Economics

The Institute for Fiscal Studies is suffering from a lack of imagination on NHS funding

Published by Anonymous (not verified) on Thu, 24/05/2018 - 5:30pm in

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Economics, NHS

The Guardian is amongst many reporting the following this morning:

British households will need to pay an extra £2,000 a year in tax to help the NHS cope with the demands of an ageing population, according to a new report that highlights the unprecedented financial pressures on the health system.

Two thinktanks – the Institute for Fiscal Studies and the Health Foundation – have said there can be no alternative to higher taxation if there are to be even modest improvements to care over the next 15 years, adding that demands on the health service will continue to rise.

I do, as usual despair at the poverty of thinking displayed by the Institute for Fiscal Studies. It really is time it stopped talking about macroeconomics, about which it appears to know almost nothing.

First, as usual the IFS suggests that government spending is paid for with taxation when that is not true: it is paid for with government created money which is then cancelled with taxation.

Second, the IFS defines health care affordability in terms of capacity to tax. This too is quite simply wrong: health care is affordable if there is the capacity to supply it within the economy. That is what limits the health care we can supply, and not tax. It really is time the IFS looked at the real economy and not just the money.

But third, and worst, is the sheer poverty of the IFS thinking. Paul Johnson admitted on the Today programme this morning, which I endured on my way down to Stansted, that he might suffer from a lack of imagination. Let me assure you, I agree. And the reason is obvious. Johnson simply cannot imagine the world changing. His whole analysis exists in a world where ceterus paribus holds true. But it does not.

I have not checked the report as yet to see what it says about automation so I will stick to discussion of tax where what the IFS is saying is that nothing will change. Johnson's commentary made this clear. We can't tax business: he thinks it will run away. Land and wealth taxes won't collect much, he says. And as for changes to allowances and reliefs, most especially when it comes to subsidising the already wealthy? Of that there was not a hint.

Let me put this in context. The IFS seem to be looking for about £30bn a year. That is, as I have shown, half the sum that subsidies to pension and ISA saving in the UK now cost each year. All of that sum goes as a subsidy to the City to effectively over inflate the price of shares. Johnson should know that. But he said on Radio 4 that there was nothing he could imagine cutting now that could meet health care costs. The only explanation for that is that he is not thinking, or cannot think, or wants to perpetuate the tax inequality we have in the UK where the wealthy pay no bigger a share of their income in tax than most in the population do.

And as I have also shown, we could raise this money from additional taxes on wealth.

So what really irritated me about the Today report? It was the introduction that claimed that the IFS is politically independent. So it might be. But it’s a massive supporter of the status quo. And that’s not independent. Nor does it evidence thinking. And most of all, it largely disqualifies a participant from debate on change when they refuse to imagine the possibility of it happening. And that’s what the IFS is doing here.

Rant over. I’ve got through the security queue at Stansted where most of this was written. I need coffee.

PS The BBC asked me to go on television about this but as I am speaking in Dublin this early evening that is not possible. 

Doing something right

Published by Anonymous (not verified) on Thu, 24/05/2018 - 3:17pm in

The Tories have launched a new think tank, called 'Onwards'. They have featured in an interview in The New Statesman.

My first reaction was to wonder what they were marching towards apart from oblivion.

My second reaction was amusement. When the think-tank's creator, MP Neil O'Brien, was asked about Labour The New Statesman reports :

How did he respond to opinion polls showing widespread support for Labour policies such as the renationalisation of the privatised utilities? “You’re promising loads of free stuff to people, of course it’s popular!” O’Brien said.

And then noted:

But did Labour’s 2017 manifesto not owe more to social democracy than Marxism? “It’s not in the social democratic mainstream to borrow £250bn through people’s quantitative easing – it’s totally crackers,” O’Brien said, referencing Corbyn’s 2015 proposal for banks to print money to finance state investment.

The New Statesman then pointed out that:

The £250bn, it should be noted, would be spread over a decade and Labour does not currently support people’s QE.

It could, of course, have added that the Tories had done substantially more QE to support banks.

But let me just note that I still seem to have contributed the Labour policy the Tories most dislike. That's got to be considered doing something right.

The digital crack down on crypto: what does the future hold?

Published by Anonymous (not verified) on Thu, 24/05/2018 - 7:45am in

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Economics

Here in Australia, a financial scandal involving the Commonwealth Bank of Australia sparked reforms to strengthen the anti-money laundering laws to include the likes of Bitcoin.

Was uns Marx heute noch zu sagen hat

Published by Anonymous (not verified) on Thu, 24/05/2018 - 4:02am in

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Economics

 

Phishing for Phools

Published by Anonymous (not verified) on Thu, 24/05/2018 - 2:13am in

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Economics

As always a pleasure listening to this great and sympathetic economist! [The book is an interesting and enjoyable read, but perhaps not as ‘innovative’ as the authors seem to think (especially vis-a-vis ‘behavioural economics’ they​ — unconvincingly​ — maintain their approach is “much more general” and in the spirit of “general equilibrium analysis.” That kind […]

EU law lets the UK renationalise its railways

Published by Anonymous (not verified) on Wed, 23/05/2018 - 6:09pm in

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Economics, Europe

The following article is by is a researcher in urban transport governance at the Centre for Transport Studies, UCL. It was published on The Conversation and I republish it here because it answers a question often asked. Republishing is permitted by The Conversation:

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The UK government has announced that it will take control of the failing East Coast train line. The franchise will now end in June 2018 – only three years into its eight-year contract. Twice before, in 2006 and 2009, the private company running the route from London to Edinburgh ended their contract early.

This has intensified calls for Britain’s railways to be renationalised – a manifesto pledge of the Labour opposition in the 2017 national election. It is a policy surveys suggest has strong public support.

Yet, whether and how renationalising the railways might be achieved depends on the final Brexit deal the UK strikes with the European Union. Under current EU competition policy, Britain could not recreate a railway monopoly. It could, however, bring much of the rail sector into public ownership.

The British model

Britain’s railways are a three party affair: the infrastructure manager, the train service operators and the train leasing companies. Network Rail is the public body responsible for track maintenance and investment. Its predecessor was a for-profit company that was replaced following a series of fatal train crashes attributed to poor track maintenance.

Train service operators – all the rail company names you encounter on your commute – are a mix of subsidiaries of other European national rail companies and private companies. They run train services, earn money from tickets sales, pay a track usage fee to Network Rail, and hire the trains from a train leasing company.

Britain’s railways use a competition-for-the-market model. This means that instead of competitors running the same services alongside each other and vying for passengers, the competition is to win the contract to run part of Britain’s railway network for usually five to ten years.

Broadly, railway routes fall into two categories: commercially profitable and public service. Train service operators make payments to government to run commercial routes, while receiving subsidies to run public service routes. Often the bidder most optimistic about passenger numbers – therefore, promising the best deal – wins the contract.

The House of Commons Public Accounts Committee concluded in April 2018 that overly optimistic passenger forecasts were to blame for the collapse of the East Coast mainline franchise.

The franchise’s repeated collapse highlights two key flaws with Britain’s rail model: it incentivises overestimating to win bids, and the government ultimately holds all the risk. Since transport plays too vital a role in keeping the economy going and all of us moving, the government cannot allow the railways to stop running.

EU rules

The key EU rule governing how member states run their railways is that the management of infrastructure and rail services must be separate. Another is that where a rail route has spare capacity, available time slots to run new services should be open to any operator to purchase. Notable services using this mechanism are the Eurostar and Heathrow Express.

These two key requirements stand in the way of recreating a unified rail monopoly. But, as other EU member states show, the majority of Britain’s railways could be brought back into the public sector.

The EU Commission argued that greater competition on the railways will improve services and reduce fares for passengers. For the past three decades, it has applauded Britain’s railway privatisation and encouraged others to follow Britain’s example.

Key to enabling fair competition on the railways is non-discriminatory track access. For this reason successive EU railway reforms have pushed for independence of infrastructure management. When unveiled in 2013, the EU Commission’s latest railway reforms, the Fourth Railway Package, set out to impose strict institutional separation of infrastructure and rail services, adopting the franchise model on all routes.

But after several years of debate and notable push back from European governments and railway operators – in particular the German Deutsche Bahn and French SNCF – a watered-down version of the Fourth Railway Package passed in 2016. It now only requires infrastructure to be independently managed and allows some public service routes to be directly awarded, specifically where a direct award would lead to better quality or cost-efficiency. This is how many regional services are run by national operators. On all other routes the operator is to be determined by competitive bidding.

Different ways to renationalise

Other European nations demonstrate how Britain could take the railways back into the public sector while abiding by EU rail rules. There are two main adopted models. The first is two separate state-owned companies (one for track, one for trains), which is used in Spain and the Netherlands.

The second uses separate companies within a state-owned group of companies (a parent company with a subsidiary company for infrastructure, and others for different train services). This is the model used in Germany and Italy.

Switzerland illustrates how Britain’s railways could be renationalised if the UK negotiated an exemption from opening up its railways to competition as part of its Brexit agreement. The Swiss Federal Railway is an example of a unified national railway company that brings together track and trains.

The Japanese model is another alternative that could be adopted if the UK were free from the requirement to separate track and trains. Japan’s railways are divided into regional units. Each unit has an integrated management of track and trains and is operated by one company (some privately, some government run). It is a model the current transport secretary of state, Chris Grayling is keen to see implemented on Britain’s railways.

Britain’s railways are already partial nationalised, as Network Rail is a public body. Although, reinstating a national rail monopoly under current EU rules would not be possible, there are ways that Britain could return many of its railway services to the public sector – Germany, Italy, Spain and the Netherlands all show how this can be effectively done.

If only we had politicians who could talk about economic reality

Published by Anonymous (not verified) on Wed, 23/05/2018 - 5:49pm in

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Economics

Danny Finkelstein has an article in The Times this morning under the heading:

Labour’s war on capitalism will end in tears

It's all trite nonsense about John McDonnell wishing to overthrow capitalism and Venezuela being his supposed role model.  So far, so much a strawman argument,  even if the Tories still know that these work to their advantage, and too many in Labour really do not do enough to kick them into touch.

What should be said? Three things.

First, capitalism is killing itself.  Since, as a matter of fact, capitalism depends upon the existence of markets in which there are many participants, and the whole trend within our current economy is for there to be fewer and fewer meaningful participants,  with the sole remaining companies servicing some sectors looking more and more like monopolists with the absolute power to abuse consumers for their own private gain, then  capitalism is dying from within.  It needs no help from Labour to destroy itself: its already doing that.  In that case the question for the Tories is what they're going to do to preserve capitalism,  because right now it appears that they are only preserving abuse.

Second,  in that case it is for the Tories to say what they going to do to regulate markets to ensure that they are effective when every current trend shows that markets are trying to destroy competition which is the only thing that neoclassical economic theory says makes them efficient.  In other words,  the Tories have no right to suggest that they will stand back and watch capitalism work precisely because capitalism is not working and the only thing that might help it do so is government intervention.

Third,  it is absurd to claim that either capitalism or socialism provides a single, simple answer to the future nature of the UK economy.  The truth is that the free market is a myth: there is, quite simply no such thing, and nor can there be without effective regulation. And at the same time, there is absolutely no appetite in the UK for a socialist economy where the right of a person to undertake trade on their own account, or with others, is denied.  Nor can I see the Labour Party proposing this.

To put it  in a nutshell then,  Danny Finkelstein's argument is nonsense,  because he's discussing something that Labour is not proposing.  And, anyway, Labour is not discussing a purely socialist future precisely because there is no chance that this would be acceptable to most in the United Kingdom.

What we actually live in is a mixed economy.  It is inevitable that this is what we will have for as long into the future as anyone can concurrently foresee. In that case  if we were to have politicians ( and  Danny Finkelstein is, I would remind you, a Tory member of the House of Lords)  who were to actually talk sense then they would be discussing the required regulation of markets and the appropriate boundary between state and private sector  in the columns of The Times,  and would not be wasting their time was spurious arguments about suggestions that neither exist, and will never happen.

But we don't have politicians who talk sense.

And as a result, we get discussion of economic issues that are of no consequence.

And we get absurdly poor politics.

And yes, that does annoy me.

International Financial Reporting Standards are not fit for purpose in general-purpose financial statements: Carillion was the result

Published by Anonymous (not verified) on Wed, 23/05/2018 - 5:11pm in

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Economics

As the FT reports this morning:

The UK government ignored advice to put Carillion on its highest risk rating before its collapse in January, following pressure from board members of the now-bankrupt company that was a major supplier of outsourced public services.

If you wish for more information on the story, it's in plenty of newspapers.  My belief is that we need to stand back from it and look at precisely what this story means.  There are, I suggest, three dimensions to it.

The first is that inappropriate lobbying takes place,  and it would appear that the civil service was susceptible to it.  That is not my primary concern this morning.

Second,  as is now obvious, the risk warnings about Carillion were raised far too late in government circles.  It is appropriate to ask why.

Third,  although not apparent from the above quotation,  what the Public Accounts Committee report that underpins it makes clear is that there were just four potential ratings for a supplier of outsourced services to the government.  These were green, amber, red and black:  the last being the clearest indication that there was a previous three-tier system to which somebody thought a higher risk rating needed to be added.

Let me offer some thoughts on this, starting with the third issue first. What the simple indicator used demonstrates is that even supposedly sophisticated users of financial information are not able to analyse them in any complex fashion.  I stress before the inevitable naysayers get in that the civil service will not be alone in this: we humans are simply not very good at handling complex data and resort to heuristics as a result.

What I also stress is that there is nothing wrong with this:  better a heuristic than no indicator at all.  The four-level risk indicator used might well have been appropriate if suitable data to make sure that the appropriate risk warnings were given had been available.

This then brings me back to the second point,  that risk warnings were given too late. Part of this may, very clearly,  have been the result of lobbying:  indeed, I strongly suspect that is the case. But there is another dimension to this,  and that is that the accounting data put out by Carillion was simply not fit for the purpose for which it was used.

In fairness to Carillion,  this was not their fault.  The information they produced was deemed appropriate by International Financial Reporting Standard and their auditors,  whose sole real task is, these days, to ensure that they comply with those standards.  But the reality is that the company, its internal accountants, the International Accounting Standards Board who produce International Financial Reporting Standard  and the auditors  all knew  that the data that they produced was not intended to, and probably could not, meet the needs of the government in appraising the risk that it faced in contracting with Carillion. This is because IFRS  accounts are quite specifically not designed to fulfil this task.  I know this because the conceptual framework for IFRS says (in summary):

The primary users of general purpose financial reporting are present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources.

The paradox will be apparent:  what the IFRS  call ' general-purpose financial reports'  are in fact decidedly specific information designed to suit the needs of a tiny proportion of the users of financial statements.

The IFRS conceptual framework then keeps digging holes for itself, saying:

The IFRS Framework notes that general purpose financial reports cannot provide all the information that users may need to make economic decisions. They will need to consider pertinent information from other sources as well.

This, of course, is a statement of pure contempt. The IASB  knows that the company only publishes one set of accounts and that there will, therefore,  be no alternative source of information on the financial affairs of the company for most users, but it does nonetheless tell them that they  are on their own  when finding it, knowing full well it will never be available.

Now, of course, it is true that a government who is a major contractor to a company could ask for additional financial information to support the contracts given.  I do not dispute that.  I rather hope it happened.  But the fact is that the government was seeking to test the solvency of the company when moving Carillion to a high-risk status and the only useful information available for that purpose is the overall financial statements,  which in this situation were not designed to fulfil that goal.

The International Accounting Standards Board claims that its International Financial Reporting Standard will result in general-purpose financial statements of use to the public.  Rarely has a more misleading claim been made. IFRS  accounts are not general-purpose financial statements;  there are tools designed to assist high-frequency stock market speculation. And since most of the public does not participate in that activity for the vast majority of users of financial statements the information provided by IFRS  accounts is knowingly not fit for purpose.

As a result nor is the International Accounting Standards Board.

And nor should accounts based on International Financial Reporting Standards be deemed acceptable in UK company law.

As long as they are we will get more Carillions.

Postcapitalising post carbon for the win

Published by Anonymous (not verified) on Wed, 23/05/2018 - 7:55am in

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Economics

Postcapitalism is not about inventing something new or imposing unrealistic utopias but is about building on existing movements, emerging successes and resilient ecosystems.

Leicester – June 12

Published by Anonymous (not verified) on Tue, 22/05/2018 - 10:39pm in

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Economics

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