Recent Economy Articles
Today’s GDP figures were certainly better than expected, with growth of +0.3% topping the estimates of most economists. But noting that something was better than expected does not mean it qualifies as ‘good news’.
The fact that avoiding an unprecedented ‘triple dip’ is celebrated as a sign of success suggests that expectations really are on the floor. This is like coming last in a race and announcing ‘well, at least I didn’t fall over and break my leg’.
Growth of +0.3% takes the economy back to where it was 6 months ago, before the fall in Q4 2012. We have had no growth in the past 6 months, only 0.4% growth in the past 18 months and just 1.8% in the 11 quarters since George Osborne’s first Budget.
Since the Government took office, the manufacturing sector has contracted by 0.3%, construction output is down a huge 9.7% and the service sector has grown by 3.6%. There are no signs of the much hoped for ‘rebalancing’.
As Will Straw notes at Left Foot Forward this is an historically weak recovery.
The recovery is also much, much weaker than the OBR originally expected. The original estimate for 2013 growth was 2.9%. Even after today’s figures we’ll be extremely lucky to get even half of that.
And for all the talk of a ‘global race’ – our growth compares very poorly to other large economies.
Whether measured by historical experience, expectations or international comparisons the UK’s recent economy performance has been abysmal.
by John Clarke
The Government’s interest in fiction seems only to apply to economics. Now we have the Culture Secretary, Maria Miller, demanding, in a speech this morning at the British Museum, that leading figures in the arts show the value of culture to the UK economy.
It sounds like a sensible idea. Unfortunately, but to a large extent it’s impossible to do.
And I don’t just mean in the sense of how cultural activities enrich our lives, I mean at the crude economic level Maria Miller is talking about.
The problem is that looking at arts through an economic lens means making predictions about future performance. In reality you can’t predict winners in the arts industry.
Research done on the US film industry tells us that the economics of this is essentially unpredictable. Arthur De Vany, Professor of Economics at the University of California, has written extensively on film economics.
In Hollywood Economics De Vany writes: ‘Anyone who claims to forecast anything about a movie before it is released is a fraud or doesn’t know what he is doing. The margin of error is infinite.’
The variables are huge. This is because capturing an audience is difficult. There are so many different things to consider. What if the artistic product is simply a bomb? What if cultural interests of the public change while the product is being developed? What if they product is good but it doesn’t get the word of mouth or the coverage in newspapers necessary for people to learn about it?
His arguments can also apply to plays, television, music or any other art form you care to mention.
On Radio 4′s Today this morning it was pointed out that huge successes like One Man, Two Guvnors and War Horse were only taken on by the National Theatre because no commercial producers saw them as financially viable.
Indeed, there are so many failures that the successful products often end up covering for the flops. The more activity there is in the arts the more likely there is to be major successes like The King’s Speech.
Just look at what happened when the UK Film Council was abolished in 2010. Film production in the UK is down 30% on 2011 levels. While there are broader economic factors at play, Paul Brett, a director of the film production and financing company Prescience, puts it down to the scrapping of the Council.
This is not to say that money should be chucked at the arts without any accountability.
The money needs to be allocated in a sensible way by experts, but doing this expecting a strict return on investment is self defeating.
Last week political news focused on a report in the Independent, claiming that Labour will pledge to go into the next election with higher spending plans than the Conservatives.
It gave a preview of forthcoming research from the Fabians:
Arguing the cuts may be unnecessary, the study says that, if the economy is growing by about 2 per cent annually, public spending could rise by 1 per cent a year and Labour could achieve Mr Osborne’s target of seeing debt falling by 2016-17 two years later or sooner than 2018-19 if taxes were increased.
Leaving aside the likely political brouhaha over what this analysis means for the politics of 2015, it is an important contribution to the economics of 2015.
The political debate on whether or not parties should sign up to the Coalition spending plans beyond 2015 is currently crowding out a much more important fact â€“ the UK no longer has a fiscal framework that is fit for purpose.
In effect many are now arguing that policymakers should buy themselves ‘fiscal credibility’ by signing up to a fiscal framework which is failing to reduce the deficit. This seems to me an odd state of affairs.
The Government originally said it would have reduced borrowing to £37bn by 2014/15; the latest estimate is for annual borrowing of £108bn in that year. Cumulatively the Government is set to borrow around £250bn more than it intended.
The current framework is not working, even on its own terms.
Partially this is because many seem to assume that reducing the deficit is simply a result of taking ‘tough choices’ and making spending cuts. But when the economy is weak then the multiplier on government spending is higher and making cuts now simply reduces growth, pushes up unemployment and makes ‘dealing with our debts’ harder, not easier.
Austerity keeps being extended and yet some people continue to argue that setting unrealistic targets and then missing them is the best way to ensure that you are seen as credible.
But the problems with the current framework don’t stop here. I would go further and argue that the structural deficit itself is the wrong target. The structural deficit is not something that can be measured, it is only something that can be estimated and those estimates are highly uncertain.
Those arguing that policymakers should sign up to the current fiscal plans are in effect arguing that policymakers should sign up to a fiscal framework that has failed to reduce the deficit anywhere as much as promised, that binds in tight austerity, that is targeting the wrong measure and that is subject to heavy revision.
The real question that should be asked of policymakers is not, ‘do you sign up to the Government’s current spending plans?’ But instead, ‘what is your proposed framework?’
A longer version of this post is here.
I’ve argued before that if I was forced to choose just one graph to understand the UK economy over the last two and half decades, the one I’d go for is the household savings ratio.
I’ve marked the three stages of the UK economy since 1992. The ‘great moderation’ of unbroken growth from 1992 to 2008 – characterised by a falling savings ratio, the sharp recession of 2008/09 – with a rapidly rising savings ratio and the virtual stagnation of 2010-2012 -complete with flat-ish savings ratio.
In the absence of either strong growth in household incomes (which looks unlikely at the moment) or extremely rapid rebalancing towards investment and net trade (also looking unlikely at the moment) then this chart will almost certainly continue to be one of the most important indicators for the UK economy.
If the household savings ratio remains broadly flat then so will the economy, if if suddenly rises again then renewed recession is likely and if it starts to drift downwards then household spending will rise quicker than household incomes providing a boost to growth.
I don’t think I’m the only one who has noticed this. It is hard to read current Treasury policy on the housing market as anything other than an attempt to drive down down the household savings ratio by encouraging more mortgage borrowing. Rebalancing, as I noted after the budget, has been all but abandoned.
Last week’s forecasts from the Item Club confirmed this. The International Business Times noted that rebalancing is ‘on hold’ whilst the “government’s influence on the housing market could spike consumer spending and engender a faster recovery than many UK businesses are currently anticipating”.
The question then becomes – are policies that drive down the household savings ratio desirable? And here I think the answer is far from clear.
Of course faster consumer spending would provide a boost to GDP in the short to medium term but in the longer term is rising household debt not one of the key factors behind the mess we are now in?
In the long run a recovery will only be sustainable if it is build on the solid foundations of rising household incomes. Sadly that doesn’t look to be happening anytime soon.
The measly 1% rise in the national minimum wage for young people is only going to make work less attractive in London, and push up the benefit bill. If the minimum wage was raised to a genuine living wage, the Government would be £2.3bn better off each year.
Raising the minimum wage below inflation is bound to put a strain on the in-work benefits bill. This will be most true in places like London, where the cost of living is far above the national average.
Imagine you’re 19 years old, it’s October and you’re earning the new minimum wage. Each month over half of your take-home pay will go on rent for a room in a flatshare, costing you at least £100 more than the national average.
A couple both earning the minimum wage would be left with £89 a month after paying the rent on a 3 bed home in London. The national average rent would leave them with £1,130. Try to imagine paying your all the month’s bills – council tax, utilities, transport, clothes, food – out of the remaining £89.
You can see just how unaffordable London’s rents are on my rent map.
We square the circle with tax credits, housing benefit and other welfare payments. We subsidise landlords’ high rents and employers’ low wages, but neither the Mayor of London nor the Government are really tackling.
As in recent years, low wages and high rents will just drive up the housing benefit bill and make life even harder for the estimated 700,000 people earning less than the London Living Wage in the capital.
But the IPPR and Resolution Foundation looked at whether this makes sense for the public purse.
They calculated that if the minimum wage was a genuine living wage, the gross savings on the benefit bill and the extra tax revenue would add up to £3.6bn a year. Take off the higher public sector wage bill and you get a net saving of £2.2bn.
A compulsory living wage could be combined with policies to reduce rent rises, like stabilising rent controls common on the continent. The Mayor of London should be shouting these ideas from the rooftops.
by Stewart Lansley
Margaret Thatcher will surely be remembered, above all, as the architect (along with Ronald Reagan) of the modern market economy. Her prime goal was to shift Britain from the post-war era of ‘managed’ to one of ‘market capitalism`.
From 1980, the British economy was turned into a real life laboratory in a prolonged experiment designed to free up markets, weaken the state and role back the power of collective bargaining. The rich were allowed to get much richer, inequality rose and the share of output going to wages shrank.
The experiment – continued by new Labour from 1997 – was launched with an intoxicating promise: it would correct for the failings of post-war welfarism, lift Britain out of its tepid entrepreneurial culture and bring renewed economic dynamism. Such was its influence, the model was eventually copied, at least in part, by a majority of other rich nations.
The big question, of course, is has the theory worked? The answer is no.
On every count bar inflation, the much heralded promises have failed to materialize. Inflation rates have fallen, but on all other measures, the economic record of market capitalism has been poorer than its predecessor. The main outcome of 30 years of blind-eye regulation, axed controls over business and a weakening of collective bargaining has been an economy that is both more unequal and more fragile and prone to crisis.
In the post-war era, the UK’s growth rate averaged 3 per cent a year. Since 1980, it has averaged 2.2 per cent. Why? Because productivity rates have fallen. Despite greater market freedom, and a growing profit share, productivity growth ( the rate of increase of productive capacity ) has averaged 1.9 per cent a year from 1980-2008 compared with an annual average rise of 3 per cent from 1961-1973.
Rising corporate profits were to be the means by which the love affair with markets would deliver economic renaissance. Yet burgeoning profits have been associated with falling investment, a decline in spending on R&D and at best a marginal boost to entrepreneurship.
Figure 1: The record on productivity: ( growth in productivity per annum, UK, )
As a result of the slower growth, unemployment levels have jumped from an average of 1.6 per cent in the immediate post-war era ( from 1950 to 1973 ) to an average of 7.8 per cent since 1980, a near five-fold rise. This is despite a steady fall in the share of national output accruing to wage-earners, a trend that was designed to unleash a new era of job creation. .
Crucially, the record on economic turbulence is also much poorer. IN the two decades from 1950, the UK economy experienced only three shallow and short-lived recessions, with output falling by 1.4 per cent in 1956, 0.9 per cent in 1967, and by 0.7 per cent in 1961. In contrast, the post-1980 decades have seen much more prolonged and severe economic shocks: in 1980-1981, output fell by 4.7 per cent; in 1990-1991, by 2.5 per cent; and in 2008-2009 by 6.4 per cent.
Figure 3: The record on recessions ( percentage fall in output )
The evidence is that the present crisis has its roots in the fanfare economic changes launched during the 1980s. Far from a more vibrant and robust economy, the great market experiment has landed the nation with an economy that is much more fragile and turbulent than the one it replaced.
The promise of rising prosperity for all has in fact meant soaring wealth for the few. Mrs Thatcher may have set about her transformation of Britain with the deepest of convictions, but she has left a model of capitalism that is deeply flawed and no longer sustainable.
Stewart Lansley is a visiting fellow at Bristol University and the author of The Cost of Inequality, Gibson Square.
There is a danger in over-stating the impact Margaret Thatcher had on British politics, I think, because it can reinforce the view that progress can only take place in the direction she wanted. There’s a danger in accepting that settlement as the final one.
But history rarely moves in one direction and we can make the mistake of viewing it in a very narrow context.
Margaret Thatcher’s economic policies were guided by one principle: that wealth will ‘trickle down’ to the masses from the top. She believed that if the rich and super-rich prospered the rising tide would life all boats.
New Labour bought into this fantasy, epitomised by Mandelson’s infamous remark that they were “intensely relaxed about people getting filthy rich as long as they pay their taxes”. In practice of course, the super-rich were highly averse to paying their taxes and the entire philosophy turned out to be a sham.
This graph by the Resolution Foundation puts it more starkly.
[average annual pay rise/cut and equivalent year-on-year % change for each group]
A George Eaton also points out today, inequality jumped during the Thatcher years, and was only mildly stemmed by New Labour.
Ronald Reagan and Margaret Thatcher’s guiding philosophy of ‘trickle down economics’ has dominated for the last 30 years, but it’s also important to remember that the tide is turning. And most significantly it is turning in the United States, the biggest advocate for free-market capitalism.
Before Obama was re-elected he repeatedly railed against ‘trickle down economics‘ – creating a dividing line between him and the Republicans. While they defended bonuses and tax breaks for the super-rich, Obama said ordinary people were suffering.
If only we cut more regulations and cut more taxes – especially for the wealthy – our economy will grow stronger. Sure, there will be winners and losers. But if the winners do really well, jobs and prosperity will eventually trickle down to everyone else.
It’s a simple theory – one that speaks to our rugged individualism and healthy skepticism of too much government. And that theory fits well on a bumper sticker. Here’s the problem: It doesn’t work. It has never worked.
Labour too is breaking with the old consensus with some courage. Two years ago Ed Miliband’s chief advisor Stewart Wood called neo-liberalism ‘the god that failed‘.
At Ed Miliband’s big speech on the economy last year, he said: “We can’t succeed as a country just by hoping wealth will trickle down from those at the top to everyone else our economy won’t turn around that way.”
Rejecting this key tenet of Reaganism/Thatcherism is no longer heresy in in Democratic or the Labour party. It has taken them a while, due to various reasons, but the statistics and reality is stark. It’ll be a little while before Conservatives also accept the evidence, though some like Charles Moore have already started down that road.
Although Thatcher’s legacy has carried on, it may not have the long shelf-life that Conservatives assume, or hope.
The Labour Party is rarely confident in talking about social security or immigration. This is mostly because the Conservatives set the agenda and Labour try a confused, nuanced position in response.
But the real reason they lose before they even go into battle is because their fear is palpable. They’re instantly on the defensive. Journalists can see it and voters can see it. Labour are responding to the other side’s points and therefore explaining themselves. In politics, if you’re explaining, you’re losing.
You’re also losing if you’re complaining (on both immigration or welfare) that voters don’t know the facts.
Furthermore, if you’re trying to neutralise Tory complaints against you, as Tom Harris, Liam Byrne and Simon Danczuk are trying to do – you’re also losing. It reinforces Tory lies, looks insincere and doesn’t convince the electorate. It never worked during New Labour years either.
So what can Labour do?
Sonia Sodha (a former advisor to Ed M) says Labour should 1) change the debate to in-work benefits by championing and highlighting individual stories 2) propose useful policies such as committing to raise the minimum wage.
Both are great ideas but I would go further.
I was talking to someone last night and made a simple point: Conservatives were not serious about cutting the welfare bill. This caught him off-guard because I was expected to play defensive than offensive. But it’s true for two reasons.
Firstly, the best way to cut the welfare bill is to grow the economy and get people into well-paid jobs. The Tories have utterly failed to grow the economy, and their budgets have consistently been rated by the OBR and IFS as being neutral on growth. Plus, many of the jobs people have gotten since 2010 have been low-paid / self-employed / Workfare ‘jobs’. That just grows the inow-rk-benefits bill. The reality behind Osborne’s jobs creation claims isn’t so rosy either. They have no serious ideas about growing the economy and this should be hammered repeatedly.
Secondly, over half of the welfare bill is spent on pensions. If they were serious about cutting the welfare bill they’d start by means-testing pensions and cutting it for rich pensioners. If they were serious they’d cut the Winter Fuel Allowance and Freedom passes for rich pensioners. That would cut the welfare bill much more significantly.
The government is instead focusing on a very small proportion of social security spending and hoping the focus remains there. They want the focus on job-seekers and disabled people knowing that the rest will find it easy to demonise that small vulnerable minority too.
You can smell Labour’s confusion and fear a mile off. For example, Simon Danczuk dismisses the Left and Owen Jones for focusing on jobs, and then explains how he wants to… er, create jobs. They know they can’t win this arms race on Tory terms, and yet some ridiculous individuals are urging them into battle anyway.
You don’t win by playing defensive – you win by going on the offensive. And Labour can only do that by hammering that Tories aren’t serious about cutting the welfare budget, and then explain why. If they force the debate on to jobs and rich pensioners, it will be the Tory turn to panic.
The BBC is right to conclude in its Great Class Calculator that simplistic brackets such as upper, middle and working class no longer accurately reflect 21st century occupations and lifestyles.
But the Beeb’s alternative shows a poor understanding of how class actually operates.
Relying heavily on home ownership, salary and savings, the BBC takes a snapshot of people at a particular time.
But conspicuously missing from the BBC poll are questions about education and family wealth and the power they convey.
Let’s take the example of Benedict Whitehall. He went through Eton and Oxford, his family own an estate in Surrey, a villa in Tuscany and a successful business empire which he stands to inherit. He’s just graduated and has landed his first job as a junior researcher at a think tank. Because the BBC’s poll takes a snapshot of his relatively low pay and the fact he doesn’t yet own a home, he is deemed to be of a lower class than a train driver on £40,000 a year with a mortgage.
But Benedict will go on to inherit millions. He will use the contacts he made at Eton and Oxford to propel him through the ranks of the think tank until he is parachuted into a safe Conservative seat and he works his way to the front benches where he will wield considerable economic and political power. By this point he will no longer be deemed an emergent service worker (second from bottom), but an elite.
In this way, the BBC implies a level of social mobility which sadly doesn’t exist in society for all that has happened in the last decades to break down traditional class structures. Benedict was born an elite and he will die an elite.
And what of the media which is meant to hold these elites to account? Most journalists must spend their first couple of years working for free building up credits and contacts to break into the industry. Working for little to no money and renting expensive London accommodation, the BBC’s class calculator would place them at the bottom of the heap in the precariat. But how many of those journalists are eking out their precarious existences without generous parental support? Is the media really as open as the BBC would seem to be suggesting to such poor, disenfranchised people?
This is the real social divide which exists with out-of-touch millionaire politicians and their media pals.
by Jack Eddy
“This is the reality we live in and we need to live within our means. Everyone will need to shoulder some of the burden and the top 10% are shouldering the most”.
This is the line (albeit paraphrased) that struck me whilst listening to BBC Radio 4′s World at One, moments after Osborne’s speech yesterday about why the new Benefit Reform was necessary and fair.
Putting aside for a moment the fact that “living within our means” apparently translates to placing enormous pressure on the poor and very poor alike – people who can’t fight back, who remain under-represented in Politics and utterly misrepresented in the Media and popular imagination.
What rung a bell the most was the fundamental juxtaposition underlining Tory economic policy, summed up by the quotation above. How can the rich shoulder the most burden when they receive a large Tax-cut in the very same week that the poor are on the receiving end of the most substantial benefits “reform” in a generation?
I realise that my understanding of economics is far from expert, but honestly, how does that logic work? Where is the top 10%’s burden? How are they shouldering their fair share if they are not paying as much?
The old ideology that those who don’t or can’t work and depend upon the state to live are merely lazy or stupid is alive and kicking in the 21st Century. Indeed, it remains fundamental to just about everything this Government has done to date.
Now nobody is saying that there are not some abuses of the system. Of course there are. There have been abuses of every “system” that has ever existed. However, to even acknowledge the fact that fraud in Welfare Budget comes to a minute 1% (or less) is somehow enough to vindicate not only these reforms, but the ideology that stands behind them.
This entire situation seems all the more absurd when we consider that the government only hopes to save £500 million a year from the Bedroom Tax.
And yet, somehow, issues surrounding Tax-Avoidance and Evasion, which is much more frequent than Benefit Fraud, and takes at least an estimated £120bn out of government revenues every year, not to mention the 50p Tax-Rate, being dropped to 45p by Osborne because it raised only £1bn a year, are all but forgotten.
In fact, if we only consider the axing of the 50p Tax-Rate, the numbers clearly don’t add up.
Why go to so much trouble and cause so much trauma to impose reforms that only stand to save half a billion pounds, whilst dropping an upper class tax that already raises twice that, if it is not ideologically motivated and self-serving?
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