economic lies and cuts november 28 2010

8/8/2019 Economic Lies and Cuts NOVEMBER 28 2010

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economic lies and cuts: what you

are fighting (for)Richard Drayton

to Cambridge Occupation of Old

Schools, November 28, 2010debt to GDP ratio? price vs. yield? collateralised bond obligations? credit default swaps?

money supply? commodity vs. asset inflation? quantitative easing? liquidity trap? theparadox of thrift?

Practical men, who believe themselves to be quite exempt from any Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct intellectual influence, are usually the slaves of some defunct

economist´ (KEYNES)economist´ (KEYNES)



three kinds of economic lies

(1) that ³the publiccoffers are empty´

(2) that cuts to publicservices arenecessary

(3) that cuts are the

rational solution to acrisis



Why cut? debt burden unbearably heavy? leading to

inefficient tax burdens?

state as economic actor ³crowding out´

private activity? as a symbolic political act

Marketism ± an ideological hostility to

government, and faith that reducinggovernment opens up space for higher efficiency of markets



Why not cut?

government a critical actor in the moderneconomy, employer of 20-30% in someregions: CUTS = DEFLATION = AWORSE DEBT TO GDP ratio!

government as more efficient than marketover long time frames and for mass

services? ³The paradox of thrift´



"

Vince Cable in April 2010 explaining the

paradox of thrift"´

³Cutting too soon and pushing the economy backinto recession will make the deficit worse, as tax

receipts fall and benefit payments rise. TheConservatives¶ so-called efficiency savings areparticularly dangerous. They have no clue whereor how these µefficiencies¶ will be made, making

it likely they will be nothing more than a smokescreen for job cuts´

or see the Magaritaville episode of South Park



do cuts make the bond markets

like you?emerging market debt experience:mproving

creditworthiness, for example, by reducing deficits and introducing neededreforms, has limited effect: instead correlation with the spread between T-

bond and junk in the US domesticmarkethttp://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=837111

NB: The Irish experience: strict cuts 2008-2010, driving a deeper collapse

NB (2)): November 2010: Irish debt continues to fall in value, AFTER bailoutannounced and new austerity budget proclaimed

Why? the role of the United States in the international money/debt system since

the 1970s. The United States as the key market for global savings, and a vastengine for producing debt gives the fundamental shape to global fixed interestmarket



The current crisis?

long term post-1980 crisis of the non-financial British and US economies

high levels of structural unemployment and underemployment

declining US and UK export competitiveness (with de-industrialisation, intrain since late 20th c.)

high levels of personal and corporate debt (which ways heavily in the lowinflation environment

long term wage decline (wages in US and UK reach their peak for lowesttier in the 1970s

the 2010 situation only an extension of a post-1980 phenomenon

(obscured by very cheap cost of capital in this period, and in the caseof the UK the North Sea oil windfall ± in 2006 UK became a netimporter

continued restriction in credit

economic recovery??: UK- public sector construction led, and US asset

inflation



cheap money: a failed option

'quantitative easing' (or how to pump up themoney supply by printing money without(initially) driving commodity inflation

BUT, little response, thus QE2- $600 billion

the threat of a liquidity trap

cheap capital ± 'keyboard credit' ± drivingasset price inflation around the world

Guardian 27/11/2010: ³sales of million-poundhomes soar by 44%´



How did we get here?: a short guide to Neoliberalism

(1) 1914-45-- collapse of confidence in the power of the

µinvisible hand¶ to make either perpetual peace or universalabundance

1929: The Wall Street Crash and the Great Depression: the rise of Keynesianeconomic and new visions of the role of government in making economicstability and social well being

Post 1919: League of Nations -- multilateral structures -- ILO - the liberalargument for the application of µbest practices¶ in labour relations around theworld -- against µsocial dumping¶ ± a Globalization of human rights

By 1945 human rights: not just freedom from tyranny, but also theright to food, the right to employment, to housing, to health, toeducation



Susan George:

I ³In 1945 or 1950, if you had seriously proposed any of the ideas andpolicies in today's standard neo-liberal toolkit, you would have beenlaughed off the stage or sent off to the insane asylum. At least in theWestern countries, at that time, everyone was a Keynesian, a socialdemocrat or a social-Christian democrat or some shade of Marxist.The idea that the market should be allowed to make major social andpolitical decisions; the idea that the State should voluntarily reduce itsrole in the economy, or that corporations should be given totalfreedom, that trade unions should be curbed and citizens given muchless rather than more social protection--such ideas were utterly foreignto the spirit of the time. Even if someone actually agreed with these

ideas, he or she would have hesitated to take such a position in publicand would have had a hard time finding an audience´



The Keynesian era, c. 1945-1976

- state intervention in industry, economic andsocial planning, restrictions on capitalmarkets

- extraordinary economic growth around theworld, extraordinary improvements in socialwelfare

- declining inequality: 1928 top 1% took 23%, 1940-84 less than

15%, 1965-80 less than 10%

± BUT: victim of its success, declining profits, USextraction of 'rent' via its dollar as reserve currency



The 1970-80s crisis- the Nixon shock ± 1971 break of link to gold:

1945-1971 dollar supply increased 55%; 1971-2001, by 2000% 'a cheque never cashed'

- the attack on Keynesianism: the rise of monetaristand 'corporate Keynesian' economics, retreat of state from economic intervention in industry

- the emergence of a new financial model- openingup for a new massive growth in capital markets

- attack on labour's power to negotiate wages,

- privatisation: transfer of wealth from public toprivate realm



Does neo-liberalism work?yes: in terms of making elites richer, transfer

of wealth from poor and middle to rich

no: in terms of real economic growth and the

experience of ordinary peoplecollapse of wages, privatisation of debt,

financialisation of society, oversaving of superrich, underinvestment in real economy

from 1960-80: output per person grew 83%,1980-2000: 33% (only success stories in Asia, where China etc. broke the neoliberalrules



The origins of the 'Credit Crunch'- growing inequality, pro-rich economic policies,

'cheap money' for bankers driving from 1980s ±asset price inflation, private debt instead of higher wages

- financialisation driving all sorts of social savings tocapital markets, with osmotic pull of US debteconomy driving flow of global savings to theUnited States

- Clinton era removal of constraints (Gramm LeachBliley and Commodity Futures Modernization Act1999-2000; Gordon Brown collaborating

- NINJA/IBGYBG> CBO > CDS: 2007-8 collapse



making us pay for their crisis

- Lehman Brothers allowed to fail, but theGoldman Sachs alumni directing USeconomic policy decree 100 cents in thedollar cover for AIG risk (key GS liability

- Ireland (like others) commits 100 cents inthe euro for distressed assets

- refusal to pursue nationalisation OR ofractional compensation for speculators, or levies on profits, or prosecution of speculators

economic lies and cuts november 28 2010

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