How Deficits and Debts Rip Us Off: An Alternative Approach to your Syllabus

 

"People Under 50 Should Quit the UK!"

 

A Level Economics 55: Income Inequality

Income Inequality: Income inequality refers to the unequal distribution of income among individuals or households within a particular economy or society. It is typically measured using indicators such as the Gini coefficient, where 0 represents perfect equality, and 1 indicates maximum inequality.

1. Market Failure: Market failure occurs when the free market mechanism fails to allocate resources efficiently, leading to suboptimal outcomes for society. It can result from various factors such as externalities, imperfect information, or the presence of market power.

Market Failure Arising from Income Inequality: Income inequality can lead to significant market failures, affecting various aspects of an economy. Let's explore how income inequality contributes to market failure:

1. Limited Access to Basic Goods and Services: In a highly unequal society, individuals with lower incomes may struggle to afford basic goods and services, such as education, healthcare, and nutritious food. As a result, their overall well-being and economic productivity are compromised.

   Example: In a society with high income inequality, many low-income individuals may not have access to quality healthcare due to unaffordable healthcare costs, leading to adverse health outcomes and reduced workforce productivity.

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3. Reduced Human Capital Formation: Income inequality can hinder human capital formation as individuals from lower-income backgrounds may face limited access to education and skill development opportunities. This affects the labor force's productivity and long-term economic growth.

   Example: In a society with minimal income inequality, all individuals have equal access to quality education and skill training, leading to a more skilled and productive workforce that drives economic growth.

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5. Lack of Economic Mobility: High income inequality can create barriers to economic mobility, making it challenging for individuals to move up the income ladder. This perpetuates intergenerational poverty and reduces opportunities for social and economic advancement.

   Example: In a society with minimal income inequality, individuals have better chances of upward mobility, regardless of their family background, as equal opportunities for education and employment are available to all.

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7. Decreased Aggregate Demand: When income is concentrated in the hands of a few wealthy individuals, aggregate demand may suffer as the majority of consumers have limited purchasing power. This can lead to reduced economic activity and lower overall output.

   Example: In a society with minimal income inequality, a larger share of the population has disposable income, leading to higher aggregate demand and increased consumer spending, stimulating economic growth.

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9. Social Unrest and Political Instability: Extreme income inequality can create social tensions and lead to political instability, as people may perceive the economic system as unfair and favoring the wealthy elite.

   Example: In a society with minimal income inequality, social cohesion is strengthened, and political stability is enhanced as people perceive a fairer distribution of resources and opportunities.

Illustration with Minimal Income Inequality: In a society with minimal income inequality, resources are more equitably distributed, leading to improved social welfare and economic efficiency. In such a scenario:

• All individuals have access to quality education, healthcare, and other essential services, leading to better health outcomes, increased human capital, and higher productivity.

• Economic mobility is enhanced, allowing people to rise out of poverty through education and hard work, leading to greater economic opportunity for all.

• A larger proportion of the population has the means to afford goods and services, leading to higher aggregate demand and increased economic growth.

• Social cohesion and trust in institutions are strengthened, fostering political stability and cooperation.

• In summary, minimal income inequality promotes a fairer and more inclusive society, mitigating market failures and promoting greater overall economic prosperity.

Every man, woman and child in Britain is more than £3,400 in debt – without knowing it and without borrowing a single penny

Jonathan Owen in The Independent

Every man, woman and child in Britain is more than £3,400 in debt – without knowing it and without borrowing a single penny – thanks to the proliferation of controversial deals used to pay for infrastructure such as schools and hospitals.

The UK owes more than £222bn to banks and businesses as a result of Private Finance Initiatives (PFIs) – “buy now, pay later” agreements between the government and private companies on major projects. The startling figure – described by experts as a “financial disaster” – has been calculated as part of an Independent on Sunday analysis of Treasury data on more than 720 PFIs. The analysis has been verified by the National Audit Office (NAO).

The headline debt is based on “unitary charges” which start this month and will continue for 35 years. They include fees for services rendered, such as maintenance and cleaning, as well as the repayment of loans underwritten by banks and investment companies.

The situation is expected to worsen as PFI projects spread across the world (Getty)

Basically, a PFI is like a mortgage that the government takes out on behalf of the public. The average annual cost of meeting the terms of the UK’s PFI contracts will be more than £10bn over the next decade.

And the cost of servicing PFIs is growing. Last year, it rose by £5bn. It could rise further, with inflation. The upward creep is the price taxpayers’ pay for a financing system which allows private firms to profit from investing in infrastructure.

An NAO briefing, released last month, says: “In the short term using private finance will reduce reported public spending and government debt figures.” But, longer term, “additional public spending will be required to repay the debt and interest of the original investment”.

A case in point is Britain’s biggest health trust, Barts Health NHS Trust in London, which was placed in special measures last month. It is £93m in debt – struggling under the weight of a 43-year PFI contract under which it will pay back more than £7bn on contracts valued at a fraction of that sum (£1.1bn).

PFI’s were the brainchild of the Conservative Party in the 1990s, but were swiftly embraced by New Labour. Successive governments signed hundreds of the deals. PFI-funded schools, streetlights, prisons, services, police stations and care homes can be found across Britain.

The system has yielded assets valued at £56.5bn. But Britain will pay more than five times that amount under the terms of the PFIs used to create them, and in some cases be left with nothing to show for it, because the PFI agreed to is effectively a leasing agreement. Some £88bn has already been spent, and even if the projected cost between now and 2049/50 does not change, the total PFI bill will be in excess of £310bn. This is more than four times the budget deficit used to justify austerity cuts to government budgets and local services.

Gateway Surgical Centre, London, is run by Barts Health NHS Trust, which is struggling under a £7bn PFI (Alamy)

Responding to the findings, TUC General Secretary Frances O’Grady said: “Crippling PFI debts are exacerbating the funding crisis across our public services, most obviously in our National Health Service.”

According to Jean Shaoul, professor emerita at Manchester Business School, PFIs have been “an enormous financial disaster in terms of cost”. She added: “Frankly, it’s very corrupt... no rational government, looking at the interests of the citizenry as a whole, would do this.”

Unlike government funding, PFI’s cannot be adjusted to match the economy’s fortunes. They are governed by contracts that often run to thousands of pages. In contrast to the radical cuts to public spending, less than 1 per cent has been trimmed from the total cost of PFI deals since 2012.

Danny Alexander, Chief Secretary to the Treasury, admitted last month: “Too many of the old PFI deals were poorly negotiated... with high costs draining local and national coffers.”

PFI contracts could escalate like America’s subprime mortgage fiasco (Getty)

Last year The Independent revealed how firms given 25-year contracts to build and maintain schools doubled their money by selling their shares in the schemes less than five years into the deals. Four – Balfour Beatty, Carillion, Interserve, and Kier – made combined profits of over £300m.

Repeated concerns over projects suffering years of delays and soaring costs have been raised in Parliament in recent years, chiefly via the Public Accounts Select Committee. Its chair, Margaret Hodge, has spoken of Labour’s promotion of the deals during its time in power: “I’m afraid we got it wrong... we got seduced by PFI.”

Allyson Pollock, professor of public health research and policy, Queen Mary University of London, said the diversion of funds from other budgets to PFI payments make the schemes “an engine for closure of public services and further privatisation”.

Leasing out Pakistan

 

Najam Sethi  TFT Issue: 21 Mar 2014

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The Saudi Kingdom has granted $1.5b to the Nawaz Sharif government. Another such donation will accrue in due course. A quick fix of $3b is a lot of free money for Pakistan’s forex-strapped economy that is struggling to cope with significant international debt payments and a rising trade gap that is putting pressure on the rupee and fuelling inflation. Indeed, the Saudi injection has reversed the rapid fall of the rupee, proving that the finance minister, Ishaq Dar, was not bluffing when he warned exporters six weeks ago not to hoard their dollars. Why then all the hush-hush about the Good Samaritan who has eventually bailed him out?

Significantly, the PMLN government has been at pains to hide the Saudi largesse. But after we discovered that the cause of the sudden reversal in the fortunes of the rupee was due to an uplifting shot in the arm of the State Bank, we were told not to ask about the “friendly” source and amount of funds. Then, after we found out about the donor, we were told that the Saudi “donation” was a measure of the personal relationship between our prime minister and the Saudi monarch. That is when our happy surprise turned to suspicious incredulity and the game became crystal clear.

A clutch of high-powered Saudis, including the Crown Prince, has descended upon Islamabad in recent weeks. The prime minister and the Pakistan army chief have made unexplained flying visits to the Kingdom. In due course a joint statement or communiqué was issued from Islamabad stressing the demand for a “transitional” government in Syria while emphasizing that there was no change in Pakistan’s position on the issue. Indeed, the foreign office spokesperson, an apparently haughty lady, was quite aggressive in ticking off inquiring hacks who argued that the demand for a transitional government amounted to a veritable “regime change” in Syria and smacked of a definite policy about-turn. Mr Sartaj Aziz, the de facto foreign minister, has also executed some verbal gymnastics to try and obscure the truth. But we, the public, are not stupid or ill-informed. We are not ready to buy this story hook, line and sinker. We know there are no free lunches, let alone free feasts, in relations amongst nations. So what’s the $3b quid pro quo?

The truth is that Pakistan has agreed to supply, among other weapons, anti-aircraft and anti-tank rockets to the Saudis. Mr Aziz says the End-User Certificate conditions will guarantee that these are not used outside Saudi Arabia. This is a load of nonsense. Why the Saudis should suddenly turn to Pakistan for these weapons when traditionally they have tapped the US and Europe has, however, given the game away. These potential game-changing weapons are clearly meant for use by Saudi-backed Wahhabi-Salafist rebels in Syria who are fighting to overthrow the Baathist secular Asad regime. The Americans haven’t supplied the Saudis because they don’t want such radical Islamist forces any more than Al-Qaeda to succeed in Syria and are therefore having serious second thoughts about regime change in Syria. Indeed, the Saudis’ sudden embrace of Pakistan portends shifting sands in the Middle-East.

The Saudis and the Emirates-Gulfdoms are feeling insecure because of the Shia revival in their heartlands. This is because the restless Shias are sitting on their oil reserves. Iran, too, is unremitting in opposing Saudi influence. Iraq and Qatar, two competitive energy suppliers, are not playing ball either. Egypt and Libya haven’t bought into the Saudi Islamist line. Worse, the Americans are seeking negotiated nuclear solutions in Iran instead of succumbing to Saudi pressure for military action. And American self-reliance on shale gas is the first definite step against continued dependence on Saudi oil.

On the heels of the Saudi VVIPs now comes the King of Bahrain to Islamabad. The PMLN government claims that foreign investment deals are in the offing. But the small print betrays the real motive behind “renewed manpower exports”. The Bahraini Emir wants well-trained and equipped Pakistani military mercenaries to beef up his police and security forces to repress the rising democratic impulses of the majority Shia populations. It is as simple as that.

It is the same old treacherous story. Since independence in 1947, the Pakistani ruling classes and military establishment have lived off rents from leasing out their “services” to the highest foreign bidder instead of standing on their own feet and not meddling in other peoples business. In the 1950s, 60s and 80s, they sold their services to the Americans, first against the USSR and then against the Taliban; now, in the 2010s, they are rolling up their sleeves to stir the Middle-East cauldron at the behest of a rich “friend”. The extremist Sunni blow back from the first lease to the US in the shape of the Taliban, Al-Qaeda and Lashkar-e-Jhangvi is now primed for escalation and blow back during the proposed second lease to the Saudi-Emirates network. We are making another irrevocable blunder, so help us Allah.