Tag Archives: Gordon Brown

An Irreverent Explanation of the Politician’s Ways of Managing the Economy

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There are many ways to explain the politicians peculiar grasp of economics. One of the best ways of doing so is through metaphor. A great many of our politicians are lovers of Opera, particularly those in the Conservative government. Imagine their horror and anger if a football manager were appointed Director of the Royal Opera House Covent Garden. They would want to know why this uneducated person, who lacking any knowledge of the culture of Opera had been appointed to the post. There reaction would be similar to that of economists, when they hear the name of the person appointed to the post of Chancellor of the Exchequer. Taking the analogy further a football manager might know a little about Opera, it is quite likely that they could be familiar the popular opera Carmen. However their lack of knowledge of Opera would make them totally unsuitable for the post. Again with politicians they might well know a little economics, but not enough to qualify them for the post of the nation’s director of economic affairs.

Metaphorical football managers have always been appointed to the post of Chancellor. Never is a knowledge of economics required as a prerequisite for the post. What is required is that the person appointed is a master of the political game. In the past it mattered less that metaphorical football managers were appointed Chancellor, as they would seek advice from those who understood economics and economic management. Advice would come from Treasury economists or from academics recruited as advisors. Unfortunately now these football managers no longer believe that they need the advice of experts. It as if the uninformed Director of the Opera House decided that as he knew something of the opera Carmen, this was sufficient to qualify him for choosing the forthcoming season’s programme. Now exactly the same happens in the management of the economy.

However I should not be too dismissive of all these metaphorical football managers. They can make surprisingly good decisions. Gordon Brown instinctively knew that British membership of the European Monetary Union was wrong. He asked for evidence from economists to confirm whether or not his gut feeling was correct. They duly delivered. Britain was spared the austerity programme which membership of the Euro required and until the crash of 2008, Britain’s economic growth was greater than that if its European rivals. Only in 2010 when a politician who was an eschatological economist became Chancellor did Britain’s economic performance dip below that of its European rivals.

Eschatological economists are those politicians that believe rather than preparing for the coming of the Kingdom of Heaven, they should be preparing for the coming of the free market. Much as with those Christians who believe the coming of the Kingdom of Heaven will remove all ills and evil from the world, they believe that the free market economy will remove all the evils of the socialised economy from the world and deliver the greatest possible benefits to mankind. Just as with the Christians they know that there Kingdom is at hand. However their Kingdom is not the gift of some supernatural deity, but one that can be created by men themselves. When they faced with the criticism that all the deregulation of the past twenty years has failed to deliver the promised world, they explain that the changes have not gone far enough. What they argue is that we at present are experiencing the painful birth pangs of a new society, all we need to do is be patient and wait for the reforms to bear fruit.

While it may seem odd to describe the dull and rather grey people who dominate politics as being in the grip of some earthly charismatic religion, it is the only way to describe their behaviour. They as with all true believers are impervious to reality. They know the truth and they won’t be deflected from the true path. Perhaps the best way of illustrating this truth is by referencing the last two Chancellors of the Exchequer, both of whom are eschatological economists. They both believe the best society is one run on free market principles. One characteristic of a free market is small government, that is a government that is restricted largely to a few basic roles necessary for the survival of human society. Roles such as the maintenance of law and order and national defence. In there perfect society the government is but a bit player in the economy. All the real decisions of significance are undertaken by businesses and consumers.

What is most significant is that these people disregard the negative impact their shrinking of government programme. One of the main methods of doing this is to reduce government spending. As a government with a small budget is but a bit player in the economy. This is achieved bu cutting the funding available to public services. Anguish expressed about longer hospital waiting lists, the shortage of medical staff and hospital beds don’t resonate with them. What matters most is that they reducing the government budget. These problems they believe are but a small price to the benefit of creating small government. They know that we will all benefit in the long run, once they have achieved their aim of introducing the truly free market economy. Us foolish people don’t understand the benefits that will accrue from the changes that they are introducing.

There is one instructive example from history that can be used to explain the behaviours of our current generation of eschatological economists/politicians. The early Jewish followers of Christ in Jerusalem were the Ebionites. These people believed in the imminent coming of the Kingdom of Heaven and the return of Christ. They gave away most of their wealth to help provide for the poor. Since they expected Messiah to return soon, there was no need to take the practical measures necessary to feed and support themselves. Unfortunately the inevitable happened and these distressed and newly poor began to suffer hunger and all the problems of poverty. They had to beg for help from Christian groups in other cities. Unfortunately the Roman destruction of Jerusalem and the enslavement of its peoples led to the disappearance of the Ebionites from history. All that can assumed is that they adopted a more practical lifestyle, as a means to ensure their survival. The behaviour of these Ebionites has similarities with the behaviour of contemporary Brexiteers, who are equally impracticable.

This weekend a series of studies were published demonstrating what would be the effect of Britain being a third country outside the EU. Customs barriers would immediately be put in place, as goods going between Britain and the EU would have to submit to customs checks. These will mean delays in the handling of goods, particularly as the British government has not put into place the necessary infra structure to handle the import and export of goods. The result will be food shortages in our supermarkets, as 50% of our food comes from abroad and mainly from the EU. Other problems will result such as shortages of medical supplies. Our Brexiteer politicians deny the reality of this scenario, as just as the early Christians believe that could neglect the practicalities of every day life and just prepare for the return of Christ, so the Brexiteers refuse to engage with the practicalities of leaving Europe. All the practical problems highlighted in various government reports or those from industry are dismissed as imaginary. All we have to do is wait for that blissful day when we exit regulation bound Europe and again become free. As with Ebonites all that it is necessary to do, is to wait for the blissful day to arrive, no practical measures are necessary.

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Fools Gold or the Economic Follies of Phillip Hammond and like minded Conservative Politicians.

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Our current Chancellor is nicknamed spreadsheet Phil, a name intended to reflect his prowess in managing the country’s finances. His proud claim was to have achieved what most Chancellors had failed to achieve, that is a balancing of the books. He announced that the government daily revenues exceeded its spending. To use economic jargonese current revenue exceeded spending, that is tax revenues exceeded spending on hospitals etc. This was for him a cause for celebration and he was feted in the financial columns in the print media. However much like iron pyrites* all that blisters is not gold.

Chancellors of a Conservative mind have always sought to achieve the holy grail of sound money. A non existent myth much like that of the holy grail. As students we were given the example of Winston Churchill who as Chancellor who returned the pound sterling to the gold standard in 1925. He choose a rate that valued the pound at $4.84, its pre war value. He said that he wanted to look the dollar in the eye. A political move as the ravages of the First World War had diminished the relative value of the U.K. economy and its currency and had confirmed the USA as the world’s leading economy. Consequently the dollar was now the world’s strongest currency. Churchill wanted to put the pound on a par with the dollar. It was economic folly, as the expensive pound priced U.K. exports out of foreign markets. In consequence the U.K. had a trade deficit, which could only be kept within reasonable bounds by depressing the level of income activity. This cut the level of overall demand in the economy and so reduced the import bill. Much of the misery experienced by the people of the 1920s was a consequence of this policy.

Phillip Hammond just as did his predecessor, does not understand that a weak or unsound economy makes any sound money policy fallacious. Simply because such a weak economy is likely to experience sudden and unexpected downturns, which in the eyes of the financial community can render the sound pound and chancellors reputation unsound over night.

Our current Chancellor has continued with the austerity policies of his predecessor and has fulfilled his predecessors aim of ensuing that government revenues exceed its spending. What they both want is the respect of the financial community. If the financial community believe that the government is pursuing a policy of sound money, they both believe many benefits accrue. One is that this community will allow them to borrow at low rates of interest. However this is of little practical benefit when the government chooses not to invest. Currently investment in infra structure projects is the same as in Greece one of the most impoverished of all EU member states.

However the plaudits of the financial community soon become worthless in a financial crisis, as then that community is forced to confront stark economic realities, that they would prefer to ignore. At present the current benign economic climate allows the financial community to overlook the very obvious weakness in the economy. When forced to confront them they will turn on the government. Greece provides the obvious example of what happens in these circumstances.

Phillip Hammond is astute enough to realise that the U.K. is subject to regular periodic economic crisis.* When that occurs he might need to find the funds to tide the U.K. economy over that crisis. He believes that if he builds up a war chest of money by continually spending less than he receives, that money can be used to avert any run in the pound as occurred on Black Wednesday. What the Chancellor fails to understand is that this cash reserve will rapidly diminish in value as the pound falls in value during a crisis so in consequence making that reserve of cash too small to be of any real value. One of the characters says in a Stendhal novel, that what takes ten years to build can be destroyed in ten minutes of warfare. The same applies to Chancellor reputations. In any major financial crisis the government and the Chancellor rapidly lose all credibility, so all the years spent creating a reputation for soundness are rendered meaningless.

What should be the aim of any Chancellor is a sound economy not a sound money policy. While there are many fundamental weaknesses in the U.K., two stand out. The first is the persistent trade deficits. At 6% of GDP it is the highest of any developed country. This debt is financed in part from money invested in the U.K. by foreigners. As a country we are paying Germany, the USA and our many other creditors by recycling the money that there nationals invest in this country. A situation that cannot continue indefinitely. One day the financial community will decide that the emperor has no clothes.

Secondly as a nation the U.K. borrows short and lends long. The U.K. is one of the world’s leading financial centres and as a consequence many foreign nationals invest there savings in London. These moneys are usually invested in accounts with a short term notice of withdrawal and pay a relatively modest interest rate. British banks to finance these accounts lend long for which they receive a relatively high rate of interest. This arrangement works fine when the investors have confidence in the country concerned. In the event of a crisis these investors want their money back. If the amount invested is relatively small compared to the size of the country’s wealth (GDP), that country will have no problem in averting a temporary ‘country run’. When those sums are relatively large when compared to a nations GDP as in the case of the U.K., the county’s reserves of foreign currency will be too small to avert a ‘country run’. As Black Wednesday demonstrated when the country was bankrupted in one afternoon due to the activities of foreign currency speculators. Unfortunately spreadsheet Phil appears to be ignorant of this fact.

Britain’s chancellors should have been working to remedy all the flaws the financial crisis of 1992 and 2008/9 revealed. Instead there has been a papering over the cracks, with the so called sound money policy. This is not a folly practiced not by just Conservative Chancellors of the Exchequer. When Gordon Brown was Chancellor in a Labour government he also pursued a sound money policy, instead of implementing the necessary structural reforms necessary for strengthening a weak economy. Although the crisis of 2008/9 was a financial one caused by the foolish speculative activity of financial speculators, the fact that he and none of his successors failed to make any attempt to create a sound economy, meant that the economy has failed to make the expected recovery from the last crisis. The majority of the population have experienced either falling, stable or small increases in income since 2009, a mark of a failing economy.

It is a perverse rule of thumb that when the financial columnists particularly of the right wing media laud a Chancellor for the soundness of his economic policy making, usually that Chancellor is making a hash of things.

* Iron pyrites or fools gold were the staple of many stories in the cowboy magazines of the 1950s.

* He is aware that just such a crisis might occur when the negative consequences of Brexit become obvious to all.

Bankers the unruly and uncontrollable children in the family

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Politicians seem to think that as they can manage their own family budgets, they have all the knowledge necessary to manage the economy. This results in statements such as the government needs to balance its books or that the country has maxed out its credit cards. Such statements demonstrate an appalling ignorance of the economy and how it works. However there is a competence that is lacking at the most elementary of levels,  as too many MPs are appalling at managing their own finances. Disraeli one of the greatest leaders of the conservative party was always on the verge of bankruptcy because of his extravagant lifestyle. Fortunately he had a rich wife and friends ready to bail him out. Politicians are as likely to follow his example as they are that of his prudent rival Gladstone. The recent expenses scandal when it was demonstrated that most MPs used their expense account to finance their comfortable lifestyle. People still remember the MP who used his expense account to pay for a duck house. If financial rectitude is not characteristic of many MPs This should give pause to any claim that they are capable of managing the economy.

If the analogy of family finances is to be made it should be said that the government resembles the nominal head of an unruly family, whose views are largely disregarded by the family members. The unruly children in the family take little notice of the head of the family, only listening to them and accepting their authority when they get into trouble. The banks are the obvious example as they pay minimal heed to the authority of the government except in times of crisis such as during the financial crisis of 2008.Once the crisis passed the banks forgot their need for government support and showed a lack of gratitude to the governments actions for bailing them out during the crisis. They successfully prevented the government from introducing a reform which would have separated their retail banking activities from those of investment banking. If a bank fails  in future the government is still on the hook, as it can’t protect the individual customers of the bank without bailing it out for the much larger losses incurred by its speculative investment banking arm.

This is no small matter as the combined assets of the banks are in total ten times the value of our national GDP.    Our national GDP is the country’s national income. There are four large banks in the UK and it is not unreasonable to suggest that the assets of each is in total a sum near to, equal to our GDP or greater than it. In the event of a failure of one of the large banks the government could be called on to raise a sum equivalent to our national income to bail them out. At one time during the crisis of 2008/9 the government of Gordon Brown had to pledge a similar figure to our banks creditors to prevent a run on their finances. Fortunately the banks creditors did not call on our government to make good this pledge, they were satisfied with the the pledge alone. When the next crisis occurs the country may be less fortunate.

When I describe the banks as unruly children over whose actions their parent has little control, there are numerous examples I can cite of such behaviour. Britains biggest bank is HSBC and Standard Chartered is its branch in the US. This bank almost lost its licence to conduct banking in the USA because of its money laundering activities. Only the pleas of the British Chancellor of the Exchequer prevented the American financial authorities from withdrawing its banking licence. It had lost its licence to bank in the USA, its parent bank HSBC would have been in serious financial trouble and it would have had to ask the British government for financial support to enable it to cope with the crisis.

The family finance analogy of which so many politicians are so fond of using describes so well the activities of the banks. The banks are the prodigal children who can behave as badly and irresponsibly as they wish as they know that their parent the British government will always come to their aid no matter how badly they behave.

In Britain as in most countries the politicians are content to remain in ignorance of these unpleasant truths. They believe that their homespun economics all they need, or they are ideologues who believe that the great prophets of economics Hayek, Friedman and Rand said all there is to be said about economics and the managing of the economy. This last group believes that all the answers to matters economic are to be found in books such as ‘The Road to Serfdom” (Hayek) or ‘Atlas Unchained’ (Rand).

There are a small group of politicians who understand the problems of which I have written, but they are only too willing to pretend that all is well in return for government office or employment as well paid lobbyists for the financial sector. Money is incredibly effective balm for soothing fear.

I am not the first person to express concern about the appalling ignorance of our politicians. Leo Amery looking around at his fellow politicians in the 1920’s said that the country would be better served, if there was  separate parliament consisting of industrialist and trade unionists to manage the economy and industrial policy.

A REPLY FROM AN ECONOMIST TO THE ANTI-INTELLECTUALISM OF DONALD TRUMP AND MICHAEL GOVE

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(There were many errors in my first draft, it was written in anger and published without  a thorough checking for error.)

Contention

Economists don’t always have the right answers, they can be wrong at times, but their answers to problems are better than those of ill-informed politicians and journalists. There are plenty of never-never land politicians selling an unreal picture of the world to the electorate. There are many fewer such economists because there work would have undergone informed scrutiny by their peers and much that is dubious would have been discarded. The overwhelming majority of economists believe that Brexit will inflict significant economic damage on the economy, while a significant number of politicians and most journalist believe the reverse (who are lacking any evidence apart from their misguided optimism in the rightness of their beliefs).

Confession of interest

I am one of those experts that Michael Gove spoke abouto he said people are fed up with and who they should be ignored by the people  when making decisions about the future, such as how to vote in the EU referendum. I am one of those people who following Aristotle’s advice  have dedicated the best part of their life to study. What Michael Gove is trashing is the value of learning, I cannot accept that my years of study have been wasted. How can such small minded person go against centuries of a tradition that values learning? He is a graduate of an elite university but he seems to dismiss the value of what he learnt there. I can say to Michael Gove that when teaching in a tough secondary school I never demeaned myself to pretending that I lacked learning. What young people can identify is the phoney, the teacher that pretends to be like them. Michael Gove’s attempt to pretend to be one of the people is as phoney as my colleagues who adopted a fake working class accents and mimicked the words and manners the young in an attempt to win their favour. Behaviour as phoney as that of the Dad who to tries to impress by claiming a knowledge of and love for garage music and rap.

The dangers of contempt for learning

If Michael Gove’s lead is followed as experts such as myself as regarded as just another self interested individual with an agenda to promote, a lot is lost. Economists such as myself are in possession of or can access a body of knowledge about the economy not available to others. Acquiring and understanding the store of economic knowledge takes years and to be honest a life time of study, because the subject is always changing and developing. What Michael Gove is saying is that my learning is of no consequence. I cannot accept that the anti intellectualism of todays politicians will stand future scrutiny. Without wishing to be too unkind Michael is an insignificant figure compared to Adam Smith, Ricardo, Keynes, Hayek, Polanyi and Robinson. With time his anti intellectual populism will be a but a minor blip in the progress of humankind. In studying economics I developed a critical faculty which makes it possible to make reasoned judgements about government policy, rather than relying up prejudice and common sense on which to found my judgements. Paraphrasing a much greater thinker than myself who used this phrase in the context of religious belief, those who don’t believe in God are likely to believe in anything; similarly those who don’t believe the truths of  economics are likely to believe any nonsense about the economy.

One such nonsense is the current belief that there is a real knowledge of the world, which is only possessed by men of business, who deal every day with the complexities of the real world, as opposed to the unreal world of academia. One such person held to possess this knowledge is Donald Trump, the next President of the United States. I would question the breadth of his knowledge, he is a real estate developer. Yet one who has failed in several business ventures and has only been saved from bankruptcy by the protection afforded by US law to such people. If you wished to buy and develop a property you would go to a real estate agent or property developer, but one with a better track record than Donald Trump. Apart from his deal making in which he has a very mixed record I cannot see how Donald Trump has a better understanding of the world than me. As a teacher I would be criticised for living and working in an unreal world, which is a silly phrase as the school is as real as the boardroom. One other silly untruth is that teachers lack the toughness to cope with the real world, all I can say is that these people who say that have little understanding of the difficulties of teaching a group of adolescents. One of the most telling examples of the falsity of this stance is a video on Youtube, where Michael Gove is addressing a group of teenagers. They show complete disdain for his lecture and indulge in all the behaviours of disaffection typical of teenagers. What I am saying is that my experience as  teacher of economics is as valid as Donald Trumps as a property developer, although if I’m honest I think mine is the superior knowledge of the world.

When politicians deny the truths of learning they became prey to the teaching of messianic and charismatic charlatans such  as the  novelist – Ayn Rand author of ‘Atlas Shrugged,’ whose followers include Sajid Javid and all politicians of the Neo-Liberal persuasion. Her book paean to billionaires who she believes are the heroic figures that make our civilisation great. The central figure of the book John Galt a man of independent means who is puzzled as to why billionaires keep disappearing from society. He is taken to a mysterious canyon remote from Washington, where the billionaires are hiding, seeking sanctuary from a rapacious Washington. These  billionaires are fed up with being oppressed by a government that so taxes and regulates them, that they are denied their role as the creative driving force of society, a rapacious government has reduced them to impotence. It does not realise that without their enterprise, society would fall into stasis and decline. When these billionaires go on strike society collapses and thousands of the useless poor die as a poor and weak government is forced to withdraw the income on which they depend for their survival. Eventually a discredited government is forced to welcome back the billionaires on their terms and these billionaires put society back on its feet and society develops and prospers. Many politicians of the new right are followers of Ayn Rand and her influence can be seen on government welfare policy. The Ayn Rands in government believe in a policy of brutalising the poor to the extent that they are forced to work at any price for anybody. It’s a cure for the wasteful culture of dependence, to such as ‘Sajid Javid’ homeless and misery is a just punishment for the useless poor. When governments ignore the truth tellers they are prey to the charlatans and other paddlers of fantasies and falsehoods.

Economists do possess a knowledge of the economy which is invaluable  for the effective running of government. One such economist is Anne Pettifor who is constantly ignored by governments because she tells them truths they don’t want to hear. Economists such as her can be compared to the Old Testament prophets who were constantly ignored by the rulers of Israel.

Anne Pettifor -is the author of ‘The First World Debt Crisis’. While most politicians are aware that economic growth is driven by consumer spending and debt, such as the popular car leasing system, they have little awareness of the dangers of this policy. The growth of consumer debt is so large that it has created a credit or debt mountain of unsustainable proportions – UK bank debt in 2009 – 586% of GDP it falling to around 400% of GDP in 2009 (Dominic Raab), but has since risen. Even Germany has similar problems the collective debts of its banks are over 300% of GDP (much of the money lent to Greece was recycled back to the German banks who had made too many ill-judged loans to the Greeks, so as to prevent them experiencing a liquidity crisis).The UK vies continually with Japan for the title of most indebted country of the industrial developed world.

David Cameron was right that Britain was maxed out on its credit card, he was just wrong about which credit card.

Rather than tackle the problem the government spends billions on quantitative easing to provide the cash to keep the banks afloat. At the height of the financial crisis in 2008/9 Gordon Brown was willing to spend a sum equivalent to the almost the total national income to keep the banks afloat. The official policy is to kick the problem can down the road leaving it to a future government to tackle the problem.

Why do governments fail to tackle this problem? They fear the electorate reaction, if they brought the credit boom to an end. Loans of various kinds account for a significant proportion of people’s spending and to reduce lending would in effect to reduce people’s incomes in that they would be unable to spend as much as previously on various consumer goods. What they are most scared of is cutting spending in the housing market which would lead to a fall in house prices. The belief amongst politicians is that falling house prices equal lost election.

The best informed of politicians know that the risk is that the whole financial house of cards will come tumbling down in a crash as bad as that of 1929, yet they prefer the risk of a future catastrophic crash to taking action now.

The right and wrong of economics

Although I can as an economist make more accurate predictions about the future than any politician there are limitations to the usefulness of my predictions. I cannot say exactly when a predicted event will occur or how great will be its impact on the economy. The economy is a dynamic social institution that is constantly changing and changes can maximise or minimise the impact of the predicted event.

Last year The Observer published one of my letters in I which predicted an economic downturn in 2017. I made my prediction on the basis that all free and largely unregulated markets are liable to exuberant booms that always end in a crash. Past history shows that such crashes occur every nine years, that is 1990, 1999 and 2008/9.

This contention is supported by the economist Hayek. What he stated was that there is a period when the benefits of innovation are exhausted and economic growth falls and the economy falls into recession. This has happened to the UK as the benefits from the mass production of consumer goods begin to tail off. Since the mid 1980s there has been too many car manufacturers in Europe, making cars that were needed. The consequence was retrenchment in the car industry and in Britain the disappearance of the native car industry. When industry fails to deliver alternative sources of income need to be found. In the UK, USA and Western Europe that has been the development of the speculative industry, increases in income no longer come from employment but from the increase in the value of assets, such as houses. A speculative economy is particular prone to booms and busts, as there become periods when it is generally believed that prices have peaked and they can only go down. These downs are quite spectacular and cause widespread distress.

However although I can predict with confidence that a downturn will occur, there are a number of proviso’s that I must make about prediction:

There is no iron law that states a downturn will occur every nine years, but evidence from the past shows that this is likely, it is events that may change the date of the crash.

Brexit – if Teresa May calls an early  election the uncertainty generated by that can bring the date of the crash forward to whatever she makes that announcement.

Events may occur that halt the downward trend – if the government panics at the thought of there being held responsible for the negative effects of Brexit and states that it will do whatever deal is is necessary to ensure that Britain remains in the single market, this could result in a boost to business confidence with businesses now rushing to make the investments that they had postponed due to the uncertainties of Brexit. This rush to investment will lead to a temporary boost to the economy that will delay the economic downturn. However it will only postpone the crash.

Conclusion – Economists are not infallible but they are closer to infallibility that most politicians. What economists possess that politicians do not is an understanding of the workings of the economy.

The Faustian Bargain that is the British Housing Market

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When economic issues are discussed in parliament they are rarely those that matter. Issues that really matter are also almost absent from the media. There are economic issues that are not spoken of in polite society or parliament, One such problem that is continually swept under the carpet is the horrendous balance of payments deficit, the largest of any developed economy. This debt is subject to constant revision so it is hard to give accurate figures, but the for last quarter of this year it reached 7% of GDP. A figure a third of that caused a financial panic in 1967, whereas today far worse figures provoke no reaction.

Gordon Brown when questioned about this problem, said the world had changed and it was no longer a problem. What he meant was the government of the time could fund the enormous trade deficit from the large inflows of cash coming into the UK from abroad. To put it simply we were using the money invested in the UK to pay our debts to the rest of the world. This particular economist thinks that it is very poor policy to remain the perennial debtor nation that relying on the goodwill of others for the means to pay its debts.

The government has to take extraordinary measures to ensure that this money keeps flowing into the country. This is achieved by introducing policy measures to ensure that property prices keep on increasing so making commercial and more particularly residential property prices continue to rise. Falling property prices the week as a result of Brexit caused a panic in government. Action was taken immediately to slow or halt the fall in property prices. The government increased the amount of money banks would have available to lend to the property market. Simply by ensuring that there is plenty of cheap money around to buy property will tempt buyers into the market hoping to pick up bargains, which in turn keeps up property prices

However the government has made what is a Faustian deal with the property market. The deal is quite simple, the government will sacrifice the rights of the young, the low paid and those resident in London to accommodation in return for the massive inflow of cash from foreign investors into the property market. All these investors want is ever rising prices and the government is prepared to acquiesce even if it means denying the young, Londoners access to adequate housing. If large parts of London are subject to significant depopulation due to rising house costs that is acceptable to the government, as the alternative is much worse. The much worst alternative is admitting to the horrendous trade deficit and reducing the import bill through imposing strident cuts in the standard of living for the nation’s people, better to lie and fantasise about the strength of the economy than admit to some painful truths.

One of the most effective ways of pushing up house prices is to reduce the supply of housing relative to demand. This is perhaps the most objectionable part of the Faustian deal, that is deliberately pursuing a policy that will leave millions living in substandard accommodation. Governments no longer build social housing, the once thriving council house building programme has ceased. The consequence is house building has fallen to the low levels ever seen in modern Britain. House building is now left to private developers and the underfunded housing associations. The various right to buy schemes have resulted in the large scale transfer of local authority housing to private landlords. Consequently market power no resides with the private landlord they can constantly increase rents, often charging higher and higher rents for what is increasingly inadequate accommodation. This increasingly profitable private rental sector attracts foreign investors, the people whose money is needed to finance the balance of payments deficit.

Various denial of truth strategies are used by politicians to excuse their inaction in what is an increasingly worsening housing crisis. One of the worse is that if the government intervenes in the private sector it will worsen the crisis. They claim that if the government intervenes by increasing security of tenure or controlling rents, private landlords will leave the market in droves reducing the amount of accommodation available and making many more homeless. This is nonsense as too many landlords have invested too much money to withdraw from the market. Legislation could be introduced to ensure that existing landlords did not withdraw from the market, through the compulsory registration of landlords.

What our political classes are unaware is that Faustus had to pay a high price for the help of Mephistopheles, he had to surrender his soul. Similarly the new Mephistopheles in the guise of international finance requires a high price for its support, the surrender of the integrity of the political classes. To keep the cash following into our economy this new Mephistopheles demands that policy be structured meet to its needs. What it requires are two things the first is constantly rising property prices and the second that in the event of a price crash the government takes measures to stabilise prices, so ensuring that the investors do not suffer too big a hit. The governor of the Bank of England in fulfilling this promise, this week announced a whole series of policy measures to stabilise the property market. The fact that these measures would also protect the house owner  from the threat of increased mortgage costs and possible repossession was only of secondary importance. Even George Osborne (Chancellor) admitted that his new policy to support new house buyers was a measure whose primary importance was to keep up house prices.

Knowing the Correct Nothing is the surest way of advancing in economics and politics

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Probably it has been remarked elsewhere that ignorance is no barrier to advancement. This is certainly true of the economics. Despite the subject matter of economics being the stuff of existence, economists have little knowledge of the real economy. There are two explanations of this ignorance.

One is the age old bane of economics and that is economists of previous generations have already established all the fundamental truths of the subject and all the current generation of economists need to do is to refine the ideas and practices of the past. They are literally standing on the shoulders of the giants of the past, giants such as Ricardo and Marshall.  Economists established in the nineteenth century that the truth that the free market was the best possible economic system and their contemporaries today see their role as providing the necessary information and advice to enable policy makers to make the imperfect market nearer to the free market ideal. They do not see any need develop and advance the study of economics through a study of the real economy, as they already know all they need to know. The fallacy of this approach can be demonstrated by the famous question the Queen asked of economists after the crash of 2008/9, which was why did none of you know it was coming? The inward looking nature of the subject means they will always be caught by surprise by events in the real world.

The other explanation is that the practitioners of economics in the real world are politicians and all they want is winning slogans that will enable the to win elections. Slogans that mask the truth, that is the very vacuous nature of their economic policy making. Rather than truth what matters is appearance, what sounds right or appears right. These politicians have no interest in those few economists that talk about the complex nature of the economy and the difficulty of effective policy making. They prefer the economist that in Mrs Thatcher’s words ‘give answers’, and these economists tend to be the apostles of a simplistic Neo-Liberal economics. There are dozens of economic thinks tank that for the right money will come up with a simplistic solution, that can be sold as a winning economic policy.

One of such of these simple sellable solutions is the need to cut of government bureaucracy. In this vein both the Labour government of Gordon Brown and the coalition government of David Cameron have boasted about the number of civil servants they have cut from the payroll. It’s a simple solution that everybody knows is right, as if you employ less civil servants you reduce the cost of employing civil servants and you reduce taxation. In such a scenario everybody is a winner, except no politician have ever considered that some of these civil servants they dispense with may perform a service that is essential for the maintenance of the good society. 

Now with the Treasury and every other government department are lacking the core of experienced civil servants that in the past would have advised on policy making. Now they have to buy in the expertise that would formally been provided in house. The bill for consultation on the proposed High Speed Rail link has cost £1/4 billion pounds and is rising, much of this money has been spend on outside advisers from various think tanks and consultancies. One wonders how much less the bill would have been,  if much of this work had been provided in house. 

Perhaps the supreme example of this folly is the reducing the number civil servants is at the tax collecting body that is ‘Her Majesties Revenue and Customs’.  There are only 300 tax inspectors employed in the investigative body that collects taxes from the rich and powerful. Constantly these overworked and under resourced tax inspectors are out manoeuvred by the accountants of the rich and powerful so they frequently fail to collect the tax owed.  In consequence the IMF has laBelled Britain the world’s largest tax haven.

In practical economics that is politics what matters is not being right or having tge correct understanding economic reality, but a sharing the common fallacy and ignorance of the real economy that passes as the public debate. If one listens to the economic spokesman of either party they in the essentials relaying the same message. It never matters in politics if the economics spokesman is wrong, only that they share in the general consensus of wrongness.    

What economists will never tell you and what politicians prefer not to know

Economics, Politics, society, , , , , , ,

Gordon Brown when  Chancellor of the Exchequer was responsible for the infamous quote, ‘No return to boom and bust’ and then when the economy went bust in 2008 he had to retract his words. There was even the Stalinist rewriting of history when all references to this quote were removed from the Treasury website. Possibly Gordon Brown is amongst the cleverest of  the Chancellors of the Exchequer that we have had this century, yet he got it all so wrong. 

What his Treasury advisors should have told him was that the trade cycle is an unavoidable feature of capitalist economies and that all politicians can do is ameliorate its worst effects. There are invariably periods of boom followed by bust. A quick glance at history would have shown Gordon Brown the truth of this. In 1990 there was the collapse of the property boom, which bankrupted many property companies and in 1999 there was the collapse of the dot.com bubble. The latter bankrupted GEC which at the time was Britain’s largest electrical engineering company. A bankruptcy caused by paying too much to purchase a series of over valued software businesses. It does seem that with the bust of 2008, these financial crisis’s seem to occur every nine years. Unfortunately the current Chancellor of the Exchequer seems to be demonstrating a similar naivety to his predecssor about the economy. He claims to have put the economy on a sound footing and his preventative measures will prevent a repeat of the crisis of 2008/9. If history repeats itself there will be a financial crisis in 2017, something of which he appears oblivious. 

Why is there this constant misreading of history? One reason is the arrogance of both economists and politicians. Economists having discovered in the free market the equivalent of the economists  philosopher’s stone cannot believe that there are times when the market will fail. If the free market is the best possible of organising economic activity and can’t be bettered, it is foolish to look for non-existent flaws. Any economic crisis is not caused by any dysfunction in the market it is the politicians who fail to implement policy correctly, it’s human not market failure. There are  economists who claim that the financial crash of 2008/9 was not due their lack of regulation in the financial markets failing to rein in  the irresponsible banks but through there being too much regulation of the banking industry. Although economic reality intrudes all too often when the economy takes a down turn, economists prefer to ignore this inconvenient fact.



Peter Cook in a scene from the film ‘The Rise and Rise of Michael Rimmer’

Economics should not shoulder all the blame for the belief in what can only be best described as a preference for the economics of fairy land. The message has to be doctored to meet the demands of the economist’s political masters. Economists must be on the message politicians only want good news.

The new politics can be best explained by reference to a Peter Cook film, ‘The Rise and Rise of Michael Rimmer’. In this film Michael Rimmer on becoming PM cuts the defence budget to finance a tax give away. When faced with the disgruntled generals he shows them a film of the marvellous new weapons that he has purchased for the military. The generals immediately praise him for his policies, even when he tells them that the weapons they have seen featured on a film don’t really exist. What matters is what appears to be, given the guarantee of their jobs and incomes the generals are only to happy to acquiesce in the disarming of Britain. All party leaders now have their coterie of ‘spin doctors’, whose job is to make bad appear good. Politics is increasingly coming to resemble the public relations industry and as a consequence policies are never subject to proper scrutiny, as any policy debate within a political party is increasingly seen as an example of disunity. It is one of the many assumed truths that voters don’t like political parties that appear disunited, so politicians will do all they can to avoid appearing disunited, so any of story will do as long as all party members stay on message. 

Not only is this a society in which appearances matter more than the truth, it’s also a society that prefers to avoid unpleasant truths. The economist or politician that disrupted the pleasant complacency by voicing inconvenient truths is vilified and silenced. When Alistair Darling (Chancellor of the Exchequer) in 2007 spoke of an impending financial crisis he found that he was a lone voice speaking the truth. There was no politician or economist who spoke in support of him. Some politicians and economists would have known he spoke the truth, yet all preferred the  pretence of the ’emperor’s new clothes’, that is were willing to keep up the pretence that all was well. Not even opposition politicians spoke in his defence, as they did not to be seen to be going against the preferred wisdom of the times.

What I am saying is that as economists and politicians have abolished the trade cycle, at least in their imaginations, any economic downturn will be the unexpected event that catchesus all by surprise. It should not have happened, it came out of nowhere, was the reaction to the crash of 2008/9.,Famously the Queen asked why no economist correctly predicted the crash. She failed to get any meaningful reply from the collectivity of academic economists, as any truthful response would have meant admitting that all their theorising and policy recommendations were wrong. 

“Untergang der Titanic”, conception by Willy Stöwer, 1912

Can I put it in terms of the Titanic metaphor, would the passengers of that ship wanted to know that it would shortly strike an iceberg, which would cause the ship to sink and most of them to drown? No they would have preferred ignorance, so as to enjoy the last moments of their life without it being spoilt by a knowledge of their impending doom. However what they would have wanted was the captain and crew to have prepared adequate means of evacuating the ship in the case of it sinking, so as the minimise the loss of human life. Economists by ignoring the existence of icebergs (economic downturns) fail to prepare adequately for them and fail minimise their negative effects on society. 


Housing: an example of the misuse of government policy

Economics, Politics, society, , , , , ,

I realised that on reading my essay through there was a repetition of themes in my writing. It is not the bad behaviour of the banks that drive me to write, but the attempt to explain why, in spite of the economy growing have we all become poorer, that is apart from a tiny elite. When I started work in the 1960’s there was full employment and everybody had the benefit of being housed well. Now that world has disappeared and neither of the last two statements are true. Why? I think an analysis of the housing market explains how this change occurred. When what was once seen as a necessity of the good life housing, is now seen as a commodity to be exchanged on the money markets. There has been a devaluation of human life.

After years of housing booms and busts it is impossible to believe that governments once took action to suppress house price bubbles. Their intention was to keep house prices at affordable levels. All these controls on the price of houses were scrapped by the Conservative governments of 1970 and 1979. Now the governor of the Bank of England is talking again of reintroducing such regulations to rein in future housing price bubbles.

The ending of any controls was in part a consequence of a long campaign by the banks and the rest of the financial community that chafed at any controls that limited their ability to make money. They could guarantee negative press headlines about credit squeezes, so making their cessation much easier. one phrase coined at the time of controls, was mortgage famine. The public were easily persuaded to that credit controls only had a negative impact. At the same time Social Democracy was going out of fashion in the political classes. This meant that controls and regulations that were an integral part of social democracy had to go. It was easy to claim that al the crisis’s of the 1970’s were consequent on having a Social Democratic system and the system that was the source of all our problems should be replaced by something better.

Why did the banks so hate directives and all the other controls that limited price inflation in the housing market? These self same banks at the same time campaigning for a control of inflation in the wider economy. The reason is quite simple, money was the asset in which bank’s traded and they wanted some stability in that commodity. Also inflation in the wider economy added to their costs, unlike house price inflation from which they could directly benefit.

What the banks wanted was the freedom to manipulate the housing market to benefit themselves. They wanted a rapid turnover of the housing stock at ever increasing prices. It was the activity of the usurer, buying and selling the same product over and over again at higher and higher prices. More houses were built each year but the number built fell far short of the ever increasing demand for them, so in it seemed as if same house was sold over and over again. The demand for houses was constantly pushed ever upward by the banks providing more and more money for ever higher mortgages. If this seems to be an over statement consider this example. I lived as a teenager in a small Sussex village and I can remember being told by an awestruck fellow villager in the mid 1960’s that certain new build houses were now selling for prices in excess of £3,500. Now such houses are selling for prices in excess of £250,000. The house in which I lived as a game keeper’s son was sold recently for a £1 million. I do not know how many times the houses on the village green changed hands.

Unfortunately the bankers greed led them to taking a series of foolish actions that led to the crash. In what were now the outdated building societies it was the savers money that was lent to out borrowers, but unfortunately relying upon savers meant that the money for loans was limited, much more was needed to finance the house price bubble. The banks had the solution which was to borrow on the wholesale money markets. If it had not been taken to extremes it would not have been a sound policy. The money borrowed had to be at a lower rate of interest than that lent out for mortgages to be profitable. Cheap money is that lent for short periods of time, sometimes for as short as overnight. To finance the ever expanding mortgage market the banks borrowed increasing large amounts of money from the short term money markets, while the banks lent out the same money for periods of up to 25 years. The banks were reliant on the short term money market to constantly replace the loans they repaid to finance their mortgage lending. Surprisingly this is not as irresponsible as it sounds, what was irresponsible was borrowing such disproportionate amounts in this way. The problem with financing mortgages in this way was that the profitability of such transactions is dependent on the price differential between money borrowed and money lent. The narrower the differential the less profitable was the mortgage business. At the height of the housing boom I was told by a banker that the banks did not make much money from the mortgage business. At first I was baffled, but I realised that the banks profit margins were being squeezed in two ways; first the huge demand for short term loans were forcing up the price (interest rates) of these loans and that competition in the mortgage market meant the banks could not increase their mortgage rates to compensate for higher loan charges for fear of losing customers to other lenders. Banks such as HBOS were having their profit margins squeezed and were at the same time over dependent on borrowed money. They were a catastrophe waiting to happen.

Banks such as HBOS depended for their survival on their ability to borrow billions on the short term finance markets to finance their mortgage trade. If they were denied those funds the bank would collapse. This happened in the period 2008 to 2009. The housing bubble burst and banks were suddenly unwilling to lend to each other, as they did not know which banks were financially viable. In the event no British bank was viable, but none were so indebted as HBOS. The rest of the story is well known, the government rescued the banks by giving them billions to keep them viable.

For the millions already impoverished by the banks playing the housing market it was a double whammy. Now not only did the ‘excluded’ have to pay exorbitant private high rents but they were further impoverished by the government’s austerity programme that reduced their incomes.

Having a nominally Social Democratic Party in power made no difference as Neo-Liberalism was so firmly entrenched as the governing political philosophy. Any action to regulate the banks to put them on a sound financial footing was deemed much worse than almost bankrupting the nation to bail them out. Without any justification the latter was deemed the better option as the default assumption is that the government is incompetent in economic matters and management of them such be best left to those ‘who know’, the bankers. It was no surprise when Gordon Brown appointed a banker, Lord Myner to clear up the mess left by other bankers.

Given that the financial sector seems to have effectively bought up Parliament; E.P. Thompson’s words are very prescient. He thought contemporary politicians are as corrupt and self interested as those of the eighteenth century. Parliament then was was part of the ‘old corruption’ in which the landed interest purchased control of government and he thought current parliaments should be viewed as part of the ‘new corruption’, as control of Parliament has been purchased by the financial interest, ‘the City of London’.

Unlike the majority of my fellow economists I believe than the solutions to economic problems lies with politics not economics. What is needed is political reform that removes the hands of ‘the City of London’ from around the throat of government.