The magic money tree does exist, according to modern monetary theory

Youssef El-Gingihy in The Independent


After seven years of austerity, we are accustomed to thinking of the economy as a household with the nation’s credit card maxed out, to paraphrase David Cameron. The fetishisation of debt translated into massive cuts to UK spending on public services. At the same time, there remains widespread public anger that the big banks continued to make record profits and bonuses in spite of George Osborne’s assurances that we would all be in it together.

That was then though. Both Cameron and Osborne have since departed. This year, the political climate turned on its axis. The Conservative majority of 2015 gave way to a hung parliament with 40 per cent of voters opting for Corbyn’s Labour. The electorate’s acceptance of austerity mantras had evidently reached its limit.

Against this backdrop, the publication of Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal Worldcould not be more timely. It is written by 65-year-old Australian heterodox economist William Mitchell and the journalist and author Thomas Fazi. The book’s introduction is topically titled “Make the Left Great Again”; a sentiment that will no doubt chime with many progressives.

It diagnoses that neoliberalism was not just a right-wing Thatcherite-Reaganite prospectus. The centre-left, as embodied by Mitterrand’s socialists in France, Blair’s New Labour and the Democratic Party in the US, was complicit in its imposition. This consensus culminated in the decimation of manufacturing, decline of union membership, the expansion of financial services, wage flattening, falling living standards and the privatisation of public services. At the heart of neoliberalism was the assertion that the free market is the supreme arbiter with the economy managed by technocratic expertise. The flip side of this depoliticisation resulted in ordinary people becoming alienated and disillusioned with the social democratic parties that formerly represented them. Instead they turned to anti-establishment (usually hard right) parties.

Margaret Thatcher and Tony Blair both knelt at the altar of neoliberalism (AFP/Getty)

Furthermore, Mitchell and Fazi point out that the notion that neoliberalism is anti-state is a misconception. In fact, the state has been essential to the neoliberal project as became evident in the aftermath of the 2008 financial crisis. The state is not only required to bail out corporations and banks but to create new markets and in an authoritarian mould to police its citizens. However, Mitchell and Fazi intend to reclaim national sovereignty as part of a 21st century progressive vision. This is where modern monetary theory (MMT) comes in.

Bill Mitchell is one of its key proponents. MMT is one of those Alice in Wonderland, down the wormhole kind of concepts that neutralises every received wisdom – from that childhood conversation when your father sat you down to explain banks using saving deposits to invest in other businesses right up to politicians telling us that the UK is broke. In other words, prepare to be blown away and forget what you think you knew about money.

MMT essentially proposes that money is created ex nihilo or out of nothing. Whether it is private banks, central banks or governments, money is an abstract concept of ones and zeros. Thus, when your bank lends you a mortgage, it essentially creates money by typing it up on a computer. Similarly, the government has the power to create “fiat money” – that is money established by government regulation or law as opposed to currencies with intrinsic value, such as gold.

In effect, the usual dictum of “tax and spend” is inverted to “spend and tax” with spending stimulating jobs and growth, which can later be taxed. Taxation is not therefore a way of raising revenue but a tool for either controlling the money supply or shaping policy through incentives. Of course, it is much more complicated than that as certain conditions must be met. Public spending cannot be unlimited and must be commensurate to the capacity of the economy amongst other things in order to avoid hyper-inflation.

Ecomomist William Mitchell argues that the notion that neoliberalism is anti-state is a misconception

Both authors have been on a global book tour taking in the US and Europe. In London, Mitchell and Fazi gave their talk at the Newington Green Unitarian Church – one of Britain’s oldest nonconformist churches. Mary Wollstonecraft was the most famous member of its congregation and was inspired by the sermons of the radical minister Dr Richard Price in her thinking on the new French republic and the rights of women.

The setting is certainly suitable for the preaching of a heretical doctrine. In fact, I am reminded that it is the 500th anniversary of Martin Luther pinning his 95 theses to the door of a Wittgenstein church. The parallels are hard to overlook; then as now Europe was in crisis with Britain exiting the established order.

Huddled on a church pew for the interview, I ask Mitchell what exactly is MMT? He answers that it is “a lens through which we can understand the monetary system”. Remarkably, the elemental question – where does money come from? – does not have a settled answer amongst economists, experts and policy makers. Organisations such as Positive Money have already embarked on the process of demystifying money creation. I am reminded of the chapter “The Great Money Trick” in Robert Tressell’s The Ragged-Trousered Philanthropists in which loaves of bread are used to illustrate how the concept of money and surplus value (profit) guarantees perpetual penury for the working class and concentration of wealth for the ruling class.

So how might all of this play out post-Brexit? Mitchell and Fazi seem to be making the progressive argument for Brexit (nicknamed Lexit). This is in keeping with the old-left position that the EU does not represent genuine international solidarity. They acknowledge that it is difficult to make progressive arguments for sovereignty as nationalism has been condemned to a default reactionary position.

John McDonnell and Jeremy Corbyn have pledged to take private finance initiative contracts back into public hands, but how would financing of infrastructure work under a Corbyn government? (Getty)

Yet polling demonstrates that sovereignty was the most common reason for people voting Brexit. Mitchell and Fazi reformulate a progressive definition of sovereignty as having democratic control over the economy rather than simply within ethno-nationalist parameters. According to Mitchell, sovereignty is absolutely fundamental in order for countries to exercise power over their money creation. As long as a country has its own central bank and currency then it is free to spend. While Greece, bound by the constraints of the European Central Bank and the euro, does not have this freedom. After the talk, Mitchell tells me that sovereignty entails having a currency issuing monopoly: “The reality is that national governments are the monopoly issuers of their own currency.”

Mitchell also debunks the idea that governments borrow money from international markets and with it the notion that they are hostage to the market. He has recently written a blog on how Corbyn should not be afraid of global markets. Mitchell cites the 2001 Argentinian debt default as demonstrating that a country can get away with it and recover. Similarly, Iceland imposed capital controls (measures to regulate capital flows in and out of a country) in order to steer the economy through rough waters after its banking system crashed.

In the same vein, Mitchell proposes that governments do not use bonds and gilts to raise revenue. He cites a previous Australian Conservative administration issuing debt when they were running surpluses as an example of the use of bonds as corporate welfare thus “exposing the game”.

At the recent Labour conference, Shadow Chancellor John McDonnell stated that Labour would take private finance initiative (PFI) contracts back into public hands. So how would financing of infrastructure work under a Corbyn government? At the start of the year, this question might have appeared absurd yet only this month The New York Times published an op-ed piece titled “Get ready for Prime Minister Corbyn”.

Milton Friedman said money supply must be controlled in order to limit inflation, so government debt must be prioritised

Here is where quantitative easing (QE) comes in. QE was intended to stimulate bank lending in the aftermath of the financial crisis. However, growth levels have remained stagnant in Britain and Europe. In reality, the banks simply said thank you for the free lunch and used QE to restore their balance sheets. Studies have shown that much of QE ended up contributing to stock market and property bubbles.

Economist Richard Murphy – whose work has focused on tax avoidance and the offshore world – proposed what came to be termed “people’s QE”. For a while, this was a central tenet of the Corbynomics programme. Murphy’s basic idea was that if QE could be used for the banking system, then why not use it to build new homes or create climate jobs? As long as sufficient value was created then the nemesis of hyper-inflation could be avoided.

It therefore appears that Theresa May’s oft-repeated refrain attacking Corbyn on the grounds that there is no such thing as a magic money tree is not exactly true. So if money can basically be created with the press of a button, then suddenly our world appears to be (pacePanglossian disciples) the craziest of all possible worlds.

At this point, you might understandably be asking why on earth we do not just spend our way out of the current mess. And while we are it – give the NHS more money, shelter the homeless and feed the poor of the world. This is where we come up against the ideological edifice of neoliberalism.

Monetarist doctrine states – as per the Chicago School’s Milton Friedman – that the money supply must be controlled in order to limit inflation. Thus, government debt must be prioritised. The Maastricht treaty, which founded the EU, stipulated limits on public spending. Greece is the textbook example of austerity in which debt repayments are prioritised in order to appease creditors (mainly banking institutions).

Banks used quantitative easing to restore their balance sheets (Getty)

However, even mainstream economists feel that the logic of austerity is somewhat fallacious. Keynesian economics posits that public spending stimulates growth with debt as a secondary consideration. As the New Economics Foundation think tank points out, Britain has historically seen much higher levels of public debt. The debt/GDP ratio was higher during a whole century between 1750 and 1850 (at the time of the Napoleonic wars and the height of Britain’s imperial glory) as well as in the aftermath of the Second World War when the welfare state was created.

While a landmark 2014 study demonstrated that the UK coalition government’s welfare changes enabled tax cuts for the wealthiest thus cancelling out any impact on the deficit. Former Greek finance minister Yanis Varoufakis has also argued that the austerity strategy applied to Greek debt has been extremely counterproductive. The combination of bailouts with cuts has depressed the economy resulting in an increase of the debt (as a percentage of GDP).

The ascendancy of neoliberalism was such that its ideology became an all-pervasive atmosphere. During the event, Mitchell asks how many in the audience have heard of the Powell memorandum. Only a couple of hands go up. Lewis Powell was an American lawyer – later appointed as a Supreme Court justice by Richard Nixon – now indelibly associated with his eponymous 1971 memorandum. This outlined a blueprint for the American conservative movement and the network of think tanks funded by business interests. It recommended that the business class should close ranks in order to present a united front. It also stipulated that lobbyists would be needed to influence policy makers and legislators. And it suggested that infiltration of the media and academia would be necessary in order to achieve the goals of unshackling free enterprise from government interference.

So what would happen if governments followed through on the logic of MMT? Well for a start the Goldman Sachs, JPMorgans and HSBCs of this world would not be as rich or powerful and in the worst-case scenario they might even cease to have any purpose. A recent comprehensive survey from the pro-market Legatum Institute confirms that significant majorities of the British public are in favour of renationalisation of utilities and railways. The public is equally split on nationalisation of the banks with 50 per cent in favour. Corbyn and McDonnell have proposed a national investment bank with a network of regional banks in order to help rebalance the economy and encourage lending.

Whether or not one accepts MMT, it is increasingly apparent that public and democratic oversight of finance and money is becoming a central pillar of progressive postcapitalism alongside public control of public services, a green economy, full automation and the four-day week.

This Cruel Austerity Experiment has Failed

The facts are clear. This cruel austerity experiment has failed

While the human cost of economic stupidity is all too visible, the world's leaders are paralysed by their dogma

• 
• • Will Hutton
  • guardian.co.uk, Saturday 2 June 2012 21.00 BST

A woman receives a free meal from a soup kitchen organised by a Greek humanitarian group in Athens’ main Syntagma Square. Photograph: Kostas Tsironis/AP

Last week was an awesome warning of where go-it-alone austerity can lead. It produced some brutal evidence of where we end up when we place finance above economy and society. The markets are now betting not just on the break-up of the euro but on the arrival of a new economic dark age. The world economy is edging nearer to the abyss, and policymakers, none more than in Britain, are paralysed by the stupidities of their home-spun economics. Yanis Varoufakis, ex-speechwriter for former Greek prime minister George Papandreou and now an economics professor in the US, said last week: "There is precisely zero chance of austerity working. It is the same as thinking you can escape from gravity by waving your arms up and down."

It could hardly be more sobering. Money has flooded out of Spain, Greece and the peripheral European economies. Signs of the crisis range from Athen's soup kitchens to Spain's crowds of indignados protesting in the streets against austerity and a broken capitalism. Youth unemployment is sky-high. Less visible is the avalanche of money flowing into hoped-for safe havens in the US, Germany and even Britain. The last time the British government could sell government bonds at interest rates as low as today's was in the early 1700s.

George Osborne and his acolytes proclaim this as a triumph of the government's economic policies. They are gravely mistaken. Rather it portends fears that the international economic order may collapse because if so many countries are simultaneously pursuing austerity, where's growth to come from?

Virtually everywhere you look there are signs of a weakening world economy. At home, manufacturing suffered its biggest plunge for three years, and this in an economy already suffering its longest depression since the 19th century. American jobs growth is petering out. Unemployment in Europe averages 11%. Even China witnessed a sharp fall away in factory activity in May.

Yet none of this should be a surprise. We live in the aftermath of one of the biggest financial and intellectual mistakes ever made. For a generation the world, with the London/New York financial axis at its heart, surrendered to the specious theory that lending and financial contracts could grow many times faster than the underlying economy. There was a blind belief that in a free market banks could not make mistakes. Free markets didn't make mistakes – only clumsy bureaucratic states made economic mistakes. Or so they said. Financial alchemists, guided by the maxims of free market fundamentalism, could make no such errors.

Except that they did. The result was the financial crisis of 2008. Had governments not underwritten their overstretched banks with trillions of dollars, euros and pounds, an even worse global slump would have ensued. But while the banks could continue trading, the hundreds of trillions of loans and financial contracts they had made did not go away.

And because governments had guaranteed their deposits, as in Ireland, or had to inject capital into them as Spain has been doing all last week, this private bank debt has steadily become public debt. Here is a classic case where all the gains were privatised, and all the losses were socialised. It was the much-maligned state that had to step in and clear up the mess left behind by the private sector. The free market wasn't so free after all – in fact it proved astonishingly expensive for the public purse. People across Europe still pay the price.

This is no solution. Overstretched banks have become more cautious about lending new cash; and even strong banks are caught up in the backwash because if they step into the breach they could fall into a vortex of falling property prices and declining economic activity, becoming weak in turn. So as banks stand aside from their crucial function of generating credit, governments and central banks must step in to generate the demand that has now disappeared.

But they have not done so to a sufficient degree. Part of the problem is that the more bank debt that governments guarantee, the less room for manoeuvre they feel they have – especially as their stagnating economies forces up welfare spending and depresses tax revenues.

But the larger problem is intellectual. The dominant ideology of the day – from the same roots that delivered the crisis – forbids it. A consensus stretching from US Republicans through to Angela Merkel's Christian Democrats via George Osborne's Treasury continues to claim that the state is the source of economic bad. The state threatens enterprise, invites damaging taxation, and is the root cause of spreading inflation. The state must balance the books just as the private sector must.

This is not just an economic but a moral necessity, they argue. Living within one's means rather than "maxing" out on debt appeals to American, British and German individualistic Protestantism. Inflation is even more a sign of moral degradation: it means reneging on promises, rewarding spendthrifts and penalising savers. We had the good years. Now we must take our medicine. The public and private sectors must retrench simultaneously worldwide. Enterprise and free markets will do the rest. The "march of the makers" will step in to fill the void left by public austerity measures.

This is a first-order moral and economic mistake. Human beings need each other for mutual support. In economic terms this means that no individual, either as a person or a company, can manage existential risk by themselves. That risk needs to be shared and mitigated otherwise the risk is not accepted. There would be no enterprise or innovation – the risks of failure too great. That is why there is a role for both private and public sectors. It is governments who provide the means through which we express our social obligations and pool our risks.

This is the heart of Keynesian economics – a different set of moral and economic propositions than those which prevail. Today we can see an almost laboratory experiment on a global scale of why Keynes was right and his detractors wrong. There is no doubt what Keynes would advocate now: a government-sponsored increase in demand co-ordinated across as many countries as possible and an acceptance of a temporary but closely managed increase in inflation to reduce the real value of debt.
The enormous legacy of private debt – whether in Britain, Germany, Spain, the US or Greece – and the fiendishly complicated way so many of the loans have been organised and distributed around the world financial system cannot be easily unwound. Sir Philip Hampton, chair of RBS, warned this week it might take a generation for RBS investors to recover their money.

The choice is thus stark. To commit to decades of economic stagnation, the break-up of the eurozone, the risk of trade protection and autarchic economic policies, the dismantling of the west's social contracts, the imposition of high unemployment and the political fallout that will follow.

Or to change course.

The technical means are relatively simple. Governments must replace targets for inflation with targets for the growth of prices and growth of output combined. Central banks should inject money into their financial systems by offering to buy new bank loans made to support new investment, new innovation or new infrastructure – helped by partial government guarantees.

Governments also need to increase demand. They can do this directly – with targeted and time-limited tax cuts or spending increases. They can also move indirectly, taxing the rich more aggressively and re-allocating the proceeds in tax cuts to those on middle incomes and lower who tend to spend more – along the lines that both presidents Obama and Hollande have proposed. There is also a case for a financial transactions tax – both to raise crucial revenue and to cap the growth and frenetic speed of financial transactions. Finance has become too powerful. It needs constraining.

Will any of this happen? The west is at a cross-roads, and although such proposals will be fiercely opposed by the British, German and American right they need to be beaten back. After all, it is their ideas that have brought us to this pass. It is not too fanciful to argue that the future of western capitalism depends upon how this argument plays out – and how quickly, if at all, there is a change of course.

The European Crisis

By Pepe Escobar

History will register his plane struck by lightning on the way to Berlin, no fancy kisses, and asparagus with veal schnitzel on the menu. This is the way the eurozone ends (or begins again); not with a bang, but a ... lightning strike. Merkollande - the new European power couple drama interpreted by French Socialist President Francois Hollande and German Christian Democrat Chancellor Angela Merkel - is a go.

Trillions of bytes already speculate whether former President Nicolas Sarkozy spilled the full beans about "Onshela" to Hollande - apart from the fact she fancies her glass of Bordeaux. King Sarko also had a knack for making stiff "Onshela" laugh. That may be a tall order, at least for now, for the sober and pragmatic Hollande.

The good omen may be that both do not eschew irony. In the middle of such a eurozone storm, that's a mighty redeeming quality. Then there's that lightning strike on the way to Berlin. Was it Zeus sending a message that his Greeks would have to be protected - or else? Not to mention that Europe is a Greek myth (Zeus made Europa, the beautiful daughter of a Phoenician king, his lover…)

About that German miracle

So now Merkollande has to show results. There's not much they're bound to agree on - apart from the possibility of a financial transaction tax (FTT) which could yield up to 57 billion euros (US$72.5 billion) a year to battered trans-European economies, according to the European Commission (EC).

Berlin is not exactly against it. But Britain, for obvious reasons, is - seeing it as curbing the City of London. The EC, applying some fancy models, has already concluded that a FTT would not be a burden on economic growth; that would represent only 0.2% in total by 2050.

Two members of the troika - the EC and the International Monetary Fund (but not yet the European Central Bank) - along most governments in the EU, now at least admit that some countries, such as Spain, will need more time to reduce their deficits. An FTT in this case would come out handy.

At home, "Onshela" is secure her austerity mantra is popular (61%, according to the latest polls). Yet she lost another regional election last weekend, in heavily urbanized Nordrheim-Westfalen, the fourth largest urban concentration in Europe after London, Paris and Moscow - now suffering from deindustrialization and high unemployment. And this after losing in rural Schlewig-Holstein, near the Danish border.

What's fascinating is that all this had nothing to do with Europe - and the messy fate of the eurozone with the strong possibility of Greece leaving the euro. German voters couldn't give a damn. They are first and foremost worried about their own eroding purchasing power.

So for the first time the Supreme Taliban of austerity, German Finance Minister Wolfgang Schauble, has admitted in public that a general wage freeze - one of the pillars of the new, neo-liberal "German miracle" - should be revised. Even the Financial Times has admitted that consumption in Germany is "anemic". Schauble now says that wage increases might help.

The heart of the matter is that whatever "German miracle" is good for Germany's robust banking and financial system, is not good for a vast majority of its workers. Plus this neo-liberal miracle simply can't be sold anywhere else in the world.

German weekly Der Spiegel did its best to show why [1].

The heart of the "miracle" is - predictably - the deregulation of the jobs market, always against the interests of workers. That implies a tsunami of part time jobs, "non traditional contracts" and sub-contracting. This means masses of workers not eligible for bonuses or participation in profits - coupled with a reduction in retirement payments and pensions. The graphic consequence has been Germany as the current European champion of rising inequality.

Who's in charge here?

It's wishful thinking to imagine some German politician seeing the light, Blues Brothers-style, and suddenly preaching a true European political integration. German regional politics is directly linked to the banking industry - the same banks which had a ball speculating on securities all across Europe, especially in the Club Med countries.

Blaming the eurozone abyss on the irresponsible acts of selected European nations, on their mounting public debt, and even their pensioners, is perverse. The real cause is the ferocious deregulation of the financial system and the worshipping of the God of monetarism. The absolute majority of European political leaders do not have a clue about basic economics. They have been at the mercy of technocrats who could not give a damn about the social and political consequences of their actions.

But now the technocrats are finally freaking out because if Greece, for instance, nationalizes its banks, the Spanish and French financial systems will go bust, and Germany's will be in deep trouble. Once more this is a graphic illustration of how countries across Europe are - in the public as well as the private sector - totally dependent on the financial system of other countries.

The Masters of the Universe in Europe are actually the Institute of International Finance (IIF) [2] a lobby representing the 450 largest world banks. They get a privileged seat on every significant euro-summit. The proverbial EU and IMF "officials" actually ask the Masters how much a country - as in Greece - should pay to get itself out of trouble. Europe's commissioner for economic affairs, Olli Rehn, is a certified servant of the Masters. Obviously the EU leadership will never admit it is in fact controlled by a cartel of bankers.

One currency, 17 debts

It's hard to believe Merkollande can find a way out of this financial labyrinth. We are facing the uber-surrealist situation of a single currency with 17 different public debts - over which the frenzied "markets" can merrily speculate while individual states cannot fight back, for instance by devaluing their currency. It's this set up that has plunged Greece into the abyss - and may do the same with the euro.

Thomas Piketty, a professor of the Paris School of Economics, dreams that Hollande might become the European Roosevelt. That may be as unlikely as Prometheus getting rid of his burden. But at least Piketty identifies the problem; imagine if the Fed everyday had to choose between Texas debt or Wyoming debt - it would never be able to conduct a sound monetary policy (not that it actually does…)

That explains why the European Central Bank cannot possibly be a factor of financial stability. Meanwhile, Europe is left wallowing in the mire of loaning buckets of euros to banks, hoping they will loan them back to individual states; or loaning the money to the IMF, hoping they will do the same.

Into this quagmire comes Hollande with an economic Hellfire missile; he says that instead of loaning at 1% so the banks make a killing loaning to individual states at a much higher rate, the ECB should deal directly with European nations. He wants the FTT - now. And the wants the European Investment Bank to extend credit to companies. And he wants euro-bonuses to finance infrastructure works.

"Onshela" is bound to give him a firm "nein" on all this - except, maybe, the FTT. Because this all implies that these debts are part of a common European debt. That would be, according to Hollande's vision, a conception of Europe true to its construction - less technocratic, less hostage of the God of the market, less constrained by the dogmas of the financial system. Will Merkollande pull it off? Ask "Onshela".

Note:
1. See The High Cost of Germany's Economic Success, Der Spiegel, May 4, 2012.
2. - See here

Pepe Escobar is the author of Globalistan: How the Globalized World is Dissolving into Liquid War (Nimble Books, 2007) and Red Zone Blues: a snapshot of Baghdad during the surge. His new book, just out, is Obama does Globalistan (Nimble Books, 2009).

The Bradford Spring

This was Bradford's version of the riots

Bradford's peaceful democratic uprising that elected me comes from the wellspring of discontent that swept Britain last summer

• 
• • George Galloway
  • guardian.co.uk, Friday 30 March 2012 18.08 BST

George Galloway addresses the media after winning the Bradford West byelection. Photograph: Andrew Yates/AFP/Getty Images

The Bradford spring. No matter how seemingly powerful, no corrupted, out-of-touch elite can last forever. The people of Bradford West have spoken, and politics in the city and in this country will never be the same again. Anyone who took part in this historic campaign, or who observed it dispassionately, knew by last weekend that something spectacular was going to take place.

A 5,000 Labour majority was transformed into a 10,000 majority for Respect – the same total vote for me as the outgoing MP had in a general election – winning across every ward in the constituency. It was the most spectacular byelection result in British political history.

The word revolution was on many lips in this deprived and hitherto disenfranchised city well before Friday morning's result. And, like the Arab revolutions, this is a movement, above all, of the young. Bradford has a young population. By 2020 half the population will be under 25. They have grown up in the years when Tony Blair and his successors murdered the real Labour tradition, taking for granted the loyalty of working people – nowhere more so than in this city, where the precursor to the Labour party, the Independent Labour party, was founded in 1893.

A rotten combination of complacency, incompetence, opportunism and rule by clique has presided over Bradford's decline. It was going down even during the 13 years of New Labour government, which included the richest decade in British history. Now it is in danger of sinking under the sado-monetarist austerity of the Con-Dem coalition.

Labour's opposition in parliament is feeble to the point of paralysis, because so many share so much of the grim orthodoxy that has plunged the world into the great recession.

This, and the continuing support of all three old parties for war and occupation abroad, has created a chasm between the political class and so many working people, especially the generation that faces a future of extortionate tuition fees, a privatised NHS, mass unemployment – and, for those who find work, an ever diminishing pension and a rising retirement age. So, while support came from all quarters in this election, it was young people who moved first and created a critical mass, which drew around it ever wider layers until it became unstoppable.

Many had never voted before, including in their 40s. As hundreds of them threw themselves into the campaign, those who remembered what a real party of labour should look like could see it forming before their eyes and they too moved. Among them were activists who had held the labour movement together through the dog years of Thatcherism.

Mass face-to-face campaigning was combined with the tools of this century – Facebook, YouTube, Twitter, mass texting, bespoke apps – all run by the generation for which they are as familiar as a printed political leaflet once was. Every night, and late into the night, hundreds gathered at our headquarters provided by Chambers solicitors to rally, plan and organise on and offline.

This peaceful, democratic uprising comes from the same wellspring of discontent and alienation that fuelled disturbances in British cities last summer. But it is a positive counterpoint – bringing forth a new generation of political leaders, not another cohort trapped in the criminal justice system. Every politician should take notice, as they did not last summer.

Labour, above all, should learn this rude lesson. It cannot continue on the disastrous path set by Tony Blair, of war and occupation abroad and inequality at home. That's what lay behind the loss of a "safe seat", held for 38 years, just as the party lost London's East End in 2005.

The real Labour values I stood for in this election swept the Tories and Lib Dems away, and swept into every part of the constituency – including those areas where some voters, only a few years ago, had succumbed to the siren calls of the racists and fascists.

The media, especially the London media, should also smell the coffee. Something is happening in this country outside of the echo chamber. The council elections take place in May in many parts of the country: prepare for more shocks to come as people find their voices at the ballot box and in mass, democratic opposition to an elite that is failing them.

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George Galloway: The political rebel with a cause

Indefatigable in the pursuit of his causes, formidable in taking on his many opponents, he has ridden the political roller coaster for 25 years. And now he’s back as an MP after a sensational by-election victory

Andy McSmithin The Independent

Saturday, 31 March 2012

There is no one in politics who can whip up a crowd quite like George Galloway can. Nor are there many with his special talent for falling out with political allies. His is a long political biography, which had lurched from controversy to controversy, and has seen a series of setbacks any one of which would have finished off a less resilient character. Somehow whenever the world of politics thinks they have seen the last of "Gorgeous George", he bounces back.

Bradford West is now the fourth constituency to have George Galloway for its MP – itself an unusual record in modern politics. There is a cruel saying in Westminster that no one is more "ex" than an ex-MP. Galloway was expected to take on that unwanted status after being expelled from the Labour Party in 2003, but made an extraordinary comeback at the 2005 general election as MP for the hastily formed Respect party in Bethnal Green and Bow.

In 2010, Labour jubilantly saw him off when he ran against Jim Fitzpatrick in Poplar and Limehouse, and again expected him to vanish from the scene. Even on Thursday evening, after voting in Bradford West was almost over, Labour officials were quite sure that they had held the seat, though they acknowledged that Galloway had made an impact and expected him to come second.

Instead, after Easter, Galloway will return to Parliament, where he first made a mark 25 years ago. In the 1987 general election, he reclaimed Glasgow Hillhead, which the Labour Party had lost in a by-election in 1981 to Roy Jenkins, leader of the SDP. Most new MPs have to wait years before they make the front pages of the national press. Galloway achieved national fame straight away – but not in a good way.

As early as 1981, newspapers had started taking an interest in this political prodigy who described himself as having been "born in an attic in a slum tenement in the Irish quarter of Dundee, which is known as Tipperary". He had joined Labour's Young Socialists at 13, and was still in his teens when, remarkably, he was made secretary of the Dundee Labour Party. At 20, he was a member of the Scottish Labour Executive, and at 22 was Dundee's youngest councillor, despite being denounced by a local priest for "living in sin" with his future wife, Elaine. By 1981, he was one of the most articulate voices in Scotland of what was then known as the Bennite left, and before he was 30, he was general secretary of a major charity, War on Want.

At first, the charity thrived from having this dynamic, gifted, politically astute young boss. He improved its political connections and, when aid to the Horn of Africa increased dramatically in the wake of the Live Aid concert, he made War on Want the lead charity in channelling aid to the war-torn Eritrean and Tigris provinces of Ethiopia.

But towards the end of his time there, word began to spread that there was another, less attractive side to this charismatic figure. The Sunday Mirror carried damaging allegations of how Galloway had been conducting himself, written by Alastair Campbell. Just after his election to Parliament, Galloway called what was to be his last press conference as head of War on Want and, under persistent questioning from journalists, admitted that he had had sexual relations with two women during a conference in Athens in 1985 – a revelation that earned him the nickname "Gorgeous George".

"My wife won't leave me," he predicted. Actually, the relationship was soon over. Four years later, Galloway met the Palestinian-born biologist Amineh Abu-Zayyad. They married in a civil ceremony in 2000, but she divorced him in January 2009, citing his relations with other women. By then Galloway had a one-year-old son by his Lebanese researcher Rima Husseini.

Galloway's commitment to the Arab cause dates back at least 30 years, when he was instrumental in the unusual decision to "twin" Dundee with the Palestinian town of Nablus. After the first Gulf war, he began a campaign to end British sanctions against Iraq, which would bring him further attention. In 1994, he visited Baghdad and was filmed telling Saddam Hussein: "Sir, I salute your courage, your strength, your indefatigability."

Four years later, he set up the Mariam Appeal, named after a four-year-old Iraqi girl, Mariam Hamza, whom Galloway arranged to bring to Glasgow to be treated for leukaemia. The appeal, which paid for a number of Galloway's overseas trips, was never registered as a charity. Nonetheless, the Charities Commission looked into it after it was wound up in 2003, and again in 2007.

The second time around, the commission alleged that £230,000 out of the £1.4m raised by the appeal came from "improper" sources, via Iraq's food for oil programme. Galloway, who has never been coy in his own defence, described the commission's findings as "palpably false".

The Daily Telegraph thought it had Galloway bang to rights when, in the ruins of Baghdad's foreign ministry building, it found a document that referred to what were alleged to be payments to the MP, measured in barrels of oil. It has never been disputed that the document itself was genuine. However, the Telegraph read too much into its find, and ran an editorial implicitly accused Galloway of treason, for which he was later awarded £150,000 in libel damages.

Though he was by no means the only Labour MP to be opposed to the Iraq war, nor the most important, Galloway was the only one expelled from the Labour Party. With his usual love of a resounding phrase, he described George Bush and Tony Blair as "wolves" and, in Labour's views, had incited foreign armies to fight against British troops.

After his expulsion, he remained an independent MP for Glasgow Kelvin and joined forces with the Socialist Workers Party and others to create the Respect Party.

When Galloway took Bethnal Green and Bow by 823 votes, in an abrasive, bad-tempered race against Labour's Oona King, it was the first time since 1951 that a party avowedly left of the Labour Party had won a seat in the Commons. The east London seat, like Bradford West, had a high proportion of young Muslims who admired Galloway's opposition to the Iraq war.

His five years as a Respect MP were marked by two highly publicised appearances in places where British MPs are not normally to be found. In May 2005, he went to Washington to confront a Senate sub committee which had accused him of profiting from Iraqi oil. The senators were accustomed to dealing with witnesses who treated Congress with reverence, and were completely at a loss in the face of Galloway's abrasive way of using attack as the best form of defence.

In 2006, Galloway went on Celebrity Big Brother, under the illusion that it would allow him to relay his political views to the show's vast audience. Actually, most of his political remarks were cut out, and all that most viewers recalled was his bizarre impersonation of a cat.

Another high-profile appearance was his public debates with the writer Christopher Hitchens, who said of Galloway: "He looks so much like what he is: a thug and a demagogue, the type of working-class-wideboy-and-proud-of-it who is too used to the expenses account, the cars and the hotels – all cigars and back-slapping. He is a very cheap character and a short-arse." Galloway was equally insulting in return.

The Respect Party split apart when Galloway fell out with the SWP. When Galloway failed to be re-elected to the Commons in 2010, it looked as if Respect was heading for terminal decline, and that there was no future for George Galloway except as a star of the Iranian-owned Press TV and one of the last people in the UK to offer a qualified defence of the regime in Syria.

When he announced that he was running in Bradford West, it appeared to be a desperate attempt by a half-forgotten man to draw attention to himself. Almost the only people to spot what was actually happening were punters who bet so heavily on a Galloway victory that the bookies are saying the result is costing them £100,000. George Galloway is back on the scene.

A life in brief
Born: 16 August 1954, Dundee.
Family: His father was a Scottish trade unionist. Twice divorced, since 2006, Galloway has been married to Rima Husseini with whom has a son. Has a daughter from his first marriage.
Education: Harris Academy, Dundee.
Career: Elected MP for Glasgow Hillhead in 1987. Expelled from the Labour Party in 2003 over his stance on Iraq, and the following year co-founded the Respect Party. Won Bethnal Green in 2005 election, but at the 2010 election lost out in Poplar and Limehouse. This week he won Bradford West.
He says: “By the grace of God we have won the most sensational victory in British political history.”
They say: “He looks so much like what he is: a thug and a demagogue.” Christopher Hitchens

----

by Tariq Ali


George Galloway's stunning electoral triumph in the Bradford by-election has shaken the petrified world of English politics. It was unexpected, and for that reason the Respect campaign was treated by much of the media (Helen Pidd of the Guardian being an honourable exception) as a loony fringe show. A BBC toady, an obviously partisan compere on a local TV election show, who tried to mock and insult Galloway, should be made to eat his excremental words. The Bradford seat, a Labour fiefdom since 1973, was considered safe and the Labour leader, Ed Miliband, had been planning a celebratory visit to the city till the news seeped through at 2 am. He is now once again focused on his own future. Labour has paid the price for its failure to act as an opposition, having imagined that all it had to do was wait and the prize would come its way. Scottish politics should have forced a rethink. Perhaps the latest development in English politics now will, though I doubt it. Galloway has effectively urinated on all three parties. The Lib Dems and Tories explain their decline by the fact that too many people voted!

Thousands of young people infected with apathy, contempt, despair and a disgust with mainstream politics were dynamised by the Respect campaign. Galloway is tireless on these occasions. Nobody else in the political field comes even close to competing with him – not simply because he is an effective orator, though this skill should not be underestimated. It comes almost as a shock these days to a generation used to the bland untruths that are mouthed every day by government and opposition politicians. It was the political content of the campaign that galvanised the youth: Respect campaigners and their candidate stressed the disasters of Iraq and Afghanistan. Galloway demanded that Blair be tried as a war criminal, and that British troops be withdrawn from Afghanistan without further delay. He lambasted the Government and the Labour party for the austerity measures targeting the less well off, the poor and the infirm, and the new privatisations of education, health and the Post Office. It was all this that gave him a majority of 10,000.

How did we get here? Following the collapse of communism in 1991, Edmund Burke's notion that "In all societies, consisting of different classes, certain classes must necessarily be uppermost," and that "The apostles of equality only change and pervert the natural order of things," became the commonsense wisdom of the age. Money corrupted politics, and big money corrupted it absolutely. Throughout the heartlands of capital, we witnessed the emergence of effective coalitions: as ever, the Republicans and Democrats in the United States; New Labour and Tories in the vassal state of Britain; socialists and conservatives in France; the German coalitions of one variety or another, with the greens differentiating themselves largely as ultra-Atlanticists; and the Scandinavian centre-right and centre-left with few differences, competing in cravenness before the empire. In virtually every case the two- or three-party system morphed into an effective national government. A new market extremism came into play. The entry of capital into the most hallowed domains of social provision was regarded as a necessary reform. Private financial initiatives that punished the public sector became the norm and countries (such as France and Germany) that were seen as not proceeding fast enough in the direction of the neoliberal paradise were regularly denounced in the Economist and the Financial Times.

To question this turn, to defend the public sector, to argue in favour of state ownership of utilities or to challenge the fire sale of public housing was to be regarded as a dinosaur.

British politics has been governed by the consensus established by Margaret Thatcher during the locust decades of the 80s and 90s, since New Labour accepted the basic tenets of Thatcherism (its model was the New Democrats' embrace of Reaganism). Those were the roots of the extreme centre, which encompasses both centre-left and centre-right and exercises power, promoting austerity measures that privilege the wealthy, and backing wars and occupations abroad. President Obama is far from isolated within the Euro-American political sphere. New movements are now springing up at home, challenging political orthodoxies without offering one of their own. They're little more than a scream for help.

Respect is different. It puts forward a leftist social-democratic programme that challenges the status quo and is loud in its condemnation of imperial misdeeds. In other words, it is not frightened by politics. Its triumph in Bradford should force some to rethink their passivity and others to realise that there are ways in which the Occupiers of yesteryear can help to break the political impasse.

How we fell out of love with Keynes

The same intellectual retreat can be seen all over the western world and it shows that noble intentions and half-decent ideas don't get you very far

• 
• • Aditya Chakrabortty
  • guardian.co.uk, Monday 26 March 2012 20.00 BST

The Greek crisis acted as a parable of what happens when countries borrow too much. Photograph: Anne-Christine Poujoulat/AFP/Getty Images

 

Remember all that talk about never letting a crisis go to waste? All those frontbenchers – from across the political spectrum – who swore that the banking crash would change economic policy for good? Vince Cable and Alistair Darling traded their favourite bits of Keynes and state intervention was firmly back in fashion. Well, you can rip up those fine, fevered promises and stick them in the bin. That at least is the big message out of last week's budget.

Oh, we all know what the papers reported: the granny tax, the kid gloves for the super-rich, and George Osborne's tin ear. But just as notable was what they didn't pick up: any meaningful dispute over the big picture. Labour's two Eds concentrated their attack on the chancellor for the fairness of his individual measures and kept schtum about the overall cuts strategy, of which they are only a small part.

The business lobby applauded the drop in corporation tax and the bungs for Grand Theft Auto and Richard Curtis (or, as they're officially known, relief for the British video games and film industries), but let the coalition off the hook on its promises to rebalance the economy.

How very different from Osborne's previous budgets. Over its first couple of years, Lib Dem wobbles and the European meltdown forced the coalition's austerity programme front and centre in political debate.

As for reform of Britain's listing economy, the strapline for last year's budget was that it would start "the march of the makers". Yet with the euro crisis temporarily on simmer, and the chancellor still clinging to his Plan A, the argument of ideas has gone all-but-silent.

Going by last week's squalls, what has replaced it is a giant scrap about who should lose most: OAPs or the young, the super-rich or welfare claimants.

As the cuts go deeper and further, and living standards remain depressed, this visceral battle of sectional interests will surely only escalate. Meanwhile, the political classes are busy getting back to business as usual. Last week's announcement of infrastructure privatisation suggests the new orthodoxy for Cameron and Osborne: when in doubt, Thatcherise it. As for the banks, where all this began, they are firmly back in charge. You know all about the bonuses, but even more telling is this underreported Treasury announcement from last week: the banks' miserliness with credit has forced Osborne to take £20bn of taxpayers' cash and use it for loans to small businesses. But wait for it: this money – your money – will be given to the same big banks to lend, with the minimum of public oversight. Take it from me: those last two sentences do not improve on rereading.

Blame Tory ideology, if you like, or Labour's failure to offer an alternative, but this is what those fervent avowals from MPs between 2008 and 2010 have given way to. As Old Whiskers might have said: all that is solid melts into hot air.

The same intellectual retreat can be seen throughout the Western world. John Quiggin, author of Zombie Economics, and political scientist Henry Farrell, have just published a fascinating paper charting how governments, central bankers and economists changed in the four years after Lehman's collapse from being "Keynesians in the fox hole" (as one Chicago academic put it) to merchants of austerity.

The tale Farrell and Quiggin tell is a simple, but compelling one. In autumn 2008, the policy-making establishment was in deep panic. The world they had constructed was collapsing around their ears, and ministers and economists had no idea how to respond. Amid this confusion, the long-marginalised followers of Keynes were able to win panicked international support for their economic-stimulus packages and reform of the financial sector. But no sooner had the global economy stabilised than governments and central bankers (led by Jean-Claude Trichet in the eurozone) returned to their old ways. They were urged on by the now-rescued and boisterous finance sector. And of course there was then the Greek crisis, offering a seemingly irresistible parable of what happened to countries that borrowed too much.

Never mind that the Greece story doesn't tell you much about any other country apart from Greece. Never mind that the principal argument of the Keynesians that you don't cut public spending amid a slump is as true now as in 2008. The conclusion one takes away from the past four years is that it wasn't the free-marketeers who were on the wrong side of history – it was all those good-hearted people punching the air and proclaiming the arrival of some progressive moment. The conclusion one takes away from Farrell and Quiggin's paper is that noble intentions and half-decent ideas don't take you very far. You need an adequate political vehicle, which Labour has plainly failed to provide, and some hard-headed analysis too.

Still, there's always the next crisis. And the failure to reform the economy pretty much guarantees that another one will come along.

The true costs of Keynes

By Martin Hutchinson

Adolf Hitler, Joseph Stalin and Mao Zedong each killed tens of millions of people, and John Maynard Keynes was a pacifist who never fired a shot in anger. However, economically, when the billions come to be totted up, it may well be the case that Keynes was the most destructive of the four.

He cannot entirely be blamed for mistakes in monetary policy, which he never understood, and even his "stimulus" ideas owed much to those who came before him - for example Arthur Pigou - and after him - for example Joan Robinson. Yet the other value destroyers had their henchmen too, in Heinrich Himmler, Lavrenti Beria and Jiang Qing. Overall, when henchmen are added in, Keynes runs the other value destroyers close, and may in the future surpass them as his value-destructions continue. Truly, persuasive but misguided economic theories can be much more damaging than they appear.

This is not to claim that big government per se is value-destructive (it is, but that's a separate issue.) The right size of government is a matter for legitimate debate, and successful societies such as Sweden and Singapore can be built with very different sizes of government. Personally, I would rather live in Singapore than Sweden, and I would expect Singapore to exhibit markedly faster long-term economic growth than Sweden, but both societies run their finances in a responsible manner and are models of governmental integrity.

Since both Sweden and Singapore currently have modest budget surpluses and have kept control of their currencies and avoided excessive monetary stimulus, they are in the modern debased sense of the term non-Keynesian, even if the managers of Sweden's economy might well describe themselves as Keynesians for the sake of harmony at international gatherings.

The Keynesian fallacy is in essence one of getting something for nothing. By Keynesian fiscal stimulus, normally involving spending more money though occasionally through tax cuts, providing they avoid the annoyingly savings-prone rich, we are supposed to produce additional economic output whenever there is an "output gap" from full employment, that is, in all conditions save those of a raging boom, when resources are scarce.

Keynes himself recommended such stimulus only at the bottom of deep recessions, and suggested that it should be balanced by running budget surpluses in times of boom. Needless to say, his disciples have neglected the disciplines he recommended.

Similarly, the analogous monetary policy (which Keynes personally did not advocate, since he believed that interest rates had no effect on output) pushes down interest rates and indulges in ever-more lavish bouts of monetary "stimulus" in the belief that by doing so the economy can be persuaded to expand more rapidly.

It's fair to claim that monetary stimulus does not derive directly from Keynes (though it is not new - it was a policy advocated by Keynesians in the 1960s Lyndon B Johnson administration, for example.) However fiscal stimulus is a direct product of Keynes' 1936 General Theory and both forms of stimulus derive from Keynes' overall approach of flouting economic orthodoxy and using ingenious paradox to propound unorthodox policies.

Keynes was the origin of the "stimulus" approach; its central idea that by manipulating monetary or fiscal policy we can get a bigger government than we pay for is his. It is thus fair to blame the costs of that approach on him.

Those costs are considerable. In the 1930s, US president Herbert Hoover's reckless expansion of government spending, including loans to cronies through the Reconstruction Finance Corporation, caused further slowdown in the economy, which was exacerbated by his dreadful early 1932 increase in the top marginal rate of tax from 25% to 63%.

Then, as I discussed a few weeks ago, Franklin Roosevelt's New Deal deficit spending, combined with his reckless "set the gold price in my pyjamas" monetary policy prolonged the Great Depression far longer than would naturally have occurred, delaying full recovery from 1934-35 to 1939-40.

In the recent unpleasantness, fiscal stimulus worldwide initially appeared merely ineffective. By diverting resources from the productive private sector to unproductive public sector boondoggles it reduced long-term output. In the US case, the Barack Obama stimulus converted a vigorous recovery into an anemic one; only in the third quarter of 2011, after the effects of stimulus had begun to wear off, did output begin to accelerate and unemployment trend down (in this case we should celebrate public sector job losses and declines in public sector output, since they free up resources for healthy private sector growth!).

However, with the euro crisis it has become clear that fiscal stimulus, if excessive, has an exponentially adverse effect. By increasing deficits to unsustainable levels, it precipitates bond market fears about the state's credit risk. Naturally, that strangles credit availability to almost all entities domiciled in the country concerned.

Thus while a mild fiscal stimulus in a country that before recession was running a surplus might be mildly beneficial (because the differential between private sector savings rates and the 100% stimulus spending rate outweighed the inefficiency effect of diverting resources to the public sector), a large fiscal stimulus, or one incurred in a country like Greece or the 2009 US that was already dangerously in deficit, will cause economic damage rising to many times the value of the stimulus itself, persisting for years or even decades to come.

Monetary stimulus is similarly damaging. As Walter Bagehot remarked over a century ago, the correct response to financial crisis is to lend on top quality security at very high interest rates. This was notably not done in 2008; instead the injection of liquidity to favored companies was accompanied by pushing interest rates far below inflation. Repeating the monetary stimulus in 2010 and again in 2011, when in the United States at least the financial crisis was over, was inexcusable.

Monetary stimulus causes structural damage to the economy in the following ways:

Normally, as was the case in 1965-79, it causes accelerating inflation. Since 1995, this has not been the case, because the West has benefited from an enormous deflationary force from the Internet and modern telecommunications, which has enabled massive outsourcing of goods and services to locations with much cheaper wage rates. That effect is now ending, while in some countries, notably Britain, the monetary stimulus has been increased to Weimar Republic-like proportions of 40% of public spending. We can expect the inflationary effect to strike with massively multiplied force compared with the gentle zephyr of 1965-79 when it finally arrives. As discussed in this column a few months back, by making capital artificially cheap, monetary stimulus encourages employers to substitute capital for labor to an artificial extent, thus raising the equilibrium level of unemployment. In current circumstances, this substitution takes the form of outsourcing production to emerging markets, thus depressing US and European labor markets further. By allowing banks to make artificial profits from "gapping" - borrowing short-term and investing in fixed rate long term bonds and mortgages - it suppresses lending to small business, thus further increasing unemployment. It must be noted that the true level of U.S. unemployment is far higher than the officially admitted 8.6%, as many workers have become discouraged and left the workforce. Ultra-low interest rates suppress savings (which receive negative real returns on their money), thereby de-capitalizing the economy. Finally if, as happened in 2008, monetary stimulus is directed only at favored banks and finance houses, it destroys the integrity of the market. Beneficiary banks have been shown by the recent Fed audit to have benefited to the tune of $13 billion by profits made on emergency Federal Reserve loans. Had that money been lent at appropriate penalty rates, this profit would have been captured for taxpayers. It was in essence a gigantic subsidy to Wall Street bonus recipients by the corrupt Federal Reserve. Needless to say, damaging cronyism has thereby been encouraged. As recent events have overwhelmingly demonstrated, both fiscal and monetary stimulus are highly addictive, since they appear to provide something for nothing and the cost of reversing them appears unpleasant to the Keynesians who control the levers of policy. As to their cost, the current Congressional Budget Office projections suggest that there is at present a 5% output gap below full employment, and that the output gap will disappear only in 2016. The cost of current Keynesian policies over 2009-16 can thus be conservatively estimated at about 15% of GDP, or $2.2 trillion in today's dollars. To that we can add very roughly 50% of one year's 1929 GDP, for the output lost through Keynesian policies in 1932-40, or another $500 billion, for a very conservative total of $2.7 trillion all-told in the United States alone. That may not sound sufficient to counterbalance the tyrants' depredations, but consider: 1930s Germany, 1940s Russia and 1950s China were all much poorer countries than the modern United States. Very roughly, Germany's 1936 GDP and the Soviet Union's 1940 GDP were both about $500 billion modern dollars, while China's 1955 GDP was about $1,500 billion. Thus Hitler and Stalin could have destroyed their entire output for more than five years, and Mao for almost two years, before doing as much economic damage as Maynard Keynes has wreaked in one country. It's a rough calculation, but illuminating - and while Hitler, Stalin and Mao are long gone, Keynes' depredations continue. Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found on the website www.greatconservatives.com - and co-author with Professor Kevin Dowd of Alchemists of Loss (Wiley, 2010). Both are now available on Amazon.com, Great Conservatives only in a Kindle edition, Alchemists of Loss in both Kindle and print editions.