With acknowledgements to the Economist: front cover 26 November, 2011

Dear readers…posted this last night, but  failed to add links…so have updated this morning….And now at 12.54 on 28 Nov, following revelations from Bloomberg, am adding in a reference to the extent that Morgan Stanley was bailed out in 2008.

A petard, I am reliably informed by the Web,

“was a bell-shaped metal grenade typically filled with five or six pounds of gunpowder and set off by a fuse. Unfortunately, the devices were unreliable and often went off unexpectedly. Hence the expression, where hoist meant to be lifted up, an understated description of the result of being blown up by your own bomb.”

Correct or not, this is a helpful analogy for the crisis of the Euro. The grenade that is the Euro has a fizzing fuse that threatens to explode imminently, causing visible panic in markets, in parliaments and treasuries across the world. Mainstream economists are either dodging the bullets and like the cowards they are, pretending that ‘it’s nothing to do with me guv’.  Or else they’re panicking in ways that are crass and unhelpful, banging their heads against the brick wall that is the Bundesbank and ECB, and demanding that someone, somewhere defuses the bomb.

The Economist has a dramatic leader this week (“Is this really the end?”) warning of grave threats and offering Chancellor Merkel and other EU leaders ways of avoiding a comet-like crash. Like many others, leader writers on the Economist, somewhat belatedly, want the ECB to act as a central bank, and to  provide liquidity to sovereign members of the Eurozone.

“Vast monetary loosening should cushion the recession and buy time” argues its leader.

Too late. By calling for ‘monetary loosening’ the Economist is indulging in a form of mindless head-banging.  Like so many others desperate to preserve the Euro, leader writers at the Economist cannot fully face up to the contradictions inherent in their own orthodoxy, and in the Eurozone currency and monetary system created and cheered on by mainstream economists – including those on the Economist. Contradictions that are so strongly held by the ideologues that drafted the Maastricht and other texts, that they are carved in legal stone into the Eurozone’s various treaties – and will not easily be erased.

The fact is that the ECB is designed to be the very antithesis of a central bank. Its purpose is to ensure that sovereign governments do not ever draw on the kind of ‘liquidity’ provided by publicly-backed, nationalised central banks such as the Bank of England. The latter is now providing £75 billion of ‘liquidity’ support to the British government, albeit indirectly, and plans to print more of the stuff in February.  Similarly, the Federal Reserve has provided vast sums in support of the US public and private sectors (see this story on Bloomberg (29 Nov, 2011) about the secret Fed loans to private banks in 2008 and the $13 billion of income reaped by same banks taking advantage of the Fed’s below-market rates. Also see this chart’s revelations of how Morgan Stanley was rescued by the Fed – at a time it pretended to be whole: Felix Salmon, Reuters, 27 Nov 2011.)  The Bank of Japan provides generous support to the Japanese Treasury and Japanese industry.

And good that they do so too. At times of crisis, when private bankers fail – society needs a lender of last resort – a public central bank that stabilises the financial system, allows the real economy to carry on working, and acts as a backstop to a private financial system that regularly fails society.

But this is not the purpose of the Euro, the ECB and the monetary system created first, by the Maastricht Treaty, and then by subsequent Treaties.  Instead its purpose is to deny governments a sound monetary system that acts in this way, and that works for society as a whole. All these Treaties force Eurozone governments to turn to, and depend on the private banking sector for financial resources.

That is why the Euro is the wet-dream of private wealth. (For more on this, see “Open Letter to the people of Greece: restore the drachma.” 21 June, 2011.)

As a result of its construction by conservative and orthodox economists and policy-makers – heavily influenced by private bankers –  sovereign governments (like Greece, Spain, Italy) upon joining the Eurozone have to borrow from private banks. They can no longer rely on a publicly-backed central bank  for borrowing; to help compensate for a slump, mitigate a private financial crisis or manage public finances.

Furthermore, the rules of the Eurozone oblige these governments to borrow in what is effectively a foreign currency – or at least a currency over whose value they have very little influence (unlike the influence that governments have over the Dollar, Sterling and the Yen).  And to do so on the basis of rates of interest set by a group of technocrats – with no real commitment to the health and success of individual sovereign economies. Instead these technocrats – on the board and staff of the European Central Bank – have an overwhelming commitment to an economic ideology that demonises the wider public interest, and upholds, almost as sacred, the interests of the private banking system.

That interest is most clearly expressed as an abhorrence for ‘inflation’ – the phenomenon that lowers the value of a creditor or banker’s chief asset: an outstanding loan. Inflation erodes the value of that loan, and is the thing most loathed by creditors. By its fixation on inflation and private creditor interests, the ECB is inured to, and intransigent when it comes to the wider, public interest: the interests of Europe’s democracies. More frighteningly, the ECB is inured to the much graver threat of debt-deflation. (See Irving Fisher’s Debt-Deflation Theory of Great Depressions.)

That much most of us know. What few will publicly acknowledge is that in persuading policy-makers and orthodox economists to construct the Eurozone monetary system, private bankers had reached a form of nirvana. Not only had they eliminated competition in the sovereign lending markets from publicly-backed central banks; but they had also been given effective guarantees that they could lend vast sums (far more than e.g.they lend to corporates) to sovereigns such as Greece, without fear of loss. Greece would not be allowed to default, the treaties ensured that. And if sovereign governments were slow in paying, the stronger members of the Eurozone (most particularly Germany) could be expected to cover and guarantee no private losses.

Of course it takes two to tango.  Greece also got to borrow at levels she could not do before; and at rates of interest more appropriate to the German economy. So Greece’s reckless politicians turned up at the bankers’ party – and gorged themselves on debt.

The bankers never lost a night’s sleep. They had all those treaty guarantees – drafted by clever economists.

Now imagine if you were a farmer, wanting to sell tomatoes to sovereign governments across Europe. Would such treaties as the Maastricht treaty and the one that governs the ECB not have been of enormous help to a) guarantee sales of tomatoes b) remove competition from other tomato sellers and c) ensure compensation, should buyers go bust and fail to pay up?

Given that conditions were set up in this way for the private banking system – the bleating of the Economist and others for the ECB ‘to print money’ – is a) many years too late; b) hypocritical, but most importantly c): an open admission of the catastrophic failure of economic orthodoxy and its construction of the Euro. Above all, of its complete subordination to the interests of private finance.

The tragedy is this: when the Euro blows up, as it must, harm will not be restricted to its architects, or the private finance sector.

Have just been told that my post on the Left Foot Forward on Ed Balls’s speech  crashed the site “under weight of people wanting to read it”…so here it is for those of you that may have missed it….

David Cameron was delighted when the formidable Ed Balls walked straight into his framing of the debate on the deficit – and was promptly trapped.

That framing goes as follows. We (the government) have spent beyond our means. And the way to pay for it, is by cutting (public sector) jobs, and raising taxation - like VAT.

Ed Balls’s speech concedes (as Labour has done since Alastair Darling’s time at the Treasury) the deficit-reduction-emphasis agenda set by his opponents. And by so doing – implicitly concedes the need to cut public sector jobs.

But I am being unfair.  Balls began his speech by mentioning Labour’s “emphasis on jobs and growth” But the speech immediately morphed into Labour’s concession to the Coalition: that what is needed is “a steady and balanced approach to halve the deficit in four years”. The implication being that cuts must be matched by ‘jobs and growth’.

But the highlight of the speech – the sound-byte that his spin doctors no doubt intended the media to emphasize-  is a call for a cut in VAT “to boost consumer confidence and jump-start the economy.”

Cameron flashed back his retort: ”slashing taxes” he argued, would only make the UK’s fiscal deficit worse.

And so Balls is trapped.

The debate now centres on whether the deficit can be financed by increasing or cutting taxes, in particular VAT. For most people, Cameron has the upper hand.  ’Of course the deficit can only be financed by increased taxes’ is the consensus. Because we have ‘spent beyond our means’ – we have to raise taxes, like VAT.   “Slashing” VAT – when it’s higher VAT returns that are paying down the deficit – is unacceptable to the Coalition, to the Treasury, to orthodox economists and to the bulk of the British public.

But that’s only because most have been drilled in the propaganda: “the deficit is like a credit card”. We need to pay it down. To do so, we have to mobilise/hoard ‘savings’ – i.e. higher taxes – to pay down the ‘credit card’.

But the government’s deficit is not like a credit card. And nor do we need ‘savings’ to pay it down.

The only surefire way of paying down the deficit is not by government cutting the deficit – which I and others have argued it cannot do -  but by employment.

Put 2.43 million people back to work, and hey presto! the deficit will vanish.

Get 2.43 million people – including thousands of skilled and unskilled workers, clever and talented student graduates –  to address Britain’s very real insecurities in energy, food and health – and hey presto, the deficit will be financed.

How? By the tax revenues that will pour into the Treasury’s coffers, either directly or indirectly – and by the savings that will be made on welfare benefits.

However, keep 2.43 million people unemployed, keep them feeling insecure, with their purses firmly shut, and you can guarantee an ever-rising government deficit (April’s deficit numbers were the highest on record for that month).

And 2.43 million unemployed is sure to make British ‘confidence’ fall and the recession deepen.

Ed Balls has to face this fact: cutting VAT on falling retail sales will do little to ‘restore confidence’. Confidence is evaporating, and retail sales are falling, not just because of VAT – but because of the fear of unemployment.

The only thing that will restore confidence will be: employment. And while it is encouraging that the private sector created 88,000 jobs between February and April, that still leaves 2.43 million people economically inactive, unemployed and lacking in confidence. Many millions more are worried about their job security, rising fuel and food prices.

So Ed Balls’ speech should have gone like this.

Jobs will cut the deficit.

Look after unemployment – and the budget will take care of itself.

And if the private sector can only create 88,000 jobs in 3 months - while 2.43 million people remain economically inactive, depriving the Treasury of tax revenues, costing the Treasury dear in welfare benefits – and causing the deficit to rise even higher – then government must step in and spend on public works, to create jobs.

Jobs will cut the deficit – and simultaneously create the ‘confidence’ the private sector needs to invest – to create more jobs.

That framing would have put David Cameron on the defensive – would have pleased Labour’s base, and would have encouraged insecure voters. It would have put Ed Balls and Ed Miliband in a ‘winning state of mind’.

Instead we are back on sterile, old territory: the centrality of the deficit to all of political debate, and economic policy-making, and the eclipse of the subject of unemployment.  Paying down the deficit as Labour’s leadership and its right-wing constantly concedes, is REALLY IMPORTANT. For the Coalition it is is far more important than creating jobs, and getting 2.43 million people back into meaningful work.

So let’s go on emphasizing the deficit, and ignoring the unemployed. But please, spare us the tears and anguish of politicians and economists when the deficit keeps rising!

Once again apologies for a longish absence. This is down in part, to smashing (literally) building works, to a little grandchild-minding, and to other writing commitments. But have been itching to comment on a) Greece and the EU b) Iceland (it seems the UK is easing up on the pressure); c) the progress of the global recession; and d) China-US relations…..so posts on a, b, c and d are on their way….promise.

In the meantime this is the text of a letter I signed and helped draft, published in today’s Observer, and yesterday (20 Feb 2010) in the Times. It is a response to the letter written to the Sunday Times last week by 20 conservative economists, including Ken Rogoff of Harvard, Lord Megnad Desai, previously a Labour peer, and Bridget Rosewell, who was Mayor Ken Livingstone’s economic adviser.

Our letter has a number of distinguished economists as signatories, as well as my pals in the Green New Deal group – all of whom I am proud to be associated with.    See below.

Sir,

We urge the UK government not to heed the siren song of the 20 economists who, having failed to predict the crisis, now seek to advise on its resolution. The world economy is in the deepest recession since the Great Depression. In the UK, output has collapsed by £70bn on an annual basis. Under such conditions, common sense tells us that the government must compensate for the collapse in private investment and address the high level of unemployment.

The only way to restore the public finances to health is to restore the economy to health.

And that means public investment (not cuts) to create jobs and income in the private and the public sector. Government should oblige the banks that have been effectively nationalised to lend to the public sector at low rates of interest. Consequent tax revenues raised and savings on benefit expenditure will reduce the public debt. As Keynes observed: “Look after the unemployment and the budget will look after itself.”

There is already a credible plan on the table. It is called the Green New Deal. Invest now and we could kick-start the transformation of the UK’s energy supply while creating thousands of new green-collar jobs, restoring the UK’s skills-base and building the recovery on the manufacture of necessary goods. We urge the government to act now and implement the Green New Deal without delay.

Andrew Simms

Policy director, new economics foundation, London SE11

David Blanchflower

Professor of economics, Dartmouth College

Dr Anastasia Nesvetailova

Assistant professor, international political economy, City University

Victoria Chick, emeritus professor of economics, University College London

Andy Denis, senior lecturer in political economy, City University London

Ann Pettifor, director, Advocacy International

Christine Cooper, professor of accounting, University of Strathclyde, Scotland

Colin Hines, convenor, Green New Deal Group

George Irvin, professorial research fellow, University of London, SOAS

Ismail Erturk, senior lecturer in Banking, Manchester Business School

Prem Sikka, professor of accounting, Centre for Global Accountability, Essex Business School

Richard Murphy, Tax Research LLP

Dr Stephanie Blankenburg, Department of Economics, SOAS

Stephen Spratt, chief economist, nef and six others

15th January, 2009.

Patient readers this blog is triggered by Jeff Randall’s column in the Daily Telegraph today.

In it he inadvertently discloses the identity of the puppet-masters dictating the Tory political agenda around public spending cuts.

In a somewhat histrionic column in which he describes the public deficit as a ‘disaster’ ( he should mind his language: Haiti’s earthquake is a disaster) Randall quotes a piece of ‘research’ by the French bank, Société Générale.  The paper is titled “Popular Delusions” and its authors explain some simple facts about government spending cuts to Telegraph readers:

“Removing the stimulus will involve pain; lower growth, higher unemployment and political unpopularity.”

Not for bankers it won’t.

The Société Générale authors continue:  “But policy-makers don’t like lower growth, higher unemployment and political unpopularity.”

Forgive me for interrupting dear bankers, but a little more ‘research’ might reveal that it’s not ‘policy-makers’ that don’t like pain and higher unemployment.  Its the people. The victims. Known in a democracy as the voters.

The bankers drone on:  “They (the politicians) enacted the stimulus in the first place to avoid it!”

Such blinding insight.  They, the elected, democratic politicians, rightly fear that ‘pain and unemployment’ will incur the wrath of the voters – especially if this pain and unemployment is a direct result of the greed and irresponsible behaviour of a small elite of financiers.

Then our bankers pose a rhetorical question: “At what point will they (the politicians) decide they do want lower growth, higher unemployment and political unpopularity?”

Bravely, they volunteer an answer:  “Given the choice, they won’t, ever.”  (And if the choice is put to the people, does that mean that, given a choice, they won’t ever vote for George Osborne and his friends?)

It is at this point that our bankers at  Société Générale turn nasty and spell out the threat:

“So it will be imposed on them …….. by a suddenly less generous bond market via a government funding crisis.”

This is nothing short of blackmail. Blackmail of democratically-elected and accountable politicians.

Furthermore this is blackmail from bankers at Société Générale whose recent history is one of fraud, incompetence, scandal and a taxpayer-backed bail-out.

Let me remind you dear readers, of that recent history.

In January, 2008, according to the Wall St. Journal (30 April, 2009) “Société Générale – a French bank – disclosed it had lost €4.9 billion ($6.44 billion) – the biggest net trading loss by one person in banking history – at the hands of a low-level employee who the bank alleged had engaged in unauthorized and unhedged trading for nearly two years.”

When news broke of this massive fraud and of the incompetence of those managing traders at the bank, President Sarkozy of France stung by growing public anger,  lashed out at the bank and particularly its chairman, Mr. Bouton (pictured above):

“We have to put a stop to this financial system which is out of its mind and which has lost sight of its purpose” Reuters quoted him as saying on 26th January, 2008.

The President placed public pressure on the chairman of the bank to resign, but Daniel Bouton “would not bow to political pressure”.

Why should a banker bow to mere democratic pressure?  After all, bankers live in an ‘offshore’  world – beyond the reach of democratic institutions – the world of ‘offshore capitalism. ‘

“As the credit crisis spread in October (2008), the French government announced it would provide €10.5 billion to the country’s banks to help them continue lending to individuals;

“Société Générale received €1.7 billion of those funds.”

“Then, as French workers took to the streets this year to demand that the government introduce measures to boost their spending power, the bank announced a plan to reward bosses, including Mr. Bouton (the chairman), with stock options. It was only after President Nicolas Sarkozy called the move “a scandal,” that Mr. Bouton and others agreed to renounce the options.”

These are the bankers that act as trusty ‘researchers’ to Jeff Randall, and as puppet-masters to those politicians – the Tories – that ruthlessly disregard the interests of their voters.

The question is this: will Telegraph readers vote for these puppets?  Call me naive, but I don’t believe they will.

It has been an extraordinary day this day, and something to witness: this frenzy of pre-election fisticuffs.

Extraordinary because Conservatives, like mindless bullies, are fighting a phoney war against the victims of this crisis.

The fact is the Tories are spineless scaredy cats, too timid to take on the perpetrators, who have successfully bribed them with various inducements, including the playground’s shiniest marbles.

As a result they have turned away from the perpetrators, and   are picking on nurses, policemen, teachers, civil servants, Alzheimer-carers, school cooks, hospital cleaners and psychiatrists – to categorise but a few.

All these victims of the financial crisis now stand accused – by the Tories and their friends -  of pillaging Treasury coffers of £250 billion  – the rise in government debt since this crisis started in 2007.

In the schoolground-type frenzy that has ensued, the Tories have been joined by most mainstream commentators including the BBC’s Stephanie Flanders and Robert Peston whose analyses are happily amplified by the smug and largely economically illiterate guests invited on to Newsnight.

Vainly they call for reinforcements – from the Ratings Agencies who have steadfastly refused to join in the bunfight, but whom the bullies claim to have on side.

Then as the dust flies and the victims scream for help, Labour and the Liberal Democrats pile in – like the nervy boys in a class hovering around the school bully as he beats up on innocent, if puny weaklings.

The Tory tactics are clear and were best expressed by Gerry Robinson on Newsnight on Tuesday 8th December.  Government spending on the public sector must be slashed. (They never attack government spending on the private sector – i.e. £400 million on the ‘cash for clunkers’ scheme that went straight to the private car companies.)

The civil service and public sector must be decimated, and at least another million workers forced onto the dustheap of unemployment.

The City of London – the big bad bully that has wrecked the playground – must be defended against all those puny weaklings – and from what Mr. Robinson petulantly called ‘spiteful populist attacks’.

Let’s remind these bullies and their minders of the facts.

Britain’s annual income is about £1,450,000,000 – £1.45 trillion.

According to the governor of the Bank of England, the taxpayer has provided about £1 trillion of that annual income to a tiny elite in the finance sector – in bailout resources.  These are not just taxpayer funds – they include the BoE’s generous liquidity injections and the Treasury’s guarantees to the finance sector.

By contrast the government’s deficit for this year is 17% of that: about £175 billion – due to rise to £178 billion.

When this crisis started government debt (i.e. the stock of debt, accumulated over time, not the annual flow of income and payments – the deficit) stood at a very reasonable 37% of GDP – and amounted to £650 billion.

Today, two years into this financial crisis, government debt has risen by 20% – that is by £250 billion.

£150 billion of that rise in debt is directly attributable to the bailout of the finance sector, including the financial rescue of banks like RBS, Northern Rock and Lloyds – according to official statistics. The rest can be attributed to the costs the government is incurring in cleaning up the mess – paying unemployment benefit, providing fiscal boosts etc.

So the rise in the government debt and the rise in the annual deficit – is directly attributable to the profound economic failure brought about by the financial recklessness and greed of a small elite in the financial sector – and their cheerleaders in governments and regulatory institutions.

As a result of that economic failure the Chancellor announced today that Britain’s GDP had contracted by 4.75%.

In the playground that would be called by its real worth -  £69 billion.

In addition investment has collapsed by 13.6% – roughly £30 billion – over this last year.

And consumers – who make up the bulk of Britain’s GDP (60%) – have cut back by 2.5%.

That sounds like a small number, but because the share of our national cake taken up by consumption is so big – 2.5% equals £20 billion.

Those numbers explain the massive ‘crater’ that has been bombed out of our economy by the finance sector.

A ‘crater’ of collapsed private sector output, investment, consumption, and rising unemployment.

A crater that cannot be filled by an over-indebted and comatose private sector. (See yesterday’s (8th December, 2009)  CBI and NIESR data).

The private sector is so worn down by the burden of its debt – piled on by banks and private equity companies – that businesses are not even asking for loans for new investment – they are relentlessly focussed on liquidating their debts.

Some – many – may not succeed, and may instead go bust.

So, because of its massive debts, and because of the slump in demand,  the private sector cannot compensate for the ‘black hole’ or ‘crater’ in the economy – only the government can.

Hence the really urgent need for government spending. And hence the disappointment in Alastair Darling’s timid budget – which includes plenty of cuts in government spending, and which bullied the innocents with the threat of another rise in national insurance taxes.

All of these political kids, fooling around in the political playground – have failed to understand the nature of this crisis.

It is a debt-deflationary crisis..as Irving Fisher so acutely explained……in which debts must be liquidated, which leads to distress selling (of property/assets/stock) – which in turn leads to a fall in prices. That then leads to a fall in profits, followed by a reduction in output, in trade and in employment of labour.

A fall in output, trade and employment leads to a loss of confidence, which leads to hoarding ‘and slowing down still more the velocity of circulation’.

A fall in output in a welfare state economy, leads to a fall in taxable income (income tax, VAT, national insurance) no longer paid by the unemployed, and to a rise in welfare benefits paid.

And it is this fall in tax revenues, exacerbated by rises in unemployment benefit spending – added to the massive costs of bailing out the finance sector (£150 billion) that explains why the government’s debt and deficit has risen.

This collapse in prices and liquidation of debt then causes ‘complicated disturbances in the rates of interest….in particular, a fall in the nominal, or money rates and a rise in the real, or commodity, rates of interest.

That, and not the ratings agencies, is what we must fear most of all.. The impact of a debt-deflationary crisis on interest rates….

Compared to that threat, dealing with the bullies in our political playground will be a pushover.

This is the press release from the new economics foundation:

“Two days ahead of the pre-budget report, and as the UN climate change talks open in Copenhagen – the second report from the authors of the original Green New Deal argues that the British Chancellor is likely to miss a historic opportunity to tackle public debt, create thousands of new green jobs and kick-start the transformation to a low-carbon economy.

The cuts won’t work, the Green New Deal Group’s second report shows how, contrary to the policy of all the major political parties, cutting public spending now will tip the nation into a deeper recession by increasing unemployment, reducing the tax received and limiting government funding available to kick-start the Green New Deal.

Instead a bold new programme of ‘green quantitative easing,’ rather than simply propping up failing banks, could help reduce the public debt and kick-start the transformation of the UK’s energy supply while creating thousands of new green-collar jobs.

Drawing on evidence from the great depression in the UK and the USA, the Group show how cuts in public spending then, before the economy had recovered, tipped both nations deeper into depression.
Now, the Group say, the Chancellor must announce a plan that updates the lessons from history for the challenges of the modern world, and spend to reduce the public debt by investing in the long-term restructuring of the UK’s energy infrastructure needed to meet the challenges of climate change and the inevitable peak and decline of oil.

To illustrate the potential of ‘green quantitative easing’, new calculations produced by nef (the new economics foundation) for the Group reveal that:

A sample of £10 billion in green quantitative easing invested in the energy efficiency sector could:

• Create 60,000 jobs (or 350,000 person-years of employment) while also reducing emissions by a further 3.96MtCO2e each year;
• This could also create public savings of £4.5 billion over five years in reduced benefits and increased tax intake alone;

A sample of £10 billion in ‘green quantitative easing’ invested in onshore wind could:

• Increase wind’s contribution to the UK’s total electricity supply from its current 1.9 per cent[i] to 10 per cent (39 TWhe) and;
• Create over 36,000 jobs in installation and direct and indirect manufacturing.
• This is a total of 180,000 job-years of employment – here we have described each ‘job’ as providing stable employment for an average of five job-years.
• Create a further 4,800 jobs in the operations and maintenance of the installed capacity and other related employment[ii] over the entire 20 year lifetime of the installation (equivalent to 96,000 job-years)
• And, if this directly replaced energy from conventional sources, it could decarbonise the UK economy by 2.4 per cent.[i] – reducing emissions from the power sector by up to 16 Mt[iii]CO2e[iv] each year  This corresponds to a £19 billion reduction in environmental damage

Or, a sample investment of £10 billion could:

• re-skill 1.5 million people for the low-carbon skills of the future, bringing 120,000 people back into the workforce, and increasing the earnings of those with a low income by a total of £15.4 billion.

The Group recommends:

• A £50 billion programme in ‘green quantitative easing’ in the short term to rebuild the economy. This is the amount of annual spending recommended by some of the most comprehensive analyses to date of the amounts needed to re-engineer the UK economy to meet the challenges of a low carbon future;

• Next, planning must begin for all of the new forms of bond finance detailed in the Group’s report to ensure the long-term stable funding needed for the long-term transformation of UK infrastructure.

Once spending on the green economy of the future has breathed life back into the deflated economy, the Green New Deal will require a whole new savings and investment infrastructure to meet the long-term investment needed to underpin the Green New Deal and to meet the needs of a new generation of investors who are fed up with all that has gone before.

This means secure new forms of saving which promise stable returns over the longer-term. The Group put forward a range of new measures to help public borrowing and encourage public investment by individuals, local authorities and companies in greening and reviving the economy. The foundations for these must be laid now. These include:

Measures on tax that are explicitly designed to re-gear the UK economy and transform energy infrastructure:

• Tax incentives on green savings and investment, so that future ISA tax relief – costing more than £2 billion a year – is only available for funds invested in green savings (tax relief for ISAs was more than the whole green stimulus package announced in the 2009 Budget, estimated to be worth just £1.4 billion).
• A general tax-avoidance provision to end the abuse of tax allowances. If just half of the tax avoidance in the UK was stopped by this provision, it would raise more than £10 billion a year.
• A Financial Transaction Tax, commonly known as a “Tobin Tax”. Such a tax, applied internationally at a rate of about 0.05 per cent has the potential to raise more than £400 billion a year. This could be the basis for a Green New Deal in the Global South, playing a significant role in enabling the majority world to adapt to climate change as well as breaking the carbon chains of fossil fuel dependence.
• New savings mechanisms that support the greening of the economy now, create thousands of new jobs and guarantee stable returns into the future:
• Green bonds, which will be issued by the government with the explicit guarantee that the funds raised will be invested in new green infrastructure for the UK. The bonds will carry conventional rates of return for bonds.
• Local authority bonds, to invest in energy efficiency and provide renewable energy for each of the country’s three million council tenants, as well as for all other local-authority-owned or -controlled buildings, such as town halls, schools, hospitals and transport infrastructure.
• Carbon linked bonds, to align investment returns with carbon saving and create a significant body of investors who will take the risk on there being carbon savings that can be secured.

A new publicly owned ‘Green New Deal Investment Bank’ to allocate the capital provided by green quantitative easing, and new bank lending to government:

• Green New Deal Investment Bank, a publicly owned bank to hold and disburse capital provided by ‘green quantitative easing’. It will be used exclusively to fund companies and projects designed to accelerate the transition towards a low carbon economy.
• Treasury Deposit Receipts, like those issued during the Second World War, a mechanism whereby banks were forced to use their ability to create credit to lend to government.

The Green New Deal group believe that despite the appearance of calm, the need for the implementation of the Green New Deal is greater than ever. When the Group launched their first report, new analysis suggested that from 1 August 2008 there were only 100 months, or less, to stabilise concentrations of greenhouse gases in the atmosphere before we hit a potential point of no return. The climate clock is still ticking and nothing like the scale of reform needed to rapidly re-engineer the economy has been implemented, anywhere.

This could be a real opportunity for the UK to show global leadership by implementing an interlinked package that recognises the need for targeted public spending in a downturn.  Not to further fuel an economy hard-wired into ever increasing use of fossil fuels, but to revitalise the productive economy and lay the foundations of the low-carbon infrastructure of the future.

The opportunity for action is even more pressing than it was when President Franklin Roosevelt instigated his bold New Deal programme that touched almost every aspect of economy and society. The timescale is limited by the urgent need to stabilise concentrations of greenhouse gases in the atmosphere before the risk of uncontrollable global warming increases significantly. Today, there is a plan on the table that could revitalise our damaged economy while also radically restructuring it for a low carbon future. Now the vision is needed to implement it before it is too late.
-    ENDS –

For more information, or to arrange an interview with a member of the Green New Deal Group, please contact:

Ruth Potts, co-ordinator, the Green New Deal Group, on:

t: 020 7820 6357         m: 07749 026 203       email: ruth.potts@neweconomics.org

Quotes from the Green New Deal Group:

“There is a pervasive and infantile notion that government budgets are like household budgets. They are not. By spending and investing in jobs, governments generate tax revenues, reduce welfare payments – and cut government debt into the bargain. Government must spend away the debt – on flood defences, on alternative energy and energy efficiency.  By investing in green-collar jobs that can’t be done in  China, government spending will pay for itself, fill the economic crater caused by the collapse in private investment – and lead to a recovery in public finances.” Says Ann Pettifor, nef fellow and Green New Deal Group member

“In the bad old days of medicine, there was a popular belief that draining blood from the sick would help them recover. More often it hastened their demise. The idea that widespread cuts are necessary to help the economy recover and pay back the public debt may be appealing as a knee jerk reaction but it makes no economic sense. An economic transfusion of resources to build a low-carbon economy is what we need to get the patient on its feet. Do this and we will create jobs, raise revenues, cut carbon and increase our energy security. It is not a time for the economic policy equivalent of medieval bloodletting.” Says Andrew Simms, policy director of nef (the new economics foundation and Green New Deal Group Member

“This is about using fiscal policy - government spending, borrowing, and tax revenue – to create real jobs,  real investment and real energy security in our economy – and all of it green. That’s not just being green, that’s about working, financing, governing and sustaining green – all in a plan that works across conventional policy boundaries to show that the Green New Deal group doesn’t just talk about integrated thinking – it delivers it too” says Richard Murphy, Director of Tax Research LLP and Green New Deal Group Member

“Its time for the Bank of England’s quantitative easing programme to stop magicing money out of nothing to prop up the banks. Instead it should use this form of money to fund green jobs and business opportunities on a huge scale. Also people are saving not spending, so the Government needs to see ‘savers as saviours’ and provide inducements for them to use such savings to fund a Green New Deal”. says Colin Hines, convenor of the Green New Deal Group

Notes to editors:

1.    The cuts won’t work: Why spending on a Green New Deal will reduce the public debt, cut carbon emissions, increase energy security and reduce fuel poverty is the second publication of the Green New Deal Group. Meeting since early 2007, its membership is drawn to reflect a wide range of expertise relating to the current financial, energy and environmental crises. The views and recommendations of the report are those of the group writing in their individual capacities. The report is published on behalf of the Green New Deal Group by nef (the new economics foundation)

2.    The Green New Deal Group’s first report, The Green New Deal: Joined-up policies to solve the triple crunch of the credit crisis, climate change and high oil prices was published in July 2008.

3.    The Green New Deal report will be delivered to the Prime Minister, Gordon Brown, the leader of the Conservative Party, David Cameron, and the leader of the Liberal Democrats, Nick Clegg, with a letter signed by the members of the Green New Deal Group demanding a response to its proposals.
The Green New Deal Group are, in alphabetical order:

Larry Elliott, Economics Editor of the Guardian,
Colin Hines,Co-Director of Finance for the Future, former head of Greenpeace International’s Economics Unit,
Tony Juniper, Environmentalist and Campaigner,
Jeremy Leggett, founder and Chairman of Solarcentury and SolarAid,
Caroline Lucas, Green Party MEP,
Richard Murphy, Co-Director of Finance for the Future and Director, Tax Research LLP,
Ann Pettifor, former head of the Jubilee 2000 debt relief campaign, Campaign Director of Operation Noah,
Charles Secrett, Advisor on Sustainable Development, former Director of Friends of the Earth,
Andrew Simms, Policy Director, nef (the new economics foundation).

Most economists (who should know better) confuse the government’s budget deficit with total government debt.

The distinction really is important.

Mixing them up is a little like confusing stocks and flows.  Or confusing your outstanding mortgage – say £200,000 – with your monthly debt repayments. They are quite different things, and if you were to lose your job, the flows (paid with your salary) come to a halt, and then it’s the stock – the £200,000 – that really matters.

Furthermore it is quite possible to increase your mortgage – and lower your monthly payments.  Many did this in the boom years of mortgage re-financing. Or even to decrease your mortgage and increase your monthly payments.

So, just as the movements in regular mortgage payments tell us little about the outstanding stock of debt, so government deficits tell us little about the stock of debt invested and the stock of debt outstanding.

The key point is this: the annual budget deficit is not a measure of the scale of government spending.  Instead it is a measure of the outcome of that spending. And that spending may not be evidence in itself of fiscal stimulus.

The annual deficit could rise because the government cuts public investment – and thereby increases spending on unemployment benefit payments and lost tax revenues from those made unemployed by the cuts.

In other words, it could just be evidence of the rise in automatic transfer payments – like increased unemployment benefits, combined with a fall in government revenues from taxes.

And if GDP is declining, then of course the government deficit rises as a share of that.

The right focus therefore is not on the deficit, but on government final consumption or total government investment.

But most economists don’t.

Instead they home in on the deficit.

It’s not clear why.  Anyway, this gives me a chance to reproduce once again the chart of the British government’s stock of debt since the 1850s – a chart which shows how low the government’s current debt stock is relative to earlier periods of crisis.

(for more on the public sector debt, see my post of 28 October, 2009 here

The Observer asked a small group of people to comment in advance of next Wednesday’s Pre-Budget Report. This from yours truly:

“Public debt will rise higher if government slashes spending, and recovery will elude us. Unemployment has high costs, but productive government spending, unlike private spending, pays for itself by creating jobs that generate tax revenues and cut welfare benefits.

Will the bond markets revolt and raise interest rates? No, because the markets apply common sense, as they did when Britain exited the exchange rate mechanism. Despite a rise in government debt from 40% to about 70% of GDP, and the extension of the Bank of England’s balance sheet by £200bn, bond markets have been positive – only too grateful for a safe haven in turbulent times. Confidence in sterling will only return when the economy recovers, and only then. Without public investment compensating for the collapse in private investment, there is little hope of recovery or confidence.”

Dear patient readers of this blog…please find below my latest Huff Post post.

Some may wonder why I cheered when White House Chief of Staff Rahm Emanuel announced that the president plans to cut the deficit, because he “does not want to keep on adding to the debt.”

It’s no secret that conservative economists believe that the way to cut the deficit is to cut government spending. In other words, government must manage the federal budget in the same way that you manage your household budget.

But in truth, the president must do the opposite.

To strengthen the levees against the rising tide of debt and the “hurricane of unemployment,” the president must both spend down the debt with a bigger fiscal stimulus, and also get a grip on monetary policy — regulating lending and keeping interest rates low for all of us, not just the banks.

Third, the administration must manage government debt effectively and not leave it to the self-serving and private financial markets.

I am surprised at how often I have to explain why the fiscal stimulus is so important. But because fiscal conservatives just don’t get it, they must be reminded of the well documented evidence again and again.

Government spending, unlike private spending, will pay down the debt by generating income, including tax revenues, and by reducing welfare payments. For unlike private households, governments generate revenues when they spend or invest, particularly on projects at home.

When a household spends its savings on say, a new wind turbine, solar panels for the roof, or insulation, money drains away from the household bank account. The engineers, builders and laborers that construct the turbine don’t pay money back into the householder’s bank account — regrettably.

By contrast, when the federal government invests in jobs that can’t be exported to China, the engineers, builders and laborers employed pay taxes back into the government’s account. They then spend the balance of their incomes in shops and businesses, and these pay taxes too. Indeed the spending might stimulate a small business to invest and hire, adding even more taxpayers paying back into the government’s account.

It’s called the multiplier effect because guess what? It multiplies government revenues. The evidence shows that the increase in revenues outweighs the spending and thus helps cut government debt.

However, it’s not enough to spend away government debt. More must be done, (and this is where Paul Krugman and I part company).

If the president is really determined to not “keep on adding to the debt,” then he must tackle monetary as well as fiscal policy. As John Maynard Keynes repeatedly emphasized, monetary policy must always precede and underpin fiscal policy. They go together like a horse and carriage — you can’t have one without the other.

It is not enough to use public funds to bail out the economy, while at the same time allowing the private banking sector to arbitrarily raise interest rates for government, commercial and household borrowing.

It’s particularly not fair — indeed it’s downright immoral — that the private banking sector is reaping such rich pickings from low rates set by the Federal Reserve; from the struggling body that is the US economy, and from government borrowing.

For proof of the bankers’ rich pickings, study the chart below from the International Monetary Fund. It shows (in pink) the low rates of interest paid by banks to the Fed and other central banks, in contrast to the rates of interest (in green) that the banks then charge to companies, households and individuals.

Note how the rates for those of us active in the real economy are always higher than they are for bankers borrowing direct from the Fed and/or central banks.

Then note how much they diverge after 2008. Bank borrowing costs fall to nothing, while private borrowing costs soar. No wonder bank profits are ballooning.

(The chart is from the IMF’s October 2009 Global Financial Stability Report. The composite real private borrowing rate [RPBR] is a GDP-weighted average of the U.S., Japan, euro area, and U.K. RPBRs.)

The Treasury must get a grip on high rates of interest — rates bankrupting businesses and homeowners, causing foreclosures and unemployment to rise — all “adding to the government debt” by increasing welfare spending.

The administration (through the Treasury, the Fed and the banking system) must adopt policies to force down rates across the spectrum, for government and the private sector; for the commercial and household sector as well as banks; all loans, short-term and long-term, safe and risky.

To stop “adding to the debt” it is vital to keep interest rates very low — while ensuring that lending is ‘tight’ — i.e. well regulated. Today, in the midst of the crisis, money is tight, and it is expensive.

Above all the Treasury must get a grip on its own debt management — and not leave that to the private, self-interested finance markets.

Because after all, bankers have one great way of making capital gains: by “adding to the debt.”