines to dig for gold.  Why would people, who had been living and surviving perfectly well for generations, want to give up their way of life to work for the colonialists?  Not only was the work demanding and uncongenial but their own self-sufficiency would be threatened.

Basically, there are three possible answers:

Offer high wages… not only would that be beside the point of colonising in the first place but (initially at least) money would only be an inducement if it could be spent on some stuff or service that the indigenous population wanted or needed.  No-one can eat bank notes.

Enslave the population and force them to work at gunpoint … but that in itself is quite labour intensive, requiring guards as gang masters, and generally incurs an inconveniently high mortality rate (as in the Belgium Congo).

The third option is much simpler…. create a currency and require the indigenous population to pay tax in that currency.

Warren Mosler has a neat routine which explains how taxing works.  He tells the audience that he is turning his business cards into a currency and that he will pay each of them, one business card, to clean the lecture theatre at the end of his talk.  The audience laugh until Warren Mosler adds that there will be armed guards at all the exits who will only allow individuals out of the lecture theatre if they pay a tax of one Mosler business card.  So now the audience has the choice of being trapped in the lecture theatre all night, or do the cleaning, get their business card ‘pay’ and be allowed to go home.

So by creating a Business card currency and enforcing ‘tax’ collection, Warren Mosler is able to control and direct the behavior of the audience.

The same system held in inducing the indigenous population to work for the colonists.  Those who failed to pay their taxes were imprisoned and could then be used as unpaid forced labour.  Either which way, the indigenous population were snookered.

Now the main point is that neither the colonists or Warren Mosler had to wait until the tax was collected before they could ‘spend’ their currencies on paying their workers.  In fact, it would have been impossible because there wasn’t a currency before they created it out of thin air. (The pound sterling became the standard currency of the Cape of Good Hope colony in 1825 … Before a unified South Africa, many authorities issued coins and banknotes in their own pound, equivalent to sterling.)

The Colonial and Mosler ‘governments’ had to ‘spend’ before the workers could pay their taxes.  Futhermore, the tax that was collected was quite irrelevant in determining how much the Colonial/Mosler ‘governments’ could spend.  If they needed more labourers, they just created more money.  The tax was not government income in the household sense.  The tax was simply part of the mechanism to get the work done and make the money flow.  In fact, after collecting, the tax receipts/business cards could just be thrown away .. the only cost would be the cost incurred in the actual manufacture of the bank notes/business cards.

Now in the Mosler currency system, the amount of tax received back would equal the amount that his ‘government’ created.. so there would be no ‘deficit’.

However, if someone wanted to ‘save’ a Mosler card memento more than they wanted to go home… there would be a ‘deficit’ of one Mosler business card collected in ‘tax’.  Nevertheless, the deficit would not be any problem to the economic system.  Warren would still have got the Lecture Theatre cleaned, he could print another set of business cards whenever he needed to, and the Mosler business card collector would have ‘saved’ his card to spend at a later date.

Essentially, the ‘deficit’ is a reflection of the total amount of saving, investment and employment that is occurring in the economy.  It is not something which has to be paid back.

Just as with the unilateral decision of the ‘saver’ of the Mosler business card:

‘It is the non-government sector deciding to save more than it invests that generates the government deficit’ (Neil Wilson cif).

Michael Burke provides the numbers to show that it is indeed the current non-government sector ‘saving’ (ie. not investing) which accounts for the ‘entirety of the prolonged crisis’.  It is estimated that private sector businesses are holding back £700+billions.  Effectively, there is an investment strike by the private sector:

The driving force of the slump remains the fall in investment, led by the fall in business investment. The fall in business investment alone more than accounts for the entirety of the prolonged crisis.

Michael Burke (and others) stress the necessity for the government to act as the ‘investor of last resort’:

Government could act to offset this by investing on its own account, if necessary drawing on the resources of the private sector to do so. Instead, the Coalition cut public sector investment by £6bn after Labour increased it modestly…. It is still the case that increased public sector investment is the only viable means of resolving the crisis that doesn’t lead to further misery for the majority of the population.

Neil Wilson writes:

Why is it so difficult for people to connect the dots… When money is injected into the economy it bounces around generating transactions and taxation. Anything left is saved by somebody and eventually ends up being swapped for Gilts.

Government spending pays for itself.  Each time every time.

It is, at least arguable, that Osborne knows that his policies on deficit reduction are a complete but ideologically useful fiction.  Generously, the Financial Times’ Martin Wolf wrote in response to the Autumn Statement:

“The government has been led astray by focusing on deficit and debt rather than the health of the economy.”

However, Professor Bill Mitchell does not mince his words and they can act as a conclusion as to why the deficit myth is a useful deception:

Structural deficits – the great con job!

… the constraints imposed by neo-liberalism are entirely ideological and came about from a concerted campaign to win the battle of ideas. There is nothing about deficits that should frighten international capital. In fact, capitalists will make higher profits in a fully employed economy than in a stagnant economy.

Update:

Important point made in comment’s thread by petermartin2001 

The question of inflation also does need to be answered. No economist, including Warren Mosler and Bill Mitchell, would say that the deficit didn’t matter. Although their argument is often deliberately misrepresented in that way. The argument at the moment should be that, as inflation isn’t the major issue at present, therefore the deficit isn’t the major issue either..

Its an argument which, as Bill Mitchell points out, doesn’t bother the more progressive of the capitalist class. They know they don’t make profits from low deficits if low deficits mean reduced business activity and higher unemployment. There’s no profit , or surplus value, to be made from an unemployed worker!

Reply:

I was trying to keep it simple. I did try working inflation into the Mosler business card model but it all got a bit surreal!

Inflation is only a problem when all the potential capacity of the economy has been reached which with our levels of unemployment/underemployment is not an immediate problem. In the words of Neil Wilson (filched from Cif):

‘five million without work that want it, education opportunities for our youth, limiting the excessive growth of house prices, and euthanising all the rentiers and oligopolists out there.’

I know that the OBR etc question that the UK has suffered a decline in capacity post 2008 but you know how iffy their predictions are.. and can’t see it being a problem when we need ‘a New green Deal’ to be zerocarbonbritain 2030!

References:

http://think-left.org/2012/08/25/why-does-the-structural-deficit-remind-me-of-libor/

http://www.youtube.com/watch?v=Z1uWVj0YJ3M

http://socialisteconomicbulletin.blogspot.co.uk/2013/11/a-milestone-reached-in-british-slump.html

http://bilbo.economicoutlook.net/blog/?p=2326

Why do politicians tell us Debt/Deficit myths which they must know to be untrue?