Financial and business news and articles
Posts tagged US economic growth and recession
US chamber of commerce slams Tobin tax proposals
Mar 11th
• Group says levy would cause Dow Jones to plunge
• Study claims seven out of 10 people oppose idea
America’s leading business advocacy group, the US chamber of commerce, has slammed proposals for a Robin Hood tax on financial transactions by claiming that a levy would cause the Dow Jones Industrial Average to plunge by 12.5%, and that seven out of 10 people oppose the idea.
Gordon Brown has led calls for an international Tobin tax intended to curb reckless speculation in the financial industry and the European parliament voted overwhelmingly this week to develop plans for a tax to be presented to the G20 in June. In Washington, backbench Democratic lawmakers have put forward potential legislation for a levy of up to 0.25% on trades that would raise an estimated $150bn (£100bn) annually.
Virulently opposed to the idea, the chamber today said the tax would double the cost of typical transactions and would turn back the clock to the days of “disco balls, parachute pants and paper trades” before technology drastically eased the price of investing.
“Technology has democratised our markets in much the same way that technology has made it easier to search for a cheap airline ticket,” said David Hirschmann, president of the chamber’s centre for capital market competitiveness. “We should focus on ways to make our markets more efficient and more transparent.”
A study commissioned by the chamber estimated that a 0.25% tax would serve to cut the typical dividend offered by mutual funds from 2% to 1.75%. Investors would react by driving down stock prices by an eighth to restore the yield to 2%, pushing the Dow down from its present level of around 10,000 to 8,750.
“This tax is designed to punish Wall Street but it really would shoot main-street right in the foot,” said one of the report’s authors, professor Charles Jones of Columbia business school.
Firing a further shot against the concept, the chamber published an opinion poll of 800 US voters, asking whether they would support a tax that “some people have said” would “double the cost of buying or selling stock, including stocks purchased on your behalf by mutual funds”. Only 17% voiced support, with 70% opposed.
The Obama administration is sceptical about the merits of a tax but advocates include the economist Jeffrey Sachs, who this week attacked Wall Street bankers for “brazenly smirking” while they pocket huge sums of money. Fans of the concept say it would raise money to compensate the public for the cost of bailing out stricken banks.
Dean Baker, co-director of the Centre for Economic and Policy Research in Washington, questioned the chamber’s claim that a levy would cause stock prices to plunge, saying that it would simply encourage investors to hang onto shares for longer: “If people hold their stock, the tax has very little impact.”
He added that directly linking the cost of trading to stockmarket movements erroneously implied that a major proportion of the market’s rise since the 1970s was simply a factor of low-cost transactions, rather than underlying economic growth.
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US federal deficit: who owns America’s debt?
Mar 9th
Find out which countries are propping up the US economy
China has defended its investment in US Treasury bonds, amid concern that its position as the biggest investor in US debt may become political as well as economic.
Treasury bonds are how the US – and all governments for that matter – borrow money: they issue government securities, which other countries and institutions buy. So, the US national debt is owned predominantly by Asian economies. The US Treasury releases the figures on this – here they are in a more useable form.
Last year, China expressed concern over the security of its vast United States treasury holdings and premier Wen Jiabao has urged Washington to safeguard their value.
Take a look, download the spreadsheet and let us know what you can do with the data.
DATA: Foreign owners of US treasury securities
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Blame it on the bubble | Dean Baker
Mar 8th
The financial crisis is just a sideshow – the real reason for the economic downturn is the rise and demise of the housing bubble
Politicians and the media continue to refer to the economic downturn as being the result of a financial crisis. This is wrong. We have 15 million people out of work because the housing bubble that drove the economy since the last recession finally burst. The financial crisis may have been good entertainment for those who like to see huge banks collapse, but it was a sidebar. The real story was the rise and demise of the housing bubble.
Those who claim that the real problem was the financial system and its faulty regulation can be disproved with a single word: Spain.
Spain is noteworthy because it now has an unemployment rate of more than 19%, the highest rate in any of the wealthy countries. Spain did not have a financial crisis. In fact, its well-regulated financial system is often held up as model for the United States.
Spain did have a horrific housing bubble. As a result, the share of construction in the economy rose from less than 8% of GDP at the end of the 90s to 12.3% in 2007. By comparison, it is typically less than 6% of GDP in non-bubble years in the United States. This rapid rate of construction led to enormous overbuilding, which meant that a collapse was inevitable with construction falling to far below normal levels.
The run-up in house prices also had the predictable effect on consumption. Because people believe that the run-up in house prices is based on fundamentals, homeowners assume that their newly created housing wealth is real and they spend accordingly. Spain’s saving rate fell from just under 6% in 2000 to 3% in 2007. When the housing wealth created by the bubble disappeared people naturally cut back their consumption.
This is Spain’s crisis. According to the IMF, housing starts in Spain fell by 80% from the peak of the boom. While total construction has not fallen as much (repairs and non-residential construction did not decline nearly as much), if construction in Spain fell by 50%, this would imply a loss in annual demand of more than 6% of GDP. That would translate into a drop in demand of more than $800bn in the United States.
Similarly the loss of housing wealth reverses the housing wealth effect. If consumption fell enough to return the savings rate to its pre-bubble level, then this would imply a loss in annual consumption demand of more than three percentage points of disposable income. In the US this would amount to more than $300bn in lost annual consumption.
There is no easy mechanism to replace more than $1tn in lost demand. This is why Spain’s economy is in a severe slump right now. Note that just about all analysts agree, Spain’s financial system was well regulated and it had none of the loony loans and outright corruption that pervades Wall Street and the US financial system. Yet, it is suffering from this economic downturn even more than the United States.
The moral of this story is that the problem is not first and foremost a financial crisis. It might be fun to watch the Wall Street and government boys sweat as they stay up late trying to keep the big banks from drowning in the cesspools they created. But this is all a sideshow. No one saved us from a “second Great Depression,” they just saved the jobs and wealth of the Wall Street crew.
The economy’s real problem is simply the loss of demand created by collapse of the bubble. Throwing even more money at the banks is a way to ensure that they don’t suffer from the consequence of their own greed and stupidity. It is not a way to restore the economy to health.
Restoring the economy to health is about finding a replacement for the demand lost as a result of the collapse of the bubble. In the short-term, this means increased government spending and tax cuts. Deficits put money in the economy, and using the old-fashioned view that people work for money, we can determine how much money we need to spend for the government to get the economy back towards full employment levels of output.
In the longer term, we need to move towards more balanced trade, with higher exports and fewer imports making up for the demand lost due to collapse of the housing bubble. This will require a lower-valued dollar – everything else in the trade picture is just for show.
We do need financial reform. We have an incredibly wasteful and reckless financial industry. But bad financial regulation by itself did not give us 10% unemployment, nor would good regulation have been sufficient to prevent it. Just ask the workers in Spain.
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Mandelson attacks Obama’s plans for US financial reform
Mar 3rd
• Mandelson claims US plans to limit size of banks ‘too difficult’
• Criticises Obama administration for ignoring G20 agenda
The Obama administration’s radical plan to limit the size of banks and ban risky trading activities is “too difficult” to achieve, according to the business secretary, Lord Mandelson, who delivered the bluntest signal yet of British unhappiness with the direction of US financial reforms.
On a visit to Manhattan, Mandelson criticised the US government for proposing unilateral banking reforms without reference to other G20 nations. And he made it clear that Britain’s preferred route is more effective regulation of institutions in their present form, rather than attempting to cut banks down to size.
In a speech to business students at New York University, Mandelson expressed discontent with the White House’s sudden proposal of wholesale reforms last month: “President Obama’s proposals on banking regulation, I have to say, came as a bit of a surprise to people working on the G20 agenda and it’s important that we keep the multinational agenda firmly on track.”
Speaking to journalists later, Mandelson attacked the so-called Volcker rule, which would prohibit banks from operating hedge funds, private equity funds and from proprietary trading: “Trying to apply sweeping rules about the structure, content and range of activities of banking entities is too difficult to do.”
He made it clear he would not countenance a curtailment of the scope of investment banks: “Whatever their size, whatever their range of activities, you need good regulation. It’s the principle and practice of regulation you have to focus on, not the size of banks.”
The business secretary’s remarks come hot on the heels of caution expressed on Tuesday by the Financial Services Authority chairman, Lord Turner, who told a House of Commons select committee that Britain was unlikely to ban “prop trading”, through which banks trade with their own money rather than clients’ funds, and would instead look at capital requirements to ensure solvency.
Wall Street banks are vigorously lobbying against restrictions on their activities, and the Volcker rule – named after former Federal Reserve chief Paul Volcker – looks set to be watered down by sceptical lawmakers in the US senate. The plan is the centrepiece of Obama’s strategy to combat so-called “casino” activity on Wall Street, blamed for the credit crunch. The administration also intends to impose a levy on banks and to create a new consumer protection agency.
While in New York, the business secretary took the opportunity for a sly dig at currency speculators who have driven the pound below $1.50 this week on concern at the possibility of post-election political uncertainty.
Mandelson said he believed investors were less concerned about a hung parliament than a Conservative victory: “I don’t know if it’s the case that the markets are reacting to the prospect of a new, perhaps lightweight, less experienced government after the election, should the Conservatives win.”
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City of Angels on brink of abyss | Sasha Abramsky
Feb 26th
Los Angeles, the second-largest US city, is facing a crisis of funding not seen since the darkest days of the Great Depression
Two and a half years after the official start of the worst economic downturn and fiscal crisis in nearly 80 years, America’s economy is supposedly growing again, the stock market is halfway recovered from the lows of 2008 and early 2009, and the unemployment plunge seems to have been halted.
Yet, built-in time lags in how revenues are raised and budgets calculated mean that many states and cities around the country are only now starting to feel the worst of the pain. This year has been, quite simply, abysmal for local and state governments, and next year promises to be even worse. With easy cuts long-ago made, these days basic services are increasingly seen as luxuries, and public sector employees are increasingly vulnerable to wage cuts, benefits rollbacks, and unemployment.
While the federal government has considerable wiggle room to borrow or simply increase the supply of money to help fight its way out of financial collapse, smaller government units in America don’t have those options; increasingly cities, counties and states are facing the sorts of austerity measures we’ve come to associate with third world countries in crisis, or, in recent years, with vulnerable European nations such as Greece or Latvia.
In Arizona, a cash-pinched legislature put the Capitol building up for sale, proposing to lease it back for state use. In the small Colorado town of Colorado Springs, officials shut off half the street lamps and one-third of the traffic lights, told residents who wanted short grass in public parks to bring their own lawnmowers, and auctioned off a police helicopter on eBay. Around the country, libraries have been shuttered, after-school programmes have been curtailed, mental health services have been decimated.
In Los Angeles, the nation’s second largest metropolis, the Democratic mayor, Antonio Villaraigosa, addressed a full session of the city council on 9 February to detail just how grim the city’s finances had become. Miguel Santana, the city administrative officer (the CAO is the mayor and council’s chief financial adviser) had recently informed the mayor’s office that LA was facing a $200m shortfall through the end of this financial year and another half billion dollar-plus shortfall in the years to come if it didn’t radically, and rapidly, restructure its budget. Santana didn’t mince words. His nearly 300-page report (pdf) opened with this stark warning:
“The city is facing a budget crisis unlike any it has ever experienced … The enormity of our current fiscal crisis forces the City to take swift action now and lay out a financial plan for the future.”
Wall Street was growing increasingly worried by the city’s financial fragility, and the city’s ability to raise revenues through bond sales was at risk.
Why the crunch? According to city council president Eric Garcetti’s office, for the past four quarters, the city has seen double-digit revenue declines, a scenario not experienced since the darkest days of the Great Depression. Quite simply, the downturn was so steep it had made government-as-normal impossible to maintain in the City of Angels. As a result, says Garcetti, the city will face a crisis of funding for the next several years as well as an increasingly bitter battle of ideas as to the role of government in modern-day America; for conservatives, he warns it will likely be seen as an opportunity to starve the public sector, to “downsize government so much it can never come back.”
Los Angeles’ budget, currently around $7bn per year, will, all parties agree, shrink for years to come. And, since much of that $7bn is committed to untouchable items – making sure pensions are paid, keeping the LAPD afloat – the hundreds of millions of dollars in cuts will fall overwhelmingly on employees and on discretionary services. And these are services that disproportionately are used by lower income residents – the very people who have already been hit the hardest by the broader economic meltdown.
The city has already negotiated with public sector unions to ease 2,400 employees (out of a city workforce of about 40,000) into early retirement, is working to immediately reduce the city’s payrolls by another one thousand, and is exploring how to make more cuts down the road that could lead to a couple of thousand additional job losses – or, if the mayor and Garcetti’s vision of “shared sacrifice” is implemented, to fewer job cuts but across-the-board pay reductions instead. “For me, government matters,” says Garcetti. “Workers matter. Services matter.” Inevitably, however, the crisis will in some ways shrink the role of city government.
At the same time as the city is negotiating concessions from unions, it is also exploring “private-public partnerships” that would hand the city’s zoo, convention centre, parking garages and even parking meters to private operators. And it has already eliminated two city departments – environmental affairs and human services – with more likely to follow, hoping to seamlessly amalgamate their functions into other departments.
Yet in reality, there is very little that is seamless about these budget readjustments. The job losses are adding to LA’s already great economic pain – the city has a more than 11% unemployment rate; even with progressives occupying key positions in the city’s political leadership, the evisceration of core public services will, over the years to come, impact the quality of life of most Angelenos; and the privatisation of venues such as the zoo and the convention centre will harm the city’s long-term ability to raise sufficient revenue to meet its growing needs.
The broader economy may be starting to show some signs of healing, but for those at the bottom of the economy, for those most reliant on government services in Los Angeles and the countless other cities teetering over financial abysses, 2010 looks more like a bona fide Depression year than one made beautiful by the myriad green shoots of recovery.
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City of Angels on brink of abyss | Sasha Abramsky
Feb 26th
Los Angeles, the second-largest US city, is facing a crisis of funding not seen since the darkest days of the Great Depression
Two and a half years after the official start of the worst economic downturn and fiscal crisis in nearly 80 years, America’s economy is supposedly growing again, the stock market is halfway recovered from the lows of 2008 and early 2009, and the unemployment plunge seems to have been halted.
Yet, built-in time lags in how revenues are raised and budgets calculated mean that many states and cities around the country are only now starting to feel the worst of the pain. This year has been, quite simply, abysmal for local and state governments, and next year promises to be even worse. With easy cuts long-ago made, these days basic services are increasingly seen as luxuries, and public sector employees are increasingly vulnerable to wage cuts, benefits rollbacks, and unemployment.
While the federal government has considerable wiggle room to borrow or simply increase the supply of money to help fight its way out of financial collapse, smaller government units in America don’t have those options; increasingly cities, counties and states are facing the sorts of austerity measures we’ve come to associate with third world countries in crisis, or, in recent years, with vulnerable European nations such as Greece or Latvia.
In Arizona, a cash-pinched legislature put the Capitol building up for sale, proposing to lease it back for state use. In the small Colorado town of Colorado Springs, officials shut off half the street lamps and one-third of the traffic lights, told residents who wanted short grass in public parks to bring their own lawnmowers, and auctioned off a police helicopter on eBay. Around the country, libraries have been shuttered, after-school programmes have been curtailed, mental health services have been decimated.
In Los Angeles, the nation’s second largest metropolis, the Democratic mayor, Antonio Villaraigosa, addressed a full session of the city council on 9 February to detail just how grim the city’s finances had become. Miguel Santana, the city administrative officer (the CAO is the mayor and council’s chief financial adviser) had recently informed the mayor’s office that LA was facing a $200m shortfall through the end of this financial year and another half billion dollar-plus shortfall in the years to come if it didn’t radically, and rapidly, restructure its budget. Santana didn’t mince words. His nearly 300-page report (pdf) opened with this stark warning:
“The city is facing a budget crisis unlike any it has ever experienced … The enormity of our current fiscal crisis forces the City to take swift action now and lay out a financial plan for the future.”
Wall Street was growing increasingly worried by the city’s financial fragility, and the city’s ability to raise revenues through bond sales was at risk.
Why the crunch? According to city council president Eric Garcetti’s office, for the past four quarters, the city has seen double-digit revenue declines, a scenario not experienced since the darkest days of the Great Depression. Quite simply, the downturn was so steep it had made government-as-normal impossible to maintain in the City of Angels. As a result, says Garcetti, the city will face a crisis of funding for the next several years as well as an increasingly bitter battle of ideas as to the role of government in modern-day America; for conservatives, he warns it will likely be seen as an opportunity to starve the public sector, to “downsize government so much it can never come back.”
Los Angeles’ budget, currently around $7bn per year, will, all parties agree, shrink for years to come. And, since much of that $7bn is committed to untouchable items – making sure pensions are paid, keeping the LAPD afloat – the hundreds of millions of dollars in cuts will fall overwhelmingly on employees and on discretionary services. And these are services that disproportionately are used by lower income residents – the very people who have already been hit the hardest by the broader economic meltdown.
The city has already negotiated with public sector unions to ease 2,400 employees (out of a city workforce of about 40,000) into early retirement, is working to immediately reduce the city’s payrolls by another one thousand, and is exploring how to make more cuts down the road that could lead to a couple of thousand additional job losses – or, if the mayor and Garcetti’s vision of “shared sacrifice” is implemented, to fewer job cuts but across-the-board pay reductions instead. “For me, government matters,” says Garcetti. “Workers matter. Services matter.” Inevitably, however, the crisis will in some ways shrink the role of city government.
At the same time as the city is negotiating concessions from unions, it is also exploring “private-public partnerships” that would hand the city’s zoo, convention centre, parking garages and even parking meters to private operators. And it has already eliminated two city departments – environmental affairs and human services – with more likely to follow, hoping to seamlessly amalgamate their functions into other departments.
Yet in reality, there is very little that is seamless about these budget readjustments. The job losses are adding to LA’s already great economic pain – the city has a more than 11% unemployment rate; even with progressives occupying key positions in the city’s political leadership, the evisceration of core public services will, over the years to come, impact the quality of life of most Angelenos; and the privatisation of venues such as the zoo and the convention centre will harm the city’s long-term ability to raise sufficient revenue to meet its growing needs.
The broader economy may be starting to show some signs of healing, but for those at the bottom of the economy, for those most reliant on government services in Los Angeles and the countless other cities teetering over financial abysses, 2010 looks more like a bona fide Depression year than one made beautiful by the myriad green shoots of recovery.
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City of Angels on brink of abyss | Sasha Abramsky
Feb 26th
Los Angeles, the second-largest US city, is facing a crisis of funding not seen since the darkest days of the Great Depression
Two and a half years after the official start of the worst economic downturn and fiscal crisis in nearly 80 years, America’s economy is supposedly growing again, the stock market is halfway recovered from the lows of 2008 and early 2009, and the unemployment plunge seems to have been halted.
Yet, built-in time lags in how revenues are raised and budgets calculated mean that many states and cities around the country are only now starting to feel the worst of the pain. This year has been, quite simply, abysmal for local and state governments, and next year promises to be even worse. With easy cuts long-ago made, these days basic services are increasingly seen as luxuries, and public sector employees are increasingly vulnerable to wage cuts, benefits rollbacks, and unemployment.
While the federal government has considerable wiggle room to borrow or simply increase the supply of money to help fight its way out of financial collapse, smaller government units in America don’t have those options; increasingly cities, counties and states are facing the sorts of austerity measures we’ve come to associate with third world countries in crisis, or, in recent years, with vulnerable European nations such as Greece or Latvia.
In Arizona, a cash-pinched legislature put the Capitol building up for sale, proposing to lease it back for state use. In the small Colorado town of Colorado Springs, officials shut off half the street lamps and one-third of the traffic lights, told residents who wanted short grass in public parks to bring their own lawnmowers, and auctioned off a police helicopter on eBay. Around the country, libraries have been shuttered, after-school programmes have been curtailed, mental health services have been decimated.
In Los Angeles, the nation’s second largest metropolis, the Democratic mayor, Antonio Villaraigosa, addressed a full session of the city council on 9 February to detail just how grim the city’s finances had become. Miguel Santana, the city administrative officer (the CAO is the mayor and council’s chief financial adviser) had recently informed the mayor’s office that LA was facing a $200m shortfall through the end of this financial year and another half billion dollar-plus shortfall in the years to come if it didn’t radically, and rapidly, restructure its budget. Santana didn’t mince words. His nearly 300-page report (pdf) opened with this stark warning:
“The city is facing a budget crisis unlike any it has ever experienced … The enormity of our current fiscal crisis forces the City to take swift action now and lay out a financial plan for the future.”
Wall Street was growing increasingly worried by the city’s financial fragility, and the city’s ability to raise revenues through bond sales was at risk.
Why the crunch? According to city council president Eric Garcetti’s office, for the past four quarters, the city has seen double-digit revenue declines, a scenario not experienced since the darkest days of the Great Depression. Quite simply, the downturn was so steep it had made government-as-normal impossible to maintain in the City of Angels. As a result, says Garcetti, the city will face a crisis of funding for the next several years as well as an increasingly bitter battle of ideas as to the role of government in modern-day America; for conservatives, he warns it will likely be seen as an opportunity to starve the public sector, to “downsize government so much it can never come back.”
Los Angeles’ budget, currently around $7bn per year, will, all parties agree, shrink for years to come. And, since much of that $7bn is committed to untouchable items – making sure pensions are paid, keeping the LAPD afloat – the hundreds of millions of dollars in cuts will fall overwhelmingly on employees and on discretionary services. And these are services that disproportionately are used by lower income residents – the very people who have already been hit the hardest by the broader economic meltdown.
The city has already negotiated with public sector unions to ease 2,400 employees (out of a city workforce of about 40,000) into early retirement, is working to immediately reduce the city’s payrolls by another one thousand, and is exploring how to make more cuts down the road that could lead to a couple of thousand additional job losses – or, if the mayor and Garcetti’s vision of “shared sacrifice” is implemented, to fewer job cuts but across-the-board pay reductions instead. “For me, government matters,” says Garcetti. “Workers matter. Services matter.” Inevitably, however, the crisis will in some ways shrink the role of city government.
At the same time as the city is negotiating concessions from unions, it is also exploring “private-public partnerships” that would hand the city’s zoo, convention centre, parking garages and even parking meters to private operators. And it has already eliminated two city departments – environmental affairs and human services – with more likely to follow, hoping to seamlessly amalgamate their functions into other departments.
Yet in reality, there is very little that is seamless about these budget readjustments. The job losses are adding to LA’s already great economic pain – the city has a more than 11% unemployment rate; even with progressives occupying key positions in the city’s political leadership, the evisceration of core public services will, over the years to come, impact the quality of life of most Angelenos; and the privatisation of venues such as the zoo and the convention centre will harm the city’s long-term ability to raise sufficient revenue to meet its growing needs.
The broader economy may be starting to show some signs of healing, but for those at the bottom of the economy, for those most reliant on government services in Los Angeles and the countless other cities teetering over financial abysses, 2010 looks more like a bona fide Depression year than one made beautiful by the myriad green shoots of recovery.
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Letter: Inland Keynesians
Feb 22nd
Gavyn Davies (The great rift reopens, 20 February) refers to the Keynesians as “saltwater” economists located on the US Atlantic seaboard. However, among the most important US Keynesians of the 60s were Gardner Ackley, chair of Lyndon Johnson’s Council of Economic Advisers (University of Michigan); Walter Heller, chair of John Kennedy’s Council (Minnesota); Lawrence Klein (Michigan, then Pennsylvania); and Arthur Goldberger (Wisconsin).
Keynesians view the level of economic activity as determined by aggregate demand, while the neoclassicals consider output to be determined by the adjustment of relative prices. It should be obvious to expert and layperson alike that the former is currently the case, requiring fiscal expansion, not contraction.
Soas, University of London
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If we live by conservative morals, we will never escape this crisis | Will Hutton
Feb 21st
The current battle between the economists may seem to be about economics. It is not. It is about the morality of debt
Nothing is more certain to arouse the armchair moralist than too much debt. Every principle of fair and moral dealing seems to be offended. It is mortgaging the future. If fair rewards are the proportional and due result of one’s efforts, debt is a means of unfairly living high on the hog today only to pay a bigger bill tomorrow. Borrowing to buy an asset such as a home or to fix an unanticipated piece of bad luck such as dry rot is more than justifiable. What is amoral is to try to escape the limits of what one fairly earns, worse still to pass the bill on to your children.
If private debt arouses these sentiments, fast-growing public debt is even more provocative. We are now having our future mortgaged for us. It is public imprudence, a nation living beyond its means. If, on top, the annual deficit is the largest in Britain’s peacetime history – as it will be this year – and it has been delivered by a discredited Labour government under a prime minister widely held to dissimulate to the point of outright dishonesty, then moral concern swells to outrage. Politicians are at their most effective if they are crusading with the moral force behind them. Debt is an issue on which David Cameron and the Conservatives feel they can take the high ground. We cannot go on like this, they insist. The deficit must be cut as a matter of moral urgency, more deeply and faster than the government plans.
However, debt morality should never be confused with good economics. Good economics attempts to deliver a functioning economic system that works for all its members. Necessarily, credit and debt play crucial economic functions, allowing the system to manage the inevitable mismatches between flows of revenue and costs over time. Changes in public debt are a vital instrument to manage the economy efficiently and, crucially, morally and fairly. Bystanders may think that the battle between 60 economists who signed letters to the Financial Times repudiating the 20 who earlier signed a letter to the Sunday Times urging that Britain’s public deficit to be eliminated in the lifetime of a parliament is a battle over economics. It is not. Economics is on the side of the 60. The gulf is about the morality of debt.
The Sunday Times 20 are less economists and more, like the Tories, debt moralists. Underneath their unsubstantiated claim that currency and interest rate crises are inevitably associated with high public debt, so that recovery will be menaced, lay the scarcely concealed language of morality. By saying that the deficit was the largest in peacetime history, without placing it in the context of the largest-ever recession, the inference was clear. A government that needed to regain trust was immorally taking debt to exceptional levels without good reason. Budgetary propriety had to be restored fast.
Debt moralism seems like common sense, but only if you put economics to one side. Three key linked economic arguments offer a different context to view the necessary growth of public debt and thus morality. The first is best set out in a recent paper from McKinsey Global Institute, Debt and Deleveraging: the global credit bubble and its economic consequences. The authors have analysed 45 countries suffering credit crises since 1930. Every shock has been followed by a period of six to seven years in which consumers and companies reduce their debt, on average by a quarter.
Five countries – the US, the UK, Spain, South Korea and Canada – are now certain to go through the same painful process, if history is any guide. Because Britain has the most private debt proportional to its output, it is the most acutely at risk. The process has hardly begun, but it will mean a prolonged period of very low growth in private demand, which is economically devastating.
Second, how best to respond? Here the evidence is provided by a paper by Emanuele Baldacci and Sanjeev Gupta, deputy division chief and deputy director of the IMF’s fiscal affairs division, the high priests of fiscal conservatism. They have examined 118 financial crises in 99 countries between 1980 and 2008. On average, national output fell by 5%. Of course, loosening monetary policy is vital to limit the impact of recession. But so, they discover, is fiscal policy, the economists’ term for spending, borrowing and taxing. Increasing borrowing by 1% of national output reliably reduces the length of recessions by 2½ months. The best response is increasing capital spending; lift that by 1% of national output and not only are recessions shorter, but there is a permanent boost to economic growth of around a third of 1%.
The third argument, completing the chain, is that, despite fears, Britain is financially capable of using fiscal policy as it has. Here is my last exhibit – the Green Budget for 2010 by the Institute for Fiscal Studies. In partnership with economists from Barclays Bank, led by Simon Hayes, the IFS paints a bleak picture of a miserable 2% growth over the next decade. They observe that consumers are already doing what the McKinsey Global Institute predicts – saving and paying off debts.
It is plain that if public spending fell any faster than the government plans, ie if there is an attempt to more than halve the deficit over four years, then growth would be even lower. But as the forecasters say, fortunately our plans to service the debt is within the margins of safety, never rising above 10% of tax revenues even at the peak moment for public debt in 2014/15. It started from a low base and interest rates are very low. They also remark that whatever the credit-rating agencies may say, Britain has not defaulted on its debt since the 14th century. There is zero risk today.
These are the unambiguous economic arguments that persuaded the 60 economiststo take on the Sunday Times 20. Nobody disputes that there has to be a credible plan to lower the deficit, but policy driven by debt moralism is not credible. Credibility lies in deploying good economics to deliver ongoing growth within which the structural deficit can be attacked.
The task is twofold: to find a way of attacking the structural deficit while sustaining and lifting growth. We need to try to protect public investment rather than halve it as existing plans do. And we need to create a national innovation ecosystem to support growth.
The next decade is going to be very tough with huge economic risks. Debt moralists dominating the national debate do not help. It is difficult enough delivering good economic policy. Let’s not make it even more difficult by making blinkered morality, rather than economics, the compass for what the next government does. That way lies perdition.
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Don’t celebrate these billionaires, be horrified by their existence | Will Hutton
Mar 14th
Posted by Will Hutton in Business
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It’s just accepted that more billionaires of any hue is a sign of economic vitality. Wrong
Last week offered a chance to collectively gawp at the super-wealthy. Mexico’s Carlos Slim and the US’s Bill Gates were in a run-off to be the world’s richest billionaire in the Forbes list of the 1,011 people with personal wealth in excess of a billion dollars. In the event Slim’s $53.5bn just pipped Gates’ $53bn. It was a moment of symbolism, opined the global commentariat. The economic baton was passing from the US to countries in Asia and Latin America. And we all could relax; the numbers of billionaires was growing again – proof positive that the global economic machine was picking up.
It is the ultimate degeneracy of the age. There is little critical appraisal of billionairedom. It is just accepted that loadsamoney, capitalism, jobs and economic progress are indissolubly linked. More billionaires of any hue is a sign of economic vitality. Lucky Mexico for coming up with the winner. But wealth is not connected to economic progress in a linear way. Wealth can come from productive or unproductive entrepreneurship. Society wants the former and deplores the latter. If you want to be seriously wealthy the message from the Forbes list is clear. One way or another you need to have played the system, played the financial markets, been born to the right class or manipulated government to have got rich. This is a list of expropriated wealth on a Midas-like scale. Marx will be grimly smiling in his grave.
Too few of the world’s billionaires can claim to be honest-to-God productive entrepreneurs who have enlarged the economic pie by dint of hard work, imagination, risk taking and innovation – although thankfully a useful proportion do populate the list. But a depressingly large number constitute a ragbag of monopolists, oligarchs gifted assets and profits by the state, mega-financial engineers or just family plutocrats. And once on the list you tend to stay there; there is little churn. The arteries of capitalism are hardening.
Sixty-two of the 1,011 are Russian oligarchs. Twenty eight are Turkish oligarchs. Even Carlos Slim made his fortune from being the monopolist who controls 90% of Mexico’s telephone landlines and 80% of its mobile phone subscribers. The OECD notes that he charges among the highest usage fees in the world. But hey! He is a billionaire and what matters today are his riches – not the manner in which the money is made. He may have started out as a productive entrepreneur. Today he is using his power to expropriate wealth on a mega scale.
The contrast with his rival Bill Gates could hardly be greater. Microsoft may have had its head-to-head confrontation with the EU Commission over anti-competitive practices, but Gates built his company by innovating around one of the great historic general purpose technologies. Information and communication technology is like the railway, internal combustion engine or air travel – a technology with massive spill-overs and implications for society. It is a classic example of productive entrepreneurship. Gates may not deserve $53bn, he was lucky to be in the right place at the right time with a great university system around him, but he undoubtedly deserves to be rich. Both Gates and Slim are exploiting their market position to get above average profits, but one is more overtly political than the other. Put another way, Gates has grown the economic pie. Slim represents a tax on it.
The good news for the US is that even if its share of global billionaires has fallen to 40%, a disproportionately high share are still productive entrepreneurs. There are figures on the list – like the Walton family riding high on Walmart – who have inherited their money, but most have made their fortunes from socially and economically useful activity and whose profits and market position are being actively challenged in the market place. A large proportion of the Indian entrepreneurs are in a similar position, although the relationship with the Indian state is sometimes more murky. Mukesh Ambani, complete with his 70-storey home in Mumbai, may be extravagantly wealthy at number 4 in the list, but like the number 5, Lakshmi Mittal (who has British residence) he has spawned an industrial empire that is generating jobs and wealth. The productive entrepreneurship spells long-term good news for the US and India – less so for the countries whose billionaires are politicised oligarchs and monopolists.
But strangely not even Forbes magazine makes much of an effort to distinguish how the billions are made. The great truth of capitalism is that it took off only once the European Enlightenment created the great institutions that kept it honest – the rule of law, a free press, accountability mechanisms, ways of forcing monopolists to give up their ill-gotten gains, creating competitive markets and elections. Before that there was tax-farming and the buying and selling of monopolies – rather as in China today. The Enlightenment offered the means, however imperfect, to challenge all that. The great mistake of the free-market revolution was to argue that all that was needed to make capitalism work was free, lightly regulated and flexible markets – and that institutions imposing ethics, transparency, accountability got in the way. We now know better.
Britain’s representation in the Forbes list is particularly depressing. Our members include a bunch of property developers, tax-avoiding retail magnates, the Duke of Westminster, a hedge fund manager and Richard Branson. Branson is probably the closest we have to a billionaire productive entrepreneur, but his companies are hardly at the forefront of technological innovation or employment generation. He glamorises – but does little to grow the economy. We do not have one genuinely productive entrepreneur on the list.
In many respects this forms the heart of the British crisis. Our political class bought the proposition that whatever the source of wealth economic progress would follow, celebrating the Mayfair hedge fund manager more than the genuine innovator. Watch the British government now fight on behalf of hedge funds against EU regulation. Only at the eleventh hour, with some of Lord Mandelson’s speeches and initiatives, together with David Cameron commissioning a useful report from the entrepreneur James Dyson, Ingenious Britain, is there any sign of change. But it is a deathbed conversion. The electorate, angry and bewildered, want a conversation about creating wealth and jobs, rewarding those that do rather than those that speculate and rig markets. Instead they are offered platitudes and bromides.