Wednesday, 6 June 2012

Don't keep calm and carry on. A guide to the economic crisis for the perplexed by the mildly confused

The rasping cough the world has been suffering from for four years now threatens to turn into pneumonia. There is a double dip recession in Britain, the European debt crisis is coming to a head, both the US and China are running out of steam economically. But the range of remedies to address the crisis is either ignored or misinterpreted by mainstream media. So here is, an admittedly biased but more informative, guide to the global economic meltdown and what different people want to do about it

1 The Austerians

Like the Klingons but much worse. Leading austerians are Angela Merkel, David Cameron, George Osborne, Christine Lagarde and Spanish Prime Minister Mariano Rajoy. The fundamental idea is that government deficits, grossly exacerbated by the huge, and ongoing, bail-out of the banks, estimated at $18 trillion worldwide in 2009 by the UN, need to be erased by cutting public spending on social programmes such as pensions and welfare benefits. The effects range from the extreme, schoolchildren in Greece too dizzy to do PE because they don’t have enough to eat to the more specific targeting of isolated groups, such as the sick and disabled in Britain.

Medical metaphors – involving a medicine that has to be swallowed – are routinely employed, as are appeals to a stoical sense of endurance. The wartime slogan, “Keep Calm and Carry On”, has become ubiquitous in Britain during David Cameron’s “age of austerity”.

But it’s not just about the deficit. As Keynesian economist Paul Krugman puts it, austerians use the crisis rather than solve it. Following the example of Milton Friedman, exposed in Naomi Klein’s book The Shock Doctrine, austerians exploit the economic situation as a way of advancing by huge leaps, their political project. Thousands of enterprises are being privatised in Greece, tax cuts for corporations and the wealthy are imposed in Britain, governments in Spain and Italy are making it easier for employers to sack workers while Conservatives and venture capitalists ache for the same approach in Britain. These are all supply-side policies masquerading as ways out of the economic crisis.

There is a strong element of masochism to the austerians’ approach. Austerity is presented as a “deserved doomsday to the borrowing way of life” in the words of American author Thomas Frank in Pity the Billionaire. The refrain is that a lot of people, especially those in continental Europe with their long holidays, early retirements and generous pensions, need the bracing winds of economic reality. The ghost of Ayn Rand  hovers in the background of austerian proclamations with her worship of billionaires and contempt for the exploiting masses.

Unfortunately for the austerians, the intractable problem of bank debt cannot be wished away. Austerians get into a lather about public debt but are endlessly forgiving about the much larger presence of private debt. (Once David Cameron did try to link the two in a speech to the Conservative party conference in 2011, but his leaked suggestion that people pay off their credit card debt was swiftly forgotten as the realisation dawned that it would completely tank the economy). In Spain, insolvent banks are bankrupting the country. In Britain, overall debt amounts to 469 % of GDP, of which the government’s share comprises only 11 per cent.

But, most significantly for the austerian approach, there is little popularity in enduring horrible tasting medicine if it does more harm than good. A double-dip recession is not a ringing endorsement of austerity. The slippery goal of austerians, “confidence” among employers, is more elusive than ever. Manufacturing confidence in the UK is at a 35 month low.

2 The Keynesians

Keynesians and austerians don’t like each other. But the source of their animus is frequently misunderstood. Each thinks the other side is playing a dangerous game. Austerians believe that Keynesian solutions, increasing government spending and expanding employment through state schemes, are a gross interference with the downturn taking its natural course – in capitalism. To austerians, Keynesians cause the dangerous precedent of using the state to respond to popular demands, and the creation of state enterprises represents an unacceptable form of competition with the private sector.

But to the Keynesians, the austerians, aside from being economically wrong-headed, are playing with fire in a different way. Their insistence on allowing, even fomenting, immense social pain, drags the class nature of capitalism into sharp relief. (see the fourth group, the Marxists). Speaking of the Great Depression, Keynes’ biographer, Robert Skidelsky, put it like this: “If the leaders of capitalism insisted on treating problems of demand as though they were problems of supply, and on screwing down the wages of workers in order to restore profit, then a class war could easily arise which would vindicate Marx’s prophesy.”

Keynesians believe that austerians focus on the long-term is foolhardy because of the suffering it permits in the meantime. “In the long run, we’re all dead,” Keynes famously said. In the medium run, we’re exceedingly pissed off and open to new ideas, he might have added.

Keynesians, it should never be forgotten, want to save capitalism from itself.

Paul Krugman is probably the world’s most famous Keynesian. The Financial Times columnist, Martin Wolf, is also essentially a Keynesian who is scathing about austerity. More populist Keynesian solutions are propagated by the Guardian columnist Simon Jenkins. The economy “needs that old Keynesian salve, money in circulation,” says Jenkins. “If money can be showered short term on banks, it can be showered short term on consumers, whether through benefit handouts, vouchers, tax holidays or scrappage schemes.”

Keynesians believe that the secret of getting out of an economic recession isn’t the manufacture of “confidence” but the maintenance or resuscitation of demand. People spending money in other words. Keynes spoke about the vital role of “effective demand”. Keynesians don’t believe in the efficacy of supply-side solutions and are more relaxed than the austerians about inflation. They think the austerians cherished policy – cutting government spending in a recession – is economic madness.

But, like the austerians, the Keynesians face some intractable problems. They may be winning a not very difficult argument about the wisdom of cutting government spending during a recession, but the Keynesian warhorse “demand” will not prove so easy to get up and running. The reasons for stagnating real wages are deeper than can be addressed by Keynesian one-off pump priming. They comprise the results of the historic domination of corporations and employers and will not be easily undone within this system though they have been masked by record consumer debt.

Secondly, Keynesians are basically right in assuming that public debt is not enormous by historic standards and so continuing government stimulus is not a problem in that sense. But public debt is dwarfed by private debt – corporate and consumer. And Keynesians have no solution to that beyond “refloating” the economy through government spending and intervention so that, in time, in theory, growth returns and fiscal difficulties are gradually overcome. For more on the Keynesian impasse, see category 5, “The Post-Capitalists”.

3 The Left Keynesians

The core ideas of Keynes usually, but not always, go hand in hand with a desire to reform capitalism. This might mean reducing the influence of finance through, for example, a financial transactions (Robin Hood) tax or banning financial products like derivatives. It might entail rehabilitating state ownership or altering the nature of corporate ownership. It might encompass increasing the taxation of corporations, empowering trade unions or reducing economic inequality. Economists such as Ha-Joon Chang, Stewart Lansley, Duncan Weldon and Ann Pettifor sit within this camp. The writer, Thomas Frank, would be a Left Keynesian.

Left Keynesians generally want to reform capitalism without replacing it. Ha-Joon Chang is implacably opposed to austerity but isn’t anti-capitalist. “Despite its problems and limitations, I believe that capitalism is still the best economic system that humanity has invented,” he says.

The policy of new French President, Francois Hollande, of introducing a 20-1 pay ratio in enterprises owned by the French government, is a Left Keynesian policy. As is his plan to introduce a 75% tax on income over 1 million.

For Left Keynesians, the model of what to do in an economic slump is provided by the American New Deal of the 1930s. Then, under the Presidency of Franklin Delano Roosevelt,  banking was regulated by tough new laws, trade union recruiting eased, corporate taxation increased, social security created and 12 million unemployed Americans were put to work through government conservation and cultural projects. Economic growth reached double digits but, significantly, the Depression wasn’t defeated (the slump returned in 1937). What finally put the Great Depression out of everyone’s misery was World War 2.

A contemporary re-imagining of the American New Deal of the ‘30s is the Green New Deal which involves creating thousands of jobs through the formation of a  “carbon army” in order to undertake massive ecological reconstruction.

What is commonly classed as “far left” is frequently Left Keynesian in orientation. The programme of the Greek left-wing grouping Syriza echoes many features of the American New Deal. Syriza wants to create 100,000 additional public employees, re-balance the economy in favour of manufacturing rather than finance, and nationalise banks reliant on state aid.

One of the stand-out policies of the Left Front candidate, Jean-Luc Mélenchon, in the French Presidential election, was a maximum income, a 100 per cent tax on income above €360,000. The maximum income was first proposed by the archetypal Left Keynesian, Franklin Roosevelt, in 1942.

4 The Marxists

We now enter anti-capitalist territory. Marx, unlike Keynes, did not want to save capitalism from itself, although Marxists are not always as anti-capitalist as people imagine. The American economist, Richard Wolff, is one of the most famous contemporary Marxists. He explicitly calls for New Deal type policies in the face of the downturn, such as increasing taxation of corporations and the wealthy and a massive government jobs programme for the unemployed.

But Wolff does not stop there.  He makes a class analysis of society, the very thing that Keynesians fear austerity will make popular. He proposes going beyond capitalism by changing the way production is organised. He wants to “coopertivise” the whole economy, making workers their own bosses, ending the control of economic enterprises by small boards of directors. He envisages a form of economic democracy. The Mondragon collection of cooperatives in the Basque country is frequently referred to by Wolff as a model. Cooperative firms there include banks, supermarkets and educational institutions. Over 83,000 people are employed. The pay differential between the highest and lowest paid is 4.5-1. In the conventional capitalist economy, the pay differential can be 300-1.

Economic democracy would have the effect of ending exploitation in the Marxist sense. Wealth would remain in the hands of the people that produce it. They would receive the “full fruits” of their work as Clause 4 of the British Labour party’s old constitution once put it. One factor in creating the financial crisis – huge borrowing caused by stagnating real wages – would be overcome by this change, as would spiralling inequality.

New Deal, Left Keynesian reforms are not enough, says Wolff, in part because we know from experience that they will inexorably be undone by corporations if the way they are organised is not altered. To introduce reforms without changing the nature of corporations is to ensure their eventual failure.

Whilst Left Keynesians tend to favour traditional, “after the fact” reforms, such as government intervention and  wealth redistribution, Marxists such as Wolff challenge inequality and the control of wealth by small elites at their source.

This is Wolff speaking:

                                                                                                                                          Wolff’s solutions do not convince all Marxists, let alone all anti-capitalists. Some Marxists would say that introducing economic democracy is not a route out of capitalism or a market economy, but merely a different form of capitalism.
                                                                                                                                           However, not all Marxists go as far as Wolff either. They might, in reality, be Left Keynesians. David Harvey, for example, wants political leaders in the West “to get down to doing what has to be done, to rescue capitalism from the capitalists and their false neoliberal ideology”.
                                                                                                                                           5 The Post-Capitalists
                                                                                                                                           Marxists believe in a post-capitalist future, even if many don’t want to do anything until capitalism is sprawled on the floor and ready to expire. The reason for a separate category of “post-capitalists” is that Marxists are usually fixated on who owns and controls “capital” or wealth. Post-capitalists are concerned with wealth but also transcending capitalism because it unavoidably entails exponential growth in a finite world. It is, by its very nature, ecologically unsustainable. Participatory economics and social ecology both envisage post-capitalist societies that have left growth behind.
                                                                                                                                           One post-capitalist economist, Harry Shutt wants to “dethrone the god of growth”. He argues for the necessity of seeking an economic order “compatible with negligible growth for the indefinite future”.
                                                                                                                                          What makes Shutt interesting in the current debate over what to do in response to economic failure is that he believes Keynesianism can’t possibly succeed. A return to growth – and Keynesianism is all about resuscitating growth – is neither possible, nor desirable.
                                                                                                                                          Not possible because debt has grown so large that it is a permanent drag on attempts to revive growth. Accumulated bank debt is the problem that will not go away in Europe, and is bankrupting governments, Overall debt is at record level and it is overwhelmingly private debt. Debt is nearly five times as large as GDP in Britain. Keynesians, to Shutt, have no solution to this mass of debt beyond enlivening the economy through government spending. And that one-off spurt can’t work over the long-term because companies and consumers are too weighed down by debt.
                                                                                                                                           But there is a deeper reason as well. As technology develops, it is accompanied by a decline in the demand for “fixed investment”, outlets for the investment of accumulated profits, that are essential for capitalism to function. “Fixed investment” means investment in tangible products like cars or fridges or steel.  
                                                                                                                                        Thus, in the words of Stewart Lansley, the “money economy” – finance, private equity, acquisition of companies by other companies and which does not need much fixed investment – has become vastly more profitable than the “productive economy”.
                                                                                                                                        With the decline of the “productive economy” comes a parallel decline in the demand for paid labour. This, in turn, impacts upon the ability of consumers to support growth through spending.
                                                                                                                                              “It portends” Shutt writes, “what is coming to be seen as a new industrial revolution, which is rendering market capitalism as obsolete as feudalism was at the dawn on the French Revolution in 1789.”
                                                                                                                                              The logic of this analysis, if correct, is that neither austerity or Keynesianism can work as economic strategies. Keynesianism is the last trick in the capitalist routine. If that doesn’t revive growth, we are entering an unexplored landscape.
                                                                                                                                             The contours of that landscape might be glanced in Spain at the moment, where the economy has collapsed to the point where a quarter of adult population and half of all young people are unemployed. There is growing interest in an unconditional income, paid to everyone as a matter of right. "Brute experience" as Milton Friedman called it, may well prove the mother of invention.