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.

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).

11 Oct 2014

NEW THOUGHTS ON CAPITAL - Thomas Piketty (From TED Talks)

I found this TED talk to be thought provoking and a challenge to us all as we witness the further stripping of State Assets being signalled in New Zealand.



1 Oct 2014

Trickle Down Economics? No way. Rather it's wealth capture by the selfish few. (From Social Journal Europe)

If You Look At One Graph About Inequality Look At This!

Henning Meyer
Henning Meyer
You might have heard about recent reports stating that global inequality is decreasing. This is a nice example of constructing the comparison according to the result you would like to see. Yes, inequality between countries has declined but the most important comparison is what is happening to inequality within countries as this tells you how the distribution system, that is under direct political control, works. And if you look at this you can only shake your head in disbelief.

Pavlina Tcherneva tweeted two graphs from her research that were also picked up by Vox.com. The graphs answer a simple question: Who actually got what share of growing national income in different periods of time? Here is the answer for the US:
Is there any question that there is something fundamentally wrong with this distribution? And if you think this is only the case in the US look at the equivalent graph for Sweden:
Something is going seriously wrong here! If you look at one graph that tells you all you need to know about income inequality look at who actually takes home the gains of economic growth.

29 Sep 2014

Th Austerity Disaster and its impact - Lessons for New Zealand? (From Social Europe)

Europe’s Austerity Disaster

Joseph Stiglitz, Austerity Disaster
Joseph Stiglitz
“If the facts don’t fit the theory, change the theory,” goes the old adage. But too often it is easier to keep the theory and change the facts – or so German Chancellor Angela Merkel and other pro-austerity European leaders appear to believe. Though facts keep staring them in the face, they continue to deny reality.
Austerity has failed. But its defenders are willing to claim victory on the basis of the weakest possible evidence: the economy is no longer collapsing, so austerity must be working! But if that is the benchmark, we could say that jumping off a cliff is the best way to get down from a mountain; after all, the descent has been stopped.
But every downturn comes to an end. Success should not be measured by the fact that recovery eventually occurs, but by how quickly it takes hold and how extensive the damage caused by the slump.
Viewed in these terms, austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation, if not a triple-dip recession, with unemployment persisting at record highs and per capita real (inflation-adjusted) GDP in many countries remaining below pre-recession levels. In even the best-performing economies, such as Germany, growth since the 2008 crisis has been so slow that, in any other circumstance, it would be rated as dismal.
Austerity has been an utter and unmitigated disaster, which has become increasingly apparent as European Union economies once again face stagnation.
The most afflicted countries are in a depression. There is no other word to describe an economy like that of Spain or Greece, where nearly one in four people – and more than 50% of young people – cannot find work. To say that the medicine is working because the unemployment rate has decreased by a couple of percentage points, or because one can see a glimmer of meager growth, is akin to a medieval barber saying that a bloodletting is working, because the patient has not died yet.
Extrapolating Europe’s modest growth from 1980 onwards, my calculations show that output in the eurozone today is more than 15% below where it would have been had the 2008 financial crisis not occurred, implying a loss of some $1.6 trillion this year alone, and a cumulative loss of more than $6.5 trillion. Even more disturbing, the gap is widening, not closing (as one would expect following a downturn, when growth is typically faster than normal as the economy makes up lost ground).
Simply put, the long recession is lowering Europe’s potential growth. Young people who should be accumulating skills are not. There is overwhelming evidence that they face the prospect of significantly lower lifetime income than if they had come of age in a period of full employment.
The European economy is still in major trouble and the policy direction is making matters worse, according to Joseph Stiglitz.
Meanwhile, Germany is forcing other countries to follow policies that are weakening their economies – and their democracies. When citizens repeatedly vote for a change of policy – and few policies matter more to citizens than those that affect their standard of living – but are told that these matters are determined elsewhere or that they have no choice, both democracy and faith in the European project suffer.
France voted to change course three years ago. Instead, voters have been given another dose of pro-business austerity. One of the longest-standing propositions in economics is the balanced-budget multiplier – increasing taxes and expenditures in tandem stimulates the economy. And if taxes target the rich, and spending targets the poor, the multiplier can be especially high. But France’s so-called socialist government is lowering corporate taxes and cutting expenditures – a recipe almost guaranteed to weaken the economy, but one that wins accolades from Germany.
The hope is that lower corporate taxes will stimulate investment. This is sheer nonsense. What is holding back investment (both in the United States and Europe) is lack of demand, not high taxes. Indeed, given that most investment is financed by debt, and that interest payments are tax-deductible, the level of corporate taxation has little effect on investment.
The hope is that lower corporate taxes will stimulate investment. This is sheer nonsense. What is holding back investment (both in the United States and Europe) is lack of demand, not high taxes.
Likewise, Italy is being encouraged to accelerate privatization. But Prime Minister Matteo Renzi has the good sense to recognize that selling national assets at fire-sale prices makes little sense. Long-run considerations, not short-run financial exigencies, should determine which activities occur in the private sector. The decision should be based on where activities are carried out most efficiently, serving the interests of most citizens the best.
Privatization of pensions, for example, has proved costly in those countries that have tried the experiment. America’s mostly private health-care system is the least efficient in the world. These are hard questions, but it is easy to show that selling state-owned assets at low prices is not a good way to improve long-run financial strength.
All of the suffering in Europe – inflicted in the service of a man-made artifice, the euro – is even more tragic for being unnecessary. Though the evidence that austerity is not working continues to mount, Germany and the other hawks have doubled down on it, betting Europe’s future on a long-discredited theory. Why provide economists with more facts to prove the point?