Why are Western politicians failing to tackle the debt crisis? Partly, because they do not know why things got this way. So they do not really know what to do. We need better understanding.
At the risk of sounding like an airport paperback I offer – Frankensteinomics! The global economy, I contend, is like Frankenstein’s monster – bloated, dysfunctional, and kept alive only by repeated jolts of artificial stimulation.
The mad scientist who first showed how to apply the electrodes was Maynard Keynes. Using State spending to jolt the economy out of depression did of course look rational and benign in the dark days of the Thirties. The technology jolt which brought cars and fridges to a mass market in the Fifties seemed equally benign. Vance Packard made sour remarks about how sales were artificially boosted by planned obsolescence. Few paid much attention – at the time.
In the Seventies, Harold Wilson’s “white heat of technology” began to cool. Labour-saving technology proved a double-edged sword, creating wealth but destroying jobs. The need to bolster the economy became more pressing. The Right won the argument that union power should be broken so that business could take charge. Yet the Thatcherites could not deliver consistent prosperity.
In the Nineties, the Left regrouped. Blair and Clinton turned to the centre. They abandoned class war, and made a novel and seductive offer to voters. Modern centrist technocrats would simply be better managers than the old ideologists and cold warriors of the Right. New Labour could abolish boom and bust. It was a bold claim. Bold measures were needed to make it happen.
Prudence was the watchword. It was also a smokescreen. The real trick was to use the electrodes. Keynesian state expansion provided one jolt. Chinese “generosity”, offering cheap goods to break into Western markets, provided a fortuitous second jolt. The bubble in “dotcom” shares provided a third jolt. At the turn of the century, that bubble collapsed. To keep up the momentum, we needed a new bubble to believe in.
We found one. Nothing succeeds like success. Bubble-generated wealth drove up house prices, creating an apparently virtuous circle favouring more and more borrowing and spending. Kitchens, phones and hi-fis became fashion items requiring frequent replacement. Finally, the pyramid collapsed in 2008. House prices went into reverse. The genius of maximum gearing turned into a mountain of unsecured private debt. Frankenstein’s exhausted monster had been jolted back to life once too often.
What has happened since has been a coda to that symphony. The markets are once bitten, twice shy. Before the crunch, they were excessively relaxed about private debt. Now, they are unduly nervous about sovereign debt. Bankers do not want to know whether deficits are good or bad for national economies. They only know that banks need their loans repaid, and will charge higher interest rates if they think there is a risk that they might not be.
Meanwhile, politicians have fiercely debated what to do. The collapse of tax receipts in 2008 turned them all into deficit-finance Keynesians by accident. Some, like Brown and Obama, have sought to maintain a Keynesian stimulus. It has not worked. The Frankenstein monster is now as dead as a doornail, and cannot be jolted back into life.
Others, like Osborne, have cut state spending. That too has not worked. The cutters boast that the latest crisis has proved them right. It has certainly proved that markets punish the greatest borrowers. However, it has not proved that the smart response to private sector bust is to throw public sector workers onto the dole as well. All that cuts achieve is to spread misery more widely and deflate a failing economy further.
There is a third alternative, but few politicians want to think about it. That is to raise taxes and spend money on genuinely useful jobs. We should not follow the Frankensteinomic agenda and buy a new model smartphone every year. We should follow a green agenda and build the zero carbon homes we will need when the oil and gas run out.
The free market is incapable of making that rational choice. A dictatorial, socialist, or centralist State cannot be trusted to act in the public interest. A liberal State – with a written constitution to guarantee real democracy and individual rights as the essential basis for an increase in State power – offers the best chance of a viable alternative to Frankensteinomics.
Could that be our big new unconventional idea?
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22 Comments
Why should we listen to economic prescriptions from someone whose diagnosis of the state of the economy is only to pluck out a tired cliche? Is our economy “deflating”? Deflation requires a falling price level. Ours is… not falling.
The idea that the the problem with the (lack of) housebuilding is that the “free market” is unable to make “rational choices” is truly hilarious. I’m sure my local Parish Council agree though, since they recommend a “refusal” of every single new build planning application.
“The free market is incapable of making that rational choice. A dictatorial, socialist, or centralist State cannot be trusted to act in the public interest.”
Okay, so the market needs to be regulated (since complete economic freedom is just freedom for the economically rich to enslave the poor). But then it seems that a centralist State cannot be trusted to act in the public interest. Well now…with a State powerful enough to regulate, you will find that the market becomes dominated by other actors that are more than willing to steer things their way, to whit corporations, banks, transnational financial entities.
The ‘Liberal’ state would a shrivelled, feeble thing and would exacerbate illiberalism.
Doh, meant to say ‘without a State powerful enough…’
I don’t think the problem is Keynesian. He advocated economic boosts to generate any jobs because it would lead to more useful jobs, thus generating tax revenue. . The deficit reduction plans in place at the moment are much more in line with, for want of a better description, the Neocon doctrines of small government, deregulation. less red tape. market forces Money going to money. Most of the advocates of. this plan are actually fearful of “digging Keynesian ditches”.
The point is you can’t just leave things to the markets because they really only generate money for shareholders with little regard for the infrastructure of the nation states. When it crashes it has knock on effects in terms of policing. the military, unemployment and attempted bail outs increases debt because the money simply disappears into a black-hole. There is nothing Keynesian about it and the test is that his plans worked, whilst subsequent attempts to reduce the role of the Nation State in favour of globalization look as discredited as communism.
I agree with the general theme of the article, however the greatest problem is our political system which, primarily, consists of two parties desperate to win or to hold on to office – Murdoch would not have acquired the power he did if this were not the case.
This leads, at GE time, to the main parties developing a strategy which they believe is most likely to hoodwink the electorate into voting for them. Once in office they do whatever they want – generally leading to disastrous consequences.
We are at a time of immense change and a consistent long-term strategy in required. I believe this is only possible if the electorate is brought into the process through direct democracy which should have the effect of educating the voters as to the challenges faced. In turn DD would oblige the party in office to stick to the long-term plan, put forward rational and acceptable measures and help to prevent some of the scandalous events that we have seen recently.
It would be a brave politician who goes out there and says, “Keynesian stimulus spending doesn’t work. So what we should do is raise taxes and spend money.”
I have been talking about the ‘Frankenstein syndrome’ for years. Government policy creates the ‘monsters’ it professes to protect us from. That’s why so much money is wasted on pointless ‘innovative schemes’ and ‘initiatives’ and their debt is so enormous. It’s all a Big Con.
The bubble burst a long time ago.
Frankenstein’s monster says it all in the book.
your acknowledgement that brownused a stimulus is corect and i wish more lib dems realised it……..but it didnt fail, keynes says you have the stimulus then youvwithdraw it to reach equiblibrium point…thats what the coalition are attempting now
Economics is that science that studies human behaviour as a relationship between ends and scarce means that have alternative uses…old definition, none too fashionable but the one I think covers the subject pretty well.
It tells us the key economic problem –scarcity – we ain’t got enough “means” to meet all our “ends” or, put another way, resources to satisfy our competing wants. It tells us economics is about studying our human behaviour as we attempt to grapple with this problem. How we decide what/who gets resources and what/who doesn’t.
All the stuff we hear about, stock markets, banks, finance, inflation and everything else comes squarely in the “human behaviour” bit.
Market capitalism is a system we’ve devised and as such it is no more a natural state of affairs than eating fish on Friday…it’s a choice. If it comes to all out war between Nation States and the market the market will lose…only it may take a lot more riots in a lot more capitals before it does.
Taxes don’t need to be raised or reduced – just shifted from earned income to unearned wealth.
By the way – if our dysfunctional economy is the monster, then its creator, sustainer and the real Frankenstein in all this is surely our over-regulatory, privilege-protecting, monopolistic state.
Glenn,
You defend Keynesian economics as being more rational and effective than neocon free market economics. Well, I certainly don’t advocate letting the free market dictate drastic cuts, social chaos and recession, either. Joking aside, nor do I aim to denigrate Keynes. He was a clever man who found the right solution for the problems of his own time. My point, however, is that we cannot keep on trying to jolt the economy back into life when we have done it too many times already. Our advertising industry has for years battled manfully to sell people more and more stuff that they do not need, in order to keep them in “productive” jobs making the stuff. Meanwhile the planet is suffering from over-production and over-consumption. It’s time to put Keynes onto the back burner.
You and many others appear to see economics as a simple choice between the free market approach and the Keynesian approach. My point is that both of these approaches have failed, which is why the more rational politicians like Obama and Boehner are actually rather diffident about offering a solution. We have to think outside the box and come up with a third approach, neither Keynesian nor free-market.
I should probably have written a longer “constructive” argument, to explain more clearly what I think this third approach should be. However, I thought it important to concentrate at the outset on a “destructive” argument, to show why our current world-wide addiction to Frankensteinomics is wrong.
It is not, let me hasten to add, only the Keynesians or New Labour who are responsible for Frankensteinomics. Indeed, it is the globalised multinationals who are most responsible, alongside “business-friendly” politicians from both left and right who have embraced the agenda of endless growth and prosperity. It is an agenda which has brought us to our knees.
“Why should we listen to economic prescriptions from someone whose diagnosis … is … a tired cliche?”
Brilliant stuff, JustAnotherTroll. It took you at most eleven minutes to read my article and scribble eight lines in response. You must have been absolutely determined to get in first. Your post doesn’t say anything constructive. All it does is try to put people off reading what I wrote. Scared of rational argument, are you?
Mike Cobley said: “The ‘Liberal’ state would be a shrivelled, feeble thing”. That’s certainly not what I meant! I suspect I need to explain better what I mean by the “liberal state”.
Frankensteinomics has failed. The ever-onward expansion of the globalised economy has come to a grinding halt, and neither free market economics nor Keynesian stimulus is able to jolt it back into action again. We simply cannot rely on a desperate advertising industry to maintain demand for more and more over-consumption of goods, just so that we can preserve the jobs of those who make the goods. (if you don’t think it is desperation tactics, remember the so-called “ecological” car scrappage scheme – which boosted car production and dismayed all the real ecologists, who knew that the net effect was to increase energy consumption.)
So does mass unemployment beckon? Well, it shouldn’t. There is actually a great deal of work that needs to be done. I gave the example of housing. We need to knock down old, draughty, unmanageable houses on a huge scale and replace them with “passive houses” which don’t need heating. if we don’t do that work, we shall all duly freeze when the oil runs out.
The free market cannot meet this need. As in so many other ways, it has failed. A logical conclusion is that the State must rediscover its sense of purpose. We must find a way to reassert State power and give governments the confidence to govern.
However – Dictatorial centralist government, however clear its sense of purpose, does not have a good track record! Mussolini may have made the trains run on time, but however appealing that may have been, it ended in tears. If we are to reassert State power, we must first be quite certain that it is a democratic State which takes the power.
Hence my concept of the “liberal” state. As part of the bargain, we need a written constitution which guarantees the checks and balances on power and which enshrines a true democracy, including electoral reform, and probably also (as John Roffey argues) measures to enable direct democracy. Only when that is in place should we be confident that we can allow the nation State the increased powers that will be needed to save the planet.
Sustaining government jobs is always more expensive and more detrimental to GDP growth than not doing so would be – however much tax you take from public sector workers, or the products and services they spend their money on, you’ll never recover all of it – the value has to come from what they do, not them being paid.
As for raising taxes on those working – way to suppress consumer spending and take demand out of the economy – your proposal is to take more money from the productive, product and value generating private sector to sustain more state bureaucracy? No thanks.
David Allen.
I agree that British politicians need need to think differently and I’m less convinced that New labour’s fiscal stimulus package was entirely sensible in the form it was implemented’. My point was that it wasn’t really Keynesian because the mechanism he advocated was primarily concerned with generating jobs within a nation state, not with protecting an under regulated banking system from practices that ranged from the idiotic to possibly criminal.
I do think that on a local level some level of keynesian regeneration would lead to less social problems. Unfashionably, I also believe in targeted higher tax rates, clamping down on tax evasion, the closing of tax loopholes and a certain amount of protectionism to ensure that jobs aren’t shipped abroad. After all this has served France and Germany very well
The first paragraph – that politicians don’t understand how things got this way etc. – is exactly right. And we urgently need better understanding for without that the remedy is as likely to do harm as good.
Start with Keynes. In the Great Depression he reallised that an economy could fail for lack of demand. Not spending in hard times is logical from an individual’s point of view but when everyone does it the economy shrinks since one person’s spending is another’s income. So it is logical for govt to deficit spend to shock the economy out of this state until it is self-sustaining.
The background to this is that the economy is a chaotic system (in the mathematical sense). What this means is that there is, in general, no “equilibrium” between supply and demand as economiests like to describe. Theirs is a fantasy world based on thinking in physics circa 1880 but still unbelievably current in economics up to today. There are only pseudo equilibria, local in time and space and an economy can easily get stuck in a sub-optimal equilibrium as happened in the Great Depression. So, it makes perfect sense to propose a shock therapy of deficit spending to jolt the economy to a higher equilibrium.
Trouble is that bad economists and lazy politicians came to rely on deficit spending as a one-size-fits-all solution and Keynes’ thinking was adulterated to provide intellectual justification for spending rather than making hard choices or working out what was really going on. And to a point it works. However sick an economy, however badly it’s performing more demand generally helps in the short run – but sometimes only like a sugar rush for an obese person. It’s not surprising that right-wingers detest this approach and deride it as wasteful and inefficient. But so should left wingers who have no business taking taxes from working people (too often the seriously rich evade them) to spend on pet projects which are too often motivated as much by politicians’ desire to “do something” as by good sense.
So, what has gone wrong this time?
I suggest that the proximate reason id debt. Mainstream economists didn’t see the crisis coming because it doesn’t really figure in their theories; probably without ever thinking about it the system found the path of least resistance which was to increase private debt. For the banks this was great because its hugely profitable; and in the short run – a few years – growing debt sustained consumer spending. In the long run it’s obviously a self-limiting trend and now it has indeed hit the buffers. So spending is down and will stay down as long as the debt is there. It really is that simple. And “traditional” deficit spending does no real good. All it will do is keep the economy hobbling along until the banks debt is eventually paid off after several decades (unlikely) or the state goes broke (much more likely).
So the first solution is to abolish debt. The banks must be made to write off unpayable debt; future generations will remain in debt bondage until this is done.
One underlying reason (out of several) the economy is in trouble is I suggest that it is too high cost. To right wingers this means cutting workers’ pay. Not to me it doesn’t. It means abolishing the “toll booths” (as Prof Michael Hudson calls them) that have sprung up like weeds in spring; ways in which monopolies and (more often) oligopolies charge more than their services are really worth. Take home pay doesn’t stretch nearly as far as it should and many firms are unable to compete internationally. In short it’s rip off Britain. But because this problem has increased slowly we are like the proverbial boiled frogs and don’t notice.
Now the thing about the strategy I am pointing too is that it is fundamentally liberal; it’s based on an analysis of monopoly power run wild, of the regulatory capture of the state by vested interests which then redefine “free markets” (in reality an oxymoron) in ways that suit themselves.
Liberal Eye,
A quick first shot at a response. I suspect that in many ways we are seeing the same problem from slightly different angles. Excessive debt is a natural consequence when Frankensteinomics finally fails to resuscitate the monster economy, and it is the mechanism whereby the financial system then stalls. Whereas I am seeking a change of political direction to solve the problem, you are (I think) suggesting that there is a financial / technical solution. I certainly wouldn’t dismiss the possibility that you could have a point there.
A couple of questions. First, how can we (as you suggest) make the banks write off debt? Secondly, on your point about a high cost economy due to market inefficiency and the excessive power of business oligopolies: do you think this is just a UK or a worldwide problem, and, how would you solve it?
Yes, I agree we are seeing the same thing from slightly different angles. From where we are there are no good or painless solutions but some are better than others.
Re the banks. What we should do here is first to first make a distinction between those parts which are the “money National Grid” – the High Street outlets and back office systems that support them as distinct from the investment banking operations and even the ordinary commercial (mortgage and small business) lending done from the High Street. it is clearly absolutely essential that the Mmoney grid doesn’t fail so it needs to be split organizationally.
With that safety measure in place we can then be much tougher with the banks and simply STOP subsidising them. The likely scale of the losses iss such that it will take decades to earn them out even if the banks suddenly morph into paragons of prudence and good managment – which I don’t think. Most are only alive today because of massive overt and covert subsidies (QE is a straight subsidy). Instead we should adopt the Victorian constitutionalist Walter Bagehot’s prescription and lend freely to them but at a penal rate. This would expose if they are illiquid (have a survivable short term cash flow problem) as they claim or are actually insolvent (the reality) in which case they will quickly fail. It’s simply capitalism 101 which, strangely, they don’t like for themselves. The assets of failed banks could be sold off at market prices and the system rebased absent a lot of debt. Shareholders would be wiped out and bondholders badly hit but that’s better than wrecking the economy. Confident that the rot was cleaned out, business would then start investing (although other factors have to be right too).
Re business oligopolies: I see this as a perpetual problem. Libertarian fantasy imagines that companies are driven by competition to innovate. Problem is that their “innovation” is not necessarily for public benefit (in finance beneficial innovations are rarer than hens’ teeth) and also that there are easier ways to meet competitive pressures than innovation – for instance fixing the regulations that govern a business. Human innovation is endless but not necessarily directly to common benefit. Eg1 When electricity was privatised after careful study about how it should be structured, the industry immediately reorganised itself. No-one now seriously disputes that it’s an oligopoly. Eg 2 When Tesco wanted to take over T&S stores a few years ago they persuaded the authorities to stand competition law on its head to allow it. Very creative, but not in a good way.
When self interested and powerful firms meet a govt that has been persuaded by right wing ideologues that “regulation is bad”, that “govt is the problem, not the answer” as Reagan put it, then crony capitalism is going to run riot and deliver little to the majority. Cue growing inequality, cue a very unhappy society.
Liberal Eye,
I’m having trouble convincing myself that salvation requires we crash the global banking system. At any rate, I don’t think the politicians who chose to do it would earn instant applause and re-election.
However I entirely agree with you that the unsung tyranny which tramples on ordinary people is global business, and that its hands on the levers of power have been a key factor in the baleful triumph of Frankensteinomics. It has been a clever sleight of hand for the business lobby to create the false bogeyman of “tyranny by government”, thereby deflecting attention from the much more harmful effects of tyranny by business. Our own Orange Bookers, so tirelessly promoting the cause of civil liberties and freedom from government, have been part of that particular smokescreen.
Sadly, however, the capitalist / New Labour / pro-business Tory / and Orange Book Lib Dem lobby didn’t have to work too hard to persuade people of the seductive appeal of Frankensteinomics. The idea that we can achieve endless growth and prosperity naturally appeals to people. Tax cuts are easy to sell.
Things will probably get worse before they get better. The Tea Party can see the way forward. New Labour may have governed in a way which was unsustainable, and produced short term gain with long term pain, but, what do they know? They are just amateurs. Once you accept that there are no limits to irresponsibility, you can outbid all your competition with sugar-coated political recipes. Oh, and wrap it all up in religion while you’re about it, so as to camouflage just how selfish and mindless you are. That’s how the Tea Party will win in 2012.
I’m not proposing that we crash the global banking system – they will do that all by themselves. The markets this afternoon were buzzing with speculation that both Soc Gen, France’s second largest bank, and Bank of America are on the verge of going bankrupt. Many others are little better including our own RBS and Lloyds/HBOS. What I propose is that we should organize to catch the bits when they fall to minimise the collateral damage to society. That is a very different proposition.
In the meantime their liabilities are LARGE in relation to GDP; UK banks to Ireland alone near $200 billion. So your point about politicians facile promises are true. Sadly, much of that prosperity is actually no more than a complex and disguised Ponzi scheme. It’s inevitable collapse will reveal that we are really much poorer than we thought. How could it be otherwise with such a neglected real economy? That is why politicians are desperate to paper over the cracks; what is coming is karma for their shallow promises on an epic scale. The trouble is that they are making things much worse and vastly increasing the eventual bill. Eg Greece’s debt to GDP ratio is now much worse than when the “bailouts” started. But then they were never bailing out Greece, only French and German banks who had got in too deep.
Liberal Eye,
A much improved sales pitch for your point of view! I don’t pretend to know what to do about banks and the private / public debt mountain. From the political point of view, however, promising to create chaos is not a big vote winner. Offering to sort out chaos when it happens sounds much more helpful. As a political sales pitch, at any rate. But can it be put into practice?
Confusion about financial issues is of course widespread. As you point out, politicians talk about bailing out countries, which sounds nice and humane, but they are actually bailing out banks and bankers. The German public seem to applaud their government for getting tough with the lazy Greeks, but, it seems to me that it was really the banks who Merkel wanted to get tough with.
The financial hawks like Merkel, however, do not seem to be getting all their own way. This is surely understandable. The hawks in the US decided that Lehman Brothers should not be bailed out. Chaos ensued, and everbody said the hawks had got it wrong. On the other hand, Gordon Brown and Alastair Darling found an emergency sticking-plaster solution to keep the world’s banks afloat, and everybody cheered (at the time).
The lesson, perhaps, is that your earlier post is closer to reality than your last one. At some point, some crazy loon may have to make the decision which brings the house of cards tumbling down. Dire consequences will ensue, and that crazy loon will be vilified until the end of history. So much better to be a hero of Frankensteinomics, and find new ways to use the electrodes and jolt the monster into one more tottering step forward!
I find the debate between David Allen and Liberal Eye very interesting and I agree with both of them in several respects.
Regarding the current crisis, isn’t the Elephant in the Room (at least for Lib Dems) the Euro? Thank goodness our political rivals didn’t share our enthusiasm for the wretched thing. Unless the EU sorts itself out it really might be worth Britain pulling out before the whole edifice crumbles (I never thought I would say that).
Looking beyond the EU and other current troubles, isn’t the root cause the fact that GROWTH is our god? Most (not all, I know) of us in the West enjoy a degree of comfort that would have been unimaginable a few generations ago. Nothing wrong in that, but can ever increasing wealth continue forever?
And the really big Elephant in the Room for the whole world is population growth.