Category Archives: Austerity

Will the post virus economy collapse or emerge leaner and fitter?

Many people facing the corona virus pandemic are focussing on immediate needs and requirements but some correspondents – and hopefully heads of state – are looking further.

A Moseley resident writes: “Once again, the bill will have to be paid. Expect years of austerity to pay for this virus disaster. I’m guessing that, otherwise the currency will be valueless and inflation will run riot. At the moment we’re in 1918 to be followed by 1920 and then 1930 and 1940 ….

A clear, convincing and relatively optimistic account was written on March 7th by Australian-born economist, Dr Steve Keen (right).

Dr Keen’s breadth and depth of education inspires confidence: it includes Bachelor of Arts and Bachelor of Laws degrees from the University of Sydney in the ‘70s and later a Master of Commerce and a PhD in economics in the ‘90s at the University of New South Wales in 1998. He is currently professor and Head of the School of Economics, History and Politics at Kingston University in London.

His article A Modern Jubilee as a Cure to the Financial Ills of the Coronavirus – is summarised here. Some links and graphics added

He points out that this is the first disease to compare to the Spanish Flu in terms of both transmissibility and virulence. Europe was embroiled in World War I at the outbreak of the Spanish Flu. Its health and population impacts were huge: estimates of the death toll vary between 40 and 100 million in a global population of 1.8 to 1.9 billion.

But its financial effects were mild, disruptions to the war economy for much of the world were relatively small, with guaranteed employment and wages for military personnel, rationing for the general public and other wartime measures. Crucially, private debt was a mere 55% of US GDP when the flu outbreak began. The private sector was relatively robust.

The situation is vastly different today. Our great financial crisis, the “Great Recession” or “Global Financial Crisis”, lies in the recent past, and its primary cause is still with us: US private sector debt is just 20% of GDP lower than its peak during the crisis, three times higher than at the time of the Spanish Flu.

In addition, we now have “the gig economy” and precarious jobs in industries which are likely are likely to be hard hit by the Coronavirus: health itself, entertainment, restaurants, tourism, education. They could lose their jobs, and be unable to service their debts or pay their rents, or even buy food.

Many employers could also be unable to service their debts. Corporations in the USA have levered up during the period of Quantitative Easing, pushing the US corporate debt to GDP ratio to an all-time record. It is also twice the level that applied during the Spanish Flu. Many corporations will find their cash flows dry up and many will find these debt levels crushing.

The production system is also more vulnerable than at the time of the Spanish Flu.

The global economy today relies on long and complicated supply chains, with many goods being produced from components manufactured in dozens of countries and shipped between them on container vessels.

  • If manufacturing in even one place (such as China) comes to a near standstill, production elsewhere will do the same.
  • “Just in Time” manufacturing methods will run out of inputs, even if their factories are still capable of operating.
  • Shipping could be affected if crews refuse to undertake trips that can take weeks with potentially asymptomatic carriers on board, or if crews are quarantined for two weeks prior to departure.
  • Shares are likely to plunge in value. We have already seen a 14% fall in the S&P500 (though followed by a 5% rebound on Monday March 2nd) . . . We are clearly in the exponential phase of the pandemic. It will ultimately taper, but at present the number of cases outside China is doubling every 2-6 days, depending on the country.
  • Banks will also suffer badly. The asset side of their ledgers includes corporate shares: if these fall in value, banks will find their assets plunging, while their liabilities remain constant. A bank cannot: it must have assets that exceed its liabilities, or it is bankrupt.

A private non-financial company can continue to operate with negative equity, so long as it can pay its debts as and when they fall due even if its liabilities are greater than their assets. But a bank cannot: it must have assets that exceed its liabilities, or it is bankrupt.

A credit-driven, private sector monetary system is not capable of handling a systemic crisis like this. If the rules of such a system are enforced, it will make the crisis worse:

  • renters and mortgagors will be evicted, put on the streets, where they are more likely to catch and transmit the virus,
  • personal hygiene and public health will suffer, when one is needed to slow the pandemic, and the other must be functional to support its current victims,
  • stock markets will crash,
  • banks themselves will fail as their shareholdings plunge in value, bringing the payments system to an end
  • and even those unaffected by the crisis will be unable to shop.

It is, on the other hand, possible for Central Banks and financial regulators, once authorised by their governments, to take actions that prevent the medical crisis from becoming a financial one.

Other mechanisms may exist, but these are the obvious ones to prevent a financial pandemic on top of a medical one.

First: make a direct payment now, on a per-capita basis, to all residents via their primary bank accounts (most effectively, their accounts through which they pay taxes).

As Quantitative Easing has shown, this does not have to be financed by asset purchases. It is quite possible for Central Banks to put a notional asset on their balance sheets to finance. This is already done by the Bank of England to back the value of the notes issued by Scottish Banks: a bill known as a Titan with a face value of £100 million balances the value of bank notes issued by Scottish banks.

The same could be done by any Central Bank to balance a direct cash transfer to the bank accounts of all residents of its country – see People’s Quantitative Easing (Coppola 2019).

This already has been done in Hong Kong. The payment there is HK$10,000, or roughly US$2,000. It does not need to be financed by the Treasury or by taxation: neither were used by the USA to support its $1 trillion dollars per year Quantitative Easing program. There will be no “debt burden for future generations”.

Secondly: boost share prices by buying shares directly.

Quantitative Easing was intended to boost share prices. Clearly it worked—but there is no guarantee that it would work in this situation.

Instead, Central Banks should directly buy shares, as they are also quite capable of doing: Japan’s Central Bank has been doing this for several years already. This puts money in the bank accounts of shareholders, while the shares are then owned by the Central Bank. This could prevent a collapse in share prices, which in turn could prevent a collapse in the banking sector—since if shares fall substantially, many banks will find that their assets are worth less than their liabilities, and they would be forced to declare bankruptcy.

Central Banks can also cope with a share market collapse in a way that private banks and financial institutions cannot. Unlike a private bank, a Central Bank can operate with negative equity. If there was still a stock market crash, a Central Bank holding shares would still be able to operate.

Thirdly: suspend standard bankruptcy rules while the crisis exists

Banks and financial institutions in particular are vulnerable to bankruptcy in this crisis. Non-financial companies which are heavily exposed to the pandemic—health companies, airlines and other transport firms, education providers (including many public universities reliant on student fees), restaurants, sporting grounds—could see their revenues plummet, making them unable to service their debts, and therefore liable to bankruptcy.

Corporations exposed to Coronavirus-driven losses of revenues should also be able to receive direct aid from Central Banks as well. This could take the form of the sale of newly issued shares in return for cash—it should not be in the form of debt, which would simply replace one problem with another.

As Professor Keen ends his constructive and reassuring article, the words of John and Andy, from Moseley and Bournville, have been blended to give their views on a post pandemic future:

If we look coolly, perhaps rather brutally, at our situation, a complete generation may be wiped out, but in the worst scenario most humans on the planet are unlikely to die and the younger members least of all. The NHS will be saved millions by not having to treat the elderly and generally infirm. Pensions will be reduced and a younger, leaner, more focused workforce that realises how soft we had become will take up the cudgels to drive the economy onwards. Human life will go on and maybe the lessons learnt from tackling this infection will help in facing the next.

 

 

 

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Reviews of John McDonnell’s ‘somewhat alarming publication’

Chris Giles, Economics Editor of the Financial Times, reviews Economics for the Many, a collection of essays by leftwing thinkers who support the Labour party leader Jeremy Corbyn, with an introduction by John McDonnell, the shadow chancellor.

Giles agrees that there is an urgent need for a galvanising economic manifesto for the new left in British politics, because the UK economy has performed poorly since the global financial crisis a decade ago, with stagnant real wages, feeble productivity growth, large cuts to vital public services and many households finding either good jobs or affordable housing out of reach.

“At the core of this programme is a new set of models, institutions and strategies that, if put in place, would in and of themselves produce vastly improved societal outcomes”. It includes:

  • a plan to build a radically fairer and more sustainable society, in which wealth is shared by all.
  • changing the ownership of companies,
  • ending short-termism in the financial sector,
  • a programme of green investment
  • and much greater regional devolution of state powers.

Giles notes some inconsistencies and omissions and complains that “precious little space is devoted to how Britain should deal with an ageing society, housing or how to manage the existing public sector responsibilities of health, education, police or the armed forces”.

He concludes: “If you want a new left coherent programme, this is not it . . . But for all its flaws, the book serves a useful guide to the thinking and language of the new left. Fellow travellers must oppose austerity, financialisation and neoliberalism, while rising to the challenge of radical democratic ownership of the means of production”.

The book will be available in paperback this month and its online blurb says: “With the election of Jeremy Corbyn as Labour leader, and the extraordinary turnaround in Labour’s fortunes in the 2017 election, we have a real opportunity to build an economy in Britain that is radically fairer, radically more democratic, and radically more sustainable”.

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The Telegraph’s Liam Halligan writes in the Spectator: Those wanting an idea of how the world’s fifth biggest economy might look under Prime Minister Jeremy Corbyn should take a look at McDonnell’s speech. For more detail, you can read the book he edited – Economics for the Many – published just before the conference . . .

McDonnell (above) writes: ”Calls for the nationalisation of water, electricity and gas, the Royal Mail and trains, greeted with howls of outrage and press derision, are very popular with the public”.

Halligan comments. “To some extent, that’s true. A recent YouGov poll suggested around 60% of voters think the railways and Royal Mail should be back in public hands, with half wanting water and energy companies re-nationalised”.

He touches on some of the inconsistencies voiced by Giles but continues: “Having said that, this volume does pose some relevant and pressing questions – with McDonnell asking, for instance, if government should ‘deal with Big Data’ by creating ‘new digital rights’. He singles out:

  • a chapter by technology researcher Francesca Bria on ‘surveillance capitalism’, which raises similar key issues, ranging from ‘the monopoly power of the tech giants’ to ‘a new tax on digital platforms’;
  • an argument by Prem Sikka, the respected accountancy academic, that ‘tax revenues are under relentless attack from wealthy elites’ and ‘tackling tax avoidance and evasion is one of the major social and political issues of our time’. He’s not wrong;
  • Ann Pettifor’s call for investment into jobs relating to renewable energy – a policy we’re hearing much more of, after 28-year old Alexandria Ocasio-Cortez won the New York Democrat primary this summer, on a ‘Green New Deal’ ticket. Almost certain to enter Congress in November, her agenda will be catapulted into the political mainstream;’.
  • Christopher Proctor’s chapter about the need for academic economics to get beyond its ‘theoretical strait-jacket’, to become ‘more open, diverse and relevant to the real world’ and
  • McDonnell’s call for ‘a real devolution of powers and resources out from the centre’ of the UK -adding it is, indeed, disturbing Britain is ‘the most geographically unequal country in Europe’ – with ‘the richest single area – central London – but also nine of Northern Europe’s ten most deprived areas’.

Labour’s 2017 manifesto promise of a corporation tax rise from 19% to 26% (the Tories plan a cut to 17% by 2021) and the party’s proposal for public spending to increase by around £75bn, a 10% uplift, over the next three years, leads Halligan to warn, “Such measures could well result in a much weaker currency, higher interest rates and slower growth. Similarly, Labour’s share transfer plans may provoke capital flight, curtail investment and, in the words of the Confederation of British Industry, ‘crack the foundations’ of prosperity’ “. And Halligan ends:

Amid corporate scandals, a massive housing shortfall and polarising wealth inequality, UK capitalism faces a crisis of confidence. Senior Tories, if they fail adequately to respond, are fools. For, as McDonnell writes in this somewhat alarming publication, his ‘better world is in sight’ “.

 

 

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Could a British Labour government enhance Portugal’s blueprint with green growth?

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Portugal: a European path out of austerity?

The Financial Times reports that Portugal’s economy has rebounded since António Costa, the prime minister who forged a partnership between the moderate and hard left reversed post-crisis budget, by “turning the page on austerity”, stressing the idea that “sacrifice is over”.

Portugal, which was hard hit by the European debt crisis, has now halved unemployment to 6.7% and the budget deficit could be eliminated this year for the first time in over 40 years. Since 2016 Portugal has consistently beat its deficit targets; the deficit of 0.5% of GDP recorded for 2018 being the country’s smallest shortfall since democracy was restored 45 years ago.

Portugal’s government reversed public spending cuts, allowing the deficit to swell well above agreed objectives and ultimately proving to EU officials that by putting more money in people’s pockets it could lift growth, make it easier to meet budget targets, raise incomes, lift private investment, cut unemployment and still have sound public finances.

“Public spending has stayed under control, unit labour costs have been reduced, hence they have been able to attract more foreign direct investment and increase their exports,” says Ivan Scalfarotto, a former Italian trade minister and centre-left MP.

In the public sector, workers are pressing Mr Costa to go further in overturning austerity.
Nurses are among swathes of state workers — from teachers to police inspectors and prison guards to firefighters — who have taken part in months of small-scale crowdfunded strikes to lift their incomes as the economy recovers following years of austerity.

Daniel Traça, dean of Lisbon’s Nova School of Business and Economics, believes Mr Costa’s main accomplishment lies in ensuring that the recovery has benefited the most vulnerable people.

This, he says, has convinced the country that “sound public accounts are compatible with social cohesion”. Mr Costa has shown that the financial crisis could be tackled without destroying jobs and living standards. As he himself puts it: “It’s no longer a matter of political discussion, it’s a matter of fact”.

An announcement by Costa (left) of a 10-year national investment programme designed to pump €20bn into transport, energy and environmental projects, may have been overlooked by people challenging his approach as not offering environmentally sustainable growth. Other criticisms were voiced in a recent Reuter’s article.

Perhaps a British Labour government – which favours national and regional investment banks – will also ‘turn the page on austerity’ and  add to the measures taken by the Portuguese government by bringing in a Green Deal surpassing the American version, extending the greening of infrastructure to the greening of transport.

 

 

 

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