Chris Dillow on UK austerity:

For years, Marxists have been accused by their opponents of believing in a crude economic determinism. However, it is not so much Marxists who believe this as our rulers. George Osborne described his Budget yesterday as “unavoidable.” His stooges have described the measures as “necessary“.This is bull. The austerity is not necessary or unavoidable. It is the outcome of a choice, a judgment: should we risk damaging economic growth in order to placate the markets, or should we risk a sell-off in gilts to nurture the recovery?  By all means argue that the government has made the right choice. But don’t pretend there wasn’t one.

Interesting article on project syndicate. It pretty much sums up how Obama is what some of us on the left feared he would be:

Despite the frequent cries of American Republicans that Barack Obama is trying to bring European-style socialism to the United States, it is now very clear that the US president wishes to govern from one place and one place only: the center. 

In fighting the recession, Obama decided early on that he would push for a fiscal stimulus program about half the size of what his Democratic economic advisers recommended, and he decided to count that as a total victory rather than press for expanding half a loaf into the full amount.

Obama has been so committed to that cautious policy that even now, with the unemployment rate kissing 10%, he will not grab for the low-hanging fruit and call for an additional $200 billion of federal aid to the states over the next three years in order to prevent further layoffs of teachers. Rather than stemming further erosion of the national commitment to educate the next generation, Obama has shifted his focus to the long-term goal of balancing the budget – even while the macroeconomic storm is still raging.

And, in order to move forward on long-term budget balance, Obama has appointed a fiscal arsonist, Republican ex-Senator Alan Simpson, as one of his fire chiefs – one of the two co-chairs of his deficit reduction commission. Simpson never met an unfunded tax cut proposed by a Republican president that he would vote against, and he never met a balanced deficit-reduction program proposed by a Democratic president that he would support. Partisans whose commitment to deficit reduction vanishes whenever political expedience dictates simply do not belong running bipartisan deficit-reduction commissions.

Likewise, in dealing with the financial sector’s distress, Obama has acquiesced in the Bush-era policy of bailouts for banks without demanding anything of them in return – no nationalizations and no imposition of the second half of Walter Bagehot’s rule that aid be given to banks in a crisis only on the harsh terms of a “penalty rate.” Obama has thus positioned himself to the right not only of Joseph Stiglitz, Simon Johnson, and Paul Krugman, but also of his advisers Paul Volcker and Larry Summers.

On environmental policy, Obama has pressed not for a carbon tax, but for a cap-and-trade system that, for the first generation, pays the polluter. If you were a major emitter in the past, then for the next generation you are given a property right to very valuable emissions permits whose worth will only rise over time.

On anti-discrimination efforts, the repeal of the US military’s “don’t ask, don’t tell” policy toward gay soldiers is on an extremely slow track – if, that is, it is hooked up to an engine at all.

On policy towards the rule of law, the closure of the mistake that is Guantánamo Bay is on a similarly slow track. Moreover, Obama has joined George W. Bush in claiming executive powers that rival those claimed by Charles II of Britain in the seventeenth century.

On healthcare reform, Obama’s proudest moment, his achievement is…drum roll…a scheme that almost precisely mimics the reform that Mitt Romney, a Republican who sought the presidency in 2008, brought to the state of Massachusetts. The reform’s centerpiece is a requirement imposed by the government that people choose responsibly and provide themselves with insurance – albeit with the government willing to subsidize the poor and strengthen the bargaining power of the weak.

In all of these cases, Obama is ruling, or trying to rule, by taking positions that are at the technocratic good-government center, and then taking two steps to the right – sacrificing some important policy goals – in the hope of attracting Republican votes and thereby demonstrating his commitment to bipartisanship. On all of these policies – anti-recession, banking, fiscal, environmental, anti-discrimination, rule of law, healthcare – you could close your eyes and convince yourself that, at least as far as the substance is concerned, Obama is in fact a moderate Republican named George H.W. Bush, Mitt Romney, John McCain, or Colin Powell.

Now, don’t get me wrong. My complaints about Obama are not that he is too bipartisan or too centrist. I am at bottom a weak-tea Dewey-Eisenhower-Rockefeller social democrat – that is, with a small “s” and a small “d.” My complaints are that he is not technocratic enough, that he is pursuing the chimera of “bipartisanship” too far, and that, as a result, many of his policies will not work well, or at all.

I understand that politics is the art of the possible, and that good-government technocracy is limited to the attainable. But it would be good if Obama remembered that we dwell not in the Republic of Plato, but in the Roman sewer of Romulus.

There’s an article on VOX.eu at the moment on the report by the Icelandic Parliament‘s Special Investigation Commission on what brought down their banks. The abstract/summary thing is:

What brought down Iceland’s banks? This column examines the revelations from the latest report from the Icelandic parliament, raising the possibility that the collapse of Iceland’s three largest banks is the result of “control fraud” where shareholders stole from their own bank in the same way as those convicted of looting from the American saving and loan banks in the late 1980s.

And there’s some pretty interesting and shocking things in the article. On the excesses in Iceland:

• Two Icelandic brothers who produced TV dinners for export became bank shareholders, and went on to buy themselves a yacht that used to belong to Giorgio Armani.
• Another bank owner bought himself a penthouse in Manhattan, but – this is actually in the SIC report – the bank “forgot” to ask for collateral.
• At a small dinner party for favoured bank clients on the Riviera, where Tina Turner stood for the music, the main course was sprinkled with – you couldn’t possibly have guessed this one – gold flakes.
• And then there was the dinner party in Reykjavik where singer George Michael had been scheduled to land on the glass roof in a roaring helicopter, but to the great embarrassment of the bank’s director of entertainment the plan fell through.
• One of the bank owners, the afore-mentioned Mr. Guðmundsson, declared bankruptcy in 2009 to the tune of $750 million, of which $500 million is owed to the bank he owned and directed. Not even Texas has seen a personal bankruptcy of such proportions.

And on the possible consequences:

The SIC has referred a number of cases or issues to the Special Prosecutor’s Office where an independent assessment will be made as to whether charges will be brought against the bankers and the four civil servants. Parliament will decide whether to press charges against the ministers; if it does, it must convene Landsdómur, a special court designed to determine whether ministers have broken the law. If Landsdómur is convened, as appears likely, it will be the first time in the 66-year history of the republic. If some or all suspects are found guilty, the constitution permits the President of Iceland to pardon the bankers and the public officials, but a presidential pardon of ministers found guilty by Landsdómur would have to be affirmed by Parliament. We are not in Kansas anymore.

Honestly, I’m not sure about all of this. I’m sceptical that what was happening in Iceland was all that unusual. Rather I think that what is unusual about Iceland is that the financial collapse was so complete and that the Icelandic public wanted ‘blood’. I’ve a feeling that if you deug down into the financial system in Ireland, Lithuania naybe even the US and UK you’d find much the same thing.

This article also reminded me to read a paper a lot of people have been referencing recently: Akerlof, George A, and Paul M Romer (1993), “Looting: The Economic Underworld of Bankruptcy for Profit“,Brookings Papers on Economic Activity 2:1-73.

The article below is an article I wrote for the newspaper The Commune. I cut and paste it from their website. ——–

Listening to the debate in the media today you would conclude that there is consensus amongst economists that the key problem of the UK economy is the deficit. And the key question is how to cut it. And the key election issue therefore should be how to cut spending. This is not the case.

Working backwards, perhaps the most ridiculous issue here is the notion that the only way of cutting the deficit is by cutting spending. Fraser Nelson of The Spectator goes so far as to say, “Cameron should ban the word ‘deficit’ and simply say ‘overspend’ instead.” It would seem that some right-wing commentators can’t add. A deficit arises when revenue is less than expenditure. An equally good way of cutting the deficit is by increasing revenue, i.e., by raising taxes. Saying the deficit is an ‘overspend’ is as idiotic as calling the deficit an ‘undertax’.

This is not to say that increased taxes would necessarily benefit UK workers. Contrary to popular belief, the UK does not have a progressive taxation system. It has a regressive taxation system. A progressive tax system is one where the people most able to pay taxes do indeed pay more. A regressive one is where either everyone pays the same or where the less well off pay more than the better off.

According to the ONS (Office of National Statistics), in the UK, the poorest 20% pay 38.7% of their income in tax, while the wealthiest 20% pay only 34.8% of their income in tax. The confusion regarding this arises because people frequently only think of taxes in terms of income tax, which is progressive, but ignore council tax and indirect taxes such as VAT. However, there is abundant evidence that increased taxes matched with increased social spending makes society more equal, i.e., it increases the wealth of the least wealthy and decreases the wealth of the wealthiest.

With that said, it is interesting to consider the current debate regarding Brown’s proposed increases in National Insurance Contributions (NIC). Brown, while he can be criticised for a lot of things, has a rather strong understanding of economics. He explained the increase in NIC on the basis that it was fairer than an increase in VAT. On this he was technically correct, although an increase in the 50% rate of income tax would be even fairer.

The confusion on the NIC proposals arise with claims from the Tories and the employers that it is a ‘tax on jobs’, a tax on employers to discourage them from employing more. It isn’t. NIC can be thought of as two taxes, one paid by the employee, the other by the employer. But, as with every tax, the issue isn’t really who it is levied on, but who actually pays it, and there is pretty strong evidence that payroll taxes that employers pay, such as the NIC, are partially paid by employers but primarily paid by workers, in the form of lower wages. The tax is not really as ‘fair’ or egalitarian as Brown suggests. It’s a tax on workers. The Tories are either being dishonest or too stupid to understand that this is not a tax on employers but rather a tax on employees. And Labour isn’t admitting what the tax really is.

The debate over NIC is interesting because it shows that the Tories are not serious about cutting the deficit. Rather they simply want to cut public spending and adamantly refuse to levy any tax on business or the wealthy. The Tory line is cut spending and pay for what’s left by taxing the least well off workers.

As mentioned above, you can cut a deficit in two ways; by cutting spending and/or increasing taxes. But neither party seems all that interested in increasing taxes and neither is even considering redressing the existing tax injustice where the poorest pay relatively more in tax. However, all this has presumed that the media consensus is correct and that the key problem of the UK economy today is the deficit. This consensus is wrong. The key problem of the UK economy today is not the deficit, it’s unemployment.

The unemployment rate is currently 7.8 per cent, 150% of what it was in January 2008. There are nearly two and a half million people actively looking for work in the UK. Despite a 0.1% decrease in unemployment in the last quarter, the number of people unemployed for more than 12 months is still increasing and is the highest it’s been since 1997. The number of economically inactive people of working age (i.e. people who are neither working nor ‘actively looking for work’) increased by 371,000 over the last year to reach 8.16 million in the three months to January 2010.

The figures are even more shocking when you look at young people, where the unemployment rate is 14.8%. The Institute for Public Policy Research estimates that 20% of young white workers are out of work, 31% of young Asian or Asian-British workers and a shocking 48% of young black workers. That means effectively one in every two young black workers in the UK cannot find work!

This is particularly disturbing given that a growing pool of research shows young people are disproportionately affected by periods of unemployment.  It has been found that youth unemployment can have a permanent impact on health status, job satisfaction and wellbeing, and can lead to reduced wages not just in the short term but throughout an individual’s lifetime.

However, despite this, relatively little is being said about unemployment in the UK today. Instead, everything is about the deficit and the need to cut spending regardless of the obvious and significant negative impact that would have on unemployment. Conservative shadow Chancellor George Osborne has argued that “[t]here is no choice between going for growth today and dealing with our debts tomorrow.” As with much recent economic debate, this is idiotic. This statement is essentially that “borrowing is impossible”. Obviously borrowing is possible, Osborne could argue it’s a bad idea but to say that that choice doesn’t exist is idiotic.

Indeed, no less a bastion of socialist radicalism than the International Monetary Fund has argued in a recent study that ‘going for growth today and dealing with our debts tomorrow’ is a good idea. They argue that cutting spending too quickly could damage the economic recovery.

“Unwinding public intervention too early,” the IMF argues, “could jeopardise progress in securing a sustained economic recovery… One of the key lessons from experiences of similar crises is that a premature withdrawal of policy stimulus can be very costly, particularly if the financial system is weak. Thus, in the current context, the potential risks associated with an early withdrawal of policy stimulus seem to outweigh the risks of maintaining it for longer than possibly needed.”

So what is Osborne rambling on about? In his Mais Lecture in February, ‘A New Economic Model’, Osborne laid out his economic theory most clearly, saying that, “[p]erhaps the most significant contribution to our understanding of the origins of the crisis has been made by Professor Ken Rogoff, former Chief Economist at the IMF, and his co-author Carmen Reinhart.

“As Rogoff and Reinhart demonstrate convincingly, all financial crises ultimately have their origins in one thing – rapid and unsustainable increases in debt….. So while private sector debt was the cause of this crisis, public sector debt is likely to be the cause of the next one. As Ken Rogoff himself puts it, “there’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt. It’s very likely that will trigger the next crisis as governments have been stretched so wide.” The latest research suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant.”

This 90% figure is getting bandied about a lot and also comes from Reinhart and Rogoff’s book. However, in the book this 90% figure plays little to no role. And in a recent Financial Times article Reinhart and Rogoff warn against introducing massive cuts. They write, “[g]iven the likelihood of continued weak consumption growth in the US and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession.”

Other economists have been even more disparaging of Conservative plans for cuts and their theoretical ‘justification’ for them. Nobel Laureate and former World Bank Chief Economist Joseph Stiglitz referred to Tory plans to cut spending as “incredulous”. He likened their proposals to those of Herbert Hoover, the US President who oversaw the development of the Great Depression, by calling the Tories “Hooverites”.

Stiglitz is even harsher with the notion bandied about by the Tories that Britain is about to turn into Greece and is at risk of default. He says to Osborne, “I say you’re crazy – economically you clearly have the capacity to pay. The debt situation has been worse in other countries at other times. This is all scaremongering, perhaps linked to politics, perhaps rigged to an economic agenda, but it’s out of touch with reality.”

And indeed Stiglitz is right. But not only has the debt situation been worse in other countries, historically it’s been worse in the UK. Indeed, for the entire period of the industrial revolution the UK had public debt above the supposed threshold of 90%. UK public debt went first over 90% in 1746 and did not come down below 90% until 1863. That’s unsustainable debt being sustained for a period of 117 years!

That is not to say that this level of debt can be taken on without costs. Rather it merely shows that the notion that the UK is on the verge of disaster unless the deficit is cut and public debt is taken under control. The UK is not on the verge of disaster. But up and down the length of the country, workers are suffering from unemployment and neither the Tories, Labour nor Lib Dems seem to be all that fussed about it.

Graziella Bertocchi summarizes some of the recent work she has done with Andrea Guerzoni over at VOX.eu.

The causes and implications of state fragility – also known as state failure – are not yet well understood. This column explores the determinants of state fragility in sub-Saharan Africa and finds that institutions – as measured by civil liberties and the number of revolutions – are the main drivers. It says institutions trump economic, geographic, and historical factors.  

The interesting findings are:

We find that institutional variables are the key determinants of state fragility. The probability of a country having a fragile state decreases with the level of civil liberties and increases with the number of revolutions. Economic determinants such as per capita GDP growth and investment are not significant when we introduce standard controls for omitted variables. Geography is also insignificant while colonial history appears to be only marginally relevant. These conclusion hold after controlling for endogeneity with standard analytical tools.

She ends the article drawing conclusions regarding EU aid and how including an emphasis on social objective as well as economic ons might feed back into economic growth.

 Among the goals declared since the 1992 Maastricht Treaty, the EU emphasises international cooperation, with the objectives to foster and consolidate democracy, the rule of law, and respect for human rights and fundamental freedoms. Our findings suggest that pursuing these objectives may indeed complement economic aid to developing countries, since it implies that the EU should be interested in reducing of the likelihood of state fragility throughout the world, resulting in a positive impact on their aid absorption.

I’m pretty interested in this question of how social objectives facilitate economic growth. From my reading the evidence that they impede on economic growth is not as strong as some might suggest. I might come back to this in another post in a few days.

There`s an interesting article in the current edition of Harvard Business Review entitled “The Myth of Shareholder Capitalism”. In it the authors, Loizos Heracleous and Luh Luh Lan, state

Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a century’s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person. What’s more, when directors go against shareholder wishes—even when a loss in value is documented—courts side with directors the vast majority of the time. Shareholders seem to get this. They’ve tried to unseat directors through lawsuits just 24 times in large corporations over the past 20 years; they’ve succeeded only eight times. In short, directors are to a great extent autonomous. 

And yet, in an important 2007 article in the Journal of Business Ethics, 31 of 34 directors surveyed (each of whom served on an average of six Fortune 200 boards) said they’d cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits. Whatever they could legally do to maximize shareholder wealth, they believed it was their duty to do.

There`s two pretty interesting things here. Firstly that “Shareholders do not own the corporation, which is an autonomous legal person”. I suppose intuitively this makes sense. We all know, from watching The Corporationif nothing else, that corporations have legal personality. And although a lot of lefties make a really big deal out of this, I`ve never heard anyone point out the flip-side which is that as Corporations have a legal responsibility in and of themselves, it is not legally justified to act solely in the interests of the shareholders. (If this is legally wrong, I appreciate someone pointing it out).

 The other interesting thing is the rather shocking finding in the Journal of Business Ethics. I hadn`t come across that before.

A rather encouraging albeit unusual letter has been published in today’s Guardian. It was signed many if not most of the UK’s top Industrial Relations academics. The body of the letter is

Dear Editor,

As academics in the field of employment relations our expertise includes the analysis of the causes, process and outcomes of industrial disputes and particularly the dynamics of strike action. Given the near certainty of further strikes (Follow-up strike will go ahead says union, March 22nd), it is clear to us that the actions of the chief executive of British Airways, notwithstanding his protestations to the contrary, are explicable only by the desire to break the union which represents the cabin crew. What other possible interpretation can there be forWillie Walsh rejecting Unite’s acceptance of BA’s previous offer or indeed of his marshalling of resources, including those of bitter industry rival Ryanair, to undermine the action of his staff? Walsh and now Prime Minister Brown have made the error of underestimating the deep seated and justifiable anger of a loyal and dedicated workforce, whose continued trust and goodwill is a vital ingredient of customer care.

Overwhelming majorities in two strike ballots in the face of tabloid opprobrium testify to employees’ understanding that a victory for Walsh’s macho management strategy would precipitate a race to the bottom in terms of working conditions and job quality. In the process, this would damage beyond repair the high standards of customer service for which BA cabin crew are renowned. The wider significance of a triumph of unilateral management prerogative would be a widening of the representation gap in UK employment relations, and a further erosion of worker rights and of that most precious of commodities – democracy. For all these reasons, BA’s cabin crew and their union, Unite, deserve our support rather than knee-jerk vilification.

I haven’t included the list of signatures but it’s well worth a look.