27th October, 2010

Today I posted a blog “Savings and the alchemy of credit’ on the Reuters site…which you can access here. What follows is the longer original.

Over the last twenty years or so, neoliberal economists have held sway over the profession – and over the economy. Individual transactions in markets; the supply and demand for goods and services and letting individuals pursue their own interests – these ideas, and this very narrow approach to the economy – were considered vital for the greatest social welfare. The role of the banking system and of credit-creation was considered peripheral. Instead economists (such as Friedrich Hayek and more recently Mark Skousen ) argue that it is the savings (of individuals and corporations) that “drives capital investment, lowers interest rates, and allows firms to adopt new production processes, technologies and create new jobs.”

The public, believes on the whole that ‘savings’ are required to finance e.g. private sector investment. Which is why there is such wholehearted support in Britain for cuts in government expenditure – with most believing George Osborne’s strongly held view, that these cuts would lead to ‘savings’ which could then be used by the private sector to ‘create jobs’. Just like individuals saving to pay off credit cards, as Mr Osborne asserted at the recent Tory Party Conference.

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Dear readers…another post on the broken banking system…This time on the Guardian’s ‘Comment is Free’…..Below you will find my version. And at the Guardian, the edited version…..

Public discourse, cheered on by the BBC, amplifies George Osborne’s assertion that the deficit ‘is like a credit card’. That cuts in government spending are needed to reduce the deficit.

If only.

If only government deficits were like our own. To pay down a credit card may require no more than a cut here and a tightening of the belt there. Perhaps we might supplement our income, with a part-time job. But with cuts and additional income, it is possible to regain control, and pay down that card.

Not so for government deficits. They cannot be managed like that.

Believe it or not, the now all-powerful UK Treasury cannot cut the deficit.

Those axe-wielders can only cut government expenditure.

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18th October 2010

Thanks to Mehdi Hasan of the New Statesman who made reference to the paper by Professor Victoria Chick and myself, ‘The Economic Consequences of Mr Osborne‘ in his article ‘Ed Miliband must not be defined by his enemies‘ earlier this week.

Hasan questions the willingness of some inside the labour party to “indulge Osborne and co by denying they are ‘defecit deniers’”. He goes on to say:

“This is the message Labour must promote: cutting spending is not the same as cutting the deficit. The new shadow chancellor, Alan Johnson, has joked that he plans to buy an economics primer to prepare for his new post. I have a better suggestion for him: reread Balls’s speech. Or alternatively go online and download a research paper entitled “The Economic Consequences of Mr Osborne”, co-authored by Victoria Chick, emeritus professor of economics at University College London, and Ann Pettifor, one of the few British economists who can credibly claim to have predicted the crash. Having studied the data from 1918 to 2009, they conclude: “The empirical evidence runs exactly counter to conventional thinking. Fiscal consolidations have not improved the public finances . . . Consolidation increases, rather than reduces, the level of public debt as a share of GDP and is, in general, associated with adverse macroeconomic conditions.”

Dear readers….after a longish period of drought, several camels have turned up at the debtonation ‘water hole’….Here, for the second time today, is a post…its a piece that I wrote for dear old Huff Po, which can be seen here..…

Let’s be honest: the banking system is now fully dysfunctional. It has failed in its primary purpose: to act as a machine for lending into the real economy. Instead the banking system has been turned on its head, and become a borrowing machine.

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Dear readers. Prof. Victoria Chick and I  had a letter in the Financial Times today. Am inserting it below for your information…..

Published: October 4 2010 05:27 | Last updated: October 4 2010 05:27

From Ms Ann Pettifor and Emeritus Prof Victoria Chick.

Sir, Kitty Ussher (“Miliband must toughen up on cuts”, Comment, September 29) is concerned that Labour should win credibility with the public on economic issues, and in particular on the government’s deficit. To do so requires some understanding of economic fundamentals.

By calling on Ed Miliband to “toughen up on cuts”, she sets up false dichotomies: between cutters and postponers; between deficit-cutting and stimulus. The debate is not between these but between expenditure-cutting and stimulus.

While we agree there should be a “plan to cut the deficit”, the question raised is whether expenditure-cutting (and tax-raising) will actually result in a reduction in the deficit or an increase? Our research shows, using UK data from 1918 to 2009, that a persistent expenditure cut was correlated with a rise in the debt/gross domestic product ratio; and expansions in expenditure with a fall in debt/GDP.

This result arises because government is not in a position to determine its own deficit/surplus. The size of the budgetary outcome depends on the plans of the entire economic system and its reactions to the government’s planned actions.

Since the deficit is not something that government can control, setting out to reduce the deficit is to look at the problem through the wrong end of a telescope: the way to reduce a deficit in a time of unemployment and feeble recovery is to spend (preferably wisely) to promote employment and permanent improvements to our infrastructure, including our “human capital”.

Keynes looked through the telescope the right way round: “Look after the unemployment, and the budget will look after itself.”

Ann Pettifor,  Fellow, New Economics Foundation,  London SE11, UK;

Victoria Chick, Emeritus Professor of Economics, University College London, UK

I am in Kuala Lumpur, Malaysia at the superbly organised World Capital Markets Symposium, sponsored by Malaysia’s Securities Commission. (The level of professionalism of  staff organising this event is a joy for participants, and puts many other conferences I have attended in Washington and London, to shame.)

We heard this morning from, amongst other very distinguished guests, Prof. Nouriel Roubini, and later today I will be sharing a panel with him. (Will post my notes for that panel on this blog after the session.)

I am a great admirer of Prof Roubini’s, and have been since in 1997/8 when I discovered his invaluable website for tracking the Asian financial crisis. Thanks to his generosity in posting every available paper/briefing written on the crisis, I, and all his readers, were much better equipped than we would otherwise have been in understanding its nature of that crisis. But although his analysis this morning was pretty sound (and is reflected in his new book) there are areas of disagreement between us, which are pretty fundamental.

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We here in the UK have had blanket coverage of the Pope’s visit, which has apparently been global. On the whole the coverage irritated me, because, as always, the trivial dominated public debate. ‘Pope’s battle to save Christmas’ was a typical headline. ‘Pope: don’t let the PC brigade wreck Christmas’ – screamed Murdoch’s Sun newspaper.   These headlines derive from the Pope’s  speech at Westminster where he was quoted as saying that “there are those who argue that the public celebration of festivals such as Christmas should be discouraged, in the questionable belief that it might somehow offend those of other religions or none.”

All of which I believe, misses the point. It is true that Christmas is being wrecked. But not by the PC brigade, despite the Sun’s attempt to discredit efforts to end discrimination.  Instead Christmas is increasingly wrecked by capitalism’s ruthless exploitation of its values and sentiments, and by the unrestrained consumption unleashed by the finance sector’s interests and values. That is what the Pope should have attacked, explicitly. He could have taken a leaf out of the book of that admirable campaign, Operation Noah (and here I declare an interest) which  has attacked the super-consumption associated with Christmas, and campaigns to ‘Reclaim Christmas’.

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Dear readers , once again accept my apologies for a long absence.  The reasons have to do with a period of productive activity (of which more below) and travel,  which kept me busy.  But I have to admit too that, in the midst of the gathering gloom, and with central bankers raising fears about the spectre of deflation there seems little to add to the arguments that I, and my colleagues have been making since 2003. Not to mention the comments  made to the Times in October, 2009 .

Then, nearly a year ago, in the midst of  much hype about the  ’recovery’  I bravely (given the scale of consensus) stuck my neck out and warned that ‘the worst was yet to come’…… That the deflation of the vast debt bubble blown up by the finance sector, and cheered on by central bankers, neo-liberal economists in think tanks, the media and academia…had a long way to go. That the debt-deflationary process is going to be prolonged, painful and destructive – unless enlightened governments learn the lessons of history and intervene.  Sadly, however, as I argued in that interview  “….now there is a consensus that governments should not spend any more in this crisis. That will tip us into a big depression.”

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If imitation is the sincerest form of flattery, then we are flattered that the FT have adopted our ‘Econoclast’ identity for their site….It is edited by Gavyn Davies, and is a good read. Furthermore, we have at times partaken of FT generosity, by using their logos, without permission, for stories…and so declare that we are quits.

This again is an example of what Clay Shirky calls the “creativity and generosity of our interconnected age” in his new book: “Cognitive Surplus“.

He makes an interesting point in an interview with the Guardian, when discussing paywalls.  I quote: “When we talk about newspapers, we talk about them being critical for informing the public; we never say they’re critical for informing their customers. We assume that the value of the news ramifies outwards from the readership to society as a whole. OK, I buy that. But what Murdoch is signing up to do is to prevent that value from escaping. He wants to only inform his customers, he doesn’t want his stories to be shared and circulated widely. In fact, his ability to charge for the paywall is going to come down to his ability to lock the public out of the conversation convened by the Times.”

No one can say that we at debtonation lock anyone out of our conversations!  Yet.

We are pleased that ‘The Economic Consequences of Mr. Osborne’ (which you can link to here)  has attracted attention and comment from a wide range of economic and political analysts.

The Royal Economic Society in its latest (July 2010) newsletter (not yet online, but expected to be soon) refers favourably to our paper in an article that discusses the views of a range of economic dissidents, including the LSE’s Director of the Centre for Economic Performance, John Van Reenen and Joseph Stiglitz. The article notes that while opposition to Osborne’s Budget is growing, “even so, the lack of comment by economists…about its overall macroeconomic impact remains striking.”

The paper has also attracted the attention of American economists and historians, notably Marshall Auerback of the Roosevelt Institute in a piece for the Huffington Post and on the New Deal 2.0 site: ‘The trouble with Tim’s Treasury.’ Also Richard Smith, in a critique of Niall Ferguson’s imperialist economics on ‘Naked Capitalism’, here.

Finally we won high praise from Mehdi Hassan political commentator at the New Statesman, in a piece entitled ‘I am proud to be a deficit denier’.

And I’m proud to be in their company.