FCA in Wonderland

The Financial Conduct Authority’s latest attempt to justify its own existence should be datelined 1st, not 5th, April. Their 2016/17 Business Plan is primarily addressed to risk. For example, the Chancellor’s decision to allow pensioners to spend their own money carries the risk that they will not do so as the FCA would like them to do. This is clearly intolerable. Fortunately “Our intelligence-led [sic] approach allows us to bring together information both externally derived and from across the FCA to develop a cohesive view of the risks, issues, challenges and opportunities in a particular sector, viewed through a number of different lenses.” (p.12) Not a lot of pensioners can do that.

These lenses do not seem to include the problem the FCA itself has created by driving so many Independent Financial Advisers out of business and thereby depriving future pensioners of the advice they need. They do, however, recognise that their hounding of banks and others, e.g. for mis-selling, has led to larger financial institutions “de-risking” their products, thereby reducing consumer choice and competition.

“We know that de-risking by banks is causing problems for some groups of consumers. While we do not control this process, we are undertaking work to help address the issue. We will complete our de-risking impact assessment in Q1 2016, giving us a clearer picture of the nature, scale and drivers of de-risking. We will work with Government, firms and others to create a proportionate strategic response.” (p.27).

The word “strategic” in that does not accord with the FCA’s continuing efforts to micro-manage the sector. The strategy we need is to return the sector to being a normal competitive market with brands, variety, innovation and consumer choice. By all means let us have a Which?-type organisation to critique and compare offerings and of course the financial sector should be included within the remit of the Competition and Markets Authority (CMA) to ensure fair trade. What we do not need is non-stop fiddling with detailed rules no one understands.

The risk-averse FCA 2016/17 plan contrasts with the speech of 6th April by Alex Chisholm, CEO of the CMA. The latter is broad in concept, technologically up to date and welcoming of innovation.

UK financial services are less at risk from Brexit, or remaining in the EU, than from the FCA’s preoccupation with risk, much of it created by the FCA itself. The only strategy it needs is self-immolation.   

Legally Bonged: Why The Psychoactive Substances Act should go up in smoke

Cannabis is the biggest player in the EU drugs market, outstripping cocaine and heroin to snatch up 38% of the estimated 24 billion euro industry, and yet the UK police force have this week revealed under a Freedom of Information request that their officers are making half the arrests for possession they did five years ago.

Despite arrests dropping from 35,367 in 2010 to 9,115 arrests in 2015, consumption has stayed stable at around 7% of the population during that period.

Numerous studies have shown, including one from the Home Office back in 2014, that it is not clear that decriminalisation has an impact on levels of drug use and that decriminalisation can significantly reduce the burden on criminal justice systems. With Durham police admitting that they are no longer targeting or investigating cannabis users “so as to free up staff to deal with things that are more important” you should rightfully question why yet another restrictive drug law was planned to come into force today.

The Psychoactive Substances Act, whose debut was scheduled for today, would make it an offence to produce, supply or offer to supply any psychoactive substance if it is likely to be used for its psychoactive effects and regardless of its potential for harm.

However, the legislation has been delayed as the European Monitoring Centre for Drugs and Drug Addiction (EMCDDA) warned that it was unlikely the Act would go any way towards stemming the flow of designer drugs onto the market, partnered with continuing confusion about what the term ‘psychoactive substances’ actually covers and a worry that under the current definition of a psychoactive substance, or lack of, the Act is not enforceable by the police. 

We urgently need an honest discussion of the law’s limitations. Our ABC classification system is far too simplistic, failing to differentiate between drugs in terms of overall harm or addictiveness, with extremely harmful drugs like heroin grouped together with ecstasy, which is statistically less dangerous to users than horse riding.

Beyond the limitations of imposing our drug laws, drug prohibition hands criminals an underground market worth over £200bn annually worldwide, and is responsible for deaths of thousands of people every year.

Just as incredibly destructive drugs like crystal meth and crack cocaine emerged from a clampdown on less risky drugs, so legal highs fill a void for the recreational drug user. A 'blanket ban' on psychoactive substances may eliminate high street 'head shops', but will push trade underground and encourage a slew of new, even more dangerous alternatives.

The fact that everyday substances like caffeine, alcohol and tobacco will be covered by such a ban (and have to be exempted) just shows how all-encompassing and heavy-handed such an approach is. To reduce harm from drug use the government should instead legalise recreational drugs like cannabis, ecstasy and cocaine so they are available with rigorous safety controls. This unworkable new Act will merely push the industry further into the dark, and frankly they’d be wise to put it in their pipe and smoke it.

Haven Is A Place On Earth

The BBC is making (not reporting) the news again, to the delight of high-taxing politicians. The fact that some chum of Putin has parked (presumably) ill-gotten millions in Panama provides a convenient excuse to close down low-tax jurisdictions. And the idea that rich folks like David Cameron’s dad save tax by sending their cash abroad stimulates enough public envy to provide the support.

The two are different, of course. Theft, fraud, tax evasion and money-laundering are rightly illegal: any firm or country that helps mafia bosses or dictators conceal stolen millions should be exposed and punished. But if you work within the rules and find ways to cut your tax bill, or invest your money in some place where it won’t be taxed within an inch of its life, that is legal and should remain so. Indeed, low-tax jurisdictions act as a safety valve that makes it harder for politicians to oppress their citizens with crippling taxes. 

But it is too easy for those politicians to lump together the illegal evasion with the legal avoidance and say that both should be swept away. 

In fact, criminals generally launder money at home, because it's far riskier to move it across borders; tackling that problem should start at home. The stock in trade of the low tax jurisdictions is actually ordinary people who put their modest lifetime savings into a respected insurance company based in Jersey, or the Isle of Man, or Luxembourg, or Switzerland. Then their savings can grow without being constantly eroded by the tax authorities.

That is why politicians hate them. They know that if other places have lower taxes, people will move their money (or their businesses, or even themselves) abroad – so their citizens can no longer be taxed with impunity. It’s pure tax protectionism: governments don’t produce widgets, so they are all in favour of free trade in widgets; but they do produce taxes, so they want to keep out the competition.

Low taxes encourage enterprise, investment, growth and freedom. So low-tax jurisdictions don’t need to flout the rules, and it is insulting to suggest that they do: in fact, many have financial sectors that are better regulated than ours. Rather than try to bully them out of existence, the big countries should ditch their tax protectionism, square up to the competition, lower and simplify their own taxes.

Can prediction markets replace politics?

Marc Andreessen, the Silicon Valley entrepreneur who co-founded Netscape, points out that markets don’t seem to be adjusting prices to reflect future costs from climate change.

Premium coastal vacation real estate prices are skyrocketing, he says. It's an interesting point that suggests that markets may think the dangers of climate change are overblown, although it’s important to try to compare this to the counterfactual. Maybe they’d be even more expensive if climate change wasn’t happening – or maybe there’s a scramble of demand for them now, so people can enjoy them before they're underwater!

But markets can be good ways of predicting the future. To the extent that they are a form of betting on the future, they can be a ‘tax on bullshit’:

I am for betting because I am against bullshit. Bullshit is polluting our discourse and drowning the facts. A bet costs the bullshitter more than the non-bullshitter so the willingness to bet signals honest belief. A bet is a tax on bullshit; and it is a just tax, tribute paid by the bullshitters to those with genuine knowledge.

As this paper outlines, markets generate good predictions for three reasons: 

First, the market mechanism is essentially an algorithm for aggregating information. Second, as superior information will produce monetary rewards, there is a financial incentive for truthful revelation. Third, and finally, the existence of a market provides longer-term incentives for specialization in discovering novel information and trading on it.

The empirical evidence (outlined in that paper) is that markets generate good predictions for these reasons, and are difficult to manipulate – even if someone is willing to spend a lot of money to bet on a particular outcome, other participants’ judgment about the outcome will not change, and there is a significant profit opportunity for them to bring the price back to the equilibrium level. Of course they’re not infallible – good incentives cannot always overcome sheer ignorance – but at least when people are wrong there, they lose out.

Futures markets are essentially large-scale betting exchanges for predictions about the future, aggregating all the individual bets people are willing to make. So to scrape out the confounding factors in the example Andreessen gives, why not set up a pure futures market on climate? What will the average global temperature be by 2030, 2040, 2050 and so on?

Here there may be a role for government. It would be very socially useful to know what the aggregated best guess about global temperatures in 2050 is, but there isn’t any demand for this so far. There are not enough 'noise traders', who subsidise other futures markets by betting stupidly, for our fantasy climate markets to exist.

So, in order to generate enough volume for the market to be worthwhile, we need to subsidise it: the government pays a premium on top of the standard, market-driven pay-off for winning contracts when the time comes. This may cost several million pounds or even more – a small fraction of the current climate change budget.

We could use this for other purposes as well. Scott Sumner has long advocated an NGDP futures market so that central banks can target the monetary policy variable that really matters, for instance. And we could set up ‘conditional’ markets on policy questions too: “if the government cuts disability benefits this year, how many more people registered as disabled will be below the poverty line next year?” If the government doesn’t do the cuts in the end, all bets are cancelled, so we have a reliable 'what if?' window into the future.

Heck, if we could agree on some end-goal everybody wants, like average wealth levels weighted by the wealth of the bottom decile with red-line rules about freedom of speech and so on, we could replace the legislature with conditional markets. (We could hold regular referendums on what this 'end-goal' should be.) Robin Hanson calls it futarchy. Anyone could propose a policy, and if conditional markets implied that it would raise long-term wealth levels (or whatever we said the end goal was), it would become law.

It’s far-fetched, perhaps, but if it meant we could abolish politics I wouldn’t bet against it. I guess that makes me a noise trader.

How to solve the obesity crisis: turn the central heating down

We have long been, well, how to say this, umm, somewhat unconvinced, of the standard explanations for rising obesity. As we've mentioned just recently, that more people seem likely to die in some decades from popped fat pustules is less of a problem than our older now solved problem of people dying next week from lack of food. But it is still true that rampant obesity, if for no other than aesthetic reasons, isn't to be greatly welcomed.

Yet we just cannot bring ourselves to believe the standard explanations. That it's all to do with increased sugar consumption is obviously nonsense given that sugar consumption per capita has been falling. That it's about increased calorie consumption is also obviously wrong: the average diet today is lower in calories (and significantly so) than the standard WWII ration at which weight would be lost. So, it must be some other cause here, something else is going on.

We have leapt from there to the idea that the major use of energy in mammals is maintaining body temperature. Something of a leap to be sure but that epidemic of obesity is at least correlated with the widespread adoption of central heating across time and countries.

Now we learn that our leap is not simply fanciful:

Elderly adults are bigger around the middle when they turn up the heat inside their homes during the cold season and have smaller waistlines when their homes stay cool, new research finds. Investigators from Japan presented their study results Friday at the Endocrine Society's 98th annual meeting in Boston.

"Although cold exposure may be a trigger of cardiovascular disease, our data suggest that safe and appropriate cold exposure may be an effective preventive measure against obesity," said the study's lead investigator, Keigo Saeki, MD, PhD, of Nara Medical University School of Medicine Department of Community Health and Epidemiology, Nara, Japan.

Cold exposure activates thermogenesis, to generate body heat, in brown fat. This type of fat is the good calorie-burning fat that prior research found most humans have. However, Saeki said the association between the amount of cold exposure and obesity in real life remains unclear.

We can thus junk all the currently fashionable nostrums. It's not killer sugar, not the food industry ramming doughnuts into our gobs, all that is required it to turn the central heating down. Sure, there's no plaudits to be won in fighting against The Man here, no tax revenue to be collected, no social justice warriors to be employed in 5 degrees today outreach. But it does have the advantage of being consistent with the empirical evidence we have. 

We're eating less, consuming less sugar, keep our homes much warmer than ever before and are getting fat. Given the increase in weight it's likely to be the thing that we've increased, not that we've reduced, to blame.

Logical, evidentially supported, it'll never catch on as public policy, will it? 

We'll chalk this up as a victory for free markets, capitalism and globalisation then

We'll chalk this up as a victory for free markets, capitalism and globalisation then

The Lancet tells us, in shocked and disapproving tones, that there are now more fatty lardbuckets on the planet than there are undernourished people. We simply cannot bring ourselves to think of this as being a bad thing. Rather, we consider it to be a massive victory for the economic policies of the last few decades. A victory for capitalism, free markets and globalisation.

A ridiculously silly complaint about the national living wage

A ridiculously silly complaint about the national living wage

We should emphasise here that we are not in favour of Osborne's new national living wage. The correct answer to some people being perceived as having too low an income is not to start price fixing, messing with the market. Instead it is for those who insist that those incomes are too low to put their hands into their own pockets and top up those incomes they perceive as being too low. Yes, it is simply moral that those doing the insisting do the paying.

Obama is wrong about the difference between capitalism and communism

President Obama recently told Cuban kids not to worry about the philosophy of communism or capitalism, but just go with what works. I have little problem with that because most people are indeed not bothered with matters of philosophy, and we know what works – and it isn’t communism. So if they do what works they will end up as capitalists.

But I do get angry when it is suggested that there is ‘little difference’ to choose between these two philosophy. The trouble is, that there is very little difference between communism and what’s called capitalism these days, largely because our politicians do not understand the philosophy themselves.

Maybe it’s just my recent speed-dating of Ayn Rand rubbing off on me, but I think we need to promote a much deeper understanding of the principles underpinning our system, in particular their ethical roots, nature and results.

Obama, for example, is at pains to point out that capitalism is just fine, provided that we make sure it has a proper ethical dimension. Which shows that he thinks that, by itself, it doesn’t, and that it somehow needs to have morality regulated into it.

Yeah, well what about the ‘moral' basis of communism? It’s not capitalism that murdered 3,000 people a day when it was going strong (add them up: Stalin, Mao, Pol Pot’s purges just for starters). And capitalism at least treats people like human beings rather than as tools in someone else’s thinking, and respects their lives, families and property. In Cuba, you have a cow and because your family is starving you kill it to eat. Then you go to jail because it’s not ‘your’ cow, it’s the state’s cow. How moral is that? 

Sure, you have to be nice to communist leaders if you want them to talk to you and maybe then have an impact on them; but there must be ways of letting them know that as a matter of plain fact, it’s communism that stinks, not capitalism, both in theory and practice. The general mass of their own population, of course, already know that.