The Pin Factory Blog

Keynesianism that is, or the management of the economy through fiscal policy. Allow us, for a moment, to pretend, and assume that we've found ourselves miraculously in agreement with all and every of Keynes' tenets. We will even agree that borrowing £175 billion in the coming year is a good idea (and that no, it doesn't matter what we spend it on) because we really could do with some fiscal stimulus.

So, where does this leave us? Well, we're saying that we need this fiscal stimulus because there are unused resources in the economy and that growth is going to be below trend. Right, but as the IFS points out, this gives us something of a problem. For if we are below trend now it's fairly easy to show that in recent years we were above trend. As indeed the IFS points out.

Now remember that we have drunk the Keynesian Kool Aid in its entirety. Just as we believe in fiscal stimulus when growth is below trend, we also believe in fiscal contraction when growth is above it. And can anyone see that happening in recent years?

Such a contraction would have meant raising more in taxes than was being spent by government. Instead of public borrowing, we would have had debt repayment. And can anyone really believe that was going to happen? When you've Polly Toynbee screaming that we can and must abolish child poverty for only a few billion more? When every policy panhandler is pronouncing on how this or that evil of the world can be solved for just a little more taxpayers' cash and anyway, isn't this what a Labour government is for?

Well, quite. The failure of the system is thus a political one at the very least. Whether it works as an economic system is for others to determine but if it's politically impossible to have fiscal contraction when the theory says that there must be fiscal contraction then it's not all that useful a theory, is it?

So, they've finally nailed one of the bankers, fined him and banned him from The City.

Peter Cummings, the HBOS banker whose division lent billions of pounds to property developers, has been given a lifetime ban by the Financial Services Authority for his role in the banking crisis. Cummings, who has also been fined £500,000, is the only former HBOS banker to be penalised by the City regulator as a result of the near-collapse of the bank which was rescued by Lloyds in September 2008 - and the highest profile banker to be punished since the financial crisis.

I find this all just too delicious for words.

Let's just potter through the standard critique of The City and banking shall we?

Everyone was too committed to trading and products rather than relationships. Too much investment banking and not enough commercial banking. Exotic products and derivatives rather than proper loans to real businesses. Even, not enough real investment, only loans.

We're told that the answer to all of these problems is to divorce investment from commercial banking. To tax, with the Robin Hood Tax, that socially useless trading. To reduce the productisation of things and to go back to relationship banking. To encourage banks to provide real capital, equity, not just debt and loans.

I'm not being unfair here, am I? This is generally the current received wisdom, yes?

So, which banker do we actually fine and ban from The City? The one who used no derivatives. Did not do any trading. Was a straight commercial banker, nothing to do with the socially useless stuff at all. Who invested in real companies making real product. Who was willing to invest equity as well as just provide debt finance. Whose activities would not have been affected for one moment by a Robin Hood Tax.

One of these three things has to be wrong. The initial analysis of the basic problem, the solution to that perceived problem or the bloke we've dumped the blame upon.

Unless, that is, we English are even better at irony than our global reputation already suggests. Punishing the guy who did what everyone says all bankers should now just do is irony, isn't it?

It's really rather difficult to know whether to laugh or cry at this latest story. The subsidy junkies are now arguing against subsidies.

Chinese solar companies could soon find themselves bereft of some of their biggest foreign markets as Western manufacturers intensify a solar trade war and seek stiff anti-dumping duties on low-cost Chinese products. German group SolarWorld said on Thursday it was working on steps to curb alleged price dumping by Chinese rivals in Europe. This comes less than a day after its U.S. unit led a group of seven U.S. solar companies in urging the U.S. government to slap anti-dumping duties on Chinese-made solar energy products.

The various European and US solar power companies have been gargling subsidies since the very first day they were a gleam in a rent seeker's pocketbook. They're so voracious in their eating of such subsidies that solar produced electricity in the UK is four times the price of conventionally so. In Germany it costs $1,070 per tonne CO2 not emitted: some $990 more than the $80 cost of such emissions. The entire industry exists only because of the great gobbets of taxpayers' money that has been thrown their way.

And now they are complaining about other people offering subsidies?That there should be trade and tariff barriers to make sure that we the poor bloody consumers cannot get a piece of the action? Cheap solar panels subsidised by someone else?

I suppose I should laugh or cry at this rather than what I'm very tempted to do: shoot them all for Gaia will know her own.

Lloyds TSB has just announced its results: 

The group, Britain's fifth-biggest bank, has taken a £280m hit on risky sub-prime loans, but that is only a fraction of the figure suffered by rivals such as Barclays, which earlier this week revealed a £1.6bn write-down.
Chairman Sir Victor Blank said the bank had benefited from its cautious approach.

Leave aside the Chairmanspeak guff that follows about high-quality sustainable results and long-lasting relationships. Knights, let alone chairmen of major banks, are not supposed to do the happy dance, sneer at their competitors and scream "Who's your Daddy!" however much they would like to. For the simple truth is that Sir Victor and his team have done exactly what the shareholders are paying them for, investing their capital so that it fructifies in a satisfactory manner while the team at Barclays were perhaps less successful and at Northern Rock, well, not successful at all.

But that's how the system works: we've not found any method better than people doing as they wish wth their own money: hiring those stewards for it that they trust. Those who turn out to be worthy of that trust prosper as do the businesses they run and those who invest in them, waxing fat off the judgement of their servants and hirelings.

Those who are careless or foolish in where they invest stand to lose their money: exactly the tonic needed for people to be careful about where they do so. Harsh it may sound, but there's nothing unfair about capitalism in this manner. 

One of Brown’s plans to boost the economy and his poll ratings, sooner rather than later, regardless of the costs, is the “biggest financial stimulus the world has ever seen". Few think Britain is in the right shape for a stimulus. Mervyn King has warned against it, markets warned too, and voters will only support it in the hope that the economy will recover.

It seems Brown will undertake any frantic measure available to boost the economy during his term, without regard for future burdens. He is playing a political and irresponsible game, inconsistent with his supposed focus on economic stability.

To make things worse, it is not even clear that the fiscal stimulus is a viable method of addressing this recession. To ‘stimulate’ Gordon must tax, borrow, or print.

If he taxes, he takes with the left hand, and dishes out with the right: a mere transfer. There may be positive multipliers on government spending, but there is a negative multiplier on all the lost private spending. As government investment is less efficient than that undertaken privately, the net effect will be negative.

If he borrows, then our debt burden will balloon into a debt bombshell of mass economic destruction. Borrowing will also take funds out of the market for loanable funds, and thus may limit the private sector’s access to funds. People will also make some adjustments in light of eventual future pain, further negating any positive elements.

If he prints, then he starts a very risky game. The private sector’s changed expectations in light of monetary inflation will mitigate the stimulus. This would then lead to redistribution rather than growth. Inflated money supply may also lead to overshoot and severe inflation, and even if that is avoided, if it is excessive it will almost certainly create the conditions for the next money-fuelled bubble.

Brown should stop trying to get the economy to a quick fix ‘boom’ for political gains, and think more about long-term stability. One hopes his G20 counterparts have restraint, and block him following what Topolanek the EU president called, the “road to hell".

The UK’s recent growth figures have been decidedly lacklustre – just 0.2% over the last quarter. Despite the claim of exceptional factors – few of which are totally convincing – the economy is close to flat-lining. This trend is hardly surprising as many households seek to rein in their debts after a near decade of over-spending. Moreover, many employees fear the loss of their jobs as the public sector cuts impact more deeply. Hence, economic caution is the order of the day.

Against this background, notwithstanding the deep-seated economic problems in the EU and in the US, modest economic growth should be expected as the excess debt of yesteryear is unwound. In particular, demand for ‘big ticket’ items has been frail. The house-building sector, which plunged on the back of the 2008 financial crisis and the scarcity of mortgages, remains in the doldrums. The UK’s top two electronic retailers – Dixons and Comet (part of KESA) – are both struggling whilst the outlook at Carpetright, a bellwether for the consumer sector, is still grim. 

For the Government, persistent low economic growth will make it immeasurably harder to bring about major reductions in public borrowing. Apart from accepting that low economic growth rates may well prevail for some considerable time, what can be done?

First, the Government needs a renewed offensive to cut back public expenditure, which is still growing strongly, especially with the net interest cost climbing remorselessly. The scope for cutting the cost of social security remains vast, whilst other major budgets, including local government – some of which is still living ‘high on the hog’ – and defence procurement present open goals for savings: similar comments are applicable to the protected NHS.

Secondly, whilst bringing public borrowing under control remains paramount, the Government also needs to give a medium-term priority to delivering substantial tax cuts. In summary, the vision of ongoing annual economic growth of 2.5% or more looks very optimistic.

One of the odder little corners of economics is development economics. It seems to be where bad lefty ideas go to be imposed on poor people after we've found out they don't work for us. As an example I would offer some of the witterings of Ja Hoon Chang: he says that free trade might be a good idea for rich countries but not for poor. Much better that they have a benevolent government planning everything and fostering infant industry protection and the like. You might then mention the socialist calculation problem: but, but, economies are just too complex to plan, no one can ever have the right information!

To which a standard (not Chang particularly, at least not so far as I know) response is that well, rich economies are indeed complex. So knowledge is very difficult as you say. But poor economics are really simple so planning can be done. So Yah Boo Sucks baggsie me the job as Minister of Planning (or his highly paid expat adviser at least). Which is just lovely until you try to calibrate this idea against the real world:

Two years ago Ghana's statistical service announced it was revising its GDP estimates upwards by over 60%, suggesting that in the previous estimates about US$13bn worth's of economic activity had been missed. As a result, Ghana was suddenly upgraded from a low to lower-middle-income country. In response, Todd Moss, the development scholar and blogger at the Center of Global Development in Washington DC, exclaimed: "Boy, we really don't know anything!" Shanta Devarajan, the World Bank's Chief Economist for Africa, struck a more dramatic tone. In an address to a conference organised by Statistics South Africa, he called the current state of affairs "Africa's statistical tragedy".

It's worth reading the whole of that piece. Yes, I know it's about economics, I know it's in The Guardian, but it's still worth reading. Nigeria, for example, has spiffed up its statistics and is expected, as a result, to double its estimate of GDP. And this is the sort of information environment in which people say that economic planning can be done? One where we're missing 50% of the entire economy from our numbers?

Which leads to an interesting conclusion. They've already agreed that rich economies shouldn't be planned because the knowledge problem. But that knowledge problem is worse in the poor economies: only the rich ones have enough cash to splash on actually collecting even halfway reliable data. Therefore no economies should be planned.

The UK's credit rating is at risk. Fitch, one of the leading rating companies, could take away the UK’s AAA rating if the government doesn’t take care of its extensive government borrowing. According to Fitch's co-head of global sovereign ratings David Riley, Fitch would have removed the UK from it’s AAA rating if it wasn’t for the fact that they expect the next government to consolidate fiscal policies.

Most embarrassingly, the UK is regarded as the only major economy unable to maintain its present rating. According to Standard & Poor, only 17 countries deserve AAA status. The UK is still amongst these, however it is the only economy with a negative outlook, due principally to a forecast predicting that national debt will rise to 100 percent of GDP! 

The Isle of Man, Liechtenstein, and Luxembourg together with all the Scandinavian countries have better economic ratings than the 5th largest economy in the world. It is imperative that the UK quickly sorts out its finances before it is too late.

You'll recall how were all worked like slaves by The Man? Capitalism holding our noses to the grindstone, how working hours are getting ever longer?

Well, no, not really:

I can't see that increase in working hours either. So we've one parp in the face of those who keep telling us that we're getting this work/life balance thing wrong. But we can go further too. Market or paid working hours are only part of the work that we do. We all also do unpaid working hours inside the home, so called household production. The cooking, the cleaning, general maintenance and so on. And hours spent on these activities have been falling even faster than those paid working hours.

The net result of all of this is that we are enjoying ever more leisure time: yes, including even commuting and everything, we're getting more leisure than any of the previous generations.

Which is of course just as it should be. As we're generally getting richer (OK, last couple of years apart) then we're choosing to take some of that greater wealth in more leisure, not just chasing after ever more money for shiny gewgaws. Our work/life balance is indeed changing: and it's us doing the deciding about how it shall change which is of course what annoys the people who think they should be telling us what to do.