Balanced Migration

As argued previously, both globalisation and the EU Single Market have created huge instability in both trade and migration. The majority of the British people now understand that it is not racist to want to bring uncontrolled immigration back into balance, but what would the necessary immigration controls actually look like, and would they be both fair and firm as well as both effective and civilized?

In fact our existing controls are far from being either effective or civilized. Border officials are often faced with having to make ad hoc decisions which inevitably are prejudiced and subjective. That is no more fair on them than it is on the unfortunate visitor, and it paints an embarrassing picture of this country. For example not so long ago a Jamaican woman turned up at Southampton wanting to donate a kidney to her brother who was waiting for it on dialysis in hospital. The border official did not believe her story and turned her away. Leaving aside the fact that a better trained official could easily have confirmed the story by a phone call to the hospital,  the possibility of such a situation should never have arisen in the first place. Then there is the case of the young man who came to this country with his parents from Germany when he was a toddler. His parents opted for him to keep a German passport as a connection with his roots, but despite the fact that he has spent all the rest of his life here he was recently told to leave. There must be a better way.

So here are a set of proposals which I believe would do the job. I have loaded them as a pdf file which you can download here. They go beyond the banner of “an Australian style points based system” and put some flesh on the bones. They are only a ‘catalytic’ proposal in that I am sure they can be improved further under peer review, but they are I hope a start.

Christmas greetings from Southall

UKIP Ealing Southall logo         AN OCCASIONAL NEWSLETTER

No. 2 : December 2016

Dear Ealing Southall resident (and quite a number of others!),

Festive greetings to you all. As before you are receiving this newsletter because we were in contact during the general election, possibly through the 38 Degrees organisation, or on some other occasion. If you would like to be removed from this circulation list please let me know.

The EU Referendum

2016 has been an historic year with victory in the EU Referendum and a fabulous 40% result in favour of Leave for the London Borough of Ealing, for which I am happy to share credit with our comrades at the Bruges Group and Vote Leave as well as the sound common sense of the voters. All the more frustrating then to discover that surreptitiously the Cameron government deliberately set it up to be only advisory and discretionary. Thankfully his successor, Theresa May, has now secured a vote in Parliament which would appear to commit it to supporting the result, so the verdict of the Supreme Court could turn out to be irrelevant. We wait with baited breath.

Gerard Batten, UKIP’s Mr. Brexit and MEP for London, has put together a full briefing here. And if you haven’t already read his renowned FAQ’s on Brexit you can get them here. I have also put up some ideas on constitutional reform on our branch website here. Happy festive reading.

Project Fear has nothing on reality

One of the more significant publications during the year was a book by Mervyn King, now Lord King and formerly Governor of the Bank of England from 2003 to 2013, entitled “The End of Alchemy” in which he traces the origins of both the banking crisis and the fall in growth to the massive international trade imbalances that have developed as a result of globalisation and free trade since the early 1990s. He makes it crystal clear that we must take trade deficits far more seriously than we have done in the past and ensure we eliminate our own.

A trade deficit is rather like a gaping hole in the bottom of our economic barrel. Jobs and consumer demand are constantly flowing out of it. So far the Bank of England has been able to top up the barrel again with quantitative easing. This works by reducing interest rates and thereby persuading people to borrow their future earnings to spend today. But as Lord King points out, sooner or later tomorrow becomes today and further borrowing becomes impossible as people have to start repaying the money they borrowed yesterday. As he puts it, diminishing returns are setting in.

Rather more vividly, it surely does not require a degree in economics to see that if jobs continue to pour out through the trade deficit, and as QE becomes progressively ineffective, the result will be a massive increase in unemployment. The only solution is to eliminate our trade deficit, but the policies required to do that – devaluation, import tariffs, balanced migration and possibly even selective protectionism – are only available through Brexit. Of course I am only talking about protectionism here if it can be negotiated (after Brexit), like a sort of inverted free trade agreement (FTA), and it may not be necessary anyway, but we are in a strong position to do so.

I include balanced migration in this list not for the usual argument that it is necessary to force employers to train up our youngsters and other vulnerable groups into employment, or to encourage them to invest in modern technology, valid though those points are, but that Keynesian management of demand, which has served us reasonably well since the war, becomes impossible without tight control of our borders. Right now the economy is overheating, but with the result that we are just sucking in yet more immigrants and imports rather than reducing levels of indigenous unemployment. The presumed indicator, inflation, is submerged in wage compression and therefore ineffective. Back in the 70’s we had stagflation, where any attempt to stimulate the economy just produced inflation. Margaret Thatcher’s union reforms put an end to that. Today we have staggration, where any attempt to stimulate the economy just sucks in yet more immigrants.

Yes I know the government are claiming unemployment is at its lowest levels for years, but they deceitfully and conveniently omit under-employment, including the many thousands who have been reclassified as self-employed, those in part-time employment who want full time jobs, and those who have been sanctioned off benefits for the flimsiest of reasons as part of austerity. The number of people on zero hours contracts has increased by 20% over the past year, indicating an expanding economy with a labour market so loose that employers can employ whoever they like however they like. Intervention and legislation will only push unemployment back up again. Employers have become so used to ministers pandering like prostitutes to them that their expectations have become totally unrealistic, and still they complain about shortages of skills. It will require a tough government committed to balanced migration to address these issues effectively.

Softies are caught in a trap. If they stimulate the economy all that happens in that immigration goes up. If they restrain the economy all that happens is that unemployment goes up. Just like stagflation in the seventies, except with inflation replaced by immigration. In my last newsletter I indicated that George Osborne had brought in a budget that would mean a million more unemployed. I had assumed he and Theresa May would act to control immigration and that he would make further progress in reducing the fiscal deficit as he had forecast. I was wrong. So we are seeing a massive increase in immigration and no progress on the deficit instead.

If economic meltdown does occur then it could lead to social and political meltdown as well. Armageddon.  UKIP stands as a bulwark for moderate, practical and balanced policies in the face of a possible rise in right-wing extremism. The British temperament has so far stood firm, but who is to say it will continue to do so if we don’t get a clean Brexit before 2020. Hopefully in that event we will just get a re-run of the referendum, but we must not be complacent that we can continue to hold the tide against a rise of the sort of fascist parties we now see coming to the fore on the continent. Societies under pressure polarise. Frustrated people get angry.

One point on which Remainians are right, albeit accidentally, is that economic conditions will continue to be difficult in the immediate aftermath of Brexit. We will have to absorb inflation caused by devaluation, import tariffs and wage rises in order to achieve balanced trade and balanced migration, reducing living standards a bit more and perhaps also requiring some rise in unemployment, before we can confidently put our foot back on the accelerator. I see Brexit in the same light as El Alamein, of which Churchill famously said “This not the end of the war. It is not even the beginning of the end. But it may just be the end of the beginning”. Not exactly “blood, sweat and tears”, but similarly requiring true British patience and grit to see us through. Never forget that the bulk of the establishment in 1940 wanted Halifax as Prime Minister. Halifax wanted ‘to get the best deal’ with Hitler, a sort of ‘soft’ Third Reich you could say. Thankfully we never found out how that would have played out. And no, I am not equating the EU with the Third Reich!

You can find more in my article “There is no such thing as a soft Brexit” on our branch website.

The Free Trade fanatics are out in force – on both sides!

Valuable as Lord King’s book is as an historical narrative and analysis, he comes off the rails with his prognosis in which he recommends yet more free trade. I have dealt with this issue more fully in my personal blog article entitled “Do I believe in Free Trade?” which I hope you will read.

Essentially the classical arguments in favour of free trade, which revolve around increased competition, economies of scale and specialisation, no longer hold true. The practice of offshoring has undermined them. Not only are multinational corporations now offshoring production (farewell economies of scale) but they are also offshoring know-how in the form of R&D and design (farewell specialisation). And if that weren’t bad enough they are offshoring their profits as well, leaving their host nations with nothing.

What we are seeing now is not so much the creation of new wealth but a massive transfer of existing wealth to third world countries as a result of globalisation and unbalanced free trade. Of course it is wonderful that we can now anticipate the ending of global food poverty by 2030, and that millions have been lifted out of poverty in China and elsewhere, or that global population is now expected to peak at under 11 billion before the end of the century. Anybody who predicted these things 30 years ago would have been carted off by the men in white coats. But let us not kid ourselves that most of this is not at the expense of the western working classes. The real twist of the knife though comes because the Remainian (“I’m all right, Jack”) middle-class establishment has protected itself with a widening pay gap, leaving the burden to be carried just by the lower income groups. No wonder they are now fed up with both the burden and the injustice of it.

There is no harm at all in putting in place a mirror image of the EU’s customs tariffs for ourselves. The rest of the world already pays these tariffs (to Brussels) whilst we desperately need the EU countries to start paying them to reduce our trade deficit with them. They can hardly complain when they are charging the same to us. The £25bn or so of tariff income will be a bonus.

We must also beware the queue of other countries lining up to secure trade deals with us. They will get the benefit of no longer paying these tariffs, but what do we get? The danger is that our deficit will get even bigger. Brexit first, put our own tariffs in place with it, and only then consider deals. It could be done within weeks – no more uncertainty and a much clearer negotiating position. I have nothing against free trade per se, but balance must come first.

It is interesting that Donald Trump appears to have a much better understanding of this than we do over here. But then he is a businessman. Successful businessmen know they have to be honest else their customers do not return and their suppliers become unreliable. Politicians are not subject to such discipline.

I first wrote about this under the heading “Greece, the Eurozone and World Trade” early last year. You might also like “Why the Single Market is a Bad Idea”.

The IFS contradicts itself.

On a lighter note I was delighted to see the experts have managed to get their knickers in a twist over productivity and standards of living. But have a look first at my chart which I drew up before the referendum and which is based directly on ONS figures. It shows that our average real standard of living is now 30% lower than it was at the end of the eighties.

Back in July the Institute for Fiscal Studies (IFS) published a report entitled “Living standards, poverty and inequality in the UK: 2016” which nobody took much notice of. It concluded that “median income had risen to above the previous peak reached in 2009-10, and is 2.2% above the pre-recession level in 2007-08.” But just as the Autumn Statement was being delivered last month, they published another report (not that I have been able to find it on their website – it may just have been a quote from their director Paul Johnson, and other commentators have attributed it to the IMF or the Resolution Foundation – but let’s just take it as it was reported in the press and on Question Time on 24th November) saying “This has, for sure, been the worst decade for living standards certainly since the last war and probably since the 1920s”.

Clearly one of these two reports must be wrong. No prizes for guessing which! The latter report also referred to the period since 2008, thereby implying the cause as being the banking crisis. That is wrong too. As explained above the cause is globalisation and unbalanced free trade.

There is no need for austerity

Talking of the Autumn Statement, Philip Hammond is clearly just as terrified of the fiscal deficit as George Osborne was, and has embarked on a programme of austerity to match that of his predecessor. He did not put it that way of course. He quoted the Office for Budget Responsibility’s forecasts that the deficit would reduce to £17.2bn by 2021/2, from £68.2bn now, which would represent 0.7% GDP, which he trumpeted would be the lowest in two decades. But not only did he fail to spell out exactly how this would be achieved, he also noted that the OBR itself says the forecasts involve a high degree of uncertainty, and goes on to anticipate a falling rate of economic growth. There is only one way those figures can be made consistent with each other, and that is through massive austerity.

But you know, there is no need. Here is how we can avoid it while still balancing the books.

Local Issues

My colleagues keep telling me to write more on local issues. Of course I could give you a long list of Labour’s failings in Ealing, but that would not be in the Christmas spirit. A more serious point though is that there is only a very limited amount any party can do at the local level while austerity is being imposed from Westminster. So the best news for Ealing would be a UKIP government in Westminster.

Well I hope your definition of festive will extend to all of the above!
Wishing you a Happy Christmas and Prosperous Clean Brexit,

John Poynton
UKIP Ealing (a notch or two above Lower Slaughter!?)
UKIP Ealing Southall PPC.
ukipealing.com and jepoynton.com

UKIP and Grammar Schools

UKIP comes to the issue of grammar schools not from a position of ideology but from a belief in local democracy. In general where a decision can be made at a local level which will not adversely affect citizens living outside its boundaries then it should be. You don’t need uniformity across the land on such issues, which generally speaking are value-judgemental rather than technical. Let there be a multiplicity of choices and the comparison in outcomes will help to inform everyone. Other examples are fox hunting and the slaughter of halal meat. The geographical area will depend on how a community defines itself for the purpose, and can range from national (within the UK) to sub post-code. In addition we should perhaps think of allowing those outside such a boundary to challenge a decision in the courts if they think they themselves would be significantly adversely affected. If such an opt-out system had been in place in the EU then perhaps it might not have got itself into such a mess!

This however does not address the problem of the 11 plus. I myself failed my 11 plus all those years ago, yet went on to gain an honours degree in physics from Edinburgh University and to qualify as a Chartered Accountant with one of the big city firms. I am therefore among the foremost to say that you cannot judge a child’s potential at the age of eleven. Many otherwise bright children are at that age distracted by problems at home or other emotional issues which they then go on to solve or simply grow out of. I was lucky in having an independent school education, so it didn’t matter.

But the system was never designed to be like that. In theory you could move up to grammar school through the 13 plus or at O level or GCSE. The fact that this rarely happened was that the secondary modern schools were rubbish. They were not properly funded, managed or monitored, and made no effort to prepare the children for those exams. It need not be like that.

I propose that where a county or other community chooses a two tier system, then the lower tier schools should be given larger budgets per child. Maybe as much as 10% or even more. It is much more challenging to teach a slower child than a bright one. The latter pretty much teach themselves once you point them in the right direction, whereas less able or distracted children need more discipline in smaller class sizes, more one-to-one support, more pastoral care, different teaching methods and above all teachers with a much greater spread and depth of ability. These things are expensive and must be provided.

Ah, you will say, so where is the money coming from? Here I refer you to my proposal for a National Credit Card which would enable any citizen to access essential services from the private sector on a means-tested basis if they so wish. Using this, I propose charging the parents of grammar school children a proportion, perhaps 50%, of the school’s actual budget for their child. As most such parents are quite well off this will bring in a substantial income whilst not penalising the poorer parents. It will also sharpen up some of our grammar schools which are not perhaps quite as sharp as they should be!

Of course we must also guard against the type of mismanagement that occurred in the past. All state schools must be managed through a national schools agency along the lines set out in my earlier post entitled The Management of our Public Services.

Bright children will by and large end up on their feet one way or another.  The less able children will not. They will end up as ‘NEET’s and a burden to both themselves and to society as a whole. It is worth making the effort to give them the attention they need through schools specially designed for the purpose, and better for them than comprehensives, for all our sakes.

Do I believe in Free Trade?

The almost universally held and unquestioned belief in free trade, that is trade unhindered by either blockade or tariffs, is generally attributed to the classical economist David Ricardo, who included a chapter on Foreign Trade in his famous book The Principles of Political Economy and Taxation published in 1817. The modern mantra holds that free trade drives investment, productivity and economic growth through increased competition from imports.

Allowing for the fact that Ricardo was writing before modern terms such as ‘value added’, ‘productivity’, ‘money supply’ or ‘GDP’ were introduced, he in fact makes no mention of this effect at all! His only mention of productivity comes when he is examining the effect on the economies of two countries engaged in balanced trade when one finds a more efficient method of production. The result is a trade surplus by that country resulting in an increased money supply, which in turn creates inflation, which in turn rebalances the trade by attracting more imports. In his argument the productivity increase is the cause of increased competition, not the result of it. He also notes the benefits of specialisation, where different countries have different natural advantages in the production of certain goods, but makes no suggestion that these advantages are anything other than fixed. That is all.

Ricardo wrote at a time when most money was fixed in the form of precious metals and thus before the advent of floating exchange rates and mega currency capital flows. His arguments preclude the possibility of the sort of structural trade imbalances we see today.

Of course there are numerous papers to be found on the internet and elsewhere arguing that free trade enhances economic growth. Invariably the writer will point to periods of economic growth, such as the post-war decades or the decade following the exit from the ERM, and notes the coincidence with an expansion in free trade. Closer inspection however reveals plenty of alternative possible causes, such as peace, reconstruction, stability and devaluation. So the logic is by no means conclusive.

I am well aware also of the classical arguments around specialisation and economies of scale. However these have now been superseded by globalisation and the advent of off-shoring. Richard Baldwin, author of “The Great Convergence: Information Technology and the New Globalisation”, gives the example of the Canadian company Bombardier that transferred the production of aircraft tails from Quebec to Mexico. He says “The ICT revolution made it feasible for rich-nation firms to leverage their knowledge with low-wage workers abroad. Bombardier can now use its know-how to make aircraft tails with Mexican manufacturing engineers who only get $60 a day instead of Canadian engineers on $35 an hour. The ability of, for example, Canadian firms to take their knowledge elsewhere means that what is good for Bombardier may not be good for Canada.” He could have added that these multinational companies also off-shore their profits, so their host nations no longer even get a share of those profits though tax.

A related perspective comes from Mariana Mazzucato, author of “The Entrepreneurial State”, who gives a detailed account of how almost all the significant technological breakthroughs of the last seventy years, including the internet, Microsoft’s Windows, Apple’s smart-phones and Google’s search algorithm to name but a few, have their genesis in state-funded research. The private sector only became involved when the uncertainties were considerably reduced, and venture capitalists when the product was almost ready to bring to market. They then made billions for themselves from IPO’s and share buy-backs, all off-shored or reduced by favourable capital gains tax regimes negotiated on the bogus claim that they are taking the enormous risks necessary to promote innovation. The result has been that none of those profits were either returned to the state or reinvested in new research.

What we are seeing now is not so much the creation of new wealth but a massive transfer of existing wealth to third world countries as a result of globalisation and unbalanced free trade. Of course it is wonderful that we can now anticipate the ending of global food poverty by 2030, but let us not kid ourselves that most of this is not at the expense of the first-world working classes. The “I’m all right, Jack” Remainian middle-class establishment has of course protected itself with a widening pay gap, leaving the burden to be carried just by the lower income groups, and they are now fed up with both the burden and the injustice of it.

Now it is not my purpose to offer conclusive evidence or the results of research but, like the established view, rely on logic and what stands to reason. The disadvantage is that logic alone does not give any measure of the factors examined. For example, it would be logical to suppose that the law of diminishing returns applies to the competitive benefits of each 1% marginal increase in imports. With UK imports running at close on 35% of GDP it would be reasonable to assume that any competitive effect comes from the established 35% rather than from any marginal increase. It might also be reasonable to conclude that the effects of specialisation are also much diminished anyway given that most countries are now industrialising and that even England can produce wine! Any given new free trade agreement is likely to have only a one-off step benefit rather than provide the ongoing growth such as we get from innovation.

So my purpose rather is to examine whether such benefits are greater or less than the damage caused by structural trade deficits, and consequently our policy towards the use of import tariffs. This issue is of critical importance at present for three reasons:

(1)  it affects our approach to negotiating our disengagement from the EU, and

(2)  it affects how we tackle the outstanding imbalances which still threaten world economic and banking stability.

(3)  it highlights the damage that free-trade fanaticism can cause.

Brexit has given us the benefit of a 10% devaluation, which should go some way toward reducing our record trade deficit, now in excess of 5% of GDP. But devaluation will almost certainly not do the whole job. The danger is that Mrs. May’s government will not now impose the maximum trade tariffs on the EU’s exports to us. We will still have to pay around 4.3% on average in tariffs on our exports to them, which we can easily afford following the devaluation, so a balanced position maintaining the status quo demands we should charge the same to them. Failure to do so will not only worsen our deficit, it will also throw away some £25bn of potential import tariff revenues; money we desperately need to plug our fiscal deficit.

Even suppose some free trade deal were to be agreed with the EU prior to the completion of the Article 50 transition period, and even suppose this were balanced in each sides’ interests, the result would be higher imports and exports but no reduction in the deficit and the loss of the tariff revenues. Indeed the deficit would increase in proportion. As we start with a deficit, any FTA will only make it worse – the very opposite of what we want. And of course in the short term any increase in imports destroys jobs just as rapidly as exports create them, so we would have thrown away the import tariff revenues for nothing.

The only way we could get any advantage out of an agreement with the EU would be if it were unbalanced in our favour. That’s most unlikely to happen, particularly in view of the EU’s desire to maintain free movement of peoples. In other words they want to skew it in their favour! Forget it, we will be better off without- the WTO option is the best option. And of course there is no prospect of any sort of new Napoleonic blockade. That would be illegal under WTO rules. All we are talking about here is tariffs. Interesting how the Remain camp use the term ‘access’ to the single market to imply a blockade! Much the same applies to the term ‘free movement of people’. The vast majority will be able to come and go with just a visa, probably obtainable online! The problem only arises if they overstay that visa, and with online identification of over-stayers that should be manageable too. The important line must be drawn at citizenship and permanent leave to remain.

At present the rest of the world pays these tariffs to Brussels, but after Brexit the danger is they would receive the benefit of a reduction in tariffs they pay with no counterbalancing advantage to the UK. That would be a disaster. If we charge the same tariffs and then simply divert them from Brussels to London the rest of the world will not notice any difference and we will gain the revenues. There is no sign that Mrs. May’s government understands this.

But this debate must considered in the light of the importance of eliminating our trade deficit; something we have given almost no priority to in the past. Lord King (previously Mervyn King, Governor of the Bank of England from 2003 to 2013) has just published a fascinating and very readable book entitled “The End of Alchemy, in which he not only proposes a new approach to bank regulation but also traces the cause of both the banking crisis and our deterioration standards of living back to the massive global trade imbalances that developed after the fall of the Berlin Wall. He makes it very clear that we must take trade deficits far more seriously than we have done in the past. Here is an extract:

“Since the early 1990’s, long-term interest rates have fallen sharply, and this has had enormous implications for all our economies. Countries such as the United States, United Kingdom and some others in Europe were faced with what were in effect structural trade deficits. Those deficits – an excess of imports over exports – amounted to a continuing drag on demand. So in order to ensure that total demand – domestic demand minus the trade deficit – matched the capacity of their economies to produce, central banks in the deficit countries cut their official interest rates in order to boost domestic demand. That created an imbalance within those countries with spending too high relative to current and prospective incomes. In countries with trade surpluses such as China and Germany, spending was too low relative to likely future incomes [so they did the same – Ed.]. And the imbalance between countries – large trade surpluses and deficits – continued.

All this reinforced the determination of central banks to maintain extraordinarily low interest rates. Monetary stimulus via low interest rates works largely by giving incentives to bring forward spending from the future to the present. But this is a short-term effect. After a time tomorrow becomes today. Then we have to repeat the exercise and bring forward spending from the new tomorrow to the new today. As time passes we will be digging larger and larger holes in future demand. The result is a self-reinforcing path of weak growth in the economy. What started as an intentional savings glut has become a major disequilibrium in the world economy. This creates an enormous challenge for monetary policy. Central banks are, in effect, like cyclists pedalling up an ever steeper hill. They have to inject more and more monetary stimulus in order to maintain the same rate of growth of aggregate spending.

Before the crisis, many thought that the Great Stability could continue indefinitely and failed to understand that it could not.  Their credulity was understandable. After all, GDP as a whole was evolving on a steady path, with growth around historical average rates, and low and stable inflation. But the imbalance in the pattern of spending and saving was far from sustainable, and was leading to the build-up of large stocks of debts. Bad investments were made, encouraged by low real interest rates. The crisis revealed that much of that misplaced investment – residential housing in the United States, Ireland and Spain; commercial property in Britain- was unprofitable, producing losses for borrowers and lenders alike. The impact of the crisis was to make debtors and creditors – households, companies and governments – uncomfortably aware that their previous spending paths had been based on unrealistic assessments of future long-term incomes. So they reduced spending. And central banks then had to cut interest rates yet again to bring more spending forward from the future to the present, and to create more money by purchasing large quantities of assets from the private sector – the practice known as unconventional monetary policy or quantitative easing (QE). There is in fact nothing unconventional about such a practice – so-called QE was long regarded as a standard tool of monetary policy – but the scale on which it has been implemented is unprecedented. Even so, it has become more and more difficult to persuade households and businesses to bring forward once again from an even bleaker future.  After a point, monetary policy confronts diminishing returns. We have reached that point.”

In other words the imbalances have not gone away. He could have added that we will see a massive increase in unemployment if we cannot eliminate the trade deficit, and that Brexit provides the only opportunity to do so. Indeed we are not just talking about trade imbalances but also about fiscal deficits and unrepayable national debts, as well as the low interest rate, low growth scenario itself. An increase in interest rates would encourage savings which would flow into investments and new technology, thereby increasing productivity and economic growth, but this won’t happen until the imbalances are eradicated. It’s not that the new technology is not there; just that it is not being used. In addition there are also severe imbalances in some particular markets within the UK, such as housing, steel and executive salaries, which also pose a threat to future growth and stability.

After reading such an interesting account of the problems we face, including Lord King’s ideas on the future of bank regulation – an approach he calls the “Pawnbroker for All Seasons”, being a continuous replacement for the crisis-driven “Lender of Last Resort” policy first described by Walter Bagehot – I have to say I came down with a bump during his last chapter, entitled “The Audacity of Pessimism”. It is here he gives his prescription for dealing with these outstanding economic challenges. He has three recommendations, and I add my comments against each one as follows:-

(1) To enhance productivity in all ways possible. Comment: All in favour of course, but surely all countries around the world will be doing exactly the same thing, so the chances of the UK or other deficit countries stealing a permanent structural march on all the others seem most unlikely to me.

(2) To extend free trade wherever possible, including TTIP. Comment: See above – surely a series of balanced trade deals will leave the opening imbalances unchanged or even magnified. This after all is why the Doha round collapsed.

(3) Return to freely floating exchange rates. Comment: I assume he is referring to an end to the eurozone here. And the best of luck with that one M’Lud! Can’t see it happening myself, and anyway it is not within our gift, though I appreciate he is stressing the need for action at international level to avoid what he calls the prisoner’s dilemma.

 

So what is my prescription then? I offer the following ten recommendations, many of which the UK can pursue unilaterally:-

(1) To set up a UK Sovereign Wealth Fund while interest rates are still on the floor to hedge our national debt, future unfunded pension liabilities and urgent infrastructure improvements. Regular readers will know I have recommended this idea on numerous occasions, for example under my post on Pensions, but the particular relevance here is that

(a) The investment of a large part of this fund overseas will make the pound more competitive,

(b) The building up of the fund will increase the national savings rate, and hence investment and economic growth,

(c) The knowledge that the debt is ultimately covered means we can take a much more flexible and cyclical approach to the fiscal deficit today, concentrating on recovery now and leaving austerity until the recovery has accelerated too far.

(2) To take advantage of Brexit to set up maximum import tariffs for the UK to minimise our own trade deficit thereby enabling us the start raising interest rates and economic growth, and to help finance our fiscal deficit (again, see above).

(3) To pursue internationally a global import tariff regime designed to counter global trade imbalances (see my earlier post on Greece, the Eurozone and World Trade). The maximum tariff rates would be set for each country by the WTO in relation both to the size of their trade deficits and to the size of any defaulted sovereign foreign currency debt (see next). Also encourage a global corporation tax regime whereby tax is levied on global profits apportioned to national/global turnover. Only the profits would be reallocated centrally, leaving each country to apply it’s own rate of tax. Start in the UK anyway!

(4) To allow internationally insolvent countries to carry forward their defaulted debt on an interest-free basis. To haircut capital balances on the other hand would surely lead to contagion across the whole banking system.  Such debts would have priory for repayment if and when the country returned to trade surplus.

(5) Rigorously control our borders so that businesses can no longer take the easy way out by importing cheap staff instead of training up our school leavers or investing in new technology. It will also end wage compression which was such a significant factor in the vote to leave the EU. Our objective must be balanced migration and well as balanced trade. Both are only available through Brexit. Richard Baldwin (see above) opines that controlling our borders will not stop firms from off-shoring, and that is probably true. But unless we do so we cannot stimulate demand and reduce unemployment through traditional Keynesian fiscal and monetary policies, as instead they will only suck in more immigrants. This is indeed is very apparent from current statistics; the indigenous unemployed are not benefiting. Keynes tells us that a balanced economy will create exactly the right number of jobs to meet the requirements of new entrants to the labour market. The fact that we are apparently now dependent on immigration is simply a reflection of these imbalances, including skills and regional imbalances, and over-stimulation of the economy as a result of political pressures.

(6) Set up a portfolio of Local Community Banks across the UK, either in the ownership of the Bank of England or allow independently, along the lines of the “Bank of Dave” in Bolton and those in Germany, to engage purely in taking in local medium to long-term deposits and lending to local businesses. It seems to me such banks could easily meet Lord King’s “Pawnbroker for All Seasons” test whereby effective liquid assets must always exceed effective liquid liabilities, and the effect, particularly in areas of higher unemployment, would help to reduce the regional disparities which were also a significant factor in the vote the leave the EU.

(7) Complete welfare reform along the lines set out in my earlier post here in order really to make work pay. The previous government introduced all sorts of sticks but no carrots. We need both, including a big increase in the UC earnings disregards in place of the duplicate tax credits system. Also introduce a separate self-assessed benefit for the self-employed which would only be continued on receipt of a monthly return of hours worked and income. Over-claims would attract a high rate of interest. This will give us a better indication of underemployment in this growing sector of the labour market and therefore a better indication of where we are in the economic cycle.

(8) Quarantine those UK markets which are themselves in disequilibrium, ie

(a) The housing market. Introduce macro prudential measures to limit the availability of mortgage finance so as to hold house prices level, or even slightly declining, post-code by post-code across the country. As well as creating stability this would

(i)   provide an additional string to the bow of regional policy,

(ii)  remove the expectation of property gains whereby the rich get richer by doing nothing,

(iii) reduce the danger of repossessions,

(iv) encourage property developers to build on and sell their land banks.

(b) The steel industry. Set tariff levels so that imports are no greater than the excess of domestic demand over 90% of domestic supply. Promote competition within the UK steel industry but limit profits with a cap, and restrict pay increases to those necessary to prevent a rise in staff turnover rates.

(c) Executive and professional employee pay. Introduce Cheapest Competent Candidate procedures, starting with the public sector and then by inclusion into company law. Also consider the introduction of Supervisory Boards for all public companies, comprising perhaps the six largest shareholders, three executives and the chairman, to ensure a shareholder veto over this and other strategic decisions. See this earlier post.

(9) Regional policy. Introduce a second personal allowance into the income tax system so that those living in areas of higher unemployment pay less tax on any given income that those living in areas of low unemployment. Adjust as you go along to achieve an even and stable level of percentage employment across the country. See this earlier post.

(10) Introduce a National Credit Card so that all citizens can choose between the public and private sectors for their ‘public’ services, both effectively free at the point of delivery, but with the latter on a means test applied after the event via the tax system. This can be introduced gradually by varying the means test gradient as supply rises to meet demand in the private sector, and will consequently both reduce the burden on the taxpayer and improve the efficiency and quality of the services provided in both sectors though competition. Working capital at 5% can be provided by the Sovereign Wealth Fund. See this earlier post.

In many respects a successful hard Brexit is very like victory at El Alamein, of which Churchill famously said “This is not the end of the war. It is not even the beginning of the end. But it may just be the end of the beginning”. Brexit merely provides the opportunity to avoid Armageddon. There will follow several years of hard graft before we can secure balanced trade and migration, during which we shall have to hold back on growth to prevent inflation. Let us never forget that the establishment almost entirely backed Halifax for Prime Minister in 1940. The Remainians won’t go quietly, but we shall fight them at the polls, we shall fight them in the press and in the media. We shall never give up!

The economic consequences of immigration.

Do we really want to carry on like this?

Chart image

This graph shows how the average real standard of living in the UK has changed over the last 25 years (GDP ÷ population and inflation). The figures are discounted by 0.5%pa for average technological productivity growth. You can see a peak in 2004, which was when the immigration floodgates opened. Many people argue that immigration is good for our economy, but that just doesn’t show up in the figures. Judge by results. Of course the banking crisis in 2008 made the fall greater, but that has now largely washed through, and anyway the index is down to below 100 by 2008.  Yet we are still 22.5% worse off than in 2004 (excluding productivity growth).

The index is set at 100 for 1991. If I had included 1990 the starting point would have been higher than 2004! The benefits of the 1992 ERM exit devaluation do show up quite clearly though.

There are clearly four principle factors involved here: productivity, immigration, the trade deficit with the EU (which exports jobs) and the banking crisis. I have tried to isolate the effect of immigration and the EU trade deficit by removing productivity by the admittedly rather crude expedient of assuming a constant rate of 0.5% per annum. It would in fact have been likely to have been higher before 2004 when investment was buoyant, and lower thereafter. I have not however so far found a way of removing the effect of the banking crisis, so the graph still shows the two effects combined. I shall have a look at levels of perhaps consumer borrowing as an indicator of the latter and edit this post shortly accordingly.