How is the Chancellor Engineering a Pre-Election Boom?

After several years of dire economic news, suddenly, just about the time when parliament went into recess, the stories about the British economy changed. Almost overnight we moved from gloom to boom, with Osborne celebrating 0.6 growth and the euphoric tone of the journalists outstripping that of the Chancellor. With an election now just 18 months away, and it being certain to be an election dominated by arguments about the economy, this has made me rather suspicious about how this return to economic joy is being measured, and how the dark forces of monetary manipulation might be influencing it.

I am not alone in my suspicion that the happy economic news may not be all that it seems. The traditional left, however, limits its critique to the suggestion that the increase in GDP is being driven by the retail sector and is based on withdrawn savings by those who can no longer wait for their wages to rise. Frances O'Grady's claim that 'Britain's fragile recovery is being propped up by families raiding their piggy-banks' is supported by ONS data showing that the ratio of household spending to savings has fallen from 7.4% for 4.2% in the past year.

What first made me nervous about the 'return to growth' was Faisal Islam's excessive use of superlatives on his Channel 4 News report on Monday. He has Capital Economics predicting 1.5% growth in this quarter alone, with huge increases in both business confidence and business investment. This caused me to think back to the stories of companies sitting on cash (largely accumulated as a result of the government's loose monetary policy via QE) because of fear of investing it. There was much discussion of how the Chancellor might encourage companies to invest their cash-pile to revive the economy, including the suggestion that he might impose a levy on them for stagnant cash holdings.

Has the Chancellor somehow found a way of encouraging UK corporates to start spending the £750bn. they have in reserves (incidentially, a figure equal to half the UK's annual GDP)? Certainly his proposal for tax relief on smaller companies, who apparently hold around £120bn. of the total, which was included in last year's autumn statement, may be beginning of have an impact. But is there some other incentives for companies to invest, or threat do them if they do not?

The less subtle evidence of engineering is in the form of the incentives to restart the housing market, that well worn engine of unsustainable booms past. The Help to Buy scheme supports purchasers of new homes to take on mortgages that the banks think they cannot afford to pay. It is thus risky in two regards, since it will tend to keep house prices at the sort of excessive levels that led to the financial crisis in the first place, and at the individual level it risks households losing their homes if interest rates rise. It does appear to have stimulated a boom in house building which helps to explain the higher GDP figures.

The manufacturing and production figures illustrated in the graphic make it clear that the hype over recovery is seriously overdone. Production and manufacturing - the sort of real economic activity that the Conservatives claimed they wanted us to rebalance towards - is still struggling and nowhere close to the level it was before the financial crisis. The improvements we see appear to stem much more from monetary manipulation and the shuffling of cash between various elite players. This sort of wealth does not find its way down to those on average incomes who are struggling with the consequence of the capitalist disaster of 2008.

However, the Conservatives are playing the politics of this extremely cleverly. The Chancellor is likely to come out of his term in shared government with the public sector smashed up and Labour vowing to continue with these destructive and draconion cuts. The recession has also led to a culture of fear amongst employees, who are accepting reduced wages and appalling working conditions, as exemplified by the zero-hours contract. A success for George and his cronies but the real problems around the failure of manufacturing, the ongoing trade deficit and lack of resilience in our local economies and the iniquitous failure of the banking system are all yet to be addressed.
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Quantitative Easing for the Poor?

Creating money was once looked on as a dangerous game, destabilising the economy and potentially leading to rampant inflation. But this traditional wisdom was swept aside and now the financial junkies are protesting the advertised end of the policy in the US and creating market falls on the basis of those expectations. In the UK context, researchers at the Bank of England investigated the distributional effect of their QE policy, i.e. who were the winners and who were the losers. Their conclusion was that most of the benefits accursed to the wealthiest 5% while some of this living on pensions were losing out quite substantially.



On the radical side of economics we have been trying to argue for direct credit creation for social benefit. At the beginning of this month the New Economics Foundation issued a report formalising this demand. Strategic quantitative easing makes the case that new money should be directly created by government to fund the transition towards a sustainable economy, particularly paying for green infrastructure and the rapid policy of home insulation that will reduce carbon emissions and prevent deaths through cold this coming winter.

Now it seems that the US government has found a way of making credit creation work for the poor. I had not realised until I watched Faisal Islam's extraordinary report on the Rhode Island gold card the sheer extent of the federal food stamps programme. US commentators have noted that the food stamps programme is the modern equivalent of the Depression era soup kitchens. It seems sadly symbolic of our individualist and technocratic age that rather than sharing a bowl of soup, in no matter what dreary conditions, today's dispossessed are issued with a deceitful imitation of the gold credit card of the wealthy.  Nationally, the number is approach 50 million and as Islam's report showed, it is now remarkably easy to use your preloaded card to do your shopping.

Now I know that the money to pay for this programme, a huge $75bn., is not directly created, but since the quantitative easing programme buys back treasury bonds, thereby reducing the debt, it effectively creates the scope for this massive federal programme for the poor. It also makes clear that questions about how money is made and who has the right to decide how it is spent has been removed from democratic control through the increasing use of technical language for what is really simple. Governments can make money directly and it is a political choice that in the UK that money is sent to financial institutions rather than to help the poor.
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