A Manifesto for Socialist Economic Sense
By Michael Roberts
On the day that Bob Diamond, head of Barclays Bank, resigned over the Libor fixing scandal (see my post, A Diamond Standard, 28 June 2012), I received an email from the organisers of the Association of Heterodox Economists, passing on a request from the eminent economics professors Paul Krugman and Lord Richard Layard. They want economists to sign up to their A Manifesto for Economic Sense. The good professors are really concerned that nothing is being done to stop the ruling governments in the mature capitalist world from advocating and imposing policies of austerity that are destroying growth and driving up unemployment to 1930s levels.
After reading it, I thought I would suggest some small amendments to this worthy Manifesto. My amendments may not be perfect, but I think they are worth considering. I am convinced that the changes would really improve the professors’ campaign message, although I doubt they would agree. I leave it to you to judge.
Here is my amended version.
[The original Krugman and Leyard text, along with access to Michael’s amendments, can be seen here. -Ed.]
More than four years after the financial crisis began, the world’s major advanced economies remain deeply depressed, in a scene all too reminiscent of the 1930s. And the reason is simple: the capitalist mode of production has failed yet again, just as it did in the 1930s. Governments are promoting vulgar ideas, long since disproved, that involve profound untruths both about the causes of the crisis, its nature, and the appropriate response.
These errors have taken deep root in public consciousness and provide the public support for the austerity of current fiscal policies in many countries. So the time is ripe for a Manifesto in which concerned economists offer the public a more socialist analysis of our problems.
Many policy makers insist that the crisis was caused by irresponsible public borrowing. This is false. Instead, the conditions for crisis were created by a system of production that goes on strike whenever there are insufficient profits. This was covered up for a while through excessive private sector borrowing and lending, including by over-leveraged banks. But eventually, profits from credit-fuelled speculation in the stock market and in property, using financial instrument of mass destruction, were no longer realised. The collapse of this bubble led to massive falls in output and thus in tax revenue. So the large government deficits we see today are a consequence of the crisis, not its cause.
The nature of the crisis.
When real estate bubbles on both sides of the Atlantic burst, many capitalist corporations and banks slashed spending in an attempt to pay down past debts. This was a rational response on their part, but – just like the similar response of the capitalist sector in the 1930s – it proved collectively self-defeating. Profits fell and the capitalist sector stopped investing. The result of the investment collapse has been an economic depression that has worsened the public debt.
The appropriate response.
At a time when the capitalist sector is engaged in a collective effort to spend less, public policy that preserves this sector cannot and should not act as a stabilizing force, by bailing them out. At the very least we should not be making things worse by big cuts in government spending or big increases in tax rates on ordinary people to pay for the bailout of the banks. Unfortunately, that’s exactly what many governments are now doing.
The big mistake.
After responding to save the banks that caused the economic crisis when it broke, just as they did in the 1930s, conventional policy wisdom deliberately focused on government deficits, which are mainly the result of a crisis-induced plunge in revenue, to argue that the public sector should attempt to reduce its debts in tandem with the private sector. As a result, fiscal policy has ended up reinforcing the dampening effects of capitalist sector spending cuts. At the same time, monetary policy cannot solve the problem. It’s not just because interest rates are already close to zero, monetary policy – while it should do all it can – cannot do it, when the problem is the profitability of the capitalist sector, not the lack of credit.. Only when the banks are brought into democratic public ownership can credit be directed towards helping investment, jobs and growth and away from speculative gambling that the banks are currently engaged in.
It is not the right policy to propose a medium-term plan for reducing the government deficit based on cuts and tax rises. That is not just because it is too front-loaded and will be self-defeating by aborting the recovery. A key priority now is to reduce unemployment, before it becomes endemic and that means more investment and growth. Reducing the government deficit is irrelevant.
How do those who support present policies answer the argument we have just made? They use two quite different arguments in support of their case.
The confidence argument.
Their first argument is that government deficits will raise interest rates and thus prevent recovery. By contrast, they argue, austerity will increase confidence and thus encourage recovery. But there is no evidence at all in favour of this argument. First, despite exceptionally high deficits, interest rates today are unprecedentedly low in all major countries because inflation is low and we are close to deflation. This explains why Japan, where the government debt now exceeds 200% of annual GDP and despite past downgrades by the rating agencies, has very low interest rates. Interest rates are high in some Euro countries, because debt is rising and economies are in depression and capitalist lenders fear they will not get their money back. A central bank can always, if needed, fund deficits and debt, but that still leaves the burden on capitalist profit down the road.
Past experience includes no relevant case where budget cuts have actually generated increased economic activity. The IMF has studied 173 cases of budget cuts in individual countries and found that the consistent result is economic contraction. In the handful of cases in which fiscal consolidation was followed by growth, the main channels were a currency depreciation against a strong world market, not a current possibility. The lesson of the IMF’s study is clear – budget cuts retard recovery. And that is what is happening now – the countries with the biggest budget cuts have experienced the biggest falls in output. On the other hand, devaluing the currency will also hit average living standards and eventually growth because costs of production will rise and profitability in domestic industry will fall, particularly in small capitalist economies that have low market share.
Companies will only invest when they can foresee enough profit ahead. Austerity discourages investment. But companies won’t invest either if their profitability is restrained by increased taxation in order to fund rising government spending and deficits. As long as the capitalist sector is dominant and profit rules, increasing government spending through more taxes and/or more borrowing will restrain capitalist investment. The real answer is to replace the capitalist system with a plan based on socialised production.
The structural argument.
A second argument against opposing austerity is that output is in fact constrained on the supply side – by structural imbalances. If this theory were right, however, at least some parts of our economies ought to be at full stretch, and so should some occupations. But in most countries that is just not the case. Every major sector of our economies is struggling, and every occupation has higher unemployment than usual. So the problem must be a general lack of spending and demand. And what causes that lack of demand is the lack of investment and what causes that is a strike by the capitalist sector due to a lack of sufficient profit.
This supply constraint is a product of the failure of capitalist production. Providing more government spending at a cost to profitability will not do the trick. Government action should be to replace capitalist investment with public investment. There is plenty of potential supply but no investment to start it.
As a result of their vested interest in profit, Western policy-makers are inflicting massive suffering on their peoples. The ideas they espouse about how to handle recessions are still conventional wisdom among most economists and nearly all economists, despite the disasters of the 1930s, accepted the continuance of the capitalist system, especially during the following forty years or so when the West enjoyed an unparalleled period of economic stability and low unemployment.
It is tragic that these pro-capitalist ideas remain rooted. But we should no longer accept a situation where the interests of capitalism weigh more highly with policy-makers than the horrors of mass unemployment.
Better policies will differ between countries and need detailed debate. But they must be based on a correct analysis of the problem. We therefore urge all economists and others who agree with the broad thrust of this amended Manifesto to register their agreement at http://thenextrecession.wordpress.com/ and to publicly argue the case for a socialist approach.
The whole world suffers when men and women are silent about what they know is wrong.
Michael Roberts is a Marxist economist who blogs at Michael Roberts Blog, where this article first appeared. Comments should be written there, against the original article, but we would appreciate if they could also be copied here. Thanks.