The Pin Factory Blog

Did you know we are all subjects of the USA?  It seems that we are.  A letter from my stockbrokers this morning advised that I had to complete two forms for the US tax authorities stating that I am British and have no US interests.  For the record, I have no US trade or income or investment or any other connection that should rightly be of interest to the US tax authorities but that is not good enough.  I have to prove it.

Apparently if I refuse to complete these forms, required under the US Foreign Account Tax Compliance Act, sanctions will be taken out against my stockbrokers who do have American interests.

The less irritating of the two forms simply asks a series of yes/no questions.  Some ask for a single yes/no responses to a multiple questions.  For example you can only say yes or no in aggregate to “Are you a US Resident or US Citizen or have dual nationality?”.  You are not allowed to say yes to one and no to the others. Some are redundant.  For example for example, having established “no” to all the above, it goes on to ask if one holds a US passport.  Could someone please tell me how one acquires a US passport without being either a US Resident, or US citizen or having dual nationality.

The more vexatious form is the W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.  Part I requires my name and address, no big deal.  Part II is more challenging as one is required to certify any or all of five things but only if they apply.  How do I know if they apply when I do not even understand what they are.  One of them asks if I am “related” to someone who might pay US tax.  I think I have a fourth cousin once removed in Iowa, but I’m not sure of that. This is all under the heading of “Claim of Tax Treaty Benefits (if applicable)”.

Part III deals with “Notional Principal Contracts”.  I have no idea what they might be and you probably have none either.  The small print asks me to certify that I have, or will, provide a statement that identifies “those notional principal contracts from which the income is not effectively connected with the conduct of a trade or business in the United States.”  This statement may be a long time coming but luckily there does not seem to be a time limit.

Part IV specifies more certification in print so fine I needed a magnifying glass.  The first is to confirm that I am the beneficial owner of “the income to which this form relates”.  What income is that?  As I said at the start, I have no US investments or income.

My stockbroker required the two forms signed and dated and a certified copy of my passport, probably just the page with the photograph but it does not say that.  A visit to the local solicitor is now called for.

Two final idiocies: I signed and dated in the English form but was then told that the form would be returned if the date was not in US format: MM DD YY.  And the bottom line says “For Paperwork Reduction Act Notice, see separate instructions.”

What asylum is responsible for this nonsense?  The UK government cravenly complies with US legal requirements, notably the one-sided implementation of the extradition agreement which was intended for terrorists but did not bring a single provisional IRA suspect back to the UK.  The UK government should make it clear that we are UK subjects and taxpayers and should not be hassled by the US tax authorities.

For a Friday afternoon, something entirely different. The American economist Art Carden has been using some of the various internet memes (err, this won't make sense to some/may but bear with me) to produce economically instructional posters. The full set is here. And here is an example.

Which is very good I think you'll agree. As these others.

Which brings us to the important point here. We economically literate Brits cannot allow ourselves to be outdone by one from overseas. We did, after all, invent the subject (yes, really, Smith, Ricardo, Mill) so we must indeed be able to do better than this bumptious upstart.

So the task is for those with time hanging heavy on your hands on a Friday afternoon, pick your meme, pick your message, then let me know about where you have stashed your picture.

Let me know where it is by sending me an email to timworstall AT gmail.com.

Any meme, any economic lesson or point you wish to get across. The prize is of course the glory of taking part. Sam and I will bicker over which we think is the best sometime next week.

You might like to use quickmeme or perhaps the cheeseburger folks. After all, there's no sporting events imminent so what else are you going to do over the weekend?

Sometimes there's just something where the stupid is so bad that it hurts: not just the inability to see the forest for the trees but a concentration upon the twig at the expense of the branch. So it is with the latest whine about the cost of housing in the UK:

UK families are among the worst off in Europe when it comes to housing costs, spending more than 40% of their household income on rent, mortgage payments and other living costs, according to the housing charity Shelter.

True, we do indeed have expensive housing. The two interesting questions, the only two important questions, are why and what do we do about it?

"This is not set to get better any time soon," Robb said. "While the situation is bleak at the moment, a succession of governments failing to provide much-needed affordable homes means that the future facing our children and our children's children is only set to get worse.

And there we have the wrong answers to both. The first, that the reason housing is expensive is because government hasn't built enough is simply wrong. The second, implicit, answer, that if only government built more is also therefore wrong.

The truth is that housing is no more expensive in England than it is anywhere else. It is the right to build a house which is expensive in England. In the South it is generally true that the market value of planning permission on a piece of land is 50% of the value of the land, the planning permission and the entire house built upon it. We can check this by looking at the amount an insurance company will offer to rebuild your house if it burns down. It is very rarely indeed more than half the market value of said house if it hasn't burnt down.

Or we could calculate it another way: agricultural land can be had for £10,000 a hectare. Building regs insist that you put some 15 houses on a hectare. Building a house costs in the £100k to £120k area (I know, I've done it). You'll not get a 3 bed house in the South of England for less than £250k. Point proven. It is the scarcity value of planning permission which raises the cost of housing. Thus, to produce more "affordable housing" what we want is to increase the issuance of planning permits so that the market value falls.

You'll recall that the Coalition has tried to do this and my word hasn't everyone screamed about it?

Something of a pity for as we pointed out all the way back in 2007 this is a simple, complete and viable solution.

By converting just 3 percent of the farms in England and Wales over a ten year period, covering 90 percent of the land with trees and the other 10 percent with houses, we would create 950,000 new homes and almost 130,000 hectares of new woodland.

Or, to put it into terms that even politicians might understand. If government wants more houses built then why doesn't government just issue more permissions for people to build houses?

Employers are just so beastly, aren't they? Attempting to get around their responsibilities to the workers. Why, some of them even decide to hire temporary workers instead of loading up on full time long term peeps that they have to pay extra costs to employ!

This example comes from the US:

Labor Ready's business customers are billed for the temp workers' wages, plus fees that cover things like workers compensation insurance, payroll taxes, and, of course, a significant markup. The clients save cash on HR and training, and they save even more by eliminating the need for health insurance, paid sick leave, vacation time, and other standard employee benefits.

We could call this beastly: indeed I will call it beastly. But no, it's not the employers who are being so by trying to dodge those costs like health insurance, paid sick leave, vacation time and other standard employee benefits. Rather the beasts are those who load all of those things onto wages while insisting that they're not really costs at all.

The truth is, as ever in this dismal science of economics, that there is no such thing as a solution. There are only trade offs. It may well be that a decent and civilised society will provide these desirable things to the people who do the scut work of that society. I certainly think it desirable as I'm sure do most of you. But we must also recognise that there are costs associated with this. Here, the obvious costs being those people who cannot get any job at all because of the costs of providing those desirable things.

We can see that there are some such as well: for some do get jobs when those costs are not imposed while they do not get jobs while they are imposed.

The solution here, for all that there are no solutions so let us say a better trade off, would be to abolish all the laws that insist upon those extra costs. That way the maximum number of people who want a job will be able to find one: a desirable outcome. But, I can already hear the cries, what about paid vacation, what about paid maternity leave? Interesting examples: for the US has no national legislation insisting upon either of these. And yet just about everyone in full time employment in the US gets both of them. Proving that both employers and employees think them desirable and entirely worth having if as and when the value added of the labour is sufficient to provide them. And also not worth having when their provision bites too deeply into the value added and thus reduces cash wages too much: and most certainly showing that there is no need at all to have a law insisting upon them.

The twitterati are out in force again this week, this time angry at G4S and their failure to secure enough staff for the Olympics. You’ll no doubt be familiar with the scandal. You don’t have to look far to find someone putting forward the argument that this is a textbook example of why we shouldn’t outsource state services.

Certainly G4S has made mistakes, yet I’m not convinced by the public outcry against outsourcing. Think of Bastiat’s That Which Is Seen and That Which Is Unseen. We see the G4S failure, but we don’t see what would have happened had the state been tasked with Olympic security.

Clearly, neither the state nor the private sector are perfect. Tasking either with Olympic security had risks that something would go wrong. The state seems to have a nasty habit of making mistakes – data is constantly leaked or goes missing, the Home Office seems incapable of running an immigration desk, not to mention the quality of state healthcare and education provision lagging far behind their private counterparts. The list goes on. To me it seems that the rational thing to do when deciding who should provide services is to go with the least risky option. To say that I’m not convinced that this option is the state would be an understatement.

Yet the popular narrative emerging from the G4S scandal is that we should trust more service provision to the state. I can’t help but think had we done that with Olympic security, the state would have had as just a difficult time securing staff, if not more.

And what would have happened had the state been in charge, and yet the troops still had to be called in? A public outcry against state provision? A wave of commentary saying how this is a textbook example of why we should outsource?

No. Of course not. It would have been a minor scandal at best. Probably not even serious enough to warrant the loss of a ministerial job, yet there are calls for Nick Buckles, head of G4S, to stand down. We would shrug off state failure as though it were the norm.

We hold the private sector to a far higher standard than we do the state. Holding those who provide public services to account is hardly a bad thing, but if we don’t demand the same high quality from the state as we do from the private sector, our public services will be doomed to mediocrity.

For some weeks transport within London has been dislocated and delayed by road closures as Olympic venues are prepared.  Soon now whole lanes will be closed off to ordinary drivers so that these 'Games Lanes' can whisk Olympic officials around in their limousines without hindrance from other motorists.  Any cyclist entering one of these lanes faces a fixed £130 penalty, and motorists have been advised to avoid London altogether during the Olympics.

My use of the word 'Olympic' risks an enforcement lawsuit from the committee 'protecting' the trademark.  Also banned are words and phrases made up of terms that might refer to the Games, including London, 2012, games, medals, gold, silver and many more.  Bullion dealers should be careful when they talk about their work.

The Spectator tells of a butcher in Weymouth banned for arranging a display of sausages like the 5 Olympic rings, and of a florist in Stoke-on-Trent ordered to remove similarly arranged paper tissues in her window.  Only Macdonald's chips will allowed at the Olympic stadium; others are banned.

There is a no fly zone around London, and some homeowners have to put up with anti-aircraft missile batteries installed at the top of their apartment blocks.  Residential areas will have to put up with the noise of commercial garbage being collected nearby between 1.0 and 4.0 am during the games.

There are queues of several hours sometimes for air passengers arriving at Heathrow, even before the games have begun.  The cost of all this long exceeded its planned budget, and is now reckoned to top £12bn, though if the cost of public transport upgrades is included, even that figure doubles.

And for what?  So that the "international sporting community" can have a good time at the expense of the locals?  So that Olympic officials can congratulate themselves on the way the locals were whipped into line to minimize any inconvenience they faced?

Welcome to the true spirit of the Olympics.  Its rings stand for corporatism, cronyism, extravagance, bullying and arrogance.  The sensible course is to be as far from it as I can be until it's all over.

In August 2006 the Adam Smith Institute produced its own (and only) wristbands.  People were being urged at the time to "Make Poverty History."  While it would be nice if it happened, the slogan was largely empty in that it did not involve actually doing anything. 

Our case was that no country has ever emerged from poverty through development aid, and no country has ever done it without trade.  To us that seemed to suggest that opening our markets to their goods might help them more than sloganeering would.

Trade creates wealth.  Full stop.  The rich countries did not become so by stealing wealth from others; they did it by creating wealth through trade.  When people exchange, each gains something they value more in return for something they value less, and both become richer.

Our wristbands said "I buy goods from poorer countries," expressing something people actually do about relieving poverty, as opposed to sloganeering.  The wristbands were made, of course, in poorer countries, and we produced thousands of them.  We sent one free to anyone who gave us a mailing address, and they went all over the world.  We had a second batch made, then a third, then we stopped.  We still have requests come in, years later, but the stock is long gone.

The arguments against free trade have not gone, however.  We said then:

"The trade which can lift peoples out of poverty is assailed from many directions. A motley assortment of protectionists and anti-capitalists use every argument they can lay their hands on to protect their interests. From the CAP to ‘food miles,’ the effect is to deny poorer people the chance to gain wealth by selling us what they produce."

Alas this is still true.  In straitened times we are urged to buy local, and protectionism is urged to protect domestic industries.  This is just a concealed tax, in which we become poorer by paying more for goods and services that free trade would have given us more cheaply.  We become poorer through protectionism, while poorer countries are denied the chance to become richer.  This is as bad a deal now as it was then, and as it always will be.

A series of news items on cash in recent days underscore the perversity of the world’s  economic situation. What they all have in common is the growing piles of cash around the world that no one knows what to do with. Consider these items:

• Some fund managers like JPMorgan Chase, BlackRock and Goldman Sachs have closed some money market funds, notably those denominated in euros, to new customers. More money at current low rates would just hurt current holders.
• A survey by the Association of Finance Professionals which represents US corporate treasurers found that 41% of them have more cash than ever before and expect that to grow. More interestingly, they’ve more of that pile - over 50% - sitting in simple bank accounts than six years ago when it was just 23%. These treasurers are eschewing capital markets because returns are too low to justify the risk. In short, they’re more comfortable holding a depreciating asset (cash) than risky longer-dated securities.
• The European Central Bank reported that funds kept at its overnight deposit facility fell in the week after its rate cuts to €325 billion from €809 billion but it all merely moved to the ECB’s current account facilities. Jens Larsen, chief European economist at RBC Capital Markets said. “The real concern for the ECB is not whether banks keep money in one account or the other, but whether the cut in rates has any effect on credit creation and real economic activity.” Clearly no.

Switzerland’s central bank is estimated to have spent some 62 billion Swiss francs (about $63.7 billion) buying up euros in June, up from CHF52 billion in May to prevent appreciation of the franc. One analyst said clients are wondering whether other policies will be needed “to slow capital inflows either through capital controls or negative rates." Those diligent, hard-working and prudent Swiss are wasting their resources buying piles of foreign cash they don’t need.

These are vast sums sloshing around wastefully but in a completely rational response to utter fear of the future. Like medieval peasants hiding copper pennies from rampaging barbarians, some of the smartest people on earth are happier sleeping on a lumpy mattress than investing in the future.

Monetary policy has run its course. Zero interest rates and quantitative easing may have saved the world’s banks from collapsing but now there’s not much point in pushing those strings anymore. As for fiscal policy, that’s also been exhausted – not even the mighty Keynes could have imagined the budget deficits and national debts from Japan to Europe to America.

Confidence in the productive sector remains low. How about some real-world policies that investors can believe in? Like completing Europe’s single market in services and unifying the disparate patent systems? Or simplifying tax codes that do away with special breaks, tax shelters and market distortions in favour of uniform but much lower tax rates – Reagan’s wistful tax return on a postcard ? Or making it easier to fire redundant or poor workers to encourage hiring anyone the first place?

Any of these would do more for confidence and growth than yet more container loads of cash. 

There's an interesting little number that comes out of the TUC's number crunching on the tax and income redistribution system. One that leads to a very interesting question: how much income redistribution is enough? What is an acceptable level of equality in other words?

The effect of taxes and benefits is to reduce an original income disparity of 29.6 to 1 to a final income ratio of 6.3.

This is using deciles and it is the median income of each decile so it's not capturing the effects at the very top, the 1%, very well. Leaving that aside though, what do we think is an acceptable level of inequality that the society should have?

I start from some fairly basic points: I doubt very much that any of us here think there shouldn't be a safety net of some sort. Maybe not the one we have (and I'd agree with that) but the idea that somehow society collectively provides for those who cannot for themselves would gain 100% support, no? Once that principle is conceded then there is going to be some redistribution of incomes. The question I'm interested in is, well, when have we redistributed enough?

The TUC's figures show, to personalise the income deciles, that someone who studied medicine for 7 years (yes, fully qualified doctors will all be in that top decile) plus a first degree are enjoying 7 times the income of someone who has never worked and is reliant upon benefits (could be anywhere in the first three deciles dependent upon family size and circumstances).

Is that enough redistribution? Not enough? And why either way?

My personal answer would be that's too much. Certainly I'd say that an airtight case can be made against further redistribution: we're done here, problem's over. But I'd be interested to hear your views. How much equality is enough?

Sam and I have been patting ourselves on the back for working out that the best and simplest way of increasing the incomes of the poor is to stop taxing them so bloody much. Raise the income tax and NI limits so as to pull all of those we define as poor out of such tax nets. We were thinking around the level of the minimum wage, around the £12,000 a year sort of level. And now I find out that we're being outflanked by people even more liberal than we are:

Both authors agreed a longer term vision to fundamentally restructure the tax and benefit system. This includes a personal allowance of £20,000 which would take half of the population out of paying income tax altogether, but would leave those earning above £36,000 contributing more because of changes in tax rates.

Well, not quite, for we're suggesting lifting the burdens of national insurance as well in a manner that they are not quite.

But even with that I'd be entirely happy to go to £20,000. But I don't think it will happen. For the quite simple reason that those people left don't have enough money to pay for the amount of government our governors wish us to have.

You see, there are two constraints to how much taxation can be squeezed out of the population. The first is this one that we're arguing about now: the morality of insisting that the poor hand over widow's mites in order to pay for bureaucrats. We're all tending towards the view that this should not be happening. On the very simple and basic moral grounds that they're poor dammit and should be keeping what money they do have. To take half the working population out of the direct taxation net is just fine by me on this very basis. I've no problem at all with it being the rich that pay for everything.

The thing is, the reason it won't happen, is that there will be a lot fewer everythings provided by government if this does happen: for there really is a Laffer Curve. A rate above which you get less revenue for higher rates. A general consensus seems to be forming that this is at around the 50-55% level for all taxes on income or, with our current NI and income tax system, a top rate income of 45% or so. On capital gains taxes, around 25-30% (compare with our current 28%). Now if that's true then there isn't any room to take more tax from the top end. We reduce tax from the poor, yes, this is excellent on moral grounds. We cannot get more tax from the rich (we can increase tax rates but we won't get more money). Thus the only way to make all of this balance is to have less government.

Which I, I have to admit, am entirely happy with.