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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Holy Credit!

Written by Jan Boucek | Friday 26 July 2013

So Archbishop of Canterbury Justin Welby wants to make the Church of England’s property available for Credit Unions so they can wipe out those dastardly payday loan sharks. This is a brilliant idea with wide-ranging opportunities for both entrepreneurial clerics and banks.

Just consider the convenience for consumers of banking and praying at the same time. After the queue for communion, you simply shuffle over to the bank teller next to the altar to pick up your loan or maybe deposit whatever spare change you have after passing the collection box.

Meanwhile, over in the confessional, the priest can follow up an absolution prayer with a financial product pitch – “Have you considered insurance for seven years of drought?”

Recruitment of young folk into the priesthood has become a real problem for the Church but Credit Unions on site offer an added attraction in the area of branch security. Wearing body armour under cassocks, learning a martial art or designing bank vaults disguised as crypts will broaden the profession’s appeal.

Of course, established banks won’t be sitting still against this new competition on the High Street. Many branches surely have space available for any number of religious sects to set up shop.

What depositor with a bag full of cash could resist first lighting a candle in the hopes his deposits won’t attract the attentions of the taxman? Impatient couples could stop off at the on-site wedding chapel before opening a joint bank account.

Imam calling for midday prayers while you’re stuck in the queue behind the old lady counting out thousands of pennies? No problem – step aside to our prayer rug area and we’ll hold your place in the line.

And what customer wouldn’t appreciate an evangelical choir lifting the spirits before meeting  the bank manager about those persistent overdrafts?

Keep those ideas coming, Mr Welby!

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The unprecedented $60 trillion of costs of Arctic melting

Written by Tim Worstall | Friday 26 July 2013

Much ado about a new study published in Nature. Arctic melting could lead to methane emissions which would cost the world $60 trillion. This is an unprecedented danger say scientists. Sadly, whatever one thinks of the scinece in this, those damages aren't unprecedented at all. Indeed, they're already written into the costs which we use to worry about what to do over climate change.

But, they say, economists are missing the big picture. "Neither the World Economic Forum nor the International Monetary Fund currently recognise the economic danger of Arctic change. [They must] pay much more attention to this invisible time-bomb. The impacts of just one [giant "pulse" of methane] approaches the $70-tn value of the world economy in 2012", said Prof Gail Whiteman, at the Rotterdam School of Management and another author.

The problem with this assertion is that all of the standard estimations do indeed include damages like this. Let us take the Stern Review for example, that's the one that tends to be used as a benchmark (and is indeed the benchmark that these scientists have used). In that Stern Review, drawing from the estimates in the Special Report on Emissions Scenarios, the assumption is that the global economy will grow by some 5 to 11 times over the course of this coming century. Global GDP will be between $250 trillion and $550 trillion. Stern then says that the damages from climate change could be as much as 20% of this sum. That is, that GDP would have been in that range but will now be in the $200 to $400 trillion range. Note that that is his worst case argument.

And here we have an estimate that damages could be $60 trillion over a 50 years time period: say, $1 trillion a year with a bit of rounding. Or one half of one percent to one quarter of one percent of global GDP. We have already got this included in our top whack estimate of damages of 20% of future potential GDP.

All of which brings us to the real point at the heart of the entire climate change discussion. No, not whether it is happening or not: let's leave the range of possibility open from nothing is happening at all all the way through to the sort of disasters being predicted here. It is still true, wherever on that spectrum we are, that we want all humans over time to be just as rich as is possible. We are therefore trying to balance the costs of not doing something about climate change against the costs of trying to do something about climate change. And as these century long figures show there are significant costs to both, or at least potentially there are.

But we should be measuring the costs of doing something as against the loss in GDP which doing something will cause. Just as we should be measuring the costs of not doing anything against the cost that not doing anything will cause. It's worth trying to avoid such methane releases if the cost of doing so is less than the economic growth that will be foregone. Which is where throwing around numbers like $60 trillion becomes unfortunate. For it's a cost over many decades: $1 trillion a year is more reasonable to use. And compared to the benefits that economic growth is going to bring to our descendants that's however large it is in one manner, really rather a trivial figure.

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The Wonga delusion

Written by Sam Bowman | Thursday 25 July 2013

The Church of England’s plan to drive payday lenders like Wonga out of business by competing with them is wonderful. After years of politicians demanding ‘action’ on the payday loan industry, an organization has finally decided to tackle this perceived social evil by giving people a better alternative, not trying to legislate problems away.

Critics of payday lenders quote the loans’ astronomical APRs — Wonga’s representative APR is 5853%. But this is extremely misleading. Representative APR is designed to show interest-on-interest compounding over a year, and is an inappropriate measure to use for a loan whose term is a month or so. A Wonga loan does not and cannot compound for longer than 60 days beyond the initially agreed loan period (which can be between 1 and 46 days).

Borrowing £200 over 46 days accrues £100.03 in interest and fees, an effective interest rate of 50% over this period. After this point, interest only continues to accrue for 60 days, after which point it stops. It simply does not make sense to look at representative APR for a short-term product that does not keep compounding for long enough for anything like that APR to ever apply.

No Wonga borrower can end up with a 5853% interest rate – the existence of this number is just an quirk of our financial regulations which require all lenders to express their rates in annualized terms. Journalists and politicians who report this 5853% APR figure as the ‘standard’ Wonga rate are mistaken and are misleading the public.

The real problem is that people are poor enough to have to rely on these sorts of lenders. Wonga et al only exist because their customers have no better alternative. Before the emergence of the formal payday loan sector, people had to rely on tattooed guys with a Rottweiler who’d happily break your legs to recover their investment. Nobody wants to borrow from a firm like Wonga, but they're a damn sight better than the existing alternatives.

The Archbishop of Canterbury appears to recognise this. Giving people more choices by offering a cheaper alternative is the sensible way to help payday borrowers.

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If you'd like to know why economic growth is slow....

Written by Tim Worstall | Thursday 25 July 2013

Then I shall tell you why economic growth is slow. We've become infested with an overweeningly bureaucratic state. I have examples from my own work but perhaps one from the public domain is better:

There was some bad news for York Potash project developer Sirius Minerals last week, after approval of its mine was delayed yet again, causing the shares to plunge.

I'm perfectly happy with the idea that a mine needs planning permission. Indeed, I've no problems at all with the idea that you need a permit to go dig a girt big hole in a national park. However, there's parts of this process that look absolutely absurd:

The second study essentially concluded that its authors did not see a market for the form of potash Sirius would produce. “In the conclusion, AMEC states that it does not believe there is a significant market for polyhalite and therefore stated economic benefits are unlikely to occur,” Sirius said. “This is followed with a view that, as polyhalite cannot be sold in sufficient volumes, the economic and employment benefits cannot be realised.”

What? One the one hand we've got Jeremy Grantham and vast numbers of enviros and organic nutters insisting that potash (and another fertiliser, phosphorous) is about to run out and therefore we're all gonna die and then we've these nutters employed by the government to say that no one will buy the stuff. A very quick Google indeed shows that there is a market for the stuff. Here. But much more than that, in order to get permission you've got to show the bureaucrats that there is indeed a market for your goods. What?

That's a planned economic system, not a market one. In a market system sure, you might need permission to go dynamiting the North Moors but whether you make money doing so is what you're there risking your capital to find out. It's absolutely damn all to do with functionaries in offices whether you do or not: that's your risk. And the only way anyone will ever find out is by going and doing it.

And this is indeed one reason why economic growth is slowing: because we've erected this system whereby the bureaucrats get to second guess everyone in their atempts at new economic activity. Yes, this is beter than a system in which only the bureaucrats ever initiate new activity: but it's still vastly worse than one in which people get on with what they want to do without having to spend several years waiting for a signed chitty. Economic growth has slowed over the past few decades simply because we've put more paperwork obstacles in the way of economic grwoth.

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The good news about world poverty and globalization

Written by Dr Madsen Pirie | Wednesday 24 July 2013

On my own website today I draw attention to the Economist story about the progress of world poverty between 1990 and 2010. I point out that:

"World poverty has halved in two decades. The measure used is the $1.25 a day of consumption that is the average poverty line for the 15 poorest nations. This figure shrank from 43 percent in 1990 to 21 percent in 2010. This was not achieved by redistributing wealth from richer countries, but by having wealth created in poorer ones by economic growth."

The ASI responded to the "Make Poverty History" wristbands that celebrities popularized in 2005 by pointing out that the slogan did not indicate how this might be done. It implied redistribution, with more aid to flow from rich countries to poorer ones.  We produced our own wristbands that read, "I buy goods from poorer countries," and sent them out free to anyone who asked for one.  We gave away many thousands. 

Our point was that poorer countries become richer if we open our markets and buy their goods.  It is this, rather than aid, that has made a difference to the lives of a billion people over those two decades, and can change the lives of the billion still to be lifted from poverty.

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Political ignorance and the porn filter

Written by Sam Bowman | Wednesday 24 July 2013

Recently I wrote about the problem of political ignorance: most voters don't know much about political issues, and most of the informed elite is also very closed-minded. Today we have an example of the worst of both worlds. Claire Perry MP has accused Guido Fawkes of 'sponsoring' the hacking of her website and of linking to it by putting a screenshot of her hacked site on his website

 

 

Given "the fact that she evidently doesn’t understand the difference between a hyperlink and a screenshot", as the Ministry of Truth blog puts it, isn't it a bit worrying (and revealing!) that Ms Perry is the driving force behind the government's plans to require people to opt-out of a block on pornography?

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Chart of the week: Eurozone car sales flat for 10 months

Written by Gabriel Stein | Wednesday 24 July 2013

Summary: Euro are car sales have moved sideways for ten months

What the chart shows: The chart shows sales of new cars in the euro area as well as in the four largest EA members, expressed as an index with the average for 2008=100

Why is the chart important: The biggest purchases of households, the ones for which they usually borrow money, tend to be cars and houses. For this reason, both purchases are excellent leading indicators of activity, in that they are usually only undertaken when they buyer is feeling optimistic. EA car sales data give rise to cautious optimism that economic activity in the single currency zone has bottomed out. However, there is still little or no sign of any sustained recovery.

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Why are tax campaigners campaigning to make the poorest of the poor poorer?

Written by Tim Worstall | Wednesday 24 July 2013

Most here will know that my favourite blood sport is hunting Richard Murphy and his buddies in the Tax Justice movement. But even I am appalled at the latest demand from them: that multinationals should be forced into paying more corporation tax in poor countries. They make this demand because they are willfully blind to the most basic point about corporation taxation: the incidence of said taxes. Here's what is said:

Corporate taxes are incredibly important to many developing countries. When many in their populations are too poor to pay any taxes and when corruption undermines much of the local tax base from commerce (and this fact has to be recognised at present) then the revenues to be earned from multinational companies form a significant part of the tax base of these states. In that case the base erosion that is now well documented due to transfer mispricing out of these countries on royalties, management services, interest, insurance and other charges levied on an intra-group basis, usually from tax haven subsidiaries within the same multinational entity, is of massive concern to these states and forms a major part of the illicit flows that prevent the provision of adequate services by many governments, undermining democracy and blighting many lives over succeeding generations.

We have argued for fundamental reform on behalf of these countries.

They're arguing that the poorest of the poor should be pushed further into poverty as a result of their determined ignorance about that tax incidence. We've known for well over a century now that companies do not actually bear the economic burden of taxes levied at the company level. It is either the workers, in the form of lower wages, or the investors, in the form of lower returns that do. This is not an arguable theoretical point: it's just a truth about this particular universe that we inhabit. No, don't worry about why for the moment, simply take it as being one of those truths.

We also know what it is that influences who carries the burden, workers or investors. The mobility of capital and the size of the economy of the taxing jurisdiction relative to the size of the world economy. The precise splits are argued about, volubly, but but all economists are agreed on those two basic points. It's some combination of the workers and shareholders and the smaller the economy and the more mobile capital the more it is the workers, the less the investors.

One more interesting point: Atkinson and Stiglitz, back in 1980 or so, showed that the burden could in fact be greater than 100%: the loss to workers and or shareholders could be greater than the sum raised in revenue. And yes, the smaller the economy and the more mobile capital the more likely this is and that this burden will be on the workers. So, what do we know about these developing economies where we are told that companies really must cough up more corporation tax in? In fact, that multinational companies must cough up more tax in? Quite: we know that these economies are very small compared to the world economy. That's why we call them developing economies: because they're small and poor ones.

Further, given that we are specifically talking about multinationals, the capital we're talking about must be perfectly mobile. It is outside investment going in: not domestic investment pondering whether to leave or not. If we piece all of this together then we get the ugly reality. The truth is that the burden of higher corporate tax on multinationals in these poor countries will be upon the backs of the workers. Those workers being, by our very definitions of poor and developing country, the poorest of the poor. These are the people we actually want to help and here the "Tax Justice" campaigners are insisting that their wages should be driven even lower. And as Joe Stiglitz has pointed out, their wages could be driven down by more than the actual revenue raised.

This is not, I would submit, a sensible way of improving people's incomes: imposing a tax which we know will reduce those incomes.

As above I usually take my pursuit of these people as a rather jolly blood sport. A day out with the hounds and if the odd vulpine gets harmed well, no matter and that's not really the point of it all: it's the jolly day out that is. But then we find them proposing something quite as barmy, even evil, as this. They simply will not listen to what they are being told about the incidence of corporate taxation. They just don't want to believe that it's not either the company or the evil capitalists who bear the burden of these taxes. As a result they ignore that their recommendations will grind the faces of the poor even more firmly into the dust. At which point the pursuit of their errors become less a jolly day out and more of a necessary duty.

If you want to raise wages in poor and small economies then you want more multinationals to invest in those poor and small economies. Trying to tax said multinationals more so that they invest less and thus depress wages just isn't a good method of raising living standards in these places. We want to tax less, not more.

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Free markets for sustainability!

Written by Tim Worstall | Tuesday 23 July 2013

I expect we're all wearily familiar with the population prodnose. Those who comment (most often seen at Comment is Free but they do spread themselves around a bit), endlessly, along the lines that "this is the problem that cannot be mentioned, the rising population". And who then go on to suggest the compulsory sterilisation of anyone a little browner than they think people ought to be. With rather fewer fascistic overtones we get similar stuff from people like Johnny Porritt and the Optimum Population Trust. There's just too many people, too many of them are peasants who won't do what Baronets tell them to and it's all just appalling.

Very strangely indeed it's largely these same people who insist that there must be a plan to deal with this population thing. Despite the fact that population is one thing that free markets deal with very well indeed thank you very much. As Ron Bailey over at Reason points out:

The crucial point is that increasing economic liberty correlates with increasing life expectancies, and thus falling fertility rates. As data from the Heritage Foundation’s Economic Freedom Index shows, average life expectancy for free countries is over 80 years, whereas it’s just about 63 years in repressed countries.

The causal chain is as follows: economic freedom increases wealth: increased wealth leads to longer lifespans. Longer life spans for women reduce fertility rates (I know, you might think it works the other way: but it doesn't). Therefore economic freedom reduces population growth.

And there we have it: we don't need grand plans to sterilise everyone a racist wouldn't like to bring home to mother for tea. We don't need to pressure the peasantry into doing what an Old Etonian thinks they ought to. We just have to leave people to get on with it themselves. People generally like economic freedom, they certainly like increased wealth and longer lifepsans and the end result of all three is that population growth falls, falls to below replacement rate and thus the gross population falls over time.

No plans, no pressure, no coercion, just free markets and the rule of law saving the planet. Great, eh? Now if only we could get the population prodnoses to understand this....

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We shouldn’t subsidise the new political class

Written by James Lawson | Monday 22 July 2013

In 1911 MPs began receiving a salary. By paying MPs it was hoped the general population could independently enter politics, rather than simply leaving it dominated by a wealthy elite.

MPs compensation has since betrayed this vision. The system now supports a new political class. In the 1970s MPs' salaries were comparable with average UK income, today they seek triple the average, putting them in the top 2% of earners. Not to mention the abuse of expenses or even illegal activities by some of this political class.

Hence the rise of professional career politicians. Consider Victoria Fowler, Labour’s 22 year old Parliamentary candidate. Her (now-deleted) Wikipedia page cites her running the Warwick Speakers (a student society) and two years experience as a councillor, to justify a potential starting salary of £77,000. Glancing over Liberal and Conservative lists, she is not alone in the political class. Many pursue power with a bland CV of nothing more than work in Parliament, brief Party Research Department experience or a token career in PR. The narratives about working class links or special expertise are common but seem to have little bearing on reality.

The solution is simple. MPs should have their pay fixed around average UK salary. After all, there are many perks, like a £5.8m subsidy for food and booze in the Commons, and prestige from the post too. Perhaps they could continue to receive a second home allowance, or basic temporary accommodation to allow them to attend debates. Travel expenses, only from the constituency to Westminster when supported by just cause, such as a vote, might be reasonable.

Rather than cutting the number of MPs and supporting politics as a full time career, MPs should be part time. Politicians should understand real world working Britons as workers themselves. They should bring genuine specialist expertise, not just the skillset of a student hack. This might reduce time for legislation, though the MPs of past debated in the evenings after work and were not supported by a modern Civil Service. Why must every government create more laws anyway? What of simplification and repeals?

MPs should take a pay cut. We need more parliamentarians from the real world rather than the rising political class. MPs should be part time, and driven by a desire for public service not the raw pursuit of power and a fat cheque at the expense of their constituents.

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