Why we continue to believe the fallacies that prevent national renewal

Photo by Toa Heftiba on Unsplash

The phrase “lying eyes” is attributed to Dorothy Dix who wrote,

“There is something to think about in the old story of the wife who trusted her husband so completely that she said even if she saw him philandering with another woman, she wouldn’t believe it. She would know it was her lying eyes.”

While not many of us distrust our eyes to that extent, we are still prey to three fallacies which prevent national renewal despite ample evidence that they are false.

A previous article explored the damage those fallacies are causing. This article asks why do we still believe them despite all the evidence?

Our conclusion is that we are surrounded by a wall of disinformation, sufficiently powerful to make us distrust our own lived experience:

• Our own eyes show us that they are false;
• But we are surrounded by powerful messages from those we feel we have a right to trust telling us the opposite;
• It suits a small number of extremely wealthy people for us to continue to believe the fallacies.

It is time to trust our eyes.

Our own eyes show us they are false

Let us take the three fallacies in turn.

Fallacy #1: Government debt is dangerously high so we can’t borrow more

UK Government debt is now close to the average level since records began – and that only if you count money the government owes to itself as real debt. It has been far higher in the past without adverse effect. In fact, the two most economically successful periods in our history, the Industrial Revolution after the Napoleonic Wars and the Golden Age of Capitalism after WWII took place during periods of extremely high debt.

While none of us are old enough to remember the Industrial Revolution, there are still many who recall the Swinging Sixties. The Golden Age of Capitalism is not ancient history, but we are encouraged to ignore it and instead to panic about today’s debt.

Fallacy #2: Taxing the wealthy would stop the trickle-down effect and the poor would suffer

Despite what we are told, taxing the wealthy is not inherently economically damaging. Here is the history of US top tax rates. It shows that the economy grew faster when taxes (and government spending and investment) were higher.

The times when the tax rates were higher, during the Golden Age of Capitalism, were precisely the times when the poorest benefited most. Since the late 1970s, worker’s pay has barely changed in real (inflation-adjusted) terms.

All of this is observable reality. But again, instead of trusting our own eyes, we are encouraged to fear that higher taxes would cause an exodus of ‘wealth creators’ and the poor would suffer most.

Fallacy #3: Creating money just leads to dangerous inflation

The Bank of England has used quantitative easing (QE) to create a total of £895 billion since the Global Financial Crisis – initially to stop the UK banking system from collapsing, and more recently to fund the country through the COVID pandemic. Of that £895 billion almost all (£875 billion) was spent buying government bonds. And that did not drive inflation – the Bank says, “QE has supported our aim of having low and stable inflation.”

The inflation we have today is caused by non-UK factors like Putin’s invasion of Ukraine pushing up energy prices. It is not driven by domestic policies.

We have seen with our own eyes that moderate amounts of money creation need not cause inflation. And as Lord Turner wrote in his book, Between Debt and the Devil,

“Central banks and governments together can create nominal demand in whatever quantity they choose by creating and spending fiat money.  Doing so is considered taboo – a dangerous path toward inflationary perdition.  But there is no technical reason money finance should produce excessive inflation, and by excluding this option, we have caused unnecessary economic harm.  ….  money finance of fiscal deficits is technically feasible and desirable, [and] it may be the only way out of our current problems.”

We are surrounded by messages to the contrary

If the arguments above are new to you, you will probably find them intriguing but hard to believe – for the simple reason that for every time you hear an argument along these lines, you probably hear a dozen contrary messages. And often these are from serious-sounding people like BBC journalists, or well-known think tanks.

On debt, for example, the BBC occasionally tells the full story but more often uses another fallacy – that governments should run like households – to perpetuate debt hysteria. Most of the media report uncritically the findings of the OBR and the IFS. And, although it has happened, the full picture of our debt history hardly ever appears in the mainstream media.

On increasing taxes, much commentary is about increasing existing taxes – which hit ordinary people – rather than targeting those who pay least in percentage terms: the extremely wealthy.

Money creation is such a taboo that it is hardly mentioned. The House of Lords Inquiry into Debt Sustainability is a good example of refusal to contemplate the issue (although ‘analysing’ debt sustainability without properly exploring the government’s power to create money is rather like an Inquiry into education that does not acknowledge the role of teachers or one into the state of our rivers that does not mention sewage). Our submission urged the Inquiry to give serious consideration to the fact that the UK runs a fiat currency system and can and does create money. We were astonished to see that the word fiat occurred zero times in their report and the depth of their analysis of money creation was illustrated by this short paragraph:

“Some witnesses endorsed Modern Monetary Theory (MMT). It posits that governments with their own sovereign currency are not fiscally constrained as they can print money to finance expenditure. History tells us that public spending unconstrained by a fiscal framework is very likely to be inflationary.”

As we have seen, history tells us the opposite – the spending funded by QE was not constrained by the fiscal rules then in place, and it did not give rise to inflation.

In short, many of those whom we might expect to give us the facts on these three issues do the opposite. Those who set our media agenda are not focussing on giving us the true picture.

This state of affairs suits some people

When we look at the UK’s long-run economic performance, this seems extraordinary: don’t these people see what we see? Don’t they want us to reverse course?

The answer is probably no. They see a different picture, and they quite like what they see.

From the perspective of the wealthiest, the Golden Age of Capitalism was not great – the gap between them and everyone else was narrowing sharply. But since 1980, things have gone into reverse: they are getting a steadily greater share of national wealth. What’s not to like?

Conclusion

We should trust our own eyes; and we should be wary of most of our media. This is very uncomfortable for most people, who do not have time to analyse these issues themselves. But it is important: as long as we keep formulating policy based on the three fallacies, we will continue to see decline.

So, here are some suggestions that can save you both time and anxiety:

1. When you see a piece talking about the ‘dangerous state’ of government finances which does not include data showing that debt:GDP is at the long-run average, explain that the government can create money whenever it needs to and point out that it is private sector debt which may be unsustainable, it is safe to ignore;
2. When you see a piece that talks about how increasing taxes on the wealthy would stifle investment and the poor would suffer which does not mention the data that show the opposite, it is safe to ignore;
3. When you see a piece that airily dismisses the government’s ability to create money with scary talk about hyperinflation in Germany or Venezuela but does not mention our own recent experience with QE, it is safe to ignore.

And, above all, when you see a piece that says that government finances are like household finances, it is safe to ignore.

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