An annualised figure of 17.9% for growth in the first half of 2010 is pretty staggering for a 5 million strong island nation with GDP per head (on a PPP basis) of $50,000.

When I see figures like this, I wish there was much more interest and debate on how the UK could lift it’s own paltry trend growth rate. Right now it stand at just over 2% and to take us technically out of economic decline, i.e. above the world growth rate, it needs to be about 5% or more.

Instead, we seem to be more interested in tiptoeing around the margins, engaging in the latest fashions like nudge economics, when clearly what we need is an almighty shove !

Amongst my somewhat copious pile of holiday reading books, I have a hardback edition of Crisis Economics by Nouriel Roubini – aka Dr. Doom – which I much look forward to reading (after finishing ploughing through Tom Bower’s weighty tome on Oil – Money, Politics, and Power in the 21st Century – of which more, later).

Roubini, you should know, is the man who told a sceptical crowd of senior economists at the IMF in September 2006 that “. . . the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession”. According to the New York Times “. . . he then laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae and Freddie Mac“.

Well, I hardly need tell you that he has the great privilege of knowing that he was right. So that’s why I can’t help but play close attention to what he said a week ago on CNBC because if anything, we have all failed to listen enough to the pessimists;

The long and short of it is if US growth is much less than capacity of 2.75-3.00% and comes in at 1.5% as he thinks, there will be net job losses rather than net job creation, aggregate demand will go down, negative feedback kicks in and the risk of a double dip recession rises dramatically.

So if, as per my earlier post, you accept that the UK is 6 months behind the USA, then I suspect these problems will hit us from the 1st quarter of 2011.

One of the pleasures of being abroad or somewhere different is to read the local/national newspapers. Right now in San Francisco I have been doing that and have to say, for an exciting, dynamic country they are surprisingly dull. I’m now not altogether surprised that so many regional newspapers have gone to the wall in the USA.  If you can forgive the tub-thumping patriotism, the likes of the Yorkshire Post knocks spots off the San Francisco Chronicle. And the Sunday Times for half the price is about 3 times better that the $6 plus sales tax NY Times on Sunday.

In contrast, the magazines though are a delight. They are a whole new level of vibrancy, content-rich and colour – as good as America’s newspapers are bad. And so to the theme of this post.  Today I picked up a copy of the Yale Economic Review – an academic magazine no less that I could actually buy in the shop. Would that be so in England !

In a piece entitled “A New Measure of Economic Performance”, Daniel Hornung points out that measuring growth in production, as in GDP, does not impart good information about actual living standards. Citing a report by Stiglitz and Sen,  amongst other points he posits that’s what needed is a measure that takes into account income and spending.  How much people are taking home and prepared to spend is a much closer indicator to how well off they really are.

Of course in most countries, we know what the data is on income and spending, the questions is how to roll it all into one and get something better than GDP?

The original report was commissioned by President Sarkozy and can be dowloaded here.

News today that house prices were up 0.5% in May goes down well of course with Estate Agents, owners in negative equity and speculative buy-to-let landlords. It is bizarre how the UK has gone so overweight real estate – once tellingly decribed by Prof. Niall Ferguson as a “one-way, highly-leveraged bet on a highly illiquid asset“.

These figures though are a somewhat meaningless national average which actually contains extremely diverse regional bursts. Just look at the breakdown of those figures on Nationwide’s website here.  So here are  just two reasons for pessimism.

The ascendance of Sterling – you may recall that foreign buyers and foreign direct investment in general is at its strongest when the pound is at its weakest. Last year, there was actually quite a lot of buying at the premium end in upmarket areas by wealthy foreign investors. Since the beginning of the year, the nascent implosion of Euroland has led to a flight to relative quality – UK Gilts, driving up the value of the pound, but not to UK housing which is typically purchased through debt rather than cash in hand which you can’t get out of easily either.

A Capital Gains Tax rise – if you can’t risk a lot of your capital to make a substantial gain from buying property would you do it?

Probably not and the government should take note. Personally I’m all in favour of people making Capital Gains and big ones, especially if Banks are still not lending, consumers aren’t spending and the scope for government to increase aggregate demand through Keynesian pump-priming is limited by the size of the budget deficit. So it seems to me reasonable to aim long-term to reduce and eliminate all taxes on capital like CGT. Unfortunately Britain’s LibCon coalition does not see it that way and there are plans afoot to raise it considerably.

I hope very much that they will agree to something like John Redwood MP’s excellent compromise involving tapering relief.  Mr Redwood gave a superb and ever thoughtful speech to the EPC the other night some of which he flagged up on his blog here.  And because bank lending is still so meagre, the government could also endeavour to make tax-free gains made by retail investors who risk their capital on the purchase loan market organised by Zopa.

Ok, the last few days there has been quite a bit of hectic attention given over to cutting quangos and yours truly has been called in to the studios to comment – see our media section.  So I thought I’d summarize in a few points here what I’ve been saying;

1) Whilst they may be no more expensive than using a government department, quangos are not always the best vehicle to deliver public services – in an age where the no. 1 problem is a lack of money, competing companies driving down costs are. There really is huge scope for marketising public services.

2) The Cabinet Office has not produced a proper report on Public Bodies since 2006 which then said that the total government funding for Public Bodies was over £120 billion and their combined budgets were £167 billion. Even then, the 2006 report only had a smattering of bodies from the devolved administrations of Wales, Scotland and Northern Ireland.  So the actual figure now for spending  using that 2006 report as a baseline is almost certainly higher today. Consequently cutting £500m from the quango budget is very small beer.

3) Don’t focus on the number of quangos (around 1200 right now) – they can easily be merged. Instead look at the functions they perform and see if that is something that can be outsourced.

4) Don’t hold your breath for a bonfire of the quangos – all previous bonfires tend to be small conflagrations quickly extinguished by a new minister’s latest penchant for action. The test is will the Coalition continue the quango rollback in years 2, 3 and 4 and will it exceed the new ones they create themselves?

5) Politicians like to bash quangos because they are the only part of the public sector that the general public like to see attacked with impunity. It also helps that they are largely non-unionised.

6) We need much more fluidity between the public and private sectors to break down the them and us ethos. Quangos, working under competitive pressure to deliver public services are a not a bad way to do that. It’s just that they don’t.

7) Advisory Bodies are a cheap way of government getting in outside expert opinion.  They tend to make up most of the quangos in numbers terms.

Writing today in the Yorkshire Post, I wanted to strike a mildly optimistic note about the new coalition and the policies it seeks to bring in to deal with out economic woes. Crucial in observing all this I think are three filters;

i) The result you wanted
ii) The result you actually got
iii) The net difference in what might have happened if things had stayed as they were

Whatever your views are, that has to be the way to look at it. Unlike David Cameron or Nick Clegg, I doubt very much this is a new kind of politics. I anticipate a great deal of ennui before too long. But in these salad days or honeymoon period, let’s give them a chance.

As an avid admirer of Nassim Nicholas Taleb’s unputdownable book “The Black Swan – The Impact of the Highly Improbable“, I have since become in awe of the power of nature, chance and random events to shape our lives, much more than we think we can direct and plan them ourselves.

As Nassim says in the prologue to his book;

“Before the discovery of Australia, people in the Old World were convinced that all swans were white, an unassailable belief as it seemed completely confirmed by empircal evidence. The sighting of the first black swan might have been an interesting surprise for a few ornithologiests (and others extremely concerned with the coloring of birds), but that is not where the significance of the story lies. It illustrates a severe limitation to our learning from observations or experience and the fragility of our knowledge. One single observation can invalidate a general statement derived from millennia of confirmatory  sightings of millions of white swans. All you need is one single  (and, I am told, quite ugly) black bird“.

Meet the Black Swan . . .

So back to Iceland. The point is that no one in the airline industry seems to have taken seriously the possibility of a – once in 200 or less years – volcanic eruption wiping out their business, because they couldn’t fly – in sky polluted with volcanic ash.

Enter the icelandic volcano . . .

This – the bankrupting of large sections of the airline industry – is now starting to look possible and already there is talk about a bailout for airlines along the lines of the banking sector. To which taxpayers are most likely to take a very dim view to say the least . . .

To face this challenge, what we are talking about here is pricing in the concept of inter-generational risk – i.e. over more than 50 years and more – which I fear, only the scientific conquest of death might work to assuage. And only then 50 years hence, not now.

There has almost been an almost worldwide political consensus that the way out of our economic troubles was through export-led growth. Some of us thought it was a bit silly to suppose that every country in the world could do this. Yesterday however we learned from the Ernst & Young Item Club that actually, if ou want to raise taxes – which let’s face it, most politicians love to do – this is not a good way of going about it.

The reason as Peter Spencer, head of the Item Club explained,  “While this is the right kind of growth for the economy, it is the wrong kind of growth for the exchequer — domestic demand is much more tax intensive.”

Exports as it turns out, generate smaller tax increases than a consumer-led upturn.

On all sorts of grounds – the cost of collection, the cost of compliance, the level of evasion and avoidance, understanding the dynamic impact – we are so far away from an optimal tax system.  Yet the return of the downturn to the business cycle ought to get us thinking again about which taxes work best at which point of the cycle and which ones don’t undermine aggregate demand.

I love this chart . . .