The Covid crisis is doing what the 2008 crash didn’t: ending the old economic orthodoxies

Larry Elliott in The Guardian

A wealth tax to help pay for the cost of fighting the pandemic. An international agreement to prevent a race to the bottom on corporate tax. An insistence that recovery from the second severe crisis in just over a decade should be green and inclusive. A conviction that governments should spend whatever it takes to fend off the threat of mass unemployment, paying no heed to the size of budget deficit.

There’s nothing startlingly new about any of these ideas, which have been knocking around for years, if not decades. What is different is that these are no longer just proposals put forward by progressive thinktanks or marginalised Keynesians in academia, but form part of an agenda being pursued by the International Monetary Fund and the US Treasury under Joe Biden’s presidency.

This matters. From the 1980s onwards, the IMF and the US Treasury forged what became known as the Washington consensus: a set of beliefs that was foisted on any country that ran into economic difficulties and came looking for help. The one-size-fits-all approach involved cutting public spending and taxes, and privatisation, to create incentives for risk-taking entrepreneurs, and making inflation the overriding goal of economic policy. These policies inevitably caused pain, but it was thought the “tough love” approach was worth it.

It has been quite a different story in the buildup to the IMF’s spring meeting this week. Biden’s fast-tracking of a $1.9tn stimulus package through Congress, including direct payments to struggling American families, was significant in two ways. First, at about 10% of the annual output of the US economy, it was much bigger than the emergency support provided by Barack Obama after the global financial crisis of 2008. Second, and perhaps more importantly, it contained no promises of future deficit reduction. Austerity has no part in the thinking of the Biden administration, and nor does the idea that demand fuelled by borrowing inevitably leads to higher inflation.

The next phase in Biden’s plan is to spend a further $2tn on rebuilding America’s crumbling infrastructure. This will be funded by reversing some of Donald Trump’s cut to corporate tax rates, which will be opposed by Republicans in Congress but not by the IMF. When asked about the projected increase this week, the fund’s economic counsellor, Gita Gopinath, said Trump’s corporate tax cut had not done much to boost investment. Moreover, Gopinath was positively enthusiastic about the idea of a global minimum corporate tax rate, something the US has traditionally been wary of but which it now supports.

For the past year, the IMF has been trying to increase the financial firepower of its member countries through currency reserves known as special drawing rights. Trump’s concern that Iran would secure these rights meant there could be no progress while he was in the White House. Under Biden’s treasury secretary, Janet Yellen, the deadlock has been broken and a $650bn special drawing rights allocation has now been announced.

If the old Washington consensus believed in small states, low taxes and balanced budgets, the new Washington consensus believes in activist governments, inclusive growth and a green new deal. Until relatively recently, the only outpost of the multilateral system that supported such ideas was the UN’s trade and development arm in Geneva.

That is no longer the case. This week’s regular IMF update on the state of the global economy emphasises how the pandemic has made pre-existing inequalities worse. That’s true within countries, where the virus and its economic consequences have been toughest on the poor, the young, women and ethnic minorities. It is also true between countries, with the central banks and finance ministries in advanced nations having far more scope to mitigate the impact of lockdowns than those in poorer parts of the world.

Both the IMF and its sister organisation, the World Bank, are clear that there can be no final victory in the battle against Covid-19 until everybody is vaccinated. The problem is not simply that developing countries lack sufficient doses; it is that their health systems are underpowered and lack the trained staff to deliver treatments. Similarly, if the world is to make the transition to a zero-carbon future, developing countries need to be included. That means extra financial resources. All this at a time when fears of a new developing-country debt crisis are rife.

Make no mistake, the IMF is still no soft touch. The conditions imposed as the price for financial support are often draconian, and critics note the disconnect between the right-on rhetoric of the IMF’s managing director, Kristalina Georgieva, and the policies imposed by her organisation’s missions to struggling countries.

Meanwhile, pushback against what Biden has been doing has come from both left and right. Some of the president’s critics accuse him of not being nearly radical enough; others are convinced that all the money creation by the US Federal Reserve and the deficit spending by the US Treasury will inevitably mean much higher inflation. Conjuring up the ghost of economist Milton Friedman, they say it will all eventually end in tears.

For now, though, it is the Friedmanites who look marginalised, with the pandemic accelerating a shift in economic thinking that has been gestating over the past decade. Biden’s approach to running the economy – spending freely and taking a tough line with China – has more in common with that of his immediate predecessor than it does with Obama.

The shift in attitudes has partly been caused by a lack of results. Austerity did not lead to the surge in private investment and faster growth that was promised. Instead, the 2010s were a lost decade of stagnant living standards, which explains why Bidenomics is a big hit with American voters.

Crises also encourage experimentation. Furlough schemes to subsidise the wages of those unable to work are not the same as a basic income, but they are similar enough to get people used to the idea. Necessity rather than ideology explains why Rishi Sunak has spent more than £400bn in the past year on emergency support programmes in the UK, but a Labour chancellor would have done much the same.

There is a sense in which history is repeating itself. It took more than a decade after the end of the first world war for the realisation to dawn that the gold standard was finished. It was the second rather than the first oil shock that opened the door to the economics of the new right in the 1980s. Those who thought that the financial crisis would result in a challenge to the Washington consensus were not wrong. The old nostrums are indeed being questioned. It has just taken 10 years longer than they were expecting, that’s all.

Britain and Covid-19

by Giffenman

This is an unusual time for the whole world as it deals with the Corona pandemic. In my opinion when the crisis ends our world will be an entirely different place from what it was in early 2020. Every one’s consciousness would have been affected by coping with the disease and I hope it will result in a different and more egalitarian politics.

The Corona pandemic has laid bare the unpreparedness of the UK government to the crisis. Its much touted public health system, the NHS, has been found short of equipment, manpower and ideas to cope with the disease. The NHS had warned the government in 2016 about its inability to cope in the case of such a breakout but the report was suppressed. This is not surprising since governments since the 1980s have been privatising the NHS by stealth.

Boris Johnson, the British Prime Minister, did not want the UK to respond like China, Korea or Germany did to Covid-19. He wanted to use Darwinian principles of ‘survival of the fittest’ and get Britons to develop herd immunity. It could be that he was aware that the NHS was in no position to cope with the pandemic and did not want the facts exposed. His ultimate ignominy was that he was afflicted by Corona and has spent the last few nights in a NHS hospital.

The biggest surprise in this period has been the behaviour of the chancellor Rishi Sunak. He has, in the past few days, made unlimited funds available for the nation to cope with the health and economic impact of the pandemic. This is in sharp contrast to the austerity agenda in vogue since 2010. Sunak’s popularity has shot up among the public and he is being touted as a replacement for the currently invalid Prime Minister.

Even more surprising is the behaviour of the czars of the independent Bank of England (BOE). In synchronised operations with Rishi Sunak they slashed interest rates to 0.1% and agreed to borrow large amounts to kick-start the economy. Then a couple of days ago, they even abandoned their orthodox ideology on borrowings via gilts and decided to create money out of thin air to help the government deal with the crisis. The BOE even surprised itself when it stopped commercial banks from paying dividends to their shareholders.

If the financial and economic arm of the government is taking such unorthodox and knee-jerk measures in a concerted manner one does not need much imagination to imagine what might be their prognoses for the UK economy in the immediate future.

We need a new language to talk about the economy - With determined effort, the terms in which policies get discussed can be changed.

Tom Clark in The Guardian

The images used by politicians can simplify difficult theories, but they are also being used to mislead us

 

‘The big ideas that might make a difference – targeting higher inflation, printing money, or ploughing public funds into infrastructure – remain too contentious for politicians to voice out loud.’ Illustration: Ben Jennings


Banks trembling, shares tumbling and gathering fears of a new slump. The start of 2016 has been chilling for a global economy that has still to shake off the crisis of 2008. Worse, there is no agreement on what to do should the worst happen again. The big ideas that might make a difference – targeting higher inflation, printing money to give consumers something to spend with, or ploughing serious public funds into infrastructure – remain too contentious for politicians to voice out loud. That is a shame, because history suggests that the words they use matter.

 Of course policies and theories have to pass muster, but just as significant in determining which ones end up being pursued are the language in which they are discussed. A smart metaphor can do more to shift the sense of the possible than the negative interest rates that increasingly desperate central bankers are relying on to alter the mood.

From economics seminar rooms to rage-pumped Donald Trump rallies there is a consensus on one thing: we need to do better next time. The last recession was followed by years of anaemic growth and squeezed pay, and taxpayers saddled with the bill for bailing out the banks. Nobody is going to be thrilled with that mix, but the despair is most acute on the left.

A crisis caused by footloose finance and preceded by decades in which the rich had raced ahead of the rest might have ushered in a new order of stability and fair shares. Instead we have quantitative easing – which puffs up asset prices for the haves and renders homes less affordable for the have-nots – and fiscal austerity, which makes the poor poorer and also leaves them more exposed, by knocking down the old storm defences of the welfare state. In the US, the top 1% grabbed more than half the total growth in the first five years of recovery, while in the UK, George Osborne, a chancellor who saw no choice to imposing the bedroom tax, still found room to trim the tax rate on top incomes.

None of this should have been possible, but it was successfully sold as necessary. To understand how, we must reckon with the deep foundations of economic orthodoxy in our culture, especially the language.

It was, RH Tawney explained, the genius of the Reformation, the ideological revolution that readied the way for capitalism, to reimagine the “natural frailty” of human greed “into a resounding virtue”. Whereas poverty, in medieval religious theory at least, had been next to godliness, early modern thinkers from Hobbes to Smith equated wealth with worth. Trade became respectable, and lending money for profit, which had been sinful usury, became a fruitful outlet for thrift. Credit became interwoven with honour and pride, while debt was shot through with weighty moral obligations.

These are the orthodox financial prejudices that have, with brief exceptions, held sway ever since – in Gladstone’s red box as much as Thatcher’s handbag. When the 2008 economic storm hit (a metaphor which itself does ideological work, implying an act of nature rather than a crisis of human folly) the then shadow chancellor Osborne reached for a tried and tested script. “The cupboard is bare,”he sternly announced, likening bankrupt Britain to an over-indebted home.

Economists have objected to lazy comparisons between domestic and national finances for the best part of a century: governments can tax, grow or even print their way out of debt, three important escape routes not open to individuals. In the 30 years after the second world war there were deficits in all but six. But far from this leaving Britain’s cupboard bare, the national debt dwindled from 250% to 50% of GDP.

So the household metaphor is deeply misleading but it remains irresistible to politicians and powerful with the public. It offers a way to make sense of the otherwise baffling billions in national debt through analogy with everyday experience. Furthermore, explains Jonathan Charteris-Black, an expert on rhetoric at the University of the West of England, it embeds “one of the most widely used of all political images: the nation as family, with the government as responsible parent”. 

It is all so familiar that only restless, malcontent minds will argue back against the claim that There Is No Alternative. But the awkward squad should not lose heart: with determined effort, the terms in which policies get discussed can sometimes be changed. One modest example was the one-off charge made on the utilities soon after Labour came to power in 1997. Few taxes are popular, but by being badged a “windfall levy” this one came to be seen as a fair way to share good fortune that had dropped into the lap of these firms.

Looking further back, Keynes was a master of the disruptive metaphor. He described the “animal spirits” of investors whose rationality he questioned, and dismissed the self-styled “wolves and tiger” of industry as pathetically “domesticated” beasts. He was even credited with livening technical debate about the efficacy of monetary policy in a liquidity trap by talking of “pushing on a piece of string”. Keynesians across the Atlantic, such as Lauchlin Currie, rationalised the deficits of Roosevelt’s New Deal as “pump priming” the economy. The image here is of an old-fashioned well, where you have to pour in a little fluid to clear air from the valve, which then allows you to pump out a far larger volume of water. It had intuitive appeal for the very many Americans who had then been raised on farms, but hydraulics remains a promising source of imagery. Where orthodox economics and the moralising that goes with it emphasises solid “stocks”, assets and liabilities of particular values – a nasty debt, a nice nest egg or indeed an empty cupboard – the real economy operates through continuous “flows” of payment and activity.

John Maynard Keynes with Harry Dexter White in 1946. ‘Keynes was a master of the disruptive metaphor.’ Photograph: Thomas D McAvoy/Time & Life Pictures/Getty Image

The engineer-turned-economist Bill Phillips illustrated this insight by building a marvellous machine that shunted coloured water about to illustrate how the components of national income related to one another. But there is no need to go to the lengths of constructing a physical metaphor to make the point about how the bubbling stream of a healthy economy can wash away the debris of debt. Or, indeed, how decisive interventions can be required to clear blockages in the arteries of finance.

The question endlessly put to the Labour opposition is whether it can put together a “credible, costed package of alternative economic plans”, and doing that will, of course, have to be part of the answer – but only part. For no such programme, whether it stacks up or not, will compete with Osborne’s until the public can be persuaded to talk about the economy differently.

John McDonnell, the shadow chancellor, has put great effort into assembling brainy economists to help refine his detailed commitments, but the results of their deliberations will likely attract even less attention than his one rhetorical flourish to date – “socialism with an iPad”. A creative writing competition might do more to help him prevail in the battles ahead.

Orthodox economists have failed their own market test

Students are demanding alternatives to a free-market dogma with a disastrous record. That's something we all need

• 
• • Seumas Milne
  • The Guardian, Wednesday 20 November 2013 21.00 GMT

Ha-Joon Chang, one of the last surviving independent economists at Keynes's Cambridge: 'The supporters of neoclassical economics have an almost religious mentality.' Photograph: Sean Smith for the Guardian

From any rational point of view, orthodox economics is in serious trouble. Its champions not only failed to foresee the greatest crash for 80 years, but insisted such crises were a thing of the past. More than that, some of its leading lights played a key role in designing the disastrous financial derivatives that helped trigger the meltdown in the first place.

Plenty were paid propagandists for the banks and hedge funds that tipped us off their speculative cliff. Acclaimed figures in a discipline that claims to be scientific hailed a"great moderation" of market volatility in the runup to an explosion of unprecedented volatility. Others, such as the Nobel prizewinner Robert Lucas, insisted that economics had solved the "central problem of depression prevention".

Any other profession that had proved so spectacularly wrong and caused such devastation would surely be in disgrace. You might even imagine the free-market economists who dominate our universities and advise governments and banks would be rethinking their theories and considering alternatives.

After all, the large majority of economists who predicted the crisis rejected the dominant neoclassical thinking: from Dean Baker and Steve Keen to Ann Pettifor, Paul Krugman and David Harvey. Whether Keynesians, post-Keynesians or Marxists, none accepted the neoliberal ideology that had held sway for 30 years; and all understood that, contrary to orthodoxy, deregulated markets don't tend towards equilibrium but deepen the economy's tendency to systemic crisis.

Alan Greenspan, the former chairman of the US Federal Reserve and high priest of deregulation, at least had the honesty to admit his view of the world had been proved "not right". The same cannot be said for others. Eugene Fama, architect of the "efficient markets hypothesis" underpinning financial deregulation, concedes he doesn't know what "causes recessions" – but insists his theory has been vindicated anyway. Most mainstream economists have carried on as if nothing had happened.

Many of their students, though, have had enough. A revolt against the orthodoxy has been smouldering for years and now seems to have gone critical. Fed up with parallel universe theories that have little to say about the world they're interested in, students at Manchester University have set up a post-crash economics society with 800 members, demanding an end to monolithic neoclassical courses and the introduction of a pluralist curriculum.

They want other schools of economic thought taught in parallel, from Keynesian to more radical theories – with a better record on predicting and connecting with the real world economy – along with green and feminist economics. The campaign is spreading fast: to Cambridge, Essex, the London School of Economics and a dozen other campuses, and linking up with university groups in France, Germany, Slovenia and Chile.

As one of the Manchester society's founders, Zach Ward-Perkins, explains, he and a fellow student agreed after a year of orthodoxy: "There must be more to it than this." Neoclassical economics is after all built on a conception of the economy as the sum of the atomised actions of millions of utility-maximising individuals, where markets are stable, information is perfect, capital and labour are equals – and the trade cycle is bolted on as an afterthought.

But even if it struggles to say anything meaningful about crises, inequality or ownership, the mathematical modelling erected on its half-baked intellectual foundations give it a veneer of scientific rigour, valued by students aiming for well-paid City jobs. Neoclassical economics has also provided the underpinning for the diet of deregulated markets, privatisation, low taxes on the wealthy and free trade we were told for 30 years was now the only route to prosperity.

Its supporters have an "almost religious mentality", as Ha-Joon Chang – one of the last surviving independent economists at Keynes's Cambridge – puts it. Although claiming to favour competition, the neoclassicals won't tolerate any themselves. Forty years ago,most economics departments were Keynesian and neoclassical economics was derided. That all changed with the Thatcher and Reagan ascendancy.

In institutions supposed to foster debate, non-neoclassical economists have been systematically purged from economics faculties. Some have found refuge in business schools, development studies and geography departments. In the US, corporate funding has been key. In Britain, peer review through the "research excellence framework" – which allocates public research funding – has been the main mechanism for the ideological cleansing of economics.

Paradoxically, the sharp increase in student fees and the marketisation of higher education is creating a pressure point for students out to overturn this intellectual monoculture. The free marketeers are now being market-tested, and the customers don't want their product. Some mainstream academics realise that they may have to compromise, and have been colonising a Soros-funded project to overhaul the curriculum, hoping to limit the scale of change.

But change it must. The free-market orthodoxy of the past three decades not only helped create the crisis we're living through, but gave credibility to policies that have led to slower growth, deeper inequality, greater insecurity and environmental degradation all over the world. Its continued dominance after the crash, like the neoliberal model it underpins, is about power not credibility. If we are to escape this crisis, both will have to go.

Economics students aim to tear up free-market syllabus

Undergraduates at Manchester University propose overhaul of orthodox teachings to embrace alternative theories

• Phillip Inman, economics correspondent
• The Guardian, Thursday 24 October 2013 19.17 BST

The Post-Crash Economics Society at Manchester University. Photograph: Jon Super for the Guardian

Few mainstream economists predicted the global financial crash of 2008 and academics have been accused of acting as cheerleaders for the often labyrinthine financial models behind the crisis. Now a growing band of university students are plotting a quiet revolution against orthodox free-market teaching, arguing that alternative ways of thinking have been pushed to the margins.

Economics undergraduates at the University of Manchester have formed the Post-Crash Economics Society, which they hope will be copied by universities across the country. The organisers criticise university courses for doing little to explain why economists failed to warn about the global financial crisis and for having too heavy a focus on training students for City jobs.

A growing number of top economists, such as Ha-Joon Chang, who teaches economics at Cambridge University, are backing the students.

Next month the society plans to publish a manifesto proposing sweeping reforms to the University of Manchester's curriculum, with the hope that other institutions will follow suit.

Joe Earle, a spokesman for the Post-Crash Economics Society and a final-year undergraduate, said academic departments were "ignoring the crisis" and that, by neglecting global developments and critics of the free market such as Keynes and Marx, the study of economics was "in danger of losing its broader relevance".

Chang, who is a reader in the political economy of development at Cambridge, said he agreed with the society's premise. The teaching of economics was increasingly confined to arcane mathematical models, he said. "Students are not even prepared for the commercial world. Few [students] know what is going on in China and how it influences the global economic situation. Even worse, I've met American students who have never heard of Keynes."

In June a network of young economics students, thinkers and writers set up Rethinking Economics, a campaign group to challenge what they say is the predominant narrative in the subject.

Earle said students across Britain were being taught neoclassical economics "as if it was the only theory".

He said: "It is given such a dominant position in our modules that many students aren't even aware that there are other distinct theories out there that question the assumptions, methodologies and conclusions of the economics we are taught."

Multiple-choice and maths questions dominate the first two years of economics degrees, which Earle said meant most students stayed away from modules that required reading and essay-writing, such as history of economic thought. "They think they just don't have the skills required for those sorts of modules and they don't want to jeopardise their degree," he said. "As a consequence, economics students never develop the faculties necessary to critically question, evaluate and compare economic theories, and enter the working world with a false belief about what economics is and a knowledge base limited to neoclassical theory."

In the decade before the 2008 crash, many economists dismissed warnings that property and stock markets were overvalued. They argued that markets were correctly pricing shares, property and exotic derivatives in line with economic models of behaviour. It was only when the US sub-prime mortgage market unravelled that banks realised a collective failure to spot the bubble had wrecked their finances.

In his 2010 documentary Inside Job, Charles Ferguson highlighted how US academics had produced hundreds of reports in support of the types of high-risk trading and debt-fuelled consumption that triggered the crash.

Some leading economists have criticised university economics teaching, among them Paul Krugman, a Nobel prize winner and professor at Princeton university who has attacked the complacency of economics education in the US.

In an article for the New York Times in 2009, Krugman wrote: "As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth."

Adam Posen, head of the Washington-based thinktank the Peterson Institute, said universities ignore empirical evidence that contradicts mainstream theories in favour of "overly technical nonsense".

City economists attacked Joseph Stiglitz, the former World Bank chief economist, and Olivier Blanchard, the current International Monetary Fund chief economist, when they criticised western governments for cutting investment in the wake of the crash.

A Manchester University spokeman said that, as at other university courses around the world, economics teaching at Manchester "focuses on mainstream approaches, reflecting the current state of the discipline". He added: "It is also important for students' career prospects that they have an effective grounding in the core elements of the subject.

"Many students at Manchester study economics in an interdisciplinary context alongside other social sciences, especially philosophy, politics and sociology. Such students gain knowledge of different kinds of approaches to examining social phenomena … many modules taught by the department centre on the use of quantitative techniques. These could just as easily be deployed in mainstream or non-mainstream contexts."