(Yesterday @occidens tweeted: #mpc misestimated the buoyancy of consumer spending. Perhaps they overestimated the amount of gloom caused by Brexit vote. Ha ha.)
Yesterday (2017/2/2) the Monetary Policy Committee revised its estimates for both monetary growth and wage inflation downward, admitting that its November estimates misread the future in two (compensating) ways: Wages were not rising as fast as expected, and consumer spending had not fallen as expected .
Mark Carney, at his press conference, made several suggestions as to wages: perhaps increased population, or changes to taxes.
I make here one suggestion as to buoyant spending. The Monetary Policy Committee probably thought everyone in Britain would all be as shocked as it was at the vote to leave the European Union. But they overlooked that fact that a majority of the country actually welcomed the idea of "taking back our sovereignty", and doubtless found in Brexit a harbinger of good times ahead.
(Haha ! They keep catching us out.)
Friday, 3 February 2017
(I am quite in favour of the new “Live-Chat” method of providing immediate help. Not, however, on the following occasion. But at least they gave me a transcript of the conversation!)
Chat Started: Friday, March 18, 2016, 15:40:30 (+0000) Chat Origin: TNL-SERVICE Agent Martha C ( 1m 41s )
Monday, 28 November 2016
Two friends have very different attitudes to health, and what to do when poorly; matters of medication, diet, sleeping, rising.
He believes in doing what feel right at the time; rest when tired, sleep when sleepy, fast when he has no appetite, eat fruit when the mood dictates, drink water when thirsty. He has a rationale; "the body knows"; millenia of evolution; the wisdom of the dumb animals that eat grass when deficient in something or other, without having a name for the missing vitamin.
His friend favours almost the opposite; the unexpected; the option that would not occur to the average person. She also has a rationale. She values the wisdom of the ancestors, and is careful to remember and transmit it. If chicken soup with rice is the "right thing" for an upset stomach, the very fact that you resist is taken as proof that the recommendation comes from a deeper source.
Of course, there is a further point in favour of her inherited wisdom, for she is the priestess that mediates between the past and the present. Just as there is point in his notion of following his immediate inclination, for that doctrine puts him in charge; who else knows?
Friday, 14 October 2016
What are the consequences of Britain running a prolonged trade deficit?I recently asked myself "Why tax?". Why not run a prolonged fiscal deficit, in which the government makes up the shortfall by printing new money. Now I ask the question above: "What are the consequences of Britain running a prolonged trade deficit?"
It is today a simple matter to find data on the web for Britain’s trade balance from 1956 to 2016 . These show an approximate balance until the mid eighties, but a period of 6 years from 1986 - 1992 where the balance of trade and services went extremely negative. Balance was restored quite rapidly and remained in balance until Labour came into power in 1997, whereupon there began a progressive slump into negative balance of trade and services. From 2004 to the present we have been running more-or-less steady at a deficit averaging 3.2 B£ per month (B£40 per year). That is around 2.2% of GDP, but it fluctuates month by month.
A somewhat grimmer picture is seen in what the Office of National Statistics (ONS) calls the 'current account deficit' a figure which, in addition to the balance of trade and services, includes profits on our British investments overseas minus the profits in this country repatriated to other countries. In the second quarter of 2016 the 'current account deficit' reached 6.9% of GDP).
I posed myself two questions: (a) by what mechanisms does the market correct itself? and (b) why is there a lag before correction? If I (like many UK citizens) want to buy a German car, I can offer £ or buy € and offer that. If the seller wants €, my purchase will depress the exchange rate. But if the seller prefers he can accept the £, and use them to buy gilts, bonds, or real estate in the UK.
I suppose there was a period of years during which foreigners were prepared to trade in £ and leave their winnings in the sterling area. The £ (for some obscure, and maybe irrational, reason) traded at a higher value than it should. That foreign money now seems to be leaving. The pound is relaxing and the skewed balance of trade should soon rectify, with us all 6.9% worse off.
Do please comment if you think I have got this wrong.
Friday, 7 October 2016
Why tax? Why not just print money?
It seems  that the business of balancing Government spending and tax revenues is not quite so crucial as many of us have supposed. A fully sovereign government can simply make up the shortfall by printing fresh money. Could it perhaps abolish taxes altogether? I mean, just print the money it needs to do what governments do.
According to Wren-Lewis  “there is a growing consensus that monetary policy and not fiscal policy should deal with macroeconomic stabilisation (Kirsanova et al, 2009)”. It is certainly true that there has been much tweeking of ’Bank Rate’ in the last 50 years, and it is also true that the novel procedure of ‘quantitative easing’ has been used vigorously in the USA, UK and the Eurozone since the credit fiasco of 2007/8, in an attempt to stabilize or revive the macroeconomy. But, in the last year, that trend seems to be waning, perhaps because you cannot lower interest rates effectively when they are already at zero, and quantitative easing seems to be about as ineffective as pushing on a piece of string. (The Bank of England gives some money to the banks, and all they do is place it on deposit back with the Bank of England , even though interest is near zero percent.) Finally this autumn there is talk, first from Labour  but then last week also from the Tories , of abandoning ‘small-government austerity’ and using Government spending as a way of boosting the economy. Does this mean that the ‘growing consensus’ of Wren-Lewis is dispersing?
A sovereign government with a floating ‘fiat’ currency can print as much money as it needs. There is talk (by Wren-Lewis) of ‘Modern Monetary Theory’ having its inception in 1971 when the USA came off the gold standard. As analysis of the theory behind a floating ‘fiat’ currency seems to date from 1905, the term ‘modern’ must mean something like ‘incompletely understood’. However, it is becoming increasingly clear that countries with sovereign currencies (as UK and USA) do not need to maintain fiscal balance; they can spend more than they raise in taxes, can run a deficit, year after year after year. Indeed (according to the ‘modern theory’, though this is far less widely understood, and may have missed George Osborne completely), they must run a deficit if the economy is to grow. Wikipedia puts it rather starkly: government deficit puts money into private pockets, government surplus takes it out. (This deserves a post on its own — later.)
I examined, in a previous post, the beneficial effect on GDP of raising taxes . Here I toy with the possibility of completely abolishing taxes, lowering tax rates to zero, running the entire cost of government by printing money.
Suppose (and these are realistic figures for 2015) UK gross domestic product (GDP) to be 1,864 B£ ; total government receipts from tax and national insurance contributions to be 515 B£ ; and the total (broadly defined, i.e. M4) money supply to be 2,115 B£ . The proposal therefore is to introduce new money each year to the tune of 515 B£. This would increase M4 from 2,115 B£ to 2,630 B£ in the current year. In simple monetarist terms this rise of 24% would be expected to cause inflation of the same amount.
Inflation, of course, takes money off everyone who has it, and in proportion. It is a tax on cash savings. If I owned a house ‘worth’ a million in 2015, in this scenario I could probably sell it for £1,243,500 in 2016, but its worth would not have changed. However, if I had a bank balance of 1 million, it would still be £1,000,000 the next year, but worth only 80.4%, or £804,000 in ‘old money’. People would soon learn to spend their cash as promptly as possible. The ‘idle rich’ (Keynes’ Rentier class) would not like this regime; but the rest of the population might. Central banks aim at an inflation rate of 2%, so 24% does seem steep, but there must be some other reason for taxation, apart from the fact that governments have always exacted tribute off the weak.
 UK GDP (nominal) 2015 = 1,864 B£ (1.864 T£). https://www.measuringworth.com/datasets/ukgdp/result.php
 Total UK tax and NIC income (2014-5) = 515 B£; =29% of GDP. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/539194/Jun16_Receipts_NS_Bulletin_Final.pdf
 UK M4 (total money supply) mid 2015 = 2,115 B£ (2.115 Tr£). https://www.statista.com/statistics/320127/uk-banking-total-money-supply/
Sunday, 25 September 2016
Professor Atkinson has made 15 proposals for reducing inequality; and for good measure added 5 further ideas that could be worked up to become proposals. His thoroughness is impressive, but is he perhaps carrying things too far. He seems to have made it his objective that everyone in the country has the same spending power. I see in Britain a great variety of abilities and tastes, and conclude that this is natural; something to work with, rather than against. To level out the wealth of citizens completely would be highly artificial and constitute a massive interference.
I believe our first objective should be to halt the slide towards inequality. There are too many ways (**) in which the rich (or smart) can take from the poor (or simple). I feel impelled to intervene, as when watching a big bully pounding a weakling. We clearly cannot rely on the ‘bullies’ having a sense of generosity or fairness. Though, in Britain, it is still regarded as unacceptably bad form to kill a person and take his goods, even that sense of justice may soon be challenged; we already tax alcohol, promote gambling, tolerate lethal drugs, allow extortionate interest rates, and overlook or condone the ‘collateral’ bombing of citizens.
So, leaving aside for the present the reasons why we must combat inequality, and passing on to consider the means, I would like to comment on only one of Professor Atkinson’s proposals.
“Proposal 2: Public policy should aim at a proper balance of power among stakeholders, and to this end should:
(a) introduce an explicitly distributional dimension into competition policy;
(b) ensure a legal framework that allows trade unions to represent workers on level terms; and
(c) establish, where it does not already exist, a Social and Economic Council involving the social partners and other nongovernmental bodies.”
Stakeholders presumably include Labour and Capital as major players, with perhaps customers and government as minor players. For two centuries we have witnessed the tug of war between Capital and Labour. The public can see both sides of the argument, though dimly, and in tiny glimpses; and has made some attempt to maintain a balance by siding at times with Labour and at times with Capital. This is a most unsatisfactory arrangement. The fair (or “proper”) balance is too ill-defined, too subjective, the mechanism too unwieldy and slow-responding. Professor Atkinson may have cracked it with his “distributional dimension”, “level terms” and his “Social and Economic Council”, but I see these as little more than making official and ponderous the agonising conflicts we all feel during a prolonged strike. What is the proper balance?
In order to “aim at a proper balance of power”, we must first define it. Of course the market can decide the proper balance, when some businesses fail and others succeed. But that is destructive and painful to watch. Some years ago I suggested looking, for each business in turn, at the ‘annual cost’ of Labour and the ‘annual cost’ of Capital. In many employments these are approximately in the ratio 1:2. It would be just to have worker participation on management boards in a similar ratio. At the very least this would lead to workers understanding better the economics of the business, and would foster a spirit of common purpose.
** The rich can buy up the competition, or the food supply, or with deep pockets they can simply wait. They can sometimes even subvert justice.
Monday, 19 September 2016
Estate Tax and Limits to Wealth
Francis Coppola discusses the “fairness” or otherwise of the tax paid by an estate when a person dies (previously call Death Duty, currently called Inheritance Tax). It seems a rather easy ‘Aunt Sally’. I think 'Estate tax' about the most essential, and least harmful, tax in existence. Great accumulations of wealth are bad for nearly everyone in society. But by ’great accumulations' I mean something like the top 1%. Gordon Brown was being snidely clever but at the same time very foolish in leaving unchanged the threshold for Estate tax, for with inflating house prices he got increased revenue, but seriously distorted the effect and purpose of the tax. Within months the Tories had realised that a great segment of the electorate would turn their way if they declared abolition of Estate Tax a manifesto issue.
I had a letter in the Times back in 2007 on Tory plans to abolish 'Inheritance tax', which I think still relevant today.
Date: Fri, 17 Aug 2007
We are told that John Redwood has proposed abolishing inheritance tax. I have not heard anything so daft in a long time.
For one thing, Britain does not have inheritance tax; it has 'death duties' or 'estate tax' paid on the estate of someone who dies, though this has mistakenly been called inheritance tax since 1986. In many countries in Europe there is a true inheritance tax, paid by beneficiaries of an inheritance.
For another thing, death duties are among the most clearly beneficial of taxes. Death duties are not new. They were levied in Roman times and in Medieval England, and have been continuously applied in Britain since 1894. It has been argued that death duties are superior both to taxing income and taxing spending, for both those depress trade and productivity.
But the most significant benefit of death duties, which I hope everyone will bear in mind, is in combating the agglomeration of wealth into the hands of the few. This is of vital importance for there are so many ways in which the few powerful interests can exploit the many weak ones. Far from abolishing the tax on estates, it is crucially important for the maintenance of a wide distribution of wealth and stakeholder interest in this country that we improve the tax; target it better and collect it more fairly. Yours sincerely,
I strongly recommend all political parties, and anyone interested in taxation, to read the “Mirrlees Review: Reforming the Tax System for the 21st Century”, which is magisterial in its scope, thoroughness, and disinterested high-mindedness. Besides, it is available online. Though published in 2011, it is still relevant, because no attention has yet been paid to its recommendations.