Coalition Multiplies the Damage

Background

Despite the IMF warning the UK government that its austerity measures are causing significant economic damage, George Osborne today announced a further round of spending cuts. Recently the IMF (International Monetary Fund) posted a paper noting that the British government had significantly underestimated the impact of the ‘Fiscal Multiplier’ which has caused even greater damage to the economy as they have pursued their ‘Austerity’ policies. The thing is I don’t think the Coalition did anything of the kind. I think they knew exactly what they were doing, but since this idea is not simple to understand, they thought they could get away with it.

The multiplier is a complicated and very wordy economic idea, and for that reason this news has largely missed the British public’s attention. However, this is the ‘smoking gun’ that proves that coalition policies are pre-designed to further their ideology of shrinking public services at any cost – and the costs are immense.

 Here I’ll try to take you step-by-step through the reality of what the IMF have said, and the real reasons for and effects of current government policies.

 What is the ‘Fiscal Multiplier’?

Imagine an economy of a government and only four people. One person is a hunter and the other three are unemployed. Right now all we have is a hunter hunting for themselves, and so the other three people are starving.

The government spends £1 training an unemployed person to be a builder, which he receives in wages, so that the economy is now worth £1. He spends the wages on meat, paying his £1 to the hunter. The hunter realises he needs help to hunt the extra animals and so employs one of the other unemployed people to help him hunt, paying them 50p to do so. The hunter has 50p profit which he spends on having a new roof built. From the helper’s 50p wages he spends 25p on the final unemployed person asking him to gather some vegetables, and the other 25p on building a new wall. So now, our economy is no longer worthless and no one is unemployed. The £1 spent by the government has caused much more than £1 of economic activity. The total value of the economy is:

£1 spent by government

£1 spent by the builder on meat

£0.50 spent by the hunter on building a new roof

£0.25 spent by the hunter on vegetables

£0.25 spent by the helper on a new wall

£3 Total economic activity

Thus, the £1 government spending has been increased by the fiscal multiplier of 3 to become £3. No one is now unemployed, and no one is starving. Instead of just having a hunter hunting meat for themselves, we now have more meat, vegetables and buildings.

*For a more precise and developed discussion of the Fiscal Multiplier please see this internal document from the very right-wing IMF which discusses it in more depth.

 

The Ideology of the Right

Economic growth, is the main economic aim of the government which is why it is such a problem for the government when the media report that the country is in recession (negative economic growth) as this means the economy is shrinking, or as in our earlier example; fewer people working, more people starving and the economy is worth less. However, the government have not told you how they have contributed to low and negative economic growth over the past three years.

Our Coalition government is dominated by Conservatives, who do not believe in government spending to help the economy or its people, and for this reason they have been cutting things. Some of the cuts include £6.2bn within the first 100 days of this government’s reign and have continued for example with plan to reduce spending on the NHS of £20bn by 2015 and £50bn by 2020. For some this is still not enough, with many prominent Tory cabinet members stating that further cuts should be made here.

In total the number of public sector jobs is expected to fall by over one million, but the misery continues for those who are the victims of these policies. If either you become unemployed, or your income is reduced because of these things you cannot expect much of a safety net. The government plan to cut over £23bn per year from the welfare budget meaning those on lower incomes will suffer. Indeed, over 7million working families are expected to see their incomes reduce as a result.

This is the result of having a government dominated by millionaires who do not need these services, and feel no obligation or desire to help those less fortunate than themselves. Think about it, if you have private health insurance would you be worried about the fact that the government has just removed its obligation to treat people’s health concerns equally, if at all. Similarly, if your child attends Eton, why would you be concerned that state schools are being turned into de-humanising exam factories?

Unfortunately though, these cuts (and they go far further than I have described) have a larger impact beyond the direct effects to your services. Austerity itself creates a need for further austerity which means the things we have lost so far are barely the tip of the iceberg.

 

The Fiscal Multiplier Effect

The UK government estimated that the multiplier effect was 0.5. This means that they thought that for every £1 they cut from the economy, only £0.50 of economic activity would be lost. The paper that I mentioned at the beginning of this article outlines that this was wrong, and states that the multiplier was likely to be 1.5. Some speculate it could even have been as high as 3, meaning that for every £1 cut from government spending £3 of economic activity was lost. This is what has caused the UK’s slow economic growth, and the consequent unemployment, fall in wages and fall in living standards that have accompanied it.

The UK government got it wrong! Or did they? When we consider the multiplier effect in reverse, we have to include the figure that is being cut. So, in our earlier example, the cutting of £1 led to a fall in economic activity of £3 including the money that the government originally spent, so a multiplier of 3. As we have to include the money that the government cut, it is very difficult for the multiplier to be less than 1. E.g.. Government cuts £1 from the economy, even if no further money is lost, the economy still shrinks by £1 because we count government spending in the size of the economy. Therefore, the minimum the multiplier can be is 1. The Coalition were telling us that they were in effect going to cut £1 from the economy, but that the economy would only get smaller by 50p. My A-level students could tell you that this doesn’t make sense!

Admittedly, George Osborne’s lack of economics training could be responsible for his mistake, but how did this get past the other 1,459 treasury employees,  Osborne’s four special advisors who are qualified or the nine members of the Monetary Policy Committee who effectively run our economy from the Bank of England? If you accept that such an obvious flaw cannot have escaped everyone’s attention, then we have to begin looking for other explanations of why this could have happened.

Remember, the incoming Governor of the Bank of England has stated that the UK is an economy in crisis. It has been estimated that the government cuts have contributed to this costing an additional £76bn, and this is a conservative estimate. The entire justification for this programme of cuts was to close the fiscal deficit, and yet because of the “miscalculation” of the multiplier effect, this has not happened. Thus, 4,800 nurses have lost their jobs for no reason, among 25,000 other NHS staff. This phenomenon is not particular to the NHS, as I stated earlier, over 1million public sector jobs are being axed.

 

The Rationale

Public sector workers are those who have chosen to accept lower pay to work in the interests of the public good. These people are being sacked through no fault of their own, not to do with their performance or their competence but because someone in a Whitehall tower decided it would be better if they weren’t paid by the state.

Why? I hear you scream. I could take you through the history of the Conservative party as an organisation of the financial elite. The land-owning aristocracy and the post Thatcher corporate glitterati. I could discuss how this party stood against the formation of the NHS and the welfare state at its inception and has attacked it ever since. I could talk about the number of Tory MP’s and Peers who stand to profit from the privatisation of the NHS, but it might be much easier just to follow the money…

The money previously earmarked for all of us through the public sector has been used to finance tax cuts for the already wealthy, and for large businesses that often currently do not pay their full taxes anyway. The TUC estimate that £25bn is lost annually from the treasury (more than the entire annual savings that the government expects to make from cuts to the welfare budget) in this manner, and while this is at the lower end of the estimates nothing is being done by the government to prevent it. Similarly nothing is being done to curtail the activities of the banks that gambled our way into this mess in the first place, and these are just a couple of small examples without referencing the estimated £20bn on offer in corporate profits from the widely discredited carve up of the NHS.

 

The Consequences

Let’s assume that the IMF is now correct in its assumption that the multiplier is 1.5 (Many suspect it is significantly higher than this). For every £1 that is cut from government spending, £1.50 disappears from the economy. As nurses, teachers, police officers and other employees are sacked as part of this policy, not only do we lose our services, but we also lose spending power from the economy.

Unemployed police officers spend an awful lot less on tax, reducing the money coming into the treasury for further spending. They also then claim unemployment benefit, increasing the money going out of the treasury. This means even less money left to pay for our schools, hospitals, fire-brigades and all the rest. It also means that the newly unemployed reduce their consumer spending, they have to spend less on everything including food, cars, entertainment electronics – everything.

This means that businesses suffer as they cannot sell things to people who do not have any money to buy them. Sales fall and as a result, profits fall. This means that business have to cut costs or go out of business. Thus, businesses have to let employees go, meaning that these employees have lower income and can spend less which forces the process to repeat itself, and compounds the entire problem. Sooner or later this lack of spending in the economy and consequent fall in business sales results in those businesses closing down.

Fundamentally, austerity is a policy of the wealthy for the short-term benefit of the wealthy, and everyone else will have to suffer the consequences. Austerity is the economics that can and will cause another great depression, just as it has before. When it does, we will all suffer but it will be the poorest and most vulnerable who will suffer first and suffer most.

We are beginning to see the first signs of this with growing demand for food banks, high unemployment and falling wages, but it’s going to get much, much worse. For every Police Officer, Nurse, Doctor, Fireman, Teacher or other Public employee that Osborne shows the door, not only are you less safe for them not being there but the threat to your job or your business grows.

Austerity is a nasty policy designed to transfer money from the poor to the rich, it is a threat to your job, your standard of living and potentially to your very life!

Does the Government Represent You?

Government of the people, for the people and by the people is the ideal of democratic nations, as Laid down by Abraham Lincoln in the Gettysburg Address (I haven’t seen the film yet honest…). Our democracy is older than that of the USA but the sentiment remains valid, a point Winston Churchill made when he echoed it in his famous “We will fight them on the beaches…” speech. I wonder though whether or not the UKs modern Conservative and Liberal Democrat coalition government has ever bothered to consider the broader spirit of the words because it seems to me that their make-up and their policies fall short in every area.

Two thirds of the cabinet  – the crux of government – are millionaires. Does anyone really believe they understand what it is to have been made redundant and be struggling to pay the mortgage? To have a disability? To have a low paid job and struggle to pay the bills? Have they ever been in a position where they have had to choose between heating and food, and are they ever likely to be? If not, then how can they represent those elements of society? 2,700 pensioers die each year because they cannot afford to heat their homes. According to the UK government’s own figures over 13m working people exist on less that 60% of the average income, and more than 7m people (again in work) in 3.6m households live in extreme financial stress unable to feed themselves and their families at the end of each month.

We have 2.6m unemployed people in this country, and according to the Office for national statistics one in four employed people want to work more hours than they currently do. In fact the number of these people has increased by 1million people in the last four years. Why do they want to work more hours? Because they cannot afford to support themselves and their families on their meagre wages. The Tory aim to increase labour market flexibility has meant that many have had to take part-time jobs because there are no full time positions available. These people do not sound like the benefit seeking scroungers that our government would have us believe they are, and yet the war on the welfare state continues.

Meanwhile we have a cabinet worth £70m pounds collectively, led by a Prime Minister of the rich who tells us “We’re all in it together” while cutting tax on the richest in the economy. The richest 1000 people in the country (according to the Guardian) have increased their wealth by £155bn while the rest of us suffer recession after recession and cut after cut. Why does he defend the priviledged so staunchly? Could it be anything to do with his net (largely inherited) £3.8m fortune? How does he get away with it? This is depressingly easy to answer. The telegraph estimates that there are 280,000 millionaires in the UK, or roughly 0.4% of the population and yet 67% of the cabinet are millionaires. It appears we do not have a government of the people, we are governed by the rich and as the old saying predicts: “Power corrupts”.

Does this government have a mandate from the people to do the things it is doing? On a seemingly constant basis the PM and those in both coalition parties tell us that they have to take unpopular decisions. That they are the ones with the strength to make difficult choices regardless of how unpopular they might be. This is wrong. The government of the UK is a representative body, they should be acting in accordance with the wishes of the electorate and doing nothing more. Clearly this is not what is happening, but if you’re not sure consider these points as examples and note that there are many, many more:

a.       Effective Privatisation of the NHS

This policy was so predictably unpopular that the Conservatives “forgot” to mention it during their electoral campaign. They did tell us that there would be no top-down reorganisation of the NHS, but I’m not sure that this statement really covers their policy of using the NHS as a franchise logo for private businesses that use your ailments to make a profit. Unsurprisingly the early signs predict disaster, with vast cuts in available treatments, privatisation of NHS trusts and individual hospitals and warnings from doctors, nurses and professionals throughout the organisation that there will be fewer treatments, more waste, less efficiency and a higher cost.

 

b.      Cuts to the welfare state

Most people take this to mean cuts to job-seekers allowance but it’s much more than that. Child tax credits have recently been re-structured in the least fair way that anyone can imagine. Being fair is not really this government’s priority though, for example the changes to child tax credits will save up to £1.5bn by depriving working families of that money, but the Tories gave this away by cutting the top rate of income tax and costing the country over £3bn. That’s a pretty tough pill to swallow for anyone who has been told that their allowances are being cut to help pay off the debts caused by rich investment bankers who will pay significantly less tax on their astonishingly large bonuses-for-failure in future. Nonetheless, the government has taken no direct action to tackle the banks or bankers and instead focussed on selling your healthcare to businesses that are trying everything to avoid paying tax at all.

 

c.       Reduction of your employment rights

In short, this government wants to make it easier and cheaper to sack you when business is poor. This may not be your fault, you may have served the organisation faithfully and successfully for years but as far as the government is concerned, the business owes you no loyalty. According to the Office for National Statistics there are 29.6million employees in the UK, and 2.6million job-seekersin a potential workforce of 34.1million people. This means that over 95% of people in the UK are employees or potential employees and the government is eroding their rights. In addition to this, cuts to the economy and the ensuing economic effects have meant that average pay increases have been 1.9%, considerably below the inflation rate which has been hovering close to 3%. This means not only are employees losing their rights, but they are also effectively taking a pay cut.

 

d.      I could go on…. And on…. I don’t want to over-egg the omelette though, so perhaps people could add other government policies since 2010 that have hurt the majority of the country to the comments (below).

It is clear that we do not have a government of the people, for the people or by the people. These people do not represent you, this is a collection of career politicians that are making decisions that benefit only the richest people at the top of the largest organisations in the country. A collection of people that pretend their decisions were difficult and have the temerity to tell you that they are acting in your best interests. We do need strong politicians that are capable of making difficult decisions, but those decisions are very different to the ones that are being made. We need politicians with real experience of life’s difficulties who are prepared to stand up to the tyranny of corporations and protect their people from the life-destroying effects of poverty and inequality.

Our current government however is simply a collection of weak politicians who are selling your rights, your health, wealth and your services. And they expect you to be grateful!

Getting-Rid of Unemployed Scroungers

Labour proposed today to guarantee a job or a training scheme for anyone that has been unemployed for two years or more. This seems reasonable until you consider that people will lose benefits if they turn down what is offered. To many this is still not unreasonable, however it is dangerously similar to the failing and widely discredited “Workfare” programme of the Conservatives which has been likened to slavery.

Whatever you choose to call it there is an awful lot of stick and very little carrot here, and once more we can only assume that any resulting jobs will have been heavily subsidised by the state (expected costs are £1.5bn) meaning that private companies can recruit extremely cheap employees and will therefore offer fewer jobs at ordinary wage rates. This means that once more real wages will fall and all employees will suffer in the long term.

The issue here is one of emphasis. Politicians are still placing the emphasis of their policies on beating the poor into poorly paid low skilled jobs with a large stick to make the employment market work. Perhaps Labour do not go as far as the Conservatives who by capping increases in unemployment benefit to make work look more attractive, might as well be saying they will make food look more attractive by starving people. But by not offering a genuinely different approach they strengthen the misguided and simplistic argument that the unemployed don’t have jobs because they are lazy.

In the 1980’s the Conservative government of the time wanted wages to be determined by the market. This means that wages are determined at the wage level where the number of people willing to work (S) equals the number of people that employers needed (D), and so anyone who is not attracted to the labour market at the current wage levels remains unemployed.

Thatcher and her party knew this when they championed the policy, they wanted to reduce wage rates by ending the focus on full employment as a political priority, and they were successful. It is however somewhat hypocritical to then complain about those who have looked at the market and chosen not to sell their efforts at the current rate, since this was exactly the point of the policy that they implemented.

I am not suggesting that unemployment is not a problem, quite the reverse. Not only does it lead to higher costs for the state and worse outcomes for the unemployed themselves, but it also causes a myriad of social problems for both the long term unemployed and society at large. However, the market alone will always leave some people unemployed. The government is trying to correct this by reducing everyone’s real wage rates (although they don't put it like this in interviews, they say "increase labour market flexibility") to encourage businesses to employ more people. Unfortunately with lower wages we can't buy as much and so the amount a business can sell falls and so the amount of profit a businesses can make falls. As a consequence of falling sales, employers have to cut costs to try to maintain profits and they usually do this by sacrificing employees (which incidentally the government would like to make easier), and so the policy actually results in higher unemployement.

The argument for using this approach is that if we can achieve full employment through it (we can’t), employers would be forced to compete on wage rates and so in the long term wages would be higher. Make no mistake, anyone on the right of the political spectrum not only expects some unemployment but they desire it since this keeps costs lower for the businesses that sponsor their political campaigns. If we really want to solve the problem of unemployment and the other issues that this causes then we need a different approach.

The market cannot solve the problem of unemployment on its own. All the market does is moderate the price of wages. More specifically, if there is some unemployment in the economy, the market keeps wages low. The Conservative workfare programme and Labour’s new proposals seek to solve this problem by subsidising the cost of employees and forcing people into work but this will not work since it does not encourage employers to demand more employees, they will just employ the same number but at a lower cost and make more profit as a result. The only way to solve this problem is to increase the demand for employees so that wage rates increase and therefore attract more people into the jobs market.

Since time immemorial this is the way that civilisations have solved this problem. Egypt built the Pyramids, Rome built the Colosseum and Britain built the NHS. The current approach to solving our problems in contrast, is to strip down and sell off everything we have achieved as a nation and pretend that our previous projects failed, and it will not work. What we need to do is engage in more ambitious programmes like the NHS which employ people, both to construct them and to run them.

 

By doing this more people are required to work which pushes up wage levels and makes us all better off immediately since employers now have to compete for our services by offerring higher wages. It also creates more jobs so that people can contribute to the economy. Once people are employed they spend the money they earn in the local community, in shops, bars and restaurants boosting our economy even further. This activity even creates an increase in the tax that government receives and a reduction in unemployment costs, and therefore allows us to pay for the projects by simply starting them.

Let’s build more schools, more hospitals, more housing. Let’s expand our science and space programmes and fund university research into projects like developing clean energy that both serve us as a community but just as importantly provide jobs and prospects. Let’s stop vilifying the unemployed as we sell the jobs that they could have done to cheaper countries and then criticise people for not working. Yes there are other issues, inflation for one and the cost of the projects for another. However, the nation's debt situation was far worse when we built the NHS than it is today, and although inflation can be a huge problem, as long as we ensure wages keep up with prices then we will find that the real cost of living falls as our mortgages and other daily costs become more affordable.

Our problems are not insurmountable, they aren’t even new and nor are the answers. Keynes suggested this approach in the 1930’s and we used it to build the welfare state. The answers are older than that even, they have been used by great civilisations for thousands of years by building better states for the benefit of everyone. China is following this model as we speak and they will soon become the largest economy in the world due to the continued economic growth that they have experienced as a result.

Let’s stop playing this hypocritical and self-defeating blame game and start doing the things that will benefit our economy by benefitting us all. That's how we get rid of the "Unemployed Scroungers"!