Dear readers , once again accept my apologies for a long absence. The reasons have to do with a period of productive activity (of which more below) and travel, which kept me busy. But I have to admit too that, in the midst of the gathering gloom, and with central bankers raising fears about the spectre of deflation there seems little to add to the arguments that I, and my colleagues have been making since 2003. Not to mention the comments made to the Times in October, 2009 .
Then, nearly a year ago, in the midst of much hype about the ‘recovery’ I bravely (given the scale of consensus) stuck my neck out and warned that ‘the worst was yet to come’…… That the deflation of the vast debt bubble blown up by the finance sector, and cheered on by central bankers, neo-liberal economists in think tanks, the media and academia…had a long way to go. That the debt-deflationary process is going to be prolonged, painful and destructive – unless enlightened governments learn the lessons of history and intervene. Sadly, however, as I argued in that interview “….now there is a consensus that governments should not spend any more in this crisis. That will tip us into a big depression.”
The threat of that debt-deflationary depression, exacerbated and even accelerated by the mania for austerity, now looms large. There is only one way to avert it, and that is for governments to urgently reverse public spending cuts, and for Central Banks to provide governments with the finance and funding (QE) needed to invest in productive activity (preferably activity that will orient economies away from fossil fuels). Sadly, banks are not providing that funding to governments or the wider economy. On the contrary, rather than lending to the wider economy – which is after all their given role and raison d’etre – banks are borrowing from the wider economy, according to the Bank of England. (Update) They need to refinance or replace around £750 billion to £800 billion of term funding and liquid assets by end-2012. Which means that far from lending into the economy, they will have to borrow about £25 billion a month for the next 2.5 years to replace this financing.
So UK bankers and the banking system are now the problem, not the solution. Instead we need intervention – by government and central banks. By such intervention, governments and central bankers could offer their citizens, industrialists and tax collectors the one and only panacea for this looming Depression: full employment (Tom Ferguson of New Deal 2.0 tells it straight in this interview).
Here in the UK the government coalition, cheered on, above all by economists at the Treasury, by the Institute for Fiscal Studies, the BBC, Policy Exchange and numerous other think tanks, is tackling the ‘ enemy’ that is the elusive ‘structural deficit’. Both Lib Dem and Conservative ministers are going about this in much the same way as General Haig tackled the German army in World War I: by ignoring history, proven economic theory and laws, data, skill and intelligence, and preaching to the nation about the need for sacrifices.
“The nation must be taught to bear losses. No amount of skill on the part of the higher commanders, no training, however good, on the part of the officers and men, no superiority of arms and ammunition, however great, will enable victories to be won without the sacrifice of men’s lives.
The nation must be prepared to see heavy casualty lists.” Haig June 1916 before the battle of the Somme.
Today the people of Britain are being prepared to face long lists of the unemployed, and so far, they seem content to do so. Of course the suffering of those butchered soldiers and their families was incomparably greater than the economic pain we are now enduring in countries led by today’s economic equivalents of General Haig. Nevertheless we too are lions led by donkeys – and the suffering that is to come will be unbearable for many millions of our fellow citizens.
Indeed it is just that thought that has depressed and silenced me these last few weeks.
But I refuse to allow today’s ‘General Haigs’ to win this ideological onslaught on the victims of a financial crisis caused by bankers – for that indeed is what it is. Instead I have been busy working with Professor Chick and a network of economists to establish a new think-tank: PRIME – the Policy and Research Institute for Macro Economics. We hope through our work to provide an antidote to the micro-economists that dominate so much commentary, and to counter silly assertions like that made by Tim Harford in last Saturday’s FT. Defending the models that micro-economists so enjoy tinkering with, he argued that like architects and their buildings, economics is not governed by laws. No, it seems, economics, like architecture, is a matter of ‘trial and error’.
So let’s try an experiment – one that those who ignore history have not tested on models. Let’s make millions of people unemployed. Let’s have a go at stripping the poor and vulnerable of what dignified protection they enjoy. Why not try keeping a whole generation of young people out of the work place, earning nothing – as a social experiment? What do we think might happen?
“Duh. We don’t know, do we?” plead the micro-economists. “After all, it is a matter of trial and error….. Just like buildings only stand up because architects built them on the basis of ‘trial and error’ and not on the basis of laws like the law of gravity….so what sensible micro-economist could fashion a mathematical model to predict what will happen to the so-called ‘structural deficit’; to economic activity, to society as a whole – as a result of mass unemployment?”
One answer could be: “the kind of economist that has read the history of the 1920s and 30s and that has studied and understood some basic macro-economic laws as outlined by all the great, if now marginalised economists – from John Law through to Adam Smith, Karl Polanyi, John Maynard Keynes, JK Galbraith to Herman Daly. ” (Do readers know that Keynes’ theories are not (or at least until recently were not) included on the Cambridge Economics curriculum? )
Those are the kind of economists we expect to assemble at PRIME. To counter potentially lethal economic ‘trials and errors’. And offer a route out of economic trench warfare.