economic situation is dire

[AshVilla]

Were all in this together remember

I predict a riot

Probably a couple of months after those welfare/benefit cuts kick in when is it next year?

[peterms]

Ahh good old Walrasian equilibrium at work, I wonder what the comparative statics of the micro guys are telling them, or the DSGE models of the macro-men, my guess is **** all.

I don't think any harm to the discipline of economics would be done if most of the equilibrium 'thinking' were thrown out all together. Macro would be better off with a balance sheet approach and agent based modelling.

There's an interview with Andy Haldane which is quite interesting on models and their failure. He doesn't mention Paul Ormerod by name, but he's one of the people who have been writing about network effects, which people like Steve Keen are picking up on.

[blandy]

Incidentally, here's someone who announces himself as a tory with a few comments about what Osborne and Cameron keep saying about debt and deficits.

Worth posting in its entirety

"A lie gets halfway around the world before the truth has a chance to get its pants on"

- Winston Churchill

As a Conservative I have no pleasure in exposing David Cameron's deficit claims. However, as long as the party continues to talk down the economy via the blame game, confidence will not be given an opportunity to return. For it is an undeniable and inescapable economic fact: without confidence and certainty there can be no real growth.

Below are the three deficit claims - the mess. The evidence comes from the IMF, OECD, OBR, HM Treasury, ONS and even George Osborne. The claims put into context are:

CLAIM 1

The last government left the biggest debt in the developed world.

After continuously stating the UK had the biggest debt in the world George Osborne admits to the Treasury Select Committee that he did not know the UK had the lowest debt in the G7? http://www.youtube.com/watch?feature=player_embedded&v=AQYfPhtWpy8: Also, confirmed by the OECD Those who use cash terms (instead of percentages) do so to scare, mislead and give half the story.

Its common sense, in cash terms a millionaire's debt would be greater than most people. Therefore, the UK would have a higher debt and deficit than most countries because, we are the sixth largest economy. Hence, its laughable to compare UK's debt and deficit with Tuvalu's who only have a GDP/Income of £24 million whilst, the UK's income is £1.7 Trillion.

Finally, Labour in 1997 inherited a debt of 42% of GDP. By the start of the global banking crises 2008 the debt had fallen to 35% - a near 22% reduction page 6 ONS Surprisingly, a debt of 42% was not seen as a major problem and yet at 35% the sky was falling down?

CLAIM 2

Labour created the biggest deficit in the developed world by overspending.

Firstly, the much banded about 2010 deficit of over 11% is false. This is the PSNB (total borrowings) and not the actual budget deficit which was -7.7% - OBR Economic and Fiscal Outlook March 2012 page 19 table 1.2

Secondly, in 1997 Labour inherited a deficit of 3.9% of GDP (not a balanced budget ) and by 2008 it had fallen to 2.1% - a reduction of a near 50% - Impressive! Hence, it's implausible and ludicrous to claim there was overspending. The deficit was then exacerbated by the global banking crises after 2008. See HM Treasury. Note, the 1994 deficit of near 8% haaaaaah!

Thirdly, the IMF have also concluded the same. They reveal the UK experienced an increase in the deficit as result of a large loss in output/GDP caused by the global banking crisis and not even as result of the bank bailouts, fiscal stimulus and bringing forward of capital spending. It's basic economics: when output falls the deficit increases.

Finally, the large loss in output occurred because the UK like the US have the biggest financial centres and as this was a global banking crises we suffered the most. Hence, the UK had the 2nd highest deficit in the G7 (Not The World) after the US and not as a result of overspending prior to and after 2008- as the IMF concur.

CLAIM 3

Our borrowing costs are low because the markets have confidence in George Osborne's austerity plan and without it the UK will end up like Greece.

Yes, the markets have confidence in our austerity plan and that's why PIMCO the worlds largest bond holder have been warning against buying UK debt.

The real reason why our borrowing costs have fallen and remained low since 2008 is because, savings have increased. As a result, the demand and price for bonds have increased and as there is inverse relationship between the price of bonds and its yield (interest rate) the rates have fallen. Also, the markets expect the economy to remain stagnate. Which means the price for bonds will remain high and hence, our borrowing costs will also remain low.

Secondly, the UK is considered a safe heaven because, investors are reassured the Bank of England will buy up bonds in an event of any sell off - which increases the price of bonds and reduces the effective rate. Note, how rates fell across the EU recently when the ECB announced its bond buying program. Thirdly, because, we are not in the Euro we can devalue our currency to increase exports. Moreover, UK bonds are attractive because, we haven't defaulted on its debt for over 300 years.

David Cameron would like people to believe the markets lend in the same way as retail banks lend to you and I.

Overall, when the facts and figures are put into context these juvenile deficit narratives and sound bites ("mere words and no evidence") simply fail to stand up to the actual facts. The deficit myth is the grosses lie ever enforced upon the people and it has been sold by exploiting people's economic illiteracy.

So, David Cameron when are you going to apologise?

Cameron is playing the blame game to depress confidence and growth to justify austerity. Secondly, to use austerity as justification for a smaller state to gain lower taxes. Thirdly, to paint Labour as a party that can not be trusted with the country's finances again. Therefore, we Conservatives will win a second term because, people vote out of fear. The latter strategy worked the last time in office (18 years) and will work again because, in the end, elections are won and lost on economic credibility. Hence, as people believe Labour created the mess they won't be trusted again.

Finally, as the truth is the greatest enemy of the a lie I urge you to share this on Facebook, Twitter, blogs, text and email etc etc. So the truth can be discovered by all. Finally, have no doubt, people have been mislead by the use of the following strategy:

"If you tell a lie big enough and keep repeating it, people will eventually come to believe it" Joseph Goebbels

[Risso]

I'm not going to trust a man with this as his Huffington bio:

"Ramesh Patel worked in finance from investments adviser with JMC Finacial Assets, to comodities brokers in metal and currencies with Capital Assets. As well as a CEO for Proactive Internet Marketing and Brown Pound Publishing. Current working on a book on the UK deficit Myth and the real agender from the right and left."

"The UK is considered a safe heaven"

What an illiterate twonk. It's not just the crap English either, it genuinely doesn't look like Mr Patel understands a word of what he's talking about.

[peterms]

I'm not going to trust a man with this as his Huffington bio:

"Ramesh Patel worked in finance from investments adviser with JMC Finacial Assets, to comodities brokers in metal and currencies with Capital Assets. As well as a CEO for Proactive Internet Marketing and Brown Pound Publishing. Current working on a book on the UK deficit Myth and the real agender from the right and left."

"The UK is considered a safe heaven"

What an illiterate twonk. It's not just the crap English either, it genuinely doesn't look like Mr Patel understands a word of what he's talking about.

Yes, much simpler to dismiss it on the basis of his spelling (is English his first language, do you think?) than engage with the issues.

Yet you accept the economic wisdom of someone whose main contact with the world of work was folding towels in Selfridges.

Beam me up.

[Risso]

Sorry, whose economic wisdom have I accepted Peter?

[peterms]

Sorry, whose economic wisdom have I accepted Peter?

George Osborne.

[Risso]

George Osborne.

I don't believe I have. I happen to think that the government is mostly doing an abysmal job as it happens. It doesn't mean that I'm going to accept every left-wing blog at face value though, especially such poorly written nonsense like the one reproduced above.

[peterms]

I don't believe I have. I happen to think that the government is mostly doing an abysmal job as it happens. It doesn't mean that I'm going to accept every left-wing blog at face value though, especially such poorly written nonsense like the one reproduced above.

Left wing? He presents himself as a conservative who wants to see a smaller state and lower taxes, and says in another piece that his concern is that the tories will be out of office for a long time because of the self-defeating policies they are following; and that tribal loyalty shouldn't lead to being silent on this. Many other tories have similar concerns about what's happening, it seems.

You seem to want to pigeon hole him as someone you can dismiss out of hand by pinning a label on him. Why not try addressing the arguments he puts forward? They're not especially left wing, if it helps. Or else your intervention looks like name-calling, and nothing more. Call him names by all means, but do try to include something with a little more substance. Like showing his stats are wrong, maybe, or explaining why his conclusions are flawed.

[Risso]

Has anybody worth listening to suggested that the deficit was all caused by overspending? Some of it was of course, and the fact that we had a structural deficit in the good times is an indictment of Brown's time in charge, but the main argument against Brown is that he helped create the conditions for the world banking crisis. As you're keen on pointing out, private sector debt was the main culprit.

[leviramsey]

Ahh good old Walrasian equilibrium at work, I wonder what the comparative statics of the micro guys are telling them, or the DSGE models of the macro-men, my guess is **** all.

I don't think any harm to the discipline of economics would be done if most of the equilibrium 'thinking' were thrown out all together. Macro would be better off with a balance sheet approach and agent based modelling.

In general I find that the more any given economist disputes Walrasian equilibrium, the sharper they are.

Walrasian equilibrium simply does not stand up to logic: indeed I would say that we cannot even say that market processes necessarily generally move towards equilibrium.

[leviramsey]

The current economic problems are largely the result of central banks with price stability mandates (inspired by poor assumptions on the part of various economists, perhaps most notably a certain M. Friedman). Those mandates created the unsustainable c. 20 year boom, by creating a prolonged period where market interest rates were lower than the corresponding "natural" rates (the rate that would balance ex ante demand for investment with ex ante demand for savings), triggering what will probably be remembered as the textbook example of an Austrian Business Cycle. When it was evetually discovered that the demand for the final products of that investment was not the demand implied by the low interest rates, the result was a recession and an opposite disequilibrium in the supply and demand for money: demand now far outstrips supply.

MV=PQ or M/D = PQ

M = supply of money

V = velocity, which is the inverse of demand [to hold] money

P = the price level (though an aggregate price level is a somewhat imaginary abstraction)

Q = level of production

In the 1980s, technology, free trade, deregulation, etc. started to increase Q. Absent changes in demand for real balances and money supply, this would result in decreasing prices. This is all desirable, but the response of central bankers, mostly with price stability mandates was to increase M to maintain stable P. This increase in turn bids up the prices (bidding down the rates) on financial assets, giving entrepreneurs an incorrect picture of how willing people are to save. The result is a boom fed by the forced savings, but the forced savings do not reflect the aggregate preferences of economic actors. The correct response would have been to let prices fall, wiping out speculators who bet on falling prices.

In the current environment however, it's fairly clear that demand for real balances exceeds money supply, and this is feeding into deflation. An increase in the money supply is called for, IMO.

Yes, I have just argued that the error was increasing money supply to stabilize prices and have suggested that the fix is to increase the money supply with the effect of stabilizing prices. This is not contradictory.

Changes in prices are not the important thing. It is what causes the change in prices. If the change in prices arises to balance the supply side of the equation (PQ, i.e. to invert a change in Q) that is A-OK. Entrepreneurs at some level have taken the effect of a change in Q into account and such a change is not oppositional to economic order, thus does not contribute to economic disorder (i.e. a global boom-bust cycle).

Money is notable for not having a market price of its own that can adjust to equilibrate its supply and demand. Its status as the asset in which all other prices are figured prevents it from having its own price (lending markets are not markets for money but markets for time). Excess demand for money will result in a general decrease in prices, excess supply a general increase. These imbalances and the changes they create cannot easily (if they can at all) be taken into account: they in general tend to decrease economic order.

The optimal strategy is to allow prices to change in response to productivity while preventing a change in demand to hold money from influencing prices. Since there is no way to know except perhaps in hindsight whether a change in prices is in response to a change in Q or a change in V/D, changes in the price level are irrelevant to determining the optimal money supply. If one assumes away changes in Q or V, one can of course justify a price-stability mandate (and that's basically what Fisher and Friedman did).

The gotcha in this is that it implies that the money supply needs to contract when demand to hold money falls (that is to say, desire to spend money rises). I am dubious as to whether any currently existing monetary regime can successfully contract the money supply quickly enough to maintain monetary equilibrium. I strongly suspect that the monetary regime which will tend to do the best job of this is Free Banking, where the banking system is subject to no regulation beyond those which would normally apply to a business in any other industry, and the banks in such a system competitively issue notes without legal tender laws. With bitcoin, my suspicion is that we may have the best opportunity yet to run an experiment in the viability of Free Banking.

Horwitz's Microfoundations and Macroeconomics lays out the synthesis of the Swedish and Austrian schools: the Stockholm School (Wicksell, Myrdal, et al) and the Austrians (esp. Hayek) essentially come to the same conclusions, though they've focused on the two different types of monetary disequilibrium, demand exceeding supply and supply exceeding demand, respectively; Horwitz manages to synthesize the insights of the two schools... it's worth reading if for no other reason than the epic takedown of the odious poseur Rothbard from an Austrian perspective in Chapter 7...

[peterms]

But, Levi,

According to a recent piece by Steve Keen, the US monetary base is now about 3x what it was in 2008. The level of excess reserves in the US is also extremely high.

The problem is a shortage of willing borrowers.

His argument is in part that the Fed has been trying to increase the money supply in order to create more inflation and increase demand, but the level of indebtedness out there means that people are trying to reduce debt, not increase it.

(May be some trouble with that link - if so, second article down on this should work).

[leviramsey]

Paying down debt is a manifestation of a desire for an increased real balance. More money needs to be created.

[peterms]

Paying down debt is a manifestation of a desire for an increased real balance. More money needs to be created.

So are you thinking of more QE? Or the govt spending money directly into the economy? Or the helicopter drop of giving money directly to people to spend? Or the debt jubilee idea of giving people money which must first be spent on paying off debt?

[leviramsey]

Any of those is conceivably a means of accomplishing the goal.

The bigger question is reducing the supply when the demand falls.

[peterms]

Seumas Milne. Hard to disagree with any of this. Good to see a Tory MP expressing outrage about taxdodgers, as well.

A roll call of corporate rogues who are milking the country

The scale of unpaid tax now outstrips the entire deficit. Forcing the elite to pay up is a matter of both justice and necessity

"Only the little people pay taxes," the late American corporate tax evader Leona Helmsley famously declared. That's certainly the spirit of David Cameron and George Osborne's Britain. Five years into the crisis, the British economy has just edged out of its third downturn, but construction is still reeling from government cuts and most people's living standards are falling.

Those at the sharp end are being hit hardest: from cuts to disability and housing benefits, tax credits and the educational maintenance allowance and now increases in council tax while NHS waiting lists are lengthening, food banks are mushrooming across the country and charities report sharp increases in the number of children going hungry. All this to pay for the collapse in corporate investment and tax revenues triggered by the greatest crash since the 30s.

At the other end of the spectrum though, things are going swimmingly. The richest 1,000 people in Britain have seen their wealth increase by £155bn since the crisis began – more than enough to pay off the whole government deficit of £119bn at a stroke. Anyone earning over £1m a year can look forward to a £42,000 tax cut in the spring, while firms have been rewarded with a 2% cut in corporation tax to 24%.

Not that many of them pay anything like that, even now. The scale of tax avoidance by high-street brand multinationals has now become clear, in no small part thanks to campaigning groups such as UK Uncut. Asda, Google, Apple, eBay, Ikea, Starbucks, Vodafone: all pay minimal tax on massive UK revenues, mostly by diverting profits earned in Britain to their parent companies, or lower tax jurisdictions via royalty and service payments or transfer pricing.

Four US companies – Amazon, Facebook, Google and Starbucks – have paid just £30m tax on sales of £3.1bn over the last four years, according to a Guardian analysis. Apple is estimated to have avoided over £550m in tax on more than £2bn worth of sales in Britain by channelling business through Ireland, while Starbucks has paid no corporation tax in Britain for the last three years.

The Tory MP and tax lawyer Charlie Elphicke estimates 19 US-owned multinationals are paying an effective tax rate of 3% on British profits, instead of the standard rate of 26%. It's all entirely legal, of course. But taken together with the multiple individual tax scams of the elite, this roll call of corporate infamy has become an intolerable scandal, when taxes are rising and jobs, benefits and pay being cut for the majority.

Not only that, but collecting the taxes that these companies have wriggled out of would go a long way to shrinking the deficit for which working- and middle-class Britain's living standards are being sacrificed. The total tax gap between what's owed and collected has been estimated by Richard Murphy of Tax Research UK at £120bn a year: £25bn in legal tax avoidance, £70bn in fraudulent tax evasion and £25bn in late payments.

Revenue and Customs' own last guess of £35bn has been widely recognised as a serious underestimate. But even allowing for the fact that it would never be possible to close the entire gap, those figures give a sense of what resources could be mobilised with a determined crackdown. Set them, for instance, against the £83bn in cuts planned for this parliament (including £18bn in welfare) – or the £1.2bn estimated annual benefit fraud bill – and you get a sense of what's at stake.

Cameron and Osborne wring their hands at the "moral repugnance" of "aggressive avoidance", but are doing nothing serious about it whatever. They've been toying with a general "anti-abuse" principle. But it would only catch a handful of the kind of personal dodges the comedian Jimmy Carr signed up to, not the massive profit-shuffling corporate giants have been dining off.

Meanwhile, ministers are absurdly slashing the tax inspection workforce, and even introducing a new incentive for British multinationals to move their operations inbusiness to overseas tax havens. The scheme would, accountants KPMG have been advising clients, offer an "effective UK tax rate of 5.5%" from 2014 (and cut British tax revenues into the bargain).

It's not as if there aren't any number of measures that would plug the loopholes and slash tax avoidance and evasion. They include a general anti-avoidance principle (of the kind the Labour MP Michael Meacher has been pushing in a private member's bill) that would outlaw any transaction whose primary purpose was avoidance rather than economic; minimum tax (backed even by the Conservative Elphicke); and country-by-country financial reporting, and unitary taxation, to expose transfer pricing and limit profit-siphoning.

The latter would work better with international agreement. But there is already majority support in the European Union, and it is governments in countries such as Britain – where the City is itself a tax haven – that are resisting reform. When you realise how closely the tax avoidance industry is tied up with government and drawing up tax law, that's perhaps not so surprising.

But when austerity and cuts are sucking demand out of the economy, fuelling poverty and joblessness and actually widening the deficit, the need to step up the pressure for corporations and the wealthy to pay their share as part of a wider recovery strategy couldn't be more obvious.

The target has to shift from "welfare scroungers" to tax dodgers, and the campaign go national. Companies that are milking the country at the expense of the majority are especially vulnerable to brand damage. Forcing them to pay up is a matter of both social justice and economic necessity.

[blandy]

Seumas Milne. Hard to disagree with any of this. Good to see a Tory MP expressing outrage about taxdodgers, as well.

When I posted similar comment about Gov't needing to do measures to plug the loopholes and slash tax avoidance and evasion I got told it was bollocks, didn't I?

[Risso]

That link to the Guardian story about how closely the government is tied up with the tax avoidance industry is a bit strange. All it basically says is that people from big firms of accountants like PwC end up in positions to do with tax policy. I can't say that I find it strange that qualified accountants and tax advisers from the Big 4 end up in such positions. I also can't see where on the KPMG link they are advising clients to move their operations to "tax havens". There's a bit in about the change to CFC rules, but that's not the same thing at all.

[blandy]

That link to the Guardian story about how closely the government is tied up with the tax avoidance industry is a bit strange. All it basically says is that people from big firms of accountants like PwC end up in positions to do with tax policy. I can't say that I find it strange that qualified accountants and tax advisers from the Big 4 end up in such positions.

It's kind of natural on the one hand. The same is true of many industries, defence, or transport or whatever. Obviously you get people who know stuff about stuff being involved in advice and policy and things like that.

Equally it's true that sometimes these people are sort of ingrained in a) doing things the way they've always been done and "looking after" former colleagues or industires they used to work with.

Most people who work in an area will be able to recount the staggering level of misunderstanding and ignorance of "other people" (not involved in their line of work) towards accounting/defence/roads/railways/air travel/health or whatever.

It's the nature of the world. There is no perfect solution.