Things will only get worse for Labour until they discuss voters’ inflation concerns

Hands up if you’re being screwed by inflation

AS LABOUR gathered in Liverpool for its party conference this week, one of their top priorities was to fashion a message on the dominant issue in British politics today: the economy. They failed.

FISCAL FAILURE

On the fiscal side, the shadow chancellor Ed Balls, unveiled an economic recovery package that seemed like it had been drawn up by a right-wing blogger taking the mick; it simply amounted to borrowing and spending more money. He refused to apologise for Labour’s borrowing – even when the economy was growing – to spend on its public sector client state. But considering that the beneficiaries of that largesse are Labour’s core vote and paymasters his hands are pretty much tied.

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Ed Balls and Irish austerity: what you didn’t hear at party conference

May the growth rise to meet you

Ed Balls used to cite Ireland as exhibit A in his argument that ‘austerity’ would cripple the British economy.

A year ago, when Ireland’s economy had just shrunk by 1.2% Balls, then making his unsuccessful run for Labour leader, said

“These figures are a stark warning to governments across Europe including our own. An austerity programme of deep cuts now, when our economic recovery is not secure, risks lower growth and higher unemployment”

Perhaps he was busy drawing up his plan for British economic recovery which he announced at the Labour conference this week (easily summed up: spend more money) or maybe he was keeping his head down following poll numbers from ComRes which showed just 27% of voters thinking he would make a better Chancellor than George Osborne with 43% disagreeing.

Either way we were denied his reaction to the latest set of figures from Ireland; second quarter GDP figures showing growth of a healthy 1.6%.

A lively (in economic terms anyway) debate has kicked off over what these figures mean.

Free market economist Tyler Cowen led by claiming that such growth following such cuts disproved the Keynesian theory. Paul Krugman responded for the Keynesians arguing that Keynes always said this would happen, it was just question of how much damage was done in the meantime and how long it took. In the long run we are all dead, after all.

There is much truth in what Krugman says. The problem in Ireland, as in Greece and elsewhere, lies mostly on the monetary side of the economy. As Patrick Honohan, a former Trinity College academic now governor of Ireland’s central bank, wrote

“Until about 2000, the growth had been on a secure export-led basis, underpinned by wage restraint. However, from about 2000 the character of the growth changed: a property price and construction bubble took hold. This boom sustained employment and output growth until 2007 despite a loss of wage competitiveness”

A slump in interest rates when Ireland joined the euro saw a borrowing boom which bid up prices and wages. As a result, given that Irish prices are now relatively high, Ireland will be unable to export. It will need to get its prices down to a level approximating those of its competitors. This devaluation can be internal or external.

An external devaluation works by inflating the money supply so that prices rise and the real wage (the amount of goods and services the money wage can purchase) falls that way. Britain has eagerly pursued this course and sterling has lost about 25% of its value since 2007. This was not an option open to Ireland. As a member of the euro the money supply of the Irish Republic is controlled in Frankfurt.

This left the option of internal devaluation where prices and wages are reduced to competitive levels by simple cuts in nominal wages and, thus, the real wage.

There are two things to note.

First, both internal and external devaluation are different paths to the same destination, devaluation. Both entail a fall in the real wage and a decline in living standards. The difference is that if it is not possible to reduce nominal wages (if they are ‘sticky’ in the odd Keynesian parlance), say because of trade union opposition, then any attempt at internal devaluation will only succeed at the price of great unrest and unemployment; as falling prices depress companies’ incomes they will reduce their wage bill with layoffs if they cannot cut wages.

Secondly, it should be clear that Ireland’s problem was a monetary one not a fiscal one. For Ed Balls to point to Irish austerity as a warning for Britain is either breathtaking cynicism or economic ignorance. Take your pick.

This article originally appeared at The Commentator

Versus: A Confederacy of Dunces, by John Kennedy Toole

‘I am at this moment writing a lengthy indictment against our century. When my brain begins to reel from my literary labors, I make an occasional cheese dip.’

Sean O’Faolain: ‘Write about what you know’ is usually the first advice given to any aspiring writer and it was certainly followed by John Kennedy Toole when he wrote A Confederacy of Dunces. Toole was a native of New Orleans with a Masters in English and mother issues. The main character of this book, Ignatius J. Reilly, is also from New Orleans, has a Masters in English and mother issues. Confederacy is one of only two books Toole wrote. It was published in 1981, 12 years after his death, and won a Pulitzer Prize.

Reilly is also loud, sanctimonious, dishonest, cowardly and convinced of his own superiority, in short, he’s one of the least appealing main characters I’ve ever come across. His actions spark a story which rattles around New Orleans some time in the early 1960s (when the novel was written) taking in a former prostitute turned bar owner, a wannabe stripper, a bored businessman and his resentful wife, a black guy who meets his oppression with wisecracks, a put-upon police officer and Reilly’s long-suffering mother among many others.

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Sam Peckinpah

When ‘The Wild Bunch’ was released in 1969 there were reports of people being stretchered out of cinemas after fainting during the prolonged, slow motion machine gun massacre which closes the film. The ambiguous rape scene in ‘Straw Dogs’ (1971) saw that film banned in Britain for 18 years. The title character of ‘Bring Me the Head of Alfredo Garcia’ (1974) was a severed head roasting in the Mexican sun.

But it wasn’t just in his films that Sam Peckinpah, director of these movies, shocked. His behaviour on the set of ‘Major Dundee’ (1965) caused Charlton Heston to charge at him with a sabre. On his first day on the set of ‘Pat Garret & Billy the Kid’ (1973) a stunned Bob Dylan watched Peckinpah urinate on a screen to show his disapproval of the footage shot that day. He was thrown out of a tribute to Jimmy Cagney for fighting a waiter.

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Correcting the contextualisers

All property is theft

The response of some to the riots which swept the UK last month was to say “Yes, we know this is criminality, but you can’t ignore the cuts/poverty” While stopping short of excusing the violence which left five dead and caused millions of pounds of damage there was an attempt by these people to ‘contextualise’ it.

Contextualising is often little more than pinning the tail of your pet political cause to the donkey of whatever is in the headlines that week. So it was with the riots. As Kristian Neimetz blogged for the Institute of Economic Affairs the riots had nothing to do with material poverty. Neimetz points out that:

“The standard rate of Income Support for a non-working single mother with one teenager is currently £562.60 per month. On top of that comes Child Benefit, currently at £87.97 per month, and Child Tax Credit at £168.90, assuming only the most basic rate. The rate of Housing Benefit depends on where she lives; it is £1000 per month in inner southeast London, £1213.33 in inner east London and £1256.67 in central London (which includes Camden and most of Hackney). Council Tax is also covered. This is at current rates, meaning after the ‘savage cuts’, and ignores other benefits which are a bit trickier to qualify for.”

You can actually live a pretty sweet life on benefits. Beveridge’s safety net has become a hammock.

This isn’t to say we don’t have poverty in Britain, we do, but only because poverty has been redefined to mean having less than half the money of the Duke of Devonshire. The rioters outside my east London flat didn’t look too poverty stricken, wearing Franklin & Marshall gear and filming their mayhem on iPhones. The truth is that in a real sense there is very little material poverty in the UK today.

The contextualisers also said that cuts to youth services played a role in the riots, as though these kids would stop burning buildings down if only they had a ping pong table. It also never seemed to have occurred to the contextualisers that earlier generations of children refrained from rioting when all they had to distract them was a Hula Hoop.

Neimetz dealt with this cuts argument in his blog but, again, we saw the common, utter confusion among the contextualisers about what it is the government is actually doing. It is not cutting the debt but the deficit, which is the rate at which the debt is growing. At the end of this Parliament government spending is forecast to be nearly £100 billion higher than when the coalition took office. So much for cuts!

That’s not to say that there was no context for these riots – there was. Base criminality. According to statistics released this week three quarters of those appearing in court for their part in the riots have previous convictions. They weren’t reacting to poverty or cuts; they were just out doing what they normally do.

This article originally appeared at Global Politics

Religious Keynesianism and Obama’s blind faith

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Birds of a feather…

In the film ‘2010’ Milson tells the astronaut Heywood Floyd “Whenever a President is going to get us into serious trouble they always use Lincoln”.

During his much trailed speech on jobs in front of a joint session of Congress last week President Obama took no chances throwing in Kennedy along with Abe. But given the content of the speech he might have been better invoking Nixon; if two wrongs don’t make a right, try a third.

Obama’s proposed American Jobs Act contains nothing he hasn’t tried already. Since his election Obama has added nearly $5 trillion to the Federal debt, helped by his last stimulus package of $787 billion back in 2009. In that time unemployment has risen by two percent. Under the proposed Act Obama will spend another $447 billion, seemingly working on the belief that doing half of what didn’t work the first time will work the second time.

Paul Krugman, one of the leading Keynesian cheerleaders for the President’s failed policies, accuses opponents of having ‘drunk the Kool Aid’ of free market philosophy. This is a reference to the followers of cult leader Jim Jones who killed his gullible followers by making them drink poisoned Kool Aid.

But in arguing, as they do, that the reason we are in this mess is because the stimulus wasn’t big enough and that all we need to do is commit our economic souls more fully to Keynes, it is the Keynesians who remind one of those religious types who, after a disaster, see it as punishment for being insufficiently pure of faith. Joan Robinson once referred to ‘bastard Keynesianism’. This is religious Keynesianism.

Also, the particulars of the package are hideously badly designed. Obama promised to “offer ideas to reform a corporate tax code that stands as a monument to special interest influence in Washington” but he also proposed, as Peter Ferrara wrote in the American Spectator, a raft of new loopholes including “a new tax credit of $4,000 for hiring the long-term unemployed…a tax credit for hiring veterans who have been unemployed for more than six months, and another tax credit for hiring the unemployed with service connected disabilities”

With the failure of the last stimulus package and the dog eared nature of the new one the belief that Obama’s  Jobs Act will do any good at all is a case of hope (and ‘Change’) triumphing over experience.

But beyond this the US can’t afford it. At one point during his speech Obama said “Building a world-class transportation system is part of what made us an economic superpower. And now we’re going to sit back and watch China build newer airports and faster railroads?”

Well yes actually, you are. The Chinese are building those airports and railways because they can afford to, the United States can’t. In fact, watching Obama speak and make billion dollar spending commitment after billion dollar spending commitment you found yourself thinking ‘I hope the Chinese are happy to pay for all this’

And they may be reaching the end of their willingness to work, save, and lend those savings to Americans to spend on things that most Chinese can’t afford. This week a senior official of the Chinese central bank spoke of Beijing’s wish to “liquidate” its holdings of US Treasury bonds. As the biggest buyer of US debt the prospect of this market drying up presents the Treasury with the nightmare scenario for a heavily indebted economy like America’s of rocketing bond yields. Think Athens on the Hudson.

They are no more impressed with Obama’s plans in Buffalo than they are in Beijing. A Bloomberg poll this week found that while sixty-two percent of Americans disapprove of Obama’s handling of the economy just thirty-three percent approve.  Bloomberg also found that “only thirty-six percent of respondents approve of his efforts to create jobs, thirty percent approve of how he’s tackled the budget deficit and thirty-nine percent approve of his handling of health care”. Americans doubt whether the Jobs Act will do anything for 9.1 percent unemployment by a margin of fifty-one percent to forty percent with fifty-six percent of independents sceptical. Overall, at 45 percent, Obama’s approval rating is the lowest of his presidency.

These weren’t the only bad figures for Obama to emerge this week. Inflation and jobless claims were up, manufacturing was down and poverty hit its highest rate for eighteen years.

This isn’t all Obama’s fault, most western countries face a painful process of deleveraging, but few are following his lead of merrily piling debt on top of debt in the hope that more debt will solve a debt crisis.

Obama has hit the road with his plan like some commission hungry vacuum salesman. He has, as ever, been met with adoring crowds, though these may be smaller than before, Bloomberg also found that those who supported him in 2008 have soured. As then the crowds have been chanting inanely but the fact that Obama’s message always seems to be capable of being summed up in between one and three words, be it ‘Hope’, ‘Change’, ‘Yes We Can’ or, now, ‘Pass This Bill’, suggests that it isn’t much of a message.

But it never was. On the campaign trail candidate Obama said “I’m not talking about a budget deficit. I’m not talking about a trade deficit…I’m talking about a moral deficit. I’m talking about an empathy deficit.” So of four deficits mentioned only two actually exist and he focused on the two that don’t.

It is an article of faith that Republican candidate Michele Bachmann is an idiot. She might be. But can you imagine how idiotic she would be considered if she went on Fox News and said “If you elect me I will spend $5 trillion dollars and increase unemployment by two percent”?

Yet that is exactly what President Obama has done. ‘Stupid is as stupid does’ as a wise man once said.

9/11 – Ten years on

I was back from university for the summer and working in my local pub. I worked in bars at uni so I’d been given the responsibility of going in at 10am to get the place ready for opening at 11am. It was quiet. The pub had been my regular for a few years and I was always struck by how different the old 16th century building could be when the only noise was the low, soft hum of the fridges and the clanking cleaners bucket.

It was, everyone remembered afterwards, a beautiful, bright clear autumn day. I carried the pub billboard onto the pavement out front and looked around the benches scattered around the town centre. Everyday from about 10:45am onwards they would be occupied by the regulars waiting to come and assume their usual perches at the bar at the stroke of 11 o’clock. Today was no different.

The regulars were all in that day. A retired gardener everyone called ‘Greengrass’ who never bought his own drink, a guy who had one day a week with his kids and would bring them in and plomp them in the corner with a coke while he drank with his pals, two old ladies who drank half a pint of Stella with a dash of lime each.

Around 2pm another regular came in, Rocky they called him because he looked like Neil Morrissey in ‘Boon’. He was a postman just off his rounds. “Pint of four X” he asked before saying “And turn the tele on, there’s been a plane crash in New York, it was on the radio in the van”

I flicked on the big screen we used for sports. It went straight to BBC 1 and I was about to switch to a news channel when I saw that they were already covering it. Whatever had happened was big.

There, billowing smoke silently on the screen was one of the Twin Towers in New York. Behind me, at the bar, the regulars shifted on their stools for a view, except for Greengrass who was wondering where his next pint was going to come from. “Fucking hell” I remember all of them saying. They fell silent when the shot changed and showed the second tower also pouring smoke into the clear sky.

Speculation started immediately. One suggested rockets, another that one plane had hit both towers. Soon the TV news showed both wrong. As two separate planes were shown hitting each tower in turn we all realised that this was an attack.

While I had been working, while the regulars had been drinking, 3,000 people had been murdered in New York City.

A decade has passed since then. It’s been a decade which has seen more murders committed in the same cause that drove the 19 killers of 9/11. In Madrid, Bali, Mumbai and London, fanatics have seen fit to murder people who never harmed them to further their own agendas.

It’s been a decade which has seen military action on a scale few expected to see again after the end of the Cold War. In the immediate aftermath of 9/11 a broad coalition of countries went with the United States into Afghanistan to topple the Taliban government which had sheltered the inspiration for the attack, Osama Bin Laden. At the end of that decade many of those countries are still there.

In 2003, with the war in Afghanistan still going, the United States led a smaller coalition, including Britain, into Iraq to topple Saddam Hussein. Less clearly justified by 9/11 this was always more controversial.

It has been a decade where, until the financial crisis hit, the attacks of 9/11 and the responses of the various actors defined the political landscape. Your attitude to terrorism and the ‘war on terror’ were the standard against which your politics and your personality were judged.

What have we learned in this decade? Not as much as we should have. People are generally rather good at learning the lessons they wanted to learn. For the neo cons who had been speculating on intervention in the Middle East even before 9/11 the lesson was that they should intervene in the Middle East. For the left, which had always opposed anything the United States had done, the lesson was to oppose anything the United States did.

The one undeniable lesson was that in the 21st century mans capacity for cruelty to his fellow man remained as great as ever. But it also taught that his capacity for compassion for his fellow man and for sacrifice remained as great as ever.

Consider a man like Pat Lyons, a fire fighter from Brooklyn who left his heavily pregnant wife to go to work that morning. When the call came he selflessly ran into the burning North Tower to save the lives of total strangers because it was his job. Pat Lyons never saw his son, Patrick, who was born on October 7th 2001. He was one of the 343 New York fire fighters who died at the World Trade Center.

Compare this to the cruel and selfish actions of Mohammad Atta, murdering to get his hands on 72 virgins. But there were more of the selfless than the selfish, more fire fighters than hijackers, more heroes than villains even on that awful day.

On that morning ten years ago today as I worked at the Swan Geoffrey Campbell went to a conference hosted by a publishing company at the World Trade Center. A couple, Dinah Webster and Neil Cudmore, who were planning to marry, were working alongside each other there. So were brothers Andrew and Tim Gilbert. Vincent Wells who worked for Cantor Fitzgerald on the 104th floor of the North Tower was celebrating his 23rd birthday. Christine Egan went to visit her brother Michael who worked on the 100th floor of the South Tower. Graham Berkeley was on United Airlines flight 175 from Boston to Los Angeles. All of them were British.

They all died that day. In total 67 Britons died in lower Manhattan on September 11th 2001 making it the deadliest terrorist attack in British history.

This wasn’t an attack on America it was an attack on a way of life. 9/11 wasn’t about blowback, Imperialism or Israel. It was about people like us living like we live who were killed out of the clear blue sky. Remember them today.

The IMF: cheerleader of the rich world’s governments

If its Tuesday this must be stimulus

Ronald Reagan’s observation that “a government bureau is the nearest thing to eternal life we’ll ever see on this earth” seems to apply to supra national bodies as well.

The collapse of the Soviet Union left NATO facing an existential crisis worthy of French cinema until Slobodan Milosevic came along. So it is with the International Monetary Fund.

Established as part of the Bretton Woods system of currency management in 1944, the IMF’s job was to lend money to countries which were having balance of payments issues; who couldn’t pay their bills in other words. With their dollar exchange rates fixed, paying the bills by inflating the money supply was only allowed in the extreme circumstances of devaluation as Britain had to do under the Labour governments of Clement Atlee in 1949 and Harold Wilson in 1967.

The demise of the Bretton Woods system in 1971 rendered the IMF purposeless. Floating exchange rates replaced fixed rates so, in theory, no country should have any trouble financing its borrowing; it could just print more money, the effects being felt in internal inflation and external devaluation with the exchange rate adjusting automatically to reflect the decline in the value of the newly debauched currency.

Milton Friedman, an advocate of floating exchange rates since at least 1950, held that floating exchange rates didn’t have to mean unstable exchange rates. In practice, removed from even the questionable discipline of the Bretton Woods system, central banks around the world cranked up the printing presses and debt crises became bound up with currency/inflation crises. The IMF’s role was much as before; covering cash strapped countries while they sorted themselves out as they had to do for Britain under the Labour government of James Callaghan in 1976.

In this not-so-new role the IMF has attracted much criticism. Nobel laureate Joseph Stiglitz, among many others, has argued that the IMF’s lending conditions, generally to balance budgets, protect the currency and free up markets, are counterproductive.

In truth a country with a debt problem will have to move towards budget balance and stabilise its currency at some stage. Critics would argue that the midst of a crisis is not the appropriate time but when countries don the IMF hair shirt they have generally reached a stage where their problems cannot be solved without tackling the fiscal and monetary problems at a fundamental level. The truth is that many of the countries it has helped would have been worse off if it hadn’t been for IMF assistance.

A more serious charge against the IMF is its inconsistency. In 1997 a clutch of South East Asian countries were hit by a currency crisis and the IMF stepped in with its standard prescription of fiscal and monetary tightening with the attendant economic pain. If this was a tough sell for domestic politicians, well, that was their problem.

But when the western economies hit trouble in 2007-2008 the IMF suddenly rediscovered its dusty old copy of Keynes’ ‘General Theory’. It enthusiastically backed stimulus spending in Britain, the United States and Europe. Western politicians were given a much easier sell than their Asian counterparts had been in 1997.

The effects of the tidal wave of stimulus unleashed in 2008-2009 were subject to rapidly diminishing returns. The accumulation of vast piles of debt produced nothing beyond the short term other than higher debt. The gruesome examples of Greece and Ireland saw ‘austerity’ replace ‘stimulus’ as the economic order of the day and, again, the IMF enthusiastically backed it in Britain, the United States and Europe.

Bad economic news abounds. In Britain the service sector and manufacturing sector are struggling. The Eurozone is struggling in the face of tottering banks and battles to reign in spending. The United States economy created no net jobs in August and unemployment is stuck above 9%. Stock markets around the world have been bumping downwards.

If a second dip does emerge from all this it will no doubt enter Keynesian folklore that ‘austerity’ was the culprit. It isn’t. Economies around the world have gorged on cheap credit and are now burdened with its flipside, debt, leaving a vast overhang to be painfully deleveraged away. Further, the period of cheap credit left behind a host of malinvestments; enterprises only viable in an environment of cheap credit. Government and central bank attempts to prop these up and bail them out, soaking up much needed capital, have only delayed the economy’s move to a more sustainable basis.

The IMF may have been taken in by this burgeoning Keynesian myth. This week saw a possible switch back to the policies 2008-2009 with Christine Lagarde, new head of the IMF, calling for renewed stimulus in Europe. Keynes is reputed to have said “When the facts change, I change my mind”. The facts haven’t changed but the IMF’s stance has, repeatedly.

Ludwig von Mises wrote that Keynes’ ‘General Theory’ was “an apology for the prevailing policies of governments”. Governments may have no need of Keynes. They have the IMF in its latest role, cheerleader of the rich world’s governments.

Why mathematics and modeling should not be equated with economics and human action

A long way from the pin factory

A very intelligent friend of mine of markedly different political persuasions said the other day that he avoided “technical economic arguments” with me as I’ve just graduated with a degree in economics. I was rather sad to hear this.

The simple truth is that after doing a module called, say, ‘Introduction to Economic Principles and Policy’, you will not study very much more which will add greatly to your understanding of the subject. Beyond that, in an ‘Intermediate Microeconomics’ course for example, you are simply ladling mostly unnecessary algebra onto the subject.

Take this from a course in ‘Intermediate Macroeconomics’ for example:

This is actually some of the more accessible math involved in modern economics. Furthermore, the concepts it is dealing with, constant returns to scale and the per worker production function, are pretty straightforward. Yet many, including almost all university economics lecturers, will tell you that this is economics. It is, in fact, simply applied algebra – mathematics looking for a real world application. Economists eager to give their art the patina of science and mathematicians searching for real world relevance have combined to render economics impenetrable.

This trend also stems from the view of economics as the study of a mechanism. People may now laugh at the model of the economy A.W. Phillips built in the basement of the London School of Economics in 1949 with its gurgling pipes full of different coloured liquids representing money literally sloshing around an economy controlled by sluice gates. But it isn’t conceptually different from the computerised models that are in use today guiding research and government policy.

These models often fail. If your model is based on erroneous assumptions, such as the creation of phantom capital called Quantitative Easing actually stimulating an economy, you will get erroneous outputs; Garbage In Garbage Out as they say. But there is a more fundamental problem. There is no exogenous ‘thing’ called ‘The Economy’ which can be quantified and controlled, there is only each of us doing what we do every day. That is why Ludwig von Mises called his great treatise on economics ‘Human Action’. Or as Friedrich von Hayek rapped recently “The economy’s not a car. There’s no engine to stall. No experts can fix it. There’s no “it” at all. The economy is us”.

It is little wonder that even intelligent people feel themselves cowed and run in terror from the thicket of abstraction that shrouds modern economics. It needn’t be like this. The great works of the discipline, those of Adam Smith or Carl Menger for example, managed to lay the foundations of the subject without it.

And it is sad that people like my friend feel put off because the economy affects all of us and, to return to the point made by the rapping Hayek, it is the study of all of us. Given this we all have economic insights by virtue of being human beings, the very subject of economics itself. As von Mises wrote:

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.

Do not leave economics to the abstract eggheads. Pick up Economics in One Lesson by Henry Hazlitt, Free to Choose: A Personal Statement by Milton Friedman or even Eat the Rich: A Treatise on Economics by P.J. O’Rourke: writers who, in these books and others, passed the economist Armen Alchian’s test of whether they truly understood the subject – they could explain it to someone who doesn’t know a darn thing about it.

Economics is about you. It is your subject. Reclaim and enjoy it.

This article originally appeared at The Cobden Centre