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Monday, 29 October 2012

Millicent Fawcett: Political Economist

Over the past few weeks I have been analysing Political Economy for Beginners [1870] by Millicent Fawcett, who is now famous as one of the originators of the modern feminist movement. While it is the modern myth that these women were all militants, hostile to the political system as it was before the enfranchisement of women, the history of Dame Millicent [as she became] was very different from that model. The little book on which I have been working was published in the year when primary education was made available at the state's expense to all children: compulsory attendance quickly followed. Millicent was at that time married to Henry Fawcett, a remarkable man who was Professor of Political Economy in Cambridge University, a Member of Parliament and a minister in the Liberal government. Although blinded in an accident in his 'twenties he pursued both his academic and political careers with great effect: so it is almost unremarkable that he married an exceptional woman. After Henry's relatively early death she continued to research and to write on economic and social issues, and earned huge respect in political circles and in society.

When the British government came under heavy international criticism for confining women and children in concentration camps during the Boer War, Mrs Fawcett was invited to go to South Africa to inspect the camps and to comment. She was chosen because of her reputation for integrity with intelligence. Her report was devastating and led to a rapid change of policy. Her example was heavily quoted as evidence of the worthiness of women to participate fully in the political process; and I believe that she would be astonished if she could see that even today women are heavily unrepresented on the judicial bench, in the cabinet and in the boardrooms of major businesses. There is plenty of work for the Fawcett Society still to do!

It is an incidental tragedy that the Governor of German South-West Africa [now Namibia] was called Goering: in the nineteen thirties his son Hermann, Hitler's closest associate, attributed the concept of Nazi concentration camps to the British original which Millicent Fawcett had condemned.

The full text of her first book is available on line, thanks to the University of California Library. I think that it is extremely important, both because of the authority and distinction of its author and because of the exact time when it was written and developed through a large number of successive editions. Mrs Fawcett was convinced of the validity of basic doctrines in nineteenth-century 'classical' Political Economy that were soon to be set aside by the new wave of Economists. The leader of the new movement in the United Kingdom [and, indeed, the entire English-speaking world] was the man who was appointed to the late Henry Fawcett's professorship in 1884, Alfred Marshall. There had been two strong candidates for the job: Marshall, who wanted to present the new 'Economics' as a 'science'; and William Cunningham who had effectively invented analytical Economic History. Cunningham would have been very firmly an exponent of Political Economy [as was Mrs Fawcett]: elucidating the principles that politicians should understand and incorporate into public policy in order to create the framework within which the economy could thrive and grow. Marshall shared with several thinkers of his generation a belief that Marxism was a real and present danger to the existing social, political and intellectual order, and since Marx had used selected principles from Political Economy to formulate his hostile analysis of 'capitalism' Marshall was determined to present a wholly different view of the economy.

During the past 150 years Economics has dominated thinking and policy about economic issues in the west; and its accumulated effect - especially in the United Kingdom - has been catastrophic. Economics has concentrated on refining a normalised model of market processes, combined with an increasingly frenetic assertion of the dogma that free markets are the ideal structure of an economy while all the evidence of the real world has indicated precisely the opposite. The ultimate catastrophe to which the Economic establishment made a major contribution was the rapid growth of markets that the impotent and uncomprehending regulators simply did not attempt to understand. Those markets - mostly in intangible 'products' which, in some cases, defied clear definition -  produced the ultimate [almost terminal] market failure in 'finance' that came within an ace of undermining the entire Atlantic Economy. Firms passed from being notionally untrammelled entities to being nationalised or subject by government and state agencies to forced mergers into entities that were abjectly dependent on government and central bank funding.

If the regulators, central bankers and ministers of finance who held office between 1980 and 2007 had been educated in the principles that Millicent Fawcett elucidated they would have prevented the banks and securities firms from doing what they did. In the aftermath of the crash one leading British regulator said that a significant proportion of the activity that had gone on in the City of London and in other financial marketplaces was of no material benefit to the real economy: and he attracted a chorus of approval. Mrs Fawcett had been explicit on the differentiation of productive from unproductive labour.

While the essential principles of Political Economy, as elucidated by Millicent Fawcett, can be applied directly to the contemporary economy, some of the expression and most of the examples are incomprehensible except to expert historians. For example, her analysis of money supply was set in the context of the full gold standard, which has no relevance to the post-1931 world. I have therefore constructed a guide to the text, with extensive quotations that elucidate all the key principles in Millicent's words. I am now checking the guide for errors; and would welcome any offer to do some proof-reading or reality-checking.
Publication on-line soon!

Saturday, 13 October 2012

The Ultimate Betrayal: The UK Government and Inflation

In his speech at the Mansion House [City of London] on October 11, 2012, Lord Turner, head of the Financial Services Authority and a leading candidate to be Governor of the Bank of England, revealed one of the darkest economic secrets that the infamous coalition government is fomenting. With the consent of the Treasury [Chancellor: the Right Honourable George Osborne PC MP] the Bank of England has created hundreds of millions of pounds in 'quantitative easing' [QE]. This notional credit has been used to buy bills and bonds that had previously been issued by the UK government, mostly from the holdings of 'reserve assets' that must be maintained by financial institutions. Much of the new spending-power has been used by the firms that sold the bonds to the Bank to buy new issues of government bonds, to enable them to retain their required 'reserve ratio' of relatively secure assets. Notionally this activity has not increased the 'money supply':because in principle the Bank of England has issued spending power that is matched by an increased stock of government debt that it holds as 'assets'.

Turner's innovative [implied] suggestion was that the Bank could 'write off' some of the assets that it has bought. This would mean that the selected bonds would simply cease to exist; they would vanish from the Bank's asset register, and be removed from the total of the government's debt. The coalition government claims that the  present national debt is a smaller percentage of the national income than it was when they took office in June 2010: notwithstanding the fact that the number of pounds that the government has borrowed has continued to increase rapidly. Cameron's government has continued to borrow more money each year to spend on benefits, and to maintain health service spending and to spend hundreds of billions of pounds on its plan to double-up the most efficient railway in the country: from London to Birmingham. Meanwhile some important spending has been reduced: the national defences have been despoiled, the effectiveness of the police has been reduced, and the construction of coastal and riverside flood defences has been deferred.

Over the last couple of years the government has ordered the commercial banks to reduce the ratio of the money that they lend to the assets that they hold. Their recognisable 'assets' were being reduced anyway as the credit crunch unfolded and they had to write down the value of many assets and to write some off. The government - partially in response to European Union diktats - has raised the ratio of assets that the banks must hold to what they can lend: so they can lend a lower proportion of a diminishing resource. The reduction in the total that banks can lend requires the banks to refuse to extend some 'old' loans that come up for review, as well as refusing to make new loans to businesses. Hence one of the main sources of funding for economic growth has been reduced almost to vanishing point: and the economy has effectively ceased to grow while government spending has continued to grow.

By tinkering with taxes Chancellor Osborne has increased the government's income as a percentage of national economic turnover, but that means that less spending-power [in real terms] can be extracted as taxation from a diminishing national income. The gap between the tax-take and the government's spending is filled by borrowing.

The banks' liquidity has been maintained by the Bank of England's QE: buying government debt certificates from them. Already the Bank has bought up almost one-third of the whole vast pile of debt certificates that the coalition and former governments have issued: and Turner's speech contained hints that some [or eventually all] of the government debt that is held in the asset register at the Bank of England could be written-off. This would mean that the national debt would be reduced by some 30%; and when that was done, interest payments on that debt would cease. The government's 'books' and the predictions for their future spending needs would suddenly become much more favourable; to the extent that it might be possible for the austerity to be relaxed.

But this would be disastrous for pensioners. In interpreting legal requirements on pensions administration the Actuaries have used their own archaic methodology to insist that pensions trustees should sell shares [that can rise with the success of companies] and to put an increasing proportion of the funds that they hold into government bonds. So when the real return on government bonds is reduced by the great coming write-off, the purchasing power of pensions and annuities will hugely be reduced. The millions of people who have  accepted reduced current purchasing-power throughout their working lives, while they saved in their pension funds to buy security in their old age, will inexorably be impoverished by the inflation. There will be a great show of handwringing on all sides of the political charade, but nothing can be done by a government of any party or by any coalition of established parties to protect the pensioners from the coming catastrophe. The calamity will almost certainly materialise. Impoverished pensioners will vote against whatever government 'betrays' them, only to find that no other gang of politicians has any idea of how to 'save' the situation. The powers-that-be have allowed this to happen through decades of purblind public policy: decent working people will pay the price of this incompetence, when they come to the most vulnerable phase of their adult lives.

Sunday, 7 October 2012

The Great Pensions Tragedy

The economic naivete of politicians is most clearly seen when financial planning for the future is brought into their arena. The political class has been warned for over forty years that the number of surviving retired people will continue to rise at least until 2030. During the same past four decades Britain's envied position as the country with the best pensions coverage in the world has disastrously been lost. The huge expansion of public sector employment, which provided those employees with the promise of generous index-linked pensions in addition to their state pensions, requires the rest of the population to pay higher taxes [and incur more public borrowing]. Meanwhile the decline in pension provision for taxpayers in private sector employment has been so precipitous that fewer people are members of optional pension schemes than at any time since the nineteen-fifties. In addition, hundreds of thousands of hereditary paupers have no access to any supplementation of the state pensions that they will receive in their sixties, in succession to their benefits.

The present coalition government has increased universal state pensions and promised to maintain their 'value' in future in line with 'inflation'; and one cannot imagine a Labour-led government reneging on that promise. No similar promise can be made by any government in respect of personal or employer-funded pensions. Inflation inevitably and inexorably diminishes the purchasing power of funded pensions over the years, and the impact is greater the more years pass after the date of retirement. A small number of pension funds are so well endowed that they have been able hitherto to increase pensions-in-payment in line with the rising cost of living, but in general pension fund trustees have asserted [and most of them have exercised] their right to make annual increases of less than officially declared 'inflation', or to freeze the amount paid out. A majority of the people who are classed as 'pensioners' are no longer members of funds managed by trustees; they are 'annuitants'': people who on retirement were given notional control of the 'pot' of cash that had accrued to their account in an employer's pension fund, to which contributions were made jointly by the employer and the employee. The recipient individual is required by law to buy an 'annuity' which is an income of a fixed sum of money each year. Most funds allow individuals to take a portion of the 'pot' as a cash sum, in which case their annual income thereafter will be reduced. As an additional complication some annuities provide limited compensation for inflation in future years, and in such cases the annuity is reduced to cover the cost and risk to the provider of having to pay the promised increases in the event of future inflation.

In response to the collapse of banking governments in most developed countries engineered massive increases in the money supply have been used to keep the banking system afloat. At the same time a huge increase in government borrowing has been needed to support the banks, and to pay both civil servants and recipients of state benefits. Government acquiescence in the continuing deindustrialisation of the economy has meant that the UK now has minimal earnings from sales of goods into international markets; yet every indication for the future is that the emergence of powerful new economies will drive up the prices of commodities that Britain needs to import. Worse still, with the abandonment of Britain's capacity to process raw materials means that imports come in prepared forms and as manufactured goods.Relative to the eighteenth, nineteenth and early twentieth centuries, and relative to population size, Britain generates grossly insufficient material exports to compete as a long-term buyer of commodities in which it is not self-sufficient. The kingdom faces both declining real standards of living and the phenomenon of dramatically rising prices for things that are material necessities for life. A glaring example of the increasing problem is in the energy market: Britain dissipated the benefits of North Sea oil largely on paying benefits to the people cast out from industry by Thatcherite-Blairite policies, and sold nuclear firms like Westinghouse to foreigners: and now cannot afford to build nuclear power stations as imported oil and gas prices face long-term increases. The phenomenon of rising prices will be compounded by the devaluation of the currency, as the country's import bill far exceeds it export earnings. Pensioner poverty will escalate; and younger people, seeing the poverty of their pensioner relatives will be disincentivised themselves voluntarily to 'waste' their current income on buying pension rights.

There is no obvious way out of this impasse. It is a stark indication of the means by which the national impoverishment prepared by generation of politicians will begin seriously to bite.