In the run up to the UK General Election, I interviewed self-professed ‘anti-economist’ Steve Keen on the state of the British economy, the chances of a Labour victory and the future of politics after Brexit. This is the first of a two part interview.
WHITE: As the UK goes to vote, the economy is the key question and the recent past will likely shape how people may vote. How would you describe the state of the UK economy?
KEEN: It’s recovered partially from the financial crisis, but because none of the people in authority know what actually caused the financial crisis they are not aware of just how strong the recovery is. What caused the crisis was a private debt bubble, which burst in the UK’s case in about 2008. The bubble meant you had a huge amount of credit-based, demand driving up economic activity and it really goes back to Maggie Thatcher.
If you go back to 1982 you’ll see that the ratio of private debt to GDP was 55%, and the maximum amount it had been in the previous century was 73% of GDP. So when the ‘right to buy’ came in – that was a major factor, but not the only one – you had a dramatic increase in the level of private debt to GDP from that point on. It went from 55% in 1982 to roughly 195% in 2010.
While debt was rising you got a large amount of credit-financed demand, for both goods and services and assets. That was what made the UK economy look ‘okay’ for the last 30 years. At the same time, you had a declining manufacturing share and a rising level of credit-based demand that expanded the City rapidly. When that stopped rising that was the end of credit-based demand and the economy just slumped.
Now since then the amount of private debt has fallen from 195% of GDP to 170%. So you’ve deleted a small amount, but you’re still looking at a level of private debt that’s three times the level it was before the bubble began and at least three times the average of the previous century.
And with that debt overhang you’re in the same situation that Japan has been in for the last 25 years of such a high level of credit-based demand, whenever it revives it runs out pretty rapidly, and when it runs out you go back into a slump again.
This is why I describe the UK as the ‘walking dead of debt’. It’s private debt which matters, not public debt which is the obsession of politicians, but it’s not the right one to worry about.
WHITE: We’ve seen Jeremy Corbyn and the Labour Party climb in the polls steadily past the low bar set by Miliband in 2015 opening up the possibility of a hung parliament is now very real. Do you think the sudden shift we’ve seen in the polling data reflects public awareness of the Tory record?
KEEN: I don’t think it reflects public awareness of the record. I think people are refreshed by finally hearing from someone who is not pushing the same old mantra that we’ve got to get government spending in order. You know, that’s the first priority. Objective number one is cutting the deficit, that’s really been the theme since the financial crisis and everything else becomes secondary to that.
People don’t know whether that’s a good or bad idea. In fact, they probably think it’s a good idea still and that the less government spending the better. That is still the mind-set that everybody has. But they’ve had seven years of absorbing the impact of this and it hasn’t quite been what was advertised. I mean it was supposed to be what would make the economy revive and everything else would pick up.
Seven years later and people are seeing the effects. Real incomes have fallen by something of the order of 10%. Cutbacks in government services which actually matter. So people are seeing food banks spring where they were once a rarity, where they are now common place. I think its people being refreshed by hearing someone not saying the same old stuff. I think that’s a major factor.
WHITE: Theresa May called this snap election on the grounds that she needed a stronger hand to negotiate with the EU. Do you think this election is a good thing for Brexit negotiations?
KEEN: No, anything but! This is the hilarious thing, May called it and it was totally opportunism. To say it was actually necessary to strengthen her hand is just bullshit. I would like to see somebody from the Labour Party side call it opportunism. She saw this enormous gap between her standing and Corbyn’s, between the Conservatives’ standing and Labour.
Basically she thought strike now, lock it in and then yeah, okay it might strengthen your hand a bit in terms of the negotiations and it will dramatically strengthen your hand in control of your party. Well, it blew up in her face in the same way that the Brexit vote did. Cameron thought the Brexit vote would shut up the right-wing of his party, the vote would be against Brexit and bang, you’d get back to business as usual and suppress that particular wing.
The next thing you know he’s standing outside Number 10 resigning. I don’t think May is going to survive the result, whether she wins or loses. She has so weakened her own position that she’s shot herself in the foot with what she claims is the motivation for the election.
Unless the polls are completely wrong and she wins in a landslide, she is going to be a laughing stock in her own party. Of course, she will be an immediate target for Boris and she’ll probably be deposed within weeks of the vote coming out – if the polls are accurate and there has been a revival of Labour’s fortunes.
Quite frankly the only way this would strengthen the Brexit negotiations would be if Corbyn won. This is the ironic thing, she is now so weakened and he’s so strengthened. People have been trying to shaft him in his own party for the last two years. That’s obvious.
But if he comes back with the sort of result that is implied: a dramatic improvement in Labour’s standing in the electorate, popularity as a campaigner and a set of programmes that no one else in his party would have put forward (such as abolishing student fees). Then obviously Corbyn has shown he is a much better public performer than she is. All of the advantages May has had at Question Time in Westminster don’t amount to nothing when it comes to the hustings.
There is no one that I know of in the Labour ranks who could claim to compete with Corbyn. He’s suddenly got all of the authority in the world. If he won there would be someone with a bit of authority in the Brexit negotiations, but if he loses May is in a bit of a pickle and it will be a disaster. So ironically, I think in terms of the best thing for a successful Brexit negotiation now would be for Labour to win.
WHITE: What do you think EU leaders want to see from this election?
KEEN: I really recommend people read Yanis Varoufakis’s book Adults In The Room. Have you read it yet?
WHITE: I actually interviewed Varoufakis two years ago and I follow his work very closely, but I haven’t read it yet.
KEEN: Okay. It just shows the brutality of European Union officials. Not only do they dismiss what happens in elections over the whole European Union and say we’re going to go on with our programme regardless of what people vote, literally at one moment Wolfgang Schaueble says that elections or politics cannot be allowed get in the way of economic policy. In other words, you cannot hold a vote that impedes the programme we have chosen to implement.
If you look at the rationale behind his thinking, it comes out of a school of thought called ordoliberalism which is a very German school. It combines this libertarian attitude to the marketplace – that the smaller the government is the better – with the belief that the government’s role is to enforce the rules of perfect competition. So the government has to be very stern about preventing monopolies and trade unions from becoming too strong. They’re out to abolish monopolies (not so successfully) and weaken trade unions (quite successfully). Then, once people obey the rules, everything will be fine. And the rules include a budget surplus.
The target they’ve set themselves in the medium-to-long-term is a balanced budget and preferably a surplus. With this orientation, they are going to ignore anything anyone else (including Macron) puts forward. But in terms of the way they treated the Greeks, they really couldn’t give a shit what the impact of their programmes was on Greece.
In Varoufakis’s recordings, these people were saying they know it can’t possibly work but the point is to discipline the Greeks and stop anyone trying to leave the European Union. They can bully the Greeks in that way because the Greeks don’t have their own currency. If they try that with the UK, well they can’t impose any penalties on the UK that the country can’t walk away from.
All they can really do is impose really unpleasant terms on trade access later and UK nationals working in the European Union. On both fronts the EU would be shooting itself in the foot, the EU has a massive trade surplus with the UK and there are more EU nationals over here than there are UK nationals over there. And secondly if they go too far, they can be taken to the World Trade Organisation for discriminatory practices.
The European Union will try to treat the UK exactly the same way that they treated Greece, but they don’t have anything like the leverage they had over Greece. This is why I think Corbyn is probably best to negotiate it. You need someone with a record of saying ‘no’. You need someone who can say “No, I don’t agree with that. What else have you got?”
Corbyn has a history of voting against popular opinion quite frequently. And looking back in history, he hasn’t done too badly. I mean people can bring up the IRA against him, but, as he has points out, he was meeting with the IRA after the British government had been meeting them through secret channels. So what they are criticising him for doing in public, they were doing it privately and secretly.
Then you’ve got Iraq. Opposing the invasion of Iraq was the right thing to do, the approximate cause of the attack we had yesterday was the invasion of Iraq by that fool George Bush. There are a whole range of ways where Corbyn looks much stronger to me – talking completely objectively, though my politics are progressive and my whole thing is to get away from this obsession with surpluses (which is really government money destruction).
If May had come out with Corbyn’s policies, I would be saying vote for May. But just looking at the two personalities, Corbyn looks like the sort of person who could stare down Schaueble. Now if May lets Donald Trump take her hand, and if May isn’t willing to sign the EU letter to take on Trump for walking away from the Paris agreement, then she’s gutless.
She’s good at soundbites, which are dreadful. But in terms of someone who can put the European Union on territory it isn’t used to, I think Corbyn is better placed than May is.
WHITE: What do you think of the investment proposals of both parties? I found it very interesting when Corbyn was talking about People’s QE, though he seems to have gone quiet about that. They are talking about an investment bank of £250 billion.
KEEN: This is what I want people to get their heads around: the whole emphasis on running a surplus. People think you save money in order to invest. It’s understandable, but unfortunately it’s comparable to people saying they know the Earth is the centre of the universe because they see the Sun and the Moon rotate around it every day.
That’s what people thought for god knows how many thousands of years until Copernicus came along. That’s what it looks like from our point of view, but we’re just turning on our axis and we’re rotating around the Sun. Yet we still talk about sunsets and sunrises, not earth-rotate or horizon-slip-below-sun. We haven’t changed our language, even though our understanding has changed.
The same thing applies with surpluses and deficits because people think governments have to save to spend later. That’s the individual perspective, but when you work at the aggregate level, your spending is someone else’s income. It’s 100% identical. When you decide to save, what you save is precisely identical to the reduction of someone else’s income.
If you decide to save $10,000 a year rather than zero, which means in the aggregate other people receive $10,000 less in income. That’s reality at the aggregate level. Saving means less expenditure and people planning their level of investment on consumer demand are going to decide not to invest. So your decision not to spend becomes someone else’s decision not to spend and you get a negative spiral.
So the only way to save more money in the aggregate is to produce more money. If you have a certain stock of money turning over, say it turns over twice a year. Say you’ve got $2 trillion in the economy of GDP, trying to save more money isn’t going to create more than $2 trillion in the first place. It will just change who has those pounds.
For us to save more money in the aggregate, and create more money in our bank accounts, you have to create more money. There are three ways to produce money in a national economy: the first is to export more than you import, if the UK was exporting more than it imports then when you sell a British car to a German consumer you get the money in euros and deposit it in the bank then presents that money to the Bank of England, which puts the euros in its reserves and gives the equivalent amount of pounds to the bank.
That’s how a trade surplus produces pounds. Problem: you’re running a 5% trade deficit, so in that sense you’re reproducing euros for Germany. You’re not producing pounds locally. The other way is banks can lend the money. But if a bank lends you money, for every dollar they give you they give you a dollar debt as well and the recipient of the borrowing gets an equivalent debt. There is no change in the net assets. There is an increase in the amount of money, but there is an identical increase in debt as well. That’s the problem with having banks create the money.
The other way is the government spends more than it gets back in taxation. People think this isn’t saving, but it’s actually money-producing in a convoluted way. When the Treasury works out that it is going to save 5% more than what it gets back in taxation in terms of a percentage of GDP, then it issues bonds and sells them to the private sector. The Bank of England buys and sells those bonds with the financial sector. When it buys those bonds it creates money.
As soon as the government issues those bonds, the government is allowed to do the spending and that is very different to you and me because we need to get cash back first. The government can create the money it needs, it faces no practical limit just operational limits on what money creation does to the real economy. What we call a deficit is actually government money creation, whereas a surplus is actually government money destruction.
Even paying and servicing the debt is a bookkeeping operation. A government can service a debt by making entries in its bank account, whereas individuals can’t do that. People may say it’s wrong and shouldn’t be allowed, whatever you say that is the case. When you have that reality, you can see that the government is one of three money creators.
Therefore, if you want a growing economy you can run a trade surplus (which you’re not doing), you can have banks lend money (but that’s also creating debt), if the government spends more than it gets back the recipients don’t have an equivalent tax liability. The government can raise taxes if it wants, or it can give more to some individuals and tax others higher.
So the government should be setting a target for what level of resources should be used in the economy and set a money creation target to do it. It can easily hit it by telling the central bank to buy X amount of bonds. It’s just like flipping your view on the Sun circling the Earth, you go from earth-centric view (where you save to spend) to a sun-centric view (where you create money and decide where you want it to go). And you end up with very different decisions.
What I like about Corbyn’s programme is he’s saying that we need these resources, we know the infrastructure is run down, we know there’s underemployment (though it’s not as bad as America), we know there are lots of people on lousy zero-hours contracts and the minimum wage is too low for people to live on. Let’s change those things.
It might affect inflation and the trade balance but at least you can do them and give the programme a try, whereas the Conservatives say you can’t change these things because we’re running a deficit. You can’t do it because if you did you’d create money. Not quite the same problem.
To be continued in part II…