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Osborne's austerity hasn't worked, so he proposes more austerity. Watch

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    The truth of the matter is that every employer knows that Britain has an almost unlimited supply of cheap labour from eastern Europe.

    A local business paid its workers more than minimum wage around 2000ish and had difficulty filling vacancies. Now it pays minimum wage for the same jobs and is able to pick names out of a hat because of the number of people who apply whenever a job is offered. Most workers are now eastern Europeans because they are willing to work long hours for minimum wage - some would even take £1 an hour if it were legal - and not complain. It doesn't take a genius to realise that such immigrants have a strong potential to drive down the standard of living in Britain by redefining what is socially acceptable.

    If a population of a country expands faster than the economy can absorb workers then it leads to wage deflation due to competition in the job market.
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    (Original post by Arran90)
    The truth of the matter is that every employer knows that Britain has an almost unlimited supply of cheap labour from eastern Europe.

    A local business paid its workers more than minimum wage around 2000ish and had difficulty filling vacancies. Now it pays minimum wage for the same jobs and is able to pick names out of a hat because of the number of people who apply whenever a job is offered. Most workers are now eastern Europeans because they are willing to work long hours for minimum wage - some would even take £1 an hour if it were legal - and not complain. It doesn't take a genius to realise that such immigrants have a strong potential to drive down the standard of living in Britain by redefining what is socially acceptable.

    If a population of a country expands faster than the economy can absorb workers then it leads to wage deflation due to competition in the job market.
    This is where I disagree. Businesses are always looking to pay as little as they can.

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    (Original post by Bornblue)
    This is where I disagree. Businesses are always looking to pay as little as they can.
    It's called the iron hand of wages. This is a function of several variables including the ratio of jobs to available workers suitable for the jobs in question. If there are more jobs than workers then employers are inclined to raise salaries in order to fill vacancies. If there are more workers than jobs then employers can drop salaries down to minimum wage because they know they can easily fill vacancies.

    I work in industry so I'm aware of this. Some jobs are well paid because its a bugger to find suitable employees but if supply of suitable employees increases then salaries fall. Web developers are one example. About 20 years ago web developers were often paid more than programmers of traditional programming languages like C because few people had the skills and knowledge but now they are usually paid less because they are ten a penny.
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    Compared to 2010 the economy is larger, wages are higher, unemployment is lower, and the deficit is smaller.

    Perhaps some other policy would have worked better - we can't ever know now - but by what standard has this policy not worked?
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    (Original post by Smack)
    Oil (and gas) certainly are key contributors to the rise in living standards.

    Living standards will more than likely deteriorate again when they are no longer available in the quantities that they are now.
    Says the oil man!



    Can we see on this graph where oil became cheap and widespread? I don't think I can. The only major use for oil that couldn't be directly substituted even with non-synthetics is producing avgas, which would be a sad loss but not really back-to-the-stone-age stuff.

    The principal significance of oil has always been military.
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    (Original post by Arran90)
    The truth of the matter is that every employer knows that Britain has an almost unlimited supply of cheap labour from eastern Europe.

    A local business paid its workers more than minimum wage around 2000ish and had difficulty filling vacancies. Now it pays minimum wage for the same jobs and is able to pick names out of a hat because of the number of people who apply whenever a job is offered. Most workers are now eastern Europeans because they are willing to work long hours for minimum wage - some would even take £1 an hour if it were legal - and not complain. It doesn't take a genius to realise that such immigrants have a strong potential to drive down the standard of living in Britain by redefining what is socially acceptable.

    If a population of a country expands faster than the economy can absorb workers then it leads to wage deflation due to competition in the job market.
    The problem with your later point is that you've taken a very broad brush to the economy. When looking at a national picture we see that actually even with a high net immigration rate there are far more jobs than the available pool of labour and ergo across the average of the economy wages are rising (albeit potentially slower than they otherwise might). Where the argument about wage deflation has more weight is only at the lower end of the income spectrum whereby there are more people wanting a job in Tesco than Tesco can create jobs for them.

    The UK economy can absorb the labour pool as a whole, the only issues are in unskilled sectors.
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    (Original post by viddy9)
    It wasn't "slightly reduced austerity", first of all, and you're correct that it's a sliding scale. In my initial post, I stated that we haven't had it as bad as some people. That doesn't mean that we should be pursuing austerity, though: it means that any austerity measures that are implemented still represent an opportunity cost, because economically sensible strategies, such as investing-to-grow, would allow us to do even better.
    Can we take a look at this strategy?

    Tax take is something like 40% of GDP, so for investment-driven growth to match increase in the deficit due to increased spending, each 1% of GDP spent by the government must return 2.5% of GDP growth.

    Typical market investments return 5-20% per year, most towards the lower end of that range, which corresponds to 1% of GDP spent by government returning 1.05-1.2% in increased GDP, nowhere near enough to cover the increase in the deficit.

    So either government investments - I think this word is used to mean any government spending rather than even money specifically intended to return a profit - make a return about 10x as large as any market investment of comparable size, or this policy is nonsense. Now if government investments return 10% as much as market investments then I suggest that the government should spend 100% of GDP, but if that were the case the economy of the USSR should have grown by over 100% per year. Something is wrong here.

    In fact academic advocates of government spending don't make this argument. The argument they make is that government spending reduces unemployment, which if there is a lot of unemployment might increase growth elsewhere by a lot simply by putting "wasted" workers back into employment. The government spending "multiplies" by creating growth distributed in the private sector. Problem: the UK has 5% unemployment, basically the same as before the recession. There simply isn't any output gap due to unemployment in the UK, which dynamites the case for deficit spending.

    This is an argument that could have made some sense as late as 2013, when unemployment was still hovering a bit below 8%. Now 8% unemployment is hardly Great Depression levels, but it was at least plausible to argue that we could have got a 3-4% boost to GDP from eliminating that output gap by deficit spending. Assume it would have worked, and that it couldn't have been achieved by monetary policy, that would probably have been worth doing. For the past year or two, though, there has been no reasonable case for deficit spending. The fact that anti-austerity advocates haven't responded to or perhaps even noticed this strongly suggests to me that their goal is just to increase government spending by any argument likely to gain traction, and has no connection to the recession or basis in economic theory.
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    (Original post by Rakas21)
    The problem with your later point is that you've taken a very broad brush to the economy. When looking at a national picture we see that actually even with a high net immigration rate there are far more jobs than the available pool of labour and ergo across the average of the economy wages are rising (albeit potentially slower than they otherwise might). Where the argument about wage deflation has more weight is only at the lower end of the income spectrum whereby there are more people wanting a job in Tesco than Tesco can create jobs for them.

    The UK economy can absorb the labour pool as a whole, the only issues are in unskilled sectors.
    The unskilled sectors have borne the brunt of immigration in the UK but higher skilled sectors are still vulnerable in the future. A large influx of Indian engineers and software developers on H1B visas into the US has driven down salaries in these industries and taken jobs from Americans. There is nothing to suggest that It can't happen here as well.

    Another problem is the way in which foreigners are often more willing to accept poorer working conditions than British people are. This makes them more competitive in the eyes of employers unless British people are willing to lower their standard of living.
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    (Original post by Observatory)
    Says the oil man!



    Can we see on this graph where oil became cheap and widespread? I don't think I can. The only major use for oil that couldn't be directly substituted even with non-synthetics is producing avgas, which would be a sad loss but not really back-to-the-stone-age stuff.

    The principal significance of oil has always been military.
    And what is the relative cost of using the various alternatives in comparison?
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    (Original post by Smack)
    And what is the relative cost of using the various alternatives in comparison?
    To do everything the same way, considerably higher.

    But most of what is done with oil is about leisure and convenience. Electric trains are more efficient than cars.
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    (Original post by Observatory)
    ...
    The argument made by academics, the OECD, the IMF and so on, is that we should be borrowing to invest at a time when we have record-low interest rates. It's not just about tax take.
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    (Original post by viddy9)
    The argument made by academics, the OECD, the IMF and so on, is that we should be borrowing to invest at a time when we have record-low interest rates. It's not just about tax take.
    If we're talking about their position rather than yours, can you provide quotes from them describing their position?

    If your own position is not that "invest-to-grow" would eliminate the deficit quicker than austerity by increasing the tax take, it does much better on L i b's "too good to be true" test. On the other hand, it depends on the much more questionable assumption that the government is good at investing money, better than the market.
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    Everybody seems to be missing the point:

    1. Why should recessions even happen at all?

    2. Why should unemployment not be negative? That is more vacancies than workers to fill them.
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    (Original post by Arran90)
    2. Why should unemployment not be negative? That is more vacancies than workers to fill them.
    Because that would imply people are being underpaid. Employers should raise salary offers until they can fill their vacancies.

    (to be fair the number of unfilled vacancies is not subtracted from the number of unemployed, and in the good times unemployment is probably around zero by this measure)
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    (Original post by Observatory)
    To do everything the same way, considerably higher.

    But most of what is done with oil is about leisure and convenience. Electric trains are more efficient than cars.
    And that is my point. We're going to have to learn to do things differently because the way we currently do them will not be as affordable. And "differently" in this context more than likely means "not as good as before". I can't take the electric train to the shops and many people can't take the electric train to work.
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    (Original post by Bill_Gates)
    Osborne must step down, he doesn't understand economics. He listens too much to his "advisors", goldman sachs much?

    He wants to hurt the disabled whilst helping the middle class. He's destroying societies moral compass.
    I'm not sure there's any real evidence being an economist (as you might suggest Nigel Lawson and Norman Lamont were) is particularly useful in being Chancellor. It's about the level of suggesting the Education Secretary should be a teacher, or the Health Secretary a medical doctor.

    He wants to "hurt the disabled"? Have you actually read what was proposed in relation to PIP?
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    (Original post by Smack)
    And that is my point. We're going to have to learn to do things differently because the way we currently do them will not be as affordable. And "differently" in this context more than likely means "not as good as before". I can't take the electric train to the shops and many people can't take the electric train to work.
    I don't see why not. Using trams with overhead wires we can repurpose the road network at relatively low cost and with vastly increased customer base the trams can be very frequent. Its also likely that local shops reappear, which is a bit less efficient but not a lot. The structure of cities will change, not necessarily get worse.

    Of course lower availability of something means "not as good as before" but I dispute that this would mean substantially lower perceived living standards, to the extent that most improvement since 1910 should be ascribed to oil. You can't drive an American muscle car to work except at exorbitant cost, cars with huge cheap engines being predicated on pre-1973 oil prices. Yet you probably don't perceive yourself living worse than an American from 1965.

    There's always some loss at the margin, but the next-best-method is never that much worse, people imagining disastrous consequences think not-at-all, not next-best-method. Economic growth is due to distributed improvements in thousands of small areas, not single massive breakthroughs.
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    (Original post by Observatory)
    If we're talking about their position rather than yours, can you provide quotes from them describing their position?
    Here's Professor Simon Wren-Lewis (my emphasis):

    No doubt we will hear the usual cries from the opponents of sensible fiscal rules: Labour plan to borrow billions more than George Osborne and they plan to go on borrowing forever. The simple response to that should be that it is right to borrow to invest in the country’s future, just as firms borrow to invest in capital and individuals borrow to invest in a house. Indeed, with so many good projects for the government to choose from, and with interest rates at virtually zero, it is absolute madness not to investment substantially in the coming years... using fiscal policy to end recessions quickly does not mean higher debt forever. The key point is that debt can be reduced once the recession is over and interest rates are safely above their lower bound.
    Perhaps the most respected economic commentator in the Western world, Martin Wolf of the Financial Times, put it like this:

    The austerity obsession, even when borrowing costs are so low, is lunatic
    (Original post by Observatory)
    If your own position is not that "invest-to-grow" would eliminate the deficit quicker than austerity by increasing the tax take, it does much better on L i b's "too good to be true" test. On the other hand, it depends on the much more questionable assumption that the government is good at investing money, better than the market.
    I was referring to the deficit-to-GDP ratio and the debt-to-GDP ratio, which is what really matters.
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    (Original post by viddy9)
    Here's Professor Simon Wren-Lewis (my emphasis):
    Hang on, you said the OECD and IMF, not a single professor's blog.

    Wren-Lewis makes the argument you have made that the government should invest because it can borrow money cheaply. He doesn't say that it should invest in, or why it is likely to make a profit doing so.

    I actually wrote to Wren-Lewis a couple of months ago on this question asking him if, given that it tends to return 5-8% p.a., the government should borrow to invest in the stock market, it seeming unlikely to me that "investing" in disability benefit would return the same. Unfortunately he did not reply.

    Frankly I think the man is more interested in political than academic questions and this comes across strongly in his blog. This post is not directed at academics it is directed at Labour party strategists.

    (fwiw, I don't think the government borrowing to invest in the stock market is a terrible idea, though I'm sure that's not that is meant)

    I was referring to the deficit-to-GDP ratio and the debt-to-GDP ratio, which is what really matters.
    What difference does it make? Neither reduce unless GDP is growing faster than debt.
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    (Original post by Observatory)
    Hang on, you said the OECD and IMF, not a single professor's blog.
    I wasn't just referring to the OECD and the IMF. You'll note that I said "academics, the OECD, the IMF, and so on".

    Anyway, here's the OECD's chief economist, calling for less austerity and more investment: “With governments in many countries currently able to borrow for long periods at very low interest rates, there is room for fiscal expansion to strengthen demand in a manner consistent with fiscal sustainability.”

    (Original post by Observatory)
    Wren-Lewis makes the argument you have made that the government should invest because it can borrow money cheaply. He doesn't say that it should invest in, or why it is likely to make a profit doing so.
    You'll find that he has addressed this question in his "political" blog.

    When the benefits are short lived, spending should be paid for by higher taxes. So the relevant metric for what should count as investment in this context is who benefits most. While paying doctors or teachers more may have some knock on benefits for the future, the main beneficiary will be today’s doctors or teachers. The benefits of new schools and hospitals are longer lasting.
    (Original post by Observatory)
    Frankly I think the man is more interested in political than academic questions and this comes across strongly in his blog. This post is not directed at academics it is directed at Labour party strategists.
    I think your views are clouded by your political views. Wren-Lewis is a highly respected academic, and he's not overtly political. He'd work for the Conservatives if they were interested in sensible economics. Unfortunately, they're not.

    (Original post by Observatory)
    What difference does it make? Neither reduce unless GDP is growing faster than debt.
    And GDP can grow faster if investment is made.
 
 
 
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