Economics for Non Economists 3 – Explaining GDP and Economic Growth

By Girish Menon

Introduction

You will have recently read:

-     At 13%, Economist Intelligence Unit Pegs India's Growth In 2021 Higher Than IMF

-    Western economies recovering faster than expected from Covid, says IMF

 -   UK GDP rose 0.4% in February

 -  China's economy grows 18.3% in post-Covid comeback

 

What does this mean?

Just like the Forbes magazine compiles an annual list of the richest individuals on planet earth, most countries participate in an annual ‘show of wealth’. The most commonly used measure in this competition is called GDP. At the end of 2019 the top six countries were:

Table 1

Country	GDP ($ trillions)	Economic growth over previous year (%)	Per Capita GDP ($)	Share of World GDP (%)
USA	19.5	2.2	59, 939	24
China	12.2	6.9	8,612	15
Japan	4.9	1.7	38,214	6
Germany	3.7	2.2	44,680	4.5
India	2.7	6.7	1,980	3.28
UK	2.6	1.8	39.532	3,26

SourceWorldometers

What do these terms mean?

Simply defined, GDP or Gross Domestic Product is the money value of all goods and services (goods) produced within an economy in a period of time. In Table 1 the GDP is estimated over the year of 2019. The data quoted in the introduction compares GDP changes over the first two quarters of 2020.

Economic growth is a measure of the additional goods produced by an economy over the last period of time  (say a year or a quarter).

Per Capita GDP means the value of goods each resident would get if all goods produced in an economy is shared equally. This is calculated by dividing the GDP with the residents of the country. Do you think per capita GDP is an accurate description of how goods are actually distributed in an economy?

Share of World GDP means the share of global goods produced by an economy. This is calculated by dividing each country’s GDP with the whole world’s total GDP.

Why is GDP and the rate of Economic growth so important?

Materialism is the underlying principle of using GDP and economic growth as the most important indicator of economic performance. Materialism, according to the Cambridge English Dictionary, is the belief that having money and possessions is the most important thing in life. It follows that as one’s material goods increases one’s standard of living (happiness) tends to increase.

GDP is a tool that measures the volume of material goods produced by an economy. A high rate of economic growth demonstrates the rate at which the material goods in an economy is increasing and as a result the happiness of the residents as well. So, when the rate of economic growth becomes negative, as in the data mentioned in the introduction, it follows that your happiness will decrease.

Are GDP and GNP the same?

They are similar but not the same. GDP measures the volume of goods produced by people living within the boundaries of an economy. The output of Nissan’s Sunderland plant will be included in UK’s GDP. In other words the output of Britons and foreign nationals living in the UK will be added to calculate UK’s GDP.

GNP stands for Gross National Product. It is a measure of the volume of goods produced by British nationals living in the UK and outside. It will exclude the output of foreign nationals (say Nissan Sunderland) operating within the British economy.

Is GDP an accurate measure of the volume of goods produced within an economy?

The answer is No. The calculation is arduous and with questionable assumptions which I will not go into here. I will however mention some weaknesses here:

1. Even though there are some standardised procedures for its computation governments are known to deliberately intervene in its methodology and computation.

2.   Not all goods are included. For example if you clean your own house and look after your family – these services are not included. However, if you employ a cleaner, a cook, a nanny and a driver then their services are included.

3.   In some countries where there is a large informal economy. The goods produced by such activities are not be included in GDP computations.

Does an increase in GDP necessarily improve residents’ happiness?

In economics, happiness is better known as welfare.

If there is an earthquake in your country and many roads, buildings, bridges, stadia are destroyed. Then rebuilding them will increase the national GDP but has it improved the citizens’ welfare?

As a resultant of economic growth the quality of air you breathe has gone down and the water supply is polluted. Has this improved your standard of living?

Due to increased standard of living everybody has a car and you are now required to spend one hour extra in commuting time. Has this resulted in improved happiness?

What is the prognosis for GDP and economic growth?

It appears that due to Covid-19 the GDP of most nations will be lower than in 2019. These economies will have negative economic growth which means that in 2020 they will produce fewer goods than in 2019.

When the GDP falls, the terms most used are recession and depression. The difference between the two according to Harry Truman is ‘It's a recession when your neighbour loses his job; it's a depression when you lose yours’ .

As you have seen in the news, firms are busy firing staff which means there will be increased unemployment. Since more people are unemployed they will not have money to buy goods in the future and so there will be even less demand for goods in the future and those who have jobs today may lose their jobs next year in a downward spiral of negative economic growth begetting even more negative growth.

Will there be lower emphasis on GDP and economic growth in the future? For such a change to happen there needs a material change in organising the world economy. (If you wish to read further click here)

I hope it happens in my lifetime.

* - annualised rate

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Give Us Kerala Model Over Gujarat Model, Any Day

Ramachandra Guha in NDTV

When, towards the end of the first decade of the present century, Narendra Modi began speaking frequently about something he called the 'Gujarat Model', it was the second time a state of the Indian Union had that grand, self-promoting, suffix added to its name. The first was Kerala. The origins of the term 'Kerala Model' go back to a study done in the 1970s by economists associated with the Centre for Development Studies in Thiruvananthapuram. This showed that when it came to indices of population (as in declining birth rates), education (as in remarkably high literacy for women) and health (as in lower infant mortality and higher life expectancy), this small state in a desperately poor country had done as well - and sometimes better - than parts of Europe and North America.

Boosted to begin with by economists and demographers, Kerala soon came in for praise from sociologists and political scientists. The former argued that caste and class distinctions had radically diminished in Kerala over the course of the 20th century; the latter showed that, when it came to implementing the provisions of the 73rd and 74th Amendments to the Constitution, Kerala was ahead of other states. More power had been devolved to municipalities and panchayats than elsewhere in India.

Success, as John F. Kennedy famously remarked, has many fathers (while failure is an orphan). When these achievements of the state of Kerala became widely known, many groups rushed to claim their share of the credit. The communists, who had been in power for long stretches, said it was their economic radicalism that did it. Followers of Sri Narayana Guru (1855-1928) said it was the egalitarianism promoted by that great social reformer which led to much of what followed. Those still loyal to the royal houses of Travancore and Cochin observed that when it came to education, and especially girls' education, their Rulers were more progressive than Maharajas and Nawabs elsewhere. The Christian community of Kerala also chipped in, noting that some of the best schools, colleges, and hospitals were run by the Church. It was left to that fine Australian historian of Kerala and India, Robin Jeffrey, to critically analyse all these claims, and demonstrate in what order and what magnitude they contributed. His book Politics, Women and Wellbeing remains the definitive work on the subject.

Such were the elements of the 'Kerala Model'. What did the 'Gujarat Model' that Narendra Modi began speaking of, c. 2007, comprise? Mr Modi did not himself ever define it very precisely. But there is little doubt that the coinage itself was inspired and provoked by what had preceded it. The Gujarat Model would, Mr Modi was suggesting, be different from, and better than, the Kerala Model. Among the noticeable weaknesses of the latter was that it did not really encourage private enterprise. Marxist ideology and trade union politics both inhibited this. On the other hand, the Vibrant Gujarat Summits organized once every two years when Mr Modi was Chief Minister were intended precisely to attract private investment.

This openness to private capital was, for Mr Modi's supporters, undoubtedly the most attractive feature of what he was marketing as the 'Gujarat Model'. It was this that brought to him the support of big business, and of small business as well, when he launched his campaign for Prime Minister. Young professionals, disgusted by the cronyism and corruption of the UPA regime, flocked to his support, seeing him as a modernizing Messiah who would make India an economic powerhouse.

With the support of these groups, and many others, Narendra Modi was elected Prime Minister in May 2014.

There were other aspects of the Gujarat Model that Narendra Modi did not speak about, but which those who knew the state rather better than the Titans of Indian industry were perfectly aware of. These included the relegation of minorities (and particularly Muslims) to second-class status; the centralization of power in the Chief Minister and the creation of a cult of personality around him; attacks on the independence and autonomy of universities; curbs on the freedom of the press; and, not least, a vengeful attitude towards critics and political rivals.

These darker sides of the Gujarat Model were all played down in Mr Modi's Prime Ministerial campaign. But in the six years since he has been in power at the Centre, they have become starkly visible. The communalization of politics and of popular discourse, the capturing of public institutions, the intimidation of the press, the use of the police and investigating agencies to harass opponents, and, perhaps above all, the deification of the Great Leader by the party, the Cabinet, the Government, and the Godi Media - these have characterized the Prime Ministerial tenure of Narendra Modi. Meanwhile, the most widely advertised positive feature of the Gujarat Model before 2014 has proved to be a dud. Far from being a free-market reformer, Narendra Modi has demonstrated that he is an absolute statist in economic matters. As an investment banker who once enthusiastically supported him recently told me in disgust: "Narendra Modi is our most left-wing Prime Minister ever - he is even more left-wing than Jawaharlal Nehru".

Which brings me back to the Kerala Model, which the Gujarat Model sought to replace or supplant. Talked about a great deal in the 1980s and 1990s, in recent years, the term was not much heard in policy discourse any more. It had fallen into disuse, presumably consigned to the dustbin of history. The onset of COVID-19 has now thankfully rescued it, and indeed brought it back to centre-stage. For in how it has confronted, tackled, and tamed the COVID crisis, Kerala has once again showed itself to be a model for India - and perhaps the world.

There has been some excellent reporting on how Kerala flattened the curve. It seems clear that there is a deeper historical legacy behind the success of this state. Because the people of Kerala are better educated, they have followed the practices in their daily life least likely to allow community transmission. Because they have such excellent health care, if people do test positive, they can be treated promptly and adequately. Because caste and gender distinctions are less extreme than elsewhere in India, access to health care and medical information is less skewed. Because decentralization of power is embedded in systems of governance, panchayat heads do not have to wait for a signal from a Big Boss before deciding to act. There are two other features of Kerala's political culture that have helped them in the present context; its top leaders are generally more grounded and less imperious than elsewhere, and bipartisanship comes more easily to the state's politicians.

The state of Kerala is by no means perfect. While there have been no serious communal riots for many decades, in everyday life there is still some amount of reserve in relations between Hindus, Christians and Muslims. Casteism and patriarchy have been weakened, but by no means eliminated. The intelligentsia still remain unreasonably suspicious of private enterprise, which will hurt the state greatly in the post-COVID era, after remittances from the Gulf have dried up.

For all their flaws, the state and people of Kerala have many things to teach us, who live in the rest of India. We forgot about their virtues in the past decade, but now these virtues are once more being discussed, to both inspire and chastise us. The success of the state in the past and in the present have rested on science, transparency, decentralization, and social equality. These are, as it were, the four pillars of the Kerala Model. On the other hand, the four pillars of the Gujarat Model are superstition, secrecy, centralization, and communal bigotry. Give us the first over the second, any day.

A civilised society supports people in need, but our brutal system shatters lives

Aditya Chakrabortty in The Guardian



Simon’s death certificate tidies away his life in a few terse official phrases. Date of death: 12 November 2017. Causes: “a) Fatty liver” and “b) Alcohol misuse”. No bureaucratic curiosity about how a 51-year-old’s life came to be cut so short.

Which leaves his only brother, Dave, dealing with the grief and asking all the whys. Why did Simon die so young? Why did no one else try to help?

No obituaries will be written for Simon, no plaques mounted, no tributes passed by politicians. But if you want to understand how Britain fails so many people in so many places, it’s stories like his you need to study.

Some people’s lives are like arrows, flying straight to their destinations. Not Simon’s. The Rhymney Valley, in south Wales, is where he was born and died, but it wasn’t where he spent most of his adult years, and it was never where he meant to land up. Bright boys, he and Dave had one notion drummed into them: get an education, and get out. On TV, Dave remembers, “We’d see the yuppie revolution going on in London – the Porsches and the red braces. It may as well have been another country.” For them, Thatcher meant mines closing, factories shutting, men being laid off in their thousands, and families going under.


Yet there are so many people like Simon, all surplus to requirements of this shrunken economy


Both sons flew away. Simon was the high-flyer, leaving Wales to do a science degree, going to Cambridge for postgraduate study, and becoming a software engineer with a giant defence firm. He married and settled far away, in Bushey, on the outskirts of London. He had got on his bike; he had looked for work. Now he was earning three times what his younger brother was making, and raring to join the yuppies.

Just as he was starting to live the dream, the dream fell to bits. He got divorced. He got laid off. Then their mother’s breast cancer returned – this time for good. The prodigal son moved back, moved in, and became her carer. Dave doesn’t remember him complaining once during the years their mother spent deteriorating and then dying.

Such setbacks await all of us, but one test of any civilised society is how well it supports us through them. In Simon’s case, Britain botched this test – over and over again. By the time his mother died, he had spent seven years outside the job market. It was 2007, the start of the credit crunch, and the economy was slowing. Even in boomtown London such a gap on the CV would have raised recruiters’ eyebrows. Here in south Wales, where jobs were already scarce, it was the kiss of death. Besides, it simply did not have positions for Si, with his Cambridge postgrad and software engineering background.

Simon “spent 25 years building up to be somebody”, says Dave. A quarter-century observing the social mobility rules laid down by Margaret Thatcher and Tony Blair. He had aspired, he’d grafted, he’d kept his side of the bargain. But while social mobility trumpets opportunity for individuals, it ignores the communities where those people live. The result was that Simon’s ambitions had outgrown his home, and now he was trapped.

Dave showed me the small terrace house their mother passed on to Simon, where he spent the last years of his life. No one was about as we walked through the speck of a village – just two long rows of cars parked outside the train station. This is the new Welsh commuter class that economists such as Cardiff University’s Calvin Jones talk about, the people who travel from the valleys to staff the call centres, shops and other minimum-wage employers in Cardiff or Newport.

Governments in Westminster and Cardiff Bay have spent decades promising to rebuild the shattered economy of south Wales. Serious money has been spent on shopping malls, new motorways and sweeteners for big business. Each time, the firms come, take the cash and – at best – leave a few poverty-paying jobs. You see the same cycle in so many deindustrialised parts of Britain. And each time, the politicians learn no lessons, and try the same thing again.
A few minutes from Simon’s old home is the town of Bargoed, where the greatest excitement in recent years was the opening of a Morrisons. Much of the rest of the high street is just memories: a huge statue to commemorate dead miners, the chapel turned into a library, and shop after shop with its shutters pulled down for good.

A rural bus services in Fochriw village, Bargoed. South Wales is one of the poorest regions of the UK. Photograph: Martin Argles for the Guardian

Simon signed on at the jobcentre, which told him to apply for 35 jobs a week. He sent off to become a teaching assistant, a warehouse operative, all the minimum wage jobs going. Barely an application led to an interview. Sometimes, “angry and very down”, he’d miss his targets or appointments. He would get sanctioned, go broke, and have to call on Dave to tide him over.

After years of knockbacks, Simon declared he’d never be able to work again. It came almost as a relief. “It meant he didn’t have to think of himself as such a failure. Now he could be a victim.”

Simon had always been a pub man. But now he’d get up in the morning and start on a glass of watered-down scotch and a sci-fi DVD. By the end of a day, he’d have finished the DVDs, his fags and an entire bottle of Scotch. Why does Dave think no employer wanted him? His answer comes back in a small, tight voice. “No one wants a 50-year-old, unemployed, overweight, drinking guy on the books, do they?”

Yet there are so many of them, all surplus to the requirements of this shrunken economy. A GP in Bargoed estimates that up to one in 10 of her patients have some kind of drink or drug addiction. Up to one in three suffer depression or anxiety. In these parts, a newborn boy can expect to live just over 61 years in good health; in the richest parts of London, it’s 75 years.

Having been one of Blair’s strivers, Simon was now one of George Osborne’s skivers. He was moved on to disability benefits, before the Department for Work and Pensions assessors declared him fit for work. His money would periodically stop until his GP contested the verdict. This spring, he was moved on to universal credit, which meant six weeks with barely a penny. Again and again, it was Dave who had to bail him out. It was Dave who suggested jobs Simon could apply for, small businesses he might start. The younger brother was filling in for the state, while Si lived in ripped clothes and ate junk. “The government was abusing a vulnerable man.”

Alcoholic Simon would go to the local NHS drink service once every few weeks – and every few months, he’d end up in such a bad state he would be admitted to hospital. They’d “dry him out, then spit him out”, says Dave. According to the thinktank the Nuffield Trust, the Welsh health system is underfunded by £500m a year.

Simon died in his small house, waiting to go back into hospital to dry out. He grew up in a town with men who’d had to dig out children from the Aberfan mining disaster; he died the year Grenfell Tower burned down. When such obvious tragedies strike, the politicians and the press vow to tackle the social injustices that caused them. But Simon was just one man dying in plain sight of his neighbours, his family and state officials. Far easier to chalk up his death to a fatty liver and booze, rather than inequality and austerity and the false promises peddled by politicians from Thatcher to May. A dead man, a dying town: he spent his last days being told he’s fit for work in an economy that has next to no work.
What’s left is a younger brother beating himself up about what he should have done and angry at others for letting them both down.

Before we part, Dave asks: “Why wasn’t there someone who could step in and help? Is that naive of me? To think that a modern, 21st-century society could do that for people who need it?”

The names in this piece have been changed and details obscured in order to protect the identity of Simon’s family

Why do people care more about benefit ‘scroungers’ than billions lost to the rich?

Robert De Vries and Aaron Reeves in The Guardian


The Paradise Papers have once again revealed the ingenuity and energy the super-rich are willing to deploy to keep their money away from the taxman. By illuminating the scale of this injustice, journalists have provided an invaluable service. And yet the revelations do not seem to have generated the level of public outrage that might have been expected.

At a time of staggering global inequality, it is perhaps surprising that people are not more animated by the determination of the ultra-rich to avoid their obligations to support our roads, hospitals, soldiers and schools – when regular citizens are unable to take advantage of such arrangements. However, this relative lack of concern is consistent with research on people’s attitudes towards tax avoidance.

Last year’s British Social Attitudes survey asked Britons about their feelings on this issue. Our analysis of this data (with Ben Baumberg Geiger of the University of Kent) revealed that the British public believes tax avoidance to be commonplace (around one third of taxpayers are assumed to have exploited a tax loophole). In moral terms, people seem rather ambivalent; less than half (48%) thought that legal tax avoidance was “usually or always wrong”.

By contrast, more than 60% of Britons believe it is “usually or always wrong” for poorer people to use legal loopholes to claim more benefits. In other words, people are significantly more likely to condemn poor people for using legal means to obtain more benefits than they are to condemn rich people for avoiding tax. This is a consistent finding across many different studies. For example, detailed interviews conducted by the Joseph Rowntree Foundation in the wake of the 2008 financial crisis found that people “tended to be far more exercised by the prospect of low-income groups exploiting the system than they were about high-income groups doing the same”.

This discrepancy is reflected in government priorities. Deep public antipathy towards benefit “scroungers” has been the rock upon which successive Conservative-led parliaments have built the case for austerity. Throughout his premiership, David Cameron, along with his chancellor, George Osborne, kept the opposition between “hardworking people” and lazy benefit claimants right at the centre of their messaging on spending cuts. Though gestures have been made towards addressing widespread tax avoidance by the wealthy, very little has actually been achieved. This stands in stark contrast to the scale and speed with which changes have been made to welfare legislation.

Will the Paradise Papers shift the public’s focus? The leaks alone are seemingly not enough. The 2016 British Social Attitudes survey was conducted just four months after the release of the Panama Papers. Even then, the British public remained more concerned about benefit claimants than tax avoiders.

Fundamentally, the Paradise Papers are about numbers – vast sums of money disappearing offshore that could be spent on public services here in the UK. However, as the former chair of the UK Statistics Authority, Andrew Dilnot, has often pointed out, people are bad at dealing with numbers on this scale. Unless you are an economist or a statistician, numbers in the millions and billions are just not particularly meaningful.

The key is to link these numbers to their consequences. The money we lose because people like Lewis Hamilton don’t pay some VAT on their private jet means thousands more visits to food banks. The budget cuts leading to rising homelessness might not have been necessary if Apple had paid more tax. Fewer people might have killed themselves after a work-capability assessment if companies like Alphabet (Google) had not registered their offices in Bermuda, and the downward pressure on benefits payments was not so intense. 

The causal chains connecting these events are complex and often opaque, but that does not make their consequences any less real, especially for those who have felt the hard edge of austerity.

The Paradise Papers have dragged the murky world of offshore finance into the spotlight. However, calls for change may founder against the British public’s persistent focus on the perceived crimes of the poor. That is, unless we – as academics, politicians, journalists and others – can articulate how the decisions of the very rich contribute to the expulsion of the vulnerable from the protection of state-funded public services. Quite simply, people get hurt when the rich don’t pay their taxes.

After the Grenfell fire, the church got it right where the council failed

Giles Fraser in The Guardian

We are an “unsuccessful church”, the exhausted Rev Alan Everett told me, as I persuaded him to take a break and have some lunch. He meant that they only get 30 to 60 people in the pews on a Sunday morning and that it wasn’t one of those whizzy Alpha course churches beloved by London bishops and their growth spreadsheets. Next to us in the church’s sunny courtyard, an extended Muslim family talked openly about their escape from the fire. “Our lungs are full of smoke but at least, thank God, we are all alive.” A church worker told them where to find new shoes and clothes. It felt like a refugee camp. Perhaps it was a refugee camp. And hanging over the whole scene, Grenfell Tower, black and enormous. It stands as a biblical-scale condemnation to a whole society.

In the days after the fire, the church of St Clement’s, Notting Dale, became a hub for grieving families, generous donations of clothes and food – and camera-ready politicians. First Jeremy Corbyn came. Then a furtive Theresa May met a few residents in the church. Then Sadiq Khan was at mass on Sunday morning. I wanted to know from Everett how the church was able to respond so quickly in a way that the council didn’t. “I was woken up at 3am by a priest who lives in the tower, and so I came down to the church, opened the doors and turned the lights on,” he said. It all began from there. People started coming in out of the dark – often passersby looking to help. First they sorted out tea and coffee. By 7am, they had a fully stocked breakfast bar, with volunteers organising themselves into teams. Within hours, local restaurants were delivering food; clothes began to pile high in the church sanctuary – about 40 Transit vans’ worth, the vicar estimates. The place looked like a warehouse.

Listening to Everett, it struck me that “opening the doors and turning the lights on” was precisely the difference between the church and a local authority that had become arms’ length from its residents, continually dealing with local people only through intermediary organisations such as the locally much-hated Kensington and Chelsea Tenant Management Organisation. The nicest thing I heard about the royal borough from local people was that it had outsourced its care for the poor as a cost efficiency. The worst, that it was deliberately running down its stock of social housing so that they could eventually bring in the developers.

Donations inside the church of St Clement’s, Notting Dale. Photograph: Matthew Barrett

In his Sunday morning sermon, Fr Robert Thompson, an assistant priest in the parish and also a local Labour councillor, channelled his anger. Contrasting the good communication of the local volunteers with the bad communication of the authorities, he said: “The people on the lowest incomes of this parish simply do not feel listened to, either this week or in previous years, by those in power. Worse than that, what the whole issue of the cladding and the lack of sprinklers may well highlight is that some people in our society have simply become excess and debris on our neoliberal, unregulated, individualistic, capitalist and consumerist society.” The churchy way of saying “I agree” with all this is “amen”. The church of St Clement was built and paid for in 1867 by Alfred Dalgarno, a philanthropist vicar with deep pockets and a compassion for the poor. Thompson is a councillor for the Dalgarno ward, named after him. “This parish was built pre-welfare state and it is going to be needed as we now enter the post-welfare state,” he told me, chillingly.

Of course, parishes like St Clement are only superficially unsuccessful. Its secularised charity arm, the Clement James centre, helps thousands of local people every year, into work, into university. That’s why the parish is so trusted locally. “We are called to share in the brokenness and the forgottenness of the people we serve,” the vicar explained. In poor parishes, the job is to keep the doors open and the lights on. And this being permanently present is no small thing. Not least because, as Christians believe, the light will always beckon people out of the darkness.

The myths about money that British voters should reject

Ha Joon Chang in The Guardian


Illustration: Nate Kitch


Befitting a surprise election, the manifestos from the main parties contained surprises. Labour is shaking off decades of shyness about nationalisation and tax increases for the rich and for the first time in decades has a policy agenda that is not Tory-lite. The Conservatives, meanwhile, say they are rejecting “the cult of selfish individualism” and “belief in untrammelled free markets”, while adopting the quasi-Marxist idea of an energy price cap.

Despite these significant shifts, myths about the economy refuse to go away and hamper a more productive debate. They concern how the government manages public finances – “tax and spend”, if you will.

The first is that there is an inherent virtue in balancing the books. Conservatives still cling to the idea of eliminating the budget deficit, even if it is with a 10-year delay (2025, as opposed to George Osborne’s original goal of 2015). The budget-balancing myth is so powerful that Labour feels it has to cost its new spending pledges down to the last penny, lest it be accused of fiscal irresponsibility.

However, as Keynes and his followers told us, whether a balanced budget is a good or a bad thing depends on the circumstances. In an overheating economy, deficit spending would be a serious folly. However, in today’s UK economy, whose underlying stagnation has been masked only by the release of excess liquidity on an oceanic scale, some deficit spending may be good – necessary, even.

The second myth is that the UK welfare state is especially large. Conservatives believe that it is bloated out of all proportion and needs to be drastically cut. Even the Labour party partly buys into this idea. Its extra spending pledge on this front is presented as an attempt to reverse the worst of the Tory cuts, rather than as an attempt to expand provision to rebuild the foundation for a decent society.

The reality is the UK welfare state is not large at all. As of 2016, the British welfare state (measured by public social spending) was, at 21.5% of GDP, barely three-quarters of welfare spending in comparably rich countries in Europe – France’s is 31.5% and Denmark’s is 28.7%, for example. The UK welfare state is barely larger than the OECD average (21%), which includes a dozen or so countries such as Mexico, Chile, Turkey and Estonia, which are much poorer and/or have less need for public welfare provision. They have younger populations and stronger extended family networks.

The third myth is that welfare spending is consumption – that it is a drain on the nation’s productive resources and thus has to be minimised. This myth is what Conservative supporters subscribe to when they say that, despite their negative impact, we have to accept cuts in such things as disability benefit, unemployment benefit, child care and free school meals, because we “can’t afford them”. This myth even tints, although doesn’t define, Labour’s view on the welfare state. For example, Labour argues for an expansion of welfare spending, but promises to finance it with current revenue, thereby implicitly admitting that the money that goes into it is consumption that does not add to future output.

 ‘It is a myth that, despite their negative impact, we have to accept cuts in such things as disability benefit, unemployment benefit, child care and free school meals.’ Photograph: monkeybusinessimages/Getty Images/iStockphoto

However, a lot of welfare spending is investment that pays back more than it costs, through increased productivity in the future. Expenditure on education (especially early learning programmes such as Sure Start), childcare and school meals programmes is an investment in the nation’s future productivity. Unemployment benefit, especially if combined with good publicly funded retraining and job-search programmes, such as in Scandinavia, preserve the human productive capabilities that would otherwise be lost, as we have seen in so many former industrial towns in the UK. Increased spending on disability benefits and care for older people helps carers to have more time and less stress, making them more productive workers.

The last myth is that tax is a burden, which therefore by definition needs to be minimised. The Conservatives are clear about this, proposing to cut corporation tax further to 17%, one of the lowest levels in the rich world. However, even Labour is using the language of “burden” about taxes. In proposing tax increases for the highest income earners and large corporations, Jeremy Corbyn spoke of his belief that “those with the broadest shoulders should bear the greatest burden”.

But would you call the money that you pay for your takeaway curry or Netflix subscription a burden? You wouldn’t, because you recognise that you are getting your curry and TV shows in return. Likewise, you shouldn’t call your taxes a burden because in return you get an array of public services, from education, health and old-age care, through to flood defence and roads to the police and military.

If tax really were a pure burden, all rich individuals and companies would move to Paraguay or Bulgaria, where the top rate of income tax is 10%. Of course, this does not happen because, in those countries, in return for low tax you get poor public services. Conversely, most rich Swedes don’t go into tax exile because of their 60% top income tax rate, because they get a good welfare state and excellent education in return. Japanese and German companies don’t move out of their countries in droves despite some of the highest corporate income tax rates in the world (31% and 30% respectively) because they get good infrastructure, well-educated workers, strong public support for research and development, and well-functioning administrative and legal systems.

Low tax is not in itself a virtue. The question should be whether the government is providing services of satisfactory quality, given the tax receipts, not what the level of tax is.

The British debate on economic policy is finally moving on from the bankrupt neoliberal consensus of the past few decades. But the departure won’t be complete until we do away with the persistent myths about tax and spend.

The hidden agenda behind Benevolence - An Indian critique of Universal Basic Income

G Sampath in The Hindu


The idea of a universal basic income (UBI) has been gaining ground globally. While Switzerland held a referendum on it last year (it was voted down), Finland introduced it earlier this month. Media reports suggest that the government of India’s flagship Economic Survey this year is likely to endorse the UBI, setting the stage for its introduction.

On the face of it, an unconditional basic income for everyone seems a great idea. In the West, the UBI is being discussed as a solution to two problems: unemployment due to automation; and growing social unrest caused by extreme inequality and precarity. It is expected to solve the unemployment problem by decoupling subsistence from jobs, freeing human beings to realise their true potential, preferably through entrepreneurship. It would address the second by supplying monetary resources to access the necessities of life. This, in a nutshell, is the popular understanding of the UBI. The reality, however, is not so rosy.

The UBI debate in India has been a narrow one — restricted, for the most part, to financial viability. Its advocates argue that it is a more efficient way of delivering welfare, while its opponents hold that the fiscal burden would be too much. What hasn’t received adequate attention is the politics behind the UBI: who is pushing the idea? To what end? And why?


The UBI evangelists

The most eloquent advocates of UBI today are free-market enthusiasts — the same lot branded as neo-liberals for their advocacy of deregulation, privatisation, and cuts in welfare spending. Their guru, Milton Friedman, was an early advocate of basic income. Outside the academic realm, the biggest champion of UBI is the global tech sector. Silicon Valley billionaires such as Elon Musk, the founder of Tesla Motors, and Facebook co-founder Chris Hughes have publicly backed the idea.

Could it be possible that the global financial elite have finally sprouted a conscience? The reports of the UBI pilot projects conducted so far offer a clue. Invariably, they all present the same conclusion: giving cash to the poor is better than traditional welfare.

Of course, it would be wonderful if the problem of inequality and poverty were solved for us by a sudden moral awakening of the rich. Unfortunately, the current enthusiasm for the UBI is not the product of such a momentous development.


Not an add-on benefit

The biggest myth about the UBI, partly responsible for sections of the Left endorsing it, is that it is a redistributive policy that would reduce inequality. It is indeed possible to have a redistributive UBI. But it would need to fulfil two conditions: it must be funded by taxing the wealthy; and the existing entitlements to the poor must not be taken away. Such a UBI would actually be a socialist measure that would increase the bargaining power of the working classes by giving them an income cushion.

But neither of these conditions is met by any of the UBI designs being promoted today, either globally or in India. The much-touted Finnish experiment is restricted to the unemployed. It does not cover all working individuals. And it only replaces the already existing basic unemployment allowance and labour market subsidy — it is not an add-on benefit.

In India, too, the UBI is not an add-on. On the contrary, it is about giving in a different form (cash), and under one umbrella, what is already being given (in-kind and cash benefits) via different channels.

Back in 2008, in an influential paper in the Economic and Political Weekly titled ‘The case for direct cash transfers to the poor’, Arvind Subramanian, the present Chief Economic Adviser of the government, along with economists Devesh Kapur and Partha Mukhopadhyay, argued that the ₹1,80,000 crore spent annually on centrally sponsored schemes and assorted subsidies should instead be distributed as cash directly to 70 million households below the poverty line. Put simply, the UBI in India is nothing but the old wine of direct cash transfer in a fancy new bottle.

Its objective remains the same: to eliminate the public distribution system (PDS) and with it, the food, fuel, and fertiliser subsidies. The same old arguments for replacing the PDS with cash transfers are now being trotted out in favour of the UBI. The addition of the word ‘universal’ signals greater ambition but alters neither the substance nor the motive.

But let us take the arguments in favour at face value. What constitutes a basic income? Common sense dictates that it should be whatever is required to take care of basic life needs. A logical equivalent for this figure would be the minimum wage. The central government’s move last year to raise the minimum wage for non-skilled, non-agricultural workers to ₹9,100 per month was set aside following opposition from industry. Perhaps ₹9,100 per month is too luxurious an income to qualify as ‘basic’. The actual minimum wage in India is around ₹4,800 per month. Could we then expect at least this amount from our UBI?

While different numbers have been bandied about, there seems to be a broad consensus around the Tendulkar committee poverty line of ₹33 a day. This works out to a basic income of ₹1,000-₹1,250 a month or ₹12,000-₹15,000 a year. But even this modest figure is estimated to cost 11-12% of the GDP. In contrast, all the government’s subsidies put together account for only 4-4.5% of the GDP. This presents three options: one, the government makes up the deficit through additional tax revenue; two, it limits the fiscal burden by shrinking the UBI coverage from ‘universal’ to those below the poverty line; and three, it further shrinks the amount being doled out.

Given India’s narrow tax base, and a policy mindset hostile to the idea of extracting more tax revenue from the wealthy, we can rule out option one. So the UBI we get, if we get one, would be derived from a combination of the second and third options, which means both ‘U’ and ‘B’ are out of UBI, leaving us effectively with what we already have: cash transfers.

Most critically, one aspect is taken for granted by all the three options: the UBI will be funded primarily by the money allocated for CSS and subsidies. In other words, a basic income, however paltry, would help strengthen the case for the elimination or a significant roll-back of programmes such as the PDS, midday meal schemes, and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).


Why a UBI now?

There is no point reprising here the case against direct cash transfers, which economists such as Jean Dreze have made convincingly. It is nonetheless fascinating to see the emerging contours of a distinctive political project.

The Jan-Dhan Yojana set out to make every Indian accessible to global finance. The Aadhaar card set out to make every Indian identifiable and enumerable as data — the currency of global tech. The high mobile penetration has connected every Indian to the global digital network. An element that was missing was consumer behaviour, which the recent demonetisation sought to address, by force-feeding ‘cashless’ to a cash-dependent population. The UBI fits perfectly in this scheme of things, as it seeks to compress the whole gamut of welfare benefits into one, and mount it on a singular JAM (Jan-Dhan, Aadhaar, Mobile) platform.

But why a UBI now? One explanation could be the immense pressure on India in secretive free trade negotiations. The developed nations have for long wanted India to wind up its food security-related provisions — both state procurement of foodgrains, and their subsidised distribution via PDS. A UBI would pave the way for the elimination of these measures, dealing a death blow to food security and deepening farm distress.

Another is that the Indian state is stuck with welfare commitments it cannot renege on without political and legal consequences. The efficiency/inefficiency argument for scraping PDS and MGNREGS never acknowledges that these are rights-based social entitlements with specified outcomes — and that is not accidental. Shifting the welfare paradigm to UBI would loosen the bonds of legal and social accountability. Under the PDS, for instance, the state must provide a specified quantity of foodgrains to the poor no matter what. With UBI, it has the option letting the payout slide behind inflation, as has already happened with the old age and widow pensions.

In the final analysis, we need to answer a simple question: is the UBI about reducing inequality and poverty? If the answer is yes, then there are many things the state could do at a fraction of what the UBI would cost — from enforcing the minimum wage law, to releasing funds on time for MGNREGS. But if a dispensation hostile to these tried and tested anti-poverty measures develops a sudden zeal to eliminate poverty through UBI, a measure of scepticism is in order.

Universal basic income trials being considered in Scotland

Libby Brooks in The Guardian


Scotland looks set to be the first part of the UK to pilot a basic income for every citizen, as councils in Fife and Glasgow investigate trial schemes in 2017.

The councillor Matt Kerr has been championing the idea through the ornate halls of Glasgow City Chambers, and is frank about the challenges it poses.

“Like a lot of people, I was interested in the idea but never completely convinced,” he said. But working as Labour’s anti-poverty lead on the council, Kerr says that he “kept coming back to the basic income”.

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Kerr sees the basic income as a way of simplifying the UK’s byzantine welfare system. “But it is also about solidarity: it says that everyone is valued and the government will support you. It changes the relationship between the individual and the state.”

The concept of a universal basic income revolves around the idea of offering every individual, regardless of existing welfare benefits or earned income, a non-conditional flat-rate payment, with any income earned above that taxed progressively. The intention is to provide a basic economic platform on which people can build their lives, whether they choose to earn, learn, care or set up a business.
The shadow chancellor, John McDonnell, has suggested that it is likely to appear in his party’s next manifesto, while there has been a groundswell of interest among anti-poverty groups who see it as a means of changing not only the relationship between people and the state, but between workers and increasingly insecure employment in the gig economy.

Kerr accepts that, while he is hopeful of cross-party support in Glasgow, there are “months of work ahead”, including first arranging a feasibility study in order to present a strong enough evidence base for a pilot. “But if there is ever a case to be made then you need to test it in a place like Glasgow, with the sheer numbers and levels of health inequality. If you can make it work here then it can work anywhere.”

The idea has its roots in 16th-century humanist philosophy, when it was developed by the likes of Thomas More, but in its modern incarnation it has lately enjoyed successful pilots in India and Africa.

Despite its utopian roots, champions believe that this is an idea whose time has come, particularly in Scotland where the governing SNP voted in support of a basic income at their spring conference (although the proposal has yet to make it into their manifesto).

At the heart of any experiment with basic income is money: how much should people get and where will it come from? Kerr says his instinct is to base the amount on similar calculations to those made for the living wage.

“It’s about having more than just enough to pay the bills. But part of the idea of doing a pilot is to make mistakes and also find out what is acceptable to the public. There will be a lot of resistance to this. We shouldn’t kid ourselves. Part of the problem is we’re working against a whole discourse of deserving and undeserving poor.”

As for where the money comes from, “the funding question is always the big one, and really will depend upon the approach a pilot takes,” says Jamie Cooke, head of RSA Scotland, which has been spearheading research on the subject across the UK.

Drawing on the experience of similar projects ongoing in Finland, Utrecht in the Netherland and Ontario in Canada, Cooke suggests: “It could be funding from particular trusts, it could be individual philanthropic funding, as we have seen in the States, or it could be a redirection of the existing welfare spend.” Obviously the latter is much harder to do in a pilot, although that will be happening in Finland next year where the experiment is being taken forward by the national government.

As the Scottish government consults on what it has described as “the biggest transfer of powers since devolution began” – the devolution of around £2.7bn, or 15% of the total Scottish benefits bill, affecting 1.4 million people – both Kerr and Cooke believe that this is an ideal moment to consider the basic income seriously. “It’s a time to be testing out new – or rather old – ideas for a welfare system that genuinely supports independence,” says Kerr.

Cooke likewise believes that cross-party support is key, pointing to the fact that the leader of the Conservative group on Fife council has joined forces with the Fairer Fife Commission, the council’s independent poverty advisory group which initially recommended the trial, with the aim of designing a pilot within the next six months.

Scotland was recently added to the list of “places to watch” for basic income activity by the Basic Income Earth Network, founded by the radical economist Guy Standing, whose hugely influential book The Precariat identified an emerging social class suffering the worst of job insecurity and most likely to be attracted to rightwing populism.

“The thing about Scotland is that they really understand the precariat,” says Standing, who recently visited the country to meet civil servants, local authorities and campaigners to discuss a basic income. “The sense of insecurity, the stagnating living standards, all of those things are clear in Scotland and the fact that so many within the SNP are supportive means there’s a real opportunity to do a pilot in Scotland.”

The momentum is there, he says, and once it is framed around a desire for greater social justice “then you get away from the stale debate about whether if you give people the basic income then they will be lazy”.

“People relate to the idea that everyone should have a social dividend. Everywhere I go, it’s the communities that feel left behind by globalisation that are most interested [in the idea of a basic income]. We have seen a sea-change in attitudes.

“This sense of alarm about populist rightwing politics has brought more people to thinking we need to do something to provide better security for people. We are risking our economic and political stability if we don’t do something about it.”

The economic argument against neoliberalism

Owen Jones meets Ha Joon Chang

Why Corbyn could come up Trumps

Mary Dejevsky in The Independent

The season of looking back with big ideas has come early this year, thanks to Brexit, Donald Trump and now the referendum rout in Italy. And two of these big ideas tend to converge. The first is that populism is on the march, thanks to those “left behind” by free-market orthodoxies. The second is a despairing cry of: “Where, oh where, is the political left when we need it?”

In the UK, those “left behind” are now in the sights of all political persuasions, but most conspicuously from the right and from those experts so derided by the Brexiteers. Theresa May has made social justice a theme of her early months as Prime Minister, while the minuses of globalisation have featured even in a speech by the head of the Bank of England, along with arguments that something – though it is unclear precisely what – should be done.

The difficulty is that the mooted solutions are unpalatable, especially to those who have thrived amid free movement and the free market. More redistributive taxes in the Scandinavian mode; swingeing tariffs on imports of cheap foreign goods; walls, literal and metaphorical, to keep cheaper labour out; incentives for employers to keep jobs at home; subsidies for workers who would otherwise be priced out of their jobs by foreign competition – none of these are seen as desirable or realistic. They fly so much in the face of all the prevailing assumptions of a generation.

If the ideas about populism in the UK and its causes differ little from those swirling around elsewhere, we have our own local personification of the political left’s failure in the figure of the Labour leader. Jeremy Corbyn is seen as inept and divisive; a man who became party leader by a fluke and has no prospect whatsoever of becoming prime minister.

Why not? To his detractors, the reasons are so obvious that they hardly need to be stated. He is in every way a throwback to an age that is long gone. He may have taken the advice about suit-wearing offered vicariously by David Cameron’s mother, he may have learned from Michael Foot about how not to turn up on Remembrance Sunday at the Cenotaph. But he lauded Fidel Castro after his death, and he still harps on about exploitative employers and profiteering bankers.

He has absorbed nothing from the victories of Tony Blair and what makes a modern Labour party electable; nothing about aspiration from erstwhile Mondeo Man, and nothing about remaining “intensely relaxed” with people getting “filthy rich”. No wonder, Corbyn’s opponents would say Blair is contemplating a comeback.

The fact that Labour’s poll ratings are disastrous, that a party candidate lost their deposit at the last (Richmond Park) by-election, and that one-time safe northern constituencies are haemorrhaging votes via Brexit to Ukip are all reasons why Labour under Corbyn is supposed to be a lost cause. And, of course, to return to appearances, Comrade Jeremy just does not look or sound prime-ministerial, and everyone knows he is a hopeless administrator: not leadership material at all.

This is not, however, anything like the whole truth. Labour’s poll ratings are dismal at least in part because it is presenting itself as a divided party. And whose fault is that? There is an ideological rift between the mainly Blairite MPs and the grassroots who – post-Ed Miliband – were given a vote for leader. Under that system, Jeremy Corbyn has won the leadership convincingly, not once, but twice. So who is perpetuating the division – the majority or the minority? In other contexts, those who don’t accept the rules of the democratic game have been called variously “sore losers”, “Remoaners”. Who, I repeat, are the non-democrats here?

Under Corbyn, Labour’s record in by-elections has been creditable – it has not lost a single seat it previously held – despite the fervent hopes of some that a loss would offer a pretext to oust him. And after the Brexit vote, has Labour’s record been any worse than that of the divided Conservatives? On the contrary, in the former Attorney General, Keir Starmer, the non-managerial Corbyn has somehow found a persuasive spokesman. Emily Thornberry is making a decent job of shadow Foreign Secretary. Labour has been scoring points on benefits and the NHS.

If it were united, it could do much, much better. But it would have to be united on Corbynite, old-Labour terms – the very terms, in fact, which explain Labour’s appeal to a whole new constituency: all those young people allegedly turned off by politics, who thronged the rallies of a bearded 67-year-old. At a time when the great and the good lament the political disengagement of the young, Corbyn has struck a chord with a programme of back-to-basics leftism from which he has barely deviated over decades.

After Iraq, the financial crisis, the spinning away of the super-rich, and the legions “left behind” by late 20th-century capitalism, those basics have a new resonance. This is why one of the big questions of the year has been: where is the left when we need it? But it is also why those who embraced Blairite centrism don’t want to know. It is their model of ideological flexibility and economic compromise that has aged badly, not Corbyn’s attachment to the old verities. It is the old left – of workers’ rights, the social-safety net, redistribution, and equality, of opportunity if not outcome – that has to be the source of Labour’s revival.

These are not my politics, and – according to some – Labour is already up to its old “splittist” tricks, with Trotskyite entryism again a threat. But there is a place for an old British left perspective on the world and its coherent critique of capitalism could yet enjoy electoral appeal. Corbyn is building a passable team; he has scored points at Prime Minister’s Questions, and in tapping into the youth vote, he has done what no other party leader has managed to do.

He may not look, sound or behave as a prime minister-in-waiting and the polls have him doomed – but these are not necessarily counter-indicators in this perverse age.