The US stimulus jobs chart meets reality

6610

the-us-stimulus-jobs-chart-meets-reality

 

Another update to the chart used by the Obama administration to promote its stimulus package. (Real figures charted as red dots.) Professor Steve Horwitz says that it's time to call it a failure. It's hard to disagree. Even on its own terms, the stimulus has not delivered the jobs promised. In fact, the situation is worse than the projection of unemployment without the recovery plan.

Those of us who see a recession as a painful but necessary process of economic reorganization will be unsurprised. If there's been a period of investment in things people no longer want, you need a period where that investment and energy shifts to things people do want. (I wrote about this idea a few months ago.) Of course, it's impossible to show that the stimulus has made things worse than they would have been otherwise, but it's clear that it hasn't worked as it was supposed to.

Austerity? What austerity?

6607

austerity-what-austerity

What a great paper City AM is. Much punchier, nimbler and cheaper (it's free) than the pink 'un. And sounder too, under the editorship of economic brainbox Allister Heath. His editorials are particularly frank and informative. Like today's on the public finances.

You've heard about the government's 'massive, reckless cuts'. Poppycock, says Heath. Public spending in April-May was 4.1% higher than the year before. The official inflation rate is 2.9%, so that's still a real-terms increase. Meanwhile, public sector borrowing was £27.4bn, up substantially from last year's £25.9bn. So we're getting deeper in debt, too. On the official figures, the national debt stood at £920.9bn (that's 60.6% of GDP) at the end of May – compared to £778.9bn (53.8% of GDP) a year ago. And that doesn't include off-balance-sheet items like pension liabilities, which are escalating fast.

All that means, says Heath, that 'austerity still remains more of a goal than an actual reality'. Until we see better numbers, it is 'too early to declare Britain back on the path to fiscal stability'. Remember that when you get stranded by the planned strike by public sector workers, who want to keep their generous inflation-proof pensions and carry on retiring at 55 or 60.

The June 30th public sector strike is politically motivated and wrong

6597

the-june-30th-public-sector-strike-is-politically-motivated-and-wrong

The public sector strike called for 30 June is just political. It is supposed to be a protest against cuts in jobs, pensions and public expenditure. But real public expenditure is set to fall by just 0.7% this year – a budget cut which most private sector firms and workers would take in their stride. If we don't want to end up like Greece, the government has to balance its books. It's doing just enough to trim its spending, but no more: it is going to keep on borrowing for as long as anyone can see.

As for pensions, public sector pensions are hugely generous and, even after the proposed changes, still will be. Private sector workers don't expect to get index linked pensions at just 60, as some public sector workers do. They may well be in difficult and dangerous jobs: but so are many private sector workers who have to slog it out until 65 (and soon, beyond). The Office for Budget Responsibility reckons that the gap between public servants' contributions and the pensions that are paid out will double to £9bn in the next four years. And we are all living longer. That's why the Hutton Report recommended basic contributions on average (rather than the often-inflated final) salaries, the same as they are in Sweden. It is why public sector workers – but not the poorest – will have to pay another 3%, and work just as long as the rest of us.

It's argued that public sector wages are lower than the private sector average, so the existing pensions are fair. Not so. Yes, there re lots of low-grade jobs in the public sector, which brings down the average. But for like-for-like work, public servants are better paid. They have more generous holidays, a lot more job security, and throw more sickies. And get more generous pensions too.

On jobs, the plan is to shave public employment by 100,000 by 2015. That's not a lot out of a workforce of 6,160,000. And many of those will be entirely voluntary redundancies. Again, millions of private sector workers who have seen their businesses fold, their hours reduced, their pensions and perks cut, or their jobs lost must wonder what the fuss is about. They think it is about time that public sector workers shared the pain.

And it seems that many public sector workers wonder what it is all about too. Yes, 61% of the public service union supported the strike, and over 90% of for the teachers' union – but on turnouts of 32% and 40% respectively. In other words, this strike is being called, when negotiations are still in progress, with the active support of only a fifth of the workforce.

That is unacceptable in the public sector, because most public services are monopolies. If your local Asda workers go on strike, you can always take your business to Morrison's or the Co-op. If coastguard stations, driving test centres, passport offices, and schools close down, you have nowhere else to go. Certainly people should have the right to strike: but in the public sector, perhaps strikes should be feasible only on a vote of more than half the employees.

A 'day of rage' it may be. But rage, I think, against the economic reality that the public sector jobs and spending spree is no longer affordable.

Greece is the beginning of the end of the Really Grand Euro Project

6598

greece-is-the-beginning-of-the-end-of-the-really-grand-euro-project

It was only fudged figures that let Greece into the Euro in the first place. But EU leaders were keen to make the Euro a Really Grand Project, and of course nobody wanted to be left out. That would be too humiliating. So the fudge thickened, and Greece was thrown into the pot.

Well, we knew what would happen, and here it is. Greece is going to go bust. There is nothing surer. It owes more than 150% of its annual income. And it's still spending. Five years from now, says the IMF, it will still owe nearly 150% of its annual income. And example after example in the past tells us for sure that when you continue to owe money on that scale, you will – before long – go bust.

There is a huge amount of political capital invested in the Really Grand Euro Project, so EU leaders have done whatever is necessary to keep the facade manned. Relatively rich Germany, in particular, has been pressured by everyone to keep bailing out Greece. And the argument is that Greece is pretty tiny in the scheme of things, so bailing it out – and even bailing out Ireland and Portugal too – is affordable and preserves the Project's credibility. But every day, more clearly, it looks like throwing good money after bad. And the IMF – now that Dominique Strauss Kahn has gone – is putting more stress on getting the economic fundamentals right rather than saving the Project's skin.

Of course there is financial capital at risk too. European banks hold more than $50bn worth of Greek government bonds. Not exactly a secure investment: nobody in their right mind today is prepared to lend to Greece for much less than 30%. All we can hope is that when Greece does default, the situation will be managed in some orderly way. But on the bright side, a Greek default would concentrate the minds of a few others. You know their names.

The Financial Conduct Authority could cripple the City

6591

the-financial-conduct-authority-could-cripple-the-city

Consumer protection traditionally focuses on the point of sale: the moment when buyers part with their money is the time to ensure trading is fair and reasonable. Now we are told that regulators “should seek to minimise consumer detriment by intervening more intensively at all points of the value chain”.

The logic of this is that when a new car is envisaged by the manufacturer, the regulators should be “working with” the designers to help them with the specifications. No doubt the Department for Business, Innovation and Skills should be involved too. Each stage of production will require approval. And not just at the design stage but also manufacturing, marketing and pricing. Can you imagine anything more certain to stifle product development?

The government has yet to apply this logic to cars, but Lord Turner of Makebelieve says this is just what the new Financial Conduct Authority should do in the financial sector. They have just (FS11/3 14th June) published the feedback to this proposal.

In the feedback (2.44) financial firms objected that this sort of intervention, which goes beyond that demanded in EU regulations, would damage the competitiveness of UK firms – while firms in other EU countries would remain free to sell their (less scrutinised) products in the UK. That is dismissed on the grounds that the Financial Services Authority aims to get the whole of the EU to adopt this intervention strategy.

That’s a contradiction: if Lord Turner really believes that making London the most difficult place to conduct financial business also makes it the most attractive to customers, then he should not be lobbying the EU to follow suit. But then Lord Turner does not believe in the real value of the City, or some parts of it, and would like its size reduced relative to UK manufacturing. Are financial services safe in his hands?

The FSA's interventions could cripple the City

6590

the-fsas-interventions-could-cripple-the-city

Consumer protection traditionally focuses on the point of sale: the moment when buyers part with their money is the time to ensure trading is fair and reasonable. Now we are told that regulators “should seek to minimise consumer detriment by intervening more intensively at all points of the value chain”.

The logic of this is that when a new car is envisaged by the manufacturer, the regulators should be “working with” the designers to help them with the specifications. No doubt the Department for Business, Innovation and Skills should be involved too. Each stage of production will require approval. And not just at the design stage but also manufacturing, marketing and pricing. Can you imagine anything more certain to stifle product development?

The government has yet to apply this logic to cars, but Lord Turner of Makebelieve says this is just what the new Financial Conduct Authority should do in the financial sector. They have just (FS11/3 14th June) published the feedback to this proposal.

In the feedback (2.44) financial firms objected that this sort of intervention, which goes beyond that demanded in EU regulations, would damage the competitiveness of UK firms – while firms in other EU countries would remain free to sell their (less scrutinised) products in the UK. That is dismissed on the grounds that the Financial Services Authority aims to get the whole of the EU to adopt this intervention strategy.

That’s a contradiction: if Lord Turner really believes that making London the most difficult place to conduct financial business also makes it the most attractive to customers, then he should not be lobbying the EU to follow suit. But then Lord Turner does not believe in the real value of the City, or some parts of it, and would like its size reduced relative to UK manufacturing. Are financial services safe in his hands?

Our inflationary spiral into stagnation

6589

our-inflationary-spiral-into-stagnation

An interesting bulletin came in from my friend Richard Jeffrey, economist at Cazenove Capital Management, on the state of the economy. The conventional (Keynesian) wisdom is that a little dose of inflation will stimulate (lasting) growth. Richard thinks that right, now, inflation is actually undermining our economic growth. But should we counter inflation with a rise in interest rates? Well, our economic masters worry that such a move could flatten our faltering growth even more. A conundrum.

Richard is certainly right to be worried about inflation. Inflation is an evil that makes sensible investment impossible. Who can tell which goods and services are really in demand when the price of all of them is shooting up? The 'noise' of inflation drowns out the 'signal' of the price system.

It now seems that quantitative easing – a smart name for printing money – gave the UK economy a boost, but a pretty brief one. The trouble is that the more money you create, the less people value it. So our devalued pounds now buy less abroad. That means higher energy and commodity prices. And energy and commodity prices have been rising anyway, as many of the world's economies recover from the crash.

So there you have it. Growth is being slowed by rising raw material and energy prices, which are the direct result of quantitative easing. Which in turn pressures the monetary authorities to keep interest rates low and stoke up the same inflation that is causing the low growth. Sounds to me that we are in a downward spiral unless we bite the bullet and move back to money and credit reality soon.

The small matter of the bill, Professor...

6588

the-small-matter-of-the-bill-professor

Professor David Blanchflower has a post on the New Statesman blog today arguing that David Cameron's credit card analogy for the national debt is wrong:

Cameron shows no understanding of basic accounting. I guess that isn't surprising for someone who has never run a business and had to file basic accounts. Folks with silver spoons don't need to do that. Let me explain. There is an asset side to the balance sheet and a liability side. The national debt is not analogous in any way to a credit card. The debt has been used to pay for the infrastructure, roads, schools, ports, the Houses of Parliament, and even Downing Street.

Basically, Prof Blanchflower's argument is that government expenditure isn't analogous to credit card spending because, if done right, government spending would buy assets that would deliver higher long-term growth. Well, maybe. But the problem with this argument is that most government spending isn't capital expenditure – roads and new schools – but current expenditure. That's things like wages, welfare payments, pensions, debt interest, and other things that don't deliver an increased economic return.

As far as I understand Prof Blanchflower's blogpost, David Cameron is an economic simpleton because his maxed-out credit card analogy doesn't account for capital spending. But this implies that most (or much) of the government's expenditure goes on capital projects, which is simply untrue. Total Managed Expenditure (TME) was around £696.8bn in 2010-2011. Of this, capital expenditure was £59.5bn – just £9.5bn higher than the total interest on government debt that year.

In other words, the capital investment that Prof Blanchflower is talking about accounted for just 8.5% of total government expenditure in 2010-11. That's not quite the picture you'd get if you read his post by itself, and it gives the lie to the notion that we don't have a debt problem.

Four alternatives to the statist quo

6580

four-alternatives-to-the-statist-quo

Yesterday I spoke at Haberdashers' Aske's boys school, with students from the girls school visiting for the day. It was at a seminar on economics and business. My theme was that in many areas of current economic and social policy there is a conventional wisdom and an alternative approach. I went through four areas where this is true.

Firstly in university applications, it is assumed that standards must be lowered to admit more people from poorer backgrounds into good university places. I pointed out that this would lower standards, and diminish the standing of UK universities. Better, I suggested, to put extra effort into improving schools so that disadvantaged bright students can score the grades to gain university admission without needing preferential treatment.

Then I suggested that the "live simply" message of many environmentalists would be far less effective than generating the resources and the technology to achieve our goals with a smaller environmental footprint.

The third area, that of getting the rich to pay a larger share of the tax bill, could be achieved, I agued, by lowering rates. In the past this has brought in more revenue and had the rich paying a higher share of the total. At the same time we should be raising the threshold to take low earners out of income tax altogether

My fourth point was on the crisis, which I suggested had been caused not by greedy bankers taking reckless risks, but by politicians and central banks trying to smooth the business cycle and to extend home-ownership to those who could not really afford it.

At the very end I added the fact that we give dribs and drabs of overseas aid, while denying poorer countries by barriers and tariffs the ability to sell in our markets, the only thing that has actually made poor countries rich. We should buy their produce instead of handing out cash to their governments.

Adam Smith's Birthday

6574

adam-smiths-birthday

It's Adam Smith's birthday today. Well, probably. We know that he was baptised on 5th June 1723 – which, because of the calendar change in 1752 translates to 16th June today. And generally, children in Fife would be baptised a couple of days after they were born, so it's a fair bet that today is his birthday.

Smith was, of course, the moral philosopher who made his name with The Theory of Moral Sentiments, which brought what we would now call an evolutionary approach to ethics. His view was that nature has endowed us with empathetic feelings towards other people – which is just as well, because we could not live and co-operate without it. The book was such a success that he was hired as the personal tutor to a senior Scottish nobleman, and on their educational tour of Europe, Smith started work on his other great book, The Wealth of Nations. That too was a hugely important book, which led to the sweeping away of trade barriers, official monopolies, and tax complexities and, arguably, set the foundation for the free-trade era of the nineteenth century.

As usual, the Adam Smith Institute will be celebrating with Adam Smith's favourite food, strawberries. And maybe some cake and claret.