Food Banks: A Bailout Too Far?

Food banks are somewhat provocative. The outcry of emotion usually triggers off related discussions, often about how austerity has pushed some members of society to use them and also how much food supermarkets and food stores throw away. Their individual usage has been increasing dramatically over the last five years and they have become a sensitive subject relating to the government’s austerity measures; you could even suggest their increase in use is one of the staples of the Conservative government.

But is their usage beneficial in both the short and long run?

Austerity has been covered in some depth on this blog, pieces here and here discuss some of the consequences of a government determined to slash public sector expenditure by the highest historical levels. The discussion here is aimed at the ramifications of such actions, particularly at the exponential increase of food bank supply and usage.

The Independent.

Moral hazard is a useful economic term, meaning when two parties engage into an agreement both can act independent from one another, contrary to the principles of the agreement itself. If you think of a car, a car has seat belts to prevent fatal and other injuries. But before cars had seat belts cars and the roads were safer because people drove slower. By driving slower there were less accidents. Of course you should wear a seat belt when driving, but it is an interesting argument and one that should make you think. If you drive slower you are less likely yo crash.

Another example is a salesperson with zero commission, the person receives a flat wage. Without the incentive of commission his or her business activity may relate to the flatness of the wage because there is no incentive to increase the variable i.e. the selling of more goods and services. A Salesperson is meant to sell as much as they can, without commission a worker that sells one unit receives the same wage as a worker that sells one hundred units. This is moral hazard. Clearly food banks enter into this discussion because as a means to equip oneself with emergency relief food is vital to survival; man’s basic requirements of food, shelter and clothing are the basic necessities required regardless of culture, belief, demographic etc.

The Trussell Trust are the largest food bank group in the UK. They actually began in 1994 and usually work as an intermediary between different social groups as a gap to help vulnerable members of society. This means that people are advised to go to a bank where they will usually be given three days’ worth of food, a person to talk to and advice to help them along what is usually a difficult journey. This is honorable and noble work.

Ultimately Food Banks present society with a huge dilemma. The graph below illustrates the dramatic increase from the market leading food bank.

The Trussell Trust

In 2011 some 128,697 adults used the Trussell Trust’s facilities, there were also ninety six facilities nationwide and these banks would open two to three days a week. In 2015 there are now four hundred and fourteen banks opening seven days a week. This is an increase of over four times the amount in just four years, equating to around a 100% increase every year. This is a huge increase in supply. The growing problem of food bank usage is the poverty consciousness it has instilled into our public psyche. Of course the mass media’s coverage of the economy is usually one of “tough” economic times and buzzwords such as “debt” and “difficulty” also shapes our collective thought and thus helps shape the societal narrative if you will.

This increasing form of dependency represents a complex moral hazard: should some food banks close in order to promote self-sufficiency?

This is one of the problems with strict economic analysis, it can be rather limiting when discussing sensitive issues, such as charity. However, a benefit for this form of analysis is the fact that when we do look at the facts, as crude as that can be sometimes, we can narrow down at what is vital and what is not. If more food banks closed people would be forced to find food elsewhere, agencies such as schools, sometimes police, social services and even GPs in small areas are all responsible for sending members of the public to food banks. The dependency the food bank increase has caused has maybe prompted an over reliance upon their use. And an over reliance on charitable handouts only prolongs the problem; without self-evaluation to confront the larger issue at hand the user will be going around in a slow circle.

The evidence presented does show that the increase in food banks supply from the market leader (ninety six in 2011 to four hundred and fourteen in 2015) a proportionate increase in demand. The users and social agencies utilizing food banks could not send people to food banks if their number was capped or they did not exist, they would be forced to seek nutrition from another means and self-sufficiency is the only cure for people who rely on charity. Another unfortunate problem is the fact that many of the main users of foods banks are children. According to Barnardo’s 33% of all children in the UK live in poverty. Not only does this mean they are immediately more susceptible to health concerns, monetary issues and their educational achievement but they are more likely to be recommended by their schools and social services for food bank usage. From 82,679 children in 2011 to 687,607 in 2015. What kind of future does a child have if they become so used to charitable handouts as a means of provision?

Food banks are a fantastic one off stop to help people in desperate times; a buffer to enable a person or people to get back onto their feet. When they were incepted they probably had this idea. The increase in food banks and thus their usage is an unfortunate concern as an over dependency creates problems and this can only prolong the negativity that the food is trying alleviate. The increase in usage is partly down to an increase in supply of facilities themselves, the mass media coverage and austerity policies. The government could impose a cap on how many banks are allowed to operate but this is unlikely due to the laissez faire attitude from the government.

An increase in charitable handouts is a sad consequence that has no direct route or origin, but austerity has certainly played a part.

Has The Government Improved The Standard Of Living In The UK?

With General Election campaigns well under way and the speculative dust settled from the 2015 Budget the timing is right for an analytical look at the coalition and their five-year premiership so far. This piece is not aimed at dissecting each manifesto claim made by the Tories, rather a commentary on living standards in the UK today.

Have the government’s policies actually improved the living standards of the average UK citizen?

Measuring living standards and the statistics and data used is critical to illustrate an accurate portrayal of actual living standards for the average person. Undoubtedly aggregate figures are important, especially when making macro comparisons with other economies. Nonetheless individuals should also be made aware with stats and figures they can truly relate to; GDP Per Capita figures give a clearer indication of this because they show the average wage per person. Moreover, people can see what the average person earns; they can also use the figure and compare how they are doing in comparison.

To arrive at a GDP per capita figure we take the Gross Domestic Product, (the sum of all work, spending and production) and we divide that by the total population we then arrive at a GDP per capita figure. This figure is a more accurate representation of the living standards for the average Briton as it provides the mean wage for everyone in the nation. Like all stats, always take them with a pinch of salt and never consider them to be final or conclusive, rather a useful analytical tool used to portray the bigger picture.

If we go back to 2009 the UK and most advanced economies were in the midst of the worst financial crisis since the Wall Street crash of 1929. I have opined my thoughts on the matter here and here. Prior to the hung parliament and David Cameron assuming leadership, Gordon Brown, the Prime Minister at the time and his Chancellor Alastair Darling, sanctioned tax payer’s money to be used on “bailing out the banks.” The term often used to describe the process that saw taxes being deployed as a monetary safety net for the struggling banks; banks that would have been crushed by their own recklessness had the tax funded finance package not arrived.

It is worth mentioning the background to the crisis in some minor detail as Prime Minister David Cameron has described this election as the “most important in a generation.” This is because the Tories have structured their election campaign on their idea of economic recovery and why continuity rather than change is required for the citizens in the UK. In the pre-election Budget Chancellor of the Exchequer George Osborne claimed, “Our economy had suffered a collapse greater than almost any country.”

Britain’s GDP like other nations suffered as a result of the global financial crash but can The Chancellor truly suggest that the financial crisis hit Britain as hard as some of the less developed nations such as Ireland, Greece or Portugal? The UK is not a Eurozone member, so it does not have to adjust economic policy in line with eighteen other nations, unlike the mentioned nations. In addition, nations such as France and Germany have higher GDP and GDP per capita figures than the UK. Both are members of what is clearly an unbalanced monetary union and still have had a stronger recovery in living standard terms since 2009.

Mr. Osborne added:

“Five years ago, living standards were set back years by the great recession. Today, the latest projections show that living standards will be higher than when we took office.”

At a time when the electorate needed reassurances and tangible evidence of a recovery it seemed a little odd to refer to living standard projections rather than the subsequent record during the coalition’s time in office. The graph below highlights GDP per capita from 2007-2014:

World Bank

As you can see in 2009 when the coalition took office living standards where at the lowest point on the range displayed. This is no surprise as the aftermath of the banking crisis combined with the deficit reduction policies imposed by the government caused a shock to the economic system. Since then living standards have been the lowest among Britain’s adversaries, Germany and France respectively. So it remains unclear what the Chancellor meant when he proudly professed “Britain was walking tall again.”

According to ONS figures, unemployment in the UK ( February 5.7%) is lower than France (10.6%), Germany (4.8%) has a lower rate however; but the news was welcomed by the coalition. With French unemployment higher than the UK’s it highlights the importance of looking at the average wage per person as opposed to other figures because they do not portray a clearer picture of living standards.

Unemployment figures cannot account for underemployment. Underemployment looks at labour utilization (how productive workers are) as opposed to just labour (people in jobs). For example, a PHD holder working in a fast food restaurant is said to be “underemployed” because they posses a skill set that exceeds their requirements for the role, yet they are employed nonetheless. An extreme example yes but the idea is to look at situations where highly qualified individuals are accepting roles where their skills are not enhanced or utilized. This is a likely factor behind the UK’s laborious productivity and why it can have more people in jobs yet lower wages for those workers. According to the Bank of England in their Quarterly Bulletin 2014 Q2

“Since the onset of the 2007-08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend.”

In addition to that, Stephanie Flanders writing in the Financial Times suggests:

 “That the average UK worker, in Yorkshire or anywhere else, now produces less in five days than a French one does in four.”

Clearly the recovery is not close to pre-crisis levels so the government has not raised living standards for the average UK citizen. With slothful productivity levels systemic of what little recovery the nation has seen, it is difficult to fathom how the Chancellor could be so optimistic when clearly the past five years have been subdued. Political rhetoric should not be confused with economic reality and the reality is clear: living standards in the UK are not close to pre-crisis levels.

Is Justice Reinvestment a viable solution to the UK Prison Crisis? Part 1

Getty

The following is part one of a special look at the prison system in the UK. The prison population is near full capacity and incarcerating criminals is an arduous and expensive process. Justice Reinvestment seeks to allocate resources away from building and funding of prisons and looks to invest resources into greater societal schemes that could prevent crimes in the long term.

Justice Reinvestment (JR) is a simple concept, reallocating resources away from prisons and investing funds into societal schemes. The resources invested are aimed at eradicating the problems that lead onto criminal activity before they manifest. That should result in the long-term reduction of the number of incarcerations. The prison system in general is wasting resources and failing to tackle the long-term problem of reoffending.

There are currently 84,000 prisoners in the UK, full capacity, despite household and violent crime falling by 46% since 1995. Sentencing has not followed in the same direction. The inverse relationship between the drop in crime and rise in incarcerations highlight the odd relationship between high sentencing and fall in crime. Crime has fallen yet more people have been sent to jail.

Clearly the current prison situation is both inefficient and ineffective as greater emphasis should be devoted to criminal prevention rather than punishment, tackling the act once it has occurred may “solve” the crime, but the greater problem of why an individual or group have committed the crime itself highlights the need for a substantially greater understanding of crime prevention. The current prison system does not tackle crime prevention very well.

Philanthropist George Soros and his firm Open Society first expressed concerns with regard to similar problems within the US penal system, Allen and Stern suggest,

“George Soros has been questioning the cost of maintaining the current unprecedented level of imprisonment in the US and asking whether a redirection of resources away from criminal justice and into social, health and educational programmes might not make a more effective long term contribution towards creating safer and stronger communities.” (Justice Reinvestment – A New Approach to Crime and Justice 2007)

The concerns raised here share similarities to those being expressed in the UK, hence why JR could provide a realistic solution to the current penal crisis.

The prison crisis in the UK is the manifestation of both the latter stages of the John Major government (1990-1997) and more significantly Tony Blair and Gordon Brown. (1997-2010.) The manifesto promise of not only being tough on crime and more significantly the causes of crime, the current prison crisis has not benefitted from their efforts.

“On crime, we believe in personal responsibility and in punishing crime, but also tackling its underlying causes – so, tough on crime, tough on the causes of crime, different from the Labour approach of the past and the Tory policy of today.” (Labour 1995)

The idea of JR would appear to adhere to the Labour manifesto of 1995 that promised to act on the causes on criminal activity. The proactive approach is likely to provide remarkable knowledge on reoffending. The data could prove pivotal for identifying patterns and relationships between the criminal and their background. Identifying certain traits in societal behaviour would provide insightful knowledge on reoffending and resources would be in place to tackle it directly.

The crisis could be viewed as a simple problem of demand being greater than supply. Half of all prisoners reoffend. This has increased pressure on the prison system to reduce overcrowding so that prisons not only punish, but educate, rehabilitate and reform prisoners so that they can reintegrate themselves back in society reformed and not reoffend. Currently, resources are at full capacity and the prisons are struggling to provide those services due to the sheer numbers of incarcerated. The revolving door culture with criminals is putting further strain on the troubled economy. JR provides insight in reducing the long-term problem of high reoffending. This is by no means a short-term solution; it requires a more long-term approach and immediate reoffending rates are not likely to fall dramatically. However, what JR would provide is an in depth understanding of the why reoffending is so high.

No room left.

For several years tough on crime or zero tolerance translated into imprisoning record numbers of criminals. Also, building more prisons appeared to offer the solution to the growing demand for prison space. All of this occurred whilst criminal activity was falling. In hindsight, it would appear that the government at the time appeased the general public’s call for the justice system to be tough on crime. JR would provide a viable alternative to the current problem, which would appear to be a problem with central legislation and the general short-sightedness of politics in the UK, local government require much greater micro control over released prisoners. With greater control, local authorities could look to improve certain areas that are disproportionally represented in prisons and look for those funds to help improve the affected regions. It may seem unlikely at this point, due to the scope of the project. Nonetheless, stiffer discussions in Parliament should take place. The most recent reshuffle saw David Cameron remove Kenneth Clarke and replace him with Chris Grayling. Many view this move a political move to the right. Clarke was rather too ‘liberal’ for many Tories who favour a hardline approach. Robert Winnet of The Telegraph suggests

“His [Ken Clarke] pro-European stance and relatively liberal views towards criminal justice have brought him into conflict with Mr. Cameron and other senior Tories” 

In addition, for true justice, emotion (which public opinion is mainly driven by) must be removed in order to maintain the authenticity and the impartiality of Justice. However, the nature of the political system in the UK requires politicians to be rather myopic with long-term decisions.  This emphasizes why JR could offer a viable solution for the capacity problems in the UK.

Albertson and Fox highlight the fact that public opinion appears to at least be shifting towards policies that would appear to support many of the ideas and suggestions that are presented in the Justice Reinvestment proposal.

“The public do not rank prison highly as a way of dealing with crime. Most think that offenders come out of prison worse than they go in.”

What this shows is that the public is aware of some of the immediate concerns regarding the penal system, reinforcing the need for desperate reform. By the same token however, there does appear to be a ‘stubbornness’ or lack of understanding from large sections of the public with regard to criminal justice and members still believe that sentences are too soft. The former Justice secretary Kenneth Clarke nonetheless was advocating for substantial change to the current penal system. In an interview with The Times in 2011 he not only expressed concerns over the cost of the current penal system, but also the conditions of prisons in general.

“Prisons are financially unsustainable. It is just very, very bad value for taxpayers’ money to keep banging them up and warehousing them in overcrowded prisons where most of them get toughened up.”

Whilst Clarke’s concerns regarding the aggregate cost of the prison system in the UK is justified due to the current state of the UK economy, implementation of Justice Reinvestment would require centralized power from national government being transferred to local government. This would involve “substantial transfer of funds.” (Allen and Stern 2007) The criminal system and local governments are not exempt from the public sector cuts. This outlines why JR moves funds around, rather than demand more. So it is a question of where those funds go.

Clarke’s main concerns appear to be surrounding the aggregate cost of the current penal system, it does display why the current system is simply not sustainable. JR explicitly states that local authorities will have greater micro control over how funds are utilised. In theory at least, this would present a viable alternative to the current, unsustainable system.

In part 2 I shall look into the prison population further, look at JR in more detail and arguments against JR. 

How can the EMS crisis of 1992-93 crisis help the Eurozone today?

Norman Lamont on Black Wednesday

Learning from the past is often the best way to prevent future tragedies but the similarities between the EMS crisis of the early 1990s and the current Euro zone crisis is uncanny. I think there are certainly lessons that should have been learnt from that episode that should have reduced some of the damage the Euro zone is facing today. This is part one of a two part special on the lessons the EU should have learnt from the EMS crisis. 

The fundamental aim of the European Monetary System (EMS) was to consolidate the process of monetary integration amongst member states through monetary stability. Increased economic stability would ensure relatively smooth movement of capital, goods and services that would lead to increased intra-national trade. Additionally, the EMS was devised in order to establish a coherent system in which exchange-rate fluctuations were centralized and reduced in order to promote and maintain stability within the European Union. EU members were advocating for a system of governance that would establish economic cohesion, minimalize exchange-rate uncertainty and safeguard themselves from external shocks. The EMS system could be seen because of the failure of the Bretton Woods system that left many European nations somewhat disillusioned with a scheme that placed international monetary fundamentals in the direct control of the United States.

The EMS comprised of two main mechanisms, firstly there was the creation of an artificial unit of account named the European Currency unit (ECU) and a fixed exchange-rate system named the Exchange Rate Mechanism (ERM). The ECU was a unit of account rather than a medium of exchange, although, it shared the similarities of a common currency, no coins or notes were issued. In effect, it was an accounting unit, which all member currencies were expressed. Nations were allowed to fluctuate within the specific limits of ±2.25%. Additional features of the EMS included the Divergence Indicator and The System of available Credit Facilities. The Divergence indicator was measured in terms of ECU to enhance economic coordination. Hence, it measured the divergence of a nation’s given market rate with the central rate. Despite the system of available credit never coming to fruition, the ECU, ERM and the divergence indicator were mechanisms designed to enhance economic integration and more specifically exchange-rate stability amongst member states.

The importance of the ERM cannot be understated because the very nature of the EMS was to strengthen monetary integration by enhancing stability for member nations. Thus, the systemic failure of the mechanism is arguably the most significant factor contributing to the EMS crisis. The ERM adopted an asymmetrical system in which the Deutsche Mark became the reserve currency, in effect, the members of the ERM handed substantial monetary control to the German monetary authorities. Germany assumed a role similar to that of the United States in the Bretton Woods arrangement. Because monetary authority was effectively concentrated with Germany, when its own domestic interests conflicted with that of other ERM members, it caused severe economic shocks. Both Jones (2001) and Copeland (2005) concur to the suggestion that the domestic economic issues in Germany caused the greatest threat to ERM stability and thus the EMS came under severe threat.

“Because the DM was the linchpin of the system, the fate of the ERM was greatly influenced by developments in the German economy.” (Jones 2001, 56)

The reunification of both German states had severe economic consequences on the ERM members. Firstly, the amalgamation of a large and wealthy nation with a small and less economically developed one had an impact on West German current account. In order to make the transition function, the West German government transferred savings revenue to the East, and the government budget deficit rose from 5% to 13.2%. (Weerapana 2004, 4). This reduction in economic power as a result of the increased structural deficit forced the Bundesbank to increase interest rates in order to reduce inflationary pressure. Unemployment in the UK in 1990 (the year in which they joined the ERM) was 7.1% (Eurostat 1990). Because the UK had effectively handed monetary control to the German authorities in the sense that exchange-rates were determined by the ERM as oppose to the UK government, there was very little in terms of expansionary monetary policies that the UK could adopt.

Moreover, it is likely that the Conservative government at the time would have opted to devalue the Sterling in order to stimulate export demand, which would have increased economic growth through high levels of investment and thus job creation. However, this was not the case and it highlights one of the main problems with the ERM, conflicting monetary interests from nations with contrasting monetary agendas. The dominant German authorities had no incentive to reduce interest rates; the reunification process meant that saving revenue had to be released in order to bring the East German economy to a competitive level, hence high interest rates in order to reduce the internal government deficit. Furthermore, this is a clear example of one of the mechanism’s fundamental macroeconomic failures; it was created in order to establish economic cohesion through marginalizing exchange-rate fluctuations but it left the UK facing high levels of unemployment and high interest rates, due to the lack of economic stability because of a conflict in economic agendas.

On Wednesday 16 September 1992 the UK was forced to withdraw it’s currency from the ERM. Not only did this event drive market confidence extremely low, mainly because of the interest rate fluctuations, which in turn lead to speculative attacks[1] on the currency, it also had severe economic consequences for the domestic economy. McDonald and Dearden suggest the UK currency was increasingly vulnerable to speculative attacks:

”For the UK, international investors watched as growing political pressure to address the recession forced the Government into a series of interest-rate cuts between October 1990 and September 1992.” (McDonald and Dearden 2005, 90)

There are various similarities with the present crisis. If Greece were to leave the Eurozone and affectively the EU, the costs of such a decision may be politically detrimental, but economically beneficial. When the UK left the ERM the decision damaged their economy in the short-run, unemployment levels were high and investment confidence was low, the years following however, saw the economy recover rapidly. Figure1.1 displays the steady fall in unemployment after 1992.

Eurostat.

Monetary integration had always been an objective for European nations. In order to establish and maintain economic stability within Europe and particularly the EMS zone, domestic nations had to merge monetary policies in order for their goals to be achieved. Hitiris suggests that four fundamental principles were adopted in order for this process to occur; “free trade in goods and services and free mobility of capital and labour.” (Hitiris 2003, 128) Domestic currencies could therefore be viewed as a barrier to achieving these economic goals. The realization of an economic monetary union was perhaps best formulated in Jacques Delors[2] report of 1989. The report made several recommendations to improve the efficiency of European monetary affairs through the convergence of macroeconomic affairs. The general theme of the Delors report was clear, the extension of a united economic European union, with little or no barriers preventing the flow of capital between member states.

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[1] The most famous example of an individual profiting on short-sell Sterling was George Soros who profited just over $1billion on ‘Black Wednesday.

[2] Jacques Delors was the President of the European Commission from 1985-1995. It was under his premiership that a proposal for a common European

currency and more importantly, a European monetary union was to established. He was the first President to serve three terms.

 

Do right wing parties become more popular during economic downturns?

Golden Dawn: Their sharp rise has occurred during the worst economic crisis since The Great Depression

Clearly the global economy is disarray. Several large economies around the world have still not resumed their pre crisis levels of output and that does not appear to be changing anytime soon. This has several consequences, unemployment across the world, especially in Europe is high, people have less disposable income so spending levels are lower and there seems to be rising support for right wing politics. This has led me to ask a question: do right wing political parties become more popular during periods of economic upheaval? My answer is yes.

Economic stagnation or downturns are periods in which more people lose their homes, credit is harder to obtain, several businesses close down, unemployment & underemployment rise and disposable income is reduced. They occur during an economic upturn, however, the positivity during an upturn far outweighs the negativity, so the effects are minimalized. So if we take the UK for example and we look back during Tony Blair’s premiership, the economy was booming during most of his time, with exception to the downturn of the early 2000s, (dot com bubble) post 2002 the economy is performing well. At the time Britain was pro E.U. and pro immigration and a lot people were contempt to allow migrant workers to come to Britain. Nobody can escape the UKIP hysteria; they were often ridiculed as just another political party whose views on immigration and E.U. membership were extreme. Now Nigel Farage has David Cameron looking over his shoulder. The progress UKIP have made since the credit crunch has been nothing short of remarkable. In this age where the main political parties have lost connection with several disillusioned members of the public, UKIP represent boldness and consistency. But their views are more acceptable during a time of economic disarray. They are saying nothing different from ten years ago, they were anti-E.U. then and they are now. They were anti-immigration then and they are now. And migrant workers coming into Britain is not a recent phenomenon, yet there surge in popularity has transformed them from just another political party comprising of disgruntled former Tories into a real pain to the three main political parties. Moreover, their MEP seat looks secure and a recent YouGov opinion poll shows that public opinion is on their side and politically, immigration is such a contentious issue, politicians know they must tread carefully around it, often lacking the boldness UKIP has, hence there surge in popularity.

UKIP leading the way according to poll                                                     YouGov

 This surge has stemmed from the fact that the large public sector cuts have affected millions of people. This is on the back of the huge bank bailouts ordered under Gordon Brown for several failing banks and the fact that the large public sector deficit does not appear to be reducing. Economically the UK has a long way to go. It certainly has a huge effect on people’s lives, their mood, thoughts and actions. People think differently during recessions and downturns and this is reflected on the political landscape. Politics provides the avenue in which any citizen can protest against political actions and clearly people are speaking out against the way society is today. And this is because the economy is in such a dire situation.

 Last year in France, François Hollande won the general election. By defeating Nicolas Sarkozy he was elected President. One could suggest that many French voted out of protest in order to remove Sarkozy due to the problems in the economy. The French had similar concerns to the British, mainly regarding its economic woes and social problems based around immigration. Moreover the real story of this election was Marine Le Pen, leader of the far-right group Front National (National Front.) Of the 35,883,209 who voted, the Front National received 6,421,426 of the votes. So 18% of the votes went to a far-right political party. Thus the Front National came third overall. Again, their clear policies struck a cord with over six million people and this was their best election result to date.

The Euro Zone has come close to collapse and nowhere has that been more apparent than in Greece. Greece has always had high levels of public expenditure and around 10% unemployed for the last ten years, so this has added to the high national debt. Who should be blamed is not the issue at hand? If anyone should take responsibility it is the Greek politicians, for overseeing the mess and allowing public finances to spiral out of control. in the midst of this the far-right party Golden Dawn has had a huge impact on Greek politics, their surge in popularity certainly provide and sometimes channels the energy the recession has created. Their anti-immigration policies, much like Front National and UKIP have resonated with people and have provided them with the platform in which they hope to gain considerable election success.

If we look at the UK again, much of what the BNP said about immigration is not that different from what UKIP opine. Where they are on the political spectrum is different fair enough, but in terms of both being anti-immigration they are virtually the same. Yet the BNP was close to bankruptcy and UKIP appear to be going from strength to strength. Times have certainly changed. In an economic downturn people may have less patience for issues such as immigration, social housing and the provision of social services such as education and health care. This is usually because tax receipts have shrunk as a result of higher levels of unemployment, public sector cuts and less activity in the economy as a whole. So people may feel that domestic policy ought to prioritise its national citizens before seeing to the needs of others. What does not garner the same emotion from public attention are the benefits immigrants usually bring to communities. Ethnic minorities make up 6.24% of the Greek population. This figure has been growing steadily, but up until 2005, Golden Dawn were not the force they are now. The Greek economy has rotted since and the popularity of not just Golden Dawn, but right wing politics, especially in smaller parties, has gathered loyal cult followings, what they hope is that it manifests into tangible political success. They are at the very least making their bigger counterparts take notice, especially at local elections.

Personally, I think UKIP and the surge in popularity in far-right political parties highlight the sad state of politics in the UK and the rest of Europe today. However, I genuinely believe in freedom of political expression. For me UKIP provide more problems than solutions because they are virtually a one-policy party and I am yet to be convinced what they would do if the UK were to leave the E.U. In the case of the Front National in France, Le Pen was recently voted the most popular French female politician so she does not look to be losing any momentum.

I am confident that if the global economy was in a better state, more people had jobs and more money in their pocket then I can’t see where the far-right could get their impetus. Blaming immigrants for instance is a weak and flawed argument for the UK at least. There is no doubt that immigrants reduce the cost of labour, but the problems in the UK are more complex than blaming one group. Maybe the UK has got too many immigrants, but what I am certain of is this issue is not a simple case of close the borders and the problems will disappear. I would personally like to see the same energy exerted towards tax avoidance from large multinationals because that could potentially recoup billions in tax revenue.

How UKIP and other right wing parties perform in the next series of elections should be interesting, if the economy is still as sluggish as it is now, I predict well, and if the recovery is looking strong then I don’t think they’ll do that well. My only hope is that the economy starts to show real signs of growth and it will be interesting to see how the right reacts to that.

How times have changed

Since the coalition came to power in 2009 the phrase “we inherited a mess” has being the prelude to almost every statement they have made with regards to the economy. It relates to Labour’s high levels of public expenditure. I try and think of when the Conservatives were in opposition and how much they said at the time to try and curb Labour’s spending. They did not. Moreover, they must accept some blame for allowing such heavy fiscal consumption and doing next to nothing to stop it. Chancellor of the Exchequer George Osborne is to deliver his budget tomorrow, I predict more of the same in terms of deficit reduction, with minor tweaks to try and boost the economy that has been sluggish for well over five years now.

http://news.bbc.co.uk/1/hi/uk_politics/6975536.stm

Is Economic Growth the aim for the UK?

High Streets up and down the UK have not had the easiest times lately

Since 2007, the global financial crisis engulfed several leading economies and placed them in a precarious position. Output in many G20 nations declined and it was the worst downturn since the Great depression. When an economy is growing we notice that more people find work, credit is easier to obtain and living standards for the majority of society tends to rise in harmony with the economy. In a downturn and recession (defined to two consecutive quarters of negative output) the opposite tends to occur, less jobs created, rise in unemployment and usually a rise in income tax to compensate for the lost output.

Since the coalition in the UK came into power in May 2009, Chancellor of the Exchequer George Osborne has led the way with polices aimed at reducing the UK’s deficit. A deficit is the sum of government debt, deficits being a flow variable and debt being a stock variable. As we have all heard, this is his primary aim, so we have seen large reductions in government expenditure, in an attempt to curb government spending because the current government deem it too high. Fair enough, Labour may have binged a little on spending and some savings needed to be made. But, the best way to reduce government debt and therefore the deficit, is to stimulate economic growth. It is economic growth that will reduce the deficit, not only will growth translate into more jobs being created, more goods & services made available and more disposable income for households, but it will also help the government achieve their aim of deficit reduction.

It is this failure of George Osborne and Business Secretary Vince Cable to recognise this that has made me ask the question, is economic growth even their aim?

The OECD has backed Osborne’s economic policies, suggesting that fiscal consolidation is an urgent requirement. Whilst I can accept that, there are policies that the government could bring in in order to increase public spending. They have not. When the government came into power one of their first economic decisions was to increase VAT from 17.5% to 20%. This increase of 2.5% makes everyday goods that have VAT attached 2.5% more expensive. If you want people spending, make things cheaper, it’s that simple. Retailers had a rather subdued Christmas, had VAT being 15% or even 12.5% then I’m sure it would have had a significant difference.

The UK is also not a member of the Eurozone. This should provide a bit of protection from the farcical situation currently engulfing several imbalanced economies. Whilst the UK is very close to the other nations, the fact that it can manipulate its currency should provide some breathing room in which it could devalue the Pound and attract new business. With the Chancellor cutting cooperation tax, the UK should be seen as an ideal location for business. However, whatever effect the domestic currency is having alongside the competitive cooperation tax rates is clearly not penetrating the economy strong enough and the recovery is taking much longer than it should be. Moreover, incomes generated by large firms do not appear to be trickling down to the rest of society. Unemployment in the private sector confirms this, as it is increasing at a sluggish rate.

All of these factors combined makes me wonder if all this austerity is actually worth it, because the opportunity cost of allowing the economy to stroll along in this mundane manner represents time lost. It just appears that the government is holding back for future consumption. It is a dangerous move in my opinion because it could lead to large structural damages that could take several years to repair.

The Chancellor will be providing a new Budget soon and I’m sure it will contain more of what we have already heard.

I’ll conclude with the fact that David Cameron does not think you tackle a debt crisis by issuing more debt (governments increase debt when they spend). However, as so long as jobs are created, taxes are paid and the economy is growing the level of debt does not matter because the positive effects of economic growth cancel the negativity associated with the debt. It is when an economy is not growing that the level of debt and deficit becomes an issue. Furthermore, there is not a single large economy that has cut its way to growth, so if it does happen in the UK all of this austerity will be worth it. The benefits do appear to be a long way away right now.

Privatisation is Justified… Only if it results in competition.

There is very limited choice in many of the privatised industries including rail.

Privatisation in the UK during Margret Thatcher’s premiership was intended to shift the economic burden away from taxpayers into private hands. It was intended to erode the natural state monopoly and establish market-based competition. Economic theory suggests that privatisation eradicates the state owned monopoly and creates competition in the market, which should lead to better services and a lower cost. Government led businesses are said to be inefficient at providing services that a private led firm can do, so the appeal is certainly there.

Nationalised industries tend to provide goods and services with high social value, goods such utilities, agriculture and transport tend to be provided by the state because these derived demanded goods are viewed as essential. Unlike firms, the state’s intention is not to maximise profits, so there are no shareholders to appease, nor answer to. This has its advantages and disadvantages because constantly operating at a loss will impose a burden on the taxpayer, who may feel their taxes would be best utilised elsewhere, where there taxes are not being wasted.

This was central when Thatcher and her government suggested that a wave of privatisations across various sectors such as transport, telecommunications and utilities were the best way to reduce the burden on taxation and the optimal way for consumers to be provided with essential goods and services. The state was viewed as a natural monopoly and the highest consumer satisfaction and utility is gained through competition, it is competition that yields the greatest efficiency and the lowest possible prices. Therefore, establishing competition through several competing firms was central to this proposal. Economists Todaro and Smith suggest,

“Proponents [of privatisation] suggest that it curbs government expenditure, raises cash to reduce internal and external debt and promotes individual initiative while rewarding entrepreneurship”  

Clearly the benefits of privatisation are clear, the eradication of the natural monopoly is perhaps the strongest because it opens the market and allow more firms to compete. However, in the UK this unfortunately has not been the case. The wave of sell offs during the 1980s continues to have a significant effect on life in the UK today. Services such as gas were privatised, so was telecommunications and parts of the rail industry. Some twenty years later after firms such as British Telecom (BT), British Gas and regulatory bodies such as Network Rail not only stifle competition, but they appear to have replaced the very monopoly it was created to replace.

John Moore was the Minister in charge of initiating the wave of privatisations. He said in 1983

“The long term success of the privatisation programme will stand or fall by the extent to which it maximises competition. If competition cannot be achieved, an historic opportunity will have been lost.”

He said at the 1983 Conservative Party conference:

“Our aim is that BT should become a private sector company…[but] merely to replace state monopolies by private ones would be to waste a historic opportunity. We shall continue our programme to expose state owned industries to competition.”

Moore explicitly states if privatisation cannot lead to a competitive market “an historic opportunity will be lost.” I could not agree more because had the privatisation initiatives been applied appropriately, with legislation implemented to prohibit cartels forming in the case of the rail industry or outright monopoly, like BT in the telecommunications market then these formerly stated owned industries would have created far more jobs on the sheer fact that the market would be significantly larger, they also would have lower prices. And they would have lower prices because there would be ten or more firms each competing to try and get customers, so lowering prices in order to attract custom. If however there are two or three firms, then they are more likely to collude, whether it is explicit or tacit, the outcome is the same and it is near impossible to detect.

Commentator John Gamble stating in 1994

“When BT, BG and the water industry were divested, the Conservatives failed to liberlise their markets meaningfully and as a result, were forced to create regulatory mechanisms and institutions to prevent the utilities from abusing their positions.” 

I mentioned in my piece about regulation and the above inflation gas price increases and how regulators in many instances interfere with business activity and can actually do little to prevent firms from these price changes. It should be noted that the way a customer will have low prices is through competition. That was the reason why Mrs. Thatcher sold off many state controlled firms, but we are seeing today that the state monopolies have been replaced by cartels and monopolies in some cases. Moreover, this is conflicting to what was proposed. One could even suggest that a return to state operated firms were better, because at least they are accountable to the public. Private cooperations are accountable to shareholders are not obliged to disclose information to stakeholders.

Privatisation in the UK does appear to have shifted from natural monopolies to private monopolies in the case of BT and oligopolies in the case of Network Rail, British Gas and so on. Clearly, this is the oligopolistic market structure is not competitive and fails to provide sufficient customer choice. Customers are therefore left to demand essential goods from limited suppliers, resulting in high prices. Unless privatisation leads to a highly competitive market, with several competing firms, it is merely replacing the very entity is supposed to be replacing.