Monday, August 24, 2009

Darling is Wrong...In every possible way

According to the Mail on Sunday, Alistair Darling is going to "talk sense into that man [Gordon Brown]" on the subject of public spending and the subject of Tory cuts, I think he is very very wrong. The debate about debt and spending is a complex one, but there is a very good case for not making cuts that revolves around the following arguments:

  • The macroeconomic effects of such a move, there's little evidence that a rise in private spending will replace the fall in public spending. The demand side consequences of this could drag us further into recession.
  • It's not known whether the fall in tax revenues is temporary or permanent, if tax revenues rebound then the current (large) deficit will not be so much of a problem.
  • The long term effects of debt are exaggerated and ignore the twin effects of inflation and growth on the real value of debt. Additionally, the cost of servicing debt is low and investors are still keen to buy government debt.

The case for cuts is all about fear of future debts, but personally I don't think it's one that Labour should accept. It relies heavily on what could be called called the common sense case, most people's experience of budgets comes from their household finances, this leads to a view that both debt and living beyond your means are a bad thing.

The Conservatives have pushed their "cuts are inevitable" line, because they know it has a common sense appeal, it sounds like a calm and level headed approach to the recession and has gained traction with the general public (even if the economics behind it are highly questionable).

What Darling has done is not only publicly disagree with his party leader, he has disagreed in such a way that it assists the Tory line of attack. Phrases such as "the voter's aren't stupid" and "talk sense" are just the kind of phrases that will help reinforce the Tories "cuts are inevitable" argument. An argument which is both highly questionable economically and will help justify policies with devastating social consequences.

Saturday, August 22, 2009

Government and Markets

Via Tom Harris.

If government decides it can intervene in the market to dictate wages, why shouldn’t it have a role in deciding other areas of corporate policy? And if it starts doing that, it might as well nationalise the-… Oh. Okay, I get it now…

I should say first that I disagree with a hell of a lot of what Tom says, but I'm not particularly singling him out here more than anyone else. This argument crops up a lot and Tom Harris is hardly alone in using it. From a personal point of view I think the whole government shouldn't intervene argument does doesn't add up.

The market is not a natural thing it is a construction of the state and it is political in it's nature. The forces that direct it are shaped quite heavily by the political preferences some imposed by the government, some so entrenched that no one would ever dare change them.

As an example, consider the examples of child labour and slavery. I doubt the most hardened libertarian in this country would advocate either, but it could be argued that the abolition of slavery was a "intervention by a narrow political interest in a vital area of property rights" it could similarly be argued that child labour was "the government interfering in the right of an individual to enter the labour market" the point of these two examples is that it demonstrates the ultimately political nature of the market, there are always political interests present.

Ultimately, I don't get the whole not interfering in markets argument, because ultimately it's what every government does to some degree. Taxation, education, infrastructure, there are plenty of ways in which the government does interfere when the market. For most it's not a matter of principle but a defence of their own "narrow political interest".

Tuesday, August 18, 2009

High Pay Arguments, Part 1, Top Execs

I've been reading some of the writing on this new high pay commission idea with interest. The main thing that strikes me about it is that there seem to be two quite distinct high paid groups who are quite clearly the target of this campaign. The first is top executives and the second is the high paid group of financial professionals who live in and around the City of London. I think these two groups need to be considered quite separately, so first I'll take a look at top execs.

With the executive class, I feel this is mainly an argument about corruption. Senior executives ultimately control the purse strings and (at least in the case of the largest FTSE companies) the money is not a huge amount in the grand sheme of things. Further to this, there is no real defined level as to what a senior executive should be paid, and no institution exercising any downward pressure. What I'll say further to this is that I don't feel that pay is necessarily tied to ability as Chris Dillow says, there are some smart execs, some stupid ones. I also don't think that this kind of pay is really determined by market forces since there is often very little actual competition (at least from what I've observed) for these roles.

What the argument really boils down to is a moral argument about whether it is right for executives to abuse their position for their own gain. Pay for top execs has risen pretty consistently year on year and well above average wages and (for the most part) at a rate well above that justified by the performance of their companies. Use of a position of authority for one's own gain is corruption, but this corruption is so endemic that there is no longer any outrage about it.

I think this is a situation that needs to be addressed because ultimately, abuse of power is wrong. In terms of solutions, I think we need a better system of holding these people to account. Shareholders are ultimately too diverse, and ultimately not interested in issues of morality. Instead, I would have to say that Chris' suggestion of greater worker empowerment is just about the best way do do it.

Monday, August 17, 2009

Taxpayers Alliance Leave an Open Goal

The Taxpayers Alliance have a post talking about how big government spending harms the economy, what really confuses me is why they've chosen to back this up by featuring a video with none other than Dan Mitchell from the Centre for Freedom and Prosperity. Needless to say, I think that the arguments he makes are pretty simplistic and make a whole lot of assumptions about the nature of markets and the key incentives for improvement in public services.

For now though, I think it's worth pointing out a few of Mr Mitchell's greatest hits, this paper on Iceland for example, that says:
Iceland’s flat tax has a high rate compared to flat taxes in other countries. Other reforms, particularly the low corporate rate and the 10 percent tax on capital income, are more dramatic. From a political perspective, however, the Iceland reform is remarkable. It is the first time a Western nation has decided to no longer impose discriminatory tax rates on more successful taxpayers. Tax reform and economic liberalization have helped Iceland prosper. It remains to be seen whether other industrial nations will learn from Iceland’s success.
Of course, nowadays some might have a different opinion of Iceland's economy, I found this rather poigniant (thank you Charlie):
"Self-made bondage is the strongest form of bondage. Thus wrote Sigfús Daðason, and thus is our situation today. The constitution was mortgaged without the nation being asked, and now we are to acknowledge the collateral and confess to the crime. We are confessing to a crime we did not commit. Let me quote Eva Joly: “This small country of 320,000 inhabitants is now reeling under the weight of billions of Euros of debt, which has absolutely nothing to do with the vast majority of its population and which Iceland cannot afford to pay.”

Yes, we are being enslaved. The Icesave agreement is stage one, the conditions of the International Monetary Fund stage two, and so it will continue until sometime in the future, when we receive an apology for the mistake that is being made … but by then it will be too late. They say we will become the Cuba of the North if we do not ratify this agreement. But shouldn’t we add: We will become the Haiti of the North if we do ratify it. They fulfilled all the IMF’s demands – and are now plagued by a famine. ... That is the reason we are here today – and we oppose this. All of us. We are being made to confess to a crime we did not commit. We are to shoulder the burdens of the global financial system, to become their underdogs.

Another article for the Cato Institute speaks in favour of tax competition and singles out Ireland, Estonia and Slovakia for praise:
All of these reforms have yielded big benefits -- particularly for the nations that have been the most aggressive tax cutters, notably Ireland, Estonia and Slovakia.
Nowadays, we all know that Ireland is having problems, the Slovakian economy looks set to contract by 4.7% this year and estonia looks set to suffer a 15% fall in GDP. It seems like the man has some kind of strange inverse midas touch, it seems as if any economy singled out for praise is now in serious economic trouble.

Why exactly, should we be taking lectures from the TPA on the best tax policy to pursue when they feature (in a section of their website rather ironically named "Economics 101" no less) the recommendations of a man who has been so consistently wrong?

Sunday, August 16, 2009

Countering a few Rightwing NHS arguments..

On my initial travels on Twitter, as well as on the blogosphere, I've encountered a few arguments being put forward by righties. The first is that we are stifling debate, that we are refusing to acknowledge differing opinions on healthcare and consider alternatives. The second is the argument being put forward by Guido, that Obama does not intend to implement an NHS style system and therfore does not support the NHS.

So, argument number one. My personal view is that the centrally funded NHS actually works pretty damn well, it's not exactly perfect, but few systems of this size ever are. There are alternatives, but there's little reason to believe that those systems can actually offer better results. Even if they could, there remain the questions of whether such a system could be applied in Britain and also the question of the cost of making such a large scale change. Certainly, the NHS could be improved by little tweaks here and there, but I simply feel that some kind of fundamental reform would just be change for change's sake.

On the argument about Obama, I think it's worth considering the just what a massive change implementing an NHS style system in America would be, both practically and politically. The NHS in the UK was created in a rare moment when the nation, having won a battle for it's very survival was gripped with a massive sense of solidarity. It was this sense of solidarity that allowed the creation of the NHS and it's a tribute to the Labour politicians who created it that they managed to seize this moment to create such a wonderful national institution.

Implementing an NHS the US would be far more problematic; what would happen to the administrative structures, set up to handle an insurance based system? What about all the people who currently work for healthcare insurers, what about their jobs? There are quite serious practical problems. On top of that there are also the political problems, consider for starters the level of political resistance that has already greeted President Obama's very modest healthcare proposals. The political will for such an ambitious project is not there, I think that's unfortunate, but understandable.

Guido is drawing the wrong conclusions from his ruling out of an NHS style system, it's nothing more than an admission of the fact that there are very sensible reasons not to go ahead with an NHS style system.

On a related note, I think this Open Letter by a British Pharmacist sets the perfect tone, heartfelt and passionate but not all arrogant.

I surrender..

Possibly due to the whole the whole we love the NHS thing, possibly due to the whole turning 30 thing, whatever the reason I am now on twitter (@citizenandreas if you were wondering)

Friday, August 14, 2009

We Built the Damn Bandwagon

It goes like this, the new president of the US is trying to push through healthcare reforms. Cue inevitable comparisons with other countries. Britain's NHS enters the mix and soon we get the Republican punditry saying some remarkably ignorant things about Stephen Hawking, add a little Sarah Palin and soon enough we have a recipe for a backlash.

The backlash comes, courtesy of Twitter and soon we get lots and lots of people are saying how much they love the NHS, how terrible they think Daniel Hannan is and such (a view I share wholeheartedly). Then, a few Labour party figures join in and all of a sudden some individuals start saying "Keep your Hands Off, Labour!" or "You're killing off people power!"

Why the hell shouldn't Labour be jumping on this particular bandwagon? We only created it in the first place and have commited ourselves to improving it. There are plenty of reasons to winge, but it would be nice if for once, people could take a look at the NHS and give Labour a little credit where it's due.

Thursday, August 13, 2009

Regulatory Capture

Moving on from my little bit of banker bashing, I thought I'd write something a little more serious on the subject of regulatory capture. The idea is that regulatory agency will become "captured" by special interests, pressure groups, lobyists etc. Further to this, it is argued that since the interests being regulated are usually the best organised and most able to arrange collective action, they are likely to gain the most sway over the regulatory agency.

Consider as an example a television regulator, a number of interest groups will have an interest in how it regulates television; viewers, advertisers, numerous special interests and of course the TV companies themselves. Of those groups, it is likely that the most coherent, well resourced group is the TV companies who all share a degree of common interest. This group is therefore likely to gain a good degree of sway over the regulator and the regulations it puts forward.

Deregulation, has in been proposed as an answer to this problem, if the state regulates less then there is less regulation to capture. Sounds nice in theory, but I think this particular argument seems to fall apart when you look at the finance industry.

The deregulation of finance has changed the face of the industry. One way it's done this is in the size of the industry, we've gone from a handful of financial products to volumes in their thousands. Another way deregulation has changed is in the level of financial innovation* in the industry, new markets, new tools to manage risk and new ways of speculating on assets. It's my view that actually, deregulation of finance has actually made the industry far more difficult to regulate due to the increased size and complexity.

In some ways, you could argue that the deregulation of finance was actually the ultimate form of regulatory capture. It seems that many of the people who make recommendations about how to proceed as far as regulating finance (in both the US and UK) are those with strong connections to the finance. Is it any wonder then that we have a set of financial regulations that allow financial businesses to make massive amounts of money.

Wrapping all this up, what I'll say is that following on from the Simon Johnson post I linked a few posts down, we need to seriously consider how we regulate our finance industry. We need to consider not just profitability, but also how well it directs money towards other businesses. We also need to ask whether the complexity of the industry, brought about by deregulation is necessary or whether we should at look at creating a simpler financial system.

* I'm a little uncomfortable with this term being used in finance, while I'd accept that some financial innovations (securitisation, credit cards) have been useful. I don't think they've improved our lives to the same degree as innovation in other industries.

A Few Random Links

Firstly, an international comparison of small business UK is kind of midtable, Greece is top, Luxembourg is lowest and the US is pretty low down the chart (well I found it interesting).

Secondly, it appears that a company in Florida has launched an "right wing internet trolls for hire business". As if there wasn't enough right wing bull on the net already.

Tuesday, August 11, 2009

A Few Minutes of Hate for Finance Sector

A quick read of my blog will quickly establish exactly what I happen to think banking classes are a wasteful bunch who've been spending our pensions on yachts, mansions and BMW M3s. I don't like them very much at all.

It's reassuring to know that I'm not not just it's not just mad lefties who feel that way though. Here's Simon Johnson (former IMF Chief Economist):

What has “financial innovation” brought us since the 1980s? One answer, of course, is “hedging strategies” that lower the cost of doing business for companies large and small. This is plausible, although not likely to be large relative to the economy - send me your favorite study on the cost of capital since 1990 (you choose the definition), and we can talk about whether this effect is significant, sustainable, or even sensible.

Because financial innovation has mostly facilitated a big increase in finance. If a sector grows, pays more wages, and rises as a share of GDP, surely this is a good thing? Not necessarily – if this is a rent-seeking sector.

Rent-seeking means effectively a tax extracted by one sector from the rest of the economy. We’re used to thinking of this as something that occurs through trade restrictions and the big breakthroughs in this area came from analysis of tariffs and quotas (Anne Krueger, Jagdish Bhagwati). If a tariff, for example, will make your life cushy, you will devote great resources to getting one established or increased – irrespective of the effects on the rest of the economy (call this strategy “let’s hammer the unprotected consumer”).

Finance is rent-seeking. The sector has devoted great resources to tilting all playing fields in its direction. Consumers are taken advantage of; consumer protection is vehemently opposed. And great risks are taken, with the downside handed off to the government (and the consumers again, as taxpayers). This downside protection allows an overexpansion of debt-financed finance – reaching the preposterous levels seen in mid-2008 and now re-emerging.

Finance in its modern American form is not productive. It is not conducive to further sustained economic growth. The GDP accruing from these activities is illusory – most of finance is simply a tax on what is done by more productive members of society and a diversion of talent away from genuinely productivity-enhancing activities.

Read the whole thing, it's rather good (and yes, I know he's talking about the US, but I reckon it applies equally over here).

Sunday, August 02, 2009

August Cometh...

And so, on one day later in this month, I reach the grand old age of 30.

Just thought I'd say, it being a milestone and all.