US President Biden has called for ‘regime change’ in Russia, a statement that should recall previous US-led regime change crusades – in Chile (1973), Iraq and Afghanistan, among many. To put it mildly, they have not been unmitigated successes. But the regime change initiative that deserves our scrutiny today was the United States’ most ambitious and most relevant to the latest demand for change, which one would dearly like to see. This is because it embraced Russia and Ukraine thirty years ago.

Let me preface this article by saying that, fortuitously, I witnessed what the USA, the UK and others did on the ground. In 1990, on behalf of the International Labour Organisation (ILO), I organised an international conference on labour policy in Moscow, which emerged as a report just as the Soviet Union was dissolving. I was then appointed director of a programme set up by the ILO to advise governments in the region on social and labour policies in what was euphemistically called the ‘transition’ from ‘communist’ to a ‘market’ economy. 

Based in Budapest, for about four years I interacted with senior government ministers and officials of Russia, Ukraine and neighbouring countries while also having numerous meetings with economists and officials from the USA, other countries and international bodies such as the World Bank, the latter all committed to their version of regime change. It was a bizarre experience. I even met the Queen, the Duke of Edinburgh and the Queen of The Netherlands as they played walk-on parts in helping to legitimise the expensive regime change plans.

From the outset, I strongly opposed what was happening, and gave numerous speeches and published articles and several books to that effect. Today, I believe that the Russian invasion of Ukraine in 2022 is partly attributable to the neo-liberal strategy led by the USA in that period. The precise details of what has been happening were not predicted or predictable, but it was clear at the time that the fault lines leading to today’s quagmire lay in that strategy. One way of putting it is that it failed to lay the ghost of Stalinism, and created fertile ground for its resurgence. 

Shock doctrine

So, what was the foreign-directed strategy? Although different proponents had variants, it enshrined a doctrine fostered by economists at Harvard, LSE and elsewhere known as ‘shock therapy’, designed with one objective, turning Russia and Ukraine into capitalist economies. This was based on three premises. First, it was reasoned that pro-market reforms had to be introduced quickly, so that there was no time for ‘socialist’ forces to regroup and block reform. 

Second, a more technical premise was that priority had to be given to macro-economic policy, backed by aid conditionality to force the Russian (and Ukrainian) government to adhere to it, over and before micro-economic (structural) policy. This was based on the orthodox economic view that macro-stabilisation was a necessary prior for structural reform. This was the dominant reasoning of the International Monetary Fund. The third premise was that there had to be a particular sequencing of the macro-economic reforms. The combination of these three premises was literally the fatal, hubristic mistake.

Before describing what the shock therapy advisers prescribed in their frenzy of activities in Moscow, Kiev, St.Petersburg and elsewhere, I should mention that as soon as I was appointed to my ILO post we mobilised funds to conduct a series of detailed surveys of hundreds of industrial enterprises in Russia (1991-94) and in Ukraine (1992-96), and extensive household surveys covering many thousands of households in both countries. In effect, the data mapped the context and outcomes of the shock therapy doctrine. This seemed an essential task, but the shock therapy advisers charged ahead without worrying about evidence.   

Folly and hubris

It was an exercise of hubristic folly. The first set of reforms in the sequencing were price liberalisation, coupled with removal of price subsidies (except on energy). Bear in mind that production had collapsed, that strict price controls had existed for generations and that the production structure consisted of huge industrial enterprises with monopolistic characteristics, dominating whole sectors and regions. 

The effect of price liberalisation was thus an extraordinary burst of hyper-inflation. While we were working in Ukraine, in one year inflation was estimated at over 10,000%, and in Russia it was estimated at over 2,300%.^[1] The impoverishment was lethal. Millions died prematurely; male life expectancy in Russia fell from 65 to 58 years, female from 74 to 68; the national suicide rate jumped to over three times the high level of the USA. 

In a collective state of denial, the western economic ‘advisers’ were almost Stalinist in their zeal. Their second policy was to slash public spending, with the double objective of squeezing inflationary pressure by curbing monetary demand and weakening the state. This had the immediate consequence of intensifying the rising mortality and morbidity. But it did something else that is affecting the whole world today. Wages and salaries in the public sector fell so low that the state ceased to function. This created a vacuum in which the kleptocrats thrived. I recall government ministers asking for $50 bribes just so they could feed their family. They were easy prey to ruthless gangsters, who in turn were bedfellows with ex-KGB officers, led by the new First Deputy Mayor of St.Petersburg, a certain Vladimir Putin.

One cannot overemphasise the folly of the anti-state ideology, when what was needed desperately was the nucleus of a professional civil service, backed by a proper legal system. But all the RCAs wanted was full-blown capitalism, which they saw as leading to a ‘Russian Boom’, in which ‘democracy and free markets have taken root for good’.

Mass privatisation

The third plank of the shock therapy sequencing was mass privatisation. It began as a bit of a joke, with privatisation ‘shares’ being handed out like confetti. I still have one somewhere, given to me by the Mayor of St.Petersburg. But it soon became a wild-west plunder. The World Bank, USAID, the new European Bank for Reconstruction and Development (EBRD) in London and other foreign bodies allocated vast amounts to assist in speeding up the transfer to the new ‘entrepreneurs’. Over 15,000 state firms were sold off; kleptocrats became oligarchs overnight; their American and other foreign ‘advisers’ became multi-millionaires. This is when the criminality stretched across the Atlantic.

One still has to be circumspect in how one puts this. However, it was widely known that prominent economists in the ‘regime change’ community were linked to the rising oligarchy and making millions of dollars. Eventually, one case was brought to the Massachusetts High Court, where several professors pleaded guilty to insider trading. They paid modest fines, with Harvard paying much more, but the main one was allowed to continue his stellar career. Rest assured, he and others did very well.

Meanwhile, there was the awkward onset of the fourth phase of the sequencing, characterised as the ‘therapy’ after the ‘shock’. This was touted as building a new social policy system, based on standard neo-liberal lines, that is, a residual welfare state with as much privatisation as possible, beginning with pension systems and education. As some of us had argued from the outset, the erection of a universalistic social protection system should have been done before any ‘shock’ policies. Callously, implementing social policies was left to afterwards, and then only done patchily, with interminable delays.  

Carnage

The carnage was palpable. In this period, two personal events occurred that epitomised the madness of what was happening. In 1992, I was invited as a ‘labour market expert’ to give a lecture to Ministers of Finance and Ministers of Education from eastern European countries, organised by the World Bank in a Dutch castle, symbolically with its own moat. There I listened while the Ministers were told what policies they should be introducing if they wanted foreign loans or grants. 

The other event was even more bizarre. In 1993, I was chairing a small conference in France on minimum wages and basic income policies for eastern Europe when I received a phone call from a US Ambassador inviting me to Washington to give a briefing in the State Department. After doing background checks, I accepted and so found myself taken to the basement of the State Department. Sitting at a long table with a ‘minder’, I was surprised to find 12 men come in to sit on the other side. Chaired by an Under-Secretary of State, they identified themselves individually, and most said CIA.  

I told them that their policies were disastrous, that huge numbers of Russians and Ukrainians were dying as a result of shock therapy and that contrary to what they were reporting, real unemployment was about 25%, concealed by the fact that enterprises were retaining the work history books of workers to claim subsidies. I argued that the people with whom they were working at the political level were deeply corrupted, and that they should focus on providing direct aid to ordinary people if a lurch to neo-fascism was to be avoided.

I argued that restructuring of enterprises and the substitution of rules of regulation and law should take precedence over macro-economic reforms and privatisation. I poured as much scorn as I could on claims being made by the World Bank and prominent RCA economists that there was no unemployment, and argued that it was crazy for the Bank to withhold a large loan to aid the unemployed on the presumption that as one Bank report claimed, the unemployment rate was only 1%, backed by the statement, ‘Contrary to initial expectations, unemployment remains not only low but declining.’^[2]  

This was ridiculous. It was clear that the neo-liberal strategy was simply creating a kleptocratic capitalism, a virulent form of rentier capitalism that was taking shape globally. A new class structure emerged, with a plutocracy of oligarchs, a tiny salariat (including educated people trying to build a decent society), a lumpenised proletariat (ageing, atavistic) and a rapidly growing precariat. The oligarchs in Ukraine were split, with Russian-speaking heavies allied to their Russian counterparts in mafia-style conflict with Ukrainian-speaking oligarchs. There were also a few Bulgarians, Romanians and others in their orbit, and they all soon found they could mingle comfortably with the financial and other plutocrats in London, Wall Street and elsewhere. 

Venal kleptocracy

After the State Department meeting, I returned to Hungary. Several months later, I was invited back to Washington to brief the Department of Labor. Afterwards, they gave me a cocktail, and at the back I saw two of the CIA officers who had been in the State Department briefing. I asked them what had happened after the first briefing. One said to me, conspiratorially, ‘Quite frankly, it went right to the top….and he doesn’t believe you.’ He meant President Clinton. 

Several months after that, the Russian elections took place, and the new party of the neo-Stalinist ultra-nationalist Vladimir Zhirinovsky, who advocated invasion of Ukraine, gained 23% of the vote, with the US-backed neo-liberal party reduced to a rump. I sent a one-liner telegram to one of the CIA officers, ‘Does the State Department believe me now?’ I was told later that this caused some wry amusement.^[3]

In sum, the regime change strategy had generated a venal kleptocracy, and in line with that today we have globally a morally indefensible form of rentier capitalism where plutocrats are funding major political parties and politicians in their interest. It is the most unfree market economy ever conceived and it is not sufficient to see the UK as Butler to the World, however apt that description might be. The state is deeply corrupted, and we will not escape the quagmire until a new progressive, transformative politics emerges, one that could mobilise the precariat in all parts of the world. 

The evil being perpetrated by Russia will not be defeated by military means alone. Of course, we should all admire and support the incredibly courageous Ukrainians. But it is a transformation of our own societies that must be achieved. In response to the rush towards an ecological dystopia and a grotesquely unequal and insecure existence for so many, progressives in politics must have a coherent, well-articulated strategy for dismantling rentier capitalism.

Today, neo-liberalism is not the primary enemy. Today is the time for a new radicalism based on principled opposition to the global plutocracy and to the system of rentier capitalism that is based on rapacious plunder. We need a new Renaissance, to revive conviviality, commoning, republican freedom and equality. So far, in Britain and elsewhere, that transformative vision is being held back by excessive pragmatism by old-left parties. However, just as Nature abhors a vacuum, so does the human condition. We need a progressive revolt, one that crosses national boundaries and that is ecologically redistributive. One can see the green shoots, but must just hope there is time for them to grow. 

Guy Standing is Professorial Research Associate, SOAS University of London, a Fellow of the Royal Society of the Arts, and a councillor of the Progressive Economy Forum. His new book is entitled The Blue Commons: Rescuing the Economy of the Sea.

^[1] These and following statistics were collated for two books at the time. See G.Standing (ed.), The Ukrainian Challenge: Reforming Labour Market and Social Policy (Budapest, ILO-UNDP, 1994); G.Standing, Russian Unemployment and Enterprise Restructuring: Reviving Dead Souls (London, Macmillan, 1996).

^[2] This view was backed by leading shock therapy advocates, such as Jeffrey Sachs and Anders Aslund. For references, see my book. 

^[3] [Zhirinovsky remained in the Duma until his death from Covid, ironically on April 6, 2022, with his dream of invasion of Ukraine realised. His original party had been funded by the right-wing French politician, Jean-Marie Le Pen, with whom he remained close.]

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Overshadowed by the appalling news from Ukraine, Chancellor Rishi Sunak presented the annual Mais Lecture in London a couple of weeks ago. Traditionally used by Chancellors (and, sometimes, Shadow Chancellors) as a space to fill out the detail of their economic plans, and (they hope) give the impression of some depth of thought behind them, this was, as other commentators have pointed, out a comparatively rare insight into Sunak’s mind a few weeks of what will be, for him, another Spring Statement severely rattled by external events.

Battered by the pandemic, and subject to the whims of a once all-powerful Prime Minister, Sunak has spent two years in office cranking up government spending whilst offering variations of St Augustine’s prayer: “Lord, make me fiscally conservative, but not yet!” Mais Lecture was no different in this respect, once again promising the faithful that he would soon, very soon, start cutting taxes.

And of course you have to read the whole thing through a potential Conservative Party leadership battle. It helps to read British politics in general through the prism of a never-ending Tory leadership contest: like other semi-democracies, squabbles amongst factions in the ruling party matter far more than debates between the ruling party and the tolerated opposition – whatever the likelihood of any actual changes at the top.

But with Liz Truss letting her Tory MMT tendencies be known early on, judiciously making sure news of her indifference to deficits was leaked to the Times just ahead of Tory Party Conference last year, Sunak had to establish some clear blue water on the question of spending. Truss wants to cut taxes, regardless of the impact on government borrowing. Sunak “firmly believes” in low taxes but is “disheartened… by the flippant claim” that taxes pay for themselves. Tut tut. Once again, low taxes, but not yet.

What’s more striking is, as per usual, what Sunak doesn’t talk about. For a decade Tories noisily insisted that the government debt and the government’s deficit were the most important problem in the world, and that all other government spending could be sacrificed to shrinking both. Former Chancellor George Osborne used his own Mais Lecture to spell out the argument for immediate action on government spending, back in 2010. Osborne offered a cogent and closely-argued case for finding the poorest and most vulnerable in society and fiscally waterboarding them for a decade.

Never mind that the gurus he cited, Kenneth Rogoff and Carmen Reinhart, turned out to have made a spreadsheet error in their calculations on the impact of government debt on growth which rendered their most eye-catching claims useless. And never mind, too, that by the time he left office, Osborne had overseen the longest decline in living standards since the dawn of industrial capitalism, even as the government debt burden continued to rise. What matters here is the intellectual framing of the discussion around the role of government in the economy as entirely negative: that government, with its shocking debts and yawning deficits, was little more than a deadweight on a long-suffering private sector, yearning to be free.  Aided and abetted by a compliant media, who didn’t know better, and the Institute of Fiscal Studies, who should’ve known better, the economic illiteracy of the story mattered less than its political purpose in justifying the reshaping of the British economy back around the interests of its financial system in the years after the 2008 crisis.

So tightly were austerity’s mind-forged manacles that it took the triple shock of Brexit, Jeremy Corbyn and covid to break them. Brexit gave us a Tory Prime Minister who wanted to talk about the “burning injustices” of the economy. Corbyn, in turbulent years after the 2017 election, gave us a different Tory Prime Minister who consistently increased spending. And covid has given us a Tory Chancellor who scarcely references the government debt.

The contrast between Osborne and Sunak, then, is stark. The current Chancellor reflects a new consensus, apparent across the business press in recent months, that government spending in the future is going to be higher: on (his words) “health, pensions and social care” for an ageing population; on the “legacy of covid” in annual vaccination programmes, antivirals, and testing; on education; on government infrastructure investment, praised by Sunak; and of course on the military, where demands have been raised for a 25% increase in the current budget.

This isn’t the austerity economics of the 2010s. It is a higher-spending, bigger-state Toryism that means, come 2024, the difference between the two main parties’ spending plans – widening in elections 2015 onwards – is likely to be substantially reduced. Reduced, too, will be their rhetoric on the fundamentals of the economy: both accept a significantly increased role for government investment, including on renewable energy; both accept the need for  intervention in the economy to address inequality, beyond using the tax system alone (aka “Levelling Up”); both accept the idea that intervention can address the productivity problem. And both have decided to foreground economic growth as the key to a successful economy.

Market morality

It’s here that Sunak gets interesting, once we get past the boil-in-a-bag Treasury policy prescriptions for growth. Sunak wants to cut taxes on investment by businesses, invest more in “adult skills”, and spend more on R&D – so far, so familiar, although Sunak at least throws in the possibility of scooping up “entrepreneurs and highly skilled people” from all over the world, post-Brexit.

Instead it is when Sunak tells us about his desire to create a “new culture of enterprise” that we should be paying more attention. Sunak’s carefully-curated public image has been of a man somewhat wary of big ideas and book-reading (“all my favourite books are fiction”), but it is to Adam Smith he turns to make the link between culture and economic growth: not via the Wealth of Nations, but its forerunner, the Theory of Moral Sentiments: that a free market not only ensures outcomes that are economically efficient, but that markets themselves are grounded in morality, Sunak here referencing the late Jonathan Sacks’ own Mais Lecture. The process of market interaction itself (says Sunak) shapes morals and therefore culture. “Moral responsibility,” he claims “can only come from being exposed to the consequences – whether good or bad – of our own actions.”

This isn’t a conventional, libertarian-inclined defence of the free market, often associated with the Wealth of Nations, in which freely-transacting individuals are magically guided by the “invisible hand” to produce the best possible outcome for society. This “invisible hand”makes no claims about the morality of your choices, simply that everyone’s preferences will be met best if we allow it do work its mysterious magic. Sunak says this is reading Smith wrong: “Smiths account of the market economy, is not as some have suggested a values free construct which rationalised social choice.”

But this argument for market morality is also not quite that of Sacks’ original Mais lecture, which was a slightly more conventional take on how free markets, desirable as they for producing economic growth and productive cooperation, also require stable social institutions: family, religious organisations, community groups, and so on. We get on with our social interactions, the market sorts out that section of them we call the economy, and the greatest happiness of the greatest number is ensured. We learn our morals and “habits of cooperation” in “the domain of families, congregations, communities, neighbourhood groups and voluntary organisations”.

The invisible hand of Sunak, on the other hand, has a decidedly morally interventionist streak. We will have better moral characters if we allow a market-type process of rewards and punishments to shape them, facing the “consequences… of our own actions”. Happily, the shaping of our characters in turn shapes a culture which then creates the conditions for economic growth through the “universal and laudable desire to better the condition of ourselves and those we love”. A free market fosters an “enterprise culture” which will, in turn, make Britain more receptive to economic growth delivered by a succession of terrific new technologies, lead by Artificial Intelligence (as always).

Note the firm limits to “laudable” bettering here, and what it should be aiming for; and whilst Sunak identifies the need for government to provide some minimum level of support where needed, the boundaries for government action are constrained. Whereas Sacks suggests that economic growth, engendered by the free market, is just one part of a what makes a good society, and that this culture provides the necessary foundations of the market, Sunak’s rather darker argument is that the desirable culture is one that produces growth, and that market outcomes themselves are crucial to shaping that culture.

Sunak may talk up economic growth. He suggests he is an optimist on its future. But if the growth pessimists he cites are right, we left with only the moral claims. What he establishes here looks more like the moral and intellectual framework for a low-growth and significantly more authoritarian version of capitalism.

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On the economic front, this period saw the theories of John Maynard Keynes provide the sound intellectual framework for the views which trade unionists had always instinctively known to be right.

Trades Union Congress, The History of the T.U.C. 1868-1968, p. 85

The bond between Keynes and workers – obvious to trades unionists in 1968 – is obscured in the latest commentary on working hours by Keynes’s own biographer, Lord Skidelsky.

As the pandemic eases, Lord Skidelsky on 17 February warned Daily Mail readers that it was “deluded to think that working from home and a four-day week is anything other than a looming disaster for the UK.” Twice he appeared to condemn “Labour leaders [that] have long advocated a world where their members work fewer hours for more money”.

Er, yes. And – up to a point – workers have been incredibly successful.

The available data (shown on the charts here) suggest that real wages advanced decisively from around the beginning of the nineteenth century. And, likewise, hours have fallen continuously from roughly the same point. Henry Pelling, the author of A History of British Trade Unionism (1963, p. 24), reckons this is the point at which trade unions became a force to be reckoned with: “The extent and efficacy of combinations in the later eighteenth century” he observes, “provoked the active hostility of parliament”. By 1833 the ‘Factory Acts’ began gradually to restrict working hours. Even Karl Marx, no great believer in the reforming virtues of the bourgeois state,[1] celebrated the “legally limited working day, which at lasts makes clear ‘when the time which the worker sells is ended, and when his own begins’. Quantum mutatus ab illo [What a great change from that time, from Virgil’s Aeneid]” (Marx, 1976, p. 416).

But Lord Skidelsky only judges trends in hours against Keynes’s prediction that ‘our grandchildren’ might enjoy working only a 15-hour week.  He thus sidesteps the still profound achievements that have so far been made. Moreover, his reasoning here is important. Keynes may have anticipated increasing automation (so permitting more efficient production), but Skidelsky argues he failed to anticipate the insatiable demand for goods and services on the part of workers (meaning more production necessary overall). With the latter meaning upward pressure on hours, Keynes’s idea of a 15-hour week was, sadly, wrong.

However, it doesn’t therefore follow that those who advocate reduced hours today, have, in Lord Skidelsky’s words, a “dismal understanding of economics”. Apparently ignorant of the insatiable appetite of their members for more work and more consumption, union leaders are alleged to reason simplistically as follows:

The demands of trade union leaders for a four-day week are still rooted in the idea of work-sharing. In their eyes, the labour force should be spread as widely as possible to ensure there is no unemployment. Each worker ‘needs’ a job, so by cutting the number of working hours, the number of jobs increases.

In effect Lord Skidelsky is arguing that trade unions adhere to the lump of labour/wage fund fallacy, which can be traced back to at least Ricardo in 1815. Nor is he the first to do so: Sidney and Beatrice Webb claimed likewise from their ivory tower at the London School of Economics. This is the belief that the quantity of work and wages represent nothing more than the total capital of society divided by the population, and takes no account of the complex dynamism of capital itself.

As the economic historian R.V. Clemens pointed out as long ago as 1961, the accusation is unfair to trade uinon leaders: “[a]s for the wage fund theory, union leaders never accepted it in any significant sense, since it was shattered by practically everything they did”.

Ironically Lord Skidelsky’s argument simply modifies the lump/fund fallacies, with technology and taste allowed to change the size of the lump/fund over time. If the workers want ‘indoor toilets’ or more than ‘two sets of clothes’, Lord Skidelsky asserts they will have to work more, not less, because there is only so much capital to go around.

Keynes’ alternative

Keynes’s approach was very different. In the General Theory he took these factors as ‘given’ and not relevant to the argument he was making (“we take as given the existing skill and quantity of available labour, the existing quality and quantity of the available equipment … the tastes and habits of the consumer …”, p. 245). He showed that increasing aggregate demand would lead to a permanently stronger economy. His primary focus was releasing previously contained (and disrupted) aggregate demand through a lower long-term rate of interest, a point I was at pains to make in Keynes Betrayed.

In contrast, the so-called ‘Keynesian’ economists who took his work forwards after the Second World War, have tended instead to focus exclusively on the role of government expenditure. The labour movement (and many ‘post-Keynesian’ economists today, e.g. Stockhammer and Lavoie, 2013) have given more emphasis to the role of higher pay in stimulating aggregate demand. ‘Wage-led growth’ is a critical priority for the Trades Unions Advisory Committee to the OECD – see the report ‘Framing the Recovery: Pathways for a World in Transition’ submitted and presented to the OECD liaison Committee in February 2022. Today ‘wage-led growth’ is a critical priority for the Trades Unions Advisory Committee to the OECD.[2]

Trade union leaders have, since the movement began, understood the basic macroeconomic truth that higher pay will not only be better for workers but better for the economy. And as we have always argued – for example most recently in A future that works for working people – reduced hours are then an additional way to share that increased prosperity. As the charts show, so it has proved in practice.

It is all too easy to revert to the orthodoxy of the industrial revolution, that somehow technology alone set us on the trajectory to today’s prosperity. And even ‘Keynesian’ economists impose the same underlying scenario on their gravely diminished Keynes.

But Keynes’s theory and the view from the labour movement tells us that causality is the other way around. Advanced technology hasn’t created more prosperity, more prosperity has advanced technology!

Slowly improving labour conditions and some rebalancing away from wealth meant a greatly advantaged economy, and set in motion a virtuous cycle of higher pay, more consumption, increased activity, improved technology and lower hours. The consumption was not insatiable, it just reflected what an economy operating less badly could deliver. Workers do not demand unending and unlimited consumption, they demand what they have always demanded – their fair share of what they themselves produce. 

Keynes’ idealism against the struggle for power

Keynes’s 15-hour prediction is of greater interest from the point of view of his failure to influence policy.  As his more streetwise colleague Joan Robinson put it:

The great trouble with Keynes was that he was an idealist. He thought that when people could understand his theory, could understand how the capitalistic system actually works, they would behave in a reasonable manner and operate the system in such a way as to produce favourable results, to produce in particular a high and stable level of employment.

Kahn, 1984, pp. 203-4

For some decades after the Second World War policy was closest to – but still a good distance from –Keynes’s and Labour’s ideal; from the 1980s, as we all know, Thatcher and Reagan led the charge in reversing Labour’s advance. This, as we also know, was not a question of rational economics, but a struggle for power between competing interests.

Incidentally, if we project hours to 2021 at the pace of improvement over 1945 to 1975 then by 2021 a 20-hour week would now be the norm.

Lord Skidelsky not only does not discuss the long-term trend, but also neglects to mention what happened in the most recent decade. In a unique and disastrous departure from a two-century old trajectory, both real pay declined and hours rose. The likely explanation is that people have had to work more hours because pay has for the first decade gone into reverse. Skidelsky’s argument does not account for this change.

We should regard this reversal as indicative of the end point of the decisive restoration of the dominance of wealth over labour and, with it, the diminishing influence of any sane economics. Further: any perceptions around the impact of the pandemic must be tempered by the understanding that COVID19 ensured that wealth enjoyed even greater gains.

Three cheers to those who have secured reductions in the working week for unchanged pay.  However it remains unlikely that the majority of the workers in an economy with 14 million children in poverty will be able to duck out of the labour force very easily – let alone enjoy the comfort of an en-suite bathroom. The existence of zero hours’ contracts simply tells us how far down the road to casualisation we have travelled and the sooner they are banned the better. Workers on these exploitative contracts do not ‘want to work more’ as Skidelsky claims, they want to be paid properly and to enjoy the security their parents’ generation took for granted.

We have been grateful for Lord Skidelsky’s dogged campaigning against austerity policies for the past 13 years. But, as trade union leaders of the past understood, the common ground between Keynes and the Labour movement goes much deeper. The need is to begin again to construct an economy that puts workers in front place, while constraining wealth. Keynes does not lambast workers for wanting to escape the present, profoundly dysfunctional economy, he is on their side.

References

Clements, R. V. (1961) British Trade unions and popular political economy 1850 – 1875. Economic History Review.

Kahn, Richard E. (1984) The Making of The General Theory, Cambridge University Press.

Lavoie, Marc and Engelbert Stockhammer (2013) Wage-led Growth: An Equitable Strategy for Economic Recovery, Palgrave Macmillan and the International Labour Office.

Marx, Karl (1976) Capital: A Critique of Political Economy, Volume One, Penguin Books in association with New Left Review.

Pelling, Henry (1963) A History of British Trade Unionism, Penguin Books Ltd.: Harmondsworth

Ricardo, David (1817) On the Principles of Political Economy and Taxation.  

Tily, Geoff (2010 [2006]) Keynes Betrayed, Basingstoke: Palgrave Macmillan.

Trades Unions Advisory Committee (2022) ‘Framing the Recovery: Pathways for a World in Transition’, submitted and presented to the OECD Liaison Committee with Non-Governmental Organisations, 21 February 2022: https://tuac.org/news/oecd-tuac-liaison-committee-meeting-policies-for-framing-the-recovery-en-fr/

TUC (1968) The History of the T.U.C. 1868-1968 A Pictorial Survey of a Social Revolution

TUC (2018) A future that works for working people: https://www.tuc.org.uk/research-analysis/reports/future-works-working-people

[1] Many thanks to my colleague Rob Maisey for helping further to bridge between Keynes and left.

[2] See the report ‘Framing the Recovery: Pathways for a World in Transition’ submitted and presented to the OECD liaison Committee in February 2022

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The Financial Times front page this morning splashes on reports that China is dropping its studied neutrality over the Russian invasion of Ukraine:

China signalled it was ready to play a role in finding a ceasefire in Ukraine as it “deplored” the outbreak of conflict in its strongest comments yet on the war.

Beijing said it was “extremely concerned about the harm to civilians” in comments that came after a phone call between Chinese foreign minister Wang Yi and his Ukrainian counterpart Dmytro Kuleba.

“Ukraine is willing to strengthen communications with China and looks forward to China playing a role in realising a ceasefire,” the Chinese statement said on Tuesday.

It added that it respected “the territorial integrity of all countries”, without indicating whether Beijing accepted Russia’s claim to the Crimean peninsula or shared its recognition of separatists in the Donbas region of eastern Ukraine.

First signs of this emerged a few days ago, as China’s Ministry of Foreign Affairs shifted its neutral tone on the conflict to stress the importance of “sovereignty” in comments to foreign journalists.

China’s central role here shows the way in which power in the world has shifted over the last decade. The US, Canada and European countries, later joined by Japan, took exceptional economic measures against Russia over the last week. These have been described as unprecedented in their scope, taking action against oligarchs, banning some Russian banks from using the SWIFT banking service, and imposing restrictions on Bank of Russia, the Russian central bank.

But the real importance of these measures sometimes gets confused. Blocking SWIFT, the interbank messaging system, has been talked up as a deadly blow to the Russian economy. It certainly adds costs and difficulties to doing cross-border business with Russia and for Russian institutions, but it’s not an economic knockout. SWIFT isn’t a payments service – it’s a system designed for banks to communicate with each other about the payments they wish to make. It could be replaced with phone calls or faxes.: a nuisance, but not critical.

Jamie Dimon, chief executive of JP Morgan, made the same point in interview two days ago:

He said the move to limit Russian access to the Swift banking network might have a lot of workarounds, meaning it wouldn’t alone stop sanctioned parties or others from doing business. The Swift network is the main messaging system banks use around the globe to conduct cross-border transactions. Mr. Dimon said blocking it doesn’t mean alternative messaging systems are blocked as well.

“A sanction says I cannot do business with you,” Mr. Dimon said. “A Swift thing says I can’t use a communication [tool] to do business with you. I can still do business with you.”

Similarly, sanctions against oligarchs and the networks of criminal financing that they use – flowing in vast sums through London and its associated tax havens – will cause difficulty and nuisance, and plausibly could help turn those closest to Putin against him. But it’s in the category of nuisance – potentially serious nuisance – for the mega-rich, rather than a fundamental blow.

Central bank sanctions are decisive

The deadly warhead in the sanctions is the ban on trading Russia’s central bank reserves. The joint communique from the US, Canada and the European powers says:

[W]e commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.

Russia will be barred from selling its central bank assets on global markets, where those assets are held in a participating country, or are being traded by an institution or an individual in a participating country. This has left Bank of Russia unable to support the rouble by, for instance, selling those assets to buy roubles (as it was doing until the ban came in force).

And it means that many Russians will assume that both their roubles are worth less, and their banks are at risk of collapse, sparking bank runs – as we have seen. The response of the central bank has been to whack up interest rates to 20%, and to impose various restrictions on taking currency and assets out of the country  – most recently, it has banned moving more than $10,000 in foreign currency out of Russia.

Central banks are the lynch-pin of a modern economy, defending the stability of the banking system and (therefore) its currency. Control over a central bank gives a hostile power immense leverage. We saw this in the eurozone crisis, when both Ireland in 2010, and Greece in 2015 were threatened with the collapse of their national banking systems by the European Central Bank, if they did not sign up to stringent austerity measures. Both were brought rapidly to heel.

The sanctions being put in place today are an unprecedented economic weapon applied by the joint powers to the Russian economy. The chaos they have produced is all too evident, the rouble falling, for a while, to an all-time low against the rouble. There are suggestions that financial markets across the world are exposed to the risk of default and economic failure in Russia, but of course the people suffering their effects most right now are ordinary Russians. They are the most effective weapon in the joint powers’ economic armory.

Russian defences against economic sanctions

Crucially, however, the sanctions leave assets not held in the joint powers’ currencies, or in their jurisdictions, outside of their scope. The Bank of Russia’s reserves come to $640bn – a veritable war chest that has been built up, very deliberately, over the last decade or so. Russia squeezed its domestic economy and ran huge current account surpluses which, in turn, enable the central bank to acquire these reserves.

But at the same time, Bank of Russia has been getting our of dollar and dollar-denominated assets, precisely in anticipation of something like this ban being applied. It now holds only $bn of US Treasury bills, massively down from the all-time high of $176bn in October 2010.

Jon Sindreu, in the Wall Street Journal, has a breakdown of the Bank’s holdings today, in a piece noting the holes in the sanctions regime:

The two largest components are gold and renminbi-denominated assets. As the caption notes, both of these are “likely safe from being blocked by the West”. It’s difficult – arguably increasingly difficult – for even the Federal Reserve to try and bar sales of renminbi assets outside of US financial institutions. Gold, playing the role it has for millennia, is a uniquely tradeable store of value. Russia holds its gold physically inside the country, and – if it can arrange physical transportation, or offer credible guarantees of its future delivery (big ifs!) – this is a viable reserve for exchange.

That leaves China. And this is where the essential leverage of China comes in. Both countries have been building up trade and other economic relations for some time, agreeing a strategic cooperation with “friendship… that has no limits” just ahead of the Beijing Olympics. Since sanctions were imposed on Russia in 2014, trade between the two countries has grown more than 50% and China is now Russia’s biggest export destination. China and Russia agreed a thirty-year contract for gas supplies just ahead of the invasion.

This is a lifeline for Russia right now. But it is also a pressure point, and potentially a decisive one. Europe gets 40% of its natural gas from Russia. This is way the gas trade with Russia is not sanctioned. China’s demand has been growing, but Russia still supplies just 5% of its domestic consumption. China could apply leverage here. Russia’s remaining non-gold central bank assets are renminbi-denominated. China could try to control their use. Or, in both cases, plausibly threaten to do so.

We are a long way from the Cold War: the balance of the world does not hinge on decisions in Moscow and Washington, or even Paris and London. They depend on Beijing.

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PEF Council member Prof. Stephany Griffiths-Jones is a member of Chilean President Gabriel Boric’s group of economic advisors. With Boric winning a resounding victory in the Chilean Presidential elections, we reproduce here a translation of Stephany’s recent interview for CTIX magazine Chile. Conducted before the second round of the election, Stephany discusses the left’s economic programme for the country, and the challenges a new President is likely to face.

Interview conducted by Andy Robinson. Original (in Spanish).

Stephany Griffith-Jones, one of the most eloquent promoters of the role of the state and public banks in the equitable development of South American economies, joined a group of advisers to Gabriel Boric, Chile’s presidential candidate, before the start of his second round campaign for the Presidency. The decision to appoint Griffith-Jones – a professor at the University of Sussex and collaborator with Nobel Laureate Joseph Stiglitz at Columbia University in New York – is proof that Boric build on not only ideas from the 2019 protest movement, but also experts close to Concertación and Nueva Mayoría, who led the centre-left governments of Chile’s slow transition from dictatorship.

It is also proof that, at the age of 35, Boric is aware of the importance of working with experienced economists such as Griffith Jones, Born in Prague in 1947, great-niece of Franz Kafka, and whose family emigrated to Chile the following year, we spoke about Boric’s dilemmas in needing to both respond to the demand for change in Chile, and to stabilise the economy.

It seems that Gabriel Boric is facing a problem. He is a candidate for change, a movement that has taken to the streets of Santiago to protest the neo-liberal model. But if he wins, he will come to power in a difficult budget situation that leaves little room for progressive budget policy…

Yes. At the moment the budgetary situation is very difficult. The fiscal deficit is already at 13% of GDP… Piñera went from one extreme to another in his response to the pandemic. He did nothing at first, and a lot of low-income people were in real trouble. This is where the first withdrawals from pension funds were introduced, to help low-income people in great difficulty. [Chile’s Congress authorised raids on the country’s privatised pension funds during covid, turning them into a “piggy-bank”, with about $50bn or 25% of their value withdrawn to date.] But then, in 2021, Piñera went to the other extreme. He gave generous support, perhaps too much, to many, even people who were not so poor. And consumption skyrocketed. Chilean GDP will grow this year between 11% and 12%. The economy is totally overheated.

What should be done?

Boric has committed himself to significantly reducing the budget deficit in one year and respecting the budget already approved by Parliament. It is a sign of his moderation. In the coming years, he wants to raise taxes gradually and increase the collection of existing taxes – higher direct taxes, and lower indirect taxes. Indirect taxes, such as value added tax, account for more than 50% of Chile’s total tax revenue, well above the OECD average. There is also a commitment to combat tax evasion, which in Chile is twice the OECD average, but this requires more tax inspectors.

The problem is more general. Latin America is experiencing a moment of polarization. It is necessary to break a model that was very unpopular, but the economic reality of countries like Brazil or Chile leaves very little space, and both Lula and Boric have moved closer to the centre.

Yes, at first many people thought that Boric would be too radical. But now perhaps the greatest fear is that he can not do enough.

Despite this, he is portrayed as radical in many media …

It’s true. The media talk about far right and far left. We must reject this false dichotomy, because Boric is a Social Democrat. [Right-wing candidate Jose Antonio] Kast is an extremist. In economics, he is quite radical; to reduce taxes when the deficit is 13% of GDP is downright daring. In politics, he is even more extreme. One of his deputies said that women should never have had the right to vote. Unbelievable. Kast proposed restricting the right to abortion, even for women who were raped, and forgiving Pinochet-era torturers.

But Boric is a European-style Social Democrat. I met him first at a conference to discuss the Scandinavian model of government. He has been more on the left, but he is aware of the current budget problems and is very open to discussions with all sides. That said, he is very committed to the need for redistribution.

Given the polarity and rejection of the system, do you think it can be a double-edged sword to enjoy the support of the main political figures from Concertación?

No. That’s very positive for Boric. Leftists will vote for him anyway. The problem is attracting the votes of most of those in the middle. Although the most important thing is to attract young people who demonstrate, but sometimes do not vote. Participation in the first round was very low. In the past, the center and the left always won when they merged. It can be expected to be the same this time. Boric acknowledged the contribution of the Christian Democrats (PDC) and it was a very good move. He met Ricardo Lagos [centre-left president from 2000 to 2006] and Michelle Bachelet [centre-left President from 2006 to 2010, and from 2014 to 2018]. They were wonderful to him. Much of the center and left have already joined the campaign. And the Christian Democrats support him even though they say they would not enter government with him. It is also true that the fact that Kast is percieved as disastrous made the reunion easier.

It is strange to compare the victory of the left in the Constituent Assembly with the results of November in the parliamentary elections. How did this happen?

Yes, 78% of voters voted [on 25 October 2020] in favor of a new constitution. Voting in the Constituent Assembly [over 15 and 16 May 2021] was a great victory for the left. But then, just a year after the referendum, the same voters voted for a parliament that was divided between left and right. There is therefore a lack of consistency. If Boric wins, he will have problems with Congress, which will likely try to block proposals such as the budget and tax reform.

Will there be more leeway afterwards?

I think so, after the first year. Boric and his supporters are very committed to the ecological transition. Chile is lucky because it has lithium, which is essential for batteries, and copper, which is essential for the energy transition. In addition, there is great potential for further development of solar and wind energy. It is necessary to give priority to certain sectors for that transition, supporting their development, and Kast does not understand this. Development banks must be mobilized for the green transition. And financial regulation can be used to incentivize commercial bank loans to companies with low-carbon investments.

Public investment is key. For example, Boric wants to invest heavily in building an extensive rail network. Then there is hydrogen. Hydrogen can be produced sustainably in Chile because there are many ways to generate renewable energy. We can use green hydrogen in mining to have green copper.

Is there not a risk that the energy transition will create demand for metals and lead to more extraction and dependence on the export of raw materials?

The idea would be to move up the value chain. Manufacture batteries, incorporate more technology and knowledge. Scandinavian economies, which in the past were like Chile, dependent on exports of raw materials such as wood, managed to move up the value chain and develop rapidly. So it is necessary, for example, to produced more refined copper, to manufacture higher value-added cables.

Why would the left do it better than the right?

Because public investment and the development bank are essential for the green transition, and then catalyzing private investment in this sector is key. Kast doesn’t understand this. He caricatures the state as a dark and negative force, but those are the ideas of the past.

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This week the UK Chancellor Rishi Sunak delivered the 2021 Autumn Budget in the House of Commons. The Budget confirms that this government has accepted a permanently larger role for the state in the economy. Spending will grow in real terms by 3.8% across government, amounting to a £111bn annual increase by 2024–25. Analysis by the Office of Budget Responsibility (OBR) shows total public spending levelling out around 42% of GDP once the huge rises associated with the pandemic wear off. This is not high by European standards. However given the figure averaged around 37% in the 30 years preceding the Great Financial Crisis it marks a step change, in particular for the Conservative party.

But Rishi Sunak and the Treasury remain fiscal conservatives. The Chancellor has created a new ‘fiscal rule’ (the fifteenth since 1997) which requires balancing day-to-day spending, excluding investment, within three years and keeping public sector investment from averaging more than 3% of GDP. Instead of achieving this through spending cuts, the Chancellor is embarking on major tax rises. Post-budget analysis by the Resolution Foundation finds that by 2026–27, tax revenue as a share of the economy will be at its highest level since 1950 (36.2%), amounting to an increase per household since Boris Johnson became Prime Minister of around £3,000.

The fiscal rule itself is arbitrary and appears to be more driven by politics than economics. With interest rates on long-dated government debt remaining at record lows, there is no obvious reason to balance the budget over the short-term when the economy faces longer-term ‘scarring’ effects from the pandemic, which the OBR estimates will be around 2% of GDP.

More generally, the Budget lacks any real vision for how to achieve the ‘high skill, high productivity, high wage’ economy that Boris Johnson spoke about in his party conference speech.

On the spending front, the biggest increases will go towards the NHS, social care and pensioners. With an ageing population and technological advances in healthcare, such increases are inevitable. They should arguably be higher, in particular for social care, which ultimately could help reduce costs on the NHS in the long run.

Disappointment

The biggest disappointment, ahead of the UK’s hosting of the COP26 summit next week in Glasgow, is the lack of any new plans to support a green transition. Keeping public sector investment to below 3% suggests the Chancellor is not yet taking seriously the massive transformation of our energy, housing and transport infrastructure required to meet the UK’s net Zero 2050 targets. The Treasury appears unable to see the potential of policies such as a national home insulation program to reduce carbon emissions, create good quality jobs and reduce the cost of living for those many poorer households in leaky homes. The announcement of a tax break on short haul flights — which are already significantly cheaper for equivalent journeys than trains in this country — confirms the Treasury’s myopic views on the net zero transition.

Sunak made much of the announcement of reduction of the rate at which universal credit is taxed for those who are in work. How the remaining four million or so households on universal credit who haven’t found work are supposed to survive the £1,050 per year reduction in their incomes from the reversal of the £20 uplift remains to be seen.

But the broader point here is that if the Treasury was genuinely interested in ‘making work pay’ as Sunak emphasised in his speech, they would be taxing wealth and not wages. A recent analysis found that the Treasury could raise £16bn a year if shares and property were taxed at the same rate as salaries. Currently, the richest 1% of the population take 13% of their income in the form of capital gains.

Given that the bulk of new spending announced in the budget will mainly support older, wealthier people, the case for a gradual shift towards taxing some of the assets they have built up over their lifetimes rather than the income of the wider population seems strong. This should also encourage more private investment into productive activities rather than property. But, just as with climate change, this kind of broader strategic vision seems missing from the Chancellor and the Treasury’s thinking.

Originally published on the UCL Institute for Innovation and Public Policy blog.

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Edited by PEF Chair Patrick Allen and council members Suzanne Konzelmann and Jan Toporowski

Publication Date 29th April 2021. Agenda Publishing

40 years of neoliberalism has failed to provide prosperity or stability to the UK economy. Instead it has led to low growth, turbulence, grotesque inequality , poverty and ill health for millions . This is the outcome of damaging economic polices driven by free market dogma, rentier capitalism and ideology. It’s time for a change.

This book contains 18 essays by PEF council members and academics who outline the essential features of a progressive economy dealing with the five massive challenges of our times to the economy – Covid-19, austerity, Brexit , inequality and climate change.

PEF calls for bold public intervention. Shrinking the state and weakening our public institutions has undermined social and community resilience and promoted an out-of-control, value-sapping and high-inequality model of capitalism. 

The authors say the resources of the state must build a fairer and more dynamic post-Covid society, using a mix of regional and industrial policy and investment to revolutionise our public health, housing and social services. A progressive new society should construct a new income floor and new measures to spread wealth and give everyone an equal stake in the economy. 

The financial crash of 2008 proved that only the state can rescue the economy when all else fails including the biggest banks. Covid has shown how only the state can rescue us from death and the collapse of the economy during a devastating pandemic. Only the state can steer the economy and deliver the investment needed to cope with climate change

The 2008 crash showed the breathtaking incompetence of the private financial sector. Now Covid has once again laid bare the myth than private is best – outsourcing to companies the job of track and trace at a cost of £37bn has so far failed to show any discernible benefit say the Public Accounts Committee.

By contrast, the selfless work of millions of NHS workers and volunteers has delivered one of the most outstanding vaccination programmes which has been the envy of the world. This has been done at modest cost and was only possible with a national health service drawing on the vocational drive of its workers for the common good.

The Biden adminstration is today showing the mighty power of the US State with Biden’s Covid and infrastructure bills. The results are expected to cut child poverty in half. The UK government should follow this lead and bring in new models of public intervention to deliver a pandemic-resistant, green economy which works for all citizens.

For an outline , list of chapters and authors and to order a copy go to this webpage

You can obtain a 25% discount on the cover price by entering code AGENDA25 on the Agenda page here

Launch event on Zoom – Wednesday 19th May 2021 at 11am . Joining details to follow.

The launch will be chaired Miatta Fahnbulleh , CEO of NEF and attended by Ed Miliband, Shadow Secretary of State for Business, Energy and Industrial Strategy . Martin Sandbu of the FT will attend as commentator.

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To start with the first. The economy has shrunk  by 10% since last March. In that time the government has spent over  £300bn ‘supporting jobs,incomes,and businesses’. The OBR expects  the economy to  have recovered all this lost output  by mid 2022,  4%  this year, 7% next year. As  a consequence, government borrowing  to ‘support the econmy’ will  tail off from £355bn today to £234bn next year and decline  thereafter,  the cancellation of the furlough in September being the biggest saving.  The national debt will peak at 97% of GDP in 2023-4 and then start falling.

The  thought processes underlying this rosy prospectus seem somewhat as follows.  The lockdown stops this summer.  ‘Non-essential’ businesses reopen, helped by tax breaks and subsidies. Customers flock back, free at last to spend their ‘forced’ savings.   Employment picks up. The economy starts booming.   Inflation –the dog which failed to bark  for ten years –is set to take off at last.

It may go like this –no one knows for certain. But I am highly sceptical about this story of ‘pent-up demand’. A shrinkage  in national  income by  10% implies a fall, not rise, in national saving. Saving out of income may go up, but income itself is lower.  That’s why it’s not like in a war, when you have full employment and rising wages, but  less to spend money on. Today, the  wealthier sections of the population,  whose incomes haven’t fallen,  will now be free to spend more on restaurants, entertainment, holidays, and so on; but what about all those  whose incomes have fallen? Where is their ‘pent up demand’ supposed  to come from?

So it is dangerous to assume that the reopening of the economy will be automatically followed by a strong recovery. To give the economy a cushion of extra spending power  the Chancellor  has wisely kept furlough going till September. I would have preferred that this money, some £60bn, be given to local authorities to create public jobs in their areas, especially for young people.   Now it is too late, because no one in the Treasury was thinking along these lines. Only someone with a bit of history can tell   30-year old Treasury officials  that there used to be something called ‘public works’.

Since the 2008-9 financial crisis, macro economic  policy has been in a mess, like a ship without a navigation system, responding to storms as they blow  up. A start has been made  on the necessary job of developing a proper policy  framework.  Mr. Sunak means three things by ‘sustainable’ public finances: first, in ‘normal’ times the state should balance its day- to- day (or current spending) budget; second,national debt should not be rising over the medium term, and  ‘we need to pay attention to its affordability’; third, it makes sense when interest rates are so low ‘to invest in capital projects that can drive our future growth’. (The Chancellor put his money where his mouth was by     announcing    a UK Infrastructure Bank to invest ‘in public and private projects to finance the green industrial revolution’ .)

 Further, in a significant  passage Mr. Sunak said  that  the Bank of England’s  2%  inflation target  should reflect ‘the importance of environmental stability and transition to net zero’ –the first hint we have had of a formal modification of the Bank’s mandate.  

 These principles give  the start of a   sensible policy of fiscal and monetary coordination which we have lacked for ten years.

But the Treasury still finds it hard  to get rid of old habits of thinking.  For example, ‘it will take years to pay back the  debt’. Pay it back to whom? Most of the debt incurred since last March to support the economy has been borrowed from the Bank of England. Paying back the Bank is simply transferring money from one government  department to another.

Then,  what did Mr. Sunak mean which he  talked about the need to ‘fix’ the public finances,  as though they were  broken? In fact they are not broken, they are doing exactly what public finances should be doing,  which is to balance the economy, supporting it when it is collapsing and withdrawing support when it is booming. This is not just policy for emergencies: it is part of the state’s normal  stabilization function. It reflects  the fact that economies do not  automatically self-balance at full employment. The state budget is the balancing factor.  Therefore,  provided we have in place a policy which supports recovery,  we should not worry about the deficit: it will reduce automatically.

My worry is rather the reverse; that the measures to support the economy during the pandemic will be withdrawn,  without  being replaced by measures to stimulate the recovery.   If that turns out to be true, we will be in for a very severe recession and the Chancellor will have to come back in six months time to announce further  recovery measures. It’s important to start thinking now about what they should be.
Robert Skidelsky

This article was first published in the Catholic Herald

Photo credit

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Covid-19 is disrupting heavily the global economy. Internationally, it led to massive financial turmoil, a sharp fall of international trade, and a major global recession, possibly even bigger than the Great Depression. It resulted in significant flight of portfolio capital from emerging markets: over $100bn according to the IMF.

In many countries, sovereign debt repayments will be due soon, and it may become impossible, to raise new funds in private markets, for both governments and private companies to roll-over their debts, or even less increase borrowing. Even before the corona pandemic hit the world economy, many developing and emerging economies were already facing severe debt and liquidity problems.

Problems will be compounded by sharp falls in commodity prices -illustrated dramatically by the recent collapse of the price of oil.  The coronavirus crisis can, therefore, trigger large-scale balance of payments crises across the developing world, as well as a sharp fall in output, employment, and increase in poverty. To avoid this, emerging and developing economies, would need $2.5 trillion of funding, as estimated by the IMF and UNCTAD.

A number of key measures need to be taken urgently by the international community to provide key international liquidity and development finance to emerging and developing economies, so they can minimize economic slowdown, and facilitate recovery.

These measures should be seen as important steps towards beginning a major reform of the international financial system. This is particularly important in the case of the global financial safety net, which remains patchy: it lacks coverage and resources to deal with a crisis of the magnitude we are currently facing.

The International Monetary Fund (IMF) should agree a rapid issuance of at least $500bn in international liquidity, in the form of additional Special Drawing Rights (SDRs). This would build on the enlightened decision, taken by the G20, under the leadership of Gordon Brown, at their London meeting in 2009 to issue SDRs equivalent to $250bn. The UK, as well as the G7 and G20 should take leadership on this now as well. 

It is highly disappointing that in the recent spring IMF/World Bank meetings, the issue of SDRs was vetoed by the United States, with the surprising support of India, even though major European countries supported it. It is key that the issue is proposed again, especially as the world economy continues to deteriorate.

The SDRs are international monetary assets issued by the IMF – acting. They are part of the foreign exchange reserves of countries, and they can be sold or used for payments to other central banks. Close to two-fifths of this allocation would enhance the international liquidity in the hands of emerging and developing countries, the main users of SDRs.

Furthermore, this should be the beginning of a deep discussion about the role of SDRs in the international monetary system. They are the only true global money, backed by all IMF members. However, it has remained as one of most underused instruments of international cooperation.

Though international liquidity is crucial, especially for balance-of-payments constrained developing and emerging economies, provision of sufficient long-term development finance, to help them fund investment is equally key, both to help support demand and future growth, as well as facilitate major structural transformation to a fairer societies and low carbon economies.

At the multilateral, regional and bilateral level (as well as the national one), public development banks can offer significant additional funding, especially at times when private capital and banking markets are unwilling or unable to take risks in the face of uncertainty and provide enough finance. It is therefore important to increase rapidly the capital of multilateral banks –the World Bank and the regional development banks like the European Investment Bank and the African Development Bank—, as well as of bilateral development banks –like Dutch FMO or German DEG—, to allow higher lending from them to take place speedily. It is important also that these banks, including especially the World Bank, do not attach structural conditionalities (particularly greater market reforms) to such loans, as the causes of the increased demand and need  for their loans is not determined by economic policies but by the internal and external effects of the COVID pandemic.

By significantly increasing their lending in a counter-cyclical way, these larger multilateral, regional and bilateral development banks can support depressed short-term economic activity and, particularly, job creation, and help build a more equitable and sustainable economic development model.

In the medium-term, a more balanced financial system, both internationally and nationally, with a significantly increased role for development banks can help create a system that far better serves the economy, society and the planet than the current one.

Image credit: flickr/niawag

Stephany Griffith-Jonesis is a Council Member of PEF; she is Emeritus Professorial Fellow at IDS, Sussex University and Financial Markets Director, IPD, Columbia University.

José Antonio Ocampo, a professor at Columbia University, is a former Minister of Finance of Colombia, and former United Nations Under-Secretary-General for Economic and Social Affairs.

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On 11 March the new chancellor presented his Spring budget. While the budget was unambiguously expansionary after a decade of cuts and freezes, as the Shadow Chancellor pointed out it did not restore expenditures to their 2010 levels especially for local government. But for all its shortcomings and faults it marked a first step towards ending the rhetoric of fiscal austerity.

In response to the shift on austerity by a Tory government, reactions to the budget demonstrate more than anything else how engrained in the media was the ideology of austerity, what we might call austerity speak. Typical was an FT article that while praising the Chancellor because he “rose to the occasion” with “a careful orchestration of fiscal and monetary policy”, said his budget “flung money at a grateful population”. To reinforce the message, the author told us that “it’s easy to throw money around” but harder to “spend it well”.

This rhetoric of being loose with money comes not only from the business-friendly FT and media on the right. A Guardian news article referred to the budget as “a spending spree”, designed to “win over [the] public.” The Guardian’s economics editor, who is one of the UK’s most progressive mainstream commentators on economic issues, hinted at the budget’s problems in an article that assessed that the Chancellor “can count himself relatively lucky” that the Institute for Fiscal Studies did not attack him more vigorously.

The source of this IFS criticism becomes clear in another article by Elliot that carries the headline “Sunak’s spend, spend, spend budget”. The author comes close to praise because the Chancellor has acted “to break the economy out of its low-growth, low-investment, low-productivity trap”. The first sentence of the article refers to this break as a “giveaway budget”. A jointly authored article by Elliot and Stewart pursued the pejorative language, writing that the Chancellor “turns on the spending taps”, and reported that the sacked Chancellor Javid “warned against abandoning all spending rules”.

Amid this language of spending sprees, turning on taps and warnings of violating rules, one searched in vain for a favourable judgement about increased spending as a budget strategy. The FT editorial board provided a rare example of an assessment almost void of value-laden language, referring to “the right budget for the moment” that seized the “opportunity provided by low interest rates to invest”.

Ancien Idéologie gets Shock Therapy

In March 2020 the UK economy faced two major economic shocks, each on its own sufficient to provoke a recession, the corona virus and uncertainties associated with leaving the European Union. With interest rates low and public borrowing under 2% of GDP, the technical case for a fiscal expansion should be obvious to any open minded commentator. Why then the widespread anxieties about an expansionary budget and the negative language of sprees and giveaways?

Two explanations present themselves, the persistence of the austerity ideology and a much older ingrained ideology in the UK media. For almost a decade the Tory austerity ideology preached a doctrine of balanced budgets, to the point that it went unchallenged, accepted as valid without need of justification. This false imperative to balance the budget received independent verification from the Institute for Fiscal Studies, which repeatedly stressed the dangers of deficit spending. Despite its focus being microeconomic and budgets requiring a macroeconomic analysis, the media embraced the IFS as Britain’s definitive source on public finances.

Judging deficit spending as a prima facie problem does not explain all pejorative language found in the media, especially use of “giveaways” and “hand-outs”. Such polemics have a long history in the UK media, reinforced by repeated reminders that all spending eventually increases the “burden on taxpayers”.

These terms are regularly applied to all budget statements Conservative and Labour. For example, whether a Tory chancellor will have the space for tax cuts to attract voters appears as a common pre-budget speculation, as do queries that a Labour government will find the tax revenue to deliver spending to its core constituency. This approach to public sending betrays a deep distrust of both the public sector and the political process. It treat public spending as the instrument used by cynical politicians to curry favour with voters rather than the legitimate or even preferable alternative to private provision.

Thus, the proposal in the Labour manifestos of 2017 and 2018 for free (i.e., public payment of) university tuition fees could be described even by centre-left commentators as a bribe for young voters. The NHS represents a striking exception to this cynical view of public spending, which in the second half of March became the vehicle for a profound paradigm change by the Tory government and in public perception.

Difference a Week Makes

Towards the end of March rhetoric of spending sprees and handouts disappeared, swept away by the threat of a national health disaster. Larry Elliot who as in 11 March referred to a “spending spree” and a “spend, spend, spend” budget, on 20 March abandoned such rhetoric. Two days later on 22 March he completely embraced and lauded the extraordinary increase in public spending by the Tory Chancellor in a deeply insightful article,

…[A] model [of limited spending] that has failed not once but twice has been ditched. Governments recognise they have to support their citizens through this. 

“Supporting citizens” and taking responsibility for stabilising the national economy are central tasks for every responsible government. The execution of those tasks should require no justification, just as the public accepts the need for a well-funded NHS protecting our health. The NHS has the responsibility for the nation’s health. The Treasury has the responsibility for a stable economy that provides decent incomes for all.

Once we re-recognise that over-riding public responsibility, we should dismiss the ideologically driven anxieties about excessive government spending, encouraged by mainstream economists of the centre-right and centre-left. In retrospect, we can see that the threat to economic stability in the UK, US and Europe lay not in the remote possibility of too much public spending but in the reality of not enough. If spending rules are necessary, they need ones to insure adequate funding not frugality.

The Progressive Economy Forum firmly states on our web site that it opposes austerity and the current ideology and narrative of neoliberalism, campaigns to bring austerity to an end and ensure that austerity is never used again as an instrument of economic policy. Is it too early to say that we are at last making progress in these aims?

Furthermore will there be at some point a reckoning for those who increased our public debt and caused needless suffering by pursuing a reckless and damaging ideology to shrink the state only to abandon this when it became politically expedient and in the face of national emergency?

Photo credit: Flickr/HM Treasury.

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