Home > General Politics, Labour Party News, Laughable Lib Dems, Terrible Tories > Resisting the cuts: what it actually means (pt 2 of 5)

Resisting the cuts: what it actually means (pt 2 of 5)

I refer to my earlier post (no 1 in this series of five, if I get round to them all).

So if, as I said in part 1, demonstrating on a mass scale, and defending the public sector ideal, are not effective as resistance, what should we do?

First (and the subject of this post) the broad argument about why cuts are simply not necessary needs to be developed. 

Yes, I know this sounds like it’s drifting straight back into the ‘this isn’t really action at all’ vacuity that I started off by criticising in part 1, but it does remain important that the more specific actions I’ll come to are ‘offered’ within the framework of a political economy argument that is wholly different from the half-baked one the mainstream left is currently offering, and thereby stands a better chance of being seen as different by the public.

This is not just about claiming the right language to set out our case, as analysed well by Paul Sagar. That’s important, but more important is the materiality of that argument.

Essentially, we need to escape the constraints of pro-capitalist (and pre-financial capitalism) Keynesianism. We need to challenge the fundamentals of the right’s argument about the need to cut spending. 

At the moment, all the mainstream left appears able to do is to say that we should cut less now because it will threaten economic recovery, while accepting that we need to reduce the deficit over time. 

The main focus at the moment is on how unemployment will rise if demand is taken out of the economy too quickly, rather than on challenging why demand needs to be taken out of the economy at all, and why we should tolerate any unemployment at all (for those who want to work). 

This Keynesian standard is credible enough in itself, but what the mainstream left is currently therefore offering by using it is just a different timetable for cuts and retrenchment of the state.  No wonder the public aren’t buying that argument; it just seems weak when compared to the Coalition’s narrative of determination to ‘sort out’ Labour’s ‘disastrous’ management of the economy.  Yes, the left knows that’s crap, but that doesn’t mean it’s not selling very well.

Fortunately, there is a ready made alternative economic model for the left to sell.  It comes in easy to understand chunks of meaty goodness, and it’s utterly, utterly different from the fare being offered by Cameron and Co, because it comes without any cuts at all.

The model repudiates the whole notion that fiscal deficit is bad, on the basis that a sovereign state with its own currency simply has no fiscal limits; it only has resource limits.  It repudiates the ‘commonsense’ notion that running a country is like running a household, where revenue must always be higher than outgoings. 

It does so clearly, and it does so convincingly for anyone who you can get to listen.  This is  not just because the logic is simple enough, but because it is correct.

This is the clearest shortest exposition of that model (with a nice line in counter-hegemoinc discourse thrown in) that I have seen:

Responsible fiscal practice

Now at the risk of repeating myself a million times, this is the macroeconomic sequence that defines responsible fiscal policy practice. This is basic macroeconomics and the debt-deficit-hyperinflation hyperventilating neo-liberal terrorists seem unable to grasp it:

1. The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed.

2. Full employment means less than 2 per cent unemployment, zero underemployment and zero hidden unemployment.

3. The sovereign government can purchase any real good or service that is available for sale in the market at any time. It never has to finance this spending unlike a household which uses the currency issued by the sovereign government. The household always has to finance its spending (as do state and local governments in a federal system).

4. The non-government sector typically decides (in aggregate) to save a propoportion of the income that is flowing to it. This desire to save motivates spending decisions which result in the flow of spending being less than the income produced. If nothing else happened then firms would reduce output and income would fall (as would employment) and households would find they were unable to achieve their desired saving ratio.

5. The government sector must in this situation fill the spending gap left by the non-government sector’s decision to withdraw some spending (in relation to its income). If the government does increase its net contribution to spending (that is, run a budget deficit) up to the point that total spending now equals total income then firms will realise their planned output sales and retain current employment levels.

6. The government sector’s net position (spending minus revenue) is the mirror image of the non-government’s net position. So a government surplus is equal $-for-$, cent-for-cent to a non-government deficit and vice versa. So if the non-government sector is in surplus (a net saving position) then income adjustments will render the government sector in deficit whether it plans to be in that state or not. If income is falling in fhe face of rising saving behaviour of the non-government sector and that spending gap is not filled by government net spending then the budget deficit will rise (as income adjustments cause tax revenue to fall and welfare payments to rise). You end up with a deficit but the economy is at a much less satisfactory position than would have been the case if the government had have “financed” the non-government saving desire in the first place and kept employment levels high.

So a responsible government will attempt to maintain spending levels sufficient to fill any saving.

Other excellent expositions of the same argument are here (including useful commentary on Greece and the Eurozone), and – from the man who has done most to turn heads towards this new model (Warren B Mosler) here. A rebuttal of the immediate argument against the model – that it necessarily induces high inflation – is presented here.

This model presented by Mosler and his colleagues is not, I hasten to add, a leftwing model. 

It has nothing to say about the distribution of benefits in such a model, and nothing to say about the democratic control of the state’s sovereign authority over its currency.  It is simply an accurate description of the way a fiat currency works, and of the illogic that lies behind the self-imposed constraints of both monetarist and Keynesian economists (though not the post-Keynesian economist John Kenneth Galbraith).

But the technocratic features of the alternative model are, for the time being at least, arguably its biggest selling point.  Leftie/green works like this from Mary Mellor (see also article here),  cover a lot of the same ground around the principles of the shift from commodity currency to fiat currency, and the way in which money has essentially been privatised over the last 30 years by banks’ ability to create it (in the form of credit) from thin air, while the state remains the unwilling but compliant guarantor. 

The problem is that they are necessarily a good deal less accessible than the simple descriptions of Mosler and co of money as ‘voucher’ from the state, fiscal deficit as the ONLY way to drive a tax system, and the unerring logic of the potential to use the state’s (logically unconstrained) fiscal deficit to match any demand gap at any time.

This, I contend then, is the radical (perhaps because it is actually so unradical in class power terms) economic argument that the left needs to be both shouting from the rooftops and drawing into all its sites of resistance against cuts (see further posts). 

This model, which our Labour leadership candidates (link to radical post) should be scrabbling to be the first to present as their ‘vision’.  For those in the Labour party it is the alternative argument that we should be demanding these leadership candidates get a handle on, and which they should be using their undoubted rhetorical skills to get over to the public. 

As the real resistance to cuts does develop, this must be the clear rationale for saying ‘no cuts are necessary’, and for calling out the Coalition on their ‘there is no alternative’ narrative.  

I’ve demanded it of Ed Balls, whom I think is the candidate who, so far, is looking like the one most prepared to examine his fundamental political stanceHe says he’s thinking it over.

Perhaps (as an aside that I may or may not follow up in later posts) those leadership candidates might look to the tactics employed by the climate change denial lobby to first cast doubt on the ‘official’ version of economic history and practice, and then promote the ‘real’ view.   The difference in this case would be that the real is actually real.

At the moment the false narrative of Conservative ‘household’ economics is winning, because the mainstream left’s narrative is both confused and too similar to the right.  It does not have to be that way.

In the next section I’ll look at what ‘legalistic’ tactics might be available to the left in the battle against the cuts (and for solidarity), including how our old friend the Powers of General Competence might just be subverted for the greater good.

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  1. Barney Stannard
    June 27, 2010 at 10:48 am

    I hate to repeat a tired theme but if you want to convince people you may need to address INFLATION and why it won’t happen if you just print money. Because that is why all these idiot economists of the monetarist, neoclassical and Keyensian economists don’t agree with your position but follow their own illogical nonsense. That is why they miss this incredibly obvious truth.

  2. paul cockshott
    June 27, 2010 at 10:31 pm

    Excellent article, and in citing Randall Wray you are pointing people at one of the most clear headed neo-Keynesian economists around.

  3. June 28, 2010 at 7:36 am

    Err, that’s not all that good a rebuttal of the idea that financing a deficit by printing more money won’t lead to inflation you know.

    Russia following the 1998 devaluation did have inflation….it was still 80% in 2000.

    Yes, it was a one time bolus of inflation: because the devaluation was a one time event.

    But if printing money to cover the deficit is an every year event, so will the inflation be……

  4. paul cockshott
    June 28, 2010 at 9:34 am

    In practice the government withdraws a large part of the money it creates from circulation by issuing bonds. The key point is that the UK issues sterling bonds, id ones denominated in the government’s own currency, and is thus in a very different position to Greece.

  5. June 28, 2010 at 11:31 am

    Thanks for this post Paul. But isn’t the danger with this approach that you are making opposing the cuts contingent on accepting this economic argument… it might be the right argument but it involves an additional leap of faith.

  1. June 27, 2010 at 11:30 am
  2. June 28, 2010 at 7:02 am
  3. June 28, 2010 at 8:01 am
  4. July 11, 2010 at 9:55 am
  5. August 27, 2010 at 9:47 pm

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