Germany vs Greece. The end game?

It looks like it’s crunch time. Either there will be some last minute cobbled together agreement to prolong the agony, or Greece will be forced to leave the Eurozone. Most neo-liberals take the simplistic view that Greece borrowed the money and has an obligation to repay come what may.

When bankers issue loans they have to be sensible and only issue loans to creditworthy customers. If the customer cannot repay the days when they were placed in a debtors prison are long gone. In any case we should not look at macroeconomic problems in microeconomic  terms. Germany has a net annual surplus of over €200 billion which, by definition, it is not re-spending. Another few billion euros, extracted under duress from Greece, would make no difference whatever to the living standard of German workers – many of whom are not at all well paid.

It would make much more difference if Germany moved to abolish its trade surplus. That would certainly increase living standards in Germany and also allow Greece and others to trade their way out of their debt problem.

Germany has been foolish in several ways. Foolish to lend the money, but also foolish in not understanding the basics of macroeconomics. Prof. Yanis Varoufakis reports that he’s done his best to explain some basic theory to their supposed brightest and best but the more he tries the more upset they become!

Simply, they don’t understand that there are consequences to running an annual surplus of over €200 billion. Where do the Germans think those euros come from? They cannot print them themselves like they could with the DM. They cannot come from the UK or USA. They pay for German exports in £ and $.

They have to come from other euro using countries which means they don’t have enough euros left to run their economies properly. It’s not just Greece. Albeit to a slightly lesser extent it’s Italy, Spain, France etc too.

Alternatively, they have to be created by the ECB or by the Bundesbank  with ECB approval. So if the ECB can do that for Germany, why not for Greece?

The British left needs to discuss more than the UK’s membership of the EU.

As the EU debate swings into life in the UK we’ve so far heard the most from the business sector who have been most pro in their advocacy of the UK’s continued membership. It is perhaps quite natural that big business would like the EU to remain as it is. Those on the traditional left would say that’s because they want to have a large pool of unemployed workers to keep wages down and maintain worker discipline!

Are they correct in saying that? As things are at the moment it is hard to say they aren’t. It is hard for big business to argue that they only want the EU for its expanded, but much depressed, market.

The modern supposedly progressive left has been seduced by the powers-that-be in the EU into thinking the EU to be a socially progressive organisation too. Recent events in Greece, for example, are shaking that view. That needs  to be shaken  some more. A first step would be to get them to actually discuss the problem. We might well think the election of Syriza in Greece, with its band of ex-Maoists, ex- Trotskyites, ex-Communists would be a topic of interest for them. Not so. They are shell-shocked into silence at the moment. The main Labour websites have nothing at all to say on that.

Anyone believing in a united Europe, as many of our EU advocates clearly do, should feel as passionately about unemployed young people in Spain or poverty in Greece as they do about it in the UK. The progressive left  say they like everything about the current level of EU integration, and like the EU as it is. If they ever remember to make a critical comment, it is not because they wish to change anything or intend to vote against any of its measures.

If the UK today had ultra high levels of youth unemployment as the south of the EU currently suffers,  the progressives would never let anyone hear the end of it. Rightly so. There would be marches  from the most depressed areas to London to demand some action.

If the UK had Greek levels of unemployment, and a Greek cost of living crisis which has depressed average real incomes by almost a quarter since 2007, again we would not hear the end of it, as the ‘progressives’ would rightly think it completely unacceptable. If the unemployment in Greece or Spain had been brought about by a right wing military coup, again there would be uproar. So why is it that these people who believe in pan European solidarity have nothing to say about the scandal of poverty and joblessness in large areas of Euroland? Why are they not insisting on new policies for the EU?

Now’s a good time to be saying something about that in connection with the EU referendum. The British left needs to discuss more than the UK’s membership of the EU. It needs to discuss the EU itself too.

How to win and lose elections. (2)

There’s been a lot of navel gazing in British Labour circles recently about what went wrong last week and what needs to be done to prevent a re-occurrence next time. Presumably in about five years time. The arguments are pretty much along the same lines as the last time that Labour suffered an unexpected election defeat. Naturally, those on the right want to move more to the right. Those on the left want to move more to the left. Those in the middle think a new personality might do the trick.

Who’s right? Let’s just stand back and look at the numbers. According to my calculations the Tories received about 24% support from the electorate in the 7th May 2015 UK elections. Labour about 20% support. That’s including those who didn’t vote. So to win government, next time, Labour need to get at least another 5%. If they are positive, and were prepared to really go for it, they could aim for another 10%. If they achieved that they’d be back big-time.

So what’s the best way to do that? Let’s leave the politics out of it as much as possible and just think in pragmatic terms. Do they try to persuade nearly half, or a quarter if we allow for the same reduction in the Tory vote, of those who voted Tory this time to switch sides? I could be wrong, but I don’t think that’s ever going to work. I know a good few Tories and I can’t think of a single one who would ever vote Labour, even if the Labour Party were offering the most Tory of policies and had a picture of Maggie Thatcher on the front cover of their next manifesto. Of course, if the party did that they would jeopardise their own core vote. That’s never a good idea.

I’d say the same would be true in the USA too. Both the Democrats and Republicans would expect only limited success if either moved towards the other politically. Probably it wouldn’t be enough to make a real difference. It could well be counterproductive and would naturally give more justification to those who were disillusioned with the lack of political choices that were on offer. They’d choose to do other things, rather than becoming involved in the election and would be less likely to make the effort to vote. This argument probably wouldn’t apply to Australia which has compulsory voting – the Aussies are quite unusual in that respect.

Alternatively, Labour could aim for the 56% who didn’t vote for either them or the Tories. This, again, would include those who didn’t vote at all. Labour wouldn’t persuade them all, that’s for sure. But, they’d just need to sway 1 in every 5 and they’d be home and dry.

This is an implied conclusion which, I have to acknowledge, will be more appealing to the left than the right. But, I’d argue it’s the reality too. The left would argue that by being true to their historic principles, and offering a message of hope rather than despair to working people they would have a better chance of winning. They’d argue the need to have a distinctive message which wouldn’t allow anyone on the doorstep to say “but you’re all the same”.

I’d add that the party, as a whole, needs to make a start on the explanation of how the economy really works which is not at all how most people think it works. Once more people have that understanding it will become apparent what the real choices are from both a left and a right perspective.

Muddled Thinking Watch #7: Chuka Umunna on Labour’s pre-GFC Deficit

Chuka makes some valid points in his recent Guradian article:

For example he acknowledges that:

” First, we spoke to our core voters but not to aspirational, middle-class ones. We talked about the bottom and top of society, about the minimum wage and zero-hour contracts, about mansions and non-doms. But we had too little to say to the majority of people in the middle.”

Partially right. “The majority of people” are in the middle. So, in a democracy, to win elections, you have to not only speak to, but also win support from,  “the majority of people”. There’s no getting away from that.

Whether Labour spoke to its core voters is a matter of opinion. I’d argue they may have spoken to them, but they didn’t listen, which is slightly different.

He also makes some invalid points. He says:

“Of course, the last Labour government should not have been running (an albeit small and historically unremarkable) deficit before the financial crash. “

The last Labour government certainly made more than a few mistakes. George Brown famously  made the ludicrous claim that he’d abolished “boom and bust”.  The period  of the Labour government  (13 years) consisted of mainly years of boom, which enabled it to achieve electoral success,  except the last 2 years were years of bust, or trying to recover from the 2008 bust, which brought about its downfall.

But did they make a mistake about the government’s deficit? The boom was caused by too much credit being created by the private sector. I don’t believe there is any dispute on that point. That credit inflated asset prices, firstly shares in the dotcom boom and then property prices in the years up to 2008.  With the benefit of hindsight what should they have done to prevent that credit bubble? They, or their so-called “independent” Bank of England,  should have increased interest rates.  If there’s too little saving and too much borrowing then interest rates should rise. Is there any dispute on that point? That would have stopped the credit bubble. No problem.

But if they’d done that there would have been a problem of the £ appreciating in value. Exports would have become uncompetitive. That, and the reduction in domestic borrowing, and therefore, spending, would have led to less economic activity. Business failures and unemployment would have risen.

So what else would the Labour Government have had to do to compensate? Run a tighter fiscal policy, with a lower deficit, or a looser fiscal policy with a higher deficit?

If you think you know the answer, please email it, with an extremely simple to understand explanation,  to:

chuka4streatham {at} gmail(.)com

PS  I’ll ask Chuka if he can provide a small cash prize for the best answer. :-)

How to win and lose elections.

At the risk of the accusation of being  pretentious, I’ve never won or lost an election ever, I thought I’d deviate from my usual economic commentary and have a try at explaining why Labour did so badly in the recent UK elections and what needs to happen for them to do better in future. There  are are an awful lot of disappointed Labour supporters around, who might be looking for some answers as to why an expected Labour small win suddenly turned into quite a large Conservative win.  There’s probably many Liberal Democrat supporters feeling somewhat depressed too, but they don’t need any similar explanation!  Something went obviously very  wrong for Labour on polling day. Either those potential Labour voters who had indicated to the pollsters they would be voting Labour did not show up on the day, or they changed their minds at the last moment and voted for someone else. The pollsters sampling methods cannot be fundamentally wrong, otherwise their exit poll would not have been as close to the actual result as it was.

The Labour Party had enough potential votes to win, albeit with some support from the SNP, but not enough real or actual votes on the day. So what went wrong?  We need to start with the fundamentals. The Labour Party has a core set of socialist supporters. It can never win an election with just those supporters , though. There just aren’t enough of them. It needs to appeal to enough of another group, the uncommitted voters to get the numbers. There is also another group of voters who are hostile and are never likely to be won over no matter what policies are on offer.  They may as well be ignored. The temptation for any political party is to take its core support for granted and try to appeal to the undecideds or even the hostiles.  I would expect the Labour Party has spent quite a lot of money, over the years, with various marketing and PR companies, to set up focus groups to find out what policies might be popular with those groups and so tailor Labour policies to suit. That’s a big mistake. Anyone who needs a focus group to tell them their politics shouldn’t be in politics. In any case, votes are often not cast totally for the reasons the voter might care to explain to others.

Another mistake is to reason along the lines that because they’ve lost the election to a party offering more right leaning policies previously, that they need to do the same to win the next time, too. That’s not a sensible approach. Why would anyone want to vote for a supposedly socialist party offering conservative policies? Why wouldn’t they vote for the real thing? Parties have to be true to their principles. If they aren’t they risk losing their core supporters. In Labour’s case, to UKIP, the SNP, the Greens, one of the minor left parties or maybe even to the “Apathy party”.  They also risk appearing disingenuous to the uncommitted. Uncommitted voters will vote for politicians they can trust, even if they are not in total agreement,  or at least, distrust little enough for to make them actually turn out on the day. If a party or individual politician appears disingenuous they won’t get those votes even if the policies on offer are carefully tailored to match. There’s no chance of picking up much support from Tory voters even with Tory policies. They are the hostile voters.

Trust has to work both ways too. Labour has lost support to UKIP who have established themselves in second position in many of the Northern English constituencies. It was a big mistake to assume that the rise of UKIP was a good thing for Labour and that it would take more votes from the Conservatives than them. There are potential UKIP supporters in all parties. Whilst they might nearly all break ranks and vote UKIP in a bye election or the European elections,it makes much less sense for Conservative potentials to break ranks and vote UKIP in a general election. The Conservatives pledged that referendum. Labour didn’t see fit to trust the electorate on the EU question.

The full picture is not yet known but it would be a surprise if the reason for Ed Balls losing his seat in Leeds, for example, does not turn out to be that he lost more votes to UKIP than his Conservative opponent.That could have been so easily avoided if the party had said that, whilst it supported the UK’s membership of the EU, it recognised that the electorate needed to have their direct say now.  They needed to offer a clear-the-air referendum, and not just before more powers were ceded. There have been more than enough already. It would have been better to have that referendum under a Labour Government than Tory Government which is the way it is going to turn out.  Democratically elected governments can do pretty much what they choose except give away that democracy. There comes a time if too many powers are ceded, that a change of elected government, is not enough. The Greeks have just discovered that – the hard way!

The Labour Party also needs to remember its own name and the meaning of its own name. The party is meant to be the party of working people.  But do working people now view Labour as their party? They don’t see Labour people like themselves in any positions of influence,  or hear accents like their own, not in England at least. They see Labour standing up for the racially oppressed, the sexually oppressed, the gender oppressed, those oppressed, or disadvantaged, because of physical and mental handicaps,  but if they themselves are not in any of those categories, or don’t see themselves as fitting into those categories, they wonder why the party has forgotten about them. What about those who are oppressed simply because they don’t have any work or they don’t have anything better than a zero hours contract or they can’t find a home? Those workers may not have heard of Keynes, or any of the post Keynesian thinkers, who can well explain why austerity economics doesn’t work, but they just know instinctively, and from their own personal experience that it doesn’t. It also applies to everyone who has an unemployed son or daughter who may be well qualified academically but is unable to find a job to match those qualifications. As the SNP has demonstrated, an anti- austerity message is not at all incompatible with electoral success.

Messages and slogans have to be simple and understandable. The slogan “One Nation” may be simple but it isn’t at all understandable.  What does it mean? That we all live in one country? Well, so what? People don’t discuss politics in those terms. The Scots may have other ideas on that anyway. We don’t all have the same problems, that’s for sure! So there’s a disconnect there between the so-called metropolitan elites, who dream up  these slogans, or in this case use a Tory cast-off,  and ordinary voters. There have always been metropolitan elites. They are nothing new. The term has crept into use simply because of that growing disconnect.

The role of emotion in Labour politics should not be overlooked. Rational arguments will only get any politician so far. Labour victories used to be memorable for the feelings they generated as much as anything else. They generated an optimism for the future. I’m not sure Conservatives can say the same thing about their successes. Let’s get something of that back for future elections and start to win them on our terms.

Why not give control of the fiscal deficit to the Bank of England?

In a democratic society, I would argue that decisions regarding interest rates, both long and short term, should be made by the elected government. They used to be. However, for nearly 20 years, short term rates in the UK have been set by the BoE. The level of short term interest rates is important and it can be adjusted to stimulate a slowing economy or slow an overstimulated economy. But there are other adjustments that can be made too.

Just as a pilot has all the control levers at his disposal when he’s flying a plane (if he, or she, does hand over to the co-pilot it would be all the controls not just one) then all the controls need to be either in the hands of government or the hands of the central bank.

But just who has the controls when it comes to controversial policy decisions like QE? Does an  independent Bank of England decide, all on its own, to buy up £375 billion of government securities from the private financial sector? I don’t think so!

QE is no big deal. That’s not a common view, I’ll agree, but from a scientific perspective, there seems to be no reason why the issue of government , or the BoE if you prefer, IOUs in the form of cash should be any more or less inflationary to the economic system than the issue of IOUs in the form of gilts (treasury bonds). If it is necessary to buy back gilts from the private sector to control longer term interest rates then that’s what needs to happen.

So why not give control of the fiscal deficit to the BoE too? The BoE could calculate the best combination of fiscal and monetary policy, including whatever level of QE is needed, and tell the government what it needs to do. Arguably the government could decide to raise income tax a bit here or reduce VAT a bit there , etc, but it would not have complete control of fiscal policy as it now does.

This is not my favoured option BTW. But, if the pilot is going to hand over the (macroeconomic) controls to his or her co-pilot it should be all the controls and not just one.