Ethics

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The inflation we are suffering is by government choice

Published by Anonymous (not verified) on Wed, 18/05/2022 - 4:45pm in

The ONS has published new inflation data today. The news is not good, although there is no surprise about that. This is the summary chart:

The Consumer Prices Index (CPI) is the headline rate everyone but the government refers to. The Office for National Statistics, acting as the government's disinformation department, prefers CPIH, which adds in literally made up (I kid you not) owner-occupier's supposed housing costs, and tends to be lower - as the chart shows.

The CPIH breakdown over time is as follows:

The change in the month was:

Household energy caused the change. There is no surprise there.

Four things can be done about this, all of which make sense when the goal of the government is to keep inflation low and stop it being embedded in the economy.

First, taxes and duties included in domestic energy costs can be cut so that the sum collected is a fixed sum equivalent to that paid in April 2021, and not a variable as now. There is no reason why the government should profit from what is happening in energy markets now, but it is and is revelling in doing so as this makes it easier to balance its books. This has to stop.

Second, electricity can be priced on the average cost of production plus a fair profit margin rather than on the basis of the marginal cost of the most expensive form of production, as used now, which seriously hikes prices.

Third, we could have a windfall tax, but they have voted against that.

Fourth, we need to increase benefits, pensions and low pay now, but they are vehemently opposed to that.

So, this inflation is by choice. It is not necessary at the rate it is being suffered at. Nor is the suffering resulting from it necessary. But the government seemingly wants both the profiteering (including by itself) and the suffering.

No wonder people are angry.

And no wonder that I have seen reports that banks are preparing for civil unrest this summer.

You can't force a population to suffer without good reason and not expect a reaction.

Venn diagrams for our times – Tories and ethics

Published by Anonymous (not verified) on Wed, 18/05/2022 - 4:21pm in

Tags 

Ethics

Why did the Tories vote to support profit over people?

Published by Anonymous (not verified) on Wed, 18/05/2022 - 4:17pm in

The House of Commons voted by 310 to 248 to oppose Labour's motion to impose a windfall tax on oil and gas producers last night.

As I read it, not a single Tory broke ranks to support the idea that people should be put before exploitation by the profiteering companies that are driving inflation. Not one.

I genuinely try to find the best in people. I find life easier to manage that way. On this occasion, I am struggling. I cannot think of a single reason why anyone would rather a pensioner freeze or a family be unable to cook food because the cost of energy is too high because the profit of a multinational corporation is more important.

And please no one tell me that they need this profit because they could not otherwise invest in green programmes, because that's nonsense. Those green programmes existed and were viable before this profiteering happened. Those programmes can pass all the required hurdle interest rates to ensure rational investment at rates of return sufficient to keep shareholders happy using readily available borrowed funds. And as a matter of fact, energy companies are not making those green investments anyway: they're searching for more oil to burn to guarantee that we have no future on this planet.

So why did the Tories vote to support profit over people? The only explanation I can offer is that their ideology - based as it is on callous indifference to the fate of most people - matters more to them than real people and I can find nothing good in that.

When will the government and Bank of England read the economic data properly and act on it? I wish I could answer that question. 

Published by Anonymous (not verified) on Tue, 17/05/2022 - 4:34pm in

The Office for National Statistics issued its latest survey on average weekly wages this morning. I offer two key charts here:

That looks reassuring. Except, of course for the fact that first of all by no means everyone gets bonuses, so the regular pay data is much more important, and second this is the nominal pay rise, ignoring inflation. Taking inflation into account this is the result:

As is now very apparent the regular real pay of people in the UK is now in negative territory when inflation is taken into account, and bonuses are not enough to compensate for that inflation.

Three things follow. First, we are not going to get demand-pull inflation in that case because most people will not have the cash to do that pulling. Only the wealthy have, which is why they should be targeted now with significant tax increases on the returns from wealth and investment.

Second, borrowers are already seeing their real earnings fall before any interest rate rises from the Bank of England.

Third, the Bank of England is deliberately making matters worse for those on lower earnings by seeking to tackle demand-pull inflation with interest rate rises when that demand-pull inflation does not exist and all that can follow from interest rate rises is more misery and more better-off people. They are literally doing the exact opposite of what is required.

When will people read the data and act on it? I wish I could answer that question.

Apart from imposing more misery the Bank of England has no ideas left

Published by Anonymous (not verified) on Tue, 17/05/2022 - 4:18pm in

Tags 

Economics, Ethics

As the FT has reported:

Bank of England governor Andrew Bailey on Monday said he was unable to stop UK inflation hitting 10 per cent this year, as he admitted sounding “apocalyptic” on food price rises.

As I tweeted yesterday:

The link in the third tweet was to my recent thread on this issue, available here.

As I added this morning:

In summary, the Bank agrees inflation is beyond its control.

It also agrees it has no appropriate tools to tackle the inflation we have.

It seems to agree that the inflation we have is of a type we have not seen before, as I have suggested. This is disaster capital inflation, not cost-push or demand-pull. Profiteering-exploitation inflation, if you like.

But Bailey said:

“This is the biggest test of the monetary policy framework for 25 years. This is when both the independence of the bank and the [2 per cent inflation] target matter more than ever.”

Except, of course, that they are not, because Bank of England independence is a sham and the 2% target is arbitrary. Both are just crutches for an economic policy that has achieved nothing for thirty years.

We need new thinking. I have offered it. But it's not going to be heard because the Right is intent on imposing hardship and Labour and the SNP are doing nothing of substance to oppose them, for reasons barely comprehensible.

What Andrew Bailey should be telling MPs today

Published by Anonymous (not verified) on Mon, 16/05/2022 - 5:25pm in

The poverty of Tory thinking is going to be very clearly on display this afternoon. Andrew Bailey, Governor of the Bank of England, is going to be quizzed in parliament. If The Telegraph is to be believed, Tory MPs are livid with him.

Their claim is that the Bank has one job, and it has not got it right. All they have to do is control inflation, and they have not done so. As a result those MPs are angry.

Don’t get me wrong: I have to agree with them to some extent. But my reasoning is very different to that of the Tory MPs.

First, until now we have had no serious inflation since the early 1990s, which was well before Bank of England independence. The reality is that they have never done their job: other factors have weighed on inflation instead.

Second, the biggest other such factor was the opening up of China, which produced a massively increased labour market suppressing wages but allowing increases in return to capital largely beyond inflation measurement that distorted society and rewards within it, but kept regulators happy. Nothing a central banker did had any impact on this.

Third, in reality, bankers were given only one tool to deliver on the task given to them, which was the control of interest rates. This tool is, however, almost useless when inflation is rising because it is far too blunt a tool to use without creating considerable social friction. And when rates are low it is also useless, because as has been seen for much of the period of independent central banks, rates had to be near zero, leaving them without impact.

Fourth, changing taxes was always a better tool to tackle inflation, with a much greater degree of finesses in the targeting and so the likely result, but this was (thankfully) never within the Bank’s remit.

Fifth, quantitative easing was never used as it should have been. It should have been used to inject money into the economy very largely as direct investment. Instead from 2009 to 2016 it was used to support banks and from 2020 it was direct government funding, which the Bank thinks it must now, quite bizarrely, withdraw. That’s because it wants a recession.

All of this shows that the Bank has never understood its role, and what it can achieve. Nor has it understood how ridiculous its brief is, or complained about it. There has never been complaint that the supposed independence it enjoys is nothing more than a charade, because it can always be over-ridden by the Chancellor. And there has been not a squeak about the absurd split between fiscal (spend and tax) and monetary (money supply and interest) policies when they so obviously need to be managed simultaneously, being reconciled through tax. That the Bank clearly does not understand (or denies) its role in the government spending cycle does not help either.

Andrew Bailey will in that case defend the indefensible from an impossible position this afternoon, making claim to a past record that is no credit to any central banker and suggesting he has solutions now when all he can actually deliver is economic meltdown, recession and serious social harm by continuing to increase rates.

What is the solution? It’s simple.

First, end the separation of economic management and bring fiscal and monetary policy back into the Treasury.

Second, make the Bank the issuer of notes and coin,; the agent of the Treasury on QE; the regulator of other banks and the supplier of central banking services to them.

Third, understand money and the actual spend and tax cycle.

Fourth, realise the supremacy of fiscal policy.

Five, use fiscal policy and simultaneously keep interest rates low to restrict upwards flows of wealth in the economy.

Sixth, put in place capital controls to stop the upward direction in house prices.

Seventh, deflate capital markets using seriously progressive taxation on wealth, including by reintroducing withholding on overseas holdings.

Eighth, tackle the real causes of inflation I discussed very recently here.

But let’s stop pretending we need an independent central bank to run the economy with bias to those already well off. We don’t.

Will Tory MP’s get that? I doubt it. But I can hope.

The government has got it very wrong if they think that deregulating the City is going to help right now

Published by Anonymous (not verified) on Mon, 16/05/2022 - 4:32pm in

As The Guardian reports this morning:

A group of 58 leading economists and politicians, including the former business minister Vince Cable, has written to the chancellor to say that scaling back City regulation will put the UK at risk of another financial crash.

The open letter, which has also been signed by the former Greek finance minister Yanis Varoufakis and Columbia University professor Adam Tooze, was sent in reaction to the Queen’s speech, which outlined Rishi Sunak’s plans to “cut red tape” through a financial services and markets bill.

I was one of the 58. The letter is intended to make these points:

  • We are worried because the government’s approach drags us back again into past mistakes. Having regulators focus on ‘competitiveness’ as an objective was, after all, found by the Treasury and parliament to have contributed to the 2008 financial crisis which cost the world economy some $10 trillion.
  • The choice to prioritise this during a cost of living crisis is also clearly totally out of touch. The last thing people need is their employment and what small savings they have put at risk by provoking another financial crisis. Polling evidence by charity Finance Innovation Lab shows 70% of people think such a policy is ‘out of touch & elitist’, and 9/10 don’t think it should be a priority.
  • On a basic level it’s clear the role of any financial regulator should be as a watchdog, not a cheerleader, and the public understand there’s something very dubious about changing that.
  • The reality of promoting ‘competitiveness’ will be to once again set the financial sector against the real economy, reducing real economic growth and instead encouraging short term gambling and risk taking, crowding out investment in small business and jobs.
  • The government says they want to ‘level up’, but the only ones to benefit from this policy are big multinational finance companies based in the City of London that want to gamble in pursuit of short term profits. It will suck money out of the rest of the economy, increasing inequality across the country, and dumping risks and consequences on the rest of us.
  • It also means an inevitable reduction in standards, as companies ‘race to the bottom’. This is one reason that a ‘competitiveness’ objective contributed to the last financial crisis, and it also means more corrupt and criminal money will end up in the UK
  • Instead of focussing on competitiveness, the government should be using this ‘once-in-a-lifetime opportunity’ (their words) to ensure that the future of financial regulation helps the financial sector play its part in tackling our real social challenges. Why not strengthen regulatory mandates to ensure that the sector contributes to our fight against climate change, overcome deep-seated financial exclusion, or to promote stable and sustainable economic growth evenly across the whole country? Those are the kind of objectives for the future of finance we can all get behind.

In other words, the government has got it very wrong if they thinkg that deregulating the City is going to help right now.

The full letter was as follows:

The government might be paying up to £40 billion a year in unearned money to banks very soon – and will cut jobs and benefits to pay for it

Published by Anonymous (not verified) on Fri, 13/05/2022 - 5:49pm in

Adam Posen, a former and still influential member of the Bank of England monetary policy committee has been arguing this week that the Bank’s base rate might need to reach 4%. Others are arguing for even more.

I think their analysis is completely wrong. But let’s for a moment consider one consequence of this. That is on the cost of what are called the central bank reserve accounts (CBRAs).

These are the bank accounts maintained by the commercial banks and some other financial institutions in the UK with the Bank of England that have two functions.

One use is to let banks pay each other - which they do through these accounts, meaning that we can in turn pay people who have money in other banks. This makes them essential to the operation of the banking system.

The other use is to assist the flow of money to and from the government. Over the last 13 years that flow has been very much from the government to the economy. Quantitative easing created almost £900 billion of new money. That money is transmitted to the banking system through these accounts. As a result, the balance on them is near enough that figure right now. The banks hold this money that the government created on deposit with the Bank of England. That is because all money is debt, and when the Bank of England created this money it created a liability owed to the commercial banks which they consider to be bank deposit accounts.

By convention, the Bank pays interest on these deposits. Until very recently this was paid at the base rate of 0.1%. The cost was less than £1 billion a year at that time: it was of no consequence.

If, however, the bank base rate increases to 4% or even 5% this cost will skyrocket. The cost might approach or even exceed £40 billion a year.

Let me put this in context. The government has announced today that it wants to cut 91,000 civil service jobs to say £3.5 billion at a rate of about £38,000 per job, including on costs. This is how disproportionate this interest cost is. It would quite literally suck the government of funds to provide welfare to banks to reward them for holding funds on deposit with the government when those funds were created by the government in the first instance and handed to those banks free of any charge for nothing being done in return. The idea that interest should be paid on this that will be used as an argument to prevent people working and the payment of benefits is hideous.

What can be done about this? The answer is easy. The rate paid in these accounts should be set independently of the bank base rate. I suggest 0.1% would still do just fine. And then the government will save up to £40 billion a year. There is literally no reason why it cannot do this. It would be entirely legal to do so, and we're all used to banks having different interest rates depending on circumstances.

Will this be announced as a way of constraining this cost? I doubt it. After all, why would a banker want to stop the flow of unearned funds to banks? So the Opposition should be shouting about this instead. Will they? Only when they break their own fixation with the Bank of England being the epicentre of virtue within the economy. Given that does not seem likely I fear that p[people will suffer as unearned money floods towards banks over the next few years.

If PWC want more legitimate tax systems this is what they need to do

Published by Anonymous (not verified) on Fri, 13/05/2022 - 4:15pm in

Tags 

Economics, Ethics

I spoke this week at a conference organised by PricewaterhouseCoopers on the legitimacy of tax systems. The conference was held under the Chatham House rule and as such I am not reporting what was said. I am, instead focusing on one particular issue that I raised.

My presentation focused upon the need to understand the tax system as a whole. As I explained tax is one of three or four funding streams for government spending, which I refer to as G in what follows. The funding streams are:

  • Tax (T)
  • The change in government deposit taking (often, and incorrectly, called borrowing) in a period (∆B)
  • The change in base money in a period (∆M)
  • Aid (A)

As a result:

  • G = T + ∆B + ∆M + A

This is an accounting identity: as a matter of fact, it must be right.

What this does, of course, mean is that it is impossible to say that tax funds government spending. However, it does not mean that there is no relationship between tax and government spending because there very clearly is. What the identity describes is a system in which tax, money creation, government deposit-taking and spending all co-exist in intimate relationship. Those relationships are macroeconomic, and what is clear is that if the system is properly viewed as a whole both fiscal and monetary policy are involved.

That is because, as I also explained, once tax is liberated from the idea that it is a funding source there are six reasons to tax:

1) To ratify the value of the currency: this means that by demanding payment of tax in the currency it has to be used for transactions in a jurisdiction;

2) To reclaim the money the government has spent into the economy in fulfilment of its democratic mandate;

3) To redistribute income and wealth;

4) To reprice goods and services;

5) To raise democratic representation - people who pay tax vote;

6) To reorganise the economy i.e. fiscal policy.

When asked to suggest how the legitimacy of tax systems could be improved my suggestion was straightforward. I proposed that PWC should, if it was committed to this issue, publish an explanation of how tax systems really work, and then provide detail of how tax fitted into the government financing cycle of every country in which PWC works – which is around 160 jurisdictions. This is data that they do, of course, have to know to work and offer advice in such places. The data would explain these processes:

The items highlighted in green are, in effect, an expenditure and income account. Breakdowns by type of income and expenditure would, of course, be required. Those in blue explain the funding used for this process and so form part of the balance sheet (capital, for money creation; liabilities for deposit-taking and equity via the income statement for aid).

Importantly, the accounting and decision-making processes with regard to tax revenues should be explained. This is a multi-stage process:

  1. The tax bases available to a government must be explained. These include:
    1. Income such as wages, profits, savings income, rents and dividends;
    2. Sales;
    3. Capital gains;
    4. Wealth;
    5. Land;
    6. Transactions;
    7. Minerals;
    8. Carbon;
    9. And so on.
  2. A tax ‘base rate’ for each base should be suggested. This is the standard rate at which it would be expected that a tax on this base might be applied. We are quite used to this idea as they are already in operation for most taxes in most countries;
  3. If it is decided not to tax a base then this needs to be explained, with reasons given;
  4. After that, detail of the cost of allowances and reliefs given, plus the benefits from higher rates of tax needs to be provided, with enough explanation by tax so that the major decisions taken in determining the reliefs and higher rate charges can be understood. This then suggests the theoretical tax take to be collected using the tax system actually in use;
  5. From this should be deducted the cost of tax avoidance, hopefully analysed by tax and cause;
  6. Then the cost of tax evasion should be deducted, analysed by tax
  7. After that t the cost of bad debt should be deducted, split by tax, which is the tax the government knows is owing but fails to collect despite that, with reasons for failure given,
  8. And that then explains tax actually paid, split by tax.

This provides the basis for some tax decision making, presuming you understand the rest of the funding cycle. I suggest PWC should or could make best estimates of these figures, or indicate why it is not possible to do so, as a result indicating areas of required reform that would be of use in itself.

Combining this data with that in the chart of the government revenue cycle what we would then know is:

  1. The amount of money created;
  2. The amount withdrawn from the economy again through tax;
  3. The increase in base money;
  4. The increase in funds deposited with a government;
  5. Any aid received;
  6. Borrowing in foreign currencies;
  7. What the government spent, stated in sufficient detail to understand that spending, including capital spending;
  8. What the government balance sheet looks like.

This is, of course, no more than requiring a government prepare a set of accounts. If multinationals can do this it is absurd that governments cannot. And if a government does not prepare such accounts then best estimates are needed to inform tax debate, not least to embarrass them into action by requiring that they do these things.

And then if you want really informed decision making you would add in tax spillover analyses. These, in the form designed by Andrew Baker and me, examine how a tax system undermines itself, for example by offering differential tax rates that encourage avoidance, or by underfunding of the tax authority that encourages evasion. It also explores how the tax system is undermined by other jurisdictions, and how in turn it might undermine them. The result is not just a risk rating, but also a clear plan of action for things that need to be addressed.

My suggestion to PWC is that they could massively increase understanding of tax by explaining all this. And they could as a result provide a massive public service by promoting the understanding of tax in its full context and by providing data, wherever possible, by jurisdiction so that better tax decision making could take place right across society.

Of course, PWC might say this is too hard, but I really would not believe them: if they do not have this ability then no one has, and I believe it is possible to make these estimates. I would understand though if they wanted to cooperate with others. I, for one, would be more than willing to partake. Critically, the aim would be to make this detailed, but still accessible.

I am hoping that this is an idea that they might just think is worth pursuing.  I am sending this post to PWC.

How did we end up with these bandits in charge? 

Published by Anonymous (not verified) on Thu, 12/05/2022 - 5:23pm in

It seems almost certain that the government will announce legislation to abandon the Brexit Northern Ireland protocol in the next few days.

No coherent lawyer I have yet noted has suggested that this is anything but a breach of international law.

The Attorney General has suggested parliament is supreme in the UK and can as a result legislate as it wishes, which rather misses the point, which is that this is about international and not domestic law. I am not also sure that I agree that parliament can legislate to break law.

Standing a little back from Tory self interest, which I very much doubt the Attorney General did, this move is almost impossible to justify. There are three reasons.

The first is that it was not any old government that signed this Protocol. It was Boris Johnson’s that did so as part of its “oven-ready” Brexit. There is no one else to blame but themselves if this deal is wrong. No one, whatever they might now claim, forced them to do so. And the deal was face up on the table. They are breaking their own law.

Second, the UK’s reputation will be shredded, even further, as a result. This will not just be in the EU. Washington will be livid about this.

Third, there will be a trade war, which will be incredibly one sided. The UK now has no effective border checks with the EU. Anything, including all smuggled goods, are waved through ports and no duties are paid, even if owed if the importer decides not to make a declaration. But the EU, unlike us, got its Brexit ducks in a row and has effective border controls. As a result it can impose sanctions on the UK, and no doubt will.

This is the last thing we need in the UK as recession bites. Our economy can only be hit harder still by the cost this will impose on exporters, when these are already down.

And then there is the cost in Ireland.

How did we end up with these bandits in charge?

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