Deficit spending (2)

Let us rethink entrenched positions, and seek an intelligent and humane middle road.

    My old school friend Howard is boldly, proudly, consistently, and cogently left of centre in his politics. Family background placed him there at an early age, but PPE at Oxford did not deflect him from the path of the 'honest citizen'. I, on the other hand, born and brought up as a Liberal and thus uncomfortably astraddle the fence all my life, have been struggling with the balance between labour and capital ever since I became politically aware with the advent of Thatcherism. "I still hate that woman" said Howard the other day. "Well, we wont fight over that", said I, "but she did curb the unbridled power of the unions that was holding the country to ransom".

    Back in 1979 I spent many hours trying to work out which argument was correct; the Tories thought that 30 years of full employment had handed power without responsibility to the unions who were forcing up prices with irresponsible (leapfrogging) wage demands and thus pricing Britain out of world markets. I could see the truth of that. On the other hand, deliberately to contrive unemployment in order to break a strike seemed to me a dirty trick as it imposed real hardship on hundreds of thousands of innocent people who could surely have been won over by simple logic. I resolved my dilemma at that time by concluding that there was no single correct policy; both policies were correct; it depended simply on who you were. If you owned a factory it was 'right' to keep wages low. If you were a worker it made perfect sense to bargain collectively; the 'right to strike' seemed to be the country's only protection against slavery. That solved, I could return whole-heartedly to my professional work as a scientist.

    However, in retirement, I can see that I had not resolved the dilemma, but simply ducked it. The country does in fact have to be steered down that delicate line. Our quaint "first-past-the-post" political system in Britain tends to flip-flop the country sloppily across the line every 7 to 11 years. (No doubt in response to, and in synchrony with, the business cycle; though I have not heard anyone say that.) Can we not do better than that? Should we concentrate on cutting the deficit to below zero, and start to pay down the National debt? Or do we attempt to re-stimulate the economy with further deficit spending. Is this just another political football which you boot to left or right on simple class principles? Does anybody understand the economy sufficiently, and in a sufficiently scientific and disinterested way, to persuade all political parties to a common economic policy?

    The Conservative way out of a recession is to let rising unemployment weaken unions and lower wages till business can once again turn a profit. This attitude so angers the workers that they demand a Welfare State safety-net and, if pushed too far, the nationalization of the mean of production. Liberal opinion, in my eyes, epitomizes the best aspects of tolerant, caring, humanity (the sort of humanity that staged a sugar strike not for its own benefit but for that of the plantation slaves). Liberals should seek to understand the business cycle, and use that understanding to anticipate and minimize the boom years, and minimize unemployment and hardship in slump years. Not because enforced unemployment is bad for the economy, nor bad for their own 'class'; but because it is bad for people. As, of course, is the Welfare State.

    Textbook Keynesian monetary theory points out that when Saving exceeds Investment (because business prospects are poor), money is lost from the system and a recession becomes a depression. Applied to the business cycle, it further suggests that the State should run a deficit when the private sector contracts, restoring its reserves during the preceding and subsequent boom years. Classical monetary theory replies that deficit spending hurts business more than it helps; it raises wages (or prevents their fall), and it raises interest rates.

    Should liberals therefore side with Labour and demand deficit spending in the current (2012) recession? I am afraid I do not trust the depth of analysis of Labour's call for deficit spending. I fear that they are re-playing Keynes' own depression of the nineteen thirties. Consider:-

    [a]  Britain did not build up reserves during the preceding boom years; it built up debt, (and ran down its gold reserves: http://blogs.telegraph.co.uk/finance/tag/gavyn-davies/ ). A glance at the pie-chart of UK government spending shows that not defence, not education, and not even health is running away with the money; it is the welfare budget that dwarfs all the others [1]. We are little better than the Greeks. Currently we spend as much annually on servicing the national debt as on housing and the environment (4% of GDP). Woe if that should double!

    [b]  Keynesian deficit spending is indeed damaging to business if there is insufficient slack in the labour market. And indeed, there is no great unemployment in the UK. The British public has shown every indication that it would buy more foreign goods if it had more money.

    [c]  British household are not stashing spare money under the bed. The average British adult is harbouring a massive £30,000 debt! If the State wished to borrow money to deficit-spend, it would have to borrow off the Chinese on the money markets; not from its own citizens (as is the case in Japan).

    [d]  Most commentators agree that some government spending on infrastructure would be beneficial in the long run. On carefully chosen projects it might also help in the short run, if the allocated wages lower welfare payments and raise tax revenues. Some highly experienced economists are beginning to murmur about possible Government spending [2], and a possible delay of the planned 'fiscal tightening' [3]. But my own assessment is that we do not have high unemployment, and the money markets currently seem surprisingly satisfied at the longer term stability of Sterling. So steady-as-she-goes seems the right course at present. Continue to build houses, roads, and railways; sponsor apprenticeships, tighten welfare payments, and rigorously collect taxes.    

References:

[1] http://en.wikipedia.org/wiki/File:UKExpenditure.svg 

[2] Richard Lambert on 26^th July -  http://www.ft.com/cms/s/0/09225846-d67c-11e1-ba60-00144feabdc0.html#axzz235Q7baLL

[3] Gavyn Davies on 9^th Aug - http://www.ft.com/cms/s/0/07a0e260-e20e-11e1-b3ff-00144feab49a.html#axzz235Q7baLL

L. Cawstein
cawstein@gmail.com

Debt (4)

"Non-productive lending by banks is beggaring the country."

It has been said that we shall never get out of the present quagmire of debt in which the Western democracies find themselves unless there is growth. And I guess that is true in a horrifyingly simple way.

If I were to borrow money to build a windmill it would be with the thought that the windmill would earn me 10% per year in flour. I could pay 5% to the capitalist and still my enterprise would be worthwhile. If I borrow money to buy a car, how on earth am I going to pay the money back, let alone pay 5% interest to the lender of the money? Except from another source, so borrowing off Peter to pay Paul.

According to Credit Action [1], personal debt in the UK in April 2012 stands at £1.459 trillion (of which mortgage-secured housing debt is £1.252 trillion). To grasp the magnitude of this, you should note that the gross domestic product (in 2009) was £1.396 trillion, while the assets of Barclays Bank plc (in 2011) was £1.459 trillion. On average each adult in the country is £30,000 in debt, largely for their house. Suppose they can pay the interest at 5% p.a., but cannot pay down the capital. Without what the politicians call 'growth' (and I call inflation) these citizens will spend their lives, like a herd of dairy cows, being milked by the bankers for the whole of their lives.

However, since the war, we have got used to a steady 'growth' of the economy. That is to say, the uncorrected data of the Office of National Statistics (a mixture of inflation and 'growth in real terms') shows a strong and persistent logarithmic 'growth' in GDP of some 9% p.a. Look at the data [2]; in the 50 years since 1958, the uncorrected GDP of the UK has grown 63-fold! If correction is made for inflation the growth is a mere 3.7 fold. In other words, the apparent growth of the economy (averaging over those 50 years) is 9% per annum, though GDP 'in real terms' has grown logarithmically at a pauky 2.7% p.a., while the value of the pound has fallen at an average rate of 6% p.a. (largely, no doubt, because of an increase in the money supply). As I have pointed out elsewhere [3], that which the Office of National Statistics calls growth of GDP is very largely inflation.

If that 9% 'growth' were to persist, it would still make sense for our average citizen to borrow £30,000 to buy a house; in 30 years time, when the debt was due to be repaid, it would only feel like £2260.  But, with an economy in stasis and house prices sinking, the average adult will be less able to repay in 30 years than he is today; he is going down the chute. Not the banks, however.

Loans fall into one or other of two categories: productive loans (for the purchase of industrial plant, land, farm stock, education, etc.), and non-productive loans (consumer goods, food, luxuries, accommodation). It makes sense to borrow, or lend, money for the former. It makes no sense to lend for the latter, yet that is the preferred type of loan for the bank. Particularly loans for housing, for, with the (supposed) security of the title deeds, there is very little risk. Banks are neither patriotic nor philanthropic; they are there to make money, even if their activity is bad for the country and bad for the customer. For a decade or two after the war, the lending by banks was under fairly strict governmental control. Perhaps we need to return to such thinking.

References:

[1] http://www.creditaction.org.uk/helpful-resources/debt-statistics.html

[2] https://docs.google.com/spreadsheet/ccc?key=0AonYZs4MzlZbcGhOdG0zTG1EWkVPX1k1VWR6LTd1U3c#gid=6

[3] http://occidentis.blogspot.co.uk/2011/11/growth.html

 

L. Cawstein
cawstein@gmail.com

"Capital Justice"

Open letter in response to a Radio 4 talk by Helena Kennedy – 6^th Aug 2012

Dear Helena Kennedy,

Your intriguing talk on "Capital Justice" must (I think) have been chopped around by the producers, inserting unnecessary quotes and bits of even less necessary music. I suggest this with some humility for I acknowledge my weak ability to follow a complex argument at first hearing (and with enormous respect for your integrity, and expertise).

         I suppose you might have started your essay with a question like one of the following:

[a]  Could the law have prevented (or punished) the injustices of the financial crash?
[b]  Surely it is (or could be made to be) illegal for clever people to take money off foolish people (as, for example, laws that regulate the sale of patent medicines).

You might have decided early on that you would end your piece with the Adam Smith quote: "Beneficence....is less essential to the existence of society than justice."  This especially as the other authors you quote en route tend to contradict each other.

I think you hinted at, but did not state, another proposition that deserves italics: Commercial companies must never be allowed to get bigger than the Nation State; if they cannot be confined (and controlled), the Nation States must themselves combine till they have sufficient power to exercise control. 

You (successfully) pointed out that people cannot be punished for behaving badly; only for breaking the law; and that the law is made by judges. Yet I would offer another proposition which I submit you significantly fudged: Democracy and "Mob-Rule" are not in conflict; they are in fact the same thing. Justice and morality are generated by the 'demos'. Laws are made by judges in response to justice and morality.

How might you traverse successfully from the question at the beginning to the Adam Smith quote at the end without creating the feeling of wandering in a dark forest seeming to pass the same landmarks over and over? No doubt you wanted to incorporate the quotations you had collected on your tape-recorder; but should you try to contrive a sequence progressively driving at one conclusion, or pair the quotations off so that they negate each other and amount to nothing, while successfully indicating the complexity of the situation?

Much of the miss-selling of mortgages and miss-classification of risk, the ill-considered acquisitions, investments and reward systems — perhaps these do not break the law. It is (after all) still legal to offer money at high interest (because at high risk) against the surety of title deeds (which bear no risk; you win if they continue to pay, you win even better if they default). It is still legal to sell lottery tickets (which is simply taking money off people, giving half back and keeping the other half). Why is this not made illegal? Probably because it is too difficult to make laws that control all the tricky ways of making money, though there may be some lack of will among the law-makers.

However, there are laws against fraud in the United States of America (we heard), so surely also in Britain. And, if not, why not? To rate, as AAA, a bond that is plainly irrecoverable bad-debt, would seem to be fraudulent; so why no prosecutions in Britain? (Here you could usefully inform the lay listener: does the law have to show knowledge of the fraud to make it criminal? Is that impossible? Are there any prosecutions pending?) Paying taxes is legally required; are these taxes being rigorously pursued? If a bank is given public money, is that money ever returned to the State, with appropriate interest? (In which case, what is the problem?)

Could it be that Government is too friendly with the bankers, or too much in awe, or too dependent? Any such suggestion should be taken very seriously, and acted upon. But that (you might say) is a matter of politics, not law. Helena Kennedy loves the law. Some 200 years ago it was perfectly legal to drive a whole countryside to starvation simply by raising rents, and outlawing vagrancy. At the same time poaching a rabbit was made a serious crime simply by declaring the wild game on land to belong, not to nature, nor to the tenant farmer who raised the corn, but to the 'gentleman' who owned the land. Because the law was in the hands of the gentry. However, the law was changed; changed by the demos; changed painfully slowly, and only when the pain became unbearable. The law must go on changing. 

 Yours sincerely, Cawstein,

Longhirst, Northumberland.

 

Pearsall Smith and the Goat at Portsmouth

"Someone mentioned a goat, so I told them the story of the Goat at Portsmouth"

'In conversation, someone mentioned a goat, so I told them the Story of the Goat at Portsmouth, whereupon an awful thought crossed my mind: "Had I told them this story before?". But then a deeper chasm loomed before me: "Was it the case that whenever anyone mentioned a goat I always told the story of the Goat at Portsmouth?".'

This quaint metaphor is well know in my family, but seems largely unknown elsewhere. It was a favourite with my father, RGR West, psychiatrist and philosopher. My brother Michael points out that Father clearly read it in Logan Pearsall Smith's 'More Trivia' which came out in 1921. What a delight to discover that cerebral goldmine of quirky fragments (which you can read online here)! One lingers unintentionally, drawn from each disjointed gobbet to the next by its sheer inconsequentiality; the only common elements are the very 'Bloomsbury' figure of Pearsall Smith himself and the chintzy clarity of his Edwardian England; umbrellas, railway carriages, teacups and sofas. (I quote: "Though I sometimes lay down the law myself on public questions, I don't very much care to hear other people do it." )  So delightfully challenging, so carefully phrased! I therefore append Pearsall Smith's original.

THE GOAT

In the midst of my anecdote a sudden misgiving chilled me—had I told them about this Goat before? And then as I talked there gaped upon me—abyss opening beneath abyss—a darker speculation: when goats are mentioned, do I automatically and always tell this story about the Goat at Portsmouth?

From 'More Trivia' by Logan Pearsall Smith (1921) (Available online)

 

Goldbach's Conjecture

Every even number can be expressed as the sum of two primes.

     One of the oldest unproven conjectures stems from a letter of 1742 from Goldbach to Euler. I was intrigued, for in seventy years I had not come across this type of concept, one which (as Euler declared) is certainly true even though it cannot be proven to be true.

     I very soon convinced myself that the conjecture is sound, by an argument that many others have discovered and explored. The gap (g) between two adjacent prime numbers (p1, p2) grows as p1 increases, but grows far more slowly than p1 grows. For example the gap between the adjacent primes 977, 983, 991, 997 are (respectively) only 6, 8 and 6. As all primes (other that 2) are odd, any two added together will produce an even sum. It is easy enough to show for small even numbers (2n, 2(n+1), etc) that the conjecture holds: 4=3+1; 6=5+1, or 3+3; 8=7+1, or 5+3; 18=17+1, or 13+5, or 11+7.   Thus we see that as 2n increases the number of ways in which it can be expressed as the sum of 2 primes also increases. So, even though it is a laborious task for computer enthusiasts to find the necessary primes, it becomes progressively harder to imagine the falsification of the conjecture.

But that is not a proof that the conjecture must, for all values of n, be true a priori. It is at least in part an induction a posteriori.

Higher Tax Bands

Gift Aid for higher tax bands

The current (April 2012) position with respect to Gift Aid is (I believe) as follows. For those who only pay 20% tax, the Inland Revenue makes a contribution to the charity that is equivalent to the donor making the donation before their tax liability is calculated. If I donate £100 the charity is given £25 extra. This is because when I earnt my money in the first place, the Inland Revenue took some in tax. I earnt £125, gave £25 to IR and £100 to the charity, whereupon IR gives the £25 to the charity.

For those who pay 40% tax, Inland Revenue DOES NOT make a proportionately larger contribution to the charity. If £100 is given out of taxed income, the donor would have had to have earnt £167 (and paid £67 in tax). To play level the Inland Revenue would give the charity the £67. Instead it gives the charity £25 and returns a portion of the remaining £42 to the donor. In the words of  HM Revenue and Customs:

"If you pay higher rate tax, you can claim the difference between the higher rate of tax 40 per cent and the basic rate of tax 20 per cent on the total 'gross' value of your donation to the charity. For example, if you donate £100, the total value of your donation to the charity is £125 - so you can claim back:  £25 (i.e. £125 × 20%)".

Mysterious!  There must be a White Paper somewhere that justifies this arcane system. To guess at the justification we suppose the tax efficient donor will see this as a way of clawing back some of the money he lost in tax; his eye is not on the charity, and giving is not his aim; his eye is on his own money. If he gave nothing his tax rate is 40% and he loses £67 of his £167 to the tax man. If he gives £100 to a charity the tax man rebates £25 to him and give the charity an equal amount. He writes a cheque for £100, but it costs him only £75 and benefits the charity £125. This incetives the donor. Furthermore, it is so complex that a considerable number of 40% (and 50%) tax payers neglect to claim their rebate, so the Revenue benefits by the complexity. 

On the other hand there is certainly a research paper from 2009 that reccommends a change (http://www.cgap.org.uk/uploads/seminar_15thDec Gift Aid.pdf). This was commissioned by HM Revenue and Customs on behalf of HM Treasury and examines the effect on donations of possible changes to Gift Aid. It argues that it is more efficient to focus on the charity rather than the donor, and suggestes that the 40% (or 50%) tax payer gets no rebate while the charity gets either all or a larger portion of the tax.  Getting all the tax would be simplest, and the easiest to justify.

Programme Notes April 2012

Programme Notes:

String Quartet in B minor, (Op. 33/1)  –––  Franz Joseph Haydn (1732 - 1809)

i. Allegro moderato, ii. Scherzo — allegro di molto, iii. Andante, iv. Presto

Though numbered 31 of Haydn's 68 quartets, this Opus 33 set, dedicated to Grand Duke Paul of Russia and first performed in his wife's drawing room in Vienna on Christmas Day 1781, is regarded by many as the beginning of his mature concept of the string quartet, and a model for Mozart and Beethoven after him. Indeed, in a letter to his publisher Artaria, Haydn claimed that these quartets were composed in an "entirely new and special style". One easily-spotted feature is that the classical minuet is here replaced by a scherzo (a more vigorous, earthy version though still in 3/4 time). Another, is the way each of the 4 voices is treated as a melody line, making the works more contrapuntal, and more interesting for player and listener alike. Our quartet (33/1) hovers between B minor and its relative major (D maj.) though other keys are touched on transiently. Each movement contains extended passages in D major, but end in the minor with its characteristic shrunken feeling.   (For an intriguing 'visual analysis' see YouTube®: http://www.youtube.com/watch?v=oaPOCoSaugw.)

String Quartet no. 3 in G major, Op.94   –––    Benjamin Britten (1913 – 1976)

i. Duets: with moderate movement, ii. Ostinato: very fast, iii. Solo: very calm

iv. Burlesque: fast - con fuoco, v. Recitative and Passacaglia (La Serenissima)

Britten (born 99 years ago) was precocious. At 12 he had written 9 sonatas (and 3 suites) for piano, and 6 string quartets. In 1928 the 14 year-old began lessons with Frank Bridge who took an interest in the lad and took him to concerts. In 1930 (aged 16) he won a scholarship to the Royal College where he studied composition with John Ireland, but it was Bridge who was the deeper influence particularly in regard to the 3 mature quartets that Britten counted in his oeuvre. Of these, Nos.1 & 2 were written during the war, while No. 3 was, in the words of Hans Keller, his "last masterpiece". His deeply serious opera "Death in Venice" (premiered 1973) epitomized, in his words, 'everything that' he and Peter Pears had 'stood for'; Thomas Mann = Aschenbach = Britten. Open heart surgery in 1973 left him partially paralysed and failed to cure his condition. During 1975, a year before his death, he wrote what David Matthew called his "Aschenbach Quartet"; the last movement, written in 'La Serenissima Repubblica di Venezia', contains 5 thematic references to the opera. Overall the texture is light, open and sparse, the thematic strands distinct, the mood reflective with only brief discords.  Its first movement, in a complex sonata form, explores tonality, and an interplay between two voices (the duet motif). The opening element is a gently shifting (semitone) oscillation. The 3^rd movement is a violin solo largely consisting of a sequence of strange intervals, large and small, sandwiching a birdsong-like passage. The  restrained, searching, intricate final movement achieves a fitting tranquillity for Britten's last musical utterance. Britten heard the work in a private performance by the Amadeus Quartet 2 weeks before he died, and was content with it.

String quartet No. 12, in F major opus 96  ––––   Antonín Dvořák (1841 – 1904)

i. Allegro ma non troppo, ii. Lento, iii. Molto vivace, iv. Finale: vivace ma non troppo

This famous quartet, now known as 'The American', was composed in 1893 in Iowa while Dvořák and family were on vacation from his New York teaching post and living with Czech compatriots. He had come to the United States the previous year with the explicit aim of exploring negro and 'first nation' music to encourage Americans to develop their own distinctive music, as Smetana and he had done so successfully in Bohemia. Many people have searched for negro tunes in this quartet, but the only musical reference to the New World confirmed by Dvořák's notebooks is to the song of the scarlet tanager (a bird whose insistent call annoyed the composer), to be heard as an intermittently repeated high warble in the 3rd movement. On the other hand, it is decidedly pentatonic; the big gaps of that ('black notes') scale give an open character and distinctive flavour to the melodies. This may have seemed to the composer distinctively 'American', for he said of his New World compositions in general that they differ "very much from my earlier works, as much in colour as in character...". However, to us the work sounds Czech; fast/slow tempi, off-beat rhythms, augmented intervals, 'gypsy' melodies. (It is well analysed on Wikipedia.)

(Programme notes compiled from various sources by Ian West.)