After the 2008 crash the debate was around whether the deficit would be best sorted by cutting public expenditure; or would it be better to stimulate economic activity so as to generate surpluses and jobs, thus reducing necessary benefits payments. In other words: austerity or stimulus?
Despite pouring billions into ‘quantitative easing’ to support the financial sector, the establishment has argued fervently in favour of austerity for the rest of us. That establishment (referred to elsewhere as the self-perpetuating industrial, financial, media, academic and political establishment – the SPIFMAPE) has proved so powerful, it has effectively buried the stimulus word and replaced it with ‘borrowing’. The establishment’s offer is now “Balance the books or borrow?” as Martin Kettle puts it [Guardian, 25.9.15 p39].
But the establishment is wrong. Stimulus is still the most effective option.
The same dilemma was confronted in the 1930s after the Wall Street Crash. Economists then argued strongly that keeping tight control of the books and letting the economy sort itself out through the efforts of hard working people, was the only way a robust economy might be recovered. So austerity and slump continued for a further three years under President Hoover. When Roosevelt took over he changed the emphasis to stimulus, not because of slick economic theory, but because of simple humanity, to address the unemployment and poverty that had been created by austerity. Roosevelt’s New Deal worked.
Economists, then and now, are in thrall to the quantity theory of money. It has been expressed in all sorts of ways, giving the impression of some scientific precision, but none of the quantities involved are actually measurable, least of all money itself. The most widely quoted expression is MV=PT where PT (Prices times Transactions) approximates to the Gross Domestic Product (GDP), and MV (Money times the Velocity of its circulation) is the more interesting calculation. The focus on austerity as the solution to our economic woes only concerns itself with M and completely ignores the Velocity of circulation, which is hugely important.
The reason why the quantitative easing billions had no effect on the real economy was simply because the money injected into the financial sector did not circulate – Velocity of circulation was zero. It had no more impact than it would have had if it had been put under a mattress. Give £100 to a poor person, on the other hand, and they will spend it immediately, because they need to. And if that £100 is spent with other relatively non-affluent people, as is most likely, it will be spent again in fairly short order. So that £100 is re-spent many times over a year. If it was re-spent each month, it would have a £1200 stimulus effect over the year and continue in subsequent years.
The establishment argue that the original £100 has to be borrowed in order for it to be passed to the poor, but even that is barely true. The effect of the stimulus is to reduce unemployment and so reduce welfare payments and increase tax income, so it more than pays for itself very quickly.
Compare that with £100 passed to the wealthy. That just goes under the mattress having no effect. Or worse still, is invested for speculative gain, such as in property, where its only effect will be to help inflate an asset price bubble which will inevitably burst at some stage causing further mayhem.
The stimulus option is not just gifted to the poor, but can be invested in areas which quickly create employment which is the means of getting the money into circulation. Our transportation infrastructure, for example, has been allowed to deteriorate. Both road and rail are in need, not of the hugely expensive grandiose political ego-solving HS2s which take many years to plan and approve. They need the immediate repair and development, from such basic things as eliminating pot-holes and the rebuilding of skilled workforces for infrastructure development.
But the establishment believes in austerity. It claims to believe that if it gives money to the rich, they will invest it in real projects and the benefits well ‘trickle down’ to the poor. So the establishment is nervous of taxing the rich too much, or even insisting too energetically that they don’t avoid and evade paying their low level taxes, in case they should decide to leave the UK. The establishment would be distraught.
This is all just part of the dominant economic ideology: free markets, open access, minimal regulation, minimised state involvement and therefore maximised privatization and sale of public contracts, even to state-owned enterprises so long as they’re not UK state-owned. How do you fancy the French and Chinese states combining to develop a new nuclear power station in your back yard?
The Bank of England’s Monetary Policy Committee (MPC) exists to set interest rates and its members include some of the country’s leading economists. But economic theory isn’t even up to sorting that out. On 18th September, chief economist Andy Haldane was reported as warning interest rates may have to be cut further, even possibly going below zero. A week later, fellow MPC member Ian McCafferty explained why he had voted for interests rates to be raised. If economists don’t even know whether interest rates should go up or down, what chance is there they will understand the power of stimulus over austerity? McCafferty made the establishment claim that ‘the UK economy is on the mend. We are closing on full employment’. He clearly lives in a different world. Has he not noticed the food banks, never mind contributed to them. Moreover, despite the statistics cheating zero hours contracts and extensive underemployment from involuntarily self-employed, the Office for National Statistics reported that there were still 1.85 million people unemployed in the second quarter of the year, an increase from the previous quarter. Some mend! Some full employment! (983 words)