The high frequency trading tax

An unfortunate calculation here, forgetting that while there are costs to everything there are also benefits to everything:

High-frequency traders earn nearly $5 billion on global equity markets a year, creating a “tax on market liquidity”, according to a report by the City watchdog.

The first part of this being that there are costs to doing high frequency trading. The profits of the sector are not that $5 billion.

The Financial Conduct Authority (FCA) found that “latency arbitrage” races - when traders profit from reacting more swiftly to financial information than their rivals - take five to 10 millionths of a second, occur once a minute for FTSE 100 stocks and account for about a fifth of the overall trading volume.

The report said the practice leads to “a never-ending arms race for speed, to be ever-so-slightly faster to react to new public information”, which harms investors.

Rather more importantly, to call it a tax on liquidity is more than a little odd. For HFT provides more liquidity to the market. They are, after all, that fifth of trading volume. What does more liquidity mean? A smaller spread between buy and sell prices. That is, the market maker tax is diminished.

As it happens, at least coincident with the rise of HFT that market maker tax, that spread, has fallen by at least 99% in recent decades. For most large stocks it is, for the retail investor, now nothing.

There’s a reason why economists insist on a cost benefit analysis. Because we do need to know the both before we try decide upon the desirability or not of some thing.

It's what you believe that ain't so that matters

Mark Twain pointed out to us that it’s not what you don’t know that’s dangerous, it’s what you insist is true but ain’t that is. And example of which in this opening from a Guardian piece:

For the past 45 years, just about all of the income gains of America’s increasing productivity have gone to the elite and upper-middle class, while real worker wages have remained roughly flat.

This links to this calculation by the EPI. The problem with the calculation being that Paul Krugman explained why it’s not true, in detail - in fact in any of its details - well over a decade before it was first constructed. As Krugman pointed out about an earlier attempt to make the same claim:

"Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs -- an abundance of the sort created by the globalization of the labor pool for US-based corporations."

What is so remarkable about this passage? It is certainly a very abrupt, confident rejection of the case for free trade; it is also noticeable that the passage could almost have come out of a campaign speech by Patrick Buchanan. But the really striking thing, if you are an economist with any familiarity with this area, is that when Lind writes about how the beautiful theory of free trade is refuted by an unpleasant fact, the fact he cites is completely untrue.

More specifically: the 30 percent productivity increase he cites was achieved only in the manufacturing sector; in the business sector as a whole the increase was only 13 percent. The 13 percent decline in real wages was true only for production workers, and ignores the increase in their benefits: total compensation of the average worker actually rose 2 percent. And even that remaining gap turns out to be a statistical quirk: it is entirely due to a difference in the price indexes used to deflate business output and consumption (probably reflecting overstatement of both productivity growth and consumer price inflation). When the same price index is used, the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor's share of national income -- and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades, and actually rose slightly over the period Lind describes.

The question here is not why Lind got these numbers wrong. It takes considerable experience to know where to look and what to worry about in economic statistics, and one should not expect someone who does not work in the field to be able to get it right without some guidance.

The thing being that the people at the EPI do have considerable experience, do know where to look and what to worry about. They even have guidance - Krugman has just provided it - and yet they still charged off down the path of telling us something that is completely untrue. Which goes on to be widely believed and widely cited.

That is, having been told how not to compose an informative statistic they went off and composed the entirely misleading one. For they compare wages, not compensation, use different inflation indices and so on. They also fail to make that balancing check against the labour share of the economy.

This, of course, being just another one of those reasons why political management of an economy is so inefficient. It is so often guided by beliefs that just ain’t so.

It's the basic concept we disagree with here

The Observer tries to convince us that the digital tech tax is righteous and justified. The very reasoning they use, that underlying concept, being the thing that we disagree with:

Talk of introducing an internationally agreed digital tax is all very well – but it could take years to implement, and looks like a delaying tactic. Amazon and similar companies take large profits out of Britain. It is only right they should put more money back through fair and proportionate taxation.

This is to misunderstand what profit is. Profit being the value added by the activity and value added is what we actually want in an economy. Value added being what GDP is (or, if you prefer, GNP, GNI, NNI, whichever flavour floats your boat).

Consider the basics. In a market economy the various inputs into any process are priced at their value in alternative uses. Land, labour, capital, further down the line into computers, telecoms and all the rest, the price is determined by what people are willing to pay for them to do all the other things that are done in the economy. Our aim in having an economy at all is to have more value added, for that GDP is, by definition, either all production, or all incomes, or all consumption.

Profit is the value added by this specific process, or organisation, above those prices of those resources being used to do other things. That’s just what it is. We like people making profits - in a free market of course - because this is us all getting richer. More value is being added in our economy.

The idea that we should therefore tax people for making us richer doesn’t make sense. It’s a perversion of the basic truth about the economy.

Sure, we’re entirely happy with the idea that we have a progressive tax system, that the wider shoulders carry more of the burden. But that’s righteously a function of the income tax system, not a corporate one.

It’s not even true that the likes of Amazon make money and then run away. They invest heavily etc. But rather more than that there’s that Amazon Effect. Studies in the US - and there’s no reason at all to think it’s not true here - have shown that the simple existence of the company (using it as a proxy for internet shopping in general) has knocked 0.1 to 0.2 % a year off inflation over the past couple of decades. Why do we want to tax the people who have done that?

Foreigners invest here, reduce inflation by doing so, that people voluntarily flock to them shows consumers like their offering, the whole shebang adding significant value to our lives. And this is the reasoning to tax them? Seriously folks, get a grip.

No, it's not Mr. Anderson, it really won't be

A claim here that can be rejected out of hand:

Flybe has requested a £100m loan from the Government in the latest twist in its bid for survival.

The appeal, first reported by the Financial Times, comes amid a war of words between Flybe, the Government and rival airlines over the extent of government support afforded to the perennially loss-making airline.

Boss Mark Anderson has hit out at suggestions of a Flybe “bailout”. He says any loan from the state would be on commercial terms.

Such a loan will not be on commercial terms. Commercial terms here meaning at a level of interest commensurate with the risks of the loan not being repaid.

Walk though the logic with us here. Why is FlyBe even asking for a government loan? Because it cannot find the money it needs in the commercial baking world at a price it is willing to pay. If it could find that money from willing bankers then it would not be asking the government. The very fact that it is so asking is all the proof we need that it’s not a loan on commercial terms.

Hey, it might even be true that it can find a commercial loan but at what it regards as a high price. The request to government being, they think, something that will produce a lower price. But that very lower price they think they might get is the proof that it’s not on commercial terms, isn’t it?

If it were a fully commercial price then there wouldn’t even be the request to government. Therefore it’s not at a fully commercial price, is it?

The thing is, this is actually true

The Guardian treats us to a jeremiad about how political appointees in the Trump Administration are damaging the environment by being political:

“There’s too much dead and dying timber in the forest, which fuels these catastrophic fires,” Zinke said. “Proper management of our forests, to include small prescribed burns, mechanical thinning, and other techniques, will improve forest health and reduce the risk of wildfires, while also helping curb the carbon emissions.”

The thing about that is that it’s true. As with the Australian fires. Both environments have developed and evolved in the presence of frequent fires. The attempts to entirely curtail fires over the past few decades have thus built up the fuel and made the fires, when they do happen, worse.

The point being that frequent fires are low level fires, burning underbrush. If they are very occasional, with a significant fuel load, then they burn the canopy too. No one seriously doubts this basic point.

Well, except all those who want to blame the fires on climate change of course. That being politics just as much as anything the Administration is being charged with.

恭喜发财 — Gung Hei Fat Choi.

Happy New Year to our Chinese readers!

The Year of the Rat has begun. The rat is typically associated with yang, the beginning of a new day. It is also associated with wealth and surplus in Chinese culture. Chinese people have achieved immense success as great traders, as builders of creative and culturally stunning societies in China, in Taiwan, Hong Kong, and Macau — as well as settled migrants to countries right across the world, including fortunately the UK and the USA.

But China itself continues to be ruled by the dictatorial Chinese Communist Party. As we enter the Year of the Rat, the first first of all zodiac animals, China is at a crossroads.

China’s population is on the cusp of shrinking, while its economy continues to be much smaller than the global superpower of the United States of America. An expansionist foreign policy meeting global opposition, an aging population, a leader that has designated himself ruler for life, overreach in Hong Kong, belligerence towards Taiwan, the ongoing trade war with the Trump administration, questions in the West about security concerns with Chinese technology and state-involved enterprises, environmental concerns, the increase in debt of public firms. That’s before talk of organ harvesting, questionable treatment of prisoners, political imprisonment, the destruction of religious sites, a social grading system based on the moral judgements of the Chinese Communist Party, the mass internment camps for the Uighur people. 

It’s not a pretty picture, and it’s getting worse. From decades of increasing economic freedom being the predominant story of Chinese success, we can seemingly only look forward to further retractions in personal and civic freedoms — in exchange for nationalism abroad and subservience to the state at home. 

In Hong Kong, China’s grip continues to dominate debate — despite Carrie Lam’s best attempts to get away from it all at Davos this week — and its as good a time as any to remember that Britain has a special responsibility to act as guarantor for the liberties and way of life in the territory. 

As part of our obligations under the Sino-British Joint Declaration we guarantee until 1947 the right to free assembly, the right to a free press, freedom of religion, free expression, the move to universal suffrage for officials, and the right for Hong Kong arms of government’s operations in the territory to not be controlled or coerced by the Chinese mainland. 

We have failed to uphold these rights against the slow mission creep of the Chinese Communist Party in recent years, we have failed to give Hong Kong’s citizens an alternative to Communist rule, and we have failed to stand by those that British in nationality in the territory. 

It’s not too late to stand up for is right, and this Chinese New Year is a wonderfully auspicious moment to do so.

It is customary to offer gifts of red packages at Chinese New Year. Might I suggest the British government looks, as we leave the EU, to give ethnically Chinese British Nationals (Overseas) a red, white and blue package instead? One filled with a blue passport, that can guarantee their freedoms and turn the tide of the debate in Hong Kong from one of fear to one of hope. 

If people have an out, they must be given a reason to stay. China would be forced to do better. 

The Chinese people deserve better than their current Communist masters on the Mainland but we’re limited in what change we can affect. In Hong Kong that’s not the case. We have a duty to speak out and stand up for those clamouring for the freedoms we all enjoy every day.

This country has the ability to do this and the responsibility under law to do it too. Importantly, Boris has the majority. 

It’s imaginative, cunning, adaptable, and a success just in the nick of time. All the best attributes for the year of the Rat. 

恭喜发财 — Gung Hei Fat Choi.

But the NHS should cost less than other health care systems

It is a standard trope that cooperation is more effective, less costly, than competition. This is one of the reasons given as to why there shouldn’t be outsourcing or private provision in the National Health Service - it’s more expensive to do it that way.

We don’t agree with that contention in the slightest but we do have to deal with arguments as they’re presented to us. The NHS, precisely because it is the NHS, is more efficient than other methods of financing and providing health care. Well, if you say so:

We don’t have enough funding. For years, the UK has lagged behind other major economies in how much money we spend on healthcare. According to a 2019 study, when compared to other major western economies, we spend the lowest amount of money on healthcare per person and it shows.

If the NHS is the most efficient method then we should be gaining the same level of health care as other countries for less money spent than those other countries. In fact, the claim that we must be spending the same amount as them is an insistence that the NHS is not that more efficient method. Meaning that, if we are to accept the insistence upon level of spending then we get to examine the claims over the efficiency of structure. Perhaps, even, to include all those bits and pieces of private provision and competition that near all other health care systems include.

That is, despite the Prime Minister being all in favour of it, we must beware of cakeism. It is not possible both that the NHS is more efficient and that it needs the same amount of cash. Either or folks, either or.

Lady Nugee insists on lowering the top income tax rate

We’re a little surprised, if we’re honest, to find ourselves agreeing on tax policy with Emily Thornberry. In her attempt - no, stop giggling at the back there - to become leader of the Labour Party she has said that tax rates should be changed so that the rich pay the average tax rate that the rich do in rich countries. We think that’s a pretty good idea. Not perfect of course, because it’s hardly a matter of pride that the state steal more, but certainly better than the current situation:

Emily Thornberry will campaign to tax the wealthiest people in society more if she is elected leader of the Labour party.

The former barrister said it was only right the richest should take on the biggest share of the tax burden, claiming that under the Conservatives the wealthiest people and businesses have been paying less.

The UK does have a progressive taxation system, the rich do carry a larger share of that tax burden. The interesting thing though is this next demand:

“The people who own the most are actually paying less in terms of the percentage. Tax rates have gone down. I’d put them back up to make them the average of the rich countries around the world,” she told ITV’s Good Morning Britain programme.

A useful definition of rich countries is those who belong to the rich countries club, the OECD. Their top income tax rates are here. The mean of those top rates (unweighted by population) is 42.4%, the UK top income tax rate is 45%.

Thus the argument is that UK top income tax rates should be reduced - we agree.

This isn’t, of course, what Ms. Thornberry either believes or means to say. But then that just shows that Lady Nugee suffers from a certain haziness about reality.

So just why is Britain building wastelands of rabbit hutches?

A complaint in The Guardian about how modern housing estates are nothing but rabbit hutches jammed together:

Matthew Carmona, a professor at University College London, whose team has surveyed new housing schemes across the country as part of a major forthcoming report, says big developers are producing too many estates with serious design flaws. “At present we are just not meeting the basic requirements for civilised living that we should expect in a country like our own,” he said.

Seems an entirely fair complaint to us.

The worst new estates lack nearby amenities such as shops, pubs and cafes. They are unconnected to surrounding areas, with few public transport links. They lack enough green spaces and playgrounds.

Simply dormitories with none of the things that make up actual civilisation. They’re also the smallest new builds in Europe. So, why is this?

The design code for the development, which will eventually see 873 homes built across 32 hectares, specifies distinctive architecture and a high-quality, accessible environment.

We’re sure it does. But why in heck are so many houses being crammed on such a small amount of land? Because the government insists that houses must be crammed onto small areas of land.

That’s around 27 dwellings per hectare there. Until recently at least the national insistence was 30 or more dwellings per hectare.

Why is new British housing nothing but rabbit hutch dormitories in civilisational wastelands? Because that’s what government insists is built. And it’s worth noting that not one single person who legislates upon, designs nor builds these horrors ever actually lives in one. They’re always for people other than those doing the insisting.

The reason modern British housing is crap is because that’s what government insists is built, crap. The solution to this is to change the insistence at least, if not the government. Rather than who is doing the building within those rules.

Don't let TfL drive Uber out of the market

It has been two years since TfL first rejected Uber’s license renewal and they still seem to be reaching the wrong decision. They have continually failed to value Uber’s popularity. Uber has 3.5 million regular users in London alone and yet TfL wants to deny Londoners the service. Backlash against Uber is not exclusive to the UK.

Today marks the anniversary of Madrid’s taxi strike. Much like in the UK, Spain’s black cab equivalent has been hostile to its biggest competitor Uber. The strike has left a black mark on the reputation of Madrid’s taxis. The standoff lasted sixteen days last year and saw taxi drivers blocking roads. But this anti-competition protest wasn’t enough to persuade people to use Madrid’s taxis. It lost them what little reputation they had left as not only did they provide an inferior service, they also actively intimidate and disrupt alternatives. 

Madrid’s taxis’ refusal to embrace competition saw them suffer. Ultimately, they were forced to accept innovation and many of them have now paired with ride hailing apps such as Pidetaxi and Tele Taxi. London’s black cabs should learn from their European counterparts that resisting competition will do them no good. In the long run, it simply isn’t viable to deny consumers what they want and consumers want Uber.

Despite criticism over its safety, Uber remains popular among many adults, including parents wanting to ensure their children get home safely (with the added benefit of not having to leave their home to do so). Part of this success stems from the ability to track rides. Parents are able to see their kids in real time. They also know the license plate of the car beforehand. Uber also enables parents to pay for their kids and know they can get home at any time, no matter what the cost and that their kids won’t spend the money on other things. While Uber may not be entirely safe, it is certainly on a par with black cabs. Uber drivers must pass a DBS check and get a TfL private hire license. 

There have been concerns over Uber’s safety as unauthorised drivers were able to upload their photos to the accounts of authorised drivers on some 14,000 journeys, however, this is not just cause to ban the app entirely. The overwhelming majority of journeys are conducted by authorised drivers with authorised profiles. Uber can introduce safety measures such as requiring photos to be taken at Uber’s office and then uploaded by Uber itself or random spot checks. Safety concerns are not, however, limited to private hire vehicles. Those who criticise Uber in favour of black cabs seem quick to forget cases such as the black cab rapist, John Worboys. 

Another reason for Uber’s success is that it’s easy to use the app. Uber is hassle free as they can be booked in advance, the driver knows the exact destination and removes the need for passengers to speak to the drivers. The last factor makes it desirable with tourists as it removes the issue of a language barrier. 

Uber has honed its service thanks to competition, such as Cabify. If Uber didn’t provide a service that people wanted, it would have failed a long time ago. Rather than changing to meet the demands of the customer, black cabs have attempted to deny the customer of a service that will satisfy them.

Uber doesn’t just make customers happy but also its employees. Uber enables 45,000 licenced drivers in London to work flexible hours that suit them. According to a 2018 report from the University of Oxford they earn above the London living wage. Banning Uber will harm these drivers and disproportionately affect minorities: 80% of black cab drivers are white compared to 26% of private hire drivers. In the States, drivers with Gold, Platinum or Diamond status on Uber’s reward system for drivers (i.e. frequent drivers) are rewarded with full tuition coverage at Arizona State University Online for them or a family member. Uber is planning on introducing this UK version of this scheme with the Open University.

TfL has denied Uber the renewal of its license over concerns over safety but left Londoners with an alternative that offers a service many customers don’t want. Any system is fallible and susceptible to be misused. Replacing Uber with black cabs leaves Londoners no more protected. The solution to problems with the market for taxis is not eradicating competition. It is introducing more of it.