the public costs of private profits: neo-liberalism after the credit crunch

8/3/2019 The Public Costs of Private Profits: Neo-Liberalism after the Credit Crunch

1/30

The public costs of private profits:

neo-liberalism after the CreditCrunch

Richard Drayton-for 'Are social cuts the solution?'

15MCambridge

February 4, 2012Practical men, who believe themselves to be quite exempt from any intellectual influence, arePractical men, who believe themselves to be quite exempt from any intellectual influence, are

usually the slaves of some defunct economist (KEYNES)usually the slaves of some defunct economist (KEYNES)IIItIt is not by augmenting the capital of the country, but by rendering a greater part of that capitalis not by augmenting the capital of the country, but by rendering a greater part of that capital

active and productive than would otherwise be so, that the most judicious operations ofactive and productive than would otherwise be so, that the most judicious operations ofbanking can increase the industry of the country (ADAM SMITH)banking can increase the industry of the country (ADAM SMITH)


2/30

What is the economyEconomy - from two greek words which mean the rules which

govern the homethis involves political and cultural choices-in whose interest is the home governed?:

- the landlord /'house father' /patriarch?

- the sovereign / 'the Crown'?- offshore landlords or sovereigns? (as in a colonial context)- or the people whose work and life give the home its real

meaning?

economic policies involve choices about how work is organised,

how the costs of social reproduction and the profits of theaggregate economy are shared.


3/30

Where does wealth come from?

- collaborative work (Adam Smith: It was not by gold andsilver but by labour that the wealth of the world was originally purchased

- the social/cultural making of ideas of value- money as 'social memory' (Keith Hart)- debt as the fundamental kind of money(David Graeber- debt as the organisation of communityrelations over time

- Power - as key fact in ordering thesemarker- the 10,000 year experiment


4/30

three kinds of economic lies(1) that the public coffers are empty, that

public debt is on an unsustainable trend

(2) that cuts to public services are necessary

(or that public spending is the cause ofpublic debt being out of control)

(3) that cuts are a rational and efficientsolution to a crisis- that cuts to publicexpenditure provide any way out of thecrisis


5/30


6/30


7/30


8/30


9/30


10/30


11/30


12/30


13/30

Why cut? debt burden unbearably heavy? leading to

inefficient tax burdens?

state as economic actor crowding out

private activity? as a symbolic political act (Stiglitz- 2012-

'mediaeval bleeding')

Marketism an ideological hostility togovernment, and faith that reducinggovernment opens up space for higherefficiency of markets


14/30

Why not cut?

government a critical actor in the moderneconomy, employer of 20-30% in someregions: CUTS = DEFLATION = AWORSE DEBT TO GDP ratio!

government as more efficient than marketover long time frames and for mass

services? The paradox of thrift


15/30

"

Vince Cable in April 2010 explaining the

paradox of thrift"

Cutting too soon and pushing the economy backinto recession will make the deficit worse, as taxreceipts fall and benefit payments rise. TheConservatives so-called efficiency savings areparticularly dangerous. They have no clue whereor how these efficiencies will be made, makingit likely they will be nothing more than a smokescreen for job cuts

or see the Magaritaville episode ofSouth Park


16/30

do cuts make the bond markets

like you?emerging market debt experience:mproving

creditworthiness, for example, by reducing deficits and introducing neededreforms, has limited effect: instead correlation with the spread between T-

bond and junk in the US domesticmarkethttp://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=837111

NB: The Irish experience: strict cuts 2008-2010, driving a deeper collapse

NB (2)): November 2010: Irish debt continues to fall in value, AFTER bailoutannounced and new austerity budget proclaimed

Why? the role of the United States in the international money/debt system since

the 1970s. The United States as the key market for global savings, and a vastengine for producing debt gives the fundamental shape to global fixed interestmarket


17/30

The current crisis?

long term post-1980 crisis of the non-financial British and US economies

high levels of structural unemployment and underemployment

declining US and UK export competitiveness (with de-industrialisation, intrain since late 20th c.)

high levels of personal and corporate debt (which ways heavily in the lowinflation environment

long term wage decline (wages in US and UK reach their peak for lowesttier in the 1970s

the 2010 situation only an extension of a post-1980 phenomenon

(obscured by very cheap cost of capital in this period, and in the caseof the UK the North Sea oil windfall in 2006 UK became a netimporter

continued restriction in credit

economic recovery??: UK- public sector construction led, and US assetinflation


18/30

cheap money: a failed option

'quantitative easing' (or how to pump up themoney supply by printing money without(initially) driving commodity inflation

BUT, little response, thus QE2- $600 billion

the threat of a liquidity trap

cheap capital 'keyboard credit' drivingasset price inflation around the world

Guardian 27/11/2010: sales of million-poundhomes soar by 44%- 2011/12

stockmarkets booming


19/30

How did we get here?: a short guide to Neoliberalism

(1) 1914-45-- collapse of confidence in the power of theinvisible hand to make either perpetual peace or universalabundance

1929: The Wall Street Crash and the Great Depression: the rise of Keynesianeconomic and new visions of the role of government in making economicstability and social well being

Post 1919: League ofNations -- multilateral structures -- ILO - the liberalargument for the application of best practices in labour relations around theworld -- against social dumping a Globalization of human rights

By 1945 human rights: not just freedom from tyranny, but also theright to food, the right to employment, to housing, to health, toeducation


20/30

Susan George:

I In 1945 or 1950, if you had seriously proposed any of the ideas andpolicies in today's standard neo-liberal toolkit, you would have beenlaughed off the stage or sent off to the insane asylum. At least in theWestern countries, at that time, everyone was a Keynesian, a socialdemocrat or a social-Christian democrat or some shade of Marxist.The idea that the market should be allowed to make majorsocial andpolitical decisions; the idea that the State should voluntarily reduce itsrole in the economy, or that corporations should be given totalfreedom, that trade unions should be curbed and citizens given muchless rather than more social protection--such ideas were utterly foreignto the spirit of the time. Even if someone actually agreed with these

ideas, he or she would have hesitated to take such a position in publicand would have had a hard time finding an audience


21/30

The Keynesian era, c. 1945-1976

- state intervention in industry, economic andsocial planning, restrictions on capitalmarkets

- extraordinary economic growth around theworld, extraordinary improvements in socialwelfare

- declining inequality: 1928 top 1% took 23%, 1940-84 less than15%, 1965-80 less than 10%

BUT: victim of its success, declining profits, USextraction of 'rent' via its dollar as reserve currency


22/30

The 1970-80s crisis- the Nixon shock 1971 break of link to gold:

1945-1971 dollar supply increased 55%; 1971-2001, by 2000% 'a cheque never cashed'

- the attack on Keynesianism: the rise of monetaristand 'corporate Keynesian' economics, retreat ofstate from economic intervention in industry

- the emergence of a new financial model- openingup for a new massive growth in capital markets

- attack on labour's power to negotiate wages,

- privatisation: transfer of wealth from public toprivate realm


23/30

Does neo-liberalism work?yes: in terms of making elites richer, transfer

of wealth from poor and middle to rich

no: in terms of real economic growth and theexperience of ordinary people

collapse of wages, privatisation of debt,financialisation of society, oversaving ofsuperrich, underinvestment in real economy

from 1960-80: output per person grew 83%,1980-2000: 33% (only success stories inAsia, where China etc. broke the neoliberalrules


24/30

Where did the banking crisis come

from?old banking: division between portfolio lending vs. partnership

investment speculation

New banking: 'securitised assets- retail banking shifts its interestfrom borrower to investor; investment banking opens speculativeaccess to broad market; mediated by derivatives: 'options', 'swaps',and compound securities (eg. CBO, and CDS)

by 2008 in the US real economy 1/80th of speculative economy

implications: drain of real capital away from investment in real economic

activity towards speculative products; enormous pyramid vulnerabilityto any weakness in the underlying asset class

but where did that come from?


25/30

The origins of the 'Credit Crunch'- growing inequality, pro-rich economic policies,

'cheap money' for bankers driving from 1980s asset price inflation, private debt instead of higherwages U.S. Bureau of Labor Statistics real wages (in constant 1982 dollars) fell from a high of $331.59 in1972 to $277.57 in 2004

- financialisation driving all sorts of social savings tocapital markets, with osmotic pull of US debteconomy driving flow of global savings to theUnited States

- Clinton era removal of constraints (Gramm LeachBliley and Commodity Futures Modernization Act1999-2000; Gordon Brown collaborating-NINJA/IBGYBG> CBO > CDS: 2007-8 collapse


26/30

making us pay for their crisis

- Lehman Brothers allowed to fail, but theGoldman Sachs alumni directing USeconomic policy decree 100 cents in thedollar cover for AIG risk (key GS liability

- Ireland (like others) commits 100 cents inthe euro for distressed assets

- refusal to pursue nationalisation OR ofractional compensation for speculators, orlevies on profits, or prosecution ofspeculators


27/30


28/30


29/30

Offshore interests

old imperialism: organising offshore economic and political life for thebenefit of an onshore community of bondholders living in an imperialpower

new postcolonial imperialism: organises onshore and offshore life for the

benefit of an offshore community, who minimise what they contributein taxes to the costs of social reproduction

the particular vulnerability of UK tax law- the imperial origins of non-domstatus, its expansion to include the principal beneficiaries of the UKeconomy

cuts as the consequence of the continued stream of onshore wealthoffshore

the democratic challenge of the 21st century is to how to drive offshorewealth back on shore.


30/30

Alternative visions of the

economy?- the organisation of work and leisure?

-the distribution of profit?

- restructuring of salary scales?- choices about inflation, transferring wealth

from the old and non-living to the young andliving

- international tax regulation (Robin Hood taxand beyond?)

choices about how we live in our home.

the public costs of private profits: neo-liberalism after the credit crunch

Documents