Why it’s hurting but not working

broken-toolsOne of our favourite economists at English Economic (yes, one or two are all right) is Oxford University’s Simon Wren-Lewis. Simon has been one of the most trenchant critics of Britain’s Tory government within mainstream economics, and his clear and straightforward arguments generally go unanswered by government supporters. Simon is also one of the few academic economists to make a concerted effort to reach out to non-economists, both through his Mainly Macro blog (which caters for both economists and the rest of us) and his campaign against “media macro” – the distortion and misinformation in the mainstream media which does so much to promote right-wing economic ideas and always seems to favour the interests of the rich and powerful.

One of the most important questions Simon has been tackling recently is why all the extraordinary measures taken in the UK and the Eurozone in recent years have failed to get the economy moving. Put very simply, there are two ways for the authorities to stimulate the economy quickly (in what economists call the “short-run”), so we can see some economic growth and start getting pay rises again. The government can either spend money itself or it can encourage other people to spend money. Either way, someone somewhere has to start putting some money down.

Read the full article on English Economic.

Photo: Jessica Taylor/UK Parliament/Creative Commons 2.0

Budget 2016: austerity has done itself in

GEORGE OSBORNE HAS turned his budgets into a kind of game show, where he flings statistics and targets around and we have to work out which ones are true, which are guesswork and which are just downright porkies. Every few months, he comes back with another set of teasers. It’s a sort of political Would I Lie to You?, except Osborne’s jokes aren’t as funny as Rob Brydon’s.

For all his showmanship and political craft, Osborne can’t escape the reality that six years of austerity have delivered neither prosperity nor any reduction in government debt. Osborne still claims it will happen – some time way off in the future – but he says that every year.

Austerity has done itself in. Like the abstract “free market” Osborne has so much faith in, austerity is an idea that devours itself. It has delivered so little growth it has failed to meet its sole objective: reducing government debt by eliminating the deficit. Even Osborne doesn’t believe in it any more, which is why he effectively abandoned austerity yesterday and rushed to borrow another £38.4bn over the next three years – before savagely cutting back again in 2019. The problem is that he doesn’t have a clue what else to do.

The Chancellor has only himself to blame. He set the fanciful targets, he made the silly rules. Osborne has now broken two of his three “golden rules” within three months of setting them. Far from reducing the government’s pile of debt every year as promised, Osborne admitted yesterday it will actually rise this year. The slowing economy and stagnating wages had already done for his cap on welfare spending. And not even Osborne can really believe in the ferrago of coincidence and convenience which would be necessary for him meet his third rule, eliminating the deficit by 2020. The independent Institute of Fiscal Studies puts his chances of success at no better than fifty-fifty. Many other commentators put them a lot lower lower than that.

I wouldn’t mind, but these are the iron rules which Osborne, in his rush to embarrass Labour, said the government must live by – at least in “normal” times. Yet he has thrown them over at the first time of asking. He can’t have it both ways. Either the British economy is doing well, as he claims, and he must live by his rules. Or it isn’t, in which case he only has to look in the mirror to see the one who should be embarrassed.

The OBR twisted the knife in Osborne’s back, sharply downgrading its forecasts for economic growth into the forseeable future. Worse, the OBR has now discovered that the £27bn in extra tax receipts it “found” down the back of the Treasury sofa last November – which Osborne used to fund his U-turn on working tax credits – has turned into a £56bn black hole. “The sofa has swallowed roughly two pounds this time for every one that it yielded last time,” said OBR director Robert Chote – presumably trying very hard not to giggle.

Osborne tried to blame the sharp deterioration in his financial position on a “dangerous cocktail” of global economic threats. That won’t wash. Osborne’s own Budget Red Book shows that the expected global slowdown accounts for well under half the reduction in expected UK growth – most of which comes from a big downgrading of forecasts for the UK’s productivity performance – overdue recognition from the OBR of one our most persistent and serious economic problems.

Osborne’s eye-catching announcements – the sugar tax, forcing all schools to become “academies” under Whitehall control and incoherent plans for further devolution to local councils – were diversionary tactics. In reality, this was a desperately thin budget. There were some modest tax cuts, mostly benefiting the well-off and corporations, more cuts to support for the disabled, some sensible measures to encourage savings, plus some further unspecified cuts to Whitehall spending, left hanging in the air like a bad smell until just before the next election. In short, a pretty typical Tory budget for “normal” times. This was a budget for the economy George Osborne would like to be running, rather than the one he’s spent six years ruining.

On our big economic problems – dismal productivity, low wages, the housing crisis – he offered almost nothing. In six years Osborne has failed to come up with a single meaningful initiative to improve productivity, which almost everyone recognises as the root cause of many of Britian’s economic woes. One housing group even welcomed Osborne’s inaction on housing – on the grounds that everything he’s tried before has made matters worse.

Osborne can’t do anything about these problems because they require active government, and doing things like strengthening trade unions and building more social housing, which are ideological anathema to the Tory MPs and activists he needs to appease to get his feet into David Cameron’s shoes. So, with austerity now a busted flush and constrained by the need not ruffle feathers before June’s EU referendum, Osborne was left with nothing much. That’s why he had to mount a smash and grab raid on other departments’ to-do lists to find something to put in his red box.

Economically, this was a budget from a Chancellor at the end of the road, a Chancellor who has missed every significant target he has set himself, a Chancellor who really wants to be doing something else. In ten months, Osborne has gone from hero to almost zero in the Tory party (how he must now regret turning down David Cameron’s offer of a different job after the 2015 election). But it’s Osborne’s constant complusion to put politics ahead of economics which has put him there.

Photo: Jessica Taylor/UK Parliament/Creative Commons 2.0 (cropped).

Osborne’s Autumn Statement: tragedy and fantasy all rolled into one

I have two (Screenshot 2015-12-17 00.43.21rather belated) pieces on English Economic in response to George Osborne’s Autumn Statement and Spending Review on 25 November. The first argues that the spending review was a deal done from a position of weakness and reflects Osborne’s economic failure. His financial statements are turning into twice-yearly Groundhog Days, in which the same failed solutions chase the same unsolved problems.

The second is a ranty thing about economic forecasting, which has, as the Financial Times itself put it, “an astonishing record of complete failure”. Why should we take the Autumn Statement seriously, when the whole thing is based on projections by people with an impressive track record in being wrong? When you look at the facts, economic forecasting deserves to be treated no more seriously than astrology or football punditry.

False economies

Healthcare Manager issue 21 Spring 2014 Healthcare is expensive. People are living longer and treatments keep getting more sophisticated and costly. In the US, healthcare consumes 18% of national income. In the UK it’s only half that, but it’s rising fast, especially as a proportion of shrinking government spending. In France, Europe’s biggest healthcare spender, it’s gone from 7% of GDP in 1980 to almost 12% today. Healthcare is a drain on the economy. A worthwhile drain, but a drain nonetheless.

But is this the right way to look at it? Why is healthcare seen as a dead cost and not as investment? In fact, why do we see healthcare as something we have to spend money on in order to be productive, and not as production itself?

We don’t say construction costs 6.7% of GDP, we say it contributes 6.7%. The same goes for transport, agriculture, leisure or culture. Perhaps this is because people like their cars, their food, telly and going to the theatre. No one likes going to hospital or being told to eat salad. Perhaps it’s also because — in Europe at least — most healthcare spending comes from the government and is financed by taxes on other economic activity.

But if healthcare is not exactly a product like any other, it’s a product all the same. It’s something people want. And like other economic activities, it creates jobs, pays wages, and supports a long chain of suppliers (everything from paper merchants to computer programmers — hospitals are in the market for almost everything), stimulates investment and encourages workers to acquire new skills. People are organisms, they get sick, and they need treatment. Just as they need somewhere to live, ways to move about and protection against risk. Healthcare is just as much production as building houses, making cars or providing insurance.

Tonio Borg, the European Commissioner for Health, says he wants “to shift the still widely held perception of health expenditure as primarily a ‘cost’ rather than an investment, and to pass across the message that health contributes to inclusive economic growth.”

In depths of our 21st century great depression, NHS funding was seen as part of the problem, rather than part of the solution. But healthcare spending can be a highly-effective way of stimulating a dormant economy.

Research published in Globalization and Health last year by a team of researchers, including Professor Martin McKee of the London School of Hygiene and Tropical Medicine and University of California economist David Stuckler, calculated the “multiplier effect” for different forms of government spending among 25 EU countries from 1995 to 2010. They found the multiplier for healthcare was 4.32, compared to an average 1.61 for all government spending. This means that for every £1 spent on healthcare by government, GDP grew on average by £4.32 once all the knock-on effects had worked their way through the economic system.

This is a much better return than for defence (where the multiplier was actually negative), housing, industrial support or even “social protection” like unemployment benefits. Only spending on education and environmental projects matched the power of healthcare as an economic stimulus.

Why? Firstly, in advanced economies at least, most of the money is spent at home — healthcare workers generally work where the services are provided. This is why the multiplier for defence spending is usually negative: most of the money gets spent on expensive imported equipment (although our big defence industry means this is less true for the UK than many others). The UK, with relatively large medical equipment and pharmaceutical industries, is well-placed to take advantage of healthcare’s capacity for economic stimulus.

Secondly, healthcare remains relatively labour intensive. Around 55-60% of the NHS’s £110bn budget goes on staff costs (the Department of Health won’t disclose exact figures). Health and social care, particularly for the very young and the very old, is a people business. In one of those paradoxes in which economics abounds, healthcare’s low productivity means it is good at creating jobs. You need to employ a relatively large number of extra people to achieve a given increase in output.

Furthermore, many of these jobs are relatively low paid. Lower paid people tend to spend their wages rather than saving them, and are less likely to spend them on foreign holidays or imported cars.

Of course, money spent on healthcare is money not spent on something else. The government could, as Keynes facetiously suggested in the 1930s, pay people to dig holes and fill them in again. In a slump, this would be better than nothing. But if we’re going to spend money creating jobs, we might as well spend it on something worthwhile, which will bring long-term economic benefits when the recession is over.

Investing in healthcare services, public health programmes and research can increase labour supply, productivity, skill and education levels, and reduce inequality, poverty and the cost of sick pay and welfare benefits. This helps to offset the undoubted tendency for healthcare costs to rise faster than general prices.

This is why the European Commission designated healthcare as “growth-friendly” spending and made investment in public health a cornerstone of its “Europe 2020” ten-year economic growth strategy.

The Commission’s paper, Investing in Health said: “Health is a value in itself. It is also a precondition for economic prosperity. Investing in people’s health as human capital helps improve the health of the population in general and reinforces employability, thus making active employment policies more effective, helping to secure adequate livelihoods and contributing to growth.”

None of this means there’s a blank cheque for healthcare. Much as spiralling house prices do nothing to solve the housing crisis, simple inflation in healthcare costs does nothing to improve health outcomes or bring long-term economic benefits. The US spends almost 50% more on healthcare than anyone else, but with decidedly mediocre results. Costs keep rising, but the returns — better treatments, better survival rates, a healthier population — lag far behind.

The European Commission recognised this in its 2012 survey, The Quality of Public Expenditures in the EU: “The relatively large share of healthcare spending in total government expenditure…requires more efficiency and cost-effectiveness to ensure the sustainability of current health system models. Evidence suggests there is considerable potential for efficiency gains in the healthcare sector.”

Professor Michael Stople of Kiel University, a leading expert on Europe’s healthcare economy, believes Europe’s ageing population and its relatively low level of investment in healthcare research, means healthcare has a major role to play in reviving European economies. “In the aftermath of the financial crisis, the growing size of Europe’s elderly cohorts is boosting the social rate of return on health-related public-good investments at a time when the borrowing costs of many European governments are at record lows.

“With sufficient translation of health improvements into longer, more productive working lives, Europe’s currently depressed economies can thus be supported in returning to sustained long-term growth and in generating the additional tax revenue that will eventually help governments balance their books.”