Yvette Cooper hasn’t got the economics right

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In the last of the Labour leadership debates, Yvette Cooper repeated her attack on Jeremy Corbyn’s economic strategy.  As a Neokeynesian, she believes that since the economy is finally growing, the time for government investment or a fiscal stimulus has passed.  She should tell that to the 2.3m unemployed and the millions more who are underemployed.

In the re-posted article below, Richard Murphy explains why her belief that Peoples’ Quantitative Easing would be inflationary, is simply not true.

Re-posted from Tax Research UK

 Why no inflation?

POSTED ON 

The question of inflation is coming up time and again in the Labour leadership election. Yvette Cooper is certain that People’s Quantitative Easing will lead to a mass outbreak of hyperinflation in the UK. It’s time to address the issue.

First, some general background. PQE is simply a way of injecting money into the economy. Such injections have happened before: £375 billion happened from 2009 to 2012. The US has only just stopped its QE programme. Japan is still doing one. The EU is near the start of a €1-trillion programme. Money printing is normal. There has been or will be about ¢5 trillion of it over a relatively short period.

And around the world there is almost no inflation. After QE the UK has got to zero inflation.

Japan would love inflation but can’t manage it.

The whole point of the EU programme is to create inflation, and many doubt it will.

In the US the inflation rate is 0.2%.

What is more, as the FT reports this morning, a Boston Fed official with some influence is today reporting that the Chinese slowdown is already making him doubt that the US can reach its 2% target inflation rate anytime in the foreseeable future. I have some considerable sympathy with that view. In fact, let me summarise what almost all the world’s central bankers are looking for right now: it is a magic bullet that might create the inflation that they want.

So the question has to be asked as to why they can’t get it? The Wall Street Journal raised this question last week. As they noted:

Central bankers aren’t sure they understand how inflation works anymore. Inflation didn’t fall as much as many expected during the financial crisis, when the economy faltered and unemployment soared. It hasn’t bounced back as they predicted when the economy recovered and unemployment fell.

As they then note, this is a massive issue. If you can’t predict inflation then what is the point of central bank independence which is all about controlling inflation as if it is the only task of significance in an economy? What if, in other words, all the priorities are wrong and for reasons central bankers and some well-trained economists (like Yvette Cooper) don’t understand inflation simply is not the threat it was? And in that case what new policies are needed?

Let me explain why I think the inflation conundrum exists i.e. why we can’t deliver the inflation we want.

First, it’s because inflation measures are measuring the wrong things. We have had massive inflation in asset prices, for example, many of which have real impact on well-being, but asset price inflation is not included in our inflation measure.

Second, some inflation measures fail to measure the right things. So, for example, in the UK there is a current belief that we will have inflation soon because we supposedly have wage inflation right now. But firstly, that is wage inflation after eight years of decline and with GDP per head only at pre-crash levels. And second, this measure might be hopelessly inaccurate. That’s because it excludes the earnings of the at least 5 million UK self-employed, who we know have had seriously declining income. That decline may be enough, given their number and the relatively small increases in wage growth to neutralise that wage increase impact entirely: the reality is that this measure of apparent inflation might be completely wrong.

Third, what the decline in self-employed earnings shows is that inflation risk is being outsourced: it is now passed on to some elements within a profoundly deregulated labour force, many of whom are suffering unrecorded real earnings decline of such extent that they are in poverty, but so destabilise the rest of the labour market by accepting any offered pay rate (which rates are beyond the control of minimum wage regulation) that  any amount of upward pressure on prices can simply be externalised into this unmeasured pool of labour meaning that anticipated inflation outcomes simply do not happen.

I stress, I am speculating. But let’s suppose across 25 million workers there is a 2% pay rise and across 5 million self-employed people a 10% wage drop (which is not impossible) then there is no net wage inflation at all: the wage rate data is just wrong as a result because it is missing an important variable that did not matter at one time but is now deeply significant.

In that case the amount of inflationary pressure in the UK economy might well come back to being effectively nothing at all, whilst we have at the same time unemployment, under-employment and a stark need for real investment which is the only way to boost earnings growth for those most in need of it, which is the only true economic goal a Treasury and a central bank should have. But because of poor inflation measures, poor theory and poor appraisal of why we do not have inflation at present, when if theory was right we should, we are denied that possibility of investment for the common good. I find it deeply frustrating that adherence to economic thinking that is obviously past its sell-by date should be used to oppose necessary ideas for reform that could massively benefit the people of this country.

Yvette Cooper is an able person. She seems to have read Keynes. She would be wise to recall his maxim that:

Practical people who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.

I fear that may be the case.

It is time to move on. There is no inflation risk right now. PQE probably will not change that: if it did then without major labour market reforms the impact would be modest, at best. But many wish for even that modest inflation impact, and most of them are central bankers. Yvette Copper should take note.

 

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Tax Research UK Blog by Richard Murphy is licensed under a Creative Commons Attribution-NonCommercial 3.0 Unported License. – See more at: http://www.taxresearch.org.uk/Blog/2015/09/02/why-no-inflation/#sthash.Mp9XSmlK.dpuf

Corbynomics is the antidote to Speculation and Bubbles

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Corbynomics and Crashes: Investment versus Speculation By Michael Burke

First posted 2nd September 2015

Words matter. But in economic discussion as elsewhere they are frequently abused. In economic commentary one of the most frequent falsehoods is to describe speculative activity as investment. Stock market ‘investors’ are in fact engaged in speculative activity. There is no value created by this speculation. The claim made by its apologists that it provides for the efficient allocation of capital to productive enterprises is laughably untrue in light of both recent events and long-run history. In fact, a vast number of studies show that that there is an inverse correlation between the growth rate of an economy and the returns to shareholders in stock market-listed companies.

The chart below is just one example of these studies, Fig. 1. The research from the London Business School and Credit Suisse shows the long-run relationship between real stock market returns and per capital GDP growth. The better the stock market performance, the worse the growth in real GDP per capita. The two variables are inversely correlated.

The Economist found this result ‘puzzling’. But it corresponds to economic theory. The greater the proportion of capital that is diverted towards speculation and away from productive investment, the slower the growth rate will be, and the slower the growth in prosperity (per capita GDP).

Fig.1 Stock market returns and per capita GDP growth

 

This is exactly what has been happening in all the Western economies over a prolonged period. SEB has previously identified a declining proportion of Western firms’ profits devoted to investment. The uninvested portion of this capital does not disappear. Instead, it is held as cash in banks and the banks themselves use this to fund speculation and share buybacks by companies (which simply omits the banks as intermediaries in the speculation). The effects of this are so marked that some analysts believe ‘financialisation’ is the cause of the current crisis, when instead it is an extreme symptom of the decline in investment and the consequent growth of speculative activity.

Stock market crashes

It is now customary in the Western financial press to routinely ascribe all aspects of the Great Stagnation to some failing in China. So, China’s fractional currency devaluation has been identified as the culprit of the recent stock market plunges, even though the 3% devaluation of the Chinese RMB followed a 55% of the Japanese yen and a 27% decline in the Euro.

The claim that the crashes were caused by China’s currency move has no factual basis. Fig.2 below shows the closing level of the main US stock market index in August. The S&P 500 rose from 2,083 to 2,102 in the 4 days after the RMB’s 3.2% devaluation which finished on August 13 (first arrow).

On August 19, the Federal Open Markets Committee (FOMC) of the US central bank released the minutes of its most recent meeting (second arrow), which was widely interpreted as indicating a strong likelihood that interest rates would be increased in September. The prior closing level for the S&P500 was 2,097 and it fell sharply thereafter. Following speeches by a number of governors of the US Federal reserve (who vote on the FOMC) questioned the need for an increase in rates, and the market has recovered in response. Yet other speeches pointing once more to a rate rise led to stock market falls once more, and so on.

Fig.2 S&P500 Index

But this uncertainty over US rate increases is only the proximate cause of the crashes. This sharp fall is a stock market verdict that it cannot easily absorb higher US interest rates. The current valuations for the stock market are based on official short-term interest rates of 0.25% and a dividend yield on S&P500 stocks of 2.24%. Even if rates were only doubled to 0.5% the level of the stock market becomes much less attractive. If rates were to rise towards 2%, the risky stock market’s dividend yield looks extremely unattractive compared to risk-free short-term interest rates.

There is a separate matter that the US economy does not look robust enough to absorb any significantly higher interest rates, but this hardly concerns stock market speculators. Fig. 3 below shows the pace of growth in US industrial production versus the same month a year ago. Production has slowed for a year and is down to a snail’s pace in the last 3 months, averaging less than 1.4% from the same period a year ago. The latest data show that the US economy is experiencing only modest growth, with GDP in the 2nd quarter just 2.6% higher than a year ago.

Fig.3 Growth In US Industrial Production

 

Despite the widespread hype about the British economy, the equivalent data on industrial production is growth of 1.5% for the latest 3 months compared to a year ago. For the Eurozone it is 1.2%. In China, industrial production has grown by 6.3% in the latest 3 months compared to the same period a year ago.

Corbynomics and crashes

Since 2010, the major central banks of the US, Japan, and the Eurozone have created US$4.5 trillion, Yen 200 trillion and €1.1 trillion in their respective Quantitative Easing programmes. The Bank of England has added £375bn of its own. Over the same period short-term official interest rates have been at or close to zero. Long-term interest rates have also plummeted. This has not led to a revival of investment in the advanced industrialised economies. After the short-lived stimulus in some Western economies to end the 2008-2009 slump, total fixed investment (Gross Fixed Capital Formation) has slowed to a crawl in the OECD as a whole, as shown in Fig.4 below.

Fig. 4 OECD GFCF, % change 1996 to 2013

Yet over the same period, the main stock market indices in the OECD economies have soared. The stock markets and real GDP are inversely correlated. The S&P500 index has effectively doubled since 2011. The Eurofirst 300 has risen by 55%, the Nikkei 225 in Japan has risen by 125% (boosted by currency devaluation) and the FTSE100 has risen by 25% (a poorer performance held back by the predominance of weak international oil and mining stocks). Data for 2014 is not yet available but the total cumulative increased on OECD GFCF from 2011 may not have reached 10%.

Corbynomics is the policy of attempting to address an investment crisis with an increase in investment. Its critics repeatedly claim that this policy will cause financial turmoil. In light of recent events this assertion ought to cause a wry smile. At the very least, the most powerful central banks in the world have to reassess their intentions on policy simply because of the wild gyrations in the stock markets. These have been accompanied by further large movements in global currency exchange rates.

The reason stock markets are so febrile, and policy so easily blown off course is that a bubble is being created in financial assets because of the combination of monetary creation, ultra-low interest rates and weak investment. Capital that could be directed towards increasing the productive capacity of the economy is instead being used to finance speculation; the worst of both worlds. This policy has caused inflation in financial assets such stock markets, in house prices and (previously) in commodities prices. But continued economic stagnation means that deflation is now the greater risk in the OECD economies at the level of consumer prices.

Corbynomics addresses those risks because its aim is to raise the level of investment in the economy. By increasing the productive capacity of the economy through investment-led growth it overcomes the weakness of the economy. By redirecting the flow of capital from speculation towards investment, it deflates the speculative bubble. So, to take an obvious example, by building new homes it provides housing and employment while deflating the house price bubble.

The root of the objection to Corbynomics is the insistence that the private sector, private capital must be allowed to dominate the economy in its own interests. But the current Western economic model is a combination of shopping and speculation, leading to stagnation. Corbynomics is the antidote to these; prosperity through investment-led growth.

The Acute Deficit Phobia – Malady Spreads

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Jcorb

Acute Deficit Phobia: The Malady Spreads

Since the election in May 2010 that brought the Tory-led coalition to government not one major political figure in England has publicly disagreed with the austerity doctrine, that the first priority of fiscal policy must be reducing the budget deficit.  I have called this astounding cross-party degeneration into economic illiteracy the “acute deficit disorder”, a pathological fear of public expenditure exceeding public revenue, a phobia in its purest form.
There seemed no party leader or would-be leader with any immunity to this neoliberal malady until this summer.  Jeremy Corbyn asserted unambiguous opposition to the theory and practice of fiscal austerity, and by doing so emerged from the depths of the backbenches to take a commanding lead in the contest for the Leadership of the Labour Party.The sudden and unexpected emergence of Corbyn at what appears to be the choice of a large majority of Labour Party members has one overwhelming explanation — his rejection of the ideology of austerity.  It is astonishing that Corbyn may be on the brink of winning the leadership.  Even more astonishing is high-profile supporters coming forward to assure us on Corbyn’s commitment to deficit reduction,  albeit in a manner quite different from the Tories (see analytical article by Jeremy Smith).The clear purpose of these unexpected interventions is to reassure people that Jeremy Corbyn favours “sound fiscal policy” and, therefore, can be trusted to manage the country’s economy.  The fundamental problem with this attempt at reassurance is that the great burst of enthusiastic support for Corbyn results from his explicit rejection of deficit reduction as a necessary priority.   A few weeks ago in a speech on economic policy he reinforced his anti-austerity message, when he stated “austerity is a political choice not an economic necessity”.   It is such statement that bring people flocking to his rallies.In the same speech also referred specifically to the budget balance, “Labour will close the deficit through building a strong, growing economy that works for all, not by increasing poverty.”For the victims of the phobia the words convey an “austerity lite” meaning, a promise that a Labour government would take direct steps to reduce the deficit; that the time scale would be longer and the deficit reduced by a combination of tax rate increases and cuts that do not harm the poor (e.g. Trident).This “progressive prudence” position is more than mistaken. It is fundamentally wrong because it perpetuates the neoliberal myth that fiscal deficits are a bad thing, that they are an imbalance that must be corrected through policy action.  The retro-reaction, “Jeremy really is for getting the deficit down, but in progressive manner”, is totally wrong and requires going back to basics.

A fiscal deficit is not prima facie a problem.

A fiscal deficit is not an imbalance that needs eliminating (or even reducing).

A fiscal deficit is a compensating response to imbalances elsewhere in the aggregate economy.

To further dispel confusion and misrepresentation before going into the analytics, I can state the central point — the public budget need not balance in the short run, long run, or over the economic cycle.  Indeed, a government can practice “sound fiscal policy” without ever balancing the public budget and without the budget ever showing a surplus.  Yes, I am a “deficit denier”;  being one is sound economics (see the excellent “confessions of a deficit denier” by Malcolm Sawyer).

Market economies expand when total (“aggregate”) demand exceeds the aggregate production of goods and services, and contract when demand falls short of supply (leaving part of production unsold, unintended inventories).  These dynamics of the aggregate economy become clearer when we divide it into three parts, the public sector, the private sector and the export and import or trade sector.

For an economy to expand the sum of the spending across the part must exceed the sum of the “non-spending”.  The familiar terms for non-spending are 1) household and business saving (private sector), 3) taxation (public sector) and 4) imports (trade sector).

During 2000-2007 the growth of demand was sufficient to drive expansion of the UK economy at a rate between two and three percent per annum.  During these years imports exceeded exports, meaning that the trade sector made a negative contribution to expansion of the economy of about -3% of GDP annually.

Had the private sector “balanced its budget” and the public sector done the same, the economy would have contracted, not grown.  The economy expanded because both the private and public sectors had net expenditure that more than offset the negative demand generated by trade.  That is, the private sector and the public sector engaged in deficit spending during 2000-2007 (by about 1.5% of GDP each).

Then, the global financial meltdown hit.  As a result, business investment collapsed.  Net private spending went negative (household plus business saving exceeded investment).  Businesses were very much “living within their means”, and as result, the economy contracted.  It would have contracted even more had the government sector not increased its spending, which stimulated a nascent recovery in late 2009 and early 2010 (Gordon Brown’s fiscal stimulus), which George Osborne aborted with his fiscal cuts.  Attempting to “balance the budget” and “have the government live within its means” was unsound fiscal policy.

This brief excursion into the theory and practice of “sound fiscal policy” produces important lessons.  A government practices sound finance by using the public budget to compensate for expenditure shortfalls and overruns by the private and trade sectors.  If the economy is stagnant or contracting, sound policy requires that the government increase net expenditure — a larger budget deficit.

This generalization, public demand should compensate for private shortfalls, holds even if the economy is at or very close to full capacity.  Indeed, the reason that the UK economy was close to full capacity in the years just before the great financial collapse was because it had a small deficit.  The deficit was not a problem, it was the solution to insufficient private demand.

The message for the foreseeable future is clear.  Until private investment and exports are sufficient to keep the economy near full capacity, a fiscal deficit is the appropriate policy.  Following the “balance the budget/run a surplus in goods times” can mean that the good times never arrive, because demand from the private and trade sectors can be too low to take us there.

The reverse is also the case.  When private demand is robust and booming sound fiscal policy requires a surplus in public budget.  Thus, we have the “sound fiscal policy” generalization:

 

Policy makers should aim for a fiscal balance that compensates for the sum of net private and trade demand when the economy is at their desired level of capacity and employment.  This explanation of fiscal policy is not “Keynesian”, though Keynes would probably have agreed with it.  The more accurate way to understand the difference between neoliberal budget balancing and sound fiscal policy is an analogy with the differences between alchemy and chemistry, or astrology and astronomy.

Each of the three sectors (private, public and foreign trade) of the UK economy run deficits at some times and surpluses at others.  The conviction that the public sector should have a special status such that a deficit is a problem that needs solving is based on ideology not analysis.  It is not an ideology that a Labour Party leader should adopt in any form or variation.

It is self-defeating to pay lip service to the ideology because the Tories have convinced a large portion of the public to believe it.  This belief is a relatively recent phenomenon, dating from 2010 at the earliest.  Attempting to dispel it is more likely to bring to success than further indulging it.

 

Economics ‘like astrology’ – John Weeks explains the myths underpinning all modern economics

Published on Apr 7, 2014

Watch the full episode here: http://bit.ly/PSPRUS

John Weeks, Professor Emeritus at the School of Oriental and African Studies, talks to Going Underground host Afshin Rattansi about the myths underlying modern economic theory. In his new book, he states that it is like astrology because it’s ‘based on a concept of the world that only exists in the imagination’ — it assumes there is full employment which has no basis in reality. This means that supply and demand does not work and public sector debts are not inflationary.

To Iain Duncan Smith – About this ‘Shake-up’..

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By julijuxtaposed – first posted 28.08.15

 

Mr Iain Duncan Smith,

About this “shake-up“. Could you please find me a job that is tailored to my abilities whilst maximising my potential; one that pays me enough that I could live, not just independently but well; sufficiently that I would require no top-up credits. Of course, I’d still need to retain the gateway awards that I was once told were indefinite and unconditional (such as my DLA and Blue Badge); that recognise how my disabilities are not going anywhere, no matter how cross and determined you are that they will. I apologise for the way my life has unfolded so unhelpfully for everybody – including me – however, I don’t know what real and beneficial work I can do that will be meaningful to Society, will end any State dependence, won’t compromise my health and will satisfy your self-righteous values and relentless need for me to justify my monetary worth within your stupid socio-economic model.

You know that bit where you say “claimants should be made to take up any work they can, even if it is just a few hours”? Well I need a job that I can do as and when I have the physical and mental resources which fluctuate, daily, according to exhaustion, pain level, concentration, the day’s commitments, your downward pressure and my subsequent social anxieties and, consequently, mood, capacity, vulnerability and efficiency. I tend to have problems – even on good days – with travelling, sitting at a desk, walking and standing and my body is deteriorating, generally and specifically – my hands, most recently, to my great distress – from years of coping with my limits and, naturally, I’m not going to get any younger, either.

I’m probably not worth the time and money of an employer who wants me at a shop till or at a desk at a call centre or inputting data, say. And my days of being a cleaner, care-worker, etc are way behind me, now. Don’t get me wrong: I’m not ‘above’ such work – I’ve done many different jobs – but the idea that I’m suitable or capable now is silly. And the notion that it’s worth the financial cost to try to enable me to do such work for an hour or two, here and there, is laughable. I’d really love an actual career but I reckon I may be a bit long in the tooth, now and that the training, itself, would likely be physically inhibitive. Besides, there are plenty of young people who need the start far more than Society should need me to compromise my health further and inevitably cost everyone more as I prostrate myself to prove my sorry lack of market value.

You know that bit where you talk about “a system focused on what a claimant can do and the support they’ll need and not just what they can’t”? Well, my best skills are now reduced to the erratic ability to communicate what is in my mind with a certain amount of eloquence. So, if you mean it about the personalised help and support then perhaps you could fix it for me to be paid for the reading, observing, thinking and writing with which I have primarily learned to content myself? I’m sure you know many who are paid handsomely for doing far less. My best times are indeterminate and unpredictable points within a given 24-hour period, according to the spoons I have, minus those I need just to get through an uneventful day. Take them away from me and I will be a husk.

I’m not saying that there’s nothing I can do, at all or that I think I’m not a worthy human being. I’m saying I can’t jump your petty false-economy hoops and that I’m worth more than that. We all are. And I’m not saying that I’m more special than anyone else, either. I’m saying it has taken me a long time to create a productive life that I can bear, with the resources I have and that my well-being is more important than your shameful social experiments. I’m telling you that I think I would rather die than live the empty life you would prescribe for me. I will not be a scapegoat for your ignorance.