Employing Society

Originally posted on Havering Young LabourDagenham and Rainham Labour, and Young Fabians blogs.

Political earthquakes taking the form of Brexit and the US presidential election have brought inequality, globalisation and automation into public debate. Global trade and new technologies have made the world a richer place, but have failed to address the worsening domestic inequalities found in many advanced economies.

In the UK, the worst examples of domestic inequality are often found in deindustrialised areas. Already victims of global competition and then chronic underinvestment, a third punch to the gut was administered through the financial recession and following austerity. Families find themselves at increased risk of poverty by virtue of where they live, and the increasing casualisation of work doesn’t help. The increase in zero-hour contracts leave some trapped in an involuntary cycle of low paying work and unemployment. The rise in self-employment bodes ill too. The Resolution Foundation estimates that the average wages (in real terms) of the self-employed are lower now than they were in 1995.

It should be no surprise that a rage is building against the machine. For some the wheels are falling off, for others it stalled long ago. Allowing this state of affairs to continue will only drive further division in our society. Policies going forward must recognise the failure to address these inequalities over the last 40 years. It must also recognise that though cash transfers support those suffering from poverty and unemployment, they do little to change the forces at work that cause these inequalities in the first place. Structural changes are needed across the economy in order to build one that provides everyone with the choice of a fair wage and the social benefits that stable employment can bring.

One way to begin tackling inequality would be the introduction of a voluntary job guarantee, giving unemployed individuals the choice to work on public projects for their local community and improve their skills, in exchange for a socially inclusive wage. With proper implementation a job guarantee could serve as a powerful tool around which structural economic issues could be solved.

First, it promotes a minimum standard of employment. Earning your keep shouldn’t mean submitting yourself to exploitation. Giving employees an alternative would encourage firms to improve practices and compete to retain their employees, promoting higher productivity and work standards that benefit us all. Firms that can only compete because they subject employees to poor work conditions would be rooted out. In the end the job guarantee is always there to support displaced employees as the economy changes meaning nobody loses out.

The job guarantee also provides a direct channel for local investment. Administering the scheme through local agencies would ensure projects are planned around the specific needs of each community and its residents, avoiding a top-down approach. Investment wouldn’t only target structural needs, but also environmental and cultural ones which would enrich and enable communities in ways that profit-focused investment might not be able to.

Finally, and perhaps most importantly, a job guarantee is focused on the individual. The skills and interests of those on the scheme are matched to the needs of their community (with some compromise). A job isn’t just about earning an income, but also a way to develop and improve ourselves. A job can be an outlet where we share our potential and passion for the benefit of those around us.

Would we rather support others by giving them the chance to contribute to society, whilst improving their skills and knowledge?

Or do we leave them on a scrapheap of excess labour, marginalise them and sacrifice what their potential could have brought into the world?

The answer should be clear.

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There literally aren’t enough jobs to go around

There are currently 749,000 vacancies in the UK according to the Office of National Statistics (ONS).

To date, of people aged 16 to 64:

  • 1,640,308 are considered unemployed, which is defined by the ONS as ‘people without a job who have been actively seeking work within the last 4 weeks and are available to start work within the next 2 weeks‘.
  • 2,150,523 are considered to be economically inactive, but want to work. Being economically inactive is defined as ‘people not in employment who have not been seeking work within the last 4 weeks and/or are unable to start work within the next 2 weeks‘.
  • 34,791 are considered to be economically inactive, and discouraged workers. Discouraged workers are defined as  a ‘subgroup of the economically inactive population who said their main reason for not seeking work was because they believed there were no jobs available‘.

These statistics are based on self-reporting, so they are susceptible to the bias of each individual’s understanding of their situation. But let’s say it is safe to assume that on the whole, these answers are accurate (after all, they are used to shape national policy). Therefore provided they were given the appropriate opportunity, there are up to 3,825,622
people looking for work who are currently unemployed.

As a measure of unemployment of people aged 16 – 64 it would mean an unemployment rate of 9.3%, as opposed to the headline figure of 4.9%. Additionally, it means there are 5 people looking for work for each job available.

This is before part-time workers who would like more hours are included.

  • 1,143,000 of those working part time only do so because they could not find full time employment.
  • Based on a 2014 study by the ONS, on average, those how wanted more hours wanted 11.3 more hours per week.

This gives a total figure of 4,968,622 , and a rate of 12.1% for underemployment (people who would like to work more hours) in the economy.

An economy where nearly 5 million people cannot find adequate employment is not a recovering economy, despite what the current government might believe. High unemployment holds down wages and makes it easier for businesses to mistreat workers as they do not have to compete with each other to attract new employees.

Rather than being workshy or conniving benefit scroungers, many people may genuinely find it difficult to find acceptable employment. Increasing welfare bills are a symptom of the poor state of the labour market, not part of the cause. So-called ‘wealth creators’ are not creating enough jobs, and treating other humans like spare parts to be left on a shelf is not a humane or acceptable state of things. On-going mass unemployment is a direct result of the failure of governments to ensure there are enough employment opportunities for all people. It results in a permanent reduction in the potential quality of life not just for those individuals, but also the nation as a whole as we lose out on the skills, ideas, goods and services these people could have brought to the economy.


If you’d like to look up this data for yourself on the ONS website, here are the references:

Economically inactive, wants work: LFM2  ¦ Economically inactive, discouraged worker: LFL8 ¦ Unemployment level: LF2I ¦ Total population aged 16 – 64: LF2O ¦ Vacancies (excluding agriculture, forestry and fishery): AP2Y, ¦ Economically active, part time, couldn’t find full time work: YCCX

 

Unsuprisingly standard and poor

Moritz Kraemer, chief sovereign ratings officer of everyone’s favourite credit rating agency Standard & Poor’s (one of the ones that helped cause the financial crash by not rating things properly) released an opinion piece titled ‘Brexit threatens UK’s top credit rating.’

The EU referendum is a hot topic and both sides have proven themselves to be incapable of saying something that might actually help voters make an informed decision, at least in the mainstream media. Instead there is a lot of fearmongering and Mr Kraemer, not to be left out, has a pop at it too.

He mentions a lot of stuff but it was mainly these two comments that caught my eye:

“Leaving the EU, our credit agency believes, would be a negative for the U.K.’s sovereign credit rating.”

and:

“Consequently, a vote for “Leave” would likely lead Standard & Poor’s to lower the U.K.’s AAA rating… the U.K. would lose its place in the increasingly exclusive club of AAA-rated sovereigns.”

To borrow a little context from Wikipedia, a credit rating is ‘an evaluation of the credit worthiness of a debtor, predicting the debtor’s ability to pay back the debt‘.

Following this through, Kraemer believes that the UK leaving the EU would hinder the Government’s ability to pay back it’s debt, though he goes no further than stating the potential for ‘significant adverse financial and economic impact’ and ‘risks to effective, transparent and predictable policymaking’ as explanations for why.

This would be applicable if the UK borrowed money in a foreign currency, something that is at the root of the ongoing turmoil in Greece. The difference between Greece and the UK however is that the UK Government is the monopoly issuer of the currency it has borrowed in.

A simple way to describe this would be a parent who wanted to make sure their kids did their chores.

In order for their children to recieve their pocket money, they must to earn a certain amount of paper tokens. They can only earn these tokens by doing chores, as mandated by their parents.

Is it ever possible for the parents to run out of tokens they owe to their children?

Of course not. So long as the children’s parents are prepared to produce the tokens and hand them to their children, they will be able to fulfil their obligations to provide their children with tokens.

So it is the same for the UK Government. The Bank of England (an ‘independent’ subsidiary of the UK Government, but a subsidiary nonetheless) has an infinite capacity to create new money like other Central Banks, which we saw in action when they created £375 million of new money for quantitative easing.

Provided the Government’s debts are denominated in its own currency, it faces no financial constraints in being able to service them. The choice to default on the debt is a political one, not an economic one. The same is true of similar countries with their own Central Bank such as the US, Japan and Australia, among others.

This does not mean that there will not be economic effects from a Brexit vote. But let’s make our decision on facts. Not statements designed to scare and misinform.

 

Why run a deficit?

Unless you’ve been living under a rock (or living on a planet that makes sense), you will have no doubt heard repeated rhetoric over the last few years from politicians of all shades, stating that “tough decisions” must be taken to close the deficit and balance the budget.

Without prior knowledge, all these claims make sense, but all these claims do is propagate myths built on the misunderstanding that the government finances are comparable to a household, politically constraining the government’s ability to support the private sector’s ability to net save, and in turn subduing the consumer demand required to keep the economy growing.

In my previous post I covered national accounting and the zero-sum relationship between the government, private and foreign sectors. As stated there, an attempt by one or two sector to spend less than its income (i.e. save) is balanced by the remaining sector(s) spending more than it income, resulting in a deficit. On average, the private sector is a net saver, and its desire to save can be met either by a government deficit, a trade surplus, or a combination of the two. A strong trade surplus provides an alternative source of earnings for the private sector (as well as more taxes for the government) which can be saved, reducing the need for a government deficit. An example of a country like this is Germany, which has a history of running a trade surplus that helps sustain its budget surplus.

In countries with a trade deficit (typically developed countries where it is generally cheaper to import goods from abroad due to lower manufacturing costs), the ‘burden’ falls on the government to provide a source of earnings to support saving (the alternative is an increase in private debt, which increases the susceptibility of the economy to shocks), and run a deficit. A simplified illustration of the flow of money between the government and non-government sectors is shown below (note that there are other sources of income  other than taxation, but this is the primary one).

national accounts arrangement

Government spending provides a safe financial asset for the non-government sector to use as payment for goods, services, debt and taxes, as well as an asset to hold as a form of savings. The national debt simply represents the cumulative sum of all government deficits, and the sum of all financial assets (denominated in £s) held by the non-government sector. Deficit spending increases the supply of these assets in aggregate, increasing the amount that can be held for the purpose of saving. During downturns, deficit spending (this typically occurs in the form of welfare payments, which increase as more people become unemployed during a downturn) helps reverse the fall in aggregate demand by meeting the non-government sector’s desire to save, without lowering its level of spending.

So deficits, not so scary right?

I will (probably) touch on why the government can sustain its deficits, and why the size of the deficit on its own is irrelevant to the health of the economy in the next post.

National accounting: easy as pie

This is the first of at least three posts in relation to deficits and public debt. I hope by the end of this you should have enough knowledge to understand why things haven’t returned to normal since 2008. This post covers national accounts, which underpins most of what I will mention.

At the simplest level, the economy is compromised of 3 sections, namely the government sector, the non-government (private) sector, comprised of households, business firms and banks and the foreign sector (the sum of which equal to imports – exports).

Following the rules of double-book accounting (i.e. if I pay you, my balance  goes down by the amount I pay, and yours goes up by the same amount, so in the end between the two of us there is no net change in the amount of money) these sectors must (no ifs, no buts!) add up to zero. In essence, a deficit (the amount of spending that exceeds income) in one or two of the sectors must be balanced by a surplus (unspent income) in the remaining sector(s), this applies at all times.

Our current government has decided to aim for a surplus by 2020, a noble aim if you don’t understand national accounting. Unfortunately, we are currently running a trade deficit, as such, the foreign sector is running a surplus! This means we are spending more on goods abroad than we make from selling our goods abroad. Therefore for the government to derive its surplus, the private sector as a whole must run a deficit to fund the foreign sector’s and government’s surplus, so the accounts will add up to zero.

As the government’s deficit falls, the private sector’s deficit will rise, and our ability to spend less than we earn is compromised, making deleveraging (paying off our debt) increasingly difficult and, could be a driving factor in why household debt has risen so rapidly since 2010 as consumers resort to debt to make ends meet.

So next time you hear someone on TV or radio insisting on balanced budgets, what they are really doing is promoting unsustainable economic growth based on private debt, a tale that only ends in tears.

Note. There are times where running a surplus is appropriate, something I might touch on later. For a more mathematical explanation (simple algebra) of national accounting, click here.

 

A foreword for the year to come

After the 2015 General Election I realised for all my moaning about the government, I was never able to produce objective arguments against what I perceived to be wrong with their actions. I also realised criticism alone doesn’t change things, nor do idyllic ideas about how society should be, they have to be joined by pragmatic solutions fostered from evidence and debate to change things for the better. In aid of this I spent a lot of time trying to learn more about politics, and eventually I stumbled into economics.

To some degree, learning about economics led me to believe money is the root of all evil, in the sense that being born into a life of poverty can lead to exclusion from society and can force people to do things they might otherwise not have done, had they had the opportunities we take for granted. I strongly believe in the government’s role in ameliorating these conditions, but it is often held back by a desire to cling to the sometimes false safety of unreasonable orthodoxy, often maintained by misinformation. So as my little effort to push against unreasonable orthodoxy, I began this blog, to share what I learn, in the hope that someone else will gain something from it, and be able to scrutinise the actions and words of those who lead us, regardless of the colour of their tie.

2016 – Left foot forward?

As the world slowly completes its recovery from the financial battering that was 2008, we see winners like the UK and US, and losers such as Greece, victims of a dogmatic pursual of policy that defies logic, at the cost of ordinary people.

The social costs of austerity are becoming  apparent here too, and public opinion may start to turn as  enthusiasm for spending cuts falters lining the Chancellor’s road to a surplus with political obstacles, more so when the global economy appears to be a repeat of the previous decade as household debt exceeds pre-crash levels. As it stands however, Osborne is on track, with his journey certainly been aided by a splintered opposition more prone to fight amongst itself and shoot itself in the foot rather than attack the failures of the current government.

It’s not all doom and gloom though,  new Labour leader Jeremy Corbyn emerged relatively unscathed from his trial by media-stoked fire as he was catapulted from obscurity to opposition leader. Next year promises to be an interesting period in UK politics, as he continues to defy the expectations of the political class, and in doing so providing an alternative to Westminster orthodoxy and austerity.

Across the world we see similar events to Corbyn’s meteoric rise and an increase in anti-austerity movements. In Canada, the Liberal Party of Canada led by Justin Trudeau took power, on a mandate of increased deficit spending. Closer to home we had the rise of Syriza (now broken), and now Podemos in Spain. Whether this momentum can be converted into a political vehicle to bring about change will be a question for 2016, as a failure to find answers to global issues such as economic inequality, migration and terrorism (all of which in my opinion are linked to some degree) will allow right-wing populists such as Donald Trump and Marine Le Pen to gain traction and use fear of the ‘other’ to promote narratives that divide people.

Judging by the unpredictable nature of 2015, 2016 is likely to surprise to carry just as many surprises. For most of us, all we can do is grab a seat, watch, and hope the world doesn’t end in flames.

mj popcorn

Austerity rhetoric has chained the Conservatives

The ONS recently released their initial Q3 GDP growth rates for the UK, showing a fall of 0.2% from Q2 to 0.5%. The third consecutive quarter of declining growth serves to highlight the risk posed to the growth of the UK economy by Osborne’s insistence on cutting public spending in order to reach a fiscal surplus, an idea increasingly seeming to be founded on politcal, rather than economic principles.

The somewhat shaky recovery from the Great Recession makes the Chancellor’s stance on tax credits perplexing, though the bill was (fortunately) rejected by the House of Lords. In all fairness I agree that the state should not be topping up private sector wages and the increase in minimum wage (it is nowhere near the living wage, and so refuse Osborne’s rebranding) is a welcome change, but does not change the reality that the cuts are still too deep and disproportionally affect the most vulnerable.

The cutting of tax credits would remove income from low and mid-wage earners, the opposite of what is required to support consumer spending, which is vital in aiding the recovery of the economy. If consumers are able to spend more, company profits increase, promoting business growth and consequently, the hire of new employees and/or wage increases. This in turn simultaneously reduces reliance on social welfare, further increases consumer spending and bolsters government tax receipts from both individuals and businesses.

The US applied this Keynesian approach through several fiscal stimulus packages, the first under Bush immediately after the crash in 2008. The stimulus  provides for tax rebates to low- and middle-income taxpayers, as well as tax incentives to encourage business investment. The American Recovery and Reinvestment Act of 2009 followed and brought $831 billion in investment in a variety of areas including education, health, and social welfare. Met initially with criticism, there is good evidence that government investment had an overall positive (albeit imperfect) effect (1,2) on the US economy. This should have provided assurance to the British government that fiscal spending (provided it was targeted to useful infrastructure) was not as irresponsible as they might have us believe.

Nevertheless austerity is still the path we currently tread, despite evidence of the contractionary effects of austerity, and even IMF warnings about excessive austerity. These views have been echoed by Office of Budget Responsibility, whose research Bill Mitchell looks over to discuss the effects of fiscal stimulus. As a quick summary, the post makes the case for fiscal stimulus based on OBR analysis that suggests the fiscal austerity enacted by the coalition government early in their term was detrimental to growth.

At the end of all this, the Conservatives are somewhat stuck. After unexpectedly winning an election on the mandate of austerity as the fiscally responsible choice (and the Chancellor’s aim of a surplus), any talk of borrowing for a fiscal stimulus package (despite rock-bottom interest rates and oil prices) is politically incompatible with their agenda.

In demonising Labour as the party of overspending and the source of the nation’s financial woes, the Conservatives have politically blocked themselves from a vital tool that could sure up the growth of the UK economy, leaving it exposed to the global economy, and so too (somewhat ironically) his chances of becoming prime minister in 2020.