Sunday, May 05, 2019

Richard Werner is doing better than Benjamin Franklin

Do you like the idea of the prosperous life which the politicians promise? Last week in Leicester an economist showed an improved way of releasing prosperity. Point by point he showed that the 10 conditions generally deemed necessary for sustainable growth are misleading. He also showed that whilst  this conventional, western, economic set of rules has been  hopelessly unsuccessful, an alternative has been running for a long time and has proved a stunning success. 

Prof Dana Brown, Founding Principal and Dean of the Business School at De Montfort University Leicester introduced Richard Werner, Professor of Banking for his inaugural lecture. DMU supports the United Nations Sustainable  Development Goals, in particular  - G16 Justice and Strong Institutions. The economics and banking aspects of this is what Werner delivered as he took us comprehensively through basic economics and banking principles. 

His argument firstly demolished the assumption that in order to develop sound, sustainable economies governments must follow the 10 policies of the Washington Consensus. These include: austerity, fiscal deficit reduction, privatisation, the opening up of currency flows, free markets (deregulation, e.g. sell your assets to foreign buyers at knock-down prices) and several other items of accepted 'wisdom'. These ideas for promoting structural changes within developing countries in particular are repeated like religious mantras by chancellors of the exchequer, secretaries of the treasury, the IMF, the World Bank and the like. The terms were conditional to IMF 'help' to developing countries in 159 cases from 1973-1994. Werner exposed these conditions as unhelpful to good economic outcomes, and showing that the actual outcomes can include the transfer of power, advantage and control to external entities. His purpose was to show how the most spectacularly successful economy on the planet for the last 30 years tried quite different methods. The title of his lecture was:

Paradigm Shift. How to get sustainable, stable, equitable and high growth. Is everything wrong they ever told us about how economics works and did Deng Xiaoping get it right?  

The bedrock of his talk was how banking works by creating credit (money) out of nothing i.e. how they make the loans.  They don't wait for depositors to bring their money in and then lend it out, they just create the money themselves when asked for a loan and then lend it. As Werner has discovered in studies of Japan and now China, as long as general central direction is given that the loans should go into the productive economy (making things, invention, product improvement, et al) this is not inflationary, and the economy then runs sustainably for as long as the overall policy is followed. 

On the contrary what typically happens in western countries is that banks prefer to lend for speculative investment such as for land and built property (real estate), shares and other financial assets, all of which are outside the Gross Domestic Product (GDP) part of the economy. As he explained the power in such non-GDP lending lies with those who hold assets where there is a shortage; thus with more borrowed money funnelled into a market, prices rise, governed by the fundamental  principle: higher demand & short supply brings price rises. Thus for deals involving land assets (e.g.  existing houses) the land value component rises raising overall house prices; assets such as shares are in limited supply and again, prices rise.  This brings the familiar price boom and bust cycle of western economies - caused by unregulated credit creation for assets in short supply. Eventually the speculative side of the boom gets out of hand and then early speculators sell up and banks find they have too many non-performing loans as the asset prices ease and a crash develops, which brings recession and job losses.

However if investment into the productive side of the economy were encouraged GDP would grow, bringing jobs. Careful management of the financial side of the economy is needed or  inflation can occur as consumers raise easy credit. The sudden demand for limited goods and an inadequate supply can bring price rises. The typical western unrestricted, free-for-all method of the Washington Consensus does not bring sustainable economies, as we all know.       

Werner spoke of his findings on interest-rate-setting by central banks. With a colleague Kang-Soek Lee, he has proved that the western central bank assumption: that  interest rates cause growth is wrong. What happens is that growth drives interest rates, thus high growth brings high interest rates and low growth the reverse.  Thus whilst central bank committees  deliberate for hours over interest rate setting, thinking they will coax the economy into life or damp it down, what they should seek out is what really drives the economy - the  causes and not the effects. Will they heed what Deng Ziaoping  set in train in 1978 when he said China would 'seek truth from facts'. Deng was a pragmatist and gave a new direction to his  country and was prepared to try whatever worked. Werner said what is called in the west 'the Chinese Miracle' is a misnomer, it is nothing of the sort. What China has achieved is sustained growth through clear repeatable policies and actions. A miracle has no naturally observable cause.

Recessions can be ended quickly by central banks. Ben Bernanke actually did this correctly after the credit crisis of 2007/8 as the US FED bought up US banks' non-performing loans at face value (not written down value)  and cleaned up their balance sheets, enabling them to lend.  This happened very rapidly as seen from a chart of the US Federal Reserve's balance sheet , with GDP growing within a year.
   
He examined the idea of equilibrium in markets. Assumptions are made: that markets being perfect, prices adjust instantly, and that markets clear automatically; that there is perfect competition; that all players are rational; that perfect information is available. These are all impossible and it is quite wrong to base policies on them. The Chinese way has been to accept the truth that markets never clear, rationing always taking place, so their government intervention is not a 'distortion', as believed in the west, but an essentially good thing to do, so that bad market outcomes are addressed. Markets are in pervasive disequilibrium Werner stated. He said that believers in equilibrium in markets (he listed 8 'features') were outdoing the Red Queen in the Alice in Wonderland fantasy novel, who sometimes believed '6 impossible things before breakfast'.

He challenged Washington Consensus believers to examine the outcomes of their conditions for sustainable growth. There is not a good track record compared with the Chinese case. One fundamental failing of western economics is the absence of textbook studies on money and clear statements that the creation of virtually a country's entire money supply, is through private banks, out-of-nothing. Until he carried out an empirical study no one had ever checked this money creation out-of-nothing theory. The result can be read here and became a most downloaded paper from Elsevier.    

A hopeful thing is that bank credit creation is a game changer for any country. With their own currency and banking system they have no need to borrow foreign currency. Their own local banks can create the credit needed in their own currency and lend it locally. Indeed, Werner demonstrated that even incoming 'foreign loans' remain in the jurisdiction of the issuing bank's country, and are merely matched by an accounting procedure in a local bank. When gold was shipped around the world in earlier times there were capital flows, but not now. All that flows is the control of the borrower's assets to the lender.  

China has thousand of local small banks so that credit is made available where the new jobs are going to arise, as the central policy of productive investment is encouraged. By contrast the UK has only 4 or 5 huge centralised banks which leaves a hopeless mismatch of the credit supply needed for the thousands of small businesses scattered over the country that will produce the new jobs needed for a sustainable economy. Werner said big banks naturally want big deals, small business need small loans which are proportionately too much trouble for big banks to bother with.   

Japan in 1945 followed the above methods and, hoping for a doubling in national income within 10 years after war, achieved that in 4 years and enjoyed  15% year-on-year growth for decades following. China adopted principles from Japan, of investment directed towards production in the late 1970s and had over 7% growth in GDP in most years for decades. By contrast Soviet Russia tried centralised direction of the economy but having only one main bank it failed to achieve a thriving economy at all.

Werner ended his lecture with a Q & A session and appealing for a local community bank in Leicester patterned on Hampshire Community Bank which is near to achieving its license.  No staff bonuses - just reasonable salaries, a charity is the ultimate owner giving towards local good causes. Such banks should follow the German local bank models which for more than 100 years: 

  • have never needed public money to bail them out
  • have never failed paying out customer deposits 
  • have under 3% non-performing-loans 
  • and provide 90% of SME loans in Germany.  

Local community-type banks have a great public appeal as they are based on relationships and trust - as was experienced in earlier times in UK banks. Werner showed that the prospect for new style local high street banks for the UK is good.

So, how do we consider startlingly different ideas that come from another culture such as  the economic success story of China? We are not fussed about buying their  goods, so why would a different way of doing economics from China be any different? UK politics is drifting to the left as Labour advocates more state intervention and as their poll ratings gain, perhaps the time is coming when economic lessons from Japan and China are becoming acceptable. Richard Werner wrote Princes of The Yen which details his findings as to how Japan ran its economy.      

A somewhat parallel story to this from 250 years ago is in The Times on 2nd May Paul Simons: 'Weather Eye.  American sailors discovered the powerful North Atlantic Gulf Stream flowing from America to England. British mail ships faced this as a counter-current on the journey to the America which slowed them. American ships found their voyages to Europe were up to two weeks shorter as they took advantage of the current. Benjamin Franklin, co-founder of the later American Constitution tried to publicise this navigation scenario.  Despite plotting the current on charts and delivering them to the Admiralty in London he was ignored. Franklin's cousin, a whaler who used the current, told him that the captains of the mail ships ''were too wise to be counselled by simple American fishermen''. It is thought that this blindspot disadvantaged the Brits in the following American War of Independence through delays to supplies and communications. The Brits lost that war. 

Werner's audience listened spellbound as his iconoclastic intellectual tornado swept through. Dean Dana Brown seemed impressed. But will there be a Bank of England governor and a Chancellor of the Exchequer who will grasp this economics nettle to reshape the economy with its banking system for the general good? Deng Xiaoping got something right about economics and decentralised banking.  With one community local bank nearly ready for the UK the hope of a more stable and sustainable prosperity might be coming, especially if the wider message from China is heeded. 
  
Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom
Director of Local First CIC - Promoting Local Banks.       

Tuesday, April 30, 2019

Richard Werner Inaugural Lecture 1st May 2019 6pm. De Montfort Leicester

NOTE: see following blogpost for report
Professor Richard Werner is to deliver an Inaugural Lecture at De Montfort University Leicester on Wednesday 1st May.

Title: Paradigm Shift - From how we do economics, to our understanding of how money and banking work, to global development policy and achieving sustainable growth.

Venue:Hugh Aston Building, postcode LE2 7DP .
Time: Doors open 5.30pm for 6pm start with drinks reception following from 7pm.
LINK to book your place: De Montfort Leicester and find 'booking form'

We will be exhorted to rescue Alice from Wonderland economics and get her to face reality. For at least 50 years in the West we have been told economics works in a particular way but meanwhile The East Asian High Growth Economic Model has been showing that sustainable green growth is possible without inflationary effects. The economic world is changing its centre of gravity to a new China, Russian, Indian, African bloc. People with openable minds are invited to attend the lecture.

posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom       
  

Friday, March 22, 2019

May election, Mrs May. Let the people have their say.

The House of Commons has not yet been allowed a free vote on variations of Brexit in order to achieve a consensus. Whether that would enable a Brexit deal that would satisfy the EU is a moot point, but it is to the shame of government that such an attempt has not been allowed. The current circumstance of a hung parliament would be expected to weaken the government but in not allowing a free vote on variations of Brexit it is actually displaying strength - maybe (final/last gasp?), stubborn strength - but it is having its way. It is ruling. 

What we are going through is an aspect of our elective dictatorship that Lord Hailsham in the 1970's pointed out is the nature of  much UK government.  Usually the phrase demonstrates that with a large majority a government can do what it wants given the party whipping system. In the current Brexit crisis the executive - i.e. PM Teresa May plus a few helpers - is very much in charge of negotiations despite not being able to achieve the outcome desired. Obviously it looks to be a 'skin of your teeth' hold on power now, but the years since the EU referendum has shown the domination of the negotiations by a very small core of the executive controlling the important issue. Parliament has not been able to challenge the negotiations, or find out what direction it has been going in to redirect  it before it reached the pass we are now in. Much time has been wasted and with it negotiating advantage possibly irretrievable lost.

An ideal way to test the latest opinion about the EU is for the Brexit dealings to be paused or stopped  and for the UK to join in the EU elections on May 23rd. This would reveal  public opinion through as many ways as the number of candidates standing.  There are 73 UK seats in the European Parliament and there would be a wide choice of manifestos available and preferences would show up in the proportional representation voting system. It would provide the latest snapshot of UK opinion and give detailed insights as to the shape the final Brexit deal should be - if Brexit is what the UK still wanted afterwards. It would get over the need for a second referendum which would take many more months to organise beyond May and brings its own problems such as: which question would it ask?

In the EU 2014 election turnout for the UK was 35.6%. For a UK 2019 EU election turnout would surely rocket.  The May EU election is a very convenient junction in the long Brexit road which would allow the government to stand back and let the people have their say. A clear, new UK mandate about the EU is within reach. 
Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom. 

Saturday, February 16, 2019

Ed Conway, unusually has blinkers on. About Basic Income.

Horses are sometimes given blinkers around their eyes to prevent them from being spooked by their surroundings. Ed Conway in a recent Times article  (Feb 15 2019) Shiny new toys are beginning to look tarnished investigates recent researches on universal basic income (aka; citizen's income; citizen's royalty) which he says is growing in appeal 'a darling of both the hard left and libertarian Silicon Valleys types'. But he comes out against the idea for poverty alleviation, quoting the International Monetary Fund and following their assumption of UBI 'Bolted on top of the current [welfare benefits] set-up'.  Apart from this simplistic reform he does not investigate how UBI might work along with other changes.

But Ed Conway can get quite far-seeing. Recently he suggested land value tax in place of business rates and a negative income tax to make work pay.  Times Oct 26 2018: Here's the radical bucket-list budget we need. So why the blinkers now? Try looking at land value tax / income tax reform along with UBI?   It is easy to put down UBI as John Kay did some time ago, see this blog , if you choose a narrow focus and don't allow your mind to wander. But isn't this what we need our commentators to do? A deeper look is needed at why the wealth of our society is getting out of balance over the generations. A more holistic solution is needed than picking off individual reforms as unworkable alone. 


See this 2 minute video for more information from the Citizen's Income Trust.  
posted by Charles Bazlinton. Author: The Free Lunch- Fairness with Freedom. An investigation into citizen's income and other reforms to empower people. 

Sunday, December 23, 2018

After the long Brexit eve, a brighter post-Brexit dawn for citizen empowerment?

The eve of Brexit extends now to two years, but how long yet? Since the referendum we have  been in a state of flummox. The bewildering closeness of the pro-Brexit vote in 2016 is now no more decisive, as a perplexed House of Commons tries to decide on the merits of Mrs May's EU leaving deal. Admittedly such a complex thing as a divorce after 40 years between a largish nation and a larger conglomeration of 27 more is bound to be protracted, and any deal bringing a 'satisfactory' outcome for both sides will get brinkmanship added to the bewilderment. So not much hope for a smooth and speedy deal.

Meanwhile urgent matters outside the all-absorbing black hole that is Brexit are neglected. The Universal Credit rollout continues to falter, and volunteer food banks (e.g.The Trussell Trust) get busier relieving the poverty arising from government failure to think the UC project through. Deaths of street beggars have increased with the average age of death of people in their early forties. These are shocking facts. As Bishop David Walker stated on BBC Radio 4 today  (appx. 3 minutes in): The reason so many are increasingly on the streets is they are 'simply there because they are poor'. They are falling through the holes in the welfare safety net, and clearly UC is not helping. The long eve of Brexit is being characterised to ordinary people by such as a parliament fossilising into a prolonged talking shop on only one subject and steadily rising deaths of beggars on our streets - a symptom of a failing welfare system. If such things happen in a relatively benign economic scenario imagine the challenges when a downturn comes. If over 600 MPs and their staff cannot sort out such fundamentally vital human problems is not our democratic system under question? A government with a large majority can choose what it will do, our government has no majority so why can't MP's combine cross-party on non-Brexit essentials?  

The shelving by government of new drone regulations in early 2018 has brought us this last week to the closure of Gatwick airport apparently through one nuisance drone. This bizarre aggravation just adds another notch to the failure tally of a government refusing to, or incapable of, focus on anything outside Brexit. UK people are being extraordinarily patient.

David Walker: The reason so many are increasingly on the streets is they 
are 'simply there because they are poor' 

The Conservative government is running scared of Labour waiting in the wings to take over and tries to frighten everyone of the possibility. Mrs May, having declared her, albeit deferred, resignation as party leader is now a self-wounded warrior leaving no obvious candidate to lead into the next election whatever Brexit deal triumph she may be able to surprise us with.

It seems Labour is aligning with issues the public feel need sorting:
  • affordable housing to bring a lost generation of renters into home ownership 
  • re-nationalisation of railways and water to stop the gravy train of top management and shareholder rip-offs at the expense of consumers
  • the scrapping of universal credit to set in place a fairer system 
Let's hope what they are planning are long-term solutions. Look no further than this blog for:
  • monetary policy so as to buy up utilities with fiat money at no interest and debt (this blog Dec 15, 2017)
  • the replacement of Universal Credit with non-means-tested Citizen's Income (this blog Jan 10, 2018)
  • the funding of Citizen's Income through land value tax, matched with income tax reduction (this blog Jan 30, 2018). 
Will there be a brighter post-Brexit dawn? If Conservatives can't get the vision and leadership for citizen empowerment maybe Labour will. Something must be done. 

The Free Lunch - Fairness with Freedom  UK £3 (post free). 

Wednesday, August 08, 2018

Alan Greenspan cold shouldered Richard Werner and set back economic progress for decades

Central bankers speak in very measured ways as they pronounce on important things such as the likely track of the national or global economy, Brexit or reading the runes about future interest rates, but what are they really up to? Are they truly working for the best interest of each of us? The Bank of England set its base rate at 0.5% in 2009 which lasted for years until a Brexit dip to 0.25% in 2016/17, and last week it went up to 0.75%. Well paid officials and back up teams deliberated over this inactivity for nearly a decade. But you might say democracy is expensive. But is it democracy? Are central banks answerable to us or anybody? Is there an agenda in central banking that we don't understand? 

Professor Richard Werner who revealed the hidden workings of the Bank of Japan in his best selling book Princes of the Yen published in 2001 in Japan, has just re-published the book in a new English edition which includes a chapter that was missing from the 2003 US, English language edition. Before that US publication he became aware of a problem over one chapter in the original Japanese language edition. It related an interesting story about the US Federal Reserve's then chairman Alan Greenspan. 

Werner is renowned for his clarity on banking and he explains these for the non-expert - and for the uninformed expert - in a series of short videos.  A key banking fact is that ordinary banks create by themselves most of the money we use in society, out of nothing. They don't wait for deposits to arrive before being able to lend. They create the money, lend it to their customers then it goes into general circulation - a new deposit arises in the borrower's account at the point of loan creation so everything balances. In the UK, only notes and coins come from the Bank of England itself the rest of the money is from private banks. It has taken a lot of Werner's career so far to get acknowledgement of this money creation fact officially stated and it is only belatedly, in 2014, that a UK chancellor of the exchequer George Osborne admitted it.    

The offending chapter was that Alan Greenspan had discovered the bad effects promoted by the Fed central bank in the 1920s, which had encouraged excessive and unwise credit creation by ordinary banks. He published his findings in a 1967 paper: 'Gold and economic freedom'. And this is just what Werner discovered about Japan in the 1990s! Werner relates how Greenspan in his paper, had shown how the US Fed both allowed the 1920s bubble to arise though unwise bank lending; and then failed to prevent the Great Recession of the 1930s 'the lost decade' when it could have kept banks solvent and encouraged the flow of money into the economy. What happened then was that the political understanding grew that the banking system was powerless (wrong, it was just malfunctional) and that the government needed to take more control to get the economy moving (only needed because the banking system wasn't working benignly). This led to new federal taxes and the growth of centralised control through the New Deal the effects of which endure.      

Werner relates about his personal dealings with Fed officials and a brief encounter with Alan Greenspan when Greenspan fully acknowledged Werner's precise findings which he had studied for himself. He then embarrassingly blanked him and moved away from further conversation. 'I received the cold shoulder. I began to realise that central bankers did not like my work. I was spilling the beans on their actions'.

Werner considers Greenspan's embarrassment arose because since the 1960s he had been captured by the same power at the heart of central banking he had observed in Japan and recounts so tellingly in Princes of The Yen. For, in his time as Fed chairman 1987-2006 Greenspan behaved as the 1920s Fed had done earlier. He frequently majored on interest rates, which as Werner says are not the determinant for economic growth whilst the quantity of productive credit creation is. Soon after he retired the world economy suffered the financial crisis of 2007/08  'triggered by Greenspan's policies'  (see Foreword in Princes of the Yen). 

Werner has much to show in the new Foreword and in the missing chapter about how central banks should operate and also how they should not operate. One of his key ideas is that many local banks should be encouraged to form and supply credit to local businesses and local institutions. Central banks should encourage the growth of lending to productive businesses and employment and discourage lending to the speculative buying of assets.

See my and other reviews of Princes of the Yen, the book is very readable and insightful. Every politician bothered enough to want to bring a better life for their voters should absorb this story which needs to affect future economic policies.       

Greenspan knew what went wrong in central banking in the US in the 1920s and 1930s and failed to practice his insights when he was able to do so. Nearly 100 years of less than optimal economic and financial policy with crashes have ensued from those times. Are central banks democratic? Do they work for the interests of all? 

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom. Director, Local First CIC , Promoting Local Banks
     

Monday, May 28, 2018

Rev Michael Curry & that Harry/Meghan address. What's not to like about Fairness with Freedom?

Rev Michael Curry might have flung a door open for over a billion people on 19th May 2018 through his talk at the royal Harry/Meghan wedding. The intriguing possibility that society might be transformed through following 'love your neighbour as yourself' - 'the good of the other, for the wellbeing of the world, for us' unexpectedly showed up on a hot sunny Saturday in, of all places, an English royal palace. The setting was gilded with centuries of privilege. His inspirational words were like a honeyed dream which we do not need to wake up from because they are grounded in a deep reality - at least for those who want to be  awake to the possibilities. And the media is still echoing the Michael Curry impact. The root of the love the Reverend spoke of is in the unconditional love of God for the world as encapsulated by what Jesus achieved and by 'love of neighbour' and its guidelines from Moses for running a society - which Jesus gave his full backing to. 

The book The Free Lunch - Fairness with Freedom has the same theme. Anyone challenged by Michael Curry to reform society - by setting new standards for fairness and for freedom for more of us than can afford freedom now, should read it.

'Love your neighbour as yourself', is not just about giving more to charity. The issue is too demanding for that. What is needed is for the creative efforts of everyone to be channelled fairly to everyone, as all are given more freedom to be themselves. Charity was only a backstop under Moses' principles and most modern national welfare is effectively  institutionalised charity which is becoming far too big to be affordable. We should move towards a scenario  where there is less neediness to be solved by patronising donations. What is essential is a fundamental citizen-based fairness combined with a new freedom for all. 

The key for this is not an unfeeling set of rules. What is needed is feeling. How would you feel under the circumstances of the 'other'? Love your neighbour as yourself.  Fortunately the tide seems to be turning slowly, Tear Fund  a noteworthy charity is pressing for such reforms as The Free Lunch advocates. 

The Bank of England acknowledges the principles of monetary reform advocated by Huber and Robertson  (see page 44 The Free Lunch) and Prof Richard Werner, which would lift a financial burden from every citizen. Archbishop Welby is on the hunt for comprehensive economic justice which 'love your neighbour ideas' ideas would start to meet: Welby's Wishlist for Fairness  

'Love your neighbour as yourself' is not a mere comedic catchphrase, it's origins are philosophically founded in ancient, human, spiritual wisdom and has possibilities that would transform fairness for society and extend treasured freedoms to all, rather than just for the currently privileged. To follow such a paradigm would not only benefit the poorer with material benefit but would be doing the rich a spiritual favour, because as Jesus said: 'How hard it is for the rich to enter the kingdom of God'.  

A wedding. An enjoyable coming-together of two people, family and friends, and a Bishop who trumpeted an old idea to a global audience. Beyond the select wedding crowd in St George's Chapel, Windsor Castle, his 'love as fire' theme could just catch on for the common good, anywhere.

The Free Lunch - Fairness with Freedom  UK £3 (post free). 

Monday, March 26, 2018

Digital subscriber royalty: Facebook & Amazon. A Basic Income resource for the people

John D Rockefeller, through controlling oil supply, and Andrew Carnegie through steel supply, created hugely successful enterprises that grew on technological advances and expanding markets.  In largely controlling the market (i.e. monopoly), they were able to amass vast fortunes through the control of prices.     

The Free Lunch - Fairness with Freedom explains how such unfair situations can be resolved beyond anti-trust and fair competition laws - (which Rockefeller manipulated in his favour) and beyond the heavy taxation of profits (which accountants can conceal).  The book shows how to deal with natural and commercial monopolies which arise when people want a share of the good things of life which are held by a minority. Including such things as land, bank money creation, minerals, technological advances such as radio spectrum, etc.   

Hardened champions of capitalism might allege that the 'the market' must have free rein to bring the good life for all and thereby solve the socio-economic problems of poverty along with a fairer distribution of wealth achieved through tax. The last 20-30 years at least shows that they are misled and mislead. Some markets have a basic fairness about them with fluid supply matching flexible demand and steady or openly adjusting prices - the ideal world. But a free market will never bring fair distribution and  reasonable prices in a monopoly situation. 

In the case of land for instance, where everyone has a desire to have a home; due to our highly developed cities where high values relate to high demand, not many people can be satisfied. The way to tackle the land monopoly is to tax the value of land each year everywhere, use it for public goods and services and, or, distribute the proceeds in the form of a regular basic income. The tax, a type of rent paid by the freeholder (to the state that guarantees the owner's title), would resist the monopoly forces which now deprive many people of reasonably priced places to live. It would induce a greater supply by lowering prices, whereas schemes such as Help to Buy only add to demand by pumping in more money - with prices maintained or rising. 

The book examines several monopoly situations that could be addressed in a similar way.  To the list can now be added what is happening as the internet giants of the past 20 years are coming of age and clearly paying very little tax. Philip Aldrick writes about this in The Times   'In the era of digital monopolies we are being taken for suckers' . He examines the way our personal data is being harvested free and sold on, bringing huge profits for such as Google, Amazon, Facebook, etc. 

According to the principles outlined in The Free Lunch for monopolies there could be a case of the state charging these near-monopoly digital firms relating to their national user numbers and distributing it in the form of a basic income to all citizens.  The value of the product they are handling, our data, has arisen purely through our initial action of signing up so it is a fair deal for us to be given a share of the profit we are the origin of. 

It might also make the data privacy issue clearer so that if I were to take an annual fee for signing up with Facebook I would also sign up to allow Facebook to crunch my data for sale to others.  Facebook makes $16bn net annual income of which say a 33% fee (appx $5bn) divided by an estimated 2bn users worldwide would give subscribers $2.5 dollars pa. Not a lot, but given the total income of the digital giants is around $100bn the aggregate fee for most people could be over $12 pa, merely considering the new digital firms.  But digital marketing information capture started with digitally-read plastic loyalty cards, so clearly any firm or organisation attracting subscribers can exploit customer data for profit and should acknowledge that potential with a annual royalty to the subscriber.  Thus to be fair to the digital giants (they are not a special case) any profit-oriented organisation or even non-profit wanting to sell on personal data should give a royalty to the subscriber.     

Our society is now dependent on the digital way of business - Amazon, Facebook, banks, utilities, retailers, etc, etc,  - so it would be invidious to merely select their own subscribers for the basic income payback. What is needed is for governments to receive the income stream, from a digital subscriber levy or royalty on every listed subscriber and to pass it on as a part of a national basic income scheme (a.k.a. Citizen's Income; Citizen's Royalty). 

To quote the book, The Free Lunch, wealth sources arise:
  'a successful society generates them...are usually limited in supply... are vital to modern living, they are in high demand and are valuable'. 
This new digital wealth source arising entirely from us as individuals and from our actions is waiting to be appropriately redirected back to us via a basic income.  Taxation justice for digital monopolies would start be addressed. Such is a way to a fairer society. 

The book is at a new special price of £3 inc p&p UK      

Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

Tuesday, January 30, 2018

What John Kay & Citizen's Income Trust agree on about basic income

Professor Kay thinks basic income for all (not means-tested / tax-free / regular) is unaffordable. His article  (Intereconomics 2017/2) carefully analyses several international proposals, but it does not take full account of the work of the UK's leading advocate for basic income the Citizen's Income Trust. CIT is confident that their revenue-neutral scheme would make a positive start on the road to a larger regular income than their initial scheme allows for. As they say in their critique of John Kay's investigation: 'What matters is the direction of travel'. CIT's scheme retains many existing welfare benefits - essential due the the low level of basic income needed to be revenue-neutral, but it is only a start. John Kay seems to assume a full 'living wage' basic income must be affordable immediately or he won't consider it relevant: 'basic income is a distraction from sensible, feasible and necessary reforms'. Both he and CIT acknowledge there could be sources of revenue yet untapped for a full basic income, but whereas Kay shies away from the political difficulties of that, CIT sees the start of an evolutionary reform away from the complexities of current welfare and its disincentives to work         
One effect of a citizen's income is that some will use it to pay for better housing with rents and house prices likely to be pushed up. It is fairly clear that the incentives given out by recent governments to first-time buyers are a factor in rising house prices. A new source of income from a regular basic income would enable buyers to afford larger mortgages thus adding to the price hike. For every new £100 per month available at 2% interest another £20,000 of mortgage is freed up, driving straight through to rising prices and rents.

This blog has always advocated an holistic approach to citizens income to prevent bad side effects. After all if the housing market is encouraged to let rip even more through a basic income aimed to alleviate poverty, what help is that to the poor?

This is not the state planning for citizens
but citizens planning for themselves, 
empowered through a basic income.

To block that perverse effect of such a benign thing as basic income, what is needed is the levying of land value tax. This to be charged annually on the underlying land value of the building + land plot. It would have a braking effect on house prices as property owners who could not afford the levy would sell. Mortgage providers whilst assessing the added basic income would have to consider the expense of a regular land tax levy and this would reduce the potential of greater credit, which would lead to price restraint, and not, like the government help-to-buy schemes, a price bubble. 

The levying of LVT would raise a fresh source of government revenue concentrated at the higher property value end (see below). It would address the acknowledgement by both John Kay and the CIT that more revenue is needed to make a basic income more effective against poverty. The national pot to run a comprehensive welfare system founded mostly on basic income is currently limited. But the time is approaching when the the huge shift of younger people excluded from property ownership through unaffordability, will translate into a ballot box revolt in their favour. If we are to continue to believe in a fair society, the haves - the larger property owners - sitting on the accumulating nest-egg gains in their land values, will eventually have to release some of these sooner than at their demise through estate duties.

Land values, as clearly spelt out in The Free Lunch - Fairness with Freedom arise from the efforts of us all and are a common resource to be shared. A good start to implementing LVT would be to make a regular charge on a percentage (say 25% representing the land) of the property's value. For political acceptability the overall charge per household would need to be cost neutral for the bulk of hometypes: thus whatever was paid in LVT would be an allowance against a homeowner's income tax. Those in high priced properties having lower earnings would need to consider selling up which would bring a downward pressure on the market and help alleviate the housing shortage. The net LVT raised would go towards increasing the basic income for all. As well as estate duty, transaction taxes such as Stamp Duty could also be abolished and bring a new liquidity to the housing market to the benefit of those needing larger accommodation but prevented by the existence of many under-occupied homes. The Annual Tax on Enveloped Dwellings owned by companies is legislation that taxes total property value and would need modifying to catch land value only, to adapt it for LVT purposes.   

For the hard case of property-rich / income-poor homeowners with a liability for LVT greater than their income tax liability a deferment scheme should be allowed so that the accumulated  LVT would be a registered charge against the property, payable on the next sale.  

Whilst we must be grateful to John Kay for crunching the numbers, the philosophical and moral case should be addressed. The Free Lunch - Fairness with Freedom  makes the case for putting the citizen at the focus of politics. This implies the acknowledgement of particular rights for people and the expectation of particular responsibilities from them.  A basic income is essential if this concept of  a new 'citizen focus' is to have real meaning. This is not the state planning for citizens but citizens planning for themselves, empowered through a basic income. It is a combination of increased fairness and increased freedom for everyone.
Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom  

Friday, December 15, 2017

Re-nationalisation at Zero Cost - No Debt, No Interest

For years the owners of Thames Water were able to skim off annual returns above 15% and eventually sell up leaving a £2bn debt with Thames Water. Nationally the private owners of the UK's water companies have taken £18bn in dividends and left consumers with debt of £42bn.  The Spectator article about this comments that this situation is of monopolies 'working as conspiracies against the public interest' (definition by Adam Smith).


So why not take them back into public ownership? At least we would have elected officials responsible to prevent more spilt sewage into the rivers and the mending of wasteful water systems. But add to public debt through a buy-back? No need at all.  As a top official at the Bank of England confirmed to me, the Bank of England could create debt-free, repayment-free money to buy up private utility firms such as these, with QE-type money creation at zero cost to the public purse. Price to be paid hopefully adjusted to take account of the huge profit rake-off of recent years. 

The lesson of QE money creation* is as follows... 

QE money definition:

  • Money created out-of-nothing-with-no-debt-to-pay-or-interest-to-pay-back 


Use of QE money over the last decade:
  • To buy assets such as Government debt held by pension funds, etc.

Proposed use of QE type money:

  • To buy assets such as the shares of water companies, railway companies, etc. 

We assume that the government is not ignorant of its powers to arrange for QE money for the above purchases. Thus we can only assume that they wish to protect the monopoly rights of banks to create money as debt. Every time a loan is created it is manufactured out of thin air by a bank. This means that the banking industry will continue to thrive, whilst burdening the taxpayer with decades of debt repayment. Will the idea of common good uses of money creation ever see the light of day?  
*George Osborne admitted the above knowledge in 2013.
    
Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

Tuesday, October 17, 2017

Richard Werner and Kang-Soek Lee. Groundbreaking findings for new economic policy

Central bankers are openly struggling to understand why their low interest rate regime of the past decade has not brought vigorous renewed growth to their economies. This new paper 
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan   should give food for what rational thought might exist in the high monetary echelons of power.   After all, if there is a startling mismatch between the practical outcomes of your policies derived from your theories then maybe, just maybe, you are relying on baseless assumptions?

Werner and Lee have taken great pains to examine the received classical economics wisdom that 'lower [interest] rates stimulate growth and vice versa' . 

They say there is a paucity of empirical evidence to back up this belief in the level of interest rates determining economic growth.  After examining half a century of data across four major economies involving 'varieties of capitalism' they conclude that the theory that low interest rates cause economic growth is rejected in 6 out of 8 cases and rejected in 8 out of 8 cases when  2 years of leads and lags were considered. However the alternative hypothesis that economic growth determines interest rates, is supported in 8 out of 8 cases.  '..long-term and short-term interest rates follow the trend of nominal GDP, in the same direction, in all countries examined'.

This has huge implications for public policy. The authors suggest that the policy makers drop the theory of price of money (interest rates) and that it be replaced by the quantity of money theory. Thus:

  • the quantity of credit (the source of the money supply) should be the key driver 
  • the raising of short term rates, to encourage banks to lend due to future higher rate expectations    
  • the large scale central bank purchases of bonds should stop - they should be sold  instead (which would raise interest rates)
  • the bank sector be structured to deliver credit creation for productive purposes
  • the backing of fiscal policy with monetary policy by ceasing the issue of government bonds but instead, borrowing from banks
  • that 'green quantitative credit guidance ' becomes a policy to ensure that sustainable projects are encouraged through central bank 'window guidance'  or through a decentralised local banking system
The paper concludes by reaching ahead to the idea of examining the possibility that the existence of interest itself imposes pressure on economies to grow unnecessarily thus depleting natural resources.     

The question is: How such a radical and necessary change Werner and Lee propose could begin to be managed? To take one obvious point: millions have low interest mortgages and the raising of interest rates would threaten the financial stability of many households. Additionally with increasing costs of mortgages reducing available funding, dropping house prices would leave many lenders uncovered by the equity in the property. Safeguards would be needed. There would probably have to be a mandatory fixing of interest rates for existing mortgages for some years. But as central bankers have created this particular property boom with the low interest rate policy they should get along with government and work together to solve it, given the new insights of this paper.

The paper shakes one part of the house of cards that is our economy. As The Free Lunch - Fairness with Freedom points out, our society is built on unfairness. Our treatment of land, houses, banking and monopoly powers have embedded poverty for many and wealth for a few.  Werner and Lee have painstakingly delivered truth as it is and not as it is taught in countless economics schools and universities. Who from the world economics establishment will grasp the implications? Which wise politicians could unite us all - losers and winners - to take a fairer course in the future and redirect us all  towards the common good?
posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

Thursday, September 07, 2017

Welby's Wish List for fairness. A new mandate from the IPPR rooted in the common good.

The IPPR (Institute for Public Policy Research) has published its interim report 'Time for Change: A New Vision for the British Economy'. Archbishop Justin Welby is leading the publicity with an FT article 'What sort of British economy do we want for our children?' [Digital title: British society deserves an economy rooted in the common good']. He continues the May/Corbyn themes (our last blogpost):
Theresa May, PM: 'We will make Britain a country that works not for a privileged few but for every one of us.'
Jeremy Corbyn, Opposition Leader: 'For the many, not the few'.

Welby calls for comprehensive economic justice - socially, regionally, generationally, environmentally - and from the IPPR report highlights his priorities: the need for reform of the education system; a fairer tax system; decarbonisation; improvements in public and private pay and the expansion of the housing stock. He believes most people want a system working in the service of human flourishing and the common good and asks why are we hearing 'Why are so many people so poor when others are so rich?' and 'Why are young people going to be poorer than their parents? 


An interesting aspect of the report is its criticism of recent economic policy.

We have experimented with bold monetary policy, but are constrained by pre-Keynesian fiscal orthodoxy. It points out the significant cuts in public spending due to government austerity programmes and says that austerity has not worked well. It suggests that monetary policy has been majored upon but helpful fiscal policy has been neglected. It wants government-initiated investment for growth and monetary policy to be coordinated to redress this, with the Bank of England advising on the integration of monetary and fiscal policy. Personal note: Ask a high official at the Bank (as I have done) if it would be possible to  invest in an industry by creating money in the QE manner - at no interest and no repayment - and they will affirm that it can be done. The IPPR obviously thinks so too and wants a change. It wants the hands of the Bank untied so that it can join in to help the economy in new ways. 

Most items on the Welby Wish List could benefit from ideas promoted on this blog over the years. Some of these are indeed mentioned in the report, which is a strong vindication of the views of book The Free Lunch- Fairness with Freedom. Such as: Education reform using monetary policy to fund education grants (Prof. Richard Werner); improving pay by  universal basic income ; a fairer taxation system which also helps the expansion of the housing stock through the incentive for development through a new land value tax .

Under the final heading (IPPR p81-83) 'Inequality and public purpose'  the report challenges the way we have measured success over the last 50 years and includes: 
'..inequality is largely a result of the ability of economically powerful groups in society to extract ‘rents’ or incomes beyond those earned by their economic contribution'. 
This gets to the heart of the matter in the way of the principles of The Free Lunch. In the vital matter of banking  (IPPR p80):
 'new insights into how the banking system creates money in modern economies, and therefore the role and limits of government or central bank monetary policy'.
The IPPR needs to look further into Richard Werner's New Paradigm in Macroeconomics who is arguably the first modern economist to have this insight. 

A banking problem from the report shows how only 5% of UK bank lending goes for businesses (15% in the Eurozone) with most going to land and property lending:
'The bulk of real estate loans and mortgages do not increase the productive capacity of the economy or contribute to growth; instead their primary effect is to drive up asset prices'.

To redress the bank lending imbalance the IPPR wants regional banks with 'geographically bounded  mandates to support the local economy' . 
It is happening already! The Hampshire Community Bank is likely to be the UK's first such regional bank and it is designed to that pattern. Additionally, being owned by a charitable foundation it will use its profits for the common good in its area and not for the high staff salaries and bonuses so roundly criticised in the IPPR report and by Archbishop Welby. Hampshire Community Bank in its whole ethos, aims to change banking for the better. Banking for the common good.  The bank, whilst not open for business yet, is currently in its licence application stage under the Bank of England's PRA. Such distinctive banks are needed across the UK. These new banks will play one part in a greater fairness for all.

With political parties broadly united over the fairness theme, and with the IPPR's excellent report spelling out some telling home truths over broad areas of economic life, the prospects that something serious for fairness will be done, are good.

Posted  by Charles Bazlinton. Author : The Free Lunch - Fairness with Freedom.  Director: Local First CIC which is promoting Hampshire Community Bank.