Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Saturday 13 May 2023
Sunday 4 December 2022
Saturday 18 June 2022
Monday 16 May 2022
Wednesday 4 May 2022
Monday 20 December 2021
Wednesday 20 October 2021
Sunday 17 October 2021
Monday 20 September 2021
Saturday 26 June 2021
Tuesday 1 June 2021
1 A new economic era: is inflation coming back for good?
Chris Giles in The FT
The December meeting of the Federal Reserve’s most important economic committee was routine. Policymakers agreed that the economy could cope with rising levels of spending “without any strong general upward pressure on prices”.
Although prices of a few raw materials were rising sharply, “finished goods have not been subject to pervasive upward cost pressures”.
Generalised inflation, the committee concluded, was not a serious concern.
This meeting of the Federal Open Market Committee was held on December 15 1964, just two weeks before the start of a 17-year period the Fed now dubs The Great Inflation. Inflation:
Turning points in price trends tend to occur just at the moment when the authorities and expert opinion dismiss the risks. The current consensus is that price rises in commodities and goods markets have clear pandemic-related explanations and that the risks of a resurgence in global inflation remains remote.
Three decades after the authorities in advanced economies managed to suppress the beast, they remain confident they are in control. The mantra of the moment is summed up by Andrew Bailey, Bank of England governor, who likes to say he is watching inflation “extremely carefully” but not worrying.
This view is still the mainstream but it is losing supporters. One notable recent defector is Roger Bootle, author of the book The Death of Inflation, who spotted the coming decline in price rises in the mid 1990s. He is now worried. “Financial markets are going to have to get used to the return of troublesome issues that had, until recently, seemed long dead,” Bootle wrote in May.
Central bankers have not had to deal with an inflation problem during their careers. Having averaged around 10 per cent a year in the 1970s and 1980s, global inflation rates fell to an average close to 5 per cent in the 1990s in the rich world countries of the OECD, 3 per cent in the 2000s and 2 per cent in the 2010s. The question today is whether their view is complacent. Is the world entering another inflationary era?
While many households think the definition of price stability would be an absence of inflation, economists and policymakers favour a gentle annual increase in prices of around 2 per cent. This reduces the risk that an economic crisis could spark a deflationary spiral with spending, prices and wages all falling, raising the real burden of debts and further hitting spending. Holger Schmieding, chief economist of Berenberg Bank, explains that a little inflation also greases the wheels of the economy, allowing declining sectors to fall behind gracefully.
“Higher inflation eases economic adjustments as it creates more scope for changes in relative wages without a need for an outright fall in wages in sectors under pressure,” he says.
In most advanced economies — the US, the eurozone and Japan — central banks have fallen short of meeting their targets of inflation of around 2 per cent despite having slashed interest rates to zero and having created trillions of dollars, euros and yen, which has been pumped it into their economies by purchasing government debt. A modest rise in inflation therefore would be welcomed by central banks, which have generally been delegated the task of achieving price stability.
And until this year, the main economic concern regarding prices was the risk that countries were turning Japanese and might soon emulate the nation’s 30-year struggle with mild deflation. Such was the difficulty of keeping inflation high enough that some economists even began to question the doctrine of Ben Bernanke, former Fed chair, who argued in 2002 that “under a paper-money system, a determined government can always generate higher spending and hence positive inflation”.
But this view of the world has turned on its head in 2021. A new whatever-it-takes borrowing and spending programme by the Biden administration, enforced savings during the coronavirus crisis giving households additional firepower, bottlenecks in the supply of goods and a reversal of longstanding downward pressures on global wages and prices have rekindled fears of excessive inflation.
No one is talking about hyperinflation of the sort seen in Weimar Germany in 1923 or Latin America in the 1980s or even the 10 per cent global rate of the 1970s, but a creeping rise to persistent levels of generalised price increases not seen in a generation. When the April rate of US inflation jumped to 4.2 per cent, financial markets swooned.
The new concern about a return to inflation is not just the result of immediate economic forces but also reflects longer-term, underlying changes in the structure of the global economy. The aggressive economic stimulus is being adopted at the very moment when the global economy is feeling the impact of ageing populations and the maturing of China’s 40-year transition.
Moreover, history also tells us that neither politicians, economists nor policymakers can guarantee the world will maintain low and stable inflation. As the Fed’s experience from the 1960s demonstrates, turning points in inflation arrive with little warning. Unlike in the US, where there was no fear of inflation after the second world war, concern about inflation was “always rumbling on” following devaluations of sterling and higher import prices in the UK during the full employment years of the 1950s and 1960s, according to Nick Crafts, professor of economic history at Sussex university.
But it only really took off in the 1970s after the first Opec oil shock and a switch in government policy from austerity to “a massively excessive stimulus, pushing the economy beyond any reasonable estimate of the sustainable level of unemployment”, Crafts adds.
Research from Luca Benati, professor at Bern university, suggests that the world’s faith in central bankers being able to tame any similar episodes is probably overblown. The UK’s inflationary pressure in the 1970s was so strong, he found, that when he ran history again in multiple simulations assuming an independent central bank is in charge of controlling prices, inflationary forces would have been more powerful than any likely action by a Bank of England with an independent Monetary Policy Committee. In the 1970s, it would have had only a “limited impact” on quelling price rises which reached an annual rate of 26.9 per cent in 1975.
According to Karen Ward, chief European market strategist at JPMorgan Asset Management, this means the Bernanke doctrine still stands and should not be forgotten. “We’ve always assumed that the structural supply side enhancements such as technology and globalisation are so great that we could never overwhelm them with demand, but it still must be the case that you can overwhelm supply with demand and ultimately generate inflation,” she says.
It is exactly this fear which is raising inflation rate expectations in the US and Europe at the moment. Alongside a recovery of energy prices to pre-Covid levels, there has been a shortage of microchips, wood products, many metals and even cheese. These have been the proximate causes of higher inflation, but financial markets worry that the ultimate cause has been the pandemic-related fiscal and monetary stimulus which has led to a much faster economic recovery in advanced economies than was thought possible at the end of 2020.
With economic policy pressing harder on the accelerator than at any time in recent history, spending could exceed the capacity of economies to provide goods and services, especially if the coronavirus crisis and government support have left people less willing to work, creating labour shortages and significant pressure on companies to raise wages.
Such is the potential imbalance between rampant demand and more constrained supply, especially in the US, some supporters of centre-left policy ideas say that warning lights are flashing. Larry Summers, Treasury secretary in the Clinton administration, thinks policy has become far too lax, repeatedly criticising the “dangerous complacency” over inflation of today’s policymakers in recent weeks.
While the White House has hit back, saying “a strong economy depends on a solid foundation of public investment, and that investments in workers, families and communities can pay off for decades to come”, even Janet Yellen, current Treasury secretary, has acknowledged the possible need for interest rates to rise “to make sure that our economy doesn’t overheat”.
The policy shift has come at a point when economists generally accept that some of the big global forces holding prices down are much weaker than they were. In the 1990s and 2000s, globalisation led to a huge transfer of the production of goods from high wage economies to China and eastern Europe, accelerating a decline in the power of workers in advanced economies to force their employers to pay them more, keeping prices low.
But these forces are at a turning point, according to Charles Goodhart, former chief economist of the Bank of England, and an author of the book The Great Demographic Reversal. The long boom in the size of its workforce has ended and its population is on the verge of falling for the first time in decades. Goodhart says that fewer new workers becoming integrated into the global labour force at a time of shrinking workforces in advanced economies as populations age will raise the pressures on companies to push up wages, increasing underlying inflationary pressures.
The change in demographic pressures have already been around for a decade and are intensifying, Goodhart says. He had been wary of putting a date on the coming inflation, saying that the world is likely so see rising inflationary pressure within five years and “we are fairly sure it would have happened by 2030”.
That was before Covid struck. Now, he says the underlying pressures, alongside more stimulative policies and Covid-related restrictions in supply, have brought forward the moment. “We tend to think that because of supply constraints in particular, it’s going to be more inflationary in 2021 than central bankers originally thought and it will last longer in 2022 and 2023 because there will be a confluence of the build-up of large monetary balances . . . combined with large continued fiscal expansion.”
Turning to specific examples of prices he expected to see rise, Goodhart notes how the added demand for holidays in the UK would push up the prices of holiday rentals, hotels and even ice cream this summer. “You’d have to be a saint not to raise your prices,” he says.
Demographic pressures are not something that can be reversed quickly, nor he argues can the forces of globalisation, which have gone into retreat having become politically unpopular in many advanced economies. Again, this is most acute in the US where economists such as Adam Posen, president of the Peterson Institute for International Economics, urges Americans to “embrace economic change rather than nostalgia” in domestic production, especially in manufacturing, as a means to improving living standards and promoting non-inflationary growth.
So far, however, although financial market expectations of inflation have risen sharply in 2021, mainstream policymakers are remaining calm.
There is increasing chatter in the Fed that at some point the current members of the interest-rate setting committee need to think about scaling back the pace of money creation and purchases of government bonds. But the view is that inflation is recovering to more normal levels and the US central bank has pledged to keep policy ultra accommodative until it achieves a more inclusive recovery.
This is the right approach, says Laurence Boone, chief economist of the OECD in Paris, a view which chimes with similar attitudes in central banks around the world. “It’s too early to ring the alarm bells about inflation,” she says. “That doesn’t mean one doesn’t have to watch what’s happening and we’re seeing frictions with the reopening of demand and supply after the crisis . . . but the right policy is to ease tensions on the supply side more than central bank action [to quell inflationary pressures].”
In most economies, there remains significant slack in the labour market, she adds, and the big demographic pressures could be eased significantly with later retirement, while other parts of Asia and Africa would be delighted to integrate into the global economy as China did.
Boone’s view still represents the consensus opinion among economists and there is considerable confidence in central banks that any rise in inflation this year will be temporary and easily tamed without having to tighten policy significantly.
But, for the first time in many decades, there is the possibility that a significant turning point has arrived, that price rises will be more than a flash in the pan and something more difficult to control.
Friday 29 January 2021
Monday 25 January 2021
As Joe Biden moves to double the US minimum wage, Australia can't be complacent
Van Badham in The Guardian
When I was writing about minimum wages for the Guardian six years ago, the United States only guaranteed workers US$7.25 an hour as a minimum rate of pay, dropping to a shocking US$2.13 for workers in industries that expect customers to tip (some states have higher minimum wages).
It is now 2021, and yet those federal rates remain exactly the same.
They’ve not moved since 2009. Meaningfully, America’s minimum wages have been in decline since their relative purchasing power peaked in 1968. Meanwhile, America’s cost of living has kept going up; the minimum wage is worth less now than it was half a century ago.
Now, new president Joe Biden’s $1.9tn pandemic relief plan proposes a doubling of the US federal minimum wage to $15 an hour.
It’s a position advocated both by economists who have studied comprehensive, positive effects of minimum wage increases across the world, as well as American unions of the “Fight for 15” campaign who’ve been organising minimum-wage workplaces demanding better for their members.
The logic of these arguments have been accepted across the ideological spectrum of leadership in Biden’s Democratic party. The majority of Biden’s rivals for the Democratic nomination – Bernie Sanders, Elizabeth Warren, Kamala Harris, Pete Buttigieg, Amy Klobuchar, Cory Booker and even billionaire capitalist Mike Bloomberg – are all on record supporting it and in very influential positions to advance it now.
In a 14 January speech, Biden made a simple and powerful case. “No one working 40 hours a week should live below the poverty line,” he said. “If you work for less than $15 an hour and work 40 hours a week, you’re living in poverty.”
And yet the forces opposed to minimum wage increases retain the intensity that first fought attempts at its introduction, as far back as the 1890s. America did not adopt the policy until 1938 – 31 years after Australia’s Harvester Decision legislated an explicit right for a family of four “to live in frugal comfort” within our wage standards.
When I was writing about minimum wages for the Guardian six years ago, the United States only guaranteed workers US$7.25 an hour as a minimum rate of pay, dropping to a shocking US$2.13 for workers in industries that expect customers to tip (some states have higher minimum wages).
It is now 2021, and yet those federal rates remain exactly the same.
They’ve not moved since 2009. Meaningfully, America’s minimum wages have been in decline since their relative purchasing power peaked in 1968. Meanwhile, America’s cost of living has kept going up; the minimum wage is worth less now than it was half a century ago.
Now, new president Joe Biden’s $1.9tn pandemic relief plan proposes a doubling of the US federal minimum wage to $15 an hour.
It’s a position advocated both by economists who have studied comprehensive, positive effects of minimum wage increases across the world, as well as American unions of the “Fight for 15” campaign who’ve been organising minimum-wage workplaces demanding better for their members.
The logic of these arguments have been accepted across the ideological spectrum of leadership in Biden’s Democratic party. The majority of Biden’s rivals for the Democratic nomination – Bernie Sanders, Elizabeth Warren, Kamala Harris, Pete Buttigieg, Amy Klobuchar, Cory Booker and even billionaire capitalist Mike Bloomberg – are all on record supporting it and in very influential positions to advance it now.
In a 14 January speech, Biden made a simple and powerful case. “No one working 40 hours a week should live below the poverty line,” he said. “If you work for less than $15 an hour and work 40 hours a week, you’re living in poverty.”
And yet the forces opposed to minimum wage increases retain the intensity that first fought attempts at its introduction, as far back as the 1890s. America did not adopt the policy until 1938 – 31 years after Australia’s Harvester Decision legislated an explicit right for a family of four “to live in frugal comfort” within our wage standards.
As an Australian, it’s easy to feel smug about our framework. The concept is so ingrained within our basic industrial contract we consume it almost mindlessly, in the manner our cousins might gobble a hotdog in the stands of a Sox game.
But in both cases, the appreciation of the taste depends on your level of distraction from the meat. While wage-earning Australians may tut-tut an American framework that presently allows 7 million people to both hold jobs and live in poverty, local agitation persists for the Americanisation of our own established standards.
When I wrote about minimum wages six years ago, it was in the context of Australia’s Liberal government attempting to erode and compromise them. That government is still in power and that activism from the Liberals and their spruikers is still present. The Australian Chamber of Commerce and Industry campaigned against minimum wage increases last year. So did the federal government – using the economic downtown of coronavirus as a foil to repeat American mythologies about higher wages causing unemployment increases.
They don’t. The “supply side” insistence is that labour is a transactable commodity, and therefore subject to a law of demand in which better-paid jobs equate to fewer employment opportunities … but a neoclassical economic model is not real life.
We know this because some American districts have independently increased their minimum wages over the past few years, and data from places like New York and Seattle has reaffirmed what’s been observed in the UK and internationally. There is no discernible impact on employment when minimum wage is increased. An impact on prices is also fleeting.
As Biden presses his case, economists, sociologists and even health researchers have years of additional data to back him in. Repeated studies have found that increasing the minimum wage results in communities having less crime, less poverty, less inequality and more economic growth. One study suggested it helped bring down the suicide rate. Conversely, with greater wage suppression comes more smoking, drinking, eating of fatty foods and poorer health outcomes overall.
Only the threadbare counter-argument remains that improving the income of “burger-flippers” somehow devalues the labour of qualified paramedics, teachers and ironworkers. This is both classist and weak. Removing impediments to collective bargaining and unionisation is actually what enables workers – across all industries – to negotiate an appropriate pay level.
Australians have been living with the comparative benefits of these assumptions for decades, and have been spared the vicissitudes of America’s boom-bust economic cycles in that time.
But after seven years of Liberal government policy actively corroding standards into a historical wage stagnation, if Biden’s proposals pass, the American minimum wage will suddenly leapfrog Australia’s, in both real dollar terms and purchasing power.
It’ll be a sad day of realisation for Australia to see the Americans overtake us, while we try to comprehend just why we decided to get left behind.
But in both cases, the appreciation of the taste depends on your level of distraction from the meat. While wage-earning Australians may tut-tut an American framework that presently allows 7 million people to both hold jobs and live in poverty, local agitation persists for the Americanisation of our own established standards.
When I wrote about minimum wages six years ago, it was in the context of Australia’s Liberal government attempting to erode and compromise them. That government is still in power and that activism from the Liberals and their spruikers is still present. The Australian Chamber of Commerce and Industry campaigned against minimum wage increases last year. So did the federal government – using the economic downtown of coronavirus as a foil to repeat American mythologies about higher wages causing unemployment increases.
They don’t. The “supply side” insistence is that labour is a transactable commodity, and therefore subject to a law of demand in which better-paid jobs equate to fewer employment opportunities … but a neoclassical economic model is not real life.
We know this because some American districts have independently increased their minimum wages over the past few years, and data from places like New York and Seattle has reaffirmed what’s been observed in the UK and internationally. There is no discernible impact on employment when minimum wage is increased. An impact on prices is also fleeting.
As Biden presses his case, economists, sociologists and even health researchers have years of additional data to back him in. Repeated studies have found that increasing the minimum wage results in communities having less crime, less poverty, less inequality and more economic growth. One study suggested it helped bring down the suicide rate. Conversely, with greater wage suppression comes more smoking, drinking, eating of fatty foods and poorer health outcomes overall.
Only the threadbare counter-argument remains that improving the income of “burger-flippers” somehow devalues the labour of qualified paramedics, teachers and ironworkers. This is both classist and weak. Removing impediments to collective bargaining and unionisation is actually what enables workers – across all industries – to negotiate an appropriate pay level.
Australians have been living with the comparative benefits of these assumptions for decades, and have been spared the vicissitudes of America’s boom-bust economic cycles in that time.
But after seven years of Liberal government policy actively corroding standards into a historical wage stagnation, if Biden’s proposals pass, the American minimum wage will suddenly leapfrog Australia’s, in both real dollar terms and purchasing power.
It’ll be a sad day of realisation for Australia to see the Americans overtake us, while we try to comprehend just why we decided to get left behind.
Tuesday 22 December 2020
Tuesday 15 September 2020
To lead Britain through a crisis, you have to be able to see beyond it: Gordon Brown abandons Neoliberal Economics
When the economy collapsed in 2008, I had to think ahead. I fear too little thought has been given to our recovery after Coronavirus writes Gordon Brown
‘Our young people now face the worst labour market for 50 years.’ Photograph: Hollie Adams/Getty Images
Our country’s Covid-19 crisis, together with the economic crisis the pandemic brought with it, is not over. In fact, it is entering a dangerous new phase.
With the UK economy collapsing by 25% in March and April – a fall twice as bad as those in Europe and the US and now only halfway back to pre-crisis level – a recovery plan is needed: closer to France’s £90bn, Germany’s £115bn and the US’s £1tn is required, not the £30bn announced by the chancellor in July.
Millions of people – not 200,000 as now – must be tested every day if the mass return to the workplace is not to result in a second wave of the disease.
And, if the end of the furlough scheme on 31 October is not to bring the highest number of redundancies in living memory, new job-protection measures – based on the Office for Budget Responsibility’s assessment that unemployment could reach 3m – will have to be implemented in the next few days.
Already I see the Conservative economic doves of the spring reverting to type, emerging as the grasping fiscal hawks of autumn, unable to see that every economic orthodoxy has been turned on its head.
Having led the country through one big crisis after 2008 – I had to learn quickly, and learn from my own mistakes – I can feel some sympathy for Boris Johnson, even though mea culpa is the one Latin phrase that will never cross his lips. But I found back then that it was not enough just to do day-to-day crisis management, or even to be one step ahead of events; the real challenge is to anticipate the next problem but one.
More than that, to solve each problem I had to get to the root of it, often by overriding conventional thinking, and following that up with a relentless determination to mobilise all the weapons at one’s disposal. In 2008 the banks were running capitalism without capital, so we nationalised strategically important financial institutions.
Now, in 2020 and still in the absence of a vaccine or a cure, we should have been clear from the outset that regular mass testing was – and still is – the effective way to detect the spread of the disease and then to respond with prompt local public health interventions.
But I fear that those responsible – having misspent millions on contracts for serially ineffective initiatives – have given too little thought to what also matters in the days ahead: engineering the long-term recovery.
Investing now – to save good companies and prevent the destruction of capacity and the loss of key jobs and skills for good – means following Germany and France by maintaining furlough payments in key sectors, preferably with a wage subsidy for part-time work, and with the backstop offer of retraining during absence from the workplace.
And, where workers have to stay at home to avoid the spread of infections during the inevitable increase of pandemic-related local lockdowns, the support available to them has to feed their families, which today’s miserly £90 a week does not.
Our young people now face the worst labour market for 50 years – yet today’s youth employment programme will assist only 350,000, and only for six months, when there are 3.5 million under-25s who are not in full-time education. So to guarantee a job, training or education requires a far more rapid expansion of new apprenticeship, college and university places, along with the re-introduction of the more generous future jobs programme that we had in 2009.
Tory austerity was never a good idea and is now an admitted failure. But it is frankly an economic absurdity when government borrowing costs are so small – 10-year gilt yields are around one-20th of those of 2008 – and unmet needs so extensive.
Indeed inflation – once seen as the justification for austerity economics – is so low in the US today that the Federal Reserve has deemed that maximising employment will now be its main priority. Again, the UK is behind the curve. In 1998, serving as chancellor, I was responsible for the Bank of England Act, which required the Bank to pursue high levels of employment. Now I am the first to say that the Bank needs a more demanding constitution, one that imposes a dual mandate: to take unemployment as seriously as inflation. This should be matched by an operational target stating that interest rates will not rise or stimulus end until unemployment falls to pre-crisis levels.
The current crisis is of course global as much as it is domestic. From 2008 to 2010, I spent much of my time persuading my fellow leaders to act as one, and to agree a synchronised stimulus alongside aid for developing countries. But I am shocked that now – with the world’s economies simultaneously damaged by the pandemic and an economic shock far worse than back then – the world’s leaders have done so little work together in response.
In short, all countries should be agreeing to call time on 50 years of neoliberal economics. They should break not only with their exclusive focus on controlling inflation, but with the pursuit of deregulation, liberalisation and privatisation at the expense of fairness, employment and sustainability. That project, once called the Washington consensus, is out of favour even in Washington. A new paradigm would give priority to fair trade, not just free trade; better control of the management of destabilising capital flows to replace the current free-for-all; a competition regime that can robustly address monopolistic behaviour from rent-seeking digital platforms; an industrial policy that would include generous support for science and innovation – with all that wrapped in a commitment to action on climate change and action on unacceptable levels of inequality.
Could it happen here? I believe so. While the government may feel able to steamroller its policies through the House of Commons thanks to an 80-seat majority, our multinational and increasingly regionally diverse country can no longer be straitjacketed, as now, by a remote and failing centralised state.
In contrast to the tiny and fallible cabal in No 10, democracy is rising again elsewhere: no longer just MPs and local councillors, but directly elected metro mayors and elected decision-making bodies in Scotland, Wales and Northern Ireland. And, as with the outrage against the government’s breach of international law, a rebellion of the regions and nations could force the prime minister to listen.
A challenge no doubt, especially with this prime minister. But he is already worried about the fragility of his recently acquired strength in the north of England; and as a unionist, he knows he must also take heed of voices in Scotland and Wales, where his popularity is waning fast. Politically – and despite his formidable record in the genre – he knows he cannot afford a U-turn on the union.
A strong alliance encompassing trades unions and businesses too can thus not only press for a recovery plan but also revive the spirit of cooperation and unity across our country – and, through a newfound solidarity, give the British people what we need most: hope.
Our country’s Covid-19 crisis, together with the economic crisis the pandemic brought with it, is not over. In fact, it is entering a dangerous new phase.
With the UK economy collapsing by 25% in March and April – a fall twice as bad as those in Europe and the US and now only halfway back to pre-crisis level – a recovery plan is needed: closer to France’s £90bn, Germany’s £115bn and the US’s £1tn is required, not the £30bn announced by the chancellor in July.
Millions of people – not 200,000 as now – must be tested every day if the mass return to the workplace is not to result in a second wave of the disease.
And, if the end of the furlough scheme on 31 October is not to bring the highest number of redundancies in living memory, new job-protection measures – based on the Office for Budget Responsibility’s assessment that unemployment could reach 3m – will have to be implemented in the next few days.
Already I see the Conservative economic doves of the spring reverting to type, emerging as the grasping fiscal hawks of autumn, unable to see that every economic orthodoxy has been turned on its head.
Having led the country through one big crisis after 2008 – I had to learn quickly, and learn from my own mistakes – I can feel some sympathy for Boris Johnson, even though mea culpa is the one Latin phrase that will never cross his lips. But I found back then that it was not enough just to do day-to-day crisis management, or even to be one step ahead of events; the real challenge is to anticipate the next problem but one.
More than that, to solve each problem I had to get to the root of it, often by overriding conventional thinking, and following that up with a relentless determination to mobilise all the weapons at one’s disposal. In 2008 the banks were running capitalism without capital, so we nationalised strategically important financial institutions.
Now, in 2020 and still in the absence of a vaccine or a cure, we should have been clear from the outset that regular mass testing was – and still is – the effective way to detect the spread of the disease and then to respond with prompt local public health interventions.
But I fear that those responsible – having misspent millions on contracts for serially ineffective initiatives – have given too little thought to what also matters in the days ahead: engineering the long-term recovery.
Investing now – to save good companies and prevent the destruction of capacity and the loss of key jobs and skills for good – means following Germany and France by maintaining furlough payments in key sectors, preferably with a wage subsidy for part-time work, and with the backstop offer of retraining during absence from the workplace.
And, where workers have to stay at home to avoid the spread of infections during the inevitable increase of pandemic-related local lockdowns, the support available to them has to feed their families, which today’s miserly £90 a week does not.
Our young people now face the worst labour market for 50 years – yet today’s youth employment programme will assist only 350,000, and only for six months, when there are 3.5 million under-25s who are not in full-time education. So to guarantee a job, training or education requires a far more rapid expansion of new apprenticeship, college and university places, along with the re-introduction of the more generous future jobs programme that we had in 2009.
Tory austerity was never a good idea and is now an admitted failure. But it is frankly an economic absurdity when government borrowing costs are so small – 10-year gilt yields are around one-20th of those of 2008 – and unmet needs so extensive.
Indeed inflation – once seen as the justification for austerity economics – is so low in the US today that the Federal Reserve has deemed that maximising employment will now be its main priority. Again, the UK is behind the curve. In 1998, serving as chancellor, I was responsible for the Bank of England Act, which required the Bank to pursue high levels of employment. Now I am the first to say that the Bank needs a more demanding constitution, one that imposes a dual mandate: to take unemployment as seriously as inflation. This should be matched by an operational target stating that interest rates will not rise or stimulus end until unemployment falls to pre-crisis levels.
The current crisis is of course global as much as it is domestic. From 2008 to 2010, I spent much of my time persuading my fellow leaders to act as one, and to agree a synchronised stimulus alongside aid for developing countries. But I am shocked that now – with the world’s economies simultaneously damaged by the pandemic and an economic shock far worse than back then – the world’s leaders have done so little work together in response.
In short, all countries should be agreeing to call time on 50 years of neoliberal economics. They should break not only with their exclusive focus on controlling inflation, but with the pursuit of deregulation, liberalisation and privatisation at the expense of fairness, employment and sustainability. That project, once called the Washington consensus, is out of favour even in Washington. A new paradigm would give priority to fair trade, not just free trade; better control of the management of destabilising capital flows to replace the current free-for-all; a competition regime that can robustly address monopolistic behaviour from rent-seeking digital platforms; an industrial policy that would include generous support for science and innovation – with all that wrapped in a commitment to action on climate change and action on unacceptable levels of inequality.
Could it happen here? I believe so. While the government may feel able to steamroller its policies through the House of Commons thanks to an 80-seat majority, our multinational and increasingly regionally diverse country can no longer be straitjacketed, as now, by a remote and failing centralised state.
In contrast to the tiny and fallible cabal in No 10, democracy is rising again elsewhere: no longer just MPs and local councillors, but directly elected metro mayors and elected decision-making bodies in Scotland, Wales and Northern Ireland. And, as with the outrage against the government’s breach of international law, a rebellion of the regions and nations could force the prime minister to listen.
A challenge no doubt, especially with this prime minister. But he is already worried about the fragility of his recently acquired strength in the north of England; and as a unionist, he knows he must also take heed of voices in Scotland and Wales, where his popularity is waning fast. Politically – and despite his formidable record in the genre – he knows he cannot afford a U-turn on the union.
A strong alliance encompassing trades unions and businesses too can thus not only press for a recovery plan but also revive the spirit of cooperation and unity across our country – and, through a newfound solidarity, give the British people what we need most: hope.
Tuesday 11 August 2020
Economics for Non Economists 5 – Inflation - Why is the government’s inflation rate lower than my personal experience?
By Girish Menon
Some of you would have realised that in the China virus season the supermarkets have raised prices and stopped offering discounts on many goods. As a result you would have experienced rising food bills which according to layman knowledge should translate into inflation*. At the same time, you may have read many economists predict a period of recession, deflation** and high levels of unemployment. So how is it that when you are experiencing inflation personally, economists predict the existence of deflation?
It all depends on the way the inflation rate is calculated.
The UK government uses the Consumer Price Index (CPI) to estimate the inflation rate in the British economy. It works like this:
1. Every year a few thousand families are asked to record their expenditure for a month. From this data the indexers estimate the types of goods and services bought by an average household and the quantity of their income spent on these goods.
2. With this information, surveyors are sent out each month to record prices for the above mix of goods. Prices are recorded in different areas of the country as well as in different types of retail outlets. These results are averaged out to find the average price of goods and this is converted into index numbers.
3. Changes in the price of some goods are considered more important than others based on the proportion of the income spent by the average household. This means that the above numbers have to be weighted before the final index is calculated.
Consider this example:
Assume that there are only two goods in the economy, food and cars. The average household spends 75% of their income on food and 25 % on cars. Suppose there is an increase in the price of food by 8% and of cars by 4% annually.
In a normal average calculation, the 8% and 4% would be added together and divided by 2 to arrive at an average inflation of 6%
However, this provides an inaccurate figure because spending on food is more important in the household than spending on cars. Food is given a weight of 75% and cars are given a weight of 25%. So the price increase of food is multiplied by ¾ (8*3/4 = 6) and added to the price increase of cars which is multiplied by ¼ (4*1/4 =1) which will result in an inflation of 7%.
Therefore if the inflation index was 100 at the start of the year then it will read 107 at the end of the year.
The accuracy of inflation calculations
Some of you would have realised that in the China virus season the supermarkets have raised prices and stopped offering discounts on many goods. As a result you would have experienced rising food bills which according to layman knowledge should translate into inflation*. At the same time, you may have read many economists predict a period of recession, deflation** and high levels of unemployment. So how is it that when you are experiencing inflation personally, economists predict the existence of deflation?
It all depends on the way the inflation rate is calculated.
The UK government uses the Consumer Price Index (CPI) to estimate the inflation rate in the British economy. It works like this:
1. Every year a few thousand families are asked to record their expenditure for a month. From this data the indexers estimate the types of goods and services bought by an average household and the quantity of their income spent on these goods.
2. With this information, surveyors are sent out each month to record prices for the above mix of goods. Prices are recorded in different areas of the country as well as in different types of retail outlets. These results are averaged out to find the average price of goods and this is converted into index numbers.
3. Changes in the price of some goods are considered more important than others based on the proportion of the income spent by the average household. This means that the above numbers have to be weighted before the final index is calculated.
---Topics covered earlier
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Consider this example:
Assume that there are only two goods in the economy, food and cars. The average household spends 75% of their income on food and 25 % on cars. Suppose there is an increase in the price of food by 8% and of cars by 4% annually.
In a normal average calculation, the 8% and 4% would be added together and divided by 2 to arrive at an average inflation of 6%
However, this provides an inaccurate figure because spending on food is more important in the household than spending on cars. Food is given a weight of 75% and cars are given a weight of 25%. So the price increase of food is multiplied by ¾ (8*3/4 = 6) and added to the price increase of cars which is multiplied by ¼ (4*1/4 =1) which will result in an inflation of 7%.
Therefore if the inflation index was 100 at the start of the year then it will read 107 at the end of the year.
The accuracy of inflation calculations
As the example makes clear this calculation is based on an imagined average family’s spending patterns. There maybe only a few families in the UK that have the exact same spending patterns as imagined by the government.
Theoretically, different rates of inflation could be calculated within an economy by changing the consumption patterns or weightings in the index. This will explain why the inflation that you experience may be higher or lower than the government’s inflation rate.
* Inflation is an average increase in price level compared over a previous period.
** Deflation is an average decrease in price level compared over a previous period.
Disinflation means the inflation in the current period is lower than the earlier period.
Saturday 8 August 2020
Economics for Non Economists 4 - The Marriage of Debt and Profit in Capitalism
by Girish Menon (Adapted from: Talking to my Daughter about the Economy by Yanis Varoufakis)
How does a new
entrepreneur start?
---For earlier articles
Explaining GDP and Economic Growth
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Positive Multiplier
As the economy grows, banks will lend even larger amounts of loans until it reaches a point when the loans they have made are so vast that the economy cannot keep pace. At this point realization dawns that the large loans will not be repaid and the economy crashes.
Debt, Profits and Crashes
Thus debt is indispensable in capitalism. There can be no profit without debt. However, the very same process that generates profits and wealth also generates financial crashes and economic crises.
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