I haven't had such a long gap in blogging for a while. I have no idea how the past two months have gone by (chronologically, I would imagine), but here we are, December 15th, and as far as anyone knows, I could be dead.

But I am not! (Of course, I would say this). I have been simply been drowning in a sea of thesis writing, teaching, working, holidays, films, meals, sleep, watching live comedy, performing in live comedy (not dead) and swimming pools. All of which is pretty standard fare, particular for those of us who write theses, teach, work, holiday, watch film, eat, sleep, watch live comedy, perform live comedy (not dead), recycle jokes and swim. So here's a brief snippet of each.

1. My thesis nears completion. It looks and sounds very much like a thesis - earthy and well researched.

2. My teaching has been fun. I hope one day to be good at it.

3. My work has proceeded. I have research papers and journal submissions and I think I'm due a minion.

4. I went to Egypt! I walked like an Egyptian - that is to say, near some pyramids and sand. This was a very good time.

5. I have watched many films. I'm unlikely to reach 100, as I've lulled for much of the year, but I've got through a lot in the past month. Donnie Brasco is absolutely my new favourite film. I like Johnny Depp playing lunatics and the weird, but Johnny Depp playing hardman undercover agent is far better, and Al Pacino's performance? Forgedduhboutit.

6. I have ate and slept. Not dead, you see.

7. I saw Mark Watson - here's a comedian who you should go and see if you want five hours of comedy delivered in under two hours. I failed to see Josie Long.

8. I have done the Imps, and that. There were new Imps who are a delight to be around and old Imps who get better and better, and a director-assistant director team who are doing a lovely job. A student of mine saw a show, which I imagine was strange for her. But that's me, shattering preconceptions about lecturers and their non-participation in improvised comedy shows. In some ways, this carries over into tutorials (no preparation, polite applause, rock music between each section).

9. I continue to Twitter. Follow me on Twitter. This is where you get everything you might expect from this blog - mystery, intrigue, preconception shatterings (bring you own!), jokes about the News and what we should do about it - but shorter (less than 140 characters) and more regular (more than 0 characters in two months).

10. I have continued with swimming. I am svelte. I am doing an exercise class on Saturday mornings. My abs glean in the midday sun. I am getting faster in the pool. My biceps bulge. I take my hands and place them on your hips, pulling you close.

Because I had some rudimentary training in economics, people often ask me about questions about areas of economics I do not know a huge amount about. I know more than, say, my parents, or probably the average Oxford PPEist (concerning, given the education of most of the front bench of both government and opposition, so let's hope experience counts for something). Large swathes of macro policy often fall into this category.

So when people ask me about the current government's deficit reduction plan, I tend not to have a definitive answer. As far as I see it, the basic argument for deficit reduction now (rather than in two years, say) is that the size of our debt has created an atmosphere of uncertainty in the UK amongst consumers and business, maybe about the timing of future tax hikes, possibly about a Greek-style default (although this is silly). Anyway, confidence is low, so reducing the deficit and (eventually) the national debt in a transparent way may restore some certainty and allay the worst of these fears and get people spending again. Government spending, if too large, may "crowd out" private sector spending, which may be undesirable - there is no guarantee that government spending is the best (most efficient, most wealth-creating) type of spending.

To me, the flip side always seemed to be more tangible. A spending cut (which isn't one of those politically convenient efficiency savings) takes money away from somebody - either an employee of the government, or someone who sells something to the government. That's somebody who goes out and spends less money, either because they no longer have a job, or their business has lower profits. Less spending has a knock-on effect - if a large group of government employees are laid off, and all of them reduce their spending, that's leads to other business earning less revenue. Maybe some of those businesses have to let some staff go because they just don't have as many customers as before. And so on. It's called the multiplier, and it's been known about since Keynes.

The reason that I dither is that evidence is limited and, even if there are lessons from the past, they may not apply to this particular moment in time as easily. This recession is special, both in origin and in depth and length. However, the Economist this week drew my attention to two very different recent papers giving some indication of the possible effects. The first they describe as the intellectual justification for many government's programmes of deficit reduction - published by two Harvard economists, it finds adjustments to the structural deficit lead to short-term growth (increases in the national output). This is great news for Mr Osborne and Mr Cameron, who were also boosted last week by the IMF's backing of their "bold" deficit reduction plan. This approval is all the more surprising when you see that the second paper picked out by the Economist this week was written by the Fund itself. They have severe criticisms of the methodology of that Harvard study, which, when corrected using their own data on deficit reductions, reverses the conclusion.

Firstly, they find deficit reduction of 1% leads to a 0.5% fall in national output, and a 0.3% increase in unemployment. Secondly, deficit reduction by spending cut is less severe - however, this has usually be accompanied by lowering interest rates at the same time. It's worth noting that in the UK's current situation, there is ZERO scope for doing this, as the base rate is, to all intents and purposes, as low as it can go.

As I say, the current set of circumstances are special, so this is by no means conclusive, and actual answers will only be known looking backwards. In fact , if you ask me about it at some point down the line... well, I'll still dither. But I'll have a more pessimistic face on.

News coverage of important and complicated economic developments is often very helpful, but sometimes it leaves more questions that it answers. I was trying to get to grips with the Budget's implications for welfare this morning, but the few headline measures don't really mean anything if you don't understand how tax credits work. So this morning I spent a few minutes getting to understand the system and a few more minutes trying to model the reforms.

There are two main sorts of tax credits in the UK: Working Tax Credits, paid to those in work but on low incomes, and Child Tax Credits, paid to those with children. The two credits replaced the old Working Families Tax Credits, which basically did the same but in one go.

There is a maximum value for each component of each credit, which is reduced as your income increases. There is what is called the first threshold (presently, £6420), where earning below this means you get the maximum. At present, tax credits are taken away at a rate 39p for each pound earnt over that threshold. They are technically ordered as well, so that the first credits to be removed are working tax credits (which have a basic component, a component for being a lone parent or a couple, and a component for working over 30 hours a week), then childcare, then the variable components of Child Tax Credits (children, baby, disability) except for the family component (which is the basic fixed element). The family component remains at £545 until the second threshold, £50,000, and then removed at a rate of 6.7p for every pound earned after that.

OK so far? The key changes in yesterday's budget are that the rate of removal is being changed to 41p for each pound for all credits (including the family component of the Child Tax Credit) and that the second threshold is being reduced to £40,000 next year. The one change that hasn't really been picked up on is that the second threshold for the family componet will be scrapped in 2012-13, so the family component will be removed immediately after all other components are - I'll show an example in a minute, but it basically hits everyone earning from about £23000 to £40,000. The baby component is being withdrawn.

At the same time, the children component of the Child Tax credit is being increased by £150 per year (in real terms) and another £60 the following year. Currently, this component is £2300 per child. This shifts the benefits from tax credits in favour of the lowest earners. Added to this, the tax allowance rose by £1000. Anyone earning between the current level and the new level will now pay no tax, and anyone earning above it will pay about £200 less tax each year. Those who have been taken out of tax will gain between 20p (for the person earning £1 more than the old threshold) and £199.80 (for the person earning £1 less than the new threshold).

Ignoring the income tax issue for the moment, I wanted to figure out who is better or worse off from the tax credit changes, so I put all of this into a model and looked at changes for benefits for incomes ranging from £1000 per year to £70,000 per year. I just focused on families (single parent or otherwise) with children (not babies and not disabled), so they receive a working tax credit - maximum of £3810 if they earn below £9,000, £4,600 if they earn over that, because at that point you would expect the person works 30+ hours in a week and receives an extra £790 - a child tax credit (maximum of £2300 per child in 2010, £2450 in 2011 and £2510 in 2012) and the family component (maximum of £545). I ignored childcare credits and child benefit for simplicity and kept all other benefits and the first threshold constant.

If you have one child, you are better off in both years if you earn less than £13,000 per year, by up to £210. This is important for government aims about poverty - the benchmark threshold for poverty in the UK is around £13,000 (about 60% of median income). So any claims that this Budget do not hurt the poorest stand up to some scrutiny here.

Up to £17000, you gain in 2012-13, but lose less in 2011-12. Above that, the losses this year from the steeper withdrawl tend to outweigh the gains the following year from the higher children component. The total net losses are between £0 and £120, depending on income.

Families earning between £24,000 and £40,000 are not affected this year, as they only received the family component. Above £41,000, the family component disappears, so familes between £41,000 and £50,000 lose all or most of their current credits this year. Next year, families earning between £24,000 and £41,000 will lose the family component due to the scrapping of the second threshold. This is why it is surprising this reform hasn't been picked up on - it will affect a lot of people to the tune of £550 per year. At the same time, it's not surprising how little it has been mentioned, because it's a bit complicated to get at.

For example, if you have two children, the patterns are roughly the same, but the exact thresholds change, and the headline "Families to lose £550 per year if they earn a certain amount per year" wouldn't work well. In this case, it is families between £31,000 and £40,000 that will lose the family component of their tax credit in 2012-13.

One last thing is the income disregard change from £25,000 to £5000. This, unlike what I thought after my first reading, is not a threshold, but a way of dealing with unexpected changes in income. So you earn £12,000 the previous year and are given the appropriate tax credit payment for the coming year. At the end of the year you earn £14,000. The income disregard means you haven't got to pay any credit back if your income change is small enough. "Small enough" used to mean £25,000 a year, and will now mean £5,000 per year. A tightening of the belt, for sure, but not one anywhere near as scary as the magnitude of the numbers (a drop of 80%), once you understand what it is. And now you do too.

Anway, that's all the numbers. The welfare state is a topic which raises strong emotions, often at the expense of facts. I would want to do nothing about the emotions, but hopefully this will do something for the facts.

By the way, our tax and benefit system hurts my head.

UPDATE: Some attention now being paid to the middle income families issue.

What I have done today:

1. Check email - three minutes.

2. Discuss Christmas holiday arrangement with colleague - two minutes.

3. Try to come up with a catchy title for a presentation: three hours, seven minutes.

This is the hardest thing about academia (easiest thing about academia: the spa days). What I want is about six words that suggests that my paper is both thrilling, yet insightful; meticulously researched, but definitely with car chases. The first problem is that my paper is on the labour market in the UK over the last thirty years - what jobs are disappearing (middle jobs income, routine task based occupations), why they are disappearing (computerisation) and where people doing them end up (words to do with mobility). This is not prime material for a catchy pun (play on words). In desperation, I tried to think of a song lyric or expression that might be tangentially related to this and what I discovered is that all of them have been used. A lot.

First attempt: "Stuck in the middle?" - a reference to noted popular music song 'Stuck in the middle'. This yields about 7000 results in Google scholar, ranging from the predicable (political science papers on countries bordering Russia and West Europe, sociological studies of middle management) to the less predictable (an article in a journal called, intriguingly, Fire Engineering) . I also found a paper called, "Tax Neutrality to the Left, International Competitiveness to the Right, Stuck in the Middle with Subpart F" (Keith Engel, if you ever Google your own paper titles, and I currently assume that you definitely do: Holla).

Second attempt: "Dude, where's my" and then something. There are 300 papers which are called, "Dude, where's my" and then something. Dude, where's my phenotype? Dude, where's my paradigm? Dude, where's my corn (possible subtitle: where's my corn, dude?). Even, Dude, where's my Black Studies Department? This is an actual book, although it may also be a page on Yahoo Questions.

Increasingly desperate attempts three onwards: "The more things change, the more they stay the same" - 3000 hits on Google Scholar (Including 'The use of popular cliches in academic paper titles: the more things change, the more they stay the same'). Next, "Moving on up" - 1200 hits on Google Scholar ("Movin' on up" has 600 hits, which tells me that for every three academics who have heard the music of M:People, two thought they could have been better). Finally, "Where have all the flowers gone? (where flowers are workers in routine task-based occupations and similar)" - no hits on Google Scholar, several hits on keyboard with own head.

So, anyway, this is the net result of my morning's work. Two paper titles. Firstly: The route out of the routine: jobs, wages and mobility in a polarising labour market. I love the 'interesting title: tedious exposition' format for academic papers. I want to write a paper called 'Punch in the balls: a study of fruit drinks at formal dinner and dance events'. The second one is called: "Calling time on the hourglass economy". Oh, by the way, there's a thing called the hourglass economy hypothesis, and I'm disputing it's importance. This is why this is clever. Both are original. Most importantly, if either are ever Googled by an up-and-coming young academic looking for ideas for a title of a new paper they will now see a link to this post. And, if they continue reading, they will also see this:

THESE TITLES ARE TAKEN. DON'T EVEN THINK ABOUT USING THEM. THINK OF SOMETHING ELSE.

AND, YES, THAT ALSO APPLIES TO THE FRUIT DRINK ONE.

I argued before that people needed to give Nick Clegg credit, rather than criticism, for trying to make a deal with the Conservatives. I believe that an agreement on a programme of government between them and the Liberal Democrats would best represent the country, and that the same people who argue for proportional representation needed to to acknowledge that it works both ways.

However, if an agreement can not be reached, then this ceases to be the case. Two parties that can't agree to a great deal and can't move on their own aims and those of the voters who supported them does not best represent the people. In such a case, an alliance of Labour and Liberal Democrats would be more representative of the country than a Conservative minority government.

Obviously, that isn't the only consideration, and the numerous media narratives that are currently going on show that their probably isn't one completely correct, iron-clad viewpoint. On one hand, many commentators have labelled the potential Lib-Lab government a 'coalition of the losers', whilst on the other hand, other have pointed out that the Conservatives are also not winners either. In fact, if you consider where the country was last year, when Labour managed 16% of the European election vote, you would have to summise that the Conservatives have taken quite a beating from the electorate too, whilst Labour did much better than expected. It's a confusing time.

Mainly, I think this is because the country at large is dealing with a new perspective on elections as the two-party system has fallen apart. A majority of people in this country voted for one of the two main left-of-centre parties. If they are the "losers", then we are essentially saying that the 36% who voted for the Conservatives are the winners, which is an odd mathematics at best.

I will say this though, as a trained economist. Screw the markets. I'm so sick of hearing about the "market's reaction to the uncertainty of a hung parliament". Firstly, it says a lot for our priorities when short-term market fluctuations could an important driver on much longer-term decisions. That's pretty much how the financial crisis started in the first place, and it's a psychology we need to lose. Secondly, the markets went down on Friday (uncertain government, failing Greece) and up yesterday (uncertain government, bailed-out Greece). One idea that presents itself to me is this: MAYBE IT'S FUCKING GREECE, YOU FUCKWITS.

Greek unemployment is over 11% and will almost certainly continue to drop. The UK's unemployment is about 9%, and has probably reached the bottom. Greece's S&P rating went from BBB to BB yesterday, thus crossing the threshold into junk bond territory. The UK's credit rating is the maximum AAA. The UK is not Greece.

What people need to realise is that debt can be willingly held by investors. In the case of Greece, it is not. In the case of the UK, it is at present. Would this change? Only if it becomes apparent that we can not service it - that is, if we can not pay the interest on it. Our tax revenues are likely to rise as the economy begins to grow again, and benefits are likely to fall. I know people get frightened by big numbers, but there is always a context. I don't know how you make this case convincingly to the public, but all the scaremongerers need to stop it. Mainly, I'm talking about the Tories, but Vince Cable this morning sounded no better.

That doesn't mean I think we shouldn't start to reduce our debt, but not for the reasons that are usually touted. Debt is a transfer of resources over time. With governments, this can be between generations. If debt is built up for investment, then the benefits of such investment will probably outweigh the costs of repaying it, so future generations are not made worse off. However, crisis management has a more immediate payoff and much less of one for people in 30 years time. It is not fair that the costs of that be paid by the future generations, nor that the government's ability to crisis manage should a similar thing happen again in the future be impeded by a shortage of cash.

http://news.bbc.co.uk/1/hi/uk_politics/8602988.stm

This is an annoying debate from both sides. Firstly, a rise in employer national insurance contributions will likely lead to fewer jobs than a world where this did not happen. The economics is pretty simple to anyone familiar with a downward sloping demand curve. Any evidence based on past experiences of the form "last time NI went up, employment also went up" is nonsense, because we don't see the counterfactual: a world where NI didn't go up. Probably, in that world, employment went up even more.

I say probably in all of this because firm decision making tends to be lumpy, rather than marginal. I'm not convinced a large firm can distinguish expected profits from creating 18 new jobs and creating 22 new jobs, for example, especially in service and retail companies (which is where many of the Telegraph writers came from). I'm positive that actual research on this would yield mixed results across different firms.

All this said, there is a deficit to correct, and that money needs to come from somewhere. I'd rather Darling came out and made the argument that as we expect the economy to grow and employment to start to expand, we are raising NI contributions from employers as a way of raising extra revenue by sharing in the returns to this growth. After all, the government's deficit is partially the result of the support it gave to employers during the recession (including the giveaway to business that was the 15% VAT rate). That seems fair to me, certainly moreso that many other sources of tax income.

Amidst all the gnashing of teeth and stomping of feet from American conservatives and morons, it's good to see a most sensible (and conservative) offering on health care reform and Sunday's vote.

I've been thinking recently about the often interchangeable use of the terms 'pro-market' and 'pro-business', which are not at all the same thing. For sure, the genius of enterprise driven by market incentives is undoubtedly a good thing, far more efficient than any socially planned direction of resources. But we need to remember that firms are ways of organising labour and capital away from the market. The market essentially starts where the firm ends. Within a firm, plenty of activities go on that could also take place in a market place. For example, instead of the creation of careers, with rules about promotion prospects and pay scales, labour could be hired on a day-to-day basis from the competitive job market, in the same way other inputs into production are bought as and when needed. The reason that firms internalise market processes is for reasons of cost reduction and profit maximisation, given a certain degree of foresight.

But in the same way that the relatively benign idea of creating careers reduces competition in the labour market for certain jobs, firms can reduce competition in other ways for the same goals of increasing profits. There are a whole raft of anti-competitive practices which firms may (and frequently do) engaged in, from legal ones, such as mergers and acquisitions (which replaces a market relationshiop between a supplier and a firm with a relationship that now takes places inside of the firm) to illegal ones, such as price-fixing (agreements between firms to rise prices about the 'market' prices) and predatory pricing (where large, cash-rich firms lower prices for a while to force smaller weaker firms out of the market). The point is, doing these things are in the interest of business. They lead to higher profits. Also, they are generally less immediately costly than other forms of activity which may create profits and benefit society (such as innovating new products or production processes).

So there is a difference between wanting to remove regulations which may stop markets working well and competition being impeded and wanting to remove regulations which impede business, because often, such regulations make competition and markets function better, not worse. Remember that, next time someone talks about a pro-business agenda.

Excitingly, I have had a paper accepted for publication in the Journal of Public Economics. This would be my first one. Go me. The world will now have to brace itself for the revolutionary impact of "Quasi-hyperbolic discounting and retirement: a comment" (forthcoming).

Sorry, haven't done this for a while. I meant to put up a Kitson review, and I probably still will. In the meantime, however:

Every morning, Cath puts on GMTV as she's getting ready. I have reached the point now where if I meet Andrew Castle in the street, I'll probably injure him (although that would only give him something else to look outraged about the following morning). Every morning there's some massive injustice going on somewhere in the country, some Little Man's battle against evil business or ineffectual government where he (or one of his co-hosts) will attempt to impersonate a real journalist by asking what I assume they think are the tough questions, but are actually just populist jabs, usually without the slightest bit of research or knowledge apart from the talking points from the segment introduction.

About a month ago, they were doing a segment on teen binge drinking, with the angle being that marketing departments in drink companies aggressively target young people. Possibly true, and morally quite dubious, but that misses the point. A representative from the industry made the reasonable point that companies can only operate with the existing law, and that maximising profits for shareholders is actually a legal requirement. They also had on a girl who had become an alcoholic in her mid teens. This sort of reporting, where you take one person with a huge vested interest and a sympathetic backstory as a spokesperson or expert for a particular point of view is manipulation, pure and simple, both of the individual, and of the watching audience, and lacks the intellectual rigour these issues deserve. Think Paul Betts everytime there's a drug tragedy story.

That said, she impressively and bravely argued that it was much more her personal choices than advertising that was her downfall, despite Castle's attempts to place sentences like 'wouldn't have happened if these companies didn't target children' in her mouth, nearly destroying the whole angle of the segment (it would have been destroyed if the host paid any attention to the input of their guests, rather than continuing with whatever they were going to say anyway).

This morning was a familiar one - the idea that electricity and gas companies pass on increases in energy costs much more than they pass on decreases in energy costs. The whole segment was lunatic on many levels. There was an 'expert' claiming that the problem was that the Big Six energy firms had been allowed to get too big, and competition was weak. There are SIX firms. That's four or five more firms than are active in most other European countries. The UK is the country furtherest along with the sort of market liberalisation the European Commision wants. How can any of them get too big? They have to share a market six ways.

The report also pointed out that companies tend to buy fuel a long way in advance, which is true, and for good reasons to do with reducing risk (which, ultimately, lowers cost). This, then, is the reason why changes in energy prices aren't always seen on bills. That is the end of the argument, because the initial question is the wrong one. Obviously, this point of logic ignored. They went on to ask if government should step in, as Ofgem wasn't doing enough, without the slightest discussion of why regulators are made independent from government in the first place.

The piece actually finished with a long statement from Ofgem stating that this issue had been investigated extensively last year, and no evidence was found that this perception (which has been propogated by media outlets like GMTV). I haven't read this report, but I do know that regulators rarely tend to side with energy companies on principle. I've worked on reports for regulators, and reviewed regulatory proceedings, and the amount of times a regulator will reject the arguments of a regulated company far outweigh the times they concede the point. Clearly, however, this argument will continue until someone writes a better report. Your move, Ofgem.

Let me finish this by noting that I'm no champion for the benefits of unfettered free market capitalism and big business. I realised long ago that capitalism is the only sustainable economic system, because it best matches human nature, with all its innate self-interest. That is not to say that I think that just because these motivations are natural, they are the best we can do - and anyone who argues otherwise is grotesquely unambitious. I believe that one of the challenges of the modern left is to find ways which greater equality can be created within this system.

Big business and the free market can, at times, do this - lower costs of living are a benefit to all, but a particular benefit to the poorest. At other times, the necessary conditions for effective free markets (information, rationality and power) fail so much that goverment intervention is better. I believe that government should care about social welfare, and that taxes can be redistributive, but that not all taxes on the wealthy are effective in achieving this goal. There's no hard and fast rule. But we can surely all agree that these sorts of programmes, with their uninformed, analysis-free posturing helps nothing or nobody - the whole purpose of it is to generate public anger, which takes away energies that could probably be better spent on real issues.

I've been wanting to post this news for a while, but there have been delays in everything being official.

At the age of 25, I have a job. Specifically, a research fellowship at SKOPE, a research group in the Univeristy's Department of Education. They were clearly fooled by my succinct yet persuasive CV (Craig Holmes, 25, unemployed, talented economist, hero to millions of children). It's perfect really - lots of academic freedom for research (within their research programme), but also more security, the ability to publish more often and at a more noticeable level, and most importantly, an office with my name on it. And an employer - nothing makes you get out of bed and start your day like having an employer (Exceptions: fire, dreams about spiders, violent wife). I'm very pleased, is all.

If anyone knows anyone who does poster design quickly, send me a message. I need to send for an order by the end of the month at the latest.

Say you buy an asset of some form, which produces a regular payment to you (like a bond or a share, for example). The price you pay for it should reflect the stream of payments you are expecting to get from it. If there are fluctuations in the stream of payments, this is generally captured in the price as a discount to compensate you for the risk you are taking on.

If an asset produces payments in perpetuity, and say that you expect the payments to be equal each year, and that the riskiness of these payments doesn't change, then the price of the asset should remain roughly constant - that is, the price you buy it for would be the same as the price you sell it for some years later.

If, however, the asset has a fixed life, after which it no longer produces any payments to you, then over time, the price of the asset falls. I mention this because of this story. The same thing as above applies here. The asset is Friends Reunited, which has produced income for ITV since it was purchased in 2005. The gap between £175m and £25m is vast, but this ignores the profits that have been earned in the meantime. In fact, if ITV expected that revenues would likely tumble by 2009 - possible, given the fact that Facebook and MySpace were taking off at the time, and are much more all-encompassing sites - and the price they paid for it reflected this, then this isn't a story at all. Investments can be for short term rewards as much as they can be for long-term ones.

In all likelihood, ITV probably didn't anticipate how much the value of the business would fall, or at least that this was at the low end of their expectations. They may have hoped to be able to create a better competitor for other social network sites than what resulted. I also don't deny that some of this is related to the recession, and the effect that has had on most businesses' income. But at least some of this is part of the riskiness I mentioned above, and the original price likely reflected it. Investmests underperform as often as they overperform, and its pointless to pick out individual ones that were bad after the fact. It may not have been, strictly speaking, bad - the overall gain from the investment (profits plus resale price) may still have exceeded the initial purchase price.

All I'm saying is there is more going on than "ITV lose £150m on investment".

By request, some thoughts on today's Budget.

The three big headline issues are the tax increase, the debt and the forecasts. On the first point, I don't disagree with various commentators who point out this is mainly a political move - the revenues raised will contribute only a portion of those needed to tighten the fiscal position. However, it will (and has) created headlines, and shifts the focus towards a different economic debate - one which Labour must be gambling will appeal to the public and push the Tories into either a weak non-position or an unpopular one. Anti-rich (or at least, anti-rich-bankers) sentiments are prevalent at the moment. We could, of course debate for hours on the merits of redistributive tax policy (actually, I'd get bored in ten minutes), so let's leave that aside.

I heard the Budget, especially the tax rise, described as smoke and mirrors, and to the extent that it appears to be a more significant policy for revenue raising than it actually is, this is valid. That said, overall, I'm not sure it's an entirely fair assessment - the government has taken a number of important counter-cyclical positions since last Summer. They are criticised for not doing enough and for doing too much.

That brings us to the second issue - that national debt will increase to nearly 80% of GDP - raises a number of worrying possibilities. Spain recently had its credit rating dropped on the basis that its debt would rise to 70% of GDP with counter-cyclical fiscal policies. Britain has a stronger economy than Spain, but even so such a high level of debt could cause agencies to regrade Britain's AAA rating, as more borrowing increases the possibility of default. Clearly, that possibility would remain low. But a slight increase in that possibility is enough to increase the cost of borrowing, and impose and even greater burden on future tax revenues.

How much is too much? There isn't one answer to this - providing it can be serviced, and provided the market is willing to provide the finance, then the large numbers may be scarier than they actually are. Of course, last month an auction failed to place 100% of new gilts, though this doesn't necessarily indicate that investors are running out of demand for government debt.

My biggest issue is the continual conflation of the issues of private and public debt by the Opposition. Excessive private borrowing has and will continue to cause problems during this recession - it should have been better regulated in the past and should be curbed in future. Public debt is a result of a government's fiscal position, so it is entirely right that it increases during a recession, as tax revenues fall and government spending increases. It, in itself, isn't reckless - the flip-side is that debt should be paid back during good times, which would have prevented such staggering public debt figures today. However you may judge the borrowing for public service investment after 2001 (and with the benefit of hindsight, it is safe to say that the government could have done more to reduce borrowing when the economy was booming), their action now is fundamentally correct.

Which doesn't stop the Tories scoring points on misinformation. They keep mentioning reckless borrowing referring to both public debt and private debt, and that will resonate. It is a lot more complicated to explain to the public that excessive household borrowing is bad, while huge government borrowing is OK (they could link to this blog post, but that probably isn't going to do it)

Finally, the forecasts need to be mentioned. The general consensus is that Darling's predictions lie at the upper end of forecast distribution, even after revising downwards his November predictions, and I have no reason to disagree with the consensus. He needs to be right. Otherwise, borrowing will end up exceeding what has been predicted, and the deficits won't be reduced is anything like the timeframe indicated. Most importantly, the predicted growth is the engine that quietly reduces defecits and borrowing requirements while the 50% tax policy will take the political credit. The question is really can the government afford to revise forecasts downward again - are they myopic enough that the short term gain of playing down the real size of the recession exceeds the long term blow to their already weak credibility. They might, if an election comes in between the realisation of the former and the latter.

Final thought: I wonder if they realised that the car scrapping proposal would open themselves up to Cameron's best line?

God, I love Stewart Lee. I will refuse to accept that there is a better comedian on the planet today. There may be funnier comedians, measured by a crude laughs-elicited-per-half-hour metric, but no-one crafts jokes like Lee. No-one has the same gift for language, for hypnotic delivery, and no-one is as relentless as he is in picking a target and demolishing it. His new show is on iPlayer now, and on Mondays at 10pm on BBC2 for the next four weeks.

On another note, the BBC had a piece today about why RPI inflation had fallen to zero, but CPI inflation had surprisingly risen. Both measure the cost of living and the change in prices for a "basket" of goods. However, the composition of the RPI basket includes housing cost, including mortgage repayments, which have obviously shrunk in recent months as interest rates have plummeted. The thing that amused me was the top three reasons for rising prices in the CPI:

1. Falling exchange rates making imported food and other products more expensive.

2. Shops reverting back prices prior to VAT rate decrease last December.

3. Poor harvest in Spain leading to increase in cucumber and courgette prices.

Wait, did we shift to a salad vegetable based economy whilst I wasn't looking? Are there people struggling with energy bills this month because their courgette expenses have rocketed? Maybe I'll just have a zucchini instead. But wait - it's the SAME THING! There's no way out!

The Daily Mail this morning is filled with hysterics about many savings accounts now facing zero interest rates, accusing the government of targetting help for borrowers (the reckless young people who created this whole mess in the first place because they don't care about morals or the family or the rule of law) by penalising the savers (the sensible old people who fought and died for this country, and had to scrape together everything they own with their own frail fingers).

Firstly, there are always winners and losers. If there were anyway of helping people without hurting others then it would already have been done. In times of crisis, those in control have to make an assessment of who needs help, and where is best to transfer that help from (whether its greater benefits paid for taxes, or great regulation which incurs costs to firms or whatever). The role of monetary policy (basically setting short-term interest rates) is to alter behaviour to control shocks to demand in the hope of maintaining steady (or equilibrium) levels of inflation and employment.

If demand-side inflationary pressures become strong, then interest rates will increase. This affects demand - people find it more costly to borrow, have less disposable income after mortgage payments have been removed, and find saving more beneficial. All of these things reduce the amount of money there is being spent, which eases inflationary pressures.

Currently, in the midst of the a downturn, where demand is falling, lower interest rates work along these same channels to achieve to opposite effects - more disposable income, easier borrowing, less incentive to save. While it is still effective (and with base nominal rates getting close to zero, it is reaching that limit) it is generally considered to most effect way of managing macroeconomic shocks.

The crucial point is that these are all short term changes. Once real variables are stabilised, interest rates will rise again. The issue that is getting confused here is that general idea that it is a good idea for people to save for retirement. It is, and and is also something that should be encouraged more as a long term goal. However, a government operates at the macro level, and while many individuals may suddenly find that their savings haven't grown as much as they expect this year and next year, they will also find (if they looked) that the recession that we are in, which will affect everyone, isn't as deep as it would be if governments (or central banks) had taken no action at all. Plus, savers have benefitted from higher interest rates during the last ten years when the economy has been doing well, which has come at the expense of borrowing and mortgage payers.

Plus, borrowers and savers aren't two different breeds of human. People borrow and people save over the course of their lifetime. In fact, many people do both at the same time, let alone during the lifecycle. Few people are Polonius. There will be times when interest rates benefit you and times when they don't. Overall, you probably do OK, given the long term nature of major borrowing and saving, and the short term volatility of interest rates.

So please, stop twisting sensible policy choices into a story about the government's attacks on the old and weak. Instead, go report on something you are well informed on, like the snow or some celebrity's battle with cancer.

Just so we are clear, you can not say "I believe in free markets" and then say "except in this case, the markets weren't working properly", especially when the next sentence is, "so a government investment of £700 billion is justified". That is exactly the same sort of nonsense as people who say "I believe in free speech, except when it is offensive to someone".

Here is the thing - markets don't work properly. Even Adam Smith didn't think so. It's a theoretical construct that free markets lead to desirable outcomes. For them to do so you need at least the following things - everyone to be fully informed about every aspect of every choice they make, no-one's choices to have any detrimental effect on any other party, and no-one to have any market power (for example, the ability to set prices). These things never happen, and they never will.

This is not to say that markets can't be made to work better (through regulation), nor is it to say that government intervention replaces market forces - the two often work hand in hand. Governments can level the playing field to ensure equity, while well-functioning market mechanisms (through prices) can more efficiently allocate goods and services.

I think many with more lefty-bent have realised that sometimes, there are good and bad ways to tax, that government spending is often inefficient and that markets can work better than social planners. This should be a similarly eye-opening moment for free-market enthusiasts. Because the things that make market function poorly are inherent to human nature, so there's always going to be a minimal level of government presence. After this last year, I think it is clear that we are not yet there.

I'd never really noticed until this morning, but news services are able to change the tone of a story about a government initiative by simply changing from "government money" to "taxpayers' money". The implication behind their usage are quite different. The first is fairly netural, and could even be seen as a positive if it implies that the government is shifting some of its resources towards the new activity. The second is far more negative - implying the wasting of money that is still our own.

On the BBC's Breakfast this morning, while discussing the new aid package to homeowners, the business and financial analyst (whose name escapes me) corrected himself from "government money" to "taxpayers' money", which is fundamentally like correcting yourself from "evening meal" to "dinner". It did reveal a narrative on the story a lot less impartial than I would expect.

They also interviewed a prospective first-time buyer who bemoaned the support (from taxpayers' money) being proposed for current homeowners close to losing their home, while she was unable to afford to get into the housing market (because her after-tax income was not high enough). She forgot a number of things. Firstly, the government is also offering borrowing support for first-time buyers, also funded by taxpayers' money (including that of current homeowners, and more importantly, the wealthy households that aren't in danger of losing their home). Secondly, offering support like this will stimulate activity in the housing market. Homebuilders have massively cut back on all new builds in the short term. Unless they can be persuaded that people will start buying again, the supply of new houses will be low for a long time. This keeps prices high. The new government package reduces the risks to homeowners of buying homes, and will hopefully improve sales.

I just realised that last bit raised another issue. House prices are falling. This has mainly been due to a fall in demand, partially driven by a lack of available credit and tougher borrowing conditions. The problem for first time buyers like the lady interviewed is that this hasn't made buying a house any easier as they haven't fallen enough given the new conditions imposed on people looking for mortgages. Two things could happen. Demand could continue to fall, which will lower prices, but at the expense of many jobs. Alternatively, the government could support homeowners to stop demand falling, hopefully encouraging confidence in the housing market and pushing homebuilders to start investing again. The lower price that would result will allow more people back onto the market, even if credit conditions do not improve immediately.

Update on self: Back from holiday, was nice, moved into new flat.

I swear if someone else equates the credit crunch with rising oil and food prices, I may start attacking at them. Both are bad. But the credit crunch is a decrease in overall demand caused by banks restricting lending. Rising oil and food prices are caused by an increase in demand (and possibly a shortage of supply) for those two particular goods. There may be some slight crossovers, because of the interconnectedness of things, but please stop using "credit crunch" to mean "all economic hardships". You just sound stupid.

I think this is an incredible story, and so far, at least 50% of people who I have talked to (talked at) about it have agreed with me.

These export taxes are cretinous. The Argentine government seem to believe that by taxing farmers' exports, who are currently benefiting from high world food prices, they can fund welfare programmes for Argentina's poor. But that's far too simple. Dividing the pie is only half the story when it's coming at the cost of the total size of the pie, and free trade leads to the biggest pie. Faced with export tariffs, farmers will produce less. What's more, resources will shift to goods which Argentina has less comparative productive advantage in, meaning they produce less and sell less.

I entirely agree with wanting to redistribute wealth - at this point of writing on this blog, I don't think I need say that. But there are less distortive, counter-productive, hell, dumb ways of doing it.

But all that aside, the drama and politics of the whole thing is what really gets me. A split decision in the Senate, a deciding vote by the Vice-President against his boss, complete with the most DUN-DUN-DUUUN of all of speeches ("May history judge me, my vote is not for, it's against" - come on!), and scenes of Argentine farmers celebrating around TV screens like they just won the World Cup (or something important).

Can you imagine that happening in Britain? Or anywhere not in South America?

Couple of short thoughts. I'd say in that they are in no particular order, exept that seems unlikely for a list of items. At the very least, they are in order of 'position in list'. Onwards:

I just submitted a paper to the Journal of Public Economics. This would be my first actual attempt to get something published. I expect at best a number of revisions, and most likely a rejection, but both will be helpful and give me some useful feedback.

There is a certain programme on television. It is Huge, and I am led to believe it is Fraternal. I don't want to hear anything about it. I don't want to know the names of anybody in the show, or which manufactured controversy they've decided will interest people this year. Radio and TV will doubtlessly attempt to thwart me by dropping reports in to news bulletins, as if things that happen on TV shows are actually news. This morning, I managed to cover my ears with my hands in time. Next time, I may be holding vases. I'm either going to have to give up the mainstream media, or give up my job as human dais.

I hate it when I agree with Tories.