Thursday, 19 January 2017

President Trump's Triffin problem

In many eyes, President-elect Trump is a loose cannon. He says things that upset people the world over. Many of these things perhaps should not be taken too seriously - after all, he is a showman. But it would be a mistake to dismiss his rhetoric on trade. There, he is in deadly earnest - and it does not bode well either for America or for the world. 

Trump's trade agenda was set out in Peter Navarro & Wilbur Ross's paper (pdf) of September 2016. Peter Navarro's most famous work is the documentary "Death By China" which essentially blames China for all America's woes. Wilbur Ross is a businessman who made a fortune from buying up and restructuring manufacturing businesses, some of them protected by George Bush's trade tariffs. Both of them are unashamedly protectionist, labelling countries running large trade surpluses as "cheaters" and "manipulators" and demanding that the rules of international trade be changed to benefit America at their expense. Both of them have been appointed to top trade jobs by Donald Trump. 

Navarro & Ross identify three causes for what they describe as "America's economic malaise". Two of them - high taxation and over-regulation - are long-standing complaints by America's right-wing business community. But the third is new. Navarro & Ross explicitly blame America's trade deficit for poor GDP growth. And they claim that the trade deficit is entirely due to unfair practices by America's principal trading partners:  
Trump views America’s economic malaise as a long-term structural problem inexorably linked not just to high taxation and over-regulation but also to the drag of trade deficits on real GDP growth. Trade policy factors identified by the Trump campaign that have created this structural problem include: (1) currency manipulation, (2) the equally widespread use of mercantilist trade practices by key US trading partners, and (3) poorly negotiated trade deals that have insured the US has not shared equally in the “gains from trade” promised by textbook economic theory.
They name China and Germany as currency manipulators, China as the biggest "trade cheater" (i.e. mercantilist), and Canada, Mexico and South Korea as benefiting from unfair trade deals.

Many people have pointed out the gross economic errors in Navarro & Ross's analysis. At Vox, Matt Yglesias explains how imports contribute to exports: imposing high tariffs on imports simply raises business costs, reducing business profits and threatening people's jobs. The economist Greg Mankiw notes that they fail even to mention the effect on the capital account (foreign investment in America) of closing a current account deficit. Paul Krugman describes their discussion of VAT as "utterly uninformed". And Larry Summers says Trump's global economic plan is based on a "misunderstanding of how the global economy works".

I'm with Larry Summers on this. Navarro & Ross have failed to understand the nature of the US's relationship with the rest of the world. And they have therefore disastrously misinterpreted the cause of its trade deficit. There may well be currency manipulation, mercantilism and skewed trade deals. But these are not the principal cause. No, the main reason for the US's trade deficit is the US dollar.

The US dollar is the world’s premier currency for international trade and investment. More trade is done in U.S. dollars than any other currency. More trade finance is issued in U.S. dollars than in any other currency. More business investment is financed in U.S. dollars than in any other currency. Global markets price oil, metals and commodities in dollars. Even currencies are priced in dollars. The world relies on dollars to lubricate the flow of goods and services around the world. 

The "quantity of money" equation MV=PY tells us that the quantity of money in circulation should be sufficient to maintain steady output. In a closed economy, when there is too much money in relation to output, there is inflationary pressure: too little, and there is risk of deflation. But because the US dollar is so widely used in the global economy, the quantity of dollars needed to support global trade far exceeds the US's productive capacity. We could say that there need to be sufficient dollars in circulation to maintain steady global output. This does not cause inflationary pressure in the US, as the equation might suggest. Rather, it creates a balance of payments problem. 

How global demand for dollars creates a balance of payments problem for the US was first described by the economist Robert Triffin. Testifying before Congress in 1960, Triffin explained how the US's trade deficit was essential for the global economy, but potentially disastrous for the Bretton Woods fixed exchange rate system:
If the United States stopped running balance of payments deficits, the international community would lose its largest source of additions to reserves. The resulting shortage of liquidity could pull the world economy into a contractionary spiral, leading to instability
If U.S. deficits continued, a steady stream of dollars would continue to fuel world economic growth. However, excessive U.S. deficits (dollar glut) would erode confidence in the value of the U.S. dollar. Without confidence in the dollar, it would no longer be accepted as the world's reserve currency. The fixed exchange rate system could break down, leading to instability.
Triffin's Dilemma, as this came to be known, played out throughout the 1960s and eventually led to the Nixon Shock in 1971, when President Nixon suspended the convertibility of the dollar to gold, effectively ending the Bretton Woods system.

From that time on, the US has been able to run persistent trade and, often, fiscal deficits without risking a damaging run on the currency. Indeed, such is the global demand for US dollars that until the era of central bank intervention and QE, the US was able to fund its growing pile of government debt at lower interest rates than any other country. The US Treasury is the world's premier savings product, and the interest rate on US T-bills is regarded as the nearest we can get to a risk-free rate in the real world.

The US's ability to obtain very large amounts of debt at very low interest rates is known as the US's "exorbitant privilege". But it could also be regarded as an "exorbitant burden". The role of moneylender to the world means the US must be a net exporter of dollars. There are two ways of exporting dollars: one is to lend them, and the other is to buy goods and services. The US does both. Its banks -including the Federal Reserve banks - lend dollars to the world, and its citizens buy imported goods and services from the world.

As this chart shows, the era of globalisation has been marked by a rapidly increasing US trade deficit.

Navarro & Ross wrongly blame this on the trade practices of other countries, failing to recognise its true origin in the US's responsibility for maintaining global dollar liquidity as global trade increased during this period. And consequently, they have come up with a policy prescription which, by closing the trade deficit, would cause a crisis of dollar liquidity, potentially leading - as Triffin warned over half a century ago - to a global contractionary spiral. We have a name for such a spiral. It is called a Depression.

I suppose Trump and his team of voodoo economists would say that they don't care if the rest of the world goes into a Depression, as long as America is ok. But there is no way that America could be insulated from the effects of such a severe global monetary contraction. To show this, we have to look at how such a monetary contraction would play out.

In the first stage, banks lend less to the world. In fact, this has been happening ever since the financial crisis of 2008. Tighter capital requirements mean banks are effectively penalised for lending to higher risks: this is causing a credit crunch for businesses (pdf), especially small and medium size enterprises and particularly in developing countries. In part due to banks' reluctance to provide trade finance, and in part due to poor demand in developed countries, global trade volume has declined significantly since 2008, though a rising dollar has helped to maintain global trade value:

(chart from David Stockman)

The US's trade deficit has already reduced significantly, which indicates that there are fewer dollars in circulation than there used to be.

For much of the period since the 2008 financial crisis, the Federal Reserve's QE programme maintained or even increased global dollar liquidity. But that is now ended, and the Federal Reserve is progressively raising interest rates. This has the effect of tightening global monetary conditions. In response to this, the dollar's exchange rate is rising.

A rising dollar exchange rate makes America's exports less competitive and encourages imports. This is entirely the opposite of what Navarro & Ross want: they want to reduce imports and increase exports. So, to the next stage of the process. To counteract the effect of the rising dollar, businesses are penalised for importing, and citizens pay higher prices for imported goods because of those penalties. What effect does this have?

Clearly, America's imports would fall, reducing the trade deficit. This is of course exactly what Navarro & Ross want. But the flip side of reducing the trade deficit is global dollar liquidity shortage (and, as Mankiw pointed out, a squeeze on foreign investment in the US). This would reveal itself as a sharply rising dollar exchange rate, especially in relation to the currencies of developing countries. If the Federal Reserve did nothing to counteract it, then the effect of the Trump team's protectionist measures would be to put upwards pressure on the dollar, impeding America's exports.

The worsening global dollar liquidity shortage would force China and other holders of US Treasuries to sell down their holdings. Such sales would be likely to raise yields on USTs, to which the Fed would most likely respond by raising the Fed Funds rate. So the tightening effect of the rising dollar could be compounded by faster monetary tightening from the Fed.

Closing the trade deficit when the dollar is rising would require progressively harsher trade controls - larger penalties for importers, price rises for citizens, perhaps outright import bans for some products. Because restricting imports raises costs for businesses, we would start to see business failures, resulting in falling GDP and rising unemployment. This is exactly the opposite of the effect that Navarro & Ross claim that closing the trade deficit would have.

Not that they would succeed in closing it, though. Other countries would inevitably respond to America's protectionist measures by imposing tariffs on American goods and services.  This, in addition to the rising dollar, would make America's exports prohibitively expensive. So the effect of Navarro & Ross's protectionism would be a severe contractionary spiral in global trade, with America at the epicentre.  It is not hard to imagine what the effect on the American economy would be.

It is, of course, possible to close a trade deficit by initiating a severe recession. Indeed, it is probably the ONLY way of unilaterally closing a large and persistent trade deficit. Navarro & Ross's protectionism would not improve prosperity in America. On the contrary, it would be a severe economic decline, perhaps even another Depression. And as always, the worst hit would be the working poor - the very people who voted for Mr. Trump in the hopes of a better life.

Related reading:

Safe assets and Triffin's dilemma
When populism fails, tragedy prevails - Manchester Policy Blogs

Image from the LA Times. 

Friday, 13 January 2017

It's not an NHS crisis, it's a social care disaster

You've probably all noticed that I haven't been writing much lately. Well, not on this site, anyway, though I have been doing rather a lot elsewhere.

In the last couple of months, my life has been upended. I suppose I should have seen this coming - the signs have been there for a long time - but the speed at which this has happened has shocked me.

At the end of October, my father suffered a fall at his home on Sheppey, where he has lived alone since my mother went into a nursing home in August 2014.  He was found - after several hours - by the taxi driver he had booked to take him to see her. I didn't find out for another two days that he had been taken into hospital.

When I went to see him, I was horrified. He couldn't talk, and when I spoke to him he just stared at me. I thought he had had a stroke. But the hospital thought otherwise. They decided it was his heart, fitted him with a pacemaker (for which he had previously been recommended, but no-one had got round to fitting it), and discharged him. Unable to talk and unsteady on his feet, he went back to his home, to live alone with no support.

He tried to carry on as before. The day after his discharge, I had a phone call from his taxi driver saying that he had just taken my father to see my mother. "He shouldn't be living alone", he said. "He's not well".

How right he was. A few days later, my father was back in hospital after a fall in the street. This time, the doctors decided that he had post-stroke seizures, though they didn't know exactly when the stroke had been. They gave him epilepsy medicine. He stopped falling over, though he still had frequent small ("petit mal") seizures during which he temporarily lost the power of speech and purposeful movement. They didn't have a solution for the small seizures, so they referred him to Kings College Hospital in London, and discharged him. Yes, you got it - discharged him back to his home to live alone without support.

Both my father and I resisted his discharge on the grounds that as his epilepsy is clearly not under control and he has a number of additional health problems, it is unsafe for him to live alone and we needed time to arrange accommodation and care. The doctors told us that there would be a care package for 6 weeks consisting of visits twice a day to ensure his safety, and the ward nurses said that he would not be discharged until the care package was in place. The discharge nurse amended this slightly - she said the care package would not kick in "for a few days". So I - rashly - agreed to cover.

Two weeks later, there had not been a single visit. Clearly, something had gone wrong. I didn't know whether the failure was at the hospital, which requests care, or in the local council, which provides it. Fortunately, I was able to enlist a spy.

About ten days after his discharge, my father had been telephoned by a community occupational therapist. Telephone calls are difficult for my father, since he often loses the power of speech during the call - this is one of his (so far unresolved) care needs. So, as my father was unable to speak, the occupational therapist decided to make a personal visit to assess his care needs.

I was not present for that visit. Later that day, when I arrived to help my father with his shopping, he said "They can't help me". The occupational therapist had concluded that since my father doesn't need help with personal care, he doesn't need any help. I spoke to the occupational therapist the following day, and he confirmed that the decision was to provide no care. I pointed out that the hospital had promised 6 weeks of twice-daily visits to ensure my father's safety, and that the NHS was paying for these visits. He said he didn't think any such request had ever been received, but he agreed to find out what care had actually been requested.

A few days later, he rang me. No care request had ever been received. All that had been requested was district nurse support for my father's permanent catheter, and follow-up by the GP regarding routine EEG as part of epilepsy management.

I am not one to take such hospital malpractice lying down. We had only agreed to my father's discharge on the basis that a care package would be provided. Had we been told the truth, my father would not have left hospital until I had been able to organise private sector support for him, which could have taken quite some time. So I registered a formal complaint with Medway NHS Trust and copied it to mine and my father's MPs.

That stirred things up nicely. Within a few days, I was contacted by the sister of my father's ward at Medway Hospital. She investigated what had happened, and discovered that somewhere in the labyrinthine administrative nightmare that is the NHS's relationship with community care providers, the doctors' request had disappeared. Despite the assurances the ward staff and discharge nurse had given us, my father had in fact been discharged  to live on his own with no support.

The hospital apologised, of course. But there is still no care. And this time, it is not the hospital's fault. It is the fault of the local council.

The occupational therapist said that even had the care request from the hospital been received, Kent Social Services would still have provided no care. This was confirmed by a social worker a few days later. "We don't do safety visits," she said.

So the local authority will provide absolutely nothing for my father. No care in his own home. Nothing to ensure his safety apart from assistive technology which requires him to be able to speak - which he cannot, when he is having a seizure. No sheltered housing (he fails the means tests). Apparently the local authority has no duty of care whatsoever to an 83-year old frail elderly man with multiple health problems who is living on his own. What kind of society have we become?

Not only has the local authority refused to provide care of any kind, it won't even help us to find self-funded private sector support. The best the social worker could offer was a referral to Age UK. Age UK say they can probably provide someone to accompany my father on trips out of the house, but they don't do safety visits, and nor can they provide an on-call service as backup to the assistive line to avoid unnecessarily calling out the emergency services. So it is now left entirely to me to find a private sector care agency that can meet these needs. Until I do, my father is on his own, and I am his sole carer despite working full-time and living 30 miles away. We have been comprehensively dropped in it.

By failing to provide care, the hospital and the local council between them have effectively forced me to become my father's carer, without my agreement and - more importantly - without any respect for my own needs. I am not in a position to give up work to become my father's carer. I still have a dependent child, whom I must feed and house (though thankfully I don't have to clothe her any more - she pays for that herself). So I am now trying to manage my father's needs in addition to working full time and looking after my own family. There are only 24 hours in a day, and they are not enough. Sleep is for wimps.

Whoever failed to organise care for my father clearly didn't give a stuff. All they cared about was getting him out of hospital. Such is the pressure on beds these days that hospitals will discharge frail elderly people into unsafe environments with no attempt to ensure that appropriate care is in place. And they will also wilfully mislead the families of frail elderly people to get their agreement to an inappropriate discharge.

But the bigger issue here is the comprehensive failure of the local authority safety net. Local authorities have cut social services to the bone. Even for those who are poor enough, or needy enough, to qualify for social support, the provision is dangerously overstretched, with inadequate care homes and carers who are poorly trained, poorly paid, insufficiently supervised and seriously overloaded. And for those who can afford to pay for their care, or whose care needs simply don't meet the extremely narrow criteria to which local authorities have restricted their care provision, there is very little provision at all.

Importantly, it is not just the public sector that is desperately short of capacity. I was advised not even to try to contact private sector care agencies over Christmas because they were so overstretched. As I have said previously, this is a massive market failure. Neither the public sector nor the private sector are able to provide the care that elderly people living in the community increasingly need.

Ring-fencing the NHS budget protected it from the worst of the cutbacks in recent years, but because the NHS was protected, other areas were cut even more heavily. Local authority budgets have been cut repeatedly: many local authorities are struggling to provide even basic services. No wonder they interpret their remit so narrowly that many vulnerable people are left without care. But I don't understand why they won't act as an enabler for people who are able and willing to use private sector care support, but need help finding providers. Surely it doesn't cost much to provide a signposting service?

The really stupid thing is that the NHS ends up paying anyway. Elderly people remain in hospital far longer than they need to, because there is nowhere safe for them to go. Or, worse, elderly people are discharged from hospital into unsafe environments with no care in place, and quickly end up back in hospital after emergency services are called out by family, neighbours, assistive line call centres or voluntary services. The NHS then has to treat them for wholly unnecessary injuries, hypothermia, dehydration, and the consequences of failing to take medication.

And it's not just elderly social care that has been cut. There are widespread cuts to other social services, such as community mental health. These local authority cutbacks don't really save any money, they simply push the cost somewhere else, increasing it along the way because of the distress this causes to those affected. And when the music stops, the cost inevitably falls on NHS Accident & Emergency departments. No surprise, then, that NHS A&E is in crisis.

When social services fail, it is the NHS that picks up the tab. This, not underfunding of the NHS itself, is the main cause of the crisis in the NHS.

Like all crises, this one has been visible on the horizon for years. There have been repeated warnings about the effect on social services of severe cuts to local authority budgets. But of course now the crisis is here, everyone will say "why didn't we see this coming?" There is none so blind as those who only see money, and none so deaf as those for whom listening is more than their political job is worth.

Related reading:

Market failure
The sandwich generation
Broken windows, broken lives

No, I'm not going to respect your opinion

What does "discussion" mean?

According to the Oxford Dictionary, there are three definitions:

  • the action or process of talking about something in order to reach a decision or to exchange ideas
  • a conversation or debate about a specific topic
  • a detailed treatment of a topic in speech or writing

Well, this is a pretty wide brief, isn't it? Lots of opportunity for misunderstanding there.

I recently joined a discussion group. There are lots of these on social media, some open, some closed. Some have clearly defined topics, others are much woollier. Most do not specify what they mean by "discussion".

I expected a friendly debate in which differences of opinion are welcomed and there is no intention of reaching any conclusion. But there is no particular reason why I should expect this. Another person might expect discussion to be focused entirely on obtaining general agreement to a particular course of action. And someone else might simply be wishing to air their views on a particular topic without those views being challenged. All of these fit within the dictionary definition of "discussion".

So I asked the members of my group what they meant by "discussion". Of course, there were different views. So we are now having a discussion about the meaning of discussion. The question is, should this discussion lead to mutual agreement about what we mean by discussion, or should we "respect each other's opinions" - by which most people seem to mean "agree to differ"?

To me, the answer in this case is obvious. We cannot possibly "agree to differ". If we don't agree on what we mean by discussion, no discussion is possible. We end up talking past each other, or worse, getting angry with each other because people who want friendly debate challenge people who just want to air their views.

When there is no agreement about what "discussion" means, a "discussion group" tends to become merely an echo chamber for the majority who substantially agree with each other. Dissenters are silenced, not by moderators but by abuse from the majority. Although the group has never "agreed" what it means by "discussion", the majority view inevitably prevails.

So in order for there to be discussion, we must in the first instance agree on what we mean by "discussion". In an unmoderated group where there is no agreement about what "discussion" means, the dominance of the majority amounts to a coup. Moderation is necessary to prevent the majority becoming tyrannical.

But we don't have to agree about anything else. Indeed, discussion is more constructive if we don't. Dissent is creative. We learn from those who disagree with us. Silencing dissent is the hallmark of totalitarian regimes. Those who see "discussion" as opportunity to air their views in a supportive environment, and abuse those who provide reasoned challenge to their views, are essentially fascists.

We can, and should, disagree with each other's opinions. Discussion does not have to mean agreement. We can take the same set of facts and reach opposite conclusions, as my father and I did over the Brexit vote: I was more positive about the future for the UK in the EU than he was. We were simply attaching different weightings to the available facts and assessing the best course of action based upon our weighted view of the facts. And we will never know which of us was right. As Aslan said to Lucy, "To know what would have happened? No. No-one is ever told that. But anyone can find out what will happen." The choice was binary and irrevocable, and we now know what will happen, though we do not yet know exactly how. The path we now walk is that which leads out of the EU.

However, dissent over facts is not reasonable. If I know there is overwhelming evidence that your opinion is based upon a wrong understanding of the facts, I am not going to "agree to differ": I am going to present the evidence and expect you to change your opinion. There is not, and will never be, £350m per week to be saved by leaving the EU. There is not, and never has been, a "pension pot" containing your NI contributions. Banks do not lend out reserves, or deposits.

You may decide not to change your opinion, of course: there are plenty of people who continue to believe that the earth is flat despite overwhelming evidence to the contrary. But I am not going to respect your opinion. It is not respectable.

So I will continue to correct factual errors and challenge ill-founded opinions. And if that is disrespectful, so be it. You are entitled to your opinion, but don't expect me to agree with you. If I think your opinion is fantasy, I will say so. And if you don't like me correcting your facts, get them right.

Related reading:

The snake oil sellers
Dangerous assumptions and dodgy maths
Banks don't lend out reserves - Forbes

Image is a still clip from the feature film "Prince Caspian", showing Aslan and Lucy. 

Sunday, 1 January 2017

The return of machismo

2016 has been an extraordinary year. Memorable for so many things: celebrity deaths, the melting of Arctic sea ice, Trump, Brexit, terror attacks in Europe, drownings in the Med, destruction in Syria. The largest movement of people in recorded history. And - perhaps - the overturning of the political & economic paradigm established by Reagan and Thatcher. Are we seeing the end of elites and the triumph of the common man? Was the Brexit vote really the victory of "ordinary people"? Was Trump's election really due to a populist surge?

I look at Trump's cabinet and I don't see a resurgence of populism. On the contrary, I see the triumph of the 1 percent. Trump's cabinet is made up almost entirely of old, white and extremely rich men. Many of them are former senior military personnel. The few women are rich, beautiful and - by American political standards - young. In short, the composition of Trump's government speaks not to pluralism, or even the end of globalism, but to something else. The return of machismo.

By this I mean the sort of machismo that defines clear expectations for men and women. Men are to be rich, white, old, powerful. Women are to be rich, white, young, beautiful. Women can hold positions of power, provided that they conform to the expectations of the men who put them there. There is no place for old or unattractive women - sorry Janet Yellen, I think you are history. And there is no place for men who are non-white or poor. Maybe I am exaggerating, but this is how it appears to me.

Trump's promise to Build A Wall should therefore be seen for what it is - machismo. So too his promises to renegotiate trade agreements in America's favour, declare China a currency manipulator, and bring back manufacturing jobs (which mainly go to men). In America, we are looking at the resurgence of male power. I'm not surprised that Trump wants to build up America's nuclear capacity, either : the ultimate macho power symbol for a male politician is surely a nuclear warhead. Dammit, it even looks like a phallus. And as for that Wall - well, I don't know if Trump will actually build it, but if he does, it will become a symbol not of America's control over immigration, but its dominance in the world.

If Trump's Great Big Wall is the symbol of "Making America Great Again", the equivalent for Britain is a Bloody Big Boat. Rebuild the Royal Yacht and send the Queen round the world hosting tea parties for nabobs. The natives will kowtow and Britain will once again rule the waves. Our former colonies will submit happily to our rule leadership, and we shall have our Empire back in all but name.

Britain's machismo is maybe not quite so obviously about male potency. After all, our Empire flourished under a Queen. But it is equally silly. No way is building Britannia II going to make Britain once again a great trading nation. The trading relationships of the past were built on colonial acquisition as much as free trade, and were backed up with force: for example, our opium "trade" with China in the 19th century relied entirely on the Royal Navy. We cannot turn back the clock to that time, however much some of us might like to. The world has changed, and those we used to lord it over now expect to be treated as equals. These days, forging trading relationships involves painstaking negotiation and a willingness to compromise. We cannot simply state our terms to other nations and expect them to sign on the dotted line. But that seems to be the approach we are currently taking.

Listen, Americans, I'm sorry if some of you have been feeling emasculated by the monstrous regiment of (old) women, but machismo of this kind does not make for a peaceful or a prosperous world. Building ever bigger warheads to impress the warlords on the other side of the Urals may keep the peace for a while, but establishing reciprocal free trade agreements with countries around the world brings far greater and more lasting benefits.

You don't need to make America great again. America is already great. It is the greatest trading nation on earth. And its greatest export is its debt. There is no shame in being the producer of the world's finest savings product and its most important currency. Embrace your destiny. Let the world beat a path to your door to sell you goods and services in return for your wonderful financial products. And as investment flows into your economy, build great things - including a Wall, if that is what you want. Build the Wall to end all walls. The Wall that is the greatest Wonder of the World. The Wall that can be seen from your colony on Mars.

And listen, Britons - or should I say "English", since I am mainly speaking to those who voted to leave the EU? I know lots of you voted for "sovereignty". But if you are not careful, you will be sovereign over not very much. Far from putting the "Great" back in Britain, the Union is in serious danger of breaking up. You have to accept that you can't have your Empire back, you can't keep foreigners out and you can't rule the waves any more. Not even in British territorial waters - after all, we lost control of our fishing rights long before there was a Common Fisheries Policy.

But that doesn't mean that Britain can't be great. Indeed it IS great. There are so many things for which Britain is universally respected - its law, its Parliamentary democracy, its openness, its tolerance, its free speech. These are what make us great. We diminish ourselves in the eyes of the world when we put up barriers, restrict free speech and become intolerant of diversity. And when we undermine our great institutions, we make ourselves far less attractive as a trading partner. Although I'm sure the Queen would love to have a new Royal Yacht, this is not what will seal favourable trade deals with other countries. Rather, it is the trustworthiness that comes from the rule of law and fair dealing. Just as America's debt is its greatest export, so English law is Britain's greatest export.

I hope the demented euphoria on both sides of the Atlantic ends soon, and is replaced with a more balanced and pragmatic outlook. The next few years will not be easy. Machismo doesn't work in Latin America or Africa, so what on earth makes us think it will work for us? We need to recognise our real greatness, and rediscover what really brings us prosperity.

It is trade that makes us prosperous. Not war games, vanity projects and phallic symbols. Trade, pure and simple. And globally speaking, the freer our trade, the more prosperous we will be.

This is not to say that free trade has been beneficial to everyone. It hasn't. But that is because for thirty years, national governments have shirked their responsibility for ensuring that the benefits of trade are fairly shared. I fear that instead of governments reconsidering how best to distribute the proceeds of trade, the return of machismo will mean that trade itself is diminished, replaced by power plays, political posturing and even outright war. If this is where we are headed, we will all be the poorer for it.

I am no fan of Ayn Rand's philosophy, but on the supremacy of trade, she was absolutely right.

Related reading:

The Morality of John Galt (5-part series) - Pieria

Image from Wikimedia Commons. 

Friday, 30 December 2016

The essence of evil

I have a confession to make. I have been reading the Daily Mail.

No, I haven't gone over to the dark side. Rather, I have been true to myself. I have always tried to keep an open mind. And sometimes that means doing something of which my critical self does not approve. Like reading tabloid newspapers.

Reading is an important part of my life. I've always needed time to myself, to read and think. Without that space, my mind fogs and I become irritable. I suppose I am a bit introverted, really.  But shutting people out, even temporarily, can be difficult. Frances has her head in a book again? Just shout to get her attention. Works every time. And now that I have become my father's part-time carer, time for reading and thinking is hard to come by. The fog is slowly descending on my mind.

I discovered long ago that the easiest way of creating time to read and think is just to disappear for a while. So, over the years, I have collected some favourite boltholes. One of them, bizarrely, is Medway Service Station on the M2. Ten years ago, I used to stop there every week on my way to teach in Sittingbourne. It has a decent coffee shop with comfortable chairs. And it has newspapers. You just borrow them to read while you drink your coffee.

Most days now, I drive from my home in Rochester to my father's home on Sheppey, and back again. It's essentially the same journey as I used to do all those years ago.

So, a few days before Christmas, I was driving back from Sheppey to Rochester after helping my father with his shopping. Longing for some time to myself, I decided to stop at Medway Service Station for half an hour.

I ordered a coffee and went to look for a newspaper. The coffee shop was fairly busy, so most newspapers were already in use. There were only three on the stand - the Daily Express, the Daily Mail and the i newspaper. Disappointed, I reached for the i as the best of a bad bunch. But something stopped me. "Keep an open mind," said a voice in my head. And I thought to myself, "I have been critical of the tabloids - and especially of the Daily Mail - but I don't actually read them. I'm a snob."

So I picked up the Daily Mail and headed back to my seat.

It was the day after the Berlin terrorist attack. The first few pages consisted entirely of pictures and reports from people at the scene. I read them with interest. The eyewitness accounts were powerful: I, too, could feel something of the fear and horror that those people experienced, simply from reading their words.

But it was not the reporting of the terror attack that stopped me in my tracks. It was something entirely different.

The previous day, Rabbi Lionel Blue had died, one of many celebrities in the 2016 morgue. In his memory, the Daily Mail devoted an entire page to one of his reflections. In it, he described how he met God in a Quaker meeting - hardly the Holy of Holies for a Jewish man. I was reminded of my father saying he met God on a railway station. People find God in the strangest places....

Irreverent as always, Rabbi Blue dubbed his new friend "Fred":
It’s a friendly name and that’s how he popped up in my imagination.  Fred spoke back to me but his answers weren’t ones I expected.
They weren't what most of us would expect. We imagine God as controlling, not permissive: as dictating what we should believe, not allowing us to decide for ourselves. But Fred was different. Rabbi Blue continued:
‘Do I become Christian?’ I asked him. He was uninterested. ‘That’s your business,’ he said.
As I read this, a memory came to me. A 22-year-old music student standing in a Russian Orthodox church in Moscow, watching with horror the elderly women praying to the icons. "It's idolatry!" cried my younger self. And a voice in my head said, "Nevertheless, these are my children too".

At that time, I believed in God, but my faith was narrow and rigid, excluding others who did not conform to Christian evangelical norms. I was sure what those women were doing was evil. But God had a different opinion. Briefly, he gave me a glimpse of the world as he saw it - and it shocked me to the core. What I thought was evil, he considered unimportant. But condemning those women for their religious practices was a different matter. My version of Christianity was his idea of evil. Not that he was condemning me, mind. He just wanted to open my eyes.

That experience fundamentally changed my world view. To this day, I remain convinced that God is far more tolerant than we can imagine. Fred, utterly uninterested in Lionel Blue's faith choice, is the God that I know, the God I met in that church in Moscow.

We are all Fred's children, whatever faith - or none - we choose. I choose to be a Christian. Lionel Blue chose to become a Jewish Rabbi. Others choose to be Muslim, or Hindu, or Buddhist, or atheist. Our choices are driven by our cultural backgrounds, our temperament, our friends & family, our life experiences. But we have far more in common than the faith choices that divide us. The most important thing we share is our humanity. When we recognise another as a fellow human being, and share in their joy and their pain, we see the face of God.

And that brings me back to the Daily Mail. As I read on, I realised that it was all about people and their struggles. About their health, and their wellbeing. Six pages of eyewitness reports of a terrorist attack. A whole page report about elderly people with dementia being discharged from hospital in the middle of the night without support. Joyful reports about advances in healthcare that make people's lives easier. Angry reports about cost-cutting and meanness that diminish people's quality of life. And through it all, I heard the voice of God. The God who told me to keep an open mind. The God who meets us in the most unlikely places. The concern of my God for humanity shone through that paper that I had despised.

That said, I am not blind. The Daily Mail is partisan and divisive. It appeals to some and alienates others. And, more worrying, it promotes "othering" of those who are not "one of us" - migrants, Muslims, the very poor, the very rich. But I can see why God chose to use this very flawed medium to teach me a lesson. I was every bit as guilty of divisiveness and "othering". It is a lesson I shall not forget.

And it is a lesson that others too need to learn. As I look at the world today, I see fragmentation and discord, growing alienation, and a distressing tendency to divide people into "right" and "wrong", "us" and "them", Leavers and Remainers, Christians and Muslims, citizens and migrants, white and black, "ordinary people" and "experts", workers and bankers .....the list is endless. I find the religious divisions particularly distressing, perhaps because I lived through the years of violent religious discord in the United Kingdom, and I fear for the fragile peace in Northern Ireland. And perhaps also because I still hear "nevertheless, these are my children too" in my head.

When we divide people into "us" and "them", we deny the humanity of those we decide to exclude. And by denying their humanity, we open the door to terrible, terrible things. By convincing ourselves that they are less than human, we can justify to ourselves the torture, rape, slavery, imprisonment and murder of our fellow human beings. Acts of unthinking cruelty become commonplace, social deviants are treated increasingly harshly, false and exaggerated stories whip up the fear that justifies brutality towards those who are "not one of us". This is the essence of evil.

It is often said that for evil to triumph, all that is necessary is for good men to do nothing. But I would say that when we stop seeing our common humanity in the faces of others, the triumph of evil is already assured.

Related reading:

The extent of evil
Joseph Brodsky on the Greatest Antidote to Evil - Brain Pickings
What have we learned from history?
True patriotism

Image: Medway Service Station from the M2. Source: Geograph

Thursday, 22 December 2016

Market failure

I hate the term "neoliberal", but in this piece I am going to use it, simply for want of a better word.

Neoliberal economic dogma says that the public sector crowds out the private sector. So the public sector should only step in as a last resort to provide for those that the private sector cannot or will not serve. In recent years, we have interpreted this to mean that the public sector should only provide for the very poorest in our society. If people can afford to pay, the private sector will provide. 

Is this true? Well, true believers say it is. So, if an elderly man with a gold-plated defined benefit pension and substantial savings needs sheltered accommodation because he is no longer safe to live on his own, he should have no problem finding it, should he? 

I did an internet search for sheltered housing on the Isle of Sheppey, where the elderly man lives. This is what I found:

Only one of these enclaves is sheltered housing: the other is accommodation restricted to over-55s, but it does not have an on-site warden. So, for the whole of the Isle of Sheppey (about 38,000 people, of whom around 25% are over 60), there is one sheltered enclave with 38 units, all of which are currently occupied. It is run by Amicus Housing Association on behalf of Swale Borough Council. There is no private sector sheltered housing on Sheppey. 

Thinking I might have missed something, I checked with estate agents. They confirmed that there is no private sector sheltered housing on Sheppey. There isn't much in Sittingbourne, either. Better go to Faversham. Or Tunbridge Wells. Richer areas. There is lots there. 

The trouble with Sheppey is that it is not an attractive place for private sector providers. Compared not only with the national average but with the county of Kent, it appears to be poor:

Or - is it?

Umm, how does that work, then? Easy. Despite the fact that it is in the South East of England and only about an hour from London by fast commuter train from Sittingbourne, Sheppey's house prices are below the national average. The average house price in England & Wales is currently £216,674, but the average house price on Sheppey is £204,369. Population statistics show that the majority of people on Sheppey are in the 30-59 age bracket, so most of them will have bought their properties some time ago. So the slightly high home ownership rate does not indicate affluence, as the banner at the top of this chart says. Rather, it reflects the affordability of housing on Sheppey relative to the average for the South East - hence the high proportion of mortgages. 

And this also explains why there is no private sector sheltered housing, or indeed any private sector accommodation for the elderly other than a couple of care homes. The return on capital is not high enough to justify the property investment. What housebuilding there is on Sheppey is aimed at commuters moving into the area to take advantage of fast road and rail links to London. New housing developments are mostly two and three bedroom homes, plus some larger properties, built close to the roads that take the commuters off the island. I asked one property developer about flats in town centres, and she said "oh we don't do those". They aren't what the commuters want. 

So we have a total market failure. The private sector does not provide for the elderly on Sheppey. In fact it doesn't really provide for local people at all. It is entirely focused on attracting London commuters. 

Since I couldn't find private sector accommodation, I issued a preliminary enquiry to Amicus Housing Association about Davie Court. (I have redacted personal details, obviously, and added the red underline.) 

This was the response:

So, the need of a frail elderly man for sheltered accommodation is treated as a housing problem not a care problem. This is really going well, isn't it?

Swale Borough Council's criteria for housing say absolutely nothing about care needs or risk. But they do say a lot about money:

I knew he wouldn't qualify. He has too much money. But I emailed them anyway, reminding them of their duty of care:

The response was a slapdown:

Translation: ""F**k off. Rich bastards like your father are not our problem". 

So, the private sector won't provide, and neither will the public sector. And the third sector has sold out to the public sector. The really stupid thing is that my father is able and willing to pay. But no-one is willing to provide. I am unable to find the sheltered housing that my father needs in the area where he has lived fo 18 years. 

And so far, I am unable to find care support either. 

Swale Borough Council referred my enquiry to the Social Services department of Kent County Council. But I had already contacted them about care support - and they decided that because my father doesn't need help washing or dressing, he doesn't need any help at all. They interpreted their remit so narrowly that ensuring his safety simply didn't feature. 

So I have had to step up myself. I am currently spending several hours at my father's house nearly every day, a round trip of 60 miles, just to ensure that he is safe. And I am permanently on call: he has an assistive helpline, but the first person on the call list is me. I am trying to find support from private sector care agencies: there are a few, though their capacity is limited at present. Maybe, in the new year.....

Fortunately, my working hours are flexible, though my work is suffering: I didn't meet my Forbes mandate last month, I didn't write my Co-Op News column either, I have cancelled numerous singing lessons, and I finally completed my American Express assignments for this year yesterday, one month late. But nevertheless, I am fortunate. Most people do not have such flexible working lives. Many are forced to give up work to care for elderly relatives.  

Market failure like this has economic consequences. Government waxes lyrical about the need for affordable childcare so that women with young children can stay in the workforce, while simultaneously cutting back on the services needed to ensure that women with elderly relatives can stay in the workforce. I say women, because the burden of elderly care by families still falls principally on women, though of course some men are carers too. What is the cost to the economy of people leaving the workforce because neither the private nor the public sector will provide adequate care for their elderly relatives?

The next neoliberal cultist who tells me that the public sector should be slashed to the bone to make way for the private sector will receive a very dusty response. Get real, ideologues. The private sector only provides when it perceives that it is in its interests to do so. 

Market failures need public sector intervention. Local authorities that only provide for the poorest and fail to ensure that the rest of their constituents have adequate provision are not doing their job. In fact they are breaking the law. The Care Act 2014 specifically assigns to local authorities the responsibility for ensuring that there is a functioning market in social care provision. 

The rich in Faversham and Tunbridge Wells are provided for by the private sector. And the poor on Sheppey are provided for by the public sector. But the people in the middle - the in-betweeners - are on their own. No-one is meeting their needs. 

Related reading:

Friday, 9 December 2016

The in-betweeners

How effective is monetary policy?

Highly effective, according to the Governor of the Bank of England. In a speech earlier this week, Mark Carney robustly defended the Bank of England's record:
"Simulations using the Bank’s main forecasting model suggest that the Bank’s monetary policy measures raised the level of GDP by around 8% relative to trend and lowered unemployment by 4 percentage points at their peak. Without this action, real wages would have been 8% lower, or around £2,000 per worker per year, and 1.5 million more people would have been out of work."
Well, lots of us might agree that monetary policy did help to offset the damaging effects of bank and household deleveraging in the aftermath of the worst financial crisis since the 1930s.

Carney suggested that monetary policy also dampened the effect of premature fiscal consolidation when everyone panicked about government deficits in the wake of the Greek crisis:
Fiscal policy quickly came under severe strain as tax revenues plunged, the costs of social benefits rose sharply, and the huge bills for too-big-to-fail banks came due. Since then sustained austerity has reduced the fiscal deficit from around 10% of GDP in 2010 to around 3 ½ % today. While necessary, this has, on average, subtracted around 1 percentage point from demand each year. Over that time, structural policies have boosted participation in the labour market but have been unable to return productivity growth to anything resembling its historic average. For seven years, in the face of severe headwinds to growth, monetary policy has been the only game in town. 
He is probably right. The counterfactual is the Eurozone, where severe fiscal consolidation has been undertaken by several countries without monetary policy support. Eight years on, unemployment remains distressingly high, growth is flat and inflation is negative, reflecting a massive collapse of aggregate demand. The ECB's monetary easing has been too little, too late for countries like Spain, where some of the unemployed have been out of work for over four years. Whole generations have been thrown on the scrapheap because of monetary and fiscal intransigence. Eventually, the price for such harshness will be paid politically.

But the most persistent criticism of monetary policy is that it has, in the words of HSBC's Stephen King, "unfortunate distributional effects". It benefits the holders of financial assets - primarily the rich - at the expense of those dependent on interest income, who are believed to be much poorer, though not necessarily the poorest.

Carney is having none of it. He rejected the distributional criticism of monetary policy on the grounds that savers are also asset holders:
Just 2% of households have deposit holdings in excess of £5,000, few other financial assets, and don’t own a home. So the vast majority of savers who might have lost some interest income from lower policy rates have stood to gain from increases in asset prices, particularly the recovery in house prices.  
Of course, realising those gains is not necessarily easy. Your house may have gone up in value, but you are still living in it. For those trying to live on declining interest income from savings, asset price rises are cold comfort.

But Carney is not having that either. He points to these two charts as evidence that the poor have done better than the rich from monetary policy:

These charts do indeed appear to show that the poorest have seen the largest rises in both wealth and income since 2006. But they are presented without explanation or notes, and they are opaque to say the least. The wealth chart, in particular, is something of a mystery.

The wealth increase of the top two quintiles is easily explained. These quintiles not only own property, they own financial assets - and monetary policy has increased the value of financial assets. But the rest of the chart is much less clear.

Firstly, it shows a very large increase in wealth for the poorest quintile, followed by a sizeable collapse and then a recovery. The Governor says that the wealth buildup for the lowest quintile after 2010 came from brutal deleveraging of property debt. I don't believe it.

This is the UK's wealth distribution in 2012-14, from the fourth and final "wave" of the Wealth and Assets Survey (WAS). The divisions are deciles: the Bank of England has used quintiles, but these are easy to derive from this chart.

Wave 4 of the WAS does say that the principal form of wealth for poorer people is property. However, the survey says that only 40% of those in the bottom half of the wealth distribution own property - i.e. P50 and below. That includes the lower-middle quintile and part of the middle quintile in the Bank of England's chart. Given that only about two-thirds of UK households own property, and the proportion of high-wealth households that own no property is vanishingly small, it is highly unlikely that the lowest quintile (P0 to P20) would include sufficient homeowners for property rises to have such a dramatic effect on net wealth for that quintile.

I think the net wealth changes for the poorest quintile are much more likely to stem from rapid buildup and deleveraging of unsecured debt (credit cards and high-interest loans), followed by renewed saving. This is supported by this statement from Wave 1 of the WAS (2006-8):
25 percent of households had net financial wealth that was negligible: a large number of households at the lower end of the distribution had negligible, zero or negative net financial wealth. 
The poorest 20% didn't have mortgages, they had credit cards and payday loans. And in the deep recession after the financial crisis, many of them defaulted on them. Some had their possessions seized to pay off debts. The few that might have owned houses in 2006 don't, any more. Now, they are free of debt and are beginning to build up savings, perhaps with the help of charities such as Stepchange.

Can monetary policy take the credit for this? Absolutely not. If there had been no monetary policy support, far more of this group would have defaulted on their debts. Under UK law, if debt default results in personal bankruptcy, the individual is not left destitute. Possessions are seized, yes, but the individual is allowed to keep sufficient possessions to support a basic lifestyle. Writing off the debts therefore leaves the individual with net positive wealth. The Bank of England's chart is absolutely correct to show this as a noticeable increase in net wealth for the poorest 20%, but this is not due to monetary policy. It is due to the disastrous 2008 crash, the personal bankruptcies that resulted from it, and the determination of many of this group never to be so vulnerable again. Perversely, monetary policy has if anything impeded the deleveraging of this group and restricted improvement in net wealth.

That said, monetary policy has to some extent protected the poorest quintile from high unemployment and large income falls. So, indirectly, it has helped them to pay off problem debt and start to build up savings.

Now we have explained the wealth increases of the richest and the poorest on the Bank of England's chart. That leaves the lower-middle and middle income quintiles (P20 to P60) - what we might call the "in-betweeners".

These people were not as vulnerable as the poorest group in the 2008 crash. They had higher levels of property ownership than the bottom quintile, less unsecured debt and more savings. But the chart shows that as a group, they have apparently been largely unaffected both by the 2008-10 housing market crash and the subsequent housing market recovery. This cannot be explained by the fact that most homes are mortgaged. Mortgages are nominal, not real. They do not increase and decrease in response to house price changes. When the price of a mortgaged home rises, the homeowner's net wealth increases. So why have house price rises had so little effect on the wealth of the in-betweeners?

My reading of the chart is that it is the in-betweeners, not the poorest, that suffered distressed deleveraging of property debt. The WAS says that much of their wealth is tied up in property: Wave 2 tells us that the average value of their property fell sharply in 2008-10, in some areas by over 8%. But if the aggregate value of their mortgages also fell, because they were paying them off, then the net wealth of the group as a whole would remain the same even though house prices were falling.

Once the housing market started to recover, of course, the deleveraging stopped and new buyers entered the market, all of them mortgaged to the hilt. So although mortgages themselves don't adjust with property prices, rising property wealth for the "in-betweeners" is nonetheless offset by rising mortgage debt. Net wealth for these groups therefore does not rise as fast as it does for richer groups, who are much less likely to be mortgaged and for whom property wealth is less significant anyway. (The WAS says that pensions - notably defined-benefit pensions - are the most important part of the wealth of the top two quintiles.)

Can monetary policy claim credit for this? Not really. The US experienced a much worse property market crash than the UK despite drastic interest rate cuts and large amounts of QE. The reasons why the UK did not experience a housing market correction on the scale of 1990 are something of a mystery, but restricted supply, political support for the housing market through a variety of fiscal initiatives, and the rise of London property as an international safe asset are all important factors.

So now we have a full explanation for the wealth chart. Monetary policy supported the rich - we knew that. It supported the poor to some extent, though it was far from being the sole cause of the large increase in wealth evident from the chart. But it didn't help the in-betweeners much.

Now to the income chart. Once again, it shows a large increase for the poorest. Can monetary policy lay claim to this? No. This is mostly due to fiscal policy. The ONS observes that incomes in the lower half of the income distribution are extensively smoothed by benefit top-ups. Working-age benefits rose from 2007 to 2010, then were cut back sharply by the Coalition government. This should have caused aggregate income in the bottom two quintiles to fall, but the cutbacks were offset by rising payments to retirees and increases in the minimum wage. The resulting income stagnation from 2010-13 is apparent from the chart.

The income chart does show that the incomes of the higher quintiles have been squeezed. But when your own income is stagnating, you feel angry about the rich even if their incomes are falling. The position of the middle quintile is particularly stark: their income was flat from 2007 to 2013. They could be forgiven for thinking that monetary policy passed them by.

So, Governor, I remain unconvinced that monetary policy has been "highly effective". There are many moving parts in this particular machine, and you have ignored most of them.

It is all very well crowing that the poorest have been supported. They have, to some extent, though perhaps not quite as much as you claim. But it is painfully evident that the "in-betweeners" have had much less support. Relative to the rich, they have lost out both in wealth and in income. And relative to the poor, they have lost out too: they no longer qualify for many benefits and other public support, and they are seeing public money going to people not much poorer than them while they are left to struggle on their own. These are people who see themselves as having done everything right: they have worked hard, saved and paid into the system. Now, they think the system has abandoned them. And with reason.

To be fair, it is not the Bank of England that has abandoned them, though some of them blame you for their woes: "in-betweener" pensioners are those who have been hardest hit by very low interest rates. The real failures lie on the fiscal side, and are of very long standing.

The promise of "cradle to grave" support upon which the British welfare state was founded has been systematically dismantled. Now, only the poorest are supported. The neglected in-betweeners are on their own. And their anger is shaking our political establishment to its foundations.

Related reading:

Austerity and the rise of populism
Raising interest rates is not that simple, Lord Hague

Image: "A mouse in between", by Open Graphics.