Regulation does not work

October 6, 2018

There is one big lesson from the Danske Bank money laundering scandal.  Regulating the modern banking system does not work.  Modern banks are now primarily giant hedge fund managers speculating on financial assets or they are conduits for tax avoidance havens for the top 1% and the multi-nationals.

The Danske Bank scandal is the latest and largest example of these modern banking activities.  Over $235bn in ‘special transactions’ flowed through the bank’s tiny Estonian branch in just four years from 2012 – an amount that dwarfs the Baltic nation’s GDP.  And this was in the period when international bank regulation had been tightened up, according to the IMF and the Bank for International Settlements, after the ‘reckless’ behaviour before the global financial crash.

Indeed, it was probably not just Danske Bank, but according to the Estonian central bank, the supposed regulator, Estonian banks handled about 900 billion euros, or $1.04 trillion in cross-border transactions between 2008 and 2015. The notion that these foreign individuals and investors would choose to run such a large sum of their money through Estonia for explicitly legitimate purposes is difficult to swallow.  After all, this comes after the liquidation of ABLV, formerly the third largest bank in Latvia, after it was caught laundering money for North Korea.

John Horan, senior associate at Maze Investigation, Compliance and Training Ltd. in Belfast, says money laundering is a Europe-wide problem. dark money will almost certainly continue to flow through the European banking system like sand through a sieve.”  It’s a never-ending story.

Indeed, that’s not all.  The very latest scandal concerns the siphoning of over $2bn of Danish tax revenues through a scam involving claiming back tax paid by foreigners on Danish shares.  It appears that these foreigners never owned any shares or paid tax on them and yet they were able to get ‘refunds’ through the connivance or negligence of Danish government employees and small European banks shifted the money – and nobody has been charged or resigned over this massive loss of taxpayer money – equivalent to $110bn in US tax revenues.

The regulators have been useless in stopping these criminal tax avoidance schemes by the banks.  For example, Carol Sergeant was a regulator at the UK Financial Supervisory Authority and headed up supervision of the banks at the Bank of England.  She got an honour from the Queen for “services to financial regulation”.  She joined Lloyds Bank in 2010 and received bonuses which Lloyds are now asking back as she (among others) presided over the payment protection insurance (PPI) scandal for which Lloyds must pay now £18bn in compensation.  But guess where she works now?  Yes, it’s as non-executive director of Danske Bank, where her responsibilities include making sure that the bank operated under regulations!

Nevertheless, in its latest Global Financial Stability report, the IMF claims that “a decade after the global financial crisis, much progress has been made in reforming the global financial rulebook. The broad agenda set by the international community has given rise to new standards that have contributed to a more resilient financial system—one that is less leveraged, more liquid, and better supervised.”

Well, it may be true that international banks are better capitalised and less leveraged with bad debts after the gradual implementation of the Basel III capital and liquidity accords and the widespread adoption of ‘stress testing’, but even that can be disputed.  In 85% of those 24 countries that experienced the banking crisis in 2007-8, national output growth today remains below its pre-crisis trend.  And the IMF admits that “in many countries, systemic risks associated with new forms of shadow banking and market-based finance outside the prudential regulatory perimeter, such as asset managers, may be accumulating and could lead to renewed spillover effects on banks”.

The ‘official’ view that regulation is the only way to control the banks is accepted by most Keynesians or those who see the financial sector as the only enemy of labour.  Take Nick Shaxson.  Shaxson wrote a compelling book Treasure Islands, tax havens and the men who stole the world, that exposed the workings of all the global tax avoidance schemes and how banks promoted tax havens and tax avoidance for their rich clients.

And more recently, he has done a new piece of research that argues that not only does the City of London and the UK financial sector operate to help tax avoidance and money laundering, it does not provide credit for productive investment. Indeed, “research increasingly shows that all the money swirling around our oversized financial sector may actually be making us collectively poorer. As Britain’s economy has steadily become re-engineered towards serving finance, other parts of the economy have struggled to survive in its shadow.”

Shaxson goes on: “Long ago, our oversized financial sector began turning away from supporting the creation of wealth, and towards extracting it from other parts of the economy. To achieve this, it shapes laws, rules, thinktanks and even our culture so that they support it. The outcomes include lower economic growth, steeper inequality, distorted markets, spreading crime, deeper corruption, the hollowing-out of alternative economic sectors and more.” So what are we to about these criminals at the centre of our economies, according to Shaxson? “We can tax, regulate and police our financial sector as we ought to.” So it’s regulation again – a policy that Danske and other scandals have proven not to work.

Then take Joseph Stiglitz, Nobel prize winner in economics, tireless campaigner against the finance sector and its iniquitous role, and (once again) adviser to the British Labour Party.  Just after the global financial crash, Stiglitz wrote a book, Freefall, about the bursting of the housing bubble and the ensuing massive defaults on mortgages that triggered the financial meltdown of 2008–09.  It was based on his study he had done for the UN, published as The Stiglitz Report, on the financial crisis, which declared: “Governments, deluded by market fundamentalism, forgot the lessons of both economic theory and historical experience which note that if the financial sector is to perform its critical role, there must be adequate regulation.”  

Stiglitz proposed that future meltdowns could be prevented by empowering incorruptible regulators, who are smart enough to do the right thing. “[E]ffective regulation requires regulators who believe in it,” he wrote. “They should be chosen from among those who might be hurt by a failure of regulation, not from those who benefit from it.” Where can these impartial advisors be found? His answer: “Unions, nongovernmental organizations (NGOs), and universities.” But all the regulatory agencies that failed in 2008 and are failing now are already well staffed with economists boasting credentials of just this sort, yet they still managed to get things wrong.

In a 2011 book, Engineering the Financial Crisis: Systemic Risk and the Failure of Regulation, Jeffrey Friedman and Wladimir Kraus contested Stiglitz’s claim that regulations could have prevented the disaster, if implemented by the right people. Friedman and Kraus observe: “Virtually all decision-making personnel at the Federal Reserve, the FDIC, and so on, are . . . university-trained economists.” The authors argue that Stiglitz’s mistake is “consistently to downplay the possibility of human error—that is, to deny that human beings (or at least uncorrupt human beings such as himself) are fallible.”  But note that Friedman and Kraus were no better in coming up with a solution.  They argued for less regulation – free market style!

More recently, David Kane at the New Institute for Economic Thinking has shown that banks have managed to avoid most attempts to regulate them since the global crash as “the instruments assigned to this task are too weak to work for long. With the connivance of regulators, US megabanks are already re-establishing their ability to use dividends and stock buybacks to rebuild their leverage back to dangerous levels.”

Kane notes that “top regulators seem to believe that an important part of their job is to convince taxpayers that the next crash can be contained within the financial sector and won’t be allowed to hurt ordinary citizens in the ways that previous crises have.”  But “these rosy claims are bullsh*t.”  Kane wants criminal bankers locked up, not the banks just fined.

Regulatory reform since the global financial meltdown has not brought under control the criminal and reckless unproductive activities of modern banking.  Even the IMF quietly admits this in its latest GFS report: “As the financial system continues to evolve and new threats to financial stability emerge, regulators and supervisors should remain attentive to risks… no regulatory framework can reduce the probability of a crisis to zero, so regulators need to remain humble. Recent developments documented in the chapter show that risks can migrate to new areas, and regulators and supervisors must remain vigilant to this evolution.”

Indeed!  As Gabriel Zucman  and Thomas Wright have shown in a meticulous and in-depth analysis of the size and extent of tax havens and tax avoidance, far from them being reduced or controlled, on the contrary, such schemes are an increasing part of US corporate profits, organised and transacted by the banks.

About half of all the foreign profits of US multinationals are booked in tax havens with Ireland topping the charts as the favourite (Irish tax rate just 5.7%). And the benefits for the increase in profits have gone to shareholders, the Zucman and Wright showed. “Ireland solidifies its position as the #1 tax haven,” Zucman said on Twitter. “US firms book more profits in Ireland than in China, Japan, Germany, France & Mexico combined.”  

Zucman and Wright also show that the rate of return (or profit) on US multi-national investments abroad has not risen, indeed the rate has slipped.  But thanks to favourable tax regimes (including the latest Trump measures) and the availability of tax havens like Ireland, after-tax profitability has jumped.

So those who think that ‘regulating’ the banks and tax evasion using ‘regulators’ will work are expecting pigs to rev up their jet engines for flight.

I have posted before on Stiglitz’s views as expressed in his book,“We can’t leave to market forces to solve the problems by themselves”, concluded Stiglitz, so we must rewrite the rules of the game.  But he admitted that his rule changes were unlikely to see the light of day. Changing the rules or regulation of the banks won’t work; we need ownership and control.


The business perspective: trade, debt and recession

October 3, 2018

Jerome Powell, the Trump-appointed Chair of the US Federal Reserve, spoke to the National Association of Business Economists (NABE)  yesterday.  He told the assembled mainstream economists who work for big business in the US that the US economy is strong, with unemployment near 50-year lows and inflation roughly at the Fed’s 2% rate objective.  So the Fed was going to continue to ‘normalise’ monetary policy by raising gradually its policy rate over the next year or so.

The NABE held its conference in New York at the same time as the Union of Radical Political Economy (URPE) was holding their 50th anniversary conference in Massachusetts.  I have already reported on some of issues that URPE participants discussed. But it is interesting to compare what mainstream business economists thought were the key issues to consider.

First and foremost was the issue of trade.  Was Trump’s protectionist ‘trade war’ with America’s trading ‘partners’ (rivals?) going to lead to disaster for the US economy?  The keynote speaker was Dani Rodrik, Ford Foundation Professor of International Political Economy, Harvard Kennedy School and author of, Straight Talk on Trade: Ideas for a Sane World Economy.  Rodrik was an interesting choice because he has been prominent in arguing that ‘free trade’ is not always the most optimal and best policy for national capitalist governments to promote.  With free trade, not everybody is a winner and many are losers.

Rodrik made this argument at last year’s mainstream conference of the American Economic Association (ASSA).  It seems that, since the Great Recession and the slowdown in world trade growth, ‘free trade’ and globalisation are now being questioned as the only way forward for American capital.  Big business economists are looking for an alternative economic theory to back protectionist policies.  So there were several sessions on this issue dealing with NAFTA and the impact of protection on manufacturing.

Other subjects discussed at NABE included behavourial economics (rising again as a possible alternative to the failure of neoclassical equilibrium theory); climate change and global warming; the property, transport and retail markets.

There was considerable concern about rising debt post the Great Recession, both globally and within the US.  One session was entitled, Corporate Debt, Student Loans, Auto Loans, or EM: Which is the Next Subprime?, Lund in which Susan Lund from McKinsey reiterated the consultancy’s research on global debt, pointing to rising corporate debt as the real worry for the next crash – something that I have also focused on.

Carmen Reinhart, the well-known (even infamous) debt historian, pointed out that the level of debt to GDP was just as high as in the last crisis but the amount of defaults by governments or corporation was much lower.  Maybe this was due to low interest rates on debt, better macro-management by governments and central banks or just mis-measurement of the impending bust – who knows?, said Reinhart! Reinhart

Some presentations considered the problem of low productivity growth in this Long Depression since the end of the Great Recession.  Could the digital and ‘knowledge’ based sectors of the economy turn things round to sustain growth? Many were confident that US capitalism would take advantage of new technologies to restore productivity growth to near previous levels.

But probably the key issue that NABE participants considered was whether there would be a new slump in the US economy or would the second-longest (if weakest) expansion in post-1945 US real GDP after a slump continue?  The NABE took a survey of its members on whether and when there would be a new recession.  Over 60% of NABE economists reckoned there would be no recession until the end of 2020 at the earliest and one-third ruled it out for the foreseeable future.  Only 10% thought there would be a slump in 2019. Swift – NABE Outlook

This optimism clashed with some of the presentations at NABE on the likelihood of a new recession.  The director of the National Bureau of Economic Research (NBER) , which is the very body that counts up the number of recessions in the US historically, concluded from an analysis of ‘business cycles’ since the 1960s that the US economy was suffering from slowing trend growth and if the growth rate drops to around 1.5%, then it increases the likelihood of recession to nearly 50%. Stock

In another session, the NABE’s own in-house economists considered what was the best indicator of an upcoming recession. They rejected the most commonly referenced monetary indicator, namely the so-called inverted yield curve (where the short-term interest rate (3m) rises above the long-term rate (10yr).  Instead, they found a much more reliable indicator.  It was the ‘threshold’ between the fed funds rate (FFR) and the 10-year Treasury yield (10-year). Whenever “in a rising fed funds rate period, the fed funds rate crosses or touches the lowest level of the 10-year bond yield in that cycle, then that is a predictor of an upcoming recession.”  This indicator apparently has predicted all US economic recessions since 1954, “with an average lead time of 17 months and a range of 6-34 months.” Iqbal

With the December 2017 rate hike by the FOMC, the fed funds rate hit 1.50% and, hence, this FFR/10-year threshold was met (the cycle low for the 10-year bond yield is 1.36%). This suggests that, starting in December 2017, there is a 69.2% chance of a recession during the next 17 months (average lead time). They also found that the cumulative effect of Trump’s tax cuts on this recession call was insignificant. Bu, higher tariffs and a trade war could speed up a recession.

So it’s a near 70% chance on this indicator that there will be a new slump in the US by summer 2019.  That’s much higher risk than the NABE members think.

50 years of radical political economy

October 2, 2018

The 50th anniversary conference of the Union of Radical Political Economy (URPE) finished last weekend.  URPE has played an important role in developing and enhancing alternative economic theory and analysis to the dominant mainstream theories in modern economics.  It has survived despite the long reaction in economics during the ‘neo-liberal’ era that we have been subjected to since the 1980s – where even the so-called ‘progressive’ economics of Keynesians was submerged under the general equilibrium, ‘free market’ economics of the neoclassical mainstream.

I was unable to attend to conference held at the University of Massachusetts, Amherst, so my comments on proceedings will be solely based on some of the papers presented that I have obtained and also from some of the comments on the sessions by participants. This is obviously inadequate but I think it is still worth doing if only to publicise the role of URPE and to let readers of my blog know the sort of issues being debated.

There were many themes at the conference: social reproduction theory; labor economics; crisis theory; environmental economics; alternative economic systems post-capitalism; international economics; broad issues in Marxist political economy and of course, China.  But as is my wont, I shall concentrate on the themes that interest me most.

There was the usual heterodox mixture of the Marxist approach, alongside post-Keynesian/’financialisation’ schema, as well as some support for the contribution of the neo-Ricardian views of Piero Sraffa.  URPE is radical political economy, not just Marxist.

In political economy, this means there was some discussion about whether Keynesian theory had anything to offer to Marxist economics.  Readers of this blog know well that I do not consider Keynesian theory as a complement to Marxist economics – indeed, on the contrary I view it as part of mainstream bourgeois economics being applied to macro-managing slumps in capitalist production.

Deekpankar Basu (UMass) presented a paper entitled “Does Marxist Economics need Keynesian Insight?” and his short answer was apparently: no. Simply put, Keynesian theory looks to the failure of aggregate demand for the explanation of crises; neoclassical theory looks to ‘shocks’ to the smooth running of production (supply); but Marx looks to the profitability of capital for the faultlines in capitalist production.   Basu’s analysis was backed up by a panel on Marxist political economy which one participant reckoned showed that “the key advantage of Marxist analysis is it theorises profit, which mainstream economic models pretend doesn’t exist – despite overwhelming evidence (from the mainstream) that it does.”

Nevertheless, Peter Skott, also at Amherst, did present a post-Keynesian analysis on the relationship between capitalist accumulation and employment in his paper “Post-Keynesian growth theory and the reserve army of labor”.  I cannot comment on this paper, but I refer you another of Skott’s which deals with the challenges facing post-Keynesian analysis of modern economies.

On the Marxist front, there were several papers on recent developments in theory.  Hyun Woon Park (Denison University) took what he considers are puzzling inconsistencies in use of MELT (the monetary equivalent of labour time, a tool used to analyse trends in capitalism with Marxist categories)(Park and Rieu. 2018). Park was concerned that if Marxist theory says that unproductive sectors like finance, real estate, merchanting etc do not produce value but merely redistribute value created in productive sectors, does it have any role in capitalism?  If it plays the role of helping to make the productive sector more efficient, can we talk about an ‘optimal’ size for the sector?  He concludes (as far as I can tell from his paper) that there is no ‘optimal’ size where the unproductive sector helps rather than detracts from capital accumulation in the productive sector in modern economies.  I’m not sure what we should conclude from this.

Sraffian economics was also discussed at URPE.  This school is based on the approach of Piero Sraffa, who also argued that the real contradiction in capitalism was not the tendency for profitability to fall, but the class battle between profits and wages.  At least this is what I think we can conclude from the Sraffa’s theoretical model, based on the classical political economy of David Ricardo.  Bill McColloch of Keene State college, presented a paper “On Sraffa and the History of Economic Thought;”, which was kindly posted on the Naked Keynesianism website.

According to McColloch, “In Sraffa’s mind Marx’s great victory was to have rediscovered the essential meaning of the classical system in an era in which it was increasingly lost to all observers” namely “that capitalism rest upon exploitation, an exploitation of human beings and of nature, and that is remains the task of economics today to speak to this reality and its consequences. Whether Marx’s own proof of exploitation can be shown to be true is perhaps of negligible importance.”.. McCulloch asks “if Sraffa was ‘really’ a Marxist? I would suggest not”.  But apparently that does not matter because both Sraffa and Marx saw economic theory as both ‘sociological and institutional’ and not bound by ‘technique’ as in the neoclassical.  Well, I find it hardly “negligible” whether Marx’s theory of exploitation is true or not.  There is now a whole literature backing up Marx’s theory why profit only comes from exploitation of labour and nowhere else – while Sraffa’s theory is full of holes on that point, among others.  For a more thorough critique of Sraffian economics, see Fred Moseley’s book, Money and Totality

Marx’s theory of exploitation is important because, at URPE, the arguments of post-Keynesian and financialisation theorists were presented again.  Fletcher Baragar of the University of Manitoba has argued that the financial crash and Great Recession were the result of increased ‘financialisation’, as expressed through rising household debt that eventually led to the housing bust.  Financialisation had created ‘two forms of profit’, one the traditional exploitation of labour in production and the other, the exploitation of households by the financial sector. (Baragar, Fletcher. 2015. “Crises of Disproportionality and the Crisis of 2007.- 2009.”).

I have disputed the argument before that there are two sources of profit (profit of exploitation and profit of alienation) under modern capitalism (see my book, Marx 200).  And I have also extensively rejected the view  that it was ‘excessive’ household debt that caused the crisis of 2008.  The first is a distortion of Marx’s value theory and the second is no more than a mainstream explanation based on debt alone.

On my blog, I have posted several times on the financialisation theme.  Recently, Mavroudeas & Papadatos have criticised the whole financialisation hypothesis on five counts.  The Financialisation Hypothesis and Marxism: a positive contribution or a Trojan Horse?’ – S.Mavroudeas, 2nd World Congress on Marxism, Peking University, 5-6 May 2018.

The most important questions for me are these: 1) if financialisation was the cause of the Great Recession, what about crises even as late as 1980 when finance was not such a large part of the economy or non-financial companies had not become financial?;  2) has finance completely separated from what happens in the productive sectors where value is created?; 3) so is finance the class enemy while ‘productive’ capitalism and workers are allies?; 4) are all crises are the result of ‘financial instability’, subject to Minsky moments and the underlying profitability of capital is irrelevant?  If they are, does this mean we just need to control the financial institutions and can leave the non-financial sector of capitalism alone?  Do we control the investment decisions of JP Morgan but not those of Amazon of Boeing?

Imperialism has become a hot topic among Marxists in the recent period with ‘globalisation’, the rise of multi-nationals operating in the so-called emerging economies; and the centralisation of finance in the US and Europe.  There is a running debate on how imperialism operates and who is exploiting whom (Harvey versus Smith) that URPE has followed.  And there were some very incisive papers on this at the conference that show light on the debate from Marx’s value theory.  I can only refer to Depankur Basu’s superb and precise account of Marx’s theory of ground rent and Hao Qi (Renmin University) on Marx’s theory of absolute rent, both of which can be applied to the issue of imperialism.  Ramaa Vasudevan (Colorado State university) also moved into this territory.  Marx_s Analysis of Ground-Rent_ Theory Examples and ApplicationsA Model of the Marxist Rent Theory

Finally, there is what happens if and when capitalism is overthrown globally.  What are the economic outlines and categories for a communist society?  Can we go beyond the prescriptions that Marx offered in the Critique of the Gotha Programme?  A panel composed of Seongjin Jeong (Gyeongsang National University, Korea), Richard Westra, Al Campbell and Ann Davis took this up at a session on an ‘alternative economic system for the 21st century’.

Al Campbell (emeritus professor at Utah) has offered some pioneering work in this area. And Seongjin Jeong’s paper on the faultlines of Soviet planning was revealing.  Two things here: first that the most important development under an economy moving towards communism is raising the productive forces to levels that quickly enable goods and services to be provided free at the point of consumption (ie transport, education, health, energy, basic foodstuffs etc).  But that could not be applied for some time for all goods and services, so there would have to be planned production and distribution.

Jeong argues that such planning should be based on labour time calculation.  But the Soviet economy of 1917–91 was not a labour-time planned economy. Although input-output tables are essential to the calculation of the total labour time needed to produce goods and services and were available to Soviet planners, they never seriously considered using them and instead depended on material balances.  However, with the development of AI, algorithms, big data and quantum power, such planning by labour time calculation is clearly feasible.  Communism will work. SovietPlanningLTC_Seongjin_URPE20180928. 

Back to normality?

September 28, 2018

US real GDP growth for the second quarter of 2018 was confirmed at an annual rate of 4.2%.  And that means US real GDP is 2.9% higher than one year ago. The ‘annualised’ rate was the highest since the third quarter of 2014.  Similarly the year on year rate is the highest since 2014. But not the highest rate in history – as President Trump claims!

But it does show a relative recovery from the near recession rates of 2016.

But as I have mentioned before in previous posts, the underlying story is not so sanguine.  First, the 4% ‘annualised’ growth rate is really dependent on some one-off factors that will soon turn into their opposites.  US net exports was a big factor in the 4% rate and this was mainly due to the rush by China to buy up American soybeans before tariffs on US exports took effect in retaliation to Trump’s trade war with China.

Second, growth has been jacked up by Trump’s huge tax cuts for corporations on their profits.  While pre-tax profits for the major corporations have risen a little, it is post-tax profits where there has been a bonanza.  According to a recent report by Zion Research, for the top 500 US companies, 49% of their 2018 profits were due to the Trump tax cuts. For some sectors, like the telephone companies, it was 152% of 2018 profits ie from loss to profit.

Nevertheless, mainstream economics seems generally convinced that the US is out of its Long Depression of the last ten years and is now motoring ‘normally’.  The official unemployment rate is at all-time lows, wages are beginning to rise a little and inflation has ticked up marginally.

So the US Federal Reserve decided to push up its policy interest rate for the eighth time since 2015 to reach 2.25%.  The rate is used to set credit card, mortgage and loan rates and will trigger rises across the board for consumers and businesses. In a statement the Fed signalled more rate hikes were imminent. “The committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective over the medium term. Risks to the economic outlook appear roughly balanced,”   So the Fed seeks to ‘normalise’ rates in line with the ‘normal’ growth of the US economy and reckons its economic forecasts are about right.

But as I pointed out in a previous post, if the Fed is wrong and the productive sectors of the US economy do not resume ‘normal growth’ (the average real GDP growth rate since 1945 has been 3.3% – so growth is not back there yet), the rising costs of servicing corporate and consumer debt could lead to a new downturn.

The key factor for growth is investment by the capitalist sector.  And what decides the level of that investment in the last analysis is not the level or cost of debt but the profitability of any investment.  Business investment has made a modest recovery in the last few quarters, driven by the 16% rise in corporate profits after tax.  But the bulk of this profits bonanza for US corporates in 2018 has been used to pay higher dividends to shareholders and buying back company shares to boost the share price, not in productive investment.  And within productive investment, most has gone into the oil industry and into ‘intellectual property’ (software etc).  Investment in equipment and new structures in other businesses has been very modest.

Moreover, non-financial corporate profits are still below levels of 2014, even after Trump’s boost.

And in the productive sectors of the economy, like manufacturing, they are falling quite sharply – as measured per employee.

At the other end of the economy, average incomes for American families are making little progress.  In an excellent post, Jack Rasmus of the American Green Party showed that for non-supervisory workers (non-managers) who are the bulk of the American workforce (133m out of 162m), real incomes are falling not rising, while the burden of consumer debt is rising. When Trump announced his corporate tax cuts, he claimed that this would allow companies to increase wages from their increased profits.  This, of course, has turned out to be nonsense. There has been very little increase in private sector wage compensation since the end of 2017.

And it is only in the US that we can talk about ‘recovery’ or ‘normal’ growth.  Everywhere else hopes of a return to pre-crisis growth rates seem dashed.  In the Eurozone, growth has slipped back to around 2% a year, still one-third below pre-crisis rates.

In Japan, it’s back at 1%.  China too is ‘struggling’ to stay above 6% a year.

As the OECD put it in its latest interim report on the global economy: “Global growth is peaking; the trade war is beginning to bite; investment growth is still too weak to boost productivity; real wages are still below pre-crisis levels; and the losses in income from the Great Recession will never be recovered.”


“Trade tensions are starting to bite, and are already having adverse effects on confidence and investment plans.   Trade growth has stalled, restrictions are having marked sectoral effects and the level of uncertainty on trade stances remains high.”

So “It is urgent for countries to end the slide towards further protectionism, reinforce the global rules‑based international trade system and boost international dialogue, which will provide business with the confidence to invest,”.

And as for the so-called emerging markets, the situation continues to deteriorate.  According to the IIF, growth tracker, emerging market growth is now at a two-year low.

And as interest rates globally rise (driven by the Fed) and trade wars begin to squeeze global trade, emerging markets with high corporate debt are especially vulnerable.

The right-wing government of Argentina has now had to swallow a record-breaking IMF bailout of $57bn.  IMF chief Lagarde said that, as part of the deal, Argentina’s central bank can only intervene to stabilize its currency if the peso depreciates below 44 pesos to the dollar. It is currently at 39 pesos to the dollar after losing 50% of its value since the start of the year. The president of Argentina’s central bank, Nicolás Caputo, resigned because of this condition.

The size of the bailout shows how desperate the IMF is to support the right-wing government in Argentina, but also to remove any independent action by the Argentine monetary and fiscal authorities. Argentina’s economic policy is now being run by the IMF.  Argentina is now under the grip of IMF dictates, something the right-wing Macri government said would never happen again.  A massive slump and austerity will now follow for the Argentine people – repeating the hell of the last major slump of 2001.

At the same time, the Turkish economy is in meltdown. There the Erdogan government refuses to take IMF money in return for austerity and control over its currency and interest rate policy – unlike Argentina.  But it will make no difference: both countries cannot avoid a serious slump as interest rates spiral and inflation rockets.

There is one economic lesson to be learned here.  When Greece was locked in the straitjacket of the so-called Troika (the IMF, the ECB and the Euro group), many Keynesians and radicals said that the reason Greece was in this mess was that it was inside the Eurozone and so it could not devalue its currency or control its interest rates.  If it broke away, it could control its own destiny.

Well, Argentina and Turkey now show that it was not the Eurozone as such that was the problem, but the forces of global capitalism.  Both Argentina and Turkey control their currency and interest rate policy.  The former has opted for IMF control and the latter refuses it.  But it will make no difference – the working people in both countries will pay the price for the crisis in their economies.

More momentum on the banks

September 25, 2018

At the weekend, I participated in a session on what to do about the banks at the Momentum conference (The World Transformed) in Liverpool, England.  For those readers who do not know what Momentum is, it is a campaigning group within the British Labour Party that supports more radical measures in favour of labour and backs the current leftist leadership in the Labour Party of Jeremy Corbyn.  The Momentum conference takes place alongside that of the official Labour Party Conference and complements it with debates, discussions and events.

The session on banking took place at the same time as Corbyn was speaking with other big names in a separate session.  Nevertheless, we got over 100 hundred along to discuss what to do about the banks.  It was chaired by Sarah-Jayne Clifton of the Jubilee Debt Campaign.  The Jubilee Debt Campaign is part of a global movement working to break the chains of debt and build a finance system that works for everyone. Founded in 1996, it is a UK-based charity focused on the connections between poverty and debt.

Matt Wrack, the general secretary of the British fire fighters union (FBU) led off.  The fire fighters have a socialist clause in their constitution and have campaigned since the end of the Great Recession for Labour to nationalise the big banks.  The FBU commissioned a pamphlet called Time to Take over the Banks (co-written by Mick Brooks, a Labour economist and myself).  Matt Wrack pointed out that Labour had a great opportunity to act on the banks when the global financial crash ensued, but the then Labour leadership, infused with ‘neoliberal’, pro-market, pro-finance ideas, did nothing, except to bail them out.

Indeed, Labour leaders adopted ‘light touch regulation’ of the banks, praising the City of London.  When Chancellor, in 2004 Gordon Brown even opened Lehman Bros’ new Canary Wharf office, saying “Lehman brothers is a great company that can look backwards with pride and look forwards with hope”(!).  As we know, the bankruptcy of this rapacious American investment bank was the trigger for the global financial meltdown.  And it seems, said Wrack, that even now the current trade union and Labour leaders are unwilling the grasp the nettle and deal with the big banks.

Fran Boait of Positive Money spelt out how ‘neo-liberal’ pro-market ideas dominated thinking on finance.  Mainstream economists did not see the global financial crash coming and on the whole have not offered any real changes, except to suggest more capital backing for banks.  Positive Money campaigns for “an economy that isn’t driven by housing bubbles, stock market booms, and a bloated financial sector and where wealth isn’t concentrated in fewer and fewer hands. Instead, investment in productive sectors of the real economy, such as affordable housing, helps to boost incomes, bring down inequality and serve society’s needs.”

Ann Pettifor is a well-known UK-based analyst of the global financial system, director of Policy Research in Macroeconomics (PRIME) a network of economists concerned with Keynesian monetary theory and policies; an honorary research fellow at the Political Economy Research Centre at City University, London (CITYPERC) and a fellow of the New Economics Foundation, London.  She is an important adviser to the current Labour leadership on economic policy.  Ann argued for the Bank of England to be brought under democratic control and then used to provide funds for the big banks as long as they were committed to use it ‘productively’ in investment and jobs etc.  This would go alongside the current Labour proposal for a National Investment Bank (NIB).

In my view, none of these approaches is likely to deliver what we need: namely, turning banking into a public service for the many and not a speculative, tax evasion tool for the few rich investors and corporations. Surely, the history of the period leading up to the global financial crash – the wild credit boom, the sub-prime mortgage crisis, the ‘toxic’ derivatives etc – has shown that the big banks will not be a public service without them being publicly owned with democratic accountability.  And the period since (the last ten years), only confirms that view.

In my contribution, I outlined briefly how the big banks even after the end of the global crash and the bailouts, have carried on just as before – it’s business as usual.  Or as Lloyd Blankfein, the head of Goldman Sachs, the world’s most predatory investment bank, once said: they continue to do “God’s work”.  And what has doing God’s work entailed over the last ten years?  A never-ending litany of scandals – particularly by British banks.

Take RBS, Britain’s largest bank, partly nationalised after the crash.  Before the crash, it was run by ‘Fred the Shred’ Goodwin (so named for his penchant for slashing lower ranked banking jobs and bank branches). Sir Fred Goodwin was knighted for his “services to the banking industry” by the then Labour government.  He was noted for his bullying of staff and his love for risky ventures and huge bonuses.  After driving RBS into near bankruptcy in the crash, he left, but not without taking a fat pension and handshakes from the RBS board, as have all the senior executives of the banks when they have been asked to ‘step down’ following a scandal.

After the crash, RBS was prominent (while still part nationalised) in the notorious Libor-rate rigging scandal, where bank traders colluded to fix the interest rate for inter-bank lending.  Libor sets the floor for most loan costs across the world.  That rigging meant that local authorities, charities and businesses ended up paying billions more than they should for loans.  The rigging activities of RBS appeared to have been even worse under the ‘watchful’ eye of Stephen Heston, appointed when the bank was nationalised.  For two years after Heston got the job, the Libor traders in this publicly-owned bank carried on rigging the rate knowing it was illegal.

Then there is Britain’s next biggest bank, Lloyds Bank (also part nationalised), which took over the scandal-ridden Bank of Scotland in the crash.  Along with all the other banks, it has had to compensate customers for mis-selling them personal injury insurance to the tune of £5bn.

During the crash, Barclays Bank was run by Bob Diamond. It has now been revealed that when Barclays was threatened with partial nationalisation, the Barclays board loaned money to Qatar who then invested in the stock of the bank to the tune £12bn.  In this way, the bank avoided state control by issuing more loans for equity.  It is still not clear what “commissions” were paid to Qatari investors.

And then there is HSBC.  In the US, HSBC was fined $5bn by the Federal authorities for ‘laundering’ money for Mexican drug cartels!  In Switzerland, former chairman, Stephen Green, was also doing ‘God’s work’ for HSBC. Reverend Green, an ordained vicar, published Good Value in 2009, an extended essay on how to promote ‘corporate responsibility and high ethical standards in the age of globalisation’!  The good Reverend was in charge of HSBC’s private banking division based in Switzerland. The Swiss division was engaged in hiding the ill-gotten gains of thousands of rich people in many countries who did not want to pay tax. HSBC arranged various schemes to enable these rich people to recycle their cash back to the UK and other countries without tax payments.

Indeed, tax evasion is just what privately-owned, not democratically accountable banks get up to: providing tax avoidance and evasion for very rich people and corporations.  Take the very latest scandal emerging from Danske Bank, Denmark’s largest. After the global crash up to 2015, Danske’s Estonian branch laundered over $200bn of Russian and British corporate cash to avoid tax.  UK corporate entities were the second-biggest proportion of customers, behind the Russian mafia, of 15,000 non-resident customers at the Estonian branch of Danske. making it one of the biggest money-laundering scandals ever. Surely we cannot let this continue?

A proper banking service should take our deposits, look after our savings and offer loans to households and small businesses for big ticket items at reasonable interest rates.  But the current banking system is much more interested in speculating in financial markets for big bucks, making corporate finance deals and helping the rich evade payments; while top executives take home huge wages, bonuses and pensions.

Britain’s banks cannot even do the basics properly, because they do not spend enough on their staff and systems.  There has been a stream of outages and failures in internet banking systems.  As current Conservative minister, Nicky Morgan put it: “It simply isn’t good enough to expose customers to IT failures, including delays in paying bills and an inability to access their own money. High street banks justify the closure of their branch networks on the basis that they are providing a seamless online and mobile phone banking service. These justifications carry little weight if their banking apps and websites cannot be relied upon.”

As for providing credit for productive investment in the economy; it’s a joke.  In our report for the FBU we calculated that less than 6% of bank assets go to industry for productive investment.  The big five British banks control 60% of all lending; their firepower for investment is much greater that Labour’s proposed NIB will ever have.  But the big five banks do not use that credit productively.  The NIB will not succeed in turning the British economy around if the big five continue to do ‘God’s work’.  Instead, another financial crash and recession is more likely.

So public ownership of the big five is essential.  Even if the government bought all the shares at market price it would cost only a one-off 3% of GDP (not that full compensation to shareholders is merited).  That could easily be financed by the issuance of government bonds and serviced easily with the revenues and profits from the big five.  The top executives of these banks would then be paid civil service salaries and have no shares – bank workers and trade unionists would sit on the boards to ensure accountability.  Public ownership does not mean more bureaucracy – on the contrary, it means more democracy.

What can public service banks do?  Well, take the example of North Dakota.  The main bank in this right-wing US state has been publicly owned since the Great Depression.  It looks after the deposits of customers and provides loans for households and farmers, and any profit it makes goes back to the state government.  It does no speculation and no laundering.  It did not suffer during the global crash.

As for investment, take the role of China’s state banking system.  Whatever we might say about the autocratic, one party dictatorship in China, its state-owned banks provide credit to support a national investment programme that has transformed China’s infrastructure.  I came up to Liverpool on one of Britain’s privatised train routes.  It left one hour late because of ‘engineering works’and crawled up to Liverpool at a maximum speed of 75mph.  On the same day, China launched a new high-speed service (220km/h) from Hong Kong to China linking it with 15 cities: punctual, modern and cheap.  This high-speed rail service reduces the need for air flights and lowers the carbon footprint. And all this was financed by state bank loans and railway bonds.

It was argued at the Momentum session by Fran Boait and by several in the audience that we don’t want great big bureaucratic banks but more diversification: regional banks, coops, credit unions etc.  I agree.  Germany’s banking system is predominantly state-owned at regional level with savings banks and development banks.  Linking the nationally owned big five with such regional and local banks would be the way to go.  Indeed, I have even drawn up a plan for such a banking system.

But this will only work if we have the core of banking in public hands.  If diversification means keeping the big five still owned by capital with just small banks and credit unions around the periphery and/or competing with the big five, then that would be like saying the health service should have at its centre big private health companies with only small public operations in the community.

There seems to be a reluctance to opt for public ownership at the centre of the banking system.  Why only railways, energy and water?  The lack of momentum on this crucial cog in controlling the economy for the many not the few seems be partly based on fear of the media and the City of London’s response.  But breaking up the banks or taxing them, or giving workers shares in the banks as Labour’s finance leader John McDonnell is now proposing will provoke just as much antagonism from capital – but without delivering banking as a public service and a force for productive investment.

I don’t quote Lenin very often.  But he hit the nail on its head (as he often did), when he said: “The banks, as we know, are centres of modern economic life, the principal nerve centres of the whole capitalist economic system. To talk about “regulating economic life” and yet evade the question of the nationalisation of the banks means either betraying the most profound ignorance or deceiving the “common people” by florid words and grandiloquent promises with the deliberate intention of not fulfilling these promises.”

Lord Skidelsky and Keynes’ big idea

September 20, 2018

Last night, Lord Robert Skidelsky spoke to the UK’s Progressive Economy Forum (PEF) in London.  He was promoting his new book Money and Government: A Challenge to Mainstream Economics.  Its aim, the blurb says, is “to familiarise the reader with essential elements of Keynes’s ‘big idea’.“  The PEF is an economics think tank composed of just about all the top British Keynesian and leftist economists (but no Marxists).  At this highly promoted meeting was John McDonnell, the Labour spokesperson on finance and economics, where he gave a favourable response to Skidelsky’s ideas.

Lord Robert Skidelsky is emeritus professor of economics at Warwick University, England.  He is the most eminent biographer of John Maynard Keynes and is a firm promoter of his ideas.  Skidelsky is lauded by leftist Keynesians, even though his politics are as unreliable for the left as Keynes’ were. Originally a Labour Party member, he left that party to become a founding member of the renegade Social Democratic Party, which ensured the defeat of the Labour Party in the 1983 election.  He remained in the SDP until it fell apart in 1992, but he was rewarded for his part in defeating Labour with a life peerage as Baron Skidelsky by the then Conservative government.

Indeed after that he became a Conservative and was chief opposition spokesman for the Conservatives in the Lords when the Blair Labour government was in office.  He was chairman of the right-wing pro-privatisation and neoliberal reform think-tank, the Social Market Foundation between 1991 and 2001.  In 2001, he left the Conservative Party for what is called the ‘cross benches in the UK’s House of Lords (ie no party).  Despite this, Skidelsky is regarded by left Keynesians as ‘one of them’.  Indeed, he sits on the council of the PEF.

I have not got access to a review copy of his new book, but his speech last night and an article that Skidelsky wrote back in 2016 criticising mainstream economics probably sums up the views in the book.  This is what I said then

In a more recent article in the British Guardian newspaper to promote his new book, Skidelsky starts from the premiss (like Keynes) that capitalism is the only viable and best mode of production and social relations possible – the alternative of a socialist system of planning based on public ownership is anathema to him (as it was to Keynes).  But capitalism has fault-lines and successively recurring slump and depressions reveals that. So Skidelsky’s job (as Keynes also saw it) is to save capitalism and manage these recurring crises to reduce or minimise their impact.

In his article, Skidelsky claims that the global financial crash and “the worst global downturn since the Great Depression of 1929” was “almost entirely unanticipated.”  Well, it was by mainstream economics and nearly all Keynesians, but as I have shown elsewhere, it was predicted by some heterodox economists, including Marxists.

Nevertheless, Skidelsky asks what we can learn from this financial disaster so we can avoid it next time (yes, it’s going to happen again). He says “prevention is far better than cure.”  But by prevention he does not mean “trying to stop the semi-regular fluctuations of the business cycle.”  There is nothing we can do about that under capitalism.  No, the job of the monetary authorities and governments is “to dampen, if not altogether prevent, these fluctuations”. And in doing so, we can avoid “looming state bankruptcy, or worse, state control over the economy.”(!)

Then he offers the usual mainstream prescriptions of monetary easing and fiscal spending (particularly in infrastructure).  But he reckons that the scale of last disaster will require “far more ambitious thinking”.  You see, you just cannot tell when it will happen again because “as John Maynard Keynes taught, the future is uncertain” (Really, I never guessed – MR).

Skidelsky then states that the reason for the weak recovery after the end of the Great Recession was ‘austerity’.  If only governments had expanded spending and run budget deficits, then economies would have been restored.  This is the same argument that American Keynesian Paul Krugman just offered on his blog and is the mantra of all Keynesian explanations of the Long Depression.  But regular readers of this blog know that there is plenty of evidence that increased government spending where it was applied (Japan) did not revive the economy; and there is little or no correlation between government spending and growth in the major economies.  That’s because under a capitalist economy, unless the profitability of capital rises, no amount of fiscal stimulus will work.

But what does Skidelsky think we should do?  First, we must break up the big banks into smaller units and “institute controls over the type and destination of loans they make.”  The idea of breaking up the banks is presented because some banks are now so large that if they fail, they would bring down the whole financial system.  But this ‘solution’ would simply mean that smaller banks would continue to conduct their sleazy, speculative, fraudulent activities.  Oh and I forgot: we are going to control (regulate) what they do.  Well, that worked well last time. There is no mention of the obvious solution: public ownership of the major banks with democratic control and accountability to establish a banking system that is a public service to households and small businesses, not acting as ‘financial weapons of mass destruction’.

The second thing Skidelsky wants to do is to ‘manage’ capitalism with proper fiscal and monetary policies.  Well, such Keynesian policies failed in the 1970s when the profitability of capital collapsed and advanced economies suffered a series of severe recessions (1974-5, 1980-2).  That’s why Keynesian macro-management was dropped by the strategists of capital.  In his speech, Skidelsky argued that it was not Keynesian policies in the 1970s that failed but the deregulation of finance.

I am unaware that such ‘deregulation’ was adopted then.  That came only after the profitability crises of the 1970s and early 1980s.  Deregulation was a response to the problems of capitalist production not the cause.  And ironically, Skidelsky ditched Labour just at this time to join the Social Democrats who supported deregulation and neo-liberal policies and broke with Labour because they feared the take-over of the party by Tony Benn (the precursor of Corbyn)!

Anyway Skidelsky wants to be a little more ambitious this time.  His aim is not to “fine tune the business cycle” but instead “maintain a steady stream of public investment amounting to at least 20% of total investment to offset the inherent volatility of the private economy.”  This smacks of Keynes’ famous call for the ‘socialisation of investment’ that the ‘master’ (Skidelsky’s phrase) advocated as a last resort in order to revive the capitalist economy when monetary easing and government spending failed in the 1930s.

Actually, in the ‘war economy’ of the 1940s, Keynes was much more radical than Skidelsky and proposed that up to 75% of total investment should be public, reducing the capitalist sector to a minority (Chinese-style)  Of course, that was in the war and no Keynesian now proposes to wipe out the dominance in investment of the big banks and the capitalist sector.  Skidelsky’s “20%” amounts to about 3% of GDP, the same target that the Labour leadership is proposing in its economic strategy.  But as I have explained in many previous posts and papers, that leaves the capitalist sector investment up to five times larger and so the profitability of capital will remain the driving force for growth.  And that means recurring crises and lower growth.

Ironically, up to now it has been President Trump who has (unknowingly) adopted apparently Keynesian prescriptions, with his tax cuts for the rich.  Two years ago when Trump also proposed a programme of infrastructure, Skidelsky got very excited.  He commented ““As Trump moves from populism to policy, liberals should not turn away in disgust and despair, but rather engage with Trumpism’s positive potential. His proposals need to be interrogated and refined, not dismissed as ignorant ravings.”  But since then nothing has come of Trump’s infrastructure promises.  All that has happened is that corporate profits are up, the stock market is booming, inequality has rocketed further, real wages are stagnant and public services are being slashed.  So much for Trump’s ‘positive potential’.

Third, Skidelsky wants to “reverse the rise in inequality”; but not because it is unjust or the result of the exploitation of labour by capital.  We need to reduce inequality so that wages are sufficiently high to sustain “the consumption base of the economy”. Otherwise it “becomes too weak to support full employment.”  Skidelsky seems to think that the cause of crises are low wages and consumption – actually something rejected by Keynes –he thought it was a low marginal efficiency of capital and too high interest rates.  Moreover, the argument that rising inequality is the cause of crises rather than the result of neoliberal policy measures has been disproved. But this argument is presented in Keynesian circles all the time.

Finally, there is the political.  You see, says Skidelsky, unless we act along these lines to save capitalism, there is the danger of the rise of ‘populism’ and “the flight of voters toward political extremism.”  Hopefully, he only means the rise of nationalist and semi-fascist forces of the right.  But I think he also means the forces of socialism on the radical left.  And they are just as much an enemy of the ‘liberal’ Skidelsky as the ‘extreme’ right (just as it was for Keynes). Lord Skidelsky remains an interesting political bedfellow for the labour movement – just as Lord Keynes did in the 1930s.

The PEF website has a quote from Keynes that they see as paramount. “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else“.  I hope the PEF do not really agree with the arrogance of Keynes’ statement that philosophers and economists are the real ‘rulers’ of the world (similar to the autocratic ideas of the ancient Greek aristocrat Plato). I think a better quote for the PEF would be: “Philosophers have hitherto only interpreted the world in various ways; the point is to change it.” (Karl Marx).

It’s greed and fear

September 18, 2018

Larry Summers is one of the world’s leading Keynesian economists, a former Treasury Secretary under President Clinton, a candidate previously for the Chair of the US Fed, and a regular speaker at the massive ASSA annual conference of the American Economics Association, where he promotes the old neo-Keynesian view that the global economy tends to a form of ‘secular stagnation’.

Summers has in the past attacked (correctly in my view) the decline of Keynesian economics into just doing sterile Dynamic Stochastic General Equilibrium models (DSGE), where it is assumed that the economy is stable and growing, but then is subject to some ‘shock’ like a change in consumer or investor behaviour.  The model then supposedly tells us any changes in outcomes.  Summers particularly objects to the demand by neoclassical and other Keynesian economists that any DSGE model must start from ‘microeconomic foundations’ ie the initial assumptions must be logical, according to marginalist neoclassical supply and demand theory, and the individual agents must act ‘rationally’ according to those ‘foundations’.

As Summers puts it: “the principle of building macroeconomics on microeconomic foundations, as applied by economists, contributed next to nothing to predicting, explaining or resolving the Great Recession.”  Instead, says Summers, we should think in terms of “broad aggregates”, ie empirical evidence of what is happening in the economy, not what the logic of neoclassical economic theory might claim ought to happen.

Not all Keynesians agree with Summers on this.  Simon Wren-Lewis, the leading British Keynesian economist claims that the best DSGE models did try to incorporate money and imperfections in an economy: “respected macroeconomists (would) argue that because of these problematic microfoundations, it is best to ignore something like sticky prices (wages) (a key Keynesian argument for an economy stuck in a recession – MR) when doing policy work: an argument that would be laughed out of court in any other science. In no other discipline could you have a debate about whether it was better to model what you can microfound rather than model what you can see. Other economists understand this, but many macroeconomists still think this is all quite normal.” In other words, you cannot just do empirical work without some theory or model to analyse it; or in Marxist terms, you need the connection between the concrete and the abstract.

There is confusion here in mainstream economics – one side want to condemn ‘models’ for being unrealistic and not recognising the power of the aggregate.  The other side condemns statistics without a theory of behaviour or laws of motion.

Summers reckons that the reason mainstream economics failed to predict the Great Recession is that it does not want to recognise ‘irrationality’ on the part of consumers and investors.  You see, crises are probably the result of ‘irrational’ or bad decisions arising from herd-like behaviour.  Markets are first gripped by ‘greed’ and then suddenly ‘animal spirits’ disappear and markets are engulfed by ‘fear’.  This is a psychological explanation of crises.

Summers recommends a new book by behavioural economists Andrei Shleifer’s and Nicola Gennaioli, “A Crisis of Beliefs: Investor Psychology and Financial Fragility.”  Summers proclaims that “the book puts expectations at the center of thinking about economic fluctuations and financial crises — but these expectations are not rational. In fact, as all the evidence suggests, they are subject to systematic errors of extrapolation. The book suggests that these errors in expectations are best understood as arising out of cognitive biases to which humans are prone.” Using the latest research in psychology and behavioural economics, they present a new theory of belief formation.  So it’s all down to irrational behaviour, not even a sudden ‘lack of demand’ (the usual Keynesian reason) or banking excesses.  The ‘shocks’ to the general equilibrium models are to be found in wrong decisions, greed and fear by investors.

Behavioural economics always seems to me ‘desperate macroeconomics’.  We don’t know why slumps occur in production, investment and employment at regular and recurring intervals.  We don’t have a convincing theoretical model that can be tested with empirical evidence; just saying slumps occur because there is a ‘lack of demand’ sounds inadequate.  So let’s turn to psychology to save economics.

Actually, the great behavourial economists that Summers refers to also have no idea what causes crises.  Robert Thaler reckons that stock market prices are so volatile that there is no rational explanation of their movements.  Thaler argues that there are ‘bubbles’, which he considers are ‘irrational’ movements in prices not related to fundamentals like profits or interest rates.  Top neoclassical economist Eugene Fama criticised Thaler.  Fama argued that a ‘bubble’ in stock market prices may merely express a change in view of investors about prospective investment returns; it’s not ‘irrational’.  On this point, Fama is right and Thaler is wrong.

The other behaviourist cited by Summers is Daniel Kahneman.  He has developed what he called ‘prospect theory’. Kahneman’s research has shown that people do not behave as mainstream marginal utility theory suggests. Instead Kahneman argues that there is “pervasive optimistic bias” in individuals.  They have irrational or unwarranted optimism.  This leads people to take on risky projects without considering the ultimate costs – against rational choice assumed by mainstream theory.

Kahneman’s work certainly exposes the unrealistic assumptions of marginal utility theory, the bedrock of mainstream economics.  But it offers as an alternative, a theory of chaos, that we can know nothing and predict nothing.  You see, the inherent flaw in a modern economy is uncertainty and psychology.  It’s not the drive for profit versus social need, but the psychological perceptions of individuals. Thus the US home price collapse and the global financial crash came about because consumers have irrational swings from greed to fear.  This leaves mainstream (including Keynesian) economics in a psychological purgatory, with no scientific analysis and predictive power.  Also, it leads to a utopian view of how to fix crises.  The answer is to change people’s behaviour; in particular, big multinational companies and banks need to have ‘social purpose’ and not be greedy!

Turning to psychology is not necessary for economics.  At the level of aggregate, the macro, we can draw out the patterns of motion in capitalism that can be tested and could deliver predictive power.  For example, Marx made the key observation that what drives stock market prices is the difference between interest rates and the overall rate of profit. What has kept stock market prices rising now has been the very low level of long-term interest rates, deliberately engendered by central banks like the Federal Reserve around the world.

Of course, every day, investors make ‘irrational’ decisions but, over time and, in the aggregate, investor decisions to buy or to sell stocks or bonds will be based on the return they have received (in interest or dividends) and the prices of bonds and stocks will move accordingly. And those returns ultimately depend on the difference between the profitability of capital invested in the economy and the costs of providing finance.  The change in objective conditions will alter the behaviour of ‘economic agents’.

Right now, interest rates are rising globally while profits are stagnating.

The scissor is closing between the return on capital and the cost of borrowing.  When it closes, greed will turn into fear.

The state of capitalism at IIPPE

September 14, 2018

This year’s conference of the International Initiative for the Promotion of Political Economy (IIPPE) in Pula, Croatia had the theme of The State of Capitalism and the State of Political Economy.  Most submissions concentrated on the first theme although the plenary presentations aimed at both.

I was struck by the number of papers (IIPPE 2018 – Abstracts) on the situation in Brazil, China and Turkey – a sign of the times – but also by the relative youth of the attendees, particularly from Asia and the ‘global south’.  The familiar faces of the ‘baby boomer’ generation of Marxist and heterodox economists (my own demographic) were less in evidence.

Obviously I could not attend all simultaneous sessions so I concentrated on the macroeconomics of advanced capitalist economies.  Actually my own session was among the first of the conference.  Under the title of The limits to economic policy management in the era of financialisation, I presented a paper on The limits of fiscal policy (my PP presentation is here (The limits to fiscal policy).

I argued that, during the Great Depression of the 1930s, Keynes had recognised that monetary policy would not work in getting depressed economies out of a slump, whether monetary policy was ‘conventional’ (changing the interest rate for borrowing) or ‘unconventional’ (central banks buying financial assets by ‘printing’ money).  In the end, Keynes opted for fiscal stimulus as the only way for governments to get the capitalist economy going.

In the current Long Depression, now ten years old, both conventional (zero interest rates)and unconventional (quantitative easing) monetary policy has again proved to be ineffective.  Monetary easing had instead only restored bank liquidity (saved the banks) and fuelled a stock and bond market bonanza. The ‘real’ or productive economy had languished with low real GDP growth, investment and wage incomes.

Maria Ivanova of Goldsmiths University of London also presented in my session (Ivanova_Quantitative Easing_IJPE_forthcoming) and she showed clearly that both conventional and unconventional monetary policies adopted by the US Fed had done little to help growth or investment and had only led to a new boom in financial assets and a sharp rise in corporate debt, now likely to be the weak link in the circulation of capital in the next slump.

Keynesian-style fiscal stimulus was hardly tried in the last ten years (instead ‘austerity’ in government spending and budgets was generally the order of the day).  Keynesians thus continue to claim that fiscal spending could have turned things around.  Indeed, Paul Krugman argued just that in the New York Times as the IIPPE conference took place.

But in my paper, I refer to Krugman’s evidence for this and show that in the past government spending and/or running budget deficits have had little effect in boosting growth or investment.  That’s because, under a capitalist economy, where 80-90% of all productive investment is by private corporations producing for profit, it is the level of profitability of capital that is the decisive factor for growth, not government spending boosting ‘aggregate demand’.  In the last ten years since the Great Recession, while profits have risen for some large corporations, average profitability on capital employed has remained low and below pre-crash levels (see profitability table below based on AMECO data).  At the same time, corporate debt has jumped up as large corporations borrow at near zero rates to buy their own share (to boost prices) and/or increased payouts to shareholders.

Government spending on welfare benefits and public services along with tax cuts to boost ‘consumer demand’ is what most modern Keynesians assume is the right policy.  But it would not solve the problem (and Keynes thought so too in the 1940s).  Indeed, what is required is a massive shift to the ‘socialisation of investment’, to use Keynes’ term, i.e. the government should resume responsibility for the bulk of investment and its direction.  During the 1940s, Keynes actually advocated that up to 75% of all investment in an economy should be state investment, reducing the role of the capitalist sector to the minimum (see Kregel, J. A. (1985), “Budget Deficits, Stabilization Policy and Liquidity Preference: Keynes’s Post-War Policy Proposals”, in F. Vicarelli (ed.), Keynes’s Relevance Today, London, Macmillan, pp. 28-50).

Of course, such a policy has only happened in a war economy.  It would be quickly opposed and was dropped in ‘peace time’.  That’s because it would threaten the very existence of capitalist accumulation, as Michal Kalecki pointed out in his 1943 paper.

Now in 2018, the UK Labour Party wants to set up a ‘Keynesian-style’ National Investment Bank which would invest in infrastructure etc, alongside the big five UK banks which will continue to conduct ‘business as usual ‘ i.e. mortgages and financial speculation.  Under these Labour proposals, government investment (even if implemented in full) would rise to only 3.5% of GDP, less than 20% of total investment in the economy – hardly ‘socialisation’ a la Keynes at his most radical..

But perhaps President Trump’s version of Keynesian fiscal stimulus (huge tax cuts for the rich and corporations , driving up the budget deficit) will do the trick.  It is an irony that it is Trump that has adopted Keynesian policy.  He certainly thinks it is working – with the US economy growing at a 4% annual rate right now and official unemployment rates at near record lows.  But an excellent presentation by Trevor Evans of the Berlin School of Economics poured cold water on that optimism.  With a barrage of data, he showed that corporate profits are actually stagnating, corporate debt is rising and wage incomes are flat, all alongside highly inflated stock and bond markets.  The Trump boom is likely to fizzle out and turn into its opposite.

Also, Arturo Guillen of the Metropolitan University of Mexico City,( IIPPE 2018 inglés) reminded us that the medium term trajectory of US economic growth was very weak with productivity growth very low and productive investment crawling.  In that sense, the US was suffering from ‘secular stagnation’, but not for the reasons cited by Keynesians like Larry Summers (lack of demand) or by neoclassical critiques like Robert Gordon (ineffective innovation) but because of the low profitability for capital.

In another session, Joseph Choonara, took this further. Choonara saw the current crisis rooted in a long decline in profitability in the period from the late 1940s to the early 1980s. The subsequent neoliberal period developed new mechanisms to defer crises, notably financialisation and credit expansion. In the Long Depression since 2009, driven largely by the central bank response, debt continues to mount. The result is a financially fragile and uncertain recovery, which is creating the conditions for a new crisis

There were also some sessions on Marxist economic theory at IIPPE, including a view on why Marx sent so much time on learning differential calculus (Andrea Ricci) and on why Marx’s transformation of value into prices of production is dialectical in its solution (Cecilia Escobar).  Also Paul Zarembka from the University of Buffalo, US presented a paper arguing that the organic composition of capital in the US did not rise in the post-war period and so cannot be the cause of any fall in the rate of profit.

His concepts and evidence do not hold water in my view.  Zarembka argues that there is a major problem concerns using variable capital v in the denominator in the commonly-expressed organic composition of capital, C/v. That is because v can change without any change in the technical composition. Using, instead, what he calls the ‘materialized composition of capital’, C/(v+s), movement in C/v can be separated between the technical factor and the distributional factor since C/v = (1 + s/v).  With this approach, Zarembka reckons, using US data, he can show no rise in the organic composition of capital in the US and no connection between Marx’s basic category for laws of motion under capitalism and the rate of profitability.

But I think his category C/(v+s) conflates the Marx’s view of the basic ‘tendency’ (c/v) in capital accumulation with the lesser ‘counter-tendency’ (s/v) and thus confuses the causal process.  This makes Marx’s law of profitability ‘indeterminate’ in the same way that Sweezy and Heinrich etc claim.  As for the empirical consequences of rejecting Zarembka’s argument, I refer you to an excellent paper by Lefteris Tsoulfidis.

As I said previously, there were a host of sessions on Brazil, Southern Africa and China, most of which I was unable to attend.  On China, what I did seem to notice was that nearly all presenters accepted that China was ‘capitalist’ in just the same way as the US or at least as Japan or Korea, if less advanced.  And yet they all recognised that the state played a massive role in the economy compared to others – so is there a difference between state capitalism and capitalism?  I cannot say anything about the papers on Brazil except for you to look at IIPPE 2018 – Abstracts.  Brazil has an election within a month and I shall cover that then – and these are my past posts on Brazil.

There were other interesting papers on automation and AI (Martin Upchurch) and on bitcoin and a cashless economy (Philip Mader), as well as on the big issue of imperialism and dependency theory (which is back in mode).

The main plenary on the state of capitalism was addressed by Fiona Tregena from the University of Johannesburg.  Her primary area of research is on structural change, with a particular focus on deindustrialisation. Prof Tregena has promoted the concept of premature deindustrialisation.  Premature deindustrialisation can be defined as deindustrialisation that begins at a lower level of GDP per capita and/or at a lower level of manufacturing as a share of total employment and GDP, than is typically the case internationally. Many of the cases of premature deindustrialisation are in sub‐Saharan Africa, in some instances taking the form of ‘pre‐industrialisation deindustrialisation’. She has argued that premature deindustrialisation is likely to have especially negative effects on growth.

As for the state of political economy, Andrew Brown of Leeds University has explained some of the failures of mainstream economics, particularly marginal utility theory. Marginal utility theory has not to this day been developed in a concrete and realistic direction not because it is just vulgar apologetics for capitalism, but because it is theoretically nonsense. Marginal utility theory can provide no comprehension of the macroeconomic aggregates that drive the reproduction and development of the economic system.

‘Financialisation’ is the word/concept that dominates IIPPE conferences.  It is a concept that has some value when it describes the change in the structure of the financial sector from pure banks to a range of non-deposit financial institutions and the financial activities of non-financial corporations in the last 40 years.

But I am not happy with the concept when it used to suggest that the financial crash and the Great Recession were the result of some new ‘stage’ in capitalism.  From this, it is argued that crises now occur not because of the fall in productive sectors but because of the speculative role of ‘’financialisation.’  Such an approach , in my view, is not only wrong theoretically but does not fit the facts as well as Marx’s laws of motion: the law of value, the law of accumulation and the law of profitability.

For me, financialisation is not a new stage in capitalism that forces us to reject Marx’s laws of motion in Capital and neoliberal economics is not in some way the new economics of financialisation and a different theory of crises from Marx’s.  Finance does not drive capitalism, profit does.  Finance does not create new value or surplus value but instead finds new ways to circulate and distribute it.  The kernel of crises thus remains with the production of value.  Neoliberalism is merely a word invented to describe the last 40 years or so of policies designed to restore the profitability of capital that fell to new lows in the 1970s.  It is not the economics of a new stage in capitalism.

Sure, each crisis has its own particular features and the Great Recession had that with its ‘shadow banking’, special investment vehicles, credit derivatives and the rest.  But the underlying cause remained the profit nature of the production system. If financialisation means the finance sector has divorced itself from the wider capitalist system, in my view, that is clearly wrong.

Sweden in deadlock

September 10, 2018

Sweden has long been the poster child of the ‘mixed economy’, the social democrat state – where capitalism is ‘moulded’ to provide a welfare state, equality and decent working and living conditions for the majority. The 2018 general election result has put that story to bed.

In yesterday’s election, the Social Democrats, the supposed standard-bearer of the ‘mixed economy’, remained the largest party with just over 28% of the vote.  But this was its lowest share in an election since 1908.  The main pro-business party, the so-called Moderates, also lost votes, coming in with 19.7%.  Cutting through both these parties, who have alternated for decades in controlling government, was the rise of Sweden’s so-called Democrats (an oxymoron), an anti-immigrant party with neo-Nazi roots, which polled 17.7%.  The smaller parties of the centre-right and the left also gained – the Left party jumping to 8%.  The middle-of the road Green party was run over and nearly failed to gain the 4% necessary to enter parliament.  The two alliances of the social democracy and the pro-business parties are virtually tied with 40% of the vote each – leaving the Democrats with the balance of power in the new parliament.  Such is the impasse.

It was an illusion anyway about Sweden being the ‘third way’ between untrammelled free market capitalism and command economy autocratic Communism.  The great gains of the Swedish labour movement in the early 20th century have slowly been reversed.  And the post-war diversion to public services of some of the profits of the Swedish engineering and manufacturing (owned by a handful of families) stopped decades ago.  Just as in other capitalist economies, the polices of neoliberalism – a reversion to free markets, low taxation for the rich and corporations, cuts in the welfare state and in real wages, rising inequality etc – have been operating in Sweden since the mid 1990s.

Why were neo-liberal policies introduced in Sweden? As in other capitalist economies, the profitability of capital fell sharply from the mid-1960s (to the mid-1990s in the case of Sweden).  After a credit boom that went bust and a major banking crisis, Sweden’s famed manufacturing sector took a massive dive.  It was then that Sweden’s major parties, the Social Democrats and Moderates, firmly adopted policies to boost the rate of profit for capital at the expense of the welfare state and public services.

Sweden may still have a more ‘equal’ income and wealth distribution than the US and the UK, but it is still very unequal – and inequality has been rising the fastest since the 1990s of all advanced capitalist economies.  In 2012, the average income of the top 10% of income earners was 6.3 times higher than that of the bottom 10%. This is up from a ratio of around 5.75 to 1 in the 2007 and a ratio of around 4 to 1 during much of the 1990s. Sweden’s richest 1% of earners saw their share of total pre-tax income nearly double, from 4% in 1980 to 7% in 2012. Including capital gains, income shares of the top percentile reached 9% in 2012. During the same time, the top marginal income tax rate dropped from 87% in 1979 to 57% in 2013.

In Sweden, like in most other Nordic countries, tax reforms over the 1990s have decreased the tax burden for wealthier households, e.g. by decreasing capital taxation and lowering or abandoning wealth taxation. At the same time, there have been cuts in welfare benefits for the poor.

What is not often known is that Sweden is no longer an epitome of state provision. The country is one of the world leaders in having public services supplied by the private sector, paid for by the government.  About one-third of all Swedish secondary schools are so-called ‘free schools’, with the majority of them run by for-profit companies, while about 40% of primary healthcare providers are privately owned. Public provision has been outsourced to the detriment of quality.  Sweden’s schools have slipped from being one of the world’s best in international ratings to “one of the most mediocre”.

The rise of the Democrats follows the pattern of so-called populism that we have seen in Germany, France, Italy, Denmark and other EU countries, as well as with Brexit in the UK and Trump in the US.  It is the product of the failure of capitalism to deliver after the end of the Golden Age in the mid-1960s, but particularly after the global financial crash, the Great Recession and the ensuing Long Depression.

Swedish capitalism, somewhat like Germany (only much smaller), has done better than most other capitalist economies since 2008.  But even in Sweden, the rate of economic growth has slowed in the last few decades and particularly since 2008.

Unemployment may be low by EU standards but the official figure hides those on work programmes  (German-style) and those on sick benefits.  As in Germany, many jobs are now ‘precarious’ and low-paid, particularly in the small towns.  And there have been significant public spending cuts on hospitals, schools, housing, pensions and transport.

And then there is immigration. Over 600,000 immigrants from the Middle East have entered the country since the Syrian/Iraq disaster (graph below).  Many immigrants are young single men and they have helped capitalist enterprises and the state sector overcome an acute labour shortage for low skilled work.  But the amount of immigrants per head of population is way more than in any other European economy and it has increased pressure on those public services, already suffering from neo-liberal measures.

There has been a massive housing boom driven by low interest rates and credit.  That has benefited the middle and upper classes but the working class and immigrants struggle for proper housing (graph – waiting list for rented housing in Stockholm).

Sweden is still growing much faster than much of the rest of Europe, but it is highly dependent on the growth of world trade and the strength of economic activity in Europe.  The strong growth has been driven again by a credit-fuelled consumer boom as in the 1980s, as well as from the extra value from immigrant labour.

Stockholm has the second most inflated housing market in the world, while the banking sector booms. The Swedish banks currently have assets that are four times the national GDP, second only to Switzerland.  The 1980s are repeating themselves.

Real GDP growth seems strong at over 3% a year.  But if you strip out the impact of extra immigrant labour, real GDP growth per person is much lower (below 1% in 2017).  Real per capita growth is seen averaging just 1% in the decade through 2026, according to the Swedish National Institute of Economic Research.

The small towns in Sweden have experienced low wages, poorer services and then were faced with an influx of new immigrants.  This was the breeding ground for the Democrats’ racist and nationalist message of ‘Sweden for Swedes’.  The Social Democrats are now paying for their support of capitalism and neo-liberal policies of the last 20 years.

A plan for a new economy?

September 6, 2018

The Institute of Public Policy Research (IPPR) claims it is “the UK’s pre-eminent progressive think tank”.  It is backed and funded by many ‘progressives’, trade unions, universities and also corporations.  And it is now seen as a think tank that influences the current left Labour Party leadership.  Now, just before the annual Labour conference at the end of September, the IPPR has published a new report called Prosperity and Justice for all – A plan for a new economy The report is result of the work of special commission of several great and good experts in the ‘progressive’ left on the state of UK economy and what to do about it.

In its interim report last year, the IPPR report provided a scathing account of the state of the UK economy:  its weak growth, low investment, stagnant average incomes; low productivity growth and high inequality in incomes and wealth.  It highlighted the overdependence on the financial sector in the UK economy to the detriment of manufacturing and other productive sectors.  It condemned the UK’s highly regressive tax system, along with all the loopholes to avoid paying tax for the rich and corporations.

This final IPPR report concludes that there is a need for fundamental reform of the UK economy.  The question what reforms are proposed and would they work?

The IPPR is clear on the problems. “The UK economy is not working. It is no longer delivering rising living standards for a majority of the population. Average earnings have stagnated for more than a decade – even while economic growth has occurred. Too many people are in insecure jobs; young people are set to be poorer than their parents; the nations and regions of the UK are diverging further.”

The causes are structural and endemic: “Many of the causes of the UK’s poor economic performance – particularly its weaknesses in productivity, investment and trade – go back 30 years or more.”  Radical action is needed: “They will not be addressed by incremental change or trying to ‘muddle through’. “

More than a fifth of the British population live on incomes below the poverty line after housing costs are taken into account, even though most of these households are in work. Nearly one in three children live in poverty and the use of food banks is rising.  There is a sixfold difference between the income of the top 20% of households and those of the bottom 20%. Wealth inequality is much worse, with 44% of the UK’s wealth owned by just 10% of the population, five times the total wealth held by the poorest half.

The IPPR says, “It is not sufficient to seek to redress injustices and inequalities simply by redistribution through the tax and benefit system. They need to be tackled at source, in the structures of the economy in which they arise. These include the labour market and wage bargaining, the ownership of capital and wealth, the governance of firms, the operation of the financial system and the rules that govern markets. Economic justice cannot be an afterthought; it must be built in to the economy.

All this sounds to the point.  But what does the IPPR Commission propose?  Well, it has a ten point plan: to promote ‘investment-led growth’ by raising public investment, holding down house price inflation and reducing the incentives that currently favour short-term shareholder returns over long-term productive investment; to rebalance the economy through ‘new industrialisation’, away from an over-dependence on the finance sector towards a more diverse array of manufacturing and other innovative, export-oriented industries, located right across the country; to give workers greater bargaining power, making it easier for trade unions to negotiate on their behalf to achieve higher productivity and to share its rewards fairly through better wages and conditions and reduced working time;  to pursue ‘managed automation’, accelerating the adoption of new technologies across the economy and ensuring that workers share in the productivity gains and are helping to retrain; to promote open markets which reduce the near-monopoly power of dominant companies, particularly in the digital economy, and make data available to promote innovation for social good; and to spread wealth more widely in society, both by widening ownership of capital and through fairer forms of wealth and corporate taxation.

Let me concentrate on what I think are the key measures the IPPR offers to achieve radical improvements in the UK economy as well as making it ‘fairer’.  Just as many on the left including the Labour leaders have advocated, it proposed to overcome the failure of the British banking system to lend to productive companies and the failure of many companies to invest in jobs and technology to boost productivity by establishing a National Investment Bank (NIB) to invest in infrastructure, innovation and business growth in England.

There are several things here.  First, note the clear omission of any proposal to take over the big five banking groups in the UK that triggered the financial crash in 2008; that continue to speculate rather than lend; and that have been exposed in all sorts of scams, frauds, tax avoidance and cash laundering and most of whose executives have remained in place even when partially nationalised (as in the case of RBD and Lloyds).

Back in 2012, the UK firefighters union (FBU) commissioned a report on the banks, that I wrote jointly with Mick Brooks.  We found that less than 5% of lending by UK banks went towards productive investment by companies.  The rest went on real estate (mortgages) or lending to other financial institutions for speculation.

Instead bank loans have poured into real estate.  The productive sectors of manufacturing, professional scientific & technical activities, information & communication and administrative & support services account for 28.7% of real GDP. But loans outstanding to these four sectors total just £108.82bn, or 5.5% of GDP.  This is less than the total of loans outstanding to companies engaged in the buying, selling & renting of real estate (£135.97bn or 6.9% of GDP).  Indeed, 33% of all bank loans go to other financial institutions to speculate.

The IPPR report too is clear on this. “The UK’s financial sector is one of the largest and most successful in the world…, but there has been insufficient provision of ‘patient capital’ for long-term investment. So the “UK has had a long-term problem of asset price inflation, particularly in land and property.“  As the IPPR points out: “the Bank of England has experimented with ultra-loose monetary policy, with record low interest rates and a £445 billion injection of ‘quantitative easing’ (QE). But these policies have not generated the sustained growth”.

But what is the answer of the IPPR?  It is to leave the big five banks to carry on as before, with the proposed NIB to do all the work in funding industry and investment.  The NIB would be ‘seeded’ to lend £50-200bn for investment over a period of time. The IPPR is right that, instead of ‘encouraging’ British big business to invest through ‘tax incentives’, such subsidies should be “channelled  into direct funding for innovation through Innovate UK and the National Investment Bank.” 

But the amount of funding for investment involved would be no more than about 2% of GDP a year.  Currently, government investment is under 2% of GDP. The IPPR proposes that the government should increase its investment programme by £15bn a year by 2022 to take the government investment ratio to 3.5% of GDP, the current G7 average.

The IPPR wants “as an alternative to QE, to enable macroeconomic policy to stimulate the economy in recessionary conditions that the Bank of England should be given the power to ask the National Investment Bank to expand lending in the real economy, and to buy its bonds to ensure this can be financed.”

However, business investment in the UK is closer to 15% of GDP.  So the planned NIB and government investment boost, even if fully implemented after five years, would still be less than one-third of the investment coming from the capitalist sector of the economy.  That sector would still be decisive for growth, incomes and investment.  And much of the NIB funds would anyway go to big companies to invest.  There would not be much direct investment by state-owned operations.

So is the NIB, more government investment and BoE funding enough to be considered a radical change?  The FBU report showed clearly that it would be ‘business as usual’ for the big banks unless they were brought into public ownership.  Surely, we cannot allow the big five banks to continue to dominate funding for investment, which will be the case even with the NIB in place?

The IPPR wants to raise productivity levels through a ‘social partnership body’; it wants to ‘modernise the labour market’ by raising the living wage to a proper level (its £8.75 an hour outside London is still pretty modest, however).  It does not propose to outlaw ‘zero hours contracts’ where people are on call from their employers and receive no job security or a weekly pay packet, but merely to raise the minimum payment. And to democratise corporations, it proposes to revive the idea of workers reps on company boards.  This is the German corporate model which sounds good but has signally failed to control corporate decision-making on wages, gender pay gaps or conditions.

The IPPR rightly exposes the regressive nature of the UK’s income tax system. “Our present system of taxing incomes is complex, lacks transparency and is insufficiently progressive. On average the poorest fifth of households pay 35 per cent of their gross income in tax, which is more than the richest fifth.”  There needs to be a return to the post-war “‘formula-based’ system, abolishing bands and applying instead a gradually rising marginal rate of tax as incomes rise.”  The IPPR would also want to increase in the rate of corporation tax and “tackle tax avoidance by multinational corporations” with a ‘backstop tax’ levied “on company’s UK sales at a rate derived from its global profits relative to global sales.”

All these measures are surely to be supported, but will they do the trick?  On the tax measure, even Keynesian reformers have expressed doubts.  Simon Wren-Lewis is unsure that “the stakeholder measures talked about, or greater union influence may not be enough to reverse runaway corporate pay….The report involves reversing many aspects of neoliberalism, but an interesting question is whether that is enough to achieve a decline in the 1% share, or whether other measures like higher top taxes are an essential part of doing that?”

The IPPR wants to establish “a National Economic Council (NEC) as a forum for economic policy consultation and coordination. This would have responsibility for drawing up and agreeing a 10-year plan for the UK economy, to provide a coordinated framework for the management of economic policy.”  But how can there be any coordinated plan that works if the ‘commanding heights’ of the economy remain in the hands of the big five banks and top corporations, entities that will continue to control the bulk of investment, employment and wages?

FT columnist and Keynesian Martin Wolf commented recently that the reason the UK economy has not changed in any fundamental way since the disaster of the Great recession was “the power of vested interests. Today’s rent-extracting economy, masquerading as a free market, is, after all, hugely rewarding to politically influential insiders.”

The finance sector stumped up over half the cash for Cameron’s party when it gained power in 2010. One in four Tory MPs elected in 2015 came from finance backgrounds – more than all who worked in schools, universities, health, the armed forces and agriculture put together. All the government reports on banking after the crash are dominated by bankers, and the Bank of England’s Mark Carney celebrated the prospect of a finance industry becoming 20 times the size of our GDP.

And yet the IPPR proposes no change in the power of these “vested interests”.  Can the bulk of the finance sector in the UK be allowed to carry on with ‘business as usual’?  In his piece, Wolf concludes that “A better version of the pre-2008 world will just not do. People do not want a better past; they want a better future”.  This is also the aim of the IPPR report.  But, in my view, its proposals fall short of achieving that.