Tag Archives: Economic system

Is the Chinese Economy a Giant Ponzi Scheme?

There has been quite of lot of justified concern among economics pundits about the Chinese economy with some, like Will Hutton,  likening the problems there to a Ponzi scheme. A Ponzi scheme operates rather like a chain letter where the  earlier entrants into a savings scheme are paid directly from the contributions of later entrants. It is a simple fraud.  It has to break down sooner or later. Whatever the shortcomings of Chinese economic regulation may be we don’t have the evidence to accuse the authorities there of allowing these schemes.

The China situation is better described as one of debt-deflation. Money is created  and then spent in the private sector when banks make loans. This spending stimulates the market: shares and asset prices prices rise, growth spurts, but the newly created money dwindles in the economy as it is spent and respent with the Govt taking its tax cut on every transaction. But the debts remain and accumulate – slowing down the economy. So more bank lending is needed to keep it going and the same thing happens again. Steve Keen has shown that everything looks OK providing the rate of bank lending is accelerating. But as it can’t do that forever, the effect of the bank lending starts to have a net negative effect and then we can have a slump if the level of private sector debt becomes too high.

The immediate fix is for government to  spend, large amounts of cash usually called liquidity, to keep the economy going. Mosler’s Law states that this should always be possible but any crash or   slump is still very disruptive.  A better solution in the longer term is to rely on monetary policy (ie the variation of interest rates and the ease of bank lending) only to a very limited extent in the regulation of the economy.

 

The Job Guarantee. Problems from a Left Perspective.

There’s no doubt that a JG program along the lines we might imagine it to be, and along the lines advocated by the leading names of MMT: Warren Mosler, Bill Mitchell and  others would be highly desirable.

We could have an economy run to ensure almost full employment except for a  JG rate of about 2%. Then maybe there would be another 2% who were in receipt of unemployment pay due to their being temporarily between jobs. We could allow a reasonable period of time for that to occur -say about 3 months. The JG could have a part to play in young people’s apprenticeship schemes too. There could be some relaxation in the principle of “public purpose” if job training was combined with education. The JG could pay a living wage meaning that the wage was more than just enough to stay alive but it was enough to enjoy life too.

The problem, for me, and I suspect others on the left, is that we fear it won’t turn out quite like that. There’s no guarantee, or even likelihood,  that the JG will end poverty. It would depend on the wage the JG pays relative to the cost of living in the locality. If you’re living in London and depending on the rental property market you’d need an income much higher than anything I’ve seen proposed for the JG to be above any reasonable definition of the poverty line.

Incidentally, this posting was prompted by a discussion between Neil Wilson and others (including myself) on his very good blog:

http://www.3spoken.co.uk/2015/11/job-guarantee-jobs-for-people.html

“Very good” doesn’t mean we always agree, BTW,  as this exchange shows.

PM: “We don’t want to get into the situation, for example, where we’re threatening young mothers with loss of benefits for not taking up the JG or getting into disputes with the mentally ill as to their capability for work.”

NW: “I’m afraid that isn’t your choice. That is the choice of the society you live in and how they perceive those individuals”.

Which is a fair enough comment of course, but if it looks, from a left perspective that there are too many devils-in-the-JG-detail for comfort why would the left want to aggressively pursue the concept of a JG? Why not just leave it ” to the society (we) live in ” to come around to the idea ? That’s not likely to happen for a very long time, though. Either the JG is pushed by the left or it just won’t happen at all. Another problem, again at least for me, is the language used to promote the idea of a JG and it being a “buffer stock”. We are real people. Yes we want to work and make a contribution but we don’t want to be a “buffer stock” in the same way as we can have a buffer stock of bales of wool or kilos of butter.

While MMT and concepts like the JG are useful they only go so far. MMT doesn’t say anything about how wealth and incomes should be shared out. If we don’t address that question, and keep on addressing it then we’ll end up with just as much poverty in the future even though society as a whole could well be richer.

There could well be very much higher rates of JG work as the not-so-innocent fraudsters in Government deliberately shift essential work into the JG sector. The JG would be a very powerful weapon and used in the hands of the fraudsters to reduce wages. We could, for example, have a JG now in parts of the EU which paid say €7 ph or whatever was just slightly higher than social benefits. So in Greece we’d have 25% on a JG instead of 25% unemployed.

There’s no way any of us with a leftist perspective would support that. If anyone is contributing to society by working, the old principle of Labour’s Clause 4 applies: “To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible etc..”

Having a JG, even on a so-called living wage, doesn’t change that one bit!

The UK Autumn Budget Statement – More Neoliberal Nonsense!

The Autumn statement would not be so bad if it was economically coherent, with the spending and taxing plans agreeable, or otherwise, according to one’s political opinion. However, it does not make any sense. Not only does it not “add up”, it is inconsistent with all the principles of arithmetic.

The right wing Tory MP John Redwood makes the point :

“In total the new estimates show us paying an extra £105 billion in tax over the five years”

George Osborne says:

” we will reach a surplus of £10.1 billion in 2019/20″

Note: it’s not just “about £10 billion” its  “£10.1 billion”. We’ve all got to admire just how precise George and his Treasury economists can be about these five year forecasts! As if !

There’s no chance of this happening with the UK running a ~ £90 billion deficit in its external deficit due to trade and other international payments.  It would mean that the UK economy would have to find ~ £100 billion every year to pay the import bill and also provide the government with its £10 billion surplus.

This, presumably, is close enough to John Redwood’s ” extra £105 billion in tax”?

George Osborne says that  “Britain will be out of the red and into the black” which is completely untrue. These figures mean the British economy will be in the red to the extent of ~£100 billion to pay for the Govt being ~£10 billion in the black,  and Britain’s overseas trading partners being ~£90 billion in the black.

It can’t possibly happen that way,  unless somehow the trade deficit can be turned into a trade surplus, and that aspect is totally ignored in George Osborne’s grand plan. The UK economy could not sustain a net loss of £100 billion even for one year – never mind on an annual basis. George Osborne will only send the economy into a downward spiral trying to achieve the impossible. An economy in a depressed state will also deliver depressed levels of taxation revenue.

In a couple of years time, the excuse for the plan failing , as it inevitably will , is likely to be that even though the Government has kept spending under control, taxation revenues will have not come in as expected. This will be attributed to: Problems in the eurozone, problems with world trade, problems with loss of revenue from North Sea oil, a new war in the Middle East maybe?

In other words, the same kind of ‘excuses’ as were put forward after the last similar plan failed, in the years following the Tory win in 2010, except the Govt could blame the Lib Dems then! If the Government cared to look for a reason, rather than an excuse, they would explain that their deficit has to be the sum of what everyone else saves. They don’t have direct control of that.

There’s a saying , usually incorrectly attributed to Einstein, about doing the same thing over and over but expecting different results, being a sign of madness.  Are the Tories mad, though, or just plain bad?

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MMT and Economic Growth

Most economists , including the MMT variety, are wedded to the notion that economic growth in itself is a good thing. Of course, it has indeed been that over the last centuries. Few of us would be happy living under the same conditions as our 19th century forebears for example.Looking at inscriptions on the headstones of an old cemetery, or the reading of a few chapters of a Dickens novel provides enough evidence of the harsh living conditions that most endured then. Infant mortality was high. Many women died in their prime due to complications of childbirth. Improvements have largely been made possible by economic growth. In our modern economies we notice that unemployment falls when economies grow. Workers can negotiate higher wages as businesses can sell their products and services into marketplace. Everyone is happy. Governments get re-elected!

Economic growth is largely a product of human ingenuity. Give a group of workers the task of doing something, like making a car for example, when they have no experience of even seeing a car before and they’ll struggle to do it. The cars they produce won’t be very good. They will consume a lot of labour power and be relatively expensive, so that only the very wealthy can afford them. That was the case in the early years of the car industry. But as the workers gain more experience and apply their intelligence to the problems at hand, the cars are continually improved. The labour time to make each one falls as production techniques improve too. Fast forward to where we are now, and we have very good cars made very efficiently by far fewer workers at a fraction of the cost of a century ago. It is the same story in just about every industry we can think of.

Those in the Green movement question that we can have economic growth forever citing the fact that economic growth implies an exponential consumption of the finite resources which are available to us. It’s a good question and it’s one we are going to have to answer sooner or later. We might want to make a start on doing that now in the context of our present economic problems. In the UK and Europe we have seen no real economic growth since the 2008 GFC. The situation varies from country to country but typically GDP per person is just about what is was a decade ago. Even so, this is still approximately twice what it was a generation ago. So is everyone twice as happy now as they were then? Or are they exactly as happy as they were a decade ago?

Of course they aren’t. There’s much more unemployment and underemployment now. There are more homeless people than there were, there aremore people relying on food banks. The state of the NHS and the education system is worse than it was. In 1980, students still had grants, but now they don’t, even though supposedly we are a much wealthier society, notwithstanding the difficulties brought about by the 2008 crash. This is not what I remember being told by Sir Keith Joseph ( a Tory politician very close toMargaret Thatcher) in the early 70’s when we clashed at a student meeting where he was speaking. He criticised me, in particular, and the left in general, for being overly concerned with the redistribution of existing wealth and not enough about the creation of new wealth. His message was that social and economic problems, of which we were both aware existed, were best solved by having a more productive economy and allowing the wealth creators free rein to create wealth unhindered by State interference. It would have been inconceivable to the rest of the meeting, and maybe even to Keith Joseph and myself, that some 40 years later we’d have had the levels of growth we’ve had but still the same economic problems would remain unresolved.

We don’t need degrees in economic theory to know that if the proverbial ‘economic cake’ is much bigger but there are still those surviving on meagre rations, that the imbalance must be due to how that cake is cut. The question of who gets what does matter when discussing Economics. Economic growth has to be more than about mopping up surplus labour in a capitalist economy. If we do achieve some growth, that’s fine, we all can feel a bit better off. If we don’t, we should all feel that we are neither better nor worse off, instead of, as now, feeling that we have to run just to stand still. Do we need a different type of economy for that to happen? The critics of MMT might argue that it’s little more than a patch for the problems of a capitalist economy. I wouldn’t accept that but we do have to explain how MMT can work for everyone if we are to establish meaningful links with the political left. A Job Guarantee on a minimum wage won’t be enough for many.

If we do want that, we have in the words of Labour’s old Clause 4 to provide an economic theory which can help to “secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof”.

 

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

Chuka makes some valid points in his recent Guradian article:

http://www.theguardian.com/commentisfree/2015/may/09/labours-first-step-to-regaining-power-is-to-recognise-the-mistakes-we-made

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. 🙂