Foreign Aid Reimagined

Rachel Reeves plans to cut almost £2 billion from the foreign aid budget. The Chancellor is preparing to let spending on aid fall to 0.5 per cent of gross national income after two years, a drop to a 17-year low. This has aroused Cabinet opposition.

The Adam Smith Institute has already told the Chancellor how to deal with this, but it seems she might not have been paying attention. In my Overton Window piece I pointed out that in addition to the aid publicly provided by the government, the UK should calculate the amount of aid sent in remittances by people to their families in the countries they originally hailed from. 

This frequently exceeds public sector aid as a proportion of total aid. The UK’s foreign aid should thus be declared as the sum of public and private aid.

The US is often criticized for giving relatively little in government aid, but the inclusion of private aid makes it clear that it is among the most generous nations in helping those in poorer countries.

The UK could increase the amount of private aid that is remitted to families in poorer countries by allowing it some measure of tax deductibility. This would increase the number sending it, and probably the amount that they send.

Private foreign aid is better in one important respect in that it goes directly to people instead of being filtered through governments and bureaucracies. Private aid is less likely to go to fund space programmes, or to fund gold bathtubs in presidential palaces or to buy tanks. Remittance has been shown to circumvent corruption-induced deadweight loss.

The Chancellor should include private aid in addition to government aid and strive to increase the former by giving some tax breaks to that given through reputable and regulated agencies that transfer funds internationally. It should prove to be an attractive prospect to a Chancellor who is no stranger to redefining things.

Liam Byrne is making a structural change on cyclical grounds

No good ever comes from this sort of thing. There are indeed swings and roundabouts in the economy and policies to deal with swings and roundabouts are fine. There are also structural issues in an economy and policies to deal with structural issues are equally fine. But imposing structural policies to deal with swings and roundabouts is one of those things likely to fail. As is the other way around of course.

But that is what is being done here:

A failure by Rachel Reeves to back a “windfall of wealth taxes” in her budget risks fuelling the rise of the populist right, a former Labour ­cabinet minister has warned.

Liam Byrne, a senior figure in the New Labour government and chair of the Commons business and trade committee, said that the rise of Reform UK at the last election meant the chancellor and Keir Starmer must urgently consider raising funds to deal with inequality.

The bit about Reform is just a bit of polish on the log of the argument. Which is really this:

The average wealth of the top 1% has risen by £2.2m since 2010, about 41 times more than the rise in average wealth of the rest of society, according to new research commissioned by Byrne for the updated version of his book The Inequality of Wealth: Why It Matters and How to Fix It.

Wealth inequality has increased we must tax to reduce it.

Now, we have our mutterings about wealth inequality. We insist that it’s badly, wrongly, measured. For absolutely nothing the State does to reduce it is counted as reducing it. The old age pension, a below market rate tenancy, free health care, they all reduce wealth inequality substantially. Except, they don’t reduce it one iota the way we measure wealth inequality. So we don’t believe a single word that comes out of the fork-tongued mouths of those talking about wealth inequality.

But this is rather simpler, the mistake here.

Since 2010 we’ve had a deliberate attempt to increase the value of assets. That’s what quantitative easing was - reduce the return on risk free assets, push people into taking more risk in search of yield, increase the capital value of assets producing a yield and thereby expand wealth inequality. QE was deliberate policy and that’s what that policy was - we want to increase wealth inequality so that people do more investing in creating wealth.

This is now being used as an excuse to tax wealth more? Really?

Further, we’ve already started quantitative tightening. Which raises the return on risk free assets, reduces the attraction of risk bearing ones and so lowers the value of those assets - QT deliberately and specifically reduces wealth inequality. We have, that is, already solved this pitiful excuse anyway.

The rise in wealth inequality is a cyclical change resulting from monetary policy - one already in the process of being solved too. But it’s being used to lead to a structural change in capital taxation. No good will come from applying policies for the wrong reasons.

That’s before we get to the idiocy of the policies themselves of course.

Hmm, what’s that? Liam Byrne is a politician you say? Ah, yes, we’d forgotten that and him. Well, no wonder it’s bad economic policy then.

Tim Worstall

Why not just burn it all?

Used plastic that is:

The inevitable consequence of this simple messaging is that the retailers have to do more work: the plastic has to be sent for sorting because we are not sorting it for them. The valuable, high-quality material they are looking for (uncontaminated mono-material) is recycled, while the rest is likely to be incinerated or downcycled. That is a bitter pill for the public to swallow, when they have so diligently brought their plastic back. But it is understandable that the messaging usually takes the form of “please bring your plastic here” rather than the perhaps more truthful (albeit depressing) “we burn some of this”.

So where is the plastic sorted? Often in other countries where sorting by hand is cheaper. Once sorted, some soft plastics might be incinerated to generate electricity because it is not economical to recycle them, others are downcycled into bin liners, or the melted plastic is compressed to make alternatives to wood. This is not necessarily a bad thing, because soft plastic we have used once may be downcycled, or redeployed in place of a raw material. It is important to note that soft plastic is often deemed unsafe for reuse as food packaging because of Britain’s high safety standards.

Why bother with all of this? Given that lots of that plastic is burnt, why not just burn it all? For given the costs of that sorting - or that shipping to cheaper places to sort - we refuse* to believe that the “valuable, high-quality material” is in fact valuable.#

We’ve made this point a number of times over the years:

We put our mix of rubbish in the right bins,…. the economics make it difficult to justify the significant cost of collection, transportation and processing.

So, don’t. Recycling things where recycling them adds value is just great, it adds value. Recycling things where value is being subtracted just makes us poorer. So, why are we doing this? Why not just burn the stuff? And other than incantations about worshipping Gaia we’ve never had anyone give us an explanation as to why not. Perhaps someone would like to try?

*See what we did there?

To remind the government - jobs are a cost not a benefit

The current government is firmly grasping the wrong end of the economic logic stick. Like most governments most of the time of course but still. We think we should point this out:

I am determined to deliver that change. But I know it can only happen if we bring investment back to Britain. Investment that can reignite Britain’s industrial heartlands to create good jobs in the industries of the future – like wind power and solar. And this includes carbon capture and storage. That’s why today we have announced up to £21.7bn of funding over 25 years to launch this major new industry for our country in a new era for clean-energy investment and jobs.

Leave aside the whole carbon capture and storage idea (which means we don’t have to address the silliness of it) and concentrate just on that comment about jobs from the Chancellor. As with this from the Sec of State for Expensive Energy:

With Labour, climate action means investment in good jobs.

Jobs are a cost, not a benefit.

Yes, obviously, everyone likes things to be produced. Everyone likes to have access to that production which does, more often than not, require having an income to gain that access. But it’s still true that jobs are a cost.

For those who have to do the jobs a job is effort that must be expended. For those trying to get the work done of course a job is an expense of that. For society as a whole a job is a cost too. Human labour is an economic resource, there’s also a limit to it and therefore it’s a scarce resource. We’d much prefer to have the production while economising on the use of such scarce economic resources.

Jobs are a cost of getting something done, not a benefit of doing that thing.

Adding jobs to the energy supply system - or to our anti-climate change efforts - is adding costs to our energy supply system - or anti-climate change efforts. As we’ve already the most expensive energy in the rich world and the cause of that is our anti-climate change efforts adding these jobs just increases our basic problem.

Yes, obviously, we’ve issues with the policy itself. But is it really too much to ask that the government of the country grasps the most basic of points about economics? Jobs are a cost…..

#Juststoptoil - Sorry, but we despise agroecology

The hashtag #Juststoptoil has a lot going for it. Started - at least we think so - by Jusper Machogu the aim is simply that basic aim behind having an economy, a civilisation, at all. To gain more output from less human labour. Therefore we’re all richer, as for each hour of human labour it is possible to enjoy more consumption. Jusper illustrates this with scenes on the ground from farming in Africa. The weep inducing toil and labour that has to go into making a living as a peasant that is.

Thus:

Which is why - and we’re sorry about this and all that - we so despise agroecology.

From degraded fields being brought back to fertile life to community gardens flourishing as food co-operatives, a growing revolution is happening in countries across the African continent.

The climate crisis, conflict and the dominance of multinationals with industrial-scale production for export have popularised the concept of agroecology – promoting small-scale farming and farmers, protecting biodiversity and adapting traditional methods that do away with the need for chemicals and expensive fertilisers.

Now, better ways to farm, of course, delightful. Varying crops, cassava as well as corn - or cabbages, courgettes and cauliflower as well - and why not? Diversifying, increasing, incomes is just great.

However, that insistence upon traditional methods - that means peasant farming. That insistence upon small-scale - that means peasant farming. And the peasant farmers’ lot is an unhappy one - one packed with toil.

For we hit a basic truth here. The income - standard of living, lifestyle - that can be enjoyed by doing something has a hard upper boundary. Which is the value created by the doing of that thing. And peasant farming doesn’t produce much value.

For example, the corn (maize to us Brits) price seems to be $170 a metric tonne. -ish. Maize yields in Africa - without that fertiliser, those expensive chemicals - seem to be around 2.1 tonnes per hectare. So, the quite literally backbreaking work of raising 2.4 acres of corn is worth $350 or so. That’s the upper limit of the lifestyle possible from the peasant farming of a hectare of corn without chemicals and fertilisers in Africa. And, you know, that’s not a lot. You’d need 5 acres - a large peasant farm - to even reach that minimum standard of absolute poverty of $2 -ish a day. For one person.

Yes, yes, it’s possible to diversify. Modicums of other crops and so on. But the base insistence is still true. Peasant farming - which is what “small-scale farming without fertilisers and expensive chemical inputs” is, by definition - leaves the farmers living as peasants. Vast toil to live in what we all define as abject poverty.

We’re all fine with the idea that African farming could, should, improve. That the incomes of African farmers should increase, that the income to toil ratio should improve in the farmers’ direction. But that just does mean that more fertiliser, more chemicals, more machines and larger farms are required. Those larger farms - and thus fewer farmers - will be the inevitable outcome of that replacement of toil by its substitutes as well. And won’t that be fabulous? Hundreds of millions will be able to move - as we all have - to indoor work, no heavy lifting, and the remaining farmers will be ploughing, by tractor not hand, the acres to feed them. Glory, they can become as rich as we are.

And that’s why we despise “agroecology”. Because that insistence upon small-scale, no chemicals, no fertilisers, farming is exactly what will condemn those hundreds of millions to an eternity of peasant farming - and, ineluctably, an eternity of peasant poverty.

#Juststoptoil - it’s the entire point of our having an economy, a civilisation, at all.

The people who don’t buy houses also drive prices

The two worst commentators on British housing are tag teaming each other. Nick Bano quotes Phineas Harper from The Guardian:

Twice as many new homes have been built in London in the past decade as the number of households added to the city’s population, yet average property values in some areas have almost doubled. In some places, rents have even gone up as populations have fallen

This is the heart of the idiot argument. Prices rise if more people buy houses in an area. If there are more houses built than people buying them then prices should not rise, right?

Therefore all this nonsense about supply and demand is wrong and….well, apparently and everyone get to continue living in rabbit hutches or some such.

The error is obvious to us select but if you’re a lawyer, or called Phineas, we’ll help you out with the obviousness.

Prices are driven by the interface between supply and demand, not by the number of completed contracts. Completed contracts, of course, give us the strike prices at which contracts were completed. But the number of contracts that complete - the number of added households actually added - is not the driver of house prices. The number of people - and how much money they’ve got, clearly - who wish to complete such a contract is what drives house prices.

Measuring housing demand by how many - at absurdly high prices - actually buy houses is absurd. What drives demand and thus prices against that badly limited supply is who would like to buy houses in those places. Thus to declare that there were only so many extra households and therefore demand is met by that limited supply is absurd. Prices, the third moving part of the system, are screaming out that there’s large unmet demand. This is why prices have risen to allocate that scarce supply.

That prices have risen tells us that more people would like to have a house in such areas than are able to. Using high prices themselves to insist that demand has been met, well…..sure, the demand at those high prices has of course but what about the demand that is there at lower?

Sure, yes, we’re great with people noting that supply and demand thing, it is indeed important. But managing to get it entirely the wrong way around - measuring the number who complete on limited supply rather than using price to tell us about supply and demand - is not a great step forward. Could we recommend that people called Phineas - and lawyers, obviously - have a look again at pages two and three of any basic economics textbook?

No, not page one, that’s the copyright note.

Tim Worstall

Buy America! Number Go Up!

No, really, cash in the cat’s ‘nip mousie collection and everything before that to collect all the munnies possible*. Then buy, buy, buy, Americans. Stocks, bonds, ETFs, anything you can get hands on.

It’s obvious, innit?

Imports reduce GDP. We all know the equation:

GDP = C + I + G + (X – M)

Well, there we are, it’s in the textbooks. M is imports, the sign in front of it is a minus sign, imports reduce, detract from, GDP..

Therefore, clearly, the economy does better, GDP rises, when imports fall.

The US has a ports strike. Two of the three coasts (Atlantic and Gulf) are closed down, locked tight. There will be no imports through those ports. America is going to get so much richer as a result of imports falling. Thus US stocks, bonds, collective investments, are going to soar. Imports are around 16% of the US economy - GDP’s going to rise by 16%, right?

Heck, sell the cat to be able to cash in here.

Well, why not?

*It’s possible there’s a certain ridicule in play here.

Spend all of everyone’s money on me. No, me. ME!

The shriek of every producer group interest ever, everywhere:

Ministers should aim for 70% of young people to continue their education after leaving school by 2040, while tuition fees in England should be increased, according to the leaders of UK’s universities.

The “blueprint for change” published by Universities UK (UUK), which represents vice-chancellors, wants the 70% target to be supported by grants paid to disadvantaged students and a new “tertiary education opportunity fund” for areas with low rates of university and college enrolments.

The blueprint makes a string of other recommendations, including a plea for the government to restore financial stability for universities by ending attacks on international student numbers as well as boosting funding for teaching and research.

More should go through tertiary education - academia can wax fat off the fees - those in tertiary education should pay more - academia can wax fat off the fees - government should pay the fees of more people - academia can wax fat off the fees - more international students paying full freight should be allowed - academia can wax fat off the fees - and taxpayers should stump up more money to boot in order to bloat those not already waxing fat off the fees.

As we say, every producer group ever, everywhere. Spend all of everyone’s money on me.No, me. ME!

This would work rather better in this instance it it weren’t for this:

42% of university-educated workers outside London work in a job that does not require a degree, up from 31% in 1993. The share is highest in Lincolnshire and Cumbria, where more than half of graduates work in non-graduate jobs (58% and 52%, respectively).

We can check this against the ONS numbers. About right. Some half of the people who have a degree do a job that doesn’t require a degree. And that’s before we start counting how “degree required” has slithered down the competence scale to where even journalists - no, really journalists - are expected to have one.

The information from reality is that the tertiary education system should be - at minimum - slashed in half from its current size. Which is a bit of a problem for those academics who would wax fat. You know, this science thing? Take our cues from the reality outside the window, facts and all that?

No, really, it’s a significant problem. Not just that the demand is contraindicated by that reality but supposed academics so ignorant of the reality aren’t worth supporting with any of our money, are they?

Shall we say a 75% haircut then? Any advances on that?

Tim Worstall

Fiscal rules are entirely unimportant except they’re vital

This might not be the most accurate, in detail, piece of economics ever but it is still a good guide:

Rachel Reeves’s “opportunistic” attempt to rewrite Britain’s fiscal rules ahead of the Budget risks causing a surge in interest rates, a leading think tank has warned.

The Institute of Fiscal Studies (IFS) said any move to alter the Chancellor’s self-imposed fiscal rules “would not be without risks”, which comes ahead of her maiden Budget in October.

Ms Reeves is considering the change to unlock up to £50bn for spending on large-scale projects such as roads and housing, as the Treasury seeks to “count the benefits of public investment and not just the costs of it”.

It’s wholly true that to borrow to invest in an asset which will then produce a return is different from borrowing to pay current expenses. Creating that weapon that will fully keep the French at bay for a century will pay dividends in a manner that spending to raise train drivers’ wages will not. Therefore lenders (or if we wish to adopt the rather fanciful claim of some on the foolish left, those who wish to partake in the savings opportunity being offered by government) will be happy with a higher multiple of cashflow available to service the debt if it’s being invested not splurged. This is why you can get a mortgage for 4x income and not an overdraft for beer consumption for 4x income.

Switching about the fiscal rules to make this more obvious makes little to no difference - it’s just playing accounting games and lenders are immune to that sort of nonsense for they make their own estimations. Borrowing to invest (but not to “invest”) will not spook the markets.

However, fiscal rules are also vital. Not particularly for any economic reason but for reasons of political economy. Taxing is hard, spending is joyous. Therefore politicians have a propensity for spending the (insert word of choice here) out of everything and not taxing to cover their joy. Fiscal rules are a self-imposed constraint upon this political fact. Changing the fiscal rules is the statement that we’re not going to accept this self-imposed constraint. Lenders (or, to taste, savers with the government) will therefore likely ask for a little more interest - or more accurately, only lend (save) if they are offered more interest - if the fiscal rules are changed for what look like political reasons. Because spending the (insert word of choice here) out of everything becomes more likely along with the future debt and interest burdens, an increase in inflation from the stimulatory effect upon the economy and so on.

Fiscal rules don’t matter except they’re vital. Odd but true.

We also have a stock of approaching £3 trillion in government debt - before we even start to think about pensions obligations and so on. A change of 1% in the interest rate demanded (or, the interest rate at which people will save with the government) thus costs £30 billion a year. A 1% change in the rate on gilts would be a huge change and is unlikely from the being discussed tweaks to the fiscal rules. A belief that the current government really was going to spend the (insert word of choice here) out of everything could change it by that and more. It’s also true that that higher rate would only kick in as the stock of gilts matured and was reissued - but the long term effect would still be there.

A tweak to produce £50 billion more to spend now at the cost of £30 billion a year forever doesn’t look hugely clever if we’re honest about it. Even if that £50 billion is invested, not “invested”.

No, we’re not saying that tweaking the rules is going to move gilts interest by a full percentage point. That’s a deliberately exaggerated example of the logic, nothing more. But insisting upon spending the mortgage on beer is likely to increase the interest that has to be paid all the same. Of course, of course, the current po-faced lot won’t spend the cash freed up on anything so useful as beer. But we really do still face this problem or point. Borrowing to invest in productive assets has its merits. So, interest rates will move by however much the lenders believe the money will be spent upon productive assets and not beer, train drivers’ wages and so on.

And do recall, money is fungible. So it’s not actually how much of the extra borrowing is invested (not “invested”). The view is going to be about how much of the average £ is invested not “invested”.

You see the problem?

Tim Worstall

Start again everybody - all economics is wrong

No, really, scientists tell us so:

Neoclassical economics (NCE) theory and neoliberal economics practice together form one of the principal driving forces of environmental destruction and social injustice. We critically examine ten key hypotheses that form the foundations of NCE, and four other claims. Each fails to satisfy one or more of the basic requirements of scientific practice. Hence, NCE is fundamentally flawed, is irrational in the common meaning of the word, and should not be used as a guide for government policies. Because NCE is socially constructed, it can be replaced with an interdisciplinary conceptual framework that is compatible with ecological sustainability and social justice.

Well, there we are and doesn’t that just tell all of us. That the sort of references they use are the American Prospect, Jason Hickel - one paper of his insists that the population was on less than subsistence incomes in a century when population tripled - Naomi Klein - she who insisted that more expensive Canadian solar cells would increase the installation of solar in Canada - and Steve Keen* could mean that we’re not going to pay much attention to this tripe but we should, in fact, take the idea seriously.

For this is a common enough claim. Some or all of the base claims - rational consumers, utility maximisation say - are not true of all people in all circumstances. As we know any scientific theory is destroyed by just the one ugly fact. Therefore neoclassical economics fails. And Yah Boo Sucks! and the Commissar will tell us when we may nibble our raw turnip.

The failure of this contention is that neoclassical economics is not a scientific theory. Thus it is not something to be proven - or subject to disproof - by the scientific method. As Brad Delong has been pointing out, correctly, for decades neoclassical economics is a toolbox we can use to explore human interaction, human responses to incentives and so on. Often enough it will give us some guidance as to how to achieve a goal. Or, more inconveniently for planners and politicians, the likely result of certain actions. But that is what it is, a toolbox.

Within that toolbox there are models that assume irrational consumers if that’s what we want to study - say, the market for Pet Rocks**. Similarly we can drop the utility maximisation - as many models do, assuming statisficing instead. That is, within the toolbox are many tools, many models, and the trick is to use the screwdriver when dealing with a screw and the hammer with a nail. It’s never “the toolbox is right” it’s “which is the right model right here, right now?”

To put this in terms these social ecological scientists might understand. All physics is wrong. There is no unified theory of everything. Newton’s just great for tracking a cricket ball or getting to the Moon. Using Newton to get to Mercury will have you crashing into it, not landing - at this point we need to use Einstein. As we also do with GPS. Neither Newton nor Einstein are going to get quantum computing working - to be fair, nor might anything else. But, of course, we don’t say that physics is wrong because we have to change models and explanations at times. We say that the models, explanations, are useful at times and not at others - we can track a cricket ball, get to the Moon and Mercury, GPS does work and quantum computing, well…. real soon now no doubt.

Neoclassical economics - neoliberal if you like - tells us that if we tax foreigners who live here really a lot they might leave the country. Or, that some will and some won’t to be slightly more precise. Which means that attempting to tax foreigners who live here really a lot might increase tax revenues by a couple or three billion £, might actually reduce tax revenues by a billion £. Which is a useful thing to know really, as we consider whether to tax really a lot foreigners living here. No, really.

Neoclassical - neoliberal - economics is useful. Which is what we ask of tools and a toolbox after all. The usefulness does not depend - as with models of physics - upon whether it’s a scientific theory which explains all. The usefulness depends upon whether the model is useful.

Tim Worstall

*Keen once insisted to one of us that as we never do have truly infinite suppliers - correct - therefore no supplier is ever a price taker. That marginal production will, marginally, change the world price and so all are price formers, not takers. Thus all markets must be modelled as oligopolies, not free ones. Logically true but of no use whatsoever - for we find that markets with more than 4 or 5 non-colluding producers act more like the free market models than the oligopolistic ones. It’s never is the model wholly and accurately true, it’s is this model useful right here?

**The answer to which is that anyone not noting that humans value a couple of minutes cackling and silly joy is not noting something fairly important about human beings. This also explains Big Mouth Billy Bass - apparently a favourite of our late, lamented, Queen - and The Guardian’s Opinion page - so rumour has it, less of a favourite.