Thursday, 12 September 2013

Turning the corner - or is it really much worse than we thought?

Originally posted at Notes from a Broken Society
George Osborne yesterday made a speech suggesting that the British economy had turned a corner and was now returning to growth – proving that the Coalition’s economic policies were working. The speech contained a sideswipe at the people – including the IMF – who had claimed that his economic assumptions were based on a misunderstanding of the multiplier effect of public expenditure and that his fiscal policies were damaging the economy (I blogged about the IMF work here).
However, against the background of adulation from the UK’s corporate and license-funded media, a major paper suggesting that Osborne’s policies could be making things far worse has been causing some interest among more restrained and sober commentators.  The paper, by Òscar Jordà of the San Francisco Fed and Alan Taylor of the University of California-Davis, backs the IMF view and suggests that the work on which Osborne has explicitly relied undersetimates the effects of cuts in public expenditure.  The full paper is not easily available but a summary blogged by Professor Taylor gives a detailed outline.  What makes this work significant is the methodological refinement which seeks to ensure that comparisons are made between economies with similar characteristics, rather than a taking a “one size fits all” approach to the analysis.
The authors conclude:
Our results contrast with the expansionary austerity view of Alesina and Ardagna, and even amplify the opposing view of the IMF. For comparisons we have to adjust for the scale of the treatments by the average treatment size, the mean of the IMF measured consolidation (in % of GDP). There is little variation in treatment size across the bins, so the average treatment effects are in fact comparable to multipliers because the average treatment, coincidentally and conveniently, is close to one.
In recent times austerity has been systematically applied in weak economic conditions: plus ça change. But in a bad current state the economy is more likely to grow faster than trend going forward. By failing to allow for the endogeneity of treatment we could end up with a far too rosy view of the aftermath of fiscal consolidations. A dead cat bounces, regardless of whether it jumped or was pushed.
Using ordinary-least-squares estimation we would walk away believing in expansionary austerity, or no effect when the economy is weak. Using ‘narrative’ instrument variables we might believe in contractionary austerity except when the economy is strong, but the estimates are possibly biased as the instruments may not be valid as allocation into treatment is not random. Using our two-stage method to deal with allocation bias, we find stronger evidence of contractionary austerity in the weak economy with much more precise estimates. These results suggest that only a strong economy can bear a fiscal consolidation without significant output losses.
Taking the UK as an example, the authors’ conclusion is even starker – that austerity not only damages the economy in times of recession but harms the performance of the economy in good times.  This is supported by a chart that shows dramatically the effect on the UK economy of austerity measures during a slump:
The message is clear.  Far from allowing us to turn a corner – and there are strong grounds for arguing that the current UK economic recovery is nothing of the sort, but an aberration caused by the stoking of house-price inflation at a time when real incomes continue to fall and consumer prices continue to rise – Osborne’s austerity is doing long-term, as well as short-term damage.  The authors concur with Keynes: austerity is something you do when the economy is booming.
These are lessons that Ed Balls should be reading carefully.  One of the points noted by Jorda and Adams is that fiscal stimulus is in principle more effective at a time when interest rates are at, or near, zero – an effect that, added to the simple fact that low interest rates lead to a benign environment for government borrowing, suggests that the Labour leadership’s current economic approach is deeply flawed.  In other words, this is a terrible time for Ed Balls to be promising to stick to George Osborne’s SR2013 spending limits.  Whatever the politics, there are clear signs that the hard macroeconomics points in precisely the opposite direction, and that Balls’ policy is both economically self-defeating as well as one likely to thwart a Labour government’s ambitions on vital standard-of-living issues like housing and health (it’s also worth noting that the economic fundamentals are entirely different to 1997, when Gordon Brown famously stuck to Tory spending limits in Labour’s first year in office, and paid down debt).
This is one paper, although its influence is growing.  But an ambitious Labour Party with aspirations to effect real change after 2015 surely cannot ignore the lessons it contains.

Monday, 12 March 2012

Getting it wrong on housing

The coalition Government has made a series of announcements today on housing.  The NewBuy scheme offers mortgage subsidies and guarantees for those looking to buy new homes.  At the same time the Government argues that it wants to rejuvenate the right to buy scheme by offering substantial discounts on prices - up to £75,000 after five years' residence in their social housing.

Both measures are dripping with ideology - Cameron has weighed in with sonorous declarations about home ownership being the key to a stable democracy.  More prosaically, critics argue that the NewBuy scheme is in effect a way of providing to the ailing and traditionally Tory-leaning house building industry.

My main complaint is that, in both cases the measures will do precisely nothing to alleviate what even Conservative politicians agree is a national housing crisis.  In macroeconomic terms, both appear overwhelmingly likely make things worse.

What are the roots of the housing crisis in Britain?  It's quite obvious that there is a crisis when the price of the most fundamental good of all has accelerated way ahead of growth in pay in real terms.  Housing has become more expensive than at any time in recent history.  A person earning the median UK average income has little prospect of being able to buy a house - the idea that soaring house prices are an indication of prosperity is in my view absolutely grotesque.  Yes, some people are sitting on paper assets which have expanded substantially - but soaring house prices represent a huge transfer of wealth from the poor and young to the old and rich, and represent a speculative bubble that, even amid house price falls in the last couple of years, has yet to burst properly (the falls in recent years have simply disgruntled the wealthy without making houses - especially at a time when real incomes are falling - more affordable).  And it encourages the sort of property speculation that fuels lending booms  - every economic crisis since 1973 has had its roots in property speculation.  Moreover, and quite obviously, poor housing is at the root of many of the most acute social ills we face as a society.

In macroeconomic terms, the measures announced today will in the longer term bid up prices and make the situation worse.  Subsidising mortgages, offering guarantees and above all effectively slashing the price of buying a social house will do little or nothing to boost supply while potentially increasing demand.  It's really just accelerating the housing trends that have been so destructive in the last three decades.  At the very best its a footling response to the crisis; most likely it will simply make things worse.

What is the answer?  More and better social housing, of course, with the public sector driving forward a programme to construct hundreds of thousands of decent affordable homes for rent.  It would both stimulate the economy and help get us out of the cycle of unstable house prices.  It's simple, it's about as good an investment as any society would make, and it will never happen because, unlike our neighbours in Europe, our political and media classes simply cannot get past the ideology of home ownership

Wednesday, 29 February 2012

Workfare - bad for capitalism

The issue of unemployed people being made to do unpaid work for their benefits for a number of big companies - mostly retail - has become one of the Con Dem coalition's hottest potatoes.  Public revulsion has led to a number of companies partially or wholly withdrawing from the scheme, and Ministers are plainly so rattled by the opposition that they have resorted to ludicrous rhetoric about "job snobbery" and even claims that the Socialist Workers' Party is behind the opposition to their scheme.

Leaving aside all the moral issues about people being made to do work for their benefits, and the questions around the extent to which these jobs replace paid work (one supermarket chain reportedly sending its paid staff home around Christmas while using its unpaid workforce to do their work), there's a fundamental economic issue here.

Put simply, workfare is just bad economics.

There are three reasons why a rational capitalist should reject workfare.

  • First, at a time of high and growing unemployment and deep recession, it takes demand out of the economy.  While using unpaid labour increases profits, it reduces aggregate demand - especially when one considers that retail jobs are traditionally low paid, which means that retail workers are more likely to spend a higher proportion of their pay. 
  • Second, if you believe in the power of the free market, it's a gross market distortion.  Effectively it means that some of the largest and most profitable companies in Britain are being handed a massive corporate subsidy.  At a time when the media are awash with cheap rhetoric about benefit scroungers - most of it, wilfully or otherwise, without any real foundation in fact - it's profoundly ironic that big and profitable companies, many of whom have already been named as employing sophisticated tactics to avoid paying tax, are receiving subsidy in the form of workers paid for by the state.
  • Third, it does nothing to produce the flexible and skilled workforce that business leaders constantly argue is needed for the future.  There is no evidence at all that mandatory workfare actually leads to long term employment (and the DWP's ambiguity about the extent to which the scheme is mandatory is one of the more curious aspects of the whole controversy); the evidence suggests that it does nothing to create long-term jobs.  Moreover, the lack of opportunity for good non-graduate jobs remains a key problem that workfare simply avoids.

In other words - a good, serious capitalist who wants capitalism to flourish should be the first in the queue to campaign against the Government's workfare programmes.  The arguments are, at heart, simple.  Hence the stupidity of the rhetoric about the SWP - I cannot claim to be an expert on the SWP's programme but I'd be surprised if it included rescuing capitalism from the imbecility of the politicians who claim to promote it (which is, in essence, the Keynsian project)  The only rational conclusion is that workfare has nothing to do with economics and everything to do with ideology.

Tuesday, 27 December 2011

Clegg and the shafting of Middle England

Listening to Liberal Democrats talking about economic policy, the challenge is to work out whether they're motivated by mendacity or stupidity.  Both appear to be at work when they claim to be reducing the tax burden on low and middle-income families, as a report in today's Independent demonstrates.

Clegg has made much of how Liberal Democrats want to raise tax thresholds and have claimed that the increases in those thresholds announced so far by George Osborne demonstrate their influence in Government.  But the Independent's research - based on a report by the Resolution Foundation - shows those modest changes will be more than offset by significant reductions in tax credits - some families will lose more than £6000 per year, or nearly a sixth of their income.  In other words, those on low or middle incomes who receive tax credits will lose out significantly; those on higher incomes who do not receive tax credits will of course gain from the increase in the tax thresholds.

Quite obviously, then, the changes taken together will achieve precisely the opposite of what Clegg claims he has achieved.  If he is being honest - and I suppose, even on the basis of his record in Government so far, one should not dismiss the claim immediately out of hand - it suggests a certain lack of intellectual grip.

The killer sentence in the Independent report comes towards the end of the piece - the fact that the families who are hit hardest are precisely those who spend all their income, so the cuts in income will drive down demand and depress the economy further.  It's both a deeply regressive measure and one that will compound the economic disaster being visited on our society by Osborneomics.

Thursday, 17 November 2011

Running out of excuses

George Osborne's tenureship of the Exchequer has been notable for the parade of excuses for his economic failures.  For the most part it was Labour's legacy; for a short while it was last winter's snowfalls; now it's the Eurozone.  It can't be long before he's blaming it on the boogie.

New Statesman blogger and former Bank of England Monetary Policy Committee member David Blanchflower has published a piece that shows clearly that the the blame lies squarely with Osborne's economic policy.

Blanchflower writes:

The recession can be split into four parts. First, the "down" part which started in the second quarter of 2008 and went on for a total of five consecutive quarters of negative growth, during which output fell by an enormous 7.4 per cent. Second, the "up" part, which also lasted five quarters (from Q3 2009 to Q3 2010) when under Alistar Darling and Gordon Brown, growth increased by 2.8 per cent. Then, the "flatline" phase under George Osborne, which is also fifteen months long (from Q4 2010 to Q4 2011) with growth of 0.2 per cent, assuming we use the EU's estimates. Osborne destroyed Darling's recovery. Then, finally, the "stagnation" phase, lasting 24 months (from Q1 2012 to Q4 2013) with growth of 2.1 per cent over two years, or an average of just over 1 per cent.
So by the end of 2013, only 5.6 per cent of the 7.4 per cent drop in output will have been restored. This is worse than the 1930-1934 double-dip recession, which had only a slightly bigger output drop but was over in 48 months. By the end of 2013, this will number 69 months and counting. 
He concludes that there's no point blaming the Eurozone - the profile of Britain's recession closely fits domestic political decisions.  Blaming the Eurozone becomes even more asinine when one reflects that France and Germany are performing rather better than the UK.  One reason for this might be that the French and German economies are much more solidly founded on manufacturing, rather than financial services; Osborne, like so much of his party, is a creature of the City and the financial sector in a way that blinds him to the workings of the real economy - assuming that he has the will and the intellectual courage to look.  If Britain is at greater risk than France or Germany, it's partly because we have allowed our economy to be far too dependent on the financial sector.

It's also interesting to wonder what the effects of the Olympics might be on those numbers - I'd expect they would be worse without the large amounts of public spending and visitor revenues that the Olympics imply.

And one of the important implications of these numbers is that they are way worse than the Office of Budget Responsibility's growth projections, which underpin Osborne's deficit reduction strategy (such as it is). This implies that for all the pain of austerity, in Britain - like Greece - there is every prospect that austerity measures will make the deficit worse, at huge economic and personal cost (not that the Tories and their yellow chums appear to care much about the latter).  It is looking like a failed strategy whose costs will overwhelmingly fall on the poorest and most vulnerable.

The political implications of this are important.  It is imperative that the Tories are not allowed to get away with their blame game, or with claims that tax cuts for the rich or (as Blanchflower points out) the frivolities of deregulation will make any difference.  Osborne never looks like a man whom nature has fashioned to stand up and take responsibility - he must be called to account.

Tuesday, 25 October 2011

An economics lesson from Argentina

The landslide victory for President Christina Fernandez de Kirchner in Argentina's general election on 23 October provides lessons in both economics and politics for Western governments in the grip of continued economic criss.

Her victory comes off the back of a successful economic and social policy based on fiscal expansion, one which has flown in the face of every neo-liberal nostrum. This paper from the Center for Economic and Policy Research shows how, following its default on its debt and the sharp painful contraction that followed, Argentina has not only seen growth that would be the envy of the Eurozone, Britain and the United States but has made huge progress in reducing poverty and inequality, with expanded social programmes producing major gains in public health and welfare.

In other words, Argentina has thrown off the burden of debt and turned Osborneomics on its head. It's not surprising that its government has been rewarded with a landslide victory at the polls.

There are two important lessons here as the Eurozone crisis develops and politicians call for more austerity.

First, it puts the lie to austerity economics imposed by financial institutions and their spokesmen in government.  Osborne and Cameron lie about job creation in order to rationalise their economics - in Argentina they've implemented the policies that neoliberals tell us are reckless and they've achieved real economic benefits, widely shared.

Second, there is an important message about democracy.  In Greece especially, indebtedness is being used to promote the interests of bankers above democracy, in an attempt by lenders to ensure they carry none of the risks of their lending.  The risk is instead borne by ordinary people.  The Argentinian default threw off that risk, and, importantly, deprived bankers and financial institutions of their powers to subvert democracy. 

At the heart of the neoliberal programme is the axiom that financial "responsibility" - which means concentrating power in the hands of a privileged minority - trumps democracy.  The real lesson of Argentina is that growth, employment, welfare and democracy can go hand in hand.  It's unsurprising, then, that neoliberal hegemonists should try to demonise Argentina as a rogue economic state. 

Wednesday, 5 October 2011

Cameron plummets new depths of economic illiteracy

The Conservative Party conference has, in many respects, been characterised by a flight from the real world of evidence and empiricism - a retreat into a fantasty tabloid world of economic benefits from higher speed limits, weekly bin collections and feline threats to human rights.  But there is perhaps no finer example of this that the comments that David Cameron is about to make about debt.

Cameron will, it is reported, argue that it is time for individuals to pay back debt.  The bad economics of this has been admirably dissected by the ever-excellent Richard Murphy:

But all that being said to have everyone throughout the economy at the same time seeking to reduce ther debt is an economic prescription straight from the mad house (or maybe Oxford; you choose).
Why is this so crazy? There are three main reasons. First, and most importantly, if everyone saves at the same time we very obviously get a recession. If people don’t spend what they earn, which is necessary if they are to save, then demand crashes. If demand crashes then very clearly employment crashes with it, businesses fail and recession follows. So that is what Cameron is calling for.
Secondly, if we have everyone repaying debt then the money supply also crashes – because debt is the basis for all money creation in the UK. Now we could get round that with QE, for example, but the government has given away responsibility for such issues and as such Cameron is calling for a cut in the money supply and a consequent liquidity crisis at the same time as he’s calling for recession. Smart move Dave.
Third, Dave really has not got his head around the fact some debt is really, really useful. Government debt is the most useful of all. We need vast amounts of it because the annuities that underpin almost all old age pensioners private pension income are based on the ownership of gilts – that is, government debt. Perhaps he doesn’t realise this, but if the government were to repay all it’s debt, which seems to be his fantasy, he’d destroy the entire logic of the private pension sector. It’s an interesting idea that this seems to be what he is setting out to do.
So universal debt reduction is a massively bad idea.
Cameron also ignores the fact that it is also basically not possible: it’s pretty much an accounting impossibility that we can all reduce debt together. Debt is owed to people. Unless those to whom money is owed agree to sit on massive piles of cash they will not spend or even save with a view to earning interest when debt is repaid to them then everyone repaying debt simply can’t occur. I agree the issue is a little more complex than this, but that’s the essence of it.
No need to add to any of that, as far as analysis goes (incidentally, Murphy wonders how Cameron could have got a first in a degree that includes economics - PPE at Oxford.  As I can testify from personal experience, you can get a first in PPE by doing very little economics indeed - and none beyond the first year course which is barely of A-level standard.  Cameron could quite easily have got a first while knowing no more economics than a middling A-level student).  But of course it's far worse than that - Cameron, a man who was born into extreme wealth, appears to have no understanding that in the long term real wages have fallen and that in many areas the cost of living is rising sharply - look at domestic energy costs or public transport fares.  

Moreover, the Government's own economic forecasts are predicated on the assumption that personal debt will increase over the lifetime of this Government

But it's worse than that.  Much of the famous record deficit is made up of the debts owed by bankers to the Government that bailed them out - but Cameron and Osborne are far from urging bankers to pay up.  It's not surprising when one reads that the Tory Party is largely bankrolled by the financial sector.

I think this has nothing to do with economics, and everything to do with politics.  It's the same as the idiot rhetoric we hear again and again from coalition Ministers about the nation's credit card - a desire to reduce economic problems which go way beyond their intellectual grasp and their framework of analysis to homely analogy.  It's the politics of obfuscation, designed to hide the fact that the Coalition has nothing to offer and nothing to say.