Why Labour should admit its part in the economic crisis


9:05 am - October 22nd 2010

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contribution by Lisa Ansell

If you turned on the television or computer after the Spending Review, you would have seen Labour shouting how mean the Tories are.

Labour are different, and we should put our faith in them, they now say.

But because Labour are seen as our biggest hope of opposition to this suicidal economic agenda, you can’t mention Gordon Brown’s deregulation of a financial sector beyond Thatcher’s wildest dreams.

You daren’t mention the overvalued property bubble that underpins personal private debt of £1457- or ask what happens as millions become unable to service that debt.

You can’t mention Darling pouring three times our total annual expenditure into a bank bailout scheme with so few conditions attached, that money is used to pay bonuses of millions.

But demanding debate about Labours role in causing this crisis, would be disloyal and undermine our most effective means of opposing this suicidal economic strategy.

But Cameron, Clegg and Osborne don’t bring it up. That would mean highlighting that they would have done the same. Their strategy for getting us out of this mess is the same strategy that got us into it.

As long as Labour refuse to come out and say what they actually did to contribute to this crisis, we have no defence against an economic policy based on lies and hysteria. Rhetoric about the deserving and undeserving poor, preferable to a discussion about the dire economic situation we find ourselves in.

Millions of us have it confirmed daily that we have no representation in parliament.

Those who are worst affected by these cuts, the ones who will lose their homes, their jobs, and their futures, are left to defend themselves against accusations that their moral defects are the source of the problem.

The tribalist din suffocates any debate about what is actually happening to our country. By the time you have all finished shouting at each other, the opportunity for that debate is lost. Who knew party politics was such an effective way of diffusing dissent? Still, the election was exciting while it lasted…

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Reader comments


It is important to ask who is to blame, but there will be a fightback against the cuts, and then the most important question arises – whose side are you on?

http://www.newstatesman.com/blogs/laurie-penny/2010/10/labour-party-answers-today

@Nick Arse

Why would you be on the side of the people who caused it?

I think its about time blanco was kicked off this forum.

It’s the system that now drives policy, it’s totally unstable and out of control, until the real problems are recognized and addressed, it will continue into chaos.

Before we retreat into the lazy invective of which party is responsible, and whose fault it was, perhaps we should pause for some thought.

Who elected these people?

By all means let us have a debate about how best to get out of this situation, but before we start throwing rocks around inside our glass house it would be wise to remember that we get the representation we deserve.

The tragic thing is that NONE of the current parties have a clue. They are as devoid of new ideas as they are of charismatic leadership. The question is will the great British electorate actually do anything, or will it (as I fear is more likely) subside into a grumbling toleration of the new improved snake oil currently being pedalled by the Coalition. A response characterised by a bovine “plague on both (all?) your houses” inactivity, hoping that they can batten down the hatches and keep their job, house, and/or benefits would hardly be new.

It is deeply depressing. Worse, there doesn’t seem to be anyone with the least chance of doing anything differently. We now seem doomed to watch as the Coalition force through a programme of questionable efficacy, which will almost certainly increase inequality, hit the poor and those least able to cope hardest.

The alternative proposed by Labour would be different only in degree, and it is right that we hold them responsible for their starring role in turning the drama into a crisis.

23% voted Lib Dem.

29% voted Labour.

36% voted Tory.

All these parties promised savage cuts. Since then, the Lib Dems have u-turned on the pace of the cuts, (faster), and Labour have too (slower, more taxes rather than cuts).

88%, not counting the BNP and UKIP voters who wanted cuts, is a mandate for the cuts.

End of.

6

A deep disquiet about the WAY cuts are implemented isn’t equivalent to some weirdy-beardy, far left denial that there is a problem at all.

Just shouting the “there is no alternative” mantra loud and often enough doesn’t make it so, any more than Thatcherism was the “only” answer to the problems of our society 30 years ago.

The tragic and politically corrosive legacy for our society of being presented with no real choice is now becoming apparent.

@ 2 – blanco

That’s a tricky one ?

This is only my personal view with no real evidence to support what I’m writing but I believe we’ve arrived at our present financial predicament by pure greed at all levels of society.

In 1998 Gordon Brown realised there was money to spend in the treasury coffers and (foolishly) opened the floodgates to a deluge of government spending.

I don’t hold that against him because life had been quite difficult for many people in Britain for years. In particular, the NHS and our schools were in a sorry state and desperately in need of huge cash injections. Unfortunately this set off a spiral of spend – borrow and tax to spend.

Meanwhile world trade was in a growth pattern so it was not too difficult to service accruing national debt. Unfortunately domestic debt was allowed to rise accordingly with banks advancing loans far in excess of an individuals ability to pay should they hit hard times. I think property prices are the main culprit in this one. In my opinion, they must now be allowed to fall back in value until they relate to about 3 times average salary for mortgage advances.

By about 2004 the government was beginning to recognise their lack of economic control over national spending but dare not declare the facts for fear of losing the 2005 election.

The banks, ever keen to keep shareholders happy, started to sell on what has become known as ‘toxic-debt’. Unknown to individual banks I suspect, they had all been making similar moves around the western world.

It was only a matter of time before the music stopped and the weakest economies were left without a chair. Iceland first if I remember correctly.

Thankfully, Germany was able to bale out Greece and provide much needed help to Spain and Italy or we would possibly be facing a complete collapse in western society. Like it or not, we’re completely integrated into global events when it comes to finance.

For the future I would like to see an end to short term shareholding as it has only provided money for investment on a ‘bed and breakfast’ basis to industry. This has consistently starved industry leaders of much needed finance over the long term.

One example is Germany where a lot huge financial institutions own vast quantities of shares in major industries for 25 years plus. Their return on that shareholding maybe low but it’s consistent. The big plus is their industries have secure finance for decades without continually scratching around for investment.

@Galen but Mark Serwotka of the PCS was just saying in the Guardian that we need no cuts at all. And this was Ed Balls’ position during the leadership campaign.

The problem with Labour is that their hysteria over the cuts is either the denial they’re necessary at all, or that it’s just a question of scale and pace. If the former, then they need professional help. If the latter, screaming about it seems hypocritical and inappropriate – they’re turning a technical disagreement into an ideological one.

Worse, there doesn’t seem to be anyone with the least chance of doing anything differently. We now seem doomed to watch as the Coalition force through a programme of questionable efficacy, which will almost certainly increase inequality, hit the poor and those least able to cope hardest.

The alternative proposed by Labour would be different only in degree, and it is right that we hold them responsible for their starring role in turning the drama into a crisis.

Absolutely.

Labour was partly responsible for getting us into this mess by presiding over an enormous housing bubble, astronomical levels of personal debt – the UK has more credit card debt than the rest of the EU combined- and a heavily underegulated financial services industry.

For years the deep structural weaknesses in our economy were masked by easy credit but once it all went pop it was all too obvious.

None of this was particularly difficult to forsee. Fiften years ago Will Hutton nailed it in ‘The State We’re In’ – chronically low levels of investment and a economy dominated by a rentier financial class.

The Labour party desperately needs to come up with a viable economic alternative. An economic model that involes real productive industries geared towards future growth sectors. But at the moment I see the party offering absolutely nothing.

11. Luis Enrique

Lisa

about all that money poured into the bank bailouts …. what do you think has happened to it?

I would be interested to see the results of a poll that asked people … I’m pretty sure most people think we “gave” the banks billions, which they used to pay bonuses etc.

the truth of course is that we extended loans that were repaid with interest or purchased equity that we will probably be able to sell at a profit (I don’t know precise figures – here are some for the US versions).

does it matter that so many people (like I suspect the author of the OP) are mistaken on this point?

I don’t know. Of course there’s plenty still to be angry about, perhaps it doesn’t matter if the details are wrong.

(oh and yes of course Labour should acknowledge that like everybody else it made hay whilst the sun shone rather than paying attention to clouds on horizon)

9

I doubt the total denial that any cuts are necessary is one many people actually believe. Balls could say more or less what he liked, as he wasn’t going to win, but the chances of either New Labour or Newer Labour adpoting that as policy was and is vanishingly small.

Whilst I agree that we need to be cautious about claims that the sky is going to fall, my point is more that we are in deep trouble politically when effectively only one position is being pedalled. Our political system appears so moribund that the only choices on offer are the Coalition view of the cuts, or one from Labour which appears to differ only in degree.

Whatever the grandstanding across the floor of the House of Commons, we aren’t being offered realistic alternatives because the three major parties are so bereft of ideas; they’ve all bought into the “there is no alternative” narrative.

Ok I am going to say it.

There should no cuts. There is absolutely no need for any cuts.

Instead we should ramp up spending funded through taking the cap of NI, taxing wealth primarily property, raising the level of corportaion tax to the G7 average and clamping down on tax avoidance and evasion.

This could would allow us to get the deficit down much quicker provide investment for new industries which not hitting the most vulnerable in society.

And before anyone suggests would raising these taxes take money out of the economy and slow down growth then they should consider whether raising VAT to 20% and making a 1+ million unemployed is really a better strategy for boosting growth.

Given this background it seems perverse that the current debate is all about which bits of spending should be cut rather than which taxes should be raised. There are plenty of ways to raise revenues. Darling could delay the introduction of the 50% tax rate but lower the threshhold; he could prevent corporate tax avoidance by taxing companies on their turnover rather than their profits; he could deter speculative holdings of property through a land value tax. Is the public ready for this? Almost certainly not. But it is probably not ready either for a bigger squeeze on public spending than Margaret Thatcher ever managed.

http://www.guardian.co.uk/commentisfree/2009/jul/21/uk-debt-fiscal-cuts-tax

‘It is important to ask who is to blame, but there will be a fightback against the cuts, and then the most important question arises – whose side are you on?’

And that, in a nutshell, is why I despair of party politics.

@bubby But the whole point is that none of that is going to happen.

Galen, given that what Bubby said is never going to happen, you have to work with what we actually have.

“purchased equity that we will probably be able to sell at a profit ”

I hope we don’t sell our equity. 2 reasons; (1) given the history of privatisations we will probably sell it on the cheap – with Osbourne doing it knowingly. Its quite likely there are already speculators getting friendly with osbourne knowing they can make a quick buck out of it. (2) we would be better off using the equity and keeping it long term, as part of a sovereign wealth fund. We should be looking to expand the portfollio as well.

the truth of course is that we extended loans that were repaid with interest or purchased equity that we will probably be able to sell at a profit (I don’t know precise figures – here are some for the US versions).

I suggest that this view is over optimistic for a number of reasons.

1- We made loans – in other words we had to borrow money to lend to the banks -its difficult to get an exact figure I have heard between 150-300 billion bandied about plus another 800 billion in guarantees- although I understand that this is not actually showing on the governmnet’s books at the moment but it’s still cash we had to borrow.

2- If we are in for a further downturn as looks increasingly likely then bad debts, forecloses and repossessions are likley to rise substantially. Big holes will open up again in the bank’s balance sheets and there is every chance in the next two years that they will come back to the taxpayer for more money.

3- You also haven’t taken into account the effect that the freezing up of bank lending plus the extortionate charges that the banks are levying on business lending has had on the wider economy

18. Luis Enrique

17

bubby,

no, clearly I didn’t take into account any indirect costs – of course those are where the real costs are (unemployment, firms going bust, tax revenue collapsing etc.) I merely pointed out the common false belief that the bailout itself (just the direct cost of that) entailed us ‘giving’ the banks billions. The fact that the bailouts had to be funded (by issuing govt. debt, some of which funded by printing presses) doesn’t change things.

regrettably, I believe the scenario you present @13 is a fantasy. I don’t believe you can have sat down an actually looked at any figures before you formed your belief cuts are not necessary.

@18

It’s only a fantasy because the bankers and “wealth creators” are holding the rest of us to ransom, using the Tories as their bully-boys. In terms of pure numbers it’s workable, and I’m still not convinced that capital flight is the risk that our financial lords and masters are telling us it is.

19

I suppose that’s my problem with the whole thrust of the CSR, that it’s being presented as the only game in town. I’m also quite convinced that at least some of the measures advocated by bubby are not only feasible, but could be sold to the electorate as desireable AND the right thing to do.

Instead what we seem to have is an uncritical acceptance that there is only one path. I just don’t buy it.

21. Luis Enrique

of course the CSR is not the only game in town – we could have raised taxes more and we could run a bigger deficit for longer. What I think is a fantasy is the idea that a combination of taxing more and spending more could create enough growth to close the deficit.

Are they a fantasy?

The coalition is looking to save £81 billion over 4 years. Compass recently came up with these figures.

1 50% Income Tax band at £100,000 2.3 billion

2 Uncap NICs and make payable on investment income 9.1 billion

6 Abolish tax havens and tax ‘non-doms’ 10.0 billion

7 Financial Transactions Tax 4.2 billion

http://clients.squareeye.com/uploads/compass/documents/Compass%20in%20place%20of%20cuts%20WEB.pdf

That’s £25 billion in one year. Maybe you couldn’t collect all that but you could collect a very large chunk. I actually think the £10 billion they estimate for going after tax evasion is actually quite conservative and you get a lot more.

Let’s look at wealth now. The ONS recently estimated that total UK wealth was just over 9000 million.

http://www.statistics.gov.uk/downloads/theme_economy/wealth-assets-2006-2008/Wealth_in_GB_2006_2008.pdf

The top 10% of the population owns just under 4000 million of this wealth -supposing you taxed this wealth at a whopping 1.5% per year for the next five years that would bring in £60 billion per annum.

Sure I hear you say this group are clever and can hire expensive accountants and its probably true that you couldn’t collect all this tax but you would pick up a very large chunk.

Much of this wealth cannot be hidden – 39% is in property which can always be located.

I suggest to you that the sums the government is trim from the deficit could easily be raised via taxation. The money is there- what’s lacking is the political will to take on the wealthy.

21 Luis

Well, to be fair I don’t think that many people take the extreme view that no cuts are necessary, any more than many beleive it should all be cuts and no tax rises. I think where the real debate lies is in the appropriate balance between how much we need to cut, and how much we can tax and spend to close the deficit, and over what period we should be trying to do it.

It seems many people, and not just those who instinctively mistrust the Coalition anyway, that the balance in the CSR is wrong, or at the very least has not been properly thought through. We are being bounced into something fairly dramatic with very little in the way of countervailing analysis or argument.

This is at least partly because the opposition is so weak, and more or less accepts the principles the Coalition have set out. Perhaps the LD’s should have fought harder to achieve a different balance, but I think the basic premise that Labour bears a huge responsibility for helping get us in this mess stands. Furthermore they seem to be startlingly unable to articulate anything approaching a different approach.

To be honest I feel like crying when I hear people say that the country is bankrupt or that we don’t have any more money.

We are an immensely rich nation. The problem is that the top 20% own the great bulk of the wealth and the policies of sucessive governments both Labour and Conservative – policies like pumping up asset bubbles and refusing to tax wealth have greated concentrated this wealth in fewer and fewer hands.

Taxing this wealth, the great bulk of which is unearned, is a complete political taboo. The main parties and the mass media won’t even countence discussing it.

25. Luis Enrique

Galen

I don’t think we disagree. You may be interested to read that both Milton Friedman and The Economist would have/do oppose the cuts.

bubby,

yes that’s fantasy, Compass should be ashamed of itself. I’m not going to be able to convince you why – perhaps even if I wrote 2000 words – but one thing to think about is that if money is taken from one place then it reduces the amount you can take from the other – all those figures are as if taking £9bn extra off rich people via point 2. wouldn’t reduce the amount you could take off them in their tax havens. They’re not thinking about the effects on prices, wages, investment, hours worked etc. To be clear I am not saying we couldn’t raise more from taxation – of course we could. But the idea that you can just extract an extra £100bn per year from an economy, just because you have found some big numbers you think you could tax, without that having gigantic negative consequences is the sort of rubbish you get from the NEF.

but one thing to think about is that if money is taken from one place then it reduces the amount you can take from the other – all those figures are as if taking £9bn extra off rich people via point 2. wouldn’t reduce the amount you could take off them in their tax havens.

Really? So if you took the ceiling off NI contributions that would make a huge dent in the ammount of money that you could extract from tax havens. Sorry don’t buy it.

What about the £4000 billion wealth of the top 10% of the population.

Why not put a small tax on that?

£1560 billion of it is in property which can’t be moved out of the country. Why not tax that?

If that money was used to invest in productive industries why would that have ‘gigantic negative consequences’ for the economy?

25 Luis

Always good to find yourself in violent agreement 😉

I do think however that there is something to be said for looking at some of the things bubby is proposing, even if you don’t accept that it can all be achieved from these sources, it is surely quite feasible to raise a considerable portion of the total cuts envisaged in the CSR by such means?

Surely that’s been part of the long term problem with this country that successive governements of both major parties have failed to make a case for taxing the richest members of society and cutting down on tax evasion, whilst expending huge efforts on cutting expenditure and going on about benefit scroungers.

‘…you can’t mention Gordon Brown’s deregulation of a financial sector beyond Thatcher’s wildest dreams.

You daren’t mention the overvalued property bubble that underpins personal private debt of £1457- or ask what happens as millions become unable to service that debt.

You can’t mention Darling pouring three times our total annual expenditure into a bank bailout scheme with so few conditions attached, that money is used to pay bonuses of millions. ‘

How can you hope to contribute to making sure the financial crisis never happens again when you have such a warped view of what happened the last time? Look the property market goes up and when prices become too expensive prices fall. If folks default the banks lose money. Banks always lose money on some loans and that is why they charge interest. The good loans pay for the bad. Nothing unique about that and it has bugger all to do with our financial crisis. Do all prices go up by the same percentage in different areas? Nope. Some can be fallen as others are rising. So how can you tell better than individuals what is overvalued and what is fair value?

The UK banking crisis was bugger all to do with the UK property market or credit cards. It was caused by a funding gap in the interbank repo market. Banks have to finance themselves by borrowing against collateral (assets). They do not operate by Mrs Jones saving her pension. If others lose confidence in the value of that collateral they will not lend except at a high interest rate. Since it is unprofitable for the banks to borrow at those rates they are forced to slash lending to business and households. The UK banks were undercapitalised and relying on a funding channel that left them exposed if the market froze. It did freeze. So what are your suggestions to stop that happening again?

‘ Darling pouring three times our total annual expenditure…’

Saying that is just silly. Providing guarantees might be accruing potential liabilities but it is not the same as pouring money in as it is not money being spent. Guaranteeing every bank account for £50,000 is not the same as actually spending the money. The guarantee alone means it will never need to be exercised because it gives folks confidence.

29. Luis Enrique

“Sorry don’t buy it.”

sorry haven’t thought about it more like. let’s start with taking another £4bn out of the finance industry. Where does that £4bn end up at the moment? salaries (bonuses) or capital income. So if you take an extra £4bn from finance, that’s £4bn less taxable salaries or capital income. Where does the income being sheltered in tax havens come from? Obviously if you tax it before it gets there you can’t tax it once it’s got there. All these figures are derived by taking some big number in isolation and saying “we could take that” as if doing so wouldn’t change the other big numbers you also propose taking elsewhere. Likewise, you can’t pay your taxes with a house, you have to sell it to raise cash. Who is going to buy it? Where do the buyers get the money from? (especially since you think you’ve just taken £10bn out of people using tax havens, £9bn extra in NI. etc.). What you say just x% applied to £X wealth could raise £60bn you are not thinking about where £60bn of disposal income will come from that’d need to be spent buying assets by the wealth raising money to pay their wealth taxes.

Now of course everything has knock-on effects and if you take money from one place you can also spend it in another place and then tax wherever it goes next – and yes there will be some combination of new taxes that could end up increasing tax revenues by £150bn to cover the deficit (forgetting for the moment your ideas about increasing spending too) – it would probably involve much broader tax increases, more VAT, more income tax paid by medium earners – and although once all the knock-on effects have knocked-on, you could still probably do it by hitting the wealthier more (it’s just idiotic NEF to think we could only hit the rich – see ‘tax incidence’) and where you’d end up when all the music has stopped would be an economy in which the composition of activity had changed, with the private sector has shrunk and the government sector expanded. Whether that would have made us richer or poorer in the bargain I’ll leave for another day.

30. Luis Enrique

oh dear – the above is a very poor attempt at explaining what amounts to a “general equilibrium” problem and the more I think about it the more I’ll probably realize i’ve done a bad job of it.

Likewise, you can’t pay your taxes with a house, you have to sell it to raise cash. Who is going to buy it? Where do the buyers get the money from?

Not at all. Let’s suppose someone has a house valued at 1 million with £800,000 equity in it.

At 1.5% they would would have to pony up £12,000

A large proportion of people who have assets like this would be able to pay it out of more liquid assets they own quite easily.

But it’s riduculous to suggest that those who don’t have liquid assets would have to sell their house. They could stick the 12,000 on their mortgage for a start.

32. Luis Enrique

fine. some people could pay a small wealth tax without having to sell assets.

@ 31. bubby

I’ve got a better solution why not stop taxing peoples labour, what on earth is progressive about labour taxes? Why not stop taxing capital? You know those folks who see good ideas and invest their money that allows good ideas to result in jobs being created.

Why not start raising taxes from a Land Value Tax (LVT) then no one benefits from unearned income. Why not a greater use of Pigovian taxes? If you want your house lit up like Blackpool illuminations well that is fine. However, you pay the rest of society for the pollution that you cause. If you want to drive around in fuel inefficient cars well that is fine too. However, you pay the rest of society for polluting the ‘ commons ‘. Revenue raised from the actual people who are doing the polluting and it changes behaviour towards better behaviour.

Consumption taxes: we are told we live in a ‘consumer society’ and apparently that is a bad thing. Well tax consumption. Oh but they are regressive how will the poor manage? Well make them progressive and exempt some groups from them. Moreover, the low paid would no longer be faced with huge marginal tax rates on their labour.


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  2. Martin Carr

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  3. Ogrizovic

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  4. Derek Bryant

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  5. Julius Whacket

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  6. Patrick Hall

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  7. Andy Saunders

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  8. Niall Millar

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  9. Marmaduke Dando

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