How not to deal with the aftermath of a financial crisis

We have a report and column telling us how to deal with the aftermath of a financial crisis. The problem being that they’ve not correctly identified what was done right after the last one, therefore they’re not picking up the correct lessons.

It is true that their exemplar, Iceland, sorted itself out rather well, certainly doing very much better than Greece which faced similar pressures even if a different policy environment.

Our comparative research, carried out with Kieran McEvoy Neophytos Loizides, reveals that Iceland stands out from the rest. Iceland, a tiny European nation of 330,000 inhabitants, offers valuable lessons on the importance of accountability and suggests how to deal with such issues if or when the world suffers another financial crisis.

Days after the collapse of 97% of its banking industry, Icelandic authorities designed a comprehensive policy of accountability, based on two overlapping objectives: establishing the truth and punishing those responsible. An independent truth commission was mandated to document the causes of the meltdown, and the newly established Office of the Special Prosecutor was tasked to thoroughly investigate and prosecute those responsible for any crimes committed in the run up to the crisis. Both mechanisms have been remarkably successful.

That is to concentrate upon the trivia. What actually mattered was that Iceland allowed all the banks to go bust, the currency to collapse and repudiated whatever debts it possible could. That extreme free market - very close to an Austrian view of what to do - led to an horrendous collapse, most certainly it did. And now Iceland is back at full employment, again on#e of the richest nations in the world even if a rather icy social democracy.

The committee which looks into things afterwards is rather less important than the things done in the heat of the crisis. And liquidationism has now been tried in the real world and it works, works rather well in fact. Better than non-liquidationism in Greece for example.

So long folks

So after two and a half years today’s my last day at the Adam Smith Institute. Starting next week I’m off to join Philip Salter at The Entrepreneurs Network as Research Director.

Being Head of Research (and before then Head of Projects) at the ASI has been a blast. There are few workplaces that can offer comparable opportunities and I’d like to thank the ASI’s co-founders Eamonn Butler and Madsen Pirie taking me on board as a graduate.

Soon after I joined I was writing op-eds in national newspapers and appearing on TV thanks to the awesome media-work of Flora Laven-Morris and the constant help and advice of Sam Bowman and Ben Southwood.

Over my two years plus, I’ve seen the office change a lot. Including seeing Sam, Ben, Flora, and Ellie Weston move on to new jobs and seeing Matt Kilcoyne, Daniel Pryor and Sophie Jarvis join leaving the Institute in good hands. That’s not forgetting a range of interns (Hunter, Olly, Amelia, Jonas and now Ananya) who have all left their mark in their own way and will surely go on to great things.

I leave knowing that the ASI remains a research powerhouse (2nd best Domestic Economic Policy Think Tank in the World!). We’re a small team but through our brilliant fellows and associates (like Anthony J. Evans and Kevin Dowd) we punch well above our weight. Over the past year we’ve published top quality agenda-shifting research on immigration, financial regulation, monetary policy, vaping and, my personal favourite, the case for abolishing the MOT test. We’ve got a whole load of great papers and reports in the works (I count 8 including one by yours truly) to release in the coming months too. So watch this space.

The Adam Smith Institute is needed now more than ever and I’m excited to see what happens next.

All port, no policy?

Having never been to the Conservative party conference and not being a member of the party myself, I was expecting it to be rather, dare I say, aloof.

There was plenty of drinking, plenty of port for sure, but the policy coming out of the main hall seemed a little bit light. Yet that wasn’t what struck me most. No, reflecting the recurring trend in politics of late I was pleasantly surprised by what I found in Birmingham.

I had the opportunity to debate, present and articulate ideas to ardent High Tories who rallied under the banner of "Church in Danger" as well as uber edgy (both in persona and on the political spectrum of the left) Labour party members of the ‘free markets...BUT’ persuasion.

Though this civil discourse is rather cute, the pinnacle of polite conversation occurred as Owen Jones heartily laughed as a group of young Conservatives for Liberty members announced they would ‘privatise him’ and responded he would ‘nationalise them’ with an even heartier laugh.

The Conservative party’s conservatism is notorious for having a historically inconsistent dogma, from Disraeli to Thatcher; reflected by Boris Johnson speaking of One Nation Toryism and Thatcher in almost the same sentence. So when I attended a fringe event with a presentation slide titled ‘Origin of the term ‘Conservative’’ I was hoping for some clarity. But the lecture (and a quick glance over my A level history course) reminded me that Conservatism is only as good as what it conserves. Paradoxically this may be why the Conservative party has been Britain’s most successful political party – but that is a topic for another blog.

Regardless of the party’s past, the conference was particularly promising for the future of the free market faction. And I mean conference and not party there. It was at the business stalls and fringe events – those attended by entrepreneurs and academics – which is where I found showcases of driverless cars, AI in financial services, and housebuilders showing they’re not just jaw-jaw.

Naturally, this meant they were popular and the temptation to parallel the ‘one-in-one-out’ entrance policy at some events with the proposal of some Tories’ immigration strategy was too tempting to resist. The opportunity for intra-party dialogue, bolstered by the tieless teens, the Truss enthusiasts, and even the tweed-wearing Tories of the youth wing of the party was both fruitful and friendly.

And so, fruitful and friendly it was, evident by the copious amounts of literature from think tanks, various organisations and charities which I had the pleasure of taking home. However, the question of whether it was all port, no policy depends on whether the literature is seriously considered by the government in the near future.

Why use the proof that we're right to suggest we're wrong?

Owen Jones is again making an economic mistake. But then, you know, Owen Jones. He’s telling us that wages just haven’t been rising - we know - and that young people have it worst. Yes, we know.

The thing is, the particular statistic brandished at us tells us why young people have it worst - because government has forced everyone to pay them more. This is actually in the source report that Owen uses.

As he says:

The lack of any organised counterweight to the power of bosses has left many employees lacking security, ill treated at work, and paid derisory wages. Indeed, while Britain’s workers suffered the worst squeeze in wages of any industrialised nation other than Greece, the fall has been felt sharpest by the youngest: for workers aged 18 to 21, real weekly wages collapsed by 16% in the years after the crash.

Therefore Yah! Boo! Sucks!, the burger flippers are on strike and we’ll fundamentally reorganise capitalism. His source is:

The CEP report also emphasises that it is the wages of young workers aged 18-21 who have suffered the most since the financial crisis, with their real weekly wages down 16 per cent between 2008 and 2016.

And that report in detail says:

There are big differences by age. Young workers (those aged 18-21) have suffered a considerable loss in their wages – of the order of a huge 16% fall in real weekly earnings.

OK, why?

Low-wage workers have benefited from minimum wage increases, especially the 2016 introduction of the National Living Wage. They have done better than workers higher up the wage distribution, thus leading to a modest decrease in wage inequality.  Young workers have been the ones most affected since the crisis, experiencing a sharp fall in real weekly wages (of the order of 16% for workers aged 18-21), linked to lower hours, part-time work and self-employment arrangements

It’s that “lower hours” in there. Those young workers are paid more per hour of work, they gain fewer hours of work and their weekly income falls by that 16%.

So, what is it that Owen Jones and others tell us about the minimum wage? That it ought to be raised so as to increase low end wages. What is it that we’ve been saying about raising the minimum wage? That it will likely backfire as people do tend to buy less of something that is now more expensive.

And who is right? Well - but the real point here is don’t these people ever actually read the research they use to support their assertions?

No, not really, they don’t, for Owen Jones will still be calling for a higher minimum wage to increase the incomes of the low paid and young, won’t he? What truly worries is that he still would be even if he could comprehend what his own source report is trying to tell him.

Health and Social Care: Dribs and Drabs

The Department of Health and Social Care (DHSC) announced on 2nd October that another £240M would be made available to local authorities to “reduce pressures on the NHS by getting patients home quicker and freeing up hospital beds across England.” This is in addition to:

  • “£145 million given to the NHS in September to boost winter resilience, which will go toward upgrading wards, redeveloping A&E departments and paying for an extra 900 beds,

  • £36.3 million awarded to ambulance trusts in June to prepare for the colder months, which will go towards buying 256 new state-of-the-art ambulances,

  • As announced in last year’s budget, an additional £1.6 billion has been given [to the NHS] for 2018 to 2019.”

No mention here of the £800M increase also for the current year that Mrs May announced in June as part of the £20bn five year uplift. There were two curiosities about that:

This new £240M exemplifies disconnected, dribs and drabs, thinking.  The headline claims it will be used to relieve bed-blocking. £240M is equivalent, according to the arithmetic above, to 1,490 extra NHS beds.  But that headline is contradicted by the following body copy which says the £240M “could pay” for “one of” three options, none of which, it seems, has yet been chosen. The first is relevant: “more than 71,500 home care packages to help patients get out of hospital quicker”.  In other words, 1,490 NHS beds cost about the same as 71,500 places at home. It looks like local authorities need the money a lot more than the NHS and the latter could afford to divert more of their resources to achieve that without additional funding.

The link to relieving bed-blocking, however, is then broken by the methodology used for allocating the money to local authorities, namely the “adult social care relative needs formula”.  In case you don’t have that, or more accurately those, at your fingertips the one for older people looks like this:

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The point here is that the formulae being used to distribute the extra moolah have no relationship with the intended purpose: unblocking beds.  If that really was the intention, one would total the number of beds capable of being unblocked and distribute the funds pro rata to the local authority recipients of those patients.

Mushy thinking aside, there is a much bigger issue undermining the DHSC.  No one is looking at the health and care picture as a whole. No one is ensuring that waste is removed.  As Lord Carter of Coles warned on 27th September “£20bn cash boost for NHS ‘could be lost to waste’”. MPs have been saying much the same but there has been no response. No one is establishing the boundaries and the priorities.  Instead, money is being parcelled out in dribs and drabs on the basis of oiling the wheels that squeak the most.

Build more houses, house prices come down - simples, eh?

We;ve had an awful lot of people telling us that housing is different simply building more won’t in fact reduce their price. We need to have set rents, affordable rents, subsidies from the taxpayer, absolutely anything other than a free market. This contention is wrong:

The North of England's property market was the worst-performing region in Britain for house price growth in the three months to September, with prices falling by 1.7pc, according to data from Nationwide.

A surge in the supply of new homes in the North is to blame, said Jonathan Hopper of buying agent Garrington. "Housebuilders were slow to start building again in the North, but new homes are finally coming on stream now. That jump in supply has depressed prices," he said.

The basic market contention in economics, that supply and demand will balance at a price, is true.
Increase supply while demand remains static and prices will fall.

Houses are too expensive? Build more and houses will be cheaper.

All of which does tell us how to deal with the housing problem, doesn’t it. Blow up the Town and Country Planning Act 1947 and successors so that houses can be built that people would like to live in, where they’d like to live, in the number desired. House prices will then come down.

Contrary to protestations, markets work.

Paying bonuses to bankers is just so sexist

It is a regular complaint - and not just about banks - than when the bonuses are handed out it’s men who gain the lion’s share of them. Women come very much second place in this race. As ever with such events we want to know which type of discrimination this is.

Taste discrimination on the grounds of gender - except among the truly extreme fringe we except things like affairs of the heart and body from such strictures - is considered to be verboten these days. But rational discrimination, people might complain but it is still accepted as being logically valid.

So, paying bonuses largely to men an not to women, which type of discrimination is this?

Male workers put in less effort at work when bonuses are cut and replaced with fixed pay, but women work just as hard either way.

Men slack off to such an extent that academics found a 12pc drop in effort in an experiment moving from piece rate payment - that is, being paid for each piece of work done - to a fixed rate.

As ever with such measurements we have to note again that “men” an “women” here dos not refer to any individual, we are talking about average differences across the populations. As in it is not true that all women are bad at physics - today saw part of the Nobel go to a woman - nor that all men are good at it - large numbers of men today did not get a share of the physics Nobel - but that skill at, or perhaps interest in, is not equally distributed across the populations of men and women.

But bonuses appear to be less effective at motivating women and more so at men. Thus it seems obvious enough that a rational employer will direct bonuses at men as that’s where they work.

If you’d like it in another manner, women are mature and men require extra sweeties to put the effort in. This being true then how would you distribute the sweeties?

So what level of taxation stops Venezuela's inflation?

Modern Monetary Theory is highly popular among those with a certain vision for government. Rightly so, for it says that a government can just print money to spend as it wishes. In a sovereign nation with its own currency there is no fiscal limit that is. To a certain type that’s very interesting indeed.

Leave aside the details of whether it all really works like that - standard economics has it well covered under the rubric of monetisation of fiscal policy, something the rules of the euro specifically bans* - and consider just two points.

The danger is that government will gaily go off and print lots of money, either on paper or simply electronically, and by spending it create inflation. That’s what many past episodes of such monetisation have led to after all. The glib answer is that the government just taxes more, sucks that created money out of the economy, and thus kills the inflation. Tax, in this theory, exists to stop the inflation caused by government spending.

Well, OK, but how different is this from old left wing policy? We end up in the same place don’t we? A high government spending and high tax economy. Sure, we’re now saying that the spending comes first, the tax second, but we’ve still got ever more of the economy being run by, flowing through, government. Obviously attractive to those who love big government but not so much to the rest of us.

That being our first point - how does this differ from any other method of giving the jackanapes in office more power over us?

The second is a little more detailed. Venezuela has been following just such MMT policy. It has been printing ever more bolivars to fund spending. As standard and MMT theory predict this has produced roaring inflation - 1 million percent by some estimations expected this year.

So, what’s the tax rate which would cure Venezuelan inflation?

Without knowing that we can’t evaluate the idea that tax can indeed be used to curb inflation, can we? Even if the political will were there - we suspect it never will be, political incentives always favour spending more, never taxing more and certainly not taxing to limit something as future tense as inflation - we do need to know that it is technically possible for tax to curb that inflation.

So, what tax rate should Venezuela have? We strongly suspect that it’s more than 100% of the economy.

Venezuela rather doesn’t have an economy these days other than oil. The oil is all government owned, all the revenue flows to government. In terms of any formal economy government really is rather some 100% of it already. The place still has that 1,000,000% inflation.

Our conclusion is that this fundamental assertion of MMT, that one can simply tax the spending created inflation out of existence, doesn’t in fact work. We’re back where we started, with those historical warnings - Weimar, The Hungarian pengo, the Zimbabwean dollar - against the monetisation of fiscal policy.

Unless, of course, some MMT proponent would like to come and tell us all what the tax rate in Venezuela should be in order to reduce that inflation rate? We’d like to see some workings, of course.

*In a shared currency you can’t let each component nation pursue such a policy. The money supply, the inflation, rises for everyone, whatever counteraction applies only in the one nation doing it. This is the mistake the late Soviet Union made, leaving each now independent republic with its own printing press printing the same rubles valid in all. Not the only mistake made of course.

Well, yes, this is what prices do, even for drugs

Right there on pages one and two of every economics textbook ever there is that little chart of supply, demand and prices. As prices fall fewer people wish to supply and as prices rise more do. That’s all we need to explain this little story:

A 700% spike in the price of a drug used to wean addicts off heroin has caused alarm among treatment agencies, which warn of a rise in drug-related deaths unless urgent action is taken to make it more affordable.

Buprenorphine is an alternative to methadone that reduces the symptoms of withdrawal and lessens the desire to use heroin. It is estimated that more than 30,000 people in England use the drug, which offers a reduced risk of overdose compared with methadone.

About which we are told:

The shadow health secretary, Jonathan Ashworth, questioned the role of the drug makers in the crisis. “We already have record deaths from drug misuse, while treatment services have been slashed by millions in recent years,” he said. “Yet again, this looks like ‘big pharma’ exploiting the market by ramping up the price, and some of the most vulnerable in society ultimately paying a devastating price. With treatment services on the brink, these escalating costs could push many into absolute crisis. Ministers urgently need to step in, get a grip and ensure access to this vital drug for the most vulnerable at fair prices.”

Well, OK, but how are we to define a fair price? Possibly one at which people willingly produce the item desired?

For what has happened here is nothing to do with patents or any other restrictive practices. It’s simply that some of the people who used to produce the drug thought the game not worth the candle and stopped doing so. That is, the price being paid was too low to call forth the desired supply. Suppliers leave the market, the price rises, that’s just what happens. That’s also what we want to happen - the price rises and we’re now assured of supply at this new and higher price.

It’s not even Big Pharma here, it is generics manufacturers.

Earlier this year it emerged that one of the makers of the generic drug, which is far cheaper than its branded equivalent, Subutex, had stopped producing it. Amid fears of an impending shortage, the government stated that pharmacies could be paid close to the same price for dispensing buprenorphine as Subutex, in an attempt to encourage manufacturers, who could command higher prices elsewhere, to continue supplying the UK. Prices rocketed.

There’s a wider importance to this little story just as there is to those basics about supply and prices. There are all too many who believe that government should be fixing prices so that they are “fair.” Rents should be “stabilised,” house prices reduced, transport fares pinned back and so on. And what happens when prices are so set - fair never does mean where people willingly produce for if it were what would be the point of the politicians defining “fair”? - then that thing whose price has been set fairly becomes in short supply to vanishes.

Venezuela, where food was most fairly priced, has no food. A price for housing which is too low to encourage market supply will have a shortage of housing. If drugs are too fairly priced then people will stop making them.

How the USA keeps the Venezuelan Regime Afloat

A common refrain among defenders of the Venezuelan regime is that the country’s problems are somehow caused by the USA. Precisely the opposite is true. The USA is the main source of the hard cash that keeps the Chavista regime afloat.

The issue of US-Venezuelan sanctions was in the news again this week after the US Government sanctioned for corruption Cilia Flores – leading Chavista and wife of President Maduro. It didn’t even stop her from travelling to the UN in New York together with her husband.

Some 45% of Venezuelan crude oil is exported to the USA and analysts expect that proportion to rise, even as total Venezuelan production continues to fall. “US refiners are among the few customers that still remit cash payments for Venezuelan crude oil,” commented Lejla Viller, an analyst with the US Energy Information Administration. Another analyst concluded that “the US is currently the ATM cash machine for Venezuela.

The main threat to the regime is in fact its own incompetent management of the Venezuelan oil industry. The Chavistas’ policies are killing the oil sector, despite Venezuela having the largest oil reserves in the world. Overall oil production has now fallen below the levels of 50 years ago and Venezuela now produces less oil and gas than the US State of Dakota.

The rot began with Chavez’s firing of 18,000 competent staff of the Venezuelan state oil company PDVSA and their replacement with untrained Chavistas, combined with the transfer of control of PDVSA to the President’s office. Rather than investing money in its essential oil industry, the Chavistas used oil funds to buy short-term support among the population and to enrich themselves personally.

The US Government could of course prevent anyone from buying Venezuelan oil in the USA. That would likely be the final blow to the weakening regime. But it has not done so, knowing that the humanitarian crisis would worsen and that US oil prices would rise. Moreover the US’s position as the main source of income for the regime gives it important leverage. Were the regime to move from merely starving its population to actively trying to kill them in large numbers, the US would be able to wield a big stick.

In the meantime, Venezuela receives over $1.1 billion every month from the US. Supporters of the Chavista regime should stop peddling the fantasy that US sanctions are somehow to blame for Venezuela’s tragedy and instead should appreciate that the US is the only reason why Venezuela’s regime has not already collapsed.

More information on the Venezuela Campaign can be found on their website