8 December 2008

Don't be fooled by the credit window

The private market banks have failed and the function of banking has moved into the public sector. But, taking one step bank, we see that the function of creating money in the private market has also failed. Reducing interest rates, i.e. making money cheaper to borrow, has not managed to stimulate the money creation system that is privately operated, and relies on debt for its existence.

So this monumental market failure requires the public authorities to pick up the pieces again. As all existing money disappears into bottomless pits of commercial debt, governments are considering exactly how they are going to put more money into the economy. Now is a useful time to learn, because the fact that governments can do this proves the case that has long been made by monetary reformers: that we do not need to go into debt to create money to pay for public services or a citizens' income scheme.

The money that will be created by public credit is plainly and unquestionably our money which gives us an unarguable right to decide precisely where the metaphorical helicopter is hovering when the balding and over-excited economist starts shovelling crisp notes out of the side door. No doubt the bloated beneficiaries of government largesse in the construction and arms industries are gesticulating wildly for attention. My choice would rather be using this opportunity to introduce a Citizens' Income scheme. The money would be much more likely to be spent than saved, and therefore achieve objectives other than simply keeping the capitalist economy afloat.

The image of the economist at the helicopter door is particularly appealing, since I have always believed that most economic theory is analogous to the window that was pushed out of aircraft during the war to mislead radar systems tracking their movements. For those with alert antennae this is a time when the real workings of a capitalist economy show themselves especially clearly.

1 comment:

  1. Molly’s notion of a citizens’ income scheme has much merit, but is fraught with policy difficulties. I have long advocated that the answer to child poverty in the UK (we have one of the worst records in the EU) is to give every carer of a child a substantial, flat rate universal payment of, say, £150 a week and to recoup the costs through a more progressive taxation regime. I once suggested this to a Treasury official whose response was ‘what about Victoria Beckham?’ I did point out that a social welfare policy driven by fear of the Daily Mail was scarcely likely to solve the problems…but this point was lost.

    There are two more serious policy barriers. First, the UK government is committed to a low wage/low tax regime in the UK in a misguided attempt to engender ‘international competitiveness’. Cash to citizens would compromise that – but the current crisis suggests that we’re going to have to pay more tax in the future to bail out the bankers. The second is more pernicious: government currently uses welfare payments as a means of ‘labour activation’ – it pays better benefits if you are in work (and on low pay) than out of it. This supports the low wage economy and dragoons people into jobs in call centres, food packing plants etc. This policy, of course, becomes problematic if there are decreasing numbers of such jobs to go to… So Molly, some form of citizens’ income might work, but I’d rather it were targetted at, say, people with kids.