George Monbiot is entirely correct here

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This will shock some, that we agree with George Monbiot on any subject more heavyweight than whether kittens are cute or not. It will also shock others that George Monbiot is actually correct about something more heavyweight than whether kittens are cute or not. But it is so, he is right and we agree with him:

No progressive party can survive the corporate press, corrupt party funding systems and conservative fear machines by fighting these forces on their own terms. The left can build only from the ground up, reshaping itself through the revitalisation of communities, working with local people to help fill the gaps in social provision left by an uncaring elite. A successful progressive movement must now be Citizens Advice bureau, housing association, scout troop, trade union, credit union, bingo hall, food bank, careworker, football club and evangelical church, rolled into one. Focus groups and spin doctors no longer deliver.

We're not, to be honest, sure that this is either left wing or progressive. For it is exactly the classical liberal vision of society. Yes, certainly there are some things that must be done by the State. For there is some small group of things that both must be done and can only be done by said State. We are not anarchists. But beyond those things that can only be done in that manner and also must be done there's vast areas of human life that do require some amount of organisation and coordination.

And who are the best people to do this organisation and coordination? Why, obviously, the people themselves in whatever manner they decide suits them to do such organisation and coordination. Let a thousand, a million, organisations of voluntary cooperation bloom across the nation. The Friendly Societies, the Churches, advice bureaus, sporting associations, however and whatever the people decide themselves that they wish to do in such voluntary cooperation. This includes any form of business organisation anyone wishes, a workers' coop, a customer one, a producer one, a capitalist firm, not for profits, for profits and every conceivable variation thereof.

Our agreement here with Monbiot does not prevent us from being just a little sharp clawed, as with those cute kittens. For of course all Monbiot has done here is rediscover Edmund Burke's "little platoons". Something that the rest of us didn't forget in the first place, not since he first pointed it out in 1790.

Mark Carney meets some journalists looking for a story

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If you’ve read the papers today you might have seen the story about Bank of England Governor Mark Carney’s supposed intervention into the immigration debate. The Mail and the Times both covered Carney’s inflation report with this angle. The Times’s coverage was boldest, claiming that Carney had ‘waded into the debate on immigration’ by describing ‘the present high level of net migration as “a key risk” to the economy’.

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

Here’s what Carney actually said:

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

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

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

Bird quotes the Inflation Report itself:

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

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

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

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

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

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

So why is it that everyone hates libertarians?

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The easy answer of course is that libertarians are hateful people. But when you translate "libertarian" from American into English you get "classical liberal" which means us. And we're lovely, cuddly, people so that cannot be the right answer. Over in the US they're trying to answer this question (Tyler Cowen, Bryan Caplan) and there's a variety of reasons given. None of which quite explain it all to our satisfaction. So, we'll put forward two more, the first not entirely serious. Which is that we're right, they know we're right, we know we're right and everyone hates smug gits who know they're right and who everyone knows are right.

The second, entirely serious, reason is that we're the only people not telling people how to live their lives. On the right, the conservatives, want to insist that everyone keep it in their pants until married, don't ingest things that make you feel good, work hard and if you conform to our prescriptions then maybe we'll let you be. On the left we've the usual hodge podge but the same urge is there. Live your life according to the manner in which we demand you live your life. Don't be greedy, don't be too successful or we'll take it all off you, you must respect everyone's decisions about how they live their lives and don't, whatever you do, blame anyone for creating their own bed that they've now got to sleep in.

By contrast we're the only people saying that we don't give a damn how you live your life. As long as you're not harming others, nor their ability to live their life as they wish, why on earth should we even pay attention to how you live let alone control, or even respect, how you do?

Which is why they all shout at us of course. For if you're running around with a set of rules that everyone must live by it's OK to have another group running around with a different set of rules about how you must live. But it's disconcerting, discombobulating even, to have a group insisting that there is no such list so would everyone shut up please? What merit in gaining control of the State in order to force everyone to follow your prescriptive rules if the libertarians (or classical liberals) have got there first and removed the power of the State to insist upon everyone having to follow any set of such rules?

To put it very simply, those who fight to insist upon vanilla flavoured cake are quite happy to battle those who fight for chocolate flavoured cake and vice versa, but they'll unite in hatred against those who say the cake is a lie.

7 policies the Labour Party should adopt in Opposition

The Labour Party is in disarray, and looking for a new leader. But being the official opposition party is an important duty, and can change the terms of the political debate. Here are the policy issues the party should concentrate on if it wants to make an impact in opposition, and eventually restore its electoral prospects. 

1. Emphasise housing and planning reform

We are unlikely to see sorely needed housing reform with this Conservative government. After all, most Tory MPs will have committed to protecting the Green Belt during their election campaigns, and their Help-to-Buy policies will probably make ballooning house prices even worse. The application of Right-to-Buy to Housing Associations also risks further lowering the UK’s already low house-building rate as they’ll lose all incentive to build more. 

Labour can use housing to out-flank the Conservatives on the economy, making the case that rising house prices and the policies that worsen them will needlessly stifle economic growth. For example, we need Green Belt-constricted areas like Cambridge and London to not drive away innovative start-ups as rents skyrocket. Labour should emphasis this in its appeal to entrepreneurs and small businesses, while using it to regain trust on the economy.

Housing is also an issue where they may outdo the Conservatives on aspiration, constructing a vision of mass home ownership with affordable housing. Labour tried to appeal to renters and young people for this election, but in a way that smacked of statist heavy-handedness with its emphasis on greater regulation. Yet parents and grandparents who already own their homes will also be worried about their children stepping onto the housing ladder in the face of rising prices. 

Labour therefore needs to adopt policies that are attractive to renters and owners alike, with the overall aim of bringing housing inflation under control. De-regulating planning laws would be a central step to achieve this. Many owners would welcome a reduction in the time and cost it takes to improve their property, and deregulation would also allow the housing supply to be boosted further, satisfying renters. Combined with a re-zoning of the Green Belt, Labour should emphasise the boost to economic growth that a house-building boom would cause.

By emphasising private solutions to out-of-control housing inflation that would also boost economic growth, Labour would further enhance its economic credentials. They would no longer need to answer awkward questions as to where the money would come from to build more government houses.

2. Regain trust on the economy by calling for tax reform

Labour desperately needs to regain trust on the economy. One way to do this would be to outdo the Conservatives in calling for tax reform. Rather than proposing Mansion taxes to spook home-owners, they need to call for wholesale Council Tax reform. Re-scaling the tax bands would be a start, but they can afford to be radical in their proposals. Any policy they come up with should focus on potential economic gains to be had from using empty houses and brown-field land more efficiently.

Labour also has a golden opportunity to reframe National Insurance as a tax on workers and jobs. They could call for it to be more progressive, perhaps even to merge it with Income Tax. This would be one way of making current taxes appear more regressive, without necessarily needing to call for higher top rates – it should now be clear that Labour cannot win in England if it is to punish people for aspiring to earn more. Reframing National Insurance would thus allow them to focus on the injustices faced by lower and middle-earning workers under the current system.

Proposing cuts to Inheritance Tax, Capital Gains Tax and Corporation Tax are likely to be anathema to the Parliamentary Party and members. However, they should not oppose Conservative moves in this direction – they need not alienate those who benefit from it. Indeed, if Labour MPs are flexible enough, they should make the difficult case for Corporation Tax to be lowered on the basis that it ultimately falls on workers. 

3. Become the party of civil liberties

Theresa May is staying as Home Secretary and is likely to be very authoritarian. By making itself the party of civil liberties in opposition, Labour will have the opportunity to reconnect with voters who previously voted Liberal Democrat. It would also allow them to deliver the final blow to the LibDems by squeezing out any space for them to be relevant. 

Over the course of the next five years, Labour needs to tap into our instinctive concerns about privacy and government intrusion.  They should therefore make opposition to the Snoopers’ Charter a core plank of their policy, while framing the Conservatives as the party of “Big Brother”. As part of this, Labour MPs should educate themselves about internet policy, and oppose attempts to regulate free speech. If May is the new Conservative leader in 2020, forming this line of attack as early as possible will be crucial to Labour.

4. Promote the benefits of immigration

One of Labour’s many problems in this election was its stance on immigration. Ultimately, any attempt by Labour to be harsh on immigration will be unconvincing, and is one of the reasons for its mug’s infamy. The party needs to accept that it will never be the party of controlling borders, and play to its strengths instead. It therefore needs to make the case for the benefits of immigration so that it can turn public opinion over the next five years and consolidate its hold over urban areas.

Ultimately, Labour needs to paint a vision of Britain as the most attractive country for the world’s top talent. For example, it should promote foreign students as a source of creativity and innovation to boost economic growth, and celebrate foreign entrepreneurs as a source of new jobs. This economic emphasis would be inspiring if done well, and should be central to regaining trust on the economy. Labour should bear in mind that it may have to compete with Boris Johnson on similar terms in 2020, given the positive noises he has made about immigration.

Labour also needs to emphasise the importance of immigrants and their contributions in paying for public services. For example, it might frame Conservative attempts to control borders as a subtle attack on pensions and the NHS.

5. Call for the legalisation of cannabis

Labour needs to see off the growing far-left threat of the Green Party, while also mopping up the few remaining Liberal Democrat voters.  To re-unite the left, Labour should therefore call for the legalisation of cannabis. It would need the next five years to help turn public opinion in its favour, emphasising rehabilitation and the positive experience of similar reforms around the world. Most importantly, it would be a less risky strategy than attempting to outdo the Greens on economic issues, while getting many younger voters enthusiastic about the party.

By taking the initiative on this, it would also force the Conservatives to take a position on the issue. This may cause havoc with Cameron’s attempts to modernise his party, as many of the Conservative MPs elected in 2010 and 2015 are of a younger generation that is likely to be more amenable to legalisation. It is worth bearing in mind that Cameron himself was broadly in favour of decriminalisation before becoming Conservative leader. This could therefore be a chance for the Labour party to shift the centre-ground of politics on social issues, despite being in opposition.

6. Call for people-powered public service reform

Labour retains its position as the party most trusted to run many public services. However, it should not squander the opportunity it has to put the Conservative government on the back foot. It failed to make any electoral headway with pledges for more funding and peddling fear of privatisations. Part of the problem was that funding promises did not square with deficit reduction, and the warnings about “saving our NHS” seemed exaggerated and insincere.

Instead, Labour should propose alternatives to privatisation that focus on civil society. It needs to grow up in how it conducts debates over the NHS, accepting the need for reforms aiming at greater efficiency and higher quality. This should be part of a wider attempt at rebuilding the party’s activist base, involving the party more directly in civil society, friendly societies, co-operatives and mutuals. It should promote communities and civil society organisations as a viable alternative to both inefficient bureaucratic state control and for-profit exploitation. For example, it should propose allowing patient-led groups to commission care services alongside GP-led consortia, and champion the use of friendly societies and mutuals as healthcare providers within the NHS.

If it were to be particularly bold, Labour should do all this while making the case for the NHS to be reformed to a more European, social insurance model. This would be one way to play up its Social Democratic credentials while also achieving positive and meaningful reform. As the self-styled “party of the NHS”, it would be a shame if it did not use its position to improve Britain’s health.

7. Become less paternalistic towards working class lifestyle choices

Labour needs a way to head off the potential threat posed by UKIP. In the North of England in particular, UKIP often came in second place, and this should be a cause for concern. Labour should accept that it will never outdo UKIP on immigration or on leaving the EU, but also realise that much of UKIP’s appeal is cultural. 

Many of these voters would have been attracted by UKIP’s tolerance of vices like alcohol, gambling and smoking; in stark contrast to the paternalistic, London-elites-know-best tone taken by both Labour and the Conservatives. Labour should therefore take the sting out of UKIP’s tail, and re-establish its credentials as a culturally working class party. For example, it should call for cuts to alcohol duties, which would have the advantage of being both popular and cheap.

Anton Howes is a Fellow of the Adam Smith Institute, and a PhD student in Economic History at King's College London. He blogs at Capitalism's Cradle

QE-a Culpa

Recently I've been looking through some of the articles I've written about QE over the last few years. I spent much of the post financial crisis period learning about monetary theory and wondered about the extent to which this was reflected in my commentary. I feel that my understanding has increased significantly, and so I should reassess my previous claims.I published several articles from 2009-2012 and benefitted from a general uncertainty that led to an increase in the demand for economic (and indeed Austrian economic) commentary. Most of the opportunities I had were not a result of my own expertise or reputation, but because I was representing a perspective that people wanted to hear. It has been an interesting intellectual journey to try to provide a mouthpiece for certain ideas, whilst also developing my own voice. Firstly, a bit of background and motivation. I've been accused of being too academic, too theoretical. However my primary aim is to prompt debate. It is not to simulate policy. Therefore I’m very resistant to the “don’t just stand there” mentality of a crisis. If I were a policy maker my instinct would probably be closer to action. As an academic my instinct is more contemplative. I have a natural tendency to think of longer term and unseen effects, and even if these are outweighed by the short term necessity for action, I still feel I’m doing an important public duty by pointing them out. If my audience were policymakers my message may well be different. But I consider my primary audience to be the educated layperson, and therefore my primary goal to provide a perspective that they may not already possess.

As I said in 2010,

my objective isn't to impress you by how clever I am. It's to participate in a conversation about economic theory and practice that all sides can learn something from. Therefore I don't see why I need to have provide[d] an alternative plan before jumping into the debate - if I convince you that fiscal stimuli very rarely achieve their objectives, you'll need to decide for yourself what the implications are. This reminds me of students that want "an answer". I'm sorry, but that's not my job. It's to provide new information that allows you to provide your own answers. I'm not trying to convince people that my "worldview" is correct, and that you should share it. I'm merely offering fragments of wisdom to allow you to cultivate your own.

I've read through all of the articles I've cited below, and picked out the money quotes. I've then categorised them and reflected on whether I stand by them (and whether I stand by them but for different reasons). You'll have to take my word that I've surveyed them honestly, and haven't simply ignored quotes that make me look bad.

Introduction

I moved back to the UK to write up my PhD dissertation in 2006. My research focus at the time was the spread of the flat tax in Eastern Europe, but it seemed clear to me that there was an impending resurgance of Austrian business cycle theory. I've written elsewhere about whether Austrians predicted the financial crisis, and that's a hard question to answer. But it seemed clear that we were experiencing a central bank induced credit bubble and that a recession was on the horizon. And yet policymakers didn't seem concerned. With Toby Baxendale I began work trying to find an Austrian measure of the money supply. By 2008 it seemed obvious that a monetary boom had preceded a monetary contraction. But at the time, official measures hadn't revealed it. I used the three charts below in a presentation on 8th November 2008. Broad money didn't show any problems: c1 Narrow money didn't show any problems: c2 And then there was the "Austrian" measure: c3 Given that the method of constructing the UK Austrian Money Supply has changed since then I was right to not draw too much emphasis to the warning signs at the time. But it signalled to me that us Austrians had something important to say and my confidence rose. Then, in January 2010, the Bank of England switched its conventional measure of broad money from M4 to M4ex, which stole a lot of my thunder: c4 Suddenly the value of the Austrian school switched from accurate forewarnings to the policy debate. In terms of QE, I think there's a narrow debate and a broad debate. The narrow debate is about whether QE will achieve it's stated aims and if this is broadly desirable given the current monetary regime. The broader debate is whether this "success" comes at the expense of unintended consequences (which may possibly be greater). Both of these debates rest on a firm understanding of what QE is, and how it differs from "conventional" monetary policy. When QE was first touted I had zero knowledge of the Japanese experiment. I'm happy with my contribution to clarifying what QE was, but perhaps focused too much on the broad, as opposed to narrow debate. Over time, this may be vindicated, because those broader concerns may becoming increasingly relevant. But in 2009 I was behind the curve in being able to make insightful commentary on that narrow debate.

Here are some of the key points I was trying to make:

1. QE is "merely" OMO

From the get go I was uneasy with the distinction between conventional monetary policy (cutting interest rates) and unconventional monetary policy (printing money to buy bonds - i.e. QE). Since QE is conducted via open market operations (OMO) it is more of a tweak to conventional monetary policy (i.e. targeting a quantity of reserves, rather than price/interest rate) than a replacement. In January 2009 Alistair Darling said

  • “We are looking at a range of measures to support the economy, to support business and to help people. But nobody is talking about printing money.

I don't think politicians should be allowed to deny that QE involves printing money and that central banks are routinely printing money. My response:

  • "QE isn't a different policy tool, it's an alternative way of using current policy. Whereas OMO means targeting a particular interest rate (and altering the money supply to hit it) QE means targeting a particular quantity of money (and ignoring the interest rate)" [see here]

As I put it in my 2009 Comment is Free article:

  • “1) QE is printing money; and 2) the printing press is already turned on.” [1]

In March 2009 I criticised a Financial Times video that attempted to explain QE because it:

  • “propogates the myth that this is fundamentally new policy - as if the Bank of England is only now being "inflationary", and "printing money".” [see here]

Tim Congdon has also made the point that QE is standard monetary policy for the situation we were in:

  • “He [Tim Congdon] challenges Gordon Brown's portrayal of his own role in the financial crisis, arguing that instead of the response being his ‘brainchild’ the then Prime Minister required a layman's briefing and did not grasp the orthodoxy of the policy for situations when nominal income is falling” [5]

Verdict: I stand by this. In fact, I think this is a strength of QE and should be why QE becomes even more conventional.

2. QE is one arm of the state financing the other

Stephanie Flanders confirmed that "printing money" is technically accurate, but defended QE:

  • “we can expect the Bank to buy a lot of gilts as part of this policy. Is that "printing money"? The politicians will say no. But any economist would say yes...
  • ... "When the Bank of England buys up gilts, one arm of the government is buying up debt owed by another arm of the government in exchange for money created by the central bank. Whether the gilt is brand new, or issued the day before, is quite simply irrelevant.”

I made this "two arms" debate in a 2009 article:

  • “despite the obfuscatory terminology, QE is nothing new. It is simply an exotic label for a discredited policy – one arm of government buying up the debt of another” [1]

Perhaps this was OTT. According to Flanders,

  • “That said, there are big practical differences between this policy and Zimbabwe-style money financing. The most important is that the Bank is choosing to buy gilts as a means to an end. It is not being forced to buy them because the government has nowhere else to go. –Also - and crucially - the Bank has every intention of unmonetizing the debt when the storm is past”

I was dismissive of the argument that QE isn't "printing money", and expressed concerns about public finance. I felt that Flanders' point rested on semantics and intentions, and the public finance considerations shouldn't be dismissed so easily

  • “Yes, the Bank of England is purchasing assets on the secondary market (not directly from the Treasury). Yes, the Bank has every intention to mop up this additional liquidity once the economy recovers, but "directness" and "intentions" are largely semantic.” [1]
  • “the Bank of England buying assets on the secondary market is essentially a gradation of the policy that Mugabe’s government has unleashed in Zimbabwe. One arm of government is buying up the debt of the other. We can pretend that those two arms are separate, but that illusion is becoming harder to maintain by the day.” [4]

And indeed the Bank of England has now became a major player in the UK debt market (from a Kaleidic post): c5 Verdict: I am glad I pointed out tangible downsides, but the jury is still out on the impact.

3. There is a risk of inflation

This is something many anti-QE commentators referred to, and we were wrong. We've not seen inflation anywhere near the scale we warned about. I said,

  • “The biggest danger of QE – one that no economist would deny – is the destructive inflation that it unleashes. We are asked to have confidence that our monetary authorities have both the omniscience to know when inflation will shoot upwards, and the benevolence to act in the public interest when this occurs” [1]

I then attempted to provide some evidence for this claim:

  • “In February 2009 food price inflation rose to 9%, and factory gate inflation is at 3.1%, which might mitigate fears over deflation. We are in for another bout of inflation; another bubble is brewing. The party isn't over” [1]

c6 The chart above shows CPI from 2004-2014 and in Feb 2009 I was warning about inflation. As you can see, it promptly falls to around 1%. However, QE starts March 2009 - February 2010 which is the period in which CPI is in a trough. The consequence is that in 2010-2011 we see inflation rise to over 5%. So I could say "there's the inflation", and QE advocates could respond "it's hardly Zimbabwe!" Indeed already by February 2010 I was saying:

  • "the inflation risk appears to be lower than first feared. Inflation expectations are contained, and yields remain low. Whether this can be maintained is another matter. The decision to cease QE indicates a concern that the inflation tiger is about to bite. Today's figures show a sharp rise, and we should not ignore the possibility that UK gilts are merely a new bubble." [3]

And then in November 2010,

  • “monetarists are right to mock scaremongering about hyperinflation… CPI is above target (3.1%), but not to the extent that I (and others) feared… [But] We should also remember that inflation could manifest itself in asset price bubbles, for example in the gilt market or emerging markets” [4]

That said, I think I was successful at avoiding the claim that QE is a sign of loose monetary policy. Indeed:

  • “those who believe that low interest rates and a fast growing monetary base imply expansionary monetary policy make the same mistake that economists made during the Great Depression. Then, as now, they were actually signs of an inept central bank failing to offset a fall in the broader money supply.” [4]

Verdict: I was wrong, but shifting the argument slightly reveals the kernel of truth.

4. QE is hair of the dog monetary policy and generates malinvestment

If loose monetary policy caused the crisis how can loose monetary policy get us out? The hair of the dog argument is a convenient one to make, as I did in 2009:

  • “the Bank's solution is a larger dose of what caused the original disease.” [1]
  • “We are now seeing the inevitable hangover and are faced with choice – either to go through the painful but necessary recovery (a hangover) or simply to prolong the intoxication… QE is more hair of the dog.” [1]

This leads to a related idea that a liquidation is a necessary consequence of a boom. Once you accept that there was an Austrian style boom then a recession is an inevitable and necessary consequence. In this 2009 article for Comment is Free article I reeled off some standard arguments:

  • “Over the last few years we have seen an unsustainable boom that has been financed through impoverishment. During this boom scarce capital has been squandered. Rather than use credit as a foundation for wealth-creation, it was erroneously treated as actual wealth, and consumed” [2]
  • “a decline in output is an important step towards production that more closely matches consumer demand. If GDP growth has been driven by bubble activity, a fall in GDP is therefore an inevitable and necessary stage of recovery.” [2]
  • “Genuine economic growth will only return if relative prices can adjust, malinvestment gets liquidated, and a correction is allowed to occur.” [2]
  • “the recession itself is a sign that markets are adjusting, and that entrepreneurs are engaging in the recalculation that is required to understand which plans were unprofitable and where capital should be reallocated. Allowing relative prices to adjust as quickly as possible, reducing labour market rigidities, and improving labour mobility will all help with this" [4]

Verdict: If the inflation argument is over simplified monetarism, then this is over simplified Austrianism. I totally neglected the distinction between a primary and secondary recession and ignored the possibility that such declines in output were unnecessary.

However, by 2010 I was making a more distinct monetary equilibrium argument:

  • “There is a plausible free market argument to say that under certain institutional conditions (such as competitive banks and no moral hazard), increases in the money supply to offset changes in the demand for money would avoid adjustments having to take place through the notoriously ‘sticky’ real economy. In the same way that inflation creates real effects, so does a monetary deflation, and these effects are neither desirable nor necessary.” [4]
  • "A further argument that Austrians might be interested in, is the distinction between an expansion in the money supply to offset an increase in the demand for money, and an expansion in the money supply as a means to stimulate aggregate demand." [see here].

And in an IEA article published in March 2011 I was a lot clearer:

  • “Austrian economists are happy to acknowledge that under certain theoretical conditions QE can work as Congdon suggests – when the demand for money rises a corresponding increase in the supply can restore monetary equilibrium without forcing an adjustment to take place through prices and output” [5]
  • “the best hope for monetary policy was that it prevented the ‘primary recession’ caused by the bubble unwinding turning into a "secondary recession" that sucked in the whole economy.” [5]
  • “just as the monetarist view is too rosy, the Rothbardian view is too pessimistic.” [5]

Verdict (2): I got there in the end

5. Unintended consequences of setting a precedent

In February 2010 I published a Guardian article that softened my critique of QE:

  • “To judge whether it worked depends on what would have happened without QE, and economists typically lack the toolkit to engage in rigorous counterfactual analysis.” [3]
  • “Even if we understood better how the economy would look without the actual policy responses, determining whether they "worked" implies we understand the intentions of the primary decision-makers. Only then would we know if the actual outcomes match the intended consequences” [3]

Part of the problem with QE is that it requires an exit strategy, and we entered it without having a clear one:

  • “The excess liquidity that QE creates will find its way into the real economy at some point – possibly after the economy has already begun to recover naturally – and this is why having an exit strategy is so important. Again, the more confidence markets have in the efficacy of such a strategy, the harder it is for QE to ‘work’, but doubts remain as to whether this can be navigated. Some argue that it’s simple to hike up interest paid on reserves, or possibly even confiscate such reserves when banks begin lending again. However, this overestimates the Bank of England’s ability to anticipate events.” [4]

I also relegated the threat of inflation as a consideration but pointed out the following:

  • "the rules of the game have changed. The conditions under which QE would be rehabilitated aren't clear." [3]

A key issue is the danger it becomes semi-permanent. In a Management Today article, published January 2012:

  • 'The Bank of England’s policy rate has been historically low for some time now and this cannot continue indefinitely. The aim of low interest rates is to boost the economy by creating incentives to borrow money and invest. But higher capital requirements and policy uncertainty create counter forces that restrict bank lending. [7]
  • 'In these circumstances the purported "benefits" of low interest rates fail to materialise, but the costs certainly do. These include the lack of an incentive to save (and actually rebuild banks' balance sheets through voluntary lending), distortions to the capital structure of the economy (making white elephants like the HS2 line appear profitable) and the erosion of people's savings. [7]
  • 'The fact that real interest rates (the difference between inflation and the return you get on your savings accounts) is negative is a harmful confiscation of wealth. [7]
  • 'When interest rates are close to zero policymakers look to alternatives, and quantitative easing has emerged as their favoured tool. However grateful banks and the financial community are in general to have an injection of freshly-printed money, it’s not clear how much this is helping the real economy. The aim shouldn’t be to preserve the status quo, but to find ways to allow banks to fail without exposing the general public to the fall-out.' [7]

In November 2010 I said:

  • “the use of QE to boost aggregate demand (rather than prevent a liquidity meltdown) is a precedent” [see here]
  • “there can be a fine line between “stabilising MV (money supply multiplied by velocity)” and “boosting AD (aggregate demand)” [6]

Verdict: QE needs to be reformed and there's a real danger that it simply becomes another source of stimulus.

6. Back door bailouts

I try not to engage in banker bashing, but was unable to resist the temptation:

  • "banks have benefited. QE served as a bailout by the back door. By enlarging the scope of assets it buys, and printing money to fund them, this creates (alas perhaps literally) a get-out-of-jail-free card for profligate bankers." [3]
  • “Whilst many businesses have benefited from being able to issue more commercial paper (as the second Giles video points out), the main beneficiaries have been the banks. For very good reasons the Bank of England is not supposed to directly finance UK government debt. This is the cause of most hyperinflations, and is "one arm of the state directly financing another". But they are able to buy them on the secondary market. This makes a massive arbitrage opportunity for banks that buy up gilts and sell them on to the Bank” (see here)

Verdict: A bit crass.

What I should have done is emphasised the importance of liquidations in market corrections and the role of central banks at distinguishing between liquidity and solvency crises. In 2010 I tried to make this point, arguing that a downside of QE is that it masks solvency problems:

  • "The original reason for having a lender of last resort was to provide emergency liquidity during a bank ‘panic’ and to help unwind unsound banks so that they wouldn’t pose a systemic risk. As time has passed since the first round of QE1 we have realised that it wasn’t merely a short-term liquidity problem, but a fundamental one of solvency. This cannot be cured with a quick gush from the monetary spigot, and direct bailouts merely obscure the distinction between liquidity and solvency problems further.” [4]

Perhaps this is too simplistic because they way in which QE is conducted can determine whether it's providing a Bagehot style penalty or a back door bailout. In March 2011 I said

  • "In a world where central banks exist, this is the mechanism by which we distinguish between the temporary illiquid to the fundamentally insolvent. And unlike QE it avoids a slew of unfavourable side effects, such as expanding the scope of the Bank of England (by redefining the types of assets and types of institutions they deal with); expanding their discretionary powers; generating regime uncertainty; increasing the upside risk of inflation; and placing epistemic burdens on policymakers that there is no hope they can shoulder.” [5]
  • “why can't the Bank of England simply fulfil its traditional role as being lender of last resort” [5]

Back then, I felt that the Bank of England should use discount window. Now, I believe QE could be used in a way that is better than a discount window.

Conclusion

In November 2010 I wrote a think piece for the Adam Smith Institute, and stand by the main argument:

  • “Policies like QE increase regime uncertainty and generate systemic instability. They have the potential to make matters worse, and ignore the fact that you cannot buy confidence. The Bank for International Settlements – one of the few organisations that foresaw large elements of the financial crisis – warns about the upside risk of continued low interest rates. Systemic misallocation of capital (including human capital) remains. Excessive risk-taking remains. Over-leveraged balance sheets remain. Volatile capital flows remain.”  [4]

However I argued that QE had run its course

  • “There is an alternative to more QE.” [4]

Now, I believe that I should have explained what it is good for, and clarified what those alternatives are. The justification for QE was to prevent a collapse in commercial banks balance sheets and reduction in broad money growth. But the main reason for this problem was an exogenous policy shock, namely an increase in capital requirements. So, mea culpa:

  • I didn’t have a good grasp at to what was happening to the money supply at the time - broad money growth data was flawed
  • I was treating the ceteris as paribus, believing that if the problem was regulatory intervention the solution is to remove that intervention, rather than introduce new ones
  • Quibbling about how QE was conducted (and not having a clear alternative) was less important than generating liquidity
  • I placed too much weight on the long term, unintended consequences of QE

Then, my main policy sympathy would have been to implement Bagehot through discount window and keep provision of market liquidity separate Now, however, I think that the problem was OMO being too narrow. If you have a “small number of counterparties” and a “small subset of “good” securities”, then a ““Bagehotian” case can still be made for occasional direct Fed lending”. However if OMO function well or are reformed (i.e. diversify the participants and diversify the assets) then that’s how Bagehot should be implemented. (See this George Selgin article for more).

I maintain that hair of the dog isn't effective monetary policy, and so the central bank should not be there handing out shots. But they do have a role in easing the hangover by handing out water. And given that they won't always know where it's needed, soak the market with liquidity and see where it goes. Here's how I'd summarise the debate: c7   References:

  1. The semantics of printing money” The Guardian, March 2009
  2. The unpalatable financial truth” The Guardian, March 2009
  3. Has quantitative easing paid off?” The Guardian, February 2010
  4. The Threat of QE2”, Adam Smith Institute, November 2010
  5. Monetarists’ blind spot on quantitative easing” Institute of Economic Affairs, March 2011
  6. Forward thinking”, Money Marketing, May 2011
  7. "To QE Or Not To QE? The Market Has Spoken” Management Today, January 2012

Anthony J. Evans is a Senior Fellow of the Adam Smith Institute and Associate Professor of Economics at ESCP Business School. This post was originally hosted at kaleidic.org.

To explain the price of English housing once again

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Absolutely everything you need to know about the absurd cost of English housing is contained in these few paragraphs:

A farmer has rejected a £275million offer for his land from housing developers wanting to build a new town.

Robert Worsley said he would be ‘doing a massive disfavour’ to the community where he has lived all his life if he ‘took the money and ran’.

The 48-year-old father of two has run 550-acre farm for the last 15 years.

He was approached by agents for housebuilder Mayfield more than two years ago. Other landowners on adjoining sites in Twineham, near Haywards Heath, West Sussex, are also believed to have been offered large sums.

The multi-million pound potential offer is 100 times the farm’s current value, even though it covers only one-seventh of the proposed 10,000-home development.

It's Mr. Worsley's land, he can do as he wishes with it.

But there's the reason that English housing is so expensive. Land that may potentially be built upon is worth 100 times that same land that cannot potentially be built upon. That is, the chitty that is issued to allow building upon a piece of land is at least 99% of the cost of the land plus chitty. It is therefore the planning system that makes housing so expensive.

Thus, as we've pointed out ad nauseam, the answer is to issue more chittys so as to bring down the cost of them. There's no mystery here, no problem. If something is expensive because it is in artificially short supply then the answer is to increase the supply of it.

Perhaps we might suggest abolishing the Town and Country Planning Acts?

We're not going to believe this report, sorry, we're not

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We have the latest salvo in the barrage about how bad foods, those ones that we enjoy, must be taxed and those good foods, the ones we don't so much, must be subsidised. That is, tax sugar and carbohydrates, subsidise fruit and veg. The argument today being that the bad foods have fallen relative in price to the good ones sand that this is very bad, not good.

The report’s authors found that fruit and vegetables had risen in price by up to 91 per cent in real terms between 1990 and 2012, a bigger increase than for other any other food group. “In high income countries over the last 30 years it seems that the cost of healthy items in the diet has risen more than that of less healthy options, thereby encouraging diets that lead to excess weight,” said Steve Wiggins, one of the authors of the report.

The report itself is here.

There's a few things being missed. Weight is a function of calories in, calories expended. We don't gain weight simply because we eat cheaper calories. So this cannot be an explanation for rising obesity levels. Further, all food has become cheaper relative to incomes, so if price really is determining what we eat then we might expect the diet to have become healthier. Whatever budget constraints we had on eating that "good" food have still been relaxed, whatever has happened to relative prices.

But perhaps more importantly than this we're not sure that we believe the price indices themselves. They appear to be looking at the prices that people actually pay for the goods, not at prices for a constant form or type or quantity. Thus it's "prices of fruit" or "prices of vegetables" as they appear in the average consumer basket. And there's a few changes in the composition of that consumer basket over those 30 years.

1) Around the year availability of alomst all fruits and vegetables. This is going to make the average price rather more than what it was when we relied upon the local and seasonal gluts. We also get very much more choice of very much more exotic fruits and vegetables and these are, not surprisingly, more expensive as well.

2) The rise of prepared foods. 30 years ago you could not wander into a supermarket and purchase a prepared salad, not a punnet of sliced fruit etc. Now one can and many do. This is obviously more expensive per unit of salad or fruit but we all seem happy enough to pay it.

3) The rise of organic and fair trade. These are both, by design, premium products at premium prices. And while they're not a vast portion of the food market they are significant enough to influence a price index composed in the manner this report seems to.

So, the price index seems to be composed not of what we actually want to know (are apples more expensive than they used to be?) but of what we actually buy (are we buying more expensive foods, of greater variety and exotica, all year rather than seasonally, in a more prepared state?). So we're afraid that we don't actually believe the stated statistic, whatever problems we've got with the theory that they're trying to push.

How I learned to stop worrying and love electoral politics

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ASI bloggers spent a decent wodge of time blogging about how democracy is silly or irrelevant or bad. I'm probably the worst here. But I have to say that I had a great time following the election, which was instantly hugely exciting and shocking and interesting after the truly unbelievable 10pm exit poll.

My experience has led me to perhaps a more sanguine view on this central institution of modern developed society.

Democracies don't make that much difference to policy—possibly because technocrats rule anyway. Democracies potentially lead to less violent transfers of power. Democracies may make people happy through recognising people's fundamental equality. Democracies may make people feel like they're having a say. And democracy is a fantastic spectator sport.

1. Democracies and non-democracies that are otherwise similar have quite similar policies, except that non-democracies may have more progressive tax schedules. (pdf)

2. It feels likely that democracies minimise the costs of power transitions. I'm not absolutely sure about this one, because I can't find any good papers (please send them my way). If you can vote people out, you don't need to fight them out.

The problem is that democracies tend to be systematically different to non-democracies in loads of ways (e.g. Western Educated Industrialised and Rich as well as Democratic). Just looking at how power changed hands in 1700s France and how it does now might not be enough. Ditto comparing France now with, say, Algeria.

And I can at least imagine transition mechanisms that would make monarchies even more flexible than democracies, if changing all the king's advisors counts as a transition as well as changing the man himself. But let's chalk this one down anyway.

3. When you drill down, lots of people value democracy for more than its supposed benefits for picking policy. People think that fundamental equality of humans/citizens is very important, and this is an important way of recognising it. If lots of people care about it then it probably makes them all a bit happier and more satisfied with their lives which is good. Obviously I'd need to see evidence to be sure, but again it seems an under-researched topic.

4. This is slightly different to the above. Voters are very unlikely to make a difference; it's about 10m to one in swing states in the USA; and the closest ever parliamentary election was decided by two votes, but then redone anyway for a gap of hundreds. No single vote ever makes a difference to the direct outcome.

But it's quite reasonable to view a vote as being 'a say', even if it's not necessarily heard in policy. And if this siphons off popular dissent and makes people identify more with their government and society it might make people more satisfied with their lives, which is good.

5. This is really how I changed during this election: it was so exciting. I didn't really go into the election caring about who won, except that I hoped the Lib Dems held up and UKIP didn't get too many seats—I didn't vote or even spoil like last time.

But as it turned out I got caught up in it all and had a great time cheering and booing. Think how many people are made happier by sports—and politics is like a sport which really matters in measurable ways!

I never really got het up about democracy, but I've decided I'm a whole lot more comfortable with the whole thing.

Geography and economic policy

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The Economist has an interesting look at the problems of countries without a coastline. Given the greater expense this loads onto international trade this makes those countries poorer. From which we can derive two interesting points:

With a few exceptions the world’s 45 landlocked countries are poor. Of the 15 lowest-ranking countries in the Human Development Index, eight have no coastline. All of these are in Africa, which is a poor region. But even compared with similar sea-front countries those without coastlines have lagged behind. Their GDP per person is 40% lower than that of their maritime neighbours.

The first and most obvious of these being that this is proof that international trade enriches a place not, as the autarkists would have it, impoverishes. Pleases that find it more difficult to trade are poorer than thoise who find it easier: pretty good evidence that all that import substitution malarkey is indeed that, malarkey.

The second is a policy point. The total trade barrier in and out of any economy is not just the tariff barrier. Nor is it the regulatory plus the tariff one. It's the costs of transport plus the tariff plus the regulatory. Thus, if you find yourself with high transport costs as a result of he above geography you should therefore be trying to be even more free trade in your regulatory and tariff attitudes. Because, as above, more trade makes you richer.

And interesting example of this is the US economy after the Civil War. Tariffs were raised considerably. This is often used as an example of a country developing successfully behind such trade barriers. But this coincided with the development of cheap ocean going steam ship transport. The total trade barriers into the American economy actually declined in this period. Late 19th century US development is an example of more trade leading to more development. We can check this too: trade did indeed rise considerably, despite those raised tariffs. And traded items converged in price across the Atlantic in this period: price convergence being a signal of freer trade.

The import substitution argument insists that some level of autarky makes places richer. The real world says that people with higher trade costs become poorer. We prefer to take our evidence from the real world, amazingly enough.

There's a difference between the intent of regulation and the effects in the real world

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We have another of these lovely examples of how the intent of a regulation can be very different indeed from the effect of said regulation out there in the real world. We'll assume that most people are pretty cool with there being regulations against murder and punishments for breaching them. We're also pretty sure that such regulations and punishments reduce the number of murders that occur. So, sure, some regulations can indeed be beneficial, achieve their stated goal. We can also look around the world and see those gurning idiots in South America who think that if you peg the price of toilet paper nice and low then the poor will be able to afford toilet paper. Of course, what happens is that no one can afford toilet paper as no one is willing to make it for this new and lower price. Regulations can have the opposite effect to that intended.

And then there's, well, then there's this:

Fair or not, this latest evidence of the risks of informal surrogacy arrangements, in the context of Britain’s strict regulatory code, can only encourage more parents to bypass local options and head straight for a poorer or developing country. In India, for example, surrogates are plentiful, screened and by all accounts more dependable than British volunteers.

Leave aside, for a moment, any judgement on either the morality or desirability of such surrogacy. And consider the statement there. That strict regulation of who may do what and when drives the very activity itself out of the regulatory net. Does this regulation therefore achieve its aim? We would say probably not. The take away from this specific example being that, if one wanted to keep the activity inside the regulatory net then one would probably argue for a lighter touch with the regulation.

This observation is of a great deal mpore use than just talking about reproductive technology of course. It's from the one side, the argument used in favour of legal abortion: without the legality it would still take place on those fabled backstreets and this would be worse. And it, from the other side, informs our attitude towards recreational drugs. As is obvious it's going to happen anyway. So, loosen the regulations on whether people can or not so as to bring the activity into the regulations on purity and safety. Which is, as should be obvious, exactly the same as that abortion argument. Both are arguing that regulation should be pitched at the level to minimise harm, that only being possible when regulation is sufficiently light for the activity to remain regulated at all.

Thus it is essential that all regulation be "light touch" regulation. Within a wide and highly variable definition of "light" to be sure, dependent upon the specific activity. But it must always be light enough not to drive the activity underground and thus out of the reach of any regulation at all.