Work Programme now yielding better results than doing nothing (just!)

The DWP published its latest statistics for the Work Programme just before Christmas, and the good news is, it’s now better than doing nothing – but only just.

Click the image to enlarge. The dotted lines show the minimum expected levels. These are based on what would be expected if the long term unemployed were just left to their own devices. The second graph shows the proportion of people who stayed on the Work Programme for 2 years, but who had a spell of employment during that time lasting for 6 months or more (or 3 months for certain groups). Of the almost 1 million people who spent 2 years on the Work Programme, just 28% fall into this category, while almost 70% were sent back to the Job Centre having been failed to be helped into sustainable work. This 28% is a mere smidgeon above the figure DWP thought the long term unemployed would achieve on their own devices. Better than nothing then!

This is a programme that has cost billions, but achieved astonishingly little. When the Work Programme started, the job market was in the toilet, so job outcomes were incredibly low. As the economy started to recover, it became easier to find unemployment people poor quality temporary and/or part time work, so the job outcome figures have picked up (while still remaining poor). In effect all it has done has transferred public resources into the hands of private outsourcing companies like Serco and A4E, who do little more than cherry pick the easy cases, while ignoring the rest. The job outcome figures for those who have come to the Work Programme via sickness/disability type benefits has been particularly poor, achieving barely half the job outcome rate deemed achievable without any intervention at all. A lot of these people are probably not well enough to be actively seeking work, but the Work Programme is failing badly for those who may be ready to return to the workplace.

Instead of wasting resources on pretending people can be got back into employment through improving their ‘soft skills’ or CV writing abilities, why not actually create some jobs?

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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.

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.

Smaller state ≠ smaller deficit

A lot of the commentary around the recent Autumn Statement has been around how the plans to move the government’s budget from deficit to surplus over the next 5 years will involve cuts and a rolling back of the state to 1930s levels of expenditure.  This doesn’t make a lot of sense to me however, because lower government spending as a proportion of GDP does not mean the deficit would be lower. You can just as easily have a 5% deficit with government spending 50% of GDP as you could if they were only spending 35%. The two just aren’t related. For example, Denmark’s government spends about 57% or GDP, but has a budget deficit below 1%. The US government on the other hand spends about 40% of GDP, but has a deficit of over 5%.

It’s probably not possible (even if it were desirable to do so) for the UK to reduce its deficit for the foreseeable future. It has a large trade deficit because countries like Germany, China and Japan have based their economic strategy on exports, so to really cut its deficit, the UK would have to rely on the private sector (households and businesses) taking on more debt. This could work for a while, but as recent history shows us, it’s not really a sustainable economic model. We would probably crash again before the budget was balanced.

So what is this talk of massive cuts all about if it’s not about the deficit? It’s already transparent to many, but it seems to be about ideology. Proponents of a smaller state have given up trying to argue for this on its merits and are instead trying to frighten people into accepting cuts. Will this work? I think not because even if the public did accept further cuts, it’s not a strategy that’s likely to create a smaller state, rather one with worse public services with the cracks being covered by expensive sticking plaster solutions. To really shrink the state would require those in power to forget about the deficit and introduce some huge tax cuts at the same time as spending cuts.

The size of government should be a political question, not a numbers game. What services should the government provide and what should be left to the private sector. Warren Mosler puts it well in his book:

“…the way I see it, we first set the size of government at the “right” level of public infrastructure, based on real benefits and real costs, and not the “financial” considerations. The monetary system is then the tool we use to achieve our real economic and political objectives, and not the source of information as to what those objectives are. Then, after deciding what we need to spend to have the right-sized government, we adjust taxes so that we all have enough spending power to buy what’s still for sale in the “store” after the government is done with its shopping. In general, I’d expect taxes to be quite a bit lower than government spending, for reasons already explained and also expanded on later in this book.”

 

Public borrowing bad, household borrowing good?

Following on from yesterday’s post about the unspoken assumptions needed to get us to a budget surplus by 2019, here’s another chart from the OBR’s report on the Autumn Statement:

Really big change in household debt to income projection from OBR http://t.co/gNG6vNAYhS—
Matthew Whittaker (@MattWhittakerRF) December 03, 2014

It shows the ratio of household debt to GDP. This peaked just prior to the crash in 2008 at around 170% of GDP after which time, households started to ‘deleverage’ and the ratio fell to around 145% today. For the reasons I gave in yesterday’s post, in order for the government’s deficit to disappear and then go into surplus, household borrowing will have to rise. The OBR forecast it will rise to over 180% of GDP by 2020. Remember that the crash coincided with a ratio of just under 170%, but it is now assumed we can go way beyond that seemingly without any problems.

I have hardly seen this mentioned in the commentary surrounding the Autumn Statement, but it’s a huge elephant in the room. If public debt is such an evil, burdening our grandkids for years to come, why is household debt (where the interest rates will be much higher) not similarly bad? I would suggest that rising household debt presents a much greater systemic risk to the economy than government debt, and no Chancellor with a serious #longtermeconomicplan would put rising household debt at it’s centre. It’s seriously unwise and is setting a timebomb waiting to go off. I reckon Osborne realises the chances of a Tory Government next May are pretty slim, so doesn’t really care what problems he is creating if it means he can retain his reputation for ‘fiscal responsibility’ and someone who can take ‘tough decisions in the national interest’.

All the media comment has been around marginal changes like on stamp duty or on the nightmare of cuts still to come, but to me this issue of household debt is one journalists should be hammering away at hard. We need to be asking if replacing government deficits with household deficits is another other than a recipe for disaster.

Osborne plans to deliver his surplus on the back of rising household debt

George Osborne delivered his Autumn Statement today (in winter!), setting out the outlook for the economy over the next 5 years. He is quite a ‘clever’ politician, so you don’t really learn a lot from listening to his speech as he changes definitions and context so best to suit his narrative. The figures he quotes though are produced by the OBR, which you can download for yourself here.

I’m not going to say anything about his speech, but rather focus on the ‘quest for a budget surplus’ as I’ve decided to call it. All parties seem to be on this quest, so I thought it might be worth setting out what assumptions need to be made in order to get us to a surplus by 2019. To do this, I’m using the OBR’s forecasts for the UK economy’s ‘Financial Balances by Sector’ found in table 1.10 from the spreadsheet Economic and fiscal outlook supplementary economy tables – December 2014.

Although people do so all the time, it’s not really possible to discuss the government’s deficit in isolation, because there is an accounting identity which means the government’s deficit (or surplus) is equal to the non-government’s surplus (or deficit). You can disaggregate ‘non-government’ in a number of ways, but the OBR break it down into ‘households’, the ‘corporate’ sector and ‘rest of world’ (which to simplify, we can think of as the trade balance).

Here are the figures the OBR put out today put into a chart. The bars up to 2013/14 are actual data, and the bars beyond are their forecasts for the next 6 years. The green bar is the government’s budget balance. You can see that in 2009/10, the deficit was over 10% of GDP, and the OBR forecast it will be eliminated by 2018/19 when there will be a small surplus.

How will we get there though? In the year just gone (2013/14), the government’s deficit came in at 5.6%. The non-government balance was comprised of a 0.1% household ‘deficit’, a 0.9% corporate ‘surplus’ and a trade deficit of 4.4% (this should sum to 5.6% but doesn’t because, as the OBR explain, there is a ‘residual error’ – this case 0.4%). The chart above shows the green bar shrinking over the years, but what is changing in the other sectors at the same time?

At the moment we have a rather large trade deficit of almost 5% of GDP. The OBR are forecasting this will be cut in half over the next 5 years. Is this likely? They are also forecasting world GDP growth to slow down over the next few years, so the prospect for UK exports may not be that rosy.

The blue bar on the chart is increasing quite significantly out to 2019/20. This is the household balance, and it is forecast to be in deficit going forward. That means the OBR expect households to spend more than they earn (in aggregate) year on year. How likely is this to come about? To give some context, we can look at what the household sector’s balance was in previous years to see how feasible an outcome of a 3% household deficit might be. The figures going back to 1997 are contained in this post on Neil Wilson’s blog. Neil’s second chart shows that in the run up to the financial crisis (from about 2004 onwards), households ran a small deficit of between 0% and 2%. This contributed (partly) to the biggest crash in over half a century, but for the OBR’s forecasts to work out households would have to run deficits about double (or more) this level year after year. Is this even possible without causing another recession before we get to 2020? I don’t see how it is. This chart from the OBR’s full report also shows the full picture since 2000 clearly. The required rise in household debt is unprecedented in recent times.

The ‘quest’ seems like pie in the sky stuff to me, and dangerous stuff at that. When it became clear Osborne would miss his targets after 2010, he eased up. Hopefully, whoever wins next year, will quickly realise what a fools errand the quest is and do the same. Pumping up household debt to dangerous level is not a sustainable longtermeconomicplan!

Last 7 Days Reading List 07/12/13

Mostly stuff on the economy this week. First up, I liked this post from Think Left, which includes some nice quotes and a video promoting MMT:

Why do politicians tell us debt/deficit myths which they know to be untrue?

Neoliberal news now, and Guardian columnist George Monbiot informs us about the US/EU trade deal about which I was previously only dimly aware. It doesn’t sound good:

The lies behind this transatlantic trade deal

One of the positive pieces of economic news over the last year has been the increase in employment. The Tories have been trumpeting this with hilarious charts like this (what scale are they using here):

Beneath the headline though, what’s less certain is about the type of employment being created. Self-employment for example has risen quite sharply in recent years, but much of it seems to be quite poorly paid, and as a result, self-employed worker’s earnings have been falling:

Self-employed worker’s earnings slump by nearly a third

And in related news, Communities Secretary Eric Pickles has been boasting about how many families have been ‘turned around’ by his troubled families programme. The definition of turned around seems as vague as the original definition of troubled families was. Turned around doesn’t seem to include finding work though as this story from my local paper describes:

Government jobs scheme gets jobs for just three in Bradford

On to the autumn statement now, and I liked this blog on George Osborne’s stated desire to run a budget surplus:

Why do the British enjoy committing economic suicide?

The economy does seem to be recovery though, although the OBR say they expect it to slow down somewhat next year. George Osborne vindicated? The FT’s Martin Wolf thinks not (must register to view):

Autumn Statement 2013: Britain’s needlessly slow recovery

And as long as we keep seeing stories like this, any claims of recovery must be dismissed:

Bradford food bank makes urgent ‘help’ plea

Moving on again with the news of Nelson Mandela’s death at the age of 95. I was only 8 when Mandela was released from prison, and I think a lot of people of my generation don’t know much about his life before that point, and how he was viewed by different people. A lot of rewriting of history seems to be going on and I thought this blog was interesting in its perspective:

They come to bury Nelson, not just to praise him

Finally, on a lighter note, the news that Amazon has been trialing drone deliveies. I thought this mocked-up Amazon calling card was well done: