Jan Toporowski

TO PURCHASE THIS BOOK click here and use AGENDA25 to obtain a 25% discount

The post The Return of the State – authors introduce their chapters appeared first on The Progressive Economy Forum.

Robert Skidelsky

Will Hutton

The post The Return of the State – Council members explain the purpose of the book appeared first on The Progressive Economy Forum.

An obituary of John Weeks appeared in the Guardian on 24th August 2020

The link is here

Laszlo Andor , Hungarian Economist , was EU Commissioner Employment, Social Affairs and Inclusion 20

Laszlo is the Secretary General of FEPS , the Foundation for European Progressive Studies

“This Summer, progressive economists lost a great thinker, author, teacher, activist and friend. I have known Prof. John Weeks for nearly three decades, starting with a visit at SOAS, and then an invitation to Budapest. During the post-1989 transition, those who refused to buy into the newly hegemonic neoliberal dogma, found his book Capital and Exploitation highly illuminating as well as accessible. more ..“

Stephany Griffith-Jones, Council member

John Weeks was a rigorous and progressive  academic economist, committed to  good economic policy and political action; at the same time he was a  very kind, supportive and loyal colleague and friend. He is being  so very badly missed; his memory, and that of his personal and intellectual contributions, however,  keeps him alive amongst his colleagues and friends

I got to know John well in recent years, when PEF was being formed. He kindly invited me to join the PEF Council, which I have enjoyed tremendously, so am really grateful to him for that. John was so  crucial to the work of PEF, and to the links with ,as well as  our support for the Labour party, and in particular for then Shadow Chancellor John McDonnell and his team. It was really admirable to see John’s dedication, which continued till the end, even as his health was failing him.In this, he was not just admirable, but in many ways heroic. He was a wonderful colleague, always generous with his support of other people’s work.

Ann Pettifor, Council member

Ann has written a full obituary for Tribune Magazine

“Late last month, pioneering socialist economist John Weeks passed away. Ann Pettifor remembers her colleague and friend – and his contributions to left-wing politics.”: https://tribunemag.co.uk/2020/08/remembering-john-weeks

Carolina Alves, Council member

John Weeks was scholar who inspired me to know more about Marx, Keynes and inequalities. I knew his work on Marx before I met him in person in 2011. Having accepted to give an interview about his views on labour theory of value, he opened his house without knowing me that well. It was an amazing encounter, and an amazing interview. From this day onwards, John never stopped supporting me and listening to what I had to say.

During my PhD at SOAS (2013-2017), he would patiently listen to my ideas, doubts and question, but he was different than other seniors scholars. He seemed to actually listen to me. He showed interests in my ideas. He was curious about my views. He always made me feel like if I knew something he didn’t. This gave me confidence, it made me feel I was doing something right and it made me grow intellectually. I think perhaps that’s what made John so good at his work and so special, he would listen to others – and he will listen to the others with an open mind and open heart. This didn’t mean he didn’t have strong views or a very clear dear of his principles, theories (we all know that he did!) but he was never afraid to test them.

My experience as a PhD student and after as a young scholar showed that John was an exception in academia because he would carry you with him. While many others would only speak about giving space to young minds or women or people from other minorities, John would actually do something about it. He would invite me for events, for discussions, and would push me to write and be vocal. All this he would do treating me as an equal.

He made me feel valuable and sometimes in academia this is all you need to enable you to carry on. There are many other things that made John very special. He was committed to build a better world and he gave his time for that. He was a humanist with his sharp sense of humour. He was transparent and honest. The heterodox community didn’t only lose a brilliant mind, we lost a human being who made our community more bearable and caring. 

Sue Konzelmann, Council member

When you’ve known him for only three of his 79 years, it ought to be harder to write about John than it actually is. His engagement with not only economics, but also the people who define, implement – and, not infrequently, suffer – from it, is not a characteristic you develop overnight. Much the same could be said of his deceptively “low key” approach to both other people and getting things done; he was someone you simply wanted to work with and help out. Unsurprisingly, that’s how we first met John in 2017 – helping him to bring another book to fruition.

This softly spoken gentleman was, though, without doubt also someone driven to continually try to improve things, a task he set about with an energy that never really wound down. Much will be written about his professional career, which will in all likelihood continue to be influential well into the future. But that’s only part of the reason for the many words of appreciation being written and spoken about John. He was also a thoroughly decent man with real sympathy for his fellow man, as well as a keen wit, making light of his declining health with the observation that “getting old is not for sissies …” 

John also took great delight in his cats, and saw no reason not to adopt another in the last year of his life. In an email exchange after his previous cat died, he wrote: “I asked my 5 year old grandson what he thought that meant. ‘He won’t come back’, my grandson said – which is not bad for a 5 year old, but not true. The cat and my sister come back to me every day in my memories”.

A lot of people are going to remember John like that, too.

Richard Murphy

I first met John when I was appointed as a Professor of Practice. John showed that he understood what others I was working with did not, which was that when appointed to such a post you might really know your subject, but that did not mean that you were familiar with the ways of academia. Because he had that insight he appreciated what others did not, which was that translating ideas into journal paper format is a skill most academics learn when doing a PhD, which stage I had missed. He helped me greatly with that process of adjustment. 

We didn’t always agree. We were on occasion robust with each other. And I like and admired John for precisely that reason. Our commitment to progressive economics permitted differences in pursuit of a greater cause. As a result I did, like I suspect many others who learned from John over his many years in academia, come to greatly appreciate his wisdom, guidance and friendship.

A life well lived is, I think, one that has positive impact on the lives of others. I only knew John in the last years of his life, but he added enormously to my knowledge and understanding during that period, and I am immensely grateful for having had the chance to know him. I suspect there will be a great many who feel the  same way. 

Guy Standing, Council member

When one loses a long-time friend, fellow traveller and kindred spirit, one realises one has lost of bit of oneself. There will be no replacement. This is the case with John Weeks. I will always recall the moment many years ago when he said to me quietly, ‘Please call me Johnny’. He was nearly always a rather serious man. However, what he meant was that he only wanted family and close friends to call him Johnny, rather than the formal John. I felt honoured.

Here is not the place to try to duplicate the excellent obituary written for The Guardian. I merely want to testify to our friendship and recall the two years we worked together in preparing a report for President Nelson Mandela’s Labour Market Commission in 1994-6. I was Director of Research for the Commission, which was a tricky assignment, mainly because of my opposition to the economic strategy being finalised by the Minister of Finance, Trevor Manuel, under the guidance of the IMF. I asked Johnny to work with me on our report and the book that came from all our research, which had contributions from about 50 economists in the country. We also asked John Sender to join our three-man team.

What I will always be grateful for is that Johnny was the one who resolutely supported me and who made major contributions to the book, particularly on macro-economic policy and above all in our economic analysis criticising the emerging IMF approach, known as GEAR.

Johnny and I concluded that if GEAR was pursued, there would be years of sluggish growth, persistence of very high unemployment and worsening inequalities, both within the white population and within the black population. At the time, South Africa had the highest unemployment in the world and probably the most unequal income distribution. Despite our efforts, the ANC government followed GEAR. Today, the country has the highest unemployment rate in the world and the worst income inequality, with a gini coefficient of 0.63. There is not much pleasure in being proved right in such circumstances, but several years ago the Minister of Labour told me that he still regarded our book as his ‘bible’. 

Johnny and I often recalled our work together, and just weeks before he died, when he was asking me to explain exactly why I was highly critical of the job furlough scheme in the UK, he reminded me that I had written a similar critique of wage subsidies in our book. I had forgotten; he had not.

Johnny was the sort of colleague and friend we all need. He could be critical at times, and often was. But you always knew that the friendship and kindred spirit would remain.

The post John Weeks – Obituaries and Tributes appeared first on The Progressive Economy Forum.

This time round, we’ve been offered a recovery plan which Boris Johnson is keen to compare with Franklin Roosevelt’s “New Deal”. That plan lifted America out of the Great Depression, expanded the economy and created employment. According to the Guardian’s estimate, though, Johnson’s plan to invest £5bn amounts to just 0.2% of UK GDP, whilst FDR’s contribution was a rather more convincing sounding 40% of US National Income in 1929.[1]

Johnson and Roosevelt were, however, as one when it came to the role of alcohol in an economy under pressure; Boris concluded that off licences were an “essential service” whilst FDR ended prohibition … Not too much to shout about then.

But the problem with Boris’ proposal is about more than scale. By focusing almost exclusively on the usual sectors – property, construction and finance – it’s also likely to make an already unbalanced economy even more lopsided. Where’s the plan for boosting manufacturing industry and creating more, better paid jobs? And how come we remain one of the few developed countries without a business bank?

The answer to those questions owes rather more to Margaret Thatcher, than it does to Roosevelt. Indeed, had Thatcher not shut down most of industry in the north of England – crucially, without any sort of plan to develop new sectors to replace it – we might not need to “level up”. It was there that the process of undermining the balance of the UK economy began.

During the 1980s, Thatcher’s programme of privatisation and deregulation (including financial services) accelerated the process. One of the less obvious ways by which this was done, was by simultaneously putting large numbers of council houses onto the market – and making large amounts of credit available to pay for them. The result was to not only rapidly expand the financial services sector, but also to make home ownership increasingly unaffordable. By going down this route again, Johnson is offering the same “old” deal, not a “new” one – and running a significant risk of simply amplifying the existing problems.

However, with the UK’s exit from the EU looking unlikely to be delayed, and the pandemic doing little to move trade negotiations along elsewhere, Johnson’s government is going to have to find some immediate growth and a bit of the “feel good” factor from somewhere. So all the emphasis on short term, easy to do projects does make a degree of political and economic sense. But not if the longer term is ignored entirely – and especially if Johnson is also hoping to emulate Roosevelt’s four terms in office.

By opting for a stimulus package at all, the current government has, like its 2008 predecessor, opted to become an economic actor. So why not do it properly this time? The need to support the NHS during the Covid-19 pandemic revealed not only that its privatised supply chain was, to quote  a senior army officer, “knackered”[2] but also  that universities, medical companies and manufacturers could work together to supply much needed medical supplies – at the government’s behest.[3]

Ignoring that success, and simply carrying on with the failed, privatised supply chain on the basis of 1980s-era dogma, would suggest a comparison less with America’s longest serving president and more like a tribute act of an entirely different nature. As Rod Stewart once put it “Oh Maggie, I couldn’t have tried any more …”

[1] https://www.theguardian.com/business/2020/jun/30/how-does-boris-johnsons-new-deal-compare-with-franklin-d-roosevelts

[2] https://londonlovesbusiness.com/military-slams-nhs-over-appalling-handling-of-ppe/

[3] https://theconversation.com/coronavirus-inside-story-of-how-mercedes-f1-and-academics-fast-tracked-life-saving-breathing-aid-136028

Photo credit: Flikr/NPGpics

The post Johnson’s Economic Recovery Plan – Not much of a “New Deal” appeared first on The Progressive Economy Forum.

The UK government, however, has conspicuously failed to learn from this idea, especially when the economy is, well, at sea. We’ve now had four decades of “every man for himself”; and when the financial services sector hit the rocks in 2008, it was more a case of “money and banks first”, with women and children – and indeed most men – coming a very poor second.

Come the new year, we will have yet another new government, which will be faced – amongst other things – with the consequences of a decade’s worth of cuts to services that, one way or another, the majority of us rely on. This is despite the fact that the accepted view in macroeconomics always was that public spending cuts during a recession would lead to falling government income, making it impossible to reduce its debt.

Whilst there’s been much talk from most of the parties of a second industrial revolution based on green tech, there’s been remarkably little detail on what it is, how it would be made a reality, when we might see some results, or even exactly what “green” means. There’s even less detail on how to address the ballooning number of people reliant on food banks and other support services – much of it provided by charities instead of the state.

Whilst reliance on food banks is the result of misguided spending cuts, rather than climate change and global warming, there’s still a very large elephant in the room: What do the various Party manifestos on offer suggest we should do about the effects of all that austerity?

The Conservatives, who, along with the Liberal Democrats, gave us austerity in the first place, seem to have taken a “job done” approach. Although the NHS and police appear to be in line for additional resources, there’s no sign of any reversal of cuts to social support or indeed significant modifications to Universal Credit – both of which make life much harder for many, and busier for food banks. In other words, there probably won’t be additional austerity – but we’ll still be stuck with the results of more than a decade of cuts. Not very helpful.

Meanwhile, the Liberal Democrats appear to have been partying with Cameron and Osborne’s Kool Aid – promising us a budget surplus as a matter of course. Aside from the implications of this for yet more austerity, there is also the question of how they would in short order – as they promise – turn the UK into an exporting powerhouse, like Germany or the Netherlands, to achieve the necessary income. Like the Conservatives, they envision a “green” revolution, but appear equally short on ideas to make it happen. Two thirds of EU member countries currently run a deficit, and ours is one of the largest; but it could be worse if the UK eventually joins the Eurozone. The euro is managed by strict limits on both public deficits and national debt; and from what we’ve seen imposed on Greece, that can result in austerity that would make the UK’s experience look like a walk in the park. So, not much joy on the austerity front from the Lib Dems then, either.

Labour do seem to have at least realised that the damage caused by austerity needs to be reversed, rather than simply slowed or, in some cases, ignored or denied. They, too, see a second industrial revolution based on environmental technologies as the best hope for the UK economy; and their manifesto includes a National Investment Bank, with the resources to help make that happen. Universal Credit would also be scrapped and replaced by a different benefit structure; whilst it’s hard to see how a replacement could actually be worse than Universal Credit, we have still to see what that structure would look like. There is also the promise of an immediate £1.79 per hour increase in the minimum wage, although how much this would help those in parts of London, such as the people served by the Euston Food Bank, is somewhat of a moot point; a 2 bedroom flat in Euston costs at least £2,000 a month to rent, against a national average income of around £30,000 per year – which is why many living there are forced to prioritise rent over food, to avoid becoming homeless.

Whilst Labour offers some hope for those of us who have been variously referred to as the “squeezed middle”, the “pinched bottom” or even the “just about making its”, the main debate in the media and elsewhere is still all about the money – not about what actually needs to be done. People are still coming a very poor second, to money and banks. So instead of demanding “where’s the money coming from?” the question we should really be asking, is “where’s our society and economy going?”

The post Whatever the outcome of this election, we need to start thinking about where our society and economy are going appeared first on The Progressive Economy Forum.

After almost a decade of austerity, during which growth has sputtered, poverty has risen and reliance on food banks has ballooned, the fiscal deficit is now almost gone. Something to celebrate? Well, it might have been, had public debt not continued to increase significantly. This is because the only way to reduce public debt is to run a significant and sustained fiscal surplus. And there is still no sign of that.

But Cameron has form when it comes to confusing a fiscal deficit with national debt. Back in 2013, Andrew Dilnot, then head of the UK Statistics Authority, found it necessary to publicly rebuke him for claiming that his government was “paying down Britain’s debts”. At the time of course, national debt was still rising strongly.

Nonetheless, Cameron now claims that things might have gone better, had he implemented his austerity plan “faster and harder”, during the “window of permission” following the 2010 election. Is he right?

In my new book, Austerity, the case study of the UK following the 2008 financial crisis strongly suggests otherwise. The period following that crisis is now often referred to as the “Great Recession” – the definition of recession being two or more successive quarters of zero or negative GDP growth. We all know that recessions usually result in higher unemployment-related social costs, as well as reduced government tax receipts. This double whammy means that an increased fiscal deficit – and therefore public debt – is pretty much inevitable during a recession. Especially if you’ve also just spent billions bailing out the banks.

Cameron’s programme of austerity was therefore misguided in the first place. Since it only targeted government spending, it simply reduced the size of the economy further. The idea that a contraction in public spending could be more than replaced by private investment and enterprise – so-called “expansionary fiscal contraction” – is at best highly controversial. In our new book, Rethinking Britain: Policy Ideas for the Many, we describe is as “the economic equivalent of Big Foot; some economists claim to have seen it, but none have been able to prove that it actually exists”. A forlorn hope then.

Cameron’s austerity was implemented when the economy was slowly beginning to grow; but the recovery was not yet strong enough to withstand its dampening effects. Policy should instead have focused on encouraging growth, which would, in turn, have reduced social costs and increased tax revenues – both of which help to reduce the fiscal deficit and – if a sustained surplus is created – public debt as well. But with a fragile economy, like the UK’s in 2010, austerity inhibited growth, with predictable results; and growth has never been stellar since. But even so, make no mistake: It isn’t austerity that reduced the deficit; it’s what little growth we’ve had. Imagine where we could have been by now had policy priorities in 2010 focused on encouraging growth, rather than killing it off.

And what are the likely effects of “harder and faster” austerity? Deeper and more abrupt cuts in government spending would have shrunk the economy more drastically and immediately – producing a deeper recession in the process. This, in turn, would have increased social costs and reduced tax receipts “harder and faster” as well. The knock-on effect would have been a sharp rise in both the government’s deficit and debt. And it is very hard to see where the growth to lift the economy out of such a deep recession would have come from, without some kind of stimulus. In other words, in economic terms, the result of “harder and faster” austerity would probably have been even more unhelpful than what actually happened.

In social terms, the probable effect of deeper and more immediate cuts is harder to assess. Cameron’s austerity programme has – in spite of claims to the contrary – resulted in growing poverty and inequality, increased homelessness, worsening crime and reduced public services. And this has contributed to a sharp increase in the number of people who have had enough of austerity. Since many of these people were looking for some means of getting back at Cameron’s government, offering them the vote on EU membership in the middle of his austerity programme, was clearly a high-risk strategy as well. All of this has resulted in a radically changed political configuration in Britain.

It’s hard to see what’s so great about eliminating the fiscal deficit, if in the process public debt has vastly increased and social outcomes for most have sharply deteriorated. Not only has austerity not worked, it’s done immense damage to Britain. We’ve had nearly ten years of austerity, and over three years of Brexit wrangling, with apparently no end in sight for either. Surely, developing policies to fix the all too obvious problems in our economy and society, would be far more productive that crowing about a reduced deficit?

The only crumb of comfort in all this is that given Cameron’s recent comments about wishing he’d imposed austerity “harder and faster” in 2010, things might have turned out much worse.

Photo credit: Flickr/Medill DC.

The post What if Cameron’s austerity had been “harder and faster”? appeared first on The Progressive Economy Forum.

Since austerity and public debt are inextricably linked, our analysis begins with the origins of public debt and central banking, back in the 17^th century, when attitudes about debt were as polarised as they are now. We then examine shifts in both the uses to which government debt has been put, and responses to the questions of how, when, and under what circumstances – or even if – a government’s budget should be balanced.  

During this long historical period, we consider the shifting economic dynamics of capitalism, as it evolved from a largely agrarian, to an increasingly industrial, to a financialized post-industrial economic system. These have changed beyond all recognition since the time of Adam Smith and his contemporaries, who were among the first to theorise austerity. When they were writing, public debt was mainly used to fund temporary military activities. The emergence of the welfare state during the early 20^th century changed all this, as governments assumed an increasing (and increasingly financial) role in the economy, with a permanent budget commitment to providing some level of social security.

Austerity unpacks these inter-related developments and questions, as well as the arguments for and against fiscal tightening – which, unlike attitudes towards debt, economic dynamics and social structures – have actually changed very little over time. We then move away from ideas and history to study the actual, measurable effects of austerity.

Almost uniquely, my book includes a chapter on National Accounting, which looks at the effects of austerity (and stimulus) on both GDP and the governmental and private sector’s budget balance. As a result, it becomes much easier to understand not only what the results of austerity are likely to be, but also the influence of other factors on the outcomes of fiscal policy, such as the rate of economic growth and the fiscal multiplier, something that is very hard to calculate without the benefit of hindsight.  

To dig deeper into the question of the likely effects of austerity, I’ve constructed a set of comparative case studies, of countries that, since the First World War, have either embraced austerity to confront the economic and political challenges they faced, or had it forced upon them as a condition for financial assistance. We also examine cases where governments chose an alternative path to austerity. Our aim is to assess the outcomes realized in the light of the objectives, stated or otherwise. We also consider questions, like “how much debt is too much”?  Although politicians have tried to put numbers to this – especially since the 2008 financial crisis – the cases reveal that the political economics are far more nuanced; and whilst some countries, like Greece, encountered difficulties with debt in excess of 100% of GDP, others, like Japan, sailed serenely on with well over twice that amount.

From this, it becomes clear that it is not necessarily a question of whether austerity is “good” or “bad”, but rather, in what circumstances fiscal tightening might be deemed appropriate (and effective), and when it is more likely to be counterproductive. There are not many hard and fast rules in economics; and austerity is no exception. Thus, my answer to the question of whether or not reductions in government spending (and/or increases in taxes) can ever be a useful policy is: “It depends”.  There is little doubt that austerity is far more likely to coincide with the objectives of public deficit and debt reduction during a boom or established recovery, when GDP growth is strong enough to support it and when protections are in place to support the most vulnerable in society; and it will be counterproductive during a recession or a recovery that is not strong enough to withstand it.

But perhaps the most significant lesson to take away from our examination of austerity – in theory, policy and action – is the same as for any other economic policy: Before committing to an idea – and the policies informed by it – take a long, hard look at economic history; and check how well the theory fits the reality.

Flickr/Elbereth Elflein.

The post Austerity – Demystifying a (still) poorly understood concept appeared first on The Progressive Economy Forum.

Rethinking Britain is not only for the many – it’s also written by the many. As a result, it doesn’t set out the vision of one or two people, but instead offers the assessment of a wide range of experts, who are working in or studying the areas we cover. We not only set out the problems and suggest policy solutions to address them. Our aim is to help improve life for people living in today’s Britain. Between each set of policy ideas, you’ll also find interludes.  These draw upon real-life stories of people in Britain who are experiencing unresolved difficulties that should be considered unacceptable in any developed economy or civilised society – and we suggest how these problems could be solved, too.

Although some depressing situations are described, our overall approach is extremely positive. Instead of denying that there are problems – or ignoring them, as many politicians have done – we take a much more “can do” approach to building the society that most of us would want to live in. That leads to another significant point: Whilst Attlee’s 1945 government put people and society at the centre of its policy ideas, less than forty years later, Thatcher’s administration reversed this, focusing on the individual, privatization and the wealthy. This raises the question: “In whose interests should the economy be run”?

The shift to individualism, private profit maximization and an obsession with “free” markets resulted in serious wealth for the few – and runaway inequality and poverty for the many. It’s therefore not hard to guess where those contributing to Rethinking Britain are coming from!  We strongly believe that a society that produces healthy, well educated, strongly motivated people – who have, or can realistically hope for, a good standard of living – will also help to generate a powerful and dynamic economy.

The post-1979 dogma – that the British government should play as small a part in the economy as possible – is also misguided. Far too much capital is being used for short-term, speculative purposes, whilst not enough is finding its way into the development of sustainable businesses that provide long term employment and pay decent wages – not the hand to mouth existence of a zero hours contract. In other words, the economy should work for the many, not just the few.

Another theme that runs through Rethinking Britain is the concept of citizenship – where sets of rights and obligations mean that you are indeed part of something bigger than yourself. This is the polar opposite of Thatcher’s point of view, that there is “no such thing as society”. Many of her policy ideas were developed in the context of the Cold War – which came to an end thirty years ago; and it’s time for her policy ideas to do the same.

By investing in Britain’s people, we can build a stronger, more cohesive society – which will underpin a more vibrant economy. Rethinking Britain shows how.

Photo credit: Flickr/Christian Reimer.

The post Rethinking Britain – How to build a better future appeared first on The Progressive Economy Forum.

Oxfam argue that over the past thirty years, wealth and income inequality have both risen to “levels never before seen … [and] are getting worse”. They conclude that extreme wealth and income inequality are “economically inefficient”, “politically corrosive” and “socially divisive”. This is because since the wealthy spend a smaller proportion of their income than the less well-off, excessive inequality depresses demand – with adverse effects on growth. Extreme wealth and inequality can undermine political processes if the wealthy use their position to secure excessive influence. Inequality can also be socially divisive, because the better-off have private access to services that the majority depend upon the state to provide – and they often lobby for withdrawal of support for those public services. However, the report ends on a more positive note, concluding that wealth and income inequality are “not inevitable”.

In recent years, even organisations like the IMF and the World Economic Forum have recognised the dangers of inequality.  In particular, they have both drawn attention to both the high and rising inequality caused by austerity, and its damaging effects on both social cohesion and economic growth.

A 2011 IMF research paper identifies income equality as by far the most significant factor supporting sustainable economic growth. While the benefits of lower inequality are shared by most income groups, extreme inequality has historically given rise to crises, with the current rise being “strikingly similar” to that of the turbulent inter-war years. According to the IMF report, “in both cases, there was a boom in the financial sector, poor people borrowed a lot, and a huge financial crisis ensued”. The study concludes that “the recent global economic crisis … may have resulted, in part at least, from the increase in inequality”.

Recent surveys from 2012 and 2017 of leaders in business, government, academia and NGOs by the World Economic Forum (WEF) also point to the potential for extreme inequality to trigger a crisis. Assessing the likelihood of fifty global risks during the coming decade – and their probable impact – extreme income disparity topped the list in both. On the basis of these views, the WEF warns of a “potentially potent combination of chronic labor market imbalances, fiscal imbalances and severe income disparity”. It goes on to argue that “[w]hen amplified by extreme demographic pressures, these conditions could lead to a retrenchment from globalization and the emergence of a new type of critical fragile states – formerly wealthy countries that descend into a spiral of decay as they become increasingly unable to meet their social and fiscal obligations”.

There is good reason for these concerns. Social welfare was originally introduced in many countries due to inequality and the appalling conditions in which many were forced to live and work. It was also significantly motivated by concerns about how the increasingly numerous urban poor might react – especially when they had very little left to lose and had started to organize themselves. The Russian revolutions of 1905 and 1917 had a powerful influence on policy between the two World Wars, with many governments keeping at least one eye on the possibility of a Communist revolution – and continuing to do so throughout the Cold War.

However, the collapse of the USSR did not end the need for social security. The recent cuts to public services, affecting large numbers of people, have inevitably had a disproportionate impact on those who rely upon them the most. During the latter part of the Industrial Revolution and the first part of the 20^th century, it was precisely these sorts of conditions that fueled organized industrial and social movements, demands for political representation, and the birth of both new ideas about the economy and society and new political parties. Whilst austerity wasn’t the only factor driving these processes, it was certainly a contributor.

It seems that this dynamic is a permanent part of the “austerity equation”. It is clearly apparent in the movement of the Labour Party sharply back to the left, motivated chiefly by those experiencing the brunt of the Coalition and Conservative governments’ austerity measures. It is also evident in the rise of so-called “populist” social and political movements across Europe and the United States – a worrying number of which are far-right in nature.

The message therefore seems clear: No one benefits from austerity – and everyone pays. By contrast, social security and high-quality public services benefit everyone, as they help to maintain social, industrial, political and economic stability. Without such stability, some very challenging economic, social and political conditions can emerge – and surprisingly quickly.

Photo credit: Flickr / ilirjan rrumbullaku.

The post Who benefits from austerity – and who pays? appeared first on The Progressive Economy Forum.

This is in sharp contrast to the decades before, when fiscal tightening was used at the top of the economic cycle to cool an over-heating economy and curb inflation – and curiously, asset bubbles and financial crises were very rare.

The timing of fiscal tightening, though, also has a strong political dimension: whilst it is clear from experience that such policy will deepen and lengthen a recession – but can have beneficial effects on an economy in expansion – this will always be a tricky idea to sell.

The reason for this is made all too clear in a 2007 Financial Times interview – at the height of the boom before the 2008 financial crisis – when the then CEO of Citigroup, Chuck Prince, said: “When the music stops… things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Similarly, in a speech at Mansion House, in June 2007, the then UK Chancellor Gordon Brown famously told the audience that the City of London was entering “an era that history will record as the beginning of a new golden age”.

This, however, is only half of the problem. Whilst attitudes like these make it difficult to find support for tight fiscal policy during the boom, a recession will immediately make government accounts look much worse. And this generates pressure to “do something about it” – often resulting in poorly-timed, and hence, counter-productive, austerity.

The persistence of austerity as an idea and a policy therefore owes far more to human emotions – or, as Keynes branded them, “animal spirits” – than it does to sound economics. It offers an apparently obvious solution to the problem of high levels of public debt, and is an easy idea to sell: if you have too much debt, stop spending so much.

Austerity also resonates with ethical and moral attitudes about debt – often being considered the “pain” required after the excesses of “immoral” over-consumption, spending and accumulation of debt have been revealed.

This rather simplistic view of austerity, however, fails to consider the radically altered dynamics of public finances since the late 19^th and early 20^th centuries, when governments assumed increasing responsibility for social security; and income tax became an important source of public revenue. Prior to this, governments mostly accumulated debts as a result of wars. Thus, likening a state budget to that of a private household or business made far more sense then than it does today.

Now that social welfare forms an important part of the state’s budget (the costs of which tend to increase during recessions) and the government relies on income taxes for its revenues (which tend to fall when the economy is in a slump), the analogy no longer makes economic sense.

It is important that any fiscal tightening is effected in a progressive way, such that “those with the broadest shoulders” bear the greatest burden. Similarly, the power of the financial sector must be curtailed to dampen the amplitude of our economic cycles.

But at some point tightening will be necessary, and a more constructive way of thinking about the timing of it is that “prevention is better than cure”. When an economy is over-heating and an asset bubble is inflating, it is better to tighten policy then, rather than waiting until the bubble bursts and trying to deal with the much more spectacular, disturbing, and costly consequences.

Photo credit: Flickr / Michael Gwyther-Jones.

The post Fiscal tightening – prevention is better than cure appeared first on The Progressive Economy Forum.