Secular Stagnation or Spiritual Growth?

One of the techniques that economists use to control the global economy and corner its value is to create concepts that constrain our thinking about what is possible and how much change we may be able to achieve. Think about the way the word 'stagflation' was used to influence the politics of the 1970s. The economic hypothesis that it was impossible to have high unemployment and high inflation simultaneously was proved to be nonsense. Rather than admitting their theories were wrong economists simply created the concept of stagflation and blamed the power of labour for the 'failure' of the economy to grow.

It seems that following the success of their bullying concept of austerity economists have now moved on to the idea of 'secular stagnation' to explain or constrain what is happening in the global economy. See, for example, an article published in the FT by Larry Summers last month which includes the phrase 'the implication of these thoughts is that the presumption that normal economic and policy conditions will return at some point cannot be maintained.'

My interpretation of this article is that following the crisis of 2008 capitalism-as-usual can no longer be maintained. Capitalism is evolving into a new form and Summers is trying to influence the form the new economy will take. Of course the priority for global elites is to maintain a system that enables their excessive wealth and power to continue. Austerity has done this very effectively in the short term but in the longer term levels of discontent will rise and Summers appears to be proposing an alternative characterisation of future trajectory of our economy, for which he is using the phrase 'secular stagnation'.

I have to say that I agree with Summers that the rules of the game have changed: 30 years of politically unconstrained economic activity ruled by market forces have resulted in a vast build-up of debt and widespread ecological destruction, to say nothing of the huge and increasing levels of inequality. Debt appears to have been the only viable stimulus outside the USA which, because of the particular and illegitimate power of the dollar, can simply create enough money to keep the economy growing.

Japan was the first country to move beyond economic growth and is used by Summers as an example of secular stagnation in practice. The response in the Japanese case was Abenomics, a concept created by journalists to describe the policies of Japan's prime minister Shinzo Abe over the past year that have been focused on stimulating demand to end Japan's 'stagnant' decades. The policy menu has included dramatic increases in monetary stimulus at home, combined with attempts at competitive devaluation of the Yen to encourage exports. To address the lowering of domestic demand employers are encouraged to increase wage rates and workers are encouraged to stay in the labour-market longer; immigration by young productive workers is also encouraged.

Perhaps I should have pointed out earlier that to economists the word 'secular' has nothing to do with religion but means a trend that persists beyond the short and medium terms. So we might explain the phrase 'secular stagnation' by saying that economists have concluded that the lack of growth is now a defining characteristic of the global economy rather than a temporary phenomenon. This is perhaps the most pernicious implication of the phrase: its inherent suggestion that growth is good and that a stable economy is stagnating. It is typical of the frenetic, perhaps adolescent, character of capitalism that it must consider stability to be equivalent to stagnation.

Given my work with the Green House think-tank and our Post-Growth Project it is interesting and important to me to consider the political power of countering the phrase 'secular stagnation'. We are in the process of thinking through what the post-growth economy might imply in terms of political engagement, the funding of public services, and the manipulation or otherwise of consumer demand. But the most important first step we must all take is to challenge the hegemonic nature of growth amongst economic commentators, of which the concept of secular stagnation is merely the latest emanation. Summers' suggestion that 'stagnation might prove to be the new normal' is designed to be greeted with horror by orthodox economists; but the earth and her defenders would greet it with a sigh of relief.

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If Ireland Represents a Success then the Model is Broken

Whatever your position on the Eurozone crisis it is an important day for Ireland. Today the country returns to being a democratic sovereign state after three years during which power was held by unaccountable technocrats working in the interests of global finance. The fact that Ireland can once again borrow in the finance markets is being heralded as a success for austerity, but that rather depends on your perspective.

If Ireland's problem was that it had borrowed excessively then this has certainly not been solved. The country's debt represents 124% of its GDP, meaning that its people are working harder to pay money to absent shareholders of foreign banks. The unemployment rate of 13.5% (see the graphic, left) is an artificially low figure because of the high rate of outward migration, a process that threatens the country's future by removing the most talented young people. Meanwhile cuts in a range of social benefits and government programmes will deepen and continue.

We should also be questioning how Ireland found itself holding unpayable debts: what is its story as one victim of the msiguided Eurozone project. Because the single currency area required a uniform interest rate for countries in vastly different economic situations it was bound to destabilise particularly the smaller economies. In Ireland's case the low Euro interest rates provoked an absurdly euphoric boom in construction. The later bailout of the corrupt and disreputable Anglo-Irish Bank at a cost of  €440bn was the final straw for the Irish economy, which became effectively bankrupt.

Ireland's political establishment chose to repay the country's debts and to win the favour of financial elites, rejecting routes such as default, deflation, or the repudiation of the debts as odious. This decision has come at a truly hideous price for the people of Ireland. At the time of Ireland's latest budget in September, the EU troika that was then effectively running the country required Joan Burton, minister for social protection, to cut €440m or just over 2% from the 2014 budget. Seamus Coffey of University College Cork points out the impact that the debt restructuring will have on future generations as 'excluding interest costs and sovereign bank support, the total deficit in the six-year period 2008-2013, will put debt of nearly €60bn more on us in services and transfers than is [collected] from us in taxes and charges.'

The European authorities have decided to allow Ireland to keep its extremely low corporate tax rate, allowing it to generate cash to pay to its creditors. This means that we, as Ireland's economic neighbour, are also suffering as a result of the deal. US corporations, particularly those in the high-tech sector including Apple and Google, set up in Ireland where they are only required to pay 12.5% tax rather than in the UK. This also justifies George Osborne's decision to cut corporate tax rates here on the basis of the need for us to be competitive. While Ireland's time with the bailout programme has turned it into a beggar its route out of the crisis is also beggaring its neighbour.

This sort of competition between countries should be cooperating for mutual benefit is an inevitable consequence of globalisation. It is the very system itself, with the free movement of capital and lax regulation of corporate activity, that is enabling capitalists and particularly financiers to benefit at the expense of the citizens of the world.

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Bursting the Bubble of Carbon Finance

The idea of a carbon bubble first came to my attention when I was researching a submission to the Environmental Audit Committee's Inquiry into Green Finance on behalf of the Green House thinktank. Anmongst other questions they asked:

'How effective are the financial markets in matching available finance to the required investment in renewable energy and other green projects? To what extent is a potential “carbon bubble” a real risk?'

They referred those providing evidence to a page from the seemingly well funded Carbon Tracker project which seeks to quantify the over-valuation of what they refer to as 'stranded assets'. The project seeks to put a value on the carbon-related assets that cannot be realised if we seriously address the issue of climate change. Once we introduce rigorous carbon limits the fuel their value relies on becomes unburnable and therefore the value is lost. Carbon Tracker reports frighteningly large numbers of potentially stranded assets: they take a value of $4trillion in 2012 that is used servicing $1.27trillion in outstanding corporate debt.

The frightening way of framing of this discussion is that once the over-valuation is recognised it could precipitats another collapse in financial markets and another financial crisis. This always seemed to me hugely naive suggesting that the rich and powerful who control these assets would permit political decisions on climate change to destroy their value. It was in this vein that I responded to the EAC inquiry:

 

'The idea of a "carbon bubble" assumes that legislation passed in the wake of concern about climate change to limit carbon dioxide emissions is more powerful than the political influence of fossil-fuel companies. While we would like to believe that this is the case we suggest that it is a rather naive position. Is it not more likely that, if energy companies find themselves with quantities of fuel that cannot be burned within existing carbon limits, they lobby to have those limits changed rather than allowing their investments to be diminished? We suggest that the EAC is in a strong position to generate evidence on this to prepare for such lobbying.'

Then I simply forgot about the debate. What brought it to my attention again was the machinations of self publicist MP Jacob Rees-Mogg and the internal Tory party debates about green crap and green levies. As I blogged earlier, it seems fairly apparent that the concern of Tory grandees is for their own assets and not shivering pensioners. Here we see the playing out of the political end-game of climate change. The post-fossil world is one of community-owned energy and economic liberation, so there is no surprise that climate change is a battle based in political economy rather than science.

The discussion about the carbon bubble issue has become a dialogue of the deaf between holders of carbon-related assets and those who are fearful about The Financial Crisis round II. How refreshing it was, therefore, to be at the Compass Youth meeting on this issue at Portcullis House last week. Although the meeting itself was advertised in a fairly scary way, through debating the issue we discovered that in reality we may not be facing a catastrophic economic collapse but an orderly transition to a post-fossil future matched by a gradual reduction in the value of carbon-related assets.

In a strange way it is even encouraging that Bloomberg recently launched their carbon risk valuation tool. Investors and those who serve them seem unconvinced by the Tories' dinosaur protection plans and appear to see the wind is blowing in the direction of renewables. And we can all play our part here by encouraging those who hold our assets, whether our pension funds, universities, or local authorities, to divest from carbon assets just as they have or should have divested from assets relating to tobacco, alcohol and arms.

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Smile: It's a Co-operative Bank

It's been a challenging few weeks for those of us who hold an ideology to the left of the political spectrum. I don't know whether I was more astonished to discover that the road to serfdom goes via the Brixton Maoist Centre or that my apparently ethical bank was actually being run by the 'crystal methodist'. I'm only waiting to discover that Shelley was an incestuous just peadophile for my despair to be complete.

I would hazard a guess that you shared my frustration after the financial crisis to hear from many economists and their media supporters that the answer to the disaster was not fewer markets but more markets. So I hope you will forgive me if I will paraphrase this response and argue that the answer to the crisis in the co-operative sector is more mutualism not less.

Ed Mayo, Director of Cooperatives-UK has been quoting the Financial Times's comment that the problem with the Co-operative Bank was not that it was a co-operative but that it was a bank. I would take issue with this comment on the basis that the Co-operative Bank a co-operative in the sense in which I understand that term. It was the bank of the Cooperative Group but it was never a membership organisation and I could never influence it policy although I have had my account there for years.

As an earlier guest post on this blog demonstrates the bank was following its market competitors by engaging in a whole range of activities that I feel its customers and members would never have sanctions have they been offered a choice. The contrast between the activity of the Co-operative Bank and the Nationwide Building Society, a large but none the less mutual organisation, is instructive. The Nationwide, a genuine mutual which has more than doubled its 'profits' this year, is anxious that it is not tarnished by the problems at the non-co-op Co-operative Bank.

For me the principles of co-operation are not challenged by the antics of Mr Flowers. Businesses run by the members for the benefit of the members and that do not deliver services to external shareholders are still the ideal form of economic organisation in my book. I have an account with the Co-operative Bank because it was part of the movement that subscribes to these values; I was always disappointed that it was not a genuine cooperative.

The problems for the co-operative movement is that it appears to have lost it sense of purpose and its ethical stance is now under challenge. To save its reputation it needs to divorce itself from those who would influence it, whether market players or Labour Party insiders. We need the cooperative to become truly ours. It is our job to wrest control back from those who would use it in their sectional interest and to make it the truly mutual business sector it has always promised to be.
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Royal Bank of Scandal Reaches New Low

The Tomlinson Report into the practices at the Royal Bank of Scotland, compiled under instruction from Vince Cable's Business Department, has been passed to the Financial Conduct Authority we read this morning. It will apparently demonstrate that the bank that we saved and which we own, had gone beyond being parasitical on the businesses of this country to actively working to destroy them and profit from their demise. It has long been clear that the financial sector in this country is sucking the lifeblood out of our economy, but the fraudulent nature of RBS's business activity takes us to a new level of revulsion.

Since the crisis of 2008 banks have found it more difficult to generate huge profits that were possible at that time. They have looked for ever more ingenious ways to exploit their customers which has given rise to a continuing tale of scandalous mis-selling, first selling insurance against potential redundancy to employees who did not need it, then selling financial products known as swaps to small businesses who had no need for them or understanding of them.

But the latest scandal to be revealed in the Tomlinson report is another step down the ladder into the slough of public opprobrium. It relates to one part of the bank known as the Global Restructuring Group (GRG). RBS's customers who got into difficulties paying back their loans were sent to this part of the bank apparently to receive help with turning their businesses around. Instead they were deliberately charged high fees so that they would become bankrupt, enabling the bank which had inside information to be the first on the scene to pick up their assets cheap. This is a shocking allegation that will now be investigated by the Financial Conduct Authority that has received a detailed report on the activity from the Business Innovation and Skills Department.

It has been clear for years that the banking sector in the UK is pernicious and not serving the real economy, but to find that it is actively working to destroy the small businesses that we need for our economy to thrive is another shock. It undermines yet again the suggestion that what we need is a change of culture in banking. What we actually need is significant structural reform and a much stronger role to be played by politicians in controlling what is possible in this most important sector in a capitalist economy.

Here is a simple idea which I have suggested before but which seems particularly relevant today: the Royal Bank of Scotland should be broken up and turned into a system of local community banks on the model of the German banking system which has done so much to support their Mittelstand - the layer of small and medium-sized enterprises that is the engine of the German economy. Each local bank could include local business people and others with an understanding of local economic needs on its board. It could still lend at interest but do so in a way that served its local economy and built its resilience rather than actively destroying businesses.

That a bank would work to undermine its customers for its own advantage is shocking and probably fraudulent, but that this activity would be undertaken by a bank that owes its existence to public support and is 80% owned by the public is, quite frankly, unbelievable. Of all the politicians who have been in a position to act on the disasters of the British banking system, Vince Cable has been the most disappointing. He clearly has the knowledge about how to do the right thing so we can only assume that he does not have the power within the coalition. Let us hope that this latest and most shocking scandal gives him the authority to take the action our small businesses so desperately need.

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Living off Our Children

On Wednesday next week, 20th November, students across the country will unite under the banner of the Student Assembly Against Austerity to protest the planned privatisation of the Student Loan Company. The outrage of pushing young people into debt before they even understand the implications lay at the heart of the protests against the increase in student fees two years ago. But the sell-off of the Student Loan Company to fill a hole in the public finances pushes students not just into debt but into the clutches of private finance companies.

The students have a Facebook page to publicise events.It shows that across the country from Aberystwyth to Essex students will be demonstrating against their use as a cash cow for cash-strapped government. In Liverpool students will be running a ‘student debt obstacle course’ and collecting signatures on a petition to send to local MPs. In York they will be having a more traditional rally with speakers. We need to lend them our support wherever and whenever we can to resist what is a mechanism to allow us to feed off their future earnings.

The reason that the student loans are attractive to finance companies is that they are prime material for securitisation - the process of financial alchemy that turns an illiquid asset into something that can be bought and sold and used for speculation. It was exactly this process, with sub-prime mortgages, that lay behind the financial bubble and then bust back in 2007/8. The original asset, the loan to a student, generates a slow although dependable income as repayments are made. But once bundled together and turned into a security these debts can be bought and sold in secondary markets where much greater speculative earnings can be made. This explains the appeal of the Student Loan Company to financial sharks.

My report for the Green House identified the problems generated by a university financing model based on debt. It demonstrated that this is a political choice, in my view based as much on the desire to create docile citizens and willing workers as to save pressure on the public finances. I argued that the privatisation of student debt as part of the plan from the start:

'This determination to sell student debt was partially confirmed in the 2010 Budget in which the government said it would in the next 12 months 'announce its decision on selling part of the student loan portfolio, including looking at the options for early repayment for individuals, in light ofLord Browne’s review of higher education finance. (Budget 2010, pg 44)'

The report quotes data from a study by Grant Thornton that demonstrates how the debt system of finance will exacerbate inequality between students and work against social mobility. The research calculates that those who will lose most are those on high but not excessively high incomes. In their comparison of three representative workers, all of whom graduate with a debt of £40,000, the journalist who never achieves a high income has the vast majority of her interest written off because she does not earn enough to repay it. The barrister (a representative high earner) repays his loan together with £28,000 of interest. The loser is the civil servant who, although he makes rapid career progression, does not earn enough to pay off his loan rapidly, and so incurs interest of £58,000 as well as his loan of £40,000. These are staggering sums of money, and indicate that the students of the future will be funding those financial companies to whom the government will sell on student debt handsomely. 

I end the report by suggesting radical egalitarian models for funding higher education arising from an open debate about the ownership and division of the product of academic labour, which in other sectors i sometimes addressed by the creation of a mutual structure. Under the supervision of Professor Rebecca Boden we have a student exploring options for a co-operative university at Roehampton. The discussion will also be taken forward at a meeting called Time for a Co-operative University? at the Institute of Education, Thursday 12 December 2013, 5.30-7.30pm, Room 804
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A New Carbon Budgeting Tool

A guest post from Aubrey Meyer of the Global Commons Institute

In the light of the positive attention to 'Contraction and Convergence' shown by the Gaian Economics blog, please may I introduce you to CBAT, the 'Carbon Budget Analysis Tool'.

CBAT is the latest phase of C&C development: and is intended to be useful now that - following the IPCC's Fifth Progress Report (AR5) - 'carbon-budgeting' seems finally to be on the agenda.

For example, the analysis tool quickly shows the IPCC AR5 Contraction-to-Concentrations results as a result of the UK Climate Act (UKCA). This particular piece of analysis shows the emissions-budget-integral in the UK Climate Act is either: -

[a] twice too much (and that's without the feedbacks) or

[b] just a third too much or

[c] just right

This really gives one something to chew on over regarding IPCC's stated '1,000 Gt C' maximum for two degrees!

Its also interesting to see/play that combined that with contraction-convergence-rates CBAT Domain Two. CBAT Domain Two perhaps explains why the prescribed global convergence date of 2050 in the UKCA was so inflammatory at COP-15. The convergence to equality by 2050 in the UKCA was something of a fig-leaf and using CBAT D2 animation quickly shows that. Its quite an eye-opener i.e. convergence by the time 80% of the budget has been used up makes no real difference at all.

GCI has always modelled that convergence for any rate of global emissions contraction should be at a negotiated in the light of 'historic responsibilities'. Subject to the UNFCCC-compliance rates of Contraction and Concentrations in D1, the animation D2 clearly shows the maths sub-division of this.

The CBAT is open to consultation and amendment so please take some time to look at it and comment on it. So far some others have and said supportive things, which is encouraging which are available on our website.

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