Corbyn's custom union proposal is not finger licking good

As Jeremy Corbyn comes out to support a customs union with the European Union risks throwing away the key benefits from Brexit. Matt Kilcoyne, Head of Communications at the Adam Smith Institute, says:

"Jeremy Corbyn’s latest position on Brexit makes little sense. A customs union with Europe, while walking away from the single market threatens any potential gains from Brexit and Corbyn's hostility to America will also hurt British consumers.

"The customs union of the European Union is dominated by continental manufacturing interests. Britain could be nimbler in its approach than the EU has managed over the past four decades and draw down its tariff structures on third countries to reduce costs for consumers while boosting trade (be it with the developing world or with the largest economies like America and China). Corbyn says that he doesn’t want the UK to become a rule taker but that is precisely what this proposal will see us end up as. The UK is the tenth largest trader in the world. In 2016, the United Kingdom exported $404bn and imported $625bn. We should make the most of this opportunity to be the bastion for free trade with the rest of the world, not be shackled to institutions and decisions made in Brussels without our say.

"A comprehensive free trade deal with the USA could open up a market of 323m to our world-beating financial services, high-quality food, legal services and cars – while driving down costs for consumers here. Corbyn might be getting all in a flap about chlorine chicken in an FTA but EU institutions like the European Food Safety Authority he so lauded have said it was safe to eat time after time. Throwing away the chance for trade deals with the USA by hamstringing the UK to a customs union with the EU would be like buying a chicken burger, throwing out the meat, and eating the wrapping."

For further comment or to arrange a interview please contact Matt Kilcoyne (matt@adamsmith.org, 07584778207, 02072224995).

Mutually Assured Prosperity

Following David Davis' speech this morning where he called on European Union partners and member states to agree mutual recognition on the basis of trust the Adam Smith Institute says that the government's Brexit secretary is speaking sense. Matt Kilcoyne, Head of Communications at the ASI, said:

"When talking about trade we often hear of the importance of rule makers and rule takers. Most countries though know that in some things they make the rules, in others they take them. It will be the same for Britain as we leave the EU. In insurance, in banking, in legal contracts and many commodities it is British rules that are the basis of global trade. In goods we've worked for four decades with European partners to set global standards. 

"The Adam Smith Institute has argued in favour of mutual recognition before and it makes sense that we'll seek to mutually recognise the work of institutions that we've helped to build. Use of a single set of approvals boosts trade by removing barriers and time costs. 

"But it mustn't stop at the borders of Europe. The safety of medical devices in the USA, Switzerland, and Canada are just as good as those found on the continent. Cars from Japan are just as safe as those sold by German manufacturers. At the heart of this issue is trust. Governments should trust each other, just as multinational companies do in their supply chains. If we want a globally facing Britain we'd do well to support further mutual recognition and trust between our allies."

For further comment or to arrange an interview please contact Matt Kilcoyne (07584778207, 02072224995, matt@adamsmith.org).

Scrap the Bank of England's Inflation Target

New Report calls on Bank of England’s remit to be reformed to move from CPI Inflation rate targeting to a nominal income target and remove discretion over Quantitative Easing. 

• Government should replace the Bank’s 2% CPI Inflation target with a nominal income (NDGP) target
• By moving to NGDP targeting, the Bank of England can credibly maintain a single target in good times and bad
• Forward guidance must be clear and credible, ambiguity creates uncertainty and reduces the effectiveness of monetary policy.
• Clear and consistent action by central banks allows effective financial market reaction and reduces spillover effects in the wider economy 
• Prediction markets, allowing people to trade on bank’s solvency, would punish excessive risk taking and create a more sustainable financial sector 

Ten years on from the financial crisis, a new report by the Adam Smith Institute urges the government to scrap the Bank of England’s 2% inflation target and move to a new system that targets nominal income. 

Conventional monetary policy by central banks used interest rates control inflation, but since the financial crisis a decade ago, the central bank has used emergency asset purchases (i.e quantitative easing). A move to nominal income (NGDP) targeting would mean more accurate and responsive decisions made by the Monetary Policy Committee (MPC) by allowing a single focus on aggregate demand.

The price system is meant to reflect real scarcities – and so supply shocks should be reflected in inflation data with policymakers trained to ‘see through’ them. The central bank itself is described as being the primary cause of demand shocks. As nominal income is demand, NGDP targeting avoids requiring ratesetters to distinguish between supply and demand shocks and increases stability.

Decisions on asset purchases by the MPC at present are discretionary and arbitrary. While forward guidance has been issued, it is sometimes seen as publicly committing the bank to future actions and sometimes seen merely as a forecast of where the economy is headed. Instead the Bank of England should move to a rules-based system, the report argues. The MPC should clearly set out the amounts and types of assets the Bank will hold in each scenario. For example, if the Bank of England owns more than a certain percentage of gilts of a specified maturity, they then extend asset purchases to a pre-announced basket of investment-grade bonds.

Monetary policy since the crisis, including consistently near-zero interest rates have prompted destabilising capital flows and driven large swings in emerging market currencies, increased the costs of pension provision, and encouraged speculation in commodities. With open market operations limited in scope, and financial markets knowing in advance which margins the Bank of England intends to exploit, these spillover effects could be limited.

By being clearer with markets about the intention of monetary policy, the Bank of England’s actions would have stronger intended effects, the paper argues. 

Ten years on from the financial crisis, it’s time to look again at whether we regulate lenders and financial markets correctly. The cat and mouse charade of complex banking regulation, setting banks up against government regulators presumed to know all, is destined to fail, the paper says. Referencing Andrew Haldane’s 2012 speech at Jackson Hole, the paper argues that clear, simple and consistent rules based regulation has a better effect than increasing complication as “you do not fight fire with fire, you do not fight complexity with complexity.”

By replacing bank stress tests that straight-jacket bank behaviour with prediction markets, the Bank of England could also help taxpayers avoid future bailouts. Questions could be posed relating to the banks objectives which could be traded on, the paper argues, and so provide real time probabilities of risks that are transparent to all markets. These markets would end up boosting competition and punishing excessive risk taking efficiently and effectively, more effectively than current regulation allows and far better than that a decade ago. 

Anthony J. Evans, author of the report and Professor of economics at ESCP Europe Business School, said:

“Since the financial crisis monetary policy has played a reasonable role in stabilising the economy, but only because it has strayed from its conventional remit. Given the damage caused by that remit in the first place, the Bank of England should take the opportunity to adopt a new approach. Reforming open market operations and adopting a Nominal GDP target is effective in good times and bad, and provides a coherent, rule-based framework for monetary stability.”

Sam Dumitriu, Head of Research at the Adam Smith Institute, said:

“Monetary policy should be stable, predictable, and rules-based. The extraordinary policy measures the Bank of England took in response to the financial crisis increasingly relied on the discretion and wisdom of policymakers. Now, nearly ten years since the start of the Great Recession, we should take the opportunity to change the Bank of England’s mandate and reform open market operations.”

Notes to editors:

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07584 778207.

The report ‘Monetary Policy After The Crash: Lessons Learned?’ is available here.

Corbyn onto a loser with renationalisation plans

With John McDonnell and Jeremy Corbyn saying a Labour government would renationalise energy companies, Matt Kilcoyne says that Labour are onto a loser picking the state just when dynamic markets are what the world needs to go green.

"Labour is right about one thing. The future of energy provision is decentralised, flexible and diverse. But their plans for renationalisation would threaten this by going in the exact opposite direction.

"The state is bad at picking winners, more often it subsidises losers. It is the trial and error of the private sector that will decarbonise our energy supply. Rigid state monopolies rarely innovate, but private sector competition is already driving down solar and wind costs. The freedom to experiment with new business models including dynamic pricing and home battery storage could be key to cutting emissions, but only the market can deliver it.

"The hidden cost of renationalisation is billions of foregone investment, just what's needed to turn our energy production green. Their ideological stance threatens not just our wallets and our ability to keep the lights on, but also how we deal with climate change."

For further comment, or to arrange an interview please contact Matt Kilcoyne (mobile: 07584778207, email: matt@adamsmith.org).

Crack-downs on social media risks competition as well as free speech

In reaction to the moves by the Prime Minister at her speech in Manchester to announce a consultation for a new offence against online abuse Matt Kilcoyne, Head of Communications at the Adam Smith Institute, called out the dangers of doing so:

"Publish and be damned were the watchwords of our free press, it should be for individuals on social media too. We have laws that govern threats of violence and death threats, we have laws that can punish libelous and slanderous claims. We should be enforcing these existing laws better, not creating a new offence of abuse – an ambiguous term that could easily be used to shut down criticism in the name of being offended.

"This is something that the Lords’ Communications Committee confirmed when they, last year, said they were not persuaded it was necessary to create a new set of offences specifically for acts committed on social media. It is worrying the Prime Minister wants to override this advice in creating a new law to restrict free speech online. 

"Social media companies that provide a platform should not held accountable for what users on their sites post, no more so than the Royal Parks are for the views of those at Speakers’ Corner. Facebook, Google and Twitter might be able to afford thousands of staff and millions of pounds to police their users' views to swiftly take down content, but such requirements create a significant barrier to entry and risks hurting disruptive start-ups. Treating platforms as publishers risks stifling innovation and competition as well as free speech."

To contact us to arrange an interview or further comment please do so via either email (matt@adamsmith.org) or phone (mobile: 07584778207; office: 02072224995).