The deepening eurozone crisis has made the likelihood of a double dip recession almost inevitable, while at the same time exposing the inability of Europe's major economies to agree and act in concert. National interest has supplanted the need for a European and global united front in order to avert a crisis caused by the banks and a financial sector which is also responsible for ensuring its prolongation.
In truth it is ideology and not economics which is the major stumbling block to the pro active government intervention that is needed to avert a deepening of this crisis. So wedded to free market nostrums is the political class across Europe and in the United States that any intervention at any level is deemed anathema by most mainstream politicians. This is ideological myopia of the most grievous kind, condemning millions to unnecessary hardship and in the process guaranteeing a worsening economic situation rather than alleviating it.
In Britain, David Cameron and George Osborne's unwillingness to change course on the economy, even in the face of economic indicators which scream for exactly that, reveals their dogged adherence to a political and economic doctrine that was proven intellectually bankrupt when the economic crisis first exploded back in 2007.
While austerity may appeal to those who confuse Victorian morality and thrift with running a 21st century economy, it doesn't alter the fact that it constitutes an act of wanton vandalism both to the economy and society. Indeed, austerity has come to assume the status of religion, with even the Labour Party at their annual conference catching a whiff as they being to show signs of succumbing to the prevailing orthodoxy of deficit reduction as code for sound government.
What is essential is that demand is brought back into the economy as a matter of priority. This translates to a major and bold plan of investment on the part of a government that first of all recognises that the free market as we know it is a corpse that cannot be brought to life no matter how long you leave it tied to its ideological radiator.
The current and ongoing global economic crisis is a crisis of fictitious capital, or debt, which exploded on the back of the credit boom of the 1990s in order to maintain the global rate of profit. For millions throughout the developed world this credit boom corresponded with a drop in real wages, with rising levels of consumer credit replacing real incomes and helping to stem the almost inevitable rise in social convulsion and breakdown that such a drop in wages would have otherwise produced. But now with the advent of austerity and the refusal of the banks to lend as previously, the ability of people to make ends meet as a result of this debt dynamic has or is being withdrawn with the certainty of a social explosion if governments fail to intervene with sufficient vigour.
Such intervention has long been advocated by respected economists at home and abroad, including the eminent Will Hutton of the Work Foundation, and nobel laureate Joseph Stiglitz, former head of the World Bank. In his excellent book, Freefall (Allen Lane, 2010), Stiglitz writes:
While most economists were convinced that a stimulus was necessary and that it was working - even though a bigger stimulus would have been desirable - there were a few naysayers. Some conservatives have even been trying to rewrite history to suggest that government spending didn't work in the Great Depression. Of course it didn't pull the country out of the Great Depression - the United States didn't really emerge from the Depression until World War II. But the reason was that Congress and Roosevelt vacillated. The stimulus was not consistently strong enough. As in this crisis, cutbacks in state spending partially offset increases in federal spending. Large-scale peace time Keynesian economics had never really been tried - the rhetoric to the contrary.
When it comes to the banks, their ability to place a gun at the head of society cannot be allowed to continue. The bond markets and ratings agencies that have emerged as de facto governments of last resort with the power they wield to influence domestic policy, despite holding no mandate to do so, must be reined in.
Four years on from the start of the economic crisis we are still waiting to see legislation restricting the ability of the financial sector to take the kind of risks that led to its near collapse. Even the relatively mild and necessary reform of legislating for the separation of the investment and retail functions of the banks has had to be fought and argued for as sectional interests take precedence over the national interest.
Considering the depressed value of sterling the UK economy should have been able to export its way out of recession by now. But that requires a strong manufacturing sector, which thanks to Margaret Thatcher and the Tory administrations that came after her, including by the way the one led by Tony Blair, this option is closed to the UK economy. Indeed, the statistics in this regard make frightening reading. In 1979, the year that Thatcher came to power, UK manufacturing accounted for 30% of Britain's GDP. By 2002 this had been reduced to 20%, while today it hovers around just13%, even though there's been a slight increase of around 0.6% over the past year.
Reconfiguring the UK economy to increase its manufacturing footprint to a point where the emphasis on the City and financial services is no longer the motor force of a service economy and property bubble that has proved a chimera demands robust government investment. The collapse in domestic demand should be addressed by spending on infrastructure projects that are long overdue, along with investment in new housing up and down the country to address the nation's burgeoning housing crisis. The multiplier effect of these measures throughout the rest of the economy is self evident.
Additional revenue will be required to help fund the aforementioned, which means finding the political will to tax the rich at a level befitting a civilised society. This is especially the case when we consider how the rich in Britain under both the previous Labour government and now the Tories have been pandered to and deified, corrupting all sectors of society with the values of the casino. A tax on bank bonuses is overdue. As is the implementation of a tax on transactions in the financial markets, the so called Robin Hood Tax. Tackling tax avoidance is another priority, especially when it leads to the disgraceful situation when cleaners working in the City are paying more tax as a proportion of income than the high earners who occupy the offices they clean.
Even without this additional revenue, the UK economy still remains in a strong position when it comes to borrowing, despite claims and fear mongering to the contrary by the present coalition government and its supporters in the financial press. The level of government debt in the UK is unremarkable compared to levels of the past, and certainly nowhere near as high as most other trillion dollar economies. Again, the multiplier effect of any resulting investment to bolster demand in the economy would more than offset any rise in the cost of borrowing incurred.
Now more than ever political will and the abandonment of ideological baggage is needed. The alternative is economic and social breakdown: a price that none of us can afford.
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