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An Economic Nightmare: Keynesian Growth v Hayekian Austerity

I am no economist, as the state of my bank deficit can testify, nonetheless I have taken some time to try and understand what the hell has gone on with the global economy in the last few years. I lived through the boom and bust of the late 1980s and early 90s and my experience with credit then, gave me a good grounding in how fragile life becomes when we live on a play now, pay tomorrow basis.

On the other hand I still live in a Western capitalist economy, some people live without debt, but they are probably the minority. I learned from the 1980s but I could not entirely mend my ways. I did learn one thing though. Don’t buy a buy now, pay later sofa – that’s just stupid.

And that’s where Friedrich August Hayek comes in. His economic theory can be loosely applied to DFS, MFI and the like. If too many people buy sofas they don’t strictly speaking need, with money they don’t strictly speaking have, we have created a sofa purchasing bubble. The bubble contains too many bums on sofas that will be paid for later, and when easy credit becomes hard to come by, the sofa bubble bursts. Suddenly, the demand for new sofas, or kitchens, or white goods decreases sharply. Companies that manufacture or retail these items make less money and worse might not even be receiving the money for the sofas they sold two years ago. Production slows, jobs are lost; it’s not a pretty sight.

Hayek said that to return to a sustainable model of production, liquidation was inevitable. Liquidation of companies and jobs – that’s the pain of a recession. Sustainable production and the accompanying modest consumption, as a model is not all bad surely? However, in a recession I find I am far more drawn to the Keynsian way of doing things. John Maynard Keynes promoted the idea that government could control the business cycle of boom and bust and that in times such as now the government should spend to stimulate growth. There’s sense in both. The weakness in the Keynsian model is that national government most evidently cannot control the business cyle in a global economy that relies so heavily on the financial sector. The weakness in the Hayekian approach is that he would see us all return to subsistence farming, living hand to mouth whilst the sustainable model of production found its feet.

Given that both these influential economists were knocking about in the 1930s and 40s isn’t it well overdue that we quit with the either or approach, where we put the notionally opposing ideologies in conflict, and try to take the elements that might work in a 21st century context?

Take the state sector in Britain, it is true to say that the public sector payroll swelled under the last Labour government, but the proportion of people employed did not exponentially increase. Employment of workers by the state is unevenly distributed regionally. Putting the same proportion of state sector workers on the dole in areas of low industry and high unemployment is not going to make Hayek’s model kick in, as if by magic. It might work better in the South East, where the spread of private and public sector employment is more equally balanced. On the other hand it might not, and it has not so far. Cutting jobs as George is doing is effectively making the poor poorer and increasing unemployment in places where you are more likely to stay unemployed – which is why Keynes’ growth model is so much more attractive.

Having said that Hayek was right at a fundamental level, which is that false demand for consumer goods will lead to boom and then bust. Equally, Keynes was right about the state spending to stimulate growth either; note no Plan B George Osborne’s announcement about a building programme to enhance rail and road infrastructure – jobs and income to stimulate the economy.

To be bold and try to decide which came first, the chicken or the egg you might conclude that the generation of state income needs people employed in the private sector. I have heard it said that the split for public sector and private sector employment is around 40/60. Apparently it has not changed much in the last half century and was actually the highest it’s ever been, in terms of jobs in the public sector, under Thatcher and not Labour, which is interesting and not much advertised. Therefore despite the private sector apparently driving things we may surmise that the state and the private sectors’ fortunes are now inextricably linked – which probably puts Keynes back in the driving seat. After all, when the banks were deemed too big to fail, who bailed the private sector out – the public purse.

In a sense, the balancing act is to cut carefully and judiciously, not quickly and savagely, and to implement a more finely tuned tax system where the rich, the 1%, are not getting wealthier at the expense of the majority. As President Obama asks ‘Is it right that Warren Buffet’s secretary pays more tax than he does?’ Warren says no, I think Obama says no. Certainly the Occupy movement say no! I am not so naive as to think that slamming the super-rich against the wall and fleecing them through higher taxes is going to generate enough money to reverse the tide, but it is can’t be beyond the wit of man to develop a fairer tax system – the paltry 0.001% levied on bank trades is a joke.

To be fair to the coalition government it appears the Big Society, with its focus on the development of social enterprise at its heart, does aspire to take a combination of Keynsian and Hayekian theory – the state funding new businesses with a heart (not for profit). The problem with this approach is that the cutting of the public sector does not immediately covert into quantities of social entrepreneurs kicking their heels. Becoming an entrepreneur, even a social-minded one, takes a particular vision and skillset, an low aversion to risk and a willingness to work every hour of the day – making money available to set these businesses up does not guarantee a supply of people wishing, or able, to start and run them.

The best that could be hoped for is that voluntary sector providers going to the wall due to lack of funding manage to rejig themeselves into a social enterprise model. There’s another problem too. Sustainable business develops at a steady pace, the subsequent impact on unemployment and growing the economy is a very long way down the line and in the meantime the unemployed (former public sector workers included), especially those in regions of high unemployment, cost the state money and generate precisely zilch state dividends. As much as I fulminate against the current regime, there’s no doubt, particularly set against the Eurozone backdrop, we are in a tight spot indeed.

Here’s some food for thought. I was listening to a radio programme at the weekend that contrasted our Chancellor and his career to date with that of his opposite number, Ed Balls; the link is here. It turns out that although Osborne has been an MP for a number of parliamentary terms, his most notable achievement has been his contribution to consistent team failure (Back to Basics, BSE, four election defeats for his party).

You might well argue that creating the largest deficit in history is nothing to be proud of either (Balls), but Labour’s subsequent management of the crisis did indeed seem to be shepherding the UK economy back to some sort of mini recovery until Osborne came along and put the skids under that with his swingeing cuts, incidentally the largest and fastest programme of its kind ever, in the world. As I personally carried on in some degree of debt having learnt my lesson partially in the last millenium, so did the Labour government and every other Western capitalist government, more, or less. What we are not told by the government when we are being given the message that budget and household deficits are bad, is that debt long since became a commodity in itself. That much of the crisis was caused by the slicing and dicing of debt and the selling it on, and on, and on, in various forms for profit. Bad, wrong, mad? It doesn’t really matter now, it is a fact. And to deal with the situation we have to deal with the facts at hand. Putting growth and austerity into head-to-head conflict with each other undermines both approaches – and in the meantime the Eurozone, lead by Germany and France, try to repackage their member states debts to make them more attractive to traders and our own government offers start-up loans to social enterprises willing to develop and sell more financial loan products to new social enterprises…

And that’s kind of what happens with this whole debt-ridden thing: we all start chasing our tails and it needs to look like we’re not because at a corporate or national level this kind of behaviour rattles the markets, stocks and bonds take a tumble and we are back to chasing our panic-stricken tails in ever decreasing circles. Which is a bit how it felt trying to write this.

It’s broke folks, and it needs some fixing. We need some radical responses to effect some real change. I wish I knew where they were coming from. In the absence of that, we probably are stuck with an ideal of cautious austerity with a little bit of growth. It’s like nursing the Selfish Giant’s garden back to life when the children have all gone away. But before we can do that, the Giant needs to drop the Selfish bit…

UK Fiscal Policy, a Chancellor & the Squirrel (that lost its nuts)

I get so angry with George Osborne on so many levels it’s probably impossible to write about the current economic position in a coherent manner.

I’ll try. He rolls into town less that two years ago (why does it seem so much longer?) with his gun-toting, whey-faced public school colleagues, desperate to reduce the deficit and sets about shrinking the state to fit his own political ideology: small state, big business, or something. He’s never been overly explicit about his evangelical zeal, but I smell it on him.

The problems he has engendered with his approach, as I see them, include:

#1 – you can shrink the state much more quickly than you can grow a business

#2 – shrinking the state manifests itself, amongst other things, as shrinking confidence and the money to fund the products and services that businesses might offer

#3 – in the meantime, whilst the state shrinks and businesses fail to grow immediately into the gap, the government exacerbate the inflation problem with the one tax hits all unequally VAT, allow energy companies to run absolutely riot with their charges to consumers and defend the continuation of the policy whereby the tax system is run to suit the rich and banks can carry on like one-armed bloody bandits

Anyone with half an eye and an incoherent blog could have predicted rising unemployment, high inflation, low confidence and the failure of the business sector to pull new jobs like rabbits out of hats. And they did.

The Autumn Statement came then as no surprise; having cut the state and reaped the rewards, George announced he was going to cut it a bit more, and a bit more. And then he was going to, once he had saved up some money (and perhaps borrowed some too) spend a bit on roads and rails to stimulate growth (sounds like public spending).

Maybe I’m just an idiot, but isn’t cutting public spending, which is working so well so far as we have seen not, to save money, to fund future public spending a bit whack? Or maybe it’s just the type of public spending Osborne prefers ideologically: roads and rail a more fitting testament to the soundness of his ideology. And that’s even before we mention cutting public spending to reduce borrowing, before announcing more borrowing. Isn’t that an #epic fail by Twitter standards?

I am certain that doing more of the same (cuts) will get more of the same (unemployment, cuts in income and confidence, a battle with inflation etc.). I can’t give you a theory-based reason why, but as I run things round here, I don’t actually have to. George is wrong; he is wrong not least because the economic model he bases his policy on is fucked.

Here is an article from Bloomberg that might elucidate one reason better than I can. It is by an American entrepreneur. It explains why business doesn’t create jobs, that the demand of the middle income citizens does. You can agree or disagree with that, but you’ve got to love the following line:

When businesspeople take credit for creating jobs, it is like squirrels taking credit for creating evolution. In fact, it’s the other way around.

Of course, the whole pact with the devil, consumerist capitalist shebang is busted up, perhaps beyond repair now. We are chastened over-consumers and that, to my mind, is probably the positive in all this. World debt is killing economies like nothing on earth. Tinkering around the edges and putting people out of jobs, reducing your PAYE returns as a result, and failing to get tough with corporate greed is going to continue to get us nowhere fast. There is some radical thinking required. And soon. I am going to get on to that later.

In the meantime, here’s an example of a rather disobedient and impertinent red squirrel that would like to tease the Chancellor.

Squirrel Nutkin by Beatrix Potter

Why Cameron is wrong

  • Because his ideology is getting in the way of rational thinking and action contingent on circumstances.
  • Because he refuses to admit that without a real strategy for growth, there will be no growth.
  • Because he insists the world economy is in trouble which is simply not true (last time I looked Asia and the Far East were doing fine).
  • Because he suspects he might be wrong, but he doesn’t know what to do about it; he has painted himself into a corner and he can’t find a way out without leaving telltale footprints.
  • Because even if he is right, he has a way of making it feel wrong.

The whole coalition government shebang seems to be predicated on one enormous gamble: cut fast and hard, shrink the state to fit the Tory persuasion and cross your fingers hoping that, in the full term before the next election, unemployment falls and business flourishes to fill the gap. 
It’s a hopelessly optimistic strategy given the fundamental trouble with the European and US economies, the increase in inflation partly as a direct result of the one tax hits all increase in VAT, and the fact that the pound in your pocket is now worth about 80p (pay freezes, inflation again, cost of fuel and knock on costs).

Cameron cut out the bit referring to personal households reducing their own debts in his conference speech the other week, but the fact that he had it in there at all betrays his deep lack of understanding of the hole capitalism has put us all in: people, business and nations.  The whole damn shooting match runs on debt you prat.  Shuffling notional money around so someone, somewhere can cream off the full fat. 

I heard it put very well on the radio a while ago in relation to the Chinese economy, which is doing ok.  The commentator remarked that they had played the capitalist West at its own game, and beat it hands down: by making tat cheaper than we could make our own tat and selling it to us by lending us money we don’t have.

The system is creaking like rackety ship and what we need is some proper intellectual rigour brought to bear on the economy; not half-baked schemes, total inflexibility and antiquated economic policy. I wonder if Ed Miliband can get that creative. On all evidence so far we can be sure Osborne and Cameron cannot.

The culture of capitalism must keep individuals sufficiently dissatisfied that they continue to seek satisfaction from it, but not so dissatisfied that they reject or resist it outright

Dr William Davies

Resist, reject, recycle. Make-do, muddle, mend, & don’t buy crap you don’t need.