Tory Economic Policy is More Akin to a Mass Experiment in Human Despair

We are living in the midst of an economic meltdown, which as the latest economic figures reveal is being made worse not better by a chancellor whose incompetence and mendacity is now beyond doubt.

The damning revelation that the UK economy shrunk by 0.3 percent in the last quarter of 2012 now sees the country headed for a triple dip recession, an economic calamity which calls for an immediate moratorium by the government on its present course and a reversal of its addiction to austerity. If not for the brief and mini economic boom provided by the Olympics, the UK economy would have likely registered negative growth for the whole of last year, and thus have made history for all the wrong reasons.

It really does not take a genius to understand that the nation’s overall debt is being made worse as a consequence of low consumption, increasing unemployment and underemployment, and a concomitant decrease in tax revenues. As a result, and by any objective reckoning, the government’s economic policy has been a disaster.

The difficulty is that a change in the policy being followed and failing so abjectly will by definition involve a step-change in ideology. Why? Because the economic strategy that is being implemented by this government is the product of ideological blinkers and not sound economic theory.

Since the economic crisis first hit these shores at the beginning of 2008 the glaring weakness in the economy has been a collapse in demand. The deficit grew in the wake of the crisis as the previous Labour government increased borrowing to fill the gap of plunging tax income on the back of rising unemployment, businesses going bust, and an increase in people claiming benefit, not to mention the need to bail out the banks to tune of £500 billion. Without this intervention the UK economy would have collapsed completely.

Now, five years on, and after two and a half years of a Tory-led coalition government, the official number of unemployed in the UK, according to the most recent figures released by the Office for National Statistics, is 2.49 million, a decrease of 37,000 compared to the previous quarter. However these figures are for the third and last quarter of 2012. The number of people in full time employment fell by 341,000 between September and November 2012, while the number of people in part time employment increased by 660,00.

But rather than takes steps to tackle the causal factors responsible, the present government has focused almost entirely on the symptoms – i.e. getting the deficit down by slashing spending, including benefits, even though this can only deepen the recession rather than produce a recovery.

As the US economist and nobel laureate Paul Krugman asserts: “Economics is not a morality play.”

Yet this has been precisely the approach to the crisis by Osborne, Cameron, Clegg et al. In this morality play it has been overspending, a jamboree of consumption, which has led us to the mess we’re in. And, now, in order to clear it up, a national exercise in economic self flagellation is required.

Clearly, given the lack of comparable measures introduced to dole out some of the resulting pain to the rich, this national exercise is to be restricted to the poor and ordinary working people – the undeserving poor as opposed to the deserving rich, you might say – making this a Victorian morality play.

Strip away the government’s rhetoric over the need to cut spending, the solution to this ongoing economic depression is really very simple. Bringing down the deficit requires growth; growth requires a resurgence in spending; and a resurgence in spending requires the reintroduction of demand into the economy.

This is where the locus of government intervention must be, as the investor and lender of last resort to stimulate economic activity. Investing in infrastructure projects such as housing, roads, transport, the emerging green economy, schools, hospitals, etc will create jobs, which in turn would get people off benefits and back to paying tax and spending in the real economy, thus producing a multiplier effect. Businesses do not create jobs – this is one of the great myths of modern political and economic discourse – consumers create jobs.

But no one should be in any doubt that the obsession with deficit reduction on the part of the government is really an obsession with keeping the markets happy, which brings into sharp focus the issue of sovereignty. However even here it doesn’t take a leap of logic to understand that of more importance to the ever-mystical bond markets is the introduction of measures designed to lift the economy out of depression and thus make the prospect of a decent return on UK bonds better over the short to medium term than it is at present. With interests rates at zero and unable to be reduced any further, this requires the implementation of a fiscal stimulus to create the demand already mentioned.

The billions in taxpayers’s money handed to the banks via Quantitative Easing has barely touched the real economy. Banks are refusing to lend at the same time as there are no consumers creating the demand that businesses need in order to expand. When it comes to the thousands of small to medium businesses that need to borrow to cover the gap between normal operating costs and income, by this point increasing numbers of those have either gone to the wall or been forced to contract as a direct consequence of an ongoing cycle of deepening recession.

Which brings us back to the question of ideology.

The financial and banking meltdown which hit the global economy just over five years ago was an economic 9/11. And just as that terrible event gave the Bush administration its pretext for going to war in Iraq, its economic equivalent was the pretext needed by the Tories to set about rolling back the state in Britain. The attack unleashed on the public sector, the attacks on benefits, pay and conditions across the board, has been accompanied by the demonisation of each of the aforementioned demographics. In other words, the economic crisis has seen class war declared in order to push through the structural readjustment of the economy and with it society in general. The public sector, a necessary ballast of demand through good times and bad, has effectively been declared the enemy within as part of this process.

This is the context in which these latest economic figures should be considered.

End This Depression Now!

Ever since the recession spread through the global economy at the beginning of 2008, a debate between Keynesian and neoliberal economists on the best way to move out of recession and back into growth has been ongoing. On the Keynesian side two US economists and nobel laureates have emerged as the main champions of an investment led approach to the crisis: Joseph Stiglitz and Paul Krugman.

Stiglitz’s major analysis of the recession came with his book Freefall (Penguin 2010). It provides a forensic analysis of the crisis which engulfed the US banking and financial sector due to the shock unleashed by the collapse of the sub prime mortgage market beginning late 2007, reaching its climax in September 2008 with the collapse of Lehman Brothers. Unsurprisingly, Freefall shot to the top of the bestseller list and remains an indispensable source of information for anyone interested in understanding the structural weaknesses of Wall Street, the global financial system in general, and why it led inexorably to financial meltdown.

But whereas Stiglitz focuses most of his book on Wall Street and the impact of the financial crisis on the US economy, Krugman’s End This Depression Now! takes a broader view.

The first thing to be noted with the book is that Krugman’s sympathies lie squarely with the victims of the depression, specifically the unemployed. He asserts this in the book’s dedication and is the starting point from which his resulting analysis flows.

What Krugman clearly understands is the symbiotic relationship between economics and ideology. For example, he writes:

“Common causation is almost surely part of the story [of the depression]. There was a major political turn to the right in the United States, the United Kingdom, and to some extent other countries circa 1980. This rightward turn led both to policy changes, especially large reductions in top tax rates, and to a change in social norms – a relaxation of the ‘outrage constraint’ – that played a significant role in the sudden surge of top incomes. And the same rightward turn led to financial deregulation and the failure to regulate new forms of banking…”

Like Stiglitz, Krugman references the lessons that were both learned and unlearned from the Great Depression of the 1930s about the causes of depressions and the way to come out of them. Similar to today the Great Depression was caused by a combination of an over emphasis on the stock and financial markets as the engine of the US economy, with the easy and unregulated availability of cheap money being married to a concomitant willingness on the part of lenders to invite more risk in order to maximise profits, producing a bubble of debt that proved unsustainable. In fact the only major difference between then and now was the catalyst for the crisis which followed. The Great Depression was triggered by the Great Drought of 1930 which decimated the US agricultural industry and left the banks exposed, while today’s depression was triggered by the collapse of the subprime mortgage market. In both events the key factor was a lack of regulation of the banking system.

Roosevelt’s New Deal, rolled out in 1933 to alleviate the crushing impact of the Great Depression, produced minimal results in the three years it ran up to 1936. But according to Krugman this was not due to a failure of the concept of government intervention, rather it was due to the scale of that intervention. In other words it was not government spending per se that would take the US economy out of depression but sufficient spending. What was called for was a bold fiscal stimulus by the Roosevelt administration. Instead the stimulus it provided was too tepid to have the necessary effect.

The event that finally did produce results was the Second World War, when the US government had no choice other than to implement a massive spending programme in order to rearm and reconfigure the US economy to fight the war. But as Krugman points out:

“Did it matter that the spending was for defense, not domestic programs? In economic terms, not at all: spending creates demand, whatever it’s for.

“But the essential point is what we need to get out of this current depression is another burst of government spending.”

Here Krugman takes the Obama administration’s recovery plan to task for, as with the New Deal, lacking sufficient boldness and size to work as effectively as it could if the lessons of wartime spending were learned. In particular he criticises Obama’s focus on deficit reduction rather than job creation. The key point to understand here is that it is the latter that will achieve the former and not vice versa.

On Europe, Krugman explores the strengths and weaknesses of monetary  union. Perhaps the most important lesson for the eurozone to emerge from the present crisis is that without fiscal union monetary  union is destined to fail. The manner in which the peripheral economies of Greece, Ireland, and Portugal have been forced to accept severe budget cuts and austerity measures from the major eurozone economies of Germany and France, measures that can only succeed in deepening the crisis rather than reverse it, is evidence of the disjuncture between the priorities of economic health across the EU and the domestic political agendas of its major economies. Greece in particular finds itself locked into a downward economic spiral as a consequence of austerity. Unable to devalue its currency to attempt to export its way out of the recession, while hampered by a weak export sector even if it could, the brutal cuts demanded by both the German controlled European Central Bank and the IMF have only heaped misery upon misery. With the consequent plunge in tax revenues, Greece is on its knees with no solution in sight.

With regard to the UK, Krugman makes clear that the current wave of austerity mania being preached and practised by the Coalition government is both completely unnecessary and grievously harmful to the prospects of recovery in the short to medium term. One of the advantages of Britain remaining outside the euro is the retention of the Bank of England as the country’s central bank, able to buy UK bonds in order to bail out the banks and inject liquidity into the economy in the process known as Quantitative Easing. The ability to control interest rates is also a significant advantage when it comes to retaining a key instrument of economic control over currency valuation and liquidity. The problem is that while utilising each of these measures, the Coalition has also embarked on a programme of savage spending cuts that have decimated demand. Rather than increase confidence this policy has damaged it. As the author notes:

“What about the confidence fairy? Did consumers and businesses become more confident after Britain’s turn to austerity? On the contrary, business confidence fell to levels not seen since the worst of the financial crisis, and consumer confidence fell below the levels of 2008-09.”

The conclusion to be drawn here is that business and consumer confidence arises on the back of economic growth; it does not create that economic growth.

Chapters in the book on the progressive aspects of inflation during a depression to erode the value of debt, along with the myths surrounding the deficit, succeed in shattering some of the received truths surrounding both. By themselves they make the book an invaluable source of reference and insight.

Paul Krugman’s main achievement with End This Depression Now! is the way that he completely debunks the concept of austerity as anything other than an attempt by its proponents to turn economics into a morality play. By the book’s end his objective of returning Keynesianism as a credible model of managed capitalism, one in which the state has a key role to play in regulating demand and ensuring equilibrium between income and investment, has been more than met. This is an excellent and timely riposte to the austerity hawks – Austerians, as Krugman describes them – and their dwindling band of supporters.

End This Depression Now!, Paul Krugman, Norton (2012)  £14.99

 

 

 

 

 

 

Latest Economic Figures Confirm That Chancellor George Osborne is a Clown

Given the seemingly unending series of gaffs and setbacks to afflict the government over recent weeks, culminating in the damning economic figures just released by the Office for National Statistics (ONS), it’s a safe bet that the opening of the Olympics could not come quick enough for George Osborne and David Cameron. Indeed, if economics was an Olympic sport Osborne would have been asked to hand his team vest back after a performance since entering Number 11 that has him on course to be the most incompetent Chancellor of the Exchequer in recent history.

Significantly, the news that the UK economy has gone deeper into a double-dip recession under his watch looks to have finally ended the cosy relationship which the Chancellor had previously enjoyed with the City and British business, with numerous calls from both demanding that he ‘do something’ to reverse the tide.

That ‘something’ would of course involve not just a change of course economically – hard for any government to do when it’s under the cosh for fear of being labelled weak – it would also by necessity involve a step-change in ideology. Why? Because the economic policy being followed by this government is more the product of ideological blinkers than sound economic theory. How could it be otherwise when in economic terms the policy being followed has thus far proved disastrous?

Since the economic crisis first hit these shores at the beginning of 2008 the glaring weakness in the economy has been a collapse in demand. Britain’s deficit has been a result of more government borrowing to fill the gap of plunging tax income due to rising unemployment, businesses going bust, and a concomitant increase in people claiming benefit.

But rather than takes steps to tackle the causal factors responsible, this right wing government has focused almost entirely on the symptoms – i.e. getting the deficit down by slashing spending, including benefits, with no thought for how it will only deepen the depression rather than produce a recovery.

As the US economist and nobel laureate Paul Krugman asserts: “Economics is not a morality play.”

Yet this has been precisely the approach to the depression by Osborne, Cameron, Clegg et al. In this morality play it has been overspending, a jamboree of consumption, which has led us to the mess we’re in. Now, in order to clear it up, a national exercise in economic self flagellation is required. Clearly, given the lack of comparable measures introduced to dole out some of the resulting pain to the rich, this national exercise is to be restricted to the poor and ordinary working people – the undeserving poor as opposed to the deserving rich, in other words – making this a Victorian morality play.

Yet strip away the government’s rhetoric over the need to cut spending, the solution to this ongoing economic depression is really very simple. Bringing down the deficit requires growth; growth requires a resurgence of spending; and a resurgence of spending requires the reintroduction of demand into the economy.

This is where the locus of government intervention must be, as the investor and lender of last resort to stimulate economic activity. Investing in infrastructure projects such as housing, roads, transport, the emerging green economy, schools, hospitals etc, will create jobs, which in turn would get people off benefits and back to paying tax and spending in the real economy, thus producing a multiplier effect. Businesses do not create jobs; this is one of the great myths of modern political and economic discourse. Consumers create jobs.

But no one should be in any doubt that the obsession with deficit reduction on the part of the government is really an obsession with keeping the markets happy, which brings into sharp focus the issue of sovereignty. However, even here it doesn’t take a leap of logic to understand that of more importance to the ever-mystical bond markets is the introduction of measures designed to lift the economy out of depression and thus make the prospect of a decent return on UK bonds better over the short to medium term than it is at present. With interests rates at zero and unable to be reduced any further, this requires the implementation of a fiscal stimulus to create the demand already mentioned.

The billions paid to the banks via Quantitative Easing have barely touched the real economy. Banks are refusing to lend because by now there are no customers creating the demand that businesses need to expand. When it comes to the thousands of small to medium businesses which need to borrow to cover the gap between normal operating costs and income, by this point increasing numbers of those have either gone to the wall or been forced to contract as a direct consequence of the present cycle of deepening depression.

Which brings us back to the question of ideology.

The financial and banking meltdown which hit the global economy four years ago was an economic 9/11. And just as that terrible event gave the Bush administration its pretext for going to war in Iraq, its economic equivalent was the pretext needed by the Tories to set about rolling back the state in Britain. The savage attack unleashed on the public sector, the attacks on benefits, pay and conditions across the board, has been accompanied by the demonisation of each of the aforementioned demographics. In other words, the economic crisis has seen class war declared in order to push through the structural readjustment of the economy and with it society in general, with the public sector, a necessary ballast of demand through good times and bad, declared the enemy within in the process.

This is the context in which the latest damning figures, namely a 0.7% contraction in the economic activity across the board over the last three months, have to be considered.

Not the Budget Britain Needs

By Robert Griffiths

Morning Star

How the 2012 Budget is just another slap in the face for working people

Chancellor George Osborne has done it again. He’s used yet another Budget to attack workers, the unemployed and benefit claimants and to enrich still further big business and the super-rich.

As before this Con-Dem regime claims that its overriding priority is to close the deficit between what the state and central government spend and what they receive in taxes.

This, we are told, will give private enterprise and the “markets” the security and incentive to invest in economic growth.

Yet the government’s policies of slash, burn and privatise have so far halted economic recovery dead in its tracks.

By destroying 270,000 public-sector jobs last year and allowing the dole queues to lengthen they have paralysed economic growth and the extra tax revenue that would come with it while increasing the unemployment bill.

No credibility should be attached to the latest forecasts of higher growth, peaking unemployment, falling inflation and a steeper decline in the financial deficit.

The forecasters were wrong before and during the post-2007 recession and have been wrong again since.

Chancellor Osborne boasted in his Budget speech about cutting the deficit still further between now and 2017, but he’s done so by grabbing the £28bn of assets in the Royal Mail pension fund.

And in order to make our postal service more attractive for privatisation the government has also nationalised the £37bn liabilities that will become due later.

Although he offered a range of new tax allowances and subsidies to exporters, private house-builders and enterprise zone businesses, these fell well short of even the modest $787bn (£497bn) stimulus introduced by US President Obama in 2009.

That package has helped produce 24 months of continuous economic growth and brought US unemployment down below the 8.4 per cent rate in Britain.

Its equivalent here would be a stimulus worth £77bn, including £27bn of job-creation measures and £22bn in extra spending on social welfare programmes.

Instead the Con-Dem government is on course to slash public spending by £203bn by 2015, with Osborne signalling on Wednesday a further £10.5bn reduction in welfare expenditure.

Yet only last month another £50bn could be conjured up overnight by the Bank of England to oil the wheels of the City of London.

That brings to £325bn the amount of public money conjured up so far to pay for “quantitative easing” to help the financial institutions and their markets, with an additional instalment likely by the summer.

At the same time we are told that libraries, youth centres, day-care facilities and Remploy factories must close while workers’ tax credits and disability allowances are chopped.

Britain has a fabulously rich capitalist class. According to the Office of National Statistics just 10 per cent of the population own at least £4 trillion in personal wealth in Britain – 44 per cent of the national total. That excludes the vast amounts stashed away in secret.

A modest 2 per cent wealth tax on this super-privileged minority would raise twice as much as the Chancellor’s five-year austerity programme without any spending cuts or tax rises at all.

Nobody should be fooled by extra stamp duty and less tax relief for the wealthy, or a tightening of measures against tax avoidance.

This Budget, like its predecessors, will make no serious inroads into the largely ill-gotten gains of the super-rich.

Instead it sets its sights on those who produce our society’s wealth, including public-sector workers.

They face postcode pay cuts which will further deflate the economies of whole regions and nations of Britain.

For the first time ever, reinforcing regional wealth inequality could become official government policy.

This Budget confirms that the austerity and privatisation programme of this Con-Dem Cabinet of multimillionaires is about boosting the profits of the City of London, the capitalist monopolies and their top directors and shareholders.

That’s why the 50p top rate of income tax is being phased out in stages.

That’s why corporation tax on monopoly profits is being reduced even further below the levels in the US, Japan, Germany and France.

Even raising the level at which income tax begins will help the rich most, according to the Institute for Fiscal Studies.

The austerity cuts are to ensure not only that the Treasury and Bank of England can honour bonds issued to financiers in the City, but also that even more funds are available for future bail-outs.

The pot of gold at the end of the capitalist rainbow is the privatisation of what remains of the public sector.

Health, education, the Royal Mail, trunk roads and motorways are enormous sources of potential profits for giant monopolies from taxpayers, patients and motorists.

For the public the results of privatising the Royal Mail, for instance, are likely to be the same as those of other privatisations: mass redundancies, rising charges and deteriorating services, mostly at public expense.

In announcing the privatisation of new motorways and trunk roads both the Chancellor and Prime Minister held up the privatised water industry as a possible model.

Here privatisation has entailed rocketing prices, soaring profits, underinvestment and, as a result, emergency anti-drought measures this spring in seven water authority areas across eastern England.

In Latin America, Asia and Europe central and local governments are renationalising their water services in order to stop the racketeering and secure vital investment for the future.

On the eve of the Budget Roads Minister Mike Penning cited the M6 toll road and the Dartford and Severn Crossings as successful examples of privatised investment. His advisers should have told him that the M6 venture has just announced a £50 million loss for 2011, while yet another round of Severn Crossing toll increases are infuriating domestic and business motorists.

We need a Budget for workers and the people – not yet another for big business and the rich.

A People’s Budget would…

- Restore the cuts on social and welfare spending

- Cancel the cuts in working tax credit

- Cut VAT

- Boost capital spending by local and central government, including a
massive public-sector house-building programme

- Impose price controls on the energy utilities

- Levy a wealth tax on the super-rich

- Charge a windfall tax on energy, banking and retail monopoly profits

- Introduce a financial transactions tax

- Increase the higher tax rates on dividends, bonuses and pension windfalls

- Close all tax havens under British jurisdiction

- Raise the top rate of council tax

- Unfreeze the local business rate on big business

Robert Griffiths is general secretary of the Communist Party of Britain.

Gmb Calls on Ed Balls to Reverse Position on Public Sector Pay

GMB, the union for public sector workers, commented on the restatement of Labour’s economic policy made by Shadow Chancellor Ed Balls over the weekend.

Brian Strutton, GMB National Secretary for Public Services, said. “International agencies and the government itself say that the UK economy is stagnating with the terrible consequences for jobs, families and young people.

That’s why Ed Balls is absolutely right to say that a wait-and-see policy is wrong and unfair to the British people. Mr Balls has now developed Labour’s economic policy beyond supporting short term spending cuts and now says the time is right for reflationary policies to avoid another recession.

Further losses of purchasing power through deflation in the real value of public sector pay is inconsistent and damaging to any attempt to reflate the economy. See below for fall in living standards by occupation. Indeed the most effective means of boosting demand and hence jobs in the economy is by maintaining the spending power of working people – which is also morally the right thing to do. Therefore it is logical and consistent to lift the current public sector pay restraint which is directly choking consumer demand and costing jobs in the private sector. Ed Balls needs to reverse the stance on public sector pay.

GMB call on all political parties who prefer prosperity to austerity to support reflationary policies including removing public sector pay restraint, starting with local government workers who have had no pay rise for nearly three years.”

Ed Balls and the Limits of Keynesianism

Ed Ball’s recent speech to the Fabians on the economy, and the attendant press coverage, is illustrative of the difficulties of economic debate in a democracy and a market economy; where messages are spun for electoral considerations, and fears about market confidence supress any instincts towards even modest radicalism.

Ball’s fairly nuanced argument is that the failure of the Tory Chancellor George Osborne to encourage economic growth has reduced tax revenue and thus increased the government’s deficit between income and outgoings. As a result the balance of deficit reduction has inevitably shifted from increasing revenue to reducing expenditure, and therefore in the public sector this raises a choice between reducing pay rises, or cutting jobs and services. Any government – of the right or left – is forced to manage the economy as they find it, and inheriting an economy damaged by Osborne’s mismanagement will constrain the options of a future Labour government.

However, in the hands of a BBC interviewer this was whittled down to a statement that Labour would oppose public sector pay rises; and Labour’s statement that they did not know whether economic circumstances when they regain power would allow them to reverse cuts is misrepresented as support for Tory cuts now. This was of course exacerbated by trade unionists, like RMT President Alex Gordon, who are predisposed to attack the Labour Party, as Alex says:

“What Ed Balls is announcing is that Labour’s given up on opposing those policies,” he said. “I think from the trade unions’ point of view, what we’re going to be asking is if Labour doesn’t want to be the opposition, then where is the opposition going to come from to this government? Our members aren’t going to stand by and take another two years of this kind of punishment and then turn out at the ballot box in 2014 and meekly vote for a Labour opposition that has supported these punishing cuts.”

Michael Meacher points out that Ed Balls’s opposition to public sector pay rises has indeed unnecessarily damaged Labour’s credibility with trade unionists, and the broader constituency of Labour voters:

At a time when the central economic problem is febrile growth because of lack of demand, it is wholly unacceptable for several reasons:
1. It would gratuitously weaken demand even further when low-paid public sector workers have a higher propensity to spend – exactly what the economy now needs – than better-off sections of the population.
2. It is grossly unfair to inflict a wage freeze for this year and next year, and then a flat 1% rise in the next two years (still a wage cut in real terms because inflation is expected to be rising at 2% a year), when 1% for a female local government worker represents less than £3 a week while for a doctor it represents £19 a week.
3. It lets the rich and particularly the ultra-rich off the hook completely, continuing to get gargantuan pay packets and bonuses hardly touched.
Why did Balls say this anyway? He didn’t have to make any such statement at all. The alleged reason – that it’s necessary to swallow the entire Tory scorched earth policy in order to gain credibility – is absurd. In fact the exact opposite is true – the Labour Party will never gain credibility whilst it continues robotically to parrot the Tory line.

Writing on this website, John Wight. eloquently expounds the type of left alternative that should command widespread support across the unions, and with the left: a clearer differentiation between Labour and the Tories over the narrative of austerity, a programme of public investment to boost demand, a shift away from economic dependence upon the finance sector, greater state intervention, and supporting wage rises for lower paid public sector workers while holding back the highest paid executives.

However, it is premature to expect that such a programme could be adopted by the Labour Party, when the left have not yet won the argument for such a strategy in the trade unions, and when we have not managed to develop a convincing political narrative that can win the middle ground in order to make such a radical stance electorally credible. That is the task ahead of us.

Ed Balls makes the point well in his Fabian speech that political debate about economics in a democracy tends to polarise around symbolic caracatures of complex arguments. Debate is further constrained by the circumspection required for parties in government, or aspiring to government, who need to maintain business confidence, especially in periods of currency exchange rate volatility.

Over the economy, Labour faces what might be called the Marks and Spencer dilemma. The chain store struggles to prosper based upon its existing customer base, but if it moves away from its frumpy image in pursuit of new customers, it may lose the ones it has got. If Labour can’t win an election, then whatever economic policy we advocate is irrelevant; so it does need to be cogniscent of the need to pitch its economic message to engage with the prevailing consensus of public opinion.

Labour hasn’t in fact endorsed the coalition’s economic policy, but in order to appease those on the right of the party who have been running a campaign to destablise Ed Miliband, this weekend the two Eds gave the impression that they have. Carl Packham accurately assesses the real problem with Ed Ball’s approach:

What Ed Balls is really to blame for is talking about this in a kind of quasi-managerial way, rather than talking about this in a way that says the coalition government are making a set of irreversible mistakes. Oddly, in an attempt to make the party’s economic message credible, they are allowing the press – from the right wingers to the left – to paint them as supportive of austerity measures that aren’t working.

Ed Balls’s five point economic plan is to nurture economic recovery, thus reducing the deficit through increased tax revenues, and for fewer spending cuts than the Tories, Boosting tax receipts through economic growth mitigates the requirement to reduce spending.

However, it is worth unpacking Balls’s argument when he says:

Of course, there will be naïve ‘Keynesians’ who will think it is always a special case – time to let rip and just ‘tax, spend and borrow’ in the hope that will deliver full employment – people who think we are always in 1930s-style depression and more borrowing is always the solution to unemployment. And that is what gave Keynesianism a bad name in the 1970s.
It is why Labour leader Jim Callaghan was right to tell the Labour Party Conference in 1976 that that you can’t just spend your way to full employment. But, as I argued well over a year ago now in my Bloomberg speech, the reason why the real Keynes is so relevant today is that the global economy has been sliding into that rare and dangerous ‘special case’ that Keynes identified in the 1930s and Japan suffered in the 1990s.

What led the paradigm shift away from Keynesianism in the 1970s was not its naïve over use, but that shifts in the structure of international capitalism had reduced the effectiveness of the conventional Keynesian mechanisms. Neither the deflationary package of July 1966 nor the Heath government’s attempt to stimulate investment supply through a Keynesian management of demand resulted in the expected outcomes.

The Labour Party’s programme of 1973, which resulted in the 1974 manifesto, was predicated upon a number of observations about Keynesianism, as operated in the post war period by British governments who had used control of interest rates to manage demand through raising or lowering the cost of credit borrowing. Although full employment could lead to a worsening balance of payments, this could theoretically be mitigated through devaluation, but political considerations acted as a constraint upon this option (the more presidential style of French government, had allowed them more freedom for devaluation). The state could also combat under-consumptionism through boosting demand. In the General Theory Keynes argues for both direct state expenditure to increase demand as well as indirect stimulus.

However, there were a number of changes that undermined the effectiveness of such measures. Firstly, there was a vicious circle that sustained slow growth rates combined with an increased organic composition of capital, which meant that the leading managers of private firms were unconvinced that costs could be recovered over the lifetime of a major investment project. This lack of confidence meant that private corporations were unresponsive to increase in demand.

What is more, the increasingly multi-national nature of capital meant that corporations were able to avoid any government attempts to restrict credit, by international transfers within their firms; and transfer pricing within corporations prevented any government price controls; and moving profits across borders allowed corporations to avoid taxation. The increasingly global nature of manufacturing meant that government stimulus for investment would be ineffective compared to the advantages of moving manufacturing to other states.

In other words, the Labour Party programme of 1973 recognised that while Keynesianism relied upon macroeconomic measures by government to create the context where private corporations would respond in a way virtuous to national economic development, the actual decisions were still left in the hands of the private sector managers of major corporations, who had institutional reasons for resisting such government intentions; and the multi-national nature and increasing size of corporations provided them with the mechanisms to avoid responding to Keynesian stimuli. Hence the commitment to undertake strategic nationalisations in profitable industries like pharmaceutical manufacturing, to allow direct government intervention at the level of corporate decision making.

This understanding that private ownership of corporations was an impediment to government intervention in the economy was fiercely resisted by the right in the party, for example in Anthony Crosland’s 1974 article “Socialism Now” he argued both that the left was wrong in identifying increased globalisation, which he argued had reached its maximum point; and also that there were no conflicts between private corporations and the public interest.

Both the left and the right in the party had in fact reached the conclusion (whether consciously articulated or not) that Keynesianism, as it was being operated by successive post-war British governments, had run its course. So Callaghan’s speech to the 1976 conference was not an attempt to defend Keynesianism from naïve over-use, as Ed Balls implies, but a deliberate signalling that Keynesianism was being abandoned in favour of allowing unemployment to rise in an attempt to curb wage-push inflation; and a rejection by the government of the 1974 manifesto commitments to nationalise sufficient leading companies to allow the government to directly intervene in the economy.

Of course, the constraint imposed by the multi-national nature of modern day capitalism is now well understood by neo-Keynesian economists, hence the enormous effort to coordinate international management of credit supply; and for international banking regulation; but the problem remains that the key decisions of whether to pursue investment are left in private hands.

These disputes are not of just historical interest as the economy which has best weathered the current recession is that of the People’s Republic of China, where a genuinely mixed economy gives the government direct access to the levers of investment and finance. There is limited possibility of really gaining popular and democratic control of the economy until we have reversed the consensus against public ownership. It is arguable that while Labour’s Five Point plan is far better than the austerity of the current government, it cannot lead to sustained prosperity in the interests of working people until the state has the capablity to directly stimulate productive investment.

Ed Balls Speech to the Fabians

by Rt Hon Ed Balls, Shadow Chancellor

[This] conference – … to debate The Economic Alternative – is, without doubt, being held in the shadow of [great] events:

- political deadlock and an abject failure of economic leadership in the Euro area, Britain and the US Congress;
- following on from the biggest global financial crisis of the last century.

A toxic combination of grossly irresponsible bank lending, poor governance and weak regulation round the world which in its aftermath poses – as I have argued consistently over the last eighteen months – a threat to the world economy as grave as that which we faced in the depression of the 1930s.

So this is my starting point for today’s Conference.

If Britain and the world are to avoid repeating the mistakes of that 1930s ‘lost decade’ and the 2008 global crisis, then we badly needs political leadership in Britain, Europe and the world to meet two great challenges:

The Growth Challenge – to stop the aftermath of the financial crisis turning into years of slow growth, high unemployment and rising debts – leaving a permanent dent in our prosperity;

and,

The Reform Challenge – long-term reform to make sure such a financial crisis on this scale can never happen again and to build a stronger and fairer economic model for the future – what Ed Miliband has called a more responsible capitalism – which can, even in tougher times, meet our aspirations for social justice and strong public services.

LABOUR’S POLITICAL SHADOW

But of course, there is another shadow which casts itself across this Conference today – a political shadow which presents a particular challenge to Labour.

I believe we are right to resist the ideological and ahistorical Tory analysis which tries to pin the blame for a global financial crisis on Labour’s approach to public spending – when it is clear that the global financial crisis bankrupted banks and pushed up deficits in high spending and low spending countries alike.

But it is a fact that this financial crisis did happen on Labour’s watch – and that Labour lost the subsequent General Election.

We have never denied that a plan is needed to get the deficit down, and that it would mean tough decisions on tax and public spending. Before the election, I set out £1 billion of cuts to education.

But as a party and a leadership, I said then and I still believe now that Labour should have been clearer before the election that if we had been re-elected there would have been spending cuts as well as tax rises.

And I have no illusions that there is a big task to turn round Labour’s economic credibility and show – even as George Osborne’s plans deliver unemployment rising, growth stagnating and long-term reform stalling – that Labour can be trusted again. Click to continue reading

Miliband and Balls Have Got It Wrong on the Economy

The capitulation of the Labour leadership to the austerity and cuts agenda of the Tories and right wing press was confirmed by shadow chancellor Ed Balls’ recent statement that Labour would not reverse the cuts and would maintain the pay freeze within the public sector if they win the next election (Balls Accepts Tory Cuts and Pay Freeze, Guardian, January 14)

This comes in the wake of Ed Miliband’s public statements to the same effect, statements made after public criticism of his leadership by Maurice (Lord) Glasman, Labour peer and founder of the Blue Labour tendency within the party. This is a philosophy of conservative Labourism that espouses an emphasis on the role of voluntary organisations, churches and local charities in promoting mutualism and self help as opposed to centralism and a focus on equality. In essence Glasman’s theory echoes the postulates behind Cameron’s Big Society wheeze, at once a rejection of modern society and government as the necessary enabler of social and economic justice, and the embrace of a social model rooted in a rose tinted view of the past.

Blue Labour fell out of favour due to Glasman’s controversial views on immigration, culminating in him calling for engagement by Labour with supporters of the English Defence League.

The fact that Miliband felt obliged to respond to Glasman’s critique of his leadership with an attempt at burnishing his credentials with a near wholesale embrace of the Tory cuts agenda could prove a seminal moment in the political orientation of the party and its future direction.

The economic logic behind austerity remains as flawed now as it was when first announced by the Coalition. Rather than understand the deficit as a consequence of a global recession decimating demand in the economy, with a sharp fall in tax revenues due to a sharp rise in unemployment, the government is intent on deepening the same cycle by introducing drastic cuts in spending in the forlorn hope that the private sector will invest and create new jobs to replace those lost. The fact that those new jobs will come with lower wages, pensions, and worse terms and conditions than the ones lost is a moot point as far as the Tories and their backers within big business and the right wing press are concerned.

The UK’s deficit and national debt as a percentage of GDP currently compares favourably to other major economies. Currently it is sitting at around 60 percent. Compare this to France at just over 80 percent, Germany at 75 percent, Japan at 196 percent, and the United States at 60 percent, and the UK’s national debt cannot in any way be described as extraordinary. It also compares favourably when measured historically. By the end of the Second World War it had climbed to over 200 percent, yet under these conditions the postwar Labour government initiated the largest and most wide ranging programme of structural reforms of any British government before or since.

Today, of course, the nature of the economy is far different from what it was then. The role of international markets as the determinant of domestic economic policy is hard to resist as a result of the success of free market nostrums in dominating the ideological and economic debate when it comes to the realm of ideas. We see this with the role of the ratings agencies in deciding the rate of borrowing for national economies, with the much prized AAA rating elevated to the status of a symbol of national prestige. It reprises Marx’s analysis of credit as ‘the economic judgment on the morality of man’, with in this case the ratings agencies passing economic judgment on the morality of nations.

The idea that the likes of Standard & Poor’s, Moody’s and Fitch’s, the three main international ratings agencies, operate in a politically and ideologically neutral environment is false. They make their profit from the fees they receive from banks, financial institutions and governments. In this regard they have come in for sharp criticism over the fact they constitute a de facto cartel and continuously rate debt instruments and securities issued by banks more favourably than bonds issued by governments – this because the banks and financial institutions pay them more. The subprime mortgage crisis that hit the US in 2007 and was the catalyst for the global recession that followed is a case in point.

The difficulty for any national economy trying to come out of recession lies with the decline in international aggregate demand. In fact, there has long been a crisis in international aggregate demand due to the overconsumption that has been a factor in the West and the concomitant underconsumption of the developing world, leading to downward pressure on prices and rising levels of consumer debt.

The ongoing crisis in the Eurozone negates the viability of Britain being able to export its way out of the recession, certainly not in the short term anyway, leaving either a policy of cuts or measures to stimulate domestic demand. This should range from the simple act of reversing the rise in VAT – and indeed cutting it below the 18 percent it was set at previously, which would benefit those on moderate to low incomes who spend rather than save – to implementing a system of progressive taxation and closing off tax loopholes, which for too long have ensured that the rich have been able to avoid contributing their fair share to the exchequer as a proportion of income.

Britain’s under par infrastructure is crying out for major investment, as is a housing crisis that grows worse year on year. The jobs created would give a massive boost to domestic demand, with every pound invested having a multiplier effect throughout the rest of the economy. Inflation could be controlled via a combination of taxation and interest rates. The only pay freeze within the public sector should be applied to management and high earners, such as the 9000 who are currently taking home more pay than the prime minister.

When it comes to welfare, Labour needs to fight for those on benefits rather than accepting the narrative that they are workshy scroungers who are morally deficient and deserve to be treated as criminals. The government’s cuts in housing benefit and its policy of forcing people on disability benefits to come off on spurious grounds must be reversed. The current level of Jobseekers Allowance is set far too low to achieve anything other than forcing claimants to survive by entering the black economy. Furthermore, the knock-on effect of rising levels of stress related illnesses, crime, and other social maladies associated with poverty impact society as a whole. In economic terms, demand needs to be introduced at the bottom rather than the top of the income scale, where as a matter of necessity people spend every penny they earn rather than save or invest on the financial markets.

Also as a matter of priority should be more government control over the operations of the banking sector, with a view to engineering a gradual replacement of an economy configured around inflated property prices that has dominated over the past three decades with one based on new technologies, green industries, and manufacturing. Renationalisation of utilities and the commanding heights of the economy would take us back to the future.

The aforementioned constitutes a concrete and viable alternative to the status quo. Unfortunately, the current Labour leadership seems unfit to the task of breaking through the free market consensus of the establishment, including the media, to argue that alternative.

What should never be forgotten is that any debate over the economy is fuelled as much by ideology as economics. The public capitulation of Ed Miliband and Ed Balls to the right wing narrative of austerity reveals an ideological accommodation to the free market that should worry every Labour member and supporter who had higher expectations and hopes of a resurgence of the left within the party after the last leadership election.