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Bill Janeway: No realistic chance that US or UK will default on debt but threat used to achieve Reagan-Thatcher objectives
PAUL JAY: Welcome to The Real News Network. I’m Paul Jay. We’re at Bretton Woods, New Hampshire, where INET is holding a conference to spawn new economic thinking and find a way out of the current economic crisis. Now joining us to talk further about this is Bill Janeway. He’s a senior advisor at Warburg Pincus, which is a big venture capital fund [inaudible] deal a lot with innovation and investments, I–.
BILL JANEWAY, WARBURG PINCUS/CAMBRIDGE FINANCE: Absolutely. I grew up with the microelectronics revolution in information technology, and that’s what I’ve been investing in for decades.
JAY: So there’s a lot of discussion at this conference and everywhere about the need for innovation, the need for investing in new technology and education, that this new global economy–we’re seeing China developing as more of a consumer market [inaudible] center of demand, and that if Britain and Canada, United States, and Europe are going to succeed in the future, they’re going to have to be innovation-rich. At the same time what we’re seeing is an austerity mania. We’re seeing the various elites saying, we don’t want to pay more taxes, and, in fact, a lot of people saying they don’t want to pay more taxes, they don’t want investment, certainly public investment. How do you put these two together, the need for–supposed need for grave austerity, at the same time need for investment and innovation?
JANEWAY: Well, I think these are–that there has been a deliberate confusion in the public debate, that much, if not most–and I spend much of the time living in the United Kingdom, I’m involved with Cambridge University, so I’ve been a kind of witness of this–the drive for fiscal austerity has been driven by the supposed fear of sovereign debt crisis, that the debts of the governments that were run up to protect the private sector from the financial crisis and the great recession, that those debts are just too big and have to be paid down fast or the financial markets will trash the currency, the bonds, and the governments, and the countries. Now, that’s happened in Greece, in Ireland, in Portugal, countries where the proportion of debt to the national income was so enormous, and where the government, in case of Ireland, had perhaps foolheartedly say, we’re going to assume all of the bank liabilities, all of the deposits of every Irish Bank, which had been grotesquely blown up in the bubble. But the fact is that Britain and in the United States the governments are borrowing today, today, at the lowest rates, in nominal and real terms, ever experienced. The markets are actually saying, you know what? You guys have plenty of running room. You have time. You have time. In the case of Britain, where a government in power, a government with a majority in the House of Commons, can do anything it wants, the fear of sovereign debt has been used to drive an actual austerity program that’s taking place right now.
JAY: So my question is: in terms of these global elites that believe this, why are they more afraid of debt than depression?
JANEWAY: Well, right now it’s not about–in my view, in my view, it’s not really about that. It’s that the threat of a sovereign debt crisis is being used to reopen the battles of the 1980s. It’s being used to cut back the size and scale and scope of the public sector relative to the private sector. It’s the age-old argument, certainly goes back to Adam Smith, as to which sets of institutions will be responsible for allocating resources and distributing income. The aftermath of the Great Depression, the state took over much larger responsibility, particularly for redistributing income. This crisis created an opportunity (just as the stagflation of the ’70s created the first opportunity) to try to redraw the lines back towards where they’d been, as far back as the 1920s. That’s what I think this is about. Now, there’s a real danger in Britain–and I know this isn’t all about Britain, but there’s a real danger that in doing this, that the government, in the name of protecting Britain, will drive it back into a recession, in the name of reducing deficits, will wind up increasing the deficit when revenues decline more rapidly than even this government can cut expenditures.
JAY: And there’s no reason to expect anything different in the United States.
JANEWAY: Well, yes, there is, for a very simple reason. Our political processes is stuck. So with the best will in the world, it’s only on the margin that you’re going to see fiscal austerity in the near term.
JAY: At the scale they’re talking about in Britain.
JANEWAY: In Britain they’re taking 4 percent out of GDP in 12 months. That is not–nothing like that is remotely going to happen in this country. This country, you have a different possible scare, and that’s of course–we saw it last night go up to the brink. A month from now, when it’s time to raise the national debt ceiling, we have a very real possibility of what I call the TARP II moment. Remember back in September 2008 after Lehman Brothers went bust and the, let’s say, politically insolvent administration of George W. Bush was forced to come to Congress to ask for bailout money, and Congress, the House of Representatives, said no, the Republicans refused to support it, and you could watch the vote on your television screen, and the stock market go in parallel as the market collapsed, and then they came back for a second vote and it passed? We may need that kind of moment of playing chicken. And there will be a consequence, because if the world actually ever came to think that politicians in Washington, that in the name of–that the Tea Party politicians could be so irresponsible as to call the credit of the United States into question because they’re arguing about planned parenthood or because they’re absolutely refusing to allow for a gradual decade-long fiscal adjustment, that will have very, very long-term, very bad consequences.
JAY: But even if this political paralysis in DC is such that the Republicans can’t do the massive cuts they’re talking about–it’s easy to talk about when you’re not really in power, ’cause we saw George Bush didn’t do anything close to what they’re talking about when they were in power. But where they are having some effect is at the state and municipal level, and there you might see the kind of draconian cuts that you’re seeing in the UK, in which case you could wind up with the same kind of depression threat here.
JANEWAY: Well, if you just scale things, US public sector is 35 percent of the national economy. Of that, about 25 percent is in Washington and 10 percent is in the states. So if the states cut by 10 percent, that’s 1 percent of GDP. See, it’s just a scale factor. Britain, the public sector is up close to 50 percent, and the cuts are–and it’s all centralized, and you have a government, as I say, that as long as it commands a majority in the House of Commons can pass any bill it wants. So it’s a different–that–and I’m not saying that irresponsibility in Washington can’t do long-term damage. I’m saying it’s harder for it to do as much short-term damage just because of the political stalemate.
JAY: Part of my question is why. Just to go back. What you said earlier is these forces, economic-political forces, are taking advantage of this moment, using state sovereign debt as the threat to re-fight these battles. What is their objective when what they’re–they have to know what they’re going to achieve at least in the–even they have to think in the short term some more recession or depression? Do they just think there’s money to make out of this?
JANEWAY: No, I don’t think it’s that. I don’t think they’re, you know, short, as it were, short GDP growth of the United States in the near term. Look, the argument about what the government should be doing and what the market should be doing, the public sector, the–this is all just–it’s endless. That’s what politics is about. I don’t begrudge them for wanting to shift. They’re entitled to their point of view, to express their interest. What I’m saying that it’s very irresponsible to be doing it in this way at this time. And I do think that there is an element–and we know that it’s much more represented in the House of Representatives than it was in October 2010–we know there’s an element that wants to, you know, destroy the village in order to save it. I’m old enough to remember [inaudible]
JAY: Yeah, they have this phrase, “creative destruction”.
JANEWAY: Well, it’s quite different. That’s–this is not about creative destruction. That’s what we were talking about in–about innovation. This is about destroying the village in order to save it from a fate worse than death, whatever that might be, from the loss of the American dream or something like that. And clearly a small minority that is fanatically dedicated can have an extraordinarily disproportionate impact on any political system. And that’s what this small minority–and it’s clearly a small minority–is having.
JAY: Well, the Tea Party’s out front here, but if you look at the discourse in DC, both from the leaders of the Democratic Party and mainstream Republican Party, they’re all on the same page.
JANEWAY: Well, they’re on the same page with respect to we have to worry about the deficit.
JAY: As the primary issue.
JANEWAY: That’s right. And the question is: is it a decade-long challenge which is best met by growth? Or is it something that has to be met in 10 months by unlearning, unlearning everything we learned in the 1930s? The one thing we know, the one way to guarantee that you’re going to have a bigger deficit, is to cut now and force the economy back into a recession. That’s what I think the Brits are very possibly going to do. I doubt if it would happen here. I do think that there should be some more going back and looking at real history. You know, the United States came out of World War II with national debt that was more than 120 percent of national income. In 20 years, 20 years later, it was 50 percent. You know why? Because the economy grew. It wasn’t that the debt was cut. Debt wasn’t cut at all. In fact, it grew back again during the Korean War. It’s because the economy grew. Now, I think the administration really does get that. I think they really do believe that and that the–I think there’s reluctance in accepting the terms of discussion, which the president has accepted–
JAY: He has, yeah.
JANEWAY: –in order to head off the damage that would be done by the political impasse becoming actually a complete freeze, because if–as I say, if it ever gets into the minds of people in financial markets that the US actually might miss an interest payment on its debt, our grandchildren will be suffering from that more than they will be suffering from whatever happens to Medicare or Social Security. In fact, it’s the investment in growth that is the most important priority and is the one where I very reluctantly have come to believe that the US has lost the plot, that we’re arguing about issues on the fringes when we should be talking about how can we square the circle, invest in innovation that gives us economic growth in a better environment. That’s what the challenge should be. And I have to say, when you look around the world, the one country that really seems to get that, or the one leadership that seems to get that, are these people in Beijing. That’s what they’re doing.
JAY: We’re hearing this [from] everyone we’re talking to at the conference.
JANEWAY: As you know, I think that it’s humiliating that the US should be taking the Chinese to the World Trade Organization and trying to get them punished for subsidizing the technology we all need and which we’re not investing in here in the United States.
JAY: Thanks for joining us.
JANEWAY: You bet.
JAY: And thank you for joining us on The Real News Network.
End of Transcript
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