Having very little to do this weekend, I have spent a fair bit of my time sitting around and browsing twitter for people to argue with. Arguably not the most constructive way to spend ones weekend, but hey, its been a busy week, and winding people up on the internet is underrated. The economy seems to be the main topic of discussion for most at the moment, nothing new there, and as such the opportunity for passionate conflict of opinion is rife.
For anyone who’s tried to debate anything in detail via twitter it is well understood how difficult it is to make a point with just 140 characters, especially when discussing potentially complex issues such as economics. So I thought Id take this opportunity to elaborate on some of my twitter-based discussions of late, in an attempt to repudiate some of the fallacies that are becoming second nature to anyone with an opinion on the matter.
The most common bit of nonsense is, unsurprisingly focusing on the argument surrounding the Coalition’s cuts to public spending. I have been attempting to remove this argument from the political sphere in my discussions and asking people to look at this objectively, solely from an economic point of view, in an attempt to break this idea that there is no alternative, which due to politicos admiration for acronyms, seems to have been boiled down to TINA.
The lack of substance in the economic arguments being offered by the government and their cheerleaders really is quite appalling. Paul may have already explained some of this in an earlier post, but seen as this illogical rubbish is spreading through the debate like a wild-fire, repeating it once, or even a hundred times is hardly going to be a problem!
The main line of argument go’s like this; the Labour government was to frivolous, for 13 years we lived beyond our means, and now as a result of such reckless spending on schools, hospitals and other public spending, the country has no money left!
In a brief appearance on BBC news, Chancellor George Osborne explained to us mere mortals how the government is like a family that has been funding a lavish lifestyle via their credit cards. We are spending more than we can afford, i.e. more than the government generates through tax revenues, and this must be put to an end!
This line of argument has been seized upon by Tory activists attempting to paint themselves as the defenders of common sense, and it resonates well with the average person (with little understanding of economics), who can relate to the “living beyond our means” part of the argument. The problem is, this couldn’t be further from the truth.
This can best be described as a “fallacy of composition”, which can be defined as follows:
A fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole
So what Mr Osborne and his minions are trying to explain to us, in no uncertain terms, is that the British government, like individual households/firms, must operate in a manner which recognises it operates with a revenue constraint, i.e. that it can only spend as much as it raise through taxes and bond sales.
The absurdity of such a statement is obvious to anyone who has studied modern economics, even slightly. Osborne, and everyone who follows his lead, is trapped in the thinking of the 1930s, before the development of macroeconomic theory, which coincidentally arose from the inadequacy of trying to rationalise the actions of the whole on the basis of the part, exactly as Osborne is doing today.
As Keynes and his pioneering colleagues in the field of macroeconomics understood, trying to rationalise the outcome of the wider economy based on the reasoning of the individual (microeconomic) level, just doesn’t work. A perfect example is Keynes theory on the “paradox of thrift” which observes an individual trying to increase savings can do so by putting money away, but when applied to the economy as a whole, attempting to increase savings can lead to exactly the opposite of the desired outcome, i.e. lower savings. So trying to frame the debate of the broader economy in the terms of the individual is disingenuous at best, but highly cunning when you wish to convince everyone that TINA.
TINA also neglects another historic economic development, as if circumventing the most basic concept of macroeconomic thought wasnt bad enough! It neglects to recognise the true nature of monetary operations in modern Britain, (as opposed to the Eurozone, which I shall go into later) and in doing so removes the most obvious alternative from the realm of possibility altogether.
British pounds sterling, are an example of a “non convertible, fiat currency”, which is simply a currency declared to be legal tender by a sovereign state, that unlike the Gold Standard system of days gone by, the issuer is in no way obliged to redeem the holder with anything whatsoever. Ever heard someone say you can go into the bank and redeem your pound notes/coins for the appropriate weight of gold bullion? Well you can’t, because that was only true under the Gold Standard, which was ended some time ago.
Why is this point relevant? Because in the old days, governments were genuinely revenue constrained, the money they spent represented blocks of gold in a vault, and if people wanted to redeem money for which there wasnt enough gold, then there would be a problem! So the money they spent, either had to be borrowed or raised via taxation.
This raises an interesting point with regard to the operation of the modern system, do governments need to tax in order to spend money? For anyone who understands the practical operation of a monetary system with a non-convertible, fiat currency, the answer is quite obviously no!
This isn’t to be misunderstood as labelling taxes as pointless, they’re not, they’re just not necessary as a means of ensuring government spending under the current arrangement. An explanation of what they are for under this type of arrangement would be enough for a post of its own, which I shall perhaps attempt to write sometime in the near future.
At this point we come to the Greek fallacy, which like the “governments are like households” argument, is totally void of any practical significance, and is regularly being invoked at the highest levels of government. The argument here being that if spending isn’t bought under control, there will be mass panic, riots on the street and eventually we will have to default and go bust (which the same people claim has already happened in close succession).
Some people, such as Labour MP Rachel Reeves, have tried to argue this away in what I believe to be an entirely inadequate manner, which completely misses the most basic flaw of the argument.
Unlike in Britain, the Greek government is faced with a revenue constraint, (as explained above, it can only spend what it raises via taxes or borrowing [bond sales]). But the Greek government uses the Euro, which is also a non-convertible, fiat currency, right? So why do they face a revenue constraint when we don’t?
Well that’s simple, because unlike in Britain, Greece does not have control over its own monetary policy, the European Central Bank does, one of several reasons I’m completely opposed to Britain joining the Euro.
So it’s important to make a distinction here, the European Central Bank has no revenue constraint, it can spend as many Euros as it likes without having to worry about running out, which in practice essentially boils down to someone changing numbers on computer screens! But the states that operate within the Eurozone do operate with a revenue constraint, and as such can’t spend, spend, spend without facing the risk of insolvency. Upon realising these practicalities it quickly becomes obvious that the debate regarding Britain’s budget deficit cannot be framed in the terms of the Greek situation, just as the micro-level observations cannot be applied at the macro-level.
I don’t know if George Osborne understands all of this, and frankly I don’t care; he has chosen his course of action and is neglecting reality as a result, the question of whether he is aware of all this or not is not something I shall concern myself with when attempting to discuss the economic implications of his actions. But if people who wish to oppose what he is doing don’t realise the absurdities of the claims being made about our fiscal position, then he shall succeed with a notable level of ease.
Sadly, many in the Labour Party have already accepted the fallacies of Mr Osbornes argument, and are instead seeking to present an agenda motivated by the same reasoning, in a more “humane” way, the only road this shall lead to is failure.
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