This Starmer idea of British Recovery Bonds. Or, as Richard Murphy is claiming, his idea of stealing everyones’ savings. It’s possible to wonder at how stupid some people can be about the idea.
Think through it for a moment. The idea is that, currently, all those savings are just lying around doing nothing. This isn’t true – banks do make use of their deposit base – but leave that aside. If that all gets spent on consumption then we’ve a potential inflation problem. So, say some, we should head that off at the pass and make sure all those savings instead go into investment.
Which is a damn stupid thing to say:
Second, one of the features of the past year is that some households have built up a significant “involuntary” surplus of savings because they have been prevented from spending on the things they usually do. One of the great debates of the moment is how much of those savings will be spent, and there is a possibility of a great splurge, when permitted, on holidays, imported cars and consumer goods, and so on.
Some in the economy are desperate for that surge, not least if they are in the hospitality business. The risk is that there is too much of a release of pent-up demand and it is inflationary. The new bond could have the useful function, if only at the margin, of soaking up some of those savings and diverting them away from consumer spending and towards investment.
Now think back a moment to cod-Keynesianism. When demand is depressed, when we’re in a recession, the standard argument is that we must boost demand. Government does this by either – note either – going out and spending or by reducing taxation. The first round effect of either is the same.
But, as we’ve been told for 6 or 7 decades now, the effect is greater if the spending is increased upon investment. Rather than just frittered away by consumers on mere spending. Thus government should build a hospital, not us all go on holiday.
Why? Because the multiplier effect of investment is greater. For every pound of money printed or borrowed and then spent we get more of a surge in demand through investment than we do from mere consumption.
See what the argument is now? We will gain less inflation if the money is diverted to investment than if it were to finance consumption. That is, the claim today is that the investment multiplier doesn’t exist, that it is actually consumption which boosts demand more. That’s why diverting those savings into investment rather than consumption will lead to less inflation.
We could even agree with this if we wanted to. But if we do then we’ve just made the case that in the next recession we don’t boost investment, we cut tax instead.
Of course, we know that the real point being made here is. The solution to whatever ails the economy is that the establishment get to spend more of our money. But we should at least demand logical consistency from them as they demand our cash with menaces.