An Argument Against The Defense of Small Business and The High Street

December 30, 2011 Leave a comment

Following the holiday period, usually on the 1st of January and through the lenses of a throbbing hangover, most people will begin coming down of the the festive high produced by gifts and slightly higher sales figures and realise they are staring another bleak year in the face. Luckily, not I, for I know that we, as a country, have the gift that keeps on giving, The Chancellor George Osborne.

January will see the release of the Q4 GDP growth (Ha!) figures for the UK economy, along with which we’ll get to hear Osborne’s latest excuse for the stagnation of the economy. Faced with mild weather and no cataclysmic events halfway across the world, trying to guess what he’ll blame it on is fun for the whole family. (My guesses are the nasty strikers, Europe, the welfare state and further Tory boggy-men (He may have a point about Europe)). Along with this we can expect a few speeches on the importance of Small and Medium-sized Enterprises (SMEs) and a few “Small Business Promoting” schemes that will do little, but look nice on the front page.

Putting aside for one moment the hypocrisy of politicians who in one breath insist that Universities and Hospitals should be allowed to rise and fall according to the logic of the free market, while in the other promise to use the power of the state to defend Small Business, this opens up an interesting can of worms. Why are politicians so attached to SMEs, and why do these stalwarts of the British Economy need encouragement?

My contention is that the answer to these two questions is one and the same: SMEs employ more workers relative to output then large businesses such as corporations. How this answers the first question, namely, why do politicians love them so much, should be obvious. An economy that doesn’t encourage SMEs courts high levels of unemployment, at least in the short term (and I would argue in the long term too), an obvious faux pas for any Chancellor.

Before focusing on how SMEs employing more workers per unit of output is the cause of their woes, let’s look at why this is. Compare the ease of acquiring credit and other forms of financing, and therefore access to capital, of SMEs to corporations. It should be obvious that corporations have the lion’s share. Moreover, the most glaringly obvious example of the unsuitability of SMEs to compete with corporations are simply economies of scale. Bluntly put, SMEs will always have higher labour costs per unit of output than a corporation producing a similar product.

Translated into the real world, they will employ more people to do the same amount of work and have smaller profits as a result. ONS figures bare this out, with SMEs accounting for almost 60% of employed workers but less then half of national turnover.

The obvious result is that SMEs are less profitable, on average, then corporations. That’s not an all encompassing statement, there will be SMEs that are more profitable then corporations but the odds are stacked against them.

The implications of this are quite startling. Opening an SME has long been acknowledged as one of the few routes open to the unpropertied classes should they attempt to better themselves, the other, of course, being an investment in their own human capital so that they can sell their labour for higher wages.

Now consider this, if SMEs are indeed struggling to compete with corporations how do they still account for over 40% of GDP? I’d say it’s probably due to their decentralised nature, they can fill small gaps in an economy that corporations find difficult to expand into. This bodes well for SMEs who have picked their markets well, but unfortunately limits their opportunities for expansion. Those who have poorly picked their markets, such as the stores you would regularly find on a Daily Mail reader’s wet dream of a high street, have little hope of warding of profit hungry corporations and will only continue to survive if the state provides ever more increasing support for them.

And so another strain is introduced to a system still reeling from the latest financial crises, and you have to wonder how long the state can use its power to prevent an almost inevitable trend.  Marx argued that capitalism, as it seeks to lower production costs, will take advantage of economies of scale and substitute ever increasing quantities of capital for labour. The other side to this prediction is that it will lead to either depression of workers wages, or rising unemployment. Taken by itself, the tendency of SMEs to lose out to corporations isn’t going to spell the downfall of capitalism, but it does lend a clue as to what stage of the development of capitalism we are in now, and points to another potential future source of social tension, large scale and persistent unemployment.

Categories: School Boy Economics

Inflation: I’ve got a bad feeling about this

August 23, 2011 Leave a comment

Inflation is defined as a rise in the general level of prices due to a fall in the value of money. The method central bankers use to measure inflation is simply to make up an imaginary basket of goods that the ‘average’ household buys each year and compare how this basket changes in price from year to year. This is how we get the inflationary indicator of CPI and is very similar to how we calculate RPI.

Inflation hasn’t been a cause for concern for a long while. Indeed, over the past 25 years the US’ inflation rate has hovered around the historical average of 3.43% which is fairly low and near what most economists would call a healthy level.

Here’s a graph showing how nice and reasonable the rate of inflation has been recently:

A good way of  understanding the value of money is simply using the concept of supply and demand. The more money, an increase in supply, the less it is worth. So let’s look at how the money supply has expanded over the last 40 years compared to how nominal GDP has increased. Theoretically, they should mirror each other with the difference between being inflation.

US nominal GDP in Q1 of 1971 was $1,098.3 bln and in 2011 Q1 it was $14,867.8 bln, or in other words it rose by 1253%.

US M2 money supply in Q1 1971 was $632.9 bln and in 2011 Q1 it was $8838.4 bln, or in other words it rose by 1296%.

This seems perfectly normal and the difference between the two is generally keeping in line with inflation as measured by CPI.

When I say ‘M2’ money supply I’m referring to one of the different classifications the US Fed uses to determine how much money is in the system.  M0 is notes and coins,  M1 is M0 plus money in current accounts and the like (essentially the money in accounts you can access at a cash point) and M2 is M1 plus time deposits under $100,000 and money market accounts for individuals. It’s a good way of estimating the total amount of money in circulation in the ‘real’ economy.

The problem is that the M2 money supply does not represent all the US dollars in the economy at the moment. There is another measure, called M3, which since 2006 is no longer made public by the Federal Reserve. M3 is M2 plus “large time deposits, institutional money market funds, short-term repurchase and other large liquid assets”.  In English, that’s how much money the big boys have. That’s what hedge funds, banks and private big investors are playing with on the financial market, but more importantly, what their computers are using. (Most financial transactions are done completely by computers based on algorithms with no human input.)

When you consider M3, the growth of the money supply becomes a completely different story.

US M3 in 1971 Q1 was $685.5 bln and in 2011 Q1 it was $15,000* bln, or in other words it rose by 2088%. That’s a  hell of a lot more than the 1253% that GDP has increased by.

As you can see M3 has risen by drastically more than GDP growth, and what’s more this increase in the money supply has gone directly to large financial institutions or the super rich, i.e. those who also benefit from Q.E. which is one of the likely causes of the M3 expansion.

This would explain why there has been no corresponding increase in CPI or the official rate of inflation. This money would by and large not effect the ‘real’ economy or be used to buy consumer goods, it’s far more likely that it’s been sent straight into the financial markets artificially inflating the stock market and causing the strong growth we’ve had for the past 40 years. Only occasionally will we have seen the effects of it in the real economy, the recent jump in commodity prices being a good example.

What does this mean? Well if I’m correct and our growth has been caused by a massive inflationary bubble over the past 40 years we’re going to go through hell soon. If I get the energy I may do a post on how I think this happened and what the results will be. Or you can buy me a drink and hear it earlier.

Max

*Estimate, as mentioned earlier the Fed no longer publishes M3 figures but various sources have reconstructed the figures and agree that it is just under $15,000 bln, putting the figure I use most likely $100 bln but up to $500 bln off the true level. For the purposes of this article the difference is immaterial.

Why The Left Should Take PR Seriously

Historically, the left wing has complained of a bias in the mainstream press. Their side of the story is largely ignored, demos and protests go unreported and activists are continually mislabeled. Furthermore, the press always seems willing to report the official line given to them by the police even if it flies in the face of all available evidence and common sense (see the molotov cocktails story that came from stokes croft as a prime example). This taken into account, it’s not hard to believe that the press is actively working to suppress and turn public opinion against any movement to the left of Labour. Actually, it’s a bit more complicated than that.

A recent-ish study of the output of four quality broadsheets (and the Daily Mail) conducted by the journalism department of Cardiff University found that of the 2,207 pieces* published in a random two week period 60% of these stories consisted entirely or mainly of copy simply lifted from either a wire report or a press release, a further 20% were largely based on wire copy or a press release with 8% of undetermined origin and only 12% actually an original story. Of these, ones that relied on a specific statement of fact, such as “Benefit scroungers cost us £X/day”, 70% were published without any attempt at corroboration of the figure.

Obviously, this has appalling consequences for the quality of British journalism but if you’re interested in those consequences then I’d suggest you read Flat Earth News by Nick Davies which does a delightful job of highlighting them. Instead, I’m going to shamelessly take findings from this research as well as several conclusions from Davies’ book and apply them to the world of political activism.

We live in a world where journalists simply don’t report news anymore. The reasons for this aren’t an elaborate conspiracy, it’s simply cheaper to have journalists reprocess wire copy and press releases then to conduct proper investigations and newspapers are, after all, a business. We live in a world where roughly 80% of articles are based on, or are simply rewritten, wire copy/PR and furthermore where 41% of the wire stories that make it into print  are themselves based on a press release or other PR activity. In short, the media has ceased to be as a reporting body and instead has become simply a conduit for PR, press releases expertly put together by PR people so that they are essentially a pre-written story for the papers to process into an article, publicity stunts and research or opinions provided by experts who are often in the employ of a special interest group . Churnalism.

My argument is that instead of shutting ourselves off from Mainstream Media, we should be using it. There is an inherent bias in the media against anyone who isn’t an official source but this does not apply exclusively to the left. The press will always favour an official quote over that of dave down the pub. Take, for example, the press coverage of global warming. I highly doubt that most papers have an anti-enviromental bias and yet we repeatedly saw respected papers and news programs give air time to global warming deniers despite the abundance of scientific evidence stacked against them. Why? Because the corporate lobby behind these crackpot talking heads knew what they were doing.

In the run up to the Kyoto Accord press releases, essentially ready made stories, were pumped into the press, into both the wire agencies and at the national level through a variety of official sounding interest groups. Most of these ‘independent’ bodies, actually paid for entirely by major oil companies but with very misleading names constantly recycled research papers from the twelve or so climate change denying scientists they could find. Exxon Mobile itself funded 43 ‘independent’ bodies dedicated to spreading doubt about climate change in the run up to Kyoto.

Bearing the importance of PR in mind, here are some simple ways to boost the media coverage of any actions you’re planning:

  • Take the work out of the journalist’s hands. Prepare a press release that’s essentially a pre-written story for them.
  • Ensure that this story is as balanced as possible, simply state the facts, put anything else in quotation marks and attribute it.
  • If possible try to include a quote from the opposition to make it appear more neutral.
  • Include photos – If possible make sure the photo fits with who you’re pitching the story to. If a local paper, try to get a local landmark in it.
  • Include backstory for the article, don’t make the journalist have to go and research the issue.
  • Send this press release as far and wide as you can. Email it to Reuters, AP, your local papers and a couple of national ones. The more they see it popping up, the more likely they are to run it.
  • Designate a media spokesman. It can be a rotating, recall-able position bu there has to be someone that the media can easily get in contact with for quotes and background information. Our decentralised structure actively makes it difficult for us to get our message out into the press as they usually don’t know who to contact.
  • Get your spokesman’s contact info out there!
  • Goes without saying but make your actions interesting.
  • At all points, try to not appear as if you are trying to use the press for your own ends. Journos don’t like that if you’re not a big company.

Journalists, especially local ones, are usually desperate for stories, especially local interest ones with photos that take little time to write up. Why not do their job for them?

Ultimately, if we want to get on a level pegging with corporations and the government in the media we will have to be more creative then this. We will have to use their own tactics to gain media coverage (Which greenpeace and the Yes Men have done to great effect), such as setting up phoney interest groups(though greenpeace don’t do this), supplying the media with talking heads, and generally setting ‘the angle’ through very clever PR management. We may not have the money that they have to do this, but we have just as many experts and a hell of a lot of time and enthusiasm. We need to start taking PR seriously.

*Refers to news pieces only, sports, entertainment, editorials and the like were ignored. Research led by Prof. Justin Lewis.

Categories: Uncategorized

Dear Mr. Cable

Here’s the text of an email I recently sent to Mr. Cable regarding his choice to not deliver the HE white paper to parliament himself. If you’re equally concerned you can send him an email at enquiry.enquiry@bis.gsi.gov.uk

Dear Mr. Cable,
 
I was surprised today to hear that you would not be presenting the white paper to parliament, but that instead Mr. Willets would have the honour. May I ask why you have choosen not to present the paper yourself? Are you OK? I can only assume that there is pressing business elsewhere for you to attend to. Kindly consider this a request to know why you will  not be delivering the results of the white paper to parliament today and furthermore to know what you were doing instead.  I hope you’re not ill though if this is your way of showing solidarity with the planned strike on Thursday I fully understand. Thank you very much for your time.
 
Yours sincerely,
 
************

I’ll be sure to let you all know his reply as soon as he gets back to me. I await his response with baited breath

Categories: Uncategorized

The Absurdity of Quantitative Easing

Say you’re the government and you want to build a bridge. It doesn’t matter where or why, but it costs £100 to make. Imagine that you don’t have £100 with which to build the bridge, school, hospital that you want, two options then exist. The first is to simply print more money, as you control the nation’s printing press it seems fairly easy to do. You print the money, no one loses any, the bridge gets built and everyone is happier.

Of course, it doesn’t actually work like that. That printed money inflates the currency, or devalues people’s holdings, meaning that everyone in your society is poorer, it is essentially a tax and a regressive one at that. The poor tend to suffer more than the rich when inflation occurs, due to wage stickiness while financial markets are usually much quicker to respond to inflation than wages.

So you decide not to do that. Instead you decide to borrow money, i.e. issuing bonds to private investors promising them X amount plus interest where X is the amount you borrow. This means that you get to build the bridge and the money supply doesn’t become inflated as the amount you spent on the bridge is no longer being spent in the economy but is tied up in bonds. Sounds good, right?

Well it is. There’s nothing wrong with even high levels of short-term debt, provided the interest rate investors are willing to lend you money at does not rise to much (ours are currently rock bottom).

Back on topic, say in your economy growth slows or it threatens to enter a double dip recession but your government is locked on a course of austerity that it would be politically damaging to turn from, what do you do? With the economy screaming for a stimulus, if you were the government how would you subtly pump more money into the economy while still looking like you’re ‘not one for turning’?

As was explained very well by  in the guardian today you begin a course of what is called Quantitative Easing. I’m going to now explain what Quantitative Easing is. I promise you this isn’t a joke.

Remember that £100 you borrowed earlier to build the bridge? The money you borrowed so that you wouldn’t cause inflation in the economy and thereby harm everyone, especially the poor? Yeah, well fuck that. I’m going to tell you what you’re going to do. You’re now gonna go and buy back the bonds that you sold to private investors earlier. What’s more, you’re going to buy it back at very attractive rates for the investors because the idea here is to push money out into the economy, not to make it. Also, you’re going to simply print money to buy it. You, the government, are literally buying up your own debt with made up money. And the best thing? Your debt that you bought at above market rates, since it’s held by a company nominally independent of the government, isn’t counted as a debt, but rather as an asset so that the government’s books stay balanced (outflow of the money printed to buy the ‘assets’ is offset by the value of the ‘assets’ now held).

To put this another way, you’re literally going to print money, use this to buy up your own debt but use an overtly complicated system to do this so you can claim that A)you’re not adding to the deficit and B)that you’re not ~really~ printing money.

Hey look, the government managed to pump money back into the economy without loosening their austerity measures. How amazing.

But wait, you may say, isn’t the government really just printing money and calling it by another name? Won’t this ‘made up’ money cause inflation? Won’t this inflation disproportionately harm the income of the poor, specifically those working in the public sector who have had their pay frozen for the past two years? Won’t the high rates paid to buy back this debt go straight to rich investors? Would it be fair to say that by choosing to stick to their austerity measures publicly and instead boosting the economy in a Keynesian fashion ‘on the sly’ the government is A)being immensely hypocritical and B) favoring the rich over the poor? Is this really a big deal, it sounds sort of dull?

Well, yes.

Inflation is already on the rise and nearing 5%. To put this in perspective, at 5% inflation if you have a steady income of £100 within 5 years you’ll be making about £76 in real pounds. At 5% inflation the public sector workers who have had a pay ‘freeze’ would have suffered a pay cut in real income of just under 10%.

In short: rich getting richer, poor getting poorer.

Categories: Uncategorized

What’s Wrong With A Healthy Economy?

Let’s start with the idea that having GDP growth is fundamentally a good thing. GDP or Gross Domestic Product is the monetary value of all goods and services produced domestically and in a theoretical world the total national income of a country, and is calculated using GDP = Consumption + Investment + Government Spending + Exports – Imports. A politician who delivers high GDP growth is a politician who gets re-elected.

The implication of the earlier equation is that a pound spent on consumption is just as good as a pound spent on investment. Given that there’s no reason to think that consumption spending somehow creates more jobs then investment spending and every reason to believe that investment spending does more good for an economy in the long term by increasing its productive capacity, we can see why this is already flawed. Money spent purchasing the latest Iphone (which will last for about 3 months) is counted as equal to money spent improving local education or investing in better roads. The best example that I can give you of this is that last year GDP calculations in the US will have included the cost of the Gulf of Mexico clean up (an entirely avoidable expense, assuming proper regulation, that added nothing to the economy) as a plus while ignoring activity of a non-monetary nature such as the introduction of Linux (freeware) or local volunteering.

Furthermore, in GDP calculations one pound spent that comes from someone’s savings or from the payment they received for their work is counted exactly the same when determining economic growth as one pound that was magicked out of the air by a bank in the form of credit. So essentially, if I take out a massive loan and spend the money on a yacht it would have the same contribution to GDP as someone saving all their life and opening a factory. Actually, it’s better because the money saved could have instead been spent on a yacht as well and the factory then financed through credit, making twice the impact on GDP.

So you see, there are really two ways to “grow” an economy. One way is to tackle supply side issues and create sustainable growth through investment in infrastructure, education and innovation which sure sounds nice but takes a very long time to pay off , well longer then the sitting government is likely to be in power for. The other option is to boost GDP through encouraging consumption and debt. Now, I’m not going to sit here and say that our politicians are guilty of promoting an unsustainable economic model to further their own careers.

I'm going to post a picture strongly suggesting it instead.

Graph from: http://www.marketoracle.co.uk

But surely, if people choose to get into massive personal debt and spend their money on frivolous shit that’s there problem? Not entirely. The government has normalized and encouraged high levels of personal debt for the past 3 decades and we’re starting to feel the effects.

Apologies for the length/disjointed nature (not to mention pretentious writing style), I’m trying to get the groundwork down for an article I’m planning about what happens when the bubble we’ve been building for the last 30 years pops.

Categories: Uncategorized

How You (Yes, You!) Caused The Financial Crisis

April 12, 2011 3 comments

The Financial crisis was caused by greedy bankers taking risks with other people’s money. This, while a gross over-simplification, is roughly the truth and I have neither the time nor the inclination to go into further depth on a subject that has been done to death already.

Instead, I’d rather look further at the causes of the bankers’ behaviour.

In a very real sense, all power is derived from collectivism, especially in a democratic capitalist system such as our own. It’s common knowledge that politicians have power because they have the support of large sectors of the population as expressed through their votes every election. A much more subtle distinction to make is the idea that economic entities such as banks and large corporations derive their wealth (and therefore their power) from their consumer base. Take super markets as an example. In effect, the public votes every day on how corporations such as Sainsbury’s and Tesco operate by choosing where they buy their groceries, voting with their feet/wallet as the case may be. In a sense, this is democracy by another name. No commercial enterprise will succeed if it does not cater to the needs of consumers and therefore we, the consumers, have far more of a say in the operation of  a company like Tesco then we do in our own government. You only need to look at the emergence of the FairTrade or organic produce movement as an example of large corporations catering to the ethical concerns of their consumers.

Now let’s apply this idea to the banking sector. Before the crash of 2008, when looking for a loan/planning to open an account/shopping for a mortgage on what did you base your consumer decision of which bank to use? I’m going to go out on a limb and say you based it on which gave you the best deal, not which bank used the most ethical business model or gave out the least sub-prime loans. By always shopping around for the best deal we ourselves pushed banks to always seek the maximum profit with less and less regard for risk. They were just delivering on what we, the consumer, demanded. At any point, if consumers had decided that what the banking sector was doing was wrong, they could have easily changed their consumption patterns and thereby caused a change in how most banks operated.

Obviously, this is not the entire story. The average consumer doesn’t have the time or technical knowledge required to monitor the financial sector for unethical or unsustainable business models, that’s the government’s job. While consumer greed was certainly a contributing factor to the financial crisis and helped build the ‘damn everything but the profit’ ethos of the banking sector blame most certainly also rests on a select group of others, such as the banking regulators, the government and the media for not making the public aware of the risks. However, don’t fall into the trap of thinking this excuses us.

We make small decisions every day in the course of our regular consumption that are effectively the same as voting. Do you buy organic or GM? Do you bank at RBS or somewhere that isn’t evil? Fair Trade or non-Fair Trade? (Actually, that gives me an idea for a future blog post) All of these decisions come together to shape what our commercial sector is doing and our purchases directly empower those we buy from. Use your vote wisely.

~Max

Categories: School Boy Economics