The Pin Factory Blog

I think we'd all agree that Britain's banking sector is not exactly covering itself in glory at present? From going bust (variously, from excessive lending to mortgages, from overpaying for a rival bank, by being caught in a wholesale banking run, no, no one went bust because of doing silly things in their investment banks) through to what I'm sure will turn out to be everybody fiddling Libor, it's not been a great few years. Yet let us not forget that there is no problem, no situation, which government cannot make worse.

Take, as an example, what is happening in Argentina.

Fernandez, a center-leftist, is embracing increasingly unorthodox economic policies as she seeks to sustain activity, which analysts say is vulnerable to insufficient credit.

"We're going to tell the 20 principal banks... they have the obligation to lend for production and for investment," Fernandez said in a televised speech.

"The central bank's going to establish the conditions," she said, adding that state-run banks should not have to shoulder the entire responsibility for business loans.

She said the loans would carry a maximum interest rate of the Badlar reference rate, which was 11.9pc per year for private banks in June, plus 400 basis points. The minimum loan period would be three years.

With inflation at 25% that's an immediate loss of some 30% for the lending banks. And just as a thought, who would want to be increasing the money supply, the availability of credit, when inflation is 25%? As Uncle Milt taught us, inflation is always and everywhere a monetary phenomenon after all.

Now we don't have anyone advocating this in the UK, not yet. But we do have plenty of people calling for a State owned investment bank. The only reason for such being to insist upon financing going to things which the market unadorned will not finance: that's the whole point of having the State part. And by definition if money is to be forced into politically approved lending then it will be at a lower price than the market will provide: the Argentinian point writ small.

For the problem to become as bad as it is in Argentina we would need our own policy to be determined by increasingly unorthodox leftists. Fortunately, such are limited to nef, Anne Pettifor, Richard Murphy, Neal Lawson, Compass, half the Trade Unions, Seumas Milne and a goodly portion of the Labour Party. I hope you find that as comforting as I do.

Having lots of shiny new infrastructure sounds like a really cool idea. Put the unemployed to work and get some asset that will enrich us all for the next 50 years or so. However, whatever it is that we do we do have to do a cost benefit analysis. How much is it going to cost us to do something and what is the benefit we get from having done so? And it is here that the case for HS 2 fails I'm afraid.

Such a cost benefit analysis was done for the train line. As is normal in these things it is the saving of time that contributes the greatest benefit. The assumption is that if you're locked up in a train carriage you cannot be doing productive things like meeting people, working, talking. Thus the time spent on a train is valued as a cost, a cost equal to the value of your time when you are working. This has the obvious effect of making the time of some senior businessman sitting in first class worth more than the kiddies on awayday tickets in cattle: but so be it, that's just the way the sums are done.

It is on this basis that the case for HS 2 rests. No, really, it does, the great girt chunk of the benefits to set against the costs is this calculation that getting people there faster means they spend less time unproductive and more time productive: less time in carriages unable to work and more time outside them able to do so.

Unfortunately for this case technology has changed:

On-train wireless internet connectivity is growing fast in Europe - but even faster in the UK, which now has more than 2,000 Wi-Fi equipped carriages.

If people are productive while in a train then the benefit of getting them there faster disappears.

That's bad news for High Speed Rail though, as the justification for HS2 (the £17bn high-speed London/Birmingham connection) assumes all travellers are entirely unproductive during transit and thus the 30 minute reduction in travelling time benefits the economy.

At minimum it is necessary to do the sums again so as to take account of that change in the world and the value of time. Then we need to change the basic method of calculation used on all such projects: time that can be spent online is not unproductive these days thus we have to change the way that we do all such sums.

Amusingly this will affect the relative merits of train and car transport. Time spent stuck in a car really is unproductive: on a train not. So we have greater benefits from making car transport faster than we used to, fewer benefits from making train transport faster than we used to. But we also have greater benefits from having more trains (not faster ones) as this pulls people out of that unproductive time in the car and into productive time on the train.

I have a feeling that doing these calculations properly will lead to something of a change in how we think about rail transport. It could well be that this all makes more local, regional, commuter, lines vible while reducing the case for high speed long distance passenger lines.

We are saddened to learn of the death of Adam Smith Institute author Dr Barry Bracewell-Milnes.

Bracewell-Milnes was one of the earliest supporters of the Adam Smith Institute in the late 1970s, and became a regular speaker at our conferences and events. A meticulous tax economist – who was for many years economic adviser to the Institute of Directors – he spent much of his life arguing passionately that taxes on capital were counterproductive and damaging.

For the Adam Smith Institute, his publications included False Economy and Captive Capital, each arguing strongly against plans to align capital gains tax rates with the income tax rate. The presumption was that a divergence between the two rates enabled some people to take income in the form of capital gains rather than income, and so avoid tax. Bracewell-Milnes demonstrated that only a tiny handful of people actually had this option, and that the problem was easily policed. Indeed, some countries (such as Hong Kong at the time) had no capital gains tax at all, and were completely relaxed about it. But what high rates of capital gains taxes did was to drive investment offshore, and lock people into out-of-date investments that they should really cash in but did not, simply because they feared or resented the amount of tax they would have to pay. This lock-in made capital less productive and damaged the whole economy.

Bracewell-Milnes also railed against inheritance taxes, which he saw as another tax on capital. For the Adam Smith Institute, he wrote Free Wills and Inheritance Without Taxation on this subject. Extending his capital gains arguments, he showed how inheritance taxes similarly trapped people into inefficient investments, because people tried to protect their capital against the tax, rather than investing it in the most productive way. Again, the result was a net loss to the economy. Indeed, Bracewell-Milnes calculated that death duties and inheritance taxes had actually produced a net loss for the economy in every year of their century-long history. A deeply religious man, he also objected to how inheritance taxes hit families at the worst times of their lives and ran counter to the natural human instinct to provide for and help one's relations and friends. It was better, he thought, to abolish the tax entirely: and he even convinced John Major's government to do that, but too late in their period of office, unfortunately, for that conversion to have any effect.

Other taxes too came under the Bracewell-Milnes searchlight, including changes to Britain's little-understood advance corporation tax, which (he said in An ACT Against Trade were deeply damaging to business). In A Disorderly House, he also dismantled the arguments for raising alcohol duties, and exposed the illogicality of EU alcohol taxes, which he felt were largely the random result of horse-trading by countries anxious to protect their own production, and which were especially damaging to Britain's beer and Scotch whisky producers.

Bracewell-Milnes's arguments remain very relevant today – witness recent debates in the UK on capital tax rates and minimum alcohol pricing. Today's politicians and lobbyists would do well to review the clear and comprehensive arguments in his Adam Smith Institute publications. We shall miss him, not just as a powerful advocate of lower taxes, but as a good friend.

In this month's Reason Magazine (whose parent, the Reason Foundation, is now home to our own Tom Clougherty), Tim Cavanaugh writes that rail screws the poor:

Since 2009 the MTA has added eight miles of train service, at a capital cost of about $2 billion. These new trains, the Expo Line and an extension of the east-county Gold Line, carry a total of about 39,000 people a day.

In the meantime, the cash-strapped authority radically reduced bus service twice: It cut bus lines by 4 percent in 2010 and 12 percent in 2011. These cuts were made even though buses move more than four times as many Angelenos as trains do. In 2009 MTA buses carried about 1.2 million riders a day. Multiplying that by 16 percent, we can estimate more than 180,000 people had their service canceled while fewer than 40,000 had service introduced.

Not surprisingly, the result is that fewer people are using mass transit overall in Los Angeles than in 2009 (about 5 percent fewer, according to MTA statistics).This is a continuation of a long-term trend. Since the MTA began rail construction in 1985, more than 80 miles of railroads have been built, but mass transit ridership as a percentage of county population is lower than it was in 1985....

Bus riders are overwhelmingly poor and working class. As a regular rider I can attest that often the only English spoken on an L.A. bus is the robotic voice that announces upcoming stops Bus riders are overwhelmingly poor and working class. As a regular rider I can attest that often the only English spoken on an L.A. bus is the robotic voice that announces upcoming stops.

This rings some bells here in London, where the government is cutting back on bus funding while driving £100m into suburban rail and a whopping £16bn into Crossrail (not to mention the money-sink that is HS2, though that may be being kicked into the long grass). While Crossrail will serve the East as well as the West, it's hard not to wonder if we're going to see exactly the same thing here as happened in L.A..

This may be unsurprising — the 'donut voters' in London's suburbs are the key swing votes in London's elections, and bus services are less useful for them than train lines into the capital. There's not much to say, in this case. Politics is politics. But maybe that's the point: government, especially local government, doesn't always act with the needs of the bottom in mind. Votes and politicians' pride can matter, and it's a risky endeavour to entrust the interests of the bottom to the whims of the voting majority, who may simply be ignorant of the importance of, say, bus routes instead of suburban rail.

The UK's experience with bus deregulation has, so far, been mixed, but certainly not a failure. If the government is going to follow L.A.'s lead, the best alternative might be to take these decisions out of the hands of government altogether, and try to create an environment where it's possible for private firms to compete and try to offer something for everyone. 

Good predictions are hard to find. Economics in particular has seen more than its fair share of bad predictions. Not to go too deep in history and examine the predictions on the demise of the Soviet Union and communism in general (here's what Paul Samuelson had to say), just recall how many pundits claimed in November 2011 that the Eurozone would break up by the New Year? [I admit it, I fell for that one — ed.]

And yet it still stands, not out of the gutter quite yet, but still determined to remain and reform. Or how many made the case for the euro and how it will increase convergence in Europe, particularly in the area of competitiveness? Or how many out there though that the housing prices never fall which is why it could be a good idea to package mortgage loans into securities? (this type of mentality was best explained in Reinhart and Rogoff’s book This Time is Different). This just means that not even the most notable forecasters out there are necessarily always correct.

However, EconLog's David Henderson pointed out yesterday (the 4th of July) how Adam Smith goes did make some strikingly precise predictions. In his 1776 The Wealth of Nations he had this to say on the outcomes of the 13 colonies' independence war, Britain's possible and likely reactions and, most impressively, the further development path of the newly founded nation:

"To propose that Great Britain should voluntarily give up all authority over her colonies, and leave them to elect their own magistrates, to enact their own laws, and to make peace and war as they might think proper, would be to propose such a measure as never was, and never will be adopted, by any nation in the world. No nation ever voluntarily gave up the dominion of any province, how troublesome soever it might be to govern it, and how small soever the revenue which it afforded might be in proportion to the expence which it occasioned. Such sacrifices, though they might frequently be agreeable to the interest, are always mortifying to the pride of every nation, and what is perhaps of still greater consequence, they are always contrary to the private interest of the governing part of it, who would thereby be deprived of the disposal of many places of trust and profit, of many opportunities of acquiring wealth and distinction, which the possession of the most turbulent, and, to the great body of the people, the most unprofitable province seldom fails to afford. The most visionary enthusiast would scarce be capable of proposing such a measure with any serious hopes at least of its ever being adopted.

"If it was adopted, however, Great Britain would not only be immediately freed from the whole annual expence of the peace establishment of the colonies, but mightsettle with them such a treaty of commerce as would effectually secure to her a free trade, more advantageous to the great body of the people, though less so to the merchants, than the monopoly which she at present enjoys. By thus parting good friends, the natural affection of the colonies to the mother country which, perhaps, our late dissensions have well nigh extinguished, would quickly revive. It might dispose them not only to respect, for whole centuries together, that treaty of commerce which they had concluded with us at parting, but to favour us in war as well as in trade, and, instead of turbulent and factious subjects, to become our most faithful, affectionate, and generous allies..."

"They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone. The persons who now govern the resolutions of what they call their continental congress, feel in themselves at this moment a degree of importance which, perhaps, the greatest subjects in Europe scarce feel. From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world."

How's that for a good prediction!

Ed Milliband’s cheap soundbites on the banking crisis could prove very expensive for British taxpayers as wealth from London shifts to the US.  Not only is the US the most litigious nation on earth but one has the impression that they see it as economic warfare.  We cannot be sure but it is at least possible that US firms losing out in the competitive marketplace immediately, but confidentially, cry “foul”. We should be alert to the dangers of firms using regulation as a form of protectionism.

Of course bribing the Saudis to sell warplanes (British Aerospace) and US doctors to sell drugs (GlaxoSmithKlein) is wrong, but ask yourself why, in highly competitive markets, they should be indulging in those expensive practices if their (US) competitors are not.  Is there a possibility that the US suppliers were simply out-bribed? Bear it mind that they have to be a lot more careful as their boards loaded with lawyers as ours are not.

Following the BP catastrophe in the Gulf of Mexico, President Obama stoked up the compensation claims by stressing the word British in BP.  He apologised later but the damage was done. So the US taxpayer makes up on fining foreigners what they lose in the marketplace.

Law-breaking individuals should certainly be prosecuted and penalised.  At the same time it is clear that Barclays and the other banks involved were not corrupt as corporations.  Even if senior executives knew of malpractice, the Boards certainly did not, still less the vast majority of employees.

Three quarters of the fines already levied on Barclays were by US regulators.  There is a tsunami of other fines and damages in the course of being claimed by US regulators, state and city governments, e.g. Baltimore, and private individuals.

Fining by UK regulators is one thing.  There is less of an incentive for the government to collude with firms to keep out certain groups of competitors.  Penalties and fines transferring to the US is quite another matter and it needs to be balanced.  And where are the British lawsuits against US interests?  Would we even be allowed to hold such suits in British law courts as Pax Americana has tended to be weighted in their direction?  Should corporations foot the bill for what a tiny minority of employees have done?  Should actions be limited to those employees?

Politicians should be careful what they wish for.  Yes, justice should prevail but it should be speedy and well balanced.  We do not need a judicial enquiry because the consequence could well be the handing over of the UK’s last successful sector, financial services, to the US and its lawyers, through protectionism under the guise of regulation. 

Madsen's "Think Tank - the story of the Adam Smith Institute" continues to attract comment.  The Guardian has just featured a review by Steven Poole, sandwiching Madsen (as he points out with delight) half way between intellectuals and gin!

Madsen is pleased his book merits a notice in the Guardian, though he's not sure about "his Panglossian triumphal march through policy concepts taken up by successive governments, inspired by the institute's "philosophy" of tax-cutting libertarianism."

Most people will probably read the book and then decide for themselves, especially since there's now a Kindle edition of it…

Prime Minister David Cameron has just got to think bigger. His announcement of a parliamentary inquiry into the banking industry as a result of the Libor scandal missed a huge opportunity. Maybe Labour leader Ed Miliband has the right idea with his call for a full-blown independent Leveson-style inquiry into British banking.

This could be the start of a series of inquiries around the country on any number of issues. After all, the music festival business is in decline and the Olympics will soon be over so Ed’s Big Idea could keep the circuses coming.

For one thing, it would help reduce unemployment. Think of all those people at Leveson officiating, supporting, analysing, covering, guarding, pontificating, chauffering or otherwise just hanging around. A smart entrepreneur could even make a profit by charging admission, offering corporate boxes and selling programs, refreshments and cream pies for throwing at the baddies. There might even be a market in DVD box sets. Cameron’s parliamentary inquiry merely recycles the tired bunch in Westminster.

A whole raft of inquiries would also leave politicians with little to do as they await the findings of each inquiry. The longer the inquiry, the better as it would keep the politicians out of mischief. Indeed, once these inquiries really get rolling, who needs Parliament at all? We just await the pronouncements of the wise – like the European Commission.

Here’s just three topics ripe for extended inquiries and loaded with drama, villains, victims, money and passion.

The Brown Deficits: How did the Terminator of boom’n’bust run up huge budget deficits during many years of economic growth? Let’s see the emails from Treasury officials, minutes from meetings with the Bank of England and lists of lobbyists trooping through No. 11. Did Tony Blair ever ask what was going on? Did anyone offer to resign? Lord Sugar would be the clear favourite to chair this one. (“What on earth were you thinking???)

The Housing Bubble: Oh, what a rogues’ gallery of witnesses this would be. NIMBYs restricting supply, estate agents flogging the impossible dream and weak-kneed politicians defending the ultimate tax shelter. Polish plumbers, Russian oligarchs, make-over TV show producers – the possibilities are endless. This inquiry would strike at the heart of the British psyche so two co-chairs would be needed. Ken Livingstone and Boris Johnson?

The Education Mystery: So much money spent to produce so many students with declining skills in literacy, numeracy and foreign languages but increasing ignorance of history, geography and literature. Let’s grill the unions on why no teacher ever gets fired for incompetence. Let’s make the trendy education theorists explain their thinking. And let’s see all the email trails flowing through education ministries, if only to assess whether they were comprehensible. Jeremy Paxman to chair. (“Come on, come on!”)

I've never really understood what Paul Mason of Newsnight is for. On which subject here is a good example. He complains bitterly about how the young people of today have been betrayed by their elders, how today's graduates are going to be poorer than their parents (an insane idea if there ever was one) and then comes to this point:

There are positives. As I've met young activists keen to tell me what their latest protest action's going to be, there is nearly always another story: they've set up an online magazine. No, it's not a collective, it's a business. They've set up a cafe, or a theatre group, or – as in the Andalusian farm I visited – seized abandoned land and planted vegetables.

All those tests, drills, teach-to-exam lectures, and the relentless vocationality of education, has made this generation highly entrepreneurial.

Rachel Rosenfelt, the 23-year-old New Yorker who set up an online publication called The New Inquiry, sums it up: "there is surplus population" of talented young people, with precisely skills a 21st-century infocapitialism would need if it took off. But it is stalled.

Just as they created, out of nothing, forms of protest that broke with the past, this generation is creating forms of business and commerce, literature and art, that live in the cracks left by shrinking GDP and collapsing credit.

Firstly, this is hugely cheering. If we've managed to educate those young into being hugely entrepreneurial then obviously something, against all odds, has gone right with the education system. But it's the larger point (leaving aside the hyperbole of "shrinking GDP") which interests me more.

What does anyone think every new generation has to do in an economy? Look around at what is currently extant, figure out whether there are any gaps in it, look at new and old technologies to see whether they can aid in filling those gaps and then, well, go and be entrepreneurial and go and fill those gaps. That's what growing an economy is: that's how it works, how it happens.

In more formal terms, back to Bob Solow's point that increases in inputs, in resource use, led to only 20% of the 20th century's growth. The other 80% came from increases in total factor productivity. Tfp improvements are just what I've been describing, people looking around and wondering whether there might not be interesting ways of doing things more efficiently.

Mason's essentially describing exactly the processes that led to most of the 20th century's eightfold increase in living standards for the common man.

Now if I were an economics editor at the BBC that's the sort of point that I would be making. But Mason doesn't so what is he for?

Government plans to filter adult content on the internet have in part relied on claims that opposition to them has been merely ideological. In a new ASI report released today, the very practical issues with such measures are laid bare. There already exist scores of options for parents concerned by what their children might see on the internet. This allows for more customisation than the standardised systems ISPs may be mandated to introduce. Such choice is vastly preferable; it is much harder to learn to circumvent a multitude of types of block than a single one.

Rather, a system where ISPs must decide which websites are acceptable and which are not will inevitably lead to a game of fast-paced Whac-A-Mole. New websites containing ‘adult content’ spring up at lightning pace, inevitably some will be missed while other websites are mistakenly blocked. Recent attempts to block such content have been laughable. TalkTalk has previously failed to block leading adult content providers such as PornHub, while innocent users of Google Images could still view thumbnails of pornography and almost any site could be accessed by viewing it through Google Translate.

Filters imposed by government can not replace a parent’s supervision of children or teaching children how to use the internet appropriately. This should be left to parents, and the attempts of Ministers to crowd out this parental responsibility will lead to growing complacency, as many will operate under the assumption that their children are protected.

Such a heavy handed approach does much to damage the internet at large, as websites which have nothing to do with providing explicit content may be obscured from view by the over-zealous censor. Could we expect to see the blocking of Guido Fawkes’ website in reaction to his regular ‘Totty Watch’ feature?

Having to put yourself down on a list in order to use the internet freely is a worrying prospect, and may be necessary for those not even interested in blacklisted content due to over blocking. The possibility of such a list being leaked could be deeply embarrassing.

If this does get implemented, worries about mistakes are not ill founded. As with many a Government IT program, there have been blunders already. The Department for Education’s consultation process has allowed respondents to read all responses (including supposedly confidential personal information).

Do we really want people who don’t even understand the internet enough to ensure basic privacy, to be those deciding how it works?