The defining moment of our time

By Jon Crooks

The UK and the world at large is in a bad place, heading in the wrong direction. To get out of this we need new economic systems and a new force in politics. Where will this come from?

As things stand, whoever you vote for in the UK, the same people win. In the recent past, whether it’s a Labour, Lib Dem and/or Conservative government, there has been no change to the status quo. Wealth and power has continued to be held and to accumulate in the hands of a few. But the existing political and economic orders are being questioned more than ever now. Syriza in Greece, Podemos in Spain, the movement behind Bernie Sanders in the US and here in the UK, where a strong new progressive force is doing the unthinkable; it’s taken over an established existing political party (something that, sadly, Bernie Sanders wasn’t unable to achieve across the pond).

The current leader of the Labour Party was voted in by a new wave of members and supporters intent on shaking things up and bringing about change from inside an existing political structure. New forces are at work. Big decisions lie ahead.

This is long overdue. Our first-past-the-post electoral system places the outcome of general elections in the hands of a few middle-income voters. Our system grants inordinate power to the corporate media, which only needs to influence those ‘middle England’ marginal constituencies to capture the vote. This combination of a media owned by billionaires and a first-past-the-post electoral system is lethal to democracy and has maintained the status quo for too long. Unless something drastic happens, we will just keep getting more of the same. That’s simply not an option.

We face huge problems in British society, which have come to light in the wake of the referendum vote. The causes of the Brexit result are deep-rooted and complex, but economic inequality has been touted by many as the main cause.

Global inequality is a huge and growing problem too and this sits alongside an environmental crisis that threatens our very existence on this planet; climate change is only one part of this problem. Two major studies by an international team of researchers, published in Science and Anthropocene Review in 2015, pinpointed the key factors that ensure a habitable planet for humans and found that of these nine worldwide processes, four have already exceeded safe levels. These processes are referred to as Planetary Boundaries and the four critical ones are:

  • Climate change
  • Loss of biosphere integrity (biodiversity loss and extinctions)
  • Land system change
  • Nitrogen and phosphorus flows to the biosphere and oceans

All of these changes are shifting Earth into a new state that is becoming less hospitable to human life and these changes are down to human activity, not natural variability. Our economic systems have gone into overdrive and as a result there has been a massive increase in resource use and pollution on a global scale.

These economic systems are based on the political and economic ideology of our time, which many refer to as ‘neoliberalism’. A belief that the invisible hand of ‘the market’ must decide everything to deliver prosperity for all. It’s a broken promise, which only delivers prosperity for those who already have it and the endless pursuit of economic growth on which it is based will destroy us.

The core tenets of neoliberalism are:

  • So-called ‘free’ markets;
  • Keeping state intervention as small as possible;
  • Boosting private rights for those able to afford property (supported by state intervention);
  • Low taxation; and
  • Individualism being celebrated (for instance through the cult of celebrity)

Neoliberalism offers the seductive view that it provides market-based solutions to all our ills and enables everyone to become wealthier. This is supposed to be due to a ‘trickle down’ effect and it’s this that has been the central mantra of neoliberals for the last 35 years.

According to Oxfam, the 65 richest people in the world currently own more wealth than the 3.5 billion poorest combined. Eradicating extreme poverty and bringing the very poorest people in the world up to just $1.25 per day, at current rates of ‘trickle down’ economics, would require global GDP to increase by over 15 times and take at least 100 years to achieve. Under the current economic system this would require huge increases in consumption levels.

This would continue to require cheap energy – which in the past has come from fossil fuels, accelerating climate change – and from more land being used to boost agricultural output at any cost, driving deforestation and environmental degradation and making the poorest of people even more vulnerable to extreme weather events.

This dominant economic theory has ruled for the last 35 years. It’s an extreme version of capitalism and any criticism of it should not be viewed as a criticism of capitalism itself, which is a longer term change that we’ve been going through since around 1610. That change has many different modes. The extreme form we now refer to as neoliberalism is just its current incarnation, and it is this particular form that we need to defeat.

The crisis facing Britain post ‘Brexit’

Austerity under the previous government has certainly had a severe impact. In particular, cuts to public services and the welfare state in particular, which many centrist ‘Blairite’ Labour MPs supported.

But the problem goes much deeper. The problem of growing inequality began with the hollowing out of our manufacturing industry as globalisation and neoliberalism took hold in the 1970s and 1980s.

I voted for us to remain a member of the EU for many good reasons that I won’t go into here, but I appreciate some of the motivations behind many of those who did vote to leave. There is at the very least a perception that immigration from Eastern Europe is depressing wages and putting pressure on public services (albeit the latter is likely to be more a result of the Conservative Government’s austerity policies).

The problem of course is not the EU itself, but the fact that the UK and the EU as a whole is in competition with other parts of the world and the neoliberal ideology that has dominated over the last 35 years has not sought to invest in alternative industries and sectors as others were lost. Much of this can be traced back to the Thatcher years. Some things improved under Blair, but not much and only temporarily. As Will Davies describes, referring to many of the former industrial towns in England and Wales who voted to leave the EU, in his recent analysis on the sociology of Brexit:

“Labour’s solution was to spread wealth in their direction using fiscal policy: public sector back-office jobs were strategically relocated to South Wales and the North East to alleviate deindustrialisation, while tax credits made low productivity service work more socially viable. This effectively created a shadow welfare state that was never publicly spoken of, and co-existed with a political culture which heaped scorn on dependency. Peter Mandelson’s infamous comment, that the Labour heartlands could be depended on to vote Labour no matter what, “because they’ve got nowhere else to go” spoke of a dominant attitude.”

Under David Cameron and his Chancellor, George Osborne, things got much worse, as they hit the neoliberal turbo button. But as Will Davies points out:

“It is easy to focus on the recent history of Tory-led austerity when analysing this, as if anger towards elites and immigrants was simply an effect of public spending cuts of the past 6 years or (more structurally) the collapse of Britain’s pre-2007 debt-driven model of growth.”

The problem of course goes back further. In Britain, most of our industrial towns have been devastated, not through the recently imposed austerity measures (though that has exacerbated the issues) or as a result of our relationship with Europe, but rather prior to that, to a period when we saw our manufacturing industries move out of Europe altogether, to places where labour is cheapest, natural resources are most abundant and where both social and environmental regulations and minimum standards are weakest. This is what we refer to as the ‘race to the bottom’.

In the long run, the winners are the big businesses that operate across national boundaries. They effectively play off nations against each other, causing countries, or trading blocs like the EU, to weaken standards to compete with China or India or wherever the next big workhouse of the world will spring up.  As these trans-national corporate big-hitters have grown in size and stature they’ve imposed themselves more and more on the seats of power in government, whose neoliberal ideology makes them good listeners. Hence, the situation is compounded over and over.

How do we counter this phenomenon? We could abandon the era of free-trade on a global basis, but is this realistic? It certainly makes sense from a green economy point of view to produce more goods locally, to reduce transportation and thus carbon emissions. But we can’t simply revert back to being small nation states that produce most of our own goods, especially as we’ve become so used to (and in many ways, reliant upon) imported goods. Yes, we need to do more of this where possible, but we can’t completely reverse globalisation. We need international trade; not least to drive the switch to a low carbon energy future.

Globalisation must work for all of Britain

Many of our industrial towns, that are home to most of our semi-skilled workers, feel on the wrong side of globalisation and voting to leave the EU was one way of ‘hitting out’. The idea that they could ‘take back control’ was appealing to people who felt betrayed by the current global economic system.

The UK needs someone – or something – to begin to address how we can make globalisation fair and inclusive. The real dividing lines are between those who are for a managed global economy – which tackles its injustices – and those who oppose intervention on ideological grounds (neoliberalism).

In this respect, Britain will first look to the new prime minister and the Tory party to try and unite us, but whilst Theresa May appears right now to be well-intentioned, they are not a party of intervention and reform. The Green Party have all the right ideas, but unfortunately they currently lack sufficient support among the wider population. Then there is Labour, who are currently in disarray. The current Labour leadership do seem to be up for the kind of radical change in economic thinking we need, but face a challenge from the right wing of their party, which has succumbed to mainstream economic ideology and don’t propose any new ways of tackling our relationship with the world.

It’s the same over the pond. Hillary Clinton represents a less dangerous and less extreme version of neoliberalism than Trump, but she is a neoliberal nonetheless. Bernie Sanders with his social reform and carbon tax was a missed opportunity.

Back here in Britain, the battle between left and right still rages on in the Labour Party. The neoliberal free-marketeers on the right of the party who have the support of the Parliamentary Labour Party (PLP) – the vast majority of incumbent MPs – versus the interventionists or progressives on the left of the party who enjoy minority support in the PLP, but who have the overwhelming support of the grassroots members, who voted the current leader in with a massive majority (60%) just 9 months ago.

Democracy

So tell me, should the PLP reflect the will and wishes of the members (which includes the unions) or should the members reflect the wishes of the PLP? I think the answer is clear.

Pretty much all the recent commentary has focussed on the personal qualities of one man, who I’ve purposely not named in this article up to now because this surely misses the point of what this movement is all about. The real battle is not over the personality of one man, or even a couple of hundred politicians. This movement is an attempt to change the rules of the game. David Graeber, a professor at LSE and who was involved in the Global Justice Movement and Occupy Wall Street, has put it like this:

“…it’s not the man himself but the project of democratising the party that really sets their [Corbyn’s supporters] eyes alight. The Labour party, they emphasise, was founded not by politicians but by a social movement. Over the past century it has gradually become like all the other political parties – personality (and of course, money) based, but the Corbyn project is first and foremost to make the party a voice for social movements once again, dedicated to popular democracy (as trades unions themselves once were). This is the immediate aim. The ultimate aim is the democratisation not just of the party but of local government, workplaces, society itself.”

He continues:

“… the object is to move from a politics of accountability to one of participation: to create forms of popular education and decision-making that allow community groups and local assemblies made up of citizens of all political stripes to make key decisions affecting their lives.

There have already been local experiments: in Thanet, the council recently carried out an exercise in “participatory economic planning” – devolving budgetary and strategic decisions to the community at large – which shadow chancellor John McDonnell has hailed as a potential model for the nation. There is talk of giving consultative assemblies real decision-making powers, of “banks of radical ideas” to which anyone can propose policy initiatives and, especially in the wake of the coup, a major call to democratise the internal workings of the party itself. It may all seem mad. Perhaps it is. But more than 100,000 new Labour members are already, to one degree or another, committed to the project.

If nothing else, understanding this makes it much easier to understand the splits in the party after the recent rebellion within the shadow cabinet. Even the language used by each side reflects basically different conceptions of what politics is about. For Corbyn’s opponents, the key word is always “leadership” and the ability of an effective leader to “deliver” certain key constituencies. For Corbyn’s supporters “leadership” in this sense is a profoundly anti-democratic concept. It assumes that the role of a representative is not to represent, not to listen, but to tell people what to do.

For Corbynistas, in contrast, the fact that he is in no sense a rabble rouser, that he doesn’t seem to particularly want to be prime minister, but is nonetheless willing to pursue the goal for the sake of the movement, is precisely his highest qualification.

As the Labour leader himself has recently said:

“Our priority must now be to mobilise this astonishing new force in politics and ensure people in Britain have a real political alternative.”

The MPs trying to bring him down seem unable to understand that Labour can only sustain itself by becoming the grassroots movement it once was, driven by the determined energies of its members. As George Monbiot says:

“This transformation – from the opaque, corrupt bureaucracy created by Tony Blair, to a party owned by and responsive to its members – is Corbyn’s great achievement.

Yes, his opponents in the party want to win elections. But it is not clear why they want to win. If they possess a political programme (and most of the time it is unintelligible), it amounts to a slightly modified version of Tory neoliberalism. Lacking anything resembling an inspiring vision, their chances of success (if somehow, they manage to install a new party leader) are even smaller than his.”

An alternative vision

  • A new kind of politics, with more bottom-up, participatory democracy, proportional representation, real devolution and radical reform of campaign finance and media ownership rules
  • Fight the epidemic of loneliness and rekindle common purpose;
  • More government intervention to help guide the invisible hand of the market to serve the interests of people and planet above profit – a system that works for the people rather than an offshore elite;
  • Contain corporate power – insisting that companies offer proper employment contacts, share their profits, cut their emissions and pay their taxes;
  • Invest in the NHS, education, affordable housing and secure jobs
  • Regain control of public services, like buses, trains, energy companies and other utilities and invest in them too;
  • Develop a political and economic philosophy fit for the 21st century

Given humanity’s extraordinary impact on the planet, any sort of efforts directed at fairly distributing the Earth’s resources might seem to be a sensible aim. We need a more equal, fair and sustainable society to protect the Earth’s environment and resources for future generations.

We need a proactive and aggressive redistribution of wealth both within and between countries. Progressive taxation is essential to rebalance inequalities. Such redistribution would actually help to reduce costs as it has been shown in countries such as Japan that the smaller the levels of economic inequality within a country, the lower the health care costs and the higher the longevity. Human well being and the health of our planet must be our barometers, not GDP growth.

Just imagine if UK politics could really offer an alternative, with more equal distribution of wealth, resources and opportunities and collective global action on climate change, environmental degradation and global security. Remember, the UK is the fifth largest economy in the world, with an estimated nominal GDP in 2015 of £1.94 trillion. So why are the bottom 99 per cent of people living here continually squeezed economically in recent years?

The priority must be to establish a viable, UK-based, publicly owned renewable energy industry that can operate alongside a thriving private sector industry, which needs government support to continue to innovate and grow. This will enable a just transition for those whose jobs in fossil fuel industries will cease to exist in the coming decades.

The vested interests of the privately owned energy monopolies have to be challenged, a point eloquently made by climate activist Naomi Klein at a packed meeting during COP21 in Paris. Sharing that platform was the current Labour leader. Whatever his detractors may say about him, he understands that this global emergency transcends party politics and ideological divisions.

The deficit crisis

This is the difference between the present value of the government’s commitments to cover its outgoings (such as state pensions and running the NHS) and the present value of its tax revenues. This difference is undoubtedly significant, at close to six times our national income.

But this has largely nothing to do with government borrowing and the creation of money other than the cost of finance i.e. the interest the government pays on our national debt, which forms part of those outgoings alongside paying for the NHS and welfare etc.

This is a problem in Europe too of course. Greece is at the epicenter of Europe’s so called ‘debt crisis’. The term debt crisis in particular is misleading here though as it is more of a deficit crisis. The Greek problem first came to light in October 2009 when global financial markets were still reeling from the financial crisis and Greece announced that it had been understating its deficit figures for years, raising alarms about the soundness of the country’s finances.

Suddenly, Greece was shut out by the private banks, as it was considered too high risk, such was the size of its borrowing and budget deficit. By the spring of 2010, it was veering toward bankruptcy, which threatened to set off a new financial crisis.

In order to protect the Euro, the now notorious Troika of The International Monetary Fund, the European Central Bank and the European Commission stepped in with a funding package, but with it imposed terms – higher taxes, economic reforms and austerity. They had to otherwise nothing would change and they would never get their money back!

Unfortunately it hasn’t worked and there is no doubt now that five years on and the Greek economy is on the brink. The only sensible solution now is surely debt forgiveness (also known as debt relief) – this simply means writing off the debt to allow the country to recover, but the Troika are not budging.

So why did countries build up such budget deficits?

According to a number of academics, the fiscal imbalances, or deficits, are a consequence of public spending pressures that we face as the baby boom generation reaches retirement age and life expectancy continues its upward trend. Many countries are facing similar problems. The UK deficit is high relative to our US and European counterparts, but the Greeks situation is made far worse because financial institutions lost faith in the country as a borrower. The UK and Greece are very different beasts though.

Our borrowing costs are low and we are viewed as safe borrowers by the banks because the markets have confidence in the UK economy, whereas the bank’s have no confidence in Greece and its finances. The UK is considered a safe heaven because investors are reassured that the Bank of England will buy up bonds (government loans) in an event of any sell off. Also, because we are not in the Euro we can devalue our currency to increase exports. Finally, UK bonds are attractive because we haven’t defaulted on our debt for over 300 years.

So if our government finances are not such a mess, why is The Government imposing such harsh austerity?

Austerity is used as justification for a smaller state to gain lower taxes. It’s also argued that austerity was used to paint Labour as a party that can not be trusted with the country’s finances again. This is how The Conservatives won a second term because people vote out of fear. As everybody knows, elections are won and lost on economic credibility. Hence, as people believed the myth that Labour created the mess and The Conservatives were cleaning it up, Labour wouldn’t be trusted with power again.

Other solutions to dealing with the deficit

It’s not to suggest that the UK Deficit should be ignored, but there are many calling for a fairer, more measured approach. There are clear choices, which don’t even get debated in mainstream politics and the media. On the one hand, we could increase income taxes, National Insurance contributions or consumption taxes such as VAT and fuel duty. On the other, we can take the currently favored option of drastically cutting public spending.

What this really comes down to is which groups in society should bear most of the burden – low-paid workers and the unemployed who rely most on the welfare state, the NHS and other support services provided by any decent modern society, or should the wealthy bear more of the cost by paying a little more tax, or at least by paying some tax? Let’s face it, we lose billions in revenue from tax dodging corporations and high net worth individuals every year.

As a recent Guardian report uncovered…

“In the financial year 2012-13, the government spent £58.2bn on subsidies, grants and corporate tax benefits. It took just £41.3bn in corporation tax receipts.

In 2012, Amazon was attacked by MPs on parliament’s public accounts committee for avoiding UK tax. Yet in the same period, the online retailer was awarded £16.5m in grants by the administrations of Scotland and Wales to help build distribution centres. To link the Wales plant to the transport network, the Welsh assembly built the mile-long “Ffordd Amazon road” at an additional cost of £3m.”

This ‘Corporate Welfare’ is a blatant transfer of taxpayers money to large corporate businesses.

The Conservative Government likes to remind us is that movements towards higher corporation tax or tougher enforcement would likely deter investment in the UK, even by those corporations who are willing to pay their fair share, as it might be interpreted as a signal that further regulations will follow in the future, making it more difficult to do business in the UK.

But our Corporate Tax levy, at 20%, is lower than the global average and lower than the EU average. It is much lower than in France and Germany and half that of the US; and we’re giving away even more than we take in tax by way of direct handouts.

Our government is so obsessed with attracting big business that it imposes punitive cuts in spending to balance the books whilst subsidising big business. And these cuts are being made at a level and pace that cannot be justified. The fast pace of fiscal adjustment that George Osborne has instigated doesn’t aim to spread the pain. He wants instant results, so that he can take credit for re-balancing the books. Shrinking the state and lower taxes also fall in line with Conservative neoliberal ideology. The result is that the burden per person is much larger, and the economic pain for individuals correspondingly greater.

Does it work?

It hasn’t worked in Greece where austerity policies have led to unemployment rates of 28% nationally, without reducing the deficit or providing the economic growth it promised.

So, what should be done?

At the very least we need to have a public debate about how to deal with the deficit issue, rather than simply accepting the path chosen by the main political parties and the European and International financial institutions imposing austerity.

Is it time to consider a different approach with a higher proportion of GDP being spent on government services; perhaps 45% as is the case in Germany. We can’t continue to roll over for big business or give up trying to collect corporate taxes because it’s too hard. Instead, we need to see rich individuals and multinational companies paying their fair share of taxes.

Thomas Picketty suggests that a tax on capital instead, or as well as, income could not only provide fiscal returns, and hence reduce the fiscal imbalance, but would have other benefits too. The tax burden would fall heaviest on the “super rich” – those most able to afford the tax and who are the section of the populace that has benefited most from the economy. The tax, depending on what tax rate is selected, would also go some way towards reversing the polarity of wealth which has been such a feature of recent decades.

The concept of taxing capital fills the richest 1% with horror and has prompted an outpouring of misleading arguments against Picketty, and regrettably these arguments hold sway to our political leaders who are under the control of the 1% by virtue of their control of the media and the lobbying groups.

As well as reducing inequality we need to live within our ecological means and our current requirement of needing the resources of three planet Earths is already causing massive disruptions that will rapidly reach catastrophic proportions. If we really want to talk about balancing the books, the truth is that we need to take a look at what our fair share of the Earth’s natural resources is and set ourselves on course to really live within our means.

Understanding Money Creation as Debt

By Jon Crooks

Banks create new money whenever they make loans. 97% of the money in the economy today is created by banks, whilst just 3% is created by the government. So does this mean the banks are rolling in it whilst a large proportion of the population are suffering through austerity?

In early 2014, The Bank of England published a report explaining how money is created and how the flow of money is controlled. Contrary to popular belief money is not issued by The Bank of England, it is created when a private bank, like those on our high streets, makes a loan to a person or business.

But this doesn’t represent free money for the bank in question – and this is where your head explodes – because money is ‘destroyed’ when the loan or mortgage is repaid. And of course these are usually just numbers on a screen, not real money, as in cash, although the principle is the same.

The bank only gets to keep the money it makes in interest. That is the bank’s income, out of which it must pay running costs such as staff costs and property costs and of course the interest it pays you on your savings if you are lucky enough to have any.

All this of course is no doubt an eye-opener to those who believed the old theory still held true, that a bank lends money that already exists in the form of bank deposits or money borrowed from other banks.

This system of money creation as debt is how the modern economy works. The question is, should we be worried?

First, you need to get your head around the fact that money has to be produced all the time by someone. The analogy often used is that the economy is an engine and money is the oil that you put in it to keep all the moving parts working properly. Without it, the engine will seize up.

So does it matter who is creating the money in the first place?

The Green Party want to bring this process under state control. But arguably, how money is created and pumped into the economy is less important than how it is controlled and there are controls in place. Banks face limits on how much they can lend based on three main principles:

1) Market forces constrain lending because individual banks have to be able to lend profitably in a competitive market and have to take steps to mitigate the risks with lending. For example, they must be careful who they lend to, how much they lend and under what circumstances; this is the fundamental principle of credit risk – the bank must be confident that they will nearly always be repaid in full to protect their profits. The regulators play a role here too in assessing whether individual banks have sufficient safeguards in place;

2) Money creation is also constrained by demand – households and businesses must want the money in the first place;

3) The ultimate constraint on money creation, in theory, is what we refer to as monetary policy.

Monetary Policy is how the state attempts to control the economy by manipulating interest rates.

If the money supply grows too fast, the rate of inflation will increase, products and services become too expensive, too quickly, wages can’t keep up and the currency loses its value, so the state increases interest rates. This encourages saving and discourages borrowing, hence less money is created by way of loans and mortgages, less money is spent and inflation reduces again – in theory.

In the UK, Gordon Brown as Chancellor handed over the power to set interest rates to the Monetary Policy Committee (MPC) of The Bank of England (BoE). Whilst the BoE has faced accusations of lack of transparency, the idea was that it removes political influence from the decision-making the process of setting interest rates, which in principle is a sound idea and should have got us away from ‘boom and bust’ by virtue of the fact that politicians wouldn’t play with interest rates in the run up to an election in order to win votes.

So what about the flip side, when the economy isn’t doing so well?

If the growth of money supply is slowed too much by banks reducing lending (as happened during and after the financial crisis of 2008), economic growth may slow (or the economy may even fall into recession) and deflation can also be a consequence, so interest rates are lowered to encourage borrowing. This is supposed to increase the money supply and get the economy going again. But following the financial downturn we had record low interest rates and yet the recovery was still very slow. This led to an additional measure known as Quantative Easing (QE).

As the banks were creating too little money to get the economy going again (and this could have been the banks being too risk averse in the new climate of heavier regulation and greater scrutiny – or people and businesses being too cautious to borrow – or a mixture of both), and as the BoE had already lowered interest rates as low as they could go (0.5% is considered to be the so-called effective lower bound), the BoE sought to provide further stimulus to the economy through QE. This is a process of buying non-bank assets such as pension fund or insurance company assets, through the creation of money. There is a common misconception here that this involved giving banks ‘free money’, whereas they only acted as go-betweens and didn’t benefit at all.

So how does this tie in with austerity? Does this throw the theoretical basis for austerity out the window?

Anthropologist David Graeber made this argument in a piece written for the Guardian in March 2014.

He made the point that the central bank could print as much money as it wishes (as it did through QE), but in reality of course it can’t print too much. This is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England and US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, but instead fund private economic activity that the government merely taxes.

It is crucial to understand all this to understand why the government can’t simply create more money to pay off the national debt or build more hospitals.

In the modern economy, the government is just another borrower like you and me.

The crux of Graeber’s argument is this: The real limit on the amount of money in circulation is not how much the banks are willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. He argues that government spending is the main driver in all this.

This is true to an extent. Government borrowing, spent on public works, increases the flow of money, which increases economic activity, which leads to more tax revenue, which allows the government to pay down its debt and then borrow more and the cycle begins again. This is the basic principle of Keynesian Economics.

So the point here is that the problem isn’t the way in which money supply works; that’s just a means to an end. Yes, there are other ways to do this, which are explored more below. Actually, the real problem is the government’s ideological reluctance to borrow to spend and then to tax to recoup. Instead, George Osborne insists on cutting borrowing, cutting spending and cutting taxes on the assumption that lower taxes will drive greater activity in the private sector and boost the economy that way.

In Osborne’s mind everybody then benefits from increased prosperity, or so the theory goes. This is ‘trickle down economics’. A theory that has been utterly discredited by the growing inequality seen the world over the past few decades; ever since this brand of economics, now commonly referred to as neo-liberalism, took precedence.

This failure of government policy should be the focus, not how cash is pumped into the economy.

Blaming the Banks

The commercial banks as a group increased the money supply by 2.5 times between 1997 and 2007 by lending it into existence, and created a housing price bubble in the process as much of the money went into providing cheap mortgages to anybody and everybody.

When the bubble burst, a recession followed because people and governments were trying to pay down their debts, and so taking money out of the economy. Quantitive Easing was seen as a way of maintaining the money supply, otherwise the recession would probably have been a lot worse.

Of course, in this respect the banks were directly to blame for the financial crisis, but it is a bit like blaming a child for eating too many sweets when left alone in a sweet shop. Banks are private enterprises, motivated by profit, and if insufficiently regulated, they will run a mock

The real culprit once again is neo-liberalism. The deregulation of the financial sector in the 80s and 90s is widely recognised as having lead to the excessive risk taking by the banks that preceded and led to the crash.

We need to improve that regulation again and that is happening – though we need to make sure full banking reform is implemented, with no half measures. Given half a chance, Osborne will start to backtrack, just like he has with the bank levy.

Positive Money

Others seek a more radical approach to reforming the banking system. Following a campaign by an organisation called Positive Money, The Green Party adopted some of its principles. One of these is that…

“all national currency (both in cash and electronic form) would be created, free of any associated debt, by a National Monetary Authority (NMA) that is accountable to Parliament.”

The Greens worry that the size of our money supply – the total amount of money in circulation – is dependent upon millions of separate commercial lending decisions by banks. Although this view is a little jaundiced because for a bank to make a loan there has to be demand for that loan from a customer. As such, the money supply is dependent on millions of customers and businesses all acting independently.

The Positive Money and The Green Party approach is based on the fact the we need more money and less debt. They believe that the Bank of England should only be directing loans to productive activity.

Capital Constraints

Still with me? I’m amazed! I’m boring myself now, but hang on in there if you can. Capital constraints are another way to control how much banks lend. Under the present system bank lending is capital constrained, not reserve constrained. How much credit a bank can create is governed by the ratio of shareholders’ funds and retained earnings.

Each new loan drains an amount of capital proportionate to its risk weighted amount. Banks can only lend within their capital ratios. In the run up to the financial crash the capital ratios were much lower than they are now and were widely ignored anyway. Now capital requirements are much higher, which limits lending, and hopefully regulators are being tougher about enforcing them.

Regulators are also trying to move towards constraining leverage as well, which is the ratio of capital to deposits. As each loan creates an equal deposit, forcing banks to restrict their leverage would also have the effect of limiting lending.

Positive Money and The Green Party would like to change this. In effect their proposal is to introduce reserve constraints on lending: they want banks to obtain reserves in advance of lending and only lend up to the limit of those reserves. They also want to force all banks to obtain reserves only from term deposits or from central bank liquidity: current accounts would be excluded, and banks would not be allowed to lend to each other. The MPC or MPA would be tasked with making sure the Bank of England created enough money to fund lending without increasing inflation.

Conversely, the Independent Commission on Banking (ICB)’s proposal for bank reform envisages significantly increasing capital requirements, particularly for systemically-important banks with retail operations. The ICB rejected Positive Money’s proposals for bank reform on the grounds that they would be unnecessarily restrictive of credit. Instead, they proposed capital ratios for large banks that would go beyond the levels previously recommended by regulators.

Predictably, the banks objected to the amount of capital they have been asked to raise, on the grounds that it would hinder economic recovery.

These tighter regulations no doubt have reduced the appetite or ability of the banks to lend post crash and during the recession (as Vince Cable and The Daily Mail kept reminding us), but tighter regulations were necessary to ensure we don’t have a repeat of the financial crisis.

There is no doubt that bank reform was and continues to be necessary. There is also no doubt that it is and will continue to be painful, not only for banks themselves but also for their customers, both borrowers and savers. Savers are receiving poor returns on their investments. Borrowers are finding it harder to get credit and are facing higher interest rate margins and charges.

Is the Positive Money ‘s alternative banking system too radical?

There are other policies we can introduce in the meantime:

  • Banks tend to take on too much risk? Insist upon higher capital or liquidity requirements. This is already happening.
  • There’s too much “speculative” mortgage lending? Impose quantitative limits.
  • House prices are too high? Build more houses (especially affordable homes) and impose Loan To Value and affordability restrictions and rent controls
  • “Productive” firms are starved of finance? Create a state investment bank.

 

First posted on http://www.thebeardyguy.com on 9 July 2015

 

There is no economy on a dead planet

 By Jon Crooks, published on 30th April 2015 on The News Hub

 

Our current economic model, commonly referred to as neo-liberalism, now dominates every corner of the earth. Thatcher and Reagan won. They sold us on an ideology of competition in every aspect of life. They began the process of removing as many barriers to competition as possible. They crushed unions, stripped away regulation there to protect workers, consumers and the environment we live in, all in the name of increasing competition. This ethos of competition now drives a large part of our human behaviour. We don’t think like communities or even as a unified nation of people any more. It’s dog eat dog, survival of the fittest. The real tragedy is that unfettered competition is supposed to benefit us by increasing choice and cutting bureaucracy, but in reality it has done the opposite. Big business is getting bigger and more powerful at the expense of small independent traders that provide real choice and originality. Real choice has been replaced by the monotony of large chain stores, restaurants and coffee shops and personal service has been replaced by call centres and self service via the internet as businesses get bigger by cutting costs.
 
Our transport, communications and energy infrastructure has been sold off to big business, so now our governments are left impotent when it comes to tackling global problems like climate change. In short, they’re no longer in charge. Our democracy is a sham. So much power has been handed over to the private sector that our politicians are powerless to act. Or so it seems. 
 
Unwilling to interfere with the market to install the infrastructure necessary to quickly switch our energy supply to clean renewable sources. Unwilling to interfere with the free market to put in the infrastructure to pave the way for a switch to electric cars. But hang on, don’t we provide millions in subsidies to the fossil fuel industry every year? And what about the deal with Eon to build and run the new Hinkley nuclear power station? Huge subsidies proposed, which has now led to a legal challenge by one of our fellow EU members.
 
It’s clear therefore that it isn’t just about ideology and an unwillingness to interfere with the ‘free market’, our problems are amplified by greed, power and vested interests. How many government ministers have links to the fossil fuel industry and the big energy companies? How many of their friends and supporters are wealthy landowners who benefit from agricultural subsidies? Those in power support privatisation because it is a transfer of public money to private interests. From the 99% to the 1%. They do this because they believe in a ruling elite and they want to maintain this status quo. Growing inequality? They simply don’t care.
 
Globalisation and neo-libralism are not compatible with securing a safe and stable planet for the future. The pursuit of continuous economic growth at the expense of all else can’t continue indefinitely. We can’t continue to base our economic system on competition at a time when we need collaboration to deliver a safe and secure future for ourselves. Tell me, how can we expect over 200 nation states to agree on a way to limit CO2 emissions whilst simultaneously competing with each other for business; the same business that is producing the CO2 in the first place based on a competitive market economy that only services to drive up consumption? We can’t. 
 
Is change possible?
 
There is certainly a growing number calling for a change to the economic system. It probably started with the Occupy movement, which has now been joined by a growing grassroots environmental movement. The problem is that whilst we know what we want, we don’t know how to get there. Politically, many on the left will vote Green this time around, but will that be enough? The they can hope for is a few seats in parliament and perhaps a little more influence on the Labour Party if they form a minority government with the support of the Left. 
 
The problems with UK politics run deep. Most people can’t think outside of the existing political orthodoxy that is represented by the three main parties and the corporate media because it’s not debated and reported on in mainstream channels, and most people vote how they’ve always voted anyway. That’s if they vote at all. Only 65% voted in the 2010 General Election and most of those votes were meaningless in our First Past the Post system, where only people in ‘marginal seats’ affect the outcome. It’s a dire thing to admit, but our democracy is not democratic enough to be relied upon to drive the real change we need. 
 
After this election and its aftermath is over there are 3 things that need addressing: 1) we need constitutional reform – a new voting system based on proportional representation, regional devolution and an elected 2nd chamber of parliament; 2) we need to free the press and media from corporate ownership and vested interests; and 3) reform party funding to make it fair and equitable and out of the grasp of corporate power.
 
We might then finally begin the journey that closes the gap between the country we have now and the country and world that most people would surely prefer.

Let’s stop feeling guilty and confront those in power

By Jon Crooks, published on The News Hub on 13 March 2015.
We need to rise up and demand real change if we want a better world. Big business can’t be trusted to save us from a crisis created by capitalism

My wife will tell you, I’m a tortured soul. If you know me you’ll know that I can’t help wrestling with large-scale social and environmental dilemmas like inequality, the degradation of the natural world and climate change. I feel profound guilt over what humans are doing to each other and to the planet. And I know I’m not alone. As individuals, the primary way people like me deal with this guilt is as consumers – buying organic, locally-produced seasonal food or signing up to Green Energy. But, in the end, whilst these are important choices to make as individuals, for our own peace of mind, a minority of us making ethical consumer choices won’t change anything. What we really need to change is the system.

We need to target the architects and governors of the current system. We already do this quite well, but in my opinion too much of this is focussed on the private sector; we focus too much on the big corporations in particular. We’ve made the oil companies enemy number one in the war on climate change and big food producers, agribusiness, logging companies, big fishing corporations etc. the focus of our attentions.

Don’t get me wrong, they are the culprits and we must continue to pressure them and shame them, but in the same way that consumer choices won’t bring about real change, neither will pressuring big business alone be enough to stop all their harmful practices. We can’t expect a multimillion pound fossil fuel industry to simply wake up one day and decide “hey, all those trillions of dollars worth of fossil fuels on our balance sheet that we keep being told can’t be burned…why don’t we just leave them in the ground and go and do something else”. Clearly that’s not going to happen.

This is because there are obvious limitations to targeting the big corporations. In simple terms, these companies exist to make a profit for their shareholders. Indeed, to maximise profits through continued growth. Whilst they engage in corporate sustainability programmes (some more than others), this is not usually through a desire to do good, or do the right thing, even if this is one of the companies stated values. Corporate social responsibility mostly exists in order to project an image or a suggestion that they are doing the right thing, in order to be able to continue to attract customers, deflect government regulation, and in order to continue to make money.

The idea that capitalism can save the world from a crises created by capitalism is a ridiculous notion. The change required from private corporations won’t happen on a voluntary basis. Even those who work in the fossil fuel industry acknowledge this.

Our governments are the problem. They act like they are powerless to act; almost bystanders. And that’s exactly what they are most of the time. Calls for action on climate change for example are growing among societies around the world, but government actions are still restricted to those that will not hamper existing business or potentially act as a drag on the growth-obsessed economic system.

The alternative ‘green’ approach is still considered too progressive, too left-wing. A green future is equated with returning to living in caves. It’s a very entrenched mentality and a huge challenge to promoting change. But is it true? Of course not. All the green movement are saying is let’s stop the obsession with growth and GDP and think about how we can develop a new green economy in a sustainable way and stop working in individual silos as nation states and start thinking more cooperatively. We need a narrative of positive change, in which our adaptation to climate changes does not just protect what’s already here, but also creates a more just and equitable world.

The time has come to demand real change.