Neoliberalism has been at the forefront of mainstream economics since its popular use by Augusto Pinochet, Ronald Reagan and Margaret Thatcher in the 1980s. Its ultimate aim was to undermine the use of Keynesian policies; moving away from a planned economy approach of the “Golden Age of Capitalism” to a new open economy with more private corporations and a stress on individualism. Throughout the thirty years of its use there have been countless theoretical and data inconsistencies. We find economic think tanks such as the OBR continuously moving back their predicated date to when the UK government will “plug” the government deficit (it was supposed to be plugged by 2015). Wall Street has had almost universal failure to actually predict market factors and Mark Carney from the Bank of England has himself stated “we are probably not going to forecast the next financial crisis”. This inconsistent data and theory is ultimately down to how vague the language is used by neoliberals. Some neoliberals, such as Blairites within the Labour Party, are economically liberal. This is in stark contrast to neoliberals on the right who argue for a laissez-faire/free market economy, which is ultimately doomed to fail in nature.
Yet despite these inconsistencies its use is still mainstream. Whilst the language is vague neoliberals do have a good use of metaphors which, to most people who don’t study economics, makes sense. Being told that a government budget is like a household budget and that there is no “magic money tree” seems easy to believe. This argument is then used to follow up with the idea that we need to plug the deficits, because deficits are bad. The final step for neoliberals is to argue for a tax cut so everyone can spend their increased disposable income into the economy. Neoliberals have simplified economics for most people to understand.
But here’s the catch. The argument they propose is nonsense. There is a magic money tree. Deficits aren’t necessarily bad. Tax cuts don’t work for everyone and in fact normally hurt the poorest.
Let’s touch on the idea that government budgets are like household budgets. It would be nice to think that Westminster is symbolically a big household trying to look out for everyone. Normal households have massive financial constraints; we heavily rely on one or two incomes within a household and need to spend just to get into next month. Normal households can possibly save, but that usually occurs with only higher earners since those at the bottom end are spending every penny to feed themselves and others at home. In 1983 Margaret Thatcher made a similar point in her party conference speech, arguing:
“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.”
Thatcher was unsurprisingly wrong with this point. Unlike normal household budgets the government can find a way to spend more without borrowing, that being the very currency states issue. I myself can’t print my own money at home (that would be illegal counterfeit with me quickly going to jail), but governments can legally do this. If the UK government issues the pound then how can they run out of them? Simple, they can’t. As modern monetary theory works upon, any state that issues its own currency can never run out of money. Yet despite this we see many on the left play along with neoliberal language. Politicians such as Labour MP Liz Kendell argued that former chancellor, George Osborne, had merits in his budget. This is incredibly damaging to the image the left want to create. As the SNP have successfully done in Scotland, Labour must universally move away from the economic illiteracy of the Conservative Party and their use of language. And it’s on the right path with the leadership election of Jeremy Corbyn, but it must do so as a party to start arguing that there is in fact a magic money tree. By issuing our own currency and not borrowing from private banks this also has the added benefit of not paying anything on interest. And we use tax as a tool to remove money from circulation to control inflation.
The second point is the idea that a state must plug the government deficit. The deficit is the difference between how much a government spends into the economy in a given year and how much it gets back from taxation. So for example if a government spends, say, £100 million into the economy but only collects £80 million from taxation then our government deficit is £20 million. Neoliberals will screech to no end at how horrible such a scenario is and will label this as uncontrolled spending. Once again this language makes sense and is easy to simplify for others. In parliament any legislation proposals that could increase the deficit are quickly shot down with not much further analyse. But there is another side to the story which political commentators and politicians don’t tend to comment on as much. A government deficit of £20 million means that there is a public surplus of £20 million for the rest of society. So really a government deficit adds pound assets to other parts of the economy. What we must instead ask ourselves is if the deficit we currently have is serving a purpose that does good for the broader public.
So yes, it’s okay to have a deficit. What we want to achieve is an equitable balance in the distribution of a surplus for the majority.
The third argument employed by neoliberals is tax cuts. They argue that by cutting taxes for everyone (although you find most right wing parties tend to cut it far more favourably for the rich and maybe do the opposite for the poorest) that this will allow households to increase their disposable income and spend it into the economy. And once again it does make sense at face value. But this goes against the understanding of how people actually spend their disposable income. If you are amongst the poorest in society then in reality you are likely to face a tax rise whereas the benefits of a tax cut will actually go to the top 10%. If you’re in the top 1% then these tax cuts almost guarantee you a lifetime of partying with your rich mates.
When studying economics we use a term called the “marginal propensity to consume” (MPC) which helps us understand how much every extra pound we receive will be spent into the economy. If you’re a fan of The Grand Tour on Amazon Prime then ask yourself this: what is Jeremy Clarkson going to spend his increased earnings on? Or what about some of the wealthiest footballers like Cristiano Ronaldo? If they gain, say, around £500 million from these tax cuts then how will they spend it? Will they decide to buy a dozen more cars from the ones they already have? Will they take their families of more vacations throughout the year? Maybe around 1% of the 1% may do this, but the vast majority of them won’t.
The wealthiest have already consumed what they’ve always wanted. By increasing their disposable income they won’t actually add anymore new spending into the economy. We won’t see new spending help create jobs for those who seek work. What this tax cut really allows is for the wealthiest to buy shares, stocks and real estate. These investments with their new disposable income benefits the top 10%. What we instead find is that such investments actually driving up prices and lock out millions of consumers. Whilst real estate markets could go up in wealth what we won’t see is a large increase in growth and employment.
The vast majority of the time since the 80s the UK has had a deficit. Whilst neoliberals have obsessed in trying to close it they have only allowed inequality and poverty to increase. It was only a few weeks ago we heard that research from the British Medical Journal found that austerity has killed over 120,000 people in England and Wales alone, despite the slow decrease in the deficit. We must move away from the neoliberal argument and instead form a new debate. The question no longer is about how we close the deficit but instead how we use it.
We must form new language and metaphors to counter the illiteracy of the right. What we need more than ever is a new economic approach for shared prosperity.