(No) stitch in time

That last Labour lot were an utter shower. It’s cos of them we’re in the mess we’re in, cos of them spending, make that wasting, all our money. Wasting I tell you.

Hold that thought for a mo ….. the scenes from waterworld/Somerset are truly gobsmacking as is the fact it appears to have been going on since Christmas. Clearly something should have been and/or must be done about this, except something already was – spending on flood defences in England and Wales was cut (in absolute and real terms) years ago by the current government.

This was part of the initial approach to austerity; routine spending e.g. benefits, are a bugger to cut as the Irritable Bowel-Duncan-Smith experience exemplifies. Capital spending on the other hand is relatively easy, you just cancel or postpone the building of new things like seawalls. Hence, in the early years of austerity, capital spending, even though it’s a relatively modest share of total government spending, accounted for a disproportionate share of the cuts. Capital spending on flood defences illustrates this perfectly, the total being cut 27% from 2010/11 (the last year of Labour spending plans) to 2011/12.

Now would a Labour government have done anything differently if it’d won the last election? Doubt it. But, some of the last Labour government’s spending looks a bit more sensible allova sudden what with them having started ramping up spending towards the £1bn a year level that’s been deemed necessary to cope with all the freak weather we now appear to have.

And there’s the obvious charge of short-sightedness that can be made against the current lot. Would keeping spending at Labour levels have prevented current events? Doubt it, but it might have ameliorated some of them, which, given what they’ll ultimately mean in terms of additional spending on tidying up the mess, lost economic activity and all our insurance premiums, suggests the spending cuts may eventually cost us all far more than they apparently saved *. Oh and it would have created jobs as well.

And BTW the above numbers are nominal i.e. don’t take inflation into account, meaning the reduction in spending is even bigger than it looks.

* you get the impression the nasty bedroom tax has already gone in this direction as well what with the time and money being wasted on chasing up newly created rent arrears and what not.

I blame Gordon Brown

Kinda-ish. Him making the Bank of England independent in 1997 is normally viewed as having been an unquestionably good thing. You could argue, well I’m going to anyway, that it actually made a notable, if indirect contribution to the credit crunch in Britain. Here’s why.

Banks regularly run stress tests. These set out stressful scenarios wherein property prices fall, inflation rises, the economy goes into recession and so on, the point being to develop a sense of what all of these things would do to a bank’s profitability, capital and liquidity. This in turn should inform how much capital a bank needs to hold just in case.

The most demanding stress test used to be the 1 in 20, which looked back over the previous 20 years (or what was regarded as being 3 to 4 business cycles), then used the experience of the worst ever period during that time to set the test parameters.

Before 2007 this meant 1987 to 93 when Canary Wharf first boomed/bust and Britain had its Black Wednesday. The primary cause of this feck up was the exchange rate mechanism experiment when the Tories used what eventually became crucifyingly high interest rates to hold the pound at an artificially high level. Then George Soros bet against the pound and won.

Given this experience, the subsequent decision to make the Bank of England independent and take the politics out of monetary policy made and makes perfect sense. Except, doing so fed directly into the NICE (Non-Inflationary Constant Expansion) decade that followed or what retrospectively looks more, in economic policy terms, like the “Great Complacency” as when schumcks started claiming to have conquered boom and bust.

Going back to the stress tests i.e. what bankers used/use to identify the risks that should be keeping them up at night, the biggest stresses they used to be institutionally aware of – destructively high interest rates and an over-valued pound - were both politically determined and as such  no longer options, the Bank of England was independent and increasingly transparent after all i.e. finance could be confident politicians were no longer in a position to do anything daft. However, this change also meant it simply wasn’t clear what the actual risks or triggers were or could be. In this environment confidence became hubris, which in turn begat a bubble that became a crash (to be fair historically low interest rates helped here as did the FSA, which was utterly rank rotten incompetent shite too).

I reckon we’re still suffering from a broader, complacency hangover due to the Bank of England’s independence when it comes to the broad understanding of economic policy. The interest taken in Mark Carney’s appointment, his supposed superstar status and notions of him being here to save the British economy distract from how (a) the Bank of England has already done pretty much all it can and then some, (b) economic policy is about monetary policy AND fiscal policy and (c) by focusing on a pretty technocrat, we ignore the reality, which is political dogma is alive and well and actively – via fiscal austerity – influencing economic policy in ways that are actively undermining Britain’s short, medium and long-term economic prospects.

The question isn’t can Mark Carney save the British economy, his primary purpose after all is nothing more than to keep consumer price inflation as close to 2% p.a. as possible, rather its why are George Osborne and the ConDems doing so much to undermine it?

I blame Adam Smith

Really, its all Adam Smith’s fault. After all, the founder of modern economics was a Professor of Moral Philosophy and its similarly impossible to understand the dominant attitudes towards the current crisis other than in moral terms. Here’s some examples:

• The tosh about skivers vs strivers and associated notions of fairness? That’s a (supposedly) moral argument that is.

• The troika, well the German for the most part, approach to Greece? Is a moral stance; they made this mess with their spending and tax dodging, so now they have to pay the price for any aid they get so they do.

• No additional public spending today because it would be at the expense of tomorrow’s youth? Yup, that’s a largely moral stance that is.

• More generally, what I’ve personally encountered is the sense that because we had a credit fulled boom we deserve the current bust, because that’s only fair, isn’t it? Like we deserve it, really. And anyway, we need to repay the debt because you can’t go on borrowing forever.......

A big problem with such notions of morality is they’re so utterly half-arsed i.e. not thought thru. Rather, they typically operate as instincts or what adherents, if challenged, dress up as “common-sense”. Except, they’re not, they're more simply statements of ignorant prejudice.

Take skivers vs strivers; researchers have actively gone out hunting and failed to find almost any of the multi-generational unemployed households that get the Daily Mail so excited. In the meantime, the benefit cuts are clattering the incomes of the disabled and the working poor as well as the unemployed who are almost all actively seeking work.

Greece? Well, I don’t think destroying an economy via the terms attached to French and German funded bailouts that helped the French and German banks that had lent to Greece in the first place is teaching Greek people the lesson France and Germany thinks it is.

Spending more today would hurt the youth of tomorrow? If proponents of this argument were actually bothered about the youth or even the "yout" they should perhaps reflect upon the massive rise in long-term youth unemployment seen across Western Europe and the associated permanent damage this is doing to future, productive capacity (and individual lives).

As for us all somehow deserving the bust, well current UK monetary policy is geared to protecting the heavily indebted via super low interest rates whilst using quantitative easing to boost asset values. Guess what caused the credit crunch here  – no it wasn’t casino banking, it was the bursting of various cheap credit fuelled asset bubbles, which here primarily meant commercial property and company values, things yer average punter had absolutely nothing to do with.

Credit did serve a useful political purpose though in that it papered over the stagnation in average real wages seen in the run up to 2007 and the associated rise in economic inequality. I’m not sure why that’s something most people should feel especially guilty about though. Oh and the notion that a country can’t borrow forever or at least for a very long time is simply dumb.

The problem with morality is that its a big dogmatic-y i.e. engrained and purely reflexive in a lets not let dull stuff like facts get in the way. And its creating big problems. What are nasty prejudices masquerading as common-sense appear so deeply engrained, widespread and popular are having a huge influence on government policy. Right now, we really are shooting ourselves in both feet whilst blaming someone else - the disabled and the poor for the most part - for the pain.

I'll house you

I really don't get it. Like why exactly, given the billions (and eventual billions and billions more) being set up to get pissed away on that new fast train line, why the government isn't instead borrowing to pay for a massive social housing programme now that would:

1) increase the supply of accommodation so push down on private rents, cutting the cost of housing benefit and private rentals
2) create assets that could be sold off,  if required, at a later date
3) before then generate revenues
4) you know, provide people with decent homes
5) address the horrendous problem with the bedroom tax which is the poor sods getting clobbered with it don't have alternative accommodation to move in to
6) create thousands and thousands of jobs and opportunities for apprenticeships
7) be used to regenerate/rejuvenate areas
8) be accurately costed and start generating at least some of the above benefits way before completion

By contrast HS2 will:

1) Do hee haw to ticket prices other than cause them to be raised to cover the cost of it
2)  cost spectacularly more than current estimates. We know this. We also know that the later phases will be postponed indefinitely - wrote someone who cycles past the Edinburgh trams every day - undermining the rationale for doing it in the first place
3)  become simply one part of a broader, subsidised network
4) because of the way procurement works, it'll generate all sorts of fat contracts for non-UK companies that means the benefits of the government spending involved will leak overseas
5) be based on mickey mouse notions of its economic benefits whereas the reality will see it suck even more economic activity darn sarth
6) waste time and money until phase 1 is complete.
7) let some English people feel less inadequate about the state of British railways vs the French

So yeah, why can't we have a massive social housing building programme now* rather than cutting however many minutes off the time it takes to get from Manchester to Leeds in however many decades time?

In the meantime, help to buy is all very good, ish. No, not really, not at all. Essentially, its a lower and middle middle class subsidy that will crank up personal debt levels as it bumps up housebuilder profits, but does hee haw about supply and is generally mental.


* rhetorical question. Successive governments have clung to a dogmatic prejudice against state social housing provision even when, as is obviously the case right now, building more would very obviously be a very good thing for the entire economy.

The power of the skiver

The mainly macro blog is well worth a read I reckon what with it being erudite, insightful and awfy polite. But …………… its post on the cost of fiscal austerity i.e. spending cuts, just doesn’t work.

Personally, I agree with every point the blogger makes about the human cost of fiscal austerity, its hard not to. Actually, its easy to add in some more about how say in the current environment the more marginal members of the labour force face the double whammy of being disproportionately affected by unemployment AND benefit cuts. You could even start making a more pragmatic argument about how some of the human costs have obvious financial implications e.g. as unemployed people are more likely to be depressed, unemployment increases the NHS drugs bill.

But, the current political response to such human costs, which it's sad to say has popular support, is to simply dismiss it all as being the result of skivers whose personal failings are the actual cause of any costs, not impersonal political-economic forces. For instance, unemployment is associated with poorer health and diets? Well why aren’t the unemployed using their time to take walks and make soup then, eh? Increased incidence of depression? They should stop watching so much trash TV during the day then shouldn’t they and so on etc.,

So spelling out the human cost of fiscal austerity fails as an argument not because its wrong, but because politically  it’s framed as a moral, moralising argument to which the right already has an embedded response based on what it thinks is sound, common sense (the more generous pro-austerity lot might go so far as to say that's all very well, but that's why spending decisions are so "tough", except then they'd spoil it by saying something like "and what we need right now are leaders willing to make the tough decisions").

Instead of what are perceived to be appeals to the heart, to which the right will respond with what it thinks is its head (but is actually 3-4 feet south of that), I  reckon an alternative is to spell out the direct economic costs, which, given the mainly macro blog is by an economist, you’d expect to have been the case. Unemployment, especially long-term unemployment, which is now at record levels, destroys skills and employability, it leaves deep scars that undermine an economy’s medium to long term productive capacity and all that means in terms of potential growth and inflation. There.

Can I just be clear though, the moral argument against fiscal austerity and what are clearly avoidable high rates of unemployment is right, but we’re in this weird place where such “moralising” is dismissed in favour of what its proponents consider to be hard-nosed, common sense.

Yes, support for spending cuts is increasingly nothing more than a nasty, little "moral" tale of its own, but that's the way things are. Positively, this also means its possible, actually its easy, to make a "good, "sound", "common-sense" "economic" case against it i.e. to beat them at their own game.

Pushing string

So there’s fiscal policy and then there’s monetary policy, the other side of the economic policy coin. Ideally the two work together. Now? Less so.

Fiscal austerity is doing its damndest to undermine and generally crap on demand what with the massive reduction seen in government spending on capital goods, investment and what not to preserve the UK’s AAA status. Monetary policy by contrast is at best tinkering and tickling round the edge as follows:

-          Historically low interest rates to minimise the number of indebted bods and companies failing (hmmm, what about zombie companies being a bad thing then?)

-          Low interest rates also encourage a competitive i.e, a devalued pound (take that all you dumb fucks that whined about the credit rating downgrade undermining the phallic worth of the pound, that’s monetary policy bitches)
- Low rates also also (well negative real rates) provide a disincentive to save i.e. they encourage people to spend, spend, spend in ourt consumer driven economy
- Obviously, following on from the above, low interest rates and the associated tolerance of above target inflation cheekily chip away at the real value of debt in our deeply indebted nation (shame pay growth is also negative in real terms)

-         Then there's quantitative easing or QE to encourage well its not that clear really, investment in marginally more risky, but still comfortably investment grade assets? To prop up prime asset values that benefit bods with pensions? No got a scoob really

-          And latterly the invention of all sorts of ways of cutting credit costs to, to, well what exactly?

Am guessing, judging by what Bank of England bods say, this last one is about encouraging demand by making it cheaper to borrow except, well how’d you reconcile that with fiscal austerity and what that’s been doing to the willingness to invest for years now? The answer is you can’t, the reason being because you can't.

To give an example using the key economic example of pies; make a pie cheaper then yeah, sure I might buy one, mebbe even two extra, but that’s cos I like pies. If I didn’t like pies, then whether they cost 50 quid or a horsemeat-tastic 50p, I ain’t buying any more and you’re wasting your time.

Similarly, cutting the cost of credit don’t mean shit if I don’t want to borrow new money or to quote from the latest Bank of England creditconditions survey

there was “a reduction in credit demand from small companies … (and) … demand from large firms was expected to remain broadly unchanged” So there you are then, banks don't want to lend to small businesses, banks don't want to lend to small businesses ....

Really? The Bank of England's own research into the impact of its own policy indicates small businesses aren't that keen on borrowing right now, which makes sense. Like European exports aside if you were a business dependent on government contracts would you fancy investing in new stuff right now? Thought not. Refinance your existing debt makes sense obviously, but borrowing more? Nah, no thanks.

Hence, a key and innovative part of current monetary policy looks about as effective as pushing string.