11 Apr 2015

Why Tackling Inequality is of such Importance. from Social Europe Journal

Why Tackling Inequality is of such Importance


Stewart Lansley
Stewart Lansley
It has long been recognised that extreme inequality has many serious social consequences, as well as causing economic fragility and weakness – now the time has surely come to act.
There’s a lot of talk about inequality. From Pope Francis to the Bank of England’s Mark Carney, a rising number of global figures have declared verbal war on today’s yawning income gaps. But talk, it seems, is as far as it goes.
In the absence of action, inequality has continued to grow through the crisis, domestically and globally. In the UK, the gap between the top and the rest has continued to widen. In the United States, nearly all the gains from recovery – over 90% – have been colonised by the very top.
There are a number of reasons for this gap between rhetoric and reality. Although inequality has been racing up the political agenda, ‘inequality denial’ remains a potent force, notably but not just in the US. As the London Mayor, Boris Johnson, puts it the rich are a ‘put-upon minority` and should be feted and given ‘automatic knighthoods’.
Big corporations and the global financial elite retain an immense grip over the political classes, enabling them to dictate on swathes of economic policy, from tax to business regulation. As the distinguished American economist, Avinash Persaud, has put it, ‘the regulators have been captured by the regulated`.
What is at work is a form of double-speak. World leaders espouse anti-inequality sentiments, while being complicit in actions that aggravate the income divide. Time and again, the head of the IMF, Christine Lagarde, has made high profile attacks on inequality: ‘Excessive inequality is corrosive to growth; it is corrosive to society.’ Yet the New York based Fund continues to apply policies that greatly exacerbate the problem. In return for bail-out loans, for example, the IMF has enforced draconian austerity measures on a number of southern European states that have impoverished large sections of their populations.
In part because of the continuing failure to translate talk into action, the Paris-based OECD has warned that inequality is set to continue to grow. The average OECD nation, it predicts, faces ‘an increase in (pre-tax) earnings inequality by 30% in 2060, facing almost the same level of inequality as is seen in the United States today.’
This echoes the prediction at the heart of Thomas Piketty’s highly influential Capital in the Twenty-First Century, of ‘a fundamental force for divergence’. Piketty argues that the great narrowing across western nations – from the early 1930s to the mid-1970s – was a one-off and we are back to the historic norm of persistently high and growing inequality.
Does this mean that current levels of inequality are inevitable and can only continue to deepen? The answer is no. The historical process is not quite as deterministic as implied in these pessimistic scenarios. As recognised by Piketty, models of capitalism are not set in stone. Social and political forces are dynamic and do change direction. There have been two seismic shifts of political economy over the last century: the first, the shift from the pre-war classical market model to the post-war era of regulated, egalitarian capitalism; then, another fundamental turning point, triggered by the stagflation crisis of the 1970s, ushered in the era of inequality-biased market fundamentalism. That model is still largely in place.
Narrowing today’s yawning income gaps will require a similar dose of transformative politics. Tinkering here and there through minor changes on tax and the level of the minimum wage, slightly more generous doses of redistributive welfare and the like – will not be enough to turn the rising inequality tide.
So, might history turn again, bringing another shift in direction to a more progressive, pro-egalitarian era, and confounding the idea that the post-war era was a one-off, special case? The big shifts of the 1930s and 1970s were dependent, in each case, on four central forces: severe economic shock, the intellectual collapse of the existing model, a loss of faith by the public with the existing system and a ready-made and credible alternative.
All these factors are at work today, though to varying degrees. We have been through a severe global crisis. The market orthodoxy of the last thirty years has a decreasing number of friends, while most of its central tenets have been discredited. There is growing public disenchantment with the current model.
What perhaps is missing is a coherent, ready-made and widely endorsed alternative that would command sufficient public support. But this was also true of the 1930s and 1970s. The elements of a new model were being developed and debated in those decades but did not take a clear shape until many years later. Today, the precise shape of an alternative and progressive economic and social settlement is equally uncertain.
Nevertheless, the central elements of an alternative political economy are likely to include:
  • A new democratic settlement aimed at spreading power as a counter to big business – to the workforce, town halls, consumers and small business. Taming runaway and unaccountable corporate power and rebuilding collective bargaining are essential to achieving greater equality.
  • The dispersal of capital ownership more widely through encouraging alternative business models based around partnerships, co-operatives, social and mutual enterprise and the introduction of collectivised social wealth funds, drawing on other examples such as the Alaskan sovereign wealth fund and the Swedish wage earner fund.
  • Accepting the centrality of the ‘distribution question` in economic and social policy making, with policies that raise the share of output going to labour, which raise the earnings floor and lower its ceiling, and which ensure that the proceeds of growth are more fairly shared.
  • The remodeling of the financial services industry with new measures to check rent-seeking activity and steer more resources into wealth creation through greater financial support for investment and the establishment of a State  Investment Bank.
  • A war on tax avoidance and the building of a more progressive tax system – through for example the greater taxation of unearned wealth, buttressed by a greater emphasis on international co-operation for dealing with tax avoidance.
Such a mix would  represent a major departure from the existing Anglo-Saxon model of capitalism and from New Labour’s third way politics. So what are the chances of another key turning point that would usher in a more progressive and pro-equality model of capitalism? There are, perhaps, two key potential catalysts for such a change.
Movements such as Occupy have helped to bring inequality onto the political agenda but there is still a lack of concrete action.
Movements such as Occupy London have helped to bring inequality onto the political agenda but there is still a lack of concrete action.
The first is the intensity of political pressure for a progressive alternative. As the American labour journalist, Sam Pizzigati, has argued in his book The Rich Don’t Always Win the evolution of a more equal and fairer society after the war depended on the way ‘egalitarians had battled, decade after decade, to place and keep before us a compelling vision of a more equal – and better – society’. Across large parts of the globe, the post-2008 crisis has brought an upsurge in grass roots political protest in opposition to the status quo and in support of a broadly social democratic and egalitarian alternative.
In the UK, there have been high profile citizens’ based campaigns against tax dodging companies, for the living wage and in opposition to austerity measures. Students from 25 countries are rebelling against the dominance of narrow free-market theories in university economic courses. The US has seen a sustained wave of co-ordinated industrial walkouts demanding a higher minimum wage.
Yet, while these protest movements have pushed the inequality question up the political agenda, they have, to date, been too piecemeal to trigger the unstoppable momentum for change necessary to force a more significant rupture in political and economic thinking. While some have dismissed such movements – the writer John Gray, for example, claims they show ‘the impotence of opposition and the absence of alternatives` – such protests are a sign that public patience with the status quo is thinning and that we may be getting closer to the political and social limits of inequality. If so, governments are likely to face a much harder ride unless there is a more even sharing of the economic pie.
Nevertheless, more, much more, is needed to force the political hand of what one group of Belfast anti-poverty campaigners has called ‘the big people`. For that reason, the most significant catalyst for change is likely to come from the impact of  inequality on economic stability. There is now a growing body of evidence that extreme inequality breeds fragility, weakens growth and promotes instability. It was a central factor in driving the global economy over the cliff in 2008 and has contributed to the depth and longevity of the crisis.
Over the last three decades, the rise in inequality has been driven in the main by the steady shift in economic rewards away from labour and in favour of capital. The OECD has shown that, from 1990 to 2009, the typical wage share across all 34 OECD nations fell from 66.1 per cent to 61.7 per cent, resulting in a great surge in corporate and private cash holdings and leading to what Guy Ryder, the Director-General of the ILO, has called  a ‘dangerous gap between profits and people.’
According to market orthodoxy, this shift from wages to profits should have led to faster growth and more stable economies. Instead, it has created a number of highly damaging distortions, fracturing demand, promoting debt-fuelled consumption and raising economic risk. Static and falling real wages have cut wage-financed consumption while booming profits have been associated with a catastrophic fall in investment.
The effect has been to make growth increasingly dependent on artificial stimulants, from the mass printing of money by central banks to the growth of personal debt. While these provide a temporary economic boost, they eventually lead to unsustainable hikes in property and business values and stock markets and so to economic collapse.
Today’s model of capitalism is dysfunctional. Because of the power of capital, too much economic activity is geared to the extraction of existing rather than the creation of new wealth with consequences that have been toxic for consumers, the workforce, taxpayers and the wider economy. The distinction between wealth creation and wealth diversion has long been recognised. As Adam Smith warned in 1776, because of their love of quick money, ‘the prodigals and projectors’ could lead the economy astray. In the 1930s it was Keynes who called for the ‘euthanasia of the rentier`.  In a modern-day equivalent, the leading World Bank economist Branko Milanovic has distinguished between ‘good’ and ‘bad’ inequality.
Despite these long acknowledged dangers, the ‘distribution question` – of how the cake is divided – once central to economic thinking, has been buried by the post-1979 counter-revolution in economic thinking. ‘Of the tendencies that are harmful to sound economics, the most poisonous is to focus on questions of distribution’, wrote Robert E Lucas, Nobel Prize winner and one of the principal architects of the pro-market, self-regulating school, in 2003. Today, that question is creeping back onto the agenda, but too slowly to have yet rebalanced the application of policy.
If we are to build a fairer and more sustainable economic model, the distribution question needs to be restored to the heart of economic management. Economies built around poverty wages and huge corporate and private surpluses are unsustainable. In that sense, restoring the balance between wages and profits, and cutting the great income divide, is not just a matter of social justice and proportionality it is an economic imperative. As long as national economic cakes are divided so unevenly, economies will continue to slide from crisis to crisis.



7 Apr 2015

Satire- the great weapon of insightful commentary.

I came across the website of John Holcraft (illustrator) recently. His illustrations encapsulate the effect of the anti-worker zero hour contracting legislation so beloved of the NZ National Party. Here are a few of Holcraft's illustrations that demonstrare the effects of the casualisation of labour that John Key and his cronies have encouraged.



5 Apr 2015

The economic collapse of Middle Earth. John Key's failure writ large.

This article is republished from The Automatic Earth blog site. It makes very revealing reading especially as the writer dissects the economic failure that is John Key and his off siders Bill English and Steven Joyce.


 
 April 5, 2015  Posted by at 11:01 am Finance Tagged with: , , , , , , , , ,
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For the second time in three years, I’m fortunate enough to spend some time in New Zealand (or Aotearoa). In 2012, it was all mostly a pretty crazy touring schedule, but this time is a bit quieter. Still get to meet tons of people though, in between the relentless Automatic Earth publishing schedule. And of course people want to ask, once they know what I do, how I think their country is doing.
My answer is I think New Zealand is much better off than most other countries, but not because they’re presently richer (disappointing for many). They’re better off because of the potential here. Which isn’t being used much at all right now. In fact, New Zealand does about everything wrong on a political and macro-economic scale. More about that below.
I’ve been going through some numbers today, and lots of articles, and I think I have an idea what’s going on. Thank you to my new best friend Grant here in Northland (is it Kerikeri or Kaikohe?) for providing much of the reading material and the initial spark.
To begin with, official government data. We love those, don’t we, wherever we turn our inquisitive heads. Because no government would ever not be fully open and truthful. This is from Stuff.co.nz, March 19 2015:
New Zealand’s economy grew 3.3% last year, the fastest since 2007 before the global financial crisis, Statistics NZ said. Most forecasts expect the economy to keep growing this year and next, although slightly more slowly than in the past year. For the three months ended December 31, GDP grew 0.8%, in line with Reserve Bank and other forecasts. That was led by shop sales and accommodation.
That sounds great compared to most other nations. But then we find out where the alleged growth has come from (I say alleged because other data cast a serious doubt on the ‘official’ numbers):
The economy grew a revised 0.9% in the September quarter, down from 1% reported earlier. Retail and accommodation increased 2.3% in the December 2014 quarter, buoyed by a 15% increase in international tourist spending, as reported on Wednesday. New Zealand household spending also increased 0.6%. [..]
“Spending by Chinese, US, and UK visitors all increased in 2014, though Australians spent less.” Australia is New Zealand’s biggest tourism market, but the New Zealand dollar has been high against the Australian currency, trading at A96.5c on Thursday. The exchange rate was under A80c at the start of 2013. Total visitor spending last year hit $7.4 billion, up 13% on the previous year. [..]
(Note: $1 US = $1.3156 NZ today.)
Increased banking activity was reflected in a 1.1% rise in financial services this quarter, while housing investment rose 5.2%.
[..] The figures also showed the first fall in real incomes since the middle of 2012. The inflation-adjusted purchasing power of disposable income was down 0.5% in the December quarter.
We’ll get back to housing in a bit. And by all means, keep those last few numbers in mind: while the economy ostensibly grew by 3.3%, disposable income was down. That’s what you call a warning sign.
But let’s focus first on tourism and especially on China. While overall tourist spending rose 15% in 2014, as part of a later quote in this article we will even see that “tourism from China was up 40% in the first two months of this year from a year ago..”
Still, that cannot make up for that other big trade with China, exports, in particular of New Zealand’s biggest industry, dairy, and the second biggest, timber. There things are not looking nearly as rosy. And after reading the next piece, I’m wondering how the economy could possibly have grown by 3.3%. More from Stuff.co.nz, dated March 25:
New Zealand posted a small trade surplus of just $50 million in February with dairy exports down heavily, especially to China, New Zealand’s top export market. Some economists had expected a monthly surplus of about $350 million. The trade shortfall for the year ended February 2015 was a deficit of $2.2 billion. Exports to China have boomed in the past few years, but melted down last year as dairy product prices plunged. Total exports to China in February were down more than 36% on the same month last year.
China remains New Zealand’s biggest export market, worth almost $9b in the past year, just slightly ahead of Australia. But the trend for exports to China has been falling for the past year, and is down 45% from the peak in late 2013. In fact, it has returned to levels seen in 2012. [..] Total exports were worth $3.9b for the month, just barely ahead of monthly imports which were also about $3.9b.
So sure, the 3.3% was over 2014, and this piece concerns this year. But it also says ‘the trend for exports to China has been falling for the past year,’ and ‘..The trade shortfall for the year ended February 2015 was a deficit of $2.2 billion..’ and that can only leave me wondering again what real GDP growth was. This is from RadioNZ, April 3:
Confidence among manufacturers and exporters has taken a hit with export sales in February down 27% compared with a year ago. A survey found net confidence – which includes measures of cash flow, profitability, investment, staff and sales – fell into negative territory for the first time since April 2013. Net confidence was minus 13, down from 21 in January. The sample of Manufacturers and Exporters Association members covered companies with combined annual sales of $178 million, with 68% of those from exports. Association president Tom Thomson said currency volatility was the biggest issue for exporters, with the big jump in the US dollar forcing up the price of some raw materials.
Now I’m wondering which raw materials this fine man has in mind. See, I can imagine currency volatility being a bit of a drag, but not too much for New Zealand manufacturers, because as far as I can see the country’s exporters don’t seem to import much in the way of raw materials. The main exports, as I said, are dairy and timber, with a bit of meat thrown in, none of which require raw materials imports, and what the US dollar drives up in there would help New Zealand more than hurt it. That the New Zealand dollar itself has gained vs various other currencies, while true, is a whole other story.
New Zealand’s dairy industry has been thrown together since the start of the century in co-op Fonterra, good for 30% of global dairy exports – most dairy farmers are shareholders (mind you, no country the size of New Zealand should ever even think of exporting 30% of the world’s anything, of course, unless it’s something unique on the planet and it comes in small quantities). Fonterra’s by far biggest clients are the lactose-intolerant Chinese, who import about all the milkpowder – for their babies – they can lay their hands on, following a domestic tainted milk scandal a few years back. Still, to establish your biggest industry around one single client is obviously a very risky venture. And now there’s the added problem of dropping prices. The New Zealand Herald, April 2:
International dairy prices continued to reverse gains made early this year at this morning’s GlobalDairyTrade (GDT) auction, putting downward pressure on Fonterra’s $4.70 a kg farmgate milk price forecast and raising concerns about next season’s likely payout. The GDT price index fell by 10.8% compared with the last sale a fortnight ago, when prices dropped by 8.8%. Big falls were recorded for the key products of wholemilk powder – down 13.3% to US$2,538 a tonne, skim milk powder – down 9.9% to US$2,467/tonne.
That 10.8% price drop occurred in just 2 weeks. There can be no doubt that if your economy depends so much on one sector and one client, you’re vulnerable. Probably as much as oil producers, who saw their prices drop more, but who mostly have higher profit margins. What hasn’t helped New Zealand dairy farmers is the Russian ban on EU milk products; these will now have to be sold on world markets. What won’t help either is the recent lifting of EU milk quotas, which will bring a huge flood of additional milk on the market. A market that is already drowning in milk. RadioNZ, April 2:
The Government is blaming a slump in milk prices on the world market being awash with milk. But New Zealand First leader Winston Peters said National’s economic policies and the high value of the New Zealand dollar were not helping dairy farmers. In the Global Dairy Trade auction prices dropped 10.8% overnight to $US2746 a tonne, the second fall in a fortnight. Mr Peters said he predicted the fall and it was a sign of rural areas lagging behind. “I’ve been saying it for a long long time – what you’ve got is a fixation with Auckland, hollowing out the provincial economies and sucking all the attention and money to Auckland and that is not going to go on any longer.”
Mr Peters said New Zealand had a free market system that no other country followed and he would legislate to control the exchange rate, similar to Singapore’s system. “The one country that’s not devaluing at the moment is New Zealand – every other economy has. [..] Economic Development Minister Steven Joyce firmly rejected that idea. “Well, with the greatest respect to Winston I am old enough, and so is he, to remember the last time we tried to set the exchange rate in this country and it wasn’t that successful…
“What he is basically saying is that he would legislate, presumably, to put the exchange rate at a level it won’t naturally go and that means effectively increasing costs for the consumer and decreasing costs for exporters.” [..] Meanwhile, the Fonterra Shareholders Council said some frustrated farmers were considering leaving the co-operative due to the price slump.
For more than a few farmers, the situation has already proved too much. NZ Herald, Jan 11:
At least four farmers have taken their lives since Fonterra cut its milk payout forecast for the coming season. On December 10, the dairy giant dropped its payout forecast for 2014-15 to an eight-year low of $4.70 a kilogram of milk solids. That’s nearly half the $8.40 paid in the 2013-14 season and is estimated to mean an income drop for farmers of $6.6 billion. Federated Farmers dairy industry group vice-chairman Kevin Robinson confirmed to the Herald on Sunday that it was aware of the December deaths. “There’s been discussion through Federated Farmers email about them,” he said.
Several industry experts blame high levels of rural debt for increased stress on farmers. In total, 14 farmers have taken their lives in the past six months, Chief Coroner Judge Neil MacLean said. The most recent four deaths were also confirmed by Te Aroha farmer Sue McKay, the administrator of a private Facebook-based support group. She added: “I also know some local hospitals have a number of farmers in them from attempted suicide. If there’s three in one ward alone, there will be more in other hospitals.”
Whole milk powder prices were down 11% in the month and 52% lower than a year earlier. Cheese also dropped 5% over the month.
But New Zealand also has a whole different side. If anything could explain the 3.3% GDP growth number for 2014, I’m guessing it must be this: a real estate bubble that would put most of Charles Ponzi’s heirs to shame. Not 10 years ago, mind you, Americans, but today. Will they never learn, you ask? No, they will have to have their faces pushed squarely through the stucco walls. And they’ll probably still have hope for a recovery when they come out at the other side. NZ Herald, April 5:
Council valuations are already out of date, with homes selling in Auckland’s overheated property market on average for more than 15% above their figure of six months ago. And previously unfashionable suburbs have recorded some of the biggest spikes as desperate buyers look for their first home. Mt Roskill made the biggest jump in the Real Estate Institute figures, which are based on Auckland sales in February and compared against capital valuations made in July last year. The valuations, which do not involve a property inspection or include chattels, were made public on October 1.
Even suburbs among the 10 with lowest rises, such as Remuera and Te Atatu Peninsula, were up 13%. Properties sold by Bayleys Real Estate last month included a West Harbour home bought for $700,000 more than its capital valuation of $900,000 and a Glendowie home with a capital value of $1.13m that sold for $1.575m. An Avondale home sold for $590,000 — $130,000 above valuation.
REINZ chief executive Colleen Milne wasn’t surprised because city fringe suburbs were now out of reach for many. The hot market made it hard for capital values to keep up, Milne said. “There has been a 19.9% median movement in Auckland in the last 18 months. I thought the CVs seemed to be quite appropriate at the time, but the whole thing is just supply and demand — we have a lack of houses,” she told the Herald on Sunday.
A ’19.9% median movement in Auckland in the last 18 months’ is about 13.25% per year, a doubling time of just over 7 years. Auckland apartment prices in the Trade.me graph below, which covers February 2014-February 2015, would double every 3-4 years.
It must be an Anglo-Saxon disease. You can see it in London, in Sydney, Melbourne, New York, Toronto. The new normal way to make your failing economy look ‘healthy’ is to sell assets to any rich foreigner or investment fund who comes knocking, no matter what the consequences, short term or long term. In all these cities, young people can forget about buying a home, that allegedly government supported dream.
And everyone but the rich are pushed out ever further into the boondock burbs. It’s a ‘policy’ that kills cities, of necessity. Cities need people, real people, all people, poor and rich and old and young, that have grown up where they live, they love where they live, they are interested in making it look good and feel good. This is an ongoing and organic process, because cities are alive, and yes, you can kill them. But that’s for another story.
Back to New Zealand’s reality for the vast majority of people, who will never be able to fork over 100s of 1000s of dollars for a house. People like the workers in the timber industry, who see slowing Chinese demand translated into job cuts both for those who cut the trees and those who transport them.
Again, a dumb idea to base a whole industry around one client, but the men and women who did the job were just glad they had work. And now they don’t anymore. Jobs that in all likelihood will never come back again. China won’t have another debt-financed growth spurt, and there are no other candidates waiting on the horizon.
And that’s all a big shame. New Zealand is not poor, but it’s by no means as rich as Australia or Canada or Germany or the US. What it does have is the potential to be largely self-sufficient. A potential that is being squandered in order to play with the big boys of globalized trade.
New Zealand has only 4.5 million citizens, one third of which live in Auckland. It has vast tracts of productive land that are now used to feed export oriented cows and American pines, neither of which are even native. It could have a great shoe industry, plenty of leather, and a textile industry, plenty of wool. But New Zealand, like everyone else, imports such basic needs from China. While having scores of unemployed people. When will that light go off?
The country’s prime minister since 2008, John Key, used to work at Merrill Lynch and the New York Fed, and that sort of background guarantees valiant efforts to sell anything in the country that’s not bolted down, and take an axe to what is. It also guarantees zero initiative to become self-sufficient.
But then there are many tragic countries and societies in the world who all suffer from the same maladie. I’ll leave you with some reflections by the man who I’m told is New Zealand’s best business writer, Bernard Hickey in the NZ Herald:
Chaos theory calls it the butterfly effect. It’s the idea that a butterfly flapping its wings in the Amazon could cause a tornado in Texas. The New Zealand economy has plenty of its own butterflies changing the weather for GDP growth, jobs, interest rates, inflation and house prices. [..] One of the flappiest at the moment is the global iron ore price.
It’s barely noticed here but it’s an indicator of growing trouble inside our largest trading partner, China, and it is knocking our second-largest partner, Australia, for six. It fell to a 10-year low of almost US$50 a tonne this week and is down from a peak of more than US$170 a tonne in early 2011.
China embarked on an infrastructure spree after the global financial crisis. Over the three years to 2013, China poured 6.4 gigatonnes of concrete, which was more than was poured in the US in the entire 20th century. All that concrete needed reinforcing with steel and China didn’t have enough iron ore and coking coal to make it. That building boom created a glut of apartments and debt, which China now needs to digest. [..]
.. iron ore production in Australia has only now ramped up to its peak levels. Weak demand met high supply to produce a price slump. This all may seem irrelevant to New Zealand, but it’s not. The Australian dollar has fallen in response to the iron ore crash, while New Zealand’s dollar has remained strong because our economy is humming along, thanks to building surges in Christchurch and Auckland and plenty of spending and investment.
That divergence between the Australasian economies drove the New Zealand dollar to a record high of well over AUD$98 this week. Dollar parity would make all those winter holidays on the Australia Gold Coast and trips to shows in Sydney and Melbourne cheaper and generate a fierce headwind for manufacturing exporters and tourism businesses here that sell to Australians.
President Xi has reinforced the contrasting effects of the changes in China on Australia and New Zealand by encouraging consumers and investors to spend more of China’s big trade surpluses overseas. Tourism from China was up 40% in the first two months of this year from a year ago, and there remains plenty of demand from investors in China for New Zealand assets.
The dark side of this tornado in New Zealand after the flapping of the butterfly’s wings in China was felt in Nelson this week. The region’s biggest logging trucking firm, Waimea Contract Carriers, was put into voluntary administration owing $14m, partly because of a slump in log exports to China in the past six months.
That’s because New Zealand’s logs are now mostly shipped to China to be timber boxing for the concrete being poured in its new “ghost” cities. The Chinese iron ore butterfly has flapped and now we’re seeing Gold Coast winter breaks become cheaper and logging contracts rarer.

17 Mar 2015

Robert Reich on why austerity and tax cuts for the rich are bad economics.

This talk by Robert Reich, courtesy of Social Journal Europe, demonstrates the fallacies that underpin the economic policies entrenched in the National Party and their fellow conservative poltical allies.
It makes rivetting viewing and provides even more reasons why NZ needs to be looking at more socially responsible and responsive policies.
http://www.socialeurope.eu/2015/03/the-3-biggest-economic-myths/

16 Dec 2014

Equality, Efficiency and Economic Theory (Social Journal Europe)


Dani Rodrik, Good And Bad Inequality
Dani Rodrik
In the pantheon of economic theories, the tradeoff between equality and efficiency used to occupy an exalted position. The American economist Arthur Okun, whose classic work on the topic is called Equality and Efficiency: The Big Tradeoff, believed that public policies revolved around managing the tension between those two values. As recently as 2007, when New York University economist Thomas Sargent, addressing the graduating class at the University of California, Berkeley, summarized the wisdom of economics in 12 short principles, the tradeoff was among them.
The belief that boosting equality requires sacrificing economic efficiency is grounded in one of the most cherished ideas in economics: incentives. Firms and individuals need the prospect of higher incomes to save, invest, work hard, and innovate. If taxation of profitable firms and rich households blunts those prospects, the result is reduced effort and lower economic growth. Communist countries, where egalitarian experiments led to economic disaster, long served as “Exhibit A” in the case against redistributive policies.
In recent years, however, neither economic theory nor empirical evidence has been kind to the presumed tradeoff. Economists have produced new arguments showing why good economic performance is not only compatible with distributive fairness, but may even demand it.
For example, in high-inequality societies, where poor households are deprived of economic and educational opportunities, economic growth is depressed. Then there are the Scandinavian countries, where egalitarian policies evidently have not stood in the way of economic prosperity.
Early this year, economists at the International Monetary Fund produced empirical results that seemed to upend the old consensus. They found that greater equality is associated with faster subsequent medium-term growth, both across and within countries.
In high-inequality societies, where poor households are deprived of economic and educational opportunities, economic growth is depressed.
Moreover, redistributive policies did not appear to have any detrimental effects on economic performance. We can have our cake, it seems, and eat it, too. That is a striking result – all the more so because it comes from the IMF, an institution hardly known for heterodox or radical ideas.
Economics is a science that can claim to have uncovered few, if any, universal truths. Like almost everything else in social life, the relationship between equality and economic performance is likely to be contingent rather than fixed, depending on the deeper causes of inequality and many mediating factors. So the emerging new consensus on the harmful effects of inequality is as likely to mislead as the old one was.
Consider, for example, the relationship between industrialization and inequality. In a poor country where the bulk of the workforce is employed in traditional agriculture, the rise of urban industrial opportunities is likely to produce inequality, at least during the early stages of industrialization. As farmers move to cities and earn higher pay, income gaps open up. And yet this is the same process that produces economic growth; all successful developing countries have gone through it. In China, for example, rapid economic growth after the late 1970s was associated with a significant rise in inequality. Roughly half of the increase was the result of urban-rural earnings gaps, which also acted as the engine of growth.
According to Dani Rodrik, we have to distinguish between good and bad inequality.
According to Dani Rodrik, we have to distinguish between good and bad inequality.
Or consider transfer policies that tax the rich and the middle classes in order to increase the income of poor households. Many countries in Latin America, such as Mexico and Bolivia, undertook such policies in a fiscally prudent manner, ensuring that government deficits would not lead to high debt and macroeconomic instability.
On the other hand, Venezuela’s aggressive redistributive transfers under Hugo Chávez and his successor, Nicolás Maduro, were financed by temporary oil revenues, placing both the transfers and macroeconomic stability at risk. Even though inequality has been reduced in Venezuela (for the time being), the economy’s growth prospects have been severely weakened.
Latin America is the only world region where inequality has declined since the early 1990s. Improved social policies and increased investment in education have been substantial factors. But the decline in the pay differential between skilled and unskilled workers – what economists call the “skill premium” – has also played an important role. Whether this is good news or bad for economic growth depends on why the skill premium has fallen.
If pay differentials have narrowed because of an increase in the relative supply of skilled workers, we can be hopeful that declining inequality in Latin America will not stand in the way of faster growth (and may even be an early indicator of it). But if the underlying cause is the decline in demand for skilled workers, smaller differentials would suggest that the modern, skill-intensive industries on which future growth depends are not expanding sufficiently.
It is good that economists no longer regard the equality-efficiency tradeoff as an iron law.
In the advanced countries, the causes of rising inequality are still being debated. Automation and other technological changes, globalization, weaker trade unions, erosion of minimum wages, financialization, and changing norms about acceptable pay gaps within enterprises have all played a role, with different weights in the United States relative to Europe. Each one of these drivers has a different effect on growth. While technological progress clearly fosters growth, the rise of finance since the 1990s has probably had an adverse effect, via financial crises and the accumulation of debt.
It is good that economists no longer regard the equality-efficiency tradeoff as an iron law. We should not invert the error and conclude that greater equality and better economic performance always go together. After all, there really is only one universal truth in economics: It depends.

24 Oct 2014

Tory Austerity mythology exposed ( from The Guardian & Social Europe Journal )

The same neo-liberal mythology which declares  National as the best manager of New Zealand's economy is used in the UK to boost the credibility of the Conservative Party with disaster-ous consequences.
This article from The Guardian and reproduced in Social Europe Journal gives debunks the mythology and gives Labour Parties world wide the argument necessary to shift the political debate from the grasp of the Tory myth makers.

Why Did Britain’s Political Class Buy Into The Tories’ Economic Fairytale?

Ha-Joon Chang, Political Class
Ha-Joon Chang
Falling wages, savage cuts and sham employment expose the UK recovery as bogus. Without a new vision we’re heading for social conflict.
The UK economy has been in difficulty since the 2008 financial crisis. Tough spending decisions have been needed to put it on the path to recovery because of the huge budget deficit left behind by the last irresponsible Labour government, showering its supporters with social benefit spending. Thanks to the coalition holding its nerve amid the clamour against cuts, the economy has finally recovered. True, wages have yet to make up the lost ground, but it is at least a “job-rich” recovery, allowing people to stand on their own feet rather than relying on state handouts.
That is the Conservative party’s narrative on the UK economy, and a large proportion of the British voting public has bought into it. They say they trust the Conservatives more than Labour by a big margin when it comes to economic management. And it’s not just the voting public. Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity. The trouble is that when you hold it up to the light this narrative is so full of holes it looks like a piece of Swiss cheese.
Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity.
First, let’s look at the origins of the deficit. Contrary to the Conservative portrayal of it as a spendthrift party, Labour kept the budget in balance averaged over its first six years in office between 1997 and 2002. Between 2003 and 2007 the deficit rose, but at 3.2% of GDP a year it was manageable.
More importantly, this rise in the deficit between 2003 and 2007 was not due to increased welfare spending. According to data from the Office for National Statistics, social benefit spending as a proportion of GDP was more or less constant at about 9.5% of GDP a year during this period. The dramatic climb in budget deficit from there to the average of 10.7% in 2009-2010 was mostly a consequence of the recession caused by the financial crisis.
First, the recession reduced government revenue by the equivalent of 2.4% of GDP – from 42.1% to 39.7% – between 2008 and 2009-10. Second, it raised social spending (social benefit plus health spending). Economic downturn automatically increases spending on many social benefits, such as unemployment benefit and income support, but it also increases spending on things like disability benefit and healthcare, as increased unemployment and poverty lead to more physical and mental health problems. In 2009-10, at the height of the recession, UK public social spending rose by the equivalent of 3.2% of GDP compared with its 2008 level (from 21.8% to 24%).

David Cameron’s economic policy is wrong and the narrative a fairytale according to Ha-Joon Chang.
When you add together the recession-triggered fall in tax revenue and rise in social spending, they amount to 5.6% of GDP – almost the same as the rise in the deficit between 2008 and 2009-10 (5.7% of GDP). Even though some of the rise in social spending was due to factors other than the recession, such as an ageing population, it would be safe to say that much of the rise in deficit can be explained by the recession itself, rather than Labour’s economic mismanagement.
When faced with this, supporters of the Tory narrative would say, “OK, but however it was caused, we had to control the deficit because we can’t live beyond our means and accumulate debt”. This is a pre-modern, quasi-religious view of debt. Whether debt is a bad thing or not depends on what the money is used for. After all, the coalition has made students run up huge debts for their university education on the grounds that their heightened earning power will make them better off even after they pay back their loans.
The same reasoning should be applied to government debt. For example, when private sector demand collapses, as in the 2008 crisis, the government “living beyond its means” in the short run may actually reduce public debt faster in the long run, by speeding up economic recovery and thereby more quickly raising tax revenues and lowering social spending. If the increased government debt is accounted for by spending on projects that raise productivity – infrastructure, R&D, training and early learning programmes for disadvantaged children – the reduction in public debt in the long run will be even larger.
Against this, the advocates of the Conservative narrative may retort that the proof of the pudding is in the eating, and that the recovery is the best proof that the government’s economic strategy has worked. But has the UK economy really fully recovered? We keep hearing that national income is higher than at the pre-crisis peak of the first quarter of 2008. However, in the meantime the population has grown by 3.5 million (from 60.5 million to 64 million), and in per capita terms UK income is still 3.4% less than it was six years ago. And this is even before we talk about the highly uneven nature of the recovery, in which real wages have fallen by 10% while people at the top have increased their shares of wealth.
But can we not at least say that the recovery has been “jobs-rich”, creating 1.8m positions between 2011 and 2014? The trouble is that, apart from the fact that the current unemployment rate of 6% is nothing to be proud of, many of the newly created jobs are of very poor quality.
The ranks of workers in “time-related underemployment”, doing fewer hours than they wish due to a lack of availability of work – have swollen dramatically. Between 1999 and 2006, only about 1.9% of workers were in such a position; by 2012-13 the figure was 8%.
The success of the Conservative economic narrative has allowed the coalition to pursue a destructive and unfair economic strategy, which has generated only a bogus recovery largely based on government-fuelled asset bubbles in real estate and finance.
Then there is the extraordinary increase in self-employment. Its share of total employment, whose historical norm (1984-2007) was 12.6%, now stands at an unprecedented 15%. With no evidence of a sudden burst of entrepreneurial energy among Britons, we may conclude that many are in self-employment out of necessity or even desperation. Even though surveys show that most newly self-employed people say it is their preference, the fact that these workers have experienced a far greater collapse in earnings than employees – 20% against 6% between 2006-07 and 2011-12, according to the Resolution Foundation – suggests that they have few alternatives, not that they are budding entrepreneurs going places.
So, in between the additional people in underemployment (6.1% of employment) and the precarious newly self-employed (2.4%), 8.5% of British people in work (or 2.6 million people) are in jobs that do not fully utilise their abilities – call that semi-unemployment, if you will.
The success of the Conservative economic narrative has allowed the coalition to pursue a destructive and unfair economic strategy, which has generated only a bogus recovery largely based on government-fuelled asset bubbles in real estate and finance, with stagnant productivity, falling wages, millions of people in precarious jobs, and savage welfare cuts.
The country is in desperate need of a counter narrative that shifts the terms of debate. A government budget should be understood not just in terms of bookkeeping but also of demand management, national cohesion and productivity growth. Jobs and wages should not be seen simply as a matter of people being “worth” (or not) what they get, but of better utilising human potential and of providing decent and dignified livelihoods. Ways have to be found to generate economic growth based on rising productivity rather than the continuous blowing of asset bubbles.
Without a new economic vision incorporating these dimensions, Britain will continue on its path of stagnation, financial instability and social conflict.

Neo-Liberal Economics and the danger to nations' sovereignty. From Social Europe Journal.

The TPPA debate has echoes in Europe as Neo-Liberal economists conspire to remove national sovereignty through the Juncker Commission.


Will The Juncker Commission Continue To Entrench Neoliberal Policies?

Lukas Oberndorfer, Juncker Commission
Lukas Oberndorfer
A few days ago, the designated European Commission finally showed its true colours: It wants to make sure that its economic policy recommendations become enforceable. Deregulation of rent setting systems, adjusting the retirement age to account for life expectancy and increased flexibility in wage-setting mechanisms were mere recommendations in 2014. That is supposed to change now. Its instruments are the competitiveness pacts 2.0 and a separate budget for the Euro area, even though there is no legal basis for such a measure. A decision is going to be made at upcoming meetings of the European.
Convergence and Competitiveness Instrument; Competitiveness Pacts; Partnerships for Growth, Jobs and Competitiveness – as numerous as their names are the attempts of the European Council to create consensus about binding contracts for neoliberal structural reforms.
Angela Merkel – the organic intellectual of a “reform alliance” consisting of trade associations, the financial industry, national ministries of finance and the economy, the EU Commission, neoliberal heads of state and government and the ECB – has been pursuing such plans since the beginning of 2013.
But is this about the countries who face financing difficulties on the financial markets or about the economies that show excessive trade deficits? No. For those countries, instruments were already put in place in the wake of the economic crisis that obligated them to accept the standards of the neoliberal reform alliance as economic policy.

The Neoliberal Reform Alliance Is Targeting The Remaining Countries

Now, the competitive pacts aim to include the remaining countries, such as France, Germany and Italy. For all Euro states, a mechanism shall be created that will, in the words of the Commission, overcome “political [...] deterrents to reform”: In binding contracts, the countries shall commit to “structural reforms of the labour market, the social security and health care systems and of retirement regulations”. Countries with timely adoption shall receive “financial” incentives.
No mention shall be made of the abuse that corporations inflict on social systems through tax evasion, which deprives public coffers of one billion euros yearly, according to estimates by the Commission itself. No mention of the ever quicker redistribution of wealth from the bottom to the top. And no mention of the erosion of democracy, in both economy and society, that is driven by financial markets. Rather, the competitiveness pacts strengthen those actors who have spent years calling for “painful but necessary” reforms of the social infrastructure. In times of tight budgets, who can afford to leave money in Brussels?
But for now, voting in the European Council has not been unanimous, as would be required for the competitiveness pacts. Resistance by the unions and by transnational alliances such as “Another Europe is possible,” among others, was too strong and the outgoing Commission too weak.

Will Jean-Claude Juncker’s Commission continue the push to entrench neoliberal economic policies? (photo: CC BY-SA 2.0 euranet_plus)

Old Ideas, New Candour: Enforceability For The Commission’s Recommendations

That is supposed to change now. Just a few days ago, the Handelsblatt reported that EU commissioners Moscovici and Dombrovskis, who have been suggested as heads of the relevant departments, want to “ensure that governments follow the EU’s economic recommendations, which have so far been accorded little attention”. Even though this was “one of Merkel’s ideas which had been regarded as rejected,” parts of the proposal are new:
1) Up to now, the Commission has shied away from stating explicitly that its country-specific recommendations should be the object of the pacts.
2) In order to provide the financial incentives for fulfilment of the competitiveness pacts, a separate budget for the Euro zone shall be established in the medium term.
But what, exactly, is the content of the country-specific recommendations? Since the competitiveness pacts, according to all proposals to date, must be concluded between “the member states of the euro zone and the Commission,” it is worthwhile to take a look at the recommendations that the Commission issued in 2014, before they were toned down by the Council:
Belgium, for example, should aim for a “reform of the wage-setting system, including wage indexation [and] to provide for effective automatic corrections when needed”. Bulgaria is advised to lower its minimum wage. France should commit itself to the German model: The unemployment benefit system shall be “reformed” in such a way that “incentives to return to work” are strengthened. Germany, in turn, shall lead the way once more and “[increase] incentives for later retirement”. Slovenia and Croatia are called upon to privatize and Sweden is even asked to deregulate its rent setting system in order to ensure “more market-oriented rent levels”. For Austria, the Commission envisions linking the statutory retirement age to life expectancy and harmonizing the statutory retirement age for women and men sooner.
But are the competitiveness pacts really about a contest between the EU and the nation state? No. Rather, nation state actors belonging to the neoliberal reform alliance are trying to use the European level to further their interests — to push through demands that are, to date, not enforceable within the democracies of the nation states due to a power balance that does not favour these interests that strongly.

Overcoming Democratic Obstacles

The manner in which the competitiveness pacts are to be established makes it obvious that the main conflict is not between “the EU” and, say, “France,” but rather between the executive (both on the European and the national level) and representative democracy. Jean Claude Juncker, the new president of the Commission, lets us know on that point: “I want to launch legislative and non-legislative initiatives to deepen our Economic and Monetary Union during the first year of my mandate. These would include [...] proposals to encourage further structural reforms, if necessary through additional financial incentives and a targeted fiscal capacity at Euro zone level [...].”
The wording suggests that the competitiveness pacts are to be implemented through a regulation. However, the European Treaties clearly do not grant the Commission authority to establish competitiveness pacts or to pay out the financial incentives associated with them. It seems that also the new president of the Commission has chosen the path of authoritarian constitutionalism which will weaken both national parliaments and the European parliament by circumventing regular treaty amendment procedures.
Yet, you cannot accuse the Commission of being dishonest. For two years now, it has clearly articulated what this is all about: overcoming political obstacles. It remains to be seen, however, if the heads of states will join in this new instance of bypassing the parliaments where the wage-earning population is able to advance their interests with comparative ease. A landmark decision will probably be made at one of the next two upcoming European Councils (October 23 or December 18, 2014).