Simon Jenkins is a perplexing, and confused man. He's written a piece for the Guardian in which he strongly criticises, on Keynesian grounds, the rise in VAT. And he has also strongly recommend that if cash is to be raised it should come from big business and banks. All of which is just fine. But then he gets terribly confused:
The chancellor is right to reduce the deficit. Rising this winter to its highest peacetime level, its cost in interest is enormous and, if unchallenged, risks a confidence collapse on a par with Greece and Ireland. Osborne has also been right to reduce public spending that had become a bull in the Treasury china shop. Labour knows this, having put the bull there, but it lacks the guts to suggest how else to get it out. When it comes to the economy, Ed Miliband is still on paternity leave.
Well, there's some truth the last point, but not the rest. That's just wrong.
Let's talk absolute cash - it's value changes over time. In percentage terms our deficit is way below the level in the 50's and 60's. Interest rates are low. People want to lend us money. The cost is affordable. No one repays a mortgage in 4 years when 20 years makes sense. There is no need to tackle the deficit now. And as we will all find - the reason government spending is so high is that we wanted it that way and until 2008 we also paid for it, quite happily, deficits being tiny in percentage terms and almost entirely explained by investment. I'm not saying all was rosy and there were no issues to address - like PFI, for example - but to say things were out of control was just wrong. They weren't. This crisis was caused by bankers - as Jenkins admits - and no one else - and he can't have it both ways.
And in that case we need a Keynesian solution to this problem, not a neoliberal cutting agenda which Jenkins' realises will not work.
There are numerous ways to do this. First, tackle the tax gap. I stress, that won't solve the problem by itself. But spending on more staff at HMRC, new legislation to tackle tax abuse, the domicile rule, residence abuses and to restrict allowances and reliefs for the best off and new taxes on banks and the highest paid employees could between them raise £20bn from the tax gap and a great deal more from the banks. Since all will take time to introduce they won't harm recovery now but will pay for costs when recovery is under way.
Second, we need a stimulus package. That could come from Green Quantitative Easing.
Third, we need to ensure that reform of pension funds so that at least 25% of all funds contributed is invested in new job creating industry in the UK is a condition of tax releif being given.
Add these up and we have a job creation programme, a boost for business, a crack down on those not paying their way that does not harm those who already are doing so, and better pension prospects as funds are invested in real economic activity and not inspeculation.
This is a programme for real change.
That's what Jenkins and other should be talking about. Not least because it is possible, and deliverable now.
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“This crisis was caused by bankers – as Jenkins admits – and no one else”
Labour had no part in the crisis? Who failed to regulate the banks?
@Harry Waterman
Banks failed in very many countries
A systemic banking failure cannot have been Labour’s fault
Only a bigot could think it was
@Richard Murphy
You are partly right, but mostly wrong.
As you point out, this was a global crisis, whose epicenter was in the United States, where regulators, central bankers, brokers, realtors, homebuilders, mortgage borrowers and lenders, commercial and investment bankers all conspired to cause the biggest asset bubble of all times. Because of America’s dominance of the world’s economy and financial system, the effects of the bursting of that bubble were always going to be felt on a global basis.
Rightly or wrongly, we are highly reliant on the United States because, amongst others, 50% of all investments in the UK originates there, and also because of our minuscule relative size (their economy is around 15 times bigger than ours). Regardless of what we did or did not do, it is unavoidable that we will feel a very big chill.
The issue in the UK, and the root-cause of the recriminations against the Labor government is that we are doing so much worse than other major nations. We are running the largest budget deficit, have allowed/suffered a 30% devaluation of our currency. Germany, France, Canada, Australia amongst others have had a less severe recession (in Australia’s and Switzerland’s cases, there was not even one), and have emerged much more strongly from the crisis than we have. And they have achieved this without running massive fiscal deficits or devaluing their currencies.
To say that this is all “the bankers’ fault”, as you and others repeat time and time again, does not add up. If this was the case, countries/territories with even larger financial sectors as a share of their GDP’s, such as Switzerland, Hong Kong or Singapore, would have experienced sharper downturn than us. But they did not; in fact they barely had a recession, their currencies have appreciated, and they are running balanced or even surplus fiscal budgets.
So somebody and their actions must be to blame, not so much for the mess we are in to start with or for not seeing it coming (we will blame Alan Greespan for that), but because this mess is far worse than about anyone else’s except for the European PIGS and (although the pick up there is by now mighty impressive) the United States.
So it is difficult to escape the conclusion that the politicians that ran the UK between 1997 and 2010 did something seriously wrong when compared to the leaders of other countries.
@Harry Waterman Banks were not regulated because light regulation (or more accurately the absence of regulation) is one of the key components of neoliberalism which has been the prevailing economic paradigm for the West since circa 1980 and unfortunately Labour swallowed this ‘hook line and sinker’. Those countries which did not follow this economic path completely were not so badly affected by the banking crisis.
Cutting the deficit at the current pace is a political choice, sold to the general public by way of repercussions from the ‘bond vigilantes’so concealing the true ideological purpose. So much for democracy in this country when unelected individuals are able to hold us to ransom.
Do you think that some of our are arguments are weak, because they are setting up ‘straw men, or are ‘ad hominem’?
@Million Dollar Babe
OK, the failing was worst in the countries that adopted the neoliberal approach
I can accept that
@paul
Sorry – not sure what the questions is?
Straw men frequently feature in the arguments made by neoliberals – but then their assumptions are of that nature
@Teresa Harding
Those countries which did not follow this economic path completely were not so badly affected by the banking crisis.
As MDB pointed out, Switzerland, Hong Kong, Singapore, and Australia didn’t even touch recession – and all are more deregulated than the UK was.
Labour was enthralled by the City during its time in government. The partty had jettisoned most of its principles and set off in pursuit of benefit “scroungers” (the No Ifs or Buts campaign). It courted big business and did little for the dispossessed and marginalised in our society. Truly scandalous in my view. I hope Miliband can distance the party from this legacy and return it to its principles.
I fear Labour is to blame for the crisis, just as Million Dollar Babe and Teresa have so eloquently explained. Sad but true.
To get some nice graphs of all this, first I would go to Krugman blog February 5, 2010, 8:40 am ‘The Spanish Tragedy’, which has a graph from OECD figures for government debt as a percntage of GDP for 27 western countries including the UK (helpfully using 1997 and 2007 at its two dates). Then ukpublicspending.co.uk has public debt as a percentage of GDP for 1692 to the present day. Finally, Krugman blog June 3, 2010, 4:59 am ‘Rashomon In The OECD’ has a graph of the size of the debt and deficit in 2009 for the UK and other countries. Why the Beeb allows new government ministers to say that Labour ’caused’ the present crisis is a mystery. There is far too much capitalism-in-one-country thinking going about.
@Richard Murphy
Hong Kong, Australia, Switzerland (and we could add Poland and Israel to the mix) are, on balance, just as liberal countries as the US or the UK. They have low tax rates, limited government intervention, regulated but competitive finanical sectors, deregulated labor markets, etc., etc.
I do not believe that your statement captures the resaons for the relative performance of one group versus the other.
“OK, the failing was worst in the countries that adopted the neoliberal approach”
Which countries are those?
If you regard the ‘countries that adopted the neoliberal approach’ to be the top 10 countries in the the 2010 Index of Economic Freedom from the Heritage Foundation (OK, just one list but certainly a good enough list of the world’s freest economies), are you saying they had the worst of the banking crisis?
Top 10:
1. Hong Kong
2. Singapore
3. Australia
4. New Zealand
5. Ireland
6. Switzerland
7. Canada
8. United States
9. Denmark
10. Chile
The countries in the list I know most about, Australia and NZ really came near top of the class in coming out of the banking crisis unscathed. I understand that Canada did OK. I am not sure I heard much about HK, Singapore, DK or Chile, but I don’t think they anywhere near bottom of the class in the banking crisis. Were they? Did the Swiss suffer the worst failings? Only leaves Ireland and US from this list in any way confirming your suggested causative link — and there were countries outside this list whose problems were worse.
@Adrian
Switzerland had massive bank bailouts – you may not have noticed
As for the others – have you noticed their importance as finance centres? Of course they did not fail! They weren’t in the game
Let’s stop being silly shall we
And don’t say HK is a centre – it’s banks are largely elsewhere
Your arguments are crass and this debate is over
Sorry Richard, much as I enjoy reading your blog, you lost this debate.
@Mike Hitch
I don’t know who you are, but I doubt your authority to pronounce on the outcome of this debate.
@Carol Wilcox
This comment has been deleted as it did not comply with the the moderation policy of this blog. The editor’s decision is final.
http://falseeconomy.org.uk/cure/how-big-is-the-problem
i think this site has the graphs previously mentioned if that helps anyone.
Also im a little confused but aren’t we still fighting a war/occupation or whatever in afghanistan so how is it the highest peacetime deficit?
cheers
si
@Richard Murphy
True, the Swiss Federal Government and the Central Bank had to bail out UBS (and sold out of their investment after a year at a significant profit).
But even while UBS was being rescued, the Federal government was running a (modest) budget surplus. The Finance Minister had to apologize in the Swiss Congress for having incorrectly forecast a deficit (only in Switzerland).
So the idea that the UK is running a massive deficit solely because of the domestic bank bail-out is a bit thin. The truth is that the fiscal position was poor even before the impact of the bank rescues.
“This crisis was caused by bankers – as Jenkins admits – and no one else – and he can’t have it both ways.”
Isn’t that a rather superficial thing to say? Ok, bankers created money and lent it out, and thereby allowed the good times to last longer than they should have. But the root causes of the crisis are far deeper than the banking debacle. They have to do with the pressures caused by globalisation, the neglect of manufacturing, increasing deregulation, the rising income inequality, the imbalances of taxation and public spending and so on. We don’t do anybody any service by blaming it all on the bankers. Where is our analysis of the core imbalances?
Well said, Richard Murphy. In his Guardian article of 5th January Simon Jenkins says of the UK’s public sector debt: “its cost in interest is enormous.” In the context of the post-war economy of the UK this statement is simply wrong, and it echoes the nonsense often pronounced on this topic by George Osborne, David Cameron, and Nick Clegg. As a misreading of the state of the public finances it is on a par with Osborne’s “we were on the brink of bankruptcy under Labour.”.
The Institute of Fiscal Studies has a helpful summary (drawn from ONS data) of the UK’s public sector spending by function for each year since the late 1940s (see http://www.ifs.org.uk/ff/lr_spending.xls). This shows that the public sector net debt interest payment as a ratio of GDP was 1.9% in 2009/10: that is, lower than for any year from 1948/49 to 2000/01.
Furthermore, the Treasury forecast (in the 2010 budget) that the net debt interest to GDP ratio will be 2.7% for 2010/11: that is, lower than the average of 3.0% per fiscal year over the period 1948/49 to 2010/11. What Jenkins should have said of the public debt is that currently, “its cost in interest is below the average of the last six decades.”
Worrying about the size of the public sector debt is just not what is needed right now — the cost of funding it is not that onerous. What the coalition should be doing is implementing policies that lower unemployment.
Oh FFS, it’s not just bailing out the banks that caused the deficit, it’s the recession which they caused and which has destroyed the tax take.
Well almost 25% of HSBC’s profit comes from Hong Kong alone! Standard Chartered HK operations contributed 21% of profits. I’d say Hong Kong is a banking centre.
@Million Dollar Babe
The narrative I would construct would be something like this:
1. Bankers went amuck in mortgage-based lending as well as investing in mortgage-backed securities.
2. House prices sky rocketed.
3. When the bubble burst, house prices fell, the bankers got caught out and so did the households that borrowed.
4. British banks got into solvency issues and stopped lending. Households got worried about the debt and stopped spending.
5. The economy took a tailspin. Jobs lost.
6. Revenues fall and benefit payments go up.
The countries where each and every one of these things happened to affect the Government budgets are US, UK, Ireland, Spain and maybe a few others I haven’t kept track of. Just deregulation or weak regulation is not enough to make all these things happen. Many of the other countries you mention didn’t have house price booms like these countries. Even if their banks dabbled a bit in MBS’s, the damage was contained.
The problems in the UK were not all that severe, as far as I can see. But there was excessive panic and conservatism in the financial sector, which meant that the economy suffered anyway.