Transcription
Britain's prime minister Kia Starama has resigned. "I will resign as leader of the Labour Party." Sixth Prime Minister of the UK to resign without completing a full term. Disappear. That's Kia Starmer, to offer my resignation. "I am resigning. I am returning to my plan. I will resign as leader. I'll tender my resignation."
But just like all his predecessors, he was applying neoliberal economic policies to the country. Britain's economy is under incredible strain. Britain's debt has grown significantly since the start of the century. Unemployment is rising, salaries are stagnating, cities are going bankrupt, and our public utilities are in dire disrepair.
One of the few economists to accurately predict the 2008 financial crisis, Steve Keane has spent years studying how debt shapes economies. His research suggests today's political instability isn't just a leadership problem. It's the result of decades of failed economic policies. "There's enough time passed between when these policies began and today to say it's a categoric failure in terms of its impact upon economic growth. So unless we have a new economics, we're going to end up exactly the same situation."
Well, it's Tuesday and that must mean that there's a new British prime minister. It's not quite that bad. But on the 22nd of this month, the sixth prime minister of the UK to resign without completing a full term disappeared. That's K Stara. There's many reasons Astama was unpopular without a doubt. As many people have commented, this was just full of spin, his overall speech. In fact, it was such a good speech in terms of spinning fact into fiction that I think he should actually be a spin bowler rather than being a prime minister. But let's have a listen to his finally conceding that he has to leave office.
"Every decision I've taken has been about putting the country I love first. That is why I will resign as leader of the Labor Party." I think one of the best comments on this was a a post on Twitter where somebody said number 10 Downing Street is now managed by Airbnb. It's great for short stays. Well, let's let's stop the jokes and just take a look at what's actually lying behind this. Apart from the unique features of Star's own troubled prime ministership, failure wasn't just characteristics that Star had that made him a uniquely poor prime minister. It's also that just like all his predecessors, whether he knew he was doing it or not, and frankly I don't think he did realize it, he was applying neoliberal economic policies to the country. And it should end with Tama, but probably it won't because the belief system that neoliberalism represents is still still permeates virtually all politicians, certainly most journalists. It's something which people believe despite its record. So I really believe he should be the last neoliberal political leader, given the track record of neoliberalism, but it won't be. And we've been following this approach to economics not just for the term of this Labor government or the one before that or back to the conservatives under David Cameron. It's something which has been around ever since Maggie Thatcher and Ronald Reagan. And in fact, I date it back to Australian politicians because I was involved in the some of the debates over the direction Australia should take after the collapse of the Whittam government in 1975. And in many ways, neoliberalism was built by Australian politicians in response to the perceived failings of the Whittam Labor government. And they, the argument was that we need to combine popular social policies, and that can be leftwing or right-wing policies. 50 years ago, they were leftwing policies, now they're right-wing policies.
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So the idea was that the textbook tells us what we should actually do. And that basically tells us that if we get rid of all the regulations on the market economy, if we cut government spending, then the private sector will rip and the economy will grow so much faster than it grew under those terrible days of Keynesian economics when we had lots of regulations and government intervention and the economy and so on. Get rid of all that stuff and the economy will grow much faster. And because it'll grow that much faster, you won't need social security. You won't need public health. You won't need public education or state pensions. You can provide all that yourself out of your own much much higher income that you're going to get from these neoliberal policies.
Now, if you take a look at the state of government policy documents in the aftermath to World War II, they emphasized above all else guaranteeing full employment. Australia's white paper on employment, which was published in 1945, said what was believed largely around the western world, and that is a policy of full employment will maintain such a pressure on demand on resources that for the economy as a whole, there will be a tendency towards a shortage of men rather than a shortage of jobs. And if spending and employment tend to decline, then government should stimulate spending to the extent necessary to avoid unemployment. That was the mindset that dominated the first 30 years after the end of World War II. But when stagflation began, neocclassical economists in particular said we have to forget about full employment. We have to maintain price stability, and we need to restrain government spending, which is causing all this terrible inflation. Neocclassical economists and the politicians who adopted their approach and gave us neoliberalism thought that this would boost economic growth significantly. And Ronald Reagan said it very well in a clip once. He said that our children will thank us. And what will they thank us for? By bringing in fiscal responsibility and leading to a higher rate of economic growth.
"I hope history says of us that we were worthy of our past, worthy of our heritage. We can seize the moment. We can do our best for America to keep our future strong, secure, and free. Our children will thank us. And that's all the thanks we'll ever need."
So that was the promise back when this all began. What was the outcome? Well, it didn't lead to a high rate of economic growth. There's enough time passed between when these policies began and today to say it's a categoric failure in terms of its impact upon economic growth, rather than being much higher to the stage where you could forget about providing state services because everybody could buy what they need with their private incomes. Rather than that happening, the rate of per capita economic growth was much lower under neoliberalism than it was beforehand. This is data from the World Bank. And when you take a look at the period from 1960 to 1975 in this data, per capita growth rate on average across all these countries was about 4% per annum. What happened under neoliberalism? It fell to 1.8% per annum. That's a huge decline. It's about 2.2% 2% per annum lower per capita economic growth. Now, to put that into perspective, if we'd maintained the same rates of economic growth that occurred before we switched from full employment policies towards neoliberalism, then advanced nations would be three times wealthier than they are today. The United States would be one and a half times wealthier, and Britain, which of course is the subject of this video, would be 1.35 times better off. The only thing that would have made neoliberalism appealing was the argument that it would lead to a high rate of economic growth. On that basis, it's an economic failure. The UK has actually relatively speaking did not as badly as many other countries in terms of the impact on neoliberalism. But it still meant that economic growth fell by about 0.8% per annum per person. What that has meant is a lower level of per capita income today than we would have had if we hadn't switched policies back in 1975. But also a dramatic increase in financial instability.
So what went wrong? Why did the policies not work? The main thing that neoliberalism did, even though it spoke about deregulating capitalism in general, it really basically deregulated the financial sector. And it also attempted to restrain government deficits. They still occurred mainly because the deficits fixed up problems that came out of the private sector that neoliberalism didn't anticipate. But what did happen was a dramatic rise in private debt. Now, you'll know that neoliberals always obsess about the level of government debt. But what really rose under their reign was the level of private debt. This is a Ravel file showing government debt and private debt for the United States. And if you know all the economists obsess about government debt, they ignore this one. This is what actually rose: private debt. So if you go back to 1974, the level of private debt as a percentage of GDP in America was under 100%. By the time we hit the global financial crisis, it was 170%. Britain was even more extreme. So for over a century, from 1880 to about 1980, private debt in the UK never exceeded 60% of GDP. Once neoliberalism began, it trebled. It reached 180% by the time of the global financial crisis. So what rose during neoliberalism was something that neoliberalism ignores, which is the level of private debt.
Now, the belief that economists had was that the private sector would finance investment. Well, it didn't. It financed speculative bubbles instead, both in the stock markets and in housing. And the scale of debt is something again that people don't understand because conventional economists obsess about government debt and ignore private debt. But here's margin debt. That's debt that people take out to buy shares on the stock market. You can see how it exploded in the 1920s and collapsed at the time of 1929. Then there was a period between 1945 and 1975. Margin debt was quite small. It never exceeded half of 1% of GDP. But then under neoliberalism, it grew again to 4% of GDP. That's a large amount of money levering up the stock market. And that's what it did. The rise in margin debt was the major factor that caused the rise in the stock market. The first graph here shows what's called the cyclically adjusted price to earnings ratio. That was invented by Robert Schiller to show just how overvalued the stock market was at various times. And the average value for this was 14. But the current value is 40, which is the second highest in history, well above the level of stock market overvaluation that applied back at the time of the 1929 crash. This is margin debt. Notice they're very similar in shape. When you look at the change in margin debt and the change in the cyclically adjusted price to earnings ratio, you find a ridiculously strong correlation. Again, this is ignored by mainstream economics. This is the real world. Credit drives asset prices. And what neoliberalism did was enable credit to grow dramatically. And what that caused was a growth in asset prices, not a growth in the real economy.
The same thing applies in housing. So we all know that America had a housing boom and bust. That's the subprime boom and bust there. What we don't know is the extent to which mortgage debt drove that increase in house prices. I have a theoretical argument as to what actually caused it, that what it comes down to is the acceleration of mortgage debt causes the change in house prices. And that turns up in the data both for the UK, America, Australia, New Zealand, Spain. All these countries had asset price bubbles driven by private debt. They didn't have investment booms. They had speculative booms. So neoliberalism promised economic growth, but it delivered asset price inflation instead. And the physical economy, relatively speaking, stagnated compared to what was happening in the 50s and 60s under the full employment policies. The physical economy grew less rapidly, not more rapidly, courtesy of neoliberalism. So asset owners and the very wealthy did very nicely out of that. And that's one reason they defend neoliberalism so much today. And it's also why politicians who rely upon funding from the private sector can't see what the rest of us are feeling, because they're talking to the people who benefited from this process. And the people who benefited are the ones who are financing the re-election campaigns of these politicians. The working class and the middle class class got screwed. And that's why we see a rise in right-wing politics today, because this began with left-wing parties like the Australian Labor Party, the British Labor Party, the American Democratic Party. They introduced these policies, and they are the ones who are being attacked by the right. This is what's leading to political decay and political instability all around the world, but most dramatically in the UK right now.
Now, as well as an increase in household debt, what households did in response to that was they thought, "Oh, I've got to hang on to money to pay my interest bill, so I should spend more slowly and therefore I can save more money." Now, that works for a single individual. It does not work for the collective economy. If each of us tries to save more money, what we do is slow down the rate at which money turns over. And by slowing down the rate at which money turns over, we slow down the economy as well. And this is vividly obvious in the data. This is the American data from the Federal Reserve economic database. But the velocity of money, money turned over about 1.8 times per year all the way from the 60s out to the beginning of the 90s. It rose during the Clinton recession and the beginnings of the telecommunications bubble. But once household debt in particular started to rise, we saw this dramatic downward trend in how much money turned over. Effectively, money was becoming less productive at this stage. Back in 1997, money turned over 2.2 times per year. So if you had a billion dollars of money, you'd created $2.2 billion worth of GDP. By 2020, we were down to the stage where a billion dollars caused $1.2 billion worth of GDP. So there's been a decline in the capacity of the monetary system to generate real economic growth.
And they never understood, they still don't understand that a government deficit is actually how what we call fiat money is created. If the government doesn't spend more than it takes back in taxation, then it doesn't create money backed by the fiat of the state. The only money that's created in that situation is credit-based money, and that credit-based money leads to a huge financial bubble rather than unfortunately rather than the physical investment we actually need. So by trying to eliminate government deficits and allowing bond sales to occur, which also destroy fiat money, almost all the money created in the last 50 years has been created by the private sector rather than the government. All the dialogue you'll see from mainstream economists complaining about the inflation caused by government spending is in fact caused by the financial by the private financial sector. This also, because there was less money being created by fiat, fiat money ends up in your pocket without a debt attached to it. But credit money ends up in your pocket with a debt attached to it. So people spend more freely when they have fiat money. And that's one reason for the high level of economic activity in the 50s and 60s.
Now all these factors combined meant that neoliberalism failed. It wasn't the only reason that Stmer's miserable leadership is over. But it's the factor which he shares in common with all his failed predecessors before him. Now, unfortunately, I don't expect any real change out of Andy Burnham, the next leader, because he's likely to follow the same policies. And why is that? Because what they're following is fundamentally what is taught by conventional economics textbooks. And this comes down to the questions which matters more, politics or economics. And one very intriguing statement was made by Paul Samuelson, who's the person who gave us conventional economics in the first place. And in a guide to one of his textbooks, he wrote, "I don't care who writes a nation's laws if I can write its economic textbooks." The first lick is a privileged one on the beginner's tabular rasa at its most impressionable state. All these politicians were 18-year-old university students at some stage. They did a bit of economics. They learned the textbook approach. They took it seriously. And because they're applying textbook economics, that is why the economy has been in a crisis ever since neoliberalism began. So, we won't get away from neoliberalism unless we get away from the economics that created it. And there is a different way. I'm not the only person who does this work by any means. I have got a large number of colleagues in non-orthodox economics. But what we work in doesn't talk about equilibrium, which is the neoclassical fantasy about a capitalist economy. We live in a complex system. We don't have a barter economy. The monetary system actually matters. You might not realize this, but neoliberal economics pretends that we don't even have a banking sector or money or debt. It pretends we work in a barter system. That is just nonsense. So the realistic approach to economics is based on decades of research that the mainstream has ignored. I teach that in my online course, which that link wstevekain.com. It's also built on my Ravel software, and that enables me to build dynamic models that show the actual cyclical behavior of the economy and the actual impact of policies like neoliberalism and redistributing income from the poor to the rich. So unless we have a new economics, we're going to end up in exactly the same situation. The only country that seems to be a major exception to this is China. Will continue down the neoliberal path, and the United Kingdom will soon have a seventh failed prime minister in another year or two.