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The Path to Ruin or Prosperity

16/01/2015 11:21 GMT | Updated 16/03/2015 09:59 GMT

In the build up to the May general election, David Cameron has issued a stark warning that voting for Labour (or presumably anyone other than the Conservatives) means "choosing the path to ruin." Such a choice would lead to "more borrowing" and the resultant "extra debt interest" of this borrowing would lead to less being spent on the things that matter - schools, hospitals, "and all the things we value as a country." [1]

What is particularly interesting about this is that Labour itself is not proposing radical spending plans; instead, Ed Miliband has promised to balance the budget, much like the Conservatives. [2] In fact, the only real difference between Miliband and Cameron are the methods they propose to use to achieve their goal: Miliband wants to use tax raises and spending cuts, whilst Cameron wants to use only spending cuts. In any case, if voting for Labour is "the path to ruin," then surely the Conservatives also lie upon this path.

These views are currently being echoed across Europe. Germany is resisting calls for the European Central Bank to print money and buy financial assets and is balancing its own budget; [3] France is being called upon to reduce its budget deficit in line with EU targets; and austerity has been harshly imposed upon the southern European countries, with devastating effects. Perhaps it is within this framework that we should view recent events in France, as the economist Bill Mitchell describes, "one form of deliberate and well-organised state terrorism (fiscal austerity) leads to a more random form of terrorism." [4] This is worth repeating: how many people have died due to the government's austerity policies - food and fuel shortages are just two examples? The number is factors higher than what the terrorists in France achieved.

Returning to Cameron's remarks, we can see the absurdity of them if we turn to Robert Chote, the Chairman for the Office for Budget Responsibility. Responding to what would happen if Britain lost its AAA credit rating, Chote answered that "the notion of how sensible it is to view this as a change in default risk, when the notion of default risk for a country that basically can print its own currency, is a slightly debatable premise." [5] This is the crucial point: Britain cannot run out of money; there will never be any "less money to spend" (as Cameron seems to think). Claiming that Britain can run out of money would be like claiming God could run out of matter.

With this in mind, Cameron's apocalyptical warning seems to hold no weight. In fact, by simply recognising Britain's sovereignty over its currency the rationale for austerity, which Mitchell rightly labels as "state terrorism," is rebuffed: a sovereign government is not like a household--a household cannot print its own money. Thinking otherwise is what will surely lead us down Cameron's "path to ruin."

If we wish to have a prosperous economy, then whichever party (or coalition of parties) that leads the next Government must realise that money is simply a tool to be used, not an end goal. If we wish to end mass unemployment - which, incidentally, some economic theories (Modern Monetary Theory, for example) take to be the result of a lack of government spending - eradicate poverty, build more and better trains, develop clean energy, or whatever it may be, the Government must spend. Whether that spending lead to "more debt" or not is irrelevant: a blacksmith does not shrink from striking their hammer because it may pick up dents.

References:

[1] Nicholas Watt, Guardian, 12 Jan 2015, 'David Cameron: Labour election win would put UK on path to ruin'. http://www.theguardian.com/politics/2015/jan/12/david-cameron-labour-path-to-ruin

[2] BBC News, 9 Jan 2015, 'Ed Miliband says unfunded spending claims "completely false"'. http://www.bbc.co.uk/news/uk-30677112

[3] John O'Donnell, Reuters, 11 Jan 2015, 'Legal challenge shows rocky path to ECB money-printing'. http://www.reuters.com/article/2015/01/11/us-global-economy-weekahead-idUSKBN0KK05I20150111

[4] Bill Mitchell, 9 Jan 2015, 'Friday lay day - unemployment is a pernicious state'. http://bilbo.economicoutlook.net/blog/?p=29916#more-29916

[5] Hoc Treasury Committee, 11 Dec 2012, Autumn Statement: Robert Chote, Steve Nickell, Graham Parker. http://www.parliamentlive.tv/Main/Player.aspx?meetingId=12062