Economics Tim Ambler Economics Tim Ambler

Financial Advice should be no Laughing Matter

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When the Financial Conduct Authority sets out to be helpful, as its latest Financial Advice Market Review does this week, it is hard to know whether to laugh or cry.  The strategic problem is that its own regulatory approach is causing the market which it is supposed to protect and grow, to fail.  The strategic solution would be to abolish the FCA but it is Osborne’s baby and he will not do that.  So the new FAMR shows the advisers and their clients how to do their business in another market beyond the FCA’s clutches. It is all a bit subtle: financial “advice” is regulated but financial “guidance” is not. The government’s Money Advice Service, for example, is not regulated no matter what rubbish it may advise. The FCA wants the Treasury to make the distinction more explicit and advisers to understand how they can exploit that.  Advisers should be “navigating the boundary between providing helpful guidance based on a customer’s circumstance (such as a financial ‘health check’ prompting customers to think about their financial needs and priorities) and [not] straying into an implicit personal recommendation.” (p.28).  It is OK to talk about X (must be nameless, wink, wink, nudge, nudge) who has very similar circumstances and wisely adopted course Y provided one does not actually recommend Y to the client.

And the FCA will now offer “new guidance to support firms who wish to offer 'streamlined advice' on a limited range of consumer needs." This should include, it says, "a series of illustrative case studies highlighting the main considerations firms need to take into account when developing such models.” “Streamlined” advice is, of course, guidance, not advice. (p.35).  Terminology is a problem as the FCA also refers to this category as ‘simplified’ or ‘focused’ or ‘basic’ advice.  “Nudges” and “rules of thumb,” in case you were wondering, are guidance, not advice.

The FCA makes the distinction that, following guidance, it is the client who decides the course of investment whereas, according to them, the client always follows advice.  This is a non-difference as the decisions are always made by the client in both cases.

One should not mock as there is a genuine attempt, in all the muddle, to shift finance advice from regulated bureaucracy to a mass market.   The FCA is excited by the idea of “robo-advice,” allowing the consumer to provide her details and options to her tablet, or whatever, and receive an investment plan back.  Banks and the other big players, who can see competitive advantage over the independent professionals, are equally excited.  And because banks’ computers are never wrong, this will be “guidance,” not “advice.”  Importantly, it could become value for money for the consumers currently locked out by the FCA.

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Economics Dr. Eamonn Butler Economics Dr. Eamonn Butler

Help to Save will only harm

First, Help to Buy, now Help to Save. What will be the next headline-grabbing, vote-seeking but yet fiddling, complicated, expensive and ultimately destructive policy from the UK government? Help to Buy helped to buy votes (at taxpayers' expense) by subsidising house purchases. As UK house prices were rising fast, it was almost universally popular. Not in the Adam Smith Institute of course: we explained its damaging consequences on the blog. By adding further to the demand for housing, but doing nothing to increase supply (such as easing the UK's suffocating 1940s planning policies), the scheme simply stoked prices further.

Under Help to Save, around 3.5m people on universal credit or working tax credits who save up to £50 a month will receive a cash bonus of 50% of their savings after two years. Then they can save for another two years, with the same deal.

That amounts to a cash gift of £1200 from taxpayers. Not that many of the 3.5m will get that amount: £50 a month is a huge amount for people on benefits to save – indeed, half of UK adults have less than £500 set aside for emergencies.

Of course, if interest rates were not kept artificially low by the Bank of England (in concert with other people's central banks), saving might be more attractive. And if there were not so much onerous regulation on hiring and firing, more people on benefits would be able to get a job, and move on to a better one. Help to Save looks like a measure to plaster over the cracks opened up by earlier ones.

And think about the administrative complexity of the scheme. The UK's tax code is already nearly the world's longest, and its welfare code is pretty dense too: but here we are, adding another couple of dozen pages. Just think about the rules, and the staff, you need to create and manage even a trifling scheme like this. First, you have to identify those who qualify – and check their bona fides. Which means rules, documents and civil servants. Then you have to check what they are saving, so you need access to their account – or are you setting up a special account for them? Ditto. You need to check that the two-year and then four-year schedule has been met. Ditto. Then you need to pay over the cash, so you need to raise payments, dispatch them, make sure it is all done correctly, deal with mistakes and complaints.... Ditto.

It does not take much reflection to see that this scheme – and countless others like it – will occupy a sizeable civil-service task force, probably in several centres throughout the country, and that the cost of the scheme could well be a significant proportion of the intended benefit. Are there not cheaper and easier ways to help poorer families? Like taking them out of National Insurance entirely?

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Economics Tim Worstall Economics Tim Worstall

As Charlie Bean says, we're richer than we thought

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Or as Sir Charles Bean points out in his new report, we're richer than we thought and getting ever richer faster too:

Improving analysis of the digital economy could show that Britain’s economy is growing faster and consumers are better off, according to former Bank of England deputy governor Charlie Bean. Bean, who published his government-commissioned review of official economic statistics on Friday, said the U.K.’s growth rate could be between one-third and two-thirds of a percent higher with improvements to data collection.

“Measuring the economy has never been harder than it is today,” Bean told reporters at the Data Science Institute at Imperial College London. While digital activity is clearly adding to the economy, it’s not necessarily being picked up by the current methodologies, he said.

This is something that one of us has been banging on about for some time now. We know, absolutely, that we're not measuring the economy properly. This is also more than just a small statistical quirk too. For there's plenty who keep telling us that the economy is growing more slowly than it did in the past and thus the government must do something. However, if it's simply that we're not measuring growth properly then there is no need to that larger state. And as we say, we know we are measuring it wrongly, we're just not sure how wrongly.

A favourite example is WhatsApp. We have three methods of measuring GDP, production, incomes and consumption and all of them are measured at market prices. WhatsApp is currently free and carries no advertising. Thus it appears not at all in either the production or consumption variants of GDP. The engineers who make it are indeed paid so there's some, what, $50 million? $100 million? appearing in US GDP by the income method. But there's a billion users of the app and people are getting some to all of their telecoms needs from it. And we really cannot say that those billion are all getting only 10 cents of value from their use at most. Ten cents a year that is.

We really do know that we're measuring this digital economy wrongly: our question is how wrongly, not whether. That in turn means we're richer than we think we are and also that we're getting richer faster too.

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Economics Tim Worstall Economics Tim Worstall

Strangely, bequests don't seem to increase wealth inequality

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An interesting finding from Denmark, that bequests and inheritances don't appear to increase wealth inequality:

Our work suggests – contrary to the popular belief – that bequests need not increase inequality even if rich parents have rich kids. In fact, in Denmark, the post-bequest distribution is more equal (if measured in relative terms) than the pre-bequest distribution.

And as we have been assured for years concerning income inequality it is that relative measure which matters. It's also worth pointing out that Denmark is significantly (by 10 percentage points or so) more unequal in its wealth distribution than the UK.

This has an interesting effect on taxation policy of course: the prime objective of inheritance taxation is to try to stop fortunes elf-replicating down the generations. It's also an interesting comment on Thomas Piketty's insistence that inheritance will become all in the near future. It just doesn't seem to work out that way.

We can see that there could be a demographic structure which was more problematic. Say, something like China, where there's a whole generation which is likely to be the only descendant of four grandparents. That's likely to concentrate wealth. But a population that is roughly stable is going to have just as much splitting of wealth between children thus bringing down the amount that any one of them gains. But it is interesting, isn't it? If inheritance doesn't increase wealth concentration then why do we tax it with such moral fervour?

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Economics Tim Worstall Economics Tim Worstall

It's not possible to say what will happen after Brexit

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We're rather encouraged by this little report into the effects of Britain leaving (or not) the European Union:

British companies could be forced to put up prices to the consumer or even be forced out of business by a ‘Brexit’ from the European Union, according to a report by Oxford academics.

No, not that bit, this bit:

It added that the overall economic impact of Brexit through changes to the country’s immigration policies were “not possible” to predict with certainty ahead of the referendum. The report said “confident predictions about the economic effects of migration after Brexit should be treated with caution”.

Some of us here have very strong views indeed about this Brexit process but we'll not inflict them upon you here. However, that point strikes us as being exactly correct. For it is impossible to state with any certainty what the economic effects of Brexit would be.

For what those effects would be, will be, depend upon the economic policies that are adopted once free of the shackles of Brussels*. If Britain adopts unilateral free trade then, as Patrick Minford has pointed out, the economy will grow. If immigration of low wage workers is curtailed then businesses which employ low wage workers will have a hard time of it, indigenous workers will start to see higher wages. What happens after Brexit depends upon the policies adopted after it, not on the leaving itself.

Thus all reports predicting either disaster or nirvana from the leaving itself should be regarded with the utmost suspicion.

*It could be that you could divine the views of one of us on this subject.

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Economics Dr. Eamonn Butler Economics Dr. Eamonn Butler

The Wealth of Nations, 240 years on

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On this day in 1776, exactly 240 years ago, the Scottish philosopher Adam Smith finally published his best-known work, An Inquiry Into The Nature And Causes Of The Wealth Of Nations – the book which Smith himself called his Inquiry but which is known to us today as The Wealth of Nations. It was fifteen years in the making. So long, indeed, that Smith’s friends eventually ganged up on him and urged him to finish it before someone else did the job for him. The final chapters (gleefully cited by Owen Jones in his talk to the Adam Smith Institute’s Next Generation Group last night) in which Smith talks about the need for governments to subsidise education and other services, show every sign of being rushed and given less of the lengthy consideration that he gave to earlier chapters.

Perhaps too much consideration, in fact. “It is a clumsy, sprawling, elephantine book,” wrote Leo Rosten; and he is not wrong. One “digression” alone, on the price of silver, takes up 70 pages, fully a tenth of the whole work. Smith seems to have found a place in it for every stray fact that came into his capacious mind – from the diamond mines of Golconda through the fisheries of Holland to the market for Irish prostitutes in London. As if that were not exhausting enough, even native English speakers have difficulty with the studiously elegant, but now very dated language; to others, it is unreadable, or nearly so.

It is for these reasons that I wrote The Condensed Wealth Of Nations. But that is not to downplay Smith's magnum opus. It is in every sense a great book. Some modern critics say that much of The Wealth of Nations was not original. But Smith’s achievement was to take the disparate ideas and facts in circulation at the time and weave them into a coherent intellectual system – indeed a new science, of economics. Overcrowded with facts it may be, and yet (as Joseph Schumeter remarked) it “lights up the mosaic of detail, heating the facts until they glow,” making it (says Rosten) "one of the towering achievements of the human mind: a masterwork of observation and analysis, or ingenious correlations, inspired theorising, and the most persistent and powerful cerebration.”

Yet Smith did not see his Inquiry as a mere textbook. It was a polemic against the suffocating regulations on trade and commerce in his time. Monarchs granted their friends monopolies, even in essential goods. The guilds restricted entry to every profession – and kept up prices. Exports were subsidised and imports were restricted because it was thought that the wealth of a nation was the amount of gold and silver it could get into, and keep, in its vaults. But Smith, audaciously, pointed out that both sides benefit from a voluntary exchange: they would not bother if they didn’t. Buyers may end up with less money, but they get, in return, goods or services they value more. Any restriction on trade necessarily reduces the value that such free exchange generates for both sides.

The Wealth Of Nations was hugely influential; the leading politicians on both sides of the Atlantic all read it, and took its advice. Taxes and tariffs were cut, monopolies and restrictions abolished, and the world enjoyed a century of free trade, enterprise, innovation, growth, and improvement. Too often today, we forget Smith’s advice; but it remains there to guide us. It is a book that has profoundly shaped our world.

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Economics Tim Worstall Economics Tim Worstall

The Guardian's big new series about the iniquities of modern life

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The Guardian has just started a big new series exploring how incomes have changed over the past decades, how income distribution has changed. Everything is terrible, of course. and there's going to be weeks of this dreck apparently. To give you a flavour:

The full scale of the financial rout facing millennials is revealed today in exclusive new data that points to a perfect storm of factors besetting an entire generation of young adults around the world.

A combination of debt, joblessness, globalisation, demographics and rising house prices is depressing the incomes and prospects of millions of young people across the developed world, resulting in unprecedented inequality between generations.

A Guardian investigation into the prospects of millennials – those born between 1980 and the mid-90s, and often otherwise known as Generation Y – has found they are increasingly being cut out of the wealth generated in western societies.

Where 30 years ago young adults used to earn more than national averages, now in many countries they have slumped to earning as much as 20 percent below their average compatriot. Pensioners by comparison have seen income soar.

that pensioners have seen incomes rise if because government policy has been to deliberately and specifically try to raise pensioner incomes.

We might not be too hard on The Guardian. They have gone to the right place, the Luxembourg Income Study, to get their data. They're looking at the right concept too: disposable incomes. However, on every other point they're following the precepts of that Daily Mash t-shirt above, being wrong about everything.

Have a look at the more detailed figures here. Run through the age groups and countries. And those young'uns in this country:

Compared to the national average, you are poorer than people of your age in the past.

Terrible, eh?

In real terms, your disposable income is about $5,130 more than in 1979.

Sorry, what? they're saying that a higher real income means you're poorer? Ahhh....they're not talking about poverty at all. They're talking about inequality. And as it works out, most age groups in the UK have had real income rises of $10,000 to $12,000, except for those young'uns bring up the rear with only $5,000. Which, if we're honest about it, wouldn't surprise us all that much given the vast expansion of the student body (from some 10-12% of the age cohort to 50% or so now) over that time period.

But obviously the neoliberal, in hock to plutocratic capitalism, UK will have performed much worse than those much more caring social democracies like Germany or France? Nope: there the young'uns have seen real disposable incomes actually fall (by $600 and $1,200).

That is, by the measures that The Guardian themselves have chosen, that neoliberal, in hock to plutocratic capitalism, UK has done better than the more liberal and more to Guardian economic tastes social democracies of Europe. Let's hear it for neoliberal plutocratic capitalism then.

And in case you think the Daily Mash is too harsh in declaring the paper wrong about everything, all the time, consider this. They can't even manage to manufacture their own propaganda properly.

One final point. UK real disposable incomes have about doubled since 1979. Let's hear it for neoliberal plutocratic capitalism just one more time.

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Economics Tim Worstall Economics Tim Worstall

There's a reason Robert Reich is a professor of public policy

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And not, say, a professor of economics. Here is Robert Reich trying to point out that the economic plans of Bernie Sanders are just copacetic. Everything adds up, kittens will gambol down sunbeams again and my, won't the Republicans be put to the sword?

Not day goes by, it seems, without the mainstream media bashing Bernie Sanders’s economic plan – quoting certain economists as saying his numbers don’t add up. (The New York Times did it again just yesterday.) They’re wrong. You need to know the truth, and spread it.

1. “Well, do the numbers add up?”

Yes, if you assume a 3.8 percent rate of unemployment and a 5.3 percent rate of growth.

That's not even true in and of itself. It's necessary for there to be a 3.8% unemployment rate, a significant rise (several percentage points) in the portion of the working age population actually working and then near a decade's worth of that 5.3% growth rate. That rise in the portion working is most important: because given the demographics we generally think that is the really impossible part: the baby boomers are retiring, coming up to retirement, and people often do not wait for 65 to do so.

However, the real joy of this is that Reich is simply assuming what everyone else is insisting is impossible. No one is doubting that if you could have those three things then the Sanders economic plan would perform miracles. The doubt, in fact the insistence that it will not and cannot happen, is that those three things will not happen.

We could just about imagine a 3.8% unemployment rate at least for short periods of time. We cannot believe that the demographics will allow a larger working age participation and we absolutely insist that 5.3% real growth (the assumption is that inflation will stay down) cannot happen. There simply isn't that much slack in the American economy, meaning that the nominal growth will show up as inflation long before we're able to have 5% and more real GDP growth for years on end.

That is, Reich is insisting it will work if we just accept all the major points which we insist cannot happen.

This might even be great politics but it's not obviously economics of any useful sort. Thus, presumably, the job description.

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Economics Sam Bowman Economics Sam Bowman

CEOs really are worth more than they used to be

I’ve speculated before that one of the main reasons that CEO pay has risen quickly since the 1950s might be that CEOs have become more important since then. The question is very important because people who worry about executive pay use this rise as evidence that CEOs are overpaid now – if they were only paid ten times what the average worker was in 1965, how could they possibly be worth two hundred times that now?

A new paper tests this hypothesis. It looks at what happens to firms’ values after CEOs die unexpectedly. (To be precise, they look at “cumulative abnormal returns”, or the difference in firm value compared to what was expected, over a five-day period.) If CEOs are important and difficult to replace, firm values should move a lot when they die. If they aren’t important or are easy to replace, they should move a little. Note that we shouldn’t expect firms to always become less valuable – a bad CEO dying should make the firm more valuable, just as sacking a bad CEO does.

Interestingly, they find that the average change in firm value doesn’t change over the 1950-2009 period. That is, the good and bad CEOs cancel each other out. But the variance – how big the changes in value are – has changed a lot. Over the course of 60 years, “the shift in market value caused by an unexpected CEO death increased by approximately $65 million (in 2009 dollars)”.

What that implies is that CEOs have indeed become more important to firms over the past sixty years. The good ones are more valuable, the bad ones are more costly. I find that quite intuitive. Markets seem more competitive now than before, and technological change seems to be moving more quickly. That means that the strategic decisions that a CEO will help make matter more.

It also undermines the claim that CEOs are paid more than they’re worth. For sure, some of the cost to firms will be risk-based – the process of finding a new CEO is costly even if the old one was no good. But the fact that the cost is much greater for some firms than others – and that some firms do better when their CEO dies – seems to be good evidence that CEOs matter, and matter much more now than they once did.

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Economics Ben Southwood Economics Ben Southwood

Property rights work—even in fish

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In theory, it's hard to set up property rights systems over many goods. A classic example is fish in the sea. Usually property rights involve stuff that stays put or whose movement you can control. But dividing up the ocean would be unimaginably difficult and hardly desirable even if we could do it. And fish will swim around.

So it would seem that it's pretty hard to have property rights over fish—who's to say that this fish is mine or yours? When a fish swims into my plot of sea does it become mine, or is it still yours because it came from your plot of sea?

Of course, laws have got around these simplistic problems, and given fishermen "individual transferrable quotas"—each of them are only permitted to bring back a certain number of fish (details explained well here). It encourages efficiency, because if someone else can haul in your take cheaper than you, you can sell your right to them. But unlike a total quota, there's no race to bring in as many as possible in as short as possible a time.

This system has done pretty well at preventing stock collapses and has been emulated in Alaska, New Zealand and elsewhere. But it may have another benefit, according to a new paper by Lisa Pfeiffer and Trevor Gratz: reducing fisherman risk-taking:

Commercial fishing is a dangerous occupation despite decades of regulatory initiatives aimed at making it safer. We posit that the individual allocation of fishing quota can improve safety by solving many of the problems associated with the competitive race to fish, which manifest themselves in risky behavior such as fishing in poor weather. We present a previously unidentified approach to evaluation: estimating the change in the propensity to start a fishing trip in poor weather conditions as a result of the management change. We chronicle a revolution in risk-taking behavior by fishermen (a 79% decrease in the annual average rate of fishing on high wind days) that is due to the change in economic incentives provided by rights-based management.

So that's another win for property rights then!
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