The Isle of Man denies it’s subsidised by the UK without ever addressing the issues I have raised

Published by Anonymous (not verified) on Wed, 15/11/2017 - 6:52pm in



It’s a bit over a week since I raised the issue of the Isle of Man’s continuing subsidy from the UK to be a tax haven.

Since then the issue has been addressed in the Guardian and in a House of Commons adjournment debate.

Today there is an excellent review of the Isle of Man and its tax practices in the Guardian today. I recommend it, not least for the revelations about the sheer nastiest of the place.

As interesting is the response in Isle of Man Today. The ritual rebuttal is offered:

In a statement, the Manx Treasury said: ’The Isle of Man is not being subsidised by the UK.

’FERSA is in place to ensure the Isle of Man and the UK get their fair share of the revenues they collect for each other.’

Except they don’t. And in the remainder of the statement they utterly failed to address the issues I raised, which is the surest sign there is that they’re on target.

This one has a while to run, again.

Links for 11-14-17

Published by Anonymous (not verified) on Wed, 15/11/2017 - 5:34am in


Economics, Links

Getting the rabbit into the neoclassical​ hat

Published by Anonymous (not verified) on Tue, 14/11/2017 - 11:16pm in



In public, including in the training of economists, Neoclassical economics usually reads its models backwards. This gives the illusion that they show the behaviour of individual economic units determining sets of equilibrium values for markets and for whole economies. It hides the fact that these models have been constructed not by investigating the behaviour of […]

We’re heading for a Customs melt down as HMRC fail to plan for Brexit

Published by Anonymous (not verified) on Tue, 14/11/2017 - 8:32pm in


Economics, Europe, HMRC

The Public Accounts Committee of the House of Commons has just (9am) published a consensus, all party, report suggesting that it would be catastrophic if a viable Customs system was not in place at the time of Brexit. It added:

The Government must address risks and ensure contingency option in place well before January 2019

The report’s summary says: 

Under current plans, the UK is set to leave the European single market and the customs union in March 2019. It would be catastrophic if HM Revenue & Customs’ new customs system, the Customs Declaration Service, is not ready in time and if there is no viable fall-back option.

In 2015, around 55 million customs declarations were made by 141,000 traders. The UK’s exit from the EU could see the number of customs declarations which HMRC must process each year increase five-fold to 255 million. A failed customs system could therefore lead to huge disruption for businesses, with delays potentially causing massive queues at Dover and resulting in food being left to rot in trucks at the border.

This is a programme of national importance that could have a huge reputational impact for the UK if it is not delivered successfully.

The uncertainty regarding the outcome of UK-EU negotiations is a complicating factor but it should not be used by HMRC to avoid taking action now in areas including: scaling up the CDS service to handle 255 million declarations; ensuring a viable contingency option is in place well before January 2019; and communicating with traders.

There are financial as well as operational implications of not acting now. This is a tight timetable at the best of times. With the hard deadline of Brexit, delay is not an option.

The Treasury needs to ensure there is funding in place to develop contingency options so that there are no barriers to continuity of service. HMRC also needs to do a lot more to work with the many businesses affected.

Much remains to be done to have an effective Customs Declaration Service in place, on time, and that traders know how to use.

We intend to keep a close eye on this programme and expect to review progress early in the Summer of 2018, following a further review by the NAO.

As Meg Hillier, who chairs the committee noted:

Failure to have a viable customs system in place before the UK’s planned exit from the EU would wreak havoc for UK business, trade and our international reputation. Confidence would collapse amid the potentially catastrophic effects.

HMRC is under considerable pressure to deliver the new Customs Declaration Service in time, but it does not yet have funding to increase the capacity of CDS to deal with the consequences of Brexit – nor to develop contingency options.

This is deeply worrying. HMRC requires a relatively small sum to upgrade the current CHIEF system – a move which would provide some peace of mind to traders, many of whom are still operating with limited information and in great uncertainty.

HMRC tells us it is merely ‘in conversation’ over CHIEF upgrade costs when, on behalf of business and the British public, it should be banging on the doors of the Treasury.

HMRC must press the case to secure this funding now and ensure that, if other plans fail, customs will be fit for purpose.

So let’s be clear what is going on here. The government is driving us, inexorably, towards a cliff edge and is at the same time refusing to plan for that fact, and the costs involved, with the inevitable consequence that economic mayhem will follow.

There is no point pretending, as some do, that this is any indication of competence: it is not.

And there is equally no point pretending that this is not happening: the PAC has a history of telling things how they actually are. Of all parliamentary committees this one has a proud record in this regard.

So there is a crisis coming, and it’s in IT systems, where HMRC has an appalling track record.

But it’s more than that. It’s also about recruiting and training all those who will have to make those, now nigh on inevitable, declarations, because right now the skills do not exist in the private sector. And it is also about recruiting those who will appraise them in HMRC, which will be no small task. It’s hard to see how that is going to happen now. And yet what this report says is that the thinking required to even start the process has not yet been undertaken.

I have understated my case on the risks that we face. The existential and political risk may be gargantuan. But I am out of words to describe the mayhem that may hit the economy.

My advice is simple: if you have the room and the budget start stockpiling tins from late next year. I will be. It’s always food supplies that are the literal weak under belly of a nation, and ours will be at risk. A bit of panic buying in response to that and who knows what will be happening by April Fool’s Day 2019.

It’s time to borrow Mr Hammond

Published by Anonymous (not verified) on Tue, 14/11/2017 - 8:13pm in


Budget, Economics

The FT would seem to have an important message in its pages for the UK Chancellor this morning. As they note:

The UK bond market has an attractive message for the current chancellor: you can loosen the purse strings. Yet when Philip Hammond stands up at the House of Commons despatch box next week, he is likely to reiterate his reluctance to increase public spending, despite conditions in the gilt markets suggesting there is scope to do so.

The market is “much more relaxed than Treasury may think about the outlook for the public finances”, says David Owen, chief European economist at Jefferies. “The public finances have improved and importantly, the UK has voted to leave the EU and there is more focus on the need for a targeted fiscal response to give growth more of a chance.”

There is plenty of other comment to support the opinion, backed by evidence of strong demand for bonds. Again, as they note:

Although real yields remain negative — two-year paper is trading at around 0.48 per cent, a discount to the 0.5 per cent base rate of borrowing set by the BoE — investor demand for gilts remains strong. Last week’s long-dated index-linked syndication saw record demand.

And this is despite the plethora of negative yielding debt in the world right now. As another FT article notes this morning the scale of this debt is significant:

What does this mean? Three things. First, government debt is not squeezing out the private sector, which is the old so-called free marketeers’ paranoia. If $11trn of money is willing to receive a negative return that is because there is nothing else for it to do. Capitalism has not a got a use for it. That’s why it’s been lent to the state as borrower of last resort.

Second, if capitalism has no use for this money it’s a forlorn hope to think that markets will solve our current economic woes. Whether those woes be slow growth, limited innovation, low wages, or a balance of trade deficit the private sector will not address the issue because quite clearly there is capital in the world looking for a home and the private sector has no use for that money. To put it another way, the private sector’s out of ideas.

So, thirdly, the state has a duty to use this money constructively. And that does actually mean more spending.

And yes, I know that the private sector want this to push up yields. Well, they may rise anyway: Brexit and the Bank of England’s simultaneous desire to create a household debt crisis may deliver that. I don’t happen to think a bit of extra borrowing will. And why not? Because those depositing money in gilts know that the spectre of QE is always present now. And they’re mighty grateful for it. It’s QE that guarantees the value of this debt and reduces it’s yield to next to nothing. And the threat of QE means that gilts can now be used to finance the Green New Deal that we need. If only.

Brexiteers: driving us to hell in a handcart on the basis of unsound reasoning

Published by Anonymous (not verified) on Tue, 14/11/2017 - 7:04pm in


Economics, Europe

I got a note from someone who I have known for a long time yesterday. He was writing in response to my suggestion, also made yesterday, that the political crisis that we face as a result of Brexit is gargantuan. Since I am bound to reply, I will share my thoughts here, simply anonymising the identity of the commentator in this occassion. This is what he wrote:

Dear Richard

I’m not sure I agree with you on Brexit.

I think Theresa May is making a better fist of Brexit than any other politician serving this realm could do. She is hated by the Press, who go around like a wolf pack, all thinking the same stuff, as usual, about the westminster reality, if reality it is. I’m fed up with the slavering anti-ness of her deriders. They’re beginning to look a bit unBritish and just a bit foolish.

There is no worry about the Irish border in any thoughtful mind: the Norwegians and the Swedes showed the way many years back. Its not that difficult.

When we are out of the EU we will be as beholden to their Courts as to any other countries with whom we have cross citizen residency issues. ie, our Courts will decide here and theirs in their lands. They know that, our legal lot know that.

Of course the EU wants as much money as it can screw out of us – that’s as plain as a pikestaff. They will dikker until the last second and beyond – that is how they have behaved for years when doing deals. If our lot keep the cost recognizably lower than their greed desires, they will be seen in the UK mind as having done a decent job.

Getting tax paid in country on business done and profits earned in country is far far far more important, and group think that it must be done is not quite there yet, though it is really growing and could get there.


I would add, the person in question is no fool. He’s had a long career, and been a director of quite large companies. His experience would normally demand that I should take his comments seriously.

I regret, that much as I would like to I cannot, in all conscience, do that n this occassion. I cannot recognise a great deal of reality in what he has said to me.

First, and as a minor aside, I resent the accusation of being called unBritish and just a bit foolish for thinking that breaking our trading relationships with just about all nations on earth without any known obvious alternative (given that almost no-one uses WTO rules, for what must be good reason) is a matter of inconsequence. Apart from the fact that I have never felt very British, because the term excludes any consideration of Ireland and is therefore inappropriate in my opinion, to worry about a clearly foreseeable outcome which is very obviously unattractive because of its implications for large parts of the UK economy appears wise, and not foolish. It was not a good opening shot.

To then suggest Theresa May is doing better than anyone else might do is interesting. Three comments follow. First, clearly this is not true, because it’s not the media that is telling me she’s making the most almighty mess of this; straightforward observation lets me reach that conclusion. Second, I think there may be others able to do this much better, but that they would not wish to do so simply because the action is so unwise. Third, if the observation is true then it says that the quality of those politicians committed to Brexit (and there are few enough of them, maybe for good reason) is so low that the question has to instead be asked why that is the case.

As for the Irish border issue, I found this comment very hard to take seriously. The comparison with Norway and Sweden is naive. First, they never had an EU / EU border and so there never was such a border to unwind, as there will be now in Ireland. Second, in that case all they had to work out was how to adapt national borders to a non-EU / EU border, which is very much easier than actually erecting a border when there has, in effect, been none. And, third, to ignore the political history of this border is very British, and deeply foolish. The suggestion made shows a remarkable lack of understanding of any of the issues involved, in my opinion, and I have not even got near the technical ones.

The comment on the rule of law is equally naive. It presumes that there are no cross border issues to resolve. To hold true the comment made would require everything to happen to discrete people who only ever exist in one place without consequence in another. But of course that is not true. We exist in more than one place and the relationships between legal systems matter the moment we cross borders. And that extends to business across borders, of course, where it is invariably the case that contracts (unsurprisingly) specify a law that must apply to resolve disputes or different decisions on one issue might arise in different countries without a mechanism to resolve the resulting conflicts. Again, unsurprisingly, that extends to a myriad of issues for governments where, very obviously, there have to be mechanisms to resolve disputes and local courts are not always considered the appropriate place to do this. Our ‘legal lot’ most certainly do not know what my correspondent claims. I think they know the exact opposite.

Regarding money my corespondent is right. The EU want money. I agree with him; they do, and lots of it. But then, so would I if I was the EU. If I was them and I had seen the UK commit to a spending plan from which they seek to withdraw I too would want the commitment made honoured. That would be because if this was a commercial matter then the UK would quite clearly be in breach of contract by trying to withdraw and not pay now. And so it will be politically as well if it does not pay. I have never had much time for those for whom their word is not their bond. And the UK is going back on its word here. Quite rightly the EU member states are livid. And that’s why we have no hope of a soft landing with them in the case of a hard Brexit. I’m wholly on their side because I know, if in their shoes, that’s how I would feel. But in that case the definition offered of a good deal for the UK is that we’ve got away with welching on our neighbours who will resent us for a generation or more as a result. If that’s a good outcome, heaven help us.

As for tax, I suppose I have just one question, which is what’s that got to do with it? I think tax is important. But getting tax paid is inconsequential if the tax base has disappeared. And, in any case, the Brexiteers appear to be the most ardent enthusiasts for tax havens and the exemption of large companies and the wealthy from tax that there are in the UK, so Brexit offers no hope on that front in any event.

So why have I bothered replying? Because if this profoundly hollow set of arguments is the best that someone of usually sound mind can come up with to disagree with me on regarding this issue then I am, if anything, even more worried than I was beforehand. Brexiteers aren’t just driving us to hell in a handcart, they’re excusing themselves from the requirement for sound reasoning when doing so. And that is very depressing.

FRBSF FedViews

Published by Anonymous (not verified) on Tue, 14/11/2017 - 10:45am in



 "A major contributor to low inflation is the health-care services sector":

FRBSF FedViews: Adam Shapiro, research advisor at the Federal Reserve Bank of San Francisco, stated his views on the current economy and the outlook as of November 9, 2017.

Moderate growth forecast

Despite disruptions from the recent hurricanes, real gross domestic product (GDP) has continued to grow at a moderate pace. After a strong second quarter, real GDP grew at an annual rate of 3% in the third quarter, according to the “advance” estimate by the Bureau of Economic Analysis. We forecast that GDP will grow in the fourth quarter at an annual rate of 2.6% and average 2.5% for 2017. As monetary policy continues to normalize over the next two to three years, we expect growth to gradually fall back to our long-trend growth estimate of 1.5%.

The recent fires in Northern California were the most devastating in the state’s history, causing billions of dollars in property damage, thousands of displaced residents, and tragic loss of life. While the full effect of the fires on the local economy is still being determined, the economic impact on the entire United States is likely to be modest as the affected areas are not sizable business or population centers.

Payrolls pushed down by hurricanes

The U.S. economy added 261,000 jobs in October, reflecting not only individuals returning to work who had been kept home by the hurricanes, but also the strong labor market. Job gains have averaged close to 160,000 over the past six months, well above the amount needed to absorb the flow of new workers into the labor force.

Unemployment below natural rate

The unemployment rate stands at 4.1% as of October. We expect the unemployment rate to decline below 4.0% by the middle of 2018 as the economy continues to strengthen. Monetary policy accommodation will ease over the longer run, and we expect the unemployment rate to gradually return back to our estimate of the natural rate of 4.8%.

Yield curve flattening

The yield curve continues to flatten as short-term rates rise while longer-term rates remain relatively steady. At the November meeting, the Federal Open Market Committee (FOMC) kept the target range for the federal funds rate unchanged at 1 to 1.25% and announced it is proceeding with the balance sheet normalization process initiated in October.

Inflation remains below target

Inflation continues to remain below the FOMC’s target of 2%. The personal consumption expenditures (PCE) price index rose 1.6% over the past 12 months, while the core PCE index, which removes volatile food and energy prices, rose 1.3%. As the labor market continues to tighten, we expect inflation to gradually reach the FOMC’s target of 2% by 2019. 

Low inflation due to industry factors

Inflation fluctuates with the overall economy but also in response to factors that are more industry specific. The degree of price sensitivity to overall economic conditions and other factors varies across sectors. Prices in some sectors, such as housing, restaurants, and recreation services and goods, are relatively more sensitive to overall economic conditions, while prices in other sectors, such as health-care, financial, and communications services, are relatively more sensitive to industry-specific factors.

The inflation rate for prices in sectors that tend to be sensitive to the overall state of the economy have moved back up to pre-recession levels, in line with the improvement in economic conditions. By contrast, the inflation rate has fallen for sectors that tend to be more sensitive to industry-specific factors and is currently holding down inflation.

Health-care inflation remains low

A major contributor to low inflation is the health-care services sector, which currently makes up about one-fifth of core personal consumption expenditures and tends to be relatively insensitive to economy-wide conditions. Health-care services inflation has declined steadily, falling from an average above 3.0% in the mid-2000s to close to 1.0% over the past five years. 

Medicare payments flat for 5 years

The decline in health-care services inflation is mainly attributable to ongoing mandated cuts to Medicare payment growth, which also tend to affect payments in the private health-care market. Medicare payments to hospitals, for example, have been flat for the past five years. Some of the payment growth cuts are permanent, which are likely to cause some continued drag on inflation in the future, despite a strengthening economy. 

The views expressed are those of the author, with input from the forecasting staff of the Federal Reserve Bank of San Francisco. They are not intended to represent the views of others within the Bank or within the Federal Reserve System.

Taking Stock

Published by Anonymous (not verified) on Tue, 14/11/2017 - 10:34am in

Tim Duy:


Taking Stock, by Tim Duy: At some point every year I sense a need to reset and clarify my baseline views on the economy and monetary policy. This is that time. ...Continued here...

Did the Rise of China Help or Harm the US? Let's not forget Basic Macro

Published by Anonymous (not verified) on Tue, 14/11/2017 - 7:28am in



Douglas Campbell:

Did the Rise of China Help or Harm the US? Let's not forget Basic Macro: This is a question which was posed to me after I presented last week at the Federal Reserve Board in DC. Presenting there was an honor for me, and I got a lot of sharp feedback. It's also getting to the point where I need to start thinking about my upcoming AEA presentation alongside David Autor and Peter Schott, two titans in this field who both deserve a lot of credit for helping to bring careful identification to empirical international trade, and for challenging dogma. After all, before 2011, as far as I know the cause of the "Surprisingly Swift" decline in US manufacturing employment had not been written about in any academic papers. This was despite the fact that the collapse was mostly complete by 2004, and was intuitive to many since it coincided with a large structural trade deficit. (Try to explain that one with your productivity boom and slow demand growth, Robert Lawrence...) 

On one hand, there is now mounting evidence that the rise of Chinese manufacturing harmed US sectors which compete with China. This probably also hurt some individual communities and people pretty badly, and might also have triggered an out-migration in those communities. On the other hand, typically the Fed offsets a shock to one set of industries with lower interest rates helping others, while consumers everywhere have benefited from cheaper Chinese goods. Which of these is larger? I can't say I'm sure, but of these shocks mentioned so far, I would probably give a slight edge to the benefit of lower prices and varieties. However, I suspect, even more importantly, Chinese firms have also been innovating, more than they would have absent trade, which means the dynamic gains in the long-run have the potential to be larger than any of these static gains/losses you might try to estimate courageously with a model.

Many (free!) trade economists use the above logic (perhaps minus the dynamic part), and conclude that no policies are needed to help US manufacturing right now.  However, I think this view misses 4 other inter-related points, and in addition does not sound to me like a winning policy strategy for the Democrats in 2020. And a losing strategy here means more Trumpian protectionism.


On Econs and Humans

Published by Anonymous (not verified) on Tue, 14/11/2017 - 4:10am in



Many years ago, Thaler was hosting dinner for some guests (other then-young economists) and put out a large bowl of cashew nuts to nibble on with the first bottle of wine. Within a few minutes it became clear that the bowl of nuts was going to be consumed in its entirety, and that the guests […]