Archive for the ‘economics’ Category

Monetary and Fiscal Policy for 2015 onwards: Seven Years Too Late

Better late than never

It is clear that we have been doing something wrong. I have no doubt what it is: fiscal austerity.  “But the debt, the deficit, the debt!” cry the bankers and the Germans.  Their fears are misplaced (at least, the Germans’ are. The banks cannot be regarded as impartial).

The Bank of England has been practising QE to ease monetary conditions and in so doing has taken a lot of public debt onto its own balance sheet.  It needs to continue to do this, effectively printing money for the government to finance the deficit.  Yes, I know, breaking every rule beloved of dear Prudence.

The Government, on the other hand, should be pushing forward fast with major infrastructure projects, principally the development of offshore wind power and the associated industrial capacity to install it. We should be world leaders in this technology (we are already in installed capacity).   It should also take on the development of more nuclear power stations, not by making ridiculous unit price promises (tying us in to paying well over the odds for new nuclear electricity)  but by commissioning contractors to build them. Put money into nuclear research and developing prototype novel reactors under the management of university physics and nuclear engineering departments – let them teach practical, as well as theory. Not just nuclear research, by the way, but really back our scientific base so that a career in science makes sense.   Better rail links – don’t just talk about HS3 for the north, build it now.  Home Insulation projects – not the weaselly Green Deal, but a programme of grants focussed particularly on social housing. Talking of social housing, build some. Build a lot. That’s what we should be doing with the money printed by QE.

Now this will, eventually, trigger some inflation and in so doing it will devalue the debt and peoples’ savings. QE has already been devaluing people’s savings, for no apparent benefit other than papering over deep deflationary cracks.  In the 20th century, big national debts have only ever been repaid by inflation, which doesn’t really repay them.  It will probably be the way today’s debt is repaid, but if we have a truly growing economy (unlike today’s phoney growth) there is a chance that some of the money owed to us – most of the government debt, by the way, is owed to us, we the people, the pensioners, the baby boomers –  will be paid for real. And this programme of managed government investment will pay us back.

A good deal of this government investment will generate a return. Offshore wind farms and nuclear power stations can be sold, or kept so we earn from the electricity they sell. Social housing capital can be recycled through Right-to-Buy (need to look at those discounts though, currently far too generous).  For others  the return will be less direct.

Osborne almost gets it

I have very little time for George Osborne but he does understand that infrastructure spending matters. He didn’t cancel Crossrail, for example.  But he didn’t go nearly far enough in boosting infrastructure spending in the recession.

Keep a lid on current spending

Current spending does need to be kept under control.  The overall budget does need to be in surplus across the economic cycle but cutting current spending in a recession is completely counterproductive.

Rebalance taxes

This is very important. The ConDems’ actions in increasing tax thresholds are, mostly, to be applauded, but they have been much more expensive than they needed to be.  They should have been balanced by an increase in rates.  For every penny off average tax rates for those on less than median earnings,  a penny more on average rates for those above the median.  Increasing allowances without an increase in the basic and or higher rate reduces average rates for everyone.  It doesn’t have much effect in making the tax system more progressive. But allied to an increase in tax rates – even the basic rate – it does make it more progressive.

I have clear views on simplifying the tax system and ultimately I think Income Tax should be scrapped, replaced with a CashFlow Tax that wraps up the benefit system as well and provides everyone with a Basic Income.  But in the meantime it is important to keep it gently progressive, by which I mean simply that the average tax rate paid should increase for higher incomes.

The German Concern

Germans are terrified of hyperinflation brought on by excessive government spending using paper money; rightly so, since it triggered the economic collapse of the Weimar republic out of which came Hitler. But Weimar would never have been in that state had it not been for the war reparations it had to pay. It was the reparations, not the deficit, that did for Weimar. Now, in the Eurozone as a whole, German reluctance to tolerate monetary expansion is keeping the entire zone barely above the deflation level. Europe needs the same medicine as the UK and the US: monetary and fiscal expansion.

The Bankers

QE was supposed to have provided banks with the liquidity they needed to start lending to small businesses to get the economy growing.  However, they really needed it to fix their balance sheets and weren’t about suddenly to start lending to enterprises without customers.  Banks aren’t in the business of providing equity capital or of taking entrepreneurial risks in the real economy; it’s not in their DNA.

Banking continues to need reform. Bankers need to be held accountable to politicians, and politicians to the electorate.  Nowaday’s its backwards: politicians are firstly accountable to bankers.



Disguising deflation

A deflationary world

This is a post about the conventional world economy, particularly the USA and the UK.

Both economies have been suffering from low-wage employment growth. Unemployment, normally a clear indicator of a failing economy, has fallen; and so have wages.

Both have had major financial crises and both governments have had to stage bank rescues.

The Eurozone and Japan are also primarily in sync with this movement. The Eurozone has suffered worse because it has had less QE.

There are a few differences, cultural, institutional, but essentially, the whole developed world has been stagnating since at least 2008, with the underlying malaise probably starting as much as a decade earlier.

The facts are that despite the key commodity (oil) being at well-above-average real price levels for most of that time, inflation has remained low and wages have fallen. We have, essentially, been living through deflationary times, saved only by quantitative easing.  Without the actions of both the Federal Reserve and the Bank of England, things would have been much, much worse over the last six years. Unfortunately, QE could not solve the underlying problems and now it is being withdrawn, they are likely to emerge with a vengeance next year.

I could be wrong; I often am and in this case I  really hope so. But I  don’t think so.

Classical economic theory (on all sides of the fence) says that recessions are the consequence of inadequate demand. Keynesian analysis says that the way to deal with that is for government to increase spending and/or reduce taxation during a recession, thus putting more more money in people’s pockets and increasing demand.  These two things aren’t, however, equivalent. On the liberal right, tax-cutting is the preferred mechanism because it lets people, not governments, decide how to spend the money and determine where the demand goes; the interventionist left favours more public works (the Mersey Tunnel, the Tennessee Valley Authority, re-arming for the second world war).  Intervention means that the money is actually spent;  individuals and companies, as is their right,  don’t always choose to do so, particularly when there’s deflation about.  The monetary authorities (central bankers) respond to this by devaluing money, making real interest rates negative. This is normally a strong incentive to spend, after all, why keep the money in the bank losing value? One of the problems of today’s global economy is that consumers, and particularly companies, haven’t been spending their money.

Quantitative Easing (QE): blowing bubbles

QE is a emergency lever used by central bankers to devalue money when the interest rate lever has come to the end of its range.  Global interest rates have been near-zero since the crash.  The central bankers create money to buy bonds from financial institutions. Creating money without creating a corresponding amount of stuff inevitably devalues it, which is the point of the exercise. However, QE has operated at a scale far beyond that originally intended.

The problem with QE is that it is used to buy assets: government securities, commercial paper, and in the US in particular the toxic securitised debt that had triggered the first crisis. This has the result of pushing up asset prices.  Suppose a bank holds $1bn of toxic debt, which it sells to the Fed. The result is that it has $1bn of cash instead of the toxic debt. That needs to go somewhere; held as cash, it will decline in value. So it spends it on other assets. Up to a point, this is a good thing. For related reasons, banks have been under great pressure to “strengthen their balance sheets”, since many had to be rescued during the crash.  New international rules on capital adequacy have come into force and QE has helped them meet the requirements, most clearly in the USA. German refusal to let the ECB do much in the way of QE, allied to the Eurozone’s structure, means that some Eurozone banks have found it harder to pass the new stress tests.    But beyond a point, it is a bad thing: it pushes up the price of assets, creating asset bubbles. There are lots of these around the world, fuelled mainly by dollar QE.  London property is one.  If the bubbles are relatively local, they can burst without bringing the system down.  The market for luxury property in Istanbul – definitely a QE bubble –  has been hit by regional unrest. But the collective effect of asset bubbles bursting is that investors lose money and the effect of the QE evaporates.  A significant factor here is the way insiders offload inflated assets just before the bubble bursts, thus passing off the losses to schmucks, or retail investors as they are more politely known.

The underlying problem is much more serious and none of the actions of the authorities since 2008 have done anything to address it.  It is structural,  based on continued weakness of real productive industries outside the newly-industrialising countries.  Growing income inequality creates a large class of people able to afford only the most basic goods and another, much smaller class of super-rich people with nowhere to put their money. Together, these two groups’ spending isn’t enough to support a prosperous middle-income, working class.  Making money by making useful stuff has been eclipsed by making money from inflating assets. Austerity policies have exacerbated and prolonged the structural problems.

I continue to believe that QE was, perhaps is, a necessary evil, but not a sufficient response to the structural failings of the global economy.  On its own, all it has done is  disguise the intrinsic deflationary phase; that needed addressing by significant state intervention on capital infrastructure projects.

The end of QE without solving the underlying deflationary nature of the economy threatens to bring deflation out into the open. That’s what I’m worried about for next year, although I believe that it’s more likely that central bankers will resume QE to prevent that particular disaster. I really don’t think they have a choice; it’s governments who need to act.

Buggers’ Clubs And The Right To Die

“If this Bill goes through, so that buggery is no longer a criminal offence provided it is done in private and with no boys concerned, then it will be a charter for these buggers’ clubs. They will be able to spring up all over the place. I can assure your Lordships that it is a very real risk.”

Thus spake Lord Goddard in 1965, when their Lordships were debating the Sexual Offences Bill, which went on to legalise homosexual acts between adult men in private.

Lord Goddard may well have been right. Such clubs certainly went on to spring up all round the Vauxhall Cross roundabout.  It is instructive to read the whole of their Lordships’ debate. In 2014, they would have to  claim a great deal of parliamentary privilege for such homophobic language.

The situation predicted by the most vocal opponents of liberalisation went on to occur. The naysayers were right. Except…

Except it’s nowhere near as bad as they imagined. Yes, there are buggers’ clubs. Apparently. But we also have a Conservative Prime Minister making the case for, and driving enactment of,  equal marriage. Gay sex became legal and the world didn’t end. Instead, it got better, by getting much more like the kind of hell that the naysayers were predicting in 1965.

1967 – Old Sex Rules scrapped

It is the same with assisted dying.  If – when – the law changes, which it will whether by Lord Falconer’s Bill or otherwise, most of the dreadful things that the Bill’s opponents are predicting will probably happen eventually.  Doctors will kill people, deliberately.  Some people will come under pressure to ask for assistance with their suicide.  But it won’t be all bad. We will learn new moral rules to allow for assisted suicide, just as we have done with sex. For most of history, sex outside marriage has been taboo and often illegal.  Then, in the 1960s, we threw the old rules of behaviour on the bonfire. The Permissive Society arrived. Now, we have new rules; anything that consenting adults do is OK. Anything non-consensual or involving children isn’t.  It took us quite a while to sort out the new sex rules, but they’re pretty much the established norm now.  (and while we were going through the change, some pretty sick people did some pretty sick things… but that’s another story).

The “old death rule”

The death rules need changing too. The old rule is an absolute: “don’t kill people”. It’s pretty simple, but its consequence is that we end up keeping people alive when they would rather we didn’t.  But to mess with the absolute “don’t kill people” rule… is a risk…

… We have to take, and it may take us to a place that seems awful.  We need to discover  and learn the new death rules. The safeguards in Lord Falconer’s Bill  or its successor will only be a first draft.  Rules like this come from society; legislators only codify them, usually not very well. The process first of discovering and then of learning the new death rules will be at least as traumatic as learning the new sex rules was. There will be plenty of mistakes made. Probably, some people will die when the didn’t want to. (Quick reminder: this already happens). The new death rules will be much more complicated than the simple, absolute, old death rule, but the process of discovery can only take place once we scrap the old death rule.

Now I am going to get controversial. The main reason we have to change the death rules is to allow a cull of the old people.

No, that is wrong. The main reason old death rule needs changing is because it makes people suffer while they wait to die.

There are two main reasons to change the old death rule. One is compassionate, the other is economic. The arguments for both are compelling. The case can and should be made purely on compassionate grounds, and would stand even if the economic arguments went the other way. If the compassionate argument failed, which it doesn’t, it could not be trumped by the economic argument. But both compassionate and economic arguments go the same way. So, inevitably, something like Lord Falconer’s Bill will be passed, sooner rather than later .


“Cull the old people”

Prediction: A “cull of old people” will be the “bugger’s clubs” of assisted dying.  A terrible thing that turns out not to be half as bad as we thought. We are very lucky to live in a time when people live longer and longer; and most of those longer lives are longer, fulfilled and active lives. Because we no longer drop dead (much) from heart attacks in our sixties, or from infectious diseases, or childhood infections, or in childbirth, or by killing each other in industrial wars,  we are living to a ripe old age, and then…  the body stops working properly. The interventions needed to keep it working become more invasive, less dignified and much, much much more expensive. Eventually they fail; eventually, we all die.We now beginning to realise that there may be a point in these final stages of life where it is better to stop giving the interventions that prolong life and change to ones that curtail it.  Recognising that point is going to be much harder than learning the vital signs. It’s going to require evaluation not just of biological and medical criteria, but social, compassionate and ethical ones.  It means we, humans, are going to have to take on more responsibility.  We may need a whole new class of professional to make such judgements; we will certainly need a whole new form of professional language in the caring professions.  Lord Falconer’s Bill skips the most difficult question by requiring “sound mind”; but the brain is a very important part of the body and it too starts to fail. For many people, the brain starts to fail before the rest of the body; for the fortunate, it is the other way round.  If I suffer dementia as I age,  I want the treatment that most mitigates my distress even if I cannot communicate it to those treating me.  If that means putting me out of my misery, please do so.

People with disabilities

The most cogent arguments against assisted dying have come from people with disabilities.  There is, naturally, a fear that their disability will be weighed in the balance when the time come to judge the time to make the switch from prolonging to curtailing an individual’s life.  It is, I think, a specious argument. People with disabilities must be treated equally, and we as a society are getting much better at doing so. We’re not perfect. But the answer to their concerns must be that a compassionate society will extend that equality to the new death rules which we need but have not yet discovered.

Living funerals

In a bit of futurology from the Tomorrow’s World annual of about 1970, it was suggested that people would check in to boutique hotels, enjoy a last meal and then go to eternal sleep.

I’d like to think that it won’t be so lonely. I’d like to share my last meal with my friends and family. I’d like it to be  matter-of-fact: yes, I’ve had a good life, you’ll manage to sort out the mess I’ve left for you,  it’s been lovely knowing you, thank you for coming, adieu. No tears. No shock, it’s in the plan.


Boris B*****cks

Boris Johnson is a charming, intelligent eloquent man.  He is also ambitious, dangerous and wrong, and we must be careful that we do not let our admiration for his cheeky tousled locks blind us to his many egregious faults.  Were he ever to become Prime Minister he would make us long for David Cameron.

Today’s speech – celebrating extremes of inequality –  is tripe of the highest order. I hope that it turns out to be a political misjudgement  and will alert us all to the sort of man he is and the sort of views he holds.

It is tripe because it is an egregious example of a commonplace  fallacy I shall call the drunk’s fallacy. This is the fallacy that if a little of something is good, more of it must be better – and there is no such thing as “too much”. If a little wine is good, more wine is always better…

 Almost no one actually advocates total equality of income. It would, as Boris correctly concluded, remove all incentive to work and to take risks. If I were to earn the same by staying in bed as by getting up and putting in a full day’s work in my business, I’d stay in bed. (Actually, in my case at the moment, that’s a very bad example, because I would earn nothing by staying in bed and I am earning nothing by working fourteen hours  a day at my business…. But I digress). 

We need an economy where people can earn  more by working harder and more productively: a measure of inequality is thus both necessary and inevitable.  It does not follow that extremes of inequality are better. In an earlier post I argue that excessive income inequality has an adverse effect on growth, mainly because the rich save more and spend less, thus driving down aggregate demand and yields on investment. 

 What we need is a fair society. One which pays a fair wage at the top and the bottom of the market. One where people can be valued for their contribution to society, not just the size of their bank balance. Boris’ unbridled Thatcherism  repeats many of the claims of the 1980s. It was during this period, under the regime of the late unlamented lady, that we money – earning power – became the main  metric of merit.  Professions such as teaching and medicine suffered. We stopped admiring teachers for their dedication and began regarding them as much less worthy than bankers, because they earned less.

Boris, your notion is both bad economics and bad politics.    Admiration is due to people not for the size of their wedge, but for their achievements, and if the banking crisis has shown us anything it is that we cannot measure achievement only via money. 


Income Inequality Causes Recession

I suspect that this isn’t an original insight, but I think it is important.

It is triggered by reflecting on the fact that the 1% pay 26% of the tax that the government collects. The state relies on the 1% for over a quarter of its revenue. So it’s all very well the 99% moaning, but we depend on the 1% for our hospitals. The political right use this statistic as an argument against higher tax rates on the wealthy, implying that it shows that they already contribute “more than their fair share”, whatever that is.  But I think this is missing the point, which is not that the top earners are over-taxed but that the  very few get so much more money than everyone else that they end up paying  much more tax in aggregate.

That is, these statistics  are a symptom of a much deeper malaise – income inequality.   My argument – which I rehearse here – is that this  skewed income distribution is an economic problem, and not just a social one.

One of the failures of the 1980-2010 financial era (the era of deregulation and debt and neoliberal economics) is that  income distribution in those nations, particularly the UK and the USA worsened.    Worse meaning wider.  A loaded word, “worse”.

True, we all got richer, but the rich got richer much faster than the poor got richer.

So, this is a problem, how?

First, it creates social pressures, class envy if you like. It seems unfair, even if (perhaps? I don’t know?) it isn’t. That’s a political position – those on the economic right tend to think that it isn’t a problem, those on the economic left think it is.  I’m a soft lefty, so I think it matters, but I respect those who think that so long as we’re getting richer we should just get over the fact that others are getting  richer still (and if or  when  expanding wealth gaps trigger social unrest, use force to suppress it…)

Let’s ignore the socio-political issues, and concentrate on the economics.

My contention is that excess income inequality suppresses growth . I think there is a point at which the degree of inequality helps to tip an economy into recession and that this has been a significant factor behind the recession of 2007-12. The process probably began more than three decades ago. 1978 doesn’t sit in my memory as a particularly good year (I graduated), but it’s the year when UK incomes were most evenly distributed. The growth in relative income of the industrial working class started by successful trade unions, and the corresponding decline of the relative wealth of the aristocracy reached its peak in 1978.

This is a fairly major claim – that the worst recession in modern times was caused by income inequality rather, than, say, irresponsible lending by financial institutions and irresponsible borrowing by governments, so before I get too stuck I’ll moderate my claim. Income inequality was a factor, one of the causes, not necessarily the only cause. I also think that it is a significant factor in making the recovery slower and longer than it need to be.

The mechanism for this is that the rich spend less of their money.  Since in an unequal society they have most if it, the proportion of the national income spent on consumption falls as inequality grows. Income can be spent, or saved. On the whole, poorer people save less of their income because they need to spend more of it on essentials like rent and food.  (The ratio of savings to income is known as the savings ratio;  its complement is the consumption ratio, and they must, by definition, add up to one)

As the rich have a greater share of the national income, they save more so less of it gets spent.

Saving and consumption – the right balance

Economies need some investment; without investment, there will be no growth. People need to save some of their money.  But equally, consumption needs to grow as fast as the economy grows; if it falls behind, you will get surplus capacity, and recession. Consumption is people spending their money on stuff, and doing so enough to generate a return on the the savings that they have invested in productive capacity to make the stuff they are buying.   Productive capacity tends, naturally, to deteriorate – assets depreciate, technology becomes outdated. So to maintain a steady economy, we must invest in productive capacity at least as fast as it deteriorates. If investment exceeds the rate of decline of productive capacity, then capacity can grow – it might not, however, if investment goes to the wrong thing or to unproductive assets.

So, as the rich save more they invest more in the economy (since savings and investment are the same thing), leading to growth and job creation. That’s what’s supposed to happen. But it isn’t quite so simple.  If consumption is lower than it should be, then productive assets won’t operate at full capacity which means that investment yields will fall.  The extra capital available for investment drives down yields further, by pushing up the price of  assets.  Yield becomes a less important determinant of the price of an asset than the potential for capital gain, so capital is diverted from productive assets (such as factories making stuff that people want to buy)  to non-productive assets (such as, in the extreme case, gold, but usually property).  Low interest rates mean banks lend money to investors to put into inflating (but not necessarily productive) assets, creating an asset price bubble. When a particular bubble bursts, the banks that have lent against that class of asset record a loss, weakening their  capital ratios and thus their ability to lend more; this has a knock-on effect on other aspects of their business, including in particular routine business lending. This is what has happened in a lot of the world in the last decade or so – the US, Ireland, Spain being acute examples, but it is also (and most scarily) happening in China now.

On the other hand, if more money is being spent on consumption, then factories making stuff are more profitable, yield is more important than capital gains and savings go into productive investment rather than to capital speculation.

So: skewed income distribution (the rich have most money) leads to more aggregate savings and less aggregate consumption; growth comes from capital appreciation; bubbles develop.

even income distribution (poorer people having more money) leads to more consumption and lower savings; growth comes from profitability; trade is sustainable.

But the amount being saved must be enough to provide the capital investment a growing economy needs – new plant and equipment, education and training, research and development, infrastructure; and consumption must be enough to earn a return on this investment greater than the returns available from capital appreciation.

There is an equilibrium point for optimal growth at which the population as a whole:

(a) saves enough to provide the economy with the capital it needs for sustainable growth; and

(b) consumes enough to generate the demand so that the capital earns a return.

(Note that savings and consumption must equal income just as the savings and consumption ratios (to income) must equal one).

However, if savings exceed the demand for capital then asset prices rise and bubbles develop. This happens when more of the national income goes to fewer people; they are more likely to save than to spend, so push up prices of assets. This draws savings away from productive investment (which generates its return by satisfying the demand for consumption) towards unproductive investments (like property) which generate their return by inflating in price.

On the other hand, if consumption is excessive then there is insufficient aggregate investment in productive assets, so production is limited, prices rise and inflation follows.

The result of this analysis is that there are two sorts of inflation, both pernicious, but pernicious in different ways. Asset price inflation – such as you get with stock market and property booms – depresses interest rates and leads to bubbles and crashes; consumed goods inflation leads to higher interest rates.  The former is likely when you have excess savings which arise from a skewed income distribution; the latter when you have an income distribution that is too flat.

This last conclusion is somewhat surprising, but perhaps should be expected. A too-flat income distribution is just as undesirable as a badly-skewed one.  (It is also undesirable because there would be no incentive to work)

It now being a very long time since I did any significant mathematics, I am not sure I quite have the head on me to put into concise symbolic terms the points I have tried to express above and to generate the necessary simultaneous inequalities that could specify the ideal income distribution for an economy; however I am damn sure we are far too unequal now.

The Net Positives of Migration

This is somewhat off-topic, but it is important. Migration Watch UK, chaired by retired diplomat Sir Andrew Green, a self-styled independent think-tank but more accurately a single-issue pressure group, has been vocal in bringing to public attention what it perceives to be the dangers of “mass immigration”. It has been very successful in getting air-time on the Today Progamme, still the most influential current affairs publication in any medium in the UK; and its views are seldom challenged.

This raises several issues, not least the question of the BBC’s famed impartiality, which is  required by its Charter.

Sir Andrew presents the “problem” of immigration almost entirely negatively. The BBC seldom has anyone up against him, and when it does it tends to choose well-informed academics who give a neutral, balanced case in reply.  No one, it seems, is willing to be as vocal about the benefits of mass immigration as Sir Andrew is about the downsides. Or rather, the BBC seems unable to find them, because such people do exist.

Immigration has always been immensely beneficial to this country. That’s my opinion, and it’s at least as valid as Sir Andrew’s contrary one. In fact, I challenge Sir Andrew to explain why he thinks immigration is bad. Does he think that immigration is always bad  – in which case, perhaps he’d feel confident explaining this to the large part of the population with immigrant heritage – or does he think that past immgration is good, or ok, but future immigration is bad? And why, in that case, choose now as the cutoff point?

No one can deny that the waves of immigration over the last sixty or so years and longer have changed the face of the country; and future immigration will continue to change it. The question is whether those changes have been positive, and it does not take much reflection to conclude that on  balance, they have. Our country is a far better one than it was sixty-four years ago, on the 22nd June 1948 when the Empire  Windrush docked at Tilbury with 493 Jamaicans on board. Those people, and the people who came after them from the Caribbean, India, Pakistan, Sri Lanka, Hong Kong and all over the world changed Britain and British culture, mostly for the better. Immigration does that. New ideas and new blood and the energy that migrants bring to an economy shake up society. Our cuisine, for example, was shaken out of its bland mediocrity at least as much by the Bengali and Hong Kong migrants who set up restaurants and take-aways across the country as it was by the middle-class cookery writers like Elizabeth David and Marguerite Patten. The Ugandan Asians, expelled by Idi Amin and welcomed by Edward Heath’s Conservative government in 1972, transformed our retail sector – amongst others.

Every time there have been waves of “mass immigration” there have been naysayers like Sir Andrew. Enoch Powell predicted “rivers of blood”. They never flowed. Opposition to the Heath government’s principled position over the Ugandan Asians was most vocal from his own back benches;  had Sir Andrew been active then, he would no doubt have been leading that opposition.There was opposition, too, to the arrival of  Jewish migrants from Eastern Europe fleeing pogroms and worse in the first half of the last century. Their heirs are now amongst the pillars of society, and society is richer for it.

There have been difficulties; it would be surprising if there had not been. The disturbances in northern England in 2001 were unfortunate, but were due as much to the particularly segregated nature of the populations in those former mill towns as to migration itself.

I live in Brixton, and I am proud to run my business in Brixton Market. I am proud because Brixton Market, with all its different traders from the Caribbean, Africa, South America, Asia,  Europe selling to Brixtonians, Londoners and visitors, represents the best of Brixton, a district that has been made and transformed by different waves of migrants for more than a century, and Brixton represents the best of London, the greatest city on the planet because of its wonderfully diverse, welcoming and beautiful people – and it’s that, above all, that makes me proud to be British.

It’s Clegg’s fault

Someone asked “has there ever been a worse politician than Nick Clegg”?, and at first sight it is hard to think of one, other than GW Bush. And actually, most American politicians.

But Clegg has been spectacularly rubbish. He has squandered the opportunity of coalition and  politically, ruined his party. Financially, it was already ruined.  He could have, should have been a much feistier coalition partner, not afraid of the odd harsh word (they are different parties, anyway) but always standing up for what is right. He’s failed, but for the nation as a whole, his biggest failure came last Thursday.

If Clegg, not Cameron, had been doing his job, Thursday night’s Brussels fiasco could have been prevented. Cameron was doing his, for the sake of his mates and his toxic backbenchers, but Clegg was asleep in Sheffield.

Clegg doesn’t have a country to run. He doesn’t have the Eurosceptic baggage that Cameron has, he speaks several languages, and he could have spent time building alliances before the meeting.

With those alliances in place, there might not have been the need for a Tory veto at all; if Clegg had done his job, the options on the table might have been palatable even to Cameron.

Had he been in Brussels, as he should have been – he’s Deputy Prime Minister, after all – he’d have been able to say to Cameron, as he was considering his veto at four in the morning, “Listen, Dave, don’t be such a twat.” Or words to that effect. He might have been able to negotiate a better deal on the Tobin Tax – “yes we support it in principle, and we will agitate for it internationally, but it must be global, so we want a deferred implementation”.

But he didn’t. He was asleep in Sheffield.

What a useless fuckwit he has been.

the current crisis.

I have been trying to express my views on the current financial crisis – the one that surfaced in 2007/8 and is still going on – in a single page.

This is my latest attempt to do so.

 transparency: a declaration about the continuing crisis

Transparency is the natural disinfectant that today’s corrupt capitalism needs. Markets aren’t working, but it’s because they are broken, not because markets don’t work. All over the world people buy and sell stuff in markets. And when it works well, capitalism delivers, as capitalism has delivered us the technology which will allow us to control it.

Today’s markets have been corrupted by breaking promises. A whole string of promises that could never be kept and should never have been made are now being broken. Promises that the baby-boomers could have as long and as wealthy a retirement as their parents. Promises that pensions would be worth saving for, promises that poor people would repay impossible mortgages. Promises made by politicians in exchange for our votes. Promises wrapped up in secrets and lies, tied into knots by lawyers for brokers and dealers who have stolen and snorted away the money they promised to look after for us and for our heirs and our parents.

Governments are entangled by loans, bonds, taxes, debt and deficits into a system corrupted by secrets, lies and broken promises. As is each of us with overdrafts and student loans, our savings, mortgages and pensions, taxes and benefits. Yes, Mr Cameron, we are all in this together: tangled in a mess where all we can see is that the more promises the powerful break the richer they become.

We know that untangling the mess will not be painless or easy, but it will be easier if we can see what threads lead where. Let the light in.

We are not against capitalism; we are against corrupt and broken capitalism. We want capitalism to keep on producing the brilliant stuff, the stuff that’s made when brilliant people work passionately together, the technical stuff that could help us to sort out this and all the other messes we’ve got ourselves into and all the other cool creative stuff that capitalism at its best can make.

“Sunshine is the best disinfectant” said the learned judge, so let the sun shine on capitalism’s dark corners and shady conspiracies.

No more secret deals. Let no contract bind unless it is published for everyone to see. Let no court enforce any agreement made or held in secret. Open the government’s books for us to read, to see how our government is spending our money, so every government ledger and every official document is searchable by Google – and by all its competitors.

And what applies to government must also apply to companies – but not to individuals.

As individuals, we have a human right to privacy.

Human rights matter: they are to protect individuals from the excesses of groups like companies and governments.

The most pressing change is to contract law: henceforth, we the people of the world will witness every contract made. If it isn’t published, it isn’t binding. No more secret deals.

Then we change company law. Every shareholder should have a right to know exactly what a company is doing with his or her money at any time. For public companies, whose shares anyone can own, this will mean that the books must be online and searchable. Not just an annual report, nine months after the fact, but the bank balance this instant.

The phrase “commercial in confidence” implies a conspiracy; a conspiracy that should be unlawful.

When we can see everything that they do, they will not be able to lie to us.

Then it will be our responsibility to sort out the mess.

Conservative fail

Conservative credibility on the economy took another step backwards today, with the announcement that they will reverse the planned 1% rise in national insurance.

Now I don’t think much of Labour’s strategy either; for all their pleadings that it was the global markets, the fact is that they were complicit in cheering on the bankers as they got us into this mess.  The Tories were the bankers of course; politically, both parties were fighting over the goose that seemed to be laying golden eggs. “Feed it more” they were saying, “force the corn down its neck!”. When the poor thing went and died of liver failure, both parties had egg on their faces. And Gordon Brown, in his time as Chancellor, lost control of government spending. The political infighting in Tony Blair’s cabinet, and of course the disastrous war, meant that ministers weren’t managing their departments properly. But this is all in the past; we are where we are, deep in a recession – if not technically (there is some token growth in the economy) certainly practically, as far  as jobs and the “feelgood factor” are concerned.  And, come what may, we are going to have to pay more taxes and spend less.

National Insurance is the worst sort of stealth tax, particularly the employers’ share. In my opinion, it should be abolished, and added on to income tax instead, with all employers required to increase salaries, as part of the transitional programme, to compensate for the change. The argument is simply transparency; it’s an income tax in all but name, so it should be called income tax. (Separately, I also think that income tax should be replaced by a cashflow tax; but that’s another question).  But, with a deficit the size it is, you can’t just promise to cut any  tax without making some compensatory changes. Since the Tories don’t plan on adding any other taxes, they must plan on cutting more, and they’ll be sure to pick on those vague “efficiency savings”.

It won’t do. Whatever cuts do come are going to be hard to implement. Efficiency savings ultimately mean civil service redundancies and cuts in services somewhere along the line.  Right now, it’s higher taxes that are needed.

ponzi schemes

Continuing my ramblings about commission, I refer you, gentle reader, to my earlier posts about Bernard Madoff.

Madoff operated a classic Ponzi scheme, and in my earlier post I postulated that the market as a whole had done the same to its participants, largely as a result of commission.

A classic, or simple, Ponzi scheme, is an investment product producing above-average returns to early adopters by siphoning-off the deposits made by new investors. So long as the scheme continues to attract new depositors, investors get a good return; but it is as fraudulent as a chain letter. It is, of course, exactly the same thing, but less honest. At least with a chain letter you are told how it works, but the inexorable arithmetic is the same in both cases. Madoff made his scheme last for so long by providing only slightly above-average returns, which both made it seem more credible and extended the time-scale of the inexorable arithmetic.

I think that in addition to the simple Ponzi scheme used by Ponzi, Madoff and many others, it is possible to conceive of complex Ponzi schemes. A simple scheme is implemented in a self-contained financial instrument, whereas a complex scheme does the same thing using multiple instruments where the value flows between them; but from the outside, the effect is the same.  A complex scheme could then be either contrived or emergent. In a contrived complex Ponzi scheme, the operators of the various instruments deliberately set out to achieve the Ponzi effect and design them to do so. I think that some of the housing/buy-to-let/mortgage frauds may be contrived complex Ponzi schemes; estate agents, solicitors and mortgage brokers are typically implicated in a conspiracy to defraud.

Much more disturbing, however, is the case of the emergent complex Ponzi scheme. In this case, it is the interaction of various financial instruments, each of which is itself entirely legitimate, which leads to a Ponzi effect. One such instrument might be broker’s commission. Indeed, I suspect it is the main villain in my very strong hunch  that most of the financial services sector has been operating for much of the last quarter-century as a very large emergent complex Ponzi scheme. Not a deliberate, criminal enterprise, but one nevertheless where the operators have benefitted enormously as punters have lost.  I suspect that it is a property of commission-based sales in savings products that a complex emergent Ponzi scheme is inevitable.

Perhaps there is evidence for this, but I think that first I need an adequate algebra to make the case and then to derive relations which can be tested against available metrics.