By Professor Mary Mellor
The Labour U-turn to vote against Osborne’s fiscal charter ‘trap’ is welcome, but it cannot stop there – Labour needs to open up a real debate about public access to money in a modern economy. Osborne’s aim to enshrine in law that States must not run deficits is profoundly undemocratic. It reflects the demand of neoliberal ‘handbag economics’ that the public sector cannot and should not ‘create money’ by running a deficit. This denial of the right of the public to create and use its own money is profoundly undemocratic because it leaves the public economy mired in debt, in hock to the speculators of the financial sector.
The view that money in a modern economy can only be created through debt is increasingly being challenged as it is demonstrably unsustainable. Ecologically, it drives unnecessary growth. Socially it creates huge inequality as the money supply gravitates to the most speculative areas and people. Economically it leads to boom and bust. The supply of money expands rapidly in boom times and contracts equally dramatically in the busts.
There is a clear choice here between privatised control of the money supply by making it only accessible through debt, and the democratic right of people to debt-free money (derided as ‘printing money’). This is particularly the case since, as the financial crisis has shown, it is the public that has to pick up the pieces when the debt-based supply of money implodes.
Public deficit is opposed by neoliberals because it is an act of public money creation. Public deficit is simply a surplus of public expenditure over public income. More money is spent into the economy than is extracted. Where did that extra money come from? The answer is nowhere. Money is not a fixed resource, it is a flow of savings, payments and debts. Money is constantly entering and leaving the economy. It enters when public monetary authorities spend (as when the central bank creates new money to lend, or spend, into the banking sector or States spend pending the collection of taxes) or when banks create new loans. The major difference is that bank creation of new money is always in the form of debt (banks are not charities) whereas publicly created money can be created and circulated debt-free.
The choice to make the public money supply based solely on debt is purely ideological. There is no need to ‘borrow’ to cover the deficit, particularly if there are no inflationary pressures. Where there are deflationary pressures it actually makes sense to increase public expenditure. In fact ‘borrowing’ the money in such circumstances makes no sense as it removes an equal amount of money from the economy in the form of loans. The main argument against States ‘printing money’ is that it is inflationary. This ignores the fact that the privatised creation of money as debt can be equally inflationary (as in the boom in house prices or shares). The most democratic solution to any inflationary pressure is to remove money from the economy through higher taxes.
Public debts and deficits have for too long been a political football. Increasingly the neoliberal handbag economic orthodoxy is being questioned. Why is the public money supply only available as debt? Why are the public paying interest on public expenditure when they could create the money free of debt? Why does the private financial sector have such power over public economies? What is wrong with surplus public expenditure (deficit) for the benefit of the people?
Corbynomics has the opportunity to change the economic agenda. To do that it must challenge handbag economics and the deficit lies.
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