Wednesday, 22 October 2014

A little light on the UK productivity puzzle?

The October Economic Review from the ONS has a section in it on productivity that is perhaps worth  highlighting.

The UK recovery has been puzzling people, because although we have not had the unemployment of other countries we have had a major impact to productivity that has been difficult to explain. Productivity has been flat to declining since the Financial Crash.

The review breaks that down by industry composition and that highlights the impact of a few sectors on UK productivity.

Part of the explanation for the weakness in productivity growth relates to the UK’s industrial mix, and in particular to the productivity performance of mining & quarrying. Productivity in this industry, which is dominated by the extraction of oil and gas from the North Sea, has been on a long-term declining trend, as the remaining reserves demand more factor inputs to reach and extract. As a consequence, while the level of productivity in this industry remains relatively high, it has fallen by more than 50% since 2008.
The drag on productivity growth is then shown in a graph showing change in output per hour.

*ABDE includes all non-manufacturing components of the production industries. This is dominated by the extraction, energy and water industries.
Looking at the change in productivity before the crisis and afterwards leads to this change graph:

Which shows a productivity decline across pretty much all the industrial sectors, with the biggest decline ex. oil and gas in the old bubble sectors - Finance and Pharma.

There is still no comprehensive explanation for what is going on here, but clearly retaining staff (contrary as that is to standard economic theory) and the return to rational pricing from bubble mania will have had some impact.

The atypical response of the UK to the crisis is a natural experiment - after all retaining staff while productivity falls is essentially a privatisation of unemployment benefits which would stop demand falling as far as it otherwise would - and a comprehensive analysis from the ground up would show some theories of the way firms work in aggregate are incorrect.

Hopefully we'll see an adaptation of ideas that can explain what has happened, rather then the usual filtering of facts to fit pre-conceived beliefs.

Thursday, 2 October 2014

UK Private Debt Levels - Q2 2014

As I mentioned in my sector post, this week's National Accounts release represents a complete review of the framework in the UK too bring it up to date with the latest European Standard - ESA 10.

This affected my private debt and credit accelerator calculation and I've had to go back to basics to rebuild it. The good news is that the review has simplified the calculation - since derivatives have been moved out into their own section on the balance sheet.

Additionally ONS now publishes a flow of funds presentation which gives a much clearer view of the interactions between the sectors, and between the UK and the Rest of the World. As usual with the ONS it isn't really indexed anywhere in the release calendar! You can find it though with a bit of perseverance

So now the private debt levels in the UK look like this:

Still the same picture really. The UK is deleveraging - mostly in the commercial sector. This shows the benefits of GDP growth and how it shrinks the percentage of debt very quickly. What is really interesting, though, is that the debt isn't just growing more slowly, it is actually shrinking in nominal terms.

All this means that the 'Credit Accelerator' has been negative now for four quarters, which suggests - if the concept still stands and my calculations are correct - that we probably have the brakes on. Debt reduction is weighing down on aggregate demand. It will be an interesting test of the idea to see if things start to slow up and everybody begins looking around puzzled wondering what happened, or if borrowing restarts with a vengeance to keep the party going, particularly with an election brewing.

Here's the chart:

Source: Office of National Statistics. Private sector debt based on tables NLBC, NKZA, NNQC, NNRE, NNXM, NNWK, NLSY, NLUA, NJCS and NJBQ (Lending and securities per sector, not seasonally adjusted) scaled by BKTL (Gross domestic product at market prices, not seasonally adjusted). Data and calculations are available online

Wednesday, 1 October 2014

The Political Aspects of a Basic Income Guarantee

Brian has put up a useful post called Consequences of a Basic Income Guarantee which runs through some of the technical issues of an Income Guarantee for Canada and other countries.

I'm from the UK, and we've had 'Means Tested' Unemployment Benefit, Housing Benefit, Universal Child Benefit, Universal Pensions and a National Health Service for decades.  The history of these benefits show why general income schemes just don't work properly in practice.

Let's run through some reality.

The UK Conservative party in their 2014 conference announced its intention to extended a benefits cap and reduce the amount of money going to the unemployed in order to 'fund' .... apprenticeships.

Yep that's jobs folks.

This is a wildly popular idea in the UK and has massive support in polls from the majority of the population.
"At heart, I want us to effectively abolish youth unemployment," Cameron said.
"I want us to end the idea that aged 18 you can leave school, go and leave home, claim unemployment benefit and claim housing benefit.
"We shouldn't be offering that choice to young people; we should be saying, 'you should be earning or learning'."
Reducing payments and increasing work, from those who are fit and able, is the political goal here, which is what chimes with the population.

Let's see what the other side has to offer.

The Labour party put forward proposals to limit Child Benefit - which was a universal benefit paying a massive £20 per week to a child. Basic income for a child in other words; although 'a pittance' would be a better description.

That has already been removed from high wage earners and the 'socialist' Labour party will remove the indexation of that benefit and will not restore universality. 'All savings used to reduce the deficit' - so there's not even any redistribution. A whole £400 million over five years - which is a rounding error in the UK budget.

It actually costs an awful lot to do the means testing rather than to simply pay out the money to wealthy people earning more than £50K. But "they don't need it" you see, and that's an important moral point. Again to huge applause from the general population and lots of column inches in the papers.

They also propose a 'Job Guarantee' - which isn't a full Job Guarantee but offers a limited amount of work to the young. Not much of a noise about that in the press and how it impacts our 'freedom'.

So there you have the political reality of operating a social security system in the real world with real human beings. It's not a matter of mathematics or accounting. It's got nothing to do with tedious technical economic issues about the nature of value.  It is simply a matter that the default Basic Income Job - "spend the money I'm given" - is not seen as sufficient recompense by the rest of society - even when the payment is universal. That makes it a non-starter.

Much is made of all the 'trials' and 'pilot projects' of basic income. You'll note that none of them ever get any traction after that. This is why. It's a political turkey.

Receiving money when you don't need it is seen as morally reprehensible, as is spending money and doing nothing of perceived value. Politically they get removed when they show up, or slowly chipped away at best. We've seen this in the UK since the Second World War - increasingly since the 1970s. Even the Universal Pension is moving the wrong way. The age at which you receive the pension is ever increasing despite having a clear contribution element that people can relate to.

Although many may benefit from being 'freed' from work, there are known detrimental effects to health amongst a chunk of the population that already receive income guarantees (the retired).  Unemployment can transform into social isolation, despair and depression unless there is active assistance finding something useful to do. That doesn't happen spontaneously. It has to be provided actively by the social support system.

I could come up with endless headlines, comment threads and quite a few TV shows that use the line: what are you doing that is of value to everybody else? Even the sympathetic press are often very keen to show people on benefits working for charities or volunteering in some way.

Getting to a useful Job Guarantee is going to be difficult enough - ensuring, as it must, that everybody is doing something they enjoy and that others see as valuable, as well as informing the general public constantly of that value in each local area. Broadening the concept of what work is and means is the main challenge. In fact in some countries it may be impossible until unemployment gets to depression levels, probably beyond that towards societal breakdown. Humans like to push things to the very edge before making a course alteration - as we're seeing with the response to Climate Change.

Ultimately BIG people tend to be interested in abolishing a quite narrow idea of 'work' as a matter of basic philosophy. It's a core value to them. They are a very small minority of people that like the idea of not having to do anything for a living and being 'free' - even though that freedom isn't really extended to those that will have to continue to work to keep the lights on, and who would have to pay a much higher tax rate for the privilege.

Essentially they come across as extreme individualists just like the free market bunch, with which they have a lot in common to the point where they can find agreement over this issue. That speaks volumes.

BIG fails in the same way that 'free markets' fail. Because you have these annoying things called human beings to deal with, operating in a social structure that requires a quid pro quo. Something that is innate and cannot be easily wished away.

But the good thing, politically, about having the Income Guarantee people pushing their line is that alongside it a Job Guarantee, within the context of Universal Health, Education and Pension provisions, sounds immensely reasonable. Something that perhaps should be made more use of in debate.

Tuesday, 30 September 2014

UK Sectoral Balances - Q2 2014

Today's Quarterly figures represent a complete review of the National Accounts framework in the UK to bring it up to the latest European Standards - ESA10. There have been quite a few alterations to the structure which have altered the net-lending positions of the sectors. The main one is the alteration to the pension accounting which is now on an actuarial basis and alters the position between the household sector and the finance sector a bit. The private debt calculations I usually put out will need checking first to make sure I've still got everything in there after the reclassification. Hopefully I'll be able to work that out and publish them soon.

Additionally the figures are now only available from the beginning of 1997.

What is interesting now is that the government balance pretty much exactly equals the Rest of the World balance. The domestic sectors are all about balanced - within the error bar - as we can see from the five sector chart.
So for anybody to 'get the deficit down' from this point requires either a significant adjustment to the external balance, or one of the domestic sectors going deeper into debt.

Right at the moment we effectively have a domestic 'balanced budget'.

Source: Office of National Statistics, tables RPYH, RQAJ, RQBN, RQBV, RPYN, RPZT, RQCH, DJDS (Seasonally adjusted Net Lending/Borrowing per sector plus residual error) and YBHA (Gross domestic product at market prices, seasonally adjusted).

Wednesday, 27 August 2014

Scottish Independence Myths - How to buy imports?

I've been amazed at how poor the understanding is on how cross border trade actually work in a modern financialised world. It's almost like they've never spent any time at the sharp end of a firm's invoicing and payment operation, and exposed to the constant stream of marketing from banks.

The introduction of an independent free-floating Scottish currency is no barrier at all to cross border trade - because the banks are already setup to support it and make money doing so. It's very straightforward.

Let's run through a scenario. As we have already learned Scotland runs balanced trade with the rest of the world and the trade deficit is therefore with the United Kingdom. So we'll take the case of a Shropshire based company exporting goods/services into Dumfries and Galloway.

The exporter could throw up their hands, refuse to accept Scottish money under any circumstances and demand payment in good old British pounds.  The result of that would be the loss of the customer (probably to a Scottish based competitor or one that read and understood bank marketing leaflets), reduced turnover and profit and perhaps even layoffs amongst the staff. Only economists would think that is a rational response to the situation or at all likely.

In a real business, sales is everything and you do whatever you can to keep the customer. Exporters need to export. The first call would be to the firm's bank to see what they can do.

Here is the overview of the situation:

For simplicity I'm assuming that the customers and supplier both bank with RBS. That isn't at all necessary. This setup just cuts out the noise of clearing and makes the point very clear. 

The Kirkcudbright branch operates primarily in Scottish Pounds and does its reserve operations with the Scottish Reserve Bank. The Telford branch operates primarily in British Pounds and does its reserve operations with the Bank of England. The customer's bank account is in Scottish pounds and the Exporters in British Pounds. 

RBS plc owns both the bank branches and produces its own balance sheet in British pounds - because that's its functional currency. That means Scottish assets are translated into the functional currency equivalent at the reporting date according to the usual IFRS rules. In other words Scottish assets are reported in British pounds even though they are actually denominated in Scottish pounds. 

So we take a sale of goods and services from the Exporter to the Importer. The exporter prices the invoice in Scottish Pounds because that's all the importer has. In this case 'no deal' unless the exporter does that. (Again that isn't necessary, the process works just as well in reverse). 

Of course Scottish Pounds are no good in Telford. So they have a word with their bank in Telford, who is quite happy to purchase the invoice at the current exchange rate. So the exporter is credited with British pounds (which as we know the Telford branch just created ex nihilo) and the Bank takes the invoice.

This expands the balance sheet of the Telford bank branch - it has an invoice asset and a cash liability to the exporter, plus a bit of profit for itself. 

Now because RBS has Scottish businesses it is quite happy to receive Scottish pounds. So it instructs the Importer to settle the invoice to the bank's own account at the Kirkcudbright branch - in the usual manner of any factored invoice. An intra group loan (which in banking circles is known as a 'deposit account') links that back to Telford and clears the invoice. 

What has happened here is that the bank has executed a swap because it has a foot in both camps anyway. Therefore it can provide the swap service quite happily to those entities that don't have that structure available to them - for a fee of course. 

The actual structure will be more complicated than this simple overview (the factoring operation is likely to be a separate subsidiary with multi-currency accounts for example), but the essence is the same.

From the point of view of RBS plc, it had liabilities in Kirkcudbright to the Importer and now it has slightly smaller liabilities in Telford to the exporter - plus an amount of profit for itself. The exporter produced and sold their goods and stays in business, the importer got their goods and can use them.

Win-Win all round. Another good day for dynamic currency systems.

Monday, 11 August 2014

Scottish Independence Myths: the currency board

The Scottish independence debate is winding up, and Alex Salmond is insisting on going down with his ship clinging tightly to his 'currency board' idea.

A currency board is how you peg your currency to another. It is, essentially, an implementation of the 'Gold Standard' that locks the monetary policy of one country to another and restricts the activities of the central bank to maintaining that peg.

And yes you can do that unilaterally. Scotland can indeed 'keep the pound' if that is what they want to do.

But of course that means that money can simply drain from the country under any period of stress, and the government is powerless to maintain the necessary excess savings ratio in those circumstances. So you quickly go down the tubes like Greece, or Argentina.

At least with Greece they had a formal arrangement with their 'pegged' central bank that eventually forced the ECB to act to stabilise the situation and bring the interest rate on government debt down. The UK has rejected that option, correctly, as not in the UK's interest.

Argentina had no such formal arrangement with the US central bank, and they are still paying for the mistake decades later. This is the route that Salmond proposes.

I'm with Warren Mosler on this idea:

a currency board is an instrument of colonial exploitation, designed to force net exports in exchange for net financial assets via downward adjustment of real wages via 'deflation.'

It's not wrong to call it a crime against humanity.
Scotland is currently a partner in the United Kingdom. Alex Salmond wishes to change that relationship to one of a subjugate colony. A very strange idea of independence.

Thursday, 31 July 2014

Don't bind your hands Argentina

It really is long past time that Argentina dealt with the hangover of the ridiculous peg they under took in the last millennium.

In other areas the law has evolved to realise that debt that cannot be paid will not be paid, and a formal wind up procedure is available in every civilised state that ensures that both creditor and debtor take the necessary cold baths as soon as possible and as quickly as possible so that economic progress is not stalled.

And in other areas of international law it is recognised that a prior parliament cannot bind a future one if the will of the people is behind the change. So treaties can be torn up, and alliances changed.

But apparently not so in the area of state debt owed in a foreign currency. There both the sensible nature of bankruptcy and the right of self-determination by the people doesn't seem to apply.

While that is the case, no sovereign state should ever borrow money in a foreign currency. Not ever. It should immediately repudiate or redenominate any that exist and constitutionally bar itself from undertaking such a practice at any time in the future.

And that is what Argentina should do now. Clear the deck permanently so that it can move on.

There is never any need for the state to get involved in issuing foreign currency debt instruments in the free floating era.

A clever state understand that private entities that can go bankrupt can undertake those sort of actions - so the private banks and the private companies can do the foreign borrowing if they see that as appropriate for their purposes.

For very early stage developing countries, the services of the IMF may be useful in getting very basic infrastructure and a functioning modern banking system in place. But Argentina is way beyond that.

A clever state understands that exporters need to export. They need to sell their goods and services to fulfil their own profit making objectives. Unless those exporters find a way to take the importer's currency and swap it for their own currency then the deal will simply not happen and no goods will be made or shipped.

For states that are export led, they necessarily have to undertake 'liquidity swaps', or the world quickly runs out of the right sort of money to allow deals to happen. They understand that the 'liquidity' enables new deals to happen that wouldn't otherwise happen, growing the real economy at the same time as the monetary one.

The result over time is that export states tend to accumulate foreign currency assets. Some then call these 'sovereign wealth funds'. That saving is forced as a consequence of the export-led policy. The export-led policy has to go first before those savings can ever be used.

Now of course an exporter is going to try and tie an importer's hands, but a clever import nation will realise that and refuse to deal on those terms. There are plenty of exporters and they are desperate for new markets. So you hand out trade permits to those who can offer the best liquidity deal. That then avoids an eternity in purgatory being whipped by the United States, which has either lost the plot internationally or is trying to force an end to this ongoing farce depending upon your point of view.

Argentina has had a series of very bad governments making very bad mistakes. Hopefully it has learned some lessons and can move forward. We shall see.

Be strong Argentina. You have nothing to lose but your chains.