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Those who helped break the economy cannot fix it

Make no mistake, yesterday’s increase in interest rates was a big deal. Painful as it might be for a good share of the population, the real point is that the Bank is signalling the end of a particular phase of monetary policy.

Since 2010 the counterpart to self-defeating austerity policies has been expansionary monetary policies. These have inflated assets – enriching the already-rich, while failing to stimulate wider economic recovery. Yesterday the Bank of England’s Monetary Policy Committee signalled an end of this dangerous game. 

But this technocratic realignment makes no difference to the fact that ‘the Guardians of the nation’s finances’ – Bank and Treasury economists – have failed absolutely to revive the economy.  You need look no further than the (ongoing) decline in real wages, to continuing low levels of private investment, and to the dangers of rising household debt. A small interest rate rise is hardly likely to improve these conditions.

Bank and Treasury economists (aided and abetted by the OBR) are guilty of defeatism. They argue that despite their powers, THERE IS NOTHING TO BE DONE. It is assumed that somehow ‘the invisible hand’ or ‘the markets’ will, without intervention by the authorities, correct the weakness, insecurity and failures of the British economy.

The prolonged and painfully weak recovery is regularly blamed on something defined as “productivity”.  By shifting responsibility for economic failure on to productivity, the Bank, Treasury and OBR economists are saying that somehow economic failure is inherent to the economy – to businesses and especially to workers. “Nothing to do with us, guv” they mutter.

They add that the situation has been exacerbated by the vote to leave the EU.  This is a handy way of denying that the ongoing economic failure of the British economy (and the Brexit vote) can be explained by austerity policies, and the failures of the financial system.

By taking this approach, economists at the Bank have – conveniently – set the scene for endorsing further inaction by the Chancellor later this month.

Yesterday the Governor of the Bank was flanked by Ben Broadbent and Dave Ramsden. Ben Broadbent, as a Goldman Sachs economist, was among the earliest to call for austerity policies [1]. Dave Ramsden (who did not vote for the rate rise) implemented these policies as top economist at the Treasury. But both Broadbent and Ramsden were senior figures in economic policy-making throughout the debt inflation that preceded the crisis, and (we presume) supporters of financial globalisation.

It is obvious to anyone with an ounce of common sense that austerity policies have hurt the most vulnerable, and damaged Britain’s economic potential, by forcing a brutal adjustment to lower quality and lower paid work. Labour has been forced to bear the brunt of the Global Financial Crisis. The weakness in productivity is just the outcome of these policies, not the cause.

The real way to assess the impact of austerity is acknowledging the role of the multiplier – a serious discussion conspicuous by its absence from economic debate. Similarly the idea that low unemployment figures are a warning of imminent inflation is frankly insulting. Everybody knows that (tenuous at best) ‘priors’ about the relationship between unemployment and inflation are completely broken. In conditions of deficient demand, low wages are paying for low unemployment. We now know that the reaction to higher inflation – following the fall in the exchange rate after the Brexit referendum – has led to even lower real wages.

Economists at the Bank and the Treasury are ignoring the lessons of history. In the 1930s interest rates were held at 2 per cent for more than 20 years, as part of far larger scale reform to the financial sector, and a determined effort to recover from the 1929 Crash. But while necessary,  low rates were insufficient to restore decisive momentum. By 1934 the Treasury (under a Conservative government) had revived government investment.

Treasury economists in the 1930s – led by Keynes – had the courage to disregard diktats from the City of London spokesmen and their allies in the economics profession.  Tragically for millions of British people, and for Britain’s future, that intellectual courage is sorely lacking today.

[1] See Ben Broadbent and Kevin Daly, Goldman Sachs Global Economics Paper No: 195, ‘Limiting the Fall-Out from Fiscal Adjustment’, April 14, 2010. 

This post was first published on Ann Pettifor’s blog Prime Economics.

12 Comments

  1. Richard MacKinnon says:

    “Make no mistake, yesterday’s increase in interest rates was a big deal”.
    No it was not. In the late 1970s (Callaghan, PM and Heally, Chancellor) inflation hit 27%. Now that was a big deal.

  2. Richard MacKinnon says:

    “The real way to assess the impact of austerity is acknowledging the role of the multiplier” What the Folkstone is the ‘mulitplier’? UK debt is £1.7 trillion, the deficit is now 75 billion/year (down from 150 billion/year in 2010).
    Think of that for a minute. 7 years of conservative government and we are still borrowing 70 billion each year. Is that really austere fiscal policy?
    Please dont try and fool us with big words. Labour has done it before in the 1970s and 2000s. It will not work again. A successful economy is a no debt economy. It does not matter if we are talking about an individual, a household or a country. The same rules apply in econimics.

  3. JohnP says:

    Unfortunately Richard MacKinnon’s understanding of economics is akin to my understanding of quantum mechanics , ie, minimal.

    Why MacKinnon feels proud to proclaim his ignorance of even a key economic principle, ie, The multiplier, whilst simultaneously yet again denouncing government debt as automatically some sort of original sin , regardless of the level of economic activity in the economy, is a mystery. This man revels in his ignorance. At 3% of GDP the current UK annual debt repayment interest is still LOWER than during any sustained period in UK history since 1916. McKinnon. It is not unsustainable per se. The point is whether the use to which the massively increased UK national Debt since the 2008 Crash has been used in the most efficient way to restore UK economic competitiveness. To which the answer is NO.

    Back in the real world of economic analysis, Ann Pettifor’s article is rich in serious, insightful analysis. The point she makes on the “multiplier effect” is a very, very, important one. Normally, when governments pump the mega billions into an economy that the outgoing post 2008 Crash, Labour, then Coalition and the current Tory governments have , it would have been expected that this extra cash would have fed through to across the board wage growth, and in turn every extra £ of consumer spending would have generated yet more economic activity. Thus conventional government expansionary techniques, fiscal and monetary should have lead to every £ of new government tax reductions, pump-priming infrastructure projects , and BoE money creation in the economy, generating many times the original extra cash originally pumped in, ie, the “multiplier effect “.

    This time around though, because the 2008 Crash originated across the financial sectors , and because of the now huge , often corrupt, influence of the grossly swollen financial sector on the political systems of western capitalism, the route out of the 2008 recession started out via the huge rescue and refinancing of the banks from the public purse , and then, rather than then moving to a more conventional “Keynsian/US New Deal” type major infrastructure programmes , and tax cuts to the lower income consumers, strategy to boost demand across the economy, Western government embarked on an unprecedented ongoing money printing and close to zero interest rate, programme of !”Quantitative Easing” which flooded the banks with free money, and massively inflated the asset values of the rich and superrich, and reinflated the very property bubbles, and speculative arcane financial instrument markets that had been a core cause of the 2008 Crash !

    Little of this new money creation fed through to the mass of wage earners, still constrained by vicious anti trades union laws, and in the UK , by the unlimited labour supply of the EU. The result of this is that the huge new money creation of many rounds of Quantitative Easing has in the main not been fed by the banks, as intended, into productive, productivity enhancing business investment, or wages, and via higher wages into higher consumer spending. Instead ordinary consumers have continued to have to BORROW unsustainable amounts – reinflating the Debt Bubble which , with the property and speculative financial instrument bubbles, created the 2008 Crash.

    Because most of this new money has not circulated very much at all within the general population, and has been mostly soaked up in the property bubble and general share and asset value inflation. the “multiplier effect” of each £ created by the BoE has been astonishingly low. This unusual phenomenum , is also featured in the closely interlinked current historically very unusual fact that the “velocity of money circulation” in the UK economy is very low. Money is quite simply “stuck” with the superrich and their speculative activities, not getting out into the wider economy to generate sustainable, economic growth.

    Only a return to Left Keynsianism as an economic model can break out of this toxic , inflated property and debt bubble, low productivity economy.

    1. Richard MacKinnon says:

      JohnP,
      When a country has to borrow money to pay back the interest on debt it has accrued through past borrowing its economy is in trouble. That is the ecomomics of the mad house. It is the equivalent to someone using one credit card to pay off another just to get to the end of the month. If you dont understand that then I cant make it any simpler.
      Maybe you will listen to one Charles Dickens. “Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
      I given you that lesson before.

      1. Mervyn Hyde says:

        Richard all you prove is your own ignorance.

        Money creation in the modern economy By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate.(1)

        • This article explains how the majority of money in the modern economy is created by commercial banks making loans.
        • Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
        • The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.

        What this document actually tells you is that 97% of all money in circulation was issued as debt, not only that but is money that did not exist before it was issued to whoever borrowed it.

        The remainig 3% was issued by the Bank of England as hard currency, i.e. notes and coins.

        So that you are perfectly clear as to how money enters the economy, it is printed electronically out of thin air each time the bank make a loan.

        The government is the issuer of that currency through the private banking system.

        The question you should ask yourself, is why the government has to borrow its own money, that which only it can create????

        The whole document is here, so that you can see for yourself how all money is debt.

        1. Richard MacKinnon says:

          Mervyn,
          Give me your opinion not the pontifications of self congratulatory expert bankers. You have a short memory.
          The UK is in a financial mess. This is after 7 years of Tory austerity measures. We have borrowed to the absolute limit. Why are we in it to the neck? To bail out failed banks once run by useless bankers that should now be in jail. Why do I say this? Why am I so sure of myself? I am not an expert in economics.
          I know this because the UK still borrows roughly what it pays back in interest each year. I know this because the debt is rising not falling. I know this because the strongest ecomomies in the world are debt free. These are facts.
          I think you need to start trusting your own instincts on this. I have just reread you last three sentences and it is clear you dont know what your are talking about. (The four question marks are a clue).
          And your last statement says it all “The whole document is here, so that you can see for yourself how all money is debt”.
          Mervyn, That is just nonsense. You are being taken for a fool if you believe this. Money is not debt. Owing money is debt.

      2. JohnP says:

        Dear god, You are an economic simpleton, Richard. There is no direct similarity between a household budget and a national economy with a sovereign currency.

        If you don’t understand this, then READ SOME ECONOMICS FFS . Though even in the case of a family budget it would be a very foolish family which refused to borrow some money to fund, for instance, sending one of the family on a training course that will boost the future earnings of that family. It can also benefit a family to borrow money now to extend the house, because this will often make the future resale value of the house significantly greater than the cost of the extension. Surely you are capable of seeing that ? Quoting the inane homilies of Dicken’s comic character ,Mr Micawber, as economic profundity is just tragic, Richard !

        You are coming across as a naïve , but self-opinionated , pooterish, fool, rather than a rogue here. But being a sad dupe of the economic nonsense of the Tory Press is not very dignified.

        1. Richard MacKinnon says:

          OK, lets take ‘The Mortgage’ as the anology to fiscal borrowing, good choice JohnP.
          You are quite right, families have to borrow some times, as do countries. Borrowing to buy a house is the biggest debt most families have to take on. It can be approached in two ways.
          First, The Mortgage can be seen as a burden that should be paid back as soon as is possible. If the repayments exceed ‘the plan’ then the number of years of repayment can be cut or the monthly repayments reduced. This is usually seen as a good thing.
          Second, after a few years, if the vaule of the property has increased and the mortgage repayments have been met, The Mortgage and be Re-Mortgaged. This is complicated but there will always be a banker happy to explain how it works. Let me try and explain, how it works; if your house has increased in value the bank will lend you more money on the strength of the new vaule. If the value of your house increases again in the future the bank will keep on lending. There is one problem with this approach. If the value of your house falls, the family can end up owing the bank more than their house is worth. This is bad.
          Regardless, Labour governments prefer the second approach, when they get the chance to run the economy. This is what Labour’s shadow chancellor has said he will do if Labour form the next government. John McDonnell has said he will borrow another £500Billion. (Please note, we already owe at this point in time £1.7Trillion which is £17,000Billion).
          I am not in favour of this approach. You call me ignorant and a fool JohnP for pointing this out. I will not stoop to your level of insults. I will instead let others decide who is talking sense.

  4. David Pavett says:

    The underlying theme of this article is that austerity is bad for the economy. That is what most of us want to hear so it is easy to read such things without much attention to the specific points made. But on a closer reading a number of things seem problematic to me.

    Most of us will agree that “Since 2010 the counterpart to self-defeating austerity policies has been expansionary monetary policies. These have inflated assets – enriching the already-rich, while failing to stimulate wider economic recovery”. But from then on things become less clear, for me at least.

    Ann Pettifor says that “this technocratic realignment makes no difference to the fact that ‘the Guardians of the nation’s finances’ – Bank and Treasury economists – have failed absolutely to revive the economy. You need look no further than the (ongoing) decline in real wages, to continuing low levels of private investment, and to the dangers of rising household debt. A small interest rate rise is hardly likely to improve these conditions.”

    This seems to look backwards and forwards at one and the same time. We are told (1) that a significant change has just been made, (2) that the change is a “big deal”, (3) that it will make “no differences, (4) that the people making the change failed the economy with their previous policies and (5) it is asserted that a small interest rate rise will not improve things. For me there is too much going on here and it does not seem to me to all hang together.

    Then we are told that the Bank and Treasury economists are saying that there is nothing to be done despite the fact that they have just changed their policies to do something. Then it is claimed that the economists concerned think that markets can solve everything by themselves without intervention. The trouble with this is that it is not what the paper referenced actually says. The paper by Ben Broadbent and Kevin Daly says for example that “deficit spending was the appropriate response to an unprecedented crisis”.

    It is further claimed that “The prolonged and painfully weak recovery is regularly blamed on something defined as ‘productivity'”. The paper referenced doesn’t mention productivity once.

    Finally Ann Pettifor says that “The real way to assess the impact of austerity is acknowledging the role of the multiplier – a serious discussion conspicuous by its absence from economic debate”. In fact the paper referenced has a lot of discussion about the multiplier including considerations of when it may be positive and when it may be negative. I also wonder if it is reasonable to assume on a general discussion website that everyone knows what a “multiplier” is.

    I don’t want to defend Ben Broadbent and Kevin Daly who are clearly arguing for more austerity but if they are going to be used as a peg to hang an argument on them some attention needs to be paid to what they actually wrote.

    I am not sure that I understand the idea of “paying for low unemployment” as in “In conditions of deficient demand, low wages are paying for low unemployment”.

    I can’t help feeling uncomfortable with what appears to be the unstated assumption behind this piece namely that it is not the social relations of capitalism that are the problem and that all we need is an appropriate monetary policy which doesn’t touch those relations.

    Ann Pettifor says “In the 1930s interest rates were held at 2 per cent for more than 20 years”. Surely not. The 1930s only gives a span of 10 years. A small point perhaps but just another sign that this article was not put together with the attention that the subject matter demands.

    P.S. I also not that this article was copied from Ann P’s blog. With all that is going on in the Labour Party and on the Labour left it seems extraordinary that Left Futures cannot organise a supply of original articles dealing with some of the many problems we face.

    1. Mervyn Hyde says:

      David it really important to check out the Board of Positive Money to see that it is not just some campaign body. Their videos here do explain how the system actually works and that we don’t have to accept the current system as though it can’t be changed. It can and we should instigate it. i.e. stop issuing money as debt, but for useful purposes in society, and it is not rocket science.

      http://positivemoney.org/videos/presentations-by-positive-money/

      1. David Pavett says:

        You say that that understanding and controlling the money supply “is not rocket science”. I am inclined to say that anyone who thinks that the theory of money is easy has not understood money. Large numbers of books have been written on the subject and still there is no general agreement.

        You refer to Positive Money but theirs is just one view. It is a view criticised by the author of the above article in her book The Production of Money. Then again her view and that of neo-Keynesians generally is criticised in Political Economy of Money and Finance by Makoto Itoh and Costas Lapavitsas.

        The Positive Money people talk of money as a “store of value” (one of the usual five functions of money) but they tell us nothing about the nature of value. They say only that money should preserve its value in that it should preserve its purchasing power (which it clearly does not) and they appear to accept the need for a mild level of inflation as do all Keynesians and this guarantees that money will not retain its purchasing power. Marxists reject the idea adopted by Positive Money, among others, that the essence of money is credit.

        I would love someone who understands all this stuff well to write a series of articles explaining the different views. In my reading so far it seems that the great majority of economists know only a small range of theories and are happy to ignore those coming from super critical sources like the Marxists.

        Lapavitsas published a book earlier this year (Marxist Monetary Theory) which I have yet to get hold of but it should be a challenging (good) read.

      2. David Pavett says:

        I followed your link and watched three of the videos – at which point they started to seem very repetitive. What strikes me is that what Positive Money offers is economics without the economics bit: it is accountancy. Their theme is that all would be well if the money supply were directly controlled by public institutions. No need to explain the mechanisms of capitalism. No need to explain the nature of profit. No need either to explain the concept of value (even though it is much used). All would be well, we are told, if only the ability to issue money were removed from private banks. There would then be no more economic crises, inequality would reduce and all this could be achieved without any need to understand the nature of capitalism.

        I am not an economist but this looks to me like a theory which only ever considers the surface of things (particularly bank accounts). The failure to consider alternative views and the constant repetition gives me the impression of a quasi-religion. As with most religions I have no doubt that some of what they say is true. It is the overall package that seems unattractive to me as an offer in economic theory.

        One specific point to consider. Positive Money, like similar approaches (Ann Pettifor, Modern Monetary Theory) explains money on the basis of credit. Critics like Lapavitsas say this is entirely misconceived and that it is credit that has to be explained on the basis of money.

        As I hinted before this stuff is neither obvious nor simple. Anyone who thinks it is either of those things almost certainly has failed to grasp the nature of the problem.

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