This isn't a reason to be against Brexit, far from it

As all will have noted there's an awful lot of propaganda flying around about this Brexit, this idea that Britain might leap free from the clutches of the European superstate (not that we want to hide our opinion here). It is sadly true though that quite some measure of that shrieking and wailing in the headlines doesn't actually tell the story being indicated. Take this for example, that Brexit would lead to a fall in the pound, a rise in inflation and thus a rise in interest rates:

The Bank of England will need to raise its key interest rate or Bank Rate to 3.5pc by the end of next year if Britain votes to leave the EU, the newest recruit to the Monetary Policy Committee has warned privately.

Michael Saunders, who was chief economist at Citibank, and will join the rate-setting MPC in August, said the drastic rise would be needed because Brexit would cause the pound to collapse, which would send inflation sharply higher.

That does sound oh so terrible, yes. But then consider for a moment what recent economic policy has been. Something, anything, to get the pound down and the inflation rate up. For that's the mechanism by which expansionary austerity might work, as it did back in the 1930s. That's how to square that circle of having a contractionary fiscal policy: by having a massively expansionary monetary one through the exchange rate. 

We've been doing this to the point that the Bank of England currently owns some £400 billion or so of the government's debt. Really, they've been tossing in the kitchen sink and inventing new tricks to try and bring about this situation. Quite why it's a bad thing if we leap free but a good thing if it's done deliberately is hard to fathom.

No, we would not say that this in itself is a good enough reason to vote leave:  our point here is rather about how confused some of the boosters of remain are becoming. We are supposed to be scared of this outcome? The one which government policy has been aimed at for a near a decade already?

Interestingly, assume that it did happen: it wouldn't actually be necessary to raise interest rates in quite that manner anyway. It would provide an interesting opportunity to unwind QE though.

Are we doomed to eternal student living?

Back in April a housing association called ‘The Collective’ launched a new concept property which Vice described as “a sort of all-in halls-of-residence-for-grown-ups where they do your laundry and deliver your sheets and pay for your Wi-Fi but you live in a small bleak white room to justify it all”. The tiny rooms, just 10 sq meters, are available for the eye watering price of £1,083 a month – which as the Guardian noted is about half the average Londoner’s take home pay.

Boasting a space invaders themed communal area and using the term ‘Twodio’ to describe rooms so small you can’t even fit a four ring hob in it, would usually signal that those signing up to the new Old Oak development were a group ripe for ridicule – but they’re not.

At the moment most Londoners are paying just under half of their take home pay on their rent, and that’s before bills. The average rent in London increased a further £17 last year to £298 per week, which starts to make The Collective’s shoeboxes look like more of a bargain.

Private renting now accounts for 27% of all residential accommodation in the capital according to the latest English Housing Survey, and it’s a sector that will continue to grow rapidly with more Londoners renting from a private landlord than owning their own home by 2025.

New mayor of London Sadiq Khan, who’ll have the happy task of trying to control the problem, focused heavily on the housing crisis throughout his campaign. But one of the less publicised proposals of Sadiq’s is the idea to give the London Mayor the ability to cap rents, and this is where we start to disagree.

It is obvious that we need to alleviate the pressures on renters in London but it’s important not to get into the habit of sticking regulatory plasters all over what is in fact a huge gapping oozing wound created in the large part by the planning system.

Putting a price ceiling on any product below the market rate causes shortages: demand outstrips supply. Landlords will remove their investments if their returns are capped, consequently shrinking the choice of rental properties, but also flooding the housing market and causing a sudden fall in house prices.

There are further potential repercussions which hurt those they mean to serve, such as limited tenancies. If you’re capping increases in rent during a tenancy, then landlords are likely to have a much higher turnover of renters in their property so as to keep up with market value – not compatible with the three-year standard lease Labour are looking for.

Capping also runs the risk of limiting social mobility as people locked into low rent contracts will find it costlier than they otherwise would to move. This may not sound important, but lowered housing mobility causes higher unemployment as people are less ready to move to find new jobs.

The best way to reduce the cost of housing is to build more, not stifle the supply. And we need to build a lot of new homes if we’re going to make any significant impact. As we’ve argued before, building on just 20,000 acres of the Metropolitan Green Belt (roughly 3.7%) would create room for the 1m new homes needed, estimating 50 houses per acre; nearly all of which could be built within 10 minute’s walk of a station.

If we don’t start building soon, we may just be subjecting ourselves to an eternity of passive aggressive conversation across a communal dining table with our 451 flat mates.

So just how badly is the economy doing? Pretty well actually

We're generally told that the entire economy is slipping down that slope to hell in that proverbial handbasket. and yet when we go and look at what people are saying, away from the politically oriented opinion pages, in those very same newspapers we find rather a different story. Things seem to be getting better, perhaps not as fast as we would like, but better they are indeed getting. From the Guardian: 

Rising employment, near-zero inflation and low interest rates have boosted household budgets. Food prices have fallen amid a supermarket price war, cheap oil has helped knock back petrol prices and the rise of discount retailers has cut the cost of clothes. All that leaves more money for non-essentials.

We would not claim that that is perfection but it's movement in the right direction at least. But there's more to it than just this. Maslow's Hierarchy is a real thing:  we humans devote our resources to solving our desires in order. Food, shelter, a decent relief of the bowels, these are first line matters which we simply must solve. When we have solved these matters, largely so at least, we then move on to devoting extra resources to further goals and desires.

But we can also run this observation the other way around too:

They call it the “experience economy”: a huge shift in consumer behaviour is said to be under way, from buying things to doing things.

The demise of high street stalwarts BHS and Austin Reed, poor retail spending figures and a downturn in the number of people visiting high streets and shopping centres, are all being held up as evidence that Britons’ priorities are changing.

Earlier this year a senior Ikea executive warned that the appetite of western consumers to own ever more goods and chattels was probably waning. “In the west”, he warned, “we have probably hit peak stuff.”

Now retailers ranging from fashion to food chains are making similar observations, because official data shows that households are spending less on clothes and food but more on holidays, cars, entertainment and eating out. Spending on gadgets that keep people connected to the internet is also on the rise.

“We increasingly see a trend for consumers to spend more on experiences rather than on products,” said Kevin Jenkins, the UK and Ireland managing director of payment card group Visa Europe.

“Eating out, booking holidays and discovering new experiences are all driving spending growth at a time when the lower cost of living is creating higher disposable incomes.”

If people are devoting their marginal resources to those things higher up that Hierarchy then they must be getting richer. Again we do not claim that this is perfection nor does it mean that all is just peachy. But is the average consumer is both gaining in disposable income and also spending that marginal income higher up that list then they must indeed be becoming better off.

Which is, obviously, the point and purpose of having an economy in the first place, that the average person becomes better off over time. Which is happening. So, that hell and handbasket story: what's left of it?

How Houston densified beautifully through markets

I recently came upon a 2011 document (pdf) from a local architect working in a suburb of Houston that I have become somewhat obsessed with. Basically, it's a pictorial account of how Houston—which has practically no land-use regulations at all—has developed as a city.

First, it sprawled outwards, but as the sprawl and population growth created more economic activity, and agglomeration benefits, the demand for housing near the centre rose and rose. Since there was no restriction on simply adding a few floors to buildings, and filling in gaps between them, to maximise the value of plots, and how many people they could accommodate, developers simply did this. And they did it beautifully and harmoniously, rippling outwards to make Houston denser and better.

Houses like these...

...quickly become houses like these

The document, by architect Barbara Tennant, mainly tells its picture through stories, so you should check out the whole thing, as they say. But it has a few key lessons, repeated throughout: restrictions were minimal, with no height limits, freedom of style and design, and only a few rules on setbacks (how far properties must be from the street).

The results are impressive. Houston is cheap, diverse, rich, and growing, and this policy experiment should make us more sanguine about the results to London's skyline if we drastically reduced land-use regulations. The results of private development seem to be very attractive; by contrast planning restrictions seem to make things uglier and less popular.

Greenery...

...and dense beauty

Happy 117th birthday, Hayek

F A Hayek, the Anglo-Austrian Nobel economist and liberal thinker, was born yesterday in 1899.
Hayek’s economic works in the 1930s, researched with his mentor Ludwig von Mises, showed how boom and bust cycles arose from the inept government manipulation of credit; and he became the leading critic of collectivism, central planning and the expansionist interventionism of John Maynard Keynes (1883–1946), arguing that the latter would lead to inflation and economic dislocation. 

The Second World War turned his attention to political science, and his bestselling The Road to Serfdom (1944) traced the roots of totalitarianism, arguing that central planning, being counterproductive, requires increasing compulsion to maintain. 

In The Constitution of Liberty (1960), he set out ideas for a free social and economic order. He updated the classical liberal idea of self-regulating, spontaneous social orders, showing how they emerge from the regular behaviour (or ‘rules’) followed by individuals. He argued that these orders, though unplanned, could process a huge amount of knowledge – held by individuals but dispersed, partial, personal and often ephemeral – more knowledge that any planning agency could process, even if it could access it. 

In The Fatal Conceit (1988), he argues that it is a delusion to imagine that we could shape such complex orders using the tools of the physical sciences, and that conscious attempts to redesign them would destabilise them and lead to social and economic disaster. 

Hayek also founded of the Mont Pelerin Society, which has become a powerful international forum for classical liberal thinking.

Eamonn Butler is author of Friedrich Hayek – His Ideas and Influence.

Economic numbers are important, yes, but it's what they're telling us that is

Roger Bootle here is nominally telling us about how difficult a problem high executive pay is. We don't think that's a problem but that's not our point here. Rather, to examine one of the numbers being used to bolster the argument. We don't think this number is telling us what people think it is:

As Smithers points out, the aggregate data from both the US and the UK tell a worrying tale. In both these countries, fixed investment as a share of GDP has fallen substantially. There are all sorts of possible explanations for this decline but surely a leading candidate is the prevailing structure of executive pay which incentivises business leaders to minimise investment.

Interestingly, this has major implications for the performance of earnings more generally. In America, surely much of the reason for the Trump phenomenon is the extremely disappointing performance of real earnings for the average American. This, too, has several roots. But one is surely US firms’ low investment.

We are, at best, deeply, deeply, unsure about this. We have two reasons floating around in our minds about this.

The first is that what we have traditionally recorded as fixed investment might not be quite what we are recording as it now. We recall one Goldman Sachs report which looked at business investment in software. This was static (as a portion of GDP) over the past decade, decade and a half. So, where is that technological revolution? Fair enough except: investment here is defined as things which are depreciated, written off, over more than one annual accounting period. That's where we get our investment figures in GDP from, corporate accounts. And you may have noted that there's been rather a change in the way that business buys software these days. All that cloud, software as a service stuff. Instead of (at the margin of course) buying proprietary software people are renting structures. To buy a two year licence of Microsoft Office is business investment in software. To sign up to Office 365 is simply monthly running costs. Yet it's (to all intents and purposes) the same software doing the same job.

That is, much of what actually is business investing in software, in computing, is no longer recorded in GDP as business doing so. The size of this difference being usefully indicated by the size of the cloud and Saas businesses out there. That size being large enough to significantly change this line in GDP.

The other is this complaint that extant businesses are paying out ever more of their earnings in dividends and share repurchases, leaving little to reinvest within the corporation. But this is something that we positively desire: we no longer think that the conglomerate is the correct business structure. Further, capital markets are hugely more efficient in allocating capital than they used to be. For example, Nat Rothschild, Bob Diamond and Tony Hayward (with varying levels of success to be sure) have been able to raise large sums from a standing start to go and create new businesses.

That extant, profitable, businesses are paying out those returns back to shareholders, who can then reinvest into other businesses, is not a failure nor an aberration, it's actually something we've long desired that large corporations do.

It is of course possible that CEO pay is a problem, that more investing should be done, as you like. Our point here is that the usual metrics pointed to on this subject don't seem to us to be telling us quite this story. And underlying this is our insistence that yes, economic numbers are indeed important. But the most important part of them is understanding the details of what they're saying. And we're really deeply unconvinced that people are so understanding.

The Panama Papers manifesto

The leaker who hacked Mossack Fonseca and thus led to the massive leak of sensitive information (for example, did you know that the British Prime Minister pays all the taxes he owes? In full and on time?) has released his manifesto. Or at least his justification for his actions. It does appear that he is rather remarkably mal-informed about matters:

Income inequality is one of the defining issues of our time. It affects all of us, the world over. The debate over its sudden acceleration has raged for years, with politicians, academics and activists alike helpless to stop its steady growth despite countless speeches, statistical analyses, a few meagre protests, and the occasional documentary. Still, questions remain: why? And why now?

The Panama Papers provide a compelling answer to these questions: massive, pervasive corruption.

That's his opening and it's just plain flat out wrong.

We agree that within country inequality has risen in recent decades just as global inequality has fallen. But this has absolutely nothing whatsoever to do with any secrecy nor use of offshore. For the quite simple reason that the inequality we're measuring does not include any effects of secrecy or offshore. Because, you see, things that are secret are not included in public information and calculations, and things that are offshore are not included in estimations of in country inequality.

That is, the information revealed has absolutely nothing whatsoever to do with the thing being complained about, that already measured inequality.

This is, by the whistleblower, logic worth of Richard Murphy. Sadly, the manifesto is, logic and facts aside, too well composed for it to have come from that source so we're still left wondering who it is.

How a poverty meme gets created

We're privileged to be at the birth of a new poverty meme. We can actually watch how it is done. First, you create your own definition of some form of poverty. As the Joseph Rowntree Foundation have done here. They define destitution as being the following:

The number of destitute people in the UK isn’t measured officially, despite growing concerns about rising use of food banks, homelessness and other indicators of severe poverty in recent years. In fact, when we started this research we found there wasn’t even a widely accepted definition of destitution which we could apply to everyone in the UK. The research team at Heriot-Watt University worked with experts to develop a robust definition, which was then tested with the general public.  Using this, we define destitution as being when someone lacks two or more basic essentials in one month, and so has experienced two or more of the following; slept rough, had one or no meals a day for two or more days, been unable to heat or to light their home for five or more days, gone without weather-appropriate clothes or gone without basic toiletries.

We agree, those are not things which should be happening to people in a rich country. We would also note that the major cause of all and any of these things is the incompetence of the anti-poverty bureaucracy run by the government. But do note that there is an important point about the numbers here:

This week we have published the first comprehensive study into destitution in the UK, which shows that 1.25 million people, including over 300,000 children, were destitute over the course of 2015. 

I any one month the number being failed by that State is some 100,000 people. 100,000 too many, of course, but it is 100,000 who experience perhaps a couple of days of that "destitution" in any one month.

And then, only a week later, see how this meme has subtly altered in the popular press (to the extent that The Guardian is popular of course):

This is what destitution looks like. More than 1 million people in the UK are so poor they can’t afford to eat properly, keep clean or stay warm and dry, according to new research by the Joseph Rowntree Foundation (JRF). What’s emerging in austerity Britain is a new level of class inequality: not simply between the wealthy and the poor, but between people who have enough money to buy toilet rolls and cook a hot meal and people who don’t.

They're referring to the very same report. And yet that meaning has hugely changed, hasn't it? From this destitution being a brief period for that 1 million over the course of a year to something that is happening to that 1 million all year.

And thus are memes created. Invent your own definition, however reasonable, attach a caveat, a qualification, and watch everyone run with the uncaveated, unqualified, extreme version. This has been done for decades now with the definition of poverty itself: the modern definition means "not as much as others" rather than the older meaning of poverty of "not much". 

We don't hold with it ourselves, think this is tantamount to lying to us all. But just look around, it's a very common tactic.

Naomi Klein just doesn't understand the real world

We've had our differences with Ms. Klein before. We recall a central tale in her most recent offering: she complained that the WTO's insistence on lifting local content rules on Canadian solar power reduced in some manner the fight against climate change. When, of course, allowing people to install cheaper Chinese made solar panels rather than more expensive Canadian made ones will, presumably, increase the number of such panels installed.

That is, there doesn't seem to be a great knowledge nor understanding of the real world in her oeuvre. and so it is with this claim: 

“There is no clean, safe way to run an economy built on fossil fuels. There is no peaceful way to do it ... If nations and people are regarded as other, it’s easier to wage wars and stage coups,” she said.

“We are running out of cheap ways to get to fossil fuels. This sees the rise of fracking which is now threatening some of the prettiest places in Britain.”

Now it's true that we don't see the problem with fracking and Ms. Klein obviously does have some problem with the technology. But imagine that you are against fossil fuel use, as she is. The one and really important observation you would have to make about said technology of fracking is that it is incredibly cheap.

It is this cheapness which is driving out the use of coal for energy production in the US for example. Where fracking has been widely deployed, as in said US, it is the cheapness of fracking which is driving the conversion of LNG import terminals into LNG export terminals. It is the very cheapness of fracking which is leading to convention gas production plans being put on ice.

We're also really rather confused as to how drilling a few holes in Lancashire is going to increase the number of wars or likely to produce a coup or two.

There simply doesn't seem to be any connection between Ms. Klein's observations and the real world out there. We therefore don't think she or her pontifications are a very good guide to what we should be doing. 

Whitehall should manage the what, not the how

BIS may not have noticed the British steel industry going to the wall but they at least deserve sustained applause for getting something right. For twenty years and more they have been assessing their International Trade Advisers on how they spent their time, not what they have achieved.  Critics have been suggesting that, as ITAs were supposed to be turning SMEs into exporters, maybe they should be assessed by the number of new exporters, or the value of exports they produced.  Now, UK Trade and Industry, under the leadership of the excellent Dr Catherine Raines, has done exactly that.
 
We taxpayers give Whitehall our money for things we could not otherwise achieve for ourselves. Is it not blindingly obvious that value for money should be assessed by what that money achieves, not by some contrived analysis of  how public servants spend their time?
 
Yet department after department has not got the message.  The Department of Health thinks it knows how to be a doctor better than doctors do.  Education likewise thinks it knows how to run schools better than teachers do.  The most disgraceful, perhaps, example is safeguarding children, or perhaps failing to do so.  The Department’s response to each child abuse scandal is to commission another enquiry.  This then further complicates the way child workers are supposed to spend their time which in turn leads to more safeguarding failures and so it goes.  Rotherham at 1,400 abused children and counting may prove an all time high but child workers are so busy with redundant admin that you can bet the abuse continues willy nilly. 
 
One such enquiry was headed by Lord Laming who, in 2003, said:
 
 “17.65 There was no doubt that the work of each of the key agencies supporting children and families should be rigorously monitored. In the past, the tendency has been to concentrate on the measurement of inputs; for example, the size of the budget, the number of staff, or the range of equipment used. This approach is of limited value and does not address the more important question of what is actually being achieved, and whether the lives of children and families are being improved by the investment.”
 
13 years later that attitude has not changed. This summer we are expecting another “Single Inspection Framework” from Ofsted setting out how social services should spend their time to please Ofsted, not how outcomes should be measured, still less how they should be used to assess child workers’ achievements.
 
When the Minister’s attention was drawn, again, to the need to monitor outcomes, the response (19th April 2016) was, if the status quo was inadequate, to consider “alternative models of delivery”, i.e. having child workers spend their time differently and, no doubt, confusing them further thereby.  Please, Minister, just establish the required outcomes and let child workers get on with it.