Regulation seems to cause bank crises, not prevent them

City AM's Pete Spence (formerly of this parish) reminded me of Mark Carney's claims in January that free banking systems are more unstable than regulated ones. I'm not so sure. Take a look at these two charts from George Selgin's Are Banking Crises Free-Market Phenomena?, which mark an x for every instance of a banking panic. The first chart is for unfree systems, the second for free systems:

In this case at least, it looks like the evidence is against Mark Carney.

In which I have to explain something to George Monbiot. Again

Unfortunately it's sometimes necessary, with certain people, to explain things again and again so that they finally get it. So it is with George Monbiot and the upcoming US/EU trade treaty. Here he is whining again that there will be a clause insisting that governments must obey their own laws:

But this is not all that democracy must give so that corporations can take. The most dangerous aspect of the talks is the insistence on both sides on a mechanism called investor-state dispute settlement (ISDS). ISDS allows corporations to sue governments at offshore arbitration panels of corporate lawyers, bypassing domestic courts. Inserted into other trade treaties, it has been used by big business to strike down laws that impinge on its profits: the plain packaging of cigarettes; tougher financial rules; stronger standards on water pollution and public health; attempts to leave fossil fuels in the ground. At first, De Gucht told us there was nothing to see here. But in January the man who doesn't do give and take performed a handbrake turn and promised that there would be a three-month public consultation on ISDS, beginning in "early March". The transatlantic talks resumed on Monday. So far there's no sign of the consultation. And still there remains that howling absence: a credible explanation of why ISDS is necessary. As Kenneth Clarke, the British minister promoting the TTIP, admits: "It was designed to support businesses investing in countries where the rule of law is unpredictable, to say the least." So what is it doing in a US-EU treaty? A report commissioned by the UK government found that ISDS "is highly unlikely to encourage investment" and is "likely to provide the UK with few or no benefits". But it could allow corporations on both sides of the ocean to sue the living daylights out of governments that stand in their way.

That it's not going to do much of any importance in the UK is true. But this is because the UK Government generally obeys the laws that it itself has passed. And this is not true of all and every government in all and every country around the world: not even, sadly, true of each and every government of each and every country here inside the EU.

And this is indeed very much the point of this sort of arbitration. It is, quite simply, to make sure that a government keeps its word. That it does not, after someone has made an investment into the country being governed, change the rules so as to, say, confiscate some part of that investment. And the way we do that is by making sure that the court which decides whether the rules, the law, the agreement, has been broken is not under the control of the same government accused of breaking the rules, the law or whatever agreement there has been. And that's all it is about too.

Any government can still go off and, say, nationalise anything it wants, whoever owns it. That's a legitimate, if stupid, use of State power. But the insistence that it is someone outside the country that determines the price that must be paid to the original owners seems sensible. And for an example of what happens when this is not the case we only have to look back to, as I've mentioned before, the Greek bond haircut.

If you were an investor in Greek government bonds that were issued under Greek law then you get shafted. For the Greek government changed the law after the issue of the bonds on what was needed for the collective action clauses to be valid. That is, when the borrower is obviously bust (as Greece indeed was) then clearly there's going to be a restructuring of those bonds and or loans. The creditors are just going to have to take a haircut. However, there are usually clauses which detail the level of agreement that is necessary between creditors and the debtor before this can happen. The general rule is that 90% of the creditors have to agree to the level of the haircut. The Greek government unilaterally changed this to 75% and this made their cramming of a deep deep haircut onto the creditors easier.

If you had Greek government bonds issued under English law you didn't in fact get that haircut: they were repaid in full. Because the Greek government didn't have the power to get the English law changed in that manner. It's a good example of why you would like to have legal matters dealt with by people who aren't the government that you might end up having the argument with. And that is, again, why the whole idea of offshore arbitration exists. Simply to keep governments on the straight and narrow about obeying the law of their own land.

And to be honest, I can't actually think of a reason why this might be a bad idea. Shouldn't governments credibly commit to obeying their own law of the land?

No, I won't make the obvious joke about Ed Balls' latest idea but it's ____s

This latest idea from Mr. Yvette Cooper rather fails I'm afraid:

People earning more than £150,000 would get only 20 per cent tax relief on pension contributions, instead of the 45 per cent they receive now. Ed Balls, the shadow chancellor, will set out plans to pay for its Compulsory Jobs Guarantee, the centrepiece of the party’s welfare plans. Every young person jobless for more than 12 months will be given a “starter job” which they will have to take or lose benefits.

Leave aside, for a moment, what the money is to be spent upon. I've no real objection to the idea that it should be welfare and work, not welfare and no work. Look instead at what the tax proposal is.

To tax people who are saving for their old age. And there really is a problem in this, for we don't actually not tax people who save for their old age. What we do is delay the tax that must be paid by people saving for their old age.

We do this by not taxing them on the money that they put into their pension pots. And then we tax them on the pensions they receive when they retire. At, it should be noted, entirely the normal income tax rates.

So, what is being suggested now is that people should be taxed on the money they put into their pensions: and then be taxed again, in the normal manner, on the money they get paid in pensions in decades to come. This is, and I'm afraid that I am indeed the first to point this out, double taxation of the most wincingly bad kind. Because, unlikely though it may seem, we rather like people saving for their old age.

The Guardian puts a different spin on the same story:

Ed Balls, the shadow chancellor, will say on Monday that Labour will move to end the plight of "young people stuck on the dole" when he says that the party's compulsory jobs guarantee, to be funded by a tax on bankers' bonuses, will last the whole parliament.

These are the bonuses that the European Union has just slashed to the bone and which are, including national insurance, already taxed at rates of 60% or so?

That's going to raise a lot of money then, isn't it?

Immoral double taxation or a pittance in revenue raising. This hasn't been thought through as yet, has it?

Does the GOP need a new stool?

Does the GOP need a new stool?

This is the question that upcoming TNG guest Tim Stanley's been asking in a recent blogpost for the Daily Telegraph. To give a bit of context:

the Republican stool is at risk of losing its balance. As William F Buckley once argued, support for the GOP historically rests on three conservative legs: free market libertarians, social conservatives and foreign policy hawks.

However, in the absence of a strong anti-communist message American politics has drifted leftwards, whilst the GOP's 'Middle American' unity has been replaced with a "discordant alliance between wealthy grey technocrats and populist crazies". The legs of the Republican stool now look wobbly and unbalanced, leading to some uneasy and often contradictory politics. As a consequence, the Republicans fail to provide a convincing or consistent alternative to the liberals and Obamanomics.

So, what's the solution? Tim suggests that it lies in a 'rugged constitutionalism', where politics is conducted at a state level, individual freedom carries real significance, and Republican governments promise to largely get out of the way. Certainly, this has real appeal to libertarian-leaning conservatives both in America & the UK, but what's the likelihood of it actually becoming an election strategy?

Fortunately, under 30s are invited to ponder this question further at the TNG with Dr Stanley on this very subject tomorrow.

The event starts at 6pm in the ASI offices, and RSVP either on Facebook or to

Republican Stool.jpg

Disqus or Wordpress for comments? Let us know

We're going to be moving over to a new, Wordpress-based site shortly. One of the things we're trying to decide is whether to keep Disqus for comments, or to use a native Wordpress-based comments system.

As I see it, the issues are this:

  1. Wordpress is simpler, requiring no login or registration. Disqus does allow guest comments but it can be quite fiddly.
  2. Disqus allows users to upvote their favourite comments and downvote others.
  3. All our current comments are kept on Disqus, though I'm not sure if we'll be able to bring these over in any case.
  4. Some users find Disqus to be extremely annoying to use; whether this is a specific Disqus problem or a more general problem I don't know.

Since ASI writers very seldom comment on the site, preferring to allow readers to discus among themselves (maybe that should change?), I thought the best thing to do would be to open it up to you — do you like Disqus? Hate it? Which would make you happier — the status quo, or a Wordpress-powered comment system? Let us know in the comments. Of course, the fact that those comments are currently powered by Disqus may skew the results...

The surprisingly Hayekian Charles Koch

This is an interesting interview with Charles Koch. Yes, he of Koch Industries, according to some the antithesis of all that is democratic (and certainly Democratic) in the US economy. He's very Hayekian for example:

The expansion seems like a vote of confidence in Wichita when other large companies — Boeing, Coleman’s corporate headquarters — are moving away. What makes Wichita a good fit for Koch Industries? How’s that worked for them? People underestimate the tacit knowledge, the local knowledge that people ... it’s the way people think about government, “The Fatal Conceit,” that a few geniuses are telling everybody what to do — it doesn’t work that way. The people who make it go are the people doing the work who have the hands-on knowledge. And all you can do at the top is set a vision and standards and try to hire the right people. And then they make it happen. That’s what so many companies are missing and what I think we’re missing in the country in a big way.

That is of course a direct reference to Hayek there but I have a very strong feeling that there's more to it than just having read the book. 47 years as a CEO is likely to give you some opinions on how business and companies really work over and above what one might have read in an academic study.

And this is lovely:

I think one of the biggest problems we have in the country is this rampant cronyism where all these large companies are into smash-and-grab, short-term profits, (saying) how do I get a regulation, we don’t want to export natural gas because of my raw materials ... well, you say you believe in free markets, but by your actions you obviously don’t. You believe in cronyism. And that’s true even at the local level. I mean, how does somebody get started if you have to pay $100,000 or $300,000 to get a medallion to drive a taxi cab? You have to go to school for two years to be a hairdresser. You name it, in every industry we have this. The successful companies try to keep the new entrants down. Now that’s great for a company like ours. We make more money that way because we have less competition and less innovation. But for the country as a whole, it’s horrible.

And for disadvantaged people trying to get started, it’s unconscionable in my view. I think it’s in our long-term interest, in every American’s long-term interest, to fight against this cronyism. As you all have heard me say, the role of business is to create products that make people's lives better while using less resources to do it and making more resources available to satisfy other needs. When a company is not being guided by the products they make and what the customers need, but by how they can manipulate the system — get regulations on their competitors, or mandates on using their products, or eliminating foreign competition — it just lowers the overall standard of living and hurts the disadvantaged the most. We end up with a two-tier system. Those that have, have welfare for the rich. The poor, OK, you have welfare, but you’ve condemned them to a lifetime of dependency and hopelessness.

Not that I tend to get offered the chance to have a beer with a billionaire but I can imagine that if it did happen we'd bore each other stupid by agreeing with every word the other said.

For that is indeed exactly the point. Large companies just love regulation because it prevents the upstarts from disrupting their comfy businesses. Being anti-regulation is therefore determinedly pro-poor: not that you'll ever get one of the Statists to believe or admit it.

Yes Polly, training the untrained is indeed expensive

Polly Toynbee tells of us of a marvellous scheme by which the young and untrained get trained and thus gain decent employment. However, the real message of this story is not quite what Polly thinks it is I fear:

The shadow work and pensions secretary, Rachel Reeves, and Stephen Timms, the shadow employment minister, were in Cardiff this week to study it, as they plan their own similar job guarantee scheme. They visited Sapiens, an international software company that has taken on 12 trainees from Jobs Growth Wales. All these young IT graduates were lost temping in part-time, low-level jobs. One had been stuck working part-time in a bingo hall for a year, others in shops and pubs, each applying for hundreds of jobs without getting interviews: "Everyone wanted people with experience. If you haven't any, you've no hope," said one. The company said it would never have hired these 12 without the programme, because training raw recruits costs so much more than taking on experienced staff. But with Jobs Growth Wales covering six months of intensive training, Sapiens ended up keeping 11 of them permanently.

You can indeed read it the way that Polly does, the Glorious State taking over and making things better where the market simply bumbles ineffectually.

Or one could try to look a little deeper. For example, all of these "young IT graduates" had been in compulsory education for 11 years of their lives, presumably an additional two to get into university and then three once there. So what the hell is our State run education system managing to do over those 16 years if it cannot prepare them for an entry level job opportunity?

The second and more major point is that yes indeed, it does cost money to train people. And the cost of that training can indeed mean that people would prefer to hire the already trained. Which is why it is so stupid to put a minimum price on untrained labour. For that pushes the total costs of untrained labour, wages and training costs, above the costs of hiring someone who already has their act together.

That is, a minimum wage will, if it is high enough to actually matter at all, will by definition be crippling to the employment prospects of the young and untrained.

As Britmouse so graphically points out here.

Perhaps instead of adding another layer of State interference we sould undo the cause of the original problem?

I have to say that this fills me with a great deal of confidence about dietary advice

As I mentioned yesterday the WHO has come out with a couple of little recommendations about the amount of sugar we eat. Don't swill too much around your moth because of caries and do remember that sugar does indeed have caloties. Too many calories, compared to your activity levels, makes you fat. That is indeed what they said. So today we have one of those campaigning prodnoses in The Mail:

On Wednesday, for instance, no less an authority than the UN’s World Health Organisation came out with the firm recommendation that we should all be aiming to cut our sugar intake by half and that children should not be given fizzy drinks at all.

No, that isn't what they said at all.

That came just one day after Dame Sally Davies, the Government’s Chief Medical Officer, proposed that a sugar tax needed to be introduced if we wanted to cut sugar intake and reduce obesity.

She did indeed say that but there doesn't seem to be any evidence to back it up.

And it came on the same day that an eminent New York cardiovascular research scientist warned that the long-running demonisation of fats, and saturated fats in particular, could be entirely misplaced. The real killer, according to Dr James DaNicolantio, particularly when it comes to heart disease and Type 2 diabetes — those two scourges of the modern age — is sugar.

And isn't that just wondrous? Absolutely everything we have been told about diet and health for the past 50 years turns out to be, in your words, untrue. So we should immediately abandon that 50 years of advice and hop aboard your bandwagon?

It doesn't really have the ring of confidence around it this idea, does it?

Oh, and here's a little challenge. If you can find those doctors who tell us that eating as much fat as we like, including those saturated ones, if just absolutely fine for us, indeed that pig lard is better for us than sugar, then we might start taking this all a tad more seriously. Indeed, we would, if this were true, we certainly should if this were true, find Action On Sugar telling us to fill up on beef dripping.

Which, amazingly, they ain't so clearly not even they believe the tosh they're spouting. In which case why should any of us believe it?

Five intriguing papers I discovered this week

In what might become a recurring feature, I am going to summarise the findings of a few research papers, potentially of interest to ASI blog readers, that were either first released this week, first published this week, or first come upon by me this week.

1. Fernandes, D., Lynch, J. G., and Netemeyer, R. G., "Financial Literacy, Financial Education and Downstream Financial Behaviors" (Jan 2014)

This paper is a large meta-analysis of 168 other papers, which in turn refer to 201 different studies and experiments. They find that at least 99.9% of financial behaviour in life cannot be explained by differences in financial education, or conversely at most 0.1% of the difference in people's financial decision-making and choices is down to education interventions designed to improve their financial literacy. In the words of their abstract: "even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention".

While other correlational studies appear to show some relationship between financial behaviour and educational schemes (i.e. one explaining more than 0.1% of the variance between individuals) they explain that this is only because those typically getting financial education already have various psychological traits associated with careful management of finances. They therefore suggest that big schemes designed to improve lifetime financial decisionmaking are futile and a waste of money; the best we can hope for is "just in time" interventions, perhaps at the point of financial transactions, that are more likely to be taken in and not forgotten.

2. Wang, M-T., Eccles, J. S., and Kenny, S., "Not Lack of Ability but More Choice: Individual and Gender Differences in Choice of Careers in Science, Technology, Engineering, and Mathematics" (May 2013)

In this paper the authors find that a substantial fraction of the male-female "gap" in STEM (Science, Technology, Engineering and Medicine) fields can be explained by the fact that women who are talented at maths tend to also have high verbal skills, skills that mathematically talented men are much more likely to lack. This means they have a wider range of choices available to them, and also possibly identify less closely with maths as part of their personality, and it is this choice not to pursue STEM further that drives the gap, rather than, for example, discrimination in the area or a perceived unfriendly atmosphere.

3. Liu, S., Huang, J. L., and Wang, M., "Effectiveness of Job Search Interventions: A Meta-Analytic Review" (Mar 2014)

Liu, Huang and Wang found, reviewing 47 different experiments testing if schemes "teaching job search skills, improving self-presentation, boosting self-efficacy, encouraging proactivity, promoting goal setting, and enlisting social support" could boost the unemployed's chances of getting a job. In fact, on average those in the treatment groups—i.e. those actually subject to the intervention, and not in the control group—were 2.67 times more likely to get a job. Since the studies all used randomness of quasi-randomness to assign treatment, this suggests, they say, that schemes that develop skills and self-motivation can be effective. However, the schemes were more likely to help the young than the old, the short-term unemployed than the long-term unemployed, and job-seekers with special needs, as compared to the population at large.

4. Karwowski, M., and Lebuda, I., "Digit ratio predicts eminence of Polish actor" (Jul 2014)

In a slightly surprising study, the two authors looked at 98 Polish actors, both male and female, and compared the ratio between their second and fourth digits on their hand (a measure of prenatal testosterone exposure) and their productivity and fame. For both men and women, even controlling for age, a higher ratio predicted more pre-eminence.

5. Aisen, A., and Veiga, F. J., "How Does Political Instability Affect Economic Growth?" (Jan 2011)

In a classic example where economists do extensive research to tell us what we already know, this IMF paper from 2011 shows us how bad political instability is for economic growth. Actually, the paper is a great one because it allows us to estimate the size of the impact of different political elements on instability and then the size of instability's own impact on economic aggregates.

Their findings are highly interesting: whereas primary school enrolment has a pitifully small impact on economic growth, and the impact of investment, economic freedom and the security of property rights comes out quite small, violence, political instability and cabinet changes have substantial negative effects, as does, surprisingly, population growth. And while the most productive regions in Europe are the most ethnically diverse, in this study ethnic homogeneity is very strongly associated with growth. Of course, the conclusions of the paper—that countries should address the root causes of political instability—are much easier said than done!

The WHO is actually quite reasonable on sugar

You'll have seen the signs of a demonisation campaign going on. That sugar is addictive, that it has no nutritional value (as if calories are not nutrition), that we must tax it, or possibly ban certain uses, that AHHHRGH! we're all gonna die! and so on.

And then we get the actual sciency bit from the World Health Organisation which looks just fine to me:

Free sugars contribute to the overall energy density of diets. Ensuring energy balance is critical to maintaining healthy body weight and ensuring optimal nutrient intake. There is increasing concern that consumption of free sugars, particularly in the form of sugar-sweetened beverages, may result in both reduced intake of foods containing more nutritionally adequate calories and an increase in total caloric intake, leading to an unhealthy diet, weight gain and increased risk of noncommunicable diseases (NCDs). Also of great concern is the role free sugars play in the development of dental diseases, particularly dental caries.

Sugar has calories, too many calories can be bad for you and sugar can, if swilled around the mouth, rot your teeth. There's nothing here that we've not all known for decades if not centuries.

And it really is worth our noting that this is the sciency bit. The WHO is not saying that sugar is addictive. It's not stating that fructose is worse than sucrose or glucose. It's not insisting that we're all being hooked on it by the dastardly food manufacturers. All of these are inventions by the public health campaigners interfering prodnoses who would rule our lives and diets for no better reason than that they enjoy doing so.

The importance of noting ths is of course that we cannot allow said prodnoses to now start telling us that the WHO has indeed backed up all of their phantastical claims. The actual advice is don't eat too much and remember to brush your teeth. Which is the sort of nannying which most of us can manage to put up with. And to hell with those who want to insist upon more such nannying.