No one is allowed to talk about costs without asking me first. That is the new rule. I hereby enact it. Legally, it is higher in status than common law. Enforceable by the highest court of the land – my tiny readership’s exceptionally well informed opinion – clear, unbiased and objective. No one is allowed to talk about how much things cost without asking me first to check they are not talking total jibberish.
I’m prompted to enact this important new piece of legislation by an exceptionally awful piece written by the normally pretty decent @Capx. For died in the wool lefties such as I, its important to cultivate sources of well informed, articulate right wing opinion and most of their output is interesting in substance and in spirit. However one of their latest pieces is so naive and economically illiterate that I feel the need to lay down the law. Here it is in all its glory. Feast your eyes. Let’s lay some cards on the table. Yes I’m left wing. Yes I’m largely pro corbyn (in the same sense that I’m pro the England football team – tribally and noisily aligned but not entirely confident in). I still feel I’m absolutely qualified, in an objective sense, to declare this criticism of Labour’s economic policies as total and utter nonsense.
Followers of the inimitable @GeorgePearkes and hopefully many others will be familiar with the concept of chartcrime. I hereby introduce a related offence – table crime. This effort from Capx will be a landmark stated case in establishing tablecrime legal precedent:
It’s really difficult to know where to start with this so I’ll take one of my absolute pet peeves first. If you’re talking about macroeconomics, and this guy alleges to be, don’t talk to me about a billion here and a billion there. I sit in my comfy chair on the dealing floor and watch the UK Government merrily issuing, and also buying back through the bank of englands asset purchase program, billions of pounds worth of gilts every week. I have personally traded bigger notionals of UK Government bonds in one clip than some of the line items in this table – and it won’t surprise you to learn that I’m not that big of a player in the UK Gilt market!
Now let’s discuss an absolutely bog standard economic pet peeve – mixing up stocks and flows. I really can’t emphasise enough that this is just utterly unacceptable if you purport to be a serious person and talk about economics. “Capital cost of infrastructure borrowing” is a weird doublespeaky way of saying “This is how much extra borrowing there will be”. And what’s the next line item? The cost of servicing that borrowing. You cannot add those two things up. Whatever calculation your table is trying to get at, adding up the stock of new borrowing and the cashflow associated with that borrowing is not going to get you there. Unless the purpose of your calculation is “write down all the biggest numbers i can think of associated with policies I dislike” in which case – bang on.
However, the main and most galling and infuriating thing about this whole exercise is the attempt to apportion these costs to households. Let’s ignore the stocks/flows/conjectures etc and assume he’d done the exercise honestly and uncovered labour plans to spend £17500 per household across the next parliament. How, in the name of all that is holy, is that a “cost per household”? Most of the actual policies tallied in the table that involve actual government spending involve the state paying costs that are currently paid by households. If we’re to adopt the frankly ludicrous language of reintroducing the spare room subsidy – or as one might more honestly put it, “not fining people any more for living in houses that we’ve decided are too big for them” , this makes it even more glaringly obvious. How can a subsidy that is explicitly paid to households be counted as a cost to households? It is so absolutely nonsensical and absurd that I can’t understand how it can have been written down by a thinking, feeling human being. But it was. I can almost forgive more the bizarre idea that the government issuing extra bonds is a cost to households, because on some level, it’s reasonable to assume that someone has to lend the government money and that households are the ones ultimately doing it. It’d be wrong to assume that – but it’d be reasonable. Declaring a government subsidy to households as a cost however is so stupid it needs some sort of new and special word to describe it.
Frankly, I think there’s a much bigger issue in terms of people’s understanding of what “cost” means – and the problem, as so often in life, comes down to money. It is worth remembering that money is the one thing of which there can never be a shortage, unless deliberately orchestrated. Parliament could pass an act tomorrow giving every UK citizen £1000 in cash. We could do a special syndicated £64bio gilt issue – which for a modest fee I would be very happy to assist in arranging in my capacity as a market maker. I’d advise the UK government to issue a new 75y inflation linked bond – on which it would pay a real yield of around -1.8%. Ok, maybe they’d have to pay more like -1.6% to give it a bit of new issue premium – but given that the long end of the real yield curve is downward sloping I’d say there’s good demand for convexity out there so why not give it a go! Anyway I digress. The point is – money is not the problem. The problem is always how we allocate real resources. Houses, people, computers, copper, grain, pins, blue tac, prawn mayonnaise sandwiches – these are what matter. Their cost in £ is only relevant in so far as if it changes too much or too quickly – people get confused and spooked and might produce or consume less of them because they’re used to a certain structure of nominal costs which guides their decisions about how to allocate real resources.
So in reality, my policy idea of a special one time bonus of £1000 for everyone might have some real costs – because it might lead to some pretty wacky behaviour on the behalf of “real economic agents” – i’m sure my local corner shop does not have enough craft beers to cope with every area hipster being given a £1000 windfall. Things could get ugly. But the point is it’s just not good enough to note that some amount of money x has been borrowed by the government, or spent on something (especially if you’ve double counted it!) – you have to be able to explain why it’s going to be a cost in real terms. Even if you’ve gone one stage beyond who wrote this Capex piece and put some serious thought into how labour’s policies might affect economic aggregates – which he hasn’t at all – it’s not good enough. People deserve better. One has a responsibility as an economic commentator to explain to people what the impact of policies will be on their lives.Econmoic aggregates don’t tell you much about that at all. I personally guarantee you that in their current state, issuing an extra £70bio of gilts a year into starry eyed yield hungry financial markets will make feck all difference to the welfare of ordinary people. But repealing cruel and vindictive benefits reforms that have barely any impact on economic aggregates will have a massive effect on the financial and psychological wellbeing of thousands.
There’s a lot of ill informed and spurious nonsense in the piece that I’ve left untouched – but one final point needs addressing. I quote the bloke directly:
“However, today’s record-low bond yields are unlikely to stay for long. Yields have typically been between 2 per cent and 5 per cent in the recent past, and inflationary pressures mean that yields will likely return to these levels by 2020.”
The market unambiguously disagrees with him . He may well be right – but I don’t think so, and I’m happy to take his bet. If 10y UK Nominal Yields are above 3% on the 31st of October 2020, I will buy him a steak dinner if he agrees to buy me one if they’re below. I’m sure we will have a lively discussion on the day either way!