ceedee's posterous

Rarely have politicians and business leaders met at Davos against such a gloomy backdrop. The World Economic Forum (WEF) helped to set the tone this month when it issued a chilling dystopian vision of mass youth unemployment, wholly inadequate elderly care provision and widening global inequality. WEF's global risks 2012 report suggested fresh economic turmoil and social upheaval could wipe out gains produced by globalisation. Nationalism, populism and protectionism threatened to take root, it warned.

The world is calling for a bold vision of economic justice to counter dislocation and austerity. But since the global economic crisis reasserted its icy grip after a brief Keynesian impasse, world leaders have failed to deliver one. The inability to articulate a narrative beyond a long, hard march out of economic malaise ultimately caused by politicians' and regulators' failure to adequately supervise the financial system is resulting in a widespread disillusionment with mainstream politics that threatens to undermine faith in democracy.

World leaders need to respond quickly, and business must play its role. A good place to start is talking up the idea that there are mechanisms beyond severe budget cuts to eliminate sovereign debt. There is money in the global financial system that, if accessed and used wisely, could go a long way to mop up deficits and reinvigorate the global economy.

That treasure trove is the $3.1tn of tax, equivalent to 5.1% of global GDP, which according to international campaign group Tax Justice Network is illegally evaded in 145 countries, covering 98.2% of the world's population. In December, Washington-based thinktank Global Financial Integrity confirmed the reality of vast sums of cash flowing freely through an unregulated financial system last month. Developing countries, it said, lost $903bn in illicit outflows during 2009 – a year when economic activity was severely constrained.

The majority of these flows are washed through tax havens. These secrecy jurisdictions act as cover from international tax authorities. Disturbingly, the obstacles placed by the global financial system that would allow individual countries to track down and repatriate this cash are prohibitively burdensome. This is why a new age of financial transparency and accountability is required. Five key reforms would lay the foundations for this:

1. The rapid introduction of multilateral automatic tax information exchange between tax agencies in every single jurisdiction. This would ensure money illegally held offshore was easily identified and accounted for.

2. The introduction of new levels of financial transparency requiring the public disclosure of the ultimate human beneficiaries of companies, trusts and foundations. This is needed to prevent the further subversion of countries' tax bases whether by high net worth individuals, businesses, corrupt politicians, criminals or terrorists. It is also required to restore faith in the rule of law and the democratic process as the current non-disclosure of beneficial ownership is corruption's best friend.

3. The global introduction of country-by-country reporting so that every company has to publicly state financial details relating to its turnover, profits, costs, employees and taxes in every jurisdiction it operates in where its revenues exceed $5m. It is astounding that in the 21st century, it is impossible for citizens in many resource-rich nations to establish whether their country has got a fair deal from its oil, gas or minerals.

4. Concerted international action needs to be taken to ensure the hundreds of billions of dollars lost to exchequers by companies artificially inflating their costs and deflating profits through intra-company transactions – known as transfer mispricing – is identified, contained and reduced.

5. The harmonisation and codification of money-laundering laws to a restrictive level. Even the City of London shows brazen disregard for rules to stop money laundering, according to a report last June by the UK's Financial Services Authority.

Together, these reforms would show that world leaders were acting in their citizens' best interests, and would go a long way to averting WEF's dystopian nightmare.

The Renegade Economist in conversation with Prof. Steve Keen

Steve Keen is Associate Professor of Economics & Finance at the University of Western Sydney. He runs the blog debtdeflation.com.

Steve predicted the financial crisis as long ago as December 2005, and warned that back in 1995 that a period of apparent stability could merely be “the calm before the storm”.

His leading role as one of the tiny minority of economists to both foresee the crisis and warn of it was recognised by his peers when he received the Revere Award from the Real World Economics Review for being the economist who most cogently warned of the crisis, and whose work is most likely to prevent future crises.

He has over 50 academic publications on topics as diverse as financial instability, the money creation process, mathematical flaws in the conventional model of supply and demand, flaws in Marxian economics, the application of physics to economics, Islamic finance, and the role of chaos and complexity theory in economics. His work has been translated into Chinese, German and Russian.

He is author of the popular book Debunking Economics, in which Steve let the general public in on a little-known secret: that many widely believed economic models have been shown by economists to be wrong.

He has just released his new book Debunking Economics - Revised and Expanded Edition: The Naked Emperor Dethroned?  

 

Molly Scott Cato (the Green Party's economics speaker) wants "A Brief Word, Mr Cameron" about government debt:

The class war has been launched, and not by the Labour Party. Cameron's speech today sets the scene for a principled stand in favour of the interests of his owners rather than earners. This should be greeted with no surprise - why else was he elected in the bungled events of last month? Certainly not on the basis of his charisma or incisive intelligence. This speech will be followed up by attacks in the media on the plans for strike actionsby working people defending their living standards before these have even be discussed much less voted through.

The political implication is that the public sector has enjoyed massive investment during the Labour years and that it will now pay the price while the private sector and the interests of capital see their just returns. The problem is that this is an outrageous untruth. My argument rests on the two pictures that are included with this post. Between them they demonstrate how the need for the shocking levels of public borrowing arose and where that money was spent.

The first graph demonstrates perfectly how we got into this mess by tracing public-sector borrowing from February 2007 to December 2008. It shows the steep rise that followed the banking crisis when our money was extracted in various ways to prevent the collapse of global finance. We didn't cause this, we didn't benefit from it, and yet the graph shows clearly that we paid for it.

The second graph shows the same variable - public sector net borrowing - between February 2009 and April 2010. If you compare the graphs you can see that we are on a totally different axis here. Annual borrowing of £35bn. in Feburary 2007 had, by April 2010, been massively increased to £160bn. This is not the result of pointless spending on government bureaucracy, or the overpayment of nurses and teachers, its precise location in time makes clear its origin in the bank bailout.

Perhaps as some sort of weak demonstration of honesty to justify his claim to have introduced a new type of politics Cameron does, in a subtle way, identify where the money went:

'The global financial markets are no longer focussing simply on the financial position of the banks. They want to know that the governments that have supported the banks over the last eighteen months are taking the actions to bring their own finances under control.'

This implicit admission of the massive transfer of value from public to private, from us to them, and the corresponding transfer of their debts to our public balance-sheet is the real political issue here. It is vital that working people defend their interests, and most importantly do not follow the divide-and-rule strategy that the attacks on public-sector pay suggest will accompany the inevitable summer of discontent.

The mess in Britain's finances has three main causes. The first is that the crisis of 2007 arrived when the budget was in relatively poor shape. Tax receipts during the bubble years were weaker than the Treasury expected, which meant that even with the economy booming the deficit stood at close to £40bn.

The second factor was the depth and duration of the recession. Deficits tend to rise during downturns because tax receipts fall and spending on unemployment and other welfare payments rise. In Britain's case, the economy contracted by more than 6% over six successive quarters from early 2008 to late 2009. By the time growth resumed national output was 10% lower than it would have been had the economy continued to expand at its normal rate of around 2.5% a year. That punched a hole in the public finances.

Finally, the VAT holiday and help for the unemployed, designed to mitigate the effects of the recession, cost around £25bn, or around 1.5% of GDP, much smaller in relation to the size of the UK economy than the packages used to support growth in the United States or China.

Part of the deficit is deemed to be cyclical – it will disappear once the economy grows strongly. The other part, the £70bn structural element, is what the government wants to eliminate during the current parliament.

The bank bailouts have little impact: the Treasury does not count money used to buy bank shares because it assumes it will get it back.

City bankers are to reap nearly £7bn in bonuses this spring even though the government has been forced to pump tens of billions into the banks to prevent them collapsing.

Analysis of preliminary pay data from the Office for National Statistics shows that in the first three months of the bonus season to February the financial sector has shared out £5bn in bonuses, half the level of the same period last year.

Extrapolating that to the full five months of the bonus season to April means payouts will be between £6.5bn and £7bn, compared with £13.7bn last year.

"These figures are alarming and show a complete lack of awareness in the City of the extent of the financial crisis, their role in creating it and the extent to which they are ultimately answerable to the taxpayer," said the Liberal Democrats' Treasury spokesman, Vince Cable. "It would be outrageous if taxpayer-supported institutions are handing out large bonuses, particularly at a time when hundreds of thousands of people are losing their jobs."

In last week's budget, Alistair Darling, revealed that borrowing would surge to £175bn this year as a result of the credit crunch and the country faced nearly a decade of rising taxes and big cuts in public spending to pay for the recession and bank bailouts.

The TUC general secretary, Brendan Barber, said: "Given the havoc that the City has wreaked on our economy, pegging back bonuses to a mere £7bn a year falls short of the value for money taxpayers should expect after bailing out the banks."

In a barbed examination of Tory spending plans, Blood & Treasure looks back to the post-war period:

In the original Age of Austerity, we managed to create the National Health Service, keep a million men under arms through conscription, and, in the Tories case, embark on a mass house building programme: all of that with public debt at 250% of GDP, twice that currently projected. Just because you don’t have much money doesn’t mean that you can’t spend what you have more or less how you please.

But to do that you need ideas: Right now, all the Tories are willing to show us in this direction is Michael Gove’s proposal to extend Academy status to primary schools: another Blairite retread and one specifically mounted right now in the hope that people will stop paying attention to the inconveniently popular tax hike on the wealthy.

In it's leader, "Optimism and the world economy -- A glimmer of hope?," The Economist is unconvinced the end is in sight:

The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.

Consider what that means. Much of the rich world will see jobless rates that reach double-digits, and then stay there. Deflation—a devastating disease in debt-laden economies—could set in as record economic slack pushes down prices and wages, particularly since headline inflation has already plunged thanks to sinking fuel costs. Public debt will soar because of weak growth, prolonged stimulus spending and the growing costs of cleaning up the financial mess. The OECD’s member countries began the crisis with debt stocks, on average, at 75% of GDP; by 2010 they will reach 100%. One analysis suggests persistent weakness could push the biggest economies’ debt ratios to 140% by 2014. Continuing joblessness, years of weak investment and higher public-debt burdens, in turn, will dent economies’ underlying potential. Although there is no sign that the world economy will return to its trend rate of growth any time soon, it is already clear that this speed limit will be lower than before the crisis hit.

The British economy shrank at the fastest rate in 30 years in the first three months of this year, raising fresh doubts over Alistair Darling's budget forecasts just 48 hours after they were announced.

Official figures released this morning showed gross domestic product (GDP) fell by 1.9% between January and March. This is the sharpest quarterly decline since the third quarter of 1979, the year when Margaret Thatcher came to power.

This was far worse than the 1.5% decline forecast by City economists. It contradicts the chancellor's claim on Wednesday that the economy shrank "by a similar amount" to the fourth quarter, when it contracted by 1.6%.

ING economist James Knightley said: "Today's GDP report again highlights how optimistic Darling was in his budget assumptions and that the risk to the fiscal deficit remains heavily to the upside."

The downturn is forcing the chancellor to borrow £175bn this year.

The data from the Office for National Statistics (ONS) revealed that output in the first quarter was 4.1% less than a year ago, the worst annual decline since the end of 1980.