UK loss on RBS sale: so what

RBS_2588550k.jpg

Bygones are bygones. Or as economists call them, 'sunk costs'. If you invest in something that doesn't pay off, you can kiss your sunk costs goodbye. Just sell for what you can get. Today we are being told that UK taxpayers are going to take a £7bn loss when the government sells its stake in the the mega-bank RBS. Add fees and costs, and it might be £14bn. So what?

When the UK's Labour Chancellor Alastair Darling spent £45bn of our money bailing out RBS – and another £63bn on Lloyd's, Bradford & Bingley, Northern Rock and the rest – he wasn't going through the Financial Times with a highlighter to pick good investments to enrich taxpayers. He was trying to rescue Britain's financial services sector during the financial crash.

For a sector that brings in £66bn a year in taxation, that was a pretty good deal. Yes, you can argue that if he had done nothing, the market would have sorted it out. Or that the government should have simply lent the banks more money. But at the time it was all pretty hair-raising. Banks exist on trust, because if all their customers pull out at the same time the banks don't (usually) have enough cash on hand to repay their deposits. They have lent out that cash to help grow businesses, jobs and prosperity. So when 20,000 queued up to take their savings out of Northern Rock, and the RBS said its cash machines were going to run out of cash in 48 hours, it wasn't unreasonable to do something.

Actually, when you look at that £108bn went, taxpayers are already in pocket. Slices of Lloyd's have already been sold off, and Northern Rock is looking like a really good business again. It depends on your predictions of what the remaining bits are worth, but taxpayers could already be £14bn up on the deal. That's no surprise: the same happened in Sweden when its banking sector was bailed out years ago.

So what of RBS? Bygones are bygones. The bank grew bloated in the boom years, and has had to spend hundreds of millions restructuring. And being involved in just about sort of financial business known to humanity, it has picked up more regulatory penalties than most. So it is trading well below the 502p share price that Alastair Darling bought it at.

But that money was spent, not on buying a bank as an investment, but on buying a bank to save it from utter collapse. Money spent, job done. Bygones are bygones, let's move on.

Should we wait until things improve, so that taxpayers get all their money back? No. After all, as they keep telling us, shares can go down as well as up.

The world is not running out of resources after all, says new ASI monograph

Dollarphotoclub_56772558-e1434014200975.jpg

The depletion of mineral reserves poses no serious threat to society, a new monograph published today by the Adam Smith Institute has concluded. “The No Breakfast Fallacy: Why the Club of Rome was wrong about us running out of resources” argues that outcries over resource availability from environmentalist groups are based on a misinterpretation of numbers and a misunderstanding of what mineral resources actually are.

The monograph, written by Adam Smith Institute Senior Fellow and rare earths expert Tim Worstall, says that groups that have warned about the world running out of rare mineral resources, such as The Club of Rome, have been using the wrong sets of data, mistaking the exhaustion of mineral reserves for the exhaustion of mineral resources.

Mineral reserves, the monograph explains, are simply the minerals that have been prepared for use for the next few decades; they are minerals that can be mined with current technology at current prices. Some reserves are going to run out in the near future, but this is a normal process. Every generation runs out of mineral reserves.

Mineral resources, however, refer to a concentration of minerals of a certain quality and quantity that have shown reasonable prospects for eventual economic extraction. These are much larger than mineral reserves.

Organic farming, for example, may be a useful idea, the monograph asserts, but the idea that it is a necessity because we’re about to run out of inorganic fertilisers is based on a falsehood. The reserves for minerals used in fertilizers may exhaust in the next few hundred years, but the exhaustion of resources is not estimated to occur for 1,400 years for phosphate and 7,300 years for potassium.

The report concludes that efforts to conserve and/or recycle mineral resources are wasteful and often end up being net harms to society, by diverting economic activity from more productive uses.

Senior Fellow at the Adam Smith Institute and author of the report, Tim Worstall, said:

We have a basic problem in our discussion of resource availability. Which is that most of the people in that discussion are grievously misinformed about what a resource is and how much of any of them we might have. It really is true that Paul Ehrlich, Jeremy Grantham, the Club of Rome, Limits to Growth and the rest are looking at the wrong numbers when they consider how much of any mineral or metal there is that we might be able to use.

This is not some arcane economic point. It is not some mystery explained only to the illuminati. Quite simply, most people assume that mineral reserves are what we have left that we can use. This is not so: mineral reserves are only what we have prepared for us to use in the next few decades. As such, it's really no surprise at all that mineral reserves are generally recorded as being going to last for the next few years.

This book explains this simply enough that even a member of the Green Party should be able to grasp the point. We are no more going to run out of usable minerals because we consume mineral reserves than we are to run out of breakfast because we eat the bacon in the fridge.

To read the full press release, click here.

George Osborne's political economy

george-osborne.jpg
We should stop teaching economics in universities and instead teach only political economy. Because every economic policy – every economic law, regulation and rule – has a political origin and a political consequence. (And not always anintended consequence.)
Take, for example, the UK Chancellor George Osborne's proposal for a UK balanced budget law, under which Chancellors would have to seek the permission of Parliament to run a deficit. Pure economists have of course dismissed this as economic illiteracy. When times are bad, they say, government has to spend more, and run deficit budgets, in order to sustain welfare payments and pump-prime the economy.
I'm not even sure this is good economics, since most people can probably spend their own money far more productively than the government can, so leaving people to make their own investments is probably better than having the state invest it for them. And debt is not free – you have to pay interest on it, and that then curbs your freedom of action and makes you poorer.
What I am sure of is that deficit budgets are lousy politics. No, not in the sense that they don't win votes – often, they do – but in the sense that they corrupt and damage the political system. If there is no restraint on how much governments can borrow, then their every incentive is to borrow more and more. Then they can spend more and more (and buy more and more votes) without having to raise taxes. They simply pass the bill on to the next generation.
This is a one-way choice that no human being should be asked to make. The high-spending, high-borrowing route is just too beguiling. You would need to be an angel to resist it, and our politicians are not angels.
This is of the main reasons why political economists from Adam Smith onwards have been worried about the very existence of a national debt. Once you admit the principle, there will be no stopping things. Forget the idea of asking Parliament – yes, it might embarrass them, but they will always support the majority party's spending. Far better to have an inflexible rule that all budgets must balance ... or if you want flexibility, that all budgets must balance over the five-year term of a government. And if not, there are consequences.
Terrible economics, some might complain. But very sound political economy.

These people are insane

smoking.jpg

Yet more from the anti-smoking fanatics:

Smoking costs the NHS at least £2bn a year and a further £10.8bn in wider costs to society, including social-care costs of more than £1bn, says the document. With the public health budget now set to lose £200m a year, the group says that the tobacco industry should pay an annual levy to offset those costs and assist with the effort of stopping young people picking up the habit as well as helping smokers to quit.

Peter Kellner, chair of the report’s editorial board and president of YouGov, said: “The NHS is facing an acute funding shortage and any serious strategy to address this must tackle the causes of preventable ill health.

“The tobacco companies, which last year made over £1bn in profit, are responsible for the premature deaths of 80,000 people in England each year, and should be forced to pay for the harm they cause,” he said.

Sigh, the tobacco companies do not cause that harm. Smokers, voluntarily, cause that harm to themselves and pay taxes through the nose for having done so. And yes, this is a liberal issue. We get to ingest as we wish, we get to kill ourselves with our habits if we so wish because we are free people.

But what raises this to insanity is that the most successful smoking cessation product anyone has ever come out with is the e-cigarette, or vaping. And those very same public health bodies are behind the move to ban the use of such things in Wales. Our apologies, but that really is insane.

Five reasons to support Osborne's budget surplus law

osborne-cuts-spending-announcement.si_.jpg

1. This law makes it harder for governments to run deficits when the economy is healthy. This is a sound approach to the public finances whatever you think the government should do during recessions. Both the Clinton and Blair governments ran surpluses for part of their time in power and they are usually praised for doing so. It's hard to think of a good argument against that. Keynes said in 1937 that, "The boom, not the slump, is the right time for austerity". 2. The law will not prevent deficit spending during recessions. The point is to make deficit spending the exception, not the rule. That also means that deficit spending is much easier if we think we need it – it's easier to go from 0% to -5% than from -5% to -10%. According to Keynesian theory it is the change in spending that matters, not the level. Advocates of fiscal stimulus should love this rule – it makes their policies much easier to implement in busts.

3. Yes, the law can be repealed by an Act of Parliament. So can any other law, that doesn't mean that they're irrelevant. There is inertia in politics and a government that is seen to repeal this kind of law will need a good reason for doing so. Making the public more aware of what's going on with government spending makes politicians more accountable.

4. Even if our models of economics told us that it was better for the government to have as much flexibility over spending as possible, our models of politics tell us that constitution-like rules are a good way of stopping abuses. This is about political economy as well as economics.

5. An honest Keynesian argument would be that the public is too ignorant and will oppose necessary deficit spending, so it's better to keep them in the dark. In this case the argument is simply that monetary policy is clearly and demonstrably just as or more effective than fiscal policy during recessions and depressions (indeed fiscal policy probably only 'works' through the monetary policy channel). The US cut fiscal spending by $85bn/year in 2013 (the "Sequester") which people like Paul Krugman warned would cost 700,000 jobs. Because monetary policy was accommodative under QE3, offsetting those cuts, this did not happen.

Thatcherism did actually make Britain richer, compared to everyone else

2013-04-08T120654Z_769204672_GM1E9481JS601_RTRMADP_3_BRITAIN-THATCHER-640x433.jpg

A new report by economists at Cambridge University’s Centre for Business Research purports to show that the post-1979 liberal reforms introduced by the Thatcher government did not boost the British economy. In a sense, that’s true. As the report shows, trend GDP growth and productivity were slower in the thirty years after 1980 than the thirty years before that. I hadn’t realised that this was new information, but OK.

The problem with the report is that it mostly looks at the UK in isolation. What it doesn’t mention is that this slowdown in trend growth was a global phenomenon. The real question should be how the UK did relative to the rest of the developed world.

Taking the US as a benchmark – the ‘technology frontier’ – the best any major economy can hope to do, basically – I’ve compared GDP per capita, adjusted for purchasing power parity, of France, Germany, Italy and the UK (German numbers include East Germany after 1991, so I’d more or less ignore them after that point). The UK is purple:

 

rawdata

And here’s those countries’ relative performance, indexed to where they were in 1980. What we see is the UK's position basically not changing until 1980, with (West) Germany, France and Italy all converging on the US up to that point, then stagnating or declining slightly afterwards:

 

2indexedto1980pre1980

 

In this relative picture, the UK’s economic performance looks a lot better post-1980. There is a clear inflection point in the early 1980s where the UK begins to converge on the US, with GDP per capita as a percentage of the US's rising sixteen percentage points from 66% to 82% in 2010. In 1950 the UK GDP per capita was 69% that of the US's. The highest it was during the pre-Thatcher period was 73%, in 1961.

France, on the other hand, falls ten percentage points from 86% in 1980 to 76% today. Germany doesn't do much until the end of the 1980s, when political events render the data basically useless. Italy's decline tracks France's closely. In every case the UK improves relatively, and of course with the US at 100 the UK is improving relative to them, too.

This is probably mostly to do with labour force participation rates, not productivity. That might mask the true welfare situation: I might be much better off retiring early, but that would make me appear poorer and reduce GDP. But it still points to a large change that seems to have happened in 1980 that the report’s authors virtually ignore.

I say “virtually” because they do, actually, show this comparison in their report, it’s just hard to find. In a report with over thirty charts, all but one start during the postwar period. The only chart that doesn’t is this one – which, weirdly, starts in 1880. I cannot understand why, but it does make the UK’s relative recovery much more difficult to spot.

It is quite interesting that the Thatcher reforms don't seem to have boosted trend productivity by very much. As Pseudoerasmus notes, there doesn't seem to be anything the UK can do to reach US levels of GDP per capita, and the Thatcher reforms only really brought Britain up to European levels of wealth. It looks as if boosting trend growth, not just playing catch-up, is really, really hard.

Well, you've got to admire the gumption here from timewise

timewise.gif

Even if, perhaps, not the economics:

Britain is facing a ‘jobs bottleneck’ due to a lack of flexible working options, says a major new study, which has found that just 6.2 per cent of quality job vacancies in the UK mention flexible working. The research, conducted by flexibility experts Timewise and funded by the Joseph Rowntree Foundation, is the first robust overview of the quality of flexible roles available for skilled professionals across the UK. It found that 14.1 million workers, equivalent to 46 per cent of people in employment in the UK, want to work flexibly to fit with modern life - but are competing over a ‘handful of vacancies’.

The gumption part is that writing a report, which then appears in the newspapers, as a method of getting a bit of publicity, is not exactly unknown in the think tank world. And the timewise foundation (like the not economics frankly crowd, it's cool to obsess over the looming shortage of capitals) is actually a part of timewise recruitment network. Umm, specialists in finding part time work for people.

The tactic, of the report and the publicity, we do understand. But we're just kicking ourselves at not having thought up the idea of getting a charity, like the Joseph Rowntree Foundation, to fund it all. Whatever butchery that does to charity law we do think it's extremely clever. We suppose they've got to do something with the money now they're not funding Richard Murphy.

However, what isn't quite so admirable is that they've got the economics of this the wrong way around:

Timewise founders Karin Mattison MBE and Emma Stewart MBE have urged employers to use the ‘F word’ to attract talented potential employees. CEO Mattison said: “The world of work has experienced a revolution – technology advances and recent legislations have facilitated a huge growth in flexible working, yet this has not been reflected in hiring practices. “Businesses are missing out, as they consistently fail to realise just how important flexibility is to people looking for a new role. This often results in the best talent having to trade down, and take jobs way beneath their level of skill and ability. It's time we reboot the way we recruit in Britain.” Stewart added that it was time to stop talking about the ‘glass ceiling’ and instead: “do more to understand the ‘sticky floors’ in UK business, which are stopping talented people from progressing’.

This isn't a problem for businesses, this is just great for businesses. For, as Gary Becker pointed out, they get to hire talent cheaply. If businesses are "taste" discriminating against part time workers, that is doing so irrationally, then this provides better and cheaper labour for those who don't: who will then outcompete those who do irrationally discriminate. As Becker also went on to point out, if this situation persists for some time then we'd probably better conclude that it's not irrational discrimination: for that outcompetition should have eradicated that taste discrimination. Leaving us only with rational discrimination, meaning that the reason there's few part time jobs around at decent salaries is because there's few things people are willing to pay people decent salaries to do part time.

Still, getting the JRF to pay for this is pretty good.

Pivotal People at Pivotal Times: John Blundell

John Blundell (1952-2014) was a very critical individual in the world-wide advance of classical liberal ideas in the 1980s and beyond.  As a young student in the UK, John played an instrumental role in spreading the ideas of the Austrian School of Economics among college and university students.  In his 30s who would assume a leadership role in the US in organizations such as the Institute for Humane Studies, and the Atlas Economic Research Foundation. And in the 1990s and 2000s, John would return to the UK and serve as the General Director of the Institute for Economic Affairs.  Along the way, he published a book on Margaret Thatcher, and a book on the important contributions of “Ladies of Liberty”.

John was personable, committed, and professionally organized.  This is why he could have such a critical role at such a young age and for such a sustained period of time.  I personally knew John from the mid-1980s, and in fact my wife Rosemary worked directly for John at the Institute for Humane Studies from 1986-1988, which was a critical time, as the IHS in 1986 celebrated its 25th anniversary and this coincided with a major capital campaign that was directed by John.  What I want to stress is that John was the right man, in the right organization, at the right time — he was a pivotal person at pivotal times in the world-wide resurgence and advance of the ideas of classical liberalism.  I would be remiss if I didn’t also mention Christine, who was his partner through thick and thin, and who played such an important role at both the IHS and then the IEA.

My narrative of John’s role is rather straightforward. (1) He possessed unique organizational skills, and this talent was evident early on so while in his mid-20s he was given major responsibilities, such as organizing the Austrian School of Economics conference at Windsor Castle as the follow up to the conference at South Royalton. (2) Clarity of mission defined John’s work at the IHS, Atlas and the IEA, he did not suffer from mission creep, but as he stressed in his IEA monograph, Waging the Battle of Ideas, he took seriously Hayek’s message from “The Intellectuals and Socialism.”  Quoting Hayek, “Unless we can make the philosophical foundations of a free society once more a living intellectual issue, and the implementation a task which challenges the ingenuity and imagination of our livest minds, the prospects of freedom are indeed dark.”

John’s mission was not one of politics, nor even one of policy, but of cultivating the creative development of policy relevant ideas.  John was an ideas man.  Clarity of thought and clarity of exposition were defining characteristics of what he sought in others and what he demanded of himself.  He was interested in the “marketing” of the ideas that explained the institutional order of productive specialization and peaceful cooperation among free individuals, and the spread of those ideas to audiences that previously had not heard the message or remained unpersuaded by the message.  But while he may have recognized the importance of tailoring and contextualizing ideas, he never failed to emphasize the critical ideas of private property, freedom of trade, freedom of association, sound money, and fiscal responsibility.  Finally, (3) John was the right man in the right organizations at the right time.  In the 1980s, John was the organizational head and manager of the Institute for Humane Studies.  He made possible the programs that were instituted under the intellectual leadership of Walter Grinder and Leonard Liggio.  Most critically, John oversaw the move of the IHS from small offices in Menlo Park, CA to the organization playing a central role in the intellectual life of a major university – George Mason University – and a massive expansion in its operating budget.  Then in the late 1980s and into 1990s, John moved to Atlas where he oversaw an explosion of free market think-tanks across the US and especially the state level policy institutes.  And, finally, in the 1990s and 2000s, John returned to the IEA where he oversaw the great expansion and resurgence of that venerable institution of classical liberal scholarship and analysis.

At the IEA the old story was that basically Fisher met Hayek, then Lord Harris, and then Arthur Seldon and the IEA was off and running. The team of Harris and Seldon was indeed a formidable one and had a major impact on the culture and policy atmosphere that resulted in the Thatcher revolution.  But the modern history of the IEA cannot be written without due recognition of the great work John Blundell did for 2 decades as its general director.  Again, John led the battle of ideas, and a new generation of students and interested members of the public were exposed continually to new ideas of liberty presented in new ways and by new voices.

The international movement for classical liberalism experienced major growth during John’s tenure at the IHS, Atlas and the IEA and it is no mere coincidence.  John’s commitment to the ideas, his clarity of mission, and his unique organizational capacities put him in a position to play a pivotal role.  He didn’t waste his opportunities.  Instead, he made the most of them.  It is now up to us to continue to push forward his good work, and not squander the opportunities we are afforded to advance the ideas of liberty – the intellectual heritage of Smith and Hume, of Say and Bastiat, of Menger, Mises and Hayek, of Alchian, Buchanan and Coase, etc.  John Blundell was indeed a pivotal person at a pivotal time.

Income inequality: more reasons not to care

Income-Inequality.jpg

Over the last few years, people have been getting very het up about socio-economic inequality. You've got the academics looking at the causes and effects; the newspaper articles detailing its contours; and even the everyday discourse whose central feature seems to be Russian/Arab super-wealthy oligarchs. The most popular narrative, among those characters you might see writing in The Guardian, the New York Times, and Vox —what you might call 'the smart centre-left'—focuses on neoliberal policy reforms. These shifts, seen across the Western and developing world since the late 1970s, have removed constraints that prevented the rich from accelerating away from the poor.

Market forces lead to a widening gap twixt rich and poor now just as they did when let rip in earlier eras (inequality now is more like the 1870s than the 1970s). There are other accounts, of course, as well as subtlety and complexity. Some think that states have more or less deliberately handed out wealth to elites—and this is partly true in middle- and low-income countries, though surely not the West. Some note that most of the widening has come through land, itself made scarce 'artificially' by policy.

This centre-left narrative holds that inequality is bad for a number of reasons. The Spirit Level argued that it led to a number of bad societal outcomes. Their data selection and methodology are extremely questionable—looking mainly at cross-country regressions and doing little to actually test whether changes in inequality itself led to worse outcomes. Others argue that it leads to inefficiency and holds back meritocracy because the rich can invest in their children. This comes up against the fact that such investments do not tend to bear much fruit.

The best argument is that people in practice have a preference against inequality in groups they are in, including society as a whole, and like any other preference this should count in what we judge desirable. The problem with this is that people tend to have wildly inaccurate judgements of what inequality actually is in their society, and their judgements don't move in line with actual changes.

One argument might be that inequality undermines the political system, since the wealthy can buy elections and impose policies that favour them at the expense of society generally. This thesis has trouble dealing with the empirical evidence, which suggests that money has very little influence in Western democracy. Indeed, economists are apt to ask 'Why is there so little money in politics?' (pdf)

Another argument might be that inequality might undercut morality or community. This certainly seems intuitively plausible. Yet even this further argument is thrown into question by a 2012 paper I just stumbled upon. Giacomo Corneo and Frank Neher look at survey data from all 34 OECD countries over 30 years and find no effect of inequality on honesty, altruism or civic-ness, very little effect on obedience or tolerance, and a positive effect on work ethic. (pdf)

So why care about inequality at all?

We look forward to the next two NHS efficiency reports

nhs.jpg

Lord Carter's report that the NHS is not in fact as efficient as we would like that august organisation to be. This has led to the predictable cries from the left that it must be the nascent market in said NHS that is to blame:

The aim is, apparently to save up to £400 million for the NHS by making more effective buying decisions that will reduce the product range used by NHS hospitals from more than 500,000 items to just 10,000.

Three thoughts follow. The first is that it is very obvious that Lord Carter is saying that splitting the NHS into hundreds of trusts each making their own buying decisions is hopelessly inefficient, as was always obvious.

Second, he is saying that if you create an inefficient system where cooperation is not allowed because that is contrary to the dogmatically imposed idea that competition produces optimal outcomes you will end up with excess cost.

And third, he is saying that imposing centralisation on the system could save a great deal, as I argued on this blog only last week.

At which point we think we'd like to see proof of the contention.

NHS Scotland and NHS Wales work under very different levels of competition and market outsourcing than NHS England does. There are two possibilities in the Carter report. The first is that the 22 trusts chosen to be examined were from all three systems. At which point it should be possible to pull out the evidence that less market based systems are more efficient, as is alleged. Or, alternatively, the 22 trusts were only from NHS England in which case everyone is, no doubt eagerly, preparing for similar investigations, under the same terms, to be undertaken into NHS Wales and NHS Scotland so as to prove the contention.

For of course those making such a claim would actually like to have solid evidence of said claim, wouldn't they? We'd not want to be deciding something of such public importance merely on the grounds of pure prejudice, would we?

Would we?

So, err, could anyone point us to those calls for or that store of comparative evidence? Because we can't see them anywhere.....