18 May

David Miliband in South Shields

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

I always enjoy the uncompromising leftist views of John Harris (though he seems most uncompromising with the facts of fiscal arithmetic.

He’s not bad doing telly either. Here in this video he follows a disappointed Labour voter, and a pre-election David Miliband, round South Shields.  The DLV followed this up with a Cif Piece explaining why he can’t be a Labour voter any more.

Miliband’s stance is a sign that “next Labour” must be willing to change. Is it? Or is it more likely that the uneasy alliance between the Conservatives and the Liberal Democrats has presented just another rebranding opportunity for a party still driven by spin? Timing is crucial, but so is integrity, more so in the post-expenses scandal era, something Miliband survived relatively unscathed. He has the support of the majority of his constituency. But will he be able to convince the rest of his party and the public at large that he can turn Labour around?

What isn’t clear to me is what ‘turns Labour around’ means.  There is a lot of stuff about reconnecting (which Chris does a wonderful job on).  But two big themes of the video seem to clash, in my view.  They are:

  • the DLV and his wife both depend on the public sector.  He ‘is a lecturer in media &cultural studies’.  She, a management consultant on a public contract in the pension industry.   Both are worried that (because Spending Minus Revenues >#150bn) public spending might be cut
  • South Shields doesn’t make anything any more.  Asda is their pride and joy.

Forgive me, and I don’t want to sound snide, but if I were a rightwinger sceptical of government spending, I would be ranting on my blog about how Labour has let the country go to rack and ruin, because instead of supporting manufacturing in some unspecified way, they’ve been lining the pockets of their ‘clients’ who do jobs like media studies and management consultancy. Something doesn’t add up; is Rob suggesting that South Shields can entirely and sustainably regenerate itself on his sort of job? Where does JH think the revenues will ultimately come from?

My other impression from the video is how DM comes across: wonkish, yes, but human, at ease with people, quite natural.  The attempt to spin this video as “Miliband doesn’t even recognise his constituency” – the reason I went to watch it – doesn’t wash for me, and seems a little underhand.

My final observation is: if there are a bunch of Labour voters who have been turned off Labour because they have accepted the need for fiscal cuts in the face of a permanently lower state income to fund spending, where will they turn?  I don’t think there is a ‘Deny the Reality of Fiscal Mathematics’ party out there – which suggests to me that they may just return to Labour.   A bit dispiriting.

18 May

I won’t deny it: the inflation figures suck

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

Here is the BBC story; here is where you can get the data.

The BBC mentions volcanic ash driving up Food prices. But as far as I can see, the things that rose hardest from March to April were not particularly vulnerable to delayed flights:

(correct me if I am wrong: I did that graph in  2 minutes and who knows what might have slipped)

My concern – and everybody’s – should be the problem Chris alluded to that may be happening in the US (via his blog) – a permanent worsening in the unemployment-inflation trade off.  If we get higher inflation for each level of capacity utilisation, the economy is in for a very poor time.  I continue to hold onto hopes that are still mentioned in the Bank’s Inflation Report – that there is still considerably slack according to surveys, that currency weakness will pass through (commodities are off their highs, driven by world economy weakness), and that working capital will be freed up, which helps drive prices lower.

If these figures DO indicate higher inflation in the future, the consequences ought to be higher Bank rates, a higher currency, and so on. Sep 11 LIBOR futures fell 7 bps on the news, indicating the former at least. If it is any comfort, they are still considerably higher (i.e. rate expectations considerably lower) than at the beginning of May – by 50bps.  However, let the comfort end there, because what probably happened since then is a general expectation that euro growth will be much lower.  That is not, in anyone’s book, good news.

(PS While I am depressing you all, see this graph of a warming world from Econbrowser.

18 May

Robin Hood, the prequel: a defence of feudalism?

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

Look, I know I ought to hate this movie.  But though I found it long, I enjoyed pretty much every one of its 140 minutes.  Yes, it plays havoc with history.  Even though Robin Hood is just a figure from ‘folklore’, and therefore a big blank as far as real history is concerned, we all have a a sufficiently strong sense of the ‘real’ Robin Hood that it can be offended. But Robin Hood is meant to represent someone striking back against murderous arbitrary power sucking all the surplus from the common working man.  Insofar as the movie is meant to set up his subsequent life of righteous banditry, it does it pretty well*

Instead, history took its heaviest blows at the level of kings’n'queens international politics.  A French-versus-British angle was daft just 130 years after the Conquest – the two Kingdoms overlapped, surely, and the Channel was not the great barrier against being overrun by the French that it was to become.  And why was King John (superbly cast, incidentally) shown burning up a copy of the Magna Carta before the barons?

Nevertheless, I enjoyed a sense of historical realism behind the nitty-gritty of the film – the sense of struggle and risk in medieval life, and how this must have interplayed with the rules of society at the time.  To put it in dull, economistic terms: the surplus produced by the farming economies of the time must have been so precarious, so subject to nature’s whim, so vulnerable to uncertain property rights, that I could understand how inhumane feudal rules and power structures were necessary. Anything that guaranteed order of some sort, including the Mafia rules of feudalism, must be better than anarchy.

The other point I was fumbling towards is this.  We use Robin Hood as a metaphor for anything that takes from the Rich and gives to the Poor.  So when Brown put up taxes on higher incomes he was being Robin Hood.  However, this is using the state to take from the rich to give to the poor. As League of Ordinary Gentlemen points out, in medieval times to be rich WAS to be the state.  Hence the temptation for numerous right-wing thinkers to adopt the Robin Hood character instead.  They link to a NYT piece by AO Scott:

You may have heard that Robin Hood stole from the rich and gave to the poor, but that was just liberal media propaganda. This Robin is no socialist bandit practicing freelance wealth redistribution, but rather a manly libertarian rebel striking out against high taxes and a big government scheme to trample the ancient liberties of property owners and provincial nobles. Don’t tread on him!

LoOG are right that the strongest message you can get from the movie is about abuses of power, and its importance in economic relations.  For me (predictably) it weakens the right of the Robin Hood Taxation people to use that image in their campaign.  As Tim Worstall and I have argued tirelessly, such tiny transaction taxes end up landing on you and me.  In Robin Hood’s time the transaction tax would be the equivalent of a duty on grain, beer and mead, which King John claims as being aimed at big Abbey brewers**, and really ends up on the ordinary peasant.  He’d be aiming an arrow at it.

*Though I doubt there will be a sequel: having seen so many castles stormed and Frenchmen thrown lustily into the sea, let alone the origins of habeas corpus, the derringdo against the Sherrif of Nottingham will seem rather quaint

**on this subject, look at the madness of recent micro-economic tinkering on breweries via a letter to the FT

The taxpayer now provides a small brewer producing around 5,000 hectolitres of beer with an annual duty subsidy of about £170,000 (and even more for those brewing stronger beers). The relief is so highly tailored to the small brewer that those brewing slightly more are likely to be in the position that even if they could brew their beer for nothing, their duty bill would still make them more expensive than a microbrewer.

17 May

Wresting back monetary control, surrendering fiscal

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

The big headline from Osborne’s first days at the Treasury is his setting up the Office for Budget Responsibility.  Stephanie Flanders describes the move here (she adds an observation about Osborne asking Mervyn King for permission to start cutting) and argues that this is not as significant as Brown giving away power over interest rates to the independent BOE in 1997.  Nevertheless, Ms Flanders sees this (current three man) operation as potentially a ‘hugely powerful force’.  John Rentoul is in no doubt:

the real issue is that the OBR will define government borrowing (clarifying the Private Finance Initiative and other off-balance sheet devices) and pronounce on what should happen to it in the coming years. Osborne and Laws would not be able, in practice, to ignore its rulings, provided that they are not patently unreasonable.

At a time when fiscal decisions will be as massively full of consequence as they have ever been, the word of an appointed three man committee may be too powerful for the new Chancellor to ignore.

The backdrop to this shift in power is the implicit assertion that Labour cooked the books.  David Smith does not agree, and LeftFootForward – run by Will Straw whom we should remember is not only son of a 13-year minister but also ex-Treasury himself – is rather outraged at the slight to the Treasury’s integrity. The FT writers at the Westminster blog meanwhile point out that ‘independent’ forecasters have their problems too, with a graph showing how evenly distributed have been the errors over the long period.

And as Dillow observes the latest revision revealed that Darling had been too PESSIMISTIC by £20bn or so.  All in all, my concerns about an OBR as expressed over a year ago in Fiscal Rules OK? are yet to be assuaged.

In the meantime, the opposite movement of power is taking place in the monetary sphere.  Politicians are recognising that in these difficult times the monetary steps we need become quasi fiscal.  Read Clive Crook today:

Monetary policy was thought separable partly because it seemed simpler: all you have to do is control interest rates. But in a crisis monetary policy gets complicated. Quantitative easing erases the line between monetary and fiscal policy altogether. When central banks support troubled borrowers, public or private, they expose themselves to default risk: again, fiscal policy by another name. Such interventions involve choices about who will be protected and who will pay. Those are, or should be, political choices.

Words that were largely prefigured in Credit Where It’s Due, where I used idea ‘restoring fiscal dominance’.

What an odd world for macro-policymakers.  With Merkel calling for balanced budget rules, and Osborne ceding some powers of suasian (i.e. embarrassment) to the OBR, we have technocrats or inhuman rules taking over fiscal policy, which in its turn is about to be ineluctably infected with the consequences of monetary policy.  Who is in control any more – if things go wrong, who do we blame?  What political structures do we need to manage accountability and to coordinate all these areas?  That is the biggie.

17 May

Orange Book in hot demand

Posted by freethinkingeconomist in Uncategorized. Tagged: , , , .

Well, it’s hardly surprising, is it?  The zig-zag story of the Conservatives’ attempt to embrace liberalism under Cameron has its images, sayings and catchphrases: the well-hugged hoodie, the huskie, the green tree, We Believe in Society, Cameron’s embrace of the NHS, and so on.   But the other movement that led to the coalition partners coming together has instead a book, one that produces its own clunky derivatives (‘Orange Bookers’ being a term of abuse in some corners of Liberal Democracy).

For a really excellent account of this journey, read Jane Merrick in the Independent.

The book is out of print, but at CentreForum we are trying to meet demand.  Email info (at) centreforum (dot) org if you want to buy one and we’ll try to get back in touch with how it works (we’re still working it out).

Written in 2004, it may have an out of date feel in places: the Fiscal sections and Real World events are sadly apart.   I have no time to reread let alone review it now, but could not help diving into Vince Cable’s chapter to see what it might turn out for the new Business Secretary.

On the downside, on p168 he calls for the abolition of the department he now heads.

But on P170 he calls for those on low incomes to be pulled out of tax altogether, and those on higher pay to pay more or at least lose various reliefs and benefits.  P171 has the (now shortlived) idea of national property taxation – the mansion tax, in other words.

If you read anything, read Laws’ chapter on “Reclaiming Liberalism”, which has some biting observations on the nannying instincts of the Liberal Democrats as they then were.  But the whole thing is bound to be useful in the years ahead.   What is certainly missing is the overriding emphasis on reducing inequality that James called for in his speech yesterday.  James writes:

Delivering the Hugo Young lecture last November, David Cameron astounded many in the audience by asserting that the real problem is not the rich-poor divide but the gap between the poor and those on middle incomes.

Whereas I am sure many ‘Orange Bookers’ think that is precisely the issue – people being well off enough to be out of poverty, not how far they are behind Beckham.   I don’t have the time to search the book to confirm this.

16 May

Crazy spending, or our lifeline?

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

To no great surprise, David Cameron has announced an immediate audit of the ‘crazy’ spending of Labour’s last years in power.  Politically, this no doubt makes great sense – “look what those idiots got up to” is perfect scene-setting for the blood-letting that will follow.  But what worries me is what sort of a narrative this tells of the crisis that has gone before – and how such a narrative restricts our future scope for action.

I’m rushing, so I’ll explain.   Look what Paul Krugman has found in the latest IMF report into the sovereign fiscal crises worldwide.  You will notice that it agrees with endless repeated polemics I launch on my slightly smaller blog:

what the report says is that there has been a fundamental deterioration in the fiscal outlook for advanced countries. Not only are they running up a lot of debt in the crisis, but — and much more important — they will emerge from the crisis with large structural deficits that weren’t there before. So spending cuts and tax increases loom.

No arguments so far.

where are those structural deficits coming from? It’s not interest on the debt: the IMF shows a large increase in primary (non-interest) structural deficits. So is it permanent increases in spending? No: the report shows that discretionary spending increases are a minor cause of rising deficits even in the crisis, and these increases will be reversed as stimulus winds down.

As I argue repeatedly, above all in A Balancing Act (see the pie chart), the revenue collapse was what finally revealed our massive deficits, the deficits that will characterise this premiership of David Cameron, and every subsequent premiership he might have.*

Why does all this matter?  Is it not just a matter for historians in what order things happened?  We are where we are: laden with debts and deficits.  Get over it, I hear you call.

But it does matter because the stories we tell of the past influence our future behaviour.  Consider the following crude account of how things happened:

  • We were going along nicely while the banks gambled madly
  • They made the economy collapse.
  • Governments responded by spending masses of money on two things.  Hundreds of billions on the banks (just read Peston)
  • And then this daffy thing called ‘Keynesianism’ encouraged that spendthrift Brown to go nuts with public money
  • Despite all this the economy has tanked by 6%, and is not growing well.  And we have a massive debt

Reading this, what would you conclude?  Well, that saving the banks and doing the Keynesian ‘splurge’ certainly left us with a debt, but only possibly helped the economy.  Next time, if we went badly into recession again, we should on no account repeat the same measures.

Which would be a terrible mistake.  The truth is that we did very little Keynesian spending indeed.  The government’s spending** did not rise very much (check out any economic reports).  The deficits happened because its ability to raise money was muellered by the collapse of the asset bubbles that fed it.  The states that were best able to do the Keynesian spending appear to have had faster recoveries.

I am not sure that I agree with Krugman in thinking this proves we need more spending, now; at some point, the risks of a sudden stop from the bond market just outweigh the benefit.   But we should be very careful that we don’t tell ourselves the wrong stories about the recent past.  We have a truly horrible fiscal situation.  Yes, cut the pay of highpaid civil servants.  But it was not the Labour government going crazy with Sir Humphrey that got us in this mess.  It was a collapse in nominal GDP, and revenues that are far too geared to an asset bubble.  Let’s get on with fixing that.

*amusingly, my working title for that piece was ‘The Cameron Inheritance’.  I was told off for begging the question – but they were 15% ahead in the polls.  Oh, how right the critics were …

**by which I mean its CONSUMPTION.  Look at the supplementary documents in the pre budget reports (table 1.12)

http://www.hm-treasury.gov.uk/d/pbr08_chartstables_501.pdf

and

http://www.hm-treasury.gov.uk/d/pbr09_chartstables.pdf

the figures for 2009 rose by just £20bn.

16 May

Most shocking quote from the Economist this week

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

Please, don’t less this be the future for a Britain now signed up to less liberal immigration policies. From a story about how an anti-immigration backlash plays out in Japan:

Families have been broken apart as parents of children born in Japan have been detained and deported. People who seemed to qualify for a special residency permit (SRP), designed for those who overstay their visa but wish to remain, have been denied. Forced deportations have become more frequent and rougher … This year alone, two detainees have committed suicide, one has publicly complained of abuse, and 70 inmates staged a hunger strike demanding better treatment.

people cannot apply directly for an SRP: illegal residents can only request it once in detention, or turn themselves in and try their luck while deportation proceedings are under way. So most illegal residents just stay mum. Mr Suraj fell into the SRP abyss after he was arrested for overstaying his visa. Although he had lived in Japan for 22 years, was fluent in the language and married to a Japanese citizen, his SRP request was denied.

ABUBAKAR AWUDU SURAJ was already unconscious when the cabin crew of EgyptAir MS965 saw him on board, before the Tokyo-to-Cairo flight. Shortly later he was dead.

As for Mr Suraj’s widow, she has yet to receive details about her husband’s death or an official apology. The topic is one Japanese society would rather avoid. The press barely reported it. Still, when her name appeared online, she was fired from her job lest the incident sully her firm’s name.

I was immensely proud of the Liberal Democrats’ policy (developed when Nick Clegg was Home affairs spokesman): of giving earned amnesty to people who had stayed illegally in Britain for 10 years, had a spotless criminal record, and wanted to come out of the shadows and start paying us tax.   Against our illiberal press, I thought the policy needed a human face to make it work – a picture of the sort of people and the sort of treatment they might get if an alternative policy of forced deportation no matter what was applied.

Mr Suraj is a chilling example of what the Lib Dems were trying to avoid.

14 May

Some stuff to add learning and entertainment to a sunny weekend

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

Sorry, I am in a sunny mood.

Martin Wolf is also infected with the sun, because he comes out with a surprisingly generous verdict on The economic legacy of Mr Brown. The general theme is that his mistakes were shared by most of the economic policymaking world, and Wolf makes this telling point:

“In retrospect, the government also trusted too readily in the stability of contemporary finance. Would a Tory government have been much more distrustful? If you believe that, I have a bridge to sell you.”

And on the spending splurge myth (see posts, passim), Wolf gladdens my heart again:

“The jump to a ratio of 48.1 per cent, forecast for this year in the 2010 Budget, is due to the recession. Nominal spending is currently forecast at 3.5 per cent higher in 2010-11 than forecast in the 2008 Budget.  But nominal GDP will be 10.3 per cent lower and tax revenues 16.4 per cent lower.”

Yes, spending is too high.  Yes, the deficit has leapt up.  But no, the high spending and the deficit leap are not the same thing.

A fantastically Euro-intellectual column about the Euro being the right side of history.

The euro remains on the right side of history, Tommaso Padoa-Schioppa

“Over many months, a mighty army has advanced on the citadel of the European currency with the cry: “It will never work””

“Their reasoning was as follows: the euro area is not a political union and can never become one, because Europeans have no appetite for it and nation-states will not relinquish power …the advent of the euro is just an episode – a most significant one – in the building of a post-Westphalian order… In this battle, the citadel emerged as the winner because it finally set aside hesitation, prejudice and division. But in a deeper sense it lost, too. It was mistaken in its belief that the euro and full national sovereignty are compatible. The attackers saw the incompatibility, but were mistaken in their belief that it was the euro, rather than the Westphalian dogma, that would emerge most damaged.”

Beautifully written.  Doesn’t make it right, of course.

And a letter repeating my point in yesterday’s post (I really ought to have written to the FT) about German monetary orthodoxy.

“Sir, John Taylor (“Central banks are losing credibility”, May 12) makes a number of interesting points, but several are erroneous ….  he criticises the European Central Bank for not buying distressed government debt, arguing that it is not conventional monetary policy. Having the financial system teetering on the edge of collapse with interest rates already close to zero is hardly a conventional position and the ECB should be applauded for what it has done. This is no time for mindless orthodoxy … Or perhaps he is thinking what a triumph has been achieve in Japan since the 1990s”

Finally, a hugely entertaining short piece from Gideon Rachman about the day he interviewed George Osborne for a job at the Economist.

I had just been appointed editor of the paper’s Britain section and we were looking to recruit a new reporter. Osborne had been working as a political adviser to the Conservative Party, which had just gone down to a crashing defeat at the hands of Tony Blair and New Labour. Self-deprecatingly, Osborne explained that his job had been to try to “destroy” Tony Blair – but, as he pointed out, “I obviously didn’t do a very good job of it.” His frank admiration for Blair’s skills as a politician was obvious.

Finally, under Aren’t Americans Extraordinary, this League Of Ordinary Gentlemen piece debates a piece of legislation. Boy, am I glad that we have never reached the point in this country that this even needs debating.

14 May

‘Labour’s electoral strategy’ – and a call for Empiricism

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

Given that the next election is possibly 5 years away, am I the only one to find arguments about Labour’s election strategy just a little premature?  I keep trying to remember what such discussions must have been like for the Lib Dems in 2005, and then find I can’t.  Because five years is such a long time … What is that saying about a week in politics?

But there are some excellent discussions, and I can’t ignore this one: between Julian and the Fink on Comment Central.

Meantime (and thank goodness, for this policy oriented blog), the discussions about POLICY are restarting.  Here is the excellent Rick on May 2012, and a Grand revolt against the Immigration Cap. Rick is an HR guru:

A combination of factors has meant that, five months into the year, the 2012 immigration cap has already been reached. Unemployment has fallen rapidly as the economy has improved and ideal weather conditions have caused farmers to bring in foreign workers to prepare for a bumper harvest. There has been little interest from local people in jobs at the Olympic Games, so London 2012 sent out an urgent appeal for migrant workers in January. The annual cap on migrants was reached a few days ago when EasyTandoori, the joint venture between Stelios Haji-Ioannou and Gulam Noon, brought 500 Indian waiters and kitchen staff to the UK, in preparation for the opening of its restaurants later this year.

Ian Cowie of the Telegraph is more, well, Telegraph-ish about the prospects for people suffering higher CGT bills.

Investors with substantial portfolios of property and/or shares who have not protected them in tax shelters – such as trusts, individual savings accounts (Isas) or pensions – face the daunting possibility that HM Revenue (HMRC) may grab half their gains.

If you are a reader with substantial wealth, it is a very expert and informed piece that may help you work out what to do to protect your wealth.  If you are NOT such a fortuante person, it is an intruiging insight into the amount of brainpower and cunning that goes into protecting the wealth of people who have the ‘problem’ of how best to sell their artwork, racing cars and second properties.

I think CGT is an important issue.  But I am most exercised about the people starting up value-added business that end up making the whole economy grow well, not the multi-generational maintenance of wealth hordes.  There are dilemmas, sure – the sanctity of property, social justice clashing as always, blah blah – but I am more concerned about the truth or otherwise of the complaints of Private Equity managers:

The British Private Equity & Venture Capital Association, which represents the industry, said it would be “bizarre” if the sector’s capital gains were taxed as non-business gains. It said the generous exemptions for entrepreneurial business activities should “obviously” be applicable to private equity and venture capital, highlighting “the positive role that private equity and venture capital are playing in the recovery”

I am an empiricist.  All sorts of things might be true in theory about taxes, but we need to know what actually happens. For example, the Right loves to construct a narrative in which the Government is the whole cause of the financial crisis. Sure, you can ‘construct a narrative’ (read my review of Norberg for an example).  But is it true?  Barry Ritholtz takes it to pieces – see this post on Economist’s View, concluding in damning fashion:

I demand evidence, data and facts. The blame Fannie & Freddie crowd have managed to remain blissfully data free. They have steadfastly ignored all calls for proof. Its way past the time to call out their intellectual dishonesty. If you cannot show any data, if you cannot prove what you are alleging with actual facts, you need to be called out for what it is you actually are: Proponents of a failed philosophy.

The version over here is our own dear IEA, so very right in the 1970s, but so pure and religious in their views against taxes that they go to the extremes, those extremes where your views are just ignored for being predictable in advance.  Consider their post asserting that inheritance tax is a tax on entrepreneurialism. I keep asking where the proof is, and I keep getting fanciful, evidence-free theories back.  There is huge cash wealth in this country.  Asserting that IHT prevents the venture capital industry getting what it needs is just daft.

13 May

A balanced cabinet

Posted by freethinkingeconomist in Uncategorized. Tagged: .

See this picture from LibCon (ooh, how ironic).

It’s nicely balanced.  One from Eton, one from St Paul’s, one from Radley, one from Cheltenham Ladies, one from Wellington, one from Brentwood, some oiks from Grammar school, and three Comprehensive pupils slipped in.

Oh, and two from Westminster, so they’re slightly overrepresented.  But it looks like the spread of public-school attendance is very even indeed … no one culture is going to dominate then.  Phew.

Matthew D’Ancona makes an interesting point here:

The vast majority of children born in the Sixties did not have the option of a grammar school education, unlike Blair and Brown’s generation. So it should be no surprise that the architects of “Clameronism” are mostly privately educated.

I hate to make excuses for this, but D’Ancona may have a point. Since parties must pick who they think are good some 10-20 years after their university time (we hope), can this preponderance reflect current prejudice, or the way things looked many years ago?  More interesting, perhaps, would be what the new crop of 200+ MPs look like.

All the same <sigh> there still isn’t someone from Ryde School, Isle of Wight.

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