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

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

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

The Growth and Stability Pact was, and is repeatedly flouted by Greece and other eurozone countries – even by Germany under Gerhard Schröder. The ECB, led by Jean Claude Trichet is also obliged to flout its terms, by effectively adopting a fiscal role – buying up the bonds of deficit countries – and thereby causing the resignation of not just Mr Stark, but also Germany’s Axel Weber.

This resistance represents a Polanyian counter-movement – however weak – which defies orthodox economists, central bankers and Haute Finance. Across the Eurozone, Europeans resist further private sector bailouts; and refuse to march like lemmings to their own destruction across cliffs of unemployment, deflation and social unrest.

The Eurozone and its economic framework was designed as a financial ‘straitjacket’; to undermine the sovereignty of Europe’s elected governments; to transfer power over financial and therefore economic policy to unaccountable central bankers; powers then enforced by ‘the invisible hand’ – ‘the markets’ – international speculators on foreign exchange and financial markets. It was also, its protagonists argued, designed to ensure peace across Europe.

But so utopian is the vision of liberalised, unaccountable finance, that it has achieved the very reverse: the divergence, not convergence of European economies; sovereign insolvency, bank failures, rising unemployment, the degradation of public services, and with it the intensification of tensions and conflict across Europe.

Regrettably we have been here before. The very same policies – and liberal finance model – were tried in the 1930s, under the Gold Standard. By 1933 their failure was complete, challenged effectively by both Karl Polanyi and John Maynard Keynes. The latter took on the responsibility of outlining and implementing a ‘Plan B’ – one which endured until overturned by neoliberals in the late 1960s and early 1970s.

So as we witness the death throes of this second experiment in liberal finance, what is today’s progressive alternative? What is the left’s Plan B?

The failure of the left to pose an alternative to liberal finance was striking both before, during and after the 2007-9 financial crisis. In the wake of the greatest financial catastrophe of our lifetimes, the loudest complaints were aimed at bankers’ bonuses, and at the failure of rich elites to pay taxes. Recently, the pro-austerity Institute for Fiscal Studies has tried to turn this into a debate about the mal-distribution of wealth.

But while these are important issues, they do not touch on the structural injustice of a liberalised financial system that is capable of wrecking the global economy; denies economic sovereignty to democratic states, and that stratifies the polarisation of wealth between rich and poor. Nor does the debate on bonuses or the addition of taxes structurally alter the role of Haute Finance as ‘stupid master’ (to quote Labour’s Employment manifesto of 1944) as opposed to ‘servant’ of the real economy.

So what should the left’s macro-economic Plan B look like? Clearly it will have to embrace both monetary and fiscal policy, with monetary policy more important in the long-run; but fiscal expansion needed immediately to deal with the collapse of employment and private sector activity.

The first element of any plan must be the careful and coordinated sequencing of both quantitative easing and fiscal expansion. This will involve the financing of a programme of public works expenditures designed not just for socially and ecologically essential projects, but also to stimulate private economic activity. Central banks are eager to supply liquidity to private bankers when they wreck both their own institutions and threaten the global economy; they should now act to supply liquidity to governments that need to stimulate economic recovery, and finance the transformation of the economy away from fossil fuels. (For more on this see ‘The Green New Deal’ co-authored by this blogger.)

Next, it will be essential to manage in an orderly fashion the massive write-off or ‘re-structuring’ of unpayable debts – to replace the current disorder of random de-leveraging by sovereigns, corporations, households and individuals. Many of these debts are phantom debts, and cannot ever be repaid. That reality must be faced. It is time for another debt Jubilee.

The third element should be the introduction by sovereign states of capital controls over the mobility of finance across borders, to strengthen democratic, accountable policy-making. In the words of Brazil’s President Rousseff, governments must protect their “internal markets.” The form these controls take will depend on local conditions and circumstances, and should be agreed by elected representatives of democratic states, with central bankers acting in the interests of domestic economies, not the proverbial ‘gnomes of Zurich’. Fourteen countries already impose capital controls, including China and Iceland; but each week new reports appear. The most recent is Indonesia which will require companies to repatriate about $33bn of foreign currency earned each year on exports (FT 9 September, 2011).

Fourth, central bankers, while regulating the creation of credit by private bankers to ensure loans are repayable, should also seek to bring down interest rates across the spectrum of lending: for safe and risky loans, short and long-term loans. Adam Posen’s recent proposal for a public bank that would make cheap loans available to SMEs should be given serious consideration. In other words, the rule should be ‘tight but cheap’ money.

Fifth, governments and central banks should be mandated to promote a) full employment and b) sustainable, localised economic activity, supporting the domestic economy – not a globalised financial elite. For just as employment makes things affordable for individuals and households so full employment will make things – including the transformation of the economy away from fossil fuels – affordable for government.

“Look after employment” as Keynes argued, “and the budget will look after itself.”

Add to the above, terms and conditions for banks bailed out by taxpayers; and a reformed taxation system and you have a coherent and plausible Plan B. Correct me if I am wrong, but so far it seems the most comprehensive one on the table.

End

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.

Keynes shared with Hayek a preference for the economy to be primarily the province of the private sector. However, he recognised that ‘the market’ did not always best serve the common good and therefore that state intervention was necessary – and not just during a slump. In this he was diametrically opposed to Hayek.

For Keynes, the market’s major flaws were rooted in monetary arrangements that favoured speculation and excess consumption rather than productive activity. In addition, in a slump, the pessimistic outlook of producers and investors allowed the slump to persist and needed the stimulus of public works expenditure.

The LSE debate neglected the subtleties of the respective positions of Hayek and Keynes and reinforced many of the most common and most dangerous fallacies about Keynes’s contribution – and even established some new ones.  While both economists were misrepresented to some extent, our main concern must be to rectify distortions about Keynes. There are eight misrepresentations that we want to bring out.

1.   Hayek as “an opponent of financial excess”

From 1971 through the early 1980s, restraints on the financial sector were steadily unwound. These actions were prompted by Hayekian ideals of liberalism, as is well known.  The Hayek supporters at the LSE debate dissociated themselves from this liberalisation, the cause as we now know, of the rapid expansion of the money supply before the crash. Hayek might not have predicted this consequence of liberalisation, but its disastrous consequences are now plain to one and all. Perhaps this is why the debaters dissociated themselves from this aspect of Hayek’s position. Instead they castigated the conduct of the liberalisation policy rather than the policy itself. Indeed the ideal of liberalisation was scarcely mentioned, for to do so would be to acknowledge the existence of an alternative: Keynes’s managed financial system.

2.   Keynesian policy as “promoting the big state”

Keynes’s most substantial legacy was a financial system managed by the state.  This system prevailed from the end of the gold standard until the 1970s. This management ensured that on the one hand low long-term interest rates facilitated both private and public sector investment; on the other, restraints on

banks and capital mobility kept speculation and excessive consumption at bay. Keynes had devised and helped implement a financial system that was conducive to production and investment rather than speculation and consumption.  A larger state rightly prevailed than in the 1920s or 1930s, but ironically Keynes’s state was still smaller than the state that prevailed after the counter-revolution of financial liberalisation

The post-war world was one in which the state and the private sector operated powerfully in tandem, supported by a greatly revised monetary architecture.

As we have stressed, Keynes was concerned mainly with the effective operation of the private economy.

3.   The inflation of the 1970s as “the fault of Keynesian policies”

The inflation of the 1970s began just after the Keynesian post-war mechanisms for the regulation of finance started to be dismantled. In Britain, controls on banking and capital mobility were relaxed, and liberalised arrangements were restored, beginning with Competition and Credit Control (1971) (evaluated as “all competition, no control” by most economists). The root cause of the inflation of the 1970s was the massive expansion of the money supply that followed the deregulation of credit control, as both Friedman’s monetarism and Keynes’sGeneral Theory, Ch. 21, predict.

The inflation of the 1970s was not the consequence of Keynes’s policies but of the dismantling of his policies for restraining the finance sector. In the past, the inflationary 1970s would have been understood as a ‘bankers’ ramp’.

4.   Keynes as “advocate of deficit spending”

While the importance of Keynes’s monetary policies is scarcely recognised, even his fiscal policies are severely misrepresented. Most prominent and pernicious of all is the idea that he advocated deficit spending. From his earliest contributions to the debate on fiscal policy, Keynes was concerned to establish how public works expenditure would pay for itself and would constitute a relief rather than a burden to the public finances. As we have shown in ‘The economic consequences of Mr Osborne’,[i] the outcomes of public expenditure policies over the last century vindicate his analysis. It remains a puzzle why even Keynes’s most ardent champions neglect the evidence.

5.   Keynes as “a supporter of wasteful expenditures”

Unemployment poster ‘jobless men keep going, we can’t take care of our own’, 1931.

We write to encourage you – to urge you on in your resistance.

In your defiance, you understand Greece is slave to the interests of private wealth.

You must understand too that it is private wealth that needs Greece. Greece does not need private wealth.

As is obvious to you – if not to EU finance ministers – Greek and other EU taxpayers are asked to shore up the immense wealth and reckless lending of private French, German, British and American banks.

Without your taxes, your sacrifices, the privatisation of your government’s assets, these bankers once again face Armageddon – as they did in autumn of 2008.

Just as then, so now they have rushed behind the ‘skirts’ of their defenders at the IMF and the EU. On their behalf, these unelected officials and some elected politicians demand that Greek and EU taxpayers shield private sector risk-takers from the consequences of their risks. The very antipathy of market principles.

In the process, the European Union is torn apart. Politicians, backed by officials, now defy the founding goals of the Community and, in the interests of private wealth, set the peoples of Europe against each other.

On 20 June, 2011 the acting Head of the IMF called for “immediate and far-reaching structural reforms, privatization, and the opening of markets to foreign ownership and competition.”

Which proves our point: private wealth needs Greece. Greece does not need private wealth.

Greece’s elected politicians have plunged the country into a spiral of decline, as austerity leads to greater economic crisis, more severe failure of public finances and social and economic hardship on a scale unknown since the inter-war years.

Is there anybody on earth who seriously believes that austerity will restore the prosperity of Greece? The idea is ludicrous.

But equally ludicrous is the idea that there is no alternative.

There is an alternative.

In reality, austerity marks the final failure of the existing arrangement between public interests and the interests of private wealth. Financial liberalisation has failed. The only way forward is a new arrangement, based on ones that have better served societies since the dawn of civilisation: since Aristotle identified the evils of usury and the barrenness of prosperity based on speculation.

The first step must be the abandoning of the Euro.

The Euro must be understood not as a currency of the peoples, but as an ideal of private wealth.

The Euro is a perversion of the greatest monies in history. These arose as a relation between people and the state. Through the institutional development of central banks, domestic banks, state borrowing, paper currency and double-entry book keeping, national monies have underpinned all of the greatest societies of the world.

Money has been aimed at the interests of society, of productive labour, and vibrant state and private activity alike.

But the Euro is a money aimed only at the interests of private wealth. It is divorced from individual nation states. Its statutes explicitly prohibit the support of state activity through money creation, while its foundation in monetarist doctrine inhibits private activity and has led to a world devoid of markets, at the mercy of large financial monopolies.

Greece must restore the Drachma

If Greece restores the Drachma, social, private and financial interests can be re-aligned; prosperity can be reignited. Issued through the central bank and domestic retail banks, the Drachma can underpin a programme of public works expenditures, and in parallel, through multiplier processes, the spending of newly earned income to revive private activity in Greece. Through the Drachma, jobs and prosperity can be restored. The expertise to facilitate such a transition exists, moreover the very nature of money guarantees precedent on which action can be based.

It has been done before – successfully

The last time the world threw off the chains of private wealth was in the 1930s. Then, Britain led the way. In September 1931, financial interests demanded high interest rates and austerity as the impact of the Great Depression hammered the people. At this point Britain, like Greece today, became defiant. The UK threw off its fetters and left the gold standard – the Euro of a century ago.

Under Keynes’s tutelage, Sterling was revived as a money managed by the Bank of England and protected from speculative and vested interest. Then in 1934, President Roosevelt freed the dollar, and with it, the people of the United States, who then embarked on the finest programme of public works expenditures known in modern history.

Great public buildings were erected, symphony orchestras established, writers were sponsored – not least John Steinbeck – fantastic murals created, swimming pools built. When, in 1935, a socialist government took power in France and freed the Franc from the fetters of the gold standard, only the fascist economies remained in thrall to private wealth.

Interrupted by war, and diluted at Bretton Woods in 1947, finance was still restrained as servant not master through the age of economic and social advance from 1945-1970.

Today, the likelihood of the UK or US once again taking this lead – and defending society from the predations of private wealth – is slim indeed. But there is no theoretical reason why the lead should not be taken by a smaller nation – like Greece.

The history of the world teaches us the ebb and flow of prosperity between nations. It would be fitting too if a new era was to arise from the cradle of western civilisation.

Certainly Greece would feel the full force of the anger of private wealth, through their allies in the media, academia and politics. But this will follow from fear – not reason.

Because Greece will show the world not only that there is an alternative, but that the alternative is very good.

Posted simultaneously on the Huffington Post >

(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?”

To refresh your memory: it was on that day that the world’s banks woke up to the scale of their debts, and to the simple truth that they may not all be repaid. On that day, the French investment bank BNP Paribas suspended three investment funds due to a “complete evaporation of liquidity” in the market. BNP’s announcement compelled the intervention of the US’s Federal Reserve and the European Central Bank, which both pumped $90billion into the global banking system. As Larry Elliott notes, 9 August, 2007 ” has all the resonance of August 4 1914. It marks the cut-off point between “an Edwardian summer” of prosperity and tranquillity and the trench warfare of the credit crunch – the failed banks, the petrified markets, the property markets blown to pieces by a shortage of credit. ”

So ‘debtonation’ stands as a reminder of that day. However, we also know that the private debts of the individuals, households but also more importantly the corporate sector have not ‘debtonated’. They are still on the books, and in the case of the private sector in the UK, but also wider Europe, look set to rise further. As Douglas Coe and I have pointed out in a paper we have written for PRIME, “Private debt has risen relentlessly since the early 1980s. Most commentators focus on the extent of household debt, which rose from around 40 per cent of GDP before the 1980s to a peak of 110 per cent in 2009. But corporate debt is even more elevated, rising from 50-60 per cent to a peak of 130 per cent in 2009. The latest National Accounts show that both measures fell back in 2010, but only by a very small margin: households to 105 per cent of GDP and corporates to 125 per cent.”

So there are very large debts on the books of the private sector, that have not ‘debtonated’ yet. And we are not alone in believing that their ‘debtonation’ will lead to yet another financial crisis, involving the banking system. Standard and Poor’s caused a flutter in the stock market dovecotes this week, when they downgraded US debt. But of greater interest is their comment on the threats facing the US banking system (drawn to my attention by Yves Smith ):

“We believe the risks from the U.S. financial sector are higher than we considered them to be before 2008, as our downward revisions of our Banking Industry Country Risk Assessment (BICRA) on the U.S. to Group 3 from Group 2 in December 2009 and to Group 2 from Group 1 in December 2008 reflect (see “Banking Industry Country Risk Assessments,” March 8, 2011, and “Banking Industry Country Risk Assessment: United States of America,” Feb. 1, 2010, both on RatingsDirect).

Which is why the title for this blog will not be changed.

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

There’s a lot of rigging of jobs data, so it’s easy for any new announcement to get my adrenalin pumping. Add to that the way journalists and economists talk about these numbers – and it’s enough to get a girl blogging.

The particular article raising my ire today is James Politi’s in the FT: “US data send out mixed message as 1m more jobs lost”.

In it Politi writes: “Yesterday’s data included revisions to figures from a year ago showing 8.4m jobs were lost since the crisis started, nearly 1m more than earlier estimates, offering a stark (a touch of empathy inserted here) reminder” “of the trouble the labour market finds itself in.”

The labour market?  In trouble? Come off it James, the labour market is not in trouble. At least, but likely many more than 8.4 million people and their families have felt the trouble, the pain, humiliation and loss of unemployment, but the market I fear, feels nothing. It doesn’t get that feeling we get when the employer’s email goes around: “Oh, my gawd, I have lost my job. I am in trouble. The credit card. Bills to pay. Healthcare. The children. My elderly mother. Mortgage. I did not see this coming, now I am really in trouble.”

No the market does not feel a thing. It carries on working  as markets do.  Destroying people’s life opportunities, their incomes, and with that their personal lives, their marriages, their healthcare – and perhaps threatening their present homes as a future abode.  Does the market care? Does it hell.  Because ‘the market’ is also lowering costs to companies, and strengthening the hand of employers in relation to workers and trades unions. Call that trouble?  Pull the other one.

So why do journalists anthropomorphise ‘the market’ – why do they care about whether it is ‘in trouble’ or not?  Well, I suppose like doctors and nurses they have to distance themselves from this tragedy, if they are to go on working, and believing in the market. Furthermore, to keep the whole shebang going, they have to distance – and numb – their readers to this immense and quite unnecessary, personal, social and economic tragedy.

Be not numbed, I say.  Remember what Roosevelt said: “lay hold of the fact that economic laws are not made by nature. They are made by human beings.”  And the law of mass unemployment is amongst the most inhuman of those economic laws.

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.

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.