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From the DWP to the economy – the Coalition’s growing credibility chasm

02 Sunday Jun 2013

Posted by Mike Sivier in Benefits, Conservative Party, Economy, People, Politics, Tax, UK, unemployment

≈ 12 Comments

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90 per cent, agencies, agency, arbitrary, austerity, benefit, bogus, bond, cabinet, Centre, Chancellor, co-operation, Coalition, confidence, Conservative, credit, credit rating, cut, Dean Baker, debt, Department, DEPR, development, domestic, down, DWP, economic, economy, fake, fiscal, fiscal cliff, GDP, George Osborne, government, gross, IMF, inequality, infrastructure, Institute, Interest, International Monetary Fund, investment, job, Jonathan Portes, living, Malcolm Sawyer, market, market price, Mike Sivier, mikesivier, minimum, national, NIESR, nudge unit, OECD, organisation, Pensions, policy, politics, product, project, psychometric, rate, ratio, reinhart, Research, revise, revision, rogoff, sham, Skwawkbox, Social Research, Steve Walker, test, Tories, Tory, unemployment, Vox Political, wage, work, yield


All the wrong things for all the wrong reasons: The evidence shows no good reason for George Osborne's economic austerity policies - other than, possibly, an intention to rob this nation of everything possible before 2015.

All the wrong choices for all the wrong reasons: The evidence fails to support George Osborne’s economic austerity policies – the only likely explanation seems to be an intention to rob this nation of everything possible before 2015.

The more we learn of the Tory-led Coalition’s policies, the wider the gap grows between what it is doing and what it should be doing.

Look at the sham psychometric tests, exposed by fellow blogger Steve Walker in a series of articles on his Skwawkbox site. It is now firmly established that the DWP – aided by the Cabinet office ‘nudge unit’ – set out to pressgang put-upon benefit claimants into taking part in a crude piece of neuro-linguistic programming – no matter what answers you provided, the test always pushed out a ridiculously upbeat appraisal of your character and then tried to get you to act according to this verdict in your jobsearching activities. The theory is that this will make a jobseeker more confident and finding a job easier. The problem is that it’s quite utterly ludicrous.

If you haven’t already, you can read the Skwawkbox exposure of this particular caper on that site – there are plenty of links to it from this one. The reason it is mentioned here is that it provides a useful set of questions with which to analyse any government activity: First, is the theory behind this activity sound? Second, if that theory is being used to support a particular course of action, is that action justifiable?

So let’s turn once again to George Osborne’s reasons for pursuing economic austerity, as described in the letter Vox Political received from the UK Treasury last month.

Firstly, the letter warns against the perils of losing market confidence. By this, we can see that it means we should fear any downward revision of our credit rating by the credit agencies, as “a one percentage point increase in government bond yields would add around £8.1 billion to annual debt interest payments by 2017-18”.

What’s being said is that a drop in our credit rating would mean the people and organisations that have invested in UK government debt (by buying our bonds) might move their funds to others, meaning the government could be faced with an interest rate rise, leading to increased difficulty in borrowing.

But we know that this isn’t true. The UK’s credit rating was downgraded only a few months ago. Did interest rates rise? Was our ability to borrow hindered at all? No. There’s a reason for that.

As Professor Malcolm Sawyer notes in Fiscal Austerity: The ‘cure’ which makes the patient worse (Centre for Labour and Social Studies, May 2012), “It is well-known that a government can always service debt provided that it is denominated in its own currency. At the limit the UK government can ‘print the money’ in order to service the debt: this would not take form of literally ‘printing money’ but rather the Central Bank being a willing purchaser of government debt in exchange for money.” This is what is happening at the moment. Our debt is in UK pounds, and we can always service it. Our creditors know that, so they remain happy to continue financing it.

This means that the Treasury’s next point, that “any loss of investor confidence in the UK’s fiscal position would not only affect the UK, but also the global economy” is also meaningless. There won’t be a loss of investor confidence, so there won’t be an effect on the global economy.

We move on – to the Chancellor’s claim that fiscal austerity is required to prevent the slowing of economic growth that happens when the national debt hits 90 per cent of gross domestic product (or thereabouts).

You’ll recall that my letter to the Chancellor was prompted by the revelation that the academic paper on which he relied most often, by Reinhart and Rogoff, had been proved to be mistaken. The Treasury’s response pulled out a series of references to other academic works suggesting a fiscal cliff similar to the Reinhart-Rogoff model, off which we would drop if the national debt passed an arbitrary level around 85-90 per cent of GDP. These were published by the International Monetary Fund, which we know isn’t quite as keen on austerity as it used to be; the Organisation for Economic Co-operation and Development, which this blog marked out as “schizoid” only a few days ago; and others.

Obviously I haven’t had time to look up eight academic works to support any opposing theory I may wish to create – and I think I would be foolish to try. I don’t have any grounding in economics beyond what I’ve been able to pick up by following the national and international debates.

But, then, according to Dean Baker of the Center (yes, it’s American) for Economic and Policy Research: “As a general rule economists are not very good at economics.”

He writes: “Most economists are unable to conceptualize anything that someone with more standing in the profession did not already write about. This is the only reason that the Reinhart-Rogoff 90 per cent debt-to-GDP threshold was ever taken seriously to begin with.”

That prodded my curiosity to check some of the papers listed by the Treasury in support of its stance, and the three that I checked (The Real Effects of Debt, Public Debt and Growth, and How Costly Are Debt Crises?) all listed the Reinhart-Rogoff paper in their supporting references. So Mr Baker is right.

“Debt is an arbitrary number,” he continues. “The value of long-term debt fluctuates with the interest rate… The value of our debt will plummet if interest rates rise… This means that we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost.

“Bonds carry a face value, meaning the amount that will be paid off when they reach maturity. This is what gets entered in our debt figure. However bonds also carry a market price, which fluctuates inversely with interest rates. The longer the term of the bond, the more its price will vary with interest rates.

“If interest rates rise, as just about everyone expects over the next three-to-five years, then the market price of the bonds we have issued in the current low interest rate environment will fall sharply. Since we count our debt at the face value of the bonds, not their market price, we could take advantage of the drop in bond prices to buy up… bonds at sharp discounts to their face value.

“The question is why would we do this, we would still pay the same interest? The answer is that the policy would make no sense for exactly this reason.

“However, if we accept the Reinhart-Rogoff 90 per cent curse, then reducing our debt in this way could make a great deal of sense. Suppose we can buy back debt with a face value of 60 per cent of GDP at two-thirds its face value, or 40 per cent of GDP. In our debt accounting we would have reduced our debt-to-GDP ratio by 20 percentage points. If this gets us below the 90 per cent threshold then suddenly we can have normal growth again.

“Yes, this is really stupid, but if you believed the Reinhart-Rogoff 90 per cent debt cliff, then you believe that we can sharply raise growth rates by buying back long-term bonds at a discount. It’s logic folks, it’s not a debatable point — think it through until you understand it.”

I found Mr Baker’s piece after asking Jonathan Portes of the National Institute for Economic and Social Research (NIESR) for his opinion on the Treasury letter. He described it as “Predictable and largely irrelevant”.

So despite my lack of economic education, we have a working theory that suggests the Treasury has built its economic castle on the sand; that its justification for austerity is unsound. What about the austerity measures themselves? Are they justifiable on any level at all?

Evidence suggests not.

Let’s go back to our other friend in this matter, Prof Malcolm Sawyer. “Fiscal austerity and cuts in public expenditure do not work – there is a limited, if any, effect on reducing the budget deficit, and any return to prosperity is severely undermined.” We can see that this is true, using the government’s own figures. It managed to cut the deficit from £150 billion to £120 billion in 2011-12, mostly by axing large projects that invested in the UK economy. How much did it cut from the deficit in 2012-13? Less than £1 billion. The benefit cuts that created much of the fuel for this blog have not helped to cut the deficit at all.

“The reduction of the budget deficit can only come from a revival of private demand which is harmed by an austerity programme,” Prof Sawyer continues. Again, we can see that this is true. Austerity measures such as benefit cuts and the axing of infrastructure investment projects means there is less money available to the people who are most likely to spend it – the working- and middle-classes, and those who are unemployed. People with less money have to spend just about everything they receive in order to cover their costs. That money passes into circulation and the economy grows, through the fiscal multiplier effect. An attempt to explain this effect appeared on this blog within the last few days. The point is that demand increases when the people who earn the least have more to spend.

Therefore we see that Prof Sawyer’s next statement, “Deficit reduction requires investment programmes and reduction of inequality to stimulate demand”, is already proved.

So the answer is to reduce the unemployment rate by creating more jobs and closing the jobs deficit, as highlighted in this blog only a few days ago; to raise incomes by significantly increasing the minimum wage and adopting the proposed ‘living wage’, as promoted in this blog frequently; and investment in infrastructure projects.

What has Osborne done, along with his economically-illiterate chums?

He has created high unemployment.

He has depressed wages.

He has cut infrastructure projects.

He has, therefore, sucked all the demand out of the economy. What effect has this had?

Economic growth has, in the single word of Shadow Chancellor Ed Balls, “flatlined”, borrowing has remained high and the national debt is continuing to rise.

In other words, this part-time Chancellor’s strategy – a plan on which we have all been asked to judge the entire Coalition government, let’s not forget – has failed. Hopelessly.

I return you to Prof Sawyer, one last time [bolding mine]: “The austerity programme is economically irrational, socially irresponsible, and lacks credibility that it can reduce the budget deficit and secure any return to prosperity. The time has come to rebuild through investment and through a major assault on inequality.”

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Local election campaigns begin – but where are the NEW contenders?

10 Wednesday Apr 2013

Posted by Mike Sivier in Conservative Party, Labour Party, Liberal Democrats, Politics, UK

≈ 5 Comments

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Baroness, benefit, bookmaker, borrower, campaign, ceremonial, Conservative, council, create, creation, cut, debt, Ed Miliband, Enterprise, expensive, funeral, gambling, Iain Duncan Smith, inferior, Interest, job, jobseeker, Jobseekers (back to work schemes) Bill, Ken Loach, Labour, lender, Liberal Democrat, local election, low, Mandatory Work Activity, Margaret, message, Mrs, National Health Action Party, No Party, Parliament, Party of the Left, pay, payday, People of the British Political and Lawful Rebellion Party, private, project, repayment, sanction, script, service, smear, Thatcher, Tories, Tory, Treasury, vanity, wage, work programme provider, Workfare


Get your votes out: But who will you support, if your local council is holding elections this year? The mid-term vote is always carefully watched, so your vote could sway predictions for the 2015 general election!

Get your votes out: But who will you support, if your local council is holding elections this year? The mid-term poll is always carefully watched, so your vote could sway predictions for the 2015 general election!

Hard though it may be to believe, in the midst of all the ‘Mrs T’ drivel, but life goes on and there are elections on the way.

The Liberal Democrats have launched their bid for seats on 34 councils in England and one in Wales, predictably, with a smear campaign.

Apparently, both their Coalition partners the Conservatives, and Labour, are inefficient and waste money on “vanity projects”.

This will be a hard criticism for the Tories to counter, considering they are about to waste up to £10 million of taxpayers’ – our – money on a ceremonial funeral for Baroness Thatcher that the majority of the people in the UK simply don’t want.

Apparently, MPs can claim £3,750 each, from the taxpayer, because Parliament has been recalled to pay tribute to her. If they all take advantage of it, that alone will cost us £2,437,500!

Praise is due to Labour’s John Mann, who the BBC placed among those calling the debate a waste of money. He said tributes could have been made next week, when Parliament is due to return.

But then, what is the Liberal Democrat plan to increase the Personal Allowance, that we are all allowed to earn before we start paying Income Tax, if it isn’t a vanity project?

Nick Clegg says the Liberal Democrats will spread “the burden of austerity fairly”, but if this policy really has made 24 million families in the UK £600 better-off than they were in 2010, that means the Treasury has received £14,400,000,000 less than it otherwise would have. Nearly 14-and-a-half BILLION pounds!

This is money that could have eased the severity of the benefit cuts on the poorest in society, or the government could have invested it in projects that would have created jobs, increasing the tax take and lessening the burden of debt repayments and benefits for the poor.

Noticeably absent from Mr Clegg’s speech, at the Eden Project in Cornwall, was any mention of what his party would do with any new council seats it picks up. Instead, he went back to the Liberal Democrat ‘message script’ that was thrust upon his party back between Christmas and the New Year. “Only the Liberal Democrats will build a stronger economy and a fairer society, enabling everyone to get on in life” he droned.

Here in Radnorshire, Wales, people hearing that will be thinking those words are familiar, and asking themselves when they were aired before. Oh yes – it was last week, when our MP Roger Williams and AM Kirsty Williams were talking up the increases in the Personal Allowance.

So there’s no offer from the Liberal Democrats.

At least Labour’s Ed Miliband launched his party’s campaign with a solid commitment – he wants councils to be allowed to prevent payday lenders from operating in their areas, and to stop bookmakers from opening as well.

In hard times, it makes sense for gambling to be curbed – although it is a shame that the last Labour government allowed it to become commonplace before the financial crash hit. And payday lenders must be brought to heel – the huge interest rates they charge mean borrowers – who need the money because they receive such a poor pay packet from their fatcat bosses, don’t forget – fall even further into debt.

But Labour’s recent behaviour in Parliament has created deep mistrust of the party among its core voters. Labour betrayed the poorest workers in the UK, and everybody who is looking for a job, by supporting Iain Duncan Smith’s retroactive law to legalise his illegal sanctions against jobseekers who would not take part in his slave-labour ‘mandatory work activity’ schemes to raise cash for ‘work programme provider’ companies and commercial enterprises that took part.

If Labour wants to win that trust back, it needs to field prospective councillors who genuinely want to represent the interests of the people in their wards, with good Labour values – ensuring they get the best value for their council tax money, rather than turning services over to private enterprises who then make councils pay through the nose for inferior work, for example.

And what about all the new contenders that have sprung up since the Coalition came to power and started reversing all the good work the previous Labour government did, justifying it by saying the new austerity made it necessary (it isn’t)?

The National Health Action Party can be ruled out, I think. That organisation is a single-issue party created solely to attack Coalition members of Parliament, and anyone else who voted in support of the Health and Social Care Act, that allows private, for-profit companies to run NHS services.

What about the ‘No’ Party? This group claims the UK needs a fresh start, and wants to contend the next general election “on a massive scale”. In that case, they should start at local level. Political organisations of any kind won’t be trusted with Parliamentary seats until their members have proved themselves in the local arena and the May elections are a perfect opportunity to get started. Where are the ‘No’ candidates?

What about the People of the British Political and Lawful Rebellion Party, which says it aims “to put the People back into politics”.

This organisation’s Facebook page says: “It is time this country came together and started the mass political and legal upheavel required for a legitimate, lawful, peaceful and successful rebellion. As a newly founded political party, we take one-step at at time while learning to utilise our skills as individuals and collectively.”

Okay, then why not start now – in local councils? Then the ordinary people will be able to find out what they’re all about.

It seems too early for any wide-based, mainstream ‘Party of the Left’, of the kind Ken Loach has been pushing, to come together in time for these elections – which is a shame.

In the light of Labour’s actions on the Jobseekers (Back to the Workhouse) Bill, it is possible that there does need to be another mainstream, national left-wing political organisation – if only to remind Labour of what it ought to be.

One of the most telling comments about the late Baroness Thatcher was that she changed not only the Conservatives, but other political parties, meaning that Labour followed a similar course to the Conservatives when it came to office in 1997.

It’s time Labour remembered that there are other, real and workable alternatives – and started working on them.

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