Wednesday, 17 August 2011

Unemployment: the tragedy continues, as does Osborne

Today the ONS revealed that there has been a big rise in unemployment over the last three months. The jobless rate rose to 7.9%, meaning there are now 2.49 million people without work.

According to the BBC and a Press Association newswire this was a "surprise", with most economists apparently believing unemployment would fall. Quite why this should have been the case is not clear. Then again these same 'expert' economists also thought the economy would grow by around 2.3% this year, and the 2008 crash came as a surprise to them. You might as well ask your cat!

While 2.49 million people are unemployed, there are another 1.26m working part-time who are looking for full-time work, which means there are 3.75 million looking for work. Compounding this misery is the news that the number of vacancies has fallen again to just 449,000.

Tragically, 409,000 people have now been unemployed for over 2 years. Welfare cuts and more conditionality cannot possibly work when there are no jobs (and there's no evidence they do even when there are). Training opportunities are also being cut.

Youth unemployment rose to 20.2%, up 15,000 to 949,000. Male youth unemployment makes particularly grim reading: 40.8% of 16-17 year olds + 19.9% of 18-24 year olds. Of course the persistent and unprecedentedly high youth unemployment levels are entirely coincidental to the recent riots that swept London and spread to many other UK towns and cities.

Economic growth is stagnant, inflation is rising, unemployment is up, real wages are falling, and more cuts are promised. Osborne's policies are "sheer criminality, pure and simple".

The PCS union is right to highlight the idiocy of closing jobcentres at time of rising unemployment. That policy has a rival for most stupid of the day in enterprise zones, which will apparently solve everything (Cameron told the press today that they will be "trailblazers for growth, jobs and prosperity throughout the country"). Yet they are only projected to create 30,000 jobs over four years, when unemployment is nearly 2,500,000 and rose by 38,000 in the last 3 months alone.

Instead, the clue to recovery lies in revealing where the biggest slump in employment has been: the worst hit public sector employment sector has been construction, down 8.5% over the last year. This has happened due to the massive capital spending cuts made centrally and enforced upon local councils. The solution to this malady must be to invest in infrastructure: renewable energy, public transport and council housing - which would create jobs and help to solve the environmental and housing crises that we also face.

Osborne though seems set on more of the same failed hard right dogma: tax cuts, spending cuts and more privatisation. It will fail and the misery will continue for the swelling ranks of the unemployed.

Monday, 15 August 2011

Will capitalism eat itself?

The liberal economic commentariat may have choked on its cornflakes this morning, when Professor Nouriel Roubini said "Karl Marx said it right, at some point capitalism can destroy itself because you cannot keep on shifting income from labour to capital" (see video below).

The shift from labour to capital has been a long term process, acute in the US and increasing in the UK too where, as PCS points out, the value of wages has declined from nearly 65% of GDP in the mid-1970s to 55% today. Over the same period, the rate of corporate profit has increased from 13% to 21%.

Roubini also seemingly dismissed the Keynesian solutions used in the 1930s as 'kicking the can down the road', the debt is now too great.

So is Roubini becoming a Marxist and was Marx right? Certainly there is the risk - as Roubini says - that capitalism might self-destruct. It does seem that there is no way out, because of the inherent contradictions of capitalism playing themselves out in this crisis:

1) Governments that impose austerity measures are reducing demand, squashing any chances of recovery.
As Roubini says, "If you are not hiring workers there is not enough labour income, there is not enough consumer confidence, there is not enough consumption, there is not enough final demand. We had a massive reditribution of income from labour to capital from wages to profits, ineqaulity of income and wealth has increased."

2) Governments could invest in the economy to create jobs. But in the short term and on the necessary scale that would mean borrowing in the money markets, and the markets have shown their propensity to punish any government not slashing budgets - see Greece, Spain, and Italy - and perhaps even the US following the S&P downgrade. One could counterpose increasing taxes on the wealthiest and clamping down on tax avoidance and evasion - but that takes time, and no western government is even preparing for that eventuality.

So if governments can't save their way out of recession or spend their way out, could capitalism self-destruct?

Certainly some defaults are likely - Iceland effectively defaulted in 2010 and Argentina in 2001. There has been talk of Greece leaving the euro and effectively defaulting. But that would damage the euro - and bond markets would inevitably up the risk factors on any country with a large deficit (Spain, Italy, Portugal - and potentially the US and the UK). This would make it more expensive to borrow, and rule 2) out while requiring more cuts under 1).

Now you might argue that the Argentinian and Icelandic defaults did not cause contagion, but a eurozone country would be a very different proposition, as would a major global economy like the UK, let alone the world's largest economy, the US.

So the only way out seems to be to take on the markets (e.g. shutting down stock markets, nationalising the finance sector, and taking currencies out of international money markets. The only risk for any country trying this route might be US invasion - but can they afford it?

I'll write more on how this could be done soon.

Thursday, 11 August 2011

King: Recovery will not happen soon

From today's Morning Star by John Millington

Bank of England governor Mervyn King admitted today that the economy would not recover to pre-recession levels for at least the next three years.

Mr King gave a damning assessment of the economy at a packed press conference in London, claiming that it was vulnerable to "headwinds" from enormous debt overhangs from public and private debt.

He also warned that despite any countermeasures taken by the government, Britain would remain vulnerable to fluctuations in energy and other import prices.

"The outlook for growth in the world economy has deteriorated and, largely as a consequence, near-term growth prospects at home are somewhat weaker," he said.

"The intensification of sovereign fiscal concerns has been associated with renewed funding stresses for banks which are contributing to high borrowing spreads, tight credit conditions for households and smaller companies and exceptionally weak credit and money growth in the UK."

The Bank of England governor also said that the euro-zone disaster in recent weeks had raised challenges for Britain.

"The greatest risks to the prospects for global demand come from the euro area and the substantial challenges faced by several member countries as they seek to ensure the sustainability of their fiscal positions and preserve the stability of their banking systems," he said.

Slashing growth forecasts, Mr King said that inflation was likely to hit 5 per cent by autumn and not reduce by 2013 at the earliest.

"Inflation has been pushed up by rises in energy and import prices and the increase in the standard rate of VAT," he added.

Mr King also said that Bank of England monetary policy could do "very little."

In a stark omission, Mr King refused to speculate on the prospects of a double-dip recession and added living standards would only be squeezed further if import and export prices rose.

Leap co-ordinator Andrew Fisher said: "Demand has been suppressed by unemployment, falling wages of those in work and consumer inflation.

"Until those issues are addressed - and there is no prospect of that from this government - then the crisis will continue and exacerbate.

"Politicians are proving themselves entirely powerless in standing up to those destroying our economies - the speculating financiers, bankers and corporate executives hiking prices to maintain profit margins."

Wednesday, 10 August 2011

Tesco to contest OFT fine

From the Morning Star

Tesco threatened to take legal action against a competition watchdog today that gave the supermarket giant a £10 million fine for its alleged role in a dairy price-fixing scandal.

Tesco was among nine firms that the Office of Fair Trading judged to have colluded to rig the price of cheese and milk in 2002 and 2003.

The penalties imposed by the OFT total nearly £50m but the scandal is thought to have hit their customers' pockets to the tune of £270m.

Originally the OFT had intended to fine guilty parties more than £116m but it scaled back the penalties after a period of consultation.

Supermarket chains Asda, Sainsbury's and Safeway and dairy processors Arla, Dairy Crest, McLelland, the Cheese Company and Wiseman all received lenient fines after admitting liability.

Left Economics Advisory Panel co-ordinator Andrew Fisher said that it was not hard to see where the real looters are.

He said: "It is very welcome that the OFT has decided to act on behalf of consumers who are being hit with outrageous price hikes by energy companies, supermarkets and banks.

"As LEAP highlighted in its March report, British supermarkets have hiked prices at a higher level than their European counterparts. They are looting people's wages to maintain their fat-cat profits. It's a rich irony that these fat cats are overcharging for cream."

But Tesco stands alone in denying it had anything to do with the price fixing of dairy products stating it will defend its position "vigorously" and "through the courts if necessary."

The supermarket's director of corporate and legal affairs Lucy Neville-Rolfe said: "We are disheartened and disturbed that the OFT continues to pursue this costly and time-consuming case at the expense of both the taxpayer and British business.

"We have always said we did not collude on prices on cheese and we stand firm in our rebuttal of these ongoing allegations."

But the OFT defended its decision and the watchdog's chief executive John Fingleton said the fines send "a strong signal" to supermarkets, suppliers and other businesses that adopt anti-competitive tactics.

Monday, 8 August 2011

Stop giving in to the markets

From today's Morning Star

Left economists advised governments to stop "kowtowing to the markets" today in the wake of a week of panic and turmoil following the US debt reduction package.

They hit out as David Cameron entered crisis talks with French President Nicolas Sarkozy to discuss doubts over the situation in the US and economic stability in the eurozone.

Left Economics Advisory Panel co-ordinator Andrew Fisher said: "There is a real concern that a further round of bailouts or quantitative easing will be demanded to prop up the markets, but this will only delay and exacerbate the inevitable collapse.

"Any public funds must be used to defend jobs and investment, not prop up overvalued assets and share prices."

Credit ratings agency Standard & Poor's lowered US creditworthiness down a notch to AA+ for the first time in the country's history on Saturday.

It said the cuts plan passed by Congress on Tuesday did not go far enough to stabilise the country's debt situation.

China, Washington's largest creditor called on the US to end its "debt addiction" and even suggested that the dollar may have to cede its position as the world's reserve currency.

Indian Finance Minister Pranab Mukherjee described the situation as "grave."

Mr Fisher said: "It is time for governments to stop kowtowing to markets - and with markets so weakened there has never been a better opportunity for democratic governments to regain some power and control.

"There is an urgent need for politicians to focus on the real economy - to tackle unemployment and to rebalance the economy away from the finance sector."

Thursday, 4 August 2011

Stock markets and nonsense

If someone walks into a pub and declares their jacket to be worth £300, but everyone else declares it to be worth a mere £50 - has £250 been wiped off the economy?

It's an interesting question, because today the Guardian website squeals that "World stock markets tumbled sharply again on Thursday, wiping nearly £50bn off the value of Britain's biggest listed companies". Further down the article we learn that in fact it's worse: £110bn has been wiped off in the past week!

Whoops, that is careless! Britain's biggest companies have lost £110bn! But it's nonsense. Going back to the someone in the pub with his '£300 jacket'. Let's say he's a scam artist this time. He walks in and says here's my £300 jacket, and has planted a couple of his mates in the pub to talk it up, say how lovely it is (reminiscent of the Emperor's New Clothes isn't it?) and fool some mark into paying £300 for a £50 coat. If the mark buys, then he has lost £250. That is because the asset has a clear value: £50.

Back in the stock market, this fluctuation between confidence and panic would not be a problem if it was only one rogue scam artist - the problem for the stock markets is, this is the system.

It is for this reason that seemingly sensible, educated, intelligent people panic when anyone points out the Emperor's flies are undone, let alone that his willy is hanging out. So when AAA rated CDOs (£300 jackets) are pointed out to be near junk (£50 jackets) the system seizes up in the same way that the mark in the pub won't buy from the scam artist again.

On such occasions these same great brains (who never predicted this could happen) start using infantile playground language: warning against 'scaring off the confidence fairy' or 'talking down the economy' - as if a sound economy would collapse because someone says something negative. In the same way that most of us aren't reduced to gibbering wrecks because someone tells us 'you're a git', sound economies don't collapse because of a few words.

Of course in 2008 economies started collapsing for the very real reason that they were based on the valuation of scam artists. Governments around the world stepped in and guaranteed much of the scam artists' nigh on worthless assets.

The question is will the government (a la the mark in the pub) be fooled twice and bail out or will it learn from its mistakes and nationalise, control and operate their assets in the public interest - maybe ven taking on the mafia behind the scam artists (the bond markets)?

For those of a left-wing disposition shouldn't we be asking,'do we need a stock market?', 'shouldn't we shut it down?', when it simply serves to create destabilising panics and to distort the economy.