They're ending furlough, we're calling bullshit : Jim on the household economics myth & MMT

Posted by Mairi Oliver on

There exists an insidious myth at the heart of popular economic thinking, colouring not just the formation of government policy, but also the general public’s conception of how national economies work. It is at best a genuine misunderstanding of how the monetary system functions, and a worst a deliberate form of economic propaganda on the part of neoliberal ideologues. And that myth is that the economies of nation-states function exactly like those of a household.

The logic is straightforward enough: private individuals cannot spend more money than they have (including whatever credit they can access), and so it stands to reason that states are similarly constrained in their spending. However much they receive in tax determines what they can spend in a given year, and so - we’re told - there isn’t enough cash for things like expansive social spending programmes, universal basic income or - right now - extending the Coronavirus furlough scheme.

This “household spending” myth was used as a justification for the programme of brutal austerity launched by the UK government back in 2010, and it’s being used again to justify bringing the furlough scheme to a premature end, an action which will lead to thousands, if not millions, of job losses. But whatever the level of suffering caused, we are told there is no “magic money tree”, and that the government’s hands are tied by brute economic facts. This claim is routinely taken at face value by the legions of media pundits and commentators who constantly demand to know how much it would cost to extend furlough, and how the government could possibly afford it. And so the reinforcement of the myth in popular consciousness continues.

But here’s the thing: state economies do not operate like a household - it’s a completely different ball game. This is an observation so uncontroversial in academic discourse that even diehard centrist Paul Krugman made it in his 2012 book End This Depression Now. The myth is a lie, both in a small way, and a big way.

It’s a small lie because states frequently operate at a deficit, that is spending more money than they have coming in. If government spending was dictated by the size of the tax pot then this wouldn’t be possible, and yet governments have run deficits for centuries. In fact, with the exception of only six years, the UK has consistently operated at a deficit for the last five decades, and the last two US presidents had the largest deficits in the country’s history. So it’s evident that states can spend more than they have at any given time, but that must mean they owe money to someone, right? After all, where is the money coming from that allows them to spend more than they’ve accumulated?

This is the heart of the bigger lie. If these states borrow in their own issued currency (i.e. fiat money), then the only people to whom they can owe that money is themselves. But to even think about this in terms of owing and borrowing money is misguided, according to Modern Monetary Theory (MMT), because how government spending and taxation work in reality is quite counterintuitive. When money is taken from individuals through taxation, it doesn’t go into some big spending pot, but is effectively deleted. Then, when the government spends, it creates new money. The counterintuitiveness of this idea is testament to how deeply ingrained the “household spending” model is in people’s understanding of macroeconomics.

To quote economist and activist Richard Murphy, “[A] government with its own central bank and currency, that is all it borrows in, has economic control. Every time it spends it creates new money. That money supply is controlled by tax.” MMT recognises the danger of hyperinflation when demand begins outstripping supply, but centres taxation, not spending, as the other side of that equation. Inflation should not be managed through curtailing government spending, but by “deleting” more money from the economy through a proper system of progressive taxation, a cornerstone of social democracy.

What does this mean for the past and future of austerity in the UK, and in particular the much-needed furlough scheme? The decision not to extend furlough support (beyond the paltry Job Support Scheme), and the threat of continuing austerity measures post-COVID (to “balance the books”) are actions driven by pure ideology on the part of the Conservative party. They are not - as they’d have us believe - constrained by a lack of money, because, economically speaking, governments do not operate like households. This myth has persisted for too long, and allowed successive governments to justify cuts to social spending even when it’s needed the most. Understanding this is the first step is changing popular understanding, and embracing the possibility of a more progressive political economy.

Want to learn more? We've listed a few recommended reads down below!

With the furlough scheme coming to an end many workers and families will face a pinch in wages at best, lost employment at worst, do consider supporting organisations providing a solidarity social net right here in Edinburgh, including Helping Hands Edinburgh, Living Rent - Scotland's Tenants' Union, & MATE. And please oh please - especially with the giving season around the corner - please shop local, or at least indie, this autumn, we need you.

Joy of Tax


JOY OF TAX by Richard Murphy BUY HERE


Deficit Myth



Futures of Socialism




debt firts 5000years


DEBT: THE FIRST 5000 YEARS by David Graeber BUY HERE


Production of money




economics of the many



Share this post

← Older Post Newer Post →

Leave a comment

Please note, comments must be approved before they are published.