This is What Austerity is For

In a climate of fear and austeria the received wisdom is that you should not be concerned about the size of your pay cheque: you should be grateful to have a job. It is this climate of reduced expectations and hegemonic exploitation that has led to the situation described by a special issue of their journal published today by the Institute for Fiscal Studies, which shows that wages have fallen more in the past five years than in any previous time during our long economic history. As far as those earning wages or salaries are concerned, this is the worst ever recession.

Although even I would not go so far as to suggest that the controllers of capital would have provoked a global financial crisis in order to attack the interests of labour, as soon as the crisis arrived they were the first to control the ideological agenda. Sadly, like sheep, most working people and the party that is supposed to represent their interests followed in the wake of the corporate spin-masters, bleating the mantras of austerity and failing to challenge the inequality and economic disintegration that its policies would inevitably bring.

The figure shows that the falls in wages came not during the recession itself but later, during the period of austerity that was caused by Tory policies (P50 is median earnings and P10 and P90 the lowest and highest 10% of the population, respectively). The IFS also show that the effects of the recession have hit the wages of the young particularly hard. This is useful for the interests of capital, since we are now likely to have generations of young people who are grateful for employment on any conditions and grow used to exploitative rates of pay.

There is a human side to the story, since the data make clear that those working for small firms are experiencing a degree of solidarity. In harsh economic times employers are keeping staff on, partly no doubt for fear of losing skills; partly for more humanitarian reasons. The longer the government strangles the economy the more these compassionate employers will come under pressure to also dismiss their staff.

The IFS conclude that the agreement to reduce wages but keep unemployment low makes this a less severe recession that those of the 1980s and 1990s. I would beg to differ for two reasons. First, the concealing of unemployment and under-employment in this creeping recession reduces the pressure for mobilisation and political change. Secondly, the permanent reduction in the wages of working people will affect current generations for their whole working lives and future generations too. The gains that resulted from the struggles of past generations have been lost and few have the will or the understanding to challenge the loss.
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Irrational Expectations

For years leading up to the financial crisis it was obvious that the money within the economy was being misallocated. A tiny elite were managing to control most of the finance and were constantly and rapidly reinvesting it in ways that could make the largest and fastest returns for them. This led to inequality within and between nations and had devastating consequences for our health and our social well-being.

But the misallocation of capital has also destroyed the ability of the economy itself to function. Although I resist cultural explanations for the financial crisis, whose origin was political, the attitude towards money amongst those who consider themselves entrepreneurs is a significant part of the explanation for the continuation of the banking and financial crisis. The whole notion of money being used as a facilitator of economic activity has evaporated as 'investors' have come to understand their role as only one of accumulating profits for no effort. The irrational expectation of vast returns for no risk is now preventing the normal mechanisms of a capitalist economy from operating.

At the level of firms this is being demonstrated by the unprecedented hoarding of cash by corporations. During the good years companies learned how to make large profits but they did not learn how to spend them: the process of globalisation and weak power by labour unions enabled companies to achieve unfeasibly high margin. Now that times have changed they are refusing to reduce these margins but they are nervous about investing the cash. More importantly, their expectations about the sorts of returns they might expect for their investments are what economists would call 'sticky'--they have not changed in line with the vast changes in the economic environment. This has led to a situation where British businesses were holding as much as £750bn in deposits, around two-thirds of it in cash. The Reuters graphic shows the situation in the US, where this issue is the subject of considerably more debate than in Europe.

There is, of course, a simple expedient to resolve this problem. Just as the government should use the power it has through owning two of our largest banks to ensure that they lend into the productive economy, so the Treasury should create incentives for companies to spend rather than hoard cash. A new capital tax proportional to reserves held should do the trick. It would encourage companies to spend their own money, but allow the government to spend it in the interests of the citizenry if they refuse to.

For long years the problem of our economy has not been that there is not enough cash around but rather than it is in the wrong hands. As the political authority governments have the power to address this, but their decade-long ideology of impotence is preventing them from doing so. Meanwhile the politics of austerity grinds on, punishing the poor and crushing life out of the economy. On the private and public side those in power, wedded to an anachronistic understanding, are sucking money out of the economy and ensuring that the slump continues.
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Ineffective Government Breeds Ineffective Demand

The launch of the Bristol Pound on 19 September was the subject of international media attention, and rightly so.  The decision by a whole city to reject the pound sterling and take charge of its monetary affairs is an exciting and unique one.  However, the most important aspect of the Bristol Pound went widely unreported: the local council is prepared to accept it for payment of local taxes.  Once a political authority underwrites a local currency in this way it can become a viable alternative, and the Bristol Pound is the first currency that has been accepted in this way in the UK.

This week I published a report with the Green House thinktank called Local Liquidity where I discuss the implications of this change.  I frame the post-2008 financial crisis in terms of the failure of effective demand. Quantitative Easing has not only increased inequality, as indicated recently by the Bank of England, but has also created only ineffective demand.  If local authorities were to back their local currencies this could enable them to generate effective demand to replace the financial energy they have removed through successive years of spending cuts. A more immediate and effective alternative, of course, would be for the government to spend the QE money on building green infrastructure, but that is beyond the control of local communities.

The report includes an authoritative account of the different types of local money that are in circulation across the world from Germany's hugely successful Chiemgauer to the currency issued by Banco Palmas in Brazil and Rotterdam's Nu-Spaarpas.  It explains how the design and democratic control of local money can help to reverse the tendency of central bank money to favour elites and starve small businesses.

From a green perspective, the building of s sustainable society requires a transition towards a system of self-reliant local economies, where the majority of our needs are met from genuinely local production. Green economists see the lengthy supply chains of the global economy as wasteful of energy, as well as leaving us vulnerable in the face of rising fuel prices and more unpredictable weather resulting from climate change. Rather than increasing growth for the sake of it, local currencies can shift economic activity out of the globalised economy and into the local economies on which we will all come to rely.

The rapidly growing body of evidence about local currencies indicates that their popularity is counter-cyclical, that is to say that they flourish in times of liquidity crisis, when there is not enough conventional money to support necessary economic activity, and shrink again when the capitalist crisis passes and the economy revives. This is true of the non-circulating currencies such as LETS and time-banks but particularly notable in the case of the scrip currencies that supported local economies in the US Midwest during the Great Depression and more recently during Japan’s lost decade. In a globalised economy local authorities often feel powerless to act to support the economies which support their citizenry, but they are not. Local authorities across the world have the power to support local currencies and enable them to underpin struggling local economies of both production and distribution.

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It's the System, Stupid!

So the Eurozone is on the brink of slipping back into Recession. The latest growth figures indicate the growing inequality that the single currency is causing between Europe's countries. The quaterly rates of growth range from -1.3% in Hungary to +1.3% in Finland.Meanwhile, annual rates of growth in 2012 compared with the same quarter in 2011 are truly shocking. Greece is showing a contraction of 6.2%, while the Portuguese economy contracted by 2.2%. The Netherlands shrank by 1.3%, while the UK is registering at zero. In the case of Greece, Spain and the countries that are showing disturbing rates of contraction, the austerity measures are the key cause of this. The failure to understand this appears to be wilful stupidity.

The first graphic indicates the relationship between government withdrawal of investment and the failure of growth. We can clearly see the economy take a nose-dive in 2008, then return to stability and slow growth as a result of Labour's stimulus policies, before nose-diving again once the Tories were elected. Do these politicians really not understand, or refuse to understand, the nature of economies as complex system, and the importance of multiplier effects? This refusal is a type of ideological blindness which is devastating all sectors of the UK economy and destroying jobs and livelihoods.

Why is it so easy for politicians to convince voters of this mistaken view of how an economy works? I think the answer lies partly in people's unwillingess to think systemically, and in this it is related to the problem we face as Greens of persuading people to think about ecological systems. As far as the economy is concerned, I have produced two graphics, which I hope help to explain how Osborne and his ilk have the economy completely wrong. We need to encourage people to stretch their minds to seeing the economy as a system, not as a linear series of transactions.

The first graphic represents the Osborne view of economics: a view that was, until recently, accepted as hegemonic by most media outlets. The first assumption of this model is that wealth is only created in the private sector. Tax then removes this wealth and feeds it to the greedy public sector, which destroys it. What remains stimulates consumption-based economic activity. If the money paid via tax to the public sector could be shrunk, as in the right-hand panel, then the private sector would expand and the economy would be more successful.

The second graphic represents the economy as a dynamic system, with public, private and third sectors all interacting. Wealth is generated in private, public and third sectors. Taxation is paid on all economic interactions, and that taxation becomes investment in further activity in all three of the sectors. Conclusion: the way to revive the economy is to increase the circulation of wealth and stimulate greater activity.

This is not a complicated argument, and it requires only a short application of mental effort to realise that the first model is simplistic and wrong. It is some combination of mental laziness and ideological perversion that prevents the majority of European citizens from grasping this - and demanding economic policies that respond to it.

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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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The Human Firm

The fanfare of publicity surrounding the announcement that the UK had experienced - hold your breath! - 0.1% of growth during the last three months of 2009 was embarrassingly inappropriate in several ways. First, and most obvious, was the awkwardness of statisticians behaving like media tarts. The explanation can only be their fear of facing the Osborne axe if the Tories get elected.

Second was the celebration over such a paltry increase - and in the quarter when all economists and statisticians know that the bulk of retail activity takes place every year. This time the Christmas effect will have been exaggerated because of what used to be January sales taking place before Christmas. The data are seasonally adjusted to attempt to eliminate these effects, but given the unpredictability of both business and consumers in these extremely unusual times, 0.1% growth is really no news at all. The dismal 'growth' trend in the figure from ONS illustrates this.

The most intelligent commentators extrapolated from this 0.1% to tell us how much smaller our economy is now than it would have been if we had followed 'a normal growth path': around 6%. I wonder how many people will think about that and realise what it teaches us about the rapid nature of expansion when we are following 'the normal growth path'. Growth on growth, exponentially in this manner, is what is driving us to the planetary abyss. As the authors of Limits to Growth identified, humans have a problem grasping the abstract reality of exponential growth. To help explain they included this story in their report:

'French children are told a story in which they imagine having a pond with water lily leaves floating on the surface. The lily population doubles in size every day and if left unchecked will smother the pond in 30 days, killing all the other living things in the water. Day after day the plant seems small and so it is decided to leave it to grow until it half-covers the pond, before cutting it back. They are then asked, on what day that will occur. This is revealed to be the 29th day, and then there will be just one day to save the pond.'

So we can learn lessons about the weakness of statistics and the crisis of economic growth, but I think I have detected a more encouraging sign: that people are not behaving like rational economic men. The statistics on which economic planning is based are monetary figures, so they include all the pointless shuffling around of money that a financial economy indulges in. If you are interesting in the real economy of stuff, then the second figure is more illuminating: manufacturing industry in the UK has fallen off a cliff.

And yet unemployment has not risen anything like as rapidly as predicted. In economic theory, a recession results in firms automatically reducing output and cutting prices and wages. They do this in a competitive process and without regard to the human costs. Yet in this recession we have seen firms negotiating with workers to share the available work and the income that is available to be paid out in wages.

Is this merely an adaptation of capitalism, where we willingly cut our own wages? I would prefer to interpret it as humanity rather than flexibility in the workplace. Since the steady-state economy implies a level of economic activity considerably lower than that which prevailed before the recession, this bargaining over the value of production is something that should be facilitated and extended. 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

What is a Brumaire anyway?

At the risk of sounding like a Marxist I can't help noticing that the struggle between capital and labour over the value in the economy is becoming more pronounced every day.

While the economy was growing, politicians could conceal the fact that, since the heady days of the 1970s, they have responded more and more to the concerns of 'business' and less and less to those of 'ordinary people'. The pie grew larger, the environment was more stressed, but even those who had the smallest slice tended to get a slightly larger slice each year. Inequality was ruled irrelevant, in spite of evidence showing that it is intrinsically very bad for a nation's health. The fact that the labels 'capital' and 'labour' have been replaced by those of 'business' and 'hard-working families' has not changed the essential power dynamic in the economy.

But with the recession, the fighting over the spoils is beginning to intensify. Unusually, although unsurprisingly, it is the leaders of the trade unions who are speaking up (finally) on behalf of their members and asking very reasonable questions. Such as why should energy companies like British Gas see their profits rise by 500% while bills soar and a significant minority of poorer people will struggle to keep themselves warm.

I'm enjoying what the unions are up to just now. Campaigning for a windfall tax on energy profits to be given out as winter fuel payments is a good start. So is there persistent campaigning to close the scandalous loopholes around the tax treatment of private equity companies. Longer term the attempts to build international unions is the only serious political resonse to the globalisation of production and the way this has reduced the power of organised labour in the West.

Once, while I was giving a talk, a woman got terribly excited and clapped her hands together squeaking 'Oh, this is just like the Sixties!' I'm feeling rather that way about the return to the 1970s. Actually they were a grim decade with Glam rock and playing scrabble by candlelight, but at least there was some honesty about the struggle over economic value. Tweet

Just Use It!

As the recession deepens, businesses will fold. They will no longer be needing the resources over which they have exerted control in an era when money determined what happened in the economy. We need to shift towards an economy that responds more to energy - and the energy of local people rather than fossil fuel energy.

The recession will offer many opportunities. As car-sales operations fold, forecourts and salesrooms will be unused; the failure of shops will make lots of premises available on the streets of our towns and cities; paddock-owners will have no use for their fields without the profits earned by businesspeople being spent on children's riding lessons. There are opportunities here for using these resources to rebuild the local economy. But how will we deal with the money issue?

Money is the one resources that will be less plentiful - but that offers no problem once you step outside the capitalist economic paradigm. Within a capitalist economy you can't do anything unless you have money; in a sustainable economy money is merely a means to facilitate transactions. Other resources should be not left idle and useful economic activity should not be prevented just because of a historical anomaly.

Several years ago, when I still lived in Aberystwyth, a jaunty anarchist named Bob Maycock led a group that 'liberated' a local defunct night-club and turned it into the People's Palace. For six months we did as we pleased there - and did not need to pay anybody for the privilege. After that, the long arm of the law ensured that, as before the people's arrival, the premises were boarded up and left useless once more.

This clearly identified the law as on the side of the owners and of property. If not, it would permit the use of unused resources by those with genuine need - whether for homes or premises to reskill themselves and provide their own food and clothing. This was not always the case: under Roman Law if land had been left idle for a certain number of years, landless peasants were permitted to make use of it. A similar law applies in Brazil today. In Europe we pay farmers to leave their land idle.

During Argentina's disastrous economic collapse in 2001, empty factories were 'reclaimed' by their workers. They could not tolerate the illogicality of productive resources sitting around, while people were unemployed, and others wanted to buy the goods the factories had produced. This setting right the inefficiencies caused by an economy where money dominated has been documented by Avi Lewis and Naomi Klein. It should provide inspiration for the next steps we will take to use our own recession to the advantage of local communities. Tweet