Three points on Rogoff
Kenneth Rogoff has ventured back into the limelight after his reputation-diminishing spreasdheet error to offer a defence of the UK Coalition’s adoption of austerity.
His basic point is that the Coalition didn’t have the benefit of hindsight, and that two factors – the Eurozone crisis and the UK’s previous credit frailties – meant that austerity was a justifiable response at the time.
Simon Wren-Lewis has already dealt with one key flaw in Rogoff’s argument, namely that in 2010 it was perfectly clear, to anyone willing to listen, that quantitative easing could be brought to bear as an “insurance policy”, and that printing money in the medium term does the job much better than austerity, since there is no inflation risk to speak.
Here I want to touch briefly on three other flaws or omissions from the Rogoff case, all of which I’ve covered at TCF over the last few years.
First, there’s Rogoff’s claim that:
[A] euro collapse would have triggered a stampede out once investors realised that the UK banks and trade would be savaged, a flexible currency notwithstanding. In that scenario, UK leaders would have been forced to close massive budget deficits almost overnight.
But who are these investors ready to stampede?
Here’s who owned UK debt in September 2009, before the flight from the Eurozone markets to the UK safe haven caused a change in balance:
As I pointed out back then, most of our debt is domestically owned, by institutions which have a clear vested interest in the health of the domestic economy, and for whom (as Vince Cable’s SpAd pointed out in the comments) moving investments to other markets is likely to be a much bigger risk than sticking put (indeed I think Pension Funds effectively have rules on keeping a certain percentage of their investments in sterling, though I’ll need to check that).
Given this, the idea of a mass Greece-style flight from gilts, and a rise in interest rates to accepted danger levels, must have seemed very unlikely even back in 2010.
Second, Rogoff pitches his defence of the UK Coalition as though it was reluctant to embrace austerity, but really had little choice if it wasn’t to risk catastrophe. But in 2010/11 the new government, for reasons of political positioning, was enthusiastic and vociferous in its call for Europe-wide austerity. Yet it is precisely that Europe-wide uptake of austerity which did so much to embed recession.
As I set out In Ideology over Algebra back in 2009, Krugman had already demonstrated the importance of the international multiplier – he calculated that the ratio of the increase in GDP to the increase in the deficit would be more than double if countries acted together on fiscal expansion – but this maths was ignored in favour of an ideological presumption that Rogoff now seeks to recast as necessity.
Third, and perhaps most important for the future, there’s Rogoff’s acknowledgment that the anti-auserity ’Panglossians’ he is so keen to deride
Do have some very solid points on their side, particularly when it comes to high-return infrastructure projects. Such projects, if done at a reasonable cost, pay for themselves.
There is no attempt to clarify what he means by “high return” i.e. where the returns might come from, or how such capital works, which always have a significant lead-in time, might have helped the economy in the short term more than revenue spending focused on keeping people in work and the economy moving.
You don’t have to be a believer in the labour theory of value (or indeed a modern monetary theorist) to be infuriated by this casual acceptance of the old accounting split between capital and revenue as the basis for sensible macroeconomics. You only have to recognise that in a modern economy “social infrastructure” matters as much as the bricks and mortar.
Fortunately, this is something Labour now appears to be getting the hang of as it moves steadily towards government, though it has not yet moved the Overton window as much as it needs to so as to allow for proper social investment of a type which both creates employment and adds value. That’s not to suggest that capital investment doesn’t have a part in that, but the Rogoff view that capital works, and only capital works, have a return is one that needs to combatted in the long term, as it is likely to be the recurring argument whenever recession strikes.
Have the poorest household incomes really risen under the Tories?
{Update 04/10: I’m grateful to commenter (ivia tweet) @ britmouse pointing out that my claim below on indirect taxation is incorrect. S/he says:
Claim on indirect taxes is wrong, you have deflated nominal income by a price index inclusive of indirect taxes.
This makes the flowchart provided on page 3 of the ONS report (see below) seem misleading, but I accept I may have got this wrong even so. I don’t think it changes the overall thrust of my argument that the claim of rising incomes for the poorest quintile is unfounded.]
Here’s Dover & Deal’s Tory MP just before Labour conference (I raise it now as it’s been picked up by John Rentoul, Matthew Hancock* and now Tory twittere Ric Holden, and may even find its way into Cameron’s speech by the time I’ve written this blog):
[T]he Labour leader will repeat his clap-line to the trade unions earlier this month: that the recovery is alright for some, but poorer people are being squeezed……..[T]he new argument from Ed Miliband and Ed Balls suffers from one other big disadvantage. They are totally and completely wrong. Wrong about the facts.
It is not just me saying this. It is the Office of National Statistics saying it. The ONS said exactly that in July this year, although the figures are under-reported.
Just two months ago, the ONS said clearly: “Disposable incomes have fallen since the start of the economic downturn… The fall in income has been largest for the richest fifth of households by 6.8%. In contrast, after accounting for inflation and household composition, average income for the poorest fifth has grown over this period by 6.9%”.
The message from our Office of National Statistics is clear, and it deserves repeating. The poorest fifth of working Brits have seen their incomes rise by 6.9% since the depths of the recession – in real terms [**] - with most of this rise coming under the Conservative team in Government. The poorest fifth are better off with the Conservatives, and it has happened for a simple reason: Conservatives are cutting taxes for the lowest paid. We set out an economic plan. We have stuck to it. And it is working.
Let us deal with the outright lie first, before moving on to the highly selective reading bits.
Elphicke’s claim of “most of this rise coming under the Conservative team in Government” is not reflected in the data. The data from which the 6.9% increase in household disposable income is (correctly) calculated covers 5 financial years from 2007/8 to 2011/12, so three under Labour to 2009/10 and t under the coalition:
Here it is, showing equivalised*** annual income (£) for the poorest fifth quintile.
| 2007-08 | 10,559 |
| 2008-09 | 10,804 |
| 2009-10 | 11,337 |
| 2010-11 | 11,364 |
| 2011-12 | 11,288 |
As you can see, it went up year on year under Labour, but ended up lower under the Tories than Labour left it.
Elphicke is simply wrong.
But this is just the start. Perhaps more important is what Elphicke conveniently leaves out.
First, there’s this analysis from ONS, explaining the five year rise in income for the poorest quintile:
[T]he average income of the poorest fifth has risen by £700 (or 6.9%) since 2007/08. This is mainly due to an increase in the average income from employment for this group, along with an increase in the average amount received in certain cash benefits such as tax credits and housing benefit. The increase in average income from employment is associated with the changing make-up of this group since 2007/08. While the proportion of households in the bottom fifth whose ‘chief economic supporter’ is in employment has increased, the proportion whose ‘chief economic supporter’ is retired has fallen. This reflects an ongoing pattern of retired households moving up the overall income distribution, due to their incomes growing at a faster rate than those of non-retired households.
In short, it’s harder to be in (low paid) work than it is to be retired.
Second, there’s the question of what disposable income actually is.
Disposable income is calculated without taking into account the effects of indirect taxation (see the handy flow chart on p.3 of the ONS report). This is what the report then has to say about the effects of indirect taxation:
In 2011/12, the bottom fifth of households paid 29% of their disposable income in indirect taxes, compared with 14% for the richest fifth. These proportions have increased over the last two years [that's the Tory years], from 27% and 12% respectively, in 2009/10. The rise in the proportion of income paid in indirect taxes over this time period is largely explained by the increases in the standard rate of VAT from 15.0% to 17.5% on 1 January 2010 and 20.0% on 4 January 2011, which have contributed to an increase in the average amount paid in VAT across all income groups. The VAT increases will also have impacted on inflation rates in these years.
That is, while the bottom fifth’s disposable income may have fallen less than the top fifth in the last five years, it certainly doesn’t feel like it, that because the bottom fifth’s money simply doesn’t go as far as the top fifth’s.
* John Rentoul has been engaging in one of his periodic attempts to convince anyone who’ll listen that the gap between rich and poor is actually becoming smaller, and that he’s the only person in the commentariat with the intelligence/bravery to speak out against accepted wisdom. This is a little odd, since he’s already accepted that he’s not intelligent enough to grapple with issues like comparative resilience of the wealthy, or the inevitable limitations of Gini-coefficients as a measure. My comments on all that stuff still stand, especially as to why the richest fifth only appear to have got poorer quicker than the poorest.
Matthew Hancock says in his interview with Rentoul and Jane Merrick: “The figures show that since 2010, the only quintile group on average who have seen their incomes rise is the bottom 20 per cent.” Again, this is simply wrong. I’ll assume, in the absence of other information that he simply picked up the nugget from Elhpicke without bothering to look at the data, given the similarity.
** I simply have no idea what he means by “in real terms”. Actual household disposable income has increased by 6.9% since 2007/8 for the poorest quintile. There is no suggestion anywhere in the data that spending power, or some such, has increased.
*** Equivalised income is just about weighting households for size.
So UNITE and I appear agree on zero hour contracts: which is nice
A couple of days go I suggested that rather than clamour for legislation to ban zero hour contracts, which I suggested might have unintended negative consequences, the left might better come to the aid of exploited workers by organising:
In the end, Labour might be better off doing the hard yards on the re-unionisation of the labour force – something I’ve argued may be a positive outcome from Miliband’s recent forays, whether or not it’s intended – rather than the easy but narrow legislative victories still redolent of New Labour’s approach to state management**.
Because I brought to bear my own experience as a zero hour contract employer*, I received the fully anticipated colourful abuse, principally from people who had only read as far as Tom Watson’s kind retweet.
So it’s with a certain degree of satisfaction that I see UNITE apparently in full agreement with my position. In the press release accompanying research conducted on their behalf into the rise in zero hour contracts, UNITE make no call for legislation to outlaw zero hour contracts. Instead, they call for a sensible package of measures. Of these, the most important of these (since many of the other protections would follow fro m it is:
A restoration of sector level collective bargaining to stop the ‘race to the bottom’ in ‘vulnerable’ sectors including social care, hospitality, retail, food and logistics.
This is precisely what the unions, and Labour, should be campaigning for/putting in the manifesto. From effective collective bargaining** follows the potential (though according to Chris only the potential) for wage-led growth as well as direct job security. And of course wage growth creates its own job security over time, irrespective on contractual niceties.
None of this, I repeat for the hard of thinking, is to defend the abuse of zero hour contracts. It is simply to suggest that the UNITE leadership has its collective head screwed on, and that the actually understand something about employment. It’s a shame some in the party are currently keen to suggest otherwise.
* Social enterprise, I’m totally unpaid, sick and holiday pay in contracts, blah blah, I point out for those doubting my ethics/parentage, though that really wasn’t the point of the initial post.
**In the public sector, or private-contracted-by-public sector, this often works best by a two stage process of union to employer pressure, then employers pressuring the government for more resources. I was involved n the detail as a union steward in the 1980s.
Falkirk and fetishes
There are some painfully stupid comment pieces this evening on the most recent development in the Falkirk saga, namely the reinstatement in the party of two party members following internal investigation. Those piece can broadly be put into groups:
a) I told you Unite had done nothing wrong, and now Ed Miliband must apologise t Unite/Tom Watson (Labour left and the non-Labour left);
b) I told you Ed Miliband was weak, and his backing down like this proves it (Blairite rump and the Tory-lite press);
There’s is, though, a common theme running through the two seemingly opposing viewpoints: what I’ll call the leadership fetish. That’s the strange idea that Ed Miliband was always omiscient and calculating about what had been going on in a local party unit 450 miles from London, and that he’s therefore either guilty of cynical manipulation as a means to “get” the unions, or of bottling his attempt to “get” them.
Of course, anyone with any iota of sense, not to mention understanding of the dynamics of small local parties (where personal and clan loyalties often take precedence over/fuse with political stance) will know that it won’t have been like that all. Instead, it’ll have been the usual mix of half-truths, back of the envelope strategic calculations, botched press release, currying favour for reasons quite separate to the matter in hand, and general incompetence and knackeredness.
But what really interests me, and actually perturbs me a little, is the idea implicit in both sides’ versions, that omniscient Ed should have taken a view on whether or not to order an investigation on the basis of his prior judgment of the likely outcome.
This comes across most clear in the weak Miliband version of events e.g. from Michael Crick:
Good timing by Labour on Falkirk – 5pm on Friday while pol journalists at G20. No doubt they hope we’ll ignore their extraordinary climbdown
In what way, I wondered as I read this, could an investigation followed by an exoneration, be considered a “climbdown”.
More importantly, are Crick and others like him therefore implying that the only way Miliband can prove he is a strong leader is for him to ensure that whenever there’s an internal investigation, the accused should be found guilty?
For myself, I’d leave a party like Crick’s ideal party like a shot, because the quid pro quo for accepting party the principle of party discipline is that the party, at least in principle, should it exert it fairly and without predetermination. That is, a party seeking to display strength by way of show trials Is not my kind of party.
As it is, I’m staying in Labour. HQ has handled Falkirk pretty poorly – that’s fairly clear – but I prefer a party that can make itself look a bit stupid from time to time than one that resorts to the methods of Stalin to enforce unity. But this little incident is a reminder that dictatorial methods are not simply delivered by dictators on a helpless public; an atomised public and its fetish-worshipping media can be just a little bit too inviting of those methods.
On being a zero hours employer
I employ 8 people on zero hours contracts, and I’m reasonably proud of that fact. Thus, when well-intentioned, influential leftie types like Tom Watson start the rallying call for the total outlawing of what I’ve been doing for about 8 years now, effectively branding my an exploitative bastard, I feel compelled to speak out in my defence.
A little background: I run***, with two fellow Directors though I make a lot of the running, a small social enterprise in the childcare and parenting support field – that is, to the outside it looks like a bog-standard but small nursery/after school club, but what happens in it is more than that because we have a social enterprise mission blah blah.
A few years ago, when I did employee contracts, like most small employers I didn’t reinvent the wheel, but used a template provided by the Pre-School Learning Alliance, effectively our trade body. This was a zero hours template.
And those contracts have worked just fine ever since. As a social enterprise taking on the challenge of addressing “market failure” i.e. providing services at much lower economies of scale than the commercial ‘big boys’ would even consider, we’ve had to shift work patterns over time as demand for our services has changed – to do otherwise would have made us financially unviable. Doing this with zero hour contract has meant that we’ve not needed to engage in formal consultation processes. But it’s also meant that our staff have been able to change their hours to suit their own life and work duties easily and flexibly. It doesn’t always happen entirely smoothly, but there’s goodwill on both sides, and it’s happened in a way which has cut down significantly on cumbersome management processes which actually get in the way of iterations and knock-ons (to other people’s hours) needed to find answers.
My point, though, is wider than one of self-justification for a contract-style now officially reviled by the left. Indeed, in order to avoid any future suspicions about our motives, I’m looking at updating contracts to the “permanent-variable” kind, but this won’t have any effect on the way we actually run things. The wider point is about tools in the right and wrong hands, and the tendency to focus on the tools, not the hands wielding them, in a way which does a disservice in the long run to those the left is supposed to be serving. It’s also, ultimately, about the ineffectiveness of state power when it comes to tackling capital-labour relations.
Take the exploitative bastards down at Sports Direct or McDonalds, for example. Introduce a zero hour contract ban, and before that ban is even through, their human resource people will have found a way round it. This might be the introduction of the one hour contract, alongside an enhanced mechanism for weeding out the ones who won’t comply. It might be something else more creative. But I’m afraid it’s fanciful to think that legislation of the type envisaged will lead to an overall increase in wage packets, even though the use of the zero hour contract has been a handy way to decrease them). But at the same time such legislation would potentially harm a non-profit business like mine, or put paid to some ‘sweat equity’ style businesses in which people without the wherewithal to take actual equity in a small panel beating start-up, for example, are happy to work for their mate Dave on the basis of a zero hours contract alongside some other work, in a way where both parties gain in what is, in human but not contractual terms, a joint enterprise. (Of course this can go wrong – read Roddy Doyle on burger vans for that – but that’s another matter.)
More fundamentally, this focus by the left on its use of legislation, when it happens to be in power, to bring about good things for the workers, can be an active though unconscious hindrance to the “real” job on the left of combatting the power of capital through the more effective tool at our disposal – solidarity (whether that’s in the form of latent/actual labour withdrawal or via co-ops/social enterprise). While it’s an unpopular idea, I still think* it’s reasonable to see the 1998 National Minimum Wage (NMW) as having been detrimental to workers in the long run, though its short term benefits were clear; witness the way in which the NMW has become the standard, not the minimum, in much low paid work.
In the end, Labour might be better off doing the hard yards on the re-unionisation of the labour force – something I’ve argued may be a positive outcome from Miliband’s recent forays, whether or not it’s intended – rather than the easy but narrow legislative victories still redolent of New Labour’s approach to state management**.
* I accept that I’ve never got round to researching the empirical evidence for the counter-factual assertions I made about this in my (correctly contested) 2009 post.
** See also, if you can be arsed, this post of mine at Labourlist on Labour’s currently theory-only aspiration to facilitate “a relational state”, also drawing on my micro-experience.
*** [update note] As I’m receiving a fair bit of personal abuse on twitter for this post, I’ll add that I and the other two directors are entirely unpaid, s set in out in our company constitution as Co Ltd by Guarantee without Shares. I didn’t put it in before as it’s not relevant to issue at hand.
What is Labour’s economic policy?
As I’ve noted, no one at all in the mainstream media or blog commentariat , left or right, seems to have any idea what Labour’s emerging economic policy actually is. This is largely, I suspect, because there are two types of media commentator or blogger – those who do specific policy, and those who do politics. The fact that Labour’s economics lies somewhere in between makes it very tricky for them. Even academics seem to struggle with this level of complexity. This is, perhaps, unsurprising, because I’m not sure even those who are actively in charge of developing Labour’s overall programme properly understand what’s going on. And that includes Miliband.*
So as I try to keep up both with Labour policy development and with how it presents it politicially, I’ll try to help, putting it as simply as I can.
1. The Labour hierarchy accept that they cannot argue for additional spending on an overtly Keynesian basis, even though some of them (especially Balls, I suspect) would like to. They accept that they cannot simply talk about spending our way to recovery, because they then become too easy ”same old Labour” target.
2. Around eighteen months ago, the emergence of seemingly respectable body of thought, principally in the form of In the Black Labour, seemed to offer the Labour leadership a way forward. Although it was was painfully thin on detail about how social justice and fiscal conservatism might actually be melded in practice, it sounded good in theory, and the leadership stated to talk up ‘hard choices’ and the like. Austerity-lite was born.
3. But as the more serous work about what social policy under Labour might actually look like, it quickly became clear that a fiscal conservatism in which every investment had to be matched by a saving somewhere else simply didn’t wash. The pretty obvious reality – that it costs money to improve things – started to hit home. so, for example, IPPR’s report on childcare started out as an attempt to work out how European levels and standard of childcare could be delivered by juggling current budgets, and ended up acknowledging that an additional investment of £5-7bn per year will be needed.
6. Thus started the shift from an exercise in balanced budgeting - essentially the same as the Conservatives’ process bar the odd redistribution tweak – to the emergence of investment-based budgeting, In which deficit spending (though it must never be called that) is justified on policy initiatives as long as there is evidence of payback in the longer term; capital projects are still preferred, because they are easier to sell as investments, but revenue is ok if it can be justified in these terms. So, for example, Twigg is now all for a big school refurbishment programme when Labour come to power, but there are also hints of additional revenue spending.
7. By early 2015, this budgeting exercise will be done, department by department. Spending promises will be made in ye olde Labour style, but always with the evidence rebuttal ready to hand when the Tories demand to know how we’ll pay for it. “Because it will save us money on such in such in so and so many years, will be the ready-to-roll answer.”
Am I happy with this approach? No, not excactly., but not principally because it fails to confront the Tories and the media on the one basic economic falsehood – that there’s a danger of bankruptcy if we spend too much. That argument was lost by Labour – largely because it didn’t turn yup for the fight – some time ago, and winning the rematch would be much harder.
I’m not even that concerned by the lack of space within this piece-by-policy-pieced budgeting process to address simple economic facts around the need to drive up wages as a key to cementing recovery, and that the way to push that through fastest is via the public and third sector initially – there is still time for that to be resolved (at least in the second year of government).
What concerns me more are the unintended consequences of a budgeting process which takes, as its principal criterion for whether something is funded, the question of whether it will produce a saving to the public purse in the long run. For here lie the seeds of a rampant managerialism which will put even New Labour’s target mania in the shade**. Here, whole groups of people – the unemployed, teenagers, the elderly, those who live in Dpncaster, those who don’t have a train station – are defined by the extent to which they are a burden on the state, rather than on what obligations the state has to them. And when you’re defined by the state’s experts as part of the problem, it’s not likely to end well.**
There are big problems with Labour’s economic policy, but lack of it isn’t one of them. And it’s still better than the Tories’.
* Sunny’s re-headlining of my earlier piece for cross-posting was misleading in this respect. I did not suggest that Miliband had a completely thought through plan; I was merely saying that he has managied the messy process fairly adeptly so far.
** Behind this unintended managerialism lies Labour’s greatest organisational failure; the failure to grasp the importance of policy implementation over and above policy making, and to recognise that what is implemented is always and necessarily at variance with policy as set from above. I explored this at length some years ago, In a well-received essay. And behind this failure, of course, lies the control of policymaking power by a narrow section of the party which has no understanding of the real dynamcis of labour – a problem for which the only real solution is the radical democratisation of the labour movement, which the leadership can either assist, or be subjected to. Their choice.
*** You could be forgiven for forgetting, in this brave new world, that Amartya Sen and his focus on capabilities was all the rage just three years ago.
Pickard’s politics
Jim Pickard, Chief Political Correspondent at the FT has an inadvertently [see update] interesting and amusing article up, in which he seeks to endorse the commentariat view that Ed Miliband is in crisis of leadership time:
Ed Miliband’s attempt to revive his flatlining poll position with a “cost of living” relaunch on Wednesday was overshadowed by a protester armed with a handful of eggs – and voters who endorsed recent criticism of his leadership.
Jim bases this ‘overshadowed’ analysis on selected comments from three people at Miliband’s walkabout (Jim calls them an ‘ad hoc focus group’, presumably as some kind of office bet about how far he can stretch the concept of research methodology). Two of the respondents say they’d like to hear more concrete policy from Labour.
For Jim, that’s bad news for Miliband, and handily confirms the commentariat view that Miliband is in trouble.
For me, it’s good news.
It suggests* Labour’s strategy to open up the pre-conference media space is working pretty well.
Ask yourself: would these two people have asked for more clarity on Labour’s policies before the Andy Burnham interview and the ensuing media reaction – a reaction that includes Jim ad-hocking his focus group to explore just this issue? Probably not. Last week they might, if you believe the media narrative, not even have known who Miliband was. Now they’re keen to hear what he has to say. As I said the other day,
Labour have simply reached for the old political play book: demand an answer on something that’s well within your power to deliver, get the media and the public to echo that demand, and then deliver on it, making clear that you’re responding to the call of the public. I was told that on my first day as leader of my local Labour group by the ex-leader (I was never any good at it, mind).
None of this changes the researched-to-death-but-ignored-by-the-commentariat fact that few people will actually remember any detail of the policy proposals the same commentariat demanded on their behalf, but it does allow Miliband’s team more airtime than they would have got otherwise.
* Of course we don’t know how Jim elicited these comments. If his questioning was open (e.g. “What do you think of Ed Miliband”) and two of the three responded about the need for concrete policy, that would suggest a more direct impact on their openness to Miliband’s coming messages. If It was closed (e.g. Do you think Miliband needs to offer more concrete policies?”), that would suggest any such openness is still being heavily mediated by the media at a secondary level.
[Update: Jim's been in touch to say he used the phrase 'ad hoc focus group' "somewhat ironically", so I am happy to withdraw my suggestion that the piece is "inadvertently" amusing. He meant to amuse me.
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