Now we’ve pinheads dancing upon angels

The Senior Lecturer wants us all to know that he’s right, absolutely and candidly correct:

This does matter. What, of course, it in effect confirms is that tax revenue does not fund government spending. We know that is true: as I noted a couple of days ago, whenever the government spends it does not use your taxes. Instead it tells the Bank of England to make payments for it. In effect, it borrows. That is why we’ve had a UK government debt since 1694. Literally, the Bank of England creates the money the government spends, which is a process that doesn’t involve a printing press. All the Bank does is some double entry bookkeeping. It debits the government’s loan account with the amount to be spent, and it credits the government’s current account. And the government then spends the money, just as anyone can when they have a current account in credit. And then what HMRC do is pay whatever they collect into the Treasury loan account at the Bank of England to help clear it. The leftover balance in that loan account is then cleared by the issue of bonds (or gilts) or quantitative easing funding.

There is then no direct relationship at all between government spending and tax, which is exactly what HMRC have now confirmed. All they do is help clear the Treasury loan account at the Bank of England, just as government borrowing and quantitative easing funding do as well.

But what that means is that the next time the government say they are spending taxpayers’ money you know that’s not true because there is, quite literally, no way they can say that given the economic reality of what is going on. They’re always spending the Bank of England’s money, which is then cleared by taxes, borrowing or QE (which is, in effect, an alternative form of Bank of England created money).

The Egregious Professor is of course in error. But where?

It’s here: “given the economic reality”

What’s he’s described is, at best, the accounting reality of what is going on. Which isn’t the same as the economic one, not at all, in the same way that accounting and economic profits are two different things.

Forget money, it’s creation and destruction and so on, entirely for a moment. Think properly like an economist – about resources.

The economy contains a number of resources. Government takes unto itself the power to collect and dispose of some of those resources. Labour is directed into the NHS for example. Steel into a bridge over the Humber. The abstraction of that labour and steel from what it would be doing in the absence of government abstraction is a tax. Resourecs owned by some people are taken off and used as government directs. This is the economic reality. Sure, we differentiate between corvee labour and taxation which goes and hires that labour but the underlying economic fact is that they’re both forms of taxation.

How the money is created or destroyed to account for moving that labour around doesn’t change the basic taxiness of the direction of what that labour is going to be doing.

Government expends the resources of the people. It might even be to good effect but it is still taxation. That’s the economic reality, not this mithering about the accounting for money creation.

4 comments on “Now we’ve pinheads dancing upon angels

  1. He has spent the last year or so flipping between these positions – that tax does not fund spending, but we need higher taxes to fund spending. Sometimes the period between flips is days, sometimes mere hours.

    It illustrates how degraded our media now is that despite this obvious and embarrassing contradiction he is still invited to comment as an ‘expert’.

  2. It seems that the MMT crowd have suddenly discovered that States now have electronic ways of creating currency, when they used to only have physical ways (ie printing presses) and that while the latter is not a good idea (given the rather obvious historical precedents) somehow creating currency willy-nilly electronically is a Very Good Thing that everyone should be doing……and its not like printing lots of £10 notes, not at all, completely different this time……after all one could operate a system with physical notes – the State prints what it needs to spend, then demands taxes in cash and chucks the notes in a furnace. Its exactly the same thing as MMT.

  3. Like they say; to a man with a hammer every problem is a nail. And he supposed to be an accountant.
    But it’s no accident, in the building trade, a hammer is oft referred to as an Irish screwdriver.

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