11 May 2010

Well and Truly Hung: Fiscal Foolishness and Crisis Convergence

In the UK, headlines are dominated by one thing: the hung parliament, and which party, or coalition of parties, is going to take power. Perhaps the subject slips to issues of economic crisis, with mention of uncertainty in the markets over the pound due to the political limbo, not to mention the Eurozone debt crisis emanating from Greece.

Otherwise, anyone would think the world has stopped to watch endless numbers of pundits pore over, continuously, the fact that Liberal Democrat leader Nick Clegg has been in talks with Cameron and Brown.

Meanwhile, thanks to the Institute for Fiscal Studies report released prior to the elections last week, we now know that all three parties fundamentally agree on the extent of the austerity measures designed to close an enormous £163 billion deficit – up to around £52 billion of which no party has been able to account for vis-a-vis future economic and fiscal policies.

Deficit fetishism

The big problem is that the three-party consensus on how to deal with the deficit is completely defunct, with Labour, Conservative, and Liberal Democrats all ignoring the most obvious and viable solutions, while skirting the issue of deep-rooted structural reform. As The Economist points out, looking across the Atlantic but with highly relevant implications over here, it is a “simple truth”, that “you don’t cut government spending or raise taxes during a recession” citing Washington’s Center on Budget and Policy Priorities (CBPP). Rather, if governments should ever run deficits, it should be purely “during recessions to compensate for lack of private demand” – efforts to “balance the budget” through spending cuts should occur “during periods of strong economic growth and full employment.” The CBPP notes that massive unqualified cuts in government spending in a recession “would reduce the overall demand for goods and services” – with reduced expenditures in health, education, and infrastructure leading to increased unemployment, reduced consumption, demand slump and thus declining productivity – “and thereby partially or fully cancel out the economic boost that the recovery measures were designed to provide.”

Of course, this is not the full picture. Running a deficit is never an optimal option, neither in nor out of a recession – and the exponential escalation in deficits of the North over the last decades has been a key structural feature of neoliberal globalization based on a monetary and banking system whose structure generates debt through the process of creating money. Indeed, the preceding years of ‘growth’, driven not by productivity gains in the real economy, but by stupendous profits raked in by financial and information services, have relied directly on generating credit based on accelerating debt tied to asset-boom driven speculation.

To Tax or Not to Tax?

The Economist’s suggestion that raising taxes is not an option is therefore only partially true. It’s certainly the case that the solution offered by the three-party consensus – which is to raise taxes in such a way that will most likely impact on the majority of the public – will of course impact detrimentally by squeezing people’s already excruciatingly tight budgets. But that doesn’t mean taxes aren’t one answer to the issue.

Indeed, as the New Economics Foundation have pointed out – and as all three-parties have completely ignored – the entire deficit could quite easily be paid off simply by resolving existing “flaws and holes” in the current tax system. It's largely the very wealthy - people earning up to or over $10 million a year - who benefit from this. Over £100 billion every year is lost “because of loopholes in the tax system, tax bills remaining unpaid and from illegal non-payment of tax.” No doubt a percentage of this revenue “would be absorbed by the modest additional resources needed to implement the measures” to strengthen tax collection and crackdown on tax evasion, but it would leave “substantial amounts... available to the public purse.” The Lib Dems, to their credit, acknowledge the issue but underestimate potential dividends to a paultry £17 bn.

The other eminently viable policy measure, which remains equally ignored by all three parties, is the prospect of making the tax system more fairer and equalising. Former Labour Environment Minister Michael Meacher MP advocates, for instance, “taxing the super-rich (a 50% tax on incomes over £100,000 including bonuses, 60% on incomes over £250,000, capital gains tax fixed at the same rate as income tax, ending the non-dom loophole, a Tobin tax of 0.1% on UK stockmarket transactions, much tougher action against tax havens and tax evasion, and a solidarity tax on wealth could yield at least £40bn over a 4 year period).” Perhaps some of these measures seem too much. Earnings over £100,000 a year are certainly about three times the average family income in the UK – but do they qualify someone as being “super-rich”? I doubt it - tax at this level would serve to debilitate capital to such an extent it could fundamentally endanger small businesses.

A better option would be to focus taxes on those who really are ‘super-rich’. Even a 0.05 per cent tax, advocated by former chief World Bank economist and Nobel Prize-winner Joseph Stiglitz, on global banking financial transactions could raise hundreds of billions of pounds a year. The combined wealth of the richest 1,000 people in the country amounts to £333.5bn – enough to pay off our deficit more than twice over. So let's tax them properly.

Bunker-Boot Sale?

Demilitarization is another viable option. Total UK annual defence expenditure is now around £37 billion – 11 per cent higher in real terms than 1990 levels, and 2.5 per cent of the GDP. A large fraction of this – just 5 bn annually now – has gone to fight the wars in Afghanistan and Iraq. Yet those wars have not made us safer at all. New studies by Simon Fraser University and the State Department demonstrate that the rise of fatalities from terrorist activity has occurred not prior to, but in the aftermath of Anglo-American regional military operations. In particular, a groundbreaking quantitative analysis by US political scientist Ivan Sascha Sheehan, When Terrorism and Counterterrorism Clash: The War on Terror and the Transformation of Terrorist Activity (New York: Cambria Press, 2007), examines the largest ever terrorism database for the period 1992-2004, documenting a direct “cause and effect” correlation between events such as the offensives in Afghanistan and Iraq, and the “intensity, lethality and regularity” of international terrorism.

Apart from seriously re-thinking the efficacy of counter-insurgency operations in Afghanistan and Pakistan (and that means more than just banally comtemplating the generic need for some defence spending cuts, but an overhaul of our entire understanding of 'security'), we should also take seriously concerns about Britain’s Trident nuclear deterrent system. It’s not only the Lib Dems who have raised this issue, but even former British Army chief Gen. Sir Richard Dannatt, who is also a defence adviser to the Tories, and who recently suggested that the Trident system would probably be irrelevant after about five years. Indeed, we now know that the replacement of Trident could cost as much as £100bn, about two-thirds of the deficit. How will this be sustained without crushing austerity measures to maintain our triple A rating along with, on that basis, further borrowing and growth premised on speculation?

Growing Our Way to Stability?

By deflecting this question, the three-party consensus in effect advocates socializing the costs of the economic crisis with a view to sustain privatized profits for the few – the public has to foot the bill to minimize losses for banks and corporations, while maintain our counter-productive military mobilization in far-flung theatres. Meanwhile, we are told, continued economic growth is another solution that will generate enough revenues to close the deficit black-hole.

But this ‘solution’ rests on the very traditional politico-economic assumptions that got us into this mess, and can only be taken seriously because the three-party consensus continues to overlook some of the most fundamental policy questions of all. Global energy scarcity being, perhaps, one of the largest elephants – soon to be inherited by David Cameron – that has been inhabiting the Prime Minister’s living room at No. 10 for some years now.

The End of the Oil Age

It is increasingly clear that world conventional oil production peaked around 2008, is currently on an undulating but gradually declining plateau, and is most likely to continue declining for the foreseeable future. One of the latest official admissions has come from Australia. Curtin University’s Professor Peter Newman, a top infrastructure adviser to the Australian government, warns that the current economic recession was indelibly linked to our energy crisis:

“Peak oil did happen I believe in 2008 and it didn’t happen because some oil exporting country had a revolution or something. It just happened because we couldn’t produce enough to meet the demand. Subprime mortgages were mostly out on the urban fringes miles away from work. People had to drive and when the price of fuel tripled in American cities they couldn’t pay their mortgages. As the demand increases again the supply crunch will happen and the price will go up.”

The implication is that the era of ‘growth’ as we currently conceptualise it is reaching its own structural limits. If there is a meaningful economic recovery, and it is patently unclear that there will be one, the problem is that the ‘growth’ it involves as demand increases will breach current global oil capacity limits, triggering an oil price spike that will once again induce recession. Indeed, the only thing stabilising oil prices at the moment has been the lack of demand that was induced by peak oil in the first place.

So potentially grave is this problem that now even the US Joint Forces Command acknowledges the dangers in its Joint Operating Environment 2010 report: “A severe energy crunch is inevitable without a massive expansion of production and refining capacity. While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds.” (p. 28) Of course, the assumption here is that the problem is not geophysical (i.e. that we have exhausted half the world’s actual reserves of cheap oil) but that we haven’t invested enough in refining capacity. A lot of hope was poured into the prospects for exploiting deepwater reserves – a hope shattered for the next few years by the Gulf of Mexico oil spill which has frozen deepwater exploitation indefinitely. In any case, it’s also clear that deepwater could at best only slightly ameliorate the impact of peak oil, but not prevent it. The US military report continues: “By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 MBD.” (p. 29)

The conclusion, in any case, is even more dire than the predictions of groups like the UK Industry Task Force on Peak Oil and Energy Security, which earlier this year timed the coming global oil supply crunch at 2015. And the new analysis by Sir David King, the UK government’s former chief scientific adviser, proves clearly that the problem is not just about capacity, but about how much oil is actually in the ground and the rates of exploitation. The King study, published in the journal Energy Policy, finds that official estimates of world conventional (including deepwater) oil reserves should be downgraded from 1,150-1,350bn barrels to between 850-900bn barrels – and forecasts that demand may outstrip supply by around 2014.

An Unnatural System

And that’s not our only problem. The danger is that as we leave behind the era of cheap oil, we will turn increasingly to other hydrocarbon energy solutions like coal and gas which, apart from representing their own difficulties vis-a-vis scarcity, will continue to contribute dramatically to fossil fuel emissions and thus intensifying interference with the Earth’s complexly-interdependent eco-systems. The spectre of runaway global warming remains a reality, whatever the pretensions of self-styled, oil-funded ‘climate sceptics’. Earlier this year, the Guardian reported the findings of a new peer-reviewed study published in Science:

“Scientists have recorded a massive spike in the amount of a powerful greenhouse gas seeping from Arctic permafrost, in a discovery that highlights the risks of a dangerous climate tipping point.

Experts say methane emissions from the Arctic have risen by almost one-third in just five years, and that sharply rising temperatures are to blame.

The discovery follows a string of reports from the region in recent years that previously frozen boggy soils are melting and releasing methane in greater quantities. Such Arctic soils currently lock away billions of tonnes of methane, a far more potent greenhouse gas than carbon dioxide, leading some scientists to describe melting permafrost as a ticking time bomb that could overwhelm efforts to tackle climate change.

They fear the warming caused by increased methane emissions will itself release yet more methane and lock the region into a destructive cycle that forces temperatures to rise faster than predicted.”

Needless to say, the impacts of this positive-feedback alone would be sufficient to propel the entire Earth climate system into a process of irreversible runaway warming that could, well before the end of this century, create conditions devastating to most species, including droughts across a third of the planet, failed harvests in the major food basket regions, increased frequency of natural disasters, unprecedented sea level rise of up to five feet, and so on.

Paradigm Shift

These converging crises speak to the need for fundamentally re-thinking our understanding of the efficacy of the ideology, structure and values underlying our current economic behaviour, and whether they really are as inevitable, optimal or natural as we tend to assume a priori. At the very least, it is clear that unqualified austerity – or in Stiglitz’s words “deficit fetishism” – is not the answer:

“... even deficit hawks acknowledge that we should be focusing not on today's deficit, but on the long-term national debt. Spending, especially on investments in education, technology, and infrastructure, can actually lead to lower long-term deficits. Banks’ short-sightedness helped create the crisis; we cannot let government short-sightedness – prodded by the financial sector – prolong it... Deficits to finance wars or give-aways to the financial sector (as happened on a massive scale in the US) lead to liabilities without corresponding assets, imposing a burden on future generations. But high-return public investments that more than pay for themselves can actually improve the well-being of future generations, and it would be doubly foolish to burden them with debts from unproductive spending and then cut back on productive investments.”

Thus, we need to focus government stimulus spending where it’s most needed in the context of global crisis convergence: the development of a zero-carbon transport, housing and energy infrastructure, generating millions of new Green jobs. On that note, the Green New Deal Group’s recent reports provide an excellent step forward, but still highly conservative in its aspirations and out-of-touch with the imminent severity of global crisis convergence. In the UK, the Campaign against Climate Change trade union set out a more ambitious plan for one million green jobs. Similar plans have been considered in the US where an investment of £100 billion over 2 years could produce 2 million jobs, but again, implementation is slow. There’s a long way to go, and time in which we need to act is diminishing fast – at the moment, only one-sixth of the British government’s fiscal stimulus package has focused on green industries. On the other hand, timely global action by governments could ride us through the storm while creating a new form of prosperity based on more harmonious and sustainable ways of living.

The simple truth is that we are now in an age of civilizational transition, premised on the intensifying inability of the global political economy in its current form to continue business-as-usual. This global systemic crisis has no easy answers, but unless we start thinking outside the three-party box, things will get worse, not better.

As the US Joint Forces Command report warns: "One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest." (p. 28)

If business-as-usual continues, and if the three-party consensus here and conventional policymaking reign the day, then the flawed policy measures taken by governments over the next decade may well precipitate the rise of the far-right, the permanent militarization of our societies, and the resort to violent inter-state and inter-communal conflicts to resolve disputes over diminishing resources. It doesn't have to be this way. We can avert a Global Weimar collapse, but we need to do things a bit more differently than even Clegg might imagine.

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