Recent Economy Articles
What would you rather have: 1) a party that tells you what you want to hear and does something different, or 2) one that tells you straight about what its going to do?
Most people, I suspect, would pick the latter option. Or at least, they would like to think they prefer the second option but they’re easily seduced by the first.
Many of my colleagues on the left have been raving about the SNP for months. Today, when they released their manifesto, it turned out their spending plans and commitments weren’t actually that different to that of Labour
— Jonathan Portes (@jdportes) April 20, 2015
I just feel sorry for those people who had raved about how SNP would challenge austerity, only to find their fiscal plans were largely the same as Labour’s plans.
The Guardian’s George Monbiot put the SNP in the same category as Syriza, Podemos, Sinn Féin, and the Greens. Follow your convictions, he extorted! Ignore those bloody bean-counters and accountants from the Labour party who offer nothing other than limp policies, he added.
Oh. Now it turns out the SNP nicked half their policies and ideas from Labour. As Stephen Bush points out, it feels as if it is the SNP being pulled leftward by Ed Miliband. Ouch!
My friends, this is what happens when you focus on empty rhetoric rather than actual policies and commitments. Monbiot and others had been saying for ages that Labour and Tory austerity was the same until it turned out… that wasn’t true.
THIS is why I keep saying, focus on the actual policies rather than the rhetoric, otherwise later you’ll be left asking why politicians don’t live up to expectations.
If the general election in May 2015 is fought on who is best placed to deal with the deficit, then the Labour party will lose. Both Labour and the Tories know this. Miliband will focus on living standards, the NHS and inequality. So why a major speech on the deficit today, six months before an election? And why a pledge to cut spending and the debt?
Both the politics of what’s going on, and the numbers that underline it, are important.
The Labour leadership feel, quite rightly, that George Osborne wants to push public services off a cliff with unprecedented cuts. They lost the first fight on austerity, for reasons I outline here. But they recognise that if they don’t fight Osborne back this time, he will once away get away with having the media debate on his own terms.
Which is why Miliband’s speech is important today. He wants to hammer that the extent of Osborne’s cuts will “return Britain to the 1930s” if he is allowed to hoodwink people into accepting them.
A few things to remember.
1) Labour has not signed up to the extent or the way Tories plan to cut the deficit. Ignore the hype, read this piece.
2) Miliband will say quite emphatically, as one of his key principles: Britain will only be able to deal with the deficit by tackling the cost-of-living crisis. That means a focus on raising wages, and cutting spending like housing benefit by building more housing.
3) Labour will “ensure that those with the broadest shoulders bear the greatest burden” – will be another key principle. That means a much bigger emphasis on tax rises than the Conservatives, to close the deficit.
And this is the key paragraph:
This is now a fight for the soul of our country. It is a fight about who we want to be and how we want to live together. The Tory vision is clear: the wealthiest being looked after, everybody else on their own, public services not there when you need them. Our vision is different: a country that works for everyday people, with public services your family can rely on, a government that prioritises working people so that we can earn our way out of the cost of living crisis, a Britain built on strong economic foundations.
I’m pleased that Miliband is seeking to expose Osborne’s horrendous plans and set up a clear dividing line.
Rather than complain that this is another speech about the deficit than something important like the NHS, we need to see it for what it is: an attempt to expose Osborne’s ideological agenda to permanently slash Britain’s public services.
by Stewart Lansley
Later this week, the government’s social mobility and child poverty commission will report that middle-class children from families with above average incomes are set to become materially less well off in adulthood than their parents.
For a growing number this is old news – it has been reality for a small but rising proportion of the working population for years. Growing numbers of the young have already had to face much bleaker life chances than their parents: a more treacherous job market, lower pay and fewer chances of advancement. On top of this they also face shrinking housing opportunities, a weakening safety net and a more punitive benefit system.
Across Britain, adverts to work in cinemas or in coffee shops attract thousands of applications, despite the jobs on offer being low paid and often temporary. Even short-term Christmas jobs in warehouses are hugely oversubscribed. With sometimes up to 200 chasing every job, the search for work in Britain has become increasingly futile.
Such trends are imposing profound social and economic costs. They are capping opportunities and trapping more of the workforce into poverty. On top of this, they are weakening the incentive to work and putting a growing strain on the benefit system.
While the global crisis has exacerbated these trends, they have much deeper roots. The last thirty years have seen a shrinking earnings pool, a doubling of the numbers on low pay, the decline of labour’s bargaining power, deindustrialization, a much more individualised social and economic culture and a housing market that benefits the already well-housed.
Three decades ago, the UK was one of the most equal countries in the world. Today it is one of the most unequal, with the proceeds of growth increasingly colonised by a small corporate and financial elite, leaving most of the rest with a shrinking share of the cake, greatly polarising life chances in the process.
Those who have suffered most are those with parents on low and middle incomes, the very groups who prospered most in the immediate post-war era.
Before the war, the social shape of Britain looked like a pyramid, with a small top and a large group at the bottom. By the 1970s it had turned into a diamond shape with a much larger and more prosperous middle. Today the ‘diamond` has gone, replaced by a contorted ‘hourglass’ with a small bulge at the top, a long thin stem in the middle, and a fat bulge at the bottom.
The impact of these trends can be seen most forcefully in the US, where the reversal of opportunities began in the mid-1970s. With incomes stagnating, the size of the middle has shrunk by more than a tenth since 1980. With large numbers of the current generation now facing lower living standards than their parents, more and more US citizens express a ‘fear of falling`, exposing as a myth one of the country’s once most widely shared values – the much vaunted ‘American Dream’.
Britain is not far behind. Here the ‘fear of falling’ has been mostly confined to those in the lower half of the income ladder. Middle class professionals – a group that sits somewhat above the ‘squeezed middle` – have largely been protected. That may be about to change.
With a third of graduates now in permanent non-graduate jobs – many from middle class backgrounds – the tightening cap on aspirations may already be spreading upwards.
Stewart Lansley is a visiting fellow at Bristol University and the author of The Cost of Inequality
by Paddy Briggs
From time to time a good Pensions trustee should have an ‘emperor has no clothes’ moment. This is when there is something about which there seems a pretty solid agreement, often with the wraparound of ‘we’ve always done it like this’. Generally when you press you find that something is done the way it is because it is the best way.
But just occasionally a challenge will reveal an opportunity to change or improve established behaviours for the benefit of the Pension fund and its members.
I was pondering this recently when the news about the government’s decision on the Royal Mail Pension Plan began to emerge. This decision is that this fund, the third largest in the UK with assets under management of some £31 billion at the end of 2011, should be wound up and its assets be requisitioned by the Treasury.
I was so astonished about this that I wrote a letter to The Times expressing my surprise that the pensions world had been so sanguine about what seemed to be an extraordinary and unprecedented action, which I said was “almost Maxwellian in its audacity”.
The conventional wisdom about the Royal Mail Pension Plan decision is that it is in the interests of members. The interests of these members are protected, so the argument goes, because the fund’s members will become like most other public sector employees – their pensions will not be funded but will be a long-term charge on the treasury.
This is to the advantage of members because they go from the uncertainty of being in a fund whose funding ratio is a weak 76% to having their pensions guaranteed by government.
But what about those huge assets which employees, the sponsor and trustees have built up over the years? Surely it is the members’ money and only they have a right to it? It is not being set aside into a special pot to help provide for future pension payments – it is being sequestered to help reduce the UK’s budget deficit.
And is the transfer of members from a funded trust into the status of being an unfunded liability on the public finances really necessarily in their interests? Governments can and do change the basis of public sector pensions at their discretion and there is little that anyone can do to stop them.
A pensions trust provides legal protection to its members and has trustees to exercise that protective role. At a stroke Royal Mail fund members will lose that security and no longer have trustees acting in their interests.
Was there an alternative to the decision that the government has taken?
The Royal Mail is to be privatised and self-evidently no buyer would wish to assume sponsor responsibility for its £40 billion of liabilities. But could the funding ratio gap not have been closed partly out of the proceeds of privatisation and partly from the exchequer and the fund given an assured long-term future, as an independent pension entity, by such payments?
And why should the taxpayers of the future have to provide for the pensions of a further 430,000 people over and on top of the public sector pensions obligations they already have? These may be ‘emperor has no clothes’ types of questions – but they should be asked.
This article was originally published here.
by Carys Afoko
Every economic issue comes with its own competing frames. Have we ‘turned the corner’ into recovery or did Plan A choke off growth? Is the government inflating a housing bubble or giving hard-working families a foot on the property ladder? Is it a spare room subsidy or bedroom tax?
But the Coalition’s story about austerity shapes how most of us think and talk about the economy. It uses powerful frames, vivid imagery and has been repeated with incredible discipline for several years.
The result is many people understand the economy on the Government’s terms: dangerously indebted due to Labour’s spending, dependent on welfare, and in need of austerity to balance the books.
Our research into how economic debates are framed found this story has strong popular support. Polling data shows that month on month, no matter what people think about the Coalition, they continue to believe their spending cuts are necessary for the economy.
That’s the bad news. But there is hope for opponents of the Coalition’s spending cuts. Our research unearthed numerous examples of issues where campaigners and NGOs had changed the economic conversation, from the living wage to tax justice and the bedroom tax.
What opponents of the Government lack is an overall story about the economy; what is wrong with it and how we fix it. Hooks to hang different single issue campaigns off, and engage people on an emotional level.
In our research we suggest seven frames that could be a building block for a new story.
But the austerity story can be defeated, if its opponents identify and activate their own powerful frames. The frames must be developed from values and resonate with public opinion. They must be tested and refined based on what works. We outline some frames we believe could be used to build a new narrative, and a story that brings them together.
1. Casino economy – our economy is like a casino, it is in need of reform so that it can be stable and useful.
2. Treading water – we are not making any progress as a nation; we are running to stand still, struggling but not moving forward.
3. Big bad banks – our current problems are the result of a financial crisis that we, and not the banks that caused it, paid for.
4. Big guys and little guys – there are two types of people in Britain, the little guys who work hard and don’t get a fair deal, and the big guys who have money and power and play by their own set of rules.
5. Jobs Gap – the biggest issue facing our country is the jobs gap: people who want to work but can’t, people who work hard but don’t take home a decent wage and young people who cannot be sure of a good job.
6. Time for renewal – we need to rebuild and renew what made Britain great – from the railways to our education system. We need to invest.
7. Austerity is a smokescreen – The Coalition uses the deficit as an excuse to do what they have always wanted to do like shrink the state and privatise the NHS.
That focuses on jobs instead of welfare, blames banks instead of the government and taps into public anger at the uneven playing field we have in Britain. We hope they’re a helpful conversation starter for those looking to challenge the austerity narrative about the economy.
The battle for the economic narrative will be won with stories, not statistics. It is time the opponents of austerity tell a story of their own. To win, they will need to do more than find their frames, they will need to be more coordinated, responsive to public opinion and find more credible messengers.
In aircraft manufacture you see two huge firms, Boeing and Airbus. You have some smaller firms like Comac and Bombardier, but really its a two horse show. The four firm industry concentration is about 70%. That means 70% of the worlds aircraft by value is produced by just four firms. The vast majority of that is Boeing and Airbus. Can you say oligopoly?
This contrasts sharply with Airlines. The four firm industry concentration is only 20%. Not perfect competition, but pretty good. So good, in fact, the average European airline’s margin for the past few decades has been 0%. Aviation is one of the few industries where profit actually is competed away as you see in your textbooks.
There are two points to take from this.
The first is that irrational policies can have positive effects. The reason we have the competitive air market we have is because governments won’t allow airlines to consolidate. A firm from Hong Kong can own the electrical infrastructure of London, but woe forbid British Airways’ iconic livery disappear. Nothing naturally keeps aviation fragmented, as its manufacturers show. Irrational attachment to a paint job can do the lord’s work and keep an industry competitive and prices down.
The other thing to take away is that the industry that matches the austrian just so story of recession is aviation. In good times airlines order lots of aircraft, in bad times they go bust but those planes don’t stop flying. Once billions of pounds of hardware have been delivered you have to use it, even if it destroys your industry’s profit margins, because if you don’t someone else will.
A more consolidated industry could retire planes earlier, purchase fewer planes or increase prices, but the hyper-fragmented and competitive industry prevents these tactics being employed. Note however, that the unsustainable boom isn’t the result of easy money, it’s capitalist competition that drives this dynamic. And airline executives hate it. Just look at the US where consolidation is advancing as large firms attempt to merge to drive up prices.
Whereas Duncan and Krugman lament that political economy trumps economics, I think we should take solace. At least it’s a mechanism! It cuts both ways, so while the political can get in the way of good policy it can also support it. When making economic arguments it will probably be best to put the political to the fore, even if it’s not your “best” reason.
Those with an eye for economic optimism will have had their eyes on the Eurozone in the last two weeks, as the European Union announced a return to growth following almost 18 months of economic decline.
Then again, it will be economists with a nose for political rabble-rousing that may sense a sort of bureaucratic-bluff from the likes of Mario Draghi, Oli Rehn and co.
Instead this recovery has been for the most part intergovernmental, increasing the level of tension between heads of states and allowing a Franco-German alliance to play Napoleon over smaller members.
“No one should believe that another half century of peace in Europe is a given – it’s not” was the ominous tone set by Merkel just two years ago. This was on the back of Germany bailing out its fellow Eurozone members, a move agreed upon in the German parliament, leading to riots within the streets of Athens.
Mario Draghi, President of the European Central Bank, came to the fore following economic turmoil within the Europe, pledging that he and his colleagues would see that Brussels does “whatever it takes” in order to return to prosperity.
One measure announced was the proposed purchasing of the bonds and debts of weak member states in order to buttress a recovery. This never happened.
In fact evidence suggests that such moves are futile in attempting to resolve an economic downturn, due to the affinity that countries, safe in the knowledge that they have a fall-back option if things go awry, have for taking risks.
In January 2011 the EU saw through new legislation designed to combat the recession. This consisted of minimum requirements for national fiscal frameworks and sanctions against countries running up huge deficits. What is bemusing however is the emphasis put on such measures when evidence strongly suggests that the effect such behaviour has is almost wholly reliant on prior circumstances which are not being addressed by the Union.
The Eurozone is liable to fall into the same difficulties it has done previously if any of the member states experience renewed instability in the coming years.
Furthermore, the policy provisions in place to protect against further insolvency appear fundamentally flawed. How are we to have a financial union if the EU remains the “lender of last resort” to member states following a financial crisis? The answer given from Brussels is budgetary consolidation, to ensure that such problems never occur again, thus rendering any bail-outs unnecessary. Yet the IMF’s own figures show that for countries such as Greece and Ireland to attain debt ratios of 60% of GDP by 2030, they would have to maintain budgetary adjustments over 10%.
If the likes of Draghi and Barroso are to really deserve a pat on the back, then they need to enforce measures such as further fiscal union and a more powerful ECB. The argument over “more or less Europe” is becoming tiresome and to see technocrats in preparation for celebration is nauseating.
The EU needs to make decisions now and it needs to make them fast. To lumber around while sitting on the fence will no longer cut it. In fact, it never did and I imagine the founding fathers of the EC will be turning in their graves seeing EU officials commend the union as being on track while unemployment in Spain remains at 25%.
John Stephenson tweets from here: @JohnStephenso14
by Tom Gill
A showdown between the French Government and unions is looming over reforms to the country’s ‘generous’ pension system.
Strikes and protests are scheduled for September 10 in response to plans by the Socialist administration of President Francois Hollande to extend the 41.5-year contribution payment period required for a full pension and other possible changes.
Hollande has indicated he has no intention of touching the retirement age that former President Nicolas Sarkozy raised to 62 from 60, having fulfilled a campaign pledge to roll it back for those who started work early. Nor is he minded to trim annual pension increases to below inflation, another option under consideration.
Employers berate the President for timidity, and say more cuts to the system are needed to plug an expected 20 billion euro funding gap in the system by 2020.
‘We cannot wait any longer and be content with half-measures because our pension system is in a disastrous state,’ the new head of France’s Medef employers organisation Pierre Gattaz wrote in an op-ed in Le Monde newspaper this week
Medef will be making this point at a meeting with the government and unions on Monday and Tuesday, when Prime Minister Jean-Marc Ayrault is expected to formally outline the reform plans.
Gattaz said it was ‘urgent’ to review pension arrangements allowing the military, police and others to retire much younger, although Hollande is expected to leave them unchanged too.
The head of the Medef employers’ group also called for France’s state-dominated pension system to be curtailed and a bigger role given to privately funded pensions.
Public spending on pensions is 14.4 percent of output in France versus 12.9 percent in the EU.
Businesses in the eurozone’s second-largest economy, which has just exited recession, fret about a prospective rise in payroll taxes as part of the pension system reform. Gattaz claims that increasing their contributions would hurt employment further at a time when more people are out of a job in France than ever before.
And it is not just employers breathing down Hollande’s neck – the European Commission is reportedly looking for indications that the government is serious about ‘reform’ in exchange for agreeing some loosening of the country’s timetable in reigning in its deficit.
Hollande is right to fear a popular backlash against changes to the country’s pensions system. All past attempts – including under Sarkozy – have encountered weeks of demonstrations and costly industrial strikes.
But is ‘reform’ – in the modern turn-the-clock-back meaning of the word – inevitable?
First, it is important to clear up the nonsense that pensions are generous in France – the average pension is only 60 percent of working-age post-tax income, versus the 69 percent average for industrialised countries. http://uk.reuters.com/article/2013/07/21/uk-france-pensions-analysis-idUKBRE96K02W20130721
Second, companies will be able to claw back much of the rise in employer contributions (+ 0.1%, or 3 billion euros) expected in the changes, through tax breaks, and they will still be paying less than they did 20 odd years ago, point out Catherine Mills, from the University of Paris I Panthéon Sorbonne, and Frederick Rauch, editor of the journal Économie et Politique.
Third, the problem is not the cost of the system per se, but the lack of funds to underpin it. In an article in L’Humanite newspaper http://www.humanite.fr/social-eco/des-propositions-alternatives-pour-le-financement-547054 Mills and Rauch point out that this is due to rising unemployment and downward pressure on wages, the result of austerity policies pursued in France and Europe, and the fact that firms are more than ever putting shareholders before employees.
Firms now pay out twice as much to their owners and for their financing needs than on payroll taxes. Indeed, the proportion of companies’ financial resources handed out as dividends has risen from 30% to 80% since the end of the 1980s, according to a report in Alternatives Economiques. http://www.alternatives-economiques.fr/pourquoi-les-entreprises francaises_fr_art_1217_63975.html And a tidy 100 billion euros were pocketed by fat cat shareholders of France’s largest companies in the three years to 2011 alone.
The two economists calculate that a drop in the wages paid by employers of 1% costs the pension system 800 million euros in revenue. When the country has 100,000 more unemployed, the pension system loses 1 billion euros in funding. Thanks to economic rigor in France and across the Continent, the country now has over 10% out of work. ‘Thus boosting employment and wages is the key to making the pension system sustainable,’ say Mills and Rauch.
All of which implies an end to the mad, self-defeating austerity policies prevailing across Europe, and a radical ‘reform’ (in the traditional sense of the word) of the capitalist system.
Tom Gill blogs at www.revolting-europe.com
Ahead of the 2010 election much of the ‘economic debate’ was in reality a debate about the deficit and what combination of cuts and tax rises would be required to close it over what time period.
This whole spectacularly missed the point. The deficit was a symptom of wider economic problems not their cause – the real question should have been, why did we end with such a large deficit in the first place and what can be down to address that?
As the IMF has very clear shown, the UK deficit originated not from excessive public spending but from a collapse in tax revenues. And the reason the drop in taxation was so acute, was that it had become reliant on frothy asset markets and too few sectors.
In reality the UK faces three key problems – a problem of jobs and their quality, a problem of wages and a lack of investment.
The recent pick-up in growth cannot be seen as a confirmation that the government were right all along. They aimed for a rebalanced, steady and smooth recovery. Instead we had the best part of three years of economic stagnation followed by a recovery which is just as unbalanced as the growth we experienced pre-crash.
The crash was not caused by reckless driving but by problems with the car itself.
Our economy has serious problems – it is too dependent on consumer spending that is often debt funded, investment is too low, growth is too concentrated in too small an area and in too few sectors, the rewards from growth have increasingly been captured by those at the top, decision making is too short term and for too long the state has been left to pick up the pieces and paper over the cracks.
Labour at least seem to understand that we face bigger problems than simply boosting growth or reducing the deficit.
Whether one calls it ‘responsible capitalism’, ‘predistribution’, ‘economic reform’ or ‘rebalancing’, they are outlining an agenda that is about fundamentally shifting our national business model towards a higher waged, higher skilled, higher productivity path.
This is an ambitious agenda but perhaps a much harder to explain one. The tools used are more about building institutions than direct intervention. You don’t reverse 30 year trends in one parliament nor can you fundamentally alter how an economy works in one Budget.
Some people seem not to grasp this.
In February this year, Ed Miliband made one of the most thoughtful speeches on the economy I have heard from any major politician. At its core was an argument about changing the way our economy works but what grabbed people’s attention was some fiscal tinkering around the 10p tax rate.
For what it’s worth I think the economic reform agenda represents the surest, most sustainable way to generate steady growth, to protect and increase living standards and ultimately to deal with the deficit.
The big idea here is the direction of travel and the ambition not the individual policies. Each alone (whether extending training levies across sectors that want them, setting up a proper well capitalised SME and infrastructure bank, extending the living wage, changing corporate governance as outlined in the Cox Review, establishing regional banks, etc, etc) might not sound like much, but this a case of the total being more than the sum of its parts.
Too many people seem to be focussing on the trees and completely missing the woods.
A longer version of this post is here.
by Sam Fowles
We’re 21 months out from the General Election and thus far a potential Labour manifesto looks like Muller Lite to the Tories’ Deluxe Corner – a bit better for me but unlikely to rock my world.
Nowhere is this more apparent than the Welfare debate – a catalogue of Labour surrenders based on one fundamental misconception: That public policy can or should be based on “fairness”. In lackluster unison, the opponents of Iain Duncan Smith’s reforms mumble that it is unfair that families with severely disabled kids should have their welfare income limited to £500 per week. Meanwhile the Tories thunder that it’s not fair hardworking families should pay taxes so the unemployed can live on a higher income.
The trouble is; they’re both right. But only because our public debate has reduced individuals in society to the level of rats escaping a fire; each trying to make sure that someone else’s life is more unfair than ours. And Labour’s just accepted it.
But public policy isn’t about “fairness” or “unfairness”, it’s about responsibility.
The rightwing paradigm, where contributing to society is seen as an imposition which must be forced upon us, reduces people to Hobbesian savages and society to a series of punitive burdens imposed by government. In fact, the innate ability to live as a society is what makes us unique as a species. Society is not an imposition on humans, it is the essence of humanity.
It is also a responsibility to make the world better for the next generation, not because we will personally profit from it but because, if we don’t, what’s the point of us being here at all? We don’t ask why we should try to give our children a better life, we just accept that we should.
But limiting our responsibility to our blood relatives is a logical fallacy. The fact that someone shares my DNA will do nothing to protect them from winds of fortune of which I can neither conceive nor control. Thus our natural responsibility to our own children and innate responsibility to society become one and the same.
Government should be the expression of our collective responsibility. As the expression of our democratic will, government can facilitate us fulfilling our innate individual responsibility and leave us, as individuals, lots of time to indulge our irrational impulses as well.
Not for nothing did JFK urge Americans to “ask not what your country can do for you, but what you can do for your country”. In the Labour party, social responsibility should be the bedrock of our creed. Ideas like patriotism, community and national purpose should be the spiritual home of the left, yet Labour seems afraid to claim them.
We support welfare, human rights, universal healthcare and free education because – fundamentally – we believe that society advances when it co operates. We believe that, as citizens and as humans, we have a responsibility to advance society.
While appeals to Aristotelian ethics may not play so well on the doorstep, perhaps a good start might be to suggest voters (and politicians) remember their humanity.
Sam Fowles is a researcher in International Law and Politics at Queen Mary, University of London. He tweets at @SamFowles
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