Friday, 14 October 2016

Balance of Trade

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[1]. 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 [2]. 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[3]).
     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?

Why tax? Why not just print money?

     It seems [1] 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 [2] “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 [3], even though interest is near zero percent.)  Finally this autumn there is talk, first from Labour [4] but then last week also from the Tories [5], 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 [6].  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£ [7]; total government receipts from tax and national insurance contributions to be 515 B£ [8]; and the total (broadly defined, i.e. M4) money supply to be 2,115 B£ [9]. 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. 


[7]  UK GDP (nominal) 2015 = 1,864 B£ (1.864 T£).
[8]  Total UK tax and NIC income (2014-5) = 515 B£; =29% of GDP.

[9]  UK M4 (total money supply) mid 2015 = 2,115 B£  (2.115 Tr£).

Sunday, 25 September 2016

Stakeholder Rights

Stakeholder Rights

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

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 

Dear Sir,

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.

Sunday, 11 September 2016

Runciman, have you any Suggestions?

Open Letter to a professor of Politics

Dear D. R.,
    In your recent article in the London Review of Books, you raise some interesting topics but, to my mind, do not carry them far enough; do not resolve anything. 
    I rather like it that you are coyly frank about your own position as a critic of the conservative establishment. I hesitate to call you a ‘leftie’ as I would probably reject that label for myself, preferring to call myself a liberal-democratic-socialist (seeing the Liberal element as referring to a Lloyd George/Beveridge type of intelligent interference with the brutalities of the free market; the democratic element as an acknowledgement that on questions of morals everyman has an equal say; the socialist element as acknowledging my preference for society as ‘one big happy family'.)
    You say that Constitutional Reform really matters, but I cannot see what reforms you are thinking of (apart from an elected upper house either to oppose or to rubber-stamp the lower house).
    You rhetorically ask “who can put together a coalition of the disaffected capable of defeating [the present Tory government]?”   Accepting your analysis, I would go further, and ask “Why does the ‘left’ appear fragmented, and unable to oppose the right?”  Is it simply that the right is motivated by a single common interest — that of ‘Self’; while motivation on the left is more diverse; the intellectual Fabian element being altruistic, the Labour Left being rooted in the sectional interests of labour, while regional parties are preoccupied with their regional interests.
    You mention a number of divides: metropolitan/rural, north/south, Scotland/England, old/young, Brexit/Bremain. Then go on to opine that the ‘First-Past-The-Post’ voting system will split any anti-Tory coalition long before it will split the Tory party. It seems empirically true, but again provokes the question ‘why’. Why was the Tory party not split on the question of Europe? It was split in the nineties, but this time round seems to be rallying to the flag.)
    Then you come to an interestingly novel, if dispiriting, idea. Social Democracy, you suggest, is failing at the national level, right across Europe; but may survive at a subordinate level in city governments (London, Manchester, and possible abroad also; at the ‘metropolitan’ level as you call it.) Dispiriting, indeed. 
    Is it that the British people recognise, perhaps subconsciously, that there is more ‘ability for government’ in the Tory party than in the non-Tory opposition; more first-class degrees, six-figure salaries, barristers, stock-brokers and bankers? If this is a valid conclusion, two questions: why and what do we do?  Was Labour’s Economic Advisory Committee pointing the way we should go?
    Regarding Constitutional Reform, what can we suggest? Would proportional representation help? I have believed so for 60 years, but [a] it is clearly not coming soon, and [b] I am no longer convinced. It will not come until the non-Tories coalesce, it won’t help unless they coalesce, and it would be unnecessary if they did coalesce. I am currently more optimistic about what I call ‘weighted voting in the Commons’, where the mathematical strengths of the parties in the country are used to balance up the voting strengths of the MPs that accept party whips. Thus one Green MP might be worth 20 Tory MPs, etc. This scheme has several obvious merits (and doubtless some flaws).
    The other ‘hope’ for the non-Tory voters would be a motivating idea so general (and motivating) as to match that giving coherence to the Tory party. Any candidate ideas? Perhaps grabbing the moral high-ground; doing the "Right Thing"; Justice, Equality, Honesty, etc.

Yours sincerely, Cawstein
Middleton Cheney,
BANBURY, Northamptonshire

Monday, 22 August 2016

Cobden, von Mises and Shostak

Is there a role for Government spending?

Under the heading “DOES UK NEED LOOSER FISCAL STANCE TO CUSHION BREXIT?”,  Dr. Frank Shostak elaborates the 'Austrian' argument that 'The Market' is the only way of determining what is in the best interests of the world as a whole; the argument that government intervention inevitably distorts prices and generates inefficiencies. It is a beguiling theory, that of the ‘invisible hand’. Many years ago I also marvelled at how, in our small  market town, there appeared to be just the right number of milkmen, butchers, etc. I was thrilled to realise that there need be no external planner; that adjustment was automatic; no less thrilled than Adam Smith 2 centuries earlier. 

Dr. Shostak ridicules the idea of government-funded work projects by considering the building of an unnecessary and unwanted pyramid, which generates no  wealth, (either directly or indirectly), which is worse than pointless, because such building misdirects resources that could have been put to work creating wealth.

However, I think Dr. Shostak overstates the case against government intervention, and therefore the case for letting the market decide. Consider, instead of a pointless pyramid, the building of a motorway, or a channel-tunnel; a project that requires enormous capital resources and 20 years before showing a profit. The ‘invisible hand’ points, but there may be no entreprenuers who are both able and willing. What about monopolies, as when one operator buys up and destroys his competitors?  Bang goes the vaunted market. What if he does not, and we end up with two parallel railway lines running between London and Birmingham, squandering resources and both running at a loss?  Perhaps we should desire that governments act minimally; and wisely.

Cobden spoke forcefully in favour of letting the market decide the price of corn, and the price of money. He said “I hold all idea of regulating the currency to be an absurdity.” He saw that by abolishing tariffs against imported corn, the price of corn would automatically fall to the ‘just’ price, benefiting humanity as a whole; the foreign producers would benefit, the shippers would benefit, the British public would have cheaper food, and consequently would be able to buy more manufactured goods; only the British farmers would lose, but justifiably. However, Cobden’s motivation was not the logical beauty of the free market; it was this consequential humanitarian benefit that motivated him. His was a lifetime of concern for “the promotion of peace on earth and goodwill among men”.

Frank Shostak follows in the footsteps of the Austrian economist Ludwig von Mises, who also advocated letting the market decide, but with his eye on the beautiful theory, not on the humanitarian benefits. Von Mises was a supporter of ClassicalLiberalism, with its logical but brutal attitudes to poverty, the welfare state, and any action whatever by the state against individual liberty. He saw Keynesian-style intervention in the economy as little better than communism. He mistrusted, and denounced, the application of mathematics and even empirical observation to economics. He was both loyal and inflexible in his adherence to the articles of his a priori ‘faith’; you could say he was ’continental’, in contrast to Hayek who, though born in Austria, drifted toward British empiricism.

Against the a priori, von Mises, approach, I would suggest that human motivation is not simple, and is not logical. You cannot assume that every individual unit in a complex economy will value money above fresh air, so you cannot proceed a priori. Some people may like to starve their workers into accepting low wages, while others may not; or only sometimes. Of course it is logical to let indigent and surplus people starve or emigrate, but it is not humane. (Ah! the humane; the ‘bleeding heart’ of humanity; that contagious wrecker of perfect symmetries, that wanders like a virus from unit to unit of the social organism, and then vanishes.)

It is odd to find Richard Cobden and Ludwig von Mises sharing a website. There is, of course, nothing wrong with that, if there are common elements, except that some articles may seem flawed, simplistic or harsh, to people who read other articles on the site with enthusiasm. 

Thursday, 11 August 2016

Scissors, Paper, Stone.

     You know that game where scissors beat paper, paper beats stone, but stone beats scissors, and how it goes round in a circle? I understand that, from the time of Cromwell to that of Napoleon, warfare was a similar game. Cavalry beat artillery, artillery beat infantry, but infantry beat cavalry, again going round in a circle. Only a swift cavalry charge could get in amongst the gunners while the gunners were reloading their pieces. Infantry, by comparison, were sitting ducks to an artillery barrage (see Culloden). But no amount of spurring could get cavalry horses to charge a wall of well-grounded pikes. Your strategy was to anticipate your opponents strategy. 
     It occurred to me that recent British politics may represent some similar features. One point to note is that the cavalry must surely be expecting to be met by cavalry when they take the field, and are disconcerted when it turns out to be artillery or infantry; just as a pike is the chosen weapon of a pikeman. Let us suppose that the establishment represent our cavalry. They trot out onto the field saying “We negotiated hard to get into Europe, and our banks and businesses need access to the market! You will all be £1000 p.a. poorer if we exit.”  But no one is listening; or too few anyway. Their adversaries instead are saying “Give us back our sovereignty. Away with the bent bananas ban!”  But no one was listening to them either. The electorate did not mind the shape of their bananas; most of us can spot a joke when we hear one. Nor (surprisingly) do we mind how much poorer we would be out than in. Perhaps we do not trust the academics to get it right this time, as they got it wrong before; perhaps no one minds as long as the poverty affects everyone equally. But a lot of voters seem to have noticed that ours is a very crowded island, and that (under the governments of the last 20 years) there does not seem to be enough money for schools, nor the police, nor the Health Service, nor the universities. Whatfor do we want 100,000 eastern Europeans added each year to the benefits queue? 
     “Err!” says the establishment, “they don’t take benefits, they work and pay income tax”. 
     “And they pick our fruit and vegetables”, say the Sovereigntists, “but we do not like to be told who we can and cannot take in.”
     “The rules are fair and we agreed them anyway,”  says the establishment. “Free market means free-movement.  We need their labour and we want their cash”. 
     “We got through the war OK” says the man in the street. “We shall just hunker down, and Europe will gradually seem less and less important.”    No one has yet found a good answer to that.