Lessons from Porto Alegre

Having come half way across the world to learn about participatory budgeting it was rather a disappointment to learn that it was now a shadow of its former self. Our informant, Sergio Baierle of the Central Bank of Brazil, spoke of the emancipatory endeavour in the past tense and with some sadness, as we discussed it in the staff canteen on the top floor of his office in leafy Porto Alegre.

Participatory budgeting is that most unlikely thing: a policy move where politicians actually relinquish power to the people they govern. Perhaps more unlikely is the fact that the politicians in question, the Workers' Party, were socialists who might traditionally have been expected to centralise and control power. The reality was that when they came to power in the city in 1989 expectations were vast but the coffers empty. Participatory budgeting was a system for mediating these demands.

The process worked by neighbourhoods across the city creating assemblies which met to discuss how they would like to see the city prioritise its spending across a range of categories such as housing, sewerage, pavements, social services, and so on. In a simple and transparent process these priorities were then weighted according to the quality of existing services in the neighbourhood and the size of population to create proportions of need, from which proportions of the city budget followed.

This idea of asking the people themselves to choose priorities for spending was truly revolutionary, particularly in a political culture dominated b clientelism, where the power of the strong men relied on the patronage they could offer in terms of new roads and schools. It was also an extremely effective means of redistribution, especially when combined with a large increase in the rate of corporation tax for those who had benefited from the increase in value of commercial property.

But as Baierle shared with us, the system has diminished and virtually disappeared since the Democratic Workers' Party returned to power in the city in 2005. In 2011 none of the projects prioritised through the participatory budgeting process were funded, compared to rates of 98 or 100% in the early years. Commitment and participation have also inevitably been affected by this ineffective implementation, as well as by the increasing ability of local businessmen to game the system.

Participatory budgeting is a radical idea and one that has a particular relevance in a time when money is short. The most important contribution is the genuine negotiation between citizens and their politicians about the limited nature of resources and how they should be spent. This is a clear contrast with our politics of austerity, where the message is that we cannot have anything that we want and yet the government can still follow its priorities such as a costly reorganisation of health services and a new generation of nuclear power stations and nuclear weapons. If money is short it should be our business to decide whether we want it spent on these white elephants.
. Tweet

Services Beyond Price

Something is still rankling with me from the Chancellors debate. It is the way that the view commonly held amongst economists that wealth is only created in the private sector is taken as an unquestioned assumption by all three of the suited men who we are supposed to choose between come the general election. This is the same assumption that leads to the captains of industry trying to resist the increase in NI contributions. They create the wealth; they create the jobs. We must not hold them back from this valiant endeavour.

Let's just spend a little while testing this assumption of modern political life. The easiest way to create money, which seems to be effortlessly elided into wealth by most spokespeople on economics, is by engaging in financial fiddles. As Adair Turner himself pointed out, very little of this creates anything of social worth.

Digging deeper we may question the value of much of what is done in the private sector. At the risk of creating an equally distorted picture from the other end of the lens, I could characterise much of what passes for work in the private sector as using a lot of energy to design or produce an item of dubious social value, or persuading somebody else to buy the same.

The justification for arguing that the private sector creates the wealth that the public sector then squanders arises from one of the principles taught to students of introductory economics courses: that taxation is a deadweight loss. In neoclassical diagrams, tax is simply extracted from the economy, as though by a greedy and thoughtless government. Its reinvestment via in valuable services via public sector wages is not drawn, and hence not measured or valued.

In reality, the position is the reverse of what is assumed. It is because what is done in the public sector - whether healing the sick or educating the young - is so valuable to a civilised human society that we don't leave it to the vagaries of market distribution. We decide that everyone should benefit and we share the cost. That is what the public sector means and that is why what is provided by that sector is always going to be more - not less - valuable than what is provided by the private sector, regardless of the amount of money it does or does not generate. Tweet

Lies, Damned Lies, and Economic Statistics

The Chancellors debate was even more disappointing that I had anticipated. Perhaps I should be thankful that we were in the middle of a digital switchover debacle so the wise words of Alistair and friends were lost in an analogue wilderness somewhere between the Wenvoe and Mendip transmitters.

There were several examples of mislabelling that George Orwell would have been proud of. First, the idea of a debate, which surely should involve some element of fundamental disagreement, honestly explored, and with progress towards a resolution? What we saw was rather a performance, each man presenting a show of confidence that his obvious nerves revealed as dishonest. Each offering defensive responses intended to maintain face. The underlying premise of the debate was that capitalism works, an assumption that flies in the face of the financial catastrophe of the past few years, not to mention the environmental crisis that has been accelerating throughout the past several decades. Without this question being put, the whole event was revealed as a charade.

Then there was the fact that it was called 'Ask the Chancellors'. This seems to chime with the widely held, although deeply misguided, notion that believers in the catechism of neoclassical economics have anything useful to tell us about sorting out the economic mess we're in. These are the guys who learned this orthodox faith at university: it is hardly likely that they are going to be the ones to trace the path towards a stable and sustainable future.

Meanwhile the masochist of the year competition continues. Our three would-be chancellors are now wishing to match their prowess against Madame La Guillotine herself: putative Iron Chancellors competing with the Iron Lady. This is an embarrassing public display of posturing that does nothing to address the question of how we protect the vulnerable in our society in a situation where the economic system we have signed up to has allowed the money they have earned and the value they have created to be stolen from them.

All three must have seen the figures that will confront the person who actually walks into 11 Downing Street on May 7th. The graph illustrates how The Economist sees the situation (it illustrates the ratio of debt to GDP for a number of countries). These data were derived from World Bank sources. They seem to bear little resemblance to what the UK is reporting to the EU and offer no justification for the singling out of Greece for a particular beating by the foreign exchange markets. Given that these figures do not include either our private debts or our off-balance-sheet debts, it is a miracle that the pound is still trading at all Tweet

Cuts and the City

It must be because we are living right through the middle of one of capitalism’s periodic adaptations that it is so difficult for people to observe and interpret what is going on. The previous avatar of this oppressive economic beast was the greedy asset monster. The inflation of house prices and stock prices made us all feel like winners, but only some of us could ever afford a yacht and a trip to Dubai. For most the book price of the house we live in was always an irrelevance: what mattered was the fact that we had to work so many more hours to pay for the same house.

This financial bubble has burst and the market alchemists, having lost their power of turning debts into assets, are casting around for the next trick that enables them to extract an unfair share of the nation’s wealth. The massive transfer of value to the banks must be repaid by the sweat of the brows of the country’s workers, apparently. The pain will not be shared equally; those who control capital will still avoid work but have access to cheap finance.

In a democratic system we might expect to be able to vote about whether we consider this the best way forward. But no political party has the courage to suggest that a different financial settlement might be preferable – one that removes the mediating power of finance that comes between work and well-being. Lest we dare think of a fairer outcome, the voices from the City are quick to let us know that they will be downgrading our stock unless we rapidly increase the rates of tax we pay. Just as the IMF punishes the countries of the South that dare to put the interests of their people before those of global finance, so the banksters and their spin-doctors terrify politicians with talk of Moody's and Fitch's and the dreadful prospect of ending up like Argentina or Greece.

The media supported the asset phase, with its TV shows encouraging us all to morph into tatty interior designers or pocket-sized Rachmans—and our rag-rolled homes and steam-rollered private tenants bear the scars to this day. Now they have followed the financial creatives into the next phase, persuading us all of the need to live within our means (by which they mean take a smaller share of the pie, not take account of the environment) and willingly accept higher taxes and cuts to public services. Tweet

A Tale of Two Sectors

I am posting from distant Brno, which is a civilised country where you can travel miles on a tram for fifty pence and people still stop work to lunch together while resting and talking. So the gloom that surrounded the latest ´growth figures´ for the UK economy seemed less important than usual.

What are these guys measuring? You begin to think that they have been convinced by their own fantasy. The reason economists did not predict the continuation of the Recession may be that they genuinely believe that what is happening in the City has some relevance to the British economy. The confusion between counting artifically inflated monetary values and accounting for real economic activity seems to have impaired the ability of the statisticians to assess what is really happening.

The capacity of the private sector to "create wealth" has always been related to its ability to find various methods for creating money. The latest is to lean on the government to use money that has been queased into existence from nowhere to buy various bits of corporate debt, thus flooding the stock market with cash. Presumably this is some desperate stratagem to prevent the yachted classes from quitting the country.

According to the economistic mythology, those of us who work in the public sector do not create wealth. Education and health are not wealth, they are mere by-products and as nothing compared to a healthy balance-sheet. It may be this sort of prejudice that is stopping the government from using the money it is creating to invest in the future of our country by building up the public sector. This would be the normal policy in a time of Recession when private sector incomes are squeezed and public sector incomes make up what they lost during the boom times. This is illustrated in the graphic taken from an IFS paper by Richard Disney that looked at the public-private sector wage gap in the 1990s.

But this Recession is rewriting the rulebook. Private-sector managers are insisting that their bonuses continue, and these growing returns are being funded at the public expense. On the one hand we are being forced to forego the public investment we need to build a low-carbon infrastructure and improve health and education; on the other, we will be required to pay more in taxes to repay the debt incurred to keep the structure of inequality.

Perhaps most serious of all, the private-sector managers who have been injected wholesale into the public sector have brought their old ways with them. So they are responding to the recession by forcing cutbacks before they become necessary. This may partly explain the appalling recent figures, although most of these cuts are yet to bite. So we can expect to managerialised into an even deeper and longer recession ones the plans laid in the public sector this autumn come to fruition in the new year. Tweet

Time to Buy Gold

Once upon a time I was taught by Danny Blanchflower. No, I have never played football, I'm talking about the economist of that name - well his name is really David Blanchflower but he told us that only his mother still calls him that. He was moonlighting from his day job at the University of Guildford to teach we humble Open University students.

He was ambitious and found himself a job at an Ivy League College in the States. Some time spent on the other side of the Atlantic is an essential stepping stone to a successful career as an economist, and membership of the Monetary Policy Committee a proof that you have arrived. So Blanchflower is an entirely pukka economist - the fact that he has published his latest tirade against spending cuts in the New Statesman is more an indication of the pusillanimous behaviour by the mainstream media than that he is a radical outsider.

What Blanchflower is trying to say, or scream, is that the recession is not over. If you look at the figures this is clear. Just look at the one graph that I've included with this post. It plots a comparison between the Baltic Dry Index and the price of gold. The first is a direct measure of how much stuff is trekking around the world; the second a measure of investor fear. When the shit really hits the fan you should put all your spare money into gold (I won't charge you for that nugget of advice since I know that if you read this blog you don't have any spare money!).

Of course I also agree whole-heartedly with Blanchflower's critiques of the economics profession. I remember him as a fairly conservative person, who thought I was a crazed hippy, but he did ring alarm bells about the house-price boom and he did call for cuts in interest rates long before his fellows on the MPC - and at a time when they might have made a difference.

He thought I was naive, but I would like to repay the compliment. Is it not rather naive to expect economics professors and politicians to come out and criticise an economic system that is deliberately constructed to suit their interests? And even more so to think that either party will give a damn about youth unemployment and the psychological pain caused to a 'lost generation'?

The meeting of the G20 in Pittsburgh was apparently intended to address the imbalances and distortions in the world economy. But the vision does not seem to extend beyond talking about limiting the bonuses of bank executives and the media is dominated by headlines about Iran. In one sense this is not so illogical: another foreign war would boost economic activity for certain sectors and might well put some of our young people back to work - and remove others permanently from the risk of unemployment.

But genuine attempts to address the causes of the economic crisis are either not being made or not being reported. The elite leaders of global capitalism are still seeing their role as trying to persuade us that all is fine and we should just carry on shopping as usual. I wish Danny well in his attempt to appeal to a more democratic tradition, where we still felt our power might be expressed through the ballot-box rather than the credit card. Tweet

Anticipating the Irrational

I have always argued with the neoclassical economists over the power of 'rational expectations', mainly because I don't think most human beings act according to rational impulses most of the time. For those who are not well versed in economics jargon, rational expectations theory suggests that many players in the economy - employees, employers, politicians, consumers, and so on - are making informed guesses about what will happen in the future and base their current behaviour on this.

An example might be somebody deciding not to put their house on the market because they think prices are likely to rise next year. Or employees demanding wage rises because they expect prices to rise, or accepting lower wages because they expect prices to fall. Clearly, there is a lot of politics at play here, since a media which manipulates public opinion may - if the rational choice theorists are correct - influence their demands in the free-for-all that is the capitalist conflict over economic value.

But what I notice at present is how those in the private and public sectors are behaving quite differently in an economic crisis. Now that unpleasant material is flying in all directions from the metaphorical fan, the private sector players - who are there because they are comfortable with risk - are exercising the utmost political pressure to gain advantage for themselves, primarily by refusing to play the game of fair shares (continuing to claim their bonuses) and scaring and bullying the government into subsidising this.

Meanwhile, those in the public sector - who are there because they are risk-averse - are anticipating cuts and radically reducing costs in preparation for cuts that haven't arrived yet. Thus in my university we are preparing to cut expenditure by 15% over the next three years, although no figures are available for investment in universities for next year. In other words our apparently 'rational' behaviour is itself causing a significant shrinkage of the economy, and guaranteeing an extension of the Recession, making it likely it will turn into a self-reinforcing negative spiral.

Perhaps this is unsurprising. Those who came with the theories about rational expectations were themselves academics. They live in a world of brainy, cautious, forward-looking types and they have simply modelled the world they know. It now becomes clear what deeply irrational behaviour this can generate.

Rational expectations grew from one basic assumption: people behave selfishly. This assumption is in itself self-reinforcing, since is is hard to behave with generosity and grace when everybody else is scrabbling for the fastest buck, and harder still when the prevailing ideology tells you that this is irrational behaviour.

University planners may feel more comfortable that we public-sector employees cut our own throats before politicians do it for us. But by causing such a massive shrinkage of the public sector - which should actually expand during a recession - they are guaranteeing that the Recession will be longer, deeper, more costly and more painful. Having worked in a university for seven years I would not have expected rational behaviour from the bureaucrats who dominate the higher education sector, but to see such short-sighted and self-destructive reactions is depressing indeed. Tweet

Time To Declare the Jubilee

As we stagger on through the summer with our ball-and-chain of impossible debt it appears that the accepted view amongst commentators is that we must knuckle down, swallow the unpalatable work-ethic pill, and 'create more wealth' to pay it all back. These people must think that we all suffer from the sort of scale-blindness that makes it impossible to grasp debts of this size, just as we can't really feel compassion when we hear about thousands of children dying in famines or millions being threatened by climate change.

Because if we can maintain some sense of perspective we rapidly grasp that the implications of the public-spending cuts caused by bailing out the banks on such a massive scale are devastating. Borrowing announced in the budget amounted to £175bn. in 2009/10 and a huge £701bn. over the next five years. If you add in our liabilities for bad debts we have ‘insured’ (since they are already bad debts it seems certain that we are going to have to pay these liabilities) then the total we are in hock for is more than twice the value of all the activity in our economy for a whole year. Just the interest on this borrowing is more than £40bn., about a third of total NHS spending in any one year. Following this year’s budget public spending will fall from 48% of national income to just 39% by 2017-18, with the health budget facing cuts of £10.5bn.

The question of the public finances is the major political issue for our generation. Smart government accountants can find ways to shift financial liabilities through time but we should not be distracted from the central political question: why should the poor pay for the mistakes of the rich?

There is nothing new about the accumulation of wealth in the hands of a minority: capitalism only increases the efficiency, speed and scope of accumulation. The ancient Hebrews had a way of dealing with this problem: a jubilee, where there was a forgiveness of sins, a wiping out of debts — and universal rejoicing. True to the biblical idiom it occurred every seven-times-seven years. So this can be our political demand: an international debt jubilee to relieve the working people from the slavery of repaying mountainous debts for which they are not responsible.

Not paying your debts can be a little embarrasing, but it is nothing compared to the consumption of energy and resources (and its impact on the planet), the sheer tedious drudgery, and the social conflict that seriously attempting to pay back debts on this scale will require. Tweet

Busted Budget

This has been an extraordinary budget season. Our economic destiny for the next 50 years is being changed and, because of the way the red, yellow and blue parties have adopted mix-and-match policies in recent years, there is no real political debate. I was sorely disappointed by the Green Party's response, which focused on the £5bn. of investment in the economy and ignored the £175bn. of borrowing (itself a significant underestimate) which will really determine the future of the economy and of our society and environment.

There are three reasons why we must reject this level of government borrowing, and in fact the whole system of money creation based on debt. The first is that it is socially unjust: it operates as a means of transferring wealth from working people who pay taxes to those who live from investment earnings. In order to buy government bonds you need to have spare money to invest, but the interest that they return will be paid by those who earn their money through work.

The role of public debt in enabling a transfer of wealth from poor to rich is sufficiently routine after 300 years to raise no qualms, but the less advantaged in our society will surely notice the pressure of the debt that Labour has taken on over the past year through increases in taxation and reductions in public services, which will combine with the rises in unemployment brought by the Recession. We already hear rumblings from union leaders. Dave Prentis’s ‘carats for the rich; the stick for the poor’ speech is only the beginning of a return to the conflictual politics that massive borrowing makes inevitable. Unless the policy is changed we face a period of social unrest and community breakdown that will make the 1970s look like Blue Peter, and perhaps an even more right-wing political backlash.

The third reason to oppose a debt-based economic policy is that it creates an in-built pressure on the planet and its resources. When the government creates money through issuing bonds it creates a parallel future demand for goods and services—goods and services which can only be produced using energy and resources. So the system of paying for future consumption by public debt, just like the system of creating money as private debt, is the central cause of exponential economic growth and the environmental destruction it brings with it. Building up an ecological debt that is far more serious than a mere balance-sheet.

So what is to be done about this fine mess that capitalist economics has gotten us into? If we begin from the understanding that the debt is unpayable, then our only alternative is to bring the debtor and creditor nations together for a negotiated round of debt forgiveness, a global jubilee. Without such a deal the decade ahead looks grim as we face internal unrest over the struggle for diminishing output and trade wars and possibly worse abroad. Rather than reliving the sad history of the 1930s Depression and the Second World War, we could just fast forward to Bretton Woods and negotiate a stable and balanced financial architecture based on the abandonment of the reserve currency system and a trade system that treats all the world’s nations fairly. Tweet

Who Pays the Piper?

The public debate has moved seamlessly from outrage at the handing of vast sums of debt-based money to reckless financial institutions to wise words about the need to tighten our belts, pay more taxes and cut the public sector.

Even from a conventional economics perspective reducing government spending into the real economy in a Depression is a disaster. It is the normal pattern in recessionary times for the public sector to increase relative to the private sector; the fact that the government has already sent unimaginable sums in the direction of bankrupt banks does not alter this fact. The bailout was referred to as 'Keynsian' but in reality was nothing of the sort. Keynesian policies involve investment in public goods, not private losses.

Let's just consider again the size of the sums involved. The cost of the bailouts plus potential liabilities is around £617bn. This is the same amount of money as the whole of public spending last year. There is absolutely no way it can be recouped from tax increases or spending cuts. The arguments for them are rhetorical and political rather than prudent.

If we add together the size of the public debt and the cost of the bailouts we arrive at a figure of £1,527bn. The British GDP is only £1,473bn. RBS’s liabilities are £1,800bn. so if we add that to the public debt it rises to £3,327bn. which is more than double the size of our GDP. The only way out of this mess is to negotiate our way out of these debts on an international basis. Attempting to pay them back will lead to a decade of Depression and several lifetimes of wage slavery.

What can we do about these misguided and unjust policies? For those who can get there, demonstrations in London around the time of the G20 should be fun and should help to vent some frustration. More important is to refuse to go down the road of the inevitability of public spending cuts: challenge every person who argues the case to you. There simply is no reason why an asset bubble and a transfer of value to the rich should mean that the rest of us have to suffer a savage cut in the standard of our public services. Tweet

Fair shares?

It has been refreshing to hear the calls for nationalisation coming from union leaders in Manchester this week - quite like old times! Even those with no interest at all in socialism must be beginning to see that crucial public institutions such as banks, transport and utility companies, even telecomms and housing, would be better off outside the risky culture of the marketplace.

But we can't have security for our most basic services because it is too expensive. So the argument runs, but let's look at the numbers. In 2007/8 total government spending was £589 billion (see the government's account here). Last Friday alone the Bank of England 'made available' $40bn, which we can guess is around £20bn and the same day the Guardian reported that the banks controlling the world's reserve currencies had together 'injected' $550bn. into the money markets that week. Given an exchange rate of around 2:1 that is equivalent to half of UK public spending in just one week!

Sums like this are beyond the wildest imaginings of the union members running hospitals and schools. They couldn't be trusted to act responsibly with such vast sums. Much safer in the hand of bankers like Sir John Gieve, deputy governer of the Bank of England, who has particular responsibility for financial stability. Back in May he reassured us that 'London's troubled money markets could soon recover' from the disastrous squeeze on credit. 'The most likely path ahead', he said 'is that confidence and risk appetite will return gradually in the coming months.' I'm so glad my money is in the hands of such a prescient economic actor.

It is capitalism's way to privatise the benefits and publicise the costs of the economy. So in the good times corporation taxes remained low for them who paid them at all, and personal taxation of those on moderate incomes paid for public services. Now the bust has come, companies are rushing into the public-sector fold, demanding our money to keep their bonuses paid.

How many people are going to accept this and just carrying on shelling out for those much wealthier than themselves? How many bags of chips do you have to fill to afford a Maserati? As taxes rise over the coming years will the meek of the earth simply run ever harder on the work treadmill to keep capitalism turning? Tweet