This again is an example of what Clay Shirky calls the “creativity and generosity of our interconnected age” in his new book: “Cognitive Surplus“.

He makes an interesting point in an interview with the Guardian, when discussing paywalls.  I quote: “When we talk about newspapers, we talk about them being critical for informing the public; we never say they’re critical for informing their customers. We assume that the value of the news ramifies outwards from the readership to society as a whole. OK, I buy that. But what Murdoch is signing up to do is to prevent that value from escaping. He wants to only inform his customers, he doesn’t want his stories to be shared and circulated widely. In fact, his ability to charge for the paywall is going to come down to his ability to lock the public out of the conversation convened by the Times.”

No one can say that we at debtonation lock anyone out of our conversations!  Yet.

The Royal Economic Society in its latest (July 2010) newsletter (not yet online, but expected to be soon) refers favourably to our paper in an article that discusses the views of a range of economic dissidents, including the LSE’s Director of the Centre for Economic Performance, John Van Reenen and Joseph Stiglitz. The article notes that while opposition to Osborne’s Budget is growing, “even so, the lack of comment by economists…about its overall macroeconomic impact remains striking.”

The paper has also attracted the attention of American economists and historians, notably Marshall Auerback of the Roosevelt Institute in a piece for the Huffington Post and on the New Deal 2.0 site: ‘The trouble with Tim’s Treasury.’ Also Richard Smith, in a critique of Niall Ferguson’s imperialist economics on ‘Naked Capitalism’, here.

Finally we won high praise from Mehdi Hassan political commentator at the New Statesman, in a piece entitled ‘I am proud to be a deficit denier’.

And I’m proud to be in their company.

Dear readers of this blog…Apologies for the silence.  Have been away… travelling, courtesy of TrenItalia’s overnight service to Tuscany, and wonderful it was too. Have thoughts to share after reading Tim Parks’ book on the train – on the Medicis and Money.

But the following is more urgent: a comment below from Prof. Victoria Chick on the confusions that arise from using micro-economic reasoning to determine macro-economic outcomes.   Prof. Chick’s comment relates to the debate on fiscal tightening generated by Martin Wolf at the Financial Times.

The government is not in a position to determine its deficit/surplus.

by Prof. Victoria Chick.

Much as I welcome the opportunity Martin Wolf has provided for a debate on the Government’s spending and taxation plans (see ‘Why the battle is joined over tightening’ here )  the debate itself was set up on false dichotomies: between cutters and postponers or the choice between  deficit-cutting and stimulus. Let me expand on why these dichotomies are false.

The debate is not between deficit-cutting and stimulus but between expenditure-cutting and stimulus. The question begged is whether expenditure-cutting (and tax-raising) will actually result in a reduction in the deficit or an increase. Research by Ann Pettifor and me  shows, using UK data from 1918 to 2009, that a persistent expenditure cut was correlated with a rise in the debt/GDP ratio; and expansions in expenditure with a fall in debt/GDP.  (For a short form see our Bloomberg piece here.  For a longer essay see ‘The economic consequences of Mr Osborne’ published on 6th June, on this site. )

The belief that it is comes from generalising from the experience of individuals. It is completely spurious to speak of ‘deficit-cutting’ with reference to governments.

You and I are small beer: if we want a surplus, we cut our expenditure and/or raise our income, and what we do is not important to anyone else or to the economy at large (unless many others are doing the same).

Government expenditure is too important for that, even at 1930s levels (9-14 per cent of GDP before mobilisation for the Second World War). The same ratio after the War has never fallen below 20 per cent (these figures exclude transfers). The size and sign of the budgetary outcome depends on the plans of the entire economic system and its reactions to the government’s planned actions.

Even more important than the proportion of government expenditure is the fact that its deficit/surplus outcome must be balanced by a surplus/deficit elsewhere, either in the private sector or the balance of payments. If the government reduces its deficit, which sector is going to reduce its surplus? Surely not the private sector, which is trying to repair its balance sheets. The balance of payments?

To try to cut a deficit by cutting expenditure and raising taxes in a period of slack demand and substantial unemployment is to jeopardise recovery; this argument is well understood.

The counter-argument, that the markets will refuse to buy government debt, is also well understood, though no-one actually knows ‘the market’s’ view: is it more worried by the size of the debt or the threat of further recession?.

But even if a reduction in the deficit were desirable, the further question arises: if government wants to cut its deficit, for whatever reason and however misguided, is cutting expenditure and/or raising taxes the way to go about it? In the light of previous UK experience, the answer is no.

Since the deficit is not something that government can control, setting out to reduce the deficit is to look at the problem through the wrong end of a telescope: the way to reduce a deficit in a time of unemployment and feeble recovery is to spend (preferably spend wisely, e.g. on green technology) to promote employment and permanent improvements to our infrastructure, including our ‘human capital’.

Green Roof Art School, Singapore

Bloomberg Opinion

Until recently, there was almost complete agreement on the need for a period of synchronized austerity across Europe. This consensus, at a time of private- sector weakness and banking fragility, is very worrying.

But Alan Budd’s resignation as chairman of the British government’s newly established Office of Budget Responsibility, coupled with a growing number of dissenting voices, suggests a fault line in this consensus. Nevertheless even most of those who dissent do so not because they support fiscal stimulus but only because they fear that a “consolidation” is premature.

Today’s dominant doctrine, espoused by George Osborne, the new chancellor of the Exchequer, is even more severe than the “Treasury view” of the 1920s and ‘30s, which merely stood in the way of increases in expenditure.

Keynes’s approach to widespread economic failure and his critical role in triggering recovery after 1934 have been entirely disregarded. In the Great Depression of the 1930s, he confronted the Treasury view that increases in public expenditure would divert resources from private business.

He developed a theory showing that, in an economy with spare productive capacity and unemployment of labor, government expenditure would create employment. Keynes advocated increasing investment expenditure rather than encouraging consumption. Expenditure by the newly employed would then create private- sector economic activity by a multiple of the original expenditure. This was “the multiplier.”

Recovered Costs

Certainly some of the new income would go overseas, but in a depression very little goes into increased prices. Government costs would be recovered through new flows of income. There would be new tax revenue and savings on benefit expenditure.

It may seem obvious that if you want to cut debt, you cut expenditure, but Keynes showed that the government finances were very different from a household budget. For him, macroeconomic outcomes were often the reverse of outcomes based on microeconomic reasoning.

Keynes was instrumental in the development of national accounts, which give us the opportunity to test his conclusions. Combining the official estimates with British economist Charles Feinstein’s invaluable historical estimates permits an analysis of the impacts of fiscal policy over the past century.

Two Periods

Up to 1947, episodes are defined according to whether government expenditure (final consumption and investment) is expanding or contracting. After 1947, expenditure increased every year. But in 1976, U.K. Prime Minister James Callaghan turned to the International Monetary Fund for help, and expenditure growth slowed to almost zero. So, the years since World War II are split into two periods: before 1976 and after.

This leads to eight episodes over which changes in the public debt (as a percentage of gross domestic product) can be compared with those in public expenditure. The results stand wholly opposed to the conventional wisdom.

For example, after World War I (1918-23, including the years of the so-called Geddes Axe) public expenditure was cut to 480 million pounds from 1.85 billion, but the public debt rose to 180 percent of GDP from 114 percent.

During the early years of the Great Depression (1931-1933), expenditure fell to 510 million pounds from 580 million and government debt increased to 183 percent of GDP from 173 percent. Conversely, from 1934, the government began to expand expenditure and the public debt fell.

From 1947 to 1975, when government spent freely on the National Health Service, public housing and education, the public debt fell each year. The first increase in debt coincides with the 1976 fiscal consolidation.

Remarkable Results

Comparing for each episode the average annual change in the public debt as a share of GDP and the average annual growth in government expenditure in cash terms, we have results that are perhaps even more remarkable than Keynes might have imagined. There is a very strong relationship between changes in government expenditure and the public debt.

But, outside the two world wars, the relationship goes in the opposite direction to that predicted by most commentators: Increases in public expenditure are associated with reductions in public debt. Very roughly, so long as there is unemployment, for every percentage rise in government expenditure, the public debt falls by half a percent, and vice-versa. This is very compelling evidence in favor of Keynes’s insights.

Osborne’s economic policies will, if sustained for any length of time, not only increase U.K. unemployment and social dislocation, but they will also increase the public debt. Sooner or later, governments, financial markets and international authorities will be forced to recognize the validity of Keynes’s analysis, just as they were forced to do in the 1930s.

The present course will cause unnecessary harm to the U.K. economy. The only rational response is to change direction immediately.

(Victoria Chick is emeritus professor of economics at University College London. Ann Pettifor is a fellow of the London-based New Economics Foundation and a director of Advocacy International Ltd. The opinions expressed are their own.)

The comments were on the whole supportive. However, one commenter, Mark Porthouse,  asked why “our conclusion (namely that public ‘expenditure creates its own income’) –   did not work over the period 2003-2009?”  As Mark notes “an increase in public expenditure” over this period leads “counter to the conclusion of your paper”  to ” an increase in public debt (…. except for 2005 where we see a 1% point decrease in public debt – but Mark notes that this is the year with only the slimmest increase in public expenditure).”

My personal response to this is as follows: first, the government in 2003 was spending to prevent the economy spiralling deeper into recession, after the collapse and bursting of the dot-com bubble in 2001. Second, much of UK government spending was not well aimed, and instead of acting as a stimulus went into non-productive expenditure on quangos, the PFI etc. We are clear that the fiscal stimulus must be aimed at productive expenditure.  Finally, there was and still is, the evolution of a massive industry in tax evasion.  This coincided with the expansion of the private finance sector, where it is relatively easy to evade taxes.

So, as we argued in the paper, the impact of a fiscal stimulus must be considered within the “wider considerations of financial architecture and monetary policy.”

These factors combined made it difficult for government spending to ‘create its own income’ over the period 2003-9.

“While we have Jack upon the sea/ And Tommy on the land/We needn’t fret. ”

The British are cheering again, as the present-day version of General Sir Douglas Haig –  the chancellor and a cabinet packed with millionaires – send the equivalent of yesteryear’s Tommies off to the economic parallel of the Battle of the Somme.

On the 4th July, the Financial Times reported that George Osborne “is the most popular Conservative chancellor since Ipsos/Mori began testing public opinion on the issue in the 1970s.”   His “Budget (which) heralded £113 billion of spending cuts and tax rises, (is) an austerity package whose necessity seems to be appreciated by the public, who have yet to see what it means in practice.”

However its not just the British people cheering on the Economic Generals, before understanding what the scale of the planned destruction “means in practice”.  Four out of five of the UK’s company directors support the Budget, according to the Institute of Directors – even though this is not just a war on the public sector, but on the private sector’s potential profits and viability.

This optimism and  high regard for the chancellor is in stark contrast to my own downhearted plunge into depression at the state of politics and economics – which is why you, loyal readers, have not heard from me for some while.  For which I apologise. It’s just that repeating the same concerns, alarms and warnings sometimes seems pointless in a world in which the overwhelming consensus appears to be that Osborne’s war on public spending is going to be a Lovely War!

But I am now rid of such downhearted thinking. After all our warnings are now heard by others. The markets are waking up to the fact that what they wished for, might hurt them more than it hurts the public sector. Even Larry Summers of the US Treasury and  the BBC’s  economic staff are beginning to show signs of regretting their own role in cheering on the economic Generals as they prepared for this war.

And then there are Paul Krugman and Paul Revere prize-winner Steve Keen - in particular the latter’s recent paper for the Levy Institute “Are we ‘It’ yet?”.   These two economists continue to blow the whistle on the flawed economics underpinning the strategy for this particular war.

Keen’s conclusion:  ” The final debt-driven collapse, in which both wages and profitability plunge, gives the lie to the neoclassical perception that crises are caused by wages being too high, and the solution to the crisis is to reduce wages.

“What their blinkered ignorance of the role of the finance sector obscures is that the essential class conflict in financial capitalism is not between workers and capitalists, but between financial and industrial capital. The rising level of debt directly leads to a falling worker share of GDP, while leaving industrial capital’s share unaffected until the final collapse drives it too into oblivion.”

Sadly,  Britain’s company directors are unlikely to read or take heed of  Keen, as they rush headlong towards the ‘trenches’ of the ‘western front’.

Last night I joined Riz Khan on his Al Jazeera evening show to discuss the budget and the dangers of synchronised austerity. Watch the video below:

Today I gave my verdict on the budget in the Guardian. Click here to see it on the guardian site or read my article below:

“When a small Canadian cruise ship hit an iceberg in 2007, its 154 passengers were nonchalant. Initial reports suggested only a small hole was punched into the hull and so they refused to panic. Twenty hours later the ship “had sunk beneath the waves”.

Today the public and particularly the Liberal Democrats appear nonchalant as George Osborne steers the ship of state straight towards the Austerity Iceberg. The foolhardy captain of this ship has recruited the most vulnerable sectors of society – children, mothers and the elderly – to act as his crew – while removing their life boats.

It’s horrible to watch – for a number of reasons. Not only because it is gross cowardice to place the weak and vulnerable in the frontline in this way. But also because the “iceberg” towards which Osborne is steering Britain is not a lone one. European countries are hell-bent on synchronising austerity across the eurozone. Icebergs are popping up everywhere. And like the chancellor, all the OECD economies cutting back on public spending hope to compensate by increasing exports – into shrinking markets.

China and Japan are set to follow suit, and are aggressively increasing exports. Last month, the rise in China’s exports was the highest in six years. One has to ask about the quality of advice the chancellor is getting from Mervyn King and Treasury mandarins, if he has been led to believe that Britain’s terminally declining manufacturing sector can compete with China. That exports can help substitute for the collapse in public investment that will now follow the collapse in private investment – itself a function of Britain’s malfunctioning banking system.

The huge increase in VAT to 20% will clobber the poor and hit the high street. But it will also hit the services sector on which the economy has becoming increasingly reliant: financial services, advertising, public relations, design and management consultancy.

Watch as the ballast of high-end private-sector jobs, as well as public-sector jobs, are thrown overboard just as the ship steers straight for the iceberg. These jobs will not be saved by the chancellor’s concessions on corporation tax. We know, because of research undertaken by the IMF.

Those high priests of neoliberalism have found that corporate tax incentives are the least effective of all possible fiscal stimulus measures examined. According to their research, stimulus equivalent to 1% of GDP comprised of corporate tax cuts show up as an increase in GDP of just 0.5% of GDP over five years. By contrast, government investment yields the highest return, up to 4.5% of GDP over five years.

Their key conclusions are worth quoting more fully: “There is a robust finding across all models that fiscal policy can have sizeable output multipliers, particularly for spending and targeted transfers.”

The authors’ sole caveat is that the fiscal stimulus should last years, not decades. But if fiscal stimulus has not worked even over that timescale, then a “somewhat more comprehensive socialisation of investment” would be on the agenda.

Watch out as, in a year or two, taxpayers are once more called upon to bail out the sinking ship – and expected to “comprehensively socialise investment”.

Published in the Guardian, comment is free, 23rd of June 2010.

Last week I was invited to speak at the Institute of International and European Affairs in Dublin on Europe’s sovereign debt crisis. Watch the video below >

My latest Huff Post blog

It’s not often that you get to sit in the same room with a group of world leaders and hear their wisdom, ideas and experiences at the personal and political levels.

I’ve just enjoyed that privilege. And the world leaders were all women.

The occasion is a conference of thousands of women in Washington DC. ‘Women Deliver’ is convened by a great New Yorker and long-time advocate for women’s reproductive rights, Jill Sheffield. Its purpose is to transform the life chances of girls and women around the world.

First, Jill gave a platform to a global leader — Melinda Gates — to make the stunning announcement that the Gates Foundation is to devote $1.5 billion to save the lives of women in childbirth and their babies.

Then a panel of women world leaders was convened. They included Helen Clark, the first Prime Minister of New Zealand and now at the head of a world organisation — the United Nations Development Programme; Valerie Jarrett, one of the most powerful women in the Obama administration, and the Assistant to the President for Intergovernmental Relations and Public Liaison; Michelle Bachelet, a player on the world stage as President of Chile; and actor Ashley Judd, fresh from Harvard’s Kennedy School of Government.

Finally there was Arianna, who leads the world in developing a truly global news website.

They were there to discuss women and power. They talked about the personal, and the political challenges of winning, and then exercising power. They were all inspiring, and it was astonishing to hear them talk so frankly and revealingly. To witness and hear insights worlds away from the usual banalities poured out in conferences.

I’d like to share a little of their wisdom with you.

Arianna hosted the panel, and had them first talking about the personal aspects of dealing with power. They all spoke of the ideal of having balance in their lives, while admitting that they are workaholics. “You can have it all, but not necessarily at the same time,” President Bachelet advised us. In other words, you may become a hugely popular and effective President (Bachelet’s poll ratings hit a positive 86% at one point) but “…your house may not shine at the same time.”

Arianna tackled the issue of failure — and said how central it was to her success. She reminded us that her first book had been rejected by 36 publishers. On the 25th rejection, she concluded that she was not a writer, and was about to give up. Her determination to carry on is what marks out both her success, but also that of most powerful women.

They use failure to spur them on to even greater achievement.

Women, we were advised, need to depersonalize attacks on them, and move on. This led to personal stories about surviving criticism and bad press.

Valerie Jarrett recounted reading a dreadful article about herself in the Chicago Sun-Tribune. Critical as it was, it happened to include a great picture. But she internalized the attack, and sank into despondency about her professional future. On Monday morning a close friend called and said “Saw that piece about you in the Tribune yesterday. Great picture!” The story had been forgotten, or ignored. Valerie moved onwards — and upwards.

Helen Clark is awesome. She told us of how her popularity, and the popularity of her party, plummeted as soon as she became their first woman leader. The press called her unelectable — her hair was too short, her teeth too crooked and the fact that she had chosen not to have children was regarded with intense suspicion. However, she was able to rally and regroup her party, and win the upcoming election. Vindicated, she made history by becoming the first woman Prime Minister of New Zealand.

But these women did not just talk about power. They exercised it — to support other women.

Valerie Jarrett cited a memorable quote from Madeleine Allbright: “there’s a special place in hell for women who don’t help other women.”

They talked about the critical importance of female-to-female networks and alliances, to challenge, as Ashley Judge argued, the entrenched power of male-to-male alliances. And of the need to stay close with your ‘tribe’ — those you trust most. The more powerful these women became, the greater their need for honest counsel.

Helen Clark said that her global organisation, UNDP, is helping women parliamentarians around the world draft legislation to increase the number of women in positions of political power and influence. The women of Papua New Guinea called on UNDP to help draft laws that would result in the greater participation of women in political life. A women Senator from Nigeria, one of only seven in the Nigerian senate of 108 members, promptly stood up and asked right on the spot for help in Nigeria.

Michelle Bachelet — whose leadership potential was only recognised when she took on the “man’s job” of Minister of Defense — helped to enact extensive legislative reforms for women, including an equal pay act, pension benefits for women, nursery school and childcare reforms, and a controversial decree allowing for the free distribution of emergency contraception.

President Bachelet then talked about the importance of symbolism, and told us the story of her friend, the first woman president of Finland, Tarja Halonen. On a visit to a pre-school class, President Halonen asked the children what they wanted to be in life. All the usual aspirations were expressed. A 5-year old boy was asked if he might want to be President?

“No” he said, “in our country men can’t become presidents. Only women can.”

To watch the whole conversation, go to Women Deliver.