Robots stealing all the jobs? - Nationalisation is the Answer, not a Basic Income

In the last year there has been increased discussion about introducing a 'Universal Basic Income' (or UBI). A Universal Basic Income would be a replacement for welfare where everyone gets an amount of money, say £100 a week, from the government as a right, just for being a citizen of the country. Unlike current welfare there are no conditions to meet to get it, either of age, or income, or anything else, and everyone gets the same. It is much simpler than current welfare, and the idea is to give people enough money to live on, just, to free people from the fear of destitution regardless of circumstances.

It is a rather expensive idea, but one that has significance advantages in areas such as simplicity and reliability. Recently, a perhaps unexpected source of support has come in the shape of various internet and technology billionaires, millionaires, etc. These captains of cyber-industry are worried about what happens if robots take all our jobs. They think, as do some others, that the rapid development of artificial intelligence and robotics will, over the next few decades, rapidly put most people out of work, not just in manufacturing, agriculture or low skilled services, but even in previously safe white-collar professions like Law, Medicine, Accounting, or whatever. They fear this will lead to a society where an increasingly tiny group of capitalists own all the robots, and everyone else is unemployed and penniless.

(Credit: Shutterstock/Salon)

Funnily the main negative thing our app-overlords have noticed about this is that if we're reduced to a vast penniless underclass there will be nobody who can afford to buy the products their army of robots and AIs produce. Hence their support for a UBI, to re-close the circle between production, purchase and consumption. Coincidentally, apart from the UBI part, this is exactly what Karl Marx thought would happen to Capitalism in the late 19th Century, but quite obviously didn't. Hence the failure of Marxism.

Ignore for a moment the obvious problem with this vision: that technology has been wiping out jobs en masse since 1750 but we haven't run out of jobs yet. The 'Tech' crowd's response is still ludicrously complicated when you think about it. UBIs are horribly expensive, so this would require massive taxation to pay for it. But if most of the population are penniless then the tax burden will have to fall heavily on the people with the money i.e. the tiny number of hyper-capitalists. So these people would be paying massive taxes, so the money can be distributed to everyone, so they can buy stuff, so the tiny minority can make massive profits on their capital, a large proportion of which would go in massive taxes, so the money could be redistributed, and so on.

It's worth noting at this point that the contemporary world is historically unique in that our aristocratic elite is both socially and economically liberal. That means they all like to think of themselves as nice, progressive people, but they also love venture capital, initial public offerings, and, oh yes, hate taxes. So I'll let you guess how long this re-distributive scheme would last before the elite decide that serfdom isn't so unthinkable after all.

But anyway, back to our dystopian future. So almost everyone has lost their jobs because robots can produce and provide goods and services of all kinds cheaper than human beings can. This means there pretty much is no problem of scarcity anymore, because AI can do basically everything. In this case there is a simpler solution than UBI, and it's called Socialism.

If we ever reach the point where most jobs disappear and capital is concentrated among a tiny elite who own all the robots and software, then we should just nationalise the robots and the software. That cuts out the ludicrous circularity of the UBI scheme (giving money to people, so they can give it to plutocrats, who give it back to the people, so, the whole process can go round again).  This all seems designed purely to keep money and power concentrated within a tiny, pseudo-aristocratic elite after real competitive capitalism has ended. Just nationalise them and then, once the robots are in common ownership, just use them to make stuff and provide services and just credit everyone directly from the output thus cutting the fat-cats out of the loop entirely. Problem Solved.

Now, I'm a right-wing, conservative, free-marketeer, so why am I suggesting socialist revolution if things go a certain way? For the answer we have to go back to Marx. The main problem with Marx's prediction that socialist revolution was inevitable was that it was based on assumptions about how economic development would occur . . . that were all wrong. A pretty large flaw. Marx thought capital would be consistently concentrated in fewer and fewer hands while wages were driven down more and more, until the whole system collapsed under its own inequality. But even his own data in Das Kapital showed that wasn't happening, real wages for workers were rising, as was their wealth (albeit from a very low base) and by the time of the Russian Revolution history clearly wasn't panning out how Marx predicted. According to his own theory revolution should happen in the most advanced societies. According to Marx Russia was the last place revolution should occur. Even more contrary to Marx Capitalism has chugged along more-or-less happily for the last 130 years, spreading wealth and raising incomes dramatically. But should this process go dramatically into reverse in the future then Marx's solution might be the right idea after all.

Free-market capitalism relies on competition among agents to generate the best prices and direct consumption and investment to best deal with the problems of economic scarcity. In all western societies this private, competitive mode of operation is balanced with democratic state control in areas where free-market provision can't cope. But in the robots-steal-all-the-jobs scenario competition and scarcity have rapidly vanished. Software putting everyone out of work would imply a massive increase in productivity had been achieved, as machines do the jobs cheaper than humans could so there would be little danger in damaging further economic growth. Economic growth doesn't matter so much if everyone has plenty anyway, while the democratic argument, that we can't allow the economy to be dominated by a handful of Mark Zuckerbergs while everyone else sinks into poverty, becomes far stronger as capital is concentrated in fewer and fewer hands.

At this point we should just nationalise companies as they reach a certain size and stability and effective competition recedes (Google, Facebook, Microsoft, anyone?). This could potentially even just take the form of nationalising certain patents or pieces of intellectual property, in terms of software. The original owners should be reasonably compensated but control should  pass into democratic hands, cutting out the fat-cats, and ensuring general control of the economy remains with the wide public. The economy would generally remain private, and competition would remain because nationalisation would be piecemeal, rather than by whole economic sectors (e.g. the Steel Industry). Businesses would remain managed much as before, allowing employees to research and develop improvements to products, and the state could allow them to shrink and go bust if necessary, because there would be a pool of further businesses or inventions to be nationalised. This should largely avoid the problems faced by classical post-war 'mixed' economies. The main difference would be that once a company or piece of intellectual property had been sufficiently developed, instead of owners being able to just sit back and live off a stream of profits perpetually, they would be effectively bought out by the state in a one-off, reasonable payment.

The majority of people would enjoy comfortable existences doing some limited work but largely supported by a vast army of robots and AI. Thus we would fulfil Marx's dream and eventually, as technology developed further, glide gently beyond Socialism to a state of prosperous democratic control, communism in the sense Marx originally meant it. Bliss.

Or alternatively the soothsayers may be wrong. Mass unemployment may not rapidly spread over the next few decades due to a shortage of work to do, and ownership of capital may not become rapidly concentrated among a plutocratic elite. If that happens we should not embrace Socialism and should just carry on more or less as we do now. Sorry.

Brexit, one week later.

1. Initial signs of Economic Chaos were overblown.

As of now the FTSE 100 has more than recovered all its losses, and the smaller FTSE 250 is only down 3.5% on pre-Brexit, taking it back to where it was in March 2015. The Pound is down against the Euro, but only to where it was in early 2014; it is historically down against the Dollar, but this should help boost UK competitiveness for exports. We will not know for months what impact it is having in underlying UK growth though. We could already be in (moderate) recession.

2. Political Chaos continues at full force though.

The Tories and Labour are both effectively leaderless, the government has temporarily ceased functioning, and the SNP are trying to destabilise things further. It is possible that Theresa May will be crowned PM within a week, but more likely the Conservative leadership election will go on until September. Democratically speaking, the Tories and Labour should both sort out their leadership problems, and then a General Election should be fought on different visions for Brexit. Economically this just risks eking out complete uncertainty until Christmas, with further negative economic effects. Economically we want to trigger Article 50 and get some things decided as soon as possible.

3. Obvious first steps.

It seems to me the following should be announced ASAP to reduce uncertainty now. Firstly, EU citizens currently in Britain should be guaranteed 'permanent leave to remain' post-Brexit, contingent on an equivalent guarantee from EU states for our citizens. Anything else is just playing games with people's lives. Secondly, the British government should promise to replace all EU funding on current projects in Britain with British money from our EU contributions. This will mostly be academic grants, infrastructure projects and agricultural subsidies. Thirdly, the government should announce all EU laws will be retained in UK law immediately post-Brexit, though after that they may be changed by the usual UK mechanisms. (Obviously not including those laws about our relation to EU institutions).

4. Our Further Negotiating Position

Given the state of the vote, I believe it is clear we should be pursuing the highest degree of economic links and co-operation in areas of law & order, science, environmental measures, visa-free travel, etc consistent with severing constitutional links and ending the total right of free-movement and settlement. If there was no right of unlimited immigration into the UK the Remain side would've won by a landslide. If the only issue was Free Movement then Leave would've won by a landslide. The only decent democratic thing to do seems to be to maximise and balance these truths. Given we already completely comply with EU law it should not be beyond the EU or the UK to reach a full agreement within the two years (though it will certainly be difficult). Brexit threatens the EU economy almost as much as it threatens ours, and the Eurozone is arguably in a worse position to deal with it.

Positively in the wider world there have already been expressions of interest in closer trade links with the UK from Australia, New Zealand, the US, and Iceland (assuming I haven't missed any). Negotiations with these states should start immediately. Someone suggested that there just aren't enough staff in Whitehall to do this, compared to in the EU. Hire some more then. Wider trade relations was meant to be one of the key advantages of Brexit. We can't afford not to at least try to make a strong effort at this.

Overall Brexit may turn out alright. But it certainly can be botched. As with many political choices how it's carried out and how other countries respond will be crucial to success. Our overall fate for better or worse was not simply determined on the 23rd June.

Oh, and please, for the love of God, no more Br-exit puns. No Bremain, No Bregret, No Scexit (Scottish, you get the idea).  Just stop it, stop it now. Thank you.      

There were alternatives to the Greek Crisis - Grexit or No Grexit

The incompetence of the EU's approach to the Greek debt crisis has been staggering. 5 years of failure have gone by and we are closer to Greek default and exit from the euro than ever.  At every stage EU policy has failed to meet its stated objectives while inflicting penury and unemployment on Greece (and other periphery countries) on a scale usually associated with a major war, and which, in this case, was largely avoidable.

It is worth briefly cataloguing just how badly EU policy has failed on its own objectives.  Back in 2010 EU leaders were loudly trumpeting the need for a bailout to avoid 'contagion' of the debt crisis. This was loudly and repeatedly stated until Greece, then Ireland, then Portugal had all fallen like heavily indebted dominoes and Italy and Spain were staring into the brink. It was an odd policy even from the start. If you are really trying to avoid 'contagion' you generally separate yourself from the contaminated object or person: the analogy here would presumably be ejecting Greece from the eurozone. Instead the bailout policy resembled hugging Greece close and giving it a direct person-to-person blood transfusion. Unsurprisingly, when you plug the financial systems of various countries into each other through massive country-to-country loans, the bad blood spreads.

Then the shout was that it was vital for Greece to avoid any default at all. Then in summer Greek 2012 default occurred.  We were told that the ECB couldn't possibly buy government bonds from distressed countries, or engage in general QE, right up until the moment both of those things happened. We were told capital controls were unthinkable, but now, you guessed, they have occurred in both Greece and Cyprus. The list goes on. Perhaps the biggest and saddest lie of all was the idea that the Euro was the great triumph of European solidarity. But in the very first major Euro crisis the rich countries have adopted a policy of taking the poor countries by the throat and squeezing the life out of them.  Where has European solidarity been for the last 5 years, as Greek and Spanish unemployment topped 25% and youth unemployment went over 50%?

At every step the EU has adopted policies that kicked the can down the road for a few weeks or months in the short term but that transparently had no hope of resolving the crisis in the long-term. And all this was predicted as far back as 2010.  There were always alternatives to the ludicrous policy the EU has chosen, and critics and sceptics have been pleading for them ever since this awful mess started.  They have been ignored and the inevitable, predictable results of economic gravity have ensued as sure as someone dropping a rock over their foot.    

There were two quite clear alternatives to the Greek crisis that could have been taken. One that kept Greece within the euro and one that saw it leave back in 2010.

Grexit.

If EU countries weren't willing to give Greece the money it needed to realistically sustain its economy while reducing its deficit then they should have let it leave the eurozone.

Grexit could have been managed in secret over a very short period of time to ensure a minimum of chaos. This would have required some outright lying to the press in advance, as the necessary official preparations were made in secret, but not much more than governments usually engage in. With preparation and support it could all have be done over a long weekend, with the banks able to open the next week in the new currency. Greek euro note and coins would have continued in use for a few weeks while new ones were prepared but now acting in the new currency. Greek banks would have to be shut and capital controls introduced while the change was made, but these could have been raised again relatively quickly once the transition was made.

The new Greek drachma would have immediately devalued massively, this would have sparked significant inflation but this would have been over relatively fast. It would massively increase Greek competitiveness overnight, giving huge boosts to Greek industries such as tourism and shipping and would only have effected international imports. Greece should have defaulted by 30% on all private debt in order to get out from under its debt mountain at that point, and reduce interest payments as a one-off measure.  From that point onwards all debt would be honoured in full.

Some eurosceptics have implied that this could all have occurred totally harmlessly, with a hop and a skip and a jump. This is foolish and ridiculous. The process would not be pain-free. The Greek people would still suffer a big fall in real income due to the inflation but with the advantage that it would be over quickly and Greece would rapidly recommence a real recovery rather than the permanent grinding recession that has seen GDP fall by 25% since 2010.  European governments would still face significant costs.  They would need to bailout their own banks where they had taken big losses in Greece. But from that point on all danger of 'contagion' would be severed as the link to Greek banks would be severed.

The EU would also be wise to sink significant sums into Greece in EU managed structural fund investments to help get the Greek economy back on track. This whole program would be with the aim of a recovered Greece being able to rejoin the Euro on proper terms in 15-20 years. Certain quantities of loans would also be sensible, but massively less than under the two bailouts we have seen thus far. Greek banks would need to be recapitalised but without Greece shifting into hyperinflation due to mass money printing to recapitalise Greek Banks. Hence the wisdom of providing some outside cash to allow Greek banks to rebuild their balance sheets with solid euros rather than just printing drachma.

The ECB should've at the same time cut interest rates to 0.5% and launch a large bank support program for Ireland, Italy, Spain, Portugal, but with the safety of knowing they no-longer had responsibility for Greece, by far the worst case. Ireland would still need a bailout, which should have been conducted on more generous terms, and maybe Portugal.  But with proper ECB assistance Italy and Spain should have been able to avoid the stress they came under in mid 2011, and hence so would the rest of the Eurozone. This should mean the entire 2012 double-dip recession could have been avoided, saving European countries billions more in gained output than they may have cost helping Greece with structural funds.

Immediate exit from the the euro and default would probably have produced a significant negative shock to GDP.  I have no idea how big, but even if it had been 10% of GDP, if it meant growth had returned within a year or so, then by now Greece would almost certainly be in a vastly better position, as would the rest of the Eurozone. Greece would probably have almost returned to 2010 levels by now instead of still being down by almost a quarter of its economy compared to 2010.

If such a program had been launched in full in 2010 then Greece should have rapidly returned to significant growth by 2012-ish and by now we could be discussing the Greek and Eurozone recovery, falling Greek debt burdens and the prospect of Greek readmission to the Euro (under more stringent regulation and monitoring) in perhaps another 10 years max.

No Grexit.


If Greek exit from the Euro was truly unacceptable to Eurozone countries then there was an alternative that kept Greece within the EU and alive. A lot of the stages would actually be remarkably similar. Rather than actually raising interest rates in 2010 the ECB should have immediately cut interest rates to 0.5% that summer. What inflation there was in the Eurozone was down to commodity price rises and would soon be quenched by the economic downturn. Slashing interest rates immediately would have helped give some small support to periphery country debt costs.

The ECB should furthermore have launched an immediate and substantial program of QE or bank support, as it eventually did.  €1 trillion euros of support whether aimed at states or banks would have been a good start, supporting distressed countries on a formula that mixed need and size. Crucially this should have been done before markets began attacking weak states, not some time afterwards when damage had already been done to investment and trade.

Greece would need to be bailed out, but on considerably more generous terms. A 30% default should again have been enacted immediately to reduce debt payments and levels. The bailout should have been considerably more generous, with Greece charged for support strictly at the rate of cost to the lending countries of raising the money. This should have been combined with an expanded program of infrastructure support projects, effectively grants, run through Brussels directly though so as to avoid any perception of the Greeks wasting the money.

Support to Greece should have concentrated on a more gradual reduction of the Greek deficit towards a current surplus, with deliberate efforts to maintain Greek economic activity. There would still need to be significant, cuts, tax rises and privatisations but with an eye on headline GDP and employment. Direct cash transfers and low taxes on poorer consumers, as well as infrastructure spending, should have been protected, while at the same time tax rises should be concentrated on wealthier Greeks and land and property, while spending cuts were concentrated on relatively economically unproductive public services.  The overall purpose of this would have been to conserve economic demand as far as possible while making significant but not suicidal progress in reducing the deficit.

Support should have come in large quantities not just in the form of loans, but also technical support in improving public sector productivity, privatisations, and improving the Greek tax take.  Tax avoiders and evaders of all classes should have been gone after like police hunting down terrorists, as a matter of national security.

While such a program would have probably taken more money than was included in the first round of Greek bailout in 2010, some €110 billion, it would almost certainly have not taken more money than was included in both rounds of bailout put together, a total of €240 billion euros. When combined with the fact that it would have hopefully seen a much smaller fall in Greek GDP, Greek debt levels should have been LOWER under this plan than what has actually happened.


Conclusion.

The counter-productive effect of current policy has been massive.  Greece has suffered a 25% recession to cut their deficit by 12%. That is €1 cut from headline GDP has only reduced the deficit by 50c while inflicting utter devastation on the Greek people. This in turn contributed to a double-dip recession across the Eurozone as a whole. If Greeks had borrowed just as many euros as they currently have, but their economy was the same size now as in 2010, then their debt burden would be only 120% of GDP instead of the 180% it is at the moment, just due to the effect of dividing the debt in euros by a larger GDP figure.

Leading politicians such as Merkel should have clearly said that you don't make yourselves rich by beggaring your customers; nor by producing a rolling 5-year crisis without any hint of resolution, which has just shook confidence across the entire EU and particularly within the other weakened countries: Spain, Italy, Ireland, Portugal. Merkel's policies (Merkelism if you will) could be fairly characterised as Thatcherism without all the upsides. Being a Leader involves, you know, leadership, and that means taking people where they need to go, not pandering to their daftest instincts.

Which brings us to our present moment. On Friday Greece will vote in a referendum on its future. Greece has never been so close to an messy euro-exit. Vote No and such an exit might give the country a chance of a better economic future, but in a severely more messy manner than could have been possible with a structured Grexit back in 2010. Vote Yes and there is nothing to look forward to other than years more grinding poverty and mass unemployment. Either way it is an utter shambles.

Educational Hip Hop

For a long time I have been very fond of what I'd call 'Educational Hip Hop'. These videos make a particular niche of Youtube content: a charming mix of of entertainment with educational substance.

Hip Hop is better than most other musical genres for education because of its emphasis on quick speech, meaning you can get across a lot more information in the same two to three minutes than you can in a traditional song.

And the genre is happily expanding all the time. Below is a small selection of videos I've come across that span History, Theology, Economics, Energy Science & English. Please do let me know about any other quality productions so I can add them to this growing library of Hip Hop academia.

And thank you, Educational Hip Hop, for combining two of my great loves: Hip Hop and Academia.

HISTORY

Origins of World War One
The Rap Battle of Kings

King Charles II & The British Restoration

Epic Magna Carta Rap Battle
Horrible Histories

THEOLOGY

Martin Luther, His 95 Theses 

and the Protestant Reformation

ECONOMICS

Fear the Boom and Bust with F.A.Hayek and J.M.Keynes

The Fight of the Century.

Hayek & Keynes . Government Austerity vs Stimulus

Deck the Halls with Macro Follies.  

Have a Very Austrian Christmas!

ENERGY SCIENCE

The Fracking Song (with funk)

Yeah, Baby.

ENGLISH

The Antonym Rap

Word! Professor. . . .  or something.

(Obvious disclaimer: No videos are my own. All thanks to respective Youtube creators.)

The Coalition must do Something Radical for the Economy. Anything.

The UK has officially re-entered recession for the first time since Autumn 2009. This has coincided with a collapse in the popularity of the Coalition government. Unsurprisingly. The 'double dip' of 2012 is far more important than merely being a problem for the government, or even temporary unwelcome news for the country though. It shows that the British economy is in far deeper long-term trouble than anyone could have thought even in the bad days of 2009. Hopes that the economy would just spring back from recession, the way it did in the 1930's, the 1980's and early 90's have vanished. Inflation has been higher, borrowing has been higher and growth lower than anyone predicted from 2008 to early 2011.

The Government's economic plan, known as Plan A, has failed. As far as most people are aware Plan A just means large spending cuts. But Plan A was never just cuts. Cuts would secure confidence in the government's control of the deficit and lower inflation, thus securing low interest rates and allow monetary stimulus to work, bringing money into the economy, allowing banks to rebuild their balance sheets and increase lending. Sharp devaluation in the currency and corporate tax cuts would tilt the economy in favour of exports and business investment, helping to drag the economy back to health. And increases in VAT and bank taxes would further encourage re-balancing away from financial services and consumption while also providing tax revenue to cut the deficit.

This plan has not worked though. Whether due to fear of cuts or the reality of higher inflation or fear of the eurozone crisis, business confidence collapsed. The eurozone crisis has made export led growth an impossibility. Rock bottom interest rates and massive quantitative easing have been tried for years but have not made enough difference. Increased capital requirements designed to make banking safer have led to lending contracting even in the face of QE and considerably high inflation has cut consumer spending much deeper than anyone expected. But that means things are even worse than we feared. We've tried running a massive deficit, and it hasn't been enough. We've tried printing hundreds of billions of pounds and it hasn't been enough. We've tried a huge devaluation of the currency and we've tried bailouts and we've tried subsidising lending, and we've tried raising taxes and we've tried cutting interest rates and none of it has worked. We've run out of buttons to press and levers to pull in an attempt to push the economy back to health and none of it has worked. The only possible conclusion is that the economy is in much worse fundamental health than after any previous recession.

Nor is there any simple Plan B alternative to austerity. The deficit is already sky-high leaving little room for further stimulus, and the deepening euro-crisis both sign-posts and increases the dangers of the markets losing confidence in the state's ability to pay its debts. The UK is a small, open economy with a floating exchange rate meaning any stimulus would just leak abroad, even before the danger of increasing interest rates. The facts don't support blaming austerity for poor economic performance anyway. The reality is that state spending has increased in both real and cash terms while the Coalition has been in power, adding to GDP in almost every quarter. The problem isn't the lack of growth in state spending, it is the fact that the wider economy has become unproductive. From 1999-2010 state spending grew 6% a year in real terms, and still overall growth fell from 3% to 2%, even ignoring the period actually in recession. A short-term fiscal stimulus can't solve these long-term problems even if we could afford it.

What that means is that the situation is not just going to get better on its own. With the failure of Plan A the government seems to have been reduced to just sitting there and hoping things turn out alright.  But this cannot work.  It was hoping that just managing the recovery would be enough to win the Coalition the next election.  But the recovery has failed, and this means that just managing the decline will lose the next election.  This cannot be stressed enough.  Unless the government does something dramatic, anything, then it is a dead certainty that Labour will win the next election with a decent majority and both the Lib Dems and the Conservatives will be devastated. However scary radical action may appear at this point, and however many people it annoys in the short term, is irrelevant for both Lib Dems and Conservatives because without it they are going to lose anyway.

They have to do something.  But fiscal stimulus and monetary stimulus have both been maxed out. There is no extra money to spend. The only thing the government can do is undertake radical reform to make the UK economy more efficient. To attempt to squeeze more bang out of each buck we do have. There are clear ways of doing this. Clear ways that the government can boost and liberalise the economy, show that it has not run out of ideas, and thus also support wider confidence. Each possible measure will annoy certain groups of people very vocally. But neither the Lib Dems or Conservatives have a choice, because without such radical reform they are definitely going to lose. With radical reform there is hope.  Even if these measures do not save the economy, they may save the government. The public are not unreasonable. A government can get re-elected with a weak economy, but only if the public can visibly see that the government has done everything to help that it could do. Governments lose when either they are blamed for causing it or they visibly have no ideas how to fight it.

If we wish to support a large welfare state with high taxes it becomes even more important, not less, to make sure the entire economy is functioning at peak, responsive efficiency. This is the major lesson to be learned from the Scandinavian countries, which are often held up as paragons of successful Socialism. These countries are not socialist countries in the way Britain was in the 1970's: ridden by restrictive practices, inefficient nationalised industries, powerful vested union interests etc. They are highly liberalised, solidly free-market economies just with high levels of taxation and public spending. On every measure of economic freedom they regularly score as well or better than the UK or the USA, apart from on measures of taxation and spending alone. Of course these measures are a drain on the economy, and that means that they can only be sustained, as they have been in Scandinavia, if the rest of the economy is operating at pitch efficiency.

Too often the argument about a growth plan oscillates between crude left wing demands for high public spending, without any regard for how efficiently that money is spent or raised, and crude right-wing demands for deregulation, without ever specifying what deregulation or how particularly this will benefit the economy.  In reality there are a wide range of possible radical measures that could help make the UK more responsive and more productive that come neither under the heading of slashing worker protection or just opening state money taps.The government has already previewed some of these ideas, but they have then gone quiet.  They seem have rejected them as too difficult to bother with.  But in our current situation nothing can be rejected out of hand without good reason. And now is the time to bring in reform, if there is any hope either that the country will see the benefit in the next 5 years or for the government to get re-elected. There are many such possible measures.  But they all involve various common themes, which I went into on my previous posts about pro-growth measures. Increasing investment, making government policy more responsive, reducing the distortions on incentives created by government action, ensuring stability etc.

On investment the government could engage in a below the surface stimulus. That would mean spending the same amount of money over-all, but shifting significant money from current to investment spending.  Basically that would mean cutting spending on government departments, programs and welfare and spending the money on infrastructure investment. Government estimates suggest that investment spending has 3x the benefit to growth of current spending. Britain's economy has suffered from chronic under-investment throughout the post-war era. Shifting £10 billion a year from current to investment spending could have a significant economic stimulus. Of course the downside is this requires deeper cuts in current spending.

The government could introduce immediate local differences in rates of public sector wages, the minimum wage and benefits, within some maximum variation of, say, 10%.  All these measures would face fierce opposition from those who lost out, but they would all make the UK Labour market more responsive and flexible to local conditions, which should produce a significant over-all gain. And much of the criticism could be muted by guaranteeing that no region will lose out monetarily over-all, either by ensuring money saved on wages or benefits remains within the region to be spent in other areas, or by deliberately increasing investment spending in those areas hit by a fall in wages.

Reform in the private sector could concentrate on boosting competition and ensuring markets function correctly. Those large banks under government ownership should be split up with the deliberate attempt to create more viable competitive retail banks.  It should be made an immediate legal requirement for current accounts to be fully transferable the way phone numbers currently are, to encourage consumers to switch bank. Legal measures should be introduced to remove all future possibility of bank bailouts, to allow failed banks to go broke like all other businesses. A FAT (financial activities tax) should be introduced for financial services, removing their VAT exemption and bringing their tax treatment into line with other businesses, and cutting the cost of financial services for businesses. Capital requirements should be temporarily reduced to encourage lending.

The manner in which we structure utilities should be broadly reviewed for value for money with the aim of boosting productivity.  This should cover both transport utilities, such as road and rail, and utilities such as gas, electric, water etc, as well as power generation.  All these utilities function as markets to the extent whereby competition is possible.  In gas and electricity competition is real, if limited, and legal efforts can be made to force greater transparency of tariffs and to make it easier for people to switch supplier. For rail there is competition from other transport options, but rail providers have local monopolies and the system of franchises has been claimed to cost the taxpayer and commuter vastly more than public ownership ever did. Options could include merging track and train ownership, mutualising network rail, cutting subsidies, increasing investment, fines for service disruption, or even wholesale re-nationalisation.  Road is the only one that is currently entirely publicly owned.  There should be consideration given to boosting investment through either privatisation or long-term leasing, or other options, and the introduction of road pricing on all motorways and major cities, with a corresponding cut in petrol duty, to take account of the cost of congestion. Speed limits on motorways could be raised to 80mph with a corresponding increase in the limit for HGV's. Water operates under a system of local monopoly with fixed prices.  There is claim and counter-claim as to whether this means improved, stable investment or just increased profits for monopoly providers. This should be reviewed with the aim of speeding up investment, renationalising bodies, or conversely, if possible, increasing the possibilities for competition along the lines of gas and electricity. Compulsory metering should be introduced. Etc.

Another area that could see wholesale reform is the structure of UK taxation.  Income tax and Employee NI should be merged immediately producing one single progressive tax on all income. CGT should also be merged with income tax in terms of rates and thresholds, with the exception of an annual rate of return allowance to avoid taxing purely nominal gains. This should also be applied to personal savings. This would massively simplify personal taxation, reduce distortions, cut admin costs and increase the transparency of how much tax everyone is paying. Housing and Land taxation could be massively overhauled removing stamp duty and establishing flat housing and land taxes for domestic and business property respectively, instead of the mess of regressive, our of date taxes and transaction taxes we have at the moment. VAT should be broadened to reduce distortions and reduce the economic impact of the tax system, as shown by OECD research. Corporation tax should be reformed to remove the tax incentive towards debt financing and incentivise investment in a clear manner.

If all these measures were introduced before the next election it would constitute a big bang in favour of growth and efficiency in our economy.  These measures may not begin to bear visible fruit by 2015 but it would certainly demonstrate that the government was doing everything in its power to reform Britain and improve our economy, while tackling fundamental inefficiencies and unfair distortions. And if not these measures, then others. The point is that there are options for radical action.  The only thing there isn't is politically cost-free options. But business as usual has fundamentally failed economically, and will therefore fail politically.  The government has the choice between doing nothing, and going down to defeat, or trying something, and possibly succeeding. This choice is the most important facing our government, dwarfing all others. The Coalition surprised observers by starting in 2010 with a burst of radicalism. Now in 2012 that radicalism has been worn down. The Coalition needs to find new radicalism, it needs a new landmark agreement to get it through the 2nd half of this parliament, for the good of the political parties and the whole nation. And given the failure of the economy then a radical growth package must be the heart of this new agreement.  If either party will not accept this then the government has no purpose anymore and a general election should occur. If it cannot agree on the radical action that we need, any radical action, then it has no point, and better to lose an election now and have it replaced by a government that may be willing to do something, than a zombie government that will coast through to 2015 before going down in defeat while Britain goes down the drain with it.

Going Beyond the Universal Credit - The next steps in welfare reform

 The current government has launched the largest reform of the UK welfare system since 1945. The British welfare system developed out of the Centuries old Poor Law in the early 20th Century. From 1945-1950 it was transformed from a limited and conditional system into a universal safety net to protect people 'from cradle to grave'. The system grew steadily more expensive and under the 1979-97 Conservative government conditionality and limits were re-introduced in an attempt to control costs. The Labour government of 1997-2010 introduced various new benefits and dramatically increased spending but also continued introducing means testing and attaching conditions to welfare.

Now means testing is perfectly sensible as far as it goes. However, it also leads to a significant unintended consequence. The means testing of various branches of welfare (JSA, ESA, housing benefit, council tax benefits and tax credits) involves people steadily losing welfare income the further their income goes above a threshold until they get nothing. For each extra pound they earn they lose, say, 20p of benefit. But millions of people are on 3 or 4 benefits at the same time. Losing 20p or so of income from each benefit and paying taxes means an effective tax rate of 90%+. In other words if someone on benefits gets a job they can find themselves no better off that being on welfare, and can even end up with less money. This welfare trap hits millions of people. Our standard suite of unemployment benefits involves JSA, council Tax benefits and Housing benefit. That is enough that if a person gets a job for a few hours a week they will lose all the extra money they earn and possibly more.

This is especially true for those with marginal, part-time or temporary employment prospects. The risk with any such work may be that a person may end up both with less money, and being thrown out of the welfare system, meaning that if their job ends or they find themselves incapable of completing it they may face re-applying for a range of benefits, a process taking months and involving climbing a mountain of bureaucracy. For those in difficult financial situations the stress of the risk of this occurring provides a significant incentive for people to actively avoid part-time or marginal work that does not provide an assurance that the person will be propelled well beyond benefits. But these marginal and temporary jobs are very important because they keep people in contact with the jobs market allowing them to maintain skills and experience, and to provide them with the basic sense of control over their own future that is essential to maintaining the morale to keep slogging away finding a real job. Hence the welfare trap is a particular problem precisely for those people from the most deprived and welfare dependent communities and backgrounds.

The Universal Credit was a centre plank of the Conservative manifesto in the 2010 election.  The idea is to solve this problem by combining all benefits into a single payment that would then have a single 'withdrawal' rate to make sure that for each pound of extra income earned welfare recipients kept at least some of the money, or as the slogan put it 'making work pay'. Allowing people to keep some of their benefits for a while when starting work, and removing benefits steadily in a manner insuring people always have a financial incentive to do an extra hour of work. The estimated extra cost of this is £3 billion a year upfront but will hopefully pay for itself in the long term by ensuring people always have an incentive to be seeking any work they can, keeping them in contact with the job market, maintaining skills and experience and hopefully meaning over time more people move from welfare into work permanently.

This is an ingenious solution to the welfare trap that exists for earned income. This welfare trap comes about through the fact that the system is a hodge-podge of different responses to particular problems. The overall effect of all these solutions was never considered holistically and hence the dramatic perverse incentives were not noticed and a system that is meant to not just keep people alive but also empower them to improve their own situation can become for many a system that traps that at a level just above subsistence. Those on welfare find themselves in a situation totally different from that facing most people. Working harder and 'earning' money often does not bring the prospect of increased income and security but at best working harder for the same money, or at worst facing greater poverty and stress. The Universal Credit attempts to correct this situation, ensuring that the welfare system acts as a trampoline not just a safety net and always involves an at least quasi-normal relation between working harder and having more money

It is possible to go beyond the reforms that make up the Universal Credit and and structurally improve the welfare system even further using the same principles and , making it even more of a springboard.  There is not just a welfare trap in Income, there is also a less well known (and admittedly less significant) welfare trap in savings.  In addition to the income means test there is also a savings mean test that is applied. For many benefits if you have cash savings of more than £16,000 then you cannot access welfare.  In particular there is a standard £6,000 threshold, below which one receives full benefits and then for each £250 of savings one has over the threshold the person loses £1 a week of benefit income.  This is quite reasonable.  If people have considerable cash savings it is reasonable that they draw on these rather than getting help from the government. The problem is the upper threshold of £16,000. As one'sone's income suddenly drops to zero. For example, someone who is unemployed with savings of £15,000 can receive around £102 a week in welfare.  Someone with £16,500 in savings will receive nothing.      

This means that if you are in a position where you have some cash savings, but not considerably more than £16,000, say in the £6,000-£20,000 range, and you think you may need to access welfare at some point in the short or medium term then you have a strong incentive to not save any of the money you earn.  You are better off spending it all, knowing that if you lose your job or your income you will then be able to safely access welfare, rather than saving the money, both forgoing buying stuff now and risking that you would just have to spend it all and then access welfare, leaving you in exactly the same position after considerable stress in the intervening period.

This is socially damaging in the long term. For most people wealth is empowering, it gives people security and a control over their own life.  Once people have a bit of wealth it makes it easier to get more wealth and stand on their own two feet going onward. More widely there is a strong correlation between wealth and social mobility, health, and a whole other raft of statistics. From a financial perspective people having some wealth in turn makes them less likely to need to access welfare or government support in the future. As with the income welfare trap it is also those with little wealth, or otherwise marginal financial situations, who are in most need of encouragement and support in gaining this security and safety net whereas in reality through our welfare system they are the ones being particularly discouraged.

This issue also applies to considerable numbers of people. Especially because in our society wealth is even more unequally distributed than income, and this distribution has been becoming more and more unequal over the last several years. There is an easy way to solve this problem though, and by using the mechanism already built into the welfare system, without the need for  dramatic re-engineering, like the Universal credit.  Two simple steps would largely remove this problem: firstly, increasing the ceiling for benefits withdrawal from £16,000->£26,000 and slightly adjusting the withdrawal rate to a loss of £1 a week in income for each £200 of savings over the threshold.  These two steps would largely remove the cliff-edge, leaving only a small step. For example, current unemployment benefits are about £135 a week for a single person. As savings increase from £6,000->£16,000 this reduces from £140->£100 and then falls straight to £0.  Under these changes as savings move from £6,000->£16,000->£20,000 welfare income falls from £140->£90->£40 and only then falls to £0.

This approach reduces the size of the drop by more than half, while also allowing people to get considerably further clear of Broke before it kicks in and hence significantly reduces the disincentive to save money. It does also maintain a reasonable upper limit, avoiding dragging more and more people into the welfare net, and also avoiding a situation of needing to process claims for a few pounds a week of welfare. These limits are always a compromise, but I think this would be a far better compromise than the current one. It also should not cost that much money. Steepening the withdrawal slightly from £1 for every £250 to £1 for every £200 would save some money.  Also for a number of people it would mean placing them on a smaller amount of weekly welfare, rather than forcing them to wear down their savings until they go below £16,000 and then putting them on a larger weekly sum of welfare, making the overall increase in cost minor.

The way to look at this is like this: The welfare system and public services are the way we redistribute wealth.  They provide access for all citizen to services and support that would normally require each citizen to have considerable amounts of money to buy.  The top 10% have 100 times as much wealth as the bottom 10%.  But it has been calculated that the wealth that would be required to buy the bundle of public services and welfare that each person has an entitlement to is about £100,000.  This is the common inheritance we give to each citizen, and that reduces the disparity in wealth to 10:1. Like I said, real wealth is empowering and gives people security and chances.  These reforms would shape this common inheritance to ensure that, like real wealth, it also acts to empower and secure people; acting as a springboard not just a safety net.

Another possible reform in relation to the savings means test for welfare relates to the definition of 'savings'. This encompasses financial savings apart from equity in a property.  This produces a sizable distortion though in favour of those who own housing against those who rent. In other words if you have £20,000 in savings and use the money to rent a property, you have no access to welfare; if you use that money to get £20,000 of equity in a house so you don't have to rent you do have access to welfare. This makes sense in terms that wealth bound up in a house is obviously not wealth that can be used to pay bills and buy food and support a family in a time when money is short.  But in terms of fairness it cannot really be justified. There are ways for people who's wealth is in housing equity to contribute that money against the cost of welfare which don't involve kicking them out of their homes. For example in terms of some amount of housing equity above a certain minimum, say £20,000, passing over to the government according to a tariff related to the amount of welfare received. The government would then get that share of the equity when the house was sold, or when the owner died in a manner similar to private equity release schemes. This would be an admittedly slow burning way for home owners to contribute towards welfare, in the same way that those without housing equity would have to.  But over the long term it may be worth it for the government, and would even-out a significant disparity between homeowners and non-homeowners and even go some of the way towards meeting the cost of the reform to savings means testing outlined above.

A third important structural improvement to the welfare system would be to overhaul the point which a partner's income affects a person's eligibility for welfare support.  I will now explain what that means in English.  I've already mentioned the Means test that is used to check eligibility for welfare both with reference to savings and income, and how this can produce severe disincentives for people on welfare to work or save. The means test doesn't just take into account the income and savings of the person applying for welfare, but also that of their spouse or partner.  Again, in principle, this is quite reasonable. Of course in situations where one partner has considerable money or income they should support their partner once their eligibility to contributory welfare runs out rather than relying on the state indefinitely.  The problem comes in the details. The means test is currently set at an absurdly low level. A partner's savings are assessed as the same as the applicant's savings and the threshold for income is only about £8,000. This basically means that if a partner has any job or savings then a person cannot access welfare beyond the time limited contributory benefits.

The UK Needs an Economic Growth Strategy . . . . so here it is! (2nd half)

This is a continuation of Part 1, found below. Basically, it's widely admitted that our economy is faltering and the government needs to do more to boost growth. I think it needs to do this, but in a manner that stays within the plans for cutting the deficit that is current government policy, the so-called Plan A. I've tried to cover every major area the government could act on to boost and secure long term growth in our economy, to give the (also so called) Plan A+. If there's anything I've missed or where you disagree with me, let me know.  What do you think?  


6) Radical Tax Reform.

Spending money efficiently is one side of the equation. Raising it efficiently is the other.  40% of UK GDP goes through the tax system every year. With £600 billion a year going through the tax system how efficiently this is done makes a difference of many billions of pounds a year. Because tax rates are so high their application to some economic areas but not others can have a powerful effect, distorting price structures and skewing economic activity on no particular rational or even deliberate basis. Almost all other public services in the UK have been thoroughly critiqued and over-hauled numerous times over the last 50 years.  Our tax system, on the other hand, has not. As it is not something that is tangible, and because it so directly involves money, which means with any change the losers shout a lot more loudly than the winners, there is a powerful incentive to not look at it too closely, and to not change it. This is the so-called tyranny of the status quo. This means our taxation system is a mix of what is practical with layers of historical accident and political expediency plastered on top.

This is not necessary though. IFS, the renowned think tank, has conducted a comprehensive assessment of the UK tax system, recently published as the Mirrless Review, looking at how the tax system could be designed to raise revenue with the minimum distortion to the economy while still retaining most of its traditional structure, and while achieving objectives of redistribution most efficiently. It outlines significant changes to Income Tax, VAT, Corporation Tax, Council Tax, Business Rates, Capital Taxes and the taxation of savings and financial services. These would remove numerous distortions thus saving the economy several billion pounds and raising billions more in additional revenue. They would also cohere remarkably with many of the other measures I have mentioned. Changes to Income Tax and NI would complement deregulation saving businesses hundreds of millions in costs; the over-haul of council tax and business rates would complement planning reform driving more efficient use of land and property; rationalisation of green taxation would cut the cost of Green Policy; a Financial Activities Tax would cut the cost of finance for businesses while making it more expensive for individuals to get into debt. In fact the possible effects of these changes are so considerable, especially with our current deficit crisis, that I mean to go over them in detail in a future article.        

7) Secure Radical Banking reform.

The ease of access to money makes a huge difference to the real economy and in a modern economy the circulatory system that disperses the supply of money is the banking system. The global recession was begun by a credit crunch that unsurprisingly most badly hit the heavily indebted developed economies. This disaster was compounded by the necessity of investing vast amounts of public money 'bailing-out' some of the major banks. To secure a reliable stream of finance for businesses, to ensure a healthy financial sector (a significant part of the economy), and to ensure that the disastrous bailouts are never repeated, radical banking reform is an essential pro-growth measure.

The government's program of banking reform has three branches.  The Bank Levy to raise extra tax from the financial sector, to disincentives the riskier forms of funding in  major institutions. The 'Merlin' agreement to go some way to reigning in bank bonuses and securing lending to the real economy, and the Vickers Report to reform the structure of the banking industry.  This report has recommended the 'Ring-fencing' of major banks, separating retail banking from investment banking. Retail banking is storing saving and lending money from and to individuals and businesses, what most of us think of as banking. Investment banking is the more high-octane, esoteric end of banking, investing in funds, shares, Derivatives, CDO's, currency and commodity speculation etc, often involving large amount of money being bet for very brief periods to secure very low margins of profit, but done over and over again making vast amounts of money very fast. Separating investment and retail banking will remove the risk of having to bail-out investment banking in order to secure the essential retail functions they are attached to. It would also incentivise major banks to shift emphasis onto retail banking and away from investment banking, due to the implicit government guarantee attached to retail and not investment banking and thus should increase the flow of funds to retail banking and thus reduce the cost to customers, i.e. the wider economy. It is essential these measures should be pushed through and implemented.  There is also a possible argument that more needs to be done to reform accountability and transparency in pay and bonuses in the wake of the decidedly mixed impact of 'Project Merlin', but I don't have anything particular to say about that.      

8) Secure Greater Investment: Including Green, Big Society and Regional Investment Banks.

One of the issues consistently raised as holding bank the economy is the difficulty small and growing businesses face gaining finance and investment, especially in developing industries and more deprived areas. Various proposals have been made to help rectify this problem by setting up various small, dedicated investment banks that would be commercial banks, initially funded by the state, that would be focused on leveraging funds to invest in certain industries or areas. The government has already committed to establishing a Green Investment Bank and a 'Big Society' Investment Bank.  The first would be focused on investing in green technologies, especially for power generation, and the second would focus on investing in social enterprises and socially responsible projects.

Various think tanks have suggested setting up regional investment banks to help fund private sector growth in particular regions. They would focus on financing sustainable growth in their particular region, with the suggestion that people in those regions would be more willing to place their savings with such a bank, knowing it went back into financing the economy in their own region. This would follow a similar model used with success in various European countries such as Germany. One question these ideas bring is how would these banks be initially financed? There has been considerable discussion among government about whether the Green and 'Big Society' Banks should be true Banks, able to borrow and lend and leverage their initial capital. There has been reluctance to let them do this for fear these debts would be added to general government debt. This seems a slightly odd objection though. When the bailouts occurred the government and ONS started quoting (for the first time) a figure for government debt specifically excluding financial interventions, and this figure has been used as the 'proper' national debt ever since. There's no obvious reason why such a distinction couldn't be made for these targeted investment banks, assuming they would pass into mostly private ownership as their success occurred.

Quantitative Easing has been suggested as a further, more radical solution for funding. The Bank of England has already run £200 billion of Quantitative Easing, basically printing money electronically. The BoE's previous scheme involved buying government bonds from various banks. There are question marks as to whether this actually worked though. Banks largely took the money to bolster their assets, rather than actually increasing lending, a phenomenon Keynes called 'pushing on string'. With the economy struggling so much again there have been calls for further QE. The problem with QE is that it also raises inflation, which is already high at 4.5%. One possible proposed solution is to engage in more limited QE but aim it more directly at the economy. A £50 billion QE program could be lent directly to businesses through a government investment agency, either a new fund or the government's existing network of regional development agencies, or more radically using it as original capital for the 'Big Society Bank', 'Green Bank' and a network of regional investment banks that could then leverage out that money to raise further finance. This would hopefully have a greater economic impact but because of the smaller over-all amount of money a considerably smaller impact on Inflation.          

9) Boost Government Investment +£5 bn
(Possible Business Investment +1£bn. Possible Science Investment +£1bn).

The measures so far outlined involve cutting costs to the economy, boosting the efficiency of public sector spending, boosting the supply of finance and lending to the economy and loosening monetary policy. All possible within the confines of the spending cuts and tax rises of the Coalition's Plan A, without any problem. Slightly more difficult policies that start to scrape up against the edges of that plan are also possible though. It is widely agreed by economists that government Investment is by far the most economically efficient from of government spending when it comes to boosting the wider economy, both in the short term and in improving the long term capacity for growth. In particular most of the loss of output in the recession came from a collapse in private Investment. If the government is going to undertake any financial stimulus at this point as the economy struggles then it makes a lot of sense to do it through boosting Investment.

The government's original spending plans contained some £17 billion of cuts to investment, about a 25% cut. This is somewhat understandable politically, as people don't tend to complain about possible future construction projects not happening, compared to schools and hospitals having their budgets cut. But economically it's silly. The government is already talking about straining every sinew in Whitehall to bring forward infrastructure projects to begin as soon as possible. But it's still rejecting boosting the spending available. This makes no sense. If there are identified projects that would boost the economy, in transport infrastructure, power generation, etc, then they should be begun now, especially if it makes the difference to the economy falling back into self-reinforcing recession. The government could increase investment by £5 billion each year to 2015, boosting the economy now and our capacity for growth in the years to the future.

Obviously pulling back on spending cuts threatens to break the confines of Plan A. But not directly. The government has two 'Plan A' fiscal targets that it has committed to meeting.  Firstly, balancing the structural, current budget; And secondly, debt falling as a percentage of GDP, both by 2015-16. The structural, current budget is the budget excluding 'cyclical' spending (the result of short term increases in unemployment caused by economic slump), and excluding investment. In other words the government can increase Investment spending without affecting this target. Obviously increasing investment spending risks missing the target for debt to be falling as % of GDP. But if the extra spending boosts growth and hence GDP, especially if the economy is teetering on the brink, then it may actually help hit that target both in year and through boosting the capacity for growth in each year to come.

There are other possibilities for boosting our core capacity for growth. Instead of, or in addition to, boosting state investment the government could take measures to boost private investment, such as increasing the generosity of tax credits offered for investment, in the hope this would encourage cautious firms to invest. Another suggestion has been boosting the Science budget, regarded as key to future innovation, development, research etc. Currently it has been protected in cash terms, meaning a roughly 10% real cut to 2015. It could be protected in real terms (a relative boost of £800 million) or increase it further (by say £1 billion). Both of these measures would possibly boost long-term growth, but they are more difficult because they are both current, rather than investment spending and hence risk both of the government's targets, unless they contribute a significant boost to GDP over the next 4 years.  

10) Rush Increase in Personal Allowance to £10,000.

If increasing Investment spending is not enough there are one final group of possibilities for boosting growth, and that is increasing government spending or cutting taxes. But obviously this goes straight against the confines of Plan A. But there are ways of minimising the danger of missing those essential government targets while supporting demand and confidence in the short-term. Research indicates that the most effective forms of stimulus are investment and tax cuts directed at poorer workers, as the poorer you are the higher proportion of your income you spend rather than saving and hence the more money actually spreads into the economy.

This offers an obvious solution to stimulate the economy in a manner that coheres with the Coalition's already stated aims. That is raising the Personal Allowance for income tax to £10,000. Now there is no space in the financial calculations, but the government could still push on with this extremely popular policy. They inherited an allowance at £6,500 and they've already increased it to £8,000, but they could announce in the Autumn financial review that immediately from 2012 the allowance will go up to the £10,000 target. They could also use the mechanism, used before, of reducing the 40% rate threshold by an equivalent amount so the top 15% (in income) don't benefit. This would give a £400 tax cut to millions of working households and cost about £9 billion. (Or if they don't think they can afford that raise the allowance by £1000 giving everyone a £200 tax cut and costing £4.5 billion.) I would also suggest at the 2012 budget following this cutting the top rate of tax from 50%->45% (assuming the forecasts for its revenue are accurate), in order to remove the possible damage caused by this uncompetitive rate of tax.

This would give a roughly £10 billion stimulus to UK consumption, which could give consumption the shot in the arm it needs to avoid collapse and, due to its crucial role to supporting the economy in general, the wider economy as well. The question is how this can be justified without breaking apart the essential constraints of Plan A. Firstly, the government currently has some leeway on this. Last estimates state that the government will hit its target a year early in 2014, and by 2015-2016 will overshoot it by 0.6% of GDP, about £8 billion. The government could formally abandon this aim to hit the target a year early, shift its aim to 2015, and spend that putative £8 billion overshoot now. It could also commit to making up the £10 billion committed now through the proceeds of the radical tax reform already outlined; immediately beginning the preparations needed to merge NI and Income Tax and bring in new House Value Taxes, A Business Land Tax, and Financial Activities Tax in 2014; to replace taxes currently on land, property and financial services, boosting revenue in time to hit the government's targets with new, economically efficient, rationally designed taxes, replacing the rubbish we currently have. Other moves could include looking again for cuts to such areas as generous benefits for the elderly that have so far escaped the axe.

All this would act essentially as not so much a genuine fiscal loosening but only a net shift of tax rises, from the start/middle of the Plan to nearer the end 2014 or so, when hopefully the economy will be in better shape to supply the tax revenue necessary, and doing so in manner that coincides precisely with the Coalition's already stated promises and objectives. These calculations also ignore any hoped for stimulus effect. If the economy is on the edge of decline these measures may be enough to hold it steady, and in that case the £10 billion (hopefully temporary) fiscal damage would do much less damage than a genuine second economic slowdown.  The government has made much of denying charges of economic dogmatism, claiming there is 'flexibility' in its plans.  Well, if that is true now is certainly the time to use it. Some government spokespersons have characterised this flexibility by saying the government would allow the natural stabilisers, rising welfare spending due to unemployment, falling taxes, etc, caused by a slowdown to occur.  But this is to have everything backwards. What point is there spending more money to slow the economy's descent once it has started falling? Surely it is better to spend the same money now to try to stop it from falling in the first place? (If we are currently convinced that we will have to spend the money one way or the other.)

11) One final thing: Co-ordinated International Action.

This last heading is so obvious that it almost doesn't need mentioning.  The major threat to our economy currently doesn't come from our own spending cuts but from the poor state of the world-wide economy.  A rising tide lifts all boats. A receding tide leaves everyone stuck in the mud on the bottom.  The largest cause of instability in the world economy today is the Eurozone debt crisis. Since the initial bold moves in May 2010 there has been no solution worthy of the name to come out of the Eurozone as the crisis deepens and deepens. Either Greece must be allowed to default, or it must be given the money it needs for as long as it needs it until it can restore growth. There is no 3rd option, and the failure to whole-hearted commit to one or the other, or indeed both, is what is doing the most part of the damage. Markets are forgiving of a good plan or a bad plan. What they scare at is prevarication, hesitation, being told things that everyone knows to be unsustainable nonsense, or the obvious sight of no coherent or credible plan at all. And bits of each of these is precisely what the EU has given them to the point where it is actually threatening the entire world economy.

So, firstly, the Eurozone nations need to get off their backsides and commit absolutely unequivocally to one of these solutions f they want to protect the Euro, or they must eject Greece as soon as possible. Secondly, the USA's politicians need to come down to planet earth, admit that the fear that the USA will be unable to repay its debts is the biggest threat to their recovery, whether that comes from future unsustainable spending, or madmen bringing their country to the edge of default in the here and now. Agree a serious long-term deficit reduction plan that includes both major tax rises and spending cuts and start to take a systematic look at the economic health of their country, rather than promising simplistic, magical solutions whether of one off stimulus bills or pointless tax cuts. To be honest in both cases politicians need to admit that it is their incompetence that has allowed things to get so bad, and that they need to massively shape up.

If that wasn't enough miracles to be hoping for at once: thirdly, Global leaders should agree a massive global, selective stimulus, re-balancing plan, whereby surplus, or low deficit, fiscally stable countries boost spending and their deficits and high-deficit, fiscally unsustainable countries cut theirs. Ideally by sufficient amounts to equal the reduction in demand in countries like the US, UK, Greece, Ireland, Portugal etc; or if this can't be achieved, by as much as possible. Now obviously the UK government does not get to decide whether these do or do not occur, so it is perhaps slightly unfair to file them under the heading of a growth plan.  But it can certainly throw its considerable international weight behind calling for them, and hence perhaps offer some of the global leadership that has been so sorely lacking recently.

Conclusion

With that I think that I have covered about every single major area of policy that the government could and should cover.  In fairness in many of these things are stuff the government is already trying or considering doing, but many are not. None of these things are particularly esoteric, but they will all annoy someone and involve fighting political battles, but the government cannot afford not to.  If the economy tanks again they will go down with it, and so will we all (to a degree). But follow through on all these areas and the government will put us in the best economic shape to face the 21st Century we can be in, for better or worse. But what do you think? Do you agree or disagree? And do you think there are any obvious areas I've missed?

The UK Needs a Growth Strategy . . . . so here it is! (Part 1)

It's pretty widely accepted that the UK economy is in trouble again.  There's been no 'double-dip' recession so far, but the economy is flatlining.  We've had growth of only 0.2% over the last 9 months, and the forecasts are equally grim for the next months. Inflation remains high at 4.5%, consumer and business confidence is rock bottom, consumer spending is flat and the mini-manufacturing boom of the start of the year has vanished. Internationally the world is in even worse trouble. The EU is still neck deep in a sovereign debt crisis that it seems incapable of getting itself out of, the US has downgraded its previous growth since the recession, and even China and the other leading emerging economies are struggling. Having blown their reserves getting through the first crisis they are fighting even higher Inflation than us and, with eerily familiarity, the first signs of credit drying up in economies become dangerously dependent on cheap money.

All is not yet lost though. The British economy is not yet going backwards, but it is barely moving forward . It's like a car whose engine is grinding away but doesn't quite have the power to push it up the hill. But it hasn't stalled entirely.  The reason growth has ground to a halt is the over-hang of the incredible levels of debt that built up until 2008. Businesses, the financial sector, households have all been plowing money into paying off debts rather than increasing output, for the first time in 20 years.  And the government has been straining every sinew to cut the deficit, and bring the explosion of public debt under control. This is important, and indeed essential to future prosperity.  We have had a debt crisis, we need to reduce our debts.  But underlying growth is needed so we can pay off our debts.

The government's original economic strategy was to focus on getting the deficit under controls, thus securing confidence in the UK's ability to control its debt and through that secure the low interest rates essential to our tentative recovery. Beyond that, Monetary stimulus would improve liquidity and lending, the devaluation of the pound would boost manufacturing and exports, and tax hikes on consumption and financial services would raise extra money while further encouraging the economy to rebalance away from consumption, debt and banking towards manufacturing and exports. Business investment and export trade would provide the fuel for the economy to steadily rebalance itself and pay off debt allowing it to move onto a more balanced and stable long-term footing.

'Expansionary fiscal contraction' hasn't quite worked out the way it was hoped though. International conditions have deteriorated dramatically and confidence has collapsed. With the whole world sinking Business investment and Exports just can't provide enough boost to push growth along. No growth risks the economy sinking back into self-reinforcing recession. It means no extra money to pay off private debts and not enough extra jobs and profits to increase taxes, cut spending and close the government's deficit. There are, thankfully, at last signs that the government is properly facing up to the reality that they need to do more to encourage growth and that deficit reduction alone, while necessary, is not sufficient to ensure recovery.  Especially with International conditions so poor. Plan A has proved insufficient.  So what is the alternative?  Well, there are two main points of view on that one. Either Plan B, Or Plan A+. 

Labour and left-wing sources have called for Plan B 'to support jobs and growth'.  Unfortunately what they mean by this seems to just be more government borrowing and spending, and more debt, rather than facing up to the more complicated issues slowing our economy. They blame the slowdown in the recovery on the government's spending cuts. I still think this approach is rubbish. Overall Britain has the 2nd largest private and public debts of any country. We need to beat this as fast as possible or we will never get back to truly stable prosperity. Devotees of 'Plan B' seem to have a belief in the almost magical power of government spending. They seem to think that what is in reality merely a slower rate of growth in nominal state spending is entirely to blame for all our economic woes; but the massive convulsions shaking the world economy in Europe, the US and elsewhere, not to mention rampaging inflation, and the drag caused by households and businesses ploughing money into paying off their own debts, is totally irrelevant. This is plain nonsense.

They also cheerfully ignore the reality that Britain could face rising interest rate and collapsing economic credibility. We have to worry about the supplying our deficit as well as the demand for it in the economy. Our struggling economy increases the case for a higher deficit to support private demand, but it also simultaneously increases difficulty in funding that deficit, cancelling this argument out. This is not just some right-wing scare story. We have almost the highest deficit of any country but yet thanks to our commitment to taming that deficit in the next 5 years we enjoy interest rates almost the lowest in the world for both public and private debt. It is correct that we were never in as bad shape as Greece or Ireland. Nor has our political system been as dysfunctional as America's. But when even countries like Spain and Italy are facing interest rates of 6% it becomes impossible to deny that Britain could have faced similar problems, if strong and determined action hadn't been taken. A higher deficit might have helped cushion the fall in growth thus far, but it may also have pushed interest rates up enough to counter any beneficial effects, or even worse.

In addition, regardless of its intrinsic merits, having committed ourselves to this plan to abandon it would hit confidence hard, as a frank admission of failure. Our current relatively privileged position rests on global confidence in our government's plans, whatever they may be.  To dramatically change direction would quite probably shatter that confidence, thus bringing about the result it was intended to avoid. There is another alternative to a Plan B of increasing borrowing and debt. That is what has been called Plan A+.  This regards Osbourne's program of deficit reduction as an essential basis for stability, but accepts the argument that deficit reduction alone is not enough and that it needs to be 1 wing of government policy complimented by an equal 2nd wing, a push for growth. A major drive across the entire range of possible government policy to improve the UK's supply side economic efficiency and productivity and thus improve growth through measures other than just crudely increasing demand.  So what would a full Plan A+ look like? 

Here under 10 broad headings I outline the steps the government could take to give the UK the boost to growth is so desperately needs. 

1) Complete Measures to ease Planning Restrictions.

One of the Government's key pro-Growth measures is a radical overhaul of the regulation surrounding getting planning permission for new construction and development.  Business leaders have long identified restrictions on planning and development as a major brake on growth in the UK. Official guidance on planning decisions now spans thousands of pages and it is reportedly slower and more expensive to gain planning permission for major projects than in almost any other European country.  According to some reports between twice and ten times more expensive.  The government has committed to massively cutting down regulation, from thousands of pages to 60, while simultaneously localising decision making and abandoning central targets and planning quotas.  For the first time a presumption in favour of (sustainable) development is being introduced.  It is estimated that our slower and less responsive planning system costs the economy £3 billion a year relative to the average of our competitors. If reform could deliver benefits of even a part of this figure it would be a significant economic boost.

2) Even-handed Business & Employment de-regulation.

The Labour years from 1997-2010 saw a vast explosion in the quantity of regulation surrounding Businesses and Employment. From the Social Chapter to the Equality Act the government imposed a vast range of new requirements around environmental issues, health and safety, employee rights, anti-discrimination measures, etc.  All these impose costs on businesses and especially small businesses that lack the capacity to spread the costs across a large turnover. Labour never found a problem they thought they couldn't regulate into submission, often in a haphazard and expensive way. The government should hold a wide-ranging review on all regulations on Business and Employment seeking to save the economy Billions of pounds a year through time and expense saved by reducing this burden.

There is a right way and a wrong way to do this though. Some right-wingers figures have recently campaigned on this front against the introduction of the latest Working Time Directive, which extends employment protection to temp workers. This is to take the wrong approach though. We don't need one class of workers who are cossetted and one group that lack even basic protections, whether that's between permanent and temporary workers in employee rights, or between public and private workers with the issue of pensions. What we need is comprehensive approach that works out what is a decent minimal level of protection and support that should apply to all workers, but which minimises the cost in time and expense to employers. Some amount of regulation and worker protection is an essential feature of a decent country and economy, but too much of it can backfire. Regulation that makes it very difficult to fire permanent workers will also reduce the willingness and likelihood of hiring workers, thus protecting those in a job at the expense of those without one, and encouraging employers to hire temporary staff with more flexible conditions. On a large scale this may even have detrimental social effect, introducing division between those workers who are so secure and those who aren't, as has actually happened in some European countries. Another argument is that extensive regulation does give protection we would like to have, like good services and lower taxes, but when the country is broke we accept that this may require paying more taxes and getting less services than we'd like, equally it may mean having less regulatory protection for a while as a cost of getting our economy back to a stable position.    

3) Reign back on and re-target 'Green' Polices.

There is a growing focus in government on bringing in 'Green' policies that are aimed at reducing our Carbon emissions over the next 20 years to hit various targets to combat Global Warming. Largely this consists of subsidising renewable energy and attempting to raise the price of energy generally to make renewable energy competitive, and to spur investment and research into these fuels. Unfortunately this is forecast to lead to a significant increase in fuel and electricity bills, particularly hitting those most energy intensive businesses, generally manufacturing and industry, to the tune of billions of pounds. This obviously goes right against our need to rebalance our economy. It may also prove largely futile if our efforts merely lead to industry relocating to countries with cheaper energy. 'Greening' our economy, like a strong welfare state is something that relies on general prosperity to fund it. They cannot be opposed. The public will not accept green measures that cut their standard of living, and Green measures that hit the economy will not last past the damage they cause. Environmentalists must abandon any policy plan built on such a basis. But the public can and do embrace Environmentally friendly measures when these measures work with them and make life easier. The massive growth in recycling coincides with government taking steps to make recycling easy, not with people being threatened into it. Also environmental targets must be feasible. We are currently signed up to strong theoretical targets for emission reduction that look good but like almost every other country we are on the way to missing by a clear mile.

This is all clearly ridiculous. But the government can take action to change these features.  It could soften our targets for Emission reduction somewhat, leaving targets that are still strong compared to where we are at the moment, but which we have a cat's chance of hell of hitting, rather than just sounding nice, and then make sure we really hit them. It should cut the cost of Green policies by reducing ridiculous levels of subsidies on certain renewable energy sources, like feed in tariffs for solar energy that are more twice the general cost of electricity. It should abandon a restricted view of what is acceptable renewable energy, and concentrate on what is practical, embracing nuclear as a relatively cheap and non-carbon intensive source of power, as well as off-shore hydro and wave, while abandoning its Quixotic obsession (if you'll excuse the pun) with Wind energy, which is expensive, ineffective and a total eyesore, even if very Green. It should focus efforts on helping households and businesses save and reuse energy, through programs to insulate homes, like the 'Green New Deal' and re-use heat and energy in industrial processes rather than just raising the price of energy until no-one can afford it. These measures would cut the cost of green policy and focus it towards saving energy, and thus cutting costs for homes and businesses and increasing their efficiency rather than pricing them out of energy.

4) Continue pursuing Public Service revolutions in Justice, Health, Education, Welfare.

The current Coalition government is currently pursuing major reform in almost every one of our major public services. These reforms have the possibility of dramatically increasing the effectiveness and efficiency of our public services at the time we need it most. In our Justice system, the government is attempting a rehabilitation revolution.  If even moderately successful this could cut serious sums of money off the massive costs to our economy from crime, as well as the expense of locking up an ever expanding number of people.  In Education, Britain has slipped down the international league tables for basic Maths and English skills, and too many of our schools are average rather than excellent. Businesses frequently complain about the standards of basic skills of high-school and even university graduates. The government is expanding spending on apprenticeships and technical education, and attempting a revolution in Schools, giving many schools extensive freedoms to run themselves while nationally improving the quality and rigour of qualifications. In Welfare the government is transforming welfare to alleviate the welfare trap that many people find themselves in and incentivise employment and work.  These measures will hopefully cut welfare spending and encourage into jobs. In Health the government is transforming the NHS in order to help is make an unprecedented £20 billion of savings and improve productivity in one of the largest organisations in the world. Improving productivity in these vital services would be worth billions to the economy a year and with the continuing likelihood of there being little extra money to spare they are vital to driving improvement in these essential public services that our economy relies on so heavily.

5) Continue efforts to improve Public productivity: procurement, quangos, PFI etc.

The Public sector in Britain generally consists about 40% of our economy, and over the last 3 years since the recession it has made up 50%. How efficiently this money is spent makes a huge difference to our economic performance and our capacity for growth. It is estimated that if public sector productivity had grown at the same rate as private sector productivity over the last several years then it would add 0.5% to our annual growth. There are various the ways that government can boost the general productivity of public sector spending.

The current government has launched reviews of procurement led by Philip Green, to look at the opportunity to use central government's spending power to gain better economies of scale in procurement, and this has outlined £3 billion of savings that could be achieved by co-ordinated action.  There has been a 'bonfire of the Quangos', operationally independent but publicly funded bodies that Labour set up in vast numbers. Dozens of these bodies have been abolished or merged, or their functions returned to the relevant government departments, with the best estimate for savings at around £1.5 billion a year. The spending cuts themselves have led to a massive drive to save money in back-office functions, in attempt to make cuts while sparing highly visible 'front-line' services as far as possible. Both central and local government are making huge efforts to save money by merging and cutting back office functions between departments. This is estimated to save £6 billion a year by 2015. 

PFI has been another area the government has attempted to gain better value-for-money. PFI is a program where the private companies build major public infrastructure projects, like a school or hospital, and the public sector rents them back for a fixed period after which they become public sector property. It is possible for PFI to deliver good value for money, but Labour went at PFI like a drunk let loose in a wine cellar. A government investigation has suggested that the public sector got only £50 billion worth of assets for a £200 billion commitment and on average PFI were 50% more expensive than conventional government borrowing. In an attempt to recoup some of these huge costs there has been growing calls for a massive across-the-board re-evaluation of all PFI contracts. The problem is that these companies have legal contracts, so even if the government does decide the contracts were insanely generous then they cannot force companies to re-negotiate. If companies refuse one other option is to levy a windfall tax specifically on those companies deemed to have made excessive profits from PFI. This is still a remarkably complicated move though.  Either way it is done it is possible that serious drive in this direction could save £1-2 billion a year in costs on these projects.


(That's 1-5. I decided to cut it up for time constraints and to keep it short.  I hope to be posting entries 6-10, from tax reform to allowance rushing shortly, so please come back soon.)