Image: acknowledgements to the BBC.

The Autumn Statement reveals but one thing: the Chancellor and his advisers are both ill-advised and dangerously ill-prepared for the forthcoming prolonged Depression. (And if you think I exaggerate, let me remind you that 20 years after the Japanese debt bubble burst, Tokyo house prices are still falling, and the stock market is worth 60% less than 20 years ago. And the Japanese economy was in a healthier state then, than the UK is today, thanks to an export surplus.)

Today’s penalising of the innocent – public sector workers, pensioners and those hundreds of thousands of young people entering the labour market  - is a result of a deeply flawed economic analysis by the Chancellor of the causes of the global financial crisis.

No depression will be averted;  no government borrowing will be reduced; no economic recovery can be hoped for, until the cause of the crisis is correctly analysed and then addressed with appropriate policies.

For me an interesting angle on the day was the difference in emphasis between the official Treasury Autumn Statement, and the Chancellor’s speech. The latter was far more ideological of course; but the Treasury Statement does indicate some grasp of the scale of the crisis. The very first paragraph of the full Statement (on page 11) reads:

“The UK economy is recovering from the biggest financial crisis in generations. Prior to the crisis, underlying competitiveness fell and economic growth was driven by unsustainable levels of debt, with the UK seeing the greatest expansion in debt of all the world’s major economies over the last decade. As a result, the UK experienced the deepest recession of any major economy except Japan and the Government inherited a budget deficit forecast to be the largest in the G20.” (My emphasis.)

So the Treasury does get it. The country that enthusiastically hosts the biggest global banks in the world; that celebrates “London ..as the world’s pre-eminent financial centre” (to quote the Chancellor today) witnessed “the greatest expansion in debt of all the world’s major economies over the last decade” – and as a consequence, the public finances worsened.

From these simple facts much analysis flows.

The most important is this: Britain (and the Eurozone) are not facing a sovereign debt crisis. We are not facing a crisis of the public finances. Instead: we are facing the biggest ever crisis of the private financial system.

Why? Because the “greatest expansion in debt of all the world’s economies” is not going to be paid back.

“The greatest expansion of debt in all the world’s economies” must first be written off, ‘de-leveraged’ or paid down.

As this process grinds relentlessly forward, the banks that lent “the greatest expansion of debt in all the world’s economies” face bankruptcy – if not now, in the near future.

That is the crisis we all face. The bankruptcy of the global private banking system - based in our backyard.

The mobilising of finance for the Eurozone is to bail out private banks that engaged “in the greatest expansion of debt.”  Although you would not believe this from media reporting, its purpose is not to bail out sovereign governments. The stubborn refusal of German politicians (with whom I have some sympathy) to agree to further taxpayer-backed bailouts of the private finance sector means that private banks face imminent bankruptcy.

Which is the why the Polish Foreign Minister warns of an impending “crisis of apocalyptic proportions“.

Given this terrifying prospect, what do our Treasury mandarins and British Chancellor recommend?

First, that we make it easier for employers to sack people, and thereby increase unemployment and cut wages – making it harder for those employees to pay back debts.

Second that we cut public sector wages of those in employment – with which some of those private debts may have been paid back. Third, that we penalise future pensioners. For why? And fourth, that we try and rescue 200,000, but sacrifice hundreds of thousands more young people on the dustheap of unemployment. That policy alone will cut the nation’s income; income that could help the banks put balance sheets back in the black.

The Chancellor’s speech reminded me of the parent that knows his child is hiding behind the curtain, but instead looks under the sofa, inside the box, behind the dresser – everywhere except where the solution lies. A silly, but in his case, dangerous game.

The fact is that the solution does not lie with cuts in public spending; with austerity. We have had only eighteen months of synchronised austerity across Europe and already the British and world economy teeters on the brink.

The failure is not that austerity was not implemented; the failure is austerity.

Private money markets are not asking for deeper austerity. They are asking for a revival of economic activity. They are begging for governments to draw back from the policies that have caused output, investment and employment to fall off a cliff.

But that is hard for governments such as ours, gripped as they are by an antiquated and flawed economic orthodoxy. As David Graeber  explains so well in his book “Debt: the first five thousand years.” orthodox economists – believe it or not – do not understand the nature of money and credit. An unfortunate weakness for a profession majoring on the economy.

Nor can their jaundiced Scrooge-like minds accept that prosperity is caused by employment. Not by rich, ‘light-touch’ regulated bankers.

They find it hard to grasp that money/credit – that is not generated by savings, but begins life at the Bank of England – can provide a bridge to employment. But only if it is managed carefully, and not outsourced to the reckless greed, and fraudulent behaviour of bankers and their friends in government. (See today’s story about Hank Paulson’s “inside jobs” with Wall St.)

Orthodox economists like those in the Treasury and the Conservative party cannot grasp one simple but vital truth. Employment can generate the income needed to a) repay debt b) pay tax revenues to lower the budget deficit and c) restore both general prosperity and a sense of national well-being. All of which might be of some help to the private finance sector.

Instead our policy and decision-makers are playing petulant, disgracefully irresponsible games with all our futures. And missing the biggest crisis of all: the imminent bankruptcy of the private finance sector.

Markets react rationally to austerity

The piece below was posted on the “Left Foot Forward” website on Monday, 8th August, 2011

“It is important that we understand the events of last week not as a new outbreak of crisis, but as a continuation of the banking crisis that first came to the public’s attention in 2007-9.

It is now just four years since the ‘debtonation’ on 9 August, 2007, when banks lost confidence in the viability of other banks, and stopped lending to each other. After a year when the fuse of huge debts endured a ‘slow burn’, the 2008 Lehman bankruptcy exploded the financial system and threatened systemic failure.

Without consulting taxpayers, central bankers and politicians rushed to the aid of bankrupt financiers. Private losses were socialised, and attempts at recovery were nursed by central bankers who pushed interest rates down to very low levels.  Thanks to the weakness of politicians and central bankers this nationalisation of private losses was offered almost unconditionally to an immensely wealthy, and unaccountable elite.

Since then politicians and central bankers, the IMF, the ECB and the EU have left the finance sector free to engage in reckless lending and speculation. Instead of disciplining financiers, they have disciplined taxpayers, and used ‘austerity’ policies to force the broader economy to bow to the will of an extremely fragile finance sector.  The purpose of ‘austerity’ we have been told, by e.g. the ECB’s Mr Trichet is to shore up the public finances, and prepare for further stages in the financial crisis, when bankers need to be bailed out again.

Only it has not quite turned out that way.

Because the result of ‘austerity’ is now clear for all to see. Far from shoring up the public finances across western economies it has weakened public finances.  As economies have faltered, tax revenues have fallen and welfare payments have rocketed. This added to the immense liabilities of the bank bail-outs, has of course strained government deficits.

And because of the policy of austerity, the global economy is weakening. Economic activity and investment has not recovered since 2009. Unemployment and insolvencies in the EU are rising and consumers are snapping their purses shut. If the US now starts cutting back further on government investment, this will lead to a further weakening of the global economy. That much is now clear for all to see.

While their disastrous impact on economic activity and employment is felt across the US and the Eurozone, austerity policies impact first and most forcefully on the poorest, weakest economies: Ireland, Greece and Portugal.

As a result, they are the first to fail the challenge of meeting foreign debt repayment obligations. These debts are the consequence of unwise, if not reckless lending and borrowing that in some cases was fraudulent. The lenders were private banks in Germany, France and the UK.  The consequence of the threat of non-payment of loans is disastrous for these private banks. Why? Because many of them are effectively insolvent already, and any further damage to their balance sheets could cause shareholders and investors to lose confidence, and lead to bankruptcy.

Hence the panic in last week’s financial markets. Bankers can’t wait for EU leaders to consult with parliaments in September on the size of taxpayer resources that must now be poured into yet another taxpayer-backed bail-out fund for the wealthy – the European Financial Stability Facility. Their banks are too fragile. They are too close to bankruptcy.

So markets repeated the blackmail they applied on 29 September, 2009, when the US Congress appeared to baulk at providing the private banking system with $750 billion of taxpayer funds (TARP).They tried hard to frighten the hell out of EU politicians on holiday.

In the process millions of investors were hurt, and billions of pounds were wiped off the value of e.g. pension funds and other investments.

That – for you and me – is the bad news.

The good news is this. Something else happened last week. It gradually began to dawn on the British and European establishment that the so-called “recovery” – based as it is on financial speculation (in e.g. food and oil) and not investment in real, socially useful economic activity – is illusory.

Second, it dawned on our estimable leaders that the financial chaos created by liberalised, de-regulated finance has not been cleared up. Far from it. Despite all the hundreds of billions of dollars poured into the banking system – the private banking system is still close to insolvency.

Finally, and this is the most hopeful development: it finally dawned on at least the British establishment that “austerity” is not all it is cooked up to be. Of course we had warned of this, but ideologues in the Tea Party, the Coalition and the ECB prevailed over more rational arguments.

But now certain luminaries in our media are beginning to recognise that cuts in US government spending really will plunge the world back into recession, or even depression. Just as we at PRIME predicted. Cutting government spending at a time of financial fragility and economic weakness is unsound economics.

While recognition of this is a hopeful development, it is overshadowed by the influence of powerful bankers that persist in backing Tea Party ideologues: and who maintain their attacks on the taxpayer hand that has so sumptuously fed them.

Last week Bob Diamond, the head of Barclays, called for UK taxpayers to swallow more doses of the poisonous ‘austerity’. Stephen Hester of RBS flatly denied that banks faced “Armageddon” and instead blamed governments/taxpayers for the crisis.

It is time for our elected leaders to call the bankers’ bluff. It is possible, desirable even, to break loose from the cords that yoke the taxpayers of Britain and the rest of Europe to the interests of an immensely wealthy, greedy and stupid financial elite

So we call on our political leaders, to stand up to bankers. After all, dear leaders, you have only your chains to lose.

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?

The Office for Budget Responsibility has adopted a model of the economy with a ‘multiplier’ – which is supposed to tell us how much the government would get in return for that investment. The OBR, according to Knowles, reckons the return would be a measly 0.35 on VAT, 0.0 on government spending overall. This model implies that an investment of £1billion in an investment in e.g.  libraries, would return nil to the Treasury. In other words, the multiplier delivers a negative return: a lot less than the £1 billion invested.

The OBR model, Daniel Knowles, is most definitely not Keynesian. In fact it is an insult to the work of Keynes and Richard Kahn – who developed the multiplier - 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‘)

For Keynes, the multiplier at the very least must be 1. That is, it must return, at the very least, £1 billion to the Treasury. This will happen because, for example,  private contractors will be hired to build the library. They will buy bricks from a supplier, who will pay taxes to the Treasury on the profits he makes from selling bricks. The construction company will pay taxes on the profits they make from building the library. And their employees will pay taxes on their income – generated by working on the library build. Then the employees may e.g. walk into  a home insulation company, and buy home insulation – to ensure greater energy efficiency at a time when gas prices are rising. The home insulation company will pay taxes on that – and employ more people to insulate homes – all of whom will be on PAYE (unless evading tax). They too, will use their income to walk through the doors of heavily indebted companies….and so on.

At the same time, the Treasury will stop doling out dole money to unemployed construction and home insulation workers.

So for Keynes and Kahn the multiplier could be at 2. In other words, with public works expenditures the Treasury could expect to get £2 billion back (in tax revenues and reduced unemployment benefit payments) for their investment. This explains why government spending, unlike the spending of an individual or company, could pay down the government’s monthly ‘overdraft’, the deficit, and in time pay down the government’s ‘mortgage’ – the public debt. Our paper, cited above, provides evidence from records of the national accounts that this is precisely what has happened in the past.

Now I don’t understand why the OBR has set the multiplier at 0.0 – and indeed will write to Robert Chote, head of the OBR to seek clarification. But anyone can see how helpful such a low multiplier is to the argument about austerity. An investment of £1billion that generates a negative return – i.e. costs the Treasury without any hope whatsoever of a return – explains precisely why the government can’t be bothered to invest in  libraries, or energy efficiency or de-carbonisation of the economy.  All of these investment could revive the economy….but why should the government bother to try and revive the economy, and with it the private sector – at a negative of return for government expenditure on public works? A return which does not even pay for the investment – and indeed is modelled not to pay for a return on the investment.

That’s not to deny that there are circumstances in which the multiplier may not work. If government spending goes into tax cuts – and if consumers choose not to spend those tax cuts – then returns to government may well be negative.  And if government spending – is invested in say, Siemens, Germany – it will leak out of the country, and returns on British public investment will go to the German government, not the UK government. That is a risk, and may explain why the OBR’s multiplier is negative. They don’t expect government to invest in Britain.

But if the investment goes into public works here in the UK – productive expenditure that improves our quality of life, employs people, generates income both for the private sector, the employed, but also for government – AND reduces the deficit – why on earth should it not do that?

Finally the unlikely point made by Knowles that thanks to cuts in government spending,  the deficit is falling in Greece.

Frankly, I can’t get my head around Greece’s numbers for its deficit – which are continuing to be revised up by actors such as the EU.. First of all, as is well-documented, with the help of Goldman Sachs and with officials at the EU and the ECB turning a blind eye, the previous Greek government ‘cooked the books’. They lied about their deficit – and hid parts of it in complex products invented for them by the bankers at Goldman Sachs. So before 2009 they claimed that the deficit was 5% of GDP. When finally EUROSTAT/ the EU/IMF got their act together and looked at the books, they estimated the deficit at 15%. Since then it has apparently come down to 10%. I find this all very dodgy.

Second: remember the government deficit can be compared to an overdraft. The public debt can be compared to a mortgage. (Although please: there is no way that government spending can be compared to individual or even corporate spending; that we can draw macroeconomic conclusions from microeconomic reasoning!)

But just for illumination: Greece’s ‘overdraft’ or deficit will, of course, be volatile. Large sums of money are being transferred by the ECB and other institutions into the government’s bank account to help with the crisis. At that point in time the ‘overdraft’ will look good. But it’s the ‘mortgage’ that we should worry about, and whether or not the ‘mortgage’ is being paid down or rising.

It’s the economy stupid.  The deficit will only recover, when the Greek economy recovers. And not before. If the ‘overdraft’ or deficit gets a boost from a one-off deposit – is that helping the Greek economy recover, so that government can collect tax revenues from an active private sector and pay down both the deficit and the debt?

Right now, I am not in a position to tell why the Greek deficit has apparently fallen. But to be honest, my major concern is whether the economic recovery in Greece is in place, and is sustainable over the long term.

And I suspect that even Daniel Knowles can see what I can see: Greece is going downhill….Is that really the model Britain should follow?

This article was simultaneously posted on LeftFootForward and PRIME >

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!

It goes without saying, I hope, that of course I support ‘clamping down on tax avoidance and evasion’ – but do not support ‘raising taxes’. I had asked the originators of the letter if we could debate this point, and later the words “those best able to pay” was added, without informing me. Even then, I may not have signed it. The fact is that with the UK’s rate of unemployment; with businesses facing a very hard time because of the rise in VAT and the cuts in government spending, and with banks effectively refusing to lend to SMEs and others (except at very high rates of interest)….this would not be the moment to raise taxes.

But I want to make a bigger point. By calling for taxes to be raised, the letter implicitly suggests that the deficit can be financed through increased taxation. In this sense, it echoes the orthodox line: that government expenditure is like a personal or corporate budget and that ‘savings’ (i.e.cuts or increased taxes on e.g. VAT) have to be found to finance it. That ‘we cannot afford to spend’. That the ‘money has run out’ and we need to find more – from somewhere, preferably taxation.

I strongly disagree. First, to reiterate: the government’s budget is not at all like individual, household or corporate budgets. Individuals cannot engage in ‘quantitative easing’. The Bank of England, on behalf of government, can, and indeed has done so, in order to support the financing of the UK government’s deficit. Individuals and corporates do not necessarily generate income from spending. The government can generate income from investment in public works. It’s a form of income called tax revenues. Third, individuals and corporates can go bankrupt. The government cannot – not even Zimbabwe.

Given these facts, the best way to finance the govermemt’s budget is by increasing, not cutting, the government’s  income – from increased economic activity. In this sense we can make a comparison between governments and individuals: as Prof Chick and I note in our latest update of “The economic consequences of Mr O” -

“Just as work makes things affordable for an individual, so too for society. A nation’s prosperity follows from its employment, not the other way around.”

What the VAT rise and cuts in government spending  do, is to cut economic activity – and therefore employment – and with it income from economic activity for the government.

And this, I fear,  is what raising taxes would do too. And I do not want to be party to that.

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

17th January, 2009.

This was posted on the Compass site on the 16th January.

I am shortlisted for the North West Durham Parliamentary Selection. A less likely candidate you would be hard pressed to find. I am not a local big wig and did not grow up in the constituency. I don’t have the backing of big hitters – either in the party, or in the unions. Nor am I a youthful 25-year-old, ambitious for power. No, I am far more ambitious than that.

I want the people (especially the young people) of North West Durham to have a sound and stable future. I want Britain to learn from the catastrophic debacle of the financial crisis, and ensure it never happens again. The hopes, aspirations, health, jobs, businesses and climate of Britain must not be sacrificed to pay for economic failure engineered by a small elite in the City of London.

That’s David Cameron’s plan: to deflect the terrain of political debate from the City and focus it instead on the public sector finances. Under this plan public services are targeted as the cause of the crisis; ‘balancing the budget’ the solution; and those least responsible expected to bear the long-term costs.

While the Liberal Democrats and some Labour Ministers have been lured on to this terrain, the British people as a whole are proving less gullible and malleable.

Cameron’s ‘austerity’ strategy has backfired – thanks to the intelligence and common sense of British voters.

That’s why I am standing, because British voters are looking for a resolution to this crisis that does not victimise, but compensates taxpayers; tames the perpetrators, and ensures that the crisis is not repeated.

I am standing too because I am ambitious for an effective, democratic local and national Labour campaign – using all the modern media – that encourages Labour’s core voters to join the party again. That mobilises disillusioned voters from the trade union movement, the Green movement, the NGOs and the faith organisations. A campaign that ensures that a Labour government and Labour MPs speak for, and represent the people that elected them – not the finance sector.

Then I want to help ensure that a new Labour government provides the resources and industrial framework needed to de-carbonise our economy and make our country more energy efficient. I want the people of North West Durham and their children and grandchildren to have a sound and steady economy, and a stable climate in which to live and thrive.

To achieve those ambitions we must support Gordon Brown’s determination to cut government borrowing.

Contrary to economic ‘groupthink’ cutting government borrowing is best achieved by investing in jobs, generating tax revenues, and cutting spending on unemployment benefits.

In other words by spending away the debt.

Of course that does not make sense to the economically illiterate Tories, and its anathema to many orthodox economists. But it makes sense to anyone on a first year course in economics, who understands the ‘multiplier’. To evidence my point see this chart – with data provided by the Treasury (Public finances databank, Table A10) and with thanks to my colleagues in the Green New Deal group.

This is a chart of Britain’s public debt as a share of GDP – from 1858 until 2002. (Please note the difference between the debt and deficit. The annual deficit is not a measure of the scale of government spending. It’s a measure of the annual outcome of that spending. The deficit (but not the debt) could rise because e.g. the Treasury cuts public investment, has to pay out more in benefit payments and loses tax revenues.)

Note that Britain’s debt today – as a proportion of the national cake or GDP – is about 55% and rising. It was twice that in 1858 – about 100% of GDP.

Government debt is expected to hit 70% soon. That’s largely because of the City of London bail-out which cost the government a massive £150 billion between 2007 and 2009.

In 1946 Britain’s debt was roughly 5 times what it is today – a staggering 250% of GDP.

At that point an extraordinary thing happened.

The heavily indebted Labour government began to spend – as soon as legislation was agreed by Parliament.

Labour invested in a bold and visionary project: – a publicly funded health service free at the point of use – the NHS. There was a slum clearance and housing programme. They revived the ancient universities, provided pensions and welfare to the poor. They trained ex-soldiers to become teachers.

To revive the economy, to protect the vulnerable, and to prepare the country for the threat posed by climate change – a Labour government must do the same again: invest in a Green New Deal.

What happened to the public debt in the 40s and 50s, you might ask, as a result of Clem Attlee and Hugh Dalton’s apparent extravagance and flouting of the economic orthodoxy? Did the deficit balloon, the bond markets blackmail the government, and did capitalism as we know it, go into free fall?

No. On the contrary. Look at the chart. What Lord John Maynard Keynes advised would happen, did happen. Government investment kick-started private economic activity. Tax revenues rose, expenditure on unemployment benefits fell, and government cut its borrowing, which fell dramatically as a share of GDP.

And the economy thrived.

Indeed 1945- 1971 is known in economics as ‘the Golden Age’.

The spending paid down the debt.

There was not much leakage, because ‘offshore capitalism’ – the kind of capitalism that dodges regulation and taxation – was not well established then. People in Britain were getting jobs and paying taxes in Britain – and so were employers, and businesses in which they spent their earnings.

Can a Labour government repeat this achievement, given globalisation?

I believe we can.

Labour will have to rein in the ‘offshore capitalists’ and bring them onshore. The government is already doing that, tackling abuse in its tax havens, restricting generous allowances for the wealthiest, and raising the tax rate to 50% for bank bonuses.

Next Labour must build on existing investment in infrastructure projects and mobilise a ‘carbon army’ of ‘green-collar’ jobs that cannot be outsourced.  Gordon Brown’s announcement of a new round of licences to support the growing offshore wind industry was a first step in that direction.

These actions will ensure a future for the people of North West Durham, and for the British Isles as a whole. Indeed with ambition, Labour could recreate ‘the golden age’. This time based on a steady-state economy. That’s my ambition, and why I have put myself forward for the candidacy of North West Durham.

Ann Pettifor

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.

At the end of last month I delivered the prestigious EBOR lecture at York. My address was entitled:

“Credit, usury and political power: chasing the moneylenders from the temple that is our democracy”

Click on the link below to read a PDF version of the full lecture:

EBOR Lecture November 25th (PDF)

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.