Recent Economy Articles

Why Labour should turn against HS2

by Sunny Hundal     July 4, 2013 at 8:25 am

At their summer reception yesterday, IPPR’s Nick Pearce joked to me that I finally agreed with Peter Mandelson over something.

It’s true. I’m glad that Mandelson has finally converted to an argument I’ve been making for a while: that High-Speed Rail 2 is a bad idea.

In one sense the economic and social arguments for and against HS2 have become redundant. The costs are so large and the payoff so minuscule that it’s bizarre to argue that HS2 will seriously regenerate the economy or provide massive payoffs in speed, the environment or re-balancing the economy.

It has now become an entirely political calculation. And this is where I think Labour is badly missing a trick.

The Labour leadership’s thinking in favour of HS2 is summed up by Steve Richards in the Indy today. As a senior shadow cabinet minister put it to me, we have show that Britain is still capable of (and needs!) large engineering projects and investment in infrastructure. The Labour leadership think accepting that we don’t have money to spend on HS2 would make it more difficult to make the case for other big infrastructure projects. Austerity would infect even long-term investment too.

I think that calculation has some merit. But I also think there is a strong political case against HS2.

For one, Labour could argue that the Coalition is now wasting billions on rail just so well-off people can get into London slightly quicker.

Secondly, Labour should be saying they would instead use a large chunk of the money for an unprecedented affordable house-building program. That would not only create more jobs, cost less and make life immediately easier for so many more people – it would help Labour’s key constituency of voters. Labour hasn’t committed to anything serious on house-building as yet.

Thirdly – it can be about looking prudent with money. Labour can paint HS2 as a gigantic white elephant with negligible benefits to look ‘fiscally responsible’ and prudent with money (their current obsession), instead of salami-slicing small bits of social security spending. If you want to make an impression with voters then go large – stop pussy-footing around.

If I was a Labour spokesperson I would put the argument against HS2 this way.

“Labour think HS2 has become a huge white elephant project which offers small benefits to well-off travellers who can get to London slightly faster. It doesn’t represent good value for money for ordinary taxpayers, and we admit we were too gungho about large projects in the past that did not always deliver value for money.

“We would divert a chunk of that money towards a massive housebuilding and schools programme, which offers real investment in our future and better value for taxpayers.”

BOOM! The Conservatives would be in tatters.

Why it’s problematic to claim ‘women are being hit hardest’ by the cuts

by Guest     July 3, 2013 at 8:49 am

by redpesto

Since 2010, one of the constant refrains about the recession and the impact of cuts has been on the ‘disproportionate’ impact on women. The one-day strike by public sector workers in November 2011 was billed as a ‘women’s strike’ by Dave Prentis of Unison. Yet despite all the campaigning effort, one key problem with the ‘disproportionality’ argument remains: the way in which the numbers stack up.

Katie Allen’s report in the Guardian is a typical and recent example:

Women are bearing the brunt of the government’s austerity drive in the public sector, according to figures showing that twice as many women as men have lost jobs in local government since 2010. George Osborne’s revelation in his spending review that a further 144,000 jobs are to be slashed from the public sector means there is more pain to come for women, critics say.

Data collated by the Guardian highlights the disproportionate blow to female workers. The female headcount in local government has plunged by 253,600 to 1.43 million since the coalition came to power in 2010. The number of men in local government jobs is down less than half that figure, by 104,700 to 452,300, Office for National Statistics data published by the Local Government Association shows.

This gets trickier on closer inspection. First of all, it’s clear that nearly three times as many women as men work in the local government sector to start with, even after the latest round of redundancies (in line with employment patterns within the public sector as a whole). Secondly, as a percentage of the overall local government workforce, the redundancies work out at 15% for women, and 19% for men.

Put it another way: if the number of men made redundant had matched the number of women, 45% of male public sector workers would have been sacked, in contrast to the 15% of women. On the other hand, if the number of women had matched the number of men, barely 6% of the female workforce would have lost their jobs, in comparison to 19% of men.

The repeated implication of the ‘women hit hardest’ narrative has been that it is a deliberate policy of Cameron and his Etonian chums to target women: a combination of a traditional Tory narrative of ‘a woman’s place is in the home’ allied to a casual misogyny of ‘Calm down, dear’. Drawing attention to rising female unemployment in the public sector therefore is potentially a powerful campaigning and recruitment tool to force the Coalition to change its policies.

But the biggest problem is this: the liberal/left cannot defend the public sector, let alone local government, against the Coalition’s plans simply because it employs lots of women. The gender imbalances in the public and private sector is a related, but separate issue.

The public sector has to be defended on the principles of the role of the state, the benefits of public sector spending, and the values of public service and public sector provision. It cannot be defended – or rebuilt – on the numerical equivalent of ‘women and children first’.

Osborne’s much derided English requirement for immigrants is only about scapegoating them

by Owen Tudor     July 2, 2013 at 9:09 am

One of the nastiest pieces of George Osborne’s Spending Round last week was his announcement that benefit claimants who refused to improve their English to find work would be penalised.

Nasty not so much because of its likely impact on unemployed non-Anglophones, as because he was giving a high profile to a problem which doesn’t really seem to exist.

As several people have pointed out, this isn’t sensible welfare strategy, it’s pure dog whistle anti-immigrant politics: 87% of those polled were reported by the Telegraph to back the utterly imaginary crackdown. We’re with the Joint Council for the Welfare of Immigrants (JCWI) who said:

“To make unfounded statements that portray migrants in a negative way is not only discriminatory but chips away at social cohesion and will only serve to create tensions in our society.”

The Spending Round 2013 document spells it out:

“all claimants whose poor spoken English [I’m not sure how significant the omission of written English is] is a barrier to work to improve their English language skills, with claimants mandated to attend English language courses and sanctions for those who refuse to participate.”

It will be interesting to see, when detail becomes available, how much this measure is intended to save. But as Channel 4′s fact checker pointed out, benefit claimants already face English tests, and if their language skills aren’t good enough, they are offered free English lessons currently costing the Treasury £50m a year, and if they don’t take them up they face the benefit curbs Osborne says he will introduce in 2015.

Ellie Mae O’Hagan, meanwhile, pointed out in the Guardian that her experience of working for Unite, organising migrant workers in London’s East End, suggested that people are keen to improve their English, contrary to what Osborne implied. Indeed, the cost to the Exchequer of teaching English as a Second Language (ESOL) has been cut from £300m to the current level, leaving many keen learners unable to access courses unless they can pay for it (which wouldn’t include benefit claimants.)

We’ll be discussing the part rhetoric is playing in the politics of social security cuts and the need for solidarity at a seminar on Solidarity and Social Security Cuts on the afternoon of 24 July. The speakers will include Alison Garnham of the Child Poverty Action Group and Professor Ruth Lister, from the Labour front bench in the House of Lords. Plenty of time has been allowed for discussion and debate. Places are free, but please book in advance.

The centre left still has no idea how to become relevant again

by Sunny Hundal     June 28, 2013 at 10:41 am

Jacob Hacker, a professor of political science at Yale University, is widely credited for coining the Labour buzzword ‘pre-distribution’.

He wrote an article for the Guardian a few weeks ago, as part of a talk at Peter Mandelson’s think-tank Policy Network. The most interesting part of the article for me was this bit:

Second, the third way took for granted that one could maintain the state’s role in providing public goods while also glorifying markets – especially, at least until the crash, financial markets. Then, of course, governments of all stripes bailed out those markets when things went sour. Throughout, virtually no investment was made in fostering a positive conception of the state’s role in making market work, which is actually more vital than ever in a complex global economy. The result is a crisis of legitimacy, and no political force suffers more from this crisis than the moderate left.

This point cannot be emphasised enough. The ‘moderate’ left is in a deep crisis of legitimacy that hasn’t gone away.

Even five years after 2007 we still don’t have an explanation of what went wrong in 2007 and what lessons have been learnt. Ed Miliband has made some attempt to grapple with this, but the agenda seems to have fallen by the wayside.

Now the focus is back on ‘fiscal consolidation’ and ‘tough choices’ and ‘pragmatic decisions’ and ‘public sector reform’ and so on. You know, the kind of words the Progress crowd love.

Now I’m not saying those phrases are not relevant in any way. But many on the centre left have mistaken this ongoing crisis of legitimacy (‘how did you let us get into this mess?‘) as a sign that people want to hear more of the things the centre-left loves talking about.

In other words, they say, obviously the centre-left is unpopular because we aren’t talking enough about ‘fiscal discipline’ and ‘public sector reform’ – rather than try and convince the public that we realise fucked up and have some bold ideas to promote this time around.

Ed Miliband started off down this path, and I was hopeful that he would stick with it, and develop it further to convince the public that Labour had learnt and changed.

But it seems the same people who were previously praising the bankers, disliked regulation and wanted the banks bailed out – Ed Balls is a key figure here – have gone back into their comfort zone again. Three years later there is nothing bold on reforming financial services, rebalancing the economy or a bold industrial strategy other than lots of speeches and a British Investment Bank (which the Tories are pushing anyway).

Instead of arguing about how far the UK economy needs to change to it work for ordinary people, the Labour party is spending all its time trying to explain how far they would match Osborne in every step he takes.

The centre left – I’m referring to Labour’s “centrists” here – aren’t even listening to their own people and recognising their ongoing crisis of legitimacy.

How Osborne tried to mislead us today about boosting capital spending

by Duncan Weldon     June 26, 2013 at 2:22 pm

George Osborne just made a great deal of fuss about his plans to increase capital spending from 2015/16. The immediate question is – how big is this boost?

The short answer is – there isn’t really one.

Osborne spoke repeatedly about investing £50bn a year and given current public sector net investment is around £25bn a year – these seems like an awful lot, a doubling of investment spend.

However, it appears Osborne was talking about increasing gross rather than net investment spending.

To clarify: the difference is that Depreciation is running at approximately 25bn a year. Osborne just started talking about a different measure, misleadingly.

Gross public sector net investment is around £47bn a year and was previously expected to be £50.4bn in 2015/16 according to the OBR (table 4.18).

In other words there doesn’t actually appear to be an increase in capital spending.

How very misleading.

This isn’t a real increase and it is not even scheduled to start for two years, the economy needs a boost now – not smoke and mirrors about the future.

Has overseas anger sunk Cameron’s plan to charge certain immigrants bond money?

by Natalie Bennett     June 26, 2013 at 11:54 am

From a British perspective, this news story looks like a familiar model: government floats trial balloon that it hopes will become policy in Sunday papers, it is shot down by Tuesday night, and it is remembered at most as an incidental footnote in political history.

That’s the obvious fate of the proposal, presented with the backing of Theresa May and Nick Clegg in the Sunday Times (paywall), to force visitors from India, Pakistan, Sri Lanka, Bangladesh, Nigeria and Ghana to pay a £3,000 bond before they can get a visa, to be repaid after they leave the country within the limits of its term. These states were labelled “high-risk” for over-stayers. (Labour had twice suggested similar schemes when it was in government, but they never came into being.)

David Cameron last night “slammed the brakes on the proposal”, in the terms of the Financial Times (partial paywall), on the basis that he doesn’t want to undermine “his growth agenda or the ‘open for business’ message he delivered on a recent trip to India”.

Outside the UK, in particular in the countries affected, however, the impact will, however, I’m afraid last a lot longer than the Sunday papers. That was clear to me after an appearance on Indian television last night (from London) to speak about the visa plan, when I was almost buried at times under giant gushes of anger, driven a sense of humiliation and ingratitude, from representatives of the business community, commentators and the host.

That’s widely reflected in the Indian media and blogosphere – the well-known FirstPost calling for matching retaliatory action against UK visitors. Discussion on the television show focused particularly on how the British economy could be damaged, with India being the fifth-largest source of foreign investment into Britain, and its home firm Tata the largest private-sector employer. “It seems that Britain is no longer interested [in trade],” The Economic Times quoted an unidentified CEO as saying.

Unsurprisingly, there seems to be similar anger in Nigeria, Ghana, and I’ve no doubt the other states.

I had a clear message that I hope got through to what I was told was up to 100 million viewers on The Newshour – that despite the stance of the British Government and Labour Party, both chasing after UKIP voters with astonishing desperation – the visa bond did not reflect the general view of the British public.

I was clearly stating that the Green Party is utterly opposed to the idea of the bonds – and more broadly to the government’s approach to immigration, and its attempts to drive down number of immigrants based on a single blunt target of a immigration cap, despite the damage the tactics employed are doing to industry and business, to our universities and colleges, to tourism, to the family life of many Britons, and to our international reputation.

On the specific bond idea, I pointed out that Canada had considered a similar proposal and discarded it as discriminatory, as it undoubtedly is. I understood why the Indian commentators to whom I was speaking were focusing on their own nationals’ treatment, but the selection of six predominately non-white Commonwealth countries for this special treatment – not the US or Australia or any Latin American state deserves to be highlighted.

The story by tomorrow in Britain will have disappeared. Its impact around the globe will take a lot longer to fade.

Three major things I’ve learnt from recent Labour speeches

by Duncan Weldon     June 24, 2013 at 3:23 pm

Following major speeches from Ed Balls and Ed Miliband a couple of weeks ago, the shape of Labour’s economic policy is becoming clearer. Another intervention from Ed Miliband this weekend provided more clarity.

So, what have we learned in the last month? I think there are three key takeaways.

The first is a new emphasis from Labour on the importance of capital spending – an emphasis which makes a great deal of economic sense.

This was evident in Ed Balls’ Reuters’ speech. Whether one uses the multiplier estimates of the OBR, the IMF or any other major forecaster the evidence is clear – capital spending has the highest multiplier. In other words, it is the most effective way to support growth.

One disadvantage of capital spending as a way to support the economy has always been the supposed lag in terms of a lack of ‘shovel ready’ projects. This is less of an issue at present with an obvious, clear and pressing need to build more affordable and social housing and also the convenient existence of the National Infrastructure Plan providing a list of potential projects.

When the challenge is to embed, sustain and accelerate a recovery rather than prevent the economy falling off a cliff, there is a clear case for capital spending over VAT cuts as a form of fiscal support.

Another obvious advantage of capital spending is that it not only boosts growth in the short run through its impact on demand but also can provide longer term benefits. A VAT cut boosts growth, but capital spending also provides some form of longer term asset – be it more houses, better infrastructure or more roads.

The second part of Labour’s emerging policy position is a nod towards new fiscal rules.

This is often presented as Labour accepting Coalition spending plans, but I’m not at all sure this is the case. It is worth remembering that the forthcoming CSR is only taking spending to 2015/16 and, under the current fiscal framework, even more savage cuts are required in the following years.

In many ways the current framework is the worst of all worlds – too flexible to actually ‘deal with the debt’ but too short term to allow any support for growth. It is perfectly possible to design a better framework – one that acts over a longer period, is responsive to the economy and which recognises the key role of growth in getting the debt/GDP ratio down in a sustainable way.

Such a framework might start by targeting lower debt/GDP by, say 2025, as suggested by Nick Pearce (£).

As I’ve often argued – a short term focus on debt risks the UK underinvesting in its future. You can’t cut your way to victory in the ‘global race’ the Prime Minister is so keen to remind us of.

The final element in Labour’s emerging position is perhaps the most important. What is often called ‘responsible capitalism’ but what cools be thought of as ‘supply side reform’. Something I’ve written about at some length over the past year.

It is important to remember that as well as a pressing problem of weak demand, the UK faces deeper problems. Things were starting to go wrong well before 2008 – median wages stagnated, consumer debt rose, the economy was unbalanced. Fixing these wider problems requires more than a new fiscal policy. It needs wider changes to our national business model.

Questions of course remain – what role does taxation play on Labour’s plans? What will their fiscal rules look like? How do they see the role of monetary policy? But the outline of the agenda is now pretty clear.

A longer version of this blog post is at Touchstone blog.

Ed Miliband’s decision on Osborne’s cuts is economic nonsense and political folly

by Sunny Hundal     June 22, 2013 at 8:29 pm

Ed Miliband made a significant speech today, saying at the National Policy Forum:

If we win the election, we will come to power in tougher economic circumstances than we have seen in generations and that will have to shape the way that we govern.

Our starting point for 2015-16 will be that we cannot reverse any cut in day to day, current spending unless it is fully funded from cuts elsewhere or extra revenue – not from more borrowing.

So when George Osborne stands up next week and announces his cuts in day to day spending, we won’t be able to promise now to reverse them because we can only do so when we can be absolutely crystal clear about where the money is coming from.

This is economic nonsense and political folly.

It makes little sense economically because the government can borrow cheaply, while the economy is suffering from a lack of demand. Borrowing some money to reverse some of the welfare cuts and put money back into people’s hands would be the quickest boost to the economy.

But won’t Labour borrow for capital spending and boost the economy that way? Sure, it will. But the impact of that wouldn’t be felt until years later while people are still suffering. Capital projects usually take years to bear fruition, and will also run into local opposition (and Labour wants to give locals more power to oppose projects too).

I recently asked the economist Jonathan Portes what impact a cut such as freezing public sector pay would have.
He wrote back:

Like most economists, I don’t think pay freezes are a great idea – especially for a prolonged period and of course this would be 5 years or so on. By all means have tight overall spending controls for programmes, departments, etc – but freezing (or constraining to a very low level) pay within that just creates rigidities, and that in turn creates perverse incentives to get round the rigidities (hiring consultants and so on).

Of course, if a pay freeze let you reduce spending overall, it would reduce aggregate demand.

In effect, Labour will continue to back Osborne’s policy of reducing demand in the economy by keeping the welfare cuts. Keep spending down would continue to hurt the economy and hurt the most vulnerable in our society – an argument that Labour has been making until now (but won’t anymore).

Political folly

1) This will alienate voters who abandoned the Coalition (especially the Lib Dems) because they did not like the cuts they were making to welfare. What incentive do they have to stick with Labour? A vague promise to build more houses?

2) The announcement is made just as the deepest cuts to public services are coming in – but Labour activists, councillors and MPs cannot credibly criticise the coming cuts as Tories will simply respond by saying that Labour is matching the cuts.

3) The messaging is conflicted too. On one hand Labour is borrowing more money (for capital spending) but on the other it refuses to do so. Is it borrowing more money or not? Yes it is. That’s all the Tories will ask. And Labour’s attempt to respond with a nuanced think-tank answer will go over the heads of most people.

4) Rather than having a debate about how our current style of capitalism is failing us, Labour is having a debate about the size of the state. Labour will have to spend the next two years explaining its confused position on borrowing and deficit reduction – a debate it cannot win.

Britain’s crisis: real wages have been falling for 40 months

by Duncan Weldon     June 19, 2013 at 9:28 am

As the TUC noted yesterday real wages in the UK have been falling for 40 months.

The last time average wages grew by more than inflation came all the way back in November 2009.

The chart below provides some context to this, it uses data from the Bank of England’s Three Centuries of Data spreadsheet to show inflation (in this case CPI), wage growth and real wage growth from 1855 to 2009.

We are now in our fourth year of falling real wages, something which hasn’t happened since the ’70s.

The 1870s that is.

The last real wage squeeze of this duration seems to have been 1875-1878.

This is why the TUC’s latest campaign is entitled, Britain Needs a Pay Rise.

So how did Quantitative Easing work out for us?

by Dan McCurry     June 17, 2013 at 11:10 am

So the era of ‘Quantitative Easing’ seems to be coming to an end.

In time to come people will ask, “Did you really just turn on the printing press, and let it rip?”

They’ll say, “Oh, yes. Three hundred and seventy five billion worth. We know a good thing.”

“Wow! And what did you spend it on? Cathedrals? Bridges? Space exploration?”

“Nah, we just gave it away to the bankers.”

“Really”, they’ll ask. “Why was that?”

“Convention. When high street lending seized up, we needed to get money into the system, we printed tons of the stuff and bought gilts from the high street banks for massively over-the-top prices. That way they had money to start lending again.”

“So at least you got them lending again.”

“Well, no. Not quite. It turns out that the people asking for loans were unrealistic. Like the ones you see on Dragon’s Den who don’t know what day of the week it is. The £375 billion we gave to the bankers ended up in the stock market instead. But the good thing is that the bankers absolutely loved it. Money for free.”

“But why didn’t the realistic companies want loans?”

“Because they were all cutting back. Austerity scared them shitless, so they didn’t want to invest, which caused more austerity and so on.”

“But surely, you could have built 200 St Paul’s Cathedrals with that kind of money. At £30m a mile, we could have had 12,500 miles of motorways. Eleven new HS2 train lines could have been built. The economy would have taken off with that kind of money.”

“True, but it would have looked like a Plan B. So we knocked that one the head straight away.”

“So you gave £375 billion to the bankers rather than be seen to do a plan B?”

“You bet we did. The bankers loved us for it. The stock market went ape.”

“So did that solve the problems?”

“It made sure there was enough money in the economy. The problem was that it didn’t cause the money to move about. There was no circulation. The money went to one part of the economy and kind of sat there. The money was sticky.”

“Wow. Well I think that was a major cock up. The electorate must have been furious?”

“Nah. They didn’t understand it. The politics worked out fantastic for us Tories.”

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