We’ve a useful example of a Guardian columnist who has failed at his basic task, explaining the economy, here. For he has quoted Richard Murphy, a sure sign of such failure. Hmm, perhaps that needs a tad of revision, he has quoted Richard Murphy approvingly, that being the sure sign. To quote him to show the errors does not automatically disqualify a column as being about economics.
It’s Phil McDuff who does this:
The counter-argument is simple but runs against much of the received wisdom of the political establishment. As Richard Murphy of Tax Research UK points out: “A growing economy requires general price increases, or inflation. Except under unusual circumstances, a general increase in prices requires an increasing money supply. A fiscal deficit is the only way in which money can be injected into an economy continuously. It follows that governments must run a near perpetual deficit or face the risk of creating a liquidity crisis due to a shortage in the money supply, which would then create a risk of deflation.”
As we’ve pointed out before – as we’ve pointed out specifically about this and also much of Murphy’s economics – this is mindgargling nonsense.
A growing economy does not require inflation. Sure, we think that a little inflation is a useful enough thing, as it greases the change in relative prices that comes from said growth. But it really doesn’t require. The British economy of 1900 was significantly larger than that of 1850 and the general price level didn’t change all that much either way. It’s certainly true that an increasing money supply can increase prices and thus inflation more generally. But to think that a fiscal deficit is the only way to increase the money supply is embarrassingly stupid.
Murphy is correct in that greater money issuance is an increase in M0, narrow money. But inflation isn’t dependent upon M0. As the truly vast and huge increase (like, a factor of 5x or so) from QE has show. It depends upon M4 (some would say M3), or the wide money supply. Which is M0 as propelled through the transmission mechanism of interest rates, credit creation and so on. If you like, the V in MV = PQ. We can in fact have inflation with an entirely static M0 if the details of that transmission mechanism, or V, change.
That’s why the Federal Reserve is winding back in that QE of course. Because they think that inflation will increase with that static $4 trillion of M0 out there as a result of QE as the economy, and V, recovers. Thus they’re reducing M0 to prevent the inflation….
Given all of that therefore a permanent fiscal deficit is not needed, is it?
But there’s worse than believing Murphy:
Forget all that. We’ve eliminated the deficit, and all we had to do was attack the poor and vulnerable with a relentless fury, create a new generation of young people for whom the concept of pensions or even steady wages is a fantasy, and undermine public services to such a grotesque extent that it will take years to rebuild what we’ve lost. Hooray!
It’s worth pointing out, not that this hasn’t been said before, that the rationale for this strategy was always a confection of fear-mongering and economic illiteracy that misrepresented the causes of the 2008 crash as being something to do with “Labour overspending” rather than a global banking crisis. This was an ideologically driven attack on the concept of redistribution through public spending. The upper-class bumblers in charge latched on to any excuse, no matter how quickly it was debunked, to pursue their project of returning the country to the Victorian slum state of their romantic imaginations, where finally, at long last, poor but cheerful urchins would give them the respect they deserved for being born wealthy.
Not being aware of reality is worse, isn’t it? What was Gordon Brown’s Golden Rule? To have a budget balanced over the business cycle, without counting public investment. At the peak of an economic cycle there should, therefore, be no deficit, even a surplus, not counting public sector investment. Where are we today? We’re certainly up and near a peak of the cycle judging by things like the unemployment level. We should therefore be roughly in balance, if not better, on current government spending. That is, no deficit ignoring public sector investment.
We’ve heard, indeed made, critiques of Gordon Brown’s economics before now but the idea that he aimed to attack the poor and vulnerable with a relentless fury is a new one on us.
But then what’s reality to one who can swallow Richard Murphy’s pronouncements?