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Addressing a recession on a scale not seen since the 1930s: three perspectives
Carol Wilcox (left), a retired software engineer with a degree in economics, asks in the FT:
“Could Andrew Law, head of Caxton Associates, one of the world’s oldest and biggest macro hedge funds (Report, March 7) explain why the UK government needs to borrow its own money, no matter how low the cost, in order to “fund targeted projects that stimulate productivity and growth”.
Juliet Samuel (right), a financial journalist who has worked in asset management, criticises ‘purveyors’ of “modern monetary theory”.
In a recent article she complained, “Not long ago, we were being forced to listen to proponents of ideas like “modern monetary theory” (MMT: a series of tautologies masquerading as a new economic theory) . . . telling us why there was little practical constraint on printing or spending money . . . “
Her preferred proposal – put forward by Andrew Law who has donated millions of pounds to the ruling Conservative party – is that the UK should borrow more, presumably from his hedge fund, to finance targeted projects that stimulate productivity and growth.
Today three economists, US Professor David G Blanchflower (left), UK Professor Lord Sikka and UK Professor Richard Murphy foresee the likelihood of recession on a scale not seen since the 1930s
They explain that households that cannot pay for energy, food, their rent or mortgages will stop spending on everything else. The knock-on effect of that on the retail, leisure and hospitality sectors will be significant. Many companies will fail. It is likely that millions of jobs will be lost. Mortgage repossessions and tenant evictions will increase. Public services in education, health and care will also be drastically impaired due to rising bills.
In 2008 and 2020 economic crises were averted using government-created money and the Bank of England’s quantitative easing process. Interventions on those occasions were of £150bn or more. It is quite likely that a further £200bn will be necessary in the coming year if the meltdown of our economy is to be avoided.
Their proposal: “Intervention on such a scale, coupled with cuts in interest rates, energy price reform, nationalising energy supply and investment in new technologies could save us from the catastrophe currently awaiting us. Not much else can”.
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Keir Starmer: learn from the convenor of Britain’s Green New Deal Group
Future QE can and must fund aspects of the economy that need investment.
Colin Hines, Convenor of the UK Green New Deal Group (right), has been prompted to comment on an assertion by New Statesman journalist Philip Collins, that Labour needs to work out what it means to be a social democrat without money (The Public Square, 6 November). He writes:
Keir Starmer needs to understand that money is not the problem, but what it is spent on, and who gains.
To help to cope with the fallout from coronavirus, the government turned to the Bank of England to inject £150bn of newly created electronic money into the economy via Quantitative Easing.
What politicians and activists need to grasp is that the previous £745billion of QE already spent or announced has not made extra demands on the taxpayer, increased government borrowing or resulted in rising inflation (which is expected to remain historically low).
However, this new money has not achieved improved conditions for the majority. Instead, it has been used predominantly to boost the property assets and shares of the wealthier sections of society.
Future QE must fund aspects of the economy that need investment. It could form part of a Covid exit strategy: not only providing short-term support for the hospitality, entertainment, retail and tourism sectors, but also financing longer-term measures that deal with regional inequality, repair our threadbare social infrastructure and tackle the climate crisis.
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COVID-19 bulletin 30: post lockdown, government has the resources to invest and reflate the economy
Professor Sikka advocates investment to rebuild the economy of Britain, which entered the coronavirus crisis with poor social infrastructure and deep inequalities. Points made in two of his recent articles.
The crisis showed that the low-paid workers such as nurses, midwives, care workers, supermarket staff, teachers and bus and delivery drivers were the lifeline of society. Detailed figures for the cuts to the police and NHS are given in his May article
Treasury documents leaked to The Telegraph show a government blueprint for recovering £300bn of the costs associated with the coronavirus pandemic.
- It lists government plans to scrap the triple-lock on the state pension the main source of income for many, which is around 29% of average earnings, the lowest among industrialised nations. The proportion of retirees living in severe poverty in the UK is five times what it was in 1986. So there is no economic or moral case for hitting retirees.
- There is already talk of further wage freezes for public sector workers.
- Influential think tanks like the Institute for Fiscal Studieshave called for a cut to the minimum wage.
- The Social Market Foundation is urging the government to hit the state pension, already one of the lowest in the western world.
Sikka (right) describes the government’s post-coronavirus economic strategy as, “more austerity, hit the poor, cut essential services”. And continues:
We have the money to build a better society after this crisis: there is no shortage of resources
With record low interest rates, government can borrow to invest and reflate the economy – just as the economy was rebuilt after the Second World War – and the subsequent prosperity enabled governments to reduce the public debt.
He adds that the government can use its overdraft facility known as the “ways and means” facility at the Bank of England. The Treasury has used £400m so far and during the 2008 recession it used £19.8bn.
The Bank of England is using its £645bn quantitative easing programme, i.e. printing money, to support purchase of corporate bonds. The government could use the same process to bail out the poor by buying their debts.
Economist Martin Wolf agrees in the FT today: “It is equally vital to support the economy for as long as is needed to ensure a full recovery. Given the Bank of England’s welcome and sensible support, the government can afford to borrow on a huge scale and must be willing to do so”.
Tax related measures advocated include raising additional tax revenues without increasing the basic rate of income tax or national insurance contributions. Investment in HMRC and curbing offshore tax avoidance could raise billions.
But corporations are already undermining our welfare
Sikka points out that the government has given billions of pounds to businesses in the form of business rates holidays, wage subsidies, cheap loans and guarantees; all without any obligations to safeguard jobs. This has freed corporations to reduce wages and cut or downgrade the jobs of workers; examples cited in detail in his June article relate to British Airways, Bam Construct, Ryanair, Daily Mirror, Daily Express and P&O.
Cuts to public services will damage the private sector which is the main supplier
Wage and pension cuts will severely erode people’s purchasing power; they will not be able to buy goods/services produced by businesses and the economy will stall.
But the Conservative government – with its large parliamentary majority – is not in a mood to listen. Shall we on the left be able to reposition people’s awareness and press the government to change its policies?
The new economy must work for everyone, not just shareholders and financial speculators. Parliament needs to make the right choices and build a sustainable economy by investing, creating resilient public services and boosting people’s purchasing power.
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Sources:
https://leftfootforward.org/2020/05/prof-prem-sikka-we-must-rebuild-not-tax-and-cut/
Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He is a Contributing Editor to LFF and tweets here.
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COVID-19 bulletin 28: Will the post virus economy collapse or emerge leaner and fitter?
Many people facing the corona virus pandemic are focussing on immediate needs and requirements but some correspondents – and hopefully heads of state – are looking further (shortened version of article on a sister site)
A Moseley resident writes: “Once again, the bill will have to be paid. Expect years of austerity to pay for this virus disaster. I’m guessing that, otherwise the currency will be valueless and inflation will run riot. At the moment we’re in 1918 to be followed by 1920 and then 1930 and 1940 ….
COLLAPSE?
A clear US-focussed account was written on March 7th by Australian-born economist, Dr Steve Keen (right). His article – A Modern Jubilee as a Cure to the Financial Ills of the Coronavirus – is summarised here.
He points out that this is the first disease to compare to the Spanish Flu in terms of both transmissibility and virulence. Europe was embroiled in World War I at the outbreak of the Spanish Flu. Its health and population impacts were huge: estimates of the death toll vary between 40 and 100 million in a global population of 1.8 to 1.9 billion.
But its financial effects were mild, disruptions to the war economy for much of the world were relatively small, with guaranteed employment and wages for military personnel, rationing for the general public and other wartime measures. Crucially, private debt was a mere 55% of US GDP when the flu outbreak began. The private sector was relatively robust.
The situation is vastly different today. Our great financial crisis, the “Great Recession” or “Global Financial Crisis”, lies in the recent past, and its primary cause is still with us: private sector debt.
In addition, we now have “the gig economy” and precarious jobs in industries which are likely are likely to be hard hit by the Coronavirus: health itself, entertainment, restaurants, tourism, education. They could lose their jobs, and be unable to service their debts or pay their rents, or even buy food. Many employers could also be unable to service their debts. Corporations in the USA have levered up during the period of Quantitative Easing, pushing the US corporate debt to GDP ratio to an all-time record. It is also twice the level that applied during the Spanish Flu. Many corporations will find their cash flows dry up and many will find these debt levels crushing.
The production system is also more vulnerable than at the time of the Spanish Flu.
The global economy today relies on long and complicated supply chains, with many goods being produced from components manufactured in dozens of countries and shipped between them on container vessels.
- If manufacturing in even one place (such as China) comes to a near standstill, production elsewhere will do the same.
- “Just in Time” manufacturing methods will run out of inputs, even if their factories are still capable of operating.
- Shipping could be affected if crews refuse to undertake trips that can take weeks with potentially asymptomatic carriers on board, or if crews are quarantined for two weeks prior to departure.
- Shares are likely to plunge in value. We have already seen a 14% fall in the S&P500 (though followed by a 5% rebound on Monday March 2nd) . . . We are clearly in the exponential phase of the pandemic. It will ultimately taper, but at present the number of cases outside China is doubling every 2-6 days, depending on the country.
- Banks will also suffer badly. The asset side of their ledgers includes corporate shares: if these fall in value, banks will find their assets plunging, while their liabilities remain constant. A bank cannot: it must have assets that exceed its liabilities, or it is bankrupt.
A credit-driven, private sector monetary system is not capable of handling a systemic crisis like this. If the rules of such a system are enforced, it will make the crisis worse:
- renters and mortgagors will be evicted, put on the streets, where they are more likely to catch and transmit the virus,
- personal hygiene and public health will suffer, when one is needed to slow the pandemic, and the other must be functional to support its current victims,
- stock markets will crash,
- banks themselves will fail as their shareholdings plunge in value, bringing the payments system to an end
- and even those unaffected by the crisis will be unable to shop.
OR EMERGE LEANER AND FITTER?
It is, on the other hand, possible for Central Banks and financial regulators, once authorised by their governments, to take actions that prevent the medical crisis from becoming a financial one. Other mechanisms may exist, but these are the obvious ones to prevent a financial pandemic on top of a medical one.
First: make a direct payment now, on a per-capita basis, to all residents via their primary bank accounts (most effectively, their accounts through which they pay taxes).
As Quantitative Easing has shown, this does not have to be financed by asset purchases. It is quite possible for Central Banks to put a notional asset on their balance sheets to finance. This is already done by the Bank of England to back the value of the notes issued by Scottish Banks: a bill known as a Titan with a face value of £100 million balances the value of bank notes issued by Scottish banks. The same could be done by any Central Bank to balance a direct cash transfer to the bank accounts of all residents of its country – see People’s Quantitative Easing (Coppola 2019).
This already has been done in Hong Kong. The payment there is HK$10,000, or roughly US$2,000. It does not need to be financed by the Treasury or by taxation: neither were used by the USA to support its $1 trillion dollars per year Quantitative Easing program. There will be no “debt burden for future generations”.
Secondly: boost share prices by buying shares directly.
Quantitative Easing was intended to boost share prices. Clearly it worked—but there is no guarantee that it would work in this situation Instead, Central Banks should directly buy shares, as they are also quite capable of doing: Japan’s Central Bank has been doing this for several years already. This puts money in the bank accounts of shareholders, while the shares are then owned by the Central Bank. This could prevent a collapse in share prices, which in turn could prevent a collapse in the banking sector—since if shares fall substantially, many banks will find that their assets are worth less than their liabilities, and they would be forced to declare bankruptcy.
Central Banks can also cope with a share market collapse in a way that private banks and financial institutions cannot. Unlike a private bank, a Central Bank can operate with negative equity. If there was still a stock market crash, a Central Bank holding shares would still be able to operate.
Thirdly: suspend standard bankruptcy rules while the crisis exists
Banks and financial institutions in particular are vulnerable to bankruptcy in this crisis. Non-financial companies which are heavily exposed to the pandemic—health companies, airlines and other transport firms, education providers (including many public universities reliant on student fees), restaurants, sporting grounds—could see their revenues plummet, making them unable to service their debts, and therefore liable to bankruptcy.
Corporations exposed to Coronavirus-driven losses of revenues should also be able to receive direct aid from Central Banks as well. This could take the form of the sale of newly issued shares in return for cash—it should not be in the form of debt, which would simply replace one problem with another.
As Professor Keen ends his constructive and reassuring article, the words of John and Andy, from Moseley and Bournville, have been blended to give their views on a post pandemic future: “If we look coolly, perhaps rather brutally, at our situation, a complete generation may be wiped out, but in the worst scenario most humans on the planet are unlikely to die and the younger members least of all. The NHS will be saved millions by not having to treat the elderly and generally infirm. Pensions will be reduced and a younger, leaner, more focused workforce that realises how soft we had become will take up the cudgels to drive the economy onwards. Human life will go on and maybe the lessons learnt from tackling this infection will help in facing the next”.
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COVID-19 bulletin 6: UK government announces monetary financing/QE to fund the immediate cost of fighting coronavirus
Source: https://www.ft.com/content/dc233540-798e-11ea-9840-1b8019d9a987
Eight hours after Andrew Bailey wrote his article, however, an FT editorial announced that the UK has become the first country to embrace the monetary financing of government to fund the immediate cost of fighting coronavirus.
The Bank of England (below) is to finance the state’s spending needs on a temporary basis to prop up the UK’s economies in the face of coronavirus – expanding the size of its own bank account at the central bank, known as the “Ways and Means Facility” – central government’s overdraft facility at the Bank of England – which normally stands at just £370m. This will rise to an effectively unlimited amount, In 2008, a similar move saw the facility rise briefly to £20bn.
Precedents
The FT editorial board reminded readers that in times of emergency, particularly war, central banks have often handed freshly printed banknotes to governments. The fight against any resultant inflation was postponed until after any crisis.
Fear of inflation
They dispelled the objections made for many years by stating that the quantitative easing of the past decade, despite predictions, has not lifted inflation above the main central banks’ 2% target.
There is no clear distinction between quantitative easing and monetary financing, the board insists: they see it as a matter of presentation: whether asset purchases are deemed temporary or permanent.
The board thinks that opinion article this week by Andrew Bailey, the Bank of England governor, may have been intended to convince international investors that there is little reason to fear keeping funds in sterling.
The scale of today’s downturn means that even the most direct monetary financing, such as “helicopter money” or handing cash to the public should remain an option.
Quantitative easing programmes may be here for the long term. The debate should be over keeping the process under control via independent central banks.
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Austerity 5: former Conservative MP deplores the effects of austerity
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Matthew Parris writes in the Times, “the cracks are showing in austerity Britain”
We don’t think enough about local government, one of whose jobs it is to mend potholes. When in our own lives our nearside front tyre is shredded, the pothole, Parris believes, represents “a momentary twitching-back of one tiny corner of a great curtain, behind which lie, no, not potholes, but a million anxious human stories, caused in part by cuts in public spending”.
He adds that accidents due to potholes are usually relatively trivial compared with cuts which for others may have meant:
- the loss of social care in dementia,
- no Sure Start centre for a child,
- the closure of a small local hospital
- or the end of a vital local bus service.
Potholes are a parable for others that matter even more. Unfilled potholes put lives at risk and have become a symbol of the damage done to every walk of life by spending cuts.
All the pressures on those who run government, local and central, are to worry about the short-term. it is usually possible to leave issues like road maintenance, decaying school buildings, rotting prisons, social care for the elderly, Britain’s military preparedness or a cash-strapped health service, to tread water for years or even decades. “They’ll get by,” say fiscal hawks, and in the short-term they’re often right.
- Nobody’s likely to invade us;
- the NHS is used to squeezing slightly more out of not enough;
- cutting pre-school provision is hardly the Slaughter of the Innocents;
- the elderly won’t all get dementia at once;
- there’s little public sympathy for prisoners;
- teachers can place a bucket under the hole in the roof
- and road users can dodge potholes.
Parris continues: “But beneath the surface problems build up. The old get older, and more numerous. Potholes start breaking cyclists’ necks. Care homes start going under. The Crown Prosecution Service begins to flounder. We run out of social housing. Prisoners riot. And is there really no link between things like pre-schooling, sports and leisure centres and local outreach work, and the discouragement of knife crime?”
“When New Labour was elected in 1997 we Tories groaned as it tipper-trucked money into the NHS, school building and other public services. Thirteen years later when Labour left office the undersupply was monetary, the red ink all too visible”.
Parris asks: “Must we forever oscillate like this?
One answer: Green & Labour Party leaders would meet these needs and avoid red ink by redirecting the money raised by quantitative easing.
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A progressive alliance with progressive policies
Christine Parkinson has drawn attention to an article in the Guardian, in which MPs Clive Lewis and Caroline Lucas express a profound sense of frustration and dismay about the Conservative victories won by narrow margins in places such as St Ives, Richmond Park and Hastings. They pointed out that if every progressive voter had placed their X tactically, Jeremy Corbyn would now be prime minister with a majority of over 100.
Highlights from their article
The regressive alliance we see forming before our eyes between the Conservatives and the DUP can only be fully countered by a progressive alliance on the opposition benches and if we work together there is nothing progressives can’t achieve. The limits of the old politics are there for everyone to see – the limitlessness of the new we are just starting to explore.
More than 40 electoral alliances, in which people across parties cooperated on tickets including support for proportional representation and the common goal of preventing Conservative candidates winning, were pulled together quickly for the snap election. People from different parties worked together to ‘do politics differently’ and there was a sense that politics has become hopeful and positive again.
We shouldn’t forget the challenges we face:
- markets that are too free,
- a state that can be too remote,
- a democracy that still leaves so many voices unheard
- and change on a scale our people and our planet can’t cope with.
It is going to take a politics that is social, liberal and green to overcome these challenges. No single party or movement has all the answers. We are going to have to learn to cooperate as well as compete to build the society of which we dream. And we are going to have to recognise that the future is not a two-party system but one in which smaller parties grow – both in influence and in their electoral representation.
Colin Hines adds detail: also advocating a progressive alliance of Labour, the Lib Dems, the SNP, Plaid and the Greens he says that they will need to get their ‘policy ducks in a row’ to win it. He continues:“Firstly, these must provide hope, not just for the young, but for every community in the country.
“To do this Jeremy Corbyn must revisit and vigorously shake his people’s QE “money tree”. This could pay for real economic activity on the ground via decentralised infrastructure projects to make the nation’s 30 million buildings energy efficient, ensure a shift to localised renewable energy, and the building of local transport systems.
“Secondly, the divide between young and old must be bridged by policies fostering intergenerational solidarity. Older people with significant saving should be offered “housing bonds”, paying, say, 3% interest to help fund a massive council and affordable homes programme.Tuition fees would be scrapped, but so too must be the threat of having to lose a home to pay for care, or having to scrabble for means-tested benefits such as heating allowances.
“Financed by progressive and fairer wealth and income taxes, and a clampdown on tax dodging, this should have an election-winning appeal to the majority of grandparents, parents and their young relatives”.
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Corbyn & Abe: increased public investment, lower taxation & a high wage policy
In the FT recently, ‘superstar’ economist Adam Posen, US co-chair of the High-Level Japan-US Working Group on Common Economic Challenges, considered that Japanese prime minister Shinzo Abe’s new fiscal stimulus package offers the prospect of a better way forward. Abe aims to increase public spending and lower taxation, giving a positive jolt to economic activity.
Figures presented by the Market Mogul suggest that quantitative easing has been successful in injecting liquidity into the financial sector via central banks, causing ‘an unreasonable euphoria in the financial markets’ but has had, in practice, little or no effect on the real economy due to a lack of buyers and borrowers – a lack of ‘of effective demand’.
Posen reminds us that the first rounds of Abenomics showed the power of spending to increase the availability of public childcare places and cuts to taxes that penalised families’ second earners. This contributed to a substantial rise in women joining the labour force and Posen notes that Mr Abe’s latest stimulus package promises further action on labour market reforms: “The lasting increase in labour supply has enhanced Japan’s long-term fiscal sustainability. We can expect that part of the new package that further promotes participation in the labour force and eases the burden on those caring for family members to have a similarly large pay-off”.
Posen sees another promising aspect of Mr Abe’s package: his proposal to raise the minimum wage and public sector wages for teachers and others. He says that encouraging an upward spiral of wages into prices and back is the best path to nominal GDP growth
Jeremy Corbyn addresses the UK’s ‘broken’ economic model at a leadership election campaign meeting in Dagenham, attended by members of the public, councillors, businesses and the mayor on the 4th of August
An informal shot taken at the meeting
The BBC quoted from his speech which may be heard here: “We need a Labour government that rebuilds and transforms Britain,” Mr Corbyn said, committing to the creation of one million new jobs through investing £500bn in infrastructure, manufacturing and new industries.
He detailed 10 areas which Labour would seek to reform, including promises to create full employment, at least half a million new council homes, a new “National Education Service”, providing universal public childcare, and ending private-sector involvement in the NHS. The money would be raised through an expanding economy and driving down tax evasion.
“A campaign for the entire public to be involved in”
And ended: “This is a preparation for a general election when we can win that general election and produce decency and real opportunity for everyone in our society”.
Are anti-Corbyn attacks prompted by politicians and their wealthy funders for religious or economic reasons?
As the Facebook blog Jews4Jeremy is taken down without explanation, online articles with allegations of anti-semitism proliferate.
The wealthy and their dependents – professing all religions or none – will fear the growing support for Corbyn’s socially valuable economic policies – some named in a blog based on a Birmingham Press article to be published here tomorrow:
- a high tax economy for the wealthy,
- re-nationalisation of the railways (by not renewing private sector franchises) and private utilities in the energy sector,
- removal of all elements of privatisation from the NHS,
- re-introduction of rent controls to reduce the amount the state pays to private landlords,
- funding of infrastructure by quantitative easing,
- a rebalancing of the economy away from a reliance on financial services to the manufacturing sector,
- tightening of banking regulations (Osborne intends relaxing them further),
- re-introduction of a 50% rate of income tax,
- raising of corporation tax (currently at a historically low level) by 0.5%, as a means of paying for the abolition of tuition fees.
Such measures would reduce investor and rentier profits or even remove their sources, in the case of re-nationalisation.
Do readers believe the denunciations of politicians with corporate allies, or the statement by Jeremy Corbyn?
‘Green Infrastructural QE’ for ‘jobs in every constituency’: a vote winning commitment
Colin Hines, Convenor of the Green New Deal Group, addresses the Financial Times:
Your editorial was correct to call on the European Central Bank to look at QE, but wrong to say that QE shouldn’t address inequality (‘Farewell to the Fed’s QE3, a monetary job well done’ Financial Times November 1st/2nd).
Opinion is now coalescing around the realisation that rising inequality and the fall in real incomes is threatening future growth through its adverse effect on effective demand within countries.
In terms of the UK, its leading export markets like those of the rest of the Eurozone, are also experiencing slowdowns in effective demand. This points to the need for countries of the EU to concentrate more on their domestic economy, but in a way that benefits all corners of nations as well as the environment. This suggests the need for a new round of QE, which would tackle these problems head on this time.
In the UK this could contribute to funding a carefully-costed, nationwide programme of energy efficiency in the nation’s 28 million homes and 2 million commercial and public buildings. Also crucial, such a QE programme would help to overcome the present annual shortfall of 240,000 new, affordable, sustainably sited, energy-efficient homes.
The previous QE purchased government bonds, and ‘green infrastructural QE’ could buy bonds from a suitably enhanced Green Investment Bank to invest in such a programme.
This is technically feasible since earlier this year your paper reported the Governor of the Bank of England as saying that if the government requested it, the next round of QE could be used to buy assets other than government debt (‘Mark Carney boosts green investment hopes’ Financial Times, March 18th, 2014).
This ‘jobs in every constituency’ approach would create employment, business and investment opportunities in every city, town, village and hamlet in the country, providing a vote winning commitment for all political parties in the run up to the election.
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Political Concern 