All politicians want these days is a story which enough people will believe in, so the politicians can scrape back into government at the next election. The Tory story, as Ha-Joon Chang summarises it, is that they are having to make tough spending cuts to recover from the mess left by the last irresponsibly overspending Labour government. Moreover, the cuts are working: unemployment is down and earnings are up. The Labour story, as told by Ed Balls, appears to accept the Tory austerity prescription as necessary and effective. So it might be better called the Westminster story. Sir Mike Derrington had a nice phrase which adequately sums it all up: ‘Total Bollocks’!
First, the real source of the mess was the financial crash caused by the as yet largely unpunished criminality of the global financial sector, led by the City of London and Wall St.
Second, government employment statistics are deliberately misleading, massaged by zero hours contracts, reluctant self-employment, and time related underemployment. Adjusted as the statistics are, unemployment still stands at 6%, well over double the rate reported on the more honest basis in the post WW2 decades.
Third, the Westminster story avoids altogether the rapidly rising, and clearly unacceptable, level of inequality between rich and poor.
On 13th October, 2014, the start of a week of public sector strikes by those denied a 1% rise, the Financial Times reported that while, over the past year, average UK wages had not kept up with inflation, FTSE100 directors’ earnings had risen by 21%. That was to an average of over 2.4 million pounds, with average FTSE100 CEO’s earnings in excess of 3.3 million pounds. That is 120 times the average full time employee’s earnings, which compares with 47 times in 2000 and a second half of twentieth century figure of much less than 20 times. Individual cases far exceed 1000 times.
The Westminster story tries to justify that exploding inequality with the trickle down argument that money gained by the rich would be lent to entrepreneurs who would invest in the real economy and that would benefit everyone. The argument was always false; today it’s not just total bollocks, it’s a contemptuous insult to the less well off.
The power of money is in its circulation. The only economic impact of a million pounds stashed securely under a mattress is that of taking a million pounds out of the economy when first it is stashed. Thereafter it has no impact. A million pounds passed to the needy is spent immediately on the essentials of life, the provision of which provides jobs for other needy individuals who spend the million pounds almost as fast. Over a year, that million pounds is spent up to twenty times, increasing the real economy by twenty million pounds.
A million pounds passed to the wealthy tends to get professionally invested by traders and fund managers, mainly in speculative securities. The global value of swaps and derivatives (the cause of the 2008 crash) was estimated four years ago at $54trillion, about the size of the global GDP and many times the size of the world’s stocks and shares. It doesn’t matter how many times that million pounds gets spent in the year on behalf of the wealthy, its impact on the real UK economy is negligible, not much different from stashing it under a mattress.
So long as it is spent in the real economy, the speed with which money circulates clearly determines the scale of the impact on the economy. The poorer the recipient of the money, the faster it will be spent and thus the greater the impact on the economy.
But the Westminster story involves not just cutting taxes on the wealthy, but pumping money into the financial sector which caused the trouble in the first place. Bailing out the banks – quantitative easing – was referred to decades ago by J K Galbraith as like trying to push the economy with a piece of string. Give the money to the banks and they simply rebuild their balance sheets so as to resume making the high return high risk bets that got them into trouble. Far more lucrative than lending to entrepreneurs, especially if you are bailed out if the bet goes wrong. Banks should be allowed to go bust and be immediately taken out of administration by government so that bank depositors and customers are protected, but shareholders take the consequences of the risks in which they invested.
We’ve been here before, have learned the lessons, and it didn’t take an economics genius to sort it out. President Roosevelt’s New Deal worked when we were last here. And it worked for all the reasons outlined above as to why the Westminster story is such a disaster.
Roosevelt’s New Deal was the result of common sense and common humanity. It was later provided with a theoretical justification – J M Keynes General Theory of Employment, Interest and Money. But it didn’t require the theory. All it needed was common humanity to understand the position of the needy in this wealthy economy, and common sense to see what to do about it.
The practical actions are not rocket science. A whole array of restorative action is outlined in Fighting Corporate Abuse: Beyond Predatory Capitalism and The Road to Co-operation: Escaping the Bottom Line, both of which are accessible from this site.