We have an interesting little example of what’s wrong with academia here. Someone who doesn’t in fact know their subject has been teaching it. The example is, as you might have guessed, Richard Murphy who has held no fewer than four professorships at British universities.
Specifically, here, he’s arguing that the effects of economic stimulus are so pernicious that we should not have economic stimulus. It’s even possible to agree with that base idea. But the reason he’s putting it forward is not because he’s grasped the Hayekian point about government v private spending or any of that. Nor the Austrian point about malinvestment that needs to be purged. Nor even anything other than simple plain out ignorance of the subject under discussion.
His insistence being that economic stimulus causes economic inequality. Therefore we must raise taxes at the same time we do stimulus. Rather missing the point that stimulus is – in fact is defined as – the gap between spending and taxation. Meaning that if we increases taxes at the same time as trying to do the stimulus then we gain no stimulus. It’s as with some bastard love child of Ricardian Equivalence but this time the product of simple ignorance – as actually is the cause of so many bastard love children of course.
This, though, is not to say that there isn’t an economic problem resulting from Covid. There most definitely is a real problem arising from the crisis. That is the result of the very high level of government spending during 2020/21.
That spending is explained by this chart of the so-called ‘sectoral balances within the economy.
So, OK, sectoral balances. We’ve the four sectors, government, Johnny Foreigner, households and business. By definition the whole thing has to balance. If someone is borrowing then someone else must be saving and so on. OK:
As is apparent, the government borrowed massively in the last year, and entirely appropriately so, and at no real cost because almost all of that was covered by money creation which need not have interest paid in it. The result was that all other sectors within the economy as a whole saved, with households doing more saving than anyone else.
We’re fine so far.
We do not know who precisely saved the most as yet: the data is not available. Past trends show, however, that the already-wealthy will have saved the most.
Seems likely, yes.
The simple consequence is that inequality will have grown considerably.
Oooooh! That’s bad!
I stand by all those recommendations. We are creating a massive wealth imbalance in the UK that right now only more tax can address.
Hmm, that’s where it all goes pie shaped.
Start at the beginning again. We have some economic problem, some deficiency in demand perhaps. So, we stimulate the economy. This is just bog standard Keynesianism and there’s not a single bank (including central bank) or Treasury economic model out there that doesn’t include this idea. We stimulate by making sure that the gap between spending and tax revenue increases. This is what the stimulus is. An increase in that gap.
Yes, it can be done by printing money – Modern Monetary Theory – it can be done by borrowing and spending – rather more bog standard Keynes – but it is the gap between revenue collection and spending which causes the stimulus.
Yes, what that extra is spent upon can make a difference. Idiot train rides to nowhere produce less future value than clever and nice train rides. But it’s still the gap between revenue and spending that is the stimulus. It’s even possible to mutter than perhaps reducing taxation is the way to do it, rather than spending more money. But it’s still the gap that matters.
So, what has the Boy Genius come up with as the solution? We must increase taxes – it always does become MOAR TAXES of course – in order to deal with the effects of stimulus. Which means, of course, that we’re not getting stimulated because MOAR TAX, by very definition, reduces the gap between revenue and spending.
The Richard Murphy plan for economic stimulus is not to have it.
It’s a view I have a certain sympathy for, to be fair, except that I’ve reasoned myself into it through watching what the cash gets spent upon rather than shouting whatever comes to mind as a result of total, blind and stupendous ignorance of the subject under discussion.
For Richard Murphy really is arguing that whenever we try to do economic stimulus we must also raise taxes.
And here’s the thing – Richard Murphy has taught economics at a British University. Who would now want to say that we don’t have a problem concerning academia?