Bankers try more of the same to solve crisis

From the Morning Star

Alarmed Bank of England policy-makers pressed the red button today and printed another £50 billion to try to boost the struggling British economy.

The bank's Monetary Policy Committee voted to increase the quantitative easing programme from £325bn to £375bn in a desperate attempt to drag the country out of a double-dip recession.

It held interest rates at a record low of 0.5 per cent.

They took the decision amid signs that the economy deteriorated in June, with the construction sector in reverse and the services sector suffering its worst performance for eight months.

The bank said the decision to pump more money into the economy came as Britain's output had barely grown for a year and-a-half amid signs its main export markets are slowing.

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "The use of quantitative easing is based on the assumption that our economic system is in crisis due to a lack of available credit.

"But 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.

"The Bank of England's now £375bn 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. It's good for the banks, but bad for the UK economy."

TUC leader Brendan Barber added: "This will only stop things getting even worse, not kickstart the economy."

Measuring the economy - rethinking the growth obsession

Yesterday the OECD predicted the UK economy would contract in the first quarter of 2012. It led the news for a while (pre-Galloway), vying for contention with pricier pasties and petrol pump panic.

The state of the economy is a vastly more important issue than both of those things, yet the way in which it is reported perhaps explains why people are more interested in pasties - and perhaps why they're right to be.

Firstly, we should define 'recession'. A technical recession is widely agreed to be two consecutive quarters of 'negative growth'.

Negative growth is a ridiculous term: economists' jargon when the English language provides ample alternatives: contraction, shrinkage, reduction. I personally favour 'contraction'.

At the end of each quarter (of a year, i.e. three months), the government (and indeed governments around the world) announce the level of economic growth - the change in our gross domestic product (GDP).

GDP is value of all the goods and services produced which includes private and public consumption, government expenditure and investments, as well as exports less imports.

So if there is economic growth then GDP has risen (relative to the last time it was recorded). If GDP has declined, then there is contraction (aka negative growth).

So back to the OECD, which predicted that in the first three months of 2012 the UK economy will have contracted by 0.1% - following a contraction of 0.3% in the last three months of 2011.

Leave aside that many close watchers of UK economic trends think the OECD has got it wrong anyway (especially after the economic boost of all the panic petrol buying), but even if the UK economy has contracted by 0.1%, what does that mean?

Well we know what it means technically: that the value of all the goods and services produced has contracted by 0.1% in the last three months. And if that is for a second consecutive quarter, as would be the case in the UK currently, then it would be a technical recession.

Somewhat illogically the economy is not in recession if it contracts by 2% in one quarter, grows by 0.1% the next and then contracts by 1% the one after. Yet two consectutive quarters of 0.1% contraction are a 'recession', even though the former case is worse.

So it's clear to me we should change our definition of recession to something that more accurately tells us the state of the economy: so how about a technical recession being redefined as contraction over an annual basis. In other words, if we look at the average of the last four quarters (or year, as most people know it).

But what does any of this mean to anyone personally or - to be less individualistic - to a community or to the economy?

Is growth that relevant? What does Mr Wilson or Ms Patel do when they hear the economy has contracted by 0.6%? A: About the same as they do when they hear the FTSE has dropped 1%. Fuck all, because it doesn't really much matter (and there's not much they can do about it).

What matters to people is their own living standards, the inequality in their community, the level of unemployment. And surely we (as fellow socialist readers of this blog) want an economy and economic measures that treat people as paramount.

So here's what's important: how does the change in your income relate to the change in inflation? That matters whether you're in waged work or receiving out of work benefits. It measures whether your living standards have risen or fallen.

Or what about the gap between rich and poor? Numerous researchers including Wilkinson & Pickett and Danny Dorling have shown the damaging effects of inequality on life chances through a variety of metrics.

And then there's unemployment - undoubtedly bad because of what it means for the individuals concerned, and also economically inefficient because it means we are paying for talent to be left idle (receiving benefits) instead of enabling that person to contribute to the economy (pay taxes).

So instead of measuring badly what matters less, why not prioritise measuring what matters most:

• Living standards
• Inequality
• Unemployment

Because next month (on 25 April), despite the OECD's prediction, I suspect that the news will be reporting that the economy has returned to growth (probably only 0.1-0.4%) and Osborne will be welcoming it as a new dawn and an endorsement of austerity - only for the economy to contract in the second quarter.

This obsession with growth encourages politicians (as those from all parties did) to ignore rising inequality and do nothing about unsustainable debt-fuelled growth.

As Ann Pettifor said on Newsnight (watch online) (discussing the OECD prediction) the government should have used the budget "to spend on infrastructure, which would create jobs to create the income to pay back the debts".

That way, we'd reduce unemployment, increase living standards, reduce inequality and, also, generate stable economic growth.

The reality is that Osborne's austerity policies mean rising unemployment, falling living standards for most, and rising inequality. Bad for people and bad for the economy.

If we, as the left, want a new economy then we should be emphasising new ways of measuring its performance too.

Dogma-induced sleepwalking

John Millington, Morning Star

Most people across the country will have been using this week to recover from hangovers and colds following a little overindulgence at Christmas.

Similar things have been said about the economy - that "we" overindulged in credit and excess and now have to face the inevitable consequence - austerity.

The "we" in this story depends on whom you blame for the crisis. And even the most liberal commentators are now pointing the blame firmly at top bankers and finance leaders.

But how long will the hangover from the initial crisis, where the economy seems to be perpetually stuttering, last?

For most of next year, according to the centre-left think tank Institute for Public Policy Research (IPPR).

In his new year's message IPPR director Tony Dolphin points to a bleak 2012 for ordinary people citing the fallout from the eurozone crisis and the dire consequences of government imposed cuts.

"The eurozone crisis is unresolved and country after country is being forced to adopt extreme austerity measures that will result in large falls in output. As a result, the whole eurozone economy is believed to be back in a mild recession," he said.

A double-dip recession in Britain has been mooted for some time and can only be avoided by relaxing austerity measures, increased investment and an uplift in the spending power of the average worker.

Hardly long-term or revolutionary stuff but is it going to happen?

Political economist and tax justice campaigner Richard Murphy is not optimistic.

"Since consumer spending, exports and business investment aren't going to increase right now the only reason why the economy will change direction in 2012 is if the government decides to boost it.

"Osborne has committed himself not to do that. He won't cut taxes - even though his party would like that - and he won't spend even though the economy needs it, because he has committed himself to austerity."

Murphy believes Osborne's sole interest is the market and its masters.

But politically the Tories are committed to discrediting the Labour opposition particularly as austerity is affecting not just working-class and unemployed people but professionals and middle-class people too.

"He (Osborne) is using austerity supposedly to keep the markets happy - although there appear to be ample signs they would love a stimulus as they're suffering. But that leaves him in a hole with that option.

"He's also done it to make clear he's not the tax and spend party he says Labour were. So for two reasons - his credibility with the markets and the credibility of his anti-Labour Party narrative - he's got himself into a corner he can't get out of and it's all of his own making to suit his own political narrative.

"The trouble is, we pay the price for it.

"Labour's challenge is to break the idea this is tax and spend. It has to use the words 'jobs' and 'investment' often. The challenge is to find the language that shatters Osborne and the myth he's created."

There are plenty of suggestions for a counter-narrative for Miliband - as Murphy suggests - emanating from respected economists and Labour-affiliated unions.

Michael Burke writing in the Socialist Economic Bulletin yesterday lays out a Keynesian response to the crisis arguing that government investment in the economy can have a "multiplier effect" on the private sector.

"Since each economic sector responds variably to a change in another sector's activity, and often with a time lag, it is impossible to assign a precisely distributed causal effect of a change in fiscal policy. But we have noted above that Labour's increased spending of 1.8 per cent of GDP led to a recovery, which added 2.8 per cent to GDP.

"This demonstrates the way the state can lead economic activity in total. This is what Keynes called the 'multiplier effect' as the private sector responds to increased government spending. In this case the multiplier is 1.56 (the ratio of 2.8 per cent to increased spending equal to 1.8 per cent of GDP)."

Highlighting the vital role of the construction sector in any sustained and consistent economic recovery, Burke busts the myth there is no money left.

"George Osborne has provided £40bn in 'credit easing' to small and medium sized enterprises. They will not build homes, provide decent affordable housing and employ workers with these funds.

"But the state could because it is a vastly more efficient provider of large-scale housing as well as infrastructure projects."

Capitalism needs to have a degree of growth in order to maintain the status quo.

But the government is anxious to keep its chums in the private sector happy even if it means sacrificing the wider economy, including restricting growth in the short-term.

State intervention of this kind would, Burke adds, "Remove the main responsibility for construction from the hands of the private sector and place it in the hands of the public sector.

"It seems that nationalisation is only permissible when bondholders and shareholders are being rescued."

And Left Economic Advisory Panel co-ordinator Andrew Fisher points out that in the long-term, maintaining steady growth and reducing employment will require an overhaul of the bankers themselves.

"We need not just a national investment bank but the public ownership of all banks and control of the finance sector to redirect investment to create jobs and build the infrastructure we need."

End the rule of the 1% as economy implodes

The force of the global economic implosion, which has seen unemployment skyrocket to a 17-year high in the UK, overwhelmed its first eurozone government last night. It is unlikely to be the last.

The Slovakian parliament voted to reject a stronger European Financial Stability Fund (EFSF) and hence a second rescue package for Greece. This was despite immense political pressure from the European Central Bank, the European Commission and the International Monetary Fund, as well as the US administration.

They all warned of the systemic nature of the worsening crisis and the direst of consequences for the world capitalist economy should Greece be allowed to fail. As a result of the vote, the coalition government of Slovak Prime Minister Iveta Radicova fell after a small party in her ruling coalition refused to back the plans.

The EFSF is the capitalist powers’ main weapon in dealing with the debt crisis that threatens the European common currency, the region's banks and the global financial system. But eurozone rules require all of the 17 member states to ratify the new plan and Slovakia was the last to vote after all the others had given their agreement.

Now the international lending agencies, responsible for holding the crumbling system together, have to stitch together a new interpretation of the rules allowing the package to be put into operation, whilst they wait to see if a more compliant government will emerge in Slovakia.

Just a few short weeks remain before the Greek government will run out of money and cease to be able to pay wages or pensions for the public sector employees who make up one fifth of the country’s workforce. But the price of the new, wholly inadequate deal would see further tax rises, jobs destroyed, wages cut and – to the banks’ horror – a write-down of the money they are owed by the Greek government by as much as 50%.

As those in the race to contain or deflect the impact of the deepening crisis struggle with its European expression, insolvency practitioners in the United States and elsewhere are gearing up for a busy time ahead.
Bankrupt book chain Borders, for instance, recently closed its doors after failing to find a buyer. Moody's credit rating agency says the number of troubled companies rose for the third month in a row in September, an ominous sign similar to the third quarter of 2007 when the economy slid into recession and the ensuing crash engulfed the world.

And in another blow for the New Green Dealers who are promoting an eco- friendly growth-oriented capitalist solution to climate change, recent failures included renewable energy companies Evergreen Solar and Solyndra. The latter collapsed in a politically-charged bankruptcy after taking a $535 million loan from the US federal government.

This time around China cannot come to the aid of the ailing system. As is now becoming clear, its huge injection of spending on infrastructure developments to ward off the impact of the global crisis on its domestic economy, has taken its toll internally.

A Reuters special report on China noted:

Local governments had amassed 10.7 trillion yuan in debt at the end of 2010. The government expects 2.5 to 3 trillion yuan of that will turn sour, while Standard and Chartered reckons as much as 8 to 9 trillion yuan will not be repaid – or about $1.2 trillion to $1.4 trillion. In other words, the potential debt defaults could be even larger than the $700 billion U.S. bail-out programme during the 2008 crisis.

Be warned. Any and every attempt at shoring up the defences of the capitalist system will involve an unimaginable, intolerable assault on the lives of billions of people. Almost a million young people are on the dole in Britain already, according to today’s figures.l

Saturday’s global occupation of city and town squares should become the focus for shaping a new social, economic and democratic political system founded upon the satisfaction of human needs. The 1% cannot be allowed to continue their rule over the 99%.

Gerry Gold
Economics editor
12 October 2011
reposted from
www.aworldtowin.net 

The 'nether world' of capitalism

The propaganda that accompanies the cutting, slashing and burning of government spending is all about “securing the fragile recovery”. It is used in every country from Iceland, Greece, Ireland, Spain, to the US and Britain – to justify what in effect adds up to crashing the economy.

But don’t get the idea that anything else can be done within the capitalist framework. After decades of credit-led expansion, the logic of capital now demands its opposite – ruthless contraction. It turns public pronouncements into lies, and politics inside out. Ireland’s government won’t be the last to find itself in trouble.

The economic trajectory of country after country, region after region confirms the slide from recession to depression. The Organisation for Economic Co-operation and Development last week cut its forecast of UK economic growth in 2011 from 2.5% to 1.7%. The Institute of Directors is forecasting UK growth of 1.2% next year. In real terms, these figures represent a decline in activity.

The eurozone, having pumped billions of euros into recovery measures, achieved relatively strong second-quarter growth of 1% to the surprise of the markets. But the “recovery” was short-lived. Despite the export of capital goods from Germany to China, growth slowed to 0.4% in the third quarter. Euro zone unemployment rose to 10.1% in September and it is forecast to go higher next year. In the United States, another round of “quantitative easing” – aka printing money – is under way in an increasingly desperate bid to boost economic activity.

The World Bank predicts that China’s growth will slow in 2011 from attempts to constrain the country’s uncontrollable credit boom. Lending by its vast, unregulated underground financial market is sending the prices of staple foods soaring and triggering social unrest. The average price of 18 staple vegetables is 62% higher than a year ago.

Inflation is eating away at incomes not only in China. Commodity speculators have driven up the price of food worldwide, while transport and energy prices in Britain are set to soar. The inexorable fall in consumer spending power – VAT is going up to 20% in January – can only deepen the contraction.

Desperate times lead to panic measures, as the so-called rescue plan for Ireland’s bankrupt banks shows. Ireland, however, is only an extreme example of the rotten core of the global financial system, which has been on state life support since 2008. All the talk of the dangers of “contagion” and the threat to the euro itself indicates that another crisis-point has been reached.

We are not the first to analyse the destructive side of capitalism. In 1848, Marx and Engels wrote in their Communist Manifesto:

Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells … In these crises, a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed.

No amount of counter-propaganda against spending cuts can halt the inexorable contraction of the global economy. Avoiding the consequences means that the system must be replaced as a matter of urgency. Today’s general strike in Portugal against budget cuts and student actions in Britain against soaring tuition fees are only flashes of the struggles ahead. Going beyond resistance to putting an end to capitalism is the real challenge.

Gerry Gold
Economics editor
24 November 2010

reposted from www.aworldtowin.net

More on the Great Rail Rip-off

Following on from our post of 4th May about threatened rail cuts, news now emerges of franchises redesignating peak times to increase - by up to 4 times - rail fares.

In our January 2009 report for the RMT union, we identified the following threats from the rail companies:

1. Either attempting to renegotiate franchise agreements, which could
include:
a. Reducing premium payments or requesting extra subsidies
b. Cutting services on less profitable routes

2. Cutting staff numbers to reduce overhead costs, which would increase
unemployment and could lead to worse services and less passenger
safety

3. Raising rail fares, which could drive passengers from the rail into
private transport

We have now seen all three in this recession. On point 3, the BBC reports that "Virgin decided to extend ticket restrictions for more than an hour a day", so many services are now peak. One example is that last year, taking the 0915 from London Euston to Manchester, returning at 0855 the next day, would have cost £66. Now that Virgin has extended its peak hours, the same ticket costs £262. It's a similar story at South West Trains - owned by homophobe Brian Souter.


Virgin remember is owned by tax exile Richard Branson who takes tax subsidy but avoids tax. Virgin is so named not because of its owner's sex appeal but because it is based in the Virgin Isles.

Afraid of more franchises defaulting, it appears the Office of Rail Regulation inside the Department for Transport is doing nothing and allowing passengers to be fleeced.

However on the East Coast mainline, which was taken over by the government last year, five trains a week have been reassigned the other way, from peak to off-peak.

The answer is simple: renationalise the railways!

More rail cuts ahead

In January 2009 LEAP published RMT-commissioned research on the UK rail system.



We said that our findings raised "serious questions about the viability of the Department for Transport's (DfT) franchise model in a period of recession."

We elaborated that, we expected rail companies to attempt "to renegotiate franchise agreements, which could include ... cutting services on less profitable routes".

Today, the Daily Telegraph reports that proposals to give rail operators an incentive to cut unprofitable routes was drawn up not by rail operators, but by the DfT in January.

Of course the ludicrous franchising system means that operators receive subsidies to operate these routes, and with no party guaranteeing transport funding it is of course the DfT who would initially benefit by not having to pay the subsidies. However, the rail companies would also benefit, since they could lease less rolling stock and roster fewer staff as they would be running fewer services.

But what about the government's other policies (i.e. apart from cutting the deficit)?


In our January 2009 report, we identified the following government policies that would be threatened by rail cuts:

1. Modal shift from road to rail to reduce carbon emissions;
2. Social exclusion – increased rail fares will drive poorer farepayers with no alternative private transport options from the railways;
3. Increasing employment towards a target of 80%;
4. Improving passenger safety at rail stations and reducing staff assaults

All of which will be sacrificed if DfT plans go ahead it seems.

Don't believe the hype on unemployment!

The headline figure from today's statistics is that the number of people claiming Jobseeker's Allowance fell by 32,300 to 1.59 million in February.

But unemployed people not claiming does not been unemployment is going down. A far more alarming statistic is that the number of people in work fell in the quarter, by 54,000 to 28.86 million.

So 54,000 fewer people are earning a wage in February than in January. That is the real statistic. It means less tax revenue into the Exchequer, and less consumer demand in the economy. This is bad news. Until the number of people in work starts rising consistently talk of a recovery is premature.

Another baseline is the continued rise in the number of long-term unemployed (over a year), which rose by 61,000 to 687,000 in February. The social consequences of long-term unemployment have been well-documented by professors Danny Dorling and Richard Wilkinson.

Women and the recession

It's the first day of the Women's TUC conference today in Eastbourne, and to coincide, the TUC has published statistics showing that women workers would be hardest hit by public service cuts.

67% of public sector workers are women, and of part-time workers in the civil service, 87% are women. These statistics highlight the better flexibility in the public sector, which allows workers with childcare and other caring commitments, still mostly women, to work flexitime or part-time.

With all parties threatening massive public sector job cuts, it is clear that women workers would be hardest hit. Download the full TUC report.

But there's also another reason why women are more likely to be hostile to public sector and welfare cuts - they are the main service users. There are more women pensioners, more women in poverty due to unequal pay, and the disproportionate caring responsibilities they have bring them into closer contact with health and education services too.

Public sector cuts are a feminist issue!

Greece is the word, democracy isn't

Ancient Greece was the birthplace of democracy - the word coming from two Greek words demos (meaning 'the people') and kratos (meaning 'to rule').

It was very clear this week that in modern Greece the people certainly don't rule, though they are fighting back.

By joining the Eurozone, Greece is subject to the Growth and Stability Pact (meaning its deficit cannot exceed 3% of GDP) and its currency is run by the European Central Bank (ECB). As a relatively minor economic force what hope have the people of Greece got of the ECB taking decisions in its favour?

The EU approved austerity plan was reported on the BBC as being:

• Cut budget deficit below EU ceiling of 3% of GDP by 2012, from 12.7% in 2009
• Freeze public sector salaries and cut bonuses
• Replace only one in five of people leaving civil service
• Raise average retirement age by two years to 63, by 2015
• Raise taxes on fuel, tobacco, alcohol and property

In short, freeze public sector pay, cut public sector jobs , make people work longer, raise regressive taxes. Yes, the EU's solution to the crisis of neoliberalism is more neoliberalism.

There are lessons for the UK here too - our deficit is about the same as that of Greece (12.5% to 13%). If the UK was in the Eurozone we might be having austerity packages imposed on us. As ever with the UK though we don't wait to have economic stupidity imposed upon us - we have three political parties fighting a general election on so far mystery austerity packages (cuts: bold, swingeing or savage - the choice is yours!).

Is the recession over in time for the election?

Andrew Fisher, LEAP Co-ordinator, assesses the economic picture in 2010.

By the time this issue of Labour Briefing adorns your doormat, Alistair Darling and Gordon Brown may be basking in the reflection of newspaper headlines declaring the recession over.

The figures released at the end of January 2010 are expected to show a moderate level of economic growth in the final quarter of 2009. If so, it will bring to an end to six quarters of decline (the longest UK recession on record) during which UK GDP shrunk by 6.1%.

As LEAP has regularly pointed out, the definition of a recession is woefully inadequate – especially for those on the left. But leaving aside the politics (very briefly), does 0.1% or even 0.5% growth really mean salvation if preceded by 6% of decline?

For those of us on the left however, the fact of more economic activity (i.e. the economy is growing) is not a central question. We are rightly more concerned about what is happening to poverty levels, inequality, and unemployment.

As we know, unemployment growth often lags a year to eighteen months behind the return of GDP growth – as it did in the recessions of the 1980s and early 1990s – and if the ‘recovery’ stutters or is slow then unemployment is likely to remain high for some time.

Unemployment is a central concern since both major parties are advocating programmes of sweeping cuts across the public sector. These cuts would be accompanied by a pay freeze, and a decline in public sector capital investment.

We have been here before and we know to what such measures lead. In the late 1970s, the Callaghan Government chose this path – they ultimately failed on all fronts: they froze pay, privatised and cut. The economy didn’t improve and Callaghan’s policies lost the election.

Nevertheless Brown – now apparently being pushed further by Darling – is going full throttle down the Callaghan route. Then, in 1979, the Tories took over, implemented a package of cuts, privatisation and anti-union laws, which is precisely what they are offering today – and with precisely the same economic misery in store: unemployment, inequality and further recession.

There is no doubt the Tory prescription for the economy and for working people is worse, but the problem for Labour is to the electorate it sounds like being asked whether they’d preferr to be stabbed or shot. Neither is palatable so the plurality of the electorate will no doubt do what it did in the last two elections: vote for neither.

The point of all this is to say that whatever the 2009 Q4 GDP figures bring, they will probably only be a false dawn, since the economic policy of all major parties seems determined to exacerbate the crisis.
But even without the economic incompetence of the political elite damaging the economy, UK capitalism is very much at risk due to its own internal problems.

The UK banks remain the most exposed in the world to US liabilities. Many US banks remain are vulnerable to the ongoing housing crisis, with delinquencies rising to unprecedented levels – one in eight US householders were either in arrears or being foreclosed at the end of 2009. This is driven by the high levels of unemployment in the States, with the U6 rate (which also includes involuntary part-time workers and marginally attached workers) still above 17%. Long-term unemployment is also at a record high with 4% of the US workforce out of work for more than 6 months.

If a further downturn in the US occurs then the risk of further UK banking collapse could not be excluded – and could any future Government possibly afford the sort of bailout needed? Politically, could it survive while cutting public expenditure?

But the housing crisis is not just of concern across the Atlantic. Here in the UK the chronic housing shortage has meant that prices have not declined as far as some predicted and many first time buyers might have hoped. Meanwhile all political parties are keen to freeze public sector wages, in a year when inflation is likely to top 4%. This contradiction cannot be sustained, and there will inevitably be calls for industrial action as living costs shoot ahead of pay settlements.

Whichever Government is elected will defend this madness in the name of cutting the deficit. By attempting to defend pay and jobs, workers and unions will be labelled unrealistic, and even greedy.

Yet the reality is the deficit is not actually a problem . . . relatively. Despite the fact that the Tory press screams ‘crisis’ preceded by ‘deficit’ on a regular basis, a massively unreported fact is that the UK has the smallest deficit of any G7 nation.

This is because New Labour has sought to fund so much of its public sector investment off the books – through PFI schemes and the like. The problem of New Labour’s economic alchemy – investment with no debt – is that, like regular alchemy, it doesn’t work.

When the PFI company collapses, all that debt suddenly transfers to the public finances, as happened with Brown’s PPP on the London Underground. As the last 12 years of PFI unravel so the UK debt will balloon or deep cuts will have to be made.

So what is a socialist response to the deficit? Firstly there is the £125bn of tax going uncollected through non-collection, evasion and avoidance. If only the Government would invest in HM Revenue & Customs, and legislate to close the loopholes then a fair chunk of this annual loss could be reclaimed.

If only one-sixth of this total could be reclaimed each year then that would halve the deficit within four years – without a single job or programme cut or a single salary frozen.

If a socialist government then wanted to make investments then some simple reprioritisation would free billions: cutting Trident, ID cards, ending the inefficiency of rail franchising, and scrapping the FireControl Project. It would also use public ownership of banking and other industries to generate a surplus to the Exchequer.

Since there is no short-term prospect of such a Government, this crisis is only going to deepen. The probably temporary emergence from recession will be a false dawn before a renewed and deep economic and political crisis takes hold.

*This article appears in the February 2010 issue of Labour Briefing

Vulnerability of UK economy cannot be under-estimated

The UK economy has now returned to growth, albeit moderately, following the longest period of recession on record (six quarters) in which the UK economy contracted by 6.1%.

John McDonnell MP, LEAP Chair, said:

"The confirmation that the UK has emerged from recession is of course welcome, but the fragility of the economy and its vulnerability to a 'double-dip recession' cannot be under-estimated.

"Harsh public spending cuts and job losses would risk sending the UK into a prolonged recession, with the human misery of mass unemployment, poverty, and homelessness. This would be the nightmare of a Tory government."

Andrew Fisher, LEAP Co-ordinator, said:

"The recession is not over for the 2.5m unemployed and the 1.8m families waiting for housing. Nor is it over for the millions more who have reduced their hours or taken a pay cut during this recession.

"The risk of a relapse into recession is acute – with the UK banks still exposed to the US housing market, and consumer demand here weakened by unemployment, pay freezes and short-time working."

Unemployment down, Employment down

A complex picture on unemployment was unveiled in the statistics released today for September to November 2009. Total unemployment on the LFS measure dropped slightly by 7,000.

The claimant count of unemployment (those actually claiming Jobseeker's Allowance) fell by 15,200 - which suggests the increasingly stringent conditionality and compulsion is taking its toll on jobseekers.

However, the number of people in work fell by 14,000 in the quarter (to 28.9 million), so where have all these people gone? If 14,000 fewer people are in work and 7,000 fewer are out of work then that's 21,000 missing people . . . surely?

The answer lies in the number of people classed as 'economically inactive', which includes people who have taken early retirement or have given up looking for work. This increased by 79,000 in the quarter to reach a record high of 8.05 million, 21% of the working age population.

But behind the unemployment figures, another picture is emerging - those on involuntary short-time working (i.e. those who have cut their hours to stay in work). Today's figures revealed a fall of 113,000 in the number of people in
full-time jobs, to 21.21 million, compared with a 99,000 increase in part-time workers to 7.71 million.

Falling employment and increasing short-time working means less disposable income which is bound to filter through into tighter consumer spending. Likewise, average pay increased by 0.7% in the year to November 2009, while inflation hit 2.9% in December - further hitting the value of wages in people's pockets.

People falling out of claimant eligibility into the grey or black economy also means tax revenues are hit.

The true picture revealed today is not one of an economy that has 'turned the corner' or is 'on the up', but of an economy that is incredibly fragile.

Is Britain turning Japanese?

Graham Turner

A defunct banking system, spiralling government budget deficits and an economy mired in recession. This description of the UK economy sounds all too familiar to those who followed Japan closely during the 1990s. The parallels are indeed troubling.

Japan tried to spend its way out of trouble, incurring record budget deficits that were buttressed by quantitative easing. A brief recovery from 2003 onwards was cut short by the credit crunch. And now, the Japanese government’s public debt burden is racing towards 200% of GDP, nearly three times that in Britain. Deflation has intensified to fresh highs, and wages are being slashed. Property prices across Japan have continued to slide uninterrupted for nearly two decades.

It is a sorry state of affairs that reflects a series of policy mistakes, which are being repeated not just in the UK but also in the US. There is time for policy makers to reverse tack. However, there is a real danger that the 'Anglo Saxon' world will be blighted by the Japan economic disease for years.

For years, Japan was dismissed as an idiosyncrasy by Western commentators. Many claimed the country’s problems were unique and that 'it could never happen here'. Some even revelled in the sudden downturn in Japan's fortunes. The remarkable rise of Japan from its defeat at the end of the Second World War had left many in awe. The spectacular growth of Japanese industry and the world domination achieved by so many of its leading companies had been viewed with considerable envy.

When Japan's bubble burst in early 1990, the Bank of Japan was slow to cut interest rates. Japan's central bank had become obsessed with the spectre of inflation and it failed to cut interest rates quickly. The threat of a deflation spiral was completely overlooked.

Frustrated by the Bank of Japan's inaction, the Japanese government responded by trying to reflate through demand management or Keynesian policies. Virtually every fiscal policy option was tried in a bid to end the decline. The first emergency supplementary budget was introduced in the spring of 1992. A total of ten emergency budgets had been crafted, worth a massive ¥124.6 trillion before Prime Minister Junichiro Koizumi came to power in April 2001, calling a halt to the great ‘Keynesian’ experiment. Large sums were pumped into building new roads, bridges and dams to keep construction companies in business.

But it was all to no avail. No matter how hard the politicians tried, the economy would only respond for a short while before slipping back into recession. The failure of fiscal policy to reverse the decline did not deter them. Politicians reasoned that if they did not try, the situation would be even worse.

The experience of 1997 in particular convinced many that the government had no choice but to keep incurring record budget deficits, otherwise Japan would slip further into difficulty. The tax increases of that year – the consumption tax (similar to VAT) went up from 3% to 5% – were followed by an alarming dip in the economy. The decision to tighten fiscal policy was blamed by many for pushing the country back into recession.

It is an argument peddled by Richard Koo in "The Holy Grail of Macro Economics", a book cited by many commentators today in defence of fiscal profligacy. His analysis is wrong.

A number of economic indicators suggest that the Japanese economy was in trouble well before the tax hikes took effect. And significantly, Japan suffered the first of five major bankruptcies in the life insurance industry. The failure of Nissan Mutual Life Insurance in the spring of 1997 caused people to panic, pushing the savings rate up sharply. The South East Asian crisis then struck. But none of this gets a mention in Koo's book, which has become the bible for those advocating relentless fiscal stimulus to keep the economy on life support.

Koo and many others also cite the 1930s to support their assertion that big budget deficits are necessary for an economic recovery. Historical evidence does not support their case. The primary tools for reversing the Great Depression were an aggressive monetary policy combined with extensive restructuring of the banking system. The US economy turned up in 1932 in response to quantitative easing. Bank recapitalisations in the spring of 1933 then added momentum to the recovery. The War Loan Conversion in the UK, a similar policy to quantitative easing, was critical in turning the tide in the UK. Abandoning the Gold Standard in both countries helped too.

But the role of fiscal policy was secondary. The budget deficit rose to a peak of just 5.1% of GDP in the US and 5.0% of GDP in the UK, during the early 1930s. The contrast with today is stark. On current projections, the US administration may run a deficit more than double this in financial year 2010. The UK is on track to run a deficit of more than 13% of GDP this year.

Too many economists and politicians have invoked Keynes to justify the aggressive use of fiscal policy, without realising – or admitting – that this was not his prescription. For much of the early 1930s, his time was devoted towards the correct debt management policies that would support a recovery. Keynes was first and foremost a monetary economist. His work on liquidity preference and the difficulty central banks faced getting borrowing costs down when asset prices collapse were the most important of his many practical contributions to economic policy during the early years of Great Depression.

But much of this was overlooked during the post-war era. Keynes was cited by those who wished to promote fiscal stimulus to drive economic growth, while ignoring many of the underlying structural problems, including the persistent downward pressure on wages that ultimately reared their head during the credit crunch.

The Bank of England would rightly argue that its aggressive use of quantitative easing has indeed adhered to the 1930s textbook. Even if the budget deficit has been allowed to rise far beyond that seen in the early 1930s, extensive buying of gilts has produced a powerful monetary response that should, in theory, see the economy emerge from recession in the fourth quarter of this year.

Adam Posen, a recent recruit to the Monetary Policy Committee, gave an articulate defence of quantitative easing in a speech at City University last month, rightly admonishing critics who warn that 'printing money' will inexorably lead to higher inflation. With wages being squeezed so hard, a resurgence of inflation remains a distant prospect. Even though the headline CPI may rise above 3% early next year, this is very modest given the scale of sterling’s decline since 2008.

However, Mr. Posen did also highlight the limits of quantitative easing in an economy like the UK, where too many of its banks are too large – and broken. The UK may be a 'world leader' in international finance but, Mr. Posen warns, the banking system is ill-equipped to support companies that do not have access to capital markets. Quantitative easing works by driving bond yields down, both for the government and for companies. Buying government debt – or gilts in this case – has a very direct impact on yields, if done on a sufficient scale.

GFC Economics has been vocal in its support for quantitative easing. Indeed, when our book The Credit Crunch was published in June 2008, the warning was explicit. "There is only one monetary policy option that is likely to work at this late stage. That is quantitative easing".

When the policy was finally unveiled in March this year, we argued it was necessary, but it would not be a panacea. Two risks were apparent. Borrowing costs might fall, but because the banks were so weighed down by non-performing assets, the recovery might still be slow. Mr. Posen gave a good critique of the structural problems within the banking system that any incoming government will need to address next summer.

The second problem remains entwined with the first. The US Federal Reserve (Fed) has plainly not learnt from the 1930s. The Fed chair, Ben Bernanke, has been widely touted as an expert on the 1930s, but closer inspection of his academic work shows a limited understanding of monetary policy during this era, and in particular the role of quantitative easing.

The Obama administration has failed to address the foreclosure crisis too. The latest National Delinquency Survey in the US made for grim reading. By the end of September, one in eleven homeowners with a mortgage was either in the process of being repossessed, or seriously in arrears (more than three months).

Despite repeated bailouts, capital injections and tax-subsidised incentives, the homeless crisis is intensifying. The banking system is failing to support a recovery in the US too. Real GDP may have risen in the third quarter, courtesy of tax giveaways, but the US faces an economic and political crisis in 2010 if President Obama does not tackle the housing debacle.

That is perhaps ironic, as critics of Japan often claimed banks were too slow in recognising their losses, which exacerbated the deflation spiral during the 1990s. By contrast, it is claimed that the losses have been acknowledged sooner in the UK and US. And yet, credit is still contracting in both countries. Owning up to bad debts does not automatically presage a recovery, if banks are not willing to lend and are busily defaulting on borrowers: in a deflation spiral that simply creates more bad debts. And the UK banks may have more nasty surprises in store for the UK taxpayer, if property prices in the US – commercial and residential – continue to slide next year.

Alternative avenues to get credit flowing are needed if the UK is to avoid a double dip. The current Labour government is trying to inject more competition in to the banking sector, allowing new entrants, but these are long term solutions to a chronic over-concentration of the finance industry – which it has long supported. State backed, democratically accountable institutions offer an alternative route. But again, time is of the essence.

Ultimately, the UK government needs to recognise the role it can and should play as the major shareholder of RBS and Lloyds/TSB, and forget trying to prepare these banks for an early return to the private sector. The banks are currently being run on commercial lines. Shrinking balance sheets and raising margins is the inevitable private sector response to a credit crisis. But more direct control of these institutions might allow the flow of credit to smaller and medium companies to resume, putting the economy in better shape to withstand a double dip in the US, and a necessary tightening of fiscal policy in the UK.

*The LEAP Red Papers 'The Cuts', available to download and discuss in full.

Cross-Party consensus on cuts will doom UK to more recession

Ahead of Wednesday's (9th December 2009) Pre-Budget Report, LEAP has published its latest Red Papers: The Cuts. The papers provide an alternative to the cross-party consensus on public sector cuts and show the damage that could be wrought by the cuts agenda.

John McDonnell, LEAP Chair, said:

"The effect of the scale of cuts being suggested in the Pre-Budget Report, and by opposition parties, would mean horrific cuts in vital services and more unemployment. They offer no solution to the economic crisis, just cutbacks in public spending not seen since the 1930s.

"Yet none of the main political parties is willing to look at a serious increase in the tax take – either by increasing redistributive taxes or tackling large scale tax evasion and avoidance."

Andrew Fisher, LEAP Co-ordinator, said:

"The finance sector that brought the global economy to its knees in 2008 and 2009 will be written out of the story in 2010 as a new consensus solidifies among the Westminster elite that the real crisis is public sector debt.

"This is an economically illiterate consensus which will only serve to entrench recession and wreak misery on millions as people lose their jobs and public services are cut. Any solution must tackle the causes of this crisis, and the public sector did not cause it."

Download the LEAP Red Papers: The Cuts

LEAP is a collective of left economists that publishes pamphlets and reports, organises conferences and blogs regularly on economic issues from a left-wing perspective. The attached ‘Red Papers: The Cuts’ published today contain contributions from Graham Turner, Gerry Gold, Jerry Jones, Andrew Fisher, Richard Murphy, Dave Wetzel and John McDonnell MP.

UK in deepest recession on record

GDP figures issued by the Office for National Statistics (ONS) yesterday showed that the UK economy is still in recession, after shrinking 0.4% in the three months to September 2009.

This means the UK economy has been contracting for 18 months, since March 2008 - the longest period of recession on record. The UK economy has now contracted 5.9% since the beginning of the recession.

John McDonnell MP, LEAP Chair, said:

"The recession continues to bite. In the real world people are losing jobs and experiencing increasing levels of poverty and hardship.

"The Government can no longer sit on the sidelines as spectators. It needs to take a more interventionist stance: nationalising the banks, and investing in manufacturing."

Andrew Fisher, LEAP Co-ordinator, said:

"Talk of recovery has been premature. The bailouts have worked to restore stock market confidence and bankers' bonuses, but the real economy is still suffering: unemployment is rising, homes are being repossessed, and wages are being suppressed. For most people, recession is going to be with them for a long time to come."

Who pays for the crisis? When Labour was Labour

Flashback to sixteen years ago: Labour was under the leadership of John Smith, and one Gordon Brown was one year into being shadow Chancellor of the Exchequer. The UK was in recession and Labour knew who should pay for it: the rich, and big corporations



Labour was also witty and radical enough to attract Stephen Fry and Hugh Laurie to appear in the party election broadcasts.

Certainly beats Brown gurning on Youtube and Darling telling the public sector it'll be cut and privatised with pay frozen

Breaking the consensus on cuts

At the Labour Party conference, LEAP and the LRC will be handing out a flyer-briefing 'Cutting our way to defeat? There is an alternative'. Read more about this and download the flyer from the LRC website.

On Sunday, as Labour Party conference (well, rally) kicks off, so does the Jobs, Education, Peace demo supported by PCS, NUT, UCU, NUJ, Stop the War, Right to Work and Unite Against Fascism. Mark Serwotka, PCS General Secretary, will tell the rally:

"The main political parties have forged a damaging consensus on public sector cuts when it was the greed of the City that caused the financial crisis."

Quite right. The demo is also on the front page of today's Morning Star under the heading 'Lobby Labour to save our public services'.

ILO G20 report, and the UK

The ILO has published a report in advance of the G20 summit in Pittsburgh later this week. The report, Protecting people, promoting jobs: A survey of country employment and social protection policy responses to the global economic crisis, compares measures taken by 54 countries in the wake of the global recession. It makes interesting reading.

Apologies for being a bit nationalistic, but here in short is what it shows about the UK:

• UK unemployment is slightly below the G20 average of 8.5%
• However, UK unemployment has risen more quickly in the last year than on average: up 38% here, compared to the average of 29.6%
• We are one of the select few countries where manufacturing has fallen more than 10% in the last year - alongside the US, Spain and Canada
• Of the countries that have had similar declines in GDP to the UK (i.e. more than 4%) only Spain has also had such a "sharp" increase in unemployment. Germany, Italy and Japan have all managed to stop job losses rising so quickly with comparable GDP drops.

The report also shows that many countries have done more to expand welfare programmes: for instance France, Germany, Italy, Netherlands, Hungary, Japan and Canada have all increased the coverage of unemployment benefits - Canada, the US and the Czech Republic have all increased the value of unemployment benefit; Japan and the Netherlands have introduced measures to protect migrant workers.

My favourite graph though is on page 20 of the report about comparable fiscal stimulus packages for 2008-10. Here the UK is well below the average, committing only 1% of GDP, compared with over 1.5% in Denmark, Germany, Finland, Sweden, New Zealand and Spain; and over 2% in Canada, Japan, Australia, the US and South Korea.

Why is it, despite Brown's modest press briefings at the G20 in London, that the UK cannot do more? It might be to do with the massive debt from our dodgy banks which were deregulated under Brown's chancellorship, and bailed out at huge cost under his Premiership.

The Credit Crunch – Who Pays?

Graham Turner

The sharp rally in stock markets since March has put a spring in the step of bankers. But unemployment continues to grind higher and the spectre of a full frontal assault on public sector workers looms. The question of who pays for the credit crunch now dominates the headlines.

In essence, all three major political parties believe that public sector workers should bear the price for a huge rise in the government's borrowing. The economy may have been stabilised, but the hit to the public purse has been unprecedented outside of war.

On current projections, the Chancellor may have been too optimistic when he rocked the House of Commons in April, announcing a projected deficit of £175 billion or 12.4% of GDP for the current financial year. The latest data for August show the moving annual total has already risen to £127.3bn. The public sector finances for July were particularly dire.

The best approach to evaluating the data is to consider the annual change in £ terms. July showed a rise in the deficit of £13.0 billion compared with a year earlier. The previous record decline was set in January this year, but that showed a comparatively modest increase in the deficit of £8.5bn on an annual basis.

The deterioration in July was significant because this is seasonally an important month for tax revenues. If the 15.8% y/y drop in tax revenues is repeated in January next year – another big month for the government coffers, the Treasury may be forced to revise its forecast for the deficit higher, to 13.0% or 14.0% of GDP.

With Gordon Brown's reputation for prudence in tatters, the door is wide open for the Conservatives – and the Liberals should they join in a coalition government – to launch savage cuts on public services far beyond those seen under Thatcher, or following the IMF bailout of 1976.

The public sector deficit is unquestionably out of control. But the right wing media and its political allies have been very successful in convincing the wider electorate that public spending is the culprit.

An objective assessment of the data suggests otherwise. During the first five months of the current financial year, tax receipts have fallen by an average of 11.4% y/y (in £ terms). That is significantly worse than the 6.5% y/y decline expected by the Treasury for the full year, set out in the April budget.

By contrast government spending is rising by less than expected. So far, its has climbed by an average of 5.3% y/y (again, in £ terms) compared with a Treasury forecast of 7.7% y/y for the full year.

And it is hard to equate this increase in spending with the media image of waste and profligacy in the public sector. In real terms, it represents a rise of 3.3% y/y, a remarkably low increase given the inevitable pressures on social security payments, in response to rising unemployment.

Indeed, it is quite possible that the ratio of public spending to GDP will be less than the 43.1% projected by the Treasury, and may only be a touch above the 42.3% recorded under Thatcher, during the early 1980s' recession.

Furthermore, it is worth comparing the Tory years from 1979 onwards, with the record under New Labour. The ratio of public spending to GDP has been exactly the same - 37.1%, even with the Treasury's forecast for a rise to 43.1% included.

Much of the onslaught on public sector workers reflects a belief among the right wing press that the UK has become a high tax country. Again, the hard evidence suggests otherwise. Between 1979 and 1997, the ratio of tax revenues to GDP averaged 40.2%. Since then, it has averaged 37.5%.

Unequivocally, the Tories are the party of high taxes. Indeed, the Treasury’s projected tax revenues for this year - just 35.1% of GDP - will be lower than under any year between 1979 and 1997. Furthermore, if the data for the first five months is any guide, the final figure could be around 33.4%. The credit crunch will have indeed turned the UK into a low tax economy.

But we should not expect the public sector deficit to fall quickly even if the economy were to recover. The collapse of corporation tax receipts in particular is not a one-off or a temporary response to the credit crunch. The ability of banks and companies to roll forward their losses implies there may be a structural gap in tax revenues that persists for many years.

US investment bank Merrill Lynch provided a rare insight into this problem in August last year, before it was subsumed by Bank of America in the panic that followed the collapse of Lehman Brothers. In a regulatory filing last year, it admitted that $29bn of losses sustained on subprime mortgages in the US were being routed through its London office. According to the Financial Times, the bank was therefore "unlikely to pay corporation tax for 60 years" - even if it returned to profit levels reached at the height of the boom.

It is clear from any objective assessment of the data that new sources of tax revenue need to be found to fill the gaping hole in the public sector accounts spawned by the credit crunch. Higher income taxes are not the only answer. Companies need to be taxed if they want to do business in the UK. They can try and relocate their headquarters to Ireland, Switzerland or the Cayman Islands. But they cannot physically remove their entire operations. So they need to be taxed on the level of business or turnover. Companies need access to the UK market to sell their goods, and they should not be allowed to operate here if they are not prepared to pay their way. Economically and morally, it is wrong for public sector workers to pick up the tab for a crisis they did not create.

* Graham Turner's new book No Way To Run An Economy, published by Pluto Press is available from Bookmarks Book Shop, price £12.99