Tuesday, 24 September 2013

Reader's Letter Of The Day

From the FT:

Sir, Your report on Mark Carney's promise to keep interest rates low missed the main flaw in the idea (Pound up as unemployment falls to 7.7%, September 12).

As ... Mervyn King pointed out, an interest-rate cut simply pulls investment forward in time. And that works for perhaps two years, after which the cut has no effect.

So while an interest rate rise would be deflationary, continued low rates à la Mr Carney will not be stimulatory.

Ralph Musgrave, Durham, UK.

17 comments:

Dinero said...

Associating interest rate desisions to employment rates is a new idea for the UK. It is using credit costs as a political tool, employment policies are a political issue usually assosiated with desisions made by parliament. Its simillar to the "dual mandate" of the USA federal reserve bank.

Mark Wadsworth said...

D, it's nuts, if it's unemployment they are worried about (they aren't), then reduce VAT and NIC or something.

Lola said...

Way to go! Ralphie

Bill Quango MP said...

Nic is uh a dumb tax. Why do they insist upon it?

It just fuels the zero..low hours contracts. Makes hem even more attractive.

Mark Wadsworth said...

BQ, actually the worst tax is VAT, NIC is the second worst tax, but for some reason neither is really considered to be a tax in the first place. Go figure.

Bayard said...

Well at least VAT is called a tax.

BQ, because it's a tax they can pretend isn't a tax, like the "TV licence fee", though it's been a tax from the moment there stopped being a national pension and unemployment insurance fund, if there ever was one.

paulc156 said...

"As ... Mervyn King pointed out, an interest-rate cut simply pulls investment forward in time. And that works for perhaps two years, after which the cut has no effect."

A feature, not a bug.

Mark Wadsworth said...

B, VAT is cleverly palmed off as a tax on "consumption" not a tax on "production" therefore VAT is Righteous and Wholesome.

PC, can you explain that? Why is this desirable?

paulc156 said...

@MW "PC, can you explain that? Why is this desirable?"

You can make arguments for or against but it appears the letter writer does both. He says it might work for two years but then says it won't be stimulatory. A little bit pregnant is really just pregnant.
It's a countercyclical measure in principle. Designed to increase investment in the next year or two when investment is low, demand and growth sluggish. To the extent that it would do so, somewhat reduced investment in two years time will be of little concern presuming that in two years time the economy has been growing more strongly than currently expected. To the extent that demand rises in the interim due to increased wages there may be a further spur to investment in any case, though that depends on other factors too.

Dinero said...

Or to increase employment
a mandated drop in the hours of the working week is not a totally unreasonable idea.

In accordance with
Ricardo's law of rent - Housing costs absorb increases in productivity, thus requiring people to carry on working 40 hours a week to afford housing costs regardless of constant increases in productivity per hour.
Thus the total amount of employed hours worked by the workforce in aggregate and individually is reaaly something for the demos to decide rather than the Bank of England.

Mark Wadsworth said...

PC, thanks, that makes sense now.

Din, I have wondered about that.

Total land rents are about £250 billion a year in the UK and GDP is £1,500 bn (we are told).

So assuming rents soak up extra output £ for £ in the short term, if they did half a Heath and announced a four-day week max, GDP would fall to £1,250 billion or something and the share going to landowners/banks etc would be zero (assuming no changes in people's expectation of "basic minimum") but the amount going to actual workers and productive businesses would stay much the same.

In theory, it could solve unemployment as well - it is better for all of us to work part-time than for some to be flogging themselves to death and others to be wasting their lives filling in job application forms/sitting on the couch watching daytime TV*

* Delete according to personal prejudice.

Kj said...

I´m a bit undecided about reduced working hours. On the one hand, some of the highest GDP countries have the lowest working hours, as average hours per year per worker. On the other hand, there´s unemployment/outside the workforce "arrangements" in these countries as well.
For some businesses, with low training requirements, this would lead to increased employment, for others, with a lack of qualified workers, it would increase wage pressure significantly -> increase costs.
The "6 hour working day" proponents hereabouts have done a thorough documentation of a project that lowered a manufacturing plant´s hours to 6 hours, where productivity stayed about the same, and work-absence was reduced a lot.
I find that the best thing to do is, if needed, regulate the maximum, allow anything below, and make sure there´s no different treatment in tax/benefits/regulations whether workers work 3, 5 or 9 hours a day.

Bayard said...

It occured to me that an a fair proportion of of those middle class women who, a few decades ago, would have been full-time mothers are now in work and that this is probably both effects and is effected by increased house prices. (BTW, before I get called a "self-loathing tosser" again, this is purely an observation and has nothing to do with the desirability or otherwise of women being full-time mothers).

D, that sounds a good idea, but it would be a) expensive for employers, because of all the bureaucracy associated with employing people and b) probably widely flouted, especially by the self-employed. We'd probably end up with a VAT style threshold which would be yet another barrier to growth.

Mark Wadsworth said...

B, from the ONS:

"Another major long-term change has
been the increasing female participation in the workforce. At the beginning of the twentieth century, around five million women worked, making up 29 per cent of the total workforce. By 2000 the figure had risen to 13 million,
representing around 53 per cent of the female population aged 16 and over and 46 per cent of the total workforce."

So it's not a huge, massive difference, and there are more unemployed men, so the bottom part of the fraction is smaller.

Mark Wadsworth said...

Din, Kj, actually that's a germ of a good idea but starting at the wrong end. You can't meddle in working hours or have rent caps without distorting something else or reducing GDP etc.

Instead, we could pass a law saying it is illegal for any household to spend more than a tenth of its gross income on rent or mortgage repayments.

Clearly, the owners of the nicest houses will want to sell or rent them to the highest earners, so rents for tip top homes will be £15,000 - £20,000 a year, but this will shuffle all the way down and the average rent paid by an average household will never be more than £4,000 a year, just enough to cover the cost of bricks and mortar.

People who only get £5,000 welfare every year will end up in the grottiest homes, but at least they'll only pay £500 a year to rent them or buy them.

Sorted.

Bayard said...

Mark, that's a slightly misleading comparison. I don't have the figures, but I am pretty sure the number of working women declined for the first half of the twentieth century, as domestic service largely died out.

Mark Wadsworth said...

B, all statistics are a gross over simplification. Neither of us has the figures, and I'm not 100% certain of anything.

All I'm saying is that it was always perfectly normal for women to be in paid employment. It used to be perfectly normal for young children to be in paid employment (and still is in some countries, unfortunately).

Maybe not in certain social circles, where having a stay at home wife is a kind of status symbol. I've genuinely heard miserable old gits saying "My wife shouldn't need to work. I can support her perfectly well on my salary" alternatively "A proper man can earn enough to feed the whole family" and I wonder WTF planet they live on.