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Posts Tagged ‘Bank of England’

Umunna, Reeves et al are wrong on free movement. Its bad politics and worse economics

22/09/2016, 10:18:57 PM

by Sam Fowles

For Rachel Reeves, immigration from the EU has caused a “slight drag” on wages. So Labour best represents the working poor by calling for an end to free movement. This is both simplistic and wrong. It represents only the loosest grasp of political strategy and no grasp of economics at all.

Labour will never win the fight to be “tough on immigration”. If voters want to kick out immigrants, they’ll vote for the parties that have been dog whistling about immigration for years. No one buys the cheap knock off when they can get the real thing for the same price. Labour must address the real causes of the low wage crisis. This strategy has two advantages: It targets voters that might actually vote Labour, and it’s not economically illiterate.

The overall impact of immigration on wages is generally positive. By contributing more in taxes than they take out, EU immigrants ease financial pressures in the public sector. Immigration can create downward pressure on the wages of low-skilled workers. But this is negligible. Reeves relies on a study that found a 10% increase in immigration creates a 1.8% drag on low-skilled wages. To put that in perspective: the largest increase in immigration since 2006 has been around 7%. This works out as costing low skilled workers 1p per hour.

But immigration is equally likely to have a positive effect on low-skilled wages. Migration increases demand: The more people in an economy, the more goods and services they need: The more goods and services required, the greater the demand for labour to provide them: The greater the demand for labour, the more employers are prepared to pay for it.

But this hasn’t happened in the UK: Why?

Because successive governments have chosen policies that drive down wages.

Austerity (more…)

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John McDonnell sheds his Corbynista cloak

29/09/2015, 09:50:06 AM

by Nick Small

For the 4.5 percenters, who, like me, backed Liz Kendall, John McDonnell’s first major speech as shadow chancellor at Labour Party conference was, in many ways, a pleasant surprise.

The acknowledgment of a golden rule of British politics, that the voting public demand reassurance from the centre-left about our economic credibility in a way that they don’t from the Tories, is welcome. It’s also welcome that McDonnell has explicitly reinforced the message that economic prosperity and social justice are two sides of the same coin; as our aims and values put it that means ‘a dynamic economy serving the public interest’. In other words, you can’t redistribute wealth unless you first create it.

Recognising that the country has to live within its means, that Labour should tackle the deficit fairly and that a Labour government inheriting a current account deficit in 2020 should pay it down without jeopardising sustainable economic growth is, again, good to hear. It’s not austerity-lite and it’s not deficit denial. This will chime well with the voters who’ll decide the next election. They may well be more economically radical than many from my wing of the party thought, but they’re certainly more fiscally cautious than many Corbynistas gave them credit for.

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Does Labour even have an opinion on monetary policy?

08/08/2013, 09:22:41 AM

by Jonathan Todd

This is a rare thing: some thoughts from a Labour perspective on the politics of monetary policy. Maybe it derives from reverence for the last government’s decision to make the Bank of England independent. Perhaps it comes from a slowness to appreciate how the George and Mervyn show has so smoothly transitioned to the George and Mark show. In any case, we do not hear enough from Labour on monetary policy.

Ed Miliband followed Stella Creasy is stressing the importance of having females on banknotes. While the symbolism of this is significant, it is only symbolism. As Carney was being pictured with Creasy and other campaigners, in the manner, according to Dan Hodges, of “three schoolgirls who have just won a Blue Peter competition to design a new bank note”, he was putting the finishing touches to an intervention of more than symbolic consequence.

That this heralded the age of the perpetual never-never – otherwise known as forward guidance or cheap money till the other side of the election – is also predictable. It has not come from the ether. It is what Carney did in Canada. Like all the most profitable, international consultants, he’s selling the same recommendations to a new client. As a variation on the framework adopted by the Federal Reserve at the end of last year, it is also of a piece with an emerging monetary consensus.

All of which sounds very elite and removed from the shop floor. Yet what could be more shop floor than worrying about how many people are on it? The rate of employment, in other words. By targeting the unemployment rate, Carney has created something akin to “the bank for the workers”, which I argued for at a Pragmatic Radicalism event at the start of this year.

All I was really doing at this event was cribbing the Fed’s idea. But, for some reason, there was something about targeting the unemployment rate that seemed apt for our party. The clue is in the name, as someone once said.

If the Fed is targeting the unemployment rate, wouldn’t you think both that this might be something the Labour party can call for and an idea whose time has come?

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We need to make better use of Quantitative Easing

10/05/2013, 07:30:48 AM

by Dan McCurry

George Osborne’s nanny state policy responses are failing our banks and perverting our markets. In the midst of the political rhetoric on welfare and debt, there is one economic policy that the chancellor has implemented which has a genuinely significant impact: Quantitative Easing (QE).

This has had a profound impact on the economy.

The normal way for the money to be supplied into the economy is for banks to provide loans. If ten £1k loans are made for every deposit of £1k, then £9k of new money has been put into circulation. The banks are liable for it if it isn’t paid back, so they have become expert at judging risk. The supply of money makes a good demonstration of the private sector achieving a public good, normally.

The problem is that lending is too slow. As a result there is a lack of new money going into the economy but people are continuing to repay the loans they previously took out. The net effect is less and less money in the economy. If money is the oil on the cogs, then without it, the machinery will grind to a halt.

As a policy response, we’ve had QE. The Bank of England is creating money on a grand scale. Under Quantitative Easing they have so far produced an extra £375billion. In this respect it is the largest nationalisation of private sector service since the 1945 Labour government. I wonder if George Osborne realises that.

For a long time the banks have been receiving contradictory instructions from government. They must lend more, but they must increase their capital reserves. It’s like telling a schoolboy to spend his pocket money then scolding him for not saving it.

As a result, innovative policies are not only proving expensive but also potentially counter-productive. The government driven Funding for Lending Scheme (FLS) aims to subsidise bank lending for small businesses.

It is bad economics. It has lowered the interest paid to savers, but achieved little increase to the loans given to small businesses. With the state competing with savers, the banks no longer need to attract deposits as they have cheaper source with government cash.

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Cameron and Osborne are not for learning. King should know better.

24/02/2011, 11:30:48 AM

by Jonathan Todd

“Is not the lesson from the noble Baroness Thatcher that, when you have set an economic course, you should stick to it – ‘there is no alternative'”?

So asked Jacob Rees-Mogg at PMQs recently. The IFS cautions “a Plan B might be needed, potentially involving some reduction in the size and pace of cuts in the structural deficit”. But David Cameron knows best. He did not demur from the insufferable Rees-Mogg.

But for what did Thatcher think the grinding unemployment and dislocation of the 1980s was a price worth paying? Low and stable inflation. The NUM was, she thought, the enemy within and the wage/price spirals of the 1970s were part of the damage they wrought. She was right that high inflation is no basis for a dynamic economy. But her policies didn’t deliver this. In his memoirs, Nigel Lawson concedes that he should have raised interest rates in 1986. Instead, with a general election looming, he offered tax sweeteners. Inflation topped 8 per cent by 1988.

It wasn’t until Labour took politics out of monetary policy by making the Bank of England independent that the inflation dragon was slain. Now politics is back at the Bank and so is inflation. Not that Mervyn King’s grovelling praise for George Osborne’s ideologically-driven deficit reduction strategy has caused inflation to be persistently above target. But that that is not his job. The governor’s remit is to run monetary policy to defend this target. It isn’t to provide cover for Osborne’s politics. (more…)

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