The article below is an article I wrote for the newspaper The Commune. I cut and paste it from their website. ——–

Listening to the debate in the media today you would conclude that there is consensus amongst economists that the key problem of the UK economy is the deficit. And the key question is how to cut it. And the key election issue therefore should be how to cut spending. This is not the case.

Working backwards, perhaps the most ridiculous issue here is the notion that the only way of cutting the deficit is by cutting spending. Fraser Nelson of The Spectator goes so far as to say, “Cameron should ban the word ‘deficit’ and simply say ‘overspend’ instead.” It would seem that some right-wing commentators can’t add. A deficit arises when revenue is less than expenditure. An equally good way of cutting the deficit is by increasing revenue, i.e., by raising taxes. Saying the deficit is an ‘overspend’ is as idiotic as calling the deficit an ‘undertax’.

This is not to say that increased taxes would necessarily benefit UK workers. Contrary to popular belief, the UK does not have a progressive taxation system. It has a regressive taxation system. A progressive tax system is one where the people most able to pay taxes do indeed pay more. A regressive one is where either everyone pays the same or where the less well off pay more than the better off.

According to the ONS (Office of National Statistics), in the UK, the poorest 20% pay 38.7% of their income in tax, while the wealthiest 20% pay only 34.8% of their income in tax. The confusion regarding this arises because people frequently only think of taxes in terms of income tax, which is progressive, but ignore council tax and indirect taxes such as VAT. However, there is abundant evidence that increased taxes matched with increased social spending makes society more equal, i.e., it increases the wealth of the least wealthy and decreases the wealth of the wealthiest.

With that said, it is interesting to consider the current debate regarding Brown’s proposed increases in National Insurance Contributions (NIC). Brown, while he can be criticised for a lot of things, has a rather strong understanding of economics. He explained the increase in NIC on the basis that it was fairer than an increase in VAT. On this he was technically correct, although an increase in the 50% rate of income tax would be even fairer.

The confusion on the NIC proposals arise with claims from the Tories and the employers that it is a ‘tax on jobs’, a tax on employers to discourage them from employing more. It isn’t. NIC can be thought of as two taxes, one paid by the employee, the other by the employer. But, as with every tax, the issue isn’t really who it is levied on, but who actually pays it, and there is pretty strong evidence that payroll taxes that employers pay, such as the NIC, are partially paid by employers but primarily paid by workers, in the form of lower wages. The tax is not really as ‘fair’ or egalitarian as Brown suggests. It’s a tax on workers. The Tories are either being dishonest or too stupid to understand that this is not a tax on employers but rather a tax on employees. And Labour isn’t admitting what the tax really is.

The debate over NIC is interesting because it shows that the Tories are not serious about cutting the deficit. Rather they simply want to cut public spending and adamantly refuse to levy any tax on business or the wealthy. The Tory line is cut spending and pay for what’s left by taxing the least well off workers.

As mentioned above, you can cut a deficit in two ways; by cutting spending and/or increasing taxes. But neither party seems all that interested in increasing taxes and neither is even considering redressing the existing tax injustice where the poorest pay relatively more in tax. However, all this has presumed that the media consensus is correct and that the key problem of the UK economy today is the deficit. This consensus is wrong. The key problem of the UK economy today is not the deficit, it’s unemployment.

The unemployment rate is currently 7.8 per cent, 150% of what it was in January 2008. There are nearly two and a half million people actively looking for work in the UK. Despite a 0.1% decrease in unemployment in the last quarter, the number of people unemployed for more than 12 months is still increasing and is the highest it’s been since 1997. The number of economically inactive people of working age (i.e. people who are neither working nor ‘actively looking for work’) increased by 371,000 over the last year to reach 8.16 million in the three months to January 2010.

The figures are even more shocking when you look at young people, where the unemployment rate is 14.8%. The Institute for Public Policy Research estimates that 20% of young white workers are out of work, 31% of young Asian or Asian-British workers and a shocking 48% of young black workers. That means effectively one in every two young black workers in the UK cannot find work!

This is particularly disturbing given that a growing pool of research shows young people are disproportionately affected by periods of unemployment.  It has been found that youth unemployment can have a permanent impact on health status, job satisfaction and wellbeing, and can lead to reduced wages not just in the short term but throughout an individual’s lifetime.

However, despite this, relatively little is being said about unemployment in the UK today. Instead, everything is about the deficit and the need to cut spending regardless of the obvious and significant negative impact that would have on unemployment. Conservative shadow Chancellor George Osborne has argued that “[t]here is no choice between going for growth today and dealing with our debts tomorrow.” As with much recent economic debate, this is idiotic. This statement is essentially that “borrowing is impossible”. Obviously borrowing is possible, Osborne could argue it’s a bad idea but to say that that choice doesn’t exist is idiotic.

Indeed, no less a bastion of socialist radicalism than the International Monetary Fund has argued in a recent study that ‘going for growth today and dealing with our debts tomorrow’ is a good idea. They argue that cutting spending too quickly could damage the economic recovery.

“Unwinding public intervention too early,” the IMF argues, “could jeopardise progress in securing a sustained economic recovery… One of the key lessons from experiences of similar crises is that a premature withdrawal of policy stimulus can be very costly, particularly if the financial system is weak. Thus, in the current context, the potential risks associated with an early withdrawal of policy stimulus seem to outweigh the risks of maintaining it for longer than possibly needed.”

So what is Osborne rambling on about? In his Mais Lecture in February, ‘A New Economic Model’, Osborne laid out his economic theory most clearly, saying that, “[p]erhaps the most significant contribution to our understanding of the origins of the crisis has been made by Professor Ken Rogoff, former Chief Economist at the IMF, and his co-author Carmen Reinhart.

“As Rogoff and Reinhart demonstrate convincingly, all financial crises ultimately have their origins in one thing – rapid and unsustainable increases in debt….. So while private sector debt was the cause of this crisis, public sector debt is likely to be the cause of the next one. As Ken Rogoff himself puts it, “there’s no question that the most significant vulnerability as we emerge from recession is the soaring government debt. It’s very likely that will trigger the next crisis as governments have been stretched so wide.” The latest research suggests that once debt reaches more than about 90% of GDP the risks of a large negative impact on long term growth become highly significant.”

This 90% figure is getting bandied about a lot and also comes from Reinhart and Rogoff’s book. However, in the book this 90% figure plays little to no role. And in a recent Financial Times article Reinhart and Rogoff warn against introducing massive cuts. They write, “[g]iven the likelihood of continued weak consumption growth in the US and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession.”

Other economists have been even more disparaging of Conservative plans for cuts and their theoretical ‘justification’ for them. Nobel Laureate and former World Bank Chief Economist Joseph Stiglitz referred to Tory plans to cut spending as “incredulous”. He likened their proposals to those of Herbert Hoover, the US President who oversaw the development of the Great Depression, by calling the Tories “Hooverites”.

Stiglitz is even harsher with the notion bandied about by the Tories that Britain is about to turn into Greece and is at risk of default. He says to Osborne, “I say you’re crazy – economically you clearly have the capacity to pay. The debt situation has been worse in other countries at other times. This is all scaremongering, perhaps linked to politics, perhaps rigged to an economic agenda, but it’s out of touch with reality.”

And indeed Stiglitz is right. But not only has the debt situation been worse in other countries, historically it’s been worse in the UK. Indeed, for the entire period of the industrial revolution the UK had public debt above the supposed threshold of 90%. UK public debt went first over 90% in 1746 and did not come down below 90% until 1863. That’s unsustainable debt being sustained for a period of 117 years!

That is not to say that this level of debt can be taken on without costs. Rather it merely shows that the notion that the UK is on the verge of disaster unless the deficit is cut and public debt is taken under control. The UK is not on the verge of disaster. But up and down the length of the country, workers are suffering from unemployment and neither the Tories, Labour nor Lib Dems seem to be all that fussed about it.


Four completely unrelated things in reverse order of what you should read. ONE: Libertarianism

The road to Serfdom…

Oddly enough some modern right-wing libertarians, inheritors of the Hayekian tradition are holding out Feudalism as a positive and desirable society. In “Democracy: The God That Failed” by Hans-Hermann Hoppe, a libertarian and professor of economics in the University of Nevada, Las Vegas, the author ‘debunks’ such myths as the idea that the move from monarchism is parliamentary democracy was a progressive one. Little could Hayek have known that his disciples would be one day be arguing not only against the road to serfdom but also against the road from serfdom.

TWO: Ben Bernanke

Ben Bernanke, chair of the Fed,  doesn’t really seem to care all that much about the unemployed. From the Washington post:

“if the pace of recovery is moderate, as I expect, a significant amount of time will be required to restore the 8 1/2 million jobs that were lost during the past two years.”

THREE: JK Rowling

This has been doing the rounds on facebook and elsewhere but in case any read hasn’t seen it. This article by JK Rowling in The Times is brilliant. It’s on being a single mother under the Tories and why she won’t be voting Tory in the upcoming election.

FOUR:  Economic Geography

Paul Krugman delivered a talk for the Association of American Geographers this week which is up online here. It’s pretty interesting and includes some interesting comments on economics as a social science and responding to critiques of New Economic Geography.


Basically just noting these articles to myself and anyone else who might be interested. Both were published over the last month. One of the recent past one on the rather distant past.

Three million Trotskyists? Explaining extreme left voting in France in the 2002 presidential election

In the first round of the 2002 French presidential election, three million voters (10.4 per cent of the national vote) supported Trotskyist candidates. This unprecedented electoral result has received little academic attention. This study aimed to identify the strongest socio-demographic and attitudinal predictors of support for the new extreme left in 2002. A multivariate framework was applied in a series of models, using data from the 2002 French Electoral Panel. The study also aimed to understand the rise of the Trotskyists in the context of broader social and political developments. The analysis was grounded in series of hypotheses constituting a model of class voting in postindustrial France. Overall, the analysis tended to confirm the predictions of the model, with younger voters at the lower end of the service sector being the most likely to support the three Trotskyist parties. With regard to attitudes, opposition to economic liberalism proved the strongest single predictor of Trotskyist voting, followed by liberal attitudes on cultural issues, political distrust and political disengagement. However, in terms of economic attitudes, Trotskyist voters still came out as surprisingly close to mainstream left voters. In conclusion, it is argued that models of class voting should reconsider the political role of social class in a postindustrial context, and pay particular attention to the trajectories of different classes over time in terms of changing employment conditions and life chances in order to understand how class is likely to shape party preferences.

Black man’s burden, white man’s welfare: control, devolution and development in the British Empire, 1880-1914

This article organizes an economic analysis of the effects of colonial rule on capital market access and development. Our insights provide an interpretation of institutional variance and growth performance across British colonies. We emphasize the degree of coercion available to British authorities in explaining alternative set-ups. White colonies, with a credible exit option, managed to secure a better deal than those where non-whites predominated, for which we find evidence of welfare losses.


Graziella Bertocchi summarizes some of the recent work she has done with Andrea Guerzoni over at

The causes and implications of state fragility – also known as state failure – are not yet well understood. This column explores the determinants of state fragility in sub-Saharan Africa and finds that institutions – as measured by civil liberties and the number of revolutions – are the main drivers. It says institutions trump economic, geographic, and historical factors.  

The interesting findings are:

We find that institutional variables are the key determinants of state fragility. The probability of a country having a fragile state decreases with the level of civil liberties and increases with the number of revolutions. Economic determinants such as per capita GDP growth and investment are not significant when we introduce standard controls for omitted variables. Geography is also insignificant while colonial history appears to be only marginally relevant. These conclusion hold after controlling for endogeneity with standard analytical tools.

She ends the article drawing conclusions regarding EU aid and how including an emphasis on social objective as well as economic ons might feed back into economic growth.

 Among the goals declared since the 1992 Maastricht Treaty, the EU emphasises international cooperation, with the objectives to foster and consolidate democracy, the rule of law, and respect for human rights and fundamental freedoms. Our findings suggest that pursuing these objectives may indeed complement economic aid to developing countries, since it implies that the EU should be interested in reducing of the likelihood of state fragility throughout the world, resulting in a positive impact on their aid absorption.

I’m pretty interested in this question of how social objectives facilitate economic growth. From my reading the evidence that they impede on economic growth is not as strong as some might suggest. I might come back to this in another post in a few days.


The New Statesman reports that “The US Treasury is delaying a report on China’s manipulation of the yuan, which was due out on 15 April, by several months.” This has been a pretty big issue of policy debate within economics recently. China is quite clearly engaging in currency manipulation on a level never previously seen (as in never ever).  The US Treasury has a statutory obligation to publish a report every year (I think) that states which, if any, countries are engaging in currency manipulation. If the US government then gets a report saying that China is manipulating the value of its currency there would be a political obligation to do something about it. This hasn’t come to a head until recently because up until the recession it was seen as China financing the US deficit. But now its seen as China importing US demand and exporting Chinese savings at a time when the US government is trying to stimulate demand and when savings are already greater than investment.

Perhaps at the for front of the debate over the renminbi is Paul Krugman. He has written a lot on this recently and has given a very interesting an informative talk with Fred Bergsten of the Peterson Institute for International Economic. Essentially Krugman is calling for a 25% sanction on Chinese imports by the US in order to force China into revaluing its currency. The response has been impassioned. Business week reports:

Morgan Stanley Asia Chairman Stephen Roach said a “baseball bat” should be taken to economist Paul Krugman over his call for the U.S. to pressure China into allowing the yuan to appreciate.

Tyler Cowen at Marginal Revolution has said that Krugman current tirade shows that he is now neither an economist not a liberal! Krugman’s calls are also being heard in China where China Daily has been condemning Krugman’s call. The best commentary that I’ve seen that criticises Krugman’s argument is that of Yiping Huang, Professor of Economics at the China Center for Economic Research, Peking University, who has a detailed article over at In that article Huang argues, as have others elsewhere, that if America goes on the offensive over the renminbi, it will only make it less likely that China will revalue. The idea here is that popular opinion will prevent the Chinese government from ‘giving in’ to America if America goes on the offensive, but that if this is done diplomatically China might revalue. I’m not too sure if I buy this argument for three reasons, 1. I don’t know how responsive the Chinese government is to public opinion, 2. a revaluation could actually benefit Chinese consumers as the renminbi would be stronger, and consumers would probably consume more and save less, resulting in a jump in living standards, 3. the US has been putting diplomatic pressure on China for years now to revalue and China simply hasn’t done it.

Anyway it’s worth listening to what Krugman is saying as, judging from the fact that the Treasury seems to be preparing a significant report, it now look like America might be about to go on the offensive. Krugmanwrites:

The renminbi thing isn’t at all hard to explain — it’s just supply and demand. Here:


The more depreciated China’s exchange rate — the higher the price of the dollar in yuan* — the more dollars China earns from exports, and the fewer dollars it spends on imports. (Capital flows complicate the story a bit, but don’t change it in any fundamental way). By keeping its current artificially weak — a higher price of dollars in terms of yuan — China generates a dollar surplus; this means that the Chinese government has to buy up the excess dollars. There’s nothing arcane about it.

Nor is there anything arcane about the implications: In the current environment, with high unemployment around the world and policy interest rates as low as they can go, this is a predatory, beggar-thy-neighbor policy.

In another post Krugman extends his argument:

By creating an artificial capital account deficit, China is, as a matter of arithmetic necessity, creating an artificial current account surplus. And by doing that, it is exporting savings to the rest of the world.

In normal times, you could argue that this policy provides benefits to the rest of the world, by reducing borrowing costs (although given what we did with those capital inflows, maybe not). But these aren’t normal times. We’re currently living in a world in which both central banks and governments are unable or unwilling to pursue sufficiently expansionary policies to eliminate mass unemployment; so it’s a paradox of thrift world, in which anyone who tries to save more reduces demand, reduces employment, and – because investment responds to excess capacity – ends up actually reducing investment. By exporting savings to the rest of the world, via an artificial current account surplus, China is making all of us poorer….

… it’s a mistake to focus only on direct China versus America competition. In many cases, Chinese exports compete with those of other developing nations. If the renminbi rises, those nations would become more competitive – and would also find their currencies appreciating against the dollar, offering new channels for onshoring. This may sound speculative, but it isn’t: remember, if China ends its artificial export of capital, that has to show up in trade flows one way or another.

In the same post he explains how he sees the confrontation playing out:

Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does.

Suppose that China then digs in its heels, and refuses to budge. From the US-EU point of view, that’s OK! The problem is China’s surplus, not the value of the renminbi per se – and countervailing duties will do much of the job of eliminating that surplus, even if China refuses to move the exchange rate.

And precisely because the United States can get what it wants whatever China does, the odds are that China would soon give in.

Look, I know that many economists have a visceral dislike for this kind of confrontational policy. But you have to bear in mind that the really outlandish actor here is China: never before in history has a nation followed this drastic a mercantilist policy. And for those who counsel patience, arguing that China can eventually be brought around: the acute damage from China’s currency policy is happening now, while the world is still in a liquidity trap. Getting China to rethink that policy years from now, when (one can hope) advanced economies have returned to more or less full employment, is worth very little.

Obviously there are a number of interesting things in here. The argument that a revaluation would benefit other Asian exporters is one I find pretty interesting but not necessarily one I’m convinced of. That said I’ve seen very little, with the exception of Huang’s article linked above, that is in anyway persuasive that Krugman is wrong. And with the being a strong appetite in Congress for taking on China (130 members of Congress signed a letter to Timothy Geithner, Treasury secretary, and Gary Locke, commerce secretary, calling for action of China’s currency manipulation. Text of the letter here), it is well worth watching how this develops.


There`s an interesting article in the current edition of Harvard Business Review entitled “The Myth of Shareholder Capitalism”. In it the authors, Loizos Heracleous and Luh Luh Lan, state

Oddly, no previous management research has looked at what the legal literature says about the topic, so we conducted a systematic analysis of a century’s worth of legal theory and precedent. It turns out that the law provides a surprisingly clear answer: Shareholders do not own the corporation, which is an autonomous legal person. What’s more, when directors go against shareholder wishes—even when a loss in value is documented—courts side with directors the vast majority of the time. Shareholders seem to get this. They’ve tried to unseat directors through lawsuits just 24 times in large corporations over the past 20 years; they’ve succeeded only eight times. In short, directors are to a great extent autonomous. 

And yet, in an important 2007 article in the Journal of Business Ethics, 31 of 34 directors surveyed (each of whom served on an average of six Fortune 200 boards) said they’d cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits. Whatever they could legally do to maximize shareholder wealth, they believed it was their duty to do.

There`s two pretty interesting things here. Firstly that “Shareholders do not own the corporation, which is an autonomous legal person”. I suppose intuitively this makes sense. We all know, from watching The Corporationif nothing else, that corporations have legal personality. And although a lot of lefties make a really big deal out of this, I`ve never heard anyone point out the flip-side which is that as Corporations have a legal responsibility in and of themselves, it is not legally justified to act solely in the interests of the shareholders. (If this is legally wrong, I appreciate someone pointing it out).

 The other interesting thing is the rather shocking finding in the Journal of Business Ethics. I hadn`t come across that before.