Tag Archives: Neoliberalism

Why we need economists

Being a former social worker and state secondary school teacher I am used to belonging to a profession that is disparaged in the media. Now I find that being an economist means that I am subject to similar vilification. What made economists (or rather the good economist) so disparaged is that they tell inconvenient or awkward truths about the economy and society. When faced with such truths politicians and the powerful will resort to abuse to silence the truth tellers. What is remarkable is that we have a parliament dominated by graduates from our elite universities and yet they are in greater ignorance of the world around them, than the parliaments of the past! Parliaments that were mocked for having too many of trade unions and country squires, men supposedly lacking in education and knowledge of the world around them.

Having made this declaration I must now produce the evidence to defend my assertion. These awkward truths usually are warnings about coming troubles that politicians would prefer to ignore. When the great crash occurred in 2008/9 politicians claimed that it was a once in a lifetime event that could never have been predicted. An economic act of God. The truth is that all the warning signs were there and instead of acting on them politicians refused to act, as any action taken would have been cutting spending and that would have been unpopular with the electorate. There were two causes of this crash were the banks irresponsible lending policies, such as 125% mortgages. The other guilty party were the governments and central bankers who rather than regulating the market for the greater public good, preferred to turn a blind eye to the irresponsible behaviour of the bankers. Their justification for their inaction was the doctrine of neoliberal economics, which states that economic well being is maximised under the free market economic system.

I suspect that those trade unions and squires of the past would not have been so gullible, as they had a superior understanding of human nature. They from their dealings with bankers would have known that these men were not the giants of the financial world but men as fallible as themselves. These men would have recognised that greed for ever greater and greater financial rewards motivated these bankers.

Awkward truth warning – little has changed since 2008 bankers are still lending irresponsibly and the government is still turning a blind eye to such behaviours. One area of concern is car finance, it is suggested that car dealers in their desire to sell more and more cars are not paying sufficient attention to the ability of their customers to fund their repayments and the risk is that these buyers will default in the future on their loans. This will cause the defaulting customers to return their cars leaving the dealers with an unsold mountain of cars other hands. This would in itself be sufficient to cause another economic downturn. The banks who source the funds which enable the car dealers to offer generous financial terms to buyers, rather than offering a word of caution or refusing to increase there lending to the dealers just continue to shovel cash in their direction.  Other forms of bank lending such as to the property market suggest that bankers have not learnt the lessons of 2008 and unfortunately neither has the government.

As an economist you learn to read the runes, in my case as I have no access to government statistics, it is those short comments in the financial section in the newspapers that give the game away. In this case it was a short piece of no more than three or four lines. A financier was asked if the Bank of England was now cracking down on irresponsible lending to prevent a repeat of 2008/9. His answer was no, as the governor knew that if he reduced borrowing he would cause an economic slowdown, which would increase unemployment with all its associated problems. If I read the article correctly little has changed since 2008.

I also realise that the banks have fought tooth and nail to stop the governments of Europe and the USA to make them resilient in the event of any future crisis. British banks have successfully persuaded the government that reserves of 3% are sufficient to enable them to ride out any future crisis. European banks have even smaller reserves. These reserves are either cash or assets that can be easily turned into cash to meet the demand for cash from their customers. (A greater ratio of assets to lending would limit the money banks could lend and in consequence reduce their profitability.) The suggestion is that in an event of a repeat of the financial crisis of 2008 the banks will lack sufficient reserves of cash to enable them to meet their customers demands for money. In a crisis customers fearing the future will withdraw their savings from the bank, either because they doubt the loudness of the bank or they want money in hand to deal with any future crisis. It will only take one bank to close its door for a general panic to ensue with the consequence that the government yet again will have to step in to bail out the banks. If the banks held greater reserves as have happened in the past such temporary crisis could easily be resolved  The banks would have sufficient quantities of cash in reserve to be able to pay those panicking customers who wanted their money back. Once it was seen that the banks had plenty of money the panic would cease. However if banks have insufficient cash reserves the whole system is liable to collective failure. If only one bank has to close its door, because it cannot meet its customers demands for cash, the contagion will spread and there will be a major run on the banks. Yet again the government would have to rescue the banks from their follies of their own making.

However we tellers of awkward truths have a problem. We cannot predict exactly what will happen or  when. We are tellers of possibilities and probable truths and us such we can be easily discredited. Economist predicted that a vote to leave the EU would have a negative impact on the economy. Then when in the days after the Brexit vote, the economy failed to collapse the naysayers could claim that they were wrong and that the collective opinion of economists was worth no more than that of the collectivity of politicians. What these naysayers overlooked was  that the Governor of the Bank of England being all too aware of the negative impact of a Brexit vote took immediate action to offset its negative economic impact. He simply increased the amount of to the nations borrowers enabling them to go on spending spree which prevented the economy from taking a nose dive. What the naysayers don’t realise it that it is a crisis postponed  not as they believe an imaginary economic ghoul or nasty conjured up from the feverish imaginings of the economists.

There is one prominent economist or truth teller who has consistently, warned of the impending credit crisis but is consistently ignored by governments and that is Anne Pettifor. She is never called to sit on the committees that governments set up to advise them on matters economic, as they don’t want to hear her truths. She has written extensively about the impending first world debt crisis, yet like some unheard of  Old Testament prophet her writings remain in obscurity.

Our one weakness as economists is that we cannot say exactly when or how or what we predict will happen. Even more frustratingly we can be right but events prove us wrong. There are no economists that can accurately predict the future, we are the scientists of the possible or the perhaps. The economy is such a volatile and complex construct that sudden and unexpected changes can make fools of us. This is why a leading politician* can say with confidence  ‘we have had enough of experts’ (meaning economists) and be praised in the media for his sagacity and foresight.

Yet our awkward truth remains the economies of Western Europe and the USA are over indebted and not one government has taken any realistic debt reduction measures. The fact that Britain with Japan shares the unwanted title of the most indebted of developed countries has passed our politicians by. They will speak endlessly about the public sector or government indebtedness, but they are focusing on the mice in the room while ignoring the elephant that is private sector indebtedness. Prior to the crash of 2008 government debt was less then a tenth of private sector debt. While great pains have been taken to reduce government debt little has been done to reduce private sector indebtedness*. This indebtedness will possibly rise to unheard of levels as the Governor has said that he is relaxed about the possibility of banks increasing their assets to nine times the size of GDP. Banks assets are loans, so he is relaxed about the banks increasing the nations debt to nine times the total of its wealth!

*Michael Gove a prominent politician who campaigned for Britain to leave the EU

* A policy practice that is common to all Western European governments.

Words of advice from a sceptical economist to any aspiring politician

No politician has requested my advice but as so many people particularly journalists proffer uninvited advice, I feel free to offer my own. Sceptics have a special duty to offer advice as they stand apart from the common run of intellectuals who are always promoting their own ideologies and schemes, as we offer a warning as to the traps into which a politician can fall.

Any politician when entering the great Houses of Parliament or the chambers of the other legislatures will be in awe of the senior practitioners of the craft of politics who display a mastery of the chamber. This mastery only extends as far as the boundaries of the legislature. In Britain it is acknowledged that George Osborne (Chancellor of the Exchequer) is the master of the house, he dominates debates and sets the agenda for policy making. However this does not mean that this mastery is any more than a dominance of the members of the house,he like many masters of the politic art achieves his dominance through his avoidance of any of the intractable problems that face the country. The palace politics of Westminster and other chambers is dominated by series Ozymandias who pretend to a control of events that they in reality lack.

Ozymandias image taken from blogspot
Ozymandias image taken from blogspot

The sceptic’s duty is to remind the politician that they don’t know and not to be taken in by the many Ozymandias that dominate parliament, who show their ignorance. Greek sceptics such as Sextus Empiricus were the philosophers who claimed that the philosophies of Plato, Aristotle and Zeno were unsound and did not embody the universal truths their adherents claimed. Rather than trust to a new unproven truth of a philosopher they recommended that the people stick to the tried and tested ways of their ancestors. A contemporary sceptic such as myself would amend the original sceptic philosophy to say that all philosophies and ideologies while not containing within themselves the ‘big answer’ to life and society’s problems, do contain many partial and useful truths. It is the task of the sceptic to suggest methods by which the few partial small truths can be disinterred from the big lies contained within political ideologies and philosophies.

Sextus Empiricus Greek philosopher of scepticism a source of inspiration to the author
Sextus Empiricus Greek philosopher of scepticism a source of inspiration to the author

If the Neo-Liberal or free market philosophy that dominates political discourse really contained the big truth and not the big lie, Neo-Liberal Britain would be a prosperous and happy nation. Instead it is a nation in which there is much social division, great income inequality and much poverty. One ill is the dysfunctional housing market, a market which is making London uninhabitable for middle and low income families. Yet even within this malign philosophy there are valuable truths, which can guide good policy making. One truth is that the government cannot fine tune a complex mechanism such as the market to achieve such ends as full employment without there being adverse consequences, such as increasing inflation pressures in the economy. The big lie of Neo-Liberalism is that because the markets are so complex and incapable of being fully understood by politicians they are best left unregulated, which can result in powerful market players abusing their power to the detriment of others. Powerful players such as the landlord who can exploit their monopoly of the housing stock to force tenants to pay exorbitant rents that can equal half of the tenants income. It is the role of the politician to choose a middle position between over intervention and non-intervention to deliver legislation and policy changes that benefit the community as whole.

In today reform obsessed society it is easier to identity problems with any existing government policy or public service organisation and even easier to suggest reforms. However these reforms are unproven and are usually rushed into operation without any real consideration of their impact on society. What appears to be broken and dysfunctional may be less broken than the reformers suggest and often delivers a better service than the organisation that exists after their reforms.

Perhaps the example of the private finance market most clearly demonstrates this point. The banks and members of the financial services complained that the restrictions under which they operated in the 1950s and 60s hampered them when competing with their international rivals. What the banks complained of bitterly was the way in which the government restricted their ability to create credit (money) , the government would compel banks to limit their mortgage lending to avoid an inflationary increase in house prices. They complained that their foreign rivals were not subject to such restrictions and were able to take business that would have otherwise been that of the British banks, although there was little evidence of this happening then. A more telling example could be found in the Stock Exchange, there was an individual called ‘the government broker’,who dealt exclusively in the buying and selling of government stocks. In the morning he dealt with customers on the phone and in the afternoon he donned a top hat and morning suit and went to the stock exchange were he would conduct government business from his stand. Bankers and other financiers looked at the American financial market with its corporate giants and wanted the same freedom to practise free of regulation. In 1986 the government obliged and removed all restrictions on the financial markets in the so called ‘big bang’. Businesses merged and grew and new mega giants came to dominate the financial world. However this legislative free-for-all had a down side, with no restraints on bad behaviour either legislative or cultural the worst happened. One consequence was one financial crash after another. Lloyds Insurance market which was once the byword in financial probity crashed because of the reckless and sometimes fraudulent behaviour it’s the underwriters. Seemingly sound banks got into trouble over reckless speculation, one of the first to go was National Westminster which lost billions on foolish American purchases. It was only saved by being purchased by the Royal Bank of Scotland. Then there were the series of bank failures in the crash of 2008/9, in which the banks were only saved from collapse by government money and guarantees totalling about 10% of GDP.

What appeared in 1986 to be a cosy gentleman’s club was in fact an efficient financial system that worked, it only fault was that it did not enable its members to earn the mega bucks of the American investment bankers. This market had evolved since the 18th century from coffee houses and financial exchanges and developed a series of working practices that protected and benefitted the customers of the financial sector. The relatively small size of the members of the market meant that the collapse of one did not equate to a financial catastrophe, as it did not as today bring down with it with it the other over indebted giants of the market. When a series of fringe banks crashed in 1973, they were easily absorbed by the larger banks and their customers suffered no real loss. The separation in the Stock Exchange of the role of broker and stock jobber had prevented the manipulation of shares to the detriment of the customer. Now with the merger of the two roles there is frequent evidence of insider trading and share manipulation by the banks which are to the detriment of the customer. There was the infamous Goldman Sachs case in which company emails revealed that the bank had sold ‘crap’ shares to their customers, whose sale benefitted only the Goldman Sachs traders. The overnight scrapping of the old established practices in 1986 which ensured the probity and soundness of the financial markets, created a market in which the reverse is true and which is prone to sudden and catastrophic breakdowns. A market which is so dysfunctional that it can only continue to exist through the continued explicit and implicit guarantees of government support which will compensate all in the event of a crash.

As a sceptic I am tempted to say that all reform is misguided, but that is wrong as society is constantly changing as governments have to adapt policy to changed circumstances. What I as a sceptic say is wrong is the belief that only ‘big bang’ reforms or those starting from ‘ground zero’ assumptions are wrong, it is the nature of reform that is wrong not reform or change itself.

Only if a politician understands the character of the reformer will they be able to judge the value of any proposed reform. All reformers are either ‘missionaries’ or ‘salesmen’ which is why such bad judges of the reforms they suggest. Once that is understood many proposed reforms can be seen as unsound, as they self interested proposals that only benefit the ‘missionary’ who have their sense of being the prophet that saves society from itself confirmed or the salesman who gets a cash benefit from the successful promotion of a reform.

The reforming Neo-Liberal economists are missionaries, they are on a mission to save society. These missionaries will always claim adopting their methods will result in some desired end. In the 1960s they were campaigning for an end to government policies that ensured full employment, they argued that allowing unemployment to increase to its natural level would reduce inflation. In the 1970s they argued for an end to the managed exchange rate system which they claimed would lead to an ending of international financial crises (history soon demonstrated the fallacy of this claim). Then in the 1980s that introducing the free market into the public services would reduce their cost and improve their effectiveness (as a rail user I and many others would dispute this claim). I compare them to the Jehovah’s Witnesses, who claim that only by adopting your religion will you get to heaven, the Jehovah Witnesses among the political reformers claim that only by adopting their practice and method will the best of all possible societies be attained. What they also have in common is that both their claims are faith and not evidence based.

The best example of the salesman type of reformer are the financiers of the City of London who argued successfully for the removal of all restrictions from the financial services. They as with the successful salesman gained an increase in income from the sale of their ideas. Obviously salesman are most frequent type amongst the financiers who recommend the privatisation of various government services. These financiers will gain from the consultancy fees from advising on the sale of a public service or as in the case of Royal Mail from handling the resale of its assets. (The financial advisors were guaranteed a proportion of shares in the newly privatised Royal Mail at a price they suggested. They were then able to sell the shares they had acquired at a much higher price making a large profit.)

From the viewpoint of this sceptical economist all proposers of reform should be regarded with extreme scepticism. Those reforms proposed by the missionary or the salesman are particularly suspect.The motives of any reformer should be treated with scepticism as it is more than likely the proposed reform includes a strong element of self interest.

One final word of advice the reforms that a politician proposes to introduce will inevitably be wrong, in that it will disadvantage one group in society. The role of the politician is to choose the least wrong of all possible options, the one that will wreak the least damage on society. Hopefully the reform may even produce more benefits than injuries, although recent policy measures in Britain have tended to damage rather than mend the social fabric.