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Scrap the FTT, have a Bourse Tax instead

January 20, 2012 1 comment

At 10.53 on 20th January 2012, the Telegraph reported on their live blog:

10.53 A German Government spokesman says that an EU-wide financial transaction tax is still the goal, but that there may be a possible bridge with the UK via a bourse tax.

What is a bourse tax?

Frankly, I have no idea beyond speculating that it’s a tax on transactions within a stock exchange. A bourse is an organized market where tradable securities, commodities, foreign exchange, futures, and options contracts are sold and bought. The very things which would be taxed under a FTT anyway.

The fact that it is limited to the individual exchanges would mean that it is an attractive deal to the British. However it does raise complications, considering that the largest Pan-European exchange, Euronext, merged with NYSE in 2007. Another large European exchange, OMX is a Scandinavian exchange with activities in Norway. Confining finance and the taxation of finance to the Eurozone will only create more problems than solutions.

However, with the smaller exchanges, such as the Deutsche Boerse, this confinement could happen without angering any non-eurozone interests.

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The Relationship between Unemployment Rate and Worker Productivity

January 19, 2012 1 comment

 This relationship was stumbled upon as I was doing some sampling on the Labour Force Survey dataset for another project.

As can be seen from the Box Plot below, a pattern emerges when output per worker (productivity) is run against the standardised unemployment rate. For the normal unemployment rate (6 per cent) productivity is between 0 per cent and 1 per cent – this is good as the economy is growing.

 

When unemployment is high, between 7 and 8 per cent, productivity is either negative or stagnant. This can be used to indicate recessions. What is interesting, however, is that when unemployment is very high, 9+ per cent, productivity is also high. I am inclined to suggest this is so due to either a recovering economy or a desire, on behalf of workers, not to become unemployed.

Conditions for the perfect economy

January 12, 2012 1 comment

In a report published by HSBC on predictions for the global economy in 2050, there were listed conditions for which create strong and sustained growth. The variables and models are based on the work of Robert Barro: Determinants of Economic Growth: a cross-country empirical study.

The variables are as follows:

  • degree of monetary stability
  • level of democracy
  • the rule of law
  • the size of government
  • level of education
  • health of population
  • fertility of population

The perfect conditions for the perfect economic model is: a very stable inflation rate, averaging less than 2%; weak democracy; strong rule of law; a high education level where the average years of schooling is 10; a healthy population and a relatively low fertility rate, but high enough to maintain population levels.

Now, most of these are glaringly obvious apart from, perhaps, the bit about weak democracy.

Barro’s work actually showed that too much democracy wasn’t necessarily a good thing for economic growth (of course it may be the best model for social development). He found that at very high levels of democracy, income redistribution becomes a dominant force, which serves to restrain entrepreneurial endeavours. And democracy places a disproportionate weight on winning current votes, potentially at the expense of future votes, and therefore can hinder the investment required for long-term development.
Overall, authoritarian regimes can deliver economic success if the system manages to set in place the incentives that a market-based system naturally delivers, namely competition and a motivation to drive efficiency.

In short, democracy is good but, like most things, you can have too much of it before it becomes detrimental to your economic health.

Central Banks are inhibiting growth

January 11, 2012 1 comment

Last night (10/01/2012) I went to a lecture given by the Governor of the Bank of Japan, Masaaki Shirakawa, at the LSE. The subject was entitled: “Deleveraging and Growth: is the developed world following Japan’s long and winding road?” In short, the simple answer is “yes, based on current trends and without any change of course.”

Mr. Shirakawa delivered a very interesting lecture the centred around, among other things including his love of the Beatles, how central banks should play a role as a guarantor of financial system stability. I have not touched the role of central banks in the past, but my opinion on the role of central banks differs from Mr. Shirakawa and probably from a lot of central bankers too.

My opinion is that the role of central banks should not extend beyond price stability. Why? Because the adoption of a extra-governmental role in guaranteeing financial system stability: a) reduces independence of a central bank; and b) aids in the depression of growth.

The independence of a central bank is undermined when it engages in a role outside price stability because, ultimately, the mechanisms and controls of a central bank are given over to the whims of politicians. For example, Quantitative Easing is a monetary mechanism to produce demand. Whether this actually works is another matter.

The crux of this argument revolves around the depression of growth.

The Bank of England’s base rate dramatically fell from 5% in September 2008 to 0.5% in March 2009, where it has stayed since. UK CPI trend since 2008 has been upward, largely encouraged by low interest rates. The same can be said of the Federal Reserve. QE itself is, arguably, a depressor of growth as the practical results would indicate an entrenchment of non-investment. Lender of last resort encourages the risky banking practices of the pre-2008 crash which aids in financial instability and depressing confidence. Unintended consequences of a policy often extolled by politicians.

By acting in an extra-governmental role, central banks maintain the status quo of “government spending is best”. This, to most economists is crass. Government spending, at best, does little to encourage innovation and enterprise because it is too busy propping up businesses that would otherwise have gone bust.

So, instead of an invigorated and dynamic economy, government spending and central bank intervention in its extra-governmental role is inhibiting growth.

Don’t be fooled by Eurosceptic ‘libertarians’…

December 23, 2011 Leave a comment

…as they are just xenophobes.

This applies aptly to the Tory right and UKIP. Some might be theoretically libertarians but by calling for a withdrawal from the EU they cannot call themselves libertarians in practice.

The EU guarantees free trade, the basis for a free market, across member states. Freedom of movement for goods, capital and, most importantly, people.

Any renegotiation of Britain’s membership would precede the removal of these important contributing factors to the British economy.  Britain would become an isolated island with an increasingly discriminatory immigration system.

The EU is not perfect. Any one who says otherwise is deluded. However, it does lay an important foundation for the liberalisation of a global economy. The future of make-up of the world economy will likely be based on political and economic blocs – like the EU is. Like the USA technically is.

Once this shift has occurred free trade can take place between the blocs. It won’t happen in for a long time, but it will happen based on ongoing political and economic trends of co-operation at a supra-national level.

The right wing wish to prohibit this trend. A protectionist measure in the name of freedom.

 

Infrastructure Investment: Privatisation

November 28, 2011 1 comment

George Osborne, ahead of Tuesday’s Autumn statement on the economy, has announced that there will be a £30bn investment in UK infrastructure. £25bn to come from pension funds and the China Investment Corporation and the remaining £5bn to be provided by central government funded by cuts elsewhere in the budget.

As a Keynesian, I favour a demand led approach but I also recognise that there is also a shortfall in the supply side, such as re-skilling of the unemployed. As Sam Bowman tweeted earlier: “Ha ha. £30 bn of infrastructure spending. Good one. That will help people to reskill for the future, won’t it? #jesuswept” I also recognise that the two are symbiotic, but that’s for another blogpost.

Investment in the UK infrastructure could be handled much better and it could also draw in more short-term capital for the Treasury. I’m referring to privatisation. Fixed Phone Lines, made of copper, need to be replaced by fibre optics to cope with increased demand on bandwidths due to a recent surge in people and products using and requiring broadband. BT currently has a de facto monopoly on this aspect of telecommunications infrastructure, with Virgin offering a cable based alternative in limited areas. The liberalisation that often comes with privatisation will provide more choice to the consumer, remove BT’s Universal Service Obligation as it has, in my opinion, failed in its obligation to provide access to advanced communications (broadband) across the nation, and create a more efficient broadband service thus aiding in growth.

Motorways could be sold off and made toll roads based on a Vignette. This would increase the immediate short-term access to capital that the UK government needs to reduce deficit and debt, remove its obligation for maintenance of the system and collect a revenue stream through a tax on the toll charges.

The attraction to these types of investment would be that the return of investment would be almost immediate and it would be of benefit to most of the citizens of this country. If the Chinese are looking to invest in the west, then the UK must be open to investment. With $410bn, that is a lot of capital to invest and the UK could do with all of it.

Retort to the Telegraph

November 18, 2011 Leave a comment

On Friday, The Telegraph ‘reported’ on “Germany’s secret plans to derail a British referendum on the EU”. The plans aren’t that secret. The think tank, Open Europe, has provided an English translation of the document, entitled:  The future of the EU: Necessary integration policies for progress towards establishing a Stability union.

The document itself mainly concerns itself with changes to Article 126 of The Treaty of the Functioning of the European Union. Article_126 is largely about maintaining a resemblance of balanced budgets amongst member states.

The document proposes that paragraph 10 of Article 126 be deleted. Paragraph 10 states “The rights to bring actions provided for in Articles 258 and 259 may not be exercised within the framework of paragraphs 1 to 9 of this Article.”

Article 258 and Article 259 deal with legal proceedings being brought against a member state by either another member state or the Commission if a Treaty is deemed to have been broken.  This would allow direct intervention into the affairs of the offending member state by the Commission or, in this case, a European ‘Stability Commissioner’.

The crux of The Telegraph’s argument comes as a note at the bottom of the penultimate page.

“Limiting the effect of the treaty changes to the Eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK).”

The proposals in the document are a change to a part of a treaty which only affects Eurozone members. However, as all treaties have to be ratified by members of the EU Britain would need to ratify the changes. The changes would only affect Britain if it were to join the Eurozone.

I recall the public being offered a referendum on Britain’s continued membership of the EU if there was a fundamental treaty change which affected its relationship with Europe. This proposed treaty change doesn’t affect Britain in the slightest.