Monday, 22 August 2016

Cobden, von Mises and Shostak

Is there a role for Government spending?

Under the heading “DOES UK NEED LOOSER FISCAL STANCE TO CUSHION BREXIT?”,  Dr. Frank Shostak elaborates the 'Austrian' argument that 'The Market' is the only way of determining what is in the best interests of the world as a whole; the argument that government intervention inevitably distorts prices and generates inefficiencies. It is a beguiling theory, that of the ‘invisible hand’. Many years ago I also marvelled at how, in our small  market town, there appeared to be just the right number of milkmen, butchers, etc. I was thrilled to realise that there need be no external planner; that adjustment was automatic; no less thrilled than Adam Smith 2 centuries earlier. 

Dr. Shostak ridicules the idea of government-funded work projects by considering the building of an unnecessary and unwanted pyramid, which generates no  wealth, (either directly or indirectly), which is worse than pointless, because such building misdirects resources that could have been put to work creating wealth.

However, I think Dr. Shostak overstates the case against government intervention, and therefore the case for letting the market decide. Consider, instead of a pointless pyramid, the building of a motorway, or a channel-tunnel; a project that requires enormous capital resources and 20 years before showing a profit. The ‘invisible hand’ points, but there may be no entreprenuers who are both able and willing. What about monopolies, as when one operator buys up and destroys his competitors?  Bang goes the vaunted market. What if he does not, and we end up with two parallel railway lines running between London and Birmingham, squandering resources and both running at a loss?  Perhaps we should desire that governments act minimally; and wisely.

Cobden spoke forcefully in favour of letting the market decide the price of corn, and the price of money. He said “I hold all idea of regulating the currency to be an absurdity.” He saw that by abolishing tariffs against imported corn, the price of corn would automatically fall to the ‘just’ price, benefiting humanity as a whole; the foreign producers would benefit, the shippers would benefit, the British public would have cheaper food, and consequently would be able to buy more manufactured goods; only the British farmers would lose, but justifiably. However, Cobden’s motivation was not the logical beauty of the free market; it was this consequential humanitarian benefit that motivated him. His was a lifetime of concern for “the promotion of peace on earth and goodwill among men”.

Frank Shostak follows in the footsteps of the Austrian economist Ludwig von Mises, who also advocated letting the market decide, but with his eye on the beautiful theory, not on the humanitarian benefits. Von Mises was a supporter of ClassicalLiberalism, with its logical but brutal attitudes to poverty, the welfare state, and any action whatever by the state against individual liberty. He saw Keynesian-style intervention in the economy as little better than communism. He mistrusted, and denounced, the application of mathematics and even empirical observation to economics. He was both loyal and inflexible in his adherence to the articles of his a priori ‘faith’; you could say he was ’continental’, in contrast to Hayek who, though born in Austria, drifted toward British empiricism.

Against the a priori, von Mises, approach, I would suggest that human motivation is not simple, and is not logical. You cannot assume that every individual unit in a complex economy will value money above fresh air, so you cannot proceed a priori. Some people may like to starve their workers into accepting low wages, while others may not; or only sometimes. Of course it is logical to let indigent and surplus people starve or emigrate, but it is not humane. (Ah! the humane; the ‘bleeding heart’ of humanity; that contagious wrecker of perfect symmetries, that wanders like a virus from unit to unit of the social organism, and then vanishes.)

It is odd to find Richard Cobden and Ludwig von Mises sharing a website. There is, of course, nothing wrong with that, if there are common elements, except that some articles may seem flawed, simplistic or harsh, to people who read other articles on the site with enthusiasm. 



Thursday, 11 August 2016

Scissors, Paper, Stone.

     You know that game where scissors beat paper, paper beats stone, but stone beats scissors, and how it goes round in a circle? I understand that, from the time of Cromwell to that of Napoleon, warfare was a similar game. Cavalry beat artillery, artillery beat infantry, but infantry beat cavalry, again going round in a circle. Only a swift cavalry charge could get in amongst the gunners while the gunners were reloading their pieces. Infantry, by comparison, were sitting ducks to an artillery barrage (see Culloden). But no amount of spurring could get cavalry horses to charge a wall of well-grounded pikes. Your strategy was to anticipate your opponents strategy. 
     It occurred to me that recent British politics may represent some similar features. One point to note is that the cavalry must surely be expecting to be met by cavalry when they take the field, and are disconcerted when it turns out to be artillery or infantry; just as a pike is the chosen weapon of a pikeman. Let us suppose that the establishment represent our cavalry. They trot out onto the field saying “We negotiated hard to get into Europe, and our banks and businesses need access to the market! You will all be £1000 p.a. poorer if we exit.”  But no one is listening; or too few anyway. Their adversaries instead are saying “Give us back our sovereignty. Away with the bent bananas ban!”  But no one was listening to them either. The electorate did not mind the shape of their bananas; most of us can spot a joke when we hear one. Nor (surprisingly) do we mind how much poorer we would be out than in. Perhaps we do not trust the academics to get it right this time, as they got it wrong before; perhaps no one minds as long as the poverty affects everyone equally. But a lot of voters seem to have noticed that ours is a very crowded island, and that (under the governments of the last 20 years) there does not seem to be enough money for schools, nor the police, nor the Health Service, nor the universities. Whatfor do we want 100,000 eastern Europeans added each year to the benefits queue? 
     “Err!” says the establishment, “they don’t take benefits, they work and pay income tax”. 
     “And they pick our fruit and vegetables”, say the Sovereigntists, “but we do not like to be told who we can and cannot take in.”
     “The rules are fair and we agreed them anyway,”  says the establishment. “Free market means free-movement.  We need their labour and we want their cash”. 
     “We got through the war OK” says the man in the street. “We shall just hunker down, and Europe will gradually seem less and less important.”    No one has yet found a good answer to that.

Wednesday, 10 August 2016

Bremain?

    (Please don’t advocate Remain without meeting the criticisms against Europe.) 

    I am a keen supporter of the European experiment and think (even now) that Britain should remain in the European Union, but I am annoyed when other people write as though we had not lost the vote. 
    ‘Mainly Macro’ grumbles that we are going to loose a lot of money if we leave, and that the broadcast media failed the country because they failed to show that all the economic experts and financial pundits were on the side of remain. Yes, of course the coffee drinking middle classes are in favour of Polish plumbers and Latvian baristas; that is simply to fail to see the complexities and problems about immigration; the ambivalence, and the double-talk. What if the unemployed of Ashington do not want to pick carrots in Lincolnshire, at 6 in the morning; can we make them?
    What are the problems with the present concept of the European Union? Is it a mistake to aim at a union in which we are all more-or-less as well off as each other? So that free movement is integral, and the means to that end? If we retain free movement, we in the richer countries will have to face considerable immigration, from poorer countries in the north and east of Europe. (We do not need to fear a large inrush of Greeks, Italians, Spanish and Portuguese, because the wonderful climate and cultures in those countries will keep them at home.) Are we in Britain too generous with our benefits; should we hand out houses to anyone in Britain who has a baby and no income? Should the European Union have been restricted to countries of similar wealth and education? Too late now, you will say; but you can still decide your answer. Maybe those who crave a closer union will have to move towards a new Europe-within-Europe.
    The sovereignty issue has not been properly discussed, and has been very badly handled. The Queen in our Westminster parliament remains totally sovereign — except for powers voluntarily delegated. And even those powers can be recalled by revoking those treaties by which they were delegated. It should have been made clear to everyone in Britain that we voluntarily adopt the legislation and judgements of European executive and judicial organs. If it were ever the case that we do not voluntarily accept these ‘foreign’ decisions, what do we do? Appeal, or ask Europe to reform/limit itself, or pull out of Europe. Did we do too little protesting, and too late?
    The democracy issue was also inadequately discussed, and badly handled. The  Council of ministers and the European parliament, which are ‘the government’ of Europe, are as democratic as our own Cabinet and House of Commons. (More so if you like, as they have proportional representation.) That bogey of the Brexiters, the Commission, is merely the civil service, the executive. 
    But The Commission is too powerful. The whole ethos is foreign to our British idea of government. It should not have a named President, but an anonymous director. It is essentially an authorised clique placed in power for 5 years by a complex power play between the leading countries of Europe; Junker, with 27 handpicked pals, and 23,000 employees. It sees its roles as (and I quote) to:
“— propose legislation which is then adopted by the co-legislators, the European Parliament and the Council of Ministers
— enforce European law (where necessary with the help of the Court of Justice of the EU)
— set a objectives and priorities for action, outlined yearly in the Commission Work Programme and work towards delivering them
— manage and implement EU policies and the budget
—represent the Union outside Europe (negotiating trade agreements between the EU and other countries, for example.)”.
    We British would expect the objectives and priorities to be set by Ministers and approved by Parliament before being sent to the Commission; likewise the proposing of legislation; only the realisation to be executed by the Commission. This ‘problem of the Commission’ (a hangover from the early days of the Coal and Steel Community) has not been tackled, certainly not solved, and may be intractable.
     The Euro, as a currency, remains a problem. It would be interesting if there were, somewhere, an authority high enough to ask the following questions. If Greece can never repay its debts to European lenders, do the Greeks spend the rest of eternity paying interest; a sort of perpetual fee and a grim warning to others? What if the total sum of paid interest exceeds the original debt? Does any responsibility lie with a lender who lends to someone who cannot easily pay back the loan? Does not the charging of interest (above base rate) imply risk of losing the principle?  But where shall we find such a high authority these days; for it used to be God who denounced usury, a voice less heard than formally.  
    We had a chance to stay and sort this, but failed. Now we leave; and when we are not picking our own carrots, we can go to sleep somewhere to the sound of our dripping ball-valves. We shall manage, as long as our more able youngsters can emigrate to countries where they are welcome. 




Monday, 1 August 2016

Is there an honourable case against Proportional Representation?

(An open letter to an MP who opposes PR)

Dear Andrea Leadsom MP,

      It struck me recently, that there would have been no need for a referendum if we had proportional representation (PR) in the House of Commons.  I believe you oppose proportional representation for elections to the Westminster parliament. 

("The principle argument against the present system is that it is not fair - it is not a proportional system. However, proportional representation is a narrow concept. The 'proportionality' relates only to the relationship of votes to seats and not to the proportionality of power. Under PR, 10% of the votes are designed to produce 10% of the seats, but not necessarily 10% of the negotiating power in the House of Commons. Indeed, a party with 10% of the seats may be in a position to wield disproportionate negotiating power.”)

     You are quoted as raising two objections to PR; that it is a "narrow concept", and that power is not distributed fairly under PR. I do not understand your first point, unless it is intended only as a summary of your second point. 
     Your second point is familiar. Even Harold Wilson was aghast at the thought of the Liberals holding "the balance of power" both with a Tory minority government and with a Labour. But surely this is a relatively simple error. Suppose the Commons contains 300 Tories, 280 Labour, 30 LibDem. Suppose, on a Tory motion,  LibDem and Labour vote (in a principled way) against, and the motion is therefore defeated. The power that defeated the motion does not reside in the LibDem portion of the opposition, but in all 310 opposers !  The motion is defeated only if there are more MPs against the motion than for; each MP counting for one vote. Have I said enough? 
     You seem to see the possibility of a centre party MP supporting a Labour motion and supporting a Tory motion and you cry “Foul!  He is supporting more motions than I. He is exercising more power than I.” But that is also nonsense isn’t it?  If you are against the moderate voices being in the majority, I am afraid you are up against an immutable law — the bell-shaped curve of the Normal Distribution. You should not disenfranchise the middle merely to give the extremes a chance to govern
     Perhaps I should consider the possibility that the combined opposition (LibDem + Labour + whoever) unanimously  wanted to vote strategically, playing games with parliament and the whole process of government. But that proposition is defeated by a number of considerations: such behaviour defeats good government, the perpetrators would be punished at the next election, the same game could eventually be played against them. I think the whole idea of parliament, and democracy itself, is based on the assumption that these people do not play silly games.
    I have heard two further objections to PR, which you have not raised. (1) "Look", some people say, "at Italy”. To which I would reply "Or at The Netherlands". And (2) it is remarked that the present flip-flop system makes for large majorities and “decisive" government.   But that is surely the DISADVANTAGE of the present system, and by no means its strength? There is no virtue in being decisive if you are wrong, or going against the wishes of the country. Furthermore, with a large majority for 5 years the backbench MPs have little to do. Add to that the devastating effect this flip-flop system has on morale in the country, and morals in the House; the people cease to vote, for they see that their votes are not counted, and the MPs overuse their privileges.
     Proportional Representation is not a new concept. Many (if not most) countries have adopted it. I do not know of any occasion when the adoption of PR has been reversed by people wishing to return to a system like ours. The referendum of May 2011 was not about PR; it was a choice between staying with the present system or changing to the Alternative Vote system which is not proportional, has few advocates, and few users.
     The 'First Past the Post’ system favours two large parties, and large parties cynically favour it in return. 
     
     Please do not oppose PR on dishonourable grounds, nor on foolish grounds. If I have misunderstood your position, please can you explain more fully. 

     Yours sincerely, Ian West
---
Ian West,
Middleton Cheney, Northamptonshire.

Sunday, 31 July 2016

Tax and Spend

Tax  and  Spend

Why is the "austerity" question still being debated?

     The argument between 'fiscal prudence' and 'deficit spending' has not yet been won by either side. Why is that? Back in 2010 Ann Pettifor and Veronica Chick declared (ex cathedra) that cutting government spending (or increasing taxes) would fail to decrease the deficit, but would instead increase it, by depressing the economy.
     In June 2012, Paul Krugman and Richard Layard published "A manifesto for economic sense" [2], calling for a policy of fiscal stimulus to reduce unemployment and foster growth. Yet our coalition government cut taxes, and the Debt continued to rise [3]. Week after week, year after year Krugman ran a column in the New York Times pushing the same argument.
     The Opposition declares itself "anti-austerity" but gets little support from the electorate. The ordinary citizens (and the governments they elect) are very unwilling to spend further money as a way to reduce the Debt; it is too counter-intuitive. It is easy to see [4] that a sovereign state is not the same as a household, and that borrowed money could be paid back with worthless paper. But that point is not enough to persuade the averagely cautious citizen to borrow money on world markets in order to "restore growth". We already spend 8% of GDP servicing the Debt; what if rates should rise? We are already in the hands of the money-lenders. Why has the Keynes-Pettifor-Krugman lobby failed to persuade?
It is unfortunately a quantitative problem, which makes it almost impossible for the average citizen to solve. Public works will cost the government, but will raise national income, and hence taxes. Is the latter enough to compensate for the increased expenditure? I therefore attempt a simple quantitative approach to test that question.
     It is not an algebraic analysis, but a robust and brutally simple approach to the numerical problem. I assume very rough figures for the way salaries enter into the prices of goods, and have simplified grossly to expose the argument, but I believe that this approach could be 'tuned' rather accurately if the correct splits (of one sum between its 2 or 3 parts) were determined and inserted. My conclusion is startling.
     Imagine for simplicity the United Kingdom to be a closed community with no external trade (*). I can therefore equate GDP with the sum of all incomes in the country [5]. Suppose, initially, that the annual GDP is 1trillion GB£. (1Tr£) Suppose that the government collects 20% of all income as income tax and 20% of non-exempt spending as VAT. [Table 1; Stage 1]   
     The income tax revenue stream is therefore 0.2Tr£ [Stage 2]. 
     If all the remaining net income (0.8Tr£) were spent, with half on VATable commodities, and half on VAT-free items [Stage 3],  the VAT stream would be 0.08Tr£, as that is 20% of 0.4Tr£ [Stage 4].
Of the VAT-free portion of GDP, I am going to assume that half represents salaries for farmers and shopkeepers, etc, while half is the cost of "raw materials". The salary portions, of course, constitute part of the eventual GDP, and are recycled back into the economy; the "raw material"  (**) is lost to the economy. [Stage 4]
     The VATable portion of net income, after deduction of the VAT, is spent on our voluntary purchases. I shall assume (in the first instance) that this also will be distributed 50:50 between raw materials and salaries (of boat-builders, opera singers and the like). The latter, as before, becomes part of GDP. [Stage 5],
     Let us now spend the tax we have collected (IT+V) [Stage 5], and suppose that 50% is salaries of civil servants, soldiers, nurses, etc.; so eventually part of GDP. A further 20% might go on benefits (which I shall count as GDP in that it will be treated as income by its recipients), 20% on infrastructure, leaving 10% as waste (e.g. paper clips, rubber bands, and shredded paper.) [Stage 6]
     In this very crude analysis it seems that, with an initial GDP of 1Tr£, a certain amount is lost to the economy on raw materials, infrastructure, and waste (0.444Tr£), while the remaining 0.556Tr£  recycles and swells the GDP to 1.556Tr£. This may relate to what economists know as the 'fiscal multiplier' [6]. [7]
     In Table 2 the argument is repeated with none of the assumptions changed except that VAT and income tax are both raised to 30%.  It turns out that the losses to the economy now fall to 0.4175 with an increased 0.5825 returning to GDP to produce an eventual GDP of 1.582Tr£.

The surprizing result is that raising taxes, in addition to improving infrastructure, has raised GDP, for the taxes in this model are to a considerable extent returned to the economy in the form of salaries and benefits. Raising taxes is very different in its effect from cutting government spending. (***)



Table 1.  Recycling of GDP with VAT and income tax at 20% (Units=Trillion £GB)

Initial GDP=1Tr£
Inc tax 
0.2
Net income 
0.8

VATable spending  
0.4
VAT exempt (rent, food)
0.4

VAT
0.08
Spent voluntarily
0.32
GDP
0.2
Raw material
0.2
Total tax  
0.28
GDP
0.16
Raw material
0.16


Waste
0.028 
InfraS
0.056
Benefits
0.056 
GDP
0.14





Table 2.  Recycling of GDP with VAT and income tax at 30% (Units=Trillion £GB)

Initial GDP=1Tr£
Inc tax 
0.3
Net income
  0.7

VATable spending  
0.35
VAT exempt (rent, food)
0.35

VAT
0.105
Spent voluntarily
0.245
GDP
0.175
Raw material
0.175
Total tax  
0.405
GDP
0.1225
Raw material
0.1225


Waste
0.04
InfraS
0.081
Benefits
0.081 
GDP
0.203








References:
[1] Financial Times 4th Oct. 2010
[3] http://www.tradingeconomics.com/united-kingdom/government-debt-to-gdp
[4] John Lanchester, London Review of Books, 8th Sept 2011
[5] http://www.investopedia.com/terms/g/gdp.asp
[7] Strictly speaking the recycled GDP will itself recycle in exactly the same way, after splitting into 'waste', 'infrastructure' etc., adding progressively smaller amounts to GDP with each cycle: 0.556, 0.309, 0.172, 0.096, etc. tending to GDP=1/(1-0.556)=2.252.  But for simplicity I consider only one cycle through the table for that is sufficient to make the argument. For the higher tax rate of Table 2 the additional GDP with successive cycles is: 0.582, 0.339, 0.198, 0.115, etc..
*  Spending of OUR money on FOREIGN goods is thereby avoided.
**  Though crude, these figures are careful not to overestimate to contribution to GDP. It is arguable that much of "raw material" is also income, e.g. for the forester. Likewise I am told that in a typical NHS Region salaries make up more like 75% of the total cost.
*** Good government could spend taxes with this effect on salaries and GDP in mind.

Thursday, 28 July 2016

Labour Party: Splitting and Co-Operating.

Labour Party: Splitting and Co-Operating.

    In 2 months' time the Labour Party will elect  a leader by a democratic vote involving Party members and registered supporters. There are (currently) to be two names on the ballot paper; the wildly popular Jeremy Corbyn, and the practically unknown Owen Smith, who is nevertheless believed to be the preferred choice among Labour MPs. If Corbyn wins, which seems probable, there is likely to be a walkout by the Parliamentary Party. Corbyn will find himself head of a large grass-roots party, but with a mere handful of loyal MPs. What might happen then?
    To provide an effective opposition in parliament, it would be good if the rebel MPs could organise themselves to co-operate in some way with the Corbynites to test government bills. And not just the Corbynites, for the concept of an "official opposition" seems no longer appropriate. Why not cooperate with all non-Tory MPs?
     There will eventually be a general election, in 2020 if not before. The constituency parties, which may well have recruited massive popular support may find themselves forced to select Corbynite candidates. In that event the current Labour MPs may wish to fight their own seats but under a new name ("New Labour", "Blairite Labour", "Right Labour", or some such). A head-to-head fight would presumably let the Tories win practically every existing Labour seat. That dire situation might sufficiently focus the minds of non-Tory candidates to lead them to an alliance. (Something like that advocated in today's Guardian by Clive Lewis.) It seems obvious that in no constituency should a Labour fight against a New Labour, or a Scottish Nationalist, or a Green. Adequate straw polls and discussions will have to take place to make one or other of these competing candidates emerge as the "most likely to succeed", to avoid self destructive conflict.

Monday, 25 July 2016

Trying to explain the Foreign Secretary appointment


(Explaining Boris to a Taiwanese friend )



Dear Hsiu-Ju,

You raise another intriguing question – what is behind the appointment of Boris Johnson as foreign secretary. I am impressed that you continue to take such a close interest in our strange country. I am not a close confident of Theresa May, so can only guess. Here I "think as I type".

[1]  As a general principle 
Theresa May seems to have decided that those prominent Tories who voted 'Brexit' should bear the brunt of the work involved. Partly because enthusiasm and insight will be needed. Partly (perhaps) as a punishment; if they had not properly considered the difficulties, they certainly should have; and will have to do so now. The job of Foreign Secretary will tax the ability of anyone with any pretensions to leadership, or even competence.
[2]  Boris was a contender for the job of PM. Throughout the last years of David Cameron's leadership the Silly Press (and by that I include essentially all the newspapers) were forever touting the possibility that Boris Johnson was a contender for the leadership. That was no doubt galling for David Cameron, and unsettling for voters. If 
Theresa May wanted to dismiss the threat from Boris she could hardly have devised a better way. If he survives the test he is indeed worth having in the cabinet. If he flounders, he will probably have to leave politics.
[3]  Perhaps Theresa May has a strong sense of humour, and is running this one just to give us all a laugh. There was a strong intake of breath around the world as the appointment was announced. Much use was made of that absurd image of Boris J. in dark suit and hard hat, trying to zip into the Olympic arena on a wire but getting stuck a few feet from the ground. But can a grown up country, even one that prides itself more on its sense of humour than on its moral rectitude, practice such a joke on the world? The opposite numbers of all leading countries will have to keep a straight face while greeting and listening to Boris as he annunciates Britain's hopes for the future, and explains his previous (but widely bruited) derogatory remarks.
[4]  But perhaps Boris is indeed a really sharp mind with a clear understanding of Britain's role in the modern world, and is not merely a charismatic communicator and instinctive clown, with a smattering of schoolboy Latin and other vestiges of a privileged education. He has been a journalist; perhaps he can command the subtle and precise language needed for the job of 'diplomat-in-chief'. Perhaps he is an excellent choice to project British policy on foreign affairs in Europe, the Middle East, the Far East, Oceania, and the American continent – if Britain does have a policy in those areas. But perhaps Britain has no foreign policy, and the job of foreign secretary is to stall and obfuscate. In short; perhaps Boris is a good choice. We shall have to wait and watch.

Best wishes, Cawstein