Financial Times chief economics commentator calls for investment as the way out of the crisis – by Michael Burke

In recent articles in the Financial Times, that paper's chief economics commentator Martin Wolf has increasingly acknowledged that investment will be decisive in engineering an economic recovery, especially for highly-indebted countries, such as Britain. [1] He also argues that conventional wisdom about the prospects for economic recovery, and the policy adjustments that will be necessary, is wrong. 'The conventional wisdom is that it will also be possible to manage a smooth exit. Nothing seems less likely.'

The reason for his sober assessment is the trend in private sector financial balances; that is, the growing surpluses of private sector incomes over private sector expenditures. For the OECD as a whole this surplus of private sector savings is projected to reach 7.4% of GDP this year. Britain is one of six countries that will run such financial surpluses of more than 10% of GDP.

This situation, as Wolf points out, has been dubbed 'the paradox of debt' by Paul Krugman, following the Keynesian notion of the 'paradox of thrift'. The argument is that, while for each highly-indebted company or individual it makes sense to save, or in the current climate pay down debt, for the economy as a whole it is potentially disastrous. The aggregate saving reduces final demand, both for business investment and household consumption, and thereby deepens the recession. So incomes for individuals and companies falls further, and they respond by cutting expenditures further, and so on.

There are many criticisms of this notion from what has become orthodoxy over the past several years. The only serious one is that, if the private sector saves in this way but continues to consume and invest in the same proportions all that will then happen is that prices will fall, and goods and services will be cheaper at the new, lower level of spending. However, this ignores two trends that tend to occur in crises and are happening currently, most especially in Britain.

The first is that in a recession investment falls much faster than consumption. Private investment is controlled in the first place by profitability and not by the objective need for production of society. Furthermore, both individuals and companies cut back on investment in order to maintain vital consumption.

Of a total decline in Britain's GDP of £80bn, personal consumption has fallen by £29.5bn and fixed investment has fallen by £45.9bn. In fact, the fall in investment accounts for a little under 60% of the aggregate decline in GDP. This is shown in Figure 1.

Figure 1

The same pattern, whereby investment is the main driver of the recession, is replicated across the OECD. It is simply not the case that consumption and investment fall in equal proportions. Household consumption has fallen by 3.6%, compared to a fall in fixed investment of 19.3%. Investment is still falling, whereas all the other key components of GDP experienced small rises in the last quarter of 2009.

The second reason why this orthodox criticism is invalid is the level of debt. If prices fall, as orthodoxy expects, the real level of the debt only increases - as has happened in Japan since the beginning of the 1990s deflation in that country. In Britain there was a real danger of deflation, that is persistent price falls, at the end of 2008 and beginning of 2009, which has been averted by lower interest rates and a weaker pound. But a return to falling prices would mean increases in the debt-servicing burden for all income earners in Britain, including individuals, corporates and the government.

Martin Wolf argues that, while extremely loose monetary policy has been necessary, simply by itself it stores up two alternative problems, both of which lead ultimately to potential disaster. One possibility is that cheap money reignites a boom in consumption, which itself merely postpones an even bigger future financial crisis. The other possibility is that there is no recovery in consumption and the fiscal position deteriorates further, to the point of widespread government defaults.

His solution, set out more fully in the second article 'How unruly economists can agree', is that investment is the solution to both the economic slump and the crisis in government finances. 'What governments should do, instead, is ensure that deficits are credibly temporary, and growth-promoting. By all means, plan to cut the structural deficit faster than the government now intends. But do not believe that that would be the end of the matter. The actual deficit might need to be larger than that, for a long time. Try investment, instead'.

Who will invest?

This focus on investment is the correct one. But Martin Wolf's reliance on the private sector, and cutting the government deficit, is misplaced.

As we have already seen, it is the huge investment fall which is driving the recession. Only a very large increase in investment can therefore restore both prior levels of activity and government finances. Martin Wolf correctly chides many private sector economists and policymakers for wishing the world would return to the way it was before the crisis. He dismisses that hope as both misguided and forlorn. Yet his own hopes for a return to private sector investment themselves are seriously inadequate.

Many private sector economists expressed shock at the very recent data showing that the collapse in UK business investment continues unabated They shouldn't be surprised. Business fixed investment fell by 5.8% in the final quarter of 2009, down 27% from its peak in early 2008. The annualised fall is £40bn, over half the fall in GDP. Manufacturing investment is down 37.5% from its peak, construction down 54.3%, engineering and vehicles down 37.8%, transport down 29.8%.

This litany of an investment collapse, a literal investment strike, highlights a key problem for the idea that encouraging the private sector to invest will provide a sufficient answer to the crisis. Martin Wolf's proposals are private investment incentives - which may or may not work. They have a patchy record, often being taken up by businesses that would have invested in any event, and providing insufficient encouragement to create genuinely new investment. At the same time, he appears to accept the idea of cutting government spending.

While government spending has been rising modestly, and provided a very small cushion against the recession, the private sector is either too cash-strapped to invest, or will not do so because it cannot be confident of profits. The idea, then, that government should forego investment spending, and the economic support it brings the wider economy, is a reckless one. It is premised on the false notion that government investment in a situation such as the present 'crowds out' private investment, as if the economy were a fight in a phone booth. As we have already seen from the investment data, the private sector is in no hurry to invest, the investment strike continues. And taxpayers now own a swathe of the banking sector, so that government could force banks to lend to support any rebound in private sector investment that does occur. Government investment can replace lost private sector investment, especially in areas of extreme falls such as transport, construction, engineering and vehicles. The state may need to increase its direct control over those sectors to achieve that.

But, while it is possible to disagree with Martin Wolf on the likely source of investment over the next period - end entirely disagree with him on the need to cut government spending - it is welcome that influential mainstream economics commentators are now coming to the view that investment holds the key to economic recovery. In his words, 'Let us not repeat past errors. Let us not hope that a credit-fuelled consumption binge will save us. Let us invest in the future, instead.'

Source

[1]Martin Wolf 'The world economy has no easy way out of the mire' and 'How unruly economists can agree'

Vince Cable on bank nationalisation

Vince Cable was one of the first to call, rightly, for the nationalisation of Northern Rock - and he received justified credit for that. He has a piece in The Times today arguing the position that Ken Livingstone and Socialist Economic Bulletin have been putting forward since last autumn regarding the extreme seriousness of the economic situation and that, therefore, if a counter-cyclical increase in bank lending is to be achieved the core of the UK banking system must be nationalised now.

Vince Cable argues: 'there is also widespread scepticism about whether the Government is still on the right track - it now looks like someone giving the kiss of life to a corpse. Yet it is only a few months since the Government “rescued” failing banks with interbank lending guarantees and a £37 billion recapitalisation package for RBS/NatWest and Lloyds/HBOS.

'The new bank lending that was expected to materialise has not done so. Large numbers of perfectly sound small, medium and large companies are being starved of working capital, aggravating the recession. The withdrawal of foreign banks is clearly a factor. But, in addition, UK banks have broadly taken the view that capital should be held against future losses, a strategy that may reassure shareholders but undermines the economy.'

UK bank 'insurance' scheme will become even more unpopular because it is economically wrong

Unsurprisingly it was the Tories who proposed the new scheme whereby UK bank loans will be insured by the state - a method whereby losses made by the private banks are 'nationalised', that is underwritten by the tax payer, while bank shareholders have share prices propped up by taxpayer guarantees. It is, in short, a system whereby bank shareholders siphon money from the tax payer.

This scheme is wrong from the point of view of economic policy - what is required from an economic point of view, as Socialist Economic Bulletin has pointed out, is bank nationalisation in order to ensure lending to the economy restarts. Under the present scheme bank shareholders will continue to take tax payers money as profits instead of all money being used for counter-cyclical bank lending.

Precisely for that reason the scheme will be deeply damaging politically - people will understand their money as taxpayers is being siphoned off to the bank shareholders and bank managements who took the decisions which are responsible for the present deep economic crisis. The scheme is therefore already unpopular for that reason and it will become more so as the taxpayer begins to pick up the bill.

That the Tories should propose the public is robbed by companies is natural -that is why they proposed the scheme. But Labour should not be supporting it. Nationalisation of the core of the UK banking system is what has been required since last autumn and it should be proceeded to before even more billions of taxpayers money is lost.

The Sunday Times gets it on how China is using state owned banks to fight the recession

The Sunday Times today carries an article by Leo Lewis that factually sets out the way in which bank lending in China is now rapidly soaring as a part of its counter-cyclical strategy. This is, of course, in sharp contrast to the situation in Britain - where banks are sharply contracting lending, seriously worsening the economic downturn, despite the fact that they have received tends of billions of pounds in taxpayer bailouts.

The reason for the difference is, as Socialist Economic Bulletin has pointed out, of course that with a state owned banking system, as in China, banks can be instructed to increase lending as a central part of the strategy to fight recession. With a privately owned banking system, as in the UK or US, bail out funds put in by the taxpayer are appropriated by the need to deliver profits to bank shareholders and no increase in lending takes place.

Lewis attempts to present matters from the shareholders point of view - warning that such large scale lending programmes as in China are putting the needs of the economy before that of shareholders. But the needs of the economy should come before those of shareholders. A state owned core of the banking system allows lending to be maintained, or expanded, when faced with a severe economic downturn - which is what is required for the economy. A privately owned core of the banking system, such as in Britain, means bank lending shrinks when confronted with serious economic recession - the opposite of what is required.

Lewis's factual description of what is occurring in China shows clearly that a sharp contraction in bank lending, severely worsening recession, is not 'an act of god' which cannot be avoided. It is a consequence of subordinating the interest of the economy to those of private bank shareholders. The way out is to take the core of the banking system into state ownership and re-commence lending to the economy. Present policy in China shows what is required in this field.

Lewis notes: 'Gripped between the jaws of financial and economic calamity — and knowing that the banks hold the answer to everything — there are two choices a government can take with the sector: caulk and coddle or maim and martyr.

'It is still early days, but with new bank lending soaring 1,000 per cent year-on-year in December, it looks very much as though China is taking the Joan of Arc (maim and matyr) option.

'China’s banks may appear to be more like market-traded, market-led institutions than they did ten years ago, but that view is wishful at best... The biggest exposé of the banks’ true nature comes in the form of a recently produced graph of new bank lending in China, dating back four years. Between April 2004 and October 2008, the line bounces around in much the way you would expect it to in a booming economy with lots of simultaneous investment cycles and bubbles. Between November 2008 and now, it suddenly goes up. Vertically.

'The 1,000 per cent surge — a slew of 772 billion yuan in new loans to companies and projects — dates almost exactly from the moment lending quotas were scrapped and regional banks were told that their loan to deposit ratio could legally drop below 75 per cent. M2 — the sum of all cash and deposits — soared 18 per cent in the same month... as CLSA’s China strategist Andy Rothman puts it: “in China, there is only a credit crunch when the political leadership wants one.”... For those who truly believe that restarting the lending cycle again is a guarantee of sustainable Chinese growth above 8 per cent, the unfettering of the country’s banks could even be more significant than the government’s $580 billion spending package... The China Banking Regulatory Commission... endorsed a massive increase in lending to small firms...

'What sort of post-dated cheques has Beijing written out as guarantees to the banks that are now loyally doing the government’s bidding? Lurking behind the scenes, there must be informal absolutions offered for the banks that lend themselves to death. Good for them, good for Beijing and, probably, good for longer-term stability in China.'

How the UK needs to start using its nationalised banking sector

Few things could better illustrate the way in which attempts at all costs to prop up capitalist private property are getting in the way of economic recovery than the present situation of bank lending.

In reality, in a structural sense, no banking system can function purely on a private basis in a modern economy. Every major advanced economy offers some degree of state guarantee of savers deposits. No large deposit taking bank could survive if it places itself outside such a state guarantee system in competition with banks which accept such a guarantee. That is, structurally the banking system is in a permanent state whereby distributed profits, which ultimately go to bank shareholders, are appropriated privately while potential losses are guaranteed by the taxpayer – that is the population. Such a potential clash of interest between bank shareholders and the population, the privatisation of profit and the socialisation of losses, only does not operate as long as banks remain profitable – that is there are no losses which have to be picked up by the taxpayer.

The clash of interests between bank shareholders and both the taxpayer and the needs of the economy becomes direct in a situation of economic crisis such as the present - where banks suffer major losses and the economy requires a major increase in lending to enable recovery to take place.

What occurs with a state dominated banking system can be seen clearly in China at present. There state owned banks, which form the largest part of the banking system, can, and have been, simply instructed to increase lending in order to head off recession. As a result total bank lending in China rose by 19 per cent in the year to December 2008 – accelerating from a 14 per cent annual increase in the summer. As The Economist noted: 'China is perhaps the only big economy where credit growth has heated up in recent months.' This is precisely the type of counter-cyclical policy on bank lending which is required.

In contrast, in the UK tens of billions of pounds has been pumped into banks but lending is actually falling. The reason is that privately owned banks, instead of passing on the billions in loans to companies which require them, are using them to rebuild their profitability – a large part of which will be then passed on to shareholders as increased share prices and dividends. In short, the taxpayers billions are not being used for economic recovery but to subsidise bank shareholders.

Put more bluntly we, that is taxpayers, are being robbed by bank shareholders who are taking for their own profit the funds that were supposed to go to economic recovery.

The way to break through this impasse, and ensure sufficient lending starts flowing again, is to use nationalised banks to circumvent the blockage that exists in the private banking system. This is not even an extremely radical proposal. It has been advocated by, among others, Jim O'Neill, head of Global Economic Research for the well known extremist institution Goldman Sachs – who has argued that the UK should set up a national bank. Preferable would be more than one nationalised bank as it is desirable to maintain elements of decentralisation and competition among nationalised banks – a point recently stressed by Cédric Durand of the École des Hautes Études en Sciences Sociales in France.

However the fundamental issue is simple. There is at present a clear conflict between the needs of the economy, which requires more bank lending, and the desire of bank shareholders to appropriate as much public money as possible to build up their profits. The economy is thereby being strangled by the desire of bank shareholders, and their representatives, to achieve profit.

The way out of that situation, and to prevent the economy being strangled, is to stop funneling taxpayers funds through the private banking system, where a large part, or all, of it is appropriated by bank shareholders, and instead for the nationalised parts of the private banking system to step up lending to the economy. That is what China is doing. It is what the UK should be doing.

This conflict of interest can be resolved in one of two ways. Either private bank shareholders will continue to appropriate money intended to expand lending - consequently inflicting huge damage on the economy and, due to this, undermining the support of the Labour government. Or the nationalised parts of the banking system are used to get funds flowing to companies again.

At present in UK banking the conflict between the development of the economy and a fetish of safeguarding private ownership is not a long term or tangential one. It is an immediate issue of economic recovery.

What happens in a recession?

The government's recovery package has gone in the right direction in the area of seeking to maintain consumption during a recession.
The cut in VAT will concentrate tax relief on the average and lower paid - which is what is required from the point of view of both keeping up consumer demand and social justice. There can be discussion about whether the consumer spending stimulus package should have been larger, and whether the restrictions on government spending are necessarily the best thing in current economic circumstances. But overall the package is a commitment to an unambiguously Keynesian approach and, in the fields of consumer and government spending it can, if necessary, be boosted later in any case.
But it is vital to realise that in a recession what is decisive is neither consumer nor government spending. What, above all, occurs in a recession is that investment declines or, in the most severe cases, collapses.
In order to illustrate this Figure 1 shows the changes in the main domestic components of US GDP in the most classic of all recessions/depressions - that in the US following 1929. [1]

Figure 1

As can be seen the pattern is clear. The economic decline in US was extremely severe - on a far larger scale than anything occurring at present. The fall in US GNP (Gross National Product) was 29.7 per cent between 1929 and 1933.[2] The 1929 US level of GNP was not regained for a decade - until 1939.
Looking at the components of this decline in GDP, however, a clearly differential pattern shows itself.
Government spending increased throughout the recession - not only after Roosevelt became president in 1933 but even under Hoover.
The decline in personal consumption expenditure after 1929 was severe but less than the overall decline in GNP. By 1933 US personal consumption expenditure had fallen by 19.7 per cent compared to the 29.7 per cent drop in GNP. Personal consumption expenditure regained its 1929 level by 1939.
But the collapse in investment was extreme, far exceeding the decline in GNP - explaining the difference between the drop in personal and government consumption expenditure and the drop in overall output
By 1933 US private domestic fixed investment had fallen by 73.9 per cent from its 1929 level. Or, put another way, by 1933, US private domestic fixed investment was only 26.1 per cent of its 1929 level. This was by far and away the most severe element of the depression - which, by multiplier effects, spread its consequences through the rest of the economy.
The reason for this differential decline is that while 'demand' may be spoken of in general, in fact the different components of demand are controlled by quite different mechanisms.
Decisions on the level of government spending are taken directly by the state and can therefore be relatively easily controlled.
Regarding personal consumption, the aim of the mass of the population is to have as good a living standard as possible. The most powerful issue affecting personal consumption is the level of income, not the desire to consume. [3]
However, private investment decisions are not controlled by consumption but by profit. Therefore investment decisions are not controlled by the same mechanisms as personal and government consumption - and can fall to almost any level. It is this decline in investment which is by far the largest in a recession.
Why, therefore, cannot the government intervene directly to stop the decline in investment? The issue here is private property in the means of production. If the government takes decisions on investment out of the hands of the private owners of the means of production it, in fact, limits or abolishes that private ownership of the means of production. Therefore, in such circumstances, if the government continues to accept as private ownership of the means of production as an absolute right if cannot halt the decline in investment. Whereas if, in such circumstances, the government aims to halt the decline in investment it must encroach on private ownership in the means of production.
The practical consequences in terms of economic policy are clear. If a recession is relatively mild, acceptance of private ownership in the means of production, and therefore the inability to control investment, may at worst be wasteful but it will not be fatal. The government still has tools to increase its own, state funded, consumption demand - it can, for example, embark on huge new health or education programmes. In terms of personal consumption there is a very severe issue in terms of maintaining demand which is posed by unemployment - overall consumer spending can fall not only because wages drop but because the number of those in work falls. However the government can still carry out large increases in welfare benefits, cuts in taxation, or public works schemes that can significantly support consumer spending.
But in the area of investment the government has no comparable instruments. Approaching one fifth of the economy is accounted for by investment - and this investment also determines the long term economic growth. Public investment is a tiny fraction of this. While the government has powerful levers in the areas of state and personal consumption it has no comparable ones in investment. Nor can it have them without a encroachments on private ownership of the means of production. [4]
This will, therefore, determine the unfolding of the economic situation. There is going to be a severe recession - in terms of comparison to those since World War II. But a severe recession, in those terms, is naturally relatively mild compared to the type of economic crisis after 1929. While the financial crisis is clearly the largest seen since 1929 the downturn in the real economy does not remotely approach that of the Great Depression. The probability is that the current crisis will remain a very severe recession and but there will not be an economic depression - although this depends on the US adopting policies that avoid the type of disastrous errors that followed 1929.
If the economic downturn remains at the level of a recession then Keynesian measures will succeed, after a period, in bringing about a new economic upturn without any severe incursions into private ownership of the means of production - outside of the financial sector where they have already taken place. That is, put in other terms, the moral case for socialism will remain. But, while the role of the state, in a capitalist economy, will require to be increased in order to overcome the economic crisis - something which is already happening, it will not require a transition to a socialist society to overcome the economic downturn. If, however, the present severe recession were to pass over into an economic depression then another outcome would be posed.
It is at this point that the moral and economic cases for socialism become inseparable. A capitalist economic solution says private property in the means of production must be regarded as absolute, and untouchable, even if that means economic collapse - this answer says the rights of capital are absolute and the rights of society subordinate. A socialist solution says that if, in order to avoid economic collapse, it is necessary to make encroachments into the rights of private property in the means of production then this must be done - it is the rights of society that are absolute and the rights of capital are subordinate to this.
These 'cold' figures on the movement of components of GDP during a recession therefore spell out, in their own way, the structure of society - that one part of the economy is controlled by the desire of people to consume, that is to enjoy a better standard of life. That another part of the economy is controlled by profit. And that the interests of the two may clash.
How far they will clash during this economic downturn, and with what outcome, remains to be seen. But the socialist answer is simple. It is society, that is people, which comes first - not the private ownership of the means of production.


Notes
[1] The international source of demand is net exports. There was a drastic contraction of international trade after 1929 which seriously deepened the depression. However this does not affect the argument regarding the components of domestic demand dealt with here. Inventories also declined after 1929, adding to the recessionary effect, however changes in stocks, by their nature, are cyclical and again the concentration here is on the long term elements in economic shift.
[2] Gross National Product (GNP) differs from Gross Domestic Product (GDP) in that is equal to GDP plus net income earned from abroad. Long term US historical economic data is in GNP terms. The size of difference to GDP is, however, small and does not seriously distort comparisons to other countries GDP figures.
[3] In a recession personal consumers may decide to save more - among other reasons to protect themselves from the threat of future economic hardship or unemployment. However there are relatively effective mechanisms to tackle this, and in any case if the extra savings are invested by the government or companies no fall in aggregate demand takes place - the savings by individual are merely spent somewhere else in the economy. The biggest effect is the fall in income due to either declines in real wages or unemployment.
[4] Such encroachments may be through large scale expansion of areas of public investment, taking over areas at present controlled by private investment, or both.

Raising the top rate of income tax, a second very good step - by Ken Livingstone

Further good news about today's economic package comes in briefings to the BBC, Financial Times, Guardian and other media that the top rate of income tax is to be raised to 45p in the pound for those earning over £150,000 a year.
Yesterday, in strongly welcoming the decision to cut VAT, I argued: 'this should be the beginning of a reshaping of the taxation system. It is being briefed that this reduction in VAT will be temporary, and it will then be restored to its previous level to reduce the budget deficit during an economic upturn. This is not what should occur - any increase in VAT would be deeply regressive for the reasons already outlined. Instead, when taxation increases again to reduce the budget deficit during an economic upturn, an increase in direct taxation on the highest incomes should take place. That is, any reduction in VAT should be used to begin a reshaping of the tax system in a more equitable direction.'
Clearly a rise in the top rate of income tax to 45p is therefore a step in the right direction. At present the fiscal arithmetic shows that it does not go far enough. This increase in income tax on the higher paid by itself will raise £2 billion, which would not by itself be sufficient to avoid the need to increase VAT as it becomes necessary to reduce the overall budget deficit during an economic upturn. An increase to 50p would have been better and the left must continue to argue that VAT must not be re-increased at a later date after the present cut.
But nevertheless the fact that for the first time direct taxation on the very highly paid is to be raised is a hugely symbolic, and important practical, step. It would be wrong at this stage to quibble and this measure increases the attractiveness of the economic package still further.
Reduction in VAT, and this increase in direct taxation on the high paid, are measures that are good for economic recovery and social justice and should be strongly supported by the left.
Note also how Labour's popularity has been transformed since it has been campaigning centrally on the economy, with measures that combine economic rationality with social justice, rather than making its central thrust being on attempting to appear right wing on crime and immigration. That must be a key lesson up to the general election. There is now a total dividing line with the Tories and their economically damaging and socially unjust policies. The party that sets the agenda has a key advantage in an election. Focusing on this economic divide is the agenda that can win Labour the election.

A cut in VAT should be strongly supported - by Ken Livingstone

It would be astonishing if, after the briefing to the Sunday Times, Observer, Sunday Telegraph, The Independent and other newspapers, tomorrow's government economic statement did not centre on a reduction in VAT. If so this is measure which should be strongly supported - not only for immediate but for strategic economic reasons.

One of the most iniquitous features of Tory tax policy, particularly from Thatcher onwards, was the shifting of the tax burden from direct to indirect taxation.

Indirect taxation hits the lowest paid proportionately more than the high paid and is therefore deeply socially regressive - which is exactly why it was a policy pursued by the Tories and Thatcher. Cutting VAT will therefore hit two birds with one stone.

First, as part of the government's measures to combat the economic downturn, this is one of the most effective measures in keeping up consumer demand. A reduction in VAT will aid all sections of the population. But, precisely because indirect taxation is socially regressive, reducing VAT will aid the lowest paid most.

The lower an income the more certainly any available income is spent, as the low paid can least afford to save. A reduction in VAT has almost exactly the same effect as a boost in income because it allows a greater quantity of goods to be bought with the same money. Reduction in VAT is therefore one of the surest ways to ensure that the maximum amount of any economic package is translated into an increase in consumer demand - one of the key measures required to fight the economic downturn.

Reduction in VAT is also, politically, just the type of measure required to ensure Labour holds together the alliance of those on around average incomes and the low paid which it should be based on.

Second, strategically, this should be the beginning of a reshaping of the taxation system. It is being briefed that this reduction in VAT will be temporary, and it will then be restored to its previous level to reduce the budget deficit during an economic upturn. This is not what should occur - any increase in VAT would be deeply regressive for the reasons already outlined. Instead, when taxation increases again to reduce the budget deficit during an economic upturn, an increase in direct taxation on the highest incomes should take place. That is, any reduction in VAT should be used to begin a reshaping of the tax system in a more equitable direction.

Discussion on the future of taxation will continue, as will that on other measures such as the proposal for the government to purchase bank shares at above market prices. But tomorrow one thing is decisive. The left should give the strongest support to a reduction in VAT and applaud the government for it. Such a measure provides a striking contrast to the economically disastrous and socially regressive policies being openly advocated by the Tories.

Banks refusal to lend demonstrates the relation and difference between Keynesian and socialist economic approaches

The public row which has developed between the private banks and the government, reported in both the Financial Times and The Independent today, demonstrates both the limits of Keynesianism and makes clear the relation and difference between it and a fully socialist economic approach.
Regarding the row, as The Independent notes in its leading article today: 'The Government has already bailed out the banks with extra liquidity and injections of new capital. The Bank of England has acted drastically to reduce interest rates and is poised to go further. But so far the banks have still not responded with loans, mortgage rates or credit lines to their customers. As yesterday's CBI survey of smaller businesses illustrated, most firms are experiencing a drastic reduction in bank credit and a tightening in terms.'
These actions by banks threaten the entire economy - and therefore the well being of everyone. As The Independent notes of any proposed Keynesian economic recovery package to meet the economic downturn: 'The sort of fiscal stimulus now being planned can counter this by putting more money into people's pockets and providing more jobs through public investment. The problem of today – as in the great crash – is that the contraction comes hard on the heels of a banking and stock market crisis. Putting more money in the pockets of taxpayers, particularly at the lower end of the scale, can help. But it cannot work alone. For that you need credit to become more freely available at an attractive price.'
The paper then notes: 'From the banks' point of view, that [refusal to lend adequately] may be understandable. They badly need to rebuild their capital base and avoid a return to excessive risk. But from the nation's viewpoint, this is only making a bad situation worse. Banks must support the reflation package by restoring lending. If they will not do it of their own accord, then the Government should use the influence of its new shares and its powers to push them into more responsibility.'
The Financial Times, similarly in an editorial, deals with the same topic - warning of a threat of nationalisation if banks continue to act in their present fashion: '“Neither a borrower nor a lender be” was not intended as advice for bankers. Someone should tell them.
'The purpose of the recent round of recapitalisations was to strengthen banks so that they could continue lending during a global downturn. But banks are not doing so. They must. They are vital utilities – a modern economy cannot function without credit...
The Financial Times notes: 'Banks around the world have been recapitalised. Governments bought shares in them, increasing the banks’ risk-capital buffers. The banks were injected with enough capital not only to make up for the losses they were expected to make in the downturn, but also to allow them to expand their lending without the capital cushion becoming too small relative to the banks’ assets.
'Newly fortified, banks were supposed to become trustworthy borrowers and confident lenders. Expecting further losses, however, they have clammed up. They are wary of extending their balance sheets further. This is, in part, because they are still traumatised after a near-death experience. Many banks have also seen their top management decapitated. Finally, investors and banks have become so risk-averse that even government guarantees on lending are not convincing. Despite being underwritten by the US government, perceptions of the risk on Citigroup’s debts have remained stubbornly high.
The Financial Times argues: 'Governments can do more to support lending. They can reassure markets that capital ratios are supposed to fall in the downturn and that they stand behind the banks. Finance ministries around the world can recapitalise further. Central banks can expand their lender of last resort functions.
'If evidence emerges that banks are not lending because they are hoarding cash to pay off the expensive preference shares taken by governments, the rescue can be restructured. One option would be to give governments more control of the banks; another would be to reduce the short-term costs of the capital.
The paper concludes: 'even if governments ensure that lenders are solvent and liquid, it could still be rational for each bank not to lend. Banks want safety in numbers when it comes to lending. But a lack of credit would force sound companies under because of a working capital squeeze.'
The Financial Times therefore warns: 'If bankers do not start lending of their own accord, governments will force them to.... Faced with this prospect [of lack of adequate lending], governments will have no choice but to step in.
'Politicians may attempt to lend directly, taking on credit risk to stimulate certain categories of lending and insurance. But banks, which have always been dependent on the largesse of taxpayers, could be forced to adopt central targets for new lending. This would overcome the problem of no institution wishing to be the first-mover. And banks would have little choice but to obey; if they are unco-operative, they could end up in public ownership.'
Regarding the same threat of bank nationalisation Nigel Morris, The Independent's deputy political editor, notes: 'The Government is using the threat of a wholesale nationalisation of banks in an attempt to force institutions to lend billions to small companies struggling to survive as Britain slips into recession.
'Downing Street yesterday made plain its fury over high street banks which refuse to use the massive injection of taxpayers' money they have received to come to the rescue of businesses hit by the credit crisis...
'The financial stimulus package is designed to breathe new life into the economy but Mr Darling fears the behaviour of the banks could undermine the moves... He is expected to announce controls on the interest rates charged on small business loans...
'Ministers are irritated that banks the Treasury bailed out are dragging their feet over passing on the money. The Treasury took stakes in HBOS, Lloyds TSB and Royal Bank of Scotland in return for £37bn of public funds. The banks promised to return lending to last year's levels. John McFall, the chairman of the Treasury select committee and an ally of Mr Brown and Mr Darling, raised the prospect of state control, saying: "If the banks do not play ball, and will not resume lending, then the demand for full-scale nationalisation may well grow."
'No 10 refused to rule out such a step, regarded by officials as the "nuclear option". Mr Brown's spokesman said: "In these circumstances, of course we have got to look at all the options. But we want to work constructively with the banks to ensure they fulfil the commitments they have entered into."
'Asked a second time about full nationalisation, he replied: "It would clearly be foolish for anybody to rule out specific options at this stage."The Government has made little effort to disguise its frustration at the behaviour of banks towards small businesses and mortgage-payers.
Morris concludes: 'Mr Darling is preparing to use his pre-Budget report to fire a shot across their bows with tough demands on lending. He is not expected to impose further legal sanctions on banks, such as the appointment of a powerful watchdog to monitor lending rates, but officials want to keep options in reserve if the banks fail to respond. '
This is the dilemma of Keynesianism. What if the banks refuse to respond to voluntarily to government 'influence'? Will the government then say 'private property is sacrosanct. We know that banks refusal to lend is disastrous for the economy. But private property, in this case in banks, comes before the health of the economy and therefore of society. To preserve private property, we must surrender and allow the economy to go into slump'. That is the capitalist answer.
Or will a government say: 'We have tried indirect methods of stimulating bank lending but these have not worked - the banks are using their claimed right as private companies, that is as private property, to refuse to lend. The interests of society, that is of economic development, come before those of private property. Therefore such decisions will be taken out of the hands of the banks. The banks will be nationalised, that is their position as private property abolished, in order to commence the necessary lending to maintain the economy.' That is the socialist answer.
The dilemma of Keynesianism, at least as orginally put forward by Keynes, is this: because it accepts capitalism, that is private property, as the basis of society Keynesianism can only use indirect methods (fiscal deficits, monetary policy, interest rate policy), to attempt to influence the most fundamental issue - the investment decisions in the economy. For, if you take away the right of companies to take investment decisions, you in fact abolish them as private property - that is you abolish capitalism.
Keynesianism can, therefore, deal with minor or moderate economic crises - in these indirect methods are sufficiently powerful to cause investment to recommene and therefore to overcome the economic downturn. But if the economic crisis is really deep such indirect methods are not sufficiently strong. Private compaies will not resume investment and the economy will go into a downward spiral. In those circumstances the only economic way out is take the investment decisions out of the hands of the capitalists and into the hands of society by nationalisation - which means going forward from a Keynesian solution to a socialist one.
In the UK will the present financial crisis require a Keynesian or a socialist solution to overcome it? Regarding the overall economy that depends on how deep the economic crisis becomes. Does the UK face a severe economic recession or an economic depression? Socialist Economic Bulletin at present, for reasons it has outlined, analyses that the UK faces a severe economic recession not a full blown depression - although the reverse outcome could occur if the US makes catastrophic economic mistakes. While the moral case for socialism remains overwhelming it is unlikely, in this country, that it will be impossible to get out of the current economic downturn without resorting to fully socialist measures - that is a wholesale programme of nationalisation. Considering the economy as a whole, a Keynesian/capitalist way to overcome the economic crisis will be carried out.
But that overall perspective not only does not apply to every country in the world it does not apply to every part of the UK economy. In the financial sector, both in the UK and in the US, what is faced is not recession but a catastrophic collapse comparable only to 1929. It is already the case that the most rational, and by far the cheapest, way to sort out the disastrous situation in the UK financial sector would be to proceed immediately to wholesale bank nationalisation. The immedite crisis, whereby the banks are refusing to lend even after the bail out packages, may make it the case that the only way out of the economic downturn is by wholesale bank nationalisation - a sort of Keynesian solution in the overall economy and a socialist solution in the catastrophically affected financial sector.
Indeed, t may be put more strongly. If the government retreats in face of the present policies by the banks, with their refusal to lend then it will not be possible to apply a Keynesian policy in the overall economy. Truly socialist policies, nationalisation, in the financial sector may well turn out to be the only way to apply Keynesian policies in the economy as a whole.

Cost of bailouts rises as welfare state for corporations gets ever wider

If ever anyone wanted a clear illustration of the class based character of our present economic system, and the moral hypocrisy of capitalism, they need only look at the newly created and rapidly expanding welfare state for corporations and shareholders.
In both the US and Britain we have been told for decades that benefits must be cut back, that the unemployed are work shy, that probably most of those claiming incapacity benefit are fraudsters, in general the welfare state is a bad thing, and we must all be exposed to the full rigour or market forces or the country will be brought to its knees by 'scroungers'.
The moment banks and large corporations were in trouble, however, literally trillions of pounds and dollars were mobilised to help save their money.
In Britain Royal Bank of Scotland, HBOS and Lloyd's TSB were propped up by taxpayers money being used to support their shares. In the US the latest news shows both the still increasing cost of the financial crisis and the widening welfare state for shareholders.
Taking first two US companies in which shareholders were wiped out before their nationalisation, the insurer AIG and the mortgage company Fannie Mae, the cost to the taxpayer of the previous decisions of these companies is rapidly mounting.
Fannie Mae has announced it is losing money so rapidly, $29 billion in the third quarter of 2008, that it may need a cash infusion from the US Treasury Department by the end of the year from a special $100 billion fund the US Treasury set aside in September to aid the company. The already nationalised AIG announced a quarterly loss of $24.5 billion and has won approval from the US Federal Reserve to change to a bank-holding company - thereby opening it up for further government aid by participating in the Paulson bank bail out plan.
Turning to privately owned companies, American Express, the credit card and finance giant, has been granted bank-holding company status - as earlier were Goldman Sachs and Morgan Stanley. The Wall Street Journal reports that under these bank bailout plans the US government had promised: 'not to force banks receiving government assistance to lend out those funds to consumers and small businesses.' That is the main beneficiary will be bank shareholders.
In a surprise tax ruling the US Treasury has simultaneously handed up to a further $140 billion to US banks. The Washington Post commented: 'The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention... corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.
'The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal... "Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."... The guidance issued from the IRS [Inland Revenue Service] caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout.
"It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops," said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. "I've been in tax law for 20 years, and I've never seen anything like this."'
Simultaneously speaker of the US House of Representatives Nancy Pelosi was calling for a special session of Congress to bail out General Motors and other stricken US car manufacturers.
As the Wall Street Journal noted on 11 November: 'It was a day when even the monolithic U.S. government might be forgiven a sense of being overwhelmed by the current financial and economic situation.' Or as one one figure the newspaper quoted put it about the US government: 'The rescue efforts are "evolving in ways that I don't think anyone anticipated," said Camden Fine, president and CEO of the Independent Community Bankers of America, a trade group. "Things are just hitting them from every single direction, every day, and I don't think they know whether to spit or go blind."'
What conclusions should be drawn from all this? They are both economic and moral.
First, the claim that capitalism is a beautiful market self-regulating system has been shown to be simply untrue. This crisis shows it requires the state to step in to keep it stable.
Second, capitalism's moral hypocrisy and bankruptcy is breathtaking. A poor person on unemployment benefit or a pension can be thrown to the wolves. But if you are a rich US or UK corporation you must be bailed out immediately. It remains to be seen how much and how rapidly public opinion draws the conclusions from all this.
But to adapt Christopher Wren's words in St Paul's cathedral - 'if you want to know the case against capitalism just look around.'

Arrogance of the private banks

Socialism holds that the rational development of the economy, and therefore the welfare of society, can come into conflict with private ownership in the large scale means of production. In such a conflict socialists hold it is the interests of society that must take precedence over the private owners of the means of production.
Two such conflicts are already being seen in the current financial crisis. The first is that the recession threatens a collapse in investment. However both to keep up demand in the economy, that is to be able to carry out effective counter-cyclical measures, and to ensure long term economic growth, maintenance of investment is crucial. For that reason it may be necessary to carry out nationalisations in key industries such as construction in order to sustain investment. Economies with larger state sectors, such as China, are also able to carry out more effective counter-cyclical measures.
But the second key area is with the banks. In order to counter recession it is imperative that interest rates are radically reduced. The rate at which the state lends to banks, set via the Bank of England's base lending rate, has been radically reduced. However the private banks are continuously either dragging their feet or refusing point blank to pass such interest rate cuts on to their borrowers - as shown clearly this week when major banks attempted not to pass on the one and a half per cent Bank of England rate cut. Simultaneously they are attempting to abolish their lowest rate tracker mortgages. The reason is because they are attempting to make profits that are to be passed on to their private shareholders.
As Phillip Inman puts it rather delicately in the Guardian, shareholders: 'want their banks to increase profit margins. If banks can increase the spread between mortgage lending and paying savings interest, then they can recover more quickly. At the height of the boom, mortgage rates were little more than 0.5% above savings rates. Today, banks want that figure to expand to 2%. If mortgage rates track down with further cuts in the base rate to 1%, which some commentators believe will happen next year, it will be difficult keeping the savings rates above 2%.'
In other words policy is not to be set by the needs of the economy and limiting recession, which requires the sharpest possible reduction in interest rates, but by the desire of bank shareholders to make profits.
Many of these shareholders, incidentally, have just been saved from their holdings being make completely worthless by a huge injection of taxpayers money. Now they not only want their share prices propped up by the taxpayer but that bank lending policy should be dictated not by the needs of the economy but by their desire to make the highest profits.
If anyone ever wanted to know why private property in the means of production can come into conflict with economic development, and the case for bank nationalisation, they need merely study current developments.
Having brought the economy to the brink of disaster through their wrong decisions private bankers now demand that the interests of the entire economy be subordinated to their interests.

Eight key policy points in London to meet the recession - by Ken Livingstone

The focus of Socialist Economic Bulletin is national and international trends. It points out that in dealing with a recession two tasks are crucial.

• First, to keep up the demand side of consumption by maintaining incomes - particularly of the average and worst off sections of the population, by maintaining government spending on areas such as health and education, and using any favourable international trends.
• Second to keep up investment - which, in a recession, can frequently only be carried out by state intervention into the economy.

But the same approach is also required locally. The following programme has been published on Dave Hill's London Blog in the Guardian by Ken Livingstone on policy steps that should have been taken by the Mayor in London. Naturally a Mayor does not have the most powerful instruments of policy in their hands - such as interest rates, the ability to run budget deficits, and the right to nationalise. Nevertheless, with weaker policy instruments, the Mayor can apply the same principles, as shown in this programme.
Its elements include:

• To keep up consumption of the ordinary fare paying public by eliminating unnecessary fare increases and by increasing international demand through boosting tourism - which in London is one of its most important important industries.
• To keep up investment through pushing ahead with the big investment programmes won during the two previous Mayoral terms (the £16 billion cross London new underground railway Crossrail, the Olympic Games, the new powers in housing development won by the Mayor), putting the focus in the Olympics back on economic regeneration, stopping the de facto run down of economic regeneration programme by the London Development Agency, and strengthening London's relations with India and China - economies whose relative weight will be strengthened by the financial crisis and are important future sources of foreign investment into London.

SEB publishes this as an example of what should be done in one city to fit in with a proper recovery programme nationally. It welcomes, and will draw attention, to similar proposals for other parts of the country.

* * *

London has entered its first recession for fifteen years. Londoners know the value of their house is falling, their spending is squeezed, and an increasing number are worried about their job security. In this situation the Mayor of London should put forward clear policies which, in areas where he has power, can best help London meet the effects of this recession. I have set out here eight key measures that should be immediately introduced by a Mayor of London. All flow from a clear choice of priorities – that the Mayor must protect the economic development of London, promote social justice and therefore help those who are being most hit by this crisis, and protect the environment.

1. Reverse the cuts in Visit London's budget and allocate a £5 million a year boost in the next two years to promote London's visitor economy
In a recession London's £15 billion a year visitor and tourism economy is going to be hit. But the decline in the pound's exchange rate means that it is going to be more possible to attract tourists to London - boosting restaurants, theatres and many other London visitor attractions. Experience shows the effectiveness of tourism-marketing campaigns.
Exactly the wrong course is now being taken through severely cutting the budget of Visit London, London's tourism agency and other budgets for the promotion of London.
The cuts already made must be reversed and for the next two years, the likely length of the recession, a temporary extra grant of £5 million a year should be given to Visit London for marketing the city. This will help aid London's hard pressed visitor economy and pay for itself many times over.

2. Abandon the damaging new restrictive planning regime in London
It is going to be difficult to keep up investment in London during the recession. Yet it is vital that as much private sector construction as possible goes ahead. The new restrictive planning regime emerging from City Hall, based on the model favoured by Westminster City Council under Sir Simon Milton, should be reversed. West End retailers and responsible developers should be told they will get strong support for new development. A planning regime must be introduced in the West End and along the route of Crossrail to ensure that London gets the most from the economic opportunities it offers.

3. Speed up the house building programme and support the call for nationalisation of the necessary parts of the construction industry to carry out a large scale government house building programme
The number of new homes being built – including affordable homes – has very steeply and rapidly declined. In such circumstances the public sector must take a more active role. The Mayor should use all the new powers acquired for housing construction and join the call of Jon Cruddas and other MPs that, if necessary, parts of the construction industry should be nationalised to allow a large scale programme of affordable homes to be undertaken.
The policy that 50 per cent of new housing should be affordable housing should be reintroduced - in a recession it will be housing for those on ordinary incomes and the low paid that will be scrapped by developers. The abandonment of the 50 per cent affordable housing policy will therefore be deeply damaging to Londoners. Policies to ensure a strong supply of rented affordable accommodation must be retained.

4. Press on with the big infrastructure projects and reorganize City Hall's business and transport functions
Any opportunity for London to come through this economic crisis in the best shape possible is in significant part due to the big spending on infrastructure projects that were won during the last two Mayoral terms, such as the Olympics, Crossrail and the Mayor's new housing powers. These investment programmes act counter-cyclically to maintain economic activity and generate tens of thousands of jobs. This contrasts with the Tories' "small government" approach which would never have secured Crossrail. The attempt by discredited monetarists to advise the government against this approach should be roundly rejected by the Mayor and the major investment projects should be defended.
Chaos in the new administration is getting in the way of those who can actually run things in London. The professionalism of many managers in London government, whose skills are vital in a downturn, does not allow them to speak out publicly but the chaos that reigns in the Mayoralty is well-known to close observers of City Hall. It is of particular concern that in two key areas during a recsession – transport and business – the mayor's office has put forward no proposals for how to deal with the economic situation. This is bad for London. The mayor needs to reorganise how his office is dealing with transport and business as a matter of urgency.

5. Put the focus of the Olympics back on economic development
The most important reason for seeking to win the Olympic Games was to carry out large scale economic development in east London. This perspective has been eroded by the new administration whose actions have effectively counterposed this objective to a pure emphasis on sport. Even more so in a recession the focus in the Olympics must be put back onto large scale economic regeneration and marketing London internationally - and London government must conduct itself accordingly.

6. Reverse the cut backs in regeneration spending by the LDA and halt the risk to its government funding
The London Development Agency should not be funneling its funds into projects that are already being financed by the boroughs, allowing them to cut their own spending. This means that economic regeneration funding in London will fall by several hundred million pounds a year – exactly the reverse of what is required in a recession. Furthermore this misuse of government funding by the LDA, not using the money for its intended purposes of expanding regeneration spending, threatens to lead to the LDA's funds being severely reduced by the government in the medium term. This must stop and LDA funds must be used for their proper purpose of expanding economic regeneration in London.

7. Strengthen London's presence in the key new emerging markets
The weight of the rapidly growing emerging market economies, above all India and China, is going to increase sharply in this recession and they will emerge from it fastest. London must strengthen the relations it has established with these economies and the Mayor's proposal to cut London's presence in them by scaling back London's offices there must be abandoned.

8. January's above-inflation fares increase can and should be scrapped by returning to taxing polluters
Fares policy on the buses and underground has to be re-prioritised to help ordinary Londoners instead of the Mayor's policy of protecting drivers of gas guzzlers. The cancellation of the £25-a-day CO2 congestion charge on the most gas guzzling cars should be reversed – raising up to £50 million a year. The 'oil for expertise' deal with Venezuela must be reintroduced – gaining London over £20 million a year at current exchange rates.
These measures together will raise over £60 million a year and allow the proposed above inflation fare increase in January to be scrapped, and single bus fares kept down to 90p instead of being raised to £1.
The further new wasteful transport proposals should similarly be abandoned. The plan to squander £13 million a year by replacing bendy buses on routes 38, 507 and 521 with ordinary single and double-deckers should be stopped. The costings for these routes show that the pledge to replace all four hundred bendy buses in London would cost Londoners £60 million a year even with existing types of buses, and this should be abandoned. Even worse, the proposal to introduce a 'new Routemaster', with open platforms and conductors has been shown by independent transport consultants to cost over £100 million a year and should be scrapped.
Further financial costs will be imposed on ordinary fare-paying Londoners if the Western Extension of the congestion charging zone is abolished. TfL have stated that abolition would lose London's transport system around £70 million a year. Even the Evening Standard, which calls for the abolition of the Western Extension, and underestimates the losses from abolition, admits it will lose £14 million a year. The Western Extension of the congestion charging zone must stay not only to reduce congestion but to raise revenue to keep fares down.
These measures will save Londoners over £60 million a year in the short term and will eventually save Londoners around £200 million a year compared to the implementation of Boris Johnson's transport plans. This will permit not only the abandonment of January's above-inflation fare increase but allow fares to be held down by the maximum amount in the coming years.
In a recession far more than economic measures are required. Experience shows that there will be a tendency for crime, or the threat of crime, to increase. The threat of racist attacks will increase, as will the danger of domestic violence against women. The planned reductions in real police spending must therefore be stopped and the cuts in the programmes against racism, and against domestic violence and other threats to women, must be reversed. Measures of environmental protection must continue. But the eight points above are vital to any programme to tackle the effects of the recession in London and they should be implemented at once."

Investment versus liquidity preference and luxury consumption

The statement by 16 monetarist economists published in the Sunday Telegraph opposing state investment to deal with the financial crisis goes right to the heart of economic theory and social interests in the present economic situation. Therefore the left should understand exactly what is wrong with it.
A recession appears in the form of, although it is not ultimately caused by, a collapse in demand in the economy. However the two fundamental sectors of the economy, consumption and investment, are driven by different factors.
Leaving aside the international sector, and in the present situation the decline in the exchange rate of the pound should increase export demand, private consumption is driven by income of the population, as individual saving is low compared to income, while state consumption (health, education etc) is driven by government decisions. Both do not undergo precipitate declines in a recession.
Investment however, in the present economy, is driven by the private drive for profit - state invesment is too low a proportion of the economy at present to stave off an investment collapse.
It is for this reason that tax cuts to companies are ineffectual in staving off recession. Tax cuts may be used not to increase investment but either in luxury consumption by company owners (dividend payments, bonuses etc) or to increase cash balances without carrying out investment (liquidity preference). Only state spending ensures either that consumption is sustained or, more important, that investment is carried out.
For this reason a state programme of investment, not tax cuts, is the only way to ensure that the fall in investment, and therefore the decline in demand in the economy, is minimised.

Monetarists emerge from the caves

With the policies that they support having brought the world to the brink of economic and financial catastrophe anyone who believes that the world is ruled by rational thought might have imagined that the monetarist economists who supported Reaganism and Thatcherism would have donned sack cloth and ashes and were presently admitting their error and were doing public penance. Not at all. In the Sunday Telegraph 16 members of the economist stone age emerge to demand continuation of the policies that have produced the greatest financial catastrophe in almost a century. Their views are worth recording in full:
'Keynesian over-spending won't rescue the economy'
'Further to your interview with Alistair Darling, we would like to dissent from the attempt to use a public works programme to spend the country's way out of recession. It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession. Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources.
'Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector's recovery once recession is past.
'Occasional slowdowns are natural and necessary features of a market economy.
'Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones. It is inevitable that government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.
'If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them.
'Dr Andrew Lilico, Europe Economics; John Greenwood, Chief Economist, Invesco; Richard Jeffrey, Cazenove Capital Management; Dr Ruth Lea, Economic Adviser, Arbuthnot Banking Group; Trevor Williams, Chief Economist, Lloyds TSB Corporate Markets; Dr Nigel Allington, University of Cambridge; Prof Philip Booth, Institute of Economic Affairs; Prof Tim Congdon, Author, Keynes, the Keynesians and Monetarism; Prof Laurence Copeland, Cardiff Business School; Prof Kevin Dowd, University of Nottingham; Prof Kent Matthews, Cardiff Business School; Prof Alan Morrison, Said Business School; Prof Sir Alan Peacock, Former Chief Economic Adviser, Dept of Trade and Industry; Dr Mark Pennington, Queen Mary College, London; Prof David B. Smith, University of Derby; Prof Peter Spencer, University of York'
The response to such neanderthal economics is simple. Interest rate cuts and tax cuts in no way guarantee that demand will be kept up to avert the fall in investment which most powerfully drives a recession. As Keynes put it, it is like 'pushing on a piece of string'. Only direct state investment and spending will ensure that extra demand is generated.
Certainly the monetarist economists are right that this will lead to an increase in the weight of the state in the economy. But that is exactly what is required in the present situation as the fundamental way to ensure that investment is maintained.
The monetarist economists' view that 'Occasional slowdowns are natural and necessary features of a market economy' has nothing to do with the present situation. Due to Reaganism and Thatcherism we are faced with the potential of a depression/disintegration of the financial system, not a cyclical downturn.
They spell out their Tory/capitalist dogma by writing of the danger that: 'the role of the state in many parts of the economy [would rise] to such a dominant position that it would stunt the private sector's recovery once recession is past.'
Their dogma, in other words, is that that the private sector must maintain its dominant position - not that the economy should recover. At present. only the expansion of the state's role in the economy can best ward off or minimise recession through guaranteeing the continuation of investment. The monetarist economists prefer to maintain the dominant role of the private sector no matter what the damage to the economy.
The monetarists should retreat to their incoherent economic caves. Neither ordinary people nor the economy can afford their obsession with the private sector.

Tory dogma gets in the way of economic recovery - again

The website Conservative Home has hosted another attack on Socialist Economic Bulletin - this time because SEB has pointed out that the severity of a recession is driven by the fact that investment declines by much more than consumption, and therefore the decisive task in recession is to keep up investment levels. SEB pointed out, therefore, that in a recession the key is 'to maintain the level of income of the population and to keep investment up.'
The attack on Conservative Home writes: 'It's actually a perfectly respectable view that investment packs the greatest economic punch, and can make the biggest difference in circumstances like these. That's why the Bush Administration cut taxes on investment after America fell into recession in early 2001. Ken Livingstone calls for cuts in capital gains tax? Alas not - nationalisation of parts of the construction industry and government 'investment' in major public works projects is more what he has in mind. Given that choice, I suspect measures to help small businesses stay solvent and keep people on will do far more economic good, short- and longer term.'
Actually SEB is strongly in favour of investment when carried out by the private sector as well as the public - it opposes unnecessary luxury consumption by the private sector, not investment. SEB has no objection in principle at all to tax cuts on investment provided it is judged that in an actual economic situation these will actually lead to an increase in investment.
The problem with investment tax cuts is that their effect is indirect and they do not guarantee that investment will actually take place. They permit, they do not ensure. To take an analogy Keynes used in another context, investment tax cuts can be like 'pushing on a piece of string'.
Investment undertaken by the state, however, can be guaranteed to take place as it is under direct government control. This is why, in regard to construction for example, a government programme of house building, which may require nationalisation of parts of the construction industry to implement, is important.
Why do Tories reject the evident economic truth that the most direct and certain way to keep up investment is to undertake state investment? Because that will mean the weight of the state, which is under democratic control, increases in the economy and investment decisions are taken away from private companies. It is more important for Tories that private control should be retained of the economy, even if that means that it slumps, than that economic recovery should take place.
As always Tory dogma gets in the way of economic recovery.

Who is blamed for the financial crisis?

The Financial Times on 20 October published an interesting poll on who the public in a number of countries blame for the international financial crisis. Given that this is a socialist economic bulletin we would be pleased to report that the public blamed the crisis on capitalism but it would not be accurate. Asked the question 'Would you say that the current global financial crisis has been caused more by the "abuses of capitalism" or by the "failure of capitalism" itself', those believing that the problem was capitalism itself were about 7 per cent in the US, 10 per cent in Italy, 12 per cent in the UK, 14 per cent in Spain, and 17 per cent in France. Only in Germany, of the countries polled, was there evidence that a very substantial of the population were blaming capitalism as a whole - 30 per cent believing the crisis was due to capitalism itself.
In contrast those believing that the crisis was caused by 'abuses of capitalism' were 46 per cent in Germany, 51 per cent in the UK, 61 per cent in Spain, 63 per cent in Italy, 65 per cent in the US, and 67 per cent in France. Those groups or institutions who were believed to have 'complete responsibility' or a 'lot of responsibility' for the crisis among the population of the European Union countries were bankers (80 per cent), Central Banks (70 per cent) and short sellers (64 per cent).
These results give no comfort to the idea that the population of any advanced country is chomping at the bit for socialism as yet. But they do show that very large sections of the population blame important capitalist institutions for the current events. It gives an interesting base line for assessing the situation. The full and detailed results of the poll can be found here.

Jon Cruddas and other Labour MPs call for nationalisation in the construction industry

The Financial Times reports that Labour MPs Jon Cruddas, Frank Dobson, and Austen Mitchell have told it that nationalisation should be extended into the construction industry. The FT reported on 18 October: 'Gordon Brown has been urged by senior Labour MPs to nationalise parts of the housebuilding industry in the wake of this week's rescue of the big banks. Jon Cruddas, who recently declined the post of housing minister, pushed for state intervention in the housing industry, arguing there was a case for wholesale nationalisation. Backbenchers, former ministers and left-wing pressure groups have told the Financial Times that the time has come for the prime minister to seize housebuilders, a move that only a year ago would have been inconceivable.'
According to the paper Jon Cruddas said: 'There's a danger that we look reactive. Now is the time to get ahead of the curve. All the indicators are going one way. We need to reintroduce a mixed economy in terms of supply. The question is the political will... What seemed off-piste a few months ago should now be centre stage in terms of policy options."
Frank Dobson told the FT he: 'backed the nationalisation of housebuilders to increase the level of social housing. Mr Dobson said this move would be an effective way to reduce the impact of recession. "I think he [Mr Brown] has got an appetite for this. He is attempting to minimise the impact on everyone else from banking lunacy and he'll be looking for anything practical. It is back to Keynes, spending money in a way that creates useful wealth."'
Also according to the FT: 'Austin Mitchell, MP for Great Grimsby, said the government should act swiftly to nationalise the builders and "put them to work" making council homes.'
This is an impoortant issue. In a recession there are two key tasks:
First, to stop the attack on the living standards of ordinary people and the attempt to transfer their resources to capital through higher unemployment, lower wages, social spending cuts, increased discrimination against the lowest paid workers, who are women and from ethnic minorities, and other measures.
Second, in a recession, due to the fact that the majority of investment decisions are still taken in the private sector of the economy, investment collapses by far more than consumption. The state must therefore intervene as far as possible into the economy with the aim of keeping up investment. Nationalisation of all or sections of the construction industry, and embarking on a large programme of house construction, would be an important way of doing this.
These proposals are therefore important and SEB will feature any policy developments in this field.

Who is old fashioned in economics now?

The crashing collapse of Thatcherism and Reganism that is taking place around us is not only bringing down financial institutions but totally changing who is in ‘fashion’ in economics.
Paul Krugman, fierce opponent of George W Bush’s economic policies, and author of The conscience of a liberal ’ column in the New York Times has just won the Nobel Prize for Economics.
It is scarcely possible to turn on the television without seeing Will Hutton.
Joseph Stiglitz, former enfant terrible of the economics profession for his attacks on the orthodoxy of the International Monetary Fund and World Bank has become totally mainstream – even moderately conservative.
Larry Elliot who toiled away for years on the Guardian explaining that Thatcherism was going to end in tears, and was ostracised by most other sections of the mainline media for telling the truth, must be remembering the old adage about he who laughs last...
The report from Germany is that Karl Marx’s economic works are now flying off the shelves.
Where are all the monetarists gone who used to sagely opine about the ‘rationality of the market’ and that the unemployed might have ‘leisure preference’? But they never were very interested in facts anyway so perhaps they haven’t noticed what’s going on – the world had to correspond to their model it wasn’t necessary for their model to correspond to the world.
The problem is that the world turned out to be much more powerful than their 'model'.

Conservative Home again reveals weakness of Tory economic policies

The Tory website, Conservative Home, has hosted an attack on Socialist Economic Bulletin. That the Tories disagree with SEB is scarcely surprising. The way that it is done, however, tells a lot about the weakness of the Tories economic arguments.
One of the most invariable tests of whether an opponent is wrong is whether they are forced to distort the position they are criticising. If an opponent has a powerful and effective argument then the position they are attacking is presented correctly, clearly and coherently – because if you have a serious argument against something that is the most effective way to demolish it. If, however, your opponents is forced to distort your position that reveals that they cannot actually answer your argument – which is why they are forced to distort it.
Conservative Home has therefore decided to criticise SEB for proposing to: ‘Nationalise some of the banks without compensation to shareholders’.
Actually, of course, SEB has proposed no such thing. It has merely pointed out that it is highly likely that the value of certain existing UK banks, when the full extent of their current and future losses is revealed, will turn out to be zero – as it was with Northern Rock and Bradford and Bingley. For example, given that HBOS’s share price has fallen by more than 90 per cent, and the extreme depressive pressure that the proposed merger of HBOS and Lloyds TSB has placed on the latter’s share price, not merely SEB but very many operators in the market strongly suspects that the actual value of HBOS, as shown by the balance between its assets and liabilities, may well eventually turn out to be zero. Royal Bank of Scotland shows similar, if slightly less extreme, weakness. What Ken Livingstone said in SEB is that if the value of shares is zero then the taxpayer should not pay a price for them, but the government should: ‘announce it is ready to take over the functioning of any of the banks that turn out to have no value for shareholders. This means that deposits should be guaranteed but not shareholders.'
Paying no compensation for something which is worthless seems rather appropriate and uncontroversial. Does Conservative Home believe that compensation should be paid to shareholders for shares that are worthless? That would seem to take the general approach of the Conservative Party, that there should be market economics for the unemployed and socialist welfare state protection for shareholders and bankers, to a new extreme!
Is Conservative Home really arguing that taxpayers should pay out money to shareholders for shares that are worthless - it would be interesting to know if it would really defend that.
There are many more fundamental reasons for knowing that Tory economic policies are wrong but the fact that Conservative Home can't even address SEB’s position, but has to distort it because it is incapable of answering it, demonstrates yet again just how weak the Tories economic policies have become.

Larry Elliot on the Green New Deal

The Guardian's economics editor Larry Elliot has an excellent piece in that paper's Comment is Free section today praising the fact that: 'Ed Miliband, the new secretary of state for energy and climate change, [has said] that he will introduce a feed-in tariff so that those who invest in small-scale electricity generation can sell excess power back to the grid. This sends out an important signal that ministers are serious about tackling climate change and are not, like Italy or Poland, using the financial crisis to wriggle out of their commitments.' He draws attention to the New Economics Foundation's pamphlet urging a Green New Deal and argues: 'Gordon Brown is calling for a Bretton Woods II to reshape the global institutions in a post-bubble world; a Green New Deal should be the starting point for discussions.' SEB strongly recommends people to read it. It can be found here.