Sunday, 2 August 2015

The Subtle Message of the UK Constitution

House of Commons Chamber - elevated viewThe UK constitution and electoral system is a bit of a mystery to those who haven't grown up here. Nothing much is written down. It is just sort of understood by all without any real discussion. It is, perhaps, the last remnant of an Anglo Saxon society which wasn't big on writing things down.

And the reason is that if you write things down it tends to ossify and get elevated to the status of a religious text handed down by the elder gods. You get endless debates about what words mean, and whole academic texts about interpretation.

Additionally the UK constitution represents the spirit of compromise and consensus building that can easily reflect change over time. Society is about that and both the UK constitution and the way our courts work avoids the divisiveness of other systems while still providing absolute certainty when things are finally decided.

And so it is with our parliamentary system. Our parliament is not the horseshoe so beloved across the world. It has two sides. On the left sits the government and on the right sits the opposition.

That is reflected in the voting system where every MP represents a particular part of the country (a constituency) and is elected on a simple ballot. The famous 'first past the post'.

This system has been described as archaic and there is endless calls for reform. However I think those that call for this are not listening to the subtle messages implied within the UK constitution.

It's pretty clear from the layout of parliament and the structure of the voting system that what the constitution wants to see is just two names on the ballot paper. In other words in the UK you need to do your coalition building before the election. Of course we nominally allow more than two names on the ballot, but in reality the constitution is suggesting it is a good idea to get down to two. And if you refuse to compromise then you, and all your supporters, will be punished by being made completely and utterly irrelevant. All the support is just a waste of time and your opponents win instead.

Forcing coalition building ahead of an election provides certainty for the voter. The electorate knows exactly what they are going to get when they cast their vote, and again if the electorate casts their vote for anybody other than the top two they have wasted their time going to the voting booth. They didn't listen or understand the message of the constitution.

Now admittedly the top two swap around from time to time and the political energies of all the parties are expended trying to climb to the top of the pile. These days it tends to be in a divisive manner because the political class seems to have lost the art of compromise.

The alternative is some sort of PR arrangement. The weakness of PR, of course, is that coalitions happen after the election. So you vote against tuition fees and end up with a pointless and unwanted referendum on voting change instead.

Political types love PR because it is good for them. It means they can hide their own particular hobby horse in a list of populist measures and then drop the populist measures due to 'negotiations'.

Actual ordinary voters just want a simple choice between two viable governments, and want to know what they're actually going to get after the election. So if you want 'voting reform' that actually helps the citizen, then it should be a way of ensuring at the actual vote there are only two candidates left on the ballot paper in every constituency.

Beyond that the political parties need to rediscover the art of compromise. We don't want a dozen different political fragments. We need those fragments to coalesce around a couple of platforms before the election. Platforms that are actual genuine alternatives.

So in this political cycle it is time for the Greens and the Liberals to consider their positions and whether it is time to merge with the two main parties. (The Greens should green up Labour. Not really sure where the Liberals sit any more). It's probably time for the Blairite wing of the Labour party to cross the floor and start pulling the Tories back to the left. The SNP need to be accepted as part of the opposition. And of course it is time for UKIP to disband and rejoin the Tory party.

Go and learn how to do coalition building before the election. And give the people the choice of Government and Opposition as the constitution suggests - however subtly that may be.

Friday, 31 July 2015

Taxes for Revenue are Obsolete - a précis

We have known for over 70 years that Taxes have nothing to do with government spending. However it is an idea that has taken root again in the recent past, and we really need to get beyond it if we are to build the society of the future. There is a faint whiff of punishment in a lot of tax proposals, which is very reminiscent of the treatment that the Greeks have received in their recent attempts to improve the lot of their population. Most unpleasant.

The following is a simple précis of the points from the Beardsley Ruml article from 1946 and the Bill Mitchell piece on the same article from 2010 - and targeted at the UK.  Readers wanting more details should click the links.

There is a common belief that in order to maintain its independence and solvency a government has to tax sufficiently. This may be true of the devolved governments and local authorities but the Westminster government has no such restriction.

There are two reasons for this:
  • Firstly we have gained great experience in the managing of central banks and;
  • Secondly the elimination of the convertibility of a currency into Gold, or any other currency or commodity. 
That means there is freedom from the money markets for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into Gold or other commodities. 

Note that buying gold, commodities or currency on a market is an exchange not a conversion (you get the gold, somebody else gets the currency. All that has changed is the ownership labels). Conversion happens when an exchange rate is fixed rather than floating.

The prime consideration, therefore, when imposing any and all taxes is their inevitable social and economic consequences.

So what are taxes for? They have four purposes:
  1. Inflation Control If the government spends too little or taxes too much then you end up with a depression or a hole filled by excessive private borrowing and little saving. Government spending must be sufficient to maintain aggregate demand in an economy, but not too much as to over spend the capacity of the economy.
  2. Redistribution Expressing public policy in the distribution of wealth and income - which is where progressive taxation comes in.
  3. Stop Bads. Promote Goods Express public policy by subsidising or penalises certain industries or economic groups.
  4. Hypothecation Politically contentious spending should be transparent and matched pound for pound. The classic UK example is of course the TV licence fee.
The questions that arise from these four purposes are:
  1. Do we want a currency with reasonably stable purchasing power over time?
  2. Do we want greater equality of wealth and income than would occur naturally from the imperfect distribution of economic forces?
  3. Do we want to discourage certain things and activities via levies and encourage others with grants?
  4. Do we want the beneficiaries of certain government spending to be aware of what they cost?
These questions are not tax questions; they are questions as to the kind of country we want and the kind of life we want to lead. The tax program should be a means to an agreed end. The tax program should be devised as an instrument, and it should be judged by how well it serves its purpose.

Nothing could be clearer. National policy priorities are the central question. Then the taxation serves as part of an overall functional finance policy package to advance these goals as best as the government can.

Saturday, 18 July 2015

Banks are fully funded

The Bank of England has published a blog post asking if Quantitative Easing boosted bank lending

The language in that piece isn't helpful. But it is written in the expected format of its intended audience (those who believe in the BLC theories) without being wrong. I thought it might confuse a few people.

All banks are fully funded, as I've indicated before

There is a persistent dynamic drain towards Gilts and National Savings which the banks must always counteract. They do that by selling equity and their own capital bonds - which have a higher cost. They are referred to in that article as 'market funding'.

Deposits are cheaper than that because:

  • they tend to have a lower interest rate generally; and
  • they have no specific collateral requirements (i.e. they are unsecured).

Deposits generated by QE have an additional advantage - they come with an equivalent amount of central bank reserves that pay an income directly from the Bank of England.

All of that reduces the net amount the bank has to pay out on its liabilities side and reduces its 'funding costs'. It also eases the capital and liquidity ratios that the bank is subject to.

And since that impacts everybody in the lending market place it means that somebody ought to be able to generate a competitive advantage by dropping their lending prices and getting more trade.

It didn't work for two broad reasons:

Firstly banks operate as a function oligopoly. In other words bankers are a tight knit lot and operate as a class of people. They have their own groupthink. They are more likely to move in unison than individually. An effect that has become much greater as the banks have moved their headquarters, to 'financial centres' so they can play casino games.

And secondly there was no demand at any price - which of course neo-liberals refuse to believe because in their religion supply creates its own demand.

Tuesday, 30 June 2015

UK Private Debt Levels - Q1 2015

Private debt ratios from the Q1 2015 data are as follows:
Relative deleveraging is still ongoing as GDP grows without any overall increase in the absolute level of private debt. When you look at the absolute numbers you notice that it is wobbling up and down around the £6.5tn mark. So that means the net borrowing shown in the sectoral graphs should be due to a reduction in the amount of gross saving.

Certainly no debt boom is going on at the moment, but what happens when the stockpile of savings runs out?

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

UK Sectoral Balances - Q1 2015

The data from Q1 2015 is out and it makes for interesting reading, with the domestic sector moving strongly into net borrowing territory: On the five sector chart you can see that all the domestic sectors are in net borrowing territory now. I can't see in the data when that has ever happened before. The UK truly is the purveyor of the finest financial savings to the globe. So lots more money was spent by the domestic sectors in Q1 than was saved. Will all that borrowing bear fruit in future quarters?

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). Data and calculations are available online

Wednesday, 6 May 2015

Vote or Vote None

One motivational trick I learnt very early on in my career is the frame constraint trick. If you have an unpleasant/boring task ahead of you, a simple mental trick is to compare it to a task that is even more unpleasant or boring. So if you're struggling to complete a report you can say to yourself: "Shall I complete this report or file my tax return" and suddenly the report seems more appealing. (Of course I would rather file a tax return because I enjoy that sort of thing, but I admit I'm not typical).

If you have kids you can use the same trick: "You can clean your room, or clean the toilets". And it works because people struggle to break out of a constraint frame. We're just not that good at lateral thought.

And so it has been with this interminably dull election campaign here in the UK. Our once in five year opportunity to answer the perennial question: "Which colour rosette is most appealing to you". This time the choice of rosette colour is much wider than it has been previously, and that is supposedly a good thing.

It used to be more often than every five years, but that intensity of rosette choice was considered too much for ordinary people to handle.

However we still have a fair amount of democracy. The problem is of course that we have Hobson's Choice. "You must choose" say the politicians. "You must choose from this list of rosettes".

Well no you don't. You have another alternative available to you if you can just break out of the deliberate framing trap and think laterally. You can say 'I reject the pallet of neo-liberal inspired disasters on offer that are all just versions of insanity'. You can say: 'I reject leaders who I wouldn't trust to run a bath never mind a country". You can say 'I reject the vision of terminal decline for the UK'.

You can vote none. I would urge everybody to read the instructions on how you can do that before making up their mind.

Please vote and be heard, but don't be constrained by the rubbish on offer.

Or we might all end up cleaning toilets.

Wednesday, 1 April 2015

UK Private Debt Levels - Q4 2014

Q4 data is now with us and the resulting private debt to GDP ratios look like this:
And so the private sector continues to delever as GDP finally grows. Interesting to note where the money to allow this comes from - particularly given all the rhetoric about austerity. But the numbers don't lie. The only sector to increase its leverage is the government sector.

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