Fabian economic update

The ever resourceful Young Fabians are producing a monthly economic update which brings together extensive data on the UK's economic performance.

In a world where we seem to be bombarded with contrary statistics it offers clarity on where we are and where we are going.

I was struck by the surge in the oil price since the beginning of the crisis. I tend to watch the oil price not because I drive a car but because I fear that green technology will have a weaker business model if they are competing with a low oil price. Others would bemoan the fact that there continues to be such a demand for such a damaging commodity.

It's also notable that the US stock market is so far ahead of our own surge, perhaps due to constituents such as Amazon and Google. The stock market is a voting machine not a weighing machine, so the investment community certainly think these companies have a lot more expansion to do.

The real boost to confidence is the graph of the Purchasing Manager's Index, which indicates buying confidence across industry. Construction has raced back while manufacturing is not so far behind. This is an indication of sentiment but it would seem that those who are close to their markets are predicting a V-shape recovery, although the ongoing virus will probably determine the true outcome of our economic fortunes. 

Link: Fabian macroeconomic update

The first speech by Anneliese Dodds

Dan McCurry 5th July 2020

There was a striking moment in the speech by Anneliese Dodds when she mentioned that the government have reintroduced the Sanctions system, a punishment regime for benefit claimants which purportedly aims to force them to actively seek work. Anneliese considers this a misguided moment to punish the unemployed as each job opening has eight applicants.

I work as a solicitor advising suspects in police stations. The job involves a private consultation with my client to decide whether or not to answer questions in the police interview. Whenever an officer shows me the consultation room, they always point out the big red button that I should press if I get attacked by my client. This would cause the police to rush in mob-handed and save me by violently restraining my client. I used to laugh at them because the clients never attack solicitors but do attack the police.

In fifteen years of advising I've never pressed that button, but in the first year of the sanctions regime I pressed it on three separate occasions, for fear of imminent violent attack from an irate client. On each occasion they were shouting the word "Sanctions" as part of their stamping violent rage.

Anneliese went to some lengths to explain that economic policy is more than just economics, it is personal. It is about the permanent scarring effect on people's lives. An economic shock for industry can be a far bigger event to an ordinary person, if they never recover.For those people, the sanctions regime doesn't merely put pressure on them to find work, it seeks to humiliate. It rubs the nose in the dirt of those whose confidence is shattered, skills lost, or whose talents and abilities were never discovered, due to events knocking them down at a vulnerable time of their lives.
Anneliese Dodds is right to argue that government policy must first concentrate on the immediate prospect of unemployment because the government's promised building program is either much further down the road or still little more than an announcement that has been previously announced and still not happened.

The Future Jobs Fund was a policy following the 2008 crisis, whereby Gordon Brown promised each young person who had never worked, six months employment at minimum wage. It was made possible because government paid the wages which incentivised companies to provide the work. It meant those young people gained experience and a CV. They got used to having money to spend rather than vegetating their youth away. It was a success.

This speech by Labour's shadow chancellor demonstrates that Labour is shaping up as a credible government in waiting. The government would be wise to listen to the advice from Anneliese Dodds.

Is Remain defeated or in tactical retreat?

By Dan McCurry - January 2020

Labour's Remain MPs accept that Brexit is now happening. So is this the end of the war, or merely the conceding of a battle? Are Remain defeated or in tactical retreat?

Labour MP Wes Streeting has spoken of Boris Johnson's predicament on winning the election: "He's got no hiding places, no scapegoats, no one else to blame. Boris Johnson is now accountable for all the promises made in the referendum and the general election."

So holding the government to account is the backbench strategy. If the leadership contenders are smart enough to prove their muscle, they will compete to hammer the Tories and Labour will be setting the agenda. If not, then Labour will engage in a period of naval gazing followed by a new leadership whose strategy we don't yet know. What we do know is that the failure to oppose Brexit has caused us huge problems previously.

Labour did not cause Brexit to be delayed for three years. Labour voted for the referendum and accepted the outcome. A year after the referendum Labour voted for Article 50. Another one and a half years later Theresa May finally came back with her Brexit deal and Boris Johnson along with Labour voted against it.

Brexit has dragged on because it is impossible to meet the opposing objectives of the Brexiteers, yet Boris Johnson did a good job of arguing that the problem has been due to Labour. Our compliance has been used as a weapon against us while our opposition was never heard because it was never made.

This is a war of attrition and it is tempting to give up and fold, to concede and move on. But in their victory the Tories have never been so weak, because as Wes Streeting so eloquently points out, they have nowhere else to hide.

For Johnson, everything has been staked on Brexit. In the last negotiation he was so desperate that he agreed to give up Northern Ireland and place a border down the North Sea. This means that the EU no longer fears a border being built across Ireland so they can play hardball with the British from now on.

What the EU have learnt is that the Tories will always concede at the last minute. Every time the Tories have negotiated, they have always thrown in the towel at the midnight hour then pretended to the home audience that they have won.

The misery facing Johnson is that his new intake of MPs are mostly aligning with the ERG making that pressure group more powerful. Yet his votes in the election were gained through the promise that Brexit would no longer generate daily rancour in the news. He really is running out of road.

His latest tactic is to argue that he must be allowed to negotiate in secret, but that's exactly what Theresa May tried to do to cover up her lack of strategic objective.

Compared to May Boris Johnson is much better at doing politics, but with all his bridges burnt, the question remains whether Labour MPs will allow him to swim.

The question for Remain Labour is this: did we lose the war, or merely concede the battle? 

Why Labour shouldn't rule out Modern Monetary Theory

Dan McCurry

          Extract: "Having the state create money rather than high street banks does not debase anything              if the quantity of money is correct."

Jonathan Reynolds, in his LabourList article on Modern Monetary Theory, is right to say that this subject would attract only a small audience, but a small audience is often the most well-informed. It's therefore vital to correct the facts on a concept that Jonathan describes as "deeply flawed and a dangerous distraction for people on the left".

He says, "Advocates of MMT claim that governments with sovereign currencies like the UK can simply spend whatever they like, and taxes only exist to deliver other public policy goals, like controlling inflation or reducing inequality. Aside from the valid concern that printing additional money nearly always leads to higher inflation, outside exceptional circumstances like the global financial crisis, currencies need to maintain value to trade internationally," writes Labour frontbencher Jonathan Reynolds.

I was one of the first, if not the first, to advocate directing quantitative easing (QE) towards the real economy in modern times. I have never advocated "spending whatever you like". The only person who advocated QE while using taxation to reduce inequality was Milton Friedman in an essay of 1948. He proposed that all money be created by government rather than by high street banks. In other words, nationalisation of the money supply. That is so left-wing that Chris Williamson should put this guy's face on his T-shirt. As for the idea of taxes being used to control inflation, this was proposed by Simon Wren-Lewis in a chapter of John McDonnell's book. It's not a consensus, but simply an idea.

For those who have an understanding of monetary theory, I will try to elaborate the main issues. It's important to understand what we mean by "circulation" in monetary theory. If an economy needs £10m of money, then we only need to print £1m because each bank note will be used ten times. The "circulation" would be x10. Hence £1m printed equals £10m in quantity.

Following the banking crisis, there was a lack of demand in the economy and the circulation slowed down. Rather than each bank note being used ten times, they were used only five times. If the circulation falls by half, then it is necessary to double the printing of notes in order to achieve the same quantity of money. So £2m printed, at a circulation of five, makes a quantity of £10m, the correct amount. QE didn't increase the quantity of money - it corrected the quantity of money.

QE was spent on government bonds, and the sellers of those bonds spent the proceeds in the stock market, which lifted shares but didn't cause companies to invest, so that money did not circulate beyond the financial markets. If the newly-created money was spent building roads and bridges, it would have had inflationary pressure because wages tend to get spent, and so circulate in the economy.

Simon Wren-Lewis proposed that the state create money but if inflation builds then taxation should be used to reduced the amount of money in circulation. I think this is faulty because it is using a tool at the circulation stage rather than the creation stage, which seems difficult to control and will have a very long lag. The existing tool of interest rates is proven effective at influencing whether people borrow or save, which is the moment that money is created.

If government decided to print £4bn of money to build roads, then the Bank of England would calculate how much this would add to inflation and would adjust interest rates accordingly. In effect, this is an indirect form of taxation: those with large debts would pay a little more in interest rates, while government gets £4bn that it doesn't have to pay back.

Only a fool would suggest rushing into printing money for government spending on a large scale. A good and gradual start might be to fund the National Investment Bank with a £4bn deposit straight from the Treasury, bypassing the need for the Bank of England to raise the money on the bond markets. This avoids adding £4bn to our national debt. If all goes well, this cautious approach could be expanded.

Having the state create money rather than high street banks does not debase anything if the quantity of money is correct. Nor is there any reputational issue, to which Jonathan alludes - as long as the quantity of money is correct. Nobody knowledgeable is proposing that inflation should be ignored.

The shadow Treasury team need to apply themselves to fully understanding the concept before they dismiss it. MMT simply offers better value for state funding with positive knock-on effects for the private economy. To rule this out without making a proper effort to understand it would be a wasted opportunity.

Created by Dan McCurry
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