Sunday, 28 February 2010

Boring is hard to sell

Perhaps it's just a reflection of my experience, but I simply don't think general life is very exciting. It has its moments, of course it does, there are spells of huge joy and deep misery. Most of it, however, is just getting on with getting on. I know I am luckier than most in that my field of work has provided variety and intellectual challenge of a type not many enjoy. When we look at the general scheme of life, though, it is not full of thrills.

If you are a politician faced with an electorate plodding through their everyday lives it's fairly obvious that promising them rewards they do not have to work for is more likely to gain their vote than telling them they shouldn't expect riches if they vote for you. This is one of the reasons socialists will always garner votes. They claim there is wealth for all if only they could be in charge and arrange things suitably. Every time they are elected they fail to deliver on that promise, and every time the next election comes around they promise the same thing while the alternative candidate does not. The promise itself is as enticing, yet as tantalising, as the rack of scratch cards on a shop counter. Faced with a choice between the idealist claiming he can make you rich and the realist saying he won't, it is hardly surprising that people vote for the former.

That they have been let down and made worse-off by the idealist every time he has gained power is neither here nor there. At least he claims to offer the chance of a lottery win. Offering bad news or "sorry chaps, it's going to be more of the same" might be factually accurate and unimpeachably honest but it is not enticing to those who see no way out of their current rut other than a fairy godmother.

The current state of the UK economy is a matter of fact. No fairy godmother will come along to change things. The recession has reduced GDP by around 6.2%. A degree of reduction was inevitable regardless of international recessionary pressures because some business was dependent on continued additional borrowing by individuals and that cannot go on for ever. Some of that borrowing was for things that were consumed immediately and had no tangible long term benefit, such as holidays. Some was for the purchase of goods to replace worn out items, perhaps furniture or a washing machine that pumped more water on the floor than through the drainpipe. Some was for the purchase of goods previously not enjoyed by the buyers, perhaps a dishwasher or a garden shredder. Some was for up-grading of items where what was already owned was perfectly serviceable but not the latest thing, such as flat tellies and fridges with two doors.

Two factors apply to limit the continuation of that trend. First, incomes dictate how much can be borrowed and once you have borrowed you have to pay interest, thereby reducing your disposable income and limiting your capacity for further borrowing. Secondly, once you have acquired a new thing, whether as a replacement, a new product or an upgrade, it will be some time before you have to spend on the same type of item again. Even in a country of 25 million households the time will come when the numbers up-grading their tellies starts to fall. Changing from a fat telly to a flat telly is a different kettle of ball park than changing from one flat telly to another.

There is probably a clever person somewhere who has calculated the overall level of person debt at which further borrowing will not be feasible, but their work has evaded my attention. The precise figure (if there is one) really doesn't matter. All that matters is that funding a certain percentage of national business on credit must have a limit. There is a limit for individuals, which is why Mr & Mrs Ordinary borrow £1,000 on a credit card to buy a flat telly plus surround-sound home cinema system and then don't borrow again until they have paid back that sum. A sudden rush of increased borrowing will boost the business of the vendors and manufacturers, but only for so long as people can afford to borrow more. One day it will slow down but the shops and distributors and manufacturers will have staffing levels to cope with the previous massive demand. A reduction in demand will mean job losses.

We now know that people borrowed more than they should because their actions tell us. They are paying-off personal debt faster than at any time in history. The reduction in demand for unnecessary replacements and up-grades is an inevitable consequence of the previous demand being a temporary and unsustainable bubble. That aspect of reduced GDP would have happened at some time regardless of other factors. Careful governments regulate the amount of consumer credit because they know that only a certain level can be sustained. But you can't easily win votes by saying "we are going to make it more difficult for you to borrow the money to buy a fridge with two doors in place of your boring old one". Perhaps it would not be a vote loser if the politicians had the courage to explain that the bursting of demand bubbles does far more damage than the benefits those bubbles delivered during their short life.

What I find utterly baffling is the apparent inability of people to equate their own financial situation with that of the government. (I infer this apparent inability from the indication from opinion polls that some people are still prepared to vote Labour) All around the country there are homes with Ma and/or Pa saying "sorry offspring, it's Margate not Marbella this year" and "no we can't get new car, we don't have the money because we are still paying for the telly and the duck-egg blue leather sofa". When money was, or appeared to be, available it was spent. Now that it is not available it is not being spent and it's beans on toast at home rather than chicken-in-a-basket at the Dog and Duck. Government spending includes countless sums on fripperies that appeared affordable during the bubble years. They weren't affordable before, so why are they still seen to be affordable now that the money has run out? It's sheer madness. But there are no votes in saying "we are going to get rid of half a million unnecessary people from the public sector payroll". Perhaps it would be a vote-winner if politicians had the guts to say that continuing to employ the pointless half million drains money that could otherwise be used to pay-down personal debt sooner or to allow a business burdened with taxes and the red tape of excessive regulation to stay afloat.

The truth is that there is only so much money and there is only so much wealth. Creating more money but no new wealth benefits no one. Only creating wealth allows an economy to expand and people to enjoy sustainable higher levels of material comfort. Creating wealth is a slow process once a certain level of wealth has been achieved. China, India, Brazil and others are creating new wealth at a fast rate because they are still far below the level we currently enjoy, indeed below the level we enjoyed twenty and more years ago. Once a particular level is reached it becomes difficult to create more. Perhaps two percent a year can be achieved, maybe even three, but two percent of a lot is a lot whereas ten percent of little is less and far more easy to achieve.

It's terribly dull to say "we are actually pretty comfortable in this country, so don't expect a lot more comfort any time soon". Yet that message is essential if there is to be any hope of realism entering governmental economic management. Our current government is clinging like a barnacle to the bubble of apparent but unsustainable wealth created by them allowing personal credit to get out of hand. Much of current government spending was only undertaken in the first place because of the tax revenues arising from the credit bubble. That revenue is no longer there, yet they insist on maintaining their spending as though it were. They don't have the courage to say "sorry chaps, I know it's rather dreary, but we can't afford it any more".

I long for dreary. I long for a government that sets its spending according to its income rather than vice versa. I long for a government with the guts to say "don't expect a lottery win, it ain't going to happen". It's not an easy sell, the desperate and irrational will never buy it, but I think most of the rest would if only someone grew some balls and tried it.

Saturday, 27 February 2010

A strange feeling about global warming

Listening to a show on BBC Radio Five Live I heard a woman in Scotland being interviewed about snow. Apparently they are having quite a lot of it up there at the moment. The interviewer asked whether she put it down to global warming. He obviously lost the cue-card that requires use of "climate change" rather than "global warming" in all BBC programmes. It was on the radio but I got the distinct impression that the woman being interviewed was one of those short feisty ladies who is as broad as she is tall and takes no nonsense from anyone.

Her reply? "I don't believe in global warming, I think these things come and go". The interviewer let his guard slip for a second time and said "you can say that, I'm not allowed to". This was not the first time I have encountered a senior BBC broadcaster say this sort of thing, I correspond from time-to-time with one who has confirmed to me that the policy line is strict. My correspondent must remain anonymous but Friday afternoon's interviewer was Peter Allen, a serious journalist with a wealth of experience and, in my opinion, an excellent broadcaster. He will probably get away with letting the cat out of the bag because the mood has undoubtedly changed over the last few months. The occasional snippet of dissent has appeared on the BBC website and even flagship news and comment programmes like Newsnight have hosted debates about some aspects of the great global warming hoax.

I find myself with a curious feeling about this.

It is probably only about three years ago that I started to read into the subject. As the warnings of dire consequences became more and more stark, so my bullshit meter began bleeping loudly and I felt I had to try to understand at least something of the technical case the warmists were putting. Of course I could only reach a conclusion that made sense to me, that it might not make sense to others is a matter for them. What I concluded, subject to revision as and when new analyses or evidence appeared, is that it was nonsense just like every other end-of-the-world prediction I had heard. Indeed, much of it seemed to me to have no more substance than a nutter wearing a sandwich board and proclaiming the descent of London into hell and damnation if we don't all repent our sins by 2.14pm next Monday. I didn't have to wait until 2.15pm on Monday to be able to dismiss his prediction of imminent doom and once 2.15pm arrived he was back again with a new deadline and a message of even more grisly suffering for those who sin.

As the last three years have progressed the modern day nutters in sandwich boards have followed the tried and tested path. When adverse consequences they predicted have not materialised they have just moved the dates and predicted that things will be even worse because we have not done what they have told us to do. And all the time people with greater technical skills than me have been continuing to chip away at the so-called science. Every month seems to uncover a new hole in the case put with absolute certainty by the doommongers just a few short years ago.

The "climategate" hoo-hah has brought matters to the public gaze when previously you had to hunt for evidence on blogs and websites. Suddenly doubts about the reliability of historic temperature reconstructions were headline news when previously they had been almost entirely the subject of discussion between those who chose to investigate. With typical perspicacity our absurd Prime Minister chose to deride sceptics as "flat-earthers" just as the shallowness of the case for man-made catastrophic global warming was being exposed publicly and brutally as it had never been exposed before.

And that is where my strange feeling comes in. Perhaps it is not a very strange feeling at all because opinion polls suggest that the Chicken Licken scenario has never persuaded more than a bare majority. But it feels strange to me. My feeling is that the views I hold have now won the argument. Before I felt like a little voice spouting what I believed to be obvious common sense but never felt that my opinion was the default position. Now that has changed. Those who thought "it sounds like nonsense to me but I suppose those clever scientists might be right" are able to delete the last nine words because their newspapers tell them of the CRU's fiddling of the figure and the IPCC's false claims about Himalayan glaciers, Amazon rainforests and all the rest of it.

Unravelling the paraphernalia of the warmist machine will take time. Politicians who have attached themselves publicly to the warmist case will not back down easily. It will probably require changes of government in many countries before the political powerbrokers reflect the new reality unless incumbent leaders realise their own careers might depend on them abandoning their established positions. They have the evidence they need to say "sorry chaps, we were advised the evidence was unimpeachable and now we know we hitched our wagon to a three-legged nag"; somehow I can't see that happening any time soon.

And then there are the vast financial interests that depend on the catastrophic man-made global warming theory such as the carbon credits nonsense. We know it's nonsense, you only need to ask what it involves to see this. It is, quite literally, trading in hot air. Then there are the "green energy" cons, with companies being subsidised to produce expensive electricity inefficiently. Once they taste the sweet milk from the subsidised teat you know they will suck harder and others will want a piece of the action. None of these vultures will give up the game without a fight.

The biggest game of all is that played by the UN and the EU. We know they are corrupt organisations run almost exclusively by those who proved themselves unfit to run individual countries. These organisations are operated primarily to perpetuate their own existence and they expand their powers so that the act of perpetuation is made easier. Nothing is better for them than an issue about which they can say "the task is so big that only we are big enough to deal with it".

It will take time. That's fine, I can wait because I am basking in the warm fuzzy glow of vindication.

Friday, 26 February 2010

A thought on discrimination

I suppose it is inevitable that every government will try to defend itself by putting as good a gloss as it can on the state of things under its stewardship. Equally inevitable is that some aspects of life are bound to improve under a government of any party, and a government in power for a decade or more will be able to point to quite a number of such issues.

Of course whether a change is an improvement is a matter of taste. Some things that were generally perceived to be improvements in one age might be treated with utter derision a generation or more later and be reversed to (perhaps temporary) universal acclaim. How many "improvements" are actually caused by government is always open to debate.

Looking back over the last thirteen years it is probably fair to say that far fewer people today are refused employment because of their pigmentation, gender or choice of intimate companion. There can be no doubt that each of these "improvements" was intended to be a result of the massively expensive programme of attempted social engineering undertaken by the present government, but no one can measure the effect government policies have had. Perhaps they sped-up the process of open-mindedness, perhaps it would have happened anyway - after all, the acceptance of homosexuals and those of dusky hue progressed at accelerating pace throughout the 1950s, 60s, 70s, 80s and 90s.

I have long been doubtful of the power of government to do anything other than steer the agenda gently in one direction or another on such social issues. Introducing laws to make it an offence to discriminate on the grounds of gender or so-called race must, I suspect, have had an effect because they brought to the issue to the fore and required employers to think a little more about whether someone was suitable to fill a vacancy. We are a generally law-abiding people, even if we do not like a particular law, and I suspect many an employer who resented having legal limits put on who he might accept or reject for a job nonetheless complied with the law when previously he might have acted differently.

Yet there is only so much that can be achieved by such laws. If they are to be effective I believe they must tap into an existing chain of thought. I remember hearing many a narrow-minded bigot in the 60s and 70s say he wouldn't want a black family in his street or a black colleague at work because they are different or untrustworthy or inherently idle or dishonesty. And there was always a "but". It was always the same "but" ... "but I don't mean Mr Patel at the Merrymart down the road, he's a lovely bloke, keeps that shop open to nine at night, very convenient, much better than old Frank who had it before him" or "but I don't mean Winston next door, he's a lovely bloke, cuts old Doris's hedge, lovely family" or "but I don't mean Mr Khan at the curry house, he's a lovely bloke, does great food he does and he gave our Sharon a job in her school holidays". And so it goes on.

The "but" is nothing more or less than "but those I know are actually just the same as us". And how true it is. All over the world countries are full of the clever and the thick, the idle and the industrious, the honest and the crooked, albeit with a different balance between these various elements, just as they are full of the old, the young and the middle aged. Anti-discrimination laws are just part of a package of factors that steer us towards greater acceptance of people from backgrounds different from our own. To my mind the most important factor in persuading people not to discriminate unfairly is exposure to those against whom they might be inclined to act. The unknown is always slightly scary, it become far less scary when it ceases to be unknown. As time passes we will all experience people from a wider and wider variety of backgrounds. The unknown will not just be countered by knowledge of one Mr Patel, one Winston or one Mr Khan but by knowledge of dozens of people from varying backgrounds.

That is not to say that such knowledge is a one-way street. When immigrants from a particular country are drawn almost entirely from the bottom of the pile the impression they give is unlikely to be positive. That might well be unrepresentative of their country's native inhabitants as a whole, but the evidence available to us will inevitably lead to certain conclusions being drawn whether or not they are fair. We can only form views based on evidence and the quality of the evidence dictates the range of conclusions we are likely to draw.

Similarly, some countries have a greater culture of self-sufficiency than others. In some you work or you starve, in others you work or you get a hand-out from the UN. In some you work and have the chance to improve your standard of living steady throughout your life, in others you can never expect more than mere subsistence. You would be hard-pressed to find someone from Thailand who is content to draw benefits. Not only is their economic system one of work-or-starve, but their culture is that living on the result of another's work is shameful. Not so if you are from, for example, Somalia - a country so poorly managed that it is dependent on vast amounts of aid simply to feed its people engenders a culture of dependency. Not just that, but work is not rewarded there for ordinary people, they cannot hope for anything more than subsistence. It is hardly surprising that they do not understand that working in the UK can produce a standard of living far higher than benefits could ever give them - it is just a different world, a world wholly outside their experience. When you also consider that the standard of living they enjoy here on benefits is higher than they could ever expect in their homeland, it is hardly surprising that there is no work ethic.

No amount of law or regulation will prevent people seeing what is before their eyes. It can, if aimed carefully, point their eyes in a different direction so that they see something that was previously out of focus, but it cannot turn apples into oranges.

There will always be justified discrimination against some immigrants because the culture of their country of origin gives rise to a fair presumption that they are unlikely to be industrious. It would be wrong to make too much of this point, it can only ever be a presumption. However, all true presumptions are based on evidence not on irrational prejudices. Once anti-discrimination policies seek to contradict evidence they are bound to result in practices that are both economically and socially harmful. It is one thing to make the previously unknown known, it is another entirely to pretend that what is known as a fact is actually a fiction.

Monday, 22 February 2010

How very stimulating

We have heard an awful lot over the last couple of years about governmental "stimulus". I have severe doubts about the benefit of it, after all if there were no downside all we would need for perpetual riches beyond imagination is ever greater government spending. Being a simple soul I have a simple view of the matter. Let me explain.

Mr Ordinary earns £10,000 a year after tax. Assume he will earn £10,000 a year after tax for each of the next five years. Mr Average lives next door to Mr Ordinary and he earns the same. They each have £7,000 to spend after housing and utility costs and they do all their shopping at Mr Patel's Merrymart. In Year 1 Mr Patel receives £14,000 in his till, £7,000 each from Mr Ordinary and Mr Average.

On January 1st of Year 2 Mr Average loses his job and is paid £6,000 a year in benefits rather than £10,000 in earnings, his bills remain the same so he has only £3,000 for other shopping. On the face of it Mr Patel will receive £10,000 not £14,000. Oh woe, poor Mr Patel. Mr Ordinary decides that the risk of Mr Patel's Merrymart going out of business is too dire to contemplate, so he decides to borrow money to help Mr Patel stay afloat.

He borrows £4,000 over 4 years at 7% interest. In the first year of the loan Mr Ordinary has £10,720 at his disposal (his earnings of £10,000 plus the £4,000 be borrowed minus £280 interest on the loan minus £3,000 of other bills). Mr Patel's takings are therefore almost what they were before, he gets £10,720 from Mr Ordinary and £3,000 from Mr Average, making a total of £13,720. The Merrymart survives, hip-hip-hooray.

In year 3 Mr Ordinary only has £6,720 to spend (£10,000 minus £3,000 of bills minus another year's interest of £280) and Mr Average still only has £3,000. Mr Patel's till receives just £9,720.

On the 1st of January in Year 4 Mr Average gets back into work at the same rate of pay as before, but Mr Patel still loses-out. In year 1 he received £14,000 but now he receives £13,720 because Mr Ordinary has to spend £280 on interest.

In Year 5 Mr Ordinary decides to repay the loan in equal monthly instalments over the year. The total interest he pays for that year is £140 but he also loses £4,000 through having to repay the sum he borrowed. Mr Average still has £7,000 to spend but Mr Ordinary only has £2,860, Mr Patel's takings are only £9,860. Maybe the Merrymart survives, maybe it doesn't, but the result of Mr Ordinary's stimulus package is a long-term reduction in takings.

Had Mr Ordinary not borrowed money to fund his Merrymart stimulus package Mr Patel would have taken £14,000 in Year 1, £10,000 in Year 2, £10,000 in Year 3, £14,000 in Year 4 and £14,000 in year 5; a total of £62,000. As it is he receives £14,000 in Year 1, £13,720 in Year 2, £9,720 in Year 3, £13,720 in Year 4 and £9,860 in Year 5; a total of £61,020. The difference is the interest paid by Mr Ordinary. Of course growth in the economy generally might occur thereby resulting in Mr Ordinary and/or Mr Average receiving pay rises which allow the overall takings in the Merrymart to rise. But it might not. What is certain is that borrowing to boost Mr Patel's takings in Year 2 will result in a reduction in disposable income until such time as the loan is repaid. Economic growth does not change this fact, £980 goes in interest rather than being taken by old Doris on the till whether or not that £980 comes out of static earnings or growing earnings.

The gamble is that the boost to Mr Patel's takings will allow his business to survive in Year 2 when otherwise it would have failed. The problem is that, in the very basic example I have given, if it would have failed in Year 2 it would also be at risk of failing in Years 3 and 5 because the borrowed money can only be spent once (in Year 2) and repayment of the debt reduces takings below what they would have been in Year 2 had no borrowing been incurred.

Obviously the example I have given is extremely simplistic, nonetheless it illustrates the difficulty I have with the concept of the "economic stimulus". Giving a boost now is all very well but it results in lower disposable income in the future because debt must be repaid. Who can say whether the instant benefit of giving a boost now is greater or less than the future detriment? The answer, of course, is that no one can say.

Saturday, 20 February 2010

We are all expert economists now

So, twenty "expert" economists say the government should start to cut it's spending now and sixty-four "expert" economists say it should not. What fun. That tells us all we need to know about "expert" economists. Economics is not an empirical science. Even when a decade or two suggests that a particular policy is likely to promote growth or limit inflation, the next decade might throw-up different circumstances that render previous policies wholly useless.

What I find so fascinating about the current debate is that it revolves around essentially simple concepts, albeit concepts that the "experts" seem determined to make complicated.

Take Mr Earnest, a diversity facilitation counsellor. He creates and adds no value anywhere yet some public sector body is stupid enough to pay him £15,000 after tax. He spends it all, that's £15,000 going into tills and helping to pay the wages of those employed by the businesses he patronises. Take him off the payroll and give him £10,000 in benefits rather than £15,000 in nett salary and the amount he will put in tills is reduced by at least £5,000, with a knock-on effect to the financial well being of the businesses that previously enjoyed his custom.

Then take Mr Widget who works in a factory and also receives £15,000 after tax and would receive £10,000 in benefits if made redundant. He also spends his £15,000.

The effect of each of them being made redundant is the same, their redundancy diminishes the amount of cash sloshing around in tills in the places they shop.

There is, however, a significant difference between the two. Mr Earnest can never make a contribution to the economy other than to spend his salary. Nothing he does in his job can ever add to the country's wealth because he does not produce anything and he does not add value. On the other hand Mr Widget's job does add to wealth provided the company he works for can sell its products at a profit.

If you had to choose between spending taxes to save Mr Earnest's job or Mr Widget's, which would you choose? I would think the answer is obvious, you save the job which has the potential to add value to the economy rather than the one which is guaranteed never to add value.

But does it make sense to save either job? The problem with using taxes to save Mr Widget's job is that it could not guarantee that his employer's business will be profitable, so there is no guarantee that saving his job will add to wealth, it might just be a wasteful subsidy. We've had plenty of experience of government throwing money into non-profitable businesses, it is almost certain to be a complete waste because government cannot create a market for goods where the market says there is no market.

So, why not save Mr Earnest's job given that Mr Widget's is going anyway? At least Mr Earnest's spending power will allow Mr Patel's Merrymart to continue to employ old Doris on the till for three afternoons a week. That's all very well, until one realises that the money paid to Mr Earnest does not come from a magic money tree. It comes from taxes raised from profits and from taxes that reduce other people's spending power. Why is it better for Mr Earnest to receive £15,000 of spending money rather than for other people to have £15,000 of reduced taxes so that they can spend the same amount? In terms of the economy as a whole the direct effect is the same.

My view, for what it's worth, is that what matters is not the direct effect but the indirect effects. The most obvious indirect effect of reducing government spending on non-value-added activities is that it allows taxes to be reduced so that break-even businesses become viable because their overheads are lower. Not only does this give them a reason to continue, it also generates genuine profits which, in turn, generate affordable taxes. Although it is a trite point, it is worth saying that the employment by government of hundreds of thousands (if not millions) of people in non-value-added activities does not generate wealth. That they are employed by government rather than the private sector carries no magic. Every pound they are paid can only be spent once. Either they spend it or the person from whom it was taken spends it, either they save it or the person from whom it was taken saves it, either they invest it in a potentially profitable business or the person from whom it was taken does the same. A pound in Mr Earnest's pocket is not worth any more than a pound in Mr Widget's pocket or that of anyone else. Yet every pound in Mr Earnest's pocket comes from personal or business profits and reduces the ability of those people or businesses to make further profits.

One can test the sense of keeping Mr Earnest in a job very simply. If his spending is beneficial it must follow that employing a further ten diversity facilitation counsellors would be ten times as beneficial and clearing the dole queue by employing all unemployed people in non-value-added government jobs would solve all our economic woes. It's just nonsense in loud trousers. Maintaining non-value-added jobs is nothing but a drain on resources. It drains resources now by requiring tax to be taken from the value-added side of the economy and it drains resources in the future by building up debt that must be repaid with interest.

Thursday, 18 February 2010

I'm sorry

It is with great regret that I must announce the need to take steps to reduce my blood pressure.

Normal service will soon be resumed.