We need inflation

Friday, 11 September 2009 06:29

So some economists would have us believe. Richard Murphy, who runs the Tax Research web site and was interviewed on the radio earlier this week, is all in favour of it. A self-proclaimed Keynsian, he argues that the economy will grind to a standstill if prices are falling. This makes no sense.

Inflation is no good idea. Savings are credit that the savers give to the community at large. Inflation destroys that credit, effectively by robbing savers of the purchasing power of their savings. How can anyone justify such a thing? It is fundamentally immoral and is destructive to the cohesion of society. It is not true to say that deflation discourages spending. All sorts of things eg electronic goods, have gone down in price over the years but it has not stopped people from buying them. And people still need to purchase goods for their daily needs.


Money is merely a medium of exchange. It enables claims on wealth to be deferred or transferred from one place to another. If its value is steadily decreasing, money becomes dysfunctional. Inflation also discourages thrift, promotes profligate personal habits, waste, spendthrift attitudes, extravagance, getting into debt, irresponsibility, and failure to consider the consequences of one’s actions. It contributes towards a generalised moral breakdown in society, because people who behave responsibly find their claims on wealth shrinking in front of their eyes. It is bad for the planet.

Even an inflation rate of 3% means that money has lost half its value in 25 years. In that case what is the point of providing for one’s future eg retirement?

When I was at school in the early 1950s, we were encouraged to buy 15/- National Savings Certificates. That would buy two day return tickets from London to Brighton so in present day terms it was worth about £50. The same amount now will not even get you on a bus. Swindle is the word that comes to mind.

Not having read Keynes I know him only at second hand but his latter-day advocates quote him in support of the notion that the economy will come to a standstill if the purchasing power of money is not steadily falling. Put another away, if people who chose to be prudent are not systematically defrauded by a process of fiscal jiggery-pokers, the economy will cease to function. It may be that those who have been dredging up his ideas recently have not read Keynes either, or have misunderstood, but if that is actually what Keynes was saying, it is indeed a strange proposition, however eminent the person proposing it may have been. Keynes was a mathematician and underpinned his theory with pages of formulae, but it does sound as if this sophisticated mathematical structure could be grounded on shaky assumptions.

Keynes is right to the extent that governments should run into debt at periods of recession, but it should not be spent on keeping people out of work. The debt should be used to absorb spare capacity in the economy, and not on make-work projects either. Keynes's advocacy of counter-cyclical deficit budgeting provided a useful insight, but prudent budgeting demands that debt is used to enhance the country’s wealth-creating capacity, not to pay people to stay unwillingly or otherwise, at home. It shouldn’t really be spent on repairs and renewals either. But given the atrocious state and inadequacy of the UK’s infrastructure, the debt could usefully be spent on national housekeeping. Recession is a time of opportunity to carry all sorts of works which have been deferred. Recession is also, or should be, a time when flakey and obsolescent businesses are cleared away to make space for new developments.

Economists and politicians on the "right" are also misguided about this, arguing that it is impracticable due to the long lead time of major infrastructure schemes. There are many small projects that could commence quickly, including the huge backlog of repairs to highways, schools, hospitals, etc, and some major ones too, on which substantial amounts have been spent already and could be quickly put out to tender. Network Rail alone has a long wish list that could be brought forward and start almost immediately. This generates real wealth-creating capacity and is consequently not inflationary.

The economy of churning

Deficit budgeting to pay for keeping people out of work, or support obsolescent business, is doubly damaging. Most of those people would rather be working and earning a proper livelihood. Out of work, their skills rot and they may get out of the habits and routines of working. Murphy pointed out in the broadcast that if someone earning £25,000 a year becomes unemployed, there is a cost to the government of £23,000 a year in benefit payments and lost tax. What these figures show is how much of the cost of employment is money that ends up in the government’s coffers. When the employees are actually working in the public sector, this is just churning. Local authorities, the NHS, etc, receive between half and all of of their income direct from central government. Nearly half of their outgoings are paid back to central government in the shape of PAYE Income Tax, and Employers’ and Employees’ NI contributions. That is churning. It would make no difference if public sector employees were paid their wages net and given tax credits instead. It would at least show that the net cost of running public services is little more than half the headline figure. It would also mean that the public sector would be spared the not inconsiderable expense of dealing with staff PAYE and NI. And the private sector would benefit from the same simple reform - replacing all labour related taxes with a payroll tax. We are not in favour of this but at least it would simplify and reflect an economic reality of sorts.

Because the tax system almost doubles the cost of employing people, then the least skilled are likely not to get employed. Labour will be replaced by machines and some tasks will simply not get done, especially labour intensive ones like care work, cleaning and repairing. It is dysfunctional, wicked and immoral to treat people in this way.


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