Last night in a debate hosted by the BBC Amber Rudd (Home Secretary of the current UK government, Conservative, desperately scrabbling to win a general election that she thought was in the bag on the day it was announced) repeatedly accused Jeremy Corbyn (current leader of the opposition, Labour, getting dangerously close to making fools of everyone who has been telling us for the last two years that he is unelectable) of making spending commitments that he would be unable to keep because “there is no magic money tree”.
This idea, that there is a finite amount of money in the economy and that government spending is restricted to the proportion of this money that can be collected as taxes, is so deeply embedded in our collective psyche that every member of the panel in last night’s debate, and every journalist reporting on it, and just about everyone watching the debate, accepts it as fact.
Amber Rudd is able to repeat the “magic money tree” line, telling us that “we have to live within our means”, without anyone pulling her up and telling her that she’s a) a liar or b) so egregiously ignorant of economic fact she is unfit to park her backside on a ministerial chair.
There are, of course, two “magic money trees” in the UK and we can harvest infinite amounts of cash from them.
First we have the Bank of England. It routinely creates money in the form of reserves which it lends to commercial banks so that they can settle accounts with other commercial banks. In recent years it has also created £435 billion to buy back government debt (this is what the deliberately opaque term “quantitative easing” actually means).
The second magic money tree is the commercial banking system, which creates money when it issues loans. The money that you get when you take out a mortgage, the money that the supermarket gets when you pay with a credit card, this is all money that your bank creates out of thin air. Most of the money in the economy – about 97% of it – is created in this way by private banks under licence from the government.
Sterling is a sovereign currency. The UK government has ultimate control of it and the organisations that create it. The government could tell the Bank of England to create enough money to eliminate the entire national debt at the stroke of a keyboard. The government could stop private banks from creating money as debt and force them to only lend money that they receive as deposits. The government can create as much money as it needs to fund whatever public services it wants.
Jeremy Corbyn is as guilty as Amber Rudd of being dishonest or ignorant about the magic money tree. He should be telling the electorate what public services he plans to provide, how much money he plans to create in order to fund them, and how much money he plans to remove from the economy in the form of taxes in order to preserve the value of the currency.
Amber Rudd could then legitimately disagree on the nature of the public services or the net amount of money being added or removed from the economy. What she cannot do, what we must not allow her to do, is perpetuate the myth that “there is no magic money tree” and that government spending is restricted to whatever can be collected by taxation.
Our economy is the sum of our collective effort – the application of our brains and muscles to do useful things. We have an abundance of underused and misdirected brain and muscle power that should be contributing to our economic well-being: building houses that people can afford; building a sustainable energy network; paying for nurses, carers, doctors, teachers; mending the roads.
Money is the tool that we use to make these things happen. When you are looking at the propositions and promises of politicians who are touting for your vote remember this: for an economy to thrive money must be available and mobile. Ask yourself, does this policy or proposal increase the availability and mobility of money through the whole economy or does it do the opposite?
Amber Rudd and her Conservative government have been deliberately restricting the amount of money in the economy by cutting taxation for the wealthy and cutting public spending, and they intend to continue on this course for the next five years at least. Their claims that lower taxes for the wealthy and less government spending will revive our stagnant economy do not stand up to academic scrutiny or simple common sense.
Even the IMF now admits that trickle down economics is fantasy. Rich people are rich because when they get money they hold onto it. Money does not trickle down. It trickles up into the bank accounts of the wealthy and stays there, starving our economy of the liquidity that it needs in order to mobilise our brain and muscle power.
Jeremy Corbyn’s Labour Party is a long way from the level of economic competence that we need in order to ensure a peaceful, sustainable future on planet earth, but its proposals to make more money available and mobile through government spending are miles ahead of the economic incompetence of Amber Rudd’s Conservatives and their idiotic austerity.
Please, if you have any love for yourself, your family and your neighbours, vote Labour on June 8th and give our economy a fighting chance of doing what we need it to do.