10 things you may not know about the Beveridge report

At the end of the year, us bloggers share some of our most-read posts of the year. This is a good opportunity to find stuff you may have missed first time around. Here’s an interesting one by Jules Birch on the Beveridge Report which I found via his list.

Jules Birch

This Saturday sees the 70th anniversary of the publication of the iconic report credited with the creation of the welfare state.

Sir William Beveridge published his report within weeks of the victory at El Alamein that seemed to mark a turning point in the Second World War. His ideas, and the language in which he expressed them, seemed to many people to symbolise what they were fighting for: a better world after the war and no return to the miseries of the 1930s.

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alittleecon top 5 posts of 2014

It’s the end of the year, so time to embark on a self-indulgent look back at some of my top posts from 2014. Here’s the top 5 most-read:

1. A random CIF commenter nails it on Tory welfare lies

Note the slightly click-baity title. I basically just copied and pasted a comment from the Guardian’s website here, but it was my most-read post of the year. Go figure.

2. The Basics of Modern Monetary Theory

This was my beginner’s guide to MMT and it seemed to go down well. I am rather more proud of this one than the number 1 post on this list.

3. What does it mean to be fiscally responsible?

This was actually written in September 2013, but continues to get regular hits, due to it being high up the rankings on Google for some search term or another. “Fiscal responsibility” is a phrase that ain’t going away any time soon though.

4. Michael Meacher’s Speech on Benefit Sanctions

Michael Meacher MP made a good speech in the HoC about benefit sanctions. I shared it here.

5. BBC Economics Editor struggles with economics of public debt

This is from just a couple of weeks ago and is about Robert Peston having difficulty with stuff he should probably already be on top of.

Dragging Santa into Politics

A bit of nonsense here for the Christmas season. Nice writeup of a recent Yougov survey which asked who people thought Santa would vote for. Some Christmas cheer for the Greens maybe?

Politics Upside Down

DipticBy Will Jennings, Professor of Political Science and Public Policy at University of Southampton (Academia.edu, Twitter). Read more posts by Will here.

B5h7S73IcAA-uRW Source: @john_neptune

“An urgent message for Father Christmas: all we wish for is our country back!” was the slogan spotted emblazoned across an upside down union jack flag in Hedge End, Hampshire this week. Poor old Santa is increasingly being dragged into the mud of partisan politics — on both sides of the Atlantic. Despite the plea for Father Christmas to return the UK to some rose-tinted age, British voters are not convinced that he is a Ukip supporter. Surveyed by YouGov last December, just 13% of people thought that Father Christmas would vote Ukip. This perhaps should not be a surprise given that, as it has been pointed out, is “is effectively a foreigner doing a job at the expense of…

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Budget deficits are neither good nor bad

This is going to be a re-blog of a re-blog, which is a bit lazy of me, but I’m repeating it again because I think it’s rather pertinent at the moment, what with the talk about long term economic plans to generate budget surpluses and spending cuts and tax hikes supposedly totalling £50bn on the way. It’s so far removed from the usual debate about austerity, I try and repeat it as often as possible. Anyway, this is from an old Bill Mitchell blog (my favourite economist) and he’s writing about whether budget deficits or surpluses are good or bad (Bill’s Australian by the way if you didn’t already know):

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.

This blog – A voice from the past – budget deficits are neither good nor bad – has more discussion about Gardner Ackley.

To add meaning to the discussion we have to relate the budget outcome to the circumstances in the economy rather than be side-tracked by some pre-conceived notion that some balance is desirable and another is not.

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.

In most budgetary discussions, it is erroneously assumed that the national government has a financial constraint and has to budget like a household.

The analogy neo-liberals draw between household budgets and government budgets is false. Households use the currency and must finance their spending.

However, government issues the currency and must first spend (i.e. credit private bank accounts) before it can tax (i.e. debit bank accounts). The claim that governments must tax or borrow to ‘finance’ its spending is false under a fiat-currency system.

The Euro nations are an exception to this rule. They surrendered currency sovereignty, and thus have to borrow to cover deficits. This makes them dependent on bond markets (in lieu of European Central Bank support) and exposes them to solvency risk. The current Euro problem lies in the flawed design of its monetary system, which was a neo-liberal ploy to limit the capacity of these governments to borrow and spend.

The restrictions on government spending are the quantity of real goods and services available for sale in its own currency, including all the unemployed labour. Neo-liberal claims that bond markets limit government spending are false.

The fact is that the only constraint that a currency-issuing government, such as the Australian government faces, are how many real goods and services are available for sale in $A. When there is mass unemployment, for example, we can conclude that the government has no real constraint at that point in time and can bring those labour resources into productive use through higher spending.”

Is low inflation a good thing?

Today it was announced that the CPI measure of inflation had fallen to 1%, a 12 tear low and also well below the Bank of England’s 2% target. Lib Dem dogsbody Danny Alexander welcomed the news, saying “This is a welcome early Christmas present to millions of families across the country.” Thanks Santa! The thinking in Government seems to be the lower the better, because they are desperate to negate Labour’s ‘cost of living crisis’ attack, but is low inflation really a good thing? Helpfully, FT columnist Tim Harford wrote a short piece on this in February, some of which I will reproduce here:

“What wrong with low inflation?

Nothing, so far – but you can have too much of a good thing. Inflation is also low and edging downwards in the US, Japan and the eurozone. Yet in all these places, interest rates are low and central bankers have printed enough money to get the tinfoil hat brigade screaming about hyperinflation. Such low inflation might be an indication of trouble ahead.

Are you saying that low inflation is a bad thing, or are you saying that low inflation is merely a harbinger of doom?

A bit of both – but mostly I am concerned that low inflation is a bad thing in itself. One issue is that unexpectedly low inflation redistributes from borrowers to creditors.

About time too, most savers will be thinking.

I hear you. Still, borrowers are more likely to be cash-constrained (that’s why they are borrowers) and are more at risk of bankruptcy. That means lower-than-expected inflation may damage the economy as a whole rather than just moving money from one person’s pocket to another’s. And there’s another problem with deflation: the “lower-bound” problem.

What’s that?

It’s a fancy way of saying that nominal interest rates can’t fall below zero. If inflation is, say, 4 per cent then a central bank can give an economy a shot of adrenalin by cutting interest rates after inflation to minus 3 or minus 4 per cent. If inflation is 0.7 per cent – as it’s currently estimated to be in the eurozone – then that’s impossible.

Why would anyone want real interest rates of minus 4 per cent?

Usually we wouldn’t. But, against the backdrop of a slack economy, such rates would be a strong incentive to spend. And if outright deflation took hold, effective interest rates would rise: people would earn money simply by sitting on their cash and waiting for prices to fall. Sounds great but for an economy it’s a disaster. If nobody buys anything there will be a recession and more deflation – a vicious spiral.

But that isn’t going to happen. Is it?

Don’t ask me, I’m an economist. We never know what’s going to happen to the economy. But it is a serious enough problem that even a low risk is worth losing sleep over.”

I guess the key points are that low inflation harms borrowers in that it raises the real interest rate on existing debt, and if it continues to fall and we get into deflation territory, consumers start postponing spending, believing prices will fall further in the future. This could push us back into recession. So much as the likes of Danny Alexander may celebrate falling inflation, let’s hope it’s not a precursor to some pretty nasty economic problems to come.

BBC’s Economics Editor struggles with economics of public debt

In a blog post about George Osborne’s Autumn Statement and what the future holds for the interest rate the UK government must pay on its debt, the BBC’s Economics Editor Robert Peston drew on conversations with his mates in the financial sector to concoct a story about the possible differences between Tory and Labour governments. Economists Paul Krugman and Simon Wren-Lewis objected to some of Peston’s post, causing Peston to write a response today. It’s not very impressive! This is the contentious passage from Peston’s original blog:

“Mr Market matters because he decides what price the government pays to borrow, and whether the government will continue to benefit from the current record low interest rates.

The Tory view is that those interest rates can only be locked in if the government continues in remorseless fashion to shrink the state and net debt.

What Labour would point out is that countries in a bit of a fiscal and economic mess and currently refusing to wear the hair shirt that the European Commission thinks necessary, such as Italy and France, are also borrowing remarkably cheaply.

And here is where Mr Market may be capricious, according to my pals in the bond market.

They say the UK’s creditors would probably be forgiving and tolerant of George Osborne borrowing more than he currently says he wishes to do, in that his record of reducing Whitehall spending by £35bn since taking office in 2010 has earned him his austerity proficiency badge.

But Ed Balls has never been chancellor, although he was the power behind Gordon Brown when he ran the Treasury and much of the country, both in the lean years from 1997 to 2000 and the big spending Labour years thereafter.

So Mr Balls has yet to prove, investors say, that he can shrink as well as grow the apparatus of the state.”

In his follow-up blog, he goes on to write:

“But does that mean a plan to reduce the deficit has been irrelevant to the borrowing costs paid by the HM Treasury? That seems implausible.

The government inherited a deficit (a gap between what it spends and what it raises in taxes) of 10% of national income or GDP. Wren-Lewis and Krugman would presumably agree that a 10% deficit is unsustainably high – and if it recurred for years would prompt fears for the UK’s solvency.

So getting the deficit down from 10% – or perhaps promising to get it down – must have had some bearing on the so-called risk premium for lending to the UK government, or the interest rate that the UK had to pay to borrow.”

So he’s selling the idea that the interest rates on government debt are determined by the bond vigilantes who look at how serious governments are at dealing with their deficits, weighing up the risk of default and setting rates accordingly. The trouble is, this is a total fairy story. Simon Wren-Lewis points out in his blog that interest rates on debt are based in part on expectations about future short term rates, and those expectations are for short term rates to stay low because the economy is still weak.

This is true, but there is an even more fundamental reason why Peston’s theory is a fairy story. The UK has its own currency, so the concept of solvency risk just does not exist. Don’t believe me? Here’s Alan Greenspan and head of the OBR Robert Chote making the same point, and this chart from Paul Krugman makes drives the point home well by comparing the rates paid by countries of the Eurozone with major economies outside the Eurozone.

Peston is not alone in believing this fairy story. The 2010 election was basically fought on this basis (although we don’t hear much about credit rating any more), but as economics editor he should be offering his viewers and readers some more reality-based analysis. Fair play to him for highlighting the disagreement over his first post, but he only succeeded in compounding his error by raising the issue of solvency. Let’s hope this conversation continues.

How to Balance the Government Budget. The MMT way! (Part2)

Modern Monetary Theory: Real Economics

To fix the UK economy requires that aggregate demand be increased. Nearly all politicians understand that. Except, the favoured way, and some might say the only way, for those on the right of the political spectrum is to create a credit bubble to encourage more private spending through more private borrowing. That’s not an option for the foreseeable future as the private sector is now saturated in debt. So saturated , in fact, that we’ll have another crash in the next couple of years unless the next government acts quickly to prevent it. That will require them to spend in a sensible fashion but nevertheless spend big time. Realistically, it is going to be a difficult sell electorally. The problem, for those politicians wishing to advocate this line, will be questions such as “where’s the money going to come from?”  and comments such as we “can’t afford” to do that.

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OBR doesn’t appear to understand the implications of its own forecasts

Head of the OBR, Robert Chote was questioned on the Autumn Statement by the Treasury Select Committee yesterday. The full transcript is here, but I don’t recommend it unless you are having trouble sleeping. I blogged last week about the OBR’s forecasts and what they imply about household debt, but this didn’t come up much at all yesterday. The only point at which it did was when Conservative MP Steve Baker asked:

“Can I just tie some of this into what we heard yesterday from some of the economists from the City who came in? I had an exchange with them about this notion that savings are being run down and that consumer credit is coming forward, and we agreed that this is demand being brought forward. So if demand is being brought forward today, through the rundown of savings and the taking up of consumer credit, wouldn’t we expect a reduction of demand in the future and wouldn’t this lead us into a further boom/bust cycle, even within the context of how you think about demand?”

So Baker is saying consumers are spending money today, not because of rising incomes but because they are spending their savings or borrowing for consumption. He asks how long this can continue. Here is Robert Chote’s reply:

“Certainly if you look at the relatively robust pace of growth over recent quarters, that has been reflected particularly in terms of the contribution from the consumer of people running down savings rather than having stronger income growth. We have assumed that it is not plausible, and I think if you look at the last year the real consumption growth has been running further ahead of real wage growth than in almost any other year over the last 15 or 20 or so. Therefore, in our forecast, the main reason we expect the quarterly pace of growth to slow into next year is that you see consumer spending moving more into line with income growth and being less driven by the sort of decline in saving you are talking about.”

So Chote is  saying the potential for the trend of consumer spending being supported by running down savings and consumer debt continuing is not plausible, but that they expect wages to pick up which will ensure spending growth continues (albeit at a slower rate). The thing is though, as I outlined in the two posts linked to above, in order for the deficit to be eliminated over the next 4 or five years, that’s exactly what the OBR are forecasting needs to happen. Household debt needs to rise and consumers need to spend more than income on an unprecedented scale. So either Chote doesn’t understand the implications of his own forecasts, or it’s his way of saying they are just ‘not plausible’. It’s a shame none of the MPs present pushed him more on this.

Daily Mail wins misleading headline of the week award (again)

Yesterday the Daily Mail published a story on its website headlined “£7,000 per person is the true cost of welfare as UK spends a quarter of national income on handouts”. This is a story about some data published by the EU which shows the amount each nation spends on ‘welfare’ – a measure which here includes healthcare and pensions. The Daily Mail calls these ‘handouts’. Is NHS care a handout now? The article below displays a bit more honesty (only a bit) and includes this chart (look at the chart title. Romania and France don’t even appear on the chart!)

Daily Mail

It trumpets the fact that UK spending on welfare is 17.5% above the EU average, but then also says it is only the 15th biggest spender in the EU. You could just as easily (and perhaps more honestly) write the headline as :

“UK spending on welfare (including health and pensions) is lowest of any Western European nation” (OK so I wouldn’t make a good sub-editor, but you get the idea).

Hats off Daily Mail, hats off.

Too poor to eat

I came across this audio clip today from a radio call-in on James O’Brien’s LBC show. The topic for discussion I believe was a report published today about food bank usage. The caller talks about how he is struggling to feed himself following being made redundant. It’s impossible not to be moved by his plight, and seems a world away from the stories we have been reading recently about families being able to save up enough of their social security payments to be able to afford a Christmas splurge. It’s striking though that what he wants is not charity but a chance to work and be able to provide for himself.

Much as today’s food bank report has been welcomed, as this article points out, although the report mentions things like a living wage, it’s recommendations involve a lot more charity from supermarkets and other to provide surplus food and expand food bank provision. Charity is never going to solve all the problems though. People need jobs, jobs that pay enough to live a decent life. For those that are unable to work, they also need to have enough money to get by without having to be worried about being sanctioned every few months. Expanding food banks smacks of being a sticking plaster solution. I think most people on the breadline like the LBC caller just want the simple dignity that working and earning a decent living brings. It would be relatively straightforward to make that happen.