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.

Wading through the fog of the Scottish referendum debate

I can’t claim to have a particularly strong view either way over Scottish independence. If I lived in Scotland, I’d probably vote yes, and then pray the SNP saw sense before independence actually became official. I feel for those in Scotland who remain undecided though. They are being bombarded with bullshit from all angles. It’s clear virtually all of the media and political class are desperate for a No vote, and are coming up with ever more apocalyptic arguments to try and persuade Scots of the consequences of a Yes vote. Recent polling suggests that if anything, their efforts have resulted in a slight tightening of the polls, so they may be as well to just shut up. As for the Yes side, it seems obvious, they are not actually prepared for what comes next if Scotland does vote Yes, and some of their stated positions particularly their desire to keep the pound in an independent Scotland would worry me if I lived north of the border. 

In this febrile atmosphere then, it’s very difficult to get objective information about the consequences of Scottish independence. On the No side we just hear blatant scaremongering, and from the Yes side quite vague promises about what an independent Scotland would look like. With that in mind, here are a few links I have found interesting in recent weeks mainly focusing on economic aspects of Scottish Independence. I post these mainly because I judge the sources to be objective in the sense that they don’t have any skin in the game, although they are obviously not value-free.

First, this post from the Southampton University politics blog written by someone familiar with independence referendums in Quebec, Canada:

What can the 1995 Quebec referendum tell us about the Scottish referendum?

This recent post by Australian economist Bill Mitchell explains why – given the SNP’s plan for the currency – he would vote No if he were a Scot:

I would be voting NO in Scotland but with a lot of anger

Another economist Paul Krugman gives his own view in a column in the New York Times earlier this week:

Scots, What the Heck?

And finally, Neil Wilson has written a series of posts on his 3Spoken blog trying to dispel some of the (what he calls) myths of the Scottish Independence debate:

How to buy imports?

The currency board

The national debt

 

 

Inflation, corporate welfare and another UKIP SOH failure

A lot of links to get through this week. First up, here’s a post outlining how we might overhaul the tax system to make it more progressive:

Towards a truly progressive tax system

And here’s two posts on inflation. Inflation is low and falling at the moment. Policy makers are so scared of inflation, they avoid policies that might improve the economy:

The Inflation Obsession

What causes hyper-inflation? Weimar Republic, Zimbabwe, Argentina, Venezuela

Next, George Monbiot reminds us that while the Government is obsessed with cutting welfare from those at the bottom, corporate welfare is still alive and well:

The welfare dependents the government loves? Rich landowners | George Monbiot

And here, JD Alt points out the obvious – if the private sector can’t or won’t invest in areas that are vital for future development, then the government should:

Forget the 1%

There was a Panorama this week about food poverty. Patrick Butler gives us the details:

Food poverty: Panorama, Edwina Currie and the missing ministers

‘Making work pay’ is a cliche we hear a lot, but according to this blog post, work already does pay in the vast majority of cases:

Yes, you’re better off working than on benefits – but it’s not enough to reduce poverty

With unemployment still high (athough falling) and the Work Programme failing, Labour say they will introduce a ‘compulsory jobs guarantee’. Details on what this will look like have been vague, but they are now hinting it might look something like this:

Labour would bankroll ‘back to work’ plan on Bradford model

Finally, news of another massive sense of humour failure from UKIP. Tom Pride explains:

Supposedly pro-free speech UKIP tries to ban satirical comedy show

 

 

High government debt doesn’t lead to high interest rates

At some point I seem to have got myself on the email distribution list for Tory Party spam, so I regularly get updates from the likes of Michael Green (Grant Shapps) and Mr Egg (Sajid Javed) about how wonderfully the current government are doing. A phrase they often include is “tackling the deficit to keep interest rates low”. This repeats the widely held belief that once government debt gets too high, the interest rate ‘the markets” demand to lend more money to the government will start to rise, at which point debt interest payments will get out of control and BAD THINGS WILL HAPPEN. Thank god for the coalition eh?

Today I came across these helpful charts presented by Paul Krugman in a recent conference paper which help us examine this assertion more closely (I found them in this post, which makes the same points I make here).

51062179debt-interest-rates-krugman-fig.1-2013-nov

In this chart, each dot is a country. The debt-GDP ratio is on the bottom access, and the interest they pay on 10-year debt is on the left-hand axis. Broadly speaking, there seems to be a clear positive relationship between higher debt and higher interest rates. The dot on the far right is Japan, which doesn’t fit the pattern, but they must be a special case right? Maybe Green/Shapps and Mr Egg are right then?

6981316debt-interest-rates-krugman-fig.2-2013-nov

Hang on though. This chart is the same, but Krugman has distinguished between Euro and Noneuro countries. The relationship between high debt and high interest rates for the Noneuro countries (like the UK) has disappeared. So what can we conclude:

1. High government debt does not lead to high interest rates if you have your own currency. Tories and Lib Dems are talking rubbish when they say “tackling the deficit to keep interest rates low”.

2. If we don’t need to fear high government debt, austerity is an even more horrendous policy

2. Don’t join the Euro. Ever. That means you too Scotland.

The Work Programme Part 3 – Payment by Results and Unpaid Work Experience

“Payment by results”. It sounds good. Firms only get paid if they do well, so there is a powerful incentive for them to act in the best interests of the individual. Something is going very wrong though. About £4 in every £5 paid out to Work Programme providers is not being paid because a ‘result’ has been achieved. It is being paid for an ‘attachment’ to the Work Programme i.e. when an unemployed person starts the programme. Only £1 in £5 constitutes ‘payment by results’, and even then as we have seen, the value of these results is somewhat dubious.

The Government has actually taken these poor results and tried to spin it into a story about value for money for the taxpayer. Responding to the dire figures published in November, Work and Pensions Secretary Iain Duncan Smith said:

“I think we are on track. Payment by results is about saying the taxpayers need not foot the risk.”

In other words, he’s saying that even if the Work Programme providers performance is abysmal, it’s OK because the taxpayer only pays for results. Leaving aside the fact that that is just not true, as we’ve already seen, the idea that all that matters is value for money for the taxpayer is frankly bonkers.

We have an unemployment crisis in this country and every day we are forgoing millions of pounds in lost income because we have millions of people unable to find work. We are not making use of all these people’s skills and experience while they languish on benefits through no fault of their own. The idea that it’s OK that we are not finding work for these people because the taxpayer is not on the hook is crazy.

The Future Jobs Fund was scrapped by the Government because it cost too much. A cost of over £7,000 per job is widely cited, but a recently completed evaluation of the programme came up with somewhat different numbers. The programme was found to have a net cost to the Exchequer of £3,100, but provided a net benefit to society of £7,800 per participant.

The idea that the only thing government’s should be concerned about is value for money, that cheaper means better is just illogical. It’s what society gains from spending by the government that really matters. The Work Programme may be cheaper than previous schemes (debatable I think), but the return on the government’s investment in the Work Programme looks like being very low (and maybe even negative) at this point. That makes no sense at all. Far better to spend more on a programme that will generate a greater return for society.

Payment by results is supposed to incentivise excellence, but achieving excellence is hard, even more so in an economy where there is a shortage of jobs. So instead of promoting excellence among Work Programme providers, payment by results seems to be promoting cheating or corner cutting (read part 2 for more on this). The result of this is that, far from creating an effective, unemployment reducing programme, it has created one which is barely (if at all) better than nothing.

Knock-on effects

Going hand-in-hand with the Work Programme appears to be the beginnings of a worrying trend in the labour market –  a growing casualisation of the workforce and – even more worrying – the rise of the unpaid work placement.

Casualisation

Casualisation, manifesting itself in the form of temporary, zero-hour or self-employment has exploded to such an extent that 3 million people now say they are underemployed, up by 1 million since the economic downturn began in 2008. So while Coalition ministers crow about falling unemployment, and 1 million new private sector jobs, it’s right to question just what sort of jobs they are, and what sort of precedent does this set for the future?

That’s not to say there is no place for zero hour contracts and temporary work. The key though is that there is a strong backstop in place to catch those who fall out of the system. Temporary work or zero-hour contracts are not so bad if there is a strong welfare state to fall back on (or a guaranteed state-funded job as I would like to see), but at the same time as the labour market remains weak, the Government are also weakening the welfare state at the same time by cutting working age benefits in real terms. Done in the name of deficit reduction, it’s the ultimate false economy. Cutting the incomes of those who spend most of their incomes mean less sales for businesses and less income overall. As Paul Krugman says:

“Your spending is my income, and my spending is your income. So what happens if everyone simultaneously slashes spending in an attempt to pay down debt? The answer is that everyone’s income falls — my income falls because you’re spending less, and your income falls because I’m spending less. And, as our incomes plunge, our debt problem gets worse, not better.”

Unpaid Work Experience (Or Workfare)

Wrapped up with the Work Programme has been the rise of mandatory unpaid work experience. Work experience has gained a lot of negative coverage in the media in recent years. A lot of this has focused on schemes outside of the Work Programme, but it is less known that it is very common for Work Programme participants to be mandated to do unpaid work experience.

The Work Programme uses the ethos of the ‘black box’ approach. This means providers have the freedom to do whatever they feel necessary to help a Work Programme participant get back to work. Often, it seems, this takes the form of unpaid work experience. This is mandatory. If participants refuse to take part, they can have their benefits sanctioned.

This practise of sending benefit claimants is growing in scope. It was recently announced that ESA claimants (those deemed unfit for work, but placed in the work-related activity group) can be mandated to do unpaid work experience for a time period without limit.

This phenomenon of unpaid work experience has now become so prevalent that private firms, with the collaboration of Jobcentre Plus and the DWP are now advertising ‘job vacancies’ that are actually unpaid placements. Here’s 2 examples:

There is a real danger I feel that this can become so normalised, that it becomes standard practise for certain employers to only hire on a ‘try before you buy basis’. This is just wrong in my view, but it just seems to have almost passed unnoticed in the press. It just shows how bad things have got when things most people would usually balk at just become the new normal. All decent people should oppose this in the strongest terms.

This post has strayed somewhat from its original theme, but just to try to draw the 3 parts of this series together. Here are the key points:

  • The Work Programme is an expensive failure. If we didn’t have a Work Programme, we would have expected more long term unemployed to have found work.
  • Work Programme providers are providing very little of value for the millions they are being paid. Instead, they are using a number of techniques to extract additional cash from the public purse.
  • Payment by results just doesn’t work
  • The Work Programme is giving rise to all sorts worrying trends, notably unpaid work experience.
  • It seems to be becoming normal for employers to expect jobseekers to work for them for free for a period before offering them a paid role. This can only displace paid employees. It needs to stop.
  • Real terms benefit cut and benefit sanctions are pure false economies. They will ensure unemployment rises, not falls and will bequeath a smaller economy than would otherwise be the case. It will end up costing us all more.