Ragging on Ritchie

Owen Tudor and Richard Murphy both claim that the IMF\’s report out today supports their case for a financial transactions tax.

Sadly they\’re both blathering (if not in fact being deliberately obtuse to the point of mendacity).

This is the same report that was leaked a couple of months back. My response is here.

What the IMF actually tells us is that an FTT (ie, The Robin Hood Tax) would not in fact reduce volatility and could well increase it, would not in fact be paid either by banks or capital but by workers in the long term and that there are better ways to achieve the desired goals anyway.

This is not what I would call an endorsement of their mitherings.

Don\’t let them get away with their \”spin\” (\”spin\”, in this case being properly defined as \”being deliberately obtuse to the point of mendacity\”).

This capital is not just financial capital: indeed, financial capital is an artifice that is, as I argue in ‘Making Pensions Work’, unsuited for pension use.

Guess who?

As I have shown in ‘Making Pensions Work’ all pensions in the UK are currently effectively paid by the state.

The reality is that this is the only thing that is sustainable.

Ritchie is actually saying that not taxing you on your savings so that you can fund your own pension is exactly the same as you being taxed in order to pay someone else\’s pension.

That the tax relief you get on your pension is the same as the tax you pay to pay a civil servant\’s pension.

This raising of effective tax rates by taxing back child benefit:

Reducing hours

Why not? It will pay handsomely!

Yes, that\’s Ritchie, pointing to what he always denies is even possibly true. That in the face of \”too high\” tax rates people will cut the hours they work and thus tax revenue collected will also fall.

What\’s even more amusing is that in one of the papers he\’s done over the past couple of years, in order to make his sums, umm, sum, he had to assume the opposite.

That raising tax rates on the rich would increase the number of hours they worked.

Nothing like consistency in his work, is there. No, quite, nothing like it at all.

Oh, and this is joyous in the comments:

And yes – 100% tax is the one point bar 0% where Laffer works

Rilly? The Laffer Curve continues to slope upwards until a tax rate of 99.99999% and then revenue slumps to zero again?

Better get that written up, eh? Sure fire Nobel material that is.

So, knickers twisted over the revisions to the Isle of Man GDP figures.

They want to get their hands on our money, certain.

And why have they done this? Well, let me remind you of a little problem the Isle of Man has: it’s called its VAT black hole. In October 2009 the massive VAT subsidy the UK gave to the Isle of Man each year, amounting to  some £180 million to £200 million a year was reduced by £140 million a year by changing the basis of calculation. According to many, including many politicians in the Isle of Man this happened as a result of my having drawn attention to the issue on my blog – and I’ll unashamedly accept credit for that. I was just about the only person to ever write on this issue so it seems highly likely that this story is true.

But it is important to then note how the split of VAT receipts between the UK and the Isle of Man is calculated: I’ve put the sample calculation on line, here.

The calculation starts by comparing national incomes. So what has the Isle of Man done? It’s restated its national income, not just a bit, but by inflating it  enormously. And since the UK’s national income has taken a bit of a hit of late the result will be a massive shift of resources to the IoM.

No, really, they do, the sponging bastards.

The impact on the sample calculation is massive. Just slotting the 2008/09 data into the sample calculation increases the amount payable to the Isle of Man by £62.8 million.

That is £62.8 million that it is not owed.

That is £62.8 million of lost services in the UK.

That is £62.8 million claimed by changing the books.

Now of course, we all know by now that we\’ve got to go and read Ritchie\’s source documents before we take on trust whatever it is that he\’s complaining about.

So here is that source document.

It details the National Income estimates for 2007/08 and 2008/09 under a new, modernised methodology. To allow for comparison with earlier published national income data, the estimates for 2007/08 under both the previous and the new methodological approach and data coverage are also provided.
The Treasury has always placed great importance on the national income accounting process providing a time series of data from which true comparisons can be made over time. Fulfilling this requirement has facilitated like-for-like comparison of national income measures and the contribution of the economy’s component sectors, and has allowed for the calculation of annual growth rates without the distortion that would otherwise have occurred from the adoption of new methods of calculation.
The downside of this approach has been a growing divergence with the estimates produced in other countries. Such disparity has become accentuated by the adoption elsewhere of new methods of calculation on a number of significant aspects of the accounts, as countries keep up to date with the European System of Accounts (ESA), the manual that details best practice in national income accounting.
Over the last twelve months the Isle of Man Treasury has worked with the United Kingdom Office for National Statistics (ONS), the authority responsible for the production of the UK national income accounts, to update its national income methodology using ESA standards and to improve data coverage. The accounts reported here are the outcome of this work.

Ah, no, you see, it\’s not that the new accounts are wrong, it\’s that the old accounts are wrong. They\’re not up to European standards, and it\’s our very own ONS which has been working with them to bring the accounts up to standard.

Which leads to a very interesting outcome indeed. It isn\’t that the Isle of Man has been skimming off too much money from the VAT arrangements at all: it\’s that the UK hasn\’t been handing over enough over the years. For the Isle of Man, as our own government agrees, has been consistently underestimating their GDP and thus the amount that we should be handing over.

We owe them money: and I\’m just absolutely certain that Ritchie is really glad that he brought this to everyone\’s attention.

Well done, pat on the back and lashings of ginger beer all around I suggest.

I have to admit, took me a little bit of time to work it out. So, there\’s this, Ritchie and Colin Hines. So there has to be something wrong with it. Larry Elliott\’s piece.

Ten thousand homes fitted with solar panels for £100 million?

That\’s bloody cheap. £10,000 a house? If only it really was that cheap to power a house with solar cells. We\’d all be using them, wouldn\’t we?

So, I had a look around to see what the catch was.

Aaaahhh.

The scheme is the first major project in the UK to use the \’feed in tariff\’

Average household annual usage is 4,800 kWh, subsidy to solar PV on the feed in tariff is about 35 p (roughly 10 p for conventionally produced, solar PV gets 45 p or so) so that\’s £1,680 per household per year.

£16.8 million a year or, over the 25 year lifespan of the programme some £420 million.

Which is more like £42,000 per household which isn\’t a good deal at all, is it?

Yes, I know, I\’ve ignored NPV, inflation, interest rates and all.

But there is the catch. It\’s not costing £100 million, it\’s costing multiples of that.

Yes, they\’ve a new report out.

Guess who contributed?

Once the technical genius at nef manages to upload a version of the report which will download we\’ll be able to have a look at how much fun they\’ve got in store for us, won\’t we?

And it\’s an interesting shout out too.

So, IKEA makes 79% of its sales in Europe and 62% of its purchases in Europe. It’s  a European dominated business then.

Righty ho.

That’s a lot of data, but you get my point I hope – tax rates may be falling but something around 27% is the norm without weighting for GDP.

And yet IKEA has a tax rate of 13.1% in 2009 and 19.3% in 2008. We have no idea whether these are current rates either: if the provision includes deferred tax the current rate may be lower, but we can’t tell.

All we can wonder is why the published rate IKEA records is so low compared to the rates available in most countries in which IKEA must actually make its profit.Without country-by-country reporting we can’t answer that.

It is, of course, a reason why we need country-by-country reporting. Only when a company reports its sales, costs, profit and tax on a country-by-country reporting basis can be know that it is really paying its way where it should.

Well, no. OK, we know the man doesn\’t know his economics so we\’ll not belabour the economic stupidity of his country by country reporting demand. Just describe it lightly.

Firms exist because why? Well, as Ronnie Coase won the Nobel for telling us, transaction costs, is because why. It can be cheaper to have the relationships inside the same organisation than to have them continually being negotiated and contracted by independent entities.

It\’s not a very difficult idea: nor is the very minor extension of it we need to make here.

Why do multi-national companies exist? Transaction costs is the because why. It is cheaper/more efficient to structure matters this way than it is to have a series of negotiations and contracts between independent entities.

Ritchie\’s (for yes, of course this delight is from that one of the country\’s leading tax accountants) demanding however that multi-national companies should and must be taxed as if they are a series of independent entities negotiating and contracting with each other.

That is, he wants to tax them by ignoring the very reason for their existence. And, I submit, that ignoring reality is not a good start on the road to dealing with the real world.

However, let\’s now turn to what the tax accountant, ignorant even though he may be of economics, should in fact know.

The first point is that, well, the tax authorities do know how much Ikea is making in each country. They are able to ascertain what their taxation should be. And of course, we do all trust the government, don\’t we? So if they\’re happy with the amount of tax being paid then we ought to be also.

It seems very odd indeed to insist that health care should be whatever the government says you can have, education is what government is prepared to give you, but not to take governments\’ word on whether a company is paying tax or not.

The second is of course Ritchie\’s constant and consistent error in looking at corporation tax rates. He looks at the headline rate and the rate paid and concludes that a gap between the two is evidence of malfeasance. When of course it is looking at the headline rate, as adjusted by allowances (a brief EU description of which is here) which should lead us to the rate paid.

It really is as if he\’d looked at income taxes, ascertained that the marginal rate is 20%, then worried about why people were not paying 20% of their income in income tax. You know, ignoring that £6,700 or so tax free allowance?

Ritchie argues that accounting regulation made the crash happen/worse.

Thus we need more accounting regulation.

Ho hum.

Fun opening line.

About the author
Richard Murphy is a chartered accountant and
graduate economist.

It\’s an interesting use of the word \”graduate\” there, isn\’t it?

For it can indeed be used to say \”graduated from a course in economics\” as Ritchie did, from Southampton University in accounting and economics.

As I did at about the same time from the LSE in much the same course.

However, that\’s not the way the word is usually used in academia. There, it\’s more used to describe someone who went on to do post-graduate studies in that subject (Masters, etc).

Which neither Ritchie nor myself have done. Which is why I don\’t say I\’m a graduate economist but each to his own, eh?

I am intrigued by some early responses to ‘Making Pensions Work’ I have received on this blog and have read in some (typically abusive) commentary on the right wing blogosphere to which I do not link.

Without exception the commentary ducks the issue, which I find fascinating. The key issues that raises are:

OK, so, here\’s one of those \”right wing blogosphere\” things to which he will not link.

Here\’s his response.

One quite gorgeous part:

c. I’m promoting a massive private equity bonanza. No I’m not. I’m promoting investment in new economic activity. The fact that those making this comment think this only arises through private equity venture capital investment is itself significant: they’re saying in effect that the larger quoted companies in the UK are actually unrelated in terms of their capital funding to the stock markets that supposedly serve their needs but which in reality act as casinos for speculation. And anyway, much of this money will go into government bonds and related products. So this is wrong.

No, really, having insisted that pensions must be invested only in the building of new productive capacity he\’s now saying that buying gilts to fund outreach diversity advisors qualifies.

Anyway, up to you, have a look at the two posts and see whether you think he\’s answered my \”typically abusive\” commentary.

Update: just spotted this as well.

b. The rate of return is not so bad. What? 1%

This in response to this:

This is simply nonsense.

As data published by the organisation promoting the City of London,
TheCityUK, showsxviii, the ten year rate of return on investment in UK stock markets was an average
loss of 2% per annum over the first decade of the twenty first century. This was also the global
average rate of return on shares in that decade.

Yes, it’s the dividend yield. Which, at least at some points for FTSE has been 3%. You know, enough to take total returns to equity positive?

They refer (again) to here. Where those promoters of the City of London give us the index returns for the major stock markets. That is, they give us the capital return (or loss) on holding shares. So, what is not included in their number then?

Finally, we have an admission from Ritchie that he\’s made an error. A silly one too, one which someone with any knowledge of finance would have spotted when it was first mentioned over a drink, let alone when written down.

And I am accused of ducking the issue?

(Do note that he\’s not had the time to alter the original document yet.)

BTW, anyone want to tell us what the real yield to maturity (we need to maturity because Richard is telling us that we really should be having those nasty second hand markets you know) on gilts has been for the last 10, 20, 30 years?

Guess who:

And they want to do this so that the burden of tax is shifted from capital – business profits in this case – to labour. And this is part of the process of reallocating wealth from the poorest to the richest in society.

So what Wolseley is doing is not a politically neutral act. And nor is it all it claims – a move against regulation. This is about shifting power. From people to capital. From countries to corporations. From poor to rich.

And to prevent this we have to assert the right to tax corporations.

Sigh.

It\’s this ignorance of basic economics which leads him into such errors.

1) Corporations don\’t pay taxes, people do. The question therefore is who actually carries the economic burden of these taxes which are nominally collected from corporations.

2) There are three groups who could be carrying this burden. It could be the shareholders (ie, capital) in the form of lower returns from their investments. It could be the workers in the form of lower wages (ie, labour) and finally it could be customers in the form of higher prices (ie consumers).

3) The general conclusion in economics (please note, not neo-liberal economics, not new classical, not Keynesian, neo-Keynesian, any of the various heterodoxies, but a basic point agreed by all such schools) is that who carries it depends. And in any particular economy it depends, crucially, on the mobility of capital. The more mobile the capital the less of the burden that capital (ie, the shareholders) will carry and the more that labour (ie, the workers) will. Very few think that consumers carry a significant portion of the burden in any of the reasonable flavours of the universe.

4) We are, as in fact are most economies, small and open (there are those which are large, like the US and thus slightly less affected, there are those which are closed, like North Korea and thus hardly affected at all) meaning that capital is highly mobile.

5) The CBO in the US estimates that some 70% of the economic burden of the US corporate income tax falls upon labour, the workers, in the form of lower wages. Joe Stiglitz (Nobel Laureate recall) has pointed out that it\’s entirely possible that the burden falling upon labour can be greater than 100% of the tax raised. Mike Deveraux has asserted that this is the case in the UK.

6) The long term effects will be greater than the medium term effects which themselves will be greater than the short term ones in this shifting of the economic burden from capital to labour.

Now none of the above is really arguable. It\’s really just the straight economics of taxation and we\’ve known about this for a long time.

The one part that is arguable is whether the various estimates of the effect are correct: the CBO, Stiglitz and Deveraux could indeed all be wrong. The effect we know is correct: it\’s the magnitude which is arguable.

Now, note Ritchie\’s dreadful error in his base assumptions. That the burden of corporate taxation is actually carried by capital. We know absolutely that this is not necessarily so. We have a number of estimates telling us that this is not so….and we don\’t, at least as far as I\’m aware we don\’t (and entirely willing to be corrected here), have estimates telling us that this is so.

Simply because Ritchie doesn\’t understand economics he\’s led into this dreadful error: that we must tax corporations because this is the taxation of capital.

But it ain\’t, is it?

The change that is very obviously needed is that a company must be considered resident where the economic substance of its management is located. And yes, that can be determined. It’s where a majority of the board and their senior management team work day in day out.

OK. So, say, BP, board and management all work in London (just as an example). So, BP is UK resident.

OK. Clearly, it should be paying tax where it is resident. OK.

So, err, BP shouldn\’t be paying tax in Angola, should it? BP\’s management and board aren\’t in Angola, so the company isn\’t resident in Angloa so BP shouldn\’t be taxed in Angola.

Which leaves your country by country reporting crusade looking a little threadbare, doesn\’t it?

Richard Murphy has a new report out, Making Pensions Work. And My God it\’s a stinker.

This is fun from The Observer.

Murphy, who is one of the country’s pre-eminent tax experts

We\’re screwed, aren\’t we, if Ritchie is the best the country has to offer.

Anyway, on to the report.

Using data for the most recent year available – 2007/08 – it shows that total pensions paid in that
year amounted to £117.6 billion. Of this sum £57.6 billion was state old aged pensions, £25 billion
was state employment related pensions paid to former civil servants and other former public
employees and £35 billion was private sector pension payments.
In the same year the total cost of subsidies to the private UK pension industry through tax and
national insurance reliefs on contributions made and from the tax exemption of income of pension
funds amounted to £37.6 billion. The result was that, albeit indirectly, the entire cost of private
sector pensions paid in 2007/08 was covered by tax reliefs given to the private sector pension funds
that paid them. To put it another way, every single penny of the cost of UK pension payments in
2007/08 was in effect paid by the UK government.

Err, no, sorry, but that conclusion is quite incorrect for two reasons.

The first is that the tax relief upon pension contributions is the tax relief upon saving for a pension: it\’s relief which needs to be accounted for against pensions which will be paid out in the future, not against pensions being paid out today.

The second is that tax relief upon pension contributions is not so much a relief as a deferment. Your pension that you get from your savings (yes, even the State Pension) is subject to income tax. Quite what the average tax rate on pension incomes is I don\’t know. Some people won\’t get enough to be paying any income tax, others will be getting the sort of sums that attract 40% (a very few will be in the new 50% bracket as well). If it\’s basic rate as the average, that\’s £23 billion coming back: if 40% (which it clearly isn\’t) then £47 billion.

Until we know that number we don\’t in fact know what the subsidy is. I\’d expect there to be some: tax reliefs being higher than income tax paid on pensions received but I\’m not certain about that at all. Anyone know?

Finally, I\’d love to know whether they\’ve accounted for the state employee pensions properly. I assume that contributions to these are similarly tax reliefed as private pension contributions: if so, how much of the £37.6 billion should be set aside the £25 billion of state employment pensions? A place where such a comparison would be appropriate given that most of them are pay as you go rather than fully invested funds?

Do note one lovely thing as well. Given that tax reliefs are for savings towards future pensions, Ritchie\’s assumption is that if more people save more for their own future, this is a bad thing. Because current reliefs will rise.

This isn\’t, to put it gently, the most sensible manner of considering the funding of pensions. More people saving more is bad?

Most importantly we suggest that if those pension funds are to attract tax relief in future they must
use a significant part of the £80 billion of contributions they receive each year to invest in new jobs,
new technology and new infrastructure for the UK so that the wealth that is needed to grow our
economy, to create jobs and to build the real capital base that must be passed to the next
generation is built on the back of pension fund investment.

Leave aside his ignorance of why we have secondary markets in investments at all and just consider what they\’re actually recommending here. Some portion of pensions savings must be in new things. New companies, new jobs, new products, new infrastructure.

Yup, they\’re insisting that part of your pension must be invested in venture capital. Might be a good or a bad thing but it\’s certainly an odd thing for someone like Murphy to be recommending.

Thirdly, we recommend that current pension deficits in final salary schemes be cleared wherever
possible by the issue of new shares in the companies responsible for those funds. This would stop
the current fruitless drainage of cash out of companies that should be used for real investment and
which is instead directed via pension funds into the stock market to buy shares in other companies,
the only benefit of which is to create a spiral of stock exchange boom and bust. We also suggest that
future contributions to such final salary pension schemes might also be paid, at least in part, by
issuing new shares in the companies responsible for those final salary pension schemes.

That is truly insane. Just about the one total certainty about pension investment is that you don\’t want both your job and your pension to be reliant upon the performance of the same company. This means that you absolutely do not want your pension fund to hold shares in your employer. We\’re trying to diversify risk here, recall, not concentrate it.

We really are truly fucked, good and proper, if \”one of the country\’s pre-eminent tax experts\” is going to recommend drivel like this.

Lastly we recommend that if enforced saving is to be required by the government then that
government has a duty to ensure that the funds so saved are invested for the common good.
Pension fund performance over the last decade has a been a history of almost perpetual loss making
despite the enormous subsidies that pension fund tax relief has provided to the City of London and
stock markets, all of which they have frittered away. Investment in local authority bonds for local
regeneration, or in bonds or shares issued by a new Green Investment Bank and in hypothecated
bonds e.g. to provide alternative funding to replace the inefficiently expensive Private Finance
Initiative for funding public sector infrastructure projects would have prevented those losses –
because all of these would have paid positive returns to pension fund investors. It is for exactly this
reason that we recommend that such assets be the basis for any new state pension fund in the
future.

Snigger.

In another report that these two did (The Green New Deal) they insisted that long term bond rates should be lowered to 3%. Inflation is currently above 3%. So everyone holding such bonds would be losing, not gaining, money through holding such bonds.

Indeed, Murphy is on record as saying that we should have higher inflation targets: 5% I think he\’s mentioned. So everyone locked into 3% bonds gets screwed, don\’t they? For every £100 that a 25 year old puts in they get back £44.57 at age 65 in fact. What a great way to save for a pension!

It\’s also highly questionable to use a ten year time period to judge pension returns. Especially from the peak of a market like 2000 to the depths of a recession like today. Tsk, really, tsk.

To date pension funds have been an almost perfect example of what Keynes described as ‘the
paradox of thrift’ – saving that sucked demand and well being out of the economy. We need
something very different now. We need pension funds that can build economic will being for the
present and the future.

Oh dear. They\’ve not grasped the paradox of thrift at all. It isn\’t that \”certain types of saving are bad for demand in the economy\”. It\’s that at times, any sort of savings are bad for the economy, reducing demand. Whether such savings are made through bonds, shares, private pension funds or some new fangled method just devised by a retired accountant.

I mean, come on, if you\’re going to tout a long dead economist the least you can do is get this theories right.

What a perfect typo!

The misspelling of
personal pensions in the 1980s and early 1990s did not help either

Tee hee.

I think this is fun:

annual contributions exceeded
£80 billion

OK, that\’s the amount being saved into pension schemes each year. And from a document that they themselves reference:

Equity issues on the UK main market and AIm totalled £82.6bn in
2009, up on £70.7bn in the previous year.

So we seem to have some sort of balance then. The amount of new capital raised each year for companies is about the same as the amount being saved for pensions. Which makes all of their wittering about how pensions aren\’t being saved in productive assets a tad odd really. Perhaps pensions aren\’t being directly but the system as a whole seems to be directing that fungible cash to such activity.

This is simply nonsense.

As data published by the organisation promoting the City of London,
TheCityUK, showsxviii, the ten year rate of return on investment in UK stock markets was an average
loss of 2% per annum over the first decade of the twenty first century. This was also the global
average rate of return on shares in that decade.

They refer (again) to here. Where those promoters of the City of London give us the index returns for the major stock markets. That is, they give us the capital return (or loss) on holding shares. So, what is not included in their number then?

Yes, it\’s the dividend yield. Which, at least at some points for FTSE has been 3%. You know, enough to take total returns to equity positive?

The blinding stupidity of their argument here will be obvious if we apply it to bonds. We\’ll not count the yield at all, only the capital return? Which means that anyone and everyone ever investing in bonds will always make a loss for reasons of both inflation and that there\’s always some level of default.

Way to go guys, way to go.

The persistent purchase of shares by pension funds when the market was paying no return cannot

Twats.

We also know that notionally some of the
tax relief given to employees on pension contributions goes to those who appear to contribute to
state ‘pay as you go’ pensions schemes – but only because they have to enjoy a comparable relief to
that which goes to those making contribution to private sector funds to ensure that the latter
appear attractive savings mechanisms.

OK, so they do mention what I pointed to above….but then go on to dismiss it. Ho hum.

Adopting the alternative ‘macro perspective
offers the second reason for private sector pension fund failure. This is the consequence of there
being no obligation on those funds to invest in a way that creates new economic activity. As was
demonstrated at the time of a previous pension crisisxxiii, 99% of all investment in corporate shares
and bonds made by pension funds is in what might best be called “second hand” shares or bonds
already in issue. The purchase or sale of such shares or bonds provides the issuing companies
nominally responsible for these assets with no direct benefit at all from their purchase. It was of
course true that when first issued such shares and bonds would have provided funds to the company
that issued them, and whose name they bear, but thereafter whenever they are bought and sold –
as they are day in, day out by pension funds – not one penny of the money traded goes to the
benefit of that company. Instead all of it goes to the previous owner of the share or bond in
question. That may be a pension fund, of course, but the point is that none of this speculative
activity does in any way benefit the productive economy. As such a pension funds purchase of these
assets creates no new investment or employment opportunities. In economic terms these pension
fund “investments” are, therefore, savings activities and not investment activities.
In contrast only about £100bn, or about 12% at most, of pension fund holdings are in government
securities. This represents a considerable investment portfolio imbalance which fails to reflect the
proportionate roles the state and private sectors each play in the economy when the state as a
whole accounts for more than 40% of GDP.

Gnnargghhh!

The existence of the secondary market allows both people to cash out their savings so as to create, say, an annuity when they retire and also allows maturity transformation. That maturity transformation allows companies (and, of course, the government) to get the necessary capital at lower costs than would otherwise be the case.

Seven reforms are needed.
Firstly, the state has to guarantee an old age pension that keeps all older people in this country out
of poverty irrespective of their fortunes during their working life, their gender and their relationshipstatus. This means a commitment to increasing the basic pension and enhancing pension credits is
essential.

Wondrous. Pension credits dissuade people from saving for a pension. If you save and earn a low pension and the other bloke doesn\’t save and gets pension credits, then why would you save to earn a low pension?

Second, if tax relief is to be given to pension fund contributions then there must be conditions
attached to doing so. To secure this tax relief in future we recommend that a significant part of
those pension fund contributions (we suggest at least 25% of them, and maybe more) must be
invested in new economic activity and not in the buying and selling of shares and bonds which
provide no new money for the real economy. This means pension funds must be proactively used to
create new capital assets, infrastructure, skills and job. In addition, pension funds must be required
to invest for the long term and to minimise the transaction costs at present paid every time a stock
or bond is bought or sold. This means that funds should be required by law to invest strategically as
business partners and not speculatively for short term gain, a role that is in any case and inevitably
in conflict with their long term duty to produce returns for their members.

They\’re handing the entire pension industry over to private equity and venture capital. And, err, without that secondary market how do they cash out the value created in order to pay the promised pensions?

I mean, Murphy and Hines do know that an annuity eats the capital, don\’t they? That it isn\’t just the returns on capital, it\’s the very capital itself as well?

Fourth, in pursuit of these objectives pension funds must seek to undertake new forms of
investment. It is very obvious that the existing profile of their ‘investments’ (which are actually
savings) carry inherent speculative risk which makes them unsuitable for long term pension saving
purposes whilst providing considerable opportunity for excessive charges to be made by the City of
London, which is contrary to fund member’s best interests. If pension funds were instead genuinely
invested in local authority bonds for local regeneration, or in bonds or shares issued by a new Green
Investment Bank and in hypothecated bonds e.g. to provide alternative funding to replace the
inefficiently expensive Private Finance Initiative for funding public sector infrastructure projects then
this situation would be changed, quite radically. What is more these alternative investments would
not only create jobs in the UK economy, they would also have life spans that will suit the needs of
many pension fund managers and their members because the investments will earn revenue over
periods of up to twenty five years and more before returning capital when required by pension
funds to provide annuities.

Erm, riiiight. So that 40 year old saving for his pension is fine. He\’s investing for 25 years. What about the 58 year old still saving for his pension? He\’s only got a 7 year horizon to invest before he purchases his annuity and, erm, in the absence of a secondary market he\’s screwed, isn\’t he?

Dingbats.

Murphy\’s ability to write reports hasn\’t improved, despite all the practice he\’s getting, has it?

When you retire, your income is reduced by quite a bit. A reverse mortgage is a special home loan that can help you enjoy retirement more. It will let you spend some of your home equity as cash during your retirement for whatever expenses you have. The exact amount you can borrow will be determined using an online calculator based on factors like government regulations. The difference between a reverse loan and a traditional one is a reverse mortgage pays you instead of you having to pay it back. It is a long-term method of borrowing money without immediately increasing your bills. If you ever move out of the home the balance must be paid, but you can also opt to allow the sale of the home at that time. There are not the same default and eviction risks you might have when taking out a regular mortgage.

Didn\’t think I\’d see this:

I believe a large number value and want what the state supplies.

I believe a large number will be willing to pay for it.

I believe Labour has to give them that choice.

If you\’re to have a choice about whether you pay for state services then this inevitably means that state services cannot be paid for through the tax system. For the very point about tax is that you don\’t have a choice as to whether to pay it or not.

So, R. Murphy is arguing that tax should be abolished and state services organised upon a subscription basis. You want what the state provides you\’ve the choice of signing up and paying for it. And, obviously, the choice of not signing up, not paying for it and not getting it.

Amazing, Ritchie, even more neo-liberal than me! For I\’m just delighted with such a scheme in many areas but even I would insist that there are some things which only the State can do, things which can only be done if financed through compulsory taxation and which also, most crucially, must be done.

But it’s also wholly irrational;. You see, a god is usually assumed to be a higher order of being, possessed of powers beyond the human. Usually that will involve omnipotence. That is, the power in this case to see the future – something economists believe we all have when building their models which is, however, untrue, and which is a good reason why they do not work for us mere mortals.

…

Or, alternatively, the bond god is a myth created by humans to serve their own purpose – a crux for their own beliefs. The sort of belief that we’re seeing acted out in Ireland. The sort of mythical belief that underpins neoclassical economics. The sort of myth that is confounded continually by evidence, but to which the true believers adhere none the less.

Sigh.

No, neo-classical economics does not believe in a \”Bond God\” nor does it make the claim that we can see into the future.

The claim is that we all, each and every one of us, have opinions about the future. Some of those opinions will be correct, some will be incorrect. Some will be correct given the information to hand today, some incorrect by that standard. Some will be made incorrect by events in the future that we don\’t know about (uncertainty, or Rumsfeld\’s unknown unknowns) and some that are incorrect by current knowledge will be made correct by the same.

All the bond market is, just as is true of any other market, is the aggregation and averaging of these opinions about the future.

That aggregated and averaged set of opinions may well be wrong: but it\’s the best that we can do. Blimey, you\’d think that Ritchie had never heard of Galton\’s Ox or the Wisdom of Crowds (and yes, I do know the conditions under which they don\’t work well).

I\’ll admit openly, as I have done a number of times, that I\’m not all that good at macroeconomics. Mostly because I tend to regard it as akin to voodoo: as the man didn\’t say, in the long run it\’s all microeconomics.

However, I am still able to spot the occasional error in macro elsewhere.

That’s what’s happening in Ireland.

That’s what could happen here.

Umm, no, you see there\’s this rather important point, rather important difference, between Ireland and the UK. One which Ritchie is usually quick to point to.

You see, we have our own currency, Ireland does not.

That means that we have open to us other methods of stimulating the economy, other than simply turning on the spending firehose.

As Keynes, who was after all at root a monetary economist, would have pointed out. Did in fact. It\’s only after you\’ve tried all the monetary tricks available to you and found that they don\’t work that fiscal expansion becomes the only thing that you can do.

So, what might you do if you have your own currency?

Allow the currency to depreciate, that\’s a good start. We\’ve done that, haven\’t we? This makes our exports to others cheaper in their eyes and increases demand for them. It also makes their exports to us, our imports, more expensive in our eyes and thus reduces our demand for the (after the inevitable J Curves) and the two of these together are indeed expansionary.

Having your own currency also means that you\’ve got your own monetary policy, if you should so wish. So you can go out and buy your own debt, increasing the money supply substantially. As we have done with quantitative easing.

Ireland can\’t do either of these because they\’re locked into the insane euro-project. Nor can Spain or Greece. And that\’s why they\’re fucked of course, because they cannot do exactly what Keynes and every other rational economist would tell them to do in the middle of a deep slump. Devalue the currency and increase the money supply.

Richard is going to tell us all why productivity will naturally fall as the state sector gets larger as a portion of the economy.

This will be good, won\’t it?

To explain, let me explore for a moment why it is inevitable that state sector productivity falls as the scale of state sector spending rises as a proportion of GDP.

Productivity is, of course, a ratio. It’s a ratio of labour to something else: usually capital employed. Labour could be the number of people. Normally it’s their cost.

And tadaaa! the double facepalm!

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For productivity is not the ratio of labour to capital! It is, rather:

Productivity is a measure of output from a production process, per unit of input. For example, labor productivity is typically measured as a ratio of output per labor-hour, an input. Productivity may be conceived of as a metric of the technical or engineering efficiency of production. As such, the emphasis is on quantitative metrics of input, and sometimes output.

Yes, that\’s right, it\’s the, when we\’re talking about labour productivity, relationship between what we get out of the system for a unit of labour that we put in.

We can also talk about the productivity of capital, of copper, of children\’s clowns (perhaps the number of smiling, gurgling babies we get per clown in the economy).

Having got the definition wrong everything else Richard says about productivity in public services and sectors is of course entirely wrong.

Sadly, for it leads him into the terrible error of ignoring all of the interesting and important things that people have been saying about productivity in public services and sectors.

Baumol and his cost disease for example, where we note that increasing productivity in services is more difficult than it is in manufacturing. More difficult, but not impossible: in fact, one way that we do improve labour productivity in services is to turn them into manufactures. The comely maiden with the brow cooling damp cloth certainly aids my recovery from headaches: aspirin has mechanised that task (unfortunately) and seriously improved labout productivity in the comely maiden classes (and my own of a morning or two after the night before as well).

Or Bob Solow\’s point about where economic growth comes from: 80% of the 20th century\’s growth came from increased total factor productivity…of which increased labour productivity is a part. Paul Krugman\’s about how average wages are determined by average labour productivity: if that\’s falling in a sector of the economy then it\’s making average wages lower. Even, Paul Krugman again, the point that non-market systems seem to find it almost impossible to improve total factor productivity while market systems can and do.

Even the natural experiment we\’ve had in the NHS in recent years: England adopted a more market stance than Wales and Scotland. Productivity in NHS England has increased while that in NHS Wales or NHS Scotland has not.

Which leads us to the final and really important point.

The very fact that in services we do find it more difficult to improve productivity (whether of labour or total factor types) means that we need to have more markets, markets being the thing which we know improves productivity, in services. That is, that the very analysis of productivity in state supplied services proves absolutely that we should have markets in state financed services instead.