#49. Politicians, voters and mutual contempt

UNASKED QUESTIONS ABOUT THE BRITISH ECONOMY

As we have seen in elections across Europe – and would no doubt see in the impending vote in Britain, too, if we had a more proportional system of representation – the public holds most established politicians in contempt.

Judging by what we are expected to swallow over economic and fiscal policy, the feeling is mutual. The voters, political leaders clearly think, are a bunch of gullible idiots.

Both of the main parties say they are committed to eliminating the fiscal deficit, even if they differ somewhat on the definition involved. Yet both have promised not to increase any of the main money-raising taxes – national insurance, VAT or the basic or higher rates of income tax – and this surely means that hefty spending cuts are inevitable.

Yet neither party has spelled out where these cuts will fall. Rather, both are bidding for electoral popularity with promises which have a net cost to the Exchequer.

Not in front of the children

All of this is very frustrating, not least because the really important issues are not being addressed at all. None of the parties have had anything to say about foreign policy, which has been disastrous under successive governments. Neither has anything significant been said about defence, where both major parties are committed to replacing Trident, yet neither has mentioned the gaping holes in our conventional defences.

Above all, of course, no-one has addressed the real issues about the economy. The Conservatives have seemed content to rest their economic case on growth and employment data, whilst Labour has talked about the cost of living without ever really getting at the fundamental reason for the deterioration in real wages, not just under the coalition but under its Labour predecessor as well.

In composing this article I have written successive drafts, each longer than the previous one and each full of data and charts. In order to “cut to the chase”, I have decided instead just to summarise the economic issues very briefly indeed.

A contrarian view

Here, then, is the contrarian view of the British economy.

1. Real living standards have deteriorated, and for a lot longer than most people appreciate. The real benchmark for living standards isn’t broad inflation but the cost of essentials, and how much money you have left after you’ve paid for them.

Since 2000, the increase in average wages (of 48%) has been far exceeded by the soaring cost of essentials as my Index measures them (+69%), meaning that real wages have deteriorated by 16% by this measure. Think about rises in the cost of gas (+245%), electricity (+135%), water charges (+87%), travel fares (+86%), council taxes and rates (+73%) and even food (+54%) and you’ll understand why people have long been getting poorer by this critical measure.

At the same time, of course, households have been getting ever deeper into debt.

2. Successive governments have pursued low-wage strategies in order to “attract investment” by making Britain “more competitive” than our rivals. A low-wage strategy, of course, is wholly consistent with reduced living standards, but it has also made the deterioration in productivity inevitable.

Small wonder, then, that taxes keep falling short of expectations, that the budget deficit persists, or that government now spends £25bn on “in-work” benefits given to working people whose wages are simply too low for subsistence.

Out-of-kilter

3. The economy has swung increasingly away from output saleable on world markets. Since 1997, manufacturing output has slumped by 24% in real terms, whilst my broader measure of “globally-marketable output” (GMO) has fallen by 26%. Instead, we have shifted the emphasis to the point where 83% of our economy consists of services that we can sell only to each other, including real estate, domestically-consumed financial services, private sector “administration”, government-funded public services and a gamut of activities ranging from pedicures and fast food to gambling and “extended warranties”.

Ultimately, a country cannot pay its way in the world by “taking in each other’s washing”.

4. Moving down the value (and wage) chain has not blunted our desire to consume. Few have noted the glaring inconsistency between pushing consumerism on the one hand, and reducing both real wages and globally-saleable output on the other.

Accordingly, last year we spent a cool £412bn on imported goods – a far larger figure than our exports (£293bn) – and we are big net importers, not just of manufactured goods, but of energy and food as well. Meanwhile, the consumption of government-provided services has increased sharply since 2000.

5. We have used debt and asset sales to fill the gap between consumption and production. Between 1997 and 2014, the economy expanded by £550bn in real terms, but debt (excluding financial sector indebtedness) increased by £2.4 trillion, which means that we have borrowed £4.40 for each £1 of “growth”.

What happens next?

6. Finally, this profligacy is catching up with us. Last year, imports exceeded exports by £34bn, which in itself is nothing new. In the past, though, this was offset by the net income generated by investments overseas.

This has reversed decisively, because far more now flows out in interest and dividends than flows in. Current financial flows, in balance until 2011, have now turned negative to the tune of £27bn in 2012, £43bn in 2013 and £64bn last year. The latter formed the bulk of an unsustainable 2014 current account deficit of £98bn.

This means that we have to borrow from overseas close to £100bn (and rising) each year just to balance the books, and, of course, each new debt taken on, or asset sold, worsens future outflows. It also means that the rest of the world now funds 6% of our GDP.

*       *       *       *

Well, there you have it – do we have an economy characterised by real growth in output and employment, or have we, instead, a system in which foreign lenders and investors subsidise our consumption as we turn our backs on well-paid, high-value-added activities?

And are we going to hear anything about any of this from politicians?

I doubt it.

19 thoughts on “#49. Politicians, voters and mutual contempt

  1. Your article makes the case for what I’ve been grappling with some time now: we live in an Orwellian Propaganda Society. I don’t mean to be patronising when I say that the majority of the population is clueless about the state we’re in. Most people either don’t have the investigative and/or intellectual capacity to address our socio-economic situation in the way that you’ve done here Tim, or they simply can’t be arsed to find out anyway.

    Most folk rely on the we’ll-give-you-anything-you-want bullshit spewed out by mainstream politicians (aimed at garnering votes) and/or the equally nonsensical “information” supplied by the intellectually benign mainstream media. Of course, worst and most powerful of all is the BBC. I’m surprised at the number of my professional, middle-class peer group who seem as ignorant about the realities of the state we’re in as the guys/gals availing themselves of lives on benefits.

    Quite where this is heading is anybody’s guess, but ending in tears comes to mind.

    • Thank you. If I’d written a longer version, I might have pointed to corporatism – the big corporates want low wages (costs) and high consumption (sales), and bankers are more than happy to take a turn on bridging the gap between low incomes and high spending….

      Of course, it cannot go on indefinitely. But politicians seem incredibly out-of-touch with reality. For instance, the bulldozing of Nimrod into scrap metal means that anyone wanting to detect our Trident boats need only loiter in a sub off Faslane and follow them, because – incredibly – we lack the airborne surveillance to know what they’re doing – yet both Con and Lab STILL want to replace Trident…..

  2. We need more bunnies in government.
    Then there would be free carrots for everyone and we would finally have a fair and just society.

    Down with Darwin!

    PS. You may find the attached article interesting

    Sent from my iPad

    >

  3. Thanks Tim for a thought provoking essay again! Like Moraymint I’m disappointed by the level of comment and reporting in most of our media – I suppose a result of the Murdochisation of the press, so well described in Nick Davies’s book “The Flat Earth News,” where so much reporting is second hand, depending on press releases, or more worryingly reflecting manipulation. For the latter the stories of journalists who were only invited back to the “inner circle” of Whitehall briefings if their output was deemed to be “on message.” This also appears to extend to economists, with a few exceptions, whether due to the sheer complexity of macroeconomics or the old adage – two economists/three opinions. I’ve still got to vote though and I’m struggling!

    • Thanks David. Perhaps the level of debate at election time has never been all that inspiring, but I can never remember it being as bad as this. I think you’re right about journalists having to be “on message” to get into the inner circle – part of the post-97 management of news, I assume. That may be true for economists, too.

    • Well Tim, at least the BBC forces everyone to pay the licence fee at gun point so that it can continue its’ Reithian mission and make it all clear to everyone… Meanwhile in the real world.

    • Yes, and I’m saddened by how the BBC has become the ‘ministry of propaganda’ for the establishment’s secular-morality-of-choice. It seems unable to report any social issue impartially. Nigel Farage has suggested reducing the BBC to the basic function of public service broadcasting, thereby cutting the licence fee by two-thirds, and I think that’s probably the best plan.

  4. Dr Morgan
    Thank you for producing a superb summary of our national plight, and many thanks also to the contributors to the discussion, which invariably offer measured and informative comment.
    I fear very much that we’re now set in tramlines and that the route cannot or will not be changed voluntarily. I suspect also that we shall have to experience a full-blown crisis of confidence in our condition for there to be a general awakening among the populace to the true state of our national predicament.
    The problem with crisis is that while it unfreezes the existing paradigm, one can be no means certain that a new path will be forged that will deal effectively with the many problems we face. Crisis by definition results in unpredictability.
    At a personal level I feel that the views that I hold, which have been encapsulated so well in your piece, make me very much an ‘odd man out’ among my relatives, friends and most folks in the town where I live.
    How will this end? Not well. I think there will be a lot of weeping and wailing and gnashing of teeth.

    • Thank you Kevin. I do not think that you, myself and contributors here are by any means alone, but there is indeed a monotony to the debate (or lack thereof) which does as you say suggest tramlines. There are also, of course, vested interests in the status quo.

      I am considering – no more than considering, at this point – a book on this whole subject.

    • You are entitled to be confused! For a start, government debt, as usually reported, does not include banking sector guarantees. Neither does it include “quasi debts” such as PFI, public sector pensions, nuclear decommissioning and so on.

      Technically, QE here means that a big chunk of HMG debt is owned by the Bank of England. Theoretically, QE is meant to be reversed one day, though I’ll believe that when I see it.

      More broadly, QE – and low interest rates – have been used globally to inflate capital markets, in order to depress market interest rates (yields). Not long ago I put an article on here about monetary activism, i.e. fiddling with money to keep the hugely-indebted system ticking over.

  5. Tim,I was waiting for some insight from you in this turgid election campaigns : many thanks.
    One question does in work benefits include housing benefit ; I assume it is an extra.
    best Peter

    • Various definitions apply, and the DWP website has good stats downloads. Here I was referring only to income support payments to those in work. There are similar problems in the US where, in particular, two large corporates pay wages so low that States have to provide income support. The good old “Anglo American economic model”, hmm.

  6. Hi Tim,
    I write this from a yacht cabin in the great barrier reef [a friend’s invitation].
    As you know I believe the technical fixes supported by MMT would go a long way to fix many of the issues you raise here. I also have heard about a movement to get the banking sector out of money creation as well, but I have no details.
    However the main serious structural problem is that all this debt creation is just papering over the resource catastrophe we are closing in on, and I know you are well aware of it.
    Under the present ostrich economy touted by business, banking, and the press and politicians, nothing will be done until it’s too late. Probably we are too late now, considering few are saying anything to stem the tide!

    • John – I’ll stay off MMT here, if you don’t mind. The resource disaster is very pressing, and your term the “ostrich economy” could not be bettered.

    • Nigel. I’m not sure about whether democracy could fix this, but the current system, which entrenches established corporatist parties, certainly can’t. If the SNP can get 4% of the UK vote they will win about 55 seats – if UKIP and the Greens together get 22% of the national vote they can expect to win only 2!

      What I think is needed is a Charter movement (which I’ve described before) to take control by using the existing system against the corporatists. How to do this is quite simple, but whether anyone will pick up that ball and run with it is another matter……

    • “If the SNP can get 4% of the UK vote they will win about 55 seats – if UKIP and the Greens together get 22% of the national vote they can expect to win only 2!”

      Did you take that to the bookies?

  7. Pingback: #50. Everyone a loser | surplusenergyeconomics

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