Risk, Volcanic Ash, Regulation and the Leaders debate 2

John Redwood today makes some brilliant observations on “Bash the banks and Praise the Regulators”. His comparison with the ash cloud and the banking regulation is particularly apt. But it is not just the cost of inappropriate regulation that there is a similarity. The leaders’ debate of tonight showed crystallised the issue for me. It is how do the authorities deal with an unprecedented situation? The risk-averse say let us do nothing until there is full information. On the financial system, nothing was done to control the excesses. On the ash cloud everything was stopped until the scope of the problem could be assessed by the experts.

There is a way of going into the unknown without full information. You set general rules and assess the magnitude of any problem.

–         On the ash cloud, you compare the risk with the size of the eruption, the size of the particles and the distance from the volcano. From this, you would have found no evidence of large jet aircraft getting into emergency situations 1,000 miles from an eruption, in an ash cloud that is hardly visible.

–         From the financial system, the situation was evident that house prices and consumer borrowing was going to unsustainable levels on an unprecedented scale from 2003 onwards. The 0% interest credit cards and the large discounts for changing mortgages were evidence of this in the UK. The sub-prime boom, with mortgages deals agreed whereby in 3 years the borrowers could not meet their repayments was evidence of this in the USA. It was the very magnitude of the problem that should have merited special attention. The action should have been to raise interest rates and increase cash requirements for banks.

On the surface the action was the opposite – One to stop what was already happening, the other that immediately stopped anything from happening. But the cause is the same – by requiring detailed rules and acting on how others will perceive our actions, the authorities took wrong course of action.

 The Leader’s debate crystallised it for me. There was one leader who stood out. His reaction to any problem is not to take any risks.

–         He will not risk safety by letting planes fly.

–         He will not start cuts now to risk the recovery.

–         He will not risk banks ever getting into trouble again.

–         He will not risk a foreigner being unidentified.

–         He will not risk existing jobs.

–         He will not risk offending our European neighbours by disagreeing with them.

–         He will not risk independent MPs, by banning them from second jobs and monitoring every penny they spend.

–         He will not risk independent thought, by stipulating what religions should believe.

–         He will not risk diversity in education by allowing independent schools to be formed in the state sector.

 In so doing, after another 5 years of his leadership we will have no recovery; we will have no decision-makers in government – just be taking orders from Brussels and the IMF; we will have no risk-takers in business as most will not want to overcome the ever-higher regulatory hurdles for achievements that are taxed away and vilified.

We will also have no future.

Nick Clegg’s confusion on total and absolute heating costs

Nick Clegg has made a mistake on the leader’s debate.

He said that an old couple in a small house are paying more for their heating than somebody in a bit mansion. This is simply not true. A large home costs far more to heat than a small one. What is true is that

a) You pay a fixed charge per property. Some companies spread this over the first few units. Therefore the average overall cost per unit is less.

b) Some of the poor who have a poor or no payment history have to use pre-payment meters. This does not include the settled poor, who have faithfully paid their bills all their lives.

c) The rates paid are hugely different between those who shop around and those who do not. If you know of people who are unable to effectively shop around, then do, as I have, and help them switch. For instance uswitch.com is a good starting point.

Nick Clegg’s mistake is to confuse marginal and actual costs.

But remember – when all the political leader tout their green credentials, they are actually saying that they will increase the costing of heating. Wind power, or nuclear, or tidal, or solar panels are all far more costly than coal and oil.

Iceland’s Volcanic Eruption in Perspective

A couple of days ago I wrote on John Redwood’s blog

“Nowadays we appear to be too risk averse. The two examples of aircraft suffering from engine failure as a result of flying through an volcanic ash clouds were both (most probably) within a few miles of the volcano. The current volcanic particles could be bigger, but the density of the clouds will be lower a thousand miles or more from the volcano. The risk to an engine going down is very small, especially if the more concentrated areas are avoided.”

In today’s Times, under “Government ‘too cautious’ over ash cloud, Adonis admits” we have the following:-

“Britain was among the last European countries to lift flying restrictions as the first flight touched down at Heathrow just before 10pm yesterday.”

Last night the Civil Aviation Authority accepted evidence from airlines and manufacturers that flights could pass through low-density ash cloud without risking passengers’ safety

“Mr Brown said: “You have got to make sure that people are safe and secure.”

“We would never be forgiven if we had let planes fly and there was a real danger to people’s lives.”

 

I am not a scientist, merely an accountant who tries to put things in perspective. What drives Gordon Brown’s thinking is not to be perceived to be taking risks. This has cost us dearly in the reaction to terrorist attacks (even incompetent ones like the shoe-bomber and someone setting fire to their underpants); the reaction to swine flu and the reaction to climate change. Good decision-making is not a matter of how it will be perceived, or waiting until the evidence all goes one-way. Good decision-making through assessing the magnitude of risks with limited information.

Ken Clarke is right on the IMF

Ken Clarke is correct to state that there is a risk of the UK having to call in the IMF if there is a hung parliament. The reason is simple. The Budget Forecast was that the National debt would reach £1400bn in 2014. This will be around 85% of GDP. For this to be a peak the following has to happen.

  1. The economic recovery has to be rapid. Yet IMF thinks Darlings forecasts too optimistic.  
  2. Most of the deficit reductions come from this strong economic growth, not from expenditure cuts and tax rises.
  3. A hung parliament would mean including the Liberal-Democrats. Their tax increases rely on cutting tax avoidance and increasing taxes to the rich. Such tax rises are unlikely to generate the necessary revenue AND they would be a disincentive to invest in the UK.
  4. Labour sharing power might be worse than Labour on their own for indecision. They have put off a comprehensive spending review, despite a huge change in the Government’s finances. Further they may further put off starting cutting expenditure. It will be damage a party who has said for so long “Labour Investment or Tory cuts” to start cutting.
  5. Further, if they sincerely believe £6bn (0.5% of GDP) cut in waste might tip the economy into recession, then they would also baulk at real cuts necessary to make the deficit peak at 85% of GDP.
  6. The main spending cuts are unspecified. A coalition government might dither at signs of protests from much of the state sector. The IMF could be called in the muscle through the necessary cuts.
  7. There could be another external shock. If interest rates rise, then consumer spending will fall. Also house prices could resume their downward path. Also interest rates rising will also mean an increased deficit. By 2014 each 1% rise in the average level of interest on the debt will add £14bn to the deficit.

 

Extending the period of cutting the deficit, has a compound effect. If each year the target deficit is missed by 1% of GDP, then after 5 years it is over 5% of GBP extra.

Lib-Dem Manifesto – an appeal to the Labour Left

After Nick Clegg produced the best performance in last night’s ITV debate, it is time to examine their manifesto. Others has so far failed. John Redwood attacks the £5bn hole in the Lib-Dem figures, but misses the more important bits. Brian Barder on LabourList has clearly not read the Manifesto and Tom Harris thinking that the policies are irrelevant. However, the manifesto is significant for anyone (like me) sad enough to read the thing. In detail it is a direct appeal to the Liberal Left. It is far more re-distributive than Labour, whilst also scrapping some of Labour’s more authoritarian policies like the ID cards.

For instance

–         In the army, reducing the top brass to fund increased pay for the lower ranks.

–         Tax increases for the rich (CGT, pension tax relief, mansion tax)

–         Anti tax avoidance measures.

–         Hitting big business with higher corporation tax.

–         Devaluing the Nations investment in the Banks by a banking levy; by breaking them up; through state sponsored competition in the form of a PostBank; and a UK Infrastructure Bank (high interest safe returns for “green investment”).

–         Cancelling a replacement fo the Trident nulear missile system. They say they will look for cheaper alternatives, but this is unlikely to happen soon with even bigger cuts in other areas necessary to pay it.

Added to this the fact that Labour have created a structural deficit that will undermine public spending for a generation, and you have a strategy to overtake Labour as the party of the left. Perhaps it is Nick Clegg’s strategy to emphasise this in the third debate when Gordon Brown thinks he will avoid Clegg’s criticism.

Does Lucy Powell support the Robin Hood Tax or the European Union?

Lucy Powell, the Labour Prospective Parliamentary Candidate for Manchester, is proud to be associated with the the Robin Hood Tax Campaign.  You will find Ms Powell proudly proclaiming this on her website, with pictures of her next to Glenys Kinnock and Arlene McCarthy MEP. Ms Powell also got a splash in the local South Manchester Reporter on 19th March 2010 campaigning on the very subject.

However, on the 1st April, the EU published a Commission Staff Working Document “Innovative Financing at a Global Level”, SEC(2010) 409 final. Before you yawn and drop to sleep, on the subject of Financial transactions Taxes it says

At least for a levy on currency transactions some legal aspects have to be considered. In relation to the original proposal by Tobin for a currency transactions tax legal obstacles were put forward by the ECB on its compatibility with the free movement of capital and payments between Member States and between Member States and third countries under Article 63 of the Treaty on the Functioning of the European Union (TFEU) (ex Article 56 of the Treaty Establishing the European Community (TEC)).45 Since the mechanism of a currency transactions levy is supposed to be based on taxing the net position of foreign exchange transactions, it could represent a restriction of the free movement of capital and payments (Article 63 TFEU). Besides the effect on the netting operation itself, it indirectly restricts underlying transactions, including those between Member States and with third countries, by rendering them more costly. It is unlikely that, for this restriction, a justification sufficient for the purposes of the Treaty could be found. Even if e.g. raising funds to benefit stability funding were to be considered as an overriding requirement of general interest, that requirement could not explain why transactions involving countries with different currencies would be treated less favourably than those involving only one currency. Furthermore, the tax is considered to be disproportionate as funds could alternatively be raised by other means of budget attribution without affecting a basic freedom of the Treaty and, in any event, because the scope of the tax would be unrelated to the risks to be covered by the tax revenue raised. Even a very low tax rate would constitute an infringement, and it would not be possible to establish a threshold of insignificance.

Which translated into simple English means that a Robin Hood Tax is illegal under European Law.

So a simple question for Ms Powell.

Do you, Ms Powell, as Labour PPC for Manchester Withington support

a) The Robin Hood Tax?

OR

 b) The Labour Party’s Policy on support for the European Union?

I think that the voters have a right to know before May 6th

Is Lucy Powell the right candidate for Manchester Withington?

Lucy Powell has some of the qualities to make a good politician. In particular she is hard-working and believes in the cause. However, there are two debilitating hurdles she needs to overcome. (see also here)

First, is that she stands for a political party that has undermined public services for a generation. By creating a structural deficit in the boom years, by my estimates, up half the National Debt of £1400bn in 2014 will be due to Labour’s policies, with less than a fifth the hang-over of the world recession.

Second, one of the worst aspects of the present government is failure to admit when their errors and learn from that experience. In the wake of defeat of the Manchester Congestion Charge by 4 to 1, Ms Powell wrote in the Guardian on 12th Dec 2008

 “Even after a big public information campaign, the basic facts of the proposed scheme just didn’t get through. It was a complex set of proposals, which were not readily understood. There remains much confusion and misunderstanding about them.”

I suggest, after an enormous expenditure of public money to vote in favour, people understood exactly what was proposed. Though only 20% of adults would have paid the charge, there were loads of voters who know someone who would be. Like donating to disaster relief, lots of people sacrificed a little to help a minority a lot. It would be a mark of political maturity for Ms Powell to recognise this aspect.

Update – Ms Powell’s strong support for the congestion charge caused her to make a little video.

Labour “Has Got Us Lost” Party Political Broadcast

Iain Dale’s first impressions of Labour’s new Party Political Broadcast “The Road Ahead”

I have an alternative impression.

This is a solitary guy who seems to have gone for a walk on unfamiliar bleak moors without a map, or compass, or drink, or food and no idea of where he is going. He was not prepared for the journey.

As such he could easily get into trouble and need rescuing. Alternatively, if the weather turned, and with no phone he could die of exposure. However, most likely he will only end up exhausted with sore feet, wiser for the mistake.

Britain entered this recession with a structural deficit. It was not best prepared for the banking crisis and recession. We then had a Prime Minister who had spent years isolating himself from contrary opinions, and so had to make decisions on his own. As a result of his imprudence, we Britain may need to be rescued in the near future, no matter who gets into power. Most likely, in a few years, we will emerge a nation weaker as a result of imprudence, but wary of ever electing a Labour government again.

Fraser Nelson misses the mark on Jobs for Foreigners

Fraser Nelson of the Spectator has been making the headlines today with his report that the jobs growth since is almost entirely accounted for by increases in foreign workers.

However, whilst the two figures might be the same in size, they are not actually the same thing.  Nor did today’s debate did not bring out the full difference. You must remember that the unemployment is now higher than in 1997 due to the recession. Netting this out means that at an equivalent point in the cycle, there are more jobs for British workers, as well as there being jobs for the recent immigrants. The implication that many might draw – that foreign workers are taking British jobs – is therefore harder to sustain. Also to get a more balanced assessment, you would have to see the proportion of foreign workers that have returned home (e.g. the Poles in the building trades) as a result of the recession. If it is in the hundreds of thousands, the British economy benefits from their work, but does not have to fund their unemployment.

To be also be fair on Gordon Brown, the large numbers on benefits is a separate issue. In the absence of immigration, the extra jobs would not have emerged. Instead you would have had some of the boom choked off by much higher rates for trades people and cleaners. Remember the £100,000-a-year plumbers before the Poles arrived?

ManicBeancounter Elsewhere

Commenting at

Mark Reckons on Nigel Farage on Drugs Policy.

– Why mainstream politicians will not back an open discussion.

John Redwood on Can Labour End it’s War on Business?

–         Not without Labour imploding, as it’s involvement

Burning Our Money on Bashing the Rich Bankers

–         As a way of diverting from Labour’s involvement in the current crisis.

John Redwood on Are Christian Country?

– Christ dying so that we might be forgiven is the central message. Watered-down implication is that we recognize our mistakes, say sorry and move on.

John Redwood on Cutting Spending Abroad

Perhaps the biggest risk we are facing is with the foreign purchase of our National Debt. The resulting high value of the pound would further erode the ability of our exporters to compete. Also, if the deficit is not brought under control we may not only have to pay higher interest rates, but issue debt in other currencies, to protect the lenders against any weakness in the pound. Then we will be like the emerging economies in the 1980s and 1990s.