Author: johnredwood

Hard on the heels of Nissan announcing a five year investment plan and a new model for Sunderland comes Vauxhall’s statement of its continued enthusiasm for plant and investment in the UK, with a new model here.

The BBC Today programme made as little progress in trying to persuade Vauxhall they should leave the UK if we leave the EU, as they did with Nissan. Vauxhall pointed out that they have an important car market in the UK that they wish to sell to. They argued that they assume there would be a satisfactory trade agreement with the rest of the EU if the UK decides to leave.

I am still waiting for the Today programme to ask about some of the advantages to business and voters of leaving the EU. It would be good if they abandoned their attempts to talk business people into wanting to cancel their links and investment with the UK were the UK to decide to vote to leave the EU. The BBC still seems reluctant to grasp that business invests in many countries all round the world that do not join the EU but trade very successfully with it.

The  campaign to get business to make the case to stay in the EU is not going well. Polls of smaller businesses shows over 40% wanting to leave, and more bigger businesses accepting they can prosper here out or in. Of course it should not primarily be a decision for business or about business. It is far wider, a matter of who governs and whether we still have a UK democracy. There is now comment from Greeks and commentators that the Greek election was largely irrelevant, because whoever won has to follow EU policies. The UK as a non Euro member is not in such a chronic position, but there are an increasing number of matters that a UK election cannot change thanks to our EU membership.

This evening I will be moving the motion in Middle Temple Hall in London for the 200th anniversary Cambridge Union debate. We will be debating the failure of the European Union. The debate starts at around 8 pm.

The VW clever computers helped engines pass the US exhaust tests. Now VW has apologised and thought better of such intelligent engineering, recognising that passing the tests was only meant to be an indicator of how  a vehicle would  perform when being driven on normal roads.

This tussle between manufacturer and regulator is one of many that occur when regulators demand certain performance, and when there are varying ways of conforming to the letter of the law. Many think companies should observe the sprit of the test and rules. Others blame the regulator for failing to invent a test which measures what they are really interested in.

This one, however, matters more than many for two big reasons. The first is VW is one of the world’s two largest motor manufacturers, accounting for more than 10 m vehicles out of a total world production of 90 million last year. VW exhausts have quite an impact on the world. The second is the output from car exhausts is of more concern to green groups than  practically any other source of carbon dioxide and pollutants, as green lobbyists are especially critical of personal transport whilst being less angry about home systems for heating ,cooking and washing that also use energy and produce pollutants.

The origins of this current controversy lie in the growing success of the global warming movement in the 1990s. They made regulators and lawmakers concentrate on carbon dioxide rather than pollutants. The diesel industry came up with good ways of cutting carbon dioxide output from vehicle engines, and in the process offered the motorist something he or she wanted – greater fuel efficiency. When I switched from petrol to diesel I gained more than a third in fuel economy from the switch. It was known at the time that older or dirtier diesels produced more pollutants including particulates, NOx and SOx. The Regulators set ever tougher standards to cut down these adverse side effects of going for the more fuel efficient diesel. The industry responded with much cleaner diesel engines.

Today the EU, governments and regulators have some explaining to do.  Did they do enough when they adopted aggressive carbon dioxide targets to police pollutants from engines? Did they set the right tests to make sure the vehicles performed as they needed? Can they now assure us they have in place the right tests, so when we buy a modern diesel we know for sure that it does achieve the high standards we expect in reducing or eliminating pollutants out of the back? And have they also set the right tests and made the right demands of petrol engines?

During this debate it might also be a good idea to look at domestic heating boilers and systems, and to remember just how much pollution still comes out of our power stations. Its total pollution which matters most. Regulators need to get a grip, and to see the volumes in proportion to the totals.

Amidst all the claims and counter claims of the two sides, there is one important fact. The UK will be £10 billion a year better off by not having to send that amount to be spent elsewhere in the EU as out net contribution. This will also improve the balance of payments by the same amount, and means a 0.6% of GDP gain or boost to our living standards.

Further gains are possible from changing and improving the regulatory burden which the EU imposes on all our domestic and n on EU trade. Whilst we would still want good quality regulations in various areas, we should be able to reduce the total costs of regulation and improve its effectiveness at the same time.

There should be trade and income gains from negotiating UK free trade agreements with major countries not currently covered by EU agreements, including India, China and the USA.

Above all, we will be spared the wild ride to political union. If we stay in the rest of the EU will expect us to pay more of the bills, as they move towards a benefits and transfer union around the Eurozone. The UK has found it difficult to contain the EU budget. In the next few years they will need to spend more on regional and development policies given the poor state of the least successful parts of the Eurozone, mired in mass unemployment.

Why the UK will be Better Off Out – Attachment: Better-Off-Out (1)

The debates this week in the EU have mainly centred over allocating 120,000 migrants to all the countries in  the EU save the UK. This has been a futile debate. It is quite clear far more than 120,000 people are bursting through the EU’s external frontier this year, so the agreement will be overtaken by far larger numbers long before it can be implemented.  It is bizarre, as the migrants the EU lets in will have views of their own on where they wish to settle. It will not be possible to make a certain number live in each country against their will.

It is causing more damage to a fractious EU. Several eastern countries have no wish to be part of this mismanaged invitation to migrants to come. Officials and some of the leading politicians have fallen prey to the “We must be seen to be doing something”, even if that something is unrealistic or unhelpful. The result has been to highlight again the conflict between central EU power and the wishes of some of the entrapped member states who disagree with the policy.

The non UK EU needs to make a simple binary decision. Is it going to restore full control, including choice of policy for borders and migration to each member state?  Or is it going to set an EU wide migration policy and take responsibility for the external border of the unified zone?  The EU largely has the powers it needs within the Shengen area to set a common policy on grounds for accepting inward migration. The issue is, does it have the good will and support of the member states to enforce this? Is the EU itself going to offer more resource to the weakest parts of its common border, in Greece, Italy and the Balkans? Can the EU enforce its extended borders?

If the EU now wishes to limit numbers to anything like the 120,000 it is talking about, it will need to send out a very different new message. It will have to announce that the non UK EU will impose strict limits on total inward migration. To do so it will define categories of people who can qualify through  asylum or other claim to gain legal entry. All others will be turned back at the border. It then needs to get on with enforcing its external frontier. In recent weeks EU leaders have sent out a wide range of differing messages, from a welcome to all through to tighter controls. Sometimes migrants have been offered free transport and passage, other times they have had to break through defended borders. No wonder the EU ends up in the current mess. It is not good for either the EU nor for the migrants.It lacks  certainty. It lacks principle. It lacks realism.

Rent control is a popular policy. Landlords as a whole are unpopular. Rents are high, and paying the rent is often resented. Like controlling rail fares, there is no evidence it works as hoped. Indeed, there is plenty of evidence from around the world that well intended rent control policies cut the supply of housing and end up making the problem worse.

The market for rented residential property is tied up with the market for owner occupied policy in the UK. Owner occupation remains the dominant form of tenure, even after the decline in home ownership in recent years. Landlords have to buy homes to let out in the same market as home owners. Sometimes a home owner becomes a landlord, choosing to rent out their home and move elsewhere rather than selling up. Some landlords are simply temporarily letting out their own home whilst they are away.

It is therefore difficult to blame buy to let landlords solely for the high price of UK housing. House prices have been chased up by four main factors. The first is rapid inward migration swelling demand for homes. The second is social change, allowing lenders to take more account of the woman as well as the man’s earnings in the typical couple buying a home together. The third is the acceptance of higher overall multiples of income for a mortgage, made just tolerable by a long period of low interest rates. The fourth is the decision of the Bank of England and commercial banks to allow massive bank balance sheet expansion and mortgage book expansion prior to 2007.

The main reason rents are high is that the capital value of homes is high for all those reasons. The way to get rents down is to work on both supply and demand. If there were more new homes to buy, that could curb rents. If fewer people came into the country or if fewer people wanted to form an additional  household adding to demand, that could cut rents.

Current high home prices prevent many young people buying their own home. They end up either staying longer with their parents in the parental home, or rent something small that is just affordable, or share with others. The government is seeking to tackle the problem in three main ways. It wants to limit migration. It is making financial help available for home purchase. It is encouraging more building. This works better than rent control.

Rent control would mean fewer landlords and fewer homes to rent.

Some of you ask me about new nuclear power. I have written and spoken recently about energy. My view is we need more cheaper power to ensure security of supply, to tackle fuel poverty and promote industrial recovery.  My main recommendation to the government has been to ensure more new gas powered stations are built to provide more lower cost electricity.

I support the government in cutting wind and solar subsidies as they are doing.  I also agree with them that if low carbon is an objective of policy then new nuclear offers a cheaper way of producing a constant supply of power whatever the weather. I may write more about this in a later post when more of the detail is available.

Mr Haldane the Chief Economist of the Bank of England  thinks we might need negative interest rates on money held in banks. I disagree   He thinks we might need lower interest rates, not higher, in the future. He wants to stop people who have saved from keeping their savings. He wants to persuade them to spend their money. Why not, he muses out loud, charge them for the privilege of owning cash?  To do so, he suggests getting rid of banknotes, and forcing people to hold cash in accounts which could be charged a negative interest rate (or taxed) accordingly, to force people to spend.

This is a bad idea. He does accept that banknotes are not about to disappear, and all the time there are bank notes people do not have to pay a negative interest rate to hold money. He suggests substituting digital money for banknotes, so all with money would have pay the negative interest rate.  Even were he able to create his dreamworld, a nightmare for savers, there would be nothing to stop them simply transferring their cash to another currency and another banking system where there was no penalty for daring to save. Nor could he prevent various other cash like assets popping up to protect savers from his negative interest rates. He needs to understand many people have good reasons to save. A society with too little savings would leave the elderly with insufficient means and the unfortunate with no reserves to fall back on.

Nor do I accept his premise that saving is evil, a crime against economic growth. If the Bank of England had kept the commercial banks in better shape between 2005 and 2010 by regulating them sensibly, they could carry on using the money that people had saved. A healthy banking system is designed to put savers into contact with borrowers, with the banks as the intermediaries standing behind the risks. It is designed to let the prudent, the elderly and those relying on savings to get a return on their savings by lending their money to the adventurous and the hard up to invest and spend beyond their immediate means. It is only because the Bank overdid the easy credit  up to 20078 and then visited a tough bust on the banks thereafter that savers have been robbed of return and potential borrowers starved of loans.

The UK economy is the fastest growing major economy in the world today. Wages and real wages are now rising. There is more investment underway. That does not argue for interest rates below the current 0.5%. In  order to sustain recovery and have a more normal economic performance post crash, we need to complete the repair of the commercial banks. They can then get the savers’ cash to work. Trying to abolish or diminish  savings is a very bad idea. It would undermine people’s sense of independence and security. If digital money is linked in people’s minds to negative interest rates, it will slow enthusiasm for this technology. Let’s have properly working banks and a return on savers’ money.

I welcome today’s announcement that the Conservative party will not seek to use party funds or party personnel and facilities  to campaign in the referendum. The party accepts there will be people on either side of the vote. It is best if the Stay in and Leave campaigns raise their own money and use their own facilities for a fair contest.

Let us hope the Labour party comes to a similarly wise view. They too will have many on both sides of this argument.

Sometimes economics and politics come into conflict. Some economists tell you  governments fixing wages higher than the market wage run the risk of reducing the number of jobs. Politics tells you trying to secure higher wages for the many is popular, as none of us likes to see people badly paid.

The economics of wage fixing appears simple. The market should find the lowest wage level for the least productive jobs that are worthwhile for the employer to offer and for the employee to accept. If government says the lowest permitted wage should be higher than the market level, then there will be fewer jobs created and accepted.

The first round effect of a higher minimum wage might therefore be to destroy jobs. The independent body that sets the Minimum Wage has always thought so, and has used this argument to keep the minimum low. We need to ask what of the second round effects?

There may well be better results than the first reaction of a market economist. We need to consider what the winners do with their extra money they get paid. They are likely to spend it, and some of this money will in turn become income in the hands of other people in the same economy. That can help create or protect jobs. Some will be lost to the economy through buying imports. Some of it may displace money that shareholders would otherwise have spent or lent on to others.  There could also be a spurt in productivity. Employers do not have to respond to higher wages by cutting jobs. They could respond by boosting skills and output per employee to justify the higher wage.

When Labour first introduced a Minimum Wage Conservative opposed it, arguing that either it would be set at a low level which would do little or nothing to raise wages, or it would be set too high and destroy jobs. Conservatives instead proposed a minimum income, made up of market wages topped up by tax credits. Labour argued against, demanding employers paid more of the minimum income. Labour then went on to implement the minimum income scheme with much extended tax credits, offering effective pay well above the Minimum Income for people who qualified for the credits.

Thanks to tax, tax credits, state employment and state pay and many other government interventions the jobs market and wages are far from the free market of supply/demand theory. Most think that government offering to put the Minimum Wage up to say £25,000 a year or to current  average earnings would destroy jobs which is why no party suggests doing it. There is more uncertainty about the consequences of the lesser rise the current government has in mind. I accept we want a better paid workforce, and understand the government’s wish to force the pace. Let us hope it generates the productivity gains and better skills and training it needs to do successfully, without job losses. Big companies can help by working with their employees to ensure they work smarter as they work for better pay.