Austerity and the Politics of Money

hello everyone I'm Karen Wright and on behalf of the Stevenson trust for citizenship I am delighted to welcome you here for the 2015 McKenzie lecture in politics this year we are very honored to have as our lecture professor mark Blythe he was going to talk to us about a subject that is something that he knows a great deal about and something that is in this core of public debate currently in Scotland and around the world and that is austerity he's going to talk to us about austerity in the politics of money a disconsolate analysis we are also very lucky to have been able to be joined to by a professor of economics and principal of the University of Glasgow Anton Moscatelli who in has a wide-ranging set of contributions both to hit academic discipline of economics and also to the public use of active of economics most recently he just told me he was appointed to the Scottish Commission of Economic Advisers so we have someone who actually has a direct line to perhaps the way things might be decided here in Scotland this is the first time that the citizen trust and the McKenzie lecture and politics have joined forces but this is also a very fitting partnership if you will because William Mackenzie for whom the lectureship is named was a long-standing and ardent supporter of the stevenson trust and had a strong belief in the importance of university staff engaging with a broader community and that is the remit of the stevenson trust we aim to bring insight and analysis to the issues of the day on local national and international levels and we aim to do so in a way that is open to all open to members of the public and citizens of Glasgow as well as and staff of the University of Glasgow okay and I see a good mix of all those folks in the audience I think the staff may have been slightly inundated by reminders today for which we have apologies one of the things that I'd like to do is make a couple of quick notes I'm not going to talk for long and then I will turn it over to the principal just a quick say that as you can probably see the proceedings tonight are being filmed and in order for that to go forward we are presuming that your presence here confers your consent for that filming the second thing I just want to mention is that in any effort to put together something like this there's usually someone who is a driving force who may not be as publicly seen but without whom whose efforts that event would not be possible and in our case that's mere totaku Sica for whom we are extremely grateful for whose efforts we are extremely grateful finally it's my pleasure to introduce professor Anton Moscatelli who for most of us here in the university needs no particular introduction but I do want to say in needs for no particularly action beyond knowing that he is a widely noted economist and principal here at the University of Glasgow but I do want to make a quick note of Professor Muscat Ellie's interest in and support for the work of the Stephenson trust over the years and more broadly for the support for the engagement of the University of Glasgow with a wider community so thank you and professor Muscat le much gone and I'm particularly delighted to be here this evening for the McKenzie lecture sponsored by the Stevenson trust by by Mark Blythe I think the debate that's currently surrounding austerity I think is one of the most important public policy debates happening at present across across the world one reason why I'm particularly keen to be here and really looking forward to Mark's lecture is that he takes you know all his work deliberately takes a political economy perspective and I do strongly believe the macroeconomic debates cannot simply be understood in purely economic theory terms in terms of pure economic models one has to understand only the politics that of the time but also one has to understand the historical context within which these macroeconomic ideas are born I suppose a perfect example of that was Keynes development of his general theory in 1936 which was really the culmination of a number of years over which he developed understandings of the economic crisis that hit many of the major economies of the world in the 1930s and indeed if one looks at the way in which macroeconomics has developed since 1945 one sees that the ideas in macroeconomics tend to Evan flow with what is happening politically historically economically so you have periods of relative macroeconomic stability as for example we saw in the mid to late 50s all the way to the late 60s or indeed as we saw from the 1990s into the early 2000s and during that time you see a development of consensus in macroeconomics you see different schools of thought coming together developing what you might call consensus model but then you look at periods of macroeconomic instability such as what happened in the late sixties into the early 70s and you begin to have to see that political consensus shattered with rival schools of thought so in the late 60s we saw monetarism emerging we saw a new Classical School emerging said the economy's self equilibrate a no need for government to get in there and rival schools emerging as well the New Keynesian and Keynesian view of the world in nineteen seventies saying no the economy isn't self equilibrate and we're seeing similar divisions of course occurring now in the wake of the financial and economic crisis of 2007-2009 we're now seeing very divergent economic ideas and models so this is why I think a political economy perspective really does matter macroeconomic models are not born in a historical vacuum now after confession I should say upfront I'm not a neutral observer in all of this some of you may have seen that I have written against some of the recent austerity led policies in Europe especially in Europe it seems to me that one of the the major messages that comes to us from economic history is the fact that effective the lack of effective demand in industrialized economies is something which does is one of the key problems in deep recessions especially following a major financial crisis as we have experienced over the last few years so effective demand often is the biggest factor constraining recovery and austerity policies actually sometimes are self-defeating because they can actually make things worse at a time if they do constrain domestic demand particularly at a time like this if you see in countries like not only the UK but across Europe where governments can borrow I'd pretty much negative real interest rates over long periods of time it does really question as to whether the right policy is the cup spending especially in capital infrastructure which could in fact add to productivity in the long run so as a very partial rather than a neutral observer I'm looking forward to what Mark has to tell us this evening I'm particularly fascinated by his work which takes a particular political economy perspective it avoids the myth that economists sometimes develop around their models and as I say avoids developing this over the over in a political vacuum I think one of the really interesting things is that we've seen over the last few years is how people have questioned whether economics as a discipline has gone right I think I take Paul Krugman with view I think he expressed in a recent in a recent interview where he says well actually I think we were expecting a bit too much from economics I think if you treat economics as a science as opposed to social science then you're bound to be disappointed I think what we need to understand is economist is as I say the historical and political context so over to you and Dell with Steven rather to introduce our speaker like your principal and ladies and gentlemen Steven Wright Department of politics just another couple of words and then we can get on to our speaker I'd like to say just a word or two about the fact that this is a rather complex arrangement with with both Stevenson and the McKenzie lecture engaged I particularly speak with thee because the lecture which we've sought to promote in the Department of politics for some years now bill McKenzie was a professor in our department he had achieved a great deal already and Manchester has built up school of government's there but he came here in the late 1960s about the same time as I came as a graduate student though I wasn't as his own graduate student he began to develop a postgraduate community and he began to make appointments I was one of the people that he appointed at that time and he nurtured what we think of as something distinctive and important in terms of the study of politics here at Glasgow as he had done elsewhere he began to write he we think he wrote more at Glasgow than he'd done in fact ever before remarkably he published a book even four years after he died which isn't given to most of us I think but of course it has been written to gradle earlier and delayed by my official secrecy from publication phil was a figure who made a great impression there will be some people here who've known him personally as I've done a bulky eyebrows have moved up and down eyes at twinkle - you never quite knew what he was thinking and in particular he had very strange grunt we never knew whether he was agreeing vehemently with the speaker or disagreeing vehemently with the speaker and with summers that little bit disturbing but at any rate were greatly attached to him since for speaking of economics I I can say he didn't unfortunately leave a large endowment that have allowed us to continue his worked with the lecture but he left I think something marked something much more valuable which is in intellectual legacy the people that he encouraged that he brought on that he appointed and the work that he's left us covering a range so this is a Bill McKenzie lecture as well as well as a Stevenson lecture my other duty is to introduce our speaker our speaker is a Scott as you'll discover from Dundee our speaker is a Glasgow graduate but not a classical University graduate I have to say our speaker has those what I think of her as a particularly Scottish virtue see speaks forcefully and plainly and coherently he doesn't I think follow fashion particularly he speaks his mind in a way that speaks his mind in a way that many of us find an attractive feature of Scotland at least certainly I do he's say he was a a graduate of Strathclyde he went there not went on to graduate study in the United States and has ended up at at an Ivy League university I think mark would allow me to say that he is a prize-winning author and particular his book on austerity as one i'll serious surprises and i think i given the theme of this lecture given austerity I can mention that we will be able to make copies of a flyer available here at the lecture that will secure you a copy of the book if you'd like to hear more from mark at a most advantageous price I think one that fully reflects the difficult nature of our time so to speak making those little contributions of the fight against austerity so it's with enormous pleasure that that I invite mark to to address us now he's already spoken to the Department he's been around town we'd look forward to continuing our discussions with them at the drinks that will follow the lecture and and later on so mark enormous thanks for coming you have thanked a very warm welcome you have a very large and mixed audience and we look forward to what you tell us now so thank you very much you principal professors colleagues friends neighbors and others it's nice to be home let me begin with a lovely story just cuz it's a brilliant story I just love tennis there's my favorite story about Glasgow so in the 1960s when they were expanding higher education from 12 to 40 universities around the time the Labour government of 64 Strathclyde was then Kings College or King's Royal Technical College or something like this and been around since the 1700s and they were going to be made one of the new universities so the guy who run the shop at that time had a nemesis now in academia is one of the few places left in this world will you're allowed to have a nemesis right so this guy's nemesis was an economist funny had the hums and he thought around gonna stuff this guy so he put him on the committee to name the university because he knew this would drive him ballistic because these are these types of committees that basically everybody talks even of the of nothing to see sucks up in an ordinary motive time nothing gets done blah blah blah so he thought he was stacking them on one so of course the guy took the committee over so this is how it work so everybody's talking about all the possible names on university of coke Arden's no scratch though right you know and eventually he says look you're messing this one Glasgow is a famous city and those two universities here what was your point well who are we we are the technical guys James Watt Boyle's law all that stuff was done here right now who's the mob up the road who Glasgow what do they do arts literature classics law so think about it where else in this world do you get one city to famous University one's the old one that does all that stuff the other ones the technical school somebody gets her oh my god it's MIT and Harvard we're the new Cambridge this is brilliant so of course the meme is released that goes around the committee everybody buys a hook line and sinker he says have you given any thought to what you like to call it we should play on the kind of MIT thing so what are you what are you thinking the Scottish hire X Institute of technological excellence without missing a beat they wrote a press release and sent it to the evening times the evening the evening Times published the following headline next year Kings College to become sheight no I have no idea whether that story is true or not but you know the wonderful thing about Glasgow it could be true and there are very few places in this world where that could be true and that's why it's good to be back home no with all of I just really wanted to tell you that story because I love it alright so let's go on with this Isle staring the politics of money a disconsolate analysis this is the title was actually given to me by Stephen is we heard another title and I had to do with the independent stuff and that's kind of like passe now I think so basically do this instead so he gave me the title this is what we're going to do all right let's get started so why be disconsolate to long diagnosis and you hear this all the time and George Osborne will set a version of this all the time so this is Wolfgang Charlotte 2011 in financial times it is an undisputable fact that excessive state spending is led to unsustainable levels of debt and deficits that now threaten our economic welfare piling on more debt now will stunt rather than stimulate growth in the long run 2015 the problem is that Greece's lived beyond its means for a long time and no one wants to give that given them give them any more money without guarantees you've heard this now this is the five year moving average of euro area government debt to GDP combined it's flat in fact it's going down into the crisis so where's the orgy of overspending interestingly it comes around here in 2008 what happened in 2008 do you remember anything maybe like a giant global financial crisis where the entire global financial system got billed at the taxpayers expense that might have something to do with large increase in death now there's the Greeks well we know they overspent right I mean the Greeks right mean seriously you know whatever well actually the biggest debt buildup is actually long before this becomes a problem and in fact if you have a look at this they're pretty much flat going into the crisis in fact even the Greeks didn't overspend but there was an overspend now how can you have an overspend if people aren't spending let's have a look why our debts going up if the mantra is cut cut cut you have to pay your debts otherwise your debts will go down here's an interesting little thing what you have here is the degree of austerity how much you're tightening your budget and here we have the change in the debt ratio so what have you go up here Greece Ireland Portugal Spain so what's this telling us the greater degree of budgetary austerity the greater the increase in the debt that's not line going up no what is this work well basically it's a denominator problem if your economy is the denominator in the sum and you hack away large parts of it the same amount of debt the numerator has to get bigger rather than small as a simple reciprocal relationship you have a look at this another way you see the same thing the degree of budgetary tightening and then here's the growth of GDP look it becomes negative really quick again there's Greece it's lost about 30 percent of GDP and it's debts have gone up 40 percent despite doing more cuts than anyone else so the more you cut in a crisis the bigger your debt gets because your underlying economy gets smaller rather than larger know if it's baloney therefore that spending caused the crisis what actually did this is my favorite picture in the world this is the greatest moral hazard trade in human history so what you're looking at you're looking at the 10-year bond yields of different european sovereigns going into the crisis and then the stable part here is when you're in the euro and then this is the crisis kicking off so there's Greece right you're getting 25% for holding Greek debt back in the 1990s 25% rate at a ton but even there look think about the others where the German Elysee was a little ease around you can around 12% for hold Italian and French debt why is it so risky it's not the France is going to go bankrupt in the mid-1990s well there was a few problems and one of them was when you have your own currency you've got what's called exchange rate risk you can devalue and there's also inflation risk because you can print your own money so when we have this wonderful idea called the euro it was second linked to financial markets that essentially you're going to get rid of these problems so you can strip that risk out of the bond so rationally then the markets price end as the euro comes in that the yields are going to go down and down and down that's a nice story it's kind of true but there's another story that goes like this as well imagine you're a big bank and you're getting twelve percent rate at a time for holding one of these things and you know that source of easy profits is going to disappear you also like holding sovereign debt because sovereign debt is highly rated it forms the base of your funding pyramid the more of it you have the more of you can pledge this collateral and borrow in what's called the repo market financing it's really useful stuff and it's all going to get more expensive because the price the bond goes up is the yield goes down so this is a bit weird so what you're going to do well you're going to bloat up your balance sheet you're going to buy as many of these bonds as you can before everybody else does and you're going to expand the size of your footprint of your bank and you're going to lever up and Brad generate lots and lots of debt and as you're doing so what you're doing is called a conversion straight you're buying the bond as its declining but you're blowing your balance at the same time so what's happening is all these banks are trying to buy the same amount of debt it's getting cheaper the yields are going down the interest rates are going down in 2001 when the Euro comes and the European Commission passes our directive that says that for the sit for the function of a repo transactions how banks fund themselves they basically bottle overnight from wholesale markets and then renew it every single day and they pledged sovereign debt in order to get the cheap financed and then they lend it to you as a mortgage for 30 years that's basically how it works 70 percent of bank funding and eurozone is done on what's called repo transactions the European Commission basically said all the sovereign debt will be treated the same this is how Greece became Germany it was both by convergence and then by edict now why is this a model hazard rate well imagine that I'm a French bank let's say I'm called crazy Agricole for example a farmer's bond much damage can you do well if you double the size of your balance sheet and you double your operating leverage and suddenly you are very very big and the Bank of France no longer has the front and it borders euro is essentially from a foreign country what would happen if that bank go under trouble who would be low oh you don't have a printing press anymore so you'd go your national regulator and say MF lay diamonds a bit of Zee Pugh can you please help me out and you would say that's not my problem I don't have a printing press anymore you'll have to ask the ECB so everyone was presuming that the ECB was in a sense the lender of last resort the crisis manager unfortunately it wasn't it was basically a currency board with an inflation target and it was still fighting an inflation with valued in 1924 quite successful in 2007 so when the crisis kicked off everybody starts to price nationally what was held to be one common bond only those bank funding structures which used the sovereign debt to fund themselves becomes really risky because what are the rating agencies do they start to downgrade the sovereign debt which means that you're downgrading the assets that the entire banking system of Europe is based upon whoops what does this do by 2011 it shows us these are the combined consolidated claims holdings of assets of France the Netherlands Portugal interestingly in Germany on Greece Ireland Italy Portugal and Spain right so basically this is how much stuff from the south is on the balance sheet of those banks have a look at France 33% of GDP equivalent value to one third of the size of the French economy is basically crappy assets from the south 20% in the case of Germany so this is a banking crisis it's always been a banking crisis have a look at this ugly but informative shear went to the troubled south into lending by each country notice so there's hardly anything going to 97 the Euro comes and boom suddenly the Germans are given 20 percent of the total lending out to the periphery and look at the periphery what are they doing Greece is getting 40% of its lending from the core so what happens in Germany is you've got a bunch of all people who save too much they take it to this podcaster this podcaster gives it to deutsche bank deutsche bank buys greek debt with it and then that basically sends money the sofa by german products and it was all working so well until the americans at the financial crisis and screwed the whole thing up because then the capital flows from north to south stopped it's called the sudden stop and the whole thing comes out of kilter because all that funding for lending that the banks are doing you know have a credit crunch how you going to fund yourself when you're levered forty to one and your underlying base capital's lost value this is the real reason we build a periphery here all the stuff about what we gave to greece what we give to portugal blah blah blah the rest of it have a look at this periphery landing was indirect Bank Billis the core bank for player over lending to the periphery Greece got two hundred and seventy four point five billion island eighty five another forty seven promissory notes blah blah blah four hundred ninety four hundred and twenty went right back to the banks it was a bank below that was a you couldn't tell your public right you could nicely come out and see actually what we're really doing is building a comment about how do you feel about that no we have to invent this not ever bet the Greeks being lazy and so on and so forth so you poison the well of European politics because you can't tell the truth about vant Bella so this creates a very interesting problem where is the Americans had a too big to fail problem or too big to jail what you've got in Europe is a too big to build problem because you've got an entire interlinked financial sector right across the whole continent and everybody's borrowing in a currency that none of them get to print that's a bit of a problem it's a bit of a lot an America type problem what everybody's borrowing dollars and then you use your own local currency so when funding dries up for these banks this isn't one country's problem this is a continental problem but there's no Continental institutions to deal with it except the ECB who under three she think that they're still fighting an inflation from the 1920s and their job is not to act as a lender of last resort obviously there's going to be a bit of a crisis now for comparison here's the two bigs to bail you too big to fail USA so there's American GDP in 2012 and here's the assets of the banking sector so the top five banks basically come to us the 1% GDP you have your own currency it's the dollar everybody wants to hold a remarkable thing about the crisis started in the United States the dollar went up during the crisis because it's all anybody wanted to hold a remarkable thing number two despite being the source of this financial crisis yields on ten-year Treasuries have went down and down and down and down since 2006 because that's all people want to hold now at the end of the day if one of those banks goes over it's going to be ugly for the United States it could take out 10% of GDP but it's 10 percent of 17 trillion and they get to print the blue border zelve asset and there are London oil illusions whatsoever about the function of a central bank which is a lender of last resort have a look at France there's Frank GDP there's the top three bank assets there's total bank assets they don't have a printing press that's a problem and that was a continent-wide problem because who's going to bail a system that's too big to bill total bank assets GDP for the eurozone including the Brits that's how big your financial sector is relative to your economy so sympathy for the Germans here think about this for a moment 2012 total bank assets for the EU are about 44 trillion euros the underlying economies are about 16 trillion the German economy is about 3 and a half trillion how an earth this thing a half bill for a 4 it's not going to do so the Germans have been playing a simple game squeeze our liquidity and pray and that's what we've been doing fortunately the press wasn't getting through things were getting worse so if it's not about spending and it's about over landing and the creditors don't want to take a hit for it how should we think about so here's when it really comes the rubber hits the road back in 2008 is it the American crisis this is what really happened highly levered financial institutions begged banks funder repo about 50 percent they basically bought overnight in length 50 years and renew it overnight pledging Calado the collateral of choice was all those mortgages asset but commercial paper why were they using us about commercial paper because they're well enough Treasury bills to go around so all the deck Hawks in the United States freaking out about the amount of debt one of the reasons that they had to using or videos because they couldn't get enough so they couldn't get enough sovereign stuff why couldn't they got enough sovereign stuff where is the largest pile of American sovereign debt in the world China exile here in China so they started to use mortgages subprime devalues the collateral the collateral calls when people basically say hey that's not what half of what it was you need to give me twice as much to get the same of my funding right this basically starts a shadow bank run and starts a bank run a layman and then there's a blessing America has big capital markets so there's other places to take stuff out of the banks and dump it and so on and so forth but basically they got a bailout from the Fed now here's what happens in 2011 to 2013 the figure for repo funding in India in the EU is about 70% as I mentioned the collateral choice is euro denominated sovereign debt that starts to get downgraded so it gets harder for the banks to fund the money shot of us money market paper in May 2011 and by November the yield spike in Hepburn's and so long as the german-born 10-year bond was trading down as the safe they are set and everybody else is going up the gentleman's didn't care and November burns started to go up which was basically danger Will Robinson danger Will Robinson it's time to do something luckily they just changed the head of the central bank that's the game changer because the too-big-to-fail system suddenly gets a bailout this is mr. Draghi this is the Draghi / so what happens long term finance or the operation a trillion euros are dumped into the European banking circuits then you don't believe me I'll dump another half a trillion you really don't believe me I'll give you nearly another half and then I'll make a promise to do whatever it takes so here's the run-up in the Italian tenure there's LTRO one there's LTRO two there's the promise to do whatever it takes that's the Italian born deal which is actually now down here was there any point in all that austerity the periphery had to do no because look at two countries that haven't done a single bit of austerity France is not four percent budget deficit which is the main reason Spain is growing they've got someone to actually export to so you have a look at all the sacrifices that were made in Portugal and Ireland and all the rest these places what's that blue line that's their debt profile what's the lifeline that the bond yield no this is meant to be positively call so basically a man to pay more for your debt the more debt you have they have more debt and their yields are on the floor why because the central bank saved the banking system by dumping all that money into it everybody used the free money from the ECB to buy those bonds the option of buying those bonds is another convergence trade and all the yields went from high down to nothing Spanish bond trader in London when this was going on told me there was even a rhyme that people said about this one about doing it it's brilliant you buy it one and you borrow it one and you buy it ten you use the spread to buddy the dead you bank it at four and repour more and then go knock on the ECB's door and that's exactly what everybody did and it was tremendously successful now there was one part of the story that you never hear about which is what went happen next because how do you get out of a debt crisis when you've generated a huge amount of debt whoops and that is a huge amount of debt well what you meant to do something called financial repression and how do you do that it's a weird town but basically what it means is you're going to inflate your debt away so how you're going to do this well you got all your local bonds and local banks and then you basically drop what's called the coupon payment and you lengthen the maturities out to infinity and then you run a positive inflation and basically inflation eats away the value of the debt this is what we did after World War two in this country within ten years of third of our debt after World War Two was gone nobody even knows there's defaulting by inflation they wanted to do that but it was a problem austerity had been so severe that they damaged the demand side of the European economies so much that the supply side had shifted and they got into a law equilibrium where they couldn't generate a positive inflation so then plan II wasn't working you're gonna have to get a plan B to get with the master you don't and that's what they've been putting in place for the past two years a new plan B now how much did it cost to keep a lot of thought before we get to what the plan actually is this is from all of our lineman's report from August 2015 about basically what's been going on in Europe total state support a proof of the EU financial sector total more than five trillion euros equivalent to 40% of eurozone GDP of capital injected into banks to kid mode for only about 10% the original capital has been repaid otherwise insolvent banks have been recapitalized and the monetary policies the ECB in national central banks have allowed themselves to do this at all cost has anybody voted on this has I've been a single vote in a single Parliament authorizing five billion of spending that's astonishing when you think about it isn't it sorry for five billion five trillion I know I mean five billions big enough but like five trillion I mean come on now go back to that slide that I showed you with like basically the French by 2011 had 33 percent of GDP and toxic assets in their banks and they've got three big banks that constitute 300 percent of GDP it's not a nice picture these are the figures The Price Waterhouse Cooper put together which includes all the numbers from the asset quality review the stress test adjusted plus the non systemically important banks most important part is here one point two to zero that's one point two trillion dollars at two trillion euros in non-performing exposures loans in the European banking system go back to that example I gave you earlier you got the gentleman's sitting there about three point six trillion euros for the Rakata me a banking system has one point to two trillion in non-performing loans let's see half of them come good behalf of them go bad that means that if Germany is the Treasury if people expect it to be the leader of last resort the land of losses or rather than the central bank they're meant to eat basically the equivalent of about 40 percent of German GDP and bad loans that's never going to happen and it's totally unreasonable to expect me do it so what's then the solution how do you get these bad assets off the books we're going to get there now all of this is a problem because what's happen is the underlying base couple of the banking systems lost volume the sovereigns that house these banks can't inflate because they don't have their own currency they can't liquidate because that would be defaulting and they don't want to do that cuz I'll blow up the economy and they can't do a devaluation trick austerity as I showed you shrinks GDP it makes debts bigger and yields Grail until you basically dump huge amount of liquidity in the yields go down and you're trying to get banks to lend and investors to invest in the midst of a policy induced recession so what's going on here at the end of the day there was a crazy funding model for the European banking system nobody was really in charge they land far too much to a bunch of people who were never going to pay a buck the system was incredibly vulnerable to shocks they had a shock they go into trouble they spent two years doing the wrong thing and then finally stuck a huge amount of public money in the system to stabilize it that's where we are so what's the politics of money that come at us go back to the 1970s as was mentioned in the introduction but in the principle the 1970s is an interesting period many of us lived through it I was a youngster in those days but I still remember the three-day week I remember candles I remember the strikes I remember out-of-control labor I remember the election of Margaret Thatcher I remember all the good music from the 1980s all that sort of great stuff right there's a terrible decade it was completely untenable we had to change everything there is no alternative remember that one this is the deal right here's Utley a thing we go back and look at it you had positive inflation you had relatively moderate to high inflation quite interesting label share of national income the 1970s was an all-time high interesting we labor took home more of national income than he'd ever done in history corporate profits right throughout the West were an all-time law unions were very strong inequality was law finance was weak it was still in its post Bretton Woods box central banks were week they were check cashing agencies for the Treasury and Parliament's were strong in politics was national then back saying that couldn't hold you know there's no telling if we're to change all that what did we do a change though so you have the whole neoliberal revolution what do you end up with secular disinflation basically ruthless product market integration and deregulation meant the prices for stuff as full article this is actually very interesting because one of the reasons that winters have stagnated because basically I don't need to give you a real wage increase of prices keep falling it's the Walmart effect so long as prices get cheaper your real wages actually going up or at least it looks like that so long as you can pull that truck off capital share of income is at an all-time high thank you thomas piketty's for reminding us of this levers separately as a low point we've never taken home last wages have stagnated unions are weak everywhere markets of globalized which means price effects are amplified through the system finance has never been stronger central banks have never been stronger and Parliament's are weak as you know they spend most of the time talking about immigration and basically tweeting to each other which is true I mean really they are useless no sighs segue for a minute what is money if you do a basically concourse will tell you this three things it's a means of exchange yeah something has to be the numerator or something last of the denominator else it's a unit of account it's very useful for counting stuff right and it's a store of value no friend of mine I write with a guy called Eric lund Organa the hedge fund manager who yes I have friends who are hedge fund managers that not all bastards and he defines actually money as a hedge against uncertainty it's a lovely way of thinking about it was why do we value cash because we don't know what tomorrow will bring and therefore if you have something that you can save which you can then exercise an option or gives you option all over the future then it's a wonderful device allows entra generational credit and transfers no it's a fantastic thing money is awesome right but the problem is if you don't know what the futures gonna bring the question is will the paper be worth anything when we get there the traditional problem of inflation and so on and so forth but like to think of this is a kind of an uncertainty problem you don't know if the money is going to be worth that when you get there so what's the point in saving the money no let's switch back to the politics for a minute social scientists who study sort of politics often talk about collective action so what's the insight here if you ever gone out to dinner with 12 people and tried to pay the bill and no restaurant you're immediately aware of the politics of collective action because somebody will be a free rider right they will try and hide right they're usually the person has had the for extra jen and tonics as well right so you know there's that problem then is the coordination problem involved and it's just basically or who had the lasagne you know all that sort of shite right but basically what it means is in large groups the optimal contribution of effort of any individual declines is a function of the marginal benefit you get from it so it makes sense for everybody to wait for somebody else to do it right now there's a wonderfully robust powerful theory but also runs up against some obvious things like facts because people do up collectively they do up purposefully you just went through two years of referendum debate which is all about collective action so obviously this stuff happens what I want to suggest is the politics of the 1970s which took place under the period of inflation produce a very different politics on what we've got just now which is a period of deflation let me walk you through this in 1943 there was a guy called Mikkel kolecki and he wrote a wonderful article at seven pages long and political quarterly and it's called the political aspects of full employment and he pointed at a problem with the Keynesian revolution that was about to be unleashed on the world and he says imagine that you can't actually get full employment all the time what's that going to do it's going to squeeze corporate profits because we just will be able to go up and up and up because the costs of changing a job will decline to zero so basically you will end up screwing capital and then they will board an investment strike they will refuse to invest and then you're going to have huge economic problems my goodness was that man prescient because that was pretty much what happened in the 1970s so what happens here an inflationary period particularly if you're talking about people who own paper assets you're taking money from them inflation is a class specific tax or an asset specific tax because if I'm sitting with an interest-bearing instrument it pays 4% and inflation is now 5% I've just lost now people say all but inflation hurts the poor the most and all that you know the only people ever make the argument of rich people with lots of paper assets because the poor can get redress through government pensions can get redress because they vote when I try cutting pensions and see how far you get that's not going to work too well is it so in that case it's capitals interests they could put on the chopping block so they mobilize they go organize and basically you have the thatch on regular Reagan revolutions carbonyls interests are clear in an inflation labor is on the defensive but is increasingly fragmented technology changes in geography where stuff is made remember the whole decline of the traditional industries here on the Clyde site right the neoliberal offensive takes place at the level of ideas and institutions there is no alternative we need to have an independent central bank inflation's more important than unemployment you can't really do anything about long-run growth through government intervention etc etc all right this state is we canden finance is ascendant and this is why Reagan and Thatcher and Blair and cover are all of one color and one cloth but when you're in a disinflationary period you are called polanyi's revenge and what's that there's a fallacy of composites in the level of interest formation what enough design mean imagine the following you're in a deflation prices are going down if you're a you're a businessman you don't know if that's a local event specific to you or a global event and if you didn't know it was a global event it's not going to do you any good because there's nothing you can do about it so what do you do if you don't want to go out of business when people aren't buying as much you have a seal so if you have a seal what happens to everybody else they have a seal to what have you just done you've all just pushed down the price level admit it was what happens if your labor and you're like oh there's unemployment we go well I'll work for Less I'll price myself and do a job I'll get on my Norman Tebbit bike and go off and I'll price myself into a job well individually rational collectively disasters because what happens if everybody tries to place themselves in a job consumption collapses and you end up with more unemployment so there's a really different politics because your first best effort to make yourself better off produces second best outcomes for everybody so we're isn't this same in this world basically capital's interests are clear here they're not so clear because everybody's getting screwed and that's the politics of deflation in such periods what you get are anti creditor coalition's led by the state it's not the capital has taken over the state to rewrite the rules to be capital friendly that was the 70s it's now and what is now look like creditor-debtor standoffs at the level of the state domestic austerity and internationally the euro zone crisis and what you get as a reply the front nacional podemos cereza the SNP Shin Fein all anti austerity they may have different flavors some of them may be nationalistic in xenophobic me so maybe cosmopolitan and liberal but ultimately they're coming up against the same thing so we live in a very very interesting period politically this is the politics of money we are dealing with no and this is the politics of money how should we think about the past eight years were part of it relate to the greatest model highs of trade in human history as the greatest baton swept in human history where by the private debts of the banking system what essentially socialized and replaced with public debt and how does that work well basically you scream too big to fail you get a bailout you get recapitalized you've got direct infusions of taxpayer cash but more importantly get a whopping ly large recession and which is interlinked across the globe and everything sort of so tightly coupled it's procyclical so you get up in a very deep recession what happens then well basically your tax receipts drop as your levels of transfers go up you're paying more unemployment taking less and your deficit widens you fell in the gut with guess what debt and your debt profile goes up a kind of automatic and kind of hard to happen but why is it a great experience which because here's the real thing we don't like to talk about on this what usually happens with private that becomes public there if you go back to for example the savings and loan crisis in 86 in the United States a thousand bankers went to jail in this crisis apart from two minor traders that saw jehanne nobody went to jail because everybody was implicated and or implicate in a very interesting way the mantra the American regulators usually talk about it as a sequences bail feel send to jail and what we did this time was bail feel a little bit and then change the subject that's pretty much what we did what we did was put together the world's largest class-specific put option so what's that well approve option is a contract whereby the guy who writes the contract gets to be or sells the contract someone else the guy in the other side gets to pick when and when a pre agreed price they cash in and think of as a form of insurance so what was the financial crisis well here's the but we're all guilty and it's a horrible thing to say but it's true particularly for people like me so how am I to blame for the financial crisis well I have a mortgage I live in Boston I have a very very nice apartment it's really cool come and see sometimes really good and cause a bloody fortune now here's the thing my mortgage is my liability but that's the bank's asset if I went bankrupt then unfortunately the bank would have my condo my back has no interest in a condo that's a liability they want the income stream from the mortgage again that's the asset all of our assets are the bank's liabilities all of the bank's assets are our liabilities and are all sums to zero so when we be like the banking sector what we're really doing is billing at the assets and incomes of the top 20% of the income distribution all those pensions all those 401ks all those mortgages all those insurance bosses all that that you've got in your house and me too we got built don't like to see it that way but it's true we got built now particularly the very top of that 20 percent it's not 2 percent it's what 1% really made out like bandits and then when you do policies like quantitative easing which lead to asset price distortion and you have to have money in order to benefit from it you can amplify the effects even follow but the key thing here is that we exercise a class-specific pre-auction on the 80% of society that doesn't have assets because by bailing out all of those banks and billing all of our assets we then turn around and horror and said my God look at all that debt we've accumulated we've been spending like drunken sailors this is terrible the Greeks are awful George Osborne austerity we're going to become Greece oh don't talk complete nonsense you've got your own currency for God's sakes not behaving like a child but nonetheless it worked and we've got to basically turn on everybody down below us the ones who rely on government transfers the ones who need public sector employment the ones whose incomes and assets are we thinner than ours and see look at all that debt we need to cut we need to cut not me I'm not paying bailout insurance I'm not paying higher taxes they're going to take it so we constructed a giant class-specific pool option and the bottom 80% of the income distribution not very nice but true I did mention I'm from Dundee you know so what is this board for the future of Europe let me give you the happy story the happy story goes like this there was a thing called the asset quality review whereby all of the bank's assets were examined by teams of bank examiners by eight months ago and it wasn't clear what that was for because I thought what we're going to do is basically take one banker in every country and sort of say you've been really not Ian smart and put it in the naughty step and on none of that happened what they're actually doing is find out where all of those bad assets well remember I mentioned at one point to two trillion and non-performing loans they want to know where they are why because what are they doing just know that anything called quantitative easing will buy you're basically giving people your bit while you're basically trying to do is you're trying to buy every government bond isn't nailed down know this can work what well for the Americans worked reasonably well for the Brits to certain extent but it's not going to lock in eurozone why not because yields the entry the return that you currently get on an asset is so law that if you're certain on a gentleman burned it's the yielding three percent no matter how much the central bank offers to you to take off your hand they're paying you in a devaluing currency the Euro lost twelve percent of its value in about three months and it's going to get worse so if I've got a choice between holding on to a real rate at a ton or three percent or buying a bunch of devaluing cash and then buying something else it's yielding 0.3% why would I do so what they're gonna have to do is go private they're going to have to go by private sector assets that's why you want the eqr because that's when you know where all is and then you securitize this and you put all in the ECB's balance sheet and then you can really do some quantitative easing damage add to there's something called the targeted LTRO program and something that was also in the news called the Yonker plan and basically what you're going to get is a very very large boost to actual spending in europe now there's been a de facto easing up on austerity basically the french have told the germans we're going to run a budget deficit screw you and they're going to and basically it's working so that's going to continue you see the big countries loosening a little button that's when the Italians never do austerity they don't even have a word for so the Jonker plan is very important because what it is is basically a big buy of magic euros that currently has 20 billion euros in it and it's meant to be leveled up to 330 billion how are you going to get the private sector to invest in this well think about it quantitative easing yields are on the floor the currency is devalued imagine of section one so no the European Commission comes along and says hey got something for you it's an infrastructure bond 10 years guaranteed rate at a ton and three and a half percent how much money is going to go flying into that everything so this is how you can do fiscal policy a European level bypassing all the stupid restrictions they've got with debt breaks and all the rest of stuff they signed in 2012 which is fiscal suicide so there is a plan there's easing up on austerity only the Greeks are really really in trouble and that's a whole conversation we can have cheaper oil is good for consumption this is given a free hand boost QE will have a big effect and the whole thing is ultimately a giant devaluation play because it means that Europe gets to run a trade surplus against the rest of the world with the cheaper currency while they're growing so if you can basically put the Greek situation to one side the future for Europe actually is getting better everything I've done everything I've walked you through it's how we go into this mess a huge amount of policy errors really bad ideas being implemented the whole lot but now it's positive story or at least it's more positive than it's been since the crisis however as I mentioned I'm from Dundee which means I'm chronically depressed so here's the scenario - is that all going to get worse and the problem is ultimately when you're left with the central bank being the only real policymaking Institute and it's left in the world basically it's a strange position to be in because Parliament's that around and tweet and don't do anything and don't do fiscal policy you're under kind of us we are bottled because also nomads can do is two tricks they can raise and lower the price of money and it's already on the floor and they can buy and sell assets and they're going to start doing that with public assets and they're going to move to private assets right but the end of the day what you're doing is trying to solve fiscal problems with monetary instruments and it's not clear that you can really do this I mean you could lead a bank to liquidity but that doesn't mean you can make them lend particularly if the environment is already depressed and if you have kind of depressed if you will deflation or the expectations locked in and that seems to be the case and parts of you have been so you can chop as much liquidity as you want you can keep it liquid but you're not actually going to get into a higher growth path the QE effects will be limited as I said there's an asset supply and asset type problem and there is something even scarier as thomas piketty's walk not the inequality stuff is what can growth if you actually do get a chance to read the book and it's huge the really important parts actually chapters two through five because what he does is you reformulate what's called the solo growth model shock so technology brings in demography basically and has long run calculations the European long-run growth rates are going to converge or rather regress to about 1.2 or 1.4 percent growth a year now when you run in ninety percent debt thresholds and you're going at one point to a year you have to have a very very high rate of inverse in order to basically get your growth track up enough to pay that day off and those factors look like they're not going to do it wrong given s and go back to the politics what you have a very very high unemployment rate you've got credit or debt or standoffs both internationally across the eurozone and within countries look at the poverty figures that came out from Scotland last week or absolutely shocking eight hundred twenty thousand people in this country are in poverty right now put this again back in terms of the 1970s that terrible decade where things couldn't continue five times as many people in Britain are in poverty today than they were in the 1970s and the economy's twice the size as it was in the 1970s so we're on average director but the average is completely meaningless because the distribution is so skewed when you have that type of world if you have a deflationary world with that type of income skew you get the politics of the SNP if you're lucky if you're unlucky get the politics of the National Front and the notion that this is all going to go where people are going to solve it up and will start voting for the centre parties again look at what's happening to the Labour Party it is collapsing because it's won support based doesn't believe a lot that says anymore and this is true for the German Social Democrats it's true for the center-left through all of Europe so what the tale are asking this one is is the politics it's not the economics exactly as you said in the introduction the economics makes a certain set of politics possible and the progressive example of that is actually the conversation Scotland had last year the regressive example of that it's all too plain to see in the periphery of Europe now how is this going to play out I'm not sure but the one thing I do know is this nobody votes for a 15 year recession not even in Bearsden and I will leave you with that sobering thought thank you can't believe I'm describing the SNP is progressive let's see so questions as I'm hugging her somebody's gonna come down and pick up a couple of mics yes and then it will bring the microphone to you lovely mmm so you run all the way right to the bark again because there's a guy up there so Laura's at the top Thomas is at the bottom questions comments clarifications contentions intention was fabulous talk really enjoyed that I'm interested in how the politics of austerity is going to play out there given the general election is coming up in particular the tension between a conservative party that characterized any coalition at the SNP these are the words of Camden in the House of Commons last week as despicable how that's been a clear F one finds oneself with the large cohort of SNP members of parliament and a majority Conservative Party that's run a campaign now and will continue to which is threatening English authors with Scottish domination without digging up Leo and economic and political anybody's guess on how this one's going to play out I love the fight to aid is basically sort of ruling out what is his ruling out his last best hope for victory I mean they're just kind of amazing be after understand why he's doing of course because if he doesn't he's starving Scottish Labour MPs in the back right so he can't do that right so you know the poultice get very complex very quickly it's you know this this what we're seeing here across all of Europe is kind of the collapse of centre party votes particularly the center-left because you know they've been hot I gave a speech to the SDP about a month ago and I referred to them and it really didn't like this at all as the second secondary enforcers of accreditors paradise and and that's kind of what they've become so I mean if you think about the way that Labor's tell in the story is like you know ed comes out does his conference speech and it's like all of a sudden you know change a conversation blah blah blah and then the press just come after them what about the deficit what about the deficit of course in any sense it's a the only reason the economy is growing because of the deficits stopped this is nonsense but it doesn't go yes you're right terrible deficit do something about it so it reminds me of the way the Democrats behave in the United States right because it's sort of like the Republic is like bomb everyone and the Democrats are like oh that's popular on someone right is this kind of like half-assed version of the same thing and if all your end up going to be is like a half-assed version of the same thing that nobody wants why would you vote for it so I mean that's why I'm very pessimistic on center-left chances I just don't think they have any credibility animal the excess what mark thanks very much I really enjoyed it could you tell me about your scenario one because as you say it I mean you put a caveat at the end you said monitor expansion will only work for as long as there isn't effectively a beggar-thy-neighbor type response from other united states other other parts of the world so I mean where do you see Europe going in a sense do you see continued movement to try and pull sovereignty and therefore we rearm if you like the fiscal arm of government or or or not and if so would you like to speculate rule that might do I think the younger plan is going to prove to be very important because what it is is a disguised util bond if they manage to do it so the infrastructure bond becomes the euro bond and all but name you notices the love that cannot speak its name so that will prove to be that's fiscal policy and to own a try on a you know a European level and it's very important how much you can go forward towards integration well you know once you've kind of poisoned the well to the extent has been done because of austerity politics I mean the minute this baby and housewife came out and got paraded up against the lazy Greeks I mean it was just going to get ugly from that point it's very hard to take those ones back particularly more what's actually happened and I hope I've tried to convince you on this one is it's a banking crisis we just build the banks again right I mean really what it was all about so malkos not going to go up stunned the old one Dingle I remember all that stuff about lazy Greeks Alonzo tall actually we build at the banks what do you think for for me right that's never going to happen so it's very difficult discursive ly if you want to put it that way to get out of the rhetorical position you've built and turn it around in a progressive way which is why we're seeing basically a kind of loosening of austerity policy without an actual explicit rejection of it because the reputation costs are going to be really really high for all the people who've invested in it if we actually turn that on Rowan to everyone and said oh sorry you lost your job and all that totally pointless should have just had a better central back you know not going to work too well so is it going to go forward progressively with more European integration at this point I wouldn't bet on it if anything if the sort of inflationary deflationary politics blocks so what you're seeing is a reen a tional ization of politics and an attempt to basically through a claim of representation and democracy and a sense domesticate market once again it's a pullback from the International and that has both flip you know from a central life perspective hasn't sort of let progressive picture - but also very regressive picture - as well because what you've end up what you end up doing is you will end up basically reducing the potential pool for investment and so on and so forth so you know there are costs with closure as well as the security that comes with it so it's very much a mixed bag just a reminder it's good if you could tell us who you are when you ask your question and speak into the microphone so we'll be able to have your question as well as the answer recorded gentleman here and then given region seem focus you mentioned the Bretton Woods Agreement in Ireland when Nexen a abolished the agreement in 71 don't you think that was at the painted moment in Western the college it was I was defining in a very unusual way and for those of you who are not sort of off a with international monetary arrangements basically Bretton Woods was the gold standard existed when everybody expects the gold that unlike to be ludicrously insanely deflationary and fragile and it blew up the 1930s so after the war the Americans pegged to gold and everybody else pegged to the dollar and this lasted basically for about thirty years eventually what happened was the French screwed up because they always do is they went a lot of Fort Knox in the big bag of dollars and said give us the gold and the Americans weren't much of a god so basically by 71 the pressure became unbearable and they basically said if you don't like a modified gold standard try having a paper standards and they just basically broke the link to gold and we're in the world button now so absolutely a defining moment right but it's can also I mean you can get sort of like you know too much into this in terms of like oh it needs to be anchored to gold you know it's a shiny rock I mean a third of its like stuck on the necks of Indian peasants I mean it's got a magical to atomic effect but ultimately it could be arbitrary could be anything that you peg your currency to so you know a well-managed fiat currency doesn't freak me out what really matters is the intergenerational capacity to tax so so long as I've got positive demographics positive productivity and positive growth then my money that dollar in my pocket will still buy stuff ten years from now I don't need a shiny yellow Rock well Mars is when you get really badly designed to monetary arrangements and the euro is a classic case because in a sense it's a bit like a gold standard because nobody gets to print it and look at what's happening because of that cuz you're taking macroeconomic policy or tools right off the table before you start so I think it's a defining moment but I think of a defining moment for like different reasons from it you usually hear electric Aria but what's very emotional I would say talk I'm probably one of the most emotion I have seen I was not very restrained you you introduced quite a few problems but you don't propose any solution so I'm both your solution I don't do solutions I'm Scottish I mean apart from mixing different types of money with you all right dear you know talk what's what so your idea more I mean yeah bro Sonic's alright say it like every ok my to be the time machine right if you go back to 2010 the cost of avoiding all of this was 50 billion euros it was called by all the Greek debt that was coming up for what's called rollover risk right basically they had to take some off the market and I see new stuff to cover 50 billion right it's now going to cost best estimate I can come up with is the tool cost of emergency liquidity assistance for the value of the Greek banking system plus everything else that could steal on the way at the door if they decided to fall probably about 700 billion right so it went from you know 50 to about 700 billion in terms of like the cost of if Greece what the default today not saying that the well but you know that's one way to think about it so we don't have a time machine we're stuck with it we've got those cuts on costs first one stop squeezing it's really simple the only reason for Spain is growing is because they've got someone to export to and the people that exported to is France because France is running a deficit deficits are not deadly they are not toxic they do not end up with everybody or ending up is the Vimal republic this is just some kind of bizarre mess that we've bought into so you can't actually have fiscal policy loosening which would lead to a higher growth track which over the long run then gives you a more sustainable debt profile so the best example of this is again Greece they've lost 30 percent of GDP their debts of skyrocketed rather than shrunk and their economic model to the extent of the hud-1 is broken beyond repair they are completely insolvent now if that's the case stop squeezing number one number two have something like a euro bond mutual eyes some risk get some bad assets off the banking systems books the key thing is it's not even an infrastructure spend for the sake of although one should notice that for example the locks on the Kiel Canal are falling off they could probably do with a better appear right so nonetheless you could do infrastructure spend but really it's just stop squeezing this is all policy error there's no need to do it is because what you're doing is you're treating a banking accident is a fiscal crisis and you're then applying the wrong remedy for a fiscal crisis to a banking accident just stop doing it and the whole thing will get a lot better really simple example is the United States didn't spend beyond and the original seven hundred billion eight dead under stimulus and it even cut a little bit but thankfully the sequester was tiny 78 billion either side on a 17 trillion dollar economy is pocket change right so they didn't cut gridlock meant that Republicans didn't get to do what the Europeans dead voluntarily look at the difference in the growth profiles they didn't spend but they didn't cut they grew five times as fast as the eurozone last year so just stop just all kind it's really simple hey I am Marie Claire so incredible talk thanks very much but can you see a political situation in the next decade whereby the deregulation of the last 30 years is rolled back to like a system of reregulate if you have the financial sector it's a tough one you usually really regulate the financial sector when it goes bankrupt and it hasn't gone bankrupt cuz it got bailed out so could you imagine another financial crisis coming along I actually think the threats are overblown in terms of like there being another one just around the corner but your political problem that comes from this is the increasing skewing of income because what you've got is collapsed real wages I mean wages in Britain are depending on how you count to eight to ten percent more than they were in 2008 you've got a massive skewing of the income distribution the top one percent and policies such as quantitative easing while effective on a macro level basically make it worse because if you're going to distort the prices of houses and stocks and bonds and again then people who have the ability to buy and sell these things are the only ones that really make any money off of it so to me the 10-year problem is basically the kind of Piketty and politics that come out of this that you're looking at figures for Scotland as I mentioned before one hundred and twenty thousand people living in poverty in a population of what would support living there just under five million just over five million I mean that's just shocking right and if the story is ten years old that's going to get bigger right they're going to get poorer and the tops going to make off with even more of the income that's when it becomes a political sustainability question that goes well beyond regulation that's no longer a regulatory question the other thing with financial regulation is a lot of talk about macro Prudential Regulation for those of you who want to geek out on that stuff I was actually involved in some of the early walk on and I've come to believe that basically it doesn't work or it's not the panacea we think it is so what would be a marker financial thing I'd be like you'd have some kind of measure of let's say housing index costs relative to wages and it gets to a certain point and you'd make it more expensive for people to get mortgages well the problem with this is lots of inter linkages in the economy we don't really understand there's a good example of this in Sweden whereby they're like Jesus there's a huge housing bubble in Stockholm the price more income multiples are huge so they raised interest rates to try and cool this down thinking this would basically call that housing market it just caused an economic slump so the other recession that they didn't need and it didn't do anything to host prices because as we saw in London it just keeps going up so because we don't really understand how these linkages work again regulation of these things is actually much tougher than we think gentlemen now George English and basically what I want to ask you is what do you think a the UK particularly Scotland should do economically and you mention politics and economics we have politicians trying to get us to believe certain things engine up last year The Herald supported independence right up to the last moment when he had this lovely quote a Pangloss Ian emphasis on the best case scenario has strained his credibility the second example the NHS apparently helps the second biggest issue for independence and again we got a flyer last week the last 7 years of Scottish government has worked apart regarding Scotland's NHS record health spending knowing full well the real spending has fallen by 1% while it's gone up by former send in England so comments on that feel all right so there's another story which is going on here as well as the inequality one there's an intergenerational story and it goes like this the United States spent 17 point seven percent of GDP on health care right let's let's author madness right now at the same time it's not because it tells me what I need to invest in to ensure a very comfortable retirement which is goal Wong Big Pharma and healthcare stocks right straight forward so of course being I'm not a 1 percent or maybe a 2 percent I can do that I can get away with that but everybody else gets good now you're spending much money on health care what's going to happen to investment now who are the people who vote Britain's a brilliant example of this the taught no difference between the young and the old is absolutely huge I think it's the biggest across the OECD so pensioners vote no what was it that George has been doing all the past couple of weeks pensioners have more have even more stuff take your annuities go on a cruise do every you want I don't care just vote for me right so pensioners vote a war and it's almost impossible to cut their benefits so if you want to cut you have to cut someone else so think about what's happened to the British welfare budget seventy two billion dollars and seventy two billion pounds in cuts twenty seven billion of those cuts fell on three programs that primarily had disabled people that's the reality of the spending cuts because the certain things are sacrosanct and all people are sacrosanct because they've worked their whole lives and they get their pensions yeah also because they vote way more than young people so young people's ability to form assets to basically do what their parents did unnecessarily curtailed because we're spending so much money on the old the nobody wants to talk about this what's a fact now the old men to take a head for this well they're not going to and eventually as all of us well they'll slept the mortal coil but what we'll do in the meantime is basically take a huge amount of national income and spend it and while that's good in a macroeconomic sense nobody benefits from having like lots and lots of all to prove people it's great that they spend their pensions but also means there's less money going to go anything like equity markets because all people buy bonds they don't buy equities so your net rate of investments but a godown simply by demography we see this all over Europe so there's a real mixed bag here in terms of how this plays out so it's not just the apparent there's lots of other transfer issues across generations as well as across classes and all societies are having to deal with us so just more stuff microphone quiz and then behind Brian Durban Glasgow and something about the politics of this again I mean you mentioned the emergence of insurgent party needs Oh perhaps that order the book most of them are strongly nationís in one form or another whether left our writers perhaps not that big an issue but does that seem to you to lead back into I mean you mentioned this the realization issue because what I mean fifty percent of Greeks now say they want they will they think Greece would be better off outside the e or just under 50 percent thinks 48 or 49 percent something like that the last figure I saw and it Britain it's 40-something percent in Sweden it's 40 something percent it's it's only the core EU states where you have relatively high levels of support for the EU so think this perhaps two questions linked here one of them is whether the U is any future at all in reality and all we're looking at really is it being poured out at the end of this because it simply can't sustain the promise that it's made and the second one is you mentioned Pawlenty but although you didn't discuss him a detail I mean one of the points he makes is that in times of crisis and his model was the lost revolution what societies do is they create ways of negotiating with capital R with the stage that hasn't happened the insurgent parties are there but you know you don't have that emergence of social democratic politics that you have in the nineteen thirties are the emergence of trade unions in the 19th century it seems to be looking across Europe and indeed looking across the advanced industrial world there's very little politically that challenges the type of consensus that you describe particularly the service city or German anti-inflation consensus I just wondered there whether you have anything to offer on that tight boat on the on the last point I think there is a lot going on it's just that it doesn't look like what we would look for right because we are old so we look for unions and we look for things like that and they don't exist seven point nine percent of the private sector your workforce in the United States is in the Union and you had these still get blamed for stuff it's hilarious but they're not and they are so those those types of social movements that we are used to are just not there but young people in podemos don't need unions to organize they need Twitter so I really think there's a very very different politics that's emerging and it's very much it's cross class but it's skewed towards the bottom and it's overwhelmingly young and if you have a look at me from looking it from me from the point of view of certain in the United States looking at the referenda to be what the way I made sense of it was pretty straightforward if I was living here now was under the age of 30 and I'd basically raised in an environment would had easy access to credit which has now become rather contentious debt my real wages have stagnated my opportunities are limited and I'm told that I need to do more with less and then on the other hand I've got a bunch of people who are over 50 who own everything and are totally fine guess which way the volt line everybody who had assets wanted to stay with the state is cool everybody who was or naive hope right selling naive hope they were the ones who were basically living for hope because they don't have any assets so when you break it down that way you know you end up in a very different space I think there's a lot going on with young people we just don't have the eyes to see it no not give it time get it give it time give it time I mean how old is podemos give it a chance look not let it go I mean you don't have to let these things go all but right only on the other point I'm going to invoke Katy Perry because I always like to do this so I call this the Katy Perry problem whenever somebody says to me it is amazing so it's like 48 percent of Greeks now don't want to be in the Euro yet there's another poll that basically says eighty percent of them do want to be in the Euro but they want to be out of where they are just now it's like doesn't make any sense right so I'm a hundred percent committed to being in a relationship with Katy Perry that's never going to happen either I don't know people want stuff all the time it doesn't mean anything in terms of what's actually possible as to what can happen in terms of the agenda of options although I'm still holding out for Katy I mean if she went for Russell Brand maybe there's hope for me you know you never know microphone to this gentleman first please my martial Blasco what's your opinion on offshore tax havens and how do they influence the situation because it seemed to have enormous funds far far greater than any national government and yet they seem to be able to operate without any difficulty whatsoever in the world and the influence everything that we did you have suggested and so I'd like your opinions on that please thank you big topic by one estimate there's 29 trillion dollars in funds hidden in offshore accounts that's more than enough to solve the eurozone crisis the unemployment crisis the investment crisis two times over so we just need got hands on it governments are looking for more revenue my favorite example of a tax haven actually isn't you know Bermuda it's Ireland and London absolutely and in fact most of the world's money laundering is done through London not through the Cayman Islands it's very difficult to do it in the Cayman Islands because everybody's looking whereas in London is incredibly easy to take money out of Russia a sticker and a lot vien ba and send it to Sweden send out to London and buy a mansion money laundering on a global scale so it's much more complicated than simply looking at the tax havens themselves right but we're looking I mean the lockout declaration was one thing you know tightening up on sort of double IRS strategies and double dutch and all that sort of stuff is there so we need more revenue they're coming after it but you know the limits on this as follows the following two statistics are absolutely true and because I know cos it's about me in 2010 I paid more income tax than Bank of America paid total tax I mean that's true in 2012 I paid more tax in the United States and income tax than American Airlines what the I mean seriously right I mean come on that's not even funny right so that has to be addressed on some level and it will be it will be whether it will go all the way to 29 trillion I don't know but we'll get our hands on a car on a wee bit of it by shutting them down but then again just shutting down London so that's a tough one it's not about being me - you know the Cayman Islands or whatever it's basically well I'll tell you sample one is basically stop you know the Irish will still have the 12 and a half percent corporation tax rate which allows them to Google's profits as a services export which is a nice trick right but the problem with these strategies is everybody tries to do it ah the SNP remember that whole thing about you have a more compared to corporation tax that's beggar-thy-neighbor against everybody else right so the problem with tax havens strides is about like Switzerland just as I have the Katy Perry problem I have the not Switzerland problem has anybody ever been to Switzerland it's a very nice place there isn't a bloody expensive but very nice the reason Switzerland's a nice place is because everybody else is not sweat salons right if everybody tried to be a tax haven and Pharma hub guess what it wouldn't work so for Switzerland to be Switzerland everybody else has to be not Switzerland right we can't all play the corporation tax game and we're all going to try to that might actually be more conducive to learning about change in anything else because it simply can't work in the aggregate but do I think we're going to like suddenly wake up and raise billions probably no gentlemen here and then you go thank you John McCain oh you go there as well forgot that but I got microphone to you next surah Bella and I don't pretend to have understood very much of that good cuz it was always smoking meadows the fall-off I'm one of you old who's fairly acid rich but bought enthusiastically into the yes company I don't know if that whoa that does mean yeah exactly I'd look for therapy on that one yeah don't office is a simple question do you read necklace dodging and John Swinney and their economic policy because that's an aspect of this MP that I don't understand bro I've bought totally into the SNP oh and you something would ask me this one um well I rate them as much as re any of the others however all right here's the deal oil prices have went down by thirty percent if you were an independent country default or today without your own currency you would use the pound you'd be fine they can't actually comment your house and take the pounds back right so the whole thing if you don't get use the phone is right forget about that right you could be insane and join the euro if you did you would become Latvia on the Clyde in a heartbeat right so just don't do that it's a really bad idea but to do the stuff that neckline is people want to do is you need your own currency you really need your own concert and getting there's a multi-year project now you would have a structural budget deficit with the collapse in oil prices for about seven to eight percent of GDP if you were on your own trying to fund the levels of transfers that we want to as a society here that's a really difficult track to pull off the only way you could do that is by a lot of borrowing in your credit rating would be different from the English and so on and so forth and you would have to do some medium-term fiscal consolidation blah blah blah so you might be able to turn yourself into Norway or Sweden but it's going to take you 10 to 15 years to even get close to starting the project and that's the unfortunate truth that nobody really wanted to fess up to so it was kind of like hope versus chronic pessimism right that was kind of you know the way that the debate was structured and it really should have been something along the lines of look where we are as kind of untenable I mean eight hundred and twenty thousand people in poverty that's just ridiculous right and it's not just about pumping more money or London financial sector and then giving it to poor people we need a growth strategy you need an actual sustainable growth strategy for the country it's a different place if you're going to go down outline be honest about it and say it it's basically it's a 15 year project it's gonna heart like hell at first but stay the course and keep the faith that would to me would be the credible thing to do in to signal and they say that you want your own currency if you're not doing all that you're kind of faking it here okay so I'll ask her a naive question cuz I'm a psychologist but I recently heard auntie Haldane chief economist Bank of England and London talking about the financial problems it's stuff like that Amy so one of the things that he listed as a potential explanation was the hubris of the decision-makers the individuals I just wanted to do I mean you're talking about everything in terms of economics and social level and so on but how much you think might actually pay for something the personalities of the people that have brought us into this city well there was that bloke that I'm the big bank here what was his name again right exactly they removed it you're the knighthoods got it back too good all that sort of stuff right yeah but I mean here's the thing so in the book you know what I encourage you all to buy so I can join the 1% in the book I basically make a point that greed is a constant and crises or variables so you can't really explain a variable with a constant so but let me say you know that sort of insufficient as an explanation because what happens I think is hubris develops because we think we know more than we do and the reason that we think we know more than we do is because the future seems to be very very stable it really does track the past quite well and if you go basically from the period of sort of cool Britannia and Tony Blair in 1997 you detain your period what it looked like it looked like to all intents and purposes the global economy was on a rep even with 9/11 even with the slowdown there in America everything was going great if you had houses you had assets but doubling up flapping the hall so basically we had as a Robert Lucas The Economist said in the United States in 2004 to all intents and purposes the central problem of depression prevention has been solved Ben Bernanke the guy Haven basically invents QE on the fly writes an essay in 2003 called the Great Moderation this says that we figured out we know who combination of inflation targeting a couple of other tracks we've tamed the business cycle Gordon Brown himself said we've tamed the business cycle that's hubris on an epic scale so I think it is important I think it's really important but I don't think it comes from personal characteristics I think it comes from the fact that we kind of feed off each other in a network sense and if everybody is really is getting the prior kind of like reinforced then it creates an overlap optimistic bias and you have an inability to see blind spots and that's kind of the way that things got channeled and there's a fair amount of work in behavioral economics and also in psychology the buck stops oh yes that's how I think about it I think we have time for one more question oh yes that's right with you nope down here we'll get you as well no one more won't keep your hand up there you go you have to pick your hand up they're not psychic they're really good but they're nice okay I think it's over here hello I'm a student at the University of Glasgow and I was just wondering you were referring time and time again to Greece and austerity in Greece and though you never explained why was it that austerity became such a commonly accepted thing as such a commonly accepted practice and why then the finger pointing to Greece was so effective and so accepted well they're two different issues why is it so effective partly because it's common sense right you spent too much then you know stop spending that ah the thing is in order for every but anyone is saved there has to be an income generated from which to save so if everybody saves at once you get the collapse and income before the whole thing's pointless but that always takes one extra step to explain so if you basically walk out with the Swabian housewife story this way being housewife knows how to run the market economy really does she that's kind of awesome because market economists don't that kind of like political common sense really sort of you know sells so there's one right second one's latent racial prejudice I mean basically thrifty Protestants in the north and you lazy Catholics and Orthodox southerners all that sort of stuff so you can throw some sort of sociological stuff in there as well there's the fact that basically you do have a lot of debt going around the system and different countries look at it in different ways so the German word for debt is shoeld which is the same warders guilt there you go the attack in what for their English word for credit comes from the Italian word cred array which is belief and faith right so the way that you even think about this of course feeds into this in a very important way right so all of that's there now why was it accepted it wasn't accepted it was imposed let us remember that there were two constitutional coup d'états took place one in Greece and one in Italy to make this stuff stick nobodies voted for this nobody actually said this is a great idea let's smash national income by 30 percent you gave her a chance because you told us the only thing to do you vote in an election you don't like the guys you throw something else you get the same guys again because basically the policy never changes despite who you vote from the to me Greece is really important for one reason not because it's economically important not we used to say in the United States Greece is the same size as devout as Alabama who gives a damn about Alabama it's no two thirds the size of Alabama so it doesn't even matter as much as that it matters politically for what it represents because what it represents is basically a rising of the non-traditional left and the center left in Europe are absolutely terrified because if senior votes year for the past ten years going down and don't and no and as I mentioned before when you become the secondary in forces of a creditors paradise why should anybody vote for you so what's the reason and podemos and on the right the National Front another represent is a way of basically bypassing the system and expressing a set of beliefs and desires which the mainstream parties are unable to articulate or unwilling to articulate so Greece is a threat because what it represents politically if they hold on for six months and basically you managed to get podemos in the city's possession a challenge of Spanish mainstream if you get a reaction in Italy along the same lines then basically you really are kicking over the applecart of European politics and that's what they're afraid of so this has to be bought off cauterized sanitized or otherwise disposed of because you're too dangerous and you going thank you and although we have a bit of an austerity regime going when it comes to time and we have to close I want to say that we do not have an austerity regime going when it comes to drink and conversation in the foyer so I would like to invite everyone to please do stick around have a conversation talk to mark if you'd like to and finally and most importantly I'd like to thank mark life are really really interesting exciting challenging and mind-bending big talk thank you very much and a final marketing ploy there are Flyers for this book out in the foyer as well

Channel: University of Glasgow

Views: 139,763

Rating: 4.9024391 out of 5

Keywords: Austerity, Mark Blyth, Mackenzie Lecture, Europe, political economy, Stevenson, Glasgow Politics, politics, money, currency, economy, finance, economics, greece

Id: B6vV8_uQmxs

Length: 89min 30sec (5370 seconds)

Published: Fri May 01 2015

Reddit Comments

[u/jeradj]

With the Greek referendum coming up this sunday with regards to more bailouts and austerity, I thought this was relevant.

[u/fjafjan]

Thanks for linking, the actual talk begins at around 13:04

[u/biledemon85]

I love listening to this guy, breaks it all down into something that's actually understandable. I'd love if he did an ama some time.

[u/POGO_POGO_POGO_POGO]

Thanks for linking, that was awesome. Really interesting. Although I feel like I need to watch it again as it was quite fast-paced and information-dense.

[u/raskolnik]

I watched his Talk at Google a year or so ago, and it was amazing. As /u/POGO_POGO_POGO_POGO said, his stuff usually requires multiple viewings to get it all.