Left Outside

What has austerity cost *me*? Half a trillion fucking dollars!

I’m me, but I’m also a fraction of a cohort. The word always makes me thinks of the Visigoths sacking Rome, but we’re more likely to be looking for jobs at Caffe Nero. The Great Recession has cost us a lot in terms of lost current GDP, but it casts a much longer shadow one which will blight people my age for the rest of our lives.

Simon Wren-Lewis points me to a Vox article which tries to quantify the cost of austerity in terms of lost GDP, 3% of GDP. Although this is couched in caveats it is close to Simon’s own calculations that austerity has led to GDP being 2% lower today. This implies an average cost per UK household of £3,500 over three years (that’s £93bn so far).

taylor fig1 19 jul

I’m less confident that austerity is the culprit here. Incompetence and ignorance at the Bank of England is far more likely to blame. Either way, the failure to get the economy working again is an ongoing tragedy of almost inconceivable awfulness. Simon concludes:

Although all governments like to give the impression that they can have a big impact on people’s prosperity, few actually do. These numbers suggest that the current UK government has managed to do so, but unfortunately by making us all poorer.

Quantifying things is good. Turning those figures into graphs is better because I’m a visual thinker. But I still think Simon does a disservice in lowballing the harm that this mini depression is doing. Sadly these harms aren’t chronic, they’re acute. They’re hitting the young and the unemployed and that needs emphasising.

I’ll outsource my take on unemployment to Chris. In utilitarian terms is George Osborne worse than the UK’s worse serial killer? Answers on a postcard.

I want to concentrate on me (young people today are so narcissistic…) because I’ve written about this before. There aren’t just current costs to a depression: they scar people. The term for this is hysteresis. This refers to the damage done to people forced to stay out, or delay entering, the labour force.

Two years ago, I wrote a response to the question “what good is macroeconomics?” Roughly $100,000 is the answer. A one percentage increase in the unemployment decreases initial wages and worsens job match. Your job sucks and you’re in the wrong one. This has effects for the rest of your life, $100,000 of effects.

Now we run the numbers for the UK.

Pessimistically, we’ll assume that the new natural rate of unemployment is 6.5%. That there has been some long standing damage done to the UK economy. Heroically, we’ll assume we’ll get unemployment down from almost 8% now by the next election. Dating austerity to mid-2010, that means that we’ll have had half of 2010 with 8% unemployment, the whole of 2011, 2012, and 2013 too, maybe 7% in 2014, and a drop to 6.5% by May 2015.

Across those five years we’ll have 4.3 million people turn 21. If a 1% elevation in unemployment imposes a lifetime cost of $100,000, for simplicity I’ll assume that unemployment at  1.5% imposes a lifetime cost of $150,000. That’s probably overly pessimistic, but it makes the maths easier.

We multiply  out the elevated unemployment rate, the adjusted lifetime cost and the 800,000 or so 21 year olds coming of age in each year and voila. Austerity is imposing £555,817,500,000 lifetime cost on the young of this country. That’s over half a trillion dollars! I had to double check the numbers but, yup, that seems about right to me across the lifetime of a whole cohort.

It represents half a trillion dollars of ideas which people never had, of coffees never made, of children never taught, of diseases not cured and houses not built. This colossal heap of lost human creativity and perspiration is the real cost of the Great Recession.

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[1] A link to a part of the ONS website which is actually useful and user friendly! Surely this is a time of miracles.

Filed under: History, Economics, , ,

The Tories’ Plan to sink the (non)recovery

Oh come on guys! Are you doing this specifically to annoy me?

George Osborne should introduce emergency tax breaks paid for by welfare cuts to “shock” the UK economy back to life,  according to the Conservative MP Liam FoxFox called for capital gains tax, currently set at 28%, to be suspended and reintroduced after three years at 10%. These should be paid for by benefit cuts, said Fox… “We need to have a look at everything that we have in terms of paternity leave and all the other things that are there.” He added: “With the sort of economic problems that we face in the UK it is irrational and unreasonable to expect that those in work should keep all their social benefits and workplace benefits should be protected, at the cost of making the next generation unemployed. That is not a sustainable generational compact.”

Liam Fox is proposing a policy which will make the slump worse, not better. Sadly, Liam Fox has chosen to drop this clanger behind the Times paywall so I can’t find the exact quotes or policy. Presuming, rather generously, this is not just a political salvo and is a thought through policy. On its own terms it completely fails, let me explain why.

Let’s leave aside the unsubtle class war and the political manoeuvring – other blogs do that better – and assume this is a serious policy. What effect would it have?

I want to ignore the small details (like fathers not seeing their children grow up or people pushed into poverty) and focus on the macroeconomics, because that is the sort of hip, cool blog this has become daddio. Fox is portraying this as a “shock” treatment to promote a rapid economic recovery. This is bullshit, in the classic sense of the word. Fox is indifferent to whether it is true, it just sounds good, so he says it. The policy is a jobs killer.

To understand why just think of Fox as the anti-Simon Wren-Lewis. David proposes a balanced budget multiplier. If the problem today is too little demand and a fragile debt market then the solution is normally simple – cut interest rates. At the moment interest rates are at zero so some help from fiscal policy may be necessary. [1] Normally this refers to deficit spending, but if you’re genuinely worried about debt this is unacceptable. You’re left with one option, raise spending and raise taxes. In doing so you increase demand because, although all the money is spent now, some of the money taken as taxes comes out of savings, not consumption. This means aggregate  consumption increases temporarily. No increase in debt, but more demand.

Liam Fox is demanding the opposite cut taxes and cut spending. In his scheme welfare payments are cut; this self evidently leads to less spending because nearly all benefits are spent. They are cut to give businesses and the wealthy a tax cut, some of which will be saved. We know lots of it will be saved because firms are already sitting on a cashpile of £64bn, which they are not spending. So if make the safe assumption that Liam Fox is proposing this policy to be fiscally neutral, then there will be no increase in debt, but there will be less demand.

Quite how a policy which reduces aggregate demand is meant to “shock” the UK economy into recovery, I don’t know. Thus I conclude: Liam Fox, bullshitter and class warrior.

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[1] The Bank of England could theoretically offset a policy this stupid, but will they? Well, with the most incompetent central banker in Britain’s history behind the tiller, I’m not confident enough to try. Fox is either a brave man or an idiot…draw your own conclusions from that little thought experiment.

Filed under: Economics, Politics, , , , ,

Why you can’t rely on the railways: Institutional constrains to fiscal stimulus

The timing of infrastructure spending should be strongly countercyclical so government can employ people without crowding out private sector activity and provide jobs when they are scarce. But, as Chris shows, government investment is in fact rarely strongly countercyclical. Simon Wren-Lewis is understandably annoyed that David Cameron is true to form in this respect. There will be no economic growth this year, borrowing is cheap and yet there will be no new infrastructure spending.

The coalition has announced £9bn of rail infrastructure spending, which is great – gentlemen, get your rivet guns ready! – apart from the fact the spending won’t hit until 2014 (and most of it has already been announced). This is because Network Rail’s investment in the rail industry takes place over five years plans control periods. We are in the middle of control period 4, which runs from 2009 to 2014, and we have just had the announcement for work to take place in control period 5, from 2014 to 2019.

It isn’t a physical problem which has pushed investment to 2014 it one of organisation. The are many shovel ready projects in the rail industry. Newark could use a flyover to ease congestion, electrifying the Barking to Gospel Oak line would open a freight corridor linking east and north London, the Welsh valleys which are to be electrified have needed more investment for decades.

So while there are rivet gun ready projects, we have to concede that investing in rail does takes a lot of planning. Since privatisation that planning has taken a very particular form. Every five year the DfT announce what infrastructure they expect Network Rail to deliver and the Office for Rail Regulation decide whether or not that is realistic given the industry’s business constraints. There is tooing and froing as they negotiate and they eventually settle on the work to be done.

It would be possible to bring forward infrastructure spending but you would have to pass new legislation to do so. The Office of Rail Regulation would need to look the other way while you stuff money and project managers down Network Rail’s throat. Gordon Brown called himself a restless reformer, rail has felt the worst of a political culture that makes a virtue of constant turmoil.

After more than two decades of regular reorganisations and continuous micromangement, there is no industry more in need of certainty over funding, infrastructure and organisation than rail.  The final round of organisation reform, infrastructure spending, spending priorities and fare structure may finally leave us with something approaching a decent railway by the end of the decade.

Fiscal policy is just one aspect of what a Government does. Countercyclical investment projects can and should be prepared, they could and should have been included in a separate schedule of possible work for this control period, but they were not. The lesson here is that where institutions have been established after hard bargained the feasibility of idiosyncratic countercyclical spending is reduced.

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PS This bargaining determined capacity for idiosyncratic countercyclical spending explains the lack of countercyclical investment before Thatcher discussed by Chris. Before the 1980s institutions were much more rigid; labour unions demanded more predictable working patterns and there was less entry and exit of firms and facilities with the greater prevalence of state owned industries. This is rather a counter intuitive result given the trumpeting of China’s countercyclical prowess.

Filed under: Economics, Politics, , , , , , ,

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