An encounter with a bigot

Yesterday I mentioned a conversation I recently had with a member of the Labour Party about the state of the British government’s finances. When I suggested he might be a bit “iffy” on the subject I got the following reply

“Yeah ..a bit like your relatives who took the soup when the going got tough in Ireland and you having “schizophrenic” tendencies over supporting the Cats in GAA when you’re clearly a Prod. You’re just a plastic Paddy”

Some of this might need a little explanation. My Irish ancestors, so I gather, converted from Catholicism to the protestant Church of Ireland at the time of the Irish Famine (about 1850) as the Church of Ireland had a better famine relief program (they “took the soup”). G.A.A. is the Gaelic Athletic Association which was founded in 1884 as part of a revival of Irish cultural nationalism, and the Cats are my team, Kilkenny.

Now, I could explain that I myself am not religious. I could explain that, while nationalist, the G.A.A. has a long history of protestant involvement (indeed, the All-Ireland Senior Football trophy is named after a Prod; Sam Maguire).

But I’ll simply ask this; why should the religious choices of my distant ancestors dictate which sports I watch today?

Beats me. But then, that’s bigotry for you.

Deficit and debt: Does anyone know the difference?

“OK, so there’s the water in the tub…”

In a recent conversation, a Labour Party member told me that the coalition was “borrowing more than we did in power”. I pointed out that this was wrong, that the deficit, what we are “borrowing”, is, in fact, down by a third under this government. He replied: “The deficit may be but the current government is still borrowing more money than the last government.”

You could write this off as simply the pig-headed economic illiteracy of a paid-up member of the party that helped us into the current mess. After all, Ed Balls, Labour’s man on the economy, can stand up in front of Parliament and say “The national deficit is not rising…er…is rising, not falling” (he was right the first time). But then you hear Nick Clegg say that the coalition is working to “wipe the slate clean for our children and our grandchildren”. Even David Cameron himself announced that “We’re paying down Britain’s debts”.

You begin to wonder if anyone knows what they are talking about. I’ve addressed the issue of what exactly is happening to the British government’s finances before but it seems it needs repeating.

We have two concepts here: a stock and a flow. Think of it like a bathtub. The stock is the water in the bathtub, the flow is the water either flowing in or out of the tub through the taps or plughole.

In this analogy the debt is the stock, the water in the tub; the deficit is the flow, the water pouring in from the tap (if our government was running a budget surplus water would be flowing out through the plughole but we’re some way off worrying about that). In other words, the deficit (flow) is the amount by which the debt (stock) is increasing.

Thus, it is possible to have a situation like we have now where the debt is increasing while the deficit is decreasing (imagine yourself turning off the tap and seeing the flow of water dwindle – water is still flowing into the tub). Borrowing is down, what has been borrowed is up.

In the final year of the last Labour government Alistair Darling borrowed £156 billion. In 2012 George Osborne borrowed £99 billion. The deficit had fallen but while ever there is any deficit at all debt will be rising. Another way of putting it is to say that in his last year Darling increased the debt by £156 billion and last year Osborne increased it by £99 billion.

This is why you can have a chart like this…

showing falling deficits coexisting with a chart like this…

showing rising debt.

This might all sound a rather long-winded way of stating the obvious but a ComRes poll late last year found that 49 percent of people wrongly think “The Coalition Government is planning to REDUCE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015”. The correct answer, that “The Coalition Government is planning to INCREASE the national debt by around £600 billion between 2010 and the end of this Parliament in 2015”, was given by just 6 percent.

The British government’s out of control spending is the central issue in British politics today yet there is mass ignorance as to what is really going on with it. In large part this can be attributed to the misleading statements pumped out by the sloppy Cameron and Clegg and the dishonest Balls.

What actually is happening to the British government’s finances under Cameron and Clegg is that the debt is growing and will continue to grow but the pace at which it grows, the deficit, is declining. This is simple stuff even if our politicians struggle with it.

This article originally appeared at The Commentator

Norman Tebbit’s cricket test

Not cricket

You may or may not remember Norman Tebbit’s old cricket test. Back in 1990 Tebbit told the Los Angeles Times “A large proportion of Britain’s Asian population fail to pass the cricket test. Which side do they cheer for? It’s an interesting test. Are you still harking back to where you came from or where you are?”

Predictably this caused outrage. Then Lib Dem leader Paddy Pantsdown condemned the “outrageous and damaging remarks” and Labour MP Jeff Rooker called for Tebbit to be prosecuted for inciting racial hatred, “(Tebbit) is a clever politician using soft language about cricket” Rooker claimed.

Yesterday a British soldier was literally butchered in the streets of London in broad daylight. The man who probably did it, who reports suggest was brought up in Britain, was filmed, still covered in the victims blood, saying

“The only reason we have killed this man today is because Muslims are dying daily by British soldiers.

“And this British soldier is one. It is an eye for an eye and a tooth for a tooth.

“By Allah, we swear by the almighty Allah we will never stop fighting you until you leave us alone.

“So what if we want to live by the Sharia in Muslim lands? Why does that mean you must follow us and chase us and call us extremists and kill us?

“Rather you lot are extreme. You are the ones that when you drop a bomb you think it hits one person?

“Or rather your bomb wipes out a whole family?

“This is the reality. By Allah if I saw your mother today with a buggy I would help her up the stairs. This is my nature…

“Through many passages in the (Arabic) Koran we must fight them as they fight us.

“An eye for an eye, a tooth for a tooth.

“I apologise that women had to witness this today but in our lands women have to see the same.

You people will never be safe. Remove your governments, they don’t care about you.

“You think David Cameron is going to get caught in the street when we start busting our guns?

“You think politicians are going to die?

“No, it’s going to be the average guy, like you and your children.

“So get rid of them. Tell them to bring our troops back so can all live in peace.

“So leave our lands and we can all live in peace.

“That’s all I have to say.

“Allah’s peace and blessings be upon you.”

The chap wasn’t Asian but it certainly seems as though he considered himself ‘other’ than British. Seems old Norm might not have been quite so crackers after all.

First principles on wealth and economic growth

Shanghai – Before and after

In all human history there have been just four ways of securing the goods, services, or the wealth to purchase them, required to maintain life or a desired standard of living.

First, we can receive them freely from others as gifts or charity. Second, we can take them from others as theft or tax. Third, we can borrow them from others with the promise of repayment in the future. And fourth, we can receive them freely in exchange for a good and service we provide in return.

It is clear that the first and second methods depend entirely on someone else producing the good or service in the first place. You cannot be gifted or steal what doesn’t exist. These methods are purely redistributive and add nothing to the available stock of goods and services, the increase of which is the essence of economic growth and increasing wealth.

Method three, borrowing, is fine as long as it is used for investment to increase the stock of goods and services out of which it will be repaid. The fourth method, free production and exchange, is best of all. People secure the goods and services needed or desired by exchanging those they produce for those produced by others. People’s desire to consume more induces them to produce more. The stock of goods and services available, society’s wealth, increases.

All societies engage in a mixture of these methods, different sections of those societies relying on different methods at different times. But it is clear that societies which rely to a greater extent on the first and second method are, at best, shuffling round a stagnant stock of goods; not creating wealth but merely redistributing it.

Societies using more of the third method could be acting wisely if they are borrowing to invest, but if they are just borrowing to fund current consumption then they will be paying this back out of the same (or smaller) stock in the future. Societies more reliant on the fourth method will be increasing their wealth unambiguously.

So we can say that if the aim of society is to increase wealth it ought to be utilising lots of the fourth method, the third method only to fund investment, and the first second method as little as possible.

This throws stark light on the shift in relative wealth going on in the world today. Wealth is increasing in Asia in part because relatively large proportions of their populations are producing things people want to buy. And, in part, the wealth of the western economies is stagnating or declining because, relatively, we have a greater share of our populations receiving the goods and services they need and desire (or the wealth to purchase them) as transfers from others. We see ever more borrowing to finance current spending and ever more redistribution of wealth at the expense of its creation.

If a country has a great many goods and services available it is wealthy. If individuals are able to command a great deal of goods and services they are wealthy. The nature of increased wealth is an increased number of goods and services. The more people we have producing them and increasing this number, as in Asia, the wealthier we will be.

This article originally appeared at The Commentator

The truth about Thatcher and the steel industry

There’s an old saying: “A lie told often enough becomes the truth”. It’s one ‘comedian’ and former Socialist Workers Party member Mark Steel should know well, it comes from Lenin after all, and he certainly seems to be taking it to heart.

Steel’s recent piece for The Independent is titled ‘You can’t just shut us up now that Margaret Thatcher’s dead’. Oh, that we could! Steel has, after all, built a career out of the sort of dated, unamusing jokes about Thatcher that guarantee you steady work at the BBC. Personally I don’t know why the Indy hasn’t given Tim Vine column inches to opine on deindustrialisation, at least he’s funny.

And it wasn’t long before Steel broke out the Big Lie: “in 1980 Margaret Thatcher’s government shut down most of the steel industry, as part of her plan to break the unions”. You hear this argument a lot, as though repeating it will make it true. But a look at the facts shows that it isn’t.

In 1955 the British steel industry was working at 98 percent of capacity. But, over the following years, this declined as a result of its failure to adopt new methods (such as the basic oxygen steel-making process and continuous casting) and increased steel production in other countries. By 1966 just 79 percent of capacity was being utilised.

The following year a large chunk of the British steel industry was renationalised (it had been nationalised for a few years in the early 1950s). In 1970 the new British Steel had a record output of 23.8 million tonnes (4.7 percent of the world total, down from 25 percent in 1929).

But the industry was now being run for political rather than economic ends and massive over-manning and consequent low productivity became endemic. By 1977 output had actually fallen to 20 million tonnes (3 percent of the world total). By 1978 British Steel was operating at just two-thirds capacity. And by 1979, British steel workers were a third less productive than their French competitors and 40 percent less productive than West German steel workers.

In the fiscal year 1978-1979 British Steel lost £309 million. This rose to £545 million the following year, one in which workers struck for six weeks for a 20 percent pay rise. They got it, but my dad, who worked in a steel works in Sheffield at the time, said that by the time they went back to work their foreign customers had gone elsewhere.

In 1980-1981, British Steel lost a staggering £1 billion on turnover of £3 billion, earning itself a place in the Guinness Book of Records. By contrast the output of Britain’s small private sector steel industry doubled between 1967 and 1979, from 3 million tonnes to 6 million tonnes.

Between 1967 and 1974 employment in the British steel industry fell from 250,000 to 197,000. And by 1990 it had fallen again by 74 percent to 51,000. But other developed countries also saw drastic declines in employment in their steel industries in the same period. In France, for example, employment fell by 70 percent, while in the United States it fell by 60 percent. Even Germany lost 46 percent of its steel workforce.

What happened to towns like Sheffield or Corby was not part of some Thatcherite vendetta and instead was part of a general trend across the industrialised world. It happened in the Rhur Valley and Ohio, was Maggie Thatcher responsible for that too?

And given that the British steel industry’s problem was chronic over-manning, which caused low productivity, it is, sadly, fantasy to suggest that there was some painless cure that didn’t involve a reduction in employment.

Indeed, in the following years British Steel recovered. Whereas in 1976-1977 it had taken a British steelworker 15 man hours to produce a tonne of liquid steel, by 1986-1987 it took just 6.2 man hours and that year British Steel turned a profit of £177 million on turnover of £3.5 billion. When the company was privatised the following year it had made a profit of £410 million on turnover of £4.1 billion. By 1997 British Steel was the most profitable integrated steel company on the planet.

So British Steel was not shut down by Thatcher “as part of her plan to break the unions”; it was privatised because it was an economic basket case. Like the coal industry it was dying by the time she got elected.

This is the truth behind the Big Lie. That industries like steel and coal were ravaged is true. That it was painful for those involved is also true. But that it happened simply because Margaret Thatcher wanted to “break the unions” is false.

But maybe I’m missing the point with all this. That was certainly the opinion of some people I spoke with recently when I explained the advanced state of decrepitude the coal industry was in when Thatcher took over. “Oooooooh facts and figures. Go on then, how many miles have you walked in pit boots?” said one. Another said I was “someone who tries to hide behind certain facts and figures without giving the whole truth of the situation”.

It’s a curious argument to suggest one can get a better view of “the whole truth of the situation” by walking around in “pit boots” rather than looking at the entire industry and the economy as a whole. But then these people were from an area heavily affected by all this. For some the strength of that experience, reinforced by repetition over the years, has compromised their ability to examine the issue rationally. This is not to ignore what they say; experience is valid and should be recorded as such, but it should not be mistaken for analysis.

Perhaps Mark Steel isn’t being deliberately dishonest and this applies to him too. I’ve no idea and little inclination to find out. But you can’t blame a guy who trades on hating Margaret Thatcher for giving his routine one last airing. After all, when Maggie Thatcher died so did half of Mark Steel’s act.

I am indebted to the article ‘The British Iron and Steel Industry Since 1945’ by Alasdair M. Blair

This article originally appeared at The Commentator

Britain’s productivity paradox

In 2012 the British economy created 580,000 new jobs yet output stagnated; more work produced the same amount of stuff. Indeed, British workers were producing 2.6 percent per hour less in Q3 2012 than in Q1 2008. Labour productivity is now 12.8 percent below its pre-recession trend.

This phenomenon, of increasing inputs producing an unchanged or decreasing amount of output, which has been christened Britain’s ‘productivity puzzle’, is one of the most perplexing in current economic debate. Indeed, even Nobel laureate Paul Krugman recently declared himself stumped.  

It’s an important debate both politically and economically. Politically, because Labour can point to grim GDP figures and claim the coalition is failing while the coalition can point to impressive job growth and claim they are succeeding. Economically, because increasing productivity, producing as much with less or more with as much, is the root of increasing wealth.

The Institute for Fiscal Studies recently offered three explanations for this decline in labour productivity. First, the fall in real wages thanks to inflation has seen firms retain and/or take on more labour. Second, business investment remains 16 percent below the pre-crash peak giving workers fewer tools to work with. Third, record low interest rates and forbearance on the part of banks is propping up inefficient enterprises.

There is a grain of truth in all these explanations but we might be missing the wood for the trees. Perhaps the actual explanation for the productivity puzzle is both simpler and more profound. Labour productivity is determined by two things: the skill of labour, and the quantity and quality of the capital at the disposal of that labour. On both fronts Britain has done pretty poorly.

Britain’s labour force is losing its qualitative advantage over others, notably in East Asia, thanks to a hideously dysfunctional state education system. According to the Programme for International Student Assessment which compares students across countries, in 2000 Britain ranked 7th in reading, 8th in maths and 4th in science. By 2008 it had slumped to 17th in reading, 24th in maths, and 14th in science. Any measures which can improve this dismal performance could be expected to improve British labour productivity in the longer term.

It is a similar story regarding the capital available to its workers. In 2001 it was estimated that a British worker had 25 percent less capital to work with than an American worker, 40 percent less than a French worker, and 60 percent less than a German worker. Why is capital so vital and how might we get more of it?

There are two types of goods: capital goods and consumption goods. Consumption goods are those that immediately meet our needs, what Carl Menger called “goods of first order”. Capital goods, what Menger called “goods of higher order”, are those which meet our needs indirectly. Bread is a consumption good, the flour and the milling stone (among others) are capital goods.

If our need is to eat we can satisfy it immediately via the labour intensive method of picking apples from trees or berries from bushes. Obviously this source of food would sustain very many less people on much more monotonous diets than we have today. We are able to eat more and better because we have capital which enables us not only to produce and consume more but also to produce and consume things we couldn’t have before with purely labour intensive methods.

Thus, to borrow Murray Rothbard’s example, Robinson Crusoe could pick 20 berries per hour from a bush by hand but could shake 50 berries out in an hour with a stick. Alternatively Crusoe could make the milling stone, grind the flour, and undertake the other capital production needed to make a loaf of bread. He could enjoy something he couldn’t enjoy in any quantity at all previously.

But making the stick or the milling stone will take time, time we cannot spend either picking berries or relaxing. We must forgo an act of consumption, either of berries or of leisure. We must save, in other words. This is the essential truth of capital accumulation; it comes from saving.

So does maintenance of the capital stock. To borrow from Rothbard again, a truck with a working life of fifteen years which makes 3,000 trips can be said to be using up 1/3,000 of itself each time it participates in the transformation of bread from ‘higher order’ wholesale to ‘first order’ sandwich. If saving is not undertaken to allow for the replacement of the truck at the end of the fifteen years this production process will cease. The capital, the truck, will have been consumed in every loaf it carried on those 3,000 journeys.

This is why countries that grow rich are those that save; they accumulate the capital per worker which enables them to produce ever greater amounts. In the late 18th century British textile workers earned six times what Indian textile workers earned because they had the capital goods to make them six times more productive. This is why we see saving nations in the Far East becoming wealthier as we wonder how our current standard of living will be maintained.

Britain, meanwhile, has some of the lowest savings rates even in the generally savings-averse developed world. We are seemingly attached to the Keynesian idea that consumption, rather than something we do when we are rich, is something we do to become rich. We have a government which can hand out leaflets on budget day telling savers they are on their side while turning a blind eye to quantitative easing and 0.5 percent base rates.

The result is that by deskilling and capital consumption we have become a lower productivity, lower wage economy. There is only a puzzle because we are reluctant to face this grim truth. Greece was recently reclassified as an emerging market. Might Britain be on its way to joining her?    

This article originally appeared at The Commentator