One of the neat
rhetorical tricks used by politicians is to present an inaccurate view of what
their opponents say and show how easy it is to dismiss. It helps them ‘score a
point’ as well as allowing them to fail to engage with the underlying argument.
The Chancellor, Rachel Reeves, was at it this week, refuting the suggestion
that governments can simply create all the money that they need and then spend
it. She’s right in principle; but I’m not aware that anyone has actually made
the argument that she dismissed. Of course there are constraints on how much
government can spend, but the debate is about what those constraints are, not
whether or not they exist.
She argues that the
constraints are twofold, which are closely interlinked: the amount of money
which the government receives through taxes etc. and the need to abide by the
fiscal rules she has laid down. But, in the first place, the rules she has laid
down are entirely arbitrary. She has set them, and she could remove them or
vary them. The UK never had any fiscal rules at all until Labour introduced
them in 1997, and they have been changed regularly ever since, usually when a
new Chancellor takes office, and sometimes during the period of tenure of a
single chancellor. And a government which controls its own currency, and whose
debt is mostly denominated in that currency, can create as much money as it
wants to, any time it chooses, and can always repay any debts it incurs. Since
money is merely a means of measuring and trading debt, and all debt has to be matched
by an asset somewhere, the total net debt in an economy, in its simplest form,
is always zero. It’s an over-simplification, yes, but it doesn’t matter how much
extra money the government creates, the total net debt in the economy will
always be zero. It cannot be otherwise. There is a non-trivial issue, of
course, about how that debt and those assets are distributed, but that’s another
issue which the chancellor seems wholly unwilling to address, and it doesn’t
affect the simple fact that money creation is potentially unlimited.
That doesn’t mean
that there are no constraints on the goverment, just that ‘money’ isn’t one of
them. The real constraint on money creation and spending is the availability of
real resources in the economy. If there are unused resources which could be put
to work, the money to do that can be created. If there aren’t then the most
basic rules of economics apply – more money competing for the same resources
causes inflation. The question which we should be asking is not whether the
government can create and spend money to improve services and improve living
standards, but whether and to what extent the resources needed to do those
things are available in the economy. It’s not an easy question to answer. As
one example of the impact of government spending, increasing benefits (by, for
instance, scrapping the two child cap) puts more money into the economy which
will then be spent, potentially driving employment - in this case, largely in
the retail sector. Roughly 4.7% of the working age population in the UK are
currently unemployed, but how many of them are really available and suitable
for the right work in the right places when the government spends more money, before generating demand no longer soaks up unused human resources but starts
to compete for existing employed resources? The best answer that can be given
without a lot of work is ‘some, but not all’.
But being a
difficult question to answer is no excuse for not asking it and trying to find
an answer; hiding behind her own rules and an alleged lack of money is just a
very lame excuse for avoiding the question.
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