Demand deniers

The Tories seem to be demand deniers, in the sense that they seem oblivious to problems of weak demand. Three things make me say this.

First, Jeremy Hunt tries to justify cutting tax credits by claiming that he wants to create a culture of hard work.

Let's leave aside the fact that working long hours is often a sign a economic failure - of low productivity - and ask: what would happen if people offered to work longer?

The answer is that, in many cases their employers would reject their offers. There are already 1.28 million people who are working part-time because they cannot find full-time work. This tells us that, for very many people, the problem isn't a lack of culture of hard work but a lack of demand for their services.

Secondly, in speaking of immigration, Theresa May says:

We know that for people in low-paid jobs, wages are forced down even further while some people are forced out of work altogether...
At best the net economic and fiscal effect of high immigration is close to zero.

Let's leave aside the fact that we don't know this at all because it is wrong. Just think about elementary economics. An increased supply of labour could force its price down and if demand is price-inelastic employment won't increase much. But the solution to this is to increase aggregate demand so that wages and employment do increase. You don't need to believe me on this. Just look at what Ms May's own department says (pdf):

There is relatively little evidence that migration has caused statistically significant displacement of UK natives from the labour market in periods when the economy has been strong...
But during a recession, and when net migration volumes are high as in recent years, it appears that the labour market adjusts at a slower rate and some short-term impacts are observed.

It is not immigration that's the problem, therefore, but weak aggregate demand.The solution, therefore, is not immigration controls but better demand policies.

Thirdly, the Tories' proposed cuts in tax credits overlook one of the great trends in the economy over the last 40-odd years - that some mix of globalization and technical change has reduced demand for less-skilled labour with the result that millions of people have low pay. Proposed rises in the minimum wage will not solve this problem, not least because many of the low paid earn a little more than the minimum wage. Tax credits exist not because the Labour government was profligate, but because it recognised that topping up the incomes of the low-paid was a roughly least-bad solution to the problem of low demand for less skilled work.

These three examples raise the question: why are the Tories demand-deniers? Alex offers one answer: it's because they still believe that poverty is the fault of the individual - they are committing the fundamental attribution error.

The counterpart to this is a perhaps wilful failure to see that there are also systemic reasons for low pay - not just bad policy, but fundamental properties of the capitalist economy.

Comments

[e]

They know. IMO in believing otherwise you give them too much credit (are they human?). Seems to me their preferred option “going forward” is smaller welfare state larger shadow economy. It offers more ‘dignity’ – just as in China?

[Chris]

Don't forget the belief that higher demand for houses caused by Help to Buy wouldn't increase prices !

[An Alien Visitor]

The Tories want to turn the state away from providing services to the public and toward providing handouts to spivs (sorry wealth creators).

This is taxation by the back door, it is the privatisation of taxation. So in the not too distant future when you see a doctor you will have to pay rather than that being part of what your taxes get you.

It is like the argument that privatising Royal Mail will bring in extra investment. No it won't, it will mean that taxation will be brought in by the back door, because anyone who invests £1 in royal mail will be expecting £2 back, and how does he get the extra £1, he screws you! So he invests nothing, you do!

[Blissex]

The answer is the same as before: there is quite a bit of voter pressure for policies to drive unemployment higher and wages down (for people with an income below the median).

This is in part direct, because for many voters close to retirement or retired the employment and wages of people on a lower income are a cost to them they want to minimize.

A government that helps the middle class find plentiful and cheap hired help is going to gain votes (the cheaper hired help cannot vote or don't vote much).

But pushing up unemployment and pushing down wages by means of demand suppression means that the central bank with a given inflation target is then bound to expand credit and keep interest rates down, helping asset prices to zoom.

Thus "austerity" (for those on low incomes, especially in the North) helps drive property prices up, and that is the single most important factor in winning elections (especially in the South, where they are won).

For many decades nearly every time a government was re-elected property prices had been zooming up, and every time a government lost power house prices had stagnated or gone lower.

Bigger better house prices are the what "aspiration" is about and "aspirational" voters are eager to fire governments that don't push them up.

Every politician but the Bennites and Corbynites (the same group...) seems to understand that house prices are the single most important election winner (or loser).

[An Alien Visitor]

"Every politician but the Bennites and Corbynites (the same group...) seems to understand that house prices are the single most important election winner (or loser)."

Brutal as always Blissex but maybe the Corbynites are trying to change what determines an election, rather than bowing before it. Not everything is fixed in stone you know.

[Blissex]

«not too distant future when you see a doctor you will have to pay rather than that being part of what your taxes get you.»

I think that the Tories ought to think about denationalizing the NHS, turning every NHS area into a PLC and distributing the shares to local residents for free in proportion to the value of their houses.

:-)

PS you read it here first...

[Blissex]

«maybe the Corbynites are trying to change what determines an election, rather than bowing before it. Not everything is fixed in stone you know.»

That would be fantastic, but my personal guess is that the election-swinging voters, the "conservatory building classes" of the South, will change their voting regardless.

The reason is really simple and big: zooming house prices have delivered an average of £10,000 a year tax-free effort-free to property speculators in the South on a gross median income of around £20-25,000 per year.

That is HUGE, HUGE, totally "free money" (funded by upward redistribution and bigger debt) and makes a big difference to the lifestyle of the "conservatory building classes" in the South.

Can Uncle Jeremy beat that? Can he obliquely yet credibly promise policies to deliver the equivalent of more than £10,000 a year of free stuff to median voters in the South on £20-25k gross income a year?

Can he persuade the middle aged and retired property owning women voters of the South that he will take care of them in the same way as George Osborne has done and Tony Blair before him?

A huge and definitive house price crash caused by the final bursting of the UK debt bubble will reset the political game, but Uncle Jeremy needs that to happen soon, just like Boris Boyo needs a mild house price crash :-).

[Blissex]

«the "conservatory building classes" of the South, will [NOT] change their voting regardless.»

Obvious correction... Given the argument that voters in the South really like those £10,000 a year of free money.

[Blissex]

«£10,000 a year tax-free effort-free to property speculators in the South on a gross median income of around £20-25,000 per year.»

To belabor the point, it is not something significant but small like £1,000-£2,000 a year, it is a around £1,000 *per month* tax-free effort-free for people on median incomes, something like a 70% boost of their after tax income. Who needs safe jobs or good pensions, trade unions or the Labour party when they get so much thanks to City, Treasury and Bank of England?

«the Corbynites are trying to change what determines an election»

The property speculators of the South have not sold out for peanuts, for a mess of pottage, but for a really significant chunk of yearly free money, and that continues to determine elections.

In the good old times that kind of yearly money went into funding final salary pensions and other benefits, but unfortunately it was "invisible" to the average voters, and it went to everybody with a job, and it came out of the pockets of business owners.

That £10,000 a year for median income voters not only is huge, and goes mostly to toryish swing voters in the South, and it comes out of the pockets of the poorer half of residents, but it is highly visible, all newspapers celebrate loudly bigger better property prices, and indeed can be cashed in easily with a visit to the local remortgage shop at low low rates thanks to demand and wages being pushed down by fiscal and labour policy.

Has Uncle Jeremy got something bigger and more visible to buy voters in the South than Slimy George does or Slick Tony did?

[jake]

Yes if we had sufficient demand our economy could absorb immigrants and not experience wage suppression on the job market.
But we don't so can we please pursue a policy that protects our indigenous working class,or is that too much to ask for.

[greg]

Blissex: "This is in part direct, because for many voters close to retirement or retired the employment and wages of people on a lower income are a cost to them they want to minimize."

Yes! Liquify the capital needed to support your future! Those clever Tories! They must know that if they let the real economy crumble, they will still have more than enough money to eat to satisfy their appetite.

Good thing they have modern macro to point to to justify their conclusion.

Just kidding. Macro's understanding of money is based on a failure of composition: Although $100 adds $100 to the wealth of an individual, that does not imply that all the money in an economy *adds* anything to the wealth of that economy.

Policy based on this failure of understanding will also fail. Spectacularly.

[Bob]

"Although $100 adds $100 to the wealth of an individual, that does not imply that all the money in an economy *adds* anything to the wealth of that economy."
Idiot.
Of course it does. It means stuff that otherwise wouldn't get made or done is produced.

[Blissex]

«"Although $100 adds $100 to the wealth of an individual, that does not imply that all the money in an economy *adds* anything to the wealth of that economy."
[ ... ] stuff that otherwise wouldn't get made or done is produced.»

Not so simple: only if there are unused resources, and even then it may add worthless stuff, or stuff that gets made or done in another country, and to whom and in which degree matters too.

Plus in the UK the central bank has an inflation target, so in theory there is always "full" employment, that is the level of employment that is compatible with the inflation target. :-)

In any case property price capital gains, the preferred vehicle for big yearly handouts to buy tory voters in the South, are necessarily purely redistributive: when a property goes up by £10,000 in a given year no new stuff has been made or done to justify that £10,000, it is purely redistributive rent.

Via trickle-down some of that may end up employing someone who was unemployed, but not necessarily in the UK.

But a policy of large scale upward-redistribution that funds a small flow of trickle down is the toriest of the "private keynesian" policy spectrum. Thus the preferred one by "making speculation pay for hard waiting families" George Osborne and David Cameron.

And exceptionally popular with swing voters in "aspirational" suburbs in the South...

Too bad that the Bennites/Corbyinites seem to be that they can win a majority of seats with just thr votes of the working class and the poor who just wan t good jobs, decent pensions, and affordable rents. That won't happen wihout a massive final crash of the credit and asset pice bubble disilllusioning the "Blow you, I am allright" median income property speculators in the South.

[Blissex]

As to the Bennites/Corbyinites I treasure this really lucid, heartfelt entry from T Benn's diary, 1986-03-24:

«The Party's Campaign Strategy committee, where four men and a woman from something called the Shadow Agency made a presentation.

They flashed onto a screen quotes which were supposed to be typical of Labour voters, for example: 'IT'S NICE TO HAVE A SOCIAL CONSCIENCE BUT IT'S YOUR FAMILY THAT COUNTS.'

What we were being told, quite frankly, was what you can read every day in the Sun, the Mail, the Daily Express, and the Telegraph. It was an absolute waste of money.

Labour was associated with the poor, the unemployed, the old the sick, the disabled, pacifists, immigrants, minorities and the unions, and this was deeply worrying. The Tories were seen to have the interests of everyone at heart including the rich. Labour was seen as yesterday's party.

I cam out feeling physically sick.»

What the Bennites/Corbinites don't realize is that they can't just ignore the above, and that they can still support the interests of the working class and the poor by representing also the petty petty bourgeoise of the southern middle classes. Just like the Tories continue to act mostly in the interest of the upper class even as they represent those middle classes.

G Brown could create a very valuable system of tax credits only because he was fronted by middle-class representing T Blair...

[Blissex]

«In any case property price capital gains, the preferred vehicle for big yearly handouts to buy tory voters in the South, are necessarily purely redistributive»

Which means that actually «stuff that otherwise wouldn't get made or done is produced» does not really work, even as trickle down.

Because if a median income landlord sells after one year and gets a capital gain of £10,000, and spends it, the buyer necessarily then has £10,000 less to spend; and if the landlord does not sell and just raises rent and spends the increase in rent, the tenant has the same amount less to spend.

The only case where £10,000 more "spending power" is created out of thin air is when the landlord does not sell and remortgages (or an equivalent arrangement for the buyer in a sale), but the effect is temporary until the landlord sells, because then the buyer is still going to pay £10,000 more.

Admittedly remortgaging is indeed somewhat popular, as a tool of upward-redistributing toryism with a bit of trickle-down:

www.opendemocracy.net/ourkingdom/oliver-huitson/thatcher-black-gold-or-red-bricks
«Another of Thatcher’s magic potions was ‘home equity withdrawal’ or remortgaging – drawing down the equity in the borrowers home for (mainly) consumption purposes – new cars, holidays, and so forth. Under the two Prime Ministers that preceded her, James Callaghan and Ted Heath, home equity withdrawal as a percentage of GDP growth was around 36% for both.
Under Thatcher, this exploded to over £250bn across her premiership – a staggering 104% of GDP growth. [ ... ]
[ ... ] But Blair did his homework and let loose – as did Thatcher – a wave of cheap credit, financial deregulation, house price inflation and an equity withdrawal-led consumption boom.
Withdrawals under Blair’s leadership totalled around £365bn, that’s a full 103% of GDP growth over the same period,»

[greg]

Bob quoting me: "Although $100 adds $100 to the wealth of an individual, that does not imply that all the money in an economy *adds* anything to the wealth of that economy."

Bob: "Idiot.
Of course it does. It means stuff that otherwise wouldn't get made or done is produced."

No Bob. Money increases the efficiency of exchange. That is why it is better than barter. But while a *change* in the amount of money may make a difference, the fact that there are 500 billion pounds in circulation or 1000 billion pounds in circulation makes no difference whatever to the total value of real assets and real production.

If there are 1000 billion pounds in circulation rather than 500 billion pounds, that does not make society 500 billion pounds richer. It just means the price levels are twice as high, assuming the distribution of money is unchanged. And while the distribution of money may affect demand and so what is produced, the total quantity of money has no affect. (Although changes do,)

[Bob]

Only in the minds of the True Believers.
"just means the price levels are twice as high, assuming the distribution of money is unchanged. And while the distribution of money may affect demand and so what is produced, the total quantity of money has no affect. (Although changes do,) "
Really?
Identical firms, not one of which says "let's keep our prices the same and run an overtime shift".
No export licence for that sort of rambling to the real world of variable orders and eight hour days.
If there are rises in prices then bring in the competition authorities to break up the oligopoly.

[Bob]

Inflation is a function of the *flow* of money, not the stock.
Your crazy model where barbers don't have queues, the economy is always of a fixed size, and nobody ever saves is nuts.

[greg]

Inflation is a function of the *change* in quantity of the total flow of money.