Hypocrisy rules supreme in the National Party Caucus

Frank Macskasy's article on the Daily Blog provides the proof of the economic and social hypocrisy that has been the hall mark of the National-Act government since the 2008 election.

The Herald cartoon also reveals the cynicism behind Key's raising the "relevance of the NZ flag" issue as his policy weaknesses are exposed by David Cunliffe.  Key may protest that he favours the "Silver Fern" when, in reality, he'd rather we adopted the Stars & Stripes where he and his asset stripping corporate raiders perfer to reside.

More for Social-Journal Europe. Money as a social construct serving the public good.

Money As A Social Construct And Public Good

27/01/2014 by Ann Pettifor Leave a Comment

Ann Pettifor

In a new book, Ann Pettifor explores money and monetary systems, subjects which have been neglected for far too long by the academic profession. As long as we remain ignorant of how monetary systems operate, for so long will the public good that is money be captured to serve only the interests of the tiny, greedy minority in possession of private wealth.

Everyone, except an economist, knows what ‘money’ means, and even an economist can describe it in the course of a chapter or so… – A.H. Quiggin

Right now many of us are transfixed by a new kind of digital money that seems to escape the control of central bankers: Bitcoin and its new market challenger, Litecoin. There are two striking things about the ‘money’ that is Bitcoin. First, its creators (computer programmers) have apparently ensured that there can never be no more than 21m coins in existence. Bitcoin therefore is like gold: its value lies in its scarcity. This potential shortage has added to the currency’s speculative allure, leading to a rise in its value. However, these rises and falls in value made it unreliable as a means of exchange.

Second, Bitcoin is not buttressed by any of the institutions that maintain advanced monetary systems. These include the rule of law, accountancy and criminal justice systems and central banks. It is these institutions that (try to) keep us honest. By contrast Bitcoin’s great attraction is precisely that it bypasses the state and all regulation. Indeed Bitcoin appears to be based on distrust. “Bitcoin was conceived as a currency that did not require any trust between its users” Jonathan Levin wrote recently.

Equally its scarcity means that unlike the endless and myriad social and economic relationships and transactions facilitated by credit, Bitcoin’s capacity to generate economic activity (trade, investment, employment) is limited – to 21 million coins. Like the architects of the gold standard, Bitcoin’s designers intend to deliberately limit economic activity to 21 million coins in order, ostensibly, “to prevent inflation”. In reality the purpose is to ratchet up the scarcity value of Bitcoin most of which are owned by originators of the scheme.

As this article is published, speculators have inflated to delirious heights the value of Bitcoin. The winners will be those who sell – just before the bubble bursts. In the absence of institutions that reinforce and uphold trust, the losers will be robbed.

Money is both a many-splendoured but also a many-layered thing. We all know what it is. We deal with it – in tangible or intangible form – every day. Most of us think it important. Not so economists. The dominant economic orthodoxy – taught at every university to the exclusion of other schools of thought – declines to take money, banks or debt seriously, as Professor Steve Keen argues. One prominent economist – whose anonymity we shall protect – once discouraged a PhD student from majoring in the subject, arguing that the study of money or credit is “a matter of third order importance.”

As a result of that neglect, those who control our money system escape close scrutiny. As a result too, there is widespread public ignorance of how the system for both creating and pricing money is effectively controlled not by central banks, but by the commercial banking system and by private, global capital markets. Despite all the hype around central bank decision-making, the public authorities have little impact on the management of the global financial system.

Perhaps one of the most disturbing aspects of academic neglect of money and monetary systems is the public’s failure to appreciate that the monetary systems of advanced economies evolved as a result of great struggles between private wealth and wider, democratic society. The success of these historic struggles meant that monetary systems in advanced economies evolved to become a great public goodserving wider interests. However, periodically monetary systems are recaptured by the “robber barons” of private wealth, and then controlled and manipulated to serve their own rapacious greed.

To shine more light on the subject of money, and to broaden the discussion to a wider public, I published a short e-book aimed mainly at students – especially women students and green campaigners. Its title is Just Money: how society can break the despotic power of finance.

While we all know what money is and means, there is still a great deal of confusion. In the book I try to draw out the key differences between economists that rely on the classical or neo-classical tradition of monetary theory; and those who take a radically different perspective on credit and money. These include great economists like the Scot, John Law, John Maynard Keynes, Joseph Schumpeter, JK Galbraith, contemporary economists like Prof. Victoria Chick, Dr. Geoff Tily, Prof. Randall Wray, Prof. Steve Keen, Standard and Poor’s Chief Global Economist, Paul Sheard; anthropologists like David Graeber; and sociologists like Geoffrey Ingham.

They all understand that the thing we call money has its original basis in a promise, a social relationship: credit. The word credit after all, is based on the Latin word credo: I believe. “I believe you will pay, or repay me for my goods and services, now or at some point in the future.”

To understand this, think of your credit card. There is no money in most credit card accounts before a user begins to spend. All that exists is a social contract with a banker; a promise made to the banker to repay the debt incurred as a result of spending on your card, at a certain time in the future, and at an agreed rate of interest. And when we spend ‘money’ on our credit card, we do not exchange our card for the products we purchase. This is because money is not like barter. No, the card stays in our purse. Instead the credit card, and the trust on which it is based, gives us the power to purchase a product. It is the means by which we purchase the good.

Your spending on a card is expenditure created ‘out of thin air.’ The intangible ‘credit’ – nothing more than the bank’s and the retailer’s belief that you will honour an agreement to repay – gives you purchasing power.

That is why money and credit is a great public good. As a result of monetary systems it is wrong to ever suggest that “there is no money” – for childcare, education, the arts or for the transformation of the economy away from fossil fuels. The bigger question is this: is our money system just? And as a public, not private good, does it serve the needs of wider society?

As long as we remain ignorant of how monetary systems operate, for so long will the public good that is money be captured to serve only the interests of the tiny, greedy minority in possession of private wealth.

This article originally appeared at British Politics and Policy at LSE

The Fallacies of Economics 101 exposed. (Social-Journal Europe)

Why Increasing The Minimum Wage Does Not Necessarily Reduce Employment

27/01/2014 by Alan Manning Leave a Comment

Alan Manning

Recent months have seen President Obama make a renewed push to address inequality in the U.S., especially via one policy lever he has focused on previously- raising the minimum wage. For many, conventional economic wisdom states that raising the minimum wage costs jobs, as employers are less willing to take on staff at higher rates of pay. Alan Manning takes a close look at the economics and the evidence of these claims, finding that one of their basic assumptions, that labor markets are highly competitive, does not hold. He argues that in light of this, and of empirical evidence from academic studies of wages and employment, it is very difficult to claim that wages have a significant effect on employment in either direction.

A generation ago, the vast majority of economists would have said that a rise in the minimum wage inevitably costs jobs. It must, they would have said, if a basic principle of economics – that the demand for labor falls as wages rise – is correct. In the current debate over the federal minimum wage, many opponents of the increase have argued that any rise poses too great of a risk to the fragile economic recovery. However, recent research shows this truism to be over-simplified and not reflective to the realities of the labor market. Rather than automatically reducing employment, an increased minimum wage presents mixed outcomes.

Until the mid-1990s, almost all studies of the minimum supported the idea of an unwelcome trade-off between wage regulation and employment. But the cozy consensus was shattered by the research of two economists, David Card and Alan Krueger, then both at Princeton. They argued that the actual evidence linking the minimum wage to job losses was weak. More important, they offered new analyses concluding that the minimum wage – at the levels observed in the United States – had no effect on employment, and might even raise it! Their seminal study compared employment in fast-food restaurants in two adjacent states, New Jersey and Pennsylvania, after New Jersey raised its minimum wage.

It’s important to bear in mind – certainly Card and Krueger did – that there is still universal agreement that employment is sensitive to a wage floor when it reaches some level. But the two economists were equally convinced by their research that, in the American context, modest increases in the minimum had no effect on jobs.

To say the Card-Krueger research generated controversy is an understatement. Its publication coincided with a debate over raising the federal minimum wage, so the ensuing academic dispute was inextricably mixed with politics. Other academics testified to Congress that the Card-Krueger conclusion amounted to a rejection of the economist’s version of the theory of gravity – and that evidence of antimatter should be treated with great skepticism.

The battle lines haven’t changed much since then. For example, the White House’s 2013 fact sheet on increasing the minimum wage approvingly cited a study by Arindrajit Dube, T. William Lester and Michael Reich, economists at the University of California, Berkeley, comparing employment growth across states (essentially a souped-up version of the earlier comparison of New Jersey and Pennsylvania) and concluding that differences in the minimum wage among states had no effect. This study has since been criticized by two other economists, David Neumark of the University of California, Irvine, and William Wascher of the Federal Reserve Board, who have long been defenders of the conventional wisdom on the minimum wage. Their arguments are technical, concluding that a better analysis of the same data supports the old view that the minimum wage destroys jobs.

What is an outsider, especially one lacking the economist’s statistical weaponry, to make of all this? I think the simplest and most persuasive explanation for radical differences in researchers’ conclusions is that the differences in employment being measured aren’t large – and that it is often hard to disentangle small effects from all the other forces affecting employment.

In the circumstances, I think it is best to focus on the studies with the most accurate, fine-grained data, and increasingly those are studies with access to payroll information from individual firms. In 2011, Barry Hirsch, Bruce Kaufman and Tatyana Zelenska used data from a chain of fast-food restaurants in Georgia. They analyzed the impact of the rise in the federal minimum wage in 2007-9, exploiting the fact that this rise had a bigger impact in low-wage regions (often rural areas) within the state. They found clear effects on earnings, but no effects on employment.

In spite of this accumulating weight of empirical evidence, it is still very common to find economists falling back on the argument that a minimum wage must cost jobs because demand curves for labor inevitably slope downward. Faced with a conflict between the evidence and 20th century economic models, they reject the evidence rather than the theory – not an ideal template for scientific endeavor. But there are, in fact, uncomplicated theoretical reasons why the minimum wage set at the levels seen in the United States has little or no effect on employment. Hence the problem may be with the economics all too often taught as dogma.

The Minimum Wage – What’s wrong with economics 101?

Bare-bones models of market behavior may assume away important elements of reality. First, the increase in total labor costs associated with a given increase in the legal minimum wage is often considerably smaller than the numbers suggest. As the minimum wage rises and work becomes more attractive, labor turnover rates and absenteeism tend to decline. Moreover, the sacrifice associated with the consequences of losing a job rises; so, arguably, workers are inclined to work a bit harder and need less monitoring. Absenteeism and shirking are not trivial problems in many low-wage labor markets, so one can reasonably expect to see a material reduction in the associated costs as the minimum wage rises.

Of course, an employer could voluntarily choose to pay $9 an hour if net labor costs actually fell as wages rose and one would expect some to adopt higher wages without government prodding if it were, in fact, a win-win. So a reasonable guess here is that these offsetting economies reduce, but do not eliminate, the impact of a rise in wage rates.

Then there’s the gap between employer perception and reality. Individual employers often view a rise in wages (or other costs) with horror, assuming it will drive them out of business. But they’re all too often implicitly assuming that they alone will suffer the cost inflation – that changes in the minimum wage will leave them at a disadvantage with respect to competitors.

In reality, businesses generally try to pass a rise in the minimum wage (or sales taxes or anything else that raises the cost of doing business for all) on to their customers. So with fast food, one would expect firms to raise prices. In that circumstance, the effect on employment is only through the effect of a fall in sales of the product, which may well be minimal. Ask yourself: do you eat fewer Whoppers if the price goes up a little at the same time as the price of Big Macs (and Taco Bell Burrito Supremes) goes up a little? Do you even keep track of the price changes?

Theory and reality reconciled

Actually, there is a more fundamental reason why one cannot find the job losses predicted by standard-issue economic theory. The key assumption, that labor markets are highly competitive, is often wrong. The view of the labor market that underlies Economics 101 is not one that many people would recognize. For in this hypothetical world, losing a job is no big deal because finding an identical job is no harder than discovering that the local 7-Eleven is out of Coke and driving around the block to a Circle K for a six-pack. But that is not most people’s experience of labor markets. The reality is that competition for workers is not as strong as many economists would have you believe. An employer who cuts wages will find that most employees are unhappy, but that few will just walk out the door. It thus follows that it may make economic sense for employers to pay workers less than the marginal worker adds to revenues. This completely alters one’s expectations about how a change in the minimum wage will affect the labor market. In this world, a change will not necessarily price the marginal worker out of his job.

Consider, too, that the higher minimum will increase the supply of labor, so the firm may actually find it easier to recruit workers. The bottom line: if one drops the assumption that the labor market is fully competitive, an increase in the minimum wage can lead to a decrease or an increase in total employment. The direction can only be discovered through observation. And as we’ve seen, the empirical evidence does not suggest much effect on employment at the levels of the minimum wage seen in the United States.

Although many people find the stylized account of how labor markets function that’s presented here to be credible for skilled workers, they still doubt it is relevant for minimum-wage workers – the archetypal teen mom flipping burgers or bussing tables. Surely, the argument goes, there are so many potential employers for this sort of labor that one should be able to switch jobs easily. But the reality that some low-skill openings go begging actually tells us that the constraint on employment may be as much labor supply as labor demand.

Economists often have a blind spot on this point. Indeed, I am baffled by their degree of resistance. For example, last year Christina Romer, a former chairwoman of President Obama’s Council of Economic Advisors (and an analyst with impeccable credentials as a champion of the poor), wrote critically of the proposal to raise the minimum wage, arguing that competition between employers was sufficiently robust to push wages close to the marginal product of labor. She seemed trapped in the view that the only exceptions were cases in which large employers dominated a local market – say, a coal mine in a remote corner of Appalachia. I believe that, in most circumstances, the market power of employers derives from the fact that it’s hard for workers to change jobs even when there are alternative employers in abundance.

Consider an irony. The financial crisis has rightly shaken the beliefs of many economists that financial markets can do no wrong because they are disciplined by competition. But faith in the competitive nature of labor markets seems unshakable in the teeth of evidence to the contrary. Markets (labor markets as well as financial markets) need to be regulated to work well, and the minimum wage is a legitimate weapon in the regulatory arsenal. Next time you read that minimum wages hikes inevitably destroy jobs – that you don’t need an econometrician to tell which way the labor market blows – remember that economic theory is no better than the veracity of the assumptions on which it rests.

This article is based on a paper from the Milken Institute Review and was first published by USAPP@LSE.

What the promised Golden trickle down really means

These cartoons demonstrate what happens if we continue to believe that the neo-liberal tax cuts for the rich, so loved by English, Key and Joyce, continue to be practiced.

The caption can be easily: "Flying Key-Air to Hawaii."

 The effects of the "austerity economics" of the National Party on the working peoples of the country.

This may read US jobs but it quite easily applies to NZ.

I read this and thought of Paula Bennett and John Key immediately (Social Journal Europe)

America’s War On Poverty, America’s War On The Poor

13/01/2014 by David Coates Leave a Comment

David Coates

January 2014 marks the fiftieth anniversary of the State of the Union Address in which Lyndon Johnson launched the War on Poverty. This anniversary is leading to much soul-searching here in the United States.

Partly that soul-searching reflects the high levels of poverty that persist in contemporary America. The US does not define the poverty level as the EU does: as a percentage of median income, and therefore as normally a rising target. It defines it still in money terms, with the poverty level adjusted only for size of family and inflation.

There is much debate here currently about the adequacy of that measure. When the War on Poverty was first launched, the percentage of Americans with incomes lower than the poverty level for their size of family stood at 19%. After a decade of sustained policy, that percentage had fallen to 11.1%. The official poverty rate then stabilized, oscillating between 11% and 15% with each business cycle. As a result of the 2008 financial crisis and resulting recession, it is currently back to a peak of 15%, with almost one American child in five growing up in poverty. At stake in the soul-searching now underway is whether poverty persists in these proportions in modern America because, as Ronald Reagan once famously put it, “in the war on poverty, poverty won;” or whether, on the contrary, the war on poverty failed because his administration (and subsequent administrations) stopped fighting it.

The political conflict around that question is now intense. Advocates of a renewed war on poverty point to the significant impact on poverty levels made by key government programmes. Take those programmes away, they say, and the level of poverty in the United States would be dramatically higher. On the most recent data available to us, the Earned Income Tax Credit reduced child poverty by 5% in 2012 alone. Food and nutrition programmes had much the same effect. Advocates point too to the involuntary nature of most contemporary poverty. The vast majority of Americans who are currently poor are poor in spite of their own best efforts. They are poor because welfare payments are low and limited. They are poor because low-paid employment (of the kind offered by, among others, America’s largest employer – Wal-Mart) still keeps people below the poverty level. Or they are poor because large-scale involuntary unemployment (there are still three unemployed Americans for every available job) is steadily pushing the long-term unemployed out of the American middle class.

The Politics of the War on Poverty

Unfortunately for the poor, however, conservative critics of welfare provision do not see it that way. They either deny that anyone is America (or, from the point of view of Paula Bennett and the Key led National Government, in New Zealand) is genuinely poor – so many of them have televisions and cars after all – or they insist that most of those now in poverty are there because of poor life-style choices or an unwillingness to work. For such critics, the welfare net is not too modest. It is too generous. Any narrowing of the gap between welfare income and low pay removes the pressure on the long-term unemployed actively to seek work. Indeed, so certain are conservative critics of this truth that, in the current US Congress, Republican legislators voted in November to cut food stamps and cannot now be persuaded in sufficient numbers to extend long-term unemployment insurance to the more than one million Americans whose insurance ran out in December. And among the Tea Party base of the Republican opposition to welfare provision, it must be recognized, strands of racism linger. The American poor is still disproportionately African-American and Hispanic, attracting arguments from libertarians about the need to honor the defining American tradition of self-reliance, and arguments from intense nationalists about the need for repatriation and the closing of the border.

But the poor in America now come in many colors including white, and in many ages – both young and old. The social compact between firms and workers that once traded modest wages for guaranteed healthcare and a reliable pension is eroding fast, and though in 2014 Republicans will no doubt still point to “welfare queens” as spongers on the public purse, they too have now to address the poverty issue in all its complexity – not least because many of their potential voters are either in or on the edge of poverty themselves. So many of the men now in poverty in America are keen to find work but cannot, and so many of the women are grandmothers struggling to survive on a modest state pension, or are high school graduates struggling to find work of any kind at all, that their plight is simply too evident and too entrenched to be ignored by even the most strident critics of welfare provision. Whether they like it or not, poverty in America has become a problem for Republicans. For Democrats it needs to become a cause.

The current political gridlock in Washington is leaving more and more Americans vulnerable to poverty. There is an enhanced churning here as well as an enhanced volume: between 2009 and 2011 the incomes of approximately one American in three (31%) fell below the poverty level for a while, remaining there for at least two months. The evidence is clear. Political gridlock and the resulting absence of effective anti-poverty programs in the contemporary United States benefit the rich, but they leave the rest of us with increasing income inequality, vast areas of urban blight and suburban drabness, and diminished access to the American Dream. Lyndon Johnson was right:

the man who is hungry, who cannot find work or educate his children, who is bowed by want, that man is not fully free.

But try telling that to a Republican legislator who is safe in his/her gerrymandered constituency only so long as the Republican Party’s Tea Party base is not enraged by any softness on the poor.

There is a lot at stake in 2014 in America, as the last mid-term elections of the Obama administration approach. We can expect Democrats to press the poverty button heavily as they campaign. Let us hope, for the sake of the American poor, that this time pressing that button works: that at long last the progressive message on wage growth and income distribution gets through to the American electorate on a scale sufficient to return power to more compassionate legislators than those currently controlling the House.

A fuller version, with appropriate footnotes, is at www.davidcoates.net

A question about responsibility and transparency in decision making in the PinoKeyo govt.

 How does the National Party Cabinet make responsible decisions on Education and use of  tax dollars when this happens?

When one reads these stories in the newspaper one does begin to wonder how seriously Key considers rationality and transparency in decision making and use of the taxpayers' dollars as being of high priority in a National-Act govt? 
"Integrated "Private"  schools under investigation for fee charges" and "Despite assets worth millions Prestigious Private school allowed to integrate to prevent it failing."

Should we be adding Wanganui Collegiate to Bill English's list of those who are taking too much from the State and are therefore "bludging"?

I don't think it too much of a stretch to believe that under this National-Act govt this decision  would appear to support the argument that asset retention is great for private enterprise but a low priority for the State as Key & English vigorously pursue selling off NZ's assets to foreign corporations.

The Great Economic Malaise - the failure of austerity economics (Social Journal Europe)

The Great Malaise Drags On

06/01/2014 by Joseph Stiglitz 1 Comment

Joseph Stiglitz

There’s something dismal about writing year-end roundups in the half-decade since the eruption of the 2008 global financial crisis. Yes, we avoided a Great Depression II, but only to emerge into a Great Malaise, with barely increasing incomes for a large proportion of citizens in advanced economies. We can expect more of the same in 2014.

In the United States, median incomes have continued their seemingly relentless decline; for male workers, income has fallen to levels below those attained more than 40 years ago. Europe’s double-dip recession ended in 2013, but no one can responsibly claim that recovery has followed. More than 50% of young people in Spain and Greece remain unemployed. According to the International Monetary Fund, Spain can expect unemployment to be above 25% for years to come.

The real danger for Europe is that a sense of complacency may set in. As the year passed, one could feel the pace of vital institutional reforms in the eurozone slowing. For example, the monetary union needs a real banking union – including not just common supervision, but also common deposit insurance and a common resolution mechanism – and Eurobonds, or some similar vehicle for mutualizing debt. The eurozone is not much closer to implementing either measure than it was a year ago.

One could also sense a renewed commitment to the austerity policies that incited Europe’s double-dip recession. Europe’s continuing stagnation is bad enough; but there is still a significant risk of another crisis in yet another eurozone country, if not next year, in the not-too-distant future.

Matters are only slightly better in the US, where a growing economic divide – with more inequality than in any other advanced country – has been accompanied by severe political polarization. One can only hope that the lunatics in the Republican Party who forced a government shutdown and pushed the country to the brink of default will decide against a repeat performance.

But even if they do, the likely contraction from the next round of austerity – which already cost 1-2 percentage points of GDP growth in 2013 – means that growth will remain anemic, barely strong enough to generate jobs for new entrants into the labor force. A dynamic tax-avoiding Silicon Valley and a thriving hydrocarbon sector are not enough to offset austerity’s weight.

Thus, while there may be some reduction of the Federal Reserve’s purchases of long-term assets (so-called quantitative easing, or QE), a move away from rock-bottom interest rates is not expected until 2015 at the earliest.

Ending low-interest-rates now would not be sensible, though QE has probably benefited the US economy only slightly, and may have raised risks abroad. The tremors in global financial markets set off by discussions earlier in 2013 of tapering QE highlighted the extent of interdependence in the global economy.

Just as QE’s introduction fueled currency appreciation, announcing its eventual end triggered depreciation. The good news was that most major emerging countries had built up large foreign-exchange reserves and had sufficiently strong economies that they could withstand the shock.

Still, the growth slowdown in emerging economies was disappointing – all the more so because it is likely to continue through 2014. Each country produced its own story: India’s downturn, for example, was attributed to political problems in New Delhi and a central bank worried about price stability (though there was little reason to believe that raising interest rates would do much about the price of onions and the other items underlying Indian inflation).

Social unrest in Brazil made it clear that, despite remarkable progress in reducing poverty and inequality over the past decade, the country still has much to do to achieve broadly shared prosperity. At the same time, the wave of protest showed the growing political clout of the country’s expanding middle class.

China’s decelerating growth had a significant impact on commodity prices, and thus on commodity exporters around the world. But China’s slowdown needs to be put in perspective: even its lower growth rate is the envy of the rest of the world, and its move toward more sustainable growth, even if at a somewhat lower level, will serve it – and the world – well in the long run.

As in previous years, the fundamental problem haunting the global economy in 2013 remained a lack of global aggregate demand. This does not mean, of course, that there is an absence of real needs – for infrastructure, to take one example, or, more broadly, for retrofitting economies everywhere in response to the challenges of climate change. But the global private financial system seems incapable of recycling the world’s surpluses to meet these needs. And prevailing ideology prevents us from thinking about alternative arrangements.

We have a global market economy that is not working. We have unmet needs and underutilized resources. The system is not delivering benefits for large segments of our societies. And the prospect of significant improvement in 2014 – or in the foreseeable future – seems unrealistic. At both the national and global levels, political systems seem incapable of introducing the reforms that might create prospects for a brighter future.

Maybe the global economy will perform a little better in 2014 than it did in 2013, or maybe not. Seen in the broader context of the continuing Great Malaise, both years will come to be regarded as a time of wasted opportunities.

© Project Syndicate

The myth of the beneficient Job Creators. How the 1% who hold the nation's wealth believe Trickle down works-

A graphic description of the myth of the wealth holding job creator actually creating employment. The reality of the neo-liberal trickle down economics.
The counter points also graphically displayed.

In the meantime here is an example of the idiocy of conservative policy direction and thought processes from the mouth of the UK Minister of Education who must share the same degree of competence and public confidence as Hekia Parata does in NZ.

Cut to the Bone National Party Policy directions courtesy of the UK Conservatives.

Which of these will be on the menu for further attacks by the PinoKeyo government as they market themselves for their constituency this year.
The UK Conservatives provide the answer.

Indications for the National Party policy directions 2014.

More Challenges for the economy- Austerity and stagnation- China vs USA vs the world

The World Economy’s Shifting Challenges

03/01/2014 by George Soros 1 Comment

George Soros

World economy – Efforts to revive growth in the world’s most influential economies – with the exception of the eurozone – are having a beneficial effect worldwide. All of the looming problems for the global economy are political in character.

After 25 years of stagnation, Japan is attempting to reinvigorate its economy by engaging in quantitative easing on an unprecedented scale. It is a risky experiment: faster growth could drive up interest rates, making debt-servicing costs unsustainable. But Prime Minister Shinzo Abe would rather take that risk than condemn Japan to a slow death. And, judging from the public’s enthusiastic support, so would ordinary Japanese.

By contrast, the European Union is heading toward the type of long-lasting stagnation from which Japan is desperate to escape. The stakes are high: Nation-states can survive a lost decade or more; but the EU, an incomplete association of nation-states, could easily be destroyed by it.

The euro’s design – which was modeled on the Deutsche Mark – has a fatal flaw. Creating a common central bank without a common treasury means that government debts are denominated in a currency that no single member country controls, making them subject to the risk of default. As a consequence of the crash of 2008, several member countries became over indebted, and risk premia made the eurozone’s division into creditor and debtor countries permanent.

This defect could have been corrected by replacing individual countries’ bonds with Eurobonds. Unfortunately, German Chancellor Angela Merkel, reflecting the radical change that Germans’ attitudes toward European integration have undergone, ruled that out. Prior to reunification, Germany was the main motor of integration; now, weighed down by reunification’s costs, German taxpayers are determined to avoid becoming European debtors’ deep pocket.

After the crash of 2008, Merkel insisted that each country should look after its own financial institutions and government debts should be paid in full. Without realizing it, Germany is repeating the tragic error of the French after World War I. Prime Minister Aristide Briand’s insistence on reparations led to the rise of Hitler; Angela Merkel’s policies are giving rise to extremist movements in the rest of Europe.

The current arrangements governing the euro are here to stay, because Germany will always do the bare minimum to preserve the common currency – and because the markets and the European authorities would punish any other country that challenged these arrangements. Nonetheless, the acute phase of the financial crisis is now over. The European financial authorities have tacitly recognized that austerity is counterproductive and have stopped imposing additional fiscal constraints. This has given the debtor countries some breathing room, and, even in the absence of any growth prospects, financial markets have stabilized.

The Political Risks Of The World Economy

Future crises will be political in origin. Indeed, this is already apparent, because the EU has become so inward-looking that it cannot adequately respond to external threats, be they in Syria or Ukraine. But the outlook is far from hopeless; the revival of a threat from Russia may reverse the prevailing trend toward European disintegration.

As a result, the crisis has transformed the EU from the “fantastic object” that inspired enthusiasm into something radically different. What was meant to be a voluntary association of equal states that sacrificed part of their sovereignty for the common good – the embodiment of the principles of an open society – has now been transformed by the euro crisis into a relationship between creditor and debtor countries that is neither voluntary nor equal. Indeed, the euro could destroy the EU altogether.

In contrast to Europe, the United States is emerging as the developed world’s strongest economy. Shale energy has given the US an important competitive advantage in manufacturing in general and in petrochemicals in particular. The banking and household sectors have made some progress in deleveraging. Quantitative easing has boosted asset values. And the housing market has improved, with construction lowering unemployment. The fiscal drag exerted by sequestration is also about to expire.

More surprising, the polarization of American politics shows signs of reversing. The two-party system worked reasonably well for two centuries, because both parties had to compete for the middle ground in general elections. Then the Republican Party was captured by a coalition of religious and market fundamentalists, later reinforced by neo-conservatives, that moved it to a far-right extreme. The Democrats tried to catch up in order to capture the middle ground, and both parties colluded in gerrymandering Congressional districts. As a consequence, activist-dominated party primaries took precedence over general elections.

That completed the polarization of American politics. Eventually, the Republican Party’s Tea Party wing overplayed its hand. After the recent debacle of the government shutdown, what remains of the Republican establishment has begun fighting back, and this should lead to a revival of the two-party system.

The major uncertainty facing the world today is not the euro but the future direction of China. The growth model responsible for its rapid rise has run out of steam.

That model depended on financial repression of the household sector, in order to drive the growth of exports and investments. As a result, the household sector has now shrunk to 35% of GDP, and its forced savings are no longer sufficient to finance the current growth model. This has led to an exponential rise in the use of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in the US in the years preceding the crash of 2008. But there is a significant difference, too. In the US, financial markets tend to dominate politics; in China, the state owns the banks and the bulk of the economy, and the Communist Party controls the state-owned enterprises.

Aware of the dangers, the People’s Bank of China took steps starting in 2012 to curb the growth of debt; but when the slowdown started to cause real distress in the economy, the Party asserted its supremacy. In July 2013, the leadership ordered the steel industry to restart the furnaces and the PBOC to ease credit. The economy turned around on a dime. In November, the Third Plenum of the 18th Central Committee announced far-reaching reforms. These developments are largely responsible for the recent improvement in the global outlook.

The Chinese leadership was right to give precedence to economic growth over structural reforms, because structural reforms, when combined with fiscal austerity, push economies into a deflationary tailspin. But there is an unresolved self-contradiction in China’s current policies: restarting the furnaces also reignites exponential debt growth, which cannot be sustained for much longer than a couple of years.

How and when this contradiction will be resolved will have profound consequences for China and the world. A successful transition in China will most likely entail political as well as economic reforms, while failure would undermine still-widespread trust in the country’s political leadership, resulting in repression at home and military confrontation abroad.

The other great unresolved problem is the absence of proper global governance. The lack of agreement among the United Nations Security Council’s five permanent members is exacerbating humanitarian catastrophes in countries like Syria – not to mention allowing global warming to proceed largely unhindered. But, in contrast to the Chinese conundrum, which will come to a head in the next few years, the absence of global governance may continue indefinitely.

© Project Syndicate

Predictions for the economy- from Social Journal Europe. Implications for NZ's mismanaged economy.

The Global Economy In 2014 – Slow Growth And Short Tails

02/01/2014 by Nouriel Roubini Leave a Comment

Nouriel Roubini

The global economy had another difficult year in 2013. The advanced economies’ below-trend growth continued, with output rising at an average annual rate of about 1%, while many emerging markets experienced a slowdown to below-trend 4.8% growth. After a year of subpar 2.9% global growth, what does 2014 hold in store for the world economy?

The good news is that economic performance will pick up modestly in both advanced economies and emerging markets. The advanced economies, benefiting from a half-decade of painful private-sector deleveraging (households, banks, and non-financial firms), a smaller fiscal drag (with the exception of Japan), and maintenance of accommodative monetary policies, will grow at an annual pace closer to 1.9%.

Moreover, so-called tail risks (low-probability, high-impact shocks) will be less salient in 2014. The threat, for example, of a eurozone implosion, another government shutdown or debt-ceiling fight in the United States, a hard landing in China, or a war between Israel and Iran over nuclear proliferation, will be far more subdued.

Still, most advanced economies (the US, the eurozone, Japan, the United Kingdom, Australia, and Canada) will barely reach potential growth, or will remain below it. Households, banks, and some non-financial firms in most advanced economies remain saddled with high debt ratios, implying continued deleveraging. High budget deficits and public-debt burdens will force governments to continue painful fiscal adjustment. And an abundance of policy and regulatory uncertainties will keep private investment spending in check.

The Global Economy In 2014

The outlook for 2014 is dampened by longer-term constraints as well. Indeed, there is a looming risk of secular stagnation in many advanced economies, owing to the adverse effect on productivity growth of years of underinvestment in human and physical capital. And the structural reforms that these economies need to boost their potential growth will be implemented too slowly.

While the eurozone’s tail risks are lower, its fundamental problems remain unresolved: low potential growth; high unemployment; still-high and rising levels of public debt; loss of competitiveness and slow reduction of unit labor costs (which a strong euro does not help); and extremely tight credit rationing, owing to banks’ ongoing deleveraging. Meanwhile, progress toward a banking union will be slow, while no steps will be taken toward establishing a fiscal union, even as austerity fatigue and political risks in the eurozone’s periphery grow.

In Japan, Prime Minister Shinzo Abe’s government has made significant headway in overcoming almost two decades of deflation, thanks to monetary easing and fiscal expansion. The main uncertainties stem from the coming increase in the consumption tax and slow implementation of the third “arrow” of “Abenomics,” namely structural reforms and trade liberalization.

In the US, economic performance in 2014 will benefit from the shale-energy revolution, improvement in the labor and housing markets, and the “reshoring” of manufacturing. The downside risks result from political gridlock in Congress (particularly given the upcoming midterm election in November), which will continue to limit progress on long-term fiscal consolidation; a lack of clarity about the Federal Reserve’s planned exit from quantitative easing (QE) and zero policy rates; and regulatory uncertainties.

Emerging markets’ difficult year in 2013 reflected several factors, including China’s economic slowdown, the end of the commodity super-cycle, and a fall in potential growth, owing to delays in launching structural reforms. Moreover, several major emerging economies were hit hard in the spring and summer, after the Fed’s signal of a forthcoming exit from QE triggered a capital-flow reversal, exposing vulnerabilities stemming from loose monetary, fiscal, and credit policies in the boom years of cheap money and abundant inflows.

Why Emerging Markets Will Grow Faster In 2014

Emerging economies will grow faster in 2014 – closer to 5% year on year – for several reasons. Brisker recovery in advanced economies will boost imports from emerging markets. The Fed’s exit from QE will be slow, keeping interest rates low. Policy reforms in China will attenuate the risk of a hard landing. And, with many emerging markets still urbanizing and industrializing, their rising middle classes will consume more goods and services.

Still, some emerging markets – namely, India, Indonesia, Brazil, Turkey, South Africa, Hungary, Ukraine, Argentina, and Venezuela – will remain fragile in 2014, owing to large external and fiscal deficits, slowing growth, below-target inflation, and election-related political tensions. Some of these countries – for example, Indonesia – have recently undertaken more policy adjustment and will be subject to lower risks, though their growth and asset markets remain vulnerable to policy and political uncertainties and potential external shocks.

The better-performing emerging markets are those with fewer macroeconomic, policy, and financial weaknesses: South Korea, the Philippines, Malaysia, and other Asian industrial exporters; Poland and the Czech Republic in Europe; Chile, Colombia, Peru, and Mexico in Latin America; Kenya, Rwanda, and a few other economies in Sub-Saharan Africa; and the Gulf oil-exporting countries.

Finally, China will maintain an annual growth rate above 7% in 2014. But, despite the reforms set out by the Third Plenum of the Communist Party’s Central Committee, the shift in China’s growth model from fixed investment toward private consumption will occur too slowly. Many vested interests, including local governments and state-owned enterprises, are resisting change; a huge volume of private and public debt will go sour; and the country’s leadership is divided on how quickly reforms should be implemented. So, while China will avoid a hard landing in 2014, its medium-term prospects remain worrisome.

In sum, the global economy will grow faster in 2014, while tail risks will be lower. But, with the possible exception of the US, growth will remain anemic in most advanced economies, and emerging-market fragility – including China’s uncertain efforts at economic rebalancing – could become a drag on global growth in subsequent years.

© Project Syndicate