Saturday, August 27, 2016

10 Economic fairy stories that people need to stop believing in

One of the big problems in the UK is the fact that the vast majority of the 93% of kids who go to state school end up with no economics education. This means that an awful lot of people are susceptible to the kind of ridiculous economic fairy stories that are pushed by right-wing politicians and their cheerleaders in the mainstream media.

In this article I'm going to quickly run through ten of them. I've already written articles critiquing several of these myths individually. Where this is the case I've linked to the full article underneath the section header.

1. Government finances are like a household budget
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This is one of the most pervasive right-wing economic myths. The Tories love it because it allows them to hoodwink economically uneducated people into supporting their economic policies by making them think they understand economic issues that are actually very much more complex.

If your family home has a printing press that can produce money out of nothing (like the Bank of England) then the government finances-household budget analogy is slightly less misleading, but it also means you're a bunch of money forging criminals, so hardly representative of the typical UK family.

Anyone who tells you that government finances are like a household budget is either economically illiterate, or they're someone who knows perfectly well that they're talking economic gibberish but they're deliberately lying to you because they're assuming you to be economically illiterate.

2. The private sector is more efficient than public ownership
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There are so many examples of this being completely wrong it's impossible to list them all. Think of the G4S security fiasco at the 2012 Olympics when public sector workers like the army and police had to step in at the last moment to rectify a massive private sector blunder. The private company had months to prepare a security plan and failed, the public sector stepped in at the very last moment and succeeded.

Then you've got the publicly operated East Coast Mainline rail franchise that was outperforming all the private franchises so dramatically that the Tories quickly bundled it back into private ownership to avoid the embarrassment.

If private ownership really is so much more efficient than public ownership, ask yourself why the military wasn't one of the first things to be privatised. Ask yourself why countries at war tend to bring private industries under public management.

3. House price inflation is good for the economy and creates growth

I'm sure you'll have seen plenty of news items focusing on house prices. When house prices fall the media report it as if it's some kind of terrible tragedy, and when house prices rise they often paint it as evidence that the economy is recovering. This is completely wrong-headed.

There's no major problem if house prices increase more or less in line with average earnings, but that's clearly not been the case for decades. The more house price inflation outpaces earnings, the bigger the percentage of people's incomes end up going on mortgage repayments rather than being spent on genuinely productive economic activities like setting up businesses, investment and consumption.

The higher the rate of house price inflation, the more skewed towards house price speculation the economy becomes. 

Things have got so bad in the UK that four times as much money is created by the private banks to channel into house price speculation than is lent to businesses outside of the financial sector that actually produce things and provide services. The more house prices inflate, the more incentive there is for the banks to pour even more money into the housing bubble rather than into the sectors of the real economy that actually generate real economic activity.

4. Austerity is necessary and not just an ideologically driven choice
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"Let's cut our way to growth" is an absolutely ridiculous policy from a macroeconomic perspective. The majority of economists recognise that severe spending cuts are harmful to the economy, and more and more people are waking up to the fact that austerity is a con job that uses debt-fearmongering as a cover for policies designed to ensure a huge transfer of wealth from the poor and ordinary to the tiny super-rich minority.

5. Everyone maximising their self-interest promotes wellbeing

This is one of the central ideas that underpins the right-wing economic models that have become accepted as the economic orthodoxy since the 1980s, and it's utterly ridiculous.

The concept that humans are rationally self-interested beings who will always act in their own self-interest is utterly ridiculous. Rational self interest is an impossible concept because in situations with multiple choices (like supermarket shopping) the number of different combinations of choices mean that a rational analysis would take thousands of years to complete, so people just use heuristics to make their decisions. 

A look at the concept of information asymmetry demonstrates how wrong-headed the idea of humans as perfectly rational economic agents is, because without a perfect supply of information, perfect rationality is clearly impossible to achieve.

Another glaring problem is that the concept of people as purely rational self-interested economic agents is the way it conflicts so dramatically with what we know about reality. If we were all perfectly selfish economic automota, then stuff like charity, empathy, voluntary activities and philanthropy simply wouldn't exist.

The problem goes further than the fact that humans don't and can't act as purely self-interested individuals. The idea that if only we were all just entirely selfish, then general wellbeing would be promoted is staggeringly backwards. If only everyone would stop giving to charity or volunteering in their community then the world would be a better place? Who actually believes this drivel?

6. It is a good idea to get China to finance our infrastructure projects
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Even before it was revealed that one of the Chinese stakeholders in the bid to construct the Hinkley Point C nuclear power plant is accused of espionage in the US, George Osborne's own father-in-law described the deal concocted by Cameron and Osborne as "one of the worst deals ever" for energy consumers and the UK taxpayer.

I'm not going to go into any more detail on this because it really boggles my mind that there's anyone out there who thinks that the UK is better off bribing the Chinese into building our infrastructure for us than building it for ourselves.

7. Impoverishing people on benefits makes them find jobs

The idea that the benefits system is too generous and that people will just go out and find jobs if the welfare system is slashed is one of the most pervasive right-wing economic myths.

The first problem is that many people on benefits are simply incapable of work. Cutting the benefits paid to the severely disabled and terminally ill doesn't make them more likely to find work, it just makes their already difficult situation much worse.

Another problem is that an awful lot of benefits go to the working poor. Stuff like working tax credits and in-work benefits accounts for a much bigger slice of the welfare system than unemployment benefit. Additionally an ever increasing slice of the vast housing benefit budget goes to the working-poor, whose employers pay such pitifully low wages that their employees can't even afford to cover their housing costs. 

Slashing Working Tax Credits, Housing Benefit, Statutory Sick Pay, maternity and paternity pay and other in-work benefits, whilst harking on about "making work pay" is obscene political propaganda from the Tories, but lots of people actually buy into it because they're unwilling to differentiate between the benefits paid to the unemployed, and benefits paid to the working poor.

Another major problem is that the concept of equilibrium unemployment is central to right-wing economic orthodoxy. They actually believe that there is an ideal rate of unemployment and design their economic policies to ensure that there's always a pool of unemployed workers. The idea of deliberately maintaining a standing army of unemployed people to drive down the wages and working conditions of those with jobs is bad enough, but it's utterly appalling to then say that we have to slash the pitiful subsistence incomes they live on in order to force them into work, when the policy is actually to keep them out of work to keep wages as low as possible.

One last problem is that the government's own evidence shows that impoverishing people in order to make them look for work is totally ineffective. In fact it actually creates more barriers to employment (inability to pay transport costs, printing CVs, cleaning clothes ...).

8. Driving down wages is good for the economy

UK workers have suffered a 10.4% decrease in their average real terms incomes since 2007 which is a decline only matched in severity by Greece in the rest of the developed world. The Tories have actually tried to make out that repressing wages is good for the economy as they tried to justify their 1% cap on wage increases for public sector workers (whilst accepting an 11% pay raise for themselves of course).

Slashing wages is bad for the economy because lower wages means lower aggregate demand in the economy. The only way that demand can be kept up when wages are falling is if people avoid cutting back by incurring private debt. Anyone who thinks that cutting wages and stimulating an even bigger private debt bubble than the one that preceded the 2007-08 financial sector meltdown is a good idea really hasn't been thinking very hard about economic issues at all.

9. Government spending crowds out the private sector

The idea that government investment crowds out the private sector is difficult enough to justify in economic good times, but in a economic situation where the private banks are unwilling to lend to businesses because they see much greater returns gambling on the house price bubble or playing the global derivatives casino it's utterly senseless.

Just look at the decline in house building since the 1970s (see image). The Thatcher government basically put an end to government house building, and if crowding out theory is correct, the private sector should have taken up the government share in the market which would have kept the number of new builds per year more or less the same.

In fact if you combine crowding out with the myth of private sector efficiency there should actually have been a huge house building boom since the 1980s, but what has actually happened is an extraordinary slump with new builds falling to the lowest level since the 1920s under David Cameron's government.

The private sector didn't build more houses at all, they simply sat back and enjoyed a huge unearned bonanza as the supply of new houses dwindled and ever increasing demand resulted in skyrocketing prices and corporate profits.

Crowding out theory clearly didn't even work in the pre-crisis period, but in the post-crisis economy it's absolute gibberish to claim state investment crowds out the private sector when the private banks are refusing to lend to genuinely productive sectors of the economy.

10. Government money creation always creates inflation

This myth is easily accepted by the masses because "wheelbarrows full of cash to buy a loaf of bread" in Wiemar Germany has been part of the history curriculum for millions of UK school kids. It's easy to perpetuate the myth that money creation creates hyperinflation when you can hark back to stuff like that, but it's basically just economic fearmongering because it relies on a complete misunderstanding of where money actually comes from (it's actually created out of nothing by the private banks) and a failure to consider the different ways in which the money could be spent.

It is true that money creation can lead to inflation, but it clearly depends where the newly created money is directed. The private banks create money out of nothing every time they make a loan and this led to a huge house price bubble. After the 2007-08 economic collapse the monetary system was not reformed and we're now seeing the development of another, even bigger house price bubble.

When the Bank of England created £375 billion in quantitative easing cash to prop up the insolvent financial sector it did not create a large spike in general inflation. The purpose of this vast cash injection was to stave off deflation in financial sector assets that are mainly held by the wealthy. As a result of it the values of the assets held by the rich were significantly inflated, while the values of pension funds and savings were deflated.

The type of inflation caused by money creation clearly depends on where the targeted money is directed into the economy.

If the government created money to just hand it out to the public that would likely cause price inflation in goods and services, but imagine if the government created £50 billion to invest in ensuring that every business and household in the UK gets free access to high-speed broadband. This spending would obviously have a significant economic effect but whether it causes inflation or deflation would depend on which area of the economy you were to look at. Such a scheme would create a large number of relatively high-skilled jobs meaning an earnings boost. It would create increased demand for materials which would have various economic repercussions, and it would also clearly cause a collapse in the value of companies providing home broadband services.

Anyone trying to claim that money creation to invest in infrastructure and services would always create hyperinflation is clearly trying to con you, probably because they prefer money creation schemes that inflate the assets of the rich, rather than money creation schemes that benefit all of society.


After the 2007-08 financial sector meltdown the "too big to fail" banks still utterly dominate the UK market; bankers salaries and bonuses are way higher than before the crisis; ordinary British workers have suffered a collapse in the value of their wages as bad as in Greece; private banks still have a monopoly on money creation and are still using the money that they create to inflate speculative housing bubbles; and the Tory government has simply repackaged the hard-right economic dogma that caused the financial sector crisis as their Austerity snake oil elixir to supposedly cure the crisis.

This utterly unacceptable response to the financial sector meltdown has come about because far too many people accept the facile and completely inaccurate economic fairy stories propagated by the Tory party and their chums in the mainstream media. 

If the British public do not learn to stop believing in economic fairy stories like these, there's little hope of any kind of change in direction away from the kind of hard-right economic dogma that created the conditions where the 2007-08 financial sector meltdown became inevitable, which means another meltdown at some point in the future and yet another effort to rebrand the exact causes of the meltdown as the solution to the meltdown.

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NOTE: This article was inspired by a comment from a guy called Simon Cohen in the comments section on the Guardian website who came up with a list of 10 economic myths that need busting. I kept several of the myths he suggested, but changed others.

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