The Perils of Inflation
The interest rate on my student overdraft in the mid-1970s was 17%. I responded by spending even more. After all, inflation had hit 24%, so the Clydesdale Bank was effectively paying me to borrow their money.
An inflationary world is a mad world. Inflation can rise so fast and so far that firms cannot keep up, and do silly things. Like subsidising my profligacy and otherwise spending money on projects that in a normal world would never be considered.
The Office for Budget Responsibility figures that UK inflation will be at 8.7% by year-end, but remembering what I do from the 1970s, I figure that might be optimistic. And it’s highly damaging. After three years at that level, inflation has shaved almost a quarter off your savings. After seven, you’ve lost nearly half.
That’s bad all round, but it’s particularly bad for young people, who have already lost out to the baby boomers thanks to the miracle of public borrowing. And planning controls too: with house prices spiralling because planners and NIMBYs won’t let us build enough houses for our increasing population, the savings-destroying effect of inflation makes the prospect of getting together a deposit increasingly remote. And because incomes are being eaten by inflation, it becomes harder for people to save at all.
That in turn prompts another damaging effect. As inflation erodes incomes, workers demand more money to compensate. And if inflation is high, they demand not just enough to balance what they’ve lost in the last year, but even more to provide for what they expect to lose in the next. That is why, in 1972, with inflation heading over 20 per cent, coal miners demanded a 43 per cent wage increase. As did others.
Meanwhile, employers see their other costs rising too, so affording wage rises becomes harder, and heightens tensions between employers and employees. And since nearly 18% of the UK workforce is government workers, taxpayers come under pressure too.
So, employers look to other ways to reduce their costs. They might use cheaper inputs to make their products — products which probably end up lower-quality as a result. One of the easiest things to cut, of course, is investment. Which gives us lower productivity and the dismal prospect of stagflation: prices rising but the economy going nowhere.
We can’t blame the government entirely for rising food and fuel prices, but even in the best of circumstances, overspending seems a way of life to them. Since March 2020, the Bank of England has bought £875 billion worth of government IOUs, simply creating more money to pay for it. But money is like anything else. The more of it there is around, the less it’s worth.
Sure, the Bank is now being a bit more cautious, but no central banker wants to inflict pain. Yet the lesson of the 1970s, again, is that those countries (e.g. Germany) that acted swiftly on inflation recovered much faster than those (e.g. UK) that thought the required belt-tightening was too painful.
How cute, Nick Timothy thinks it's all about politics
Politics affects the world, certainly, but does not determine it:
For globalisation – the treaties, processes and structures that have made the world more complex, inter-connected and inter-reliant – is the product of political choices. Those choices, such as the regulation and deregulation of labour markets, the regulation and taxation of capital, and the terms on which countries traded with one another, determined not only that globalisation proceeded apace, but the nature of change it brought.
Globalisation - that process which is on the verge of finally killing off absolute poverty among human beings - was not a policy choice. Technological change meant that it was almost, almost, inevitable. The policy changes that would have been required to stop it were such that only the most insane of polities did in fact stop it.
Air travel has become cheaper in real terms. International telecoms have declined in price to being, in effect, free. Goods transport has declined in cost to where - pace just this past 18 months - it’s possible to move 40 tonnes of goods from anywhere to anywhere for $5,000.
With those three globalisation was inevitable. If goods, people and information are trivially cheap to move around then globalisation is inevitable. It’s possible, as North Korea has shown, to unplug from this but it does have to be that extreme in order to do so.
Our favourite example of this point comes from the 19th century. In antebellum America it was the South, that agrarian, plantation, society that was against tariffs upon imports. The North, with its growing manufacturing base, tended to desire much higher tariffs. Post-bellum, tariffs rose, doubled in fact and more for the North had won and who cared what the South thought?
Trade continued to rise though, the American economy continued to integrate into the global one. For the barriers to trade are tariffs (and quotas, bans, other political things) plus the costs of doing the trade - transport, communications and so on. The steamship alone so lowered ocean transport costs that despite the doubling of tariffs the costs of trade fell.
Looking back over this past 80 years yes, tariffs have fallen and so on. But it is those larger influences of cargo, communication and carriage that have really driven the process. As with the 19th century political trade barriers would have had to double, triple and more in order to stop the process and even then would likely only have slowed it. If we still had the trade politics of 1950 (just to pick a date) we would still have a very much more globalised economy today than we did back then.
Mr. Timothy ascribes far too much influence to political choice - but then he always does, doesn’t he?
Regime change in Russia
The statement by Vladimir Putin that the government of Russia is something for the people of Russia to decide is one that has been echoed by some Western leaders and politicians. It is a pious sentiment but, unfortunately, it is not true. The Russian people have no opportunity to change their government because Russia is not a democracy in any meaningful sense of the word.
The Russian media is not free, and opposition and dissent are stifled. One opposition leader, Boris Nemtsov, was murdered in 2015, almost certainly by the FSB, successor to the KGB that Putin once worked for, and was done on his orders. The use of a Novichok nerve agent to poison another opposition leader, Alexei Navalny, is known to have been carried out by the FSB, again on Putin’s orders, and the name of the agent who carried it out is known.
A leading Kremlin critic, Alexander Litvinenko, was murdered in London with radioactive polonium-210, and again, the names of the two FSB agents who carried out the attack are known. The attempted murder of Sergei and Yulia Skripal was carried out on British soil by two known and named FSB agents using Novichok supplied on Kremlin orders and almost certainly sanctioned by Putin personally.
Street protesters are routinely and regularly beaten by police truncheons, arrested and imprisoned. The media toes only the Kremlin line, and opposition newspapers and TV and radio stations are silenced and shut down.
Elections are rigged, and ballot boxes are stored without scrutiny in the custody of government officials, or disappear altogether. The courts routinely hand down whatever verdicts and sentences the Kremlin seeks to impose.
This means that all the elements that go to make up a democracy are absent. No free press and media, no independent judiciary, no effective opposition tolerated, and no fair elections. The Russian people have no say in how their government behaves, and cannot change it. It is a mockery to say it is “in their hands.” It is not.
The behaviour of Russia’s brutal regime underlines the merits of democratic accountability in the free countries of the world, the ones that can peacefully change their government and influence their government’s course of action. It makes us appreciate what we have when we see what happens in countries which lack that.
When regime change comes about in Russia, it will not come from the Russian people, but probably from men in military uniforms, or more likely from the black-robed figure bearing a scythe.
Just to remind, you can tell all sorts of political lies with numbers
On seeing this we thought we’d better change our line of business. Net profit at 20% of turnover? Why aren’t we - and everyone else - piling into this sector?
Revealed: top 10 children’s care providers made £300m profits
Concern at growing role of private equity as councils struggle to meet spiralling costs
Sounds like the very thing, doesn’t it? Such profits must mean gross undersupply and thus plenty of room for us and others to fatten our own wallets:
Profits among the top 20 providers of care home and fostering places now amount to 20% of their income.
We thought we’d check though, for such margins are most, most, unusual outside the racier sort of tech operation. This is last year’s report on the same issue but they’ll not have changed their measurement method:
Aggregate profits measured using the popular EBITDA method (Earnings before Interest, Depreciation and Amortisation) amount to £265 million at an EBITDA margin of 17.2%.
Ah, they’re not in fact measuring profit at all.
There is a spectrum in politics concerning numbers. One can tell the truth, be misleading, that shades into casuistry and then to flat out lying. We’ll leave it as an exercise for the reader as to where this particular measure belongs on the spectrum.
So, one is doing children’s care, children’s homes. Which rather implies that there’s a home, a building, in which this is being done. Businesses, just like us individuals, tend to borrow on a mortgage to pay for those buildings. The interest bill on that borrowing is a cost of being in business - a substantial one. As is putting money aside each year - depreciation - to do the necessary reworking, repair and general maintenance on those very buildings.
As with anything property based in Britain these days these costs will be substantial.
So, the measurement of “profit” being used here is one before a substantial portion of the costs. That is, it’s not profit at all. It’s margin before interest, amortisation, depreciation.
Or, somewhere on that spectrum from truth to lying - again something for the reader to specify.
Just to make one further point. The second part of the report worries about the debt levels at these companies. Measuring profitability before interest plus also being concerned about high debt levels does strike us as being very close to cakeism. But then that’s rather the art of using numbers in politics, isn’t it?
Mrs Sunak and the Infosys dividend
We thought that perhaps one of these little details of how capitalism works might be useful.
Mrs. Sunak owns a stake in an Indian company, Infosys. That has paid her a dividend.
The Infosys accounting period - fiscal year - is to March 31. The latest accounts available are therefore for the quarter to 31 Dec 2021. Infosys pays an interim and a final dividend each year - or has done in the recent past at least.
Any dividend received recently will therefore be connected to the business activities, profits made, before Sept 30 2021.
Not that we expect this to change the shouting going on but we did think that someone, somewhere, ought to point this out.
The outrageous rip offs of capitalist free markets
Just such appalling behaviour, how could anyone possibly support this? Supermarkets are ripping off the poor consumer by, well, by cutting prices to said consumers:
UK supermarkets accused of ‘bombarding’ shoppers with cheap meat
Entirely disgusting, we hope we can all agree.
Britain’s biggest supermarkets stand accused of “bombarding” shoppers with offers of cheap meat, despite pledging to promote more meat-free diets to improve health and tackle global heating.
They are using money-saving promotions, such as two for the price of one, as a way of “pushing” meat, at odds with moves in the UK and globally for consumers to eat less of it, research found.
Consumers gain more of what they desire and this is - as the tone here makes clear - just appalling, isn’t it?
At which point to make that distinction between what people ought to want - even what they might say they want - and what they do want. Expressed and revealed preferences in the jargon. The best guide to which is to follow the money.
The supermarkets offer deals on meat because this at least appears to them to be profit maximising. That means that consumers must desire cheap meat - otherwise the offer would not be profit maximising. From which we can divine that consumers want cheap meat, whatever is said about health and or global heating.
As the aim of our having an economy - a civilisation even - is that more people gain more of what they desire this seems to be a good idea.
The only people who seem to be unhappy about this are those who think that consumers shouldn’t desire nor have more, cheap, or possibly even any, meat. But it is one of those very basic axioms that the people who get to define what they want is the people themselves, not others on their behalf. For those who would and do say that you cannot have what you desire because we say so are authoritarians and as such they can go boil their heads.
Supermarkets offering cheap meat? It’s the very proof perfect we require that capitalist free markets make us all richer. Because we end up with more of what we desire, not less of what some prodnose thinks we shouldn;t be allowed to have.
An amusing demand for slavery reparations
We are, of course, not meant to find such things amusing but then we tend to have a rather dry sense of humour around here. In the current demands for slavery reparations:
Sadly, too many of us do not know that it was the slavemasters – not the slaves or their descendants – who received reparations after slavery ended and the plantations collapsed.
We tend to think of that not as reparations but as a bribe to overcome political resistance. And, at £20 million, an absolute bargain at the price. Without that “compensation” slavery would have persisted for some more decades, at that great cost to those enslaved. It was a bribe, money well spent.
On the larger issue:
Work has already been done. The Caricom Reparations Commission has outlined a clear 10-point action plan with a tangible plan forward for creating justice.
One of those points leads to our amusement:
2. Repatriation
Over 10 million Africans were stolen from their homes and forcefully transported to the Caribbean as the enslaved chattel and property of Europeans. The transatlantic slave trade is the largest forced migration in human history and has no parallel in terms of man’s inhumanity to man. This trade in enchained bodies was a highly successful commercial business for the nations of Europe. The lives of millions of men, women and children were destroyed in search of profit. The descendants of these stolen people have a legal right to return to their homeland.
A Repatriation program must be established and all available channels of international law and diplomacy used to resettle those persons who wish to return. A resettlement program should address such matters as citizenship and deploy available best practices in respect of community re-integration.
Well, OK. The expansion of the Liberia programme perhaps, the country having been founded to do exactly this. If that’s what people want, then why not?
Except there’s little to bar this right now. We’d not insist that migration from, say, the Bahamas to Ghana is entirely simple but we’re equally certain that it’s possible. Also, that it doesn’t happen very much.
The reason it doesn’t is because the economic situation of near anyone in the Caribbean is between largely and hugely better than that of near anyone in West or south-west Africa.
That is, the very fact that the repatriation being demanded doesn’t currently happen is the very reason that reparations aren’t due. Because - we agree, the experiences of the intervening generations were very different - the descendants of slaves in the Caribbean are now better off than the descendants of the non-slaves in Africa. It’s not in fact possible to compensate someone for making them better off.
That very reparations demand proving that reparations are not due, yes, that does amuse.
We wouldn't call this enhanced wildfire risk a problem exactly
It is sometimes necessary to properly examine a statement before coming to any useful conclusion about that same statement:
Wildfires will pose a greater socioeconomic risk in years to come, scientists have predicted, as they increasingly burn agricultural areas and harm populations.
A study uses machine learning to model where wildfires are likely to strike in coming years, and their impact on humanity.
We agree, that doesn’t exactly sound good, but what is the driving force here?
This, the researchers said, is because: “Such elevated socioeconomic risks are primarily caused by the compound regional enhancement of future wildfire activity and socioeconomic development in the western and central African countries, necessitating an emergent strategic preparedness to wildfires in these countries.”
What they mean is that western and central Africa is going to become richer, therefore there will be something of value in those areas to burn. The wildfires aren’t exactly desirable, agreed, but hundreds of millions of people rising up out of historic and abject poverty seems a good result to us.
This all being something we think is underappreciated. Yes, it’s true, the standard models - all of those used by the IPCC and so on - do indeed say that emissions could rise dependent upon the technological path taken. Note could - there are paths where this does not happen, at least not to what even the IPCC considers dangerous levels. But all of those models also include the poor of the world getting rich.
As with this study this is one of the, perhaps the, major drivers of those worries about increased damages from events. A richer world simply has more to be damaged. It is the nett position that matters to human welfare and it is only at the very extremes of predictions that this becomes negative overall.
A threshold win - after two decades
It was a lacklustre budget that did little to address creating the conditions for economic growth, and saw the UK saddled with the highest tax burden in 70 years. But there was one small victory to celebrate.
For over two decades the Adam Smith Institute has tirelessly and repeatedly made the case for bringing the threshold at which National Insurance is levied up to that at which income tax is levied. National Insurance is a tax, not an insurance premium, despite its name, and it was always unjust to tax people who were below the minimum wage the government deemed necessary.
Finally, after more than 20 years, the thresholds are to be equalized. It is one small but much appreciated victory for common sense and fairness. It is small, however, compared to the stealth taxes imposed elsewhere. Rishi Sunak has been a tax-increasing Chancellor, not a low tax Chancellor. Unlike Nigel Lawson, who with Peter Lilley used every budget to lower taxation and abolish at least one tax, the present Chancellor has raised at least 15 taxes during his term. He uses fiscal drag, freezing thresholds and allowances to pull people into higher tax brackets by inflation so that it does not show to the general public as tax increases, but it does show to economists.
The increase in the National Insurance levy by 1.25%, the so-called “Rishi Tax,” will increase the costs of employment and put up prices generally. This is especially true of businesses where wage costs form a large part of operating costs, such as the hospitality industry. People will blame “inflation,” not seeing that the “Rishi Tax” is a major cause of the higher prices.
But one small victory is better than no victories at all, and it is a cause for celebration that we will no longer tax, via National Insurance, those earning below the minimum wage. So we thank the Chancellor, along with others who came late to this game and added their support to our campaign. Sometimes we have to take the long view, as we did with fair treatment for Hong Kong people and Freeports, but we are prepared to put in the years if it takes years. We have a huge agenda, and will still be here to advocate it long after this Chancellor has moved on. We therefore celebrate a small victory today, and hope for bigger ones tomorrow.
But what would be wrong with the Uberisation of the NHS?
We’re aware that Hunt means something a little different here:
The NHS is moving towards an “Uberisation” of GP services, with patients forced to see a different doctor every time they book an appointment, Jeremy Hunt has warned.
He’s muttering about the cab rank rule being applied to GPs in the same way it is to lawyers or, ahaha, taxis.
But let’s widen the point a little and think about what Uberisation of the NHS would mean, if the effects were the same as those of Uber itself:
First, platform users gain 72 cents per dollar spent on these platforms. Second, welfare gains are disproportionately higher in locations and times that have been underserved by taxis and public transit. Third, we estimate that 64% of welfare gains come from dynamic pricing used by these platforms.
Gosh :
…we estimate that in 2015 the UberX service generated about $2.9 billion in consumer surplus in the four U.S. cities included in our analysis. For each dollar spent by consumers, about $1.60 of consumer surplus is generated. Back-of-the envelope calculations suggest that the overall consumer surplus generated by the UberX service in the United States in 2015 was $6.8 billion.
It first argues that Uber's success stems not (just) from regulatory arbitrage or other malfeasance, but from having created a far more efficient market for car-hire services. It then argues that Uber's rise is cause for both optimism and pessimism. In addition to its obvious positive effects on consumer welfare,
The effect of all of this being that:
Chicago's business school asked its panel of 43 eminent economists if "letting car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements, but without restrictions on prices or routes, raises consumer welfare," all 40 who replied said yes
That is nice, isn’t it?
Allowing competition free of regulatory constraint makes consumers - that’s you and us out here - better off. So, we should do that then, shouldn’t we? Uberise the National Health Service immediately.
Sometimes economics is easy.