Category Archives: Economics

One of Jez’s first tasks must be to frame his project, and to de-frame Osborne’s

If there is one single reason why Labour lost the election, it’s that Osborne realised the critical importance of framing his project in a way that made it acceptable in the eyes of a majority of the electorate.   The fact that it was a string of lies didn’t matter as long as people believed it.   This was Osborne’s line: the Labour government left a terrible economic mess, we’ve cleared it up by the only means possible, it’s been painful but we’re all in it together, we’ve succeeded in our recovery and should stick with it.  Every statement there is false, but in the absence of Labour refuting all these lies, it was the only tale in town.   Labour lost because Ed Miliband, though he won a lot of support for his policies on energy freeze, living wage, house-building, etc., nevertheless neither exposed the Tory mantra for the utter falsehood it was, nor, even more crucially, produced a commanding narrative which framed his own project in a manner which grabbed the electorate’s attention.

Labour didn’t cause the economic breakdown, the bankers did.   The Tories didn’t clear up the collapse in the only way possible; they chose to impose austerity when they coul dhave continued with Alistair Darling’s policy of expanding the economy and generating growth and jobs to pay down the deficit quicker.   We were not all in it together when the top 1% have continued to increase their wealth while the squeezed middle and pummeled poorest have paid the price for the bankers’ recklessness and arrogance.   Osborne has not produced a proper and sustainable recovery , only a weak and irregular upturn trapped in prolonged austerity with no end in sight.

Why Labour didn’t say this loud and clear between 2010-15 must remain one of the unaccountable mysteries of modern politics.   But Labour didn’t, and it allowed Osborne, lies and all, to dominate the political landscape right through to the election.   Now he will try to do exactly the same again, and paint Corbynomics into a corner even before it’s got off the ground.   Labour must now urgently do two things.   It must tell the truth about Osborne’s total misrepresentation of the political record, even if it means apologising for letting down the country by not pronouncing the truth before.   But above all, Jeremy Corbyn should quickly begin to draft his own project.   It might run something like this.   The Tory bankers allowed their greed and incompetence to capsize the British economy.   The Tory government chose to deal with this by imposing austerity which hits the poorest hardest and lets the bankers off the hook.   It hasn’t worked because hard-working families are still worse off, companies are not investing and household borrowing is at dangerous levels.   We need a fundamental change, and growth and jobs is the answer to austerity.

Corbyn forces the Tories to take him seriously

After all the slurs about unelectability, the Tories have very quickly changed their tune and acknowledged that they are now facing a very real threat that they’ve not encountered for the last 30 years.   At a meeting of the political cabinet last Tuesday they decided to focus on the idea that they offer a better future through lower taxes, a higher minimum wage, more jobs, and better public services, while a left-wing agenda would deliver insecurity through higher spending, higher taxes and more borrowing.   If that is their plan, they have a real fight on their hands since almost all of their claims are downright wrong.

Taxes have been lowered for the top decile and for multi-national corporations, but the severe cutback in tax credits in this next Tuesday’s Finance bill will increase taxes for the bottom third of the population, even after the increase in the personal allowance is taken into account.   The £9 an hour minimum wage, which will not be reached till 2020, is actually unlikely to exceed by much, if at all, the uprating that the minimum will have reached by then.

As to more jobs, there are still 1.8 million people unemployed and the jobless figures are already starting to rise again.   Moreover, the quality of jobs created over the last 2 years has been poor: 40% self-employed on a pittance wage and most of the rest insecure, low-paid, and on zero hours contracts, and even then 11 out of 12 jobs created have been in London or the South-East.   As to better public services, are they serious?   The NHS is being outsourced and privatised strongly against the wishes of the public, education is being made to fit Tory ideology, and legal aid is being drastically pared back.

A left-wing agenda that produced growth and better-paid and more sustainable jobs could be generated at minimal higher spending while interest rates remain at 0.5% which will be for some long time yet.   But it would produce the opposite of what the Tories claim – higher income and greater security than the Tory option of prolonged austerity.   Again a left-wing agenda would certainly increase taxes on the very rich who are holding the country to ransom by their industrial scale tax avoidance, but it would lower taxes on the poorer half of the population.   As to more borrowing, the Tories have a cheek at throwing that at Labour when they themselves are forcing the 13 million households in poverty in the UK, half of them in work, to borrow more because of the £12bn welfare cuts about to be imposed.

 

 

It’s about the fundamentals, silly

The basic reason that the leadership election has been so disappointing, until Jeremy Corbyn came on the scene, was that it was stuck on issues (insofar as it was stuck on any issues at all) that, while certainly important, did not have the makings of a vision.   Even when Corbyn prompted the others to produce some actual policies, they were not the real thing.   Andy Burnham was right to praise land value tax and above all the need to integrate social care within the NHS, and Yvette Cooper was absolutely right to demand that Britain takes its proper share of Syrian refugees where the government response has been callously dehumanised.   Bully for her.   But these are not the fundamentals, and only Jeremy Corbyn seems to have grasped what this election is really all about.

it is about how the world (because it concerns far, far more than just Britain) should respond to the most momentous event since 1945.   That is the biggest financial/economic crash for nearly a century, the slowest recovery since the Great Depression, and the longest run of prolonged austerity (and far from over) since the 1870s.     The City, the corporate business elite and the Tories (and to a lesser degree the Blairites from Blair downwards) regarded this as a glitch from which business-as-usual should return as soon as possible.   They believed the underlying structure was sound, the ideology was right (i.e. de-regulation of finance, unfettered capitalism, glorification of the market, privatisation of all industries and services wherever possible, and suppression of any counter-force and in particular the trade unions), and removal of governments from the action was the best way to promote efficiency and growth.   But not only did they believe it then, they still believe it when the evidence against it is now overwhelming.

The ultra-liberal business model has manifestly failed.   It has led to an intensely fragile global economy, indeed to secular stagnation as Lawrence Summers has rightly termed it, and over six years of grinding austerity have produced neither sustainable growth nor much deficit reduction.  We need some new ideas about the fundamentals, and only Corbyn seems to be offering them.   He opposes further austerity on the grounds that continually contracting the economy is incompatible with lasting growth.   He wants to rebalance the economy by large-scale public investment in industry and services, with the serious goal of full employment, paid for either by mandating the publicly-owned banks to prioritise investment in British manufacturing or by a direct injection of QE funding into industrial investment rather than via the banks or by requiring a fair contribution of the costs from the extremely rich, none of which would require any increase in public borrowing.   Instead of pursuing privatisation and outsourcing which has turned out wildly expensive and wasteful, he would seek to create a new settlement between State and markets where private markets have clearly failed, particularly in sectors like energy, housing, rail, water, pensions and banking, in a manner that optimised the public interest rather than just maximised money-making.   And much more.

Carney’s rose-spectacled survey of the economy as Parliament returns does not convince

The UK economy’s ticking over fine: that’s the view of Carney, Osborne’s man.   So that’s alright then.   Or is it?   With time-honoured spin we were treated to the most optimistic scenario on every count, with the flip-side downturn kept carefully out of sight.   His central message was that “there is no clear evidence of deflationary mindset among UK households”, bankers’ jargon for households continue to borrow to buy what they can’t afford.    That matters because the government’s entire economic strategy now hangs on consumer borrowing.   That is very worrying if interest rates rise, which the City is constantly lobbying for, because the hundreds of thousands of households mortgaged to the hilt will be forced to cut their spending and the government’s reliance on consumer borrowing as the main driver of demand will collapse.   That could be the start of the next crash.

The other driver of demand is supposed to be investment, but that is mostly in property, especially expensive prime property in west London.   Then there’s manufacturing (remember Osborne’s ‘march of the makers’ which never materialised like his Northern powerhouse).   It’s now caught in a pincer between uncertainties of demand and a higher exchange which illogically makes exports harder to sell.   He’s also assuming that the UK economy is now insulated from the impact of global economic pressures for him to be able to set our own monetary policies, but that’s a wry assumption which is simply too good to be true.    Another bland assumption is that real wages are now rising, but that neglects the fact that they’ve only been rising for a period of 6 months after a decade of flat or falling wages, and even now have only reached the levels of 2004.

One crucial item of the UK economic outlook which Carney did not even mention – hardly surprisingly given the facts – was the balance of payments.   This has gone from very bad to awful.   At the latest count Britain’s trade balance in manufactured goods – the index of how far we are paying our way in the world – is nearly £110bn in deficit.   This is the worst recorded figure since 1830!   The simple fact here is that this appears on the government’s accounts as a huge debit and consequently a significant increase in the government’s deficit.  Until that trade deficit is reduced by a very large amount, it is difficult to see how the budget deficit, now standing at just under £90bn (it was predicted by Osborne to be zero in his 2010 budget), can be cut by any large margin.

 

The deeper reasons for supporting Corbynomics go far beyond re-nationalisation

It is curious that the main charge thrown against Jeremy Corbyn – apart from all the bluster and hysteria – is that his policies lack ‘economic credibility’.   The assumption presumably is that the economic policies pursued by UK governments, both Labour and Tory, as well as by the EU, were sufficiently credible and rewarding as to justify or even necessitate their continuing to be followed.   Even a second’s thought shows that that is an absurd proposition.   The business model of free market de-regulated capitalism which has been ruthlessly taken to extremes over the last 3 decades is patently bust.   It led inexorably to the biggest global breakdown for nearly a century, followed by the longest recession and the slowest recovery since the 1870s – indeed a secular stagnation with still no recovery in sight.

We were told that the markets were self-regulating and that the role of government was to get out of the way.   It turned out that the opposite was true, and that the economic system was only kept going at all by the constant drip-feed of government-initiated QE.   We were told that the dynamics of capitalism would self-generate the levels of demand to keep the system constantly expanding.   It turned out that growth was only achieved, if at all, by stacking up debt to prodigious levels, opening the way to the next financial crisis when the debt bubble imploded.  We were told that giving a free hand to investors would ensure the maximum efficiency in the allocation of capital.   What actually happened is that capital flocked to emerging markets which offered the best return, then flowed out again equally fast as soon as Western financial conditions improved, leaving emerging markets badly weakened and exporting deflation to the West.

The cataclysm of 2007-9 was a lesson that international policy co-operation was needed to increase global demand.   It was a lesson that higher investment in infrastructure and skills was needed to increase productivity.   It was a lesson that an economic model based on widening inequality was undermining the essential requirements of a successful economic system.   It was a lesson that uncontrolled capital flows are both dangerous and counter-productive.   It is clear that none of these lessons were learnt.   Perhaps Jeremy Corbyn’s greatest contribution is that he is not accepting the status quo which is rotten: an over-sized financial sector, a neglected manufacturing industry, inadequate investment, flat productivity, huge and growing balance of payments deficits, ballooning inequality, and an economy mired in enormous permanent debt.   He deserves credit for arguing that the fundamentals have got to be changed; it’s a debate we desperately need.

Three-quarters of jobs created in UK went to workers from EU

UK unemployment, which is still as high as 1,850,000, is now starting to rise again.   Combined with the jobs standstill, the lack of momentum in pay makes this the most worrying set of labour market figures for a long time.   What is equally disturbing is that almost all the increase in employment since the 2008-9 crash has been accounted for by workers from the EU.   Employment among EU citizens born outside the the UK has now risen above 2 million for the first time.   The latest figures point to falling demand for jobs, fewer hours being worked, and little or no evidence of a rise in pay.

The number of non-UK nationals working in Britain over the past year is recorded as having increased by 257,000 to 3.1 million, whilst over the same period the number of working UK nationals rose by only 84,000.   But demand for labour fell during the spring, with the number employed 63,000 lower in the 3 months ending in June than in the first quarter of the year.   In that first quarter employment among UK nationals fell by 146,000 while over the same period employment among workers from overseas rose by 91,000.   It also emerged that since 1997 the proportion of employment accounted for by non-UK nationals increased from 3.7% to 10.3%.

The turnaround in the labour market was expected to generate pressure for higher pay.   That hasn’t happened.   Regular gross pay for employees as a whole remained unchanged at £463 a week in June.   However pay at the top continues to rise sharply.   The High Pay Centre has just released figures which show that the salary ratio between FTSE-100 chief executives and an average worker jumped from 160:1 in 2010 to no less than 183:1 last year.   At the extreme Sir Martin Sorrell, chief executive of the advertising group WPP, took home £42.9 million (£825,000 per week), which works out at 810 times as much as the average WPP employee.

All of this is of course without reference to the quality of the jobs.   We are seeing in both the UK and the eurozone the steady growth of ‘the precariat’.   More than half the eurozone’s young workers are in temporary jobs, churning from one short-lived contract to the next.   The share of the eurozone’s 15-24 year old workers who are temps is the highest on record, a deeply disturbing 52%.   It’s clear that the 2-tier labour market won’t go away without more incisive action.   But for now the priority must be to tackle the ‘black legacy’ of long-term unemployment where  Osborne repeatedly boasts success, yet is now already worsening from a total little short of 2 million.

Brown has a nerve to lecture us on economic credibility or winning elections

It is hard to believe that Brown had the gall in his anti-Corbyn diatribe to declare that “the best way of realising our high ideals is to show that we have an alternative in government that is…neither a pale imitation of what the Tories offer nor is the route to being a party of permanent protest, rather than a party of government”.   The prime reason that Labour lost 5 million votes between 1997 and 2010 was, apart from Iraq, the fact that a very large minority of Labour voters did think precisely that – that under the regimes of Blair and Brown Labour was indeed ‘a pale imitation of what the Tories offer’.   It’s also why UKIP gained 4 million votes at the election three months ago because a huge chunk of the electorate had indeed come to the conclusion that ‘they’re all the same’.

Brown was the overseer of deregulated finance, free-wheeling market finance, the introduction of privatisation and outsourcing into health and education, and keeping the unions on a short leash to encourage foreign investment into Britain.   Those were all Tory policies inaugurated by Thatcher which Brown didn’t reverse in any significant way, but actually extended in various ways, particularly in offering huge concessions to the City of London when he hosed down the banks and hedge funds with laudatory hyperbole in his Mansion House speeches to the assembled potentates of finance.   And to give equal encouragement to Big Business, Brown enormously extended the Private Finance Initiative (PFI) which  offered government-guaranteed profits to business for the next 25-40 years at taxpayers’ expense.   This wasn’t a pale imitation of the Tories; it was the epitome of Tory ideology.

And as to Brown lecturing us on winning elections, he was the most unpopular prime minister since the second world war and lost the 2010 election with the lowest Labour vote since 1918.   He was the architect of ‘regulation lite’ (i.e. virtually no regulation) for the banks and finance sector which undoubtedly contributed to the recklessness and arrogance of the banks in all but triggering a global recession.    To that extent Brown’s support for unregulated free-market capitalism was a significant contributory factor in bringing about the biggest financial crash for nearly a century, from which the Labour party and the centre-left parties of Europe have still not recovered.

It is the arrogance of Brown and Blair in assuming that they alone, the Labour establishment, have the unique skills to win elections that actually they have proved rather adept at losing, which is so galling.   Above all they, alongside the Tories,  have insisted on endless austerity as the right way to achieve deficit reduction which is not only incredibly unpopular, but also patently failing to achieve its ostensible goal.   Jeremy Corbyn is far more aligned with what the people of Britain clearly want, while the Blair-Brownites are in a state of denial.   Brown should look to his own record: when in a glasshouse, don’t throw stones.

Anti-austerity should be clincher of Labour leadership contest

Austerity is the wrong policy on every count.   Over-spending was not the cause of the financial crash,  so austerity is not the right policy for dealing with what did cause it which was the bankers’ arrogance and irresponsibility triggering the global recession.    When the massive bank bail-outs led to huge budget deficits, austerity was the wrong policy to cut the deficits because prolonged contraction of the economy makes deficit reduction far harder to achieve than systematic growth and expansion.   And all that still leaves aside the cruel torture of impoverishment and hopelessness which endless austerity imposes on the innocent victims of the crash whilst letting the guilty perpetrators go free.

In the Labour decade before the crash the average budget deficit was 1.4% of GDP, half the average under Thatcher and Major.  Moreover Labour inherited a national debt from the Tories in 1997 which stood at fractionally under 40%, but reduced it to 36% by 2007.   So there was no Labour over-spend, though there certainly was substantial Tory over-spend.   In neither case however was austerity justified as a counter-measure when the true cause was external and the real motive for its imposition was, and still is, Osborne’s desire to shrink the State rather than primarily to cut the deficit.

The bail-outs did produce a peak budget deficit of £157bn in 2009-10.   The stimulus of Alastair Darling’s last two expansionary budgets cut this by £40bn by the end of 2011, but the Osborne austerity budgets then kicked in which slowed deficit reduction by two-thirds. That’s because continuous contraction of the economy flattens growth which then enforces a slowdown in deficit reduction, which is exactly what happened in 2012-3 and which now seems likely to recur if Osborne imposes his £12bn further cuts in benefits plus another £29bn cuts in public expenditure.

Most wicked of all is the Tory indifference to the merciless battering inflicted on the squeezed middle and the helpless 20% at the bottom of society.   Over 150,000 elderly and disabled persons no longer receive help with washing and dressing because Councils are now so cash-strapped that they can only afford help to those with the most extreme needs or none at all.   Councils now, because they cannot fund alternative accommodation, regularly every day at 700 different locations break the legal requirement that children should not be forced to stay in bed-and-breakfasts or shared hostels for more than 6 weeks at a time.   And to sidestep the opprobrium arising from austerity increasing child poverty, the Tories have cynically changed the definition of poverty to avoid any measure based on lack of money and instead to focus on ‘life chances’.

Tory privatisation economics: try the London sewer, the mother of all scandals

As an illustration of what the Thatcherite privatisations of the 1980s now mean, you could not have a better example than the London super sewer.   It costs £4.2bn, and you might expect that Thames Water, the privatised company that controls the whole of its length, should obviously be expected to pay for it.   Not a bit of it.   They will fund just a third of it only, and the rest will be met by a team of investors which will own, manage and finance the projedt during construction and then supply sewerage services to Thames Water on a 125-year concession!   But that’s just the start.   Unusually for a construction project, the investors will receive an income from the first day, paid for by Thames Water’s 15 million customers.   The surcharge on London water bills is likely to be £80 a year in perpetuity.

But here’s the main point.   The risks of construction, including cost overruns, accidents or any other incidents at the project’s 42 sites, as well as any financial risks – such as another global collapse in credit – will be borne by taxpayers because the government is acting as guarantor.   This is common for infrastructure projects where traditional insurers won’t cover the risk, so once again the privatisers take the gains and the public take the potential losses which could be billions of pounds, and Thames Water walks off all the way to the banks.   There are two enormous scandals here.   One is that if Thames Water were a publicly owned company or part of a national water company, the sewer could be built far more cheaply because governments can borrow money more cheaply than anyone else.   Second, why shouldn’t Thames Water be made to pay for the project themselves when they have paid out dividends of £1.1bn over the past 5 years?

Then there are the tax implications.   Thames Water is owned by a Luxembourg-domiciled consortium which includes the (Australian) Macquarie European Infrastructure Fund as well as Abu Dhabi and Chinese sovereign wealth funds.   So Thames Water is racking up huge debts using EU-blacklisted tax havens to pay out massive dividends and executive fees, at the same time as expecting household consumers to pay a big chunk more themselves.   Alongside a one-third increase in billing to its consumers, Thames Water have seen fit to grant a 60% pay increase to £2 millions a year to its chief executive – what for exactly?    The mother and father of all financial skulduggery?