niq’s soapbox

Someone called the Joseph Rowntree Foundation is reported as saying a single person needs £13400 a year to live an acceptable lifestyle, whatever that means. Couples and families need correspondingly more.

Let’s see. In round numbers, you’d pay 31% tax on £8000 of that, leaving just under £11000, or £900 per month. In a reasonably cheap area, that would leave £300 after rent, and £150 after council tax, water/gas/electricity, telephone and ADSL. Indeed, not a lavish lifestyle, but not too bad: well over twice what I had in the lean years (before 2004).

What if you live somewhere expensive, like London? I don’t know where London prices are nowadays, but I don’t imagine you’d get anything more than a grotty bedsit in a run-down area for £600 - or even £900 - a month. Standard lifestyle for a student or young graduate, but not something I’d care to return to, at least not without the package (rich social life, zero/low cost clubs and societies).

But hang on a minute! Googling the actual report tells an altogether different story. They put rent at £52.80 a week. Erm, where the **** do you get that? Highly-subsidised “social housing” maybe, but did you ever hear of a single person qualifying for that?  Must be an average that includes those who own a home or live rent-free - e.g. with parents.

And they put spending-money at £157.84 a week (£684/month)!

Yow! I don’t think I’ve ever sustained that much (excluding housing) for as much as a year, nor ever will until and unless I’m a property-owner[1]. Not even now that I’m paying top-rate income tax on more than half my income[2].

Furthermore, I can’t imagine many non-property-owners have that much spending money after housing costs. Have they just arrived at the fundamental principle of economic life in the UK: If you own property, you’re rich, if not you’re poor. Income is irrelevant except at major-celebrity or city-banker level.

[1] OK, that’s just a half-truth: it relies on excluding the money going into a SIPP, so I’ll be able to pay off a mortgage when I retire without all my money going in tax.

[2] And reclaiming some of it, by virtue of having the SIPP.

‘Absolutely horrendous’? Or absolutely predictable?

The first is an economist quoted by the BBC, on the subject of today’s producer price figures - one element in our rising inflation. The second is, well, me (e.g. here, here) and anyone else with basic numeracy.

In basic commodities (though not yet in manufactured goods, thanks to China), we have regression to the mean: the return of something closer to normality after a period in which prices were artificially low. In the case of food and energy, that’s no mere economic cycle but a generational period. As of now, rising food and energy prices are getting the lions share of the blame. International factors make a good scapegoat when the more important factors are what the late Douglas Adams called Somebody Else’s Problem.

But we’re missing the monetarists’ basic lesson. Printing more money doesn’t create more value, and increasing the money supply will fuel inflation, unless there’s something real and new to spend that extra money on. Pouring billions into subsidised housing, Northern Rock, and now the banking system at large, doesn’t create extra value, so it can only fuel inflation.

And then there’s the housing crash, which has finally begun in spite of yet more government money to prop up prices. Real-world interest rates are rising in spite of the Bank of England, and have a long way to go before they re-align with debt levels (after all, it was Gordon Brown paying off the national debt in the Prudence years that enabled rates to come down from double-digits to their boom-years values).

No government dares not bail out their articulate, well-represented middle classes. So there will be more tax, more downward pressure on the pound, and much more inflation, to help shift the great bulk of the burden from the established powerful but over-borrowed to the hapless hard-working.

Here’s an easy solution, if they’d dare be honest about it. Include house prices in inflation figures. That gives a measure of inflation as it affects those of us who are not so rich as to own property. And the good news is that after years of hyperinflation, it’s finally falling!

We know that the powers-that-be can’t do joined-up thinking and come up with coherent policies.

The coincidence of two news items today illustrates this rather clearly:

• Congestion charging for Manchester.
• Social and Economic benefits of a much-improved broadband infrastructure.

Manchester’s proposed congestion charge will, at best, work like London’s. That’ll only happen if there’s consistent political will to make it work. It needn’t take more than one person in a key management position to scupper it, and turn it into an expensive fiasco. Think “Sir Humphrey”, though if he opposed a proposal he’d (one hopes) at least stop it before spending billions on it. But at best, congestion charging is a poor substitute for John Major’s fuel price escalator.

Coupled with the congestion charge will be a huge investment in public transport. That is, public investment: the state poking its nose in. We’ll pour billions of taxpayers money into providing more inefficient and polluting transport so we can move ever more heavy, reluctant bodies on their daily journey to the cubicle. Public transport should be less polluting than private, but that’s not automatic. Even if they get it right it’s a marginal improvement, and massive public investment is a great way to get it wrong.

Meanwhile, also today, the Broadband Stakeholder Group’s report points to benefits such as flexible working, lifelong learning, and a big impact on social exclusion. Now that’s an altogether better way to invest large sums of public money. Instead of one city catching up with where it should’ve been maybe two generations ago (by European standards), the whole country can catch up with where it should be NOW!

Actually I don’t think public money should go into broadband either, except at the fringes to ensure universal basic availability. Let the market do that, and let it compete honestly with old-fashioned transport. With energy much more realistically priced than it has been for a couple of generations, efficiency will soon win. Sustainably.

Stop subsidising last century’s solutions!

The amount of money being paid by the taxpayertreasury to bail out the banking system as a whole is spiraling rapidly. Though it’s not targeted at a particular institution, it’s looking like the early weeks of the Northern Rock bailout last year. That is to say, the taxpayertreasury is underwriting debts that the market won’t touch, but everyone currently insists they’re good and we’ll be repaid.

Today it’s reported that the taxpayertreasury, through the Bank of England, will buy up dodgysound mortgage debt that the banks can’t shift.  So the banks can lend more, and keep the bubble inflated.  The pyramid must be supported!

Once again, this smells of throwing good money after bad.  The mortgages that they can’t shift in the open market are by definition the most dodgy ones.  They may be better than US subprime, but speaking as a taxpayer, if I’m forced to buy this debt at anything more than 40% of its face value, I shall be seriously pissed off.  Again.

What’s happening now is a correction to the housing market.  This is great news for the poor, who are currently paying three times over, but more likely to be able to afford a place when the prices have fallen.  It is neutral news for the comfortably-off, who are both buyers and sellers if they move house.  It is bad news only for the seriously rich who have wealth tied up in property over and above their own homes.

So we can’t allow that - the long-suffering taxpayer has to bail them out as usual.  No correction!  The bubble must be sustained!

If chickens can’t come home to roost now for property millionaires and bankers, we’re transferring yet more burden onto the productive economy.  And that’s tilted towards the young (because fewer of them own property) and high-earners (who pay more tax).  That’s precisely the people who will be most welcome in other countries, when the burden of subsidising our fat-cats gets too much for them.   If we drive too many of them out, the economy is basically gone!

The Fed. today joins the US government and much of the financial sector in complete panic mode. They feel the need to print themselves more money since their housing bubble (or should I say pyramid scheme?) collapsed. Like the last desperate gamble in a Hollywood epic, it may even work - subject to suitably adjusted expectations. The losers will be those who didn’t benefit from the bubble, but did expect to benefit from their own prudence.

The UK authorities panicked when they threw unlimited billions into Northern Rock. Just a few short months later, they’re into damage limitation, where damage dwarfs the bailouts of lame-duck heavy industries in the 1970s. And the only reason the government is getting off so lightly in the blame game is that too many people - including opposition politicians - supported the intervention that created the problem in the first place. They, and their paymasters, were panicking too.

I have a suspicion that Mervyn King, governor of the Bank of England, would have done a much better job if he hadn’t been put under political pressure to throw good money after bad. We’ve already committed to the biggest round of inflation for a generation: let’s hope he can resist the pressure to make it far, far worse than it already is. His current speech sounds like a worthwhile attempt to defend against the worst of it.

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p.s. yes of course Northern Rock should have been allowed to go bust! That would have triggered an automatic injection of public money under the depositor protection scheme, but on a less staggering scale than what has now happened. And the other institutions bidding for its assets could have done so with clarity, as opposed to trading taxpayer-funded sweeteners for political expedience, and not even really knowing who they’re dealing with.

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p.p.s Another “told you so” moment, as George Soros, in an interview this morning, points out that house price inflation was driven more by excess money supply than by housing supply-and-demand.

A while ago on this blog, I predicted some smoke-and-mirrors to cover the worst effects of the Northern Rock fiasco. I still predict we’ll see some serious spin in terms of inflation rates, and I can’t help thinking the disgraceful treatment of police pay, and perhaps other spending issues in the public sector, owes something to a vain attempt at damage-limitation.

But one element of that appears already to be unravelling. Since the government has now taken Northern Rock’s liabilities on itself, the Office of National Statistics is apparently insisting that it be included on the government’s balance sheet. This is probably a Good Thing: trying to pretend it’s not there stinks of Enronism.

A corollary of this is that Brown’s economic “prudence” is now officially well-and-truly busted. This shoots public-sector debt way above Brown’s limit of 40% of GDP.

Even as the mirage of a private-sector bailout for the taxpayer billions thrown at Northern Rock fades, central banks are to throw far more taxpayers money at the commercial banks. That is, banks that threw their money into what is probably the world’s biggest ever bubble (USA, UK) in a classic race to the bottom, and are now terrified of the pyramid collapsing.

I’ve already commented on the demise of Prudence and expected inflation. Combine that with throwing unlimited public money in in panic, and we’re straight back to something like the 1970s. Or perhaps worse.

The best hope for avoiding much deeper trouble now is if the remaining banks can keep away from this money.

The government has announced a serious programme of building offshore wind farms to supply a significant proportion of our energy needs. For the first time in a political generation, this is not obviously-empty bullshit, but looks like a real announcement. So let me join with everyone else in welcoming it.

However, I must express some reservations about the plan. Apart from practical problems like engineering and maintenance (which I’m sure can be solved - eventually), there are a couple of serious problems.

The lesser of these is the inevitable law of unintended consequences. Some idiot has already described the plan as powering all the UK’s households energy by wind. So householders, anxious to massage their consciences, will tell themselves “my energy use is now sustainable”, and cease to think about constraining it. But that only really affects those few households that are doing anything more than empty tokenism in the first place.

The more serious problem is that it has no economic basis. For the time being, and perhaps throughout the construction, the immediate cost of providing this wind power exceeds that of burning hydrocarbons. So the work will be driven by government rules and incentives. History has demonstrated clearly that free markets are altogether better than command economies for efficiency and innovation. Yet here is the government, commanding let it be so.

The government understands about markets They will create a competitive market, as they have done in other areas of public expenditure, from construction projects, to weapons procurement, to schools and hospitals. So where’s the problem?

The problem is that it’s a narrow micro-market. Sure, it’ll drive efficiency and innovation in the business of building and operating offshore wind turbines. But it will do nothing for out-of-the-box “big picture” ideas: in fact, it will actively lock them out, if they don’t happen to fit neatly in the defined micro-market. That’s the same underlying straitjacket that afflicts the command-and-control economy.

I refer the reader to my sketch Alice in Business for a story of how a marketplace in a narrow sector stimulates incremental optimisations at the expense of a radical order-of-magnitude improvement.

It’s not possible at any price to clean up fossil fuels to the standards we rightly impose on the nuclear industry (one could say, the true cost would be infinite if we did). The proper way to bring in large-scale development of renewable energy is to make fossil fuels pay a more realistic cost for the damage they do.

Governments can do that through taxation: indeed, I have argued for a major reduction in taxes on individuals and companies, with the shortfall being made up by taxing destruction and use of non-replaceable resources. Adjust taxation every year, and make it clear to everyone that this will continue for as long as we are burning any fossil fuels, and suddenly the free market will drive huge investment in renewable energy, including offshore wind.

That’s the real market, where Big Ideas can compete on their merits, and not be squeezed out by narrow constraints.

A political generation ago, John Major’s government did that, albeit just in one market sector. But instead of broadening it to encompass power generation, the present government killed off his good work. While the wind power programme is welcome, it’s no substitute for stimulating the market.

The BBC news just told us the latest amount of taxpayers money that’s gone to prop up Northern Rock, and calculated it as £730 per taxpayer in the UK.  That’s to date: it’s increasing without limit!

The effect of Northern Rock’s over-generous lending that got it into trouble was to inflate property prices artificially. Other financial institutions are doing it (albeit to a lesser extent), and the long-suffering taxpayer pushes up prices directly too, by putting money into social housing. All that money in the system inflates both prices and rents.

Non-property-owners are paying for this twice over: once through our rents, and again through our taxes. And of course a third time if we ever get rich enough to buy.

I want my money back!

After a month of appearing sensible, the Bank of England appears to have caved in and bailed out not just one bank’s depositors, but the banking system as a whole. More proof - if it were ever needed - that the prudence years are long gone. We’ll inflate our way out of letting the city bankers - and indeed multiple-home-owners - face the consequences of their gambling.

Whether or not this could be fixed using interest rates is now immaterial. They’re not even going to try. Expect some smoke-and-mirrors over the coming months, to pre-empt and limit the damage to headline rates.

Worst, pumping more money in will only prolong our housing bubble. The major cause of it was oversupply of mortgage money, aided by smaller amounts of public money.

Poor old prudence. And poor taxpayer.