Thinking outside the Red Box

Andrew Simms is nef‘s Policy Director and head of nef’s Climate Change programme.

Debt-fuelled over-consumption is a model broken beyond repair, both economically and environmentally. But which potential chancellor is closest to understanding this, and has the vision to deliver an alternative?

Is it Alistair Darling, who gave the minimum nod necessary on curtailing banking excesses to appease public anger, and seems bent on returning to business as usual? Is it George Osborne, sliding effortlessly into the old Conservative comfort zone of quick, punishing public spending cuts? How quickly people forget that the cuts agenda is driven by a massive private sector, market failure. Or, is it Vince Cable who, of the three, first called the banks’ failure and is most outspoken on reform?

All different, but for all, the future is a just question of when, not if, to make huge spending cuts. None fully sees the big win-win opportunity for major, productive, counter-cyclical public investment in a Green New Deal. It’s the one vision that could create jobs, and build a national housing, energy, food and transport infrastructure fit to flourish in a world of energy shortages and climate change.

So, my vote for next Chancellor goes to Adair Turner, former head of the Confederation of British Industry, chair of the official Climate Change Committee, and now leading the Financial Services Authoriry. He knows the market is often invisibly underwritten by the public realm, sees through the City’s attempts to defend the indefensible and understands the need and benefits of the great economic transition we have to make. He could be the first independent Chancellor, taking office in a hung parliament, symbolising a new politics.

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Lord Turner attacks the City again

Andy Wimbush is nef‘s Communications Officer and blogmaster.

Lord Turner was at his iconoclastic best last night. In a lecture to the Cass Business School in London, the chairman of the Financial Services Authority once again questioned the value of Britain’s swollen financial sector and called for tougher regulation on City activities.

“We need to challenge radically some of the assumptions of the past 30 years,” he told the audience, “and we need to be willing to consider radical policy responses.” According to Turner, there are a range of ideas that need to be taken out of the “index of forbidden thoughts” and brought into the mainstream.

Among those radical policies was, pleasingly, the idea of a Robin Hood Tax on financial transactions, proposed by nef back in 2001 and now the subject of a major campaign from a coalition of NGOs, faith groups and trade unions.

Lord Turner also reflected on an interview last year in which he branded much of the activity in the financial sector as “socially useless”. “People have asked me whether I regret those comments,” he said, “The answer is no, except in one very small respect, which is that I think it would have been better to use the phrase ‘economically useless’ or ‘of no economic value added’.” This echoes nef‘s recent report A Bit Rich which found that Elite City bankers (earning £1 million-plus bonuses) destroy £7 of value for every £1 they create.

Turner’s comments come less than a week after the publication of new research showing that London has lost its unique position as the highest ranked financial centre in the world: it now shares that status with New York. The banking lobby has tried to argue that the news should make Government cautious about increasing taxes and regulation on the financial sector.

Here at nef, however, we have long argued that finance should be the servant, not the master of the economy. The protracted financialisation of the UK economy has not brought benefits to everyone. Around 3 million people in the UK still lack a basic bank account, and small businesses find it increasingly hard to obtain loans, as banks moved away from local, high street level activities to prioritise speculation and short-term profiteering. The more we can do to reconnect financial services with the real economy – and especially disadvantaged communities – the better. We might also do well to refocus attention on neglected areas of the economy – such as agriculture and manufacturing – in anticipation of the necessary transition to a low carbon food and energy system.

Lord Turner’s comments show that, contrary to what been said  by some defeatists in the movement for a just and sustainable economy, there is still plenty of opportunity to introduce new ideas and challenging, radical policy proposals. The door that was flung open by the financial crisis hasn’t closed yet. So let’s delve deep into that index of forbidden thoughts and see what works. If you’re curious, you can start here.

Lord Turner proposes border tax to encourage action on climate change

Andy Wimbush is nef‘s Communications Assistant and blogmaster.

Steel manufacturing in Shanghai | Image by 2 dogs via Flickr

You’d be forgiven for suspecting that the Chairman of the Financial Services Authority, Adair Turner, might be some sort of Climate Camp mole (and you wouldn’t be the first: the Financial Times nicknamed him Swampy last summer).

Look back over Lord Turner’s policy suggestions over the last twelve months and you’ll find that they read like an activist’s wishlist. He began his call to tame global finance by accusing banks of engaging in activity that is “socially useless”, and arguing that many financial institutions had grown “beyond a socially reasonable size”. In the same interview, Lord Turner proposed that banks be subject to a tax on financial transactions, pre-empting the Robin Hood Tax campaign. Speaking to nef policy director Andrew Simms on the BBC’s World Tonight in January, he even suggested that the pursuit of economic growth at all costs might become a “false god“. Not surprisingly, we’re completely in agreement: see our report A Bit Rich on the real social value of elite City banking, our publication on the Robin Hood Tax and our various reports on the limits to growth and GDP: Growth Isn’t Possible, Growth isn’t Working and National Accounts of Well-being.

The reality is, of course, that Lord Turner is a figure at the heart of the establishment, who has reached his conclusions not through ideology, but from a long cool look at things as they stand. Now he is back in the news for his suggestion that government should consider a carbon tax on cheap imports from countries not implementing serious climate measures to help boost British manufacturing and encourage world leaders to tackle climate change. From the Guardian:

Lord Turner, who heads the UK committee on climate change, said the government should “rigorously assess” bringing in levies on cheap imports from countries outside the European Union, which are not subject to carbon-related costs such as the EU emissions trading scheme.

Ministers have in the past resisted calls from European counterparts to introduce such carbon levies, arguing they would be anti-competitive. In future, heavy industry such steel and cement manufacturers in the EU will not have to pay for most of their allowances to emit carbon under the trading scheme, unlike other firms taking part. The idea is to protect EU manufacturers and prevent “carbon leakage” – plants being moved to countries which do not have their own trading schemes.

It has emerged that Indian-owned steelmaker Corus, which is closing its Teesside plant, stands to pocket around £250m by selling unused carbon permits. Unions allege that this is why the company does not want to find a buyer for the plant.

Lord Turner said a change of approach was needed. “Business needs a clear and consistent market-based incentive to move towards a low-carbon economy. We can’t solve the problem by giving out emission allowances for free as the only option for internationally trading manufacturing sectors. Border carbon-price levelling should not be excluded, but rather subject to rigorous assessment alongside other options.”

In 2003, nef published a report called Free-riding on the Climate which proposed that since UN negotiations were not delivering the binding agreement necessary for avoiding dangerous climate change, the UK and the EU should consider using litigation or trade measures to force other industrialised countries to cut emissions. The thinking behind the idea is that if some countries are spending money to cut their emissions in industry and manufacturing, then they will be undercut by cheaper goods from other countries that are still using cheap and dirty energy. A border tax on these imports would try to redress the balance. It’s called a countervailing duty, and is permitted by the World Trade Organisation in certain circumstances. Andrew Strauss, Professor at Widener University School of Law, explains:

The Organisation currently allows states to impose countervailing duties when foreign companies ‘dump’ goods into their markets at less than the market value, and to offset the previously discussed competitive trade advantage that foreign companies gain when they receive subsidies from their governments.

So despite seeming like a radical measure, a carbon tax wouldn’t be without precedent in other areas. In fact, nef‘s report pointed out that there was a scheme introduced in the USA to help clean up domestic toxic sites, which was paid for by taxes levied on the petro-chemical industries: the 1980 US Hazardous Substances Trust Fund, popularly known as Superfund. GATT – the precursor to the WTO – decided that the Superfund wasn’t an unacceptable restraint of trade.

When George W. Bush was resolutely refusing to even acknowledge climate change, Caroline Lucas – on nef‘s behalf – asked Pascal Lamy, then European Commissioner for Trade, whether economic measures against the United States would be permissable under existing agreements. He replied that it was a “thought-provoking contribution”, adding:

“There is a clear case for being aware of any adverse effects on our industry and doing everything in our power to minimise these. In that sense, it is relevant also to keep under review the scope for action under WTO rules to ‘level the playing field’.”

Even with President Bush out of the way, a binding international agreement on climate change still seems impossible to reach. Perhaps it is time to reconsider the possibility of border taxes and sanctions against those countries who are still taking a free ride on the climate.

Back to ‘bubble economics’

Josh Ryan-Collins is a researcher in the Business, Finance and Economics team at nef.

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.