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.

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.

Tax Dodger Ads

jqhoaldxunqism8da1w.jpgThe online and Facebook activist group, 38 Degrees, which emerged in response to the MPs expenses scandal last year, has succeeded in raising funds to place this ad in major newspapers on January 4th to coincide with the rise in VAT. The ad is designed to highlight Government hypocrisy over its austerity plans whilst at the same time taking no action to stem the mammoth sums of money lost each year to the exchequer due to tax avoidance on the part of the rich and big business.

In conjunction with UK Uncut, the grassroots organisation which is currently playing such an exemplary role in the same regard up and down the country and which has grown exponentially since it began, these ads and the counter argument they contain presage, along with the excellent student protests that have already taken place, a torrid 2011 for the Coalition and its objective of making the majority foot the bill for a recession caused by the few.

Don’t Let George Osborne Anywhere Near Number 11

The shadow Chancellor, George Osborne, could be in charge of the British economy in just over two months. So it is well worth looking at what he stands for.

Last Sunday he came up with the stunning idea 

 “to sell shares in the nationalised banks to ordinary Britons at a discount in order to reward them for seeing their money as taxpayers rescue the troubled financial institutions. Young people and those on low incomes will get even steeper discounts as part of an aim to “recapitalise the poor”. “The bankers have had their bonuses,” Mr Osborne told The Sunday Times, and Conservatives plan “a people’s bank bonus for the people’s money that was put into these organisations.”

Let us look at the enthusiastic reaction to their economics frontman in comments on Conservative Home:

“Sell the shares by all means, but by open subscription at the top price possible. I want my money back and I don’t expect to pay to get it back.”

“Oh god. So stupid from Osborne. … Every penny must go to cutting the deficit. The deficit is either the number one issue or it isn’t. The Tory leadership must make their mind up.”

“David Cameron needs to get tough and boot out this grinning buffoon and Conservative vote loser”

Ian Cowie, personal finance editor of the Daily Telegraph is scathing:

The State owns about 41pc of Lloyds and 73pc of RBS – formerly known as Royal Bank of Scotland and including subsidiaries such as NatWest and Coutts. But what about the views of the owners of the rest of the equity in these banking groups; including 3m private shareholders at Lloyds and 195,000 individual investors at RBS?

They only own a tiny minority of the shares by value but they hold a substantial proportion of the votes which are likely to be cast in the next General Election. Few will be pleased when they realise that whatever discount to the prevailing market price Mr Osborne offers any buyers to make his “people’s bank bonus” attractive must cut the value of existing shareholdings.

So, for example, if the State were to sell its stake in Lloyds at a 20pc discount to the market price today, the disposal of such a large line of stock at a fifth below the going rate would be likely to cut a tenth or so off the current price of 52p . The same discount applied to RBS today would cut its price from 36p to something like 32p.

So George Osborne’s wheeze would cut the value of stock held by around 3.2 million individual shareholders, most of whom can be assumed to be conservative voters.

Remember that just three years ago, RBS was trading at 600p and Lloyds at 400p a share. According to the National Audit Office, the effective price at which the State obtained its stake in Lloyds was 74p and it paid an average of 50p for RBS.

Now looking at the current share price, and the price paid by the government to shore up the banks, it is clear that some public money was jeopardized by buying before the share prices hit the bottom of the trough. But nevertheless based upon historical trends, the government’s stake was bought at a bargain price.

There are two ways forward with this. The best way would be to leverage off the advantage and bring the banks permanently into the state sector, thus increasing the economic footprint of government and providing a direct mechanism for the state to control and boost borrowing, especially to small and medium size businesses who are unable to raise money by more sophisticated means; thus pushing productive investment.

But more cautiously, they could simply wait until the banks’ share price rises again to nearer their historical norm, as they will, and then sell at a profit.

This hare-brained scheme from Osborne of a fire-sale of bank shares is worth looking at because its rashness undermines the attempt he made this week at the annual Mais lecture to present himself as a serious economic figure, which if we judge him by the press reaction, he achieved with some success.

Clearly, there are very serious weaknesses in the UK economy. Sterling had been sustained at too high an exchange rate for far too long, to the benefit of the financial sector, but to the detriment of manufacturing jobs in the English regions and Wales, and Scotland. The level of private debt was and still is unsustainable; and the financial markets have been out of control.

Most damagingly, the government’s direct stake in the economy has become relatively peripheral, so it is reduced to only fiscal measures to nudge the economy. It is worth comparing to the economies who have been least affected by the recession, China and Brazil, where increasing state investment in the productive economy provided sufficient stimulus, based upon an existing substantial state sector. (This is, of course, a criticism George Osborne would not make)

Naturally, given these real problems then all George Osborne needs to do to sound sensible is to acknowledge some of them, and his question “where will future growth come from” is a very good one; and one which the current Labour government struggles to answer.

Nevertheless, central to Osborne’s vision is cutting the deficit. This week he warned that Britain will face “savage and swingeing” public spending cuts and a loss of economic sovereignty unless a start to reducing the record £178bn fiscal deficit is made this year. Osborne says that financial markets will panic unless a “credible” plan to reduce the deficit is introduced this year.

This is a controversial position, for example,

“according to analysts at UBS AG, the British Pound may fall below parity with the Euro and drop to $1.05, the lowest level against the Dollar since the mid-1980s, if the government tackles the country’s debt burden too early.

Mansoor Mohi-Uddin, chief currency strategist at UBS in Singapore, said yesterday that, “if the next government was to prematurely curb the fiscal deficit, without the economy reaching a surer footing, the consequences for sterling would be grave”

There is a very real danger that cuts in the public sector, quite apart from their effect on services, will kill the fragile economic recovery. Generally the measures taken by the government, the bank bail-out, the car scrappage scheme, the cut in VAT rate, the quantitative easing were effective in preventing the recession deepening into a depression, and were effective in preserving the jobs and prosperity of millions of working people.

The Tories opposed or pooh-poohed these sucessful measures, and advocated suicidal laissez faire.

As socialists we need to be clear that state intervention was effective, and we can see from other countries where greater state intervention was used, more state intervention can be even more effective.

Of course neither the Labour Party and the Tory Party are presenting socialist economic policies, but that doesn’t mean the differences between them are unimportant. The response from the government to the banking crisis was significantly better from the point of view of ordinary working people and our families than the policies of the Tories.

The pro-market prejudice of New Labour – including Gordon Brown – has been dealt a savage blow by the events of the last eighteen months. Now is the time to press our advantage and argue for the broader labour movement to again adopt policies in favour of social ownership and state direction of the economy, allowing the economic priorities to be placed under democratic popular control.

That means that we all need to see the Tories as a great danger, a Tory government could close the window that has opened, as well as blighting the lives of a generation.