You can download a pdf version of this post here until I can work out how to do tables in html!
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.
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!
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Do we really want to carry on like this?
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.
Herewith another letter to the editor of the Sunday Telegraph. He didn’t print the last one, so lets hope for better luck with this one!
Stephen Crabb’s piece last week in which he predicted economic Armageddon if we left the EU is typical of the genre. He uncritically and selectively quotes reports by alleged experts without reproducing or testing any underlying arguments. There is no such thing as an infallible expert, and these people may well be more interested in covering their backsides than in pursuing the truth.
One thing that is near certain is that we will gain a devaluation on Brexit, just like the exit from the ERM in 1992. That delivered about 10% additional competitiveness and laid the foundations for twelve years of strong economic growth, culminating in our economy becoming the fourth largest in the world. You also reported last week that we have already gained 4% since the referendum announcement, and that the CBI is reporting an upturn in exports (although how that squares with the government’s latest report that unemployment is rising I will leave to your readers’ imagination; a useful opportunity to correct the figures?).
A 10% or more gain on devaluation is greater than on average any amount of tariffs the EU could throw at us. In other words we cannot lose, which means we do not need any new deal with the EU and that therefore the EU cannot prevent us from controlling our borders. The only uncertainty lies between gaining a little and gaining a lot.
We desperately need such an economic boost. It will not come from anywhere else. The export and import-substitution led recovery will increase demand, which will stimulate investment, which will introduce new technology, which will improve productivity, which will create economic growth, which will increase living standards. As in the 1990s it is a domino growth effect in which the first tile is now Brexit.
The truth is we cannot afford not to leave the European Union. He who dares wins.
PS. Although the editor has again failed to publish this letter, Charles Moore, a Telegraph columnist, makes the interesting point that the US has never had a free trade agreement with either the UK or the EU. Doesn’t seem to have held them back! So I repeat, we do not need any new agreement with the EU.
PPS. I also like the cartoon from London University which I have shared on my facebook page showing a minister of George III telling the Americans they will BE STRONGER IN THE EMPIRE! Obama’s visit, clearly scripted by Downing Street (note use of the word ‘queue’), has not gone down well.
The Editorial in the Daily Telegraph April 7th concludes “The Remain Camp is relying not only on the fear of the unknown but also the comfort of the Status Quo”. But we cannot repeat too often: in the EU, there is no Status Quo. The EU is not a destination but a process. To those who think of the EU as a comfortable safe haven, let’s ask some questions.
How many more Port Talbots? Just yesterday I heard EU Commission Vice-President Sefcovic proudly promising “a tsunami of new legislation” aimed to reduce emissions by increasing the cost of CO2 emissions, and therefore the cost of energy. The EU’s green policies have already caused plant closures across the EU in steel, aluminium, chemicals, fertilisers, petroleum refining, glass and ceramics, and other energy-intensive industries. Jobs lost. Investment moved overseas. Perhaps it will be your job and your…
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