You can't use a manipulated price to judge prices

It’s Scott Sumner who tells us to never reason from a price change. To which we’d add the corollary that we should never use a manipulated price to tell us about prices. Thus we cannot take the current price of money to be indicative of the non-manipulated price of money currently:

Their concerns were twofold. First, the amount of money sloshing around the global financial system then was scarce and therefore came at a high cost. Second, former and declining colonial powers don’t have the productive engine of entrepreneurs and skilled workers that allow an economy to power its way out of a crisis.

The first of these concerns has evaporated. Seventy years of accumulated post-war savings, whether stashed in western pension funds or the sovereign wealth funds of oil-rich nations, means that the price of borrowing has fallen to almost zero.

No, we can’t do that. The point of quantitative easing is to lower the price of money. We’ve rather a lot of QE at present, perhaps $12 trillion of it and that might well be a significant underestimate when we add the 2008 and following amount to the Covid.

We can indeed say that pensions savings have lowered the cost of money over the decades. We can even say that the current low cost of money is a good time to be borrowing. But what we cannot say is that the current price of money is a market price from which we can derive useful information about market prices.

All central banks have deliberately and with malice aforethought gone out to distort and manipulate the price of money in recent years. That price cannot thus be regarded as a market one conveying market information to us.

Stop doing this, everyone, the post-QE interest rate is not the correct market price of money.

It's because, not despite

Correcting Guardian headlines is one of those participatory sports that we think more people should take up:

Tesco defends £315m dividend plan despite business rates holiday

The actual claim being made is that the dividend is because of the rates holiday, not despite it:

Tesco has defended plans to pay a £315m dividend to shareholders at a time when the supermarket chain is benefiting from a business rates holiday worth £249m.

Of course, if we were to spend the time necessary to correct all of that newspaper’s mistakes we’d never have time for anything else. But the argument even as corrected has its mistakes:

Positive Money, a campaign group, criticised the Tesco move. Fran Boait, its chief executive, said: “There needs to be conditions to ensure that any company receiving public support in a time of crisis isn’t wasting money on paying out dividends to wealthy shareholders.”

The New Economics Foundation think tank said the money from business rates was used by local government to fund the vital local infrastructure needed for Tesco stores to function, such as refuse collection and the bus services that workers use to get to work.

“For Tesco to accept this relief, and then be able to turn around and pass the benefit straight on to shareholders, shows that the system is not fit for purpose – public funds should not be captured as private profit,” said senior economist Sarah Arnold.

Some snark is due over Positive Money there for they’re grand proponents of Modern Monetary Theory. Which insists that tax doesn’t in fact fund public spending, the government creates the money the economy requires by printing and spending it. An interesting implication of this being that if we’ve no inflation then government shouldn’t be taxing. We’ve not, they shouldn’t so stop bleating.

The more pernicious concept is embedded in NEF’s comment. Tesco is the product of over (just, by a year) a century of investment. A continual exploration of how to do retailing, of the expansion of logistics chains, of the management of supply. Those owners have delayed gratification, by continuing their holdings even if more money was only occasionally poured in, for that century. So, when we actually need experts in logistics, supply, when a pandemic closes most of the British economy and yet the population is still fed, watered and even bottom wiped, when we need the system it has taken a century to build, we’re to whine about the existence of the system that provides what we so desire?

We’re to insist that no reward should happen for that century of work?

Presumably the NEF thinks the system should be replaced with something more short term than capitalist free markets. But then there is a reason that Giles Wilkes insisted that the true meaning of the acronym is Not Economics Frankly.

Huzzah!

There is at least the hint of a suggestion that we’ll gain the single obvious and logical climate change policy:

Rishi Sunak is examining proposals for a UK-wide carbon tax that could raise billions of pounds while encouraging the drive towards net-zero emissions.

The chancellor is seeking to replace existing EU carbon-reduction schemes with the new tax when the transition period finishes at the end of the year.

Treasury officials are also looking at longer-term proposals to extend the tax to other areas including domestic gas and agriculture, which could raise more than £25 billion by 2030, supporters say.

The idea - whether climate change is happening or not, whether something needs to be done about it or not - that nothing is going to be done about climate change is clearly beaten into a pulp. It’s simply not going to survive in the current politics. Thus the argument is over what is to be done rather than whether.

As William Nordhaus gained his Nobel for saying, as Nick Stern his peerage with the eponymous Review, as more than 90% of economist asked insist, the effective and efficient solution is a carbon tax at the social cost of emissions.

Around £25 billion is around right for the UK too. Take emissions levels, several hundred million tonnes CO2-e per year, multiply by $80 per tonne, convert to sterling and yes, around the £25 billion mark, that’s close enough for government work.

Each economic actor now bears, in the prices they face, those formerly external to markets emissions costs. We thus gain the optimal level of emissions. That is, this one tax and we’re done, finished, all we’ve got to do then is wait for the economy as a whole to chew through the changed incentives.

There are those who disagree:

However, the move has alarmed some environmental groups

Well, yes, clearly, for it will end the orgy of cronyism which is current climate policy. For the carbon tax is a one stop shop. Once instituted we get rid of everything else. Repeal the Climate Change Act, abolish the Climate Change Committee. If fracking makes sense when paying a carbon tax then we should have fracking - if green hydrogen then ditto. We also cease all subsidy, feed in tariff and planning partiality for solar, wind, hydro, tidal and the rest. The entire load of providing the correct incentives is now on market prices, as adjusted by that carbon tax. We even stop wibbling about insulating every house in the country - if more expensive fuel, incorporating all costs, doesn’t incentivise then it shouldn’t be done anyway.

Our view here is that given all that can be abolished by having that one correct policy of the carbon tax it’ll all end up being markedly cheaper this way. Especially as the literature recommendation is for a revenue neutral tax, meaning other taxes should fall by that same £25 billion.

That the associated parts, the abolitions and the reduced other taxes might not be quite what Mr. Sunak is actually proposing is all the more reason to hold feet to fire.

The Glorious Victory of Bolivarian Socialism

Venezuela, under Chavez and then Maduro, has certainly tried to impose a non-market form of socialism on that unhappy country. Leading to a destruction of wealth to rival, perhaps even beat, the idiocies in Zimbabwe over much the same period.

Both places have also employed the essence of modern monetary theory in the course of their economic actions. Print money for the government to spend and don’t worry over that pesky idea that possibly there should be some connection, just some relationship at all, between tax revenue and that spending.

It’s even possible to claim, as some do, that there’s nothing wrong with either theory or course of action, it’s just it was all implemented by know nothings, by idiots:

Venezuela plans to launch the biggest-denomination note in its history, but owing to delays in printing and hyperinflation it will be worth less than 18p by the time it enters circulation.

The value of the bolivar has collapsed after years of economic mismanagement and even beggars on the streets of Caracas refuse to accept the lower-denomination notes.

The central bank took delivery of 71 tons of security paper from an Italian printing company this year in preparation for the issuing of a 100,000 bolivar note, according to Bloomberg.

Since 2007, eight zeroes have been removed from the currency to make accountancy simpler and avoid the humiliation of having to issue multimillion, or even multibillion, bolivar notes.

Inflation is running at about 2,400 per cent, down from its high of over 2 million per cent in early 2019. The minimum wage, once a boast of the government, is now the lowest in the world. Including all “bonuses”, it is equivalent to £1.40 a month.

Of course our socialism, our modern monetary theory, would be implemented by clever people.

So, that’s alright then.

Why does Green economics always have to be so dreadful?

We share the usual environmentalist desire for a cleaner, greener, world even as we do insist that it is human flourishing in the round that matters, not just one specific aspect of it. We also obviously differ on how to gain that cleaner, we insisting that capitalism and markets seem to have done an excellent job in cleaning up London’s air since the 1300s just as the one example.

What worries us though is how much of Green economics is so absolutely terrible:

The prime minister announced £160m for ports and infrastructure in Teesside and Humber, Scotland and Wales, needed to build and service these turbines, but if these plans are to benefit communities as well as reducing emissions, the goal must be to keep the jobs and manufacturing contracts in the UK.

We’re not sure if we do want lots more offshore wind let alone the government planning and subsidising such. But let us allow that and examine this specific part of the argument.

Imports are the benefit of trade, we get to consume them. They replace the stuff that we’ve got to sweat blood over making ourselves. In this case the aim is that we get to consume electricity without boiling the oceans. OK, seems acceptable as a goal. But the insistence here is that we’ve got to be doing the work. Instead of using other people who are better at it to do it for us.

Why?

That they are better at it is obvious for if they were worse then we’d not even be thinking about importing the machines. There would therefore be no reason to have to encourage local production or restrict that foreign competition from our shores. The very insistence that something must be done to gain this goal is that insistence that not only are we going to have to do this work but also we’ll be bad at it - and therefore poorer for having done it ourselves.

Why is it that people keep insisting upon pursuing what might well be laudable goals in the worst possible manner?

Health Imperialism UK

“Healthcare UK is a joint initiative of the Department for International Trade, NHS England and Improvement (NHSE/I) and the Department of Health and Social Care (DHSC)...We work with the NHS to strengthen its capability and capacity to operate and succeed internationally.” In fact there is more to it than that. The Department for International Trade (DIT), at least in theory, helps the private sector export profitably and helps overseas bodies, private and public, export into the UK.  Provided the DIT adds value after deducting the costs it creates for itself and its clients, few would argue with the former objective.  Quite why a country with an adverse balance of trade wishes to support the latter, is another matter. 

Helping NHS providers succeed in export markets is not just good for themselves and the UK trade balance, it also helps the NHS to buy state-of-the-art goods at competitive prices. What is less obvious is why our overstretched National Health Service should devote its time, energies and resources to the rest of the world.  The BBC World Service is funded, as part of demonstrating the UK’s soft power, by the Foreign and Commonwealth Office.  They may not wish to fund the NHS World Service for the same reason. 

Healthcare UK’s Annual Review, and perhaps Healthcare UK itself, is a huge muddle. It is based on the premise that, now we have given up on the USA, the rest of the world should become more like us.  Britain rules the air-waves and “In 2019, the NHS Long Term Plan pledged the creation of a new initiative to provide a ‘front door’ for NHS family organisations looking to grow and coordinate their international commercial engagement, and for other countries wishing to access the NHS’s extensive expertise.” (p.40) 

On the plus side, the Review notes that it was “Supporting UK business and NHS in 22 countries” and its financial achievement was “Contributing to the healthcare sector’s part of DIT’s overall £27bn export wins” (p.8). We are not told the size of that contribution, nor the staff employed nor the costs of Healthcare UK.  The Egyptians invented the maze over 2.500 years ago but it could not match the labyrinthine connections that Healthcare UK has with all the government bodies known to Whitehall.  Whenever you see the term “working with”, read “talking with”. 

“Digital health” is the application of IT to health matters, diagnosis, cure, records, communication etc.  Healthcare UK claims we lead the world and can make megabucks by exporting our skills worldwide.  On the other hand, an October 2018 policy paper from the DHSC said: “Technology systems used daily across hospitals, GP surgeries, care homes, pharmacies and community care facilities don’t talk to each other, fail frequently and do not follow modern cyber security practices. As a result, some people are getting suboptimal care, staff are frustrated and money could be saved and released for the front line.”  The reality is that the NHS has sponsored a series of IT disasters and (the Test and Trace App) is still doing so. The causes are always the same: the NHS is so big it talks a big game but then cannot deliver. Some people would consider that the DHSC should sort out its own systems before claiming world leadership. 

Similar considerations apply to mental health: “Northumberland, Tyne and Wear NHS Foundation Trust (NTW) has launched a partnership with one of India’s largest providers of mental health services, Cadabams Group. The partnership offers both organisations the opportunity to share expertise in the delivery of mental health care to different populations. As part of the partnership, NTW will provide support for the Cadabams Group to develop new ways of working within areas including addictions, smart prescribing, school mental health, community and home-based care.” “Maudsley Health was formed as a joint venture between South London and Maudsley NHS Foundation Trust and the local United Arab Emirates (UAE) partner, MACANI.”. Learning through sharing has much to commend it but with such a shortage of mental health support in England, one has to wonder if this empire-building is worthwhile. In any case, Britain’s mental health hospitals have a great deal to learn from one another before turning to less developed practitioners. 

These concerns may be misplaced: the NHS in foreign parts may benefit both the UK and our overseas partners but that is not the picture the Annual Review paints.  There are no clear objectives and no performance nor progress that can be assessed against such objectives.  The pictures are attractive and the intentions are fine but so they were for the Victorians.

The IMF says let's have lots of public investment

We do seem to have an example of slavery to some defunct economist here:

IMF urges governments to turn on the spending taps

A 1pc rise in public investment could eventually create up to 33m new jobs, the international lender has said

If governments up the rate of public investment then there will be more investment and thus economic growth. Et voila!

In the actual report we get the little proviso that causes the problem:

Even so, a gradual scaling-up of public investment financed by borrowing could pay off with positive

short- and long-term multipliers, as long as interest rates do not increase too much (Buffie and others

2012; Online Annex 2.1) and governments choose and manage investment projects to maximize economic returns for their citizens.

It’s that last which produces the problem. Such public investment must be productive in and of itself. The argument to just spend now on anything isn’t enough, the projects built must be wealth increasing themselves.

And what does our government spend the public investment cash upon? We’re still only just starting HS2, something that has been on the books since the last recession but three. Something which technology has made into a massive boondoggle before we even start.

Or perhaps that idea of insulating every house in the country, that Green New Deal?

13.8 million homes had cavity wall insulation (70 per cent of homes with cavity walls).

Of the 5.3 million homes without cavity wall insulation, 4.0 million are easy to treat

standard cavities, and 1.3 million are hard to treat (including standard cavity wall

property with issues such as structural faults or presence of a conservatory, creating

access issues and some unfillable cavity walls). There are around 0.8 million properties

which may or may not have cavity wall insulation.

• 16.2 million homes had loft insulation of at least 125mm (66 per cent of homes with

lofts). Of the 8.0 million homes with lofts without at least 125mm of insulation, only a

small number are estimated to have no insulation. Around 5.8 million of these homes

require easy to treat loft insulation, and 2.3 million are hard to treat (including room in

roofs, flat roofs and some unfillable lofts).

Most of that’s already done and any crash program will bring out every bodger in Western and Central Europe to waste the budget. As happened - without the European involvement - in Australia.

Government isn’t a good manner of identifying projects which maximise economic returns. There is no shame in this of course for we’ve that other sector of the economy, the market one, which lives and dies - in a manner which bureaucracies don’t - by identifying economic returns. Things which that market sector leaves by the wayside tend, therefore, to be things which don’t have said returns.

Yes, of course, there are exceptions, public goods being among them. But that’s still a tough test, identifying and then crafting the plan to provide them. A tough test which our current system of government - whoever is nominally running it - doesn’t seem to pass.

It’s important to grasp this caveat the IMF insists upon. The public spending only boosts the economy if the plan is, in and of itself and regardless of when done or who financed by, economically sensible in the first place. Oh, and it needs to be done efficiently too, that spending.

Hands up who believes the British government is capable of either identifying or managing projects like that? Well, quite, probably better to run with the fructification in the pockets of the populace option then.

We object to this description of the Asda takeover

This is a more and more common mistake:

Indeed they have, but as custodian of the public finances the Chancellor might have left the celebrations to others. A large chunk of that £1bn is likely to be paid for with much lower tax bills. Asda paid £95m in corporation tax last year under Walmart ownership. The takeover by the Issa brothers and their British private equity partner TDR, fuelled by £4bn of junk bonds and leveraged loans, is likely to leave the Exchequer out of pocket for some time.

As is typical in a leveraged buyout, the cost of the borrowing will be set against the supermarket’s profits, leaving less or perhaps nothing for the taxman to tax.

As a former investment bank analyst and hedge fund manager, Mr Sunak knows this better than most. There is nothing particularly unusual about any of it, beyond the fact it drew a round of applause from Number 11.

It’s entirely true that the tax bill to that specific corporate shell will be lower by being highly leveraged. Interest is a deductible expense of doing business. But that same interest is then taxable in the hands of the recipients. If they profit from the lending - which we can assume they intend at least to do - then those profits are taxable. Or if they pay it all out to their bankers then those salaries are taxed.

Taxation is not a one stop shop, d’ye see?

This is of grander importance than just some muttering over a particular takeover. There is a definite movement out there to restrict that tax deductibility of interest on these very taxation grounds. A movement which entirely ignores that the interest itself is taxable upon receipt - that is, the movement is ignoring the basic reality under discussion. Equally, we get complaints about how varied tech companies pay little corporation tax when they issue shares to the workforce. Which misses that the workers pay tax - at higher rates than corporation tax - upon the receipt of their shares.

Discussions about the tax system have to start from the clear and obvious basis that just because one horse on the merry go round isn’t writing a cheque for one specific tax that doesn’t mean that no one is writing a cheque under any tax. It’s an integrated system, taxing at many points, and all such points need to be considered.

Everything old shall become new again

Torsten Bell tell us that there’s a terrible problem with carbon taxation:

The public was sceptical that green taxes would be effective and worried they would hurt the poor. So the to-do list for eco-warrior economists is to design policies that protect lower-income families...

In the jargon, such consumption taxes are regressive, they eat a larger part of the income of poor people than of rich.

Well, yes. Except this observation is baked into all of the sensible discussion of such taxation in the first place. The point, the aim, is to alter market prices so as to reflect the externalities, to insist that the larger costs to others are included in the costs that economic actors face. There is no argument at all which states that government should gain more revenue as a result. So, all long the argument is in favour of a revenue neutral carbon tax.

For some this means a carbon tax and dividend - the money raised is paid out again to each household on a per capita basis. The problem with this being that the correct level of carbon taxation - from The Stern Review we can peg this at £30 to £40 billion a year for the UK in total - means that such a dividend will be small and probably not worth the cost of the payment system to distribute it. For the more sensible this means reducing some other regressive tax by the same amount of the revenue being raised by the carbon tax.

The usual suspect identified is national insurance. So, impose that carbon tax and reduce national insurance payments. The combination of the two makes the carbon tax both adjust market prices to reflect externalities and also increases the progressivity of the system - or at least doesn’t reduce it.

This is so much part of the mainstream that when John Gummer instituted the landfill tax - another form of Green taxation - he specifically linked it to a reduction in national insurance payments. And let’s be honest about this, if even John Gummer could grasp the point a quarter century ago then it should be within reach of the rest of us by now.

The argument for carbon, as with all other forms of Green, taxation has always been that it should be revenue neutral. This means reducing other taxation by the same amount that is being raised - and yes, reduce regressive taxation to counter the regressive nature of the carbon imposition.

Don't forget that the consumer benefits from a voluntary transaction

If we go and buy something, voluntarily, then we must do so because that thing we are buying is of benefit to us. It is also logically obvious that we consider that thing we’ve bought to be of greater benefit to us than the other things that we could have gained with those same resources we are giving up to gain it.

The consumer benefits from whatever it is she buys.

EU threatens to cut off City unless it gets answers over regulation after Brexit

Well, yes, but who is it getting cut off?

Brussels will refuse the City of London access to the EU's market

No, that’s not correct.

We need to avoid being overly dependent on a third [non-EU] country for key financial services, Ms McGuinness told MEPs before calling for the bloc to build up its financial infrastructure.

From that we can derive what is correct. The consumers - all those about to be remnant-EU companies and consumers of financial services - are about to be cut off from their suppliers in the City of London. Which does sound like a rather silly thing to be doing given that imports are the very purpose of having trade in the first place.

Under the current regulatory dispensation financial services across the EU are a close approximation to a properly free market - at least in so far as the geographic location of the supplier is concerned. The idea that consumers should be cut off from their preferred supplier for indeterminate political reasons is just so absurd that of course that is what the political system is about to provide.