Entries:

Showdown in Wisconsin (28 February 2011)

Insurrection in North Africa: Looking Ahead (7 February 2011)

The continuing madness of Chancellor George (28 Jan 2011)

Public Expenditure: the Affordability Fallacy (21 December 2010)

Invest in your child's education (6 December 2010)

Reforming Old Age Pensions: a modest proposal (22 November 2010)

Crashes and Bailouts, Confusion and Lies (1 November 2010)

Crime wave announced in House of Commons (27 October 2010)

Nobel Prize in Economics (17 October 2010)

Chronic Deficit Disorder (5 October 2010)

Ed and the Union Pawnshop (29 Sept 2010)

Sticking with the Union (21 Sept 2010)

Stimulating Ideology (6 Sept 2010)

One Big Dip and we are in it (14 August 2010)

Democratic control over capital (20 July 2010)

Growth and Deficits (10 July 2010)

The G20 and the Decline of the West (25 June 2010)

The Banks and what to do with them (17 June 2010)

In Praise of Protection (11 June 2010)

Personifying Markets (3 June 2010)

"No more money" and other economic illiteracies (26 May 2010)

LINKS

Socialist Economic Bulletin

Research on money and finance

Left Foot Forward

 
 

This Weeks Commentary

 

Showdown in Wisconsin: Defending democracy
Wisconsin.jpg
Defending democracy in Madison, Wisconsin.

Until recently known as the home of whole food co-ops and alternative life styles,  Madison, Wisconsin is today the key battle field in a class war declared unilaterally by capital.  Formally at stake in the battle of Madison are the rights of public sector employees to bargain collectively.  In practice the battle is joined over the basic human right of freedom of association, which lies at the heart of a democratic society.  It is not hyperbole to describe the struggle in the snows of Madison to be a battle in US capital's counter-revolution against democracy.
            To understand the full significance of the confrontation in Madison it must be placed in historical context.  A progressive alliance of farmers and workers in Wisconsin produced Robert Marion La Follette (Fighting Bob), who was probably the most leftwing politician elected to major office in the United States.  Elected to the US House of Representatives, governor of the state, and US senator, La Follette was a Republican when it remain partly the party of Lincoln. 
            By World War I he was too progressive for either major party.  In 1924, the year before he died, La Follette formed his own party, the Progressives.  He won seventeen percent of the national popular vote for President, running as an uncompromising enemy of corporate power.  If 100 years later the Republicans generated a defection to a new party, it would be neo-fascist (as opposed to the proto-fascism of what would remain). 
la follette.jpg
Fighting Bob La Follette

            Fighting Bob's sons Philip (governor in the 1930s) and Robert Jr ("Young Bob", US Senator 1925-1946) formed the Wisconsin Progressive Party that briefly controlled state politics.  Wisconsin was a state deeply divided between progressive labor and reactionary capital.  In a bitter electoral defeat of progressive ideals, Young Bob lost the 1946 Republican primary to Joseph McCarthy (by 5000 votes).  McCarthy went on to defeat the Democrat in the general election and become perhaps the most venal US politician of the first half of the twentieth century.
            The current governor leading the assault on human rights in Wisconsin,  Scott Walker, rests comfortably in the McCarthy tradition.  To give credit where it is due, Walker has considerably exceed McCarthy's assault on human rights.  While McCarthy for the most part restricted himself to alleged communists and the alleged "fellow travelers" of those alleged communists, the neo-venal Walker has broadened the assault to the population as a whole (except, of course, capital and its agents). 
            In the state elections of 2010, those who voted in Wisconsin brought a Republican majority to both branches of the legislature, as well as the governor.  This would be no changing of the guard.  With the state's budget deficit as an excuse, Walker launched a program of savage cuts.  Had he done no more than this, he would have remained as singularly undistinguished as he certainly is.  He would have been lost in a crowd of similarly reactionary politicians throughout the western world, a George Osborne with a mid-west accent.
            Walker of Wisconsin is no commonplace reactionary.  He aspires to a far baser goal than budget cuts:  a frontal assault on the right of people to associate.  Freedom of association is the right of individuals to collectively express, promote, pursue and defend common interests.  While the phrase "freedom of association" does not appear in the US constitution, federal and state courts interpreted the first amendment to include it (the amendment specifies freedom of religion, speech, the press, assembly, and to petition the government).  
            Just thirteen months ago the US Supreme Court stuck a potentially fatal blow to the freedom of speech part of the first amendment.  By a 5-4 ruling the court voided restrictions on the funding of political campaigns (Citizens United v. the Federal Election Commission).  This ruling granted capital unlimited freedom to propagandize and, by doing so, judicially reduced the rights of the rest of the population to freedom of speech.  The unspeakable Walker has his eye on another first amendment prize, the freedom of people to "petition the government for redress of grievances" (last clause of the first amendment).
            A growing number of people in the United States recognize the danger to democracy posed by Walker's bill to destroy pubic sector unions in Wisconsin.  Over 70,000 are suffering snow and freezing temperatures to stop him.  Credit should also go to the Democrats in the state senate who temporarily blocked legislative action (by preventing the senate from having a quorum).
            At stake in Wisconsin are not wages and pensions (the union has conceded to Walker these issues).  It is not a "labor issue".  At stake is political democracy.  Walker and the Wisconsin Republicans are militant extremists.  With the overt support of big capital, they seek the destruction of democratic government.  The demonstrators in Madison struggle against a reactionary vanguard that would implement its anti-democratic programme at the national level when it can seize the presidency. 
            For those of us living in the United Kingdom the struggle is at an earlier but no less dangerous stage.  Only last month the prime minister David Cameron told members of parliament that he intended to act "to prevent militant trade unions holding Britain to ransom" (Daily Mail, 13 January 2011).  Feeling its power on the rise, global capital is abandoning the pretense of democracy in favor of "order".  A New Order. With an old name, fascism.

 

Insurrection in North Africa:  Looking Ahead
Tunisia.jpg
President Zine El Abidine Ben Ali got the message.

Along with my partner I was in Tunisia during the last week of December, leaving only a few days before the insurrection that overthrew the long-standing dictator (we claim no personal credit).  Soon after the Tunisian dictator fell and fled, street demonstrations and other protests occurred in Yemen, Jordan and Egypt, with the last, it would appear, on the verge of the overthrow of the government. 
            With Ben Ali gone and Mubarak on borrowed time, it is appropriate to speculate on what type of governments to expect in Tunisia and Egypt.  The media in the United States and the United Kingdom (and perhaps in Europe for all I know) seem obsessed with the danger of "radical Islamic" regimes.  By this term they seem to mean something like in Iran or in the mould of Hamas.  For several reasons "radical Islamic" regimes are unlikely in these countries.  It is also unlikely that knowledgeable people in the US and UK government (assuming such exist) believe such regimes will unfold.  More likely is that the warnings against Islamic regimes betray a deeper game being played.
            First, why are "radical Islamic" regimes unlikely in Tunisia and Egypt? The principle reason is that both countries have a strong secular past, and religious groups have not been important in the insurrection in either country.  In Egypt the Muslim Brotherhood has had a prominent role in opposition politics for two decades because of the repression of secular parties.  At the risk of oversimplification, the politics in the two countries reflect that it has been illegal to be an opponent of the regime, but not illegal to be a Muslim.  It is not impossible that a post-insurrection government in both countries would have a strongly religious ideology, but it is unlikely.  If religiously-oriented governments appear in Egypt or Tunisia they are likely to be similar to the one in Turkey, where the religious fervor at the base of the ruling party has limited impact on the policies of the leadership.
            Extremists are likely to come to power in Tunisia and Egypt, extremists of the neoliberal variety.  This has been the unenviable fate of populations that have overthrown dictatorships during the last twenty-five years.  This is most obvious in Central and Eastern Europe, where not one of the sixteen countries (old or new) that moved from dictatorship to formal electoral democracy in the 1990s produced a progressive government (with the possible exception of Moldova, 2001-2008).  By whatever name they gave themselves, these governments were neoliberal to the core, pursuing economic policies that were criminally callous.
            If these examples are not considered relevant for North Africa, the same lesson is taught by the transition to majority rule in South Africa, a clear case of neoliberal policies in the guise of national liberation.  Going a bit further back, the same transition from dictatorship to neoliberalism occurred in Argentina (under Carlos Menem, 1989-1999), Uruguay after 1985, and Mexico after the dictatorship of the Partido Revolucionario Institucional ended in 2000.
            Many if not most of these dictatorships fell because of a genuinely popular and multi-class uprising, in which ordinary people displayed extraordinary courage and determination.  In all the countries progressive forces were weak, especially the trade unions, brutally repressed by the dictators.  When progressive forces are weak, the agents of capital are strong, and prepared as they always are to step into the power vacuum.  That is the most likely outcome in Egypt and Tunisia.  It is the game plan of national capital in these countries, and eagerly encouraged by the governments of the major economic powers, the United States, in the European Union and China.
            From the breakup of the Soviet Union, South Africa and Latin America, we know how the game unfolds.  Once the dictator flees, an interim government installs itself and discovers to its great regret that the insurrection has caused such economic disruption that a period of severe fiscal austerity is necessary.  To the good fortune of the new government, the IMF will organize a recovery package for the country.  This package will contain a large number of neoliberal conditionalities.  Some of these, such as the "deregulation" of labor markets, will legalize the repression that the dictator carried out on an ad hoc basis.  The new government will justify its neoliberal onslaught with the argument that the old dictator maintained his rule through a variety of state institutions and regulations which, in the interest of democracy, transparency and good governance must be privatized, deregulated and abolished.
            This sad but probable outcome does not argue against overthrowing dictators.  On the contrary, their overthrow is the necessary condition for progressive governments in the future that rule in the interest of the majority.  One hopes that the moment for such governments has come in Egypt and Tunisia, more probable for the latter because of the important role played in the insurrection by the national trade union federation (Union Générale Tunisienne du Travail).I fear that the decent and humane governments the courageous demonstrators seek will lie on the other side of neoliberal regimes that will parade as democracies.  Aided by the governments of the United States and the EU, the agents of neoliberalism are poised to seize power and implement the interests of capital, as their predecessors have done in Central and Eastern Europe, South Africa and Latin America

 

The Continuing Madness of Chancellor George

 Ray Goulding and Bob Elliot on the economy (see below).

           On 14 August 2010 in this space I predicted that if the Calamity Coalition's budget cuts and tax increases were adopted, the UK economy would have negative growth (scroll down for the forecast itself).  They were and it did:  in the fourth quarter of 2010 the UK economy contracted by minus 0.5 percent.  I was pleased that the not-so-ragged-trousered philanthropist George S[oros] denounced this outcome at Davos (people still attend this anachronism!!), though, bizarrely enough, did so while endorsing the "austerity program" itself (Guardian 27 Jan 2011, page 1).
            Undeterred by apparently abject failure of policy, Chancellor George (Osborne) held his ground.  With an insight that will no doubt result in a major reformulation of econometric forecasting models, he explained that the contraction resulted from snow in December (to be known by posterity as the Snowball Recession).  It is true that snow fell in December in much of Britain (I was snowed in myself twice in the backwoods of Hampshire).  Snow also fell in some other countries without resulting in an economic contraction.  Preliminary estimates indicate that the US economy trudged through the snow at 3.7 percent during the fourth quarter (www.actionforex.com), up from 2.2 percent in the third quarter.
            On the chance that Chancellor George might be mulling over why the US economy grew robustly and the UK economy contracted miserably, he might wish to note that the Obama administration implemented two fiscal expansions during 2009-2010.  However, the madness of Chancellor George takes the form of a disbelief in the principle of cause and effect in economic matters.
            It was plaintively suggested by the former national treasure Vince Cable that no "independent" forecaster had predicted such a severe outcome for the fourth quarter (there is talk of a re-make of Carol Reed's 1948 film Fallen Idol with Cable playing the title role of Baines, Ralph Richardson in the original, and Nick Clegg as the pre-adolescent Phillipe).  Mr Cable is incorrect.  Many made this prediction, including George Irvin (http://blogs.euobserver.com/irvin/about/).  Cable is correct that no one with a substantial media exposure made such a prediction, which raises the question, why not?
            That the UK economy would contract as a result of Coalition policies was and is blindingly obvious.  The likelihood that exports or investment would compensate for the fall in public sector demand is not low, it is zero.  Making the prediction that the economy would contract is what was called "a bird nest on the ground" when I grew up in Texas, a task so easy and profitable that only a fool would pass it up.  Yet commentators in the press and broadcast media continued to refer to the possibility of avoiding a "double-dip" recession when it was clear we were in it.  Predicting economic decline was "a mug's game", commented an apparently progressive academic economist at a Guardian meeting in November.
            The failure is partly due to the contagion of the madness of Chancellor George, a madness that includes the belief that the economic equivalent of the laws of gravity have been repealed.  The basic laws are quite simple and universal for capitalist economies.  First, in the short run the level of aggregate output is determined by the level of aggregate demand.  Adjustments in relative prices, the basis of Chancellor George's faux vision of recovery, at best occur slowly and unevenly. 
            Second, in the short run household expenditure is a function of current and anticipated income.  There are no "consumer led" recoveries, because consumption expenditure in the short run is derivative from household income ("endogenous" or "induced").  Household expenditure can assume a semi-autonomous character, as in the United States in the 1990s and 2000s, but not in the short term, because its autonomy from income flows requires institutional accommodation such as refinancing mortgages that require time.
            With these two basic laws in mind, predicting the UK contraction was, indeed, "a bird nest on the ground".  Household income would fall due to the cuts and tax increase, resulting in a fall in household consumption expenditure, and - Hello! - the economy contracts (aka rocket science).  Three decades of voodoo economics, for which several remarkably unremarkable men won Nobel Prizes, have successfully obscured the basic laws of macroeconomics, and done so for a purpose.  The purpose has been to justify the unregulated rule of capital over society by discrediting the public sector as the regulator of the economy.
            If anyone wants to hear economic sense rather than nonsense, I recommend attending the Progressive London Conference on 19 February, where one of the UK's most sensible economists, Victoria Chick will speak (details of the conference can be found at http://www.progressivelondon.org.uk/).  In the meantime, I invoke the closing line made famous by Ray Goulding on the US radio programme The Bob and Ray Show, "write if you get work".

 

Public Expenditure: the Affordability Fallacy
hobbs
Read Thomas Hobbs on government.   

Implicit almost all discussion of public expenditure and revenue, most virulently in the debate over deficit reduction, is the fallacy of public affordability.  This fallacy is manifested, for example, in the argument in the United Kingdom that if university education is available to a large portion of the population, the public sector cannot afford to deliver it without substantial fees, even less to provide support grants to all students. 
            Because "the public sector cannot afford" to provide university education, it is necessary to ration the public contribution on the basis of need (income or means testing). The same argument is applied in very major area of social expenditure:  with an ageing population, "the public sector cannot afford" to pay more than a safety net pension; cannot afford to provide all the drugs and care needed by that ageing population, and so on.
            "Affordability" arguments are fallacious.  The fallacy is obvious once one considers it from the level of society as a whole.  Consider the example of funding of university education.  Only a tiny minority of people would argue that primary education should be a matter for individual families to decide and wholly fund themselves.  This near-consensus results from the conviction that children have a right to be educated, and that a democratic society requires an educated and informed public.  These convictions, not finances, determine the provision of primary education by the public sector:  for everyone, regardless of income or status, and if some wish to contract for private education, they may do so.  The social consensus on public provision of secondary education is equally broad (for everyone), but number of years provided varies (lower in Britain than most developed countries).  Only a few on the far right wing would argue that the pubic sector "cannot afford" to provide primary and secondary education for all, though in practice many right of centre attempt to minimize the expenditure and therefore the quality of provision.
            The same principle applies to university education:  what is the appropriate coverage and to what level?  Here there is no consensus, and those who believe that people have no right to higher education avoid taking that potentially damning position by seeking cover under the affordability argument: "I wish we could provide everyone with a university education, but we cannot afford it.  In any case, people gain personally from higher education, so they should pay for it themselves to the extent that they can.  The public sector can only afford to help the poor, and if you are poor and clever you will find funding." 
            This line of argument is the most superficial mendacity, and would apply equally to primary and secondary education (see my previous comment).  The true essence of the affordability of higher education argument is, "People have no right to higher education.  If they want it, let them pay for it.  If you are poor and clever you might go to university.  If you are dumb and rich you certainly will."
            When there is a social consensus that people have a right to a university education if they want one, then reducing public expenditure and raising fees does not save society money.  There are two affects: 1) for those with high incomes it shifts expenditure from the public sector to households, and 2) for those on low incomes it reduces provision.  It "saves public money" in the same sense that not filling potholes is a financial gain.
            Most pernicious is the application of the affordability fallacy to pensions and health.  Two core values of democratic societies are that children have a right to education and the old have a right to live their final years in decent conditions with dignity.  Given this consensus on the elderly, discussing financial affordability is grotesque.  The question is, in light of a country's economic development and productive resources, what level of decency can and should society provide to everyone past a certain age?  Once the level is decided, it merely remains to decide the institutional mechanism by which it will be funded.  Considerable empirical evidence indicates that provision of pensions through the public sector has the lowest resource cost.  This is primarily because unlike private insurers, the public sector need charge no risk premium.  Its revenue is guaranteed, and the growth of that revenue is determined by the growth of the economy as a whole.
            Even more obvious is the fallacy of the affordability argument for health care.  It is an appalling manifestation of the power of capital in US society that there seems to be no consensus that everyone has a right to be healthy, a principle Franklin Roosevelt included in his "Economic Bill of Rights" speech in January 1944, that every American had "the right to adequate medical care and the opportunity to achieve and enjoy good health".  In almost every other developed country this principle is accepted.  When it is accepted, as with education and pensions, the issue is not financial affordability, nor is it coverage (everyone qualifies).  The only issue is the level of society's obligation to itself on health care.
            The affordability argument perpetuates a profoundly anti-social and anti-democratic fallacy.  Whoever makes it asserts (as Margaret Thatcher did) that there is no society and no obligation to fellow human beings beyond an absolute minimum that the residual of social decency forces upon even the most reactionary Thatcherite or Reaganite.  Reducing that residual of social decency is the project of the affordability fallacy.  Existence is viewed as a collection of isolated individuals, for whom one has no concern, even if, or especially if, for those whose lives are rendered nasty, brutish and short.
           

Invest in your child's education

The reduction of funding for universities and a trebling of admission fees are among the many blessings bestowed by the Coalition Government on the United Kingdom (though not Scotland nor, it seems, Wales).  Because the (formerly) Liberal (ex-)Democrats (fLxDs) had a pre-election pledge to oppose university fee increases, unscrupulous opponents have called the fLxD'ers "hypocrites".  
            Using the pedantic argument that they did not tell the truth, extremists have called them as "liars".  The party leaders, N. Clegg and C. Cable, defend their bold action on the argument that circumstances changed for the worse between making the pledge and gaining the power.  Unprincipled opponents, such as the self-seeking university students, have suggested that keeping pledges when it is difficult to do so is a test of character.
            What the critics fail to realize is that money spent on education is an investment that increases a person's earning power (except for the social parasites that choose lower paying jobs such as school teaching and nursing).  It is incentive-sapping socialism in its most degenerate manifestation for Big Government to fund education for children whose parents lack the foresight to pay for it.
            The Calamitous Coalition (CamCo) should be congratulated for its defense of capitalist principles at the university level.  As usual it leaves a job considerably less than half done (see previous comment on old age pensions).  It is common knowledge that all competent research shows that across levels of education, the highest return to public investment is for early childhood (“The Economic Impacts of Child Care and Early Education,” 2004, Massachusetts Institute of Technology, Sloan School of Management, http://web.mit.edu/workplacecenter/docs/Full%20Report.pdf).  Since the return to money spent on educating the young is so high, it is shocking that it should be done by Big Government rather than families through the private sector. 
            If, as the Coalition argues, people should pay for their university education because they gain financially from it, all the more for primary school.  No doubt this is why in the United States kindergartens are rarely if ever supported by the long-suffering taxpayer, with the United Kingdom quite good on non-funding, as well.  Having clearly placed itself in support of markets for university education, CamCo should have the courage of its convictions and announce an end to socialism in education:  abolition of all public funds for schooling in any form.
            So dramatic would be the change that it is impossible to fully appreciate the long run benefits.  Most obvious, the socialist-government schools would cease their near-monopolist crowding out of the private sector at the primary and secondary levels.  In the UK the portion of students at market-based educational institutions is a shockingly low seven percent (lower still in the United States).  Eliminating the anti-competitive socialist sector would immediately raise that to 100 percent.  As usual, leftists and fellow travelers would claim that the number in school would fall once families had to pay up-front the true cost of education.
            Would that be a bad outcome?  It would merely indicate, as it did at the university level before the Labour Government of 1945-1951, that most consumers choose to buy other commodities instead of education (food and rent are common examples).  Indeed, when the British Empire was powerful and great, a minority people attended school of any type.  The fundamental problem is the same as for pensions.  State pensions exist because people are under the delusion that they have an entitlement to grow old.  Public education exists because people are under an equally anti-capitalist delusion that they have a right not to be ignorant.  While the first delusion is a severe threat to the public purse, the second strikes at the very basis of the social order that the Coalition defends.

Reforming Old Age Pensions: a modest proposal

[Ultra-left German politician of the 19th century.]

I am confident that everyone realizes the disaster humankind faces, by comparison to which the impending global depression is a mere blimp on the radar screen:  people grow older. It is happening even as you read this.  Over eight years ago the BBC led the way in recognizing that people grow older:

…[A]geing is increasingly becoming one of the most salient social, economic and demographic phenomena of our times. (BBC News 11 September 2002)

            As one would predict, for decades liberals have favored people growing older, and see what it got us (millions of old people).  As should be immediately obvious to any rational person, the problem with the retired is that they cost money and do not work:

Spending on the [US] government's three main entitlement programs--Social Security, Medicare, and Medicaid--is projected to rise significantly in coming decades. If left unaddressed, these increases put the government's budget and the American economy at risk. (emphasis added, American Enterprise Institute, http://www.aei.org/outlook/28443)

            The word "entitlement" is notably appropriate in this context.  It is clear that all over the civilized world there are people who selfishly believe that they have an "entitlement" to grow old (as I near 70, I am myself a shameless offender).  More serious still, millions of people are in the grips of the delusion that they have a right to grow old and stop working, even if they are healthy (cynically called a "healthy reitrement").   The source of this delusion can be traced to nineteenth century chancellor of Prussia and ultra-leftist Otto von Bismarck (like Karl Marx, J S Bach, and Adolph Hitler, a German), who introduced a state pension (please note, state pension, as in nanny state, welfare state and police state). 
            This was a disastrous precedent, even in the land of Free Enterprise where one would expect the entitlement to work unto death would be protected.  To the contrary, in 1935 Franklin D Roosevelt, the American Lenin, forced into law the Social Security Act, which offered parasitic idleness to everyone over 65 (at least those who paid their employment taxes for the appropriate period).  The only mitigating element in this Nazi/communist retirement law was that both male and female life expectancy were below 65 (60 and 64, respectively), as was the case in the United Kingdom. 
            Offering retirement when most people would be dead is fiscally sound, but offering it as a substitute for work is communism.  On the largesse of the bountiful state pension a man in the United States and the United Kingdom now can expect to live in total idleness for ten years and women for fifteen! And some of these people are healthy!   Those who argue that these indolent oldsters paid taxes for these pensions fail to appreciate the impact on capitalist values of government endorsement of idleness.  As former Wyoming Senator Alan Simpson put it so accurately and eloquently, "social security is a milk cow with 310 million tits". (http://www.cbsnews.com/8301-503544_162-20014698-503544.html)
            It is estimated that at the moment in the United States and the United Kingdom that state pension handouts keep forty percent of those over 65 out of poverty.  This shows the seriousness of the problem.  Public pensions are a vicious cycle:  as most people grow older, they automatically receive pensions, and as a result of receiving them they can to continue to age to no productive purpose.
            It is fortunate that the US National Commission on Fiscal Responsibility (though notably not President Obama) and the UK Chancellor of the Exchequer George Osborne realize the disaster and are on the case.  Mr. Osborne has recommended an increase in retirement age to 66.  This is no more than a pathetic gesture.  The appropriate policy is to end the free ride of the millions of dottering welfare cheats.  Vice-(understudy?) prime minister Nick Clegg put the matter well back in June when he said that there is nothing progressive about the young carrying the debt burden of the old.  That is a process that could go on forever unless something bold is done.
            The problem is that pensions encourage people to live longer (as do the free drug prescriptions in the UK).  The solution is staring us in the face: a market society should make the elderly pay for themselves (as the people on the New York Upper East Side and in the London boroughs of Chelsea and Kensington can, which is why their life expectancies are so high). 
            Stop state-sponsored idleness. Joe Glazer, the US "labor troubadour" wrote a song with the refrain, "too old to work, and too young to die".  Solve the idle aged problem by ending the state pension and the "entitlement" to grow old.  Use the money for something useful, reducing the highest tax rates.  If politicians lack the courage to take this obvious step, an interim measure is to raise the retirement age to 90.  Then the song will be shorter, "too old to work, die".
[Next week: A modest proposal to fund education.]

 

Crashes and Bailouts, Confusion and Lies

Of the many myths and self-serving lies about the financial crisis of 2008, certainly the most impressive is the near-universal belief that a very large amount of the people's money was used to "bailout" banks around the world, especially in the United States and the United Kingdom.  This bailout bullsh*t takes many forms, from the relatively bland BBC "taxpayer bailout" to the 4th International's outrage that the working class financed the salvation of the banks (check out their website).

Depositors run on the American Union Bank
in New York 1930.


            The most politically inflammatory manifestation of the lies is the slogan of the neo-fascist Tea Party that President Obama "bailed out Wall Street not Main Street".  Common to all of these slogans is a fundamental confusion about the infamous TARP, the Troubled Asset Relief Program (Public Law 110-343 of the US Congress, The Emergency and Stabilization Act of 2008).  This should not be confused (though it invariably is) with the American Recovery and Reinvestment Act of 2009 signed by President Obama (find it at http://www.recovery.gov/About/Pages/The_Act.aspx) which involved no money for banks.
            The first Big Lie about the bailout is that it was the work of the Obama government.  It was not.  It was passed and signed during the late, unlamented presidency of George Bush (the 2nd).  The neo-fascist Tea sippers and the rich that maintain them have been extraordinarily successful in achieving general acceptance that Obama did the bailing.
            The second Big Lie is that the bailout of the banks was done with "our" money, taking tax revenue that could have been used for people rather than banks.  The almost universal opinion is that the bailout had a huge cost that "drained the public purse", and left no money for anything else. This view can be found among the population at large, and by nominally impartial media such as the BBC that should know better.  No tax money was spent on the bailout;  indeed, no public borrowing went to banks.  The re-capitalization (to use the correct term) of failing banks involved the US and the UK governments acting as creditors, by lending money to private sector banks.  Far from pushing these governments into debt, the re-capitalization created assets for the public sector.  For example, in the United States, the Federal Reserve System created credit (as central banks can do), which the US government lent to banks, and those loans were and are assets.
            The third Big Lie is that the so-called bailout had an enormous cost that untold generations of Americans and British will pay, world-without-end.  Completely false:  the US government and the UK government will probably make a profit on the interest on the loans, and as a result of taking partial ownership of the banks, receive dividend payments.  On 15 July 2010, a business website reported, "of the 19 largest American banks, with more than $100 billion in assets, 17 borrowed funds under the [TARP], accounting for 81% of the total funds lent by the Treasury.  Of the 17 largest banks that borrowed money, 76% have already fully repaid the amounts borrowed" (http://problembanklist.com/over-small-banks-may-default-on-bailout-loans-0133/). 
            That the so-called bailout should be criticized is the understatement of the 2000s, but NOT because it "bailed out Wall Street not Main Street", NOT because it was done with "our" money, and NOT because it was costly.  It should be criticized because it gave the Obama administration and the Brown government the chance of a life time which they squandered:  to take political and economic control of the banking system and end financial excesses.  At the minimum, the public control could have prevented excessive salaries and bonuses, and in the United States provided the vehicle for preventing mortgage lenders form expelling people from their homes.  In his 1936 acceptance speech for the presidential nomination, FDR famously said, "This generation of Americans has a rendezvous with destiny".  I regret to say that Barrack Obama missed his.
            It is difficult to account for the near universal belief in this pack of lies.  Part of the explanation is that once the banks were no longer in trouble, the lie of the Great Give-away fell on fertile ground across the political spectrum.  Among progressives it confirmed the usually-correct suspicion that nominally centrist governments are in the pocket of the bankers.  On the other side, especially among the reactionaries and neo-fascists, it became part of their anti-government ideology.  For the banks themselves and capital in general, the slogan of "no more fat-cat bailouts" is easily adapted into an anti-regulation campaign:  giving our hard-earned money to a bunch of fat-cat banks shows we need less government.

            It is not hard to find black humor in this, the Big Bailout Lies.  However, the result may be considerably more black than humorous.  Tomorrow in the United States people shall vote for congressmen, senators, governors and state and local officials.  Know-Nothings, crazies and neo-fascists account for a solid 35-40 percent of the electorate, manipulated by powerful and reactionary capital.  Add ten to fifteen percent of potential voters who may vote for atavistic reactionaries or stay away because they believe the Big Bailout Lies.  It is my opinion that there is not a majority of US voters that is or would support neo- and proto-fascist candidates and policies.  I hope I am right.

 


osborne.ipj

Crime wave: These men are dangerous and may be armed. Approach them only in large, organized groups.

Crime Wave Announced in House of Commons

It would be quite easy to ridicule the House of Commons performance of Chancellor George Osborne last week when he announced the coalition government's five year spending plans.  The grim reality is that ridicule must be replaced by a clear statement of what the people of Britain face:  Osborne announced a five year government-organized crime wave.
            The most immediately brutal and serious crimes are the combination of stealth spending cuts and commercialization for the National Health Service.  An independent investigation earlier this year concluded that the change in hospital status from "trust" to "foundation" was more than dangerous for people's health, it killed:
…a damning investigation by the Healthcare Commission…found that between 400 and 1,200 more people died at the Mid Staffordshire NHS Foundation Trust than at other hospital trusts between 2005 and 2008. [Guardian 24 February 2010]
            The current government has made its policy clear, "the new reform will see all hospitals become Foundation Trusts and thus have more independence from central control"  (PNH Alliance, 3 August 2010).  Because the impact of the shift to "foundation" status on those in hospital care is known, the loss of life that will result would qualify as "premeditated murder, causing the death of another human being after rationally considering the timing or method of doing so, in order to either increase the likelihood of success" (Wikipedia), with the success in this case being the destruction of the public health system.
            Other crimes that render the coalition a gang of felons include: denying higher education to the majority of the population through prohibitive fees;  aiding and abetting common crime by under-funding the police;  endangering the health and safety of children by allowing buildings and grounds to deteriorate; forcing people out of their homes by benefit cuts;  and victimizing the handicapped through reduced care and support. 
            Only the ideologues and gentele would fail to recognize this so-called budget as a program of organized crime.  The usual method of dealing with criminals is to call in the police.  It is unfortunately the case that this remedy is not available, because the police find themselves under the command of the leading felons.  In principle police intervention would be replaced by a citizen's arrest, "an arrest made by a person who is not acting as a sworn law enforcement official".  However, rarely if ever is this method effective with major criminals such as prime ministers and chancellors.
            The only practical action is for the victims of these crimes, the vast majority of people in Britain, to take the law into our hands and go out on the streets.  This is being organized by those who were responsible for the construction welfare state in the late 1940s, the trade unions (for information, go to http://www.unitetheunion.org/).
            The coalition cuts will result in a severe and extended recession (see 14 August comment lower on this page).  However, even if this mad fiscal policy resulted in a boom unprecedented in UK experience, would still cause suffering and death.  It should be opposed for its gross criminality.

 

 

 

Economics Nobel won for studies linking
higher benefits to more unemployment
[The Guardian, 12 October 2010, p. 28

"[The prize winners'] analysis of why unemployment remains high when jobs are available has found favour with governments attempting to create a more flexible environment for employers."

1932 Nobel Prize in Economics Awarded Posthumously
to Jean-Baptiste Say

[Daily Mial 31 November 1932, p. 1]

Despite the controversy that it is the Bank of Sweden (BS), not the Nobel Committee, making the award, it was announced that the Prize in Economics for 1932 would go to the late-great French economist and visionary Jean-Baptiste Say (on the 100th anniversary of his death).  Insiders report that while those making the award were not favorably disposed to M. Say's opposition to Napoleon's dictatorship (suggesting that if alive today he might oppose fascism), this was outweighed by the Frenchman's consistent support for free trade and unregulated markets.
            Indeed, overwhelming all else was M. Say's irrefutable demonstration of "the mere circumstance of creation of one product immediately opens a vent for other products" (Traité d'économie politique 1803, 179), frequently shortened to "supply creates its own demand".  Especially at this critical moment, after the temporary adjustment in financial markets almost exactly three years ago (vulgarly called "Black Thursday" by communists and their fellow-travelers), the BS'ers considered it essential to assert clearly the virtues of free markets by honoring M. Say post-humously. 
            Sources close to the BS report that great concern arose after the defeat of President Hoover by the populist Roosevelt.  It is hoped that the choice of M. Say will help induce the new American president to keep faith with free markets and non-intervention in economic matters.

Jean-Baptiste Say with anarchy in the background.

            That governmental resolve for free markets might falter in Europe and the United States is considered a serious danger by the captains of finance.  Their fears arise in part from the irresponsible interpretations by some of current unemployment rates, 25% in the United States and 30% in Germany (despite, in the latter country, of commendable efforts by the Weimar government to balance the public budget). 
            Most shocking have been absurd suggestions by the notorious currency speculator Maynard Keynes (who has personal links to the degenerate "Bloomsbury Set"), that government action might somehow reduce unemployment.  Having made much of the increase the number of unemployed from 1.5 million in January of this year to the present 2.6 million, Mr. Keynes should make himself aware that "the rise is to a large extent owing to the temporary closing down of works for extended holidays" [note: actual quotation from The Guardian, 7 January 1931].   It is difficult to believe that some suggested Mr. Keynes himself for the Nobel!
            So completely mad is Mr. Keynes that his "solution" to the current "problem" of unemployment is to bury money in coal mines! [See below]  All sensible people have the BS to thank for this selection of M. Say to remind us that the current "depression" is an illusion exaggerated by the forces of disorder, and soon to be rectified, as always, by our vigorous private sector.


If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well tried principals of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.
(J M Keynes, Collected Writings, Book 3, p. 129)

 

 

Chronic Deficit Disorder and how to treat it

After going into remission during 2008-2009, there has been a virulent outbreak of Chronic Deficit Disorder (CDD) in the United States and even more so in Europe.  While it is a well-recognized behavioral malfunction, CDD is frequently used to cover a broad range of anti-social activities.  Strictly speaking, CDD refers to a morbid and irrational fear of public expenditure exceeding current revenues, and can be distinguished from Acute Deficit Disorder, a delusion that public enterprises should balance expenditures with income (e.g., Vince Cable and the Post Office).  A special case of CDD which I shall not consider because there is no known cure is Congenital Chronic Deficit Disorder (CCDD), the loathing of taxation by those with inherited wealth (e.g., David Cameron and George Osbourne).
            Over the last year CDD has swept through the Conservative Party (frequently CCDD rather than CDD), where natural resistance is virtually nil, and afflicted almost the entire Liberal-Democrat Party (as might be expected given the absence of preventative measures characteristic of  its class clientele).  Quite surprising has been infestation in the Labour Party, most notably (but hardly isolated) the extreme case contracted by Alistair Darling.  It is therefore encouraging that Ed Miliband seems to have recognized the threat that CDD poses to social order and taken steps at least to limit its spread.
            In the United States the rampant spread of Deficit Disorder is extremely worrying, because it has afflicted groups previously immune, Neo-conservatives, Neo-liberals and the filthy rich.  During the presidencies of Reagan, Bush I and Bush II, these groups were not merely indifferent, but enthusiastic about public sector red ink.  With the arrival of a Democratic President intending to spend on programs other than making war, CDD spread through the GOP with a virulence unprecedented since the Black Death.
            With public welfare threatened, it is the responsibility of the healthy to take remedial action.  The first step towards containing CDD is that those who suffer from it recognize that they are in the throes of an anti-social malady - that they are ill.  This first step involves taking three doses of remedial rationality.
            1. Recessions cause public sector deficits
            Public expenditure has a slight tendency to increase during recessions and public revenue invariably declines.  During recessions unemployment increases and wages decline for many of the employed.  The former automatically generates unemployment payments, while the later leads to increases in household support payments, such as food stamps in the United States and various means-tested benefits in Britain.  Recessions are by definition declines in income, and taxes decline when income declines.  These relationships might strain the mental capacity of a pre-schooler.
            2. Public Expenditure Cuts made deficits worse
            Declines in household income result in declines in taxes and increases in deficits.  Cuts in public expenditure reduce public sector employment and household income.  Therefore, cuts in public expenditure reduce public revenue, with the result that at best a deficit does not decline and at worst it increases.  If there is a flaw in that logic, no economist has found it.
            3. Economic Expansion reduces deficits
            Economic growth increases employment and household incomes, which increases taxes and reduces payments to the unemployed and means-tested benefits.  The fiscal deficit declines.
            Try as one might, it is impossible to avoid the conclusion that endorsing expenditure cuts for deficit reduction is a behavioral disorder.  However, except for those afflicted by the congenital form of the malady, it is a disorder that can be treated. 
            In 1930, J M Keynes warned, "The world has been slow to realize that we are living in the shadow of one of the greatest economic catastrophes of modern history".  The same warning applies in 2010, and the slowness to realize the impending disaster is the essence of Chronic Deficit Disorder.

 

 

Ed and the union pawnshop: Have I missed something?

No one can be surprised that the Tory press (i.e., 90% of the daily editorial commentary) is in danger of cardiac arrest because the new leader of the Labour Party was elected with the support of the trade unions (seems logical, Labour Party, labour unions).  What is a bit mystifying is that journalists and commentators associated with a left of centre location also seem prone to hyper-tension on this issue.  For example, on the BBC Today programme (27 September) Polly Toynbee of the Guardian assured listeners that Ed Miliband was not “in hock to the unions”.
             To place this assurance in context, a few obvious points might be made.  First, most of the major social programmes that progressives support in the United States, Britain and continental Europe have been the result of the active and often militant support of trade unions.  Governments enacted these programmes because they were “in hock to the unions”.  With this so obviously the case, why are progressives urging Ed Miliband not to make more trips to the TUC pawn shop?
            This question leads to a second fact even more obvious:  capitalist societies are divided into three classes, the capitalists themselves, those they hire (once called workers), and the professionals that may or may not be hired by capital (captured in the now never-used term “petite bourgeoisie”, which despite or because of its current disuse has an entry in Wikipedia, http://en.wikipedia.org/wiki/Petite_bourgeoisie).  The first of these three is fully organised into its own political movement which it wholly owns, the Conservative Party, as well as a smaller one it does not directly own, but for which it maintains a first-refusal option (the Liberal Democratic Party).
            Since the employers are organized, why not the employees (note that I avoid the ideological terms “bosses and workers”)?  Unless I have missed something, “the Labour Party in hock to the unions” would seem the logical and necessary response to the Tory part wholly owned by capital.  The alternative pursued by the late, unlamented Tony Blair, a bargain price to capital to purchase the Labour Party, would not seem what progressives would want.  But, it is the de facto alternative to being “in hock to the unions”, because those of us in the PB are never organized as a principle of our existence.
            How then, do we account for anxieties by progressives that Ed Miliband was elected with union support?  This derives from a rather particular petite bourgeois (please forgive the term) view of the electoral process;  namely that it should unfold in market place of individuals, and the contending politicians should offer their policy products for selection on the basis of the personal choice of voters.  In this political market place monopolies and collusion by any group, be it capital, labour or the East Hampshire Cat Lovers, is an affront to democracy.  By this line of argument, labour unions are always Big Labour, with plans as nefarious as those of Big Capital, to deny free thinking individuals the democratic process (as well as causing the Winter of Discontent and all that).
            This view of the democratic process is the political equivalent of free market ideology, and if we reject the one, we must reject the other.  A progressive politics without being “in hock to the unions” is as likely as competitive markets generating full employment and equitable distribution.  Competitive markets are destabilizing, generate concentrations of economic power in the hands of capital, and that economic power of capital becomes its political power through control of the media and its own parties. 
Ha-Joon Chang has written a new book ridiculing the idea of “free markets” (see my review under Media and ecomment).  No less imaginary and worthy of ridicule is the idea of a free and open political arena where ideas compete on their merit.  In hock to the unions? Go for it Ed.
           

Sticking with the Union (21 Sept 2010)

With budget cuts in the offing in Britain and the Tea Party Neo-NoNothings* on the rise in the United States, we might reflect on how we came to this sorry state of affairs in both the Mother Country and the Colonies.
            In 1945, immediately after the Second World War, the Labour Party won a landslide election victory and enacted measures that radically transformed the role of government in society.  Britain was transformed into a social democracy.  Until Margaret Thatcher in 1979, the Tory Party reluctantly accommodated itself to this arrangement, though always eager to limit, contain and roll-back the so-called welfare state when it could. 
            The term "welfare state" was and is an ideological misnomer, implicitly suggesting that there exists some defensible role for government other than fostering the welfare of men, women and children.  That radical 1945 Labour government created, however incompletely, the Responsible State, a governmental system that sought to achieve some of the goals that define a decent society: elimination of poverty and homelessness, a healthy citizenry, work for all, and dignified retirement for the elderly.
            Over sixty years later, these obvious essentials of a decent society are viewed suspiciously as indulgences of "big government".  In a country incomparably richer than the war-ravaged Britain of 1945 these responsibilities of a decent society are considered "unaffordable".  Instead of being the only defensible way to organize society, a government that ensures none are hungry, homeless and infirm goes undefended in the media.  From a social consensus that no one should suffer the indignity of poverty, a new consensus is proposed in Britain, based on the principle of indifference to the plight of one's neighbor.
            If the trend is bad in Britain, we are already there in the United States.  After financial collapse, severe economic contraction, and the election of a Deomcratic president, the political landscape is polluted by the most right wing polemics the US has endured since the end of the Second World War, beyond even what the John Birch Society could muster.  If the stoning of women for alleged adultery is barbarous, a wealthy society without universal health care, in which the infirm die of medical neglect, is no less so.  If the murder of people escaping tyranny by East German border guards was a crime, it pales in comparison to the official and vigilante killings along the US-Mexican border.
            This is a far cry from Franklin Roosevelt's fourth State of the Union address in 1945 when he called for a "Second Bill of Rights", made up of "economic truths [that] have become accepted as self-evident…regardless of station, race, or creed", including full employment, a living wage, an end to "domination by monopolies", decent housing, universal health care, free education, and security in old age.  Sounds good to me.
            From such hopes and visions of this good society, we find ourselves with governments content to preside over lives that are "solitary, poor, nasty, brutish, and short" (Hobbs) for a growing share of the population in both countries, and solitary, brutish and self-focused for those who are not poor.
            What happened to destroy not only the political discussion of the good society, but the belief in its possibility by the vast majority in Britain and the United States ("can't afford it")?
            The answer is, trade unions.  They sustained hope for and achievement of the good society.  Capital launched a class war in the 1970s and 1980s and workers lost.  In Britain trade union strength was brutally broken by Thatcher in the 1980s, and all but destroyed in the United States in the 1970s and early 1980s.  The policies and programs that made Britain and the United States decent places to live resulted directly from the political demands of the trade union movement.  The current political problem is not that Barack Obama and the potential leaders of the Labour Party are insufficiently progressive.  The problem is the weakness of the working class to make them progressive.
            If this is not obvious to the aspiring middle classes who read the New York Times and the Guardian, big capital has no doubt about it as it fights its Thirty Years War against the working class in both countries.  No Marxist has epitomized the result of labor's defeat in this war in Britain and the United States better than Franklin Roosevelt's speech to the Democratic Convention in 1936:

The hours men and women worked, the wages they received, the conditions of their labor - these had passed beyond the control of the people, and were imposed by a new industrial dictatorship.

            Stopping the budget cuts in Britain, passing an effective recovery program in the United States, and realizing other progressive hopes is the goal.  The means is the trade union movement, to break the power of this "new dictatorship" of capital.  Those engaged in the workplace struggle to organize workers are the frontline warriors of the progressive movement.  The most important task for the rest of us is to support these class warriors, the flight attendants' battle with British Airways, immigrant meat packagers in East Anglia, the Teamster strike against Holcim cement in Massachusetts, and wherever else "working folk defend their rights" ("Ballad of Joe Hill", last stanza). 
            To quote from the famous song by Florence Reese, "which side are you on?",
I'll stick with the union
Till every battle's won.
(1931, Harlan County, West Virginia, coal miners strike)

Which Woody Guthrie repeated in "Union Maid" (1940),
            I'm sticking to the union till the day I die.

*The No Nothing Party was an anti-immigrant, semi-secret political movement restricted ot white Protestant men in the United States in the 1840s.  The name comes from instructions to members to deny knowledge of the party.

Stimulating  Ideology: the debate over deficits (6 Sept 2010)

Anyone following the depressing economic news out of Washington, London and Brussels knows that during 2009 the United States and several other countries implemented fiscal expansion to counter the catastrophic effects of the international financial crisis (see UN, World Economic Situation and Prospects 2010, page 20, for list of fiscal stimulus packages for 55 developed and underdeveloped countries).  Insufficient though these stimuli may have been in the developed countries, the countercyclical fiscal interventions provoked an ideological debate far stronger than the mild and transient recoveries they fostered.  Initially implicit and now explicit in the stimulus debate is an ideological confrontation over the role of governments in capitalist economies.  As a result the political implications of the stimulus packages are at least as important as the economic outcome they generate.
            In continental Europe, most notably in Germany, the objections to fiscal expansion have featured dire (and bogus) warnings about the reaction of "capital markets" to increased public deficits and debt.  Indeed, Germany provides an interesting variation on the debate.  The possibility that its economy might expand at two percent in 2010 has prompted squeals of delight from the rampant right throughout the world, which attributes this recovery to their much-desired fiscal austerity.  They certainly are correct on the "austerity" part, which has been suffered by the German working class in the form of stagnant real wages over two decades.  However, it is not clear that beggar-thy-neighbor policy of wage compression would be a successful recovery program for the global economy.
            In both the United States and the United Kingdom, the debate has quickly turned ideological, with the right wing seizing the opportunity to reassert the atavistic argument that markets are self-regulating and public intervention is the source of all economic evil.  Especially in the United States, the weakness of recovery has become part of the right wing narrative:  the crisis itself resulted from government guarantees to the banking sector that encouraged reckless financial practices, and sluggish recovery is the natural consequence of excessive government expenditure.
            As many have pointed out (Krugman being the best known), the US stimulus of 2009 was insufficient to do more than arrest the decline of the economy and prevent unemployment rising above ten percent.  An article in The New York Times by Peter Goodman (29 August) nicely complements the right wing narrative by describing the meager measures of the Obama governments as "an aggressive regimen of treatments", and provides us with the ominous warning that "any proposed curative could risk adding to the national debt".  
            On the chance that the reader might not appreciate the full horror of additional debt, Mr. Goodman reminds us that "the dramatic expansion of the debt…has increased fears that one day creditors like China and Japan might demand sharply higher interest rates" on US government bonds.  Strangely enough, quite the opposite has occurred with interest rates on US bonds lower in 2010 than 2009 which Goodman actually notes ("investors are flooding into government savings bonds, keeping interest rates low").  However, this does not stop him from concluding that now and in the future "policy makers cannot deliver any meaningful intervention".

            If The New York Times runs such rubbish on the front page of its Sunday "Week in Review" section, there is little need to check elsewhere for the right wing narrative (cancel your subscription to the Wall Street Journal, you can read it in the Times).  Under current policies, the US economy will at best stagnate.  The greatest hope of the free market fundamentalists, that the fiscal stimulus appear ineffective, seems assured without a further stimulus far greater than the mild measures proposed by President Obama at the end of August.

 

One Big Dip and we are in it (so to speak)
(No recovery: You read it here first. 14 August 2010)

If the UK Chancellor George Osborne announced that he had retained a Druid to perform growth-enhancing ceremonies each morning in Parliament Square, would the media report this as a credible recession avoiding measure? I assume that it would, since radio, television and the newspapers, even the business pages of The Guardian, treat seriously Osborne's prediction that growth of private employment will compensate for his pubic sector redundancies.

For months media commentators have mulled over the possibility that the US, the UK and the euro zone countries might suffer from a "double dip", a "return" to recession. The ink, airwaves and cyberspace spent on this non-issue give new meaning to "idle speculation".

Let me draw attention to the obvious:
There was one Great Dip, we are in it, and Mr Osborne's policies made a strong contribution to it.

To grant the Chancellor the benefit of the doubt is to humour a madman. The proposed rescue of the UK economy by the private sector is more than unlikely, it is so improbable that it approaches the impossible. Even business recognizes this:

"I think [the Bank of England] are right to review their forecast and to expect a slower recovery based on the new Government’s decisions regarding public sector spend, and the surely obvious resulting fall-out of these." [Managing director of the COS Group, James Emery, quoted at www.walesonline.co.uk, 13 August 2010]

As my fellow Americans would say, "HELLO"! Or, "no kidding?"

A few simple calculations demonstrate the absurdity of Mr Osborne's fairy tale. For the economy not to decline, the net fall in government spending (expenditure reductions plus tax increases) must be matched by an equal increase in net private spending. The increase in net private spending must come from increases in household consumption, exports, business investment, or a decrease in imports. The first and second can be ruled out.  Consumption is primarily a function of household income which will be determined by the other components of demand. Exports will not rise because the UK's largest trading partner, the EU, is also in recession. Imports may well decline, but it will be the result of falling household incomes, not a source of recovery.

Mr Osborne's hopes rest on a burst of business enthusiasm for new investment. Increased investment does not occur when falling domestic demand generates excess capacity. And there other several obvious and equally insurmountable problems. Public expenditure is at least three times the size private investment (depending on one's exact definition).  Therefore, to prevent the economy from declining a given cut in public sector demand must be matched by a private sector increase three times as large in percentage terms. If Mr Osborne were successful in achieving a five percent reduction in public expenditure, the compensating increase for private investment would be fifteen percent. Should he seek a very modest one percent rate of growth for 2011, an increase in private investment of twenty percent would be required, and an increase of over a third for two percent growth. All three of these improbable increases would bring the investment share in GDP to its highest level in decade. In a recession? Not very likely.

Why would private investment increase without expectations of increased sales? The question itself is absurd. But right wing ideologues such as Mr Osborne and his colleagues in the Calamity Coalition (Cal-Co for short) are fond of arguing that less public spending will lead to a fall in the commercial interest rate which would induce investment (see previous comment, "Growth and Deficits"). Cal-Co ideologues may not have noticed that the Bank of England base rate is at a historic low (one-half of one percent). And on 11 August the head of the Bank of England warned of an increase in commercial lending rates as banks "look to their balance sheets".

Mulling over multiple dips can end. Forget recovery. There will be no growth in 2011 for the UK. Considerably more probable is that the economy will decline. The most likely outcomes are:

Scenarios                                                                          Growth outcome
1. The Calamity Coalition achieves
part of its cuts but not all                                                   positive, but less than 1%
2. Expenditure cuts & tax
measures fully adopted                                                     negative growth near zero
3. Proposed measures depress
private expectations, investment falls                                negative, minus 1 or lower
4. Number 3, plus fall in exports due
to EU fiscal cuts& no US recovery                             minus 4 or lower (as in 2009)

Were I a betting man, I would inquire at Ladbroke's about odds being offered for UK growth being negative in 2011. Because the pros at Ladbroke's are more rational (and may know more economics) than Mr Osborne, the odds they will offer are not likely to be very favourable.

A year ago I was extremely optimistic that the US fiscal stimulus combined with Gordon Brown's modest one, plus the policies then in place on the continent would make the recession short and "shallow". Mr Brown is gone, Angela Merkel has become a expenditure reducer (despite a small public deficit and a trade surplus), and the Cal-Co team makes Jack the Ripper seem benign. Plan on depression.
 
[Sources: Bluebook 2010 for expenditure shares in GDP. For a study of UK investment shares 1979-1990, http://www.ifs.org.uk/bns/bn18.pdf. Anyone wishing details on my estimation of the "scenarios", please email me.]

 

Democratic Control over Capital (20 July 2010)

The sufferings caused by the Great Depression of the 1930s, quickly followed by the horrors of the Second World War, generated a broad consensus in the developed countries of the need for public intervention to protect people against the instability and criminality that results from the accumulation of economic and political power by great corporations.  Franklin Roosevelt, four times elected president of the United States, had this dangerous power in mind when he addressed the US Congress in 1938:

Unhappy events abroad have retaught us two simple truths about the liberty of a democratic people. The first truth is that the liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic State itself. That, in its essence, is fascism—ownership of government by an individual, by a group or by any other controlling private power. The second truth is that the liberty of a democracy is not safe if its business system does not provide employment and produce and distribute goods in such a way as to sustain an acceptable standard of living. Both lessons hit home. Among us today a concentration of private power without equal in history is growing.

          The advanced industrial countries, especially the United States and the United Kingdom, have reached the point at which private power has become stronger than "their democratic state”.  This private power is manifested in so-called financial markets, which is a thinly disguised reference to unconstrained corporate power that over-rides democratic decisions.  Fundamental reform is required to prevent that unconstrained corporate power from a latter-day fulfilment of Roosevelt’s warning against fascism.
          During and after the Second World War even prominent economists recognized the dysfunctionality and anti-democratic nature of excessive private power.  In 1947 in the premier English language economics publication, the Economic Journal, K. W. Rothschild wrote,


…[W]hen we enter the field of rivalry between [corporate] giants, the traditional separation of the political from the economic can no longer be maintained. Once we have recognised that the desire for a strong position ranks equally with the desire for immediate maximum profits we must follow this new dual approach to its logical end.
Fascism…has been largely brought into power by this very struggle in an attempt of the most powerful oligopolists to strengthen, through political action, their position in the labour market and vis-à-vis their smaller competitors, and finally to strike out in order to change the world market situation in their favour.
 

           While history does not repeat itself, it carries lessons.  The link between excessive corporate power (“oligopoly”) and reactionary political power is an obvious lesson.
            Controlling corporate power requires four fundamental reforms, whose purpose is to severely restrict the economic and political power of capital.  These four measures are little more than what was in the UK Labour Party programme for the election of 1945.  First, the financial system should be taken into public ownership to prevent the tendency inherent in finacial capital to proliferate into vehicles of speculation.  The governments of the United States and the United Kingdom had the opportunity to do this in 2008 and 2009, and did not, even though a Swedish right-of-centre government had provided the model for banking nationalization in the early 1990s.  With control of the banking system the state could focus capital on production.
            Nationalisation of the financial system is essential because public action to reduce the severity of crises would have contradictory results.  The instability created by the financial system produces the failures of banks and related institutions such as occurred at the end of the 2000s.  These were followed quickly by generalized failure of private sector demand.  The public sector can act to maintain demand, using Keynesian monetary and fiscal policy, and this can prevent the severe contractions such as the European countries are now entering.  However, this is done at the cost of maintaining a fragile, inefficient and dysfunctional financial system.  Preventing recession also prevents the collapse of corporate giants that would facilitate the efficient reorganization of private capital.  Control of the financial system provides the public sector with the vehicle for a guided restructuring of productive capital in place of the catastrophic and ineffective market-generated crisis mechanism.
            Second, the nationalisation of the banking system must be complemented by public sector management of external trade and capital flows.  This management would include a fixed exchange rate and controls over capital inflows and outflows.  The fixed exchange rate would reduce currency speculation to the marginal role it played in the 1950s and 1960s, and effective implementation  of a fixed rate requires controls on capital inflows and outflows.
            Third, government regulation of internal markets would be based on the principle one finds in the constitution of the International Labour Organisation that "labour is not a commodity".  The apparent inconsistency between this principle and wage employment could be resolved by various programmes that eliminate unemployment as a form of labour discipline.  The most effective of these would be the universal guaranteed minimum income programme.  A universal income programme would not eliminate unemployment, but it would reduce the repression of labour that unemployment facilitates. 
            Fourth, and the basis for the others would be the protection of the right of workers to organize.  A program of fundamental reform would be based on the political power of the working class, in alliance with elements of the middle classes.  This is the political alliance that brought about major reforms throughout Europe after the Second World War and in the United States in the 1930s.  An effective reform of capitalism that eliminates its economic and social outrages requires a democracy based on labour and its allies in which the political power of capital is marginalised. 

 

Growth and Deficits: It's not rocket science (10 July 2010)

In early July the International Monetary Fund revised the economic growth projections which it had made in April.  To the surprise of no one except perhaps George Osborne and Angela Merkel, the countries that maintain a fiscal stimulus had their growth rates adjusted upwards, while those committed to "sound" finances and budget cuts saw their prospects down-graded.
            As the table shows, the IMF raised the projections for both the US and Japan for 2010, also for 2011 in the case of the US, for a two-year up-grade of half a percentage point.  For the UK and Germany the story was the reverse, lower growth for 2010 and also 2011 for the UK, and decline for Germany in 2011.

 

 

Projection, April 2010

July adjustment:

country

2009

2010

2011

2010

2011

No stimulus

-3.2

1.2

1.4

.0

-.2

UK

-5.3

1.5

1.8

-0.1

-0.4

Germany

-2.0

.8

.9

0.2

-0.1

Stimulus

-3.8

2.9

2.4

.4

.1

United States

-2.4

3.3

2.9

0.2

0.3

Japan

-5.2

2.4

1.8

0.5

-0.2

            Would the gain for the "fiscally sound" governments be lower deficits that would somehow out-weigh the pain of decline?  For that fond hope to be realized, two outcomes are required:  that expenditure cuts will reduce the fiscal deficit, and a lower deficit will stimulate growth.  The fashionable argument for the lower-deficit-provokes growth is that by reducing public borrowing, interest rates will fall, making it cheaper for companies to borrow and invest.
            This recovery hypothesis can be rejected for the UK.  Commercial bank lending remains weak despite a Bank of England base rate below one percent.  Interest rates are rock-bottom with no recovery of lending in sight.  Net lending to UK businesses has been negative for twelve consecutive months through April 2010 (see Chart 1.1, Bank of England report of June 2010, cited below).
            However, the deficit-reduction-recovery argument is irrelevant because, strange as it may seem, experience shows that cutting expenditure will not reduce the fiscal deficit, as it did not in the early 1980s (see Leftfootforward, below).  There as several reasons for this, the most important being the decline in tax revenues as the cuts provoke falls in national income, and the automatic rise in recession-related expenditures such as unemployment benefits.
            If the deficit will not decline through cuts, how is it reduced?  The answer is not esoteric:  deficits are reduced by economic growth.  This can be demonstrated by simple example that understates the growth effect because it ignores indirect effects.  In 2009 government expenditure in the UK was 51.4% of GDP and the overall fiscal deficit was 11% of GDP.  A rational government would maintain the stimulus initiated in 2008-2009 by not cutting expenditure. 
            The hesitant recovery that began in the last quarter of 2009 would gather steam.  During the ten years 1998-2007 the average growth rate of the UK economy was 3.4 percent per annum.  If the growth rate recovered to an average of two percent for 2010-14, the deficit would decline to five percent by the end of that period, to four percent for a growth rate of 2.5 percent, and down to the famous Maastricht criterion of three percent for a growth rate of three percent.  If that rational government were to increase taxes, most equitably the personal income text, deficit reduction could be combined with increases in expenditure.
            In case Mr. Osborne, Ms. Merkel and their colleagues missed it, the scenario described above is what happened in the United States during the Clinton presidency.  The overall fiscal balance was minus 4.7 percent of GPD in 1992 (last year of Bush the First), moved into surplus in 1998, and reached a positive 2.4% of GDP in 2000, during which time the economy grew at four percent per annum (to revert to deficit under Bush the Second).
            The UK Coalition government may think it is common sense that one reduces the deficit by cuts.  This brings to mind the observation by the US economist Stuart Chase that common sense is the sense that tells us the earth is flat, which provides an insight to the general economic sophistication of the Coalition government.

Bank of England, Trends in Lending, June 2010
http://www.bankofengland.co.uk/publications/other/monetary/TrendsJune10.pdf
Cuts increase the deficit
http://www.leftfootforward.org/2010/06/cuts-wont-reduce-the-deficit-investment-will/
Growth and deficit statistics
http://www.oecd.org/statsportal/0,3352,en_2825_293564_1_1_1_1_1,00.html

 

The G20 and the Decline of the West

Several progressive commentators decried the final communiqué of the recent G20 meeting in Toronto.  Paul Krugman in the NYT gave a withering analytical critique of the deficit reduction plans of European countries, while Naomi Klein was inspired to polemics of outrage. 
            The most important lesson to draw from the meeting is that the governments of the major European countries decided to give a short-term acceleration of the long term decline of the economic power of the West.
            The context of the G20 was the stark difference between the economic performance and policies of the United States and Europe, on the one hand, and the Asian and Latin American countries, on the other.  On track to fall behind China in terms of economic power, the governments of the major countries of Europe, especially the United Kingdom, Germany and Spain, have decided to speed up their region's decline by depressing their economies while the government of China enthusiastically increases public expenditure to replace weakening external demand.  For the four quarters through March 2010, the Chinese economy expanded at almost nine percent on an annual basis, while the major EU economies had zero growth. 

Quarters

2009.2

2009.3

2009.4

2010.1

Average

US & UK

-0.4

0.1

0.9

0.5

0.3

EU, major

-0.1

0.3

0.1

0.2

0.1

EU, other

-0.5

0.3

0.2

0.5

0.1

China

7.9

8.9

8.4

9.5

8.7

Brazil

1.5

2.2

2.3

2.7

2.2

India & South Korea

2.2

2.5

1.1

3.5

2.3

            The Chinese leadership must be pleased indeed with European economic policy, as it hastens the day when the world's largest economy[ies?] will lie "somewhere east of Suez".  The president of the United States seems the only leader of a western developed country to resist the lemming-like rush of the Europeans to the edge of the economic cliff.  Politicians in Beijing must have been doubly pleased to see President Obama forced to smile and concede to a collective depression commitment (which he has no intention of following).
            If not pleased, the governments of the major developing countries present in Toronto must have been bemused.  Having for the last decade increasingly linked their economies to China, they must be speculating as to why the European leaders are so eager to demonstrate the wisdom of that shift.  That link contributed to growth rates averaging over two percent for Brazil, India and South Korea.  If rather modest, these were robust compared to the near-zero performance of the medium and small EU-linked countries.
            In addition to possible bemusement, the leaders of China, Brazil, India and South Korea must have gone along with the final communiqué with tongue-in-cheek and fingers crossed, since all are implementing fiscal a stimulus in their own countries (as is the government of Japan).  It is only a mild overstatement to say that G20 deficit reduction is in practice a German-British project, entered into only reluctantly and with bad-grace by other European governments (if at all).
            The enthusiasm of the Cameron government for deficit reduction might credibly be attributed to ideologically-driven ignorance, but the behaviour of Merkel and her coalition seems inexplicable.  Inflation in Germany is near zero after one adjusts for quality changes in commodities, the fiscal deficit and public debt are small, and the country enjoys an enormous trade surplus that would ensure that a fiscal stimulus would not generate balance of payments problems. 
            In addition, the contraction policy is and will be extremely unpopular for an already unpopular government.  There seems no rational reason for a purposeful compression of the German economy.  The infamous "financial markets" argument is irrelevant, because the German debt is relatively small and its borrowing would be small on international markets.  Further, the suggestion that there might be some risk in the bonds of a government with a massive trade surplus is absurd. 
            One possible explanation of the new German Problem is that a fiscal stimulus would end the real wage repression that has been so successful in generating a trade surplus for Germany and pushing all other EU members into or deeper into deficit.  I shall pursue this possibility in a subsequent comment.
[On German wage repression, see the excellent report on the Greek debt crisis of the Research on Money and Finance, on the web link provided at the left on this page.]

 

The Banks and what to do with them (25 June 2010)

Financial crisis in the United States and the United Kingdom demonstrated that the banking system is in severe, immediate need of fundamental reform.  The reform of banks would be to correct three glaring problems:  1) their potential to provoke global instability, 2) their failure to fund productive activities, and 3) their pernicious political power.
            The first would the easiest problem to solve, for example, by an enhanced version of the proposal by former Federal Reserve chairman Paul Volker for the Obama administration. The original proposal would prohibit proprietary trading by institutions covered by federal deposit insurance and allow no financial entity with more than US$ 300 billion.  If a levy on transactions ("Tobin tax") were added along with stricter oversight and regulation, an acceptable level of financial stability would result.
            These changes would do little to induce banks to lend for productive projects rather funding the more lucrative property speculation, mergers and acquisitions.  This predilection for the quick and unproductive is made all the more difficult to alter by how corporations raise capital.  Instead of borrowing from banks, non-financial corporations in the US and the UK have increasingly shifted to "securitisation", in which bonds are issued backed by assets of the corporation other than plant and equipment. 
            Thus, the fundamental problem is not that the current recession has temporarily lowered the profitability of non-financial enterprises, large or small, but that even in the best times banks prefer fast turnover lending, and the largest corporations provide much of their own funding.  It should be possible alter this situation with a combination of restrictions on securitisation and property dealing with tax incentives.  However, it would require quite complex regulation and close monitoring.
            The third problem, the political power of financial capital, is the most difficult to confront through regulation, not least because the regulated have the power to control the regulators.  In his 1938 address to the US Congress, Franklin D Roosevelt warned:
Unhappy events…have retaught us a simple truth about the liberty of a democratic people…A democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself.
            The danger Roosevelt warned against, and in the next sentence called "the essence of fascism", has come to pass when the major preoccupation about the fiscal deficit is the response of so-called financial markets.  These putatively impersonal "markets" are in reality "private power stronger than the democratic state".  When democratically elected governments most base their fiscal and monetary policy decisions on the demands of a few people in financial institutions rather than on the electorate, fundamental reform is urgently required.
            An obvious solution to the technical problems (financial instability and unproductive lending) would be to resolve the political problem (bank power) through nationalisation of the central institutions of the financial system.  This is not as radical as it might seem.  The Atlee government was accused of radicalism for nationalising the Bank of England in 1946, and today a proposal for a private central bank would be considered absurd.  An analogous type of operational independence to that granted the Bank of England in 1997 would be allowed for the publicly owned financial system, which would be democratically accountable.  In rendering unto the people the power of finance, a major step would be towards what Keynes in Essays in Persuasion (1931) called a "great change in the code of morals":
The love of money as a possession…will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease ...

 

In Praise of Protection (11 June 2010)

Trade liberalisation is one of the few aspects of economic analysis and policy about which there is agreement across the political spectrum.  Almost all conservative commentators endorse it with gusto, for centrists it is an article of faith, and many progressives accept it at least implicitly by their criticism of industrial country protection.  And if one is an economist, to endorse trade restrictions one day of the year requires spending the other 364 (365 for leap years) apologising for it.  This is despite the views of the greatest economist of the twentieth century, J M Keynes, who recanted from his support for free trade.  In a rarely quoted (suppressed?) passage in The General Theory, he wrote,
So lately as 1923, as a faithful pupil of the classical school who did not at that time doubt what he had been taught and entertained on this matter no reserves at all, I wrote: “If there is one thing that Protection can not do, it is to cure Unemployment. ..."  As for…mercantilist theory…we were brought up to believe that it was little better than nonsense. So absolutely overwhelming and complete has been the domination of the classical [free trade] school. (The General Theory of Employment, Interest and Money, 1936, Chapter 23, end of Section 1)

            The claimed advantages of liberalising trade are well-known:  it will increase welfare though a better allocation of production and consumption;  it will increase domestic competition and lower prices for consumers; and it will stimulate exports and employment as the mirror of the cheaper imports.  Better use of resources, cheaper goods and more employment:  what possibility to be against?
            The simple answer is, Everything.  First, as demonstrated over forty years ago by the world's leading advocate of "free trade", Jagdish Bhagwati, the assumptions required to reach the conclusion that free trade improves human welfare are so restrictive as to be absurd:  continuous full employment of all resources, all countries could produce all traded commodities, the consumption preferences of all countries are the same, and (my favourite) in every country the same technology is used to produce each commodity. [The true believer in free trade might wish to read: Jagdish Bhagwati (1964), "The Pure Theory of International Trade", Economic Journal, 74, 1-78].  If you accept all these absurdities the most that can be demonstrated is that some trade is better than no trade (autarky).  It cannot be demonstrated that more liberalisation is an improvement on less. [The famous principle of the Second Best.]
            Second, protection rarely acts to prevent competition from foreign suppliers.  If effective, tariffs and non-tariff measures increase the prices at which imports sell.  This does not prevent competition from being intense in the protected domestic market.  As part of an industrial policy trade protection can be designed to foster competition.  And, of course, it is quite common in small countries for the allegedly competing imports to be marketed by the domestic producers of the same product (who have production facilities abroad).
            Third, there is no theoretical basis for the argument that freer trade stimulates domestic production and employment.  It is quite impossible to produce such a theoretical conclusion, since trade models assume full employment.  Adam Smith made the argument that trade provided a demand outlet for a country's surplus production ("vent for surplus"), which subsequent economists rejected as naïve and simplistic.  As well they would, since if domestic demand were insufficient for full employment, increased public expenditure (or domestic investment) would resolve the problem as well as export demand would.  The exception would be if a country requires a demand stimulus when it simultaneously suffers from an unsustainable import level.  However, via more imports trade liberalisation would be likely to make that problem worse, not better.
            Lurking in the wings is the argument that developing countries would benefit from the elimination of industrial country protection, especially on agricultural products.  Since the latter countries cannot expect the former to liberalise unless they do, a general liberalisation would be good for all.  Perhaps the most surprising thing about this argument is that anyone other than a true believer in free trade would take it seriously.  First, most of the agricultural products protected by developed countries are not grown in the low income countries, so the benefiting countries could be middle income (e.g., Argentina) where the agricultural population (and, therefore, beneficiaries) is small.  Second, for those few products which are produced by low income countries (cotton in Mauritania is invariably cited), the most likely beneficiary of a decline in production in the United States and the European Union would be China, not any country in Africa. In any case, the domestic consumption of these products while diversifing exports might be a considerably better outcome than mutual trade liberalisation.
            This possibility suggests a more important objection to this attempt at a pro-developing country trade position.  Imagine if governments throughout the world were offered the following choice:  1) the industrial countries will liberalise their trade when you liberalise yours; Or, 2) there will be no industrial country liberalisation and you are free to pursue whatever industrial policy you wish in order to diversify your economy.  In the days before the WTO, most countries that enjoyed successful development, employment growth, and diversification chose the latter. [Very relevant to this choice is the excellent book, Ha-Joon Chang, Kicking Away the Ladder: Development Strategy in Historical Perspective, 2002].  They are stuck with the former through no choice they have made.
            Finally, consider a counterfactual world in which in 2008, in response to the global financial collapse, all the major countries of the world had combined strong fiscal stimulus packages with temporary import and capital controls to prevent economic growth from generating unsustainable trade deficits and/or currency depreciation.  As these countries approached full potential on the basis of expanding domestic demand and steady exchange rates, it is quite possible, even with the import restrictions, that world trade would have grown faster than was actually the case: an anaemic 3.3 percent in 2008, a disastrous minus ten percent in 2009, and a barely-breathing one percent during the first half of 2010.
            Perhaps there is a lesson here:  a world with free trade should come after not before full employment.

 

PERSONIFYING MARKETS (3 June 2010)

            The personification of markets, universal in the media, is an essential part of the justification of a capitalist economy free from the constraints of democratic oversight.  This personification is general across all types of markets, as if the market itself were an independent actor in society.  In recent years it has become integral to the justification of a socially dysfunctional financial system, national and global.  It is manifested in such statements as the "the European Union is struggling to convince financial markets it has got what it takes to save the currency". [http://www.reuters.com/article/idUSTRE64R22S20100528?type=ousivMolt]
            This personification is an abstraction from the real world of speculators and financial fraud, universal in the media, and is an essential part of the mystification of financial behaviour. It facilitates the mythology that the dysfunctional financial system is not the work of men and women (mostly the former) within institutions with socially irrational rules and norms, but rather a manifestation of the inexorable operation of the laws of nature that no government can change.  It is not "markets" that "wanted" countries to commit themselves to fiscal cuts, but a specific collection of financial speculators that sought to coerce governments to take actions in the immediate economic interests of those speculators.
            The turmoil in currency and bonds markets in Europe and elsewhere provides opportunity for massive profits for financial speculators.  Frequently this turmoil is the result of actions of a few people with access to extremely large amounts of money, whose role is obscured by the personification of markets as independent actors, and whose destructive role in society is disguised by the media describing them as "investors".
            In the absence of appropriate controls and regulations, speculators with access to large financial resources act through markets to undermine the actions of governments.  Too frequently governments (e.g., Merkel's) aid and abet that speculative behaviour by pretending it occurs through an impersonal market process over which little control can be exercised.  Financial markets are not in themselves the problem.  The problem is that the rules and constraints on those market are so weak or inappropriate that speculators can behave recklessly with confidence of never being held accountable.

 “No more money” and other economic illiteracies (26 May 2010)

An insightful letter by Professors Philip Arestis and Malcolm Sawyer in The Guardian (25 May 2010, page 31) on public expenditure cuts reflects the expert judgment of the vast majority of UK economists.  Why, then, is the principle that deficits are policy instruments and not merely “black holes” to fill so ignored, shunned and ridiculed across the mainstream political spectrum?  The question is pertinent because such is not the case in the United States, where President Obama’s stimulus package was one of his few major initiatives to receive broad, cross-party support in Congress.

Further, in the British media, including The Guardian and the BBC, one finds almost no commentator who does not support the antediluvian view that deficit reduction is both immediately necessary and the essence of "sound" fiscal policy.  Again, this is in contrast to the United States where there are several prominent columnists who strongly and explicitly support active fiscal policy, Paul Krugman being the best known.  It is somewhat of a mystery why countercyclical intervention would have been endorsed so quickly and strongly in the land of neoliberalism and not in the country where Keynesianism first emerged.

Part of the answer would appear to be the extremely backward nature of the UK Treasury as an institution, which traditionally viewed itself as literally the “keeper of the public purse”, rather than its proper role in a democratic country as a major instrument to pursue the public welfare.   The Chancellor tells us that awaiting him at his new desk was a letter stating, “Sorry, there is no more money”.  If, as seems unlikely, a Treasury official left such a letter, it reveals a shocking ignorance of public sector finances.  I would have thought that the official would be aware that governments of countries with their own currencies can borrow from themselves; i.e., deficits are an instrument of policy.

 

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