China has exposed the fatal flaws in our liberal economic order

Floor of the New York Stock Exchange, Thomas J. O'Halloran, 1963

Floor of the New York Stock Exchange, Thomas J. O’Halloran, 1963

How can we make sense of volatile global stock markets? Economists explained this week’s dramatic falls by pinning responsibility on China. They are at pains to assure us this is not 2008 all over again. I beg to disagree.

Even though data is not reliable, it appears that China is slowing down. By 2009, the Chinese authorities were embracing the Western economic model that had just brought down much of Western capitalism. Undeterred, they launched a massive credit-fuelled investment programme. Growth soared at 10 per cent per annum. Investment recently peaked at an extraordinary 49 per cent of GDP. Total debt (private and public) rocketed to 250 per cent of GDP – up 100 points since 2008, according to the IMF. Property and other asset markets boomed, as did consumption. The Chinese should have been warned, for they won accolades from Western economists for their “Goldilocks” economy.

China’s stimulus helped keep the global economy afloat in the years following. But there are economic, ecological, social and political limits to a developing country like China continuing to support richer economies. And there are limits to Beijing’s willingness to abandon control and adopt in full the Western neoliberal economic model; the Communist Party has begun intervening. It is this intervention, we are led to believe, that spooked global markets.

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Jubilee debt write-offs & Occupy Wall St: on

Photo by Maz Kessler

Joan Walsh of asked me some questions on Occupy Wall Street and wrote this article:

As the Occupy Wall Street movement spreads to dozens more cities and towns, it’s waking many Americans to the unrivaled control Wall Street exerts over American politics and the economy. It’s also shining a spotlight on the crushing amount of debt carried by Americans today – debt that’s at the core of our lingering economic troubles, which many experts believe can never realistically be repaid.

In 2007, American debt was 100 percent of GDP; today, after an austerity binge, it’s down to 90 percent, which is still a stunning imbalance. Almost a quarter of all home mortgages today are currently underwater, 2 million homes are in the foreclosure process – and at least 5 million homes have already lost to foreclosure since 2007. American student loan debt is over $1 trillion right now, higher than American credit card debt, with the average student leaving school with about $24,000 in loans.

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My verdict on Ed Balls’ conference speech – apologies are not enough

Published in the Guardian Cif alongside responses from Jonathon Freedland and Sheila Lawlor:

Ed Balls said sorry for Labour’s record on ultra-light-touch financial regulation, and that must be acknowledged.

But apologies are just not enough. He and Ed Miliband must stop attacking his electoral base, “hardworking families”, many of whom are trades unionists.

As Balls recognises, unless urgent action is taken, this may be the gravest economic crisis in history – given the global integration of finance and the growth of world population.

So Balls must go further.

First, he must declare loudly and forcefully that Labour will never again be captive to neoliberal central bankers like Alan Greenspan; or private bankers like Sir Fred Goodwin of RSB.

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The game is up: the age of liberal finance over. The Left's Plan B?

By Ann Pettifor. An edited version of this piece was published on Left Foot Forward, 14 September, 2011. This original, longer version posted 19 September, 2011. 

The game is up. The 2007-9 private banking crisis that started with the unpayable debts of the US sub-prime sector, was never over. The crisis has now moved on to include the unpayable debts of sovereigns owed to private European bankers. It is increasingly clear that there is declining political and institutional support for further private bank bailouts. The dramatic resignation on Friday 9th September of Jürgen Stark, architect of Europe’s equivalent of the Gold Standard – the Growth and Stability Pact – marks an important step in the resistance to bailouts by the ECB; in the inevitable collapse of the Maastricht Pact, and with it, the utopian vision of the neoliberal Euro.

And so the age of liberalised, de-regulated finance appears to be over – at least in Europe. That is the conclusion of investors in both Wall St and the City of London and explains the collapse of confidence in banks and the volatility of stock markets as investors rush for the exits, transferring speculative gains into the safety of government bonds.

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Making the boom interviews and upcoming talks

It has been a busy week in Australia – I will be posting in more detail very soon. But for now you can listen to an interview with me on ABC Radio National Breakfast:

For any of you in Sydney – come along to the Catalyst event: ‘Making the boom pay… if not now, when?‘. I will be speaking along with others, more details are here:

What a financial tailspin may mean for you and me

Wall Street plummeted as concerns over European debt and the US economic downturn spurred a broad sell-off. Photograph: Shen Hong/Xinhua Press/Corbis

Read my article from Guardian Cif, Friday 19th August:

As bank shares and stock markets plummet, and investors flock to the safety of government bonds; as obstinate EU leaders crucify their countries in a futile struggle to defend today’s equivalent of the gold standard; as British and American politicians adopt austerity policies and drive their economies closer to the cliffs of depression; and as most professional economists stand aloof from the escalating crisis – what lies ahead for ordinary punters like you and me?

First, let’s take look at the big political picture. This crisis is already sharpening the divide between left and right in both the EU and the United States. Studying a precedent – the implosion of the 1920s credit bubble in 1929 – we note that four years after that crisis erupted, the political divide sharpened decisively. The United States and Britain moved to the left. Germany chose a different path. After 1930, Germany’s Centre party under Chancellor Brüning adopted austerity policies that resulted in cuts in welfare benefits and wages, while credit was tightened. At the same time the German government engaged in wildly excessive borrowing from the liberalised international capital markets. The ground was laid for the rise of fascism.

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Eight fallacies in the LSE Keynes/Hayek debate

Tonight, Wednesday 3 August 2011 at 08.00pm BST (GMT +1), BBC Radio 4 will broadcast a debate which took place at the London School of Economics (LSE) on 26 July.  This broadcast will be repeated on Saturday, 6 August, at 10.15 p.m BST (GMT +1).

Along with my colleagues Prof. Victoria Chick and Douglas Coe at PRIME  we have written the following response to the debate:

Debaters considered whether Keynes or Hayek had the solution to the present financial crisis. The economist George Selgin and philosopher Jamie Whyte spoke for Hayek; Keynes’s biographer Robert Skidelsky and the economist Duncan Weldon spoke for Keynes.

On the one hand we are pleased that the BBC and the LSE now acknowledge rival positions to the present austerity policies of Western governments. On the other  we are concerned that the debate might have served mainly to reinforce existing prejudices, rather than to clarify the substance of the matters under discussion, matters which – there can be no doubt – are of the most profound importance.

Lord Skidelsky provocatively but justly reminded the audience that in the early 1930s, the same orthodoxy driving western austerity policies directed the actions of Germany’s 1931 Bruning government and paved the way for the rise of Nazism. These actions – vigorously opposed by Keynes – were the final straw for a Germany crushed by defeat and the disastrous boom-bust cycle that followed their return to the gold standard. Reparations were easily circumvented by wildly excessive borrowing from financial interests around the world, in a manner that even Keynes did not anticipate. It was these financial and fiscal policies that brought Hitler to power.

With financial interests still firmly in the ascendency and reactionary right-wing forces increasing their grip in the United States and much of the Western world, we must not forget these lessons from history, which formed the background to the original debate between Keynes and Hayek themselves. The stakes are high indeed.

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Clinton spots it: the austere emperor has no clothes.

The austerity brigade is rattled. Daniel Knowles at the Daily Telegraph is so worried, he has had to rise to the defence of the Treasury and OBR – and then resorts to proposing Greece’s economic strategy for the UK. Why? Because orthodox economic ideology has been challenged by none other than Daniel’s ‘hero’ President Bill Clinton. Bill gets it. On the deficit that is.

Thanks to Left Foot Forward and Mehdi Hasan we have all read Clinton’s  speech:

“(the) UK’s finding this out now. They adopted this big austerity budget. And there’s a good chance that economic activity will go down so much that tax revenues will be reduced even more than spending is cut and their deficit will increase.”

Daniel Knowles contests his hero by drawing attention to the OBR’s use of the multiplier, on the following grounds:

“The Office of Budget Responsibility..using a Keynesian model, estimates that the fiscal multiplier is about .35”……that means that…overall the deficit is will be smaller than it would have been without cuts….. (Note: Knowles Update:  “I actually made a mistake with that statistic – 0.35 is the estimate for the multiplier for VAT. Estimates of the fiscal multiplier overall, including those of the OBR, IMF and others, are closer to 0.”)

Before I respond, let me say what a relief it is to hear orthodox economists and right-wing bloggers talking about the multiplier. For the past twenty years multipliers have been buried in macroeconomic models, and not discussed as matters of substantive consequence. But they most certainly merit being drawn into the light of day, given unemployment in the UK stands at around 2.5 million and the widespread fear and paralysis now prevailing. To do so, let us examine the consequences of the government investing £1 billion in building wind farms.

Keynes and Hubert Henderson devised the original idea of the multiplier. They understood that the primary expenditures on any public works project would lead to secondary expenditures as the newly employed spent their wages on other goods and services produced by the private sector. Richard Kahn then looked to quantify the scale of these repercussions. He concluded that the effects on national income of investment expenditures would be around twice the original outlay, and equally the impact on employment would be of a similar order. Repeated assessments supported Kahn’s view: the multiplier was around two.<!–more–>

There were then improvements to the public finances. Increased national income and employment meant increased taxation revenues and reduced benefit expenditures. Keynes was always very confident, and asserted that the effects of the spending would more than cover the costs. The exact impact, however, depends on the precise value of the multiplier, the average tax rate and the size of benefits.

The ‘Economic Consequences of Mr Osborne’ written by Professor Victoria Chick, myself and PRIME colleagues, vindicates Keynes and Kahn. We show that spending did reduce the public debt (and as Clinton claims, cuts increase the public debt), so their assessment of the multiplier must have been roughly right.

Today the multiplier may well be different (around 1 1/2 perhaps), but tax rates and benefit expenditures will be higher, so it seems likely that a similar assessment should hold today. The building of the wind farm would return at the very least, £1 billion to the Treasury.

We are now told that the Office for Budget Responsibility has adopted a model of the economy with a ‘multiplier’ of 0.35 on VAT, and 0.0 on government [investment?] spending overall.

These figures imply that the investment of £1billion in a windfarm would lead to no change in overall GDP.  Given the expenditure on the windfarm has to score in national income, – the only way this conclusion can come about is through a simultaneous cut of £1billion in other government expenditures.

So, the OBR implies, the consequences of government investment in a windfarm are as follows:

a)      The workers who get new jobs, stash their wages/salaries under the bed, and do not spend these.

b)     If they do happen to spend, then all their expenditure goes on imports – they spend nothing in British-owned businesses.

c)    The rest of the economy takes such fright at government expenditure policies that the private sector cuts back on expenditure on consumption and investment.

There may be some who believe that this is a realistic outcome from an investment of £1 billion, but they can only live in ivory towers. Most people understand the basic principle that when the private sector is not spending the government must step in and that this government investment will in turn revive private fortunes. When people are employed and earn money, they use it to buy or pay for the basics: accommodation, food, clothing and travel. When they are unemployed, and without income, they do without these.

So all Daniel Knowles reveals is that the OBR model is most definitely not Keynesian.

In fact it is an insult to his and Richard Kahn’s work to describe it as such. It is the very reverse of what Keynes and Richard Khan argued, (for more see appendix 1 of ‘The Cuts Won’t Work‘)


But Knowles inadvertently has done a public service. He has revealed how the OBR has managed to arrange the books so that austerity does not damage the economy. The multiplier has been used in a thoroughly un-Keynesian way so that the OBR can draw conclusions that are the opposite of Keynes’s own. It explains how the OBR can present huge cuts in public investment as making no difference to overall prosperity. Moreover, given it involves the negative processes outlined above, he has revealed how unlikely this is to hold in practice.

Some may see debate about the multiplier as being about a mere technicality – opaque economic jargon.  It is not. It is fundamental to the possibility of economic recovery.

Those who argue for government investment – as we do – have backed up our arguments by showing that spending on public works leads to both economic recovery – but also improved public finances.

Those opposed to government investment – argue instead that government investment makes no difference either to recovery, or to the public finances.

Which is why we have to thank Daniel Knowles for shining a light on the OBR’s tactics.

Knowles needs to listen more carefully to ‘hero’ Clinton on deficit reduction

The austerity brigade is rattled. Young Daniel Knowles over at the Daily Telegraph is so worried, he has had to rise to the defence of the Treasury and Office for Budget Responsibility – and then resorts to proposing Greece’s economic strategy for the UK. Why? Because orthodox economic ideology has been challenged by none other than Daniel’s ‘hero’ that notorious womaniser, President Bill Clinton.

Bill gets it. On the deficit that is.  Thanks to Left Foot Forward and Mehdi Hasan we have all read Clinton’s  speech:

“(the) UK’s finding this out now. They adopted this big austerity budget. And there’s a good chance that economic activity will go down so much that tax revenues will be reduced even more than spending is cut and their deficit will increase.”

Daniel Knowles challenges his hero, on these grounds:

  1. “The government cannot spend so much that net revenues actually increase. By Clinton’s logic we should increase spending until our deficit goes away. ”
  2. “The Office of Budget Responsibility..using a Keynesian model, estimates that the fiscal multiplier is about .35”……that means that…overall the deficit is will be smaller than it would have been without cuts….. (Note: Knowles Update:  I actually made a mistake with that statistic – 0.35 is the estimate for the multiplier for VAT. Estimates of the fiscal multiplier overall, including those of the OBR, IMF and others, are closer to 0.)
  3. Greece: spending cuts have reduced the deficit from 15.4% of GDP in 2009 to 9.5% now.

The first two points are rightly, morphed together in Knowles’s argument. The first is to do with the impact of government spending. In a slump – which we are living through now – it is vital for the government to spend to fill the investment vacuum created by an over-indebted and extremely nervous private sector, desperately trying to de-leverage its debt. Right now the UK private sector is busily hoarding cash, because they are – rightly – worried about their levels of debt; and because they fear – rightly – that if they do invest, customers (both private and corporate) will not walk through the door – because customers too, are heavily indebted and worried about the threat of unemployment and falling house prices.

So given these circumstances of widespread fear and paralysis in the economy – what the ONS calls ‘flat-lining’ –  say the government invests £1 billion in libraries. What would happen next?

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Is the banking crash imminent?

Bernard Madoff’s 90ft yacht ‘Bull’ is offered for sale in Monaco for €3m this week. Image source: associated press.

I learnt to my cost that the role of Cassandra is no fun.  Why “Apollo’s cursed gift is a source of endless pain and frustration.”

While it is possible to note that the ‘tectonic plates’ of the financial system are shifting and that those shifts presage a ‘financial earthquake’…unless one can get the timing of these things right – one’s insights are, rightly, scorned and ridiculed.

But I am now more attuned to the signs.

In the run-up to the 2007-9 crisis advertisements for yachts started appearing in the FT’s ‘How to Spend It’ magazine. First, there were one or two. Then more. Then they expanded and became double-page spreads. The vast backgrounds of sea and sky, set against the shiny white of the boats were blinding to the casual, disinterested reader. But as the credit-fuelled asset bubble expanded, text on these glossy ads disappeared. There was just the sea, the sky, the vast burnished white boat and some numbers: $7 million.

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