Debunking George Osborne’s “Recovery”

age-of-austerity-george-osborne-desktop

George Osborne spouts some nonsense about some so-called economic recovery:

The UK economy is “turning a corner”, Chancellor George Osborne has said in a speech in London.

Mr Osborne cited “tentative signs of a balanced, broad based and sustainable recovery”, but stressed it was still the “early stages” and “plenty of risks” remained.

Mr Osborne said that recent months – which have seen more upbeat reports on the economy – had “decisively ended” questions about his economic policy.

At this point, I have absolutely no idea what he is talking about. He appears to be inhabiting a parallel universe, one entirely separated from the reality which has seen sustained unemployment about 8% for the last 5 years — that’s 2.51 million people out of work who are looking for work — and a slump worse than the one Britain experienced in the Great Depression:

Screen-shot-2013-04-25-at-10.46.07

A tiny uptick after a huge and long depression is barely anything to celebrate. It is a probabilistic certainty that after falling off a cliff and lying prone on the ground awhile, things will one day sooner or later tick upward. Five years later is much later than sooner, and we’re not even back to the level of activity that existed in 2008. It could be eight or ten years at current growth levels after the initial events of 2008 that we make it back to that level of activity. And there is no sign that unemployment will begin coming down any time soon. In the long run, the sea will once again be calm and flat but no-one knows how long away the long run will be.

You cannot cut your way to growth. You do not stimulate growth by taking money and economic activity out of the economy. That is the manner in which you instigate depression. Supplies of capital and labour are both extremely slack — this is illustrated by the extremely low level of interest rates, and the high level of unemployment. Eventually the excesses of capital and labour will be used up, and the economy will return to full-employment and growth. But eventually could be a very long time. Waiting around when capital is available at the lowest interest rates in history and while unemployment continues to number in the millions is extremely dangerous and fragilising. Maybe the uptick will continue, and we will return to 2008 levels of activity by 2016 or 2018. Yet we would still have had a lost decade, one that probably could have been avoided had we not embarked on austerity in the wrong place at the wrong time. And it is possible that things may get worse, not better.

If I had been the politician who presided over this disaster, I would have resigned and hid myself away behind a rock. And it’s not just Osborne’s failure. The British media and other political parties have mostly failed to hold Osborne’s disastrous austerity policies to account. The fact that this depression has been a greater slump than the Great Depression is not the talking point that it ought to be. Perhaps that is because all the major political parties bear some responsibility, as Labour oversaw the start of the slump from 2008 to 2010, and the Liberal Democrats and Conservatives have overseen the continuation of the slump from 2010 to 2013. Whatever the reason, it is dreadful, and individuals from all sections of society continue to suffer for this disastrous mismanagement.

About these ads

On Policy Uncertainty…

Paul Krugman says that the notion that the weak economy is due to policy uncertainty has been thoroughly debunked. The Stanford/Chicago uncertainty index has considerably fallen:

chart3

Without any considerable boost to job growth:

PayrollJobs7.13

While policy uncertainty is concerned with policy in general, and not executive policy in particular, Krugman’s analysis is that “policy uncertainty” is a thinly-veiled attempt to blame Obama for the sluggishness of the recovery:

One of the remarkable things about the ongoing economic crisis is the endless search for explanations of something that’s actually quite simple — the sluggish pace of recovery. You have a large overhang of private debt; you have a still-depressed housing sector; and you have contractionary fiscal policy. Add to this the well-established fact that recovery tends to be slow after recessions caused not by tight money but by private-sector overreach, and there’s just no mystery that needs explaining.

Yet we’ve seen an endless series of analyses declaring that there is indeed a deep mystery, and it must be Obama’s Fault. Probably the most influential of these analyses was the claim that Obama was creating “uncertainty”, and this was holding everything back.

This crude notion of policy uncertainty is often attached to the notion of the Confidence Fairy; the idea that by running large deficits, government is crowding out private investment due to fears of future tax increases. The corollary of the Confidence Fairy view is that the only way to bring back private investment is to have large-scale austerity, to solidify expectations of lower future taxes. This view has been the basis for David Cameron’s economic policy in the UK, which can only be soberly judged as a large-scale failure.

Krugman is right to trash the Confidence Fairy — austerity at this point in the business cycle is a catastrophic error, because it sucks money out of the real economy. And he’s also right to trash those who view the sluggishness of the recovery as solely Obama’s fault. But he’s wrong, I think, to throw policy uncertainty out of the window entirely as a proximate cause of some of the problem’s we’re now facing.

Broadly, policy uncertainty goes both ways. That is simply because not all entrepreneurs in the private sector are looking for or worrying about tax cuts. People are heterogeneous. While there are some entrepreneurs worried about the future trajectory of taxes, many other entrepreneurs may be hoping for fiscal stimulus either because they would expect to receive orders from the government (for example, construction firms, defence contractors, universities, energy companies) or because they would be hoping that with stimulus, more people would have money in their pockets and they would be spending it.

While this, of course, cannot explain the crisis itself, nor the long and slow deleveraging since, having a deadlocked Congress erring on the side of austerity could be a major headache for many private enterprises. The fact that the more severe austerity experienced in Europe and Britain has actually led to bigger budget deficits there could result in even deeper and greater uncertainty for businesses. Put more simply, many businessmen could be reading Paul Krugman and others like him, agreeing with their interpretations, and worrying about the confused and deadlocked approach that the Federal government has taken to the post-2007 economy, and the dangers of austerity. This could contribute to the uptick in policy uncertainty measured by the Stanford/Chicago Index experienced since 2007 just as much as Wall Street Journal-reading Republicans worrying about the Confidence Fairy and taxes.

Is the British Economy Finally Recovering?

The British government would like us to believe that the British economy is finally recovering after a quarter of 0.6% real GDP growth, which if sustained over a full year would equate to 2.4% annualised real GDP growth.

David Cameron claimed:

To accept this argument, one would have to make oneself entirely ignorant of the facts of the current economic situation. Here’s the British economy’s post-2008 real GDP growth, compared to the United States which has also experienced a relatively lukewarm, disappointing recovery:

BPbn8cdCYAAGT_S

We are still far below the 2008 peak. Even the United States has done better. Only Europe — which has adopted even greater fiscal austerity than Britain since the slump — has done worse.

On unemployment, we’re doing even worse. Since the slump, unemployment hasn’t even begun to come down:

fredgraph

The truth is that the British economy is in a depression, very similar to the one experienced in the 1930s — what Keynes called a “depressed equilibrium”. The government now — as then — is not taking the malaise seriously, and would prefer to spew meaningless slogans about “building an economy for hardworking people” instead of focusing on job creation, which is the only viable short-term route out of the slump.

When All Else Fails, Housing Bubble

Last month I asked:

So what’s Osborne’s plan to generate growth?

Today we seem to have an answer.

As Anatole Kaletsky sarcastically put it:

That’s right — aside from an underfunded infrastructure pledge, a duty cut on beer and cigarettes, and a tiny and delayed corporation tax and national insurance decrease, George Osborne’s plan is to throw money at housing and hope for the best. 

Sounds markedly similar to the American strategy following 2001 when Greenspan “created a housing bubble to replace the NASDAQ bubble”, and we all know how that ended.

I’d tend to argue that the opposite is a much better idea. Instead of propping up the housing market, Cameron and Osborne should deregulate construction and planning (getting planning permission can be a long, costly task in the UK, and planning restrictions are estimated to add up to £40,000 to house prices) so that housing prices fall (if not absolutely at least priced in median wages) and Generation Y can start getting on the housing ladder.

As Faisal Islam put it:

But alas no. Instead of using the ultra-low interest rate environment and idle resources to invest in a quality business infrastructure  — high speed broadband, roads, railways, energy — and lower unemployment, Osborne has chosen to throw his stock in with the malinvestment-loving property speculators.

Unfortunately, pumping up credit bubbles can win elections (as we saw with Bush in 2004), so this may have improved the Tory electoral chances for 2015. But in the long run, we will see this as a dire move.

Cameron’s EU Policy Uncertainty

So, David Cameron wants a referendum?

I believe that small is beautiful, and that the European Union system is big and fragile. I am all for free trade, freedom of movement and immigration. But as for regulatory, monetary and fiscal integration — which is the direction that Europe has taken, especially since the self-inflicted Euro crisis that grew out the fundamentally flawed Euro system — how can Europe be responsive to its citizens when they are so numerous, so diverse and so geographically and linguistically dispersed? How can it be viable to have the same regulatory and political framework for Poland, Spain, Austria, Britain, Denmark and Greece? Political and monetary frameworks that are local and decentralised are usually responsive and representative. Big bureaucratic juggernauts are very often clunky and unresponsive.

That means that I am quite open to the idea of Britain leaving the political union, so long as we retain the economic framework that Britain voted for in a referendum on joining the European Economic Community — the predecessor to the European Union — in the 1970s. Britain never voted for political union, and the British public has been shown again and again in polls to be broadly against such a thing.

But David Cameron’s plan for an In-Out referendum in 2017 — but only if the Conservatives win the 2015 election — is misguided. It will just create five years of totally unnecessary policy and regulatory uncertainty.

There is empirical evidence to suggest that policy uncertainty can be very damaging to the economy. A 2013 paper Scott Baker, Nicholas Bloom, and Steven Davis used automated text analysis techniques to count key words relevant to uncertainty in the media. They combined the news analysis with data from tax code changes, disagreement among economic forecasters, and information from equity option markets to create an “uncertainty index”:

UncertaintyIndex

They looked at changes to gross domestic product, private investment, industrial production and unemployment, and found that spikes in uncertainty foreshadow large and persistent declines in all four. First, GDP and private investment:

GDPInvestment

Next, industrial production and unemployment:

Policshocks

The last thing that Britain needs is five years of policy uncertainty. If Cameron wants to have a referendum on E.U. membership, why not do it now? 82% of the public favour such a referendum — presumably not only UKIP and Conservative voters, but also Liberal Democrats and Labour voters. If we vote to leave, then we leave, if we vote to stay, we stay. We — and the markets — will know exactly where we stand.

Frankly this strikes me as more of a political ploy. The Conservatives are haemorrhaging support to UKIP. They are roughly ten points behind Labour in the polls. This strange announcement just seems like an attempt by Cameron to claw back support and distract from the disastrous state of the economy which just entered a triple-dip recession and which has been depressed since 2008. Ironically, this announcement may actually worsen the economic woe.

George Osborne Cuts His Own Welfare

George Osborne, the Chancellor of the Exchequer, a man whose salary totals £134,565 receives government welfare.

But he claims he is about to give up the dole in the interests of fiscal sanity.

In an Op Ed in the Daily Mail Osborne writes:

This week my family will not receive the child benefit we’ve been getting every week since our children were born. Any household where at least one member is earning more than £60,000 will be in a similar position.

They can either choose to stop receiving child benefit, as we have done, or they can have the equivalent sum taken away through the tax system later.

Those earning between £50,000 and £60,000 will lose a portion of that child benefit cash.

It’s not an easy decision we’ve taken as a Government – these days, there aren’t any easy decisions.

Osborne’s claim is that only through contracting spending can we reduce the deficit, and only be reducing the deficit can we have a brighter future. He couldn’t be more wrong.

While it is absurd that rich men like Osborne receive child benefit that they don’t need while severely ill and seriously disabled individuals are thrown off welfare and told they are have to find work (even though unemployment is already elevated, with eighteen people applying per vacancy in 2012, so just how disabled and sick people are supposed to find work in such a depressed economy is quite a conundrum) this is merely a side issue to the wider folly of Osborne’s economic policies.

Balancing a government budget is not simple arithmetic like balancing a household budget. The two policy tools typically discussed in dealing with deficits — cutting spending, and hiking taxes — have powerful hidden effects that often (paradoxically) make deficits bigger, as has happened in the case of the extreme austerity in Greece.

If spending on welfare is cut, then the income of those who would have received that spending is cut, in turn cutting the incomes of others — shops, manufacturers, service-providers — who could have otherwise sold things to them, cutting the incomes of their suppliers, and so on.  And the government will also lose any tax revenues that would have been paid, shrinking revenue and leading to bigger deficits.

If taxes are hiked, then not only does this shrink disposable income — leading to a similar contractionary effect as welfare cuts — but it also leads to Laffer-curve-style tax avoidance, as those subjected to higher tax rates move their income offshore, and use loopholes and creative accountancy to avoid paying taxes. This too can actually drink revenue and lead to bigger deficits.

The better option is to stop trying to balance the budget using contractionary budget cuts and tax hikes and instead focus on increasing output and decreasing unemployment by growing the economy. If the economy grows significantly, and government spending remains the same, then the budget deficit will by definition close itself (and the welfare bill will by definition shrink as more people find jobs). Although the capital markets are offering governments the ability to borrow at very low rates, there is really no straight binary choice between debt-fuelled stimulus and austerity. Policies that promote growth are possible without adding a penny of debt.

  1. Attract more foreign capital into Britain — there are trillions of dollars of foreign capital in emerging markets like the middle east, Russia and China. Britain could offer British citizenship and other incentives for citizens of foreign countries that invest in the UK. Foreign capital can be used to improve British infrastructure, like improving the road, rail and broadband networks, which will in turn provide new jobs.
  2. Increase entrepreneurship — use the bailed-out part-nationalised banks as a vehicle to offer business startup loans to unemployed people. There are millions of jobless people who want to work or a start a business, but cannot because of credit conditions and the weak job market.
  3. Deregulate small business — decrease the regulatory and tax burden for new businesses. Make it easier and simpler to achieve planning permission to build new homes.

Indeed, the current government has paid lip-service to some of the above, but with few tangible results. Britain’s difficult immigration laws continue to deter foreign investment. Four years after the bailouts and in spite plenty of promises from the government, the banking sector is still not lending to small business. The overwhelming thrust of the government’s policy has been contractionary austerity. And the overwhelming result has been weakness and contraction:

uk-vs-us-real-gdp-in-current-downturn

If Cameron and Osborne don’t change their strategy — move away from trying to cut absolute government spending, and move toward trying to boost the wider economy, and so cut government spending as a percentage of GDP, then the economy is highly likely to stay depressed.

And that would be a cut to everyone’s welfare.

Thoughtcrime in Britain

A 19-year old man was arrested yesterday for the supposed crime of burning a Remembrance Poppy and posting a picture of the incident on Facebook.

A teenager arrested on Remembrance Sunday on suspicion of posting a picture of a burning poppy on Facebook is being questioned by police.

The 19-year-old was held after the image of a poppy being set ablaze by a lighter was reportedly posted online with the caption: “How about that you squadey cunts”.

Police said the man, from Canterbury, Kent, was detained on suspicion of an offence under the Malicious Communications Act after officers were contacted at about 4pm on Sunday.

This is simply dangerous, absurd and Orwellian.

It is just the latest in a succession of police actions against individuals deemed to have caused offence: mocking a collapsed footballer on Twitter; hoping that British service personnel would “die and go to hell”wearing a T-shirt that celebrated the death of two police officers; making sick jokes on Facebook about a missing child. Each time the police have arrested people for nothing more than expressing an unpopular, outrageous or offensive opinion.

Britain is setting a precedent for trampling all over free speech in the interest of enforcing public morality. Mussolini would be proud.

The point of free speech is not to protect popular speech. It is to protect us from becoming a society where the expression of unpopular, offensive and distasteful ideas is criminalised. That is the surest guard against totalitarian tendencies.

This new incident is particularly bizarre. Children are taught in school that Britain fought the Second World War to defeat fascism. They are taught that the deaths of British soldiers commemorated on Remembrance Sunday were for the cause of freedom, to defeat fascism, to defeat totalitarianism. And now we arrest people merely for making offensive comments and burning symbols?

Are we turning into the thing that we once fought? 

What has happened to free speech?

What has happened to Britain?

Are Cameron’s Economic Policies Working?

Britain has returned to growth:

But compared even to the USA — which has huge problems of its own — Britain is still mired in the depths of a depression:

An Olympic bounce does not constitute a recovery. As I noted in March, Britain is under-performing the United States — in GDP and in unemployment. Although Cameron and Osborne keep claiming that they are deficit hawks who want to cut the government deficit, the debt keeps climbing.

Defenders of Cameron’s policies might claim that we are going through a necessary structural adjustment, and that lowered GDP and elevated unemployment is necessary for a time. I agree that a structural adjustment was necessary after the financial crisis of 2008, but I see little evidence of such a thing. The over-leveraged and corrupt financial sector is still dominated by the same large players as it was before. True, many unsustainable high street firms have gone out of business, but the most unsustainable firms that had  to be bailed out — the banks and financial firms who have caused the financial crisis — have avoided liquidation. The real story here is not a structural adjustment but the slow bleeding out of the welfare state via deep and reaching cuts.

Britain has become welfare-dependent. Britain’s welfare expenditure is now over 25% of its total GDP. Multi-billion pound cuts in that figure are going to (and have) hurt GDP.

I believe countries are better with small governments and a larger private sector. The private sector consists of many, many individuals acting out their subjective economic preferences. This dynamic is largely experimental; businesses come and go, survive, thrive and die based upon their ability to stay liquid and retain a market, and this competition for demand forces innovation. The government sector is centrally directed. Governments do not have to behave like a business, they do not have to innovate or compete, as they have the power to tax and compel. (The exception to this is when governments become overrun by the representatives of private industries and corporations, who then leverage the machinations of the state to benefit corporations. When this occurs and markets become rigged in the favour of certain well-connected competitors, it matters little whether we call such industries “private sector” or “public sector”).

So I am sympathetic to the idea that Britain ought to have a smaller welfare state, and fewer transfer payments than it presently does. But the current and historical data shows very clearly that now is not the time to make such an adjustment. The time to reduce the size of the welfare state is when the economy is booming. This is the time that there is work for welfare claimants to go to. Cutting into a depressed economy might create a strong incentive for the jobless to work, but if there is little or no job creation for the jobless to go to, then what use are cuts? To reduce government deficits? If that’s the case, then why are British government deficits rising even though spending is being reduced? (The answer, of course, is falling tax revenues).

An alternative policy that would reduce unemployment and raise GDP without increasing the size of government is to force bailed-out banks sitting on huge hoards of cash to offer loans to the jobless to start their own private businesses. The money would be transferred to those who could be out working and creating wealth, but who cannot get credit through conventional channels, unlike the too-big-to-fail megabanks who are flush with credit but refuse to increase lending to the wider public. Even if the majority of these businesses were to fail, this would ensure a large boost in spending and incomes in the short run, and the few new businesses that succeed would provide employment and tax revenues for years to come. Once there is a real recovery and solid growth in GDP and in unemployment, then the government can act to decrease its size and slash its debt. Indeed, with growing tax revenues it is probable we would find that the deficit would end up decreasing itself.

Standing Up to Extradition

It took ten years, but finally Theresa May, the British Home Secretary, has denied the United States’ extradition request for Gary McKinnon, the British hacker who broke into the Pentagon and NASA.

This was an absurd case from the start, and it is awful that McKinnon, who essentially did nothing wrong other than exploit incompetence — the systems he entered had blank passwords  — had to live for ten years with the shadow of spending sixty or seventy years in a Federal Supermax.

McKinnon was searching for evidence of exotic energy and flying-saucer technology, and believes he found evidence of the latter, describing seeing images of a cigar-shaped craft:

Recently declassified documents corroborate that the United States Air Force was working on supersonic flying-saucer-type craft in the 1950s:

The aircraft, which had the code name Project 1794, was developed by the USAF and Avro Canada in the 1950s. One declassified memo, which seems to be the conclusion of initial research and prototyping, says that Project 1794 is a flying saucer capable of “between Mach 3 and Mach 4,” (2,300-3,000 mph) a service ceiling of over 100,000 feet (30,500m), and a range of around 1,000 nautical miles (1,150mi, 1850km).

Whatever the truth behind McKinnon’s claims, it is encouraging that Britain has finally stood up for its sovereignty and refused the United States’ extradition request. Britain is — at least in theory — an independent country, and not merely a corner of the America empire and there is absolutely no reason beyond dogged loyalty that the British government should be cowed into complying with American demands. America’s neoconservative policy elite have already dragged Britain into multiple stupid and awful invasions and occupations of the middle east, costing billions of pounds and thousands of lives, jeopardising Britain’s national security, and making Britain into a prime target for international terrorism. Rejecting this extradition request is a good first step toward restoring British integrity.

Competing For State Contracts is Not Competition

Here in Britain, we hear the word competition a lot. Since Margaret Thatcher, there has been a general trend — in the name of competition — toward the selling-off of utilities such as water, railway, electricity and telecoms providers. More recently, there has been a trend toward government services being provided by private companies, such as the bungled Olympic security arrangements contracted out to multinational security giant G4S, as well as work capability assessments contracted out to French IT consultancy ATOS, and the contracting-out of some medical services.

The way this works is that the government provides the funding for services, which private sector companies then bid to undertake. This is also the way in which defence contractors have historically competed for defence contracts, a sector which is renowned worldwide for its profligacy, waste and inefficiency.

This is a bizarre arrangement. Competing for government contracts is nothing like the free market. In a true market environment businesses compete for the custom of individuals based on their ability to provide the best products and services. Individuals spend their money to satisfy their needs. New businesses can generally enter the marketplace at any time, and take business away from existing competitors. Competition is beautiful, because it allows economies to quickly adjust capital, labour and resource allocation to the preferences of society based on which goods and services people choose to purchase.

Under a model where private contractors compete for government cash, this is impossible because contractors are essentially bidding for a state-backed monopoly. State bureaucrats determining which contractor will get the money is not competition; there is no market mechanism, there are no consumer preferences. Contractors are just bidding for handouts from the taxpayers’ purse based on the preferences of economic planners. Consumers cannot take their custom elsewhere, because the custom is involuntarily coming out of their taxation.

This has also been the reality of privatisation. Although I am no fan of government-controlled industry, the reality of privatisation in the UK has been the transfer of state monopolies into private hands.

One very clear example of this is telecoms infrastructure. BT Openreach, an arm of the privatised BT, has a complete state-enforced monopoly on telephone exchanges. Other telecoms providers have to lease their infrastructure in order to operate.

And the same for railways; rail lines are sold off as monopolies for ten-year periods. For travellers who want to travel by rail from one destination to another, there is no competition; there is only a state-backed monopoly operating for private profit. No competition, only endless fare hikes, delays and a complete lack of market accountability as contractors take the government cash and do whatever they want.

Ultimately, the state-backed-monopoly model seems to manifest the worst of all worlds. Costs for taxpayers remain high, budget deficits continue to grow, and utilities remain inefficient and messy. The only difference appears to be that taxpayers’ money is now being funnelled off into corporate pockets.

A free society cannot be based on economic planners allocating resources based on a bidding process. A free society is based on the state letting society allocate resources based on the market for goods and services that people want and need.