Saturday, 24 February 2018


Cassandra – gifted, with the power to see the future, but punished with the curse of prophesying in vain.

How long should the "transition" take, for Britain to leave the European Union?  On 22nd Feb 2018 the Guardian reported [1] that a leaked  document from senior Tories suggested:
 “The UK believes the period’s duration should be determined simply by how long it will take to prepare and implement the new processes and new systems that will underpin the future relationship....“The UK agrees this points to a period of around two years, but wishes to discuss with the EU the assessment that supports its proposed end date.”  Commenting further: 'During the transition period, the UK will effectively remain a member of the single market and customs union under the jurisdiction of the European court of justice, but without any say in EU rules.’   I said much the same in a letter to the Guardian and to my local Tory MP [2] on 15th October 2017; commenting that the negotiation might take far longer than 2 years, and that during transition we should carry on with full fees and full privileges, but no new commitments (see references below)

In May 2017, The Observer reported [3] that Sir David Nicholson backed the LibDem's suggestion of a penny more tax to pay for the NHS.  Bravo, Sir David; bravo the LibDems.  But I suggested exactly that idea 4 years previously, in a blog and a letter to the LibDem Party.   "What we need is a goal that is universally popular, such as the National Health Service. Who would not dip into their purse for our beloved NHS? I therefore suggest we all pay this as an additional, specifically earmarked tax, and think of it as paying for the NHS, which we all clearly want." [4]. (Lots of others have advocated less austerity, but not this focussed tax-rise.)
According to Al Jazera of 31 March 2017 [5] (and the Daily Mail of 22 Feb. 2018): "The United States has said that it is no longer focused on ousting President Bashar al-Assad as it seeks a new strategy to end Syria's civil war. "  But, back in 2012, I pointed out [6] that the United States and its allies should acknowledge that al-Assad was still the de jure and de facto leader of Syria, and that, though unpopular in the West and with many enemies at home, he might nevertheless be the democratically appropriate leader, because the most popular single candidate among his own people.
It is very frustrating, being so far ahead of the field that one's message is not heard, or heeded. Yours sincerely, Ian West

Friday, 19 January 2018

Limits to the NHS: which healthcare spending should be free?

I shall be sad if the British National Health Service dies from deliberate starvation of resources, and passes into history — a lofty and "once successful" product of the human spirit. (See e.g. / 
     However, I think the death of the free-for-all-at-point-of-use health service comes partly from the failure of the medical professionals themselves; their understandable failure to limit their costs.  The Hippocratic concept does not have space for rationing. 
     The valiant committees of the institute for health and care excellence (NICE), make recommendations that limit the way public money is spent, to maximise value for money. But perhaps not quite enough to dispel the vague notion we all share that the NHS is a bottomless money-pit. Their spending cut-off point is a sensitive matter of judgement, and may drift in time. 
     For example, I would point to the case of in vitro fertilisation (IVF), which is limited to a few rounds of implantation, and to a certain age range (see: But we are in a badly over-populated world. And babies are not an "inalienable human right", given by providence to all. We are coming to the point where, to introduce one more life is, in effect, to introduce one more death; and incrementally intensifies the tensions and rivalries we see all around. 
     I, though over seventy myself, see some grounds for limiting free healthcare of the elderly to palliative care only.  

Carillion: for and against PPI

Mainly Macro (namely Simon Wren-Lewis) has written a good piece on the collapse of the large bulding firm (Carillion) that won contracts to build for the government. Not only are the points clear, telling, and fair; the writing is unusually free of the blemishes of hasty, late-night, blogging.

He fairly sees advantages as well as disadvantages in letting private firms compete for contracts. Competition holds down prices. But private firms seem to needs more supervision than they tend to get; supervision of quality and of management ethics. Furthermore, lending to private firms is riskier than lending to Government, and so interest rates are higher.


Thursday, 11 January 2018

Ebeling on the virtues of Austrian and the fallacies of Keynesian Macroeconomics

Dr. Richard Ebeling posted a piece on the Cobden Centre website on 10th January contrasting Austrian with Keynesian economics. 

On the one hand Ebeling criticises the widely accepted `Keynesian´ approach to macro economics on the grounds that it deals with aggregate quantities (average prices, average wages); quantities that have no real existence, an approach that overlooks all the individual prices and wages of specific products and skills. On the other hand he praises the 'Austrian' way of looking at macro economics (as expounded by von Mise, Hayek, Rothbard and others) for its refusal to consider such aggregates, and its insistence that the economy will adjust itself far better if left alone than when tampered with by ill-informed government intervention.

I think it is ridiculous to view these two approaches to macroeconomics as though they are in conflict; as though one must be `wrong´if the other is `right´.

Of course there is an average wage and an average price level. They do not exist, but they are determinable quantities.  Keynesian theory does not interfere with the prices of individual items nor the wages of particular operatives, any more than the Austrian theory does; they are of course left to market forces, by both theories. If the average price level rises (or is raised) a few percent relative to appropriate wages, individual productions will become profitable one after the other in the same general way(#) on the Keynesian theory as with the Austrian theory.

The Austrian theory does not require aggregates because it is not going to advocate any government interference. It is simply going to watch while the business cycle works its way through the economy, bankrupting firms and depriving families, until entrepreneurs once again find that there are too few skilled workers, and start to hire `foreigners´. It explains, but does not intervene. 

Non-intervention is better than bad intervention, and that is the virtue of the Austrian school. But is it better than good intervention? I think not, and that is the weakness of the Austrian school. I think that it is morally impossible to sit back and watch capitalism at work. I mean impossible for a moral conscience. It is too easy for the wealthy to exploit the poor, the clever to cheat the foolish. And I think western civilisation has come to the same conclusion over the last thousand years, instituting taxes and charities, encouraged by a predominantly Christian view of heaven and hell.

But if that is the weakness of the Austrian School, what of its strengths? And do governments effect more harm that good? 

It is undoubtedly a weakness of democracies that they find it hard to raise sufficient revenue in taxes. Who, for example, campaigns for votes by offering to raise taxes? (Only in Scandinavia, and that one suspects is for predominantly climatic reasons.) So, I suggest that the fact that governments seem to get it wrong more often than right, may not be solely down to their (governmental) stupidity. (As for the newspapers and the voters, that is another matter, and I suspect that ignorance plays a considerable part.)  I like to think that, since 1936 when Keynes published his "General Theory", governments have, occasionally, mitigated the severity of the business cycle on the populations in their care, by providing relief, or work on infrastructural projects. 

Tinkering with bank rate has its limitations, and I am not yet convinced of the benefits of "quantitive easing", except benefits for the bankers, for I am skeptical of the extent of "trickle-down".

(#  I realize that the order in which businesses become profitable one after the other will be slightly different when the price rise is general (as it might be if government intervenes) compared with the diverse price rises that pure market forces can devise. The Keynesian result will not be identical to the Austrian result.)

Thursday, 30 November 2017

Leadsom's Towcester Meeting

Dear Emily Hall,

Thank you for the invitation to attend Andrea Leadsom's meeting on 8th December. I am currently in Mexico, and it would be impractical. Sorry.

My views:
(1)  for complete separation, the task for the civil service seem essentially impossible inside 2 years. Five would be more realistic, or 10.
(2)  a solution to the Irish border seem almost impossible, except that of UK staying inside an EU-compatible customs union.
(3)  to maintain trading access to EU we must maintain EU standards, which in any case suit the British preference for safety, and the environment. 
(4)  we have already lost the medicines agency, and banking authority. We must clearly brace ourselves to lose remaining vestiges of influence in the world's second largest trading and cultural block as we press on out of the EU.


Yours sincerely, 

Tuesday, 21 November 2017

To Andrea Leadsom, MP

Dear Andrea Leadsom,

You are my MP; you represent me in Parliament. 

I believe that M. Barnier has just put the crucial question in a concise form. Yesterday (20th November), Barnier said: 
“The UK has chosen to leave the EU. Does it want to stay close to the European model or does it want to gradually move away from it? The UK’s reply to this question will be important and even decisive….”. 
That is it in a nutshell. I want regulation and high standards. What do you want? What does Britain want?

According to a good piece in the Guardian, Peter Mandelson added 
that many Brexiters would be “very happy for the UK to become a regulatory satellite of the US”, while “some in the present cabinet barely know what a trade negotiation is, let alone why it is desirable”.
Where do you stand? Close to the USA, or close to Europe?

Yours sincerely, etc.

Sunday, 12 November 2017

Werner on GDP and Interest

Werner on GDP and Interest Rates

Lee and Werner have posted a paper  destined for the Journal of Ecological Economics in 2018. According to Lee and Werner there is essentially complete agreement amongst all schools of economic thought, that lower interest rates stimulate economic growth; they extrapolate to a belief that when the Bank of England lowers ‘Bank Rate’ (the overnight rate of interest at which it lends to commercial banks) it is trying to boost growth of the economy. Lee and Werner’s object is to test, against the data, whether low interest rates cause the economy to grow. Of course, they cannot show causation, but they can test whether or not a fall in interest rate precedes a rise in ‘growth’. Their answer is the complete opposite – not only does increased rate of ‘growth’ lead a change of interest rate (rather than lag it), but raised rate of ‘growth’ correlates with a raised interest rate (rather than a fall).

I propose to return to the question of how to determine the growth of the economy, but wish first to consider why the Bank of England tinkers with the base rate of interest on the overnight loans it offers to its commercial bank customers, which we call “Bank Rate” or “Base Rate”. Ostensibly ‘Friedmanite’ central banks such as the Bank of England (BoE) are tasked with maintaining the stability of the currency by controlling inflation at a steady rate of 2%. The Bank of England currently uses two methods to manipulate the purchasing power (in Britain) of the pound (i.e. the cost of the basket of goods in the Consumer Price Index). These are: [i] rate of interest charged on overnight loans from the Bank of England, and [ii] asset purchase (i.e. Quantitative Easing). 

The idea behind the first is presumably the monetarist belief that the quantity of money in circulation directly affects prices; doubling the money will double the price of goods (and halve the value of the money). And of course, money nowadays is mostly credit, rather than coin. I have no idea what volume of business flows into and out of the BoE reserves every night, nor what a commercial bank would do if the BoE said “sorry, you cannot borrow from us this evening.” I imagine that Bank Rate is largely operating as a signal. If Bank rate rises, all the lenders in the country gleefully raise their rates. If the economy stagnates and the Governor fears a recession, he will signal a willingness to encourage lending by lowering base rate. However, when base rate is essentially zero he cannot use that tool to encourage inflation; he turns to Quantitative Easing.

The idea behind Quantitative Easing seems to be as follows. The Treasury issues gilt-edged IOUs at such an interest rate that they do not all get sold. The Bank of England buys (up to 70% of) them, so holding down longer-term interest rates. If the Bank of England buys these ‘assets’ from commercial banks these latter acquire (in exchange) money they can lend out, or reserves at the BoE they can use as surety against extending credit to smaller customers. You might ask where the BoE gets the money with which to buy the Gilts? But remember, it has the power to print notes; so it (therefore) does not need to; it simply gives the liquid asset of digital cash in exchange for the gilt-edged IOU; it can always swap it back again. In many ways QE is simply doing, for longer-term interest rates, what the BoE routinely does for its overnight Bank Rate. But the process injects ‘broad money’ (in the form of credit) into circulation, and that can cause inflation if it gets into the hands of the general public. There can be a delay, of months or years, depending on what the commercial banks do with their new money (sit on it or lend it out); and on whether the general public borrow that money to build factories or fund purchases. But it will eventually cause inflation, unless the BoE swaps back the IOUs it purchased. 

Lee and Werner’s question (whether low interest rates cause the economy to grow) is timely in that there seems to be a growing disconnect between the efforts of the central bank and the performance of the economy. However, the performance of the economy is a preoccupation of the government, and above all of the media. It is not the concern of the BoE which is is focussed on keeping inflation low and stable.

For two centuries Britain has watched the economies of other countries grow faster than its own. This growth represents capital accumulation and in its early phase is logarithmic (auto-catalytic). It is usually measured as gross domestic production (GDP), which is a compilation of all the incomes of all the people in an economy, expressed in the local currency. If we do not grow as fast as our competitors we loose market share; and we cannot grow as fast because we are no longer in the logarithmic phase of growth. 

Because nominal GDP is expressed in local currency, it reflects not just accumulation of capital, but also inflation. Let us consider a peculiarly simple but quite plausible form of inflation in which, at the beginning of every financial year, all prices and all wages rise abruptly by 5%. The citizens and businesses would be no better off; nor worse off. A bag of flour would cost 105% of what it did the previous year, but citizens would soon realise that their salary would stretch exactly as far as before.  At the end of the year the macroeconomists would note a 5% jump in nominal GDP, but this is not growth – except to ‘the media’. Any sensible discussion of GDP must start by correcting nominal GDP for the change in value of the currency (using e.g. RPI or CPI). (See also my post on Growth; and on Coppola Comment.)

Let us now look at the data of Lee and Werner. They plot the “year-on-year growth” in nominal GDP over a period of 50 years from 1960, presumably taking the published GDP for each 3-month interval and subtracting that of 12-months before (thereby introducing a 6-month offset into the profile; any growth in the 12 months to December 1970 being ascribed to December 1970 and not to June 1970). On the same graph they plot interest rates on 3-month Treasury bills or (on another graph) 10-year government bonds. These interest rates are not simply base rate, but are complex reflections of (a) instantaneous base rate, (b) what the markets think will happen to base rate and (c) what the markets think will happen to inflation over the period of the loan. 

My interpretation of their data is that in all 4 major economies the rate of inflation rises and falls irregularly (but with a tendency towards a 5-7 year periodicity) over the 50 years of the study, causing a similar fluctuation in nominal GDP, and (with a slight lag) the 3-month and 10-year interest rates. Lags are the essence of the over-shoots and under-shoots of the business cycle. If information were instantly available to businesses and bankers, and if the spreading of rumours and building of factories were instantaneous, there would be no business cycle.

(It would be interesting to compare, for each time-point, (i) the 3-month rate, (ii) 10-year rate, (iii) base rate, (iv) inflation rate, and (v) ‘corrected’ GDP growth-rate ascribable to that time-point; but that was not done.)

‡‡  There are old men in pubs remembering when beer was 20p a pint and their fist car cost £600. In 1970 the average house cost £4975 and the average annual wage was £5700 [;]. So in 1970 the annual wage was equivalent to 28,500 beers or 9.5 cars, or 1.1 houses.  Today our average annual wage of £25,000 is equivalent to 8,000 beers or 2.5 average cars, or 0.11 average houses.  But these figures do not capture the whole picture, or you might think we were considerably worse off now than in 1970. We work less, live longer, fly to the sunshine for our holidays. We throw away worn clothes and broken umbrellas, and play with our smartphones in front of our flat-screen TVs. I have not met anyone who would prefer 1970 to 2017. Nor would I, even if it meant being young again – I think. 
★★  If the real (i.e. corrected) GDP of Britain increased 5% on the previous year, what has increased? To simplify, it could be the population, leaving us identically well off on a per caput basis; or we could all work longer days; or (finally) it could be that a new machine makes 110 shirts per diem instead of a mere 100. That new machine could be bought on credit if interest rates were temptingly low. Believing that is easy; proving it is hard.