Cooking the Books 2 – No reformism in one country
In September Jamie Driscoll, former Labour Mayor of North Tyne and now a member of the Green Party, published a report called Hostage Nation: Britain’s Escape Plan. He contends that Britain is a hostage to foreign bondholders and speculators and proposes a plan to remedy this so that the government can run the economy in the interests of everyone.
Governments as such do not produce any wealth. To function they have to obtain this from the section of society that does. Capitalist governments do this by taxation and borrowing. As they control the issue of money they can also create money and spend it. However, if this is more than the economy requires, this depreciates the currency and so raises prices. It is really a hidden form of taxation, an indirect way of extracting money from those who have some since the depreciation of the currency reduces their wealth.
Driscoll, relying on the arguments of ‘Modern Monetary Theory’ (also known as ‘Magic Money Theory’), has claimed that ‘as a sovereign nation with a central bank, Britain can effectively borrow from itself’. In a section headed ‘Let’s dismantle the myth that the state cannot afford to build things because it has “run out of money”’, he argues:
‘When a currency-issuing state invests in its own economy, that money moves in a circle. Every pound the state injects into productive infrastructure sets off a powerful chain reaction known as an economic multiplier. When the state funds a project, that money immediately pays the wages of engineers, project managers, and construction workers. Those workers don’t stuff that cash under their mattresses. They spend it on the high street, paying for groceries, haircuts, and clothes, boosting local businesses. Those businesses, in turn, expand and hire more staff. The Treasury takes a cut at every stage. It collects income tax and national insurance from the workers, VAT on their purchases, and corporation tax from the businesses.’
‘This investment,’ he says, ‘creates downstream savings across the state apparatus’, giving the example of insulated homes meaning less state spending by the health service to deal with respiratory illnesses caused by damp housing. So, basically, the government gets its money back through taxation and reduced spending.
However, there is a time lag between what the government spends and when it saves money on other spending. In the meantime current spending has to continue. So, when a state does what Driscoll sets out, total government spending increases. The classical way to deal with this is to borrow the extra money and repay when the benefits arrive. Driscoll argues that the government needn’t borrow this from overseas lenders. ‘The money,’ he asserts, ‘is already here. We do not need to look abroad for capital.’ He is talking about people’s savings and suggests that the money can be raised from directing this into non-tradable government bonds and from taxing the rich. Some could be raised in that way but hardly enough to avoid borrowing from foreign bond and currency speculators.
Driscoll has very little to say about the implications of his plan on Britain’s position as a capitalist country that runs a trade deficit (more spent on buying imports than received from selling exports) that has to be balanced by payments from abroad, whether investments or loans. Reduced government borrowing from abroad would have to be balanced by a combination of increased foreign investment, reduced imports and more exports … or, if this doesn’t work, cutting government spending, ie, austerity.
Whatever the government implementing his plan tries to do about this it wouldn’t be able to escape from the pressures of the world market as the capitalist economy is an integrated world system. No state can. None is that ‘sovereign’. Reformism in one country is just as impossible as socialism in one country.