Reply to Sir John Major in the Sunday Telgraph of 20th March 2016

Dear Sir,

It is Sir John Major who is suffering from fantasies over the EU, and I can see why. He wants to blank out that it was our exit from the ERM in 1992 that set up twelve years of strong economic growth; not EU membership as he claims. In fact since 2004 our living standards have fallen and never recovered.

Does he think we have any hope of resolving the housing crisis unless we can control our borders by leaving the EU? Does he imagine it will be possible to maintain a cohesive society by ending wage compression and reducing the pay gap without doing so? How are our SMEs going to provide the jobs we need without removing the tourniquet that EU regulations impose upon them? And how does he think we are going to protect ourselves once the EU has absorbed GCHQ, MI5 and MI6 into some new central incompetence? Indeed Brexit may well set up a new devaluation with all the consequent benefits we enjoyed after the exit from the ERM.

Sir John is disingenuous in comparing 45% of our exports that go to the EU with 7% of theirs coming here; apples and pears. It is irrelevant how much they export to the rest of the world; we are looking at the bilateral position here. And that shows a goods deficit of £89 bn last year; over 5% of GDP just with the EU alone! They are bleeding us dry; a veritable haemorrhage of jobs. Even in the worst, worst case scenario where they raise the maximum WTO tariffs against us and we do not retaliate, the percentage barriers are small compared to the likely benefit of devaluation. Britain will still be attractive to inwards investment, and the small increase in import prices is a small investment to make for the subsequent growth. Food prices in fact are likely to fall as we come out of the CAP and CFP. If we do raise import tariffs in retaliation they will provide much-needed additional fiscal revenues as well as promote import substitution.

There is no leap into the dark here. We know exactly what life will be like after we leave. On Brexit all our trading arrangements, security deals and laws will remain unaltered by default. They won’t change unless somebody changes them, and the EU cannot risk the consequences of trying. The only change is that we will save a net £12 bn or so from our membership fees, and that is after replacing all of the payments that Scotland and others receive. The point is that we do not need any new deal with the EU. We will not be dependent on the EU in any way. We can simply walk away if we do not like anything Brussels may propose.

Sir John is however right on one point; that we have a choice between Great Britain and Little Britain. He has just got it the wrong way round!

Yours faithfully,

 

And here’s a further reflection which I did not include in the letter. The devaluation from the ERM exit in 1992 was worth about 8 or 9%. As I write we already have a 4% devaluation consequent on the announcement of the referendum, so we should certainly get 8% or so after it, and if the maximum tariffs the EU can apply on average are 5%, we are bound to gain either way, even with a 10% maximum for motor vehicles and agricultural produce. But we could go further. Suppose we raised 10% tariffs against against motor vehicles ourselves. We may have to apply those globally, but we import very few vehicle from outside the EU. Most Japanese cars are made here anyway, so it would probably only affect the Koreans. Suppose we then said to both the Koreans and the continental manufacturers that we will not raise any tariffs on spare parts and components worth less than 10% of the value of the whole. They would then have a strong incentive to set up final assembly plants here, creating lots of new jobs in the UK as well as enabling them to continue tariff-free trade to us!

As for the rest we could be very selective (not forgetting steel, of course). We produce lots of good cheese in this country so that would be a good target, but not much wine which would not.

As regards steel, this is clearly a special case as a result of Chinese dumping. The global steel market will not ‘get back to normal’ until there have been significant reductions in capacity. Most commentators agree that a global economic recovery will not be sufficient. But whose capacity should be up for the chop? Why should it be ours? Even the Chinese themselves are now restricting imports, along with the Americans and many others, but we are not allowed to do so by EU rules.

Logic would suggest that the least efficient plants should go first. But that does not take account of ongoing investment and technological change. So I am bound to conclude that the ideal solution for the UK is to create a temporary closed market in steel – neither imports nor exports being allowed until the global market stabilises and UK capacity being set to supply UK demand. Whether the existing capacity is nationalised or nationally recapitalised, like the banks, it should be allowed to set prices within the market to enable it to be profitable overall. That market would of course have to be regulated, and the best basis for that would be a cap-and-collar profit regulation regime combined with quality inspections. By that I mean setting a range for profitability, perhaps 5% =/- 2.5%, so that if average profits went outside that range national prices would have to be adjusted according, other factors being equal. Such a regime would have to be applied on an industry wide basis of course so that new entrants with more efficient processes could still have an incentive to replace older suppliers who could not keep up.

 

Rupa Huq and the Ealing Gazette

Early in February the Ealing Gazette carried an article by Rupa Huq, MP for Ealing Central and Acton, supporting Britain’s continued membership of the European Union. My colleague and our GLA candidate, Alex Nieora, responded with a letter, which was edited down, and I with a fuller article, for which, predictably, space could not be found. So here is the full story, starting with Rupa Huq’s original article. I reproduce them without comment as each speaks for itself.

Rupa Huq’s Article.

“The word ‘crisis’ tends to be much over used in politics. Every year we have an NHS winter crisis and I have even raised the spectre of a curry crisis in the House of Commons before Christmas last year to George Osborne. But on the fate of our European membership it is no exaggeration to say that it would be nothing short of a crisis if we were to exit. To leave behind our biggest trading partner would put jobs and growth at serious risk.

Europe has also been a source of social reforming legislation, like maternity and paternity leave for new parents. EU competition agreements have brought down airline ticket prices. It is by working together with our European partners that we can catch criminals who do not operate within national borders through mechanisms such as the European arrest warrant. Our island is much stronger with the combined might of 28 nation states rather than the fanciful idea that we could ever go it alone.

Implications are wide-ranging – the universities’ science research budget that is working on cures to fatal diseases only functions due to European funding. David Cameron does not really want to leave but he is managed to have his tail wagged by a dangerous minority of extremists and Euro obsessives in the Conservative party. He is now boxed into a corner with his renegotiations, which are only being conducted to appease the Eurosceptic headbanger wing of his party – a rash promise made when he saw support ebbing away to UKIP. It is a sad day when government policy appears to be written by Nigel Farage.

In an age of globalisation we are part of numerous international alliances – NATO and the UN are others. It has been claimed that our historical ties to the Commonwealth act as an impediment to our playing a full part the EU. This is far from the case – it is not a mutually exclusive relationship. We can have the best of all worlds by participating in both Commonwealth on the one hand, with the Queen as figurehead and countries that once formed the empire, and on the other the European Union, which has so crucially kept the peace post World War Two in a continent previously ravaged by two world wars in a short space of time”

Alex then responded as follows:

“I write in response to Rupa Huq MP’s opinion piece in the Ealing Gazette last week. Contrary to what Dr. Huq’s asserts most of UK trade is not concluded with the EU. UK businesses now trade more with the rest of the world than with the EU, although the EU prevents the UK from signing trade agreements with other countries. This means that exports to the UK from developing world nations such as, for example, the Congo are forced to pay tariffs as they cross the EU Common Customs Border putting Congolese exporters at a competitive disadvantage. Moreover EU regulations act as a hindrance to the 80% of UK small and medium sized businesses that do not trade with the EU, while protecting corporate interests.

Dr. Huq mentions ‘European funding’ for science research without realising perhaps that the UK now pays the EU a staggering £12 billion more per year than the paltry 49p in the £ which it gets back from the EU. There is no ‘EU funding’ Dr. Huq – it is British taxpayers’ money.

Dr. Huq talks about EU ‘’competition agreements’’ but overlooks the impact that the 30,000 strong permanent corporate lobby in Brussels has on legislation that imposes restrictions and obstacles for would be competitors and smaller businesses. I doubt she has heard of gallium arsenide. It’s a compound semi-conductor used in microelectronics to make smart phones, integrated circuits, solar panels etc. Great you would think. Well French corporate interests have succeeded in getting the EU to ban gallium arsenide across the EU commencing from this year because it is a threat to their silicon based manufacturing interests. And the worst part is the UK’s MEPs who make up barely 8% of the European Parliament are powerless to do anything about this, or indeed anything else.

Perhaps Dr. Huq has heard of TTIP, the Transatlantic Trade and Investment Partnership deal between the EU and the US which threatens the NHS, by opening up public services to competition from the private sector and allowing corporates to sue governments who enact policies that negatively impact their profits. Both UKIP, Labour and other MEPs voted against these terms in the European Parliament but were outvoted no thanks to the small and ever decreasing British influence in the EU. While in the EU the UK can do absolutely nothing to prevent the implementation of TTIP, or indeed to renationalise the railways if it so wanted (due to the First Railways Directive) or a whole raft of other policy areas.

Dr. Huq disingenuously says the word ‘crisis’ is overused before writing ‘every year we have an NHS winter crisis’. Perhaps I might remind her that the NHS is indeed in crisis, and the last Labour government is largely to blame. The NHS is riddled with extortionate debt from decades of misguided PFI contacts. The NHS owes £80bn in PFI loan unitary charges. Next year alone trusts will make some £2bn in repayments. While PFI contracts were started by the Conservative government under John Major under the Labour government between 1997 and 2008 90% of all hospital construction funding was under PFI agreements.

Perhaps she is further aware but conveniently overlooks that each week politicians send £350 million to the EU net – that’s enough to build a new hospital every week. Dr. Huq mentions social reform legislation from the EU but omits to mention that most social reform and welfare state legislation was introduced by the UK Parliament a long time before the UK joined the EEC as it then was. As Tony Benn would have been the first to tell her the British government can just as easily pass social reform legislation as the EU but at a far less national debt accumulating cost.

The only crisis will happen if British voters listen – to use your own terms, Dr. Huq – to ‘dangerous extremist’ pro EU politicians”

And my contribution was

“Rupa Huq’s article last week claiming that Britain would be stronger in Europe is profoundly mistaken on so many fronts. Her case is purely negative and concentrates on what she perceives to be the risks of leaving, not mentioning a single one of the many far greater risks of staying in.

She starts by claiming that it is necessary for Britain to stay in the Single Market. Others have similarly accused UKIP for failing to give a clear picture of what it would be like outside. WRONG on both counts! We have always said that we would take up again our vacant seat at the World Trade Organisation (WTO) and trade with the EU on exactly the same basis that the US, China, Japan and many others do so successfully at present. That automatically would be the situation immediately after Brexit.

Quite separately there is the proposition that we could negotiate a new treaty with the EU effectively giving us zero-tariff access to the Single Market as at present. That of course remains to be seen, but don’t forget we trade at a huge deficit with the EU. So the betting is not only on the EU being the more desperate to continue with the current arrangements, but also that without a deal a bit of old-fashioned protectionism would in fact be to our advantage. Yes, trade volumes in both directions would be lower, but so would the trade deficit. And trade deficits export jobs. Any loss of jobs from a reduction in exports would be more than offset by job creation from import substitution. The import tariffs would help fund our public services and reduce our fiscal deficit, and the reduction in international trade volumes would save energy. Further the SM is highly unstable, like removing the bulkheads from an ocean-going oil tanker, thereby undermining economic growth. Thus four strong positive reasons for not re-joining the Single Market. Whilst we would not be the first to raise tariffs, we would of course respond in equal measure if tariffs were raised against us. So please, do not lose any sleep over this issue. We can handle it either way.

Dr. Huq then claims we would lose all the beneficial employment and other legislation we have derived from the EU. WRONG again! The day after Brexit the statute book would remain exactly the same as now. We can then decide for ourselves whether we keep those laws, change them or ditch them.

Next she claims our security would be at risk without solidarity within the EU. Still WRONG! There will be nothing to prevent us from co-operating fully with Europol or any other institution on the continent where we have a mutual interest in so doing. She claims that peace in Europe since WW2 has been kept by the EU, whereas most commentators attribute this success to NATO. Even today the EU has no significant military capability, though of course Brussels is itching to spend yet more money on what inevitably will be a fractious and ineffective force.

Then she claims we are safer with mechanisms like the European Arrest Warrant. This is a bit like saying we would be safer under a dictatorship. What about human rights? In this country a person is innocent until proven guilty. Not so on the continent where, under the Napoleonic Code, it is the other way around. She talks of the ‘combined might’ of the 28 states. Excuse me? What combined might? Not been very apparent during the refugee crisis, has it? And of course our influence as one of 28 countries is next to nothing, as David Cameron is currently demonstrating.

Next comes the assertion that our universities and other current recipients of EU funding would lose that funding. Also WRONG! Because we pay into the EU more than we get out we shall save not only the net deficit on funding, now some £12 billion a year, but also the value of all the funds we currently receive. We can, if we wish, guarantee that all current EU payments into the UK will continue £ for £ from those savings instead.

At least Dr. Huq has not repeated the hoary old canard that Britain would lose jobs if we left the EU. I assume simple logic has now informed her that once we control our borders, only possible outside the EU, the labour market will tighten because of the fall in the supply of workers. Leaving the EU will be good for both jobs and wages – an end to wage compression and a start to reducing the income spread and all the adverse effects of overcrowding such as the housing crisis.

Dr. Huq’s letter is full of emotive words such as ‘fanciful’, ‘headbanger’, ‘extremist’ and ‘obsessive’. She even claims that ‘it is a sad day when government policy appears to be written by Nigel Farage’! This is sure sign of a politician on the back foot. Let’s have fewer personal insults and more well-researched argument. I see UKIP as a libertarian centrist party committed to getting Britain out of the European Union. We always have been. We believe strongly in fairness and human rights as well as creating a freer society for those who want to be creative and enterprising. We call time on Labour’s deceitful propaganda.”

Reflections on Question Time, 17th December 2015

Now that the debate over leaving the European Union is well under way it is becoming more interesting to respond to the arguments being put forward by the Stay-In Brigade rather than go over yet again the well-worn reasons for leaving.

Last Thursday’s episode of Question Time gave a perfect opportunity to do this. It came from Slough and the panel comprised Piers Morgan, Hannah Bardell from the SNP, Jacob Rees-Mogg (Con), Emily Thornberry (Lab), and Mark Reckless. It was also encouraging to see how sympathetic the QT audience now are to the Leave point of view, and even David Dimbleby showed a much more open-minded position than perhaps has always been the case in the past.

The first point that arose was from Hannah Bardell who claimed that Brexit would mean that Scotland would lose all the funding she currently receives from the EU. This of course is complete rubbish as Westminster would be in a position to replace that funding £ for £, if not better, due to the saving of £11 billion or so that Brexit would generate. I have heard the same argument from a number of institutions, including Universities who ought to know better. To emphasis the point the Leave/UKIP campaign should perhaps guarantee that for the first two years after Brexit all funding currently received by UK institutions from the EU will be replaced £ for £. After that ongoing review could alter matters in either direction.

The next point came from Emily Thornberry who picked up on Sir John Major’s recent comments about Britain opting for ‘splendid isolation’ in international affairs which he thought would leave us powerless to promote or protect our essential interests. But have they not noticed how powerless we already are? What could be more debilitating than belonging to an organisation, the EU, that insists on sole representation of our interests internationally but then pays absolutely no attention to our point of view? The fact is we are already in splendid isolation, and Brexit will re-establish our ability to reach out and engage in the world around us. We will be able to do so through all sorts of alternative relationships as and when the need arises. Britain is one of the most talented nations on earth and will thrive once let free.

Another point that Labour and LibDem politicians often raise, though not on this occasion, is a fear than they may lose employment protection and other laws which have originated from the EU and are now on our statute book. Again this is scaremongering, because the day after Brexit those laws will still be there. By regaining our sovereignty we can chose, one by one, whether we wish to keep them or ditch them. It’s a red herring.

And then came the whole issue of trade. I have argued elsewhere why I think the Single Market is destabilising and counter-productive, and how leaving the EU without a new trade treaty could be just what the doctor ordered. The question came in the light of recent research by Lord Rose, who we are told is leading the Stay campaign, that Brexit would cost around £11bn in increased trade tariffs raised by the EU on our exports to them if we had to revert to trading under WTO rules.

Now I have no argument with that figure, as I have not been able to check it, so let’s accept it for the purpose of the argument. The point he has completely overlooked is that the same will apply to their exports to us. And because we import far more from the continent than we export to it, the result would be a net benefit! I accept that both imports and exports would be lower, and that there would be a period of adjustment during the transition as companies orientated towards exports would struggle and those aimed at the domestic market would expand, but it is ultimately the balance between them that matters.

I do normally advocate free trade, but such a position does assume we pursue policies which keep our trade in balance. We have not done that, and have ended up now with a deficit in excess of £5bn. A trade deficit exports jobs and undermines employment, so anything that reduces a trade deficit is a good thing, even if that means lower volumes. Employment within the UK can then be adjusted by stimulating or moderating consumer demand through fiscal and monetary policies, and of course the ability to control our borders will mean the focus transfers to a shortage of labour rather than remaining on a shortage of jobs.

This means that if the EU were to throw a tantrum after Brexit, always possible, and refuse to negotiate a new trade deal, despite that being in their own best interests, we can always just walk away at no loss to the UK. Whichever way it goes, we can handle it. So please, do not lose any sleep over trade.

Finally, and this is another point that did not in fact arise on this occasion, there is the whole question of why big business and leading UK institutions such as our universities are so uniformly in favour of staying in. The answer is that they can afford to spend a lot of time and money lobbying politicians both in Brussels and at Westminster. This gives them an advantage over smaller businesses that cannot afford to do this. So the question is, does the nation as a whole benefit from it? Almost certainly not, as most of our employment creation and economic growth comes from all of those small and medium-sized businesses put together. Restricting access to politicians would reduce corruption and create a more level playing field to the benefit of the nation as a whole. So let’s take the EU out of the equation once and for all.

Unaffordable Housing

Continuing my new series taking issue with Sunday Telegraph columnists, this week it is the turn of Jeremy Warner, who yesterday wrote some very strange things under the heading ‘Unaffordable housing’.

Now to be fair his diagnosis was spot on. He reported that average real house prices in London have soared by almost 40% since the beginning of 2013, and concluded that the three primary causes of this are under-supply, intense overseas buying and virtually unbridled immigration. So far so good.

It is with his prescription that he goes belly up, writing “I’m all in favour of free movement of labour, and on high levels of inward investment, but if you are to have these things it is incumbent on the Government to ensure adequate supply and the infrastructure to service it.”

Let’s take these factors in order. Since 2004, when the immigration floodgates opened, our average real standard of living has fallen by over 20% (see ONS statistics). Indeed if you factor out an annual one percent for productivity growth, that is a fall of over 30%. Of course some of this is due to the banking crisis, but on another page Liam Halligan helpfully tells us that “our economy endured a 7.2% peak-to-trough drop after the banking crisis”. He doesn’t tell us where he got this figure from, and I suspect it is a tad understated, but let us accept it for the time being. That means that a fall of over 20% was due entirely to immigration (unless you can think of any other possible factor commencing in 2004?).

Now at first sight this conclusion might seem counter-intuitive. After all most immigrants do work hard and pay their taxes, and we are constantly being told that the NHS would collapse without them. But you know you can argue the whys and wherefores until the cows come home. I was always taught to judge by results. And those results, particularly in the week following the Paris atrocities, are unequivocal. Immigration is hugely damaging to our standard of living as well as to our security, our environment, our infrastructure and our housing provision. At these levels it also results in cultural swamping. I have no difficulty with cultural diversity, nor with our historic commitment to taking in refugees from persecution, but when the numbers and population density reach these levels we are in a completely different ball game.

Then there is the question of inward investment. For decades successive governments have preached the benefits of inward investment and have done all they can to encourage it. But again I say judge by results. Where are all these benefits? I don’t see any. What I do see is a record balance of payments deficit in excess of 5% GDP, which of course exports jobs and undermines employment. Inward investment has the effect of pushing up our exchange rate and making our currency uncompetitive.
We should stop encouraging it forthwith.
I have no difficulty with foreign ownership as all who invest here must obey our laws, but there is plenty of money sloshing around the money markets, especially post QE, and corporate savings are at high levels. Domestically sourced investment will naturally follow an increase in consumer demand.

Finally there is Jeremy’s frustration at our planning laws. Jeremy, those planning laws are there for a reason. They are there to protect our heritage, our habitat and our environment. Once these things are destroyed they cannot be recovered. I do accept that there may be insufficient brown field sites to provide the housing necessary to make good the current shortfall, particularly if mixed development is provided as of course it should be. I would also favour the creation of a new planning category for what I would call, for want of a better name, scrub land, ie undeveloped land of no particular alternative merit. I would certainly favour a big increase in stamp duty for foreign buyers of UK domestic property.

But even if we do all these things we have no chance of keeping up with ‘virtually unbridled immigration’. Balanced migration has to be the starting point, and of course that can only be achieved by leaving the EU.

Simon Heffer gets it wrong on Devaluation

I seem to have found a new hobby – taking issue with Sunday Telegraph columnists! Last week it was Janet Daley and this week it is Simon Heffer, another redoubtable writer who often has interesting things to say but yesterday talked complete rubbish about devaluation. It was just a short piece so here’s what he said in full.

“The latest thinking aloud by Mark Carney, Governor of the Bank of England, tells us that he believes interest rates should not rise until 2017. He’s wrong: but he’s changed his mind several times before, and will doubtless do so again. His remarks cheer those who believe sterling should be devalued to help our competitiveness. But that would also be helped if we improved our productivity, surely a much better idea. Those demanding a weaker currency need to be asked how weak they’d like it to be. Would like the Weimar Republic be enough? Or do they want the full Zimbabwe?”

NO, Simon, you cannot force the pace of productivity growth! In a free market economy it is simply the result of myriad decisions made by private individuals and companies. The best you can do is set optimum conditions for investment. To do that you have to stimulate consumer demand so companies have an expanding market to invest into, otherwise they won’t take the risk. But guess what? Even if we achieve this, our competitors are likely to be investing just as fast as we are. So we never catch up! Getting rid of an ingrained massive Balance of Payments deficit such as we have, which has the dire effect of exporting jobs, can only be achieved by devaluation.

Of course that is not easy, and you are right to point out the possible inflationary consequences. Inflation simply undoes all the good work and sets you back to square one. But it is not inevitable. Remember the Exit From The ERM? That was one of the most effective devaluations on record because it came when unemployment was very high so the inflationary impact was completely absorbed. As a result we got ten years of solid export-led economic growth.

The lesson here is that the best time to devalue is during a recession. Once again Osborne has failed to fix the roof while the sun has been shining (from that perspective), just as he has done by failing to set up a Sovereign Wealth Fund. However the global recession now developing may give us a second chance. Osborne should ask Mr. Carney and Treasury officials to put together a plan of action to get our BoP back into a small surplus within five years. To answer your question, that’s how weak (I prefer the term ‘competitive’) it needs to be.

Which leads us to consider what options may be open for this. What after all has caused the over-valuation in the first place? As you may have seen in my earlier post on Greece, the Eurozone and World Trade, a large part of the problem arises from the fact that capital flows through the foreign exchanges now swamp trading flows, so that the natural effect of having to finance a deficit no longer has a stabilising effect on our exchange rate. Thomas Piketty, in his recent book, observed that capital to GDP ratios have now risen to about seven, having been only around two at the end of WW2. It is a problem that affects the entire globe, and is the main reason why the Doha round disintegrated.

But it also gives us a clue as to the solution – to act on those capital flows directly. A bonus from setting up a Sovereign Wealth Fund would be that much of it would be invested overseas, thereby selling Sterling and making it more competitive. We also have at present very high levels of inward investment, which has the opposite and counter-productive effect. Partly this is due to Russian oligarchs and far eastern millionaires using the UK as a safe haven for their money (I have elsewhere advocated a big increase in stamp duty on foreign buyers of UK domestic property), but it is also due to the encouragement by successive governments of inward investment for infrastructure and industry. I say that is counter-productive and should stop. We will gain far more jobs from a competitive exchange rate that we do from mountains of inward investment.

And here’s a further twist. A failure to agree a new trade deal with the EU after exit could be a blessing in disguise. Just suppose that, in a fit of pique, Brussels chose to cut off their nose to spite their face and refuse a deal. What would happen? Well they would raise tariffs on their imports from the UK, reducing our exports. But of course we would give as good as we got, reducing our imports from them, which are far greater. What we would lose on the export swings we would more than gain on the import-substitution roundabouts. The deficit would be scaled back, and fewer jobs would be lost. Not only that, the import tariffs would provide useful extra fiscal revenue. A little bit of protectionism could be just what the doctor ordered!

Janet Daley misfires on tax credits.

Janet Daley is one of the Sunday Telegraph’s more robust commentators and often has interesting things to say, but yesterday she completely screwed up over the arguments for reforming tax credits. You can find her article here, but the most offending passage reads as follows:-

“What was missing from the Osborne defence was a very persuasive moral argument against government topping up low wages and thus creating a low-pay trap. The economist Arthur Laffer has said: ‘If you pay people to be poor, you will get more and more poor people.’ He was referring specifically to the benefit-dependent underclass held in permanent poverty by the welfare system that created perverse disincentives to work. But the same principle applies to tax credits: if you pay people to be low-paid, you will get more and more low-paid people. Instead of low-wage jobs simply being an entry point to employment, or a temporary stop-gap at particular stages of life, they become the permanent condition of a whole tranche of the population. Because low rates of pay automatically trigger the government tax credit system – raising the total income to an acceptable level – there is no pressure on the employer to offer more or the worker to seek anything better.”

NO, Janet, tax credits do NOT cause employers to pay low wages. Only one thing does that and that is the balance of supply and demand for labour. Wages are low partly because we are still in recession and partly because of high levels of immigration. Have you ever met anyone who does not wish to be better off? Even millionaires want to be billionaires! It depends on their negotiating position and on what employers can afford.

Where you are right is that there is indeed a strong moral case for reform. Reform to deal with structure and perverse incentives rather than to reduce the cost per se. The cost is cyclical and will come down as unemployment comes down. Unfortunately unemployment is now more likely to rise again due to a combination of austerity at the wrong phase of the economic cycle, high rates of immigration and the government’s interventionist intention to increase the minimum wage.

Tax credits are a duplicate welfare system which were originally introduced as a way of overcoming the poverty trap (‘making work pay’ in modern parlance). A much better, cheaper and more efficient way of doing that is to increase the earnings disregards under the old system, now aka Universal Credits. Yet Osborne has done precisely the opposite by reducing them. As so often with this government and the coalition before it the rhetoric says one thing and the action says completely the opposite. Work pays less now than it did before!

Osborne is not an intellectual. He runs for the hills at the slightest challenge. We saw it in 2012 and we are seeing it again now. That is why he cannot make the case. For a more detailed review see my previous post here.

PS. Since posting this on the Telegraph’s page I received there a couple of interesting comments concerning the Iron Law of Wages and the Speenhamland system. I responded as follows:-

“I don’t know what the unemployment rate was in 1834, but I suspect it was quite high. Hence the downwards pressure on wages.

One point that does come out of this discussion though is how comparatively rare it is that governments manage to get unemployment down to the sorts of levels that would produce sustained wage increases. It seems to boil down to how we manage inflation.

Back in the 70s and 80s any wage inflation quickly developed into a comparative wage-price spiral, forcing the government to slam on the economic brakes. With union reform that may no longer be the case, but now we have property price inflation instead.

It seems to me that there are at least four different types of inflation that require quite different policy responses: wage inflation, import inflation, property inflation and general inflation. I would welcome both wage and import inflation at a moderate and constant level; the latter because we need a much more competitive exchange rate to stop jobs being exported. These are both cost-push types of inflation and so not particularly volatile. That means measuring each separately and managing property inflation by restricting mortgage availability and only general inflation by increasing interest rates. Wage and import inflation could then be given much more leeway.

I would also welcome a change in the way we determine public sector wages, which are invariably reduced to a political football much to the detriment of our public services. No successful private sector employer would underpay his staff because otherwise he would lose them, and all the investment he has made in recruitment, training, team and experience building would be written off. The general approach is to look at staff turnover rates and increase wages when they are getting too high. We should do the same in the public sector, permitting any local HR manager to appeal for an increase on the basis of auditable high staff turnover rates.

I maintain that the rate for any job has nothing to do with comparatives but is determined by the balance of supply and demand for that particular skill in that particular location and at that particular level of seniority. And maybe some other factors as well. An appeals process would enable public sector wages to be increased when and where it became necessary.”

The Story of the Economist, Three Fishermen and a Politician.

Just back from Conference, where the atmosphere was upbeat and united in prospect of success in the OUT campaign (despite as usual what the press had claimed!). I was also intrigued by a fringe group called FreeKip, run by Councillors Bill Etheridge MEP and Paul Brothwood and by Phil Henrick, which is putting together ideas on economic policy and which, as you will know, is very much my own core interest. They have produced a document called The Mount Charles Charter, and I shall be responding to it fully shortly. You can find it here.

At dinner that evening I was at first sitting next to a spare place when a delightful young lady came and sat beside me. We fell into conversation and it transpired that she had recently joined UKIP from Labour. I asked what areas of policy she was most interested in and she soon said that she knew little about the private sector.
Now this should have been a red rag to a bull, but I found myself waffling somewhat and afterwards felt I had not done justice to the subject. So here, with the benefit of hindsight, and in case I see her again, is my Story of the Economist, Three Fishermen and a Politician.

“Once upon a time there was an Economist. Now this was in the days before fishing and politics, whereas of course there have always been economists with us. Our economist liked nothing better than to sit upon the beach looking out to sea and to ponder the ways of the world.

And it came to pass one day as he sat there that he spotted a large shoal of cod swimming about freely in the sea. So he said to himself “Hm. Those fish look good to eat and the people are starving. I wonder how much they are worth?” So he thought, and he thought, and he thought, but eventually he concluded that they weren’t worth anything at all. After all anyone could go out and catch them, but also there were no buyers out there in the sea. So if demand is zero, value must also be zero. Indeed he concluded this principle applies to all natural resources in situ; it is only when Man extracts them that value is added to them.

Now as he sat there, savouring his new-found wisdom, a young man came along and sat and entered into conversation with him. And when he learnt of the fish in the sea he said “Wow. I wonder how much money I could make if I caught those fish and sold them to the people, who are starving”. And the Economist encouraged him, saying that barriers to entry to this industry are low. And so he did.

So it came to pass that in due course the young fisherman landed his first catch upon the quayside. And as he did so the Economist called out to him and asked “How are you going to price your fish? If you price them too high you won’t sell them all, but if you price them too low you won’t make as much money as you might have done.” But the young fisherman was canny and replied “I shall adjust my price as I go along so that I just attract enough customers to buy all my fish.” And so he did.

At the end of the day the young fisherman was ecstatic. “Look at all this money I have made. Let us go to the pub and celebrate”. But the Economist was cautious, saying “That is not your profit, that is only your income. By moving the fish from the sea to the quayside you have added value to the fish because the balance of supply and demand on the quayside is more favourable than it was in the sea. And by finding the marginal price you have maximised your income. But you will not know if you have made a profit until you have deducted your costs.”

It was only at this point that it dawned upon the young man that his costs, which were not inconsiderable, were an entirely separate and unrelated figure to the value he had added to the fish. Only if his income was greater than his costs would he have made a profit, but it might just as easily be the other way around, making him a loss. So he hastily totted up his costs and, to his great relief, discovered that he had indeed made a large profit.

As he and the Economist sat drinking in the pub a second young man came and sat and entered into conversation with them. And when he learnt how much money the first young man had made he exclaimed “Wow. I could do that too, and become as rich as you are”. And the Economist encouraged him saying that barriers to entry to this industry are low. The first young man was also at first pleased at the prospect of having a friend in the industry. And so he did.

But when in due course the second fisherman landed his catch beside that of the first upon the quayside, the first fisherman quickly realised that something was wrong. Although he was doing nothing different, and although the level of demand on the quayside remained unaltered, the supply had doubled, which meant that the marginal price had fallen. He was furious and remonstrated with the Economist, but the Economist reminded him that the law required open competition and that there was nothing he could do. So the two fishermen continued to fish and both made reasonable but not excessive profits.

And it was not long before a third young man came and saw the two fishermen making a reasonable but not excessive profit. So he said to himself “I could do that too.” And so he did. But when he landed his third catch beside the first two, the marginal price fell still further and thence all three fishermen made a meagre profit just above the breadline.

Indeed a fourth young man also came and considered becoming a fisherman. But when he saw the meagre profits the first three were making he decided there was not enough money in it. And so he didn’t. But the people were delighted at the plentiful supply of cheap fish in the shops and considered themselves much better off. As the Economist observed, they were better off because they could now satisfy a greater proportion of their needs.

It was at this juncture that the Politician arrived on the scene. He was under pressure from his voters who were demanding better public services and a more reliable welfare state, and wanted protection from many nasty foreigners who wanted to enslave them in volumes of red tape and regulations, and to chop their heads off. The Politician replied saying “You can have all these services but you must pay taxes for them as they do not grow on trees.” But the people were angry and protested violently saying “These are our Human Rights. They must be freely available to all. If you want to tax anyone, go and tax those fat fishermen over there. Do not tax us as that is not fair.” And so he did.

But the Politician, not being of the UKIP variety, had not done his homework and when he did as the people demanded and imposed a profits tax on the fishermen he discovered it produced very little revenue. So he went back to the people and said again they must pay taxes for the services they wanted. But the people grew even angrier, shouting ‘conspiracy’ and ‘tax evasion’ and ‘fraud’, so the Politician had to find other ways of taxing the fishermen.

So he imposed business rates, and employers’ national insurance, and insisted the fishermen take expensive training courses to obtain qualifications they did not need. And lo his friends in local government joined in too, imposing parking charges and other restrictions, and painting yellow lines all around.

But the fishermen were sore afraid because they knew their costs would now exceed their income. And so they did, and they all went bust.

And the people were by now indignant also, asking “What has happened to that plentiful supply of cheap fish which was in the shops and which is no more, for we are starving once again.” And they blamed the Politician for mismanaging the economy, even though he had simply done as they had demanded.

So they all lived miserably ever after. Indeed quite a lot of them died.”

Why the Single Market is a Bad Idea

Many people who are prepared to consider changing our relationship with the EU still say that remaining a member of the Single Market is essential to our economic future. But why, exactly? Do they actually understand what it is? Let’s have a closer look.

As I see it there are three principle characteristics to the Single Market as follows:

1). The harmonisation of commercial standards and procedures. Yes – all jolly good stuff. But it’s been done now and is water under the bridge. Nobody is suggesting we revert to the old arrangements, so it’s not an issue. In any case we can always voluntarily choose to adopt new standards at any time if we so wish.

2). The removal of tariffs and other barriers to trade. Again all very useful, but done now and nobody is suggesting they be resurrected in the event of Brexit except as a mirror image on our side of what is now there [Also see PPS below]. It is certainly not in Brussels’ interests to do so as we import more from the continent than we export. Roger Helmer also has some interesting perspectives on this here. In any case if we had to go back after Brexit to trading under WTO rules both imports and exports would reduce so the deficit as a whole would reduce, which would help conserve employment within the UK! A blessing in disguise? Certainly we can handle it either way, so it’s not an issue.

3). The creation of free movement of people between member states and of capital within the eurozone. This is the crux of the matter and has created massive instability within both the eurozone and the EU as a whole. It has been like removing the bulkheads from within an ocean-going oil tanker. As soon as the first big wave comes along all the oil slops down one end and the tanker up-ends and sinks.

Ask any economist or businessman what they consider to be the single most important precondition for steady long-term economic growth, and almost certainly they will say ‘stability’, or something similar. So why do they contradict themselves when it comes to membership of the Single Market? Roger Helmer may again have the answer here, where he observes how Brussels will stop listening to any large organisation that does not toe its party line.  The access that their size and wealth affords these organisations to lobby the EU creates a lumpy playing field to the detriment of all who have to compete with them. It is SME’s that create most jobs.

It is also noticeable how many will jump to unfounded conclusions. For example Labour claim that all EU laws now on our statute books, including employment protection legislation, will automatically be erased. It won’t. Academic institutions, who ought to  to know better, assume that all international cooperation will come to a standstill. Nobody is suggesting that temporary residence will be a problem, and as for citizenship the aim is simply balance.

I would say ‘balance and stability’ in all things. Balance in our fiscal accounts, our external trade, in monetary policy, regional policy, the balance between employment and inflation, between left and right (equality vs free enterprise and aspiration) and of course balanced migration. Indeed that is how I would describe UKIP’s position on the political spectrum as a Centre party.

PS. 03 Feb 2016. Article by Roger Bootle in the Telegraph entitled “We should not be swayed by sound-bites and slogans about Europe.”

PPS. 16 Nov 2016. Unbalanced free trade is also a danger. See my later post “Do I believe in Free Trade?”

Pensions

In this post I argue the case for the following changes to the state and public sector pension schemes, as I believe the recommendations from Lord Hutton’s report in 2011 fell far short of what is both required and possible.

1). Funding the state and public sector pension schemes, thereby saving in excess of £20bn a year in employer (taxpayer) contributions, and hedging future demographic risks,

2). Removing employers from public sector pension schemes altogether thereby creating a purely bilateral relationship between members and administrators. This can be achieved simply by adding employers’ contributions to salary and treating them subsequently as employees’ contributions. This would then :-

a). enable members to tailor their schemes to their individual requirements. They would be able to set two of the three parameters – contribution level, retirement age and pension level – and obtain a quote for the third,

b). amalgamate all of the many thousands of public sector schemes into one, thereby saving millions on administration costs as well as addressing Hutton’s concerns over local accountability and scheme variation. Hutton actually doubled the number of schemes required, each with its own board of trustees and administrators,

c). allow members to move between the public and private sectors without suffering a break in their pension arrangements,

d). enable the defined-benefit arrangement to be retained by presuming an underlying growth rate of 4% (Piketty’s 5% unmanaged average – see below – less 1% risk premium). The taxpayer would still bear the risk of any shortfall, but would benefit from fund growth in excess of 4% (more likely). It is the 4% fund growth allocated to the scheme that enables the contribution rates to be reduced. However during the transition from the pay-as-you-go to the funded basis the cash-flow shortfall would be made up from additional government borrowing as for the Sovereign Wealth Fund. Borrow twice what is required for cash flow and the extra will grow sufficiently over 30 years to pay off the full amount on redemption plus interest. If funds are not available at 3% or less the transition is simply extended until they are once more.

3). If necessary introduce clawback to state pensions to balance the books. This is in any case in line with the insurance principle indicated by the name NIC’s. These measures give the lie to those Ponzi-scheme artists who propose ever greater immigration to fund future pensions.

4). Limiting the amount of cash lump sum withdrawals from any pension, public or private, so that the member could not end up back on benefits later on.

Funding

It is around this time of year that my pension schemes send me their annual statements showing whether my funds have grown or not. I have a couple of defined contribution (money-purchase) schemes, and it is twenty years now since I stopped paying into them. They are both now invested fully in global managed funds of one sort or another, though in the early years there were some fixed interest and with-profits funds as well. Each year I calculate the net growth after charges and before income draw-down. So this year I thought I would calculate also the average net growth over twenty years. You can do this in two ways. You can either calculate the annual rates first or then average them, which give you a compounded rate, or you can take the growth on the opening value and divide by twenty, which gives you the simple rate. On the first basis the results are 6.2% and 7.4%, and on the second 10.4% and 13.2%. I also looked up the performance of one of the leading investment trusts, the Alliance Trust, and found a corresponding growth in share price of 5.4% and 7.4% respectively. That of course is ex-dividend, so you can add another two or three percent to get the full return.

These all compare favourably with Thomas Piketty’s 5% long term compounded rate of return on capital. Clearly his is an unmanaged average. Any half-competent fund manager should be able to beat it. I mention this also in the light of my previous recommendation to hedge the National Debt with a Sovereign Wealth Fund.

When I read Lord Hutton’s report on the reform of public sector pensions four years ago I scoured it for his conclusions about funding. In fact there is only one short sentence in the entire report about it in which he states that the “benefits of funding are not clear”. I have to say I suffered something of a Victor Meldrew moment when I read that! Not clear? Try going to Specsavers, m’lord! And then the penny dropped. To anyone with experience of corresponding with HM Treasury and its Ministers, this phrase “the benefits are not clear” is standard mandarin-speak for “over our dead bodies”. What is clear is that poor old Lord Hutton had been squished by the Treasury long before he had even sat down to write his report! I can quite see that he would want to continue on a defined-benefit basis, but that doesn’t rule out funding. I can also see that there would have to be some form of interim funding to cover the cash-flow switch from using contributions to pay current pensions in payment to investing them, but with 30-years bonds currently only costing 3% pa the same conclusion applies.

Hutton provides tables which show the level of contributions typically paid into public sector schemes. There are in fact thousands of them, one for each employer, including local authorities, and a few of them are funded or semi-funded. Some, where early retirement is normal, such as the Fire and Armed Services have combined contribution levels over 30%, but most work out at about 20%. Of these typically 30% of the totals are employee contributions.

In the late 80’s I was involved with the setting up of two employer money-purchase (defined contribution) schemes. I cannot recall exactly what contribution levels we settled on, but I am pretty sure the combined contributions were less than 10% of salary. This indicates that at least half of the public sector contribution levels could be replaced by fund growth. According to Hutton the cost of the public sector employer contributions (70% of the combined total) is around £30bn, so half the combined total would be in excess of £20bn.

Employer Participation

Employer participation is rooted in the days when employers adopted a patrician attitude, and when jobs were for life. For me this simply does not fit with a libertarian approach or with the flexibility people now require for careers involving many different employers and for varying life-styles. The employer’s pension contributions are all part of the salary package and in my opinion the employee should have maximum flexibility on how that is deployed.

The simplest way of doing this is to set the reduced total contribution rate, 10%, as the employee’s contribution by adding the amount transferred from the employer’s contribution onto gross salary. That would on average represent an increase in gross salary of 4%. The resulting benefits in terms of transportability, flexibility and administrative cost were set out above and are I trust self-explanatory. In the early years the employers’ contributions would still be required for cash-flow purposes, but would phase out later as the fund builds up, though as these would boil down to borrowing either way there is no need to retain the link.

The next question is should this be a compulsory employee contribution, or could employees opt to receive some or all of it in pay now? The national interest surely does not extend beyond ensuring that as many people as possible are not dependent on the state for non-pension benefits in retirement, so we have to look at the overall position.

The role of the State Pension

Many people have noted the absurdity of the National Insurance system when there is no separate insurance fund to pay for those services. In fact almost all the NIC contributions go towards paying for the state pension on a pay-as-you-go basis. Total NIC receipts in 2014/5 were £110bn whereas the total cost of both state pensions and pension credits came to just over £95bn. However ONS forecasts suggest this cost will have risen to over £435bn by 2062/63, or nearly £500bn if you add in other benefits paid to pensioners such as housing benefit and disability benefit. Clearly this is unsustainable unless massive changes are introduced.

Possible ways of meeting this cost could include:
• Increasing the statutory retirement age (already increased to 68 by then)
• Funding
• Increasing employee NIC’s
• Introducing clawback where pensioners have other income over a certain threshold, say £25k. A clawback rate of 50% would then give a taper up to around £40k. This would also be in line with the insurance description of the contributions.
• Allowing Inheritance Tax relief (or CGT relief in the hands of the beneficiary if IHT is abolished but replaced by CGT) for legacies paid into a pension fund (or to pay off student loans for that matter!)
• Allowing members to switch state pension funds into other pension schemes for a reduction in qualifying years.

The answer probably lies in a combination of all of these, but I do also suggest that when an individual’s total pension provision, taking state, employer, private schemes and SIPPs all added together, at any age exceeds the annuity cost of providing a pension from that age at the top of the benefit tapers, then they should no longer be required to pay NPCs. The same test could be applied to reducing public sector contribution rates.

Constitutional Reform

Am I the only person in the country to think that an elected House of Lords is a thoroughly bad idea? I suppose I am coming at this with my professional management consultancy hat on, under which I advise that it would destroy single-point accountability by Parliament as a whole. The House of Commons and the House of Lords are essentially doing the same job; creating our laws and managing the statute book. What happens when something goes wrong? Who would you blame? For as sure as eggs is eggs each of your two elected members would blame the other! It is recipe for buck passing and unresolvable chaos.

Nor is it necessary. As Confucius once say, it only takes one link in a chain to break and the whole chain is broken. In other words it only takes one House to be democratically accountable and Parliament as a whole is democratically accountable. Making the House of Lords elected as well adds nothing. Except chaos. I would rather abolish the House of Lords altogether than make it elected.

But then the House of Lords does have an important role to play as a revising chamber. It is a bit like the quality control stage at the end of the production line. To do that job effectively you need people with talent and experience. Unfortunately talent and experience are seldom high priorities in an election, and indeed there is rightly no requirement for a representative to have them. People generally go for someone local or with a similar background to themselves. To acquire people with talent and experience you need an appointment system.

The only question is: who does the appointing? The problem we have at present is that the House of Lords is the private fiefdom of the Prime Minister of the day. He can, and does, stuff it with as many of his own party cronies as he can get away with. Even then we seldom get people with talent and experience! I don’t actually have a problem with the size of the membership, as members tend to attend only when they feel they have something to contribute. Given the almost infinitely wide range of subjects involved, a wide range of members and interests is a benefit if not indeed essential.

I accept that the person or group doing the appointing must themselves be democratically accountable; all that is necessary is that they are independent from Parliament. I also observe that in fact there are a number of functions and issues in which Parliament itself has too much of a vested interest. How about these for starters?
• The Judiciary
• The Armed Forces
• Granting of the Royal Assent (as a purely constitutional compliance matter)
• The Honours system
• MPs’ pay and conditions
• The Boundaries Commission
• The Parliamentary Commissioner
• The National Audit Office
• The Office for National Statistics
• The Office for Budget Responsibility
• In fact all constitutional matters and matters that should be kept independent from politicians generally.

My proposal is that we elect a quite separate Constitutional Council – it needn’t be large – perhaps just a dozen or so regional members with a minority of co-opted law lords as well, and perhaps chaired by the Lord Chancellor, who would be elected from within their own number – to take responsibility for a written constitution as well as for the above responsibilities.

In my book a sovereign constitution is about the institutions and procedures necessary to uphold democracy. It would not incorporate anything such as a bill of rights as that properly belongs on the statute book. Thus Parliament would be responsible for the Statute Book, and the Constitutional Council for the Constitution. Two quite separate tasks and documents which do not overlap.

None of this would adversely affect the monarchy, of which I am a strong supporter. An elected president could never provide the continuity and experience that all the Queen’s prime ministers, on both sides of the political divide, say they valued so much from their weekly audiences with the Queen. Nor does the monarch have any absolute powers. She has the right to be informed, and the right to advise, and that’s it. Everything else she does she does on the advice of her ministers. As a result democratic accountability is simply not relevant.

However, regrettably, we have so undermined the authority of the monarch over the past century that she can no longer act in any proactive way as custodian of the constitution. This profound weakness in our current arrangements was notoriously brought into focus by the adoption of the Lisbon Treaty. If a Constitutional Council had been in place it could have advised HM not to grant the Royal Assent to that Bill, at least pending a referendum in accordance with a written constitution, and no-one would have thought that undemocratic. Changes to the constitution itself could also require a referendum. They should not need to be frequent.

Finally I would advise that a written constitution should require all foreign treaties to contain a five-year break clause. These could default to a continuation, but the point here is that it should not be possible for one Parliament to bind its successors. I would also personally favour a clause prohibiting the courts from awarding financial compensation for non-financial loss. After all, life and limb are priceless.