Everyone Pays Taxes and Everyone Benefits from Welfare.

In the UK it's easy to end up feeling guilty about living on social welfare. Most people don't choose that life but have it thrust on them and do what they can to get out of it. But the media seem to join with politicians in wanting us to believe that only income earners pay tax or that income tax is the only tax. It is not. Income tax is only about 25% of the government's income.

Everyone in the UK pays VAT. This is a 20% surcharge on goods and services. Food is excluded, but most other things you buy include tax. of the so-called indirect taxes, VAT alone accounts for about 17% of government revenue. Other taxes such as alcohol duty affect nearly everyone in the UK. So even if you pay no income tax because you have no income, you still pay taxes. So this mantra 'my taxes are paying your wages' is inaccurate. Everyone pays tax.

Housing Benefit is a government subsidy of some
£17 billion per year to the housing sector.

What's more the benefit system represents a subsidy on many sectors. For example, despite the economic crisis and falling house prices, rental accommodation has steadily increased in cost. Housing Benefit is paid to many people who work as well as those with no regular income. This is a government subsidy of some £17 billion per year to the housing sector. And the scale of it helps to keep rental costs high.

The alternative to subsidised housing in the short-term, however, would not be lower rental costs. No, it would be mass homelessness, because demand so outstrips supply that even without subsidies the demand would be more than could be supplied.

The housing shortage has been left to the market to fix, but the market has a vested interest in not fixing the problems, in keeping supply restricted so as to keep rents high and rising. Especially when other forms of investment are struggling during the Long Recession. Some estimates suggest the UK needs 2 million more houses as of now. Immigration keeps the population growing, despite the baby boomer bulge now squeezing out of the top of the population pyramid.

At present it seems that the UK government are content to allow this situation to continue on the landlord side, probably because so many of the government are themselves landlords. But they are undermining it from the tenant side and so homeless and poverty are about to start rising.

Since people who accept social welfare payments tend to spend all of it, the government also subsidises supermarkets and pubs and all sorts of other businesses. About £167 billion per year is spent by the DWP and most of that finds it's way back into circulation in supermarkets, shops and pubs - and a percentage makes its way back to the government as tax, but most of it is either spent again (hence the infamous multiplier effect) or saved. Just imagine what would happen if this subsidy was suddenly withdrawn. On top of homelessness and all the other problems of poverty, many of the struggling businesses would go bankrupt. More especially in the present since so many companies are teetering on the edge of solvency anyway, or are zombie companies, technically insolvent but allowed by banks to continue trading because banks, themselves close to insolvent, can't afford to lose the revenue stream.

Those receiving welfare payments could think of themselves as low-paid civil servants distributing government subsidies to local businesses. 

I've often wondered why we call social welfare payments "benefits" in the UK. After all it seems strange to think in terms of the benefits of losing your job or becoming too ill to work. Social welfare is more of a consolation for misfortune. But society as a whole does benefit from supporting those people who cannot work. The benefit is for society as a whole, not one particular individual - hence in most places it is called social welfare. Keeping those who lose jobs or become ill in the loop of society makes the transition back into work smoother. It keeps people from becoming homeless for example, or from completely dropping out of society.

Far from being a burden on society, welfare is a massive subsidy that is helping to keep the nation afloat in a crisis. It's the remains of a from of economic thinking that is not based in the fantasy of the market will solve all our problems. Social welfare is still predicated on the idea that the market will not provide fairness and as such is one of the few remaining counter-weights to the fantasies of NeoLiberalism. It also provides a cohesive factor when centripetal economic forces are sending many people to the margins of the economy and beyond.

But make no mistake. The social welfare system is under attack by NeoLiberals aided and abetted by mainstream media who are largely uncritical of the NeoLiberal agenda. The real benefits of social welfare are systematically hidden and mirages of disadvantage are being created. The mythical "tax-payer" is told they are missing out when someone else gets welfare. The working person who has seen 40 consecutive months of contracting wages only knows that their money doesn't go as far as it used to. It's all too easily for them to buy into blaming the social welfare system, because the government are spinning it with everything they've got. Working people are squeezed because of government policies which are designed to maximise the wealth of the wealthy at any cost, but the government is seeking to deflect responsibility away from themselves. And such governments traditionally blame the poor for being poor. Being rich is a measure of moral goodness in their worldview, and being poor is laziness at best. There is not enough critique of these kinds of assumptions, no substantive opposition from the left, and precious little public discourse which does not come from spin doctors.

This same attitude means that political parties are unwilling to consider alternatives to the status quo of NeoLiberal values and NeoClassical economics. And not just the traditionally right-wing parties, but the left as well. The possibility that instead of using QE to directly subsidise banks with no great effect on the economy, that we might use it to stimulate the economy by giving money to individuals, especially poor individuals is not even considered. Not even by the left. Sadly I no longer see any possibility of the Modern Debt Jubilee taking place. Or anything like it. Combating government propaganda, combined with the propaganda of big business, is not yet effective - despite the state of the UK economy there is no sign of anyone offering a credible alternative.

Why are we holding back?

On the FundWeb page Tomas Hirst has posted an article about the problem of reserves. Corporates Sitting on Piles of Cash. The strap line is

"When the UK corporate sector reacted to the onset of the financial crisis by hoarding cash reserves, it set in train a phenomenon that is now casting long shadows over the UK recovery."

As he says a report has put the cash reserves at £729bn. To put this in perspective the total private debt in the UK is £7.4 trillion. So the cash reserves are about 10% of the total debt. He then goes on to outline the problems caused by lack of business investment - based on various other reports. But none of these reports are able to see that lack of business investment is also a problem with a cause - massive private debt.

I tried to post a comment on the website but it kept self-borking, so I'm putting it here instead. (Always write long comments in Notepad before posting them!)

There is certainly some evidence to suggest that business is sitting on reserves. But there is also evidence (from the 2011 Budget Report and a subsequent McKinsey Report) that private debt in this country is around 490% of GDP, and McKinsey thought this on the increase at the end of 2011.

Now I've asked every economist I come across the same question: what are the interest payments on ~ £7 trillion of debt likely to be? They uniformly ignore me, even the one's that argue that we should be looking at private debt.

We can see that every 1% of interest rate requires about 5% of GDP. But what is the average interest rate? 1% 5% 10% 20%? No one seems to know or care.

In an economy where interest payments alone amount to a significant proportion of GDP (my guess is about 50% each year) we don't have to theorise why demand is low. It's because everyone is busy deleveraging (including the finance sector who account for about half the total debt). As Richard Koo observed: right now business is not maximising profit, it's minimising debt.

But what it also means is that investing right now is not going to produce much return because the choke is on demand not supply. People are simply buying the absolute minimum of stuff at every level of the economy. More supply of anything in an economy saturated with debt is not going to stimulate much in the way of demand. At the same time government is busy squeezing the economy - and undermining confidence. And meanwhile we know that 1000's of zombie companies are being kept afloat by the banks in the hope that things will improve soon. But even the one-eyed, head-in-the-sand government are starting to realise that a recovery is a long way off. Those zombie companies are going to be wound up soon - let's see how Christmas goes...

So what would a sensible individual or business do with their reserves right now? Buy gold? I don't know. But investing in a new business venture would not be sensible right now in general. Of course some people are doing it and doing well. But they are a drop in the £1.5 trillion GDP bucket. And the Bank of Dave is happily and profitably lending money. But a few thousand at a time.

Those reserves could be quite huge, but until the debt problem is sorted, which will take another 10-15 years, there won't be much incentive to make risky investments.

I don't disagree that there might be reserves, and they'd be better spent than not. But in the broader perspective it's not sensible to risk your capital in business ventures right now. Which is partly why banks are loathe to lend - they've sobered up and realised that, given their reserves, they loaned far too much money at far to high a risk, in the 1990s and early 2000s. And now it's being said that they're under-capitalised - which is arse about face.

Past, Present and Future of GDP Growth in the UK.

This post was inspired by one by Mark Thomas: Does This Ease Your Worries?: US GDP from 1870-2008 where he shows that USA is getting back on trend for GDP growth. In the UK things look very different and so no, it doesn't ease my worries.

The Guardian conveniently provide a spread sheet of all the GDP figures from 1955--Q2 2012. Below is a plain graph of quarterly GDP figures with an exponential trend line courtesy of Excel.

What the graph shows however is that the trend overall is exponential growth - a shallow exponential curve, but with an R² value of 0.9917 the fit of the line is very good. There were ups and downs but basically we got back to trend until the global economic crisis. If we graph from 1955-1997 an exponential line is still the best fit, though the R² value is less at 0.9873.

Thatcher (1979-1990) inherited a recession and a period of below trend growth from Callaghan (1976-79) though the problem probably dates from earlier - witness the hiccough in 1973 that was followed by several years of stagnation. When Thatcher handed on to Major (1990-1997) things were picking up, but recession and below trend growth followed. And as Blair took over in 1997 growth had  returned to trend and growth was about 1% per quarter. It had been a turbulent few years since the early seventies and the collapse of the Gold Standard, the end of the Bretton Woods agreement, and the UK's Competition & Credit Control Act. Now things seemed to be looking up.

After 1997 growth in GDP began to accelerate, rising above trend at an increasing rate. However growth in this period is more accurately described as linear (R² = 0.9974) rather than exponential (R² = 0.9965). Clearly we got a long way ahead of the trend of the previous 43 years, further ahead than any previous period. This was Gordon Brown's economic miracle.

In fact the period of above trend growth (1997-2008) is the debt bubble caused by New Labour's deregulation of the finance industry. It caused a sustained period of GDP growth which Gordon Brown called "the end of boom and bust". It was part of a global phenomenon. In the USA they called it "the Great Moderation".

However in 2008 it all came tumbling down.

With GDP still shrinking we are unlikely to ever get back to the pre-crash trend. Having risen about 6% or £25 billion above the trend by 2008, today, four years later we are about 12% or £47 billion below trend (and remembering that these are quarterly figures). In pre-1997 terms we've lost 35 quarters or nearly 9 years of growth and counting.

I actually lean to the left in politics and I think the present Chancellor is a moron. His legacy will be the extension of the worst recession in modern times as the graph from the NYT shows. The UK has been mismanaged. The USA is about to head back down unfortunately and German is likely to be devastated by the breakup of the Euro if they don't act soon. That said our part in the global financial crisis was facilitated by the New Labour government with Gordon Brown as chancellor. He didn't end boom and bust, he increased it by an order of magnitude!

There are a couple of key differences between the USA and UK trends. In the UK we had no great perturbation of GDP in the Great Depression. For the UK the post-World War One recession was much worse. And whereas we see in the graph above the USA returning to growth, albeit possibly weakening, in the UK we started up and faltered. We're now so far off trend that we probably will never get back.

When economists say that this recession is different they do mean that it is both qualitatively and quantitatively different. What is happening now is unique in the post-War period and we're unlikely ever to make up those nine years. In previous recessions the economy has always bounced back and got back on track. Not this time.

Below is Japan's GDP Curve (from http://professorpinch.wordpress.com/).

This is going to be the shape our the UK's GDP curve now. Basically an extended period of stagnation at best. All those predictions of a return to growth? Just forget it. The game has changed. And the difference is levels of private debt.The USA and Germany are further ahead because they have half the level of private debt that the UK has.

In political terms I don't see anyone really getting to grips with this, so we'll just have to ride it out. A lots decade looks optimistic given our political leadership at present.

Steve Keen on BBC Hardtalk

SK on BBC Hardtalk.

"Write off debt, bankrupt banks, nationalise financial system (temporarily), and start all over again."

"We're already in another Great Depression"