22 Dec 2014

Still the Best Brief Explanation of the Financial Crisis

Richard Koo sums up the problem in Japan which is exactly mirrored in present day UK and many other countries, all in less than 10 minutes.

And incidentally he also explains why concentrating on the current account deficit is detrimental to the economy at this stage.

8 Dec 2014

Credit Bubble 2.0

The various rebel economists are all talking about a return to rising rates of household debt. Even the Independent picked up on it (George Osborne’s deficit reduction plan requires unprecedented binge in personal borrowing. 4 Dec 2014). In any cases the warning bells are sounding that private sector debt is no longer falling.

John Ficenec, Questor Editor, writing in the Telegraph:

Consumer spending during the past five years has heroically dragged the economy from brink of disaster despite falling real incomes. Retailers now face the horrifying prospect that having maxed out credit cards and plundered the household savings account households may have simply run out of money in the run up to Christmas.
As we know a build of debt causes a parallel build up of debt repayments. These repayments soak up money that might otherwise be spent in the economy. Low demand means continuing low investment (and hoarding of cash). And so on. And at some point there will be another tipping point that will send us back into recession. 

6 Dec 2014

The Wrong Metaphor

Just listened to Ann Pettifor (a director of Prime Economics Policy Research in Macroeconomics) arguing with Liam Halligan (economist and Telegraph columnist) on BBC Radio4. It's painful when the presenter isn't really interested in an alternative view and goes out of his way to let the Neoliberal spout the same old lies (couched in the catch phrases that Tories employ so well). Pettifor is not quite a lone voice, but she is getting more exposure than many others. Those who are in the Neoliberal groove find it hard to understand another point of view and thus it's difficult for her to get her point across.

The basic problem is this: the Tories argue that the economy is like a cheque book. Thus when the govt borrows money to meet it's obligations to citizens, they say that this is like a personal loan. Perhaps it is like withdrawing equity from the a home by borrowing against it's value. Tories say that this saddles future generations with a debt burden. This is unfair and perhaps unethical. Therefore, according to Neoliberals, the government must simply reduce spending, start paying back loans as a priority, and aim stop borrowing at all. The result, as Pettifor points out, is that we are moving towards an economy that supports public squalor and private wealth.

But this metaphor is simply wrong. Pettifor tried to get this across, but the presenter's questions were premised on the Neoliberal ideology and he allowed Halligan who was talking in the same terms to get the last word. In fact national accounting is not like household accounting. Unfortunately with constant repetition the wrong metaphor has taken hold and is now being repeated endlessly.

Government's income is a share in the private sector's output - in the form of direct and indirect taxes. Their role is to administer services and facilities on a national scale for the nation: health, education, welfare, pensions, transport infrastructure. In the past this included much more, but with the rise of Neoliberalism governments have stepped back from provision of universal services and utilities like electricity, water, sewerage, public transport and university education.

The cheque book metaphor says that government spends money and gets no economic return - like a family spending money on food and so on. A family must buy food to stay alive, but the money runs out and must be continually replenished. If we find that govt income shrinks - as it did radically in 2008 - then the answer is to cut government spending aka austerity. But the government is not like a family buying food. This is because government spending is always someone's income. For every £1 the government spends it generates £1 + £x of economic activity (called a multiplier). Economists argue over the size of the multiplier effect, but as long as it is not zero it means that government spending is more like a business investing than a family spending.

The most dramatic example of this is post-WWII Britain. With the country in ruins after the war, public debt at 250% of GDP, the government embarked on a massive building and infrastructure program using borrowed money. Not only did the economy flourish for a generation, but Britain paid off it's massive public debt within that generation. That's how national accounting works.

Spending only gets you the thing you purchase. Investing continues to pay dividends over the long term. Benefits can be widely varied. If the government builds new homes that provides not just new homes, but jobs for builders and income for building supply merchants. The builders and merchants spend their income in other businesses, which spend their income and so on. And the government actually gets a percentage in tax at each stage. Each government pound spent has a momentum that enables it to continue circulating for a time. The benefits of public spending are broadly based and benefit everyone, though often indirectly.

Rather than being a burden, taxes are an expression of how much we care about our country and the people in it. It's clear that the wealthy, who think they could go it alone, are happy to denigrate the provision of public services. But most of us are better off if we help everyone collectively. The Scandinavian countries routinely come out on top of countries with the highest standards of living. Far and away the best places to live in Europe. And they have very high taxes and a very high level of support for each other. By looking after each other they prosper and flourish. It ain't rocket science.

The trouble with austerity is that government spending is a significant source of income for the private sector. So at a time when the private sector is suffering a drop in income, for the government to make cuts only worsens the situation by reducing income further. And this reduces the amount of taxes they collect, reducing their income, and tempts them to reduce their spending more. The logic of austerity is destructive of governments role in society and economy. Which is just what Neoliberals want - to be free to exploit everyone and everything for profit. And while the super-rich really can insulate themselves from the world to the extent that they fool themselves into thinking they don't need us, in fact everyone needs everyone else.

Ann Pettifor has pointed out elsewhere that George Osborne in practice acknowledges this and has taken his foot off the austerity accelerator and put money into infrastructure programs. Also the government is presently borrowing at 0% interest (or with inflation so low almost negative interest) and can easily afford to keep on borrowing like this for decades. If it would only borrow a little more to invest in Britain we'd all be better off. Note that the Tory policy for the election is hardcore Neoliberal: promises of more cuts in next parliament. And using the leverage they already have they can sell this to the public as a good thing. Mr and Mrs Bloggs will sadly shake their heads and agree that there's nothing else for it. Because they believe the big lie about government spending.

Ultimately we come back to the scale of private debt in the wake of deregulation of the finance industry beginning in 1971. With private sector debt on the massive scale that we have in the UK (and everywhere in the G20) we're going to see debt repayment and interest payments soaking up any excess income that might otherwise be spent. Household debt, where spending really is like a cheque book, is very high and rising again after a period of falling. House prices rise at something like 400% of inflation, driven by foreign absentee buyers, a chronic shortage of stock, and landlords who know they can make easy money gouging the rental market. But credit card debt is also rising again. We're borrowing against the promise of growth when the forecasts are all for stagnation or worse.

Business on the other hand is stymied by low demand and is not investing, but doing the opposite, i.e. hoarding cash. Or entrepreneurs simply cannot get loans because banks are still not lending (they are still deleveraging after the crazy over-lending of the 1990s and early 2000s).

It's vitally important that someone starts to take apart the lies and talk sense about the economy. Ann Pettifor is a voice of reason, but the message needs political backing. The Greens seem to get it, but they're small-fry and as recent events have shown the political discourse is very easily hijacked. Nigel Farage has dominated the news coverage for months now - and is doing so again. Every time the liberal press attack him he seems to become more popular. And the right-wing press know that his message on Europe and immigration resonates with the electorate. The other political parties lurch into announcing immigration policies in reaction to UKIP showing that they know this too and making Farage seem more credible. But the Tories firmly control the discussion about the economy and the opposition parties seem to have largely capitulated to them. Even ostensibly the Socialist Labour Party has an openly Neoliberal economic policy (although it has had for 20 years now - Brown was a thorough going Neoliberal) and doesn't seem to be able to counter the mantras that Tories chant. They don't even point out that "hard-working families" is a phrase they coined!

In an ideal world the solution to our problems would be debt relief for households to enable them to spend without more borrowing and without an instant rise in wages (since wages still appear to be falling with respect to prices). An injection of cash at that level - a modern debt jubilee - would prime the economic pump. However, if it led to another credit bubble it would be disastrous. Citizen's need to be weaned off debt. We need to return to the wisdom of previous generations and not get into personal debt. Business need to see a definite and sustained increase in demand before they will invest their hoarded cash.

It's so depressing watching our politicians game the system - use propaganda techniques to control the narrative all with the aim of holding on to power. They all do it, but some are better than others. Unfortunately Neoliberal narratives are close to being normative nowadays. Britain is fast becoming the nation that doesn't care about anything except facilitating the enriching of oligarchs. Britain used to be the country where you could pop into the neighbours to borrow a cup of sugar. Now it's the country where you probably neither know nor speak to your neighbours and don't care about them or anyone outside your own circle. We are the country were the solution to beggars on the street is to make begging illegal.