David Miliband in the FT, his errors, and a positive policy for wealth creation

The Labour Party will eventually get back in power again. There is a very good chance it will be led by David Miliband.

In the FT yesterday he wrote: “Framing the debate as a choice between the public and private sectors is certainly good politics, but it is bad economics. The Budget will force 600,000 public sector workers into unemployment”. You can see the full article here. This demonstrates that Miliband is a slave to the underconsumptionist crank Keynes. He does not understand the role of costs and savings in society that was recently explained so well by Prof Guido Hulsmann.  I draw your attention to my notes explaining the two underconsumptionist “Elephants in the room.”

Mr Milliband, please note.

Slide 9

Sophism 1: A “leak” in the circuit of spending? – In Glory of Hoarding

To Keynes, an act of savings is a leak from the economy. If I choose to sit on all my money under a mattress then I increase the purchasing power of all the money in ownership of others not under my mattress. I enrich people by an act of hoarding as their money units have more command on the same level of goods offered for sale.

Sophism 2: “The Paradox of Savings” – Circular Flow of Income

One man’s spending is another man’s income. Save, i.e. cut back on spending in the economy as a whole, and the workers’ income will fall. This will cause a depression. If the arguments in the above do not solve this then you must add; what matters is not that income will fall, but the relative difference between the level of costs and profits is the thing that really matters. If incomes all fall and thus the costs of labour has fallen, companies’ costs positions go down in a greater percentage to their overall cost base so they remain profitable, then there is no system-wide depression as this adjustment process (bringing costs into line with expenditure and making business profitable once more) takes place. Relative cost and income matters, not absolute cost and income.

Milliband says:

I am an economic realist….The government also has no plan for jobs…. Instead, it should focus on the jobs deficit: the 2.5m people looking for work. Sweden made halving unemployment its priority during its 1990s fiscal consolidation.

Jobs for sure should be the centrepiece of any economic policy and I will come back to this later….

Sadly he demonstrates that his knowledge of economic history is very poor. For example:

Britain is repeating Japan’s response to its crisis: pulling stimulus too early, raising value added tax and relying too heavily on monetary policy – leading to unemployment and stagnation.

Japan has had the biggest increases in its money base and the largest sustained fiscal expenditures thrust upon it. It is the Keynesian belief in demand management that has all failed over the last 20 years. Yes – 20 years. This nation has been postponing its reckoning for two decades. When you find that the Imperial Palace in Tokyo (3.5 km sq patch of land) was worth more that the whole value of property in California, the word “bubble” comes to mind. For sure, there are still many system-wide adjustments that need to take place before that nation emerges out of its fiscal and monetary incontinence. With Miliband under such delusions we should be getting worried that this no doubt well-meaning politician could do so much damage to us as a nation, just like his old boss. That nightmare just finished and I do not want to go back there soon!

He has identified five steps to renew Britain.

Step 1: Create a British Investment Bank.

This is very irritating indeed; we have a whole slew of banks, private equity and venture capital. The last thing we need is the State becoming the allocator of capital. Professional investors or lenders lend to opportunities that have a very good chance of creating wealth. The only purpose of having a State owned bank is so that it can lend based on political criteria, otherwise why do it? This will cause more bad investment and slow down the process of the liquidation of the bad investments we have already. This really is far too important an area of society for the government to get involved with; they simply do not have the skill or understanding.

If he really wants to lift the lid off growth and release the true creativity of all entrepreneurs he should consider the following:

• Abolish Corporation Tax in full so that all businesses can use their own retained profits to facilitate further investment in them and not be reliant on bank funding. This was how things were done in the Industrial Revolution.
• Abolish Capital Gains Tax in full so that entrepreneurs are incentivized to create more businesses with our reward of getting a tax free gain. Sir Gus O’Donnell initiated, via Gordon Brown, the most favourable CGT regime in living memory. I was staggered at the time that a Labour government could actually have such great vision. It put the business community right at the heart of Labour. Miliband would do well to remember this, should he wish to get the support of business again.
• Abolish Inheritance Tax in full.  This will stop the crazy incentive of having to avoid tax by going into exile, or doing some very fancy and expensive tax planning so you can build great intergenerational wealth that is built upon and passed down through generations for the ongoing benefit of many people. This nation was built on great big industrial and financial fortunes created this way. The more the State confiscates and sets up perverse incentives to avoid and leave the nation, the more impoverished we will become.

This line of thinking applies to all of those taxes.

Corporation Tax is due to be around £35 bn and the other two raise approx £5bn in total. This is currently also what we pay in terms of interest payments for the national debt, a burden which significantly increased under the last Labour government.

This July the two big State owned banks, RBS and Lloyds, missed the lending targets set by their last political masters by nearly £17 bn.

We pay nearly 6 million people in this country to do nothing, being either unemployed or on incapacity benefit. What a colossal waste of human resources, and a staggering affront to human dignity. If each one of them with all their benefits was costing us £6,667 per year, this would be £40bn a year. If the private sector was released from the corresponding tax burden, it would have the means to create jobs and wealth.  £40 bn a year more in the hands of businesses would prompt a jobs revolution that could well take most of these people off benefits and into work.

This is what Miliband and indeed all politicians should be brave enough to be thinking, but the Miliband plan shows no such enlightenment …

Step 2: Get 60% of people into University

This is often said by well meaning well educated middle class people. They want to see Oliver Twist blossom. There is, of course, nothing wrong with this, indeed all people should be encouraged to achieve their potential – but so should the Artful Dodgers. It is not possible for all people to be like the middle class, well-educated Miliband. Where is the respect for the artisan? Where are the technological colleges to educate our carpenters, butchers, mechanics, fishmongers, and plumbers. All these critical skills are severely undervalued and are being worked by an increasingly imported in work force which does value these skills.

Instead, Miliband should be thinking about doing the following:

• Abolish the minimum wage for all people aged under 21 years old and let employers pay anybody anything if they can prove that they are putting a young person through a artisanal skill based training program that could well lead to a job. A young lad living with his mother aged 16 is largely no use to man nor beast until he has gained experience and at £240 per week (plus NI etc) a plumber would not bother to take him on as he would not produce that benefit for maybe a couple of years which would make it worthwhile to invest in the employment and training of this person.

The next gem from Miliband involves the magical mystery multiplier:

Step 3: Deploy the public sector “to invigorate local economies by maximizing the multiplier effect of public services

I tell you no lie! I will not even bother to comment on this suggestion. The thought of those crack troops of bloated inefficiency trying to organize a fairly lean private sector will send us into the dark ages.

Miliband would do well to read this article which also shows why the multiplier is a myth. Here is one quote from it:

If I have £100 and I spend it on goods and services, my demand to hold cash or my money demand goes down by £100 and I receive goods and services in exchange. The person(s) who sold me the goods and services receives the £100 in exchange for those goods and services and his demand for a cash balance, or money demand has gone up. Where is the multiplier in this? It does not exist

Meanwhile, back in Miliband land …

Step 4: Increase productivity “and the quality of work in low pay, low value sectors of the economy.”

I am not sure what this means but I could not disagree with the desire to increase productivity. This is the only aim of capitalist entrepreneurs. I try to use the existing factors of production in better and more efficient ways over time to get better products and services for my customers. The only thing that gets in the way of this is endless pronouncements and laws from various government departments here and in Europe. If Miliband is advocating a total abolition of all this garbage, then great. Somehow I suspect he is advocating better meaning meddling, which will have exactly the opposite effect.

I suspect the low quality and value sectors comment is political rhetoric. Needless to say, 100 years ago if you had electricity you were a prince among men. Now, I would think it is 99.9% of our country. The onward accumulation of wealth, built upon the shoulders of our ancestors via the operation of private business – and not government – ensures that the maximum number of people are lifted out of poverty. Not allowing the creative talents of people to freely express themselves, by having things like the minimum wage, is an affront to the Judeo-Christian ethic upon which this society is built and will ensure that Miliband’s objectives are hampered. If paying people more were the answer, we could stop poverty today by not just having a minimum wage of £5.93 per hour but £593 per hour. The absurdity of this is plain to see. However, not so plain to Miliband who is obsessed with the underconsumptionist fallacies mentioned above.

Step 5: Produce an industrial strategy, “marshalling the state’s tools of procurement, regulation, planning and taxation to attract the private sector where it is needed most”

He goes on to say: “We can learn from Portugal’s initiative on infrastructure for electric car-charging, a viable commercial case for investment in manufacturing. Germany’s renewable energy policy combined feed-in tariffs with regional development areas and research, creating more than 300,000 jobs. Israel’s incentives-based approach to commercializing university research has taken it to the top of the innovation charts. Globally, governments are helping to expand the economic pie.”

The government can only take what the private sector generates. It does not own factories producing things that create wealth. It spends wealth that would otherwise have been spent by the private sector on things that people actually value.

He concludes

At the last election Labour could not find a single business to support its economic policy. I am determined to put this right – and lead Labour into again becoming the party of spreading wealth creation, not just spreading wealth. It is not good politics to have bad economics.

Sadly for Miliband I suspect that that will still be the case should he get in power! I hope his period in opposition allows him to reflect on why the people have put him out in the cold. I hope he learns a bit of economics as well, and visits factories, enterprises, banks, and other businesses at the coal face, and talks to people who are involved in the creation of the wealth of our nation. I hope he asks them how they would go about creating more wealth. If he does this, and reflects sincerely, he must surely realise the secret to our nation’s future prosperity lies not in what government can do, but in what it can stop doing.