(Originally published in the Huffington Post UK; Photo source: The Guardian)
George Osborne, the British Chancellor, has publicly disagreed with his prime minister on a fundamental issue of monetary policy – in an official Treasury report.
The prime minister recently argued that “There’s no magic money tree to fund” what he called “this ever more wishful borrowing and spending”.
But his Chancellor, George Osborne, disagrees.
The disagreement is aired in one of the documents tabled by the Chancellor on budget day. It’s titled: “Review of the Monetary Policy Framework.” – and is tucked away in the bundle of documents issued last Wednesday.
In paragraph 3.34, the Treasury makes plain that the monetary authorities could finance increased government spending on infrastructure “through the creation of money”.
Taxpayers, the Treasury makes clear, are not the only source of finance for governments – as neoliberal economists would have us believe.
There is a money tree, and it’s called the Bank of England.
In arguing the contrary Cameron echoed his predecessor Margaret Thatcher, who in October, 1983 told the Conservative Party conference that:
“the state has no source of money, other than the money people earn themselves. If the state wishes to spend more it can only do so by borrowing your savings, or by taxing you more. And it’s no good thinking that someone else will pay. That someone else is you.
There is no such thing as public money. There is only taxpayers’ money”.
This idea that “there is no such thing as public money” was later foolishly echoed by Labour’s Treasury spokesperson, Liam Byrne. He left a note for his successor upon leaving the Treasury in 2010 which said: “I’m afraid there’s no money left.”
But now it’s official: there is “a money tree”.
Here is how the Chancellor explains Bank of England financing of public investment in his Review of the Monetary Policy Framework:
“central banks could go beyond the range of unconventional instruments deployed … in advanced economies since the 2008-09 financial crisis. For example, it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. In theory, this could allow governments to increase spending or reduce taxation without raising corresponding financing from the private sector.” (My italics).
Having contradicted Cameron’s ‘there is no money tree’ approach the Chancellor then lays out his own objections to the Bank of England financing fiscal deficits.
These relate mainly relate to inflation – a serious matter for concern.
But interestingly, neither the Chancellor nor the Treasury seem very concerned about the inflation caused by Bank of England Quantitative Easing (QE). This finances the purchase of speculative assets by bankers and other financial institutions. By doing so, QE is inflating asset bubbles across all global capital markets, just as ‘easy credit’ fuelled the property and other asset price bubbles of the 90s and 00s. These bubbles are caused by deregulated private sector speculation. They are expanding and will inevitably burst.
The Chancellor seems relaxed about the threat of an asset-price inflationary bubble. Grassroots Conservatives are not so sanguine. A blog on the impact of QE on asset prices on the Conservative Home website states correctly that:
“… the reason why QE isn’t stimulating growth or stoking inflation is that so little of the money created has “filtered down to the high street”. It is, however, pushing up demand for investment products.”
For ‘investment products’ read, speculative assets. Despite Conservative Home’s and the Spectator’s efforts to raise concern about asset price inflation, there is very little commentary on the subject. Instead, the fear of wage and price inflation is raised to block Bank of England financing of public investment that will benefit millions of ordinary Britons, and filter “down to the high street”.
If managed well, this investment in real productive – as opposed to speculative – activity, will not create inflation. That is because right now there is far too little money ‘chasing goods and services’ in Britain’s high streets. As the economist Michael Burke notes both public and private investment have been slashed and “industrial production… is now back where it was in 1992, in the depth of the crisis during sterling’s membership of the exchange rate mechanism (ERM)”.
The government could reverse this collapse in investment – and finance “the march of the makers.” With Bank of England financing, there would be no need to cut spending or raise taxes. Instead, with the help of the monetary authorities, government could increase spending on sound infrastructure projects. Low-cost financing by the Bank of England would enable George Osborne to implement Vince Cable’s public infrastructure investment plans.
Public investment would generate employment. Employment would generate wages, salaries, profits and tax revenues – from both the public and private sectors. Tax revenues could then be used to finance the deficit, repay the Bank of England, and pay down the national debt.
Only once the economy is operating at full steam, with full employment, would the Chancellor have to start worrying about inflation. Not before.
Has this macroeconomic (and Keynesian) insight finally dawned on the Chancellor? Is this why he has dared to contradict his leader? And is this why he is flying a kite that suggests he may, after all, shake the branches of the Bank of England’s money tree?