The Guardian has one of its occasional economically illiterate editorials today, on the subject of PFI and John McDonnell's plan for it.
The illiteracy starts with:
Mr McDonnell was — it soon emerged — exaggerating when he told an ecstatic conference that Labour would take them all [pfi contracts] back in house (a project with an incalculable price tag).
Of course it is not true that the cost of buying out all PFIs is incalculable. There is a finite sample of contracts. It is relatively easy to foresee a methodology for appraisal that parliament might adopt to assess worth. And we can be sure that if it was not worth buying a contract back parliament need not approve doing so. In other words the cost is, inevitably and deterministically, less than the current forecast spend. There is no incalculable price tag.
Second I note this comment:
Recent Treasury figures put the capital investment value of current private finance deals at £58bn; yet there are outstanding cash commitments of £232bn — nearly four times their original value.
The second part of the liability - which includes the value of services supplied - is not not in any way qualified to recognise that fact, which is absurd. The implication, that the excess is pure profit that will have to be bought out, is just wrong: it is only the margin that does in that case have to be compensated for. What is more, since much of that profit is way in the future it is not paid for (by a long way, as I have noted) at current prices; deeply discounted ones can be used. Again, there is no hint of that. And that is misleading.
Instead this is said:
Labour's plans for individual examination of each against a set of criteria, and potential nationalisation with compensation set by parliament, have to be set against the continuing need to persuade the markets to lend the government money.
At this point I despaired. First, no government has to borrow. QE proves that. We have done £435 billion of it. Another £58 billion to cover capital costs and a little bit more to cover lost profits is neither here nor there in that scheme of things, and since QE's debt carries no interest cost there is precisely no cost at all to buying these contracts in as a result, as I have long argued in the form of People's QE. So let's be clear, the idea that we are beholden to the bond market 'confidence fairy' (as Paul Krugman so aptly named it) is just nonsense. The fact is that if bond markets are truculent the government (any government) can just work around them.
Second, this comment ignores the fact that there is enormous demand for government debt from two sources. One is the growing number of relatively (and I stress, relatively) wealthy retirees needing a secure home for their money. The other is big business that is sitting on massive cash piles because it has no idea what to do with all the profit its monopoly based activities now generate for it, and so they lend it to governments as the only secure place to deposit mountains of cash. These people (real and legal) are not doing the government a favour: by providing them with a secure home for their money the government is doing them the favour by removing the risk they face by being so cash rich.
Third, as the Bank of England has recently agreed here (and this is an issue I must return to), the reality is that if a government wishes it can also just print money. I am not saying it needs to do so for this exercise, but it can.
It really is time that the Guardian woke up and smelt the coffee on economics, because right now it is about as economically literate as the Mail, and that's not a commendation. As a result what it has written on PFI is best described in one word: it's wrong.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
“The other is big business that is sitting on massive cash piles because it has no idea what to do with all the profit its monopoly based activities now generate for it, and so they lend it to governments as the only secure place to deposit mountains of cash. ”
i do despair at this. So rather than taxing these companies appropriately for their activities, we let them instead hold large cash reserves and end up being in servitude by borrowing that money back from them at a nominal interest rate.
They effectively get their cake and eat, whilst we the public via the government, get to borrow the crumbs and give them back with icing.
You got it
Of all the absurdities in the Guardian piece the idea that anything currently has “to be set against the continuing need to persuade the markets to lend the government money” is most absurd for me. Of course there is enormous demand for government debt , as you say, and has been for years, at historically low interest rates – how could anyone deeming themselves fit to publish on this topic not know that?
And that’s just for starters.
Richard I think that you should request a CiF peice in the Guardian by way of reply and they will will probably grant it. You can smooth it , abridge or simplify it for mass layman consumption if you wish but I think that the record here needs to be corrected and it may be a good idea to strike while the proverbial iron is hot.
I have submitted a letter
The debt already exists, it is owed by the public sector to the PFI operators.
Simply talking about replacing this debt with another one, not borrowing more, and making economic gains in the process.
It’s called restructuring when the private sector does it.
Is it a matter of ‘economic literacy’ or just neoliberal slippage?
The Guardian went south in more ways than one when it left Manchester.
John Graham’s demise put a lid on it for me.
Spot on. The Guardian showing it’s true colours with a pernicious piece of misleading propaganda.
The most recent DMO data suggests that Public Corporations (Who I assume we are calling ‘big business) hold £ 496 Million in Gilts, and that households hold £ 84 Billion. (2.5% and 4.4% respectively of total Gilt issuance). Corporate holdings have remained static for the last 5 years, whilst household holdings have increased by 2.5% over the last year.
I do not trust government statistics at the best of times, and it looks, assuming you are correct, that the deceit is continuing.
That is the DMO holding
The Bank of England holds 23% of all gilts
At a Labour fringe meeting in Brighton yesterday Bill Mitchell described the Guardian as a terrible rag ( or words very much to that effect ).
This received a substantial round of applause.
Heartening to know that Labour activists are on to the Guardian.
‘The Guardian’ has become a lost cause. For a while now it has been following in the neo-liberal footsteps of the BBC. There is no longer a progressive voice in the MSM. Thankfully the Internet has filled – and is increasingly filling – that vacuum. Unfortunately the MSM, both print and broadcast, still carries not inconsiderable influence with the electorate. Economic illiteracy is the norm.
[…] blog here to the lead Guardian letter for tomorrow’s […]
Great blog Richard. Thanks.
Do you have any thoughts on Labour’s ‘war games’? And potential risk and response of run on the pound and capital flight should they take office?
Thanks
I think it’s wise
I said so two years ago
There is a risk
it would last a day or two – and then markets would realise that what Labour is doing is good for business, stop their silly protests and value fundamentals
I do worry that labour can come across as ‘anti business’.
Much like yourself I think labour can go further with it’s economic policy e.g peoples QE but could also do much better in articulating the role the private sector can and should play in a modern “socialist” economy. Sometimes it feels like there is an us and them narrative that I think is unhelpful.
I think Labour should work hard to avoid this
I think Labour will be good for business
A well argued piece.
I agree that the buy-out cost (in cash or gilts) is calculable, though it is not easy to estimate in the aggregate.
Contracts actually specify the elements of the termination fee that would be payable:
(1) the outstanding balance on the debt (note that this is often higher than the original capex)
(2) the market value of the equity (i.e. forecast free cash flow to equity discounted at, say 7-8%)
(3) the costs of exiting financial derivatives, including interest rate and inflation swaps
(4) the costs of exiting subcontracts, particularly for the hard and soft facilities management services
(5) transaction costs
(6) compensation for the extra corporation tax payable by the SPV
So, sure, it calculable, and indeed it has been calculated for individual schemes – see my analysis of the Hexham PFI buy-out here: http://www.bmj.com/content/351/bmj.h4030). But I think it’s wrong to suggest this process will be cheap, and there is clearly an argument that if the required sums are available they might be better spent on other things.
You entirely ignore my argument on PQE
Why not try following it?
Sorry, but in the above you state: “Another £58 billion to cover capital costs and a little bit more to cover lost profits is neither here nor there in that scheme of things.” The point is that £58bn plus “a little but more” is not what the government would pay (assuming that the government honours the terms of the contracts). Among other things, the contracts determine that future profits cannot be heavily discounted as you suggest. For example, I’ve provided empirical evidence (linked to above) in relation to one buy out in which the termination fee was over 200% of the capital value. Whether the actual amount to be paid has economic significance or not is debatable, and I’m not a macroeconomist, but it seems to me that as long as PQE-funded investment has an opportunity cost, that has to be estimated accurately, and set against the estimated benefits before decisions are made.
And tell me what is the opportunity cost of PQE?
It’s about the same as the opportunity cost of all money creation.
Zero then
Unless your argument is that, with PQE, society’s budget is non-finite, then expenditure on buying out PFI contracts (or anything else) carries an opportunity cost. That implies that we should assess whether we think these costs are worth paying relative to the benefits. So it matters that the costs will be higher than is assumed above.
If your argument is that society’s budget is non-finite, then I’m confused about why you mention costs at all: surely, they are irrelevant.
I asked the opprtunity cost of PFI repurchase, not supplying the services
They are quite different
Any suggestions?
I’m talking about the repurchase cost. It’s not £58bn. See the Hexham case I linked to if you want the detail.
And if the purchase cost is new money created costlessly for the purpose what is the cost of this?
The opportunity costs being zero, it begs the question of why we’re asked to pay interest on bank ‘loans’, which as we are reliably informed by banks themselves are actually money creation. Fees to cover basic overheads, yes, but interest as compensation for opportunity costs, no way.
Relevant questions
Did you hear what the BBC did last night on R4’s PM?
I walked in from work to hear some City toff banging on about what amounted to gilt vigilantism – the same sort of rhubarb I’ve seen Richard putting to the sword here on this blog.
And where was the counterview? No where. He came on, got on his soap box and then was given free reign by the ‘Broadcasting Bollocks Collective’ and that was the end of that it seems. I prayed that they’d got Richard in (or anyone with some sense) to say otherwise but it was all one way.
Again.
Rubbish – utter rubbish.
Sometimes when the Tories talk ominously about changing the BBC I really do wonder if it might actually be a good idea (but no doubt we’d end with some thing far worse).
I offered the counterview on LBC and Talk Radio this morning
hi Richard,
is there any chance you could tell us the programs you were on for both those radio stations?
just so i can at least find them and have a listen.
thanks
One was Nick Ferari on LBC at 8am
The other Julia Hartley-Brewer on Talk Radio at 10am
I didn’t know whether to comment on the “Laura Keunsberg bodyguard” blog, or the “Guardian economic illiteracy” blog, but did you watch the Keunsberg/Corbyn interview video? She tells Corbyn that he “wants to load up the country’s credit card” and suggests that planning for the threat of capital flight sounds like planning for war against an enemy and he should rather be planning for “bringing people together”.
It’s no wonder she irritates people and makes them suspect her motives. Economic illiteracy? Mischievous manufactured headline grabbing?
The credit card analogy fallacy is not a new one for this blog but there’s a nasty risk in confusing the interests of “business” and “finance”, as she is presumably doing. As Chris Brown says above we need business friendly government, even while business should be being persuaded to treat its workforce well. The potential “enemy” of a socialist government today is much more likely to be imho the finance industry, its rent-seeking offshoots, and all its various parasitic tentacles reaching into politics and the professions and the media.
She’s offering orthodox comment from mainstream economics
Of course that’s an issue for those who disagree with it
But until paradigms shift, and they haven’t, that’s what happens
Are you saying the BBC should shift paradigms itself? It would not last long
As it is, I think it’s humour output does help that goal
Or are we meant to ignore that?
Political interviewers do sometimes have to play Devil’s advocate in order to get their interviewee to properly articulate their position, something which should perhaps be born in mind.
Its humour output? I don’t think HIGNFY, The News Quiz and The Now Show, much though I love them, are going to shift the Overton Window, persuade Daily Mail readers that they are being lied to, and bring a better understanding of the ill effects of neoliberal ideas to the populace. I believe I read somewhere that the BBC charter requires it to inform and educate, as well as entertain.
I guess that your statement “it would not last long” is the key point. The BBC is scared of the current government. My progressive friends (unfortunately few) think that the BBC is the best we can hope for, and we risk getting something far worse. To most people I know it is a hot bed of “lefty do gooders”. Personally I’m very much with PSR – I hope he’s calmed down and will feel better after a good night’s sleep and avoids R4 tomorrow!
But back to economic literacy. I can’t believe that even Philip Hammond sees government borrowing as analogous to personal credit card debt. Is the current government’s deficit obsession “orthodox economics”? Surely it’s a political stance. And conflating the interests of the business community and the finance industry is very dangerous – the former need supporting and, as shown by the financial crash, the latter needs detoxifying, wouldn’t you agree?