CIVIC REPUBLICAN NEWSLETTER
“Constructing a Humanist Politics”
Issue No 33 Friday 24 April 2009
· A matter of economic life or death
Highlighting news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.
· A Matter Of Economic Life Or Death
In Michael Rowbotham’s seminal book “The Grip of Death”, he wrote about the effect of trying to run a modern economy with the government having a balanced budget.
The overall theme of Rowbotham’s book is to show how all present economies rely on the private banks to create money and because banks always create money that carries debt the overall amount of debt in the economy is forever climbing. The increasing debt means that most people cannot live on the wage they receive and so have to borrow – mortgaging their future. The word “mortgage” means literally “death’s grip” – hence the apt title of the book.
The effects of this in “normal” times are ameliorated by the fact that government runs a deficit, that is to say, it spends more money on government services than it raises in taxes. This gives a boost the economy to counteract to an extent the burden of all the debt. It does, of course, mean that the government is forever getting deeper and deeper into debt. That is to say the “national debt” is forever rising as with successive years the effect of the yearly deficits mounts up. It is a bit like the problem of a nuclear power plant producing waste that cannot be destroyed. Year by year we kind of get by, but we know in the back of our minds we are gradually building up one hell of a problem for which no one has a solution.
This is a description of the “good years” of a modern economy when the government takes on debt. But what about the years when the government seeks to balance the books and tax revenues are equal to expenditure. First of all the only times this has actually happened in recent times is when the Conservative government of the eighties sold off nationalised industries, or in Sir Harold Macmillan’s famous phrase “sold the family silver”. In just two years, 1989 and 1990, budget surpluses of a measly 5 billion pounds were achieved – in terms of the size government expenditure just about balancing the books. (This was against 80 billion raised by selling off assets that belonged to the public.)
Needless to say you can only sell of the “family silver” once and so the effect of achieving a balanced budget in normal years would be quite different. Michael Rowbothan describes how it would be thus:
“The …effects of … trying to run a balanced budget would be catastrophic. The government would initially have to lay off hundreds of thousands of public sector workers. The social security budget would rise with the redundancies, so it would then have to cut services and lay off yet more employees to restrict its total outgoings to the balanced budget level. This gathering pool of unemployed workers and their families could not act so effectively as consumers: Demand across the economy would drop, and some private firms would shut down, causing more unemployment. So the government’s bill for social security would again rise, necessitating yet more public sector layoffs. Meanwhile the ability of people and businesses to pay taxes would fall with the decline in sales and total incomes, again requiring cuts to be instituted. Demand would then fall even further; more businesses would close, causing more unemployment and a higher social security bill. Eventually the economy would grind to shuddering halt. The pursuit of a balanced budget would cause a progressive drop in demand of such impact as to precipitate a gathering spiral of unemployment and business failure …”
But in the future, as Alistair Darlling’s budget statement to the House of Commons on Wednesday, 22nd April 2009, made clear, we will not be trying to simply balance the budget. We will have to go further than that – a lot further. In order to even think about correcting the government’s present state of finances we are going to have to run surpluses We are going to have to run surpluses not just for one or a few years but for a decade or more. And even that may be optimistic.
The scenario described in “The Grip of Death” as above is a golden age compared to what we can expect if, under the present economic model, we are going to climb out of the cavernous hole we are in.
“The economy's heading south fast, while the state coffers are in the biggest peacetime mess ever. Yet all we got from the Chancellor was a bland acceptance that his earlier forecasts have proved utterly wrong, along with a load of rose-tinted rubbish about "the country's strength" and "a confident and successful Britain".
“The trouble is, when reality finally hits home, Mr Darling will have to admit that his hopes for a storming 'recovery' in 2011 were just as flawed as all his other forecasts. And that to return the budget to any sort of balance, we'll face higher long-term interest rates, as well as raised taxes – and not just his new 50% top rate for higher earners – for many years to come. Regardless of who's in power…
The Chancellor is alone in his optimism. As recently as November's Pre-Budget report, the Chancellor was still trying to pretend the British economy would only shrink by 1% this year. That's gone right out of the window – the official view is now for a fall of 3.5%.
Even that guess is still behind the curve - Capital Economics reckons the UK will shrink by 4% this year. But worse still, Mr Darling is pinning his hopes on a 1.25% pick-up in 2010. And even more unbelievably, in 2011, on Planet Darling, the hope is for 3.5% growth.
Amazing! No City analyst is anywhere near that upbeat. "Economic historians were trying in vain to find examples of developed countries that managed to recover within 12 months after so significant a one-off drop in growth", says The Telegraph.
This isn't just a debating point for economists. It matters a lot. Because how fast the economy grows or shrinks determines how much tax the government gets, and how much of that tax it has to spend on the likes of welfare benefits as job losses jump. Which in turn dictates how big an overdraft the public purse will run up.
The economic news is the worst it's been for years On both counts, yesterday's pre-budget news was dire. UK dole queues are now at their longest in 12 years, stretching by 177,000 in the three months to February to 2.1m, while jobless claims rose a further 74,000 in March. That's far from the end - most forecasters expect unemployment to hit 3m or more by the end of next year.
So it's little wonder that the government deficit has tripled to £90bn in the last fiscal year. That's the biggest shortfall since World War Two.
The Chancellor now claims that will rise to £175bn this year - up a cool 50% on his guess five months ago. He also reckons the shortfall will start to fall next year, but even then it will take until 2013/14 for the annual deficit to drop below £100bn.
The trouble is, the Chancellor is about the only person who believes these numbers. Why should anyone trust a politician who claimed just last November that the UK would suffer a mere temporary dip before recovering this summer?
So how big is the national debt really? Capital Economics believes the government's shortfall will hit £200bn in 2009/10 and stay above it for several years, "but even then, these estimates might be too rosy, given our view on the recession's length and severity".
All that money has to come from somewhere. Some will be printed by the Bank of England. But much will have to be borrowed. Sales of UK government bonds – gilts – are now forecast to be £220bn this year, much higher than expected. That's already pushing up gilt yields, and so long-term interest rates, as the market fears the Treasury will need to offer higher returns on all the extra bonds it must sell.
Otherwise, a "buyers' strike", when investors refuse to fork out the cash the government needs, looms. And so the government would be unable to raise the case it needs. That really would spell trouble, pushing interest rates sharply higher – or in the worst-case scenario, resulting in a trip to the International Monetary Fund.
The next few years will be very painful. As for the rest of the shortfall, we'll have to stump it up in extra taxes, which will have to rise and stay high for ages. It all points to the next few years being very financially painful for us Brits. By the time we, and our children, have repaid Mr Darling's national debt, this budget will be a distant memory.
Between the government and the recession, British people aren't going to have much cash to spare for the next few years. “
The picture painted by the Chancellor and then elaborated by David Stevenson and others is as grim as could be imagined. We are not only in a very deep hole now, it seems it will be years before we get out of it. Gordon Brown said he had abolished “boom and bust”. And so he did. He has replaced “boom and bust” with “boom and Armageddon”.
The government has no real answer to the problem they have created. The Conservatives haven’t a clue and admitted they did not recognise that the economy throughout the Brown era was being run as a giant Ponzi scheme. Even the admired Vince Cable cannot think outside the box of the orthodox economic theory that has got us into this mess. Commentators like David Stevenson saw the problem coming a while ago and certainly have a great deal of integrity and perception when discussing the problem. They can paint a convincingly black picture, but also have no solution to offer.
There is no solution that is not going to involve a lot of pain for a lot of people. As CRN has already pointed out a big mistake was made in bailing out the banking industry for much of the debt we will have results from this action. It was said that the economy needed a banking sector in order to function, but the problem with that argument is that in propping up the banking sector there may be no economy left for it to serve. The existing corrupt banking institutions that we are crucifying ourselves to preserve should have been let go to be replaced by new state banks which could have got us through the worst and then sold into a (properly structured and regulated) private sector.
The only way we can begin to make the economy function in future will be to change the way money is created. This will have to be left to a reformed Bank of England to carry out. Private banks should never again be allowed to create money. It does not matter how good the regulation becomes. It will never have the resources to combat highly paid “rocket scientists” employed by the banks who will spend every waking hour designing schemes to get around the regulation.
“Quantitative easing” involves the Bank creating or printing money but this will do no good as it effectively delivers this money to the private banks to somehow use it in a way that will benefit the economy at large and people and businesses at large. Why these rotten institutions can be expected to act with such largesse is never quite made clear.
Money created by the government should be spent directly into the economy. In that way the economy will directly and immediately benefit.
This is the only way to create long lasting prosperity for the people and their workplaces. We know the tunnel we are entering will be long. But no one else is realistically suggesting when we can expect to see the light at the end of it.
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……. …….until next week