Category Archives: Finance

There’s nothing wrong with People’s Quantitative Easing

It’s fashionable among the economic scribes to deride Corbyn’s advocacy of what he calls People’s Quantitative Easing (PQE) as though it were somehow illiterate.   In fact it is an entirely sensible policy.   Conventional QE operates via the central bank buying bonds in the financial markets, thus transferring newly-created money to banks, hedge funds and other investors.    The effect is therefore to boost the prices of bonds, shares and other assets, making the rich richer.   The theory then is that this wealth effect should stimulate the economy as the investors who have been enriched by selling assets at high prices to the Bank of England spend some of their profits on the high streets or employing servants or investing in new businesses.   It is clearly a very indirect and extremely inefficient way of  stimulating an economy.   Both Tory and Labour governments have spent £375 bn in using this device with very little to show for it since we still have the slowest recovery for over a century.

A better alternative – though not the best – would be ‘helicopter money’.   Or slightly more realistically, send cheques of £20 a week to every man, woman and child as a sort of reverse poll tax.   Technically, if £375 bn were spent this way, these cheques could continue to be sent out every week for nearly 6 years since £375bn is roughly £6,000 per head when equally divided among the 64 million people of Britain.   That would indeed be a far, far quicker way of stimulating economic activity.   Since neither dropping money from helicopters or sending cheques every week to every household in Britain is very practical, a third alternative is to bypass the banks and, after full and detailed consultation with the CBI ansd TUC, invest directly in key industrial or manufacturing projects.

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.

 

 

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.

 

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’.

Cameron-Osborne’s vendetta against the young could prove their downfall

Osborne really has got it in for young people – unless of course they are poised to inherit their grandparents’ £1 million home or will benefit from a higher inheritance tax threshold.   It will be young people who cop it from changes to universal credit that will deduct benefits faster as they earn more.   That will cost 3 million families an average of £1,000 a year according to the IFS.   Altogether some 13 million families, over half the population, will lose an average of £5 a week as a result of extending the freeze in working-age benefits, tax credits and local housing allowance, until 2020.

Then there’s unemployment.   The largest increase between 2008-13 was among 18-24 year olds, with 210,000 more out of work.   The latest figures show nearly half a million 16-24 year olds jobless, an unemployment rate of 13.7%, more than double the national average of 5.5%.   Even if they can find a job, Osborne’s over-hyped ‘national living wage’ won’t apply to those below 25 years of age.    The rate for 18-20 year olds will be a miserly £5.30 an hour, whilst for 16-17 year olds it will be slave rates of £3.87 an hour and and even £3.30 an hour for apprentices.

University fees are ending up putting poorer students into permanent debt.    When fees tripled to £9,000 a year, the maintenance loan was means-tested to target students from poorer families.   More than half a million students in England received the £3,387 maintenance grant last year, costing £1.6bn.   Now this grant is being turned by Osborne’s latest budget into another loan, of up to £8,200 a year.   So student debt will now rise to £51,000 after 3 years.   Unsurprisingly a report by the Joseph Rowntree Foundation has recently found that the largest increases in poverty in the last decade has been among younger adults of working age.

As for housing, anyone aged 18-21 will no longer be automatically able to claim housing benefit under the new rules.   The exclusion of young renters from any State support comes as young earners are increasingly locked out of home ownership as a result of soaring prices.   The average age of a first-time buyer has rocketed from 29 to 38 over the last decade.   Nor is further education a way out.   Further education colleges face some of the biggest cuts in the comprehensive spending review due in the autumn.   Indeed the further education sector, which provides the bulk of the UK’s post-secondary training, faces possible collapse and the loss of the invaluable source of technicians and mechanics.

What have young people done to deserve these successive kicks in the teeth?   In today’s volatile political climate this Tory campaign against the young will surely boomerang against its perpetrators.

 

Tory privatisation scams (2): the Hinkley Point C nuclear payola guaranteed by UK taxpayers for Chinese investors

If you think the London super-sewer is merely the exception in Tory privatisation economics, dream on.   It’s more the norm in a whole string of colossal financial scams, all put in place secretly and never sent to Parliament for approval.   Another flagrant example of privatising the gains and socialising the losses is the nuclear power station planned at Hinkley Point C in Somerset at a cost of £24.5bn, three times the original proposal, and using the UK taxpayer to guarantee to its French builder EDF  a price per unit of output no less than double its current UK wholesale price.    The government agreed this in November 2011, yet since then wholesale power prices have fallen by 16%; nevertheless the Tories are still guaranteeing the price of £92.50 a megawatt hour, inflation-linked for 35 years and funded through household bills.   So far from being the heroes of competition as they regularly claim, the Tories are driving a pernicious, underhand contempt for market forces to subsidise State-owned foreign companies whilst refusing to offer the same aid to a UK State-owned venture for the same project.

Just how bad a deal this is is shown by the fact that Hinkley will provide just 3 gigawatts of capacity, yet for the same price gas-fired turbines could provide about 50 gigawatts, onshore wind 20 and offshore wind 10.   The plant will not open till 2023 at the earliest, well past the date of the most acute energy shortage at the end of this decade.   And it will cost as much as the combined bill for Crossrail, the London Olympics and the revamped Terminal 2 at Heathrow – beat that for the most expensive white elephant of modern times!

It’s an anachronistic behemoth from the bygone age of energy dinosaurs when the world is rapidly moving towards distributed power via renewable energy.   It’s far too costly, and is it even needed?   First there is the UK’s declining demand for power, currently falling at a rate of 1% a year as energy-saving measures steadily take effect.   Then there is the expected threefold jump in the UK’s Interconnection capacity with continental Europe by 2022 which increases the ability to import cheaper supplies.   And third there is the litany of setbacks in price overruns and huge delays that have afflicted Finland, France and China over EDF’s European Pressurised Reactor which is the same type as is planned for Hinkley Point.

However nothing distracts the Tory nose from a good old-fashioned financial fix behind the scenes, especially when in this case it plays to their abhorrence of UK State involvement in meeting a public need.   So Cameron is off to Beijing in October to sign a final deal wit the Chinese president from which only Chinese investors will gain at UK taxpayer expense.

 

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?

 

Why Blairites are going hysterical

In 1994 Blair took over the Labour party and made it safe for British capitalism.   Which is why so many top companies and banks were content to contribute large sums to the party in order to hedge their bets – they gained whichever party won the elections.   Up till now they have dominated the Labour party for the last 20 years.   Blair’s abiding legacy, apart from the Iraq war, was to abandon the fundamental principles of the party and to assimilate it instead to the Thatcherite ideology of ‘let the markets rule and the State get out of the way’.    When Mrs. Thatcher was later asked what was her greatest achievement, she replied without hesitation: ‘New Labour’.   And the Daily Telegraph 6 months into Blair’s premiership published a half-page photo of Blair standing in front of a large picture of Thatcher in No.10 with the inscription underneath: ‘To Thatcher, a son’.   By accommodating the ruling corporate class the Blairites used the Labour party as their avenue to power, and it’s hardly surprising now that they are in such a state of denial and disbelief at their abrupt fall from power over the last month.

Of course the Blairite faction is sincere in believing that they alone know how things should best be run and that, as Blair himself has constantly reminded us, any millimetre departure from his prescribed course will bring chaos and disaster.   Not only does that show their unwillingness to listen (the party was virtually disbanded under Blair into a press release and door-knocking organisation), but it also exposes a deep arrogance about their own invincibility and their contempt for any radicalism from the Left.   The writing was already on the wall in Greece, Spain, and Scotland, but still they thought they could muffle dissent and ignore it.   It is a lesson in political nemesis.

Of course the Blairites will protest that they, and they alone, won three elections in a row.   The truth however is that the Tories threw away the 1997 election rather than that Labour distinctively won it, the second election was marked by stasis after an undistinguished 4 years, and the third saw the loss of 4 million votes after Iraq.   They will also appeal to the huge investment in health and education.   But a large part of the former was spent on building (fine for the construction industry rather than the essentials of health) and on outsourcing and privatisation (again good for the corporates rather than patients), whilst in the case of the latter there were huge building programmes inaugurating academies and free schools which have never proved their worth and have never been popular.

 

Blairites still don’t get it over public ownership

So the latest Blairite plan to derail the Jeremy Corbyn steamroller is to try to label him as rewriting clause 4 when it is perfectly clear that what he is really trying to do, rightly, is to re-start the debate about public ownership which is now so badly needed.   Thatcher’s dominant ideology was ‘let the markets run the whole show and the State get out of the way’ .   That was the route to the efficient allocation of capital underpinning a strong economy, offering big rewards for innovators and entrepreneurs and a trickle-down of prosperity for all.   Blair if anything took it even further with privatisation of public services and regulation-lite hands-off the City of London.   So was it a phenomenal success?   Unrestrained free-market capitalism led directly to the biggest financial crash for a century, the banks massively abused the power of de-regulation as we keep seeing day after day in the papers, and the privatisation of energy, water, rail and the Royal Mail have even Tories demanding the restoration of public ownership.   And even that’s without the scandals of behemoths like G4S, Serco, A4E, Atos, and Capita.

With the dominance of corporate power has come unrestrained market greed and a collapse of accountability.   Private markets have proved a bonanza for shareholder dividends and executive bonuses, but a millstone round the neck of (to use the uncomfortable cliche’) ‘hard-working families’.   The housing market has reduced owner occupation by 12% over the last decade and has made home ownership a no-go area for millions of young couples.   The energy cartel has exploited its pricing power ruthlessly till Ed Miliband threatened to impose a price freeze and to restructure the industry.    The pensions market abounds in steep hidden charges which enrich the City of London and impoverish millions of public sector workers who are reduced in retirement to penury.   The fragmentation of rail in the precipitate and ill-thought-through privatisation of 1996 has been seen as a costly mistake even by most Tories.  And part-privatisation of both health and education is rejected by a majority of the electorate.

Corbyn’s opponents bluster against public ownership as a ‘throwback to the past’.   But in truth what they’re advocating is a throwback to the private market heyday economics of the 1920-30s – and where did that lead to?   The real point has nothing to do with purity or ideological dogma: it’s about what works best, and the record of private markets in the last 30 years of the Thatcher-Blair imperium has not exactly excelled itself.   Moreover the record does not, or at least should not, turn on money-making and profit, but rather on quality of output, service to the customer, and benefit to the wider community.   We badly need a public debate on how public and private markets perform under those criteria as well as efficiency, and how sometimes co-operation serves the public better than mutually destructive competitiveness.