We would not say, ourselves, that we are greatly in favour of the burkini and other such manifestations of Islamic prurience. Yet we would, as with people saying things we might not agree with, insist that the populace should be allowed to dress themselves in any such manner that doesn't actually frighten the animals.
We've another of these dirges about how the libraries are under such great threat:
Nearly 350 libraries have closed in Britain over the past six years, causing the loss of almost 8,000 jobs, according to new analysis.
In a controversial move that sparked protests by authors including Philip Pullman and Zadie Smith, councils across the country have shut their reading rooms in an effort to make deep savings.
Children’s author Alan Gibbons warned the public library service faced the “greatest crisis in its history”.
All of which brings out our inner Karl Marx. Who did insist that the forces of production (ie, technology) determined social relations. And if we're to be a little more narrow about this, technology determines, or at least should, how we go about doing certain things. The economic historian Brad Delong has long pointed out that the university teaching style of a lecture is really just a hangover from medieval days. When books were vastly expensive (a scholar might hope to accumulate a library of perhaps a score volumes over a lifetime) then having one person reading that very expensive product to 200 made some sort of sense. When a copy of the book costs less than the hourly wage of the reader perhaps less so.
So it is with libraries. When books were much more expensive than they are today then increasing the Solow Residual (in exactly and entirely the manner that Uber and so on do today, the sharing economy) through reuse and lending made great sense. But technologies change, relative prices change. It may or may not be true that we have reached that tipping point just yet, where the value of the books being lent is less than the cost of running the lending system, but we think we can all see that that is going to happen at some point.
The point is thus not that libraries are closing, nor that we should all fight the power to prevent it. What should actually be the discussion is, well, do we need libraries any more? And if we still do then when won't we?
But of course, as C. Northcote Parkinson pointed out, there's nothing as conservative as a bureaucracy considering its own existence.
Almost everyone on the libertarian free-market side recommends a similar top ten books, including the classic works of Hayek, Popper, Friedman and the others. They are in my top ten, too. However, I have drawn up a second list, one of books less celebrated, but which sustain, if more obliquely, a similar philosophical outlook.
That Tesco's brands a few of its products with the names of fictitious farms is amusing, as is the outrage that this has brought forth from the usual suspects. But then matters take a turn for the worse as we get a question of such driveling stupidity as to potentially make our brains leaks from our ears. Or possibly to ponder whether this has already happened to the questioner. We refer to this from Yvonne Roberts:
How have we allowed a system to emerge that squeezes the whole supply chain in the name of profit and seduces us into ignoring our carbon footprint for that dubious consumer privilege called “choice”?
For this is the point and purpose of having an economy in the first place. Both Adam Smith and Frederic Bastiat tell us that we must always look at economic questions from the point of view of consumption. And we can and do go further than that ourselves: the point of this whole economy thing is to maximise the consumption possibilities of the population. What is to be consumed, how such consumption is to be valued, being the choice of said population. If choice is what said people value then an increase in such choice is an addition to the value they gain from consumption: which is, again we insist, the reason we have this whole structure of markets, exchange, production and all the rest. This is the very purpose of our efforts: to increase consumption opportunities.
Profit is simply a method of keeping score along the way. If you make a profit in your production process then that means that you are adding value. The value of your outputs is greater than the value of your inputs. More accurately, the alternative uses of those inputs would produce less value added for consumers to enjoy. Thus profit is a good thing, losses bad, for losses indicate that you are subtracting, rather than adding, that value which can then be consumed.
If growing a pig in Belgium, slaughtering it in Germany and eating it in England produces more value for the consumers to consume than to grow, slaughter and consume a similar pig in England then so be it: this is the very point of it all, to produce the greatest value of output that may be consumed from the limited resources at our disposal.
Choice, consumers, consumption, these are not things to be disdained from the comfort of an Islington eyrie, they are the entire damn point of having a society or an economy in the first place.
Take the Easter egg. The salt may have come from China; palm oil from south east Asia; whey from New Zealand; sugar from the Caribbean; cocoa from South America, on and on. Britain imports food from more than 180 countries.
Ain't it just fantabulously wondrous?
School competition works in exactly the same manner as other forms of competition that is. It's something that happens at the margin, that margin then dragging up the performance of others:
There is no evidence that academies perform better than council-maintained schools. The white paper highlights impressive improvements in primary schools – 85% of those are still maintained. 82% of maintained schools have been rated good or excellent by Ofsted, while three times as many councils perform above the national average in terms of progress made by students than the largest academy chains. Where a school is failing, there is no question that action must be taken – but converting every school to an academy will not tackle those issues.
Think of a different arena to study the effects of competition. We know very well that the firms who export are those at the productivity boundary: exporting firms are near always significantly more productive than the other domestic firms in that same sector. Now think of the flip side of that statement: imports from Germany into Britain expose British companies to the finest and most productive German forms. This is one of the major channels by which trade improves productivity. Domestic firms must compete against those imports and near by definition those imports are coming from firms with greater than average productivity. Thus the domestic firms have to pull their socks up.....or be replaced by those who do.
Imports are not, of course, a majority of the UK economy: but that exposure to the best does improve matters over the whole economy. Now back to academies and schools: that some small portion of the education system are academies is exactly what, entirely analagous to that effect from trade and imports, is improving the non-academy state sector. To state that non-academies are improving too is not some symptom of a failure of the program, it's evidence of the success of the program: competition works.
At which point, turning all schools into academies. If it works, as it does, if it's working, as it is, then why not? After all, we do all believe in evidence based policy making, don't we? Good, academies, the competition and freedom to experiment that they bring, are improving the school system by their existence. Thus let's do more of it so as to have an ever better education sector.
Unless, of course, we'd prefer to return to the policy based evidence making of yore which insisted that competition was a bad thing....
We'd like to leave aside our well known biases on the subjects of the European Union and the NHS and make a still important point. Brexit itself is going to make no difference at all to domestic policy: what will is the policies adopted once the UK is again free to adopt whichever policies it wishes. And the NHS, sure, we're not wholly in favour of the current form of the organisation and think the same provision can be done better. But leave those both aside and consider this statement:
Norman Lamb, the Liberal Democrat MP and former health minister, backed Hunt’s EU stance.
He said: “I don’t agree with Jeremy over the current funding of the NHS.
“I’ve been very clear that I’d like to see the government investing more in the NHS and social care. But we could not even have that debate if we vote to leave the European Union.
Spending upon the NHS is not investment. Yes, parts of such spending are: building a hospital which will still be there in 30 years' time is investment. But by far the vast majority of NHS spending is upon wages and consumables and is thus current spending. We could, of course, just dismiss this as being pedantry, a symptom of "investment" to a politician being public spending upon anything said politician approves of. But sadly the issue goes deeper than this.
It is not just an apocryphal story that the original founders thought that after the backlog of problems had been cured then spending upon the NHS would go down: they really did think that it was investment. Get over the hump of untreated disease and costs would decline even as tax revenues from the newly again healthy would rise. That could indeed have been described as investment: if it had actually happened. It didn't of course, that nascent NHS went from consuming 3 to 4% of GDP to the current 9 to 10% and more (all figures are a bit hazy as exactly what is NHS spending is a bit hazy).
We're not going to get to a proper and rational discussion on what amount should be spent on the health of the nation, nor how that should be raised nor allocated, until we get over that 70 year old delusion that health care spending is an investment. It isn't: it might be just, moral, necessary, better organised in another manner, just perfect the way it is. But it's most definitely current spending and must be recognised as such before we can have a proper discussion about it.
For example, the correct question is, at heart, how much of current production of the economy should be devoted to health care? No, not how much should we borrow to "invest" in it, but what portion of current income should be devoted to it? That's what that essential division into capital and current spending aids us in seeing: and given that that's what we must see before we decide thus we must see it. Further, the insistence upon seeing it as current spending aids us in viewing that "how much" question in its proper light: what other things are we not going to have as a result of having health care?
Or as an economist would put it about everything, there are always opportunity costs. Thus the true price of something is what we give up to get it. There is no cute let out by calling it investment and thus that is the correct lens through which to view health care spending whether it's done through the NHS or not. What won't we get as a result of more NHS and is more NHS worth more or less than what we must give up?
After all, we can only find the right answer if we ask the correct question in the first place.
Apparently it is some terrible scandal that local authorities do not build anew those houses that are sold under the right to buy legislation. The answer given to this accusation being that they do, but slowly. What neither side actually says being the important part: local authority housebuilding is simply not a relevant measure of anything interesting at all:
Local authorities in England have replaced one in 10 of the homes sold through right to buy since discounts were increased in 2012.
Government figures show there have been 49,573 sales since the scheme was relaunched, while 4,594 have been started on site or acquired by councils.
About this we are told:
John Healey, shadow secretary of state for housing and planning, said government decisions were “leading to a huge loss of genuinely affordable homes to rent and buy at a time when they’ve never been needed more”.
He said: “Tory ministers have repeatedly promised that every home sold under right to buy will be replaced one for one, but these figures show that they are failing by a huge margin. Only one home is being built for every eight sold.”
That would seem to be a slam dunk, wouldn't it? And yet:
The DCLG said: “Under the right to buy one-for-one additions policy, local authorities have three years from the date of the sale of each additional home to provide an additional affordable property. There were 1,326 additional sales between Q1 of 2012-13 and Q3 of 2012-13. There have been 4,594 starts and acquisitions since Q1 of 2012-13, exceeding the target for one-for-one additions.”
What is not being said is that all of this is entirely irrelevant, The housebuilding statistics are here. Local authorities started perhaps 1.700 houses last year, out of some 150,000 for the country. They're 1% of the market, no more. No, this does not mean that "affordable housing" is not being built (quite apart from the fact that a house people can afford is affordable). Because we simply do not use local authorities to build such housing these days. That is now done by housing associations. They have taken over that 15% of the market that used to be councils.
Local authorities and their activities in the housing market are simply an irrelevance. We don't use then as we used to, we've changed the structure of the system. Bleating about irrelevances is, well, it's irrelevant.
An ever so slightly puzzling piece over in The Guardian. Telling us that we Britons are hugely well off by any historical or global standard, something which is true, and therefore perhaps we have a moral duty to spread some of our good fortune to those less fortunate. Also quite possibly true. We ourselves suggest buying things made by poor people in poor countries, this being what will make them richer. But we certainly have no problem whatsoever with the idea that you, we or anyone else might wish to simply send money to alleviate poverty or other human suffering.
What puzzles is this though:
If, in your ideal world, rich people and corporations such as Amazon and Google would pay more tax, and you believe it’s the government’s job to redistribute resources, it is hard to feel enthusiastic when charities pick up the slack created by cuts. Church-run food banks may have been appropriate in 1816 or 1916, but not now.
The collapse of Kids Company showed such concerns to be valid: with her brown envelopes of cash, Camila Batmanghelidjh oversaw a shadow benefits system on a personality-driven model far preferred by rightwing ideologues to the boring old state.
Well, we'd rather take issue with the idea that Kid's Company was a creation of the rightwing. But that's by the by. A centre left captivated by the idea that throwing money at something was more important than checking what was being achieved quite possibly.
In 1970 the UN set a target of 0.7% of GDP that economically advanced countries should give in development assistance. Sweden, Norway and others beat the UK to it, but last year this commitment was enshrined in British law. Just 12% of individual British donations go to charities working abroad, but it is striking that the UK’s aid budget of around £11bn is close to the total amount donated by individuals each year.
For a person on the median full-time salary of £27,000, 0.7% of their untaxed income equates to £15.75 a month, a couple of pounds more than what the Charities Aid Foundation calls a “typical” gift. On average, then, and if we regard the aid budget as a form of state charity, British people are a bit less generous than their government.
No, that last line is simply not correct. The government takes some £11 billion a year from our pockets and spends it on whatever foreign japes it thinks makes sense. This is not generosity at all: spending other peoples' money on other people does not come under that title. We Britons then dig into our pockets for near another £11 billion a year to send to things that actually have some effect in relieving poverty and other human afflictions.
That is, we are significantly more "generous" than the government, but only if it isn't the government spending the money. Given what the government does spend that money on probably quite rightly so too. Why, we might even suggest cancelling that official budget, returning the cash to the citizenry, and see how much better the little platoons can spend it.
Today's tale of gibbering stupidity from those who would rule us. So, the Transportation Security Administration over in the US has been asking all the people who make locks for travel bags to conform to certain standards. Standards which allow the TSA to have master keys to the luggage being transported by the population of course. There's echoes here of the FBI's fight with Apple, with the more general arguments over the encryption of digital data and so on.
Well, fair enough you might think. At which point the TSA wants to show off how well it does, asks a newspaper to come see how it works. Which then publishes pictures of the master keys. Near immediately these are scanned and run through a 3D printer from those newspaper or magazine images:
THE TSA IS learning a basic lesson of physical security in the age of 3-D printing: If you have sensitive keys—say, a set of master keys that can open locks you’ve asked millions of Americans to use—don’t post pictures of them on the Internet.
A group of lock-picking and security enthusiasts drove that lesson home Wednesday by publishing a set of CAD files to Github that anyone can use to 3-D print a precisely measured set of the TSA’s master keys for its “approved” locks—the ones the agency can open with its own keys during airport inspections. Within hours, at least one 3-D printer owner had already downloaded the files, printed one of the master keys, and published a video proving that it opened his TSA-approved luggage lock.
Forget the gibbering stupidity for a moment and consider the underlying tale here. Any system of security, any system of encryption for example, that has a government backdoor is simply not secure. Theresa May might want to take note of this. We might want to take note of it in fact. It might, just possibly, even be true that we'd like there to be a way for our protectors to study the activity of those who would do us harm. But those backdoors will leak and there will then be no security at all.
This posting goes through the Bank of England’s leverage ratio stress test using an improved version of the leverage ratio to replace the one used by the Bank: it uses CET1 capital in the numerator instead of the looser and more gameable Tier 1 capital measure used by the Bank. Results show that the UK banking system performs extremely poorly by this stress test when assessed against the fully implemented leverage ratio requirements possible under Basel III, and even worse when assessed against minimum leverage ratio standards coming through in the United States and those recommended by experts.
In the previous posting, I examined the outcomes of stress tests that use the ratio of banks’ Tier 1 capital to leverage exposure as their capital adequacy metric. However, the use of Tier 1 capital in the numerator of the leverage ratio is problematic: Tier 1 capital is the sum of Core Equity Tier 1 (CET1) capital plus Additional Tier 1 (AT1) capital, and AT1 includes hybrid capital instruments such as Contingent Convertible (CoCo) instruments which are of unreliable usefulness in a crisis. Including these in our capital measure is undesirable because it might overstate the capital available to support a bank in a crisis and so undermine the principal purpose of any core capital measure.
We therefore need a more prudent capital measure and a natural choice is CET1 without any additional, softer, capital. Roughly speaking, CET1 approximates to Tangible Common Equity (TCE) plus retained earnings, accumulated other income and other disclosed reserves.  The ‘tangible’ in TCE means that it excludes intangible items such as goodwill and Deferred Tax Assets, and the ‘common’ means that it gives a measure of common share capital (i.e., shareholder capital stripped of more senior capital instruments such as preferred stock and other hybrid items). Of the measures available (and unfortunately, TCE is typically not available) CET1 is the best capital because its component elements are the most fire-resistant and hence most deployable in the heat of a crisis. To quote Tim Bush, CET1 is:
the plain old fashioned accounting shareholder interest. It's what bears the first loss, pays divs, and is what has to be recapitalised. It also excludes goodwill [and any other intangibles and] any expectant income and books all expected losses. 
Now define the CET1 leverage ratio as the ratio of CET1 capital to leverage exposure. If we take the outcomes of the Bank’s stress test applied to the CET1 leverage ratio and take the pass standard to be the potential maximum required minimum leverage ratio under fully implemented Basel III, then we obtain the outcomes shown in Chart 1:
Chart 1: Stress Test Outcomes Using the CET1 Leverage Ratio with the Potential Maximum Basel III Pass Standard
Notes to Chart 1:
(a) Author’s calculations based on information provided by the Bank of England’s ‘The Financial Policy Committee’s review of the leverage ratio” (October 2014) based on the assumption that the pass standard is the potential maximum required minimum leverage ratios under fully-implemented Basel III.
(b) The outcome is expressed in terms of the CET1 leverage ratio post the stress scenario and post any resulting management actions. These data are obtained from Annex 1 of the Bank's stress test report (Bank of England, December 2015).
It is fair to say that if the previous outcomes were disastrous, these are positively dire. The average outcome is 3.1%, the average pass standard is 4.2%, the average shortfall is over a hundred basis points and every single bank fails the test by a comfortable margin. By this test, the entire UK banking system is well and truly below water.
But it gets worse.
One problem is that reported CET1 values can be inflated by at least three different factors. Briefly:
- The reported CET1s are based on IFRS accounting standards, and a key component of CET1 is retained earnings, the reported values of which are likely to be inflated because IFRS allows banks to inflate the underlying asset values. 
- The regulatory definition of CET1 endorsed by Basel III involves an awkward ‘sin bucket’ compromise by which various items of softer capital (such as Deferred Tax Assets and Mortgage Servicing Rights) can be included in reported CET1 provided they account for no more than 15% of total reported CET1. 
- The CET1 values reported here are book values and market values will typically be less. Thus, ‘true’ CET1 values can be considerably lower than those reported in the Bank of England’s stress test report.
The reported capital ratio is inflated further by a downward bias in the reported leverage exposure, which is the denominator in the leverage ratio. This downward bias is another long story. In theory, the leverage exposure is meant to take account of off-balance sheet items that would not show up in traditional exposure measures such as total assets. However, the regulatory leverage exposure measure is a highly compromised measure that is the result of a lot of behind the scenes lobbying by banks keen to keep their measured exposures down, not least in order to minimise their resulting capital requirements. Given (a) that off-balance-sheet items considerably exceed on-balance-sheet ones and (b) that accounting netting rules tend to hide a great deal of financial risk, if only because many supposedly hedged positions often fall apart in a crisis, and (c) that we know that banks are riddled with major data quality problems, then we would expect any half-decent exposure measure to be much greater than, say, reported total assets. However, they are not. In fact, when I looked into this matter, I was astonished to discover that the leverage exposures of UK banks are not only of the same order of magnitude as their balance sheet total assets, but are sometimes even lower. For example, the reported 2015Q3 leverage exposure for Lloyds was only 88% of its reported total assets. So once again, we have a downward bias in the leverage ratio numbers and no real way in which we can assess what the extent of that bias might be. However, whatever this bias might be, we can reasonably infer that it must be large.
We should also note that the pass standard assumed in the test reported in Chart 1 is by no means a high one and the Federal Reserve, for one, is already preparing to impose even higher minimum leverage ratios. In April 2014, the Fed finalized a set of ‘enhanced’ Supplementary Leverage Ratios (SLRs) on the 8 U.S. global systemically important banks (G-SIBs) and their insured depository institutions. These are supplementary requirements in addition to those required under Basel III. As part of this requirement, the U.S. G-SIBs will have to meet a 5% SLR at the holding company level and a 6% SLR at the bank level, and are due to come into effect on January 1, 2018.
Well, to spell out the obvious: if the UK banks perform badly against a pass standard equal to the maximum potential standard under fully implemented Basel III, then they would perform even worse when assessed against the Federal Reserve’s higher standards.
There is also the question of what the required minimum leverage ratio should be, i.e., as assessed from first principles. Curiously, this is one of the few subjects in economics and finance where there is a considerable degree of consensus among experts – and their view is that minimum standards should be much higher than they currently are. We are not talking here about a couple of percentage points, but a minimum that is potentially an order of magnitude greater than current minimum capital requirements anywhere in the world. There is of course no magic number but what we want is a minimum requirement that is high enough to remove the overwhelming part of the risk-taking moral hazard that currently infects our banking system. As John Cochrane put it: it should be high enough until it doesn’t matter – high enough so that we never, ever again hear the call that banks need to be recapitalized at public expense.
This consensus was reflected in an important letter to the Financial Times in 2010, in which no less than 20 renowned experts – Anat Admati, Franklin Allen, Richard Brealey, Michael Brennan, Arnout Boot, Markus Brunnermeier, John Cochrane, Peter DeMarzo, Eugene Fama, Michael Fishman, Charles Goodhart, Martin Hellwig, Hayne Leland, Stewart Myers, Paul Pfleiderer, Jean-Charles Rochet, Stephen Ross, William Sharpe, Chester Spatt and Anjan Thakor – recommended a minimum ratio of equity to total assets of at least 15%, and some of these wanted minimum requirements that are much higher still. Independently, John Allison, Martin Hutchinson and yours truly have also called for minimum capital to asset ratios of at least 15%, Allan Meltzer recommended a minimum of 20% for the largest banks, Admati and Hellwig recommended a minimum at least of the order of 20-30%, Eugene Fama and Simon Johnson recommended a minimum of the order of 40-50%, and John Cochrane and Thomas Mayer have suggested 100%.
By these minimum standards, the UK banking system is not so much underwater as stuck as the bottom of the ocean.
So what can we conclude from these stress test exercises?
Without a shadow of a doubt, the entire UK banking system is massively undercapitalised even under the relatively mild adverse ‘stress’ scenario considered by the Bank of England.
 For a more complete definition of CET1 capital, see Basel Committee on Banking Supervision (BCBS) “Basel III: A global regulatory framework for more resilient banks and banking systems” (Basel Committee, June 2011), p. 13.
 Personal correspondence.
 These and other problems with IFRS accounting standards are explained further by Tim Bush, “UK and Irish Banks Capital Losses – Post Mortem,” Local Authority Pension Fund Forum, 2011, and Gordon Kerr, “The Law of Opposites: Illusory Profits in the Financial Sector”, Adam Smith Institute, 2011.
 For more on this subject, see Basel Committee on Banking Supervision, “Basel III: A global regulatory framework for more resilient banks and banking systems," revised version June 2011, pp. 13, 21-26 and Annexe 2, and Thomas F. Huertas, Safe to Fail: How Resolution Will Revolutionise Banking, Palgrave, 2014, p. 23.