Socialist Economic Bulletin

How the austerity con works

.796ZHow the austerity con worksBy Michael Burke

‘The Austerity Con’ is the title of a recent article in the London Review of Books. It is written by a leading Keynesian economist Professor Simon-Wren Lewis, who is also a fellow of Merton College, Oxford. The article is available to non-subscribers here. It deserves to be widely read because it contains two important arguments against austerity.

The first argument nails the lie that austerity was necessary because of an immediate crisis of government funding. The second argument exposes the myth that austerity has been responsible for an improvement in government finances. Both of these arguments will be familiar to regular readers of SEB and Prof. Wren-Lewis will give them a far wider airing. Given that averting the crisis in government finances is offered by the supporters of austerity as its main justification, the title of his piece is fully justified.

However there is a difference of view among opponents of austerity about the nature of the current crisis. It is important because it underpins both the overall analytical framework and the suggested policy prescriptions. Prof. Wren-Lewis says, “The place to begin is 2009. By then the full extent of the financial crisis had become apparent.” He goes on, “The financial crisis was leading consumers and firms to spend less and save more. That made sense for individuals, but the problem was that because everyone was doing it, the total amount of demand in the economy was falling. As demand fell, firms produced less, so they reduced their workforce.”

This is not entirely accurate. Demand is comprised of two components, consumption and investment. By taking a step back to 2007 it possible to see more clearly how the crisis arose. Regarding the industrialised countries as whole grouped in the OECD it is possible to see that only one of these experienced a sharp fall. This was investment not consumption.

Fig.1 below shows the level of real GDP and its key components, consumption, investment and net exports. The data is presented in both in constant prices in constant Purchasing Power Parity exchange rates and is itemised in the box below.

Fig. 1 Real OECD GDP and components, US$ PPP trillions, OECD base year

OECD GDP & Components, US$ trillions, PPPs
Source: OECD (data may not sum due to rounding and omissions)

By 2009 the OECD economies as a whole had experienced economic contraction compared to 2007 (the 2008 data is almost identical to 2007). But the direct contribution of falling consumption to the overall economic contraction was non-existent. It had even marginally increased.

The cause of the slump in 2009 was the decline in investment. In round terms GDP in the OECD fell by US$800billion in the two years to 2009 and investment (Gross Fixed Capital Formation) fell by US$1,100 billion. Over the same period, consumption rose fractionally.

It is the case that household consumption fell, just as Wren-Lewis says. But this was more than off-set by the simultaneous rise in government consumption. As he correctly states this was largely because of the operation of what are known in the jargon as ‘automatic stabilisers’. In economies where there exists significant provision of social security and other payments, these tend to rise automatically as unemployment increases along with in-work poverty and other aspects of social deprivation.

Yet taken together the effect of falling household consumption and rising government consumption was a small net increase in total consumption. More important than either a small net rise or fall, what is also clear is that a broadly steady level of consumption was not enough to prevent a sharp fall in investment, which was more than responsible for the entire slump across the OECD.

It is also the case that consumption in the OECD has recovered and now exceeds its pre-recession peak, but investment has not. This is not to say that ordinary households, workers and the poor have not suffered in the crisis. That is true in most countries and is at an extreme in a country such as Greece. But the decline in investment was both the cause of the economic crisis and is responsible for the weakness of the subsequent partial recovery in activity.

Furthermore, recent experience shows that increases in government consumption can at most soften the effects of the downturn (and some cost to government long-term finances, if not the apocalypse conjured up by the supporters of austerity). Rising government consumption during the crisis did not prevent the sharp fall in investment. The slump in investment cannot be corrected by ever more consumption. Consumption has risen since 2009 and is above its pre-recession peak.

The fall in investment was not only responsible for the economic crisis. It was also directly responsible for the deterioration in government finances. Falling investment is a form of saving (unwillingness to spend on investment). As the private sector of the economy increased its savings the public sector was obliged to increase its borrowing which creates the deficits on public finances.

The crisis was not caused and is not perpetuated by a fall in both the components of demand. Only investment fell and it alone has failed to recover. Analysis needs to take account of this key factor, and the policy prescriptions which flow from it. Prof. Wren-Lewis is entirely correct to highlight the ‘Austerity Con’. The biggest con is that the crisis was caused by the public sector, when it was actually caused by the refusal of the private sector to invest. This cannot be addressed by government increasing consumption, or subsidies for consumption. It needs state-led investment.

Fake Anglo-Saxon recoveries are damaging global economy

.558ZFake Anglo-Saxon recoveries are damaging global economyBy Michael Burke

Official economic opinion from the IMF is that the US and the British are the only industrialised economies that are growing strongly and that their growth model should be reproduced generally.

The reality is very different. Both recoveries are the weakest on record and are fuelled by an unsustainable (debt-fuelled) rise in consumption. The international effects of this are negative, acting to provoke further instability in the world economy. The Anglo-Saxon recoveries cannot possibly be widely copied without deepening crises.

First, it is necessary to dispose of the myth that either the US or Britain is enjoying a robust recovery. In sharp recessions there is frequently a large amount of spare capacity in the economy as hours or jobs are cut and factories and offices lie idle or under-used. As a result, recovery from deep recession is often rapid. But that is not the case. Neither the US or British economies has accelerated beyond a 2.75% year-on-year growth rate in the entire recovery period. As a result, they are the weakest recoveries on record.

Fig. 1 below shows the current US recovery phase compared to previous recoveries.
Source: Wall Street Journal

The US recovery is the worst on record as it is also worse than the recovery from the Great Depression. But the performance of the British economy is worse still, significantly slower than any previous recovery phase.

Fig. 2 shows the current British economic recovery compared to previous upturns.
Source: NIESR

Recent trade data also demonstrates the underlying weakness and fragility of even these feeble economic upturns. The US recorded a trade deficit of almost $47bn in December and the British economy had a trade gap of £35bn for 2014 as a whole. These were, in both cases, a return to respective 4-year low-points.

The US trade gap is on a sharply widening trend once more, despite the much lower level of oil imports because of the shale gas boom. In real terms, after accounting for inflation, the US trade deficit excluding oil is at a record, as shown in Fig. 3.

Fig.3 US Monthly and Annual Real Trade Balance, excluding Oil
Source: Census Bureau

As a matter of logic the world cannot emulate an economy where the trade deficit is widening dramatically. The world cannot run a trade deficit with itself. Holding up the Anglo-Saxon recoveries as a model to be followed elsewhere is simply foolish, or overblown rhetoric which has no practical value in policy formulation.

The same increase in effective net overseas borrowing applies to Britain where there are new record deficits on trade balance and on the current account (trade plus current payments overseas, mainly interest and share dividends). In fact the situation is qualitatively more grave for the British economy, for a number of historical and structural reasons which will be examined in a future post. For now it is enough to note that that a very mild British recovery is being funded by record overseas borrowing.
The latest current account deficit is 6% of GDP, an all-time record.

In effect the weak British recovery is being funded by unprecedented borrowing from overseas. Because this has been a continuous process, it has also led to an unprecedented deterioration in Britain’s international investment position. The continuous accumulation of new overseas debts has formed a record level of overseas liabilities, which is shown in Fig. 4 below.

Fig. 4 Britain’s Net International Investment Position as a per cent of GDP
Source: ONS

Both the US and British economies are uncompetitive even at previous exchange rates and are dependent on borrowing from abroad to fund recovery. But the funds they are borrowing from overseas are not being used to fund further economic expansion, via investment. Instead the recoveries in the Western economies are almost exclusively driven by consumption.

This is shown in Fig. 5 below, which shows the real change in both US and British consumption and investment since the recession began to the end of 2014 (Q3 in the case of the UK data). The data is shown in common US$ purchasing power parity exchange rates for comparative purposes.

Fig.5

In real US$ PPP terms the US has increased consumption (combined government consumption and household consumption) by $1,064bn since the recession while investment (Gross Fixed Capital Formation) has increased by just $40bn. In Britain consumption has risen by US$88bn, while investment has increased by just $4bn. This belies any notion that the economies are struggling with the lack of ‘effective demand’. The weakness of the recovery and its dependence on increased overseas indebtedness is due to the virtual absence of growth in investment.

Complete data for the major industrialised countries has yet to be published. But any growth at all for either the Euro Area economy or for Japan is likely to have been almost entirely driven by consumption with investment either flat or contracting once more.

This is placing unbearable pressures on the rest of the world economy, the so-called ‘emerging markets’ and other non-industrialised economies. In part the rise in consumption in the industrialised countries is only possible because prices for basic commodities have fallen sharply. But it is also leading to capital outflow from poorer nations to richer ones, mainly the Anglo-Saxon economies to fund their increased consumption. This outflow of savings is preventing a rise in investment elsewhere, or significantly increasing the costs of that investment. This will both prolong and deepen the global economic crisis.

The industrialised countries as whole led by the US and copied by Britain are consuming, not saving or investing. This produces weak and unsustainable growth in their own countries and is causing a global slowdown and further crises.

Fake Anglo-Saxon recoveries are damaging global economy

.558ZFake Anglo-Saxon recoveries are damaging global economyBy Michael Burke

Official economic opinion from the IMF is that the US and the British are the only industrialised economies that are growing strongly and that their growth model should be reproduced generally.

The reality is very different. Both recoveries are the weakest on record and are fuelled by an unsustainable (debt-fuelled) rise in consumption. The international effects of this are negative, acting to provoke further instability in the world economy. The Anglo-Saxon recoveries cannot possibly be widely copied without deepening crises.

First, it is necessary to dispose of the myth that either the US or Britain is enjoying a robust recovery. In sharp recessions there is frequently a large amount of spare capacity in the economy as hours or jobs are cut and factories and offices lie idle or under-used. As a result, recovery from deep recession is often rapid. But that is not the case. Neither the US or British economies has accelerated beyond a 2.75% year-on-year growth rate in the entire recovery period. As a result, they are the weakest recoveries on record.

Fig. 1 below shows the current US recovery phase compared to previous recoveries.
Source: Wall Street Journal

The US recovery is the worst on record as it is also worse than the recovery from the Great Depression. But the performance of the British economy is worse still, significantly slower than any previous recovery phase.

Fig. 2 shows the current British economic recovery compared to previous upturns.
Source: NIESR

Recent trade data also demonstrates the underlying weakness and fragility of even these feeble economic upturns. The US recorded a trade deficit of almost $47bn in December and the British economy had a trade gap of £35bn for 2014 as a whole. These were, in both cases, a return to respective 4-year low-points.

The US trade gap is on a sharply widening trend once more, despite the much lower level of oil imports because of the shale gas boom. In real terms, after accounting for inflation, the US trade deficit excluding oil is at a record, as shown in Fig. 3.

Fig.3 US Monthly and Annual Real Trade Balance, excluding Oil
Source: Census Bureau

As a matter of logic the world cannot emulate an economy where the trade deficit is widening dramatically. The world cannot run a trade deficit with itself. Holding up the Anglo-Saxon recoveries as a model to be followed elsewhere is simply foolish, or overblown rhetoric which has no practical value in policy formulation.

The same increase in effective net overseas borrowing applies to Britain where there are new record deficits on trade balance and on the current account (trade plus current payments overseas, mainly interest and share dividends). In fact the situation is qualitatively more grave for the British economy, for a number of historical and structural reasons which will be examined in a future post. For now it is enough to note that that a very mild British recovery is being funded by record overseas borrowing.
The latest current account deficit is 6% of GDP, an all-time record.

In effect the weak British recovery is being funded by unprecedented borrowing from overseas. Because this has been a continuous process, it has also led to an unprecedented deterioration in Britain’s international investment position. The continuous accumulation of new overseas debts has formed a record level of overseas liabilities, which is shown in Fig. 4 below.

Fig. 4 Britain’s Net International Investment Position as a per cent of GDP
Source: ONS

Both the US and British economies are uncompetitive even at previous exchange rates and are dependent on borrowing from abroad to fund recovery. But the funds they are borrowing from overseas are not being used to fund further economic expansion, via investment. Instead the recoveries in the Western economies are almost exclusively driven by consumption.

This is shown in Fig. 5 below, which shows the real change in both US and British consumption and investment since the recession began to the end of 2014 (Q3 in the case of the UK data). The data is shown in common US$ purchasing power parity exchange rates for comparative purposes.

Fig.5

In real US$ PPP terms the US has increased consumption (combined government consumption and household consumption) by $1,064bn since the recession while investment (Gross Fixed Capital Formation) has increased by just $40bn. In Britain consumption has risen by US$88bn, while investment has increased by just $4bn. This belies any notion that the economies are struggling with the lack of ‘effective demand’. The weakness of the recovery and its dependence on increased overseas indebtedness is due to the virtual absence of growth in investment.

Complete data for the major industrialised countries has yet to be published. But any growth at all for either the Euro Area economy or for Japan is likely to have been almost entirely driven by consumption with investment either flat or contracting once more.

This is placing unbearable pressures on the rest of the world economy, the so-called ‘emerging markets’ and other non-industrialised economies. In part the rise in consumption in the industrialised countries is only possible because prices for basic commodities have fallen sharply. But it is also leading to capital outflow from poorer nations to richer ones, mainly the Anglo-Saxon economies to fund their increased consumption. This outflow of savings is preventing a rise in investment elsewhere, or significantly increasing the costs of that investment. This will both prolong and deepen the global economic crisis.

The industrialised countries as whole led by the US and copied by Britain are consuming, not saving or investing. This produces weak and unsustainable growth in their own countries and is causing a global slowdown and further crises.

Tsipras versus Cameron: people versus bankers

.671ZTsipras versus Cameron: people versus bankersby Michael Burke

David Cameron became the first elected politician in Europe to criticise the election of the Syriza government in Greece and was quickly followed by George Osborne. This might seem odd as Britain is outside the Eurozone and has limited direct influence over its policies. But the urgent and unrestrained nature of the criticism is very revealing about what is at stake in the anti-austerity struggle and specifically the very different roles being played by the British and Greek governments.

The Syriza government represents the popular will to end austerity. Only the parties of the left increased their vote in the recent election, and that was overwhelmingly to Syriza’s benefit with a rise of 9.4%. But entirely new parties and even parties of the traditional right adopted similar anti-austerity rhetoric in an effort to shore up their vote. The election showed the Greek popular majority wants to end austerity.

In Britain the banks have an extraordinarily large weight in the economy. Consequently, this dominance is felt through all areas of political and social life. A recent Global Financial Stability Report from the IMF (pdf) demonstrated the dangerously lop-sided nature of the British economy by focusing on ‘shadow banking’, the artificially created networks of companies and vehicles to disguise the real liabilities of the banks. In Britain shadow banking accounts for over 350% of GDP. The next highest exposure of all the industrialised areas or economies is the Eurozone at less than 200% of GDP. The phrase ‘too big to fail’ is insufficiently grave to convey the threat posed by the outsized level of British bank liabilities.

This explains the sudden and intemperate Tory interventions against the newly-elected Greek government. The British government represents the interests of British big businesses and the most important of these is the banks. The banks have sharply reduced their loans outstanding to Greek borrowers. As Martin Wolf the Financial Times’ chief economics commentator explained recently, the banks in general were the key beneficiaries of the bailout, not the Greek economy or its population. Since the €254bn bailout organised by the Troika just €27bn was to support the Greek economy. The rest went to creditors with British, German and Dutch banks at the head of the queue for the taxpayer-funded bailout. But the huge debt is incurred by Greek taxpayers, and so the debt burden is unbearable.

Fig. 1

Recent data from the Bank for International Settlements show that bank loans to Greece have been edging higher again and that British banks have the biggest exposure at $10bn which is equal to the loans from German banks and ahead of US ones at $8bn. The chart below from the Breugel Institute shows the trend in national banks’ lending to Greece.

Fig.2

So there is an immediate concern for the British, German and US politicians who act on behalf on the banks. But Cameron and Osborne are not primarily protecting the immediate interests of British banks, who have already been bailed out of their far bigger failed speculation in Greek assets. They are trying to protect the strategic interests of British banks against popular claims for wider government debt reduction. British banks do have large exposures to countries such as Ireland, Spain, Portugal and others. Their fear is that Syriza represents the turning of the tide where multilateral agencies and their domestic allies can no longer burden the citizens of European countries with more debt in order to bail out failed bankers.

This is why everyone in Europe and beyond fighting austerity has a direct interest in Syriza’s success. It has the potential to free Greek society from the impositions of the banks and offer a new model to the whole of Europe. In Britain apart from those receiving huge bank bonuses and their hangers-on no one else benefits from these hugely bloated banks. In general they do not even pay dividends to shareholders. Cutting them down to manageable size by forcing them to take losses on government debt would be everyone else’s interest.

There is a particular onus on all those in Britain who want Syriza to succeed or who even simply support the democratic principle that the British government should not attempt to subvert the popular will of another country. We need to get the bankers and their British representatives off the necks of the Greek population.

Tsipras versus Cameron: people versus bankers

.671ZTsipras versus Cameron: people versus bankersby Michael Burke

David Cameron became the first elected politician in Europe to criticise the election of the Syriza government in Greece and was quickly followed by George Osborne. This might seem odd as Britain is outside the Eurozone and has limited direct influence over its policies. But the urgent and unrestrained nature of the criticism is very revealing about what is at stake in the anti-austerity struggle and specifically the very different roles being played by the British and Greek governments.

The Syriza government represents the popular will to end austerity. Only the parties of the left increased their vote in the recent election, and that was overwhelmingly to Syriza’s benefit with a rise of 9.4%. But entirely new parties and even parties of the traditional right adopted similar anti-austerity rhetoric in an effort to shore up their vote. The election showed the Greek popular majority wants to end austerity.

In Britain the banks have an extraordinarily large weight in the economy. Consequently, this dominance is felt through all areas of political and social life. A recent Global Financial Stability Report from the IMF (pdf) demonstrated the dangerously lop-sided nature of the British economy by focusing on ‘shadow banking’, the artificially created networks of companies and vehicles to disguise the real liabilities of the banks. In Britain shadow banking accounts for over 350% of GDP. The next highest exposure of all the industrialised areas or economies is the Eurozone at less than 200% of GDP. The phrase ‘too big to fail’ is insufficiently grave to convey the threat posed by the outsized level of British bank liabilities.

This explains the sudden and intemperate Tory interventions against the newly-elected Greek government. The British government represents the interests of British big businesses and the most important of these is the banks. The banks have sharply reduced their loans outstanding to Greek borrowers. As Martin Wolf the Financial Times’ chief economics commentator explained recently, the banks in general were the key beneficiaries of the bailout, not the Greek economy or its population. Since the €254bn bailout organised by the Troika just €27bn was to support the Greek economy. The rest went to creditors with British, German and Dutch banks at the head of the queue for the taxpayer-funded bailout. But the huge debt is incurred by Greek taxpayers, and so the debt burden is unbearable.

Fig. 1

Recent data from the Bank for International Settlements show that bank loans to Greece have been edging higher again and that British banks have the biggest exposure at $10bn which is equal to the loans from German banks and ahead of US ones at $8bn. The chart below from the Breugel Institute shows the trend in national banks’ lending to Greece.

Fig.2

So there is an immediate concern for the British, German and US politicians who act on behalf on the banks. But Cameron and Osborne are not primarily protecting the immediate interests of British banks, who have already been bailed out of their far bigger failed speculation in Greek assets. They are trying to protect the strategic interests of British banks against popular claims for wider government debt reduction. British banks do have large exposures to countries such as Ireland, Spain, Portugal and others. Their fear is that Syriza represents the turning of the tide where multilateral agencies and their domestic allies can no longer burden the citizens of European countries with more debt in order to bail out failed bankers.

This is why everyone in Europe and beyond fighting austerity has a direct interest in Syriza’s success. It has the potential to free Greek society from the impositions of the banks and offer a new model to the whole of Europe. In Britain apart from those receiving huge bank bonuses and their hangers-on no one else benefits from these hugely bloated banks. In general they do not even pay dividends to shareholders. Cutting them down to manageable size by forcing them to take losses on government debt would be everyone else’s interest.

There is a particular onus on all those in Britain who want Syriza to succeed or who even simply support the democratic principle that the British government should not attempt to subvert the popular will of another country. We need to get the bankers and their British representatives off the necks of the Greek population.

Syriza’s victory: turning hope into reality

.557ZSyriza’s victory: turning hope into realityBy Michael Burke and John Ross

The Greek people have inspired every progressive force in Europe, and beyond, by electing the first anti-austerity government in Europe. Syriza has similarly inspired every progressive person with the great political skill with which it outmanoeuvred the forces in Greece and Europe who attempted to scare the Greek people into not voting for it. As Alexis Tsipras said immediately after its victory Syriza has opened up hope for the Greek people – and many others as well.

The key question now is how to turn hope into reality.

Syriza has outlined clearly its orientation – which should be supported by every progressive force. Syriza has said it is not seeking to exit from the Euro. It wants Greece’s unpayable and unjust debt renegotiated. The immediate priority of the left throughout Europe must be to organise support for this demand of Syriza during the coming negotiations. It is to be welcomed that not only the political left but also far wider groups arguing for a rational economic policy support this course – including eminent figures in their profession such as Nobel Prize winners in economics Joseph Stiglitz and Chris Pissarides. All efforts must be redoubled across Europe to gain support for the renegotiation of Greece’s debt – a course which corresponds not only to the interests of the Greek people but to the interests of rational economic policy across Europe, and therefore to the interests of the people of Europe.

Whether or not these negotiations succeed, however, the new Greek government is faced with key choices in economic policy. This is even more the case as, if the economic policies of the new government do not succeed, sinister forces that failed to win this election will seek to turn Greece backwards.

The first and immediate priority, of course, is to reduce and eliminate the appalling humanitarian suffering imposed on the Greek people by the austerity policies. Creating jobs, raising wages, restoring pensions, recreating the best possible social security are the top priorities. As always politics must take precedence over economics.

But to sustain the improvement in the living standards of the Greek people it is necessary to relaunch economic growth. And the key to economic growth is necessarily investment. Without rising investment an economy cannot grow.

Under the conditions of Greece it is even more unrealistic than normal to rely on the private sector for investment. It is the collapse in private investment which has driven economic collapse in Greece and economic recession across Europe. Since 2007 Greece’s GDP has fallen by €57bn of which the bulk is the fall in investment at €36bn. The only way to secure economic growth is therefore to embark on a programme of state investment. Those countries which have used state investment as their key instrument to promote growth have enjoyed outstanding success – for example Ecuador, Bolivia and China.

In a country such as Ecuador, which has enjoyed 5% GDP annual average growth over 10 years, real incomes per capita have risen by over 2% a year, and 10% of the population has been lifted out of poverty. This has been driven by state investment which has now reached 15% of GDP.
Economic growth, led by state investment, will in turn create the conditions under which the private sector will begin to invest again.

A key economic task is therefore to assemble the finances and practical programmes which can begin such a programme of state investment. State spending to improve the immediate living standards of the population is necessary but if it is not accompanied by measures to increase investment it will not lead to economic growth, making it increasingly difficult to sustain the popularity of the government.

Under normal circumstances the immediate resources for such an investment programme could come from borrowing – which can be cheap in the present interest rate conditions in Europe. A budget deficit divided between immediate measures of social welfare and measures of state investment would be financed by this borrowing. But the agreement with the Troika prevents the Greek government turning to public borrowing. A key goal in any negotiations must therefore be for the Greek government to regain the right to borrow not only for social welfare but for investment.

While borrowing is the rational way to speedily launch social welfare and state investment, it is entirely possible to finance these programmes through overturning Greece’s corrupt and inefficient taxation system – one designed solely to prevent the rich paying their proper share of Greece’s taxation. As rapidly as possible a fair and efficient taxation system, capable of funding both social welfare and investment, must be created. Borrowing would be the transitional measure until the time such a taxation system can be put in place.

These measures will become even more necessary if, as is very possible, forces within the EU and IMF attempt to block Greece getting the debt reduction which is required for any rational economic policy. The obstruction of these forces will be all the greater because they will consider not only the situation in Greece but they fear the risk of ‘contagion’ – that debt relief for Greece, and success in its anti-austerity policies, will inspire others in Europe to challenge the policies of austerity which have led Europe into a dead end. Here the British government plays a wholly negative role with Cameron and Osborne both criticising Syriza’s victory. As politicians who rely most on the finance sector, this role is hardly surprising.

Very difficult choices will of course be faced by the new government in Greece in the negotiations, in its economic policies if the negotiations are successful, and in the case that forces of reaction in Europe block the successful outcome of these negotiations. All the skill which Syriza has shown achieving the support of the Greek people, without which nothing can be achieved, will have to be shown even more in carrying out the necessary economic policies. If the immediate welfare of the people is not secured, and if state investment is not created to restart economic growth, a way out will not be found.

Studying the economic policies of Ecuador, Bolivia and China will give ideas as to how aid in constructing such programmes.

Before all else, while the new government of Greece deals with key economic and other issues which confront it, the widest possible forces across Europe and the world must campaign with all their strength to ensure that the legitimate needs of the Greek people are met in the coming negotiations. The greater the success of this campaign the greater will be the chances of success for Syriza and the hope it represents first of all for the Greek people but also for every progressive person in Europe.

Tory own goal on debt and the deficit pledges

.636ZTory own goal on debt and the deficit pledgesBy Michael Burke

The Tory Party has decided to make public finances a key battleground for the election. Key supporters of austerity such as the FT’s economics editor Chris Giles have echoed that, arguing that the “defining battle of the 2015 general election [is] over borrowing and public spending“.

It is only possible to stake out political ground on the issue of public finances because of the distortions surrounding them. The level of government debt is rising. This is because the government is adding to its annual levels of debt stock with new public sector deficits.

The actual trajectory of government finances, rather than Coalition propaganda, shows that austerity has not led to a significant improvement, certainly nothing like the promise to ‘balance the books’ in this parliament. Government debt and the deficit have both deteriorated under austerity. In addition the data on public finances actually show that the opposite policy works. Investment (albeit in a very distorted form under Osbornomics) leads to economic recovery and improving government finances.

This article will deal solely with debt and a further article will deal with the deficit. There are two main measures of public sector debt used by the Office for National Statistics (ONS). The first is Net Debt. But this is data which includes the costs of the bank bailouts from 2008 and 2009. Therefore the ONS produces a dataset on Net Debt Excluding Public Sector Banks. This is an underlying measure of debt related to the real economy and government fiscal policy.  

These two measures have been moving in opposite directions. This is because the amount of debt incurred in the public sector bailout of the failed private banks has been falling. A large proportion of that debt has been repaid by the banks. The two main measures of public sector debt are shown in Fig. 1 below.

Fig.1 Net Public Debt and Net Public Debt Excluding Public Sector Banks

The last year of the New Labour government in 2009 recorded a level of Net Public Sector Debt Excluding Public Sector Banks (‘Net Debt excluding banks’) of £884bn. The same measure of debt has risen to £1,483bn by end 2014, and will certainly be higher before the Coalition leaves office in May.

At the same time the total Net Debt measure has shown a decline from a peak of £2,261bn in 2010 to an estimated £1,795bn at the end of 2014. This is because there has been a repayment of over £1,000bn in the amount borrowed by the public sector to bail out of the banks. The remaining discrepancy between the two main debt measures is the amount still owed by these banks, a total of £308bn.

It is highly questionable whether all of these outstanding debts will be repaid and there were certainly better uses for government funds than bailing out failed bank speculation. Even so, the divergence in these two debt measures should highlight two important facts. First, austerity has not led to an improvement in government finances, the underlying level of debt has surged under the Coalition.

Secondly, even the investment in failed and corrupt banks, whose managers and traders continue to siphon off huge bonuses, has provided a return to government finances. If the bonuses had been curbed and instructions issued to lend to the most productive sectors of the economy then the return could have been substantially higher. In solely the narrow and false framework of government finances austerity fails to deliver improvement whereas even misdirected investment does. Properly directed pubic investment remains the real alternative to austerity.

The data does not support the Tory propaganda on public finances. The debt has soared under austerity. The alternative of state-led investment has been shown to work.

Greece needs debts cancelled and growth

.134ZGreece needs debts cancelled and growthGreece goes to the polls this Sunday (25 January) and the anti-austerity party SYRIZA has been consistently ahead in the opinion polls for a number of months. A SYRIZA win would be a boost for all those opposed to austerity in Europe and beyond. The Greek economy has seen a devastating collapse, brought on by austerity policies as well as the efforts to pay off the debts incurred by bailing the banks and other speculators who lent to Greece. In the Guardian a number of economists have supported the letter below, which outlines some key economic demands on dropping the debt.

Greece needs debts cancelled and growth

As economists, we note that the historical evidence demonstrates the futility and dangers of imposing unsustainable debt and repayment conditions on debtor countries; the negative impact of austerity policies on weakening economies; and the particularly severe effects that flow on to the poorest households.

We therefore urge the troika (EU, European Centra Bank and IMF) to negotiate in good faith with the Greek government so that there is a cancellation of a large part of the debt and new terms of payment which support the rebuilding of a sustainable economy. This settlement should mark the beginning of a new EU-wide policy framework favouring pro-growth rather than deflationary policies (Report, 14 January).

We urge the Greek government to abandon the austerity programme that is crushing economic activity and adopt a more expansive fiscal policy setting, targeting immediate relief from poverty and stimulating further domestic demand; to launch a fully independent investigation into the historic and systemic failure of the Greek public financial management processes (including any evidence of corruption) that led to the accumulation of debt, the disguising of the size and nature of the debt and the inefficient/ineffective use of public funds; and to consider the establishment of a judicial body or alternative mechanism that is independent of government and charged with a future responsibility of investigating corruption from the highest to lowest levels of government.

We urge other national governments to exercise their votes within official sector finance agencies and to pursue other diplomatic activities that will support a cancellation of a large part of the Greek sovereign debt and new terms of payment for the rebuilding of a sustainable Greek national economy.

Malcolm Sawyer Emeritus prof, University of Leeds
Danny Lang Associate prof, University of Paris
Prof Yu Bin Professor and deputy director, Chinese Academy of Social Sciences
Prof Ozlem Onaran University of Greenwich
Prof Mario Seccareccia University of Ottawa
Hugo Radice Life fellow, University of Leeds
John Weeks Professor emeritus, Soas, University of London
Prof Howard Stein University of Michigan, Ann Arbor
Anitra Nelson Associate professor, RMIT University, Melbourne
Prof George Irvin University of London, Soas
Dr John Simister Manchester Metropolitan University
Mogens Ove Madsen Associate professor, Aalborg University
Wang Zhongbao Associate professor, editorial director, World Review of Political Economy
Dr Susan Pashkoff Economist
Andrea Fumagalli University of Pavia
Pat Devine University of Manchester
Professor Ray Kinsella University College Dublin
Alan Freeman Co-director, Geopolitical Economy Research and Education Trust
Eugénia Pires Economist, member, Portuguese Citizens Debt Audit
Dr Jo Michell University of the West of England, Bristol
Michael Burke Economist, Socialist Economic Bulletin
Paul Hudson Formerly Universität Wissemburg-Halle
Dr Alan B Cibils Universidad Nacional de General Sarmiento, Buenos Aires, Argentina
Guglielmo Forges Davanzati Associate prof, University of Salento
Prof Sergio Rossi University of Fribourg
Faruk Ulgen Associate prof, University of Grenoble
Tim Delap Positive Money
Eleni Paliginis Middlesex University
Grazia Ietto-Gillies Emeritus professor, London South Bank University
Professor Radhika Desai University of Manitoba
Michael Roberts Economist, ‘The next recession’
Michael Taft Unite the Union, Ireland region
Dr Andy Denis City University London
Peter Kenyon Chartist
Professor Emeritus Geoffrey Colin Harcourt UNSW Business School


The letter in the Guardian was originally published here.  

The causes of the A&E crisis

.506ZThe causes of the A&E crisisby Michael Burke

The A&E service in British hospitals is in crisis. All health services come under pressure during winter as seasonal flus take their toll and some lead to more complicated conditions. But winter comes round every year and this is not an especially severe one so far. Yet hospitals across the country report increasing pressures and this is focused on accident and emergency services, not normally in the front line of winter demand. A more severe winter could produce a deepening crisis.

NHS England data shows that waiting times for A&E are now the worst in a decade. The Coalition reduced the previous targets for waiting times but even these targets have been missed. Only 92.6% of A&E admissions are being seen in under 4 hours, which means 3 out of every forty patients are waiting longer. Some of these emergency patients are waiting much longer. The data is shown in Figure 1 below.

Fig. 1 NHS A&E waiting times

There is a significant campaign of misinformation underway, with the government attempting to escape responsibility for the crisis. But Dr Clifford Mann President of the College of Emergency Medicine was clear. He told Radio4 listeners that, “elective surgery is profitable. Emergency surgery will always be unprofitable and so hospital trusts have not invested in it.” The structural cause of the crisis is clearly the introduction of market mechanisms and principles into the NHS.

There is also a direct effect from austerity policies, which is the catalyst for the crisis. The government likes to claim that it has ‘ring-fenced’ NHS spending. But this only means that the cash total for the NHS is broadly unchanged. In effect NHS spending is frozen in real terms. But there is inflation in the health service (usually greater than the broader economy because of rising drug and equipment prices). In addition, the population is rising and it is ageing. There is an increased demand in terms of rising prices and rising need. Freezing spending inevitably leads to deteriorating services.

The fact that NHS spending has been frozen in real per capita terms is directly responsible for the immediate crisis.

The fall in NHS spending as a proportion of GDP is shown in the chart from the Office of Budget Responsibility (OBR) below. According to OBR projections the fall is likely to accelerate in future years.

Fig.2 NHS Spending as a proportion of GDP

There is no mystery behind the crisis in the NHS. Structurally, the introduction of the market made crises inevitable and austerity has brought it about. Saving the NHS and providing a decent health service means ending austerity and removing the market ‘reforms’.

The transformation of Latin America and the Caribbean and its new challenges

6992,00.html”>Above $4 a day people can also begin to move beyond basic necessities and establish at least some quality of life. Most important of all average life expectancy at birth has risen by 3 years, from 71 years to 74 years. This is the most fundamental social indicator of all indicating improvement in living conditions and prosperity and is only possible with a combination of increased access to a range of foodstuffs, improved healthcare and housing.

There are a large number of indicators of poverty reduction and social progress which point in the same direction, although some important indicators of the position of women have not improved or have even gone backwards. These are significant omissions which need addressing. But taken as a whole the improvement in the economy, the general well-being of the population and its poorest members have also shown remarkably rapid and dramatic improvement since the beginning of this century.

Source of growth

Many Latin American and Caribbean economies are exporters of basic commodities. Like all commodity producers they benefited from the strong rise in global commodity prices in the early years of this century. The increase in commodities’ prices is illustrated in Fig. 4 below, as the commodities’ research Bureau (CRB) aggregates a basket of many of the key commodities’ prices, which doubled in price over the period.

Fig.4 CRB Commodities Index, 1993 to 2012
Source: Reuters/CRB

However the widespread assertion that exports were the sole or even main contributor to regional growth is a misconception. The accurate picture is that the increased export earnings from rising commodities prices were a catalyst for growth in general but that this growth was led by investment. This is shown in Table 1 below which itemises the growth rates for GDP and its components since the beginning of this century.

Table 1. Latin America & the Caribbean, Growth of GDP & Its Components, 2000 to 2016 (Forecasts)
For most of the period 2000 to 2012 exports were one of the weaker components of GDP growth. Over the period as whole they grew more slowly than GDP itself. Furthermore for the entire period exports grew more slowly than imports. As a result net exports actually subtracted from growth.

The leading component of growth was fixed investment. This conforms to economic theory, where the amount of capital deployed and the growth of the workforce and its quality (via training and education) account for the overwhelming bulk of growth. In the most accurate terminology, fixed investment is the accumulation of the productive capacity of any economy. As previously noted, both consumption and living standards improved dramatically over the period. But consumption cannot be an input into growth. If consumption growth exceeds output, it can only be sustained by increased indebtedness which actually leads to lower living standards. The increase in both private and public consumption was only made possible through the sustained increase in fixed investment, which was the strongest component of GDP growth by some distance.

It was only in 2010 and 2011 that exports grew more strongly than GDP. This was a result of global quantitative easing led by the US and the modest recovery in the leading economies which had the effect of driving up global commodities prices even further. But this produced its own negative effect. 2012 was the first year where fixed investment growth lagged GDP growth and the economy has slowed since. As resources are diverted away from investment economic slowdown inevitably follows.

Problems caused by the US

The period 1980 to 2000 was a lost generation for Latin America. The US had overthrown the Allende government in 1973 and held sway over the continent mainly through its alliances with brutal military dictatorships. The revolts against the dictatorships in Nicaragua, El Salvador and Grenada were all blocked or overturned by the US or US-backed forces.

It was this US dominance in the region which paved the way for economic collapse. The US had unilaterally withdrawn from the Bretton Woods currency system in 1971, provoking a global spike in commodities’ prices. It was forced to do so because it was unable to finance both the Viet Nam war and domestic consumption at the prevailing exchange rate. This fall in the US Dollar/rise in commodities’ prices resulted in a huge increase in the Dollar export earnings of the oil producing states, concentrated in the Arab world.

The oil producers, led by Saudi Arabia effectively bailed out the US through a huge inflow of those earnings in the form of ‘petro-Dollars’ into US banks. As well as financing US budget and trade deficits these funds were also used to boost US banks overseas lending, especially in Latin America.

The global downturn of the late 1970s left these borrowers exposed, primarily government borrowers. A full-blown currency, debt and economic crisis was marked by the Mexican government’s debt default in 1982. At US insistence, it was the US banks that were rescued, not the Latin American economies, through the issuance of ‘Brady Bonds, named after the US Treasury Secretary. Debt crises in a host of other countries followed and the resulting debt burden sucked capital from South to North over the following decades and led to economic stagnation and misery.

These gyrations are not solely of historical interest. The role of the US Dollar as the major reserve currency and the denominator for virtually all globally-traded commodities means that significant or abrupt changes in US economic and monetary policy are magnified in commodity-producing and/or debtor economies. Sharp changes in US monetary policy always lead to sharp dislocations in the rest of the world, especially in ‘emerging markets’. As the US is also the world’s largest net debtor economy, it has a constant necessity for inflows of overseas capital. In periods of economic expansion this need increases sharply. Changes in US monetary policy are conditioned by this requirement for capital generated in the rest of the world and so can cause abrupt and hugely dislocating flows of capital in other countries.

This is precisely what has happened in the most recent period. The US Federal Reserve Bank ended its third round of quantitative easing on October 29. This had helped to inflate financial assets included commodities prices from 2010 onwards. Now the US is consciously aiming to drive down key commodities’ prices. The US has agreed with the key oil producer Saudi Arabia that the oil price should fall. On the US side this is an extension of the sanctions against Russia, but it welcomes the collateral damage to countries such as Venezuela, where sanctions are now also threatened.

New challenges

Politics comes before economics. The economic transformation of an entire continent cannot happen randomly. Across the region (with certain exceptions) through decades of upheaval a political leadership has been forged that rejected the dominance of the US and its neoliberal economic policies. The period 2000 to 2002 was marked by the sharp turn of Hugo Chavez’s revolutionary government in Venezuela towards Bolivarian socialism, ending generations of national humiliation. Shortly afterwards the serial humiliations inflicted on Argentina hit a brick wall with its default. Then in 2002 the Lula and the Brazilian Workers’ Party won the Presidential election.

Although they represent different social coalitions their common platform is a desire for economic growth, and the improvement of the living standards of the population, in particular the poorest layers of society. In different ways they draw inspiration from the Cuban revolution and its determined resistance to US rule.

It is important to stress that economic redistribution was an outcome made possible by growth. It was not the driver of it. The principal economic contributor to the economic transformation was the rise in fixed investment. Until 2012 fixed investment was the strongest component of growth and was its leading element. Growing trade, including intra-Latin American trade was a key catalyst for investment-led growth. This in turn allowed the growth of both public and private consumption, which indicates the general rise in living standards.

But the catalyst of rising export revenues has gone into reverse. At the time of writing the CRB Index had fallen to 247, close to levels last seen at the depths of the crisis in 2008. The oil price has fallen below $65/bbl a new 5-year low. This is a direct consequence of changes in US policy. This is in effect a crisis of 2008/2009 proportions for most of the commodity-producing economies, which takes in virtually the entire continent of Latin America and the Caribbean.

The growth of fixed investment has slowed to a crawl, which will prevent any sustainable revival of GDP growth. This is illustrated in Fig.5 below with reference to Brazil, which is by far the largest regional economy and accounts for nearly 40% of the entire continental GDP. This shows Brazilian Gross Fixed Capital Formation (GFCF) as a proportion of GDP, both the total and the specific contribution of the private sector. From 2002 onwards the long-term decline in the investment rate was being reversed. But there has been a renewed decline in 2012 (and other data suggest this has been extended since).

Fig. 5 Brazil GFCF, Total and Private Sector, % of GDP

Capital outflow

There is also a new threat in the form of capital outflow. The US is the dominant financial power in the world and the US Dollar the main currency denominator not only for commodities but also for international debt. Yet the US has a structural capital shortage, as shown by its chronic deficits on the balance of payments. In periods where US capital is seeking to expand, it is obliged to suck in capital from the world. The outflow of capital from ‘emerging market economies’ was recently the subject of a strong warning from the Bank for International Settlements (BIS). This is a specific threat to the Latin American economies.

The BIS data show that Latin America and the Caribbean owe BIS-reporting banks (the banks of all the industrialised economies) a net amount US$1.337 trillion. Of this $565 billion is held in foreign currencies, which is virtually all in US Dollars. The overwhelming bulk of this US Dollar debt is owed by both private sector firms and banks based in the region and is owed to Western banks. US Dollar debt owed by governments is a relatively modest $113 billion.
In addition to the challenge posed by falling commodities’ prices and the need to reverse the sharp slowdown in the growth rate of investment, it is the region’s private sector firms which are the Achilles Heel of the economy.

The regional firms and banks are no longer benefitting from the rise in exports and are primarily responsible for the sharp slowdown in investment. They are also the primary source of capital outflow from the domestic economies, and will in many cases be directly responsible for it. They are likely to come under severe pressure as they absorb the effects of lower exports, slowing domestic economies and rising debt-servicing costs. There is no point in minimising the scale of these difficulties. They amount to a new crisis for the entire region and need a new response.

Responding to the new threats

A revival of growth is vital for a return to rising living standards. Three key steps are required, each of them interrelated. Returning to per capita GDP growth depends first on reviving the growth of fixed investment. Secondly it is necessary to soften the blow of falling export prices by increasing trade diversification. This is both a geographical diversification as well as adopting measures to increase the value created in production by increasing the output of finished goods and manufactures, compared to basic commodities. Thirdly a series of strong defensive measures are needed to insulate the region from the US-driven outflow of capital.

The decline in fixed investment is primarily the responsibility of the private sector. Since private sector investment is determined by the anticipation of profits a spontaneous recovery cannot be relied on, especially in the current conditions. Therefore the state sector must increase its own level of investment. It can do so in a number of ways, including directing domestic banks to increase productive investment by cutting back on speculation or other useless activity. It can regulate the level of private sector firms’ investment by legislation and other means (including in the awarding of government contracts). It can also apply windfall or other confiscatory taxes to fund direct government investment. If the private sector resists any of these measures, all necessary steps can be taken to overcome that resistance, including nationalisation.

One of the great successes of the period of expansion has been increasing continental economic co-operation through a variety of regional bodies, including Mercosur/Mercosul and ALBA. This helps to break down colonial patterns of development, where nearly all international trade was formerly geared towards exports of basic goods to the US. The deepening of regional ties through increased trade and infrastructure projects can help to soften the blow of falling commodities’ prices. But it is also important to move higher in the value chain of production and away from basic goods. Over the long-term manufacturing has been in decline as a proportion of GDP across the region. Increasing regional value creation requires both development of the economic capacity and access to hi-tech investment products. Here the two key potential allies are the deepening of ties with China and Russia. The former can provide funding for regional infrastructure and both can provide access to hi-tech investment goods, vital to revival of manufacturing and increasing value-added.

The outflow of capital represents an immediate and significant threat to regional prosperity. National savings need to be protected from US predations. Strong counter-measures are required. These may include restrictions on financial trading, capital controls and taking state ownership and control of the banks where necessary, as they facilitate the highly damaging outflow of capital.

Conclusion

Latin America and the Caribbean have seen a remarkable transformation in the most fundamental of living standards of the population in the first decade of this century. The first condition was the forging of a political leadership capable of coming to power and ending US domination.
Economically they were able to achieve this as the commodity-producing economies of the region benefited from the global rise in commodities prices. But this benefit was used to fund investment, which was the leading component of growth. It was the rise in investment which allowed the rise in living standards.

Now commodities’ prices have gone into reverse. Yet it remains the case that only increased investment can lead to increased prosperity. Therefore new radical measures are required in order to fund investment. Continuing the transformation in distribution will require a transformation in production.

This is centred on the direction of private sector firms and banks operating in the region. They have reduced their level of investment in the face of falling commodities prices and a slowing economy. They are also the primary source of the potentially disastrous capital flight from the region, which is being orchestrated by the US to destabilise its enemies and for its own benefit. Only by directing their levels of investment can growth be resumed. In some cases taking ownership of some of these banks and firms can the governments continue with their policies of economic and social transformation.