Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 12 March 2024

On maxing out credit cards and magic money trees


“When you repeat a lie, you spread it.

When you spread a lie, you strengthen it.

When you strengthen a lie, you become an accomplice to it.

In this disinformation age, we must do better.”

George Lakoff

Keir Starmer, in commenting on the recent Budget, said “Britain in recession, the national credit card maxed out, and despite the measures today, the highest tax burden for 70 years”. The analogy of maxing out the nation’s credit card has been repeated by other Shadow ministers. Rachel Reeves, Shadow Chancellor, has joined many Conservative ministers in saying there is no ‘magic money tree’.

Anyone who knows any macroeconomics understands that these analogies are false. The nation does not have a credit card with an externally imposed credit limit that it can ‘max out’, and the UK government does have a magic money tree because it can create money. But are those of us who do know some (or rather a lot) of macroeconomics getting a bit pedantic in worrying about politicians who use these phrases for rhetorical flourish? After all, analogies are usually inexact, and if using inexact analogies gets across points to a lay audience why worry about this inexactitude?

Imagine, for example, if we forced politicians to be more precise. Rather than claiming that the government had ‘run out of money’ and ‘maxed out its credit card’, they would instead have to say that the government had almost hit their self-imposed borrowing limits. Rather than saying you couldn’t promise to spend this or reduce that tax because there is no magic money tree, politicians instead would say need to say that the government could create more money or borrow more, but that would add to aggregate demand which would risk higher inflation and so force the Bank of England to raise interest rates. You can see why speech writers, and authors of lines to take, prefer talking about credit cards and money trees, things most people can relate to that don’t involve macroeconomics.

Now of course those who know some macroeconomics will say that these false analogies were used by a Conservative government to persuade first the media and then voters to embark on the ruinous policy commonly known as austerity that began in 2010. But surely today’s Labour politicians would argue that purpose matters, and if these false analogies can be used for good, to finally get the party that imposed austerity out of office, why not embrace it. Use the enemies’ weapons against them.

Indeed, those who complain about politicians using these false analogies are in danger of being hypocritical. After all, the word austerity was originally used to describe the post-WWII situation in the UK, where rationing continued and didn’t finally end until the mid-1950s. Wasn’t co-opting that term to describe some (any?) cuts in government spending just the kind of rhetorical inexactitude involved in talking about magic money trees and national credit cards? Doesn’t using the term austerity create all kinds of difficulties. For example, is cutting government spending during a boom ‘austerity’? Are tax increases in a recession an austerity policy?.

OK, enough of playing devil’s advocate. I want to set out here why I think it’s important for people in the public domain to avoid false analogies, and in particular the false analogies discussed above. Let me start with the money tree, which any government with its own central bank has. Furlough during the pandemic was to a considerable extent financed by the Bank of England creating money (by creating what are called bank reserves). More generally, if a government really wants to do something it can, by creating money or borrowing. That is why money was borrowed or created during the pandemic.

So why do politicians say there is no money tree at their disposal? Because they don’t like telling the truth, which is that they don’t want to break their fiscal rule, or they don’t want the additional spending or tax cut adding to aggregate demand and leading the central bank to raise interest rates. That is a trade-off where many voters might take a different view, so it is much easier for them to say there is no money. It is a way of disguising a political choice, and not being honest about these choices.

So ‘there is no magic money tree’ is normally said by Chancellors or Prime Ministers who want an easy excuse for not spending money or cutting taxes. It is a straightforward deception to give politicians an easier life, and therefore it is difficult to defend its use. The phrase ‘maxing out the nation’s credit card’ is more often used by politicians attacking the borrowing record of others. Yet it too suggests politicians have less choice than they actually have. In this case it perpetuates the idea that governments can only borrow so much, and that they are currently hitting that limit.

This is nonsense. There is a limit to how much UK governments can borrow, but it is way above levels of debt ever historically recorded. (Debt was 2.7 times GDP after WWII.) [1] But it sounds more dramatic to say a government has maxed out its credit card than to say it is leaving insufficient headroom to meet its own fiscal rules. In the case of 2010 austerity, talking about maxing out the nations cedit card was a way of frightening people into believing it was more important to cut the deficit than help a fragile economic recovery. So again we have politicians deliberately misleading for political gain.

It really shouldn’t matter whether the politicians in question are those you support or not, when what they are doing is just wrong. Saying it is for a good cause is a poor excuse. Would you support a politician lying if it was for a good cause? What about the claim of hypocrisy by those happy to use the term austerity? I have some sympathy with that, and where the meaning is ambiguous I try to be clear about what I mean by the term. But co-opting an old word for something new is not the same as using false analogies, and there is not a huge difference between restricting parts of private consumption (1940/50s rationing) and restricting the consumption of public goods.

The use of these false analogies probably wouldn’t matter too much if we had an informed and informing media that was quick to correct these attempts to mislead. Unfortunately the complete opposite is the case. Because much of the media views macroeconomics as too complex and boring for its viewers, it laps up these incorrect attempts to relate fiscal policy to household budgets. I have discussed this at length in my book and many posts over the last twelve years.

Sometimes this media environment gives politicians little choice but to follow. But that is not the case with phrases like ‘no magic money tree’ and ‘maxing out the nation’s credit card’. No one is forcing politicians to use these phrases. Instead it is their own choice to do so. If they know they are false analogies that just mislead the public they shouldn't use them. If they don’t know that they are false, I'm afraid that is even worse.

[1] People will stop lending to a government that can create its own money if they think that government will choose to default (or if they think the government will direct the central bank to substantially increase inflation). That in turn happens when the political cost of raising taxes to pay the interest on debt exceeds the considerable political cost of default. Some of these issues are discussed in a paper by Corsetti and Dedola that I discussed here

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