Brexit, Poverty and the Wonky Metric of Growth
George Kerevan on the massive cost to Scotland of Brexit already, and the rise in poverty (almost one in five people in Scotland live in poverty, and for children the situation is worse, with one in four in poverty).
FRASER OF ALLANDER REPORT: BREXIT UNCERTAINTY HAS TAKEN HALF A BILLION OUT OF SCOTTISH INVESTMENT
FRASER of Allander Institute (FAI), Scotland’s leading academic think tank on matters economic, has just published its latest quarterly report. As FAI report stresses at great length, the Brexit mess makes any kind of economic forecasting impossible. However, dig into the data (such as it is) and there is some good news.
The Institute’s own measure of economic activity – the FAI Business Activity Index – remains positive. In other words, there are more firms reporting growth and improved order books than reporting contraction. Certainly, activity is down compared to last year, the one exception being financial services where firms reported strong growth over Q2 and Q3. (Whether you believe most financial services add real value to the economy is another question, of course.)
One specific area that looks good is exporting. Since 2016, international exports have grown by 9 per cent in real terms, compared to 4 per cent growth in domestic GDP. This is partly down to the lower pound (though the value of sterling has gyrated, like everything else in our topsy-turvy Brexit economy). However, we can also thank a strong export drive by the Scottish Government. In May, ScotGov launched a new strategy focused on helping local businesses grow their international footprint. It seems to be working.
However, overall, Brexit has made the economy anaemic. Total GDP growth in Scotland for the year to Q2 (end June) was a modest 0.7 per cent. This compares badly with the UK figure of 1.2 per cent. On a per capita basis, growth in Scotland for the year was a tiny 0.1 per cent compared to 0.6 per cent for the UK (though the latter is bad in its own right).
Should we worry? After all, GDP is a seriously wonky metric. It measures marketable activity, the equivalent of an economic pulse. The pulse is definitely slower and spluttering. But this tells us nothing directly about who in the economy is suffering. I’m also convinced that with so much economic activity now debt financed, the level of GDP growth no longer reveals any reliable data regarding how real production is behaving.
However, it is clear from the FAI data that there is a general slowdown across all the main economic sectors, which suggests something fundamental is dogging the Scottish economy. The explanation is not hard to find – lagging investment and productivity.
UK and Scottish investment (infrastructure and business related) has always been low compared to America and Europe, thanks to the obsession of the City of London with maximising short-term profits. Now it seems we have an added factor. According to the FAI data, business investment in Scotland grew relatively steadily (if unspectacularly) from 2010 onwards till 2016. Since then it has increased only marginally. There’s a similar depressing trend in commercial property investment.
This new deceleration in investment is clearly down to Brexit again. But FAI has been able to hazard an estimation of the numbers for the first time. According to FAI, if the Scottish economy had continued growing at its pre-2016 trend rate, business investment might have been as much as 13.7 larger by now. That’s the equivalent of £550m of lost investment already thanks to Brexit uncertainty. Given that FAI is a very conservative body, claiming (in the small print, of course) that Brexit has whacked half a billion off the Scottish economy – even before we are out of the EU – is quite big news.
But there’s more…
ROWNTREE REPORT ON SCOTTISH POVERTY
Low investment means low productivity. Since the 2008 Bank Crash, Scottish productivity – in terms of output per hour worked – has increased by 10.3 per cent gross. That’s an average of just over 0.9 per cent per annum. It’s that extra ‘oomph’ in the economic engine that creates extra wealth. (Or if you want to be more technical, this is the extra ‘exploitation’ squeezed out of the given system.)
Here is the killer: that annual 0.9 per cent productivity increase is well down on the 1.5 per cent averaged between 1998 and 2007. This low productivity growth leads directly to rising poverty levels – especially given the relatively weak bargaining power of labour, these days in Scotland.
The recent Joseph Rowntree report “Poverty in Scotland: 2019” (published at the start of October) noted that – while overall the situation is still better than it was pre-devolution – since 2009–12 poverty rates have started to rise again, especially for children. This is down to parental in-work poverty – which brings us back to the productivity question.
Another caveat. Poverty measured before housing costs is roughly the same in Scotland and the rest of Britain. But once you take into account lower housing costs north of the Border, poverty levels are lower here when compared to the rest of the UK. The difference is even greater for children. Effectively, lower housing costs in Scotland act as a protective factor against poverty in Scotland. Let’s not get too carried away – poverty is poverty.
But ScotGov and local authorities can take some credit for easing the housing market compared to much of England, especially in the very south.
DELOITTFUL ENDING
By the way, I note that the Fraser of Allander Institute report is now being financially sponsored by Deloitte, one of the ‘big four’ crooked accounting firms. Example: in July, the Financial Reporting Council fined Deloitte £4.5m for its ‘failure’ to properly audit the accounts of a Serco Group’s subsidiary, Serco Geografix. The Deloitte partner directly involved, a Ms Helen George, was also fined personally, to the tune of £97,500. Just saying.
Trade and external finance mysteries – Part 1
http://bilbo.economicoutlook.net/blog/?p=39282
Trade and finance mysteries – Part 2
http://bilbo.economicoutlook.net/blog/?p=39303
With diagrams. There appears to be a lot of confusion about the external economy in a fiat monetary system. Many economists do not fully understand how to interpret the balance of payments in a fiat monetary system.
So it is no surprise that the general public struggles in this domain. The fact that Scotland uses a foreign currency the £. Which would all change if we had our own central bank and own currency.
The biggest threat to the Scottish economy. Is the changes the SNP would have to make to meet the criteria to meet its promise to be at the heart of Europe.
They would have to destroy over 5% of GDP of the non government sectors ” surplus” our savings and our pensions to meet the debt criteria.
It would destroy our economy and” Private debt” the debt that matters would explode. Never mind the permanent austerity we would endure if we got into the EU club.
Perhaps the International League of Evil Accountants are indeed not the most reliable authority on what should be considered a healthy economy. No doubt they give a clean bill of health to the US military-industrial-congressional complex and its trillion-dollar global terrorist network.
Surely there is some way of breaking down economic statistics into useful categories: those that support life, for example, and those that poison, shorten, threaten and/or extinguish it?
Boris said he would die in a ditch ??
The tax ditch.
Since taxes do not fund government spending. Tax cuts and increased government spending are needed.
But the right kind of tax ditch
https://www.epi.org/blog/the-tax-cuts-and-jobs-act-isnt-working-and-theres-no-reason-to-think-that-will-change/
I would get rid of business rates on small medium size companies.
Cut taxes on the middle and working class.
Increase government spending with one objective to increase productivity. The easiest way to do that is get rid of the current automatic stabilisers that are ineffective and replace it with a job guarentee.
Make the private sector compete on a level playing field.
Business is tight. Employer A hires Labourer B at the minimum wage. Employer A can then pile more and more work and hours on Labourer B because B’s alternative is the dole. So B ends up earning far less than the minimum wage for their hours while Employer A earns super-normal profits, or perhaps even normal profits in a downturn, when they shouldn’t.
Hardly fair is it. We have a minimum wage for a reason.
However that scenario only applies in a system that is systemically short of demand and has no alternative employers bidding for Labourer B. There are other scenarios over the business cycle. When you get alternative employers popping up, as you do in an expansion, you get the following:
Business is good. Employer A hires Labourer B at the minimum wage. Employer A piles on the work. Employer C pops up, but doesn’t like the unemployed because they have no idea if they will turn up. Instead Employer C offers the minimum wage and promises faithfully to be nicer to employees. So Labourer B changes jobs, and Employer A is stuck because the alternative is unemployed people who they have no idea will turn up, let alone work the crazy hours now expected. Then Employer C piles on the work… Rinse and repeat.
You’ll note the scenario is highly dynamically disruptive, yet this is the scenario that plays out pretty much every day in areas like the construction business. It is partially the reason why getting things completed is so difficult. The cultural dynamic is corrosive and workers walk off the job.
Now let’s look at boom time:
Business is really good. Employer A hires Labourer B at the minimum wage. Employer C pops up, doesn’t like the look of the unemployed and starts touting round their alternative offer at a higher rate. Labourer B asks for more money, or they’ll move. Employer A doesn’t like the look of the unemployed, because they have no idea if they’ll turn up, so agrees to pay more money because there’s loads of work coming in and charges accordingly.
The unemployed buffer has little effect on the behaviour of business because it is a one way trap designed to frighten labour.
Now lets replay those interactions with a Job Guarantee in place.
Business is tight. Employer A hires Labourer B at the market determined minimum wage. Employer A can no longer pile on the work onto Labourer B because there is a guaranteed decent employer who Labourer B will move to if ill-treated. So Employer A has to keep the work at a reasonable level. Employer A now earns normal profits, and may move into a loss, while the worker earns the minimum wage.
Surely that is how it should be?
Let’s do the expansion phase:
Business is good. Employer A hires Labourer B at the minimum wage. Employer C pops up offering the minimum wage and has the choice of Labourer B or new Labourer D currently with a track record of reliability on the Job Guarantee. Employer A would be happy to retain Labourer B but knows they have the option of Labourer D. Neither Employer A, nor Employer C can pile on the work, because the Job Guarantee is known to be decent. So both Employer A and Employer C get the labour they require at a fair deal and stuff finally gets done.
And the boom phase.
Business is really good. Employer A hires Labourer B at the minimum wage. Employer C pops up offering the minimum wage because they have the choice of Labourer B or new Labourer D currently with a track record of reliability on the Job Guarantee. Labourer B asks for more money. Employer A would be happy to retain Labourer B but knows they have the option of Labourer D so they turn the wage rise down. Labourer B can’t get any more money out of Employer C either for the same reason. Yet still neither Employer A, nor Employer C can pile on the work, because the Job Guarantee is known to be decent. So both Employer A and Employer C get the labour they require at a fair deal and stuff finally gets done.
Importantly Employer Z will tend not to pop up and stay around because policy has been set sufficiently tight that the Job Guarantee buffer will not exhaust. But even if it did the Job Guarantee remains a credible threat to labour services in the private firms. Nobody can become a parasite business. Competition for labour would ultimately eliminate one of the other players, force their profits down to the new normal, or drive an innovation cycle (doing more with less). All of which leads to cheaper prices, not more expensive ones.
In 2019 the days should be numbered of a monetary policy that keeps a group of human beings unemployed just to control the inflation rate.
It is far better option to keep a group of humans employed that the private sector can hire from when needed.
The Job Guarantee wage is only paid to people working in Job Guarantee jobs. The more people on the scheme the more government spending. When they move to private sector jobs that payment stops — which automatically reduces government spending.
It is an ‘auto-stabiliser’. Spending goes up when the economy is down, and spending goes down when the economy is up.
So because it is carefully targeted at only the people that need it, and it automatically self-adjusts based upon need, there is no requirement to correct any over spend via taxation on the other side.
The result of that is straightforward. The current low tax rates can stay.
Not only is it a brilliant automatic stabiliser it is a fantastic price anchor also.
A crucial point is that the JG does not rely on the government spending at market prices and then exploiting multipliers to achieve full employment which characterises traditional Keynesian pump-priming.
It works like any Monopoly price setter you set the price and let it float. See Saudis in the oil market for an example.
Full employment, brilliant automatic stabiliser and a fantastic price anchor.
What’s not to like ? Makes perfect sense once you have your own central bank and currency and stay away from the EU fiscal rules.
Unfortunately, I think Boris will give us the wrong kind of tax ditch.
The main reason that the supply-side approach is flawed is because it fails to recognise that unemployment arises when there are not enough jobs created to match the preferences of the willing labour supply. The research evidence is clear – churning people through training programs divorced from the context of the paid-work environment is a waste of time and resources and demoralises the victims of the process – the unemployed.
Imagine a small community comprising 100 dogs. Each morning they set off into the field to dig for bones. If there enough bones for all buried in the field then all the dogs would succeed in their search no matter how fast or dexterous they were.
Now imagine that one day the 100 dogs set off for the field as usual but this time they find there are only 95 bones buried.
Some dogs who were always very sharp dig up two bones as usual and others dig up the usual one bone. But, as a matter of accounting, at least 5 dogs will return home bone-less.
Now imagine that the government decides that this is unsustainable and decides that it is the skills and motivation of the bone-less dogs that is the problem. They are not “boneable” enough.
So a range of dog psychologists and dog-trainers are called into to work on the attitudes and skills of the bone-less dogs. The dogs undergo assessment and are assigned case managers. They are told that unless they train they will miss out on their nightly bowl of food that the government provides to them while bone-less. They feel despondent.
Anyway, after running and digging skills are imparted to the bone-less dogs things start to change. Each day as the 100 dogs go in search of 95 bones, we start to observe different dogs coming back bone-less. The bone-less queue seems to become shuffled by the training programs.
However, on any particular day, there are still 100 dogs running into the field and only 95 bones are buried there!