The Labour Manifesto and the Myth of “Free Stuff”

I keep hearing and seeing  people saying “Labour just want to give everyone free stuff.” Let’s briefly take a look at this.

• Good Education for all benefits all of us and leads to greater prosperity for everyone;

• well funded health ensure that all of us benefit, being happier, more productive, and living more fulfilled lives. That benefits everyone;

• fairer benefits mean that if sickness, disability and unemployment should come, no one will be left destitute. We all benefit;

• higher minimum wage means more money to spend in the economy. We all benefit by this increase. 100 years ago even Henry Ford knew that if workers are paid more, they buy more of your goods. More jobs;

• mass machine automation is coming: we need to rethink how we structure work, payment and society. These will be in so called middle class jobs too, disrupting everything we know about how work, earnings, profit and reward are understood;

• water companies being owned by the regions means the profits get ploughed straight back in to those communities. Everyone benefits.

And so on.

The phrase “Free stuff” is utter nonsensical term. Everyone pays in one form of another, everyone benefits. If “free stuff” were even a true statement, then how would one describe the situation in Norway, Iceland, Denmark, Sweden, Germany and so on, where tax is higher, public services and ownership so much better provided for, and quality of life, productivity, and satisfaction is very high.

What a basket case.

Labour will enact a Robin Hood Tax on financial transactions

Modern “neoliberal” capitalism requires constantly increasing velocity and atomisation of transactions. A #robinhoodtax at 0.5% is nominal and fair. Capital cannot remain stateless and boarderless.

Consider what VAT is: a regressive tax on the transaction of purchasing goods set at 20% (with exceptions). 0.5% on financial transactions is fair and reasonable, will raise £26bn.

There is already a transaction tax, it’s just the proceeds for this go to the big financial institutions. Every transaction has a cost. That’s how modern capitalism works. 0.5% per transaction is effectively a micro payment. Remember these banks make hundreds of billions, and caused a world wide financial crash. It’s about time we stopped being so deferential to them and make capital contribute to the security of the societies they effectively leech off.

The Great GDP Fallacy

The economic figures for the UK released on 1st May caused economists and not least the government to exhale a sigh of relief. The UK had narrowly avoided a third technical recession because ‘Gross Domestic Product’ (GDP) had grown by 0.3%. Not quite trebles all round, but perhaps at least a thumbs up at any rate.

GDP is not an indicator of wealth, or consumption, or growth. It is a recording of transactions.

However, at the heart of mainstream neoclassical economics, and thus in our financial system, there lies some uncomfortable fallacies, or delusions, and they are very seductive. Like sirens they draw us into putting too much stall by metaphors used to explain the market; and the illusion that “the system” can be analysed as if it is like a physical system subject to scientific laws.

The Language Gap

‘When I use a word,’ Humpty Dumpty said, in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’
Through the Looking Glass, by Lewis Carroll

All sciences develop their own language, just as Humpty Dumpty invented his own meanings for words. They take words in common usage, but endow them with quite different technical meanings. But no other science plays so fast and loose with the English language as economics. (Keen: p.271)

“Efficiency” is one such term. “When economists say that the stock market is efficient, they [actually] mean that they believe the stock markets accurately price stocks on the basis of their unknown future earnings. [It shifts the meaning] from something that is obvious to something which is debatable. But that is not the end of the story, because to ‘prove’ that markets are efficient in this sense, economists make three bizarre assumptions:

  • “that all investors have identical expectations about the future prospects of all companies;
  • “that these identical expectations are correct; and
  • “that all investors have equal access to unlimited credit.

“Clearly, the only way these assumptions could hold would be if each and every stock market investor were God… Yet economists atsset that stock markets are ‘efficient,’ and dismiss criticism of these assumptions [by saying] that you can’t judge a theory by its assumptions. …this defence is bunk.” (Ibid.)

Neoclassical Market Liberalism

In my recent post, a reblog under the title ‘What is Neoliberalism,’ I explained that the free market is not simply ‘exchange’ or ‘trade’. I will summarise some of the points made:

  • the market is the primary process, and market transactions are the interaction;
  • economic transactions should take place in a framework which maximises the effect of each transaction on every other transaction;
  • there is a desire to intensify and expand the market, by increasing the number, frequency, repeatability, and formalisation of transactions. The ultimate (unreachable) goal of neoliberalism is a universe where every action of every being is a market transaction, conducted in competition with every other being and influencing every other transaction, with transactions occurring in an infinitely short time, and repeated at an infinitely fast rate;
  • new transaction-intensive markets are created on the model of the stock exchanges – electricity exchanges, telephone-minute exchanges. Typically there is no relationship between the growth in the number of transactions, and the underlying production;
  • new forms of auction are another method of creating transaction-intensive markets;
  • artificial transactions are created, to increase the number and intensity of transactions. Large-scale derivative trading is a typically neoliberal phenomenon, although financial derivatives have existed for centuries. It is possible to trade options on shares: but it is also possible to create options on these options, an accumulation of transaction on transaction;
  • there is contract expansionism and therefire transaction costs play an increasing role in the economy. For example in the privitisation of British Rail, there were 30,000 contracts and these had to be drafted by lawyers, and all the assessments have to be done by assessors. There is always some cost of competition, which increases as the intensity of transactions increases.

In even shorter bullet points, neoclassical free markets require and produce:

  • transaction maximalisation
  • maximalisation of volume of transactions (‘global flows’)
  • contract maximalisation
  • supplier/contractor maximalisation
  • conversion of most social acts into market transactions
  • artificial maximalisation of competition and stress
  • creation of quasi-markets
  • reduction of inter-transaction interval
  • maximalisation of parties to each transaction
  • maximalisation of reach and effect of each transaction
  • maximalisation of hire/fire transactions in the labour market (nominal turnover)
  • maximalisation of assessment factors, by which compliance with a contract is measured
  • reduction of the inter-assessment interval
  • creation of exaggerated or artificial assessment norms (‘audit society’)

I am hoping that you can already see where this is all going and its relationship to GDP.

What is it, what does it do?

  • Financial and economic markets are transactions. [If the references above to transactions didn’t pop-out at you, they sure should now!] GDP is not an indicator of wealth, or consumption, or growth. It is a recording of transactions. That is why, for instance, GDP in Japan rose after their tsunami. As people cleaned up the mess, they transacted more. (Sell)

So when we say that the UK’s GDP went up by 0.3%, we all perceive that the UK is growing, doing well. However, the metaphor and the system has deluded us. Of course, this sounds very different from “Britons transacted 0.3% more.” And free market economics artificially creates reason for there to be an increasing number transactions. Increased transactions are assumed to mean (and we already know that their meaning of assume is nothing like ours!) that output has increased, and thus the ‘product’ of the nation has increased.

Take the loyalty card of the global coffee chain Starbucks, for instance. It is a ‘pre-pay’ card system, but it can also be used on a mobile phone. I charge the card up in the app, and can pay for my coffee by scanning the bar code on the screen. A fantastically swift cashless interaction and far quicker than chip and pin. However, as was said previously, the amount of transactions has dramatically increased from the one transaction, handing over cash in exchange for the coffee,  to a complex chain:

  • I request that the loyalty card be charged with £10 on my phone app;
  • the app requests this amount from the issuer of my registered credit/debit card;
  • the card issuer charges a transaction fee for this process to Starbucks;
  • VISA charge a transaction fee to the issuer for using the VISA payment system and branding;
  • the £10 is then transferred from my bank account and there is yet another transaction fee applied (the banking system is a complex series of transaction in itself, most of them probably pointless in reality);
  • a Starbucks subsidiary company that runs the loyalty card scheme receive this money, and another transaction with its corresponding fee is registered;
  • when I scan the bar code, there is yet another flurry of transactions between subsidiaries and accounts, causing work for auditors and accountants, and transferring money via various other chains, through to their next temporary purgatory.

All of this ‘activity’ looks absolutely fantastic as far as economists and free marketeers are concerned, despite what looks like an utter waste to anyone on the outside looking in. In this surreal world of free market economics, if you were to pay for your shopping basket each individual item at a time, they would be in absolute glee and the GDP figures would look astounding if we all did that.

But it is and will always remain a fallacy.

Postscript

Sell:
The second of the twin delusions is to mathematicise the recording of the transactions. So, for instance, economic transactions such as GDP, which is a number, can be cross referenced with other numbers in the financial sphere, such as interest rates, or currency transactions.

“Interest rates fell and GDP went up so that must be an indication of XYZ ratio., especially when we look at the $A cross-rate ….”
[This] mathematicisation [of the system] creates the illusion that these correlations are necessary, like physical laws. That is far from inevitable. Except for the purely computer driven activity (admittedly becoming increasingly dominant) transactions are created by people. People have to decide that there is some shared value system and minimum level of trust to engage in a transact. I often think that the word is interesting: trans (across) act (an act). I wonder “across what?” The answer must be some shared belief about value. So when that belief starts to come apart, such as during the GFC, the artifice starts to fall to bits, the “system” starts to disintegrate.

The point about the twin delusions is that they take us a step away from the fact. The fact is that transactional systems are a human artifice conducted by humans. Humans are at its centre. And humans produce that wonderfully unpredictable thing: HUMAN BEHAVIOUR. They are self conscious, unpredictable, they feel more strongly about losing money than gaining it and so on.

Columbia University economist Jeffrey Sachs described an environment of Wall Street buying off politicians with their huge campaign contributions. In the 2012 election cycle, political contributions by the securities and investment sector totalled some $271.5 million, compared with $176 million in 2008, according to the Centre for Responsive Politics.

“I meet a lot of these people on Wall Street on a regular basis right now,” Sachs told the conference, hosted earlier this month by the nonprofit Global Interdependence Center. “I am going to put it very bluntly: I regard the moral environment as pathological. And I am talking about the human interactions . . . I’ve not seen anything like this, not felt it so palpably.”

Greed and Wall Street have been bedfellows as long as Wall Street has existed.

What is new is the way the “pathology” is concealed. It is easy to cover up greed and its immorality by either deploying a metaphor – “these are the way the capital “flows” are going and we have to invest accordingly – or by creating a mathematical equation. In both cases the activity is pushed one step away from what it is – an activity between humans – and so decoupled from anything human such as morality, or ethics or what is good for society. By being denuded of its human element, scientised, as it were, the question of personal responsibility is removed. In other words, the greed is not new. It is the sophistication of the cover up that is new.

“Sachs said these same people on Wall Street are out to make billions of dollars, and believe nothing should stop them from doing that. “They have no responsibility to pay taxes; they have no responsibility to their clients; they have no responsibility to people, to counterparties in transactions,” he said. “They are tough, greedy, aggressive and feel absolutely out of control in a quite literal sense, and they have gamed the system to a remarkable extent.”

Sachs’ outburst stunned the crowd. “There was an initial shudder, is how I would describe it, because they could feel the passion that was in the discussion,” said attendee Dennis Peacocke, head of Strategic Christian Services, a religious group that advocates on topics of economic and social justice. “Jeffery Sachs’ comments were full of conviction. I was applauding him for bringing values and ethics into the discussion.”

 

Bibliography

Books:
Keen, S. Debunking Economics.London: Zed Books, 2011.

Web pages:
Sell. “The insufferable conceit.” Macro Business. Published: 5 May 2013. Accessed: 5 May 2013. <http://www.macrobusiness.com.au/2013/05/the-insufferable-conceit>.

Basic standard of living vs. Long-term Incapacity Benefit

Do you earn enough for a basic standard of living?

The Minimum Income Standard for the UK shows how much money people need, so that they can buy things that members of the public think that everyone in the UK should be able to afford. Take the test at the link: http://www.minimumincome.org.uk/

Screen Shot 2013-04-05 at 08.28.42Now compare ‘minimum income standard’ with what someone on long term sickness/disability benefit actually gets. The hypothetical person has no realistic prospect of returning to work in the near future, yet their compensated income isn’t even subsistence income.

But whilst the public may think that someone on a wage should be able to afford these things, you may not. It could be said that they can do without alcohol and they don’t need to spend money on social activities because there are things that can be done for free. Someone can quite rightly claim that clothing isn’t something that has to be purchased every month either, especially if you’re careful with your clothes.

It is often mis represented that the case for higher benefits (in this context) is wanting parity with an earning standard of living. This was an exercise in demonstrating the current wide disparity by showing that £115 per week is the gap at two extremes (within the context). However the figures proposed at minimum working/earning standard of living are not wild or fanciful. The reality for all disabled and long term sickness benefit recipients is that the benefits are barely meeting their needs, let alone even partially their desires.

I think that the debate should be where between the two extremes should the income be set. So what is appropriate substance levels, bearing in mind that the disabled person has no fair reason to be excluded from normal participation in society? Also bearing in mind the difference between an Able bodied job seeker, vs what we are talking about: incapacitated through sickness/health or disability.

For the job seeker, a temporary exclusion from normal participation is acceptable due to the temporary nature of unemployment relative to employment, and the motivation that exists there in; however the long term sick/disabled faces exclusion from participation in cultural activities, or from affording enough variety in food and social activities, and the motivation factor is redundant in this respect.

The disabled or long term incapacitated person will also have generally higher costs of living associated with their incapacity. There also comes a point where all clothes eventually do fall apart, no matter how careful one is, or become tatty/ragged, yet the less than substance existence provides not much leeway for replacement of items clothing or household that break or wear down.

For international comparison, the income for disabled/sickness benefit in UK is 1/4 of that in Canada, and 1/2 of the European average.

And final, all social security will be uprated at 1% for next three years. As the benefits barely cover cost of all essentials, this means a very real drop in income as inflation increases.  Compared to someone on median wage of £21k, someone on the income provided here has currently £96pw. In fixed cash terms, after three years that will be equivalent to £66pw.

The point being: there is very little “fat” left to cut. Literally in some cases!

Why did Jesops go in to administration?

The high street camera retailer Jesops is the latest business to have entered administration, adding to a string of closures last year following the failure of high street names including Comet, JJB Sports, Game, Peacocks and Blacks Leisure.

According to many company sources, they are still dong a good trade, but it wasn’t making a profit. Why? What is the actual issue?

I think I can sum it up like this: The problem is the over leveraging coming from debt from constant restructuring coming from the constant need to extract more and more value from the business because of the pressure to create high returns for their shareholders, who is mainly made up of…. A BANK!

A History of Acquisitions

Let me try to explain, (with the help of the Guardian’s article.) Jesops was a family owned business. Then in 1996 Alan Jessop retired, and it was sold in a management buyout. In 2002, Dutch bank ABN Amro’s venture capital arm bought Jessops for £116 million. Can you see where this is going?

But the company began to struggle, narrowly avoiding administration in 2009 thanks to a deal with HSBC, which became its largest shareholder. The company has debts of £80m, nearly £30m of which is held by HSBC.

The decision by HSBC to step in last time prompted the then chief executive, Trevor Moore, to take comfort. “I don’t think it gets much more secure than being 47% owned by HSBC. They are committed to a long-term plan for Jessops – it is not about a quick turnaround or spin-out,” Moore said at the time.

While the firm achieved sales of £236m in the year to December 2012 it has not managed to trade profitably in any year since HSBC took its stake and it reported a £909,000 loss in its last published accounts for the year to 1 January 2012.

This is the crisis in capitalism. We are seeing it over and over again. If free markets, and the wisdom of self correcting markets, actually worked there could be no bubbles; but there have been too many, and the constant refinancing to pay for the pass the parcel take overs are a part of the blame.

I would recommend that you take a look at “The Cost of Inequality” by Stewart Lansley, where he tackles the mirage of wealth creation created by constant debt fuelled acquisitions and mergers. The suck out the value, replace it with debt and in the end spit out a husk of business unable to perform, going bust and relying on the state to fund all of the failures of the risk taking.

Jesops should not by any normal sane measures be failing. But there we are, and unless we do something to change the model of capitalism, there will be nothing left.

How much of your income tax is spent on unemployment?

Correction: The multiplier is actually 0.375 not 0.851.*

I don’t want even more of my hard-earned money taken in tax and spent on the unemployed or work-shy. My wages aren’t a bottomless pit for the unemployed. That’s MY MONEY they’re spending.

We’ve all heard things like this being said, maybe we’ve even said something similar ourselves. So just how much of your income tax is spent on unemployment?

I set out to work out the answer.

Government Revenue, Expenditure & Borrowing

In 2012, the total revenue from all forms of taxation and incomes was £591 bn.
(Source: Institute for Fiscal Studies)

Of this, taxation from personal income is shown in the table:

Revenue
Source
Amount
£ bn
% of total
revenue 
Income Tax 154.8 25.2
National Insurance 105.6 17.9
Total 260.4 43.1

Total government expenditure for 2012 was £695 bn.
The government borrowing  for 2012 was £103.5 bn.

Borrowing makes up 14.9% of all expenditure, leaving 85.1% of government spending coming from revenue. 37.5% of total expenditure by government is made up of revenue from personal income taxation, which means the remaining income from other revenue is 47.6%

* This produces the personal tax multiplier p of 0.375

p=(\frac{37.5}{100})

Spending on ‘unemployment’ (which includes all costs associated with unemployment) for 2012 was £8.4 bn. This is 1.2% of all expenditure.

Adjusting for spending from only personal taxation income, just 0.45% from direct tax goes on unemployment.

How much of your income tax is spent on unemployment?

I will use the average salary for this calculation. In 2012, the average salary or income for working was £26,000 per annum.

Taxable Income £17,895
Tax £3,578
National Insurance £2,208.96
Total Tax Paid £5786.96

So if 1% of the tax you pay goes on unemployment, that means that £26.04 of the average personal income tax paid to the government is spent on unemployment.

Or to put it another way: you spend 7p a day on unemployment.

Considering anyone of us could be made unemployed at any time for any reason, 7p a day for unemployment ‘insurance’ seems a very reasonable cost to pay.

In fact, one of the commenter below makes a very good point about how this also insures us against social unrest too.

Update: The Formula

I thought I would include the formula used in working out the final figures.

x=(\frac{t}{100})(sp)

t = total personal tax
s = percentage of government spending
p = government spending proportion from tax revenue multiplier = 0.375 x = tax paid that goes towards s

So, if one third of government spending is spend on all welfare,  I calculate that this is £716.13 for a person on £26,000, or £1.96 per day.

1625.15=(\frac{5786.96}{100})\times(33\times0.375)

I once thought that the Conservative-led coalition was a good thing. Then I opened my eyes.

I apologise if this is a bit of a rambling torrent, but perhaps I need to say: I didn’t always think the way I do now.

I actually believed the Tories back in 2010. I thought the coalition was a good thing. I thought they were the green, socially aware, de-toxified tories. I believed all the stuff they said. Then I started to look in to the figures, and I started to question.

The Tories started using really odd metaphors likening the economy to an indebted family, saying the overdraft was at its limit, or the credit card was run up. I know economics, and these images didn’t make sense. The economy of a sovereign country that has its own central bank and its own currency cannot be likened to family finances. Our debt is mostly money we owe to each other; even more importantly, our income mostly comes from selling things to each other. Your spending is my income, and my spending is your income. We also have historically low interest rates, and I know it’s best to borrow to fix the roof now, than wait until it caves in next year.

I also couldn’t forget recent history. Until 2008, the Tories said they were going to match Labour’s spending plans. We never heard them say Labour were borrowing too much, nor did we even know about this deficit thingy either. I do remember the banks and financiers getting in to trouble with their bundled-debt ratings and Lehman Brother’s collapsing in the US. And then the banks starting to crumble over here and demanding that the tax payer prop them up; we duly did because they were “too big to fail.”

Labour didn’t ruin the economy, financiers / bankers did. These super rich elite pretty much run the economy by commodotising everything, including food and health. Then they create more and more complex derivatives, until they themselves don’t even understand them, and it leads to trillions of pounds worth of loses. They helped pushed wages low so that profits could climb high. They controlled the wealth and in order to for the finance driven version of capitalism to survive, pushed every one further in to debt. Then they took it away. Companies still cannot borrow to invest to grow.

“The boom, not the slump, is the right time for austerity,” declared John Maynard Keynes 75 years ago. The austerity drive in Britain isn’t really about debt and deficits at all; it’s about using deficit panic as an excuse to dismantle social programs. I looked at the countries in Europe that have weathered the economic storm best, and near the top of the list I found big-government nations like Sweden and Austria.

You cannot rely on a free market. The economic experiment of the last 30 years, starting with Thatcher, has been a failure. The bottom 50% of the UK own less than 6% of the wealth, while the top 1% own over 40% of the nations wealth. The link between GDP and wages was severed as long back as the late 80s, yet it took until 2008 to mirror the horrific crash of 1929. Back then the world took control of capitalism and the financiers, but now for the super rich it seems it is business as usual.

Until we take hold of capitalism and keep it under control again, like the post war period up to the mid 70s (read keynes) then we’re just going to get more inequality, which leads to this kind of thing, and a huge gulf between super rich, workers, poor … at present the labourers are increasing in productivity, but wages are being kept low, so profits can become higher, so executives can get richer, and take it all abroad.

The Tories keep saying they are reducing the debt, but the autumn budget we just had will see debt increase from 70% of GDP to near 80% over the next 3 years. They have already spent more than Labour had planned to under their proposals. Can’t people see that the Tories are bare faced liars? “We won’t reorganise the NHS,” resulted in reorganising the NHS! And on it goes.

So, I started to open my eyes to the language of divide-and-rule the Tories were using against the sick, disabled and poor; I saw their broken promises;

And I decided, they stink.