I’ve written elsewhere on what a poor way the National Insurance Contribution (NICs) rise would be to fund the contribution cap, amounting to a perverse redistribution from mainly younger and poorer workers to at least some better off elderly. Almost any tax alternative currently on the table – from increasing income taxes, with its broader base, to Capital Gains Tax increases, to introducing a proper, progressive wealth tax – would be fairer and preferable.

That the NICs rise currently polls ahead of other options is a tribute to the framing of NICs (and the polling question asked!) more than anything else: it isn’t called a tax, and there’s still a firmly held belief that NICs payments go into a grand national pot that people can draw from later. This was the original intention of the system, dating back to the 1944 Beveridge Report and beyond, in which “national insurance” would act as a genuine, contributory insurance system, providing for those who had paid in during times of need. It has never really functioned like that: the Treasury, as its wont, has always treated NICs payments as just another flow of tax payments (with some slight complications).

But the seeming popularity of NICs rises is likely to prove fragile if the case against them is made, and – crucially – if the case for an alternative is clearly presented. Labour have now indicated that they will oppose the hike, but to clinch the argument they will need to present an alternative. Otherwise, it really will look like the party is just moaning about the world: you can’t look like an alternative government if you don’t have alternative policies. And if they can bite the bullet on wealth taxes for social care – in whatever form here – it can force open the argument about wealth and taxation more generally: a must if the party is to go into the next election with something approaching a serious, long-term programme to solve Britain’s chronic economic problems. And wealth taxes, as the polling evidence keeps showing us, are popular. (Unsurprisingly: by definition, almost none of us are in the top 1%…)

Party Conference

Labour Party Conference, returning to Brighton at the end of the month after a two-year covid-induced pause, will be the biggest opportunity the party and its new leadership has had to date to present its case. You don’t often get a free hit at the following day’s front page headlines as the Opposition, but that’s what Conference can offer, Keir Starmer has offered some rather broad hints about his own speech, and of course it’s the leader’s closing address that gets the bulk of the media attention. But Shadow Chancellor Rachel Reeves’ own speech is going to be worth keeping an eye on. She has already marked out a few key commitments, including a strikingly anti-neoliberal Mariana Mazzucato-style policy to support domestic supply chains and jobs. This was particularly noteworthy: the first time that I can recall Labour offering a genuinely post-Brexit policy under Starmer’s leadership. Now that we have left the EU, there is a seam there to be mined – with a bit of policy imagination.

But the challenge for Reeves and her team in three weeks’ time will be to not only throw in some headline-grabbing policy announcements – essential for the front pages – but to start to create a convincing story about what sort of economy the next Labour government wants to shape. Credibility doesn’t come from parroting the economically illiterate nonsense that clutters Westminster political reporting; it’ll come from having a clear, simple story that potentially millions of people can grasp and understand. The Tories’ NICs hike has given Labour a free gift, the chance to show they are the party that will look after your pay packet. Tax the wealthy, not the workers has a certain ring to it.

The post Social care and the Tories’ raid on paypackets appeared first on The Progressive Economy Forum.

It is all very well for the Opposition to look constructive and reasonable. But as with Labour’s lukewarm reaction to the initial phase of austerity a decade ago, there could be a long-term moral and political price to pay.

Elsewhere, I have explained why the flagship Coronavirus Job Retention Scheme (CJRS) is highly regressive, a contributory factor in the sharp drop in production and, as recently shown by research, subject to extensive fraud. Here I just want to highlight the regressive character of Sunak’s ‘plan for jobs’ announced this month in the Summer Statement.

In the Statement, the Chancellor confirmed that the CJRS would end in October, adding ‘Leaving the furlough scheme open forever gives people false hope that it will always be possible to return to the jobs they had before.’ Well, encouraging false hopes is what the scheme had been doing for months. He then added to the confusion by announcing a ‘job retention bonus’, giving firms a gift of £1,000 if they retained furloughed staff beyond October. He said this could cost the Treasury £9bn if every job furloughed was protected.

Since higher-income employees are the most likely to be retained after October, and thus gain £1,000 for their employers, this was another regressive measure, and encourages to employers to keep those they intended to retain anyhow doing nothing with their time during the summer months until the CJRS ends. Could anybody be in any doubt that fraudulent arrangements would be one outcome? Research had already shown     

Once lured into wage subsidies, new gimmicky versions usually proliferate. The Summer Statement included a slickly-named Kickstart Job Creation Scheme, promising to pay the wages of new employees under the age of 24 for six months. The initial £2bn put aside for this is intended to fund hundreds of thousands of jobs. The Chancellor said there would be no cap on the number of jobs to be funded in this way.

Among the questions such a scheme should prompt is whether the jobs so subsidised must persist beyond the six months. That was unclear. Either way, there were bound to be problems ahead. There is a long record of youth wage schemes, which should have been enough to dissuade any government from introducing another populist gesture.

What will happen is that many young workers who would have been hired anyhow will gain a nice subsidy for their employer. This is part of the deadweight effect. Probably worse is the substitution effect, whereby firms will take on somebody aged 23 to substitute for somebody aged 53 or even 25. The end result will be that few ‘extra jobs’ will be generated, even though the government will boast that 300,000 jobs were ‘created’ by the scheme. Enough commentators will want to show support for the government to go along with the claims. No proper evaluation will be done. But among the regressive effects will be that youths will be paid a low minimum wage and displace others paid somewhat more.    

Another ad hoc measure was a doubling of so-called ‘work coaches’ employed in Jobcentres, to 27,000. What are those coaches doing? What productive role do they fill? As research has shown rather conclusively, they have had no discernible positive effect on the probability of the unemployed obtaining jobs.

Their main function has been on forcing their so-called ‘clients’ to do a lot of job-like activity, spending 35 hours a week doing what they are told and, in the event of being deemed not up to the job, being sanctioned by losing benefits on which they depend. The coaches have a policing role. Doubling their number will not alter that. The measure will increase inequality, further depressing wages and conditions in the lower echelons of the labour market.  

The Statement’s Green Investment part sounds attractive, to cut carbon emissions by providing vouchers worth £5,000 for retrofitting homes with insulation, with up to £10,000 for lower-income households. It can be presumed that this will increase the capital value of properties. Insulating houses and other buildings is obviously desirable. But the measure will increase wealth inequality, and lower the cost of living of relatively high-earning households. The precariat do not own homes and thus cannot make use of the scheme.

To coin a phrase a ‘levelling-up’ progressive government would have offered some policy to compensate those being further disadvantaged. There was no such measure.

The same reservation applies to the substantial cut in Stamp Duty, in the form of raising the threshold for paying it from £125,000 to £500,000, to run until next March. As the precariat is not in the housing market, it will not gain anything from this. Only the relatively rich, able to buy and sell houses, will gain. It may be desirable to ‘re-invigorate the housing market’, but once again, the wealthy will gain while the precariat is left further behind.

Then we come to the obnoxiously populist measure, which regrettably will appeal to the think-tank crowd. This is the VAT cut on eating out, staying in hotels and going to ‘attractions’. Which groups in society have the lowest probability of being able to benefit from this largesse? It might lead to some more low-paid short-term jobs. But the precariat mostly cannot afford to go to restaurants or stay in fancy hotels. The affluent who tend to go to expensive restaurants and hotels will gain the most. Among them will be friends of members of the government.

The accompanying whizz of a scheme, Discounts on Eating Out, is clearly a brain wave of some over-heated brain of an adviser. The Chancellor said it is ‘an eat-out to help-out discount’. For the month of August, those eating in participating restaurants or cafés will gain a 50% discount up to £10 per head. The only disappointment for those taking advantage of the gift is that they will have to do so only on Mondays, Tuesdays or Wednesdays. The form-filling and other bureaucratic costs will add to the cost of what is clearly a gimmick.

The edifice of measures introduced since March has been permeated by disregard for their regressive impact. What was needed initially and what is needed now more than ever is recognition that, as the pandemic and lockdown constituted a tremendous demand shock, the way to respond was to stimulate demand while providing economic resilience to everybody.

Schemes that wilfully increase the disadvantages and vulnerabilities of the disadvantaged and vulnerable will not only increase inequalities but will weaken their resilience and that of society as a whole in the likely scenario of a second wave of the pandemic or some other pandemic that will follow sooner rather than later. Labour should not be quiet.   

Photo credit: Flickr/UK Parliament

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For one thing, as Labour’s Anneliese Dodds pointed out, COVID-19 has had worse health effects – and inflicted more damage – on the UK economy than in any of our comparators. The depletion of state capacity to respond effectively to the health crisis has left a legacy of mistrust and fear which will make it exceptionally challenging to “kick start” the economy quickly.

Let me concentrate on the most important aspect. Ending the furlough scheme in October means that the government will no longer pay the wages of nine million workers.  That means that either the firms on whose books they remain will have to start paying them, or they will be made redundant. Rishi Sunak has offered a “son of furlough” incentive to employers, so as to avoid mass redundancies. Until January, companies that pay the wages of furloughed workers will receive a £1000 bonus for each one.

However, whether it will be worth it for employers to resume paying their workforce (even with the £1000 bonus) will depend on the demand for their goods and services, that is, on what happens to consumption over the next few months.

And this depends on two things: how quickly the supply-side of the economy can be reopened and how soon people are ready to resume their old shopping and recreational habits. The two are of course connected: the easier it is for people to shop, go to pubs, cinemas, and theatres, stay in hotels and eat in restaurants, the more they will be ready to do so. But it also depends on their psychological willingness to risk infection.

The government’s ineptness in handling the health crisis will thus impact both the supply and the demand sides of the economy. The precautionary regulations affecting distancing, masks, crowd numbers and travel will still remain in place as long as the threat of new waves of infection remain: indeed the failure to develop a viable “test, track, and isolate” system means that the threat will stay longer than necessary. There will also be less appetite for some kinds of spending under these conditions. This means that even with the best will in the world, consumption will remain awkward and constricted in many sectors of the economy.

But the fear of contact, created by the propaganda which justified mass lockdowns, will also be a powerful limiting factor. A quarter of parents have said they will not send their children back to school in September. This fear of contact is bound to limit the business of all those companies whose industry depends on contact, especially hospitality, travel and recreation. Even £10 off the restaurant bill in August, as promised by the Chancellor today, is unlikely to induce a mass resumption of eating out in our large towns and cities.

The Chancellor’s measures, which include VAT reductions, and financial incentives for training, apprenticeships, house buying, and energy-saving are welcome. But they are a holding operation. I do not see how they can prevent a haemorrhage of jobs after October. The real choices will come with the Autumn Budget.

The choice will essentially be whether to continue with the financial orthodoxy of recent years which denied a state “mission” in investment or job creation or whether to use the immense fiscal power of the state, which, when circumstances demand, is perfectly capable of keeping households provisioned through a months-long standstill of private enterprise, to transform the subsidy culture into a new lasting partnership between the state and the people.

This piece is cross-posted from: Catholic Herald

Photo credit: Flikr/HM Treasury

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The prevailing image people have of inflation is frequently that of toy boats in a bathtub.  Water is money and the boats are prices.  Turn on the money tap and the boats (prices) rise.  That metaphor is wrong.  Prices are not equally inflatable, do they not all float with the same buoyancy, and money cannot be strictly regulated.  Price increases do follow a general rule, that they result from excess demand for the good or service in question.

Almost all inflationary pressures, a general rise in excess demand, have one of four causes: 1) cycles in internationally traded commodities; 2) exchange rate depreciation; 3) external debt-related excess demand; and 3) sudden loss of tax revenue.  In the United States over the thirty years 1990-2020 almost all of the general increase in the consumer price index of 2-3% annually resulted from changes in international fuel prices (Economics of the 1%, page 148),   The same applies to other developed economies including the UK and major EU states.  While presented as “inflation” in the media, fluctuations in international prices are more correctly viewed as price adjustments responding to the economic cycle. 

Hyperinflation in developing countries frequently results from exchange rate depreciation, which itself follows from large trade deficits.  This type of inflation rarely occurs in advanced countries.  Infamous examples include the Indonesian inflation during the Asian Financial Crisis of the 1990s.  Large external debt payments are a closely related cause of high and hyper-inflation.  External debt service acts as an export for which there is no compensating import.  Exports generate foreign currency which is channelled abroad to pay interest and principle on public debt held by foreigners. 

With no import to absorb the domestic income generated by the export, the national economy suffers from chronic excess demand unless the government runs a budget surplus equal to the debt service.  The budget surplus eliminates the excess demand, but at high social cost.  This process generated high inflation in the deeply indebted Latin American countries in the 1980s and 1990s.  Governments were loath to generate the necessary budget surpluses because of their depressing effect on output and employment.  The German hyper-inflation of the 1920s was a rare case of this process in an advanced country, caused by the large war reparations specified in the Treaty of Versailles and the French military occupation of the Ruhr.

Sudden loss of public revenue is related to debt-related inflation.  Historically this has occurred as a result of looming or actual civil conflict.  Chile in the 1970s and Zimbabwe in the 2000s are obvious examples.  After the election of the progressive Salvador Allende president in 1970 the wealthy in Chile in effect went on strike, not paying their taxes and undermining the expansion of the economy.  The politics of the disintegration of Zimbabwe’s civil society developed in a less clear cut manner, but reflected a process of social disintegration.

In summary, over the last four decades mild inflation occurred in most countries developed and underdeveloped in response to international price cycles, most often prices of hydrocarbons.  In contrast rapid inflation invariably results from one of three causes or the interaction of the three — exchange rate collapse, high external debt burdens and civil strife. 

We should view the role of money in the inflationary process as passive, the policy or systemic response to the deeper causes.  Governments choose to cover strong inflationary pressures with monetary expansion in order to avoid what they consider a worse outcome of collapsing output and employment, even though the resultant hyperinflation may have the same effect.

For most advanced countries the low inflation rates of the last few decades should not fall into inflation terminology.  Price increases of 0-3% reflect international and domestic price adjustments inherent in dynamic economies.  Suppressing those price pressures results in economic stagnation and allocative inefficiency.  Treating any positive change in the consumer price index as inflation is practically and analytically wrong. 

If as some have suggested, the post-corona virus period brings a stronger role for trade unions and more vigorous expansion and innovation-driven productivity growth, we should expect higher rates of price increases, perhaps up to five percent per annum.  Should that happen it will reflect another general rule of market economies, that increased real wages occur during periods of moderate price increases.  That is because economic expansion itself creates upward pressure on prices while simultaneously reducing unemployment and strengthening bargaining power of employees.

Far from a problem, moderate rates of price increase signal a healthy, expanding economy.

Photo credit: Flickr/Alan O’Rourke

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Rational Monetary Policy Returns

For decades neoliberal ideology drove discussions and practice of monetary policy.  The essence of neoliberal monetary policy, enthusiastically adopted by neoclassical economists, has a simple premise leading to a simpler policy process. 

The neoliberal approach assumes that market economies tend to automatically adjust to full utilization of resources with a stable price level.  Inflation causes instability and excessive public sector expenditure is the cause of inflation.  Sound fiscal policy requires balanced budgets, and monetary policy reinforces fiscal policy by repressing inflation.  Central banks repress inflation through the management of interest rates.  To achieve successful monetary management central banks must be independent of political influence.

The neoclassicals criticized Keynesians for allegedly unsuccessful attempts to use fiscal policy to manage the economy — fiscal “fine tuning”.  However, neoliberal monetary dogma demanded faith in the monetary equivalent.  If one accepts the questionable claim that inflation causes systemic instability, the neoliberal policy response requires acceptance of a more dubious hypothesis, that small changes in interest rates would have a substantial impact on inflation rates without a substantial impact on output.

So-called inflation targeting set precise and low inflation goals, typically in the 2-3% range (2% or less for the European Central Bank and within one percentage point of 2% for the Bank of England).  The central bank rate served as the instrument to achieve the target.  One must marvel that this simplistic hypothesis reached a level of acceptance to become policy in many countries — that in a complex economy open to international trade and capital flows, small changes in domestic central bank rates would quickly produce predictable changes in the rate of change of the price level.

More importantly, in the neoliberal era monetary and fiscal policy consciously contradicted rather than complemented each other.  To the limited extent that fiscal policy acted in an expansionary manner — before 2008 — monetary policy sought to constrain demand and prices.  After 2010 obsession with balancing budgets constrained recovery, while monetary policy sought ineffectively to stimulate recovery (so-call Quantitative Easing).

Monetization and the Virus Crisis

In early April of this year as the virus raged in Britain, the Chancellor announced further extraordinary budget outlays.  This expansion in spending made FT headlines by the manner in which it would be financed.  Rather than financing through offering public debt in financial markets (“gilts” as the bonds are called for historical reasons), the Treasury would sell the bonds directly to the Bank of England.

This financing arrangement involves an exchange within the public sector.  In a rather strange comment, a former Bank of England official reassured the FT that the financing “was unlikely to turn Britain into Zimbabwe”.  The comment was strange to the point of economic illiteracy because bonds sales by governments to central banks have a long history among advanced market countries.

For example, this April the Federal Reserve System held 15.8% of  the US public debt, while other federal agencies owned an additional 10% (the largest being the Social Security Trust  Fund), for an intra-government total of 26%.  In the United Kingdom the intra-governmental ownership of public debt is higher.  Before the April policy announcement the Bank of England held about 30% of UK debt.

Why Use Monetization

Acceptance of the neoliberal hypothesis and its implied framework of an otherwise stable economic system led to the reduction, trivialization, of monetary policy to interest rate management.  The pre–neoliberal emphasis on central banks buying and selling public bonds faded to obscurity.  This earlier approach derived from an analysis that considered interest rates an ineffective tool for short term economic management.  In place of interest rate adjustment central bank bond transactions sought directly to increase (bond purchases) and decrease (bonds sales) bank liquidity.

The bond transactions could be used to reinforce the effects of fiscal policy, making macroeconomic policy more effective.  As I explain in detail in my new book Debt Delusion, governments “live within their means” by use of taxation and borrowing to fund expenditure.  In a democratic society social necessity determines public expenditure.  Rational governments use taxation and borrowing to fund those expenditures in a manner that maintains economic stability and fullest possible utilization of resources.

In times of extreme economic and social need such as wars, recessions and the current covid-19 crisis, public borrowing serves as a major instrument to maintain stability and protect health and livelihoods.  The role of borrowing involves more than funding, though that is its immediate purpose.  The interaction of spending — fiscal policy — and borrowing — allows monetary policy to play a central role in economic stabilisation.

This interaction becomes clear by inspecting the two vehicles for managing public bond sales, financial markets and the Bank of England.  Current spending needs associated with the health crisis provide an instructive concrete example.  At the end of February 2020 the central government annual budget involved borrowing of about £40 billion or 1.8% of GDP.   Almost all revenue comes from general taxation; there are few taxes “earmarked” for specific expenditures.  Thus, the £40 billion in borrowing and the £790 billion in annual revenue funded composite expenditure. 

Having identified (however accurately) needed expenditure, the government has the choice of what vehicle to use for the borrowing, bond sales to financial markets or to the Bank of England.  At least three considerations influence which vehicle to use.  First, the desired rapidity of fiscal expansion plays a major part in deciding how to finance expenditure.  Bond sales in  financial markets leave the monetary base unchanged; the sale takes money out of circulation and the subsequence expenditure returns it.  A government might prefer this sequence if the economy is near full utilization.

Providing the private sector with a safe asset is second reason for bond sates to financial markets.  Evidence suggests that the demand for bonds by banks and other financial institutions is frequently quite high; indeed, that financial markets could absorb a considerable amount of bonds given the uncertainty caused by the corona crisis.

If the economy is depressed, the combination of a fiscal stimulus and a monetary boost is appropriate.  Selling bonds to the Bank of England combines monetary expansion with a fiscal boost.  The bond sale creates new credit which the government spends.

The regulation of interest rates provides another motivation for monetization.  In the early 2010s several EU governments suffered speculative attacks on their bonds that drove interest rates to unsustainable levels.  This speculation severely undermined the ability of governments to service their debts.  Had EU rules not prohibited it, the governments could have prevented that speculation by selling their bonds to their central banks or directly to the European Central Bank.  The British government faces no effective restriction on sales to the Bank of England.  This implies that monetization provides an effective mechanism for regulating the interest rate on the debt.  If the government offers bonds for sale and private buyers do not purchase them, the Bank of England serves as fault buyer at the prevailing bond rate.

Preventing speculation and complementing fiscal policy provide strong motivations for monetization.  Possible inflationary effects provide the main argument against.  I address that possibility in a separate blog.

Image credit: Flickr/American Advisors Group

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On 11 March the new chancellor presented his Spring budget. While the budget was unambiguously expansionary after a decade of cuts and freezes, as the Shadow Chancellor pointed out it did not restore expenditures to their 2010 levels especially for local government. But for all its shortcomings and faults it marked a first step towards ending the rhetoric of fiscal austerity.

In response to the shift on austerity by a Tory government, reactions to the budget demonstrate more than anything else how engrained in the media was the ideology of austerity, what we might call austerity speak. Typical was an FT article that while praising the Chancellor because he “rose to the occasion” with “a careful orchestration of fiscal and monetary policy”, said his budget “flung money at a grateful population”. To reinforce the message, the author told us that “it’s easy to throw money around” but harder to “spend it well”.

This rhetoric of being loose with money comes not only from the business-friendly FT and media on the right. A Guardian news article referred to the budget as “a spending spree”, designed to “win over [the] public.” The Guardian’s economics editor, who is one of the UK’s most progressive mainstream commentators on economic issues, hinted at the budget’s problems in an article that assessed that the Chancellor “can count himself relatively lucky” that the Institute for Fiscal Studies did not attack him more vigorously.

The source of this IFS criticism becomes clear in another article by Elliot that carries the headline “Sunak’s spend, spend, spend budget”. The author comes close to praise because the Chancellor has acted “to break the economy out of its low-growth, low-investment, low-productivity trap”. The first sentence of the article refers to this break as a “giveaway budget”. A jointly authored article by Elliot and Stewart pursued the pejorative language, writing that the Chancellor “turns on the spending taps”, and reported that the sacked Chancellor Javid “warned against abandoning all spending rules”.

Amid this language of spending sprees, turning on taps and warnings of violating rules, one searched in vain for a favourable judgement about increased spending as a budget strategy. The FT editorial board provided a rare example of an assessment almost void of value-laden language, referring to “the right budget for the moment” that seized the “opportunity provided by low interest rates to invest”.

Ancien Idéologie gets Shock Therapy

In March 2020 the UK economy faced two major economic shocks, each on its own sufficient to provoke a recession, the corona virus and uncertainties associated with leaving the European Union. With interest rates low and public borrowing under 2% of GDP, the technical case for a fiscal expansion should be obvious to any open minded commentator. Why then the widespread anxieties about an expansionary budget and the negative language of sprees and giveaways?

Two explanations present themselves, the persistence of the austerity ideology and a much older ingrained ideology in the UK media. For almost a decade the Tory austerity ideology preached a doctrine of balanced budgets, to the point that it went unchallenged, accepted as valid without need of justification. This false imperative to balance the budget received independent verification from the Institute for Fiscal Studies, which repeatedly stressed the dangers of deficit spending. Despite its focus being microeconomic and budgets requiring a macroeconomic analysis, the media embraced the IFS as Britain’s definitive source on public finances.

Judging deficit spending as a prima facie problem does not explain all pejorative language found in the media, especially use of “giveaways” and “hand-outs”. Such polemics have a long history in the UK media, reinforced by repeated reminders that all spending eventually increases the “burden on taxpayers”.

These terms are regularly applied to all budget statements Conservative and Labour. For example, whether a Tory chancellor will have the space for tax cuts to attract voters appears as a common pre-budget speculation, as do queries that a Labour government will find the tax revenue to deliver spending to its core constituency. This approach to public sending betrays a deep distrust of both the public sector and the political process. It treat public spending as the instrument used by cynical politicians to curry favour with voters rather than the legitimate or even preferable alternative to private provision.

Thus, the proposal in the Labour manifestos of 2017 and 2018 for free (i.e., public payment of) university tuition fees could be described even by centre-left commentators as a bribe for young voters. The NHS represents a striking exception to this cynical view of public spending, which in the second half of March became the vehicle for a profound paradigm change by the Tory government and in public perception.

Difference a Week Makes

Towards the end of March rhetoric of spending sprees and handouts disappeared, swept away by the threat of a national health disaster. Larry Elliot who as in 11 March referred to a “spending spree” and a “spend, spend, spend” budget, on 20 March abandoned such rhetoric. Two days later on 22 March he completely embraced and lauded the extraordinary increase in public spending by the Tory Chancellor in a deeply insightful article,

…[A] model [of limited spending] that has failed not once but twice has been ditched. Governments recognise they have to support their citizens through this. 

“Supporting citizens” and taking responsibility for stabilising the national economy are central tasks for every responsible government. The execution of those tasks should require no justification, just as the public accepts the need for a well-funded NHS protecting our health. The NHS has the responsibility for the nation’s health. The Treasury has the responsibility for a stable economy that provides decent incomes for all.

Once we re-recognise that over-riding public responsibility, we should dismiss the ideologically driven anxieties about excessive government spending, encouraged by mainstream economists of the centre-right and centre-left. In retrospect, we can see that the threat to economic stability in the UK, US and Europe lay not in the remote possibility of too much public spending but in the reality of not enough. If spending rules are necessary, they need ones to insure adequate funding not frugality.

The Progressive Economy Forum firmly states on our web site that it opposes austerity and the current ideology and narrative of neoliberalism, campaigns to bring austerity to an end and ensure that austerity is never used again as an instrument of economic policy. Is it too early to say that we are at last making progress in these aims?

Furthermore will there be at some point a reckoning for those who increased our public debt and caused needless suffering by pursuing a reckless and damaging ideology to shrink the state only to abandon this when it became politically expedient and in the face of national emergency?

Photo credit: Flickr/HM Treasury.

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The event will be introduced by Patrick Allen (Chair of PEF). On the panel will be:

• Alfie Stirling, Head of Economics, New Economics Foundation
• Carys Roberts, Chief Economist and Head of the Centre for Economic Justice, Institute for Public Policy Research
• Avinash Persaud, Founder and Chairman, Intelligence Capital (by video-link)
• Robert Palmer, Executive Director, Tax Justice UK
• Prem Sikka, Professor of Accounting, University of Sheffield, and Emeritus Professor, University of Essex (written statement supplied)

This will be followed by a Q&A session with economists, policymakers and journalists.

While there have been immediate responses from the media on the manifestos, this workshop will offer measured economic analysis, with experts on relevant policy areas sharing their assessments of the parties’ pledges and costings. By providing detailed, analysis of policies and their costings, the workshop aims to help improve public debate on economic policy for the forthcoming election.

Event details:                                       Contact details:

1PM – 2.30PM                                       Adam Peggs

Hodge Jones and Allen                         apeggs@progressiveeconomyforum.com

London                                                  07479973727

NW1 2NB

Notes:

The Progressive Economy Forum was founded in May 2018 and brings together a Council of eminent economists and academics to develop a new macroeconomic programme for the UK.

The forum seeks too:

1. Advance macroeconomic policies that address the modern challenges of environmental breakdown, economic insecurity, social and economic inequalities, and technological change.
2. Encourage the implementation of these policies by working with progressive policymakers and improving public understanding of economics.

To these ends, we publish research and policy proposals, run a wide variety of events, and manage a blog featuring authoritative analysis from progressive economists and academics.

The Forum was founded by Patrick Allen who is Chair of the Council. The Forum is not aligned to any political party.

The post Press release: PEF to host workshop analysing party manifestos and costings appeared first on The Progressive Economy Forum.

Those who write for these newspapers also have their political orientations and predilections. Because journalists are also citizens it would be unreasonable to expect them not to hold political views. In this context we should distinguish between the political orientation of a newspaper and author and political bias. Whatever may be the writer’s political orientation we expect a professional reporter to apply a consistent, unbiased analysis. Political orientation should not result in flagrant political bias in reporting.

Two articles on the same day by FT journalists Chris Giles and Delphine Strauss demonstrate political orientation generating political bias. Both articles address the same issue, fiscal austerity. Under the simple headline, ‘UK Chancellor signals an end to the “age of austerity”‘, their introductory paragraph reads,

Sajid Javid, UK finance minister, reversed a decade of austerity by the Conservative party with a promise to raise public spending ahead of a likely autumn election and a looming exit from the EU.

…[T]he chancellor signalled that he would in any case relax this [austerity] rule if he came to presenting a Budget, taking advantage of “a strong fiscal position and a record low cost of borrowing”.

The authors present government policy as fact (the Chancellor “reversed a decade of austerity”) without expressing an opinion on the credibility or wisdom of doing so.

On the same day in a much longer article, the same authors assess the end of austerity promised by the economic policies of the Labour Party. The headline for this article was far from simple, ‘Cost soars for Labour’s grand pledge to reshape the economy’. In contrast to the other headline, this one makes a subjective judgement (“cost soars”) and employs a condescending adjective to a straight-forward proposal, (“grand pledge”). In general, the authors of articles do not write the headlines, so I do not attribute the headline biases to Giles and Strauss. Nevertheless, the two headlines prove very indicative of what follows, one article a neutral-to-favourable presentation, the other a highly sceptical and condescending exposé that clearly suggests the unsoundness of Labour Party policy.

The first two paragraphs of the second article read,

The next Labour government will have to find at least £26bn in new tax rises if it wants to end austerity, invest in infrastructure, reverse social security cuts and live within its own budgetary rules, according to Financial Times research.

The brutal maths of the public finances mean that shadow chancellor John McDonnell’s plan for £250bn of increased public investment over 10 years uses up all of the wriggle room in Labour’s fiscal credibility rule. The UK opposition party has pledged to keep public debt lower as a proportion of national income at the end of a parliament than at the start.

Giles and Strauss reported that Javid “reversed a decade of austerity”, clear and un-nuanced statement. Equally clear in these two paragraphs is their view on Labour achieving its goals, not likely because of the “brutal maths” [sic! arithmetic] of the public finances; £26bn in “new tax” would be necessary. In the first article the reader was told that the cost of the end of austerity would come in at £13.4bn. The authors describe that increase with the statement,

While Mr Hammond warned that public spending should be battened down until Brexit was settled, Mr Javid jettisoned such caution in a statement which effectively framed the Conservative manifesto in an election which many expect within weeks.

In one case a spending increase is described as “brutal maths”; in the other case the authors characterise the spending increase as a change in a party manifesto.

The article about Conservative fiscal policy reports a policy change and leaves the reader to assess the credibility and wisdom of the change. In the article on Labour Party fiscal policy, the authors guide the reader to a conclusion: the plans of the Shadow Chancellor are not credible. The two articles epitomise biased reporting.

Photo credit: Flickr/tripu.

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However, what the ONS measures now as unemployment now is not what it measured 44 or even 25 years ago. Forty years ago the distinction between “employed” and “unemployed” was clear and binary. In 1980, 51% of UK employees were union members, which for most meant a decent-paying, regular job governed by a collective bargaining contract. Most non-union unemployment was also governed by contracts. Now, in 2019, the union membership rate has fallen to 22%, and the portion of the work force protected by collective bargaining has fallen more.

At risk of oversimplification, we can generalise that in 1980 the employed/unemployed dichotomy reflected a real dichotomy in the labour market. Now, “employment” is a much more ambiguous and fluid concept, as the ONS statistics show (see Table 3 in latest ONS labour market statistics report).

A recent editorial, also from the FT, summarises well the contemporary UK labour market:

…2.8m people in poverty live in families where all adults work full time. That is a challenge to the intellectual basis of welfare reforms for the past 30 years, including on the centre left. Bill Clinton’s embrace of workfare was meant to tackle “dependency” and promote personal responsibility; Tony Blair’s New Deal aimed to get people into work and keep them there; and Gerhard Schroeder’s Hartz reforms have led to the rise of precarious and low paid “minijobs” in Germany.

The growth of precarious and unstable employment explains why consistently falling unemployment has not led to consistently rising wages. The chart below shows the two variables, average weekly wages at constant prices (left axis) and the overall unemployment rate (right axis). The chart shows that, between 2013 and 2019, wages have risen while unemployment has fallen. The probability that this wage-unemployment link is actually random over those seven years is less than one in a thousand. But the relationship is very weak – real wages and their annual growth rate are still below their pre-crash levels despite ‘record low’ unemployment.

This is what we would expect from the transformation of the UK labour market over the last few decades. In the 1960s and 1970s, a fall in unemployment necessarily implied a “tightening” of the labour market: fewer people looking for work and more companies seeking workers. This tightening meant that competition among private employers to fill vacancies increased, putting upward pressure on wages.

Now, a change in the unemployment rate does not necessarily imply a tightening of the labour market. Instead of a straightforward move from unemployed to employed, a tightening of the labour market might now involve a shift from temporary to permanent employment, from part-time to full-time status, or from self-employment to employment proper. All of these shifts – and their reverse – could occur with no change in measured unemployment. This conclusion is obvious given the ONS definition of “employed”:

The number of people in employment in the UK is measured by the Labour Force Survey (LFS) and consists of people aged 16 years and over who did one hour or more of paid work per week and those who had a job that they were temporarily away from.

The definition creates the perverse possibility that the overall unemployment rate could fall while the actual amount worked by people also falls; i.e. a lower unemployment rate with lower employment. This apparently nonsensical outcome actually occurred in recent months. The measured unemployment rate for January-March 2019 was 3.8% compared to 3.9% for December-February 2019, even though the “total in employment” fell by 24,000 and the number of employees fell by a striking 118,000, only partly compensated by self-employment rising 98,000 (see ONS Table 3, columns B and C).

How can the unemployment rate fall when the number of people employed in all categories declines? The obvious answer, not covered above, is a fall in those defined as “economically active”, specifically in the category of people without work but seeking work and unable to obtain it. Back before the ideological hegemony of neoliberalism, the “economically inactive” were known as “discouraged workers”: people who gave up seeking work because there was none to find (see explanatory video and the US Bureau of Labor Statistics’ technical explanation).

In summary, the Financial Times headline, “UK unemployment rate drops to lowest level since 1974” was correct but incomplete. It would have accurately stated, “UK unemployment rate falls with fewer in work and fewer seeking work”.

There is perhaps no better example of the economic distortions of an austerity-ravaged, neoliberal economy than a lower unemployment rate when fewer have work. A look at the numbers below the headlines is never a bad idea in this brave new world.

Photo credit: Lydia / Flickr

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Today, I just want to say a brief word about the uncritical interpretation of these statistics in the media, using the BBC’s article on the new figures as an example. The headline is “wages accelerate to fastest pace since 2008”, and the introduction reads:

“Wages are continuing to rise at their highest level for nearly a decade, the latest official Office for National Statistics figures show.

Compared with a year earlier, wages excluding bonuses, were up by 3.3% for the three months to October, the biggest rise since November 2008. Average weekly wages are £495 – the highest since 2011, when adjusted for inflation.

The number of people in work rose by 79,000 to 32.48 million, a record high. That is the highest figure since records began in 1971.

Unemployment increased by 20,000 to 1.38 million, although the margin of error is 70,000 and the total is still lower than a year ago. The number of unemployed men increased by 27,000, while the number of unemployed women fell by 8,000.

The reason both employment and unemployment have increased is a result of the UK’s rising population and more people joining the labour force, such as students and older people.”

First, it is nominal wages that are growing at their fastest rate for nearly a decade. But real wages – wages after inflation – are what really matter, as they tell us far more about workers’ living standards.[1] Here, the picture is much more dismal. Real wages grew by just over 1% in the past year – slower than in most of 2015/16, and well below 1945-2007 average of 2.5%.[2]

Indeed, this meek growth has not been enough to compensate for the falls in real wages during and following the recession, conferring onto the UK the dubious honour of being one of the only OECD countries (along with Greece) to have experienced negative wage growth since the Global Financial Crisis (GFC). So yes, weekly wages are at their “highest” since 2011, but this is not cause for celebration. If wage growth had kept up with the WW2-GFC trend, wages would be approximately ~28% higher than their current levels.

Instead of explaining this broader context in their introduction to the piece, the BBC decided to note that the number of people in work is at its highest since records began in 1971: unsurprising, given that the population of the UK has steadily risen by 11m people over this time period. Choosing to devote space to such a facile observation is questionable at the very least.

Though the BBC did add critical commentary from Margaret Greenwood, Frances O’Grady and others over the course of the day (though without timestamping these contributions/noting that the article had been edited ex post, I might add), the fact that the earliest, and likely the most-read version of the BBC article contained no such counterpoint is serious cause for concern.

The overarching issue is that wage and productivity performance has been so dismal over the past decade that it allows the Government to pass off news that would be considered miserable by any reasonable standards as fantastic. Employment Minister Alok Sharma, for example, cited “wages outpacing inflation for the ninth month in a row” as a sign of “the enduring strength of our jobs market”.

The fact that avoiding real wage falls for a grand total of nine months – outside of recession time, no less – is touted as a mark of enduring strength highlights that something is seriously wrong with the UK labour market. This is why continuing to draw attention to the wider context is so important.

[1] One commentator pointed out that higher nominal wage growth does benefit indebted households; this is true, but it is stagnant real wage growth that is driving the increase in consumer debt in the first place.

[2] Using the ‘real consumption earnings’ time series from the Bank of England’s A Millennium of Macroeconomic Data.

Photo credit from previous page: Flickr / Ali Craigmile

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