The Economy Of Analysis - Part 5

In Part 4, I argued that the policies adopted over the last three years to deal with the Financial Crisis, and subsequent recession, were shaped by economic orthodoxy in the shape of Monetarism, as well as by a pragmatic need to deal with the immediate crisis, by an injection of old fashioned Keynesian fiscal stimulus. But, that begs the question of why some Governments and States HAVE been pursuing policies in the last year or so that amount to “collective suicide”. In a number of posts during that period I have set out why I believe that to be the case. It has not been an easy position to take given the general position of most of the Left. But, that is the point of Marxist analysis, of trying to understand what is going on, and telling the truth about it, even if it is unpopular, and against the stream.

The increasing stream of commentary coming from the international organisations and representatives of Capital, signalling the need to abandon the policies of austerity, and to introduce measures to stimulate growth, are demonstrating that Marxist analysis has proved its worth again, providing an anchor to prevent being tossed about on a sea of Left Public Opinion.

The first thing to say is that it simply has not been true to say that all Capitalist Governments and States have been pursuing policies of austerity, and reductions in the role of the State. That most “neo-liberal” of regimes, the US, most certainly has not. As I have demonstrated above, even under Bush the size of the State was continuing to expand e.g. with the $750 billion of private health care costs that were socialised off the books of companies, and placed on to the books of the State. The wars in Iraq and Afghanistan, certainly swallowed up large amounts of finance that had to be paid for by additional borrowing, but the much larger, longer term increases have come from the continued need to finance US Welfare programmes such as Medicare and Medicaid that cater for the socialised health and social care needs of the retired, and the poor.

That is before the huge amounts that Bush implemented, such as the $750 billion TARP programme, used to recapitalise the US Banks, and the intervention to save GM. Just last year, Obama introduced a further $2 Trillion fiscal stimulus in the form of tax cuts for workers, and an extension of Unemployment Benefits for the longer term unemployed. And last week, as the economy showed that it was clearly slowing again, he put forward a further $450 billion fiscal stimulus to help try create jobs. For the last two years the US has used every opportunity to put pressure on its European partners to follow that lead, and to stimulate their economies, in a similar way. Over, the next few days, Treasury Secretary, Timothy Geithner, will be using the Ecofin, meeting in Poland to push the same line.

On Thursday, the US joined with the Bank of England, Bank of Japan, ECB, and Swiss National Bank, to make available a supply of dollars for European Banks, via the ECB. In part, it is an indication of fright. For the last couple of months, US banks have been withdrawing dollars from European Banks, and effectively refusing to lend to them. It has seen the kind of seizing up of interbank lending that preceded the last Credit Crunch, and has been responsible for the gyrations in the Gold Market, with institutional holders of Gold, selling in order to raise cash, in a way they did in 2008, selling Oil, prior to the Credit Crunch. The kind of action we have now seen was conducted after the collapse of Lehman Brothers. It worked for around thirty-six hours, before the attacks on the Banks resumed.

But, its likely that this action is just the forerunner of other measures to be announced on Sunday. Then, Geithner's proposal for the establishment of some form of TALF programme like that used to recapitalise the US Banks in 2008 will be agreed. It may use the EFSF, but more likely it will require something with greater firepower, and may involve setting up some new vehicle that a range of international funders can take part in, including China.

But, even that will only be a stop-gap. It will act to recapitalise the Banks to prevent the likelihood of a failure that could spread throughout the global economy, but it will not address the fundamental issue of the sovereign debt of Greece, and the other PIIGS. It probably is not intended to. What it may well do, is create the conditions under which a Greek default can occur, without it bankrupting those banks. It remains a high risk strategy. Such a default, even a planned one, could have ripple effects through the Credit Default Swap and other derivative markets. Moreover, it would only work if it acted a firebreak. But, we have seen the use of such firebreak throughout the EU debt crisis, and each time the fire leapt across them.

If Greece defaulted, and it simply then moved on to Ireland, Portugal, Italy, and Spain – and if you are under pressure from the voters in any of those countries, why would you not follow Greece's example, and default? - it is no solution, at all. Instead, it could simply have made things worse, reducing confidence as another stop-gap measure failed.

In fact, at every stage, the politicians have been way behind the curve. They have been operating with a political timescale that is measured in months and years, to try to move Public Opinion, and move through the democratic – or more often bureaucratic – process, whilst the international markets where the future is being determined, make decisions in minutes, via electronic, often automated trading systems. The basic idea behind “Terminator” could turn out right, but it will not be computers controlling weapon systems via Skynet, that will be key, but those controlling trading on international Capital Markets.

And, the seriousness of this should not be underestimated. EU leaders, have stressed in the last week that a failure of the Euro would likely spell the end of the EU, and that would itself likely lead to a period of intense reaction, a strengthening of all kinds of right-wing, nationalistic sentiments.

The Polish Finance Minister, in a Financial Times Blog, has warned,

“after such economic and political shocks, like those which are currently affecting Europe, it is rare that after 10 years there is not also the catastrophe of war.”

In 2008/9, it was the US, and UK, which led the way in putting forward such policies of traditional Keynesianism, which were adopted in much of Europe, and adopted even more aggressively in Brazil, China, and elsewhere. Its true, that Labour prior to the election, proposed to introduce Cuts to tackle the deficit. The Liberal-Tories make great play of the fact, and they are joined by much of the Left. But, its necessary to tell the truth about this.

Despite the Liberal-Tory claims, the main reason for the increase in the deficit under Labour was the Financial Crisis. As I've set out before, although Gordon Brown began to introduce counter-cyclical policies from around 2002, these increases were minor. As I wrote in CPGB Strategy Falls between Scylla & Charibdis

"Public Sector Borrowing and Repayments shows that, contrary to Mike McNair's account, in the period after 1999 up to 2002/3, Labour was actually paying down the debt rather than intervening with Keynesian stimulus under instruction from Capital. Between 1979 and 1997 borrowing accounted for 3.4% of GDP, between 1997 and and 2005 it averaged just 1.2%. Moreover, even when Labour did begin to act counter-cyclically, under Brown, the increase in the deficit was nothing extraordinary. It is clear from the data that the significant change DID come in 2008/9, when, even excluding the amounts pumped into the Banks, net debt rose from 36.5% of GDP, to 43.2%, a bigger cumulative rise than in the previous 7 years combined!”

The intervention was an emergency measure introduced to deal with the worst financial crisis the world has seen. In what way is it rational to believe that a sensible economy policy would NOT involve removing that stimulus, and indeed reversing it, once the crisis was over. Yet, Labour had NOT proposed large cuts in spending in 2010, and had not set out policies for exactly what they would cut in 2011. Of course, even until a few months prior to the election, the Tories were supporting continued levels of Public Spending, and even promising to at least match Labour's spending plans.

The Liberals, even during the Coalition negotiations were arguing that Cuts in 2010 would be a big mistake, and David Laws has said that the talk over the deficit was hyped up. But, more than that, even the proposals for the halving of the deficit over four years from 2011 were being put forward by Alastair Darling in the face of opposition from Brown. Had Labour won the election, then not only would there have been no talk of making immediate cuts, there would have been none of the talk about Britain being as bankrupt as Greece, that the Liberal-Tories were forced to make to justify their agenda, and which did such damage to confidence in the economy even before any Cuts were introduced.

The data is clear, the stimulus was working, it continued to work for several months after the election, but the scare-mongering of the Liberal-Tories, and their talking down of the economy, sent it quickly into reverse.

That is what is making the situation much worse now. Of course, the slow down in Britain cannot be separated from the slow down in Europe, which is the UK's largest trading partner, but to see this in isolation is also not to view things dialectically. Had Labour won, then the pressure that the US has been applying on Europe to reflate over the last two years would have found support from Britain. The general right-wing, populist sentiment surrounding the need for austerity would have been challenged. It is not at all inconceivable that had Labour won the election, then Brown would have removed Darling and installed Ed Balls as Chancellor, and that at the first sign of renewed weakness, the UK and US would have led calls for fiscal expansion, providing a basis for support for such policies from others in Europe. There is no necessary Capital Logic that led to the current situation. An example of that was given by Timothy Geithner, US Treasury Secretary, on a CNBC interview with Jim Cramer on Wednesday.

Geithner admits that he is a fiscal hawk, but argues that given the current conditions it is necessary to do what ever is required to get growth. Only by getting growth, and intervening to create the conditions through restructuring, can efficiency be built, so that the economy is capable of paying down doubt, and becoming strong enough to allow fiscal contraction.

He was talking about the US here, but he is not the only one to have made this point also in relation to Greece, that it cannot get out of its debt problems via austerity. Larry Fink of Blackrock, who is advising the EU, has made a similar point, about the need to make the necessary investments that allow economies to become efficient and competitive.

This series of posts will continue next week.

Back To Part 4

Forward To Part 6