Playing the Neo-Liberals’ Game
The advice offered by some of its leading thinkers that Labour should switch the focus away from the role of central government and towards a greater devolution of power to the regions and communities has a fashionable ring to it. But it is another, perhaps unwitting, admission of the left’s damaging loss of intellectual self-confidence.
There is, of course, much to be said for bringing the exercise of power closer to the people; but the difficulty lies with its corollary – that expectations of what can be achieved by government should be reduced.
A reduced role for government is, after all, an essentially right-wing – and, in modern terms, neo-liberal – preoccupation. It was Ronald Reagan who famously claimed that government was the problem and not the solution; and since then, the political right has worked hard to scale down, and in many cases remove, any power claimed by government to intervene in the “free market” economy.
The left, by contrast, has traditionally and valuably seen government, particularly when its role is legitimised by democratic election, as a necessary bulwark to protect basic freedoms and an essential defence for the interests of ordinary people against the otherwise overwhelming power of those who would dominate the market place.
The shift in power away from democratically elected governments and in favour of large corporations, greatly aided as it has been by globalisation and the acceptance of neo-liberal economic doctrines, is after all already well advanced – which makes it all the more surprising that influential voices from the left should recommend that it should be further encouraged rather than resisted.
It is one of the main indictments of New Labour that it showed itself to be so welcoming of the notion that government’s duty was to put business interests first – and it seems that the lessons to be drawn from that experience have still not been learnt.
Not only do we live in a society where all values are increasingly subordinated to the bottom line, but we run an economy in which all the major decisions have been removed from democratic government and handed over to institutions which owe no loyalty to anything other than the profits to be made for their shareholders from – as the Bank of England acknowledged last week – an astonishing monopoly power to create huge volumes of new money. Virtually all the important economic decisions are now made, not by a government accountable to the voters, but by banks accountable only to their shareholders.
The craven attempt by politicians to hand over responsibility for economic management has a lengthening history. The Exchange Rate Mechanism, the European Monetary System and the Euro – to say nothing of setting up an “independent” Bank of England to decide monetary policy – have all been devices to allow politicians to escape being held to account. It is disappointing to find voices on the left advocating a further extension of this cowardly disclaimer.
That disappointment is further compounded by the apparent failure to understand that fragmenting, localising and under-resourcing interests opposed to those of the business big battalions is a recipe for clearing the way for yet further domination by those powerful interests. The only chance we have of countering the ever-growing power of international capital is to summon up, coordinate and combine the total potential power of government – all the resources potentially at its command and all the legitimacy that is derived from the ballot box.
For the left to turn its back on this obvious truth is a painful – and totally unnecessary – dereliction of duty and counsel of despair. Are we really ready to concede – as George Osborne asserts – that there is no alternative to the current destructiveness of austerity, and therefore no role for a government taking a different view and pursuing a different policy?
Are we really saying that voters need not and should not look to a Labour government for a society that is fairer and more caring – a better society that is necessarily based on a better-performing economy?
Do we concede that a better-performing economy is beyond the capacity of a Labour government? Are we so lacking in intellectual curiosity and ambition that we are unaware of, and unwilling to pursue, the increasingly accepted possibilities of a quite different approach to macro-economic policy? Do we really have nothing to say on these central issues, but are instead content to linger in the foothills so as to divert attention away from the need to scale the challenging peaks?
Why not do some hard work on the central issues facing this country- and in particular on a different macro-economic policy – and then have the courage and confidence to say to the electorate that changing government will make a real and beneficial difference to the lives of most people. If we don’t believe that, why should anyone else?
Bryan Gould
1 April 2014
The Bank of England Owns Up At Last
For those of us who have argued for a long time that orthodox monetary policy is fundamentally misconceived, a significant milestone was achieved this week. In an important paper published in the Bank of England Quarterly Bulletin*, three Bank of England economists have acknowledged that the overwhelmingly greatest proportion of money in the economy is created by the banks out of nothing.
This finding comes as no surprise to that growing number of economists and others who have recognised, as a consequence of simple observation, that this is the case. But it will no doubt be hotly denied, in the face of all common sense and evidence, by those (including bankers themselves) who, for reasons of self-interest or sheer ignorance, continue to adhere to the classical view that banks are simply intermediaries between lenders and borrowers.
The great British public is itself the victim of the confusion and obfuscation that has surrounded this issue for generations. Most people, if asked, will tell you that what the banks do is to lend out to borrowers the money that is deposited with them by savers. On this analysis, there is nothing particularly special about banks; they simply charge for the service they provide in bringing savers and borrowers together.
The truth, however, now conceded by the central bank, is very different. The banks enjoy a most spectacular and surprising monopoly power. They alone are able to create new money – vast quantities of it – by the stroke of a pen or, in modern terms, by pushing a key on a computer keyboard.
When a bank lends you money, it simply makes a book entry that credits you with an agreed sum; that sum represents nothing but the bank’s willingness to lend. The debt you thereby owe the bank does not represent in any sense money that was actually deposited with the bank or the capital held by the bank. Nevertheless, when it arrives in your account, and you use it to spend or invest, the overall money supply is increased by that amount.
The only attempt to regulate the volume of new money created by the banks comes through raising or lowering interest rates – a power exercised not by government but sub-contracted to – you’ve guessed it – another bank.
This means that, in practice, the only limit on bank lending is their willingness to lend to applicant borrowers at whatever the current rate of interest may be. The size of the market which provides the huge profits enjoyed by the banks is, in other words, decided by the banks themselves and their assessment of, and willingness to accept, the degree of risk involved.
There will, in the search for the ever higher profits to be made from lending more and more of the money which they themselves create, always be the temptation to lend more than is prudent in their own interests or desirable in the wider interest – and that is how the global financial crisis came about.
The astonishing feature of this monopoly power enjoyed by private companies seeking profits for their shareholders is that their decisions as to how much and for what purpose money should be created, made with virtually no external control or influence to restrain them, constitute by far the single greatest (and potentially distortional) influence on our economy.
The Bank of England paper has now laid all of this out for public inspection. The authors do not quite have the required courage of their convictions, since they attempt to downplay the significance of their conclusions by using the operations of a single bank to illustrate the process of credit creation, and thereby fail to register the immense scale, when looking at the banking system as a whole, of what they are describing. Even so, the policy implications of what they say are immense.
Our macro-economic policy at present is virtually limited to attempting to control the money supply as a means of regulating inflation. But since the volume of money is a function of bank lending and reflects nothing more than the banks’ search for profits at whatever the current interest rate may be, it follows that the whole thrust of current policy is entirely misplaced.
The banks, in deciding for themselves how much, to whom and for what purpose they will lend, will always give priority to lending for house purchase since it requires by far the least effort, and is the most secure and profitable form of lending. Can we be surprised that, as a result, those wishing to borrow for business investment are at the tail end of the queue while house prices – inflated by the volume of new money going into the housing market – go on rising inexorably?
It is bank-created credit that provides the major stimulus to asset inflation in the housing market, with all of its deleterious economic and social costs, while at the same time diverting essential investment capital away from where it is really needed – in the productive sector of the economy. If we wish to restrain inflation, why do we not target the most obvious cause, rather than burden the whole economy with deflationary interest rate hikes? And if we want a stronger real economy, why allow the banks the exclusive power to decide that the new money should go to housing rather than productive investment?
Our current monetary policy is based, in other words, on a complete misunderstanding of the role of money and its impact on economic activity. Our economy is awash with money, but it is neither the economically neutral phenomenon – interesting only because of its impact on inflation – that classical theory describes, nor does it provide the stimulus to new productive investment in the real economy that it could and should do.
Monetary policy need not be just a rather ineffectual tool for controlling inflation. It has the capacity instead to be a major stimulant and facilitator of real productive investment if we understand and use it properly. The banks’ monopoly of the power to create money prevents us from doing just that.
*Money Creation in the Modern Economy, by Michael McLeay, Amar Radla and Ryland Thomas.
Bryan Gould
22 March 2014
This article was published in the London Progressive Journal on 25 March 2014.
The Voters’ Anger
The disenchantment of British voters with democracy, we are told, is to be explained by the anger they feel at the failings of politicians. Those failings, it is supposed, are to do with the perception that politicians are “on the make”; but that conclusion – while no doubt partly justified – is surely far from the whole truth.
The Guardian/ICM poll finding that 50% of respondents chose “anger” as their principal sentiment when thinking of politicians may well conceal a deeper malaise. The scale and depth of public disaffection is, I believe, to be explained by something much more fundamental than the sadly all-too-common instances of politicians breaking the rules governing their “perks” and allowances.
What is in play instead is a growing realisation that the political class – which extends far beyond the ranks of elected MPs to include the whole of what used to be called the establishment – has failed a country that is now in a state of unmistakable national decline. Those responsible for what passes for serious debate about the state of the nation – and that includes business leaders, the media, civil servants, leading academics and experts, as well as politicians – have contributed to a process that has not only meant manifestly hard times for many of our citizens but also offers little hope of a better future.
Despite constant assurances that better times are just around the corner, the UK has over the last four or five years suffered the sharpest fall in living standards in over a century. Those who have borne the main brunt of that precipitate decline have been the weakest in our society, for whom the safety net is regressively being withdrawn. Economic decline and social disintegration are now seared deeply into the national consciousness.
None of the major contenders for government seems to offer anything but further retrenchment. The voters look in vain for an alternative to the current orthodoxy. Labour continues to suffer the burden of the New Labour legacy. The Tories commit themselves to self-harming austerity and promise to make life tougher for the already disadvantaged. The Liberals look for ways of distancing themselves from Tory failure without giving up the fruits of office. Even those voters tempted by UKIP recognise that they offer a counsel of despair rather than redemption.
Little wonder that voters feel a sense of frustration and anger. They understand that the democratic process has not protected them from national failure and decline and that – although the formal power of decision is exercised by government – the shots are really called by global business interests whose dominance over what actually happens has, if anything, increased as the failure of the policies they enjoin has become more evident.
What the voters expect from those who govern them is what they expect from any other group of supposed professionals – simple competence. What they see instead is a bunch of amateurs with little understanding of the economy they are supposed to manage and therefore totally at the mercy of political prejudice and vested interests.
The cure for voter disaffection with democracy is simple. Politicians have to convince the electorate that they are able to abandon a failed orthodoxy that continues to smother new thinking, in favour of a fresh and more positive economic policy – and then deliver on that promise.
What should be the elements of that new policy? It should focus on real issues and not on imagined problems. It should take as its starting point the need for a sustainable rate of growth which current policy is incapable of delivering.
It should recognise that decades of comparative failure have left us with a profoundly uncompetitive economy and a manufacturing industry that is on its last legs. We cannot rebuild our productive base for as long as we cannot compete in international markets.
The loss of competitiveness means that we cannot and dare not grow for fear of ballooning trade deficits and rising inflation. It means that the government’s debt – even while public spending is being cut – will continue to grow faster than the economy as a whole. And while growth languishes, unemployment continues to cost us lost output, acts as a brake on recovery, and undermines our social structure.
We need to face facts and to engineer an exchange rate that allows us to make a fresh start by immediately improving competitiveness. We need a new approach to monetary policy, treating it not primarily as a means of restraining inflation but as an essential facilitator of increased investment in productive capacity. We need an agreed industrial strategy and new investment institutions to ensure that an increased money supply goes into productive investment rather than into consumption or bank bonuses.
Above all, we need to restore full employment as the central goal of policy. An economy that offered productive work to everyone able to work, that provided ample finance for those ready to invest in new and competitive businesses, that found ready markets around the world for all it could produce, would not only restore faith in the value of government and democracy; the Labour Party should note that putting such proposals forward might get them elected as well.
Bryan Gould
29 December 2013
This article was published in the London Progressive Journal on 31 December and in Comment Is Free in The Guardian on 6 January.
Aiming at the Wrong Target
Labour will be “tougher than the Tories” when it comes to forcing long-term beneficiaries back into the labour market; so Labour’s new shadow Work and Pensions Secretary, Rachel Reeves, was reported as saying last week. The comment, which was presumably made deliberately to secure the headline, seems to be a mistake on a number of levels.
The report suggested that the comment was a response to polling that showed that voters were twice as confident of the Tories’ effectiveness in dealing with the issue as they were of Labour, and was presumably an attempt to nullify the supposed advantage that the Tories enjoyed.
But my own political experience, and particularly experience of campaigning, suggests that the initiative was based on a false premise. Most voters, unlike those who are politically active and committed, do not have coherent political positions that are consistent across all issues. They are perfectly capable of adopting attitudes that contradict each other from one issue to the next.
What determines the way they vote is not necessarily what they think on a given issue but which issues are uppermost in their minds on polling day. History shows that, with their allies in the right-wing media, the Tories are expert at tweaking the issues that give them an advantage at the crucial time.
So, immigration, supposed benefit “scroungers”, trade unions bent on strike action, all attract headlines as part of a deliberate attempt to raise the salience of issues that suggest that our deep-seated problems are caused by failing to rein in the nefarious activities of ordinary people and are in no way the responsibility of the powerful people who run our economy and take most of its benefits.
It is an important part of this well-proven strategy that Labour should be lured into contesting such issues so that public attention is focused on them. I recall that, in the run-up to the 1992 general election, the Tory press provided the “oxygen of publicity” to fears that a new Labour government would raise income taxes.
The Labour response was to launch, at the beginning of the election campaign, a plan to raise National Insurance contributions. The idea was to use John Smith’s Scottish prudence to show that this was a sensible initiative that should not be regarded as an increase in taxes.
Not surprisingly, this proved difficult to sell to the electorate. Labour’s tax plans became the dominant and continuing theme of the election campaign, with the result that John Major’s government was re-elected.
The lesson to be drawn is that election campaigning is largely about controlling the agenda. A successful opposition campaign should be about exposing the government’s failures and focusing on those elements in its own policy that are likely to strike a chord with most voters.
Time spent on trying to negate vulnerability on issues peddled by the Tories, in other words, is likely to be wasted at best and counter-productive at worst. And that is never more true than on the issue on which Rachel Reeves thought it wise to make her own demarche.
Her comment spells bad news for Labour. It focuses attention on an issue which can only benefit the Tories. No one will believe that on this issue the Labour opposition will be as ruthless as the Tories (and heaven help us if they did!) The most the voters should hear from Labour on the issue of benefit fraud is that, as in every part of public spending, dishonesty will be punished and value for money will be insisted upon.
But what it does do is to validate the Tory insistence that benefit fraud and supposed “scrounging” is an issue that deserves to be at the top of the government agenda. The more Labour proclaims its “toughness’, the more voters will believe that this is an issue that deservedly requires priority government attention – and the more likely they are to think that Labour is simply posturing and that only the Tories are to be trusted to take real action.
Worse, it diverts attention from what Labour should really be saying about the fact that so many people are victims of unemployment and are therefore forced to depend on a generally miserable level of benefits in order to keep house and home together.
The most effective means of reducing the number of beneficiaries would be, in other words, not punishing the unemployed further, but restoring something approaching full employment; and the most important obstacle to that is a damagingly under-performing economy, the direct consequence of failed government economic policies and of their insistence on austerity as a response to recession (now disowned by the IMF, no less) in particular.
Nor is it the case that this is an accidental by-product of Tory policy. It is an essential part of the Tory strategy that the burden of getting our economy moving again is to be borne by working people. According to this doctrine, it is their responsibility to price themselves back into work by accepting lower wages, and accepting fewer rights and protections at work – “zero hours” contracts are a good example.
The pressure on beneficiaries is all of a piece with this approach to our economic problems. In the absence of new jobs, forcing the unemployed back into the labour market can only mean that those with jobs will be compelled to withstand that competition by accepting lower wages if they wish to stay in work. The result? Downward pressure on wages as a whole.
Is this the strategy that Rachel Reeves intends to endorse? Wouldn’t she do better to focus on unemployment and its causes, and persuading her colleagues to develop a strategy for dealing with it?
Bryan Gould
14 October 2013