DWP offers intensive support for any dog failing to find a bone after 2 years

The title above refers to this press release today from the DWP:

Work Programme leavers targeted by specialist advisers as part of a tough approach to get them into a job.

A more honest title would end with “… a tough approach to get them off Jobseeker’s Allowance”, as getting someone a job seems to come a distant second to those at the DWP.

Anyway, the press release is about what action will be taken once the private sector Work Programme provider has failed to find work for someone (or bullied them into being chucked off JSA) after 2 years (!!!). Apparently, those poor souls are going to be “targeted by a hit squad of specialist advisors”, which doesn’t sound too pleasant, but also begs the question of what the hell the Work Programme provider has being doing for the previous two years.

It all comes down to the same idiotic idea that the unemployed don’t have work because of personal deficiencies rather than a systemic lack of jobs, and if only the right attitude can be instilled into the individual, then a job will instantly appear. The problem with this is that it’s a fairy story. At the moment, there’s about half a million vacancies, but 2.5 million unemployed, another 2.5 million classed as inactive but want a job, and 1.4 million who are underemployed. If we send out 100 dogs to find 10 bones, most are going to come back without one, and no matter how much ‘intensive support’ we give give those dogs, unless we increase the number of bones, the same amount will come back without one next time (although maybe not the same dogs).

So rather than wasting £30m on this intensive support package (or the £5bn on the Work Programme for that matter), why not just create some jobs? What, more public sector non-jobs I hear you say? When there is spare capacity, a non-job is always better than no job at all, but with a bit of imagination we could think of much more productive things for people to do. This should be a statement of the bleeding obvious, but apparently it’s still quite a minority view. Politicians seem to much prefer to compete to see who can sound the toughest, rather than who can actually solve problems which doesn’t inspire hopes of a quick recovery any time soon.

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Osborne says he won’t take us back to square one. We never left

George Osborne has been coming under increasing pressure to change course of his austerity strategy. Even the IMF – who originally backed austerity – have deserted him. Osborne is sticking to his guns however and last night, in a speech at the annual CBI dinner said:

“Now is not the time to lose our nerve. Let’s not listen to those who would take us back to square one. Let’s carry on doing what is right for Britain. Let’s see this through.”

So the message is that doing anything additional to help the economy would “take us back to square one”. But how does “square one” compare to now? Assuming square one would be the situation Osborne inherited in May 2010, have far have we come since then? Here’s a few quick stats and commentary.

1) The Deficit

2009/10: £159bn

2012/13: £121bn

So the deficit down by a quarter. This seems to be the thing Osborne is most proud of, but – putting aside the fact that the deficit on its own is neither good nor bad – this reduction has been achieved primarily by cutting capital expenditure in half. From right to left, almost all commentators believe capital spending is precisely the thing not to cut, so in trying to lower that headline deficit figure, he’s actually setting us up for problems further down the road. Square one with double the capital spending actually sounds quite attractive.

2) Unemployment*

3 months to March 2010: 2.51m

3 months to March 2013: 2.52m

Yes, you read that right. Unemployment is actually higher now than in the comparable quarter in 2010. We are still at square one!

3) Employment*

3 months to March 2010: Employment rate – 72%; Total Employed – 28.83m

3 moths to March 2013: Employment rate – 71.4%; Total Employed – 29.71m

The Coalition like to say it has created 1 million private sector jobs. The net additional jobs since March 2010 though has been just under 1 million, and the working age population has risen faster than that, so the employment rate has actually fallen. Square one would actually be an improvement here.

4) Real Incomes

Median hourly earnings 2010 (constant prices): £11.92

Median Hourly earnings 2012 (constant prices): £11.21

Real incomes then have fallen since 2010, so again, square one doesn’t look too bad.

5) Interest Rates 

10 year bond yield May 2010: c3.6%                                          

10 year bond yield May 2013: c1.9%

Interest rates are another success Osborne likes to trumpet, and they have come down since 2010 (although by May 2010, they were already coming down). Whether this is a good or a bad thing depends on whether you are a borrower or saver, but assuming they are a good thing, how much credit should Osborne take for them? According to Jonathan Portes, not much.

In conclusion then, if Osborne were to change course, taking us back to square one, what would that look like? The deficit would be higher, but so would capital spending. Unemployment would be slightly lower, and a greater proportion of people would be employed. They’d also be paid more for that work. Interest rates would be higher (although on a downward trend). So the overall economic picture has barely changed since May 2010. I haven’t even mentioned the almost complete absence of economic growth since then. It looks like we never left square one. Going back there would actually be a slight improvement, and if we could go back there, but deploy our resources smarter than Gordon Brown in 2009/10, a huge one.

* Labour market figures sourced from ONS here: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/index.html

The Government’s Super Platinum Cashback Credit Card

This post will start with a bit of consumer advice, and then extend that idea to government spending.* So what’s the advice? Cashback. I love cashback. Like many people, I regularly buy stuff online. It’s often cheaper and more convenient than the highstreet. But an added attraction for me is cashback. Click through to a site where you want to buy something from a cashback site like topcashback or quidco, and you could save up to an extra 10% plus on whatever you buy. Most major online businesses have affiliates programmes with the cashback sites, so it’s well worth checking before you buy anything if you could get cashback as well.

There are many credit card companies that also give cashback each time you use one of their cards to make a purchase. If you’re someone like me who pays off their balance in full each month, this makes owning one of these cards an absolute no-brainer.

But what has this got to do with government spending? Well just like me, the government also has a cashback credit card; only theirs is super platinum. I only get a couple of % cashback when I spend, and then only on certain things, and I have a strict credit limit. The government by contrast, has no credit limit and gets cashback every time it spends in the form of tax revenue. And as every (or nearly every) transaction made in the economy is taxed, ultimately the cashback on all government spending is 100%. Some of the spending will leak into savings, so it won’t get it all back straight away, but at the end of the day, while the money the government has spent is circulating, it will be getting taxed and coming back to the government.

Once this point is understood, the common question “How are you going to pay for it?” whenever a political party suggests a spending policy, seems a bit silly. The spending will pay for itself. Instead, politicians should be concerned with important questions like are there enough jobs for everyone who wants one? are living standards rising for all, not just those at the top? To get positive answers to these questions, they need to ensure they spend enough money into the economy, creating it out of thin air like the banks if needs be.

The common retort to hearing this argument from the less imaginative will be “Great, a magic money tree, let’s just print £1m for everyone and we’ll all be rich!” This argument fails, because what is not being said here is that there are no constraints on what a government can spend. While the super platinum card has no credit limit, there are real constraints. Once an economy is running flat out, if the government keeps spending, prices will start to rise – inflation would be the result. So the super platinum card needs to be used wisely. As long as it is used wisely though, there is no need for us to put up with high unemployment, rising poverty and falling incomes. It is within the government’s power to do something about it if they just unleash the power of their super platinum cashback credit card.

* This is an idea I’ve nicked after reading a comment by Neil Wilson under this post. I’m running with it because it struck me as a great way to try to visualise government spending in a way that runs counter to the common narrative.

UPDATE: As Neil points out below, he expanded on his super platinum card idea a post on his blog a couple of years ago. It’s excellent. Read it: http://www.3spoken.co.uk/2011/01/how-governments-super-platinum-credit.html

“Are budget deficits or surpluses good or bad?”

Here’s another extract from a recent “Billy Blog” by economist Bill Mitchell on “MMT Budgetary Principles“. The context to this as Bill writes is:

“This is a background blog which will support the release of my Fantasy Budget 2013-14, which will be part of Crikey’s Budget coverage leading up to the delivery of the Federal Budget on May 14, 2013. This blog provides some general principles that should govern the design of a budget.”

Bill is an Aussie, and is writing here for a home audience, but the following extract is equally applicable to the UK economy (or the US, Canada etc). It cuts right through the usual fact-free ruminations about the deficit which we are subjected to on a daily basis.

“Are budget deficits or surpluses good or bad?

The budget balance has no meaning as a standalone aggregate. What does a $A30 billion federal deficit mean? Nothing in itself. What does a deficit of 2 per cent of GDP mean? Only that the deficit is 2 per cent of current price GDP. Is a deficit that is 2 per cent of GDP better or worse than one that is 4 per cent of GDP? The answer it that it all depends.

The higher deficit figure might be the exemplar of fiscally responsible policy choices whereas the lower outcome might indicate fiscally irresponsible decisions. Or, the opposite might be the case, depending on the circumstances.

There is nothing intrinsically good or bad about any specific budget outcome.

In response to the 1982 attempt by conservative politicians to pass a Balanced Budget Act in the US Congress, the revered macroeconomist Gardner Ackley said:

“My own position on deficits has always been, and remains,      that deficits, per se, are neither good nor bad. There are times when they are not only appropriate but even highly desirable, and there are times when they are inappropriate and dangerous. During a recession or a period of “stagflation”, deficits are nearly unavoidable, and are likely to be constructive rather than harmful.”

…It is not the government’s role to run deficits or surpluses. We want governments to make policy choices that will maximise the potential of the people to enjoy their lives and contribute the best they can, given their own circumstances to the well-being of society and the planet.

We might call this goal one of public purpose. An essential element of that goal, given current cultural morays in most nations, will be to ensure that everyone who wants to work has a job and for those that are unable to work, for whatever reason, have adequate income support so they are not alienated and socially-excluded.

That goal is constrained by the availability of real resources that the nation commands – labour, capital, land, etc – but not by the financial capacity of the currency-issuing government.”

Do read the whole thing here. If you want to learn about economics and the current mess we are in, you could do a lot worse than spend a few hours browsing Bill’s blogging back catalogue.

Why we should leave the EU

This is a quick post on the issue of the EU, which has been claimed by the right wing as their noble cause, as popularised by UKIP and Tory MPs like Peter Bone. Today former Tory Chancellor Nigel Lawson has called for the UK to leave the EU. I suspect his motives for doing so are questionable, but does he have a point?

The prevailing view on the left seems to be strongly in favour of the UK’s EU membership, with the feeling that leaving would be unthinkable. These seem to be the common arguments in favour of staying in, and why I think they are misguided:

1) EU regulations on employment rights, environmental protections etc would be torn up if we left and it’d be like Victorian Britain all over again. This seems a strange sort of argument to me. Of course, there are a lot of people who would love to tear up a lot of these regulations, but we should have more confidence in our ability to win the argument about the importance of retaining these protections whether inside or outside of the EU. We shouldn’t need an external body to protect us from the more extreme elements on the right.

2) Around 3m jobs would be put at risk if we left the EU. I’ve seen this claim a lot, and I’m not sure where it comes from. Obviously, a lot of people work for companies that trade with the EU, but I think people over estimate the impact on trade our leaving the EU would have. The UK is a huge economy. The idea that the remaining EU nations would not want to trade with us on favourable terms seems unlikely to me.

3) British workers wouldn’t be able to go and work in Europe any more and millions of Brits would have to come home. Again, I don’t think this is as big an issue as it is made out to be. It’s likely there would be new restrictions on labour movements, but skilled workers would always be welcome to work in other countries, as we welcome skilled workers from outside the EU today. People that have retired to Spain are not going to be sent home, as their spending power is a great benefit to the Spanish economy.

Here are some other reasons why our EU membership does not benefit us.

  • There are a lot of things in the various treaties we are signatories to which tie the hands of our government. Deficit limits and the prohibition of using the full power of the central bank severely limit the ability of government to react economic crises. You can argue (maybe rightly) that in a crisis, these rules are routinely ignored, but moves are afoot to make these rules even more binding on nations.
  • State aid rules mean it’s very difficult to implement an active industrial policy, which I would argue is vital for long run growth. Government needs to be able to ‘pick winners’ and nurture their growth. State aid rules don’t allow this.
  • Immigration. Most of the evidence on immigration shows it has a strongly positive impact on the UK economy. This post makes that case wellBut does this mean we should be banned from imposing any limits on immigration from the EU? I don’t think so. It may be that we decide it’s in our interest to let anyone who wants to come here to work do so, but it should be a decision for the national government to make, and they should be free to impose limits if that’s in the best interests of the nation.

Above then are just a few quick points by way of suggesting that although one’s position on the EU seems to have been reduced to a split between left (pro) and right (anti), it shouldn’t be. There are strong arguments against our membership of the EU, and they shouldn’t be dismissed out of hand. As ever, feel free to disagree, or suggest things I’ve missed in the above.

Why don’t more people vote?

In the run-up to and aftermath of last week’s elections, all the talk was about the rise of UKIP as a new force in British politics. UKIP managed to go from 8 county council seats to 147 on a projected national share of the vote of 23%. There’s been a lot of ruminating in the last few days about why so many people voted UKIP. Was it because of immigration, the EU, or just a reflection of dissatisfaction on the economy? Was it an anti-politics vote? Are people just fed up of the main parties?

All of these are interesting questions, but there’s something that’s less focus placed on it, although to me it is the elephant in the room – turnout. The BBC has estimated the average turnout at last week’s elections to be 31%, down from 41% in 2009, the last time these elections were fought. So while in wards where UKIP stood candidates, 25% of those voting, voted for UKIP, when all eligible voters are taken into account, this means only around 8% of people who could have voted, actually voted UKIP. The proportions for the other main parties will be similar.

The Conservatives have taken UKIP’s success as a sign they need to start talking tougher on immigration and Europe as that’s what they think the message from voters has been, but what about the 69% (plus the (around) 10% who aren’t even registered to vote) who didn’t vote at all? Even in the last general election, turnout only just touched 65%, down from over 80% in the early 50s, and at last November, a paltry 15% of people bothered to cast a vote. The main parties seem a bit complacent about what to me is becoming a democratic crisis, and are instead focussing on appealing to a smaller and smaller number of people. But why are people opting out of voting at elections in such great numbers?

The following table (click on it to enlarge) is comprised of data taken from the website of the Institute of Democracy and Electoral Assistance (IDEA). I’ve compiled data on turnout and electoral systems from each of the current OECD countries. The turnout is for each country’s last Parliamentary election, while the right hand column gives the peak turnout since the end of WWII.

Voter Turnout

A few things jump out on looking at the table. Firstly, and perhaps unsurprisingly, countries which have compulsory voting have higher turnouts in general, although a few countries (like Denmark and Iceland) manage to achieve high turnouts without voting being compulsory.

Secondly, with the exception of Australia, all of the top 15 countries in the table have some sort of proportional voting system, mainly the list system. It was interesting that during the referendum campaign for AV, the no campaign made much of the fact that AV is used hardly anywhere else, but of the OECD countries, only three use our current system of First Past the Post, and of those three, the UK had the highest turnout at the last Parliamentary elections, but that was only the 19th highest in the OECD. This makes the Lib Dems decision to settle for a referendum on AV rather than PR all the more baffling.

Thirdly, the data on peak turnout is quite interesting. In relatively young democracies (like the former communist states), turnout tends to peak at the first democratic election, after which it falls off quite quickly. In more mature democracies though, peak turnout seems to have been in the period between the end of WWII and the 1970s, dropping off significantly since then. This is true of the UK, US, France, Germany, Australia, Canada and so on. Nordic countries, by comparison have managed to maintain high turnouts since WWII without much of a drop-off. So why might this be?

Here’s my theory (feel free to disagree). Since the late 1970s we have been living in the neoliberal period, during which time, the agenda known as the ‘Washington Consensus’ has been pushed – privatisation, liberalisation of trade and financial/capital markets etc. Initially, there were distinct political parties, which fought over these big issues, but as time went on, all main parties came to accept these ideas to such an extent that they are now largely indistinguishable on the main issues. This has been true of the UK since about 1992. These policies are detrimental to the welfare of a significant proportion of the population, so under a first past the post system, where the main parties look identical, what’s the point in voting? At least when people vote for an X Factor contestant, they can see that their vote has counted and can feel as though they have influenced something (no matter how trivial).

So what can be done? Working on the assumption that the more people voting the better, from the data above, we can see that in general, the countries with the highest turnouts use a proportional system for voting. If people feel like their vote counts they seem to be more inclined to vote. Compulsory voting also seems to ensure high turnouts. The Lib Dems blew a golden chance to address our democratic deficit in 2011. They blew it by plumping for AV – when they could surely have got a more proportional system on the ballot – and perhaps ensured the downward slide in turnout becomes terminal.

Politicians need to react to this if they are to remain committed to democracy. PR and compulsory voting will go most of the way to turning things around, and will also promote differentiation of political parties, which desperately needs to happen. The concept of a ‘party of protest’ should not exist. UKIP should have to spell out their policies like all parties and attract voters on their merits, rather than purely because they are not a ‘mainstream’ party. Labour, the Lib Dems and the Tories should be made to diverge so that, at the very least, the difference between them goes beyond the colour of their rosettes.

Reinhart and Rogoff on Austerity (Or what they should have said)

The names Reinhart and Rogoff have been heard a lot lately. A widely cited paper they authored which suggested that high debt was associated with low growth was recently found to contain some embarrassing errors which invalidated its findings. That the errors were found by a grad student named Thomas Herndon added another layer of interest to the story.

R & R have been spending a lot of time defending their work since then and yesterday, they were given space in the FT to give their views on austerity. The title of the article is “Austerity is not the only answer to a debt problem”, but they then use the body of the article to prove otherwise and push austerity (although with some qualifications). Warren Mosler, one of the founders of the economic school of thought known as MMT, welcomed their article, but added some amendments of his own to make it a more accurate representation of the actual situation developed economies face. You can read Mosler’s post herebut I found it a bit hard to follow the flow, so I thought I’d reproduce it here as a single body of text with Mosler’s additions in bold:

Austerity is not the only answer to a debt problem

By Kenneth Rogoff and Carmen Reinhart

May 1 (FT) — The recent debate about the global economy has taken a distressingly simplistic turn. Some now argue that just because one cannot definitely prove very high debt is bad for growth (though the weight of the results still say it is, likely via the reaction functions of governments and not the high debt per se), then high debt is not a problem. Looking beyond the recent public debate about the literature on debt we have already discussed our results on debt and growth in that context the debate needs to be reconnected to the facts.

Let us start with one: the ratios of debt to gross domestic product are at historically high levels in many countries, many rising above previous wartime peaks. This is before adding in concerns over contingent liabilities on private sector balance sheets and underfunded old-age security and pension programmes. In the case of Germany, there is also the likely need to further cushion the debt loads of eurozone partners as they are ‘users’ of the euro the way US states are ‘users’ of the dollar, and not the actual issuer of the currency like the ECB, the Fed, the BOE, the BOJ, and the rest of the world’s central banks. Some say not to worry, pointing to bursts of growth after the world wars. But todays debts, while they pose no solvency risk for the issuer of the currency will not be dealt with by boosts to supply from postwar demobilisation and to demand from the lifting of wartime controls.

To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched if there remains a choice, that is, as is always the case for the issuer of the currency. Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives, as is the case for ‘users’ of a currency in general, including the US states, for example.

Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, (which are confirmation by the CB policy makers who set the rates low that they too believe demand is weak) where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis. Additionally, weak demand can be addressed by tax reductions, recognizing that counter cyclical fiscal policy of currency users, like the euro zone members, requires funding support from the issuer of the currency, which in this case is the ECB.

Ultra-Keynesians would go further and abandon any pretence of concern about longer-term debt reduction without a credible long term inflation concern, as for the issuer of the currency inflation is the only risk from excess demand. This position has been in the rhetorical ascendancy in recent months, with new signs of weaker growth. It throws caution to the wind on debt with regards to solvency (as is necessarily the case for the issuer of the currency) and, to quote Star Trek, pushes governments to go where no man has gone before (apart from war time, when the importance of maximum output and employment takes center stage). The basic rationale of the mainstream deficit doves (not the ultra Keynesian MMT school of thought) is that low interest rates make borrowing a free lunch.

Unfortunately, the mainstream believes ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. No one fully understands why rates have fallen so far so fast (apart from the Central Bankers who voted to lower them this far and this fast, and in some cases provide guarantees to other borrowers), and therefore no one can be sure for how long their current low level will be sustained, as it’s a matter of second guessing those central bankers.

John Maynard Keynes himself wrote How to Pay for the War in 1940 precisely because he was not blas about large deficits even in support of a cause as noble as a war of survival. Debt is a slow-moving variable that cannot and in general should not be brought down too quickly. But interest rates can change rapidly. All it takes is a vote by central bankers.

True, research has identified factors that might combine to explain the sharp decline in rates (in fact, all you have to do is research the votes at the central bank meetings). Greater concern by central bankers over potentially devastating future events such as fresh financial meltdowns may be depressing rates. Similarly, the negative correlation between returns on stocks and long-term bonds, while admittedly quite unstable, also makes bonds a better hedge. Emerging Asias central banks have been great customers for advanced economy debt, and now perhaps the Japanese will be once more. But can these same factors be relied on to keep yields low indefinitely? In the end, it’s all a matter of the central bank’s reaction function.

Economists simply have little idea how long it will be until rates begin to rise. If one accepts that maybe, just maybe, a significant rise in interest rates in the next decade due to inflation concerns might be a possibility, then plans for an unlimited open-ended surge in debt should give one pause if he does not see the merits of leaving risk free rates near 0 in any case, as there is no convincing central bank research that shows rate hikes reduce inflation rates, and even credible theory and evidence to be concerned that rate hikes instead exacerbate inflation. 

What, then, can be done? We must remember that the choice is not simply between tight-fisted austerity and freewheeling spending. Governments have used a wide range of options over the ages. It is time to return to the toolkit.

First and foremost, only governments who fail to recognize that these are merely matters of accounting that don’t themselves alter output and employment must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US. Additionally, for Europe in particular, any reasonable endgame will require a large transfer of public goods productionfrom Germany to the periphery which in fact would be a real economic benefit for Germany. The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way towards a stable growth path.

There are other tools. So-called financial repression, a non-transparent form of tax (primarily on savers), may be coming to an institution near you. In its simplest form, governments cram debt into domestic pension funds, insurance companies and banks by removing governmental support of higher rates from their net issuance of debt instruments, particularly treasury securities.Europe is there already and it has been there before, several times. How to Pay for the War was, in part, about creating captive audiences for government debt. Read the real Keynes, not rote Keynes, to understand our future.

One of us attracted considerable fire for suggesting moderately elevated inflation (say, 4-6 per cent for a few years) at the outset of the crisis. However, a once-in-75-year crisis is precisely the time when central banks should expend some credibility to take the edge off public and private debts, and to accelerate the process bringing down the real price of housing and real estate. It is therefore imperative for the central bankers to make it clear to the politicians that there is no solvency risk, and that central bankers, and not markets, are necessarily in control of the entire term structure of risk free rates, and that their research shows that rate hikes are not the appropriate way to bring down inflation, should the question arise.

Structural reform always has to be part of the mix. In the US, for example, the bipartisan blueprint of the Simpson-Bowles commission had some very promising ideas for simplifying the tax codes.

There is a scholarly debate about the risks of high debt. We remain confident in the prevailing view in this field that high debt is associated with lower growth but must add that the risk is that of misguided policy response, and not the level of debt per se. Certainly, lets not fall into the trap of concluding that todays high debts are a non-issue as we must be ever mindful of the possibility of excess demand using up our productive capacity. Keynes was not dismissive of debt. Why should we be?

The writers are professors at Harvard University. They have written further on carmenreinhart.com

A vast improvement I think!