'There's no Money Left': a Misconception Fuelled by the Press

Ronan Jack, 6 April 2011 | 1 Comment

Categories: Politics | Finance | Conservative Party | The Daily Mail |

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'Dear chief secretary, I'm afraid to tell you there's no money left. Kind regards and good luck.'

The now-famous note left for his successor in May 2009 by Liam Byrne, the outgoing chief secretary to the Treasury, was apparently intended as a joke. Almost a year later, as we start a new tax year and the budget cuts begin to take effect, there seems to be a widespread view that the country has in fact "run out of money".

This is one of several ideas which underpin the government's approach to economic policy. We are told the crisis this requires us to accept many things which we wouldn't otherwise countenance. That we have alarming and unprecedented levels of budget deficit, and national debt (this has been discussed in my article "Government Deficit: The success in framing the debate").

We hear that only the private sector generates wealth, and the public sector just consumes what others have produced; that because public spending "crowds out" private sector activity, we have to cut back the public sector in order to make room for real growth.

So, have we run out of money? Is there a crisis which requires drastic cuts if we are to avoid catastrophe?

In its article discussing Byrne's note, the Daily Mail touches on several of the themes which accompany this debate. The debt is staggering, cuts are necessary, we "could face a Greek-style crisis", public pensions are gold-plated and we face a massive liability for paying these "hugely generous" pensions.

More recently, the same paper continues the theme, with a long and rather angry piece from Max Hastings about the March 26 demonstration in London against the cuts. Mr Hastings continues the theme about gold-plated pensions, but broadens his attack into an onslaught against public sector workers as a whole, who he says have been transformed from "humble little bureaucrat" into "the modern-day counterparts of pre-Revolution French aristocrats, enjoying advantages such as the rest of us can only dream of".

He supports his view with information from what he calls "the independent think-tank Policy Exchange", but which others have pointed out was established by Conservative MPs, and which currently has close ties to David Cameron. Mr Hastings goes on to make the claim that there are two Britains: "One is populated by taxpayers who generate profits; the other by Labourís vast client vote which spends it, as of right." Not quite a Disraeli moment, but it is helpful in articulating clearly one of the main notions of the pro-cuts position, that wealth is created by the private sector but consumed by the public sector.

This is expressed here by Mr Hastings, but of course it's not just him who thinks this. The idea has gained some popular support. Does it make sense? Let's look at some practical examples.

There are many jobs which are done both in the public and private sectors. Is a teacher a profit-generator if they teach in a private school, and a tax-consuming spender of other people's money if they move to a school in the public sector? If a dustman's job is privatised, have they become wealth-creating rather than wealth-consuming, even if the service and their wages in both cases are paid for through taxation? When private firms bid for contracts from the public sector, are they leeching off the taxpayer, or carrying out valuable work of building national wealth?

It's hard to see how these things could create wealth if they are located in one sector, but destroy it if they are in public hands. The truth is surely that all wealth creation requires physical and social capital - transport systems, education, health, security, a legal system - the things which are largely provided by the public sector and which build the nation's wealth, not use it up. Public spending creates wealth, just as private spending does.

Although everyone recognises this on one level, the argument is still made that the funding for these things comes from taxation, we are spending more than we are raising in taxes, and therefore we have to make cuts.

So where does money come from, and have we run out? Should we cut the public sector because we can't afford the current level of spending?

Because the government gathers in taxes from people, it is easy to think that taxes fund spending, and we must gather in taxes before we have funds to spend. However, we know that when the government wishes, it can create a lot of money out of nothing, such as when we bailed out the banks - we didn't raise money from taxation for that, the money was just created. That's how money appears, both in the public and the private sectors, as when a bank makes a loan without having first accumulated the cash from savers.

In the case of a government issuing its own currency, it can't "run out" of money, though it does have to be careful not to print money beyond the capacity of the economy to use the extra it creates, or else inflation will rise. In a time of recession, with vast underused resources in the economy, that's not an immediate risk.

Why should we not invest now, for example to build social housing, repair the crumbling roads, improve education, healthcare and social care, and by doing all these things employ more people, reduce welfare spending, create more disposable income, and thereby generate economic growth? If we cut spending, won't we just reduce demand and prolong the recession? It's an old argument, back to what Keynes was saying during the depression of the 1930s.

But this argument has been marginalised. In Britain, the Labour Party is criticising government policy by reference to how quickly cuts are being made and the impact on specific groups, rather than challenging the direction of travel. In the USA, the argument seems to be about whether $33bn or $40bn should be cut. In Ireland, the austerity programme is not working, the cuts have reduced employment and cut demand, and it is looking increasingly possible that the country will default on the debts it has taken on in bailing out the banks. As in the UK and the USA, whether to bail them out and on what conditions was not a matter on which we were consulted - we are just told to live with the consequences.

In these three countries and others, there is no serious argument for an alternative being put forward by any of the largest political parties. As a result, media coverage of the issues tends to take place in a narrow band of opinion based on an acceptance of mainstream neo-liberal economic thought. In turn, this stokes a sense of inevitability, an acceptance that we really can't afford current levels of public spending, and possibly also reinforces a view that national wealth only comes from the private sector.

Yet there are alternative voices. Economist Bill Mitchell has recently been published in 'The Nation', setting out a clear explanation of why the austerity approach is wrong. The New Economics Foundation is developing some alternative economic thinking. Several writers linked with the Kansas City group are explaining their alternatives to austerity. A fairly mainstream economist, Paul Krugman, also argues that the austerity programme is wrong.

While you can find these dissenting voices in the blogosphere and the more thoughtful parts of the press, the dominant voice in most of the media and the political parties is that we don't have the resources to keep public services going as they are, and the question is about how much and how quickly to cut. It's as though we are told we are to be confined to a cell, but there's some room for discussion on what colour to paint the walls.

Categories in which this article appears: Politics | Finance | Conservative Party | The Daily Mail |

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Comments (1)

1. 29 November 2011 14:12

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