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<h3><img style=”margin-left: 5px; margin-right: 5px;” title=”Josh Ryan-Collins” src=”https://neftriplecrunch.files.wordpress.com/2009/07/josh_ryan-collins.jpg” alt=”” width=”34″ height=”34″ /><em> </em><a href=”http://www.addthis.com/bookmark.php” target=”_blank”><img style=”border:0 none;” src=”http://s7.addthis.com/button1-share.gif” border=”0″ alt=”Bookmark and Share” width=”125″ height=”16″ /></a>Josh Ryan-Collins is a researcher in the Business, Finance and Economics team at nef.<em>
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One of the great joys of living in London is its social and economic diversity. One minute you can be walking past million pound mansions in Kensington and the next you will find yourself in the middle of a housing estate populated by a mix of native London working classes and first or second generation immigrants from all over the world. Get on a bus or a tube and a similar mix confronts you. A similar dynamic can be found in other large UK cities, like Birmingham and Manchester.
Its quite a different story in other European cities, where poorer residents and immigrants in particular are often ghettoised in to particular areas of the city. In Paris, the poor are located in ‘Les Banlieues’, grim, grey and endless blocks with high levels of crime and racial tension.
The are a variety of reasons for London’s mix, not least the chaotic and organic growth of the UK capital, but the coalition government’s recent announcement that it is going to massively reduce housing benefit could drive things in quite the opposite direction. The local housing allowance for those on low incomes or unemployed will be reduced from the level below which 50% of local rents fall to 30% and capped at £400 for a four-bed and £250 for a one-bed home. According to The Guardian, this could result in a new form of ‘social cleansing’ as poorer residents are forced out of the richer areas of our cities and towns, in the South East in particular. This is because demand in the private rented sector (PRS) remains buyount in this region, so landlords will happily evict poorer tenants who are no longer able to meet their rental costs in the knowledge that there are plenty of wealthier tenants to take their place.
The UK already has some of the highest levels of wealth inequality in Europe, with London the most unequal city the developed world according to research by Professor Danny Dorling, who in a recent book showed that London’s richest were worth 273 times than the poorest. More severe economic and geographical polarisation is only held in check by universal welfare programs like housing benefit. The government, if it is to live up to its promise of not making the poor pay for reducing the budget deficit, needs to have a serious rethink on housing policy.
Housing benefit is a massive cost to the taxpayer and there are many good arguments for reducing it from an economic efficiency perspective, but first the fundamentals need to be sorted out. Firstly, we have to found a way of bringing house prices back down to earth. Increasing or creating new property taxes which would put off speculative buy-t0-let investors in the PRS and bring first time buyers back in to the market, reducing the demand on the PRS. The decision to raise capital gains tax by 10% is a step in the right direction but is nowhere near enough and its a shame Vince Cable obviously lost the battle to raise it to the same 40% level as income tax. Why is it fair or sensible to tax earned income at a 12% higher level than unearned asset appreciation?
Secondly, its necessary to increase supply by building more homes and bringing empty properties back in to use. Regarding home building, the Tories Green paper on housing suggested incentivising new house-building by matching local authorities’ council tax take for each new house built for six years, with special incentives for affordable housing. A great idea, but sadly no mention of this in the recent budget. Instead, Eric Pickles, the local government secretary has abandoned local council building targets, resulting in the reversal of many thousands of planned new homes. This will, of course, have a knock-on effect on the construction sector and jobs.
These non-sensical policies have no doubt been made easier to drive through by the demotion of the Housing Minister – the lively Grant Schnapps – from the coalition’s cabinet. If anyone can find some good news in the new government’s plans for housing, please do let me know.
And yet another group of big business chief executives have signed up to the Conservatives’ policy to reverse Labour’s proposed 1% increase in National Insurance. Should anyone really be surprised that businesses would rather not have to contribute to reducing the public deficit? No, the interesting thing about this media furore is how few alternative suggestions are being promoted by any of the major parties in the run up to the election. The tax debate remains stuck in the ‘old economics’.
Critics of Labour’s policy are right that it is a tax on labour or ‘jobs’. But what is less clear is that government ‘efficiency savings’ are not equally a tax on jobs in the public sector. Anyone who thinks public agencies can achieve the kind of cuts the Conservatives are proposing without major redundancies is living in cloud cuckoo land. And given there are proportionately many more jobs in the public sector in the poorer areas of the UK one could also argue that cutting public sector budgets is more regressive than taxing business.
But it doesn’t have to be a zero-sum game. The ‘new economics’ is about replacing taxes on what we do want – productive jobs, investment in high quality public services – with taxes on what we don’t want.
And everyone’s pretty clear on what we don’t want. We don’t want fossil-fuel intensive production or transport. We don’t want another housing boom. We don’t want massive windfall profits for energy suppliers because its been a cold winter. We don’t want huge bonuses for bankers who have made speculative short-term profits by playing with our pensions or retail deposits.
If we tax these areas we not only raise revenue to meet the budget deficit, but we also steer our economy in the right direction and provide incentives for more productive investment. A land value tax, for example, would act as automatic brake on speculative booms in the housing market and might encourage us to invest our savings in industry rather than non-productive property. A carbon tax or rationing system would incentivise investment in renewable energy schemes and encourage more sustainable consumption. A financial transaction tax (FTT) would slow down and shrink the ‘socially useless’ finance sector.
Plus, these schemes would also be progressive, a land tax stopping the widening wealth gap between home owners and tenants, a carbon tax redistributing from rich to poor in most cases (as demonstrated in the recent report by the Green Fiscal Commission) and an FTT would bring city pay back down to earth.
This is not rocket science. And its not simply a call for more ‘green taxes’, although even that seems to have dropped off the political radar. It’s a call for a taxation system that promotes ‘economic goods’ and punishes ‘economic bads’. A new economics of tax can be win-win for the economy, society and the environment as well as improving the public finances. Lets hope the party (or parties) that come in to power in May feel able to turn over a new leaf in the tax debate.
You know that something is amiss in the world when the entire Greek civil service goes on strike as an indirect result of hedgefunds speculating against the Euro.
Perhaps an answer might be found in Gordon Brown’s reaction when questioned as to whether Britain might offer financial assistance to Greece, as now appears inevitable for Germany and perhaps other big beasts on the contintent: ‘This is a problem for the Eurozone and its a problem that the Eurozone members will have to deal with…’, he said with just a hint of smugness.
Quite. The UK is not a member of the Eurozone, for whatever complex political and economic reasons, and right now that is looking like a pretty good choice. It is often forgotten in these discussions that currencies, if allowed to, can serve an important role in providing economic feedback to the markets about the health of particular economy. Following the financial crisis, the UK economy was left in a bad way. Sterling depreciated rapidly against the Euro and to some extent the dollar. This naturally helped to make UK industry more competitive in terms of exports as well as encouraging more domestic demand for goods and services – or ‘import substitution’ (more people holidaying in Cornwall and Scotland than Spain for example). This, in turn, helped us with our budget deficit.
But Greece and other less robust European economies – Portugal, Ireland and Spain (the delightfully named PIGS) – have no such economic feedback. Instead, when their economies faltered, they had to borrow more and more in Euros to maintain public spending, with their native industries competing directly in terms of exports with economic powerhouses such as Germany and France.
The late ecological economist Jane Jacobs had a clever biological analogy describing this kind of situation. Imagine the Euzone countries as people each doing different kinds of activities – sleeping, swimming, playing tennis, collecting the rubbish – that require different amounts of oxygen. These people are properly equipped with diaphragms and lungs but share only one single brain and breathing centre. Their ‘brain’ receives consolidated feedback on the carbon-dioxide level of the whole group without discriminating among the individuals producing it. Everybody’s diaphragm contracts at the same time, with potentially catastrophic results.
The Eurozone is made up of discrete economic units at different stages of development. This worked more or less (although Italy would probably disagree) when the Eurozone was growing, as the larger states were happy to make up for the lack of natural feedback to their less developed cousins through large income redistributions and subsidies. But when a shock like the financial crisis hits the system and everyone faces budget problems, redistribution (or bail outs) suddenly becomes problematic and inefficient, with the danger of moral hazard raising its ugly head once more.
Leaving the Euro is not an option for PIGS – their debt is in Euros and this would not doubt trigger another financial crisis. Another option, suggested recently by Charles Goodhart in the FT and long-championed by nef, would be to allow the creation of dual currency systems in these states, following the example of California when it ran in to trouble and in Argentina during the Peso crisis of 2000. An internal Greek IOU currency could be created, to enable teachers and binmen to carry on working and businesses to continue internal trading, at a devalued rate against the Euro, reflecting more accurately Greece’s real exchange rate. It is a radical option but the alternatives don’t look promising – IMF style austerity measures resulting in mass unemployment and violent protest (the Greeks have a record on that) or a bail out which could permanently undermine the integrity of the Euro project.
Jacobs argued in ‘Cities and the Wealth of Nations’ that the City and its hinterland is the true economic unit and the optimum size for a currency in order to ensure efficient feedback and allow effective import substitution effects. We are a long way from that but the financial crisis has revealed the danger of the merciless pursuit of economies of scale – both in terms of the size of financial institutions like banks and now also currencies – at the expense of diversity and increased economic resilience.
Probably not what Gordon was thinking when he declined British responsibility for the Euro mess, but you can bet your bottom ‘dollar’ he’s glad the UK never quite passed those five tests.
The recession is over claim the newspapers. Growth has returned. House prices are definitely on the up. Let the good times role.
That’s the good news – at least, for anyone who doesn’t think the Earth’s resources are finite. The bad news is we are probably entering in to another credit bubble, of exactly the kind that caused the last financial meltdown. But are we really that surprised? If you neglect a child and let them eat so many sweets they get sick, the general advice is to set some pretty strict rules afterwards to limit further sweet bingeing. In contrast, the financial sector has just had billions of pounds thrown at it by governments (and taxpayers) and, in return, it has been asked to change very little about how it operates.
As this astonishing interactive graph from the New York Times shows, big finance, after shrinking from $1.87 trillion dollars market capitalisation in the summer of 2007 to just $290 billion in March 2009, has now tripled in size from this low back to to $947 billion. Some of the banks got knocked off along the way of course, meaning some of the survivors – such as JP Morgan Chase – are even bigger than they were before the crash. And the sector as a whole is even more concentrated and, arguably, poses more of a systemic risk.
Yet, suggestions by Lord Adair Turner and, more recently, the Germany Finance MInister, Peer Steinbruck, that perhaps it might be time to impose a tax on financial transactions are being given short shrift.
Steinbruck’s neat suggestion is that receipts for the tax could be used to repay the cost to governments of tackling the crisis, including the bank bailouts. That sounds like the kind of policy that might be quite popular over here, with both Labour and Conservative struggling to put together attractive election manifestos in the face of the huge public sector deficit, caused in no small part by the bank rescue packages. Alas there is little sign of enthusiasm for the idea from the other members of the G20 that will be meeting later this month. nef, you won’t be surprise to hear, has been arguing for a tax of this nature for some time, most recently as step 15 in our From the Ashes of the Crash booklet published last year.
Meanwhile, back in the UK, its all about house prices, as ever. And thank goodness, they seem to be going up again. But here again, the rate of increase looks scarily bubble-like (see graph below). House prices have increased for 3 consecutive months now meaning prices are flat across the year. One explanation, suggested by recent data on lending, is that banks are finally starting to hand out credit again, but have a strong preference for mortgages. In contrast, corporate lending, which is need to kick-start the real economy of businesses making profits and creating jobs, was shrinking rapidly.
The danger then is that the government’s £175 billion quantitative easing program – which has involved buying 7% of UK GDP – may have got bank’s lending again but only to feed another damaging house-price bubble. Its not surprising though, when you consider that interest rates are zero, there is a severe shortage of housing in the UK and property is still the only asset that doesn’t attract capital gains tax.
Instead of just handing the banks billion of pounds to do with what they want, the government should either be creating credit directly in areas that will be most beneficial for the economy and environment – such as a green energy, transport infrastructure and domestic energy efficiency – or at the very least introduce taxes to both financial transactions and capital gains in property to prevent us sleep-walking back in to bubble economics.
The financial crisis which erupted almost two years ago has led to the biggest shake up in economic policy since the Oil Crisis of the 1970s. Neoliberal economics lies in tatters, with the UK Conservative party dismissing the notion of the ‘utility-maximising rational actor’ as a fantasy and Martin Wolf of the FT pronouncing the end of the dream of global free market capitalism. The question is what will come next.
Sadly, there are few signs of a new approach which takes seriously the ‘triple crunch’ of the financial, environmental and energy crises. Rather, governments are turning back to tried and tested state-led growth strategies to reflate national economies, pumping liquidity into credit markets and creating new or bringing forward existing public spending plans. In other words, there has been a return to post-war Keynesianism – the doctrine that the state could and should regulate the market and step in to boost demand whenever required. This thinking lies at the heart of Obama’s $787 billion fiscal stimulus package, as well of those of Europe and China. China is embarking on what is possibly the biggest Keynesian experiment in history, with the government attempting to create a welfare state virtually overnight so as to maintain demand as well as pumping billions of yuan into mainly state owned industries, as Newsnight’s Paul Mason recently revealed.
Aside from the fact that the proportion of this new funding that will be spent upon green investment is rather small (very small in the case of the UK), there are bigger questions about whether this whole approach will prevent another, bigger financial crisis and help us move towards to the low carbon, low throughput ‘steady-state’ economy required to prevent catastrophic climate change.
As Walden Bellow, the Phillipino intellectual and activist, points out in a recent article, today’s crisis requires us to move beyond Keynesian demand management at the national level to address global problems of inequality, overproduction and over-consumption. For Bellow:
“The challenge to economics at this point is raising the consumption levels of the global poor with minimal disruption of the environment, while radically cutting back on environmentally damaging consumption or overconsumption in the North. All the talk of replcaing the bankrupt American consumer with a Chinese peasant engaged in American-style consumption as the engine of global demand is both foolish and irresponsible.”
These are issues nef has addressed in our interdependence reports but currently they are not even on the ‘any other business’ agendas of the finance ministries of the world’s great powers. Rather, we are seeing a return to a ‘Growth as Usual’ policy which flies in the face of global inequalities and serious attempts at a transformation to a low carbon economy. It is about time that economists began to look at some of Keynes’ less well known policies, such as that economies should be primarily concerned to consume only what they are able to produce, outlined in his essay on “National Self-Sufficiency“. Globalisation, in particular the globalisation of capital flows, is a major part of the reason we are in this mess – a bit of de-globalisation will be required to get us out of it.
The expenses scandal may not have cost Gordon Brown his job, but it has done a good job of helping everyone forget about the fact that the world is facing the most serious economic downturn since the Great Depression.
The recent talk of ‘Green shoots’ is now looking distinctly optimistic. A recent analysis by economists Barry Eichengreen and Kevin O’Rourke suggests that the world economy is following a worryingly similar pattern to the Great Depression. One year in, global output is declining at roughly the same rate as it was in the 1929-30 downturn (Chart 1).
However, in terms of global trade, things are looking a lot worse than 1929-30 (Chart 2).
You may remember all the talk of how important it was to avoid protectionist policies for fear they would lead to another Great Depression. Well, there has hardly been a whiff of a trade tariff yet global trade has collapsed anyway.
This has resulted in the interesting phenomenon, as Paul Krugman recently suggested in his series of lectures at the London School of Economics, of major exporting countries such as Japan, Brazil and Germany, who had very little in the way of housing or other asset-bubbles, suffering more than the Anglo-Saxon bubble economies of the UK and the US. Meanwhile, developing countries dependent on foreign investment flows have been hit even harder. The Great Depression was global and global financial deregulation has made this one equally so.
Governments have been much more active in stimulating demand – through slashing interest rates and pumping money in the economy – than in the Great Depression of course, so things may pick up.
On the other hand interest rates can’t be lowered much further and there remains massive questions over the amount ‘de-leveraging’ still required by the major banks (and shadow banks) before credit lines can really be freed up. Germany still refuses to go public with the results of its banks’ stress tests, no doubt for fear of the resulting stock market collapse. As long as US house prices and the mortgage-backed securities dependent on them continue to lose value, counting chickens remains ill advised. And then then there is the possibility of another oil shock of course.
Rather than looking vainly for green shoots, governments should be getting on with the job of creating a Green New Deal with reform of the financial system at it heart. Some progress has been made on tax havens, yet other structural reforms have lost momentum, or not even got going. There is little evidence of the UK or European governments seriously looking at separating retail from investment banking for example, or re-mutualising financial institutions, as proposed recently by nef. And there is a danger that stronger reforms issued by the EU – for instance stricter regulation of mortgage credit limits – will be blocked by an increasingly euro-sceptic Britain.
A Labour MP I quizzed last weekend suggested it was rather hard for Britain to take the lead on financial regulation ‘because we live in a globalised world and might lose out to other countries’. Funny how this doesn’t work the other way around – Britain has always been very happy to be the first to de-regulate.
As the FT suggested in its editorial on Monday, a return to ‘business as usual’ in the financial sector is simply not a viable option. Its time to get the financial crisis (or perhaps we should call it the depression), and what to do about it, back on the agenda.
Demanding efficiency savings from our public services now is like asking us to burn our lifeboats in the middle of a storm. The unintended consequence of efficiency savings is that they erode local public services. Ultimately this impacts most on the poorest in the UK who are least responsible for causing the crisis, exacerbating already untenable levels of inequality and storing up more problems for later.
Measures to rebalance the tax burden are welcome, but don’t go far enough. With the worst impacts of the recession still to play out in full, the Government should be using this opportunity to take a progressive approach to taxation so that the companies and individuals who have benefitted most pay their fair share, ensuring that we can invest in the public safety nets we need to protect us from the worst impacts of the recession, and against future shocks. In addition, measures to help local businesses win public procurement contracts would both help to shore up front line services when they are needed most, and keep more money circulating in our local economies for longer.
For more on the real costs of efficiency measures, see nef’s report A Better Return.
The UK is sliding deeper in to recession and it is becoming clear that the Government’s strategy of ploughing billions’ of pounds of tax-payers money in to rescuing the banks is not working. And as the UK’s debt increases, sterling’s volatility increases, with a recent recovery still leaving it historically weak against the pound and the Euro.
The Conservative’s solution to the sterling problem is for the government to commit to a more ‘fiscally responsible’ strategy, aka reductions in spending (and thus debt), to try and boost the confidence of investors. That’s not much use to the predicted 3 million people who will be facing unemployment by the end of the year. Will Hutton’s solution is to keep pumping money in to the economy whilst also joining the Euro, a currency big enough to mimic the dollar as a reserve currency and hence less likely to be subject to damaging currency speculation.
But abandoing the pound will weaken further the UK government’s control over monetary policy, as nef argued back in 2003 when the UK was last considering Euro-membership. Interest rates will be set by the European Central Bank and reflect the interests of the biggest economies in the Euro Zone, of which the UK is just one (and a shrinking one) amongst many.
Perhaps, instead, we should be considering diversifying rather than centralising our currency system. There are some parallels with the banks here. We now have four major banks, all of which have become ‘too big to fail’ as opposed to the rich patchwork of credit unions and building societies that were actually connected to and interested in local and regional economies. Maybe we also need to re-link our money system and currencies to local and regional economies, so that if the national (or even international) currency collapses, others will continue to enable people to conduct economic exchange.
This is exactly what happened in Argentina in 2000 when the government was forced to massively devalue the Peso, previously pegged at 1:1 with the dollar. As the national currency became virtually worthless in the space of a few weeks, municipal authorities across the country began issuing regional currencies to keep teachers and nurses and public sector workers in their jobs. Similarly, during the great depression in the US over 4000 local currencies had sprung up around the country before they were abolished by Roosevelt’s New Deal program.
Complementary currencies do not displace national currencies but serve different, but no less important functions. They encourage people to spend more money locally, thus supporting local independent businesses, as with the Transition Network ‘local pound’ currencies, pegged one to one with sterling, currently circulating in Lewes in Sussex and Totnes in Devon. Such currencies should also stimulate local production of goods and make local food growing more appealing for example, thus reducing carbon emissions and shortening supply chains. The Swiss WIR, one of the few complementary currencies that wasn’t squashed by Central Banks post-depression, has been circulating in Switzerland since the 1930s and is now used by 62,000 small and medium sized enterprises. A recent academic study showed that it is ‘counter-cyclical’ – i.e. that it is used more when the economy slows.
And, as George Monbiot and The Economist have recently pointed out, there is no reason why money should only be created as interest-bearing debt by private banks. Complementary currencies can also carry a cost in holding on to them which would encourage people to spend money in to the economy rather than hoarding it. Experiments in Switzerland and Germany point to the potential of such ‘free money’ in stimulating economies at times of recession and depression.
More research is needed to better understand the potential of complementary currencies and what optimal currency zones might look like in order to create a more sustainable and resilient monetary system. But, as nef argued in From the Ashes of the Crash, government and local authorities should encourage experiments in complementary currency systems and move beyond the ‘one size fits all’ approach that doesn’t work for banks and doesn’t work for currencies.
If anyone is wondering what people mean when they talk about a credit/banking bubble, this wonderful graphic produced by JP Morgan last week sums it up quite nicely. The blue bubbles show the major bank’s market valuation in Spring of 2007 when everything was still fairly hunky dory. The considerably smaller green bubbles (one might even call them dots in the case of Citi-group and a couple of others) show their market value now.
One wonders if there is a hint of irony in JP Morgan’s footnote: ‘while JP Morgan considers this data to be reliable, we cannot gaurantee its accurancy or completeness’.
Thanks for that JP.
Oh to be a fly on the wall when Gordon Brown and Alistair Darling haul the big banks in to Downing Street, demanding to know why interest rate cuts are not being passed on to small businesses and homeowners. The press, not least the tabloids, have jumped on the ‘blame the banks’ bandwagon with relish.
But as we have seen since September, there is little national governments can do to encourage lending when the Banks are locked in to a global credit crunch with plenty more steam in its engine. The reality is that these behemoth banks, through successive rounds of deregulation and mergers, are no longer structured in a way that properly serves the needs of local communities and businesses. They weren’t doing much of a job even before the crunch, making their money not through careful loans to local businesses they knew and understood but through investment in the speculative markets of high finance and consumer loans.
But as recession looms, community banking is making a come back. In the last two weeks, Essex County Council and the City of Birmingham local authorities’ have announced plans for local banks. Their aim will be to lend public money at reasonable rates to cash strapped small businesses and homeowners in their areas. What a wonderful idea.
Essex has been inspired by the successful lending models of small regional banks in the US, including its namesake across the Atlantic based in Virginia. Importantly, legislation – the Community Reinvestment Act – in the US requires banks to disclose where and to whom they lend in their local community. Compliance with this act is part of the bank licensing requirements, and it also exerts public pressure if they are failing to invest in local communities. As nef has argued in a recent report, similar legislation should be created for the UK.
Meanwhile, Birmingham City council, the UK’s largest local authority, is planning to create a bank to lend up to £200m to small businesses, as reported in the Financial Times. The Bank of Birmingham (AKA BoB), which had its first incarnation in 1916 when Neville Chamberlain was the Mayor of Birmingham, will apparently also take retail deposits.
nef has been making the case for community banking for some years and is currently involved in developing Community Banking structures with Local Authorities and other partners in mid-Wales, Merseyside, London, the Midlands and Somerset.
A secure and stable economy requires a diversity of local and regional financial institutions, none of which will be too big to fail but all of which will be small enough to care about their local economies. Essex and Birmingham have shown the way, now lets hope others, including perhaps the post offices, will follow.