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By Ann Pettifor, 2nd January 2013
Happy New Year to all PRIME readers, and welcome to my latest PRIME publication, The power to create money out of thin air. At first sight, this is a long-delayed review of Geoffrey Ingham’s book, Capitalism (Polity Press, first published 2008). However like all the best reviews, it has become a hook on which to hang discussion of the author’s contemporary pet themes. Here, these include primarily, capitalism’s ‘elastic production of money’. However, I also take the opportunity of explaining why misunderstanding about the creation of money out of thin air is so widespread, and why orthodox economists are mainly responsible for the confusion.
Out of this discussion arises a further one about ‘fractional reserve banking’ – currently at the heart of debate surrounding an IMF Working Paper by Kumhof and Benes. Then I take a pop at the theory and policy frameworks that prevent (or claim to prevent) co-ordination between monetary and fiscal authorities.
The review challenges, too, the widespread assumption (long promulgated by the enemies of labour, but also held by others) that wage claims by trade unionists caused, or led to, the inflation of the 1970s.
But Ingham’s book raises important issues which are and will be at the heart of politics and economics in 2013: with a deeper understanding of capitalism’s ability to create ever expanding amounts of credit-money, how does a democratic society once again rein in, regulate and subordinate the private finance sector to the wider public interest? How does society regain control over the public good that is credit and a sound banking system, and use both for financing society’s most important needs – including the need to tackle the threat of climate change?
And finally, how can public goods (including liquidity) avoid being confiscated by the finance economy? And how can they be restored to public accountability?
All of this should of course have been drafted as a series of short, readable blogs. Instead I offer only a long ‘review essay’ – for which I beg forbearance, but welcome readers’ own comments and ideas on the issues raised.
To download the pdf, click on:
30th November
With the Chancellor’s autumn statement coming up next week, it is important to restate why austerity is a self-defeating policy – and why public sector deficits are often …a good thing in economic terms. The following is a slightly shortened version of Professor John Weeks’ article, which was first published in Social Europe Journal. The full article is here in pdf format: Deficits are goodpdf
Professor John Weeks BSc MSc PhD is a Professor Emeritus of the School of Oriental and African Studies of the University of London and a development economist
With the presidential election in the rearview mirror, a so-called fiscal cliff alleged threatens disaster for the US economy. The time has come to drive a stake through the ideology of the budget cuts, not only in the United States but also Europe. This ideology draws great support from the creeping coup that replaced economics with nonsense as the true guide to public policy.
In the ideologically reactionary period that we find ourselves, all but a few politicians and almost all the media in North America and Europe present as self-evident, and needing no defense, the proposition that governments should continuously balance their budgets and not accumulate debt. Lack of an economic or even accounting justification for balancing the budget has not stopped this fiscal foolishness from justifying appallingly anti-social policies under the umbrella of “austerity”, policies provoking suicides in Spain.
The “Austerity Doctrine” maintains that current public revenues should cover government expenditures, and if not, tax increases and/or spending reductions must quickly correct the deficit. Part of this ideology is the fantasy that “fiscal correction” will have little or no impact on total output or growth because expansion of the private sector automatically compensates for the contraction of the public sector.
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“I had to let it happen
I had to change
Couldn’t stay all my life down at heel
Looking out of the window
Staying out of the sun
So I chose freedom”
Lyrics by Tim Rice
By Jeremy Smith & Ann P ettifor, 24th November
Few of our readers (we suspect) will have heard of NML Capital Ltd – a company which today is at the centre of an extraordinary and damaging New York court judgment relating to the sovereign debts of Argentina. NML Capital was founded by Republican-funder Paul Singer, of the US$19bn hedge fund Elliott Management Corporation. Here is how Fortune magazine describe Mr Singer:
“Over the past 35 years Singer, 67, has produced an extraordinary 14% average annual return after fees…He’s achieved that record in large part by buying the debt of bankrupt companies and nations — a strategy that has earned him considerable opprobrium in some circles. His firm, which is engaged in a costly, protracted legal war with Argentina over its defaulted sovereign debt, is so influential that fear of its tactics helped shape the current Greek debt restructuring. Among the sophisticated investors who have placed their confidence in Singer is Mitt Romney himself. According to Romney’s financial disclosures, the trust managing his more than $200 million fortune has at least $1 million invested with Elliott.
In recent years Singer has emerged as a quiet force in the Republican Party. He’s one of a handful of moneymen who have given $1 million to the Romney super PAC “Restore the Future,” which so far [March 2012] has raised $37 million and spent some $34 million.”
Not only do ‘vulture funds’ as they are called buy the debt of bankrupt companies and nations, they buy the outstanding debt at a considerable discount, and then ‘hold out’. In other words, they sit and wait until the sovereign debtor (inevitably) recovers from economic crisis – and then pounce. They demand repayment in full, with compounded interest added – of bonds that were bought in the first place at a ‘firesale’ rate.
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By Jeremy Smith, 29th October 2012
In recent days, our media have been full of stories about the impact of Scotland and Catalonia seeking independence. One key issue for both is whether they would automatically become member states of the European Union, or would need to apply (my view has always been that they would be obliged to apply, and it won’t be easy). The following article (slightly shortened here) was written by me a month ago, on my last visit to Spain, but has become even more relevant.
I was prompted to write it because of my long-standing interest in national Constitutions as a “window into the national soul”, and by a fascinating visit to the Museum in Cadiz where the first Spanish Constitution was launched. But I was also pushed to write by the fact that in the same week, the Catalan government announced new “regional” elections with a focus on independence, whilst the Spanish government announced its latest mega-austerity package.
What I did not realise – it emerged from the Spanish statistics authority’s figures on unemployment issued last week – was that over the last year, Catalonia’s unemployment has grown by more than any other Spanish region, with an increase of 192,000 out of the total of 800,000.
A fascinating but lethal combination – with far wider implications for all Europeans, as we are starting to realise.
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By Ann Pettifor and Douglas Coe, 24th October 2012
At their annual meeting in Tokyo this year, IMF economists destroyed the case for austerity. While their analysis constituted a small part of a routine report – the World Economic Outlook – and was technical in form, the devastating impact of their conclusions could not be ignored by the media. These IMF conclusions are of the greatest possible importance and must not be allowed to be lost with the passage of time. We are concerned that they should be fully understood by the public at large.
The attached PRIME briefing sets out the issues, including the implications of the new IMF analysis of multipliers, as well as the UK Treasury assumptions which are now heavily questioned.
By Ann Pettifor and Douglas Coe, 17th October 2012
In this PRIME analysis, we are republishing work we did back in December 2009. That was when we first made an evidence-based case against austerity. We show in this analysis that in a downturn - thanks to the multiplier – increased public investment on sound projects pays for itself.
We have taken the decision to republish this work as evidence that those of us who opposed austerity from the start did so on the basis of careful analysis. This cannot always be said of the proponents of fiscal consolidation and austerity.
The work was published in collaboration with the New Economics Foundation and the Green New Deal group as part of “The Cuts Won’t Work” in December 2009. To download the analysis, click here.
By Michael Burke, 7th October
The final release for UK GDP in the 2nd quarter of 2012 showed a small upward revision to recorded ‘growth’. But this still showed a contraction of 0.4% of GDP for a third consecutive decline. Real GDP is now 1% below the level recorded in the 3rd quarter of 2011.
Previously we have shown that the driving force behind the recession has been the decline in investment (Gross Fixed Capital Formation, GFCF). That remains the case. In aggregate real GDP has declined by £60bn since the peak level of activity in 2008. Investment has contracted by £50bn. But now it is the decline in public investment that is the main problem.
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By Jeremy Smith, 12th September
Look, we’re really sorry to come back so soon to the question of the UK labour market. But when someone as normally incisive as Izabella Kaminska of FT Alphaville asks “Are UK companies hoarding labour?”, and opens by saying
“Something of a puzzle is emerging in the UK’s labour market”
…well, we realise that there’s a lot of what we can only describe as “puzzlement” out there.
So this is our “Ka-Minsk(a)y” moment to clarify all. We have no alternative but to repeat what we said on 19th August, “UK economy: there is no puzzle – just more work on lower pay”. Or yet more accurately, there are more people working but on average for lower real pay, and a growing number for no pay.
And here is the updated evidence.
The Office for National Statistics (ONS) published its Labour Market Statistics for the period May to July 2012 today. They show a positive increase in the total number working, which is up by 236,000 on the previous Quarter, and up 431,000 on the same Quarter a year before.
So far so good. But underneath the headline, we note that the increase in employees was just 86,000 or +0.3%, and that the number of employees working full-time is actually down by 0.4% on a year before (though slightly up on the quarter). And the main rise is in self-employment – lots of it part-time.
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4th September
We coldn’t resist giving a bit of UK airing to this chart, from Paul Krugman’s NYT blog of yesterday entitled “Britain’s Paul Ryan”. It shows the divergent paths of the US and UK economies since the financial crash. They ran more or less in parallel until about Q3 of 2010, since when…it’s enough to bring tears to our eyes.
It was just over a year ago (11th August 2011) that British Chancellor George Osborne posed this question to the House of Commons:
“Those who spent the whole of the past year telling us to follow the American example, with yet more fiscal stimulus, need to answer this simple question: why has the US economy grown more slowly than the UK economy so far this year?”
As we pointed out, it wasn’t correct at the time.. and it sure ain’t right now. US economic activity may be pretty lacklustre, but at least our transatlantic friends don’t ‘enjoy’ the benefits of the UK coalition government’s austerity policy. George Osborne promised once “to speak truth unto power and wealth”… maybe the folks at the Olympic Stadium took him at his word last night!
By Ann Pettifor and Jeremy Smith, 3rd September
Last Tuesday, 28th August, Ann was invited on to BBC Newsnight to debate the economic case for or against a third runway (R3) at Heathrow. At the last minute, Nick Clegg’s unrequited call for a wealth tax became the focus for the programme, leaving little chance to debate the Heathrow issue.
On the panel with Ann was Emma Duncan, Deputy Editor of The Economist. She had that day announced her flightpath-to-Damascus conversion to the pro- R3 camp, joining Tim Yeo MP in what looks like an orchestrated campaign. The Coalition Government has insisted that it is not for turning, for the moment, but there are strong hints that at least the Conservative Party proposes to change its position for the next election. So the issue will not go away, we can be sure.
We thought it worthwhile recording why – on economic as well as environmental grounds – we remain strongly against the Heathrow extension, and against building any new major airport in the London and south-east region. We therefore also disagree with those who oppose the Heathrow extension but favour a major new airport in say the Thames Estuary.
We have set out the issues and arguments in the attached Prime Position Paper PDF:
Heathrow 3rd runway 03092012
In brief, Heathrow remains by far Europe’s biggest hub, and has excellent connections to most main buiness centres. Government and the industry can make (or ensure) the necessary changes in destinations where in the national economic interest. Whilst other hubs have grown faster, there is no evidence that they have achieved better economic growth. On the other hand, the aviaition industry is a major contributor to climate change, and exponential growth in air traffic is not viable. We need to shift the strategy of Europe’s hubs from ceaseless growth and competition, to complementarity and using the strengths of each to common advantage.
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