Economics - Again

A few days ago, I had a brief discussion with a student of History about my views on Economics and the Econocracy, referring him to the website of the Post Crash Economics Society where I first saw the very apposite term, Econocracy. On our next encounter [in the pub where he earns a crust as a part-time barman] he told me that he had mentioned my stance to a friend who is studying Economics; and the friend had vehemently disagreed with me. Perhaps we will be able to have a face-to-face discussion some time. In the mean time, I will post here today the briefest summary of my views.

I had the great good luck to go up to university when classes were small - my year in Politics and Economics comprised just 12 students - but teachers were good and libraries well resourced. The era of electronic access to data had not yet arisen, so we had to read: and we read voraciously.

At that time what we now call neo-Keyesianism was in the ascendancy, and models of the entire economy had been constructed in the National Institute for Economic and Social Research [NIESR], in the Treasury and in various universities. Given the state of development of computers at that time the models were crude and simplistic, and they could only be manipulated laboriously. Nevertheless, estimates could be made of the impact on the modeled economy of the policy options that were available to governments. These options came in two categories, monetary policy and fiscal policy. Monetary policy involved the creation of money; implicitly by the Bank of England on behalf of and with the authority of the government that owned the Bank. Banning the creation of money was a means of limiting the rate of growth of the economy; and encouraging the Bank to create money to lend to the trading institutions in the economy was a way of stimulating the growth of the money supply more generally. It was taken as a sign to the commercial banks that they could risk making more loans of their own money [deposited by their customers] whenever the Bank of England was stimulating the money supply; thus the amount by which spending could increase was very much greater than the amount by which the Bank increased the supply. Any commercial bank could borrow money from the Bank of England at a 'bank rate' [later called the 'base rate'] which was publicly announced; and lending by commercial banks was made at rates higher than the bank rate. The banks charged their customers rates of interest that varied according to the perceived riskiness of the loan. When the Bank of England had the nod from the government, it lowered bank rate; which was a clear indication to all the banks that they could drop the rates they charged to their customers, and perhaps risk extending the range. Thus a drop in bank rate, accompanied by an increase in the Bank of England's willingness to lend, signaled that banks and their customers should invest to expand the economy; thus expanding trade generally and stimulating economic growth and job opportunities in many sectors of the system could be increased.

However, at that time there were major constraints on the expansion of credit extended by banks. Their customers were required to pay cash deposits on durable consumer goods, and were only allowed to borrow a set percentage of the purchase price. Thus the spread of TV sets, washing machines and other desirable consumer goods was slowed down by the legal requirement for would-be buyers to save up for the deposit before they could enter into a hire-purchase agreement under which [having paid the deposit] they could pay off their borrowing while they had the use of the device. The firms that made the television sets were protected from foreign competition by import tariffs and controls on the amount of foreign currency that businesses could buy: so the system of monetary policy operated within a physically controlled system of protection. The present situation, where consumers can borrow huge amounts of credit and thus create the 'consumer demand' that 'drives' the economy was unthinkable. The world in which neo-Keynesiansim appeared to thrive was utterly different from the world in which we live now; and over the next few days I will outline how that change happened.

I try to keep my blogs at a modest length, and hope that anyone who becomes interested in my ideas will word-search through the archive.

The Truth About Immigration

Today's UK media carry stories that disclose - yet again - the infinite capacity of Economists for earning the contempt of the public. A think-tank, the National Institute of Economic and Social Research [habitually described by economic journalists as 'the respected NIESR' ] published a paper that asserted, unequivocally, that there is "no association" between higher immigration and the rise of joblessness in the UK.

Within a few hours the government's Migration Advisory Committee published a paper which declared that one Briton lost their job for every four non-EU migrants arriving over the past five years, which put 160,000 workers onto benefits. It also found that wage-rates for less-skilled jobs were pushed down by immigrant labour: while wages of higher-paid employees seemed to rise with immigrant numbers. This paper also indicated that further pressure would be put on living standards, particularly for the lowest-paid, because the inflow of immigrants would compete for housing [especially in London and the south-east] and cause upward pressure on rents and house prices.

Yesterday MigrationWatch - a pressure group opposed to 'excessive' immigration published its own findings, which were that: "Youth unemployment in the UK increased  by almost 450,000 from [the first quarter of] 2004  to [the third quarter of] 2011. Over the same period, numbers of workers from the A8 countries [the new entrants to the EU, who became free to enter the UK in 2004] grew by 600,000". MigrationWatch made the caveat that "Correlation is not, of course, proof of causation," but went on to make the crucial point that "given the positive employability characteristics and relative youth of migrants from these countries, it is implausible and counter-intuitive" to draw a conclusion that "A8 migration has had virtually no impact on UK youth unemployment."


Readers will have noticed that the data sets taken by the three reports are different. MigrationWatch focuses primarily on youth unemployment and the relative attractiveness to employers of the work ethic and numeracy  displayed by continentally-educated people, compared to the low literacy, negligible numeracy and unpreparedness for employment displayed by a very large proportion of young Britons [broadly regardless of ethnicity].  The government's committee compares total unemployment with the number of immigrants from outside the EU.   The NIESR took all migrants who were issued with national insurance numbers [which are a necessary condition for gaining legal employment] and compared their numbers with the pattern of unemployment among the pre-existing population. The NIESR noted also that the growth of juvenile unemployment in the UK had begun before 2004 [when A8 citizens gained full rights of entry] and reached greater heights after 2008 although east European immigration was reduced and some Poles and Slovaks went home.

Recruitment to jobs in general diminished during and after 2008 as the recession intensified. Reliable, hard-working east Europeans generally kept their jobs in greater numbers than did Brits, and the number of east European arrivals tailed off when the word reached potential migrants that opportunities in the UK had diminished.

Political correctness forbids 'decent' researchers from ascertaining which specific categories of immigrants get well-paid jobs, badly paid jobs or no jobs; beyond the differentiation between EU and non-EU that is sanctioned by the Brussels bureaucracy and the European courts. Since increasing numbers of immigrants from outside the EU obtain citizenship in other EU countries, then come to the UK, there is no implicit ethnic connotation to the EU non-EU differentiation even though the overwhelming majority of A8 migrants were white Europeans. Consequently bar-room assertions about some ethnic groups 'coming here for benefits and free houses, with no intention of working' remain untested, but the legends fester with repetition: and the political class avoid mentioning the matter even though it is a widely expressed concern 'on the doorstep' to political canvassers.

The net effect of the three reports is to serve no useful purpose: they present no clear guide for policy-makers and their different selection of data contributes to a confused cacophony that has long been characterised by the lack of any agreed basis for comparison. On this issue, quintessentially, the disparity between the dialogue that emanates from the political class and the dialogue that rumbles on among the electorate has become extreme and will some time soon create a major political problem that will tax the present generation of politicians to the all-to-apparent limits of their competency.