Here’s how you work out how many Bulgarians and Romanians are coming to the UK next year

bulgaria-romaniaConcluding his piece Tom Harris says “No one any longer believes government estimates of how many are likely to come here anyway.” No wonder when our elected representatives refuse to explain why the government was wrong in the past. Instead of publicising pieces attacking migrants MPs like Tom should be educating the public. Instead it is going to fall to me.

The original sin of the last decade’s immigration debate is that UK governments have purposefully underestimated the number of expected immigrants. This persistent myth acts as a golden thread connecting immigrant bashing in the same way as youcan’teventalkaboutit, flood metaphors and the same persistent negative stereotypes.

In 2004 eight ex-communist states joined the EU. Their democratisation has been one of the crowning achievements of the European project and to the UK’s eternal credit as principled liberal democracy the UK was one of the few countries not to impose immigration restrictions on these A8 countries.

Christian Dustmann was the lead author on the now infamous Home Office report which predicted an average annual net immigration of 5,000-13,000 from these A8 countries. Needless to say the report wasn’t very accurate. It massively underestimated the pent up demand of Poles to search for a better life and poorly predicted the behaviour of other EU states. It did so because it lacked good data. Tom Harris is happy to pretend we still don’t know what’s going to happen, but that’s not true.

According to ONS data, annual net immigration of A8 nationals during 2005-06 was 66,000, more than four times higher than predicted. But according to data from the Worker Registration Scheme that was set up in May 2004, the average annual number of A8 workers registering for employment during 2005-06 was 216,000, almost three times the ONS figure because the ONS excludes people staying for less than a year.

This is what happened. In 2004 73 million Estonians, Latvians, Lithuanians, Poles, Czechs, Slovakians, Hungarians and Slovenians gained access to the labour markets of the UK, Ireland and Sweden, a combined population of 74 million. Those were the only three countries to open their doors to their new democratic neighbours, something which Dustmann did not anticipate.

Next year the 29 million Romanians and Bulgarians will be allowed access to the combined labour markets of Austria, Belgium, France, Germany, Luxembourg, Malta, Spain, The Netherlands and the UK, a total of 293 million people.

The average GDP per capita of these counties in 2004 was $8,300, ranging from $6,000 in Latvia to $16,000 in Slovenia. Today Romania’s GDP per capita is $8,000 and Bulgaria is a little poorer at $7,000. The obvious conclusion from these stats will jump out at anyone, January 1st will be a non-event. Half as many people will get access to a labour market four times the size.

Although the UK jobs market is still depressed and in a worse state than Germany’s it is in a better state than southern Europe. A back of the fag packet prediction with much better data and assumptions can get us a realistic picture of what will happen in January. If we had a 200,000 person increase in migration from A8 accession migrants we’ll see an eighth of this.

Conservatives and Labour know they can make hay from immigration. Although they’re both terrified of the public on the subject they know that there are votes in immigration baiting. There’s not much in the numbers and that’s why some in Labour are picking on Roma and David Cameron is reannouncing old immigration policies as new.

I’ll go out on a limb and say that we’ll get between 20,000 and 30,000 more people a year from Romania and Bulgaria coming to work in the UK.  This is a lot less precise but a lot more accurate than anything else you will hear on the topic. Don’t let the scaremongers win on this one.


Everything you never knew you wanted to know about Islamic Central Banking


This is cool! [1] Hassan Rouhani talking about monetary policy? Could I be any more excited? No.

Despite inventing zero, arabs have no use for it, [2] at least not when it comes to central banking. Lending money at interest is haram in Islamic finance so the use of interest rates to control demand as is normal in the west doesn’t apply. So does this also means that unlike in the UK and the US there is no danger of interest rates going to zero and the economy entering the liquidity trap?

Most reporting on Iran focuses at its very high inflation but nobody is paying much attention to the tools used by the central bank. This is understandable, inflation has skyrocketed and the central bank has no independence and is controlled by the Iranian state. My rhetorical question is largely irrelevant at the moment, but if we look at the tools Iran’s central banks uses the question is likely “yes”. I think we should look a little at the tools of Islamic central banking anyway as they give us a window into a world of central banking with interest rates or a zero rate problem.

To begin, a little history. The first Islamic savings bank was established in Mit Ghamr in 1963 by Ahmad El Najjar, an economist. In the 1960s Nasser was trying to modernise egypt and so the bank kept secret its overtly Islamic nature. Riba – charging interest – is haram so the saving bank operated on a profit share basis. Today, the much larger Islamic finance industry – in 2011 $1.357 trillion of shariah-compliant assets existed globally – has a variety of alternatives to charging interest.

Islamic finance seeks to avoid unearned income, which is seen as exploitative. Instead of lending money and charging interest, which is seen as just transferring risk, risk is shared through a variety of mechanisms; as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar). This can be illustrated with an example: Unlike in western finance a mortgage transaction does not involve interest payments. Instead the bank would arrange to buy the house from the seller and sell it on to the buyer at a profit with payments arranged as installments.This arrangement is called Murabahah and is the most relevant for our discussion of central banking.

Sukuk is also an important concept too. This is similar to a bond in which interest is regularly paid on a principal. However, because riba is haram in Islam it cannot be structured like this. Instead sukuk imply a transfer of ownership and can look like a form of repurchase agreement. You agree to repurchase something at a certain price over a certain period of time. This echoes previous posts of mine of what saving really is. Interest rates are just symbolic, what is really happening is people buying durable things today with an expectation they will be able to sell them on for more in the future. Interest rates are our way of expressing that, Murabahah or Sukuk are another. The latter seems clearer and more honest on the mechanism actually.

(At this point, I do want to point out to all the snooty economists, engineers, mathematicians who mock post-modernism…who’s laughing now?)

So what does all this mean for Islamic central banking? The most prominent method of controlling monetary policy is the control of the profit rates allowed by banks when they lend, the Mudharabah discussed above. Anything from an 18% to 20% on non profit-and-loss sharing arrangements, and slightly lower on profit-and-loss sharing arrangements. In a country shrinking around 5% a year finding a 20% return implies a high rate of nominal GDP growth which is split between negative growth and even higher inflation.

We can see that the implied maximum profit rates require very high growth in nominal incomes and we also see very fast growth in the monetary base. Entering into a profit-and-loss agreement will guarantee you a high nominal return in a low growth environment and monetary growth is high to accommodate these contracts. There is no reason however that the profit share cannot be set to a lower number. This would amount, via the Kalecki equation, [3] to a monetary tightening and NGDP and inflation would both have to decrease to accommodate this lower allowable rate of profit. Weirdly a shrinking of the nominal profit rate could increase it in real terms. Money is weird.

This piece from Cato, caveat lector, says that Iran stopped publishing information on its money supply in March 2011, at the time they showed continued very rapid growth in the money supply. If Rouhani has changed this that’s great. The country’s monetary policy at the moment is chaotic but once the chaos fades it will be useful to bear in mind how Islamic monetary policy works. The details in this post are broad sketches only. I took lots from these documents [12345] and I’m not sure of their quality. This is an area where I don’t even know anyone who might know an expert, so any input in the comments or on twitter is welcome. Likewise please share this as this might get picked up by someone better informed than me.


[1] Yes. Cool. You’re here aren’t you?

[2] Yes. Persian or Iranian is more appropriate but I’ve been looking for a chance to use that line since I drafted this post months ago. UPDATE: As Lorenzo tells me, actually the Indians invented zero as a concept, the Arabs were miles behind. More here.

[3] I’m making the Kalecki equation  [1, 2, 3] do some heavy lifting here, but I think that’s right…

An answer to secular stagnation, the socialisation of investment, is already happening

Last week Larry Summers brought the idea of secular stagnation right into the mainstream (of the little read econoblogosphere). In my eyes it was a big presentation in a “only Nixon can go to China” kind of way. Larry Summers is a creature of technocratic centrism in America, ex-President of Yale (whoops, thanks Tim/a>) Harvard and creature of Wall Street. When Unlearning Economics declares capitalism fundamentally flawed I meh, when Larry Summers does it, I’m more curious. Not because I like Larry more but because of the opposite, Larry’s an arsehole.

“Many people think monetary policy was too easy [before the crisis], everybody believes that there was a vast amount of imprudent lending going on and almost everybody believes that wealth as it was experienced by households was in excess of reality. Was there a great boom? Capacity utilisation wasn’t under any pressure, unemployment wasn`t at any remarkably low level and inflation was entirely quiescent. Somehow even a great boom was unable to produce any excess in aggregate demand…

Suppose then that the short term real interest rate that was consistent with full employment had fallen to negative two or negative three percent. Even with artificial stimulus to demand you wouldn’t see any excess demand. Even with a resumption in normal credit conditions you would have a lot of difficulty getting back to full employment.”

Larry Summers – November 8, 2013

Marco Nappolini at Pieria suggest that increased vulnerability to energy costs has reduced the incentive to increased fixed business costs by hiring permanent employees. Excess capacity and the end of scarcity have led to a situation where investment is only profitable at very negative interest rates. Only measured against very inhospitable risk-free returns does any sort of investment make sense. Even then it only makes sense inasmuch as you mitigate your losses, rather than capture the superprofits which once supposedly animated capitalist.

This situation has been characterised by Paul Krugman as “When prudence is folly.” Responsibly saving when interest rates are trapped at zero just reduces demand, and depresses your returns. In essence because capacity and savings are abundant further investment or saving only reduces current spending further and makes further investment and saving even less appealing. Interest rates stay at zero and we just stay far from full employment for a long time.

As Larry Summers says in his talk. This has been resoundingly rejected by the economics profession for a number of years. At least since the monetarist revolution in the 70s/80s economics have been comfortable arguing that aggressive monetary and fiscal stimulus can produce the necessary demand to restart spending, saving and investment at the necessary levels to return economies to full employment. The nature of investment and technologies may have changed and I want to discuss a little the nature of that change and the response already in train.

The extended (for blogs anyway) Skidelsky quote on Keynes explains that he thought eventually capitalism would lose its vigour and that some “socialisation of investment” would be required. You can only read the bolded bits, that’s why I do on other people’s long blockquotes.

The problem of maintaining full employment arises from ‘the association of a conventional and fairly stable long-term rate of interest with a fickle and highly unstable marginal efficiency of capital’ (Keynes, 1973A, p. 204). His solution to the problem is to use monetary policy to establish a permanently low long-term rate of interest. For ‘any level of interest which is accepted with sufficient conviction as likely to be durable will be durable…’ (Keynes, 1973A, p. 203). For this reason, he did not want to use interest rates to manage the business cycle: the exact opposite of present practice. Nevertheless, he believed that it ‘seems likely that the fluctuations in…the marginal efficiency of capital…will be too great to be offset by any practicable changes in the rate of interest’ (Keynes, 1973A, p. 164). Hence, apart from keeping interest rates permanently low, investment needed to be ‘socialised’. Keynes wrote: ‘I expect to see the State…taking an ever greater responsibility for directly organising investment’ and ‘I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment’ (Keynes, 1973A, pp. 164, 378).
By ‘socialisation of investment’ Keynes did not mean nationalisation. Socialisation of investment need not exclude ‘all manner of compromise and devices by which public authority will co-operate with private initiative’ (Keynes, 1973A, p. 378). This single throw-away line in the General Theory reflects Keynes’s thinking on ‘public-private partnerships’, which came out of his involvement in Liberal politics in the 1920s (Skidelsky, 1992, chs 7 and 8). In essence, he sought to expand the public-utility component of investment to give greater stability to the investment function. Today, he would have seen the big institutional investors like pension funds as a major support for stability. A guaranteed stream of investment would reduce fluctuations to modest dimensions, which could be readily controlled, if so wished, by speeding up or slowing down elements in the investment programme. Such investment would not necessarily be profit-maximising. But provided it yielded positive returns, there would be a gain. If markets had perfect information, public investment would be inefficient. But with uncertainty, there is a gain as against having no state investment at all, because of the losses due to uncertainty.

I am here to present evidence that this is already happening and is uncontroversial in the heart of government. Within both DECC and the Department of Transport the above is taken for granted. I think as we move towards an economy in which networks and the free flow of data become ever more important this trend will continue and because the benefits are hard to capture it will look a lot like secular stagnation. One such example is the smart meter roll-out:

Between now and 2020 energy suppliers will be responsible for replacing over 53 million gas and electricity meters. This will involve visits to 30 million homes and small businesses.

DECC estimate that the programme will cost £12 billion and produce £18 billion of benefits. The programme involves all energy suppliers and network operators working together with government to set up a new national communication grid to exchange real time data on energy usage. There are no comparable Key Public Infrastructure projects anywhere close to it in scale or scope in the world. All work is taking part because the government has demanded it under advice from industry and the public-utility component of investment has been extended to give greater stability to the investment function.

The costs are almost certainly an underestimate, they almost always are. The benefits are based on headline savings. Shifting of consumption, reducing energy consumption, making investment in the grid more efficient etc. They are almost certainly an underestimate. Smart gadgets, smart homes, and the potential to totally disintermediate electricity sale will be opened up by this investment.

Power is a commodity. It should be pretty unprofitable, but it is not. The data produced by its consumption is valuable though. The smart meter roll-out infrastructure will allow the entry of people good at data into a commodity business. Google selling electricity and using your data to make your life better is a business proposition that will totally destroy the incumbents. The benefits could be huge but the investment had to be socialised.

There’s a similar problem with rail smart ticketing in the UK. The benefits to smart ticketing vastly outweigh the costs, but rail operators are unable to capture the majority of them. Indeed as it becomes easier to track people on the railways it might be easier for the services rail companies offer to be replaced by new entrants. The data produced will enable passengers to track their own journeys and work out how valuable they are. Jeffrey Sachs (via Mark Thoma and Arnold Kling) pushes back against Summers and writes that investment is only sluggish because regulation and policy is holding it back. I think that is unrealistic. In lots of areas policy is already helping to address the problem of secular stagnation with the socialisation of investment. 

Technology is changing and reducing the return on investment which can be monetised by those making the investment. The benefits from networks, twitter or the internet of things will be broad, ubiquitous and difficult to monetise. Because this investment won’t produce a good return for those carrying it out it will look a lot like secular stagnation. The new world will be built on smart networks (and intuitive marketing much to Alex’s horror) and the private sector cannot trusted to carry this out. The need to socialise investment is driven by secular stagnation and the difficulties encountered in monetising investments reliant on network effects. 

Remember, there’s a charity that fights mental illness and domestic violence that will double your donation every three years

The last time we checked in on GiveDirectly they’d published a report outlining the amazing results they’d recently registered from their latest trial project.

The full report detailed, amongst other things, that a pound given freely, without condition, to someone in absolute poverty generated a 28% annual rate of return. Restated, that means that every two years your donation doubles in value. It’s not Wonga levels of accumulation, but it’s pretty good.

Today I found out that GiveDirectly had successfully expanded into Uganda. Up until now they’ve only operated in Kenya which is an anglophone country with a reasonably centralised state. Uganda has many more languages and its government is more decentralised. If GiveDirectly is going to be successful it is going to have to change the way it works to operate in the myriad different circumstances in which the absolutely poor live.

Instead of another stats dump you can listen to the field workers directly explaining their initial scepticism and current enthusiasm for the programme. Enjoy!

“The first time I heard about GiveDirectly, I couldn’t believe [an NGO could] just come in and give free money…and I thought people were going to waste it….” in this video, GiveDirectly Uganda field officers Rosemary Apolot and Charles Omoding share their initial skepticism about giving cash to the poor, and explain how their experiences with GiveDirectly recipients changed their thinking.

Resisting quick fixes: banning HGVs won’t make cyclists safer

Former Olympic cyclist Chris Boardman has called on Boris Johnson to consider banning lorries from some of London’s roads during peak times.

Following the death of six cyclists on London’s roads in two weeks, Mr Boardman asked the mayor to honour a “promise” he made by looking at similar schemes in operation abroad.

He said: “The longer we delay, the more lives will be lost.”

Mr Johnson told BBC London 94.9 he was not convinced by the argument.

Nine of this year’s 14 cyclist fatalities and five of last year’s 14 deaths involved a heavy goods vehicle.

In Paris, where there are restrictions on lorries, there were no cyclist fatalities last year.

It’s the reference to Paris that gives it away. I know a lot of people might not realise this, but people cycle outside London. Indeed, there are people living full, fulfilled happy lives outside London (I’m told). Banning HGVs from London’s rush hour will prevent some deaths in London but it is a quick fix that would have only a small effect over the long run. I think Boris’s objections are entirely cynical but he might be on to something.

The whole country’s road infrastructure is inappropriate for cyclists. Junctions are designed to force cyclists into the most dangerous position possible, squeezed in next to the traffic waiting at the lights. Bike lanes double as parking spaces. A “solution” to bike deaths that only deals with deaths that occur at a small but significant number of junctions is one part of the country is no solution at all.

Having HGVs enter London after 10 involves them being on other streets during rush hour. Rush hour immediately follows prime delivery slots for HGVs. If the lorries aren’t in London they’ll be elsewhere. These lorries won’t sit idle, they’ll just bother cyclists elsewhere who are less used to HGVs and who lack the safety in numbers London’s cyclists enjoy. Banning HGVs in London might sound like a sensible policy but its a sticking plaster on a huge wound.

Banning HGVs  will give the illusion of safety and, probably, fewer people in London will die. But more people outside London will die and cyclists across the country will have to put up with worse infrastructure because the problem of (high visibility, cosmopolitan) cyclists being killed will have been fixed. It’s an excuse that will delay upgrades to infrastructure and will only move around the carnage like the squeezing of a balloon.

Why getting a Mickey Mouse degree or working for a benevolent monopsony are the only ways to guarantee a job

Via Alex I learn from the ONS that Media graduates have the second highest rate of employment of any graduate:

Employment rate by degree

…but they also have the lowest aggregate wages. Ouch.

Wages by Degree

This is a nice contrast to the graduates with the highest wages and the highest rate of employment of any graduates: Doctors.


Just my little joke…anyway, moving swiftly on. This seems pretty odd, no?

Medicine needs good A levels, constant hard work and the final years of the degree are spent on placements which normally lead to jobs in medicine. Media Studies requires significantly less good A levels, a lot less work and you don’t get nearly as much support finding a job. So what gives?

The 2010 economic Nobel prize went to Diamond, Mortensen and Pissarides for looking into exactly this sort of problem. Matching jobs to workers is not a costless or effortless process. Although economists have spoken about this since the 1930s this only really got formalised in the 1970s.

Several factors can make finding employment (or employees) difficult. Imperfect information about trading partners can lead you unaware of opportunities; heterogeneous supply and demand can mean that there are job openings for which nobody is suitable; slow mobility could prevent people from moving to where the work is or people may be poor judges of their own skills and demand too high a wage.

Medicine degrees are incredibly hard work and require incredibly bright students. The search process for students is totally different to “normal” job hunting because there is one employer, the NHS. After an online application, students rank their preferred cities, ranked and then selected into jobs by the hospitals they are matched with. The high skill and short supply of Medics explains their high wages and this search system explains their high employment. A similar system of search exists for nurses, which have similarly high employment rates.

Media degrees are easier to start and there are no specific search programmes set up to find graduates employment and yet they are still employed at far higher rates than Humanities graduates, even though their wages are similar and Humanities graduates are just as thick. [1] What’s the difference? Its the reservation wages stupid. And added flexibility. Being told you’re doing a Mickey Mouse degree reduces your reservation wage and makes the psychic cost of taking non-graduate jobs easier to bear. An Historian would never make lattes, a meeja grad might. Graduates become easier to match to jobs because they’re willing to cast the net wider and accept a worse wage.

For medics, in terms of search costs we can see they have higher reservations wages than Media studies students, but their sole employer is used to this. An efficient matching mechanism helps to match supply to demand. Supply and demand are kept close to one another because the number of new jobs and new graduates is predictable. Finally, new doctors list the cities they’re willing to move to reducing frictions associated with mobility.

Engineering is more curious, but thinking about search costs can help us explain their lower employment and high wages. They’re clever, hard working people and many engineering degrees require vocational work. But the multiplicity of firms involved means that search costs are higher. Plus, whereas hospitals tend not to move around much engineering work does. For example, over the next decade (or more) there will be work in Somerset, then it might be in Cumbria, or London. While it can be hard to find a job, there is a big shortage of engineers. 6000 people will be required at any one time at Hinkley Point C. Crossrail’s progress means that there are no qualified drillers left in the UK. Want to bore a tunnel? Bore off. All the tunneling experts are busy. 

It’s easy to tell a story looking at the above tables and say that of course lots of media students are in employment they’re cheap. That logic kinda breaks down when you apply it to expensive doctors. And a story about high skill people being super employable breaks down when you look at engineering. But thinking about search costs can help explain a lot and make slightly odd patterns easier to explain.


[1] I’m a History graduate. Calm down.