Economic Policy for Lemmings

Economics is a complex study because economies are systems reliant on many variables which interact with each other in ways that are difficult to interpret. As an economist what you tend to do is to have a basic belief about how the interactions work and a particular focus on variables you think matter most. A Keynesian, for example, would focus strongly on effective demand and its interaction with government spending. A neoclassical would focus on tax cuts for the wealthy as a stimulus to economic activity. A green economist would make energy a key variable in their consideration, as well as money.

But surely we must be consistent in our basic understanding of how economies work. So if we think that spending cuts can lead to recession in one country this must be the case for another country that also has a similar level of economic development and is also a capitalist economy? I ask this question because of the bizarrely inconsistent reporting of the emergency debate in the US about whether to rush voluntarily over the 'fiscal cliff'. In 2011 Congress passed the Fiscal Control Act, limiting politicians' freedom to make economic policy, and particularly prohibiting any policy that would increase the country's enormous debt.

It is an indication of the atrophied state of US democracy and the poor quality of its politicians that they can only make policy by tying their own hands at some future date. If the do not agree today then both sides will lose: there will be a rollback of Bush's tax breaks for the wealthy matched by cuts in spending on programmes for the vulnerable, including Medicare.

The political fight between politicians who have had to accumulate vast sums of campaign funding just to reach office is an unseemly and unrepresentative one, but the reporting of the potential consequences of 'falling off the cliff' is more troubling. The BBC reports baldly that the spending cuts could 'trigger a US slowdown' that might also lead to an intensification of the recession in the global economy. If this is so easy to see from the perspective of the other side of the Atlantic, why is it so hard to see that similar policies to cut public spending are also destructive to our own economy? As US politicians are criticised for stumbling towards the edge of the cliff, why are the same journalists not criticising the lemming-like instincts of Osborne and chums who gleefully decided to push us all over that cliff in their first budget proposals?

As I said earlier, it is hard to explain how economies work, and much harder to predict future economic outcomes. That is precisely why it matters to have a basic theory of how the main variables interact. If you think that public spending cuts lead to recession then you should say that clearly, and as clearly at home as when critiquing somebody else's economy. What we have seen so far in terms of public-spending cuts has been just the overture: the huge cuts to disability payments, housing benefits and transfers to local authorities represent significant withdrawal of effective demand. The consequences for the national economy will be a year of even deeper recession in 2013.
. Tweet

Drunken Driver Rewarded with Knighthood

How on earth can it be justified to give Hector Sants a knighthood in the New Year's Honours List? More than anybody else he is responsible for allowing the public interest to be neglected so that bankers could profit. His tenure as boss of the Financial Services Authority in the period leading up to the financial crisis defeats all attempts at superlatives. As the man who, more than any other individual, is responsible for the worst financial crisis for a century, that has detroyed livelihoods and bankrupted the country 'disastrous failure' seems wholly inadequate.

In a way typical of the Information Age, when if something isn't available via Google then it is not information, it is quite difficult to find out anything interesting about Sants. We do know that he approved the RBS takeover of the Dutch bank ABN Amro, costing billions in public money when RBS had to be taken into public ownership. We also know that the Commons Treasury Committee accused him of being 'asleep at the wheel' as the British economic car veered wildly around the risky financial roads to speculation and dodgey takeover deals. More speculatively, in March of this year the Evening Standard reported on Sants's failure to protect UK investors during the collapse of broking firm MF Global.

He seems fairly efficient at organising his own PR, viz this fawning story by Jill Treanor in the Guardian, encouraging us to admire a man who gives up his massively overpaid job in the city to engage in public service as a regulator. I suppose she must be feeling rather sheepish since news emerged about his megabucks position at Barclays. From banker, to the regulator who did not regulate, and back to banker - what is there to admire in such a trajectory? Awarding a public honour to such a man is just to rub our noses in the culture of rewards for failure, while the price of the failure is borne by citizens who just work hard or the vulnerable who rely on public services.

In his evidence to the HoC inquiry Sants commented that people who have shown 'serial misjudgement' should not be allowed to run financial organisations again. Although he also confessed to his own failure in this evidence he does not seem to think this undermines his right to a multi-million pound job as head of compliance at Barclays. In awarding him a knighthood the establishment clearly agree. His service to British banking has been rewarded; the devastation wreaked on the British people and our economy ignored.
. Tweet

Finding Your Place in Space

In spite of the cultural dominance of the idea of 'science' and forming understandings on the basis of 'facts' it is clear that what you think you are is crucial to defining what you are and what you may become. The furore over an ancient calendar belonging to a people who were arguably destroyed by the technologically superior culture of our ancestors is demonstrating today the influence of myths in determining our sense of ourselves in time. I want to argue that we should also be asking questions about how we think of our place in the world in a geographical sense.

Most of us are defined by political boundaries. I am a councillor for Stroud District, but when I think of 'Stroud' it is the people and the landscape that make it a place I love. This emotional identification of places through natural landforms and human and animal companions lies at the heart of the reconceptualisation of our world that bioregionalism demands. It is for this reason that I called my book The Bioregional Economy. I suggest bioregions as the basic provisioning units of a system of self-reliant local economies that will be the sustainable economy of the future. But perhaps more importantly I suggest the importance of a undertaking a rethinking of who we are that involves allowing our selves to be defined much more by the part of the world we inhabit.

Blogger and - crucially - geologist Nick Arini has taken this idea on an produced a really interesting and useful blog about what the boundaries of his bioregion might be. Nick concludes that proponents of bioregions often suggest one characteristic to use in defining their boundaries: watersheds, say, or geological underpinnings. He argues for, and I would agree, a fusion of characteristics, and that the definitional characteristics are specific to each bioregion. He concludes:

'I wanted to consider a bioregion as a living being and this idea that each region is unique and is defined by its own set of characteristics supports this notion. Applying the same formula to each different bioregion is likely to yield sub-optimal results. Listen to your region and let it tell you what characteristics are important for defining its identity.'

He is suggesting sketching the boundaries of other UK bioregions, although since this process is all about knowing your backyard this process is best done as close to home as possible. If you would like to follow Nick's example and define your bioregion please be sure to let me know how you get on.
. Tweet

Laughing All the Way to the Bank Bailout

At last something has come out of Ireland that gives you a reason to smile, if only wryly. Campaign Group Debt Justice Action has made an application to the Guinness of Book of Records on behalf of the Irish government. The category: most expensive bank bailout per head of population. As the video tells, since Iceland refused to allow its citizens to carry the weight of private bank failure, 'plucky little Ireland' has enforced on its citizens more private debt than any other country - including Greece. The cost is €16,500 for every man, woman and child in the country.

According to the Irish Independent, Ireland is the only country currently suffering from a banking crisis so serious as to rank in the top ten worst banking crises of all time. The country has already won the dubious accolade from the International Monetary Fund of being the costliest since the Great Depression. The study by IMF researchers compares the severity of 147 banking crises between 1970 and 2011.

Debt Justice Action tells us that:

'It is estimated that at least €67.97 billion has been poured into Irish banks so far, representing 45% of GDP, which came to €156.4bn in 2011 though DJA argue that the nature of Ireland’s economy makes the figure of 56% of GNP, €123.9bn in the same year, more relevant.

Of the €70 billion, one single institution, the infamous Anglo Irish Bank, accounts for over €30 billion of socialised debt. When the interest is factored in, this will cost Ireland €47 billion, or the equivalent of €26,000 per person working for pay or profit in the country.'

Two conclusions seem worthy of note. First, and most obviously, a global financial system that is so crisis-prone, and whose costs are so immense, is clearly in need of major structural reform. But secondly, the loss of the Irish people is the gain of the financiers, hence the general paean of praise for Ireland's politicians while they beat up on their old, sick and vulnerable citizens to pay their corrupt bankers.
. Tweet

Not with a Bang - Not Yet

The news that the inquiry into the decision about whether to build a new nuclear station at Hinkley Point in Somerset was complete in less than a year slid out into the public domain almost unnoticed. In spite of the horrors of Fukushima - still unresolved - in spite of the decisions by a number of other countries to abandon their nuclear programmes, the UK government is still ploughing ahead with this dangerous and out-dated technology. Local people demonstrated but were barely covered by national media. Where was the lengthy and dramatic public inquiry, akin to the three-year process that preceded the permission for a new station at Sizewell in 1987?

Such things are now vestiges of a lost democracy, swept away in the brave new world of the Infrastructure Planning Commission, now 'seamlessly transferred' into the Planning Inspectorate. Without any apparent irony the government website informs us that: 'The main change introduced by the Localism Act will be that the relevant Secretary of State will be the decision maker on all national infrastructure applications for development consent. The Secretary of State will have three months to make a decision, following a recommendation from the Planning Inspectorate'. The main consequence of Pickles's commitment to localism is that he will now make all controversial decisions in his department in London.

Being somewhat surprised about the speed with which the Hinkley decision was made I enquired of the National Infrastructure Directorate of the Planning Inspectorate about how the members of the Hinkley panel were chosen and what was their relevant experience. I was told that when the IPC was an independent body the Commissioners were public office-holders whose biographies and personal information was available on the IPC's website. When it was subsumed into the Planning Inspectorate they became civil servants and so it was no longer appropriate to publish their personal details.

Chair of the panel Andrew Philipson appears to set the tone for the approach to people's concerns in the face of the planning juggernaut. According to a press release from Stop Hinkley: 'When local resident and single mother Nikki Clarke asked who would look at the dangers of nuclear power to the health of local children if the IPC were not prepared to do so, Sir Andrew's response was to tell her that her point was irrelevant; when she tried to continue he had her microphone switched off and adjourned the meeting, asking her to leave.'

This is what the Ministry of Localism means: the ministry of centralised decision-making in favour of the elites, within a government committed to communication by doublespeak.

Tweet

Bristol Green Deal

The election of an independent  mayor in Bristol offers opportunities for truly creative policy-making. In this guest post Chris Cook, a former market regulator in futures and petroleum markets and now senior research fellow at UCL, suggests a novel financing mechanism for funding a rapid expansion of Bristol’s renewable infrastructure as one step on the road to what he calls a ‘natural grid’.

One of the key objectives of any 21^st century political administration – and Bristol is no different - is how to achieve energy independence and energy security by becoming as self sufficient in energy as possible. Energy independence for Bristol can be achieved in two ways: firstly by investment in Bristol renewable energy, and secondly, by massive investment in energy efficiency.  21^st Century problems cannot be solved with 20^th century solutions, but the irony is that the radical funding solutions leading to energy independence may be found prior to the advent of modern banking in1694.

Prepay 1.0

It has been long forgotten, but for many hundreds of years British sovereigns financed their expenditure though issuing undated IOUs – at a discount enabling a profit - to creditors who provided value in exchange. These IOUs were returnable in payment for taxes and that part of the wooden 'tally stick' record issued to a creditor as a token of the IOU was known as the 'stock'.

Interestingly, the phrase 'rate of return' describes the rate at which the creditor could generate his profit by returning his IOU/stock to the Exchequer for cancellation.  The more tax he was due to pay, the quicker was the rate of return of the stock.

Now, while the idea that the mayor's administration might fund itself by issuing prepaid rates 'stock' at a discount in this way is a fascinating one, it happens to be illegal, and this proposal is rather more pragmatic, being achievable immediately, with no change in any law.

Prepay 2.0

Both renewable energy and energy efficiency are free.  Clearly, if renewable energy or energy savings can be packaged and sold to investors at the right price, then necessary capital investment can be funded. But there are several problems with conventional sterling (£) funding of renewable energy.

Firstly, compound interest on bank borrowings: a debt doubles in 10 years at 7% compound interest.  Secondly, electricity is sold at a low price to a wholesaler, who makes as much profit as the regulator permits when selling to retail customers. Thirdly, the high rates of return demanded by investors in respect of shares in Victorian vintage 'Joint Stock' Limited Liability Companies. 

Then, to add insult to injury, because most renewable energy development is by foreign owned companies, most of these fat profits from UK renewable energy are hoovered out of the UK. So, let's put renewable energy investment to one side for the moment and look at the low-hanging fruit: massive investment in energy efficiency – or a Bristol Green Deal.

The Gas Pool

The Gas Pool will be a fund, administered by an ethical and competent provider of financial services such as Triodos Bank. The proposition for Investors is that they may buy units in the Pool, and that these units will be denominated, like their gas bill, in MMbtu's of heat energy.  So investors may invest directly in the value of natural gas. However, in addition to only being able to sell units conventionally (or unconventionally)  to other investors they will also have the 'stock' choice of returning their units in payment for gas bills.

Note here that in the US there are billions of dollars invested in natural gas and other energy funds by investors who observe zero% interest on Treasury Bill investment, while the Federal Reserve Bank prints new dollars massively.  These risk averse 'inflation hedger' investors do not seek a return on their capital: they simply seek a return of their capital.

Gas Loans

The Bristol Gas Pool will invest – alongside the existing Green Deal and complementary to it – in 'micro' level energy saving investments in homes and the resulting 'Gas Loans' will be repaid as occupiers buy back units in the Gas Pool at the gas market £ price via their gas bill.

The conventional bank debt funded Green Deal suffers from two flaws: firstly, compound interest at perhaps 7%, and secondly, the behavioural problem that even though people may save £ there is no guarantee they will save energy. However, with Gas Loans, there is firstly no compound interest, since the return to investors is in the energy value of gas, and secondly unless occupiers use less energy then they will not save £. With the right legal and financial structure, such a Bristol Green Deal could be introduced tomorrow.

A Natural Grid

But of course, investment in homes addresses only part of the problem.  The UK needs a least energy cost 'Natural Grid' which is complementary to the 'least £ cost' National Grid currently festooning the country's beauty spots with pylons. Denmark leads the way here, both with retrofitting 'macro' infrastructure (eg Copenhagen's 150km hot water grid) and with massive 'bottom up' investment in community level heat infrastructure, such as combined heat and power, and heat storage.

Such macro and 'meso' level investment in Bristol – such as a network of community level modular Combined Heat & Power installations- may be funded using similar techniques. But exactly how that works would be - like resolution of unsustainable Bristol property debt using similar investment techniques – for another radical Bristol policy story.

.

Tweet

Understanding Money

Many people are seeking to understand how the money system works and looking for answers on websites and in books. My own journey of discovery has been informed more by Mary Mellor than by anybody else. She has a refreshingly down-to-earth approach and an underlying commitment to sustainability that make her explanation particularly appealing.

Very sensibly, Mary's local Transition Towns network asked her to give a series of lectures explaining money, which were filmed and have been made available online. Mary gives four lectures: What is Money?, Money and Banking, The Financial Crisis, and The Future of Money. Mary's view of the latter is an empowering one: money should be a social resource from which we all benefit. We must end the privatisation of money and the banking monopoly.

Mary is critical of the view of money in economic theory, claiming that it is shot through with inconsistencies. It is focused on modelling rather than understanding. 'The influence on coinage on Western notions of money has misled us', she claims. Even in 1698 the amount of money held in 'tally sticks', a physical system of recording money owed between two parties, was actually larger than the amount of money held in coins. Money is a story of relationships, a story of communities, and of economic exchanges based on trust.

James Robertson, doyen of the monetary reform movement and grandfather of green economics, said about these lectures: 'Mary Mellor's understanding makes an essential contribution to anyone wanting to know more about how the money system work and what its future could and should be. I warmly recommend these films to anyone who wants to learn more and think what we should do about it.' So please find time to watch them, learn more, and begin to change the world.
. Tweet

Life Beyond Growth: Join the Evolution

I have been puzzling over why the Office for Budget Responsibility, which was only established to give prudent and honest advice about what is happening in our economy, has failed so resolutely to either predict or interpret the current economic position. It hasn't helped that the man chosen to head up the organisation was qualified in communications more than in economic analysis, but perhaps there are deeper answers to the questions about why it keeps predicting more growth than we are likely to achieve.

If you were on the edge of a paradigm shift, would you honestly be able to look across the gulf and believe what you were seeing on the other side? Or, rephrasing that question with relevance to the purpose of this blog, would you be able to believe that growth will never return and that your job as an economist should be not predicting its returning, or even trying to bring about its return, but rather encouraging the evolution of the economy towards a structure that does not rely on growth?

Let's spend a while looking at the figures. Osborne's disastrous revisions to his growth figures, which lead him to conclude that we must face at least another six years of grinding austerity, are based on more OBR predictions. The OBR now suggests that the 0.8% growth they predicted just eight months ago has been transformed into 0.1% of contraction. Next year's growth, they suggest, while less than their March prediction of 2%, will still be a determinedly positive 1.2%. The fantastical nature of these predictions arises from the fact that the past always looks worse than in OBR-land, but the future continues to look rosier. This suggests a failure of judgement and the need for a reality check. The OBR economists appear to be psychologically incapable of responding to a world beyond growth: being incapable of imaging such a world they gaily predict it away.

What is the view from Euroland? Even the German economy, the final functional growth engine, is beginning to sputter. In spite of our view of Germans as sober and rational, the disease of fantastical prediction appears to be spreading their way. The Bundesbank is making even more rapid adjustments to its predictions, suggesting the German economy will grow by just 0.4% next year compared with its June forecast of 1.6%. When a key economic variable can be reduced so drastically in just five months you realise that you are dealing with psychological rather than statistical error.

So what does the economy beyond growth look like? At present, without any evolution in our expectations and basic parameters, it looks very grim indeed: desperate pressure on the planet, growing inequality as the fight over the shrinking pie continues, and increasing social tensions as the elites refuse to accept that a future without growth means they cannot continue to extract disproportionate amounts of wealth as they have in the past.

Yet as a green economist I can see the end of growth as part of a story with a decidedly happy ending. Economic growth, and the inequality and ecological pressure it brings with it, could be replaced by an economy where the objective was balance and harmony between people, other species, and the planet we share. How can we move towards such an economy? What might its social and political institutions look like? How can we begin to create a culture that makes this not just a possible but a desirable future. It is to answer these questions that Green House is hosting a seminar in London on 19 December in partnership with the Green European Foundation. Please join us - and join the evolution.

.

Tweet

Winter Statement of Discontent

Some have characterised the presentation of the Chancellor's autumn statement yesterday as a paradox of political theatre: how could a man who comes to the house to admit that he has failed in all the objectives he set himself possibly look so cheerful? And how can the opposition perform so badly in response? The key to the answer lies in the word theatre: what the Tories do so well is the debating they learned in their public schools, which they perform with the panache of those educated to know that they have the right to rule.

And from another perspective, of course, Osborne has been one of the Conservatives' most successful chancellors. He has used the financial crisis to advance the interests of capital in ways that would have seemed impossibly radical before 2008. The measures offer clearer evidence yet of the Tory strategy of using the debt to achieve long-desired political objectives.

Item 1 is the cut to corporation tax, now to be reduced by 3% in April rather than the promised 2%, meaning an official rate of 21% from 26% last year: a full 5% reduction in the contribution from business at the very time they are in the dock for avoiding the tax they are supposed to pay. Osborne boasted of his generosity to corporates: 'This is the lowest rate of any major western economy. It is an advert for our country that says: come here; invest here; create jobs here; Britain is open for business.' The headline UK rate has already been reduced from 26% to 24% this year. The rates of 40% in the US, 33% in France and 29% in Germany make it clear which Chancellor is really the capitalist's friend and help to explain why we can no longer afford to fund our public services.

Items 2 is cuts to welfare, with a three-year freeze meaning real reductions and real hardship for all except pensioners. It is basic arithmetic to explain why those on the lowest incomes can least afford to see their incomes squeezed by inflation since the marginal impact on them of rising prices is so much strong. The justice of this situation is about not depriving the poor of the means to survive, rather than some new conservative commitment to income differentials. And meanwhile the stigmatisation of all those who claim welfare (which is probably around 99% of us at some point in our lives) stokes the fires of prejudice and fear.

The best news in the budget is the retreat from an earlier announcement of an end to national public sector pay. In the poorer areas of the country, nationally negotiated pay rates for public-sector workers can keep local businesses afloat in desperate economic times like these. Negotiating deals for teachers and doctors that relates to local labour-markets would have sucked more money out of the regions, exacerbating the inequalities between regions that have already increased throughout this Recession. Presumably the U-turn here was a result of Liberal Democrat pressure.

The 'greenest government ever' banner now lies in tatters at the Chancellor's feet as he lures investors into the sorts of developments that will drive economic growth at any cost, threatens to abandon Labour's climate change targets, and offers subsidies to the frackers. With 30 gas-fired power-stations looming and the final abandonment of the fuel-duty escalator we can wave goodbye to any hope of doing out part to prevent carbon dioxide emissions from spiralling out of control.

The language used by the Chancellor is also deceptive and oppressive, although I find it helps to substitute the word 'capital' for the word 'business', making sense of Osborne's repeated claims to be 'prioritising the interests of business'. I am also intrigued by the constant repetition of the phrase 'the economy is healing'. Is the personification of a complex system made up of a mass of individuals supposed to win or empathy? Or to soften the perception of the stark economic news? It is fairly clear that, rather than healing, the economy is like a patient that has been stitched up leaving a festering wound inside. Proper healing would have required tackling the distorted financial and monetary systems rather than ignoring their flaws and hoping that they will somehow mend themselves.
.

Tweet