Friday, 30 September 2011

Thoughts on the Conference

The conference season should by rights be a good time for labour. The liberal democrats and the conservatives-- who have been drowning out labour in terms of media excitement since the labour leadership election-- are in government and don't really have much new to say. Labour on the other hand is trying to reposition itself, and that has brought a sharp focus onto what their new platform will be, as well as its colour scheme, oddly enough.

And it has been exciting for me. In fact words like 'reposition' and 'platform' feel completely wrong. I got the sense of a surprisingly genuine and cohesive set of principles at work here. Ed Milliband, under fire over his comments on 'predatory' asset strippers, was quick to point to the Beveridge welfare state, and its emphasis on responsibilities as a part of welfare; of the 'deal' aspect. It would be easy to see this as Labour trying to capture the centre ground on the right, attacking welfare cheats instead of tax avoidance, but there's a lot to be said for it.

This is a difficult area because it begins to descend rapidly into questions of personal freedom and paternalistic policies, issues I hope to write more about next week. Even so, expectation is a powerful thing which can encourage us in pursuit of our better natures to rise and meet the expectations placed on us, to be better people and to satisfy our responsibilities as citizens. I do think it may be necessary to ask for more from those on benefits at times, and from all of us. In the manner of civic republicanism I favour the creation of better citizens as a goal of government. It benefits the recipient to feel they have earned the help given, and to be proud of their work and accomplishments, and it benefits society as a whole to feel their help is merited.

Equally our laws and our society have to seem fair to us. Seeing CEOs take home vastly overgrown sums when the value of their company has scarcely improved at all, and being told that this is 'pay necessary to attract top talent' is simply revulsive. The tax avoidance issue and the 50% tax band do come into play here, or should. Unfortunately the current global race to the bottom means that unless rich countries continuously outbid each other on undertaxing the most (upwardly)mobile of their citizens think tanks will continue to threaten us with dire economic consequences if we do not pay competitively, tax competitively, and so on. This is not a local issue. The other side of the coin is that companies don't just want low taxes, they want infrastructure, a well educated workforce and synergies and subsidies.

The indications from the two Eds seems to be a move towards a more responsible way of interfacing with the private sphere, providing benefits to those who act in accordance with our values and the greater good of our society. Despite the fairly hostile approach in many sections of the press to 'arbitrary distinctions' between good and bad companies, it is possible to wield the public purse in such a way as to incentivise desired behaviours, and the idea regarding apprenticeships was particularly interesting. It struck me that they'd learned some of the lessons from our European allies, and that this could be a way of improving those synergies and the infrastructure mentioned earlier, provided it was part of a coherent strategy of course.

Most important for business is growth, of course, and that is Labour's distinctive point on the economy. Ed Balls delivered a surprisingly good speech to conference in which he accepted New Labour's past mistakes but defended its successes. Labour's new line that: "Lehman in New york did not fail because Labour hired too many teachers and nurses." is long overdue. I've heard versions of it given rarely and stutteringly for nine months now, but this formulation is basically pretty good.

I support Ed completely in this. Labour has to defend itself. I'm not going to pretend for one moment it didn't make plenty of mistakes, but it's easy to see how the facts have faded in the minds of many in the public, only to be replaced with a year of sound bites about profligate spending and running up deficits. If Labour does not fight back on this issue it will face two problems. First, that it will continue to be identified according to the coalition narrative, and this narrative can easily be applied to Balls and Milliband, who are hardly detached from New Labour. The leadership vacuum at the top last year left this unaddressed for far too long, with dangerous potential consequences.

And second, if the economic prognosis offered by Labour is sincerely held, which I firmly believe and hope it is, then by sticking to it the party can quickly regain some part of its economic credibility by being proven right by events. Admittedly, the spectre of European crisis has somewhat reduced this by giving the coalition an external excuse for the worsening economy, but if we had conceded the argument we would have gained nothing. We would be the party with no alternative to offer, which had abandoned its principles and its economic logic simply because of the prevailing political winds, only to run adrift by virtue of the same.

This was the most encouraging part of the conference for me. It was only a start, yes, but it was at least a start. A coherent, forward looking set of ideas. Confident enough to apologise, and willing to learn from the mistakes of the past, while being bold enough to continue to assert its firm beliefs.

Sunday, 25 September 2011

Framing the Debate Over Public Finances - Austerity and Deficit Reduction

One year into austerity Britain and the data on the UK’s fiscal position has provided for some surprising twists in the perennial debate over how far and fast to cut the public finances: public spending isn’t actually going down. This seemingly perverse outcome has led to an equally perverse argument: if these are the cuts, then how can Labour say the cuts are too deep? This contention is among the most dangerous, as it springs from the complexity of interpreting public finances and is easily misunderstood.

The first thing to remember is that there are a lot of accounting tricks you can employ to change how these numbers look. The choice between expressing an expenditure as a proportion of GDP, or of total government spending, or in absolute terms for example, can produce markedly different results. If inflation is high an absolute figure may be misleading as absolute figures will natural tend to increase over time as prices rise. Similarly if government spending as a whole is rising or declining, then that can distort any single component expressed as a percentage of spending. If the overall budget is cut but health spending is protected, then health spending is increasing as a proportion of total spending. Last but by no means least, movements in GDP growth / decline can produce similar effects-- you can maintain the same level of spending as a percentage of GDP while cutting spending if GDP has fallen.

The UK currently has modestly high inflation, and this is doubly true in certain areas such as health. The payout on retirement benefits, health spending and education have tended to and are projected to soar over time because of demographic, technical and demand-based reasons. If government spending does not increase in absolute terms these areas will see a real-terms decrease in funding, they will not be able to keep up with the increase in costs. This is, if you like, a negative cut as opposed to a positive one. A passive cut.

The next thing to remember-- and a critical point for Keynesians-- is that government spending also goes on items such as welfare. In times of high unemployment the cost of providing benefits also rises. And as a result, cuts elsewhere may be cancelled out by increasing cyclical expenses. The so-called ‘automatic stabilisers’, which cause the government to spend more during downturns, have the side-effect of masking cuts in spending elsewhere.

As a result it is never reasonable to look at government spending as a whole. If the coalition cut spending in specific areas, but the effect of this was to lower employment, then given the current economic climate this would reduce demand in the economy and increase government spending on welfare. Moreover, companies would see the decrease in demand and cut investment and hire fewer people. These effects can quickly multiply, as consumers cut back on spending out of fear of what the future might hold.

So it is entirely possible that the government could cut spending, and yet fail to actually reduce total outgoings. It is therefore equally true that the opposition could have, were they in government, cut spending by less and not have been in much worse of a position fiscally. In fact, the UK’s debt is structured in a very long term, low interest rate way compared to most other nations, and is able to borrow at historically low rates. This is in part because investors can also see the bleak prospects for demand, and would rather put their money into national debt than private-- and some nations rather than others.

The experience of Japan, and of the US and UK today, is one where high debt has not proven catastrophic. The capacity to print money and the size of the economies concerned makes them very different to the greek situation. More importantly, the US and UK are growing--however slowly, and are able to produce revenues. As GDP grows the size of the national debt as a percentage of GDP falls, and government revenues tend to rise. This means that the long term position is sound provided a protracted recession does not re-emerge, and the low interest rates on government debt, combined with high inflation means the government can effectively borrow for free. This is why, during a liquidity trap, many economists argue government spending should actually rise in the short term, and fall in the medium and longer term. The government is taking up the slack in private sector investment created by an environment of low confidence and high risk, and taking advantage of its own low rates of interest.

There are therefore two ways to express the current situation: A) The government has barely cut anything, so how could it have cut less, and B) Despite its cuts the government has failed to reduce the deficit. Both arguments are easy to make in the media just now, and the only reasonable policy for the average person is caveat emptor: buyer beware. This is an area where it’s very easy to invent your own facts, and both sides are going to do it.

The conservatives like to call this a debt-based recession, and that’s true. It’s also a demand-led recession. Without demand for their products and services companies will neither hire nor invest. Households still have too much debt, household bills-- especially energy bills-- are rising too quickly and wages are not going anywhere. There are no private sector jobs in selling to people who won’t buy and demand has collapsed in Ireland, in the Eurozone, in the US. All our major trading partners, and the kind of goods and services we export go disproportionately to those countries-- not to developing countries. Cuts are not going to miraculously solve any of these problems, and there are no quick fix supply side measures to remedy them either.

In principle Labour were right, cutting the deficit needed to be a medium term priority, while in the short term the recovery was supported, however in reality it may not matter at all, as the looming crisis in the Eurozone threatens to plunge the entire world back into crisis.