CoVid 19 has hit the economy ; But where is the Recovery going to come from?

above: Australia Institute Economist, Richard Denniss

Dr Tristan Ewins

CoVid 19 has hit the Australian economy hard.   By some estimates the Australian economy will shrink by approximately 7 per cent in 2020.  Maybe more.   That’s a virtually unprecedented recession.

https://www.abc.net.au/news/2020-04-15/how-coronavirus-crisis-compares-to-1990s-recession-australia/12148020

Shutting down workplaces: hospitality and tourism, higher education and some manufacturing: comes at an enormous cost.

We can’t put a price on peoples’ lives and peoples’ health.  But many people will need to sacrifice to ‘spread the burden’ of funding recovery.

Some have suggested a ‘HECS-style loan’ for those unemployed as a consequence of this crisis.  Because this discriminates, it is unfair.  Richard Denniss – speaking on ABC radio – is correct about this.  Though I think he is wrong about HECS more broadly.  Income contingent loans to pay for government  support of individuals during the crisis would mean a veritable ‘labour market lottery’ as to who was left with debt.  But also ‘income contingent loans’ have a longer history of losing their progressivity as governments reduce thresholds to help pay for other endeavours – such as ubiquitous corporate welfare.

Also will the government temporarily increase corporate tax  during the recovery period to service debts incurred supporting the private sector during the crisis?

https://www.abc.net.au/radionational/programs/sundayextra/the-lasting-economic-damage-from-the-covid-19/12223194

The government’s stimulus has provided a lifeline for many.

But one rational assumption is that the economy won’t simply ‘snap back’ at the end of a six month period ; and as a consequence the government cannot afford to ‘step back’ and just let the private sector ‘fill the breach’.  The real economy doesn’t work like this.

In hospitality and tourism the structural effects on the economy could last quite some time. We don’t know whether there will be a ‘second wave’ or whether we will ‘break the back’ of the spread in this country.  But global travel will take years to ‘get back to normal’, and the US and the UK are still deep in crisis.  The ACT and Northern Territory also understandably want to reap the benefits of wiping out the virus, and don’t want it reintroduced from interstate.

On the other hand the crisis provides an opportunity to broaden and deepen the public sector to create the ‘economic infrastructure’ around which recovery will occur.  Make strategic infrastructure investments, as well as structural improvements in public services ; unemployment services ; in Health, Aged care and disability services ; in welfare, transport, communications, arts.   Fix the NBN with ‘fibre-to-the-home’.  And coming out of the crisis: Have an active industry policy which strategically supports and invests in high wage manufacturing.

On ABC radio high speed rail was inferred as perhaps a ‘dubious investment’.  But it could drive growth in the regions, with a flow on of jobs and affordable housing.  As well as containment of urban sprawl and the transport crises that ensue from that.

The simple truth is that the public sector might have to pick up the slack on the economy for some time to come if there is to be any chance of a recovery.  And if we navigate this in the right way it can present an opportunity.

Modern Monetary Theory (MMT) holds that as the issuer of the currency the government can create money at will to invest and ensure a ‘full employment guarantee’.   Though this is limited by real economic constraints concerning the scale and nature of goods and services actually produced in the economy at the end of the day.  In some instances there might also be inflation ; and you cannot ‘create money’ to fund an infinite influx of imports.

But full employment is in everyone’s interests: so long as there is an ‘efficiency dividend’ which provides benefits for all ; and so long as consultation with unions ensures there is no endless ‘wage-price spiral’.   Higher employment has a ‘multiplier effect’ on the broader economy that also makes debts easier to service. At the same time, the wage share of the economy has been falling for decades ; and long term there is a need for a structural correction which could also create extra demand in the economy.   As part of this picture there should be reform of the labour market improving compensation in low-paid jobs – either with regulation, or through the social wage. (or both)

Modern Monetary Theory has been somewhat sceptical of the role of taxation, claiming it ‘takes money out of the economy’.  But this need not be the case if all that money is spent ; if indeed there is a stimulus.  Taxation also allows for a much more finely targeted redistribution of wealth: which should be desirable for progressives.

The current public health crisis is going to cause much more pain before it is overcome.  But the right kind of policies on investment, industry policy, welfare and stimulus can minimise that pain, and even help ensure in the end we come out of the crisis stronger.

Reflecting with Joseph Stiglitz - Addressing the Recession; and Measuring social and economic progress

Earlier this September I happened upon an interesting article in ‘The Age’: a critique by Professor Joseph Stiglitz on the question of what kind of measures we ought use to measure social well-being. The most common measures referred to here is Gross Domestic Product: GDP. As Stiglitz noted, world leaders feel pressured to pursue growth in GDP – but this also “causes conflicts”.

There are environmental factors, and then there are issues of quality – rather than just ‘quantity’ of output. An important example, here, is US health care – where the sector comprises a greater proportion of US GDP – but quality and outcomes are inferior. And GDP masks real inequality – where concentration of wealth is not reflected in a single indicator of national wealth.

Such insights also sit well with post-materialist critiques of GDP. GDP - as a measure - obscures inequality. Again: it reflects quantity rather than quality. Do we really need to upgrade our cars every second year: or would we be better off allocating our resources – including our time and labour - elsewhere? What about time for family, social circles, or civic activism? And if the consequence of reshaping our priorities is that we need to increase tax as a proportion of GDP to ‘keep up’ with the provision of infrastructure and social services – is this so bad? If the consequence is that free human development and social connectedness flourish – surely the ‘trade off’ can be worth our while.

In another article from ‘The Age’ back in August 2009, Stiglitz also puts the case for economic stimulus in these difficult economic times.

Some might suggest that the case for stimulus is at odds with the project of reshaping the economy for human need. Rather they aim beyond economic measures which are concerned with only quantity – rather than quality of human life.

The pace of such change, however, is slow. In the interim people need jobs. And tax receipts must be supported here and now to provide for infrastructure and services: social wage and welfare provision. Furthermore: the case needs to be won for a readjustment of economic priorities – and in the meantime we must address the problems we face in the immediate term.

All this considered, Stiglitz contends that President Obama’s economic stimulus measures have not gone far enough. He observes that the aim of Obama’s policies was to “create some 3 million jobs more than would otherwise be the case”. Despite the effect of stimulus the unemployment rate in the US at the time of writing is still 9.6 per cent, http://www.bls.gov/cps/

This translates to 14.9 million US citizens officially unemployed – with a contractionary flow-on effect for the world economy. http://www.bls.gov/news.release/empsit.nr0.htm

There are many dimensions to the problem: but Stiglitz notes the emphasis in the US on tax cuts. Burdened with personal debt – and in fear of job loss: Stiglitz holds that only a fraction of the US tax cuts have flowed on to consumer expenditure. This has frustrated attempts to buoy the US domestic economy. In the face of this conundrum – further (better targeted) stimulus is required.

The crisis – if unaddressed – could lead to exponential economic deterioration: and so Stiglitz insists that if we don’t spend now “we risk spending much more later”.

These circumstances must be addressed by the Obama administration – but the lessons must be heeded in Australia and elsewhere as well.

Conservative Australian Opposition leader Malcolm Turnbull especially needs to face facts – rather than ‘beating the drum’ on government debt and inflation.

Any minor difficulty with inflation later down the track is no reason to ‘take the axe’ to economic stimulus: including expenditure on economic and social infrastructure. Such programs provide for human well being: and may expand economic capacity into the future. Again in ‘The Age’, Tim Colebatch has quoted Max Corden: “One is not causing a flood by hosing down a fire”. Powerful words indeed.

And indeed – the qualitative improvement in living standards which might follow with some programs of expenditure – such as Australia’s ‘National Broadband Network’ – is greater than any purely quantitative economic indicator can express.

Further: some areas of public spending comprise a genuine and important human need - while requiring only a 'one off' major investment. Investment in social housing especially addresses a critical problem in Australia of homelessness. Cutting back on such programs under such circumstances - to reduce the budget deficit - does not make sense.

Without sustained stimulus, the world economy could again nosedive. Hence Stiglitz has also suggested the possibility of a “W-shape’ recession. Without sustained stimulus recovery could be temporary – followed by a lapse back into recession.

Now is not the time to withdraw economic stimulus. In Australia, the US and elsewhere – we need continued and decisive action to support the world economy. But we also need to address qualitative concerns which relate to the economy – not deceptive readings based purely on economic quantity.

The struggle for health care reform in the US is precisely one such issue – and we should all support the Obama administration in its endeavours to achieve change. If anything we need to revisit the kind of mobilisation achieved by the Obama team in its election campaign: to ensure that as comprehensive a public health care program as is possible is achieved in the United States.

I welcome all readers to discuss these issues here at the blog. Hope to hear from you. :))

Tristan Ewins (Moderator, Left Focus)

Not Time for Champagne Yet

By Jim Stanford

Financial headlines around the world herald the seemingly happy news that “recovery” is here. Global stock markets have surged 40 percent or more. Business confidence has shifted quickly from gloom to boom.

But hold on a moment. The world economy is still suffering through its worst downturn since the 1930s. World GDP is still declining, for the first time since the end of World War II. Unemployment rolls are still growing, not shrinking.

So why is the champagne being uncorked in financial centres around the world? More importantly, will the rest of us get to share in this good cheer, along with the bankers and brokers? Unfortunately, not likely. In reality, for working people, the effects of this crisis will linger for several years to come.

And that’s why governments, including Australia’s, need to stay on an active recession-fighting footing. Far from turning off the tap of job-supporting stimulus measures, governments’ efforts to spur real recovery (not just a financial bounce) need to be intensified in the tricky months ahead.

The financial party began back in March, when Citibank and other U.S. banks began reporting positive profits (largely thanks, of course, to $1 trillion in government handouts). After months of doom and gloom, the prospect of renewed financial profits set the markets on fire.

But before getting too carried away with this good mood, let’s remember there’s much more to economic recovery than profitable banks and roaring equity markets. True recovery requires getting people working again, producing actual goods and services. And on that score the world economy is still going backward, not rebounding.

Much confusion over the arrival of “recovery” arrived stems from the narrow terminology used by economists. For them, it’s not a recession unless real GDP (that is, the total value of economic output, adjusted for inflation) declines for at least two consecutive quarters. Then recovery simply constitutes the point when real GDP stops falling, and starts to grow again – no matter how fitfully.

So even if unemployment is growing and poverty is getting worse, the recession is “over” once real GDP is growing (as it is in Australia now). But this narrow terminology utterly misses the point. If people are losing their jobs and their homes, and living standards are falling not rising, then the economy is in trouble – regardless of whether GDP is rising or falling. Australia’s self-congratulation for narrowly avoiding “technical recession” this year is small comfort to the tens of thousands of Australians who continue to face tough times – tough times that are sure to last for some years to come.

It is typical for unemployment to continue to rise for months and even years after economists officially declare “recovery.” GDP growth must get up enough steam and generate enough jobs to offset lay-offs incurred during the downturn (let alone absorb new entrants to the labour force). So the unemployment rate will continue to rise right through 2010. Then, unfortunately, it will stay at very high levels for at least two or three years after that. That’s the human reality of the global financial crisis – in contrast to the all-to-easy rediscovery of irrational exuberance in the realm of high finance.

So don’t be fooled by the headlines celebrating imminent recovery. The brokers and speculators inhabit a hyperactive, surreal world. Only they could speak of “recovery,” when so much hardship and fear is plainly visible outside in the real world.

For most Australians, insecurity and austerity will prevail for years to come. And government must continue to actively address the social consequences of this crisis, without being sidetracked by reports of this so-called “recovery.” Stimulus will be required for some years to come. If anything, the existing recovery package should be expanded – to include active supports manufacturing and other productive sectors, funding for training programs (an alternative to continuing redundancies), and protection for workers’ accrued entitlements (like annual leave and sick leave) in order to underpin purchasing power despite rising unemployment.

Jim Stanford is economist with the Canadian Auto Workers, and author of Economics for Everyone (www.economicsforeveryone.com).

He is speaking in several Australian cities this month.

(see the earlier post immediately below for details)

Political Economy and the Economic Crisis Part II

Political Economy and the Economic Crisis Part II

by Lev Lafayette


What Should We Do?

The very thing that is required is a recognition of the importance of normative economics and political economy in the discussion of contemporary economics. For these essentially moral questions - who owns what, and why - do have highly significant positive effects as well. If ownership of the factors of production favours a class in exchange-value greater than their contribution to the production of use-value then the economy as a whole will inevitably suffer.

The notion of factors of production and economic classes is poorly understood today. It is a field of inquiry largely ignored since the development neoclassical economics in the latter part of the 19th century. Whilst providing important contributions to price, value, scarcity and studies in marginal utility, the conflation of land and capital into a single entity has all the signs of a tragic mistake. The neoclassical economists contributed to the conflation by converting land into capital, essentially an accountant's recording rather than an economist's recording. But also some rather dogmatic and vulgar Marxists could only see the existence of the worker and capitalist classes. Finally, the conflation was partially due to the influence of American functional sociology which investigated relationships and activity on the basis of income, rather than ownership of the means of production.

In contrast all classical economists, including Adam Smith, David Ricardo, Karl Marx, Léon Walras and John Stuart Mill, recognised the distinction between the factors of production (land, labour and capital), the respective sources of income derived from each of these factors (rent, wages and interest) and the respective economic classes (landlord, worker and capitalist); it is noted of course that an individual can be a member of multiple classes simultaneously and proportional to the way their income is derived. In addition to this it is useful to distinguish between public and private ownership of the factors of production, or socialism and capitalism, and between planned or market mechanisms for exchange. Another exogenous dimension refers to a political subsystem that operates in parallel to the economic; by which varieties of dictatorship may be contrasted with varieties of democracy.

Rather than a "mixed economy", where the public and private ownership is appropriately allocated along with planning and market mechanisms is not entirely unfair to suggest that the world system is a "muddled economy", a quasi-political system where productivity and efficiency come a poor second to supporting an increasingly powerful alliance of a section of the capitalist class with the landlord class. Recognising these class relations brings the normative question; on what possible basis is earned income justified? With the assumption of honest provision of labour and the honest acquisition of capital, the moral right of wages and interest can be ascertained; but the same cannot for the income of the landlord class. Their income is acquired entirely from the ownership of a pre-existing resource which is necessary for other economic activity; in effect the landlord derives their income for workers and capitalists whilst providing nothing in return.

The long-recognised solution to this injustice is the public socialisation of income according to site-rental market value, and the use of this income for public expenditure, instead of the range of onerous and inefficient taxes placed on workers and capitalists and all of which come with both a high administrative cost and deadweight loss through the restriction of trade (land value taxation in contrast suffers from neither of these features). Economists are nearly unanimous that as much public income should be derived from land values and use of natural resource as possible; and as little as possible should be derived from labour, capital and transactions. The normative effect should be the abolition of the premodern landlord class as the normative economic priority for advocates of socialism and capitalism alike.

Such a normative claim is not made however without reference to positive effects. With both the incentive to seek rental income from not engaging in productive activity, economic activity is redirected towards the actual production of goods and services. This raises both the appropriate normative and economic models for ownership and distribution in all these cases which, by necessity, must be abstracted. A general principle that can be suggested here is that the closer that a good or service is to being a natural monopoly the greater the requirement for centralised socialisation as a public service, and the close the good or service is to being in accord to perfect competition (including monopolistic competition), the greater the requirement for decentralised private ownership in a variety of forms (including cooperatives etc). Likewise the smaller the number of input and output variables the greater the possibility of accurate planning, whereas the greater number of such variables suggests efficacy of a price mechanism to deal with issues of relative scarcity and opportunity cost. The aforementioned public income should be spend entirely on matters of transparent public goods for the general benefit; the mitigation of negative externalities (e.g., pollution), the enhancement of positive externalities (e.g., networks, education).

Whilst if one wants to understand economics, they should study it. In the study of economics one cannot avoid finding a point where public policy seems totally at odds with the view of nearly all economists. I refer to the way that public income is derived (invariably by taxes on labour and capital), and the way that the private ownership of land (used here in the economic sense of all natural resources) is endorsed. John Locke was the first to suggest that one is the legitimate owner of their labour, and the improvements that they make to nature. Following a stricter class analysis, David Ricardo expressed it rather bluntly. "[T]he interest of the landlord is always opposed to the interest of every other class in the community."

Today, nearly every economist in the world, whether liberal, conservative or radical, agrees that public finances should be largely derived from resource rents. The radical capitalist Milton Friedman argues that "In my opinion the least bad tax is the property tax on the unimproved value of land", whereas the neo-Keynesian Paul Sameulson argues that "pure ground rent is in the nature of a 'surplus,' which can be taxed heavily without distorting production incentives or reducing efficiency". The conservative Robert Solow has claimed "For efficiency, for adequate revenue, and for justice, every user of land should be required to make an annual payment to the local government equal to the current rental value of the land he or she prevents others from using", whereas the radical antifascist Jewish refugee and economist Franco Modigliani stated "It is important that the rent of land be retained as a source of government revenue". Finally, the maverick socialist William Vickery claims "While the governments of developed nations with market economies collect some of the rent of land, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies - taxes on such things as incomes, sales, and the value of capital goods."

Each of the people just quoted are Noble laureates in economics. One can reasonably make the assumption that they have some idea of what they are talking about. If that is insufficient evidence however, consider that in 1991 no less than thirty five of the top economists of the United States - all either Noble prize winners, professors, or deans and across the political spectrum - wrote to to the then President of the Soviet Union Mikhail Gorbachev urging him in the transition to a market economy to retain public ownership of land and to derive a market-based common income from land-rents. Unfortunately, in the replacement of Gorbachev by Boris Yelstin the latter capitulated to demands to a cheap sell off natural resources, the results of which are empirically and readily available; mass impoverishment and even malnutrition in what used to be the second most powerful nation on earth.

Those who labour for wages and those who invest for interest, are indeed productive and beneficial. But the landlord class, increasingly powerful as the revolutionary aspects of capitalism are diluted into a new feudalism mediated by money rather than genetic lineage, produce nothing of value that was not already present in nature And so it is today that the productive worker and the productive capitalist are both fettered by taxes, tariffs, and rents, onerous on their ability to provide goods, services and create wealth. And so it is, more and more aggressive wars are fought for the control of natural resources with horrendous civilian causalities.

What happens when more and more people try to get into the landlord's game, which was called 'Monopoly', for good reason?

What happens when the banks start lending money with cavalier disregard at extremely low rates and lax conditions, with with the assumption that "someone else" will engage in the productive labour and investment that will give a location a good rental price?

What happens when fewer and fewer invest in new business, industry, new goods, and new services? What happens when the expected returns from "somebody else" do not materialise?

'What happens?' indeed. The monopolists find themselves with a debt that they cannot afford to repay. What was once marked as an asset by the banks suddenly becomes written off. Confidence is lost, industry fails, economies shrink, unemployment for masses loom. And like pigs the monopolists come squealing once again before the our governments. They plead for the government, which means us, to prime the printing presses and pay for hundreds of billions of bad assets, under the assumption that "confidence" and "stability" in the credit market will be recovered - and so they can exploit both worker and investor yet again.

That is what happens.

Political Economy and the Economic Crisis Part I

Political Economy and the Economic Crisis Part I

by Lev Lafayette


What Is This Economic Crisis?

A crisis is something to be taken seriously. The word is often used haphazardly, and that denigrates its importance. So, by means of introduction, I will use the classic multi-disciplinary definition expressed by Jurgen Habermas in the opening pages of "Legitimation Crisis".

"In medicine it represents a point where, regardless of individual will, the physiological system of an individual is tested to capacity in its ability to heal. In literature, it is the point of the narrative where the protagonist either successfully confronts their antagonist, be that
the setting, circumstances or another character or, in the case of tragedy, their own weaknesses. In the environment, or social systems, it is also sensible to speak of crises, points in time and place where the capacity of the system is faced with a "life or death" test in its
abilities to continue."

An economic crisis is one of several potential crises in a social system. Typically they are described as a variety of financial crises; a sudden rush of withdrawals from depositors, leading to a run on the banks., a stock bubble, where the price far exceeds the present value of future income., or when a government is forced to massively devalue its currency due to speculative attack, or it fails to able to pay back its own bonds; the latter two often result in a capital flight. Such financial crises often result in an economic recession, usually defined when a country's Gross Domestic Product shrinks for two successive quarters. By way of example, in the third quarter of 2008, the U.S. economy shrank by 0.5%, (although that was after a 2.8% increase in the second), the economy of the UK by 0.6% in the same period, Germany by 0.5%, and Japan also by 0.5%. Of those major economies, only Japan technically fitted the description of currently being in recession at that time.

Such a decline doesn't sound like much; a drop of half a percent, or even a few percent, of a country's GDP isn't what one would consider terminal case, especially from such a high base. But there are some other considerations here. Firstly, this is truly an international problem, rather than one of localised examples; even the countries which are not in recession have very slight levels of growth. Secondly, there will be other major economies which are expected to fall into recession, such as Russia and Canada, and whilst the Chinese economy is expected to
grow, albeit at a slower rate, their manufacturing sector has just had three consecutive months of negative growth. Thirdly, this problem is expected to be lasting, probably at least until 2010, due to extremely low consumer confidence and falls in private consumption. Most importantly however, the reason why using the term 'crisis' is not hyperbole, is due to the systematic cause.

What Happened

The start of the current economic problems first became evident as far back as the end of 2005. That is when there was a sudden halt to the rampant increases in prices in the US housing market. Throughout 2006, as prices remained flat, however the share market did not reflect this. In 2006 the Dow Jones Index actually increased approximately a quarter. In 2007 real-estate prices faced significant declines and foreclosure activity increased by 79%. Twenty-five subprime mortgage estate lenders went bankrupt, including the largest lenders such as New Century Financial, American Home Mortgage and Ameriquest. The largest U.S. mortgage lender Countrywide Financial narrowly avoided bankruptcy by borrowing $11 billion from other banks, the Internet banking pioneer NetBank (not to be confused with the Commonwealth Bank of Australia service of the same name) went broke, whereas across the big pond, there was a run on the Northern Rock bank, which was eventually put into public ownership in 2008.

Amazingly, the stock speculators seemed to remain ignorant of the old adage of a collapse in share prices following a downtown in the real estate market, even though the financial collapse in South and East Asia in 1997 should have been in recent memory. Instead, the Dow Jones Index increased even further, from 12,643 in January to 14,093 at the end of October; although for most of this time the price of natural commodities, especially oil and food prices, had been increasing significantly. The price per barrel of crude oil increased from just over $40USD at the beginning of 2007 to over $130USD in the middle of 2008 (it now below $40). Between the start of 2006 and 2008, the average world price for rice rose by 217%, wheat by 136%, maize by 125% and soybeans by 107% - all of which had a dramatic effect on the poor of development countries.

The 2008 new year started jittery with all share market gains of the previous year being wiped out. A series of arrests for fraud shook the mortgage industry in the middle of year. The Bear Stearns Companies, which had been one of the largest global investment banks, was caught in
this operation and it's stock value went from a high of $133.20 to a low of $10 per share when it was purchased by JPMorgan Chase. When added to a massive reliance of the mortgage lenders to Credit Default Swaps, which insure debt holders against default, investor confidence was rather suddenly wiped out. The U.S. government was required to nationalise the Federal National Mortgage Association ("Fannie Mae"), and the Federal Home Loan Mortgage Corporation ("Freddie Mac") in September. Combined, they owned or guaranteed about half of the U.S.'s $12 trillion mortgage market. Soon afterwards, the financial services company Lehman Brothers filed for bankruptcy, despite holding assets approaching $700 billion dollars. Merrill-Lynch despite having a trillion dollars in assets, had such a poor revenue stream (negative $60 billion in 2007), that it was purchased by the Bank of America for a mere $50 billion. Goldman Sachs and Morgan Stanley survived, in a manner of speaking, by converting their status from an investment bank to bank holding company.

As the U.S. government struggled to raise support bailout, the Benelux Fortis bank required half nationalisation to the tune of €11.2 billion (US$16.3 billion). The French-Belgian bank Dexia required a government loan of €9 billion. Eventually the U.S. Congress passed its bailout
plan, which included a guarantee to bank deposits to $250,000 and included $100 billion in tax breaks. Bank deposit guarantees were also put in place by the governments of most European countries, such as Germany, Ireland, and the U.K. Wachovia, which had been the fourth
largest bank holding company in the U.S., was acquired by Wells Fargo. Russia was twice forced to suspend its trading exchanges in October, due to dramatic falls. The UK government made £25 billion available to major British banks as preference share capital, or permanent interest bearing securities, as form of partial nationalisation; in December it was revealed that the Royal Bank of Scotland and HBOS (Halifax and Bank of Scotland) had been "only hours away from being unable to open for business". By November 20, the Dow Jones had fallen to 7,507 - that is, approximately half of its value from October 2007. Ford, General Motors and Chrysler were provided an estimated short-term $15 billion bail-out. Although not a major economic player on a world scale, the Iceland the stock exchanged fell by more than 90% and with banks there holding 80% of their €50 billion foreign debt during 2008, all of Iceland's major banks were put under public administration; the estimated cost to the Icelandic economy of the financial collapse has been put at 75% of the country's entire GDP for the previous year.

The crisis, so named, is obviously on-going - on Friday the Bank of America shared price slumped 20% and Citigroup 18% - and the preceding material provides some idea of the scale of events. There have been three main strategies to deal with the problem, which I can be described as the Bush administration approach, the European approach, and a proposed Obama administration approach. The first, constituting roughly $1 trillion for a $14 trillion economy, was a set of deposit guarantees, stock purchases, tax breaks and direct aid. However when Associated Press contacted 21 major banks which received the bailout, none of them could give specific answers on how much has been spent? What it had been spent on? How much was being held in savings and what's the plan for the rest? Thomas Kelly, a spokesperson for JPMorgan Chase, which received $25 billion in emergency bailout money. "We have not disclosed that [information] to the public. We're declining to."

In contrast the European and Obama approach is, in different guises, forms of Keynesian government intervention as social liberalism or social democracy. It involves re-regulation of the financial sector, the purchase of preferential shares or outright nationalisation on one hand
and one the other, as expressed by President-elect Barak Obama, a massive government expenditure in public works and infrastructure, on electrical grids, on public transport, on dams and investment in alternative fuels, expected to be valued at another $1 trillion dollars,
although the US Federal Reserve chair, Ben Bernanke, has warned Obama that this may not be enough. Nevertheless after several years of significant neglect in this area the intervention will undoubtedly assist those most dependent on improvements in public goods and thus provide positive externalities to the US economy as a whole. Comparison with Franklin Delano Rooselvelt's "New Deal" program have, of course, already been made.

nb: 'Part Two' will follow soon.

The Global Financial Crisis – What can we do about it?

Originally published by Australian Options – a quarterly journal for social justice and political change.  (Please copy and distribute)  To contact Australian Options email Frank Barbaro – filef@tne.net.au

Written by Patricia Ranald

The share market crash of October 2008 sent shock waves though the global economy, with unemployment growing in many countries. We hear the same people who caused the problems, the bankers and major employers, calling on governments to bail them out with public money, and to put off urgent environmental measures needed to address climate change.

At the same time workers are losing jobs, and pensioners and superannuants are struggling just to keep going. We need to understand why this has happened and what can be done to stop it happening again.

We must ensure that workers and others on low incomes do not bear the main burden of the crisis through unemployment and reduced incomes.

Why did it happen? Deregulation and growing inequality

The immediate causes of the global financial crisis lie in the US banking system, but the longer term causes arise from policies implemented by governments around the world

over the last twenty years. Called economic rationalism, neoliberalism, or the Washington Consensus, these policies have removed social regulation designed to protect consumers

and workers, have redistributed income to the rich, and promoted huge growth in both corporate and consumer debt. These policies also assumed that economic growth could

be endless, ignoring the history of boom and bust cycles in capitalist economies over the last two centuries. Global inequality also increased, with over two billion people living on less than US$2 per day.

Governments have cut company taxes, wealth taxes and income taxes for high income earners, and have introduced consumption taxes like the GST, which fall most heavily on

low income earners who spend most of their income. There have also been cuts in government spending on health, education and welfare, and privatisation of many services.

But private profits have been guaranteed by continuing government subsidies, as we have seen in services ranging from childcare to toll roads.

 

Legislation like Howardʼs Work Choices reduced basic working standards and allowed employers to impose individual contracts on workers, while restricting their rights to join unions and bargain collectively.

 

The justification for these policies was that redistributing wealth to the rich would result in higher levels of investment and employment, and that benefits would “trickle down” to

lower income groups. But they were based on a culture and practice of greed which undermined community values and increased inequality. As the late American journalist Studs

Terkel remarked, “The only thing trickling down from the top is meanness.” 

In their recent book Who Gets What? Analysing Economic Inequality in Australia (Cambridge University Press 2007), Frank Stilwell and Kirrily Jordanʼs detail the falling share of wages as a share of total income, and the increase of profits as a share of total income particularly over the past two decades.

 

Executive pay has reached obscene levels.  A recent survey by the Australian Council of Superannuation Investors showed that chief executivesʼ fixed median pay increased by 96.4% from 2001 to 2007, compared with a 32.3% increase in average adult weekly ordinary time earnings over the same period. For the 69 chief executives surveyed, average total pay

in 2007 was $5.53 million, up from $4.56 million in 2006 and $3.77 million in 2005.

Growth of the finance sector, ʻcasino capitalismʼ and the environmental crisis

Following the Great Depression of the 1930s, in which unemployment reached 30%, many banks collapsed and millions lost their savings, governments introduced regulation to ensure that banks had adequate funds and would not engage in high risk loans or investments. Government-owned savings banks provided for low income savers. Since the 1970s, privatisation and deregulation of the banks, and the finance sector more generally, removed these safeguards.

Mergers have created giant global banks focused only on short term profits. This led to the “financialisation” of the economy, or “casino capitalism”, in which the finance sector as a whole has grown much faster than the rest of the economy, driven by highly profitable but complex financial products involved in currency trading, futures markets and corporate and consumer debt.

The growth of consumer debt through credit cards, personal loans and mortgages has been highly profitable. Falling real wages and casualisation of work have meant that consumer

debt can be the only option for low income earners to maintain living standards.

The growth of all forms of debt enabled huge increases in production and consumption which

accelerated the global warming that had been developing over the last two centuries of industrialisation.

The US sub-prime mortgage crisis

The immediate cause of the crisis was the massive growth of high risk or “sub-prime” mortgage loans in the US housing market, which began after interest rates fell in 2001-2. Falling real wages and casualisation of low paid work in the US increased the numbers of working poor, often depending on more than one part time job without earning a living wage.

Millions of low income Americans, often from Afro-American and Hispanic communities, had no access to affordable housing as governments cut public housing programs.

Lending to people who cannot afford to repay is known as predatory lending, and had been illegal in some US states. But these laws were repealed in the name of deregulation.

US banks offered mortgages to low income people at initial low interest rates. But hidden in the fine print was a shift to higher interest rates that they could not afford. The banks knew that many people would not be able to continue payments, but they gambled that rising house prices would cover the cost of defaults.

The banks then converted the risky loans into securities, which were promoted and sold as investments with acceptable risks but high interest returns. Ratings agencies like Moodyʼs and Standard & Poors rated these securities as good investments.

The deregulation of global financial markets meant these securities could be sold to other banks, local government and pension funds all over the world, including Australia, creating contaminated time bombs in the global banking system.

By 2007, the highest risk sub-prime mortgages were 14% of the total US mortgage market, with a further 10% of the market classified as risky. As the higher interest rates kicked in over

2007-8, millions defaulted, flooding the US market with millions of houses for sale, leading to sharp falls in house prices. Families were left homeless as their houses were sold.

The ratings agencies downgraded the value of the securities. Banks and other investors

throughout the world suffered huge losses, leading to bank failures in Europe and the US. Banks stopped lending to each other and to their customers.

With less money available to buy shares, share markets plunged in value, leading to losses for superannuation schemes and retirement incomes. Economic growth has slowed, unemployment isrising, and the US and European economies are now officially in recession.

The Australian economy was boosted by the resources boom, but growth is now slowing We are now seeing rising unemployment and layoffs in retail, mining,manufacturing and other industries.L FINANCIAL CRISIS

Government responses

The crisis has undermined the myth of self-regulating markets. Governments are now discussing how, not whether, to regulate markets and use government spending to prevent a worsening of the recession and to create jobs.

Government spending is essential when private investment is paralysed. Priority should go to job creation in health, education, public transport and environmental projects, and to assist workers and low income people who will otherwise bear the brunt of the crisis through unemployment, homelessness and loss of retirement incomes.  Maintaining these incomes also creates demand for goods and services in the economy, and helps economic recovery.

Some business interests are trying to use the economic crisis as an excuse for delaying urgent action on climate change.This is nonsense, since green jobs can be part of the solution to the crisis.

A new report Green Gold Rush issued jointly by the Australian Council of Trade Unions and Australian Conservation Foundation shows that 500,000 jobs could be created in renewable energy, energy-efficiency, sustainable water systems, biomaterials, green buildings and waste recycling if governments provide the necessary support   

see http://www.unionfiles.com/green/Green_Gold%20_Rush_final.pdf).

 

Similar proposals for a “Green New Deal” have been made in Europe and the US.

Globally, governments have said that they will guarantee bank deposits. This does not involve immediate spending, and has prevented the disastrous runs on banks of the 1930s which meant millions lost their savings. 

Governments have also agreed to introduce stricter global regulation of financial institutions, but the details remain to be seen. The European and Chinese governments have also announced massive government spending programs.

Direct government support in the form of payments to particular banks, especially investment banks that have made and lost super profits, is more controversial. In Britain and Europe, governments have invested in or nationalized some banks, meaning that they will eventually get a return on their investment, and have introduced stricter regulatory frameworks.

In the US, in the dying days of the Bush Republican government, the conditions for banks to access $700 billion of government funds were unclear. There is strong public opposition to public money going to investment banks without any assistance for the millions who are losing their homes, while bank executives walk away with massive payouts. The new Obama Democratic government will have to address this challenge.

Although Australia has a much lower level of sub-prime loans (called “low doc” loans here), Australia has a high level of overall consumer debt (including mortgages, credit cards and personal loans).

Sydney economist Steve Keen estimates this consumer debt is 156% of the gross domestic product. We are now seeing increases in mortgage defaults with rising levels of homelessness. (see Deeper in Debt: Australiaʼs addiction to borrowed money, at www.cpd.org.au)

The Rudd Government has guaranteed bank deposits and paid an initial government assistance package of $10 billion to pensioners, carers and families with children in

December 2008. This both helps those on low incomes and boosts consumer spending, helping employment in retail, manufacturing and services industries.

The bringing forward of government capital spending of $5.5 billion on local government infrastructure, larger infrastructure projects and renewable energy will also help to boost employment.

But as the global crisis has worsened, the government has introduced a second, much larger package totaling $42 billion.

Again many of its proposals are welcome, especially expenditure on schools, public housing, energy efficiency and other infrastructure. But there are questions about the equity impacts. There is no rise in payments for unemployed people, wealthy private schools may receive the same assistance as more needy public schools, and more investment is needed in public transport.

There were some improvements to means tests for unemployment benefits, green energy investment and investment in the Murray-Darling basin environment made by Greens and independent Senators, as the Government needed their support to pass the package in the face of Liberal-National Party opposition.

 

Proposals to create jobs and make Australia fairer and more environmentally sustainable

•   Re-regulation of the financial system to prevent such a crisis in the future. This would include much stronger regulation and transparency rules for all financial instruments and institutions, outlawing of all forms of predatory lending, regulation of lending for stock market trading and regulation of ratings agencies

•   Regulation of senior executive incomes, and removal of bonuses that reward risky behaviour for short term profit

•   A uniform national tax on all properties over $2 million to discourage speculation and property booms,

•   A small Tobin tax of a fraction of one per cent on international currency transactions, to discourage speculation and provide a fund for development assistance in the poorest countries

•   A publicly owned savings bank to provide low cost banking for consumers and small business as real competition with other banks

•   Publicly funded consumer credit education programs for schools and the community

•   Increased public spending on public housing, including cooperatives and local social housing projects, and incentives for private investment in affordable housing,

•   Public investment and incentives for private investment to create green jobs in renewable energy, energy-efficiency, sustainable water systems, including industry and household water recycling, biomaterials, green buildings and waste recycling.

•   Increased spending on public transport, in cities, between cities and in rural centres

•   Increased spending on public hospitals and health care, and restore bulk billing and dental health coverage

•   Increased spending on public education at all levels (preschool, schools, TAFE and university) to reduce class sizes, and upgrade school buildings and equipment.

•   Following the failure of ABC Learning, government should fund good quality, accessible and affordable community-based childcare

•   Public investment to close the gap for Indigenous health outcomes, and encourage biodiversity conservation and environmental management on Indigenous lands

•   Boost pensions and benefits to provide a living income

•   Use the new industrial relations law to implement Australia’s commitment to fair workplace laws under the International Labour Organisation Conventions, including freedom of association and collective bargaining rights.

•   Clearer obligations on employers to consult and negotiate with unions about proposed layoffs, including paid training days as an alternative

 

Protecting the most vulnerable: Pension Reform Now!

As we lurch deeper into economic crisis, the unemployed face a potential backlash as they are particularly vulnerable to the ravages of poverty. Pensioners, aged and disabled are also unfairly disadvantaged and there is an urgent need for reform “across the board”. In the run-up to the next federal budget, the poor and the vulnerable - and those with the decency to stand alongside them - need to mobilise for change.

This paper considers the plight of the most economically vulnerable of our community; and demands change now in the name of kindness and justice.

Aged pensioners are already - and justifiably - mobilising for a “living income”. The Council On The Ageing (COTA) in New South Wales, has called for single aged pension payments of 35 per cent of Male Average Total Weekly Earnings (MATWE).

Theoretically, this is to be linked to a new “Cost of Living in Retirement” benchmarkwhich would translate to $750.60 a fortnight for singles, and $1125.90 a fortnight for couples. For singles, this would amount to $19,515 a year for those living purely on the pension.

Alternatively, the Combined Pensioners and Superannuants Assocation (CPSA), has made the case for a more tightly targeted regime of assistance “to be paid to around 1.5 million pensioners with little or no additional income”.

Charmaine Crowe, speaking on behalf of the organisation, has indicated that these figures refer to “age, disability support pensioners and carers”. Ms Crowe, elaborating further, argued for an extra $80 per week for those single pensioners now on $280 a week. Such a move, providing a modest income to some of the most vulnerable pensioners, according to the CPSA, would cost $3.2 billion.

These proposals must be taken seriously, and should feature prominently in public debate, so that the vulnerable may be delivered from grinding poverty.

The CPSA has defined “low income” as $19,399 a year for singles: enough for a “modest” standard of living. Furthermore, the CPSA has noted that pensioners cannot earn over about $18,200 under the current means test regime; well short of the “modest living” standard of $19,399.

To view this in the appropriate context: such figures stand in contrast to “expenditure on [concessionary] taxation of superannuation” which for the last financial year was “almost $24 billion”. Expenditure on the Age Pension in the same financial year was $22.6 billion. Many superannuation concessions, here, apply to the wealthy.

In light of the hardship suffered by so many, the call for justice, and for governments with better priorities, must go out now.

Compassion and justice for the unemployed

The plight of so many pensioners, aged and carers, must be addressed as a matter of great urgency. And yet the plight of the unemployed is also of critical importance: their financial straits being all the more dire. According to the Brotherhood of St Laurence, Newstart (Australia’s unemployment pension) is $50 less than the Aged Pension every week.

There is a deeply-ingrained sentiment among some sections of the Australian community that the unemployed are “undeserving poor”. Populist rhetoric about “dole-bludging” abounds. Importantly, though, some commentators predict unemployment will rise by an additional 300,000 by mid-2010. As this human tragedy unfolds - now more than ever - we need to counter popular disdain for the unemployed. How can appalling myths and contempt for these people stand in the face of such widespread human misery?

Our response to the crisis ought to be one of social solidarity: a repudiation of the selfish core of the neo-liberal ideology.

The pressing need for reform arises with the backdrop of increases in the cost-of-living, and the moral imperative of providing dignity and quality of life for all.

Reform of pensions - the need for a clear formula

The Greens - in negotiations with Labor - until recently looked to have secured an increase of only $30 a week for single aged pensioners.

These proposals did not come anywhere near the modest standard proposed by the CPSA. Furthermore, they seem to be considered in isolation from other vulnerable pension groups.

The Federal Government’s “Pension Review”, meanwhile, looks set to suggest an increase of $35 a week for single aged pensioners. Recently Treasurer Wayne Swan seemed likely to accept this option, reportedly confirming to The Age that there will be an increase for pensioners.

When pressed, though, Mr Swan's office said that the government had not formally committed to its response to the pension review, and that no firm figure had been “set in stone” yet for any pension groups.

But even supposing there is an increase of $35 a week for pensions “across the board”, there remains the need for a formula that builds upon and extends the previous standard of 25 per cent of Male Total Average Weekly Earnings (MATWE). Without a new formula, immediate changes in pension rates cannot deliver security and certainty for pensioners of all kinds over the long term.

Australian Greens Senator, Rachel Siewert, has made a point of condemning current rates for the unemployed. For singles, the unemployment allowance, Newstart, is only $224.65 a week; for singles with children, it is $243 a week.

Considered on a fortnightly basis, the single unemployed person’s pension is $449.30: more than $100 a fortnight less than the appallingly inadequate single pension for the aged, carers and the disabled.

Some welfare groups, meanwhile, have been reticent in arguing for more ambitious agendas. This February, the Australian Council of Social Services (ACOSS) called on the government to increase the Newstart Allowance (the dole) by $30 a week - to $255.

Among these competing claims for reform, the key to fairness ought to be discerned through ongoing enquiry into the material needs of all pensioners: such as to provide - among other things - for the following:

•  social connectedness, recreation and activity
•  personal development - e.g. through community education and other avenues;
•  access to high quality health care of choice;
•  the means to enjoy a nutritious and varied diet;
•  subsidised pharmaceuticals and free health care;
•  fair and comprehensive allowances for utilities bills;
•  transport expenses;
•  adequate housing - and where applicable - home maintenance and gardening expenses;
•  engagement through the communications and information technology of the day;
•  allowance for contingencies - eg: repairing the fridge, the computer or the TV; and
•  purchase of consumer goods which are in keeping with the accepted standards of the age.

Such standards must be considered essential for all pensioners and allowance recipients: the aged, unemployed, disabled and carers.

Pensioners should not be forced to choose only the worst quality cuts of meat; to use candles instead of electricity; to risk pneumonia because they cannot afford adequate heating; to be lost as to what to do - in the instance of a broken washing machine or fridge. Such austerity simply is not right.

And much more generous provisions should be made for students also: many whom struggle to apply themselves to their studies while working part-time; barely making ends meet. Surely students should be financially secure so as to be free to apply themselves properly to their studies. Not only is it in the interests of individual students: there is also a social benefit from - and investment in - their education.

If support is provided by the Greens, Nick Xenophon, and Family First, one possible response to the impending crisis could be a formulaic increase in the full single rate of all pensions - perhaps to 30 per cent of Male Average Total Weekly Earnings (MATWE). This would amount to $674.52 a fortnight. (an increase of just over $100 on top of the current singles rate of $562.10 a fortnight for aged pensioners). The full single pension rate, in such an instance, would be about $17,537 a year.

While such reform would still not meet the modest standard proposed by COTA and CPSA, the benefit for Newstart pensioners would be especially marked - in comparison with their current circumstances.

Here the point needs to be made - emphatically - that government should aim to eliminate unnecessary poverty and hardship. We need an honest and comprehensive enquiry as to how this may be achieved. The modest standards promoted by the CPSA, here, might comprise the desired outcome.

It is to be hoped that inclusive and comprehensive benchmarks will have been set by the government’s pension review: but there is the danger that standards will be understated for the benefit of the budget bottom line.

Perhaps the most vulnerable pensioners of all ought to be provided with the kind of tightly-targeted cash payments proposed by Charmaine Crowe of the CPSA. Here, we refer to those who are dependant upon their pensions, and without other sources of income.

Importantly in this equation, we must take into account reasonable activity tests on the part of the unemployed. And we should also consider the enormous amounts which are saved every year by the selfless efforts of carers.

These elements considered, what just argument can be made against granting these people a modest yet adequate living income? Just as critically though: the Greens, Family First and progressive voices from within the Labor government need to mobilise behind - and promote - such reform.

No one should be excluded from the struggle, or from the reform agendas of those politicians guided by compassion and justice. All those concerned should co-operate in the spirit of solidarity. “Let no one be left behind.”

by Tristan Ewins