Digging in a Hole

by Robin Hahnel, Alex Doherty

Robin Hahnel is Professor of Economics at American University. His most recent book is Economic Justice and Democracy and he is co-author with Michael Albert of The Political Economy of Participatory Economics. In this interview he and NLP’s Alex Doherty discuss the continuing mismanagement of the economic crisis in the UK, Ireland and the US. 

Is the choice facing the UK economy simply whether to cut the deficit immediately, as the government is doing, or to do it over a much longer period of time, as the economy grows?

The Tory/Liberal Democrat government austerity program is not only callous and unfair, it is completely counterproductive since it will further depress the economy and not only increase unemployment, but reduce production, income, and therefore tax revenues. In the midst of the greatest economic decline in over eighty years, what is needed is fiscal stimulus, not fiscal austerity. Tory austerity policy will only damage the UK economy and make it even harder to balance budgets in the future. The Tories are practicing misguided nineteenth century economics—acting as if Keynes had never been born, and no lessons had ever been learned from the Great Depression about what is needed to reverse recessionary dynamics.

The common “wisdom” that advanced economies can no longer “afford” to provide high quality public services and adequate welfare programs is total malarkey. The productive potential in the advanced economies is considerably greater today than it was during the height of the welfare state, which means it is easier to provide even higher quality public services and more generous welfare programs than in the past.

When we look at the budget picture in the long-run, what has changed is that large corporations and the wealthy have managed to avoid paying the taxes they used to be required to pay. Not only Tories but the Labour Party has lost the political will to require them to pay their fair share of what it costs to provide adequate public services and welfare. That is what is creating long-run deficit problems in the UK, which means after the economy is up and running again the solution to any deficit problems is to force those who have benefited tremendously from capturing over 90% of productivity increases over the past thirty years to ante up!

What is your response to the argument advanced by some orthodox economists that while some people will inevitably suffer in the transition to a more efficient economy, in the long term the majority of people will benefit? In other words, even if it is true that cutting certain aspects of government expenditure and shrinking the public sector will hurt a lot of people in the short run, in the long term do we not face a choice between either moving our resources to where they are most productive or using them to prop up unproductive and uncompetitive industries?

Why do people continue to listen to purveyors of the same old trickle down economics snake oil which not only did not cure their ills in the past, but often made them even sicker? If the left could figure out the answer to that question we would be well on our way to power!

Anything that truly makes the economy more efficient means, by definition, there is an “efficiency gain.” An efficiency gain can take any form. It could take the form of more sports cars, or more public transit. It could take the form of more McMansions, or more low income housing. It could take the form of more leisure – more vacation time, more paid childcare leave, earlier retirement, or even a reduced work week – or it could take the form of more consumption. It could be more aircraft carriers or weatherizing more public buildings to reduce their energy consumption. It could take the form of more consumption now, whether private or public, or more investment to increase the productivity of future generations.

An efficiency gain can also be shared in any way. The increase in income could be captured by those who are already much better off, and thereby increase economic inequality. It could be distributed to those who are worse off, and thereby reduce inequality. It could be distributed in a way that everybody receives some of the efficiency gain, in which case economists call it is a Pareto improvement. In this case if those who are better off capture more of the efficiency gain inequality will increase, while if those who are worse off capture more of the efficiency gain inequality will fall. But there is another possibility: The policy that produces the efficiency gain actually makes some people worse off while making others better off. In this case, those who are made better off not only are capturing the entire efficiency gain, they are capturing the losses of losers as well. This is what has been going on for the past thirty years, and this is what those whose advice you paraphrase above propose we should allow to continue.

Note 1: If there is an efficiency gain it is possible to compensate any losers and still leave others better off. That puts the lie to “some people will inevitably suffer in the transition.” For example, when there is an efficiency gain from greater specialization and trade, it is possible to compensate workers who lose jobs in importing industries through unemployment compensation and retraining programs until they can be re-employed in exporting industries—and still leave everyone else better off. While this has never been done in the US, it was done very successfully during the 1950s, 60s, and 70s in Sweden.

Note 2: There is a subtle disconnect between your first and second question. You have implicitly assumed that shrinking the public sector yields an efficiency gain in the economy. However, there is no reason to believe this is true. The size of the public sector has to do with how we choose to consume our productivity. It has nothing to do, per se, with how productive we are. A larger public sector simply means people have chosen to consume more public education, libraries, parks, etc.—and in the UK healthcare services—and less private consumption goods. If spending a pound on public services generates more wellbeing than spending a pound on private consumption, then it would be inefficient to move resources, as you put it, from the public to the private sector.

Note 3: What about propping up “unproductive and uncompetitive” industries? Deploying scarce productive resources where they are less productive than they would have been elsewhere is never a good idea. Of course right now when a sizable portion of the labor force and industrial capacity is idle in the UK resources aren’t exactly scarce, are they? So the best way to increase productivity in the UK right now is to put idle resources to use producing something. But when resources are scarce we should always seek to put them to best use. However, just because a business is unprofitable does not mean it is inefficient, and just because a business is profitable does not mean it is efficient. Many private businesses are quite inefficient, yet profitable, because they successfully externalize costs onto others. And if the prices charged for services provided by public agencies are deliberately set low, these agencies will run in the red even if they are highly efficient. Conflating efficiency and profitability is a favorite ploy of apologists for capitalism we should never fall for, and the assumption that the private sector is always efficient while the public sector cannot be should never be taken on faith.

In the current climate mainstream Keynesianism, as espoused by economists such as Krugman and Stiglitz, has come to seem almost left-wing. Do you think the Keynesian critique of austerity is the correct one, and is a return to Keynesianism what we need?

YES. And because I believe this point needs to be emphasized, particularly among those of us who are to the left of Keynesians like Krugman and Stiglitz, I am tempted to leave my answer at that. YES, with no “ifs, ands, or buts.”

Keynesianism only seems left-wing because the center has caved rightward. First, even a Nobel Prize does not protect one from ostracism by the mainstream of the economics profession today if you persist in dispelling Keynesian wisdom and challenge the assumption that unfettered markets always know best. As hard as this may be for non-economists to believe, Stiglitiz and Krugman are now persona non grata within the economics profession. Second, in the 1950s and 60s even Tories and Republicans had to begrudgingly accede to the wisdom of financial regulation and Keynesian fiscal and monetary policies. But that day is long past. Now even Labour and Democrats buy into the myth that markets, including financial markets, can be relied on to self-regulate, and governments must engage in fiscal austerity when recessions create temporary budget deficits. When the center caves right, center left appears to be left.

There are two important lessons to be drawn. (1) While socialists should not have to lead the charge for Keynesian policies to ameliorate capitalist crises, unfortunately that is the position we find ourselves in. Right now we must not only do our own work – explaining why all versions of capitalism are far less desirable than participatory, democratic socialism – but do the work of Keynesian reformers as well who have lost influence in all major political parties. (2) There is no point in trying to explain to Tories and Republicans why their policies are flawed. They have chosen to embrace ill-advised, discredited, nineteenth century economic policies because these policies serve their most important purpose – further pressing the class war they have been winning for more than three decades. Their first instinct when a crisis hits is not to search for policies that would actually solve the crisis. Instead they search their “wish list” for ways to take advantage of the crisis to press for changes that serve their class interests – further cuts in social spending, further concessions regarding wages, benefits, and working conditions, more tax cuts for corporations and the wealthy, and of course more corporate welfare like the bailouts doled out to the financial industry. The fact that every one of these policies will only deepen the current crisis is of no concern to them.

When capitalism proves completely incapable of putting our productive potential to good use what is called for is replacing capitalism with socialism. A return to Keynesianism would be to settle for only part of a loaf, and leave us vulnerable to another counter revolutionary roll back of hard won gains, like the one we have been living through. However, unless I am pleasantly surprised, and leftists can win the loyalty and support of a majority of the population for replacing capitalism with socialism much sooner than I foresee, there is no road to participatory, democratic socialism that does not run through many successful reform campaigns to bring Keynesian policies back in vogue.

Do you favour the nationalisation of banks? If so on what terms ought that nationalisation to take place?

I am a socialist and favor nationalizing all industries. However, if we are to nationalize only one industry, I would make that the financial industry for several reasons: (1) Failure to properly regulate the financial industry causes more harm than failure to regulate other industries. (2) The financial industry is more adept at outmaneuvering regulations than other industries, so the alternative to nationalization, regulation, is always likely to unravel. (3) Right now the financial industry is so fat with profits that it has literally bought the allegiance of most politicians, making a shambles of political democracy.  And finally, (4) if you are relieved of the burden of figuring out how to turn the simple business of lending people’s savings to credit worthy borrowers into a casino where the house rips off huge profits, it is a fairly easy business to run.

However, what I support is nationalizing the financial industry without compensating stockholders or bondholders, and prioritizing loans on the basis of social returns. One must be careful not to socialize losses and privatize wealth. To nationalize banks simply to absorb losses on their toxic assets, and then turn them back over to stockholders when they are solvent is worse than no nationalization. One must also be careful to run public banks differently than private banks. If managers of public banks evaluate loan requests strictly according to profitability, little is gained. The purpose of a public credit system is to lend according to social rates of return, which is not at all the same as commercial profitability.

The UK government has dramatically reduced the budget for social housing – how do you view this policy?

Since the private sector has failed miserably to provide an adequate supply of affordable housing, the government should do whatever is necessary to do so. So cutting this program is unfair to lower income residents, and women and children in particular. Cutting social housing is also unnecessary. Productivity levels in the UK surpassed what is sufficient to provide all with decent housing long ago. And unlike the government of Ireland which can only borrow to avoid cuts in social spending at highly inflated rates of interest right now, the UK can still borrow cheaply and should do so to expand, not contract its social housing programs.

There has been much talk on the left of a “green recovery” - how do you see the relationship between ecological concerns and left economic prescriptions. How realistic is a green recovery?

Unless the advanced economies do a total “make over” of our energy systems, transportation systems, industries, agriculture, and built infrastructure to render our economies carbon neutral by mid century, we risk unleashing cataclysmic climate change. Only a mad man would run that risk. The only way to meet this deadline is to launch a Green New Deal on a scale that Great Britain and the US launched to produce the war materials needed to win WW II. Since a mammoth increase in public expenditure is required to turn this recession around, this is also our best hope for putting tens of millions of unemployed people back to work. If they are working building wind mills and solar farms, not mining coal or oil, if they are refitting the energy grid to handle decentralized sources of power, not building environmentally destructive weapons, if they are working retrofitting the existing housing stock to be more energy efficient, not building new McMansions, if they are building trains, trolleys, and bikes, not gasoline powered cars, then all their work and production will be saving the environment, not destroying it.

There is only one solution for the two great crises we now face—the worst economic decline since the Great Depression, and the greatest ecological crisis in human history. The left needs to make the argument for a Green New Deal at every turn, work with others who do not yet see themselves as leftists, but who do understand the ecological dangers we face, and together force governments by whatever means prove necessary to take on this challenge without further delay.

How do you view the current situation in the Republic of Ireland? What policies do you think the Irish government should take? What are the likely consequences of an EU bailout?

Ireland is in a very bad predicament. In the fall of 2008 their unsustainable economic model came crashing down. A serious housing bubble burst. An over extended, fragile banking system became insolvent. Unemployment skyrocketed as construction companies went bankrupt and international businesses which had located in Ireland to be inside the euro zone laid off employees, and the government budget deficit rose dramatically as more and more people qualified for assistance and tax revenues plummeted. GDP has shrunk for three years in a row, last year by 7.1%, and 65,000 people emigrated to places like Australia and Canada because no jobs were to be had in Ireland. This year GDP is predicted to drop and emigration increase by even more. And now international speculators have driven interest rates through the roof for Irish treasury bills making it prohibitively expensive for the government to roll over its debt. While economic fundamentals justify charging Ireland somewhat more to borrow than Germany, speculation by international “bond vigilantes” has overly exaggerated the differential. At the moment the Irish government is being charged 7.73% to borrow while the German government is only being charged 2.67%. This is a problem not just for Ireland but for all of the so-called PIGS in the euro zone – Portugal, Italy, Greece, and Spain.

Besides pursing a sustainable growth model instead of trying to ride a lethal combination of unsustainable bubbles, what Ireland needs at the moment is to avoid draconian cuts in social services which only aggravates its slide into deeper depression. To do this it needs the EU to help it borrow at reasonable interest rates so it can grow out of the recession. But first the Irish government has got to stop trying to save “its” banks. The government nationalized Anglo Irish back when the crisis broke in 2008. Ever since it has been throwing good money after bad protecting Anglo Irish creditors at taxpayer expense. Now a depositor run on Bank of Ireland and Allied Irish Bank has stampeded the Irish government into orchestrating an even larger bank bailout. It is time for the Irish government to stop trying to save Irish banks and instead concentrate on saving Irish citizens. The government needs to admit these banks are dead on arrival, proceed with bankruptcy, and distribute losses. They key is to protect depositors but not stockholders and creditors – which is not rocket science, and as a matter of fact was common practice until recently.

Instead, the Irish government and European Commission have cooked up a scheme to protect stockholders and creditors in Irish banks at the expense of Irish taxpayers – a scheme which may well unravel a year or so down the line in any case. What the European Commission and European Bank should do instead is take on the bond vigilantes and prevent them from playing speculative games and overcharging the Irish government for borrowing short-term. These bond vigilantes are not only pummeling Ireland, and by first pummeling one PIG and then the next they are making it increasingly difficult to hold the EU together. Yet the European Commission and European Bank refuse to use their considerable powers to stare down these international speculators. The German government, which can borrow at 2.67%, could also lend to the government of Ireland at 3% to save Ireland from what amounts to a 4.73% overcharge, and make it possible for Ireland to finance a budget deficit until the global and Irish economy can turn around. What Ireland needs is not a bailout of its insolvent banks, with draconian fiscal austerity conditions attached, but a “co-signer” for its government bonds while it orchestrates a way to grow out of recession.

Unfortunately, there is no sign that the European Commission and European Bank are going to give Ireland or any of the other PIGS the kind of help they need and have every right to expect from the EU. Instead the EU is prioritizing saving Irish bank creditors and imposing austerity conditions that will further damage the Irish economy. Moreover, as long as Ireland and the other PIGS stay in the euro zone they cannot devalue their currencies relative to Germany, and therefore will continue to lose jobs to Germany who enjoys a large trade surplus with the PIGS. If Ireland and the rest of the PIGS cannot force the EU to give them a way to grow out of their recessions, they may have to leave the euro zone, as disruptive as that would be.

Right now the Irish government is not pursuing any options that could move the country forward, but instead is scrambling to protect creditors and embracing fiscal austerity, which will only aggravate Ireland’s economic problems while punishing the Irish people terribly. Hopefully the Irish people will “just say no,” and show their elected officials the door, either through massive demonstrations and strikes or in the next election.

How does the British government’s aggressive approach to reducing the national debt compare to the approach of the Obama administration?

Since fiscal austerity is exactly the wrong policy in the midst of the worst recession in eighty years, doing it “aggressively” is even worse than doing it half heartedly, or passively—which is what the Obama Administration is doing in the US. What the British government is doing is madness from a strictly economics point of view because it will deepen the recession, weaken the productive potential of the economy for decades to come, and not even improve the budget picture. Since it will cause terrible suffering to no avail it is also a tragedy from a human perspective. The British people cannot get rid of its current government too soon.

In the US we got a fiscal stimulus of $700 billion in early 2009. It was half the size needed, and much of it took the wrong form – tax cuts instead of spending increases on education, healthcare, green jobs, and aid to states so they could avoid cuts. In other words, not only was the stimulus too small, we got fewer jobs per deficit dollar than we might had the stimulus taken different forms. Nonetheless, the fiscal stimulus package did save millions of jobs. The official unemployment rate in the US is now 10%. It would certainly have been 11% or 12% absent the stimulus of 2009.

However, when you add up all the cuts in state and local spending here in the US over the past two years, they cancel out almost all of the increase in federal spending in the stimulus package, meaning that what we have gotten here in the US to date is essentially no fiscal stimulus at all. Not only did the Obama administration fail to ask for a second fiscal stimulus, even when it was painfully obvious that the first one had been woefully inadequate, he then gave credence to budget balancing mania by appointing a bipartisan commission to make recommendations about how to cut the US budget deficit. If we follow the commission’s recommendations – which include unnecessary cuts in social security benefits—we will be going down the Tory/Liberal Democrat road towards the full disaster.

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First published: 01 December, 2010

Category: Economy

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4 Comments on "Digging in a Hole"

By Michael Krog, on 02 December 2010 - 20:13 |

Trying not to sound too negative is difficult when so much seems to be moving so quickly, in completely the wrong direction, for example, the Tory/Liberal coalition’s economic policies.

The rhetorical question about the left finding a way to present a critique and alternative to the neoliberal dogmas dug up from the nineteenth century’s economic graveyard, and that success in this area of intellectual and political struggle would lead the left towards electoral success, is a valid point to make. However, preventing this, and neutralizing such an outcome, is one of the central cultural and intellectual legacies of ‘Thatcherism.’

It wasn’t just enough to crush the organised working class and social democracy, what was of equal, if not more importance, was to radically alter the intellectual climate in Britain, effectively outlawing a whole range of ideas relating to economics and society. To virtually destroy the concept of socialism as a valid alternative to capitalism on the intellecutal as well as the practical level.

When people are not allowed to hear heretical ideas, these ideas, effectively do not exist, and therefore there is no alternative, and capitalism, the ideology of the market,  assumes the role of being the natural state of society and man. Thatcher’s declared desire to change the way people thought and how they felt in the souls became reality.

As the mass, corporate media are under firm corporate state control, how on earth one explains anything to anyone which is even slightly critical or represents an alternative perspective, and when the three major, national, political parties are really little more than rival factions of the same centre, business party, and when there is no left inside parliamnet anymore worth mentioning; it’s difficult to see where the change, and the challenge,  is going to come from.

It would appear that it will have to come from outside Westminster, from outside the corporate state controlled parties, media and political system. But before something close to a ‘velvet revolution’ Czech-style, can occur, and succeed, an awful lot of water has to pass under the bridge, and the coalition’s economic forces have to be not just understood as a failure, they have to be seen and felt as a failure.

By Robin Hahnel, on 03 December 2010 - 20:19 |

I agree with Michael Krog. I am not British, nor am I a specialist on British political and economic history. But what he says above rings true to me. I do know the situation here in the US is little different. Reagan began what the corporate media and mainstream of the economics profession here in the US have finished—a resounding victory for pro-corporate, free market ideological hegemony. In the world of electoral politics this means that the center left is now center right. There is no audible voice for economic sanity, much less fairness in the Democratic Party here in the US. My reading of Labour Party history under Blair and finally Brown was much the same. That is what now makes left center discourse appear as far left. It is ironic that it has been left to socialists to make the case for center left sanity and fair play, when what we really believe and want to be saying is there is a far better way to organize our economic affairs, that a truly democratic participatory socialism is quite possible and highly desirable. But instead of pondering the irony of the situation I suggest we take advantage of the fact that liberals have abdicated their role as kindly nurses to capitaism to fill their roles with real leftists who will not only fight for sane economic policies, and not only fight for economic justice and economic democracy, but will also continue to point out the advantags of pensioning off the capitalists and their economic system once and for all and embracing a socialism worthy of the twenty-first century.

By Michael Krog, on 04 December 2010 - 22:09 |

Keynes, Stiglitz, Krugman, Riech… all of them are now seen as critics of capitalism, if not men of the far left. This is indeed somewhat ironic, or maybe that should be, grotesque? It’s so bizarre, Keynes would turn in his grave. Keynes a Marxist? I think not.

But this just shows how far what passes for contemporary economics has degenerated into something close to religious dogma, not science.

To cut to the chase. I don’t believe capitalism is going to be challenged in any meaningful way anytime soon. We are all along for the ride, wherever that leads us. There is a far, far, greater possibility that the supertanker ‘Capitalism’ will remain on course and hit the reef up ahead, than some group is going to capture the bridge and alter the ships trajectory, and remember, changing the course of supertanker isn’t easy or quick, inertia and momemtum are unfortunately built into the system.

Although oviously it’s vital that we challenge the economic dogmas of the neo-liberal version, or cult, of capitalism, I’m not really optimistic that the ‘idea’ on its own, is a match for raw power. I think the left underestimates the importance of Power in society. If we lived in a healthy and functioning democracy, with a free debating climate, and a neutral mass media, I’d be more optimistic, only we don’t. Our version of democracy is a colourful bird in a gilded cage.

Given the multiple crises we face as a capitalist society, or even a capitalist civilization; the coming permanent energy crisis, global warming, climate change, population growth, environmental degradation on a colossal scale; a people’s revolution would seem to be our only chance of avoiding disaster or collapse. On the other hand I’m not sure that the revolution will happen quick enough, that is *before* the collapse of capitalism, which seems more likely to cave in on itself rather than being overthrown in a revolution. Which comes first, the revolution or the collapse?

By Robin Hahnel, on 08 December 2010 - 19:36 |

Again, I find myself in agreement with Michael Krog. However, the practical question is what to do. Here I have changed my views about some relative priorities in response to what I believe are some important changes in circumstances from a few years ago.The dilemma the left faces remains the same: This percentage varies from country to country—and that makes a big difference to what stategies should be in different places—but nowhere in Europe or the US/lCanada does the left have the trust and loyalty of anywhere approaching a third of the population. Worse stil, we no longer have the ability to mobilize whatever percentage does agree with us. Until that changes our ability to affect outcomes in a global capitalist world will remain minimal. And until that changes our ability to move the agenda of replacing capitalism with a participatory democratic socialism will also remain minimal. There is always a debate on the left about how much to prioritize electoral vs. non-electoral work, how much to priortize working in mass reform campaigns vs. building what I call “imperfect experiments in equitable cooperation” but are generallly called counter cultural or prefigurative institutions, and social movement building vs. agitation for socialism. I can speak only for the US. I believe that circumstances here in the US warrant a shift of priorities at least to some extent. In light of the Citizens United Supreme Court decision which now permits unlilmited and secret corporate money to pollute electtions it seems to me that working to elect decent candidates, whether they be inside or outside the Democratic Party ,will prove even less productive than in the past. Those who work on electoral issues need to prioritize electoral reform more and getting partcular people elected less. I also believe right now non-electoral work deserves somewhat greater emphasis because electoral work will become even less productive than it has been. Because the center left has become the center right, and because reform organizations have diminished in power, if not abdicated leadership altogether, and because those are the forces the left must work with in reform organizing, I believe reform work will also prove even less productive than in the past—at least for the moment.  While I believe these are logical conclusions, I do not consider them good news. Electoral work and working in reform campaigns are the most productive ways to reach out to new recruits. So the fact that these kinds of activities will prove less productive than in the past, at least for now, is not cause for rejoicing. However, because electoral and reform organizing will be less productive, and also because disaster capitalism will continue to abandon many more struggling to simply meet their basic needs, I believe that organizing counter institutions should receive greater priority than in the past. I also believe that as disaster capitalism consolidates its power and realistic prospects for social democratic capitalism become more distant at least in the near term, it makes more sense to preach the ills of capitalism and sing the praises of socialism. So even though only a small minority are receptive to the message “capitalism is the problem and only socialism is the solution” I believe this message will resonate more than in the past among those who disaster capitalism pushes out of the middle classes and whose life prospects dim.

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