To stop cuts, seize control of the banks!

Submitted by martin on 16 March, 2010 - 11:08 Author: Clarke Benitez

The Tory shadow Chancellor George Osborne must think he pulled off a coup on Monday 15 March. He got Jeffrey Sachs - a real economist, an architect of Russia's "shock treatment" after 1991, but who has since distanced himself from extreme free-marketism - to co-author an article with him for the Financial Times.

The article said that the Tories are right to go for rapid, big cuts in public spending to reduce Britain's Budget deficit, rather than a slower approach which includes waiting and seeing whether future growth will erode the debt more painlessly.

The European Commission gave Osborne backing the next day, 16 March, by tut-tutting that Britain needs "additional fiscal tightening measures".

The most instructive thing about the Osborne-Sachs article was the explicit way in which it based its argument on a claim about the psychology of international financiers.

Some mainstream economists, the article noted, "see the financial markets as benignly ready to finance [further] budget deficits". Why are they wrong? "We believe financial markets are perfectly capable of getting spooked about the prospects of debt financing in the medium term".

It's a matter, not just of paying the financiers their due sums, but keeping them mellow. To do that, the British government must axe hospitals, schools, libraries, pensions, welfare benefits, whatever. For if the financiers are "spooked", then the British government will end up like Greece, having to pay higher premiums to borrow on international markets, and seeing its problems spiral as the financiers get even more "spooked".

A short, sharp blast of cuts, by contrast, will "restore confidence", make borrowing easier, and thus (they claim) paradoxically speed new growth.

Osborne and Sachs make no claim for a cast-iron "objective" constraint enforcing big, quick cuts. Their entire argument rests on claims about what will "spook" international financiers and what will win their trust.

What about Greece? What has it done wrong? Greece's current budget deficit, measured relative to national output, is less than Britain's. Its accumulated government debt, again measured relatively, is less than Italy's and far less than Japan's.

On 13 March the Financial Times compared the impact of the crisis on different countries by the measure of the number of quarters of growth "lost". By that measure, Greece has been the least hard-hit of the eight countries surveyed. Like the USA, it had got "back to" output levels of early 2007, thus "losing" only 11 quarters of growth. Germany has lost 15, the UK 17, Japan 19, and Italy 26.

So what is it with Greece? Financiers' perceptions. The financiers have a revealingly derisive acronym for the countries at world-financial-market risk: pigs (Portugal, Iceland, Greece, Spain).

In 1945 Britain had a much bigger government debt "problem" than today, but the government, far from cutting, introduced the modern welfare state?

What is different today? First, "sensibility". A government in 1945 could not get away with citing the need not to "spook" international financiers as reason for refusing to legislate welfare provision, or for cutting what little existed. And the financiers knew that. They adjusted (and survived happily enough with it).

Today, financiers are accustomed to have their word considered instant law, and governments are accustomed to complying and getting away with it.

There is a more structural difference, too. Economic barriers between countries were much higher in 1945. There were strict government controls on exchanging currencies, which continued until 1979. Governments dealt much more with financiers within their own countries, and those financiers could not so easily move their wealth (or themselves) out of the country.

Now every government is immersed in uncontrolled, global, and very fast-moving financial markets.

To placate those financiers, Alistair Darling in his Budget will schedule big cuts, if not as big and fast as the Tories.

Two political conclusions follow. Within a certain range, there is vast flexibility in the amount of cuts "necessary" for governments to survive in the international markets. One element of that flexibility is the pressures on the government. If it thinks it can make big cuts easily, it will. Why not? If it knows it can't, then it has to find other ways to conciliate the financiers. And governments, despite what they say, are still huge concentrations of economic power. They have their ways.

But all that is valid only within a certain range, and a range too narrow for socialists and working-class activists.

Further, the call for the government to tax the rich - correct always, and sufficient sometimes - does not meet the case here.

A government which tried to placate the international financiers by closing its Budget deficit through heavily taxing the rich would do worse than one which simply continued the deficit.

The shrieks provoked by New Labour's recent minuscule increases in taxes for the rich show us what would happen. The international financiers would brand Britain not just a "pig", but a loathsome warthog.

There is a limit to what can be done by dancing with the international financiers in open, uncontrolled, fast-moving, global financial markets.

In current conditions a workers' government would have to reimpose exchange controls and insulate itself from the financial markets. It would do that not because it believed in walling off the national economy - on the contrary, it would know that its survival depended on winning workers' governments in several other countries, and organising mutual aid - but because it needed breathing space.

Reimposing exchange controls, after thirty years of spiralling global financial markets, probably could not be done without taking the whole financial system into public ownership and integrating it into a unified public banking, mortgage, and pension service, with workers' control in all the crannies of the operation to stop financial sabotage. That public ownership is what we should demand.

Far-fetched? In conventional politics, maybe. But it's going to take a lot more than conventional politics to stop the torrent of cuts due to be unleashed on us.

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