Let's pay the people to vote

Another election; another poor turnout. 

In this week's county council elections the turnout was barely above 30%, not that we should be surprised. Four years earlier when the same seats were contested the turnout was again only 39.2%. In the local elections of 2011 the turnout was 42.6%. In fact the only recent local election with a turnout of over 50% was in 2010 when it coincided with the general election, and yet even for that general election the turnout was a fairly pitiful 65.1%. While this was an improvement on the 59.4% in 2001 and the 61.4% in 2005, it is still a long way short of the 77.7% in 1992. 

These figures should be worrying for Labour because it is the Labour Party that suffers disproportionately from differential turnout. At the last general election the average turnout in consistencies that returned Labour MPs was about 61%. For those electing Tories it was over 68%, and in one Conservative-held seat (Kenilworth and Southam) the turnout was a staggering 81%. Overall this means that approximately 10% more people vote in Tory-held seats than in Labour-held ones. This goes some way to explain why the Tories need a greater number of national votes to gain a parliamentary majority, and why with 24.6% more votes than Labour in 2010 they only won 19% more seats. 

It is partly this issue of differential turnout that allows the Tories to (falsely) portray the electoral system as being biased in favour of Labour, and thus to provide cover for their attempts to gerrymander the electoral system with policies like the recent one to equalize constituency sizes in terms of voter numbers. Of course their approach conveniently overlooks the other issue that damages Labour: the problem of voter non-registration in many urban areas. As a result there could be as many as an extra 10% of potential voters missing from the electoral roll in these predominantly Labour constituencies.

Taken in combination with the differential turnout problem, these figures suggest that the Labour vote may be over 20% below what it should be, which means that even at the 2010 election Labour's total vote should have matched that of the Tories at around 10.5 million votes, ceteris paribus. The question is, how many extra seats would this have yielded for Labour? I suspect not many as most of these missing votes are in safe Labour seats. Of course that suggests that the 19% extra seats that the Tories won in 2010 is entirely down to an electoral system that actually favours them, not one that penalizes them. So the big question is: how can this problem be rectified? 

So far most of the media analysis has concentrated on issues centred around political apathy. There are many causes for this malaise. The electoral system is clearly one. The combination of a first-past-the-post (FPTP) system and a large number of safe seats clearly makes many voters feel that their vote is worthless. 

Another problem is of course the lack of voter/consumer choice. With elections dominated by swing voters in marginal seats there is a tendency for all three parties to converge on the "centre ground" and to steal each other's policies. As a result most of the potential remedies have focused on changes to the electoral system, of which the AV referendum was a prime example. 

Other solutions have focused on improving the ease of voting. Thus strategies for increasing the number of postal votes have been proposed, as well as making polling day a bank holiday or putting it on a weekend. So far, however, no-one really appears to have considered financial incentives, with the possible exception of implementing some form of lottery. Why? 

Perhaps because it seems to resemble a form or bribery reminiscent of the rotten boroughs of the late 18th and early 19th centuries. Yet politicians bribing the electorate is nothing new, old, or unusually. The tax cuts, privatizations and council house sell-offs under Thatcher in the 1980s were little more than bribes to a certain section of the electorate. In that sense they were truly insidious because they were selective and divisive rather than universal. They only benefited those with large incomes, spare cash or current tenure of council properties. Those who fell outside these groups were left out of the feeding frenzy. Doubtless some would argue that such a measure would run counter to the provisions of the Ballot Act of 1872, but if the "bribe" is merely conditional on voting and not on voting for a particular candidate or party, would that still be so? 

Of course the principal reason why paying people to vote has probably not been considered is the cost. To make it attractive enough to the potential voter each would need to be offered over £100. Yet with around 45 million potential voters the total cost could then be over £4.5bn. If this was only applied to general elections, though, it would still only equate to £900m per annum. That is peanuts for the UK government. Yet there is another solution that would cost nothing in nominal term. Use the shares the government already owns in the privatized banks. The total government stake in RBS and Lloyds TSB is currently valued (according to their FTSE-listed share price) at over £30bn. That is enough to fund a voter giveaway at the next six general elections. 

Earlier this year Lloyds TSB claimed it was close to being ready for privatization. Now RBS is saying the same. However it is highly likely that any share sale would need to be staggered over a number of years in order to get the best price. 

Nor is the idea of giving these shares away a new idea. This is an idea that was originally proposed by some LibDems a couple of years ago. Then in February there were reports that George Osborne may consider giving bank shares away to all taxpayers (does that include poor pensioners and the unemployed?) It is therefore only an additional small step to suggest that such a gift should be conditional in some way. So why not make it conditional on a citizen exercising their democratic right, nay duty, at the ballot box? Let us call it the citizen's dividend. 

It should be clear that while all may benefit from this idea, the Labour Party and Labour voters will benefit the most. A typical Labour voter is more likely to be incentivized to register on the electoral roll and to subsequently vote by a cash windfall of £100-£200 than is a merchant banker living in Surrey. And when they vote they are more likely to vote Labour in order to ensure that the policy would not be discontinued. If the Tories and LibDems copied Labour's policy then they would still lose out because of the greater benefit to Labour in terms of differential turnout. If they fail to support the idea then they risk the loss of even more votes to Labour. And then there are the economic benefits. Most of the shares will be sold on receipt, and the proceeds spend. The result will be an urgently needed fiscal stimulus for the economy, while the universality of the share allocation will help reduce inequality. So where is the political downside?

The Big Lie #1 - Austerity is needed to appease the bond markets

It is often said that truth is the first casualty of war. It could equally be the first casualty of politics as well. Given the extent to which politicians have appeared to play fast and loose with language and semantics in recent times it is perhaps unsurprising that their collective credibility and reputation, both at home and abroad, appears to be following the same trajectory as that of a test firing of a North Korean rocket. Whether it is politicians being "economical with the actualité", or Orwellian doublespeak of the type invoked by David Cameron recently where the term austerity has been magically redefined to mean "efficiency", the first casualty of UK political debate now always seems to be the English language. Of course none of this is accidental. It is all designed to disguise the reality behind a particular policy or action so that the voters are hoodwinked into believing in an illusion. 


One of the biggest fictions we are currently being expected to swallow is the one regarding the necessity of the current coalition government's deficit reduction measures and their apparent success. The argument that has been advanced by those on the Right on an almost daily basis since the last general election in 2010 is that the only way the Government can finance its deficit is if it can establish the confidence of the bond market. And the only way it can do that is if it slashes spending. And the central piece of evidence used to corroborate this claim has been the yields of government bonds or gilts. 


Gilt yields are currently at historic lows despite the Government running up record budget deficits over the last four years. Now we are told that these low yields are a direct result of the confidence that the bond market has in the Government's economic strategy. We are told that the Government cannot, or dare not, borrow any more money to stimulate the economy otherwise gilt yields would rise dramatically. We are told that our economy would then go the same way as that of Italy, or Spain, or worse still Greece! But how much of this is really true? The answer is hardly any of it. The reality is that our gilt yields are low because our borrowing has been almost completely self-financed over the last four years. That self-financing has come in the form of Quantitative Easing (QE). 


Up until April 2002 the last Labour government ran a financial surplus in its accounts. Then over the next six years this turned into a modest deficit of approximately £35bn per annum. While not ideal, these deficits were nevertheless sustainable in the long term as they typically increased the national debt by a smaller proportion than the corresponding annual increase in GDP due to economic growth. As a result the debt-to-GDP ratio was actually declining after 2006 despite the nominal debt level still increasing, and as a result it was actually more serviceable. It is therefore economic fantasy to suggest, as some on the Right have done, that these deficits caused the financial crash. The real cause was the set of economic policies implemented by the Thatcher and Major governments in the 1980s and 1990s, particularly with regards to the liberalization of consumer credit, laissez-faire bank deregulation and a wholly disfunctional housing policy. The result was the worst recession in living memory and a national debt that has increased to £1022bn. Of this total, over £500bn has been added since the start of 2008 - almost half the total. So why have gilt yields remained so low when the supply of gilts from the Government to the bond market has been so huge? The answer is QE. 


Since 2008 the Bank of England (BoE) has "printed" an additional £325bn of new money in the form of Quantitative Easing and used this money to purchase UK gilts. Irrespective of the fact that this was done through the secondary bond market, the net result is that 65% of all the new gilts issued by the Government since 2008 have in effect been acquired by the BoE. That means that only about £180bn have actually been purchased by the private sector, or £45bn per annum. That is only fractionally more than were purchased each year prior to the crash, and this has been going on for nearly four years now. In fact QE has been operating for so long now that the financing of government deficit spending has become semi-detached from the bond market to such an extent that it is almost operating in a parallel economic universe. That is partly why yields are so low and as you can see it has nothing at all to do with the international financial markets supporting the deficit reduction plans of the coalition. 


But that is not the whole story, for one of the additional consequences of the financial crash is that UK banks are now forced to hold more assets to strengthen their balance sheets. As a result UK banks have needed to buy more UK gilts themselves in order to increase their own financial stability. It is therefore highly debateable if there has been any significant increase in the purchase of UK gilts by overseas investors in recent years, yet capital flight from the PIIGS (Portugal, Ireland, Italy, Greece and Spain) has driven up the relative demand for UK gilts.


Only yesterday did we see further worries about the Spanish economy driving yet more capital away from the Eurozone and forcing it to look for safer havens elsewhere. The result was a further drop in UK gilt yields. And all of this is happening at a time when the supply of UK gilts, contrary to popular opinion, has actually been significantly reduced, or has at least been far less than the headline figure of the UK government deficit. So, given these two complementing drivers, it should hardly be any surprise that UK gilt yields are so low, irrespective of the general state of the economy, which in case you had missed it, is lurching from one recession to another. That is hardly the sort of performance that is usually associated with inspiring the confidence of international investors. 


You can of course look at all this from another perspective: that of the balance between supply and demand and its effect on market prices. Low gilt yields are an indication of excess demand and insufficient supply. Consequently they represent a market price signal that says: "The market wants more!" In which case why should we not supply more gilts to the market, particularly when we can put those gilts to good use? Those who believe in the power of markets, and the price signals that they send, cannot have it both ways. If high yields are a sign that government borrowing is too high, then low yields can be a sign that it is too low. And as I pointed out previously, when it comes to low interest rates you can have too much of a good thing. Ultimately banks, including central banks, cannot push money out into the economy when there is no demand, or no cost to holding it. In such circumstances monetary policy is like pushing against of piece of string and a coordinated and complementary fiscal policy is then also needed. 


Of course the real tragedy is that despite having access to what has effectively been free money for four years, both the last Labour government and the current coalition have failed to do anything effective or imaginative with it. Rather than using it to stimulate a programme of infrastructure investment, it has instead been used to refinance the banks, and indirectly to prop up house prices. Once again successive governments and the Bank of England have shown that they are more worried about negative equity than they are about unemployment; that they prize inflated asset values over real economic growth. As a result, all this free money has in effect been used to insulate the rich from the consequences of their own mal-investment rather than improving and protecting the lives of the poor. 


The choice of austerity is therefore a political choice not an economic one. Just because there is a lot of debt in the economy does not mean that there is no money at all. It just means that all the money is in the pockets of the wrong people. The current government with its tax cuts for the rich and its attacks on the incomes of the poor clearly wishes to keep it there.

The Budget 2012: Should George Osborne learn from Barack Obama?

This was the question that Larry Elliott asked on The Guardian's Economics Blog yesterday. He was of course referring to fact that the USA has implemented a major economic stimulus package whereas the coalition government here has instead (with the tacit encouragement of the Treasury) been implementing a policy of cuts and austerity. As a result the USA has had falling unemployment for most of the last year whereas in the UK unemployment is still rising. In the USA economic growth is well over 1% and approaching 2%. In the UK it is barely above zero. So has Obama got it right and Osborne got it wrong?

To answer this we must first take stock of what it is exactly that the US government has done. Its stimulus package has in fact been in three parts. First it reduced its short-term policy rate (just as the Bank of England did). Then it introduced Quantitative Easing (QE), just as the Bank of England did. Then last autumn it launched Operation Twist. This involved buying long-dated bonds to bring down long-term interest rates and replacing them with short-dated bonds, but as Operation Twist is such a new initiative can it really be held responsible for a US recovery which has been underway for over a year now? Probably not, and as Larry Elliott suggested in his column, it is difficult to see how Operation Twist could really effect aggregate demand. So is the real explanation for the difference in recovery rates between the US and the UK just down to the size and length of the stimulus. Perhaps not.

Perhaps the real reason that the US economy is growing faster is not just down to the federal stimulus. A point that is too often overlooked has been the scale and the effect of the housing crash in the US over the last four years. Unlike in the UK where house prices fell by only about 20% from their 2007 peak and are still at historically high levels, in many parts of the US the fall has been much more dramatic. Could this be part of the reason that the US economy has seen a better speed of recovery?

In case you had forgotten, it was the boom in the housing market in both the USA and Britain (and Ireland and Spain for that matter) that led to the financial crash in 2007, rather than just a failure of bank regulation. In all of those countries mentioned the housing bubble was the result of either rising inequality or increasing economic imbalances and, in the case of the US and UK, stagnant growth in real wages for the less well off as well. As a result an excess of investment funds got misdirected into creating bubbles in asset prices (i.e. property) instead of being use to create new means of production.

What is different about the US response to the crisis, compared to the UK one, is that the US allowed their housing bubble to implode. We did not. In fact government policy in the UK is still more concerned about supporting house prices than it is about keeping people in work. That is the big mistake. Negative equity is only an economic problem if people start losing their jobs.

In the USA by contrast, by allowing the housing market to crash the policy makers have forced the debt holders to take a "debt haircut" and thus allowed the economy to partially reset itself. Thus the USA has benefited from a combination of a debt haircut and a stimulus. In the UK we have had a weak stimulus primarily for the banks but no haircut. In the Eurozone (e.g. Spain and Ireland) they might get a small debt haircut but no stimulus. Thus it is the combination of stimulus and debt write-off that is the necessary remedy. Those countries that only take half the medicine either take much longer to recover, or don't recover at all.

However it is not just about the size of the stimulus either. It is also about the shape of it. The correct economic response to the current crisis is not just to provide a stimulus, but to direct that stimulus towards correcting the original cause of the problem, namely the housing market. By building more social housing the government would not only have created jobs, it would also have reduced house prices and private sector rents and thereby increased disposable incomes for the majority of families. That would have magnified the effect of the stimulus and helped to eradicate the core problem. Instead we are having to endure an economic policy that protects the haves at the expense of the have-nots. That is just a repeat of the very economic policies that caused the whole sorry problem in the first place.