Tag Archives: unemployment

“Look after the unemployment, and the budget will look after itself ” (Keynes 1933). Is he still right?


(This article was first published in Liberal Democratic Voice)

Keynes was undeniably a genius of his time, but he wasn’t infallible. We should not just assume that he was always correct. As with all prolific writers we can cherry-pick quotations to suit our own political purposes. If we want to argue for more government spending, we can use this:

“For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income.”

(Collected Writings of John Maynard Keynes, Volume XXIX, pp 80-81)

Keynes meant that the mere supply of a commodity is not enough to ensure the sale of that commodity, but money from all government spending inevitably ends up in someone’s pocket. This is a statement of the obvious, maybe, but he evidently felt it needed making anyway. On the other hand, if we are suspicious of what sounds like “magic money tree” economics, as many scathingly describe any deviation from their understanding of ‘sound money’, we can find this quotation:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

(Economic Consequences of the Peace, Chapter VI, pp. 235-236)

Rather than play these games we might look at how economics has progressed since his time and interpret his comments in the light of the now available evidence. This Huffington post article makes a good a case, in support of Keynes’s opinion, that a healthy economy will help minimise the government’s budget deficit.

One possible counter argument, from those of a more right wing disposition, would be that it is unclear which is cause and which is effect. Does a healthy economy with low levels of unemployment, and underemployment, naturally produce a small budget deficit or is it the other way around? If we force the budget to balance, by draconian measures, will unemployment fall too? A quick glance at the figures for Greece is enough to eliminate that possibility. It has a relatively modest budget deficit of 3.5% but an unemployment rate of over 25% with no tangible sign that any fall is imminent.

To give an answer to the question posed in the title, we can say “usually yes”, but we must acknowledge there are several, sometimes conflicting, factors involved. It is possible to conceive of a healthy economy with low levels of unemployment at the same time as the government’s budget deficit possibly being a little on what some may consider to be the high side.

To understand why, we need to look at the sectoral balances. To start with, imagine that everyone who issued or used the pound sterling as a currency was separated into either the government or the non-government sector. The assets of the non-government sector have to equal the liabilities, or debts, of the government sector. If money is paid as tax to government the assets of the non-government sector fall exactly as the government debts fall too. We can then divide up the non government sector into domestic and international. So in one year, and using the terminology of internal deficit for the Government’s deficit:

Internal Deficit = Savings of Domestic Sector + External Deficit.

For Keynes to be right on the question of unemployment and the internal deficit it should follow that everyone will save less when unemployment is low. This is a reasonable assumption but there could be exceptions. Everyone is more likely to borrow too, essentially the same as de-saving, when the economy is buoyant and there is confidence that money doesn’t have to be stored for those rainy days ahead. The effect on the external deficit is harder to predict. If the UK reflated its economy, when everyone else was in recession, we could well see that, even as unemployment fell, the external deficit, and so the internal deficit, could increase due to a local upturn sucking in more imports. Exporters could also switch their production to local markets. In that sense, and if we interpret “look after itself” to mean “fall”, Keynes could possibly be wrong! The important thing is that governments should understand these relatively simple relationships to make informed policy choices. The internal and external deficits may not be such a problem as we might be led to believe, if international investors see the UK as a safe place to park their surplus cash. The number one priority for any government, at least in peacetime, should be to ensure the health of the economy, both to offer jobs and business opportunities for all citizens and at the same time maintain the confidence of our external investors.

Ironically, if the UK lost that confidence, no-one would want to lend us any money. The pound would fall. Imports and exports would have to balance. We’d all end up somewhat poorer and we couldn’t then afford to save so much. The internal deficit would have to fall too and maybe even turn into a surplus. But, we have to ask ourselves: “Is this what we really want?”

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The Job Guarantee, MMT and the Redistribution of Wealth

One important component of MMT is known as the Job Guarantee (JG) or sometimes the Employer of Last Resort (ELR) . The idea is an unemployed worker would be offered a job by the Government instead of unemployment welfare benefit. The job would be for public purpose and pay a basic wage. This would effectively define a minimum wage for other workers too.  There’d be no point working for less than the JG wage somewhere else for example. The government would possibly pay out slightly more than it would in welfare benefits to support these jobs, but it would not be paying out money for nothing. It would be receiving something in return, for the benefit of society as a whole,  and would prevent useful resources, the labour power of millions of workers, from going to waste.

Instead of there being a pool of unemployed there would be a pool of JG workers. Instead of an unemployment rate there would be a JG rate. Whereas government now uses unemployment as a means of inflation control,  a future government would use the JG and the JG pay rate as a means of inflation control. Bill Mitchell likens the JG scheme to one previously used by the Australian government to stabilise the price of wool. It used to buy up wool, which might otherwise have been unsold,  at sales auctions to guarantee a floor price. Then, later as the price of wool might have risen, stocks were sold from the buffer supply to reduce wool prices.

One potential problem is with the rights of JG workers. If they feel they are being asked to work for a lower level of pay than they might consider to be socially acceptable, and also under conditions which might be less than acceptable, do they have a right to join a union and demand higher pay and better conditions? The scheme cannot work too well if that is the case because the minimum wage will then potentially be a source of inflation.

So, the question arises: can we really compare human workers with bales of wool?  Should workers be ‘sold’ from a buffer stock to lower the wages of other workers?  This does not sound, to my admittedly socialist ears,  like an appealing idea!  Trade unions have to have an input into the level of the minimum wage whether or not it is defined by the wage of a JG. Governments may be fair and just in defining a reasonable living wage or they may not be!

It is potentially only a problem if  unemployment is brought down to something like 4% and efforts to reduce it below this figure create inflationary tendencies in the economy. Some of those 4% will be people between jobs but some will be, for as variety of reasons, hard-to-place workers. They shouldn’t just be abandoned but neither should we be too hasty to introduce compulsory work. The meaning of ‘compulsory’ being that there would be no social benefits otherwise.

MMT doesn’t, IMO,  make this point at all clear in its theorising. Bill Mitchell has expressed his view as:

“The existing unemployment benefits scheme could be maintained alongside the JG program, depending on the government’s preference and conception of mutual responsibility.
My personal preference is to abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations.
The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a JG job…..
I would also allow a person a short-period – perhaps two weeks – in between losing their job and starting a JG job – to sort out their affairs. This period would be covered by full JG pay.”

We can all have our ‘personal preferences’ . Mine would certainly NOT be to “abandon the unemployment benefits scheme ” until such time as we have a genuine socialist society and not just a so-called socialist government in charge of an essentially capitalist society or economy. No economic theory, including MMT, has much if anything to say about the desirability of wealth redistribution. The argument to concentrate on economic growth rather than redistribution, is I would argue, a neoliberal argument in itself. GDP per capita now in the UK is twice what it was in 1979 when Mrs Thatcher first won a general election. It is a similar ratio in most advanced countries too, so Mrs Thatcher cannot have been at all responsible for the UK growth!

Her accusation then,  and from her supporters too,  was  the left was being reactionary in its demands for redistribution and that all economic problems would be solved by having a more productive economy. This might be described as the ‘rising tide raises all boats’ theory. Experience should have taught us that the rising tide may well have raised luxury yachts but not necessarily “all boats”. We have more unemployment now than we had in 1979, more underemployment, more homeless, more people relying on food banks, and the NHS is in very poor shape. Clearly all problems have not been solved and will not be solved, regardless of the level of past and future economic growth, until the question of wealth redistribution is back on the political agenda.

By all means let us establish a  Job Guarantee but let us make it very clear we mean a Voluntary Job Guarantee. We should make sure the benefits of that extra production, that extra economic growth,  are used to equalise wealth distribution rather than those benefits ending up in the possession of the already ultra wealthy as has happened with previous economic growth.  Let’s see how that works out before even thinking about any compulsion.

Do we really have austerity economics in the UK?

Many right wing commentators make the point that public spending is higher now than under the last Labour Government in both real and nominal terms. They dispute the charge made against the present government by the left that they are engaging in the ‘austerity economics’.  Even the deficit (they mean the government’s budget deficit)  they will admit, when pushed,  is higher than the last Labour government’s deficit. So why are we being so harsh when they are clearly doing their best? If we want austerity , they argue, just look at what happens in the Eurozone.

Is there any justification for their defence? Possibly. GDP per person is just about the same as it was a decade ago. There were no accusations of austerity economics then and most voters  in the UK felt fairly well off. Or, at least they did in sufficient numbers to re-elect a Labour Government in 2005. So, why is the general feeling that we are worse off now than we were then? If the published figures are correct, and there is no reason to dispute them as far as I know, then the problem must be one of distribution of the available income.

Ironically, the best defence the Tories have against the charge of austerity economics is that there would be no austerity if everyone had a fairer share of what was available. They might not go for that though!  GDP per person is now twice as high as it was when Mrs Thatcher first won a general election. She and her government were of the opinion that the left were reactionary in quibbling about the distribution of the proverbial cake, and that it was better for all if we just concentrated our efforts into making a bigger cake.

Well, we’ve done that. The cake is now twice the size, but there are more homeless now than there were then, with higher levels of unemployment and underemployment. Terms like “Zero Hours Contracts”  and “Food Banks”are in existence now which weren’t then. So why the problem? It has to be caused by how the available wealth and income is divided.  There is no alternative explanation.

That would be the socialist explanation of why we have austerity. An economist would perhaps adopt a different tack as has Professor Bill Mitchell:

“Austerity occurs when the government runs deficits that are too small relative to the spending and saving decisions of the non-government sector. In this context, it is moot where the revenue comes from. The impacts of running insufficient fiscal deficits usually does impact on the poor and disadvantaged, most notably, because it causes mass unemployment and/or underemployment. And I don’t diminish the concern we should have for those distributional consequences. But from a macroeconomics perspective that is not the point. Austerity is about the sufficiency of the deficit contribution to total spending and national income generation.”

So how does this work with the present bout of austerity in the UK?

John Redwood recently made the following claim on his blog:

“The most recent figures show the UK deficit gradually reducing, with tax revenues growing more quickly than the growth in public spending, as planned.”

There are two problems here: Firstly he, I would suggest David Cameron and George Osborne too,  thinks that reduction is a good thing. Secondly,  he thinks the UK’s deficit is the same as the Govt’s budget deficit which it clearly isn’t. A better description of the UK’s deficit is the net loss of ££ to pay for the net import bill and which is currently some 5% of GDP.

So, it must follow that if Government reduces its own deficit to below 5%, as it has recently done, that it is simply pushing the economy into recession. That’s austerity. Everyone will run increasingly short of money. Gross aggregate demand can then only be maintained by increased private sector borrowing which of course just inflates the bubble economy.

London property is rated as the most overvalued in the world with a bubble index of 1.88 and the rest of SE England can’t be far behind.

http://www.theguardian.com/money/2015/oct/29/london-house-prices-most-overvalued-world-ubs

If the Government wants to run a a 5% deficit in trade it has to run something like a 7-8% deficit in its budget to allow those in the economy who wish to save (rather than borrow) some capacity to do so.

Pushing it down to only 4% is a recipe for disaster. The economy is now hanging by a thread. The bubble will burst sooner rather than later and we all know what happens to real economies when bubble economies burst.

Even looking at this kind of economics from a right wing perspective, I can’t see it makes any sense. Firstly it will reduce the electoral chances of the Tory Party. Voters who become economically disadvantaged and become reliant on State support will vote for parties offering better rather than worse support. Secondly, it will hinder their desire for a smaller state. That is only going to be possible when workers have sufficient spending power to afford private sector alternatives to those services the State now provides.

Want to reduce your deficit, Mr Osborne? Stop your boys burning those £50 notes* !

* Or at least ask them to tell you about it!

The Oxford University based Bullingdon club has attracted controversy of late, in large part  due to certain unsavoury practices  indulged in by its young, privileged, elitist but poorly behaved members. Their current initiation ceremony is reported to include the burning of a  £50 note in front of a beggar or homeless person.

.B

Former members of the club are now a well ensconced part of the UK political establishment. These include the current Prime Minister Mr David Cameron (In photo, second from the left standing) , the Chancellor of the Exchequer Mr George Osborne, and the Mayor of London Mr Boris Johnson (far right sitting)

A key source of worry for our worthy politicians is the UK’s government budget deficit which now runs at approximately 4% of GDP. This is the gap between what the government spends into the economy and what it receives back in taxation.  The budget deficit is often referenced in support of their argument that we are all “living beyond our means”,  that our “credit card is maxed out”, and that cutbacks in spending  and increases in taxes are unfortunately necessary to “cut our coat according to our cloth” etc etc.

So in this context, we might ask just what macroeconomic impact the burning of our currency might have? It is course illegal to deface or destroy currency. Why should that be?

It does have an effect. If these wealthy young men had chosen to give £50 to a homeless person that money would no doubt have been quickly spent. It would have been a stimulus to the economy.  The destruction of £50 has the opposite effect. It is exactly the same as if we had handed that £50 note over to the government in taxation, where the government routinely puts old notes through the shredder.  If Mr Osborne knows of specific instances where currency has been deliberately destroyed he is quite entitled to count that as voluntary taxation. His deficit would be reduced commensurately.

As he can’t know just what happens to our currency he has to assume it still exists and that it is just being saved somewhere. The net effect is still the same. To keep the economy functioning,  at full capacity,  any money which has been taken out of circulation either by its destruction or because it is being stored in a safe or bank account has to be respent back into the economy by government on our behalf. It’s neither here nor there  whether the budget is in deficit or in surplus.

We don’t need to know how much is being burnt and how much is just being stored. If any government overdoes the spending, relative to the levels of taxation, we’ll have too much inflation, but if it underdoes it , like now, we’ll have deflation and high levels of unemployment and underemployment.

Is Government Spending Already by PQE?

We can think that all spending by government is already by the creation of new money, which is the general understanding of PQE (otherwise known as  Overt Monetary Financing of Government), using the concept that money is an IOU of a sovereign currency issuing government.

So, just as you or I have no use for our own IOUs, we tear them up when we get them back, neither has government. All money collected  in the form of taxation or in bond sales is simply shredded. Destroyed -either physically or digitally. When govt spends, it does so by issuing new IOUs. ie Issuing new money.

So what is the point of taxation? It’s to prevent high inflation as has already been mentioned in previous posts.

And the point of selling gilts (bonds)? It is to set longer term interest rates. Generally speaking: The more that are sold by auction, the lower their price, and the higher their yield. The higher their yield the higher are longer term interest rates.

If Government wants lower interest rates in the longer term it should sell fewer gilts, yet still create as many new IOUs, as many new ££, as it needs for spending purposes. Its spending decisions have to be such that they won’t produce too much inflation, of course,  which would require the raising of taxes. The balance between spending and taxation remains the subject of political debate as always.

A better idea might be to stop selling gilts completely and allow savers, ie the hitherto bond purchasers, to put their money on account with the BoE ( which is best considered as part of Treasury) and set the interest rate payable just as a high street bank would set the interest to us on our longer term savings. Short term interest rates are already set this way so the concept, and practice, just needs to be extended to include all savings. The interest rate would probably be higher for a longer deposit period, again as we might expect from our own bank.

And what about the exchange rate?

If the government offers lower interest rates the £ might be expected to fall, and higher rates will probably cause it to rise. If we stay with the idea of selling gilts, and stick with the concept that PQE  is somehow different,  we can say there will be less need for the government to ‘borrow’  and therefore less need to pay out interest.

This will have the same effect on the exchange rate as directly reducing interest rates.  It is just looking at the process from a different perspective.

PQE, as is conventionally understood, could be part of the government’s exchange rate strategy. That is if it wants one, and that could be the subject of another discussion! If it wants a lower pound, it does more PQE. A higher £ means less PQE. It depends on what sort of trade deficit we want to run. If we are happy to run a high deficit, and there is no reason why we shouldn’t, we can keep the pound high, but if we want to reduce it we will need a lower £.

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.