Action October-February
Although both were slow starters, the government and the Bank of England have taken significant action to end the recession. We have had:
(i) interest rate cuts - from 5.5% to .5%;
(ii) Alistair Darling’s £20 Billion Fiscal Stimulus;
(iii) hundreds of £ Billions to support banks;
(iv) a decision for the Bank of England to pump £150 Billion into the economy to increase lending (‘quantitative easing’);
(v) a number of small initiatives to support small firms and borrowers.
More could, and should, have been done – as I have argued in earlier Blogs. However, the above, and the fall in sterling and commodity (especially oil) prices, amount to a significant stimulus to the economy.
Why is it, then, that the doom and gloom persists – in forecasting, as well as in every day experience?
No Conviction
The crucial factor is that, with few exceptions (e g David Blanchflower), the government’s and Bank of England’s forecasters are useless.
When everything seemed to be going well in 2007, the majority of forecasts predicted that things would continue to go well. Now, when everything seems dreadful, most predictions are that things will continue to be dreadful.
To be fair, today (16 March 2009) the Bank’s governor says that the period of deflation need not be long if there is ‘prompt and decisive action’. Although he does not specify, he presumably means government action.
And to be fair to Alistair Darling, he has not, so far as I am aware, departed from his October forecast that we would start to come out of the recession in the middle of 2009.
As I have indicated in earlier Blogs, I am in the Darling camp: my forecast in a February Blog was that ‘green shoots’ will start to appear April/May 2009.
‘Green shoots’ are not, of course, the same as significant recovery, which is why I added that government action on a large scale is necessary.
No Control?
Uncertainty about the future is very largely the result of the government’s, and Bank of England’s, limited control of the economy.
Banks are told to increase lending but they do not – even when it is part of a ‘deal’ when they receive £ Billions of taxpayers’ money.
My prediction on the bottoming out of the recession April/May is based on the fact that the Fiscal Stimulus, aggressive interest rate cuts, the fall in sterling (against the dollar and the Euro), the fall in commodity prices (especially oil), quantitative easing must have an effect.
Timing is clearly a difficulty. April/May will be more than 6 months from the time of the Fiscal Stimulus, and from the beginning of interest rate cuts.
But the recovery will be extremely slow without further government action. This must include taking more control. The priorities are:
(i) lending, to businesses and households, through institutions under government control (Post Office, Northern Rock, Bradford and Bingley, Royal Bank of Scotland, Lloyds Group);
(ii) assisting first time (house) buyers with deposits (e g an interest free government loan);
(iii) additional spending to create jobs, build houses etc along with a convincing strat al egy to repay borrowing from increased taxation (progressive rates on incomes over £80,000) and reducing expenditure (mainly on defence).
These should all be included in the Budget in a few weeks time.
For the details of these proposals see my February Blogs.
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Monday, 16 March 2009
Monday, 9 March 2009
Will Government Listen?
Forget the City
The Blair governments’ strategy, which has persisted since he resigned, was to avoid upsetting the City at all costs. Favourable financial conditions (e g low taxes, the prospect of big bonuses, high returns on investment) would, it was argued, keep money flowing into London and support an expanding economy.
We now know where this strategy has landed us. Without government £ Billions, the banks would have collapsed – resulting in the collapse of the capitalist economy.
It is now clear that the position would have stabilised much more quickly if, instead of the half-cock arrangements we now have, the banks had been nationalised. The government could then have determined a level of lending (and interest rates) to save jobs and stabilise the housing market.
YouGov Poll (Guardian 9 March 2009)
This poll of Labour Party members found over 70% support for most of the measures advocated on this Blog over the past 3 months. There is support for:
A Windfall Tax on excessive company profits (e g the utilities);
Ending, or drastically reducing, bonuses;
Higher rates of tax on those earning over £100,000 a year;
Greater equality (through legislation).
The only major issue (which I regard as very important) not mentioned in the report is a large reduction of expenditure on defence.
The Budget and Economic Recovery
In 20 February Blog (Will April Be The Cruellest Month?), I predicted that there would be signs (green shoots) of the recession end April/May 2009. Significant recovery will follow, however, only if the government takes further action.
The action must include job protection/creation, taking at least a million out of tax brackets, increases in allowances and pensions - and, vitally important, a strategy for repayment of the necessary borrowing over a 5 year period.
The strategy for repaying the borrowing is a key factor in creating a fairer, and more equal, society.
My proposal, which the YouGov poll indicates would be supported by a large majority of Labour Party members (and, I believe, a majority of citizens) is for borrowing of £100 Billion to fund the above.
The repayment strategy, over a 5 year period, should be along the following lines.
Reductions of expenditure (mainly defence) £35 Billion
Windfall Taxes on Companies £25 Billion
Higher Tax Rates on Personal Income £30 Billion
A Wealth Tax £10 Billion
Without this kind of strategy, any claim that the government intends to create a fairer, and more equal, society will lack conviction.
Tuesday, 3 March 2009
The Real Income Scandal
Sir Fred’s Pension
A £650,000 a year pension for ruining a bank is clearly a scandal. In perspective, it is about 100 times what an old age pensioner gets. As Gordon Brown says, we are all entitled to be angry.
But what can be done about it? There is, the lawyers tell us, very little chance of any legal challenge succeeding. In reality, talk of legal action – or even M/s Harman’s act of parliament – is really a diversion.
The Real Scandal
The real scandal is that Sir Fred is not alone. Dozens, maybe hundreds (nobody knows how many) in the last ten years, have received similar awards. Indeed, we now learn that some (including at least one from the Royal Bank of Scotland) have been awarded much larger pay-offs.
To receive a large pension, you need a large ‘pension pot’. In Sir Fred’s case, this is said to be something over £16 million. In other words, without this, it would have cost the taxpayer (you and me) £ millions less to bail out the Royal Bank of Scotland.
£10 million, £20 million, £30 million ‘pension pots’ have been accumulated, significantly from tax free contributions. The first step in action to be taken is to impose, by legislation, a wealth tax which includes pension pots.
Wealth Tax on Pension Pots
In would not be at all unreasonable to levy a tax rate of 40% on that part of the pot which is assessed to provide a pension above £100,000 a year. In Sir Fred’s case, this would mean a one-off payment of around £4.5 million.
However, this would still leave him, and his like, with annual pensions of around £500,000. – still grossly over generous when an old age pensioner receives little more than £6,000 a year.
Higher Rates of Tax
These scandalous payments draw attention to the real issue – that the UK is a grossly unequal society. Because everyone is now aware of this, the government should act immediately.
Higher rates of tax (the existing top rate is 40%) on all incomes, including pensions, should be introduced along the following lines.
Incomes over:
£80,000 45%
£120,000 50%
£150,000 55%
£200,000 60%
£250,000 70%
These rates are not unduly punitive. I, and I suspect many readers, would support higher rates.
However, the above would make it possible to take a million of the lower paid out of tax brackets – a significant first step towards a more equal society.
And, as I have argued in earlier Blogs, more income for the poor would help towards economic recovery.
A £650,000 a year pension for ruining a bank is clearly a scandal. In perspective, it is about 100 times what an old age pensioner gets. As Gordon Brown says, we are all entitled to be angry.
But what can be done about it? There is, the lawyers tell us, very little chance of any legal challenge succeeding. In reality, talk of legal action – or even M/s Harman’s act of parliament – is really a diversion.
The Real Scandal
The real scandal is that Sir Fred is not alone. Dozens, maybe hundreds (nobody knows how many) in the last ten years, have received similar awards. Indeed, we now learn that some (including at least one from the Royal Bank of Scotland) have been awarded much larger pay-offs.
To receive a large pension, you need a large ‘pension pot’. In Sir Fred’s case, this is said to be something over £16 million. In other words, without this, it would have cost the taxpayer (you and me) £ millions less to bail out the Royal Bank of Scotland.
£10 million, £20 million, £30 million ‘pension pots’ have been accumulated, significantly from tax free contributions. The first step in action to be taken is to impose, by legislation, a wealth tax which includes pension pots.
Wealth Tax on Pension Pots
In would not be at all unreasonable to levy a tax rate of 40% on that part of the pot which is assessed to provide a pension above £100,000 a year. In Sir Fred’s case, this would mean a one-off payment of around £4.5 million.
However, this would still leave him, and his like, with annual pensions of around £500,000. – still grossly over generous when an old age pensioner receives little more than £6,000 a year.
Higher Rates of Tax
These scandalous payments draw attention to the real issue – that the UK is a grossly unequal society. Because everyone is now aware of this, the government should act immediately.
Higher rates of tax (the existing top rate is 40%) on all incomes, including pensions, should be introduced along the following lines.
Incomes over:
£80,000 45%
£120,000 50%
£150,000 55%
£200,000 60%
£250,000 70%
These rates are not unduly punitive. I, and I suspect many readers, would support higher rates.
However, the above would make it possible to take a million of the lower paid out of tax brackets – a significant first step towards a more equal society.
And, as I have argued in earlier Blogs, more income for the poor would help towards economic recovery.
Thursday, 26 February 2009
THE FAILURE OF CAPITALISM
The global economic crisis is the strongest evidence of the failure of capitalism. It reveals the nonsense of the oft-made claim that only a free market can lead to prosperity and higher standards of living for everyone.
In reality, unregulated capitalism has always resulted in higher and higher booms, followed by deeper and deeper busts. The most serious consequence is persisting inequality with, worldwide, hundreds of millions living in poverty.
When the rhetoric is swept away, and the evidence examined, it becomes all too obvious that capitalism has failed even to provide stable economies.
The issue of inequality, and the determination of the establishment to maintain it, is the subject of the three publications described below. They provide the background to the articles on this Blog.
Capitalism in Crisis: a Socialist Solution
This pamphlet analyses the current economic crisis in the UK and demonstrates that a solution will emerge only when a socialist strategy is adopted.
Further Education and Democracy
This book illustrates inequalities in the further education system in the UK. It explains how more than half the population aged 16 and over (‘The Neglected Half’) are denied the education they need - to obtain jobs, and to become fully participating members of society.
Who Killed Bilston Community College?
Bilston Community College, the most successful in the country for creating new opportunities for working-class (especially ethnic minority) citizens, was closed illegally in 1999. The government’s decision to close the college resulted in the denial of opportunities for tens of thousands.
An appeal against the closure, supported by over 50 voluntary community organisations, was completely disregarded by the then Secretary of State for Education and Employment.
All the above are all available on ebay.co.uk, or from keithwymer@blueyonder,co.uk
In reality, unregulated capitalism has always resulted in higher and higher booms, followed by deeper and deeper busts. The most serious consequence is persisting inequality with, worldwide, hundreds of millions living in poverty.
When the rhetoric is swept away, and the evidence examined, it becomes all too obvious that capitalism has failed even to provide stable economies.
The issue of inequality, and the determination of the establishment to maintain it, is the subject of the three publications described below. They provide the background to the articles on this Blog.
Capitalism in Crisis: a Socialist Solution
This pamphlet analyses the current economic crisis in the UK and demonstrates that a solution will emerge only when a socialist strategy is adopted.
Further Education and Democracy
This book illustrates inequalities in the further education system in the UK. It explains how more than half the population aged 16 and over (‘The Neglected Half’) are denied the education they need - to obtain jobs, and to become fully participating members of society.
Who Killed Bilston Community College?
Bilston Community College, the most successful in the country for creating new opportunities for working-class (especially ethnic minority) citizens, was closed illegally in 1999. The government’s decision to close the college resulted in the denial of opportunities for tens of thousands.
An appeal against the closure, supported by over 50 voluntary community organisations, was completely disregarded by the then Secretary of State for Education and Employment.
All the above are all available on ebay.co.uk, or from keithwymer@blueyonder,co.uk
Wednesday, 25 February 2009
WILL APRIL BE THE CRUELLEST MONTH?
Inexcusable Late Start
The Bank of England did not spot the recession until October 2008: the warnings of David Blanchflower (a lone voice on the Bank’s Monetary Policy Committee) were ignored for more than 6 months. Interest rate cuts, October-February, should have started at least 4 months earlier.
We cannot know how many lost their jobs and/or homes as a consequence of this delay. Whatever the number, it was unnecessary and in excusable.
The government, despite its many advisers and consultants, was also a late starter. Thousands had been made redundant, and tens of thousands more were facing redundancy, when Alistair Darling launched his, extremely modest, Autumn Fiscal Package.
‘Too little, too late’ is the, not unreasonable, criticism levelled at both the Bank and the government; although the situation is rather more complex. The Bank was certainly a late starter but, apparently not knowing what else to do, has continued to cut interest rates beyond the point of their effectiveness.
It would have been much more sensible for the Bank to start its ‘quantitative easing’ (pumping more money into the economy) in December rather than March. Late again! Incidentally, the public would be much better informed if the Bank, and the media, explained, clearly, what was happening, instead of using obscure terms like ‘quantitative easing’.
Full-Hearted Recession: Half-Hearted Response
The criticism of the government is not so much that it has failed to act but that it has acted half-heartedly. A string of minor initiatives to halt the recession do not amount to a convincing strategy. What should have been done (e g a much larger Autumn stimulus) is described in detail in my Blog: March 2009? It’s too Late.
The £14 Billion for Northern Rock to lend (announced 23/2/09) is a case in point. The figure should be at least £56 Billion: £14 Billion each, for lending, for the other institutions owned by the government – Bradford and Bingley, the Post Office; Royal Bank of Scotland.
The £14 Billion is intended, particularly, to help first time buyers. Yet, coinciding with the announcement, Gordon Brown wrote an article in the Observer arguing that a 10% deposit should be a minimum requirement. Although this is clearly sound in principle, it is no encouragement for first time buyers - until the government explains how it intends to help them to acquire such a deposit.
The government is unable to act on the scale required because it has boxed itself in. It is afraid to launch a £100 Billion expenditure plan because it lacks the convincing repayment strategy I described in my last Blog.
Will April 2009 be the Cruellest Month?
With the exception of a few ‘Blanchflowers’, experts failed in their predictions. While the sun was shining (people in jobs, house prices rising etc) they, in broad terms, predicted that the sun would continue to shine. Now, when all is gloom and doom, they predict more gloom and doom.
Because the downturn is global, it is impossible for the UK to recover in isolation. However, it seems likely that the action taken by USA’s new President, and his decision (implied in Hilary Clinton’s comments last week) to work more closely with China, will result in greater stability in the next few months.
It is in this context that the UK’s prospects must be considered. My view is that, if the Bank and the government had acted when Blanchflower gave his first warning, the bottom of the recession would have been reached January/February 2009. Their tardiness makes it look more like April/May 2009.
This prediction is made on the assumption that the belated action taken by the government, and the Bank of England, will begin to have an effect from March. The bottoming out of the recession is not, of course, the same as recovery.
The downturn would have been worse without the action taken but it is difficult to see significant recovery without further action.
Action for Recovery
I have been assisted in my predictions by an excellent article by Kevin Daly and Ben Broadbent (Goldman Sachs economists) in The Sunday Times (22/2/09); although the judgements below are, obviously, my own.
My view is that the situation in April will be ready for recovery but that this will not occur without a government expenditure stimulus of, at least, £100Billion, along the lines outlined in my last Blog. As I emphasise there, the key for the government to get out of its box is a convincing repayment strategy.
Providing the government acts now, the factors which will assist the recovery (as Daly and Broadbent point out) include:
(i) the reduction of interest rates (from5% t0 1%);
(ii) the fall in sterling, which makes exports cheaper;
(iii) import substitution – for example, people taking their holidays in the UK, instead of overseas.
In the current global crisis, the fact that the UK relies less on exports than, say, Germany and Japan means that government action can be more effective. It can be more effective because government expenditure can support the production of goods to replace imports, and also because governments can give people money spend.
With regard to ‘import substitution’, Pontins and Butlins are creating new jobs in anticipation of expansion of the home tourist trade. In the retail sector, a number of companies (including Asda, Tesco and Morrisons) have announced the creation of thousands of jobs.
The bringing forward of a number of government capital projects, and the boost to green energy will also create jobs.
Although these are ‘green shoots’, significant reduction of unemployment depends on further government action – quickly, and on a large scale.
For a more detailed discussion of these issues see me two previous Blogs: March 2009? Its Too Late, and A Clear and Convincing Strategy is Required – Gordon.
The Bank of England did not spot the recession until October 2008: the warnings of David Blanchflower (a lone voice on the Bank’s Monetary Policy Committee) were ignored for more than 6 months. Interest rate cuts, October-February, should have started at least 4 months earlier.
We cannot know how many lost their jobs and/or homes as a consequence of this delay. Whatever the number, it was unnecessary and in excusable.
The government, despite its many advisers and consultants, was also a late starter. Thousands had been made redundant, and tens of thousands more were facing redundancy, when Alistair Darling launched his, extremely modest, Autumn Fiscal Package.
‘Too little, too late’ is the, not unreasonable, criticism levelled at both the Bank and the government; although the situation is rather more complex. The Bank was certainly a late starter but, apparently not knowing what else to do, has continued to cut interest rates beyond the point of their effectiveness.
It would have been much more sensible for the Bank to start its ‘quantitative easing’ (pumping more money into the economy) in December rather than March. Late again! Incidentally, the public would be much better informed if the Bank, and the media, explained, clearly, what was happening, instead of using obscure terms like ‘quantitative easing’.
Full-Hearted Recession: Half-Hearted Response
The criticism of the government is not so much that it has failed to act but that it has acted half-heartedly. A string of minor initiatives to halt the recession do not amount to a convincing strategy. What should have been done (e g a much larger Autumn stimulus) is described in detail in my Blog: March 2009? It’s too Late.
The £14 Billion for Northern Rock to lend (announced 23/2/09) is a case in point. The figure should be at least £56 Billion: £14 Billion each, for lending, for the other institutions owned by the government – Bradford and Bingley, the Post Office; Royal Bank of Scotland.
The £14 Billion is intended, particularly, to help first time buyers. Yet, coinciding with the announcement, Gordon Brown wrote an article in the Observer arguing that a 10% deposit should be a minimum requirement. Although this is clearly sound in principle, it is no encouragement for first time buyers - until the government explains how it intends to help them to acquire such a deposit.
The government is unable to act on the scale required because it has boxed itself in. It is afraid to launch a £100 Billion expenditure plan because it lacks the convincing repayment strategy I described in my last Blog.
Will April 2009 be the Cruellest Month?
With the exception of a few ‘Blanchflowers’, experts failed in their predictions. While the sun was shining (people in jobs, house prices rising etc) they, in broad terms, predicted that the sun would continue to shine. Now, when all is gloom and doom, they predict more gloom and doom.
Because the downturn is global, it is impossible for the UK to recover in isolation. However, it seems likely that the action taken by USA’s new President, and his decision (implied in Hilary Clinton’s comments last week) to work more closely with China, will result in greater stability in the next few months.
It is in this context that the UK’s prospects must be considered. My view is that, if the Bank and the government had acted when Blanchflower gave his first warning, the bottom of the recession would have been reached January/February 2009. Their tardiness makes it look more like April/May 2009.
This prediction is made on the assumption that the belated action taken by the government, and the Bank of England, will begin to have an effect from March. The bottoming out of the recession is not, of course, the same as recovery.
The downturn would have been worse without the action taken but it is difficult to see significant recovery without further action.
Action for Recovery
I have been assisted in my predictions by an excellent article by Kevin Daly and Ben Broadbent (Goldman Sachs economists) in The Sunday Times (22/2/09); although the judgements below are, obviously, my own.
My view is that the situation in April will be ready for recovery but that this will not occur without a government expenditure stimulus of, at least, £100Billion, along the lines outlined in my last Blog. As I emphasise there, the key for the government to get out of its box is a convincing repayment strategy.
Providing the government acts now, the factors which will assist the recovery (as Daly and Broadbent point out) include:
(i) the reduction of interest rates (from5% t0 1%);
(ii) the fall in sterling, which makes exports cheaper;
(iii) import substitution – for example, people taking their holidays in the UK, instead of overseas.
In the current global crisis, the fact that the UK relies less on exports than, say, Germany and Japan means that government action can be more effective. It can be more effective because government expenditure can support the production of goods to replace imports, and also because governments can give people money spend.
With regard to ‘import substitution’, Pontins and Butlins are creating new jobs in anticipation of expansion of the home tourist trade. In the retail sector, a number of companies (including Asda, Tesco and Morrisons) have announced the creation of thousands of jobs.
The bringing forward of a number of government capital projects, and the boost to green energy will also create jobs.
Although these are ‘green shoots’, significant reduction of unemployment depends on further government action – quickly, and on a large scale.
For a more detailed discussion of these issues see me two previous Blogs: March 2009? Its Too Late, and A Clear and Convincing Strategy is Required – Gordon.
Tuesday, 10 February 2009
A Clear, and Convincing, Strategy is Required - Gordon
The Brown government took decisive (if belated) action when banks reached the point of collapse last October. Hundreds of £ Billions was provided, mainly as loans to be repaid over years. It is important to emphasise that this is not expenditure – in the longer term, there could even be a profit for the taxpayer.
The banks have been ‘saved’ but they have not kept their part of the bargain - to increase lending to the level the economy, and individuals, need. The reasons for this must be addressed urgently. Steps are likely to include extending the period for repayment to the government, and perhaps a lower interest rate on the loans.
If the privately-owned banks do not co-operate to the full, they must be nationalised. In any case, the banks already controlled by the government – Northern Rock, Bradford and Bingley, Royal Bank of Scotland (and the Post Office) - should be developed as a People’s Banking System.
Make Do and Mend No Good
The banks have been supported with hundreds of £ Billions. In comparison, the rest of us have received very little. Alister Darling’s £ 20 Billion package was woefully inadequate; as are the small ‘make do and mend’ measures to help the unemployed.
The government gives the impression that it believes the financial markets will recover in their own time, and that we shall eventually be back to where we were in 2007. This seems most unlikely and, in any case, this is not where we want to be.
The state, albeit reluctantly, is heavily involved in the financial markets. It must stay there and take the steps necessary to create a much fairer and more equal society. The challenge is not to mend a broken system, which has undermined the economy and caused large-scale unemployment, but to create a new system.
The new system must function in the interests of the whole nation, not just a few speculators.
2009 Priorities and Cost
‘Make do and mend’ will not do. Because there is no convincing strategy, the government is boxed in. It recognises that borrowing is necessary but is afraid to borrow on the scale required because it refuses to make the policy changes required for repayment.
The priorities are to:
(i) keep the elderly alive, by ensuring that they are warm and properly fed;
(ii) keep families in their homes;
(iii) ensure that children have proper care;
(iv) prevent unemployment and to create new jobs.
This requires £200 Billion, rather than the £ 20 Billion of the Autumn Package This obviously requires government borrowing but there must be a clear and convincing strategy for repayment.
Strategy for Repayment
Repayment is a major problem only if it is believed that restoring the old, free market, system is the solution. Even if restored, it would be a pale shadow of its former self – and, even more important, the old inequalities would continue.
Gordon Brown and Alister Darling are nervous about the necessary expenditure because they do not have a convincing strategy for repayment. Without it, they are open to the charge of ‘irresponsible borrowing’.
To repay the £ 200 Billion, the first step is to stop spending on what we do not need and cannot afford. The obvious example is Trident and armed services geared to intervention in the affairs of other countries (e g
The second step is to crack down on tax avoidance (companies and individuals) and to impose a windfall tax on companies which make excessive profits.
The third step is progressively higher rates of tax on incomes over £80,000 a year.
Over a 5 year period, starting 2010, these steps would more than repay the 200-300 £ Billion of borrowing to see the country through the recession. They would also result in a fairer, and more equal, society.
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