Yesterday, the - Flash Germany PMI - was released, which shows that "German business activity"…
The problem of living in Darwin some of the time is that the normal day to day travel that one engages in while pursuing professional life becomes very onerous. It is a four hour flight to any of the capital cities (whereas most were around 1 hour or so from Newcastle). Further, the flight schedules are crazy because Darwin Airport has no curfew (because there is no residential areas nearby) and so you catch planes to and from, say Melbourne at 1.45 in the morning, fly all night, then have to hit the ground running to meet work commitments. This part of Darwin life is very austere. Talking about austerity – in a much more significant way, however – I read that Mr Ed Miliband, thinks he is the 2013 version of Clement Atlee and he can do great and radical “Labour” things in Britain while pursuing a neo-liberal economic austerity program. My immediate reaction was who does he think he is kidding. Sadly, the British Opposition leader seems to think his party can defy basic accounting – that is, reinvent the rules of addition and subtraction – as he tries to present himself as a small target but one imbued with traditional British Labour Party values. The point of this blog is to explain why this neo-liberal bluster is so anti-1945 Labour, without dwelling too much on history. My personal austerity (flying overnight last night) has impinged on my time to wax lyrical today!
The economics are that a government can use fiscal policy to change the composition of spending within a given level of economic activity. So if the politics permit, a government could shift spending to promote equity for example while leaving the overall net public injection.
This is not to say that the level and composition of public spending are independent of each other, which is an assumption that underlies the rhetoric of the current Opposition leader.
The level of government net spending is a significant influence on aggregate demand and hence national income and employment generation. In times of high pressure (low unemployment), many policy initiatives can be effectively pursued more easily than if there is massive unemployment.
It is much easier bringing in significant equity reforms when times are good. Distributional shifts are very hard to accomplish politically when there is crisis because there are too many losers.
I will come back to this argument presently.
But first, here is a little historical context. The following graph shows the British unemployment rate from 1881 to 2012 (annual data).
The red segment of the graph (no particular colour meaning) is the period when Clement Atlee was the Prime Minister and clearly the current Opposition leader thinks is a reference point for his narratives.
I used the Labour Trends Special Feature (January 1996) – Unemployment statistics from 1881 to the present day – published by the British Government Statistical Service (Labour Market Statistics Group), which is now the Office of National Statistics for data between 1881-1970.
The current ONS data was used from 1971 to 2012.
Whatever else we might think about the period from 1945 to 1951 – including the nationalisations of coal, the central bank and transport (rail and road haulage), the utilities (electricity and gas) etc – the policy stance adopted by the British government maintained an unemployment rate that averaged 1.8 per cent.
The other point is that the UK current account balance was typically in substantial surplus during this period – which regular readers will immediately know provides certain policy options that are not available to a nation that is running significant external deficits as Britain is today (more about which later).
On June 21, 2013, the UK Guardian published an interview with the British Opposition leader – Ed Miliband on the Saatchi-Lawson pictures: ‘our duty is to intervene’ – where Ed Miliband started channelling Clement Atlee, at least in the way spin merchants do who try to command respect from history but are, in fact, violating that historical connection.
There was an accompanying article (June 21, 2013) – Labour can achieve radical change amid austerity, says Ed Miliband
The second Guardian article notes that:
Miliband has urged his party to remember that the post-war Labour government achieved radical social change while also managing to run budget surpluses in a time of austerity.
The Labour leader urged party members concerned about his decision to accept coalition spending plans for 2015-16 to recognise that high day-to-day spending is not the only route to social justice and that Clement Attlee created the welfare state and NHS while also balancing the budget.
The first cited article quoted the Opposition leader as saying:
If you go into the roots and history of the Labour party and think about our most dramatic society-changing government, the 1945 government, we all remember the NHS, building homes, and the family allowance …
What is less remembered is the other half – yes they created the NHS, but, believe it or not, they were running a budget surplus. There was wartime rationing. This is a government that banned the import of sardines because they were worried about the balance of payments. It shows a government can be remembered in difficult times for doing great things
What defines the Atlee period was the emergence of the Post-War commitment to full employment and strong government intervention into resource allocation.
The Government members sang – The Red Flag – on the first day of the Atlee Parliament.
Just to get you in the mood, here is Billy Bragg singing The Red Flag.
And in case you prefer a more – traditional version. Get angry either way.
As an aside, I am giving a public lecture tonight on “The relevance of Marx today”. I might get everyone to sing along before the talk just to put us in the right mood.
Perhaps, if Ed Miliband was here he could reprise a verse or two for us.
He might recall that Denis Healey (a youthful aspiring MP in 1945 – but didn’t enter Parliament until a bit later) who told the 1945 Labour Party Conference (Source) that:
The upper classes in every country are selfish, depraved, dissolute and decadent. The struggle for socialism in Europe … has been hard, cruel, merciless and bloody. The penalty for participation in the liberation movement has been death for oneself, if caught, and, if not caught oneself, the burning of one’s homeand the death by torture of one’s family … Remember that one of the prices paid for our survival during the last five years has been the death by bombardment of countless thousands of innocent European men and women.
I hear that sentiment in Ed’s narratives about capping welfare and weeding out the scroungers (not!). I hear it when he says the Labour Party should support the austerity packages of the Tories, which are transferring real income and wealth to the rich and driving higher poverty rates at the bottom (not!).
The Atlee Government was about central planning via nationalisation of all the key industries. The National Coal Board changed the way the mining industry operated (made it safer and better paid).
Within that milieu came the commitment to full employment and universal welfare via the Beveridge reforms. I have already considered why the current British Labour MPs who wax lyrical about William Beveridge are totally misguided and untruthful.
Please read my blog – Back to William Beveridge requires a commitment to true full employment – for more discussion on this point.
The basic point is that Beveridge was writing immediately after the Great Depression which only really ended when government spending associated with the prosecution of the Second World War accelerated.
The Great Depression taught us that, in the absence of government intervention, capitalist economies are prone to lengthy periods of unemployment, the Second World War experience proved that full employment could be maintained with appropriate use of budget deficits.
The employment growth following the Great Depression was in direct response to the spending needs that accompanied the onset of the War rather than the failed Neoclassical remedies that had been tried during the 1930s. The problem that had to be addressed by governments at War’s end was to find a way to translate the fully employed War economy with extensive civil controls and loss of liberty into a fully employed peacetime model.
That was the context that Beveridge was working within.
William Beveridge’s work in the 1940 (noted above) was entirely consistent with the emerging Keynesian orthodoxy of the time, which saw unemployment as a systemic failure in demand and moved the focus away from an emphasis on the ascriptive characteristics of the unemployed and the prevailing wage levels.
Beveridge (1944, 123-135) said that:
The ultimate responsibility for seeing that outlay as a whole … is sufficient to set up a demand for all the labour seeking employment, must be taken by the State.
Welfare support for the unemployed was conceived as short-term support rather than a permanent source of income support. It was taken for granted that the state would use its fiscal policy capacity to ensure there were enough jobs available.
If British Labour is now serious about returning to the immediate Post Second War period then it has to do it wholeheartedly.
Its neo-liberal macroeconomic policy does not sit with the welfare policies proposed by Beveridge in the early 1940s.
The current British Labour Party is not remotely in the same ideological camp (collectively) as the Atlee government.
But the preposterousness of Miliband’s claim that they can have austerity and a grand social vision for Britain because Atlee ran surpluses in a few years is revealed when we reflect a little on the sectoral balances.
Britain is currently running an external deficit equivalent to around 3.7 per cent of GDP (the highest since 1989). So that is a drain on aggregate demand and national income generation. The external deficit has not fallen despite the depreciating exchange rate.
The British ONS reports – Public Sector Finances, May 2013 – that the budget deficit is currently around 6.3 per cent of GDP. So that is supporting demand but clearly given the persistent mass unemployment, the support is inadequate.
In March 2013, the Independent reported in the article – Households saving more on jobs worries – that:
Britons saved the most for 15 years in 2012 amid worries over an uncertain jobs market … Experts put the rise in the household saving ratio to 7.1 per cent, the highest since 1997, down to higher precautionary savings by families.
Regular commentator on my blog, Neil Wilson provides up-to-date analysis of the – British Sectoral Balances. His latest estimates suggest that the private domestic sector overall is running a small surplus.
Using my figures, the sectoral balance equation would suggest the private domestic sector is running a surplus of around 2.6 per cent of GDP. That is, there is some deleveraging going on (spending less overall than earning).
With the non-government sector draining demand overall, the public deficit is the only thing that is adding to demand in net terms. As noted above, it is not adding enough.
The austerity push will worsen the drain on aggregate demand and drive unemployment up further unless there is a massive net export boom or the private domestic sector starts running up increasing debt levels again.
Does Mr Miliband understand this? It would seem that he doesn’t.
The last thing the UK wants right now is for the private domestic sector to go back into increasing deficit. The behaviour of that sector signals that it intends to adopt a cautious approach and run down debt levels. That means there is not going to be a big credit-led spending boom to offset the public austerity.
The only hope then to avoid further economic malaise is for the external sector to provide a massive turnaround. How likely is that? Not likely at all.
Thus an austerity push is consistent with overall income losses, which will push the private domestic sector closer to deficit and reduce the external deficit somewhat (via import reductions).
But that sort of economic environment is nothing like that which Clement Atlee faced or created. He ran surpluses on the back of the massive public debt expansion during the World War 2 but he also had aggregate demand adds coming from the external sector (mostly).
His government was also devoted to maintaining full employment. That is, they were light years away from the current British Labour narratives.
I thought this letter from the leader of the Greens Party in the UK published by the Guardian yesterday (June 24, 2013) – Westminster now has three parties of austerity – adequately summarised the dilemma that the British population faces – all their major political parties are misguided and leading the nation along a path which will make it hard to achieve any prosperity or distributional equity.
The writer says:
Instead of trying to outcompete the government in some kind of masochistic virility test to see who can threaten the greatest austerity, an opposition party worthy of the name would be making a far stronger case that austerity isn’t working, and offering a genuine alternative.
I live in a nation with a similar dilemma.
That is enough for today!
(c) Copyright 2013 Bill Mitchell. All Rights Reserved.