Mark Carney meets some journalists looking for a story

If you’ve read the papers today you might have seen the story about Bank of England Governor Mark Carney’s supposed intervention into the immigration debate. The Mail and the Times both covered Carney’s inflation report with this angle.

The Times’s coverage was boldest, claiming that Carney had ‘waded into the debate on immigration’ by describing ‘the present high level of net migration as “a key risk” to the economy’.

This is strong stuff, and it would indeed be big news if it were true. But I’m not sure it is.

Here’s what Carney actually said:

In recent years labour supply has expanded significantly owing to higher participation rates among older workers, a greater willingness to work longer hours and strong population growth, partly driven by higher net migration. These positive labour supply shocks have contained wage growth in the face of robust employment growth. Wages have grown by around 2% in the past year – less than half the average rate before the global financial crisis – and a key risk is that these subdued growth rates continue.

Such strong growth in labour supply is unlikely to be sustained. Going forward, growth in the UK economy’s potential will increasingly depend on productivity.

It’s hard to see Carney’s exact meaning from this, and he has already distanced himself from the Times’s and Mail’s interpretation. As BusinessInsider’s Mike Bird points out, he’s most likely talking about a compositional effect – the average changing because we’re adding more people on the lower end of the spectrum, not because any existing worker is being made worse off.

Bird quotes the Inflation Report itself:

Bank staff estimates suggest that the changing composition of employment growth — including the mix of occupations, industries, ages and job tenures — could explain around 1 percentage point of the recent weakness in average annual earnings growth. Compositional effects will only suppress wage growth for as long as such shifts continue.

Indeed. It would be a surprise if Carney had said what the Times and Mail suggest he said. The government’s Migration Advisory Committee found in 2012 that “Studies estimating the impact of migrants on UK wages have generally found little or no impact on average wages,” although, “in some studies migrants were found to increase wages at the top of the UK wage distribution and to lower wages at the bottom.”

That means that, if there is a negative impact from immigration, it reduces wages for the workers at the bottom, but not the overall wage or productivity level, as Carney is supposed to have claimed.

A 2014 Home Office report concluded that this effect on low-paid workers was found during recessions but not periods of economic growth, and was small and temporary in any case. The effect was not present in other government studies at all.

NIESR’s study into the impact of immigration on native British productivity found it to be small but positive. In general I suspect that there is a strong relationship between how good immigration is for natives and how flexible the receiving country’s labour market is.

The Mail is the Mail, but I can’t quite understand why the Times, in particular, decided to report Carney’s remarks in this way. To misinterpret him so badly seems to almost wilfully prefer a good story to an honest one.

Whoda thunk it? A free market in banking means more competition!

Some economists, especially economic historians, have really consistently interesting CVs. You’ll look at their publication list because you’re interested in their work on the US experience of free banking, and you’ll end up finding interesting papers on genetic and cultural diversity on economic growth. Prof. Philipp Ager at the University of Southern Denmark turns out to be one of these types.

I came across Prof. Ager November 2013 working paper with Fabrizio Spargoli: “Bank Deregulation, Competition and Economic Growth: The US Free Banking Experience” (pdf) which has a very interesting finding that although US free banking led to more bank failures it also led to more competition and probably higher growth.

We exploit the introduction of free banking laws in US states during the 1837-1863 period to examine the impact of removing barriers to bank entry on bank competition and economic growth. As governments were not concerned about systemic stability in this period, we are able to isolate the effects of bank competition from those of state implicit guarantees.

We find that the introduction of free banking laws stimulated the creation of new banks and led to more bank failures. Our empirical evidence indicates that states adopting free banking laws experienced an increase in output per capita compared to the states that retained state bank chartering policies.

We argue that the fiercer bank competition following the introduction of free banking laws might have spurred economic growth by (1) increasing the money stock and the availability of credit; (2) leading to efficiency gains in the banking market. Our findings suggest that the more frequent bank failures occurring in a competitive banking market do not harm long-run economic growth in a system without public safety nets.

This is particularly interesting, because it suggests that even in a free banking system with fairly important regulations, free banking may outperform the alternative.

As Larry White details on the new blog alt-m most histories of US free banking miss out that many of the major distortions and problems in the US experience stemmed from regulatory interventions—especially restrictions on what kinds of collateral banks could accept and tight restrictions on branching, making banks much more vulnerable to idiosyncratic local risks.

My real issue here is not deciding what side is correct. Basically all of the thoughtful work concludes that free banking is better than the tightly restricted banking we have had outside of a few historical experiences. The ‘evidence’ I see against consists of stuff like this Philly Fed paper, i.e. nonsense.

My real issue is why this evidence isn’t breaking through? Why are so many smart, knowledgeable people opposed to free banking? Why is the ruling tendency now towards practically outlawing bank/debt finance altogether in favour of steps toward equity financing everything? I don’t have a good answer.

UK poverty is rising we’re told: they’re wrong

We’re told today that poverty is rising in the UK. Apparently the baby eaters have decided to push into destitution yet ever more of the inhabitants of this sceptered isle. On the grounds, presumably, that they just hate poor people. This is not in fact true and this report doesn’t show anything like that happening either:

Poverty in the UK is increasing after two years of heavy welfare cuts have helped to push hundreds of thousands of people below the breadline, according to an independent study of the coalition government’s record.

Although middle-earners saw incomes rise marginally after 2013, policies including the bedroom tax and below-inflation benefits rises have reduced incomes for the poorest, pitching an estimated 760,000 into poverty since the last official figures were produced, according to the New Policy Institute (NPI) thinktank.

The report itself can be found here. The reason the statement is incorrect is because they haven’t looked at poverty at all. There is, by any historical or global standard of measurement, no poverty in the UK today. There is, of course, inequality, and this is what they are measuring. That number of people are, by their calculations, now getting under 60% of median income. That is, they are looking at relative poverty, not poverty.

Which is, of course, why inequality was renamed relative poverty (and the relative almost always immediately dropped) so that the terminally aggrieved would have something to complain about still. After all, how can you go on shouting about the horrors that capitalism afflicts on the poor when capitalism has abolished poverty?

Change the definition and carry on shouting, obviously.

Well, yes, this is what happens in recessions

Interesting new figures out from the TUC:

The coalition government has presided over the worst five-year period for living standards since modern records began more than half a century ago, according to the Trades Union Congress.

In an analysis based on data from the Office for National Statistics, the TUC said the 2010-2014 period was unique in seeing a drop in real household disposable incomes.

RHDI – a yardstick of living standards that takes account of incomes, benefits, taxes and inflation – was 0.6% lower in the half-decade ending in 2014 than in the five years ending in 2009, when it rose by 6.9%.

We have two responses to this. The first being that it was probably Done It Duncan who pieced this together:

Living standards are a key battleground in the general election campaign and in last month’s budget, George Osborne said on this same measure they would be on course to be higher in 2015 than when the coalition came to power five years earlier. The two measures differ because the chancellor was comparing a forecast with RHDI for the end of this year with RHDI in 2010, while the TUC is comparing an average of RHDI per head between 2010 and 2014 with an average of the previous five years.

We do rather wonder how many tweaks and variations Duncan had to make to his spreadsheet to get a version which showed a fall. However, there’s another point to this, which is that yes, this is what happens in recessions. The economy becomes smaller. As a result the incomes of the people of the country fall. That’s what all of these words actually mean.

“Living standards fall in recession” is about as startling as the claim “water is wet”. So, err, quite what everyone is chuntering on about we’re not quite sure. Unless it’s an insistence that there shouldn’t have been a recession in the first place and we’re OK with that idea. Only that we can’t bring ourselves to blame the people clearing up after a recession had already happened for the existence of a recession. That blame rather belongs to those who didn’t prevent the recession itself we feel.

Woe and thrice woe as the decline of Britain is upon us

So we’re told by an academic, must be true ‘coz it’s science, right? Britain is doomed to decline and fall because, well, actually, because us moderns just aren’t up to much:

Britain is experiencing the same decline as Rome in 100BC, with the collapse of civilisation inevitable, a scientist has warned.

Dr Jim Penman, of the RMIT University in Melbourne, believes Britons no longer have the genetic temperament to advance because of decades of peace and a high standard of living.

He claims that the huge success of the Victorian era will not be repeated because people in the UK have lost the biological drive for innovation.

Instead, Britain is existing in a period similar to the decades before the fall of the Roman Republic where social tensions were rife, the gap between the rich and poor was increasing and extremism was growing.

Hmm, well.

We do think that in order to be able to do history well you need to actually know history. At which point a little putting of that huge success of the Victorian order in context is possibly needed. Per capita GDP, from 1700 to 1870, is usually estimated as having at 0.5% or so a year. Our experience of the 20th century was very much better than that. And here we are now, with GDP per capita over the past four years growing by 1.1%, 0.9%, 0.0% and 1.1%. This in the middle of what we all agree is the worst recession of modern times. We generally think that trend growth is 1.5 to 2% for this number.

Or about 3x that 19th century number, just if we keep generally rolling along without too much strain or effort. If this is failure compared to the Victorian success then bring it on we say.