141207financial-balances

“Let’s push the private sector into debt”, says the Coalition government. But how will bankrupt businesses and households pay their taxes and push the government into surplus?

This one is from way back in 2012, so it seems reasonable to use quite a lot of it without fear of taking away readers from the source material. It shows how right some critics of austerity were, more than half the Coalition government’s lifetime ago – and it also provides an opportunity to cast light on matters that were obscured back then. Here’s Paul Krugman:

“The boom, not the slump, is the right time for austerity.” So declared John Maynard Keynes 75 years ago, and he was right. Even if you have a long-run deficit problem — and who doesn’t? — slashing spending while the economy is deeply depressed is a self-defeating strategy, because it just deepens the depression.

So why is Britain doing exactly what it shouldn’t? Unlike the governments of, say, Spain or California, the British government can borrow freely, at historically low interest rates. And still can, despite losing its AAA credit rating early in 2013, the year after this was written. So why is that government sharply reducing investment and eliminating hundreds of thousands of public-sector jobs, rather than waiting until the economy is stronger?

(The answer is, to weaken the public sector, making it easy to create an illusion that public sector service provision is always of poorer quality than that offered by the private sector. This in turn would make it easy to justify selling off publicly-owned assets into private hands. This would make the beneficiaries of such sales better-disposed towards the Conservative Party, meaning they would donate funds that could be used to overwhelm opposing political parties in the propaganda campaign before the next general election – the general public having been ‘softened’ to the Tory message by the UK’s right-wing press. But Mr Krugman didn’t know that at the time. With it in mind, let’s see what else he had to say…)

Over the past few days, I’ve posed that question to a number of supporters of the government of Prime Minister David Cameron, sometimes in private, sometimes on TV. And all these conversations followed the same arc: They began with a bad metaphor and ended with the revelation of ulterior motives.

The bad metaphor — which you’ve surely heard many times — equates the debt problems of a national economy with the debt problems of an individual family. A family that has run up too much debt, the story goes, must tighten its belt. So if Britain, as a whole, has run up too much debt — which it has, although it’s mostly private rather than public debt — shouldn’t it do the same? What’s wrong with this comparison?

The answer is that an economy is not like an indebted family. Our debt is mostly money we owe to each other; even more important, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income.

So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.

(Boldings mine because this is something that is still not clear to some people. If you take money out of the system, it becomes harder for fiscal multipliers to work, and therefore for anybody to make a profit and pay their taxes. That is why George Osborne has been surprised by lower-than-expected tax returns – even though he took all the money away.)

So why have so many politicians insisted on pursuing austerity in slump? And why won’t they change course even as experience confirms the lessons of theory and history?

Well, that’s where it gets interesting. For when you push “austerians” on the badness of their metaphor, they almost always retreat to assertions along the lines of: “But it’s essential that we shrink the size of the state.”

The austerity drive in Britain isn’t really about debt and deficits at all; it’s about using deficit panic as an excuse to dismantle social programs.

… And to sell publicly-owned assets in order to boost party donations and buy the next election, as described above.

The article is notable also in that it points out: When the private sector is frantically trying to pay down debt, the public sector should do the opposite, spending when the private sector can’t or won’t.

The Tory-led Coalition policy is to increase private sector debt, in the belief that it will put the public sector into surplus; that’s why benefits have been slashed, for example.

So what happens when everybody goes bankrupt and defaults on their taxes? How does that surplus become a reality then?

Follow me on Twitter: @MidWalesMike

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