Politics and Economics

The Problem with the Greek Government’s Economic Policies.

Mr. Tsipras and his government are socialists. The basic philosophy of socialism is a strong sense of entitlement to other people’s wealth.

His logic will be the same as any other socialist, who has a strong social agenda but rarely a credible economic one:

i.e. “I need a certain amount of income to live a decent life therefore I am entitled to have it.

If I’m unable to earn this much myself then somebody else must make up the difference:

1.   My employer must pay me more for my efforts (minimum wage)….or……

2.…. my next-door neighbour (who earns more than me) must give me some of their income (intra-generational redistribution of wealth)….or

3.…The Government must borrow more money, give some to me and get my children and grandchildren to pay back the debt (inter-generational redistribution of wealth)…..or…..

4.….a combination of 1,2 and 3.”

As a country Greece cannot demand a salary increase from its employer, although this would doubtless appeal to Mr. Tsipras if it could.  So he is resorting to 2. Expecting his rich European neighbours, such as Germany, to give him money by writing off debt and 3. Taking on more Government debt and expecting his country’s current and future children to pay it back.

Socialism is often merely self-interest justified by ideology and in a normal socialist economy the sense of entitlement to other people’s wealth is legitimised by democracy.  i.e. to claim that most people in the country voted for redistribution of wealth so it is legitimate to implement it.  Mr. Tsipras is using democracy as justification for his current stand.  But he has forgotten that whilst Greece has democratically voted itself the right to more free money, that Germany, as a separate country, is equally democratically entitled to refuse to give it.

It reminds me of the worse days of the trade union excesses of the 1970s when they would decisively vote themselves a 40% wage increase and then were scandalised when their “democratic will” was not fulfilled by “management” or the prevailing government. They failed to understand that voting for something didn’t automatically mean it was practical or affordable.  All the Greeks have done in electing Syriza is to vote for an end to austerity. As did the French in 2012.  Look where it got them.

The concept of earning the money you want to spend does not compute in the socialist psyche.  So Greece has now reached the inevitable fatal flaw with socialism:  Eventually you run out of somebody else’s money to spend.

Politics and Economics

The Labour Party has missed the real trend acting against them – the colossal rise of Individualism

Labour has missed the real trend which is acting against them.  It is not the anti-austerity yearning of Scotland, or the anti-immigrant sentiments of the working classes in the North of England.  It is not even the rising aspiration in the Midlands and South of England.  What Labour has failed to see through their statist, collectivist eyes is the colossal rise of individualism.

Society has moved on from Henry Ford’s “you can have any colour you like so long as it’s black” philosophy   We are the internet generation and do not need to identify with mass movements in order to express ourselves.  We can define ourselves very precisely on social media and advertise and revel in our many similarities and differences with people across the globe.  We believe that what we buy is a reflection of who we are and there is a mesmerising diversity on the market.  Just look at the car market.  Choose your colours, body styles, interior designs, mood lighting, car audio, Sat Navs, engine size and type, gear box…define it on the web and the manufacturer will make it – just for you.  No need to buy an LP record anymore, create your own playlist on iTunes from a whole world of music.  No need to buy your clothes from the store on the high street but go online and find exactly what you think projects precisely who you are and how you feel.  We are less likely than our elders to consider ourselves part of any particular religion and less likely to join a political party or a trade union.  We can tailor our world to exactly fit who and what we believe we are.  A highly individual, tailored personality.

Part of this tailored identity resides in where we are from.  There is now more identity with local geography i.e. North and South, Yorkshire, Welsh, Cornish, English and Scottish, rather than British. The rise of nationalism in Scotland should not be a surprise.  Many Scots don’t identify with the English and Labour’s campaigning with The Tories (“The English Party”) against Scottish Independence lost many voters.  After all, 45% of Scots wanted independence.   The English, London based, Middle Class personalities running the Labour Party alienated even more Scots. This was not an argument about austerity and extent of left-leaning political positioning. It was an argument about the desire for a tailored personal identity expressed as a localised, geographical belonging.  The UK’s disaffection with the EU is following a similar trend.

Work has also become less collectivist.  The mass employment coal, steel and car industries are long dead.  Automation has taken manufacturing jobs.  We are more likely to start our own business than our forbears.  Starting a business online is easier than ever before.  We make our living designing web sites, apps and computer games.  Online we sell our marketing skills, our ability to write, entertain and solve problems.  We can advertise our spare room for B&B and our car as a part time taxi.  Our local bespoke businesses can now reach a global audience, be it in IT, local food and beverage or art and craft.  We make a living from millions of small industries.  We now get our employment protection through employment law and the EU, not from our politicians and trade unions.  Politicians are only important in creating an environment where these businesses can flourish.  They cannot control business as they did in the 20th Century. They cannot control the internet, let alone nationalise it.

So we are not collectivist.  There is no more tribal belonging.  Our individualism can be expressed in so many ways through commerce, in social social media and fashion.  We believe we have a right to express ourselves by what we consume and how we choose to live.

Organised Labour and Trade Unions don’t connect with this new reality.  The Labour Party are arguing there is no point offering “Tory Light” politics and that they should go back to their core vote and historic beliefs.  i.e. the traditional left position by offering classic statist, collectivist, trade union supported, high tax, high spend, nanny-knows-best politics.  The Tories, however inadvertently, stand for individualism and personal freedom.  They believe individuals should have the economic freedom to spend more of their own money themselves and they are increasingly advocating more social freedom with the passing of laws around gay marriage for example.  They believe in a small state that doesn’t interfere with our personal lives and doesn’t tell us how to think, what to buy and how to live.  They are the party of free enterprise, individualism and free expression.

In the modern, highly individualistic, personality tailored world who do you think will win?

Politics and Economics

Despite the scale of Labour’s electoral defeat its supporters are still in denial.

Labour’s denial of why they lost the 2015 General Election is symptomatic of a chronic mental condition called “idiopathic socialist ideology”. It seems that its sufferers have such an overwhelming delusion that their beliefs, logic and thought processes are right (and that everybody else is wrong) that they fail to detect, interpret and internalise opposing points of view.

Involuntary motor-neurone symptoms include inappropriately enthusiastic clapping on Question Time every time a left wing politician so much as farts and knee jerk reactions to perceived social and economic inequality. In extreme cases small groups of those afflicted can be seen shuffling along public streets holding placards and robotically shouting inane slogans.  Sufferers can also have paranoid delusions that the media is deliberately disseminating toxic opposing views and that non-sufferers are particularly stupid for believing them. Their delusions are further manifested by a ludicrous belief that they are the only ones immune to the media’s propaganda because they are intellectually and morally superior.

This condition further exhibits itself with impaired social interaction whereby its sufferers speak very loudly to people expressing contrary opinion (often even shouting) and hurling Tourette-like ad hominem insults in debates, on social media and in the press. Sometimes they are even deliberately offensive to people who don’t share their delusions.  This aggressive and anti-social behaviour is very cathartic for the sufferers but unfortunately it creates a downward spiral in their symptoms, as they are subsequently further angered when they inevitably fail to change the opinions of the people around them.  Sufferers are further deluded by thinking that this behaviour enhances their self-image as a virtuous individual.

Currently there is no cure for this serious mental condition. Fortunately, however, it is self-limiting.  The recommended treatment is a repeat subscription to The Guardian and to quarantine the sufferers into the Labour Party, where they will not interact with society at large.  Consequently their symptoms can be contained by only interacting with a shrinking number of sufferers with similar delusions.

Politics and Economics

Is Syriza the solution to Greece’s economic problems?

The root of the Greek economic crisis is that they have been living beyond their means.  They paid themselves too much for producing too little and made up the gap with excessive borrowing.

Greece is an extreme example of a problem that left-leaning economies in the West have failed to address for more than a generation.  There is a significant disparity in global labour costs.  The average worker in the West earns $135 per day; the average worker in urban China earns $12 per day.

What entitles the rich world’s 500 million workers to salaries ten times greater than the 1.1 billion workers in urban bits of the developing world?

(Full, brilliant article is here:    $135 – $12 = the pay gap the West can’t bridge.)

Greece has bigger problems because this issue is compounded by massive tax evasion, out-of-control corruption and a culture of taking Government hand-outs and public-sector salaries without giving anything in return.  Greeks can retire at 58 and some professions retire even earlier.  Clearly this has to end and the previous government was working hard to achieve this.

So now that Greece cannot borrow any more it must stop overpaying itself.

There are three ways to do this:

1. Devalue your currency.

Advantage:  A tried and trusted mechanism that would have lowered their wages on international markets.  This lowers domestic costs of production, which boosts exports and reduces imports whilst maintaining domestic living standards – so long as Greeks buy home grown goods and services.

Disadvantage:  Doesn’t address the main structural problems of the Greek economy.  It is just delaying much needed economic and structural reform required to address low productivity, tax evasion, corruption and a “something-for-nothing” culture.  Also devaluation only works if a few countries use it.

Greece cannot devalue its currency as it is in the Euro.  So it must choose from the other two options:

2. Cut Wages.

Advantage:  This quickly addresses the problem allowing Greece to regain competitiveness in international markets, boosting exports, attracting internal investment  and creating economic growth.

Disadvantage:  Causes an instant reduction in living standards, which creates hardship, which reduces consumer spending, which slows down the internal economy further.  i.e. the economy gets worse before it gets better.

This is painful solution but it is a shortcut to growth.  Ireland used this method and quickly returned to growth after initial hardship.  It concentrates the pain over a shorter time period than the only other alternative which is…..

3. Freeze Wages

This is a slower way to achieve a wage cut because it relies on inflation slowly eroding the wages compared to living costs –  i.e. eventually causing an effective pay cut.  The UK government has adopted this approach along with devaluation.

Advantage:  Less painful way of cutting wages but…

Disadvantage:  …delays the time it takes to regain competitiveness on international markets.

This is effectively the same solution as 2 but stretched over a longer time period.

The Greeks have suffered over the last few years but they required significant restructuring in order to develop a strong, sustainable economy.  The medicine was working as Greece has slowly returned to growth and even has a small budget surplus.

Now Syriza want to adopt the usual socialist solution to a budget deficit – that is to get somebody else to pay for it.  In this case they want Germany to write off their debt.

Many reference the 1953 London Debt Agreement that reduced Germany’s war debts by 50% and stretched the repayment of the remaining debt over a longer period.  This led to German economic growth so surely this could also work for Greece?  This may well be true, but at the time it was only Germany’s debt that was being written off.  Poor old Britain repaid all its war debts, with the last payment being made to the USA on 29th December 2006.  But this time we have France, Italy, Spain and Portugal waiting in the wings with beaks wide open and palms out-stretched.  Any hint of weakness towards the Greeks will cause a landslide of similar political extremism and a similar expectation that their debts will also be forgiven. Why should Greece have special treatment?

In any case the Greeks have already been given voluntary debt forgiveness by private creditors.  Banks have slashed billions from their debt.  Their remaining official debt has a 16-year maturity and an average coupon of 2.4%. So despite Greece’s extraordinarily high public debt (175% of GDP last year) successive concessions have already eased its debt-servicing charges so that annual cash interest payments are now only 3% of GDP.

And yet Syriza has pledged to go on yet another spending spree. They have promised to launch a welfare package worth €2 billion; to rehire 12,000 sacked civil servants; to give a massive increase in the minimum wage and to freeze privatisations. They have agreed to tackle tax-avoidance and cronyism but these are unlikely to do enough to pay for their profligate promises.  They will quickly return Greece to the mire from which it is slowly extricating itself.

The best compromise is for Syriza to jettison their ludicrous socialist economic policies and negotiate some further debt relief, perhaps by further pushing back the payment schedule (as did Britain in the 1950s), in return for further political and structural reforms.  Greek wages must be linked to productivity, they must retire later, reduce their public sector costs to an affordable level and clamp down on corruption and tax evasion.

Politics and Economics

The Greeks vote for Syriza. Is this the end of austerity or fantasy economics?

The Greeks voted emphatically for the radical left wing Syriza party who claim they will reject austerity.  The UK Labour party might look wistfully for inspiration from Syriza, reassured by Ipsos Mori polling that shows half of voters in the UK think no more cuts are needed.

This coincides with some 15 Labour MPs led by Michael Meacher and Diane Abbott leaping on the success of Syriza in the Greek elections by demanding that Ed Miliband reject austerity. They released a signed statement aimed at persuading the Labour leader to pledge significant state investment in the economy and jobs, instead of backing swingeing public cuts.

It’s difficult to know if these Labour politicians and voters are being economically illiterate or populist or both.

It reminds me of the worse days of the trade union excesses of the 1970s when they would decisively vote themselves a 40% wage increase and then were scandalised when their “democratic will” was not fulfilled by “management” or the prevailing government. They failed to understand that voting for something didn’t automatically mean it was practical or affordable.

All the Greeks have done in electing Syriza is to vote for an end to austerity. As did the French in 2012. Look where it got them.

These statements avoid the obvious question of how they will pay for the public services and welfare they want and this in turn highlights two of the many problems with socialist economics.

Firstly they believe money comes from taxation, an impersonal and limitless ATM in the sky, rather than the hard earned income of taxpayers. Extra taxation can always come from the “rich” – a vague, nebulous, undefined collection of immoral capitalists who are just queuing up to hand their money over to the exchequer. Somehow they always overestimate their numbers and under-estimate their global mobility. Something the French have learned very quickly.

Secondly they have not grasped the simple fact that if you want to borrow money somebody has to be prepared to lend it to you. The more you owe, the higher the risk of default so the more the lenders charge to cover the extra risk. Eventually the risk becomes so great, because the interest is so high, that lenders will stop lending. The UK’s interest rates are only low because the lenders see a plan to bring spending under control.

Have you noticed that left-wing politicians love applying fancy labels? The group of 15 leftist MPs were given a boost by Peter Hain, the veteran Labour MP and party grandee, who made a separate intervention yesterday that echoed their sentiments. He said “capitalism that dominates today requires far more radical responses than the neoliberal, right-wing orthodoxy of the post banking crisis era could ever provide”. This sounds very grand. Giving contrived labels to things is a trick used by many academics to make a simple subject sound intellectual. Pompous language helps left-wing politicians fool naïve voters that they are thoughtful and clever and know what they are talking about. This is because the simple language “we hope to spend our way out of our catastrophic debt ” is not as convincing.

These statements by Labour’s back benchers is the reason why Labour cannot be trusted with the economy. Labour must now convince the country that they can manage the country’s massively reduced public spending capacity for the foreseeable future. The Labour front bench may believe they can do this, but it is clear that their political paymasters (Unite and the GMB trade unions) and their socialist Labour backbenchers will not let them.

Politics and Economics

Labour’s Mansion Tax – too good to be true?

The left-leaning UK Labour party plans to raise a tax on all UK properties valued at over £2 million if it wins the next election.  This is socialist economics at its best.  A promise of  “free money” from the old mythical sources – closing tax loopholes, reducing tax evasion and increasing tax on somebody else.

In the Labour mind this somebody else is the “rich”, a vague, nebulous collection of immoral capitalists who are just sitting around waiting for Labour to increase their taxes.  A group that can always find more money whenever a bill is presented. The ultimate, infinite ATM.

Unfortunately, the “rich” are very few in numbers and highly mobile. They can live wherever they want.  And pay tax wherever they want. Consequently Labour’s numbers never add up. Perhaps they should ask Francois Hollande why not?  He has recent practical experience.

According to Labour the mansion tax will only hit those that can afford it and will raise £1.2 billion of somebody else’s money.

There are just over 108,000 homes in the UK valued at more than £2m. Of these, 85,461 are in London (88% of the total), and a further 14,261 are in the south-east. In Wales there are just 87 homes that would be liable for the tax. One London borough, Kensington and Chelsea, would pay about 35% of the tax in total.  As this policy is half-baked Labour has not revealed the precise rate it would charge.  But if the party reckons it will raise £1.2bn, then that sum spread equally over 108,000 homes suggests an average of around £12,000 per household.   Labour also promises to reintroduce the 50p tax rate, so a top-rate taxpayer would have to earn an additional £22,917 gross to cover the mansion tax.

My parents taught me that if something is too good to be true then it probably is.  The mansion tax is too good to be true and a dangerous distraction.

Here’s why:

In the UK we have an annual £100,000,000,000 deficit which is bloating our £1,400,000,000,000 + debt.

The current interest payments are greater than the defence budget.

This type of policy can only be considered as “tinkering” by a government with much bigger problems.  The maximum revenue would be a  £1.2 billion without accounting for the law of unintended consequences.

For example, the UK is desperate to attract high net worth individuals to the UK who will spend their money in our high streets, in our art galleries, in our car show rooms, on our housing market and in our private schools.  They employ builders, plumbers, decorators, teachers and domestic staff.  These purchases provide income, employment and in many cases VAT at 20%.

The type of people who would be caught by this mansion tax are exactly the people who are rich enough to live anywhere they like.  Dubai, Switzerland and numerous other countries world-wide will accept these people with open arms if we are clumsy in our attempts to unilaterally implement a mansion tax in a global market.  The only alternative is to convince the vast majority of the world’s countries to adopt a similar policy.  A global State with a global tax regime.  Good luck with that.

Those that can’t leave will be mostly forced to sell their property if Labour wins power next May.  These people are generally asset rich but cash poor and won’t be able to afford the £12,000 per year additional tax. The Institute for Fiscal Studies (IFS) estimates that one in four of those affected by a mansion tax are pensioners.  But who will buy a property at between £2 to £3 million if there is a huge hike in tax?  Better to buy something slightly cheaper.  In my case I’d buy a small comfortable flat in London and spend the rest on a nice cosy cottage in the country.  I’d have the best of both worlds and Labour wouldn’t raise any additional tax.  There would be a huge distortion in the housing market with nobody wanting certain properties because of the extra costs.

Labour is spending time and energy on a policy with very little financial upside and vast potential financial downside.  They should be racking their brains on how to pay down our £100,000,000,000 annual deficit so we can eventually start paying down our £1,400,000,000,000 + debt.

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.