I often think that if people knew what our governors really believe, or are willing to pretend they believe, about how our country works they would be horrified. The theories that form the basis of the political class’ framework for managing our country are mostly superstitions and religious nonsense, but the topics are so convoluted and boring that they’ve managed to keep it all a secret. This smokescreen around their beliefs has created a kind messy, self-contradicting, cartoon reality that can be twisted and shaped to fit any story, which is exactly the way politicians, all politicians, like things to be. Politicians would never risk reality coming into their discussions if they can help it.

I just overheard a man from the Guardian newspaper on TV, on a discussion show, say to the audience members “the deficit on all of your pensions will be £75 000!” I have no idea what he could possibly think that means.

Luckily, I have a high threshold for convoluted, boring subjects. In these religious ideas there is a particularly crazy idea. One that they will never let slip. They think that unemployment is necessary.

This idea is interesting because it really shows everything that has gone wrong with how we run our country, but first thing’s first, why do they think unemployment is necessary? The reasoning is this: if there were more jobs than people the companies would have to compete for workers, this would force them to offer higher wages to get staff. Higher wages mean higher costs, which means higher prices. Higher prices is called inflation and inflation is like the devil incarnate to economists. So if you eliminate unemployment you unleash the inflation monster and you destroy the economy.

Now this misses the obvious point that prices might be higher but wages would be too. If everything costs twice as much but wages are twice as much then any inflation just cancels itself out. So what’s the problem?

The problem is that there is a group of people who earn money, not by being paid wages, but by capital investment (which is a technical term for “owning stuff”, another one of those smoke screens). For those people wages are a cost they pay to maintain those capital investments. For example, if you own a stretch of land that you rent out you might have to pay people to look after it. Those people have a vested interest in wages being as low as possible. Those people also have vast amounts of money from centuries of capital investments, they could pay people wages with that money or they could spend a fraction of it to buy politicians and theorists to write and spread nonsense scare stories about what will happen if they don’t get what they want.

The result of this is everything we see. Wages have been held down for decades while returns for capital investors have increased. Wealth, and therefor control, is being concentrated into a smaller and smaller fraction of the population. At the top of the pile we have a financial sector that engages in no actual production, their capital is imaginary, hires very few people, and yet commands extraordinary profits for the people who own that capital. The government is implementing policies designed to cause unemployment.  When the government increases interest rates they do it because they believe it will slow down economic expansion, that is, stop people doing new productive activities, because they are afraid, or say they are, of runaway inflation. The most extreme measure is austerity. New jobs require new pounds. New pounds come from the treasury deficit. Austerity is designed to stop the creation of new pounds and thereby limit how many new jobs the economy can finance. They want to maintain what they call a “buffer stock” of workers to ensure employers can always find someone cheaper.


The UK’s £1.7 billion surcharge is the big thing in UE/UK news right now. It’s in the interests of Cameron and Osborne to present this surcharge as a serious problem for two reasons. Firstly, because it presents the EU in a negative light forcing us to part with pounds at a time when we need them all, and secondly because it’s an opportunity to spin themselves as heroes, even if only in that they publicly resist it. Although they managed to totally **** that up. ALittleEcon describes the situation here.

The question is why should we be worried about this? Well, as far as I can tell even if paying the surcharge causes a problem for us, which is questionable, the problem is not at all what we are supposed to think it is.

We are supposed to imagine that we can only pay this bill if we give something else up. We need to give up a hospital or something. What actually happens when the government pays this bill? Someone at the Bank of England opens a spread sheet, finds the row that represents the EU’s bank account, and increments it by 1.7 billion. That’s it. They don’t have to raid any savings, or some budget. They don’t have to find a pile of cash somewhere. There is no bank account they withdraw from. They just press some keys and that’s that. No budgetary effects at all. If they then choose to subtract the same amount from somewhere else that’s purely up to them. Incidentally, the talk about the interest that might or might not be incurred is ridiculous. The government can pay that bill any time they want regardless of how big it is, so if they could only be forced to pay late fees if they choose to put off paying it, but there is no intrinsic reason for them to wait. Again, they don’t have to get the money from anywhere.

The EU can then do two things with the pounds in that account. They can buy things from the UK or they can trade it on the currency exchange market. If they buy things from us then, obviously, the pounds go right into one of our bank accounts. That would have some effect on prices. What effect? No-one has of yet provided a model to figure that out so there is no way to know. Anybody buying anything has a similar effect but we rarely stress about that.

The only clear effect of our government issuing the pounds needed to pay the surcharge is it’s effect on the exchange rate. You have to accept that the law of supply and demand holds, which is shaky but, assuming it does, if we increase the supply of pounds by some factor then it’s value should drop by the same factor. If we double the number of pounds in circulation then we would halve it’s value. In theory… which they call a law. So the magnitude of the effect is equal to the magnitude of the change of supply… right? We know the change is £1.7 billion, but what’s the total supply of pounds? If you go to the Bank of England website they have data on this. I think it’s at about £1.5 trillion. That puts this theoretical total effect on exchange rates in the range of about 0.1% over some period of time. To put this in perspective the Pound:Euro exchange rate has moved around over a range of 10% over the last couple of years. We’d have to issue 100 times this surcharge just to get back to 2012 rates.

Would this flicker in exchange rates be bad? Who knows. It would (again assuming theory holds) make imports more expensive and exports more profitable. Is this enough to warrant offsetting the pounds placed in the EU’s bank account by taking the same number away from some other public services? Given that our public services are being strangled to death through lack of investment I imagine that the theoretical exchange rate blip is a better choice.



Sam Harris collided with Ben Affleck recently on Bill Maher’s show. Affleck accused Harris of being racist and presenting opinions that are ugly while discussing the behaviour of what Maher called the “Muslim World”. The video spread and inspired lots of reflective opinion pieces. The opinions seem polarised, even in the new atheist community. The original video has been shared with the title “Affleck 1, Harris 0” as often as with the title “Harris 1, Affleck 0”. It’s interesting that people who consider themselves rational are happy to accept the rants of a man who thought that germs were a conspiracy.

Harris responded to this case specifically by arguing that Affleck was belligerent, which may well be the case, and wrong, and to the general case in an article asking “Can liberalism be saved from itself?” in which he criticises liberals for having a blind spot for Muslim extremism.

A few days later I noticed a post on the Richard Dawkins Foundation’s facebook page by Jerry Coyne in which he criticises “liberals” for holding to “the notion that Muslims should be held to a lower standard of behavior than people in the West”. This, for me, has purged any respect I had for new atheism movement, at least for its guiding lights.

In his recent posts about the Gaza conflict, in which Harris argues that Israel is the worlds most humanitarian ethnic cleanser, he had an exchange with Andrew Sullivan. In it he said that “the problem with invoking history in this discussion is that you have to decide when to start the clock”. There is another name for history: the facts. It’s inconvenient and complicated; more so because it’s relevant. A person considering themselves a scientist and ignoring history is, well, doing something wrong. The facts that Harris prefers to cite are from opinion polls, like the ones that ask Muslims if they think it’s OK to kill to protect Islam. Opinion polls are great but they tell you nothing about causation, they just tell you about how people say they conceptualise things. Harris of all people, being a neuroscientist, should be well aware that people telling you how they think might not be the best source of data on action causation. Also, Harris never mentions what the results would be of a poll asking Americans, either Christian, Muslim, Jewish or Atheist, whether it’s OK to murder to protect the USA, or ‘Freedom’ or ‘Liberty’ and ‘Democracy’ or some other culturally loaded concepts that mean something different to everyone.

It got me thinking: how extreme are Muslims, really? I thought it would be interesting to take stock of things that have actually happened. To solve the problem of when to start the clock ticking I thought, surely, the start of the span of living memory would be reasonable.

This history begins shortly after the collapse of the Ottoman Empire a few years after the First World War. The Ottomans were Muslims and operated the Caliphate. This event is the end of anything that could be called “the Muslim World” in any coherent sense. Contrary to T. E. Laurence’s stories the majority of Muslims were perfectly happy to be part of the Ottoman Empire, but as usual, like most populations, they had no say. The Ottoman territories were carved up and shared out largely between Britain and France. Three regions: Baghdad, Mosel and Basra, home to three different ethnic groups (roughly Sunni, Shia and Kurdish) were formed into the Kindgom of Iraq. A leader was inserted, Faisal, a man who as far as I can tell never even lived in Iraq, as a kind of compensation from Churchill who was a big fan and friend of T. E. Laurence. He felt that the Hashemites should be rewarded. There was no election. Faisal was a member of the Hashemite clan, descendents of Mohammed, they had tried to grab control of the Ottoman Empire during WWI and were hacked off that Britain didn’t give it to them after they organised the “Arab Revolt” (which was a military power grab). Later, Faisal’s brother was made King of Transjordan, by Britain, without election to keep him happy. What did the Muslims at a large have to do with this so far? Not a great deal.
Between the world wars there was a huge change in worldwide geopolitical landscape with the Russian Bolshevik Revolution. Muslims were involved, they comprised several ethnic minorities in Russia and as such have been subject to various and systematic oppression for centuries.

Not long later WWII happens. Anti-Semitism, which wasn’t unique to Germany, or even Europe (although Jews in the Middle East were given broadly free mobility), was given lethal form when Europeans busied themselves conducting one of most awful chapters in modern history. What did the Muslims have to do with that? Not a lot, although they were drafted to fight through colonial mandate.

WWII ended with the US nuking two cities. Now, in the land of extremism, surely the nuking of two cities must be the King and Queen. These events are even more extreme when you look at the narrative surrounding them. You can find plenty of rational, educated and moral people arguing that it was unfortunate but necessary and that it shortened the war, indirectly saving lives. Some even argue that not only was it moral, not doing it would have been immoral. The justification for these atrocities is based on lies. The US high command had been told that the Japanese were ready to surrender and had no capacity to fight. We know now because the documents were declassified. The Japanese had one condition: that the Emperor retained the status of god. The Whitehouse wouldn’t accept that, America doesn’t get told what to do, and so chose to nuke them instead.

Later Britain lost control of its South West Asia colonies because of anti-colonial revolts and the prototype Israel-Palestine conflict being developed by terrorists that would later be given a state to run. Britain formally handed the situation over to the UN who issued the resolution making Israel a thing. What did the Muslims have to do with this? Well they weren’t pleased with the idea of the UN drawing more lines on maps and declaring them states, not such an unusual reaction, but their opinions didn’t matter (their disapproval of that resolution is somehow used as grounds today to argue that they have no rights to a Palestinian state and therefore no rights to resist Israel’s expansion). Arabs were seen as a set of backward and numerically irrelevant tribes.

Shortly after Israel became a state there was an Arab-Israeli war, although it’s more accurate to say that a civil war that was already under way continued. Israel took 60% of the land designated by the UN as Palestinian. Note that the states involved: Israel, Syria, Jordan, Iraq and Egypt, all states that were either literally created by the west or at least highly steered by western neo-colonial influence. The West (with Russian interference) had essentially created a series of units of influence designed to act as agents in the Middle East that had their own interests and often fell out with each other. There wasn’t a great deal of democracy going on, more a set of warlords, balanced precariously in place, trying to get more control.

At about this time a civil war broke out in Burma, which never ended. On the one side are a series of pro-Government movements, starting with the Anti-Fascist Peoples Freedom League, Buddhist and Socialist in ideology. Later the DKBA, a Buddhist movement, joined the anti-government side, together with various military ogranisations. The US supports the anti-government side, as does Mujahedeen. The war kicked off after Burma gained independence from Britain and the situation escalated sharply when the state declared Buddhism as the official religion.
In parallel a war broke out in Malaya. The locals weren’t happy about the way the British were running their economy (as a means to get the stuff Britain needed to recover from WWII, what elites now call globalisation). They had moved from Japanese occupation to British neo-colonialism. Protests were punished and eventually a continuous war broke out.

A few years later the US goes to war with North Korea, which was one of the most advanced economies in Asia, second only to Japan, and literally bombed the whole country to the ground. Recently declassified documents mention US generals in awe of their own destructive power as they watched villages washed away by the water burst from the dams they were destroying. Islam had nothing to do with this.

Later the US decides to attack Vietnam because they didn’t like how they were organising their own country. The US had been running proxy terrorism plans to undermine Vietnamese integration, then decided to switch to overt attack. They attacked the south but dressed it as an attack on northern insurgents in the south, even though there weren’t any. They destroyed the country. There are people being born right now with deformities resulting from the chemical weapons dropped on their grandparents.

At the same time the world almost ended. The US became annoyed because Russia moved nukes to Cuba. US had had nukes in Turkey pointing at Moscow for years, but that doesn’t matter, the US can do what it wants, it can nuke cities and everyone will think it’s fine. Kennedy calculated the odds of nuclear war to be 50:50. Pretty extreme. As far as I’m aware he didn’t read the Quran. Good times.

So far this has sketched a significant chunk of murder and mayhem, covering the first half of a lifetime of history, and so far the Muslims have had little involvement with the exception of the WWI (the Ottoman Empire could have easily been on the side of the British if Churchill hadn’t impounded some war ships that were supposed to go them and there were plenty of Muslims fighting against the Ottomans too) and the Israel-Palestine conflict. Many of the conflicts that involve Muslim populations, that are the backdrop for our impression of Muslim extremism, are largely extensions of the Palestine conflict in some way, in which the west is complicit.

Those are the big obvious conflicts but there are of course many others. There are also whole continents worth of history of carnage that I haven’t mentioned. There were and are various armies, many citing Christian ideologies, marching around Africa turning children into soldiers and sex slaves, situations tangled in old colonial pathologies. There’s also plenty of history of terrorism in the South Americas, of US rigging elections to get their representatives in power and resorting to kill squads and terrorism when that doesn’t work out. The west’s hands are bloody from both of these histories and neither can claim Islam as a factor. There are also lots of examples of extreme violence if you look at the history surrounding China but although Muslim populations feature Islam can hardly be said to be a significant factor there either, and much like in the case of Russia Muslims are very much the minorities.

Since the point of this is to get a perspective on what we can call Muslim extremism in reality we can look at conflicts in reverse order of deaths focusing at events in the last century that involve Muslims in any systematic sense:

The first would be WWI with Muslims fighting on both sides. The next is the Iran-Iraq war. It started when Iraq, under the control of the Ba’ath party, US/UK endorsed and supported and equipped, invaded Iran. The UK, thanks to Thatcher, who liked Hussein a lot, had given him lots of weapons. The US declassified Iraq as a terrorist state so that they could sell them chemical weapons. The Iran-Contra weapons scandal was happening during all of this. And just to add an extremist jewel to this crown, the US shot down an Iranian passenger jet flying over Iranian airspace for no reason other than, apparently, to try out their weapons.

The next would be the Soviet war in Afghanistan, a recent episode in the Russian version of a familiar story of colonial intervention. Russia pulled out and the country went into a continuous civil war that lasted for decades. The Russians left lots of weapons behind. This is the context in which the Taliban, often thought of as a perfect example of Islamic craziness, came into power backed by, you guessed it, the west. They only became bad guys when they started thinking that they had a right to the oil resources inside Afghanistan in the mid 90s.

Next is the Algerian Civil war, which seemed to be largely a nationalist revolt against a brutal French colonial regime.
Next the Bangladesh Liberation War, which was a nationalism conflict, resulting in the Independence of Bangladesh. The conflict seems to have stemmed from perceived economic exploitation of one region over another by a state that didn’t want to loose control. This template of violence can be seen over and over in history, in fact, the US War of Independence has that exact template but we don’t consider that an example of extremism.
The Somali War started in the 80s and has never really stopped. The conflict is a government/anti-government affair beginning as resistance to Siad Barre. The US joined in on the anti-government side. Guess who supported Siad Barre until just before the war.

The Syrian Civil war is another ongoing conflict borne of resistance to an oppressive (incidentally secular nationalist) regime. The Muslim population are the victims in this situation, subject to a small group of warlords who took power in a military coupe and never gave it up. The Arab-Israel conflict actually helped the Assad regime take power in that it was seen as a strong contender that was able and willing to stand up to Israel. Note that at the moment the west is figuring out how to destroy Islamic State, which would help Assad a great deal.

The ongoing war in Darfur has resulted in hundreds of thousands of deaths and displaced millions. This conflict seems to correlate mostly to Arab/non-Arab ethnic sets rather than Muslim/non-Muslim ones.

Next is the First Iraq war. This is a big one in terms of deaths. Remember that not long before both the US and UK bent over backwards to give Hussein weapons of mass destruction. If you are going to give a warlord such weapons, someone is going to get gassed. He had already ethnically cleansed Kurds by the time the Iraq war began but we didn’t care. The conflict between Iraq and the Kurds goes all the way back to 1912 and started with one King Faisal of Iraq, that Hashemite clan leader the British put in power I mentioned earlier.

The Islamic Insurgency in the Philippines, which is an interesting choice of name, is another conflict arising from resistance to colonial rule. Each time the current colonial power went to war with someone and was defeated the locals were taken over by the winner and so there is continuous resistance, termed ‘insurgency’. You can tell when the resistance can be called ‘extremism’; it’s extremism when the colonial power is the US.

That gets us down into the sub 100 000-death conflicts and so far Islam hasn’t featured as a significant predictive factor. You might think it callous to lump these conflicts together based on kill-count and pass over them, which is true, every death is important, but 300,000 Americans died since 1970 in industrial accidents. How many people have died because we have devoted resources to developing Viagra or curing baldness instead of Malaria/Aids/Ebola/Rabies/Small Pox/Naeglaria treatments? We have policies killing more people than these conflicts.

What’s interesting is that the examples of extremism that leap to mind aren’t present above. We tend to think of historically small events involving relatively tiny death counts as somehow extraordinarily relevant, for example 911, or the attack on Pearl Harbor, or videos of someone being beheaded. Meanwhile the west is apparently free to carpet bomb cities or murder people in mountains in Afghanistan and the world is supposed to be thankful. To any objective analysis it seems that the discriminating variable is level of technology. If you kill a few dozen people with a predator drone that’s fine, do it with a home-made car bomb and you’re an extremist.

It could be argued that I have ignored the content of what people like Harris are saying is extremism, that they were more talking about women being forced to wear head coverings or treatment of gays. As it happens forcing women to hide their faces originated in Ancient Greece, not the Middle East. In the Middle East it was the other way around: certain women weren’t allowed to wear head coverings. Anyway, that just reasserts the question: why are some things “extreme” and other objectively more extreme things not? Why is being an extremist a sin while knowingly creating, training and arming them isn’t? It seems that the form of argument used by Harris or Maher or Coyne is to create a box called extremism, put a tiny set of real events into it, leaving ourselves out, and.. what do you know? It’s full of the warlords we put in power!

Muslims have been involved in some huge and terrible conflicts but they have also had nothing to do with many of the biggest and worst, and the schematic of these conflicts tend to be transferable across history, geography and culture (resistance to oppression and unwanted government regimes). There is a difference in quantity but also of quality. Conflicts involving Muslims tend to be local border disputes and civil wars, nothing like the type of global conquests that the west engages in. And, again, even those local conflicts have arisen with significant western interference. Viewed in the grand scheme Muslims are relatively meek. And when you swap Muslims for some other group, and keep the West, you see the same patterns of violence and “extremism” in other parts of the world.

So perhaps non-Muslims so critical of Muslim extremism should redirect their energies away from worrying about what Muslims are up to and toward modifying the behaviour of their own states.

In response to: http://alittleecon.wordpress.com/2014/09/13/objections-to-a-job-guarantee/

Actually this isn’t really a response; it’s more of an elaboration. Some common objections to a theoretical Job Guarantee are listed in the post. I wanted to add that the objections really highlight what I think is a muddling of what unemployment actually is, and what solving it as a problem actually achieves.

The most important detail, that is easily missed, is that employment is a purely financial construct. It is an aspect of the monetary system, which is financial, and not part of the ‘real’ economy, and solving unemployment has nothing to do with solving any real output problem.

We tend to think of jobs as, pretty much just, doing stuff. This is incomplete. You could do whatever you do as a job, right now, without anyone paying you to do it. No-one can really stop you pursuing whatever you think the work content of jobs are. So what’s difference between driving a bus around and being employed as a bus driver? Simple: you get paid. If you are seeking to be paid to do something you are unemployed. If you are seeking to just fill your time and not get paid you are not unemployed. Unemployment is the problem that there are people seeking to be paid, not that they are seeking to do stuff. People may well be seeking to do stuff, people work for reasons other than to get paid, but that is not unemployment.

Solving unemployment is a financial solution to a financial problem. You can solve unemployment by hiring people to do useful things, by hiring them to do pointless things, or by hiring them to do something terrible like kill each other*. All of these policies would, by definition, solve unemployment, and that’s that. The confusion is mixing the solution to unemployment with the solution to the problem of useful real output. They are not related. As the above example shows it’s possible to affect real output in whatever way you want, from terribly to brilliantly and everything in between, while eliminating unemployment. It’s also theoretically possible to have perfectly adequate real output (by whatever standard you want) without everyone being employed. You could even imagine a science fiction world in which no-one is employed but everyone is perfectly happy.

Talking about ‘non-jobs’ while discussing job guarantee is like discussing a balance sheet and just imagining what real assets the numbers represent, and then concluding the activity producing that sheet must be non-assets. Those numbers could represent anything, a balance sheet is just a financial description and doesn’t track real assets, let alone their qualitative value.

*all of which happen right now.

Immediately after the Scottish Independence referendum Nigel Farage complained that the UK government “made a promise to maintain the Barnett Formula whereby the UK taxpayer spends £1,600 more on every Scot than on every English person”. This kind of factoid is the sort of thing that immediately pisses people off. The problem is that it’s a nonsense figure that refers to nothing meaningful and hides far more important information.

If government spending consisted entirely of paying money directly into people’s pockets then he might have a point. Some is spent that way, of course, but, as everyone is well aware, a huge chunk of government spending pays for goods and services. There would be no point in the government paying people just to pay taxes. The government wants certain things done. For example, a large part goes to the NHS. The NHS then translates that money into a health services. The taxpayer then receives those services, not the money. The NHS provides those services by spending it’s budget on provisioning the goods and services necessary to provide health services. Ultimately the money it is budgeted ends up in the revenue stream of companies that provide it goods and services, some of which will end up in people’s pay packets and some of which will end up in share holders’ and owners’ pockets. Those share holders and owners could be anyone, anywhere. They could, and statistically are likely to be, in London. They could be in the US. The fact that the initial spending is geographically, in a sense, in Scotland has almost no baring on how the money filters down to people.

Another fact is that cost structures vary. So, say for the sake of argument, that for some reason transporting things is more expensive in Scotland. Maybe because of all of the hills. That means that provisioning of services to the public via the public sector will incur higher costs, say, to pay for extra fuel. That extra payment would show up, again, in the revenue stream of a company, in the case a multinational energy company. Or more precisely some weird holding account system somewhere so that shareholder profits can be maximised. Again, where the money ends up is a matter of topology of the economy, which has almost nothing to do with geography.

It might be, arguably, more reasonable to look at spending per head at the whole-nation level, but that figure is largely meaningless as it could be anything. Working out where money really ends up would, as far as I can tell, be perfectly doable. What makes it hard is that we would need access to data on where companies spend their money and, specifically, who all the shareholders are. That data might be available, partially, through public audit records, but we have no intention of really knowing because that might be too revealing. It’s far better to use nonsense metrics like spending-per-head.

Put plainly there is a good chance everything you have been told about how our country, or other similar countries, function is pure fiction. Like a lot of my posts, I think, I’ll start by saying something that seems, at first, ridiculous and counter-intuitive but bare with me…

I am going to talk about three functions of the government: taxation, spending and borrowing (a.k.a. government / public debt). The biggest lie we are told, and largely believe, left to right, is that these three things are interrelated. In reality they are not operationally related in any way. They are related in the sense that they form parts of a strategy employed by the same governing body i.e. the government, but they are completely distinct mechanisms that exist to meet distinct objectives. Those objectives, again, form parts of an overall objective, but that is at a strategic level, not an operational one, and completely different to what we are told.

The intuition goes that government spending is funded by taxation and shortfalls met by borrowing; adding to the public debt. The debt must be financed by future taxation or more debt. The government cannot spend without raising finance from taxation or borrowing. This intuition relates to nothing in reality, and is based on straight-up lies and a few misrepresentation of facts.

Taxation and Spending

The government’s ability to spend is in no way linked to tax receipts. Have you ever gone to a cash machine and got a second hand note? No? Why? Banks buy cash from the Royal Mint. They don’t buy second hand ones, they want new ones. If you take your cash to the Treasury to pay a tax bill they just throw the money away. It doesn’t go into a pot or an account or a fund… it just ceases to exist. The treasury could keep it and they could reuse it, if they wanted to, but they don’t have to and usually don’t. Why? Pounds are of no value to the UK government. They can issue as many of them as they wish, whenever they like.

If the government wanted to build a hospital or pay housing benefits, or whatever, they just credit bank accounts and pounds appear. That’s it.

Debt and Spending

So if the government can (and does) simply issue money when it spends why are we told that the government incurs debts? The government does incur debts, that’s true, and those debts do show up on the government’s balance sheets because they are financial entities that need to be tracked. The government, however, doesn’t need to incur debt to spend. It’s ability to spend is not linked, at all, to the sum of it’s debt and tax revenue. The idea that the government incurs debt to allow spending is, again, a pure lie.

Why does the government Tax, Spend and Borrow?


So, if the government doesn’t need to tax or incur debt to spend why does it tax and incur debt? In order to understand this and to see what the core of the misunderstanding is (and how it’s exploited) you first have to realise that the government is not part of the economy in the way private firms or people are. If the economy were a game the government would be in god mode, if the financial system were a game the government would be the score keeper. The government has it’s own rules and it’s own limitations, of course, but those rules and limitations are not commercial or market based and fall outside of what is generally referred to as ‘the economy’. Much of the confusion about all of this comes from the insistence that the government is part of the economy and is like a firm or a household.

The government does have to interact with the economy if it has any chance of doing anything effective. Once it interacts, it’s actions take on the form of economic or financial operations. This is why the government incurs debt. Or at least debt is one of the ways it chooses to interact with the economy. It lends, it borrows, it buys, it sells. It has bank accounts and asset sheets. The government debt is really just one channel for controlling the level of reserves (bank money) in the economy and controlling interest rates. It shows up as a ‘debt’ on the balance sheets. The government is constrained by the basic principals of accounting, which is why it can be said to have a balance sheet with a huge liability on it called debt.

The mechanism of government debt is familiar to you: it’s a huge collection of savings accounts. A savings account is when you give someone some money, they keep it for a while and then give you it back with interest. The treasury offers this service to banks in the form of bonds. The treasury sells bonds to banks and receives money (reserves). When the bond matures the government will buy the bond back at the sale price plus interest. The government does this to effectively bribe the banking sector into temporarily giving up some of its reserves for a short time. This, in financial terms, reduces the banks liquidity (that is their money is tied up and therefor less liquid). It also gives the government a channel to pump new reserves into the banking sector in the form of interest payments on the bonds. Banks buy government bonds simply because they can earn more interest than whatever else they were doing with the reserves. Doing so ties up their reserves. That’s why they offer savings accounts to us. We send money to the bank, the bank sends the money to the treasury (by buying a treasury bond), they take a cut of the interest earned and give us what’s left in the form of interest payments to us.

So, all in all, the  total government debt is the sum total of our savings accounts. It’s our asset and the government’s liability. That’s it. Not a big terrible monster that’ll engulf the world.

The government chooses to give the banking sector a high interest / low liquidity option and chooses the terms. It’s debatable whether it is necessary to do so and how it should be done. What isn’t a matter of debate, however, is that firstly the government can continue making interest payments of any amount forever and never become insolvent. Secondly, it can do so without ever needing to increase taxes. And thirdly, it chooses the interest level it pays, and can choose any, including zero. One of the (intentional) effects of the government doing this is that it sets the minimum interest that can be earned lending reserves out. This is because if a bank can get 5% interest by giving their reserves to the government why would they give them to someone else for less? In this case the government is intervening in the market to push the interest rate above zero. Note that the government could, I think, stop doing this. We would still have savings accounts because the banks could still offer them. It’s just that the base interest rate would be at it’s natural value: nothing.


The primary function of taxation is to create demand for the pound. That’s it. So long as the tax burden is big enough to ensure sufficient demand for the pound then taxation is doing it’s job. The government could arguably choose, far valid reasons, to increase taxation if it needs to suck money out of the economy (for example if the economy is expanding too quickly) but of course that’s never given as a reason to increase taxes. The secondary function of taxation is to steer economic activity, for example, putting taxes on certain things to reduce demand for them. These two functions are distinct. For the first, the overall number is what’s important, for the second it’s the specifics that are important.

There is a very clear indication that this is true. No matter how broke the UK government says it is, no matter how committed to austerity they are or how desperate they are for cash, have they ever even mentioned the possibility of you paying your tax bill with gold, or dollars, or bit-coins? Why not? They could spend those things, right? Surely everyone has old gold stuff they can get rid of to pay tax bills or fines. So why don’t they? Well, if they did they would risk destroying the economy, literally. Using the tax system to raise demand for bit-coins instead of pounds would risk making pounds worthless. The government wouldn’t have to radically increase it’s spending as the value of pounds drops. In the worst case the value could drop to zero and the government would cease to function. Public services would fail and the country would be a mess*. Sovereign currency systems that fail to maintain a tax burden always collapse.


Perhaps the most surprising thing about all of this, the thing that might be hardest to swallow, is that government spending doesn’t cost you anything. Of course the government could demand tax revenue to cover the cost of spending, in which case you are being charged as a result, but there is no inescapable reason why it has to cost you anything. At all. For example, the government pays for a hospital to be built. A new hospital is built. Did that cost you anything? It is possible that the resources being used to create that hospital are in limited supply, so the government bidding for them could push their price up. If you need those resources then you will have to pay a higher price (which is a very loose conception of ‘cost’). If you are selling those resources you will earn more. If you earn more you will have more money to spend on other things. If the resources used are not in limited supply then new resources will be sourced, in which case there couldn’t be inflation because there would be an increase in both supply and demand. This rough outline is about as far as mainstream (and Austrian) economic theory gets you. There are also lots of other indirect costs and savings that are hard to quantify but very important. For example having an extra hospital could save countless worker-hours lost through illness. The point is that it depends on the situation and the complexities of who supplies what to whom and why and the spending habits and interests of those whose incomes are altered. Unfortunately economists as yet have provided no way to model this outside of ludicrously unrealistic and simple thought experiments carried out in their individual heads, so don’t have much to add to the matter.



*Incidentally, if this were to happen, many economists would point to the inflation, blame it on government spending, and say “We told you so! Government spending causes inflation!”, not realising that the order of causation is the other way around.


I generally agree with what Harris said in The Moral Landscape. I thought a lot of the bad press he got over it wasn’t deserved simply because his book was largely a set of thought experiments; interesting as academic pursuits. As far as applying them to the real world goes not much was given. It’s defensible that what’s moral is an empirical, and therefor scientific, question, but what tools does that give us in the real world? I don’t know. 

So it’s interesting to look at how Harris himself approaches real-world issues just to see how it links back to his book. I’m not really sure how it does and what he has said gives the impression that if his position is based on his moral theorising it has left him unable to see an invasion as an invasion. In this blog post he starts out by arguing something like “in wars all bets are off, people do bad shit”. Maybe, but applying that to what’s happening in Gaza is extra-ordinarily misleading. He made this point in response to Israel’s record of war crimes. The vast detail he doesn’t mention is that all the terrorism and crimes against Israel that are given as pretexts to murder are the result of it’s invasion, blockade and siege of Palestine. Even the existence of Hamas itself is arguably the result of Israel’s war crimes. According to the Nuremberg Military Tribunal a war of aggression “is the supreme international crime, differing only from other war crimes in that it contains within itself the accumulated evil of the whole.” 

You have to ask yourself, given Harris’ recent history as a champion of reason: what is the reasonable response to terrorism? Is it murdering people who had nothing to do with it? If there is a way to stop it without killing people should that be the first option open to a reasonable mind? International law is clear on this. Another detail Harris ignores. Israel has the right to defend itself and everyone with any understanding of terrorism or security or the situation in Palestine understands exactly how Israel can stop all the terrorism right now: call off their invasion, blockades and sieges and go home inside Israel’s borders. They accidentally did this already. Hamas agreed to a cease-fire, which Israel totally violated by implementing blockades, another war crime, during which Hamas completely stopped rocket fire into Israel. So they could just do that, forever this time. Even if Israel was justified in using aggression, which it’s not, it would still be guilty of breaching the Geneva Convention, which explicitly forbids transfer of population into occupied land. You have to understand that war is declared against states, not people or land. The threat is the state and once the state is pacified the threat is gone. Even declaring war doesn’t give a state de facto right to take any region over.

Harris’ entire thesis in The Moral Landscape is that morality comes down to suffering versus well-being. With that in mind read the following:

Consider how we behaved in World War II: We did things that would now constitute the worst war crimes imaginable—the firebombing of Dresden, the nuclear weapons dropped on Hiroshima and Nagasaki. We literally burned hundreds of thousands of noncombatants alive. Was all that carnage strategically necessary? I don’t know—probably not. And we certainly couldn’t behave this way today without invoking the wrath of billions of people. However, the crucial question is, what sort of world were we trying to create? What were the real intentions of the U.S. and Britain with respect to Germany and Japan? Well, you saw our intentions after the war: We helped rebuild these countries. Out of the ashes of this war, we created the allies we deserved. The truth is that we wanted to live in a peaceful world with thriving economies on all sides.

He seems to have stopped slightly short of saying burning people to death is OK so long as you have a nice idea in mind, OK so long as we “create the allies we deserved.” I’ll give him the benefit of the doubt and assume he didn’t mean that. Even to argue that intention is the crucial question seems to be a total deviation from his moral theoretics. It’s not the issue of killing people nor the issue of whether any of it was strategically necessary that’s central, we should look away from that, it’s the issue of intention that is crucial. 

So let’s talk about intentions. The current escalation in Gaza started with the abduction of some teenagers from Israel. Actually, not exactly… they were abducted form the occupied West Bank, not Israel. Netanyahu immediately blamed Hamas and ordered a search in Gaza. Israeli soldiers started arresting people in Gaza, something like 800, no-one has since mentioned this, the biggest kidnapping ring in history. Not surprisingly this investigation pissed people off. You can imagine what would happen if foreign soldiers showed up in New York and arrested 800 people. Shortly after it was discovered that he knew that they were dead before starting the investigation. It was then revealed that his own people thought that the culprits probably weren’t receiving orders from Hamas; which was later confirmed. People get kidnapped and murdered all the time, do countries usually go to war over it? Why does Harris, a self defined supporter of reason, have nothing to say about such unreasonable behaviour? And if we are supposed to be interested in intentions: what are the intentions powering Israel’s actions? It seems murderous irrational belligerence.