Sucking money out of the economy

Tweet

 

We won’t know exactly how much money Rachel Reeves is planning to suck out of the UK economy until she stands up and delivers her budget on 26 November. There is a sense in which the actual number matters little – the underlying principles remain the same. One of the big ‘ideas’, a term which can only be used loosely, is to cut spending on benefits. It is true, of course, that, if the government spends less on benefits, then the gap between spending and income will reduce, and (assuming that to be a ‘good thing’, which seems to be the position of both government and opposition), the overall government finances will look ‘better’ as a result. But the thinking of those looking at government finances – whether Reeves or the Tories – seems to stop at that point, as though government finances can be considered in isolation. In reality they can’t.

Reducing benefits reduces the spending power of some of the poorest in society, which – in economic terms – reduces overall demand in the economy. (To those not glued irrevocably to economic mantras, it also impacts people’s lives, health and welfare, but I don’t really expect either Reeves or the Tories to worry unduly about that.) One of the key differences between the Tories and Labour on this is that the Tories seem committed to ‘giving away’ part of the money saved in the form of tax cuts, whilst Labour seem more committed to larger reductions in the current account deficit. Superficially, in overall economic terms, reducing taxes decreases the size of the hit to the economy of that reduced demand, but that ignores the way in which the costs and benefits are distributed. Reducing the spending power of the poorest (which is what benefit cuts do) whilst increasing the spending power of the richest (which is what tax cuts do) means that inequality continues to rise. It’s where simplistic economic analysis starts to break down – the total numbers tell us one simplistic story about the overall impact, but the detail tells us that there are winners and losers. That detail is important. Well, to most of us it probably is. But most of us includes neither Reeves and Starmer nor the Tories.

Nose-holding might not always be entirely dishonourable

Tweet

 

The deliberations of the committee awarding the Nobel Peace Prize are secret. It’s just as well; it’s easy enough to imagine how much hilarity Trump’s hyped-up claims to have solved several wars (some of which the ‘participants’ didn’t even know had happened) would have caused the members. It’s also easy to imagine the extent to which Trumpian anger would have boiled over had that hilarity become publicly known rather than merely widely assumed.

It's probably reasonable to assume that his blatant campaigning for the prize might just have rubbed a few people up the wrong way as well: it’s not the way things are usually done. It’s hard to believe that a man who renamed the Department of Defence as the Department of War; whose government demands a stronger warrior culture and the abandonment of any rules of engagement which might prevent US forces from unleashing fear and intimidation; who is determined to unleash maximum lethal force on the streets of his own country; and who has taken to random extra-judicial killings of people in boats in international waters might not have struggled a little to be seen as a ‘man of peace’.

He might, though, have just the tiniest bit of justification in his jealousy about how Obama got the award so early in his presidency. What exactly had Obama done at that point to justify the award other than having learned to string a sentence together and avoid being called George Bush? Neither of those two things are entirely inconsequential, but they’re not exactly epoch-making either. Brokering a ceasefire between Hamas and Israel is no mean feat, although since it appears to have happened only because Trump effectively ordered Netanyahu to stop the bombing there are questions about whether it could have been done earlier. His expectation that he could announce the ceasefire one day and pick up the prize the next was always a long way short of realistic.

If the ceasefire holds and turns into a lasting peace, then maybe next year or the year after he might actually deserve some sort of recognition even while continuing to attract condemnation for many of the other things he does. He doesn’t understand the connectedness and maybe we shouldn't even expect him to; for him, the self-styled great deal-maker, every deal should be judged in complete isolation. It’s part of his natural transactionalism. There may even be a sense in which holding out the possibility of the prize which he clearly covets so much might encourage him to stick with the Israel-Palestine peace process for longer than his usual gnat’s length attention span. The probability of that happening currently looks very low, but if a nod-and-a-wink now made such an outcome more likely, might not a bit of collective nose-holding be worthwhile?

What is racism if not judging on skin colour?

Tweet

 

When I look at current leaders of the Tory Party, I don’t see a single white face. It’s a stupid, racist comment to make, of course. But is it really more racist than Jenrick’s comment that he didn’t see another white face on a visit to an area of Birmingham? How many people did he see, and in how big an area, over that fateful 90 minutes? Without such statistical context, it’s impossible to draw any meaningful conclusions about what it means for integration. How much bigger was his sample than the sample of one in the first sentence above? It’s worse than that, though. Suppose all the faces had been white, but they’d all been Poles or Romanians? How would he have known? And why would that have been more acceptable to him?

Both Jenrick and his party leader claim that his remarks weren’t racist, but leaping to a conclusion about the extent to which people are, or can be, ‘integrated’ into UK society (whatever that means – and other than dispersing them more widely geographically, it’s not at all clear that Jenrick knows what it means either) based purely on one visible characteristic, skin colour, is about as close to a textbook definition of racism as one can get. Maybe he really, genuinely isn’t a racist himself, but he knows that more than a few voters are, and he knows how to appeal to their prejudices.

By a curious coincidence (?), Handsworth, the part of Birmingham dishonoured by Jenrick’s presence, just happens to be next door to Smethwick, scene of an infamous electoral battle in 1964 which the Tories won on the basis of a campaign based on the number of non-white faces in the area. The Tory candidate that time round denied being racist too. It’s probably being excessively charitable to suggest that Jenrick might simply be too young to remember how well that worked for his party.

Would Trump really bomb Tel Aviv?

Tweet

 

A few days ago, Trump gave Qatar an astonishing guarantee of security, promising that he would view any armed attack on the tiny energy-rich nation as a threat to the United States itself and be ready to take military action in defence of Qatar. Given that, in a way that I don’t pretend to fully understand, the ‘right to self-defence’ has somehow morphed in recent years into a right to mount a wholly disproportionate retaliatory attack, the pact must surely mean that anyone attacking Qatar should expect a massive response from the US military. And which country is most likely to launch a military attack on Qatar? Based on recent events, the most obvious answer is Israel.

Maybe Netanyahu has given Trump some sort of promise that he won’t do it again, so Trump doesn’t think the question will arise. But neither of them are exactly famous for keeping their word. A Trump promise to Qatar based on a Netanyahu promise to Trump doesn’t immediately strike me as a reliable basis for the security of anyone. In normal times, a $400 million bribe in the form of a free aeroplane might be enough to get something in return; but then again, in normal times, the idea of the President of the USA accepting a $400 million bribe would be unthinkable. One wonders what else Trump has extracted from Qatar in his latest protection racket payment for the defence pact. After all, the first bribe didn’t stop the US allowing Israel to bomb Doha (and even if Trump is personally and unprecedentedly telling the truth when he says that ‘he’ had no advance knowledge, the idea that the largest US base in the region wasn’t warned in advance is for the birds). There must surely be something else involved. Another golf course or hotel perhaps?

There is another aspect to Trump’s promise as well. If an attack on Qatar is treated the same as an attack on the US itself, does the NATO guarantee of mutual assistance extend to that circumstance as well? Has Trump effectively promised that the whole of NATO would attack Israel if another bomb were dropped on Doha? No, I don’t seriously believe that he has – although that doesn’t necessarily mean that he doesn’t think that he has. Whatever the Qataris have given Trump in exchange for this latest guarantee, they would be very foolish to depend on it ever being honoured.

Where's the ideological response to Tory nonsense?

Tweet

Accusing the ‘Welsh’ Tories of possessing principles of any sort would be a foul calumny, but lacking any basic principles isn’t the same as lacking certain fundamental ideological beliefs. One of those is that tax cuts are axiomatically a good thing, and they are at it again today in the Senedd, calling for a cut in income tax and the abolition of business rates for small businesses. These changes, they claim, will put more money in peoples’ pockets and boost economic growth.

The Welsh government (and the Welsh budget) are fundamentally different creatures from the UK versions, and don’t have the same freedoms. It’s a consequence of the difference between devolution and independence: an independent government in control of its own currency and with debt mostly denominated in that currency can spend as much as it wants to as long as the physical resources are available, and that spending isn’t constrained by the availability of money through taxation. The Welsh government has no such freedom: it’s budget, and its ability to borrow or transfer money between financial years are limited by external dictat, and over a period, it must balance the books. It means, in essence, that whilst it’s not true that a UK tax cut must be balanced by spending cuts, it is very definitely the case that a Welsh tax cut must be balanced by spending cuts. And the Tories know it, even if they didn’t spell it out.

What that translates to in practice is that, whilst the tax cuts proposed by the Tories may make individuals and small businesses feel better off initially, they will either have fewer (or worse) services delivered by the Welsh government (and by the local authorities who receive large transfers from the government in Cardiff), or find that they have to pay more for the same services out of the ‘extra’ money they gained from the tax cuts. More people will end up paying for private health care, or private tuition, for example. There will be those who argue that that is a ‘good’ thing, and that those services can be provided better or more cheaply by private providers. Whether that is true or not (and I’m not at all convinced by the arguments) is irrelevant to the economics here – a subject for another day. The point is that those who gain most from the tax cuts will be better able to afford such things than those who gain least – and that is especially so for those who earn so little that they pay little or no income tax already.

Whenever a tax cut is proposed which leads to cuts in what the government can do, it necessarily promotes a further disparity between those who can afford to bridge some or all of the gap and those who cannot. Some won’t be able to do so at all and will suffer as a result; others will see all the gains from their tax cuts swallowed up by extra costs; and the luckiest few will end up banking the difference. It goes to the heart of the argument for funding some basic services in society collectively, through taxation and public bodies, as opposed to leaving individuals to find the money to pay themselves or go without. Concentrating primarily on the financial effect on the Welsh government and its budget – which seems to be Labour’s response – is to miss the underlying ideological point. For too long, the argument about collective provision rather than individual provision has gone largely unmade, an omission from the debate which helps only the Tories.

Reeves is sidestepping the real question

Tweet

 

One of the neat rhetorical tricks used by politicians is to present an inaccurate view of what their opponents say and show how easy it is to dismiss. It helps them ‘score a point’ as well as allowing them to fail to engage with the underlying argument. The Chancellor, Rachel Reeves, was at it this week, refuting the suggestion that governments can simply create all the money that they need and then spend it. She’s right in principle; but I’m not aware that anyone has actually made the argument that she dismissed. Of course there are constraints on how much government can spend, but the debate is about what those constraints are, not whether or not they exist.

She argues that the constraints are twofold, which are closely interlinked: the amount of money which the government receives through taxes etc. and the need to abide by the fiscal rules she has laid down. But, in the first place, the rules she has laid down are entirely arbitrary. She has set them, and she could remove them or vary them. The UK never had any fiscal rules at all until Labour introduced them in 1997, and they have been changed regularly ever since, usually when a new Chancellor takes office, and sometimes during the period of tenure of a single chancellor. And a government which controls its own currency, and whose debt is mostly denominated in that currency, can create as much money as it wants to, any time it chooses, and can always repay any debts it incurs. Since money is merely a means of measuring and trading debt, and all debt has to be matched by an asset somewhere, the total net debt in an economy, in its simplest form, is always zero. It’s an over-simplification, yes, but it doesn’t matter how much extra money the government creates, the total net debt in the economy will always be zero. It cannot be otherwise. There is a non-trivial issue, of course, about how that debt and those assets are distributed, but that’s another issue which the chancellor seems wholly unwilling to address, and it doesn’t affect the simple fact that money creation is potentially unlimited.

That doesn’t mean that there are no constraints on the goverment, just that ‘money’ isn’t one of them. The real constraint on money creation and spending is the availability of real resources in the economy. If there are unused resources which could be put to work, the money to do that can be created. If there aren’t then the most basic rules of economics apply – more money competing for the same resources causes inflation. The question which we should be asking is not whether the government can create and spend money to improve services and improve living standards, but whether and to what extent the resources needed to do those things are available in the economy. It’s not an easy question to answer. As one example of the impact of government spending, increasing benefits (by, for instance, scrapping the two child cap) puts more money into the economy which will then be spent, potentially driving employment - in this case, largely in the retail sector. Roughly 4.7% of the working age population in the UK are currently unemployed, but how many of them are really available and suitable for the right work in the right places when the government spends more money, before generating demand no longer soaks up unused human resources but starts to compete for existing employed resources? The best answer that can be given without a lot of work is ‘some, but not all’.

But being a difficult question to answer is no excuse for not asking it and trying to find an answer; hiding behind her own rules and an alleged lack of money is just a very lame excuse for avoiding the question.

Starmer is avoiding honestly facing the problem of racism

Tweet

 

At the weekend, Starmer told us that he didn’t think Reform Ltd voters were racists, merely frustrated. It’s a sweeping statement to make. Although it’s entirely reasonable to suppose that some Reform Ltd voters are not racists, it doesn’t follow that none of them are. It also doesn’t address the converse: whilst it may well be true that voting for Farage’s lot doesn’t make someone a racist, it doesn’t follow at all that being racists doesn’t drive people to vote for Reform Ltd. Whilst it’s not an absolute, 100% causal link, it’s not a bad indicator. Racists have a strong tendency to think that Farage is expressing their views, and not without justification.

When asked directly whether Reform Ltd were trying to appeal to racists, Starmer’s response was a flat “No”, before proceeding to waffle about frustration and economic decline. Given that he’d already said that he thought that Reform Ltd policies were racist, this is a somewhat astonishing contradiction. What on earth is the point in promising outright racist policies if not to appeal to racists? His problem is that – just like Farage and Badenoch – he too is trying to appeal to racists. Not only to racists, of course; and maybe not so blatantly as Farage, but in a sense, that just makes it worse. Offering skimmed or semi-skimmed racism legitimises the full fat version, and can make voting for the real thing more acceptable.

Pretending that anger whipped up by the tabloids over migration is really just about the impact of economic decline and that people’s ‘concerns’ can be addressed by improving the NHS and putting more money in their pockets is wilfully turning a blind eye to the pernicious presence of racism. There is more racism, and even more latent racism, around than most of us would really like to acknowledge, even if racist voters don’t all choose to vote for Reform Ltd. It’s understandable that a PM tanking as badly in the polls as Starmer would be fearful of losing more votes to Farage, but aping his rhetoric in milder terms looks more like panic than a thought-through strategy. Whilst he might be more comfortable competing with other ‘right wing’ parties for the votes he’s losing in that direction, it seems as though he’s oblivious to those deserting Labour for the ‘left’, although there is evidence to suggest that he’d actually find it easier to get those back than those who’ve gone over to the Farageist dark side. It might be easier to pretend that it’s all about economics, but it isn’t honest.

Money spent by government doesn't generally simply disappear

Tweet

 

One of the arguments against the Nation of Sanctuary policy which the Tories and Reform Ltd advance is that they want the money spent on the project diverted instead into local communities. The Reform Ltd candidate for the Caerffili by-election probably put it most clearly saying that we should “bring that money back to communities”, but the same point has been expressed in different words by others. It’s economically illiterate (or should that be innumerate?). Where do they think the money used for the project goes? It doesn’t simply pass from the government into a big black hole labelled ‘refugees’ pockets’; it gets spent. On accommodation, on food, on language lessons, on venues, on helping people to integrate and find work – and all that expenditure goes ‘back into the communities’. Much of the spending leads to payment of VAT, and the money which becomes other peoples’ income (as most of it does, eventually) leads to payment of Income Tax and National Insurance. It might not be a big project where the sponsors can put up a giant billboard declaring that it was funded by the Welsh Government, but the cash mostly ends up in local communities, circulating and providing income to people.

There’s a more general point there as well. The above doesn’t only relate to the Nation of Sanctuary. When the government pays out benefits and pensions, that money doesn’t just disappear either. It, too, gets spent in communities and ends up as income for other people, generating tax receipts as it does so. Looking at all government expenditure as though the money spent has gone and disappeared for ever is looking only at a single part of the flow of money: the economic effect of that expenditure is much wider. When it comes to this variety of economic innumeracy around benefits, Labour are as guilty as the Tories and Reform Ltd. There’s something else that we know for certain as well: the less well-off people are, the more likely it is that none of the money they receive will be saved, and all of it will be spent, mostly in the communities where they live.

Having said that, there is one important way in which spending by the government can make money disappear from our communities, and that is when it ends up in the pockets of the richest. As, for instance, when benefits are cut to enable tax cuts, something which always benefits those who pay most tax. Those who can afford to save often do. And money saved is money no longer circulating, no longer providing an income to someone else. Worse, some of those savings end up in offshore accounts – disappearing not only from local communities but from the whole country. Yet that, in effect, is the economic policy supported by Labour, Tory and Reform Ltd alike.

There is scope for debate about what the most effective method is for a government – any government – to put money into local communities. Is it through large, highly-visible projects which feed through into incomes, or is it by making sure more directly that all citizens – yes, and guests, whether temporary or permanent – have sufficient income and/or publicly-funded services to be able to meet their needs and live a decent life? Which approach has the greatest effect in the shortest timescale is a legitimate subject for debate. We should remember though that the two aren’t even mutually exclusive: the constraint on what we can do isn’t the availability of money, it’s the availability of resources, an economic truth which has been known for decades. Claiming that one way of spending money simply makes that money disappear is a dishonest way of avoiding that truth, while blaming the poorest for their own plight and facilitating the accumulation of wealth in fewer and fewer hands.

Voters aren't fish, and don't always choose the 'right' angler

Tweet

 

A couple of weeks ago, following a by-election in the Vale of Glamorgan, this blog post talked about the need to count, rather than assume, voters’ second choices. The question about making assumptions came up again on Thursday, in this article by Ben Wildsmith on Nation.Cymru, calling on Gareth Hughes and the Green Party to withdraw from the Caerffili by-election. I’m something of a fan of Ben’s writing: his articles are well-argued, make good points, and are often humorous to boot. But on this occasion, I cannot agree with his logic. The idea that parties seen as outside chances should ‘stand down’ to avoid ‘splitting the vote’ and letting (insert your bête noir of choice here) win is not one I’ve ever been keen on, although my view might be slightly coloured by having been on the receiving end of such expectations on more than one occasion.

There tends to be something of a belief amongst those performing mathematics on polling numbers that there are only two pools of voters. One contains only progressive fish, with Labour, Lib Dem, Plaid and Green anglers all trying to catch them, and the other contains only reactionary fish, with anglers from the Tories and Reform Ltd trying to haul them in. Since the number of fish in both ponds is limited, any caught by one angler are unavailable to the other anglers, and if one of those anglers is better at catching fish than the rest, his total catch is still limited by the number of fish caught by his competitors. And, obviously, the more anglers in one pond, the harder it is to match the catch of the best angler in the other. I’ve knocked enough doors and spoken to enough punters to know that life really isn’t that simple. Voters don’t always stay in their allotted pond, and if the Green angler lays down his rod, some of the fish are as likely to swim into the other pond as they are to leap onto the Plaid angler's waiting hook.

There is a convenient and comfortable myth to which many involved in Welsh politics cling, in which the electorate in Wales is of a radical disposition and finds the Tories toxic. Would that it were so; but whilst it may have been a couple of decades ago, it isn’t today. And the rise of Reform Ltd shows us that Tory toxicity isn’t about policies or personalities anyway, it’s just about branding. Take the same people and the same policies and give them a different brand name, and many voters will, apparently, flock to the cause. To a very large extent, I blame Labour for that. Firstly, because they’ve ceased to be particularly radical or even progressive, and secondly because they’ve depended for so long on one simple attribute rather than arguing for any particular policy platform: being 'not-the-Tories'. It turns out that even those who have voted for them for years, if not decades, have come to believe that Reform Ltd, despite being largely composed of ex-Tories, are also now ‘not-the-Tories’, with the additional advantage of being untainted (as a brand, even if not as individuals) by having failed in the exercise of power.

And that’s the point about the Green angler and his rod. Laying it down simply gives credence to, and reinforces, the idea that all self-identified ‘progressives’ essentially share a perspective, and that ‘progressive’ voters should support the ‘progressive’ candidate most likely to win. I doubt that the Green Party candidate will receive many votes in the by-election (sorry, Gareth), but even if the total votes cast for him is more than the difference between the first and second placed candidate, there will be no way of knowing that his absence would have made a difference – in a first-past-the-post election, his votes cannot simply be added mathematically to those of another candidate. And he will be putting a different perspective and agenda before the electorate – can giving the voters more choice ever be a bad thing?

There is actually a very good case for politicians to come to an agreement on which party will stand where, but it applies only to a single issue and is only relevant in a Westminster General Election. It relates to the question of electoral reform. A short, single issue parliament which passed such a law and then dissolved itself for a new election under new rules would be well worth while. The problem is that that single issue doesn’t neatly split itself between self-styled ‘progressives’ and ‘reactionaries’. And whether Farage will still be as keen on electoral reform if an election under FPTP gives him absolute power on a minority vote is an unanswered question. Not one to which I really want to discover the answer the hard way.

Depending on character rather than formal rules could be even worse

Tweet

 

Perhaps it was, as some around Trump like to believe, an act of deliberate sabotage when that escalator ground to a halt; perhaps it was an accident – an aide or a member of the press corps running on ahead and accidentally triggering the emergency stop. My own alternative theory is that Trump was feeling thirsty, saw a big red button, and thought that if he pressed it, someone would bring him a diet coke. Stupidity usually beats both accident and conspiracy.

Trump’s Press Secretary’s response to the incident was to say that “If someone at the U.N. intentionally stopped the escalator … they need to be fired and investigated immediately.” The order of events there is important: start with assumed guilt, implement the punishment, and then investigate to determine the facts. It’s very much a Queen of Hearts approach to justice. It’s certainly an approach that Trump has adopted elsewhere. He’s regularly declaring the guilt of people without having a shred of evidence, and demanding that they be punished immediately and then prosecuted. And if the prosecutors can’t find any evidence, then they should be fired and replaced with people who can. The evidence is probably hiding in the same place as those 11,780 votes that Trump demanded that Georgia’s Secretary of State should ‘find’ after he lost the 2020 election. When you ‘know’ that someone is guilty of breaking a law that you’ve just invented, it surely can’t be that hard to prove it.

The Queen of Hearts was, of course an absolute monarch. ‘Off with their heads’ was an instinctive response to just about anything. To date, the formal written constitution of the US has not proved to be the barrier which I had naively expected that it would be. Partly, that’s because Trump has managed to capture all three branches of government power; and partly because the US system of law grinds exceedingly slowly and no legal ruling ever seems to be final until an overwhelmed supreme court, tilted heavily in one political direction, eventually gets round to ruling. Maybe a written constitution doesn’t provide the protection that some of us might have imagined. On the other hand, just imagine how much more freedom a Trump might have in the UK where so many of the ’rules’ depend simply on precedent, the assumed good character of the incumbent, and the royal prerogative. The same applies, of course, to any Trump surrogate who might happen to come along.