Saturday, October 31, 2015

Will Hutton: Back to the Future, part 3/3

Hutton’s prescription for the global economy is a Keynesian one with a ‘credit creationist’ twist, attempting to iron out the boom and bust inherent in capitalist production.  J.M. Keynes (writing in the slump of the 1930s) saw the instability of capitalist production, its tendency to boom and bust, as due to the fact that investment tends to stall because not every seller in a market becomes a buyer as there is a tendency for businesses to hoard a portion of profits rather than to reinvest it all in new production, which creates a deficit in market demand.  For Keynes, the state needed to step in order to provide the demand that was missing through direct investment and through redistributive taxation. 

To overcome the crises such as that of 2008 and the current crisis in China and other ‘emerging market economies’, Hutton urges international banking reform and demand stimulation in western economies.  He argues that global banking needs to be regulated by a ‘reinvigorated IMF’, reconfigured so as not to be dominated by western political right (those marauding Anglo-Saxons) in order to ensure ‘proper surveillance of global finance’.  This would involve restrictions on capital flows between countries and ensure that central banks regulate banks reserves to prevent banks ‘creating money’ by lending multiples of what they hold as fractional reserves.  This assumes that global banking has not arisen hand in glove with global trade and that banks can lend what they don’t have (which they can’t). 

 In order to divert ‘excess credit’ from flooding ‘emerging market economies’ Hutton also calls for western governments to ‘launch massive economic stimuli, centred on infrastructure’ and ‘new smart monetary policies that allow negative interest rates.’  This is Keynesian economics designed to stimulate demand by direct government investment and kick-starting investment by making it expensive for banks not to lend.  The problem with the first suggestion is that Quantitative Easing inflated the value of asset prices (stock-market prices) without stimulating inflation (because the new money created – by the Bank of England which can create money - did not enter general circulation as notes and coins).  The ‘economic stimuli’ mentioned by Hutton (what has been called ‘People’s QE’ by Jeremy Corbyn), on the other hand, would involve the creation of new money that would enter circulation as notes and money and therefore run the risk of creating high inflation (a rapid rise in the general price level).  The problem with the second proposal of negative interest rates (which is happening in several European countries) is that in the absence of the opportunities for profitable investment (i.e., in a recession) banks may not lend more but simply hoard, accentuating the fall in investment.

Keynesian economists often point to the post World War 2 period as evidence of the success of their policies of state intervention in the economy to increase demand.  However, sustained post war growth was due to the recovery of the global economy following the slump of the 1930s and reconstruction following the World War 2.  When this growth stalled in the 1970s Keynesian attempts to stimulate demand created double digit inflation.  This and high rates of taxation tended to stall investment even further and state borrowing came with conditions to reduce the policies that necessitated the borrowing.  These problems were faced by all governments following Keynesian strategies once the post war boom was over.  It was not Thatcher but Dennis Healey who started the process of spending cuts in the late 1970s.  In France Mitterand was elected in 1981 on a platform of increasing consumption through state intervention.  The higher taxation, government borrowing and inflation led not to stimulation of the economy but to lower growth - by 1983 the Mitterand government had taken the ‘austerity turn’ in an attempt to restore favourable conditions for profitable investment.  Bang up to date the failure of the Syriza government in Greece to reverse austerity in Greece by renegotiating the terms of its borrowing failed ignominiously, the government backing down rather than face even more uncertain prospects outside of the EU.  Austerity is not being imposed by the political right as Hutton would have it.  It is being enforced by the need to create conditions favourable to profitable investment.  Trying to go back to a time before Thatcher and Reagan to get to a non-austerity future is going back in time to face the same problems, pursuing policies that will require the same policy reversals enacted by Healey and Mitterand.  Hutton’s Keynesian and currency proposals to calm global economic turbulence could not be enacted (say by a Corbyn Labour government) without worsening the prospects for productive investment, requiring a return to the very policies blamed by the left for causing current economic stagnation.   A real end to austerity requires the success of the socialist campaign to abolish capitalism itself not repeating the disillusion of past attempts to save capitalism from itself.