Colin Hines and the Magic Money Tree

It had to happen of course: once people started talking about unconventional monetary policy then there was always going to be someone who espied the Magic Money Tree. And it's Colin Hines who has:

It was heartening to hear Ed Miliband say in his speech that tackling climate change is a passion of his and that solving it could be a massive job-generating opportunity (Report, 24 September). The inevitable question of how to pay for this can be tackled by writing to Mark Carney, the governor of the Bank of England. He is on record as saying that if the government requested it, then the next round of QE could be used to buy assets other than government debt. Miliband said that the Green Investment Bank would be used to fund green economic activity and so Labour should allow it to issue bonds that could then be bought by the Bank using “Green QE”. Similarly, local authorities could issue bonds to build new energy-efficient public homes funded by “Housing QE”.

The Bank has already pumped £375bn of QE into the economy, but with little tangible benefit to the majority. Imagine the galvanising effect on the real economy of every city and town if a £50bn programme of infrastructural QE became the next government’s priority. This could make every building in the UK energy-tight and build enough highly insulated new homes to tackle the housing crisis. It would provide a secure career structure for those involved for the next 10 years and beyond, massive numbers of adequately paid apprenticeships and jobs for the self employed, a market for local small businesses, and reduced energy bills for all. Such a nationwide programme would generate tax revenue to help tackle the deficit, but in an economically and socially constructive way. Best of all it would not be categorised as increased public funding, since QE spending has not and would not be counted as government expenditure. Colin Hines Convener, Green New Deal Group

Wonderful, eh? We can have everything we want, and a pony, without ever having to pay for it!

Hurrah!

The problem being that Hines (and there are others of that ilk out there too) hasn't grasped the difference between the creation of credit to reduce interest rates (what QE does) and the creation of base money to spend into the real economy. That second has rather different effects: as the Germans found out post WW I, the Hungarians post WW II and the Zimbabweans more recently. It creates hyperinflation, those last having it to such a bad extent that they kept printing until they'd run out of the real money necessary to buy the ink to print the play money.

I do not, note, claim that £1 billion or £50 billion or even £500 billion of this "Green QE" will inevitably produce inflation of 1000 % a day. I do however claim that use of this Magic Money Tree will, given the way that politics works (which politician doesn't like spending money she's not had to find through taxation?) will inevitably lead to hyperinflation. For the thing is we've tried this experiment before, many a time, and that is always what does happen.

Simply not a good idea.

Trying to explain the American academic jobs market

Something's clearly not right about the academic jobs market in the US. The actual process of applying for a job seems to take forever and as one of the more recent Nobel Prizes pointed out such search frictions and inefficiencies do prevent markets from clearing. This is, you know, a bad thing. Further, we've got the fact that American academia is pumping out huge numbers of Ph.Ds who then can't find jobs as tenured professors: but also can't find them elsewhere in the economy as the only thing they've really been trained to do is to try and become tenured professors. They thus end up trying to survive on less than minimum wage as adjunct professors.

So this isn't what we might want to hold up as an example of a successful part of the jobs market. But the question then becomes, well, why is it like this? What's gone wrong?

One possible answer being that this is what happens when you let the left wingers try to run a market. It's not actually much of a surprise to anyone, or at least it shouldn't be, that the US professoriate runs largely leftish. 90% to 10 D to R is the usual number bandied about. It also wouldn't be a surprise to find out that those who do the academic administration tend further left than that: there does have to be an explanation for the various diversity policies around the place.

The end result being extraordinarily strong union protections (that tenure means that, roughly, absent raping the Dean in his office no professor can get fired), vast overtraining of would be market entrants and the majority not actually being able, they being excluded from those union protections, to gain a living. Oh, and the end product becoming ever more expensive as the providers layer themselves with ever more orgies of bureaucracy.

Sounds just wonderful really: or perhaps we might want to use it as a warning. This probably isn't the way that we want the entire jobs market to work so let's not attempt to add more of those job protections, unionisation and so on.

Everything's coming up monetarist!

In "QE and the bank lending channel in the United Kingdom", BoE economists Nick Butt, Rohan Churm, Michael McMahon, Arpad Morotz and Jochen Schanz tackle the popular creditist view that movements in lending drive overall activity, and that quantitative easing works by stimulating lending, and find "no evidence to suggest that quantitative easing (QE) operated via a traditional bank lending channel". Instead, their evidence is consistent with the monetarist view, that "QE boosted aggregate demand and inflation via portfolio rebalancing channels." They find this result by looking at the difference between banks that dealt directly with the Bank of England when it was buying gilts (UK government bonds) with new money in its QE programme. If the creditist view held, these banks would be more able to expand their lending with the extra deposits created when the BoE hands over new money for gilts.

Our first approach exploits the fact that, for historical and infrastructural reasons, it is likely that not all banks are equally well placed to receive very large OFC (other financial corporation) deposits. We use historical data on the share of banks’ OFC funding (relative to their balance sheet) to identify a group of banks that are most likely to have received deposits created by QE, which we call ‘OFC funders’. We use this variable, along with variation in banks’ OFC deposit funding to test whether there was a bank lending channel by comparing the lending response of such OFC funders to that of other banks during the QE period.

They check their result by looking at gilt sales that commercial banks had no control over, since they were obliged to carry them out on the behalf of their clients. This makes them random with respect to those banks' separate funding and lending decisions, and isolates the effect of extra deposits created by QE on those banks' credit activity.

Our second approach makes use of the fact that while most gilt purchases were from OFCs, these had to be settled via banks who were market makers in gilts. As these gilt sales were likely to be unrelated to banks’ lending decisions, we can use data on gilt sales to remove the endogenous variation in banks’ OFC deposit holdings and so test for a bank lending channel using an instrumental variables approach that controls for the interrelatedness of the bank’s decision.

This paper only adds to a welter of recent studies supporting the monetarist perspective on the macroeconomy. "Institutional investor portfolio allocation, quantitative easing and the global financial crisis", another BoE paper released earlier this month found, like Butt et al., that pension funds and insurers rebalanced their portfolios in response to QE, moving away from gilts and into corporate bonds relative to what they would have done without the programme.

If firms rebalance their portfolios to reflect their preferences, then relative prices would not appear to be 'distorted' by the programme, and markets would still be performing their chief function—aggregating information so everyone can economise effectively and create wealth.

Another BoE paper, from April, "What are the macroeconomic effects of asset purchases?" found that:

Our results suggest that asset purchases have a statistically significant effect on real GDP with a purchase of 1% of GDP leading to a .36% (.18%) rise in real GDP and a .38% (.3%) rise in CPI for the United States (United Kingdom).

Finally, another new paper tells us that even the good old quantity theory of money is pretty good at forecasting post-war US inflation. Looks like everything's coming up monetarist!

It really is the planning system that's harming us

It really is the 1947 Town and Country Planning Act that is causing our housing problems:

Britons live in the smallest homes in Western Europe because of draconian planning laws restricting house building, a report found yesterday.

Residential floor space in Britain is on average just 66 square metres (710 square feet) per household, compared to a spacious 118 square metres (1,270 sq ft) in Ireland, 115 square metres (1,238 sq ft) in Denmark or 110 square metres (1,184 sq ft) in Italy, according to data compiled by the Institute of Economic Affairs.

‘All the evidence suggests that years of tight planning controls restricting house building has led to us having the smallest space per household in Western Europe.’ The figures were compiled as part of a report which confronted some of the most widely-held views about the cost of living crisis.

We have some of the most expensive housing in Europe and some of the smallest. Those two logically go together of course: people tend to consume less of something the more expensive it becomes. But is it actually desirable?

If we were facing a shortage of land upon which to build then perhaps so. If something does have to be rationed then rationing by price is the way to do it. But there isn't any shortage of land. Housing takes up some 3% of England all urban areas no more than 10%. Famously, more of Surrey has golf courses than housing on it. What we do have though is a shortage of the pieces of paper that allow building a house on a piece of land.

Many say that this is a problem that government should solve. Build more council houses for example, force the private sector to do so. And the aim is correct, the government should solve this problem. But not by actually doing anything of course. That shortage of planning permissions is an active action by government: and the solution is therefore for them not to try to do something but to stop doing something.

Simply liberalise that planning system. After all, the last time the private sector built houses in the sort of volumes we need today was the 1930s. And it built all those houses where people wanted to live, in sizes they desired: those semi-urban semis are exactly what people find desirable today as well, judging by their prices. And all of this was done without much restriction on what could be built where.

We know this solution works because the last time we had a reasonably functional housing market was when we had an absence of that planning.

The visa and the sausage

The policy making process is a messy business. It is widely and fairly quoted that “laws, like sausages, cease to inspire respect in proportion as we know how they are made.” Think tanks sit at the very start of the policy process – writing recipes for politicians to feed to the public (as well as writing recipes for the public to feed to politicians). However, polices can become adulterated as they are funnelled through the sausage machine of government. Some policies are just bad ideas – such as the creeping reintroduction of incomes policies, which dramatically and unequivocally failed in the 1970s – but some good policies fail in their implementation. At least one is failing because nobody knows it exists: the Tier 1 Exceptional Talent Visa for tech.

As Sam Shead explains at TechWorld:

As part of an effort to get more of the world's best tech entrepreneurs and software engineers to come to the UK, prime minister David Cameron announced last December that the government was going to allow Tech City UK to endorse 200 of the 1000 slots. At the time, Cameron said more overseas talent was needed if the UK wanted to overcome the skills gap that exists in the tech sector.

The Tier 1 Exceptional Talent Visa should be a fast-track for tried and tested entrepreneurs to enter the UK, but even though Tech City UK has been free to endorse entrepreneurs since April, the policy is struggling to get off the ground.

The failure is largely the result of so few people knowing the visa route even exists. I’ve spoken with plenty of entrepreneurs, recruiters and lawyers – all of whom are needed to make this policy work in practice. Most haven’t heard of this visa route and none has the information required to understand the process. There is plenty of blame to go around but Tech City UK and UKTI probably deserve the brunt of it.

The failure of the Tier 1 Exceptional Talent Visa tech demonstrates how government departments and quangos are falling short in their job of communicating policy to so-called stakeholders (for want of a better word). We can’t rely on MPs to spread the word. In a recent poll commissioned by The Entrepreneurs Network it was discovered that they are largely ignorant of current policies to support entrepreneurs.

Based upon the evidence (and my cosmopolitan biases), fiddling with the Tier 1 Exceptional Talent Visa doesn’t go nearly far enough in liberalising the immigration system. But before this great battle of ideas is won – which will encompass cultural as well as economic clashes – every failing policy is a setback.

Philip Salter is director of The Entrepreneurs Network.

On Ed Miliband's new tax on tobacco profits

Ed Miliband has decided that there should be higher taxes on the profits of cigarette companies. The argument being that smoking costs the NHS money and that thus some cash should come from the one activity to cover the other. However, that activity of smoking already more than covers the public costs associated with it. As is helpfully pointed out here:

Estimates for the amount spent on tobacco in the UK in 2011 range from £15.3bn to £18.3bn. The cost of smoking to the NHS is put at between £2.7bn and £5.2bn.

The Treasury earned £9.5bn in revenue from tobacco duties in the financial year 2011-12.

When even The Guardian is pointing out the mathematical difficulties with a Labour Party leader's promises then it would be fair to say that it's not really going to fly, wouldn't it?

And that is rather the point about smoking. The activity is already sufficiently taxed that it pays for all of the public costs associated with it and more (and that's to ignore the fact that shorter lifespans as a result save the NHS money). There are substantial private costs of course: but public taxation isn't the correct way to deal with such private costs either.

Why Miliband is wrong on energy policy

This article was originally published in the Young Fabian’s quarterly magazine, Anticipations (Volume 18, Issue 1 | Autumn 2014). On this we will agree: the corporate monopoly dominating the UK energy market needs to come to an end. Currently, British customers have a total of six firms to choose from in the energy market, all of which offer very limited price distinctions.

And those prices keep going up. Since 2010, gas and electricity rates have risen by three times the rate of inflation (10.2% between 2010-2013). Quite rightly, the Big Six are constantly under attack from very political party in the UK for over-charging customers and raising retail prices, even when wholesale costs fall. With such little competition in the energy market, mega-firms can charge extortionate prices, and customers have no choice but to pay the bill.

Another point of agreement: a change in government regulation is key to breaking up this monopoly. Both Labour and Conservatives acknowledge that government regulations, like Ofgem, aren’t holding the Big Six accountable for what they charge customers. Over the past few years, party leaders have come up with new variants of the Regulatory State to combat the problem. Most recently (and most misguidedly) Ed Miliband has advocated for a government-mandated freeze on energy prices, which would force firms to fix their prices for 20 months, regardless of future changes in market conditions.

Why is this misguided? Let’s put aside Miliband’s refusal to acknowledge the costs that are loaded on to energy companies by the state (ie: requirements to source energy from renewables), which in turn, gets pushed onto the customer and focus on a second, more important point: Miliband’s policy proposals reinforce the energy monopoly.

It’s near impossible to create a market monopoly without help from the ultimate monopoly; that is, competition in the market place is so often drowned out, not by competitors, but by the state.

The energy sector is a prime example of well-intentioned government regulation gone awry. The sector is regulated so heavily, through both onerous compliance requirements and heavy taxation, that it is near impossible for any budding energy firm to compete with the Big Six. In its effort to stop energy firms from over-charging customers, the state has effectively regulated all competitors out of the market, re-enforcing the monopoly it was trying to prevent.

The bureaucratic, slow-moving nature of government bodies means that they are not equipped to understand or anticipate the unpredictability of market prices on energy. The security of energy supplies, complexities of long-term contracts, and real commodity costs are often dismissed by politicians who have made unsustainable, politically motivated promises to voters. Whilst the Big Six have no incentive to bring energy prices down when they can, a Labour prime minister would have no incentive to bring the prices up even when he must.

Britain needs appropriate, scaled back monitoring of the energy market that removes ‘safeguards’ for the Big Six’s market share and introduces healthy competition in the market place. A less-regulated system where consumer choice dictates the real price of energy would see monthly bills drop. But piling price fixation on top of bad regulations will produce a lot of heat and very little light.

Two cheers for technocracy

Who needs experts? The minimum wage was once an example of the triumph of technocracy, where decisions are delegated to experts to depoliticise them. The Low Pay Commission was set up to balance competing priorities – increasing wages without creating too much unemployment. If you were a moderate who thought the minimum wage was a good way of boosting low wages, but recognised that it might also create unemployment, the LPC gave you a middle ground position. (For what it’s worth, I’m an extremist.)

That technocratic settlement also allowed politicians to, basically, safeguard against an ignorant public. By delegating decisions like this to experts, bad but politically popular policies could be avoided. Relatively well-informed politicians could avoid having to propose bad policies by depoliticising them.

Other examples of this include NICE’s responsibility for deciding which drugs the NHS should and shouldn’t provide, and the Browne Review that recommended student fees, which had cross-bench support. The old idea that “you can’t talk about immigration” comes from an informal version of this – everyone in power knew that people’s fears about the economics of immigration were bogus, so they were basically ignored.

But that technocratic settlement now looks dead. Labour has now made a specified increase to the minimum wage part of its electoral platform, following George Osborne’s lead earlier this year. That means that voters will have to choose not just between two rival theories about the minimum wage, but two competing sets of evidence about whether £7/hour or £8/hour is better, given a wage/unemployment trade-off.

Whether voters are self-interested or altruistic doesn’t really matter. A self-interested low wage worker would still need to know if a minimum wage increase would threaten her job; an altruistic voter would similarly need to know a lot about the economics of the minimum wage and the UK’s labour market to make a judgement about what level it should be.

And of course the minimum wage is just one of dozens, if not hundreds, of questions that political parties offer different answers to that voters have to make a judgement about.

In practice this does not happen. Voters are very uninformed about basic facts of politics, and are almost entirely ignorant about economics, which almost everyone would agree would be necessary to make the correct judgement about something like what the minimum wage level should be (even if they didn’t agree on which theories and evidence was relevant). Even the use of rules-of-thumb such as listening to a particular newspaper or think tank (ha) will suffer from the same problems.

Voters, then, face a nearly impossible task. Assuming they are bright, well-intentioned, and believed that it was important for them to cast their vote for the party that would have the best policies, they would have to amass an enormous amount of information to make the right decision on all the questions they, in voting, have to answer.

So voters are trapped. They cannot know what minimum wage rate is best any more than they can know what drugs the NHS should pay for. They are, empirically, very unaware of basic facts, but they would find it hard to overcome that even if they wanted to.

Does democracy make us free? Maybe, but it’s the freedom of a deaf-blind man – we can choose whatever policy we want, without any idea about what those policies will actually do. So, if the alternative is more direct democracy like this, maybe technocracy isn’t so bad.

The end of an auld West Lothian song

The Scottish National Party leader Alex Salmond loves causing trouble (as many contemporaries of mine from the University of St Andrews relish as well). He must be grinning, because despite losing the independence referendum in Thursday, he has really put the Westminster politicians in a stew.Before the vote, to buy off wavering Yes voters, all the main political parties in Westminster signed a pledge to give more powers to Scotland anyway. On Friday, UK Prime Minister David Cameron correctly declared that if Scotland was getting more power, then people in Wales, Northern Ireland – and particularly England, the only bit of the UK without devolved powers – would expect nothing short of the same. He is right, even if that reality only made itself plain after the more-powers pledge had actually been signed. And having set the idea running, he realizes that he has to initiate a House of Commons vote on English devolution before the June 2015 UK general election.

Labour leader Ed Miliband is currently refusing to back any such plan, calling it a 'back of the envelope constitutional change'. He has a point: Westminster politicians are remarkably cavalier about how they change the UK's constitution. A small public company cannot change its rules just on a majority vote of the directors, so why should a large government be able to change its rules on a simple majority in Westminster? But his real concern is to ensure that the large number of Labour MPs that Scotland sends down to Westminster can still vote on everyone else's business, the 'West Lothian Question'.

The impish Alex Salmond will be chuckling at the stooshie he has created. Some say we should devolve powers down to the English cities and local authorities. Others say we need a proper English Parliament. A few talk about barring Scottish MPs from voting on English-only laws.

But devolution of power to the local authorities is a non-runner. We have been promised it for decades, but it has never really happened, and nobody trusts that it will now. As for an English Parliament – well, we have seen the expense of the Scottish one (the extravagant building alone cost ten times its original estimate) and its notoriously poor quality (stuffed, inevitably, with failed local councillors and superannuated MPs).

The simple solution to devolution, all those years ago, would have been to form English, Scottish and Welsh parliaments out of their respective Westminster MPs; and have them meet at Westminster in the mornings on their own country business, then together on UK business in the afternoon. Yes, there will be a few arguments about which matters are 'UK' and which are 'English'. But the solution is costless, and without adding an extra tier of government, you get home-grown politicians of some quality deciding home-grown issues. It is the obvious solution for England. And the end of an auld West Lothian song.

£8 minimum wage hype: political trick, economic disaster, moral outrage

Britain’s Labour Party leader Ed Miliband says that a Labour government would boost the national minimum wage to £8 an hour, an increase of about £60 per week, by 2020. He says the UK economy is booming, and the low-paid should get a bigger share of it. Actually, at present rates of growth, the minimum wage will be close to £8 in 2020 anyway, so this is a one of those political sensations that doesn't amount to much. Even so, it is foolhardy now to commit UK businesses to pay any specific figure in 2020, since anything could happen in the meantime.

The minimum wage gets unthinking politicians (and not just Labour leaders) dewy-eyed. 'We can't have people being paid a wage that isn't enough to live on.' 'Businesses should pay their workers more, and take less profit.' 'The minimum wage hasn't killed jobs as the doomsayers say.' You know the story.

In fact, high minimum wages do destroy jobs. in particular, they destroy those starter jobs, the low-paid, temporary jobs that once gave young people their first step on the jobs ladder – pumping petrol (as I did), stacking bags in supermarkets, ushering people to their seats at the flicks. Now those jobs don't exist, because they are not worth the minimum wage (plus all the National Insurance and the burden of workplace regulation that goes with them – a particular burden on small firms). So we have a million young people out of work.

As for profit, try using that argument on anyone running a small business, already weighed down by taxes, rates, and regulation. Often they are getting less than their lowest-paid employees, and working longer hours for it Higher minimum wages mean they can afford to employ fewer people, or provide less generous perks and conditions.

I don't want to live in a country where people can't afford to live on what they take home either. That is why we have a welfare system, to top up the earnings of the lowest paid. We need a negative income tax – above the line, you pay tax, below the line, you get cash benefits – structured so that you are always better off in work than out of it. A paying job, even a low-paid job, is the best welfare system the human mind can devise.

And we must take low-paid people out of tax and national insurance entirely. Then more small firms could afford to take on more low-skilled workers and give them that first step on the jobs ladder.

If we could simply vote ourselves higher pay, why stop at £8? Why not fix the minimum wage at £800 an hour. The answer is obvious. The only people who would be worth that amount to anyone would be a few Premier League footballers, rock stars, investment bankers and high-class hookers. The rest of us would be out of a job.

The minimum wage does no harm to people who are already earning it, though it does them no good either. But it does positive harm to those earning less, or those who cannot get a job at all. The former will be let go, or will have to endure worse conditions; the latter will find it very much harder to get a job. And all that, of course, has already happened.