Politics and Economics

The 2008 Financial Crisis was Primarily a Failure of Socialism.

I’ll argue that the 2008 financial crisis was primarily caused by a failure of a socialist policy and exacerbated by socialist economics.

Mr. Miliband and Mr. Balls of the UK Labour Party believe that the 2008 financial crisis was primarily caused by a failure of capitalism.  To an extent this is true, but then few of us believed that capitalism is a perfect system, just the best system currently available.

But it was not Labour’s lack of regulation of the “casino banks” in the UK that started the economic crisis, although they may have accelerated its effects.  The initial spark was provided by the policy of “sub-prime” lending in the USA.  A policy of which Mr. Miliband and his socialist colleagues would have been proud.

In 1999 President Clinton effectively reversed the Glass-Steagall Act opening the way for the credit unworthy to engage in the property market.   For the Democrats it was positive discrimination; social engineering.   The left had long complained that the property market was allowing the already wealthy and Middle Class to profit from the property market boom.  By allowing the poor and economically unreliable to borrow money and buy their house was considered another blow for equality.  A huge amount of debt built up in a part of the economy that couldn’t afford the interest payments.  When asset prices started to fall many people defaulted on their loans leaving the banks with properties that were worth less than the value of the mortgage debt.

So Sub-prime lending was the spark.  It caused a brief economic downturn in many countries.  However in many left-leaning economies, which borrowed billions to spend on social engineering experiments, it went on to cause a crash.

Let’s be clear about the economic legacy left by the last Labour Government.  The deficit was a whopping £155,000,000,000 in one year!  Whilst I have heard many Labour politicians responsible for this eye-watering number blame it on extra spending required to avert an “world-wide financial crisis” created by bankers, the facts do not support this defence.

It was not a “world-wide” crisis as it affected only countries that ran up huge Government deficits (Greece and the UK being prime examples) or massive private deficits (Ireland).  This includes the US who refused to raise very low tax levels to meet spending obligations, and the EuroZone who cannot put taxes up any higher to match their totally out-of-control spending plans.  Many countries, including Canada, Australia, Saudi Arabia, China, Sweden Germany and much of South East Asia all avoided the worst of the crisis because their spending was more-or-less in line with their tax revenues.  Labour must take its share of the blame with the bankers, as it was them that ran up Government debt.

Also, Labour turned on the spending tap long before the 2008 – 09 financial crisis.

http://www.ifs.org.uk/bns/bn99.pdf (see Fig. 4.1 on page 10)

Labour spending went from 36% of GDP in 1999-2000 to 42% in 2005 -2006 whilst revenue was broadly flat at 37% of GDP over the same period.  Increasing Government deficits is not new and the size of this early deficit was not unusual by historical standards.  But the key difference here is that Labour increased spending and debt during the boom which started at the end of John Major’s government.  We expect Governments to increase spending and deficits during a recession.  This is essential to cover increased unemployment benefits and lower tax revenues and smooth out the economic shocks that inevitably hit the most vulnerable citizens.  However, prudent Governments will then pay down debt during the boom times to allow more future borrowing when the economic cycle inevitable takes a turn for the worse.

Remember that the deficit is given as a percentage of GDP, which is much higher during a boom therefore the deficit is proportionally bigger.  Also, the last boom lasted for a long time, an unprecedented 16 years, allowing massive debt to build up if you were foolish enough to continue to borrow during this time.

The reason that Labour felt they could borrow with impunity, even during a boom, was it believed it had banished “boom and bust” economics.  Gordon Brown famously made this statement in the House of Commons. The world’s finances were linked for the first time by technology and Labour believed the massive global market could spread financial risks. Labour bet the country’s financial health on a belief that asset values would continue to rise, allowing borrowing against those assets.  Finally, Labour selfishly expected our disenfranchised children and grandchildren to pay back the debt sometime in the future, believing this was acceptable because it assumed the economy would be much bigger by then and they could afford it.  This is undemocratic and immoral. The consequence of all this is that Labour foolishly and arrogantly believed there would never be another downturn so could continue to spend above tax receipts.

Labour was wrong on all counts.  The connected global markets did not spread the risk, it spread the contagion, asset prices fell and the economy shrank increasing the debt to income burden.

So because Labour arrogantly believed there would be no more downturns they increased their profligate spending rather than pay down debt.  Consequently, when the financial crisis hit in 2008 there was no more credit available, which left the UK economy unusually exposed.

So, a socialist policy started an economic downturn, which socialist economics turned it into a crash.

Thanks to Labour the incoming coalition government had the unique problems of solving a massive economic slowdown with no ability to borrow more to smooth the worst effects.  They had to reduce spending when there was more need for the extra money.  An impossible task without causing major hardship.

Whether the coalition policies produced the best possible outcome given the disastrous economic hand they were dealt by Labour is difficult to judge.  This remains to be seen and history will be the judge.

Labour’s election prospects do not lie in trying to talk down the coalition economic performance or in justifying its recent economic mismanagement.  To win the next election they must address one key question:  Which party will best manage our new economic reality?

We have over a trillion pounds of debt, which is still rising due to an annual deficit of over 100 billion pounds.  All this must be paid down.  Combining this with an older population (with their large pension and healthcare needs) means we will have no more spare money for at least a generation. We must earn what we want to spend.  We cannot continue to borrow what we spend. Increased taxation can get nowhere near lowering the deficit, let alone the debt.

Massive public spending cuts are inevitable.

Labour must now convince the country that they can move from a party which financially supports in-work welfare benefit and uncontrolled public spending to one which puts financial prudence ahead of its social engineering experiments i.e. manage the country’s massively reduced public spending capacity for the foreseeable future.

The Labour front bench may believe they can do this, but I doubt that their political paymasters (Unite and the GMB unions) or the socialist Labour backbenchers will let them.  They have a social agenda not an economic one. The country may feel that there are other political parties with a longer history and proven innate instincts of supporting a smaller State and lower public spending.

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Politics and Economics

Why are Living Standards Dropping in the UK?

Let’s take a toy model analogy.

I earn £30,000 per year and spend £25,000 on consumption and £5,000 investing in the future.

I entrust my financial affairs to a Labour Chancellor who assures me I can spend £30,000 per year on consumption and £5,000 on investing in the future because “I’m worth it”.   So I borrow £5,000 a year for 10 years.

For 10 years I feel like I’m earning £35,000 per year.  I consume £30,000, invest £5,000 and life feels pretty good.

What I’ve not spotted, until it is too late, is that after 10 years I owe £50,000 and the interest is costing me 10% or £5,000 per year.

The financial crisis hits me, causing my income to drop to £28,000 (drop in GDP) and my consumption has increased to £32,000 per year (to pay increased unemployment benefits).  I am now also paying £5,000 in interest.

My consumption (£32,000) + interest (£5,000) is £37,000 without paying off any debt. My costs are now £9,000 more than my income (£28,000). And I have no money for investment.

Because I feel like an incompetent fool I hand over all my finances to a Coalition Minister.

He painfully cuts my consumption to £25,000 (what it should have been) but I still have to pay £5,000 interest on the debt and therefore need to borrow £2,000.  I have no money for investment.  Debt rises from £50,000 to £52,000.

Immediate effect:  I now have £5,000 less per year to spend on consumption and prices have risen – so I feel much worse off  (“cost-of-living crisis”) – and my debt has still gone up by £2,000 therefore my interest payments rise by another £200.  I still have no money for investment.

In the Autumn statement my income goes back to £30,000 (GDP growth) giving me an extra £2,000 to spend.  £200 goes on interest and £1,800 on investments.

Compared to 10 years of Labour Government this is how I feel:

1. My consumption has gone from £30,000 to £25,000 despite inflationary price increases, so my standard of living has fallen and I worry about paying fuel bills.

Of course my living standard is falling!  I’m comparing my current standard of living to a period when it was held artificially high by borrowing!

2.  My investments have gone down from £5,000 to £1,800 which will slow the pace of future economic growth.

3.  Interest is now £5,200 and rising

4. Deficit is down from £5,000 to £2,000 but…..

5……my debt is still going up.

Can anybody spot where the problem started?

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Genetic Explanations, Liberty, Politics and Economics

Why do we vote for a particular political party? Geography and genetics can play a role.

Screen Shot 2017-09-17 at 12.30.57

 

Geography is more likely to dictate voting patterns in modern Britain than “class” or even income. Well-off people in the north are more likely to vote Labour and poor people in Kent are more likely to vote Conservative:

Leader Article

“The north has wealthy suburbs, like South Wirral, west of Liverpool. They vote Labour. The south has impoverished pockets, like north-east Kent. They vote Conservative.”

Reference

As well as geography dictating political behaviour there is good evidence that genetics may play a role as well.  Twin studies unequivocally demonstrate the heritability of politically related behaviour.  A collection of a dozen genes might be responsible for inclining people towards liberalism or conservatism. There are no genes for socialism or conservatism, or for prejudice or tolerance, any more than there are genes for Christianity or Islam. But a person’s genes can sometimes propel them more easily in one direction than another. Free will is a little freer to turn right than left, or vice versa.  Of course genes are inherited and tend to cluster in particular regions, even in today’s highly connected world.

Genetics and politics

It seems that reason, logic and informed debate play a smaller role in forming our voting patters than we might hope.  This means the electorate has less flexibility and “free will” to change the Government according to the prevailing needs of the nation. 

This is a particular concern at present as the overwhelming need is to reduce the cataclysmic UK budget deficit and national debt.  Each year we borrow more than 100 billion pounds that is swelling a debt that is already over a trillion pounds.  Tax increases will not get near reducing the deficit, let alone the debt, so massive spending cuts are inevitable.  We need to understand from each political party how they will manage our country’s new financial reality.

Even if the Labour leaders understood the need for reducing our colossal debt, their Union paymasters and back-benchers would not let them reduce public spending. The country should feel that there are other political parties that have more currently relevant instincts towards wealth creation, rather than wealth spending, and a strong, historically proven philosophical belief in a smaller State supported by lower public spending.

Even for entrenched Labour supporters there should be an understanding that there is a time and a place for Labour policies.  And that time is not now.  For the good of the nation many traditional Labour supporters must be persuaded to hold their nose and vote for somebody else. Unfortunately it seems they have less free will to change their vote according to circumstance than we might hope.

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Liberty, Politics and Economics

The 2008 Financial Crisis was Primarily a Failure of Socialist Economics

Mr. Miliband and the UK Labour Party believe that the 2008 financial crisis was caused by a failure of capitalism.  To an extent this is true, but then few of us believed that capitalism is a perfect system, just the best system currently available.  Mr. Miliband and his colleagues are very vocal at pointing out the failures of capitalism, but silent on the many everyday failures of The State, negating a credible socialist solution to our problems.

I’ll argue that the 2008 financial crisis was primarily caused by a failure of socialist economics.

Let’s be clear about the economic legacy left by the last Labour Government.  The deficit was a whopping £155,000,000,000 in one year!  Whilst I have heard many Labour politicians responsible for this eye-watering number blame it on extra spending required to avert an “international financial crisis” created by bankers, the facts do not support this defence.

It was not a “world-wide” crisis as it affected only countries that ran up huge Government deficits (Greece and the UK being prime examples) or massive private deficits (Ireland).  This includes the US who refused to raise very low tax levels to meet spending obligations, and the EuroZone who cannot put taxes up any higher to match their totally out-of-control spending plans.  Many countries, including Canada, Australia, Saudi Arabia, China, Sweden Germany and much of South East Asia all avoided the worst of the crisis because their spending was more-or-less in line with their tax revenues.  Labour must take its share of the blame with the bankers, as it was them that ran up Government debt.

Also, Labour turned on the spending tap long before the 2008 – 09 financial crisis.

http://www.ifs.org.uk/bns/bn99.pdf (see Fig. 4.1 on page 10)

Labour spending went from 36% of GDP in 1999-2000 to 42% in 2005 -2006 whilst revenue was broadly flat at 37% of GDP over the same period.  Increasing Government deficits is not new and the size of this early deficit was not unusual by historical standards.  But the key difference here is that Labour increased spending and debt during the boom which started at the end of John Major’s government.  We expect Governments to increase spending and deficits during a recession.  This is essential to cover increased unemployment benefits and lower tax revenues and smooth out the economic shocks that inevitably hit the most vulnerable citizens.  However, prudent Governments will then pay down debt during the boom times to allow more future borrowing when the economic cycle inevitable takes a turn for the worse.

Remember that the deficit is given as a percentage of GDP, which is much higher during a boom therefore the deficit is proportionally bigger.  Also, the last boom lasted for a long time, an unprecedented 16 years, allowing massive debt to build up if you were foolish enough to continue to borrow during this time.

The reason that Labour felt they could borrow with impunity, even during a boom, was it believed it had banished “boom and bust” economics.  Gordon Brown famously made this statement in the House of Commons. The world’s finances were linked for the first time by technology and Labour believed the massive global market could spread financial risks. Labour bet the country’s financial health on a belief that asset values would continue to rise, allowing borrowing against those assets.  Finally, Labour selfishly expected our disenfranchised children and grandchildren to pay back the debt sometime in the future, believing this was acceptable because it assumed the economy would be much bigger by then and they could afford it.  This is undemocratic and immoral. The consequence of all this is that Labour foolishly and arrogantly believed there would never be another downturn so could continue to spend above tax receipts.

Labour was wrong on all counts.  The connected global markets did not spread the risk, it spread the contagion, asset prices fell and the economy shrank increasing the debt to income burden.

So because Labour arrogantly believed there would be no more downturns they increased their profligate spending rather than pay down debt.  Consequently, when the financial crisis hit in 2008 there was no more credit available, which left the UK economy unusually exposed.

Thanks to Labour the incoming coalition government had the unique problems of solving a massive economic slowdown with no ability to borrow more to smooth the worst effects.  They had to reduce spending when there was more need for the extra money.  An impossible task without causing major hardship.

Whether the coalition policies produced the best possible outcome given the disastrous economic hand they were dealt by Labour is difficult to judge.  This remains to be seen and history will be the judge.

Labour’s election prospects do not lie in trying to talk down the coalition economic performance or in justifying its recent economic mismanagement.  To win the next election they must address one key question:  Which party will best manage our new economic reality?

We have over a trillion pounds of debt, which is still rising due to an annual deficit of over 100 billion pounds.  All this must be paid down.  Combining this with an older population (with their large pension and healthcare needs) means we will have no more spare money for at least a generation. We must earn what we want to spend.  We cannot continue to borrow what we spend. Increased taxation can get nowhere near lowering the deficit, let alone the debt.

Massive public spending cuts are inevitable.

Labour must now convince the country that they can move from a party which financially supports in-work welfare benefit and uncontrolled public spending to one which puts financial prudence ahead of its social engineering experiments i.e. manage the country’s massively reduced public spending capacity for the foreseeable future.

The Labour front bench may believe they can do this, but I doubt that their political paymasters (Unite and the GMB unions) or the socialist Labour backbenchers will let them.  They have a social agenda not an economic one. The country may feel that there are other political parties with a longer history and proven innate instincts of supporting a smaller State and lower public spending.

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Liberty, Politics and Economics

Trade Unions Are An Anachronism

One has to ask what is the point of Unions in the context of all-powerful UK / EU employment laws?

The UK and EU offer such high protection to workers that it actively discourages employers taking on new staff, particularly full time staff. Higher unemployment (particularly youth unemployment) and a disproportionate number of part-time workers is a consequence.

The only added value of Union membership is to enable a certain minority of strategic workers to extort additional income from taxpayers and other workers with the threat of industrial action. This detrimentally skews the labour market causing major economic inefficiencies, which make us all worse off.  For example, because tube train drivers can economically ruin London with a damaging strike, they can extort extra income from other workers (fare-paying commuters and tax payers) and earn significantly more than hotel workers doing similarly skilled work.  London Underground staff are lavishly paid by public transport standards, with Tube drivers on basic pay of up to £52,000 ($85,000) by 2015.

They can also prevent the modernisation of an essential economic asset by insisting we have cash based ticketing offices in an era of cheaper automated vending machines and Oyster Cards that can be automatically topped up with cash online.  The Unions are also the reason we have drivers on tube trains in an era of cheaper, more reliable and safer driverless trains.   Transport for London faces a budget shortfall of nearly £80 million for 2013 and 2014. It cannot afford to ignore opportunities to cut costs and modernise for the sake of old-fashioned ticket offices or a confrontational union boss with a social agenda.

The final insult is that it locks away workers in out-dated and unproductive roles that could be doing something more economically useful.  Does anybody remember the Transport Unions forcing diesel trains to have a driver, guard and fireman? Anybody assuming moving to driverless train would cause unemployment should remember this era and swot up on the Lump of Labour Fallacy. Another example of a minority holding the majority to ransom is the National Union of Teachers ability to prevent the modernisation of our education system because a small minority of teachers can vote for strike action. We all vote for policies in general elections. Why should certain workers get an extra vote?

We have a new economic reality since Labour was last in power. Over a trillion pounds of debt, which is still rising due to an annual deficit of over 100 billion pounds. All this must be paid down. Combining this with an older population (with their large pension and healthcare needs) means we will have no more spare money for at least a generation. The UK must now earn what it wants to spend; it cannot continue to borrow what it wants to spend. Increased taxation can get nowhere near lowering the deficit, let alone the debt. Massive public spending cuts are inevitable.

To win the next election Labour must address one key question: Which party will best manage this new economic reality?

Labour must now convince the country that they can move from a party which financially supports in-work welfare benefit and uncontrolled public spending to one which puts financial prudence ahead of its social engineering experiments i.e. prudently manage the country’s massively reduced public spending capacity for the foreseeable future.

The Labour front bench may believe they can do this, but I doubt that their political paymasters (Unite and the GMB unions) will let them. They have a social agenda not an economic one. Unless Labour loosens the power of the Unions over its selection of leaders, MPs and policies the country will not trust them with its new, constrained economic reality.

I understand the important role played by Unions in securing workers rights in the latter part of the Industrial Revolution. But they have won the battle and served their purpose, which has been superseded by modern employment laws. They have become nothing more than a sinister anachronism, practiced in the art of blackmail and extortion on behalf of a tiny minority.

The Labour Party will have more credibility and electability without them.

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