Wage falls in the UK as ordinary workers suffer since the recession

workersEvidence here, once more from the UK’s TUC (Trades Union Congress) that real wages here fell by 10.4% between 2007 and 2015; in other words, since the financial crisis and recession. This is the worst record in the group of rich OECD countries and roughly the same as Greece.

On the bright side, employment growth has been relatively strong in recent years, although putting the two together suggests that a large proportion of the jobs created pay low wages. This means that job creation is less likely to reduce poverty for those already struggling.

As I have written previously, strong population growth has flattered the GDP growth figures so that per capita growth in incomes and output has been poor since the recession.

Stagnant or falling wages should boost the profits of firms, at least for a while, which could feed through into rising investment, which is necessary for productivity growth. But if real wages do not at some point pick up, then the only way that consumption can grow is for people to take on more debt, which will eventually prove unsustainable, especially from today’s already high levels.

Of course, the government will put a positive spin on the figures by distracting from them with the employment figures and overall GDP growth rather than the per capita evidence. But the picture is clear. We have a lot of ground to make up on productivity and real wages compared with our fellow OECD members and it is these variables which play a big role in determining living standards.

The continued failure of the government’s ‘long term economic plan’

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The ex-chancellor George Osborne in his hard hat

Some evidence here that the outcomes of the oft-mentioned ‘long term economic plan’ of the UK government have fallen far short of predictions and claims. First of all: austerity. Geoff Tily, Senior Economist at the TUC, shows that public sector net borrowing for the first quarter of this financial year was £26.6bn, more than the November 2011 official forecast for the whole of the 2015/16, which was £24bn.

The cuts to public spending and tax increases have reduced the deficit much more slowly than hoped, since growth has been much weaker than forecast since 2010.

The government has claimed many times that it has turned the economy around and saved it from ruin. What it doesn’t mention is that recovery was underway when it came into office in 2010. The combination of austerity and the Eurozone crisis slowed growth significantly until 2013, when it picked up and the chancellor George Osborne in fact relaxed austerity to some extent.

The UK’s recovery since the recession has been the weakest since records began. Continue reading

From austerity to expansion?

Contando_Dinheiro_(8228640)Could we be about to see a shift from austerity to fiscal expansion? The UK’s new finance minister, Phillip Hammond, as reported by the BBC here, has signalled that he may ‘reset’ economic policy at his next budget statement come Autumn.

There are some indications that the UK economy has been subject to a substantial negative ‘shock’ as a result of Brexit, the UK’s vote to leave the EU. The latest business managers survey showed a sharp move towards economic contraction. If this heralds a significant growth slowdown or even recession, the budget deficit will tend to increase as a result, even if the government does nothing. This is because slowing or negative growth reduces tax receipts and usually leads to higher spending on unemployment benefits and welfare, automatically increasing government borrowing. If this extra borrowing boosts spending in the economy overall, then it is known as the ‘automatic stabilizer’, in effect stabilizing the economy by compensating for lower private spending.

Mr Hammond could also increase borrowing further through tax cuts or extra spending on infrastructure, beyond what happens automatically, in order to try to boost growth. Alongside the abandonment of his predecessor George Osborne’s aim to achieve a budget surplus, in which tax receipts are greater than public spending, by the end of the parliament in 2020, this would represent a significant policy shift away from austerity. Continue reading

How to end the excesses of executive pay

An interesting post from Paul Ormerod on how to curb the excesses of executive pay, following the new Prime Minister’s announcement that she would legislate to do so. CEO pay has risen dramatically in proportion to that of shop floor workers since the 1980s, particularly in the US and UK, and less so in other countries. This trend has little economic justification in many cases and has become a social norm with its own self-sustaining dynamic.

Ormerod suggests a more subtle approach than legislation: withhold the awarding of honours such as knighthoods, or a seat in the House of Lords, to bosses who behave ostentatiously with regards to pay. Who knows, it might work. But something needs to be done as part of a package of policies to promote greater social justice.

Governments can pick winners (Ha-Joon Chang’s Thing 12)

23-things-they-don-t-tell-you-about-capitalismThis post continues an occasional series based on chapters in Ha-Joon Chang’s book 23 Things They Don’t Tell You About Capitalism. Chapter 12 aims to counter the idea among free market economists that the government should not be in the business of supporting particular firms or sectors, and should leave things, as far as possible, to the market. In other words, if industrial policy is at least partly about ‘picking winners’, then ministers and bureaucrats should stay out of the way, as those in business will inevitably know more about how to achieve economic success.

Chang notes that there are plenty of examples from across the world in the history of capitalism of the successful picking of winners by the state, from South Korea to the US. In another part of the book, he points out that what is good for one particular firm may not be good for the economy as a whole. After all, economic growth and development under capitalism involves a process of creative destruction and structural change, as some firms succeed and others fail, expanding and creating new jobs in some cases, and stagnating or shrinking in others, going bankrupt or being taken over and restructured, with jobs being lost. There is constant change in a successful economy, and this is essential to rising productivity and overall living standards. If the state can play a role in facilitating this process, then this may involve intervention and not simply deregulation and leaving it all to the market. Continue reading

Government as entrepreneur

A short video talk from TED by Professor Mariana Mazzucato of Sussex University on the state’s vital role in promoting innovation in a capitalist economy. Her book The Entrepreneurial State makes a fascinating read.

I wrote my MSc dissertation, way back when, on Industrial Policy in Malaysia, which admittedly had mixed results. Since then I have always been interested in how state intervention can promote growth and development, both in rich and developing nations.

Mazzucato describes how all the key technologies which make up the smart phone were funded by the US government, which definitely goes against much propaganda and conventional wisdom.

Anwar Shaikh’s Classical theory of inflation

9780199390632Economic theory needs to account for the phenomenon of inflation. This post draws on Chapter 15 in Professor Anwar Shaikh’s recently published book Capitalism in which he outlines his theory of inflation under modern fiat money (state-backed money not fixed in value to gold or another commodity). He contrasts it with neoclassical and Keynesian theories, and provides empirical evidence to support his ideas.

The essence of Shaikh’s model is quite simple. Inflation, a rise in the overall price level in an economy, is determined by aggregate demand and supply, and these are influenced by three factors having either a positive or a negative effect on it: new purchasing power (PP), net profitability (the rate of profit minus the interest rate, rr) and the so-called ‘growth utilization rate’ (u).

PP is a demand-side factor, and the other two factors operate on the supply-side. PP is influenced by private and public sector credit, or a rise in borrowing to fuel greater spending in an economy. Note that this can be generated domestically or from abroad, for example through a rise in net exports. In theory, under modern fiat money, the amount of PP generated by the government ‘printing money’ has no limit, and history shows that in wartime, governments have often financed the extra demands on their activities through the creation of new money, which has given rise to inflation. This source of inflation, generated from the demand-side, seems similar to monetarist theory, in which the state is to blame via its intervention in the economy and its creation of an excessive growth of the money supply, and trying to keep unemployment below its ‘natural rate’. Continue reading