Time to dig deeper and analyse things:

 You must be aware of headlines about the IMF saying Truss & Kwarteng have got it wrong; this is not unusual, and a quick search would find numerous instances where they have been proven wrong - and worse. Still, to understand their stance we should look at the data and facts:

28 September 2022

Why does the IMF care more about equality than growth?

By Sam Ashworth-Hayes @SAshworthHayes

Photo: Olivier Douliery/AFP via Getty Images

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•   If the IMF is so concerned about inequality perhaps it should look at the US
•   The economic orthodoxy hates it when governments do anything unusual
•   The Sensibles have a lot riding on supply-side reform petering out

The IMF is less than impressed with Liz Truss and Kwasi Kwarteng’s first mini-budget. In the kind of admonishment you’d normally expect them to make about an emerging economy, they said, ‘the nature of the UK measures will likely increase inequality… [the government might want to] reevaluate the tax measures, especially those that benefit high income earners’.

This is a bizarre statement to make. The UK is substantially less unequal than the USA, and the inequality/growth relationship is not particularly strong for developed economies. Should the IMF be expressing concern that the American economy will be undermined by its low top tax rates?

The cut in the highest rate of tax from 45% to 40% has driven a huge amount of media coverage, but is expected to cost around £2bn a year once behavioural responses are taken into account. As the IFS notes, it may very plausibly end up costing nothing.

It does, however, run contrary to an interesting strain of thought that has begun to predominate the IMF’s guidance to Britain. In this analysis, what really matters is how equal a country is, rather than how well off rich and poor are. But if this were true then why are so many people leaving countries like Pakistan – fractionally less unequal than Britain – in the belief that they will live better lives in the UK?j

To get a taste of how the Fund thinks Britain should be run, we can look at their country reports from earlier in this year. The UK needed a ‘revenue-based strategy’ for funding government spending, which meant tax rises. Among the suggested options were increasing income tax for the upper 50% of the population, applying a one-off wealth tax ‘payable on all individual wealth… above £2bn and charged at 1% a year for five years’, or raising dividend taxes for higher rate payers to 26%.

These suggestions are insane. Economists uniformly recommend against ‘one-off’ wealth taxes precisely because after a government’s done it once, nobody will ever believe that they won’t do it again. The damage this does to the incentive to invest or situate wealth in Britain would be huge, particularly as it probably wouldn’t actually raise very much: anyone with more than £2bn in assets is likely to simply leave the country rather than pay. Similarly, taxing dividends for the people most likely to invest in companies is a great way to shut off capital for British firms.

The March of the Sensibles

One explanation for this is that the IMF has been captured by a deep cover cabal of Soviet sleeper agents desperate to bring down the capitalist system and revert to communism. I am sympathetic to this argument, but think we can probably do better. Financial markets didn’t much like the Truss budget either, and while they may be many things they are rarely hotbeds of Trotskyism.

I’ve written about the market reaction on these pages, but to reiterate, my view is that they are understandably pessimistic about the ability of the UK government to produce the sort of growth it’s promising. They expect inflation to increase. Generally, this should drive a currency upwards (see my thread here). This means the drop signals either a sudden panic over the long-term fiscal sustainability of the UK, which would be entirely unwarranted, the competence of the government (which won’t affect the previous), or – most plausibly – Mike Bird’s suggestion that markets don’t think the Bank of England will do its job sufficiently well to mop up the inflation created by the tax cuts (although, again, it’s debatable just how much inflation will be caused).

The IMF’s reaction doesn’t fit neatly into these categories, and I think that’s because it’s driven by something else entirely. The IMF is staffed by a certain sort of person who is commonly found in the policy world, writing at papers like the Financial Times, working at think tanks like the IFS, or speaking soberly about fiscal sustainability in the Treasury. Let’s call them the Sensibles.

Sensibles pride themselves on being, above all else, sensible. Sensible means not doing anything that might rock the boat; like the apocryphal provincial official, their working orders are to ensure that nothing changes. In macroeconomic policy, that means making sure that governments don’t do anything unusual. If the country is on a long, slow path of decline – like the UK very much is – then that’s bad. But if an attempt to shake that up fails and drives up borrowing costs, that’s much worse: now you’re paying more on your debt, and still in decline. Much better to try the Approved Method again and see if it works this time.

The Sensibles hated the mini-budget. It put growth ahead of the deficit. It didn’t go out of its way to appease bond markets and keep borrowing rates ultra low – resulting in borrowing costs rising to a dizzying 0.2% real yield. It made lots of sweeping statements about planning reform and deregulation – risky! It wasn’t at all what British economic policy orthodoxy has preached for the last decade.

The Sensibles have quite a lot riding on this. If the mini-budget and the associated supply side reforms work in the long run, then everything we were repeatedly told was Sensible was not. This would be quite damaging if your career is based on sitting in an office and wisely telling people that changing anything is bad. Doubling down on Sensibleness is the only response open to the mini-budget: if you can bully Truss into changing course, then Sensibleness prevails. If Truss changes course after failing to get further supply-side reforms through, you are vindicated. And if the policies do work, well – you’ve lost anyway.

This is republished from Marginally Productive. Read the original article here.

GDP vs GDI - great for evaluation

 Have a read; anything you are not sure about make a note and ask me. I had to read some bits twice to understand them properly. Note it doesn't do capitals for GDP/GDI - this is an anomaly of the software on this page; both should be in caps. If you actually go to the article there is the option to listen to it as a podcast.

A focus on GDP understates the strength of America’s recovery

Gross domestic income, a close cousin, paints a far rosier picture

Jun 9th 2022

It is fashionable in some circles to lament the “cult of gross domestic product”. The pursuit of growth, this criticism goes, blinds officials to less quantifiable but worthier objectives, be it a contented population or a clean environment. For many economists, the concern about gdp is very different. They see huge value in the core mission of the measure: namely, to provide as timely and accurate a snapshot of the state of the economy as possible, a lodestar for governments setting policies and for companies making decisions. Their criticism instead is that gdp occasionally struggles to achieve this, and that better alternatives might exist.

This debate has again come to the fore in America because of an unprecedented gap between gdp and its close relative, gross domestic income (gdi). In theory the two ought to be aligned. Gdp tracks all expenditure in the economy, summing up the market value of consumption, investment, government spending and net exports in a specific period. gdi tracks the earnings associated with that expenditure, summing up wages, profits and any other income. In reality the two never match up perfectly, since the long-suffering bean-counters in statistical agencies must draw on different sources, released at different times, to tot them up.

The gap between gdi and gdp (officially known as “the statistical discrepancy”) is typically about 1%. Since late 2020, however, the discrepancy has been much larger. In the first quarter of this year America’s gdi was fully 3.5% larger than its gdp. That is much more than a rounding error. As Ben Harris and Neil Mehrotra of the Treasury Department wrote on May 26th, when the latest gdi data were released, it results in remarkably different pictures of the economy. If gdp is the better reflection of reality, economic output is still about 2% below its pre-pandemic trend. If gdi is accurate, the economy is 1.2% above trend, a far stronger recovery.

One approach to reconciling gdp and gdi is just to split the difference. In 2015 the Council of Economic Advisers in Barack Obama’s White House laid out the case for doing so, calling the average the “gross domestic output” (gdo). The crucial point is that both gdp and gdi derive from entirely independent gauges of output. Combining them should, on average, reduce measurement errors. Mr Obama’s advisers found that gdo was an excellent predictor of later revisions to gdp. For instance, when gdo growth is half a percentage point faster than gdp growth, it is associated with a subsequent upward revision to gdp growth by roughly half a percentage point. This observation is slowly creeping into mainstream thinking. The Bureau of Economic Analysis has started publishing the simple average of gdp and gdi, though few journalists or analysts bother to mention it in their reports.

Accounting for the huge discrepancy at present is somewhat trickier. A useful starting point is the observation that the gdi-gdp gap opened up at the height of the covid-19 pandemic as the government’s stimulus flowed into the economy. The sudden infusion of cash through transfers to households and loans to businesses appears to have messed up conventional measures of economic activity. Corporate profits have been uncharacteristically strong, explaining the vigour in gdi. In principle that should have been mirrored in much more robust gdp readings, too.

Matthew Klein, the author of “The Overshoot”, an economics newsletter (and who worked at The Economist a decade ago), reckons that an undercounting of business investment in gdp may be the most likely cause. Statisticians have struggled to keep tabs on all the newfangled ways that companies spend money, from software to cloud computing. During the pandemic entire business models were upended to accommodate online shopping and remote working; it stands to reason that investment data may have failed to capture such spending.

Another possibility, running in the opposite direction, is that incomes have been overstated. Some people and even businesses may have mistakenly inflated their incomes, at least in a statistical sense. Dean Baker of the Centre for Economic and Policy Research, a left-leaning think-tank, noted back in 2011 that there was a correlation between asset bubbles and gdi. When the stockmarket soars, as it did during much of 2020 and 2021, gdi tends to outstrip gdp. Capital gains are not supposed to count as income in gdp calculations, as they reflect the prices of existing assets rather than production of new ones. But the pattern suggests that people sometimes may misreport capital gains as ordinary income.

Nerds to the rescue

The uncertainty about whether to blame the discrepancy on undercounted business investment or overstated income does seem to argue in favour of the simple gdi-gdp average as a measure of economic output. That, however, is not entirely satisfactory. In a paper in 2010, Jeremy Nalewaik, then an economist with the Federal Reserve, showed that gdi was generally closer to the mark than gdp in registering fluctuations in the business cycle. It did a better job of documenting the true extent of the downturn in 2007-09. Moreover, its outperformance relative to gdp over the past two years is also more consistent with the run-up in inflation. Policymakers who had paid more attention to gdi may have become more concerned sooner about economic overheating.

Frustratingly, initial GDI estimates come out a month after the first gdp figures. But researchers are on the case. In a paper published in January by the Cleveland Fed, economists pulled together gdp, gdi and a basket of monthly indicators such as the unemployment rate and average hours worked in manufacturing. The result, they hope, is something closer to “true gdp” that can be updated on a monthly basis. Encouragingly, it performed well in documenting the recovery from the pandemic. If it proves itself over time, it will be one more in a dizzying array of indicators to keep track of. But the message is clear: a focus on conventional gdp alone is unduly restrictive at best, and misleading at worst. 

India overtakes UK to become the 5th biggest economy

 This is a typical one-sided article - it tells you everything good but makes no mention of obstacles. Last week's Moneyweek does, so if you want a contrasting view go look it up:

India is quietly laying claim to economic superpower status

The rise of China has been the biggest story in the global economy in recent decades.

Published by

12 Sep 2022

The rise of China has been the biggest story in the global economy in recent decades. But amid concern about its stumbling property market and global fears about inflation, the emergence of its neighbour, India, as a potential new economic superpower may be going under the radar.

You won’t find mention of it in Liz Truss’s blueprint for a “modern brilliant Britain”, but the UK has just been overtaken by India as the world’s fifth biggest economy. The nation of 1.4 billion people is on track to move into third place behind the US and China by 2030, according to economists.

And while the world became familiar with Chinese business titans such as Alibaba founder Jack Ma, the staggering wealth accumulated in recent years by Indian billionaires Gautam Adani and Mukesh Ambani has been less well publicised.

Adani, in particular, has come to represent India’s growing economic strength thanks to the rapid expansion of his Adani Group conglomerate, which covers everything from ports to airports, and solar power to television. Having entered the global Top 10 when he became Asia’s richest person in February, he is now ranked third with a fortune of $143bn (£123bn) and is closing fast on second-placed Amazon boss Jeff Bezos.

India was for many years seen as the poor relation to China, held back by a sclerotic, sprawling state sector and labyrinthine bureaucracy. It still has enormous problems of poverty and poor infrastructure, but it is beginning to emerge as a rival to its large neighbour with the kind of economic growth figures that were once the pride of Beijing.

Gross domestic product (GDP) grew by 13.8% in the second quarter of this year as pandemic controls were lifted and manufacturing and services boomed. Although double-digit growth is unlikely to be repeated in subsequent quarters, India is still on track to expand by 7% this year as it benefits from economic liberalisation in the private sector, a rapidly growing working population, and the realignment of global supply chains away from China.

“India has overtaken the UK to become the world’s fifth-largest economy,” says Shilan Shah, senior India economist at the consultancy Capital Economics, citing recent updated figures from the International Monetary Fund. “Looking ahead, India looks set to continue its march up the global rankings. In all, we think India will overtake Germany and Japan to become the third-largest economy in the world within the next decade.”

A key part of India’s continued rise will be its ability to grow its manufacturing sector and challenge China as the world’s No 1 exporter. India has already benefited from a large, well-educated, often English-speaking middle-class, helping the country to develop world-class IT and pharmaceutical sectors. It also has strong consumer demand, which accounts for about 55% of the economy compared with less than 40% in China.

Now the trick will be to benefit from its youthful working population to position itself as a manufacturing power to rival China, where an ageing labour force and rising pay levels are reducing its competitive edge. With a geopolitical wedge opening up between China and the west, India also has the opportunity to grow in reshaped international supply chains.

Nguyen Trinh, emerging markets economist at Natixis bank in Hong Kong, says the outlook is promising for India if it can keep investing.

“Indian demand is expected to be strong due to its demographics,” she says, “which is rather favourable with rising working-age population that will push for demand for essentials such as food and energy as well as infrastructure investment. The normalisation of activities post-Covid as well as an increase in government spending, particularly in infrastructure investment, is helping growth. Consumption rose in double digits and investment is accelerating.”

As with many aspects of India’s economic rise, Adani’s story is instructive. Now 60, the billionaire dropped out of Gujarat University, moved to Mumbai, and began trading diamonds before expanding into ports, construction and – latterly, but very profitably – renewable energy.

These widespread industrial interests have dovetailed perfectly with the country’s thirst for growth and seen his Adani Group holdings on the Indian stock market rocket in value. His main listed company, Adani Enterprises, has grown 50-fold in value in the past five years, while Adani Green Energy, which looks after its push into solar power, has doubled in value in the past year. The group is ploughing $70bn into green energy projects by 2030 with the aim of becoming the world’s largest renewable-energy producer – ironic given the controversy over its plans to expand coal mining in Australia.

Another important symmetry comes from Adani’s origins in the western state of Gujarat, which is also the power base of the Indian prime minister, Narendra Modi. Modi’s market reforms, which have included cutting corporation tax from 35% to 25% and opening up India to more foreign investment, have freed up entrepreneurs such as Adani and the man he overtook as the country’s richest person, Mukesh Ambani, head of Reliance Industries, and another Gujarati. Adani is close to Modi who has been known to use the tycoon’s private jet for campaign trips.

Nowhere is the local and global ambition of Adani more clearly illustrated than in Mundra, the Arabian Sea port which he wants to become the world’s largest by the end of the decade. With Modi’s government rolling out a 100tn rupees ($1.35bn, £1.1tn) infrastructure programme – it aims to build 25,000km of new roads in the current financial year alone – Adani is well placed to profit at every stage as the necessary raw materials are shipped in, turned into goods and services, and then sent back out around the world through Mundra.

This article was written by Martin Farrer from The Guardian and was legally licensed through the Industry Dive Content Marketplace.

Why don't we grow very large companies?

 

More of Britain’s pension assets should be used to drive business growth

They are stuck in low-yielding bonds while companies are hungry for capital

Jun 23rd 2022

Britain is a good place to be a budding entrepreneur. The country’s share of global venture-capital (vc) funding has doubled since 2018, to twice its share of global gdp. One out of every seven dollars the world invests in the earliest-stage “pre-seed” firms is invested in Britain. Although financial markets have taken a hammering this year, British vc funds have record amounts of unspent capital to throw at tomorrow’s winners.

But Britain is not a good place to turn promising startups into titans. There are many reasons for that, from Brexit to poor productivity. But a big stumbling block is that as British firms grow, the capital they need dries up along the way.

By the time these companies are raising tens of millions of dollars, rather than a few hundreds of thousands, their share of global vc funding has halved. “Deep tech” ventures, which try to develop industry-disrupting new technologies like quantum computing or artificial intelligence, fare especially poorly. And at the top of the capital ladder, Britain’s once-mighty stockmarket has drifted into insignificance. In 2006 it accounted for 18% of the equity capital raised in global initial public offerings. This year it has raised under 1%.

America provides a sobering contrast. It has spawned four trillion-dollar behemoths in the past five decades. Britain has not created a business worth even a tenth as much in more than a century. In 2011 the ftse 100 index of leading shares contained only two globally respected tech firms, Autonomy and Arm. Now it has none. Autonomy has been sold to Hewlett-Packard, an American giant, and its reputation tarnished by fraud claims (which its erstwhile leaders deny). Arm was bought by SoftBank, a Japanese conglomerate, and is now considering relisting on the nasdaq.

Comparisons between Britain and America are often misplaced. Much of America’s success in nurturing corporate titans was forged in the crucible of Silicon Valley, which has far more than abundant growth capital to recommend it. First-mover advantage in the vc market, long-standing partnerships with America’s Department of Defence and a culture that celebrates enterprise—they all turbocharge innovation. But Britain’s courts, excellent universities and world-class financial centre should make it unusually fertile ground for firms to grow, too.

What should be done? One focus ought to be to simplify corporate-governance rules. Britain has had more iterations of its baroque governance code in the past 25 years than it has had prime ministers. The result is a tangle of worthy disclosure requirements that distracts fledgling firms. Another should be to seek to attract those rare experts capable of making sensible commercial decisions in deep-tech areas like quantum computing. Britain’s excellent research universities are already a lure. One idea would be to create fellowships that combine an investment role with an academic one.

But the top priority is to direct the £4.6trn ($7.4trn) of assets held in British pension and insurance funds into more productive areas. Less than 1% of these assets is in unlisted equities. Defined-benefit pension schemes’ allocation to the British stockmarket has sunk from 48% to below 3%. The government should dilute the pension-fee cap that crimps investment in early-stage firms. It should reform accounting rules that incentivise funds to load up on low-yielding gilts rather than riskier equities. The plethora of tiny pension funds—like the 90-odd local-government schemes—should be merged so they can invest at scale. Britain has assets seeking returns, firms hungry for capital and a financial centre that can bring them together. It can do better.