Tuesday, 18 January 2011

Ground control to Major Murphy

TL;DR Sorry, another Ritchie fisk.

Ground control to Major Ritchie, take your protein pill and put your helmet on...

Yes it is another entry in the logs of Space Cadet Murphy and the S.S. Fantasy Land.

Here is Ritche's original post if you can be bothered to increase his hit count.  I have copied the whole thing here anyway.

So the inflation figures for December came out today. And the analysis from an accounting, tax and economics "expert" is:
...bad. At 3.7% the number is bigger than expected.
Christ, a 5 year old could have come up with that analysis and for a lot less than the TUC plays Tax Research LLP aka Richard Murphy.
But then stand back a minute.  As the Guardian notes (above link)  if you exclude increases in indirect taxation the figure is just 2%.  and if you excluded the impact of the 2.5% VAT increase that has just been introduced for the rest of the coming year, as will be necessary, the figure will probably remain within the target level set for inflation.
 So what we are facing is a situation where inflation has been increased as a result of government policy -  yes, both Labour and Conservative -  and now we are seeing the City bringing pressure to bear upon the Bank of England to push down inflation, even though they also wanted the VAT increase to rebalance the government’s budget.
 So, to translate, Ritchie is saying that if you remove the effect of VAT, duties and the planned increase in VAT (which started in January and should* therefore have no direct impact on CPI figures for December) then inflation is still within the target 2%.

For once Ritchie actually admits that Government policy (past and present) is making the situation worse.
At the same time,  their  chosen policy instrument, an increase in bank base rates, will have no impact whatsoever on this inflation.   When inflation is caused by  a combination of government policy domestically and international raw material price rises ( fuelled by City-based speculation)  downward pressure on consumption  is irrelevant.  That downward pressure already exists because in the current environment of substantial involuntary unemployment,  which can only rise,  there is already real downward pressure on net household income that will already achieve this consumption orientated goal  without further pressure being  brought to bear by increasing interest rates.
 Ritchie obviously missed it last week when the BoE decided that they would keep the base interest rate at 0.5% for another quarter, so the pressure to raise the rates clearly isn't that bad.  Ah, Ritchie's usual scapegoat... speculation.  Ignoring the fact that speculation protects future supply by decreasing present demand (price cycles and so on).  Say for one minute that the City is being detrimental by 'over-speculating', the only reason they can do that is because money is cheap because of low interest rates, they know that the loans they use to fuel trading can be easily repaid when rates rise by selling the stock they have accumulated, the value (i.e. price) of which will have increased over the price they paid.  So when supply starts to pick up again, the price will drop massively because of the stored supplies and the increased production... business cycle theory, wins every time.
The simple truth is that  the knee-jerk reaction of neoliberal economists in the face of inflation to demand that interest rates be increased is on this occasion  wholly inappropriate, as has so often been the case with neo-liberal prescriptions.  What we are actually facing is  a situation where, like it or not, real incomes in the UK may be under pressure because of a fundamental rebalancing of the overall economic equation within the world economy, where income shifts to the far east and the Indian subcontinent and away from Europe.  In overall global economic terms this may be welcome, but if there is a reaction within the UK which sees ordinary consumers penalised for something that is entirely beyond their means to rectify through altering their pattern of consumption the  consequence is that we will, inevitably, see an exacerbation of the fall in household income, and the creation of the environment for a double dip recession, which will inevitably follow.
 Ah... Ben and I have been discussing whether methodological approaches can apply to social sciences like economics.  My answer was that we can be methodological in our approach but we can never say an increase of 'x' in the interest rate will always cause a proportional decrease 'y' in inflation, for example.   Economics, when centrally controlled (true where there is a central bank) is more art than science.  Ritchie doesn't tell the whole truth in the above paragraph; if the base interest rate is increased too much over a short period of time then there is indeed an increased risk of double dip because the economy can't respond to a big change as quickly as a small change.  But the economy and markets mirror one of my favourite chemical principles, Le Chatelier's principle:
If a chemical system at equilibrium experiences a change in concentration, temperature, volume, or partial pressure, then the equilibrium shifts to counteract the imposed change and a new equilibrium is established.
I love it when I can use chemistry to talk economics.

Back to the fisk...
The right reaction  to this situation is to ask what we can do to restore our income, and not what we can do to restore the value of our currency, which is a matter of secondary importance.
 This is fucking rich coming from the man who a few months ago was calling for more stimulus/quantitative easing, i.e. devaluation of currency by printing more money.  One more piece of hypocrisy from Ritchie.
We can of course enhance our income.  We can get people back to work,  in the short  term by government spending, which will pay for itself through increased tax revenues, and in the long term from the stimulus  that this will supply to the private sector which would otherwise not grow.  We can also ensure that  funds invested in pension funds are put to real economic use by demanding that at least 25% of all contributions be used to create investment in new income generating opportunities in the UK economy  as a condition of the grant of tax relief on those contributions. That will put £20 billion a  year into the UK economy. And we can use green quantitative easing to start a programme of investment in the Green New Deal - in itself  capable of generating hundreds of thousands of new jobs in the United Kingdom  and paying for itself through the creation of long-term energy sustainability which supports the value of our currency by reducing our dependence upon imports.
 Ah yes, the great Keynesian multiplier, this argument is invalid when you learn about the "Broken Window Fallacy".  Before proposing increased government spending Ritchie was actually close to a solution.  What Ritchie neglects to tell his readers is that when he says "increased tax revenues", is that the multiplier on government is never above 1, and rarely close to it; so the only way government could actually increase its tax revenue is by increasing said taxes, direct and indirect (don't be mislead here, while the government may appear benevolent by not lowering tax boundaries, with inflation at the level it is and boundaries not increasing in line with inflation they are actually lowering them).  Once taxes start to go up as a result of Ritchie's "plan" then the Laffer Curve will come into play and tax revenues will decrease.

Like the rest of the paragraph, Ritchie's "Green New Deal" is more fantasy tinted with ecofascism.  Internal long-term energy supplies can only be met by meeting the ever increasing base load which no renewable source can meet.
But all this requires a government with foresight  and a willingness to commit our economy to a long-term vision of prosperity based upon the work  people in this country can do for themselves.  Instead we have a government that worries about the value of  rate of return on short-term cash savings.  It is that impoverishment of thought that cripples us.
 Now Ritchie is being an utter retard.  He supports Big Gov (tm), which actively prevents people from doing the work that they can do themselves and forces them into either working for government supporting corporations or the government itself.

As for people's savings, savings in the present are investments in the future.  Present day cash savings are also the capital that banks lend out for people to start businesses, buy houses, etc.
I was in discussion with a shadow minister this morning.  As he said to me,  whether or not Labour gets back into office is not dependent on detailed plans for micromanagement of particular issues.  It is dependent upon it having a meta-narrative that explains why a different economy is possible. That is the policy goal. And he is right on this occassion.
 One Union stooge talking to another, shock.  A Labour front-bencher not wanting to micro-manage private affairs of the people, I'll believe it when I see it.

Now that I have taken Ritchie's post to pieces I'll reassemble them into a better plan.

The biggest cause of inflation is government and its central bank.  Low interest rates and high taxes is the perfect recipe for stagflation so the solution I propose is quite simple:
  1. Cut back government spending, cut the foreign aid budget, stop money going to the EU, kill the quangos.  At the moment it is just money that could be used to lower the tax burden and therefore increase disposable incomes.  We are aiming for small government here.
  2. Raise the tax free allowance to at least £12,500,  then you aren't kicking the lowest earners while they are down.
  3. Scrap the minimum wage, businesses that want and need to hire people now can't afford to because the NMW and NI make employees make expensive.  Ritchie dreams of 100% employment, this is the only way to get it.
  4. Follow Europe's lead and cut VAT (I'll accept a VAT rate of 10% or less), we are the only country that is currently running full VAT at the minute and the only one who has increased it.  Cut all duties, especially fuel duties, watch how businesses boom when they aren't paying so much for transport.
  5. Scrap the marginal 50% rate, these are the people you want to encourage to invest not punish for being successful.
  6. Make income tax easier to administer by lowering it and making it a flat tax rather than a progressive one, no allowances, no time consuming tax returns.
  7. Increase the BoE base rate slowly and steadily until you reach 4-6% to increase personal savings.

* The trend is that inflation is higher in December because it is the main retail month of the year so unsurprisingly shops put their prices up for Christmas.  It wouldn't surprise me if they went up that little bit higher this year so that shops could cover the expected short falls in sales that the VAT increase would bring.  Look here if you don't believe me and see that December is normally higher, 2007+2008 being the exceptions in the last 10 years because of the Credit Crunch.

UPDATE:  The ASI have a short piece that runs parallel to what I have said here.


  1. "which started in January and should* therefore have no direct impact on CPI figures for December"

    Proof enough to discount the guy entirely ... or just have fun as you did & Worstall will forever :)

  2. It's a bit of a red mist issue for me.

    The guy's nonsense makes me so angry I have to tell someone he is being a idiot and a shill (which is worse).

    Since he won't let me do it on his comments any more I have to do it here.



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