The Pin Factory Blog

Margaret, Lady Hodge, has been wibbling on about corporate taxation so much that it's a relief to hear her on another subject. Not that her wibbling gets any better, it's just a different set of things to disagree with her about. This particular outburst contains two classic political illogics:

Margaret Hodge, chairman of the PAC, lambasted the OFT’s regulatory efforts claiming it has “never given a fine to any of the 72,000 firms in this market” and has “very rarely revokes a company’s licence”, The PAC said the OFT spent just £11.5m regulating the market last year - “or £1 for every £15,300 in the market, which is low by comparison with other regulators”, according to the report. The OFT’s “investment in regulation is paltry”, said Ms Hodge. “It could easily have increased its fees, especially to larger credit card companies who only pay a £1,075 fee, and used that income to raise its game as a regulator.”

The first is the complaint that no one has been driven out of business by the regulator. There are two possible reasons why this is: the first being that the regulator isn't trying. The second is that no one is actually breaking the law and thus the regulator has a reason to drive them out of the business. Note that the politician's response is to immediately assume the former reason. For as a politician one just knows that the capitalist bastards are indeed defrauding the good honest folk of the Kingdom. That people just voluntarily borrow and lend money at rates which they find mutually acceptable is not a thesis that can be permitted to cross the synapses.

The second is the assumption that the verity of regulation depends upon how much is spent upon such regulation. More is better here: it's again a classic political delusion. We cannot measure the output of most government activity so we measure instead the input. And thus more is better. By this logic we get the idea that if we spend vast amounts of money on aircraft carriers with no planes then the nation is better defended: look, we've spent lots of money, see?

But what is rather more amusing is the final call:

Ms Hodge added: “It would be a big step forward if consumers were given straightforward information on just how much loans are going to cost them. We would like to see the misleading APR rules ditched and replaced by a legally required statement of the Total Amount Repayable in cash.”

Lady Hodge is going to get into such trouble for that. For the entire capmaign against payday lenders depends upon that very manipulation of the APR. Here's Stella Creasy, a fellow Labour MP to La Hodge, with one of her oft repeated statistics.

The legal loan sharks profiting from the austerity that Britain is currently experiencing. The Consumer Finance Association boasts that it has "intelligent financially-savvy consumers who are making critical, proactive and positive financial decisions every day to help them live within their means whilst coping with the varied challenges of the post-credit crunch era." The Citizens Advice Bureau tells a very different story. They deal with the fallout of a country where companies offering loans with rates of 4,000% cover every town centre and dominate internet and mobile phone advertising.

4,000 % eh? What outrage, such usury!

Except, of course, the APR comes from taking the interest rate and arrangement fee on a loan for one week and then multiplying by 52 and compounding. The actual cost of a £100 loan for a week is more like (and no, I'm not going to do the maths here) £100 for the loan, £20 arrangement fee and £10 in interest. Or for £200, £20 in arrangement fee, £20 in interest and the £200 of the loan. Please do note that these are only examples, not actual numbers.

Now, you or I might look at those numbers and think that £30 on £100 for 7 days is a bit steep. But then we've never been the single mother needing nappies and baby mush on a Friday after The Social has screwed up the benefits payments telling her to come back on Tuesday, have we? However, others in that situation might think that it's a price well worth paying. Which is why the industry exists at all of course.

Which is rather why I expect that call to do away with APR as a measurement to be a suggestion which is swiftly dropped. For to do away with it will rob the campaigners against voluntary association with their greatest weapon: the ability to use badly calculated and horrendous APRs as a scare tactic.

All of which I find most amusing. Lady Hodge manages, by some happenstance, to blunder into a good idea and it will almost certainly be the one she has to drop as a result of political pressure.

I thought this was a very interesting little story:

Massive cuts to social safety nets have led to "destitution, hardship and hunger on a large scale" in Britain, with more than half a million people now forced to rely on food banks for sustenance, key poverty charities have warned in a report.

Welfare changes and mistakes by Jobcentre Plus staff are causing delays in benefits and errors or sanctions, which push vulnerable people into precarious situations, the report from Church Action on Poverty and Oxfam warns.

The charities want an urgent parliamentary inquiry. "The shocking reality is that hundreds of thousands of people in the UK are turning to food aid," said Mark Goldring, Oxfam's chief executive. "Cuts to social safety nets have gone too far, leading to destitution, hardship and hunger on a large scale. It is unacceptable that this is happening in the seventh wealthiest nation on the planet."

A number of reactions are possible: the one that they hope to engender is that we must spend more through the State to alleviate such problems. Although it has to be said that that's not terribly persuasive as they're blaming screw ups by that very State for a goodly portion of the problems.

We could also agree (as I certainly do) that in a country as rich, both compared to history and to the current globe, it is ridiculous that people, absent mental or drugs problems, are going hungry. There is indeed enough wealth around to make sure this does not happen.

The really interesting line though is this:

Food banks may not have the capacity to cope with the increased level of demand.

From which we can deduce that food banks are currently coping. Which leads us to an extremely interesting conclusion.

One of the major screaming matches in this whole "whadda we do about the poor and or incapable?" is that one group tells us that only the State can possibly take responsibility and thus we'd all better cough up our taxes and do as we're told. We also have those who insist that without the State exactions we human beans are empathetic enough that we'll, purely charitably, provide what we think those poor and or incapable need. Now look at what the argument being put forward here is:

As the State withdraws from providing some things to the poor and or incapable food banks, those purely voluntary organisations, are taking up the strain. This therefore proves that the State must provide all.

It's not an argument that works, is it? It's very much evidence for the other side of the shouting: that private charity is indeed, possibly only at times, a viable alternative to State provision. For you really cannot use the growth of private provision as an argument that only State provision can work which is what is being tried on here.

No, I don't therefore conclude that therefore there should be no State provision. Only that the existence, the recent growth in, food banks show that the alleviation of poverty, hunger, is not something that is necessarily entirely a State competence. For we've actual evidence that as the State retreats that charity does indeed move in.

Over the last three years, the caseload of the Financial Ombudsman Service FOS) has soared. The fault lies not with building societies, or insurers, or financial advisers, but with the big banks.

Few complaints come in about Building Societies and those are mostly not supported by the Financial Ombudsman.  The Building Societies are good at dealing with their own complaints.

Not so with the big banks, which generate 74% of Ombudsman complaints, most of which are upheld.  Clearly the banks’ internal complaint procedures do not work.  And market forces do not work either because consumers think the banks are all the same so there is no point in switching.  Or most of them:  when frustrated by Barclays’ incompetence and failure to deal with complaints, I moved to First Direct and the sky is blue again.

No customer is more loyal than one whose complaint has been well handled.  I complained about my breakfast on British Airways once and got a personal letter from Colin Marshall, then the CEO. How can we get banks to satisfy their own customers like that?

Properly managed internal complaints systems would be better for consumers, better for FOS, better for the country at large and better for the banks themselves.   The banks cannot win public trust unless, like the building societies, they cut complaints to the FOS to a trickle and lose few FOS judgements.

What can FOS do about it?  If they charged the banks thumping fines for their poor complaints handling, FOS would be accused of bias, imposing fines just to raise revenue.  Handing the fines over to HM Treasury might mitigate that but maybe not enough.

The big banks are more of a club than a competitive market.  The FSA has to take the rap for that.  By trying to standardise everything, making entry difficult, disallowing failure and fining them all together in an effort to be fair, the regulator has done no service to the consumer.  The new Financial Conduct Authority talks competition but nobody has any idea of how that will be achieved. Maybe the FCA has no idea either.  The FOS could make a start by singling out and publishing the best and the worst performer of the month so that the odium can be targeted, not shared equally.

The FCA should be closed down immediately and these matters left to the FOS. That would deal with the boundary issues between them.  The suggestion that regulators look forward but the FOS looks back is nonsense: for ten years the regulators have lagged far behind the FOS – which at least has its ear to real customers in the real world.

Chang's eighteenth is the regulation can sometimes be good for business, even if business doesn't think so, therefore we should not rail against the regulation of business. This is certainly true to some extent: regulations against trading while insolvent are most certainly helpful to clearing out the deadwood of zombie enterprises from the economy, to the benefit of all other businesses. But that isn't of course, quite what Chang means. His meaning rather is that a benevolent government will stop business doing things that might be extremely worthwhile in the short term but will have bad long term effects. An example of his is that companies in poor countries should be barred from importing old technologies. As this could lock them into a sub-optimal development path, perhaps they should be forced into importing more expensive, more up to date, technology even at that short term cost.

This is an argument to which there are a number of answers. The first and most obvious being, well, what evidence do we have that any random group of bureaucrats or politicians are capable of recognising a technology, let alone an appropriate one? This isn't a skill that is notable in the currently advanced economies after all: vide any and all governmental computing projects. We'll not dwell too long on the way in which in currently poor countries what is an appropriate technology, or supplier of, tends to be influenced by how fine the new car of the licensing bureaucrat's mistress is either. Nor who paid for it. And a third objection would of course be what the hell's it got to do with the government what technology a private company installs?

But this is Chang's point of course: that it is indeed the government's business whether I use (in my current project) wet or dry gravitational separation and that there is indeed a bureaucrat or politician somewhere who knows the answer. I think not: and no doubt I am near blasphemous given that my basic project is to recreate a process that the Socialist Government of this country I'm in closed down in 1952.

What Chang's insistence is missing though is that we've only actually got one process that reveals to us whether a technology is appropriate or not: that's its interaction with the rest of the world through the free market. As before, we are uncertain about the future. We simply do not know what future conditions are going to be. The only method we have of dealing with that uncertainty is to try lots of things and see what does survive in the conditions that happen. Which really does mean that we cannot centrally plan what we do, detail which technologies who should use from the Ministeriums, simply because that will not allow enough variety.

There's a possibility of redemption in this comment of Chang's:

The story of GM teaches us some salutary lessons about the potential conflicts between corporate and national interests - what is good for a company, how important it may be, may not be good for the country.

This is most certainly true: but Chang then manages to get it entirely the wrong way around. Leave aside the now ritual complaint that we shouldn't be talking about the country, or the nation, but the economy, which is a very different thing. Chang avers that government planning and co-management of those large firms like GM will help them to survive in the long term. Which is entirely true, large firms can indeed co-manage government to aid in ensuring the survival of them. The way they do this is by manipulating the desire of the politicians and the bureaucrats to regulate. The burden of regulation is much easier for a large firm to carry than the same burden is for the small and snappy competitor chasing at its heels. Regulation thus becomes a wall keeping out that free market competition which is the gale behind capitalism's creative destruction.

And that's really what is wrong with the idea of extensive regulation of industry. That it is actually bad for the economy in and of itself as it protects the corporate dinosaurs who can manipulate it at the expense of new competitors and the consumers.

Another way of putting this: even if all of those who implemented regulation were the omniscient philosopher kings that Chang assumes inhabit our ministries (rather than the bumblers who do), regulation is still bad for the economy as a whole over time. For regulation protects the incumbents. And the important thing we know about this capitalist and market system is that advances come not from incumbents developing but from their being replaced. It is market entrance and exit that drives the system, not the development of the current market players. Thus a system of regulation such as Chang proposes, one that protects the incumbents at the expense of the newcomers is going to be bad for the economy in the longer term. Even, dare I say it, for the nation.

Summary: The Italian banking system’s balance sheet is expanding – this could be good news

What the chart shows: The chart shows the change in the size of the consolidated balance sheet of Italian and German MFIs, set to an index of September 20081=100

Why is the chart important: The bulk of banks’ assets are loans to the public, corporate or household sectors. The bulk of their assets are deposits held by the non-bank private sector. These make up most of what we refer to as ‘money’ (cash is actually quite irrelevant). If banks’ balance sheets are shrinking, the amount of money (and credit) in the economy are probably also shrinking. This is bad news for economic growth. Expanding bank balance sheets usually mean the stock of money is growing and there is scope for more lending. Although the Italian economy is currently very weak, the expanding bank balance sheets therefore hold out at least the hope of a possible improvement.

Chart and comments provided by Stein Brothers (UK) www.steinbrothers.co.uk

In Thing 17 Chang tells us that the current preoccupation with extending access to higher education is grossly wrong. It might well be true that more people should enjoy three years at the gleaming spires (and in the modern world, the booze, babes or boys to choice) and we are indeed in a richer world so why not? We do expect to take some portion of our ever increasing wealth in more leisure and there's no reason at all why this shouldn't be three years at the start of working life rather than more days off during it or more years of senescence after it. But if we think that more of this higher education is going to make us all richer then we're simply wrong. In this argument Chang is absolutely and completely correct.

Even the blind Haplorrhini gets a banana sometimes.

As Chang points out, Tony Blair might have caught the zeitgeist with his mantra of "education, education, education", but there's absolutely no evidence at all to show that he was right. Countries with higher further education rates do not have richer economies, ones growing more strongly, ones with higher technologies. There just isn't, in the actual data, any correlation at all with wealth and university education. Indeed, there's the suggestion that going above the 10-15% of da youf going off to uni is wasteful: we just end up in a signalling game rather than actually teaching anyone anything that's useful in terms of working life.That 10-15% that Switzerland had until recently and we had historically.

Given that so very little of what we're ever actually taught at university is ever used in a job (other than teaching the next cohort through uni) this shouldn't come as all that much of a surprise.

We might also muse on the fact that Chang's book has been very popular among the Guardianista classes. Haven't seen any of them mentioning this point though. Funny that.

I would take issue with only one of his points.

"What really matters in the determination of national prosperity is not the educational levels of individuals but the nation's ability to organise individuals into enterprises with high productivity".

I would replace national and nation there with economics and economy. For the nation state isn't actually the determinant of that ability to organise into such enterprises with high productivity. Indeed, one of the major points we can make about the UK is that absolutely it isn't.

London, The City at least, is organised into a global economy that connects Hong Kong, Singapore, New York and a number of other lesser international legal, financial and banking centres. London is also the richest of the EU statistical units (ie, not nation states, next level down). Cornwall, parts of the North, the bin ends of Wales and Scotland, are some of the poorest such regions in the EU. It is the ability of an economy to organise high productivity, not the ability of a nation to do so, which is important.

Perhaps you might think this a trivial distinction. But if we keep on getting all national about these things then we'll become both nationalist and statist. Which is very much the point we shouldn't be taking from this. If such high productivity can be organised across national boundaries, without national governments doing the planning or the regulating, then we know that the creation of those high productivity enterprises is not dependent upon the nation or the State, don't we? Nor even that "helping hand" of government.

Tax Freedom Day—the day when the average UK resident finishes paying George Osborne and begins putting money in her own pocket—is finally upon us.

After 150 days of sending all our money to the Treasury, we can earn for ourselves over the rest of the year.

The ASI's Director, Dr Eamonn Butler, says “Tax Freedom Day, which the Adam Smith Institute has been calculating for 25 years, is the plainest way to show what the tax burden really is. That is why the Treasury hates it. They of course want to conceal how much tax we pay, which is why they are so keen on stealth taxes.”

“But we put in every tax, including stealth taxes – income tax, national insurance, council tax, excise duties, air passenger taxes, fuel and vehicle taxes and all the rest – and show just how long the average person has to work to pay their share of them all. The stark truth is that this burden costs us all 150 days of hard labour every year. That's not how long a rich person has to work – it is the time the average person must labour for the tax collectors.”

“In the Middle Ages a serf only had to work four months of the year for the feudal landlord, whereas in modern Britain people have to toil five months for Osborne’s tax gatherers.”

“An increasing number of economists believe that Britain's taxes are too high and are choking off recovery. Some politicians say they need to keep taxes high in order to balance the government's books. But the trouble with governments is that they always spend everything they raise in tax – and then as much more as they can get away with through borrowing. Just as the rest of us have had to cut back, so should the government. The UK economy would be a lot healthier for it.”

Steve Baker, Conservative MP and member of the executive of the 1922 committee, adds: “Many congratulations to the Adam Smith Institute for once again revealing the shocking truth about taxes and overspending. This doomsday machine of deficit spending, debt and currency debasement will eventually blow up and there is no kindness in pretending otherwise. Politicians who are serious about the prosperity of our country and the wellbeing of the poorest within it should take note.”

For more information see our press release or our Tax Freedom Day page.

Britain's Ministry of Justice is considering "wholesale privatization" of the courts and tribunal service. Quite right too. Anyone who has seen the country's courts in action knows how inefficient they are, to the frustration of all who use them. That is because they are a monopoly, and monopolies do not have to please their customers – in this case, not just the public who use them but the taxpayers who fund them.

The Adam Smith Institute advocated privatization of the court system decades ago in its Omega Report and the replacement of civil courts with a system of arbitration. Some of this has been started, falteringly. It is time to bring a new, privatised vision to the sector.

The legal profession more generally needs reform too. Its trade union and its standards bodies are pretty much the same thing. Again, it is a closed shop. While the ability to represent people in court has been opened up somewhat, the monopoly remains, just as it does in medicine. Let us hope that the Ministry of Justice's proposals have a clear vision of how we can deliver justice in a more modern way, more competitively, more cheaply and at a higher standard. That is what privatisation usually does.

Our sixtetenth thing is that we're all just too damn stupid to be allowed out without the government nanny holding our hands. Chang doesn't put it in quite these words but but it is his general meaning. He runs through the usual arguments: we free marketeers think that people are rational so allow them to get on with it. Chang says (rightly) that people aren't always rational so they need guidance. When that runs into the problem that the people doing the governing are going to be just as irrational as everyone else Chang then says well, OK, government should simply ban things until we understand them. For example, and it's his example, new financial products should be banned until we understand them.

One major problem with this approach is that the argument for market activity doesn't depend upon rationality. One is, over and above that, that I know my desires better than you know mine. And however much I want to be Prime Minister I don't know yours better than you do. There's thus an extremely strong assumption that I shouldn't be (even if I do become PM) trying to restrict your actions unless there is some over riding reason to do so. What I think best for you ain't good enough. That over rising reason can be found in Mill for example: the proximity of an about to be broken nose to your swinging fist. Chang's argument in favour of regulation doesn't overcome this reason for non-regulation at all.

It's also rather irritating to be told, again, "that as Adam Smith said about the invisible hand". No, he didn't: he used the phrase once in WoN, about the propensity for domestic investment even in the face of the free movement of capital. It was absolutely nothing at all about the glories of market coordination. Grr.

The real heart of Chang's argument is Herbert Simon's point that we humans have bounded rationality. We cannot consider everything so we don't: we're not bright enough to consider the ins and outs of every possible action so we have rules of thumb which we act by. This is undoubtedly true: it's rather the flip side of the idea that we don't particularly maximise utility but we do satisfact (although a purist would argue that by not bothering to think too much, because thinking is hard, we are maximising utility). And there is indeed a great deal of truth in this. Company routines, our own sleep patterns and breakfasts (to use Chang's examples) are based not on rigorous contemplation of all the avaliable options. Rather, on the very limited number of choices that we allow ourselves through our routines or company structures.

Thus, says Chang, the government should impose such regulation on all: and that's the leap that is too far. Yes, even in the face of the uncertainty (no, not risk, uncertainty) about the impact of that new financial instrument.

Think a moment of evolution. We all generally think of it as leading to a certain harmony. Which isn't, as deeper down we know, how it actually is. We've this random mixture going on through mutation, we've a further mixture of genes through mating (in sexual animals at least) and it's the ever changing environment which does the selecting about who and which will survive. That's the only way that life can in fact deal with the inherent uncertainty about future conditions.

You can see where I'm going with this: market processes are an endless repetition of experimentation, much like those gene mutations and mixtures. Which of these experiments will survive depends upon the environment they are tried in. Writing great smartphone apps in 1955 would not have been a path to success: in 2015 it's highly likely to be. And this is exactly why we don't want government building regulation to stop the experimentation. Precisely and exactly because we don't know what the future environment will be and thus don't know what will succeed in it. And because it's uncertainty, not risk, we cannot know: therefore we must not stop the experimentation.

Another way of putting this is that we don't want to regulate market experimentation out of existence because such market actions are precisely the way we find out what is either good or bad. Further, if we don't allow the ideas out into the markets we can never get enough information to know whether they are good or bad: so, in Chang's universe nothing would ever happen because we've lost the very mechanism by which government can decide whether to regulate or allow something.

The final killer for Chang's extreme interpretation of the precautionary principle (for that is what it is) can be explained by anyone who has ever tried to explain something to a politican. You know, the people Chang wants to make all these decisions for the rest of us. They're no brighter than you or me and almost inevitably less well informed. They also have rather different motivations: one becomes a politician with power by spending inordinate amounts of time working out how to gain and hold on to power. Bad incentives, less information and no greater (at best) mental faculty than the rest of us: their rationality is more bounded than our own. This is not a good argument in favour of their being responsible for protecting us from our own bounded rationality.

Tyranny does not come as a thief in the night, but openly. The killing, by two radicalised islamic extremists, of a British soldier on a London street has brought the usual calls to suspend the rule of law. A BBC interview with one radical preacher prompted Home Secretary Theresa May to ask what the state broadcaster thought it was doing by broadcasting such a thing, and Baroness Warsi, formerly a prominent Muslim minister, joined the chorus. The newspapers reported that a ban on radical clerics being covered on the airwaves is being actively discussed.

If so, it won't work. Those with long memories will remember how the UK government tried to prevent the broadcast media carrying interviews with radical politicians from Northern Ireland. That came about after a particularly sickening interview with Sinn Fein leader Gerry Adams on the back of yet another Irish Republican Army murder. The law was duly passed, but the media simply used actors to dub the words of their interviewees, or put the text on screen and had the newsreader read it out.

Frankly, I don't want to hear extremists justifying murder on UK radio and television. It can be pretty revolting, not to mention deeply upsetting for bereaved relatives. But we have – or had – a rule that people should be free to express their opinions, no matter what the rest of us think about them. We have that rule because we believe that, although it may be abused on occasion, and although it may give air to views that might prove damaging, in the long run it is better to have ideas openly expressed and debated. If ideas are good, they will win that debate. If they are bad, they will not.

There is a limit, though, as the libertarian philosopher John Stuart Mill pointed out over a century ago. We do not allow people to say or do things that could cause real damage to others. We do not allow people to shout 'Fire!' in a crowded theatre, and we do not allow them to incite violence. The line between condoning a murder and inciting violence might be a thin one for the broadcasters to tread. But we owe it to the rule of law to try to maintain that line.