The household analogy is an absolutely great way to describe government debt

Much tutting over a reporter using the “household analogy” to describe government debt. The thing is, for all the squealing that no, no, it’s really different, it isn’t. The size of the governmental credit card is much larger, the constraints appear at a much higher level of debt but they’re still there and in the same way.

In a recent edition of the Newscast programme Kuenssberg, the broadcaster’s former political editor, suggested government borrowing was like a mortgage or taking out a credit card. She said: “One of the differences that is very important is the limit on borrowing for different kinds of spending. And just to give people some context, and I know some people object to trying to use metaphors to explain this stuff, I think actually it is quite important so you understand that borrowing for capital spending is a bit like if you took out a mortgage to buy a house or for day-to-day spending you buy loads of new frocks on your credit card: they are not the same kind of spending.”

Apparently this is terrible because:

Households have a limit on how much they can borrow because banks and other lenders put a cap on the amount. It means that once they have hit borrowing limits and can no longer afford to pay the interest bill, they tend to fall into arrears and before long creditors call in the debt. Thousands of households declare themselves bankrupt each year for this reason.

A review of the BBC’s economics coverage by Andrew Dilnot, a former head of the UK Statistics Authority, said in 2022 that countries also do not “tend to retire or die, or pay off their debts entirely” like households, which is why comparisons with household debt – and suggestions the government must ‘pay off’ or ‘pay down’ the debt – “can cause intense debate”.

Banks and lenders put a limit because they think there’s an amount that a household will not be able to repay. And as that limit is approached the more staid institutions refuse to lend and the wilder shores of the system are approached. That’s how moving from 3% over base for a mortgage (“investment!”) rises to 49% on a credit card with a guarantor (a recent offer from a non-traditional lender in the UK market).

Exactly the same happens with a country. The income is the amount that can be squeezed out of the populace over time in taxation. As the lenders think that’s getting closer to that upper limit then so does perceived risk and the interest rate at which anyone is willing to lend. This is how the Russian government ended up paying 300%.

Yes, obviously, a government can print money. But so can a household. Getting the pub to run a tab is money printing - debt creation is an increase in the money supply after all and there’s nothing that says that only banks can do that. But willingness to do that also rises as lenders - creditors - assess that risk of repayment. Until, at the limit, no one thinks promises of repayment are credible so no one lends. This is what happened to both Venezuela and Zimbabwe. To the point that both countries should, really, have started printing the money on larger pieces of paper - perhaps in rolls - so that it could be used for more fundament and valuable purposes.

The household analogy for government finances really does work. The limitation is different, sure it is. For the household, what income can be brought into it, for the government that income that can be squeezed out of everyone else. But it’s still a limit. And as that limit is approached interest rates charged on loans rise and the value of promises to pay become worth less - not worth the paper they’re written upon.

There’s only the one thing wrong with all of the above. The limitation upon government is actually lower than that upon a household. Lenders will, entirely happily, lend 4 or 5 times annual income to a household for an investment - say a mortgage. Currently the UK government takes 40% of GDP in taxation. 5 times that would be 200% of GDP as an outstanding debt. Who thinks that the markets will be happy to lend to a government with a debt to GDP ratio of 200%?

Governments face lower credit limits than households, that’s what makes them different.

Tim Worstall

Interesting questions we might be able to answer

This particular formulation is from Danny Blanchflower but it’s an often enough asked question:

Here is a question why didn't the tories borrow a trillion pounds - or even two - between 2010 and 2020 at really low interest rates and invest/repair them in schools, infrastructure and hospitals, train doctors and build lots of houses roads, railways, clean up the water supply, and rebuild what was needed

I am just an old economist who wants to understand why they did austerity instead and now are borrowing really expensively> Just asking for a friend (me..)? Why didn't they?

The answer is because no one was lending to the government at those really low interest rates. That’s how the Bank of England ended up owning that near £1 trillion of gilts. You know, the flip side of that near £1 trillion of central bank reserves they’re paying 5.25% to the banks upon, the cause of the massive inflation we did finally get and so on.

If anyone had actually tried to borrow a couple of trillion at those 0.5% interest rates then interest rates would not have been 0.5%. If the BoE had printed more money (done more QE) in order to buy them then the money supply would have blown out and so would inflation. So also would the losses right now be vastly greater than they already are.

Why didn’t the tories (sic) or anyone else borrow £2 trillion at low interest rates to then “invest”? Because they couldn’t.

Glad we’re able to have sorted this out.

There was no market for those low rate gilts, that’s why the Bank of England owns them all. #

Tim Worstall

Nationalisation produces less and worse

From Works in Progress:

We can see the effects of wars of course. We can also see the effects of free markets in those periods before each of the World Wars. Housing construction boomed as the country got richer and the population grew.

Then in 1947, with the Town and Country Planning Act, we got the nationalisation of development rights to land. We now have less - and worse given the size of what is permitted - housebuilding. Simply because that process is indeed now centralised and subject to every whinge and complaint from whoever.

Nationalisation means less and worse. We should perhaps solve this by privatising development rights. Blow up the TCPA, proper blow up, kablooie.

Tim Worstall

Labour’s Plan to Make Work… and the Average Joe Pay

The policies outlined in Labour’s new Plan to Make Work Pay has been gleefully welcomed by Britain’s would-be gilets jaunes. The Plan, which, to name its main policies, aims to end fire and rehire, put an end to zero-hours contracts, strengthen trade unions and raise the minimum wage, is Starmer’s latest attempt to tread the tightrope that exists between pleasing both the unions and big business.

Unveiled by Labour deputy leader, Angela Rayner, two days after Sunak announced the snap election, stands to frustrate workforce productivity, cut company profitability, deter business in Britain and allow unions to place the country in a state of paralysis as they hold both companies and governments to ransom.

Take for instance, the Plan’s pledge to make pay ‘fair.’ Raising tips for frontline hospitality workers, extending sick pay and raising the minimum wage will only place our already-flailing economy in even hotter water. Such policies will squeeze the bottom line of pubs, bars, cafes and restaurants, which are on the frontline of the war against the UK’s loneliness epidemic and serve as iconic symbols of British culture. The hospitality industry continues to struggle post-COVID – with over 3,000 pub closures in the UK since 2017 - and being unable to reinvest tips will only add insult to injury.

Similarly, raising sick pay and the minimum wage will make it harder for corporations to meet profit targets. The consequences will be twofold: firstly, the consumer will feel the impact of the policy at the till, where prices will be higher as corporations attempt to negate rising expenditure on salaries, and secondly, these rises promise to push the innovative corporations that fuel British growth abroad in search of more supportive and growth-friendly environments. It speaks volumes that M&S Chairman, Archie Norman – who knows a thing or two about attracting investment and driving growth after returning M&S to the FTSE 100 last year after a four year absence - spoke out against Rayner’s Plan, urging Labour to “consider carefully whether a package that reduced flexibility, makes it more costly to hire people, and seeks to bring unions into the workplace will help attract new investment”.

Speaking of unions, the plan to strengthen Britain’s unions would undo the erosion of union power since the 1980s. As both history and conditions across the English Channel illustrate, unions are diametrically opposed to productivity, increase consumer prices and can paralyse entire nations. For instance, the gilets jaunes protests of 2018 paralysed France for a month, forcing President Macron to pass an eyewatering €10 billion package of policies to quell union protests, including a €100 rise in the minimum wage for roughly five million French households. Empowering unions to the extent that Labour’s Plan vows to could well see the aforementioned disruption and costly concessions make the 20 mile hop across the Channel.

The strengthening of Britain’s unions promises to distort labour supply, restrict employment flexibility and limit research and development (R&D). Restricting flexible employment disincentivises productivity as employees are contractually locked-in regardless of personal performance, and discourages firms to employ experts, who are required on ad hoc bases - frustrating innovation in the process. 

Furthermore, as Hirsch’s research in the 1980s found, the wage increases brought about by unions in essence serve as a tax on any return on investment. If a firm performs well, unions invariably demand a wage increase, often above competitive levels. Once again, this disincentives productivity and inhibits R&D, as return on investment is hogged by union demands rather than directed towards growth-stimulating R&D. What’s more, with improved R&D comes more consumer-friendly services and products, which stand to improve the average joes’ standard of living.

Indeed, the Plan may make work pay, but not without the knock-on effects making Britain’s average joe financially worse off. The Plan may usher in employee unproductively and hamstring organic corporate growth, neither of which are conducive to improved standards of living.

Louis Plater

Why don’t we, erm, just have less government?

In this election campaign everyone, but everyone, is saying that taxes are going to rise whoever does what. Which leads to one point which is just plain and simple. We can’t have more nice things from government because we’ve already spent all the money. This must be true - if we’ve already got to increase taxes over and above their highest rate for 8 decades to pay for the things we’ve already promised ourselves then we cannot then also buy ourselves other nice new things.

This leads on to the second point, which is that if we do desire new things from government then we’re going to have to do without some of the things we already get from it.

Now, yes, this is trivial and yet it is still indicative:

Michael Landy’s Lemon Meringue, which has been installed in East Bank in east London, consists of a series of large fluorescent signs depicting different cockney rhyming slang – rhyming phrases used to replace words.

The installation includes phrases such as “apples and pears” (stairs), “S Club Seven” (heaven), “duck and dive” (hide), “April showers” (flowers) and “dog and bone” (phone), as well as additions to the dialect such as “chicken jalfrezi” (crazy) that speak to more recent diasporic influences on the area.

We seem to have modern art celebrating Cockney rhyming slang by someone who doesn’t understand how Cockney rhyming slang works.

The direct description:

The artwork was commissioned as part of the Waterfront Art within Queen Elizabeth Olympic Park curated by Louise Trodden on behalf of London Legacy Development Corporation. It is associated with the cultural and education organisations of East Bank.

Michael Landy has named the artwork 'Lemon Meringue' as according to the conventions of the style that means 'Rhyming Slang'.

Yes, we are paying for this. And according to the conventions it should be called “Lemon”. For the entire and whole point of rhyming slang is that the rhyme is not said.

Apples and pears does not mean stairs. Apples means stairs. Derived from the phrase apples and pears, indeed, but the “and the rhyme” is always left unsaid. Brahms and Liszt does not mean pissed but Brahms does. Boat race does not mean face but “boat” does.

The man’s plastering the environment with his ignorance.

Now, some of us would suggest that we the people shouldn’t be paying for modern art at all. I certainly stand by the argument that we should abolish the Arts Council entirely - thus not paying for old art either - and all such tendrils and sucker-growths into the public purse. But I’m willing to agree that I’m an extremist on this matter. An extremist who has a point up to the point of being right about this but an extremist all the same.

But perhaps we can all agree that we should not be forced to pay for people to display their ignorance? Restrict tax funding only to that portion of governance that is being done by the competent and knowledgeable?

Oh, good, well that is nice. So, what are you going to do with your 90% tax refund then?

Tim Worstall

The true joy of microfinance

That Muhammad Yunis has been having problems in Bangladesh has been true for a long time. Sad perhaps but true. But it’s still worth pointing out what we really found out when we tried microfinance:

Yunus is credited with pioneering microfinance, a financial service for people locked out of formal banking systems. It allows them to take out small loans to invest in building their own businesses. Piloted in 1976 among a group of women in a Bangladeshi village who were given small loans without needing collateral, by the mid-2000s it was seen as a key tool for ending poverty. Yunus and the Grameen Bank won the Nobel peace prize for the work in 2006.

The first point is that those loans were not without collateral. Rather - and this is a very Elinor Ostrom point - the collateral was the social reputation of the borrower. Potential borrowers are placed into groups - who should know each other well. Only one of the group can have a loan at any one time. There’s therefore considerable social pressure to repay so that one other of the group can borrow. The very poor do still have an asset - their social reputation.

The second, and perhaps much more important, thing we’ve found out - more from Mpesa than Grameen - is that what the poor really want is a form of secure savings. Microsavings if you wish. The ability to put by - out of reach of the mice that will eat paper cash, thieves who might take it - a few days or a couple of weeks of necessary funds.

The point to be made here is not that therefore everyone must provide opportunities for microsaving even if that would be a good idea. It was that until those poor actually did get banked no one had a clue that that’s what the poor really wanted. Even Yunus thought it was access to capital that was the grand wish. But it’s been the ability to save, even at that microscale yet securely, that has had the biggest take up.

We don’t, in fact, know what people are going to do with a new thing until they’ve the opportunity to do so. Planning at some rarefied level of abstraction simply does not work. It has to be actually tried then, of those things that work, we do more of them. Markets that is and markets with free entry. Let all try stuff out then do less of what isn’t wanted, more of what is.

There’s, well, umm, you know, a plan, eh?

Tim Worstall

Your reminder, the social housing waiting list is those who want cheap housing

We’ve pointed this out before and no doubt we’ll have to point it out again. This is a very basic point about supply, demand and prices. The queue of people asking for below market price housing tells us absolutely nothing at all about the number of people who need below market priced housing. It is, by definition, the number of people who would like below market price housing:

Between April 2013 and April 2023, the number of social housing homes owned by local authorities and housing associations in England fell by 260,464 units, according to the charity Shelter, which calculated the figures.

Polly Neate, its chief executive, said: “We are seeing more social housing being sold off or demolished than built, despite the staggering 1.3m households stuck on social housing waiting lists in desperate need of a genuinely affordable home.

If Aldi (or Lidl, Tesco, whatever and to taste) cut the price of bananas to a penny each there would be a queue at Aldi (or Lidl, Tesco, whatever and to taste) for one penny bananas. Everybody likes having things at below market price.

And, as that very basic supply and demand model tells us, as prices fall then demand rises. So, the demand for below market price housing is high and that then leads to a queue.

Sure, it’s possible that more cheap housing should exist. We certainly think so, that’s why we insist that the Town and Country Planning Act 1947 should be blown up - proper blown up, kablooie. In order to make housing cheaper for everyone.

But it’s still not true that a queue of 1.3 million households for below market priced housing is proof that there are 1.3 million households that need below market priced housing. It’s proof that there are 1.3 million households who would like to pay below market price for their housing. This is not the same thing.

There are queues for stuff going cheap are there? Gerraway……

One problem with monopolies is groupthink

Back in that - at the time - famous book “The Wisdom of Crowds” there was a long discourse on the perils of groupthink. Some inaccuracy creeps into the thinnking of an isolated group and becomes a foundational belief. The dynamics of ingroups mean that the belief becomes ever more extreme. There’s no reference - it’s within group groupthink - to outside reality to check this process of spiralling off into ever greater error:

Considering the fact this part of their website was updated in April 2024 after several maternity scandals, including at Shrewsbury and Telford NHS trust, where mothers and babies died or were left severely disabled in part because of the pursuit of “normal birth at any cost”, this policy was completely tone deaf. The Royal College of Midwives dropped its initiative to promote “normal birth” in 2017. British women have had the right to a caesarean birth on request since 2011, though some are still having to fight to have that request granted.

NHS midwifery did indeed become overcolonised by the “madwives”. Some number of would be mothers and their children were killed by that, umm, “overenthusiastic” insistence upon natural birth rather than the technological marvels that we spend £160 billion a year on the NHS to gain access to. Why?

The NHS is a closed system, does not face competition from those not subject to its groupthink. Therefore we gain that spiralling off into extremism of the thinking within the group.

This is a criticism at a much higher level of abstraction than whether taxpayers should be paying for other peoples’ healthcare or not. It’s that the one monopolistic supplier is a bad idea. Because Monopolies Are Bad, M’Kay? This groupthink leading to extremist error being only one of the reasons they are.

Tim Worstall

Big Brother is alive and well and living in Westminster

Seventy-five years ago, on June 8th 1949, George Orwell published 1984, his classic novel on totalitarianism. It was not about the future, so much as an indictment of Communism in the Soviet Union of the 1930s, but it gave us the language to speak about totalitarianism. It gave us doublethink, thoughtcrime and Big Brother, among others.

If one looked as many years forward from 1984 as Orwell had done from 1948, when he wrote it, those 36 years would take us to 2020. In 2020 we were locked indoors, only allowed out for essentials. We were banned from sitting down to rest outside. Police stopped people to see if their journey was ‘essential,’ and in shops the book sections were taped over as ‘non-essential.’

Schools and universities were forcibly closed, with many students confined in hostels, with barbed wire in some cases to prevent them leaving. A father was warned by police for playing in his garden with his children. Police drones were used to track and caution country walkers.

No meetings were allowed with strangers, or visits to relatives and friends. Foreign travel was prohibited. Mask mandates were enforced. Hymn singing was banned in churches. Some towns were sealed off, with no-one allowed in or out. NHS health inspectors enforced self-isolation by phone calls and unannounced visits.

No visits were permitted to hospitals and care homes, and attendance at weddings and funerals was limited to six persons. Most tellingly, a climate of fear was deliberately cultivated to force people to keep to the rules.

If anyone had told Orwell, or indeed anyone else in 1948, what 2020 would be like, they would have been met by astonished disbelief. Yet it happened, and much of it went far beyond what Orwell’s dystopian future had envisaged. The people who broke those rules received criminal sentences. The people who dreamt them up were knighted.

Those who say, 75 years after Orwell published 1984, that it could never happen, should be reminded that it did.

A wealth tax wouldn’t make the poor wealthier

One of these strange but true things. A wealth tax wouldn’t make the less wealthy wealthier. Apologies for making heads explode and all that but this is, in fact, true.

When we tax richer people on their income and give it to poorer people as an addition to their income then those poorer people are of course richer. They’ve got more cash, have a higher income. We include this in our calculations of income inequality too, as we should. Even those measures of relative poverty are after taxes and benefits.

This is entirely separate from whether we should be doing this, should not be, are damaging the economy by doing so and all that. It’s just the observation that we do count the money given to top up in the incomes of the poor when we measure income by poverty.

We do not do this with wealth. This is something that it’s important to understand when people chunter on about wealth inequality and how, therefore, we’ve got to tax the really wealthy in order to redistribute it. For example, the JRF:

The average family in the poorest 10% of families has negative net wealth (such as their debts exceed their assets) (Advani et al., 2021). The bottom 2% have just £2,500 (including household physical assets). At least half of the bottom 10% only held wealth in physical assets (with a mean value of £8,000)

We could (well, we couldn’t, but as an exercise in logic) tax all the wealth off all the rich and ship that off to the poorer in goods and services, income tops ups and so on. This would change that wealth distribution to the poor by not one iota, not one pound nor even penny. Because we don’t count as wealth the things that are sent to the poor via government action.

Formally, from Saez and Zucman:

Our definition of wealth includes all pension wealth— whether held in individual retirement accounts, or through pension funds and life insurance companies—with the exception of Social Security and unfunded defined benefit pensions. Although Social Security matters for saving decisions, the same is true for all promises of future government transfers. Including Social Security in wealth would thus call for including the present value of future Medicare benefits, future government education spending for one’s children, etc., net of future taxes. It is not clear where to stop, and such computations are inherently fragile because of the lack of observable market prices for these types of assets. Unfunded defined benefit pensions are promises of future payments that are not backed by actual wealth. The vast majority (94% in 2013) of unfunded pension entitlements are for government employees (federal and local), thus are conceptually similar to promises of future government transfers, and just like those are better excluded from wealth.

The NHS is not counted as wealth, free education is not, the benefits system is not wealth, not just the state pension but a civil service pension - a doctors pension! - is not wealth. But all of these things are wealth. And that they are funded by a progressive taxation system - as they are - means that we already have a considerable redistribution of wealth in this country.

It’s very easy indeed to tot up that absolutely every citizen in the country has a half million or so of wealth. Free lifetime healthcare is perhaps £250,000 - that’s, -ish, what it costs to provide. Free education per child costs £90,000 or so - per child again. The state pension has an actuarial value of £150,000 or so. And so on. Simply by being born British people have a half million in wealth before we think of the insurance value of the welfare state and so on.

But, as above, all that wealth is not counted when we discuss the wealth distribution. Which does mean that if we tax the wealthy harder to spend on more of these things for the less wealthy then, by the measurement system we use, we’ve not made those poorer any wealthier at all. Which isn’t a good way to be doing the counting.

Of course we’re against a wealth tax for that’s an idiot idea. But moving from opinion, however based, to irrefutable fact. We do not measure wealth properly at present, therefore we don’t measure wealth inequality correctly. Which seems like the first thing we need to be doing if we’re going to then discuss whether we want to change that wealth distribution.

For, as above, it really is true that given the way we measure these things we could double pensions, triple the NHS and cost every school in the country at Eton levels and we’d not have increased the wealth of those who get pensions, health care or education by one iota nor penny. Which is not just insane it’s misleading.

Tim Worstall