We Are All Greeks

Over the weekend I was able to engage in some discussions about events in Greece. It is an increasingly desperate situation akin to similar situations in democratic countries put under pressure by finance capitalism. Political views are polarising between the extremes. Syriza, the coalition of left parties, is building towards a majority, but the fascists Golden Dawn are handing out bread and simple slogans - and they are also infiltrating the police. When people are hungry enough they may vote for a socialist party; whether that party is allowed to take control of the country is another matter.

Our comrades from Greece spoke movingly about how supported they felt by the use of the slogan 'We are all Greeks', that has been seen increasingly in recent months. It goes beyond the need for solidarity; it goes beyond the need to attack racism, however subtle; it goes to a deep understanding that the nature of capitalism as a system that requires co-operation if it is to serve human needs without leading to war. The rules of the global system need to be focused on balance and prosperity for all, rather than enabling the stronger, larger economies to profit at the expense of the rest.

This was the argument made by Keynes at Bretton Woods, in his desperate and failed bid to create a global financial and trade system that would not set us on the path to future wars. It is simple: in a system of exchange one country's success will inevitably lead to another country's failure and so rules have to be introduced to enable the weak to gain as well as the strong. Economic policy should be based on the principle of circulation rather than accumulation. While Germany refuses to recirculate its accumulated wealth in Greece it will not only damage the Greeks and increase tensions, but ultimately damage itself.

Keynes argued for the bancor, a neutral trading currency, and for countries to be fined for holding trade surpluses as well as trade deficits. What was agreed was the dollar as the trading currency and no rules to achieve trade balance. The euro was created to enable Europe to compete against the dollar, but it created its own imbalances which are the responsibility of the system designers, not the Greek people.
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A Green Paradox of Thrift

In case you were wondering, Comment is Not Free, at least not at the Guardian. There are guardians of freedom, and they rejected the following piece. Whether on political or quality grounds who knows? But we tried, over quite a long time, and didn't succeed. In spite of the opnion of the Guardian's guardians I commend it to the higher in quality but smaller in quantity readers of this blog:

It is somewhat ironic that it was Keynes who said that politicians tend to be in the thrall of a defunct economist because his shade is haunting our council chambers at this budget-setting season, but sadly he is one of those ghosts that remains unseen and unheeded. John Maynard was a man with an aphorism for all seasons,and that most appropriate for today's economy was his 'paradox of thrift'.

Commenting on the horrifying consequences of the Depression of the 1930s, Keynes noticed that people's natural response to be cautious in times of crisis could actually make the problem worse. While saving at the individual level may be entirely noble, at the level of an economy as a whole, and especially one with insufficient demand, it can be devastating. The lost decade for the Japanese economy, when cautious citizens saved and the economy floundered, is often taken to be the paradigmatic case.

In this era where Depression threatens us again it is dangerous to have so many councillors whose experience is in running small businesses and who rather than understand economies as systems of interacting citizens take the perspective of the shop-keeping: economising rather than economics. What was revolutionary about Keynes's way of looking at economics was that he was able to see the system as a whole, to explain, and even to influence the system dynamics. We need our politicians nationally and locally rethink their understanding of their role. Two concepts that may be useful in this process are boundaries and circulation.

If you are a business, then money you spend goes on the negative side of your balance sheet - it is a leakage, its benefits are external to your balance-sheet and therefore it should be minimised. This is because your business has clear boundaries. If you are a highly diversified business you may be able to keep a much higher degree of spending within your organisation, which is why SMEs are facing unfair competition, but none the less keeping costs down makes absolute sense.

If you are a local authority all the businesses within your area are inside your organisation, since all pay taxes if they thrive as do the people they employ. The boundary you should bear in mind when writing budgets is the local economy: just as you try to minimise costs within a business your priority as a politician should be to minimise leakages from the local economy. To cut your own budgets to the bone, or not to spend money budgeted in this period, is like cutting your own income rather than cutting your own outgoings.

The question of circulation is a bit more difficult to grasp because it requires us to think systemically, something the human mind seems reluctant to do. It is also not entirely valid in an environment where the interaction between local and central government spending is so complex, but it is still true to say that money spent by local councils is not lost to them. Every time they create a job they potentially save spending on housing benefit or homelessness, and add to their revenue from council tax. If they intentionally spend more with local businesses then they may well see a rise in their business rates. This is an example of positive multipliers – local government spending can stimulate the local economy and as it grows more money flows into council coffers.

At the moment we are seeing the reverse effect – both national and local governments cut spending and this reduces their spending with businesses and reduces the revenue they gain from businesses. This happens when councils cut jobs, so, as a key local employer, the decision many local councils have taken to cut their staffing levels will inevitably reduce spending by their employees in the local economy.

It was because of the importance of flows rather than isolated transactions and of the economy as an interacting system that Keynes invented the term 'the multiplier'--government spending can stimulate activity, leading to more transactions in the economy, more money being raised in taxation, which can be respent into the economy, creating a virtuous circle. The austerity measures of the Coalition are achieving precisely the opposite: cuts are leading to economic shrinkage, lower tax revenues, and a growing deficit. This is the problem that Greece is facing, and is what Danny Blanchflower refers to as the 'death spiral'.

But let's return to Keynes's aphorism about the defunct economist, because what he was really criticising was the tendency amongst policy-makers to always respond to the previous crisis and to ignore the facts that have changed. This is the failure of the socialist and even, to some extent, the New Labour left. Their focus is still on jobs and on growth, but a Keynesian stimulus on the 1930s pattern cannot be the solution this time. We are boxed in by an environmental crisis that, if unsolved, will cast our present economic woes into the shadows.

Here is where green economists might play a useful role in rehabilitating and updating thrift. The idea of the thrifty housewife, who was a heroine during the war years, was deliberately targeted by advertisers keen to expand consumption to ensure sufficient 'aggregate demand'. The thrifty housewife who insisted on durable fabrics and eschewed fashion and refused to take on debt was persuaded to become the spendthrift retail therapist, maxing out her plastic and buying shoddy goods imported from foreign sweatshops. The consumer, and especially the person who consumed on credit, was the only thing standing between our national economy and economic disaster.

Before the economy had reached the planetary boundary this simulation of growth made sense, but it is now as dangerously obsolete as a death-dated printer or a cream stair-carpet. Our duty must be to become ecological citizens, to prioritise happiness founded on relationship and virtue rather than on material acquisition.

So where does this leave green economists with Keynes's paradox? As Stephen Fry likes to say, it is all a question of levels. An acknowledgement of the ecological limit to economic activity means rethinking the wastefulness of the global economy, but encouraging the health of local economies. In Keynesian terms we might think of this as working with local rather than global multipliers.

It may seem paradoxical but in fact it is entirely consistent to pursue an economic strategy that acknowledges the paradox of thrift while simultaneously arguing that we should learn to flourish within ecological limits. What a green economist would aim for is the substitution of local economic activity for global economic activity.
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Interest, Money, but No Employment for Keynesian Scholars

Keynes was an example of that rare thing: a sociable and entertaining economist. Not only was he married to a Russian ballerina, he was a member of the Bloomsbury set and a friend of Virginia Woolf. According to a biopic of Wittgenstein by Derek Jarman that I watched recently, he also wore rather natty and colourful clothes. The film, with a script by Terry Eagleton, is well worth watching.

How glamorous this all seems compared to the life of an academic economist today. The poor quality of work is surely related to the absence of creativity and joy. Now Keynes has even been excluded from the conference celebrating the 75th annivesary of his own major work, The General Theory of Employment, Interest and Money. The work cannot be ignored, but its relevance in this time of crisis is so threatening that only those who oppose it were invited, according to a scathing critique by Ann Pettifor. Tweet

The Paradox of Thrift

It was Keynes's view that 'Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.' He is now become the posthumous eponym of his own adage, as the economic crisis forces the resuscitation of politically unpopular measures that are no longer appropriate to our times.

Commenting on the horrific consequences of capitalism's last truly spectacular bust, Keynes noticed that people's natural response to be cautious in times of crisis could actually make the problem worse. In the typically natty way he had with language Keynes referred to this conundrum as 'the paradox of thrift'. While saving at the individual level may be entirely noble, at the level of an economy as a whole, and especially one with insufficient demand, it can be devastating. Japan is often taken to be the paradigmatic case.Wise he may have been, but Keynes did not recognise the planetary frontier and so his plans to save us from Depression through exhorting us to consume more are now dangerously outdated.

Thrift has been a concept with a serious PR problem for several decades, as built-in obsolescence and the fashion industry have generated wants and desires that were then satisfied by production and consumption. In my paper 'Sen and the Art of Market-Cycle Maintenance' I sketch the environmentally destructive consequences of this capitalistic modus operandi.

The paradox itself is easily resolved once we think our way beyond the ideology of capitalism, since its existence results from the underlying assumption that individual behaviour is only helpful if it fits in with that system's logic. We are, in reality, free to make much wider choices than whether to spend or save, or what variety of washing powder to buy. We are free to choose a whole new economic system based on balance rather than growth and justice rather than inequality. Tweet

The Q&A of the Borrowing

I was recently commissioned to answer some questions about where on earth the government is getting all of this money from - a question asked by many in pubs and on buses up and down the land. Irritatingly, they did not then publish the answers I had spent time considering, so I offer it now, in a temporary change to the style of the blog. Comments and corrections are welcome.

What is government borrowing?

When I learned my economics this was called the PSBR or ‘public sector borrowing requirement’ but it has since been renamed the PSNCR or ‘public-sector net cash requirement’. These renamings usually have political intent and in this case I’m guessing it it is to get away from the unhealthy concept of ‘borrowing’. This is the annual amount that central government, local government and the public services borrow each year to keep themselves going. The ‘national debt’ is the accumulated total money that government has borrowed over the years which it couldn’t afford to pay back. Sometimes it goes down but, since the Bank of England was set up in 1694, the trend has been steadily upwards.

Where does this money come from?

The government has three sources of revenue: taxation, where it takes money directly from companies or individuals; from selling government bonds; and from printing money directly. The last of these has become increasingly unpopular since the Second World War, but is in fact a liberating way for government to create money without putting anybody into debt. At present government only creates note and coin in this way, which represents around 3% of total money.

What role do gilts play?

Gilts is just another name for government bonds—gilt-edged securities—because they are safer than anything else, since so long as the country doesn’t sink the government is bound to pay interest twice a year on them. Investors will get their money back after a certain fixed time specified on the bond, however before that time the value of the bonds will fluctuate, depending on the rate of UK interest rates. If interest rates are expected to fall, investors will tend to buy bonds because they are likely to be worth more in the future.

Who is stumping up?

This is an interesting question. Why should anybody want to invest in UK bonds when our economy is clearly short of a paddle and in unpleasant surroundings? If you are somebody with plenty of money to invest your primary concern at the moment is going to be security, so bonds might look quite attractive compared to stock in a corporation. So your gamble is likely to be about which countries bonds are most attractive, based on your view of how the interest rates of countries are going to move. Given that all countries are cutting interest rates one would assume that all national bonds are equally (un)attractive.

This question makes it clear how we are all entangled in the same mess. China owns a vast quantity of US treasuries (their name for government bonds) and if it chose could sell these and destroy the US economy. But if it did that it would lose its main export market and its own economy would falter. So, on a global basis, owning more stock doesn’t necessarily make you more powerful. Remember the old adage: if you own £1m. the bank owns you, but if you owe £1bn you own the bank!

Why should anybody buy our national debt?

Your ability to sell you bonds depends on the general perception of your reliability as an economy. This was the problem Iceland faced, being a volcanic rock with a population the size of Bristol and no resources other than fish and hot water, it couldn't realistically stand behind the debts that its entrepreneurs had racked up. A country’s ability to do this depends on its perceived power in the global capital market. The most powerful economies are those that control the ‘reserve currencies’—the dollar, euro, pound, yen and Swiss franc. These are currencies other governments hold their national reserves in and therefore are good for massive debts. The US is in a special position because in 1944 it negotiated that its currency would actually be held as equivalent to gold in reserve terms. It had to maintain a link between its currency and gold to back this up, but broke that rule in 1971 and since then has been able to print paper and get massive amounts of resources in exchange for it.

The UK is therefore in a strong position in increasing its national debt. One important way of measuring this is comparing the amount our economy produces each year with the size of our national debt—the so-called debt-to-GDP ratio. Ours is currently around 40% and is predicted to go above 50% as the recession deepens. Argentina went bust in 2001 with a debt-to-GDP ratio of less than 40% and a healthy level of exports and resources. The difference was it did not have a reserve currency and when speculators targeted the peso the government could not defend it. So it is really about political rather than economic power.

Who calls in the debt, both to the banks and the government? When?

So long as government continues to pay the interest it owes on the bonds there need never be any ‘calling in’ of the debt. There never has been since this malarkey started in 1694. When the bonds come to the end of their life, the government creates new ones to pay back the people who bought the old ones. The same people probably buy the new ones—at least to some extent.

Aren’t we the taxpayer then going to pay for what we’ve lent?

Yes. Absolutely. This is why Percy Bysshe Shelley called the national debt ‘a system for transferring income from the labouring segment of the population to those who’ had money to lend to government and would thus accrue interest, and who profited from government expenditure in wars. It is a way of transferring money from the poor to the rich and always has been. Amazing how they’ve got away with it for so long isn’t it? I wonder how many people will wise up now.

The banks seem to want to have their cake and eat it; they can take our money but still decide that we’re too much of a risk to invest in?

What is happening with the banks is a bit different. They do not lend pre-existing money but create money through a multiplier process—because they never expect all depositors to come back for their money at the same time. But to accept other banks’ promises to pay requires mutual confidence between the banks and this is lacking. You can see it as rather like a pyramid-selling scheme. While you can find new buyers it works fine, but when the market is exhausted the people at the end of the chain lose their money and the system collapse. That is what just happened. The only way out is for banks to believe in each other again—which is what the government is trying to ensure. Then they will bring money into existence again and the whole upward spiral can start again. So, to be fair, I don’t think the government gave money to the banks to be passed on in loans, but rather to reboot the system. This doesn’t appear to have worked and banks are only following their rulebook in not lending their own money.

Why does government policy on banking keep changing?

When the Rock started the rot the government still believed it could stop the rapid downward spiral if it stood behind just this one bank, initially just in theory. But the bad debts were so frightening to the banks that this didn’t work and it was clear that other banks—-perhaps all the banks—could go down like dominos. At that point it took complete control of Northern Rock. At each stage it has in mind to achieve the rebuilding of confidence as cheaply as possible. Supporting Northern Rock did not rebuild confidence so then they moved to the full-scale bail-out. This also doesn’t seem to be working, since credit is still tight. In a world where businesses rely on debt to survive this is now damaging the real economy that provides goods and services. So the economic bail-out is the latest stage. But it is still jump-starting and is by no means guaranteed. We will have to pay the damage whether or not it succeeds.

There is still no plan to address the problem at source, which is the gap between nominal value in terms of finance and real value in terms of what our economy actually does. On a global basis, 98% of the transactions that take place everyday have nothing to do with the real economy, they are just gambling in the casino economy, most of it speculation in the possible future rises and falls in the value of the various currencies. This is a much more efficient way to make money than actually making stuff.

This sounds like a merry-go round rather than a rescue plan?

It always was a merry-go-round. That is how finance works. It has worked fairly well for the 200-odd years that we have lived in the capitalist economy, but with periodic booms and busts. To achieve a steady-state economy would also require stable money. Government could just create that money by fiat—we would believe it because we believe the government, just like investors believe in the value of government bonds. But this would be money creation without debt. The difference would be that the process would not require our work to pay back the national debt and would therefore undermine the work-money nexus at the heart of capitalism. Sounds tempting doesn’t it?!

Surely the global financial system as currently configured is on any accepted measure a write off?

I agree with you about this. I think the only solution is to go for the full-scale jubilee and go back to the Bretton Woods conference table. We could then reinstate the two major planks of Keynes’s plan at that time: balanced budgets between nations with fines for deficits and surpluses, and a neutral international currency so that no government had the ‘reserve currency’ advantage. In addition I think we could tie this currency to an agreement on climate change and therefore stitch the environmental crisis into the solution too. The main difference between then and now is the liberalization of finance so that it is not under national control. This needs to be reversed with the reintroduction of credit and exchange controls. Without control of finance how can a government claim to be sovereign? And how can we imagine we live in democracies? Tweet