UK: Vacancy Ratio and People Wanting Work - Mar 2013

People wanting work. There's a definitely drop from the peak, but overal the number of people in the pool isn't going down that much.

The ratio of people out of work wanting work to vacancies. This continues to fall, and the vacancies seem to be with larger companies.

The UK participation rate.

This is the ratio of those 'in the labour force' (ie unemployed and employed) to the household population. It differs from the ONS's 'employment rate' in that it doesn't exclude those over 65 (although over 65s who want a job are still classed as 'retired').
This is still historically in very high territory.

Source: Office of National Statistics, tables MGSC (ILO Unemployment Level Ages 16-64 - Quarterly seasonally adjusted), LFM2 (Inactive - wants a job - Quarterly seasonally adjusted), YCCX (Part time workers - reason for working part time, could not find full time job - Quarterly seasonally adjusted), AP2Y (All vacancies - Quarterly seasonally adjusted), MGSL (LFS Household Population - all aged 16 and over - Quarterly seasonally adjusted) and MGRZ (Employment Level - all aged 16 and over - Quarterly seasonally adjusted).

The misuse of the fiscal multiplier

The misuse of the fiscal multiplier effect is beginning to annoy me and it's about time that the record is set straight on the issue.

You are seeing classic lines like this :

Tax cuts are only one third as effective as government investment in new capital spending projects

and the propaganda is then backed up by some magic number calculation that shows the multiplier is 1.5 for capital spending and 'only' 0.5 for tax cuts. Obviously the bigger number is better because, well, it always is isn't it.

On the other side you have this belief that if the multiplier is less then 1 for any activity then you shouldn't undertake it.

Let's expose the assumptions those statements are based upon:

1. There is a fixed amount of money available
2. If the government spends from this fixed pot of money, it automagically crowds out an alternative activity with a multiplier of one.
3. That you can ignore the effect on the distribution of savings.

All of those beliefs are rubbish.

Let's look at what the multiplier is first so you can understand what is underneath the numbers. 

The multiplier is fairly straightforward. If the government gives money to somebody then they will spend some of it and save some of it. What they spend likely causes a real transaction to occur - and an amount of taxation. What they save will either go to reducing debt or building up financial savings. And in either case the banking system retains what isn't taxed away as bank reserves.

What is spent becomes somebody else's income. Rinse and repeat. 

The calculation of the multiplier however only adds up the GDP impact of the transactions over a time period. It is silent on the impact of extra savings caused by the process. And that is where the problem starts.

Firstly it biases the multiplier against tax cuts. The mathematics of the multiplier demonstrates that clearly. It's standard knowledge in simple Keynesian Models that the tax multiplier = 1 - spending multiplier.

So obviously the fiscal multiplier for a tax cut is going to be less than equivalent government spending. That's because you are, as a matter of policy, allowing extra savings first before any consumption happens. Duh!

Secondly the debate is always based upon an amount of government expenditure. Function finance thinking shows this is putting the cart before the horse. Rather than saying how much output can we get for £10bn of government action, we should be saying given we have a GDP output gap of £80bn how much do we need to deploy on the various policies to get that - given the multipliers and savings/income distribution of those policies.

Thirdly there is this idea that government actions inevitably prevents private sector action. This is crowding out again. Endogenous money theory demonstrates that the money supply is elastic. It goes up and down as required by the demands in the economy. You won't run out of money. So if there is stuff stood idle, it can always be brought into use without affecting anything else.

So suggesting that government action with multipliers less than one shouldn't happen is nonsense. It ignores the value of net-savings. It ignores the obvious point that a do-nothing alternative means that nothing additional happens.

Relieving the burden of debt on individuals is a valuable action. It makes them feel more secure and therefore more likely to spend in the future. It reduces the size of bank's balance sheet in the economy and allows you to narrow them more easily - diluting their economic power so that they are no longer too big to fail.

I think that's something we should be looking at doing. Yet you'll still get people pointing out that it has a low fiscal multiplier and we'd be better off building bridges to nowhere instead.

There's more to this game than GDP I feel. The distribution of net-financial assets matters.

Why Citizens Income/Universal Pension/Income Guarantee can't work

Sometimes I find the quality of debate depressing. In this paper, supposedly on idleness, there isn't a single mention of generating a permanent direct job programme that ensures that people have something to do. It's all indirect and hairy fairy. Irritating. Stick tax rates up on rich people and give it to the poor; that'll cure it. Nirvana will be with us by Tuesday lunch. Honestly, the ideas haven't really evolved since Robin Hood's days.

If the market equilibrium processes worked we wouldn't need to intervene.

Stuff for people to do doesn't turn up magically - it has to be created and organised. You can't just give people money and expect it all to sort itself out. The economic system has systematically failed to create adequate work for people to do. Why on earth would anybody think that if you just shuffle the cash around it would magically create an adequate standard of living? It's a pipe-dream.

If there is one thing to be taken from MMT it is that there is no direct connection between money and stuff. The monetary circuit and the real production circuit have no direct link. Instead the process operates more like electrical induction. Sometimes the flow of money induces lots of efficient real production, sometimes the same flow of money induces nothing of real benefit at all.

Assuming a one-to-one correlation between money and stuff is a dangerous simplification that will lead you into error.

I'm very grateful that Pavlina Tcherneva has taken the time to write up the argument for why we need a proper Job Guarantee - an alternative job offer available to all at the living wage working to further the public good - that helps anchor the monetary and real circuits together. And I can do no more than offer a quote from that paper - which I would encourage you all to read in full.

For a genuine transformation within the marketplace or the household, an active agent of change is needed. Income support programs are passive agents of change – they make their recipients invisible and hide them from the sphere of most socio-economic life. Even if income afforded greater degree of freedom to individuals, transformative changes occur when individual action is harnessed by institutions that can propel the collective interests forward. The JG is just such an institution—it puts human needs first and redefines what is “efficient” from what is “profitable” to what is “socially useful”. It engages its members directly in the goal of advancing the public purpose and is therefore a program that promotes inclusion.

Funding for Lending for Dummies

For those following the UK developments you may have heard trumpeted the news that the fabled Funding for Lending Scheme (FLS) is being extended to January 2015. But few understand what it is, or what it does.

And importantly what it doesn't do.

So I thought I'd try and shed some light on the system.

1. FLS is a discount window that banks are less embarrassed to use. There is huge embarrassment about the discount window in the UK - primarily because it has only just been invented here. Prior to 2008 there wasn't really one in place, and after that the banks have treated it like the financial version of an STD clinic. In contrast the FLS offers a good chunk of four year money at a very low rate to those who fulfil the criteria and the government sector is encouraging its use. 
2. FLS is really 'funded' by HM Treasury. As you can see from the graphic above the 'money creation' is actually initiated by HM Treasury - in that they create the 9 month Treasury Bills and lend them to the Bank of England, who then lend them onto the FLS participant. Conveniently that doesn't show up on the Bank of England balance sheet, as it's a 'Stock Lending Transaction'. See how the consolidated government sector MMT analyses is used when required, despite all the Wizard of Oz style smoke and mirrors about 'central bank independence'.
3. FLS differentiates between different loan types. Banks get access to more funding if they increase their lending over time and even more cheap funding if they lend or cause certain others to lend to SMEs. Which is of course a form of central planning. Bang goes the efficient capital allocation of financial markets theories.
4. Funding for Lending is more Lending for Funding. Less driving the amount of 'real world' lending forward and more desperately trying to stem the retreat. MMT analysis tells us that so long as the margin between the return on the loan and the rate they would have to borrow from the central bank through the discount window is sufficient, a bank will lend. The continuing retreat in lending suggest that the problem is lack of demand at the current price - even with funding costs suppressed by FLS.
5. FLS is about setting a limit. The amount of money drawn down from FLS is less important than its expectation effect on the rest of the debt market. The cost of risk funding had been rising prior to the widening of the discount window in this way. Widening the window has returned the cost of risk funding to near what it was previously. 
6. FLS does not affect bank capital. The discount window is a collateral upgrade system. You pledge risky assets and get less risky assets in return - which increases your liquidity. It does nothing about your solvency though. As far as I can see Treasury Bills don't add to regulatory capital, which means that the amount of lending is still capped by the price of obtaining that regulatory capital in the market.
7. FLS demonstrates that its all about the width and depth of the discount window. How much further does this market manipulation have to go before the powers that be realise that central banks hold interest rates up and set corridors as required. And therefore by far the most rational approach is simply to disintermediate the entire process, with the central bank providing all the bank funding required to those who will narrow their banking business to underwriting those capital projects required by society.

UK Sectoral Balances and Private Debt Levels - Q4 2012

Apologies for the delay in getting these out. I've been checking the figures to make sure I've got things right. Fortunately ONS published the Economic Review for April 2013, which included a section on sectoral balances. I've adopted their approach of using a four quarter moving average.
Overall the non-government sector is saving to excess driving the government deficit - largely via the automatic stabilisers. Note the rise in the external sector balance.
The five sector chart shows that households are barely saving, and the financial sector is back to net lending - however that may be an artifact of the Post Office pension fund transfer.

And finally the private debt levels:

Private debt levels are holding around the 435% of GDP levels. The financial sector increase in debt offsetting the small decrease in non-financial sector debt.

Source: Office of National Statistics, tables RPZD, RPYN, RQAW, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted). Private sector debt based on tables J8XI, NLBC, NKZA, NNQC, NNRE, NNXI, NNXM, NNWK, J8XK, NLSY, NLUA, J8XM, NJCS, and NJBQ (Lending, securites and derivatives per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted).

UK borrowed foreign currency from IMF in 1976

The 1976 IMF debacle in the UK was a defining moment when the promotion of full employment ended. Fundamentally though it was a political mistake by people who didn't understand that floating the UK pound fundamentally changed how it behaved.

The government was terrified about a 'run on the pound' and wanted to keep an exchange rate of $2 to the £. The panic set in with it got to $1.80. Of course since then the £ has been down to near parity with the dollar at one point and the world didn't end.

It's important to remember that throughout the Bretton Woods era the UK had made frequent use of the IMF facilities to keep the pound in it range. And that is what the UK government wanted to do in 1975 and 1976 using the same old fashioned techniques. But to do that you have to have sufficient foreign exchange reserves. Providing those is what the IMF did throughout Bretton Woods, and did again in 1976.

The difference was the size of the loan - the biggest ever at that point - and the fact that previous drawings had been cleared by that time. Politically it was a huge win for the opponents of the Labour approach to government.

What is amusing is that using fixed exchange rate thinking with floating rate currency areas is still the problem today.

The nature of the loan is described in this document at HM Treasury dated 15th December 1976 and the appropriate section is reproduced below.

The government of the United Kingdom hereby requests of the International Monetary Fund a stand-by arrangement under which for a period of two years the Government of the United Kingdom will have the right to purchase from the Fund currencies of other members in exchange for sterling up to an amount equivalent to SDR 3,360 million. Before making purchases under the stand-by arrangement, the Government will consult with the Managing Director on the particular currencies to be purchased from the Fund.

2. The purpose of this request is to support the policies that have been adopted by the Government of the United Kingdom to strengthen the balance of payments and create the conditions in which it will be possible to get both unemployment and domestic inflation down from the present unacceptable levels and keep them down. The standy-by arrangement will also help to repay external debt now falling due and assist in maintaining orderly conditions in the exchange market for sterling. ...

Quick note on Cyprus deal

Interesting that the Cyprus deal has finally come full circle back to resolving the banks that are bust. The one interesting element is that the ELA of Laiki is to be transferred to the 'good bank'.

ELA is Emergency Loan Assistance that is backed by the ECB via the local National Central Bank - because the collateral on offer isn't good enough to access the direct ECB schemes.

Some people have struggled with why that is being transferred. My theory is to do with the assets. 

Remember that ELA is collateralised against a set of assets. The Laiki assets were assessed by the Cypriot National Central Bank as being good for the ELA.

So I suspect that the Assets and the linked ELA are being transferred to the 'good bank' to avoid the central bank having to resolve the assets and get the value for them.

Which I suspect would lead to awkward questions about whether ELA should ever have occurred in the first place.