Tuesday, December 29, 2015

Political insights from Anatole Kaletsky

Anatole Kaletsky in Prospect Jan 2016More jobs by the day - but why? has provided a promising 'ladder view' from the Osborne maze (see this blog 26 Nov). He gives three views of the economic situation with the third highly convincing. He thinks 'the misconceived fiscal austerity that condemned Britain to four years near-zero growth'  may be over and even suggests George Osborne may be seeing things the Kaletsky way as evidenced by the autumn U-turns.

Kaletsky's main point is that current conventional economic theories deal inadequately with the computer and internet revolution because traditional ways of measuring gross domestic product (GDP) and productivity per worker are not recorded adequately, or at all.  The huge rise in jobs  is a beneficial effect of the ICT revolution and should be seen as a harbinger of better times, but instead, apparently weak productivity statistics are warping judgement. In Kaletsky's view George Osborne's long-term fixation with the deficit is far too pessimistic because of the failure to acknowledge the true strength of the economy.

Kaletsky explains the new way we should look at what is happening around us. Whilst the internet adds enormously to reading, communications, shopping and entertainment much of this is free to users and leave no financial record, with a corresponding reduction in GDP. And again, postal services have been transformed by the ICT revolution. Old industries - such as the struggling Post Office - are being decimated because communication is now done through other means such as e-mail, text and suchlike and being mostly free is unrecorded in GDP numbers. An old economics chestnut from the 1960s was that a Beethoven quartet still took four musicians as it did a century before, and this was taken as an example of the minimal productivity growth possible in service industries. Kaletsky points out that technology has now actually multiplied the productivity of the four players by millions of times and this shows up the inadequate economic theory. Unfortunately economists such as Robert Gordon who is a power behind US government economic advice deems the 'third industrial revolution' based on ICT to be productively poor compared with the earlier ones and he sees no gains since the 'ICT peak' in the mid-1990s; and that the ICT revolution is stalling due to diminishing returns as devices hit a size barrier due to 'the fixed size of the human finger' for entering information.

The problem is that governments are running economics with their eyes fixed on some old-fashioned outcomes and making policy judgements that affect us all. AK has a choice phrase to explain the difficulty: '...in academic economics, lack of realism is rarely and obstacle to success.' He calls for a delay in deficit reduction and a delay in interest rate rises until wages and productivity are well up and inflation above 2%, using the official measures.

Kaletsky points out a wealth distribution effect of the ICT revolution, as do others such as Adair TurnerBetween Debt and The Devil ) .  As Lord Turner has it (p.69-70) Facebook needed a trivial amount of investment capital compared with the earlier revolutions. Its 2014 equity valuation was £150bn  and a significant part of this new wealth ends up in real estate and particularly in increasing land values. After those fortunate enough to share in the ICT revolution have their desires for consumer goods met they want 'locationally desirable land'. This in turn attracts those wanting capital gains to the real estate market and so the poor, and increasingly the less poor but young, lose out on the opportunity of owning their own home. George Osborne obviously aware of this trend which is cutting against the core Tory home ownership imperative is trying to manipulate the market with incentives and handouts to aspiring homeowners. In terms of this blog - he is handing out land-value-based Free Lunches for political ends rather than with fairness. Kaletsky in the Prospect  article points out the populist political movements around the world show that growing income imbalances are 'likely to be unpopular'.

In terms of The Free Lunch - Fairness with Freedom solutions to income imbalances lie in giving a regular citizen's income, as of right, to everyone, without means test. As to wealth imbalances and in order to dampen land price booms, all land values should be taxed (excluding the building value) which will capture for public benefit the huge flow of wealth into land which is now probably a lasting feature of the ICT revolution. Income taxes should be simultaneously cut to make the change politically possible.

UK politics is down a blind alley whilst a third industrial revolution is in spate but there is little vision for the problems of our time with few able to grasp the issues and offer solutions. Although The Church of England was good on analysis in March but timid on the way forward, TearFund in April was much bolder. Yesterday The Times (leader Dec28) has it: 'It is hard to avoid the feeling that the issues are big but the politics, at the moment, is rather small'.             

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