An economy as if people mattered

Andrew Fisher's speech for People's Budget at the Southampton People's Assembly

After a minute's applause for both Tony Benn and Bob Crow, these are the notes from which I made my speech (with a few ad libs!)at the Southampton People's Assembly on 20 March, responding to the Budget and arguing for an economy as if people mattered:

Well I hope you’re grateful.

Two years ago the Chancellor was taxing your pasties – that is what you people eat isn’t it?

And taxing your caravans – that is how you people holiday?

But now look:

You’re getting tax cuts on beer and bingo (or working class culture as the Chancellor calls it). See, tax cuts aren’t just for big business and millionaires, they’re for you – the little people – too!

Budget 2014

So aside from the Tories'  lame efforts to persuade us they're on our side, what were the main things we learned in the Budget?

• No end to austerity: because it’s ideological - by 2018 public spending will be lower than at any time since 1948 - the year in which the NHS was founded. "Rolling back the state", but going further than Thatcher ever managed. And if anything austerity is being ratcheted up. Public spending has risen by less than inflation (so a real terms cut), but his estimate for 2015-18 is for cuts to public spending in absolute terms 
• ISAs – who can save £15,000? Someone working full-time on the minimum wage doesn't even earn £15,000 a year.
• And what's underpinning Osborne's forecast for more growth? The assumption is more household debt - which will rise to the levels that precipitated the crisis. There's also some utterly delusional figures for business investment rising between 8-10% year-on-year for the next three years.
• An array of green taxes were scrapped or capped in the Budget, making more of a mockery of the Coalition's "greenest government ever" rhetoric.

What the Budget didn’t address

• Pay – it did nothing for people's wages and falling living standards. As Bob Crow said: 

• The Housing crisis – nothing in there that will build the homes our country needs, nothing to tackle rising homelessness or the rising costs of paying the rent. We are back to a pre-war situation where more of us are dependent on private landlords, with not enough council housing and fewer able to afford a mortgage.

• Jobs or industrial strategy – far from being a budget for 'doers', following his 'march of the makers' budget, OBR projections show UK exports falling in future years. This is a government - to be fair, like those before them for the last 35 years - without a serious labour market or industrial strategy. The recovery in unemployment is due to low wage, insecure jobs.

• And the energy crisis – nothing to tackle the fuel poverty which disproportionately affects the poorest pensioners; and nothing to address the UK's woeful investment in renewable energy, in which we lag behind the rest  of Europe.

What sort of economy we want

While Osborne rattles on about his modest and delayed economic growth, and the 24 hour news tells us every hour how the FTSE is doing, what would an economy look like as if people mattered?

Five questions, I think would matter to most people:

1. Are we reducing poverty and inequality?
2. Is unemployment falling?
3. Are people's living standards rising?
4. Is the tax gap - the £120bn of avoided, evaded and uncollected tax - reducing?
5. Is the economy stable and environmentally sustainable?

If we want that economy, an economy that acts in our interests, then we need greater economy democracy. Tony Benn said:

And you can see how that happened, we built the NHS, the welfare state, council housing, comprehensive education, and brought the utilities under public control. And sadly we can see how that has been reversed through privatisation - anti-democratically transferring power back from the ballot to the wallet, from the polling station to the marketplace.

For me anything too important to fail should be in public ownership - if we want an economy where people matter. And we need economic rights, individually and collectively. The right to a minimum income, protection from being made redundant - why on Earth are profitable companies allowed to make people redundant - taking away people's jobs to give bigger bonuses to directors or higher dividends to shareholders?

And trade union rights restored, so that we can protect our jobs, pay, pensions and fight for better working conditions.

I hope that's a good basis for discussion. Thank you.

• Andrew Fisher is LEAP Co-ordinator and author of the forthcoming book The Failed Experiment ... and how to build an economy that works

Hamstrung SFO not capable of holding bankers to account

Prem Sikka

Iceland has sent four former directors of its bank Kaupthing to prison for fraud. But the chances of similar legal action happening in the UK are low, where fraud investigators have a poor record.

The Serious Fraud Office (SFO) is the main agency for investigating and prosecuting major fraud. It was formed in 1988 after a spate of high-profile cases. A government-sponsored inquiry into share price rigging at Guinness in the 1980s concluded that too many executives at major corporations had a “cynical disregard of laws and regulations … cavalier misuse of company monies … contempt for truth and common honesty. All these in a part of the City which was thought respectable”.

But rather than changing corporate laws, amending personal liability of directors, or creating an effective enforcement agency, the government created the SFO.

Last week, the SFO’s case against businessman Victor Dahdaleh collapsed because at the last minute it could not provide evidence of alleged graft. This is not the only case the SFO has botched. It spent between £25-40m investigating price-fixing by pharmaceutical companies supplying the UK’s National Health Service (NHS), but the case collapsed because of errors in the interpretation of law.

Previously, the SFO was very slow in taking action against BAE Systems over allegations of corrupt practice. The SFO mislaid 32,000 documents relating to the case. It is currently facing a lawsuit for damages from the Tchenguiz brothers after dropping a three-year investigation into the collapse of Icelandic bank Kaupthing.

Bigger beasts

In 2012-13, the SFO brought 12 cases covering 20 individuals, eventually securing 14 convictions and recovering £11.4m from fraudsters. But it rarely went after the bigger beasts. Money laundering and sanctions busting by British banks did not appear on its radar. The SFO has hardly been visible in investigating and prosecuting the misdemeanours of bankers who brought the UK economy close to collapse.

In mitigation, it might be argued that the SFO’s failures are the outcome of the politics of government cuts. In 2008-09, the SFO had an investigations and prosecutions budget of £52m. Despite the banking crash, LIBOR rigging and other scandals, the UK government has drastically reduced SFO’s resources.

For 2013-14 its budget is £30m and will decline to £28.8 million for 2014-15. That is a cut of over 44% since the start of the global financial crisis.

Faced with a reduced budget and pay freezes, the SFO has been losing experienced staff and outsourcing a lot of its legal work, often paying very high fees. Such practices make it difficult to build in-house expertise and an institutional memory.

Other countries seem to assign higher priority to fraud investigation. The US equivalent, the Securities and Exchange Commission (SEC), has an annual budget of US$1.674 billion (about £1.1 billion). It is therefore in a far stronger position to take on the bigger beasts. The SEC has its shortcomings, but it is more likely to get a result than the SFO.

Ineffective patchwork

The SFO’s failures are indicative of Britain’s failure to build durable and effective institutional structures to fight financial crime. Rather than a single powerful and well resourced agency, there is an ineffective patchwork of institutions.

These include the Financial Conduct Authority (FCA), the Office of Fair Trading (OFT), The National Crime Agency (NCA) Her Majesty’s Revenue and Customs (HMRC), the Crown Prosecution Service, the London Stock Exchange and the Financial Reporting Council, to name just a few. The overlapping and often unclear boundaries result in duplication, waste, obfuscation, delays, poor accountability and outright failures.

Any effective fight against globalised financial crime needs to streamline its institutional structures. In the age of globalisation the UK cannot fight financial crime on a shoestring, with puny organisations. Large parts of the patchwork should be replaced by a UK equivalent of the SEC.

But a new organisation would not be able to combat wealthy elites or giant corporations without significant resources. This might be expensive, but it is an investment that would pay off.

• This article originally appeared on The Conversation website

Why David Cameron is economically illiterate

David Cameron has managed to find folksy metaphors that have resonated. His one about the last Labour government "maxing out the nation's credit card" may be economically illiterate - implying that the state is like an individual consumer (a point demolished in this Guardian editorial) - but it certainly conveyed the claim that Labour had spent too much and that was why we're in a crisis.

"They didn't fix the roof when the sun was shining" resonated equally, even though it implies a classic Keynesian demand management strategy (that Labour should have raised taxes during the boom*) which Cameron would presumably reject ... but it did communicate a point that Labour was reckless.

However, his latest claim - from his speech on the economy last Thursday and repeated at Prime Minister's questions today - is that:

“They think that by borrowing more they would miraculously end up borrowing less ... Yes, it really is as incredible as that.”

But it's not incredible, in fact it's a common occurence for most people - and lends itself to a Cameron-style metaphor. Balls or Miliband could simply retort:

"It's like when you borrow money today to buy a house with a mortgage, so that tomorrow you spend less because you don't have any housing costs in later life"

The metaphor can actually be stretched even further:

"And why do we borrow more today? Just like the mortgage holder: to get an asset at the end of it. That's exactly like the infrastructure Labour is advocating on a million new council homes. As well as creating jobs, reducing unemployment, tackling homelessness and overcrowding, we'd also get extra income from council rents and save on the housing benefit bill. So yes, Mr Cameron we'll borrow more today so that we borrow less tomorrow."

In the FT today, Martin Wolf also assesses Cameron's economic credibility - and pulls no punches.


*instead Labour cut corporation tax from 33% to 28% during its period of office and only introduced the 50% tax rate from 1 April 2010, well after the boom had bust.

The Economist backs Cable, but it's no lurch to the left!

Cable looks to the heavens for inspiration

In a further sign that Cameron and Osborne are losing economic credibility even among their own side ahead of the 2013 Budget, The Economist's editorial has come out in favour of Vince Cable's proposals which he outlined in the New Statesman earlier this week.

Although more clearly articulated, Cable's proposals and modest critique of Osborne's strategy are actually more right wing than what the two Eds' Labour Party is calling for. Call it 'austerity-lite-lite'. Vince has since been feted by many, including now the journal "read by more of the world's political and business leaders than any other magazine".

The Economist backs the case for extra borrowing, made by Cable:

"All in all, the present evidence does indeed – with qualifications – point to some weakness of domestic demand and a low risk of expansionary policies spilling over into significant domestically generated inflation."

As the editorial points out, "between 2009-10 and 2011-12 public-sector net investment plunged from £48.5 billion to £28 billion" a large part of the reason for the appalling construction figures.

However, like Cable, The Economist also advocates that some "expansionary policies" i.e. public investment, should be funded by cuts to pensioner benefits and that perennial punchbag, welfare. The Economist also supports Cable's call to remove the ringfence around NHS funding.

This highlights how Cable is still very much on the Orange Book wing of the Liberal Democrats. Austerity is failing, the markets are unhappy, and what Cable and The Economist reflect is the capitalist class scrabbling around for an ideologically compatible solution to the enduring slump.

The fact that the right is divided, and Cameron and Osborne increasingly isolated, is reason for joy, but Labour and the trade union movement should not be taking sides in this internecine squabble.

Instead the struggle goes on to stop austerity in its tracks - not simply find another route for it to get to the same destination.

The left should take some encouragement however that its analysis is being proved right and that the right is having to adopt some of our proposals. In the case of The Economist both for more borrowing to invest, and - surprisingly - for a Land Value Tax:

"One reason why companies sit on development land is because they do not pay taxes until the offices and warehouses are built. It would be much better to tax the land value: that would make hoarding expensive and force owners to sell to someone who can use the site. Once in use, the site value and the tax would rise—creating a virtuous circle, as the revenues pay for better infrastructure, making land more valuable."

Downgrade your expectations: it pays to be wary of credit ratings agencies

Prem Sikka

Evaluating the creditworthiness of countries is far from an exact science, yet the influence of credit ratings agencies is extraordinary.

Recently, the UK government’s debt rating has been downgraded by credit rating agency Moody’s from AAA to Aa1. It joins France, whose credit rating was downgraded to Aa1 in November 2012. In August 2011, Standard & Poor’s (S&P) had downgraded the US from AAA to AA+.

Credit ratings enable investors and markets to assess the risks of government securities. In the case of the UK, a downgrade could increase the government’s borrowing costs. It would also further reduce the value of the pound sterling and thus stoke inflationary pressures by increasing the cost of imports, though the weak pound may help British exporters.

But the notions of social stability, justice, and fairness are beyond the remit of credit ratings agencies. The general message from the Moody’s downgrade is that the UK government must deepen its austerity program and attack hard-won social rights on education, pensions, healthcare and unemployment.

Credit ratings can have serious impact on national and household accounts, but are also a major money-spinner. In 2012, Moody’s reported profits of $1,077 million and 2012 is expected to produce record profits as investors seek shelter from growing financial uncertainty. However, the models used by credit rating agencies continue to produce odd results, and there is an urgent need to check the economic, social and political power exercised by the rating agencies.

The UK government has provided around a trillion pounds in loan and guarantees to ailing banks. For many years, the UK-based banks engaged in organised tax avoidance, money laundering, interest rate manipulations, mis-selling of pensions, endowment mortgages, payment protection insurance and many other scandals. These scams did not persuade credit rating agencies to reduce the UK’s credit rating. Perhaps they approved of hot money rushing to London to take advantage of scams. Just as the regulators began to show signs of getting off their bended knees to giant corporations, Moody’s has downgraded the credit rating.

The very concept of risk assessment requires some openness and a relatively free flow of information, but credit rating agencies continue to give higher ratings to opaque jurisdictions. Bermuda, whose opaque structures often enable corporations and wealthy elites to avoid taxes elsewhere, is rated Aa2, while the economic powerhouse China is rated Aa3. Oil-rich Saudi Arabia is rated Aa3, the same as the Cayman Islands which is well-known for its secrecy, opaque structures and fiddle factories that facilitate tax avoidance. Iceland, bailed out by the European Union and the International Monetary Fund enjoys a credit rating of Baa3. It shares the same rating as India, which has foreign currency reserves of around $300 billion. In December 2009, Moody’s boldly stated that “investors' fears that the Greek government may be exposed to a liquidity crisis in the short term are misplaced”, but barely four months later, the Greek government was negotiating bailout deals.

Credit rating agencies have a history of poor performance. Enron, the fraud-ridden US energy giant, collapsed in December 2001. Right until its demise, it continued to attract favourable credit ratings. These enabled the company to overstate its profits and assets and understate its liabilities. Credit rating agencies said that lessons will be learnt, but the banking crash once again has shown that the emperor had no clothes. Moody’s, Standard & Poor’s, and Fitch, the world’s biggest credit rating agencies, maintained A-ratings for Lehman Brothers and US insurance giant AIG until early September 2009, just days before their collapse and bailouts.

In 2008, just prior to the banking crash, there were about twelve AAA-rated companies and about the same number of AAA-rated countries, but around 64,000 complex financial instruments received the AAA-rating. Banks sliced, diced and repackaged subprime mortgages, collateralised debt obligations and structured finance deals into what they described as “safe investments”. This illusion was supported by the AAA-ratings given by rating agencies, which subsequently turned out to be junk. The regulators were content to let the banks hold less capital for AAA securities and, as a result, banks did not have the buffer to deal with toxic debts. Investors, governments, taxpayers and markets were duped, and the whole financial system came tumbling down.

Credit rating agencies wield enormous economic, social and political power, but do not owe a “duty of care” to the stakeholders affected by their opinions. These issues have now become the subject of legal disputes. In February 2013, The US Department of Justice sued Standard and Poor’s (S&P) for issuing “inflated ratings that misrepresented the securities’ true credit risk”.

The Australian case of Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 held that credit ratings agency S&P was liable for the “misleading and deceptive” ratings issued by it because it made unfounded and irrationally optimistic assumptions in its analysis. Protracted litigation will follow as credit rating agencies try to wriggle out of any social obligations. These issues are important because credit ratings form the basis of economic experiments that can result in austerity drives, unemployment, loss of social welfare, and ruined lives.

This article first appeared at The Conversation

Britain needs a pay rise

The PCS union today launched a new report 'Britain needs a pay rise' looking at the effect of falling wages on the UK economy.

The report shows that UK workers (public and private sector) are collectively losing £50 billion a year since austerity pay policies were introduced from 2008.

As today's inflation figures show RPI inflation at 3.3%, this looks set to continue and worsen - as the average pay settlement has been 1.5% over the last year.

The report notes that since the onset of recession in 2008 the real value of wages has fallen by 7% (£50 billion a year). During the same period there has been a real terms drop in consumer demand of 5%.

This is not a coincidence - freezing or capping wages sucks demand out of the economy. It also forces more workers on to tax credits, housing benefit and other welfare payments costing the government more.

For public sector workers in general, and civil servants in particular, there are lots more facts specific to them in the report - including comparators with the private sector. In the public sector, where all increases are capped at 1% this year (for many for the second year after a two year pay freeze), pay policy will cut £7 billion a year until 2015 (at least).

Whatever sector you work in, the report highlights the necessity for workers' wages to improve for any recovery to take hold.

Launching the report today, PCS general secretary Mark Serwotka said:

"Almost everyone can now see that austerity is not working. The chancellor George Osborne is borrowing more for failure, we are on the verge of a triple dip recession, food banks are on the rise and pay day loan sharks are preying on the vulnerable.

"We believe the government's pay policy, built on the lie that hardworking civil servants are paid too much, is having a seriously damaging effect on the whole economy.

"Instead of burying their heads in the sand and hoping for the best, ministers can and should act now to put money into people's pockets and back into our economy."

Read the report

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

Jobless figures 'are only going to get worse'

From the Morning Star, by John Millington

Unemployment will continue to rocket for another five years according to a damning new report out tomorrow.

The Centre for Economics and Business Research predicts that Scotland could see its unemployment rate hit 9.7 per cent by 2016, the highest rate since the recession of the early 1990s, and in Wales unemployment could reach 10.5 per cent, the highest since records began in 1992.

North-east England, which heavily depends on public-sector jobs, is also expected to be badly affected.

The report also found that the south-east and east of England and London are the only regions likely to see unemployment drop.

Report author Rob Harbron forecast "five more years of pain" across Britain "with unemployment continuing to rise in almost every region.

"Family budgets are being squeezed between the pressures of rising unemployment, low earnings growth and stubbornly high inflation."

Left Economics Advisory Panel co-ordinator Andrew Fisher told the Star: "The mounting evidence is now incontrovertible. Austerity is failing all around Europe and voters are rejecting it.

"There is now a huge responsibility and urgency for Labour to start putting forward a clear alternative."

Squeezing ordinary people's finances always leads to disaster

Prem Sikka

The UK economy is flatlining, unemployment is rising and around 13.2 million people live below the poverty line. The prospects of building a sustainable economy remain distant. The common factor behind these grim statistics is that the purchasing power of ordinary people has been severely eroded and without adequate resources people cannot buy goods and services produced by businesses.

The UK gross domestic product (GDP) has increased from the 1976 figure of £621bn to around £1.5tn, but the share going to employees in the form of wages and salaries has declined. In 1976, the amount of wages and salaries paid to UK employees, expressed as a percentage of GDP, stood at 65.1%. By the end of 2011, it was around 54% (see table D of the Quarterly National Accounts). This rate of decline is unmatched in any other developed economy. With many people now facing wage freezes and loss of pension rights, the employees' share of national wealth is set to fall below 50% of GDP.

The above figures are not the whole story, because a disproportionately large slice of the shrinking cake has been taken by wealthy elites. A study by the Resolution Foundation noted that in 1977, for every £100 of GDP, employees in the bottom half of the earnings distribution received £16. But by 2010 it had fallen to £12, and after taking out bonuses their share declined to just £10. In contrast, the top 10% of earners increased their share from £12 per £100 of GDP to £14, and after taking account of bonuses, it rose to £16.

In principle, the state can boost the spending power of low and middle-income households through redistribution, but that possibility is constrained by the erosion of tax revenues. In 1981-82, tax revenues expressed as a percentage of GDP stood at 45.5%, but by 2011-12 they had declined to 37.8%.

So where has the national wealth gone? Well, it has been transferred from employees and the state to corporations and their controllers. In the mid-70s the average rate of profitability before interest and tax at current replacement cost stood at 3.9%. Now, despite one of the deepest recessions, it is still averaging around 11-12%.

The seeds of the disastrous position were primarily sown by the policies pursued in the 1980s and 90s. Mass unemployment and government-led attacks on trade unions severely eroded the ability of employees to maintain their share of national wealth. The current UK trade union density of 26.6% of employees is considerably less than 69.2% for Finland, 68.4% for Sweden, 66.6% for Denmark and 54.4% for Norway. Unlike Scandinavian countries, UK employees and unions are not permitted to elect directors and are excluded from corporate governance arrangements, therefore they have not been in a position to protect workers' share of national wealth.

The comparative demise of manufacturing has resulted in the disappearance of reasonably well-paid skilled and semi-skilled jobs. These have been replaced by less well-paid service-sector jobs. Privatisation and outsourcing of work has contributed to low wages.

Successive governments have appeased corporations and wealthy elites through tax cuts. The rate of corporation tax has declined from 52% of taxable profits in 1982 and will reach the lowest ever rate of 22% in April 2014. The top marginal rate of income tax has declined from 83%, plus a surcharge of 15% on investment income, in 1978-79, to 45%. Rather than effectively tackling organised tax avoidance, successive governments have shifted taxes to labour, consumption and savings, as evidenced by higher national insurance contributions, higher VAT and the failure of tax-free personal allowances and income tax bands to keep pace with inflation. The result is that households in the bottom 20% of income bracket pay 35.5% of their gross income in direct and indirect taxes, compared to 33.7% for the top 20% of households.

The massive transfer of wealth is camouflaged by government rhetoric on the need to rebuild the economy and control inflation. Here are some reflections from Sir Alan Budd, a key economic adviser to the Thatcher administration: "My worry is … that there may have been people making the actual policy decisions … who never believed for a moment that this was the correct way to bring down inflation. They did, however, see that it would be a very, very good way to raise unemployment, and raising unemployment was an extremely desirable way of reducing the strength of the working classes – if you like, that what was engineered there in Marxist terms was a crisis of capitalism which recreated a reserve army of labour and has allowed the capitalists to make high profits ever since."

In his analysis of the 1929 Wall Street crash and the ensuing economic depression, liberal economist JK Galbraith identified "bad distribution of income" as the biggest cause of the crisis. Yet history is repeating itself. It is hard to discern any government policies that are designed to increase the employee share of GDP.

Despite the banking crash, the government's not-so-bright idea for economic recovery is that by 2015 ordinary people will somehow increase their personal borrowing by another 50% from £1.5tn to £2.12tn. Clearly, no lessons have been learned from history.

• This article first appeared on Guardian Comment is Free
  

Quantitative Easing isn’t working

There is an economic crisis, yet those who advocate quantitative easing as a solution have misunderstood both the nature and the magnitude of it. This blog has consistently criticised Osborne's austerity programme and his evidence free belief that the public sector has been ‘crowding out’ the private sector.

Now I want to look at the Bank of England’s monetary policy: quantitative easing.

Quantitative easing (QE) is often referred to as ‘printing money’. In fact it is more accurately described as giving banks cheap credit (see BBC guide to QE). The use of QE is based on the assumption that our economic system is in crisis due to a lack of available credit (a credit crunch) and a lack of lending.

The same intellectual malaise is evident in the ‘soft Keynesians’ who advocated bailing out the banking system, but now reject an economic stimulus. Their unspoken slogan is ‘save the banks, fuck the people’.

These people failed to foresee the crisis, and now fail to offer viable solutions for resolving it – in fact (if one assumes their policies are advocated rationally) they seek to make it permanent by institutionalising declining real pay and hoping the private sector will magic some jobs soon (crowding out theory)

There are several collective nouns for this group: Chancellors, Treasury ministers, leading economists or business leaders.

Today the economy does not suffer from a lack of credit. It suffers from a lack of demand. Unemployment, underemployment and wage constraint have all produced a situation in which living standards are falling.

Separately, the government has massively cut its capital spending, sucking further billions out of the economy.

Vincent Cable whinges that the banks are not lending to small businesses yet why would they in a climate of falling demand, and wider financial uncertainty? Regular pay is increasing at only 1.1% per year, outstripped by inflation at over three times the rate. It is no surprise that retail sales volumes fell 0.8% in February 2012 (incorporating a 1.5% decline for non-food items).

Some, to make the case that QE is necessary, have pointed to statistics showing that the number of small business loans rejected by the banks has quadrupled since the crisis. This ignores two very salient factors:

1. Businesses are now making more loan applications to cover (what they hope are temporary) shortfalls, rather than to invest
2. Banks, whose reckless lending practices played a major role in causing the crisis, are now more rightly more cautious
3. The same business plan in 2006/07 at a time of high employment and rising real wages was a lot more attractive to invest in than it is in 2012/13

The real need for the UK economy is not more credit, but more demand –and that means putting more not less money in people’s pockets. It would mean doing the exact opposite of what George Osborne is doing – redistributing £30bn from benefits and tax credits into the pockets of businesses via tax breaks. It would mean ending pay constraint and reversing the VAT hike (a tax on consumption). This could be funded by reinstituting the 50% rate and closing down on the loopholes used by the super-rich and big business to avoid their obligations.

Meanwhile the Bank of England’s now £325bn quantitative easing programme has clearly not been used to extend credit to meet any growing demand. Instead, the banks have used the extra liquidity to speculate in derivatives markets and to invest in safer foreign markets.

This is not to say quantitative easing is always a bad policy. It’s not, but in the current climate it has long outlived its utility. Part of the problem is the limited policy options open to the outsourced (independent) Bank of England and the lack of any coherent strategy from HM Treasury.

Instead of botched austerity, we need investment based around a new industrial policy to create jobs in sectors that meet people’s urgent needs, including housing, energy, and transport.