Tag Archives: Bill Gates

The ‘sky cannot fall in’ school of economics.

There is an economic school of thought commonly held by politicians and journalists, which can be best described ‘as the sky won’t fall in’ economics’. What the practitioners of this economics believe is that the economy is a thing that just goes on delivering whatever politicians might do. There foolish decisions have some negative impact on the margins, but come what may the economy will still working as well as ever tomorrow. Such people described the financial crisis of 2008/9 as a ‘once in a lifetime affair’, it was what insurers call the unexpected, an ‘act of God’. What it was not was a crisis brought about by the foolish behaviour of bankers and politicians. The cause of the crisis was not the foolish speculative behaviours of the banking community or in the naivety of politicians in believing that the financial market could regulate itself, no the causes lay elsewhere.

Similarly in the U.K. we are suffering from a surfeit of ‘the sky won’t fall in’ economics from the Brexiteers in the politics and the media. Warnings of the dire impact that a hard Brexit will have on the economy are dismissed as ‘Project Fear’. One leading politician when warned of the damaging impact of a premature exit from the European Union (EU) on manufacturing industry, said that it won’t matter, as manufacturing only accounts for 10% of U.K. output. Only a person completely ignorant of economics could make such a foolish statement.

Yesterday a journalist who normally displays the utmost scepticism about politicians and politics revealed themselves as a member of this school of thought. He in his articles has on numerous occasions exposed the follies of politicians; yet he takes the word of these self same politicians that a premature rupture in trading relations with our biggest trading partner will have minimal impact on the economy. He writes that the day after Brexit the economy will be functioning as normal, planes will still be flying and there will be food in the supermarkets.

Yes the economy will still be there and it will be functioning, but the question he fails to ask is how well will it be functioning. To take his first example, yes the planes are likely to be flying, as it’s inconceivable that the British and European politicians can’t come to some agreement on airlines flying rights. (One must mention a proviso, politicians are just as likely to come to an agreement which is detrimental to the interests of our airlines, as beneficial. He assumes a competence which our politicians in the Brexit negotiations, have been singularly lacking.) What he fails to understand is that whatever results, the British government is exchanging an agreement about rights to fly over Europe that is highly beneficial for our airlines for one that is much less beneficial. What we do not as yet know is how much more difficult will it be for Britons to fly in and out of Europe. Obviously the uncertainty generated by Brexit will the day after Brexit lead to some cancelled or delayed flights. All that can be said is that British airlines won’t enjoy the same access to flight space over Europe than they had before. However what will obvious is that flying from Britain to Europe will become more difficult.

Journalists and politicians of the Brexit persuasion hide behind this uncertainty. I as an economist know that Brexit will be damaging to the British economy and society. Just because people such as myself cannot spell out in accurate statistical format the exact damage that Brexit will inflict on the economy, Brexiteers claim that we should not be believed as we really just don’t know. However to put it in its simplest terms believing the Brexiteers is asking the people to accept that there uninformed guesses are as good as my informed guess of myself and other economists.

John Maynard Keynes was once the doyen of British economists, but he is now so out of favour that his economics has been banished from the Treasury and political circles. As a consequence politicians lack an understanding and knowledge of his great insights to the workings of the economy. What all in politics and most in journalism have forgotten is his insight that the capitalist economy is inherently unstable. In his books such as ‘What is to be Done’ he demonstrated how the misguided decision making of the politicians had brought about the worst of all possible economic circumstances. The Peace Treaty of Versailles might have delivered peace but it also delivered a Europe wide economic recession. Imposing punitive sanctions on Germany wrecked the economy of what before 1914 had been Europe’s largest and most prosperous economy. The knock on effect was Germany no longer bought the goods it had previously, so spreading the misery of slow growth and high unemployment throughout Europe. Added to this British politicians made a series of decisions which worsened the impact of this depression on the U.K. The 1920s in terms of economic growth was a lost decade.

What cannot be stated often enough is that the economy is not a thing that will constantly deliver, regardless of the poor decision making of our political and business leaders. Just as with any human construct it has flaws and one flaw is its propensity towards instability. This unstable economy can be as easily pushed into recession, through the follies of our leaders as it can be thrust into exuberant growth through the ingenuity and good decision taking of the same people.

Bill Gates, Steve Jobs and all the other entrepreneurs of Silicon Valley kickstarted the information technology revolution, which led to a sustained period of economic growth. One only temporarily halted by the bursting of the dot.com bubble. A bubble caused by foolish speculators bidding to much for dot.com businesses. When it became obvious that these companies would never earn the expected profits, it became obvious that these companies had been overvalued, so there share prices collapsed, causing a loss of business confidence and a recession.

To this economist one the main causes of sudden changes in the business cycle are human folly and ingenuity. The economy is not a perfect construct it has weaknesses and foolish decisions made by politicians and businessmen can expose those flaws which leads to economic collapse. Similarly it has strengths which men and women of ingenuity can exploit to create immense wealth, which benefits all.

In answer to Michael Gove and Simon Jenkins, despite what you think, the ‘economic sky can fall in’. It’s the actions of men such as you that make this more likely to happen than not. Unfortunately the leading politicians in Britain at present seem to lack amongst them, people of realism and ingenuity that could prevent ‘the sky from falling in’.

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Billionaires and the Scrooge Factor

Dickens’ Scrooge is treated as an agreeable story to be told to children at Christmas, yet this is to misunderstand Dickens intention. This was a book for adults one that was intended to show the destructiveness to the human personality of acquiring money for money’s sake. There was a real life Scrooge, a John Ewles who went so far as to sleep with the horses in the stable as he used the warmth generated by the horses so he would not have to light a fire in his house. There is no doubt that the CEO’s of the largest business corporations have read or at least are familiar with the Scrooge story, but what they fail to realise is that their behaviours mirror that of Scrooge.

A friend told me that the largest business corporations in the world have cash assets totalling three times the world’s GDP. Checking with the internet I find that the cash reserves of Apple and Microsoft combined exceed those of the British Treasury.  Apple has the world’s largest cash reserves of £95 billion. Although I cannot confirm my friends figures, I know him sufficiently well to know that he has not made them up. (The source I think was Oxfam but I could not find the figures I wanted on their website). The usual reason given for these huge holdings of cash being stored in overseas  tax havens to avoid losing their cash to the taxman. Not paying tax is one of the moral imperatives of the new Scroogian morality.

(The following text only makes sense with an economists understanding of money. Money has no intrinsic value, it is only a claim on wealth and its value is determined by how large a share of wealth can be claimed by each unit of money. If the total sum of money to spent is greater than the monetary value of the goods and services produced in an economy, then when that  money is spent those who have the greatest sums of money will outbid those who have least for the available goods and services and so push up prices. This is in essence is inflation, if the price inflation is modest people will retain their faith in money and will continue to treat it as a store of value. If as in Germany in 1926 if price increases are high and of ever greater frequency, people lose faith in the currency and a hyper inflation develops as money becomes increasingly worthless.)

However what I want to suggest is that such holding such vast sums of cash is an act of stupidity.  The first thing to realise is that these companies can’t use this money in any productive way. The sums held are so vast that if these companies decided to spend that money, it would significantly increase the rate of inflation and reduce the cash value of their holdings. The London property market until recently demonstrated this effect, it was a market where billionaires and multinationals seeing it as a safe haven for their money have successively bid up the price of London properties to astronomical levels. If they started to spend their cash piles other sectors of the world economy would experience similar levels of inflation.These businesses are trapped by their piles of cash, they cannot do anything that would reduce their value. If Apple for instance spent £10 billion from its vast cash pile on investing in a new business venture, the shareholders would be up in arms, as that reduction in the cash reserves would be matched by a reduction in the value of their shares. Apple, Microsoft and the other cash rich multi-nationals are held prisoner by their money, they can do nothing which might diminish their cash stock piles as in doing so they would risk the wrath of their shareholders. Rather than these CEO’s being the giants of the world of business, they are reduced to rather pathetic figures do all they can to protect their cash hoards. They are held captive by their money.

I do wonder if this practice of hoarding and nurturing their cash piles does not make the owners more risk adverse. I own an Apple Iphone but instead of planning to upgrade to a newer model at the end of the contract, I might just instead keep my current model. It does seem that the innovative flair that made Iphone a ‘must buy’ is now lacking in the company. Has the desire to hoard cash diminished the funds for innovation?

When this cash is spent it not only devalues the currency but also the politics of a country. One example is the Koch brothers, millionaire oil traders who have spent billions backing those candidates who do their bidding or who have an agenda similar to theirs. In consequence in the Koch influenced US Congress the majority of the Congressmen oppose any action that would effective ameliorate the effects of climate change and reduce oil sales. It is possible to say that the melting of the Arctic ice is a consequence of the action of the Koch brothers. What happens when this occurs is a narrowing of the political agenda to such an extent that Congress and other political institutions come to represent the views of their financial backers rather than the people.

One consequence of this is that these companies spend some of their cash pile on ‘economic toys’. Such toys have very little productive value but whose ownership brings status and prestige to their owner, they do little for the companies bottom line. However the sums spent on such toys are but a minuscule proportion of their cash piles. Nobody ever made money from owning a Formula 1 racing team, but the money squandered on such an enterprise is merely the small change from these huge cash piles.

The problem for the owners of these vast money mountains is that they dare not risk moving them out of their havens for fear of devaluing the value of these cash reserves. The Bill Gates foundation that does so much good in the developing world, is a ring fenced fund, quite separate from the Microsoft business, which has its own huge cash pile.  The Dicken’s solution to the Scrooge complex is for the rich man to give his money away. While such a move would be welcomed because their cash holdings are so vast, any such spending would risk destabilising the world economy. They just have too much money for their own and the world’s good.

Unfortunately just as with Scrooge their desire to protect their money forces them into many anti-social acts. The British press barons have campaigned relentlessly to leave the EU. One of their main motives for doing so was to prevent any future European wide body from organising a more effective system of tax collection. It was said by the IMF that Britain is the largest tax haven in the world and these group of anti social men will do anything to prevent any action that would lead to them paying more tax. The fact that leaving the EU would do tremendous damage to the British economy is of no consequence to them. Even the threat to their wealth from a fall in property prices  consequent of Brexit is a price worth paying to protect their tax exemptions. Just like Scrooge these men care only for their money and little for their fellow men. Aristotle said a nation governed by the rich was a plutocracy, however that term does not do justice to spirit of meanness that prevails in contemporary Britain, a better word to describe the country is a Scroogocracy.

There is a solution to this problem. When I first studied economics in the 1960s the top rate of income tax was 79%. Now it a wealth tax of a similar rate was applied to these cash piles they would be reduced to an amount that was insufficient to destabilise the world economy. It would also reduce the attractiveness of acquiring these cash piles. One curious fact that would result is that the governments of the world would face restrictions on how they used this cash. They could spend some to alleviate their budget problems, but if they spent all this windfall at once, hyper inflation would result and there would be a major destabilisation of the world economy.  Most of that money would have to sit untouched in the treasuries of the world’s central banks.

One objection to my proposal is that all this money is hidden in tax havens beyond the reach of the world’s governments. However these tax havens are little more than the foreign branches of the major banks. The money might appear on the balance sheet of a Bahama’s bank, but in reality it is banked in London. If the banks and the owners of these cash piles wanted to keep up the pretence that this money was really in the Bahamas, capital controls could be imposed preventing this money being transferred to London or New York. There is little that the vast sums that are banked in these tax havens could be spent on locally. They would just harmlessly rot way.  What I am recommending is the destruction of these cash piles, as they do little for the world economy and they create a risk adverse culture among the super rich, which means economic growth rates are much lower than would be otherwise. I would recommend a policy in which either the holders of these vast cash piles adopted a voluntary ‘potlatch’ in which they destroyed their useless cash piles or they surrendered them to government where they could stored as part of the national reserves, where they could do little harm.