Sunday 3 March 2024

A Cynical Case of Fiscal Dishonesty

In an incredibly soft ball feature for The Telegraph, Rachel Reeves told the paper she learned all about balancing the books at her mum's kitchen table. I wonder if mum taught her that copying other's people's work was wrong, because the evidence suggests not. Not that the Telegraph were rude enough to mention it, and so Team Reeves will be happy with the results of their handing the Tory house journal "unprecedented access". They wanted to show the human side of our tinny voiced shadow chancellor, and something that would endear her enough to the readers that they might give Labour a punt - and once again assure the interests that circulate in the paper's political orbit that contrary to some of its more excitable articles, there is absolutely nothing to fear. Keir Starmer is as committed to Britain's sacrosanct class relations as Rishi Sunak is.

But because this is the Telegraph, the heavy Thatcher allusions were there. Reeves said she wanted to be known as the "iron chancellor", simultaneously invoking the blessed Margaret and, for those readers who prefer to life in the 19th century, the wily but tough Otto Von Bismarck. And the kitchen table anecdote with mum, her calculator, and the notepad famously recalls Thatcher's brilliant but wholly misleading reduction of government spending to household budgeting. This builds further on the consistent messaging coming from Labour: don't promise, don't ask. Unfortunately, if social media and earnest think pieces are anything to go by too many people think Reeves is genuinely mistaken about how state finances operate. When she attacks the Tories for maxing out the credit card, and Labour now has to be "disciplined" with its spending you can see why anyone with half an understanding about how the state makes money and the way economics works feel like they're banging their heads against a wall. My advice? Relax. It's not you, it's Reeves.

The shadow chancellor is not a stupid woman. She knows the British government can't bankrupt itself. Rather, her fondness for the household metaphor is driven entirely by politics. Cynical politics. It helps Labour bat away the tax and spend attack lines customarily deployed by the Tories and their favoured journals. By caving without a fight to right wing framing, the editorial offices might be flattered into thinking that it is they who will get to set the agenda for the incoming government. Not the members, and not the unions. Which helps explain why we've yet to see much bellyaching about extending workers' rights that, theoretically, Reeves and Starmer remain committed to.

The second reason is central to their political strategy. With Reeves affecting the countenance of a robotic disciplinarian whose commandments are programmed by "the economy", this is a concerted effort to depoliticise economic questions and spending decisions. Hospitals in crisis? Sorry, growth is sluggish - let's get business to help. Below inflation public sector pay rises? There is no money because the Tories sunk the economy. Kids getting taught in crumbling RAC classrooms? Can't replace them any faster because of the fiscal rules. Cut social security? Not my fault guv'nor, not enough tax receipts. It suits Reeves to misrepresent the budgetary position and how state cash really works, so Labour is off the hook when things don't change as fast as they should or don't change at all. And when they condescend to do something, they can toot the over-delivery tune when a public service is patched up. They want to control the agenda and the pace of authoritarian modernisation, so is there any better way of setting up some spurious objective rules that they say they are powerless to change, and must obey come hell or high water? It's a deliberate effort to obfuscate, distort, and make snoring boring the most fundamental political challenges of the day.

Reeves is playing a deeply cynical game as all the Labour right have done. And they can get away with it for now because the election is in the bag. But as we saw on Thursday, when there are controversial issues Starmer et al have no answer for, they will be punished for it. And as these are going to multiply once they're in government, it won't be long before the rust clings to Reeves's steely projection and chews great gaping holes in what the Labour leadership believes is a clever-clever strategy.


Robert Dyson said...

Perfect analysis. There is no leadership in Labour now, just a wish for power for the sake of it and their own egos and security. I expect to be around for the next election though maybe not the one after. I now want to live in the hope of witnessing the denouement. Totally corrupt people at the top now, Sunak, Starmer, Biden, Trump, Scholz, Macron. I hope we are about to see Götterdämmerung.

Zoltan Jorovic said...

Actually Phil, I think she is a committed Neoliberal who believes that the neoclassical dogma is correct. She does think a national budget should be 'balanced', that public debt is bad (but private debt, who cares), that the problem with privatised utilities is not that they are private, but that better people were not overseeing them (i.e. her and Keir).

She and he both think that better regulation can sort the mess out. Neither appear to grasp the depth of the problem, and how it is embedded in the neoliberal 'reforms' that deregulated finance. This has led to a corporate world where debt, leverage and cash milking are the main drivers. Private equity has bought into those businesses that once were in the public sector, or are providing services to it, and asset stripped them , then mined profit through lowering quality, lowering wages, and abandoning any investment in infrastructure. The national infrastructure has been left to rot, services hollowed out, and businesses run into the ground. It's a policy of profits today, and move on to the next victim.

Private companies subject to this vulture capitalism get liquidated, but the public ones can continue to be drained as they shamble around, half alive, because the government has to keep them going in some, albeit zombified, form. This has been slowly building up since the late 80s, but really accelerated after the Great Financial crisis of 2008/9 and the ensuing austerity stupidity of the coalition government.

I get that the problem is so serious that it might frighten the electorate if it were to be revealed openly, but my concern is that they don't realise it either. They genuinely think that some tinkering can sort it. It's like they are about to inherit the family estate, and think that the baronial home just has a few leaks and needs a coat of paint, when its got dry rot, the roof needs replacing, the walls are crumbling, the basement is flooded and the there's serious subsidence.

Rodney said...

While Reeves may want to bring to mind Thatcher or Bismarck there is another Iron- person who she is most likely to embody.

The Duke of Wellington gained the nickname the Iron Duke because his tenure as prime minister was so unpopular he had to install iron bars on all his ground floor windows to stop angry members of the public putting bricks through them.

McIntosh said...

You have to presume that Mum didn't tell Rachel about the mortgage on the house and that the family were actually 3x their income in debt. Otherwise Rachel might have a different view of borrowing to pay for an asset.

Jenny said...

You're quite right that government finances are not very like household ones. However, there are constraints. When the economy is running quite hot, with near full employment and inflation higher than desired, it isn't possible to do more of anything without doing less of something else. For example one might want to spend more on the NHS. If so, in the current economic situation, borrowing would be unwise, and it would be better to increase taxation. In short, the government can create money, but it can't directly create economic capacity. And if it tries to get more out of the economy than it can provide by creating money / borrowing (effectively the same for a government), then inflation would result. Which would increase everyone's costs for food and fuel as sterling would fall against the USD.

Karl Greenall said...

Essentially we are living through the end days of Globalisation II, which began in the late 1970s in the aftermath of the slump in the earlier part of that decade. It parallels Globalisation I which started in the 1880s, and culminated in the Wall Street Crash of 1929, the Great Depression and rise of the Nazis, and World War II.
It took the mighty efforts of the 1945 Labour government to make sweeping and wide ranging changes to rebuild our country.
The problem is that we need such a government again.

Zoltan Jorovic said...

We can see how embedded the neoclassical dogma is from some of the comments above.
"it (the government) can't directly create economic capacity."
It can, by investment in infrastructure. A sound national infrastructure, including effective health, education, social and transport systems ARE part of Economic capacity. Their neglect is one reason for flatlining productivity.

How to repair these? If you can't borrow, or can't create money? The option then is to let them continue to rot, which leads to further decline, and a reduction in economic capacity. So, its actually WORSE then the alternatives.

"Mum didn't tell Rachel about the mortgage on the house and that the family were actually 3x their income in debt."
No. That's exactly what she believes. But, there is no mortgage. If you owe a mortgage, you have to pay the bank back using their money. By a given date. Failure means the house is seized. None of that applies to a national 'debt'.

Every pound a government spends is spent INTO the rest of the economy, some returning as Tax, the rest allowing other transactions and allowing businesses to operate. When there are cuts, its reduces capacity and activity. The big question is WHAT the money 'borrowed' (its not borrowing as you or I do it) is spent on. Building up capacity, or just inflating assets?

Inflation is a usually at its core a supply issue - as in not enough of the goods/services to meet demand. Supply is a feature of capacity, which requires investment. The failure of investment is the root of all this. Any govt which thinks that cuts will solve anything is adding to the problem.

Boffy said...

Jenny said,

" And if it tries to get more out of the economy than it can provide by creating money / borrowing (effectively the same for a government), then inflation would result."

If government's actually COULD create "money" all their problems would be solved! Money is the universal equivalent form of value of all the commodities in the economy, i.e. a measure of total social labour-time, as Marx describes in A Contribution To The Critique of Political Economy, Poverty of Philosophy, and Capital I, Chapter 3. In other words, you cannot create more "money", without simultaneously creating more value, which is its equivalent embodied in commodities.

The idea that the state could simply create more "money", by creating more currency, is a delusion going back to the start of currency itself, as Marx describes. Its precisely because you cannot create more money without creating more value as its equivalent that means, as Marx describes in the above works that, if you simply produce more currency, i.e. money tokens/credit, each one of those tokens, the currency, standard of prices, is correspondingly devalued, as in total they can only represent that same total of value/money/social labour-time.

The same error is being made by the delusions of MMT. But, of course, nor is it possible to simply increase taxes rather than printing money tokens or borrowing. Certainly not for Blue Labour that has cut off all paths to higher taxation, and its few tokens in that regard such as Non-Doms have been removed by Hunt. Higher taxes simply means lower profits, less capital accumulation, capital moving elsewhere, and that goes double after Brexit.

Those problems cannot be resolved within capitalism, and certainly not a decaying British capitalism outside the EU.

Boffy said...

Zoltan saud,

"No. That's exactly what she believes. But, there is no mortgage. If you owe a mortgage, you have to pay the bank back using their money. By a given date. Failure means the house is seized. None of that applies to a national 'debt'."

Not true. Most national debts, Japan's being a major exception, are actually owned by foreigners. Either way they are owned by individuals either singly or via pensions and mutual funds. Those individuals and institutions have to be paid back, and failure to do so, leads to the interest rates you have to pay rising shortly. Yes, you can print money tokens on the basis of the fantasy that what you are doing is printing money, instead, but that simply leads to inflation, which causes nominal interest rates to spike. Inflation acts like wear and tear on fixed capital, but for loanable money-capital instead. Its what Weimar Germany did, Argentina, Zimbabwe and elsewhere, with dire results.

Boffy said...

Zoltan said,

"Inflation is a usually at its core a supply issue - as in not enough of the goods/services to meet demand."

No its not! That is no more correct than the idea that prices themselves are determined by supply and demand. If it were true that inflation were a supply issue, then, once that supply issue is resolved, and supply rises again, its not only the case that inflation should stop, but that there should be "deflation", i.e. prices should fall, back to their original equilibrium price. That never happens. As Marx describes inflation is a monetary phenomenon caused by an excess of currency/credit in circulation, which devalues the standard of prices.

Jenny said...

Globalisation 1 powered by coal. Ended by peak coal around 1920. Globalisation 2 powered by oil. Ended by peak oil around 2005. Globalisation 3 will be powered by fairy dust .

Boffy said...

Actually, I'd say globalisation 3, WAS powered by the microchip revolution that took place in the 1970's, and has continued since.

Attempts to stop it such as Brexit, and Trump and Biden's trade wars are swimming against the tide, and likely to fail short of another global imperialist war - which of course the US/NATO imperialist alliance and the China/Russia/BRICS imperialist alliance are, indeed driving towards, with the help of assorted social-imperialists and campists on both sides.

Its in workers interests to oppose both, and their current attempts at trade wars and restrictions on globalisation, which amount to the flip side of the concept of war as the continuation of politics by other means, i.e. its war by other means. But, it will never be possible to do that within the context of simply seeking reforms of existing capitalist nation states, and the relations between them as signified by the ridiculous, 19th century, liberal, idealist notions of national self-determination, used by the Brexiters and other nationalists.

It is only possible on the basis of an international socialist struggle against those nation states, and national interests, which now represent a fetter even on the free and rational development of large-scale capital itself, just as the monopoly of private capital represented such a fetter in the 19th century, as described by Marx, which had to be swept away by the development of large scale socialised capital, in the form of cooperatives and joint stock companies/corporations, i.e. the expropriation of the expropriators.

In the age of imperialism, of multinational capital, and the multinational state, socialists have to apply that same principal.

Zoltan Jorovic said...

@Boffy Most of the national debt is owned by or on behalf of British citizens. Some is foreign owned, but by no means the majority. The debt is also someone's asset. And many of those someone's live here.

Are you saying govt debt is bad, or just that the size needs managing?

Don't forget, govt surplus = rest of economy deficit and govt deficit = rest of economy surplus.

Zoltan Jorovic said...

Boffy, Marx was a clever guy, but money operates very differently in 2024 from in the late 19th century. MMT isn't a delusion, its just a factual description of how modern fiat currencies work.

Yes governments can and do create money. That's how they pay for things. After all, tax is after the fact. You don't pay it in advance. As for borrowing, that is also after the fact. Plus, what else is QE? That's pure money creation.

Money is not the same as value. Obviously. We can create money, but that doesn't create anything real. And it risks undermining the confidence in the currency. The point isn't where money comes from. It's what it is used for. That's the key. Used wisely, it will produce value. Used stupidly, it won't.

Zoltan Jorovic said...

@Boffy re Inflation.

Inflation simply means that prices are rising over a given period of time. So of course it's a monetary phenomenon. But the key is WHY are prices rising? Could be because demand is increasing, but supply not. Or supply decreasing, but demand not. Or because suppliers are gouging. etc. But most periods of sustained inflation are provoked by supply issues - e.g. oil crisis, covid induced supply line problems and so on. When resolved, prices don't fall back because the whole system has moved up to compensate - wages, knock on effects, foreign exchanges etc. The system is more of a ratchet than a simple in-out screw.

Boffy said...

I'm not saying debt is good or bad. Its not my job to advise capitalists or their state on how to manage their system. I want to overthrow it. What I am saying is that your claim that sovereign debt does not have to be paid back is false.

Boffy said...

No money is exactly what it always has been, the universal equivalent form of value. You are confusing money with currency, just as David Ricardo and others did. MMT is the same delusion as that perpetrated by John Law and the Pereire Brothers, in the 19th century, who also confused money with currency/money tokens. In the end, commodities are bought by commodities, with money being the means of placing a price on those commodities so that equal values are exchanged, and currency, in a money economy, then intermediates that exchange C – M – C. If a government simply prints more money tokens, M, but the quantity/value of commodities produced is unchanged, it simply devalues those money tokens, it does not produce more commodities, or create more value, and so no additional money. If the government wants to buy more commodities, it must first obtain more actual money, for example, by taking in additional taxes, but then, what it takes in additional taxes, is money in the hands of whoever it takes those taxes from – ultimately from profits – which then does not get spent, which in the case of profits, means slow capital accumulation, lower economic growth.

QE is not money creation, its just currency creation, and devalues the currency/standard of prices. If what you say were true, there would be no need for tax or borrowing, just “create money” by plucking it from the money tree, via QE. Why do you think states do not do that, and that when they have tried as with Weimar, the Credit Mobiliere, John Law, Argentina, Zimbabwe, and even the USSR in the 1920's, the result has been hyper-inflation?

Money is the same as value, as Marx describes. Money arose naturally, from the production and exchange of commodities, as one regularly traded commodity whose value was well known, was singled out as the standard measure of the value of all other commodities. You cannot create money without creating value simultaneously. You confuse money with currency.

Boffy said...

No inflation is NOT simply that prices are rising over a given period of time. Inflation is that unit prices are rising, relative to unit values, as a consequence of a fall in the value of the standard of prices. Thee can be inflation, even if the general price level is falling, simply because the standard of prices has been devalued by a greater proportion than the fall in unit values of other commodities.

So, unit prices can rise, even if aggregate demand and supply are unchanged. It only requires that the value of the standard of prices falls.

You skip over the process by which prices do not fall back, after supply issues are resolved by simply saying that "the whole system has moved up to compensate". But, then, this moving up, requires that the supply of all these other commodities etc. must have been constrained, or their prices could not have moved up. Moreover, when the supply issues are resolved, they must also, then be resolved for these other commodities, so that their prices should also fall back, creating a general deflation.

But, they don't. As Marx showed, supply and demand cannot explain prices, which requires first an analysis of values, to explain supply and demand itself. Changes in supply and demand can explain changes in prices, i.e. up or down, but not prices themselves. As soon as demand and supply is in balance they lose all function to explain, whether you are talking about supply and demand for a single commodity or aggregate supply and demand.

If the supply of ice cream on a hot day is not sufficient, then ice-cream prices may rise. But, equally, on a colder day, they will fall. If the supply of potatoes falls due to a crop failure, meaning a shift in its supply curve to the left, potato prices will rise, but when that condition is removed, potato prices will not stay the same, but fall, at least back to their earlier price. Similarly, if aggregate supply is constrained for some reason, such as lockdowns, meaning a shift of the aggregate supply curve to the left, that may cause aggregate unit prices to rise, but the, the removal of lockdowns should shift the aggregate supply curve to the right, causing aggregate unit prices to fall.

You can only explain the fact that they do not, by Marx's explanation that the value of the standard of prices is reduced, so that even when aggregate demand and supply return to balance at their previous levels, aggregate unit prices are still higher.

Adrian said...

"Supply is a function of capacity, which requires investment ". Exactly. As proven by what the Attlee govt did, and achieved. Outstanding comment, Bolton.

Boffy said...

Supply is, indeed, a function of investment, but the question is where the fund and the physical product comes from for that investment. Take the orthodox economist's favourite fictional character, Robinson Crusoe.

If, he is able to work 10 hours a day, and spend 8 of those hours fishing etc., to produce the vital things required for him to live for a day, he has 2 hours in which he can produce other things, not required for his immediate consumption. He creates 10 hours of new value, 8 of which constitutes necessary labour, and 2 hours surplus labour.

The value of the 2 hours surplus labour is the fund required for his investment. What he produces in that two 2 hours, say fishing nets, or animal pens, is its physical equivalent, the surplus product. He can then use this surplus product as investment, which raises his productivity, and increases his future supply. However, if he can only work 8 hours that is not possible, or if he chooses to use his whole 10 hours fishing, he has no surplus product, no investment, no rise in productivity or supply.

The question is where the fund and surplus product comes from that is the equivalent, including for use by a government such as that of Attlee? As Marx sets out, the same surplus value/fund is created by surplus labour, as is the potential for a surplus product, comprised of additional materials, machines etc. required for investment, as well as the additional wage goods required to expand the workforce. But, capitalists control it, not the producers.

Competition drives them to accumulate it, in search of market share and profits, up to the point where capital is over-accumulated relative to labour-supply, and so where it stops acting as capital. That can't be resolved by having some government simply take part of those profits and invest it in production instead. Attlee's government and others after the war were able to do what they did, because capital was not overproduced, there was ample labour supplies, and capital needed core industries modernised. Attlee's government closed far more pits and laid off far more miners than did Thatcher, for example. It acted as the national capitalist.

By contrast, Wilson's governments in the 1960's and 70's, tried, but failed to do that, because, by then capital was already overproduced, relative to labour supply.