economic lies and cuts: what you

are fighting (for)

Richard Drayton
to Cambridge Occupation of Old
Schools, November 28, 2010
debt to GDP ratio? price vs. yield? collateralised bond obligations? credit default swaps?
money supply? commodity vs. asset inflation? quantitative easing? liquidity trap? the
paradox of thrift?

Practical men, who believe themselves to be quite exempt from any intellectual
influence, are usually the slaves of some defunct economist” (KEYNES)
three kinds of economic lies
(1) that “the public
coffers are empty”
(2) that cuts to public
services are
necessary
(3) that cuts are the
rational solution to a
crisis
 Why cut?

debt burden unbearably heavy? leading to
inefficient tax burdens?

state as economic actor “crowding out”
private activity?

as a symbolic political act

Marketism – an ideological hostility to
government, and faith that reducing
government opens up space for higher
efficiency of markets
 Why not cut?
 government a critical actor in the modern
economy, employer of 20-30% in some
regions: CUTS = DEFLATION = A WORSE
DEBT TO GDP ratio!
 government as more efficient than market
over long time frames and for mass
services?
 “The paradox of thrift”
 Vince Cable in April 2010 explaining the paradox of
" thrift
"”

“Cutting too soon and pushing the economy back into

recession will make the deficit worse, as tax receipts
fall and benefit payments rise. The Conservatives’ so-
called efficiency savings are particularly dangerous.
They have no clue where or how these ‘efficiencies’
will be made, making it likely they will be nothing
more than a smoke screen for job cuts”
or see the Magaritaville episode of South Park
do cuts make the bond markets
like you?
emerging market debt experience:mproving
creditworthiness, for example, by reducing deficits and introducing needed
reforms, has limited effect: instead correlation with the spread between T-
bond and junk in the US domestic market
http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=837111
NB: The Irish experience: strict cuts 2008-2010, driving a deeper collapse
NB (2)): November 2010: Irish debt continues to fall in value, AFTER bailout
announced and new austerity budget proclaimed
Why? the role of the United States in the international money/debt system since
the 1970s. The United States as the key market for global savings, and a vast
engine for producing debt gives the fundamental shape to global fixed interest
market
 The current crisis?
long term post-1980 crisis of the non-financial British and US economies
high levels of structural unemployment and underemployment
declining US and UK export competitiveness (with de-industrialisation, in
train since late 20th c.)
high levels of personal and corporate debt (which ways heavily in the low
inflation environment
long term wage decline (wages in US and UK reach their peak for lowest
tier in the 1970s
the 2010 situation only an extension of a post-1980 phenomenon
(obscured by very cheap cost of capital in this period, and in the case
of the UK the North Sea oil windfall – in 2006 UK became a net
importer
continued restriction in credit
economic recovery??: UK- public sector construction led, and US asset
inflation
 cheap money: a failed option
'quantitative easing' (or how to pump up the
money supply by printing money without
(initially) driving commodity inflation
BUT, little response, thus QE2- $600 billion
the threat of a liquidity trap
cheap capital – 'keyboard credit' – driving
asset price inflation around the world
Guardian 27/11/2010: “sales of million-pound
homes soar by 44%”
How did we get here?: a short guide to Neoliberalism

(1) 1914-45-- collapse of confidence in the power of the

‘invisible hand’ to make either perpetual peace or universal
abundance
1929: The Wall Street Crash and the Great Depression: the rise of Keynesian
economic and new visions of the role of government in making economic
stability and social well being
Post 1919: League of Nations -- multilateral structures -- ILO - the liberal
argument for the application of ‘best practices’ in labour relations around the
world -- against ‘social dumping’ – a Globalization of human rights

By 1945 human rights: not just freedom from tyranny, but also the
right to food, the right to employment, to housing, to health, to
education
 Susan George:
I “In 1945 or 1950, if you had seriously proposed any of the ideas and policies
in today's standard neo-liberal toolkit, you would have been laughed off the
stage or sent off to the insane asylum. At least in the Western countries, at
that time, everyone was a Keynesian, a social democrat or a social-Christian
democrat or some shade of Marxist. The idea that the market should be
allowed to make major social and political decisions; the idea that the State
should voluntarily reduce its role in the economy, or that corporations should
be given total freedom, that trade unions should be curbed and citizens given
much less rather than more social protection--such ideas were utterly foreign
to the spirit of the time. Even if someone actually agreed with these ideas, he
or she would have hesitated to take such a position in public and would have
had a hard time finding an audience”
The Keynesian era, c. 1945-1976
- state intervention in industry, economic and
social planning, restrictions on capital
markets
- extraordinary economic growth around the
world, extraordinary improvements in social
welfare
- declining inequality: 1928 top 1% took 23%, 1940-84 less than
15%, 1965-80 less than 10%

– BUT: victim of its success, declining profits, US

extraction of 'rent' via its dollar as reserve currency
 The 1970-80s crisis
- the Nixon shock – 1971 break of link to gold:
1945-1971 dollar supply increased 55%; 1971-
2001, by 2000% 'a cheque never cashed'
- the attack on Keynesianism: the rise of monetarist
and 'corporate Keynesian' economics, retreat of
state from economic intervention in industry
- the emergence of a new financial model- opening
up for a new massive growth in capital markets
- attack on labour's power to negotiate wages,
- privatisation: transfer of wealth from public to
private realm
 Does neo-liberalism work?
yes: in terms of making elites richer, transfer
of wealth from poor and middle to rich
no: in terms of real economic growth and the
experience of ordinary people
collapse of wages, privatisation of debt,
financialisation of society, oversaving of
superrich, underinvestment in real economy
from 1960-80: output per person grew 83%,
1980-2000: 33% (only success stories in
Asia, where China etc. broke the neoliberal
rules
The origins of the 'Credit Crunch'
- growing inequality, pro-rich economic policies,
'cheap money' for bankers driving from 1980s –
asset price inflation, private debt instead of higher
wages
- financialisation driving all sorts of social savings to
capital markets, with osmotic pull of US debt
economy driving flow of global savings to the
United States
- Clinton era removal of constraints (Gramm Leach
Bliley and Commodity Futures Modernization Act
1999-2000; Gordon Brown collaborating
- NINJA/IBGYBG> CBO > CDS: 2007-8 collapse
 making us pay for their crisis
- Lehman Brothers allowed to fail, but the
Goldman Sachs alumni directing US
economic policy decree 100 cents in the
dollar cover for AIG risk (key GS liability
- Ireland (like others) commits 100 cents in
the euro for distressed assets
- refusal to pursue nationalisation OR o
fractional compensation for speculators, or
levies on profits, or prosecution of
speculators