If it can't be fixed, scrap it!

At the end of last week, Lord Mandelson, the authentic, unelected voice of global capital within the New Labour government, stated what he saw as the “simple problem”. He was making a bid for supranational influence in Washington, in a speech entitled “Can we fix globalisation?".

He put it like this: “The stability of the global economy is the sum of sovereign national macroeconomic policies on interest rates, currency levels, domestic spending and demand. There is no mechanism to mediate between these policies or enforce action that would counter systemic risk, in financial markets or at the general level of the global economy.”

Mandelson, who is now effectively deputy prime minister after saving Gordon Brown’s skin, couldn’t have put it clearer: the whole thing is beyond control. Capital does what it has to do, regardless of what policymakers and wonks want. Take pensions, for example. Employers now see their contributions as a major cost to be cut at a time of crisis.

Yesterday, the Organisation for Economic Cooperation and Development warned that the destruction of the value of both private and public pensions threatened to turn the two year financial crisis into a “social crisis lasting decades”. An OECD survey found that private pension plans lost 23% of their value last year, while higher unemployment “leaves little room for more generous public pensions”. At the same time, accountancy firm PricewaterhouseCoopers revealed that for the first time many firms are planning to end their final-salary pension schemes for existing staff as well as new entrants.

What, you may ask, about the total of $5,000bn (about £3,000bn or £3 trillion) already pumped into banks and pledged by governments to stimulate their own economies? Even if you discount the fact, according to Kroll, the world’s leading risk consultancy, in the rush to spend the money, more than $500 billion – at least a tenth of the total - will be lost to fraud and bribery it’s still a load of cash. Surely all that money is doing its job, freeing the credit markets and restarting investment? Surely the upturn is on the way?

No, it isn’t.

The World Bank, another global agency with no power at all to fix the crisis, projects that the world economy will now contract 2.9%, seriously worse than its forecast of a minus 1.75% just three months ago in March.

Capital inflows to developing countries will turn sharply down, says the report, falling by a shocking 75%, leading to a 50% contraction in industrial outputs. Germany, Japan and South Korea are heavily dependent on capital intensive exports to economies like Russia, China and Hungary, so will suffer badly from the reciprocal effect of the accelerating downturn. Shares in Russia have crashed 20% this month already, and its banking system has all but ceased lending due to growing fears about a second wave of financial crisis that could hit the banking sector later this year.

Meanwhile, back in the UK, 16 weeks have passed since the Bank of England began “quantitative easing” after Alistair Darling authorised the creation of £150 billion of new money, widely trumpeted as the last throw of the financial dice. So far, £96 billion has been spent, of which £93.5 billion was used to buy “gilts”, which means it was not lent to industry for capital investment but lent to the government.

But it isn’t working. Overall, lending to private, non-financial companies fell by an average of £1 billion over each of the past six months. It’s OK though, Alistair’s capitalist friends haven’t gone empty-handed. They’ve had £750 million in the form of corporate bonds. It’s amazing how they’ve got away with it for so long, and it’s high time they were stopped. The simple truth is that the capitalist system cannot be “fixed” and instead would benefit from a unique scrappage project much more radical than the one introduced to try and boost car sales.

Gerry Gold
Economics editor

A Tom Paine for the 21st century!

The economy is in such a steep decline that the top global corporations are now feeling the impact. The collapse of consumer demand is cutting the ground from under giants like Sony, which expects a record $2.9 billion annual operating loss, and Microsoft which is cutting 5,000 jobs worldwide – about 5% of its estimated 96,000 employees – and refusing to make a forecast of future profitability. 

With the news that December car production by global manufacturers operating in the UK declined to barely half of its 2007 level, the Society of Motor Manufacturers is looking for government support to sustain “valuable industrial capability during this exceptionally difficult period”. This is a hardly veiled threat to cease production altogether following Honda’s doubling of its two month Christmas shutdown. 

Some market watchers are at last beginning to appreciate the scale of the problem in the economy beyond the financial markets. "It is pretty bad when things are deteriorating so fast that even the largest companies in the world don't know how rapidly it is happening," said analyst Katherine Egbert. "We are certainly in the midst of a once-in-a-lifetime set of economic conditions," according to Microsoft’s chief executive Steve Ballmer. "The economy is resetting to a lower level" of spending, he said, adding that he did not expect a quick economic rebound. 

A UK survey of 100 major private sector employers reveals the toll that the crisis is taking on company pension schemes. The bursting of the credit balloon has driven the collective deficit of the UK's final salary pension schemes up to £195bn in December, and 25 of the 100 will act soon to end the schemes for current contributors, thereby abandoning the companies’ responsibilities for their employees’ future. 

The Pension Protection Fund said the deficit rose by 43% from the £136bn recorded at the end of November. The deterioration in pension finance has been largely due to the international credit crunch, the worldwide economic slowdown and the accompanying slump in share prices. In other words, the value of private sector pensions has simply blown away. Those who manage to hold on to their jobs until retirement age in the UK will have nothing to live on beyond what the state offers, which is now the worst in Europe. 

January 2009 marks 100 years since Lloyd George, Chancellor of the Exchequer under the Liberal government led by Herbert Asquith, paid the first UK state pensions. Lloyd George was influenced by the ideas of Tom Paine and especially his book The Rights of Man published in 1791. Paine strongly recommended progressive taxation, family allowances, old age pensions, maternity grants (as well as the abolition of the House of Lords and the creation of a democratic republic). 

The 21st century deepening global financial and economic disaster demands a renewal of Paine’s ideas in a radically fresh context. Paine’s ideas were ultimately incorporated into most bourgeois democratic states and economies. Now the state cannot deliver a basic standard of living for older citizens, and companies are destroying workers’ pensions. A transfer of political and economic power along the lines advocated in our People’s Charter for Democracy  is where we should begin. 

Gerry Gold
Economics editor