The European Commission makes a play to further centralize power in Brussels

European Commission President - Jose Manuel Barroso - outlined his dastardly plan for dominating the free people of Europe.

He gave a frightening speech to the European Parliament this week where he outlined a power grab by the European Commission.   While the Eurozone crisis inflicts misery on Southern Europe, the Federalists in Brussels see it as an opportunity to diminish the authority of member states and centralize power and control within the European Commission.

Do you think I exaggerate?  Do you think my language is too alarmist? Judge for yourself.  Here is what the man said:

Greece; a country on the edge of a nervous breakdown

Living the dream

I am having a hard time paying attention to the Labour Party conference.

Have I missed anything important? I caught a few headlines. There was something about a five-point recovery plan. I also saw something about an end to the "fast buck culture".

Did see something about an apology? Or did I dream that?

It is a strange world when the rich are more fearful than the poor

According to an ONS survey, over 90 percent of households earning more than £100,000 a year think the global economy is in bad shape. The poor - those earning less than £20,000 year - don't seem quite so concerned. Just over 75 percent think the world economy has gone to the dogs.

Which is better; to be rich and fearful or poor and complacent?

Decline and Fall

We have reached the "end of the road". Human development has finally "matched the planet's ability to sustain growth". Unless "we reduce ecological stress upon the planet" we are toast. That is the claim of a new book called "Factor Five; transforming the global economy through an 80 percent improvement in resource productivity."

The "factor five" doesn't refer to sunblock. It refers to five environmental strategies needed to save the planet from the human plague. Environmental doom mongering doesn't sell, unless it offers a glimmer of hope. The authors of this grisly tome provide a long list of inconvenient behavioural changes if there is to be any future for humanity. It's the usual tired ideas packaged under the catch-all slogan of sustainable consumption; recycling garbage, turning off light bulbs, and taking shorter showers. We need to be energy efficient. We have to replace fossil fuels with biofuels, and generally live a more sustainable lifestyle.

Stripped of its hopey-changey rhetoric, this book advocates the downsizing of Western economies. In that sense, is very timely. That is exactly what is happening right now in Europe and North America. It follows therefore, that these have been four great years for the environment. Western economies have stagnated. Greenhouse gases have not increased. Presumably, our lifestyles have become just a little more sustainable.

Run, Chris, Run

Chris Christie is under a lot of pressure to step into the Republican race.

My kind of guy!

UK Income tax; Who pays? How much?

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A genuine exit strategy from this crisis

In 2010, the global economy enjoyed steady if unremarkable growth. By the third quarter of 2011, it teetered on the edge of recession. The post-crisis recovery lasted barely 2 years. Moreover, in many advanced economies, growth proved insufficient to ensure that GDP reached its pre-crisis level.

How did things get so bad so quickly? The answer lies in the public sector balance sheets of advanced economies.

When banking sector difficulties turned into an economic downturn, tax revenues took a hit, while expenditures on unemployment benefits rose. In some countries, the revenue decline was exacerbated by a long-standing dependence on asset prices and financial bubbles as sources of taxes.

Politicians believed that they could buy their way out of recession. With revenues already weakening due to the economic downturn, governments tried to stimulate activity by cutting taxes and increasing expenditures, pushing fiscal deficits up to levels not seen since the Second World War. With rising deficits came rising debt levels, which were already extremely high in many socialist leaning European countries.

Britain is swimming against the tide

The feared double-dip recession is almost upon us. For weeks, stock markets around the world have signalled the impending downturn. 

Is it just me, but I feel as if I missed the recovery. Unemployment remains high, real living standards are falling, and inflation is running at around 5 percent a year.  If there has been any growth,  I haven't noticed it.

US GDP data helps explain why so many of us feel as if this crisis continues to weigh so heavily upon us. The 2008 recession was deep, and despite a return to growth in 2009, the level of GDP has yet to attain the peak is achieved prior to the crisis. In other words, the US economy has not grown in real terms for over four years. The GDP numbers in Europe tell the same story; a steep decline in activity followed by an anaemic recovery.  In real terms, European economies have stagnated.

House prices to earning ratio is on the slide, but it has still some way to go

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Should we squeeze the rich or leave them alone?

Before we address the heated question of tax policy and the super rich, let is start with a question......

In fiscal year 2010-11 how many people in Britain earned more than £1 million a year? Before you answer, here are three background facts. First, there are 31.5 million income tax payers in the UK. Second, their total tax liability was £159 billion. Third, the average nnual payment for all tax payers was £5,220.

So what is your answer? Well, according to the Office of National Statistics, the number is just 13,000. Their tax liability, on the other hand, was a little more impressive. Again, in 2011, it amounted to little over £12 billion. A tidy little sum, but still only a fraction of the total economy-wide income tax liability.

What does this tell us about tax policy? Should the Chancellor squeeze these big earners with a higher income tax rate? Or should we leave them alone?

It is this group that the leftists have in mind when they proffer a “soak the rich” alternative to austerity. The argument is by taxing this miniscule minority of super rich, we can pay for a first-class health service, a generous benefit system and ample subsidies for climate friendly start ups. The Right, on the other hand, counter that these are the wealth creators. If the rich are overtaxed, incentives are blunted, and ultimately economic growth is diminished. If the tax rate is really punitive, the super rich will pack up and go, leaving Chelsea and Kensington to be reclaimed by Chavs.

Neither of these arguments are terribly convincing. Even if the rich were taxed at the rate of 100 percent, the UK would still have an unpleasantly large fiscal deficit. While the rich earn telephone number salaries, there aren't enough of them to cover the difference between government expenditure and tax revenues.

As for the incentives argument, the vast majority of these super earners are working in the financial sector. The staggering growth of the banks and other financial institutions certainly contributed generously to UK GDP prior to 2007. Once the crash was underway, the costs of the bail out and the repression have meant that the UK economy gave back everything it gained from finance during the heady days before Northern Rock and Lehman. Moreover, the household and corporate sectors are now deleveraging massively. As the financial sector shrinks, consumption and investment will be constrained. The financial sector will impose a terrible burden that could weigh upon GDP growth prospects for at least a decade.

So, taxing the rich will not solve our problems, but neither will it make them any worse. The UK's fiscal difficulties are much more intractable. Rather than start with unhelpful rhetoric about the rich, it is more useful to think about the size of government. Currently, government expenditure is almost half of GDP. Taxation also claims a fearful amount of national output, but it's more in the region of 40 percent of GDP. In other words, public expenditure is massive, the tax burden is oppressive, and we still can't balance the books.

Prior to the crisis, the headline numbers didn't look quite so bad. However, dig into the details and we quickly find some deeply disturbing trends.

On the expenditure side, health and education spending were growing alarmingly. On the tax side, revenues became heavily dependent on financial services, asset price growth, and housing transactions. This vulnerability became painfully evident as soon as the financial crisis began. From the autumn of 2007 onwards, tax revenues fell down a dark hole. That tax revenue model isn't coming back any time soon.

Does the UK public want a government that spends half of national output? Overall, it appears that they do, especially when one considers that it was health care, pensions, and education that drove the public expenditure to GDP ratio upwards to 50 percent. Is the public prepared to allocate 50 percent of national income to taxation? Unfortunately, the answer seems to be no. We want the services but we don't want to pay for them.

This is why discussions about tax policy have homed in on the 50 percent tax rate for the rich. If the rate goes up or down or stays where it is, it won't seriously affect fiscal outcomes. It is a phony war; a largely irrelevant discussion that neatly avoids addressing the deeper and more painful issues. What should be the optimal size of government? And are we really serious about paying for public services in a sustainable way?

Quantitative easing was a failure, whatever the Bank of England might say

The most effective way to convince the world that you've done a wonderful job is to get someone else to say it. If you shout it yourself, it lacks credibility. This basic public relations principle didn't stop the Bank of England from loudly declaring that quantitative was a resounding success. Well, they would say that wouldn't they?

Yesterday, the Bank of England issued its quarterly bulletin. In a predictable self serving way, the report claimed that quantitative easing boosted the level of GDP by 1.5-2 percent and added between ¾ and 1.5 percentage points to inflation. Quantitative easing was equivalent of 150-300 basis points cut in the bank rate. The Bank of England were selling the story that quantitative easing packed quite a punch.

Is it true? Even the article cautions that there is considerable uncertainty around these estimates and that the precise impact of quantitative easing is likely to vary according to circumstances.

Notwithstanding this warning, the BoE made great play of the effect of quantitative easing on government borrowing rates. It is true that government bond yields have not risen sharply. The UK  avoided the horrific bond market meltdown that ripped through the eurozone. It is also likely that the coalition's announcement of a medium-term fiscal plan also kept yields down. Disentangling the effects of cheap central bank support to the budget through bond purchases, coupled with a substantial hike in VAT rates is not easy.

The report says that quantitative easing was instrumental in supporting asset prices. Here, the Bank of England sails into murky waters. Quantitative easing had powerful redistributional implications that favoured the wealthy and punished the poor. Asset prices stabilised and then grew as the bank pumped out massive amounts of liquidity. At the same time, interest rates became sharply negative eroding the value of bank deposits. The house price correction was delayed, effectively denying many people on modest incomes the opportunity of buying a home at a reasonable price. Quantitative easing robbed deposit holders in order to enrich holders of equity and housing.

The Bank of England would probably retort by saying that this redistribution was justified because overall growth was enhanced. It is not an argument that survives serious scrutiny. Those that have borne the brunt of this recession has tended to be at the lower end of the income distribution. This is where unemployment struck hardest. This is where people keep large amounts of their wealth in cash rather than equity.

The Bank of England claims that consumer confidence improved once quantitative easing began. However, the data suggests otherwise.  From the moment the crisis began, consumer confidence tanked. Any recovery in household confidence was temporary, small, and coming off catastrophically low initial levels.  Over the last year or so, confidence levels have again started to decline alarmingly. This is borne out fully in the data for consumption growth, which has been feeble for at least four years.

Ultimately, QE was an ill-judged strategy that failed to resolve the UK's post-crisis difficulties. Growth remains weak, and the economy teeters on the edge of another recession. Inflation has surged, while unemployment has remained high. Asset prices are higher, but in a sense, that was always at the core of the UK's difficulties. Before the crisis, the UK had become a bubblized economy, and QE only exacerbated and delayed the inevitable adjustment. 

The economy remains a wreck. QE failed, it was always going to fail, and if the BoE tries it again, it will fail again.