Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.

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Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.

By Peter Martin Twitter: @petermartin52

An economic and political discussion usually and rather quickly gets around to a discussion on “the deficit”. Of course what everyone means is the Government’s deficit rather than the deficit neo-liberal politicians have created in our spending power in recent years. The other less mentioned deficit is the one the UK runs in its trade and financial dealings with the rest of the world. There are various terms used in connection with this such as current account deficit, balance of payments deficit. Then there is the capital account which includes the sale of gilts. To keep things simple I’ll just use the term external deficit for the net flow of ££ out of the economy. So we can think of this as the Surplus the Rest of the World has in its dealing with the UK in £ terms.

If we consider everything as a surplus we can say:

Government Surplus  + Private Domestic Sector Surplus(or PDS savings) + Rest of the World Surplus = 0

This is the well known sectoral balance equation. The Private Domestic Sector would essentially be the real economy and would include all publicly employed workers, local councils and their workers,  and even some Govt owned companies – though this might just depend on how the accounts are presented. This is just in £ terms. They don’t include any real assets like gold reserves or land holdings.

Going back to deficits this works out as:

Internal Deficit (Govt Budget Deficit) = PDS Savings + External Deficit (Trade)

It is common in discussions for someone to say something like ‘the trade deficit is not the fiscal Deficit.” Which is of course true, butthe two deficits are very closely related. If, as now, we are running a 5% of GDP trade deficit and the  Government is running a 4% deficit there is 1% more spending leaving the economy to pay our net import bill than is replenished by the Govt deficit. That money has to come out of everyone’s savings. So if the external deficit was zero the Government deficit would certainly be reduced substantially and may even be eliminated completely. Another way to look at it would be to say that money paid out for imports can’t be taxed but if it is paid out for local products it can be. Money generated from export sales, or import replacements can be taxed too. Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.

Exporting more, to the value of 2.6% of GDP and importing 2.6% less will close the trade gap completely.  This may require a some initial discomfort to achieve but it will be nowhere near as bad as continually putting up with with tax rises and spending cuts, ignoring the external deficit and running the economy into ever deeper recession.This is a saleable message that our politicians (are you reading this John McDonnell? ) could well explain to a sceptical public.

There are those MMT supporters who will not be at all pleased with the thrust of this argument.They will be thinking that we should not be using MMT to explain how our deficits can be reduced but, rather, we should be explaining how they do not matter. They’ll argue that the deficits are just numbers on a spreadsheet, that ££ are just like runs on a scoreboard, that the government is monetarily sovereign and that it can never run out of pounds, it can never involuntarily default and it can never go broke in any debt denominated in ££. They will further argue that exports are a net real cost to the economy and that imports are a net real benefit. Therefore we should be exporting as little as possible and importing as much as possible. Of course, this is all absolutely true and intellectually incontrovertible. Except, I would just question the morality of deliberately taking more from the world than we are prepared to give in return.

It is also true is that we live in a democracy and we have to assess the chances of the voters ‘buying’ this argument in sufficient numbers for Labour to win in 2020. I am not a politician but I would say there is no chance at all. So, if this is a correct assessment, we have to look for the next best alternative. If we don’t offer that, which is an economy at relatively full employment with low internal and external deficits, stable but modest levels of growth, inflation and interest rates, we will end up with something very much worse.  An economy with high levels of unemployment and underemployment, high numbers of low paid and low productivity jobs, higher internal and external deficits, and with a government which is forever chasing its own tail with a succession of tax rises, spending cuts and the encouragement of excess private credit created asset bubbles.  In fact, just like the one we have now.

People are sick of all that. We just need sensible politicians to explain that there is a much better, if not a perfect, option

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.

Telegraph Tosh on Economics

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Steven Hail’s point by point response to the Daily Telegraph Article by Jeremy Warner  which suggested the Jeremy Corbyn’s economic plans will turn us into Zimbabwe.

Margaret Thatcher’s Biscuit Tin – and Austerity

Margaret Thatcher’s Biscuit Tin and the Austerity Scare

From Pam Field and Syzygysue

The Austerity Scare is the greatest myth, by which the rich have deprived others of their basic needs of survival (Maslow), by some argument that those are unaffordable. How can it be justified to deny anyone these basic human rights, while others have vast resources far beyond their own personal needs? This wealth, and hence power was gained  by the systematic acquisition of resources by unjust means, much as the barons claimed land to be their own.  (Primary accumulation – dispossession of low income people from their high value land). By what right can anyone claim to have a right to own earth when others cannot?

Benn EstablishmentHaving power of the law permits reinforcement of privilege so that attempt to brainwash the public  through whatever means is available – education, press, advertisements, commercialisation  – or force. So the very rich have the means to control all the sources of food and sustenance, the media, the security and defence. Fear of destitution leads to social division, and of course with disunity no resistance can be effective. What needs to be done to redress the imbalance?

There are sufficient resources on this planet for everyone.  Oxfam  believes there can be enough food for everyone…

IF we give enough aid to stop children dying from hunger and help the poorest families feed themselves

IF governments stop big companies dodging tax in poor countries, so that millions of people can free themselves from hunger

IF we stop poor farmers being forced off their land and we grow crops to feed people not fuel cars

IF governments and big companies are honest and open about their actions that stop people getting enough food.

It is shameful that in Britain, the seventh richest nation, has 25% of children living in poverty, many people are homeless and one million people are relying on food-banks. It is a scandal created by gross mismanagement, or by wilful neglect. The Tories recall the Victorian days of Empire, like the cheering and flag waving Falkland task force, without addressing the fundamental truth.

 Any society can only measure its wealth by the poorest, and its strength as the weakest.

Having seen the horrors man can inflict on man in WW2, there was a united resolve which followed that it should never be repeated, and a determination to build a fair society fit for everyone. Rationing was accepted after the war to ensure a fairer distribution of scarce resources. Meanwhile Attlee’s Labour government invested in full employment, massive house building, a welfare state and National Health Service. There was a growth in the economy, despite the ravages left by war.

“The psychology of competition and love of Peace are uneasy bedfellows” Aneurin Bevan

One of the saddest legacies of Margaret Thatcher’s premiership must have been the destruction of optimism in society, the killing of compassion, and comradeship, and communities.  It was replaced with isolation, resentment and fear engendered by soaring unemployment, caused by destruction of manufacturing industries while attacking on trade unions, so making the working class further malleable by the ruling elite.

The idea that the nation’s wealth was somehow like the family budget, pennies hidden away in a biscuit tin in the larder, just to be taken out and spent on a trip to Margate when the factory shuts down for a fortnight in August, can be understood as people prioritise their needs by similar means.

So, unbelievably, Margaret Thatcher sold the idea to the nation, that the money which the government has to spend on schools and hospitals, is like the microeconomics of a family budget, or the ins and outs of her parents’ grocers shop. And since that time the biscuit tin idea comes into play, “There’s no money left” as Cameron carried that piece of paper to hustings in May. “The nation can’t afford it, we’ve all got to tighten our belts.”  “We’re all in it together!”

Now, where does wealth come from? It comes from the labour, skills, arts, and talents of people, from research, technology and from the natural  resources of the planet. Did Margaret Thatcher expect the nation to believe that they can be parceled up and saved in the biscuit tin?

Biscuit tin

As the cuts to basic provisions became chipped away, so fear sets in, the law of the jungle, competition, scrambling to get to the top, developing addictions to more and more material goods to satisfy a lack of something fundamental – happiness. It might seem a cliché, but this is the background to the shallow, inadequate shells we are becoming, soulless commodities suspicious of some others and hatefully despising the rest.

“The successful as well as the unsuccessful are unemancipated in the competitive society” (Bevan)

It doesn’t have to be like this. Of course money is not hidden away in some virtual biscuit tin, no longer gold hidden in vaults to be hauled from place to place. Austerity is totally unnecessary and we can change it at will once we accept what is wrong.

Money is a tool by which goods can be shared around ensuring management of resources, rewards for labour and supply, and trade.  Money doesn’t originate  from the taxpayer. It comes from the government spending.  The US dollar and the UK pound are sovereign monetary systems under control of their respective nations.

Neoliberal economics have led to the greatest inequalities in human history, based on the mystique, that market forces will adjust to give the best possible outcomes.

Considering the unhappiness, poverty, and isolation, in what sense is the current state of the UK, the best of all possible worlds?

We are told that there is no money left so that public services must be privatized and government spending cut but the actual problem is that corporations are hoarding their profits, not investing in well-paid jobs in the real economy and instead are chasing fictitious capital.

Real wages have not increased since the 1970s and consequently there is insufficient demand in the economy, and increasing levels of personal indebtedness.  Forget the national debt, it is household debt that is the real danger!

This is the slowest recovery of GDP per head on record. See graph (Touchstone Blog)

As Simon Wren-Lewis writes:

Anyone who continues to describe what is happening in the UK as a ‘strong recovery’ either has not bothered to look at the data, or is being deliberately deceptive.’

What is desperately needed is not ‘Austerity’, but a fiscal stimulus and if the banks and the corporations will not invest in the real economy, then the government should act as ‘lender of last resort’.  In other words, a stimulus such as that proposed by Jeremy Corbyn, with investment in jobs, the NHS, education and mitigating climate change.

The allegorical Frank Baum story “The Wizard of Oz” reflects clearly how the pursuit of the yellow brick road “gold”, leading to the “Emerald City” revealed merely that there was no magician, just a helpless, powerless man who admitted the capitalist ideal was a fallacy. The main characters had lacked belief in their own limitations, lack of courage, brain or heart, and believing therefore that others had power. And in that idea, we can see that economy needs to be run for the benefit of the people, not according to the vagaries of the so-called ‘wisdom of the markets’.

So what is necessary is that

… First we need to accept that economy is something which sovereign governments have the power to organise.

… The financial system has been abused for too long.  It needs to be under democratic regulation and control.

…The economy needs to be balanced and controlled to allow people and societies to function sufficiently so that all members can afford the essentials of Maslow, live comfortably, with a little bit extra for everyone to enjoy their leisure.

…There needs to be a commitment to full employment.

… Basic needs such as food, water, energy, transport, health and education need to be under democratic control.

IT IS THE RESPONSIBILITY OF GOVERNMENT to ensure adequate distribution of these services. Therefore nationalisation, and/or transparent democratic control is necessary.  To treat food, water, and medical supplies as commodities to be gambled with is an obscene and unacceptable concession to the very rich.

Cutting spending during recession/depression only delays or forestalls a recovery.  The allegory of Alice in Wonderland describes falling down a rabbit hole, and seeing the world differently, and that is what is needed – the opposite of austerity. Jeremy Corbyn’s Peoples’ Quantitative Easing is about the government producing money, as we have our currency, the government can do that,  but instead of this going to private banks, this money goes directly to the people wherever it is needed – for building, homes, schools, hospitals – and creating jobs. In other words, a responsible state in which everyone would have access to needs being met, and poverty eradicated.

We are told that the deficit is too big but the reality is that it is still too small.  Inflation is only a risk once the last unemployed/underemployed person who wants or needs a job is employed.

Since private companies are not providing sufficient employment, we need government to invest in a job’s guarantee, a buffer stock.  This would have the advantage of underpinning a living wage that the private sector would have to match in order to attract workers.  It would also allow individuals to maintain or upgrade their skills.  It would decrease the mental health problems associated with unemployment, and finally, it would mean that all sorts of worthwhile activity, which would not be undertaken by the private sector, could occur.

The anger and  resentment has been smouldering for a long time. The lack of opposition to neoliberalism and austerity has disillusioned the electorate, so many no longer see any point in even voting.  In August 2010, riots broke out in English cities, in London, and Birmingham. This August, Jeremy Corbyn has reached the ordinary people,  and has channelled that anger in such a way that people are united, and we are a witnessing the greatest political force in 64 years, a tidal wave which can sweep away neoliberalism and bring our communities back. The Labour Movement is reborn. At last, there is hope.

The politics of divide and rule, of resentment and ” benefit scroungers ” is where we have lost our way.  It is not about politics of envy.  It is about the politics of justice. We need brave political leaders to reunite our communities, put away the law of the jungle, and bring back the Spirit of ’45, the sort of social cohesion which followed WW2.

The biscuit tin myth has to be tackled,

and the sooner , the better.