Can dodgy maths and economic theories ruin lives?

Mick Brooks 

The multiplier is a pretty recondite concept in Keynesian economics. Really it just expresses the fact that in the economy we’re all interdependent. So if I am plucked off the dole and get a job, I have more money to spend and my spending helps someone else to get a job. It’s called the multiplier effect.

The spool runs the other way too. If the government cuts public services and sacks public sector workers, that depresses economic activity generally.

The Tories don’t accept this. They argue that austerity and cuts will let the private sector grow instead of being ‘crowded out’, so cuts will make no difference to jobs. In effect they are arguing that economic activity will just be transferred automatically to the private sector to fill the gap. In their world everyone has a job all the time. What world is that?

If the multiplier exists, how big is it? The International Monetary Fund has reckoned in the past that it was 0.5. So if the government spends an extra £1 the economy will get an extra 50p for free. But if the government cuts £1, the economy gets 50p smaller. To that extent - 50p - the cuts haven’t worked. The IMF thinks the multiplier has changed because of the recession. It’s now between 0.9 and 1.7 (IMF-World economic outlook). As Wolfgang Munchau commented in the Financial Times (15.10.12), “It was disguised as a technical appendix, but it turned out to be an act of insurrection.”

So, on the most favourable assumptions, if the coalition cuts £1 it loses 90p of the effect in lost output. And, with a multiplier of 1.7, every £1 in cuts causes the economy to decline by £1.70. On most assumptions cuts are utterly self-defeating. Munchau goes on to calculate that, with a fiscal multiplier of 1.5, “A fiscal adjustment of 3% of Gross Domestic Product would translate into a GDP contraction of 4.5%. He explains, “The multiplier thus tells you what kind of recession Spain can expect. And it tells us that the Spanish government forecast of a 0.5% fall in GDP in 2013 is delusional.”

That would explain what is happening in Greece. The government there is cutting off arms and legs in order to go on a diet! It would also explain why austerity isn’t working here and why it won’t work. It explains why the government deficit is going up in Britain despite - no, because of - the cuts.

All this is from the IMF, which Anthony Sampson called the financial sheriff. The IMF has spent past decades rampaging round the world demanding that debtor countries cut, cut and cut again. They have destroyed millions of livelihoods in the process. Now they say they got their sums wrong.

Their fellow members of the troika which has put Greece on the rack, the European Central Bank and the European Commission, didn’t say the IMF’s findings were wrong; at the recent Tokyo summit they merely declared they were “not helpful.” On the other hand Jacob Funk Kierkegaard of the Peterson Institute (Financial Times 12.10.12) points out, “The WEO section on fiscal multipliers is a very important finding, which shows the IMF is a credible empirically driven institution not shy of giving up its own dogma on these issues.”

This evidence blows the austerity programme of the Tories out of the water. Not only are they inflicting terrible hardship now – it’s won’t ever work to get the economy going again.

• Mick Brooks is the author of Capitalist Crisis - Theory and Practice

Greece - the people vs global capitalism

Events in Greece over the last 24 hours have resembled the plot from a political thriller – A Very British Coup perhaps. Under fire Greek Prime Minister Papendreou announced a referendum on whether to accept the bailout terms agreed at the recent EU summit. He apparently did so without consulting his Cabinet, and by lunchtime his finance minister was in hospital with a suspected heart attack, and a backbench MP resigned.

He also took the surprising step of replacing all of the military top brass – the heads of the defence staff, army, navy, and air force – all replaced and apparently without any warning to Cabinet or military. Obviously the Greek military has history – a CIA-backed junta ruled Greece from 1967-74 – but did Papendreou believe a coup was on the cards?

Certainly there are the siren calls for a government of national unity from opposition MPs (and the PASOK MP who resigned yesterday). The major opposition party is right wing, and the security establishment will have been rocked by the massive and occasionally violent protests and strikes in Greece which have intensified and grown in recent weeks.

Plus by calling for a referendum, he will have infuriated the EU and IMF – and therefore NATO (of which Greece is a member) – and so the Greek military and political right (supportive of the bailout terms) would have potentially had international support.

Twenty four hours after issuing the referendum call, the Cabinet has unanimously backed it, and it will take place in December according to rumours. With no further resignations, Papendreou seems likely to survive a confidence vote on Friday too.

While all this clandestine backroom activity may have been necessary to get the referendum (and avert a coup?) it was the very public protests that have won it. The marches, rallies, strikes, direct action and street-fighting against the government, banks and police have been a demonstration of the commitment of the Greek people to resist austerity.

Now the people have the final say in a referendum, which as Papendreou has said will effectively be on membership of the euro.

So what would a yes or no vote mean?

A yes vote would mean misery heaped upon misery for the Greek people. With a stagnant and contracting economy, high and rising unemployment (16% nationally, but 40% for young people – double the respective UK rates), jobs and services already slashed, taxes increased and wages cut or frozen.

The bailout demands an intensification of austerity to satisfy creditor nations and banks.

A no vote is more complex. It would mean defaulting on debts, an exit from the euro (so as not to further weaken the currency). It would mean reinstating a national currency (drachma mk2).

As Greece would still be an economic mess, this is no silver bullet. The Greek economy is heavily flawed and needs urgent investment. Tax evasion is rife and needs to be immediately addressed, but so does investment – in order to create jobs and bring unemployment down.

Greece would need a friendly nation to support it – to lend to it on a comparatively favourable long-term basis. Which nation could do this? That would depend on the nature of the government in place at the time. A possibility would be one of the BRICs least affected by Greek default, or by going to the Latin America via Mercosur or even ALBA for an extraordinary loan.

To avoid the money markets playing havoc with the new currency, and a descent into Weimar hyperinflation, there would have to be firm capital and export controls – which would in turn necessitate breach EU rules, and presumably necessitate exit from the union entirely. Bilateral arrangements, such as those achieved by other non-EU states should be possible but will take time.

Much of the above is necessarily speculative – we are entering unchartered waters – but one thing is clear the people of Greece have forced this referendum through considerable struggle. They now need to realise their power and create a vision that can unite what they are for too.

Their victory (albeit partial)* should also inspire anti-austerity struggles across Europe, particularly in Spain, Italy and Portugal.

*It is a victory to have forced their right to have a say, when the EU and IMF though they had done a deal to salvage banks and creditor nations at the Greek people’s expense. But the victory is partial because – without winning a no vote in the referendum and then, crucially, having a unifying vision that their movement can force into the political arena – it may only be kicking the can down the road. But for now, it is the Greek people doing the kicking.

Delusional IMF in the dark

Confusion and disarray is apparent in every national and global capitalist institution – and nowhere more so than in the corridors of the International Monetary Fund. Despite access to confidential data, they don’t really have a clue as to what’s going on. When Olivier Blanchard, the IMF’s director of the research, introduced its latest World Economic Outlook (WEO) with sombre demeanour and measured words, he wasn’t pulling his punches:

The global economy has entered a dangerous new phase. The recovery has weakened considerably and downside risks have increased sharply,” he announced. "Fear of the unknown is very high. Stock prices have fallen. These will adversely affect spending and growth in the months to come.

Blanchard added:

Markets have clearly become more sceptical about the ability of many countries to stabilise their public debt.

Bad enough.

 But in the first paragraph of his foreword to the WEO, in which he calls himself “economic counsellor”, he makes an astonishing admission:

Relative to our previous World Economic Outlook last April, the economic recovery has become much more uncertain. The world economy suffers from the confluence of two adverse developments. The first is a much slower recovery in advanced economies since the beginning of the year, a development we largely failed to perceive as it was happening. The second is a large increase in fiscal and financial uncertainty, which has been particularly pronounced since August.

To repeat – “a development we largely failed to perceive as it was happening”.

 With all the resources they have at their disposal, how did they get it so wrong? It surely does no good at all for the reputation of counsellors of all kinds.

 With their oft-repeated mantra of a recovery, of a return to growth, the IMF has consistently underestimated the scale of the crisis, and overestimated the ability of governments and central banks to do anything about it.

 They have deluded themselves, and they have deluded governments and central banks. In 2008, for example they forecast that the UK economy would fall by 0.1 per cent in 2009 but it actually fell by almost 5%.

 Now that the necessity of a global contraction is evident to anyone with even a smattering of an understanding of the limits to growth, the IMF both continues on its delusional path, but is simultaneously forced to change tack.

 It has downgraded its economic outlook for the UK, the US and Europe through to the end of next year, effectively pulling the rug from all the deficit reduction plans in the world. It now predicts that UK gross domestic product will grow just 1.1% in 2011, compared with its April prediction of 1.7% The US, it says will grow by just 0.4% more than the UK and may already be in recession. But at the same time it warns that “if growth threatens to slow down substantially”, if activity were to undershoot current expectations, countries like the UK and Germany should “consider delaying some of their planned adjustment”.

 Which means, says the IMF, that the UK Coalition, adamant that its brutal austerity programme must stand, will have to think again. Government spending cuts may have to be delayed to avoid a greater catastrophe.

 If you or I put up a piece of work like the WEO we’d be out on our ears, but the IMF is accountable to no-one. Its enforcers are due back in Athens next week checking on the government’s progress with cutting wages, putting people out of work, selling off national assets etc etc.

 So now it’s time to build alternative, revolutionary governments everywhere, with the power to implement the May 27th vote of the People’s Assembly of Syntagma Square which ends:

 ‘We will not leave the squares until those who compelled us to come here, leave the country: the governments, the Troika (EU, ECB, IMF), banks, the IMF Memoranda, and everyone who exploits us. We send them the message that the debt is not ours.”

Gerry Gold, Economics editor. A World to Win

Irish budget won't stop the rot

The Irish Parliament’s vote to implement a further, more savage €6 billion programme of spending cuts and tax increases has done nothing to stop the worsening debt crisis transforming the political landscape throughout Europe and beyond.

Quite the opposite. As Ireland follows Greece, and with Portugal and Spain jostling for position in the queue for aid, the conditions of the Intenational Monetary Fund-sponsored package for the Irish Republic are reverberating throughout the continent. And the pressure is mounting across the Atlantic too.

In the United States, Democrats are in open revolt against President Obama’s deal with the Tea Party-inspired Republicans to continue Bush’s 10-year-old tax breaks for the wealthy, which were widely expected to be allowed to expire at the end of the year.

This proposed new deal is part of the political price for agreement on a further debt-funded stimulus. But the markets are worried, and the cost of US borrowing has started to rise.

Dominique Strauss-Kahn the managing director of the IMF says the “piecemeal” country-by-country approach can’t solve the crisis but Germany’s chancellor Angela Merkel is not alone in blocking proposals for a Europe wide rescue scheme. In the Netherlands, Geert Wilders far-right Freedom party teamed up with the so-called Socialist Party to oppose the deal for Ireland.

For the Irish people, the new budget slashes social welfare benefits, public pensions and capital projects, whilst forcing the 45% of low wage earners to pay income tax for the first time in order to rescue the banks and pay the interest on government bonds.

Michael Noonan, finance spokesman for the centre-right Fine Gael party stated the obvious: "This budget is the budget of a puppet government who are doing what they have been told to do by the IMF, the EU Commission and the European Central Bank."

But what he didn’t say is that the demands of these agencies are themselves orchestrated and conducted by the much more powerful forces at work in the rapidly contracting global capitalist economy.

Even as the captive Irish government was applauding itself, warnings of further mass assaults could be detected in the absurdly optimistic growth forecasts underpinning the new budget.

Finance Minister Brian Lenihan pins Irish hopes on gross domestic product national income (GDP) expanding by 1.7 percent next year, nearly double the European Commission's forecast of 0.9 percent.

The government is forecasting growth of 3.2 percent in 2012, 3.0 percent in 2013 and 2.8 percent in 2014, but Danny McCoy, head of the Irish Business and Employers Confederation said he saw little in the budget to help job creation or restore economic competitiveness.

In reality, governments throughout the world are in a competitive race to destroy living standards, driven by the needs of an economic system of global corporations competing for declining profits as markets shrink and collapse.

The crisis began when credit-funded stimulus reached its limits. Political parties of the left and right are ganging up together to design and implement “austerity” programmes that can only accelerate the process of contraction. Despite the rhetoric of recovery it is what they are required to do.

Campaigns to resist the assault on people’s lives must be brought together with the democratic and legislative means to replace the moribund capitalist system rather than patch it up. People’s Assemblies can begin to construct a richer form of democratic control based on social ownership and not-for-profit production and finance. Check out A World to Win’s proposals for transforming social relations in our new Beyond Resistance booklet.

Gerry Gold
Economics Editor
reposted from www.aworldtowin.net

The apostles of growth have had their day

following on from Andrew's post on the Tobin Tax.................

Gordon Brown is in big trouble. The financial system he piloted to prominence during his years as Chancellor is in ruins. Rupert Murdoch has turned The Sun against him. The majority of the UK population is in favour of a withdrawal from Afghanistan, and his letter-writing skills have slipped, angering army wives and mothers.

Brown’s plight is a pale reflection of the political crisis engulfing capitalist governments throughout the world as disaffection grips the masses whose lives are being destroyed by attempts to prevent a slump unparalleled in history. Despite trillions of stimulus dollars, pounds, euros, and the lowest interest rates ever set by central banks, unemployment is soaring worldwide.

In an attempt to repair the damage to his reputation as warm-hearted saviour of the global economy, Brown is trying a populist appeal to the massed ranks of the Trades Union Congress (TUC) and the many other well-meaning members of the Stamp Out Poverty Coalition.

At the weekend G20 meeting of finance ministers and central bankers in Scotland, Brown took up Brendan Barber of the TUC’s call for a tax on financial transactions within the UK – something within the powers of the national government, at least in theory. Having resisted the 30 plus year-old Tobin-tax campaign till now, the UK’s prime minister upped the stakes on the TUC, declaring his support for a tax on global financial transactions.

The chorus of disapproval was almost deafening.

The response from Barack Obama’s Treasury Secretary Timothy Geithner gave a clear and succinct voice to the objective force that is capital. Geithner said there was broad agreement that "growth remains the dominant policy imperative across our economies". US unemployment, which hit a 26-year-high at 10.2% in October, highlighted a "very tough economic environment" that will take a period of sustained growth to correct.

"Government policy has to provide a bridge to growth led by the private sector," he said. "We're now in the middle span of that bridge." In an interview with Sky News, Geithner added: “A day-by-day financial transaction tax is not something we are prepared to support."

Geithner, late of Goldman Sachs, insisted that government had to stay cautious (apart from giving bankers untold billions) and warned: “If we put the brakes on too quickly we will weaken the economy and the financial system, unemployment will rise, more businesses will fail, budget deficits will rise, and the ultimate cost of the crisis will be greater." In other words, business as usual is the goal.

Canadian finance minister Jim Flaherty and Dominique Strauss-Kahn, the head of the IMF joined the opposition to a transactions tax. Flaherty said Canada was working out how to reduce taxes, while Strauss-Kahn opted for a politer more diplomatic response – it’s just too difficult to measure international transactions. Unsurprisingly the banks including Barclays and HSBC aren’t in favour either.

All of the voices in this song-fest are united in their blind subservience to the status quo. The chorus against a tax on financial transactions shows two things. Firstly, reform of the global capitalist financial system is out of the question. Secondly the dependent relationship that links the state to the productive and financial components of the capitalist economy has to be shattered before we can move forward.

The world is now ready for a society that places the satisfaction of needs as its primary goal. Rather than attempting to tax the proceeds of gambling in the global casino, the casino should be shut down and the capitalist state deconstructed. Geithner, Brown and the other apostles of capitalist growth have had their day.

Gerry Gold
Economics editor
www.aworldtowin.net

G20: The IMF consolation prize isn't enough

Graham Turner (Graham will be speaking at the LEAP Conference 'Capitalism Isn't Working' on 25th April)

In the end, Brown and Obama could not get the Europeans to agree on yet another fiscal boost at the G20 meeting. But the consolation prize – an infusion of $500bn into IMF coffers – gave the Anglo Saxon leaders something to trumpet.

Their brand of casino capitalism may have spawned multiple credit bubbles across a wide swathe of emerging market economies. But as eastern Europe and many other countries slide towards depression, their governments can rest assured. The global cop of last resort, the IMF, will come to the rescue.

Many will shudder at the thought. When the SE Asian bubble burst in 1997, IMF staffers were sent to Bangkok, Seoul, Kuala Lumpur and Jakarta to impose tough conditions for loans that still failed to prevent exchange rates from collapsing.

In return for emergency loans, they demanded a draconian and anti-Keynesian tightening of fiscal policy that drove the Asian economies deeper into recession.

We wait to see if similar terms and conditions will be applied today. Judging from the myriad bailouts launched by the IMF since last year, nothing has changed since 1997. It is still one rule for the west, another for the rest.

Indeed, it was the IMF intervention in 1997 that persuaded central banks across developing countries never to be left so dependent upon the west again. They vowed to drive their foreign exchange reserves higher, to provide a cushion against financial crises. But that merely aggravated trade imbalances and provided the fuel for the global credit bubble of 2004-2008.

When it all came crashing down, record reserves were still unable to cushion these countries from the incompetence of western governments.

And trebling the IMF's kitty will not resolve the core immediate problem facing the world economy – a collapsing US housing market. Ironically, the Bank of England's rapid fire rate cuts are gaining traction, with some signs of a stabiliation in the UK housing market.

Obama can only dream. The US took the world into recession, and it may take many countries into depression yet. The collapse of the US housing market is accelerating because, for ideological reasons, the Obama administration will not nationalise its banks and intervene to stabilise its housing market. Obama's plans are little different from those seen in the final months of the Bush administration.

February saw a record decline in house prices across 20 major US cities, because banks are unable and unwilling to pass on rate cuts to homeowners. Average property values are now 30% below their peak, but they could easily fall that far again.

Unemployment in the US is soaring. March could be the worst month yet for job losses, as the wider "U6" unemployment rate, including discouraged and involuntary part-time workers, soars to 20% and beyond.

One in eight homeowners with a mortgage will have been in arrears or in default by the end of March. That could climb to one in seven or one in six over the summer. Obama is not facing up to the scale of economic and social catastrophe facing his country.

And not even a bigger IMF will be able to fix that.

Darling deludes no-one except himself

The measures set out in the New Labour government’s emergency budget yesterday were designed to set pulses racing and induce a collective sigh of relief across the country. Instead, the record amounts of borrowing required will not only reinforce the economic and financial crisis but also point towards the possibility of state bankruptcy in the not too distant future.

At any other moment, the unprecedented scale of government borrowing, mostly aimed at stimulating consumption, would have seemed beyond imagination. But, even with £20 billion more now and £118 billion by end of next year, the best that Chancellor Darling said he could hope for was to lessen the severity of the downturn!

To put it bluntly, the emergency budget will not stop the avalanche of company failures, job and pension losses, personal bankruptcies and house repossessions. Initial reactions from the high streets and businesses to a 2.5% cut in VAT were dismissive and rightly so.

As Jeremy Warner, business editor of The Independent put it:

“The … reduction in VAT, which accounts for the bulk of the giveaway, will make no difference at all to low and moderately earning households, virtually all of whose disposable income is being eaten up by essentials unaffected by the VAT tax changes. Even on petrol, alcohol and cigarettes, the VAT concession is all clawed back again through a compensating rise in excise duty.”

The real problem that New Labour is incapable of tackling is that the global production overcapacity induced by 30 years of credit-led investment generated tsunamis of consumer goods which overwhelmed the market. Inevitably, consumers reached the limits of their ability to repay the debts they’d amassed under intense pressure to buy. Consumers eventually had to stop buying ever more products. Under capitalism, if people don’t buy, companies can’t sell. So the global corporations that were the result of the growth hysteria needed to sustain profits are tumbling one by one. And with the promise of future profits disappearing over the horizon, the whole house of cards is crashing to the ground. Neither Darling’s emergency measures, nor US President-elect Barack Obama’s massive stimulus package to be financed by very large deficit spending announced virtually simultaneously, can put Humpty back together again. The previous packages have failed and so must these. Remember those bank bail-outs that were supposed to get lending going again?

There is worse, far worse to come. In a research report published last week, the International Monetary Fund warned that the failure of a single major financial institution could result in losses to the derivatives market of $300-$400 billion. “What’s more, since such a failure would likely cause cascading failures of other institutions, the total global financial system losses could exceed $1,500 billion." That’s a big number by anyone’s standards.

Darling is predicting – gambling is a better word – that the record borrowing can be repaid in seven years through higher taxes derived from an economy that has returned to buoyant growth. This is delusional behaviour because a) there is a global recession in place and b) the future tax increases and public expenditure cuts needed to repay the borrowing will stop any hint of recovery dead.

The Financial Times was dismissive: “The UK consumer is now too stunned by the housing crash, stagnant wages and fears of unemployment to be coaxed into resuming the insane credit-fuelled binge of yesteryear. The government’s belief that output will contract by just 0.75-1.25 per cent next year will, therefore, prove too optimistic.”

What the paper doesn’t say is that restarting the economy after every previous crash has required the destruction of productive capacity – factories, offices, transport infrastructure, employees. It’s in the nature of the capitalist system. It’s what “boom” and “bust” means. But this time the scale and severity of the crash will be far greater than at any previous time in history. New Labour’s policies of promoting free-for-all, corporate driven globalisation and the fantasy financiers of the City have made certain of that.

Gerry Gold
Economics editor
A WORLD TO WIN