our economy

What's the real number of jobless people in Britain?

Fri, 19 Nov 2010 18:55:00 -0800

The number of jobless is double the number of unemployed in Britain. See the breakdown by region and the costs of getting people back to work. Read more on guardian.co.uk

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Crises of capitalism by David Harvey and RSA Animate

Tue, 17 Aug 2010 02:25:00 -0700

The animation is brilliant! You can see David's full lecture on YouTube.

I am also including below a related piece published last year by me on the 'open democracy' website.

Crisis in the real economy
A crisis in the US real economy marked by growing unemployment and failing businesses is not a product of the current financial crisis. In fact, the financial crisis was but a symptom of a long brewing systemic crisis in the real economy. These claims are made separately by economists Richard Wollf (Univ. of Massachussetts, Amherst) and Ravi Batra (Southern Methodist University, Dallas). They propose an alternative diagnosis of the current economic crisis. If their analysis is correct, fixing the financial system might just deal with one of the symptoms but not the root cause of a deeper economic malaise. Given the amount of public money that is being thrown at fighting the economic downturn, it is critical to consider alternative explanations of current economic problems in order to devise strategies that make the best use of scarce resources.

Housing Bubble
The most widely accepted diagnosis of the current financial and economic crisis is that it started with the housing bubble in the US. This in turn resulted from irresponsible sub-prime mortgage lending coupled with unregulated and reckless financial engineering. When the housing bubble burst, banks found themselves holding heaps of unsecured debts packaged into complex financial products that could no longer find new buyers. Financial institutions suspected each other to be in a precarious financial position similar to their own and inter-bank lending came to a halt. Several of these institutions went bankrupt or would have gone down that route if public money ($2.98 trillion at last count) had not bailed them out.

Wage-Productivity Gap
Wollf and Batra do not deny the role of housing bubble and financial malpractices in triggering the financial collapse. What they seem to suggest is that there is a need to explore the chain of causation further. Doing so in their analysis reveals that a wage-productivity gap since the last three decades in the US created a systemic imbalance between aggregate demand and aggregate supply in the economy. Since the early 1970s wages of employees in the US have not risen at the same rate as their productivity (output per hour). In fact, real wages of roughly 80% of the US workforce have been stagnating for more than three decades. On the other hand, productivity has been increasing rapidly due to technological innovation and improvement in human skill levels. Now wages are a key lever for creating demand in the economy whereas productivity drives the increase in supply. In other words, workers' wages need to increase in order to absorb the increase in supply of goods that results from increased productivity. Yet, the wage-productivity gap has now existed for nearly 35 years.

The consequence of this imbalance is that demand for goods and services required to keep up with supply is created in the short term by creating new debt. The housing bubble was a product of this demand-supply disequilibrium. Since real wages are not rising in step with productivity, people could only consume the increased supply of goods and services by taking help of cheap and easy credit. But after the housing bubble burst, credit is no longer easily available and levels of debt have been exposed to be unsustainable. Businesses realize that their goods will not be sold, profits will decline and they are laying off people and in many cases closing shop. Due to the wage-productivity gap, this economic decline may have happened even in the absence of a mortgage driven crisis. Then again, the housing bubble may have simply postponed the real economy crisis that was imminent, and in the process exacerbated the systemic tensions between demand and supply in the economy.

Where did the profits go?
So why have wages not kept step with productivity despite what some have called a "golden era of profitability"? Where have the profits from the productivity growth gone? A paper by Gordon and Dew-Becker, economists from Northwestern University, found "that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth...[whereas] the bottom 90 percent of the income distribution fell behind or even were left out of the productivity gains entirely" (italics in original). Additionally, the wage share of national income is declining in the US, while the share going to corporate profits has increased from 17.7% in 2000 to 20.9% in 2005. The European Trade Union Congress complains of a widening wage-productivity gap in the eurozone as well.

It appears that "the killing fields of inequality" (as Göran Therborn puts it in his recent piece) and the relentless pursuit of profits by many businesses are critically undermining the primary source of demand in the economy - its workers' wages. As more people lose their jobs in the recession, there is further downward pressure on consumer demand. Making credit available to businesses alone is not likely to reverse the unemployment trend since businesses will invest only when they have confidence in potential returns on their investment. Lack of demand for goods and services in the economy, however, does not give that confidence. It is a vicious cycle but one that can be broken by restructuring the economic system to distribute the wealth more equitably. And unless this fundamental factor is addressed, according to Wollf and Batra, it is hard to see a long term economic recovery.

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What recession? A few pockets haven't felt warmer...

Mon, 16 Aug 2010 06:46:00 -0700

While the economy is still struggling to come to grips with the severe recession that hit the UK in 2007-08, real wages for most workers have declined. But the average pay package among the UK's top executives increased by £500,000 in the past financial year, according to a report by employment consultancy Hewitt New Bridge Street.

The report says that the pay hike was partly due to weak targets set for the bosses but primarily due to an "improvement in economic conditions". At the same time, wages of a third of the employees of blue chip companies still remain static since the 2009 wage freeze for 60% of the workforce.

I'm sure that the workers of many of these companies would like to know why gains from these improved conditions could not be shared with them, at a time when reduced purchasing power is having a major impact on consumer confidence.

Pay for performance?
Executive pay over the last two years has risen on average by 5% despite a 1% fall in share prices over the same period. In fact, in the last ten years the salary packages for executives in the FTSE 100 companies have quadrupled while share prices have declined showing no relation of their pay to a key performance indicator.

Why such massive pay increases then?
CEO pay packages at top firms are set by a board of directors which often comprises of executives from other similar companies. The CEOs in question may be serving or are likely to serve on other companies' boards performing a similar function. It is a small circle where "you scratch my back and I'll scratch yours" is an indulging self-serving game. Also, the compensation is recommended by consultancy firms who try to match what is offered by other companies. Most importantly though, the consultancy firms are hired by the same elite group and the consultants have every reason not to upset their paymasters.

Why do shareholders not object?
Some shareholders do object. Just recently, 47% of the largest supermarket Tesco's shareholders revolted against boardroom pay at their annual meeting, and it was not the only instance this year. However, in many cases where large shareholders like banks, pension and mutual funds are involved, they may not object since their own executives would not like to draw attention to their high salary packages. In any case, shareholder objections in most cases are not binding on the board of directors and cannot overturn directors' decisions on compensation plans.

Surely, some CEOs deserve their million pounds annual compensation packages?
I would not question the absolute figures but if the executives are paid 100s of times relative to the average worker, it certainly seems obscene and excessive.

Let's say that the profits of a company double under a CEO. Should all the credit go to the CEO alone? What of other workers who must have contributed to the growth? What about suitable market conditions playing a role? What if the growth in profits relative to the previous term were only an indication of the poor performance by the previous executive?

Leadership matters immensely but so does the contribution of those who are led. There's no easy way to numerically compare a CEOs talent and contribution compared to the rest of the workforce. But a fair society and a fair economic system would recognise the contribution of all workers in the economy and not tolerate the grotesque levels of income and wealth inequality that are prevalent today.

Years of research show significant social costs of excessive inequality. And the latest report on inequality shows that the UK is now one of the most unequal among the economically developed countries.

While some inequality may be justified to provide incentives for performance and create efficiencies in the economy, maximum wage level must be tied to a reasonable proportion of the minimum wage, say 10-20 times, to ensure that the gains of economic growth are distributed fairly across the population.

Otherwise we have an absurd system where "to make the rich work harder you pay them more, to make the poor work harder you pay them less – or so it seems," in the words of Billy Hayes, the general secretary of the Communication Workers' Union.

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Unemployment dips but the numbers are far from comforting

Thu, 12 Aug 2010 02:17:00 -0700

Unemployment in the UK declined by 49,000 to 2.46m in the last quarter. However, the number of claimants seeking jobseeker's allowance fell by only 3,800 which is less than what many economists had expected, raising concerns about a slower than expected recovery.

Here are some other numbers to take home from recent reports and statistics on the UK job market:

The number of 18 to 24 years old who are out of jobs for two or more years increased by 42% over the last year to reach 72,000. In the same age group, numbers of those unemployed for over a year has increased from 104,000 to 184,000. According to the Recruitment and Employment Confederation's Youth Employment Taskforce, the direct cost of youth unemployment is £4.7bn a year.
Jobseekers over the age of 50 are finding it particularly difficult to get back into the market. Numbers of those out of job for more than 12 months has increased by 52% over a year to reach 170,000, the worst numbers in a decade. While the government plans to extend the retirement age limit, the job market is struggling to find place for a number of over-50 workers.
An extra 40,000 people over the age of 65 have taken up jobs amidst fears of reductions in expected pensions.
According to the Chartered Institute of Personnel and Development, it is likely that private sector job creation will not keep pace with public sector cuts for at least the next two years, as nearly one-third of employers, among the 600 surveyed across all sectors, were looking to downsize in the coming three months.
Another survey among businesses in Wales shows that around 84% of those businesses have no plans to recruit this year.
Scotland saw a rise in unemployment by 34,000 over the last quarter to reach 223,000, or an 8.4% unemployment rate compared to 7.8% for the UK.
Vacancies have increased by 9,000 over the quarter to reach 481,000.
Real wages continue to decline among those employed as earnings growth rate falls behind the rate of inflation.

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News digest 9-10 Aug 2010

Tue, 10 Aug 2010 08:47:00 -0700

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25p an hour, 16 hrs a day

Mon, 09 Aug 2010 03:11:00 -0700

Amidst recent protests by garment workers in Bangladesh and Cambodia for a living wage and decent working conditions, a new sweatshop case was uncovered by the Observer at Indian factories where workers are paid 25p an hour and forced to work overtime to manufacture clothes for M&S, Next and Gap. A few workers who voiced complaints were beaten up and fired from their jobs. This story from the garment industry is nothing new nor is it surprising anymore. But what are we going to do about it?

I suspect, many of us have come to accept what mainstream economists like Paul Krugman, Jagdish Bhagwati, and Jeffrey Sachs have preached for too long. "Bad jobs at bad wages are better than no jobs at all".

At the time of slavery, these economists would have given a similar argument for slavery being better than no jobs at all. By their logic, husbands can perpetrate violence on their wives, as long as they provide them shelter and food, especially if their wives are unskilled and cannot get a job due to market or social constraints. Just because slaves would "voluntarily" choose slavery over starvation, and oppressed wives would continue to suffer their husbands instead of ending up with prostitution, does it justify the status quo? In fact, there is often a worse option to compare with when attempting to justifiy the most horrific and exploitative practices.

We should know better than find comfort in the ethically deviant arguments supporting sweatshops. Due to civil society campaign pressures, many big companies in the UK, including M&S, Next and Gap, have signed up to a code of conduct called the Ethical Trading Initiative. However, this form of self-regulation has not improved labour conditions by much so far.

Most of the global garment retailers work through a network of sub-contractors. This setup allows the retailers to distance themselves from unfair practices of their sub-contractors. On the one hand, the retailers may ask their sub-contractors to adhere to labour standards. But on the other hand, they apply intense pressure on these sub-contractors to reduce costs. Competition is fierce among the sub-contractors and they know that costs are the main factor in securing contracts. Labour standards therefore get a short shrift.

The greatest power consumers can exercise in this struggle for labour rights is by discriminating in favour of ethical retailers and manufacturers. However, there are serious constraints in doing so. Most people's income is in some proportion to the overall price of goods in the market. This makes it difficult for a large section of the population on average income to pay a significantly higher price for ethically produced clothing.

Nevertheless, big social changes and victories in the fight for human rights have only come at the cost of personal sacrifices. If we all can do our bit, according to our respective financial capacities, we can send a strong message to the retailers. Looking at the alternatives is a good start.

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News digest 5-6 Aug 2010

Mon, 09 Aug 2010 02:53:00 -0700

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Server outage

Thu, 05 Aug 2010 14:37:00 -0700

Just in case you were wondering why you couldn't reach this website for nearly a day, this blog's server was under siege due to 'denial-of-service' attacks. Normal service should resume now. In the future, you can also read this blog at: http://www.oureconomy.co.uk and http://oureconomy.posterous.com

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News digest 3-4 Aug 2010

Thu, 05 Aug 2010 14:35:00 -0700

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Why do banks need to be forced to lend money to businesses?

Wed, 04 Aug 2010 03:54:00 -0700

British banks are being urged to lend more to small businesses. As some banks return to profit, the government and many media commentators are demanding that the banks must avoid diverting bailout funds and profits to increase bonuses and salaries for its employees. Instead businesses should be helped to create more jobs. But why do we need to beg banks to lend money? Is it not something that they would do anyway if the odds were in favour of getting good returns on the loans they would make?

A reason for the sub-prime mortgage crisis was that the banks were guilty of carelessly lending to people who could not pay back their loans. Also, the banks were mindlessly betting for profit on the likelihood of defaults on such loans. After the causes of the crisis came to light, the banks were expected to learn from these mistakes. They were rightly asked to keep more reserve capital in proportion to the loans they make and do their homework well before lending to prospective borrowers.

So the rationale behind banks' reluctance to lend money to businesses may very well be that in the tough economic climate with consumer demand suffering due to job losses, failing businesses and declining real wages, many prospective clients of the banks are not seen to be creditworthy. These businesses may not have assets or business plans to guarantee safe returns. Or the banks do not believe that they will make enough returns on the money lent to small businesses in comparison to other profitable ventures in speculative markets.

If the borrowers are not creditworthy, the banks are right not to put massive sums of public money at risk again. If, however, investment in speculative markets provides better returns than investing capital in the real economy, then the government must enact regulations to disincentivize influx of money into speculation. The US government's financial reforms have stopped short of that. Global banking reforms are not looking 'tough' enough either. We have to wait and see the how the regulatory reforms proposed by the coalition government in the UK shape up.

There is a lot of justified anger against banks for filling up the coffers of their top-level management despite them being responsible for a number of bad decisions that led to the current crisis. The managers take little personal risk as public money underwrites their business.

If the government is really serious about dealing with management profiteering, it must stop barking at the banks or begging them to change their unscrupulous ways. It has full powers and indeed the responsibility to enact laws to cap salaries and bonuses of high ranking bank managers in order to make funds available for viable businesses. But by forcing banks to lend without adequate demand for business loans or creditworthiness in the market, the government may simply be leading the economy into the makings of another credit default crisis.

If small businesses, especially locally oriented ones were to prosper, they need a boost in local consumer spending. This spending must increase, not by increasing consumer debt, but by increasing real wages of people in employment. Many big businesses in the UK are in fact running financial surpluses and this must be shared among its workers whose wages form the backbone of consumer demand in the economy.

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News digest 2 Aug 2010

Tue, 03 Aug 2010 09:53:00 -0700

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Welfare reforms in the UK: whose pain?

Mon, 02 Aug 2010 10:01:00 -0700

For long, the Conservatives have lamented about a welfare system in the UK which does not provide those on benefits enough incentives to take up paid work. To remedy that, Iain Duncan Smith, the Secretary of State for Work and Pensions, has announced plans for sweeping changes in the current benefits system.

In the new system, people who opt to work will keep 40p of every additional £1 they earn, instead of just 4.5p they get to keep under the current rules. All the different benefits such as child, housing, incapacity, unemployment and others will be brought under a single umbrella 'credit' to reduce administrative costs and make it easier for claimants to navigate the system. People's benefits will not be reduced based on the number of hours worked, but on the amount they earn. This should allow some to gain some work experience on low pay without benefits being taken away.

So what is not to like? Critics are apprehensive about how cutting certain benefits will affect the poor when full details of the welfare reform are made available later in the autumn. Already, reductions in housing benefits are sure to hit the most vulnerable. For instance, check out how a single mother will struggle to make ends meet after the proposed housing benefit reductions. In fact, the government has been legally challenged for not doing a gender equality assessment of their budget cuts and putting the brunt of pain from benefit cuts, around 72% of the £8bn proposed savings, on women.

If the government really wants to move people from welfare to work, they need to create jobs in an economy with only 72% employed. But so far all we know is that nearly £1.3m additional jobs will be lost as a result of budget cuts. There are no signs of the private sector picking up on those losses yet. The current half a million vacancies in the economy need to contend with at least 5 people for each of those vacancies. This is not taking into account that many of the unemployed may not be skilled for the available jobs, unable to move due to family commitments, unable to retrain due to lack of financial resources or simply the lack of talent and ability.

Despite some reservations, many will welcome the professed principles behind the proposed welfare reform which aims to simplify the system, cut costs, and get people back to work. In nudging people out of the benefits trap, however, the government must make sure that the poor and vulnerable do not fall deeper into the poverty trap.

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News digest 31 July

Mon, 02 Aug 2010 06:24:00 -0700

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How secure is Britain's food supply?

Sat, 31 Jul 2010 07:34:00 -0700

In September 2000 a lorry strike in Britain threatened the country's food supply as large supermarket owners rushed to the government to inform that they only had stock for three additional days. Ten years on, the situation hasn't improved by much. The country's major supermarkets now have 8-10 days of food stock at a time. What are the threats to our food supply system and is the system resilient enough to withstand the shocks?

Andrew Opie, of the British Retail Consortium and Tim Lang, professor of food policy at City University, discuss the question in a BBC podcast.

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News digest 29 July 2010

Fri, 30 Jul 2010 07:49:00 -0700

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Speculative land grabbing

Thu, 29 Jul 2010 15:11:00 -0700

A World Bank report leaked to the Financial Times raises concern that wealthy investors are targeting arable land in countries, especially African, with poor governance laws to benefit from rising commodity prices and demand for biofuels. Also, countries like China and Saudi Arabia are buying prime agricultural land in Africa to ensure food security for their people.

In many cases promises for development of land and investment in infrastructure and job creation are not fulfilled by the buyers. The purchase is often for speculative gains rather than increasing the productive potential of the land.

Poor farmers in these countries are losing out on their local resources and their governments seem to be more keen on making fast money rather than protecting livelihoods and local community interests. Although records are not very reliable, the report suggests that land transfers included, for instance, as many as 3.9 million hectares in Sudan and 1.2 million in Ethiopia between 2004 and 2009.

For more details, readers are urged to look at the website dedicated to raising awareness on the issue of farmland grab in the developing countries. John Vidal of The Observer also wrote an investigative piece on this subject.

And who owns the land in Britain?
Reading about this issue reminded me of the stark land inequality in Britain that was highlighted by the book "Who owns Britain" by Kevin Cahill and also a BBC programme based on the book titled "Whose Britain is it anyway?".

Here is a list of key points about land ownership in Britain:

69% of the land is owned by just 0.6% of the population, and nearly 30% is still owned by the aristocracy.
90% of the British population lives on under 10% of the land.
While ordinary people pay council taxes and have to deal with very high property costs due to "apparent" scarcity of building land, large land owners are exempt from any taxes on land ownership. On the contrary, they enjoy enormous taxpayer funded subsidies simply for owning land designated as "agricultural", even when they often do not use the land productively for agriculture.
We still do not know who owns up to 50% of the land in England and Wales as there are no records about it in the Land Registry. Clearly, many among the landed class strongly oppose making this information available to the general public.

So far the aristocrats and other large land owners have prevailed in maintaining the concentration of ownership. Countryside land has been more or less beyond the means of low or even middle-income people. But there are initiatives like Landroots that are attempting co-operative ownership models to change that and make rural land more accessible for all.

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News digest 28 July 2010

Thu, 29 Jul 2010 04:25:00 -0700

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Big Four audit firms under scrutiny for their role in the financial crisis

Wed, 28 Jul 2010 10:32:00 -0700

The Big Four audit firms - PricewaterhouseCoopers, Deloitte, Ernst & Young, and KPMG - are to be questioned by the House of Lords about their role in the current financial crisis. There are concerns that the auditors failed to alert investors as well as regulators about the risks and warning signals that must have been evident during their audit of many of the financial institutions that collapsed or had to be bailed out.

For instance, Ernst & Young (E&Y) was accused by a US court bankruptcy examiner of aiding Lehman Brothers in hiding $50 billion of debt using accounting tricks so that Lehman's credit rating was not adversely affected. E&Y earned $110 million in fees over 2004 to 2007 for its auditing work at Lehmans. When the business is so rewarding with the client, it may be easy to overlook risks and break bad news that may damage the cosy relationship. Bear Stearns and other firms also received a clean bill of health from their audit firms shortly before they reached their credit dead end.

Since the big accounting scandals of Enron and Worldcom, many more cases have come to light. The biggest among them was when KPMG was made to pay $456 million for "criminal violations" in a tax shelter fraud case.

A 2003 report also looks at the audit firms' controversial roles in public-private partnerships. They advise government bodies in handing out contracts, they advise bidders, and in some cases bid for contracts themselves, all at the same time.

The problems are systemic. There are inherent conflict of interest issues when the supposed accounting regulator is financially dependent on its clients for business. The problem is amplified when the audit firms also provide advisory and non-audit consulting services to their clients.

Perhaps, independent third-party auditors paid by an autonomous government body should be responsible for audit? The companies could be charged an audit fee based on their revenues or other relevant parameters by the government body. This approach may also deal with the market concentration of the Big Four audit firms (97% of FTSE 350), the lack of competition and choice in the industry and the significant barriers to entry for mid-size firms in attracting top tier clients.

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Vote for 'Our Economy'

Wed, 28 Jul 2010 08:40:00 -0700

Please vote for "OurEconomy.co.uk" in the 2010 UK best blogs poll.

Just three days left. You can email your top ten (but not less than five) favourite UK blogs to toptenblogs@totalpolitics.com. Find other interesting political blogs from last year's results.

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News digest 27 July 2010

Wed, 28 Jul 2010 08:37:00 -0700

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