Archive for the ‘Rational Economic Policy’ Category

The Pound in Your Pocket

The value of the British Pound is in steady decline. It fell by 7% in the first two months of this year alone and it continues to fall against the Dollar, although its fall relative to the Euro has been slightly softened by the impact of the Italian general election and the Cypriot crisis.

Some sections of British industry and some economic analysts are arguing that the decline of the British Pound is a good thing. On the face of it there is a strong case for welcoming the falling price of Sterling. After all, weaker currencies are good for exports, right?

Switzerland was certainly hurt by the price of the Swiss Franc relative to the Euro being driven up as a result of the Euro crisis. The Swiss economy being a particularly sensitive to the price of its exports, their government took swift action to keep the price of their currency low. Could devaluation benefit Britain in the same way?

A lower Sterling allows British businesses to offer more competitive prices on exports and Britain is certainly in need of more competitive exports in sectors other than financial services and the arms trade. Further, the added demand for British goods could boost growth. We could grow our way out of recession. Couldn’t we? This is a flawed argument. In the past it is certainly true that a reluctance to devalue for political reasons has cost the country dear. But does that mean devaluation is good for us today?

Devaluation essentially has two effects, it makes our currency cheaper to buy thus making it cheaper for foreigners to buy from the UK, on the other hand it makes foreign currency more expensive and drives up prices on goods imported from abroad. The simplified story is that strong currency is good for imports and weak currency is good for exports. Neither is inherently better than the other, it’s a balancing act and which is better depends on the situation.

Public Domain

“It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued.” – Harold Wilson talking out of his arse.

I would suggest that since the days of Harold Wilson, the harm done by an increase in the cost of imports has risen and that the advantages that can be gained by making British exports more desirable has collapsed. The cost to consumers cannot be understated. British workers have become hugely dependent on imported goods: most of our food is imported, electronics are imported, cars are imported, energy is imported. Back in 1967 Harold Wilson commented on his reluctant decision to devalue to pound saying that here in Britain “the pound in your pocket” is not worth less. That wasn’t true then and its even less true now.

All this pain might almost be justified if the increase in exports boosted British industry, got the economy growing and we were all better off in the long run. But it seems like it may well all be for no benefit. British exporters are also importers, whose costs will rise. The cost of capital goods rises along with that of consumer goods. The much noticed rise in the cost of fuel, in no small part a result of the falling pound, could have a devastating impact on costs all on its own. Suddenly the number of producers who stand to see a net gain shrinks considerably.

Moreover, exporters are also employers of labour, the cost of which is tied to the cost of living, which in turn is tied to the cost of imports. In the UK the cost of living is highly sensitive to the cost of imports and hence to changes in the exchange rate. It’s only those industries which are least sensitive to changes in the cost of labour which can fully reap the benefits of a low exchange rate.

Why, then, does the Government not appear to consider this a cause for concern? The answer, I would suggest, is that while the inflationary effects of devaluation can mean pain for workers they can be a boon for governments. It’s much easier to cut or suppress real wages in times of high inflation that low inflation, especially if contracts are only renegotiated every few years, and those public pay or benefit freezes go a lot further when you drive down the value of that capped figure. For a government fixated on a programme of austerity, knocking a few points off the pound every now and then is stealthiest and least politically harmful way of picking every pocket in the land; if done well, it’s less likely to provoke strikes than direct pay cuts and it’ll cost them fewer votes than tax hikes and benefit cuts.

The Real Welfare Parasites

In keeping with their ideology, a core plank of the Conservative Party 2010 manifesto was to harness the ingenuity of the private sector to help get people back into work. As such, it’s rather a shame how far from their professed free market principles the Government has strayed with its current welfare policy.

Rather than harnessing the initiative and innovation of private enterprise to provide a service to those looking to get into work, a parasitical industry has grown up around the Jobcentre, feeding of DWP and ESF funding and the involuntary participation of jobseekers, providing largely junk courses and training schemes of questionable value.

It’s just a matter of common sense market economics that service providers who benefit from guaranteed demand, revenue and a stream of semi-willing participants won’t have an overwhelming incentive to ensure that the services they sell are high quality or valuable in terms of employability. Equally, if the state allocates a certain amount of funding to be spent on privately-provisioned training courses, the demand (and hence the price) of these courses will be artificially increased. When the trainee is not the customer the market just don’t function well. I’d be curious to kow what the price mechanism has done to successive Work and Pensions Secretaries to deserve such cruel treatment.

Do claimants benefit from this way of providing training? No, they would be much better catered for if they could pay for courses which are of direct use to them as an when required out of a slightly increased JSA cash payment. Does the taxpayer benefit? No, it would be much more cost effective to slightly increase direct payments to claimants so that they could purchase those private courses they feel would actually benefit them, rather than spend huge amounts of money on courses of limited value. Who benefits? The private training firms who have attached themselves to the state’s boated arse like a leech.

As somebody currently receiving jobseeker’s allowance, I’m entitled to state funded provision of secondary healthcare – those things the NHS doesn’t usually pay for, like opticians and dentists – I’ve already grabbed a nice new pair of glasses, my previous pair being rather old and shabby looking but still in perfectly functioning condition. I went out and “bought” the new pair sooner than I likely would have otherwise and, frankly, why wouldn’t I? This isn’t an efficient system for spending the total amount of money that is made available to a claimant. Do claimants benefit from this arrangement? No, we would be much better off if we received a cash lump sum which could then spend on healthcare services as and when required. Does the taxpayer? No, it would be much cheaper to make direct payments to claimants who then have an incentive toward allocative efficiency rather than to take advantage of whatever services they can get. Who benefits? The private service providers, again.

Meanwhile jobseekers are being forced into zero pay jobs, a policy which only makes it more difficult to get a job by reducing the demand for actual waged labour. Why would Tesco hire somebody at minimum wage to do an unskilled job when they can just get somebody to do it for free? It’s the very people who would be applying for these jobs who will end up being forced into them without pay a year later!

So tell me, who are the real parasites? Is it the unemployed or is it the middlemen and the vampiric industry which sets itself up between them and the government, sucking out every drop of misdirected public spending they can? If the Tory government wishes to uphold the conservative, small state principles to which they claim to adhere, why not cut out these middlemen? Why continue to micro-manage how welfare expenditure can be spent (NHS vouchers, council tax credit etc.)? The mantra of the small-state conservatives has always been that government attempts at micro-managing society tend to make a small problem bigger and the history of government attempts to fine-tune the benefits system certainly bares that out. But the political currency of the government has never been conservative economic reliability, it has been prejudice, and so instead of reforming welfare along the lines of free market principles and choice, they talk about a food stamp system. How can a party which believes a bureaucrat knows how to spend money on your behalf better than you do claim to be the party of the free market?

Why not allow jobseekers to decide how to spend that money, whether a particular course is worth while, what to spend on secondary healthcare, what to spend on food and what to spend on booze? This doesn’t just help the claimant, it would reduce the cost to the tax payer due to the money being spent more efficiently. The only people who benefit from the status quo is Big Welfare.

Why not apply real free market economics to the benefits system and eliminate the cost of the massive, hideously inefficient bureaucracy required to maintain conditional benefits and kill off the parasitical Big Welfare industry which has grown up around it? The cost of conditional benefits is one of the largest bureaucracies in the country. It has created a Jobcentre that is obsessed with box ticking and hoop jumping but just isn’t fit for the purpose of helping people back into work and where the only people it has helped into jobs are the people who work in the Jobcentre itself.

Milton Friedman, the Chicago school libertarian whose ideas influenced both Margaret Thatcher and Augusto Pinochet, observed these problems in the US welfare system over half a century ago. His solution, much to the incredulity of his right-wing peers, was to scrap the role of the bureaucrat spying on welfare claimants and restricting how their money can be spent and to replace benefits with a negative income tax, in which the government would pay out on negative taxable incomes in the same way they take payment on positive taxable incomes. It’s better for the unemployed, it’s better for the working taxpayer and it costs the state less. Milton Friedman had a point, and his is one certainly worth taking seriously.

In keeping with the ideology, a core plank of the Conservative Party 2010 manifesto was to harness the ingenuity of the private sector to help get people back into work. As such it’s rather a shame how far their professed free market principles the Government has strayed with its current welfare policy.

Rather than harnessing the initiative and innovation of private enterprise to provide a service to those looking to get into work, a parasitical industry has grown up around the Jobcentre, feeding of DWP and ESF funding and the involuntary participation of jobseekers, providing largely junk courses and training schemes of questionable value.

It’s just a matter of common sense market economics that service providers who benefit from guaranteed demand, revenue and a stream of semi-willing participants won’t have an overwhelming incentive to ensure that the services they sell are high quality or valuable in terms of employability. Equally, if the state allocates a certain amount of funding to be spent on privately-provisioned training courses, the demand (and hence the price) of these courses will be artificially inflated. When the trainee is not the customer the market just don’t function well. I’d be curious to kow what the price mechanism has done to successive Work and Pensions Secretaries to deserve such cruel treatment.

Do claimants benefit from this way of providing training? No, they would be much better catered for if they could pay for courses which are of direct use to them as an when required out of a slightly increased JSA cash payment. Does the taxpayer benefit? No, it would be much more cost effective to slightly increase direct payments to claimants so that they could purchase those private courses they feel would actually benefit them, rather than spend huge amounts of money on courses of limited value. Who benefits? The private training firms who have attached themselves to the state’s boated arse like a leech.

As somebody currently receiving jobseeker’s allowance, I’m entitled to state funded provision of secondary healthcare – those things the NHS doesn’t usually pay for, like opticians and dentists – I’ve already grabbed a nice new pair of glasses, my previous pair being rather old and shabby looking but still in perfectly functioning condition. I went out and “bought” the new pair sooner than I likely would have otherwise and, frankly, why wouldn’t I? This isn’t an efficient system for spending the total amount of money that is made available to a claimant. Do claimants benefit from this arrangement? No, we would be much better off if we received a cash lump sum which could then spend on healthcare services as and when required. Does the taxpayer? No, it would be much cheaper to make direct payments to claimants who then have an incentive toward allocative efficiency rather than to take advantage of whatever services they can get. Who benefits? The private service providers, again.

Meanwhile jobseekers are being forced into zero pay jobs, a policy which only makes it more difficult to get a job by reducing the demand for actual waged labour. Why would Tesco hire somebody at minimum wage to do an unskilled job when they can just get somebody to do it for free? It’s the very people who would be applying for these jobs who will end up being forced into them without pay a year later!

So tell me, who are the real parasites? Is it the unemployed or is it the middlemen and the vampiric industry which sets itself up between them and the government, sucking out every drop of misdirected public spending they can? If the Tory government wishes to uphold the conservative, small state principles to which they claim to adhere, why not cut out these middlemen? Why continue to micro-manage how welfare expenditure can be spent (NHS vouchers, council tax credit etc.)? The mantra of the small-state conservatives has always been that government attempts at micro-managing society tend to make a small problem bigger and the history of government attempts to fine-tune the benefits system certainly bares that out. But the political currency of the government has never been conservative economic reliability, it has been prejudice, and so instead of reforming welfare along the lines of free market principles and choice, they talk about a food stamp system. How can a party which believes a bureaucrat knows how to spend money on your behalf better than you do claim to be the party of the free market?

Why not allow jobseekers to decide how to spend that money, whether a particular course is worth while, what to spend on secondary healthcare, what to spend on food and what to spend on booze? This doesn’t just help the claimant, it would reduce the cost to the tax payer due to the money being spent more efficiently. The only people who benefit from the status quo is Big Welfare.

Why not apply real free market economics to the benefits system and eliminate the cost of the massive, hideously inefficient bureaucracy required to maintain conditional benefits and kill off the parasitical Big Welfare industry which has grown up around it? The cost of conditional benefits is one of the largest bureaucracies in the country. It has created a Jobcentre that is obsessed with box ticking and hoop jumping but just isn’t fit for the purpose of helping people back into work and where the only people it has helped into jobs are the people who work in the Jobcentre itself.

Milton Friedman, the Chicago school libertarian whose ideas influenced both Margaret Thatcher and Augusto Pinochet, observed these problems in the US welfare system over half a century ago. His solution, much to the incredulity of his right-wing peers, was to scrap the role of the bureaucrat spying on welfare claimants and restricting how their money can be spent and to replace benefits with a negative income tax, in which the government would pay out on negative taxable incomes in the same way they take payment on positive taxable incomes. It’s better for the unemployed, it’s better for the working taxpayer and it costs the state less. Milton Friedman had a point, and his is one certainly worth taking seriously.

The motivation behind the current system of conditional welfare and micro-managed spending isn’t cost saving or economic efficiency, it’s the political capital which comes with attacking the unemployed.