Export-led growth equals lower tax receipts

March 29th, 2010

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.

China – Currency Manipulating Protectionists or President Obama’s scapegoat?

March 20th, 2010

An excellent, absolutely must-read piece in this weekend’s Wall Street Journal – The Yuan Scapegoat – and a timely rejoinder to calls for China to orchestrate a revaluation of the Yuan so that all will be well with global imbalances, US trade deficit etc.

And before we get started, those of you not familiar with the deep interdependence of the America and Chinese economies could have it summed up as what the excellent Niall Ferguson calls Chimerica;

To put it very simply, one half did the saving and the other half did the spending. Comparing net national savings as a proportion of gross national income, American savings declined from above 5 per cent in the mid 1990s to virtually zero by 2005, while Chinese savings surged from below 30 per cent to nearly 45 per cent. This divergence in saving allowed a tremendous explosion of debt in the United States because one effect of what Ben Bernanke, chairman of the US Federal Reserve, called the Asian “savings glut” was to make it very much cheaper for households to borrow money – and to a lesser extent for the government to borrow money – than would otherwise have been the case.

Back to the WSJ piece. Ok, so China pegs its Yuan to the dollar at about 6.83 and if it was floating, it would be worth a lot more because of the US recession and continued growth in China. However, the point is that currency pegs are not just about mercantilism – far from it. They are also about exchange rate stability and stable monetary policy.  Those were after all the two main reasons for the creation of the Euro (thank God we never joined it!) and all the legion currency pegs that have existed in the past and continue to exist today.

The WSJ leader adds that “China is right to resist calls for devaluation, not least because a large revaluation could damage growth. China has learned from the experience of Japan, which bowed to similar US currency pressure in the 1980s and 1990s” which as we all know was followed by a prolonged bout of deflation and near zero growth.  Less observed though is that Japan continued to run a trade surplus, as imports fell with slower internal growth and cross-border prices adjusted.  Whilst conceding that the current situation is not ideal, a far better solution to the revaluation says the WSJ would be to address the shortcomings of the yuan’s development as a tradable currency and disintermediate China’s central bank who keeps buying US T-Bills or Fannie Mae Securities which it calls a huge misallocation of global resources.  What the Chinese could do would be to make the yuan convertible (+ a small one-time revaluation to 6.5), and let capital and trade flows adjust through private markets rather than the Chinese Central Bank. All of which sounds pretty sensible to me.

Unlike a spectacularly worse solution that is now being proposed by none other than Paul Krugman, who is actually advocating a 25% surcharge on Chinese goods.  As Jeremy Warner cogently observes;

Let us briefly consider what would happen if Professor Krugman got his way and there was either a 25 per cent devaluation of the dollar against the renminbi or 25 per cent import duties. Almost overnight China would sink into a deep recession as exporters already operating on wafer-thin margins were plunged into insolvency“.

A Chinese recession  really matters a lot because as I wrote in Spring 2007 (the May 2008 date shown is incorrect) for World Finance Magazine – The Nightmare of a Chinese Economic Collapse – the country could quite literally implode into a morass of ethnic tensions and profound rural unrest and may even try to maintain unity by lashing out at Taiwan, which America is pledged to defend.

When you start a trade war, you just don’t know where it’s going to end. No doubt, some genius at the European Commission is already thinking about how to implement a 30% import tariff on US goods because the Euro is seriouly over-valued against the US Dollar.

Now back to the real world. Can I just say that I for one, have been very impressed with my Chinese printers – who are cheaper, better, keener and almost as fast thanks to air freight as my local ones.  No wonder the price of paper pulp has shot up since last year because of Chinese demand . . .

No, the UK government is not in (very great) danger of default

March 13th, 2010

I love this chart . . .

it shows historical Credit Default Swap spread charts since the beginning of the financial crisis – a gauge of how close a nation is to not being able to finance its debt. As per a point I made in my recent piece in the Wall Street Journal I think these charts show clearly that Ireland’s commitment to reducing public expenditure a year ago has paid dividends in reducing CDS spreads by 150 points, whereas Greece which started at the same level, has gone some way in the other direction. In light of this success – much more pronounced with 5 year bonds (as shown in this chart) perhaps there’s scope for less of an argument being made for the UK following what Canada and Sweden did 15 years ago, and much more of a case for what’s happening in default-defying, tangible real time, just across the Irish Sea?

Meanwhile, thankfully, the UK is not in that much danger of default with a “mere” 90 bp spread. This is still expensive debt servicing at £30 bn plus a year. But it’s a long way from default. Then factor in some other points in the UK’s favour against the likes of Greece;
i) We have a lower base rate 0.5% v. 1% in Euroland
ii) Government debt is much longer term maturity than anywhere else – about 14 years, so no imminent rollover crisis
iii) That government debt is not held largely by foreign creditors – although no one knows precisely by country of origin, but it seems that Insurance Companies, Pension Funds and the Bank of England play a hugely bigger role than foreign investors in the gilts market compared to say Chinese and Japanese owners of T-bills in the USA or German investors in Greek bonds.
iv) The value of the pound has fallen around 25% giving us plenty of upside potential come the recovery. Ok, so it hasn’t happened yet, but who seriously wants to go into a recession and come out of a recovery with a strong currency?

In praise of German local government ingenuity – the pothole tax

March 9th, 2010

I love it.

Unseasonally cold weather in North Western Europe has created a load of potholes across the streets of the old continent but a town in the Ex-Communist East Germany, Niderzimmern, has hit upon a way of makling money from this driver’s blight.

Niederzimmern, not far from Weimar,  and an area I know quite well (and appreciate much more) having spent some time in Jena in my fairly sensible youth – reckons that people will pay to have potholes filled in if they can stamp it with their intials or I love my wife, dog, mistress etc.

Meet the Niederzimmern pothole . . .

I’ve often thought that the problem wth local governnment in the UK is that it is not free to innovate and raise (and cut) funds as it thinks fit. Such an action would probably be unthinkable here. Taxes really do need to be localised and innovative. What’s special about this is that they could potentially raise tax from all over the world to solve a local problem.

According to the local website, they’ve only sold 52 so far.  So seeing as East Germany is emptying of people and the massive transfer of funds from West Germany is finally petering out, this is a really good idea. Three cheers for Niederzimmern !

Micro-hydro – huge potential for the UK?

March 4th, 2010

I keep thinking about this trip I went on last weekend – a tour of micro-hydro plants organised by the South Somerset Hydropower Group. It was a good deal – for £60, we got lunch, coffee x 3 and bussed around 6 quite different micro-hydro sites, with plenty of expert commentary, not least by some very proud owners – full details here. At this time of year as well, these plants are working nearly flat out,  because there has been so much rain (and lots of mud too – I’m such a townie!). Load factors of 70+% are right now about the norm.

Anyway, here’s one of my favourites of the day, Hainbury Mill which has an archimedes screw. The benefits of this technology are that it is; very fish-friendly, virtually no filtering out of river debris required and it’s really quite unusual to look at.

With feed-in-tariffs coming in from the 1st April, it’s anticipated that a mini-boom might come about for micro-hydro. Let’s see – I wouldn’t hold my breath for any government scheme scaling up quickly and efficienctly. For all that, this is different to the pre wind rush of just over a decade ago. Back then, complex regional monitoring of windspeeds was required to get an idea of where the best locations were. This time, the UK already knows where its long-retired 30,000 mills are located and technology has come a long way in the last few years, to enable the extraction of power from low head sites. And micro-hydro has much higher availability, works at a higher load factor – even contributing baseload power than those poster childs of the micro-generation sector – wind and solar.

One more picture – I thought this mill won the beauty prize – Hewletts Mill.