I used to be a productive member of society like you...

Skyrim damages the economy according to Geek Dad writer Dave Banks. His explanation is worth a read, gushing with praise for one of the most immersive and impressive video games yet, and finishing with a petition to politicians to ban Bethesda from making such great games. But it should be read as a parody, as one of the best and most culturally relevant mock petitions since Bastiat pretended that the sun was putting unprotected candle makers out of business.

Unlike Bastiat's petition, this one has a more modern target, pointing out the skewed priorities of many economists and econometricians. While capitalists are most often accused of being obsessed with economic efficiency and making money, the true materialists are the Keynesians and statists. In fact, free-marketeers and particularly the Austrian school instead focus on human action and preferences, and would see the decision to lock yourself in a room for the 300 hours of Skyrim's estimated game-play as perfectly valid.

Some may not approve, and others may tell you to get a life doing something 'productive'. To top it all, you may well not be the best, most rational decision-maker. But you still know yourself best, and you often unconsciously act on it; after all, your definition of 'productive' may involve clearing Dwemer ruins, mining ore on a snow-swept mountainside, and absorbing dragon souls.

People like Owen Jones who decry the 'funemployment' of the wealthy forget that the whole point of work is to pay for leisure. They're right that work sometimes brings its own therapeutic benefits, and perhaps a degree of dignity, but the free market and the progress of technology have allowed our generation to have more leisure time than ever before. Rather than being good for its own sake, employment is the cost of leisure, as defined by our personal preferences and decisions.

The money earned doesn't just provide some security and standard of living, but also gives us the opportunity to pursue our own happiness. If that happiness involves 'wasting' your time becoming a thane or slaying virtual vampires, then how else were you going to spend it? On vapid consumer spending to 'boost the economy'? There's something inherently wrong about the idea, as if you're working for others at your own expense; and the value of Mr Banks' parodic petition is in making it so obvious and repugnant. So let's give ourselves a deserved break and have our virtual adventures, before we take the metaphorical arrow to the knee and are stuck back at work on a Monday morning.


The consumer failed to deliver last year!

This week I have been reading The Consumer Failed to Deliver Last Year and Other Fables, a short (33-page) monograph of essays by Terry Arthur, who has written for the ASI on occasion. The monograph itself was originally published in 1993, but its timeliness has earned it a new edition, published by LCF Research. It's an engaging, enjoyable read, and very ably dismisses some of the myths that pass for received wisdom in most people's understanding of economics and investment.

Terry's great ability is to use simple, step-by-step reasoning to expose bad, confused ideas for what they are. On the idea that interest rates are simply the price of money (which implies that the government can manage them without many problems), he is gentle but brutal. Would you swap 10 packets of cornflakes for 20 tomorrow? Probably. Would you swap 10 packets for 20 in fifty years time? Probably not, if you like cornflakes. You have an internal weighing scales that, in choosing how many extra packets you would want to forgo having them right now, determines your time preference for cornflakes.

Time preference is a hugely important concept in economics, and one that I would wager very few economics journalists are aware of, let alone being able to explain as clearly as Terry. Why is this concept so important? Because, as Terry explains, ignoring it leads to state money printing which drives booms and, inevitably, busts.

The underlying lesson throughout is the sensible and very Austrian view that saving, not spending, is what makes us richer. The latter half of the monograph deals with investment, applying this sort of thinking to what people should actually do with their money. Is risk-taking the only way to reward? Bearing time-preference in mind, there's no reason that that should be the case. Bears (like me) will appreciate the clear-sighted, fundamentals-focused approach Terry takes. It's a very good read, and well worth a look. It's available from Amazon now.


Europe's road to serfdom

The deal was struck. The EU and the eurozone are on a new path towards a more strict fiscal union. And with the deal, it is very likely a move towards a double speed Europe, or a union within a Union. Britain has isolated itself from the new treaty by a veto from its PM David Cameron. Whether such a move is good or not for the UK, only time will tell. It would be frivolous to make predictions now, as it is likely that Britain will remain a part of the EU, only now left out of some main decision making and possibly regulatory standards. This isn’t necessarily bad, as Britain mostly suffered under various EU labour and financial market restrictions, but it is an open question on how Britain might suffer politically.

The treaty agreement itself is much more a plea towards fiscal discipline and austerity than it is a solution to Europe’s major problems. It lacks a long term strategy apart from hope that within a fiscal union there will be less scope for irresponsible behaviour and everyone will have to act as Germans. If they were treated as Germans by the bond markets before, now they will finally have a chance to act like ones.

The budgets of eurozone members need to be balanced or in a surplus. This will be introduced in each country’s legal system and possibly be overseen by the European Court of Justice. If any country breaches the 3% deficit ceiling (which was the initial requirement for the euro introduction) it will suffer automatic consequences and possible sanctions unless, of course, the majority of other nations oppose. I see room for political mischief once more.

The financial measures in place were designed to increase the firepower of the eurozone institutions to rescue the currency and its most endangered member states. There is a new rescue mechanism, the European Stability Mechanism which is to hold €500bn, and there is an additional €200bn to arrive through the IMF.

The problem with the current plan is that it requires more and more bailouts, which essentially implies more and more debt accumulation. The socialist foundations of Europe are falling apart simply because they refuse to realize (or are unable to realize) that socialism and the welfare state are unsustainable, once you run out of other people’s money, that is. The dependency of peripheral nations is causing the highest burden on the eurozone. Its core members don’t have sympathy towards these countries, they require bailouts to save their own countries’ banks who plied up on peripheral debt due to Basel capital requirements – another example of European regulatory oversight that ended up increasing systemic risk of the financial sector rather than decreasing it.

As long as the EU officials close their eyes on the only plausible solutions left – defaults that will end further bailouts and dependency – Europe will remain in dire straits. More socialism and more faulty policies that caused the current situation cannot be the answer to its problems. The response must come from a different perspective – just like it did in the 1980s. The question is how much longer will it take for the policymakers to realize they are on the road to serfdom. 


What the graphs tell us


This is a fascinating look at what leading economists see as the significant trends for the eurozone economies.

Top business economists were asked to pick out their favourite graph or chart from 2011. Many chose ones that have bearing on the state of the eurozone countries.  A few picked ones that illustrate changes in the UK savings ratio, or the level of private debt. 

The message they give without exception is a gloomy one throughout, and for the euro it is little short of catastrophic.  There is no way, on these figures, that the euro can survive in its present form with its current members.  The euro is going down the tubes, and sooner rather than later.  Some commentators think the UK was wrong to stay out of the proposed fiscal union designed to save it, but from these figures it cannot be saved anyway.  The UK might be thankful it will be outside the mess that is coming.  It will be affected, of course, and the hope must be that we have made some preparations to minimize those effects.  The graphs tell us clearly that it is time to batten down the hatches rather than engage in fanciful but ultimately doomed political schemes to stave off economic reality.

Twisted sex stories

The BBC has a report up this morning that claims that the number of students in sex work has doubled. But the story is paper-thin – the NUS says they’re being misreported, and the BBC gives no useful figures to support the claims in their report.

The article’s headline says “NUS: Students turning to prostitution to fund studies”. The basis of this claim is not an NUS report or even an NUS press release, but a comment given by an NUS officer on the BBC’s own story. And the content of the story is weak, to say the least.

To begin with, the story is based on a statistical fudge. It reports the change, without any concrete numbers. But relative figures are only useful if you have the original numbers to see where the change has taken place. An increase from two people to four isn’t very significant but, if expressed in terms of the change, it’s the same as an increase from 10,000 to 20,000. And, obviously, if you’re dealing with very small numbers it’s hard to say that a “doubling” of an extra ten or twenty people is statistically significant. That the number of students who know someone working in the sex industry has risen from 3% to 25% in the last ten years doesn’t say very much about the actual numbers doing so, especially given the nebulous status of the term “sex industry”.

Next, the BBC story interviews a woman who “turned to escorting during her A-levels when she found out her education maintenance allowance (EMA) was in danger of being cut.” Note the weasel words there – if Clare was studying for her A-levels and getting an EMA, she would continue to get it until June 2012. So Clare hasn’t actually been getting less money from the government at all, and won't until June next year.

Far from being forced by poverty into sex work, Clare says “I began looking for jobs, but the hours were unsociable.” I’m sympathetic to Clare – she says that she was misled by a “friend” into escort work, which is grotesque. But for the BBC to appropriate this story to support their flimsy thesis about students being forced into sex work is exploitative to her and deeply misleading to its readership.

There are people resorting to illegal sex work because of poverty. This is very, very bad, especially because the prohibition of a lot of sex work has made it a violent and dangerous type of work. But this BBC article has hijacked this very real problem in order to promote a specious non-story that misleads readers.

I wrote about more BBC bias the other day.


The law of opposites: Illusory profits in the financial sector

An Adam Smith Institute report released today (Wednesday) claims that the failings of the International Financial Reporting Standards (IFRS) allows banks to overstate their profits by recognising years of often very uncertain future income as current profit. As well as having the potential to deceive investors and lead to misallocations of capital, this overstatement of profits benefits company executives whose performance is typically measured and rewarded on this basis. Recent developments in accounting rules have encouraged, rather than tried to prevent this.  In addition, the latest developments of the Basel international rules specifying banks capital and liquidity minima only exacerbate the problem.

Though standardised accounting standards effect many sectors, any unintended consequences they throw up are especially problematic for banks, since such failures are magnified by banks taking exposure to each other. Moreover, in the case of banks attracting state bailouts, real transparency is clearly needed to protect the taxpayer.

The Adam Smith Institute report is structured around six shortcomings in the rules governing bank profit and capital reporting, which must be addressed:

  • Uncertain future cashflows can be recognised as certain by purchasing a credit default swap (CDS) or similar “protection”, even though the supplier of the protection is likely to default if the insured event occurs;
  • Profits can be recognised from the increased value of assets, or decreased value of liabilities, on the basis of a market price, even though the totality of revalued assets or liabilities could not be sold at that price;
  • Profits can be recognised from the increased value of assets, or decreased value of liabilities, even when the revaluation of assets is estimated, not by market prices, but by a model built by bank employees. This is the so-called mark-to-model approach to valuation;
  • The net present value of uncertain future cashflows can be recognised as profits even when they are estimated using implausibly optimistic forecasts. (This is a variation of the mark-to-model problem listed above);
  • The EU’s IFRS accounting system, voluntarily adopted by UK and Irish banks at the banking company level, is inconsistent with UK law
  • Banks need not make provision for expected losses when calculating their profit.

With much of the activity in the banking sector aimed at nothing more than exploiting these accounting rules, the report suggests the introduction Steve Baker MP’s bill to bring about simple legislation to reveal the extent of mark-to-market and mark-to-model banking activity.

Author Gordon Kerr adds: “Accurate accounting is at the root of the legal and scrutiny framework; without accurate accounts basic laws are incapable of enforcement. As this report shows, banks have been using loopholes in these rules to inflate their accounts and create illusory profits, which pay for bonuses and short-term gains for their shareholders, but give a very misleading view of their real financial health.

"The accounting regulation system needs radical reform so that banks are not encouraged by the rules and regulations to invest in risky assets to make themselves seem more profitable than they really are. Honest balance sheets are the cornerstone of a healthy financial system – right now, we don't have the transparency we desperately need to avoid a repeat of 2008.”

Download full report


The impossibility of financial regulation

Samizdata's Brian Mickelthwait has done a great job capturing Jamie Whyte's appearance on Radio 4 last night to discuss the failings of the Financial Services Authority (FSA). Jamie's analysis is, I think, spot on:

"[The FSA] did fail. But I don't blame it on the individuals of the FSA. I think that they have an impossible task. What's happened in banking is that because of government guarantees to those people who lend money to banks, explicitly in the case of retail depositors – you and me with our ordinary money in the bank, and implicitly and pretty reliably in the case of wholesale lenders to banks. Because they're government guaranteed, there is no price mechanism any longer in the banking market for risk. So banks can take as much risk as they like and without paying a price for it. Normally what would happen in a free market is that it would become more expensive for banks to borrow money. And that doesn't happen. There's no risk premium for banks taking larger risks, because the people lending the money realise that the government will bail them out.

"Now the effect of this is that basically the government is subsidising bank risk taking on a massive scale. And the job of the FSA is to counteract that. There are these rules – the Basel rules and so on about capital requirements. And then there are supervisors, regulators, people who go into the banks and check they're complying, and their job is to counteract the massive incentive towards risk taking that the government has already provided. Now the question is: can they do it? They obviously failed to do it. Can they, if they do a better job? And I think they can't.

"And the reason they can't is that there are almost infinitely many ways that banks can take risks. The rules will always specify some particular ways, and regulators will go in, looking at that stuff. Are they doing this or that? But the bankers are very clever and they can always come up with other ways of taking risks, and I just think it's a hopeless task that they've been given."


Bond seller’s blues

Friday night in a north London pub and the downstairs room has a bunch of old blues musicians wailing about hard luck, bad women and hittin’ the road again. All those train whistles, pawn shops and late-night soup kitchens, however, seem a bit out of date and out of place in Crouch End, especially with a perfectly decent tapas bar next door. Still, it’s always been the lot of the hard-working right to see the best poets and musicians flock to the unemployed left.

Surely, though, there must be someone out there prepared to take up the struggle of  beleaguered bankers charged with offloading truckloads of gilts, German bunds, US Treasurys and all manner of bonds from the foothills of Mount Fuji to the lush green of Killarney.

This is brutal work for untold thousands of bond salesmen, chained to desks from dawn to dusk in soulless dealing rooms, sweating to find buyers for the stacks of paper that nobody believes will ever be repaid in full value. Fail to meet your basket quota and you’re chucked out on the street. Sell too many and the taxman cuts you off at the knees. Outside, you’re burned in effigy by an angry mob while nations’ leaders vilify your efforts, even as another truckload of paper hits the loading bay. Few survive the ordeal to a ripe age – forty year-olds are called gramps.

It’s time for the blues to move on from Mississippi cotton fields in the Depression and into the modern world of flogging debt in high-security skyscrapers. With apologies to Willie Dixon, here’s something in need of a strong voice and a funky guitar:

I Just Want To Sell Bonds For You

I don’t want you rated less than A
I don’t want you not to pay
I don’t want you without accrues
I just want to sell bonds for you

I don’t want you to cut my spread
I don’t want you to need the Fed
I don’t want you to dream EU
I just want to sell bonds for you

Well I can see by the way that you tax and spend
And I can tell by the way that your debts extend
And I know by the way that you seek your vote
You gonna come round soon and take my boat

I don’t want you to cook your books
I don’t want you to call us crooks
I don’t want you to say we’re through
I just want to sell bonds for you


It’s official: the BoE’s money printing achieved almost nothing

By taking away from one side of the economy to stimulate another, Keynesian economics is smoke and mirrors at the best of times.  But now it transpires that our own most recent example, Quantitative Easing, was more akin to a volcanic ash cloud and a one hundred mile-long mirage.

The BoE claimed that the £200 billion it printed in 2009 onwards, resulted in the yields on five and ten years gilts being 100 basis points lower than they would otherwise have been.  It claimed that growth was boosted by between 1.5 and 2%.  On the basis of this, it enthusiastically decided to print another £75 billion this October.

Not so, says the highly authoritative (and not personally interested) Bank for International Settlements in its latest quarterly report.  The real effect was about a quarter of what the BoE claims.  Yields were on average 27 points lower.

The BIS also doesn’t agree with the BoE’s belief that new stimulus will have a similar effect.  “It may be harder to achieve the same degree of effectiveness as with the initial programmes once the surprise or novelty element wanes”, it states in its conclusion.  This basically means that financial movers realise that the money printing results in inflation, and that they therefore add that future inflation into their behaviour.

Will Sir Mervyn now review the decision of the 6th of May to print another £75 billion? 


Bias at the BBC?

We've been very pleased about the coverage our new report on renewable energy, Renewable Energy: Vision or Mirage?, has been getting. I was particularly impressed by the balanced coverage given by the BBC this morning, which fairly summarized the report along with some criticism from a spokesman from the World Wildlife Fund.

Unfortunately, their story now appears to have been heavily rewritten to give the thrust of the coverage to businesses that profit from state subsidies to the renewables sector. Even the headline has changed, from this morning's "Green energy push ‘flawed’ claims Adam Smith Institute" to this afternoon's "Scottish Renewables slams 'flawed' energy report".

You can read the original version of the story here, since the BBC doesn't preserve its original news stories after they have been rewritten. Interestingly, the BBC story also covers a report by Reform Scotland that is strongly in favour of renewables — remarkably, the BBC does not include any criticism of this paper despite its inclusion of renewable energy companies' criticisms of our report.

It's possible that this is all normal, but does anybody really believe that this would be the practice if our report was in favour of wind turbines? Somehow, I doubt it.

Update: In the comments, Man in a Shed points me to this comparison of the two versions of the report. As he says, I think it makes the point rather well (click for full size):

Update 2: To answer my own question, I read through the four stories linked to at the bottom of the BBC's report on our paper:

Obviously this is a small sample, but it's striking that, in the last four news reports, not a single comment was quoted questioning the basis of Scotland's renewable energy policy — the only "dissenting" voices are the firms asking for more money from the taxpayer. Is there any other business sector that gets such an easy ride from the BBC?