Category Archives: finance

Prem Sikka: “If austerity is over, the Chancellor must present a plan to invest in our economy”

Chancellor Philip Hammond’s number one focus should be investing in a sustainable economy, argues Prem Sikka, Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. 

In a recent article, Sikka (below right) observes that in the face of Brexit uncertainties, many businesses are withholding investment. But to meet the challenge, the government will need to abandon almost of its headline polices.

He points out that historically, the private sector has shown little appetite for long-term risks and the state invested heavily in biotechnology, telecommunications, postal, information technology, utilities, shipping, railways, airlines and many other long-term industries.

For the last 40 years, the government has privatised most of these industries and relied on a variety of tax incentives to persuade the private sector to invest.

Sikka’s verdict: the results have not been encouraging – investment slumped

The lowest ratio of investment to GDP in EU countries was recorded by Greece (12.6%), followed by Portugal (16.2%) and the United Kingdom (16.9%). And since the 1990s, the UK R&D expenditure has fluctuated between 1.53% and 1.67% of GDP, well below the EU average.

Successive governments made a deliberate decision to prioritise the service sector though it is the manufacturing sector which generally generates more skilled, semi-skilled and higher paid jobs. Its multiplier effect – the ability to generate additional jobs – is also greater as the items need to delivered, maintained and repaired. Yet the manufacturing sector has continued to shrink and now accounts for around 9% of the UK GDP compared to 30% in China, 20% in Germany, 12% in the US and 19% in Japan.

Without adequate purchasing power, people cannot afford to buy goods and services and that itself discourages investment.

Investment, innovation and R&D need to be accompanied by sustainable demand. Since 2010, the government has been wedded to building a low-wage economy. Workers’ share of the GDP for the second quarter of 2018 stands at 49.3% of GDP, compared to 65.1% in 1976.

At the same time, the increases in gas, water, electricity, rents and travel costs have further eroded people’s purchasing power. The inevitable consequence of squeeze on household budgets has been the closure of shops such as Carpetright, Jamie’s Italian, Maplin, Marks & Spencer, Mothercare, Poundworld, Prezzo and Toys R Us, just to mention a few.

The Chancellor needs to find ways of boosting people’s purchasing power

This could be done by curbs on profiteering by utilities and train companies, raising the minimum wage and state pension, ending gender discrimination and pay rise for women and public sector workers, abolition of university fees, and ensuring that the tax-free personal allowances for income tax purposes match the minimum wage.

Sikka emphasises the urgent need for state investment in providing social infrastructure, transport, house-building, green industries, artificial intelligence, space and other industries and Hines proposes a Green New Deal infrastructure programme, offering jobs in every constituency.

In the Guardian, Colin Hines, convener of the Green New Deal Group, recently wrote about a GND infrastructure programme which would contribute substantially towards reducing Britain’s domestic carbon emissions and also address the serious threat of rapid and ubiquitous automation raised by Yvette Cooper.

Two major labour-intensive sources of local jobs were advocated: face-to-face caring in the public and private sector and infrastructural provision and improvements. Both are difficult to automate and can’t be relocated abroad.

Infrastructural provision and improvements are crucial to tackling climate change, prioritising energy efficiency and the increased use of renewables in constructing and refurbishing every UK building. In transport the emphasis would be on increased provision of interconnected road and rail services in every community, encouraging electric vehicles for private use. Hines added that the advantages of this programme include:

  • improving social conditions,
  • protecting the environment,
  • offering opportunities in every constituency,
  • requiring a wide range of skills for work that will last decades
  • and helping to improve conditions and job opportunities for “left behind” communities in the UK.

Sikka ends: “Neoliberals will no doubt respond with the usual comment ‘we can’t afford it.’ But can we afford stagnation, economic decline, social conflict and instability? The answer is a clear no. A government which can bailout banks with billions oquantitative easing, appease corporations and wealthy elites with tax cuts and guarantees profits through the Private Finance Initiative (PFI) and subsidies to film companies, can also find resources for economic welfare. If it chooses not to, it should make way for someone who can”.

 

 

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Yunus advocates an additional financial system

Quartz magazine’s  Eshe Nelson spoke with Nobel prize-winner Mohammed Yunus at the One Young World summit at The Hague, which brings together 2,000 young people from 190 countries who are working to improve their societies, and the world at large, by fighting to end sexual violence, improve access to education and demand justice and human rights accountability from governments. The conversation has been summarised for this website.

Yunus believes that the whole capitalist system has failed: “The very number of poor people shows that it has failed. It pushes all the wealth to the top continuously and the top became very fat and owned by few people. What kind of system is that? We have to redesign the system”. He continues:

“Today, there’s only one kind of financial institution, which are banks for the rich. You are asking the banks for the rich to lend to the poor. The very system is designed in a completely different way. This machine doesn’t work for them. The way to really address the problem of the rejected people from the financial system is to create a new financial system. Capitalism went wrong because it started with the wrong premise. It misrepresents human beings and says we are driven by self interest. But human beings are both driven by self interest and selflessness.

The economic system forgot the selflessness part, and once we include it into the business, you have two kinds of business:

  • business to make money
  • and business to solve problems.

Then the economic system becomes different”.

In the 1970s, Yunus began work on what would become Grameen Bank in Bangladesh, which provides small loans to entrepreneurs, primarily women, who otherwise couldn’t access funds due to a lack of collateral and other resources. Grameen Bank takes deposits to finance the loans it offers; it decided in 1995 that it wouldn’t accept donations – for Yunus, ending poverty isn’t about charity. Last month, the 10-year-old US division of Grameen announced that it had provided more than $1 billion in loans to 106,000 women. Over the next decade, it plans to provide $1 billion in loans every year, and nearly double the number of branches, to 42. He comments:

“Microcredit still remains the same as when we started in Bangladesh 40 years back. But many more people around the world have started microcredit programs. Some took advantage of credibility of the word “microcredit”—they used it to make money for themselves, turning into loan sharks. After 42 years it’s not gone into the mainstream. Microcredit has remained at the NGO level, a footnote in the financial sector.

“Earlier this year, the World Bank showed how little progress there has been: The proportion of people with active accounts has stagnated and the gap in financial inclusion between men and women has stayed the same.

The very word “inclusion” is suspect. This is not about inclusion; it’s about having a separate kind of banking institution to address the people at the very bottom.

“Governments are used to giving grants to poor people for survival. Whether you are a rich country or a poor country, every country does that. Instead of giving grants, it’s much cheaper to do it as a loan. The money comes back, covers its own cost, and is sustainable. It’s a market-based system. Whichever way you do it, it has to create income. In order to create income you have to encourage people to become entrepreneurs”.

His view on giving cash transfers to entrepreneurs versus credit

“If it comes as a grant then there’s no responsibility, and the money can be misused easily. A loan comes with responsibility: you have to create a return from it. People become very relaxed if they are guaranteed money because they will get it again. If you fail, the second round of cash transfers will come, so why make an effort?

“The welfare system never produced any entrepreneurs. The welfare system in every country, you don’t see anybody coming out. They go in and stay there because you take care of them. Universal Basic Income is the same thing; it’s a welfare system. Charity doesn’t create activity. Charity is a dependence creation. Dependence creation is always a negative thing for a society. Systems should be geared towards creating activity. Creating entrepreneurship rather than dependence. Taking risk. That’s what human beings are for”.

 

 

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What is the main solution to the UK’s weak productivity growth?

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Chris Giles (FT) is examining why Britain is suffering from weak productivity growth. As part of his series, he wants to hear what readers think is the main solution to the UK’s weak productivity growth since the financial crisis of 2008. Share thoughts directly with him at ask@ft.com. Some may be published in a follow-up piece.

Prem Sikka, Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex, who tweets here, has already published thoughts on the subject. Briefly:

UK company dividends are high & investment low

This lack of investment and innovation means that the country’s productivity is low. The output per hour worked in the UK is about 16% below the average for the rest of the G7 advanced economies. The UK productivity is around 27% below that of Germany – despite the UK labour force working almost the longest hours in the western world and the country is neither rebuilding its manufacturing base, nor developing new technologies.

He itemises the boardroom dominance of accountants:

Sikka then argues that short-termism, leading to the neglect of the long-term prosperity of companies and the economy, has been accelerated by the boardroom dominance of accountants.

Compared with other developed countries, UK companies are paying out the highest proportion of their earnings in dividends.

According to the Bank of England’s chief economist, in 1970 major UK companies paid £10 in dividends out of each £100 of profits – but by 2015 the amount was between £60 and £70. 

And at the same time as paying this large percentage in dividends many companies were downsizing labour and reducing investment, lagging behind the EU average:

Sikka asserts that the most effective way to disrupt the accounting-think prevalent in boardrooms is by appointing directors who are focused on the long-term – appointing employees and consumers so that they can challenge the obsession with short-term returns and promote investment in productive assets.

Giles quotes Lord Andrew Tyrie, new chair of the Competition and Markets Authority, who told companies in July to stop “ripping people off” or face the full force of the watchdog’s sanctions. His focus is mostly on regulated markets such as banking and energy, where companies are accused of exploiting vulnerable households by extracting a “loyalty penalty” if they do not switch suppliers.

Lord Tyrie told MPs during his confirmation hearing for the CMA in April that retail banking and auditing were parts of the economy that did not work in the interests of the public or productivity.

Scott Corfe, chief economist at the Social Market Foundation, a think-tank, claimed that pro-competition moves had some potential for raising productivity growth rates. He suggested that consumers should be switched between energy suppliers automatically after several years to stop companies exploiting customer inertia.

See this video: https://www.ft.com/content/ae25a5bc-9405-11e8-b747-fb1e803ee64e (possible paywall)

After noting that since the mid-2000s, British industries have become more concentrated, with fewer companies enjoying larger market shares, Giles focusses on this ‘one key question’:

Is inadequate competition contributing to Britain’s feeble growth in output per hour worked? 

 

We look forward to the next article in the series.

 

 

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Climate change should be placed “front and centre” of the central bank’s mandate to boost green investment

A Green Bank of England, Central Banking for a Low-Carbon Economy

Delphine Strauss (Financial Times) summarises advice in this report (link to pdf above) from the campaign group Positive Money.

It recommends that climate change be placed “front and centre” of the Bank of England’s mandate so that the central bank can boost green investment.

The report has won backing from Lord Deben, who chairs the independent Committee on Climate Change which was set up by the government to monitor the UK’s progress in meeting its statutory targets for cutting emissions:

“They are right to seek some radical measures, because the issues are radical. I think that monetary policy does need to reflect these risks”, he said, adding that central banks should do more to ensure the availability of green finance and divest from fossil fuel companies that showed no inclination to change their business.

The BoE has been reviewing UK insurers and banks’ exposure to climate-related risks and supports efforts to develop international standards for voluntary disclosure.

Mark Carney, the BoE’s governor, has repeatedly warned of the physical damage climate change could wreak on the economy and the risks to financial stability that might result from a sudden revaluation of carbon-intensive assets.

Positive Money argued that this concern for financial stability will look “incoherent” unless the BoE does more to boost investment in the transition to a low-carbon economy. Its report urged the government to rewrite the mandate of the Monetary Policy Committee to include green objectives explicitly and called on the BoE to look at ways to build climate-related risks into its macroeconomic models.

The Positive Money report urges the BoE to set an example:

  • by disclosing the carbon risks of assets on its own balance sheet
  • by ending the practice of buying bonds issued by fossil fuel companies
  • and by financing green projects via quantitative easing during any recession.

It argued that the BoE has unintentionally promoted high-carbon sectors because its criteria for asset purchases favoured the bonds of large fossil fuel companies.

 

 

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Japan: a model of capitalism that manages to balance income growth and income distribution

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Jesper Koll, one of the top Japan strategists and economists, observes that Japan’s economy is performing well and deserves more attention as a model of capitalism that manages to balance income growth and income distribution. Some points made in his article, which may be read in full here, follow. 

The goal of an economy is to create and sustain a stable society. To do so, an economy must produce growth and must distribute the spoils of that growth in a fair and equitable way.

At the end of last year, the median net financial wealth for households in Japan stood at $96,000. In the United States, the same number was $50,000. The average Japanese is de facto twice as wealthy as the average American.

At the bottom end in Japan, approximately 9% of households own less than $10,000 worth of net financial assets. In America, that’s true for 28% of all households. Japan certainly does have an ‘underbelly of poor’, but relatively few are truly left behind financially.

When U.S. presidential candidate Hillary Clinton talked about “deplorables” during the 2016 campaign she missed the point: What is truly deplorable is the fact that the U.S. ruling elite, of which Clinton is a leading member, allowed this gravely destabilizing financial inequality to happen in the first place.

According to the OECD database American median incomes rose by approximately $24,000, from $36,000 to $60,000 between 2016 and 2017. Over the same period, Japanese median incomes rose from $27,000 to $51,000, i.e. a similar increase of $24,000, prospering at about the same pace.

So much for the myth that Japan has been stagnating.

The bottom 10% of income earners in Japan strongly outperformed their American counterparts: Between 2000 and 2017, the bottom 10% of income earners saw a $15,000 rise in earnings in Japan, from $17,000 to $32,000. Their U.S. counterparts got only $10,000 more income, from $18,000 to $28,000.

If you are among the bottom 10% of income earners, you are now better off in Japan than in America ($32,000 versus $28,000)

How did Japan successfully bring up the poor? The growing scarcity of labor is forcing steadfast improvement in employment offered — not part time or contracts, but full time — as well as steadfast pay increases for particular jobs at the bottom end of the employment attractiveness spectrum. General white collar sales or management jobs have seen relatively pedestrian pay increases, but truck drivers, construction workers and shipbuilders have seen their pay almost double in recent years.

(Ed) A Tokyo contact agrees that the rapidly declining working age population helps a lot. As automation is coming on a scale not imagined, a lot of countries will struggle with unemployment and that may well put Japan in a very strong position over the next 20yrs or so.

Koll comments that the government deserves credit for actively encouraging positive changes in employers attitudes. This year’s tax code changes should make it easier for spouses to seek higher incomes — not by taxing the rich but by removing a tax ceiling for the poor. The overall impact of rising female participation is already very positive in general for society as a whole, for closing the gap between the rich and the poor in particular.

The overall outcome produced by the Japanese economic system is extremely positive. Japan manages to balance income growth and income distribution unlike many other advanced economies.

Japan’s economy is working well and deserves more attention as a model for “capitalism that works.” The system is very good at bringing up the bottom of the income pyramid and generating exceptional inclusion for all in financial wealth creation.

Japan deserves the Nobel Prize for applied economics.

 

 

 

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March visitors

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People from 6 countries visited the site in March.

There were twelve times more visitors from the USA than the next largest group from the UK.

 Top posts  

Brexit: moving away from globalisation towards self-reliance.

In this post, Colin Hines draws attention to Green MEP Molly Scott Cato’s publication and launch of a report by Victor Anderson and Rupert Read: ‘Brexit and Trade Moving from Globalisation to Self-reliance’. Read more here.

Prem Sikka: a critic of the Pin-Stripe Mafia

Accounting professor Prem Sikka received the Abraham Briloff award from The Accountant and International Accounting Bulletin.

The award was presented at a conference and awards dinner in London on 4 October – The Digital Accountancy Forum & Awards 2017. Read more here.

 

 

 

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Fiscal Money

Biagio Bossone, formerly at Banca d’Italia, the IMF, and the World Bank, an international financial consultant and Chairman of the San Marino Banking Association and a member of the Group of Fiscal Money, Italy, comments on an article in the Financial Times by Martin Wolf. 

“Mr Wolf agrees that the fiscal money proposal that we have developed and promoted for years is technically possible, albeit that “it would surely create hysteria in Northern Europe”. Well, it shouldn’t.

“Fiscal money would be issued as transferable and negotiable bearer bonds, which recipients would be entitled to use for tax rebates two years after issuance. Such bonds would carry immediate value, since they incorporate sure claims to future fiscal savings, and would be immediately exchangeable against euros or usable as payment instruments in parallel to the euro.

“Under European accounting rules, they would not constitute public debt. Fiscal money would be allocated, free of charge, to supplement employees’ income, reduce enterprises’ tax wedge on labour, and fund public investments as well as social expenses.

“Fiscal money is sometimes wrongly characterised as the anteroom of Italexit. Quite the contrary — it provides a way to overcome the eurosystem’s dysfunctionalities that condemn the Italian economy to a permanent state of depression”.

Fiscal Money has been proposed to the Italian government to boost aggregate demand and increase GDP without increasing public debt

In Social Europe, journalist Enrico Grazzini examines the main differences between various proposals:

  • Fiscal Money or Tax Discount Bonds (TBDs) are issued by the state and backed by the future tax revenues. TDBs would be assigned directly to the households, companies and (only pro quota) to government administrations as the best, and maybe the only way to overcome the liquidity trap and the austerity constraints.
  • Helicopter Money involves a central bank dropping free money straight into people’s pockets, recently advocated by many economists (such as Eric Lonergan and Martin Wolf, chief economics commentator at the Financial Times) as the very best solution of last resort to increase demand and face the next possible crisis.
  • and Quantitative Easing for the People, proposed by Labour Party leader Jeremy Corbyn, who would like the Bank of England to issue new money to finance a state bank and public investment as the optimum way to expand the British economy in an equitable way.

Bossone summarises: “Fiscal Money would allow Italy to expand domestic demand and improve enterprise competitiveness, while avoiding any increase in public debt and breaches of the fiscal compact. In fact, it would make debt sustainable, reversing the effect of years of austerity, and would remove any inducement for the European Central Bank to withdraw Mario Draghi’s “whatever it takes” pledge”.

For more information go to: https://monetafiscale.it/english-version/, https://www.zerohedge.com/news/2017-10-15/italys-parallel-fiscal-currency-all-you-need-know and https://www.socialeurope.eu/fiscal-money-better-helicopter-money-qep-beating-deflation-austerity

 

 

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