Now this is how you value a company
Finally we've got someone valuing a company, a producer, in the correct manner. Which isn't by the amount of tax the company pays (no, sorry Margaret, Lady Hodge, it simply isn't), nor by the number of people it employs and most certainly not by either the stock market valuation nor turnover of the organisation.
No, the greater value of a producer is what it delivers to us, the consumers:
Calculating the value of search to users was a bigger challenge, and Varian pointed to a study called “A day without search engine” by Yan Chen at the University of Michigan. As a part of the study, students were hired to answer the same questions using A) Google and B) Library. Students who were using Google to find answers got the same or even better quality answers and saved 15 minutes per search. It took an average of 22 minutes for students to locate the answer using the library books, as opposed to an average of 7 minutes needed for the same search using Google. Varian calculated that Google search saves people 3.7 minutes a day which translates into $1.37, the number he got using the average US hourly wage of $22. Multiplying that with 365 days in a year, Google saves users $500 yearly. He then multiplied that with 130 million, which is the number of employed people in the United States, and got $65 billion. The total value of Google to US users adds up to more than $119 billion.
We can argue a little about those numbers, are all of those estimates correct sorta thing. But the basic method is absolutely correct: the value to us is the value in use, the utility of consumption if you prefer. Now extend those US only numbers out across the roughly 2 billion richish world people and we've got something like $800 billion or so of value delivered to consumers each year through the simple existence of Google.
I'd add another point, that the number is going to be significantly higher than this. Firstly, there's all of the other Google services that people can and do use. And secondly he's only measuring the savings in time from doing more quickly what people already used to do. But we're also able to do new and different things as a result of the company's existence.
But even if we exclude those things, even if we aren't all that happy with the detail of the valuation, we can see that the value delivered to consumers is some $800 billion each and every year. Please note that this number does not appear in any calculation of GDP. The only part of it that does is the small portion of this that Google manages to appropriate unto itself as either the wages paid to employees or profits in the bank. All the rest of that value is entirely left out of all forms of national accounting. Roughly speaking therefore there's something like $750 billion of value being delivered that while we all enjoy it no one is actually writing down anywhere.
And, as I've said repeatedly, this number is so vastly larger than whatever tax bills Google has or has not been paying as to make them irrelevant. It dwarfs their turnover, let alone their profits or putative tax bills. So perhaps we might all stop worrying so much about those tax bills? In the grander scheme of things they are tiny details.
Bitcoin is poised to shake the world- are you paying attention?
If you thought technology was already disruptive enough, here’s the news. We’re just getting started.
The Roman Rallying sequence in the Top Gear Middle East Special is an exhilarating example of the old world rubbing up against the new. As Jeremy Clarkson and Co charge around the sacred Jordan hippodrome in their battered sports cars, they inevitably start to kick up a lot of ancient dust. Clarkson starts to worry: “someone’s gonna see this dust, and then they’re gonna come, and then there’ll be anger and rage“.
There was a time when Bitcoin was able to rub up against the old financial world without anyone noticing. Now that time has gone. They’re simply kicking up too much dust to go unnoticed any more. Take the recent seminar at Stockholm’s School of Economics as a case in point. A simple two hour session featuring the current figurehead of the Bitcoin movement, Jon Matonis, turned out to be their quickest selling and most oversubscribed event in their 100 year history. But for those who know even a small amount about Bitcoin, this comes as no surprise. How could anyone resist a story involving giant stone money, gold, aliens, and the possibility of displacing some of the most significant polices of modern governments with an algorithm?
Bitcoin is poised to shake the world: are you paying attention?
If you thought technology was already disruptive enough, here’s the news. We’re just getting started.
The Roman Rallying sequence in the Top Gear Middle East Special is an exhilarating example of the old world rubbing up against the new. As Jeremy Clarkson and Co charge around the sacred Jordan hippodrome in their battered sports cars, they inevitably start to kick up a lot of ancient dust. Clarkson starts to worry: “someone’s gonna see this dust, and then they’re gonna come, and then there’ll be anger and rage“.
There was a time when Bitcoin was able to rub up against the old financial world without anyone noticing. Now that time has gone. They’re simply kicking up too much dust to go unnoticed any more. Take the recent seminar at Stockholm’s School of Economics as a case in point. A simple two hour session featuring the current figurehead of the Bitcoin movement, Jon Matonis, turned out to be their quickest selling and most oversubscribed event in their 100 year history. But for those who know even a small amount about Bitcoin, this comes as no surprise. How could anyone resist a story involving giant stone money, gold, aliens, and the possibility of displacing some of the most significant polices of modern governments with an algorithm?
International Man of Mystery
Let’s start with a little background check. It’s a given nowadays that the most innovative internet technologies no longer emerge from the R&D labs, but from the world’s student dorms. The case of Bitcoin is no different. Well, not entirely different anyway. The twist in this particular story is that the originator – who goes by the name of Satoshi Nakamoto - is closer in style to the techno duo Daft Punk than Mark Zuckerberg. According to modern folklore, Nakamoto could be a combination of any of the following: a gifted Japanese student (or even group of students); a graduate of Trinity College Dublin called Michael Clear; and/or a group of international entrepreneurs who filed a patent for something very similar to Bitcoin only 72 hours before the domain was registered. However all attempts so far to arrive at a real person have ended in either denials or dead ends. Perhaps this is as it should be. All this anonymity is entirely fitting for a distributed P2P network that champions the (somewhat contradictory) dual principles of open source and cryptography. The simple fact that no one seems to own Bitcoin means everyone does.
So What’s Different This Time Around?
The world has seen innovation in ICT and Finance before. In fact, Sweden itself can even claim to be a bit of a world leader in the field. While things like iZettle’s iPhone dongle, and services such as Tink, Flattr and Klarna may seem (and indeed are) groundbreaking, they are still little more than a smart interface into the traditional banking world. As such they’re not creating a new game so much as simply making it more efficient to play the old one – and taking their cut to do so too. What’s cool about Bitcoin is that it’s inventing a totally new ball game altogether.
Here’s the rub. In the world as we know it, each institution, credit card, bank or financial service has it’s own ledger (or set of ledgers), and every time we ask them to transfer some money in or out of our accounts they do so by adjusting their ledgers. And when they adjust those ledgers, they charge a (not insignificant) transaction fee. Not only that, increasingly these transactions are electronic, and that means they’re tagged with our identity too. Depending on your point of view, this could be either good for tracking criminals and/or a convenient tool for governments to snoop on what their citizens are up to.
Bitcoin does two significant things which drive this traditional paradigm into the sand.
First, it makes the transactions anonymous, much like cash transactions. Any transactions you make on Bitcoin are not coupled to your identity. That’s bad news for nosey governments.
Second, it has only one giant ledger in the cloud, so the transaction costs of transfers are as close to zero as you can get, and (because of Moore’s Law) they will keep falling. Essentially, in the Bitcoin universe, there is no difference in the transaction costs between a) buying a loaf of bread at your local store, or b) sending millions of Bitcoins through the ether from one side of the planet to the other. The cost for both is more or less zero.
The Go-Betweens
But before we get all excited about hopping up and down on the graves of clearing houses, banks and other financial middleman, it’s worth mentioning that there’s actually a really sound reason why these kind of institutions exist in the first place. Convenience.
Convenience is the reason we buy our chewing gum and cigarettes from the local store and not from the out of town cash and carry. Even though we know the local store charges a premium, that’s still better than hopping in the car and driving across town for a small purchase. The same logic applies to the world of traditional banking. However unreasonable a transaction cost may be, it’ll still be cheaper than hopping on a plane with a sack full of cash. What makes the Bitcoin solution unique here is that it sidesteps this issue by making all financial transactions equally convenient. From the perspective of both the buyer and the seller that’s a very attractive proposition – from the perspective of the (possibly soon defunct) middlemen, it’s a nightmare. The emergence of Bitcoin is going to make a lot of very powerful, influential and traditional middlemen-style institutions very nervous.
Stark Contrast
Jon Matonis tells a great story to demonstrate just how different Bitcoin is to the traditional money world. When he gave a talk on Bitcoin at the monumental premises of Swift HQ in Brussels – one of the world’s largest central clearing houses – he asked if he could see the “live transactions” that roll through their computers every nano-second of every day. He was told that the ledger (the bank of computers doing the work) was private and kept in a locked room. By contrast not only is the Bitcoin clearing system totally decentralised, it is also public. Very public. In fact it’s so public you can even watch the transactions as they happen in realtime on the web, and, because the entire enterprise is driven by open source and thereby open to the creative talents of the dorm world, you can even listen to it.
One other big paradigm shift in the Bitcoin world is around credit. In the Bitcoin world, there simply is no fictional money. This would make fractional banking (the method by which banks lend out more money than they actually have in reserves) almost impossible. In the Bitcoin world, banks would only be able to lend the money they actually have. Perhaps loans would be spread across Bitcoin’s distributed network, much like crowdfunding. However it works in practice, the impact of reduced credit on a world currently addicted to the stuff is anybody’s guess.
Area 52
The key point about Bitcoin’s decentralised nature vs the centralised nature of the traditional money world is worth exploring in more detail. It’s also where our story takes a slight off-road detour into Area 52 territory.
Until recently, SETI (the project who’s aim is to Search for Extraterrestrial Intelligence) has been the number one global distributed computing network. However now that Bitcoin is on the rise, it’s been bumped down to second place. In fact the surge in Bitcoin’s distributed computing power is like nothing we’ve ever seen before. As Bill Gates said, “Bitcoin is a technological tour de force“.
This distributed nature also makes it incredibly resilient. Imagine if the SWIFT was somehow taken out, either physically or by attacks on it’s network. That would more or less cripple the money exchange markets that depend on it. Compare that to Bitcoin. The loss of a few computers in any given country on the network makes no difference – the system simply adjusts and life carries on as before. In this regard Jon Matonis likes to draw a comparison between Bitcoin and the ancient Rai Stones that were used on the island of Yap, Micronesia. These huge stone wheels were used to demonstrate the wealth on the owner and serve as a public record of significant transactions. Even though the ownership of any given stone would change over time, as long as people knew where it was, the physical location of the Rai Stone did not matter. In fact one Rai Stone even sank to the bottom of the sea during a voyage, but as the villagers could all agree it still existed, the stone was still able to be used.
A Dismal Science No More?
Despite the fact that we’ve already covered the mysterious origins of Bitcoin, its power to reduce transaction costs to zero, and its distributed, anonymous nature, we’ve still only scraped the surface of its disruptive powers. What it can potentially do to governments is mind blowing.
While some progressive governments (such as Germany) have already embraced the power of Bitcoin, the majority remain sceptical. Some – such as the government of Thailand – have even opted to ban it (and good luck with that…)
So why all the worry and hoo-hah?
Here’s the punchline. Bitcoin would not only effectively sidestep a government’s monetary policy, it would severally restrict its fiscal policy too. But what does this mean in practice?
For those of us who are not economists, we can explain it this way. First, on the monetary side of the equation, governments often like to reserve the option of setting the base lending rate (or discount rate) themselves through a central bank. They’re also keen on printing more money if needed to help pay for stuff, and they like to control the markets by buying and selling their own bonds (known as open market operations). In the Bitcoin world, it is the Bitcoin algorithm which controls the flow of new Bitcoins, not a central bank. This would make it much harder (if not impossible) for governments to rely on the fictional money they’ve grown so used to. That’s goodbye to quantitative easing for starters.
Second, on the fiscal side, as income gets harder and harder to trace back to individuals, governments would have to switch taxation to the consumption side of the equation. In turn this would rather limit the governments supply of tax revenues, and may even force them to get real about balancing their books.
As Al Gore has wryly noted, “I think the fact that within the Bitcoin universe an algorithm replaces the functions of [the government] … is actually pretty cool.”
System D
So now we’ve looked at the potential impacts on governments, we’re done, right? No.
Some of the most exciting implementations of all this kind of new technology isn’t happening in the old world, but the new. While the EU and the States are mired in government bureaucracy, restricted by powerful lobbying bodies, and stunted by military units run with half an eye on health and safety regulations, Africa and Asia are leapfrogging a lot of these issues to implement some truly original solutions.
At the Stockholm seminar, we also got to hear from the amazing Pelle Braendgaard who runs Kipochi. He told us about the everyday use of digital currencies like M-PESA in Kenya, and how people there who have been let down by the traditional banking sector have found an exchange lifeline with digital currencies that run on old cellphone technology and sim cards. M-PESA in effect gives a banking-like infrastructure to those people who would otherwise be “off the grid” and operating in the System D economy. Imagine the possibilities for anyone in Africa or Asia to either wire money in our out of the country for free (or as good as), while at the same time sell their goods without having access to a bank account. They could also shop around for a loan on a global scale, and even pay for their groceries at the local store in the same currency.
So What Happens Next?
The exponential rise of Bitcoin will no doubt start to generate some heat from here on in. It’s only a matter of time before we see the traditional gatekeepers start to cry foul. No doubt we’ll see a lot of anger and rage in the courtrooms. At least in the west. In Africa and Asia we’ll probably see things take off a little quicker. I predict it will only be a few years from now before we see Bitcoin (or other similar digital currencies) emerge as the exchange of choice for the majority of people otherwise denied access to the established money structures. And when that happens, prepare for the world to shake.
Rare sensible move from Mario Draghi and ECB
Nominal interest rates cannot be brought below zero, because non-cash assets can be sold for cash, which always effectively bears an interest rate of zero. Monetary policy affects the economy through changing nominal interest rates, which given somewhat sticky inflation changes real interest rates, which affects spending, saving and investment decisions—a cut in the interest rate makes saving more expensive and investment cheaper. Essentially working on these two facts (there are much more complex versions, but this is the core) New Keynesian economists argue there is a "zero lower bound" on monetary policy. The Fed cannot support demand by targeting a Fed Funds rate lower than zero, the Bank of England cannot support demand by lowering Bank Rate any further than zero, and the same for the European Central Bank. This means, they say, fiscal policy is necessary to stabilise demand when the interest rate that would be needed to do falls below zero.
Now I think this argument is false. Monetary policy does not mainly work through interest rates. Monetary policy mainly works through affecting consumers' and firms' expectations about future demand conditions. But even if this argument were true, the simple Keynesian story—that fiscal policy must be employed to get the Eurozone out of recession because monetary policy is ineffective at the zero lower bound—will not fly. Why? Because the ECB, headed by Mario Draghi, cut interest rates by 0.25% today, bringing them from 0.5% to 0.25%. The ECB was not yet at the zero lower bound.
Monetary policy doesn't seem to need long and variable lags of the type typically assumed in models. As I write, the Euro is down 1.4% against the dollar 1% against the pound and 0.7% against the yen. The Bloomberg 500 measure of European stocks is up 1% and the Euro Stoxx 50 measure is up 1.3%. That means the value of the Euro has already fallen. That means that money is already slightly easier. If there were a good measure of nominal income expectations—the best definition of money easiness or tightness—I'd wager that that would be up.
It's true that this is unlikely to be enough. Nominal GDP is not growing at pre-trend rates, never mind catching up to the pre-recession trend. The ECB is letting the euro area slip into deflation when it is barely out of its double-dip recession. Sovereign debts have grown to eye-watering levels despite very tight fiscal policies in many of the hardest-hit member nations. And none of this is to mention the excessive regulation and badly-designed tax systems that contribute to low long-run productivity growth and high rates of unemployment even in good times. But it's both a step in the right direction, and evidence against the simplistic Keynesian arguments that get trotted out all too often in macroeconomic debate.
Woo time on tax poverty
Yes, it's still tax poverty week and the claims about moving from the current minimum wage to the living wage are coming in thick and fast. The latest piece of woo on offer is this:
Unlike previous research, today’s Landman Economics Report looks at what would happen to the jobs market as a result of the stimulus to the economy from raising the pay of millions of low paid workers to the Living Wage. More people spending money in local shops and a reduction in the amount the government needs to spend on in-work benefits. The report finds that, when you take this into account, shifting the NMW up to the Living Wage could create an extra 58,000 jobs.
Howard Reed manages to reach this amazing conclusion, that raising the price of labour will lead to an increase in the demand for labour, by simply assuming away the effect that raising the price of labour will have.
For these two reasons, I have assumed here that the short-run impact of reduced profits on consumer demand is zero.
There won't be any bad effects because I have assumed in my workings that there won't be any bad effects. That's bringing the eonomist who assumes a can opener into disrepute.
I have to admit that I much prefer this point made by my fellow Fellow, Gavin Kennedy:
Employee tax payments go to the government, so removing them for the ‘Living Wage’ does no affect employment because the total wage cost remains the same, and does not have detrimental employment affects.
The argument against raising the minimum wage is that yes, there really will be unemployment effects. The argument in favour of reducing the tax bill on those in employment is that it will still increase their incomes but it will have no effect whatsoever on unemployment. Indeed, removing, as Gavin points out, the employers' NI would probably increase employment.
As before, we do not have a problem with low wages in this country, we have a problem with taxes being too high on the lowly paid. It is all a matter of tax poverty, nothing else.
And now for the ritual conclusion: if you want the lowly paid to have more money then just stop taxing them so damn much.
The value to us of Sainsbury's is not the amount of tax that they pay
This is a slightly strange thing for a businessman to be saying:
Justin King, chief executive of J Sainsbury, has challenged business leaders to “stand up” and reveal their tax practices, arguing that “tax is a moral issue” for British companies.
The supermarket boss argued that “consumers have every right to ask” how much a company is putting back into the country where they operate and make their profits. Speaking on a panel about Business Trust at the CBI annual conference he said that he “strongly disagreed” with those - including the CBI - who have said that company tax bills should be based on the letter of the law, not social responsibility.
He told the CBI conference: “How we do business, how we put back into the community of which we are a part, put back into the society from which we draw our revenues is a moral issue and it’s one that our consumers have every right to ask us.”
How Sainsbury's put back into the society they draw their revenues from is by drawing those revenues. Their job is to be a grocer for goodness sake: to provide us with somewhere we can attain nirvana with 15 brands of baked beans and 17 of toilet paper. That's the point of them, the only point of them. If we didn't think we gained more value from their existence and services than we would from their absence then we wouldn't shop there. Thus, given that we do shop there we must value their existence and the services they provide.
And that really is the end of it I'm afraid. How many people they employ to provide these services, what profits they make, what bite the government takes out of their revenues or profits are all entirely irrelevant things. The contribution Sainsbury's makes to our society is that we have somehwere to get beans and bogroll from.
Nowt else.
Yes, it's still tax poverty, not a Living Wage
So we've had the announcement of the new Living Wage rate: that level of income which allows a full year, full time, worker to earn and not be in poverty in the UK. That definition being, rightly, what people think people should be able to do and not be in poverty: as with Adam Smith's linen shirt.
That number that has been announced? 7.65 an hour.
But as I have been shouting for years that is a pre-tax number: that's the earnings before the State gets its grubby mitts on these paltry earnings of the working poor.
If you do work full time full year at that Living Wage rate you'll get 14,917.50 over the course of the year. I don't think that's a large amount and I'm sure that you don't either. Which is why it is so appalling that at this low level of income said Living Wage worker will be charged 1,095.50 in income tax and 1,110.00 in employees' national insurance. For a net income of 12,712.00
Compare and contrast this with the 12,304.50 that someone would earn on the national minimum wage of 6.31 an hour, if no tax were charged on it, and we can see that what we have here is not wages which are too low, it is taxes which are too high.
And of course there is also employers' NI of a further 1,100 or so: opinions differ as to how much of that is really carried by the employee, most to possibly all being the general view.
The reason that the national minimum wage is not a living wage is because government taxes the working poor too much. We do not have a low wage problem at all, we have instead tax poverty.
And, as is ritual now on this point, if you want the working poor to have more money just stop taxing them so damn much.
Libertarian film screening of V for Vendetta
Tom Stringer has arranged a really fun Monday evening outing on Monday November 4th. It's a showing of the movie "V for Vendetta" at the Bowler Bar and Pub in Clarkenwell. The screening starts at 7, but people can arrive from 6pm onwards and there'll be plenty of time to chat with fellow libertarians. There's an amply stocked bar and what's more there is a free drink for every attendee courtesy of EzyOrder when you arrive (all you need to do is download their app onto your smartphones).
Welcome To Tax Poverty Week
Someone or other has decided that this is Living Wage Week. A far better name, one that properly describes the reality, is Tax Poverty Week.
I've a long piece here laying out the basic argument. Cutting to the chase the core arguiment is very simple. The sugggested Living Wage of 7.20 an hour is a pre-tax wage. Once you've taken off the tax and NI due on that sum the resulting post-tax income is only 50 pounds a year different from what the minimum wage untaxed would be. Therefore the minimum wage is indeed the living wage except for the depredations that government makes into the pocketbooks of the poor.
That is, the poor are being taxed into poverty, it isn't that employers are paying too little. So let's start calling it what it is: tax poverty.
So my suggestion for this coming week is that every time someone mentions the living wage we should just replace that mention with the phrase "tax poverty".
And then we've got a truly ludicrous suggestion:
Miliband will pledge that in the first year of a Labour government firms which sign up to the living wage will receive a tax rebate of up to £1,000 for every low-paid worker who gets a pay rise, funded by tax and national insurance revenue from the higher wages.
You what? Someone is suggesting that we make sure the working poor have more money by taking more off them in tax?
Eh?
It's really terribly, terribly simple. The UK tax system dips into incomes too far down the scale. Thus if you want the working poor to have more money please, just stop taxing them so damn much.
Intending to tax them more is an insanity worthy of a lunatic asylum.
Curb the ministerial credit card
Attention has focused on energy bills, but Britain’s water industry has its own troubles –drought orders, hosepipe bans, and tariff hikes. The new management at water regulator Ofwat should focus on changing the counter-productive incentives that are damaging efficiency and choice.
Because companies are regional monopolies, regulation involves careful balancing between enabling companies to finance investment, and protecting customers from higher prices. It’s now time to tip the scales: the drive towards attaining ever-increasing water and environmental quality at an ever-increasing cost must come to an end.
Following reductions in real incomes, the 2014 Ofwat price review should set below-inflation price limits that would give nominal stability to the tariffs paid by customers.
The focus on environmental improvement has driven up costs for consumers and choked supply. Massive investment has been financed by rising tariffs. Now it is time to intensify the search for more cost-effective – and less capital intensive – methods.
Ministers have treated regulatory financing arrangements as an environmental credit card, with too little concern for those paying the bills. Take the Thames Tideway – a major new sewer under the Thames at an estimated cost of £4bn, the need for which may arise from neglect of sewer maintenance. The objectives of dealing with storm water could be dealt with much more cheaply than by a grandiose tunnel project.
More use should be made of markets. Retail competition – along Scottish lines - should be extended . There should be more trading of raw and bulk water, including supplies from independent providers.
Existing company networks should be linked to enable water to be transferred, by trading, from the water rich North to the thirsty South, reducing the incidence of hosepipe bans, giving choice to customers, and incentives to companies. Extension of metering should be linked to the use of pre-payment devices that would reduce bad debt by helping customers to budget for their water bills.
And water companies, especially when private equity owned, need to improve their governance: footloose global money has now acquired ownership, and should behave more responsibility to its customers.