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9 March 2015

Nation-states aren’t households: debating their economies as if they are is stupid

Our economic debate is conducted in terms of household budgets - a handbag economy. But the economy isn't a handbag, and this "debate" closes down real alternatives to the neoliberal consensus. 

By Eliane Glaser

Politics is becoming unpredictable, we are told, yet as the election approaches, political interviews have started to follow an identical script. The party leader or minister in question announces their policy: lowering student fees, say, or building social housing. Immediately the interviewer barks back: ‘And how are you going to pay for that?’

On Radio 4’s Today, on Question Time, even on Channel 4 News, politics is now universally presented as a household budget. The BBC’s Robert Peston responded to Ed Miliband’s announcement on student fees with a characteristic raised eyebrow and sucking-in of breath: “To be a credible commitment – at a time when the public sector deficit is £91bn – Labour would have to find a new tax to cover the significant cost … so Ed Balls has been asked to make the sums add up”. Credibility, covering costs, sums adding up: this is the banal weekly-shop lexicon of the contemporary political imagination. Having signed up to the Coalition’s priority of a balanced budget, Ed Miliband has explained that he will ‘pay for’ the policy with a tax on pensions. ‘Good lord, where would you get the money from for that?’ was Nick Ferrari’s reply to Natalie Bennett’s plan to build 500,000 new social homes.

This line of questioning sounds so much like straightforward common sense that we are scarcely aware of the stealthy alchemy of consensus-formation that has produced it. The Coalition has repeated its austerity mantra with admirable message discipline. The nation has maxed out its credit card, the story goes; we need to pay down our debts, balance the books and live within our means. After five years, these myths masquerading as reality checks have become thoroughly internalised by politicians, the media, and the public. Even the Greens, ostensibly the only party now thinking outside the neoliberal box, are trapped in this paradigm, stressing that their plans will be ‘fully costed” in their manifesto.

But all this is economic bunk. Government spending is not a zero sum game in which individual policy costs must be matched by corresponding ‘savings’ elsewhere. Governments can raise money not only through taxation but also by borrowing, creating money, and investing for growth. Contrary to his proclamations, Osborne has merrily carried on borrowing billions, not only because he’s a hypocrite, but also because it’s the rational thing to do. As the New Economics Foundation has pointed out, the UK’s debt-to-GDP ratio is not high by historical and international standards, and with interest rates so low the cost of servicing the debt remains eminently manageable.

The most powerful riposte to handbag economics is quantitative easing. The cognitive dissonance between ‘the British government has run out of money’ and ‘the Bank of England has just created £37bb’ is so great that we tend to just stick with the handbag as the simplest model. But the parallel between economics and a household budget breaks down when you realise there’s a money-printing machine in the garden shed. The European Central Bank is about to conjure a trillion euros out of thin air. This elastic fiscal latitude is what makes Nick Ferrari’s question to Bennett – “500,000 homes, £2.7bn? What are they made of, plywood?” – so maddening: it’s false, yet irresistibly tangible.

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There is a debate among economists about the extent to which money grows on trees in an economy like the UK, but we certainly have enough monetary freedom to conclude that Osborne’s crust-and-gruel economics is not only unnecessarily punitive, but also fiscally illiterate. The classic risk of QE is inflation, but that is at an all-time low. We were sold austerity on the grounds that we might otherwise become like Greece, but Greece’s problem is that its hands are tied by being in the Euro. The IMF has since admitted that austerity was a mistake in countries that have control over their currency. Positive Money is rightly arguing for money to be created by governments rather than by commercial banks, so it can be used for investment that actually benefits people, rather than flooding financial markets, pushing up asset prices and making the rich even richer, which is what has happened to all that QE. Adair Turner is advocating helicopter money – yes, literally dropping money out of a helicopter for people to spend, arguing that this would kick-start the economy and lead to growth. But God forbid that wealth might actually be more evenly distributed.

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“Balancing the books” has little to do with economics, and everything to do with a political desire to cut public spending and shrink the state. But countering it is difficult, because its metaphors have such visual and moral clarity. In reality, macroeconomics is counterintuitive.

In 2011, Cameron had to hastily rewrite a speech stating that “the only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills” after economists pointed out that this would massively exacerbate a recession fuelled by lack of demand. But two years later the penny had still not dropped. “Labour say that by borrowing more they would miraculously end up borrowing less,” Cameron said in 2013. “Let me just say that again: they think borrowing more money would mean borrowing less. Yes, it really is as incredible as that.” What is really incredible is that either Cameron doesn’t understand the economics of investment, or he’s misleading the public.

“It is well enough,” Henry Ford once said, “that the people of the nation do not understand our banking and monetary system; for, if they did, I believe there would be a revolution before tomorrow morning.” Grasping how the economy actually works would open up a policy space that is entirely absent from current political “debate”.

Right now, if anyone suggests a progressive alternative to the austerity straightjacket they are dismissed as a naïve fantasist, but that is a reversal of the facts. This is not even about daring to dream. It’s about daring to be an economic realist.