Thursday, 31 December 2015

Fixing the Floods - a Modern Money Approach

Christmas didn't end with much cheer for the residents of the Calder Valley where extensive flooding has devastated homes and businesses. Hebden Bridge is just up the road from here and I spend a lot of time there during the year. We have many friends and acquaintances up the valley and the stories filtering down are heartbreaking. One of my daughter's friends, having lost her father to aggressive cancer just before Christmas, has been flooded out of their house and has had to move the funeral to Halifax Minster because the original church has been inundated.

Of course the flooding has been more widespread than just the Calder Valley. It's been across many flood prone areas of the North of England and Scotland.

The buildings in many of these areas have been uninsurable for several years and these floods will destroy many businesses and bankrupt individuals. The poor areas of Salford that have been flooded include many people without contents insurance. Their ruined stuff is now piled up in the street, and with little income the prospect of rebuilding a life is bleak.

With all this human misery around I don't have a lot of sympathy for idiot politicians and their economist lackeys coming out with nonsense statements. Both sides are as bad. The Tories for failing to invest in flood defences and pretending climate change isn't happening, and the Labour lot for either suggesting foreign aid should be cut, or trotting out their usual 'tax the rich' line as though either of those approaches will cause flood defence engineers to rise fully formed from the primordial soup.

The constant talk of numbers just demonstrates a lack of understanding of how government actually get things done.

They need to take a Modern Money approach.

What Modern Money tells us is that the state can command any resources available for sale in its own currency. And it tells us that the only constraint on what resources it can command is the inflation constraint - in other words multiple bids for the same item that causes the price to rise.

So the correct approach is to forget about the numbers. They just happen automatically as a consequence of taking action. And they always add up as a matter of accounting.  What you need to concentrate on is the engineering resources required. Where are they and what else are they doing at this point in time?

If what they are currently doing is less important than fixing flood defences, then you suspend what they are currently doing and reallocate them to fixing flood defences.

Within construction that is fairly easy because everything needs the State's permission to proceed anyway - via planning and building control. That means you can delay any project currently proposed or operating via advanced policy tools rather than using the primitive price mechanism to bid away resources.

So the State can set a price for a job, and if it doesn't get enough bids from free resources it can suspend activity around the area to free up capacity until it does get enough bids for the job. Projects are then reordered in time with the state's requirements coming first. Since the mechanism used eliminates other offers there can be no multiple bids. Therefore no change in prices and no inflation.

The real costs are then borne by the businesses whose projects are delayed and by the banks whose lending volume will drop as projects are prevented from starting due to lack of available resources. Which would always be the case however you get there.

So, with a correct Modern Money understanding, you end up with a much more precise and direct approach to resource allocation.  The correct people and stuff are found, surgically extracted and reallocated in a way that the carpet bombing approaches of 'tax the rich', 'cut foreign aid', or 'expansionary fiscal austerity' could never achieve.

In addition, by concentrating on finding the available actual resources at your disposal, you end up realising that the engineering talent within the armed forces exists and is much better deployed repairing riversides in Rochdale than rearranging the rubble in some distant land.

It's all very straightforward once you think about it properly in terms of actually getting stuff done.