Inflation – what a Hout!

As I write, Britain is bombing a former colony – one of the poorest countries on earth, the scene recently of the “world’s worst humanitarian crisis” according to the UN, which was caused by a war inflicted by the medieval limb-severing Saudi Arabian regime with British weapons. But trying to stop the genocide in Palestine is crime enough to resume the sorties. And they want ordinary people to actively help out with this never-ending war for civilisation!

But pause for a minute and consider the reason for ‘Operation Prosperity Guardian’. The fear is that any continued obstruction to shipping routes in the Red Sea, which accounts for 15% of global sea trade, will reignite inflation, the bogeyman western governments and central banks have been trying to slay for the past two years or more.

I don’t want to minimise the problem of consumer inflation, to give it its proper name, which given that it causes massive rises in the cost of essentials like food involves real misery. This is exacerbated in an era when collective bargaining has been reduced to a rump of the economy so that wages can’t keep up with the price rises.

However, consumer inflation is not the only kind of inflation. Over many years, western countries have also been subject to asset price inflation – basically huge rises in the prices of shares and houses. In Britain, house prices have risen by about 1,000% since the early 1980s. And despite some ups and downs, the stock market across the western world keeps hitting record highs. In America it has enjoyed some of its best returns since the 1880s.

It is a basic axiom of our Thatcherite political mind-set that, in total contrast to consumer inflation, asset-price inflation is not something to dread. Quite the opposite, it is positively benign.

But, as we are now seeing, this is a travesty of the truth.

The inflation we like

So, unlike consumer inflation, the authorities have not tried to fight asset-price inflation. They have, by contrast, endeavoured to boost it at every turn and, if it seems to be flagging, to rekindle it with blatant forms of state intervention (despite the propaganda we don’t live in a ‘free’ market economy).

House prices in Britain have been deliberately stoked by restricting supply. It is a basic law of economics that if the supply of any good is suppressed, its price will increase.  This happened first through Thatcher’s ‘Right to Buy’ policy and was then reinforced by simply banning local councils from building new council houses. More recently, more direct forms of buttressing house prices have been necessary, for example the government’s ‘Help to Buy’ policy which is a simple subsidy to housebuilders.

The rise in share prices was first underpinned by legalising the process of share buy backs, banned in the aftermath of the Wall Street Crash of 1929. This has led to an internally-generated rise in share prices, caused by companies being pressured by their shareholders to ‘retire’ some of their shares, thus increasing the share price and the dividend payments to existing stock-holders. This practice has now become routine in the corporate world – according to economist Michael Hudson, publicly-listed American companies have, since 1985, retired more stock than they have issued.

Since the 2008 financial crisis, share prices have also been massively boosted by the artificial method of (electronic) money printing known as Quantitative Easing (QE). QE works by creating a huge mass of money, and by reducing the yield on government bonds, ‘incentivising’ investors to place it in the stock market or with other assets such as housing, or financing corporate mergers. According to investment manager, Kate Rogers, at venerable asset manager Cazenove, “Quantitative easing certainly stimulated asset markets. The billions that went from the banks to investors to buy the bonds was soon recycled into more attractively valued equities and property-boosting prices.”

This flagrant state intervention, practiced simultaneously in Britain, America, and Europe, is what lies behind the thriving stock market performance of the last decade or more (15% returns compared to an average of 9%). It is nothing to do with a healthy economy pushing up share prices. GDP growth, as we know, has been consistently poor for many years.

Of course, central banks are now pursuing the opposite policy to Quantitative Easing. ‘Quantitative Tightening’ involves selling assets to reduce liquidity in the financial system. This hasn’t (as yet but more on that later) produced a collapse in share prices. The conventional interpretation is that large companies are finally able to stand on their own two feet. But possibly QE under Covid was so huge – the creation of $834 million per hour – that the subsidy is still having an effect.

This is how it feels

The only way in which this asset-price inflation is commonly seen to have a downside is in terms of housing. The enormous rise in house prices – from an average of £26,000 in 1983 to £280,000 today – is regarded as a boon for the majority of people who already ‘own’ houses (or have mortgages on them). They can sit back and see their asset rise in value without having to do anything. But for young people who want to buy their first house – to ‘get on the housing ladder’ in common parlance – it’s a disaster. They frequently can’t even afford the deposit and are forced into permanent renting which, for those who have experienced it, is a distinctly unpleasant and insecure existence, apart from the fact that it soaks up most of your disposable income.

The last time houses were this unaffordable in Britain Benjamin Disraeli was Prime Minster.

However, with the resumption of consumer inflation and the central banks’ response of raising interest rates, the majority are no longer so content. They are, belatedly, seeing at first hand the malevolent side of asset-price inflation. Because house prices, with official blessing, have risen exponentially for decades, mortgages are a lot more expensive. And when interest rates rise above the minute level they have occupied for years, so do mortgage interest payments. This has resulted in huge increases in mortgage payments for many people. More than anything else, this lies behind the haemorrhaging of Conservative support in Britain. The private renting experience is going viral.

The share-owing oligarchy

What has happened to house prices might have its downsides, a defender of the status quo might argue, but surely there is little to object to in shares rising in value, the other main form of asset-price inflation? In fact there is. Undoubtedly some people benefit but the windfall accrues to a very small minority of share owners, including corporate executives who, these days, are all partially paid in share options. The original Thatcherite promise of a ‘share-owning democracy’ is now just a bad joke.

We now live in a resolutely two-track economy in which the stock market prospers while the real economy flounders. But given that rich people, who own shares, largely control the manufacture of public opinion, this experience doesn’t truly hit home. Thus the official opposition can come out with ludicrous non sequiturs like “when business profits, we all do” and are taken seriously.

The share price boom also comes at the cost of spiralling inequality. Since 2009, as the stock market has enjoyed nearly unprecedented gains, the wealth of the top billionaires in Britain has grown by 281%. In 2021, as actual economic activity was mothballed but massive amounts of QE ensured asset prices went skywards, the planet’s wealthiest people saw their balance sheets swell by $5 trillion. In Britain, since the pandemic, in the midst of the cost of living crisis, the number of billionaires has risen by a fifth.

Another trusted method of ensuring share prices go on rising – share buy backs – also damages the real economy. Because often the money companies use to buy back their shares (thus decreasing their number and raising their price) comes from funds that could otherwise be spent on business investment, they work to enrich their shareholder owners at the expense of wider economic health. Anaemic investment in production is a problem all over the western world.

The share price boom is not a win-win situation. It’s more like they win, you lose.

The economic trapeze

Central bankers – those who twiddle the dials of the world economy – are in a real quandary because of the actions of the Houthis. They believed they had, through historically moderate interest rates rises, solved the problem of the re-emergence of consumer inflation, as prices were heading downwards. They could then return to their prime function – ensuring that asset prices go on rising.

However, if global trade is impaired because of attacks on shipping in the Middle East, consumer inflation may return with a vengeance. If that happens, central bankers might feel they have no choice but to increase interest rates again, risking pricking the multi-asset bubble they have so carefully cultivated for the last decade or more.

It is a little appreciated fact that the 2008 Global Financial Crisis was sparked after a rise in interest rates. In America, they rose, incrementally, from 1 per cent in 2003 to 5.25% in 2007. Really large rises in interest rates do cause recessions, as evidenced by the experience of Britain and America in the early 1980s when, to prepare the ground for the Thatcher and Reagan ‘revolutions’, rates were increased to 17/18% in full knowledge of the carnage that would – and did – follow.

Given that western economies are much more indebted than they ever were when John Lennon was murdered, much more modest rises could have a catastrophic effect. 

According to economist Radhika Desai, if the Federal Reserve raises interest rates to “required levels, the US can expect a recession that will make that of the 1980s seem like a boom”. The alternative to not doing so is, if the projected effect on world trade comes to pass, the return of chronic (consumer) inflation. “Both paths,” she says “will damage working class incomes and wellbeing”.

Other People's Money – The Degeneration of Thatcherism, part two

 And so we move on to part two of the chronicle of the Conservatives’ remarkably profligate attitude towards other people’s money, despite what Margaret Thatcher may have led you to believe in 1978. Here is part one. 

This revisionism is not solely directed at Conservative hypocrisy – tempting as that may be – it also exposes the barren hulk of the current Labour party, which promises to transport us back to the halcyon days of early David Cameron. Another of Margaret Thatcher’s famous lines was to describe New Labour as her greatest achievement. “We forced our opponents to change their minds,” she said. And we haven’t stopped paying for it since.

Housing

If any part of British society bears the unmistakable imprint of Thatcherism – and almost all do in some way – it is the housing sector. The policy of the ‘Right to Buy’ – allowing council house tenants to buy their homes at discounted rates – undoubtedly came to embody the Thatcherite promise of creating a ‘property-owning democracy’. In awarding her the Presidential Medal of Freedom, the elder George Bush commended Thatcher for putting “private roofs over British heads”. But the policy, because it also involved preventing councils from replacing the stock they had to sell, had one consequence that was the polar opposite of owning your own property – having to rent it.

The number of private renters has more than doubled since the turn of the century and that doesn’t include those renting from housing associations. This change was enabled by classic Thatcher-era legislation, the 1988 Housing Act, a deregulatory bonfire which introduced short-term tenancies, allowed landlords to charge whatever rent they liked, and got rid of any security of tenure for tenants, permitting them to be evicted with only two months’ notice. It presaged a huge change from the post-war social democratic settlement which was characterised by a mix of owner occupation and council housing. “The private landlord, increasingly associated with the rack-renting of slums was nearly eliminated”, wrote historian David Edgerton of that period.

But this brave new (old) world which saw the triumphant return of the private landlord and the phasing out of council housing had consequences: the number of private tenants who couldn’t afford the rent, and thus became reliant on financial assistance from the state, shot up. The amount spent on housing benefit increased from less than £2 billion to £24 billion in 2015/6 and now stands at over £30 billion a year. This is a public subsidy to landlords to make up for the fact that the level of rent they are charging is beyond the capacity of their tenants to pay. True Thatcherite Conservatives like to present the enormous housing benefit bill as indicative of out-of-control welfare spending that needs to be pruned back but, in fact, it is a direct result of their deliberate gutting of the post-war social order.

Speaking of which, the Cameron/Osborne administration did successfully, although temporarily, reduce the size of the housing benefit subsidy. Naturally, this was through eliminating tenants’ entitlement to it – through denying it to under-21 year olds and introducing a benefit cap – rather than reducing the need for it by cutting rents. Curiously though, a little publicised feature of the Conservatives’ 2016 Welfare Reform Act did indicate the financially sensible nature of the latter approach. ‘Social’ Landlords – i.e. local councils and housing associations – were required to reduce rents by 1% a year for four years. According to a House of Commons Research Briefing, “of all the measures implemented to date, the requirement on social landlords to reduce rents …. has achieved the highest level of saving.”

Innocently, you might think therefore that such a policy of rent capping should be applied to the private sector, where rents, the number of renters and the housing benefit subsidy have all mushroomed over the last 30 years. But such an idea doesn’t factor in how the Conservatives are the party of asset owners, whose interests – even if reliant on a huge state subsidy – must be protected at all costs. Rent control, if applied to the private sector, seems to cause an irrationally vituperative reaction among Conservatives. Friedrich Hayek, Margaret Thatcher’s favourite philosopher, described the policy as “deadly”. More recent adepts have condemned it as almost as devastating to a city as bombing it.

At the other end of the scale, the Conservatives have subsidised the deposits and mortgage repayments of first time home (usually flat) buyers through the Help to Buy scheme launched in 2013 which has so far cost £21 billion. Aside from artificially raising house prices, and thus benefiting housebuilders like Taylor Wimpey, the scheme has left recipients high and dry after the huge rise in interest rates, and thus mortgage interest payments, following the Truss debacle. But such is the Conservatives’ obsession with home ownership, seen as such an indelible part of Thatcher’s remodelling of British society, they are prepared to move heaven and earth –  including their own allegedly free market ideology – to massage the optics.

The Economy

The Conservatives did not, it should be said, instigate the huge state bail out of the banks that the British government felt it had no choice but to pay following the 2008 financial crisis. That was the prerogative of the last Labour government. But market fundamentalist Thatcherite ideology – convinced of the inherent wisdom of allowing those at the top of society maximum leeway – was certainly in attendance in spirit.  And the Sunak administration is pursuing the very sensible policy of removing the regulations that Cameron introduced as a sop to the prevailing zeitgeist that something had to be done to prevent 2008 from playing out again. I’m sure it’ll end well.

What can be laid at the door of Thatcher’s children, however, is subsequently using the exclusive money generating power of the state to massively augment the wealth of the richest in society. This was through the capital creating policy of Quantitative Easing (QE). Since 2008, QE has been deployed three times – immediately in response to the financial crisis (Labour), after the Brexit vote (Tory) and then again in the economic panic that ensued post-Covid (Tory) – totalling £895 billion in Britain alone.

QE works by creating a huge mass of money (so-called fiat money), that naturally seeks investment opportunities. The stock market is one of those investment outlets, although the booms engineered are decoupled from traditional market reasoning – the backing of companies because they are thought likely to be successful in the future. The resultant “explosion in billionaire wealth” – the cumulative wealth of the UK’s top 10 billionaires has increased by 281% since 2009 – therefore cannot be explained solely, or even mainly, by the natural workings of the market. During the pandemic for example, economic activity and growth plummeted but the number of UK billionaires rose by a fifth. This huge wealth – a billion is a thousand million – has been given a stupendous boost by positively Stalinist state intervention, carried out by, among others, devoted Thatcherites.

It should also be pointed out that Quantitative Easing directly contradicts one of the core tenets of original Thatcherism, that of monetarism. Developed by the American ‘free market’ economist, Milton Friedman, monetarism held that, to combat inflation, the supply of money should be strictly controlled. Doubtless the theory was honoured in the breach by ’80s Conservatives, but from the 2010s government policy around the world has simply laughed at it. Whether the inflation we are now experiencing has something to do with massive increases in the money supply – á la Friedman – is a moot point. In the last decade, notwithstanding regular doses of QE, the main threat was deflation, not inflation, suggesting that the capital boost of QE had stayed within the financial system. Possibly the last tranche of it – the creation of $834 million dollars an hour worldwide for 18 months – was so huge that some of it, in line with the official narrative, leaked out. Or maybe support for a largely mothballed ‘real’ economy – i.e. increasing the amount of money in circulation but reducing the amount of goods – produced the classic ingredients for inflation. Who knows?

Certainly now, we are seeing the opposite of QE, so-called Quantitative Tightening (QT), on the part of the world’s central banks, along with increases in interest rates. Whether this presages a new financial crisis, which may be unfolding as we speak, is an interesting question. But to even make a dent in the massive inequality caused by the economic intervention of adoring Thatcherites it would have to go on for decades.

Possibly Conservatives would retort that their post-Thatcher predilection for economic intervention does not just help those at the summit of the society but also the many millions at the bottom end. This is through working tax credits which ‘top up’ low or moderate incomes. Tax credits were introduced in America in the 1970s and expanded massively by Bill Clinton. Naturally, this country followed suit, and working tax credits became a core part of New Labour’s welfare philosophy (with emphasis on the working).

Their origin among parties theoretically antithetical to Thatcherism and Reaganism is deceptive, however. In reality, tax credits are another form of state subsidy to vested interests, enabling employers to pay low wages and institute more part-time or zero hours contracts with the assurance that the state will meet the shortfall. They are an essential part of our Thatcherite economic landscape. In 2015, the charity Citizens UK revealed that large retailers, such as Next and Tesco, were costing taxpayers £11 billion annually so that their staff could enjoy “a basic standard of living”. The situation has only become more acute in the interim.

Perfunctory, if high profile, attempts to wean on employers off tax credits, such as Osborne’s higher minimum wage, have not worked partly because they have been accompanied by a never-ending war on trade unions, the one force in society capable of making tax credits unnecessary through compelling employers to pay higher wages. Rishi Sunak’s anti-strike legislation, which permits employers to seek damages for the effect of strikes, will hit what’s left of trade union power, already hobbled, as we know, by archetypal Thatcherism. Tax credits in themselves are hostile to trade unions because if wages rise because of trade union influence, the tax credit level will fall as a result. It is no accident that a country such as Norway, which regards trade unions as social partners, not ‘the enemy within’, and which has a system of sectoral collective bargaining to determine wages, has not introduced tax credits. It doesn’t even have a minimum wage because strong trade unions mean it isn’t necessary. Norway, incidentally, also has a much higher standard of living.

It’s clear that the Thatcherites in Britain didn’t vanquish ‘socialism’ as they claimed they had. They merely changed the beneficiary group.

Covid and Corruption

There is something viscerally enraging about the Conservatives’ fiscal incontinence during the Covid pandemic.  It came after years of justifying taking money away from poor people – through policies like the benefit cap, sanctions and reducing the amount received by sickness claimants by £30 a week – on the grounds that it was only fair to the hard-pressed taxpayer.

But the interests of the taxpayer, allegedly so close to Conservative hearts, were strangely downgraded during the Covid lockdown when corruption and the raiding of the public purse by friendly businesses were rife. Virtually no prosecutions concerning the £5.8 million lost through fraud have taken place despite 30,000 allegations of fraud being reported to HMRC. The same is true of Rishi Sunak’s month-long Eat Out to Help Out scheme, which attracted an estimated £21 million in fraudulent claims from the hospitality sector. This dawdling contrasts with the alacrity that the Conservatives look upon alleged fraud in the benefits system. Permanently staffed hot-lines for the public to report fraud, regular tests for sick and disabled people, and the dispensing of thousands of sanctions to claimants for not upholding their “contract with the state”, have been features of this parallel universe in the UK for years.

In total £4.3 billion lost in fraud during Covid has been written off by the Treasury, prompting one minister in the House of the Lords to resign and accuse the government of “having little interest in the consequences of fraud to our society”.

But far from having little interest in it, Conservatives seem positively in favour of subverting free market ethics when it involves their friends. Michelle Mone, accused of secretly receiving some of the profits of a PPE firm that won large government contracts after she recommended it ministers, became a Conservative life peer in 2015. Altogether, nearly £1 billion in Covid contracts were awarded to 15 companies linked to donations to the Conservative party. It certainly pays to network.

The Conservatives’ alleged concern with getting value for money for the taxpayer is for the birds. The overriding aim is that 1) A narrow elite circle benefit and 2) The cash – otherwise known as other people’s money – finds its way through labyrinthine sub-contracting to the “good hands” of the private sector. Dido Harding, appointed as chair of “NHS Test and Trace” in 2020 is an example. Her lack of medical experience was no obstacle. Known as “an accomplished networker” according to The Times, she went to Oxford with David Cameron, married a future Conservative minister, and rose to become the chief executive of a mobile phone company and a Tory peer. Despite being given an astronomical £37 billion in funding, Test and Trace, reliant on sub-contracting by firms like Serco and consultants paid up to £6,000 a day, was a monumental failure, with more than 60% of those with Covid symptoms not being contacted. By contrast, the in-house teams of the doomed Public Health England and local authorities reached nearly 98% of their contacts. Go figure.

Ubi omnes errabis?

As alluded to earlier, this is not about simple hypocrisy. Arguably most political movements are hypocritical in that they don’t do what they say they are going to. The historical reputation of the Britain and America is that they compelled the rest of the world to accept the virtues of free trade, whereas in reality they were arch protectionists, and in Britain’s case, actually destroyed the industries of competitors through imperialism.

But Thatcherism started out with free market intentions. In its early days it preached the tenets of monetarism and controlling the money supply, sold off loss making industries to the private sector, declared war on trade unions as impediments to ‘free’ employment relations and hiked interest rates (causing a huge recession and remaining unmoved while thousands of businesses who couldn’t survive in the new unforgiving environment went to the wall). Only gradually – through for example contracting out essential public services and bailing out ‘too big to fail’ banks – did it morph into something else. Now the Thatcherites, notwithstanding their free market sheen, are presiding contentedly over a system of socialism for the rich.

Partly this is to do with misunderstanding what conservatism is. Friedrich Hayek, the major intellectual influence on the modern Conservative party, succeeded in reconnecting it to its classical liberal, or ‘old Whig’, philosophical inheritance. According to him, this conservative-liberalism, in contrast to idealistic socialism, had a “low” view of human nature. Hayek famously said that everything would turn out well if everyone behaved selfishly. But this selfishness was meant to exist within the law and the rules of the free market.

But nobody, besides intellectuals, believes in the sanctity of the free market. Many wealthy people will go where they can make even more money and the state, which rakes in and distributes hundreds of billions of pounds, offers that opportunity. The corruption around Covid illustrates the temptations and modern privatisation more broadly relies on the existence of a well-endowed state which can re-distribute taxpayer funds to the private sector. The Conservatives have, for years, been resolutely unforgiving about a ‘something for nothing’ attitude on the part of the multitude. Benefit sanctions, already at an all-time high, are being multiplied still further by Jeremy Hunt. But for the rich this sternness melts like ice left out in the sun. This is because the Conservatives are, and always were, a class-based party and exponents of class solidarity. When Tony Blair declared in 1999 that the class war was over, only one side was listening.

But the degeneration of Thatcherism has deeper causes than just the class bias of the Conservative party. Thatcher tapped into a profound conviction among Conservatives that if burdensome regulations and socialistic rates of taxation were lifted, the result would be prosperity for all and runaway economic growth. This certitude can be traced back to Adam Smith who thought the “natural effort of every individual to better his condition” was so powerful a principle it would carry society to “wealth and prosperity” and surmount ignorant obstacles placed in the way by “the folly of human laws”.

Coincidentally, the UK did – in common with the rest of the world – experience an economic boom in the mid-1980s. Naturally, Thatcherites took this as confirmation of the economic wisdom of their policies, which despite the temporary pain involved, had to be persevered with (actually the pain was probably connected to the ensuing boom, capitalism had always relied on a shake-down of capital value to lay the ground for subsequent growth). In fact, the economic boom of the mid-1980s became lodged in the public mind as the consequence of tough Thatcherite medicine and has endured despite the boom being revealed as a unique event.  Economic growth has declined in every decade since the 1980s, culminating in the present torpor. Real wages are not predicted to return to their 2008 level until 2026 and are experiencing a 3.9% annual decline, productivity is terrible when compared to before the Financial Crisis (0.5% compared to 2.3%), and business investment is anaemic.

But rather than face up to these issues, Thatcher’s children are umbilically attached to the idea that the only solution is more deregulation and tax reductions for the investors. These policies – known as supply-side reforms because they concentrate on those ‘supplying’ investment and employment (or not) – are religiously propagated by many conservatives despite the fact that they have already been implemented, with the results we see before us, for nigh on four decades (the corporation tax rate was 52% in 1981, it is now 19%). Liz Truss, for example, convinced herself that a bias towards redistribution over economic growth lay at the root of poor economic performance despite the evidence pointing in exactly the opposite direction.

One very obvious reason why these questions are not honestly examined, is that it would move into the crosshairs numerous Thatcherite shibboleths, most notably the idée fixe that underperforming economic growth can be palliated by reducing tax rates and irksome regulations on the wealthy. This ‘fix’ seems to be impervious to empirical evidence, though the Sunak administration is finally increasing corporation tax after decades of reductions, hoping no-one will notice that this contradicts a basic tenet of conservative economic philosophy.

As the South Korean economist Ha-Joon Chang pointed out a few years ago, the level of regulation is not a disincentive if there is a prospect of profit to be made. “…. strange as it may seem to most people without business experience,” he wrote in 2010  “businesspeople will get 299 permits … if there is enough money to be made at the end of the process. “In contrast, if there is little money to be made at the end of the process, even 29 permits may look too onerous.”

Why there is in the UK “little money to be made” – with the notable exception of finance and property – is not a question many are eager to ask, especially if it indicts their whole economic strategy which supposedly rests upon the inherent virtue of making money.

Herein lays the explanation as to why Thatcherism has degenerated into a system of socialism for the rich. It’s quite possible – indeed common – to remain ideologically blinkered in the face of evidence showing the hollowness of your ideology. It’s even possible to implement policies, such as corporate tax cuts, that do not have the beneficial effect you say they will. But it’s not possible to ignore the real world consequences of the failure of your economic philosophy. That is why free market Thatcherism has degraded into a swirl of subsidies, bail-outs, phoney privatisations, landlord patronage and plain corruption. They’ve been necessary because the free market hasn’t been able to prosper under its own devices and if you, as a party, represent the interests of asset-holders at the end of the day, they aren’t especially difficult choices to make. And in those circumstances, delving into the ready pile of “other people’s money” becomes irresistibly tempting.

But the remains – what lies at the root of economic failure?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The inability to make half an argument

The startling thing about the death spiral currently engulfing the UK economy is that the medicine prescribed to deal with it – austerity and tax rises on ordinary people – will only make the economic pain worse. And yet they are seen as the only conceivable option.

Jeremy Hunt soberly tells us we must “pay our way in the world” as he ordains £30 billion in spending cuts and £24 billion in tax rises. Meanwhile the ‘Labour’ opposition rules out taking “risks with public finances” and or “getting its big government cheque book out”. Given that Hunt’s public spending cuts will take place in 2025 – after the next general election – and that the Labour party will almost definitely, following Blair’s example in 1997, not dare deviate from Tory spending plans in a bid to appear economically ‘credible’, it is an odds on certainty that austerity mark 2 will happen regardless of which party is in power.

That that party is the Conservatives, is dependent, we are told, on the unlikely event of them recovering their reputation for “sound money and sound public finances” lost in the Liz Truss debacle. But the incredible thing is that following the Cameron/Osborne years they had it in the first place.

The twin disasters of Austerity Mark One

It is established, if not universally known, that the original version of austerity was a disaster in social terms. The 40 per cent cut in funding for public services, most apparent in huge reductions in local authority social care budgets (for home visits, help with dressing, washing etc.), translated to 335,000 excess deaths and falling life expectancy .

But austerity was also a disaster economically.  GDP per head only reached an average of 1.2% between 2010 and 2018, lower than the previous decade (which was already low). Despite a mania for selling off public assets, which raises revenue in the short-term, public debt rose from 65% of GDP in 2010 to 79.1% in February 2020, and then mushroomed further because of the Covid lockdown.

Under ‘Osbornomics’ all this pain for masses of people was accompanied by an unconditional bounty for the super-rich in the form of quantitative easing, a state subsidy which raised the value of financial assets like shares. In the Eurozone, a mirror-image – ‘Draghinomics’ (after Mario Draghi former head of the European Central Bank) – likewise dispensed the suffering and largesse to, respectively, the undeserving poor and the undeserving rich, resulting in similarly comatose economic growth.

That there is a connection between falling real wages, lacklustre GDP growth, rising government debt, and austerity (which cuts the public sector workforce and reduces spending power and thus has ripple effects in the economy, and therefore on government revenue) can only be denied by an ideologically-induced blindness, which handily our government and its handmaidens in the media have in abundance.

Nonetheless, the barely contested response to projections that government revenue will be reduced in future, in the context of even larger falls in personal income, is to reintroduce austerity, the effect of which will be to further reduce government revenue.

It must have been this kind of iron-clad logic that earned the Conservatives their reputation for economic competence.

Don’t cut your cloth according to your measure

It shouldn’t take a PhD in economics to see through it. Despite the tenacity of home-spun wisdom that the government is like a household and must budget for hard times accordingly, cutting its outlays to take account of lower income, it isn’t and shouldn’t*.  The government’s spending – on for example enhanced salaries for nurses and other public servants – will multiply through the economy by being spent by individuals, and eventually turn into income for the government paid through tax. As economist Anne Pettifor points out:

Once earned, individuals, households and firms spend and invest their new, higher income. They spend on goods, on rent, on food, and on services provided by for example, football clubs, lawyers, accountants, musicians, artists etc. That spending generates additional tax revenues for government, this time paid by football clubs, firms, shops, landlords, farmers, lawyers, musicians etc.

This anti-austerity insight that the government is not like a household and shouldn’t behave like one essentially comes from John Maynard Keynes, who famously said in 1931, “You cannot balance the nation’s books by cutting its income”. That this perception, which comes from a man who explicitly wasn’t a socialist, is now indelibly associated with the Left and non-mainstream economists is an indication of how far to the Right politics and economics have shifted in the West in the last four decades.

The economic limits of shopping

Because in the context of 2023, not 90 or so years before, there’s something wrong with it. It, and its contemporary proponents, are making half an argument.

Resuscitating what economists call “effective demand” – a virtuous circle that ensures people have more disposal income so they go out and buy consumer goods, thus stimulating production to keep up and, through increased tax, shrinking government debt – is not the panacea for the economy because it doesn’t get to the root of what’s fundamentally wrong with it.

For decades the economy has become more dependent on profits from finance and speculation for the prosaic reason that more money can be made that way than from expanding production. This is despite unrelenting efforts to sustain demand in the form of escalating personal debt. And as a profits are made, more capital is inevitably produced, conditioned to seek profitable outlets of one sort or another. Curiously, governments in the West in the last decade responded to this surplus of capital but creating even more of it through Quantitative Easing.

There is no realistic way of expanding demand quickly enough to absorb this ever growing mass of capital. Even if the UK government miraculously saw the light and stopped suppressing demand through austerity and holding down public sector pay.

In this financialised economy, government progressively becomes more indebted as it has to support a weak private sector through bail-outs, tax cuts and subsidies to low pay. Meanwhile private sector debt escalates because being “highly leveraged”, in technical parlance, is seen as the way to increase exposure to financial products and thus bring in future profits.

Theoretically, the route out of this conundrum is strong economic growth which enables the gradual amelioration of debt, private and public. In its own rather pathetic way this is what the short-lived Truss administration was trying to do through its “investment zones” and scattergun tax cuts, which would supposedly have ‘paid off’ after a few years. That the ‘markets’ quickly pulled the rug from under Truss’s feet is an indication that no-one really believes revived economic growth is possible. With Sunak and Hunt, we’re back to stabilised misery.

Socially it is imperative that the RMT and others win their pay disputes. It is vital that the NHS is properly funded and re-nationalised. It is essential that Sunak’s attempts to force workers to continue working even if they want to go on strike – reminiscent of the Fascist regimes of the 1930s and one continuity with Liz Truss – are defeated. But we shouldn’t pretend that these victories – should they happen – will bring about an economically sustainable system.

*The idea that the government should ‘trim its sails’ in hard times, much like a sensible household, has proved to have a tenacious hold on public opinion, since it was first outlined by the conservatives and their allies in the media in the wake of the 2008 financial crisis. But not only is the analogy wrong, it is belied by the fact that most people don’t take any notice of it in their own lives, in that personal debt goes on rising year by year.

 

 

 

 

 

 

 

The Economy the Rich Won

The two-part BBC documentary, The Decade the Rich Won, which concluded last week, made for interesting viewing. It told “the little understood story of our times” – how through the policy of Quantitative Easing (QE), the fabulously wealthy became even more fabulously wealthy and the rest of us had to make do with austerity and falling wages. But it did beg certain questions:

Why didn’t anyone say so at the time? “Full disclosure” said hedge fund manager Paul Marshall. Since the 2008 crash the world’s largest central banks (US Federal Reserve, Bank of England, European Central Bank and Bank of Japan) have created around $20 trillion which has basically gone into the already cavernous pockets of banks and wealthy individuals (like Paul Marshall’s).

In the words of Andrew Huszar, who was QE Program Manager at the Federal Reserve (and thus in charge of the entire process): “over the last 12 years, we’re talking about unprecedented amounts of money being printed and funnelled into the markets, banks being showered with trillions upon trillions upon trillions of dollars, ultimately benefiting the most privileged in our societies.” Only a fraction of the ‘stimulus’ he admits, “was actually getting out and making a difference in the lives of everyday people”.

But these mea culpas are strictly retroactive. When QE was first happening, not only politicians and central bankers – who you might expect to parrot the official line – but also media organisations like the BBC uncritically rehearsed the story that QE was providing  a lifeline to the ‘real economy’.  In 2009, the BBC likened QE to putting “imaginary petrol” in your car. 

And this isn’t of purely historical interest. The Covid shut down saw governments quickly turn to the “unconventional” (now used so much it must be thoroughly conventional) technique of QE. In Britain, the Bank of England increased QE from £495 billion to £895 billion. And the BBC was on hand to explain how this pumping of money into the economy would “help it to recover”.

So much like a war, when the controversy in question has to be implemented unscathed, critical voices are sidelined. But in the aftermath, when it doesn’t much matter anymore, they are allowed airtime and what actually went on can be safely revealed. That’s how much freedom we’re allowed.

If the economy wasn’t saved, what was? All the old familiar faces protested that they had no choice but to implement QE. It was a no brainer. “We kept the economy going,” said Alastair Darling (Chancellor in 2008). “People who’d otherwise have lost their jobs didn’t”. Former Bank of England Governor Mervyn King attested that the first tranche of QE prevented a re-run of the Great Depression. Transient Tory PM Theresa May called QE “emergency medicine”.

But if only a small amount of the QE trillions actually escaped into the ‘real economy’ – in the US mortgage lending actually went down after QE was introduced – it can’t have been the actual economy, the economy of people exchanging goods and services, that was saved. The “emergency medicine” has to have been for the conduit through which QE was implemented, the financial system. And only by QE preventing the implosion of the financial system, was the real economy rescued from oblivion.

The real question is therefore how did QE save the financial system? This is something the documentary didn’t try to explain but is actually the crux of the whole story. One means was simply by pumping huge amounts of money into the system. Thus hugely indebted banks and other companies escaped their natural free market fate.

But QE did more than supplying, in Huszar’s words, “the greatest Wall Street bailout of all time”. It also works by ensuring an ultra-low interest rate and by increasing the price and reducing the yield on government bonds, incentivising investors to shift into other assets, such as shares.

In this way, zombie companies – firms that do nothing more than survive by meeting the interest payments on their debt and paying wages – are permitted to live on. And the stock market as a whole receives a purely artificial boost. Under ‘normal’ market conditions, shares prices reflect investors’ expectations that profits will be high or low in the future. But not under QE. Thus a company such as car rental firm Hertz can file for bankruptcy and see its share price soar at the same time.

This is nothing like a free market system. More accurately it should be called a state capitalist system.

You can’t artificially hold down energy prices but you can, apparently, artificially raise share prices. Ex-banker and hedge fund manager Rishi Sunak lectured us last week on the futility of the state trying to hold down the natural, market prices of gas and electricity. But strangely this King Canute style impotence does not apply to share prices – or house prices – which through QE can be synthetically raised for years.

But what happens, you might wonder, when this outside ‘stimulus’ is taken away? When “the shot of adrenalin”– in Alastair Darling’s phrase – has done its work and we can get back to normal.  Will there be a massive market correction towards ‘natural’ share prices, precipitating widespread company bankruptcies? In 2018, US Federal Reserve started selling the bonds it had acquired under QE – a practice called Quantitative Tightening – but it had to abandon the policy after a few months owing to a negative reaction from markets.

In Britain, authorities have reached for the “unconventional” policy of QE on three separate occasions in the last decade. Currently central banks around the world are reducing the amount of QE but not stopping it altogether or reversing it which should happen under a free market system.

The documentary only nibbled at this question. “In a way markets are addicted”, said hedge funder Marshall, “and central banks have become very nervous indeed about removing the drug.”

But if QE has become a near permanent part of the economic landscape what are the consequences? Does its very existence – and the huge amount of money involved – mean that it is always accompanied by the shadow of austerity?

Or can QE be redirected to pay for essential public services like the NHS? If you can save the financial system by injecting huge amounts of money why can’t you do the same for public services millions of people depend on? This is essentially the argument of Modern Monetary Theory – that public services can be fully funded through nothing more elaborate than hitting keys on a computer. The need to amass taxpayer funds to pay for everything is a myth. Austerity is a political choice, not an economic necessity. The only constraint – MMTers argue – is inflation.

However, lack of inflation is the one sure sign that QE didn’t diffuse through the real economy, rather staying within the financial system. The classic explanation of inflation is that it is caused by too much money chasing too few goods. And the simple fact that inflation didn’t rise exponentially is a pretty strong indication that the QE trillions didn’t filter through the financial system. Inflation is rising now unquestionably, probably caused by supply chain disruptions and Covid relief spending. The Bank of England predicts it will hit 7.25% in the spring. But this is not the level of inflation that QE, if the theory is right, should generate.

However, if QE is redirected to pay for public services, all the ingredients for spiralling inflation are there. This is because the money in its entirety will enter the real economy – through spending by consumers and suppliers. And the mere existence of more money, if accompanied by rising prices, does not translate into greater value or purchasing power.

It’s also the case that QE, notwithstanding the public pronouncements, is intended to have financial effects. Through buying bonds from banks and other companies, these institutions are suddenly awash with cash which they will inevitably use to buy assets, such as shares, thus inflating their price. It is also meant to reduce interest rates on debt for vastly overleveraged companies. QE “for the people” cannot, I would suggest, use the same conduits without having similar effects which pointedly don’t benefit the people.

But the establishment’s faith in QE is unshaken. The BBC doc did reveal a certain buyer’s remorse on the part of some. Ex-Bank of England governor Mervyn King admitted, “if you’ve had the biggest monetary policy stimulus the world has ever seen and you still haven’t had adequate economic growth, maybe the answer is not yet more monetary policy stimulus.”

But there no indication that those at the helm would, in retrospect, have done anything different or, indeed, would do anything different today. Even in conditions resembling 1970s’ “stagflation” – negligible economic growth and rising inflation – alternative means of stimulus are not seriously entertained. “Helicopter Money”, for example, the crediting of ordinary people’s bank accounts with cash in the expectation they will spend it, contravenes a core principle of our political settlement, that only the financial system deserves bailing out and everyone else – especially the bottom 30% — must be kept on a firm leash.

The QE/Austerity duopoly thus reigns supreme and is, if anything, more entrenched than ever given that it is longer a leap in the dark but tried and tested policy. The Chancellor of the Exchequer, for example, hails from the finance system and has faithfully imbued its self-interested mores. The personally very wealthy Rishi Sunak used to work for Goldman Sachs and a hedge fund – the precise ‘sector’ of the economy that Paul Marshall says has “made out like bandits” because of QE.

And if that isn’t guarantee enough, Sunak’s opposite number – Shadow Chancellor Rachel Reeves – used to work for the Bank of England and is an expert – mercifully! – on QE.

So despite the enormous pile of evidence that QE just makes the rich richer and has no impact on economic growth, the establishment faith in the practice remains undimmed. The bandits have taken over the asylum.

QE’s impact on inequality is astonishing. A statistic flashed on the screen at the end of the documentary revealed just how well the bandits have done. UK billionaires (individuals who own assets of more than a thousand million pounds) are worth 310% more than in 2010. But the effect is not limited to this blessed island. According to rich peoples’ magazine Forbes, in 2021 there were 2,755 billionaires in the world, an increase of 660 from just a year earlier. “Altogether these billionaires are worth $13.1 trillion, up from $8 trillion in 2020,” says Forbes. In 2006 – just two years before the QE era began in Euro-America – there were less than 1,000 billionaires globally with a collective net worth of under $3 trillion. What explains the huge increase in a period of insipid economic growth?

Objecting to this is not just a case of the “politics of envy” as it used to be derided. Beside the fact that these individuals do not deserve their loot under any objective free market criteria, such mammoth inequality fundamentally distorts society. As I have argued in a previous post, these billions are not all spent on buying luxury yachts or even blasting into space. They are also used as capital – money invested to make more money. In areas such as housing, privatisation, fossil fuel extraction, the media and democracy the invested funds of the ultra-rich are perverting society in ways that are directly at odds with the interests and desires of the vast majority. And through QE we have, through government action, turbocharged this process.

But then that is not all that surprising as the ultra-rich basically own the government as well.