Deflating the Great Inflation Scare

January 20th, 2010 by The Parallax Brief

John Redwood MP (Con, Wokingham) joined the Great Inflation Scare yesterday, posting a blog, ominously titled “Inflation Soars”:

“December’s inflation figure was as bad as I feared – and that’s before the force of higher VAT kicks in in January.

The Consumer Price Index, the government’s preferred measure, rose by 2.9%, just a whisker below the level where the Bank of England has to write a letter of apology and explanation to the Chancellor. The Retail Price Index (including mortgages) rose to 2.4%, whilst the RPI excluding housing hit an alarming 3.8%.

The Monetary Policy Committee has a lot of explaining to do.

[...]

Their defence will be twofold. They say inflation will come down again after a further rise in the first quarter of this year. That is likely to be true unless there is another devaluation and a further difficult surge in the price of commodities and fuel.”

This encapsulates the Parallax Brief’s objections to the inflation hawks. Mr. Redwood fumes about inflation, but it is actually near post-war lows; he then admits later in the very same article that inflationary pressures will probably ease after the first quarter. But still he pens a blog entry front loaded with language like, “inflation soars”, “[the figures were] as bad as I feared,” and “[the MPC] has a lot of explaining to do”. Amazing!

And Iain Martin, the deputy editor of the Wall Street Journal Europe, did exactly the same yesterday on his blog, admitting that the Bank of England — which, the Parallax Brief would like to remind his readers, is an independent institution — was probably right to say the figures were nothing to worry about, but then going on the claim that inflation as it stands could lead to a resurgence of militant trade unionism. Astonishing!

Inflation is only 2.9%, a figure that almost every single government between the war and 1993 would have killed for. Second, these hawks actually admit themselves that inflationary pressures are likely to ease in the second quarter.

Yet here they are whipping up support for the idea that we should be panicked about a non-existent threat that, even if it did exist, might not even be a threat, as opposed to, say, concentrating on real problems that actually exist now.

Tags [ , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 0 ]

Singapore’s Startling Sovereign Savings System

January 15th, 2010 by The Parallax Brief

Fascinating stuff from Matt Yglesias’s nostril-flaringly good blog:

I often here right-of-center people cite Singapore as an appealing social policy model. And I agree that there’s a good amount to admire in Singapore’s approach to a variety of issues, especially health care. That said, I wonder what these same free marketeers would say if anyone attempted anything even remotely resembling Temasek Holdings here in the United States.

The company is clearly loathe to describe itself in these terms, but Temasek is basically a sovereign wealth fund—an investment vehicle owned by the government of Singapore. It’s an active investor in companies around the world, but especially focused on Singapore’s region and on Singapore itself. And it’s portfolio of “more than US$120 billion” is giant compared to Singapore’s $240 billion GDP. Imagine we had a public sector entity managing a $7 trillion portfolio of investments in private companies…

It would, frankly, be such a dramatic departure from free market practice that I don’t even know how to go about forming an opinion about it.

Obviously, to provide enough funds to get something like this started, Britain would have to have basically zero net debt and run a sizeable budgetary surplus, or, more likely, a huge current account surplus — neither of which is going to happen anytime soon. But what always shocks the Parallax Brief is how these countries can run such entities without politicising them.

One argument against nationalising the banks when they were about to collapse and take us all with them was that the state would be terrible at running them. Now, the Parallax Brief puts it to you that it’s literally impossible to be worse at running a bank than the Boards of RBS, HBOS, et al; however, he suspects that if politicians were placed in charge of banks we would very swiftly see the denizens of Westminster digging rapaciously into the porkbarrel in order to make loans of dubious commercial value at cheap rates to political pet projects in marginal seats.

The same goes to the idea of a sovereign wealth fund. The idea is great; but even if we could generate the conditions to fund it, you know it wouldn’t be invested to get a decent return on allocated capital, but would instead be showered on, at best, the political flavours of the month and porkbarrel projects, and at worst, the companies that can entertain on yachts and guarantee retirement funds.

Tags [ , , , , ]

Categories [ Economics and Finance, Miscellaneous Titbits, UK Politics ]

Comments [ 0 ]

Has Labour Sacrificed it’s “New Labour” Credentials with 50% Top Rate, Banker Super-Tax?

December 16th, 2009 by The Parallax Brief

Via UK Polling Report, the Parallax Brief recently read an article in the Independent by John Rentoul in which he argued that the pre-budget report, with its soaking of bankers though the 50% super-tax on bonuses, “has postponed the Labour Party’s return to electability until 2028” by completely sacrificing the economically conservative credentials the party worked so hard to build in opposition and in government.

This strikes the Parallax Brief as risible proposition.

Labour’s reputation for economic soundness was destroyed long before the pre-budget report. It was destroyed by the party’s fiscal incontinence before the crisis, and the onset of that crisis, not its response to it.

Government economic policy should be counter-cyclical, cooling the economy when bubbles may be forming, and saving money in the good times, but conversely taking on more debt in the bad times to compensate for a muted private sector, while mitigating slumps by injecting stimulus. When Labour should have been saving for a rainy day, it was splurging the cash like a government fighting total war, both adding flames to the boom and leaving the country bereft of a safety net. It has meant that Britain has had to rely on monetary policy to do all the heavy lifting during the crisis, something which is enough in normal recessions, but insufficient for the current crisis, where the economy was still plummeting when monetary policy reached the zero lower bound and could therefore help no more.

Britain needed fiscal stimulus, but it hardly got any, because we were already mortgaged to the hilt; Britain needed the public sector to take up some slack left by a ravaged private sector, but the public sector couldn’t, because it was already bloated to bursting point.

To argue in the face of that damning indictment that the Labour Party’s economic reputation was poleaxed by the decisions to raise the top rate of income tax and impose a one off super-tax on bankers bonuses, seems rather like arguing that George W Bush destroyed his foreign policy credentials by not bombing Iranian nuclear facilities.

But beyond this, one must ask the question whether the policy of asking the rich to bear a greater burden was even the wrong thing to do? Is it morally reprehensible? Is it a political blunder?

No, no, and no.

From a moral and economic perspective, the super-tax on bankers’ bonuses was the right move. First, the bonuses are not deserved. Banks have been able to make such large profits only because of government guarantees — explicit and implicit — on their liabilities, as well as government equity support and regulator monetary and financial support. It is preposterous to have large portions of this support siphoned off into private hands. It is wrong for the sector of the economy which caused the crisis to reward itself after the taxpayer picked up its bills while that very same taxpayer is suffering.

Second, in the same way that one can justify the swingeing taxes imposed on packets of cigarettes as de-incentivizing socially undesirable behaviour, so one can justify taxes on bankers bonuses. The gargantuan bonuses paid to bankers encourage short term risk taking that leads banks to take on far greater risk than should be the case. Furthermore, much of the trading and financial “innovation” is not socially useful, and paying people so handsomely deprives other, more useful sectors of the economy of sharp minds. Which maths whizz kid in his or her right mind would want to become an engineer earning GBP50,000 a year, when he or she could easily earn 250 times that in the City? In which occupation would that maths whizz better serve the country?

Equally, taxing those who earn more than GBP150,000 was likely less about ideology, and more about the government proving to the bond market that it had the ability to address the country’s deficit with unpopular measures. It was likely a sign of economic rigour more than it was an ideological policy.

Finally, the Parallax Brief isn’t really sure if the move is the kind of political blunder which, as Mr. Rentoul puts it, leaves “the centre ground abandoned to the enemy”.

The centre ground is the middle classes, not the super rich. And while the centre ground generally want lower taxes for hard working people (like themselves) and less spending on welfare (on people who aren’t like themselves), there’s nothing to suggest they wouldn’t support higher taxes on those they see as grossly overpaid (people who also aren’t like themselves).

Indeed, polls by YouGov and ComRes seem to support this hypothesis. ComRes shows that 66% support the notion that those with high incomes should pay more, and YouGov shows that a whopping 79% support the super-tax on bankers’ bonuses. When was the last time a government policy had support from 79% of the population? The first Iraq War, perhaps? The Falklands?

From a moral, economic and political point of view, Labour’s moves were the right thing to do. Indeed, after the crisis hit, Labour hasn’t performed so very badly.

But that doesn’t mean it shouldn’t be punished for its pernicious pre-crisis economic policies.

Tags [ , , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 0 ]

Comrade Portillo: Spending Cuts “Impossible”; Tories Should Raise Taxes

November 23rd, 2009 by The Parallax Brief

Peter Hoskin on the Spectator’s Coffee House blog has an interesting take from Michael Portillo, who the Parallax Brief last remembers in Government as the uber-Thatcherite Dark Prince of the Right.

Ever the contrarian, Michael Portillo makes a case that you don’t hear from many on the right in his interview with Andrew Neil on Straight Talk this weekend. George Osborne has given “a fair amout of detail” about the Tories’ debt-reduction plans, he says, but that could be the wrong approach:

“I wouldn’t seek probably to give very much more detail …. You know, I was with Margaret Thatcher when she came in to Government in 1979, we faced a big public spending problem. It was terrible. It was a hard slog but she didn’t cut public spending. I was Chief Secretary between ’92 and ’94 – big public spending problem – I was trying to cut public spending; I did not succeed in cutting public spending. I don’t think the Tories will succeed in cutting public spending. Now this is what they won’t want to tell you. The reason they’re not telling you the cuts is that I think the cuts are almost impossible to make and what will happen, whoever wins the next election, is not so much that there’ll be public spending cuts, there will be restraint, but that there will be tax rises.”

The Parallax Brief has argued for a long time that the Right are going to be sorely disappointed if they think that an incoming Conservative government will be able to stabilize Britain’s desperate and exigent public finances through spending cuts alone. But he also believes, as does the Spectator, that the scale of the problem suggests that tax hikes alone cannot solve the problem either — public expenditure will have to be cut after the economy starts to right itself.

It’s interesting to see key figures on the right, such as the Spectator and Portillo, now supporting this view. The Parallax Brief wonders if they are paving the way for a more gentle approach to spending from the Conservative Party than many on the Right had hoped, and in the media had assumed?

Tags [ , , , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 0 ]

Economic Improvement Won’t Help Labour

November 19th, 2009 by The Parallax Brief

UK Polling report notes that despite polling trackers showing the economic expectations of voters have improved, this has had little impact on Labour’s opinion poll standing.

“Economic optimism has already returned. There are several different trackers following people’s expectations on the economy, they have all come back strongly since 2008 and early 2009, with some in positive territory. However, it does not seem to have produced any meaningful recovery for Labour. However, I’m still not ready to conclude for certain that it’s not going to have an effect – if an improved economy is going to improve Labour’s position in the polls, I think the trigger may be when the recession formally comes to an end, when the good news will no doubt be plastered across the media and the government will be primed to capitalise. That was expected in the last lot of quarterly economic figures, but never arrived. With the rest of Europe emerging from recession it must be very likely that the next lot of figures will show the formal end of the recession.”

What’s important to understand here is the difference between abstract terms and figures useful for measuring the strength of the economy, and the actual effect the economy has on the lives of individuals. It is unemployment, not GDP, which provides the lens through which voters view the health of the economy.

And unemployment figures are unlikely to provide any succour for incumbent governments anywhere in the developed world anytime soon.

The Free Exchange blog on the Economist’s website, explains the point:

“THE good news is, the OECD’s latest economic forecast revises up sharply projected economic growth for member nations. The bad news is, that still leaves OECD economies in pretty dismal shape. The organisation is now projecting that OECD members will grow by 1.9% in 2010, up from an earlier 0.7% forecast. The OECD estimates that the American economy will expand by 2.5% next year, where earlier 0.9% growth was anticipated.

It’s nice that expectations have risen, but we had all better hope that they rise more. In the two years after the end of the 1982 recession, the American economy expanded by 4.5% (1983) and 7.2% (1984), and at the end of that period the American unemployment rate was still above 7%.”

Similarly, the Parallax Brief noted in a previous blog post that:

“In both the 80-81 recession and the 90-91 recession, Britain’s GDP started moving back up in the 6th quarter after recession started, yet in the 1990-91 downturn, unemployment didn’t reach it’s peak until the 11th quarter. The 80-81 slump was even worse, with unemployment still at its high watermark in the 17th quarter — over four years after the recession started, and two and a half years after it finished. On both occasions, a full 19 quarters (nearly five years) after the recession started, unemployment levels were still above their pre-recession levels, despite GDP reaching it’s previous levels around three years after the recession began.”

That’s because unemployment lags GDP, moving up well after GDP recovers.

Even if the economy roars back before the next election — which it won’t — it is likely that unemployment will stay near its high watermark, or just as likely, continue rising. Given that personal economic hardship is far more important to individual voters than general economic health — especially when demonstrated by abstract numbers like GDP — it seems doubtful that the economy will give Labour much help.

Of course, rising GDP might make it slightly more difficult for the Conservative Party to beat Labour about the head with the Economy Breeze Block, especially if Labour can show that it has done better than might have been expected given the conditions, but it’s unlikely that Labour can get back into power through economic improvement alone.

And considering the mess we’re in, that’s exactly how it should be.

Tags [ , , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 0 ]

Where’s the Deflation? And Will it be Bad if we Find it?

November 18th, 2009 by The Parallax Brief

Guido wants to know today “Where’s the Deflation?” because figures recently released show inflation back on the uptick. He also makes an argument that deflation isn’t very bad because “history shows that there have been times of increasing prosperity that coincided with deflation,” that “Deflation happened several times in the nineteenth century,” and, of course, the hoary point that “pensioners know that their standard of living would have improved” had deflation set in.

It is important to debunk the idea that deflation wouldn’t be that bad.

Deflation increases the real burden of debt — something that would be disastrous given current levels of debt in the UK — while providing powerful incentives for consumers to hold off on purchases — why would you buy now when it’ll be cheaper next month? — adding a further drag on economic performance. Japan’s lost decade went missing as a result of deflation. The privations of the Great Depression were brought forth by massive debt-deflation.

Of course, pensioners would see the real value of their pensions increase, but economic policy is not made to satisfy one specific interest group at the great expense of all others — as I’m sure Guido agrees when he discusses matters of pension reform.

Guido’s embrace of deflation might be the most unpopular economic decision since King… no, hang on, hasn’t that line been used before somewhere?

The Parallax Brief knows that conspiracy theories about shadowy groups deciding to introduce QE to prop up gilts and bail out Brown (and no doubt to further the new world order) are far more interesting than mundane reality, but is it too much to ask that Guido might consider the simple explanation that deflation was avoided because of the (independent) Bank of England’s super loose monetary policy?

A better question to ask, given the number of conservative and libertarian commentators droning on about Mugabenomics and Wiemar II, might be “Where’s the hyperinflation?”

Tags [ , , , , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 2 ]

Can Bank Regulators be Trusted with Banking Regulation?

November 18th, 2009 by The Parallax Brief

Former IMF chief economist Simon Johnson has written today about a terrifically illuminating paper published by the Bank of International Settlements (the central banks’ central bank) called Banking on the State.

Co-authored by Andrew Haldane, Executive Director for Financial Stability at the Bank of England and, according to the Baseline Scenario, closely in line with BofE supremo Mervin King, the paper offers a gloomy assessment of the current financial system. In broad terms, it argues that the banking system is locked in a boom-bust-bailout cycle whereby the taxpayer lifeboats provided to the management, shareholder and creditors of the banks lay the foundation for the next crisis by encouraging excessive risk.

In order to “drive the conversation forward” the Mr. Johnson discusses seven talking points touched upon by the paper. However, the Parallax Brief would like to concentrate on just two:

1—The authors say that it is clear, in retrospect, that banks were excessively leveraged. But how did regulators/supervisors miss the implications of this at the time? Banks’ balance sheets started expanding from 1970 onwards (page 3) and by 2000 “balance sheets were more than five times annual UK GDP.” This was not an overnight development – see the last sentence on page 8 which says “Higher leverage fully accounts for the rise in UK banks’ return on equity up until 2007″. It may be difficult for a central banker to come clean on who convinced whom that modern banking in this form is safe – but at a minimum the authors should draw lessons from earlier failures of regulators/supervisors when discussing prospective changes in the framework of regulation. Could some of the changes being proposed suffer the same fate as all previous attempts to regulate big banks? It seems the authors answer is that just moving things to Pillar I (from Pillar II) will help. This sounds like wishful thinking.

2—The author are right that US banks faced a leverage ratio constraint, which European banks did not. But US banks circumvented this by setting up SIVs – see the damage at Citi for details. Again, what were the regulators/supervisors thinking when they allowed this?

When placed in these plain terms, it becomes nauseatingly clear that those responsible for the regulation of banks have been outright negligent. How was it possible to the banks to become so huge, so leveraged, and so dangerous? All right under the noses of the regulators.

And more to the point, now that Gordon Brown and Mervyn King seem to be clashing antlers over which of the Treasury-FSA-BofE regulatory menage a trois should hold what responsibilities and for whom after the financial system has been reorganized, can we trust any them? After all, each and every one seemed to be blissfully oblivious to the fact Royal Bank of Scotland had liabilities larger than Britain’s GDP. Was it not, like, you know, pretty obvious that if anything should happen, it might be in trouble?

Talk about missing the elephant in the room.

Mr. Johnson’s conclusion rings depressingly true:

How can we believe that for the regulators, “next time is different“? Most likely, next time will be exactly the same, with different terminology: the financial sector “innovates”, regulators buy their story that risks are now properly managed, and the ensuing bailout (again) breaks all records.

It’s all politics. Unless and until you break the political power of our largest banks, broadly construed, we are going nowhere (or, rather, we are looping around the same doom).

Tags [ , , , , , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 0 ]

Can This Man Repeat Canadian, Swedish Successes and Fix Britain’s Finances?

November 17th, 2009 by The Parallax Brief

The Adam Smith Institute runs with a very good piece today regarding the task facing what is likely to be an incoming Conservative government to bring down Britain’s budget deficit.

So I have a new job for Philip Hammond MP. Currently he is the Conservatives’ spending spokesman, and what he doesn’t know about public spending isn’t worth knowing. But he needs to become instead the spokesman on public service renewal – and minister for that is the Conservatives win the election.

You will never streamline the public sector by Treasury ministers bullying departments over money. Instead, you need a complete review of what government does, what it has to do, what it can do better, and what can be done better by other people and by the public. All departments need to buy into that, and it needs a reform, not a finance minister in charge if everyone is going to trust the process and be a part of it. After all, the process may find that spending in some areas should be increased, even if other departments are found to be doing a lot of pointless stuff.

Sounds very sensible. The article goes on to point out that Canada faced a similar budget crisis to the one Britain faces today, and managed to turn its 9.1% deficit into a surplus. Sweden also went through a similar process — albeit using a different method, cutting the same percentage from the budget of each department in order to remove any feelings of resentment or unequal treatment, and generating a spirit of team work to battle the problem.

But whichever method is used, the government will have to start getting Britain’s fiscal house in order once unemployment figures start showing some strength, and inflation returns. And Canada’s and Sweden’s experiences show that it’s not an impossible task.

Tags [ , , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 0 ]

Is Brown’s Anti-Unemployment Strategy Working?

November 12th, 2009 by The Parallax Brief

Charts which the Parallax Brief has found on the Office of National Statistics website (via Left Foot Forward), suggest that the Labour government’s efforts to combat unemployment may be more effective than often assumed, but also show that whether GDP improves or not, unemployment figures will likely offer Gordon Brown no respite on election day.

The chart below indicates just how bad this recession has been, with a decline steeper, and longer, than the previous big recessions.

However, as the next table shows, unemployment hasn’t increased by as much as in previous recessions. It started from a lower base than in 1990 and 1980, and has remained behind the curve set by both recessions.

Beyond the asinine partisan conclusions that could be drawn from these charts, the Parallax Brief wants to highlight two points.

The first is that the statistics show conclusively that unemployment lags movements in GDP. In both the 80-81 recession and the 90-91 recession, Britain’s GDP started moving back up in the 6th quarter after recession started, yet in the 1990-91 downturn, unemployment didn’t reach it’s peak until the 11th quarter. The 80-81 slump was even worse, with unemployment still at its high watermark in the 17th quarter — over four years after the recession started, and two and a half years after it finished. On both occasions, a full 19 quarters (nearly five years) after the recession started, unemployment levels were still above their pre-recession levels, despite GDP reaching it’s previous levels around three years after the recession began.

Yikes!

Even if we take the more optimistic early nineties scenario, unemployment will still be rising come election time.

The second point is that the government’s efforts should not be judged against unemployment levels in boom time, but how their predecessors managed in similar circumstances. In that context, it appears that Labour is, in fact, doing better.

But the Parallax Brief can’t escape the feeling that it is doing far, far worse than might have been the case if it had assiduously shepherded public finances during the good years. If the government had ran a surplus during the times of economic plenty, it would have had available the fiscal room for manoeuvre required for a truly effective blast against unemployment. But Labour didn’t so it wasn’t.

It’s probably true to say, then, that Labour has done well given the position it found itself in, but that’s a position of its own making.

Tags [ , , , , , , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 0 ]

Does The Spectator Understand Economic Indicators?

November 11th, 2009 by The Parallax Brief

The Parallax Brief noticed today that both Guido and the Spectator concentrated on the latest unemployment figures from the ONS, offering them as justification for the argument that the country is not, as has been claimed by the government and some — less politically pure — sections of the media, on the road to economic recovery.

“…my lack of enthusiasm is partially explained by the fact that a 6,000 employment rise is not proof of recovery.

Britain is still visibly contracting, albeit at a decelerating rate. Vacancies fell by 1,000 and have never been at a lower level since records began in 2001. Economic inactivity, another indicator of unemployment and opportunity, rose again, but only by 0.1 per cent.

When every other major economy is recovering, Britain is stagnating.”

The Parallax Brief is tempted to call this deliberately disingenuous, but will at least wonder whether the Spectator quite understands what people mean when they say “on the road to recovery”. From a basic level of comprehension, a reasonably educated person should be able to understand that being “on the road” to something means that one has not arrived at the destination.

However, beyond this, from an economic standpoint, when we refer to the “economy” we’re almost always referring to GDP, not employment. To be sure, employment is often paramount in shaping people’s views of the economy, but when people say “the economy is recovering” they always mean, “GDP is starting to move upward again.”

Using unemployment figures to refute this, therefore, is rather like arguing that a pop song isn’t moving up the charts because you haven’t heard anyone whistling the tune on the street.

Unemployment will continue to rise even as GDP increases, because it is a lagging indicator, rising and falling six or eight months, give or take, behind GDP. So, while the Spectator is right to imply that America is recovering, by it’s own standards it isn’t, because unemployment is still on the up. That’s also why Britain entered technical recession before unemployment began to soar. But Guido and Speccie preferred to rely on GDP data back then, didn’t they?

Tags [ , , , , , ]

Categories [ Economics and Finance, UK Politics ]

Comments [ 0 ]

« Older Entries