The Precariat , Trump and cheap-to-extract Energy

When job figures in the US came out in early November 2016 the unemployment rate was 4.9 percent and hardly anyone worried. For economists a 5% unemployment rate is a really good figure. But remember the new definition of who is employed? Employment in most developed nations these days is "at least one hour of work done in the past week by a person aged 16 or older". So the "employed" includes all those who lack job security, and those with intermittent employment or underemployment and the resultant precarious existence.

This is what the Democrats missed. There is many a commentator who has observed that the urban privileged are completely out of touch with those who experience the worry of a day to day precarious existence, always uncertain whether they can pay their bills. This is the precariat. Professor Guy Standing, in a book published well before Brexit and Trump's election warned that the rapid growth of the precariat is producing instabilities in society. He warns it is a dangerous class because it is internally divided, leading to the villainisation of migrants and other vulnerable groups. And, lacking agency, its members may be susceptible to the siren calls of political extremism.

Something familiar there? While they might not call it the precariat, Bernie Sanders, Donald Trump and Nigel Farage all appeal to this group. So while the question is legitimate, the solutions of Trump and Farage are wrong, wrong, wrong.

The tragedy is that just as politicians miss the precariat, economists miss energy. And strangely they are related. Here is how:

Oil is a remarkably dense energy source with one barrel of oil supplanting eleven years of human labour. Graph its use with the rise in GDP and they are in complete lockstep. The economy as it is currently structured is utterly dependent on growing supplies of cheap to extract energy. Only a fool would deny it is extremely unwise to build an economic system that relies on ever growing expansion in oil supply. In real terms energy supply is already on the decline due to the expanding internal energy requirements of the oil industry.

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The cost of oil exploration and extraction is rising and with it debt

Actuary Gail Tverberg writes that peak oil didn’t play out as expected because we didn’t factor in the financing of the oil industry. As the cheap-to-extract oil ran low, the cost of extracting non-conventional oil grew higher. This meant the firms had to go into more debt in the form of bank debt, bonds and derivatives. Eventually the debt overwhelms the oil companies and the layoffs begin. In order to pay interest on all their debt, indebted firms have had to keep wages low. The same happens for all firms that extract commodities, because they all require cheap-to-extract energy. The last step is that these low wages reduce the general demand for goods.

Nicole Foss points out that if demand collapses, the money supply declines and a deflationary spiral begins that few notice. 18 months after the decline in oil prices started, by February 2016 Bloomberg Business reported there had been 250,000 oil jobs lost and apparently each of these jobs supports over three basic wage jobs.

Tverberg says, "Why is the price of oil so low now? In fact, why are all commodity prices so low? I see the problem as being an affordability issue that has been hidden by a growing debt bubble. As this debt bubble has expanded, it has kept the sales prices of commodities up with the cost of extraction, even though wages have not been rising as fast as commodity prices since about the year 2000. Now many countries are cutting back on the rate of debt growth because debt/GDP ratios are becoming unreasonably high, and because the productivity of additional debt is falling."

So the drop in oil prices leads us to an underlying problem. The world is reaching the limit of its debt expansion. This is what is called Debt Deflation.

So even though we are living in a time of energy constraints, our blinkers don't allow us to see that. Risk analyst David Korowicz wryly observes,"The irony is that people may rarely notice they are living under energy constraints. Energy retraction from the global economy can be achieved by production declines or collapses in demand, though as we have seen, they are deeply inter-related. We may experience energy use collapse not as an energy constraint, but as a systemic banking collapse and vanished purchasing power."

So here is the source of the vanished purchasing power of the precariat. In a post election blog energy analyst Richard Heinberg observes that the problems won't go away when Trump is elected. In the face of the door being closed to national action on climate change, build community resilience is his message. "The most promising responses to our twenty-first century crises are showing up at the community level anyway. It’s in towns and cities across the nation, and across the world, where practical people are being forced to grapple with weird weather, rising seas, an unstable economy, and a fraying national political fabric."

None of these arguments will be known to the incoming president, though some advisors may try to educate him.Good luck to them. He is an anti-science president. If he slaps tarriffs on as he has promised, purchasing power will decline still further and accelerate the already active deflationary spiral.

trump-digs-coal

Trump's attitude to women seems the same as his attitude to the environment – if it's there, it is there for my use. Coal stocks soared on his election and renewables dropped. However, oil stocks didn't rise much, possibly a sign that reality of constraints are already priced into the market. 

An interesting question with Trump is how committed he actually is to his own ideas, from the potentially sensible to the crazy.   He is a “top of the head” sort of a guy, who changes position and contradicts himself on exposure to new things (or simply because he finds himself in a new context). Is the Presidency just a vanity project for him, in which he will blow with any policy wind he encounters? His victory speech, and his abandonment of the “Lock her up” approach, suggested that.

At the worst, if his “vision” as expressed during the campaign carries through, the US (and to a lesser extent the world) are in for an appalling time – racist, misogynist, anti-environment, pro-individualist, pro-violence and so on. And if the Republican Party as a whole gets the bit between its teeth, the US Government will be gutted and corporates will simply finish their take over. At the best, there’s no doubt he has created more space for these sorts of behaviours at the fringes in the short term. In between, as seems more likely, the direction as a whole will probably be negative, but it’ll be muddled and maybe not so fast moving.

There are a few bright spots, less likelihood of a war with Russia and above all, an increased energy and commitment of climate change activists. Our lives depend on it. He has focussed our minds. There is no spare planet. Somehow we must find a way.

The New Economics Party – What’s in it for me?

markets-headerWhat is in it for me? What ordinary people want to know about a party’s policies are “What is in it for me?” And that’s a very valid question.

What are the outcomes for you the voter when we fundamentally alter the structure of the tax system and the money system as we are proposing?

OK here is what is going to happen. The whole prices structure will be altered. Because GST and income tax are a component of the price of everything you buy, prices will drop. Because interest is included in the price of everything you buy, prices will drop.

And that will make everything more affordable. But wait? What about other taxes? You said you were going to tax the use of land and other natural resources including the use of the biosphere for waste. Yes for those items that will put the price up again.

For example, for imported petrol the price won’t drop, it will actually rise if we want to do something about climate change. The price of any fossil fuel based goods will rise including artificial fertilisers, pesticides and insecticides. So the farmer will have to learn how to use EM (effective microorganisms), together with other good farming methods, to keep the soil full of nutrients.

What about imported whiteware and vehicles? The lack of GST will keep the price down and since they are manufactured in other countries, but that is about all. It is only when it is manufactured in New Zealand that it drops because of the lack of income tax. And it will include some natural resources taxes, depending on the metal.

The land, because it is fully taxed, will be more efficiently used. The sheer waste of city people living on valuable “lifestyle blocks” just outside a city or township will vanish as Crown Leasehold land gradually replaces freehold land. This land will once again be used by genuine farmers growing food for the city. The need for transport will decline. So we will see fewer huge trucks on our roads transporting chilled goods from Auckland.

And a Citizens Dividend distributed in Land Dollars – how will that change things? Once again, a marvellous result. Even if every man, woman and child gets, say, a L$50 dividend, for a family of two adults and two children that is $200 in land dollars. Spend it at the Farmers Market. The local producers then pay their suppliers with it and can employ labour tax free, thus boosting production. So Farmers Markets could soon occur more often and pretty soon you have the revival of the small fruit and vege store and butcher. Welcome back! Mainstreet is invigorated and the supermarkets that rip off the suppliers of produce take the hit. Meanwhile the local farmers and horticulturists have an incentive to go more and more spray free and organic and employ more labour.

The distribution of the land rental to the citizens through a Citizens Dividend will have a huge impact on poverty. Poor people will spend it on essentials, thus invigorating the local food growing industry. These dividends will eventually be quite big. In the end they will free citizens from boring jobs they dislike so they can take up something they really want to contribute – be it entertaining, art, creating inventions, volunteering or caring for an elderly parent. Mothers with factory jobs two bus rides away will be able to leave the job if they prefer to devote themselves to their family life.

Jobs will return to the provinces. Because when you build in an incentive to use local building materials and locally manufactured fertilisers there is no impediment to building a sawmill or a factory. Factories in Levin lie empty. The clothing manufacturing jobs went to the Pacific islands and to Asia long ago.

We know the changes we advocate in designing and creating a second national currency backed by land are massive. After all 79% of our government revenue is from either income tax, GST or company tax. We believe that you should pay for what you hold or take and not for what you do or make. We need to share the rents of land and the harness the power of monopoly. We need to design and issue our own currency and not let the private banks keep control.

Health and Education When essential food items become more affordable the health of the population improves. The Asian takeaways that line the streets of the small poorer centres will gradually disappear as young mothers are empowered through their Citizens Dividend. Remember the plan is to give the children’s dividend to the primary carer, which is most often the mother. Once the Citizens Dividend rises to the stage where it frees the mother financially, she can choose further education, once again benefitting the children too. Our population will end up healthier and better educated.

Inflation or Growth Ridiculous Options

We have just sent out the following media statement (but have left out my phone number for this version)

Media Statement

13 March 14

Inflation or Growth Ridiculous Options – New Economics Party

The unproductive arguments raging among economists and central banks about when and how much to raise interest rates to curb inflation illustrates the complete failure of conventional economic theory, according to Deirdre Kent, spokesperson for the New Economics Party.

“Here we have the Reserve Bank putting up the official cash rate to keep inflation below 2 percent and the manufacturers saying that will slow productivity and put people out of work. Economists argue themselves round and round.

"It seems then that under the orthodox economic theory, you can’t both avoid inflation and have a thriving economy. A small child can see how stupid this is. Surely, the child will say, intelligent adults can invent an economic system where there is no inflation yet there are jobs at the same time?

"The problem is that governments and central banks are relatively helpless when they allow banks issue 98% of the country’s overall money supply as they do in New Zealand. They have few tools at their disposal to curb inflation. We end up with this inane cycle of inflation one minute and unemployment the next.

"During the Depression, Wörgl, a small town in Austria, created its own money and charged a circulation fee. Every month the holder of a Work Certificate had to buy a stamp and place it on the back of the note to keep it valid. So the money circulated fast. At one stage there was inflation, so some notes were withdrawn from circulation. Over 15 months, unemployment in Wörgl dropped 25 per cent, when in the rest of Austria it had risen 10 per cent during the same time period."

The New Economics Party supports a return to state seignorage, where the country's legal tender is issued by the Treasury and not by commercial banks.

Two major blindspots in David Cunliffe interview so the Labour policy won’t deliver jobs.

It was with considerable interest that I spent half an hour watching the streamed online broadcast from thedailyblog recently. Bomber Bradbury and Selwyn Manning were interviewing the new Labour leader David Cunliffe.

For a while I was very excited. Here was a man who was head and shoulders above his predecessor. His replies showed his high intelligence, considerable knowledge and a lot of political wisdom. Yes he would come down hard on tax evasion, he would reform the trust law, focus on exports and jobs. He showed he had a very good grasp of climate change, talked about extreme weather events and said there must be a price on carbon. When asked about the meltdown of unregulated financial markets it was clear he knew about Consolidated Debt Obligations and explained how the world came to be awash with phony debt. He wanted re-regulation of financial markets and described the kiwi dollar being a “speculative plaything of international markets.” He said nobody ever gets pinged for trading the NZD but it drives up the dollar and is bad for exporters.

Asked about FTT he said “If you hear a giant sucking noise it will be overseas money leaving New Zealand”, that will be the global capital would leave in a rush. He said in a borderless and internet-enabled world economy a financial transaction tax has to be imposed by the whole global community rather than going it alone. Interesting.

On the TPPA he wants the text released so we can have a mature public debate. How refreshing that was. He was good on the GSCB and showed a lot of insight on our role in the Pacific.

Like a good Labour Party stalwart he advocated a living wage, raising the minimum wage and said that Labour was working on fine tuning Working for Families so that all children benefit.

But there were two questions which put a halt to any thought he might be the saviour of New Zealand. When asked “Would you find yourself in a position to reduce GST if you are putting up the top income tax rate?” the answer was “I hate to disappoint you but no” he said it would take five years to get the Capital Gains Tax to the stage where it raised revenue, and with all the programmes they wanted to introduce, the Crown balance sheets would be stretched thin. Well this is a huge slap in the face to working poor to keep GST, the most regressive tax of all.

So I looked up Capital Gains Tax and found most countries have it in some form. Wikipedia gives good information. Oh yes there are a few like us who don’t have it, Jamaica, Kenya and Singapore being three of them. But most countries have it in some form or other. It is sending the right signal to property investors. Australia’s and Canada’s seem similar and I guess the Labour Party is modelling theirs on Australia’s. That means they get the capital gain, divide it by two, and apply the marginal tax rate to it, which is 43%. So here we are, all these properties rise in value in Auckland 18% a year. If you sold a rental and made a capital gain of a mere $100,000 you would pay 43% of $50,000 or $21,500 in CGT. The other $78,500 you can keep for yourself. Nice. That is rightly public money, as it is society which creates the extra value on land. The whole of it should be publicly captured.

And if you sell your home and make $300,000 don’t worry you won’t have to pay a cent of that to society. So for just investment properties (and commercial and industrial properties?) you will pay 21.5% back to society and capture the rest yourself.

Capital Gains Tax in its present form doesn’t stop at gains on property. Several websites go into it at length and one is left with two impressions. The first is that there is apparently no apparent understanding of the difference in genre of land and its gifts and capital. Land and capital are collapsed together. One is a gift of Nature and one is the combination of labour and resources.

The second impression is that CGT is so complex that it will be extremely expensive to administer. Already the Inland Revenue Department has to spend $1 billion over the next ten years upgrading its IT systems and CGT will make it worse.

Neither Bomber Bradbury nor Selwyn Manning asked him exactly how he would ensure that jobs were created. And of course jobs can’t be created under this scenario. The CGT is weak and relatively ineffective and the progressive tax means that the tax burden is greater. A currency overburdened by tax and issued by private banks as interest bearing debt will surely not circulate fast enough into productive enterprise.

Only when there is a working moving currency will jobs be created. And the currency must be relieved of its burdensome and illogical taxes on work and enterprise. A lack of awareness of currency theory, linked with a lack of understanding of the difference between the gifts of Nature and the work of humans are two important blindspots. Until then wealth will continue to accumulate with private banks and landowners. It is disappointing that policy shaping up to be about redistribution, rather than creation of wealth. It is so much more important to understand the role of currency design than to artificially prop up wages. Currencies can be designed to be abundant and flow, rather than pool with the wealthy.

So are we to see a Labour Government that showed much promise yet failed to deliver on jobs? Of course. Expensive social welfare programmes, a complicated and burdensome tax regime with a very regressive GST and a money system which perpetuates the status quo will see to that. The tax avoidance industry will have a heyday. Sadly I forecast the only jobs that will be created are jobs as accountants, tax lawyers, WINZ and IT specialists in the Inland Revenue Department.

Reform of tax and money system essential for narrowing gap and bringing jobs

So we have just seen the Ikaroa Rawhiti by-election win for Labour with Mana coming in second. The successful candidate Meka Whaitiri has repeatedly said "Our people are hurting. The issues are poor housing, jobs and poverty" Labour has said people are moving from National to Labour because of the rising cost of living.
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With currency reform and tax reform money will flow into activities that maintain and upgrade assets like houses

If the money system widens the gap between the rich and the poor then a party which ignores this or even understand this will do little to reduce wealth disparity. Explaining this: If money is created by banks as interest bearing debt, but the banks don't also create the interest, then there will never be enough money in the system for everyone to pay back debt. So the losers have to go further into debt. This widens the gap. If in addition the tax system causes wealth to concentrate with property owners and stops money going into investment in the productive sector then a party which ignores this will surely make little progress in alleviating poverty or bringing jobs for the rangatahi of Ikaroa Rawhiti electorate. Explaining this: If we tax labour, sales and enterprise with income taxes, GST and company tax, then the purchasing power of everyone declines. The cost of living rises relative to income. At the same time investment money goes into housing, because there is no tax on land and everyone is betting on rising land prices. A notable example was of an Auckland house which was recently sold by New Zealand Transport Agency for $220,000 above Rateable Value. The housing bubble in Auckland is a serious threat as the Reserve Bank constantly reminds us. Because our party has looked to the root of the issues, and have proposed a well designed domestic-only currency linked to a completely new tax and welfare system, (see http://neweconomics.net.nz/index.php/2013/06/how-to-build-a-life-supporting-economic-system/), only our party can offer serious solutions to the growing wealth disparity and bring real jobs to the Ikaroa Rawhiti electorate.  

Import substitution will only happen with currency reform

Last Friday I went shopping in our local village, Otaki. First I went to the chemist to order a prescription for aspirin. Probably this is an import. Then I was keen to suss out black coats as mine had been going for over twenty years and was faded. Our wonderful department store had a good selection and as I tried them on I looked at the labels. They said they were Cashmere and of course the inevitable “Made in China” label was on them.  Goodness knows how many middle men were involved or how much transport was involved. Did we send the wool to China and then ship it back as clothing? Probably. The clothing manufacturers in nearby Levin have nearly all closed down these days and factories lie empty.  Jobs have gone to China. Then I went to the local butcher to buy some cat’s meat and a lamb shank. (Oh I know I should be a complete vegetarian but I like lamb shanks and anyway when we move towards permaculture and mixed farming, it won’t be so energy and water intensive in its production and I am anticipating this day). The butcher wrapped both in plastic bags, sealed with more plastic and then put them together in a third plastic bag. So how do we move our economy to a new economy? By currency and tax reform, that’s how. All this talk about sustainable development for the last thirty years has been only so much rhetoric. It can’t happen without dual currencies and without being able to design the second currency ourselves and issue it backed by land.  All this talk about ‘Green growth’ is just an oxymoron when we insist on using a single monopoly currency, bank issued as interest bearing debt. All this talk about smart growth is just talk. They can go on doing it for another century and wishing won’t work without getting the underlying structure right. What we want is to move to a truly sustainable economy. We can’t wave a magic wand or lecture people or choose winners to change that butcher from wrapping the meat in three plastic bags. We do it by designing our money system and our tax system in a smarter way.  If we add in another currency, based on land, and have it only for trade within our country, then we are cooking with gas. We can grow our own trees and turn them into brown paper and wrap our meat in that. There is no need to spend our precious New Zealand dollars buying plastic to make into bags  or importing them. Given the right currency signals, a paper making factory could come to Otaki, Levin or a small town near you. And the empty factories can get going again using our own wool and our own labour and our own skill to make the coat I want to buy. As for the aspirin, maybe kawakawa might be processed. I don’t know if it is the right plant or if it is possible, but I suspect all the older people like me who need to take a regular blood thinner to prevent heart attacks could well be serviced by a New Zealand product made with some natural product grown in New Zealand . I guess the lesson is this. If you get the structure right that is all you have to do. We have seen this in abundance in recently revealed ACC’s structure. If case managers are given financial incentives to get long term claimants off ACC and the incentive is high enough, it will work. Leaving aside the totally immoral action in doing this, the policy was implemented and was successful in that the financial situation had a dramatic turn around.