1. AUSTERITY DOES NOT WORK! © 2014, Institute for Economic Futures

2. A LOOK AT THE EVIDENCE

3. THE CRISIS In 2007, financial markets all over the world collapsed, dragging the real economy with it. Behind the collapse was a huge bubble where asset prices had been reached unsustainable proportions. The asset bubble had been financed by borrowing, which made the crisis into a debt crisis. Other factors: Increasing inequality forced normal people to borrow. Low government revenue and bank bailouts forced governments to borrow. For many countries, interest costs were pushed up to unsustainable levels.

4. THE EVIDENCE IS IN: AUSTERITY DOES NOT WORK! Countries owed more money then they could cope with. The solution they came up with was austerity. Cut expenses in order to be able to pay down the debt! This was done at a terrible cost to the economy: Increased unemployment. Contraction in the economy. Increase of poverty. And no end in sight. What did these sacrifices accomplish? An INCREASE in debt! The Evidence is in. And it is conclusive. AUSTERITY DOES NOT WORK! As a result of the austerities, the debts of the indebted countries have increased, not reduced.

5. WHAT IS AUSTERITY Cut in total government non-interest spending! Cut in investments Cut in welfare spending Reduction of pensions Lay off of government workers Sometimes accompanied by sale of government assets

6. WHY AUSTERITY? Government debt reached proportions that are unsustainable Basically two reasons: Fiscal crisis: The government has over time run large budget deficits to finance stimulus programs, bad investments, or government corruption. Italy, Greece, Portugal, Romania Banking crisis: The government forced borrow money to bail out banks. Spain, Ireland, Iceland, Cyprus, A fiscal crisis can turn into a banking crisis, if the government gets overextended (Greece). A banking crisis can turn into a fiscal crisis if collapse of banking sector requires stimulus to restart economy.

7. MEASURES TAKEN Reduce government spending Cut in investments Cut in welfare spending Reduction of pensions Lay off of government workers Sale of government assets

8. AIM OF AUSTERITY MEASURES Reduce fiscal deficits Balance budgets Reduce government debt as portion of GDP This is supposed to put the economy back to recovery

9. EFFECT OF MEASURES Unemployment up Growth reduced Poverty increased Inequality increased DEBT AS PERCENTAGE OF GDP INCREASED

10. GREECE

11. CYPRUS

12. ITALY

13. SPAIN

14. PORTUGAL

15. IRELAND

16. FRANCE

17. UK

18. UK – PROOF THAT AUSTERITY WORKS? As we saw, the UK economy is starting to turn around. Growth is resuming and unemployment is coming down. This has been taken as proof that austerity is working! But is it? In reality, the economy turned around only after austerity measures abandoned! The economy improved after government deficits started to increase! If deficit increases and government spending contribute to growth it can no longer be called austerity! Government rhetoric still austerity, but the actions are the reverse. “If I keep hitting myself in the head with a baseball bat, and then I stop, I will start to feel better; this doesn’t mean that hitting yourself in the head with a baseball bat is a good thing!” – Paul Kruger

19. DEBT SITUATION IN THE EU

20. CHANGE IN UNEMPLOYMENT EU

21. CHANGE IN GDP EU

22. ROMANIA

23. SUMMARY Austerity measures were introduced at a tremendous cost to the general population, in order to get government debt under control. In spite of the enormous suffering, the stated objective of reducing debt did not happen. In the UK, which has been held up as an example of that austerity does work, the economy only improved after austerity measures were suspended! Quack medicine! Aggravates the sickness while having lots of negative side effects.

24. WHY AUSTERITY DOES NOT WORK

25. UNDERSTANDING THE ECONOMY Different competing views on how economy works Classical Economics Monetarists Keynesians “Other Cannon” Marxist Different views gives different understanding

26. RECESSION: THE TRIGGER OF AUSTERITY While government deficit spending, overextension of banks may go on for many years, they only become an issue when a recession strikes. Recession often triggered by the burst of speculative bubbles. During a recession Productive resources in the form of people, machinery and raw materials are idle. The financial system, which is necessary for a modern economy to function, freezes up.

27. CAUSES OF RECESSION AND CRISIS Monetarist view: Temporary, random shocks. Keynesian view: Fall in aggregate demand. Marxist view: Fall in the rate of profit.

28. MONETARIST VIEW As long as money supply is kept stable, inflation and output will be stable as well. (MV=Py) Recessions and unemployment occur due to temporary, random shocks, that affect markets. During this time the demand for money increase, and result in a drop in output. Monetarists recommend in such situation and strong increase in the supply of money. Although they believe monetary policy is more effective than fiscal policy, they have never called for a reduction in government spending at the start of a recession! Milton Friedman recommended dramatic expansion of Japanese money supply to get out of stagnation. The thought of austerity never occurred to him.

29. KEYNESIAN VIEW Demand drives the economy. When aggregate demand drops, the economy is thrown into recession. This can happen when: Purchasing power drops for common people. The government cuts back on spending. Investment slows down. The government’s role in a crisis: Spend more to stimulate the economy. This will have a multiplier effect to revive the economy.

30. MARXIST VIEW Marx considers that the periodic crises of capitalism is triggered the by falling rate of profits. Due to competition between companies, there is a constant pressure on profits, the so called tendency of profits to fall. When profits have been reduced to unsustainable limits, a recession takes places, that forces many companies into bankruptcy with the wholesale destruction of productive resources and inventories. This reduces competition and profits are restored. This is an inevitable outcome of the capitalist mode of production, and cannot be done away with except in socialised, planned economy. As to the present crisis, Marxists disagree: Some consider it a classical example of the periodic crisis of capitalism (e.g. Mick Brooks, Capitalist Crisis: Theory and Practice, (London, 2012)) Some consider it a new phenomena of financial : structural accounts of the crisis 2007-9) crisis not analysed by Marx (e.g. Costas Lapavitsas, Financialisation and capitalist accumulation Austerity programs during recession is from a Marxist view seen as having the workers bail out the capitalists, and is hence not supported.

31. THE TENDENCY OF THE RATE OF PROFIT TO FALL Labour theory of value: All value comes from Human Labour. They alone produce surplus value. Machines do not add any value. Due to competition, better and faster machines are always developed. Industries more capital intensive (Marx: Increase in Organic Composition of Capital) Fewer workers needed to produce same things. As value only comes from human labour, and the exploitation of workers is more or less constant between industries, the surplus value per product reduces, and hence the profits decline.

32. MARX AND FINANCE CAPITAL Marx also analysed what he calls finance capital, but does not consider it the cause of crisis. Capital formation: Production: M-C-M’ Finance: M-M’ Finance capital causes assets bubbles. When expectations of future earnings increase, then the value of the underlying assets increases, e.g., the value of stocks go up. When it becomes clear that the value of future earnings are unrealistic or false, the value of the asset goes down. If the assets were highly overvalued, then the bubble bursts. Marx calls these over valued assets “Fictitious Capital.” According to Marx, Fictitious Capital can be a contributing cause, but not the main cause, of crisis. In general, Marx had an astonishingly clear understanding of the financial system that seems well before his time. While the system has got more sophisticated, in general it still works the way Marx described.

33. DIFFERENT THEORIES SAME CONCLUSION: AUSTERITY MAKES THINGS WORSE Neither Monetarist, Keynesians nor Marxists theories recommend austerity measures to fight recession! Indeed, no economic school of thought has even made an argument that austerity measures will revive the economy. The supporters of austerity this time invented a theory that went like this: Cutting the government deficits would increase expectations of future growth, and would increase demand today! This went against all existing economy theories, and, as we have seen, did not work!

34. THE DIFFERENCE BETWEEN STATES AND FAMILIES Families Cutting expenses has no effect on income The family is too small to effect the whole economy Governments Government spending in Western Countries 20%-30% of GDP US If government cut spending 5%, it immediately cuts 1-1.5% of GDP! This has a ripple off effect on individuals and companies that will earn less. As they earn less, they pay less in taxes. Government revenue shrinks, which necessitates even higher cuts.

35. DEBT/AUSTERITY SPIRAL

36. WHO LENDS OUT THE MONEY? In the economy, we have public wealth and private wealth. We cannot borrow from the future! Whatever money is borrowed is borrowed from someone who has it now. If the government borrows money, who does it borrow from? From the private sector!

37. COUNTRIES ARE RICH BUT STATES ARE POOR Public debt, about one time national income, equals national wealth. Net public wealth: ZERO. Private wealth, which equals total national wealth, equals 4 to 6 times national income. Therefore, most countries are not broke, they are rich. It is the states that are poor. Had the states

39. WHY ARE STATES POOR? Since 1970’s, a long set of policies have been geared to transfer wealth from the low and middle income groups to the rich. In addition, all public assets were also transferred to the rich. Policies include: Regressive income tax. Reduction in taxation for speculation. Reduction in wages at fixed prices which increased profits. Bailing out the rich. This was financed by Increased borrowing. Depletion of government assets. Cut in education, welfare, and other public services.

40. INEQUALITY HIGH AND INCREASING Private assets are roughly 5-6 times National Income, so the countries are not really poor. It is only that private people own most of it. Out of this, the richest 1% own 35%, or two times the national income, and the next 9% richest own another 35%. The poorest half of the population own only 5%. If we took half of the wealth of the richest 1% it would pay back all public debt, and they would still have more than three times more wealth than the bottom 50% combined!

43. INEQUALITY OF INCOME USA

44. INEQUALITY OF WEALTH USA

45. INEQUALITY OF WEALTH SWEDEN

46. INEQUALITY WILL CONTINUE TO RISE Unless steps are taken to change policies, inequality will keep on rising. Even with the reintroduction of a progressive income tax it will take hundreds of years to remove inequalities in wealth.

47. INEQUALITY AND THE ECONOMY The poor and the middle class consume their income. This money goes back to the economy. The rich invest their money. While some of the investments are productive, most are speculative and do not benefit the real economy. The greater the divide between rich and poor, the more resources are wasted in hoarding, financial services and speculation. Also: Inequality leads to increased borrowing by common people. When the bubble bursts, they are forced to try to repay their debts, thus lowering demand. This makes a direct link between inequality and recession.

48. SPECULATION AND INVESTMENTS Productive investments create wealth: Create something new Examples Building factory Writing software Growing food Speculation redistributes wealth: Buy something in the hope that the price will go up Examples Buying stocks Buying real estate Speculate in derivative products (e.g., CDS, CDO, DCD, trackers, futures contracts, options) Financial services redistribute wealth Does not create anything new Extracts a commission to facility loans and speculation

49. SIZE OF SPECULATIVE ECONOMY Global GDP: USD 75 trillion Global annual world trade: 19 trillion Global annual foreign exchange turnover: USD 1,900 trillion Global market capitalisation: USD 63.4 trillion Notional value of outstanding derivatives: USD 1,200 trillion

50. SPECULATION AND FINANCIAL SERVICES Speculators are like gamblers in the casino – they sometime win and sometime lose. Financial firms and banks are like the bank of the casino – they always win regardless of who else wins or loses. Financial services and banks drain wealth from the real economy. 40% of corporate profits in the United States are siphoned off by financial service firms.

51. CONCLUSIONS No backing for austerity programs by any economic school. The real problem is that the state has too little resources compared to the private sector. In the private sector, inequality is extreme and rising. Due to inequality, consumption by the poor is curtailed and wasteful speculation among the rich is rife. Austerity is not the solution. Any solution must entail a transfer of resources from areas that waste them to those who will use them productively. In other words, resources has to be moved from the rich, who use them for speculation, to the common people and the state, who employs them productively.