Deconstructing Austerity II. Jobs

Aside from fallacious claims about reducing the national debt, the Conservatives' second claim to economic success--the creation of millions of private sector jobs--is also requires exploration. The well-rehearsed argument goes that massive cuts to public spending are not problematic since the private sector will take up the slack and create jobs to replace those lost in the public sector. There are several sleights of hand say that require unpicking in this part of the austerity narrative.

First it is important to note that the statistics tell us something about the quantity of jobs but nothing about the quality of those jobs, an argument made cogently by the TUC. A job as a nurse or an administrator in a public-sector setting is likely to be a unionised job with a nationally negotiated rate of pay and decent terms and conditions. The sort of job being generated in the private sector is much more likely to be an unskilled, poor-quality job with low pay. These jobs will do nothing to help with the standard-of-living crisis and will also not contribute to rebuilding a flourishing economy even in conventional terms.

The political narrative behind these arguments about the substitution of private for public jobs is the inability of the public sector to create wealth: an important part of the Conservative attack on the public sector (and devastatingly critiqued in an earlier blog!). So it is important to realise that many of the 'new' private sector jobs are actually simply redefined public-sector jobs. My job is a good example. Two years ago I worked in the public sector but now I work in the private sector. Because universities were privatised and are no longer funded from taxation, my job is now one that creates value whereas previously I was a parasite on the taxpayer. The same also applies to those who work in privatised sections of the health service or in services that are increasingly being outsourced from public sector employers such as schools and hospitals. (The Guardian has carried out some preliminary work unpicking this tissue of statistical manipulation.)

Finally, we need to ask what is a job? The data are most often used by Tories in claiming credit for this economic miracle are aggregated data based on everything that counts as a job. Incredibly even people working on zero-hours contracts are included in these figures as are those who are on any type of work scheme. So you don't actually have to be working to be counted in the government's jobs figures. Any government spokesman who presents data on increases in jobs without relating these two full-time equivalent jobs is, if not a liar, at least being very economical with the truth.

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Deconstructing Austerity I. Money

The narrative of austerity as proposed by Osborne and his cronies is that our huge national debt is the responsibility of feckless Labour politicians and their uncontrolled spending. An examination of the data from the Debt Management Office shows clearly that this is nonsense (this is shown in the graphic and discussed in more detail in my paper 'Who Owes Whom?'). The many billions that were spent as an emergency to prop up failing banks and prevent the financial system from crashing are the real explanation for the huge increase in the public debt. Osborne is a liar by omission because he will not discuss whether he would seriously have refused to invest this money and allow cashpoints to seize up.

 

The reality is that under Osborne far more money has been poured into preventing the cardiac arrest of the economy that results from a lack of circulating money. This is the money created through quantitative easing and the difference between it and what was spent by Darling during the crisis is that the QE money was direct credit creation whereas the money spent by Darling was generated through the sale of bonds and hence features in our national debt.

Since 2009 £375 billion has been created directly by the Bank of England and poured into financial institutions. They have greedily hoovered up this money and paid it to shareholders as well as improving their balance sheet position. They have barely loaned any of it to businesses or invested it in the economy, although the government could have used it for such direct investment, as I argued at the time. This explains why the wealthy and those with interests in finance are flourishing while the rest of us are suffering austerity. The £80 billion created for Funding for Lending has similarly not resulted in an increase in debt and has also been kidnapped by the banks rather than being fed into the real economy.

The Treasury bonds that were bought during the quantitative easing programme are still sitting inside the Bank of England presumably with a big label saying 'do not touch'. If they were to be cancelled, which they could be since they are IOUs issued on our behalf, nearly a third of our national debt would be wiped out in an instant. What a marvellous way of reducing the burden of austerity - or not depending on your political objectives.

These are political choices and hence the narrative of austerity politics that there is no alternative is simply a lie. Darling could have created money directly to save the banks; Osborne could create money directly now for investment in a renewable energy transition. Darling's unwillingness to resort to direct credit creation in the early days is hard to fathom and perhaps resulted from a failure of understanding. Osborne's refusal now to engage in any type of monetary policy that would assist the real economy is a consequence of his desire to use the financial crisis to achieve his long-term policy goal of destroying the public sector.

Almost without challenge Osborne portrays himself as the saviour of the economy while Cameron claims deceitfully to have reduced the debt. The national debt is of course still increasing (see the Spectator graphic) and while the deficit is slightly decreasing we're way off Osborne's original projections. However, this is all smoke and mirrors since the Conservatives have no intention and no desire of reducing the national debt: it's far too useful to them politically.

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How Rising House Prices Serve George's Friends in the City

There is a lot of controversy about the potential of the Help to Buy scheme to restart the housing bubble. I must say that I share this concern and am disturbed by the thought that Osborne may be deliberately reflating the value of the housing market to enable himself to portray the government as having tackled the problem of the deficit. To portray this policy as one of compassion for the homeless, and to encourage homeowners to celebrate rising house prices, as Cameron did on the Andrew Marr show yesterday, is disingenuous.

The PM  may sanguinely say people can afford these high-proportion mortgages but how much do interest rates need to rise until this is no longer the case? Cameron used the example of two people earning £20,000 or £25,000 per year and an average house price of £200,000. Leaving aside the 5% deposit to make the maths simple, the BBC mortgage calculator indicates that if interest rates rise to only 3% this couple will now be paying nearly £1000 a month to fund their mortgage.

Clearly the Tories think that offering young people homes financed through large amounts of debt will be politically popular, but the historic pattern in Britain of high and rising house prices and high rates of home ownership financed through a mortgage actually serves the financial sector much more than it serves British citizens. The explanation is simple: if your house costs twice as much you pay the bank twice as much in interest.

Useful data from the land registry indicates that the house price index has risen to more than 250 compared with January 1995 (the graphic indicates the ratio of prices to earnings during this period). At its peak before the crash the index reached nearly 300, which means that prices had undergone a threefold increase net of price inflation. As I teach my students, because of the compounding nature of interest, you are likely to pay back something like double the principal when you take out a loan over 25 years. This means that when house prices double, twice as much is paid back to financial corporations in interest. No wonder that those with friends in the City encourage us to celebrate house price rises.

House price inflation serves financiers and those who welcome the increasing value of their home as though it were an asset are missing the point. Those who still have mortgages are simply celebrating an increase in their housing costs; if their house is a home then they have no greater value from it even if its financial value has doubled. As it turns out in Britain the house is not a machine for living in, as Le Corbusier once suggested, but rather a machine for increasing bank profits.

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How is the Chancellor Engineering a Pre-Election Boom?

After several years of dire economic news, suddenly, just about the time when parliament went into recess, the stories about the British economy changed. Almost overnight we moved from gloom to boom, with Osborne celebrating 0.6 growth and the euphoric tone of the journalists outstripping that of the Chancellor. With an election now just 18 months away, and it being certain to be an election dominated by arguments about the economy, this has made me rather suspicious about how this return to economic joy is being measured, and how the dark forces of monetary manipulation might be influencing it.

I am not alone in my suspicion that the happy economic news may not be all that it seems. The traditional left, however, limits its critique to the suggestion that the increase in GDP is being driven by the retail sector and is based on withdrawn savings by those who can no longer wait for their wages to rise. Frances O'Grady's claim that 'Britain's fragile recovery is being propped up by families raiding their piggy-banks' is supported by ONS data showing that the ratio of household spending to savings has fallen from 7.4% for 4.2% in the past year.

What first made me nervous about the 'return to growth' was Faisal Islam's excessive use of superlatives on his Channel 4 News report on Monday. He has Capital Economics predicting 1.5% growth in this quarter alone, with huge increases in both business confidence and business investment. This caused me to think back to the stories of companies sitting on cash (largely accumulated as a result of the government's loose monetary policy via QE) because of fear of investing it. There was much discussion of how the Chancellor might encourage companies to invest their cash-pile to revive the economy, including the suggestion that he might impose a levy on them for stagnant cash holdings.

Has the Chancellor somehow found a way of encouraging UK corporates to start spending the £750bn. they have in reserves (incidentially, a figure equal to half the UK's annual GDP)? Certainly his proposal for tax relief on smaller companies, who apparently hold around £120bn. of the total, which was included in last year's autumn statement, may be beginning of have an impact. But is there some other incentives for companies to invest, or threat do them if they do not?

The less subtle evidence of engineering is in the form of the incentives to restart the housing market, that well worn engine of unsustainable booms past. The Help to Buy scheme supports purchasers of new homes to take on mortgages that the banks think they cannot afford to pay. It is thus risky in two regards, since it will tend to keep house prices at the sort of excessive levels that led to the financial crisis in the first place, and at the individual level it risks households losing their homes if interest rates rise. It does appear to have stimulated a boom in house building which helps to explain the higher GDP figures.

The manufacturing and production figures illustrated in the graphic make it clear that the hype over recovery is seriously overdone. Production and manufacturing - the sort of real economic activity that the Conservatives claimed they wanted us to rebalance towards - is still struggling and nowhere close to the level it was before the financial crisis. The improvements we see appear to stem much more from monetary manipulation and the shuffling of cash between various elite players. This sort of wealth does not find its way down to those on average incomes who are struggling with the consequence of the capitalist disaster of 2008.

However, the Conservatives are playing the politics of this extremely cleverly. The Chancellor is likely to come out of his term in shared government with the public sector smashed up and Labour vowing to continue with these destructive and draconion cuts. The recession has also led to a culture of fear amongst employees, who are accepting reduced wages and appalling working conditions, as exemplified by the zero-hours contract. A success for George and his cronies but the real problems around the failure of manufacturing, the ongoing trade deficit and lack of resilience in our local economies and the iniquitous failure of the banking system are all yet to be addressed.
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Greens Celebrate EU Policy to Control Tax Havens

Readers of this blog will remember Green MEP Sven Giegold as a staunch campaigner against the excesses of the finance industry and for his attempt to discover the most destructive so-called 'financial product'. Now Giegold is celebrating another success: his campaigning to open up the festering sore that is the global tax system and to shine the light of transparency into the dark recesses of global tax havens appears to be contributing to change in the EU finance regime.

As Giegold writes in his newsletter:

'It is music to my ears. The finance ministers of the six largest EU countries Germany, France, United Kingdom, Italy, Poland and Spain held a memorable press conference in Dublin on Friday night. Their requests have been put forward by Attac and the Tax Justice Network since their establishment more than 10 years ago: Closure of tax havens, automatic exchange of information for all income from capital, an end to the abuse of banking secrecy for tax evasion and disclosure of the real beneficiaries of companies. I have given uncountable interviews, written articles and shown presentations campaigning for the subject, and now it has all become mainstream.'

German Finance Minister Schauble, who had longed campaign to maintain banking secrecy, turned the tables during discussion in Dublin last Friday and argued for a new regime of transparency so that all data relevant for taxation purposes must automatically be made available to the tax authorities in the home country of the foreign investor. Campaigning by Greens and Socialists in the European parliament had created sufficient momentum to undermine the long pact between German finance ministers and the gnomes of Zurich who they had been sheltering. You can watch the press conference here: George Osborne's discomfiture is particularly enjoyable.

The message of the press conference is that the members of the EU will set the standard of financial transparency, and will then expect other countries to reach this standard. This would appear to be a significant challenge to the world's tax havens, at least those that rely on secrecy. Amazingly, and with no apparent irony, the agreement is called FATCA, with just a missing letter to get to the real heart of the matter.

In these days of austerity the pressure is on for all to pay their share, so we should not be immediately sure that these fine words will butter the necessary legal parsnips. It was when I heard that 'Italy has always been committed to fighting in the field of tax evasion' coming from the lips of Italian finance minister Vittorio Grilli that I wondered whether Sven was being somewhat naive. But hey ho, even hearing these suited guys who have for so long taken the side of bizniz without question talking tough on tax evasion is an enjoyable change and it looks as though even arch-nemesis of the tax cheats Richard Murphy thinks that we are getting somewhere. The race to the bottom in terms of corporate tax rates must become the next objective. 

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Economic Mood Music Darkens

What are we to make of the downgrade of the opinion of UK debt by credit-rating agency Moody? The chat on the airwaves is all about the politics of the decision. As noted by the Guardian last night, 'The chancellor has used maintaining the top credit rating for government bonds as one of the key arguments for the austerity programme.' So are we likely to see the flags out to celebrate the end of austerity? I think not so long as we allow vulture financiers to suck the life out of our economy, the process for which credit rating is just a sideshow.

The credit-rating agencies invented a profitable business for themselves by taking the responsibility for assessing risk on behalf of investors. My own local council, for example, is advised by the local authority financial advisor Sector, to only place its reserves in funds with triple-A ratings. This avoids the need for us to employ our own financial experts and outsources the risk if we make bad investments. The credit-rating agencies were paid handsomely for carrying this responsibility, although at no real risk to themselves.

The fear that was engendered around the loss of the triple-A rating relates to how this measure of risk relates to the cost of national borrowing. If Moody and friends decide that we are at greater risk of defaulting on our debts then investors will expect to be paid more for lending to us to reflect this risk. The cost of our borrowing would rise, and given its vastness relative to our economic output we might teeter closer to being obviously and publicly bankrupt.

So why have the rates barely changed in the market this morning? The answer is that the credit-rating agencies never had the power they claimed for themselves. Investors have taken on the chin the downgrades of the US and France. They are not interested in some end-of-term report but make their own assessments of how they can make the greatest return. Investors believe that UK gilts are a good investment because they believe that UK citiens will make good on them through their work.

Taking a wider perspective we can see that what has happened has been a change of cast: the credit-rating agencies that were used to bully us into unprecedented cuts to pubic spending have lost favour, but the policy continues. The real question for us should be whether we are happy to continue with a  means of funding our national economic affairs that accepts that a proportion of our wealth will be constantly siphoned off to financiers. This is the reality of debt financing and the performance around triple-A rating is the show that conceals the very real decisions investors are making about which country's citizens and resources will yield them the greatest returns.
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Economic Policy for Lemmings

Economics is a complex study because economies are systems reliant on many variables which interact with each other in ways that are difficult to interpret. As an economist what you tend to do is to have a basic belief about how the interactions work and a particular focus on variables you think matter most. A Keynesian, for example, would focus strongly on effective demand and its interaction with government spending. A neoclassical would focus on tax cuts for the wealthy as a stimulus to economic activity. A green economist would make energy a key variable in their consideration, as well as money.

But surely we must be consistent in our basic understanding of how economies work. So if we think that spending cuts can lead to recession in one country this must be the case for another country that also has a similar level of economic development and is also a capitalist economy? I ask this question because of the bizarrely inconsistent reporting of the emergency debate in the US about whether to rush voluntarily over the 'fiscal cliff'. In 2011 Congress passed the Fiscal Control Act, limiting politicians' freedom to make economic policy, and particularly prohibiting any policy that would increase the country's enormous debt.

It is an indication of the atrophied state of US democracy and the poor quality of its politicians that they can only make policy by tying their own hands at some future date. If the do not agree today then both sides will lose: there will be a rollback of Bush's tax breaks for the wealthy matched by cuts in spending on programmes for the vulnerable, including Medicare.

The political fight between politicians who have had to accumulate vast sums of campaign funding just to reach office is an unseemly and unrepresentative one, but the reporting of the potential consequences of 'falling off the cliff' is more troubling. The BBC reports baldly that the spending cuts could 'trigger a US slowdown' that might also lead to an intensification of the recession in the global economy. If this is so easy to see from the perspective of the other side of the Atlantic, why is it so hard to see that similar policies to cut public spending are also destructive to our own economy? As US politicians are criticised for stumbling towards the edge of the cliff, why are the same journalists not criticising the lemming-like instincts of Osborne and chums who gleefully decided to push us all over that cliff in their first budget proposals?

As I said earlier, it is hard to explain how economies work, and much harder to predict future economic outcomes. That is precisely why it matters to have a basic theory of how the main variables interact. If you think that public spending cuts lead to recession then you should say that clearly, and as clearly at home as when critiquing somebody else's economy. What we have seen so far in terms of public-spending cuts has been just the overture: the huge cuts to disability payments, housing benefits and transfers to local authorities represent significant withdrawal of effective demand. The consequences for the national economy will be a year of even deeper recession in 2013.
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Winter Statement of Discontent

Some have characterised the presentation of the Chancellor's autumn statement yesterday as a paradox of political theatre: how could a man who comes to the house to admit that he has failed in all the objectives he set himself possibly look so cheerful? And how can the opposition perform so badly in response? The key to the answer lies in the word theatre: what the Tories do so well is the debating they learned in their public schools, which they perform with the panache of those educated to know that they have the right to rule.

And from another perspective, of course, Osborne has been one of the Conservatives' most successful chancellors. He has used the financial crisis to advance the interests of capital in ways that would have seemed impossibly radical before 2008. The measures offer clearer evidence yet of the Tory strategy of using the debt to achieve long-desired political objectives.

Item 1 is the cut to corporation tax, now to be reduced by 3% in April rather than the promised 2%, meaning an official rate of 21% from 26% last year: a full 5% reduction in the contribution from business at the very time they are in the dock for avoiding the tax they are supposed to pay. Osborne boasted of his generosity to corporates: 'This is the lowest rate of any major western economy. It is an advert for our country that says: come here; invest here; create jobs here; Britain is open for business.' The headline UK rate has already been reduced from 26% to 24% this year. The rates of 40% in the US, 33% in France and 29% in Germany make it clear which Chancellor is really the capitalist's friend and help to explain why we can no longer afford to fund our public services.

Items 2 is cuts to welfare, with a three-year freeze meaning real reductions and real hardship for all except pensioners. It is basic arithmetic to explain why those on the lowest incomes can least afford to see their incomes squeezed by inflation since the marginal impact on them of rising prices is so much strong. The justice of this situation is about not depriving the poor of the means to survive, rather than some new conservative commitment to income differentials. And meanwhile the stigmatisation of all those who claim welfare (which is probably around 99% of us at some point in our lives) stokes the fires of prejudice and fear.

The best news in the budget is the retreat from an earlier announcement of an end to national public sector pay. In the poorer areas of the country, nationally negotiated pay rates for public-sector workers can keep local businesses afloat in desperate economic times like these. Negotiating deals for teachers and doctors that relates to local labour-markets would have sucked more money out of the regions, exacerbating the inequalities between regions that have already increased throughout this Recession. Presumably the U-turn here was a result of Liberal Democrat pressure.

The 'greenest government ever' banner now lies in tatters at the Chancellor's feet as he lures investors into the sorts of developments that will drive economic growth at any cost, threatens to abandon Labour's climate change targets, and offers subsidies to the frackers. With 30 gas-fired power-stations looming and the final abandonment of the fuel-duty escalator we can wave goodbye to any hope of doing out part to prevent carbon dioxide emissions from spiralling out of control.

The language used by the Chancellor is also deceptive and oppressive, although I find it helps to substitute the word 'capital' for the word 'business', making sense of Osborne's repeated claims to be 'prioritising the interests of business'. I am also intrigued by the constant repetition of the phrase 'the economy is healing'. Is the personification of a complex system made up of a mass of individuals supposed to win or empathy? Or to soften the perception of the stark economic news? It is fairly clear that, rather than healing, the economy is like a patient that has been stitched up leaving a festering wound inside. Proper healing would have required tackling the distorted financial and monetary systems rather than ignoring their flaws and hoping that they will somehow mend themselves.
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Osborne Offers Dodgey Deal on Employment Rights

A surprising article from the Financial Times identifies 'cash upfront on the road to serfdom'. It describes how plans announced by George Osborne offer employees the chance to sell their birthright for a mess of pottage, or in this case to voluntarily relinquish their employment rights in exchange for shares in the company they work for. This is taking the idea of self-exploitation to new depths.

This is surely unlikely to be legal, and a letter from an employment lawyer in the same edition of the paper suggests that this is more ineptitude on the part of Osborne, or what he calls a 'car crash of a policy'. His argument relies on the precedence on European law, however, and the defence we have from European human rights and employment law is clearly the target of the 'renegotiation' with the EU that Cameron is calling for. Tweet

Green House Launches Post Growth Project

The growth figures released yesterday were shocking. They demonstrate clearly that Osborne is mistaken in his view of how an economy works, a point I have been repeating in somewhat tedious fashion over the past couple of years. The clear pattern of economic growth following the election and the massive cuts in capital expenditure make it clear to anybody who is not an utter ideologue that there is plain choice between a Keynesian or Hayekian response to this latest, and biggest, capitalist crisis. The Hayekian response smashes up the public sector and enhances the power of capital; the Keynesian response, if skilfully executed, might return us to over-stimulated growth.

Of course amongst green economists there is a totally different way of looking at this. Economic growth has ended: fact. Attempts to restimulate it via pressure on consumers, monetary injections, and so on will be chaotic and unpredictable, but more importantly will only add to the ecological pressure caused by an economy growing out of control. The alternative? Accept that the growth has ended, even welcome it, and begin to plan for a stabilised, post-growth economy.

To explore the implications of such a worldview the Green House thinktank has launched its Post-Growth Project. The aim of the Green House Post-Growth project is to challenge the common sense that assumes that it is ‘bad news’ when the economy doesn’t grow and to anatomise what it is about the structure of our economic system that means growth must always be prioritised. We plan to set out an attractive, attainable vision of what one country would look like, once we deliberately gave up growth-mania – and of how to get there. And we intend to find ways of communicating this to people that make sense, and that motivate change.

Over the next year we will be publishing a series of reports addressing various aspects of the transition to a post-growth economy. What will this mean for our politics, and how can we ensure that a post-growth society is characterised by social justice and democratic decision-making? What would the macroeconomics of post-growth look like, and how can we pay for excellent public services in such a scenario? How can we ensure that, this time around, we don't just return to the mistaken idea that we must stimulate further aggregate demand, whatever the planetary cost?

Please join this debate: read our papers, feel free to offer ideas of your own, and join us as we set up events and activities to spread the message. Together we can build a better world: the end of economic growth is an opportunity, not a tragedy.
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Lending for Spending?

At first sight the 'new' policy announced at the Mansion House last night is incomprehensible. Banks, whose job is to create money to lend to companies, are to be loaned money at low rates of interest to lend money to companies. This bizarre and pointless piece of choreography appears to ignore the fact that banks have the ability to create their own money without the Bank of England's involvement, and that what limits their lending is the absence of companies seeking loans which they, as profit-making institutions, consider worth the risk. Following the previous policies of quantitative easing, Project Merlin and the Loan Guarantee Scheme, this new policy indicates not only the continuing desperation of Chancellor and Governor but their stubborn insistence that private-sector solutions growing out of monetary policy will solve our problems.

The reason for the impasse is more ideological than economic. Those with power are just refusing to accept that monetary policy is not, and never was, a private affair. The 2008 crisis made clear that the citizens of a country stand behind their banks and that a banking crisis, unless dealt with early and in a way that allows banks to make losses, will become a sovereign debt crisis. In the UK case, we went even further than this, taking control of some of our largest banks, which have in reality been transferred to the public sector. As such, they could be used to send money directly into the economy, not via banks that are too nervous to lend, but directly to fund green infrastructure projects or other transitional public investment. What stops this from happening is the destructive ideological mantra that says the private sector should grow while the public sector shrinks. This is maintained not because it is working, or because it would make our country a better place, but rather because it is an article of faith for free-market believers.

This foundation of economic policy on inappropriate ideology also prevents the Chancellor from insulating us against the problems of the Eurozone. While little can be done to reduce the impact of Euroland recession on our exports, this could be compensated by increased effective demand at home if the Chancellor used his control of our national currency to intervene positively in the economy. This is why economists across the political spectrum fought to maintain our national currency. Similarly, because we own some of our largest banks we can also insulate national monetary policy from the turbulence in the European banking system, at least to the extent that it derives from the internal contradictions of a currency area of which we are not a part.

We do not need to be suffering from the death spiral, which is largely of the Chancellor's making. We could be using the opportunity of the bursting of the credit bubble to acknowledge the role of the government in monetary policy and to use that to shift the economic energy in our country away from finance and speculation and towards investment in a transition to a real green economy. The opportunity is there; it is only the ideological blinkers worn by our politicians that prevent it from being grasped.
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Is it the Economy, or is Osborne Stupid?

Now George Osborne has me really worried. We are all used to him misrepresenting how the economy works to score political points: there is no alternative to austerity, no wealth is created in the public sector, and so on. But this morning on the Andrew Marr show he seemed to just plain misunderstand something.

If you watch the beginning of the interview you will hear him make a familiar point about how we are benefiting from low rates of yield on our national debt because of market confidence in the savagery of the austerity policies being imposed. He then seeks to imply that this has a direct link to household finances via the interest rates they pay mortgages, and to growth via the interest businesses pay on loans. But in reality these are connected only indirectly if at all. The Bank of England has set the interest rate at 0.5%, which explains the comparatively low interest rates faced by households and businesses. If there is a connection between this and the yields financiers demand for gilts then I would be glad for a commentator to explain it.

This is precisely why the eurozone countries are in the hole they are in. They can control neither the rate they are charged for their debt, nor the rate at which money is priced, since they have abandond their central Banks and are now subject to the interest rate set by the European Central Bank. In fact, that rate has remained resolutely low as rates charged on Spanish or Greek debt has swung wildly, again illustrating Osborne's error.

The main advantage we have over the countries of the Eurozone is that we can print our own money and set our own interest rates. That gives us considerably more room for manoeuvre and scope for fiscal stimulus like that undertaken in the US, but which the European economies do not have the power to implement. Osborne should gain credit for helping to keep us out of the euro but, if he agrees with the independence of the Bank of England then the he cannot claim credit for low domestic interest rates.

Osborne's is, at best, a high-risk strategy. What if the markets turn? The rate they charge us for debt is entirely within their control and is the result of a calculation about how they can extract the most value from their various holdings of peonage and bonded labour across the world. If the countries of southern Europe cease to yield such healthy returns then they will turn their greedy eyes in our direction. We could find ourselves in the of a sterling crisis sooner than we think.
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Class War

While yesterday's budget could not be considered the launching of the class war, it was surely a new offensive. There was no attempt to conceal the transfer of value from poor to rich which has characterised this government's economic policy. The strategy of using the financial crisis, caused by the elites, to grab more power for exactly that same class was followed with blatant shamelessness.

Duncan Weldon has illustrated the changing shares of the national product between the end of the Second World War and today: his graphic is striking in demonstrating the link between labour organisation and the share going to labour. This is not a hard lesson to grasp: ensuring equity requires struggle or, in the words of the South Wales trade unions, eternal vigilance is the price of freedom. We have forgotten the need for vigilance and Osborne is the result.

In a classic conjuring trick, Osborne focused our attention on the sideshow of the mansion tax, while the main event was actually the radical cuts to corporation tax. It had already been due to be cut to 25%, but it will now fall to 24% with two further 1% cuts in years to come. This will mean that Britain is following the 'pile them high and sell them cheap' business approach of Ireland, rather than the corporatist approach of our much more successful neighbours Germany and France, where corporate tax rates are well above 30%. This is not an industrial policy but part of a class war, to reverse the advances made in the last century, when those who controlled capital accepted their responsibilities to wider society.

I am a Quaker, so I have to follow my war analogies with care, but I would say that, if we compare Osborne's class war with the Second World War, we are currently somewhere in 1938. The mass of the British people are looking on with fear while Hitler strides across fairly distant parts of Europe grabbing territory, but they are still hoping that he will stay far enough away from them. This strategy of hunkering down and hoping for better times did not work then and it cannot work now. We need to find methods of active and passive resistance.
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Currency Warts and All

As the struggle for dominance in the 21st century global marketplace intensifies the battle over which currency that economy will be denominated in is becoming more explicit. Can we see Osborne's appeals to China to use London as its banker to Europe and the world as the final betrayal of the dollar empire?

This blog has been following the currency wars and I have long been calling for a globally agreed trading currency. This is also the preference of the Chinese, who understand the risks that come with being the banker to the world and are apparently not seeking to take over from the US the role of global hegemon and global policeman that so often accompany the role of banker to the world.

More importantly, the renbinmi is not a convertible currency but is still controlled by the Chinese government. Although this value of external trade balances settled in the currency has increased rapidly in the past couple of years, this is a fraction of the global trade in dollars. Since the currency is tightly controlled it is also not held in reserves – the other key feature of any candidate for status of global currency.

China has long been calling on the IMF to extend the role of SDRs (special drawing rights) so that they can become a de facto global currency. In this context perhaps we should interpret today's intervention by Osborne as not only an attempt to tout for banking business but also an attempt to pressurise China to take on more of this role itself. Such a decision deeply affects the peace and stability of the world and should be taken, rather than via press release and bilateral discussions, in a full-scale global conference to remake the world economy and to focus on the need for stability, sustainability and equality.
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OMG

The Guardian columnist Simon Rogers has produced a useful graphic, illustrating how the changes to growth forecasts announced by Osborne in the autumn statement affect our national borrowings.

This is truly scarey, especially if you notice how the GDP predictions in the later years have clearly been fixed to keep the borrowing possible in the next couple of years. As the predictions move through time it is clear that they lose contact with reality and are created post facto to make the numbers work inside the Treasury. What we will really be facing in 2014 or 2015 if we carry along the path that Osborne has set does not bear thinking about.
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Public Sector Jobs Carnage

Job losses in the public sector are happening much more rapidly than predicted, which will have serious knock-on effects in terms of reducing demand in the economy as a whole, as well as reducing tax payments and increasing the amount of money needed to repay the deficit. This is according to figures from the Chartered Institute of Personal and Development and published by the BBC this morning. Put together with the misguided comments from Cameron about people reducing their credit card debt, which were later pulled from his conference speech last week, this adds to the growing sense that Conservative politicians do not understand how to respond to the second Great Depression which faces us.

An early political move by the New Ricardians was to create the Office for Budget Responsibility - a figleaf to justify their unacceptable policies. Such an Office only has a reason to exist if it can provide informed judgements about the economy that are also genuinely independent. Yet it has repeatedly produced reports to support Conservative policy, and its predictions have been inaccurate to the point of uselessness.

In November 2010 the OBR predicted that the government cuts would lead to 410,000 job losses in the public sector between 2010/11 and 2015/16, a revision downwards from the 610,000 it had predicted that June. The CIPD statisticians indicate that the original figure was correct. So why did the OBR change it? Was this to support the government in difficult political times?

The hard news for the UK economy is that the risk-averse managers in the public sector are cutting jobs more rapidly than their immediate financial situation demands, so that the number of jobs lost since the beginning of this financial year is five times what the OBR predicted. With projections as far out as that, with consequent impacts on deficit management, what is the use of the OBR?

It proves its usefulness to the government by enabling a Treasury spokesman quoted in the article to opine as follows: 'Half a million private sector jobs were created last year and the independent OBR has forecast that there will be 900,000 more jobs created in the private sector than lost in the public sector by 2015'. But if this forecast is as unreliable as the rest then it provides no basis for policy-making, just an opportunity for the spokesman to save the government's face.

It begins to seem increasingly likely that the OBR is a research unit created to provide statistically impressive but factually inaccurate cover for a government bent on its own destructive course. As such, it is itself a waste of money in these days of austeria. It should either be funded from Tory party coffers or abolished.
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George Makes King Mad

Proof that the economic crisis is still, fundamentally, a monetary crisis came during the Chancellor's speech to the conference yesterday, when he announced that he would be experimenting with another novel policy, which the policy advisors have decided to call 'credit easing'. This represents a worrying incursion by the Treasury into the realms of monetary policy traditionally reserved for the Bank of England.

You may have noticed the media pressure in recent weeks from 'financial commentators' attempting to force Mervyn King, governer of said bank and therefore the chap in charge of the nation's monetary policy, to resort to another round of quantitative easing, a policy that the media usually refer to as 'printing money' but which has actually consisted of the bank buying up a lot of corporate debt, thus making it easier for the corporates to take on more debt. Since that is the way that this form of capitalism considers appropriate to create money it is a novel but predictable response to a squeeze on credit.

It seems that King and his eight wise men of the Monetary Policy Committee (for such they are - no sign of skirt in the room when such decisions are made) have refused to put more money into the economy in this way, and so the Chancellor has found a way around this block by inventing a system of government guarantees of corporate IOUs, allowing them to issue bonds and get the liquidity flowing. Few details have been given yet, but it appears that the process of creating money through issue bonds is being privatised, with corporations now being allowed to create money in this way.

The Treasury will guarantee this process, which appears to mean the we, as taxpayers, will become entangled in the securitisation corporate debts that was the process that led to the credit crunch in the first place. With bank debts looking so dodgey, only debt backed by our obligation to work is acceptable. The problem is we have no say over who is allowed to create this debt, how they bundle and sell it, and what it is invested in. These deeply political decisions have been privatised and devolved to corporates.
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I must confess that the arcane niceties of what is referred to in textbooks as 'open market operations' baffles my mind, but the political economy of this seems clear: the debt crisis has resulted in the sucking of money - liquidity - out of the economy at all levels. Everybody is clamouring for investment, whether in hospitals or from the corporate sector: it is a political decision that money will be allowed to be created in the private sector while the public sector will continue to be starved of cash.
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Two Bald Men Fighting Over a Comb

As we blunder towards another credit crisis, with banks losing confidence in each other and increasingly refusing to accept each other's debt, the inability of politicians to act is extraordinary. This morning's headlines might have read: 'Lagarde says nothing, recommends doing something, not clear what'; 'Osborne demands strongly that something is done'. Tomorrow's headline should read 'Geithner insists on urgent (unspecified) action'.

Everybody is demanding action from everybody else, but all those who apparently have power have given it away and forgotten how to use what they have left. My Ten Point Stabilisation Plan is still available, free of charge, to any who would wish to use it. But while our politicians find themselves incapable of thinking their way around free markets we can expect more blundering and empty performances in the days to come.

While Tim Geithner appears to have no thoughtful content to contribute, the intervention by the US Treasury Secretary adds interest and takes hypocrisy to new heights. Geithner's advice will presumably be to cut public spending harder and faster, this coming from a country whose own debt is so out of control that it threatens to incapacitate the political system entirely.

Thinking back a while we can recall why the Euro was invented in the first place: because the Europeans were tired of the trade advantage the US enjoyed by controlling the world's trading currency. The Euro was intended to compete with this supremacy and become an alternative reserve and trading currency. The US's intervention is thus more evidence of its presumption in favour of its own interest, no matter what the consequences.

But it was no only the Europeans who had grown tired of producing goods for the US and receiving only arrogant pronouncements in return. The Chinese worked their way into such a massive external trade balance that they could buy up the US and have change. Hence their continuing and repeated calls for a neutral trading currency to replace the dollar and the euro. Meanwhile, the growing economies of Latin America and south-east Asia found ways to facilitate mutual trade without using the dollar. The US no longer has anything to support its assumption of a right to tell the rest of the world how to behave.

If this really is a situation of two bald men fighting over a comb it's fairly clear that the comb, like everything else these days, has been made in China, and the Chinese are holding on tight.
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Chancellor Fails to Separate Retail and Commercial Banking

The loudest call for reform following the failure of the banking system in 2008 was that the risky activities undertaken by investment banks should not, in future, be able to threaten the deposits of ordinary working people. Osborne's speech at the Mansion House last night indicated that he is not going to separate these two very different aspects of UK banking activity.

The newspapers this morning draw attention to the proposal, adopted by the far-from-independent banking commission, to 'ring-fence' the savings and deposit side of banking from the global casino. Like the stock-market itself, this tired metaphor is drawn from the agricultural sector. But the beasts of the City are far more powerful than the politician's fence. Admissions that negotiations are still ongoing makes it clear who will decide the outcome. Needless to say, the citizens who have paid for the banking fiasco are not represented in these discussions.

If retail banking remains within the same company structure as its more glamorous, more profitable and more powerful investment-banking sibling, the efforts of all the most creative and Machiavellian minds within each global conglomerate will surely be bent towards finding ways through the barrier. Only a clear separation into separate companies, with separate boards pursuing different agendas can remove the threat of another crisis in future. The banks will refuse to settle until they have made this clear separation impossible, until they are sure that the ring fence is full of holes.

But this whole discussion addresses only half of the problem. Even if your own savings are safe, if the massive investment banks run into problems as a result of their absurd and irresponsible activity then, while they are large enough to provoke a systemic crisis, the risk that we will all have to carry the costs and take over their debts onto the public balance-sheet will remain. Another policy proposals is, if anything, even more important than the separation of retail and venture banking: to limit the overall share of the market held by any individual institution.

I would anticipate that most readers of this blog keep their own money far away from the commercial banking system, in a mutual organisation such as a building society or with the Co-operative Bank. However, we are still vulnerable to the threat that the uberbanks make to the credit system on which our national economy depends. Never was there a clearer example of when finding your own small-scale solution is not enough: we must rather find a way of turning public anger into a significant political challenge to the banking sector.
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Less Osborne More Hobsbawm*

Advocates of a market view of the economy and proponents of further and faster globalisation both tend to seek inspiration from the work of Adam Smith, who is taken to be the founding father of market economics. Smith's work The Wealth of Nations, was published in 1776, only on the cusp of the industrial revolution and before its technological advance had had the chance to impact widely on social and economic structures.

The economist who better represents the theory that has come to dominate our modern world is rather David Ricardo, whose most famous work Principles of Political Economy and Taxation was published in 1817, some 40 years after that of Smith, and whose work set the parameters for the world of laissez-faire capitalism and export-led growth that we inhabit today. Ricardo was attempting to theorise the economic reality of a world where labour and land were made subject to market forces, as they had been to only a limited extent in Smith's day.

In an excellent article in the New Statesman back in March, Robert Skidelsky made clear George Osborne's debt to Ricardo, whose economic theories he rather brutally summarised in the following phrase: 'It goes like this: the private sector creates wealth and the government squanders it. The smaller the government – the less it taxes and spends – the more the economy will thrive.' Moreover to a Ricardian there is no fundamental distinction between taxation and government borrowing: borrowing is merely deferred taxation.

This is an article of faith, unsupported by empirical evidence. It is clearly politically attractive to politicians like Osborne, who seek to abolish the public sector and see in the current deficit the opportunity to do so. But what if Keynes was right, and cutting borrowing in a time of economic crisis merely leads us into a downward spiral? Ricardo's theory might be all very well in a flourishing economy, with a functioning money system, but in an economy that has been destroyed by its own parasitic financial system, it might be the worst possible medicine.

Economics is a complex system, where numerous variables interact in ways that can never be predictable. This is why jokes about one-armed economists are just foolish: there will always be a multitude of answers to every question and predicting the future is a mug's game. Hence the wise economist leaves his options open, and makes sure that the politicians he is advising do the same.

Interpretations of history are rarely more helpful. We simply cannot know whether the spending that led to the deficit was necessary to prevent us entering a lengthy and devastating Depression. Can we really believe that, had he been Chancellor when the bubble burst, Osborne would have stood by and seen the global financial system collapse? In my more troubled moments I think that perhaps he might have done, such is his ideological faith in the market.

Back in March, when Skidelsky wrote his article, economists were already downgrading growth forecasts, and they have been doing so ever since. This week economists from the the Organisation for Economic Co-operation and Development (OECD), the very body that Osborne has proudly announced as supportive of his economic approach, downgraded their forecast for UK economic growth from 1.5 to 1.4 per cent this year and 2.0 to 1.8 per cent next year. Osborne, increasingly beleaguered, and increasingly isolated, persists in his Ricardian illusion.

*Thanks to the imaginative marcher who came up with this slogan for the 26th March.
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