The logic of the left-wing BBC
Here’s a BBC reporter on Radio 5 Live (around 47 mins and 30 secs in) quizzing Ian Gray, Scottish Labour Leader, on the political response to Diageo’s decision to a) slash 900 jobs in Kilmarnock and b) turn down flat alternative plans put forward. (This is the same Diageo plc which posted £2bn profits on August 27th).Get that? Remember it well, because it’s a new interviewing tactic thought up by those clever BBC journalists in the wake of Labour’s admission that it’s planning spending cuts as well as the Tories. I’m sure we’ll hear it lots more.
And just marvel at the logic that lies behind it:
a) International capitalism screws up bigtime, and a massive crisis and recession ensues;
b) So governments bail out international capitalism with billions of pounds in taxpayers money in order to keep international capitalism going;
c) Governments, cowed by international capitalism and their handy international credit agencies into thinking there that the absolute priority is to cut the national debt caused by international capitalism, decide that the only way to pay back the debt is to cut public spending and massively reduce welfare and public services;
d) The decision to massively cut public spending means that governments and their politicians can no longer validly questions the decisions of international capitalist, who are in fact only seeking ‘efficiencies’ through their decision not to use any of the £2bn profit to stop the lives of thousands of people in a Scottish town being ruined.
Yes, that makes perfect sense to a journalist from the notoriously ‘leftwing’ BBC.
Paul,
Though I respect your reasoning here, surely the government, in theory, has a fair amount of leverage over the banking sector, namely:
a) The shares purchased in exchange for the bailout funds;
b) The loans to the Banks that have to be repaid over time, with interest (thus providing the government with what effectively amounts to an extra tax on the banks in the short term).
The government, at least in theory, should have more leverage than usual over the banks. Surely part of the problem is a lack of political will — the remnants of the neo-liberal consensus, the idea that the government must not become too heavily involved in business? Remember when Northern Rock was nationalized, the government was keen to stress that it would be managed “at arms length”, despite the fact that it had failed as a previously independent business.
I know nothing about the Diaego decision, so I won’t comment. I’m tempted but I won’t.
As for the BBC question – yes it isn’t particularly logical, but there is a kind of intuitive point behind it. “Government (rightly or wrongly) always criticises businesses when they cut jobs yet will almost inevitably (it seems) do so in the next few years. How does that square?”
The job of a journalist isn’t to be super rational and ask only the right questions all the time. It’s to dig out and explore things. To many people the above intuition probably makes a fair amount of sense. A good journalist should therefore ask the question, if only to give the interviewee an opportunity to deal with it. The question can be easily rebutted (I couldn’t be bothered to listen to the interview, but I imagine it was) and everyone is a little wiser.
But I am interested by your point c. Do you think that cutting debt isn’t a priority (i’d grant it isn’t an “absolute priority)? I’m not saying you’re wrong, I’m just interested where you stand on this.
Barney: there are two ways to answer that question, but on both occasions the answes comes out as ‘no, spending cuts should not be a priority’. Both are interrelated.
The first way of answering is refuse to accept the paradigm of national debt, on the basis that we’re talking about what Marx describes as ‘fictitous capital. I won’t cover that here but have a look at if you like at my site and search on ‘Germany’ – i’m in mad hurry so will post link later on
I won’t cover it because I suspect you’ll be more interested in an ‘in paradigm response’, which accepts the notion of a ‘settlement’ between capital and labour with whatever frictions and upheavals that brings.
Here the answer is ‘no’ because
a) I don’t accept that public services cuts should come before tax rises on the wealthy;
b) It is stupd economics to cuts the public sector, which people seem to think of some amorphous mass of inutility but in fact consists of people with jobs, or without them if cuts are made. This reduces demand at exactly the time we need it most to boost production. I know such an explanation meets with disapproval from people talking about the classic IS/LM model of Keynesianism, but I am very unconvinced of that and am interested in the ‘neo-Hobsonianism’ now coming out of the woodwork. For what I think is an illuminating discussion on this, see Duncan economic Blog – again I’ll link later on
c)Alongside this is the fact that our national debt is being totally overplayed for political/neoliberal moenetarist purposes. There is simply no evidence that a national debt of our size makes us less ‘creditworthy’, and this has been backed up by Moody’s this week (not that I’m adocating for ghe integrity of Credit rating agencies,but point it out as it’s in utter opposition to what Hammond said). And even if we were deemed officially less creditworthy, there is no evidence that gilt rates and therefore repayments would go through the roof. Japan has a consistently lower gilt rate than US and UK because of domestic saving levels but also simply because the gilts remain attractive compared to other stuff.
So is the ‘threat’ to our economy of a burgeoning national debt actually part of capitalist conspiracy to change ‘social reality’ and make us all accept lower level services and public spending? Yes, it bloody well is, and a very effective conspiracy it is too, and the job of people like me is to expose fact that capitalism as a whole is seeking to renege on its part of the Keynesian bargain, and if it does , trouble lies ahead (see my most recent post on the future of Keynes when Dave puts it up)
Sorry this is a bit brief. Am in dash but wanted to reply sooner rather than later for courtesy’s take. expect you may come back with the ‘but profits are what leads to all our pensions’, but I’ll have to revert on that if you do.
Later I’ll also link to a useful series of 13 blog posts at Post-Keynesian Observations, which sums up a lot of the argument for the need to boost not cut public spending (and there’s a later article).
Back later
David
Sorry, only just seen yours – stuck in filter for some reason. I’ll reply later on today, but in v brief – yes you’d lik to think govt had more influence but pressure from int finance makes it more complex (in some ways see above reply to Barney).
Actually it was a bit of a throwaway fun post and i’m surprised it’s got so many legs….it’s not the best I’ve ever written, lets say/
Cheers Paul I look forward to the links. I am actually interested in both paradigm and non-paradigm responses.
a) I’m uncomfortable with that statement in its uncaveated form as above. Whilst I have no problems with the rich paying higher tax (goodness knows they can afford it) I’m not sure you can always raise tax rates high enough to bring about the necessary changes (the nature of which I will discuss in my response to your other points), without causing serious economic inefficiencies. These take both macro and micro variables. The macro argument is well worn and I won’t bother to repeat it here – apart from to mention the IFS analysis that the recent tax hike may in fact of cut revenues.
The micro argument is the usual one to do with inefficient allocations. I heard an interesting new wrinkle to this recently. It runs that the kind of consumption that higher incomes engage in to the exclusion of others (tailored suits, Ferraris etc) may be pure luxuries, but that the industries that produce them are some of the most rewarding to work in of lower income jobs. There are no mass factories, no producing one tiny part and never seeing the end result, no real mass dash to mechanise and cut jobs and a quality product of which you could be proud at the end. I’d be interested to see how this stands up to scrutiny.
b)It’s not stupid economics – its the consensus of many in the economics profession. Of course, one can doubt these people’s motivations, as seems to be in vogue (step forward Mr Krugman), but there is a reason why fiscal stimulus is doubted as a policy: there are very few, if any, clear cut examples of it working. Personally I’m unsure – my econ background simply isn’t developed enough. It is a fascinating discussion.
http://gregmankiw.blogspot.com/2009/09/how-large-is-fiscal-policy-multliplier.html
To focus directly on your point about cutting the public sector right now. I’d tend to agree, if only because the disruption and loss of confidence could tip us back, and is far from clear we are out of the woods.
c) I take issue with one major part of this section. Firstly, yes, there probably are lots of people acting in a conspiratorial way – want to keep debt low to keep the state small, so they can buy champagne. But there are also lots of intellectually honest people who genuinely think that high national debt is a bad thing for all of us. Greenspan is a classic example: yes he is a raving libertarian; but he genuinely believes that all humanity will be better off under that system. I think he’s wrong, but I don’t doubt his sincerity.
Secondly, credit worthiness isn’t the main consideration. The interest on the debt is quite a drag, various calculations put it at around 2.5% of GDP at the moment. (But see http://www.ifs.org.uk/budgets/gb2009/09chap3.pdf for an interesting long run discussion).
Of course a critical variable in the drag is the interest rate which depends on credit worthiness. Firstly there is clear evidence that high public debt can raise long term rates. Japan is but one example of what happens, and a pretty unusual one at that. Without access to stats data (my JSTOR account is no more, BofE data only goes back to 1993, and Fed data is obscured by the Volker recession and recent activity; a large n is needed, and I simply don’t have the resources) I can’t prove it I guess, but it is hardly controversial. Sure we aren’t going to get whacked and pay 20% a la Argentina. But no one credible is saying that. It is simply that our debt repayment costs will rise 2-3 ppt, maybe 4-5 ppt depending on what happens. A lot depends on whether the savings imbalance persists, whether inflation creeps up. No one really knows about these (much though they may pretend) – but the risk is certainly there.
As for CRA ratings – not that relevant. Very much doubt we’ll lose AAA in the forseeable (after all Germany has hung on to it despite much high debt). But as I said above, it isn’t complete catastrophe which is likely in the short run, but a long slow drag on the economy. To combat that long run national debt needs to come down. How that is done (what speed, what proportion tax increases or spending reductions) is unclear. The technicalities and data are extremely complex I just don’t think that most of us are in a position to say. Unless you deny the entire paradigm – unless we argue ideologically.
Barney
Here are the links, somewhat late because the site was down for a bit yesterday
On ‘out of paradigm’ stuff re: fictitious capital/financial common sense as hegemonic construction see http://www.bickerstafferecord.org.uk/?p=424 and http://www.bickerstafferecord.org.uk/?p=371
and (lots of links on there too).
On ISS/LM see http://duncanseconomicblog.wordpress.com/2009/07/07/savings-investment-is-lm-an-answer-for-tim/
For post-Keynesian stuff, see http://rommeldak.wordpress.com/
I’m sorry I’ve not time right now to come back on the other comments, Barney. Will do later, promise. Your level of engagement deserves such courtesy at TCF, but I’m not as quick at commenting on comments as Dave, sadly.
Paul, thanks for linking me to an interesting debate.
I tend to side with Barney. “Tax the rich”, like “Scrap Trident and ID cards”, is a gift that keeps giving for left-of-centre polemicists – when I was at the LSE searching in vain for a student politico willing to recognise what a great thing Tuition fees were, their answer was always that Scrapping Trident and Taxing the Rich could pay for their dreams. They would never answer the question “So, even if this revenue could be grabbed, why should it go to you overprivileged so-and-sos”.
The fiscal gap is WAY larger than “tax the rich”/etc can pay for.
http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=10336
The top decile in this country – 2.5m households – have an average gross income of £95k – or about 240bn. They already pay about 32k in taxes (and receive about 3.5k in benefits in kind). Even if you gathered an extra 10k per household from them – good luck – you would only be raising about £25bn a year.
There is about 100-150bn a year to be raised, depending on your degree of optimism about how much of cyclical bouncebank we are about to get.
Yes, wealth is more unequally distributed, and could be taxed more. But even if you managed, say, to double council tax and put it ALL on the wealthy land-owning houses, and somehow did it without distortion or evasion (good luck, again), you would get anotehr £25bn. Still a long way to go.
I agree with the general Keynesian insight that cutting spending now would be counter-productive, economically. But this situation will not last forever (I hope). Moment for self-publicity: I wrote on this subject in
http://www.centreforum.org/assets/pubs/a-balancing-act.pdf
and it has had some reasonable government attention.
I tend also to agree that the hysteria about the debt is overplayed. But to say “and therefore don’t worry about the debt” is to fail to notice the dynamics of the situation. In other words: the markets are not fussing because they think that we take it seriously. I don’t go so far as to believe with the Telegraph that it is because the Tories are coming in that we don’t have a debt spiral. But contrast with this situation.
Debt market: Hello, I’m here for my regular chat with the Chancellor
Chancellor: Hello, my name’s Paul. I won the election unexpectedly.
DM: ah, nice to meet you. Now, this year we have £35bn of coupons to repay, and you said you had £120bn of outgoings more than your incomings, and I wondered what was the plan . . .
Chancellor: Woah, hold it a mo. I refuse to accept the paradigm of national debt, on the basis that we’re talking about what Marx describes as ‘fictitous capital. Stop your capitalist potty-talk
DM (edging towards the door): I see . . .
Scene 2. Rioting in the streets, gilts at zero, the only currency left is snout.
I agree with Barney. This matters.
Freethinkingeconomist (whom i presume is Giles?)
I take your point about debt being an issue, if for no other reason than because there are debt markets, Britain does have a credit rating and these are things we do have to accept as the realities of the situation.
I guess my question is: how likely is it that Britain really would be downgraded if, say, the government said “just wait for a few years, OK? We will lower the debt in due course but right now that is not a sensible economic decision – and sensible economic decisions are surely something you favour us doing, for it makes us more worthy debtors”?
OK that’s expressed very badly. But it’s a way off from the depiction of Paul-as-Chancellor introducing the idea of fictitious capital, and the debt markets bolting to downgrade Britain’s rating, the result being social collapse and anarchy.
What I’m asking (not very clearly) is this: surely Britain, as a developed nation with an excellent and long-standing national credit rating, can get away with quite a lot before the debt markets actually down-grade our status? And given, as you say, that Keynesian demand-stimulus rather than cuts are what we need right now, surely the government should take a firm line and ignore scare-stories and Tory spin about the debt markets black-balling Britain and consigning us to a barter economy?
I agree 100% – I have not heard a better statement of the case in so many words. I do believe that is what they are doing however: spending cuts will only be starting 1-2 years into recovery, I hope.
Gotta dash