Time to listen to the Greeks?

The thing about a crisis is that it’s a great moment to re-examine some fundamental assumptions about what on Earth you’re up to. And when it comes to the European Union and, in particular, the Eurozone such an examination is badly overdue.

No one in authority in the European institutions will see it that way, but what this means is that the Greeks may well have done them a service.

By voting massively to reject the austerity package being forced on them by the Troika of the European Union, European Central Bank and the IMF, the Greek people have sent us all an important message. It is that though the Greeks may be in serious trouble, and the difficulties there have to be addressed, it can’t be done exclusively on the backs of those least able to cope with it.

It is almost unthinkable that a modern economy should shrink by a quarter over five years. 26% of the workforce is out of work, and that figure reaches nearly 50% for the young. Pensioners have seen their pensions cut in half – pensions to which they had loyally contributed throughout their working lives. To behave in that way is to break any kind of covenant there may be between government and people – it is to say that even if you do what we ask you to do, and the law requires of you, we reserve the right to refuse you the reward we’ve promised, even if that plunges you into penury.

To say “no” to that kind of action is practically an obligation.

Guardian photo of young Greeks celebrating the "no" vote

Nor does it matter only to the Greeks. Austerity politics are being pursued in a great many countries, particularly across Europe. And yet we know they fail. Back in the 20s, in the last great crash of the proportions of the current one, the immediate reaction of the Right was to tighten belts and impose austerity – though, as ever, not on themselves, only on the poor.

The result was mass unemployment and back-grinding poverty. In Britain, we had the Jarrow Hunger marches, starving workers converging on London from the North. In the US, we had “buddy, can you spare a dime?”

Fortunately for all of us, the US had the genius to find a man of Franklin Roosevelt’s calibre to replace the austerity incompetent Herbert Hoover. He applied policies of public investment in large projects to stimulate the economy and return it to growth. And at last the problems of the slump began to be solved.

This time round, we’re dominated by people of the Hoover persuasion once more, and they’ve made Greece the test bed of their policies. Where, unsurprisingly, they’ve failed again. Even the IMF has admitted as much, in a report that was leaked last week: they conclude that even if it applies the austerity policies precisely as prescribed, Greece cannot sustain its debt.

What Greece needs is help not austerity. It needs debt relief so that it can start to invest in itself, and get itself back to growth.

And by the way – a lot of economic activity these days is in services, where you’re not manufacturing, you’re not even consuming an intolerable amount of energy, you’re just using people to provide service to other people. Growth, in other words, does not have to be environmentally disastrous.

The irony is that the entire Greek government debt works out at $630 per inhabitant of the Europe Union. If the EU took on half the debt and cleared it over ten years, we’d be talking about just over $30 a year per inhabitant. What’s that? The price of a cheap shirt?

In any case, no one’s asking for that extent of debt relief. The question we should be asking, though, is if we can’t make that level of sacrifice for a member of our own union that is in desperate trouble, then what is our union for?

The Greek referendum result poses that question starkly, to us all.

And we too should be asking it, of our governments. In Britain, for instance, government is about to take £12 billion out of the benefits bill. That may sound like a necessary retrenchment at a time of economic hardship. But what it really means is that £12 billion of demand will go out of the economy: recipients of benefits spend what they receive, so every penny goes into generating demand.

Is Britain really saving anything by making those cuts? Are other European nations or the US doing themselves a favour by seeking austerity solutions? Or are we making things worse?

The Greeks have given their answer. It might be a good idea to listen to them.

Best avoided: standing on chairs and austerity politics

You’re at a concert but your view of the stage is blocked by the heads in front of you. So you stand up on your chair. Brilliant: now you can see. You’ve gained an advantage over the rest of the audience.

Hey! How about standing on my chair? I'd get a much better view...

Until, that is, everyone else starts standing on their chairs too. At which point the view’s as bad as it was before – and now you don’t even have the comfort of being able to sit down.

That’s called the fallacy of composition. It’s the belief that because something is in the interests of an individual, it’s in the interests of a whole community. It’s most vividly illustrated in what Keynes called the paradox of thrift. Saving may be great for an individual, but if everyone starts saving more, then the amount spent across the economy goes down; firms start to lose money and lay people off; incomes go down; and saving, which is proportional to income, also goes down.

So everyone saving leads to less saving.

It’s even worse if one of the bodies saving, or at any rate spending less, is government. Thrift by government does away with capital projects and reduces employment, particularly at the low end of wage scale, where people spend a greater proportion of their income. That depresses demand and drives more companies into difficulties. Growth stutters or may even turn into recession.

That’s what happened in the States after the great crash of 1929. President Hoover tried to balance the books and watched the country sink into increasing depression. In 1932, he was replaced by Franklin Roosevelt, who followed a policy of deliberately spending for growth; by 1937, he’d turned the economy round. But he too was prone to the thrift argument, so then he tried to rein in government spending – and took the country back into recession.

That is the danger in Britain now. We have a little growth. Now we need to stimulate it, to make it sure it’s sustained. The government, however, is proposing to do exactly the opposite – to cut further. If it delivers on its dire promise to take £12bn out of the benefits bill, it will take £12bn out of spending, and the effect on the economy may be devastating.

An argument can be made to say that it’s immoral that some people, on the top rate of benefit, may be on £26,000 a year – more than the median earnings in work. But taking their payments down to £23,000, as now proposed, only takes another £3000 a year out of the economy for each of those households. The economic damage may far outweigh any moral satisfaction anyone might feel.

Benefits cuts don’t just hurt the recipients. They hurt all of us. And with all the other cuts proposed, they will hurt us even more.

What’s the alternative?

• A great deal of tax is uncollected, especially corporation tax. Getting it collected won’t be easy, but why should we expect government to do only what’s easy?
• There is probably room for some small increases in tax at the top end of the income scale: these are people whose wealth has grown astronomically since the crash, while at the other end living standards have fallen.
• Establishing a more generous level of minimum wage – the living wage – and enforcing it would allow us to start reducing tax credits. If it’s applied for migrant workers too, it would put an end to the use of immigrants to undercut local wages.
• And why are we so worried about debt? Interest rates are practically zero. There couldn’t be a better time to borrow moderately.

All of this would allow us to prime the pump of the economy. With growth secured once more, tax revenues would start to rise, simply because more people would be earning and spending. There may be a need for some cuts anyway, but on nothing like the scale now being proposed: smaller cuts and rising revenue would give a much more sustainable means to improve economic performance.

That, however, means freeing ourselves from the paradox of thrift. It means understanding that sometimes governments have to spend to save themselves from debt. It means ending our reliance on austerity to get us out of a hole which, as Greece shows, it only makes deeper.

When the Tories came to power in Britain, they kept using a phrase which was crass in its over-simplification but struck a chord with many voters: “the country has maxed out its credit card.”

It was nonsense because it ignored the ability of a government, unlike an individual, to increase its revenue by spending more. So in answer I suggest we adopt a slogan against austerity which is just as simple and direct – and actually has the merit of being true.

“If the roof’s leaking, fix it. Don’t burn down the house.”

Certainly gets rid of the problem of the leaky roof
But is it the most judicious way?

David Cameron: aiming high in the indolent politician stakes

On being told of US President Calvin Coolidge’s death, Dorothy Parker famously said, “how do they know?”

Coolidge was known as “Silent Cal.” A young woman who sat next to him at dinner one evening is said to have told him that she’d taken a bet that she would get more than two words out of him. “You lose,” he replied, and never addressed another word to her.

Silent Cal
Cameron sadly seems as little inclined to rise to challenges
Even more sadly, he can't emulate him in keeping quiet about it

To be fair, Coolidge was probably not quite as awful as his successor, Herbert Hoover, who presided brainlessly over the great crash of 1929. He concentrated on balancing the budget, and left the economy in free fall. It could only be rescued once he’d been voted out of office and replaced by Franklyn Roosevelt.

Interestingly, David Cameron is nothing like Coolidge in that he keeps on talking. But like him, in all other ways, he seems hopelessly unable to make a good judgement. And, like Hoover, he’s so fixated on balancing the budget, that he can’t see what he’s destroying on the way to doing it.

He behaves like a man who doesn’t want to have to read his briefing documents.

On coming to office, he oversaw the bold decision to slash spending on flood defences by £125m a year, from Labour’s spendthrift level of £665m. No doubt he felt this bolstered the macho image he was cultivating, of a Prime Minister with the guts to take the tough decisions to balance the books.

Then there was serious flooding in 2012. And – lo and behold – he found £120m to plough back in, all but restoring the cut, to relaunch delayed projects.

You could be forgiven for wondering whether he hadn't thought through the consequences of his actions.

This is just one of a series of half-baked decisions over which he’s presided. He dropped Labour’s plans for a new generation of planes to fly from aircraft carriers, preferring a different model. But there were problems with that model. So he had to revert to the Labour approach.

That bright fellow, Michael Gove, then Cameron’s Education Secretary came up with a smart idea. The GCSE, a state exam taken by most school pupils at 16, would be replaced by something far better. Except that it turns out it wasn’t – the boards that oversee exam qualifications, most educational experts and even the Tories on the parliamentary select committee on Education, pointed out all sorts of flaws in the plan, and five months later it was dropped.

David Cameron
And when you think he's half asleep, he's really half awake

It seems Cameron is starting his second term exactly how he started his first: with wild, ill-thought through proposals. And, curiously, Gove’s involved again, on the latest and most egregious of them. He’s now Justice Minister and therefore closely bound up in the Cameron wheeze to repeal the Human Rights Act.

Cameron was at it again in the parliament this afternoon: “Be in no doubt: we will be introducing legislation and legislating on this issue because I want these decisions made by British judges in British courts, not in Strasbourg.”

It seems that once more he hasn’t completely mastered his brief. Britain is a signatory to the European Convention on Human Rights. As a result, British citizens can bring human rights cases to the European Court of Human Rights in Strasbourg.

Incidentally, this is not an institution of the European Union, but of the Council of Europe, a much bigger but looser grouping of countries. Britain’s leaving the EU would not take it out of the Council.

The idea of the Human Rights Act was to incorporate the legislation into British law, so that citizens wouldn’t have to appeal to Strasbourg, but could instead have their cases heard in Britain. In other words, to have “decisions made by British judges in British courts.”

It’s hard not to conclude that Cameron really hasn’t done his homework. Again.

Fortunately, though, he seems to have woken up to his mistakes slightly more quickly this time than he has on previous blunders. The Queen’s Speech today, where the government announced its legislative programme, contained no reference to repealing the Human Rights Act, just a vague reference to bringing in “proposals for a British Bill of Rights.”

It’s just as well. Even Conservative MP Dominic Grieve told Sky News that “I am wholly unpersuaded that the benefit outweighs the really substantial costs that will come with this.”

As for Labour, the former Justice Minister Lord Falconer was firm: “It increasingly looks like the Tories are making it up as they go along. What is clear is that if they suggest completely scrapping people’s human rights protections, Labour will oppose them all the way.”

Making it up as he goes along. Sounds like Cameron. Sounds like any lazy man.

He may not be as silent as Coolidge, but Cameron’s seems to be rivalling his inertia. As well as Hoover’s ineptitude.

Tears before bedtime, when a big bang spoiled the party

Fascinating to get into a debate about the finer points of economic theory at any time, especially as my knowledge of the field is strictly limited: I try to make up in enthusiasm and conviction for what I lack in actual expertise. But then, arguing from strongly held belief without much knowledge puts me in august company, including most religious leaders down the ages.

What added spice to my most recent foray into the field was that it was conducted on Twitter. Debating the economic history of the last 80 years in 140-character bites is, frankly, challenging. Though no doubt my opponents would argue that my views don’t warrant much more.

Still, I’ve decided that I owe it to myself to take the slightly greater space a blog post affords to summarise my thinking more fully here. You, of course, by no means owe it to me to read on; however, if you do, I promise I’ll put in one or two funny bits before the end.

My potted history of the world economy over the last eighty years

There was a pretty ghastly depression in the 1930s. One of the worst ever.

A major step forward was taken when the US turfed the ghastly Republicans out. The incumbent was Herbert Hoover who gave his name to a dam. He was certainly a spectacular blockage to any kind of forward movement.

Alongside Roosevelt’s New Deal, a number of measures were put in place to ensure that no similar financial collapse would ever happen again. In particular, the Glass-Steagall Act included provisions to prevent the same organisation being involved in both investment banking and retail banking.

That makes sense since investment banking can lead to huge gains, but at the risk of massive losses. If only the money of wealthy individuals is involved, fine; if it’s the savings of millions of modest individuals, and the firms they rely on for a living, it’s not so smart.

Now fast forward to the 1980s. The ghastly Republicans led by Ronald Reagan are back in office in the US, supported with poodle-like loyalty by Maggie Thatcher in Britain.

They listen to bankers, outstandingly qualified to brief them on economics, notably by virtue of having bankrolled their electoral successes. The bankers want a bit less constraint. Reagan and Thatcher confer. There’s been no great financial crisis since the Glass-Steagall Act, so what is it protecting us from? We might as well do away with all that red tape.

As they sowed, so we are reaping. And weeping too.

At this point I’m reminded of a story told me by an intensive care physician. He was treating a man close to death from malaria. The patient went hunting each year Burkina Faso.

‘Don’t you take malaria tablets?’ my friend asked.

‘Well, I did for ten years, but I never got malaria so I thought I didn’t need them.’

Reagan repealed the relevant bits of Glass-Steagall. Thatcher brought in the ‘Big Bang’ in the city.

Released from their bonds, the bankers leaped exultantly into action. For twenty years they made fortunes and they paid themselves huge sums. What a great time they all had! As the guy I was arguing with on Twitter pointed out, ‘Big Bang was good for Britain.’ Measured by spiralling house prices, the number of Porsches on the streets and the amount of champagne consumed, that’s how it felt.

The nay sayers were, of course, saying ‘nay’. Even Alan Greenspan, then Chairman of the US Federal Reserve, warned against ‘irrational exuberance.’ But everything kept going well, year after year. And people don’t tend to think much further than a year or two. Few, apart from some of the better economists, realised that we needed to be reasoning in decades.

As it happens, two decades were all it took. The exuberance ended in 2008 when the present financial crisis blew up in our faces. The worst, surprise, surprise, since that of the 1930s. The smarter economists said it would end in tears, and here we were, crying.

How did I get into this argument? Because I criticised the present British government for trying to blame today’s banking scandals on the previous, Labour administration.

‘The recent scandals took place while Labour was in power,’ I was told. Which is true. But we mustn’t forget that it was Republicans and Tories who unleashed the bankers to wreak their worst on the whole of society.

The criticism that Labour deserves is that in office they did too little to re-establish effective regulation. It was hard, though. After ten or more years of huge apparent prosperity following the Big Bang, there was a powerful consensus that this was the way to build a stable, thriving economy. Labour wasn’t immune from that generalised belief.

Here’s an extract from a speech making clear how deeply ingrained that thinking was:

The Left advocated more intervention and government ownership. Those on the Right argued for monetary discipline and free enterprise.

Over the last 15 years governments across the world have put into practice the principles of free enterprise and monetary discipline.

The result?

A vast increase in global wealth.

The world economy more stable than for a generation.

The speaker ended by haughtily declaring ‘the debate is now settled’.

Who was the speaker? The then leader of the Conservative opposition, David Cameron. When did he make this speech? In September 2007. A year later, the crash burst on us.

And two and a half years later, God help us all, he became Prime Minister.