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Men Should Weep: glorious realism, but reality was worse

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Paul Mason | 12:31 UK time, Sunday, 31 October 2010

Ena Lamont Stewart's 1947 play, Men Should Weep is wowing reviewers who've acclaimed some stunning performances and pointed to the play's sudden relevance, in the week the Coalition's housing benefit cuts have led the headlines.

But Men Should Weep is not about social housing: it's about the working class family faced with poverty. It is the realism of a specific time and place (east Glasgow in the 1930s) portrayed so truthfully that its insights reach out across dialect, period and economic climate.

It's poverty that traps the Morrison family's adult children into lives that, despite the glamour of their going-out clothes (they had "ghetto fabulous" in the Gorbals, even then), they cannot bear. It's poverty that limits the confidence and imagination of the mum and dad so that they never quite get around to asking for a council flat, nor to getting their kid treated for TB. It's poverty too that breeds the domestic violence - which Lamont Stewart's script describes and which Josie Rourke's production makes more overt.

Though all these themes are the stock-in-trade of soaps now, above all EastEnders with its perpetual "scream-ups", the play captures as soaps do not how family life adapts to survive poverty. The dad slaps one of the kids around; they retreat to a shared bedroom with the other young adults; the neighbours turn up to gossip but are shoo-ed away when the tension rises.

But in some ways, Lamont Stewart softened the reality. There are two things missing from this family's life that were pervasive in poor communities in the 1930s: drink and debt.

The central character, John Morrison, is only casually employed but is on the wagon, permanently - and while the family has debts to other family members and neighbours, it does not live in terror of the doorstep lender and the means-test man. Its income is boosted by the pension of the live-in grandma. And the Lyttleton's inevitably expansive set makes the two room flat look bigger than it would have been in real life: the characters can get further away from each other than real life tenement architecture would have allowed.

Obviously, the shape of the working class family has changed massively since the time depicted in Men Should Weep: in the post-war boom, gigantic social housing programmes gradually removed the need for young, married adults to live with their parents; slum clearance placed greater physical distance between extended families and, you are reminded, greater physical distance between people inside the family home. The prosperity of the 60s and early 70s, then, created a short lived stable "nuclear family" in the working class household, where both partners worked, hugely changing the economics of family life. And then...

And then it gets torn apart. The boom and bust cycles that began in the mid-1970s, together with the "permissive society", allowed ordinary families to fly apart in a way that neither economics nor social morality in the 1930s allowed.

So now, once again, we're faced with a turn in the cycle that is placing new economic and social pressures on the poor.

What Men Should Weep reminds us is that the ultimate social safety net that took my grandparents' generation through the 1930s - the heavily interdependent and authoritarian family with its shared spaces, shared meals, strict hierarchies - will not be there if we ever have to face another Depression like the 1930s.

Society - "Big" or otherwise - and the state are the only safety nets for the bedraggled kids and their harassed parents who will struggle through the economic hardships of the 2010s.

And the family was not a very effective safety net in the first place. For all the tight-knit social solidarity on display in these rugged performances, real life in the 30s was a kill-or-die competition for jobs, credit, housing - which I think Orwell, Greenwood and McArthur captured better at the time,

The play itself has, if not a happy end, a hopeful one, in which the family ties prove stronger than the economic penury that is pulling them apart. The audience in 1947 could accept this because they knew how the real story ended: it was the war that finally lifted large parts of the British workforce out of poverty, and the post-Beveridge welfare state would keep them out.

The play was part of a wider movement to put the working class voice and lifestyle onto the stage. Lamont Stewart wrote:

"One evening in the winter of 1942 I went to the theatre. I came home in a mood of red-hot revolt against cocktail time, glamorous gowns and underworked, about-to-be deceived husbands. I asked myself what I wanted to see on stage and the answer was Life. Real Life. Real People."

The movement would peak, in the mid-1950s, with Joan Littlewood's Theatre Workshop and the whole Look Back In Anger phenomenon of "kitchen sink" drama. But in its specific Scottish form the movement ran into three problems: how real should realism be, how authentic the language, and how tied to specific left-wing politics?

Copies of the original scripts of Lamont Stewart's and other Glasgow Unity Theatre plays show that the actors helped "Glasgaeicise" some of the dialogue, pulling it closer to the rhythms of real life - so there were no pulled punches there.

But though MSW shows a tough life, especially for women and the young, it veers away from the harsher themes that pervade both Robert McLeish's Gorbals Story (1946, also produced by Unity) and that uber-story of Gorbals life, Alexander McArthur's novel No Mean City (1936) - a tale of razor gangs, sectarianism and back-alley prostitution that was so unpleasant that Glasgow booksellers refused to sell it.

Though the politics of Men Should Weep were mild for its time, it was her association with Unity Theatre put Lamont Stewart on the wrong side of a political divide in Scottish theatre, and buried the play for a generation. When Men Should Weep was first rediscovered, in the 1980s by John McGrath's 7:84 it was its absence of agit-prop preaching, melodrama and despair that saw it acclaimed as a lost Scottish masterpiece.

But it is only one solution to the problem of how to put the authentic voice of the poor onto the mainstream stage.

In her determination to portray hope, love and solidarity Lamont Stewart avoided the worst. Though what we see is realism, reality for many was worse.

And while it was thrilling to see this talented cast in full flow, what would be even more thrilling would be to see the National commission something just as raw and real about the present day.

How could the deficit reduction plan 'work'?

Paul Mason | 13:14 UK time, Friday, 29 October 2010

Like a pint of bitter, the Spending Review 2010 has taken a little time to settle down and become clear. Its claims to fairness were attacked by the IFS within 24 hours - and the debate on housing benefit rages.

But I've been taking a closer look at the big macroeconomic questions, which have caused both the FT and the Economist to call it "an experiment":
-Will it flatten the economic recovery?
-Does the labour market story hold water - of 490,000 job losses replaced by 2m private sector jobs over the same timescale?
-How does its impact interact with monetary stimulus, global currency war and still frozen credit conditions?

And I want to ask a possibly heretical question for those who are against the austerity package: what would you have to do to make it work? JM Keynes famously said don't wish for the failure of the anti-crisis measures, even if you consider them imperfect. So...First: what is the likely impact on GDP?

-Public spending will fall from 48% of GDP to 41% in 2014-15 (according to SR2010)
-So the private sector has to rebalance the economy, filling a 7% gap.
-The OBR in June published estimates of how it would do this, namely that there would be a switch - achieved by 2013 - from public spending to export led, investment led growth.

Here's a pie chart of GDP growth in 2008.

And here's one as projected by the OBR for 2014. Overall growth is the same, but its components massively different.

Starting next year, spending cuts create a 0.7% of GDP headwind against growth, so they disappear as a contributor to the pie chart. Business investment - which averaged 0.3% between 1999-2008, has to contribute 1.1% in 2012, 2013 and 2014. Net trade - which has been on average negative since 1999 - has to be contributing 0.5% by 2014 and indeed 0.9% in the next two years. (Source: OBR Supplementary Material to June 2010 Budget, Table 1.2)

So the conceptual shape of the rebalanced economy, at this level is clear: private investment flows in, stimulated by changes to corporation tax; Britain switches from a trade deficit to a strongly export led economy by the end of FY2011.

It is worth remembering why these projections were done by the OBR: if growth does not remain strong in FY 2011 and beyond, the tax take falls, the deficit rises. Unemployment places further pressure on the welfare bill, which in CSR 2010 was made to take £18bn of strain out of an £81bn cuts package.

The theory of "expansionary fiscal austerity" supports the OBR's projections - but it is only a theory. Its poster children are Canada and Sweden after the 1991 recession. Its theorists - most notably the October 2009 Policy Exchange report "Controlling Spending and Government Debts", look at three scenarios for the impact of a high budget deficit.

-In a "normative" economy, where information flows transparently and everybody acts rationally, a deficit does not produce a stimulus to the economy because consumers rationally react to the future tax hike implied by saving. This is the so-called Ricardian equivalence model. Its critics believe it has no relevance to a modern economy.

-Next, in times of crisis, because rationality goes out the window, a "right sized" deficit/stimulus can work - and therefore reversing it can cause a second recession. This is the common ground between Keynesians and neo-liberals.

- Finally there is a situation of a "too big" deficit: "When deficits are too large and/or spending levels too high, instead of providing a boost to demand large deficits actually impair growth, and so fiscal consolidations, far from driving additional contraction or limiting recovery, actually promote faster growth and more rapid recovery." (Policy Exchange, op cit, p26)

This is the essential theory behind the Coalition's strategy. The PX document states a preference for 80:20 cuts/tax rises and says:
"Providing spending cuts predominate over tax rises tightening is more likely to promote recovery than impede it." (p103) adding the caveat that this is especially true if fiscal tightening can be accompanied by monetary easing.

The IMF, in its World Economic Outlook this month, has issued a pretty thorough refutation of this theory. The IMF's position is not based just on a historical survey but on the most developed model of the world economy in existence - the GIMF.

Running its model, and the historical data the IMF finds:
"The idea that fiscal austerity triggers faster growth in the short term finds little support in the data." (WEO, IMF October 2010)

It does support the idea that deficit reduction has a benign long-term effect, but issues a caveat, of which more later.

The IMF sets out its model for what usually happens. They do not draw a distinction between "exceptionally large" deficits and right sized ones: for them the main distinction is whether a country is at risk of default - in which case cutting the deficit supercedes worries about austerity.

They calculate as follows:
-A 1% fiscal tightening brings 1% cut in demand plus a 0.3% rise in unemployment. But GDP only falls by 0.5% - due to the mitigating factor of a 1-for-1 percentage fall in value of currency, facilitating a rapid switch to exports.
-Without a boost from currency depreciation, higher exports and lower interest rates, the impact on GDP is worse.
-In particular if you are already at zero interest rates and cannot lower them any more "the output cost of fiscal consolidation doubles to about 1% after two years". (p109)
-It gets worse, because the IMF economists then model a global fiscal tightening scenario (using Canada as the guinea pig) where one country cuts the deficit but so do several others. This shows for every 1% of tightening, Canada - a small, open, globalised economy - suffers a 2% fall in GDP a year later.
-The IMF accepts that cuts-based tightening stimulates growth faster than tax-based tightening - because the absence of increases in VAT and other indirect taxes leads to the central bank being able to slash interest rates. So it implicitly supports the Coalition line on the mix of cuts to tax rises.

Applying all this to the UK, what it shows is that there is a large theoretical variability to the outcome of a 7% fiscal tightening. What are the variables:
Is the interest rate 0%? Yes it is.
Does everybody else cut? In many places yes.
Does the currency depreciate to boost exports? Yes it has done by 18% - but now needs to fall at least another 7% in the next 4 years.
Does everybody else attempt depreciation? You bet - we're in the middle of an undeclared currency war.

Without a massive monetary policy boost, the IMF's model would indicate the UK faces at least 1% reduction of GDP for every percentage point of tightening. Of course it's only a model, and an abstract one at that.

Both the IMF and Policy Exchange believe there are beneficial long-term outcomes from reducing the size of the deficit relative to GDP. This is because the long-term real interest rate falls, pulling in private sector investment. However the IMF is clear on the limitations of this, and the timescales:
-It believes the long-term interest rate effect takes place about 5 years into the cuts.
-It believes there is a stronger positive impact of deficit cutting in countries at risk of sovereign debt default. Hence the debate about the real or imagined nature of Britain's sovereign risk is important there (see Kaletsky, Wolf etc)

Here too it is important to understand the IMF's model is global, and depends on interaction between economies, not just the domestic impact of deficit reduction. In the global model, the developed world can make a one-off long-term cut in the size of budget deficits, and this can boost growth, but only if there is a one-time rebalancing of world trade so that the entire developed world improves its export performance while China, India, Asia, South America consume more.

But the complicating factor - the crucial factor - is quantitative easing (QE). Since we can't cut interest rates much further, the monetary stimulus relies on QE being effective. George Osborne has already signalled he will allow for more QE - but will it work? To work it has to get real interest rates down.

Whether it is because of QE or merely a signal of long-term stagnation, inflation-protected bond yields are currently at their lowest ever. Here is the indexed yield on a 10-yr gilt:

As you can see it is extremely low. One bond-market source told me:
"Credit risk is not being reflected in real yields today. Or rather, if there is credit risk in UK real yields, then the 'risk-free' real yield is a deeply negative number. Real yields can only fall in the UK due to market concerns that the long-term sustainable growth is falling, or because they see the stock of Gilts evaporate, and in this way what we see is no longer a 'market price'."

So while it is true, and welcome, that deficit reduction plans - even before implemented - are able to lower the cost of borrowing for government considerably, and hike its credit rating, you have to have some long-term view of what's going to happen in this combined world of QE, deficit reduction and currency depreciation.

And the starting point is, the risk-free rate is historically low: if my bond-market source is right, it is the credit system, not the perceived risk of a UK default, that is strangling the recovery.

In summary. To answer the question - how could the deficit reduction plan "work".
-It needs the maximum possible assistance from monetary policy. If it is the case that 12% of GDP spent on QE suddenly switches through from bank balance sheets into the money supply, then you will see QE supporting the austerity programme and the conditions for success will be in place. However then comes the moment where the monetary authorities have to decide what to do if this boosts core inflation.
-Real credit conditions would need to change. The risk-free rate is, as I say, already low: it is the margin between that and real business credit rates that is too high for recovery to take place. My hunch is that much of what "worked" in Labour's fiscal stimulus was micro-economics: the grants to businesses, the instructions to the banks to avoid foreclosure; the rapid return of A8 migrants to East Europe. Micro-strategy is important in the austerity phase as well.
-Then there is the labour market. Actually the labour market is crucial in these situations. Policy Exchange notes, inter alia, that it was the Invergordon Mutiny that finally pushed Britain off the gold standard and thus onto a softer path through the Depression after 1931. Likewise, the theory that if Britain pegged its currency to gold, wages would fall in line with global market forces, ran up against that ultimate example of wage stickyness, the 1926 General Strike.

Today wages are sticky for a number of reasons:
-The minimum wage: impossible politically to abolish, or to cut without sustained inflation.
-During the boom there was already downward pressure on wages at the lower end. The problem is at the salariat level. You cannot place mid-term downward pressure on wages without this showing up as a new stress in the property and personal credit market.
-The 490,000 estimate of public sector jobs lost was reduced from 750,000 on the understanding that public sector pension cuts would mitigate the public wage bill. We already know the scale of increased pension contribution in the public sector: it's about 1.5bn. But we also know the government's strategy is to encourage public sector workers to trade wages, pensions and hours for job security. We will have to wait for the OBR's assessment of the impact of SR2010 on 25 November. The OBR is now "under new management" and its new boss Robert Chote may want to revisit the methodology used in June.
-The longer term issues remain: do the new jobs created go to A8 migrants, does the Universal Credit succeed in getting millions of Brits back to work, and does it do so in time?

On currency: according to the IMF theory you would need a massive boost from sterling depreciation. Having fallen 18% you now need a 7% depreciation. But the USA is depreciating - despite its doctrine of strong dollar. So is Japan. QE should help depreciate but it is not yet a done deal at the Bank of England.

Of course, the real economy has a habit of defying all theories and models. But it is striking how overtly the IMF's view clashes with the underlying assumptions of the UK government - despite the fact that the IMF gave the June budget a nod of approval.

Another striking thing is that, while academics and journalists are locking horns at this theoretical level, the two front benches seem keen to skirt around the deep detail.

It leaves me asking the question - to make the austerity work the way it's intended to, will they have to adopt a vigorous modern form of protectionism, aggressively promoting trade, tanking the currency, printing money and manipulating the cross-border labour supply?

Mervyn ponders abolition of banking as we know it

Paul Mason | 20:00 UK time, Monday, 25 October 2010

Mervyn King, the governor of the Bank of England, has tonight made a big intervention into the debate on banking reform. In a speech at Buttonwood, New York, he describes the Basel III bank regulations as inadequate and proposes a much more radical structural breakup of the banks:

"If [Basel III] is a giant leap for the regulators of the world, it is only a small step for mankind. Basel III on its own will not prevent another crisis."

Surveying the various proposals for higher taxes, levies, higher capital holdings etc -and the idea of "living wills" for banks that are too big to fail, King says:

"But taxes, the Basel capital requirements, special arrangements for systemically important financial institutions and enhanced resolution procedures all have drawbacks and are unlikely to do the job perfectly."

This leads him to a list of much more radical proposals.

1. Forcing the riskiest banks to hold capital "several times the magnitude" of requirements at present.
2. The Volcker rule-style enforced breakup of banks into speculative and non-speculative arms.
3. The "Kotlikoff proposal", which forces banks to match each pool of risks with a requisite amount of capital, preventing losses in one spilling over into another.
4. Stunningly, Mervyn King imagines the "abolition of fractional reserve banking":

"Eliminating fractional reserve banking explicitly recognises that the pretence that risk-free deposits can be supported by risky assets is alchemy. If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not co-exist with risky assets."

King does not advocate any of these radical plans - but the fact that he goes out of his way to list them, and to place them on the agenda of the UK's Independent Commission on Banking, means that we are not yet at the end of the debate about long-term reform of the banks. It may take years, even decades says King, but:

"This crisis has already left a legacy of debt to the next generation. We must not leave them the legacy of a fragile banking system too."

Beyond the technicalities, the fact that a central banker in a G7 country is prepared to imagine such outcomes is itself significant. Imagine the head of the UK Armed Forces floating the idea of a Swiss-style militia and giving up the nuclear deterrent and you get a sense of the scale of blue skies thinking the formerly "unswervin' Mervyn" is doing.

Gary - City of the century? BBC News Channel/BBC World

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Paul Mason | 10:44 UK time, Saturday, 23 October 2010

An extended (23 minute) version of my report on the failures of the US stimulus is on BBC World/BBC News Channel this week. Entitled Gary - City of the century? it airs on BBC News Channel at (GMT):

1430 23 Oct
0330 24 Oct (British Kebab Time)
1430 24 Oct
2330 24 Oct
0330 29 Oct

On BBC World the times are:
Saturdays at 0330 GMT
Repeated: Saturdays at 1130 GMT and Sundays at 0430 and 1730 GMT

But check here for your local schedule. In addition to some of the stuff that was in the Newsnight/World News America versions, there are interviews with Gary steelworkers and with community theatre organisers. This is the definitive version of the report and worth recording if you are one of the many people who wants to use it as a talking point for economics/urban development studies. It's also available on iPlayer for the next 13 days.

£81bn austerity: What's the narrative?

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Paul Mason | 09:24 UK time, Thursday, 21 October 2010

It's been a while since I've seen so many journalists stumped by a major event. So many newspaper front pages with differing lines, interpretations and concerns. Politicians too: stumped, lost for words, having to " wait and see" and read a bit more. And so many faces composed into rictus non-betrayal of their real feelings.

For the problem with the Spending Review was that there was no clear narrative. Both sides struggled to express one - and some struggled to suppress one.

If these were "The Biggest Cuts Since World War II" (and the Institute of Fiscal Studies managed to brief that they both were and weren't) then the plotline of that movie was hard to follow.

On the Coalition side the action was clear. No flinching from the £83bn cuts outlined in June. £81bn delivered (with two shaved off by previous action). £11bn of pain switched from Departmental Spending to Annual Managed Expenditure (AME), mainly through welfare and pension cuts. And the theory re-iterated that the shrinkage of the state will lead to a rapid rebalancing of the UK economy into an industrial export dynamo.

But there were problems with the story. Since they had flinched from further eroding universal benefits, the graph showing the impact of yesterday's measures on different social groups showed clearly: the poorest tenth get hammered and the richest tenth get hammered even more. Strip away Labour's redistributive tax increases and the Coalition contribution to that graph falls hardest on the poorest.

There was some attempt to explain that these poorest may include the "temporarily poor" - perhaps like the person who lost their £113m lottery ticket - but this narrative fizzled out mid-afternoon. As a result you had the Guardian going on "Axe falls on the poor" and the Telegraph going on "Cuts leave middle class £10,000 worse off".

Here's the explanation. After being shaken by the response of middle Britain to the removal of Child Benefit for those in the 40% tax bracket, the Coalition backed off from its planned extension of that cut to 16-19 year olds. In fact it backed off any attempt to erode universal benefits further - or "middle class benefits" as they were called throughout the Conservative conference.

They could have, quite logically, come out with the narrative "we have listened, we know the middle class values universality as a principle, and the cash in practice". But it would have been hard to do since the conference fringes of the Tory, Liberal and Labour conferences were one big revving up session for an attack on middle class benefits. (The Institute for Public Policy Research was outraged yesterday by the non-attack on universality).

As a result I think the combined spin machines of the Coalition were not really firing yesterday.

Likewise with Labour. Today's Spectator asserts: "In his response to the spending review statement, Alan Johnson unwittingly demonstrated that Labour no longer has a message on the economy". On the Labour backbenches there has been some out-loud wondering what Ed Balls might have made of that prime-time opportunity. Since Labour cannot do a shadow CSR, and supports about 5/8ths of the cuts in principle (having proposed them) it is hard for them to decide which of the specifics to oppose.

Labour-aligned economists are batting hard against rapid deficit reduction, on the grounds that it could cause a double-dip recession, but the view of people like Joe Stiglitz, Ha-Joon Chang and David Blanchflower are actually aligned with the Ed Balls position, not that of the current Labour leader.

So we move on today to the dissection phase, in which the IFS discovers various slights of hand, the spinmeisters get to dissing individual cuts etc.

What I take away from yesterday is that it is a giant experiment. Or as HSBC's Stuart Green puts it in a note this morning:

"Real-terms annual declines in current expenditure are pencilled in for 2012/13, 2013/14 and 2014/15, despite only four such declines having been registered since the data were first collated in 1967, emphasising both the unprecedented nature of the upcoming fiscal consolidation and the hugely uncertain implications for growth."

Basically there is no proof that slashing back the state will promote private sector growth in a country like Britain amid an economic crisis like this. The FT's Martin Wolf, no friend of hand-wringing state-ism, mobilised the evidence of the IMF to argue this earlier this week. That does not mean deficit reduction is wrong, nor does it dictate which of the two deficit reduction paths (Labour's "halve it" and the Coalition's "eradicate the structural part") is better. It just means we are engaged in an experiment.

If it goes right then, as the Spectator cannily predicts today, then in 2015 "the Tory election campaign will write itself. It will be morning in Britain - and why would we want to go back..."

If it goes wrong, then, conversely you would expect Labour to benefit. For the Libdems either scenario will be tricky (their manifesto, all those months ago in April 2010, actually proposed a "one year stimulus" which, had they won, we would have been in the middle of right now).

Because Conservative strategists cannot guarantee it will go right, nor that the essential benefit reforms will work, nor that the new private sector jobs created will go to UK citizens, nor that an army of volunteers will come forward to provide services in lieu of the state, they are wary of launching a metanarrative.

In fact what is striking is that the metanarrative that pervades every page of the Speccy cannot really be embraced by the Conservative front bench: chief whip Patrick McLoughlin has been enforcing the line that the Tories "don't want to do these cuts". However there is a perfectly good argument that they should want to do them: that if the British state is a millstone around our necks it should be lighter.

Labour meanwhile has two narratives. Nobody with any experience of the Balls/Cooper philosophy and modus operandi can be in any doubt that this part of the Labour clan would have handled yesterday very differently. Indeed, in the bowels of Parliament this week Labour's no-show leadership contender, Jon Cruddas, offered the opinion that the party was in an even deeper existential crisis than it was before the election:

"There is a pervasive sense of loss around our Party," Cruddas said, in the Nye Bevan memorial lecture. "It is a loss of identity. We do not possess some kind of historical right to exist."

So basically there's a struggle for narrative going on in British politics - and that's what explains the confused storylines of the British press this morning.

#SR10: The big picture is the size of the welfare cut

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Paul Mason | 12:29 UK time, Wednesday, 20 October 2010

The gist of George Osborne's speech was clear. The projected welfare budget from June 2010 is cut, using cuts to tax credits, to council tax benefits, and several other benefit threshholds. In addition by raising the state pension age, with the female retirement age contributing to the savings in the short term.

The macro picture from the SR2010 document is as follows.

The old welfare budget was set to rise from 295bn this year to 355bn in 2014/15.

I will insert the new figures here as soon as the Treasury's PDF downloads. For now the claim is that the DEL cut is lower than the one projected in Alistair Darling's budget, ie 19% not 20%.

The figures in Table 1.1 say that by 2014/15 the departments will be spending 12bn more in cash terms than they would have under Osborne's June 2010 Budget, and in return the welfare budget is 11bn less.

SR2010: Watch welfare shrink

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Paul Mason | 11:44 UK time, Wednesday, 20 October 2010

Benedict Brogan of the Telegraph has the first concrete tip-off that the government's "get out of jail" card is to be a cut in future welfare spending. The blog is here.

The gist is that the OBR is about to pronounce that the welfare budget allocated in the Emergency Budget of June 2010 is too high, and will not be needed. Some centre-right think tanks also pointed out at the time that it seemed high - and provided wriggle room to ease the cuts on Departmental spending.

Just for clarity, there are two lines in the Budget - DEL (Departmental Expenditure Limit) and AME (Annually Managed Expenditure). You can't technically set that in a Spending Review, but you can predict it.

If you look at the last budget, Social Security plus Tax Credits rises from 186bn to 213bn by 2014/15 (hat tip to Neil O'Brien of Policy Exchange for this): if Robert Chote has discovered that they will not need to spend this much at all, that is one heck of a bunch of billions (nominally) to contribute towards the expected 83bn cut - on top of any specific reduction in entitlements like Child Benefit.

Watch this space. Am tweeting as we go.

Danny Alexander photoscoop: what does "action on pay mean"

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Paul Mason | 16:22 UK time, Tuesday, 19 October 2010

Danny Alexander has fallen foul of the Nikkor 400mm lens problem in Whitehall, leaving his briefing notes open for the snappers to snap.

For me the most interesting part of the note is the issue of public sector pay. The notes are briefing notes, not a list of measures: so they contain arguments for ministers to use.

One is: "Action on pay will minimise the job losses..."

The Guardian takes this to be the existing action on pay - namely a pay freeze, saving £3.3bn.

But it prompts in my mind a further question. Is the government planning further "action" on public sector pay in the form of an actual pay cut? This would be par for the course compared to other European governments. Ireland, Spain and Greece have all imposed actual pay cuts in the public sector, using a similar argument to the one in the line above on Alexander's document - namely that pay had risen above that of the private sector.

We'll find out tomorrow, but in excess of 490,000 job losses will bring a heavy toll of redundancy payments. One way around this would be to propose an across the board pay cut to mitigate the job losses.

If only Mr Alexander had left the correct page open for the snappers we would not have to wait until tomorrow.

Week of cuts mania: what do you want to know?

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Paul Mason | 20:32 UK time, Sunday, 17 October 2010

It is Sunday night and I am getting ready for one of those weeks of hell in journalism where you know roughly the whole choreography of the events before they happen. Monday - new National Security Strategy; Tuesday, first sight of the military spending cuts, first leaks of the CSR. Wednesday: the CSR. Thursday: CSR - the aftermath (subplot - the Libdem anguish). Friday, the bits we missed but were spotted by eagle eyed bloggers, print journos and dweebs.

My question is: what do you want to know amid all this. What are the things Newsnight can tell you, delve into, analyse, etc. And who would you like to see grilled by my esteemed colleagues? This is no empty exercise - I really want to know. Likewise what is making you fed up about the coverage.

It will help me. So hit the comments and gimme your ideas...

UK faces "hard headed re-appraisal" of foreign policy and security

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Paul Mason | 22:56 UK time, Friday, 15 October 2010

David Cameron has intervened tonight to broker a deal between the Ministry of Defence and the Treasury. The MoD had been facing a Treasury proposal to slash its budget by 20%. I'm told by Downing Street that it is less than that but they will not confirm a figure.

Meanwhile the UK is about to undergo a "hard headed re-appraisal of our foreign policy and security objectives" according to a draft National Security Strategy, dated 13 October, and seen by Newsnight.

In concrete terms what is being haggled over in the SDSR tonight is pretty stark.

One proposal, according to a senior source, is to cut the army by 7,000 short term. This is still the subject of negotiation. It is understood the UK will make clear its intention to leave Germany within a decade, and that the army will be re-organised into 5 combat brigades with 6,000 troops each.

The Royal Navy is facing cuts to its surface fleet: frigates and destroyers will be cut from 24 to 15 or 16.

The navy gets to keep the two aircraft carriers and the current draft proposes to buy 40x F-35 Joint Strike Fighters (not the 138 originally planned). There is no financial gain, I am told, over the next four years from cutting the carriers.

The National Security Strategy, to be launched on Monday lists four so called Tier 1 threats to UK national security, which some see as radically re-drawing Britain's defence priorities they are, in order:

  • A terrorist attack by Al Qaeda, including the threat of chemical, biological, radiation or nuclear attacks
  • Cyber attacks
  • The threat of natural disaster or major accident
  • And the threat of a international military conflict

The document states:

"No state currently has the combination of capability and intent needed to pose a conventional military threat to the territory and integrity of the UK. Yet history shows both capability and intent can change."
It says: "our main priorities for resources and capabilities will be to protect our operational counterterrorism capability, and intel and policing anhd the necessary technology to support them, while delivering some efficiency gains in these areas."

The UK will:

"Focus and integrate diplomatic, intelligence and defence capabilities on preventing the threat of international military crises while retaining the ability to respond should they nevertheless materialise."

I read this as the essence of the re-appraisal - with a greater focus on diplomacy before force projection. The document consistently places terror and cyber threat at the top of the list of threats likelty over the next five years, above conventional warfare with another state.

"The government, the private sector and citizens are under sustained cyber attack *today*."

The document warns that the UK is at the centre of "many global networks" - hence the new priority given to cyber warfare.

The document lists other, less imminent threats, so-called Tier Two and Three. Among the Tier Two threat is the renewed terrorist threat in Northern Ireland, a CBRN attack by another state and from large scale illegal migration and organised crime; and possible disruption to the UK satellite system.

Military sources said they were unhappy at the mismatch between the strategy - with its focus on multiple and emerging threats - and the force structure contained in the SDSR, which one described as "Cold War".

One source claimed that by cutting the surface fleet the UK would be unable to simultaneously defend the Trident submarines and the aircraft carriers at sea.

China: Don't mess with the iron house

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Paul Mason | 10:34 UK time, Friday, 15 October 2010

It's been a bad week to be inside the Zhongnanhai, the walled compound in Beijing that is Communist Party HQ.

Amid the Ming-era landscape of lakes and pagodas the ruling elite have been forced to watch jailed dissident Liu Xiaobo awarded the Nobel prize; then a letter signed by 23 party elders was released to the press, calling for an end to censorship, the end of internet spying and a no-taboos discussion of party history.

Then the Chinese basketball team staged a mass brawl with the Brazilians, live on TV, getting themselves a month's suspension.

And later on Friday it could get a little bit worse than that. The US Treasury is set to release its twice yearly report on exchange rates, and there is a chance it will finally get around to formally accusing China of currency manipulation. If it does that, it will give the US the right to invoke bi-lateral trade sanctions against China.

While traditionally the US Treasury avoids using the term, this is election year and while in the US I heard nothing but spleen vented against China, from sources as diverse as the Tea Party movement and the United Steelworkers union.

Euro rise

Whether the formal move happens today or not, China is in the sights of US policymakers, and currency war is - in any case - already at the mobilisation stage.

The US has finally managed to do what the Bank of England did for two years - talk down the dollar. The graph on the front page of today's Financial Times shows its progress, slicing 10 points off a trade weighted index since January.

Meanwhile Japan is busy trying to devalue the Yen. And poor old Europe, which thought it could offset the impact of fiscal austerity with Euro devaluation, has seen the Euro soar instead, with Goldman Sachs predicting a further 4.7% fall of the dollar this year and a 4% rise in the value of the Euro.

Just to be clear - if the value of your currency rises in a situation like this, it is bad, because it means your exports get dearer. With the public sector in retreat across Europe, and calls for the private and export sectors to take the strain, a rising currency makes this impossible.

Conversely if you can talk, trade or bully your currency in a downwards direction, you can effectively export unemployment somewhere else.

This is the great lesson Ben Bernanke taught the world about the Great Depression - the Hoover administration's attachment to the dollar-gold peg undermined all its domestic stimulus efforts. Those who devalued first recovered first.

Feeling beleaguered

Today the US needs to devalue against China above all - but cannot because China maintains a currency peg to the dollar, allowing for only mild appreciation over time.

So where next? Well World Trade Organisation Director-General Pascal Lamy in Friday's Guardian warns of actual trade war; and we find the Germans circulating a document accusing China of dumping practices in Eastern Europe, where its companies are winning lucrative contracts.

What we are seeing is the metaphorical rolling stock being assembled and the military bands polishing their instruments.

China feels beleaguered. America feels beleaguered. Both have political dysfunctions in that the US population believes it is state intervention that is causing the crisis and will resist any further stimulus, Meanwhile China cannot allow either a free labour market, free trade, free currency exchange nor free speech because each of these threatens the ability of its communist elite to spend their days in quiet contemplation by the central lake inside the Zhongnanhai.

How beleaguered they feel can be read in the subtext of this article from the People's Daily today (The Endless Ideological Wars Against China):

"The West will continue to target China in its ideological war. It seems the Western way has to be the only way and people around the globe should adopt the Western attitudes. In the minds of some Westerners, even if China grows and develops to an advanced level, it still needs to surrender to Western ideologically."

"China has adopted much Western wisdom since its opening-up. But it refuses to be westernized. The rejuvenation of the Chinese civilization is its dream. The more China learns from the West, the more confident it becomes in its own culture."

The article draws a clear line between China's determination to avoid democracy and to defend its economic place in the world.

The iron house

In 1915, at a time China seemed trapped, culturally, amid the wreckage of the Qing Dynasty and equally determined not to become westernised, the great Chinese novelist Lu Xun warned the young idealists who would go on to form the Communist Party:

"Imagine an iron house without windows, absolutely indestructible, with many people fast asleep inside who will soon die of suffocation. But you know since they will die in their sleep, they will not feel the pain of death. Now if you cry aloud to wake a few of the lighter sleepers, making those unfortunate few suffer the agony of irrevocable death, do you think you are doing them a good turn?"

Shaking things up could only do harm, was the message. But Lu concluded:

"In spite of my own conviction, I could not blot out hope, for hope lies in the future."

China's leaders are issuing, in these recent comment articles, the same warning as Lu Xun: don't shake things up because our rule is as permanent as Lu Xun's iron house. Waking the sleepers can only cause unnecessary suffering. It is a warning directed at the West, at dissidents like Liu Xiabo, and at the 23 party veterans.

If a currency war breaks out for real, it will shake up a lot more than the forex market.

In the shadow of 1860 - America's "two nations" go to the polls

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Paul Mason | 13:45 UK time, Wednesday, 13 October 2010

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"No two nations on earth," wrote the Ohio Senator Benjamin Wade, "entertain more bitter feelings of rancour toward each other than these two nations of the Republic."

The two nations in question were the southern and northern peoples of America in the run up to the Civil War.

The historian Allan Nevins believed it was this "sectional consciousness, with all its emotional and psychological implications" which made war inevitable by 1861, not the issue of slavery per se.

Long before they were defined by grey and blue on the battlefield Americans had split into two sociologically and culturally distinct societies, sealed off from each other by distance, economics and a localised media.

Today the shadow of this division looms, barely acknowledged, over America's mid-term Congressional election, which has descended into a rancorous culture war with blasts of literal bellicosity at the edges.

Cultural divisions

Though you would not want to push the direct parallel with the 1850s too far, in this key quality - the emergence of exclusive "separate" consciousness - it is relevant.

In Angola, Indiana, I saw two thousand people assembled in a college gymnasium to hear the Fox News commentator Glenn Beck. Beck himself spoke moderately: America's problems began in 1915 with attempts by "progressives" to regulate business; the best solution to any problem is private, not public. He did not, as previously, call President Barack Obama a racist. He urged his followers to love their enemies.

But the speakers that surrounded Beck were on a different script. Merchandise stalls sold the Gadsden Flag - a coiled rattlesnake with the slogan "Don't Tread on Me" - symbolising the promise of armed resistance during the American Revolution.

A local tub-thumper during the warm-up attempted to claim not only that the battles of Bunker Hill (1775), Fredericksburg (a Confederate victory in 1862), Iwo Jima, Khe Sanh, Fallujah and Helmand had equivalently "defined America" - but that the very latest battle in this conflict was being fought right now on American soil.

The Tea Party movement never invokes the American Civil War but revels in the imagery of the War of Independence. It maintains a discreet social silence on a figure like Jefferson Davis but idealises George Washington.

In this ideological scheme it is the Constitution of 1787 that has been "destroyed" by President Obama's healthcare reforms, and by the $787bn fiscal stimulus.

When Republican Congressional candidates describe the current "ideological battle" as a battle to "defend the flag on our own soil" the question arises: who is the battle with, and what form will it take?

Uncomfortable parallels

The Tea Party movement is sociologically, not just overwhelmingly white but devoutly Christian, and often - but not exclusively - rural. Its adoption of placard imagery open to the charge of racism, and its initial craze for historical costumes, blindsided the liberal media in the USA into believing the movement was fake, or "Astroturf".

Its capture of key nominations in the Republican Congressional primaries proved its support extended far beyond this core activist group.

The Tea Party is now dictating policy and candidate selection to parts of the Republican Party, forcing mainstream Republican politicians to make a straight choice: do a deal with the Sarah Palins and Glenn Becks to get them off your back, or confront them in defence of a conservatism that is fiscally orthodox but socially tolerant. Few have openly chosen the latter.

As a result, the Tea Party movement gets to define American conservatism anew - and its definitions are exclusive: everything statist is deemed ungodly, unconstitutional; everything socially progressive spits on the graves of the heroes of Iwo Jima; every taxpayer handout to the undeserving poor defiles the flag.

If the key to American politics before 1861 was a split into two demographically separate "nations" then the parallels today are uncomfortable.

Then the South was defined by a white, slave-owning elite leading a mass of white farmers who saw Lincoln's attack on slavery as just one part of industrial capitalism's attack on their way of life.

They too believed they were defending the Constitution - not just over states' rights. J Mills Thornton, who studied the political ties between the "yeomen" of Alabama and the plantocracy discovered that, for the former, their entire conception of individual freedom and equality under the law had become bound up with the defence of slavery.

The North, in turn, represented not just a new economic model: it contained a different people. By 1861 its population included freed slaves, southern whites alienated from Dixie culture and millions of European migrants - including tens of thousands of Germans so steeped in the traditions of 1848 that they would march, uncomprehended by their English-speaking generals, onto the battlefields from Shiloh to Chattanooga singing socialist anthems.

America's two nations today are "virtual" - distributed across state borders by information networks, divided by the unseen boundaries that segregate many American towns and cities along lines of colour, lifestyle and class. But they are no less easy to identify. It feels to me like they are primarily defined by their attitude to the state and its role in the economy.

Different nations

A city like Gary, Indiana, blighted by industrial decline, is now 84% black. The neighbouring steelworks, America's biggest, is mixed and has a significant number of white workers: yet streets and the steelworks are part of a shared political culture that is pro-Democrat, liberal and multi-ethnic. It is a culture that accepts the state as having a role to play in economic life, that does not see any wider moral or constitutional issues raised by America's attempts to create a healthcare safety net. The anger here is that Obama and the state has not done enough.

A city like Elkhart - a vehicle manufacturing centre 100km to the east - can feel like part of a different nation. The unemployed autoworkers I met there in 2009 expressed the desire for the state simply to "get out of our way".

One, Ed Neufeldt, had introduced President Obama to the rally that launched the fiscal stimulus there, back in February 2009. The image of Obama embracing Ed was flashed across America - symbolising the new President's cross-over powers into this part of middle America. When I met him in April 2009 Mr Neufeldt was still prepared to give the President tacit support.

Eighteen months later he has become a celebrated figure in the local Tea Party movement, receiving a name-check and a standing ovation at the Glenn Beck rally:

"I guess I've switched sides," he told me.

He was disappointed with the outcome of the stimulus and bank bailouts but that was not the clincher: "I guess what did it was the President's position on abortion".

To America's newly militant "nations" of the right and left, every political controversy impacts - as Nevins understood about the 1850s - "emotionally and psychologically".

Ben Clement, a black community leader in Gary told me:

"When you hear the vitriol on the TV - it's culture based, it's race based and it's frightening. Your stomach tightens into a knot: you think if they think that about the President - what are they going to think about me?"

In the Glenn Beck rally both Beck himself and many in the audience are reduced at times to tears. He tells them:

"The progressives had to destroy our faith. They did it with something most people don't even know about. In our churches - all of our churches - there are termites, some of them are wolves. They've been eating for so long that our churches are nothing anymore. But you must get this out: you must know what social justice and collective salvation and all of this nonsense is all about, and where it came from. It was put into our churches to destroy us."

Some of America's mainstream media is in a state of denial and disorientation over the Tea Party movement, as are some political strategists in Washington. Though the Republicans since the 1970s explicitly based their election strategy on courting religious conservatism in the south, it was always assumed that this visceral plebeian tendency would remain a minority strand in the GOP, controllable by the elite.

At first much of the media, staffed at senior level by the children of the Lyndon B. Johnson era, looked at the Tea Party and saw "just" the same old anti-abortion groups that had plagued Reagan and Bush Senior.

Tentative battles

Meanwhile pro-Democrats revelled in the electoral calculation that a right-wing dominated Republican Party would hand the struggling President an unexpectedly clear victory in 2012.

In all cases the commentators under-estimated the Tea Party's momentum. What has changed is that its ideas have become defining ideas, as they have tapped into a seam of frustration and despair among the victims of the recession.

Driven by the movement, states such as Arizona have already picked tentative battles with the Federal authorities over tougher immigration laws. Should they win office on 2 November 2010, the Tea Party candidates will champion a new "states sovereignty" bill, aimed at weakening the power of the Federal state.

It is hard to see where this stops - short of some cathartic showdown with Federal authority or some miraculous turnaround in the economy.

Even then, there is no direct read-off between hardship and the rhetoric of resistance.

Observing the way both black and white communities have responded to the new penury of the middle class - by hunkering down with family, church and community - provides a clue to why "identity" on both sides of the argument has become so important.

The American dream of self-advancement was a unifying myth - but downward mobility seems to be emphasising the differences.

Of course these are only parallels - we are not about to see history repeated. And I am certainly not predicting civil war.

Most Americans still do not count themselves part of any other "nation" than the USA.

For now the battle takes place within the Republican party, just as it took place within the south in the 1850s between what Nevins described as "two southern ideas".

The first conceived the conflict with the liberal North in terms of conventional politics and saw it as containable within the existing institutions; the second acknowledged the emergence of a Southern nation that would transcend party politics and Federal law. The latter triumphed.

Mainstream Republicans are having to do their thinking fast in response to the Tea Party. Mitch Daniels, Indiana's governor and tipped as a Republican candidate in the race for the White House in 2012, tells me:

"People ask me, is this a civil war? I say no - it's growing pains. A little creative hell-raising on behalf of freedom is not a bad thing... Now, when the confetti's fallen and quite appropriate alarms have been raised, I think at some stage it will be necessary to stand in front of those people and say - you were right about the diagnosis, here are the sorts of things we'll have to do if America is going to get back on its feet - and that's a transition that is yet to happen, but I hope and believe it will."

That is Plan A for the Republican establishment: to corral the anger of the Tea Party behind a new politics of fiscal austerity in 2012, designed and led by the Washington-based elite. To make, once in Presidential office, a compromise with Democrat governed states over issues like abortion or migration.

It may work. But co-existence is hard to achieve once the genie of "sectional consciousness" is out of the bottle.

When I met Civil War historians staging a re-enactment of the 1860 election debate in full costume on a handcart near the battlefield museum at Chickamauga in north Georgia, surrounded by American tourists in their baseball caps and shorts, they were all too aware of the parallels.

Park ranger Christopher Young, sweating under his top hat, broke out of character and told the crowd:

"The debate you've just heard was prelude to massive warfare. So be aware that the words we use can be far more lethal than any weapon on the battlefield."

Watch my report from Georgia on Newsnight at 2230 on Wednesday 13 October 2010. Or catch it afterwards on the BBC iPlayer.

Gary, Indiana: Unbroken spirit amid the ruins of the 20th Century

Paul Mason | 10:47 UK time, Tuesday, 12 October 2010

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I'd been to Gary, Indiana before. In April 2009, when the Obama fiscal stimulus had just begun, the city's mayor had told me that all the city needed was $400m of stimulus money in order to "fly like an eagle and make our country proud".

To put this in context you have to know that Gary, home to what is still US Steel Corp's biggest plant, is suffering from one of the most advanced cases of urban blight in the developed world. Its city centre is near-deserted by day. The texture of the urban landscape is cracked stone, grass, crumbled brick and buddleia.

Gary is one third poor, 84% African American, and has seen its population halve over the past three decades. If crime, as the official figures suggest, has recently dropped off then - say the critics - that is because population flight from the city is bigger than the census figures show.

Gary in the end got $266m of stimulus money and has, according to the federal "recipient reported data" created a grand total of 327 jobs. That's $800,000 per job.

I went back determined to find out how the stimulus dollars had been spent; to get beyond the ideology and recriminations and see why President Barack Obama's stimulus has failed to turn the country around.

Because - if anywhere needs a stimulus it is Gary. If there were ever an easy win to be gained from state spending you would think it might be here.

David Tribby, professional photographer and son of a local steelworker, specialises in exploring urban decay. I persuaded Mr Tribby to take me into some of Gary's wrecked architectural masterpieces.

The striking thing is that they are all structurally dangerous and yet totally accessible. I did not have to cross a single piece of wire, tape or fencing to get in, nor did I encounter a security guard or dog patrol. The city seems to have given up even securing these ruins.

Urban dereliction

We toured the City Methodist Church - built in the 1920s with local stone. We stood on the once-sprung floor of the ballet studio in the Methodist School. We tramped through the remains of the post office, opened by Henry Morgenthau in 1936 as a New Deal reconstruction project, its wood-block floor coming apart; the peep-holes in the overhead walkway showing where Depression-era managers would check on the work-rate of the postal workers below.

I sat on the back row of the Seaman Hall, its seats creaking dustily, and imagined the young steelworkers and their girlfriends in the 1950s, playing Big Daddy and Maggie the Cat in an am-dram production of Cat On A Hot Tin Roof, whose playbill is still peeling off the stage door amid the crumbling stonework of the proscenium arch.

I stood where Frank Sinatra stood on the day he came to Gary in 1945.

It was a feisty occasion because hundreds of white Gary school kids had gone on strike against the right of black kids to swim one day a week in the same swimming pool, and share the instruments in the band room.

Ol' Blue Eyes cancelled a $10,000 gig, rushed to the Gary Memorial Auditorium, told the audience this was the most shameful event in the history of education, warned them he could "lick any S.O.B in the room" and then sang.

He did not, as in this 1945 propaganda film accuse them of being no better than a bunch of Nazis, but he did sing the song from that film - "The House I Live In" - a schmaltzy paean to what were then seen as core American values: religious tolerance and anti-racism. It was a film that would win Sinatra an Oscar, shortly followed, as the political climate changed, by a hounding from Senator Joe McCarthy.

What Sinatra fought against, three decades of industrial decline managed to complete. There has been "white flight" from Gary. More precisely there has been "middle class flight" - ie the salariat, including many of the steelworkers, has moved out, or moved into landscaped and patrolled communities on the edge of town.

Brink of bankruptcy?

So what's the story with Gary and the stimulus? The mayor believes the city is "last in line" when it comes to federal money - because the money is dispensed via the state of Indiana, which is Republican controlled. Mayor Rudy Clay tells me:

"I guess they thought, well, Gary voted in large numbers for the president, enabling him to take the state of Indiana, so he will look after them."

But it is more complex - Gary's public finances are a mess. It owes tens of millions of dollars to other entities. Its great get-out-of-jail card - tax revenue from casinos - turned out to be a busted flush. Its convention centre is dark most of the time. The one-time Sheraton Hotel, right next to the City Hall, is derelict.

With no ability to raise a local income tax it is reliant on property tax. But the State of Indiana passed laws capping tax raising powers, so by 2012 Gary's tax income from property will halve.

At that point, according to the fiscal monitor appointed by the city, it will lack the revenue to fund even its police, fire and ambulance services. The monitor calls for much of the rest of Gary's services to be privatised - but as city officials point out, once privatised they cannot enforce job guarantees that allow the city to employ local people. Says the monitor, bluntly:

"The city will simply have to give up some long-standing - and often important - services that are the responsibility of other governments, even when it is likely that those governments will not provide the same level of service."

In summary, Gary is about two years away from bankruptcy and is being forced to cut taxes and cut spending even as the federal government tries to pump money through.

In this context, with the stimulus money not available to fix the core financial problem, the results were always going to be patchy.

In the event the stimulus dollars have mainly gone to a one-off schools re-organisation project - you can see some of the results of that in my report tonight - and to street renovation, and beefing up the arsenal of the local police. Gary's police have to combine The Wire style policing with a kind of armed social work amid a Gary's night-time chaos of "recreational shooting" and domestic disputes.

Philosophical divide

When I speak to the Republican governor of Indiana, Mitch Daniels, about Gary's plight, he is blunt. He blames Congress for micromanagement of where the stimulus could be spent. Could nothing more have been done?

"If there been more flexibility about the funds [from the US Congress], it could have, but I think it's important to be charitable here - Gary has been a disaster for many, many years. It is a tragedy what has occurred there and in some other cities here in the US. There wasn't going to be an immediate turn around, no matter how many borrowed dollars you showered on the place. "

But, how can you enforce fiscal austerity on a place like Gary, at the same time as the official policy of the federal government is to reflate the economy? Surely, I ask Mr Daniels, something has to give? He says:

"Gary's the most extreme case that you could find in our state, but there are many others that are a lesser version of that same story, and as I say to those communities - their leaders - all the time: people aren't leaving here because you didn't tax them enough, because you didn't spend enough money on this or that public service - they left because you taxed them too much or you simply did not create the conditions for a private sector to flourish."

And that brings you right back up against the philosophical divide in American politics.

Large parts of the Indiana population believe all taxpayer dollars spent on Gary are wasted. Some Republican candidates in the 2 November election are standing on the explicit message that there has been no positive impact at all from the stimulus.

Whereas in Europe, and even parts of Asia, the national government would have taken charge of vectoring regeneration money to a place like Gary, the US does not seem in a mood to do public regeneration.

Uncertain future

Gary's city officials are well aware that there are templates for resurrecting their city, and they've got the basic first steps defined - demolishing 3,000 derelict homes, installing new street lights. The stimulus money applied for in each case has been slow in coming and less than asked for. Beyond the ideology, the American public sector seems very poorly geared to spending money, full stop, despite being in charge of quite a lot of it.

Gary's uncertain future fascinates economists and urban planning experts - along with cities like Detroit and Flint in Michigan it is in danger of just being reclaimed by nature. One of the black community leaders I met in Gary was passionately advocating that they simply raze whole blocks to the ground and set up urban farms.

When you go into the wreck of the Palace Theatre on Gary's Broadway - just across from the wreck of VJ Records, which released the Beatles' first ever single in the US - you get a sense of the splendour of an industrial community at its height.

When it opened, the theatre - like so much of Gary's architecture, built in the "Mission Revival" style - contained blue fountains and crushed velvet, each seat arm moulded into a Moroccan-style arch.

In the orchestra pit there is a squashed grand piano, made in Chicago by Adam Schaff, surely the original one installed there in 1927. I banged its grime encrusted keys and discovered to my astonishment that, amid the clunks and groans, a clear D-sharp three octaves above Middle C.

It took just a single century for Gary to rise and fall. Its people still carry that relaxed pride you find in black communities across the industrial mid-West. It's a developed and quite mature urban culture - where everybody seems to know each other, an edgy community but not really a broken one, despite the night-time drug and gun antics of some young men. Go into the schools and you can feel that its spirit is not broken. What is broken is the landscape.

If it is ever one day fixed we will know that America has found a way to cope with the urban collapse that comes with industrial decline. Conversely Gary may be just the first leafy oasis of a post-industrial dystopia that awaits, maybe a century down the line.

Watch my report from Gary on Newsnight at 2230 on Tuesday 12 October 2010. Or catch it afterwards on the BBC iPlayer. On Wednesday I explore the new penury of America's middle class - and the political discontent it is stoking up.

Currency war hots up: what happened to Pittsburgh promises

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Paul Mason | 10:58 UK time, Monday, 11 October 2010

The IMF talks this weekend ended in acrimony, with no agreement between China and the USA over currency manipulation and dire warnings coming from the mouths of all the intermediaries that we are entering a competitive devaluation phase of the crisis that will, with certainty, lead to competitive trade policies once everybody realises currency tactics take you nowhere.

It's all a far cry from Pittsburgh last year, where G20 countries agreed to co-ordinate not only fiscal and monetary policies, banking re-regulation but also macro-economic policies. In a way they are - they are all in a co-ordinated way trying to shovel the economic dirt onto another country. The one certainty - the gold bubble ain't a poppin' anytime soon.

Open thread below while I follow up this story and work on my US films (TXing Tuesday and Wednesday).

QE2: Policymakers struggle in a world of strategic uncertainty

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Paul Mason | 11:03 UK time, Friday, 8 October 2010

As the world's finance ministers huddle in Washington there is a comprehension problem with quantitative easing. It's not just that the general public fails to understand it but that there is emerging evidence that those running it do not really understand it either.

As they get ready to do more of it there is trepidation in investment circles for a bigger reason than it might not work: fund managers are starting to realise that they live in a world where all the major movements in the markets are in fact the product of state policy, not market forces.

They fear we are approaching a kind of global state capitalism whose laws operate, as it were, "behind the backs of its producers" (Karl Marx's phrase - he would have loved the irony).

Let's go back to the problem with QE1 - the $1.25 trillion injected in the USA and £200bn in the UK, each around 12% of GDP. The central bankers who printed this money constantly struggled with the theory as to why they were doing it and what it was supposed to produce. Ben Bernanke travelled to London in January 2009 to tell the world not to do it, and then, two months later, did it. Alistair Darling said it was not being considered, that it was indeed a theoretical matter, but again a few weeks later the Bank of England did it.

Having done it, they grappled with how to understand its success. At a Bank of England briefing its bosses explained that having poured 12% of GDP into the economy, they would not predict in which of the next three years that might show up as actual demand. They had a clue but they were not telling. It has certainly taken a long time to work through into the money supply.

Some of the proponents of QE think it was done cack-handedly. If the aim is to reduce the risk-free borrowing rate in the economy to very low, then as well as pumping money into the banking system you have to do what Ben Bernanke is now considering: you fix interest rates close to zero and say they will remain there whatever happens to inflation; you abandon inflation targeting and even go so far as to start targeting an interest rate. You could also take micro-economic powers to force the money through the banking system and into the real economy: the UK government has done this in two successive budgets through targets, but the targets have never been met. Hence I use the word powers.

In any case the outcome is clear: QE1 stabilised the situation but was not enough to re-start self-sustaining economic growth.

Bernanke stated the case against QE2 last month: that it might have only a marginal effect on growth but boost inflation. Alan Greenspan this week has joined in, warning that extra money might not be enough without micro-measures to force the banks to lend it instead of sitting on it.

But its supporters argue the new flush of money could be used to finally end the US housing crisis by refinancing many of the distressed loans that are still dragging American families into penury (and making the banks unsafe).

Another view comes from Toby Nangle, director of fixed income and currency at Barings Asset Management. In a letter to investors this week he argues that there is no danger of QE2 causing wage inflation and no possibility that the new money will sort out the housing market.

"QE1 proved itself as be an effective tool to restore inter-bank and corporate liquidity. However, QE2 is being flaunted as an effective tool to restore household solvency. I believe that it will instead be counter-productive." (Risk on, risk off, Letter to clients 5 October 2010)

Instead what it could do is boost commodity price inflation and squeeze company profits, or both, producing stagflation. Nangle writes:

"This will leave companies in developed markets with the choice of passing on these higher input prices or taking a hit to margins. Cost-push inflation without accompanying wage inflation would reduce disposable incomes and thus increase the real cost of debt to households and commodity- importing governments. Neither cost-push inflation nor a margin squeeze is good either for the relative standard of living in the West, or developed market equities more generally."

That is, the pressure in the system from a new bout of global inflation would rise, but its outcome would be entirely the product of policy decisions and who wins the resulting currency war.

Already inflation has reduced the yield - that is the interest rate for investors - on US and UK government bonds to their lowest ever. Repeat - and this comes from the bond guys' mouths direct - inflation-protected bond yields are their lowest ever.

OK here's the scary bit, (and if you are still with me congratulations - it is hard to get your head around): some economists believe bond yields are an accurate predictor of long-term GDP growth. So if you believe this theory, the bond markets right now could be predicting a decade of low or zero growth.

However, if you don't buy this, the alternative is quite unpalatable also: the bond market has ceased to be a market at all.

Its prices are simply the product of decisions taken by six or seven unelected central bankers. To those who live and breathe this market it is beginning to feel very unlike capitalism, in which a 24-hour interplay of guesses, punts, wisdom and knowledge produce a market price.

The really interesting thing - or scary thing take your pick is: nobody knows for sure anymore. Usually it is the world of equities and derivatives where there is massive uncertainty. Now the world of bonds and central banking has been gripped by a kind of strategic uncertainty - not about tomorrow's market moves but about whether the old models still work.

One implication of Nangle's view is that the current rebound in stock market prices, on the back of recovering company profits, could be a "last hurrah" before a decade of stagnation. Again, opinion is divided.

More mundanely, for both George Osborne and whoever becomes Labour's shadow chancellor, they will have to decide what they think about QE2. David Cameron once indicated it would be withdrawn:

"If we spend more than we earn, we have to get the money from somewhere. Right now, the Government is simply printing it. Sometime soon that will have to stop, because in the end, printing money leads to inflation." (8 October 2009)

But our central bankers are seriously considering extending it, not stopping it. Alistair Darling once told me that if Britain did QE it would be his decision - a political decision not one outsourced to the central bank. And indeed the BoE's ability to do QE depends on a letter of guarantee from the Treasury.

It would be interesting to see some public debate among politicians, and not just wonks and monetary obsessives, about QE2, above all because the final impact of the cuts to be announced on 20 October can only be calculated once we know how much offsetting monetary stimulus there is likely to be.

Beyond that however, if the pessimists are right and the bond markets really are signalling stagnation in the west, what do we do? I would expect a shift from macro-economic lever pulling to micro-level policy. This means the state, which is already shaping the most important markets on the planet (Chinese production, US consumption, Euro debt and the US bond market), getting its hands into the sticky business and consumption like a baker with a lump of dough.

If you watch my films on Newsnight next week, coming from the American south and Midwest, you will see how objectionable this may feel to many people brought up in the era of freemarket economics.

* My films on the fiscal stimulus in Indiana, and on the collapse of middle class lifestyles in the American south, will be on 12,13 October on Newsnight and later that week on BBC World News America.

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