This week I appeared on Newsnight with Gillian Tett of the FT and Louise Cooper of BGC Partners. We discussed our graphs of 2011 (see mine below) and wider questions around the global financial crisis this year – and how ecnomists and policy makers need to respond.

Watch the show on iPlayer for the next 5 days here. Our discussion begins at 33 mins.

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.

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

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

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

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

So Balls must go further.

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

Labour must never again be seen to be in the pockets of the finance sector.

Balls and Miliband must give the Labour party back to its electoral base, to its members.

They must both distance themselves from Labour leaders that profit from links to the global finance sector.

Second, Balls must stop talking about the deficit; about “tough decisions on tax and spending” – the last thing the economy needs. It is private debt – 469% of British GDP and six times the public debt – that is the real crisis facing Britons. It is debt-deflation, and debt-deleveraging, and collapsing private investment that pose the gravest threat to us all.

Given this, there is an urgent need for government spending on environmentally sound projects to generate economic activity – jobs, the income, the savings that will help protect us from Armageddon.

Until he does, his apologies will count for nothing but special pleading.

Read the original article on Cif here >

(Photo: REUTERS / Yiorgos Karahalis )
A Greek riot policeman stands in front of graffiti written on the wall of a bank during violent demonstrations over austerity measures in Athens, May 5, 2010. Greece faced a day of violent protests and a nationwide strike by civil servants outraged by the announcement of draconian austeristy measures.

Dear readers….Recovering from ‘flu and a trip down to Hay on Wye…Thought you might be interested in this piece I have written for Prime.

“We should note recent developments in political economy, that – while understated – are, we hope, of significance. Last week, the OECD published their latest World Economic Outlook, which features chapters on each developed economy as well as an assessment of the world economy as a whole.

The report is schizophrenic. It clumsily offers an outlook of excessive optimism; makes a selective assessment of ‘risks’; but continues adherence to an economic policy doctrine that is clearly making OECD economists very uncomfortable.

While the OECD report contains the expected justifications and support for the ‘austerity’ approach, nevertheless the organisation’s ‘cold feet’ are becoming apparent, even before the full extent of austerity programmes has begun to impact. There is no better example of this unease than their approach to the UK.

The report commends UK policymakers for their “current fiscal consolidation (which) strikes the right balance and should continue.”  At the same time, OECD economists hedge their bets by urging the UK government to embark on “higher infrastructure spending (that) would lower the short-term negative growth effects of consolidation without affecting its pace.”   At a press conference last week, the OECD chief economist warned that the UK should be prepared to cool austerity in the wake of weaker growth.

In parallel, President Obama was reported as disappointing the expectations of UK policymakers by failing to endorse the Government’s approach to economic policy. While Obama has not proved the champion of the better world that we had all hoped, – he is no FDR -  his stance is important and perhaps even brave.

In the second half of 2010 the world economy began to weaken, but this is greatly underplayed by OECD economists.  Instead they point to a perceived optimistic outlook ahead. But this outlook is thinly based. We are told that financial conditions are improving: but in the UK the latest assessments of project Merlin flatly contradict such a notion.

Source: www.telegraph.co.uk. Data: BBa / BIS / Bank of England

In the real economy, world trade has retreated substantially from the relatively rapid outturns at the start of 2010. The report recognises that this is a consequence of monetary policy tightening in emerging markets and the wearing off of stimulus packages in major economies. The retraction of earlier stimulus programmes by the US and EU is rather an understatement. Stimulus has not only been withdrawn, it has been replaced by austerity.

So what are the grounds for OECD optimism?   Especially given that their economists remain obsessed by inflation as the causa causans of all possible outcomes. Their overriding fear is that inflation will cause consumers to retrench. This threat is then used to justify tighter monetary policies – which would hurt over-indebted consumers, corporates and SMEs. But unemployment is a much more important driver of consumer behaviour. Wage earners snap their purses shut in the wake of what for many millions is the reality of, and for others the threat of, unemployment. Inflation is no doubt painful to the less well-off, but from a macroeconomic perspective ‘core inflation’ today is at low levels, no matter how much the OECD tries to play it up. Watch out as inflation falls rapidly over the next few months, in line with weakening economies.

The austerity and fierce monetary strategies embarked on by governments – already burdened by losses transmitted by the private banking crisis – have been directed by the civil servants of supra-national organisations: such as the OECD and IMF as well as the global central banking fraternity. These public employees enjoy immense influence, and as the the president of the European Central Bank, Jean-Claude Trichet indicated in a speech on 2 June, 2011 they wish to capture:

“a much deeper and authoritative say in the formation of the country’s economic policies….. A direct influence, well over and above the reinforced surveillance that is presently envisaged”

Given the ECB’s role in exacerbating the crisis in Greece (described by Nouriel Roubini as ‘throwing good money after bad – to bail out, rather than bailing in, reckless creditors….a giant Ponzi scheme”)  such “authoritative” advice  by supra-national organisations has crucified economies “in a struggle which is certain to prove futile” –  to quote Keynes.

But the OECD’s latest report hints that minds might be changing. It contains the beginnings of the admission that the world is being forced down a desperate path that has no justification in economic reason and the evidence of history. The experience of the great depression stands before us. It was only enlightened monetary policies and expansionary fiscal policy that restored the US and UK not only to health but to a position to resist reactionary forces and fascism.  The current strategy is likely to make us more vulnerable to reactionary political forces – in the EU and the US.

Some might like to celebrate the previous timid stimulus for e.g. car scrappage schemes etc, under both Alastair Darling and the Larry Summers White House.  But in the light of present events, it is clear that their approach was designed not to save society but to preserve a financial system that has palpably failed the vast majority of the citizens of the world.

We at PRIME economics have repeatedly called for something greater and more just. Perhaps the foot-shuffling of the OECD indicates recognition that imposing austerity policies at a time of global economic weakness is indeed a futile struggle – soon to be abandoned?”

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.

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