Open Democracy is an infuriating site. On the one hand, they discuss important developments in the Middle East and North Africa, women’s issues, topics relating to democracy and mass media.
On the other hand, they keep giving a propaganda platform to neocons like the war mongerers that argued that since the US can attack Iran it should, or neo-liberals like Haldane of the Bank of England who was allowed to give an incredibly self-serving interview in which he proclaimed to rethink economic thought all while ignoring the heterodox economics in existence and of course without challenging neo-liberal dogma. Or like the dear Mrs Szusterman who has nothing but contempt for the Kirchers’ successful break with neo-liberalism in Argentina.
And now they’re at it again. Open Democracy has started a propaganda channel called “Devalue or Else!” which pushes a devaluation of the pound as a supposed solution to the austerity-caused recession.
This opening post alone does not give much hope for the direction the discussion will take. The author wants to move
beyond the tired dichotomy of austerity vs Keynesian stimulus
yet proves quickly that he’s firmly rooted in neo-liberal, gold-standard thinking:
the shortfall must be financed through debt (private and public borrowing)
Private borrowing is problematic, as shown by the collapsing of the loan bubbles in the US, Ireland, and Spain and the aftereffects. Public borrowing by a government issuing its own currency, like the UK, is an entirely voluntary act that has no inevitable bearing on the real resources such a government can command should it choose to do so. This is MMT 101 and the fact that this is never mentioned on Open Democracy bodes ill for any “solutions” developed.
In fact, the focus on balance of trade is problematic itself. Let’s spell out what a negative balance of trade means: the UK imports more than it exports. In other words, the UK makes use of other countries’ real resources, giving them pounds sterling in exchange, which it can create at negligible cost.
“Austerity vs Keneysian stimulus” is a discussion within by the make-belief world of currency-issuing governments whose spending is somehow constrained. If one wants to have a meaningful discussion about how to deal with the UK’s economic future, the first step must be to face up to reality which is that the UK government can never run out of pounds to spend.
One of the commenters points out correctly that a devaluation has already happened without clear effect on the trade deficit: this is an effect of fallacy of composition – since most other countries (including the EU) are experiencing a recession (depression in places such as Spain, Greece, Portugal) there is simply no one to buy potential UK exports. What would be helpful would be a strong fiscal stimulus in the UK, for instance by upgrading aging infrastructure, which would first stimulate UK economy, whose imports would stimulate UK trading partners due to the trade deficit. Direct public job creation would also increase domestic demand with the positive aftereffects this has. As long as everybody pushes austerity, exports won’t increase. Yet this is another issue that is simply not discussed, neither in the introducing post nor in the one that inspired it.
And none of these measures, absolutely none, depend in the least on the pound depreciating.
This propaganda push is not OD’s idea alone. Turns out that a certain Mr Mills has argued forcefully for devaluation and OD allows him to start things off by republishing his pamphlet.
There’s so much here that it’s hard to decide where to begin. So let’s start with the positive. The author gets a few things right:
The British economy is in dire shape. Growth is melting away. Unemployment is rising fast, with over one million young people between the ages of 16 and 24 out of work…
[T]he resurgence in private sector activity and employment that reduced public expenditure was supposed to achieve is nowhere in sight as both consumer and corporate confidence falter and the economy lurches towards a double-dip recession…
There is no reason at all, other than remediable policy errors, why we are in our present predicament…
Actually, it would be surprisingly easy to avoid all the austerity which now appears to be in prospect for the foreseeable future…
We have been chasing the wrong economic goal and we have been doing so for a long time. Keeping inflation down to two per cent, the Bank of England’s target, or even less in the case of the European Central Bank, with the Fed’s goal being about the same, is not the most significant objective.
This would be a great start into a discussion why Ricardian equivalence is an illusion, how austerity destroys domestic demand, how worshipping the NAIRU will lead to long-term unemployment, and how all of those are political choices, influenced by neo-liberal dogma and easily changed.
Unfortunately, this is not what happens. Instead, much of the rest is nonsense. Mills conflates government debt and consumer debt and treats them the same when they are in fact completely different. Take for instance
When the sums owed both by consumers and the government begin to look uncomfortably large, lenders get increasingly unsure about lending to them. They also start to worry about the country’s capacity to meet its obligations.
Complete and utter nonsense: Japan, with a debt-to-GDP ratio of over 200%, pays negligible interest rates on its bonds. The UK (as the US), with a higher debt-to-GDP ratio than Spain, still pays much lower interest rates. UK public debt, as long as it is denominated in pounds, can always be honored by the UK government and investors know this. The UK government is the monopoly issuer of pounds – it cannot run out of them. This is the biggest, most important difference between currency-issuing governments and private citizens and ignoring this difference falsifies everything else. Private citizens do not issue the currency they use.
In the same manner that members of the Eurozone don’t issue the currency they use. Which also means that the statement
We will drift into the same predicament as hopelessly uncompetitive Eurozone economies such as Greece and Portugal now face.
is complete nonsense since the UK is in a fundamentally different situation from those countries.
Mills is very explicit about his conflation as well, writing:
Deficits then have to be financed either by selling assets or by borrowing. Any current account deficit has, therefore, to be matched pound for pound by an exactly equivalent amount of capital receipts. These can take the form of either selling assets such as shares in UK companies, or direct investment or borrowing, in exactly the same way as any individual who spends more than his income has to draw on capital or borrow to make up the difference.
equating a currency issuer with a currency user without the slightest hesitation.
Furthermore, given that the UK government issues the pound, there are no external constraints on how many pounds it can spend. A statement like
Coping with all these liabilities, without unsustainable tax levels, depends on a much higher rate of economic growth than looks likely to have any chance of being achieved.
is therefore also nonsense. If the UK government decided to do so, it could run large deficits without selling a single pound of public debt. Which also means that worries about
This is all too likely to lead rapidly to the UK’s credit rating being downgraded and interest costs rising.
are completely misplaced. Even if investors followed the credit rating “advice”, the UK government does not need to “borrow” to finance its spending. Or even if the interest rates rose immensely, it could still pay them – it issues the pounds to pay them with, after all. Which also means that a statement like
Very significant constraints on borrowing then come into play.
is meaningless in terms of government finances for a country issuing its own currency. Members of the Eurozone, however, do have to finance their spending from tax revenues and selling public debt if the ECB is not willing to honor their public debt unconditionally, investors get worried. Hence high interest rates for Portugal, Spain, Greece, Ireland, and low ones for Germany, for instance.
So the author is dead wrong about just about everything he says about UK public spending and public debt. This also means that while he’s right that austerity is not inevitable, he doesn’t draw the obvious conclusion: since the UK government is not spending-constrained, austerity is a political choice. Instead, the UK government could hire public servants, institute a job guarantee, and upgrade public infrastructure, boosting the domestic demand in the process.
In addition to fear-mongering about a non-existing threat regarding public spending – fear-mongering that is straight from the neo-liberal propaganda toolbox, the author puts out some fear-mongering about imports too. Because a statement such as
we cannot pay our way in the world
is nonsense too. As long as there are goods from outside the UK that can be bought in pounds, there is in fact little to no constraint on buying them since the UK government can either acquire them directly at very little cost, or pass on pounds to UK consumers via public spending, again at very little cost to the government. This realization also characterizes imports for what they are: imports are real goods and service that UK citizens get to consume in exchange for units of a currency that the UK government issues at almost no cost. Imports are a real gain for the UK population. In the same way are exports real goods and services that UK citizens give to other countries’ populations in exchange for currency units their governments can issue at almost no cost.
The only thing that could seriously undermine the ability of UK citizens to enjoy the real gain that imports represent is a devaluation of the currency since imports the become more expensive. Yet this reduction in standards of living is exactly what the author is advocating! Of course he tries to throw up a smokescreen, stating:
In the end, living standards are determined by the national income divided by the number of people in the country. If the national income goes up but the number of inhabitants stays the same, national income per head must increase.
This would be cute if it weren’t so disgusting. Given neo-liberal, i.e. current, income distribution, dividing national income by number of citizens is just plain dishonest. Any increase in national income would be captured to a large extent by the top 10-20% whereas much of the increasing costs of imports would fall on the rest of the population:
So the author proposes reducing the standard of living of the majority of the population – in the name of combating non-existing bogeymen.
I understand that Open Democracy purports to give all parties an outlet. But is it really necessary to invite those to post here that can already use mainstream media and government functionaries for their neo-liberal propaganda?