The City: Not that Important

Finance and Professional services are not synonymous with The City, something Rob Marchant (via Chris Dillow) needs to grasp when discussing Hollande’s lessons for Ed Miliband.

And, regarding his policy programme, it is difficult to see Hollande being a pragmatist in government. For example, take this declaration from a January speech:

“My enemy is not another candidate, it is not a person, it has no face, it is the world of finance.”

All very well, I suppose, down with capitalism: hurrah. But, whatever additional regulation the financial sector may need, is it a good idea, on any level, to emote about it being the “enemy”? In any event, this is an approach that Miliband would be wise not to try to emulate; in a country like ours, where one-fifth of GDP derives from the City, it would have very deep implications for government credibility, for borrowing and for investment. It is easy for France to talk about a financial transaction tax when it has a tiny financial sector compared with the mighty City; everyone wants higher taxes for the other guy.

The City probably adds about 4% to UK GDP not a fifth, that number is from 2003 and The City probably added a little more than that between 2003 and  2007 and a lot less (perhaps negative?) since then. [1] It’s contribution to GDP is still about half that of UK manufacturing (!) and about a fifth of the total 20% added by all finance, insurance and professional services combined. Data from the ONS. This is where I presume Rob Marchant got his one fifth figure from by adding K48, K57 of page 19.4 and deriving a percentage from cell K77.

Discussion of high and low finance should be separated, something which I suppose Hollande needs to take on board as well. I should perhaps tentatively suggest three things: that most finance is dull, should be dull and most of it takes place outside The City. It consists either of taking short term deposits and lending that money out at a rate slightly higher rates or taking payments from large numbers of people and paying a small subsection of them large sums when something bad happens. It is very dull, very worthwhile and  it adds a lot of value but it is a world apart from what occurs in The City.

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[1] Remember that many firms in The City receive a huge hidden subsidy each year too.

For UK banks, the average annual subsidy for the top five banks over these years was over £50 billion – roughly equal to UK banks’ annual profits prior to the crisis. At the height of the crisis, the subsidy was larger still. For the sample of global banks, the average annual subsidy for the top five banks was just less than $60 billion per year. These are not small sums.

Not small sums at all, and I recommend you read Haldane’s speech in full. The City’s contribution to GDP is modest, although its contribution to exports is larger.

Filed under: Economics, History, Haldane, High Finance, Low Finance, Rob Marchant, Subsidy, The City

How to End this Depression!

Targeting the path of Nominal Gross Domestic Product (NGDP) is probably the most “fashionable” solution proposed for dragging the developed world’s economies out of depression. This post will refer to the UK, but lots more work has been done on the US from this perspective, particularly by Scott Sumner and David Beckworth. Britmouse has blogged about NGDP from a UK perspective.

Real GDP is a proxy for our incomes adjusted for inflation, how well off we are. Nominal GDP is the same but refers to our incomes in cash terms. This nominal measure deviating from trend has been what has driven the wild swings in employment and production the developed world has seen since 2007.

NGDP matters because wages and debt are sticky.

Wages: NGDP can decrease if all other prices decrease with it, the relative prices between them will not change and apart from updating some menus nothing will have really changed. But it is incredibly hard to cut wages, look at the clustering of wage changes around zero in the below graph (via Paul Krugman). This means a decrease in NGDP relative to wages will throw people out of work as employers become unwilling to employ them at the prevailing nominal wage.

Debt: We care about what real resources we can consume but all our contracts are written in nominal terms. If I owe someone £10,000 then at some point I have to hand over some bits of paper, or packages of electrons, to someone for that amount. But, if NGDP grows below trend the total nominal size of the economy will be smaller than expected when I took out the debt, but the size of my debt will not. The real cost of my debt will have increased and this will work to depress the economy because this dynamic will affect a number of people.

If NGDP sinks below trend there are then at least two mechanisms which can act to depress an economy. [1] Has it sunk below trend? Yes it has.

Is off trend NGDP growth associated with weak real GDP growth? Yes it is.

Are changes from trend NGDP correlated with changes in employment? Yes they are.

That might be a little difficult to make out for some. So I zoomed in and inverted the unemployment figures. Are they correlated? Yes, and closely.

Let me tell you a story with a different ending to the one you know. The year 2007 began with NGDP growing to trend, and employment decreasing against the backdrop of international inflationary pressures and financial distress. NGDP reversed course and began to decline during the second quarter of 2007 as did employment, crucially this was before the Lehmann Brother’s bankruptcy and the ohmygodwereallgoingtodie stage of the financial crisis. Unemployment had already increased by nearly 200,000 after NGDP began declining but before the financial crisis began in earnest.

This doesn’t exhonerate any bankers, they put the Bank and Treasury in this position after all. But it does imply different priority for actions. Occupy Threadneedle Street, my friends, not the London Stock Exchange.

Scott Sumner and Ben Bernanke

Looking at the third graph you can see NGDP decline, recovery and stagnation correlating closely with decline, (mild) recovery and stagnation in UK employment. The Bank of England controls the country’s printing presses and hence the nominal economy and responsibility for this depression lies with the Monetary Policy Committee for doing too little to avert it and with the Treasury for doing so little to force them to do more.

In the UK and US the last couple of decades have seen NGDP grow at about 5% a year, and this nominal growth has been split between price increases and economic growth. In 2008 NGDP collapsed and we saw deflation, disinflation, and recession. To date NGDP has not yet recovered to trend, in fact it remains over 10% below trend – and this is our main problem.

Increase NGDP and employment, incomes and taxes would increase, many intractable problems would vanish (though many would not). There are risks and there are methodological problems, but there huge gains for everyone if they right policy is adopted and I want to do my part to try and make sure the right policy is adopted.

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[1] Data from here, I’ve used basic prices to strip out the effect of VAT jumping up and down

Filed under: Economics, Foreign Affairs, History, Politics, Society, Adam Posen, Britmouse, Market Monetarism, Mervyn King, NGDPLT, Scott Sumner, Unemploy, Unemployment

Don’t let idiots run things

Is the Argentine government good at running things? Not really. Then it is probably a bad for them to run things.

Filed under: History, Politics, Argentina, Baring Bank, Corralito, YPF

The Eurozone as a Country

I think this data from WolframAlpha is worth thinking about with reference to thinking about the Eurozone as a country.

1 | Luxembourg | $107000 per person per year
2 | Netherlands | $48300 per person per year
3 | Ireland | $47600 per person per year
4 | Austria | $45900 per person per year
5 | Belgium | $43800 per person per year
6 | Finland | $43700 per person per year
7 | Germany | $41500 per person per year
8 | France | $41200 per person per year
9 | Italy | $35100 per person per year
10 | Spain | $32400 per person per year
11 | Greece | $29400 per person per year
12 | Cyprus | $28300 per person per year
13 | Slovenia | $24300 per person per year
14 | Portugal | $21700 per person per year
15 | Malta | $20300 per person per year
16 | Slovakia | $18200 per person per year
17 | Estonia | $14400 per person per year

Some thoughts. The most successful currency union I can think of is the United States. The Eurozone is very different from the US is some very important ways normally the negative are emphasised, but some of these differences are positive.

Potted History: The South and the North had different institutions up to the 1960s, what with the South being very, very racist. Unsurprisingly this left the South much poorer. After much brouhaha, the North won, finally completed the South’s reconstruction and the South began to converge on the living standards of the North. The South went from about half as wealthy, they were even still picking about half their cotton by hand, to about as wealthy. There is about a three to one difference between the poorest parts of Europe and the richest (ignore Luxembourg). That convergence took basically the whole history of the United States until very recently, this does not bode well for Europe, disparities can exist for a very long time.

But, despite larger inequality with respect to income, nowhere in the Eurozone is as much of a basket case as was the US South in terms of institutions. This means that it should see faster convergence on wealthy living standards which is one thing which makes the current crisis such a tragedy. There are no fiscal transfers within the Eurozone analogous to those within the US but neither does Europe have the terrible legacy the poorer parts of the US had. So there are (limited) reasons to be cheerful.

UPDATE: As Innocent Bystander points out in the topics, I’ve just provided a list of numbers without context. As you’re all not psychic let me say they refer to Gross Domestic Product Per Capita.

Filed under: Economics, Foreign Affairs, History, Convergence, Estonia, Eurozone, Institutions, Jim Crow, Luxembourg, Racism, Slavery, US North, US South

The Tories at least used to be competent

Why couldn’t it have been this lot to have taken on the miners? Scargill would have eaten them for breakfast. Mind you, the Argies would have as well.

Theresa May, the Home Secretary, ordered the rearrest and deportation of the extremist cleric on Tuesday morning, believing a time limit in which his lawyers could appeal against his removal had elapsed.

But yesterday, to the surprise of the Government, officials at the European Court of Human Rights said the deadline was 24 hours later and that it had received an appeal application from Mr Qatada’s legal team with an hour to spare.

As the situation descended into chaos on the eve of a government-hosted conference in Brighton to reform European human rights laws, the Home Office was accused by Labour of potentially acting illegally by starting the deportation process apparently before the deadline had passed.

Filed under: History, Politics, Idiots, Theresa May, Tories

Tom Bursnall, today’s new Worst Person in the World

Via @ByrneToff, we have an ex-Chairman of Conservative Future, ex-Conservative Party Councillor and future UKIP apparatchik who thinks people on unemployment benefits shouldn’t be able to vote.

He’s being so intensely shitty that I think I’ll do him the honour of promoting him above the entire cadre of the heartless US prison service and make him April 17th’s worst person in the world.

Tim, he’s one of yours, a UKIPer, and you really should do the honours, but I can’t help it. Mr Pro-Capitalist, pay attention this is important:

The primary goal of British political evolution has been resistance to arbitrary rule. Starting with Magna Carta the Baron’s received protection from the King, but this protection had roots going back in theory to the Norman Conquest. Many of these privileges were extended and universalised through the Glorious Revolution and the Bill of Rights in the seventeenth century. Later, when elites tried to use the courts to enrich themselves by seizing land these rights were reinforced by popular resistance to the Black Act by protest and in the courts. These rights were hard won, and hard fought for.

Once again, through the nineteenth century these rights and protections, chief among them the right to vote, were reinforced again  and again by Great Reform Acts, perhaps finally the Suffragettes completed this process in 1928, by getting political rights extended to all, so that everyone could protect themselves from arbitrary rule…Jesus, about a thousand years of history on one theme you seemed to have missed… politics is there to keep people safe from arbitrary rule.

To you Tom, Government may be all about redistribution, but hating poor people has completely blinded you to the main purpose of politics, protecting people from autocrats like you. What is more arbitrary than taking the vote away from people at their most vulnerable? I’m not sure I can think of one, it certainly goes against a thousand years of British history.

I’ll tell you something funny. How you’ll laugh Tom.

You are a member of UKIP, a party whose raison d’etre, if you’ll excuse my filthy French, is to maintain the hard won freedoms of one thousand years of British history from preening, authoritarians…that is…to protect this country from…

…you.

UPDATE: I’m not the only one to notice it seems.

Filed under: History, Glorious Revolution, Magna Carta, Tom Bursnall, UKIP, Worst Person in the World

You can be a well cultured despot you know

Noah and Scott‘s argument about China’s culture is going nowhere. They’ve got bogged down talking about whether culture affects economic potential or not. Long story short, of course it does! Consider these two examples:

Chinese expats around south-east Asia seem more entrepreneurial and they sure as hell are richer than the locals in places like the Malay Peninsula and Thailand. Less fortunately, Black Africans are less trusting than other people and this is just one reason economic growth is more difficult there. Without being able to trust that someone will take your money, disappear into another room and come back with what you want there can be no Argos. And where would you be without Argos? A lot poorer. [1]

The reasons for these cultural traits are complex. I don’t know the Chinese, but Africa’s level of trust appears to still be badly effected by the long defunct institution of slavery; kidnapping was very common for 200 years or so in a way which the rest of the world hasn’t had to deal with. You can be culturally more entrepreneurial. Likewise, you can culturally more or less prone to trust strangers. Both of these have real effects for lots of things, including economics. There, cleared that one up for you.

But whether culture affects wealth given a certain set of economic institutions is irrelevant. What is important is whether culture can influence China’s institutions. China is still deep in the throws of catch up growth, entrepreneurship is of course very important, but not nearly as important as having institutions which allow for the full execution of whatever entrepreneurship occurs. As I said earlier:

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients…

Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right.

The only way China’s culture will significantly influence its long run - at least until it reaches say half of rich world income per capita) – growth prospects is by influencing its institutions. An entrepreneurial culture, or pragmatic culture, is completely unrelated to whether China adopts a growth friendly political framework over the next five to ten years. What matters is whether the politically powerful can be convinced/forced to become economic losers. Look at those guys at the top. Do you think they’re culturally inclined to agree to that?

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[1] Not sure if that translates to my non-British readers. Argos is a shop with a tiny shop front full of catalogues and a big warehouse full of stuff. You order at the front and stuff appears a few minutes later from the back. The flippancy of my reference is of course a little ruined by this extensive footnote.

Filed under: Economics, Foreign Affairs, History, Politics, China, Elites, Entrepreneurship, Noah Smith, Scott Sumner, Why Nations Fail

The Occupy Handbook

Via. Coming out in May: Amazon.

Krugman, Graeber, Taibbi, Wolf, Saez, Rajan, Roubini…its kind of a who’s who of whose opinion I want to read on Occupy. I didn’t even read the blurb before ordering it.

Filed under: Blogging, Economics, History, The Occupy Handbook

Why China Might Fail

I found Scott‘s post very confusing, for many of the same reasons discussed here by Noah. [1] Scott says:

China boosters like Robert Fogel claim that China will soon grow to be twice as rich as France the EU.  Others pundits claim it will get stuck in the middle income trap.  Both the boosters and pessimists are wrong.  Like Japan, like Britain, like France, indeed like almost all developed countries, it will grow to be about 75% as rich as the US, and then level off.  It won’t get there unless it does lots more reforms.  But the Chinese are extremely pragmatic, so they will do lots more reforms.

China is currently a very poor country, so the Chinese model has nothing to teach the West.  If we want to learn from the Chinese culture, learn from Singapore(or Hong Kong), which is how idealistic Chinese technocrats would prefer to manage an economy; indeed it’s how China itself would be managed if selfish rent-seeking special interest groups didn’t get in the way.  But they do get in the way—hence China won’t ever be as rich as Singapore; it will join the ranks of Japan, Korea, Taiwan, and the other moderately successful East Asian countries.

First of all, what I agree with in the post. China is poor and has for the last 40 years not been run by bloodthirsty foreigners or a psychotic madman. Growth from the abject poverty that was 1970s China is inevitable under those conditions. What is clear from Scott’s post is that China’s growth has very little to teach the wealthy West other than “don’t let genocidal maniacs into government” something we learned the hard way a little while ago.

Scott seems to think that China has got its act together and that it isn’t in anybody’s interest to derail its development. Things will be better for everyone when China is like Singapore and therefore we shouldn’t worry that China’s growth will decline disastrously or go into reverse. Technocrats are good! Just like the technocrats in the Fed…oh never mind.

Although I kinda agree that China looks like it has a good culture, strong infrastructure and abundant human resources, so did Argentina 100 years ago, and look what happened to them. What matters are institutions, Argentina’s stank and so do China’s. I am curious that Scott seems so keen to give a clean bill of health to China’s crony-capitalist economy and dictatorial, judicially-repressed polity.

I think he is being naive. Elites rarely do the right thing because they are oh so wise, they do the right thing if they are forced to.

Think about China this way: Whether its Township and Village Enterprises or Foreign Direct Investment into Free Economic Zones, a significant proportion of the growth which China has enjoyed has been controlled by the Chinese Communist Party. Not control as centrally planning, but control as the ability to cut of freedom of action of each. This ability to cut off these developments has kept party chiefs on the same side as China’s bourgeoisie.

It becomes difficult to keep control of growth when you hit middle-income – the low hanging fruit has been picked. One reason Michael Pettis is so worried about Chinese is that consumption repression has always been at the heart of the Chinese growth model. This has been fine for capitalists operating export orientated firms or contractors building infrastructure or real estate, but again places great power in the hands of China’s elites. To reverse this would require a massive transfer of wealth and power from political control to private control. I think Scott underestimates how much the Chinese Communist Party fears the consequences of this.

You can see this in the security apparatus of the Chinese State and its repression of free speech and its tight grip on the internet. they know that as their population gets wealthier they are going to demand more freedoms and more political representation; likewise they are going to demand more economic freedom and more social mobility, something which by definition must damage the interests of the current ruling elite. Powerful magnates will arise to  challenge the power, wealth and status of the current Chinese elite.

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients.

Scott says that he cannot see a stable China with a middle-income coast and a poor interior. You can be rich and surrounded by poverty, look at North America! Just look at it! Its been rich and surrounded by poverty for centuries. China still operates a hukuo system of local registration which until very recently prevented anyone from moving anywhere without official say so. You think the Chinese can’t stymie growth by reintroducing the hukuo system of internal border control? Urban Chinese still seem pretty dismissive of “farmers” judging even by the international lot I meet at LSE.

We’re back to my new favourite book to think with: Why Nations Fail. Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right. The point isn’t to describe how China will fail, I’m not sure it will, but only to highlight that there are powerful pragmatic reasons for those in power to want China to fail.

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[1] I will not that Noah has still not commented on my rebuttal of his bullish post on the potential for Chinese industrial espionage. Noah should note that I argue Scott is wrong for the same reasons I argue he is wrong. They both slightly misidentify how the drivers of long run growth operate.

Filed under: Economics, History, China, Elites, Hong Kong, Noah Smith, Scott Sumner, Singapore, Why Nations Fail

Shit Historical Practical Jokes

They [the British Officers in 18th century India] had a clever way of enjoying practical jokes, and at the same time indulging their mercenary propensities. One of them would enter the premises of a Banya and pretend that he was shooting doves or sparrows. The horrified believer in metempsychosis would then come out, earnestly implore him to desist, and even offer him “ ready money.” He “drops in his hand a roupie or two to be gone,” says the narrator. There, reader, is a picture of the representatives of a high-minded nation drawn by one of themselves. Poor Civilians ! At least in your case necessity was the mother of invention.

So reading around the history of the British in early modern India I come across this.

In case you can’t parse it: As a funny joke and also a way to earn money British Officers would visit the houses of rich Indians and pretend to shoot birds outside and because Indians tend to believe in reincarnation they would pay the British to stop shooting their dead parents.

Hooray for imperialism!

Filed under: History

My word!

The biggest-ever experiment in rolling back the state is now known as the Dark Ages.

Hmm… via.

Filed under: Blogging, History

Enough picking on Ritchie – Now I want some of whatever Tim’s smoking

And for those who want to argue that it’s the cuts to come. That everyone is pulling in their horns now given the future cuts. Erm, you do realise that’s a form of Ricardian Equivalence.

The RE which, if true, means that Keynesian stimulus cannot work?

 Come again? That doesn’t sound like the Ricardian Equivalence I know about.

Ricardian Equivalence says that the timing of taxes do not matter, it implies that temporary tax cuts have no effect because people will save any short term tax cuts to cover the higher taxes in the future. It is basically the Modigliani-Miller theory for governments: Things cost other things and in competitive markets differences in the price of things should be arbitraged away.

Ricardian Equivalence implies stimulus spending cannot work if and only if “what the government buys (and distributes to households) is exactly what households would buy for themselves. [Ricardian Equivalence] by itself doesn’t do it.” Because that is pretty much impossible, you can only categorically say that if Ricardian Equivalence holds true then temporary tax cuts will have no stimulative effect. This rather awkwardly puts Tim in the position of arguing that his own policy suggestions are wrong. [1]

On the other hand, suggestions additional spending are stimulative are entirely logically consistent with Ricardian Equivalence. If the government buys something with borrowed money then your future self is going to end up paying for it one way or another, so under Ricardian Equivalence, you save towards it. But, because the cost is amortized, you don’t save as much today as the government spends more today, hence total outlays increase, hence stimulus. (c.f Bastiat)

The same story can be told in reverse. The government spends less, so you anticipate lower future taxes so you spend a little more today. But you don’t spend as much more today as the government spends less today, hence total outlays decrease, hence contractionary contraction.

If the government says it’ll spend less and others don’t pick up the slack then total spending must decrease and this in combination with stick prices and wages can depress economic activity. Now this won’t depress economic activity as much as a debt crisis but that is an entirely separate argument, so I hope Tim doesn’t try to change the subject from his misunderstanding Ricardian Equivalence (what terrible violence that phrase does to Ricardo’s reputation).

Of course all of this assumes the central bank will allow total nominal spending to career around. If it narrowly targets nominal expenditures then all of this talk is academic. However, we do not live in such a world, so this discussion is very important and Timmy is doing it wrong.

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[1] That is unless Tim is arguing some people are liquidity constrained and must spend the extra income now rather than save it. But this is several levels of nuance deeper than Tim usually opts for.

Filed under: Economics, History, Bastiat, Fiscal Policy, Monetary Policy, Ricardian Equivalence, Tim Worstall

No, not really

…a substantial proportion of us still think of the monarchy as an embarrassment at best, and at worst, to quote Cooke, “dangerous to the liberty, safety and public interest of the people”…

I don’t think seeking analogies between Charles I and Elizabeth the II is the best way to gain support for the republican cause. At least not with the historically literate. I believe that Andrew Marr’s The Diamond Queen must have been terrible watching for a republican, but that is no excuse to play fast and loose with history.

In the seventeenth century there was an ever-present danger of expropriation, a collision of landed and merchant interests and religious persecution; all of which often pursued to the point of death.

This meant the royal family really were  ”dangerous to the liberty, safety and public interest of the people.” But not, of course, the sort of “freedom from want” liberty Laurie subscribes to, but a bourgeois liberty for capitalists to operate without interference. Today, the soon to be Charles III has been mean about some architects…

 Although lines like this from our Laurie do make one titter:

Instead, we are served a twee little panegyric to the many unlikely hats of Elizabeth Windsor. 

Filed under: Blogging, History, English Civil War, Laurie Penny, Religion

Smack Down Watch: Tim Worstall versus Brad DeLong

Much as it pains me to say, Timmy comes out on top. Brad DeLong lauds the Neville Champerlain that dragged Britain out of the Great Depression:

BERKELEY – Neville Chamberlain is remembered today as the British prime minister who, as an avatar of appeasement of Nazi Germany in the late 1930’s, helped to usher Europe into World War II. But, earlier in that fateful decade, relatively soon after the start of the Great Depression, the British economy was rapidly returning to its previous level of output, thanks to Chancellor of the Exchequer Neville Chamberlain’s reliance on fiscal stimulus to restore the price level to its pre-depression trajectory.

Tim is confused and I share this confusion:

Our Neville became Chancellor in 1931.

Whereupon he got us off the gold standard and cut government expenditure.

It was a couple of years later, when the currency devaluation thing had done its stuff that he started to expand spending again.

I’ve not got the numbers for the deficit or national debt in those years. But the idea that Our Nev did “fiscal expansion” in 31, 32, seems very strange indeed. Anyone know?

So, was Neville Chamberlain to the left of Clegg and Co or is Timmy correct and Brad DeLong doing economic history wrong?

Luckily I don’t have to adjudicate this – I’ve brought the cavalry for Tim, someone even Brad will not snark at - Nick Crafts has the answer (via). There was fiscal stimulus from 1935 as rearmament kicked in, but from 1932 onwards taxes were raised, spending cut and debt stabilised:

Over fiscal years 1932/33 and 1933/34 the structural budget deficit was reduced by a total of nearly 2 per cent of GDP as public expenditure was cut and taxes increased, the public debt to GDP ratio stopped going up while short term interest rates stabilized at about 0.6 per cent. Yet, from 1933 to 1937 there was strong growth such that real GDP increased by nearly 20 per cent over that period…Fiscal stimulus was not a factor in the UK recovery until after 1935 when rearmament began.

The secret was no secret at all, and is alluded to by Tim. It was unconventional monetary stimulus to raise the price level back to pre depression trends. This raised inflation expectations, pushed down interest rates, and promoted consumption and investment, et voila, the UK grew 20% over 4 years in the face of fiscal contraction.

Something similar today from the Bank of England, like price level targeting or NGDP level targeting would get some life into the British economy, and save us all a lot of bother and suffering.

PS: Other quotations from this paper to warm the cockles of Timmy’s heart include…

A major way in which [easy money] stimulated the economy was through its favourable impact on housebuilding in an economy without strict planning rules; the private sector built 293000 houses in the year to March 1935.

Filed under: Blogging, Economics, History, Brad DeLong, Fiscal Policy, Gold Standard, Monetary Policy, Neville Chamberlain, Nick Crafts, The Great Depression, The Little Depression, Tim Worstall

*Sigh* Ford didn’t pay high wages so that his employees could afford his cars

From Richie (via Chris):

When Henry Ford built his car plant he realised that unless the product he made was cheap enough for the workers to buy then there was no point in building it: there was no market to supply. This was the basis of Fordism.

Nope. The main element of Fordism is mass production of standardised products and scientific management of that process. The high wages were added later and not for the reasons Richie gives.

The high wages typically associated with Fordism were efficiency wages, wages paid to ensure people continued to work hard even though they were being managed intensively and told exactly how to do a boring repetitive job by annoying people with clipboards. Always with the clipboards.

After introducing the production line Ford was annoyed that his very profitable company was suffering because of high labour turnover and worried because this high turnover was damaging productivity. He was not worried that his potential market was not big enough.

The US economy was the richest country in the world, growing strongly and still attracting lots of migrants, his market was secure and he was always bloodymindedly sure that meant the US would need cars, lots of cars.

He decided to do the sensible thing and offer more money to his workers. That this enabled his workers to afford to buy one of his cars was incidental to the logic behind the move, although it made for good propaganda.

He didn’t do this to increase the size of his market, but because people tend to work harder for more money. Don’t take it from me though, a lowly blogger, try Larry Summers and Daniel Raff:

Ford’s decision to increase wages dramatically is most plausibly portrayed as the consequence of labor problems of the kind stressed by efficiency wage theorists. The structure of the five-dollar day program is consistent with the predictions of efficiency wage theories. There is vivid evidence that the five-dollar day resulted in substantial queues for Ford jobs. Finally, significant increases in productivity and profits at Ford accompanied the introduction of the five-dollar day.

 Moral of the story: don’t go valorising old capitalisms.

Filed under: Economics, History, Chris Dillow, Daniel Raff, Efficiency Wages, Ford, Fordism, Larry Summers, Richard Murphy, USA

Why can’t we give people jobs that don’t involve killing people

You escaped from the Dole queue, from Mum’s nagging, from a United Kingdom where you really weren’t wanted, or appreciated.

Anna‘s post reminded me that the military is the only public works programme that is widely supported. If our society fucks up someone’s life chances they can always find “meaning” and “skills” and “camaraderie” in the military.

Why we can’t give people meaning doing something useful? For example, we live in an ageing society, soon to be in need of a great number of carers. That is something far more productive than the military and wouldn’t cost a penny more.

I have a feeling that some people who think it is good people can find meaning in the military might think care work is below our boys; I think that reflects badly on them not me.

If your support for the military is grounded in giving people a chance in life you might want to consider giving people a chance in life that doesn’t involve centrally directed ultraviolence.

Oh well, this opinion is deeply unfashionable and tantamount to saying that our brave boys are wasting their time killing foreigners and dying for no good reason. No good reason?! Why look at the monuments we’ll build them!

 

 

 

DULCE ET DECORUM EST

Bent double, like old beggars under sacks,
Knock-kneed, coughing like hags, we cursed through sludge,
Till on the haunting flares we turned our backs
And towards our distant rest began to trudge.
Men marched asleep. Many had lost their boots
But limped on, blood-shod. All went lame; all blind;
Drunk with fatigue; deaf even to the hoots
Of tired, outstripped Five-Nines that dropped behind.
Gas!(7) Gas! Quick, boys! – An ecstasy of fumbling,
Fitting the clumsy helmets just in time;
But someone still was yelling out and stumbling,
And flound’ring like a man in fire or lime. . .
Dim, through the misty panes and thick green light,
As under a green sea, I saw him drowning.
In all my dreams, before my helpless sight,
He plunges at me, guttering, choking, drowning.
If in some smothering dreams you too could pace
Behind the wagon that we flung him in,
And watch the white eyes writhing in his face,
His hanging face, like a devil’s sick of sin;
If you could hear, at every jolt, the blood
Come gargling from the froth-corrupted lungs,
Obscene as cancer, bitter as the cud
Of vile, incurable sores on innocent tongues,
My friend, you would not tell with such high zest
To children ardent for some desperate glory,
The old Lie; Dulce et Decorum est
Pro patria mori.

Filed under: History, Anna Raccoon, Carers, Never Again, The Military, We Will Remember

Cameron’s dreadful case for national pride

This is just wonderfully revealing from Cameron today:

Whatever the obstacles to growth today, we still boast some of the best universities in the world, the most favourable timezone in the world, and the world’s first language.

Hundreds of years ago we conquered and colonised a load of places and they and their trading partners now speak our language. Also, by historical fluke, we just so happen to sit in between populus Asia and wealthy North America.

So this is what national pride has come to. No celebration of the English Pub, the centre of the community, no longing for days of imperial grandeur, no ideological fervour for christ, cricket and capitalism. Nope, something more like this…

A cosy 25 million bedroom nation with excellent local amenities, a large secluded garden and great transport links. Comes complete with lovely views of France and neighbours who will begrudgingly speak your language.

Filed under: Economics, Foreign Affairs, History, Politics, Cameron, Capitalism, China, Christ, Colonialism, Cricket, France, FT, India, nationalism, The Pub, USA

Migration as Technology

I was a little confused by this Robin Hanson post. He cites with approval the fact that since 1970 40% of all the extra consumption in the world has occurred in the United States. Below are the top 30 gainers in terms of tens of billions of dollars a year.

United States 583, Japan 183, China 103, United Kingdom 73, Germany 63, France 53, India 47, Brazil 47, Italy 39, Canada 37, Mexico 37, Spain 28, Indonesia 14, Netherlands 11, Greece 9, South Africa 8, Thailand 8, Switzerland 8, Belgium 8, Austria 7, Colombia 7, Sweden 7, Philippines 7, Norway 7, Malaysia 7, Portugal 6, Chile 6, Finland 5, Ireland 5, Denmark 4. (source)

Robin argues that this is argument against Tyler’s notion of a slow down in technological innovation. But the population of the US is 48% bigger in 2010 (310,000,000) than in 1970 (209,000,000). At first I couldn’t see why this would counts as evidence against some notion of a slow down in intensive growth. The US got more from more which is great for all those people involved, but it is not evidence we can get more from less, is it?

Well, in a way it is, although you have to denationalise your perspective. The US does have an overwhelming lead in one “technology”; that of receiving and assimilating migrants. The factors behind this are geographical, historical and cultural, but it still as a really important technology in terms of increasing “our” productive and consumptive capacity.

The productivity of millions of people has been hugely increased simply by them moving across a border. Allowing more migration is an innovation that can make many people better off by improving their productivity. But it is a technology which cannot be excercised by a single firm, it is better thought of as a society-wide innovation akin to germ theory or corporation law.

Filed under: Blogging, Economics, History, Migration, Austria, Belgium, Brazil, Canada, Chile, China, Colombia, Denmark, Finland, France, Germany, Great Stagnation, Greece, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, Migration, Netherlands, Norway, Philippines, Population, Portugal, Robin Hanson, South Africa, Spain, Sweden, Switzerland, Thailand, Tyler Cowen, United Kingdom, United States

A Safer Way to Save the Eurozone

Cross published from my Uni paper, not sure if I’m allowed. But hey, I’ve nothing else written.

For the fourth or fifth time in as many years Europe needs a rescue plan. A group of academics from all around Europe, including LSEs Professor Luis Garicano and Professor Dimitri Vayanose now have a proposal which may be part of the last rescue plan necessary.

The problem is simple. Many countries, from Greece to Portugal, Italy, Spain and Ireland, carry debts they may not be able to pay back in full. Failure to pay back these debts would return Europe to recession because much of this debt is held by European banks who once considered it safe.

There is enough money in Europe to pay these countries debts, it is just that it is earned and spent in Germany by Germans, and the Germans are understandably keen to keep it this way. Previous plans have fallen short because the citizens of northern Europe are unwilling to commit to a bailout of southern Europe.

A rescue plan is not elusive because the economics are hard, politics is the fundamental problem. A successful plan to save Europe from renewed crisis will need to leverage Europes economic clout to shore up confidence in its riskier members in a way which does not put German taxpayers money in harm’s way. Eurobonds, once mooted as a potential solution to Europes woes were rejected for just this reason. They would have left Germany and other safe European countries on the line for the risky borrowing of other European countries.

Their rescue plan, published at the Euro-nomics website, is gaining traction with many of institutions at the heart of Europe. They propose to bundle up a portion of the debts of all Eurozone members and split it into a safe senior tranche and a risky junior tranche. Complex financial products got us into this mess and it is hoped that they may well get us out.

The senior tranche of debt would be known as European Safe Bonds (or ESBies, if you like your financial derivatives to have cute names) and would be amongst the safest financial assets in the world. They would be backed by the first 70% of debt payments from all European countries. Were things to go badly wrong through the Eurozone and many countries were to default ESBies would remain safe.

By their calculations, this means ESBies would only suffer losses every 600 years or so. They would be dull and their rewards would be meagre, just what Europe needs in these troubled times. Those who wanted higher returns, hedge fund and private equity investors, could gamble on the junior tranche without the problems caused by risky bonds being held by large banks.

This is important, rescue Europe and you rescue the employment opportunities of everyone who graduates from LSE next year. It would take a few months to get up and running but even moving towards this solution would calm markets and help return Europe and the world to stability.

Filed under: Economics, History, Politics, CDO, ESB, ESBies, EU, Europe, Eurozone, UK

You’re only as wealthy as you feel, but as poor as I say you are

One of the fun things with Libertarians is that they are very fond of dispersed tacit knowledge. I happen to think this is an excellent idea. What we know is limited, but what we all know should be used to the furthest extent. It is why markets are useful, they amass knowledge.

This fine idea, that knowledge is finite and that wisdom is dispersed among many people, often runs up against the ideals of Libertarianism. For example, a great many people feel themselves poor, but compared to most who have ever lived nobody is poor. David Henderson expands:

106 billion humans have been born since Homo sapiens appeared about 50,000 years ago. That means that the richest one percent in history includes 1.06 billion people. There are currently 6.2 billion humans alive, leaving approximately 100 billion who have died. Who among the dead was rich by today’s standards? Not many. Royalty, popes, presidents, dictators, large landholders, and the occasional wealthy industrialist, such as Andrew Carnegie and Leland Stanford, were certainly rich. All told, it is difficult to imagine more than 20 million of these people since ancient Egyptian times. This leaves 1.04 billion wealthy alive today, or 17% of the world’s population.

When discussing something as palpable as poverty this relativism vanishes. Tacit knowledge is useless, wisdom is concentrated. You, me, all of us, are very lucky. We are all very rich people because someone we were once related to once suffered terribly.

Nevermind if one another’s specialist knowledge of suffering says otherwise. Nevermind if some of us feel like we are in poverty compared to all we can observe, a nice academic assures we aren’t in suc ha bad state.

I find this terribly funny. Because it just goes to show that people align their ideology with their prejudices, not vice versa.

(UPDATE 13.46pm 17th October. Just to clear up my meaning a little, I was rambling.)

Filed under: Economics, History, Politics, Society, David Henderson, Econlog, Hayek, Libertarians, Michael Polanyi, Tacit Knowledge