Heroes Not Zombies

The cost of living crisis is causing hardship for millions and the months ahead seem even more worrying. While fossil fuel companies make historic profits, prices soar and wage rises below the rate of inflation amount to pay cuts. Millionaires and billionaires rake in ever more millions as the number of people needing to use food banks just grows and grows.

We hear a lot about national debt and a lot about tax rates. How do we make sense of it all? Well my starting point is Stephanie Kenton’s “The Deficit Myth”. She sets out a clear explanation about money.

The first thing is to ask “where does money come from?” Money is issued by (created by) the government. There is only one source of Sterling….the U.K. government. If you or I were to make any Sterling we’d be committing fraud. Once upon a time money creation was pegged to the amount of gold held in the central reserve. That hasn’t been the case for decades.

So when politicians say “how are we going to pay for….X?” the answer is “just do it”, the way they do when fighting a war….or bailing out failing banks. What the money is spent on is a political choice.

This doesn’t mean a government can just create as much money as it wishes….if there’s too much money for the country’s resources then inflation kicks in. But there’s the key point – are there underused “resources”?

“The Deficit Myth” makes it clear there is no “budget deficit” to be “paid off”. Government is not like a family or a business. Sterling is a “fiat currency”. Families and businesses can’t create the money they need, the government can.

Stephanie Kelton describes, in detail, the various deficits which do exist – “The good jobs deficit”, “the savings deficit”, “the health care deficit”, “the education deficit”, “the infrastructure deficit”, “the climate deficit” and the “democracy deficit”. These are the real unmet needs.

We don’t have enough good housing, enough decent jobs, enough care workers, nurses, doctors, teachers, enough work on producing sustainable infrastructure and power supplies….you get the idea?

But what about tax, because that’s the other big issue we hear about? Government doesn’t use tax to pay for services. That’s the insight from Modern Monetary Theory. Tax can only be paid with money already created and put into circulation by the government. First they spend, then they tax. Not the other way around.

So what’s taxation for? To take money out of the system to control inflation and to incentivise certain desirable activities. And also, to address inequality.

Money flows. But not the way politicians usually claim it does.

I recommend you read Prof Kelton’s book, or listen to a podcast like “The Pileus Hosts: The MMT Podcast”, with Patricia Pino and Christian Reilly, or follow Professor of Accounting Practice, Richard Murphy, “@RichardJMurphy” on Twitter. Indeed, I’d say “and not or”! Do all three!