The easiest way out of the collapse would be to increase benefits
The first thing I think of when the government cuts benefits is my friends – friends already forced to their knees by massive youth unemployment, now being kicked in the teeth by those who destroyed the jobs in the first place.
But perhaps as galling as the injustice is that the measure is likely to make the economic situation worse. At its most simple level, the economic crisis at the moment is one of demand. Once the banks had collapsed, once the lending had dried up, people stopped spending.
A pound spent is the unit of economic success the government pretends to care about. It is, basically, what GDP is made up of. So if no one is buying anything, they have no chance of mending the economy. Once a pound is spent, the person who receives it will then likely spend it themselves, and the person who receives that will likely spend it again. Get spending moving, and economies fix themselves.
If you are the government, where to take that money from is, of course, contentious. There are so many options, it must be hard to pick:
- You can tax it off the richest humans who have ever lived (because the rich tend to save, taking money away from them and giving it to poorer people increases spending).
- You can borrow it at low interest rates (though these have risen a little in recent months as the Tories have continued to trash the economy).
- You can create it by getting the Bank of England to press a button (which only leads to inflation if it doesn’t deliver growth because you do something stupid with it, like giving it to banks).
And how you spend it is also difficult. Were I in charge, I’d like to see a very different kind of spending, building a different kind of economy. I’d like to see public spending on new council houses, on education, on social services; on funding new workers co-ops and mutuals and on community buy outs.
But given the current government, this isn’t going to happen. So, let’s imagine that what you wanted was to save the consumer capitalist economy. What would be the easiest way to do it? What’s the easiest way to increase spending in the economy? Well, you could increase spending on public services. They should do this, but it takes some time. If you want to stimulate the economy quickly – if you want to inject cash straight into the pockets of the people most likely to spend it (ie, the poorest people), then there is a dead easy way to do that. Increase benefits.
Given this, we can assume that the government’s move to cut benefits has nothing to do with a desire to save the economy, and everything to do with a political attempt to divide the working class, and attack us all.
What’s galling is the the Tory government seems to have inadvertently put a lot of groundwork in place for the Green policy of the citizen’s income – which solves the psychological issues of resentment relating to greater benefit payments. Iain Duncan Smith’s universal credit idea was flailing about in that general direction, and the new policy of paying everyone child benefit but taxing it back off people who don’t voluntarily opt out presumably helps to set the precedent for doing this with other benefits as well.
The salubrious economic effects of increasing benefit payments cannot seriously be doubted. Claimants are overwhelmingly likely to spend the dole within the local economy and the multiplier effect is likely higher than average within public expenditure.
This is totally distinct from the common perception of benefits as fair/unfair.
Evidently, any practical benefits regime will result in some false positives and some false negatives – those who should receive but do not and those who, due to fraud or systemic glitches, should not receive but do.
It is morally warped to err on the side of shutting people out of their entitlements, rather than accept that a civilised society requires a welfare system and that this involves certain overheads.
I hope the majority of people in the UK, if pressed, would share this intuition and I think a lot hangs on whether they do. The Tories are strategising on the premise that that there is no breaking point within the (swing voting?) public beyond which emnity towards claimants might give way to compassion for those forced into indigence.
Here in Ecuador, the vice president (who was crippled years ago) has been pushing to vastly increase the “cuotas” of those unable to work due to disability, and family members who care for them. In the case of a full time family member carer, this will increase to the national minumum wage of 318 USD per month (more than many people earn working in casual jobs).
I asked a friend about whether there was any resentment from people working hard to make the same money as someone receives freely from the state, or suspicion that people might be gaming the system. He thought that this was an odd way of looking at it and I was somewhat embarrassed to admit that in the UK, this is what the debate turns around.
I think further insights into cultural reasons for the colder attitude towards entitlements in the UK are crucial.
Buy more pounds in the economy isn’t the same as inflation. That may be what some monetarists say, but it’s not true. Nor has QE actually led to a increase in the money supply given the private sector deleveraging.
On the first point, assets do go up, but yields go down, which to some extent cancel. I think government has benefited more than banks from QE, and some parts of the city have been hugely hurt by it, insurance for example.
@Ali – hmmph – I agree that saying ‘giving to banks’ is a simplification, but the net effect is that bank’s asset values go up, and so they get richer.
On inflation, I guess there’s two different points – does it deliver inflation if it fails (ie there are more pounds in the economy, but the economy is the same size) – yes.
Then, if it has suceeded in taking the economy out of recession, can you do it forever..? – no, I’d guess not.
One, minor, issue. I don’t think what you’re saying about QE is right, for one it wasn’t given to banks, it was an asset swap, they exchanged treasuries they’d bought off the government for central bank reserves, the BoE’s balance sheet increased, and the government’s interest rates decreased, but bank balance sheets didn’t increase, at least not directly. And it’s more likely to be inflationary if there is growth. For Krugman’s faults, he’s right on this, QE, or even just printing money, isn’t inflationary when you’re in recession and at the zero lower bound of nominal rates, but when/if the economy recovers that will (probably) need to be unwound to prevent inflation.