Trump’s Trade War


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President Trumps promise to impose tariffs to boost employment in the US will have consequences. It will make the US and the world poorer.

If the US imports foreign goods then there has to be an exact same amount of exports whether that is in goods, services or assets. Any payment the US makes for overseas goods can only be used to purchase something in the US. The only thing that US dollars can be used for by the the foreign seller is to purchase things in the US domestic economy just as only sterling can buy things in the UK or Euros can be used to buy things in Europe.

If the effect of the tariff is to level the price between imported steel say and US steel so increasing the ability of US steel producers to sell their product in the domestic market then that will be good news for US steel workers. The tariff makes no difference to the efficiency of the US steel industry.

To pay for that transfer of wealth to the US steel workers an equal amount has to be transferred from somewhere else in the US economy. It cannot come from anywhere else since dollars to US steel workers has to come from dollars consumed in the domestic market by someone else. President Trump’s view is I am sure that foreigners will be paying for the increased employment in US steel workers but they won’t at least not directly. They may pay for it with an increase in domestic unemployment but that won’t help the US. Only the US economy is able to make the redistribution of wealth within the domestic market. If the overseas exporter still wishes to sell in the US the price simply rises to US customers. If the overseas producer pulls out of the export market then the reduction in US imports will be matched by a fall in overseas purchases of US goods, services and assets. It is probable that this will effect President Trump’s wealthy backers as foreigners stop buying US real estate, companies and goods.

What happens in the exporting country? The fall in exports to the US has to result in a fall in imports from the US since US currency can only be used in the US domestic market. That means that even without tit-for-tat tariffs US exports must fall. The exporting country industry would need to make an adjustment resulting in unemployment and workers forced into new areas coupled with a deflation in prices as supply adjusts to a lower level of output.

Maybe President Trump is hoping that the tax give away to the wealthy will be redistributed to the Steel workers or at the very least compensate the wealthy for the loss of foreigners buying their assets. I suspect the burden of the transfer will actually fall on the rest of the US population to adjust their consumption in order that the consumption of poorer workers can increase. That’s good news for the US steel workers but bad news for everyone else.



What is the point of an audit?

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KPMG is in the news again for the competency of its audit standards over the collapse of Carillion. KPMG has previously been criticised over its audit of HBOS, Co-op and Rolls Royce. Arthur Anderson collapsed after its audit of Enron.

There are clearly issues around auditing standards but let’s be absolutely clear on one thing. It is the responsibility of company directors to ensure the accuracy and relevance of the published financial statements of their companies and to give an informed opinion of the future prospects of the business. For too long directors have hidden behind the role of auditors and sought to gloss over the short comings of their businesses. Directors who exaggerate the strength of their businesses in the Directors Report whilst being in possession of management forecasts which should fully show the future risks the business faces should be the ones that incur the ire of shareholders and not the auditors who will never be fully informed of all aspects of the business. It is entirely the responsibility of the directors to keep informed their shareholders and other stakeholders of the sustainability of the business and what actions they intend to take to maintain the business and its profitability. An audit shows a degree of compliance within the law of the preparation of the company financial statements. It contains an outsiders opinion on the short term sustainability of the business based on the numbers prepared by the Directors and the comments and opinions of those Directors. Beyond that the audit does not claim much else. If shareholders wish to elevate auditors to watch dogs then big changes would be needed.

Firstly, auditors would need to be independent of the company. Currently businesses appoint auditors and pay their fees. Much as Credit Ratings agents were paid by those seeking to get a rating this conflict of interest gives rise to a risk that auditors will err on the side of Directors opinion when it comes to explanations of the accounting data. Would the state take over the cost of company audits? Would companies need to be charged an audit levy to cover the cost? Who would set the price of audit services for each company?

Secondly, auditors would need to be safe from prosecution by companies where an audit opinion is given which damages the audited shareholder value of a company. Since business failure risk can never be 100% certain auditors would be required to give some subjective view of a company’s future potential performance. In nearly all cases this view would be wrong due to circumstances changing with time. An opinion given in January would almost certainly have changed by March if not sooner. Only company Directors and managers can fully be aware of the day to day changes in a Company’s fortunes. Many complete basket cases are rescued by either private or state intervention and it would be impossible for an auditor to comment with any certainty on the likelihood of such a future event or any other crystal ball type occurrence. How for example would an auditor rate the possibility of banks continuing or not continuing to support a business.

Audit opinion would become a major factor in market valuations which could cause big falls in share prices based on unsubstantiated views and those shareholders would be even more irate at the inadequacy of audit opinion then they are now.

It is clear even on just these two factors that it is almost impossible to create a foolproof audit system which captures the potential for business failure within the audit process. It is possible to criticise an audit opinion as being of limited value in evaluating the viability of a business. This criticism is perfectly valid and less emphasis should be paid to audit opinion. Auditors are not watchdogs and cannot be held responsible for not spotting failure any more than racing tipsters can be held responsible for not picking winners.

My view is that shareholders only ever consider the Audit Report when a business fails and largely ignore it up until that point. Shareholders put their faith in the statements of management and Directors when it comes to investment decisions and it is the management and Directors who should take responsibility when businesses fail.

Politics is about story and narrative not economics

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Many believe that economics and the economy in general lead the political agenda. Economists have developed ever more complex mathematical theories in order to “prove” how society works and benefits from progress. Policy is formed from these economic insights.

But that is not how it works. Political parties have a set narrative and then seek justification for that narrative as a support to the story they want to tell. The story leads and facts and theories are sought to justify the policy narrative.

In the 80’s both Margaret Thatcher and Ronald Reagan had a narrative based around small government and individualism. Little matter that the size of government grew substantially over the period the story that the electorate wanted to believe was the one projected. To support the policy academics such as Hayek, Milton Friedman and the Chicago School of economics were pressed into service to give the narrative some gravitas but their theories followed the dynamic of the storyline offered by the politicians. There were many opposing economic theories to the monetarism of the day which could have supported a counter narrative. In many respect the political narrative came from an intuitive belief held by the chief protagonists. It was a gut view not one supported by hard evidence.

More recently Donald Trump gained success based on a narrative reasserting former national greatness and the resurrection of rust belt industries aimed at reinvigorating working class fortunes. The story is enhanced by a form a scapegoating of foreigners as being the source for the decline in working class fortunes whether that is Mexican immigration or a story of Chinese manipulation of world trade to the detriment of the US. There is no factual basis for these assertions but that does not matter. What matters is that the narrative is believable to those to whom it is aimed at. Trump has not sort to justify his position with any intellectual rigour or economic theory. His Presidency relies solely on his story narrative.

In the UK too we have Brexit. The leave campaign told a narrative that appealed to a large portion of the electorate. This narrative was one, like Trump’s, based on a story of former greatness now lost due to the unwelcome embrace of foreign powers taking away the sovereignty of the nation. As humans we are more susceptible to a story narrative than something based around numbers. The remain campaign lead with dry numbers and economic data in an attempt to show that economically leaving would be a mistake. But this was a mistake. We are a species of story tellers not mathematicians. There can be little doubt that on balance leaving will be economically detrimental but for voters that didn’t matter. What mattered was the affirmation of national pride and the promotion of a golden future free from foreign interference. The fact that the world does not work in this way did not matter. The narrative of the story was something the voter wanted to believe in irrespective of any counter narrative based on purported facts or economic numbers. The leave campaign found it easy to bat away these facts as “project fear” a narrative easily understood by voters who supported the central story of lost national power and lost cultural identity caused by immigration.

The way forward for politicians is clear. Have a strong spoken narrative for your policies otherwise voters will not connect with the message however strong the academic evidence backing it up.

For economics too the need to project a strong narrative outweighs the cleverness of the mathematical proposition. Only when economists grasp the fact that their discipline is only useful if people understand the story will it become truly relevant to our society.

Why the referendum on Europe has fundamentally damaged British democracy


There is much debate about a second referendum on whether Britain should leave Europe. Those on the leave side consider such an event to be tantamount to treason and unconstitutional. The argument is that the people have spoken and their view is that Britain should leave. Any attempt to amend that is unlawful and unconstitutional. It is arguable that referendums themselves are unconstitutional in that they bypass the sovereignty of Parliament. Curiously that sovereignty is one of the rights the leave camp are claiming to recover from Europe.

Many resist the potential for a second referendum principally because they fear the result could be reversed. This view that a second referendum could produce a different result stems from fear. If, as many claim, the British public are steadfast in their desire to leave Europe there should be no fear in holding a second vote. The people would simply re-affirm their original choice or even strengthen their vote given the strength of conviction the leave politicians insist is the preference of the Country.

The reality is that the fear of the leave politicians is genuine. They realise, but are unwilling to say, that the likely result of a second referendum is that there could be a majority which would vote to stay within Europe. The narrowness of the first vote and the absence of over a third of the potential voters puts a narrow win to remain highly likely. In such an event would the leavers consider that result to be a representation of the ‘will of the people’ or the theft of their legitimately expressed view exercised in the first referendum. Many would say that it is a typical move by politicians where the result doesn’t correspond to what they want to keep having a vote until they get the result they want.

The view of leavers is that the first result represents the ‘will of the people’ as expressed by a democratically held vote and that choice as expressed in that vote should be respected. The problem arises in that a second referendum vote would be no less a reflection of the democratically held views of the electorate. Any number of referendums have the same legitimacy as every other referendum and so it is a fallacy to hold up a single vote as being the sole will of the electorate. That is why historically referendums have not been resorted to in British politics. Prior to 1975 there had never been a UK wide referendum. Since 1975 their have been a number of other referendums but only two other UK wide votes, one on the voting system itself and of course one on membership of the European Union. The conclusiveness of the vote in the other two votes has been more decisive but this is tempered by lower turnout in both those votes suggesting the EU vote was of greater concern to a higher number of voters this time around.

Referendums are good at obtaining voter opinion on simple binary questions. What they are very bad at is answering complex questions especially where information regarding the consequences of those questions are either scarce, distorted or hard to predict. Political votes are seldom clear black or white choices. It is only now after the decision to leave the EU that a proper discussion is being held as to what the consequences will be. This debate highlights the foolhardiness of making complex decisions based on a simple binary yes/no vote where emotion takes a prominent position fanned by exaggerated and partisan opinions lacking a proper factual analysis both in the press and from politicians. The Cameron government clearly grossly miscalculated voter attitudes to Europe in a vain attempt to squash internal Conservative Party discontent and to shore up his own personal position within the party. Mrs May made a similar miscalculation in her decision to call a General Election again over European issues.

The referendum on Europe has done irreparable damage to the UK constitution. Cabinet collective responsibility is undermined when it is clear that so many within cabinet disagree fundamentally with decisions being taken on Brexit for whichever side. Cabinet Ministers brief in the press their personally held views against the Government held position. This is clearly counter to the principle of collective responsibility.

Parliamentary sovereignty has been undermined when David Cameron gave a cast iron guarantee of a referendum and then creating a virtual fait acomplis that the vote would be binding on Parliament even though the majority of parliamentarians disagreed with the vote against leaving the EU. At the time it is arguable if the UK public held strong views on the issue at all and that the referendum was actually forced on Cameron by discontent within his own party and a section of the press with an ongoing rabid dislike of Europe coupled with an erosion at the extreme edges of the Conservative vote resulting in a shift towards more extreme views held by UKIP. At no point was UKIP ever a serious political movement only ever having 1 seat at Westminster and for the Conservative Party to use the political expedient of the referendum to shore up its own flagging vote is a dishonest use of the parliamentary system which effectively took the decision making process away from parliament.

Discontent with Europe will not be removed once the UK leaves the EU. It will only take one rejection of UK goods due to non-compliance of EU standards or an increase in water or energy prices instigated by a European owned water or energy company to stimulate the headlines in the tabloid press about the iniquity of perfidious europeans. The only difference now will be that the UK will have no say in European issues beyond that of a lobbyist. Our political parties will be riven by discontent caused by the polarisation of views over Europe for years to come unless, as the leavers proclaim, the UK will sail off into the sunny uplands of economic prosperity now that the country is released from the constraints of European bureaucracy and the crippling costs of supporting French agriculture. There is little to believe that this will happen beyond the wishful thinking of a few rich businessmen who see the opportunities for themselves. The economic boom wasn’t there in the 1970’s when we begged to join the EU and there isn’t any reason to believe the UK is in a stronger world position now.

The Art of the deal – A way forward for Brexit


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Brexit negotiations continue to stumble along in an inconclusive and chaotic manner. The European Commission refuses to countenance opening up trade talks until the UK agrees how much it will pay to leave the club. The UK negotiators seem incapable of coming up with a figure and to a certain extent that is understandable because the price paid to leave will effect the concessions both are willing to concede on any subsequent trade agreement. It is also understandable that the EU does not want to lose out on funding it had expected to receive to cover planned projects. Germany in particular would want this resolved as in all likelihood it would be Germany that would shoulder the lions share of this extra cost.

So here is the dilemma. The UK electorate expects a substantial saving on contributions to the EU and it expects them immediately. The EU in contrast expects to maintain the UK contribution. These two positions are not reconcilable.

The Government negotiators tell us that in any negotiation you never show your hand otherwise you are simply giving away your position to the other side and so the negotiations become mired in stalemate. This is madness. In any negotiation there is always a position which can be stated around which negotiations can take place. It is a fallacy to imply that talks can only revolve around secrecy and guess work. The UK Government does not have to comply with the notion that nothing can be said about trade until the divorce bill has been settled. That is the EU position. The UK can make a positive step and set out what it wants from Brexit and what in principle it is willing to pay for it. That is how negotiations work. One side sets an agenda and talks move toward consensus. It also allows Parliament to comment on the position being taken by the UK Government which seems only right given that any deal will impact all future governments.

Here is one possible set of broad principles around which negotiations could take place.

1. The UK agrees to the free movement of goods and services on a tariff free basis from the EU. (This seems reasonable in that there seems to be no disagreement that foregoing this is detrimental to both the EU and the UK)

2. The UK agrees to the free movement of Irish nationals between Ireland and Northern Ireland and the rest of the UK. (This seems feasible to allow Irish EU passport holders to enter the UK as present and should be easy to implement. Many countries allow entry without visa requirements. This measure and 1 above would remove the Irish border issue.)

3. Other EU nationals will be subject to UK immigration laws and regulations. (These laws and requirements would need to be fleshed out but this measure is necessary as immigration was probably the main issue in the referendum along with the source of lawmaking.)

4. EU nationals currently legitimately resident in the UK will be granted permanent rights to remain and be treated in the same way as UK nationals either by dual nationality status or visa rights, to be determined.

5. The UK agrees to maintain compliance of EU safety standards on goods including any regulations applying to food safety. The UK could not therefore export non compliant food stuffs to Europe although it would be free to import them should the UK choose. (This would need to happen in order that free movement of goods and services could continue. It also seems rather pointless to have different standards for the UK and Europe.)

6. The UK will incorporate EU law into UK law where it is considered appropriate and of sound value. The UK as a sovereign nation shall not be obliged to adopt EU laws. (This would allow for legal harmonisation where possible but would still grant sovereign rights to the UK with the ability not to implement EU law if after appropriate scrutiny the UK decided it was not appropriate.)

7. The UK will pay a contribution towards the EU budget to cover its share of costs relating to Europe wide initiatives on policing, counter terrorism, safety standards and other mutually beneficial policies. This would be open to negotiation but could be in the region of £4bn to £6bn annually. The UK will not pay a penalty fee to exit but will agree to the annual payment. (It would be fair for the UK to continue making some contribution to the EU budget to cover mutually beneficial joint policies and access to the market place.)

In return for the above the UK would want the following;

1. The free movement of goods and services from the UK to the EU bloc on a tariff free basis.

2. The free movement of UK citizens to and within the European Union. (Some will argue that if the UK doesn’t grant reciprocal rights why should the EU grant this. Since the EU advocates that free movement is beneficial to the EU it should acknowledge that this benefit still exists and the EU would be foolish to punish itself. It is UK that is losing out in its mind.)

3. The UK would be free to negotiate with non-EU countries the basis of its relations with them especially with regard to trade.

4. UK courts and Parliament will be the sole arbiter of UK law, although consideration will be given to the implementation of EU law where appropriate.

5 The UK will be granted a transition period to allow for the smooth transition to new arrangements.

No doubt there will be many arguments against the above but it does set out a position around which negotiations can take place and to allow for UK Parliamentary discussion of the primary aims of the UK in its negotiating stance with Europe. What shouldn’t be allowed to continue is the mist of uncertainty over what the UK position is. There can be no negotiation unless one or other of the parties sets out terms around which the negotiations can be held. Too much time has already been wasted in secrecy in the mistaken belief that only by withholding information from the respective electorates will solutions be found. That is a recipe for disaster.

Better Funding for University Education


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A university education has we are told become more expensive, possibly for government, definitely for students.

A big part of the problem is that universities got a free hit when setting their price. When the government set a maximum level on fees for a degree it was no surprise that all universities set their price at the maximum knowing that for every student it could enrol it would receive the fee irrespective of the quality of the education or the true cost of providing it. Universities didn’t have to compete on price to receive their funding all they needed to do was fill their student quota. As a consequence the result has been an increase in Vice Chancellor salaries rather than an increase in the quality of education.

What is required is to put the choice into the hands of students when deciding to which establishment they want to attend and how much they are willing to pay for it.

Each student should receive a fixed amount of government funding to pay for degree level education. It may be that there are tiers to promote take up of science or medical degrees to take account of the societal benefits and the longer duration required to complete studies but the general principle of a fixed amount per student applies. Students would then be free to choose how and where they could spend the funding. It could be that they would top up the amount to pay extra to go to a specific college or chose to live at home to defray costs of living but the choice would be entirely theirs to make.

Universities would likewise be entirely free to set their own prices just as they currently set their own entry requirements. Those that consider themselves of a higher standard would be free to set a higher price. Others would need to compete for students by lowering costs. The universities would be incentivised to improve the quality of their education provision in order to attract students or go out of business. If higher funding is offered for science and other courses deemed to be more societally beneficial then universities will be incentivised to provide those courses.

Universities can tailor their courses more appropriately rather than see everything as a fixed three year degree. Two year or even one year courses could be offered. Students would decide what is appropriate for them rather than the one size fits all that is in operation at the present.

I would also propose UK league tables (not just a single ranking list) of universities based on student assessments or other agreed measures of the quality. Universities would compete to rise up or be relegated into lower leagues as a further pressure on quality, costs and price. It would also provide better information to wider society and employers as to the quality of higher educational establishments. Nothing provides better focus than the fear of relegation or the joy of promotion.

Students should repay the funding once employed within certain earning parameters as is the case now but no interest should be charged. Society will recoup it’s investment via the higher earnings and other societal benefits of a better educated population.

What will people argue against.

Firstly that the why should the better off receive a benefit from the state to fund their education. The funding would be available to all regardless of social standing although clearly some standard of educational achievement would be required to obtain a place at a college. The benefit from funding would be negligible in that the funding is repayable. The benefit accrues by virtue solely of an interest free loan not much different than the current funding arrangements but without the usurious interest rates charged. The benefits from a better educated society will accrue to society as a whole and those better educated members of society should repay the benefit received many times over in higher taxes and greater skills.

Secondly elite universities will be priced out of range of intelligent but poorer students. This is a possibility but the elite universities will still want to attract the best students and will not solely base their decisions on profit. Elite universities I believe will still offer bursaries and other choices in education to the less well off as they do now.

Thirdly universities will up their fees further. Yes some definitely will but the choice of whether to go to those colleges will be in the hands of the student. If it becomes too expensive entrants will fall. Universities will need to be far more critical of what they offer students rather than simply filling a quota and then applying to the government to pay a fixed fee for each student. Some colleges will find that they boost their income by revising their prices downwards rather than increasing them. Vice Chancellors will have to merit their salaries by managing their institutions rather than just getting as many students as possible for a plethora of courses many of which are of dubious merit and collecting a fixed fee per student from the state.

Fourthly, students will game the system and keep some of the money themselves rather than spending it on education. Some will and it is that very incentive that will put college funding on a better footing. It shouldn’t cost society any more but will put pressure on universities to properly price and provide quality education. Students have to have a college place, have to repay the money loaned but are free to manage that equation themselves. If a one or two year course works out as being a better option at a lower price then students are free to make that choice. If they wish to spend less at a less fashionable institution then so be it. If they prefer to stay at home and help the family finances then they are free to do so. I believe putting income into the hands of the young will be an economic benefit not a drag.

Fifth, some people just don’t agree with market solutions. I would say the focus should be on outcomes not methodology. 

Currently students are told the price of a university education and have no influence over that price yet it is they who are being asked to fund it. If universities are forced to compete for students then the higher education system will get better. Universities should not be handed cash without earning it.