Thursday, December 08, 2011

A Poll I would like to see

Inspired by Lord Ashcroft's polling in Feltham and Heston, would be a poll comparing Boris Johnson, Ken Livingstone and AN Other Labour Candidate.

The reason for this being a fair amount of the internal Labour party arguments about Ken's popularity. The poll above confirms that Labour are ahead of the Tories, and that Ken is behind Boris, what we don't know is whether this is because Boris is more popular than the Tories or Ken is less popular than Labour. The view that appeals to my politics is that Boris, as a larger than life figure enjoys a large popular vote that extends to those who would normally support Labour, Ken's appeal has faded, but he is not really less popular than Labour.

Like I say, only my personal opinion here but it would be good to sort this one out once and for all.

Thursday, October 06, 2011

On QE, Pyramids and the Like

If you follow me on twitter, you'll probably guess that my reaction to the new QE announcement is a positive one, athough obviously, I'm a little disappointed that none of the freshly minted QE money will be used to finance the building of a pyramid.

Of course, I don't actually think we should build a pyramid, in reality there are plenty of alternatives that we could choose in preference to pyramid building. The point I'm trying to make is that if we're going to create new money into the economy, we really ought to get that money generating economic activity, preferrably among people who are currently not engaged in economic activity. This to me, seems a far better way of doing things than buying government debt off banks in the hope that it might be enough to get them lending again

I think we should go this way for two reasons, the first is that like Chris Dillow, I think we have a shortage of investment of opportunities; the second is that I believe we are suffering from a balance sheet recession, households and businesses are already struggling with large quantities of debt, are there many individuals and businesses out there willing to take on more debt? It's for these two reasons that I have doubts about QE, even if it helps with bank lending I can't see there being many takers for this new debt.

I support QE because I believe that a not very effective stimulus is better than no stimulus at all, but I have my reservations.

Wednesday, September 14, 2011

The Mysterious Ideas of Hard Keynsianism

I'm reading a lot these days about the ideas of this think called "hard" or "real" Keynsianism, the idea that we should run a surplus when the economy is in good shape. As well as finding a home on political websites like Labour list, it's also been mentioned by economists I incredible amounts of respect for like John Quiggin and Paul Krugman(1). I've also seen arguments from right wing types suggesting that Keynes said surpluses should be run during the good years. The problem I've got with this is that I can't find anything in the General Theory(2) that supports this.

It's obvious that Keynes thought that in time's of high unemployment, we can find plenty of passages to support this viewpoint in the general theory, the idea of running surpluses in good times I'm not so sure about. One fact that leaps out at me when reading the General Theory is the contempt he holds for the principle's of what he calls "sound" finance. We have this snippet from Chapter 8 where he laments excessive requirements for sinking funds (suppose you could call them reserves) for building maintenance and it's affect on employment.
Or again, in Great Britain at the present time (1935) the substantial amount of house-building and of other new investments since the war has led to an amount of sinking funds being set up much in excess of any present requirements for expenditure on repairs and renewals, a tendency which has been accentuated, where the investment has been made by local authorities and public boards, by the principles of "sound" finance which often require sinking funds sufficient to write off the initial cost some time before replacement will actually fall due; with the result that even if private individuals were ready to spend the whole of their net incomes it would be a severe task to restore full employment in the face of this heavy volume of statutory provision by public and semi-public authorities, entirely associated from any corresponding new investment.
Another good example of this is Chapter 10, one of the places where he talks about digging holes. The point he makes here is that in situations where there is unemployment you may as well pay people to dig holes, indeed he suggests that humankind had already unwittingly discovered this practice with the form of hole digging known as gold mining.
The analogy between this expedient and the goldmines of the real world is complete. At periods when gold is available at suitable depths experience shows that the real wealth of the world increases rapidly; and when but little of it is so available, our wealth suffers stagnation or decline. Thus gold-mines are of the greatest value and importance to civilisation. just as wars have been the only form of large-scale loan expenditure which statesmen have thought justifiable, so gold-mining is the only pretext for digging holes in the ground which has recommended itself to bankers as sound finance; and each of these activities has played its part in progress-failing something better. To mention a detail, the tendency in slumps for the price of gold to rise in terms of labour and materials aids eventual recovery, because it increases the depth at which gold-digging pays and lowers the minimum grade of ore which is payable.
He then proceeds to point out the absurdity of the principles of sound finance by suggesting that hole digging in the form of gold mining is a superior investment to building houses on this basis.
In addition to the probable effect of increased supplies of gold on the rate of interest, gold-mining is for two reasons a highly practical form of investment, if we are precluded from increasing employment by means which at the same time increase our stock of useful wealth. In the first place, owing to the gambling attractions which it offers it is carried on without too close a regard to the ruling rate of interest. In the second place the result, namely, the increased stock of gold, does not, as in other cases, have the effect of diminishing its marginal utility. Since the value of a house depends on its utility, every house which is built serves to diminish the prospective rents obtainable from further house-building and therefore lessens the attraction of further similar investment unless the rate of interest is falling part passu. But the fruits of gold-mining do not suffer from this disadvantage, and a check can only come through a rise of the wage-unit in terms of gold, which is not likely to occur unless and until employment is substantially better. Moreover, there is no subsequent reverse effect on account of provision for user and supplementary costs, as in the case of less durable forms of wealth.
Ancient Egypt was doubly fortunate, and doubtless owed to this its fabled wealth, in that it possessed two activities, namely, pyramid-building as well as the search for the precious metals, the fruits of which, since they could not serve the needs of man by being consumed, did not stale with abundance. The Middle Ages built cathedrals and sang dirges. Two pyramids, two masses for the dead, are twice as good as one; but not so two railways from London to York. Thus we are so sensible, have schooled ourselves to so close a semblance of prudent financiers, taking careful thought before we add to the "financial" burdens of posterity by building them houses to live in, that we have no such easy escape from the sufferings of unemployment. We have to accept them as an inevitable result of applying to the conduct of the State the maxims which are best calculated to "enrich" an individual by enabling him to pile up claims to enjoyment which he does not intend to exercise at any definite time
Now to me, the idea of saving in the good years to prepare for inevitable downturns seems to be me very similar to those ideas of "sound" finance. I have a hard time believing people who advocate a practice similar to that Keynes was so passionately critical of suggesting that their interpretation is "Hard" or "Real" Keynsianism.

Now, I will have to add a bit of a caveat here in that I don't think Keynes thought it was acceptable for governments to continually run deficits. I'm sure he recognised the obvious dangers of accumulating excessive levels of debt obligations, I'm also sure he recognised the role fiscal policy played in price stability. Given those two assertions I think it's fair to say that he advocated keeping national debt stable and budgets roughly balanced over the medium term. I don't object to this, what I object to is the fact that a lot of people seem to have read between the lines on the subject of balanced budgets and come up with a set of hard and fast rules and then had the cheek to call it "Real" Keynsianism.

The specific problem I have with this kind of policy is that it seems to assume certain properties of economic cycles that don't really exist. People act as if recessions are regular and inevitable events rather than occasional freak events with vastly different causes. The List of Recessions in the UK notes recessions in 1919, 1930, 1973, 1980, 1990 and 2008 and each one has a unique cause(3) (. If we were to run surpluses in the "good" (non bad?) years we have to ask ourselves just how long we would have to maintain this surplus, we have to ask ourselves why we are withdrawing demand from the economy and why we are putting off the building of houses, schools and hospitals for no other reason than to prepare for an imaginary downturn that may or may not happen.

Overall then, I'm not really sold on this whole Hard/Real Keynsianism idea. I think that unfortunately it's an idea that's cropped up because of the current obsession with fiscal policy in political debate rather than as a product of solid economic reasoning. I think it's important to remember that Keyne's main concern was always that of unempoyment.

1. Krugman is quite nuanced in what he advocates, so I'm not sure whether my accusations s
2. I should admit that I may be missing something here, I've not really read much of Keynes' other work.
3. Finance seems to crop up an awful lot in recession causes, funny that? You might think that a better way of dealing with the problem of downturns and the deficits they produce might be to regulate this activity more strongly.

Wednesday, September 07, 2011

The Paterson Curve

Move over Laffer curve, there's a new graph shaped taxation related narrative device in town. Given that people are writing letters to the FT about the 50% tax rate I thought I'd attempt to come up with a way of saying why it's ok to tax the rich provided we don't tax them too excessively. So people, witness The Paterson Curve!

Obviously our great wealth creators need decent rewards so that they go and do their thang, but I figure that there must be a some upper limit where it doesn't matter how big the rewards are, there's just no more productivity forthcoming. Will the prospect of ├╝ber richness really be much of a carrot to the merely super rich? As a result I've decided to stick that reasoning into a nice little curvy graph.

And so, because by my reckoning, we're at a point on the Paterson Curve where there's little extra to be gained from increasing levels of reward, I reckon it's perfectly OK for us to keep the 50% rate.

Wednesday, April 13, 2011

The Ever Consistent Taxpayers Alliance

The TPA on the spiraling cost of obesity:
Matthew Sinclair, of the TaxPayers' Alliance, said last night: ' Cancer patients are missing out on vital drugs because of cost.
'There has to be more individual responsibility over obesity.'
The TPA on the Rotherham Institute for Obesity, an NHS center specialising in (amongst other things) helping people take responsibility for their own weight:
Charlotte Linacre from the TaxPayers’ Alliance said: “This initiative has done a fat lot of good and been a massive drain of taxpayers’ hard earned cash.

Thursday, March 31, 2011

The Big Society Credit Card

If you haven't yet read Duncan's False Economy piece about how Osborne's plan have a read, it really is very good. Here's a snippet:
Back in June last year, before Osborne’s policy changes, the OBR forecast (pdf) that public sector net debt (government debt) would be £1,294bn in 2013/14. After two budgets and a spending review they have revised that (pdf) to £1,251bn – a reduction of only £43bn.

Change in debt by 2013 under Osborne's plansHere we can clearly see the impact of Osborne’s changes over the next three years: public debt down by £43bn BUT private household debt up by £245bn – five times as much

So, we'll still be picking up debt it's just that instead of it being the government's debt, it'll all be our own private debt. I herby call dibs on the term Big Society Credit Card.

Tuesday, March 22, 2011

Problems and Solutions on the Deficit

Unless you've been living in a cave for the last few years you'll undoubtedly know that the country currently has a rather large deficit. What I'd like to do with this post is spell out the dangers and the arguments on how to deal with the situation. It's intended as a response to the gentlemanly @Parlez_me_nTory as to why us lefty economist* types don't want to see the deficit cut to rapidly.

The Dangers of the Deficit
The first danger is the obvious one, by taking on a greater stock of debt we are commiting ourselves to larger interest payments. This means tax money going on interest rather than schools and hospitals and such.

The second danger relates to the bond markets, for the government to borrow there need to be investors willing to put up the cash. These investors will only do so if they believe that government debt provides good value for money. Traditionally the strength of government debt has been that it is very safe, if lenders start to believe it isn't, they'll start by demanding a higher interest rate and in extreme circumstances they may outright refuse to lend.

Structural and Cyclical Deficits
A lot of discussion at the moment has centred around the ideas of structural and cyclical deficits.  To explain this we need to look at what traditionally happens in a recession, that is that tax revenues tend to drop at a far greater rate than the loss of output from a recession. GDP might drop by 2% but taxes are likely to drop by far more. Equally, when the economy recovers, taxes tend to rise quite quickly.

To show this, check out the change in spending versus the deficit in the 1990s where the deficit dropped despite increased spending.

The point of this is that it's often the case that an awful lot of the deficit will take care of itself, this is what we call the cyclical deficit. The other part of it is the structural deficit. This bit of the deficit is basically the bit that would sill be there once the economy was back up to speed. There's currently a considerable amount of debate about just how much of or current deficit is structural.

The National Debt and Growth
As a final bit of background, we also need to consider the role of the national debt in all this. In the past 63 years there have, the government has only run a surplus in 14 of them (6 Tory, 8 Labour). Despite this, the trend for the national debt (until recently) has very much been a downward one.

This is of course because this graph judges debt as a percentage of GDP. The reason we use this measure is that GDP can be seen as a reasonably decent approximation of our national income, it makes sense to judge our debts according to our ability to pay. The reason Labour politicians like to make the case for growth is that if we have a vibrant economy, the debts no longer matter as much.

The Case for Deficit Reduction
The case for deficit reuduction is simple enough, it's basically that we are buliding up a level of debt that will at some point become unsustainable and also that if we don't show a willingness to deal with the problem our creditors will no longer lend to us (because they don't think they'll get it back). At this point we face a situation where there simply won't be anY money to pay government employees.

The Case Against
The case against deficit reduction is based around the idea that a public sector worker is also a private sector customer who is spending their money with various private sector shops and businesses. This means that a reduction in public spending will have an impact on the revenues of private sector businesses.

We can generally assume that the private sector will slowly expand creating new jobs which will leed to a virtuous cycle of spending an growth. If cuts our made too rapidly, there is a risk of halting private sector growth which could lead us towards the dreaded double dip recession. It's further argued that even if we don't see a double dip, we will see slow growth meaning that although we may have less debt, that debt will be more of a burden on account of the poor growth.

*Just to be clear, I'd classify myself more as in interested amateur rather than a proper left economist.

Monday, March 21, 2011

On Merging Income Tax and NI

It appears that a good few Tory friendly papers and organisations are being briefed that George Osborne intends to eliminate Employees National Insurance and merge it with income tax. From an entirely practical point of view this strikes me as a good move, politically I think it's a masterstroke.

From a practical point of view there is no real reason why we need to have two separate income taxes operating with different sets of rules. There's no real difference between how the revenues from the different taxes are spent, it all goes into the same pool. What we ultimately get from all this is an easier to administrate taxation system, which is good for both the HMRC and employers more generally. A problem that would need to be worked out is that this kind of change could hurt pensioners who might end up with a higher tax bill (since they don't pay NI), but this would not be a hugely difficult thing to implement.

Politically though it's more interesting, because George Osborne has found Labour's achilles heel. In 13 years Labour steered well clear of income tax, the basic rate only ever went down, the higer rate wasn't changed. When Labour needed to raise the equivelant of a penny on income tax, it did it through raising NI, not income tax. The only time Labour ever increased income tax it went horribly wrong (the 10p tax scandal a few years back). It's an unfortunate truth that Labour is scared to death of being seen as a tax and spend party.

By merging income tax and national insurance Labour no longer have the easy option of raising national insurance, it has to commit to raising income tax. For a Labour party still scarred by it's election loss in 1992, this is a frightening prospect. That said though, from a personal point of view, I'm not quite so worried. If we really needed to pull the wool over the taxpayers eyes to implement our policies, we've already lost the argument. The Labour party will need to get better at making the case for higher taxation, but I don't necessarily see this as a bad thing.

On Arguments about Interest Rates

There's an argument that I've heard quite often recently that a major factor in the recent financial crisis was loose monetary policy and low interest rates. This argument is particularly popular among conservative lunatic fringe. Witness Allister Heath (Chair of TPA Tax Comission, daddy is a TPA director) here or Dan Hannan over here as an example of this kind of thinking, there's more in the form of Derek Scott at the Telegraph.

Thing is, I'm not sure that this is entirely resembles what actually happened. A quick comparison of recent and historical interest rates reveals that bank interest rates were not really well below any kind of historical average. Another key point to make is that around 2006/07 mortgages could easliy be obtained at well below the bank base rate.

To foist the blame onto the base rate ignores other important factors. We have for a long time had a financial system that has allowed money to flow freely across borders. This has meant that our banks are free to borrow on the international money markets.

This change has reduced the effectiveness of the bank base rate. While it's true that many mortgages do track the base rate so a rise will squeeze spending among those consumers with tracker mortgages. The effect on the supply of consumer credit will be reduced because banks can seek an alternative to borrowing from the Bank of England at the base rate.

The point I think it's worth making here is that you can't really put the blame on interest rates set by the Bank of England while ignoring the developments that occured in the financial markets.

Wednesday, February 23, 2011

A Brief Thought on this Month's Budget Surplus

A lot of Tories and right leaning media types seem to be rather happy about the higher than expected revenue for January this year. I really don't think it deserves such celebration.

It's worth pointing out that the higher revenue was due to higher income tax, and a fair bit of that was from self assesment returns due at the end of that month. It's then worth pointing out that these returns would have been for the tax year running from April 2009 to the end of March 2010 (when Labour were still in power).

So not necessarily something that the coaltion can take all the credit for.

Thursday, February 17, 2011

On Youth Unemployment and the Minimum Wage

Today's youth unemployment statistics are worrying, no doubt about that. Tim Worstall is pointing the finger of blame for squarely at the door of the minimum wage, I thought I'd take a look at the historic data and see what it shows.

The data in question can be found here (Specifically, Table 9, Datasets: YBVQ,YBVR,YBVS)

It's a bit of a short cut because the data is only for 18-24 year olds, so doesn't include 16 and 17 year olds, but I think it's close enough. In addition to the data for youth unemployment I've also included the data for the minimum wage and adjusted for average earnings. We can only go back as far as 1993, but this is a reasonably good time period since A) We were recovering from a recession and B) We didn't have a minimum wage.

So, here's a graph of the results:

So what conclusions can we reach from the dat, well since we can't see the 80's we unfortunately can't really prove anything on my preferred "it was Thatcher, Neoliberalism and Globalisation" line of reasoning. We can however see that there's not a huge amount of difference between the non minimum wage nineties and the minimum waged noughties, the latest figure is a little higher than the 90's figure but this could be put down to the greater severity of the recession and the current set of cuts.

There is one potential bit of support for the anti minimum wage argument in all this data, that is the rise in youth unemployment after 2004, this rise occured against a background of above average increases in the minimum wage despite the otherwise benign economic conditions. Unfortunately there's anther huge variable that throws a gigantic spanner in the works and that's that 2004 was the year that ten new eastern european nations joined the EU. While it's an acceptable argument that the minimum wage might have put employers of hiring, it's also quite reasonable to argue that employers hired foreign workers in preference to unskilled domestic workers.

All we can really say from the data is that if the minimum wgae had an affect on youth unemployment, the effect was not particularly signifigant. While the data may in parts indicate a relationship, it could easily be explained by other factors. All in all, I personally don't think the minimal benefits we'd see are worth the massive social costs.

Thursday, February 03, 2011

All About Industrial Policy:,Part 3 - Notes on Unemployment

The inspiration for this post all began with an argument I had with Tim Worstall over at Duncan's place over unemployment. I suggested that there was a relationship between trade policy and unemployment, Tim's rather scathing response was:
Eh? Trade causes unemployment does it? Well, that puts the kibosh on Keynesian economics then, doesn’t it: what with the insistence that employment is determined by aggregate demand.
Which to be honest, I thought rather missed the point. As a general rule, an increase in aggregate demand leads to a drop in unemployment, it is clear though that this rule doesn't describe the whole picture, that dealing with unemployment is more than just a case of fiddling with the right macroeconomic variables. To drive home this point, in 2007 at the height of an economic boom with demand by the bucketload, youth unemployment was 14.4%, it's clear that we need to look deeper to find the cause of unemployment.

At a basic level we can say that unemployment occurs when there is no demand for the available supply of Labour. This might be because there is no demand at all for labour, although it is often more likely that that the supply and demand are not compatible. Although there is a demand for labour, it is likely to be a demand for labour with specific skills not possesed by the available labour.

An obvious question at this point is: Why are jobs not being created that can make use of the available labour supply? To do this, we need to look at the process of job creation. One of the best descriptions of this process is the idea of Creative Destruction from the Austrian Economist, Joseph Schumpeter. Essentially, entepreneurs within a market economy will constantly be looking to put resources to their best use and even when jobs are lost, entepreneurs will find new uses for this newly available labour. I believe that this process as a whole goes on, but I think it's far from perfect.

Where we see unemployment, I believe that largely it is because the creative/destructive process within the economy has been unable to find a use for the available labour. It's at this point that we can bring the issue of trade. The starting point here is to imagine a world where wages are roughly equal, in this situation entrepreneurs have a huge range of options open to them. Once we start to add in competitor nations with lower wages to this world, many of the potential avenues of opportunity in the higher waged countries will dry up since as they will be unable to compete with lower priced competitors.

The point here is that the rise of foreign competition means that domestic entepreneurs have a harder time of things (they also have some advantages, but I'll cover these in a later post), making the process of job creation becomes more difficult. In a market economy, we have to accept the fact that jobs will be destroyed, what's important is that we look after those who lose their jobs, ideally by creating an environment where it's easy for them to find new jobs.

One reason I'm a fan of industrial policy is that it is clear that there are areas of the country and segments of the population for whom the job creation process as it stands is not working particularly well, jobs have been destroyed but not enough new jobs have been created. I'd like to see the government take a more active role in improving the situation.

Tuesday, January 25, 2011

On Today's GDP Figures

I was quite shocked at todays economic growth statistics, I was personally suspecting something to towards the lower end of what was forcasted, maybe 0.2-0.3% growth, a 0.5% drop was a shocking number.

More worrying is the cause of this drop, some of it may be down to the snow, but I'd have thought that would have been factored into the independent estimates. In addition, the government's programme of cuts hasn't really started to bite just yet.

There remains the possibility that todays figure is an anomaly, the result of incomplete data or a mistake in the calculations but otherwise it would seem that the drop is driven almost entirely by a collapse in confidence. I find this very worrying.

I've always thought that the current economic recovery was uncertain, mainly on account of the large levels of consumer debt. If the recovery is so uncertain that it can be knocked of course by nothing more than the expectation of cuts we have serious reasons to be afraid.

Wednesday, January 05, 2011

All About Industrial Policy, Part 2 - A Few Notes on Balance of Trade

Further to my first post on this subject, I wanted to get into the subject of why the global imbalances matter. To demonstrate this I'm going to start by considering two countries.

Country A: Is a wealthy well developed country, citizens of this country have high individual incomes. Due to the level of consumption in this country the country has a trade deficit with country B.

Country B: Is a developing country, citizens of this country have a far lower individual incomes. Consumption in this country is low, although it makes a large number of the high value goods consumed in Country A. As a result it has a trade surplus with country A.

As these two countries continue to trade with each other a problem will arise, because A is not producing enough goods to cover the value of the goods it buys from B there is a need to cover the difference. One way would be for B to either pay more or buy more goods from A. An alternative would be for B to build up a stock of country A's currency for use at a later date. This situation may continue for a number of years, however, at some point it's likely that B will no longer accept A's money at this time we have a problem.

A is now no longer able to buy it's usual quantity of goods from B, as a result B's firms have a problem since they are not able to sell the stock they are producing. In this theoretical example the problem could be solved quite easily B could use it's stock of A's cash to continue to buy from A and spend the spare cash on domestic goods produced in their homeland. In the real world however, it's not quite that simple, to demonstrate this I'm going to add a little more complexity to the model.

Firstly, it takes time for an economy to change and adapt, factories need to be built, old factories need to be closed down. An economy can't just change what it produces in an instant. Second, we need to consider how supply and demand match up, consumers living on Hawaii are unlikely to ever want snow ploughs, for example. Third, we need to consider the structure of firms, if a firm can't sell it's goods it's going to go into administration with all the consequences that entails.

Going back to the example, B's consumers are unable to take up the slack due to the vast difference in average income between the two countries. The goods that A's consumers buy are not affordable to the average consumer in B. It's at this point that the problems start to occur.

The Reckoning
In B there is now a problem of a massive drop in demand, much of the infrastructure will have developed with a view to producing goods for consumption in A. In A, problems also occur since much of the economic infrastructure will have been developed with a view to selling those goods produced in B. Inevitable conseuqnce of this is an economic downturn, with the accompanying unemployment and social unrest as well as a considerable amount of value being destroyed in both countries. In addition it will take several years of adjustment for the economies to correct themselves.

The issue of global imbalances seems to have become a far greater problem with the development of the financial system. Freely moving international capital seems to have increased the degree to which debtor nations can borrow before thing go wrong, as a result economies have developed further in the wrong direction and the size of the adjustment is greater.

One reason I'm in favour idea of industrial policy is that by actively seeking to improve the balance of trade we can play a part in making sure the economy remains more stable.