Crazy Brexiters

22/06/2016 1 Comment

It seems that in yesterday’s post, I failed to mention the main argument of the brexiters for why we should ignore the overwhelming economic evidence and vote Leave instead.

It seems to go like this (please correct me if I am wrong):

There are examples in history of an economist, or more than one economist, being wrong on something. Therefore we should ignore all economists now when they say that leaving the EU would be bad for the UK economy.

I’m not altogether sure this works as an economic argument, or indeed an argument of any kind. I think also, I have been quite generous to the brexiters with that summary. They aren’t actually asking you to ignore economists on the economic argument, they are actually asking you to look closely at the view of economists and then go out and vote for precisely the opposite of what they say.

Are economists alway right? Of course not and they often disagree with one another. Economic consensus on the scale that we see on brexit is actually fairly rare. This is in part because of the lack of any cohesive economic argument for brexit – there basically isn’t one, but also it’s a much simpler task we are asking economists to model here than we often give them. We aren’t asking economists to give an exact number on the size of the economy in five or 10 years time, just asking how it would be if we stayed in the EU relative to leaving. The majority of the variables and unknowns that you would need to get to a precise number cancel out when you are only comparing one aspect, (even if it is in this case a big one).

Of course, the argument from the brexiters against economists doesn’t stop there. Today Michael Gove, helpfully informed the public, that the economists’ motives are actually akin to those of Nazi sympathisers. 

I’ll tell you something – they really aren’t at all. I’m pretty sure the IMF, the OECD, NIESR, the LSE, the Bank of England etc are not heavily staffed by that kind of person and given how stupid a thing it was to say, we should perhaps leave it there.

Even if we do though, we are still looking at an economic argument with economists on one side and Michael Gove and Boris Johnson on the other. Like I say, the economic community’s economic forecasts aren’t always right, but I doubt they are less accurate than those of Aunt Sponge and Aunt Spiker.

8f11c695112aeec4917c90b7293bdc16

Look familiar?

I did say yesterday that I thought the whole referendum was a massive waste of time and while it is, it won’t for one second stop me taking the time out of my day to go to the polling station and voting to stay in. I did like Ben Goldacre’s conclusion on the same subject:

Just vote remain. It’s boring, there’s nothing awesome about it, but sometimes you have to take a break from useful productive work to stop idiots breaking things.

RedEaredRabbit

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Should I stay or should I go?

21/06/2016 Leave a comment

In recent weeks I’ve had quite a few people asking me my opinion about the upcoming EU referendum.

My opinion is quite simple – it is a massive waste of time and money. As I wrote when the referendum was first announced, the advent of a referendum would simply result in politicians and the media spamming the public with misinformation, making informed decisions impossible.

And that has of course happened, exactly as I said it would. Not that I want to take much credit for that prediction – we have been here before recently with referenda:

  • Changing the voting system to AV (2011)
  • Scottish independence (2014)

Politicians didn’t exactly come out of those looking like their mission was to responsibly inform the public.

But, I guess, “massive waste of time”, wasn’t exactly the answer that the people asking me were looking for. After all, like it or not, the vote is going ahead, so I’m sure they were asking my opinion on voting in or out.

It’s a fairly clear case for me – I will vote to stay in the EU.

THE END

…..

 

What, you want more? Dammit.

It’s a complicated decision, so I shan’t try to cover every possible aspect of EU membership, but I will try to cover a few that seem to be getting the most airtime and seem to be most important to people.

So let’s start with the economy. Would the UK be better off or worse off if we left the EU? You wouldn’t think so by listening to politicians and the media but this one is actually fairly clear cut. Leaving the EU would make the UK significantly worse off compared with staying in the EU and that is in the short-term, the medium-term and the long-term.

If you want to read about the analysis then have a look here:

As Chris Giles wrote in the FT, there is a huge consensus among economists that leaving the EU would be significantly worse for the UK economy than staying in and if you don’t fancy following the maths in all of those papers, you probably don’t need to anyway. We know that trade makes us all richer. Making trade harder makes us all relatively poorer. Leaving the single market makes trade harder. It shouldn’t surprise us that the maths check out, when the basic logic is so straight forward.

According to the Cameron and Osborne analysis the UK is in for a recession if we leave. That is certainly not certain, as you can see from the papers. What is certain is that we would be worse off when compared with staying, both in the short-term and the long-term.

 

Yes, the leave campaign can always find an ‘economist’ to tell people the opposite but this is right in the leagues of Sarah Palin finding a ‘scientist’ who says global warming is fiction, or the Earth is only a few thousand years old.

On this issue the evidence is overwhelming.

Ok, so let’s have a look at immigration, which I guess is the next most discussed topic. Does immigration make us poorer? Are we at breaking point? Again, the good news is that we don’t need to listen to politicians or tabloids because we have some good analysis on this.

What we know is that EU immigrants, on average, contribute more to the UK economy than their native born colleagues. We also know that, on average, they take out less in benefits that their native born colleagues. In short, immigration from the EU makes the UK better off and the numbers here are, again, not in dispute.

There are poor people in the UK and there are some significant factors that cause their poverty. As much as the leave folks would have you think it, immigration isn’t one of them.

Of course, there are also the nonsense stories that lots of people believe – 70% of our laws were made in the EU, we pay the EU £350m a week etc. I could spend five minutes linking to why those are nonsense but if you still believe them, then you are probably beyond help and you probably didn’t get this far into my blogpost.

The EU is far from perfect – the Common Agricultural Policy, for example, is a big pile of cow poo. It doesn’t mean that we should turn our backs on the EU, make trading with our closest neighbours harder, lose the benefits of free movement and free trade etc.

Those who tell you that we will be economically better off outside the EU, or that the UK is at breaking point due to immigration fall into two categories:

  • People wilfully misleading you for their own reasons (politicians, tabloids)
  • People who have listened to politicians and tabloids

The people in the first camp are no better than climate change deniers or the flat Earth society.

Do yourself a favour and don’t be in the second camp.

RedEaredRabbit

 

 

 

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Pre-Election Reading

05/05/2015 3 Comments

Hello there! I hope you are all well.

I haven’t had much time for blogging of late, for which I apologise. The good news is that there are plenty of better people than me still doing it. With the election almost upon us, I thought I would direct you to some things you should read before casting your vote. If you are thinking of voting for the current government based on their economic record then I urge you to read these posts before doing so. If you know someone who is thinking of doing that then point them in the direction of these posts before they get near a polling station.

Paul Krugman is a winner of the Nobel Prize in Economics* and his recent essay published in the Guardian says everything I’ve been trying to say for five years – but much better:

The Austerity Delusion

Simon Wren-Lewis is a Professor of Economics at Oxford University but also writes economic blogposts that everyone can understand. He recently wrote a whole series debunking what he calls the “Macromedia Myths” – the stories we receive every day from the right wing press and the government, stated as facts but, as he shows, clearly not based upon them:

Media Macro: Introduction

Media Macro Myth 1: Britain faced a financial crisis

Media Macro Myth 2: Labour profligacy

Media Macro Myth 3: The 2007 Boom

Media Macro Myth 4: The immediate necessity of belt tightening

Media Macro Myth 5: The long term plan

Media Macro Myth 6: 2013 recovery vindication

Media Macro Myth 7: The strong recovery

Media Macro Myth 8: Employment growth

Oh, and on the subject of Labour’s “overspending” you might want to look at what George Osborne’s spending policy was in the year before the financial crisis:

http://news.bbc.co.uk/1/hi/uk_politics/6975536.stm

Use your vote well on Thursday.

RedEaredRabbit

*Yes pedants, I know it is really called the “Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”

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Royal Fail

01/04/2014 2 Comments

Jonathan Portes, via Twitter, drew my attention to this article in The Telegraph by Tory MP, Douglas Carswell:

20140401-215636.jpg

The article is a fantastic example of how, no matter how bad the situation, politicians are able to rise above the usual constraints of fact, logic and evidence and carve out their own reality.

It is, of course, an article in response to the report that found that the government, when selling off Royal Mail, had substantially undervalued it.

In case you missed it, on the morning of 11th October last year, the government sold off Royal Mail. By the end of that day its value was £750m higher than that for which the government had sold it. It’s a bit like selling your car to your next door neighbour, only to find that, later on the same day, they’d sold it on to your other next door neighbour for much more.

While we won’t get the £750m back from Royal Mail’s new shareholders, at least with this government, we can easily get it back through cutting benefits for poor people. Hoorah.

Anyway, back to that Telegraph article:

Far from undermining the case against Royal Mail privatisation, today’s National Audit Office (NAO) report that suggests Royal Mail’s sell off was bungled actually convinces me that it the right thing to do.

That’s some logic that only a politician could come up with – if the government hadn’t bungled it, he would have remained unconvinced on the whole affair. But because they did bungle it, he is now convinced it was a good idea.

The basis for this “logic” is that because it was sold too cheaply, it proves that that government weren’t competent in knowing what to do with it, so it’s ok to sell it for much less than it is worth. That’s like saying, “I am rubbish at driving my Ferrari, so I should sell it for the price of a Nissan Micra.”

The article moves on, apparently now forgetting that it had previously said the sale was “bungled”:

Predictably, the NAO report is being interpreted as evidence that Royal Mail was sold off “too cheap”

In fairness, it is being “interpreted” this way because that’s exactly what it says.

The article then loses itself in a very muddle-headed analysis of what determines the value of a company. Essentially we are told, as the headline suggests, that the reason for the sudden and substantial increase in valuation was because the company was privatised.

This just makes no sense whatsoever.

A share price is essentially a measure of the market’s view on the future profits of a company. Occasionally a share price will increase substantially within a day but it happens when a piece of information becomes known that dramatically changes the market’s view of the future of the company. For example, if a pharmaceutical company announces that it has developed and patented a new drug that cures a common condition for which there was previously no treatment, then their share price might suddenly go up a lot. That’s understandable because the market expects their future profits to reflect this new piece of information.

On the day that Royal Mail was sold off, their new private status did not cause them to develop, patent and announce a new, substantially more efficient, way of delivering letters. The increase in share price was simply because the government undervalued the company when it sold it off.

So where did the money go? As we found out, a small number of investors in the City bought up a huge amount of shares and sold them on shortly afterwards, making hundreds of millions of pounds of profit. It really does take a politician to come up with the bizarre kind of argument given in this article to justify why it that money should have been profit for a few people in the City rather than money for the public purse.

If the government were now holding their hands up and admitting their mistake, while simultaneously apologising to the poor people, whose benefits are now being cut, we could at least give them credit for being honest.

Predictably (hey I can use that too), it’s smoke and mirrors time and if this is anything to go on, the government’s smoke and mirrors are looking thinner than ever.

RedEaredRabbit

 

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Time for Plan B

08/03/2014 Leave a comment

It’s probably not controversial to say that politicians change their minds a lot. Nick Clegg, for example, found little difficulty in voting to increase tuition fees shortly after he’d happily been photographed doing this:

A pre-election Nick Clegg

It’s easy to pick out Nick Clegg over such inconsistencies (in fact it’s fish, barrel, howitzer time) but this is undoubtedly a common trait amongst politicians. Let’s look at another.

SNP Leader and Baron Greenback doppelgänger, Alex Salmond once described the pound as “a millstone round Scotland’s neck”. These days though he’s desperate to keep it. These days, we are told, that Scotland losing Sterling would cost British businesses hundreds of millions of pounds.

It’s a pretty big change in his position, so it’s worth asking why that change occurred.

Before that though, I feel I obliged to back up claim that he looks like Baron Greenback from Dangermouse:

Alex Salmond

Alex Salmond

Baron Greenback from Dangermouse

Baron Greenback from Dangermouse

Uncanny, no?

Back to the question. Why has his position changed so much? Economically this is hard to answer. While different currency options have different pros and cons, those pros and cons don’t really change a huge amount over the long term*. When Alex was strongly in favour of Scotland scrapping the Pound in favour of the Euro, he didn’t mention those lost hundreds of millions of pounds that are now such a problem.

Unsurprisingly this has nothing to do with economics and everything to do with politics. The past six years have not been kind to the public’s perception of the Euro and while such a policy might once have been a vote winner, today it would be a huge vote loser. The experience of close neighbours, Ireland, (amongst many other Eurozone economies) has been hard for Scottish voters to miss. Here are unemployment rates as one example:

UK & Ireland Unemployement (Source: IMF)

UK & Ireland Unemployement (Source: IMF)

Alex wanted the Euro when he thought it would gain him more popularity for independence and today wants Sterling for the same reasons. Not that that makes him any different to any other politician but it is important to understand that all of this has a lot to do with politics and not a lot to do with economics.

In any case though Alex’s new found love for The Pound is fairly immaterial because, as we’ve seen, there seems to be very little motivation from the rest of the UK to enter into a formal currency union with an independent Scotland. While this has generated much ire from Alex, it’s worth putting this position into perspective.

An independent country cannot demand than another country enter into a formal currency union with it  Unless both countries want to do it, it won’t happen and, to be fair, it shouldn’t happen.

Alex, as an expert on independence, should probably realise he can’t just pick and choose which aspects of independence he wants and which he does not. He might want The Bank of England to continue to act as Scotland’s central bank but, in the case of Scottish independence, that’s simply not a demand he can make.

Given this, it’s surprising is that he doesn’t seem to have any “Plan B” on the matter of what currency an independent Scotland would actually use. With six months to go until the vote, this looks more than a little disorganised. So what are the options for “Plan B”?

Essentially there are three:

Option 1: Dollarisation

Scotland could continue to use the pound as their currency without any formal monetary union. Several countries already do this with the Dollar (hence the term Dollarisation for using a foreign currency), such as Panama and El Salvador. Several also do this with the Euro, such as Monaco, Andorra and the Vatican City. Scotland would be, comparatively, a very big economy to try this out but it is definitely an option. There are some serious disadvantages of it, one of the big ones being that if, as a country, you have no control over your currency, you can go bust.

As an independent country, Scotland would start out with debt of around 80% of their GDP and with no control over their currency, markets would be unlikely to want to give them more very cheaply. Additionally, given recent history, the Scottish financial sector, dominated by RBS and HBOS, is unlikely to want to remain based in a country where they have no lender of last resort. NIESR go into the whole dollarisation thing in more detail here but it’s probably fair to say that:

a) To go down this route there would be an awful lot of details to sort out before September

b) Although workable, there are additional risks in dollarisation over the current system, some of which are material

Option 2: Adopt the Euro

LOL

Option 3: Create a new Scottish Currency

In this scenario, Scotland would set up its own central bank, print its own currency and have full control over both its fiscal and monetary policy. Unlike the other options, it would be economically independent. The down sides would be that the new currency was likely to be more volatile than the pound and there would be costs involved in cross-border transactions between Scotland and the UK when converting from one currency to another. There’s no reason to think that either of those would be an insurmountable problem though – neighbouring countries throughout the globe have used different currencies successfully for a very long time. Additionally markets wouldn’t panic about an independent Scotland using a foreign currency as they’d control their own, so Scotland would be able to borrow at reasonable (albeit higher) rates without being seen as a default risk. I really can’t see any reason why Scotland couldn’t do this successfully and it seems to me by far the cleanest and most workable (not to mention the only “independent”) of the three options.

As I mentioned earlier though – the economics of the debate aren’t taking centre stage (on either side) and, to be honest, it is worth asking whether they should anyway. If Alex Salmond could just communicate a sensible currency policy to the Scottish people we could then just move on to what the debate is really about…

Is it about other economic things?

No it’s not. An independent Scotland would certainly have the ability to operate successfully. Would they be on average better off or worse off? Despite what George or Alex tells you, I doubt there would be a big difference – there’s little evidence to suggest that things would vary much either way.

Is it about political things?

No it’s not. A “Yes” vote would mean Alex Salmond being in charge (and he is clearly a bampot), but a “No” vote would mean David Cameron being in charge and, if anything, he is an even bigger bampot than Alex Salmond. But that is politics for you – no matter how you vote, you’ll probably get a bampot.

So if it isn’t about economics and it isn’t about politics, what is it about?

Let me give you a hypothetical example to explain. Supposing there were clear economic benefits to the UK scrapping sovereignty and becoming the 51st state of the United States, would we all want to do it? I suspect that we would vote “No” and I doubt it would be a close run thing.

Alex Salmond, if he has any sense, should move straight past the currency discussion with a credible alternative to formal currency-union and focus on what is actually important in this debate. I suspect it is the reason he has spent his life campaigning on the subject and it isn’t about economics:

As a Scottish person, would you feel happier if Scotland were part of the United Kingdom or happier if it were not?

We can argue the economic and political details as much as we want. A question such as this goes way past economics and politics and it is essentially the question that will determine the way the Scottish people vote.

I can’t help but add that I hope you decide to stay.

RedEaredRabbit

* I say long term because in the short term pros and cons will change. Perhaps today being in the Euro would make people better off. Perhaps in six month’s time dollarisation would be slightly ahead. A currency choice is a long term option though and not something you can just keep switching every few months. Therefore the long term is where you should focus.

Filed under Economics, Politics

Greed Is Not Good

04/01/2014 3 Comments

As we enter another year under Conservative-LibDem coalition, there are many stories I could highlight as my story of 2013. I could talk about the UK’s credit-rating downgrade and how it underlines the government’s (willing or unwilling) misunderstanding of what determines their borrowing rate. I could talk about how the government should take no credit whatsoever for the signs of economic recovery we have started to see. I could talk about how the government’s policy on immigration is, at best, completely ignorant of the widely available evidence on the subject. I could even forget politics and economics and talk about taking photographs of herons if you want to give me a moment.

However, in my current state of reflecting on 2013 whilst simultaneously looking to our future, there is one story that I feel needs to take precedence and that story is the story of inequality.

In November, Boris Johnson gave the annual Margaret Thatcher Lecture. You can read the full transcript if you can bear it but here’s a snippet:

Like it or not, the free market economy is the only show in town. Britain is competing in an increasingly impatient and globalised economy, in which the competition is getting ever stiffer.

No one can ignore the harshness of that competition, or the inequality that it inevitably accentuates; and I am afraid that violent economic centrifuge is operating on human beings who are already very far from equal in raw ability, if not spiritual worth.

Whatever you may think of the value of IQ tests, it is surely relevant to a conversation about equality that as many as 16 per cent of our species have an IQ below 85, while about 2 per cent have an IQ above 130. The harder you shake the pack, the easier it will be for some cornflakes to get to the top.

…the income gap between the top cornflakes and the bottom cornflakes is getting wider than ever. I stress: I don’t believe that economic equality is possible; indeed, some measure of inequality is essential for the spirit of envy and keeping up with the Joneses that is, like greed, a valuable spur to economic activity….

When Margaret Thatcher came to power in 1979 they faced a top marginal tax rate of 98 per cent, and the top one per cent of earners contributed 11 per cent of the government’s total revenues from income tax. Today, when taxes have been cut substantially, the top one per cent contributes almost 30 per cent of income tax; and indeed the top 0.1 per cent – just 29,000 people – contribute fully 14 per cent of all taxation….

I proposed that we should fete them and decorate them and inaugurate a new class of tax hero, with automatic knighthoods for the top ten per cent. Well, my friends, I am proud to say I have often been accused of being out of touch, but hardly ever have I produced so frenzied and hate-filled a response. People aren’t remotely interested in how much tax these characters pay. That does nothing to palliate their primary offence, which is to be so stonkingly and in their view emetically rich.

When George Osborne gave his speech about welfare cuts in April, I labelled it the worst speech ever made. I didn’t expect it to hold that record for such a short period of time. Let me take Boris’s points one by one.

The high and ever-increasing level of inequality is inevitable in a competitive economy

In a free and competitive economy, the laws of economics say that workers’ wages are set by supply and demand. That is we would expect workers with skills for which demand is high compared with supply, to receive higher wages than their counterparts. If there is a demand for apples and I am better at growing apples than the average apple grower such that I grow on average 10% more apples each year, then I would expect my wages to reflect this. In fact, if my wages didn’t reflect this, I probably wouldn’t bother growing the extra 10% and instead work fewer hours. Therefore it is fair to say some level of inequality of inevitable in a competitive economy.

However, that level of inequality is very far removed from the wage disparity that we see today. The wages received and the wealth held by the richest 1% dwarf that of the average worker by such a degree that it cannot be explained simply by the supply and demand of their skills. In 1998 the average remuneration of FTSE100 CEOs was 40 times that of their average employee. Just 13 years later it had ballooned to 140 times that of their average employee. This is the scale of inequality we are talking about and it is simply not explainable by supply and demand for skills – it’s not as if the number of people with the skills to be a CEO massively declined between 1998 and 2011. Something else is going on here.

The high and ever-increasing level of inequality is a natural result of varying intelligence

Firstly, it’s worth noting that the intelligence explanation of inequality is completely at odds with the explanation of our current government. David Cameron and George Osborne have for the past couple of years been pushing the explanation that people who do well, “go out and work hard” and being poor or unemployed is a lifestyle choice.

That’s clearly nonsense but Boris’s explanation doesn’t work either. The gap between the super rich and everyone else has increased at such a pace that it simply cannot be linked to intelligence in any significant way. How can the dramatic rise of CEO wages in such a short period of time be explained by “different people have different IQs”? It can’t.

Additionally it is worth asking why, if you accept that there is naturally a variation in ability, you should use that as a reason not to tackle inequality. Surely if you understand that some people are born with a natural advantage it is all the more reason to form policy to support those less lucky.

Let’s look at a couple of other examples of inequality from the US and see if these seem to be linked to a variation in IQs among workers.

In the US, the Walton family (I’m referring to the 6 heirs to the Wal-Mart empire not John Boy etc.) command a wealth of $67.9bn – equivalent to the combined wealth of the entire bottom 30% of US society. That must be one smart family!

In case you think by using the example of one family I am cherry-picking, let’s go macro. This recent paper from UC Berkely showed that between 2009 and 2012, the earnings of the top 1% of Americans grew by 31.4% compared with just 0.4% for the other 99%. Or to put it another way, 95% of the increase in US earnings between 2009 and 2012 went to the top 1%.

Can that possibly be explained by intelligence? No. Something else is going on.

Inequality is necessary to motivate people to work harder

To a point. Going back to my original example, it’s a fair possibility that my apple growing neighbour will see my apple haul is larger than her’s and work hard to increase her output next year.

As I have already stated though, this is just not the scale of inequality we are talking about and the idea that such a motivational effect exists when inequality is high is purely wrong. A small level of inequality might make me see an opportunity for increased wages by working harder but a high level of inequality will have the opposite effect. When a worker in a FTSE100 company sees the pay of their CEO increasing astronomically year on year, while their own pay stagnates, are they more and more motivated? Of course not, it is throughly demotivating.

Worse still, those at the very bottom living in poverty see the gulf they must cross to get out of poverty becoming greater and greater and the chance of crossing it becoming less and less. In South Africa the rich live in luxurious, gated communities surrounded by razor-wire and armed security guards. The poor live around them in shanty towns. If extreme inequality is an extreme motivator then we should expect to see high numbers of South Africans that were born in extreme poverty moving out of it. But we don’t.

The higher inequality becomes, the harder it is to solve.

Margaret Thatcher looked out for the rich and in doing so made things fairer

This one is half right in that Maggie did look out for the rich but the idea that she made things more fair or more equal is (in Boris terms) balderdash and piffle.

The Gini Coefficient is a standard measure of inequality in a country. A Gini Coefficient of 0 means everyone is equally well off. A Gini Coefficient of 1 means one person holds all of the wealth and the rest of the population have nothing. The lower the Gini Coefficient the more equal the society.

This graph shows (in blue) how the Gini Coefficient changed during the period of government over which Maggie was in charge. I’ve included the years back to 1961 (in green) to show that this wasn’t just an existing trend.

UK Gini Coefficient (1961 - 1990) Source: IFS

UK Gini Coefficient (1961 – 1990) Source: IFS

And this graph shows how real income changed during her time in charge for each fifth percentile:

Real Weekly Incomes 1979 & 1990 Source: IFS

Real Weekly Incomes 1979 & 1990 Source: IFS

As you can see the income of the poorest went down, while the richer you were, the more your income went up!

As Boris says, it is in large part due to Maggie that today the richest are paying a higher proportion of the total income tax than ever before. While that’s true he has failed to mention RedEaredRabbit’s Law of Income Inequality:

If you give the rich all of the income, the rich pay all of the income tax.

That doesn’t make it fair.

The rich should be lauded for the amount of income tax they pay

This one might be the worst of the lot.

A rich person who pays income tax (without trying any dodgy tricks to avoid it) is obeying the laws of the land. They are obeying them every bit as much as a poor person is who is paying their taxes. No one is paying income tax to be philanthropic – they are simply obeying the laws of the land as set by the politicians.

More than that though, are we seriously trying to say that someone in severe poverty would rather be where they are now, watching every penny just to put food in front of their children but paying a small amount of tax, rather than being a millionaire who pays much more? I leave you to choose your own heroes here.

Income tax is a government policy. It is they who decide who pays how much income tax. To say that heroism and knighthoods should come with the 45% bracket is worse than ridiculous.

The 99% hate the 1% for being rich

This is the always the last refuge of the right in this discussion. If you are concerned about rising inequality you’re just a nasty jealous person. This is not the case. The 99% do hate something but it isn’t the 1%.

The 99% hate the system that sees the wealth of the 1% accelerating away from everyone else. They hate the fact that the same system that caused the 1% to go from rich to super rich simultaneously caused their own pay to stagnate. And they hate the fact that this system caused a global economic crisis for which they are paying the price.

People don’t hate the individuals, they hate the system that causes the inequality. Why is it hugely convenient for right-wing politicians to push the case for the former? Because the responsibility of the latter lies solely with politicians and it is a system that those on the right seem to rather like the way it is.

Summary

It’s easy to say that inequality is inevitable in free market economics but that is simply not the case. Inequality did not suddenly balloon under Margaret Thatcher because the laws of economics were different in the 1980s – inequality ballooned directly because of the policies of her government.

Boris would like us to believe that the laws of economics exist in a vacuum but they don’t. They exist in a world dominated by politics. While the laws of economics help us to understand what the outcomes of different government policies might be they do not decide the policy that a government chooses to go with. Economics doesn’t define economic policy any more than economics decides the laws of the land. These are determined by politicians and those politicians absolutely have the power to reduce inequality if they choose to implement measures to do so.

CEOs of FTSE100 companies are allowed to give themselves large increases in remuneration not because of economics but because the politicians have set laws on corporate governance that allow them to do so. Companies operate monopolies not because of economics but because the laws of the land set by politicians allow them to do so. Banks were allowed to lend irresponsibly in the run up to the financial crisis, not because of economics but because politicians relaxed banking regulations to allow them to do so.

The problem with allowing inequality to increase forever might seem fine to Boris, (who we should remember, described his second salary of £250,000 for his Daily Telegraph column as “Chicken Feed”) but it has really serious implications.

Today we live in a country in which a child born into a rich family has a significantly greater chance of receiving a high income later in life than a child of equal intelligence born into a poor or average family. That is not the sign of a well functioning society.

We live in a country in which a child born into a family at one end of the income spectrum has a significantly higher life expectancy than a child born into a family at the other end. That is not the sign of a well functioning society.

As I have said, the laws of economics do not exist in a vacuum. Our politicians have every opportunity to reverse this trend, not just by implementing controls at the top but also by investing seriously in state education in the poorest areas and reducing poverty, especially child poverty.

We do not employ our politicians simply to tell us that it is “inevitable” that the profits from everything we produce should go the richest few. We employ them to look after every one of us, rich or poor, and don’t ever let them tell you that doing so is not feasible because of economics or free markets.

Boris has his sights set on being Prime Minister. You have seen the rise in inequality that occurred under the leader he idolises and you have heard his abdication of political responsibility for inequality.

One day he will run for PM.

When he does, you know what to do.

RedEaredRabbit

Filed under Economics, Politics

Killing the Confidence Fairy

20/11/2013 1 Comment

Long-term readers might recall a blog post I wrote a while ago that explained why the UK government could borrow money at such low rates while the economy was weak. The government’s explanation was that their austerity policies had given markets “confidence” in the UK economy. So high was the confidence their policies had created, we were told, that we were now able to borrow money at the lowest rates in history, despite an ongoing economic depression.

If that smells a little fishy, it’s because it was. As I explained in that post, our low borrowing costs were a result of the market expecting short-term interest rates to remain low because they expected the economy to remain weak. Only when the economy started to recover would we see UK borrowing costs going up.

The government’s confidence argument was tested earlier this year when the UK lost its AAA credit rating, (the maintaining of which was one of the government’s key economic pledges.) If the government was right and confidence in the economy meant lower interest rates then this would, as they had repeatedly warned us, lead to a big increase in our cost of borrowing. I predicted the opposite would occur.

And what actually happened? Yes, the cost of borrowing went down after we were downgraded.

You might think that, after that, the government would have admitted that their faith in the Confidence Fairy had been misplaced. Well you might, if you were unfamiliar with our government.

Moving on, over the past two quarters we have seen the start of an economic recovery. Yes, it has been the longest wait we have had to recover after any recession in our history but a recovery it is nonetheless. So what would the government’s explanation of borrowing costs driven by confidence predict? It would predict that as the economy recovers, confidence would increase even further and borrowing costs would go down.

And what would my explanation of borrowing costs driven by expectation of future short-term interest rates predict? As the economy recovers the expectation of higher future short-term interest rates would cause the government’s borrowing costs to go up.

Let’s see if we can spot any movement in the rates during the past six months that might help us work out who’s right. This from Bloomberg:

Yield on 10Y UK Gilts

Yield on 10Y UK Gilts

If you favour the argument that low rates are all about confidence then explain to me why the cost of borrowing increased significantly during the period that the economy started to recover.

The confidence argument was, of course, nothing more than a means to an end – a manufactured tool to scare us into thinking that austerity during the bad times was a necessity. In a country like the UK, with control over its own currency, the confidence argument had no economic basis whatsoever and now we have the evidence to prove it.

The confidence argument was a lie. It really is that simple.

RedEaredRabbit

Filed under Economics, Politics Tagged with , ,

It’s the Recovery, Stupid.

01/11/2013 2 Comments

Ok, I had a bit of fun in my last post but the (hopefully) obvious point I was making was really anything but fun.

The bloodletting analogy works very well and not only because that ancient practice lengthened the patient’s recovery but also because of the reason that it gained such popularity. And what was that reason? Well most of the time, patients undergoing a course of bloodletting got better. It had nothing to do with the bloodletting of course, it was due to the fact that when people are sick they usually get better. It’s easy to laugh at how dumb our previous generations were but when I look around today, I’m not sure we have learned any more than our ancestors about the difference between causation and correlation.

As I have mentioned several times over the last few years, the basic model of macroeconomics that is taught to first year students has performed very well during the financial crisis. It explained why our economy was weak and it explained why the economy, after an initial period of recovery in 2009, then went into a state of economic depression in 2010 from which it is only now, three years later, starting to recover. Basic macro did other useful things, like explain why a country whose debt was in a currency that they controlled (e.g. the UK) didn’t turn into Greece, (whose debt was in Euro, over which they had no control.)

You could summarise it by saying that the financial crisis gave a very strenuous test to the basic model of macroeconomics and that model came through with flying colours. That model, when applied to the circumstances in which our government came to power, (an economy suffering from a lack of demand, with interest rates at zero), said that cutting government spending would just make things worse. Output in the short term would be determined by demand and cutting government spending would further reduce demand. Cutting spending at such a time would cause the economy to remain unnecessarily weak for an unnecessarily long period.

Lo and behold that was what happened. The government had predicted, with their austerity measures in place, the UK would see significant growth in 2010, 2011 and 2012 but all we got, as the basic model predicted, was depression.

I think on that part of the argument we’re pretty clear – the basic model predicted bad things, the government predicted good things and we got bad things. There is though, apparently, some confusion regarding the fact that we are seeing the economy starting to recover, (and I do believe it is a recovery). The government is now saying this recovery advocates their policy of austerity in a depressed economy. That seems reasonable enough, doesn’t it?

Er, no. In making this argument, the government is intentionally misrepresenting the basic model and what it’s supporters said.

The basic model told us that output would be driven by demand in the short-run and supply in the long-run. In other words, assuming that the downturn didn’t cause the UK to lose its ability to make things, the economy would eventually adapt and growth would one day begin again.

The argument was never that growth would never return with government policy, it was simply, that when we have all of the knowledge and all of the tools to implement a recovery in the short-run, why should we wait for the long-run? The British economist John Maynard Keynes faced the same arguments in the 1930s when he proposed government spending to solve The Great Depression. He acknowledged that, irrespective of government policy, the economy would recover in the long-run but as he famously pointed out, in the long-run we’re all dead. If you have the knowledge and the tools to solve a depression now, you should probably do it. The alternative of waiting for the long-run would be pretty dumb.

But, remarkably that’s what we did and in doing so, created by far the longest recovery from a recession in our country’s history. This graph from NIESR, showing the current recession vs previous recessions, demonstrates just how dismal our ability to recover has been. No previous recoveries even come close to being as slow as our current one:

UK Recessions Compared (NIESR)

UK Recessions Compared (NIESR)

I wouldn’t care too much about saying, “I told you so”, if our politicians could just be honest about exactly how badly their austerity policy has performed. If they were now saying, “Our policies have directly caused the weakest recovery ever. Soz!”, I might leave things at saying, “Thanks for being honest and let’s not do anything this dumb next time around.”

Saying that a recovery now is advocation of their policy is entirely ridiculous though and there is a real danger, as the recovery continues, that people will accept that austerity in a demand-led recession causes a recovery and the same mistakes will be made next time.

Of course, the reality is that the government’s policy was never about engineering a recovery. The reality is that they used the recession as camouflage for the policy they wanted to implement anyway – shrinking the public sector and reducing taxes for the rich.

I often refer to the bad policies as “mistakes” but that is giving the government far too much credit because all along, they knew exactly what they were doing and why they were doing it. Economics is far from perfect but it will have proved an extremely useful discipline if only we learn the lessons of the past six years.

If an eventual and inevitable recovery in the long-run is taken to be a justification of what our politicians did then we might as well throw economics in the bin and just let our future selves be governed on nothing more than the political ideals of the right.

RedRearedRabbit

Filed under Economics, Politics Tagged with , , , , ,

Why Is The Right So Obsessed With The BBC?

28/10/2013 2 Comments

Grant Shapps recently got himself into the news with what appears to be a thinly veiled threat to the BBC to become more right-wing in its reporting or face losing its funding. This was, a few days later, followed up by an Opinium/Observer poll, which showed that there was a, not large but still significant, public perception that the BBC’s reporting had a left-wing bias. This was their graph:

Source: Opinium/Observer

Source: Opinium/Observer

The view on what is left and what is right is quite subjective though. If you read the Daily Mail every day and then read a BBC article it probably does seem left wing (it probably seems like extreme Communism) and if you read the Daily Mirror every day it probably seems very right wing.

It might therefore be useful, when interpreting the data, to take into account the newspapers that people read. What does that look like? These are the 2013 January circulation figures for all UK newspapers with circulations above 100,000. The divisions by Right, Left or Not Obvious are my own.

Title Right-Wing Left-Wing No Obvious Political Persuasion
The Sun 2,409,811
Daily Mail 1,863,151
Daily Mirror 1,058,488
Evening Standard 695,645
Daily Telegraph 555,817
Daily Star 535,957
Daily Express 529,648
The Times 399,339
i 293,946
Financial Times 275,375
Daily Record 251,535
The Guardian 204,440
The Independent 76,802
TOTAL  6,989,368  1,514,463  646,123

If you want you can put the Independent as left-wing, (which it is in terms of issues like climate change, less obvious whether it is politically), either way it doesn’t change the overall picture much. The press is overwhelmingly right-wing:

UK Newspapers' Circulation by Political Persuasion

UK Newspapers’ Circulation by Political Persuasion

If we take into account the information that is fed to people by the newspapers they read, plus the huge campaign from Tory politicians and the right-wing media to convince people that the BBC is a left-wing organisation, the only surprising thing in the poll is that more people didn’t find left-wing leanings in the reporting of the BBC.

But rather than a simple poll of people, why not actually look at all of the political reporting the BBC does and actually analyse whether it gives more time to the views of the left? Well that would be a huge task, far beyond the capacity of this blog. Fortunately it wasn’t beyond the capacity of Cardiff University and the most comprehensive analysis I have seen on the subject. Yes, from all their research they found no left-wing bias.

I want to move on to my personal view on the BBC but before I do, I need to make a (possibly) surprising admission – I actually don’t consider myself particularly left-wing. The red in my ears came a long time before the blog and is no way a reflection on a political persuasion. I actually consider myself a fairly neutral individual who has unfortunately awoken in a very right-wing world. If I found myself in a country governed by left-wing idealists and dominated by a left-wing press, perhaps my criticisms would run the other way.

I would not be BlueEaredBunny though – as I said, the ears have nothing to do with it. My position is simply that I will do my best to base my opinions on the best available evidence. At this time that position makes me slightly wary of the Labour Party and entirely conflicted with the Tories.

In this position though, I too take big issues with BBC reporting. Not because I am worried about their lack of impartiality, but because I see their need for impartiality above all else, as completely obliterating their objectivity.

Take for example, the subject of climate change. In one corner, we have science and in the other we have the political ideals of the right-wing. The BBC, in its desire for impartiality above all else, reports both sides’ arguments with equal weight and this narks me because, on the subject of climate change, I don’t feel those two sides should be represented equally. I understand the BBC’s position of needing to remain impartial but seriously people, this is important stuff and on a matter of science, scientists saying one thing and George Osborne saying the opposite should not be reported with equal weight. The best scientific minds, the people with the most knowledge of the subject, are telling us we must act now and George is telling us it isn’t a priority.

A quote from Michael Shannon it in the excellent film Take Shelter puts it better than I could:

There is a storm coming! Like nothing you have ever seen! And not a-one of you is prepared for it!

(If you haven’t seen that film, you should rectify that soon.)

Moving on from climate change, reading Stephanie Flanders’s BBC articles over the past few years has also narked me because although I rate her ability as an economic journalist very highly, her reporting seems to have often be constrained in a way that says, economists say this but the government says that. (And understandably, the Labour Party says something wishy-washy that no one really understands.)

Add immigration or welfare into the argument and the trend continues. We have evidence on one side and political ideals on the other. On each subject, the BBC reports both sides of the argument with equal weight, desperate to maintain impartiality over objectivity.

You might conclude from that that I think the BBC is rubbish. Wrong. I think the BBC panders to politicians too much but they do a fantastic amount of good outside of politics. Let’s think about their wildlife documentaries for a moment. Planet Earth, The Blue Planet, Africa, The Frozen Planet. The list goes on and on. But I’m not just listing the best BBC wildlife documentaries – I’m listing the greatest wildlife documentaries that have ever been created by any television company ever.

The sole reason that we have those programmes, and many other great programmes in other fields, is due to the way that the BBC is funded. Take way their funding and make them rely on adverts and everything would change. Making Planet Earth was never about getting the best return on investment. If you were to rely on advertising revenue, you would make far more money by just making more reality TV programmes with C-List celebrities than you would by paying some poor camera crew to sit in the Antarctic winter for months filming emperor penguins balancing an egg on their feet.

My thoughts are this: Programmes designed to maximise revenue are available everywhere, we are almost drowning in them, but those designed to be more than that are only available on the BBC. Yes their political reporting annoys people from both sides simply because we give them a mandate of impartiality over objectivity.

Yet when we see all of the good they do in other areas, that is a small price that we all have to live with and it is definitely a price worth paying.

RedEaredRabbit

Filed under Politics Tagged with , , ,

Economic Bloodletting II: Revenge of the Quacks

25/10/2013 2 Comments

Britain, 1642. A patient, Mister Edmund Conomy of London, sits up in bed, sipping broth from a bowl. People stand around his bed amazed at his miraculous recovery.

Four long years earlier, Edmund had been struck down with a severe case of anaemia. The new local physician, Doctor Gideon had fortunately arrived early on and prescribed a course of bloodletting to treat his condition. Doctor Gideon had pumped out a few glugs on his first visit, then returned each month and never noting a change in his patient’s condition, continued, each time, to pump out a few glugs more.

Mister E. Conomy’s housekeeper was a lady by the name of Miss Carmen Sents. Miss Sents, had taken issue with Dr Gideon’s prescribed treatment:

“He’s weak enough already.” She told the doctor. “Removing his blood will just weaken him further.”

“Rubbish,” snapped Dr. Gideon, “The cause of this man’s illness is clearly that his previous physician allowed him to produce too many blood cells.”

“Look, if anything he needs more blood cells, not fewer. If you can’t see that, then at least leave him as he is and wait for his body to eventually recover on its own.”

Miss Sents’s protests were ignored and over the next three years, Dr. Gideon continued his policy of letting blood from Mr E. Conomy. Mr. E. Conomy didn’t recover though. In fact he looked worse than ever.

By the fourth year, Dr. Gideon, noticing the pale and shrivelled look of his patient, decided to drastically reduce the amount of blood he was letting at each visit but he didn’t want to tell anyone he was doing that. He did just a tiny bit each time to show he was sticking to his “tough policy” because he was afraid of what people would say if he changed course.

Then the miracle happened. Mr. E. Conomy started to recover and once he started to recover, the recovery was quick. With every month that passed, his strength grew and within a year he was almost as strong as he was when the illness struck.

Dr. Gideon was made a hero. Stories of the success of his bloodletting on Mr. E. Conomy spread far and wide. Perhaps it would not be unfair to say that Dr. Gideon was a major factor in spreading them.

And what became of Miss Carmen Sents? When Mr. E. Conomy learned exactly what had cured him, and of the erstwhile protests of Miss Carmen Sents, he fired her and sent her out of his house to live on the streets. After all, the success of his treatment was obvious and where would he have been if people had listened to her?

Sadly, in all of the bravado, no one seemed to notice that in every previously recorded case of anaemia, the patient had, without bloodletting, recovered much faster than had Mr. E. Conomy.

Sadder still, they now thought that bloodletting was the best way to solve anaemia.

RedEaredRabbit

Filed under Economics, Politics Tagged with ,

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