An absolutely excellent article. It’s so nice to read these absolutely accurate description of the UK political economy and the solutions for sort it out.
An excellent article, but it highlights how depressingly uneducated MPs are as to the working of a fiat currency. I can endorse your recommendation of Leah Downey’s excellent and very readable book, where you rightly say she is more critical of the politicians for irresponsibly hiding behind the “independent” central bank. I recall the redoubtable Tory Chancellor, Ken Clarke, was against Gordon Brown’s move to make the Bank of England independent. In double-checking that via ChatGPT, I learned that John Major agrees with Leah Downey: “John Major, before and during his premiership, opposed making the Bank of England operationally independent. He argued that the person setting interest rates should be politically accountable.” Though that should be extended to more than just interest rates.
The paradox you highlight is crucial: the Treasury cuts the nation's income through tax increases, expecting to balance the books, but instead the deficit worsens as economic activity contracts. What's particularly frustrating is how the accountancy mindset treats government budgets like household finances, completely ignoring the macroeconomic reality that the state has enourmous collateral power. The call to reclaim democratic control over monetary policy feels especially relevent given how unelected technocrats now wield foundational powers insulated from democratic politics.
Aotearoa/New Zealand has a right wing coalition government that has enthusiastically applied austerity - and the Finance Minister always goes back to “government is like a household or local authority and like a household has to balance its budget”. I doubt that she will read your excellent piece.
I can still hear Henry Smith saying such when a Ruskin College, Oxford student over 50 years ago. Makes you wonder how and what they teach about economics nowadays? Thanks Ann.
Excellent article Ann, thank you! Stephanie Kelton talks along similar lines when matching fiat money supply to the productive capacity of the economy. Productivity seems a catch-22 problem in the UK, with the wrong mix of available skills yet a large group economically idle. There’s also a huge political fear of bond markets, egged on by msm, following what happened in the brief Truss/Kwarteng tenure which wasn’t entirely wrong, but extremely badly handled in PR and execution
Ann, this piece reads like both a rallying cry and a lesson. That opening image with the megaphone was a good choice to set up your theme: Citizens straining to be heard against austerity. Juxtaposing accountancy with macroeconomics is a clever way to highlight how governments sometimes mistake household budgeting for national economic management. Fiscal and monetary powers should be used boldly to expand prosperity, not timidly to chase a balanced ledger.
All of which seems to suggest to myself that: the crushing hegemony which the unverifiable constructs of contemporary mainstream economics has asserted, seems to have fatally infected establishment thinking? As though it is as an arcane magic, which should not be interfered with by anyone without deferring to its self-proclaimed priesthood?
Thanks for another insightful article Ann, and also for flagging up the Leah Downey book!
Thank you Ann for another very informative article. I am so frustrated that political economists such as yourself, Richard J Murphy, and Prof Steven Keen write so clearly about how the economy really works, and yet our politicians are trapped in the wrong headed Neoliberal claptrap - "there is no money!", or worse..."there is no alternative!"
""If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods….
We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense.
Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment).
This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.
Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence". Mikhail Kalecki.
An absolutely excellent article. It’s so nice to read these absolutely accurate description of the UK political economy and the solutions for sort it out.
An excellent article, but it highlights how depressingly uneducated MPs are as to the working of a fiat currency. I can endorse your recommendation of Leah Downey’s excellent and very readable book, where you rightly say she is more critical of the politicians for irresponsibly hiding behind the “independent” central bank. I recall the redoubtable Tory Chancellor, Ken Clarke, was against Gordon Brown’s move to make the Bank of England independent. In double-checking that via ChatGPT, I learned that John Major agrees with Leah Downey: “John Major, before and during his premiership, opposed making the Bank of England operationally independent. He argued that the person setting interest rates should be politically accountable.” Though that should be extended to more than just interest rates.
I did not know that David. Thanks...
The paradox you highlight is crucial: the Treasury cuts the nation's income through tax increases, expecting to balance the books, but instead the deficit worsens as economic activity contracts. What's particularly frustrating is how the accountancy mindset treats government budgets like household finances, completely ignoring the macroeconomic reality that the state has enourmous collateral power. The call to reclaim democratic control over monetary policy feels especially relevent given how unelected technocrats now wield foundational powers insulated from democratic politics.
Aotearoa/New Zealand has a right wing coalition government that has enthusiastically applied austerity - and the Finance Minister always goes back to “government is like a household or local authority and like a household has to balance its budget”. I doubt that she will read your excellent piece.
I can still hear Henry Smith saying such when a Ruskin College, Oxford student over 50 years ago. Makes you wonder how and what they teach about economics nowadays? Thanks Ann.
Excellent article Ann, thank you! Stephanie Kelton talks along similar lines when matching fiat money supply to the productive capacity of the economy. Productivity seems a catch-22 problem in the UK, with the wrong mix of available skills yet a large group economically idle. There’s also a huge political fear of bond markets, egged on by msm, following what happened in the brief Truss/Kwarteng tenure which wasn’t entirely wrong, but extremely badly handled in PR and execution
Ann, this piece reads like both a rallying cry and a lesson. That opening image with the megaphone was a good choice to set up your theme: Citizens straining to be heard against austerity. Juxtaposing accountancy with macroeconomics is a clever way to highlight how governments sometimes mistake household budgeting for national economic management. Fiscal and monetary powers should be used boldly to expand prosperity, not timidly to chase a balanced ledger.
UK government isn't different from France's government in this matter. They're hell bent on destroying their countries.
All of which seems to suggest to myself that: the crushing hegemony which the unverifiable constructs of contemporary mainstream economics has asserted, seems to have fatally infected establishment thinking? As though it is as an arcane magic, which should not be interfered with by anyone without deferring to its self-proclaimed priesthood?
Thanks for another insightful article Ann, and also for flagging up the Leah Downey book!
Thank you Ann for another very informative article. I am so frustrated that political economists such as yourself, Richard J Murphy, and Prof Steven Keen write so clearly about how the economy really works, and yet our politicians are trapped in the wrong headed Neoliberal claptrap - "there is no money!", or worse..."there is no alternative!"
""If the government undertakes public investment (e.g. builds schools, hospitals, and highways) or subsidizes mass consumption (by family allowances, reduction of indirect taxation, or subsidies to keep down the prices of necessities), and if, moreover, this expenditure is financed by borrowing and not by taxation (which could affect adversely private investment and consumption), the effective demand for goods and services may be increased up to a point where full employment is achieved. Such government expenditure increases employment, be it noted, not only directly but indirectly as well, since the higher incomes caused by it result in a secondary increase in demand for consumer and investment goods….
We shall deal first with the reluctance of the ‘captains of industry’ to accept government intervention in the matter of employment. Every widening of state activity is looked upon by business with suspicion, but the creation of employment by government spending has a special aspect which makes the opposition particularly intense.
Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment).
This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness.
Hence budget deficits necessary to carry out government intervention must be regarded as perilous. The social function of the doctrine of ‘sound finance’ is to make the level of employment dependent on the state of confidence". Mikhail Kalecki.