Savings are not needed for investment. Ever. There is absolutely no need for example, for the Chancellor to rattle the tax collection box, or cut government spending - to build up savings, before the government is able to invest. No need whatsoever.
On Wednesday 29 November 2017, PRIME's director, Ann Pettifor, gave evidence at the Committee's invitation to the UK Parliament's Treasury Select Committee, together with Professor Jagjit Chadha, Director, National Institute of Economic and Social Research and Paul Johnson, Director, Institute for Fiscal Studies. A verbatim report of the discussion can be found on the Select Committee's website here.
For the last several years the media have carried reports of a crisis of low productivity plaguing the British economy, both in terms of level and rate of change. Almost two years ago, PRIME's Jeremy Smith provided what I considered the definitive refutation of the existence of such a crisis. But, far from ending, the “crisis” discussion has gathered pace to become a recurrent media theme.
The following is a statement in response to recent media comment on the public finances, signed by 37 economists as at 30th November, 2017. It has been updated since first posted on 26th November (by then signed by 22) to include the further signatories.
Andrew Neil of the BBC Politics programme recently challenged the Shadow Chancellor, John McDonnell, on the likely cost in interest payments of additional public borrowing. He suggested that current debt interest payments are estimated at £49 billion, and rising. His use of £49 billion was misleading, as it included £9 billion owed by the Treasury to the Bank of England (BoE).
The British economy is simply not performing the way we need it to. As the Interim Report of the IPPR Commission on Economic Justice shows, the UK has the weakest performance on investment, productivity, trade and geographical imbalances of any major European economy.
It must be about more than the ‘supply side’. There’s little point improving the conditions for investment when demand is so weak. Since the financial crisis private sector investment has flatlined. There’s a vital need for Government to increase public investment to pick up the slack. In our report we call for an injection of £20bn in additional annual public investment spending by 2020-2, or 1% of GDP. This would take net public investment to 3% of GDP, its OECD average.
In the latest edition of the Times Literary Supplement, I review a range of new books that converge around the theme of responsibility. My opening theme of generalized irresponsibility was challenged by Harvard's Yaschca Mounk, who in his book The Age of Responsibility argues that "the notion of personal responsibility has become central to our moral vocabulary, to philosophical debates about distributive justice, to our political rhetoric, and to our actual public policies”.
Yesterday’s increase in interest rates was a big deal. Painful as it might be for many, the real point is that the Bank is signalling the end of a particular phase of monetary policy.
Since 2010 the counterpart to self-defeating austerity policies has been expansionary monetary policies. These have inflated assets - enriching the already-rich, while failing to stimulate wider economic recovery. Yesterday the Bank of England’s Monetary Policy Committee signalled an end of this dangerous game.
But this technocratic realignment makes no difference to the fact that Bank and Treasury economists have failed to revive the economy.
In its latest true-to-form report, “Between a rock and a hard place”, the IFS discovers to its horror that the Tory Chancellor badly missed his borrowing target and is unlikely to balance the central government’s budget. Apparently gobsmacked by the report, the Guardian reproduced many of the IFS charts, sounding the alarm of a “new budget black hole”, its default moniker for a fiscal deficit
The orthodox approach has not prescribed economic policies which have been able to deal with the multiple problems we now face. We desperately need a new approach - both to economic analysis and to policy. You could say, indeed, that we need a new paradigm.
This is the conclusion reached by the Interim Report of the IPPR Commission on Economic Justice, published last month. ‘Time for Change: A New Vision for the British Economy’* argues that the structural problems of the UK economy are so deep that ‘fundamental reform’ of economic thinking and policy is needed. Such reform needs to be of the magnitude of the two economic paradigm shifts of the 20th century.
“Strong and stable” seems of a world so far, far away. The recent Daily Mail headline “PM slaps treacherous Chancellor down” portrays a government in political chaos. Thanks to open, unresolved intra-Brexiteer warfare, ministers are unable to agree the basics of how to exit the European Union. This state of uncertainty intensifies just as the risks to British jobs and living standards are becoming starker and more potent. Ironically, just as we teeter towards the cliff, ONS data reveals that exports of goods to the EU grew over the last three months, while those to the rest of world fell back, a fact not devoid of dark humour.
There is no doubt that the current institutional architecture of the Eurozone and the austerity policies implemented in recent years are irrational - leading to very significant increases in unemployment, waves of business failures, a drop in the growth rate and increases in the public debt/GDP ratio, not only in Italy.
The question, however, is whether or not it is advantageous for a single country to go back to its own currency and, more generally, whether the question of a potential return to the lira is actually relevant.
The shadow money banking system in its use of continuously repriced collateral is reliant on opacity, leverage and global interconnectedness. It is therefore highly pro-cyclical. Will the next systemic crisis occur when markets lose confidence in the 'fair valuation' of collateral used in shadow banking?
We know that the UK economy has remained in a rut, plagued by foolish austerity and declining real wages, since the great financial crisis.
So I thought it might be interesting to look, in a simple way, at the performance of a set of mainly developed economies, in Europe and a few from other parts of the world, and compare their progress – or lack of it - over the 10 year period 2007 to 2016. And then see where the UK sits in comparison with others.
This time, I want to talk more about the political economy.
I think the headline mostly gets at what I am going to say. We are only seven months into Donald Trump’s presidency. And I think we can call it a failure. I’ll have a lot more to say on that momentarily. But I want to flag this as not being a dealbreaker for the US or global economy.
The major point I was trying to make in my article was that the real improvements in poverty reduction, as well as in life expectancy and many other fields, do not depend wholly on economic policies, but also on the role of fossil fuels, and on scientific, medical and other advances, which, other things being equal, should accelerate in impact across time and space. Hence the fact that the rate of improvement is in the form of a curve, not a purely linear effect. These improvements have taken place under different economic systems, and are not a function of neoliberalism or “global markets”.
Disillusionment with democracy is fuelled by the belief that social democratic politicians could not, and would not protect populations from the catastrophic impact of market forces after the 2007-9 financial crises. The political class appeared unwilling to restrain or tackle (through regulation) the sustained rise, and then implosion, of excessive private debt-creation by bankers and financiers, which in turn was used for reckless property speculation.
Neoliberalism’s finance-driven model, beset by rising crises since the 1970s, properly derailed in the crash of 2007 – 08. Then, the greatest exponent, Alan Greenspan, chairman of the US Federal Reserve, had a brief moment of enlightenment and appeared to renounce his faith in the invisible hand of self-interest, saying he’d, ‘discovered a flaw in the model that I perceived is the critical functioning structure that defines how the world works.’ Private finance was revealed as a froth that sat on the foundations of public guarantee. I tell this story and the tale of alternatives in a new collaboration with the playwright, Sarah Woods, in Neoliberalism - the Break-Up Tour.
PRIME (working with the New Weather Institute) organised an event at the TUC to commemorate the day - 9th August, 2007 - that inter-bank lending froze, central banks came to the rescue, and the Global Financial Crisis began in earnest. We will be publishing transcripts and notes from that event, chaired by Ann Pettifor and with contributions by Frances Coppola, Professor Daniela Gabor and Andrew Simms of the New Weather Institute. We will shortly publish articles written before August, 2007 that warned of the forthcoming crisis. To begin the series, we are posting a longer version of an article written by Ann Pettifor and published in Red Pepper on 8 August, 2017 - The economic crash, ten years on.
On 30th June 2016, just one week after the EU Referendum, I wrote this:
It has swiftly become clear, if it were not already so, that neither the government nor the leaders of the Brexit campaigns had anything resembling a plan for what to do if the people voted in favour of leaving the EU.
Alas, over a year later, there is still no plan – and awareness that the Conservative government has simply dumped us here without any idea what to do next is becoming overwhelming.
So we badly need a transitional deal - but what kind?
Total global debt has increased, growth has been slowing down since the onset of the global financial crisis in 2007 and has been rapidly decelerating after 2012. This may be a sign that the world has arrived at its debt carrying capacity or has even crossed it, meaning that capitalism is probably already insolvent.