Let’s ban Libra: it’s monopoly rent-seeking unhindered by regulation

Five reasons for banning Libra, the new “crypto” currency proposed by Facebook:

First, Libra co-operates with “competitors” in payment market seeking cartel pricing power

Market Cap of Competitors ($ bn)

Visa 359
Mastercard 266
Paypal 137

Libra 0

Facebook itself has market cap of 549, but would like some piece of payment system action. It tries to compete and co-operate with Visa and Mastercard at the same time. That is a cartel, surely.

Second, Libra tries to position itself as “crypto” currency, hoping that its value will rise through unsubstantiated speculation

This is the dodgy bit.

Market cap of “crypto” nonsense competitors

Bitcoin 201
Ethereum 33
others about 150

Libra 0

Facebook hopes that its currency will also go into the stratosphere from 0, based on computer bits, blockchain and bullshit, when people invest in it.

To be fair, Facebook say investments will be backed initially by “real money” investment fund .

But the investment in Libra could go up due to manipulation, irrational speculation, greed, and bullshit (see bitcoin), so divorcing itself from underlying value.

Third, collusion with other big companies is barrier to competition

Libra will have the lobbying power of one of the biggest companies in the world, backed by allegedly another 100 companies.

On that market concentration power alone, Libra should be banned.

Which brings me to the question, why are bitcoin and other crypto-fraud-coin-currencies even allowed in the first place? Bitcoin and others crypto currencies not backed by assets or earning  power and only supported by speculation should be banned.

Only 5 countries in the world ban crypto.

Why are they not banned in UK?

Fourth, Libra is mainly about rent seeking

“It is a giant leveraged rent seeking activity ” – This is Richard Murphy, talking about the deposit arrangement of Libra.

He is right – that is also true of the payment part of it. If you want Mark Zuckerberg taking 0.6% as net profit of all your payments, sign up!

(Paypal processed payments of $160bn last quarter, on which it charged 2.5% commission, leading to 0.6% net profit)

Fifth, Libra tries to operate outside state power

Here is the full piece from Richard Murphy, setting out how Libra will undermine the power of the state, as Libra will undermine national taxation, fiscal policy and exchange controls. All outside the regulatory power of the state.

How to write off student debt in the US (and the UK)

Bernie Sanders, candidate for the US presidency, is currently proposing to cancel all outstanding student debt in the USA. That is a whopping $1.6 trillion, owed by 45 million US students. It is about 7.7% of GDP. There is another 280 million Americans who never had student loans or have paid them off, they will not get anything.

Clearly, they might feel hard done by. Others think, why do we need to subsidise US doctors who will have massive salaries, partly to pay their massive student loans back? They will benefit, not us. And why student loans, not mortgage debt? Are they only looking after students, and not people who did not go to college?

So potentially a popular and sensible policy could mean that people will not vote for Sanders, because they will not benefit.

So how to share the benefit of a loan cancellation programme equally in the country?

Here is a suggestion: Bernie Sanders should pledge to give every single American $5,000 student debt cancellation vouchers.  That comes to $1.6 trillion for a country of 323 million.

If they have a student loan, they can use it to reduce the loan.

If they do not have a student loan, they can sell it back to the Student Loans Cancellation Agency for a 50% discount, over the next 5 years. So the effect would be to get $500 cash over each of the next five years.

The student with loans remaining can buy the $5,000 vouchers from the Loan Cancellation agency at half price, for $2,500. With these vouchers they can pay back the remaining loan outstanding.

The whole effect of this is that 45 million student loan holders now pay back 43% of their student debt – just $700bn, instead of $1,600bn. $900bn is paid by the government.

For those without student loans, all 280 million of them, they got $2,500 cash from the government, which they would not have had otherwise. That comes to $700bn, too.

So the American government still paid out $1,600bn in recognition of student loans – but it is shared out more equally in the country. Everybody shares the benefit.

Surely a vote winner for Bernie Sanders.

—

Right, it is an American problem, they have 7.7% of GDP as student debt. The UK is much lower, surely, we have not had student loans for so long, right? Well, it is a bit lower, at 5.5% of GDP, but rising very fast. What is our plan to deal with existing student debt?

Jeremy Corbyn said at the last election in 2016 something along the lines “we will deal with it”, but how? Nothing has been heard of since.

Something along similar lines would work in the UK, too. Labour should consider it.

 

 

Solar panels – make them or import them?

Luigi and Mario, neighbours in Italy, discuss getting solar panels installed on their roofs.

Luigi worked, until about a year ago, at a solar panel plant, but was laid off when a tariff agreement between the EU and China was ended and China could import panels without any restrictions. Luigi was furious, and knows that in the same year China-EU tariffs ended, the US President elected to Make America Great Again started tariffs of 30% on solar panels made in China.

 

Import panels:

This is the hypothetical situation for Mario, who is still working and can put panels on his roof: Buying imported solar panels from China cost about €2,000. However, were the same panels manufactured in Italy it would cost (a hypothetical) €4,000.  So the choice surely is simple, imports it is.

Fans of globalisation would leave it at this, denounce the big orange Donald of not understanding global trade or economics. Surely the consumer benefits from these cheap imports, American tariffs are a tax on the American consumer. So Europeans getting them cheaper from China are surely better off.

But looking at the transaction from a macroeconomic point of view, considering not just the consumer, but the health of the whole of the economy, we see that Trump might have a point.

That is the summary:

Any import substracts from GDP (-2,000), but the purchase of Mario increases GDP (+2000), the net effect on GDP is zero.

The Trade Deficit for Italy increases by 2,000.

Luigi has to be paid unemployment benefit of 1,000, which adds to GDP.

The government deficit increases by 1,000 due to unemployment benefit.

Manufacture Panels in Italy

However, if we were to find a way to make panels in Italy, and make them as cheap for the his neighbour Mario as Chinese ones, Luigi could have a job and an income. That would bring in taxes, and reduce the trade deficit.

Now making panels in Europe costs so much because if Luigi is going to earn €2000 net, the total cost to him and his employer (because of taxes and high social security charges on wages) would be about €4,000.  If these expensive panels could be sold, the effect would be as follows.

GDP increases by 4,000 from sale of solar panels.

The Trade Deficit is not affected.

Luigi now has a salary of 2,000 which he spends and adds to GDP.

The government deficit decreases thanks to 2,000 extra taxes.

But nobody is going to buy the panels, if cheaper ones are available. Big Problem.

Sell Panels in Italy

To sell these panels at the same price as the cheap Chinese ones, the Italian government has to subsidise the making or selling of these panels.

It has tax revenue of 2,000 from the taxes on wages, and it has saved 1,000 which was previously paid out in unemployment benefit. So the government budget is 3,000 better off after panels were made in Italy. It now subsidises the panels by 2000, so they are as cheap as the Chinese made ones. Hey, presto:

GDP increases by 2,000 from sale of solar panels.

The Trade Deficit is not affected.

Luigi now has a salary of 2,000 which he spends and adds to GDP.

The government budget is still 1,000 better off compared to Luigi being unemployed, after 2,000 is now used to subsidise the panels.

For the Italian economy everything is better, GDP is up 4,000 in total, Luigi has a job and doubled his income compared to being unemployed, panels are made in Italy and can be sold at the same price as made in China, there is no trade deficit increase and the government deficit has reduced by 1,000.

 

What about the Chinese manufacturers?

In order to exclude Chinese panels from the market either extremely high tariffs have to be put onto Chinese panels within Europe or some other excuse has to be found. They might pose a security threat, like Canadian steel, or Huawei phone switchgear in the US and could therefore be forbidden (or high tariffs set).

All in all a tricky situation and potentially leading to a European-Chinese trade war.

 

How could a trade war be avoided?

China exports twice as much to Europe as Europe to China, approximately. So advocating a balanced trade approach should be key (even if it involves high tariffs on certain industries) until a bi-lateral trade position is in balance. In time WTO rules will have to be re-written in line with this.

 

 

Are their any drawbacks from excluding the Chinese panels?

The Chinese are the market leaders now in solar panels, and the size of their own domestic market means that progress in development is likely to be quicker in China than in Italy. Italy’s panels could, over time, become a lot worse, comparatively, if protected behind trade barriers, due to lack of competition.

Chances of implementing very high tariffs against China in EU?

What are the chances of implementing a policy which would tackle unemployment, climate change, lack of income in depressed economies, lack of economic growth, excessive current account deficits  and more balanced government budgets, and delivered the same goods at the same price to the Italian economy? If the EU record is any guide, chances of implementing these policies are virtually 0.

If China has to close its trade surplus with Europe, Europe (and especially Germany) will of course have to close its surplus with the rest of the world. These WTO rules will have to be agreed with everyone in the end. Expect considerable push-back from the Germans with their massive trade surplus.

We just do not have this attitude, Make Europe Great Again. Or the same attitude to trade as Donald Trump. EU president Jean-Claude Juncker is just not that kind of person, and I guess his successor soon to be announced will not be either. It is a shame, as huge unemployment in Italy and the rest of Southern Europe is still a big problem.

 

 

 

Europe – especially Greece and Italy – is not working

Unemployment is still one of the main problems in Europe,  after the Great Financial Crisis, and the Eurocrisis. Two countries stand out in particular with a set of problems which are unique. Greece and Italy are still forecast to have very high unemployment rates next year. Unemployment is also high in Spain with 13%, but it does not face two other issues, which Greece and Spain have in common.

They pay the most interest in the EU on their government debt, both currently as part of GDP and also cumulatively over the last 23 years.

And these two countries have some of the highest tax and social security charges on work.

 

The above table shows these three problems. The UK is shown for comparison purposes.

So how has unemployment developed since these countries joined the Euro in 1999?

Unemployment

Many observers will have forgotten that German unemployment was higher for 3 years from 2005 to 2007 than the rate of Greece and Italy. 

But obviously since then, unemployment in these countries exploded, Germany’s has dropped. How can we get it down again? The previous post on Minibots has already talked about ways of getting unemployment down in Italy. Increase aggregate demand through offering a limited job guarantee (20 hours a week) plus an state-owned electronic transfer system for the new Minibots in electronic form, which would pay each Italian 10 minibots a month (helicopter money), to increase acceptance of these minibots by making them universal.

A similar scheme had previously been proposed by me for Greece. The advantage would be that the extra GDP from these measures (multiplier of 2) would be sufficient to increase GDP, and generate enough extra income to prevent a shortfall in taxes.

Government interest

Since 1995 both Greece and Italy have in total paid (over 23 years) more interest on their government debt than they have generated GDP last year. (They paid 125% and 105% of GDP, respectively – the next worst country in Europe is Portugal, with 56%) That would not matter that much if interest was only paid to domestic bondholders. Some of this interest income could be taxed, and the government could invest in the economy without increasing the deficit. The remainder of the interest would still remain in the country with domestic bondholders, and the untaxed interest income could be spent or invested in the country.

However, if foreigners buy Italian and Greek bonds – which they did (Greece), and still do (Italy) interest is lost mainly abroad. It will not be available for investment domestically and might not even be taxed.

Does this matter, this lost interest income to the domestic economy? Yes, it will over time reduce the ability to invest and spend in Italy or Greece with the strict EU deficit limits. And it will also increase any current account deficit in the country. Over time it adds up.

If only half of government interest income was lost abroad, around 50% of GDP in total will have been lost to the economies of Greece and Italy since 1995, approximately 2% a year.

That is still ongoing, Greece paying most of its interest to the EU and IMF now, and Italy sold two-thirds of a recent 20 year bond issue to foreign investors. All interest income lost to the domestic economies and going abroad instead.

What can be done about it? Capital controls or taxes will be tricky to implement. Domestic borrowing by governments from domestic banks would get around it, too. Neither are allowed by EU rules.

But let’s remember, currency notes (or parallel currencies) will not pay any interest. So from an interest rate point of view countries should want to issue as many units of currency notes (or parallel currency) as possible. So the idea of printing minibot notes, which is currently under discussion in Italy, will save a huge amount of interest.

When discussing problems of Greece or Italy you never really hear people talk about this but interest payments drain about 2% of GDP each year from the domestic economies to foreigners. Money which will be missing the following years in their own economies. It can only be replaced by ever increasing government debt. Any country would be struggling in the long term.

This gets us to the third issue – the tax wedge  (using Italy as an example)

The tax wedge on average industrial salaries is huge in Italy and Greece. To earn Euro 1, the cost to employer and employee in taxes and social security charges is 1.94.

In Germany it is about the same, but unemployment is very low in Germany already. And in the UK it costs only 1.44 to earn Euro 1 net. The lowest in Europe for a large economy. Spain is at 1.65.

This huge wedge makes domestic goods and services, as well as exports, less competitive than they could be. I have already suggested (in the post about minibots) to take Euro 100 each from social security contributions from salaries from both the employer and the employee each month both in Greece and Italy.

In Italy, that would drop the average cost of wages throughout Italy, increase net salaries, but cost the Italian tax authorities lost taxes of Euro 55bn, about 3% of GDP.

Years ago, Italian economists Cattaneo and Bossone already suggested the idea of fiscal money.  Instead of dropping social security contributions by the state, they suggest the state issues minibots (in fact they call them “CCFs” for fiscal money). To stay with the example above each employer and employee is paid minibots  of 100. The net effect is the same as a reduction in each of their social security contributions in Euro of 1,200 each a year. The employer and the employer each have minibots 100 more each month to spend.

Now thanks to the introduction of minibots through electronic helicopter money, everybody will be happy to accept minibots. They are also valued to pay taxes, of course. And, unlike Euro government borrowing, the state does not have to pay interest to domestic or foreign borrowers either.

However, these minibots issued to employees and employers should, suggest Cattaneo and Bossone, only be available to pay taxes in two years time from the date of issue. This will enable the additional minibots  to stay in circulation for two years longer and enable the economy to grow, so by the time taxes can be paid with them, a tax shortfall (in Euro) can be avoided. The economy will have grown so much the additional growth will now bring in more taxes paid in Euro as well.

Finally, Cattaneo and Bossone are certain that their version of fiscal money can be issued without it breaking the EU’s deficit rules. They talk about it here.

So ultimately minibots (or an alternative parallel currency for Greece) will be able to make a contribution to a reduction in unemployment in these countries, and will enable these countries to save some of the interest they would otherwise have to pay.

If they are introduced, Greece and Italy would quickly reach lower unemployment levels and grow their economies to its full potential. And there would be no need to even think about leaving the Euro.

 

 

 

 

Monetary Policy – a tax on the productive part of population

When defenders of monetary policy are challenged with the drawbacks of monetary policy, and asked to provide evidence of its advantages or even that it works at all, there is usually a bluster of “there are plenty of studies which show that it works” response.

Recently Simon Wren-Lewis provided an example of such a study from 2014 to support this point. Its main finding is that a 1% rise in interest rates leads to a 1% or more fall of inflation after 2 to 3 years. Here is what it shows:

First, the study looks at the time period of 1975 to 2007, so it leaves out the major rise of inflation 1973/74, or the period after the financial crash of 2008. There will be a reason for limiting the time period, because otherwise the data does not support the conclusion. You can see for yourself, whereas in the big inflationary periods of 79/80 and in the early 90s the graph seems to support the conclusion, it does not prior to 1975 or after 2007 even. So the authors of the study pick the time period to support their claim.

Secondly, when the study takes into account central bank forecasts for the economy, the model seems to work, however when they leave these forecasts out of their model, the prediction is that higher interest rates INCREASE inflation. The authors say that themselves, they speak about a prize puzzle. (The case that higher interest rates mean lower inflation is still the subject of fierce discussion)

That is like a doctor saying, take this medication, I forecast you will get better. And the medicine will work. If you take the medicine without the forecast from the doctor, though, you will get worse. How can this be true?

Thirdly, the paper predicts that a 1% rise in interest rates will lead to a decline in industrial production of 2%. Now which sane economists would want to support a policy like that? Too much money chasing too few goods is the definition of inflation, and the cure is supposed to be a 2% reduction in the production of goods? Monetary policy should be disqualified on that ground alone.

Lastly, changes in interest rates are only expected to work after 2-3 years. Do we know any other human control system where changes have an effect after only 2-3 years? The long time delay alone should disqualify monetary policy as an economic policy tool, as taxes (such as VAT) seem to have a much better and quicker effect on inflation. They work immediately. They seem to dampen demand the minute they are introduced. Have a look at the graph below, which would give you an alternative to interest rate rises:

The boxes in red reflect lower VAT rates (1970s purchase tax) , the boxes in blue higher VAT rates.

 

So the study presented by Simon Wren-Lewis does nothing to dispel the fears that monetary policy is a useless tool, if anything it confirms it. He, or other economists looking at this study cannot provide good answers to the issues raised above. Why not?

My guess is that monetary economists such as Professors Simon Wren-Lewis, Danny Blanchflower or Tony Yates have worked all their working life for and with monetary policy in positions at the Treasury, Monetary Policy Committee and Bank of England. They are heavily invested in the cult of monetary policy and very, very reluctant to admit in public that the Emperor of Monetary Policy they are following is, in fact, naked.

So what does hiking and lowering of interest rates do to the economy? How about QE?

Example: The Bank of England raises rates by 1%.

Here some quick estimates. Households, the corporate sector and the government each have about 80% of GDP in debt, that is in total about 250% of GDP is outstanding debt. If there is a 1% rise in interest rates, that is a further 2.5% of GDP has now to be paid in interest. That would be in UK’s £2,000bn economy, about 5% of GDP. That is £100bn.

Now, not all interest rates rise immediately when the bank rate changes, many do, but many will be fixed rates which will not change. Let as assume that only half of interest rates will go up in line with the 1% interest rate change. Fixed rates stay the same. So indebted households, corporates and government will have to find £50bn of additional interest. That will go to the banks and bondholders (the rich).

Interest rate rises are distributive policy in favour of the rich.  In fact, the effect of a £50bn interest rate rise is about the same as putting up national insurance rates by 1/3. Here too, the working population and businesses would be hard hit.

Except, in a national insurance rate increase, the state would get the money. In an interest rate rise, the rich get the money. Because they do not spend as much as the poor, demand will eventually fall.

That is what happens in an interest rate rise.

However, when interest rates fall, it works in favour of the workers and businesses with loans. Bank and interest income falls, usually by less than they have gone up in a rise. The last major fall in interest rates following the financial crisis in 2008 was almost immediately supplemented by quantitative easing. Here again the rich benefited most, as the value of their assets were now protected by the large amount of money from quantitative easing. That helped asset prices from falling too steeply.

Now interest rates are pretty much at the bottom, at 0.75%, and are more likely to go up in future, as they have done in the last couple of years in the US. If we want to move that distribution from poor borrowers, mortgage holders and businesses to the rich banks and savers, we should move away from a monetary policy with interest rate changes.

Instead we should use taxes to take out demand from the economy. Taxes which take out demand from everyone in the economy, rich and poor, and not just the working population and businesses with loans. Taxes would work much more effectively than interest rate changes.

 

 

 

 

 

Minibots increase liquidity, but how about unemployment?

The Italians are proposing to use new printed notes (minibots) to pay back all the arrears the state has accumulated in the past. These unpaid bills from the Italian state to the private sector amount to Euro 53 billion, about 3% of GDP. Minibots will provide liquidity and alternative notes, but will not solve Italian unemployment (10.2%) unless the concept is expanded.

Minibot means huge interest saving for Italian state

Instead of increasing the deficit further, by issuing more interest bearing treasury bills or government bonds, the Italians propose to print minibots instead. That saves the government up to 3% interest a year (Euro 1.6bn a year on Euro 53bn). That is an enormous advantage, as much interest goes to foreign investors and is lost to the Italian economy.

Minibots will look and feel like money and can be used to pay tax liabilities. Acceptance in the private sector is voluntary, as only the Euro is legal tender.

How minibots work in practice

An example: After their introduction, the Italian state will be handing over to its main road contractor various briefcases with brand-new, freshly printed minibot bills to pay a multi-million Euro road building programme.

The road builder can now, again in minibot cash, pay his employees or sub-contractors. Both the employee and the companies can in future, when tax bills become due, pay taxes in these minibots. Again, these notes will have to be physically carried to the tax-office. Payment in shops might or might not be accepted in minibots, as they seem inferior to the Euro. Maybe banks will accept them in repayment for loans (banks also have to pay taxes), but that is by no means assured.

So the only benefit is that the minibots inject another 53bn in (inferior) notes into the Italian money system, on top of the 192bn in (superior) Euro already in circulation. That additional liquidity is valuable, as it will free working capital for companies. Lack of working capital is one of the main reasons companies fail, or have to reduce their workload. Therefore the injection of cash might ensure the survival and prospering of companies.

Disadvantages of the minibot system

However, minibots do not spur on economic growth directly, deal with the lack of jobs, high taxes on employment, or provide an alternative payment system to the Euro – with its bank account infrastructure behind it. The current government has no plans to expand the minibot system.

But let us review what would be possible, following an expansion of the minibot system:

Extend functionality of minibots to increase growth and reduce unemployment

Two options are available here:

1. Employer of last resort programme
2. Electronic accounts for minibots, with a Euro 10/month credit from government

Employer of Last Resort Programme

2.7 million Italians are without a job. If the state provided work for them, 20 hours a week, perhaps, at minibot 500 a month ( 5.80/hour), it would cost the equivalent of Euro 16.2bn/year. (0.9% of GDP)

Increase minibots acceptance

60 million Italians will get a new minibot account, provided by the state, with minibot 10 credited each month. If minibots can be given out for free with an electronic account and payment card, that would improve their allocation and acceptance – which would still be voluntary. Minibots could now be used to transfer payments into other accounts.

That would cost the equivalent of Euro 7.2bn/year (0.4% of GDP)

So the total cost of these two measures is tiny, at 23.4bn a year, or 1.3% of GDP.

These two measures alone would add probably more than their cost to GDP, perhaps twice as much, assuming a fiscal multiplier of 2. In which case these measures would be completely neutral. The additional taxes from these measures alone would pay for the cost of the Employer of Last resort programme, and the free Minibot 10/month “helicopter drop”.

However, even if there was a cost, Italy should insist on issuing these minibots. The EU will almost certainly add the cost of minibots to the total borrowing of the country – so the high indebtedness of Italy will go even higher, to 140% of GDP or more. Italy will have to argue its case in Brussels, insisting that these measures are important to move the sclerotic Italian economy to a higher level and fight unemployment.

There will be important benefits: the minibots do not attract interest. So minibots will not lead to destructive leakages of interest abroad as happens with government bond interest at the moment.

(In due course Italy should review the huge costs associated with employing someone, in terms of social security payments for employer and employee. Italy is in the top 6 in Europe here, with obligatory charges on work. It is the top 3 for unemployment, after Greece and Spain. It should consider cutting these charges by  Euro 100 each from employer and employee social security contributions. (Cost about Euro 55bn/year or 3.1% of GDP) That will make it more attractive to move from the employer of last resort programme to the real economy. At the same time Italians would gain more spending power, and goods and services produced in Italy would become more competitive.)

However, making changes to the social security contributions is important, but for another day.

First Italy should first introduce the minibots:

• in newly printed notes, to ease working capital constraint of Italian companies
• as a finance mechanism for an employer of last resort programme
• as a new electronic currency, which credits of minibot 10 each month paid by the state

The introduction of minibots will lead to an important and unique benefit:

Italy would have no unemployment.

Only a tiny percentage of government liabilities would be held in minibots. The vast majority of money and economic activity (more than 95%) in the country would still be in Euro. The minibots would help, however, to make Italy more prosperous. It would therefore be less likely that the country would want to leave the Euro.

 

 

 

 

 

A new Digital Markets Unit – What should it do?

Earlier this week, while an unsavoury selection of characters made their pitches to be the new prime minister, the current one, Mrs. May, endorsed the Unlocking Digital Competition report.

The idea is to set up a Digital Markets Unit and its remit should be this:

This is the summary conclusion by a bunch of economists, led by the American Jason Furman (previously economic advisor to the Obama administration) who were given the task to look at this issue. You can get the whole 150 page report here.

Certainly, this is not getting the attention it deserves.

But then, on the other hand, this report does not deal with the digital market problems which are far more serious than the lack of competition. In fact, arguably, for the public the lack of competition is not an issue at all.

So if the UK will have a Digital Markets Unit its scope should be expanded enormously from this rather narrow view of digital market competition.

Public Concerns with Digital Markets, I would suggest, are:

1) National Security: Can the platforms work without foreign interference?
2) Competition with the High Street: Do we want High Street shops and how do we ensure they can compete with digital markets?
3) Privacy: How can I delete my data from these platforms?
4) Taxation: How can we tax super profits of monopoly providers.

These are the more pressing issues. Let’s take them in turn.

1) National Security:

Let’s not beat about the bush. Pretty much all social media and retail platforms are American. America is a country which is happy to push its weight around to influence and if necessary overthrow democratic decisions in other countries. Regime change is what America is all about. If people think we are not Venezuela, they better wake up, as this report in the Guardian confirms. Here is Mike Pompeo, the American secretary of state.

“It could be that Mr Corbyn manages to run the gauntlet and get elected,” he said on the recording. “It’s possible. You should know, we won’t wait for him to do those things to begin to push back. We will do our level best. It’s too risky and too important and too hard once it’s already happened.”

And the American hostile stance towards Huawei (where Facebook and others have now cancelled uploading apps on their new mobile phones) proves that these American platforms are happy to dance to the American tune to avoid agonizing the US administration.

Do we need Google and could we live without Facebook and twitter were the Americans to shut it down? We did not have them 10 or 20 years ago.

However, if we now see them as a valuable tool in our democracy we should of course have options available were they closed down by “enemy action”.

We do not want to find ourselves in this position. We should now build mirror applications which do what Facebook and twitter do, so they could be employed quickly were other ones shut down.

2) Do we still want a High Street with variety of shops?

That is a political decision. Do we value local shops with local people having local jobs. Or are we happy to have all our goods delivered from Amazon and Co?
Taxation is the key here, as people buy online, because it is cheaper and more convenient. Taxation can make online goods more expensive relative to high-street goods, and re-balance that choice.

3) Privacy:

Google will know where I am Wednesdays from 6 to 8pm. Google would not be wrong to guess that I drive my son to his football training in the park, if I leave my location detector on in my mobile phone. Sainsbury can probably determine whether our family’s diet will cause premature death purely by looking at our consumption of bacon compared to fruit and vegetables. Sainsbury can guess that based on the weekly shop it delivers to us.

That is the kind of information I would prefer nobody to know, but that is of course the data which is valuable to Google and Sainsburys. This is the kind of data which makes it easy to target advertising by Cambridge Analytica, to, perhaps, swing a referendum result based on illegal campaign financing.

Can I prevent this data being used at all? I know I press all kinds of buttons when first accept cookies, but I would like a button to explicitly say “We will not use your data for anything other than you using our app” I have never seen that – it is time that was introduced.

4) Taxation

All digital platforms should be heavily taxed, based on an access charge to the publicly provided network here in the UK which they all use. This tax should be based on turnover. The more dominant in its market, the higher the tax. This would avoid any re-patriation of profits to lower tax.

This tax would work differently from other taxes of traditional businesses which would typically only be taxed on their profits and are subject to more competition, and do not benefit from platform effects. They also cannot hide their profits as easily as the online giants.

A Digital Markets Unit should address these issues. The public or politicians will probably have similar concerns.  But the digital markets unit will not address any of them.

Instead the scope of this government quango will be extremely limited, but still cost millions. (Sorry, but can anybody explain to me this: why do we need a Harvard based economist on this panel?)

By endorsing a Digital Markets Unit with such limited scope in her last days of office, Mrs May can add a further failure to her despicable premiership.

Modern Money Theory could save the planet (and even Labour)

 

Modern Monetary Theory could pay for a Green New Deal in the UK, but Labour is stuck in the past and wants to try to appease finance and neo-liberal economists instead:

First a quick definition of MMT in two paragraphs:

There is no limit to the amount of money a government can borrow to undertake government projects. The only constraint are real resources available to the government, such as workers, raw materials. And if you try to use too many of these limited resources all at once, there might be inflation.

Rather than controlling inflation through interest rates (monetary policy), MMT suggests, if other measures (such as price controls, resource planning) do not work, to ultimately use taxes. Raising taxes will kill inflation. Short term interest rates could then be pretty much kept at 0%, with only slightly higher rates for borrowing for longer periods.

The main reason Labour does not want to sign up to this is because

(a) this theory, as a coherent set of thoughts, is completely new (especially the tax to control inflation bit) – and opposed to everything neoclassical (and certainly neoliberal) economics says, which aims for balanced budgets. Labour does not want to alienate economists that are supporting the status quo and their right wing propaganda think tanks and newspapers

(b) Labour does not think they can raise taxes at times of booming demand

(c) the pound might fall

(d) foreigners might not buy UK government bonds (they now buy about 30% of them)

(e) we end up in a crisis worse than the 2008 financial crisis

The main advantage of MMT is that now we have no financial constraints to save the planet. Any Green New Deal for the UK could be financed, even if it costs £1 trillion or more. It could be done within a ten-year time frame, even.

Clearly the MMT policies would need to be credible. How would we know how many resources do we need, how do we plan for that, and what are the fiscal rules to deal with inflation, should it arise? That still needs to be determined. It is astonishing that no economists (beyond the proponents of MMT) have argued to use taxes or other measures to control inflation in the past.  Even though just these inflation controls were successfully implemented in times of war, for example.

(A comparison of fiscal and monetary measures to can be found here, though.)

Let’s deal with the main objections stated above quickly (although detailed criticism is available here, here, here and here)

 

How valid are the above criticisms in an MMT fuelled economy?

(a) Anything a left wing Labour government does will be taken apart by the right wing press or think tanks – so trying to appease (by issuing a fiscal credibility rule, for example), might prove to be futile.

(b) taxes have been raised by governments in the past (even VAT) and they were re-elected – because the economy was booming

(c) the pound might rise in a booming economy – us generating our own energy rather than importing it will help with our external trade position

(d) Foreign buyers of UK government bonds (now owning 30% of UK debt) could boycott them, but on the other hand if the UK has high economic growth, UK bonds could be very attractive. Should there be a “buyers strike”, however, then Quantitative Easing would kick in, where the Bank of England would buy unsold bonds, adding to the quarter of outstanding UK bonds it already holds.

(e) there is no reason to end up in a crisis – why would that be in an economy which is growing sustainably?

A MMT financed economy – nobody has ever tried it before, explicitly. Arguably China (with their state-owned banks providing huge domestic credit) and Japan (with their huge Japanese bond buying programme) have come closest. There is no excessive inflation in China, and Japan even has a deflation problem. But nobody has tried to use taxation to suppress inflation before – outside a war economy.

Could Labour do a Green New Deal without MMT – just within the confines of the existing rules? Difficult to say, because there are no official estimates what this GND would entail. (Labour are useless in planning anything in detail – and remember, a Green New Deal or a Green Industrial Revolution was only announced after Greta Thunberg and Extinction rebellion forced the issue last month.)

If Labour aims to decarbonise the economy by 2050, perhaps financing under the Labour Fiscal Rule might suffice. If Labour will want to do it by 2030 or 2035 the money needs to be spent sooner, then Labour will break its fiscal rules.

What are the advantages using MMT? They are really threefold.

First, currently the government pays about £39 bn a year to bond holders. That money could be saved when issuing government bonds at 0% under MMT. These £39bn are about 2% of GDP. The Green New Deal costs 2% to 5% of GDP (depending on how quickly we want to implement it). So MMT could finance up most of the Green New Deal, just by issuing bonds at 0%.

Secondly, Monetary Policy to control the economy has been highly regressive, hurting poor people more and relatively helping richer people. A Green New Deal boost to the economy could drive inflation higher. Interest rate rises will again hit the poorer part of the population more, unless we use MMT to control inflation. Taxes could in turn spread the pain of inflation busting tax rises between all parts of the population, and not just the working population and the poor borrowers, as under current monetary policies.

Thirdly, a Job Guarantee (MMT proponents see it as an integral part of MMT) should be part of the implementation of MMT in the UK. It would provide a job to the unemployed (or a sub-set of them) who would otherwise have difficulty finding work. In a recession, which is likely to come at some time, such a Job Guarantee infrastructure would provide a valuable tool to fight against the scourge of unemployment. That last benefit is, of course, not directly linked to a Green New Deal.

So any strategy trying to sell MMT should concentrate on these three benefits.

Or in other words, unless Labour implements MMT, while trying to finance the Green New Deal,

•  taxes or borrowing will rise by 39bn a year,
• higher interest rates will benefit the rich holders of savings and hurt poor borrowers,
• we will not have a job guarantee to cope with persistent unemployment and a potential recession.

Snake Oil Party whips gullible audience into frenzy

A quick report  on yesterday’s rally of the Brexit Party in Surrey.

It was absolutely packed – probably around 1,000 attendees. Very slick presentations, and even though there were two Bentleys and a massive Rolls Royce parked just outside the venue, also attended by plenty of “ordinary people”. Yet, the audience is entirely white – well, I saw one black face in the 1,000 and no brown faces. About 70% of audience are pension age. Apart from a handful of kids being dragged in by their parents, there seem to be only two people under 25 there.

The presentation begins with a short film – where two presenters introducing the film are black – before the film cuts to Farage in his ludicrous hats ranting and raving about Brexit.

Inside the atmosphere is a mixture of Christmas Pantomime and Evangelical Church Meeting, with the speakers whipping everyone into a frenzy to hold up their little placards. The candidates are presented and give a short speech each. Each have very public school plummy accents, and obviously members of the British Upper Class.
They are introduced as benign journalists and businessmen and student of European Law. In reality they are Family Office and Hedge Fund managers (Rowlands), ex-UKIP spokeswoman (Phillips), Trustee of a Charity which was given £500k by the government to send disadvantaged people on holiday and only sent nine in the first year (De Lucy), or a leader writer for the Daily Telegraph or Daily Mail (Bartholomew).

So they are really engaged in tax avoidance for really wealthy clients, ex-UKIP propaganda and spin, being connected to a slightly obscure charity and real aristocracy, and opinion former for the Brexit right-wing press and author of a book against the Welfare State. None of this, of course, is mentioned.

It does not matter – the youngish women selected (Phillips, De Lucy), with their long blonde hair will look good on Question Time in the future – undoubtedly selected for the appeal to a woman electorate – as well as their obvious eye candy appeal to the 60+ older male voters. What matters are that speeches are emotional, jokes are corny, and that it plays well with the audience.

Nobody in the hall cares about little details like the real background of candidates.

Or why we allow autocratic limited companies now to send candidates to elections, rather than democratically elected ones from a real membership base.

Or why we allow which looks like illegal funding by millionaires and payment methods which cannot be verified in our democracy.

Or why the EU parliament even allows candidates whose only policy is to leave the EU. Who gives a damn about these democratic details? Not the audience, that is for sure. They are just worried that the democratic will of the people is ignored.
The European Parliament is not even mentioned by any of the new candidates. Each candidate will make about £115,000 each year if elected and if we do not leave – as seems increasingly likely. Half a million over the next 5 years for doing sweet FA in the name of the electorate. How is this democratic? But these details would just get in the way of the coherent storyline.

And the story told for 90 minutes is one of betrayal, the incompetence of existing parties to deliver Brexit, and the threat to our democracy this poses. This is literally the only thing being said, in various forms and iterations by all the six candidates – 3 years of Brexit disasters condensed in 1.5 hours, looked at from various angles. Not one word about how exactly a Brexit negotiated by the Brexit party would look like. It is a very coherent and powerful narrative.

That narrative won in the referendum in 2016 and it will get the largest number of votes again!

All candidates studiously avoid the word Hard Brexit, but are for a “WTO Brexit”. This is the party which is against charlatans like Boris Johnson, who is against the May Deal, but then votes for it anyway. They love their hero Nigel when he finally comes on and mentions exactly that. Nigel Farage in real life comes across like a mixture of Berlusconi (he is a short-arse really) and Hitler (outdated, crappy, over-rated oratory skills). Very appropriate to the snake-oil Brexit which is being peddled here, and the story of betrayal.

These people literally stand for nothing, other than Brexit. “We mean what we say, unlike the other ones currently in power.” That is their main message. Vote for Brexit, for real this time.

As a show it is not bad, well worth the £2.50 everybody paid to be there. It is balsam for the soul of the part of the 52% who are now either upset or stupid enough to vote for the Brexit party and their right wing hedge fund candidates. They voted for Brexit – it has not happened – they are now betrayed – and Nigel is the leader of the Betrayed party. That is what it is about. Emotions not reason. Nothing else.

How to eliminate CO2 emissions in ten years

The UK  has been one of the success stories regarding CO2 reductions. It has been able to half its emissions per person from its peak in 1973 of 12 tonnes of CO2 to 6 tonnes of CO2 now. Not many countries can match that.

Can we now eliminate the last six tonnes in the next ten years? Good question.

Here are some suggestions from the last week: Tim Harford, advocate of messy desks and creative thinking: The – not very creative – Carbon Tax.

May I suggest to the prolific Tim Harford a new entry to his “100 things which changed the modern economy” series. The yellow vest, the symbol of protest which changed the French government plans to introduce higher charges on fuels. These charges were like a carbon tax. They are now dropped. A change of plan of at least 5 billion Euro extra taxes, which is not bad for a bit of yellow plastic worn by French protesters.

And this is exactly the reason why Richard Murphy is against it. A carbon tax is regressive, and would hit poorer people more than the rich. As it would have done in France.

Anyway, the reduction in CO2 we have seen will have been the result of regulation, which Richard Murphy also proposes, not further taxes on fuels.

No suggestion of a carbon tax from Paul Johnson, father of four (according to his twitter handle) and Head of the Institute of Fiscal Studies. He is also part of the UK’s Climate Change Commission, which is partly responsible for the elimination of CO2 which we have seen in the past. “We should be aiming to get to net 0 by 2050”, I slightly paraphrase his latest article for The Times, although “we do need to get a move on”. So we do need to get a move on, but if we are aiming for 2050, that is 30 years from now – what is it? Are we in a hurry or can we dawdle?

The problem is that 2050 might be too late, as Extinction Rebellion protesters and many scientists will confirm, although nobody can be sure.

I suspect Paul Johnson might concur, were he the father of four kids in Bangladesh, which will be hard hit by climate change, or the father of four polar bear cubs.

So, what would we have to do to eliminate 6 tonnes of CO2 each in Britain in the next ten years, just to set a good example for the rest of the world that it can be done?

Here is a six point plan:

Let us look first where we actually blow CO2 into the atmosphere, by person in the UK. This now includes CO2 emissions due to flying, which increases each person’s share by about 10% to 6.6 tonnes per year. All figures derived from the UK Digest of Energy Statistics.

 

First – The above table shows that to eliminate CO2 we need to decarbonise liquid fuels for flights and (mainly) road transport. And to do the same for natural gas used for mainly electricity production and heating. We will have to use carbon-free electricity instead.

Second – We do not use all of the CO2 personally. Only about half is used directly, the rest is used in commercial premises, factories or offices and will be used when we buy things or use services.

Third – How do we make sure that CO2 actually reduces? CO2 Certificates could be issued for free by the government to each citizen in the UK to allow them to either use them themselves or sell them to commerce, industry and government. (6,600 kg of CO2 in year 1, the following year 6,000 kg of CO2, then 5,400 kg, and so on.) These CO2 Certificates would work like loyalty cards, however, nobody would  be able to buy fuels, gas or electricity without giving up some the CO2 Certificate credits. Each petrol station, electricity and gas provider, flight booking service would need payment in money and CO2 Certificate credits. So a return flight from London to Madrid might cost £200 and 600 CO2 Certificate credits (representing the 600 kg of CO2 used for the flight)

If trade/industry/government want to emit CO2 they have to buy CO2 Certificate credits from citizens, at a price determined by the government. The money will be paid into special accounts of these citizens which can subsequently only be used for investments in renewable energy.

So poor people, who might use less CO2, would be able to benefit, while rich frequent fliers with big hard-to-heat mansions would need to buy CO2 certificates from them, just as industry and commerce does.

Fourth – Road transport will need to be electrified, alternative synthetic fuels for flights or trucks will need to be developed, and each house or flat will need to be well insulated and subsequently heated by electric heat pumps.

Fifth – Heating by heat pump currently does not make any sense. If a heating boiler in the UK breaks down, there is a theoretical choice between investing in a new gas boiler (£2,000) or an electric heat pump (£10,000). The heat pump is less powerful and slightly more expensive to run than the gas boiler. That is where carbon tax can have a useful role to play.

The last column in the table above shows that per tonne-of-emitted-CO2 natural gas is the cheapest fuel, by far. To put one tonne of CO2 into the atmosphere with natural gas costs £165 at the cheapest retail prices. It costs 3 times as much to burn diesel or petrol, as natural gas is very lightly taxed.

However, to make heating with heat pumps more attractive, the higher cost of initial investment will have to be set off by lower running cost – similar to LED bulbs and electric cars now. It will therefore be useful if gas prices could be increased each year by a new gas carbon tax to make a heat pump investment more attractive. The same is true for jet fuel. There are no taxes on jet fuel, thereby making it cheaper to fly when it might be less polluting to take a train, even after air passenger duties. So let us tax jet fuel and natural gas and let us increase taxes slowly over ten years. (Higher gas heating costs of less well off people might have to be subsidised, before gas is substituted by heat pump electricity)

Sixth – Finally, huge investments will be necessary to pay for this. Probably about £1 trillion, about an investment of about 5% of GDP a year (£100bn) for each of the next ten years. Who pays for it? Ultimately it will be a mixture of industry/commerce/government who pay for certificates from citizens, the government through government borrowing, individuals and companies through their own savings and private borrowing.

Some of it are investments which would have to be made anyway, as cars, trucks and boilers are up for natural renewals.

Other investments are new in order to double electricity generation (to run heat pumps and transport), to research synthetic fuels, to insulate homes, to switch to expensive heat pumps.

Government subsidies will play a huge part, especially for low income families and to set off huge cost of heat pumps, making up perhaps 50% of the investment of £1 trillion in total.

In total the investments are estimated to be

insulating homes – £125bn
installing solar panels on each home – £135bn
subsidising 30 m electric cars £5k each – £150bn
new electric generating capacity –  £150bn
cost of heat pumps £10k each – £270bn
other R&D costs, investments public
transport, synthetic fuel develpmt.,
factories for heat pumps, electric cars – $170bn

Total £1,000bn over 10 years

These six points are the plan in short. It will be expensive, although all of these numbers are guesses. It will take major planning and effort. And it can be done in 10 years, although is very, very ambitious.

However, an investment of £100bn a year is about 5% of GDP. In 2017 energy accounted for just under 3% of GDP. In 1982 it accounted for over 10% of GDP. (see page 19 of Digest of UK Energy Statistics)

So these investments are not completely out of line with historic costs for energy.

There is no question that it could be done. Or that it would be affordable. Which government would say that they cannot invest 5% of GDP per year to transform our country?

Is there any reason to delay? Would it be cheaper to do this decarbonisation of the UK over 30 years instead of 10 years? Exactly the same actions would have to be taken over 30 years as over 10 years. At exactly the same cost.

The only reason it would be slightly cheaper is because higher polluting assets (such as gas boilers, petrol cars, diesel trucks and kerosene planes) would be allowed to pollute for longer.

So anybody querying these figures should try to explain why it is not possible to invest 5% of GDP into renewable energy to allow for a CO2-free United Kingdom within a time frame of ten years.

Or, more importantly, perhaps the influential Paul Johnson (the one from the Climate Change Committee) can explain in detail to his four kids why he thinks 2050 instead of 2030 is a good target to aim for, when many scientists say otherwise. Everybody would be interested in his detailed answers. After all, “we do need to get a move on”.