The media, including the Guardian, report that an independent poll shows the government’s austerity agenda is a vote winner. That conclusion is drawn from responses to a statement that “We must live within our means so cutting the deficit is the top priority.” Agreement was registered by 84% of Tory voters at this year’s election, 63% of UKIP voters, 58% LibDem and even 32% of Labour voters of whom only 34% disagreed. Therefore, the argument is, voters believe austerity is a Good Thing!
Everyone knows from personal experience that living within your means is important to peace of mind since living beyond your means generally has pretty disastrous results. So cutting the deficit is, of course, a top priority. But austerity is not cutting the deficit: it is just one possible way of achieving that end; and a horrendously inefficient one at that.
That message was learned 80 odd years ago following the Wall Street Crash. The US government imposed austerity which then produced the ten year long Great Depression, which was only ended by Roosevelt’s common sense and common humanity based New Deal. That stimulated the economy back to life. Stimulus is the far more effective alternative to austerity as a means of cutting the deficit. [Postings on this site 20.3.2012 and 11.5.2013 refer.]
Since common-sense and common humanity departed economic debate some three decades ago, successive UK governments, New Labour and Conservative alike, have accepted the doctrinaire Friedmanite neoclassical economic belief system (NEBS) that the invisible hand of market forces, driven by the shareholder wealth motive, would result in the best allocation of resources. Therefore government interference and regulation should be minimised. That is till everything goes pear shaped. Then, when the financial sector, which has recklessly caused the crash, bankrupts itself, the taxpayer is made to bail it out.
Any other bankrupt business would be allowed to fail. If the business content was deemed to be in the public interest, the state could maintain it, but it would not compensate shareholders. Investors know that’s the risk they take when they buy shares – dividends being greater than interest is the reward for that risk. But when banks, run by the likes of the charismatic Fred ‘the Shred’ Goodwin go bust, their shareholders are compensated at taxpayer expense. In the case of RBS this was to the tune of around £5 a share.
Such was the government’s mindless panic in 2007-8 about the possibility of financial collapse, melt down, going over the brink, apocalypse, catastrophe, Armageddon – there were endless meaningless terms used to refer to something no-one could explain in practical detail – that they authorised a bank rescue package totalling around £500 billion, followed over the next few years with £375 billion of the ‘quantitative easing’ gift to the banks.
This is not to be confused with stimulating the economy. Subsequent governments complained that the banks didn’t use the QE money to finance innovative projects such as those initiated by manufacturing SMEs. Why would they? Many decades ago, J K Galbraith described QE as like trying to push the economy with a piece of string. The banks needed QE money first to rebuild their balance sheets and then to make as big and fast a return as possible. That meant financial speculation, not investing in new widget systems or in long term R&D. There is clearly no trickle down from QE to real people working in the real economy.
There are massive opportunities for New Deal type stimulation of the economy. [Posting on this site 22.10.2014 refers.] The world is headed for big trouble and is crying out for innovative investment in sustainable developments. Under the current belief system this may not provide sufficient shareholder wealth to motivate government to action. But alternative perspectives are emerging. Unilever CEO, Paul Polman takes a long term perspective saying ‘Business cannot survive in an environment that doesn’t function. So it’s important that business moves from being a bystander in a system to become an active contributor to improve the system.’ A new government new deal would assist that improvement, and invest in projects that might be thought of as too risky for the mass of businesses still subject to the NEBS. This is the alternative to the endless pursuit of austerity whose only real effect is to multiply inequalities. The only UK political party that currently supports this stimulating approach is the Green Party.
So what about the sell-off of state owned RBS shares? Well, the income will provide a positive in the next set of published statistics. So the government might gain some short term PR advantage. We’re either being ruled by idiots, or by smart crooks who think the rest of us are idiots.