In praise of the Neo Cafe

Mr. Chakrabortty has one of those pieces praising the people for doing it for themselves. This is what real community is, people simply working together, without direction, without central control, to make things better for themselves and those around them.

This apparently puts those two fingers up to The Man and shows that this neoliberal capitalism thing is all wrong.

Neo also runs a social supermarket, offering food – that the likes of Marks & Spencer and Tesco would otherwise plaster with yellow stickers or chuck away – to residents on a “pay what you feel” basis. One father, Jamie, detailed how he had picked up around £40 of groceries for £8. Later on, he told me how he’d recently been diagnosed with a vitamin B12 deficiency, a complaint that can be traced to the sustained lack of decent food. It had left him tired, forgetful and in pain. I wondered how much worse off he’d have been without Neo’s cut-price shopping.

All vital work – but it’s the next bit I really want you to hear. Because Wilkes and Doherty are doing something harder, rarer and perhaps more valuable than dispensing charity: they’ve begun restoring a sense of pride to a community left for dead by the rest of the country.

Take the centre the pair work out of. Once used by the council, it had long fallen into disrepair. Weeds thrust knee-high out of the paving and the paint on the railings was peeling. On opening day the gates were flung open, a bouncy castle was put up in the garden and some food was served up. The women, who are from neighbouring Wallasey, didn’t know what to expect. Then by the end of the first morning, the garden began to overflow with stuff: footballs, a racket ball set, climbing kit.

Neighbours who wouldn’t even say hello to each other were bringing over their kids’ playthings. When removal men brought over the giant M&S chiller cabinets for the social supermarket but left them outside, muttering about the wrong angles, it was the locals who stood guard against any nicking – and then shifted them inside.

The crucial line there is "Once used by the council, it had long fallen into disrepair. "

This is not two fingers to neoliberalism, this is neoliberalism. Which is, as we all know but all too many others don't, insisting upon the freedom and liberty which allows people to voluntarily cooperate. Sure, sometimes this is in the form of a capitalist style business. But in the smaller echelons of society it isn't and never has been. We actually have our inspiration in the rather more conservative idea of Burke and his "little platoons". 

We have absolutely nothing at all against the Neo Cafe. Indeed we'd hold it up as a shining example of how things ought to be. People getting together to do as they wish - this is freedom and liberty in action.

And note what was required before it happened. The State, in the form of the local bureaucracy, had to get out of the way in order for people to be able to use the assets previously colonised by said bureaucracy and State. And when that happens there is that flowering of voluntary cooperation that Mr. Chakrabortty so praises, as do we.

The usual technical term for this is that the State can be guilty of "crowding out" such activity. Or as we've been saying for a number of decades now, if you want the good society you're going to have to shrink said State so there is room for the good society to flourish.

Burke got it two centuries ago - pity it's a lesson all too many still don't grasp, isn't it?

 

Tax clampdowns make the rest of us poorer too

I’ve been warning of it for years, and we now have fresh evidence; the wealthy industrialised countries’ desperate search for more tax revenues is causing actual problems that risk seriously damaging the global economy.

Many European and American governments’ spending makes drunken sailors look restrained, but rather than looking at their own behaviour they are blaming their deficits on their citizens’ unwillingness to pay even more tax.

Offshore tax evasion is one culprit often blamed for deficits, even though real tax evasion, hiding income that really is taxable, is very rare.  HMRC estimates that it loses only a tiny 0.8% of tax revenues through tax evasion, and only a small part of that is from offshore evasion (most tax evasion is local, such as small businesses not reporting cash-in-hand income).

But a ‘clampdown on tax havens’ is seen by politicians as a convenient way of distracting attention from their failure to balance their budgets, promising that the latest schemes will bring in the lost billions and solve their financial problems.

The tax authorities’ current favoured tool is automatic exchange of information, whereby banks and other financial institutions around the world are forced to report their clients’ income, not just to the banks’ home tax authorities but, directly or indirectly, to their clients’ home country tax collectors, wherever they may be around the world.

The USA was an early adopter of this, with its 2010 Foreign Accounts Tax Compliance Act (FATCA), which imposed onerous reporting requirements on banks around the world.  In response, some banks stopped providing accounts to US nationals, because of the burden of compliance and risk of penalties for making mistakes in their unpaid work for the taxman, but the reach of the US economy meant that many had to comply.

FATCA, backed up by the long arm of Uncle Sam, spawned several related schemes, and now the OECD (the Organisation for Economic Co-operation and Development, which is helping its member governments collect more taxes whilst preserving its own tax-free status in Paris) has its own “Common Reporting Standard” to demand information from financial bodies.

So a massive information collection and reporting exercise has been created to pursue proportionately tiny amounts of tax, but as financial services businesses start to implement it we are seeing alarming evidence of the costs and risks that it is causing, costs that have to be passed on to the customer and that risk de-railing global growth.

Worse, by making international business more difficult, there is a danger of wider costs to the world economy and for society.

The latest evidence comes from compliance firm Sovos and financial researchers Aberdeen Group, who have produced an analysis of financial institutions which shows that financial services providers are struggling with the requirements of FATCA and similar measures.

(“Stop Playing With Fire”, http://sovos.com/aeoi_benchmarking_report)

The Sovos report found that less than half, only 44%, of FATCA returns are accurate, showing that the financial service sector is finding it difficult to comply with the demands made on it.

And although the systems are still new, the regulators are clearly not giving any leeway while the industry gets to grips with the requirements; the Sovos report found that firms subject to FATCA reported that they were paying an astonishing 6% of their turnover in fines, not for deliberately hiding information but for accidental mistakes in their reporting.

And note, that’s not 6% of profit; it’s 6% of turnover.  That’s going to wipe out a large chunk of the profits of any finance business.

Not surprisingly one of the reasons why finance businesses are finding this difficult is that governments just cannot make a decision and stick to it; 21% of finance businesses surveyed for the Sovos report said that “frequently changing regulatory standards” were a top challenge.

But the bigger issue is more fundamental; the Sovos report found that 26% of finance businesses see “reporting across multiple jurisdictions” as being a major problem.

And that problem is fundamental to FATCA and similar processes; large financial services providers have operations in different countries, possibly with different languages, and customers in different countries.  They are having to capture and collate information from all around the world, put it into various required formats and submit it to different tax authorities around the world, quite possibly for countries where they do not even operate.  And all of this is in addition, and generally different, to their domestic reporting requirements.

Computer systems, according to the Sovos report, are struggling to reconcile client information from multiple sources (only 45% success), to cleanse data of errors (as low as 32% success) and create reports with the correct formats and required encryption (as low as 25%) without expensive manual intervention.

Of course the procedures are still relatively new; as they bed in (if governments can ever resist tinkering for long enough to allow that), systems will be put in place to reduce costs and improve compliance, reducing fines.  Apparently Sovos, the authors of the report, have systems to do just that.  But the fundamental problem remains; the ever-increasing demands for more, and more complex, information from tax authorities is increasing the costs of providing financial services.  Those increased costs are going to be passed on to customers, both individuals and businesses.

It is difficult to justify that these complex, expensive processes are even needed.  The old days when money could be confidently hidden away in a “tax haven” have long gone.  Finance centres, including offshore ones, have operated for years on the basis of “information on demand”, whereby financial institutions, law firms and other intermediaries answer legitimate questions from tax authorities and other government bodies in other countries.  Those systems have now bedded in and are working well.

This was supported by the recent leaks of confidential information (Panama, Liechtenstein, Luxembourg and so on), which have not actually disclosed much tax evasion; by and large the supposedly “hidden” money has either been declared to the tax authorities or is legitimately not taxable.

It is therefore doubtful whether much extra tax will be collected from automatic information exchange; it looks more like the usual government desire to be seen to be doing something rather than actually doing something useful. 

But the costs of compliance are huge, and because these reporting requirements are increasingly about international investors, the cost of doing cross-border financial business is going to rise disproportionately.  Worse, it is likely that some financial services providers will pull out of some jurisdictions, or stop serving customers from some countries, because the compliance costs of reporting on them to the various tax authorities will just be more trouble than it’s worth.

That is a serious problem for the world economy.  Global financial integration, making it easier to move money to trade and invest around the world, has played a major role in the growth in world trade and reduction in world poverty in recent decades.  Reducing financial integration, by making it more costly for financial services providers to operate in, or serve customers from, various countries, risks stalling this growth.

Nor is this just a “first world” problem; when businesses pull out of countries, they pull out of the least profitable first, and that means that less developed countries are going to find it increasingly difficult to access world financial markets because banks will decide they just aren’t worth the costs and risks of dealing with the compliance regulations.

IMF research estimated that a 10% reduction in global financial integration would reduce annual GDP growth by 0.3 percentage points.  That may not sound like much, but it would have pretty much wiped out all economic growth in the EU for the last eight years.

Governments’ misguided attempts to prevent the relatively tiny problem of offshore tax evasion risks causing horrifying damage to the world economy.  Is it really worth that, just to demonise a minor problem of offshore tax evasion which is already far more myth than reality?

Damn right too

It has always been one of the great gaping holes in the British system that if at some point in life you need a helping hand with housing then you're likely to gain housing subsidy for the rest of your life. That is, if at some point in need of subsidised housing, council or housing association, then that subsidy is going to stay with you whatever your future income.

Thankfully this has changed:

More than 70,000 tenants face average rent rises of more than £1,000 a year under the government’s “pay to stay” policy aimed at ensuring supposedly high earners living in social housing are charged market rents.

This is as it should be. There is no reason at all why those on median income or above should have their housing subsidised by the rest of us. Thus those who make more than around and about median should indeed be paying full market rents, not something subsidised because at some point in the past they needed said subsidy.

And I'm afraid no, it is not possible to state that such housing is not subsidised. That would be to ignore opportunity costs. And whatever it is that you're doing when you do ignore opportunity costs it isn't economics.

That the welfare system stands there to offer a helping hand in times of trouble is just great. But such should not turn into a privileged economic position for life. As recent changes have stopped it being so and damn right too.

Some laws we don't have we shouldn't have

Good news from the House of Lords. We don't have certain laws that we shouldn't have:

Baroness Neville-Rolfe, the minister for business, energy and industrial strategy, said the Government had no such powers, and that it was up for the respective companies to decide on them.

This was in response to this bleating:

In a recent parliamentary question, he asked whether the Government was able to require that SoftBank provide financial support to ARM and whether it had reviewed SoftBank’s financial position before approving the deal.

The point being that ARM Holdings is a private sector company. This means that it is the private property of the shareholders, for them to dispose of as they see fit. For the government to have the powers to insist upon terms is as ludicrous as their deciding whether my spare shirts go up on e-Bay, stay in the cupboard or are given to Oxfam. They're my shirts - it's their company. I, they, get to decide on the disposition of my/their property.

That's just what private property means.

If Lord Myners thinks that ARM Holdings or any other organisation in the land should not be private property then he's entirely at liberty to campaign for their nationalisation. And to work out where to raise the money from. But until that day then private property really is private property.

 

There's a solution to this

If the NHS is not working as we would wish it to work (and there're few who would argue that the current situation is perfect) then obviously there's an argument that the way that the NHS works should be changed. Which brings us to two surprises, the first that the head of 38 Degrees agrees with us on this matter. The second that he doesn't see the obvious answer:

Politicians have failed the NHS. We need people power to save it

David Babbs

If the politicians have failed it then perhaps the answer is not to have it run by politicians?

Conventional politics has failed us when it comes to the NHS.

If that is so then conventional politics is the wrong system to be using to run the NHS then, isn't it?

One thing is certain: we know that when we leave the politics of the NHS to the politicians, it doesn’t end well. Now, more than ever, people-powered campaigning is critical to the future of the NHS.

The ultimate people power is of course people spending their own money in a marketplace. There will obviously be subsidy to those who simply cannot afford the treatments they need - as with France, Germany and many other advanced countries. It would even be possible to suggest the Singapore system. A combination of government catastrophic insurance and medical savings accounts for routine expenses. A system which provides health care as good or better than the NHS at half the cost.

But the central point being made seems obvious to us as well. The system of the politicians at the centre doling out the health care doesn't work as we would wish the system to work. The answer therefore is simple, move to a system which doesn't have the politicians at the centre doling out the health care.

 

Not a lot of people know this about insurance

It's generally true that we expect, in a competitive market, insurers to lose money by writing insurance. That's something which not a lot of people know nor realise. But understanding the point will aid in understanding what the latest complaint about the market is for car insurance.

Motorists are facing higher insurance premiums even though the industry is saving millions of pounds thanks to Government imposing curbs on whiplash claims.

Drivers have seen the cost of insuring their cars rise by up to 20 per cent - adding £115 to the cost of a policy.

But at the same time the insurance industry has saved around £520 million because of a dramatic drop in personal injury claims, The Times reported.

The changes which led to it being more difficult to claim for whiplash were supposed to have saved everyone £90 a year on their premiums. Whiplash has become more difficult to claim for yet premiums are rising. Cue capitalist rip offs and so on.

However, now add in that we expect insurers to lose on their underwriting books, the actual process of writing insurance, the difference between premiums paid in and claims paid out.

The reason for this is that there's a timing difference between the two. That gives the insurance company a large pile of money to play with. And play with it they do. The go and invest it in nice, safe, and short term, investments in The City. This brings them an income, of course.

As these things happen in competitive markets that second income is important. Because there's always going to be one or another insurance company which notes that they can gain more of that cash pile to invest by cutting premiums. And so the general return to capital in the business reverts to the general return, risk adjusted, across all business. That means that the investment returns subsidise the insurance premiums. 

Another way to say the same thing is that the two income streams must, in a competitive market, end up as amounting to that general return on capital, so one of the two will subsidise the other.

We can and do use this as a measure of whether an insurance market is competitive (and also some other businesses which get such a cash float, like futures broking, possibly retail banking). If the underwriting, the provision of the basic service, isn't loss making in the face of the investment returns then it's not a competitive market.

Now change what those investment returns are. Safe, short term, investments in the City now yield pretty much nothing. Thus the float isn't making a great profit, thus the losses on underwriting are not being subsidised as they were. Thus prices across the market are rising to consumers.

It is, of course, possible that they really are collaborating to rip off the consumer. But it's almost impossible, from prices alone, to tell the difference between a perfectly functioning and competitive market and a perfectly operating collusion. Prices will still move in lockstep. When we see this happening we thus need to really investigate said market.

And here with car insurance the test will be. Are the insurers making more than the general return on capital, adjusted for risk? If not then the likely explanation is that fall in investment yields, reducing the subsidy to premiums.

We'll leave to those with the further interest the task of going and reading the financial results of the insurers. But that is where the answer will be found. Only if that return on capital is out of step would further investigation be warranted.

Don't give index funds the finger

Are passive investors worse than Marxists? These are people who buy index tracker funds to invest in a whole financial market, instead of trying to pick individual firms to invest in.

Allister Heath has an entertaining and mischievous piece today, inspired by a recent investor’s note, which toys with the idea that they might be a problem. Though he (correctly, of course) concludes that “Marxism is always worse than everything else, including of course trackers”.

But are they really a problem at all? I think not. The case against them can be summarized like this: since passive investors don’t move their money out of bad firms, and don’t raise their voices against bad executives at shareholder meetings, they misdirect capital and effectively subsidise bad firms. They follow the herd and when they do succeed, it’s because they’re free-riding on the efforts of active investors.

Worst case scenario: if they were the only kinds of investors, there would be stasis. Capital would be completely locked up in bad firms and financial markets would grind to a halt. Capitalism as we know it would be over – hence the comparison with Marxism.

But in this worst-case scenario we can see why (a) this would never happen and (b) passive funds’ supposed flaws aren’t problems at all. Indeed, as well as free-riding on active investors, passive investors subsidise them too.

Consider a world where nearly all capital – 99% – was invested by algorithmic passive index funds, and the other 1% was invested by very lazy “active” investors. In this world, a certain phone company has a market cap of £10bn – at the point at which the last genuinely active investor left the market, its future profits and assets were reckoned to be worth £10bn in current-day terms (for that is what determines a company’s share price).

But something unexpected happens to boost the firm’s future profitability – the firm developed some new technology that made its phones cheaper to build, say. In a world of active management, that would cause new, properly active investors to buy the now-undervalued shares held by the lazy “active” investors, bidding the price up until the firm’s total value reflected its newfound expected profitability, and moving capital into that firm from other firms or investments which are now relatively less profitable. Passive funds, of course, would follow suit by design.

In a world where there were zero active investors, of course, this wouldn’t happen and the firm’s price would be stuck at a too-low level. But as long as there are some people willing to enter the market when the returns are big enough, that too-low level would induce non-investors to enter the market as active investors! Get-rich-quick schemes would, here at least, really work. Buy some shares at just above the market price but below its ‘true’ value, either from a fund or from the firm directly through a new share issuance, and you’ve made potentially quite a lot of money overnight. Easy.

The reverse would work too. If the firm had lost value – maybe its phones unexpectedly became unfashionable with consumers, or its board was just managing it badly – something similar would happen as profitable short-selling drove the price down and down.

In other words, if and when passive investments became inefficient, that inefficiency would create an incentive to become an active investor.

Clearly, barring legal barriers to entry, a world of all passive investors is impossible for long. To the extent that this happens in our mixed market – with passive investors slowing down stock price movements, perhaps – the subsidy is there for active managers who spot and act on changes in firm value before the others. The more passive investors, the greater the returns for the active investors.

All this reminds me of a paradox of efficient markets. If markets were 100% efficient, there would be no money to be made in active investment. But if there was no active investment, markets wouldn’t be efficient. So the equilibrium is somewhere in-between – and just where you think that equilibrium is probably determines whether you want to invest by picking winners, or be passive and let others do that hard work.

Do passive investors free ride on active investors, or do they subsidise them? Yes.

Less regulation means shorter recessions

In recent years, many economists on the left of the political spectrum, such as Joseph Stiglitz and Paul Krugman have argued that laissez-faire policies have made banking crises (like the Global Financial Crisis) more likely.

But, even if this were true is it a mark against them? It depends. As Scott Sumner points out not every banking crisis becomes a recession. Indeed, one study by Dwyer et al, found that one in four banking crises didn't lead to a fall in GDP per capita in the following two years. And countries that experience occasional financial crises typically grow a lot faster than countries with more stable financial conditions.

What matters then, is not the likelihood of a banking crisis, but whether an economy is more or less likely to make a quick recovery.

According to a working paper by Christian Bjørnskov, economies with greater levels of economic freedom (in particular greater levels of regulatory freedom), recover faster and more likely to stop an economic crises from becoming a recession. Looking at 212 crises across 175 different countries, he found that countries with high levels of regulatory efficiency (as measured by their score on The Heritage Foundation's Index of Economic Freedom) tended to have shallower and shorter recessions.

Why might this be? Bjørnskov gives a few possible reasons.

"As a crisis hits an economy, a substantial share of resources become unemployed, which creates profit opportunities for entrepreneurs to the extent that these resources become cheaper. Yet, whether or not this happens and at which speed existing firms and new entrants can reallocate resources depends on the regulatory framework.
Licensing requirements and similar business regulations constitute entry barriers that prevent entrepreneurs from seizing legal opportunities and thereby limiting the economic and social losses during crises. Unstable monetary policies and inflationary interventions prevent the formation of precise price expectations, thereby increasing uncertainty, which would also hold back new investments (Friedman, 1962).
Finally, labour market regulations can make it both more expensive and risky to hire new employees, providing a third channel through which deficient or inefficient regulations significantly increase the transaction costs of reallocation. Consistent with the evidence, this does not prevent a crisis from occurring, but limits its extent as more firms in a flexible economy can react faster and in a more economical way to the challenges and opportunities created by the crisis."

Recessions that forces business to cutback, lay off workers and even shut down may be painful, but they also allow for the creative destruction and dynamism that benefit us all. But it's only when regulatory barriers are low, inflation is predictable, and labour markets are flexible, that entrepreneurs can take advantage of those opportunities quickly enough to avoid a prolonged slump.

Shut down the war on drugs, not Fabric

After the tragic drug related deaths of two men recently, the nightclub Fabric has been forced to temporarily close its doors. Despite the club’s full cooperation with authorities- and its concerted efforts to clampdown on the sale of drugs on its premises- it might be forced to close down permanently.

Such a move would be devastating for London’s nightlife and music scene. Fabric is internationally renowned and attracts visitors from all over the world. It has also helped to launch the careers of world famous musicians and DJ’s. Closing down Fabric would also hurt the economy- it employs 250 people and many people travel to London in order to visit Fabric.

Not only would the forced closure of Fabric destroy the rich cultural tapestry of London and hurt the economy, it would also be incredibly unfair. Fabric is being punished as a result of the free choices of individuals. The club did not sell them the drugs or encourage them to take them- in fact they have tried repeatedly to clamp down on drug use and their staff offer support and advice to those who may have taken them- and yet Fabric is being punished.

The plight of Fabric serves to highlight the absurdity of the UK’s drug laws. People should be treated as free agents and be allowed to put whatever they please into their body without the State harassing them. Drug laws are an affront to individual liberty.

Drug laws are also ineffective and there is a plethora of research that strongly suggests decriminalisation has no real impact on levels of drug use. Furthermore, other studies reveal that decriminalisation has a positive impact, as it reduces the burden on criminal justice systems. Therefore, if decriminalisation would not result in more people consuming harmful substances, and if it would reduce the burden on the justice system, perhaps it is time to seriously consider decriminalisation.

In fact the prohibition of drugs exacerbates the problem as it results in the development of even more dangerous drugs. Crack cocaine and crystal meth, two of the most terribly destructive drugs, came into being as a result of the US government’s attempts to eradicate the supply of less dangerous drugs. Such a clampdown on cannabis led people to legal highs; any further legislation will force the market underground and will hand even more power to criminals, meaning more harmful substances being created and consumed.

Not only are drug laws in the UK and around the world ineffective and cumbersome, they are also inherently unfair and increase inequality. As a result of drug laws, prison populations in the UK and the US have a disproportionately high number of people who are black, young or poor – quite often all three.

Furthermore, drug prohibition hands power and money over to violent and odious criminals. This is particularly true with cannabis, which holds the largest share of the drug market. An example of this is provided by the impact of cannabis legalisation in some American states. As people can now buy cannabis legally, it has reduced the prices that drug dealers are charging. Decriminalisation has had a massive impact on the power and profits of Mexican drug cartels.

The government needs to seriously consider decriminalising drugs. If it did this, it would radically reduce the power of some of the most vile and detestable people around the world, decrease the burden on the already overstretched criminal justice system, and dramatically reduce the number of ethnic minorities and other disadvantaged people in prison.