23 Mar 2015

Party Time

The 2015 UK elections are approaching and people are trying to decide who they'll vote for. One way to find out which party represents our ideas is to do a quiz. One which looks quite comprehensive is The Political Compass. The Political Compass profile of the various political parties (in several countries now) gives us a pretty good idea of where they stand.

Their research confirms my intuitions of what's happened in the UK over the last few decades. The whole country had drifted to the right and towards authoritarianism. Indeed the major parties in the last election all contested the same political-economic quadrant as this diagram of the 2010 Election shows:

For the 2015 election they show the parties present positions as these:

The LibDems have drifted back into their original lower-right quadrant. Tories are towards the right of their usual territory (probably influenced by UKIP who are the most right party - note the comparison with the BNP who are centrist-authoritarian).

The author of this blog is to the left of and on the same vertical level as the Greens. Take the Political Compass test.

21 Mar 2015

Whatever Happened to the Long Boom?

Back in 1997, hip culture-tech magazine Wired (5.07) wrote an editorial piece "The Long Boom: A History of the Future, 1980 - 2020". The strapline was "We're facing 25 years of prosperity, freedom, and a better environment for the whole world. You got a problem with that?"

The article repeated the usual Neolibertarian bullshit, a lot of which can be traced back to former Goldman Sachs exec and then Secretary of the Treasury Alan Greenspan. As bullshit goes it was very persuasive and taken up and spread around by most mainstream politicians and economists.

Just 10 years later Lehman Bros collapsed because their debtors were defaulting at such a rate that their cash flow was insufficient to pay their own debt commitments. This initiated a cascade of events that led to the worst economic recession in history (arguably) which we now call the Global Financial Collapse. A few prescient economists pointed out that the high levels of personal and business debt, and the rate at which that indebtedness was increasing, would inevitably lead to disaster. But no one listened to them then and hardly anyone listens now.

If you keep borrowing, there comes a point when paying off debts soaks up all of your disposable income. And if you have a sudden need, or there is an interest rate fluctuation, or you lose your income, then you can no longer service your debts and go bankrupt. When you income is rent paid on borrowed money, as it is for all banks, and many debtors default on payments at once, then this can cause serious problems. When you over-lend to thousands of people who cannot afford to service their debts, then disaster is inevitable.

When we borrow heavily (as on average people and businesses did and are doing) then the future becomes impoverished. As individuals we can only stave off that impoverished future by tightening our belts or borrowing more, but more borrowing only undermines the future more and eventually it must collapse. Businesses can borrow and invest in growth and trade their way out of trouble as long as there is sufficient demand. But when the consumers have maxed-out their credit cards and their disposable income is paying off the interest, then cannot spend to create demand for products. This was the fatal flaw in the thinking of the Wired editorial and of all mainstream thinking about economics in the 1990s and 2000s. This still is the fatal flaw of the idea of the Long Boom - the length of it was determined by how much we could undermine our own future and have not collapse on us.  The mainstream has yet to really admit that this is what went wrong.

Governments on the other hand operate differently. Our UK government has convinced more or less everyone that the government is like an individual household, that investing is not an option and that belt tightening is the only way to balance the budget. And that balancing the budget is the only way to prosperity. Spending increases are only for the purposes of buying votes in elections (as we have seen this week). But every £ the government spends is an investment - it returns a dividend to the government in taxes (presuming the government is competent and willing to collect them). The government that builds a house provides jobs for builders (better employment figures), who spend money in shops (better retail figures) and shops buy from wholesalers and manufacturers (better manufacturing figures) and tax is extracted from each transaction. The house is sold (another wodge of tax) or rented (generating taxable income over the long term) and people living their pay for utilities. But they are also comfortably housed and create relationships with neighbours - an indefinable good. The returns for the government and by extension for society, are long term and positive. And a government can borrow the money to build the house at 0% interest over a very long term, and thus both pay off the debt and make a profit in a way that no business can do.

Our present government is systematically misrepresenting the nature of a national economy to hide ideological commitment to minimal government in the service of promoting unlimited profit making. As we have seen quite clearly in the last five years, only the wealthy benefit from this.

Looking back to the 1990s and before we were all seduced by the idea that debt was a good thing. The story of that seduction has yet, I think, to be told. My parents generation grew up knowing that debt was a bad thing. One borrowed for a house, and perhaps to invest in growing a business, but one would never borrow money for consumer goods. One saved up or went without. And this is both rational and sensible and we need to get back to this as a personal ethos. On the other hand it is madness for a government to operate this way and they need to get back to judicious investment in the economy when the private sector is unable to. The Long Boom was a Big Lie. The boom was created on the back of personal indebtedness and collapsed as the weight of debt broke our backs.

Our present government is still encouraging, still relying on, citizens to undermine their own future by borrowing to spend, in order to further enrich the wealthy. And yet, without any sense of irony, they mock the Labour Party as the party of borrow and spend. Of all the many reasons to mock the Labour Party (and there are many) it is ironic that the Tories should harp on this one.

7 Mar 2015

Debt is methamphetamine. 

Banks are cooks. 

Governments are "Better call Saul".

Debt is like Meth

Debt is like methamphetamine. We can spend a lot more than we normally would, but after days of not sleeping we have to crash. Debt allows us to mine the future for wealth, to spend what we have yet to earn. Just like amphetamine allows us to continue to burn energy long after we would normally need to rest. But at some point the debt repayments soak up all of our disposable income  - either because we have too much debt or because the interest rates go up. The latter is one of the reasons that central banks around the first world are holding their interest rates at or near zero. A rise now, when households are once again accumulating debt, could precipitate another recession as people diverted spending into debt repayment. As we are accumulating debt again we'll reach this stage in any case.

Ironically governments are far better equipped for this - they borrow at very low interest rates and can print money. The government is in a reciprocal relationship with the rest of the economy. If the government tries to run a budget surplus then the rest of the economy must run a deficit to pay for it (in excess taxes). Whatever the theory, the facts is that this is how the economy works.

Debt is methamphetamine. Banks are cooks. Governments are "Better call Saul".
In this scenario the banks are drug dealers. They make money from interest payments. And as we see without external limits they will just keep on pushing debt onto anyone and everyone with no thought for the consequences. They will lie and cheat in order to keep making more money. The banks have broken bad and started cooking meth.

Banks and governments are run by the same people. The secretary of the US treasury is almost inevitably a former big finance executive (often from Goldman Sachs) and treasury execs end up working in finance where their connections make it easy for them to lobby. So the legislators and the beneficiaries of the legislation are the same execs. This means that the regulatory branch of government is hobbled. Despite massive malfeasance in the subprime mortgage scam, something that came out in the Senate investigations, the Goldman employees had magically not broken any laws. Similarly here in the UK the major banks had been manipulating world interest rates for profit for years and no one was held accountable - the firms were fined, but the people who engineered this fraud were not.

Successive governments from both left and right had removed constraints and oversight from the debt pushers to allow them to make profits unfettered. The idea was that it would make everyone wealthier. But what happens is that the top layer take their cut and don't pay any tax, and they ensure below inflation pay rises for the lower layers. So only the top layers benefit. Government ministers present and former are very much part of this layer.

4 Mar 2015

Putting two and two together

On Twitter today the Office for National Statistics made two announcements with accompanying graph.

Recovery in #GDP driven largely by strong household spending http://ow.ly/JUpoP  

Close to 60% of full time employees experienced a pay cut in 2010/2011 http://ow.ly/JUoIb  

And what do these two pictures tell us? That despite falling wages, households are spending more and driving an increase in GDP. That the people benefitting from the increase in GDP are only the top 10% of earners.

So this is a clear example of a transfer of wealth from the poor to the rich. 

Something is deeply wrong with the structure of the economy of the UK (and most other places too). Households are earning less but spending more. They can only do this in two ways: by spending their savings or by increasing their debts. Neither is good for the poor. And virtually all of the economic benefit is going to those whose remuneration has consistently out-stripped inflation and all other sectors, the top 10% of earners.

The trouble we have in the UK is that no mainstream political party is against this wealth transfer any longer. Labour used to be, but New Labour embraced economic Neoliberalism and the present crop of Labour politicians have no intention of doing anything different. The left have no one to vote for anymore.

UPDATE. For those who bought the Institute for Fiscal Studies line that living standards had returned to pre-crisis levels, look at Notayesmanseconomics's Blog today