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.
Last week I gave a talk in Brussels at a debate moderated by Pierre Defraigne, Executive Director of the Madariaga – College of Europe Foundation. It was A Citizen’s Controversy with Lars Feld, Professor of Economic Policy at the University of Freiburg and Member of the German Council of Economic Experts.
Below is my slideshow from the talk:
'Standard & Poor’s is just following events, not shaping them.' Photograph: Stan Honda/AFP/Getty Images
This is a piece I wrote for the Guardian in response to the S&P threatened downgrade of the Eurozone’s ‘core’ economies. The Guardian wanted a maximum of 600 words, delivered in a short time, so this was written hurriedly, and in the back of taxis ferrying me to TV stations. For this reason I have made a few changes this morning:
So European politicians want to shoot the messengers? Sure, ratings agencies haven’t always been reliable, decent or honest. And sure, like Eurozone politicians Standard & Poor is just following events, not shaping them.
But on this occasion S&P’s analysis, if not their solution, is right. Credit Crunch 2.0 is fast accelerating and squeezing life out of the real economy. The global (not just Eurozone) banking system faces insolvency. This private financial crisis impacts disastrously on the real global economy, and incidentally on the Eurozone.
But politicians – in the Eurozone and elsewhere – are not fixing the broken global banking system.
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Published in the Guardian Cif alongside responses from Jonathon Freedland and Sheila Lawlor:
Ed Balls said sorry for Labour’s record on ultra-light-touch financial regulation, and that must be acknowledged.
But apologies are just not enough. He and Ed Miliband must stop attacking his electoral base, “hardworking families”, many of whom are trades unionists.
As Balls recognises, unless urgent action is taken, this may be the gravest economic crisis in history – given the global integration of finance and the growth of world population.
So Balls must go further.
First, he must declare loudly and forcefully that Labour will never again be captive to neoliberal central bankers like Alan Greenspan; or private bankers like Sir Fred Goodwin of RSB.
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Tonight, Wednesday 3 August 2011 at 08.00pm BST (GMT +1), BBC Radio 4 will broadcast a debate which took place at the London School of Economics (LSE) on 26 July. This broadcast will be repeated on Saturday, 6 August, at 10.15 p.m BST (GMT +1).
Along with my colleagues Prof. Victoria Chick and Douglas Coe at PRIME we have written the following response to the debate:
Debaters considered whether Keynes or Hayek had the solution to the present financial crisis. The economist George Selgin and philosopher Jamie Whyte spoke for Hayek; Keynes’s biographer Robert Skidelsky and the economist Duncan Weldon spoke for Keynes.
On the one hand we are pleased that the BBC and the LSE now acknowledge rival positions to the present austerity policies of Western governments. On the other we are concerned that the debate might have served mainly to reinforce existing prejudices, rather than to clarify the substance of the matters under discussion, matters which – there can be no doubt – are of the most profound importance.
Lord Skidelsky provocatively but justly reminded the audience that in the early 1930s, the same orthodoxy driving western austerity policies directed the actions of Germany’s 1931 Bruning government and paved the way for the rise of Nazism. These actions – vigorously opposed by Keynes – were the final straw for a Germany crushed by defeat and the disastrous boom-bust cycle that followed their return to the gold standard. Reparations were easily circumvented by wildly excessive borrowing from financial interests around the world, in a manner that even Keynes did not anticipate. It was these financial and fiscal policies that brought Hitler to power.
With financial interests still firmly in the ascendency and reactionary right-wing forces increasing their grip in the United States and much of the Western world, we must not forget these lessons from history, which formed the background to the original debate between Keynes and Hayek themselves. The stakes are high indeed.
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This morning I joined the Guardian’s panel of Martin Kettle, Len McCluskey and Matthew Oakley to give our verdict on today’s GDP numbers:
“The Chancellor must eat humble pie”
The statisticians, clutching at straws, blamed the victims – the British people – for the measly 0.2% growth in GDP. It turns out we are too fond of holidaying (the royal wedding effect) and basking in “warm weather”.
But this cannot explain the fall in manufacturing by 0.3% and the 3.2% fall in electricity, gas and water supply. Nor does it explain the rise by 0.7% in “business services and finance”. The fact is the economy remains unbalanced, and the coalition government is doing very little to restore some balance, and with it the potential for recovery.
And without economic recovery, there can be little hope for the public finances. The fact is, the chancellor cannot cut the deficit if the economy does not recover. Today’s numbers offer little succour. GDP is still lower than it was in 2006 – four years after the crisis “debtonated” in August 2007.
The chancellor’s budgetary outcome depends on the plans of the entire economic system and its reactions to the Treasury’s policies. Right now the British economy is responding to the government’s determination not to provide a stimulus to the very weak private sector – by faltering.
The argument is that Britain “cannot afford” a fiscal stimulus. That we “cannot afford” to boost the private and public sectors, create jobs, generate income and restore hope to 2.5 million unemployed people.
But we could, apparently, afford to bail out the banking system.
The coalition government’s determination not to stimulate the creation of employment, and with it the income that will generate recovery – will be viewed negatively not just by the powerful rating agencies, but by the British people too.
The fact is that just as work makes things affordable for individuals, so employment makes recovery affordable for the economy as a whole. And until the chancellor eats humble pie, and absorbs this economic lesson, neither the economy, nor the public finances will recover.
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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:
- “The government cannot spend so much that net revenues actually increase. By Clinton’s logic we should increase spending until our deficit goes away. ”
- “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.)
- Greece: spending cuts have reduced the deficit from 15.4% of GDP in 2009 to 9.5% now.
The first two points are rightly, morphed together in Knowles’s argument. The first is to do with the impact of government spending. In a slump – which we are living through now – it is vital for the government to spend to fill the investment vacuum created by an over-indebted and extremely nervous private sector, desperately trying to de-leverage its debt. Right now the UK private sector is busily hoarding cash, because they are – rightly – worried about their levels of debt; and because they fear – rightly – that if they do invest, customers (both private and corporate) will not walk through the door – because customers too, are heavily indebted and worried about the threat of unemployment and falling house prices.
So given these circumstances of widespread fear and paralysis in the economy – what the ONS calls ‘flat-lining’ – say the government invests £1 billion in libraries. What would happen next?
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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.
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I thought long and hard before refusing to sign the letter calling for a Plan B. Not because I do not think it is urgently required. But because the letter called for “clamping down on tax avoidance and evasion, as well as by raising taxes on those best able to pay.”
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.
(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.
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