Sean Hayden wrote: ↑
Sat Aug 29, 2020 12:31 am
I'm not seeing a justification for the claim that worrying about a government being hard up, or going broke, is a convenient political fiction.
Hmm. That's not quite what I thought you were asking for, because that's not quite what I said.
Brian Peacock wrote: ↑
Thu Aug 27, 2020 9:49 am
...The conservative narrative around taxation is that tax cuts make you richer, therefore give you more purchasing power, and therefore stimulate the economy. This gives the impression that there's a fixed amount of money to go round, that incomes and taxes are balanced in such a way that if you're getting less someone else is getting more, and that the economy is founded on consumption.
In simple terms, the government is not a household or a business because the latter are merely the users of a currency whereas the former is the issuer of currency. The government's fiscal capacity, it's ability to create and spend money, is virtually unlimited compared to the ability of a household or business to earn money and then spend it.
In this regard
, stories about how the government are hard up or can go broke are misinformed, or just a politically convenient fiction...
For a bit more context I spent a bit of time outlining how government spending precedes economic activity etc, with spending, of course, being a hot political issue. Western governments don't operate on pocket-book economics like households or the majority of businesses do, balancing incomings against outgoings, and the idea I'm trying to get across is that narratives suggesting that the nation's finances do work that was, stories about how tax revenue is equivalent to the nation's wage packet, do not really reflect the reality of how the monetary system operates.
Sean Hayden wrote: ↑
Sat Aug 29, 2020 12:31 am
Weren't the austerity measures a response to a hard up, threatening to go broke, government? How would this hard up, broke government have spent its way out of trouble? Obviously, they were given another loan to see their way out. But, at first glance at least, it hardly seems prudent to rely on such things.
Who does a government ask for a loan? 'Borrowing' is another term which is used to suggest that the government's finances are essentially the same as household accounts. If you can't pay for a new roof you go to the bank and persuade them that you can pay back a loan plus a 'little extra' over a fixed period. You sign an agreement and the bank add some zeros to your account. The bank has an understanding with some institution further up the financial food chain that allows them to add zeros to people's accounts, to create an account deposit, and they pay the difference between what they've added an a bit of what they've charged back over time. Those zeros travel up a food chain that leads to the government and the central bank, and get added to... "The Deficit" (scary music!). The bank created money it didn't have and then told the government about it who marked it up as 'out' rather than 'in'.
Governments also spend money they don't have by adding zeros to the accounts of regional governments, contractors, public service providers, tax rebates, blah blah blah, and add it to "The Deficit!". They create money out of thin air in the form of debt, where debt is a function of the future value of the money they've just created. Governments also issue short, medium, and long-term bonds. Bonds are another way to managed the zeros, and as well as generating revenue they can also be used to take value out of the system now on the understanding that a certain amount of addition value will be returned to the economy over time. This also goes on "The Deficit!" Governments also allow regional government and public service providers etc to borrow in the commercial markets which, as we've seen, ultimately bubbles back up the food chain to the government - another way the government can borrow money from itself while adding the extra value of interest and charges and economic activity into the system. All of this comes under 'borrowing'.
Just as every dollar spent is someone else's income, and every liability is someone else's asset, the other side of "The Deficit!" can be thought of as a 'surplus', that is; "The Deficit!" represents the difference between the value the government has created (or allowed to be created) and the proportion of that value that remains at-large in the economy. If the deficit were zero then the amount of value the government had created would match or balance the amount of value in the economy, which would mean that there was no additional value being created on either side of the equation. And if the deficit were a positive number, an actual surplus, then the government would be creating value and withholding it from the economy.
Government 'borrowing' is not like getting a loan from a bank for a new roof and "The Deficit!" is not like an overdraft.
The conservative narratives starts with the assumption that there exists somewhere in the world a limited or absolute stockpile of money - unused money made out of savings; when governments have a shortfall between tax revenue and spending ("The Deficit!") they have to borrow (in the traditional sense) from that pile; if governments borrow they reduce the size of the money pile, which increases competition and drives up interests rates; if interests rates rise private businesses find it increasingly difficult to access the money pile, which reduces investment; when investment falls the economy slows; when the economy slows tax revenues fall; when tax revenues fall government has to borrow; rinse and repeat - therefore Deficit Bad!
But as I've pointed out, that's not actually how the system works. When a business wants an investment loan they go to a bank, and if the request meets the bank's conditions the bank create a deposit for the borrower - they aren't moving some money from one pile to another; they have the authority to add some zeros to an account and pass that information up the financial food chain. Given this system, and the fact that base rates (the cost of money) are so low at the moment as to be negligible, why do conservatives still insist we need to cut taxes to boost business investment?