Misunderstandings around austerity economics

After the 2008/9 recession the coalition government famously adopted a set of contractionary fiscal policies with the aim to reduce national debt. Elements of this austerity programme included significant cuts to government spending, public sector job reductions, and changes to welfare programs. Various Keynesian economists claimed that such policies would be detrimental to the British economy, including Nobel prize winners Paul Krugman, and Joseph Stiglitz. 

In some sense they were right, but for all the wrong reasons. 

Austerity in the UK was harmful due to the impact which it had on total expenditure. The reduction in government expenditure caused a reduction in public sector employment, which had a knock on effect in the private sector as lower total spending in the economy led firms to layoff workers. Primarily through these mechanisms austerity policy led to rising unemployment, and a general reduction in standards of living. 

However, this is not inevitable. Following the recession the US adopted a very similar set of austerity policies to the UK, if anything they were slightly more radical. Just as economists did in the UK, a letter signed by 350 Keynesian economists suggested that this might push the US economy into recession. The US budget deficit was then reduced from roughly $1,050 billion in 2012 to $550 billion in 2013. Despite this, there was never an equivalent ‘double dip’ recession, as was experienced in the UK and EU.

This is because the Federal Reserve adopted sufficiently expansionary monetary policy to offset the impact of the reduction in government expenditure on NGDP (total expenditure). While government expenditure fell, this was negated by the increase in private sector expenditure, meaning there was no significant increase in unemployment. Had the Bank of England adopted similar monetary policy, the country undoubtedly would have fared far better during the austerity period. 

Austerity in the UK was not harmful because government expenditure fell, as many will often suggest, but instead because inappropriate monetary policy allowed total expenditure to fall. 

We think this is probably a very good idea indeed

Not, particularly, about KFC and or fast food near schools, but:

Anti-obesity policies designed to stop takeaways being opened near schools are being thwarted by challenges made by the fast-food giant KFC.

At least 43 local councils in England and Wales have had their anti-obesity policies challenged by KFC since 2017, The Times has found.

In more than half of these cases the fast-food giant has succeeded and town hall bosses have either abandoned their plans or significantly watered them down.

The supposed justification of these policies is that child obesity - the thing that Chris Snowden has proven does not, in fact, exist - spiced up with a post-rationalisation:

The findings come after an analysis found this week that Britain’s weight problem is costing the state almost £100 billion a year. Henry Dimbleby, the government’s former food adviser, found that the effect on national productivity from excess weight was nine times bigger than previously thought.

As we’ve pointed out that Dimbelby number is abject nonsense. And The Times doesn’t even manage to quote it correctly either. As the fishfinger sandwich salesman actually says, more than £60 billion of that cost is private, individual, costs, not costs to the state at all.

But let us assume, just for the sake of argument here, that everything said about fast food, childhood obesity and the costs to us all is correct. We still support such challenges and such watering downs. For:

Officials said that after they submitted their plans to improve children’s health, KFC has argued in some instances that the measures were “unlawful” because they had not been through all the correct processes, or that there was not enough evidence of links between obesity and the proximity of fast food outlets to schools.

We are in favour of the rule of law. It’s a basic and absolute requirement for a free and liberal society. Whatever it is that may not be done must be written down, passed through the legislature and be a rule, not a matter for the discretion of whoever is currently occupying the corner office.

Local authorities create unlawful plans? Then local authorities should be - must be - challenged about their plans until they manage to bestir themselves into producing something that is actually legal. They’re swift enough to impose that duty upon us, the citizenry, so fair is fair, no?

That is, the O Tempora, O Mores, complaint here is not that obesity is not being attacked, it’s that we now have to rely upon a fried chicken joint to preserve the most basic of civil liberties, the primacy of the rule of law.

One reason we don't believe certain economic claims about climate change

Geoffrey Lean - yes, yes, we know - tries to tell us about climate economics.

The Cop28 president told a shocking lie about fossil fuels – and he’s wrong about climate economics too

Wrong, eh?

Study after study has revealed the immense potential. One, by Deloitte for the World Economic Forum, concluded that a transition to net zero could benefit the world economy by $43 trillion over the next five decades.

A commission of some of the world’s top businesspeople and financiers decided that similar measures could create 380 million jobs.

Jobs are a cost, not a benefit. Having to direct human labour to some task reduces the amount of such human effort that can be devoted to sating some other desire - it’s a cost. So that boast is that dealing with climate change would add 380 million costs to the global economy. Yes, obviously, this is an opportunity cost but if you’re not doing opportunity costs then whatever you’re doing it’s not economics.

The Deloitte claim is here. The “bad” outcome they’re testing against is SSP2 6.0. That’s a target we’re already going to hit, we’re - roughly, you understand - on RCP 4.5 or so at present. But rather more importantly:

$178 trillion in global economic losses Net present value terms to 2070 in US dollars

Ah. So, divide by 50 years (yes, ignoring discounting, aren’t we such terrors?) to give $3.4 trillion a year. Perhaps 3% of global GDP currently. And very much more like 1 to 2% in 2070 - yes, all these forecasts assume that the global economy will continue to grow over the decades. For the loss being detailed is the cumulative loss, not the annual.

So, one thought is that this is a fraction of the Stern Review loss of 5% (an annual number off in that future) and so Deloitte is telling us that climate change is very much less of a problem than Stern did. Which is interesting.

Rather more apposite we think is that we don’t, in fact, know current GDP to within 1%. Whether or not we add drugs and commercial sex or not moves the number by that much. Imputed rents (what people don’t pay for living in the houses they own) is multiples of that. The difference between the first estimate of the monthly GDP numbers and the final count 6 or whatever months later can be 0.5% of GDP. Claims about a few percentage points 50 years out strike us as little more than a demonstration of a sense of humour.

As with Peter Lilley we’re fine with what people tell us about the physics of climate change. But the economics of it all is much more marginal. Leave aside the deluded who think that job creation is anything other than a cost. The reason that the Nordhaus and Stern analyses insist that we must do this the cheap and efficient way is that the difference - absent a Venus-syle runaway - is marginal. It’s a few percent either way. Therefore the efforts cannot, logically, be more than a few percent either way for if they are then the costs will be greater than any possible benefits.

The actual economics of climate change does tell us that avoiding disaster is a pretty good idea. After that it’s all rather a marginal issue.

Mr. Dimbleby really is wrong on this - obesity costs the nation near nothing

Yet another attempt from the founder of a fast food chain to tell us that - well, fast food actually - obesity is one of the grand public costs:

Britain’s weight problem is costing almost £100 billion a year and will scupper Rishi Sunak’s plans to get the sick back to work, analysis suggests.

This is not, in fact, true. It’s not true in the slightest. We assume that the idea is if the insistence is made forcefully and often enough then the political system can be stampeded into doing the wrong thing.

The cost to the NHS of obesity-related illness is now estimated at £19.2 billion a year, up from £10.8 billion, while the wider social costs include productivity losses of £15.1 billion, compared with £1.7 billion previously. The total cost of £98 billion, which includes the £63 billion cost of shorter, unhealthier lives, is equivalent to about 4 per cent of GDP.

As we’ve pointed out, repeatedly, obesity does not cost the NHS money. Yes, obviously, treating obesity related diseases has a cost. But we have a lifetime health care system. Therefore it is lifetime health care costs that matter. People dying young of exploding hearts save the system the money required for decades of hip replacements and Alzheimer’s care.

The researchers found that from age 20 to 56, obese people racked up the most expensive health costs. But because both the smokers and the obese people died sooner than the healthy group, it cost less to treat them in the long run.

On average, healthy people lived 84 years. Smokers lived about 77 years and obese people lived about 80 years. Smokers and obese people tended to have more heart disease than the healthy people.

Cancer incidence, except for lung cancer, was the same in all three groups. Obese people had the most diabetes, and healthy people had the most strokes. Ultimately, the thin and healthy group cost the most, about $417,000, from age 20 on.

The cost of care for obese people was $371,000, and for smokers, about $326,000.

That NHS cost of £19.2 billion therefore does not exist. The correct number is actually negative, not positive. The £63 billion is a private, individual, cost not a societal nor public one.

We’d be willing to take a bet that those public costs, all in, are negative given that the NHS cost is negative.

All of which really does leave us with something of a puzzle. Why are people trying to influence public policy with numbers that are so obviously untrue?

We’ve even been quoted making this point:

Tim Worstall, of the Adam Smith Institute, has called warnings that obesity poses an NHS funding crisis “nonsense on stilts”. He wrote: “When you add in the costs of the state pensions that those who die young don’t get, smoking and gorging save the government vast sums of money. Having us all slim . . . would cost the NHS very much more money than the current level of topers, smokers and lardbuckets does.”

Disagreeing with us is obviously no sin but being at odds with reality is. So why are they doing this? What’s the plot here?

Hayek did warn us about this

How people larffed and larffed when Hayek said that the creation of the National Health Service was to Road to Serfdom. Free health care would lead to an imposition upon us from government would it? Larff, Larff.

If we want lower taxes in the UK, we should get serious about becoming healthier

Hmm.

Our older and sicker population has a big price tag. Spending on working-age health and disability benefits is heading to £71bn by 2028-29, a 51% increase from today. We can’t get younger but, if we want lower taxes, we should get serious about becoming healthier.

We must eat our morning granola, do our press and sit ups, so as to be able to afford that health service. Physical jerks are to be performed in praise of the Wonder of the World. Somewhere out there we hear the echo of an Austrian accented chuckle.

We’ve got to stop smoking, eating meat, imbibing, exercise more, to save the NHS budget.

A warning to prohibitionists

This is true of booze, of drugs, of tobacco and, yes, jet engine parts:

Ryanair has found “fake parts” in two of its aircraft engines during scheduled maintenance checks, becoming the latest airline to be impacted by a brewing scandal.

The parts were discovered during assessment in Texas and Brazil over the past few months and have since been removed from the engines, the low-cost carrier’s chief executive Michael O’Leary told Bloomberg News.

It comes as the global aviation industry is grappling with a fake parts scandal that has left airlines and regulators scrambling to assess engines and trace equipment.

We do not, of course condone this. But we do know quite a bit about it as a result of having been out there in that international and global economy for all these decades.

The difficulty is that the nut, bolt or screw for a jet engine is worth 5x to 10x with the right piece of paper than it is without. Let’s not make the situation more complicated than that. It’s righteous that it should too, traceability of parts in something so complex, so horrendous in effects if failure occurs, is a very good idea indeed.

But, it’s always going to happen that people will try to trade across a 5x to 10x price difference. Note that this is not a result of markets or capitalism. This isn’t neoliberalism run riot - this is just what happens among humans. This also doesn’t mean that people who do even fake jet engine parts should not be righteously jugged, not that we should not investigate allegations of it - as here, allegations only so far.

What it does mean is that governments simply cannot go around creating 5x and 10x price differences as will be true of banning tobacco and so on. Because people simply will trade across those differences. As they do with drugs, at large scale, and as currently also does happen with both tobacco and booze.

With jet engines the consumers - the airlines - absolutely do not want fake parts at any price. For knowing use of them would likely violate both their insurances and also their licences. Now switch the model to one where consumers do desire the item on offer - drugs, booze, baccy. There is that demand, there is that profit margin, trade will happen across it.

This then being the message for the prohibitionists. Even if it were true that society would be better without these things - it wouldn’t - it still won’t work. And there’s absolutely no point at all in implementing a policy that won’t work. So, don’t.

A reminder - That basic supply and demand works, yea even for housing

There’s a waiting list for social housing. This could be taken as the number of people sleeping under hedges who desperately require housing at taxpayer expense. This could also be taken as being an exemplar of basic supply and demand. We can even go one stage further and suggest that it’s telling us something about the shape of the demand curve for housing.

The numbers:

There were 1.21 million households on local authority waiting lists on 31 March 2022, an increase of 2% from 1.19 million in 2020/21.

Or more recent numbers from the activists:

1.2 million households in England are currently stuck on waiting lists for a social home, a rise of 5% in the last two years.

The other numbers:

The number of people estimated to be sleeping rough on a single night in autumn 2022 is 3,069, which after 4 years of decreases has risen for the first time since the peak in 2017.

So, the 1.2 million is not those sleeping under hedges. If it isn’t, then what is it?

A reasonable definition of social housing is that housing on offer at lower than market rents. As our basic Econ 101 chart of supply and demand tells us, demand rises as prices fall. 1.2 million (minus the 3,500 if we insist) is therefore the number of people who would be willing to move in return for lower than market rents.

We can go further too. This tells us something about the shape of that demand curve for housing. Affordable housing (one component of social, but let’s run with that) is defined as being at 80% of market rents. So, a 20% price fall seems to increase demand by that 1.2 million of the about 30 million households (we might be blurring UK and England numbers here but the point still stands). A 20% change in price seems to move demand by 4%? That means that housing demand is inelastic with respect to price. Demand changes, as a percentage, by less than the percentage change in price.

That then - again from that supply and demand theory stuff - tells us that an increase in supply will have a significant effect upon price. For the same reason, demand doesn’t change that much with respect to price therefore an increase in supply will move the price more than the demand.

Building more houses therefore will indeed solve the housing affordability problem.

We could also abandon all this economic theory nonsense and just return to basic, plain, common sense. There’s a queue for cheap stuff, is there? Gerraway.

By definition going green reduces productivity

Diane Coyle is suggesting that there needs to be a good, hard and long look at Britain’s productivity problem. Which would be an excellent idea, of course:

But what explains the UK’s specifically dismal productivity problem?

Some culprits will be depressingly familiar. A new report from The Productivity Institute (TPI) documents the consequences of the decade of declining spending per capita on education at all levels above primary school, the way expenditure on research and development as a share of GDP has fallen far behind other G7 economies and the confusing mishmash of small business support schemes. There is no shortage of diagnostic evidence about the wide range of productivity-limiting challenges. But two overarching weaknesses stand out: long-term under-investment and policy churn.

Investment in the UK has been lower, as a share of GDP, than in other G7 countries for decades.

This then leads to this suggestion:

This political economy context is why this week’s report, which captures the views of many of the UK researchers investigating productivity, calls for a new independent and statutory body to monitor, evaluate and report on policies for productivity and growth.

This institution would parallel the Office for Budget Responsibility, with a remit covering supply-side policies. It would co-ordinate across areas of policy and levels of government, with a focus on spatial economic growth, and would involve relevant stakeholders in its assessments. And it would need to be protected from policy churn itself with a statutory footing.

No, we’re not in favour of yet another bureaucracy. But even if we were we’d insist that people get to grips with what is being measured when we talk of productivity. For, by going green, we are deliberately, definitely and with malice aforethought, reducing productivity. This is also by definition, this is not something arguable.

We’ve mentioned this before around here but here’s one we prepared earlier, elsewhere:

We are, by dealing with those externalities, devoting economic energy — and other economic resources, but think just of the human effort here — to solving things which are not included in markets, in prices, in GDP. It’s that last factor that should cause the dawning realisation. It’s entirely true that solar power creates more jobs than nuclear per GWh of ‘leccie produced. The GWh is worth the same from either source, though, and solar requires more human labour — that’s the same statement as “creates more jobs” — so therefore solar power lowers measured productivity.

Sure, sure, we can say that not melting Greenland is important — human utility maximising even — and that’s almost certainly true as well. That’s not in our economic measures, though (externalities, see?), which means that, yes, preventing Lowestoft sinking beneath the waves is actually recorded as a decline in UK productivity.

It could be entirely true that we’re better off by addressing climate change. But it would still also be true - and again by definition - that by addressing climate change and other green externalities we are reducing productivity.

Now, given that the person recommending a Productivity Institute - or as far as we’re aware, actually runs one - isn’t mentioning this point we’d assume they’re not thinking of it. Which means we’re really most unsure of the merits of the thinking being done. And we’d certainly not recommend entombing that thinking into the bureaucracy.

It really is true that going green reduces labour productivity. By definition. A conversation about productivity that doesn’t even mention this isn’t one worth having.

Shouldn't the CMA know this?

The Competition and Markets Authority tells us that increased prices - beyond increased inpout prices - on branded goods increased inflation. This is not obviously true.

But they claim it:

But the evidence collected by the CMA indicates that, over the last 2 years, around three-quarters of branded suppliers in products such as infant formula, baked beans, mayonnaise, and pet food have increased their unit profitability and, in doing so, have contributed to higher food price inflation.

The problem here is that they also claim the following:

However, own label products often provide cheaper alternatives with suppliers of these products earning lower profit margins and competing to win and retain contracts from retailers. In all but one of the relevant product categories the CMA looked at, as food prices have risen, many consumers have switched away from brands towards own label alternatives, or reduced their consumption, leading to a decline in brands’ market shares and profits. This switching is positive for competition and allows those able to switch, to lessen the impact of high food price inflation.

Aaaah. No. For that second is substitution. The price of one good - branded baked beans - rises so consumers substitute away to unbranded or supermarket own. So much so, as they say, that total profits and sales by the branded goods have fallen.

Now, if inflation was the counting of the same goods over the years then this makes no difference. But inflation isn’t that for inflation takes account of substitution.

From the ONS:

Within each calendar year, the basket contents are fixed so that changes in the indices from month to month reflect only changes in prices, and not variations in the quality and quantity of items purchased.

However, the contents of the basket and associated expenditure weights are updated annually. This is important in helping to avoid potential biases that might otherwise develop, for example, because of the development of entirely new goods and services. These procedures also help ensure that the indices reflect longer-term trends in consumer spending.

The substitution away from those higher priced branded goods (now priced even higher) to own brand is already included in our inflation statistics. Because the consumer basket has changed in order to reflect those changes in buying habits.

Just one of those things that bolsters our long running insistence that it’s not possible to have enough knowledge to run an economy in detail. Hayek got there before us of course. But this is a good example of the point. The very people trying to work out the effects of inflation upon food prices aren;t accounting for one of the effects of inflation upon food prices.

This isn’t going to then produce the information necessary for detailed economic management, is it?

Another one of those ideas that just doesn't work

No, this wouldn’t do what is claimed:

All businesses should be forced to embrace the environmental, social and governance (ESG) movement, New Labour’s favourite think tank has argued in an attack on the profit motive.

A report by Demos, viewed as a key source of Labour policy in the Blair years, claimed that changing company law to “insert purpose into the heart of directors’ duties” would add £149bn to the economy.

If business were forced to do everything that is currently trendy then the world would be a better place. Well, by the standards of those who support what is trendy that’s no doubt true. But the claim is more than that. It is that businesses which do this grow faster, are more profitable, do better.

Just chew on that for a moment. The shareholder interest is in businesses which grow faster, are more profitable, do better. Therefore, a system of company law which prioritises the shareholder interest already forces companies to do those things which make the company grow faster, be more profitable, do better.

It is only if all of these other things - the stakeholder interests, the promotion of diversity, recycling and who knows, reparations for slavery and whatever - do not promote growth, profitability, better, is it necessary to have a law forcing a company to consider these things.

The very insistence that there outta be a law ‘baht it is all the proof we need that those promises of growth, profits, better, are not true. In fact, the insistence upon the forcing is an insistence upon shareholder interests being subsumed into what is trendy, with less growth, lower profits and not better.

That is, the new suggested law would make us all poorer. And why would we want to do that?

This is also a more general feature of such desires for new laws, new forcings. We often are presented with evidence - well claims, at least - that this or that will make the world a better place. Often enough backed by how it would be better for suppliers, producers, if these things were done. To which the correct response is, well, thanks for the information. If the claims are true then in the face of the new evidence people will adopt the new ways. But the moment there’s an insistence upon forcing this new and better way we gain the evidence that not even those promoting it do believe it’s better. For, they’re not willing to allow the betterness to be evident, even after their explanation, they’re insisting upon the forcing. And you don’t have to force people to make themselves better off. Explain to them how, maybe yes, but force, no.

That very insistence upon forcing ESG on all is all the proof we require to know that even Demos thinks ESG is a crock. So, err, why would we do that?