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No easy fixes

To those who have been preaching state intervention as the solution to the credit crunch and the recession it must seem as though their time has come. Out go the discredited free-market assumptions of the late 20th century and in come the theories that found favour in the late 1930s and the immediate post-war.

These were largely the work of the British economist John Maynard Keynes. He claimed that relatively low government spending and/or high taxes had contributed to and then reinforced the economic depression of the 1930s. Now New Labour has apparently gone back to Keynes in their desperation to find some answers to the lethal cocktail of a collapse in jobs, sharp falls in consumer spending and financial meltdown.

But bringing forward a few infrastructure projects does not even begin to address the enormity and breadth of what is a global economic as well as a financial catastrophe. Bringing already budgeted spending forward, funded by new borrowing but without creating new money, is at best a new twist on an old solution to a different problem.

All forms of credit and debt, including money, are promises to pay in the future, so the prescription to bring future spending forward most certainly means a massive expansion of the injections of the drug that produced the current mayhem. The system can’t survive without it. New Labour already has accumulated record debt, and some doubts have already been raised about the availability of enough lenders to fund the new borrowing needed to bail out the bankers. Where will these additional lenders be found? When they fail to materialise, will the government simply print money?

With many of world’s banks and corporate behemoths – Ford, GM, Chrysler, GE on the point of bankruptcy, and most, including Starbucks in retreat, the cost of limiting the recession and preventing or even reducing the looming prospect of a depression, will be too great. There’s simply not – and can’t be – enough real value in the economy to service the debt already accumulated during the last years of globalisation. It’s why we have the present crisis.

The vast unimaginable gulf between the value of global production, even before the recession set in ($65 trillion), and the monstrous imploding balloons of credit and debt ($550 trillion in the credit derivatives markets alone – this is a small fraction of the total) puts the few trillion guaranteed to the banks into perspective. There is not, and reflation cannot provide sufficient real value in the economy to stave off the financial hurricanes still building to Category 5 and beyond.

In any case, tax rates are at rock bottom thanks to decades of Tory/New Labour policies; UK consumers are weighed down with personal debt (with millions now in negative equity); tax income from medium-sized business is falling away (the transnational corporations hardly pay any tax in Britain); and unemployment is growing rapidly throughout the world. The global crisis is now penetrating China, with that country’s export markets in a state of collapse.

The sudden infatuation with Keynes (even the right-wing Daily Mail is on board) should also come with a health warning. Claims that Keynesian policies were working before World War II are simply not true. Unemployment in the United States – where his theories were put into practice by Roosevelt – remained persistently high until the preparations for war began to reflate the economy.

A return to growth was only possible once the overcapacity produced in the speculative frenzy of the run up to the Wall Street crash 1929 was destroyed in the war itself. And then, when the orgy of destruction abated (including the slaughter of 60 million people) Keynes was once again called upon to provide a means of restarting production and capital accumulation, at Bretton Woods. And, lest we forget, that agreement broke down in crisis by the late 1960s.

What all this shows is that are no simple, state-led fixes to the recession we are now in and that leaving power in the hands of New Labour and their corporate/financial friends is a recipe for large-scale social disaster.

Gerry Gold
Economics editor
21 October 2008

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