'Never kill a job, mate. Never kill a job'

These words were spoken, through a just alight dog end stuck to his bottom lip,  by a labourer in a potato merchant to a friend of mine who was his foreman and was trying to hurry him up in loading the lorries.  The message is don't work too hard or fast or the job will go.

But what really kills jobs?

We all know that jobs are a cost of production, not a benefit hence the costlier you make it to employ somebody the less jobs there will be.

Which brings me on to this (which I have just re-discovered):



It seems to me that the other takeaway from Fred's analysis is that by taxing labour not land you kill production which in turn kills jobs.  Or rather the killing of jobs kills production.

Of course it gets worse.  The value of money arises from production.  Fiat money is what it says it is. Its value does not arise from production.  So without production (and yes that would include house building) money must eventually have no value.

So on top of reducing production we now have money printing to save production...

It's not going to end well is it.

Unless we change course...

UK Rents Higher Than in Europe? Why the High Net Migration?

The IEA recently published a piece of work arguing that although the UK has high rents, rent controls will only make things worse. Illustrating the point regarding high rents, they link to a piece in the Telegraph showing a table comparing average rents across Europe. As the IEA points out “To be precise, British tenants are paying the highest rents in Europe, both in absolute terms and as a proportion of their incomes. Average rents in the UK are between 40-50% higher than average rents in the Netherlands, Belgium, Germany and France. They also exceed those of Luxembourg and Switzerland, two countries that are vastly richer than Britain. In most of Europe, rent payments account for between a fifth and a third of tenants’ incomes; in the UK, they account for around 40%.”

Only there are a few problems with this analysis.
Firstly rents are affected not only by wages, but by taxes and other major spending, like healthcare provision. So any measurement needs to be as a ratio of discretionary income.

Secondly, average rents will be affected by social housing and rent controls on one hand, and housing benefits on the other.

Thirdly, if unemployment is high, average wages might be high, but average rents will be lower.

Fourthly, London is by some margin the largest city in Europe accounting for 22% of UK GDP. It therefore pulls in demand for housing from around the globe. Over half of people in the capital rent, many of them in high pay jobs, or just very wealthy. This will completely distort the UK “average” rent compared to other countries.

Fifthly, if all things are equal and UK rents are higher than those in Europe, it is axiomatic that discretionary incomes must be lower. If this was the case, we would have expected to see an exodus of  people leaving the UK to work in France, Germany and indeed Poland. But the opposite is true isn’t? So, all things cannot be equal.

Rents are set by disposable incomes at the margin. While they may well be expensive in London, distorting UK averages, this will have little to do with the supply of housing. We can build loads of homes in the UK, but as we discussed recently, this will just move the margin of production, as more people will continue to migrate towards London/SE. Good perhaps for London landowners (as they will capture the rise in London GDP), not so good for everyone else.

It might therefore be better if the IEA were to tell us where they think David Ricardo went wrong with his Law of Rent. Then we can all move on.

"Darling fine-tunes recovery plan"

The government has gone completely and utterly mad:

The Chancellor, Alistair Darling, is spending the weekend putting the final touches to a package of tax cuts and big increases in public spending. The measures, designed to revive the flagging economy, are to be announced in Monday's pre-Budget report. It is understood Mr Darling will say tax cuts will only be short-lived and taxes will have to rise in the future.

*sigh*

1. The gummint has already extended current spending far, far beyond the core functions of the state (being those things which only the state can do and which 'add value'; law and order; refuse collection; street lighting; immigration control; defence etc), in other words it is wasting huge sums of money - at least £100 billion per annum. (I'm not counting pure redistribution i.e. welfare and pensions as gummint spending for these purposes). So there's no point wasting even more.

2. The State can also spend money on longer term 'capital' items, like transport infrastructure, which can add enormous value, far in excess of the cost, provided they stick to the budget (which they never do). But these projects take years to plan and implement, so initially there is an additional burden on the economy, which is exactly what we don't want right now. In fact, the State spends most of its time preventing private companies from investing their own money in infrastructure (see Heathrow, Kingsnorth, Donald Trump's golf course etc).

3. Then there's the marginal interest rate. Let's assume our National Debt is 40% of GDP, on which we have to pay an average interest rate of 5.4%. The higher the debt-to-GDP ratio, the higher the interest rate, of course. If they cheerfully borrow another 10% of GDP, the overall average interest rate might not go up much, let's say to 5.7%, but that's a marginal interest rate of 6.9%*

4. Then there's the hotly disputed idea of Ricardian Equivalence,"...an economic theory which suggests that it does not matter whether a government finances its spending with debt or a tax increase, the total level of demand in an economy will be the same. It was proposed, and then rejected, by the 19th century economist David Ricardo." He appears to have rejected it because ".. if people had rational expectations they would be indifferent between the two systems, but since they do not have them, they are subjected to a fiscal illusion which distorts their decisions."

IMHO, it is far simpler than that, and it is irrelevant whether people are entirely 'rational' (whatever that means) or not. It is a cash flow thing: it makes absolutely no difference whether we all pay an extra £1,000 tax this year; or whether the governments borrows £1,000 from each of us. Either way it's money out of our pockets. And whether we realise it or not, that money can only be repaid in future by taking more money out of taxpayers' pockets to transfer to the pockets of those people who lent the government the money in the first place.

The theory goes that the trick only works if people are dumb enough to overlook the fact that in cash terms, they'll never get the money back that they are lending the gummint now. But if household spending is to be maintained, this in turn has to be funded out of borrowing, because people have less cash of their own (having lent some to the gummint). Which is what got us into this mess in the first place.

OK, things get more complicated if the gummint borrows the extra money from abroad, but ultimately it must cancel itself out.

And what's worse, despite coming up with a plan that will worsen and prolong the recession, Labour are catching up in the polls.

*/sigh*

* You work out the marginal interest rate thusly:
40% of GDP @ 5.4% costs 2.16% of GDP;
50% of GDP @ 5.7% costs 2.85% of GDP
Therefore, that extra borrowing of 10% of GDP has cost us an extra 0.69% of GDP
Therefore the additional 10% of GDP that we borrow is at an interest rate of 6.9%.

"US to send out $100bn in rebates"

Just how stupid is George W Bush?

You only get positive dynamic or Laffer effects if you cut tax rates going forward, in particular sales taxes or payroll taxes. Merely sending people money just leads to inflation and/or if they are paid for by increasing government debt, this just increases the future tax burden in an equal and opposite manner to the original boost (Ricardian Equivalence*).

* The theory is disputed, but it makes sense to me.