The IFS proves that Scott Sumner is, in fact, correct

One of Scott Sumner’s assertions is that government doesn’t really have control over the overall expansionary or contractionary stance of economic policy. This is, at the very least, shared with the independent central bank. Or, in Sumner’s insistence, it entirely offset by the decisions of that central bank.

One proof of this might be the Truss/Kwarteng adventure where the low tax dash for growth was indeed derailed by the Bank of England (well, according to some tellings of that story at least).

Another and more detailed proof could be this from Paul Johnson at the IFS:

Tax cuts would put ‘scary’ UK finances in greater danger, warns top economist

That’s not quite what is said, that’s the headline writers. Rather:

Rishi Sunak and his chancellor Jeremy Hunt remain under intense pressure from their own MPs to cut taxes in March, in the run-up to the next election. While the prime minister has been clear that cutting inflation is his only economic priority for now, officials have privately hinted he is interested in making a cut, such as reducing income tax by up to 2p.

However, Johnson said such a cut would be a “political and not an economic decision” that came with risks. “Two pence off income tax is quite a big change,” he said. “That’s something like £15bn. The big question for the chancellor then would be, how’s the Bank of England going to respond?

“The nightmare scenario will be a nasty market reaction, a la Truss. But an almost equal nightmare reaction would be the Bank saying, ‘We were effectively saying that we were keeping interest rates steady, but now you’ve just injected an extra £15bn into the economy. We’re still worried about inflation and we’re going to put them up’. That should weigh very heavily in any decision on tax cuts.

“A £15bn cut in tax this side of March - without concrete tax rises or spending cuts proposed to offset it - it would be a political and not an economic decision.”

Something being a political, not economic, decision should not be a total disproof of the decision itself. We do have elections so that we can choose between different political visions after all.

However, that more technical point there. If the current government cuts taxes by £15 billion, without also cutting spending to match, then the expansionary effect will - likely enough - be offset by the Bank of England changing interest rates.

The expansionary - or contractionary - stance of fiscal policy is offset by the equal and opposite effects of monetary policy. Therefore the overall stance is not something in the power of the government. That is the Sumner point. It’s something that is so embedded in serious thinking on the subject that here we’ve the IFS warning about it.

What this means is that if the current government wants to cut taxes by £15 billion then they should also cut spending by £15 billion. A thoroughly good idea of course. Indeed, give us a free hand and we’ll find £150 billion in spending to cut. Certainly £100 billion because O’Rourke’s Principle of Circumcision is correct - you can take 10% off the top of absolutely anything.

But the Sumner point stands - government is not in control of the stance of policy because the fiscal stance is and will be offset by the monetary stance. Which is fine of course. This leaves government in charge of fiscal policy. How much is to be taken off the populace to be spent upon what?

Less, obviously.

This is how markets work, yes

Savers pull £80bn out of Britain’s four biggest banks in protest of dismal rates

Savers are either switching to rival savings providers or paying off rising mortgage bills

We’d not say in protest ourselves. Rather, someone’s offering them a better deal elsewhere. Either a better interest rate on their savings or perhaps zeroing out some of their debt is that better offer.

But this is how markets work. No one at all looks at the price they’re paying for supplies - which is what our deposits into a bank are to a bank - and works out what is fair. They pay the least they think they can get away with. The thing which limits that minimal getting away with it price is what other people are willing to pay for that same thing.

This is true of everything in a market. Wages are not - contrary to belief - determined by what your employer thinks is fair to pay you. Rather, by what the next, alternative, employer is willing to pay you. Your actual employer must at least match that number (plus conditions) to retain your efforts. And so too of steel - the steel price is not set by what Ford is willing to pay, the price to Ford is set by what Stellantis, Aston and GM are willing to offer.

The interest rate offered on your savings is not determined by Lloyds deciding what is fair. But how much Lloyds has to pay to get you to deposit there. Something determined by the interest available on other deposit accounts and, even, the negative return you’re getting on your borrowings.

Banks must have deposits of course - no, MMT is wrong on this. Look at the bank’s financial accounts sometime. Deposits plus capital always equals loans out. Banks must balance their books in this manner each and every day (at 4.30 pm in fact). Thus, if Lloyds (to continue with the one named example) suffers an outflow of deposits it must find some from somewhere else. By, say, changing the price it is willing to offer for them - the interest rate.

It is true that banks have not increased the interest they pay on deposits as fast as they’ve been raising what they charge for loans. Fortunately we also have a system to deal with this - the market. Leave it be and she’ll be fine.

The Emis Group proof of why UK GDP growth is slow

Now, whether Emis Group should be taken over by United Health isn’t an interesting point for us. We’re not sure what they actually do, either of them and care rather less. For our example here is not about the specific companies it’s about why economic growth in Britain is so damn slow. We’re even willing to run with the idea that the proposed takeover here should be denied - it isn’t being - and yet our criticism and explanation would still stand.

Here’s the story from the Stock Exchange announcement:

On 17 June 2022, the Boards of Bordeaux UK Holdings II Limited ("Bidco"), an affiliate of Optum Health Solutions (UK) Limited ("Optum UK") and a wholly-owned subsidiary of UnitedHealth Group Incorporated and EMIS Group plc ("EMIS") announced that they had reached agreement on the terms of a recommended all cash offer pursuant to which Bidco would acquire the entire issued and to be issued ordinary share capital of EMIS (the "Acquisition"). The Acquisition is being implemented by means of a Court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006 (the "Scheme").

On 9 August 2022, EMIS announced that at the Court Meeting to consider the Scheme and the General Meeting to consider the Special Resolution relating to the Acquisition, all resolutions were approved by the requisite majorities. EMIS further announced that a notification had been made and accepted under the NS&I Act and that the Secretary of State had confirmed that no further action will be taken in relation to the Acquisition.

On 31 March 2023, the United Kingdom's Competition and Markets Authority (the "CMA") announced that it had referred the Acquisition for a Phase 2 investigation. On 6 April 2023, EMIS and Bidco announced that they would be proceeding with the Phase 2 CMA investigation and would engage constructively and collaboratively with the CMA throughout the process.

The CMA has today published a summary of its provisional findings from its Phase 2 investigation into the Merger (the "Provisional Findings").

Bidco and EMIS are pleased to announce that the CMA has provisionally cleared the Acquisition. The CMA will now publicly consult on the Provisional Findings before reaching a final decision by 5 October 2023.

As we say, whether the bid should go through or not is not our point. That this started in June 2022 and won’t even get to the beginning of the end until Oct 2023 is.

The economy is the aggregate of our collective and individual actions. GDP is the measure of those actions but restricted to those monetised and measure at market prices. Changes in GDP are - therefore and obviously - changes in the amount we do and the things we do. The speed of GDP changes - the rate of economic growth - will be determined by both how quickly we work out how to do new things, plus old things in a new way and also the speed at which we are allowed to do new things and things differently.

If we’ve a bureaucracy placing a 16 month delay upon doing things differently then economic growth will be slower than in the absence of such a bureaucracy.

Therefore speed GDP growth by abolishing the Competition and Markets Authority.

It’s even possible that every decision made by the CMA is perfectly, rigorously and justifiably correct. But either they need to make decisions promptly - say, 5 working days - or they need to go. For we hold it to be self-evident that more wrong decisions would be better for economic growth than a 16 month delay on anyone doing anything at all.

A new approach to overseas development

The United Nations has a target for developed countries to spend 0.7% of their Gross National Income (GNI) on Official Development Assistance (ODA). The UK had previously set this target, then reduced it to 0.5%, but now targets returning to 0.7% in 2024-2025.

Some commentators criticize the UK, and indeed the USA, for contributing too little to the development of poorer countries, but the amount the two countries give is much higher than the figures show. The statistics only show what governments contribute (£15.2bn), but data from the World Bank shows that £23.6bn is paid in remittances from the UK, with £10.6bn in charitable donations. People who came here as immigrants send money to their families back home, and thereby make a significant impact on their domestic economy. The same is true in the United States.

Furthermore, this direct person to person aid does more economic good than government to government aid. As Professor Peter Bauer pointed out, government aid signals to ambitious people in poor countries that they must turn to the government to improve their lot. People who might otherwise go into business or start businesses themselves, turn instead to seek contracts from government or positions within government. There are also fewer opportunities for corruption and waste in person to person transfers of wealth, although some smaller fraud has occurred. The money goes straight into the local economy and helps to fund things such as education, as well as raising living standards.

There is something else that works. It is the low tax, light regulation model that boosted Hong Kong from abject poverty into first world affluence. It did the same in Singapore, in Taiwan, and in South Korea. It was behind the West German “Economic Miracle” of Ludwig Erhard, and of Japan’s rapid post-war recovery.

The UK should boost development in poorer countries by the two things that we have ascertained work in practice. It should encourage person to person aid transfers from UK people to their relatives in poorer countries. This could be done by giving such contributions the same kind of tax relief that goes to those who make donations to registered charities through Gift Aid. An allowance would be set at such a level as to avoid this generous tax relief being used for tax avoidance or overly advantaging those whose families live abroad.

The UK could also collaborate with poorer countries to have an area, preferably including a port, assigned on a lease of perhaps 30 or 50 years to a consortium, solely at the invitation of the host. It would be a freeport and much more. The governing consortium would set the levels of taxation, and run the area’s policing and judicial administration. They would determine its property laws and its regulatory structure. The aim would be to recreate what Hong Kong and the others did. With the right conditions, property rights and rule of law, international investment would pour in, creating both businesses and jobs locally. Local people would rush to work or live there because of the opportunities.

There is little doubt that untrammelled enterprise would achieve far more than development aid has managed to attain after decades of effort. Combined with incentives to augment person to person transfers, this could set poorer countries on that upward path to affluence and increased prosperity.

The idea's right here, a tax on private jet fuel. It's the details that are awry

This is not a bad idea, despite being about climate change and also in The Guardian:

Our legislation would increase fuel taxes for private jet travel from the current $0.22 to nearly $2 a gallon – the equivalent of an estimated $200 a metric ton of a private jet’s CO2 emissions – and remove existing fuel tax exemptions for private flight activities that worsen the climate crisis, like oil or gas exploration.

We advocate the carbon tax so we should, must and do welcome proposals to impose the carbon tax.

There are a few problems here. If emissions from flying are a bad idea then emissions from flying are a bad idea. There’s no reason why only private jets should pay such taxes - government ones should as well. So too should commercial ones. That goose and gander thing really does apply to Pigou Taxes upon externalities.

Of course, the rate is wrong, should be more like 80 cents so as to reach the $80 social cost of carbon. There’s the usual American political foolishness about hypothecation of tax revenues. Instead of allocating that revenue to some specific subject better to simply put it into the general fund. There’s absolutely nothing at all about climate change that says government should get bigger. Only that the revenue for government should perhaps come from different places.

We spend enough time around here berating people for proposing very silly things to do about climate change. Here we’ve at least the beginnings of a sensible suggestion. Yes, the solution to aviation is the carbon tax. Because people should pay the full price of their actions and that should be visible in prices. Once those costs are included then of course we are finished with the subject. The only flying that will take place is that which is producing more value than the damages caused. That is, the only aviation left after a carbon tax will be that which increases human utility.

Which is, after all, the point of the game itself - civilisation’s aim is to maximise human utility.

Contestable monopolies, if exploited, will be contested

The latest of the Yellow Perils is that China is restricting the export of gallium and germanium.

The Chinese today produce 98pc of the world supply of primary gallium. The figure falls to 80pc for purified gallium used in industry, but you cannot reach that stage without access to the raw material. This is the metal that China has chosen to target along with its sister germanium, 31 and 32 respectively on Mendeleev’s periodic table. It won’t be the last.

Many are getting very worried over this. No one should be very worried over this.

One set of reasons is technical. The raw materials to produce the two are, respectively, Bayer Process residues and fly ash from coal burning. Here’s a list of those plants that extract alumina from bauxite, that Bayer process. Stick the right doohickey on the side of any of those plants - very few currently have one - and get gallium. Very, very few think that there’s a shortage of fly ash in the world. Both can also be extracted as byproducts from certain zinc ores.

There is simply no shortage at all of the base materials. All that’s ever needed is the willingness to actually process them out of extant resources. So, not a large problem then. China’s the major supplier because it’s willing to do it cheaper than others and when that’s not true then China won’t be the major supplier.

We can prove this from experience. Back in 2010 China tried something similar with the rare earths. As one of us predicted - to predict these things, in print, is more impressive we feel than simply historical pointing - that this would not be a problem. Four years later it was agreed that we had made the right prediction.

It’s also possible to appeal to another set of reasoning, away from the technical details of these markets. Which is that if anyone tries to exploit a contestable monopoly then the monopoly will be contested. The only way you can keep a monopoly position that could be contested is by not exploiting it for reasons of profit or power. That is, if you have a monopoly over the production of something just because you do it well, or cheaply, or subsidise it, then the moment you raise your price to profit from your control then everyone else is going to roll up sleeves and go back to doing it themselves. Slightly more expensively than when you were doing it, true, but less expensively than your attempt to exploit.

Which is indeed what happened with rare earths. And will also happen with gallium and germanium. And, as we insist, every other contestable monopoly. It’s the very attempt to capitalise upon that monopoly position that motivates everyone to break it. And precisely because it is contestable the contestation will work.

It is true that Gerry Wise is no longer with us to guide the germanium factory (Gerry being perhaps the tail end of that Finchley area metals industry described by Oliver Sachs in “Uncle Tungsten”) but as it happens one of us has the plans for a germanium extraction plant on a desk somewhere - fly ash from a lignite plant to produce perhaps 4 tonnes a year (say, 2% of global demand. About). If anyone’s unconvinced by the explanation above about why not to worry they can just send a blank - but signed please - cheque and we’ll get on with it.

Or perhaps more sensibly, leave those who know what they’re doing to contest that monopoly that China is trying to exploit. As we insist, it will be successfully contested.

The NHS guarantee card

The announcement that private facilities are to be used to provide some healthcare services without charge to NHS patients is an important step on the road to improving the NHS. More such steps should be taken

All UK citizens should be given an NHS Guarantee card, like a credit card, that guarantees them free treatment. Their Health Guarantee card must give whoever treats them full access to their health records, previous treatments, together with any previous or current conditions. It must cover the cost of their treatment, funded by the state.

In the event of any delay in access to treatment in the public health sector, the card should be valid for private sector treatment, with a cap on costs similar to those widely used in automotive and housing insurance. Such caps should be subject to periodic review by the Department for Health and Social Care.

With the funding of healthcare covered by social insurance, the delivery of healthcare should be provided by a mix of public and private facilities paid by the state or private insurers on the basis of the treatments they deliver. GPs should be paid according to the number of times they see and treat patients, with in-person consultations paying more than video or telephone meetings. Doctors would be paid for providing healthcare for patients, rather than for having them on their books, which is the current system.

Similarly, hospitals and consultants should receive their funding according to the treatments they provide. The government should make contracts with them to provide healthcare on an agreed basis.

GPs, consultants and hospitals should be given their independence through a wider rollout of NHS Foundation Trusts, rather than being managed by a centralized bureaucracy. They should compete to provide treatments, to attract patients, and might be encouraged to specialize in doing what they do best.

There should be tax deductions for those who use supplementary private insurance to save the state money and resources. This happens in Australia, where most people take out private cover in addition to the state’s Medicare programme that guarantees them treatment. Since the private insurers cannot take into account the current health status of the applicant, the risk is pooled.

UK doctors are leaving in significant numbers to go to Australia, some as soon as they have finished their qualifications. Yes the changes outlined herein could potentially make the UK’s NHS as efficient, as attractive, and as popular as healthcare in Australia is.

How dastardly of those epicanthic'd, communist, foreigners

Apparently Chinese competition in electric cars is worrying the Germans:

German car makers must do more to make electric vehicles cheaper and more appealing because manufacturers are losing out to China, the head of Berlin’s top group of economic advisers has warned.

Monika Schnitzer, chair of the Germany’s Council of Economic Experts, said car makers needed to “get their act together” and “do their homework” as people increasingly turn to cheaper Chinese-made cars.

Our word. People on the other side of the planet have worked out how to do something - it matters not what it is - better than those closer to us. That those far foreigners look a little different, don’t share our political system, speak wildly different languages, matters not. For trade, just trade alone - the freedom of the individual to buy whatever it is from whoever the individual cares to alight upon - means that the local capitalists are forced to rip us off a little less.

For that is what is happening here. And it doesn’t matter a fermented mung bean why those Chinese are making cheaper cars than Germans. Chinese government subsidies, simple skill, application, lower wages - all make no difference to the important point here. That there is competition in electric vehicles forces those German - and every other in the world - factories to up their game and make better and cheaper. The beneficiaries are, entirely obviously, us. Us consumers, us going about our daily lives.

As we’ve recently noted people will try near any argument to show that trade’s a bad idea. And yet think about this. Every producer of everything is, all the time, forced to compete with those who are the best in the world at doing that thing. Which is why things just get cheaper and cheaper for us out here the people the economy ought to be run for. You know, us, the people.

True, a problem with Chinese cars could be that we’d just want another one an hour later but if they’re cheap enough why not?

Ahistorical, economically illiterate nonsense

Jason Hickel is out there again, trying to prove that it was capitalism and markets - through colonialization and oppression - that caused the poverty of the past. Before that all were Breughel peasants straight out of a painting, dancing happily with their abundant harvests.

The aim of this is to prove that capitalism causes - actively creates - poverty and that therefore socialism works. Of course.

The new paper. And as they say it depends upon the earlier one here. The major claim is:

The rise of capitalism from the long 16th century onward is associated with a decline in wages to below subsistence, a deterioration in human stature, and an upturn in premature mortality.

All adults should admit that our economic numbers over this time period are estimates, derived from proxies. We know they’re not accurate even as we somewhere between hope and insist they’re around and about right. But perhaps they’re not? Possibly Professor Hickel has done us a great service by calling attention to their failures? At which point, abacii out and let’s try to get them right this time then, eh?

Well, possibly. Though first we should get all Worstall on the Hickel Thesis. Which is to accept the workings and the thesis. Then ponder what should also happen if it is all true. The absence of that other thing which must - that is, must - also happen would show that there’s some problem in those workings.

That thing which must also happen? The population must shrink. Because that’s what below subsistence means. Hickel himself uses it, a family of four can survive. Thus two adults can raise two children who then go on to have children - the very definition of what is necessary for the population to remain of stable size.

Actually, we need more than this because of child deaths, infertility and so on but two make two make two on average is necessary for that stable population size. And that is also the definition of subsistence income. One below subsistence is one where the population is not even replaced. That is, population must fall.

No one at all doubts that for periods the general population was below subsistence, we do have periods of falling population. Similarly, no one at all doubts that parts of the population were below subsistence for long periods of time. London’s population never did replace itself for centuries, it always did depend upon immigration - but for reasons of disease more than poverty.

But Hickel’s claim is that in general the population was below subsistence for the centuries from the beginnings of capitalism - that long 16th century - up to the 1880s in N Europe and well into the 20th century in Asia and other parts.

Well, that’s easy enough to test. If that is true the global population must have declined over that time period. Because that’s just what the mass of people living below subsistence means.

Ah. Global population quintupled over this time period. As did the population in Asia. As, near enough, did the other measured subsets, that in Africa, the Americas and so on. It is not possible to have 5x the population if everyone has been living below subsistence for those centuries.

Therefore the Hickel Thesis is wrong. The true intellectual masochists can worry about why he’s wrong, where the short circuit in his abacus is, and the rest of us can muse over the errors of allowing the anthropologists to do numbers and then go do something more interesting.

When’s the footie then?

It's amazing what people will try as a protectionist excuse, isn't it?

Chinese electric cars imported to the UK to help hit net zero targets will enable Beijing to spy on British citizens, ministers have warned.

With car companies facing quotas for zero emissions sales from next year ahead of a ban on new petrol and diesel vehicles in 2030, China is predicted to dominate the UK market because of its prowess in providing cheap electric cars.

However, sources at the heart of government have raised concerns that technology embedded in the vehicles could be used to harvest huge amounts of information, including location data, audio recordings and video footage, while also being vulnerable to remote interference and even being disabled.

Meanwhile, a cross-party group of MPs warned the Government that Britain is poised to cede control of the “critical infrastructure” of its car market to Beijing “with all the attendant security risks”.

Therefore - and we have no doubt at all that this will be next - Jaguar Land Rover must be subsidised so that the Indians can have the data instead. Or Ford, so the Americans, BMW the Germans and so on. Or, for the truly weird, there will be an insistence that British Leyland be revived.

Because Johnny Foreigner might find out that location - a British car is being driven in Britain - therefore cars in Britain must be vastly more expensive through either the taxes to pay subsidies or the banning of the cheapo version made by J Foreigner.

The actual answer here is for government to butt out. Anyone worried that the sojourn on Lover’s Lane is being tracked in Guangdong won’t buy a cheapo Chinese. The rest of us can get on with our own trade offs over data, cost, privacy and the rest.

After all, it’s probably better that someone on the other side of the world has that Lover’s Lane tape than someone inside our own government, isn’t it? Shenzen really isn’t going to care while locals might well try to use it.