PROUT UK

What's the real number of jobless people in Britain?

noreply@blogger.com (Pranav Bihari) — Sat, 20 Nov 2010 03:01:00 +0000

The number of jobless is double the number of unemployed in Britain. See the breakdown by region and the costs of getting people back to work. Read more on guardian.co.uk

Crises of capitalism by David Harvey and RSA Animate

noreply@blogger.com (Pranav Bihari) — Tue, 17 Aug 2010 09:37:00 +0000

The animation is brilliant! You can see David's full lecture on YouTube.

I am also including below a related piece published last year by me on the 'open democracy' website.

Crisis in the real economy
A crisis in the US real economy marked by growing unemployment and failing businesses is not a product of the current financial crisis. In fact, the financial crisis was but a symptom of a long brewing systemic crisis in the real economy. These claims are made separately by economists Richard Wollf (Univ. of Massachussetts, Amherst) and Ravi Batra (Southern Methodist University, Dallas). They propose an alternative diagnosis of the current economic crisis. If their analysis is correct, fixing the financial system might just deal with one of the symptoms but not the root cause of a deeper economic malaise. Given the amount of public money that is being thrown at fighting the economic downturn, it is critical to consider alternative explanations of current economic problems in order to devise strategies that make the best use of scarce resources.

Housing Bubble
The most widely accepted diagnosis of the current financial and economic crisis is that it started with the housing bubble in the US. This in turn resulted from irresponsible sub-prime mortgage lending coupled with unregulated and reckless financial engineering. When the housing bubble burst, banks found themselves holding heaps of unsecured debts packaged into complex financial products that could no longer find new buyers. Financial institutions suspected each other to be in a precarious financial position similar to their own and inter-bank lending came to a halt. Several of these institutions went bankrupt or would have gone down that route if public money ($2.98 trillion at last count) had not bailed them out.

Wage-Productivity Gap
Wollf and Batra do not deny the role of housing bubble and financial malpractices in triggering the financial collapse. What they seem to suggest is that there is a need to explore the chain of causation further. Doing so in their analysis reveals that a wage-productivity gap since the last three decades in the US created a systemic imbalance between aggregate demand and aggregate supply in the economy. Since the early 1970s wages of employees in the US have not risen at the same rate as their productivity (output per hour). In fact, real wages of roughly 80% of the US workforce have been stagnating for more than three decades. On the other hand, productivity has been increasing rapidly due to technological innovation and improvement in human skill levels. Now wages are a key lever for creating demand in the economy whereas productivity drives the increase in supply. In other words, workers' wages need to increase in order to absorb the increase in supply of goods that results from increased productivity. Yet, the wage-productivity gap has now existed for nearly 35 years.

The consequence of this imbalance is that demand for goods and services required to keep up with supply is created in the short term by creating new debt. The housing bubble was a product of this demand-supply disequilibrium. Since real wages are not rising in step with productivity, people could only consume the increased supply of goods and services by taking help of cheap and easy credit. But after the housing bubble burst, credit is no longer easily available and levels of debt have been exposed to be unsustainable. Businesses realize that their goods will not be sold, profits will decline and they are laying off people and in many cases closing shop. Due to the wage-productivity gap, this economic decline may have happened even in the absence of a mortgage driven crisis. Then again, the housing bubble may have simply postponed the real economy crisis that was imminent, and in the process exacerbated the systemic tensions between demand and supply in the economy.

Where did the profits go?
So why have wages not kept step with productivity despite what some have called a "golden era of profitability"? Where have the profits from the productivity growth gone? A paper by Gordon and Dew-Becker, economists from Northwestern University, found "that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth...[whereas] the bottom 90 percent of the income distribution fell behind or even were left out of the productivity gains entirely" (italics in original). Additionally, the wage share of national income is declining in the US, while the share going to corporate profits has increased from 17.7% in 2000 to 20.9% in 2005. The European Trade Union Congress complains of a widening wage-productivity gap in the eurozone as well.

It appears that "the killing fields of inequality" (as Göran Therborn puts it in his recent piece) and the relentless pursuit of profits by many businesses are critically undermining the primary source of demand in the economy - its workers' wages. As more people lose their jobs in the recession, there is further downward pressure on consumer demand. Making credit available to businesses alone is not likely to reverse the unemployment trend since businesses will invest only when they have confidence in potential returns on their investment. Lack of demand for goods and services in the economy, however, does not give that confidence. It is a vicious cycle but one that can be broken by restructuring the economic system to distribute the wealth more equitably. And unless this fundamental factor is addressed, according to Wollf and Batra, it is hard to see a long term economic recovery.

What recession? A few pockets haven't felt warmer...

noreply@blogger.com (Pranav Bihari) — Mon, 16 Aug 2010 19:04:00 +0000

While the economy is still struggling to come to grips with the severe recession that hit the UK in 2007-08, real wages for most workers have declined. But the average pay package among the UK's top executives increased by £500,000 in the past financial year, according to a report by employment consultancy Hewitt New Bridge Street.

The report says that the pay hike was partly due to weak targets set for the bosses but primarily due to an "improvement in economic conditions". At the same time, wages of a third of the employees of blue chip companies still remain static since the 2009 wage freeze for 60% of the workforce.

I'm sure that the workers of many of these companies would like to know why gains from these improved conditions could not be shared with them, at a time when reduced purchasing power is having a major impact on consumer confidence.

Pay for performance?
Executive pay over the last two years has risen on average by 5% despite a 1% fall in share prices over the same period. In fact, in the last ten years the salary packages for executives in the FTSE 100 companies have quadrupled while share prices have declined showing no relation of their pay to a key performance indicator.

Why such massive pay increases then?
CEO pay packages at top firms are set by a board of directors which often comprises of executives from other similar companies. The CEOs in question may be serving or are likely to serve on other companies' boards performing a similar function. It is a small circle where "you scratch my back and I'll scratch yours" is an indulging self-serving game. Also, the compensation is recommended by consultancy firms who try to match what is offered by other companies. Most importantly though, the consultancy firms are hired by the same elite group and the consultants have every reason not to upset their paymasters.

Why do shareholders not object?
Some shareholders do object. Just recently, 47% of the largest supermarket Tesco's shareholders revolted against boardroom pay at their annual meeting, and it was not the only instance this year. However, in many cases where large shareholders like banks, pension and mutual funds are involved, they may not object since their own executives would not like to draw attention to their high salary packages. In any case, shareholder objections in most cases are not binding on the board of directors and cannot overturn directors' decisions on compensation plans.

Surely, some CEOs deserve their million pounds annual compensation packages?
I would not question the absolute figures but if the executives are paid 100s of times relative to the average worker, it certainly seems obscene and excessive.

Let's say that the profits of a company double under a CEO. Should all the credit go to the CEO alone? What of other workers who must have contributed to the growth? What about suitable market conditions playing a role? What if the growth in profits relative to the previous term were only an indication of the poor performance by the previous executive?

Leadership matters immensely but so does the contribution of those who are led. There's no easy way to numerically compare a CEOs talent and contribution compared to the rest of the workforce. But a fair society and a fair economic system would recognise the contribution of all workers in the economy and not tolerate the grotesque levels of income and wealth inequality that are prevalent today.

Years of research show significant social costs of excessive inequality. And the latest report on inequality shows that the UK is now one of the most unequal among the economically developed countries.

While some inequality may be justified to provide incentives for performance and create efficiencies in the economy, maximum wage level must be tied to a reasonable proportion of the minimum wage, say 10-20 times, to ensure that the gains of economic growth are distributed fairly across the population.

Otherwise we have an absurd system where "to make the rich work harder you pay them more, to make the poor work harder you pay them less – or so it seems," in the words of Billy Hayes, the general secretary of the Communication Workers' Union.

Unemployment dips but the numbers are far from comforting

noreply@blogger.com (Pranav Bihari) — Thu, 12 Aug 2010 12:53:00 +0000

Unemployment in the UK declined by 49,000 to 2.46m in the last quarter. However, the number of claimants seeking jobseeker's allowance fell by only 3,800 which is less than what many economists had expected, raising concerns about a slower than expected recovery.

Here are some other numbers to take home from recent reports and statistics on the UK job market:

The number of 18 to 24 years old who are out of jobs for two or more years increased by 42% over the last year to reach 72,000. In the same age group, numbers of those unemployed for over a year has increased from 104,000 to 184,000. According to the Recruitment and Employment Confederation's Youth Employment Taskforce, the direct cost of youth unemployment is £4.7bn a year.
Jobseekers over the age of 50 are finding it particularly difficult to get back into the market. Numbers of those out of job for more than 12 months has increased by 52% over a year to reach 170,000, the worst numbers in a decade. While the government plans to extend the retirement age limit, the job market is struggling to find place for a number of over-50 workers.
An extra 40,000 people over the age of 65 have taken up jobs amidst fears of reductions in expected pensions.
According to the Chartered Institute of Personnel and Development, it is likely that private sector job creation will not keep pace with public sector cuts for at least the next two years, as nearly one-third of employers, among the 600 surveyed across all sectors, were looking to downsize in the coming three months.
Another survey among businesses in Wales shows that around 84% of those businesses have no plans to recruit this year.
Scotland saw a rise in unemployment by 34,000 over the last quarter to reach 223,000, or an 8.4% unemployment rate compared to 7.8% for the UK.
Vacancies have increased by 9,000 over the quarter to reach 481,000.
Real wages continue to decline among those employed as earnings growth rate falls behind the rate of inflation.

25p an hour, 16 hrs a day

noreply@blogger.com (Pranav Bihari) — Mon, 09 Aug 2010 13:31:00 +0000

Amidst recent protests by garment workers in Bangladesh and Cambodia for a living wage and decent working conditions, a new sweatshop case was uncovered by the Observer at Indian factories where workers are paid 25p an hour and forced to work overtime to manufacture clothes for M&S, Next and Gap. A few workers who voiced complaints were beaten up and fired from their jobs. This story from the garment industry is nothing new nor is it surprising anymore. But what are we going to do about it?

I suspect, many of us have come to accept what mainstream economists like Paul Krugman, Jagdish Bhagwati, and Jeffrey Sachs have preached for too long. "Bad jobs at bad wages are better than no jobs at all".

At the time of slavery, these economists would have given a similar argument for slavery being better than no jobs at all. By their logic, husbands can perpetrate violence on their wives, as long as they provide them shelter and food, especially if their wives are unskilled and cannot get a job due to market or social constraints. Just because slaves would "voluntarily" choose slavery over starvation, and oppressed wives would continue to suffer their husbands instead of ending up with prostitution, does it justify the status quo? In fact, there is often a worse option to compare with when attempting to justifiy the most horrific and exploitative practices.

We should know better than find comfort in the ethically deviant arguments supporting sweatshops. Due to civil society campaign pressures, many big companies in the UK, including M&S, Next and Gap, have signed up to a code of conduct called the Ethical Trading Initiative. However, this form of self-regulation has not improved labour conditions by much so far.

Most of the global garment retailers work through a network of sub-contractors. This setup allows the retailers to distance themselves from unfair practices of their sub-contractors. On the one hand, the retailers may ask their sub-contractors to adhere to labour standards. But on the other hand, they apply intense pressure on these sub-contractors to reduce costs. Competition is fierce among the sub-contractors and they know that costs are the main factor in securing contracts. Labour standards therefore get a short shrift.

The greatest power consumers can exercise in this struggle for labour rights is by discriminating in favour of ethical retailers and manufacturers. However, there are serious constraints in doing so. Most people's income is in some proportion to the overall price of goods in the market. This makes it difficult for a large section of the population on average income to pay a significantly higher price for ethically produced clothing.

Nevertheless, big social changes and victories in the fight for human rights have only come at the cost of personal sacrifices. If we all can do our bit, according to our respective financial capacities, we can send a strong message to the retailers. Looking at the alternatives is a good start.

Why do banks need to be forced to lend money to businesses?

noreply@blogger.com (Pranav Bihari) — Wed, 04 Aug 2010 14:26:00 +0000

British banks are being urged to lend more to small businesses. As some banks return to profit, the government and many media commentators are demanding that the banks must avoid diverting bailout funds and profits to increase bonuses and salaries for its employees. Instead businesses should be helped to create more jobs. But why do we need to beg banks to lend money? Is it not something that they would do anyway if the odds were in favour of getting good returns on the loans they would make?

A reason for the sub-prime mortgage crisis was that the banks were guilty of carelessly lending to people who could not pay back their loans. Also, the banks were mindlessly betting for profit on the likelihood of defaults on such loans. After the causes of the crisis came to light, the banks were expected to learn from these mistakes. They were rightly asked to keep more reserve capital in proportion to the loans they make and do their homework well before lending to prospective borrowers.

So the rationale behind banks' reluctance to lend money to businesses may very well be that in the tough economic climate with consumer demand suffering due to job losses, failing businesses and declining real wages, many prospective clients of the banks are not seen to be creditworthy. These businesses may not have assets or business plans to guarantee safe returns. Or the banks do not believe that they will make enough returns on the money lent to small businesses in comparison to other profitable ventures in speculative markets.

If the borrowers are not creditworthy, the banks are right not to put massive sums of public money at risk again. If, however, investment in speculative markets provides better returns than investing capital in the real economy, then the government must enact regulations to disincentivize influx of money into speculation. The US government's financial reforms have stopped short of that. Global banking reforms are not looking 'tough' enough either. We have to wait and see the how the regulatory reforms proposed by the coalition government in the UK shape up.

There is a lot of justified anger against banks for filling up the coffers of their top-level management despite them being responsible for a number of bad decisions that led to the current crisis. The managers take little personal risk as public money underwrites their business.

If the government is really serious about dealing with management profiteering, it must stop barking at the banks or begging them to change their unscrupulous ways. It has full powers and indeed the responsibility to enact laws to cap salaries and bonuses of high ranking bank managers in order to make funds available for viable businesses. But by forcing banks to lend without adequate demand for business loans or creditworthiness in the market, the government may simply be leading the economy into the makings of another credit default crisis.

If small businesses, especially locally oriented ones were to prosper, they need a boost in local consumer spending. This spending must increase, not by increasing consumer debt, but by increasing real wages of people in employment. Many big businesses in the UK are in fact running financial surpluses and this must be shared among its workers whose wages form the backbone of consumer demand in the economy.

Welfare reforms in the UK: whose pain?

noreply@blogger.com (Pranav Bihari) — Mon, 02 Aug 2010 19:44:00 +0000

For long, the Conservatives have lamented about a welfare system in the UK which does not provide those on benefits enough incentives to take up paid work. To remedy that, Iain Duncan Smith, the Secretary of State for Work and Pensions, has announced plans for sweeping changes in the current benefits system.

In the new system, people who opt to work will keep 40p of every additional £1 they earn, instead of just 10p they get to keep under the current rules. All the different benefits such as child, housing, incapacity, unemployment and others will be brought under a single umbrella 'credit' to reduce administrative costs and make it easier for claimants to navigate the system. People's benefits will not be reduced based on the number of hours worked, but on the amount they earn. This should allow some to gain some work experience on low pay without benefits being taken away.

And what is not to like? Critics are apprehensive about how cutting certain benefits will affect the poor when full details of the welfare reform are made available later in the autumn. Reductions in housing benefits are sure to hit the most vulnerable. For instance, check out how a single mother will struggle to make ends meet after the proposed housing benefit reductions. In fact, the government has been legally challenged for not doing a gender equality assessment of their budget cuts and putting the brunt of pain from benefit cuts, around 72% of the £8bn proposed savings, on women.

Also, if the government really wants to move people from welfare to work, they need to create jobs in an economy with only 72% employed. But so far all we know is that nearly £1.3m additional jobs will be lost as a result of budget cuts. There are no signs of the private sector picking up on those losses yet. Also, the current half a million vacancies in the economy need to contend with at least 5 people for each of those vacancies. This is not taking into account that many of the unemployed may not be skilled for the available jobs, unable to move due to family commitments, unable to retrain due to lack of financial resources or simply the lack of talent and ability.

Nevertheless, many will welcome the professed principles behind the proposed welfare reform which aims to simplify the system, cut costs, and get people back to work. In nudging people out of the benefits trap, however, the government must make sure that the poor and vulnerable do not fall deeper into the poverty trap.

How secure is Britain's food supply?

noreply@blogger.com (Pranav Bihari) — Sat, 31 Jul 2010 15:10:00 +0000

In September 2000 a lorry strike in Britain threatened the country's food supply as large supermarket owners rushed to the government to inform that they only had stock for three additional days. Ten years on, the situation hasn't improved by much. The country's major supermarkets now have 8-10 days of food stock at a time. What are the threats to our food supply system and is the system resilient enough to withstand the shocks?

Andrew Opie, of the British Retail Consortium and Tim Lang, professor of food policy at City University, discuss the question in a BBC podcast.

Speculative land grab

noreply@blogger.com (Pranav Bihari) — Fri, 30 Jul 2010 03:04:00 +0000

A World Bank report leaked to the Financial Times raises concern that wealthy investors are targeting arable land in countries, especially African, with poor governance laws to benefit from rising commodity prices and demand for biofuels. Also, countries like China and Saudi Arabia are buying prime agricultural land in Africa to ensure food security for their people.

In many cases promises for development of land and investment in infrastructure and job creation are not fulfilled by the buyers. The purchase is often for speculative gains rather than increasing the productive potential of the land.

Poor farmers in these countries are losing out on their local resources and their governments seem to be more keen on making fast money rather than protecting livelihoods and local community interests. Although records are not very reliable, the report suggests that land transfers included, for instance, as many as 3.9 million hectares in Sudan and 1.2 million in Ethiopia between 2004 and 2009.

For more details, readers are urged to look at the website dedicated to raising awareness on the issue of farmland grab in the developing countries. John Vidal of The Observer also wrote an investigative piece on this subject.

And who owns the land in Britain?
Reading about this issue reminded me of the stark land inequality in Britain that was highlighted by the book "Who owns Britain" by Kevin Cahill and also a BBC programme based on the book titled "Whose Britain is it anyway?".

Here is a list of key points about land ownership in Britain:

69% of the land is owned by just 0.6% of the population, and nearly 30% is still owned by the aristocracy.
90% of the British population lives on under 10% of the land.
While ordinary people pay council taxes and have to deal with very high property costs due to "apparent" scarcity of building land, large land owners are exempt from any taxes on land ownership. On the contrary, they enjoy enormous taxpayer funded subsidies simply for owning land designated as "agricultural", even when they often do not use the land productively for agriculture.
We still do not know who owns up to 50% of the land in England and Wales as there are no records about it in the Land Registry. Clearly, many among the landed class strongly oppose making this information available to the general public.

So far the aristocrats and other large land owners have prevailed in maintaining the concentration of ownership. Countryside land has been more or less beyond the means of low or even middle-income people. But there are initiatives like Landroots that are attempting co-operative ownership models to change that and make rural land more accessible for people.

Big Four audit firms under scrutiny for their role in the financial crisis

noreply@blogger.com (Pranav Bihari) — Wed, 28 Jul 2010 21:04:00 +0000

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Cameron courts India: for whom?

noreply@blogger.com (Pranav Bihari) — Tue, 27 Jul 2010 19:34:00 +0000

David Cameron will arrive in India today accompanied by 39 executives from some of Britain's largest companies in a bid to strengthen bilateral business ties.

It is obvious what India can offer to these British companies. BAE Systems will be looking to push defence equipment deals worth around £1 billion. The private equity firm 3i will look into investing further in infrastructural projects in India's rapidly growing economy. Barclays would like to extend its wealth management services to the high net-worth individuals and families in India. Then there are outsourcing opportunities with Indian IT powerhouses like Infosys, whose headquarters in Bangalore Cameron is scheduled to visit. British retailers such as Marks and Spencer would want a greater share of consumer spending from India's rising middle class numbers.

India has many suitors among the developed economies and it should be in a good position to negotiate foreign investment which would create further jobs and consumer demand in its economy. However, the same cannot be said of Britain.

While Britain's capital owners will largely benefit from investing in India, it is difficult to see a significant benefit to its larger population from these trade deals. For instance, much of the defence equipment from BAE will be manufactured under licence in India. BAE's deal might only create some additional service level jobs in the UK, if at all.

Foreign investment in the UK has almost halved in the last year, according to a UN report. Britain is clearly an expensive place to build most products compared with the emerging economies. Its economy relies significantly on the services sector and a few niche areas of innovative technology industries like pharmaceuticals, biotechnology and aerospace.

Over-reliance on the financial services sector has already proven to be risky after the recent crisis. At the same time, competition for the higher end technology industries is growing in the emerging economies like China and India, who are increasingly developing a skilled workforce.

Britain on the other hand is seeing a dwindling number of engineering graduates. As such, hopes of attracting more foreign investment into the high-tech industry in Britain remain weak. It will be good if the government is able to keep domestic investment from migrating elsewhere. Or else even if trade between the countries increases, the benefits will accrue to only a few investors positioned to benefit from the exchange at the expense of further job losses in the UK.

Why did Goldman Sachs have to pay a record fine over fraud charges?

noreply@blogger.com (Pranav Bihari) — Sat, 17 Jul 2010 00:19:00 +0000

Goldman Sachs settled charges of fraud with the Securities and Exchange Commission (SEC) by agreeing to pay a record $550 million fine.

The company did not admit or deny any wrongdoing but accepted that it had provided "incomplete information" to investors for a financial product, structured and marketed by Goldman Sachs for Paulson and Co., one of the world's largest hedge fund management companies.

Some $250 million of this fine will compensate the investors, including the Royal Bank of Scotland, who will get $100 million, as one of the product's largest investors.

So what exactly was the nature of Goldman's fraud?
In 2007, Goldman was paid $15 million by Paulson and Co. to structure and market a collateralized debt obligation (CDO) product to potential investors. The product, ABACUS 2007-AC1 (ABACUS), consisted of a portfolio of sub-prime mortgage credit default risks, that is, how likely were people with mortgages in the sub-prime sector to default on their loans. The investors were told by Goldman that items in ABACUS' portfolio were selected by a third-party firm, ACA Management LLC (ACA), who were experts in assessing such credit default risk products.

However, in reality Paulson and Co. had a significant influence in selecting what went into the portfolio. The investors were kept in the dark about Paulson and Co.'s involvement in structuring the portfolio. This was problematic since Paulson and Co. were betting on making money in the event the sub-prime market collapses and people default on their mortgages. As such, Paulson and Co. were bound to select in the portfolio the most risky items, that is, those credits that were most likely to default. This directly conflicted with the interests of the investors. At the same time, Goldman Sachs Vice President Fabrice Tourre told ACA that Paulson and Co. had invested $200 million in the equity of ABACUS, leading ACA to believe that Paulson and Co. had confidence in the portfolio and that their interests were aligned with the investors. It was in fact exactly the opposite.

In other words, despite knowing that the portfolio of ABACUS consisted of highly risky products for the investors, Goldman led the investors as well as the third-party assessors into believing otherwise. When the sub-prime mortgage market crashed, according to Gregory Zuckerman, a Wall Street journalist, Paulson and Co. made earnings of around $15 billion, helped in the process by the likes of Goldman Sachs, who knowingly and fraudulently passed on the risks of these credit default products to trusting investors. According to the SEC, ABACUS investors are alleged to have lost more than $1 billion.

Did Goldman get away with a very small penalty?
Many commentators feel that the fine was much less than had been anticipated. In fact, the amount was merely equal to two weeks of Goldman's profits in the first quarter of 2010.

Related to this story, there is an interesting account in the New York Magazine about the circumstances in which Goldman Sachs benefited from AIG's bail out by the government at the height of the sub-prime crisis. Another report says that "Other Major Banks Did Deals Similar to Goldmans".

Graduate tax to pay for higher education in the UK?

noreply@blogger.com (Pranav Bihari) — Fri, 16 Jul 2010 04:03:00 +0000

Business secretary to the coalition government, Vince Cable, proposed in a speech today that a 'graduate tax' may be introduced to fund higher education in the country. This tax is supposed to be progressive in the sense that students who go into higher earning jobs will pay more than those who earn less. For how many years the students will be required to pay this tax after they start working is unclear, but it certainly seems that on an average the students will pay back substantially more than the current tuition fee capped at £3,225 per annum.

Mr Cable also suggested that private education providers may play a greater role in the higher education system. One may see more two-year instead of the standard three-year degrees on offer from the universities and the design of many degree programmes may be modular to provide more flexibility to part-time and continuing education students. Universities will need to attract more students in order to get a greater share of funding and will be judged on the quality of their teaching rather than research excellence.

Critics of the proposal say that it may take a long time for these tax payments to start coming through. In the meantime the government will have to make huge up-front investments to compensate for the lack of tuition fees, which is not sustainable in a difficult economic climate. Some fear that a graduate tax may drive skilled workers away from Britain and may overly burden the higher wage earners who are already paying higher taxes.

However, the National Union of Students has welcomed the proposal of graduate tax in principle and has even made its own recommendation for a 5% graduate tax rate. For more opinions from universities, staff and unions, you can visit BBC's webpage on "Graduate tax: Who stands where?".

Unemployment falls but fails to create confidence in the job market

noreply@blogger.com (Pranav Bihari) — Thu, 15 Jul 2010 01:52:00 +0000

The UK unemployment rate has fallen slightly over the last quarter from 7.9 to 7.8 per cent. The improvement was largely due to an increase in the number of people employed part-time. These numbers hit record levels to reach 6.63 million. Of these, around 1 million said that they need full-time jobs but could not find them. Full-time employment is at 18.2 million with a fall of 22,000 in the numbers over the quarter.

The number of working age people who are economically inactive has fallen to 8.1 million or 21.3% of the working age population. Those in the "long term sick" category, however, have increased by 54,000 to reach 2.07 million. Also, the number of people unemployed for more than a year rose by 61,000 over the quarter to reach a 13-year high of 787,000. There are now nearly 5 unemployed people for every vacancy available.

Additionally, public spending cuts by the government are expected to create severe job losses in the next couple of years. The private sector will need to compensate for those job losses and also pick up the existing slack. This will require fresh investment and for that the private sector will look towards healthy consumer demand. However, with high levels of unemployment and falling real wages reducing the purchasing power of a large number of people in the UK as well as its major trading partners, consumer spending is not expected to rise significantly any time soon. So how will the economy create new jobs?

Massive NHS shake up: more power to doctors and patients?

noreply@blogger.com (Pranav Bihari) — Wed, 14 Jul 2010 02:29:00 +0000

Housing market on the brink of a collapse in prices?

noreply@blogger.com (Pranav Bihari) — Mon, 12 Jul 2010 14:51:00 +0000

Despite the slight recovery in 2009 and early 2010, British house prices are now 17 per cent lower than their peak before credit crunch. Some analysts believe that the house prices are still about 27% overvalued. The average house price in the UK is currently 5.5 times the average UK salary. The long term (30 year) average for the ratio of house prices to the average UK salary is around 4, which suggests that a correction may be due.

More importantly, poor economic outlook, growing unemployment and further job losses projected due to spending cuts, as well as a stagnant mortgage market, all point to significant downward pressures on house prices, leading some analysts to expect a 1990s style collapse.

Can trade be the engine of economic recovery?

noreply@blogger.com (Pranav Bihari) — Sun, 11 Jul 2010 02:25:00 +0000

A few days ago David Cameron resolved to "reboot and rebuild" the British economy by checking deficit, slashing benefits and stimulating international trade to drive growth and create jobs. A leaked Treasury's analysis suggested a loss of 1.1 million jobs by 2015 due to budget cuts. Additionally, Oxford Economics consultancy reported that 2.3mn jobs in private sector depend on public spending and hence these will also be at risk due to spending cuts. As UK buys £3.8bn worth of goods and services more than it sells, trade deficit is widest since 2008 and imports are growing faster than exports. Looking at these figures, it is difficult to see how net trade would lead economic recovery and make up for the projected job losses.

The Crises of Capitalism

noreply@blogger.com (Pranav Bihari) — Wed, 09 Jun 2010 21:02:00 +0000

Global Prout Policy Parliament Statement on Guaranteed Basic Necessities and Common Amenities

noreply@blogger.com (Pranav Bihari) — Fri, 05 Mar 2010 08:00:00 +0000

This text has been taken from "Global Prout Policy Parliament Statement on Guaranteed Basic Necessities and Common Amenities"

Introduction

Earth’s resources are the common inheritance of all humanity. So all people should enjoy the fundamental right to the goods and services required to maintain their existence and to support their development and their expression.

The United Nations Declaration of Human Rights asserts that, "Everyone has the right to a standard of living adequate for the health and well-being of [themself] and of [their] family, including food, clothing, housing and medical care and necessary social services," and that, "Everyone has the right to education, [which] shall be free, at least in the elementary and fundamental stages."

The Global Prout Policy Parliament declares that:

(1) the right to the minimum requirements of life — food, clothing, housing, medical care and education — must be constitutionally guaranteed;

(2) other basic necessities and common amenities of life must also be guaranteed; and

(3) effective policies are required for establishing this right in practice.

Minimum Requirements, Basic Necessities and Common Amenities

The minimum requirements of life include food (and drinking water), shelter, clothing, education, and medical care. People also need access to certain other requirements, including energy/fuel, transportation, communications, water supply, and waste disposal. Together, these constitute the basic necessities. In addition, all people desire common amenities — those things which make their life easy and satisfy their physical and psychic longings.

Society's standard of the necessities and amenities that are due to all should be established according to the age and place in which people live. This standard should be progressively adjusted with changing conditions.

Purchasing Capacity

Acquisition of basic necessities and amenities should, in the main, come through individuals and families having access to adequate purchasing capacity.

Assuring a sufficient level of purchasing power should not just be the burden of individuals and families but, where appropriate, the society should assist as well.

For those able to work, purchasing capacity would be acquired through dignified labor, compensated by adequate pay. Those not able to work, because of disabilities or demands of family care, should receive their income through family support or from financial assistance arranged by the society.

With respect to education and medical care, the responsibility of the society is comparatively greater to provide these services directly. Basic education is the investment of the society in its future. And medical care cannot be provided efficiently and universally without being managed, in some manner or other, by the society.

Common Amenities

In addition to guaranteed basic necessities, the society must also see that its members have sufficient purchasing capacity to acquire common amenities — the commodities, services and experiences that are enjoyed in the age and place in which they live.

Not only should the common amenities be available to all, but they should become available in increasing measure.

Amenities that are at one point considered to be special goods, only available to a few, should increasingly come to be within the standard of living enjoyed by all.

Also, the productive capacity of the society should be devoted to maximizing the availability of common amenities, with comparatively less of its productive capacity going toward producing luxury goods. That is to say, the production of luxury goods should not take place at the expense of adequate production of everyday consumer goods.

The purpose of the progressive increase in common amenities (whether in quality or quantity) is not to promote consumption or clutter people’s lives with material possessions. It is to meet people's natural physical and psychic longings and give them an expanded material base for their all-round development and expression.

While people should enjoy the right of ample access to common amenities, this must occur within the context of sustainable production and protecting the health of the environment.

Arranging Purchasing Capacity

The guarantee of people’s purchasing capacity requires two main factors:

First, the society must arrange for full employment for all who are able to work. This, in turn, requires policies and approaches that ensure a vital, stable, and sustainable economy. It also means that as efficiencies of productivity increase due to mechanization and improved utilization of human potentials, the length of the work-day should be reduced.

Second, economic planning and policy must insure the availability of commodities, stable prices, periodic increases in wages, and a steady increase in collective assets (such as roads, electrical grids, and communication systems).

Constitutional Guarantee

The right to guaranteed basic necessities and common amenities should be established in principle in the global declaration of human rights. It should then be constitutionally and legally established at the national level. And it should be implemented in practice through national, regional and local economic planning policy.

If a regional or local economy, due to underdevelopment, lacks sufficient capacity to adequately assure basic necessities and amenities, then neighboring regions within the concerned nation or multi-national federation should contribute resources and other assistance for the accelerated development of the less developed region or locale.

Where citizens enjoy a guaranteed right to purchasing power, should they then face economic hardship due to unemployment or lack of state assistance, they would be statutorily empowered to take legal action against the concerned state for failure to manage the economy in a manner that assures them adequate income to meet their needs.

Relativity of Standards

The standard of basic necessities and common amenities that people should enjoy cannot be fixed but require adjustment according to three relative factors.

First, standards will change over time: education in the age of print required use of books, while education in the electronic age also requires access to the Internet.

Second, standards depend on location: the clothing worn by Siberians will differ from that of Nigerians.

Third, people may have individual needs: an autistic child, for example, may need special educational assistance.

Wealth Limitations

Neither basic necessities nor common amenities can be properly provided if the society fails to place reasonable limitations on over-accumulation of individual wealth. The limits on excessive accumulation should be periodically adjusted so as to maintain balance between social equity on the one hand and the efficacy of income incentives on the other. Social policy should strive to continually adjust the gap between the highest wage compensation and the lowest in a manner that encourages equitable growth in everyone’s standard of living.

Should the society feel an individual is able to make socially constructive use of a greater level of wealth, it should give that individual express permission for an exception to the cap on accumulation.

Incentives

The guarantee of basic necessities and common amenities and the provision of material incentives are intimately linked. Where the standard of income rewards for hard work and socially valued talents fails to create sufficient incentives, the economic vitality of the whole society will suffer — and those with the least will suffer most.

Increasing Standard of Living

To serve both individual and collective interests, there should be a steady rise in the standard of living of the society. Indeed, the increase in standard of living is a principal measure of the vitality of a society.

An increase in the standard of living cannot properly be measured by growth in per capita income. Money may lose its value, taxation may rise disproportionately with growth of income, or people may become burdened with new kinds of expenditures required by the society.

The proper measure should instead be that of growth in purchasing power. When there is growth of purchasing power, there will implicitly be an increase in the material standard of living.

Maintaining Balance

Increase in the standard of living does not necessarily mean an increase in the quantity of material consumption. In underdeveloped and in developing societies this may be the case, as many in these societies lack even the basic necessities. But in developed countries, an increasing standard of living may mean access to a higher quality of goods, housing, and services. Or it may entail the acquisition of creative skills or of personal development experiences, rather than the acquisition of material stuff.

Balance between the society and the environment cannot be maintained where there is mindless consumption. Much of the present excess in material consumption is due to enticements to buy that are goaded by profit-driven advertising. And it occurs because spiritual development is not well-supported, so that people seek fulfillment by indulging in material cravings, rather than through personal development and spiritual upliftment.

A New Paradigm of Development

No society can guarantee basic necessities and amenities if its economy depletes and fouls water tables, soil vitality, forests, arable land, marine life and other resources necessary for human, and non-human, life to thrive. Giving primacy to the profit motive in economic development goads resource depletion and environmental destruction.

Therefore, the guarantee of basic necessities and amenities cannot occur under capitalism, but requires a new economic system that promotes balanced and sustainable development.

Capitalism has had success in increasing the scope of necessities and amenities enjoyed by many on the planet. And, with the adoption of regulatory and welfare policies, a near universal social safety net has been established in a few developed capitalist countries. Yet, capitalism is inherently unable to assure adequate purchasing power to all, to manage a path of development that is truly sustainable, or to sufficiently support the inner development of human beings.

So an expanded economic paradigm is now required, one that has a life-centered value base. Only then can the whole of the human family be well cared for and be given opportunities to fully develop and fully express their potentialities. And only then will the impact of human economic life lighten on the planet, so that all other living beings can also thrive.

Policies for Enhancing Purchasing Capacity

Full implementation of the principle of guaranteed basic necessities and common amenities may prove difficult in profit driven economies and may have to await the acceptance of a new socioeconomic paradigm able to give more attention to human needs.

However, in this time of growing economic hardship and high unemployment, there is great need to develop practical policies and approaches that can increase people's purchasing capacity. Immediate practical steps are required. If this is not done, those who are without the means to acquire their basic goods and services will either suffer from want, or over-burden the state with welfare expenditures, or resort to anti-social or desperate means for their livelihood. And, having meager disposable income, they can do little to help revive stagnant economies.

There are several strategies available to local communities, and to regions and nations, to create and enhance purchasing capacity. The Global Prout Policy Parliament recommends making use of the following approaches, as may be appropriate given local conditions and opportunities:

(1) make affordable goods and services more available, thus extending the purchasing capacity of money;

(2) arrange to make jobs more available (eg, through policies that promote job creation) or to prevent job losses (eg, reducing work hours to prevent job loss), giving more people access to earned income;

(3) establish means of exchange that are outside of the money economy for acquiring income, goods and capital;

(4) create opportunities for citizen-based access to small enterprise credit;

(5) keep capital within the local community where it can circulate and enhance opportunities for more people to earn sufficient livelihoods;

(6) protect the productive capacity of the earth from environmental degradation, and restore the productivity of lands that have been degraded;

(7) enact policies that prevent money from lying stagnant and keep it circulating;

(8) create policies that serve to reduce concentration of wealth and which progressively redistribute it;

(9) protect local jobs from being outsourced;

(10) relocalize economic development, and in particular build the capacity of the local economy to produce goods locally;

(11) help people to acquire new job-related skills;

(12) provide capital and infrastructure development that assist in establishing new enterprises that have promise to create new employment;

(13) tightly regulate and limit all speculative markets;

(14) find new and productive uses for resources that are presently wasted or underutilized,

(15) regulate profit margins on basic necessities to prevent price gouging,

(16) give preferential support for small labor intensive industries that make efficient use of technology and do not require large capital investment,

(17) provide government funding for jobs that build the society's productive potentialities by enhancing its human capital, infrastructure capital, natural capital, and social capital, and

(18) encourage the formation of producer cooperatives as a means of retaining wealth within local economies.

Understanding PROUT (Vol 1): Essays on Sustainability and Transformation

noreply@blogger.com (Pranav Bihari) — Sat, 02 Jan 2010 08:00:00 +0000

A new online book on PROUT has been published by Proutist Universal, Australia. It has very insightful essays on various aspects of PROUT and should be a must read for getting a deeper understanding of the application of Proutist principles.

I hope the editors, Michael Towsey and Jake Karlyle, and the contributing authors continue this good work and produce many more volumes.

When Is God not God? by Dada Jyotirupananda

noreply@blogger.com (Pranav Bihari) — Sat, 02 Jan 2010 08:00:00 +0000

Listening to BBC today, I heard that the Malaysian government is banning the importation of 10,000 Bibles because the Bibles, written in Indonesian, and intended for the use of Roman Catholics in Malaysia, use the word Allah to refer to ‘God’.

The arguments for and against banning the Bibles for using Allah, seem to boil down to these points:

For banning:

1. Allah is an Islamic word for God,
2. Thus using it in a Christian context will upset Muslims in Malaysia
3. (Apparently) the Muslims will feel bad because they will feel that the Roman Catholic Church is either disrespecting the word Allah (and thus disrespecting the religious sentiments of Muslims in Malaysia) or perhaps trying to ‘take over’ the word Allah for the Church.

Against banning:

1. Allah is an Arabic word for God, not for a particular interpretation of God.
2. Arabic speaking Christians used the word Allah even before Islam was founded.
3. (Apparently) as Allah is part of the language, rather than a copyrighted Islamic word, it is ridiculous to ban the use of the word by those speaking Malay who are not Muslim.

If we look at religious conflict over many many centuries, this recent case of inter-religious conflict will hardly rate an asterisk.

But it is symptomatic of what I think of as the absurdity of such conflicts.

I have never figured out why my belief system should cause any violent conflict with another person’s belief system. How can my mode of honouring (or worshipping) the divine, cosmic system conflict with your way of doing such?

But of course over several millennia we’ve seen innumerable examples of religious differences causing violence between communities, even leading to war. Here I’d use the term ‘war’ in a broader context than just military conflict. When witches were burned to death in New England (in what later became part of the USA) because they were suspected of heresy against the church, is this not a sort of war? When Jews were, centuries earlier, deported or killed in huge numbers, in the Inquisition in Spain, was this not a sort of war? (And a footnote here is that the wealth that Spain confiscated from the Jews apparently financed the expeditions of Christopher Columbus, in finding the ‘new world’. And as we studied in school in the USA, an important reason why many Europeans came to the new world was to have religious freedom.)

And when Islam was spread by the sword, in various parts of the world, is this not a war against the existing beliefs of people?

Jews and Hindus have perhaps not engaged in such extensive war against ‘other-believers’ as have Christians and Muslims, but I would not call either religion universal or all-inclusive. Both of these religions have the sense that they are the chosen people. As do Christians and Muslims.

Of course here I’m not referring to every individual believer of these religions, but to general doctrine.

(In future blogs I can site examples of how each major religion claims superiority over every other religion.)

So, what’s in it for the followers (or rather the leaders) of each religion, to persecute or execute ‘other-believers’?

What benefit is there for a believer in God to see others banished, persecuted or murdered because they believe differently?

Could they be looking for Power?

Worldly Power?

I’ve thought about this a long time and I can’t think of any other reasonable, or comprehensive answer. But let me know if you have another answer.

(More thoughts on this in the next blog.)

Note: This is a blog by Dada Jyotirupananda and is published here with his permission.

Minimum income standard in Britain in 2009

noreply@blogger.com (Pranav Bihari) — Wed, 08 Jul 2009 07:00:00 +0000

New report published by the Joseph Rowntree Foundation shows that "minimum cost of living is rising at twice the rate of inflation".

Some key findings are:

A single adult with no children now needs to earn at least £13,900 a year before tax to reach the minimum standard. This is a £500 rise from 2008; nearly half of this extra income is needed for the rising cost of food.

About one in four people are living below the minimum income standard for Britain, and this is increasing as unemployment rises.

The minimum cost of living has risen by 5%, contrasting with official inflation figures of 2½% (CPI) and -1% (RPI). A low-paid worker whose earnings were linked to the retail prices index could be 6% worse off this year, relative to the minimum cost of living.

Job loss can leave you with less than half the income that you actually need to live according to the minimum income standard for Britain.

Crisis in the real economy

noreply@blogger.com (Pranav Bihari) — Tue, 09 Jun 2009 07:00:00 +0000

A crisis in the US real economy marked by growing unemployment and failing businesses is not a product of the current financial crisis. In fact, the financial crisis was but a symptom of a long brewing systemic crisis in the real economy. These claims are made separately by economists Richard Wollf (Univ. of Massachussetts, Amherst) and Ravi Batra (Southern Methodist University, Dallas). They propose an alternative diagnosis of the current economic crisis. If their analysis is correct, fixing the financial system might just deal with one of the symptoms but not the root cause of a deeper economic malaise. Given the amount of public money being thrown at fighting the economic downturn, it is crucial to consider alternative explanations of current economic problems in order to devise strategies that make the best use of scarce resources.

Housing Bubble
The most widely accepted diagnosis of the current financial and economic crisis is that it started with the housing bubble in the US. This in turn resulted from irresponsible sub-prime mortgage lending coupled with unregulated and reckless financial engineering. When the housing bubble burst, banks found themselves holding heaps of unsecured debts packaged into complex financial products that could no longer find new buyers. Financial institutions suspected each other to be in a precarious financial position similar to their own and inter-bank lending came to a halt. Several of these institutions went bankrupt or would have gone down that route if public money ($2.98 trillion at last count) had not bailed them out.

Wage-Productivity Gap
Wollf and Batra do not deny the role of housing bubble and financial malpractices in triggering the financial collapse. What they seem to suggest is that there is a need to explore the chain of causation further. Doing so in their analysis reveals that a wage-productivity gap since the last three decades in the US created a systemic imbalance between aggregate demand and aggregate supply in the economy. Since the early 1970s wages of employees in the US have not risen at the same rate as their productivity (output per hour). In fact, real wages of roughly 80% of the US workforce have been stagnating for more than three decades. On the other hand, productivity has been increasing rapidly due to technological innovation and improvement in human skill levels. Now, wages are a key lever for creating demand in the economy whereas productivity drives the increase in supply. In other words, workers' wages need to increase in order to absorb the increase in supply of goods that results from increased productivity. Yet, the wage-productivity gap has now existed for nearly 35 years.

The consequence of this imbalance is that demand for goods and services required to keep up with supply is created in the short term by creating new debt. The housing bubble was a product of this demand-supply disequilibrium. Since real wages are not rising in step with productivity, people could only consume the increased supply of goods and services by taking help of cheap and easy credit. But after the housing bubble burst, credit is no longer easily available and levels of debt have been exposed to be unsustainable. Businesses realize that their goods will not be sold, profits will decline and they are laying off employees and in many cases closing shop. Due to the wage-productivity gap, this economic decline may have happened even in the absence of a mortgage driven financial crisis. Then again, the housing bubble may have simply postponed the real economy crisis that was imminent, and in the process exacerbated the systemic tensions between demand and supply in the economy.

Where did the profits go?
So why have wages not kept step with productivity despite a "golden era of profitability"? Where have the profits from the productivity growth gone? A paper by Gordon and Dew-Becker, economists from Northwestern University, found "that over the entire period 1966-2001, as well as over 1997-2001, only the top 10 percent of the income distribution enjoyed a growth rate of real wage and salary income equal to or above the average rate of economy-wide productivity growth...[whereas] the bottom 90 percent of the income distribution fell behind or even were left out of the productivity gains entirely" (italics in original). Additionally, the wage share of national income is declining in the US, while the share going to corporate profits has increased from 17.7% in 2000 to 20.9% in 2005. The European Trade Union Congress complains of a widening wage-productivity gap in the eurozone as well.

It appears that "the killing fields of inequality" (as Göran Therborn puts it in his recent piece) and the relentless pursuit of profits by many businesses are critically undermining the primary source of demand in the economy - its workers' wages. As more people lose their jobs in the recession, there is further downward pressure on consumer demand. Making credit available to businesses alone is not likely to reverse the unemployment trend since businesses will invest only when they have confidence in potential returns on their investment. Lack of demand for goods and services in the economy, however, does not give that confidence. It is a vicious cycle but one that can be broken by restructuring the economic system to distribute the wealth more equitably. And unless this fundamental factor is addressed, according to Wollf and Batra, it is hard to see a long term economic recovery.

How would PROUT tackle inequality in Britain?

noreply@blogger.com (Pranav Bihari) — Tue, 26 May 2009 07:00:00 +0000

Many political parties pay lip service to the goal of reducing inequality, but have done little to effect change. Currently, the government mainly uses a combination of taxation and welfare policies to reduce inequality and so far its policies, irrespective of the party in power, have clearly failed. Reports show that UK's income gap is the widest since 60s. There has been an increase in child poverty and "the proportion of children living in poverty has doubled in the past generation".

PROUT recognises that in order to drive efficiency in the economy, there should be incentives for people to work harder and to use their talents in service of the community. However, excessive inequality is socially destructive and may not even boost economic efficiency, as a report from ILO suggests. Hence, excessive inequality must be regulated.

Minimum and Maximum Wage Law

PROUT recommends a mandated minimum wage as well as a maximum wage. In the UK, the minimum wage per hour is currently £5.52 and should be raised to £6.88. According to research by the Joseph Rowntree Foundation, a wage of £6.88 per hour is the minimum required to cover the basic costs of living.

The case for maximum wage has been argued by Andrew Simms of New Economics Foundation, Prem Sikka of University of Essex, Sam Pizzigati of the Institute for Policy Studies, among many others. How much should this maximum wage be? Public opinion, according to a poll conducted by the Fabian Society, seems to vote for £135000 as the top wage and acceptable salary for the Prime Minister of Britain. Sam Pizzigati prefers the maximum to be capped at ten times the minimum, whereas Prem Sikka suggests that the maximum be 10 times the median wage. A Proutist government could start with setting the maximum wage at 10 times the median wage and move it gradually to ten times the minimum wage, as the minimum wage increases. That would mean that the government would let the minimum wage increase at a slightly faster rate than the maximum wage. According to government statistics, the annual median income currently in the UK is £27,500. So to begin with, the maximum income would be capped at £275,000 per year.

But ongoing income is not the only variable that contributes to economic inequality. Many people may have acquired and inherited a disproportionately large share of economic assets in a system characterized by grotesque inequalities. And that may be true in both capitalism and communism. Liquid assets like interest earning savings and stocks have to be treated differently than hard assets like buildings and capital. In terms of liquid assets, hypothetically, if one was to earn a maximum annual income for a period of 60 years (an optimistic estimate of one's working life) and save all of it, one would accumulate £16.5 million. Capping assets at 60 times maximum yearly income should provide enough incentive to save, invest and pass on some of those savings to ones children.

As far as hard assets such as house and land are concerned, one has to be mindful of the fact that these need not automatically translate into higher income or return on investment. As such, unless ownership of assets is prohibiting productive use of those assets for critical collective needs, maximum wealth cap would not apply to these assets in the same way as it would apply to liquid assets. For example, a large mansion, potentially worth £20 million, owned by an individual for residential use, will not be seized by a Proutist government simply on the basis of its estimated market worth being more than the maximum wealth ceiling. The house in itself is not providing any additional income to the individual. On the other hand, someone owning thousands of acres of agricultural land but not using it productively and thus undermining a community's food security may be required to either put that land to productive use or sell it to an entity that can do so. Of course, income from the use or sale of this land will be subjected to the maximum income cap.

It is important to note that while the regulation of wealth and assets in a Proutist system is done in the interests of collective needs, it maintains a balance with individual freedom to grow and prosper. Generous incentives are provided for the talented and hard-working unlike in the commune system. Linking the maximum wage to the minimum wage in a relative ratio makes sure that fruits of economic growth are distributed in a just and fair manner. It will stop the runaway exploitation of the many by the few and profits from economic enterprises will be more equitably shared among the workers and not just among the top level managers and the owners of capital. If the proposed maximum wage law is put into practice, only the top 0.1 percent or so (around 45 to 50 thousand people) in the UK may see their incomes capped at £275000 (not including the Prime Minister who earns £194,250), whereas millions others will see their income increase as more of the wealth is shared. Also, with the growth of prosperity both the minimum and the maximum wage will increase proportionally and the society as a whole will move forward on the economic path without leaving any of its members far behind.

Comparative advantage and its limitations

noreply@blogger.com (Pranav Bihari) — Fri, 15 May 2009 07:00:00 +0000

In response to my article, "Protectionism: all bad?", Mads Lindstrøm said:

The most common argument for free trade, among mainstream economist, is comparative advantages. See http://en.wikipedia.org/wiki/Comparative_advantage . Therefore, if you want to argue against free trade, you really ought to counter that argument. The point is that free trade is not a zero-sum gain. If I can produce bananas at $10 and apples at $15, and you can produce bananas at $15 and apples at $10, then we are both better off if I just produce bananas $10 and you just produce apples $10. We can then _trade_, so that we both get bananas and apples at $10.

My brief response is as follows:

The key argument in my article is that it may be preferable in certain circumstances to use protectionist policies to free trade if those policies can create more jobs, increase purchasing power and reduce risks to economic security. Applying the theory of comparative advantage in the real world has a few limitations.
Firstly, the theory is based on an incorrect assumption that wages between industries do not vary. Construction and manufacturing workers are often paid much more than retail workers. Even workers with same skills may receive different wages in different sectors of the economy. For example, a secretary in a car manufacturing company will most likely earn more than one in a public school. So workers moving from high wage sector jobs to low wage sector jobs are hurt if an economy specializes in the latter.

Secondly, the nature and structure of certain industries may be such that the benefits from trade may accrue only to very few workers (owners and managers of banana plantations) whereas the majority of workers (agricultural labourers) may actually be worse off despite aggregate gains from trade. The welfare consequences of trade for most of the people in such an economy will be negative.

Thirdly, different goods have different elasticities of demand. In tough economic times when global demand may be falling, an economy specializing in producing jewelry, for instance, may find it difficult to trade its products to raise enough money to import food. Some degree of self-reliance in producing essential commodities for the local economy may be preferable to free trade if maintaining economic security and stability is a policy preference.

These are just some of the arguments that can be made against unqualified acceptance of the free trade doctrine. For a slightly more detailed argument, see: Globalization that works for working Americans