The Economic Mess - All the Fault of Welfare Spending?

There is quite a long list of people who can legitimately be held to account for the current crisis.   Most people I imagine would put bankers, particularly investment bankers and regulators high on the list.  However it seems that it is welfare spending by governments which is mostly to blame.  At least that is the consensus view of most of the mainstream media.  It is also the determined view of our present nasty Coalition in the UK.  Though of course they blame the previous New Labour government and not themselves.

A typical example of this thinking was to be found in today’s editorial in The Scotsman.  Their leader writer intoned: “The harsh reality is that across America and Europe, huge rises in government and welfare spending have been financed by resort to debt to the point where the ability of government to service and repay these debt obligations has come under question.”  The harsh reality is that this leader writer is talking a load of bunkum.  Let’s try and unpick his or her assertions a bit.

It is true that in many countries there has been a rise in government spending, but it is not true that this rise has been by historical standards huge.  As  Professor George Irvin, Research Associate at SOAS, puts it:  “For thirty years after the war, most major governments carried more debt than they do today. They serviced this easily and eventually reduced the burden because they were able to use fiscal policy to boost and maintain growth.”

What is manifestly untrue is that this rise is primarily down to welfare spending.  While welfare spending will have gone up, this is perfectly natural in an economic downturn.  This is precisely why welfare benefits were introduced in the first place.  To mitigate the damaging effects of downturns or recessions.  What usually goes along with this increase in welfare spending is a sharp downturn in the government’s income, as tax receipts decline due to the downturn.  So the reality is that there has not been a huge rise in welfare spending, but there has been a reduction in government income.

However this downturn in tax returns does not in any way explain the current high levels of government debt.  Here we need to look more closely at where this debt has come from.  And we quickly discover that most of this rising debt has come from the private sector.  Both individuals and companies.  And this private debt of course was financed by our friends in the banking sector, who were more than happy to lend out vast sums of money to all and sundry - no questions asked.  But as soon as the bubble began to burst, well these private banks immediately turned to their governments and begged or bullied them into bailing them out.  Which for some unfathomable reason they all did.  This is what has caused the issue of sovereign debt to raise its ugly head.  In a free market economy, companies, including financial companies that get into trouble are supposed to pay the price of failure.  It is known as market discipline.  And it applies to the shareholders as well.   The companies go bankrupt or get taken over by a competitor at a knockdown price.  And the shareholders lose some or all of their investment.   In extreme cases, where the company is of national importance to the economy, they get nationalized.  Now that is what has effectively happened with the banking system.  Unfortunately for the poor taxpayer, this form of nationalization was designed to protect the shareholders, by keeping the banks afloat.  And to complete the cave in, the management teams that got us into this mess were left in place.  Free to continue to pay themselves huge bonuses.

It is interesting to note that none or little of this gets much of a hearing in the media.  So, in a nutshell, the private sector gets into a critical mess and begs the government to bail out the private banks by taking on more and more debt.  The private sector then blames the government for this rising debt.  Wonderful.

Top Bankers really do destroy our society

A fascinating new study from the New Economics Foundation has examined in detail just what top bankers contribute to the UK economy and society. Their conclusion - City bankers destroy £7 of social value for every pound they earn. Wow!

The basis for this claim comes from using a different way of thinking about the value generated by different types of work. This looks beyond the narrow definition of economic productivity to calculate the broader social and environmental value of the work we do.

In their recent report, “A Bit Rich”, the New Economics Foundation attempts to put a value on what different types of employment are worth to our society. By drawing on the principles of Social Return on Investment analysis, they were able to quantify the social, environmental and economic value that people’s work produces – or in some cases the value that is undermined or destroyed.

In particular they looked at a sample of six professions - three highly paid and three low paid. The sample included City bankers and childcare workers. In the case of highly paid City bankers - people who took home salaries of between £500,000 and £10 million - the analysis found that ‘for every £1 in value created, £7 worth of value is destroyed by a highly paid City banker. In summary, our calculation is derived from the following:

Factors in value created:

1. Average annual contribution of the City to UK economic activity, as measured by gross value added
2. Tax contributions to the Exchequer
3. Jobs provided in the wholesale finance sector.

Factors in value destroyed:

1. The cost of the current financial crisis in terms of loss to UK gross domestic product and economic capacity
2. The cost of that crisis in terms of the negative impact on the public finances.

We might also have thrown the net wider and included other impacts, not least the negative impact on the global economy of the activities of highly paid investment bankers and traders. Far from being ‘wealth creators’, City bankers are being handsomely rewarded for socially damaging activity. They are not just overpaid; they are overpaid at the expense of others.”

As regards childcare workers, most of whom will earn less than £15,000 per year, the report found that, “Both for families and for society as a whole, looking after children could not be more important. As well as providing a valuable service for families, childcare workers release earnings potential by allowing parents to continue working. They also unlock social benefits in the shape of the learning opportunities that children gain outside the home. For every £1 they are paid, childcare workers generate between £7 and £9.50 worth of benefits to society.”

These are two of the finding, but you get the drift. We have somehow managed to create a society and economy in which those who do most damage to the economy and society get paid the most, and outrageously so, while those who contribute most to life get paid the least.

This is potentially a very important report, and the more people who read it the better. It provides very convincing evidence to back up demands for a restructuring of our economy to one that rewards adequately those who contribute most to our well-being and to protecting our precious environment.

The report includes a section on 10 myths about pay and value and concludes with some specific policy recommendations. You can download the whole report from the New Economic Foundation’s website here.

How much is a banker worth?

Just how much money is the Chief Executive of a large bank worth? Eric Daniels of the new Lloyds Banking Group gets £1 million as his annual salary, while Stephen Hester of the Royal Bank gets £1.2 million per annum. In addtion of course there are very substantial bonuses on offer. In the case of Stephen Hester these include a £2 million non-cash bonus, and nearly £6.4 million of long-term share and stock options if the bank's shares rise to 70p per share (currently 37p per share). Top executives at Goldman Sachs in both London and New York are also eyeing up obscenely high bonuses. The question has to be asked what exactly do these men, for they are nearly all men, do to justify these obscene earnings?

I'm not sure that earning is the right word for the amounts of money we are talking about here. Let us leave aside the bonuses for a moment, what justifies the basic salaries, which in the case of Lloyds and RBS amount to £1 million plus? There seem to be two basic arguments advanced in favour of these high salaries. The first is that the chief executives and other top managers have a very demanding job and that it is a very tough market out there. The othe justification is that banks and other financial institutions work in a very competitive market - if they didn't pay the "going rate", then their top managers would be snatched up by the oppostion. Both arguments are pretty much self serving crap.

While running a large bank may be a demanding job, lots of other jobs are very demanding and some involve a degree of personal risk. There are plenty of jobs in the health and education sector, for example, that will be extremely demanding, with far more direct exposure to criticism from the public than running a large bank. Furthermore there never seems to be any financial risk at stake. No matter how catastrophic the mismanagement, the outgoing management never seem to suffer financially. They are in a win-win situation. If the banks do well they make millions of money, if the banks collapse, they still make millions of money. What is demanding about that? There does not appear to be any reward or incentive for managing a sustainable concern. Manipulate the share price and you hit the jackpot. Who cares what the business actually does.

The other argument, that banks work in an internationally competitive market is also absurd. The fact that nearly all top managers are male, reduces the competition quite significantly. As does the fact that most top mangers are white. Given that Asian business schools produce top class graduates year after year and most of them speak English, why are most of our top managers not Asian? If there was real competition then most Asian managers from India, China, Taiwan etc would work for a lot less than £1 million. And probably do at least as good a job. The reality of course is that there is no competitive market for top managers. The salaries and total renumeration packages are agreed by the boards with their non-executive members who are often executives in other companies and the packages are then sanctioned by various committees made up of top managers from other companies. Since they are all in the same game they are most unlikely to recommend paying less. This is about as closed a shop as you can get.

Another fundamental flaw which affects both arguments is that the continual pursuit of obscene amounts of money is not what motivates the overwhelming majority of people. This is not to suggest that most people don't want a decent income, but vast sums of money are not what motivates people. All the evidence points to the opposite. To restrict ourselves to banking for the moment, the majority of people working in banks are the relatively lowly paid counter staff. The tellers of old, the people who provide the front line service, the public face of the bank. None of them earn a great deal - in the case of the Royal Bank, counter staff probably earn about 1/80 (one eightieth) of Stephen Hester's basic salary. Yet these lowly paid bank staff turn up every day, work away under great stress and always have to put on a polite and cheery face to the public, however grumpy they - the public - may be. What motivates them? Not their measly salary - important though that is. They simply want to do a good job and support their colleagues in their branch. Sure, they would love to get paid more, probably a lot more, but they don't wait until they get a decent salary before they put in a decent stint at work. And what about our chief executives? Without his £1.2 million basic annual salary are we to believe that Stephen Hester would not turn up for work? Or if he did turn up that without the £1.2 million he wouldn't work that hard. He would only be a half hearted chief executive? Before heading RBS, Stephen Hester was the chief executive at British Land and only earned half of what he now gets at RBS. Are we to believe that Stephen Hester only worked half as much then as he does now? A pretty preposterous notion.

Two further points. People who make a fortune starting from scratch, people such as Bill Gates or Richard Branson, start off by pursuing a dream or an idea. Money is certainly a factor, but rarely if ever the main motivating factor. They simply want to make something or provide some new kind of service. If it works well they may then go on to make a fortune. But, millions and millions of people go down the same route year after year and never make anything. Some only make losses and end up bankrupt. Nevertheless they continue and other people keep on trying. Further evidence that obscene levels of remuneration are not needed. The final point is the vast army of unpaid workers - all those volunteers who freely give of their time and expertise to help others. This is what makes the world go round. Most of the current chief executives, not just of banks, but of all companies would continue to do their job and give of their best for much, much less in the way of salary, providing it happened to everyone. Those who are only motivated by money, should not be in charge of anything.

The Budget - or how not to solve a crisis

That was really exciting wasn't it? Even by the (very low) standards of previous budgets this one was pretty pathetic. Faced with an unprecedented global crisis all we get is a bit of tinkering here and there and an enormous amount of borrowing. The borrowing is actually OK. It makes no sense to cut back on public spending during a recession, especially one as serious as this one. What is most depressing about the budget is the complete lack of thinking and questioning that has gone into the budget.

It was very revealing that all three of our major UK parties are essentially singing from the same hymn sheet. One after another they parrot the same line – we cannot afford to pay for public services or pensions and there just has to be significant cut backs in provision. The only real difference is in degree. Labour says not just now, but the cuts will come in a couple of years, while the Tories say we need to cut back now! The Lib Dems as usual are somewhere in the middle.

Now who exactly is this We that can't afford to pay for decent public services? Why the good old United Kingdom. And is this very same United Kingdom not the sixth largest economy in the world and about the 16th richest country in the world? So, just to get this right, we are asked to believe that the 16th richest country in the world can't afford to pay for good public services and can't afford to pay for decent public pensions? Not only can the 16th richest country in the world apparently not afford this so-called extravagance, in fact we need to cut back on services and on the paltry pensions most of us currently get.

It is very interesting to note that the people who are saying this – the politicians in charge of our main UK parties, the Institute of Directors, the CBI, the leader writers of the right wing press etc, are all themselves pretty generously paid, to put it mildly. And they represent and speak for the well paid. Who in all of this is speaking out on behalf of the low paid, the poor and the majority of middle income families? Certainly not the Labour Party or New Labour as now is. Something would seem to be wrong with our democracy when none of the main UK parties is able to articulate an alternative vision of how to get out of this mess without punishing the less well off.

Without getting into to too many details here are two alternatives to the current prognosis. The first is to have a fairer and more equitable taxation system. Over the last three decades income and wealth inequality has risen dramatically in the UK, while at the same time the tax burden on the better off has declined. Labour's proposal to introduce a 50% rate for those earning over £150,000 per year is a welcome step, but is more about appeasing those residual Old Labourites still in the party, than a serious attempt to rebalance the tax system. Much more needs to be done.

From the perspective of reducing public spending, one major way to do so would be to revisit the Defence budget. Something that seems to be off limits for all three main parties for some reason. The very name itself – Defence - is absurd, when you consider how little defending we do and how much attacking, invading and occupying the UK does. And in addition to the vast sums currently spent, the government wants to spend even more on upgrading Trident and building two new aircraft carriers, at a cost of £25 billions or more. None of which have been or could have been of any use in Iraq or Afghanistan. If we as a country decided to just have a Defence force – based on fisheries protection and coastal security – we wouldn't need even a half of our current Armed Forces, let alone nuclear weapons and aircraft carriers. This proposal would also I contend make the country safer. Invading and occupying Muslim countries is not an obvious way to reduce hostility to the UK. Nor for that matter is our carte blanche support for Israel's continuing occupation and ethnic cleansing of Palestinians.

I would suggest that a combination of a fairer taxation system and scrapping our Armed Forces in favour of a realistic Defence Force would allow the UK to get through this crisis without the need for cuts in socially useful public spending. Why is it then that both these options are apparently off limits for our political leadership? Why is there no real debate in Parliament and in the mainstream media? We seem to have descended into a situation in which all our political elites, irrespective of party, are in such close cahoots with the main business and financial elites that alternative options are hardly ever raised. There seems to be something rotten in the state of our United Kingdom.

Break up the Banks

A New Way Forward is a grassroots campaign which has recently started in the United States. The campaign centres on the demand to break up the big banks – the big banks that got us all into the current financial and economic mess. They plan to hold a series of public rallies throughout America on Saturday 11th April.

The new way forward involves three fairly simple steps:
NATIONALIZE: Experts agree on the means -- Insolvent banks that are too big to fail must be taken over by the state - no more blank check taxpayer handouts.
REORGANIZE: Current Chief Executive Officers (CEOs) and board members must be removed and bonuses wiped out. The financial elite must share in the cost of what they have caused.
DECENTRALIZE: Banks must be broken up and sold back to the private market with strong, new regulatory and antitrust rules in place-- new banks, managed by new people. Any bank that's "too big to fail" means that it's too big for a free market to function.

This seems an excellent idea and one that could and should be applied here in the UK. Once again we need members of the public to protest loud and clear and often. In particular it is vital to attack the notion that big is good and the bigger the better. Any bank that is too big to fail is a danger to all of us.

This is seen most clearly in the recent actions of the Royal Bank of Scotland (RBS). Bailed out by the UK taxpayers, RBS has still payed out huge compensation packages to the former top executives who were responsible for the collapse of the bank. Sir Fred Goodwin is only the most conspicuous of the culprits. Most of the current board and the other top executives are still in place – most of them will have been equally guilty and yet they are still in place, still earning very substantial salaries and bonuses. And to cap it all the RBS has recently announced a second round of massive cut backs which mainly involve massive staff losses. So the high heidyins who messed things up get huge pay-offs or get to keep their jobs while those in the front line who had nothing to do with the bank's losses and collapse are to lose their jobs. And who is to pay for all this? Why the UK taxpayer in a double whammy! First we pay for the bailout and bonuses and then we will have to pay for the unemployment benefits that will arise as unemployment soars. RBS has started this process of job losses, but almost certainly the new Lloyds group will be following in their footsteps soon. The only way Lloyds can make money out of their take over of HBOS is by getting rid of lots of staff – the blameless ones again.

What we have here is the worst of all possible worlds. We the taxpayers own the banks, but we do not control the banks. The people who created the mess are still in control and clearly have no conception of running the bank in the long term interest of the taxpayer – increasing unemployment in a recession is not in the interest of taxpayers. And this comes about because the UK government refused to nationalize RBS and HBOS. Nationalization would have enabled the government to demand the resignation of all those culpable of creating the collapse of the banks. RBS and HBOS could then have been stabilised by sorting out the good bits and the bad bits. The good bits could then be sold off as smaller banks under strict regulations.

This would almost certainly save the taxpayer money. And I don't just mean the obscene pay-offs and bonuses. With smaller banks there would be no need for the new directors and managers to be paid such excessive salaries. In addition the creation of smaller banks would avoid the need for large scale redundancies. This means that more tax is paid and there is less expenditure on unemployment benefits. Thus there is a double gain for the government and ultimately for all of us as taxpayers.

This seems like a no brainer to me. In fact it is so obviously a no brainer that even the Tories, God bless them, are thinking along the same lines. Just thinking about it at the moment. They need a bit of sustained pressure from us to make them do it. Just send a simple message to Brown, Darling and your MP: Break up the Big Banks – now!

The website for A New Way Forward can be found here