It's deeper than tax avoidance

Supporters of UK Uncut, a relative newcomer to the world of protest, in common with millions of others, are justifiably angry about the savagery of the Coalition’s cuts programme. They say the cuts aren’t necessary and that the government is implementing them out of ideological spite.

Like the official pronouncements from the TUC, UK Uncut , on the one hand, insists that the size of the budget deficit isn’t a problem because the UK’s credit rating remains high. And on the other hand, they say that there are alternatives which could be used to reduce the total of government debt.

UK Uncut activists specialise in activities designed to highlight tax avoidance by corporations including Vodafone, Boots, and Tesco, as well as the banks who they blame for the economic crisis. Their hope must be that if enough people get angry, they’ll force the government to change tack.

UK Uncut activists were greatly encouraged by Johann Hari’s recent article in The Independent which i) denies that the scale of debt in the UK is a problem, and ii) asserts that debt is “part of the cure”. The facts suggest, claims Hari, “the need to spend more, not less, to get the economy back to life – and pay back the debt in the good times, when we will be able to afford it.”

Leaving aside the nature of Hari’s “good times”, the problem with accumulating more debt following the logic of the inter-war years economist John Maynard Keynes, is, as the article itself points out, contained in a key lesson of history:

“The Great Crash of 1929 was followed by a US President, Herbert Hoover, who did everything Cameron demands. He cut spending and paid off the debt. The recession grew and grew. Then Franklin Roosevelt was elected and listened to Keynes. He ramped up spending – and unemployment fell, and the economy swelled. Then in 1936 he started listening to the Cameron debt-shriekers of his day. The result? The economy collapsed again. It was only the gigantic spending of the Second World War that finally ended it.”

Yes, but no.

It wasn’t the gigantic spending of the Second World War that ended the global recession of the day, but the destruction of surplus productive capacity that had been accumulated during the previous period funded by speculative investment – and debt.

While tax avoidance by private equity companies like Boots, who are registered in a tax haven in Switzerland, is a scandal, it’s a symptom rather than a cause. It’s corporate-driven globalisation that has enabled corporations to dominate national governments and force down tax rates, as well as register offshore. Any threat and they’re off overseas like a flash.

Ironically, during the credit boom, New Labour funded its spending via tax revenues from the City. That came to a sticky end with the credit crunch and the recession that followed. Now, despite the crisis-deniers, the global recession is deepening, inflation is accelerating, debt is growing – all at rates which outpace anything any government or group of governments can do. Increasing tax revenues wouldn’t make much of a dent in the national deficit and would leave the fundamentals of capitalism unchallenged and unchanged.

These are symptoms of a long-developing spiralling problem that has bedevilled capitalism during its entire three and a half centuries: Competition for profit amongst capitalist enterprises forces them to invest in productivity-enhancing technologies that drive the rate of profit down. This in turn requires an increased volume of sales which surpasses the available market. Credit allows a few more turns on the spiral of growth, until it too becomes unsustainable.

Though the crisis didn’t erupt into view until 2007/8, the endpoint had already been breached in 2004/5 when consumers reached the limits of their ability to juggle their credit card debt, and mortgage payments came under pressure. So once again, the only road the capitalist class can follow now is to eliminate the surplus capacity in every country. Halting that process requires the elimination of the profit system itself and a move towards a sustainable, not-for-profit economy.

Gerry Gold

Economics editor

No easy fixes

To those who have been preaching state intervention as the solution to the credit crunch and the recession it must seem as though their time has come. Out go the discredited free-market assumptions of the late 20th century and in come the theories that found favour in the late 1930s and the immediate post-war.

These were largely the work of the British economist John Maynard Keynes. He claimed that relatively low government spending and/or high taxes had contributed to and then reinforced the economic depression of the 1930s. Now New Labour has apparently gone back to Keynes in their desperation to find some answers to the lethal cocktail of a collapse in jobs, sharp falls in consumer spending and financial meltdown.

But bringing forward a few infrastructure projects does not even begin to address the enormity and breadth of what is a global economic as well as a financial catastrophe. Bringing already budgeted spending forward, funded by new borrowing but without creating new money, is at best a new twist on an old solution to a different problem.

All forms of credit and debt, including money, are promises to pay in the future, so the prescription to bring future spending forward most certainly means a massive expansion of the injections of the drug that produced the current mayhem. The system can’t survive without it. New Labour already has accumulated record debt, and some doubts have already been raised about the availability of enough lenders to fund the new borrowing needed to bail out the bankers. Where will these additional lenders be found? When they fail to materialise, will the government simply print money?

With many of world’s banks and corporate behemoths - Ford, GM, Chrysler, GE on the point of bankruptcy, and most, including Starbucks in retreat, the cost of limiting the recession and preventing or even reducing the looming prospect of a depression, will be too great. There’s simply not - and can’t be - enough real value in the economy to service the debt already accumulated during the last years of globalisation. It’s why we have the present crisis.

The vast unimaginable gulf between the value of global production, even before the recession set in ($65 trillion), and the monstrous imploding balloons of credit and debt ($550 trillion in the credit derivatives markets alone – this is a small fraction of the total) puts the few trillion guaranteed to the banks into perspective. There is not, and reflation cannot provide sufficient real value in the economy to stave off the financial hurricanes still building to force 5 and beyond.

In any case, tax rates are at rock bottom thanks to decades of Tory/New Labour policies; UK consumers are weighed down with personal debt (with millions now in negative equity); tax income from medium-sized business is falling away (the transnational corporations hardly pay any tax in Britain); and unemployment is growing rapidly throughout the world. The global crisis is now penetrating China, with that country’s export markets in a state of collapse.

The sudden infatuation with Keynes (even the right-wing Daily Mail is on board) should also come with a health warning. Claims that Keynesian policies were working before World War II are simply not true. Unemployment in the United States – where his theories were put into practice by Roosevelt – remained persistently high until the preparations for war began to reflate the economy.

A return to growth was only possible once the overcapacity produced in the speculative frenzy of the run up to the Wall Street crash 1929 was destroyed in the war itself. And then, when the orgy of destruction abated (including the slaughter of 60 million people) Keynes was once again called upon to provide a means of restarting production and capital accumulation, at Bretton Woods. And, lest we forget, that agreement broke down in crisis by the late 1960s.

What all this shows is that are no simple, state-led fixes to the recession we are now in and that leaving power in the hands of New Labour and their corporate/financial friends is a recipe for large-scale social disaster.

Gerry Gold
Economics editor

Time to cut the losses

In the last week, stock markets the world over have been showing the classic signs of bipolar disorder, but in the most concentrated form. Euphoric, manic, hysterical highs followed by the deepest depression. Much of it, say some of the commentators, is internally generated, the result of speculators feeding off each other’s panic.

But as everyone else knows, there are clear external causes. The soaring highs are the direct result of a renewed series of injections, by governments and central banks, of credit – the same stuff that the world’s financial system became addicted to and wholly dependent on during the “long boom”. It doesn’t help. Yesterday, the two largest Swiss banks UBS and Credit Suisse were obliged to seek new capital in a further attempt to prevent them turning into non-banks, ceasing to exist, becoming, as Monty Python had it, dead parrots. When the Swiss banks fall, there’s nowhere safe left for your money.

The stock market lows – a five-year retreat reached in the UK and back to the 1980s in Japan – are the result of an avalanche of indications that the recession is not only with us, but will last for years. Giant corporations are bankrupt, jobs falling off a cliff, house prices dropping like a stone. Even the price of oil has fallen back, as the speculators move their money elsewhere. China, which has powered the global economy, is cutting back and shutting down factories.

The Brown-led government, which has taken on the role of street-level pushers, are looking to raise the money that they are guaranteeing to the banks by issuing more debt to the investment markets. But there’s a limit to what can be raised. The rest will come from an assault on government spending, public services, the elimination of the legal guarantee for public sector pensions, and last but not least, any measures to deal with climate change – irrespective of Miliband the Younger’s pronouncement on an 80% emissions reduction by 2050.

Early signs of the brutal reality that will result came from the news that under Brown and Darling’s control, Northern Rock has been foreclosing, repossessing and evicting at double the rate of the rest of the industry. So much for the benefits of “nationalisation”.

Brown knows that the bankers’ bail-out won’t stop the rot, so he’s promoting a restructuring of the world’s economy, along the lines of the Bretton Woods arrangements that laid the basis for the post-war recovery and the boom years. The Financial Times says this is premature, adding:

“Lest we forget, Mr Brown himself was in charge of the IMF’s ministerial steering committee for a large part of the past decade and yet signally failed to implement the ideas he is parading. During this time, it was repeatedly explained to him that every early warning system devised by the finest minds in international economics, including those at the fund, either predicts crises that never arrive or misses those that do.” The paper of business is correct. The basis for restoring stability after a decade and a half of the Great Depression wasn’t Keynes’s proposals, but the massive destruction of surplus productive capacity and human lives during the second world war.

A much easier, less destructive way out of the mess would be to cut the losses, admit the capitalist system is bankrupt and make the transition to a new kind of economy altogether. One based on not-for-profit production, social ownership, self-management, planned production for need, distributed via an intelligent market informed by democratic processes and expressed preferences. That’s what we will be discussing tomorrow at the Stand Up for Your Rights festival. Be there!

Gerry Gold
Economics editor