Readers of the Cobden Centre may be interested in a new book by Paul Knott. “Ouch!: Ignorance is Bliss, Except when It Hurts – What You Don’t Know About Money and Why It Matters (More Than You Think)” is written for ordinary people, but provides an extraordinary overview of the financial system and why it matters to everyone.

Amongst the swathes of books released following the financial crisis, this is both readable and full of sound economics. It explains fractional reserve banking, introduces readers to Austrian economics and to behavioural finance, and is done so in a highly engaging style. It will make you laugh out loud and shake your fist in anger.

I strongly recommend it, and indeed was lucky enough to read several drafts of the manuscript. At under a tenner it’s the perfect gift for people who moan at bankers and politicians, but want to understand a bit more about the monetary system.


Corporate giants rarely outlast their usefulness

In this article for City A.M. I discuss Joseph Schumpeter’s concept of “creative destruction”, and why Karl Marx was wrong to suppose that capitalism generates an increasing concentration of capital:

In 1987, Forbes magazine released a study looking at how large companies fare over time. It took the 100 biggest companies in 1917 and looked at what had happened to them since. Rather than see the big companies getting bigger, they found the opposite. As the chart shows, 61 per cent of the companies became defunct. 21 per cent still existed, but had fallen outside the top 100. That left only 18 of the biggest 100 companies in 1917 still there 70 years later. Of those, 16 companies underperformed the market as a whole, leaving just two companies that managed to “beat” the market. One of those companies was GE, and the other was Kodak.

Read more


The single income tax

Last week saw the launch of the 2020 Tax Commission report on UK tax reform. It’s called “The single income tax” and can be downloaded from the website (PDF).

I was honoured to serve as a commissioner and learnt a great deal from the discussion  meetings. It was a long process and the result is something I’m very proud of.

I think there are three important things to say about the report. Firstly, it is thorough. At over 400 pages we wanted to survey the academic and policy literature to base the proposals in strong theory and rich evidence. Secondly, it is policy-focused. It attempts to find a balance between being genuinely radical (which it is) and politically feasible. Or, if not feasible, then relevant to debate. It is not intended to be utopian, but at the same time stays true to some basic principles of public finance. Thirdly, it directly confronts the moral and ethical dimension of taxes. It discusses the libertarian perspective and does not treat ethics as a no go area. Indeed it is one of the few tax studies I’ve seen that attempts to engage with different ideological positions.

Personally, I find it hard to truly advocate 30% tax rates. But this isn’t about what we’d like in theory. It’s about mapping out a direction of travel, shifting debate, and engaging with policymakers and the public. If you believe such aims are futile, then you may be disappointed. But if you want a well researched and implementable proposal for radical tax changes – this is it.


It’s hard to account for flaws in the rule-book

In my latest City AM column I discuss Gordon Kerr’s recent book, which points to the role of accounting regulations in the obfuscation of the price system that contributed to the financial crisis:

When economists talk about the efficiency of the profit and loss system, we tend to take for granted that the profit and loss we observe matches with reality. But government interventions are liable to disrupt these signals – inefficient taxes, arbitrary subsidies, and monetary debasement all separate prices from the underlying conditions of demand and supply. Another source of noise is faulty accounting standards – as Gordon Kerr has pointed out in his fascinating new book The Law of Opposites: Illusory profits and the financial sector.


To QE or not to QE?

I was recently quoted in Management Today with some thoughts on current monetary policy:

The Bank of England’s policy rate has been historically low for some time now and this cannot continue indefinitely. The aim of low interest rates is to boost the economy by creating incentives to borrow money and invest. But higher capital requirements and policy uncertainty create counter forces that restrict bank lending.

In these circumstances the purported “benefits” of low interest rates fail to materialise, but the costs certainly do. These include the lack of an incentive to save (and actually rebuild banks’ balance sheets through voluntary lending), distortions to the capital structure of the economy (making white elephants like the HS2 line appear profitable) and the erosion of people’s savings.

The fact that real interest rates (the difference between inflation and the return you get on your savings accounts) is negative is a harmful confiscation of wealth.

When interest rates are close to zero policymakers look to alternatives, and quantitative easing has emerged as their favoured tool. However grateful banks and the financial community are in general to have an injection of freshly-printed money, it’s not clear how much this is helping the real economy. The aim shouldn’t be to preserve the status quo, but to find ways to allow banks to fail without exposing the general public to the fall-out.

Read more.


Government vs private investment

Those of you based in London hopefully know that I have a regular column in City AM each Tuesday. Last week I discussed government vs. private investment:

When private sector investment declines, then the reasons need to be identified and a solution found. The key policy question needs to be “why aren’t businesses investing?” Attempting to offset it with government spending is just an accounting deception. And too much government intervention can be the underlying cause, not the cure – through high tax rates, burdensome regulations and policy uncertainty.

The print edition contained a chart in which I used the Gross Fixed Capital Formation data to compile and contrast government and private investment. That data has now been published by Kaleidic Economics: here is the announcement, and you can view the data here.


The money supply continues to contract

Regular readers will know that The Cobden Centre’s sister roundtable – Kaleidic Economics – is engaged in measuring the MA measure of the money supply, as discussed here several times. In October 2011 MA fell by 6.6% compared to the previous year, which is around twice the recent rate of contraction. As turmoil regarding the Eurozone and threats of a double dip recession continue, good policymaking requires good data. And the monetary aggregates paint a gloomy picture.


Did QE work?

I think this is a complicated question to answer, and both sides of the debate have a tendency to over simplify.

If we understand the goal of QE to be an increase in aggregate demand such that the Bank of England’s implicit and explicit objectives are met, I think it’s reasonable to conclude that it worked “better” than its critics feared, but not as well as its advocates hoped. In other words, I think output is higher than it would have been without QE, inflation is lower than some people warned, but the former is lower than and the latter higher than the MPC would like.

In this week’s column for City AM I wanted to highlight an irony in the debate. If “above target inflation makes little difference if expectations remain anchored” one possible explanation of the muted effects of QE is the Bank’s decision to retain an inflation target. Therefore:

We now have the odd situation where those warning of impending hyperinflation – the sternest critics of QE – provide the intellectual prerequisites for it to work. By contrast, in pandering to those concerns, its proponents ensure that it will not.

It strikes me that unless the Bank of England allows inflation expectations to rise, QE will have a muted effect.

Read the whole article here.


Monetary policy is not all about pulling levers

My latest article for City A.M.

I’M A big fan of the Bank of England museum. I find the way it attempts to educate children about how monetary policy is conducted to be charming. There is an exhibit with a tube of clear plastic containing a ball. The tube is “balanced” when the ball is level with a marker for 2 per cent inflation, and there is a lever labelled “interest rate”. As you pull down on the lever, the tube rotates and the ball shoots over 2 per cent. If you pull up, the tube moves in the opposite direction. Just as you grasp the mechanistic relationship between the target and the tool, “economic shocks” are added to send the tube into constant motion.

Continue reading.


Money supply down 4.3% in August

When we updated MA (our Austrian school measure of the money supply) for August, we expected to see signs of the market turbulence that has characterised recent events. Although still in a monetary contraction, MA is falling at a lower rate than previous months. It has been indicating a tightening of credit conditions for several years now, but has not significantly deteriorated.